International Commercial Arbitration Outline
Whole review of International Commercial Arbitration...
1 INTERNATIONAL COMMERCIAL ARBITRATION
CHAPTER I: INTRODUCTION Introduction -
The subject most akin to Arbitration is civil procedure. The difference between the two is that arbitration involves the consent of parties as contained in the contract.
Other ways in which arbitration differs from court litigation? -
Enforcement problems are common to both. A main difference is in the types of adjudicators in both forms of dispute resolution.
Advantages of arbitration: -
You can tailor your tribunal to fit your needs in terms of skills and language.
Arbitrators are also generally not bound by precedent or complex systems of law (e.g. conflicts of laws rules), although arbitrators still nevertheless look at how national laws handle a particular problem.
In principle, arbitrations are confidential, but there are collections of awards although not systematic in nature. The rule of confidentiality stands in the way of going into too much detail of the court.
Arbitration is, in principle, a one level system with a limited right of appeal.
Arbitration is meant to be expeditious. But when recognition of the award is sought, the enforcing court will scrutinize the award to some extent. Certain legal orders can set aside the award under the NY convention. NY convention – generally, the individual enforcing state only has the choice of whether to enforce the award or not, but not to set it aside.
But the “seat” of the arbitration or the state of which procedure was adopted then you also have a right to set aside the award. There is considerable discussion on this point. Recent development is that if the jurisdiction under the NY Convention can set aside the award, the other courts may not have to accept that decision as a final word on the matter.
Litigation or Arbitration? -
Dispute resolution and international agreements, James Carter, pg 24.
1) Why is arbitration so prevalent? (a) Predictability – dispute will be resolved in one place rather than in multiple courts (b) Competence – in theory arbitrators will have the specialist commercial and technical skills to resolve the dispute (c) Party participation – procedures are shaped by the parties rather than dictated by detailed rules as in litigation (d) Finality – resulting award will be subject to relatively little risk of being set aside or altered by the court (e) Enforceablity – easy to enforce worldwide due to NY Convention (f) Costs – to some extent may result in less cost (g) Privacy – no open hearings or filings, but public ancillary litigation may defeat this. 2) Drawbacks (a) Panel must be selected before anything can be done. This is likely to take some time. (b) Not all courts provide provisional remedies in aid of arbitration. (c) Courts that do provide such remedies often only do this to the extent of preserving the status quo and no more. (d) Litigation may result in a bid to prevent arbitration. (e) Arbitration tends to split the difference rather than deciding whether one side is totally right or totally wrong. 3) Litigation may be preferable if one party will not agree to arbitration in a place or under terms which the other will accept (a) but arbitration may be equally unwieldy if, for example, the transaction involves several parties or if related proceedings cannot be consolidated. (b) A party may require broader judicial discovery; for example, discovery in relation to non-parties. Factors to consider in selecting a dispute resolution mechanism: (a) (b) (c) (d) (e)
who is the likely claimant? who will be holding the money or goods? who will be holding records and other evidence? will there be other leverage at the time of dispute, such as dependence by one party on the other for spare parts or service? Where are the parties’ assets?
3 (f) (g) (h) (i)
Is there security in the form of guarantees or letters of credit? In which language will the parties be dealing? What will be the governing law of the contract? Does either party have a substantial base of operations in a third country and familiarity with its legal system?
Status of arbitration in western legal theory? -
Arbitration is a very old form of dispute resolution, which existed before national legal systems. On the other hand, over time, at various periods, there was the view that arbitration ousted the jurisdiction of the courts - that private individuals should not have the power to deprive the courts of the jurisdiction that the state gives it.
Federal Arbitration Act (1925) -
First signs of change. Before then, in most US jurisdictions, an arbitration clause was revocable at any time before the commencement of the arbitration – you could not bind yourself to submit the dispute to arbitrators. The federal legislation introduced the proposition that you could be challenged on the grounds available to any other ground of contract (s.2). 1924 was a period when many states were going through the same process and introducing arbitration after refusing it for a considerable period of time. We will see that the French system at the time of the revolution that the best way to resolve disputes was by arbitration. Consistent with revolution – revolt against complicated legal systems. This illustrates how political thinking impacted on arbitration. But then, curiously, there was a reaction against this. Cour de cassation held that it was contrary to principle that you could deprive yourself of the judge that society provided for you. There is still the feeling that the arbitration process can be abused by stronger parties – can enforce a certain dispute resolution process on parties which may not be well equipped to handle such a process. There is therefore the protection of employees in disputes between them and businesses. This will be discussed in further detail. The Act does, however, have a significant omission – it does not deal with the issues of recognition and enforcement.
New York Convention On the Recognition and Enforcement of Arbitral Awards (Supplement p.1) -
Probably the most successful instrument in creation of law. Remarkably effective document – ratified by more than 100 countries. It initiated a new idea in that it deals with issue of jurisdiction and authority of arbitrators (if it satisfies certain standards) and goes on to say that the
4 resulting award is also enforceable elsewhere. A single document regulates both exercise and recognition of this exercise. There are considerable differences in views involving certain provisions – but still very effective regime. - A double convention- deals with both the adjudicatory authority and recognition and enforcement. • Established the adjudicatory authority of private tribunals set up by party agreement. • Deals with the effects that other foreign institutions must give to the award of the tribunal. - Convention says that certain legal orders have the right to set aside the award: • The state in which the order was handed down • The state whose law applied. - Article V (procedural efficiencies): When it comes to recognition and enforcement of the award, unless you are a state that has the right to set aside the award then you can only set it aside if there are severe procedural problems. - Reservation by the US that it will only apply to commercial disputes. Problem is that in some legal systems, there is a sharp distinction between commercial and non-commercial disputes – language not meant to deal with commercial in narrow sense. This is not really a crucial point. Change in national laws -
If you look back at history of national arbitration laws after the NY Convention, one notices that the national laws become more user friendly. Case-stated – in an arbitration refer matter to the judge and suspend arbitration till the judge adjudicated – interfered greatly with what most arbitration users wanted. English arbitration act Change of national rules dealing with arbitration – motivated by arbitration business going elsewhere. Now, for example, you can allow the arbitrators to chose the laws to apply and to act as compositors. Certain expansion – NY Convention stimulated the American convention – for American continent – but this has not been as successful, as parties could also use the NY convention. Something we will discuss at some length. Enforcement of awards in the US – governed by state law. Will also be examined.
Basis of arbitration
Arbitration lies in principle of consent – party to arbitration is entitled to name an arbitrator. In a standard two party case, the party bringing an arbitration can each appoint one or they could nominate an arbitral institution to nominate the arbitrators; or the court could do it. In multi-party cases, it can be difficult to combine – separate arbitrations could have inconsistent results – also benefits of expediency and expense. There is no problem if the parties agree, but if the parties do not agree – can the state or institution appoint arbitrators or order consolidation of disputes? California, for example, has statutes on this. In certain matters, you have to arbitrate. Different animals – parties have no freedom to select arbitrators and does not allow them to establish their own choice of law rules etc. It is a different kind of situation – one which has not been very successful – but if it is successful, it will not be an offshoot of arbitration in the traditional sense.
Patterns of problem solving – Thomas M. Frank “The Structure of impartiality: examining the riddle of one law in a fragmented world” (pg 2.) -
Types of dispute resolution: i. One Party dispute resolution: Power. One party imposes its will on the other (cannot create predictable law) ii. Two Party dispute resolution- works within the legal system. Based on consent and agreement (Compromise principle). Parties have to agree and arrive at a decision. Difficult to generate rules of law or derive any principles from it. iii. Third party dispute resolution- third party who is impartial who attempts to resolve disputes between parties. Based on principles of law. Society needs standards that can justify impartial principles that govern the decision (Impartiality principle)
Hybrid two/three party systems – give mediator a certain authority but parties retain control of the process. It is difficult for such a process to generate rules. Difference between arbitration and other forms of dispute resolution Mediation: result is still consensual and not forced upon them. No result unless parties agree. Arbitration is the only one which can finally resolve the dispute – as it does not depend on the parties’ willingness to compromise. Mediation – when is this attractive? In case where there is parties wish to preserve strong business relationships.
6 Another difference is that the procedure and result need not be one mandated by law. In arbitration, the outcome is determined in accordance with an objective standard – the applicable law. Mediation is an interests-based procedure, whereas arbitration is a rights-based procedure. In arbitration, one attempts to convince the tribunal; in mediation, one attempts to convince the other side. Facilitative vs. Evaluative approaches to mediation: see Guide to WIPO mediation (p.9) Facilitative approach tries to get both parties to reach their own conclusion whereas the evaluative process analyzes the situation and provides a non-binding opinion which the parties are then free to accept or reject as the settlement of the dispute. Some dispute resolutions combine both facilitative and evaluative processes- try to mediate a conclusion but provide an outlet for evaluation if that fails. Mediation can also be turned into arbitration if the parties want the arbitral tribunal to make an award based on the mediated agreement so it has the effect of an arbitral award. Zurich arbitration device High level executives participate in the proceedings and claims are explored by both sides. What can this achieve which you would not necessarily achieve in the case of arbitration. Give each side a better understanding of the other side’s case. Insofar as arbitration is concerned, is there any effort to conciliate generated in the course of an arbitration? Arbitral tribunal may express the view that they are inclined to decide in a certain way and to let the parties negotiate on this basis. May be a sign of weakness but not necessarily so if this is suggested by the arbitral tribunal. Problem that an arbitrator may, in a sense, be bound to a particular view if he expresses a preliminary view early on. Pressures on arbitrators Fees – to what extent do they play a part? It is unusual for arbitrators to rule that the dispute is outside the scope of the dispute. This may suggest that fees do play a part in the decision making process, even though it should not. A number of pressures operate on arbitrators - Arbitrators like to have a result which gives something to the losing party. This is perhaps to give a certain degree of compromise between the parties.
Selecting the mediator – WIPO Guide to mediation (pg 13) In the mediation process, the most important step is the selection of the mediator. What should the parties do or look for? Parties should consider the following matters when deciding who to appoint as mediator (as listed on pg 13): i.
Role of mediator? Which is the most important purpose – facilitative or evaluative? Facilitation role – added value of attempting to bring the parties together, which the whole reason why they chose mediation to begin with. Technical competence of mediator? Do they want a mediator with substantial training and experience in the subject matter of the dispute? Or do they want someone who is particularly skilled in mediation? This probably depends on how technical the dispute is. Do they want a single or more than one mediator? Esp in complex of specialized or highly technical disputes, they could have co-mediators; or where the parties have different cultural or linguistic backgrounds. What nationality should the mediator have? To what extent should nationality of the mediator matter? It matters in some bits of the world – international arbitration – at least in part founded on mistrust of the courts – choosing someone from the country – but it’s because for govt contracts in particular, it may be that they just do not want the courts of country X to decide a case involving the govt of country X. Are the potential mediators independent? What professional qualifications, experience, training or areas of specialization should the mediators have?
Main steps in mediation i. ii. iii. iv.
Agreement to mediate Commencement: request for mediation Appointment of mediator Initial contacts between mediator and parties (setting up first meeting and agreeing any preliminary exchange of documents) First and subsequent meetings (agreeing ground rules for process, gathering information and identifying issues, exploring interests of parties, developing options for settlement, evaluating options) Concluding
v. vi. Med-Arb
Should same person act as both mediator and arbitrator? Unless the parties approve, the two should not be combined. The arbitrator in such cases
8 will not have the same impartiality after seeing the evidence and hearing the arguments. The benefit of such an approach is that the process continues and does not come to an end if mediation fails. Technical Expertise -
International Chamber of Commerce Technical Expertise Rules adopted in 1993 (p. 279 of the supplement). → Rules that provide for appointment of experts & for their basic functions, if parties choose to submit their expertise questions (if any) to the ICC Centre for expertise. Expertise & arbitral proceedings are different ⇒ In order for the ICC rules on expertise to apply, parties must have inserted a clause providing for ICC expertise, in addition to the arbitration clause. Attention!! Art. 8§3 of ICC Rules on expertise: “Unless otherwise agreed the findings or recommendations of the expert shall not be binding upon the parties”1. → But of course the parties CAN provide in their agreement that the findings will be binding. (Questions 1 & 2, p. 18)
Quote from American Almond Products v Consolidated Pecan Sales (Learned Hand) (Pg 23) “Arbitration may or may not be a desirable substitute for trials in courts; as to that the parties must decide in each instance. But when they have adopted it, they must be content with its informalities; they may not hedge it about with those procedural limitations which it is precisely its purpose to avoid. They must content themselves with looser approximations to the enforcement of their rights than those that the law accords them, when they resort to its machinery.” You can make up your own rules in arbitration and you cannot expect to have the same type of process or thinking in courts. It maybe an advantage or disadvantage, but you just have to live with it. International Commercial Arbitration (Pros and Cons) Why has there been an increase in the role of arbitration in modern commercial life? Neutrality of forum and enforceability of awards are the most important advantages of arbitration. It has been driven by the lack of predictability of procedures of national courts and the fear that certain courts are not reliable. i) Impartiality- The forum is international not domestic- It is neutral. (a) Important in some international transactions like when the government is one party and a private entity is another. The government perspective 1
Emphasis added !
9 is that it would not want to be sued by the courts of another state and the private party would not want to be sued in the government’s court. Especially true with courts of questionable impartiality. (b) Can also solve this problem by having the parties agree to have the dispute submitted to a court system in which both parties have confidence. ii) Choice of Rules- Parties can choose the rule of the arbitration and the arbitrators. (a) Parties can shape the procedure according to their preferences and needs. iii) Speed- final decision reached faster iv) Confidentiality- arbitration can be confidential (a) Less clear than it has been suggested. v) Selection of arbitrators- choose arbitrators that are skilled in the area of the dispute and bring expertise to the tribunal. vi) Treaties ensure enforcement of results abroad vii) Cost- may or may not be less expensive -
Survey of advantages of arbitration (Text p. 26) Two major advantages are that: (1) the forum is neutral and (2) treaties ensure enforcement of results abroad. Other advantages: (1) forum has expertise (2) results are more predictable (3) greater degree of voluntary compliance (4) confidential procedure (5) limited discovery (6) no appeal (7) procedure is less costly (8) less time consuming (9) more amicable
i. ii. iii.
Problems with arbitration A lot depends on the arbitrator- no developed law like a domestic court system. There is no appellate review within the system itself. Can only seek to have the award set aside or should not be recognized under Art. V. If the arbitrators badly handle the matter, parties are in a worse off position. If the arbitral process does not yield a result or the award is set aside, the whole process has to be restarted. In order to enforce the award, litigation may be inevitable. The possibility of long arbitration followed by long judicial proceedings in some cases. Tendency of the arbitrators to split the baby.
If one party does not want to arbitrate on terms which the other will accept, then litigation is again necessary.
Ad Hoc –vs- Institutional Arbitration (e.g. ICC, London, Stockholm etc.) (pg 27) a. Ad Hoc- parties shape the process of the arbitration i. If it is well-done it have the advantage of specific tailoring. ii. The advantage of the UNCITRAL Rules provides the ad hoc arbitrations with rules that can be used. iii. Do not provide the setting of compensation. If the fees of the arbitrators are not set beforehand then the arbitrators can set whatever they want. iv. Saves the administrative costs of the institutional arbitration. v. Now less important because competition has lowered these charges. vi. Requires the parties to set up rules and agree when they are in a dispute, which isn’t always easy. vii. UNCITRAL Rules do not provide for compensation. b. Institutional- parties submit the dispute to an institution that uses its set of rules and processes. i. Provides general known rules that parties can depend on. ii. Provides institutional support to the arbitration. iii. Allows the parties to have a third party make decisions about processes so they do not have to agree when they are in the dispute. Whatever is not decided beforehand can be decided by the institution. iv. Unless parties are really experienced in setting up arbitrations, should go with institutions. - Question is whether if you are going to arbitrate, should you do ad hoc arbitration – not under the care of an established arbitration center? - Main advantage of institutional arbitration is that there is a well regarded system of rules and staff which can apply and facilitate these rules. These institutions also select arbitrators for the parties – which is often the most difficult part of the process. - ICC used to charge very exorbitant fees which were a percentage of the award. Now, because of competition, the ICC has capped its fees for arbitration at $75k. - Review of awards by ICC – supposed to be only a procedural review. Some doubt as to whether that is true in practice. Most people think this is not useful. - Are parties bound by arbitral precedents rendered by the same institution? - Most important things are controlled by the parties. For example, the parties are free to choose the procedure applicable to the proceedings. Adaptation of Contracts -
“Frydman v. Cosmair, Inc”, US District Court of NY, 1995 o Facts: P & D entered into an agreement to arbitrate the value of P’s shares. → Later on they entered into a contract where by D agreed to buy P’s
11 holdings at a price to be determined by the same person who had been appointed for the arbitration. The price determination was to be made pursuant to French Civil Code, art. 1592. o Procedure: French court held that there was fraud in the valuation of the stock & the valuation was quashed. →The shareholders brought suit in state court and the corporation had the suit removed to federal court pursuant to 9 U.S.C.S. § 205 because the action related to arbitration. The shareholders filed a motion to remand the case to state court. o Question at issue: Whether the decision on price value of the shares constituted an arbitral award OR a simple price fixation conducted as part of a contract formation. → If it constituted an arbitral award, suit should be examined by federal courts because the action relates to arbitration & falls under NY Convention (pursuant to 9 USCS §205). If this is not an award but simply part of the contract formation, then it does not fall under NY Convention and US State Courts may very well be seized of the matter. o Court’s holding: Court granted the motion to remand. It found that the price appraisal decision did not relate to arbitration falling under the NY Convention. → Court underlined 2 major differences between arbitration & art. 1592 procedure: i) General arbitrations: conducting as means of resolving disputes ≠ Art. 1592 price arbitrations: means of providing the price term for contracting parties. ii) General arbitration awards: take status of a judgment ≠ Art. 1592 price appraisal: NEVER statute of a judgment. ⇒ Art 1592 procedure was conducted as part of a contract formation and not for the purpose of resolving a dispute. The court concluded that the signing of the contract for price valuation changed the case from arbitration to a contract. → The action did not relate to an arbitration falling under the NY Convention & there was no other basis for federal subject matter jurisdiction, so state court was the proper venue. -
Several attempts to design special procedures for adaptation of contracts → Eg. ICC adopted “Rules for Adaptation of Contracts” BUT rules were not a success and, therefore, abrogated. When such adaptation of the contract is provided by means of arbitration, it may not be an award but remains binding on the parties as a provision of the contract → It is binding just like any other provision of the contract. Art. 1020 of Dutch Arbitration Act also provides for adaptation of the contract by arbitration and the result of such arbitration seems to be binding upon the parties (Question n°3, p. 23).
Institutional & Ad Hoc Arbitration -
George AKSEN, “Ad Hoc v. Institutional arbitration” 1991:
12 o Int’l comm. arb. (ICA) as the generally acceptable method of resolving disputes between transnational contracting parties. → ICA fortified by NY Convention. o BUT Question whether to arbitrate under institutional OR ad hoc arbitration. o Definitions of the 2 types of arbitration: Institutional arbitration: proceedings administered by an organization (usually in accordance with its own rules of arbitration), eg. ICC, LCIA, AAA. Ad hoc arbitration: no formal administration by any established arbitral agency → The parties opt to create their own procedures for a given arbitration (eg. By drafting a set of ad hoc procedures OR by reference to Uncitral rules etc). → Parties can even use institutional arbitration rules without being formally engaged in an institutional arbitration. o FOR ad hoc arbitration: Flexibility: Ad hoc procedure can be shaped to meet the wishes of the parties & facts of the particular dispute. Cost & Time saved when ad hoc arbitration (as opposed to instit. arbitration). Possibility to use Uncitral Rules (adopted in 1976): Sort of a substitute for the rules of arbitral institutions, while avoiding inconveniences of institutional arbitration. BUT for ad hoc arbitration to be effective, parties, counsels & arbitrators have to work together. o FOR institutional arbitration: Drafting the arbitration agreement: • Ease of incorporating by reference the institution’s rules in an int’l contract. → All ready made rules which have proven to be effective in past arbitrations. • Use of ICC rules for example is valuable in preventing parties from successfully asserting in national courts that the claims are non-arbitrable. • ICC rules available in 7 major languages. Arbitrator selection: • It is the most important service of an administrative agency. • Institution will select the most appropriate arbitrator. • Thus, problems deriving out of parties disagreement on arbitrators are avoided. • Instit. arbitration provides an administrative referee to ensure that all arbitrators are truly independent. Professional Administration • Instit. arbitration has staff to guide parties through the arbitration process & provide a variety of routine services.
Arbitator’s fees are easier negotiable & more predictable in institutional arbitrations. • Helpful service when a losing party fails to honor an award. Judicial Deference to Institutional Arbitration • Arbitral awards receive the increasingly favourable recognition of national courts. → Judicial respect for the integrity of arbitral awards. Default award • Ability to proceed in the absence of a defaulting party (≠Ad hoc arbitration: more difficult to enforce a default award) o Conclusion: Ad hoc arbitration is good choice when the parties are able to select experienced arbitrators & cooperation between counsel and parties. BUT prudent advice is to opt for institutional arbitration. → Many more guaranties. -
Prof. Von Mehren also recommends institutional arbitration for the fix & solid background it provides. Question of conflict between party stipulations AND national rules OR Institutional Rules → Prof. V.M: If conflict between party’s agreement & other rules (institutional or national), the party’s agreement will prevail ONLY if the other rule is not mandatory. o Example: Requirement of an uneven panel is basically for arbitrators to be able to reach a decision. But Prof. finds that if arbitrators manage to reach a decision, why hold that the party’s agreement providing for appointment of 2 arbitrators is against public order? As long as the (national or institutional) rule for uneven panel is not mandatory, award should be valid & enforced. BUT for ex. In Italy, there is a mandatory rule that the arbitration panel CAN NOT be constituted by 2 arbitrators. Therefore, under Italian law any award rendered by uneven number of arbitrators could not be enforced.
Fast-Track Arbitration -
Prof. Von Mehren on Fast-Track Arbitration: o The whole procedure is speeded up. o It is not a usual situation. → Parties normally opt (should opt) for fast-track arbitration ONLY when time is an imperative. o Requirements for fast-track arbitration: Find arbitrators fully available for a short period of time. Parties & arbitrators willing to rely more on documentation than on witnesses. Parties & arbitrators willing to focus on the pre-arbitral phase (i.e. on the preparation of the case).
Hans SMIT, “Fast-Track Arbitration”, 1991: o Fast-track arbitration was initially conceived for long-term contracts between international business enterprises → BUT – with efforts of ICC – it has a wider use. o An arbitration can be “fast-track” i) if the parties provided so in their agreement OR ii) if the institutional rules applicable to the arbitration provide for such a possibility. → Smit suggests that is preferable for fasttrack to be provided by institutional rules (as opposed to provided by the parties in their arbitration agreement). o Regime to be created for institutional fast-track arbitration must have the following features: Regime should be set forth is separate rules dealing only with fasttrack. Rules should shorten the time limits & institution or the tribunal should be given authority to modify them (According to Prof., tribunal should be able to modify time limits for flexibility reasons – cf. question 2, p. 40 case book). Rules should set out the procedure to be followed for submissions & hearings. Rules should allow extension of the contractual time limit for rendition of the award. Rules should specify for which issues fast-track treatment is possible. Tribunal should be granted general authority to modify the rules for processing the case when justice so requires.
Stockholm rules for expedited arbitrations, adopted by the Stockholm Chamber of Commerce, 1999 (p. 270 supplement): o Fast-track reserved to minor disputes, matters of limited importance. o Prof.: Question if there really is an extensive use of these rules? NO. Prof. thinks that these rules apply mostly for domestic arbitrations and not that much for international arbitrations. BUT on p. 41 of the case book, proof of wide use of the fast-track rules.
On the evolution of the standing of arbitration within the legal system -
Tibor VARADY, “The standing of arbitration within the legal system”, 1995 o Arbitration is an exception to regular court litigation. o BUT arbitration is the dominant method of settling int’l trade disputes & int’l commercial arbitration arbitration (here-in, “ICA”) has become an almost completely self-sufficient institution. o ICA: follows a more simple, flexible & speedy procedure than courts do.
15 o ICA: founded on the autonomy of the parties will → Adaptability to party needs. o Increasing development of ICA: Network of int’l instruments pertaining to arbitration has emerged (ex. NY Convention, ICSID Convention) → Arbitration agreements have become more reliable & arbitration awards more efficient and enforceable → Courts have become more supportive of arbitration. A glimpse back in history – A French Case -
“L’Alliance v. Prunier”, Cour de cassation française, 1843 o Facts : Insurance contract between an insurance company & a private person (insured). → Contract contained an arbitration clause (“clause compromissoire”, which was part of the contract signed in advance of the dispute, as opposed to “compromis” which is an arbitration agreement signed ONCE the dispute has already arisen). French code of civil procedure of the time had only provisions on the “compromis” and did not provide for arbitration agreement signed in advance (clause compromissoire). o Question at issue : Whether the « clause compromissoire » was valid even though it did not specify the subject matter to be arbitrated nor the names of the arbitrators. o Procedure: Lower court found the arbitration clause void because the names of the arbitrators were not given. o Court’s holding : Court held the “clause compromissoire” to be invalid. It applied art. 1006 of French Code civ. Pro. (which is on “compromis”) to the “clause compromissoire” in dispute. Art. 1006 required i) that the arbitration agreement specify the subject matter to be arbitrated AND ii) the names of the arbitrators. → Court found that neither requirement was satisfied in the present case & therefore, that the arbitration clause was not valid. o Obviously none of the 2 requirements could have been satisfied by the arbitration clause since it was a “clause compromissoire” by which the contracting parties in advance submit themselves to arbitrators for all the disputes not foreseen that may arise under their contract. → Probably Cour de cassation did not want to open the door to such arbitration clauses because feared that individual parties are not really aware of the existence of such arbitration clauses when signing such adhesion contracts → Cour de cassation wants to protect these weaker parties. o Purnier rule (nullifying all arbitration clauses concluded before the dispute arose) had a disastrous effect on ICA. → Flagrant example of mistrust of arbitration. o But later on French Statute & case law recognized the validity of “clauses compromissoires”.→ French Code de commerce art. 631 was amended in
16 1925 to provide that “parties may, when they contract, agree to submit to arbitration when they arise “ the following cases of controversies (…)”. A note on the relevance of the international dimension -
A. Von Mehren, “ICA: The contribution of the French jurisprudence”, 1986: o France: development of an acceptable regime for ICA was quicker that the comparable regime for internal commercial arbitration. o Disastrous consequences of the Prunier rule on ICA. → End of 19th century, French courts began creating a distinct legal regime for int’l arbitration (as opposed to internal arbitration) in order to avoid the Prunier rule. o French Court of Appeal (“Migout v. Arguad”, 1865) overturned the Prunier rule on the ground of choice-of-law rules. If arbitration agreement was subject to French law, then it was void. If subject to another law which considered such clauses valid, then clause valid. o Separate & distinct legal regime for int’l arbitration began to emerge in French law. o BUT question arose where the line lies between national & int’l arbitrations. → “Mardele” case (Cour de cassation, 1930): int’l arbitration if the situation involves the interests of int’l commerce o Cour de cassation no longer relied on choice-of-law analysis to escape the Prunier rule → As long as the situation had some connexion to int’l commerce, the arbitration clause was valid. o Conclusions drawn from French case law: i) Various aspects of the legal regime applicable to domestic arbitrations do not apply to arbitration which involve interest of int’l commerce. AND ii) rules that apply to int’l commerce need not be contained in any national law.
Another glimpse back in history – A U.S. Case -
“Kulukundis Shipping Co v. Amtorg Trading Corp.”, US Court of Appeals, 1942 (extract): o Court elaborates on history of the judicial attitude towards arbitration. English courts: Strong judiciail hostility to arbitration agreements → For a long-period beginning end of 17th century, English courts would do little or nothing for breaches of arbitration agreements. → 78 years later, Coke held in a dictum that for a breach of an agreement to arbitrate the damages were only nominal ⇒ In all, the ordinary arbitration agreement lost all real efficacy in the UK since it was not specifically enforceable in equity. → Midst of 18th cent. arbitration agreements were considered against public policy because they “oust the jurisdiction” of the courts. ⇒ Lord Campbell explained this british judicial hostility toward arbitration agreements as due to the desire of the judges to avoid loss of income. (Prof. Von
Mehren added in class that today UK has an advanced system of arbitration). US Courts, 19th century: Took over british hostile attitude towards arbitration & were in general unfriendly to executory arbitration agreements. BUT the lower federal courts became critical of this judicial hostility & effective state arbitration acts started being enacted → Also, US Arbitration Act 1925 was enacted which placed arbitration agreement upon the same footing as other contracts. → The 1925 Act provides that arbitration agreements ought to be enforced & provides a procedure in the federal courts for their enforcement. → The 1925 act was mainly enacted to make injunctive relief possible in case of breach of an arbitration agreement.
A comparative historical survey on the standing of arbitration within the legal system -
Arthur VON MEHREN, “A general view of contract”, 1982: o Standing of arbitration within a legal system depends on the status & efficiency of court litigation in that same legal system (example: if official tribunal are slow & costly, arbitration is favored). o France: Beginning of 19th century, French legislator was very favourable to arbitration since at the time France was recovering from the Revolution and courts were not well organized. o Germany: During same period, arbitration was at a low point in Germany & the very validity of arbitration clauses was disputed. o Common Law Countries: Very restrictive position towards arbitration & arbitration clauses were in principle void. → Why? Because official courts in these countries were able to establish their supremacy relatively early & provided a tolerably efficient administration of justice. o French law (Von Mehren repeats what was summarized previously) o German law: German law moved from a restrictive approach to a position affording a very wide scope to private autonomy. → Today, German law is among the “legal orders most favourably disposed towards arbitration”. o English law: English law recognizes arbitration but still maintains a significant judicial control over the arbitral decision. However, 1979 act still allows judicial review of an arbitral award but in a more restricted form. o US law: 19th century: arbitration agreements were generally unenforceable. → Progressively, rules more favourable to arbitration were first introduced by statutes providing for specific enforcement of arbitration agreements & for the enforcement of awards. → 1955: Uniform Arbitration Act which serves as a model of contemporary American legislation favourable to legislation. o Postscript: Trend towards acceptance & facilitation of arbitration as an essentially party-designed & controlled dispute resolution process still continues:
1981: reform of the French Code civ. Pro in a way that strengthens the position of int’l arbitration conducted in France. 1985: adoption of the UNCITRAL model law on int’l commercial arbitration. 1996: enactment of the UK arbitration act. 1998: German arbitration act.
Questions & Comments - Comment n°1 (p. 61): ⇒ In all, agreements providing for arbitration of an already existing speicif dispute received earlier recognition than agreements submitting to arbitration possible future disputes. ⇒ State (court) control has been declining, while the readiness of the courts to enforce arbitration agreements has increased. Prof. Von Mehren’s appreciations on the evolution of the standing of arbitration within the legal system (class notes): o Attraction of NY Convention favours status of arbitration (BUT possibility to set aside an award). o Arbitration conceived as a rival of national courts whereas on the international level jurisdiction is not that easily determined. → Therefore, arbitration developed more on the international level than on the national. o ICA has been reinforced as from the 70’s and on. o NY Statute 1920 & Federal Arbitration Act 1925: arbitration clauses shall be valid & enforceable UNLESS reasons to set it aside. o ⇒ Steady march towards recognition & more user-friendly arbitration arrangements. That is connected with the growth of international commerce. → Convergence of arbitration through international instruments. On the sources of relevant norms -
Arbitration has been regarded as a creation of the parties BUT such a creation can only function within the framework of a legal system. → Arbitration relies both i) on party autonomy AND ii) on court assistance (when party cooperation is lacking). Question: What norms control the process of ICA? What is the hierarchical relationship among these rules? Party autonomy: Basic difference between arbitration & courts lies on the fact that the basis of the jurisdiction of an arbitral tribunal is the will of the parties. → This wide freedom of the parties is limited by mandatory norms of certain countries AND by int’l agreements. Institutional rules of other than state origin: Institutional rules offer a preestablished set of procedural rules & provide solutions of various typical problem patterns. → Parties rely a lot on these prefabricated patterns. → These rules apply only if i) parties designate the institution that administers the rules (in an institutional arbitration) OR ii) if parties choose them (in an ad hoc arbitration). →
In ad hoc arbitrations, the UNCITRAL arbitration rules (adopted by the UN General Assembly in 1976) are widely adopted by the parties. → Parties may even combine pre-established institutional rules with solutions designed by themselves. Municipal Procedural Rules: ICA has become a self-contained & self-reliant decision making structure BUT has not entirely escaped from the control of certain municipal procedural rules. o ex. Art. 182 of Swiss Private Int’l law act 1987 : (in substance) arbitration tribunals may freely follow procedural rules chosen by the parties as long as they observe basic requirements of due process. o Local procedural rules become very important when recognition of foreign awards is sought. o Model Law on ICA adopted by Uncitral on 1985: Aim was to provide a set of rules which would be acceptable world-wide & which could be progressively adopted by national legislations. → In August 2002, legislation based on the Model law had been enacted in 38 jurisdictions and many other legislations enacted under the influence of the model law. ⇒ Model Law has brought about a worldwide trend towards convergence in the domain of ICA. Int’l agreements: o Effect of int’l agreements on int’l arbitration: ICA needs an int’l framework which provides for recognition of the arbitration process & of the award beyond the boundaries of a particular country. → Today, ICA is backed up & guided by a unique network of int’l conventions which makes possible an almost worldwide recognition of arbitral awards. o Effects of int’l agreements on domestic / national arbitration: In many countries, the acceptance of int’l conventions led to new and improved standards in municipal procedural rules. o Examples of int’l conventions on arbitrations: NY Convention 1958 ICSID Convention 1965 Inter-American Convention on ICA 1975 o Many bilateral agreements have also been contributing to the worldwide standing of ICA.
Party stipulation v. Institutional Rules -
Preliminary award in 1974 ICC case (p. 68): o Facts: Dispute between i) 2 enterprises (claimants) & ii) a State other than their own & a public authority of this state (Defendants)→Contract between the parties provided for an ICC arbitration by one or more arbitrators appointed in accordance with ICC Rules. BUT annex to the contract provided that the appointment of the arbitrator should be made by an authority other than the Court of Arbitration of the ICC → This other authority refused & ICC Court of Arbitration considered that it was up to it
to proceed to the nomination of the arbitrator. → Arbitrator was finally nominated by the ICC. o Question at issue: Question of the regularity of the nomination of the arbitrator by the ICC since the parties had stipulated for another appointing authority which refused. o Preliminary award: Arbitrator held that he had validly been appointed by the ICC. He bases his decision on art. 7.2. of the ICC Rules according to which “failing agreement between the parties (on the nomination of a sole arbitrator) within a period of 30 days (…), the arbitrator shall be appointed by the Court”. Arbitrator held that the present case qualified as failing agreement between the parties on the nomination of a sole arbitrator. → So, the arbitrator was validly appointed by the Court. “Ecofisa v. Societe Gas del Estado”, French Cour de cassation, 1990 (question n°7, p. 70-71): o Facts : ICC arbitration clause by which parties agreed on 3 arbitrators. → According to the clause, each side was to select 1 arbitrator, the 2 arbitrators were to select the chairman & if ever they did not agree on the chairman, he was to be appointed by the President of the ICJ. BUT the arbitration clause stated that “the constitution of the arbitral tribunal as well as the applicable procedure” shall be governed by the ICC rules. → When dispute arose the claimants asked directly the President of the ICJ to constitute the tribunal. BUT the ICC applied its institutional rules & nominated all 3 arbitrators. → Arbitrators confirmed their jurisdiction & rendered an award. o Procedure: Paris Court of Appeal refused to recognize the award on the grounds that the agreement of the parties regarding the constitution of the arbitral tribunal was not respected. → In other words, parties’ agreement overrides institutional rules. o Court: The Cour de cassation confirmed the CA’s holding.
Party stipulation v. State Norms -
“Al Haddad Bros Entreprises v. M/S Agapi”, US District Court – Delaware, 1986 (in substance): o Facts: Arbitral award rendered by an arbitral tribunal which was not composed in accordance w/ the alleged agreement. According to the agreement, each party was to nominate an arbitrator. Defendant nominated an arbitrator & plaintiff did not react. Defendant, therefore, asked his arbitrator to serve as a sole arbitrator. → Notice of this appointment was sent to the plaintiff → Award was rendered in favour of defendant. →Plaintiff sought to ignore the award and filed a motion to re-open the litigation in the US district court of Delaware. → In response, defendant filed a counterclaim seeking to enforce the award. o Question at issue: Question whether a London arbitration award should be enforced when arbitral tribunal was not composed in accordance with the parties’ agreement but in accordance with the British arbitration statute.
21 o Court: Court answers YES. The fact that the award was not rendered in accordance w/ the parties’ agreement does not invalidate the award. Under the British arbitration statute, a sole arbitrator appointed by one of the parties may decide a dispute when the other party fails to appoint an arbitrator under the agreement. → In other words, Court holds that the law of the country where the arbitration took place overrides the parties’ agreement. → Award was recognized & enforced. o Note: Von Mehren believes this interpretation is not necessarily the best one. The parties agreement should count more than that. -
Rederi Aktiebolaget Sally v. SRL Termarea, Italy, Court of Appeal of Florence, 1978 & “Tarmarea SRL v. Rederiaktiebolaget Sally”, QBD, England, 1979: o Interpretation of Section 8 and 9 of the 1950 English Arbitration Act. • Section 8: (1) Unless contrary agreement, where two arbitrators are provided for, presumption that the 2 shall appoint an umpire.; (2) Unless contrary agreement, umpire may decide the award if the two arbitrators cannot agree. • Section 9: If the agreement requires three arbitrators, one to be appointed by each party & 3d to be appointed by the 2 appointed by the parties, agreement shall have effect as if it provided for the appointment of an umpire (and not of a 3d arbitrator). • These two situations seem very different. Abolished by the 1968 English Arbitration Act. o Facts: Dispute arose between the 2 parties → Their agreement contained an arbitration clause which provided for a panel of 3 arbitrators (one by each party & one by the two arbitrators chosen by the parties). 2 arbitrators were appointed and never a third one. The 2 arbitrators rendered their award. One party sought to enforce the award in Italy. o Question at issue: Can the award be enforced? o Holding of CA Florence: The award is not enforceable under NY Convention because the parties did not contemplate a two party but a 3-party arbitral tribunal. The arbitral tribunal was not in conformity with the parties’ desires so the award could not be enforced. → The UK arbitration act (under which the composition of the tribunal was valid) would apply – and thus validate the agreement – only if the parties had not provided for a different composition of the tribunal →Agreement of the parties prevails over the law of the country where the arbitration took place. o Holding of the English Court: The award rendered by only 2 arbitrators can be enforced under the UK arbitration act, even if the parties’ agreement provided for a tribunal of 3 arbitrators. →As long as the 2 arbitrators agreed, they had jurisdiction – under the UK arbitration act – to render an award without calling in an umpire. → The law of the country where the arbitration took place prevails over the parties’ agreement.
22 o Result: there may not be a way to enforce the judgment because the courts have contrary holdings. It can be enforced in England and not in Italy so if there are no assets in England, then too bad. o Van den Berg says that the moral of the story is that parties should be very careful in drafting the arbitral clause. o Note: Under Art. V (1), d of the NY Convention, the law of the country where the arbitration took place should be examined with respect to the composition of the tribunal ONLY if the parties agreement did not provide for the composition of the tribunal. → So, Delaware Court & English court erred in the application of the NY Convention. Only the Italian court applied art. 5 correctly. → The Delaware & English court defeat the purpose of art. 5 which is to restrict the law of the country where the arbitration took place.
CHAPTER II ON THE AUTHORITY OF ARBITRATION TRIBUNALS II.1. ARBITRATION AGREEMENT Variations of the arbitration agreement The authority of arbitration tribunals rests on an agreement between the parties. They can take two forms: - Clause comprimissoire – submits to arbitration disputes that may arrive in the future. It is much more frequent in practice. - Compromis – submits to arbitration an already existing dispute. After the dispute has arisen, it is difficult for the parties to agree about the site of arbitration, applicable law, etc… It happens only when there is a common interest in finding a quick solution. Referring the parties to arbitration After a valid agreement is signed, there are mechanisms for compelling arbitration. There are two situations in which courts refer cases to arbitration: - Independent suits – discuss only the validity of the arbitration agreement. - Embedded suits – issue of arbitration and effectiveness arises as a defense in an action. Ex: in a lawsuit for damages, the defendant contests the jurisdiction of the court based on the arbitration agreement. NY Convention, article II (3) – it undertake a clear commitment to refer the case to arbitration at the request of one of the parties, unless the agreement is null and void, inoperative or incapable of being performed. ⇒ Some national statutes go even further, and mandate a referral ex officio, without parties’ request (Hungary).
Existence and validity issues before courts and arbitrators Arbitrators have competence to decide upon their own competence to arbitrate (competence-competence principle). However, courts can review this decision. The NY Convention takes no position, leaving national legal systems do determine, whether a court should decide the issue of the existence and validity of the arbitration agreement or allow it to be solved in arbitration. There are two different approaches: - US approach – the court will just decide if the invalidating defect goes specifically to the arbitration clause itself. Thus, if the party alleges that the container contract is invalid, consequently the arbitration clause, the court will send this question to the arbitrators. However, before referring to arbitration, the court will analyze the existence of the whole contract (ex: the absence of a proper offer or acceptance). This is pro-arbitration response, because it is easier to ‘fabricate’ an invalidating complaint about the container contract than about the arbitration clause. - French approach – competence between judge and arbitrator is regulated in the French ‘New Code of Civil Procedure’, art. 1458. If an arbitration tribunal has already been established, the court will refuse jurisdiction and leave validity and existence questions to the arbitrators. If the tribunal has NOT been seised, then the court will retain jurisdiction ONLY if the arbitration agreement is MANIFESTLY NULL. The expression ‘manifestly null’ is too subjective and the French courts don’t usually recognize an agreement as being null, referring the parties to arbitration. ⇒ Judicial review will be available in post-award enforcement proceeding. Different national approaches also exist concerning the conclusiveness of a decision by arbitrators declining jurisdiction. While some jurisdictions provide a plea against this decision, others do not accept this remedy. Formal requirements A widely established requirement is that there be a written arbitration agreement. This provision can be interpreted flexibly, for example, the condition can be fulfilled by an exchange of letters, telexes… NY Convention, article II (2) – has set to the contracting States a minimum and maximum international standards, national statutes cannot impose stricter requirements, nor can it accept flexible ones. ⇒ German courts have taken a completely different approach, not requiring the written clause, allowing a tacit agreement when arbitration is a trade usage within a particular branch of trade. ⇒ It is important to allow and facilitate arbitration when the parties really wanted and to disallow it when the expressed intention of the parties is not clear or when there is no operative structure for decision making. The maintenance of some border controls is prudent, since institutional structure of arbitration is malleable, giving a lot of liberty to the parties.
24 ⇒ If there is no valid agreement, but both parties do not object to the arbitration, is it valid? The UNCITRAL Model Law, article 7 (2), determines that the exchange of statement of claims is equivalent to a written agreement. However, the NY Conventions does not recognize implicit submission. Scope Since litigation is the presumed method of settling disputes, it is essential for the agreement to determine what issues are going to be submitted to arbitration. It is important to avoid splitting related claims between arbitration and litigation. The scope can be problematic when the parties renew the contract without explicitly adopting its arbitration clause. Compelling the reluctant party to arbitrate - Tennessee v. PP Filippo and Prix Italia, US District Court, Tennessee, 1990 -
Facts: Prix appointed Tennessee its exclusive distributor for the US, Canada and Mexico. Prix notified to terminate the contract, but Tennessee wants two more years. Tennessee suit Prix for breach of contract and for false and intentionally incorrect statements. Legal issue: The parties had an arbitration agreement, according to which the “Arbitration Court of the Chamber of Commerce in Venice (Italy)” would resolve the disputes. The district court had to decide about the dismissal of the action. Holding: the language of the arbitration clause was very broad, thus all claims were inside its scope, even the contract-based tort claim. Tennessee failed to demonstrate that it would be inconvenienced and prejudiced so significantly as to overcome a valid arbitration clause. The contract was negotiated at arm’s length, the arbitration clause was the price paid by Tennessee to become Prix’s exclusive distributor. Also the clause was not hidden. Since the clause was valid, operative and capable of being performed, the parties were referred to arbitration, with the exception of PP Filippi, because he wasn’t a party to the agreement. Nevertheless, his action was determined to wait the result of the arbitration. ⇒ The clause did not mentioned the ICC but a Chamber of Commerce in Venice, however, Prix affirmed that the clause referred to the ICC arbitration court, and Tennessee did not oppose this assertion.
- Pepsico v. Oficina Central, US District Court, New York, 1996 - Facts: Pepsico contracted with Oficina, which represented the bottling Venezuelan companies, granting these companies the exclusive right to bottle Pepsi. The laws of Venezuela governed the agreement. The contract provided that: (a) any party prematurely terminating the contract would be liable for specified liquidated damages, and (b) all the disputes would be resolved by NY ICC. Oficina terminated the contract. Consequently, Pepsico demanded the payment of $118,400,940 for liquidated damages. Oficina petitioned a civil court in Venezuela for a declaration that the amount of liquidated damages was much smaller (embedded suit). Pepsico answered by filling a formal request for arbitration with the ICC and a petition
before the District Court to declare the validity of the arbitration clause (independent suit). Legal issue: the district court had to decide about the validity of the arbitration clause in order to refer the parties to arbitration, taking in consideration a previous lawsuit on the same matter. Holding: the Venezuelan court already had the issue of arbitrability before it, thus, it should have the initial opportunity to resolve the question of Venezuelan law before a non-Venezuelan court is called upon to do so. Such deference is consistent with considerations of legal economy, international harmony and parties’ intentions, once they chosen Venezuelan law to govern the contract. The Court decided to retain jurisdiction, but suspended the proceedings for 60 days, in order to afford the Venezuelan court to decide.
- Menorah v. Inx Reinsurance, US Court of Appeals, First Circuit, 1995 - Facts: Menorah and Inx had seven reinsurance contracts, according to which the disputes would be arbitrated in Tel Aviv and would be settled by equity. Menorah made a claim to Inx that the latter did not accept. Menorah tried to seek arbitration but Inx responded that it would not arbitrate. Menorah filed a suit against Inx, who chose not to respond or contest. Menorah filed an exequatur action in the Superior Court in San Juan to enforce the Tel Aviv judgment. Only during exequatur, Inx moved to dismiss the claim affirming that the parties had an arbitration agreement. Inx removed the action to US federal court, which found that Inx had waived arbitration. - Legal issue: whether a party can waive arbitration or not. - Holding: the explicit waiver came when Inx was invited to arbitrate and expressly declined it. The implicit waiver came from Inx’s entire course of conduct, since after three years of proceeding there was no attempt to go to arbitration. To require the parties to arbitrate, despite their advance in court, would be unfair, and would also give Inx a second chance in another forum. Menorah suffered prejudice from the incurred expenses as a direct result of Inx’s dilatory behavior. Most important of all, arbitration clauses were not meant to be another weapon for imposing delay and costs. Test to determine when a party waives its right to arbitrate: (1) party was aware of its right to arbitration; (2) acted in a manner inconsistent with the exercise of that right; (3) prejudiced the opposing party as a result. ⇒ Party autonomy allows explicit waiver of arbitration. Spanish definition of waiver requires explicit action taken indicating waiver, so INX would not waive by not doing anything. However, if it had participated in the judicial process without bring up arbitration, it would had waived arbitration under Spanish law. ⇒ In US law, it is important to show prejudice, that the other side was adversely affected by not going to arbitration. This preserves the involuntary loss of right. Here, there was prejudice to Menorah in their litigation costs. Kompetenz-Kompetenz and separability - Texaco and California Asiatic oil v. Libya, preliminary award, 1975
Facts: the parties signed a contract with an arbitration clause determining that each party should provide one arbitrator who would appoint a third. If one of the parties did not indicate his arbitrator, the President of the International Court of Justice had the power to designate a Sole Arbitrator. Libya refuses to appoint their arbitrator and challenges the President of ICJ ‘s power to solve the problem. - Legal issue: Sole Arbitrator’s power to define his own jurisdiction. - Holding: it is for the Sole Arbitrator to render a decision on his own jurisdiction. According to the jurisdictional nature of arbitration, the arbitrator has the duty to state the law and, as any other judge, he is the judge of his own jurisdiction. In respect to the contractual nature of arbitration, when the duty is found directly in the agreement of parties, there is a paragraph that established that the Sole Arbitrator would determine the applicability of the clause and the procedure in the arbitration. Also, unilateral cancellation of a contract has no effect on the arbitration clause, which continues to be operative. ⇒ Today, answers to this kind of questions are typically derived from interpretation of applicable rule, rather than from legal nature of arbitration. ⇒ Kompetenz-Kompetenz and Separability is designed to ensure the success of the arbitration. For arbitration to be effective, it must be able to handle issues without turning to national courts. Only when it is time to enforce a judgment should the arbitration tribunal turn to national courts. Arbitration must be separate from government intervention to maintain the integrity of the process. ⇒ Fiat (p. 117) Arbitration held that a person that was not yet a party to the arbitration contract was nonetheless subject to the jurisdiction of the arbitrators. This determination was challenged in court and the court held that non-party was not subject to the authority of the arbitrators. ⇒ How much deference should a national court show to what the arbitrators have done. There are two issues: (1) to what extent can the national court review the issue at all; (2) what weight should they give to the arbitrators determination? The French system gives the greatest weight to what the arbitrators have done. They take the position that unless the arbitrators authority is manifestly improper, they will not intervene. The US system does not go as far. For the court to accept the award there must be clear and convincing evidence that the parties intended to arbitrate. - American Bureau v. Jules, Cour de cassation, France, 2001 - Legal issue: declaration that the civil court is competent to decide a compensation damage lawsuit, since the plaintiff is not a part of the arbitration agreement. - Holding: since there is no claim for manifest nullity, the arbitral tribunal is the one competent to decide the existence, validity and scope of the arbitration agreement. - SNE v. Joc Oil, Court of appeal, Bermuda, 1990 - Facts: the parties entered a long-term sale and purchase contract for oil and oil products, which had an arbitration agreement. SNE made 39 shipments of oil to Joc and the latter only paid 3 of them. SNE began proceedings at the FTAC against Joc, who defended itself by saying that the container contract was invalid because the two obligatory representatives of SNE did not sign it, consequently, the arbitration agreement was also invalid. The FTAC, when deciding about its own competence,
27 ruled that it had good jurisdiction to decide. The arbitrators also determined that, although the container contract was invalid, Joc should pay SNE a substantial sum of money, in order to prevent unjust enrichment. SNE began proceedings in Bermuda seeking to enforce the award. - Legal issue: should the formal validity requisites of the container contract be applied also to the arbitration agreement? Principle of separability. - Holding: the doctrine of separability determines that the invalidity of the main contract does not entail the invalidity of the arbitral clause, allowing the tribunal to declare a contract invalid and yet retain jurisdiction to decide a dispute. The doctrine of separability has an effect on the practice of the competence-competence, because if separability is accepted the arbitral tribunal will only be compelled to deny its own jurisdiction in few circumstances. However, there are two main exceptions to this principle: when the container contract is inexistent and when the arbitral clause itself is invalid. The burden of demonstrating that there never was a contract will be a heavy one, particularly if at any stage the parties acted as if there were a contract between them. Since the contract existed, although it was invalid for the lack of the required signatures, the arbitration clause is separable and does not require the same formality, thus, it is valid and enforceable. ⇒ The lower court said that the burden was on SNE to prove the separability under Soviet law. The appeal court reverses this in order to enforce NY Convention, article V (1), which puts the burden of the proof on the party seeking to refuse the enforcement of the award. - Harbour Assurance v. Kansas General, Court of Appeal, UK, 1993 - Facts: the orthodox view in English law has always been that if the contract is void, the arbitration clause contained in it must also be void. For this reason, the lower court decided that the arbitrator couldn’t decide if the container contract was void ab initio. The defendants appealed. - Legal issue: the container contract is void, under UK law, is the arbitration clause void too? Is it possible top give jurisdiction to arbitrators to decide a dispute over the initial invalidity of a contract? - Holding: the court decided that the principle of separability gives power to the arbitrators to decide whether a contract is valid or invalid, even when the ground of invalidity was initial illegality. An arbitration clause has been held to be a selfcontained contract, collateral to the containing contract. The decision was also based on various decisions from different countries, showing the importance of comparative law. ⇒ Although the principle of separability is adopted by international law, therefore this problem would not easily occur, in the hypothesis that the law of the contract does not recognize separability, and, at the same time, the law applicable to the arbitration clause does, to decide the question we would have to use the contact law. - Republic of Nicaragua v. Standard Fruit, 9th Circuit, USA, 1991 - Facts: the parties signed a memorandum of intent that had an arbitration clause with a non-existent arbitration institution. Nicaragua began an action in federal district court against Standard Fruit claiming breach of contract and moving to compel arbitration. The district court rendered summary judgment affirming that
28 the memorandum was not a biding contract and that the arbitration clause was just a provision declaring expectations. Nicaragua appealed. - Legal issue: it was contested if the Memorandum represented a biding contract and if the arbitration had enough information to be performed. - Holding: first, the court decided that the clause of invalidity of a container contract had no effect on the arbitration clause. Therefore, although the Memorandum was just an agreement to agree, the arbitration clause was valid. Second, it established that the most minimal indication of the parties’ intent to arbitrate must be given full effect. The court made use of the scope rule — any doubts concerning the scope of arbitral issues should be resolved in favor of arbitration — to determine the existence of the clause itself. Nicaragua’s motion to compel arbitration was granted, leaving the arbitrators to decide whether a valid arbitration agreement existed. ⇒ It was a clear that the parties had the intention to arbitrate, but is this enough? Is the agreement capable of being performed? To what arbitral tribunal should claimant go, who has the power to decide that? The form of the arbitration agreement – an agreement in writing As already seen, there are formal requirements for an arbitral provision, one of them is that it must be in writing. This is not merely a requirement that there be written evidence, but the agreement itself must be in writing, each party have to declare in writing its consent to arbitration. This requirement has three functions: evidentiary, cautionary and channeling. ⇒ After the NY Convention many other means of communications arose, thus, some countries are being more flexible in this matter. Ex. France allows oral arbitration agreements. Uncitral Model Law, article 7 (2) - Article II of the NY Convention specifies that the agreement must be in writing. Art. II (2) sets out further requirements. UNCITRAL Art. 7 dilutes NY Convention Article II by expanding what is a valid arbitration agreement beyond mere writing. ⇒ Various efforts have been made to loosen the provisions in the NY Convention without changing the Convention. The UNICTRAL Model law tries to do this. But Article IV of the NY Convention says that you need the original award or the original agreement or certified copies. So you need the written documents at the very least. ⇒ Neil Kaplan: Art. 7 of the UNICTRAL is slightly more extensive than Art. II (2) of the NY Convention, but both fail to provide solution to practical problems. In commercial practice, an arbitration clause should not have a higher degree of proof than the contract that it is inserted on. -
Robobar Limited (UK) v. Finncold SAS (Italy), Supreme Court of Italy 1993
Facts: 1989-1991 Finncold supplied refrigerating units to Robobar for the manufacture of refrigerators for European and US hotels.
29 The purchase confirmations sent by Robobar contained a clause (in Italian) stating the following: “any dispute arising out of this order shall be exclusively referred to arbitration by a person to be appointed by the President of the Law Society.” 1991: Robobar suspended payment alleging that the units delivered by Finncold were defective and of a poor quality. Upon answering client complaints, Robobar mentioned the faulty performance of the Finncold units. Finncold initiated proceedings seeking payment of the purchase price plus damages for loss of reputation. Robopar requested a preliminary ruling on jurisdiction by the Supreme Court which held that the Italian court had jurisdiction as the arbitration agreement was not valid. Issue: Does the clause satisfy the writing requirement? Holding:
Reasoning: Art. II of the NY Convention “recognizes as valid an arbitral clause for foreign arbitration contained in a document signed by the parties or in an exchange of letters or telegrams. There is no doubt that none of these formalities has been met in this case, since the clause is only contained in Robobar’s confirmations, upon which Finncold does not seem to have agreed by letter or by telegram. The court states “the agreement to arbitrate contained in an arbitral clause in a contract is an independent agreement; its validity and efficacy must be ascertained independently of the validity and efficacy of the contract.” Treating the formality of the underlying contract as enough to satisfy the arbitration clause ignores the concept of separability. You need to meet the independent formalities of each. The Brussels convention does not apply to arbitration and the argument that the validity of the arbitral clause must be maintained on a good faith basis after having performed under the contract in which that clause is contained equally fails, since the formal requirement cannot be derogated from. -
Compagnie de Navigation et Transports SA (France) v. Mediterranean Shipping Co. SA (Switzerland), Swiss Supreme Court, 1995
Facts: The matter concerns a maritime carriage contract. The general conditions (along with the arbitration clause – article 2 of the general conditions) were printed on the back of the bill of lading. Upon discovery of the fact that packages were missing and damaged, the French company filed a request with its insurance company for indemnification. The insurance company commenced proceedings against Med. Shipping Co. before the Court of First
30 Instance of Geneva. Med. Shipping objected that the State court lacked jurisdiction because of the arbitration clause in the bill of lading. Court of First Instance found that it had jurisdiction. Court of Appeal reversed the Court of First Instance’s decision. The Supreme Court affirmed the appellate decision, finding that a valid arbitration clause had been concluded between the parties although the shipper had not signed the bill of lading. Issue:
Was this a valid written arbitration agreement under Article II?
Holding: There was a bill of lading so that counts for one party. But the carrier had not signed it so technically it does not satisfy the requirements of Art. II. Nonetheless, the court held that because the parties were experienced traders and had prior interactions, the arbitration agreement was valid. The parties, for several years, always made use of the general conditions as printed on the back of the bill of lading. Even though there wasn’t a formal written agreement, there was enough additional evidence to conclude that both parties were aware of the agreement and agreed to it. Analysis: There is no question that the NY Convention applies. Both France and Switzerland are signatories. The Swiss Court reasons that Article II(2) of the NY Convention must be interpreted in light of Art 7(2) of the Model Law [UNCITRAL Model Law] which provides that “[t]he arbitration agreement shall be in writing. An agreement is in writing if it is contained in a document signed by the parties or in an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement.” The Court goes on to state that Art. 178 of the Swiss Private International Law Act (PILA) was inspired by Art 7(2) and by Article II(2) of the NY Convention. The question remains however, why did the Swiss Court even look at 178 – in order for this provision to apply, the seat of the arbitration tribunal must be in Switzerland but it was in London (answer to question 3 on page 150). Policy: What is the extent to which the arbitration tribunal is willing to read the text broadly. This can lead to ambiguity, which may appropriate because of the difficulty of changing the convention. It may be possible to lessen the formal requirements if there is evidence the parties intended for there to be an agreement (parties were repeat players, were sophisticated). Conclusion: The tribunal may look at who the parties are when deciding when the agreement is valid. The tribunal may be willing to lessen the formal requirements if there is evidence that the parties intended for there to be an agreement.
31 Sphere Drake Insurance v. Marine Towing – US Court of Appeals 1994 Facts: Marine Towing contacted an insurance company to “acquire protection and indemnity service for its vessels.” A policy is eventually secured from Sphere Drake. Vessel sinks prior to insurance policy being received by the insured. Marine Towing sues Sphere Drake and another insurance company that Marine Towing had initially contacted (not relevant). What is relevant is the fact that Marine Towing filed its suit in state court. Sphere Drake removed the case to federal court and moved to compel arbitration and to stay the litigation pending arbitration. Marine Towing argued that the district court lacked jurisdiction under the Convention because Marine Drake and Sphere Towing had “no agreement in writing” to arbitrate. Issue:
Interpretation of the language of the NY Convention Art. II.
Holding: The Court interprets Art. II of the Convention definition of “agreement in writing” to include either (1) the arbitral clause in a contract, or (2) and arbitration agreement (a) signed by the parties, or (b) contained in an exchange of letters or telegrams. Basically the judge read the writing requirements differently. He read it disjunctively. There’s either an arbitration clause or a separate arbitration agreement that must be signed by the parties or contained in an exchange of letters or telegrams. Analysis: Does this reading make sense? It allows for a free-standing arbitration clause, which allows the parties to circumvent the formal requirements. Seems to ignore the policy underlying the formal requirements. (question 8 – page 151) Note: bad holding because it removes the signature requirement from the arbitral clause. Can a battle of the forms yield an arbitration agreement? (page 151 of text) A battle of forms: The offer and acceptance do not match. A makes an offer to B. B replies by accepting the offer but under certain conditions. What happens if A doesn’t respond? Is there a contract? Which contract governs A, B? Under the UCC, there is a contract for what is substantively similar, and what is different is thrown out. Nokia-Maillefer SA v. Mazzer – Tribunal Cantonal – Swiss Court of Appeal, 1993 Facts: Battle of the forms began with Swiss confirmation of an Italian order which referred to Confirming party general conditions of sale. Difference between the offer and acceptance at this stage was that it was a forum selection clause not an arbitration agreement. The initial contract was a purchase order that provided for a forum of Milan. The Swiss company returned the purchase order and replaced Milan with the ICC, Paris.
32 By telex, the Italian buyer accepted the modification. Dispute arose between the buyer and the supplier. Nokia argued that the dispute should be referred to arbitration. Issue:
Was there an arbitration clause?
Holding: Court of the First Instance refused on the grounds that there was no valid arbitration clause. On appeal, the court affirmed the lower court’s decision. ANALYSIS: No common intention of the parties was established. An arbitration clause can only be validly concluded only where there is a common intention of the parties to refer a possible dispute to arbitration. In this case it was not possible to determine the possible intent of the parties. The court concluded the parties did not have a valid arbitration agreement. NOTE: There were several defects in the transaction, which was a major one? Court states (page 153): there is no common intent on arbitration unless the final arbitration clause has “manifest and certain meaning”; it is not possible “to ascertain the common intent of the parties, in particular as to the arbitration agreement”; “the word arbitrator or arbitration does not appear and the ICC itself does not act as an arbitrator”; “appellant must bear the consequences of the ambiguity and obscurity… which it modified…”. Was this a messy transaction? Another issue is to what extent should the courts make Herculean efforts to solve the problems created by the parties’ messiness. -
I.T.A.D. Associates, Inc. v. Podar Brothers (notes section on page 154)
Facts: Contract between the NY company and the Bombay Company. Both companies provided for arbitration but NY company for the arbitration in NY and Bombay Company for arbitration in Bombay. A dispute arose and NY company sued in US courts. Issue:
was there a valid arbitration clause?
The court compelled arbitration
Analysis: Both parties wanted arbitration but there was no agreement on where the arbitration should be held. NOTE: the case is bizarre according to vonMehren! What business does the court have to step in and decide that there should be arbitration because the parties wanted general arbitration- the parties didn’t have a complete arbitration agreement. The site was the only element of the arbitration process that was specified. This case carries the court’s desire to arbitration further than makes sense. Jurisdiction by Virtue of Tacit or Post-Agreement Submission or Estoppel
33 William Co. v. Guangzhov Ocean Shipping Co. – High Court of Hong Kong, 1993 HISTORY: Many companies send commercial activity to HK not China because it has superior legal system. Lead to proliferation of cases from HK. Facts: A cargo owner brought an action for damages to cargo against the defendant ship owner in HK. Important: the plaintiff brought the action in the High Court of Hong Kong. Bill of lading issued in HK provided all disputes arising out of controversy shall in accordance with Chinese law shall be tried in Chinese courts or arbitrated there. Defendant seeks in HK courts to refer the dispute to arbitration in China. The plaintiff argued that the matter could not go to arbitration for two specific reasons: 1. the clause was unenforceable because it was uncertain (it did not choose arbitration or litigation to the exclusion of the other) and 2. the arbitration was not formally valid because the defendant had signed the bill of lading but the plaintiff had not Issue:
Was there a valid arbitration clause?
Holding: Yes, even though the acknowledgement post-dated the arbitration clause, this is a sufficient record of agreement. Analysis: Plaintiff argues that: the clause was too uncertain (provided for both arbitration and litigation) and that it was not formally valid (document signed by one party). Validity of the proceedings was governed by the UNCITRAL Model Law because HK had adopted the Model Law before the bill of lading was issued. Arbitration/Litigation: In general, the plaintiff has the right to choose the forum. In this case the plaintiff did not choose a valid forum so it lost the choice. The court said that it was up to the defendant in the HK action to determine whether there should be adjudication or arbitration in China. Formal Requirements: Model Law’s formal requirement could be satisfied only if (1) there were either letters that provided a record of the agreement or (2) an exchange of statements of claim and defense by which the existence of an agreement was alleged by one party and not denied by another. Issue is that after the arbitration agreement, the exchange was made. Does this comply with the model law? Yes, the phrase “record of agreement” is wide enough to include correspondence which post-dates the arbitration agreement. Therefore there is a valid arbitration agreement. Therefore the proceedings were stayed and the case is sent to arbitration. HK Court reads Art. 7 very broadly. (bottom of page 157) Court accepted the defendant’s argument that “exchange of statements of claim and defense” (Art. 7(2)) applied to courts as well as to arbitration proceedings.
34 The court also says that what is clear from this article 7 is that the agreement cannot be oral. The written agreement however, can be entered into by the party’s agent. NOTE: Raises problem of tacit submission. In litigation, if a defendant appears and participates, it assumes the court gets adjudicatory authority. Court does not get jurisdiction if the defendant denies jurisdiction. If defendant does not do so, then the court get jurisdiction. Problem: award from an arbitration tribunal that lacks jusrisdiction – what happens? What if there is an award from an arbitration tribunal that lacked jurisdiction? Since the authority of the arbitrator is based on party agreement, there is no authority when there is no agreement, even if a party participates, it seems. Von Mehren thinks the drafters of the NY Convention never thought about this kind of problem. Possible solution is that is the party participates in the tribunal without challenging the tribunal’s authority, then it is deemed to have consented. But this ignores the technical problem of having an agreement. Sometimes a party will participate in the arbitration so as to protect itself from an adverse award, even though it does not recognize the authority of the tribunal. -
Jiangxi Provincial Metal and Minerals Import/Export v. Sulanser, Supreme Court of HK, 1995
Facts: Corporation concludes contract for sale of cement. Agreement was reduced to writing but not signed by the parties. Jiangxi brings the dispute to court - the other party wants to invoke the arbitration clause. In view of the fact that Sulanser insists on invoking the arbitration clause before the court, Jiangxi agrees to file a request for arbitration. The court declines jurisdiction and refers the parties to arbitration. After both parties had appointed arbitrators, Sulanser (the same party that had initially challenged the jurisdiction of the court on the basis of the existence of an arbitration clause) challenged jurisdiction because of the absence of a signed agreement. The arbitrators determined that they had jurisdiction and that there was a valid arbitration agreement. There was an award for the claimant. Application for enforcement of the award in HK court. Losing party (Sulanser) wants the enforcement order set aside because there was no arbitration agreement and therefore no arbitration jurisdiction. Issue:
was there a valid arbitration agreement?
Holding: Yes there was a valid arbitration agreement. The exchange of letters does not have to be between two parties. Can be between the court also. Analysis: Even though the NY Convention formality requirement was not satisfied, the court could still recognize and enforce the award if the provisions of the Model Law Art. 7 were satisfied.
35 Exchange of letters: Although there must be an exchange of letters to prove that both parties agreed to arbitration the exchange does not need to between two parties. Copies of documents submitted between each party to the Wuhan Court and to CIETAC were received by the other. This is sufficient to the court for an exchange of letters. It should also be noted that the court relies on an argument of good faith when it states that “within a little less than three months, the respondent concluded three contracts with the claimant with essentially identical wording but never signed the acknowledgment of the orders together with the arbitration clause contained therein…” that did not prevent the respondent from relying on the clause in another two situations. Estoppel: Estoppel is not contained in the NY Convention, it’s a background provision that’s available in most legal systems. Note: It’s better to rely on the exchange of letters rationale because it will be more likely (than the estoppel argument) to be upheld when it comes to enforce the award. NOTE: Is Art. II Para. 2 of the NY Convention an exclusive provision? (p. 164) Different languages have different meanings. 1. Definition in English is not exclusive as it says “includes” 2. French definition is “means” which indicates exclusive. 3. Five authentic texts that are not in agreement which creates a problem of interpretation of the convention. 4. Strong argument is that there is no reason in policy on why Art II(2) should be exclusive. It seems appropriate to allow a legal system to enforce an agreement that does not satisfy the article if it is prepared to do so. Not impose the requirement on the arbitration clause, but simply mean that if you meet the requirement of Art. II(2) you are guaranteed enforcement, otherwise it is a matter of national law. -
Claimant (Austria) v. Respondent (Germany) – Federal Economic Chamber, Vienna – 1994. page 161
Facts: Austrian Company requested arbitration against German company. Claim was breach of contract (failing to deliver steel). The contract and the arbitration clause existed only in the acknowledgment of an order sent by the claimant to the respondent – the respondent never having countersigned (only one party signed it). It was submitted that the respondent had not fulfilled its “obligations of the basis of two contracts for the delivery of cold-rolled sheet concluded with the claimant, since it had either not taken delivery of or had not paid for part of the goods purchased”. Issue:
Was arbitration clause valid?
Yes the arbitration clause was valid.
Analysis: An agreement to arbitrate signed by the parties or contained in an exchange of their letters is sufficient. The requirement is also met if the addressee replies in writing to the acknowledgement of an order in such a way that need only conclusively show that he accepts acknowledgement of the order together with the arbitration clause mentioned therein. This is what happened in this case, therefore the arbitration agreement was valid. Court states that according to the NY Convention, “the agreement must be in writing” but this “does not mean that the arbitration clause must be contained in a contractual document signed by both parties”. “Though initially the respondent only tacitly accepted the two acknowledgments of the order by the claimant, it subsequently – to be precise in a letter to the claimant of January 1993 – expressly referred to the relevant contracts […] and thus satisfied the requirement as to the written form of the arbitration clause contained therein.” The court also relies on good faith and points to the fact that the respondent has also relied on the specific arbitration clause before the courts in other matters”. It looks that the court is really using estoppel to enforce the arbitration clause to prevent the claimant from both relying and denying the existence of the contract. UNICTRAL Proposal to Amend Model Law Article 7 ii. See p. 167 #3 should such an amendment be adopted? iii. If you simply adopt the interpretive, non-binding resolution, then you are simply confirming a situation exacerbate the problem of different interpretations. iv. Alternatively you could amend the NY Convention but that would open up the Convention to amendment in other areas which you would want to avoid. v. There is no authoritative tribunal which can provide interpretation of the various conventions. This it is difficult to gain judicial interpretation and control when you’re dealing with and international convention such as the NY Convention. Amendments may only make the situation worse. Practically, it sounds as though the best strategy is to simply deal with the provision (II(2)) of the NY Convention as it stands. Scope of the Arbitration Clause- Settlements and Renewals -
Mediterranean Enterprises Inc. v. Ssangyong Corp. – US Court of Appeals, Ninth Circuit, 1983 (page 168)
This dispute illustrates the importance of having a clear arbitration clause. Facts: MEI and Ssangyong essentially entered into a preliminary agreement for a joint venture. Arbitration clause was accounted for. The venture went sour and MEI alleged that Ssangyong used the venture in order to gain access to certain projects. Among the allegations raised by MEI is the allegation that Ssangyong fraudulently inserted the words “arising hereunder or” into the arbitration clause. District court ordered the action stayed pending receipt by the court of the arbitration between the two parties on certain issues – essentially, the court forced the parties to go to arbitration on certain issues by ruling that several arguments being raised by MEI were arbitrable. Ssangyong contends that the district court improperly interpreted the scope of the arbitration clause between the parties. Ssangyong wanted the matter stayed before the court on all issues and wanted arbitration to take place on all issues. Issue: What is the scope of the arbitration clause? The clause read “any dispute arising hereunder shall be settled by arbitration.” “Arising hereunder’ was read very narrowly and excludes peripheral matters that may emerge but may not technically arise under the contract (such as quantum meruit claim). The clause should have been written more broadly (“any dispute arising under or relating to the contract…”) Unjust enrichment and conspiracy to breach the contract were peripheral claims. Since the arbitration and the court proceedings would likely deal with the same issues then there are three possible ways to deal with it: 1. Stay the court proceeding and go with arbitration first a. This is the preferred order because the parties agreed to arbitrate, so that agreement should hold weight. b. Also, the issues to be adjudicated in court are dependant on the issues in arbitration. c. It also takes the cases off the docket. 2. Stay the arbitration and go with the court proceeding 3. Do both the arbitration and the litigation at the same time What would the scope of the arbitration clause have been if the joint venture had been formed? The court would likely have included only issues related in some way to the joint venture. Interesting to note the court’s comment mid-page 172: “the arbitrator’s award, if it clearly exceeds the scope of his authority by deciding a matter not within the ambit of the arbitration clause, will not be given effect by the court” – almost seems that the court is assuring parties that the arbitrator can only rule on the issues sent to it by the court
Ermenegildo Zegna Corp v. Lanificio Mario Zegna – US District Court 1996
Facts: Companies broke up in 1941 and created an agreement in 1949 to determine the use of the name in Italy and US. In mid-80’s, plaintiff initiated an action in SDNY for trademark infringement. In connection with the litigation, the parties negotiated a settlement that included an arbitration clause and a no-contest clause. The arbitration clause provided for arbitration in Milan under Italian Civil Code. The US branch of the family (defendant) took the position that recent changes in the Italian law made the provisions of the settlement unfair. The defendant claims that the dispute is within the scope if the arbitration provision, the plaintiff argues that the no-contest clause excludes the dispute from arbitration and that “this arbitration constitutes a violation of the Agreement’s nocontest clause”. (page 173) Issue: Is the arbitration clause negated by the no-contest clause? Holding: No. The dispute is within the scope of the arbitration clause because it is not excluded by the no-contest clause. The no contest clause prohibits the parties from contesting the agreement in its entirety but does not prohibit the parties from contesting certain provisions contained in the agreements. Court points to a severability clause in the agreement and also states that the parties are sophisticated – if they wanted to preclude the exclusion of specific provisions, they would have said so. Interesting comment by the court on page 175: when assessing whether or not the matter was arbitrable as a result of falling under the rights, duties and obligations of the parties as stipulated in the second clause of the arbitration provision, the court states “any doubts concerning the scope of arbitrable issues should be resolved in favour of arbitration”. Provisions that exclude certain disputes from arbitration must be “clear and unambiguous” (page 175). Analysis: What is the effect of a no-contest clause when it arises in connection with the arbitration? The parties had submitted to arbitration the issue on which there is supposed to be no-contest, which poses a Kompetenz-Kompetenz problem because it requires arbitrators to determine their authority. The solution to the no-contest problem which emerges from litigation is different from what is appropriate in arbitration. In arbitration it is an issue that relates to whether the parties have conferred on the tribunal adjudicatory authority. The court only has the authority to look at the arbitration clause, the no-contest clause falls to the arbitrators to interpret. To take the same approach to the meaning of the no-contest provision in arbitration that is given to it in judicial decisions runs contrary to the first option principle that the court should decide whether the issue is submitted to arbitration. The parties must be explicit about what they intended. This is an issue to be decided by the courts unless the parties have made absolutely clear that they confer authority on the tribunal. NOTE: What issues are arbitrable in the Ssangyong case if they adopted the language from Zegna? With the broader language the claim for quantum meruit would be included but the
39 other issues would still be outside because they relate to the joint venture agreement but do not arise from it. This is all about the subtleties of language. Court states that in the Zegna case, it is not clear and unambiguous that the parties wanted to exclude the underlying dispute from arbitration and when one considers the “strong policy favoring arbitration as an alternative means of dispute resolution”, the court sent the matter to arbitration. -
Hart Enterprises International v. Anhui Provincial Import & Export - US Dist. Crt. 1995 (page 177)
Facts: NY textile distributor buys goods from Chinese Supplier. Sues for damages for deficiencies of goods and breach of contract. Defendant moves for a stay pending arbitration in China pursuant to an arbitration clause contained in the defendant’s confirmation of the sales. The motion is granted. Hart had signed the document that included the arbitration clause. Hart failed to make the required payments. A settlement agreement was entered into. The original agreement said you must try to settle and if no settlement can be reached you go to arbitration. They reached a settlement that was subsequently breached by Hart. Hart resisted arbitration even though the settlement agreement said they should go to arbitration under previous contract. Hart argues that the issue should go to litigation because there was a new and distinct contract. Further, they claimed the prerequisite for arbitration had not been met. Basic problem: A settlement was reached but not carried through. Hart no argues that there was no recourse for arbitration because there was no arbitration clause in the settlement agreement and that the settlement agreement represents a contract distinct from the initial agreement. (As an aside, Hart also raises “undue hardship”.) Issue: Was there recourse to arbitration? Had the plaintiff lost its right to arbitration because it entered into a settlement agreement, even though the settlement agreement turned out not to be performed? Holding: Yes, there was recourse to arbitration. Even if the settlement agreement governed, that agreement provided for the full rights under the original agreement, so there is still a right to arbitration. The settlement agreement and the original agreement are “inexorably linked”. If the settlement agreement did not govern, then there was a right to arbitration based on the original contract. The settlement agreement was merely the extension of the original agreement therefore incorporated some of the rights granted under the original agreement. Court draws a distinction between this case and another (First Options) – in that case, there were four documents and only one of the documents contained an arbitration agreement. The party disputing the application of arbitration did not sign the one document containing the arbitration clause.
40 Hart also argued that arbitration in China would provide undue hardship. This is not a persuasive argument- Hart should have taken this into account in the first place. He agreed to arbitrate and now he is stuck with it. -
Becker Autoradio v. Becker Autoradiowerk – US Court of Appeals – 3rd circuit, 1978 (page 180)
Facts: US firm entered into an exclusive distributorship agreement with German supplier. Contract terminated on June 30, 1976. In early 1977, Becker USA fought this action in federal district court alleging the German company had promised to renew the agreement provided that Becker USA fulfill certain conditions. Becker Germany moved to stay judicial proceedings and compel arbitration. Court of appeals granted this motion. The initial arbitration agreement provided for arbitration of “all disputes arising out of and about this agreement”. “In reaching its conclusions, the court distinguished cases, in which the disputed transaction occurred prior to the expiration of the contract whose arbitration was invoked, from cases in which the disputed transaction occurred after expiration.” (page 180) In the former type (at least where a renewal would cause the entire agreement to be carried forward), it can be said that the dispute as to termination and renewal “arises out of” or is “about” the agreement that contains rge arbitration clause. (page 181) NOTE: Why does Becker Germany want arbitration while Becker USA prefers court adjudication? Choice of law in federal court is determined by the court rather than by the parties. Adjudication might include a jury trial (jury might be more willing to accept the story than the arbitrators would). Does Becker Germany have a strong argument as to why this matter should go to arbitration? Did the original agreement contain provisions that said that unless the parties indicate otherwise, the contract will automatically be renewed? No. The agreement said that to renew the agreement, negotiations should begin 6 months prior to termination. In the absence of a tacit agreement provision, is an oral agreement effective to renew the contract? No- the formal requirement under Art. II of the NY Convention is not met for any arbitration clause to be in force. Can one say that when there is an existing contract that it can be completely renewed (along with the arbitration agreement) then there is no need for the formality under Art. II? Generally, the formal agreements must always be met with every contract. In terms of policy, without explicitly providing for a tacit agreement, there would need to be a complete formal renewal of the contract. To what extent is it significant whether the renewal occurred before the expiration of the contract? It depends on how you read the arbitration clause: If you read it as only applying
41 to disputes that arose during the life of the agreement versus if you read it as also applying to disputes that arise after the termination of the agreement. This issue does not relate to the formality requirements. Von Mehren thinks the court should be looking first at the formal requirements and only second at when the renewal occurred. NOTE: Von Mehren thinks that the district court was right, but that the 3rd circuit has gone to extreme efforts to make the arbitration available. If the plaintiff really wanted to get into PA courts so as to have a jury trial, then the 3rd circuit is really going to try to block this by providing arbitration. Arbitrators are not going to be as sympathetic as a jury to the implausible story. Is an oral agreement sufficient to renew a previous agreement. District court says no, 3rd circuit says yes to protect the arbitration. Von Mehren says district court was right, but 3rd circuit went too far. II.1.g The Position of the Parties Who Are Not Signatories of the Arbitration Agreement a) Cosmotek Case (United States District Court, District of CT, 1996, p. 183) Facts: Cosmotek USA and Cosmotek Turkey entered into an agreement (containing an arbitration clause) whereby Cosmotek Turkey became USA’s distributor for the sale of units, which were manufactured by APSI who was neither a signatory nor a party to the contract. Cosmotek Turkey argues having claims against both Cosmotek USA and APSI. Issue: Cosmotek Turkey argues that both claims should be heard together in federal court, notwithstanding the arbitration clause, because APSI (the not signatory party) cannot be compelled to arbitrate. Cosmotek USA and APSI move to stay the proceeding before the District Court because of the arbitration clause. The issue is whether the court can merge what was supposed to be submitted to arbitration into the court proceedings. Holding:
The Court did not accept to merge both proceedings. It granted the motion for a stay of the court proceedings, subject to the reporting to the court as to the progress of the arbitration proceedings and subject to the absence of any delay or hindrance in the arbitration proceedings. The reasoning of the Court was the following: o The Federal Arbitration Act (FAA) does not apply to the plaintiff’s claims against the not signatory party. o An arbitration agreement must be enforced notwithstanding the presence of other persons who are parties to the underlying dispute but not to the arbitration agreement. Because there is a valid arbitration clause, the court has no discretion to merge both proceedings.
42 o The Court rejected the plaintiff’s argument that APSI, the not signatory party, was bound by the arbitration agreement under agency law. Indeed, the Court rejected the plaintiff’s agency theory (i.e. that the signatory contracted as APSI’s agent) on the ground that the agentprincipal relationship was not disclosed in the contract. o Since the court decided not to bring the not signatory party into the arbitration proceedings, the question of the sequence of both proceedings arose. The court granted the stay of its proceedings because the not signatory party would not suffer any hindrance or obstruction in an expeditious determination of its claims by a stay and relegation to arbitration. If the court had not stayed its proceedings, there could have been different decisions on the same issue. To sum up, the Court stayed the litigation to wait the results of the arbitration and ordered safeguards in order to avoid undue delay. The consolidation of both proceedings would have resulted in more difficulties (in particular at the enforcement stage) than advantages. b) The theories for binding non-signatories to arbitration agreements The two following situations should be distinguished, the first one being far more common than the second: • Situation where a signatory tries to force a nonsignatory to join the arbitration proceedings as a party (Cosmotek case); • Situation where a nonsignatory wants to intervene in an arbitration against the objection of one or both parties. As to the first situation, US case law has recognized the 5 following theories under which non-signatories may be bound to arbitration agreements of others (see in particular Thomson-CFS, SA v. American Arbitration Association): 1. Incorporation by reference: A nonsignatory may compel arbitration against a party to an arbitration agreement when that party has entered into a separate contractual relationship with the nonsignatory which incorporates the existing arbitration clause. Case law examples: o Separate agreement with nonsignatory expressly assuming all the obligations and privileges of signatory party under an agreement constitutes grounds for enforcement of the arbitration clause by nonsignatory. o If a party’s arbitration clause is expressly incorporated into a bill of lading, nonsignatories who are linked to that bill through general principles of contract law or agency law may be bound.
43 2. Assumption: In the absence of a signature, a party may be bound by an arbitration clause if its subsequent conduct indicates that it is assuming the obligation to arbitrate. 3. Agency: (this argument was made in Cosmotek) Traditional principles of agency law may bind a nonsignatory to an arbitration agreement. An agent who signs a contract on behalf of a disclosed principal will not be individually bound absent explicit evidence of the agent’s intention to bind himself instead of or as well as the principal. When an agent signs a contract and does not indicate in the contract that he is signing on behalf of a disclosed principal, as its agent, the agent is deemed to be acting on his own behalf. 4. Veil Piercing / Alter Ego: In some instances, the corporate relationship between a parent and its subsidiary is sufficiently close to justify piercing the corporate veil and holding one corporation legally accountable for the actions of the other. Courts generally pierce the corporate veil in two broad situations: to prevent fraud or other wrong and where a parent dominates and controls a subsidiary. It should be noted however that veil piercing determinations are fact specific and differ with the circumstances of each case. 5. Estoppel: Nonsignatories can also be bound to arbitration agreement under the estoppel theory: if a party does not sign the agreement but knowingly exploits it, then it may be bound to the arbitration clause. Those theories developed in connection with a signatory’s effort to join a nonsignatory as a party in an arbitration are not decisive in case of a nonsignatory’s effort to intervene in an arbitration against the objection of one or both parties. In several cases, a signatory was bound to arbitrate with a nonsignatory at the latter’s insistence because of the close relationship between the entities involved, as well as the relationship of the alleged wrongs to the nonsignatory’s obligations and duties in the contract and the fact that the claims were intimately founded in and intertwined with the underlying contract obligations. The following problems arise in connection with enlarging the arbitration to nonsignatories: •
Arbitrators: the principle of arbitration that each party should have right to name an arbitrator can be violated. If there are different parties that have the same interest, then their position can be represented by one arbitrator. If the positions are not identical, more arbitrators are needed.
Enforceability: The legal order may not recognize and enforce an award rendered against someone who is not a party to the arbitration agreement. It is questionable whether the above discussed theories for binding not signatories are compatible
44 with the “agreement in writing” requirement of Article II(2) NY Convention and of Article 7(2) Model Law. Prof. von Mehren did not answer the question! Often, persons who are the real debtors tend to remain behind the scene and the temptation has grown quite unsuccessfully to reach for the real personae dramatis. For example, an award rendered by an ICC tribunal which asserted jurisdiction over 4 states when the party signing the arbitration agreement was an organization created by these states was set aside by Swiss Courts. Split Arbitration Clauses a) Astra Footwear Industry v. Harwin International Inc (United States District Court, Southern District of NY, 1978, p. 193) Facts: The sale contract entered into between the two parties contained the following split arbitration clause: “For all claims of disputes arising out of this agreement which could not be amicably settled between the parties, is competent the arbitrage for export trade at the Federal Chamber of Commerce in Beograd (sic). In the case that the buyer is accused, the Chamber of Commerce in New York is competent.” A dispute arose between the parties and Astra sought to compel arbitration before the International Chamber of Commerce in New York. Issue: The issue was the identification of the arbitration institution chosen by the parties: did they agreed upon the New York branch of the ICC or upon the New York Chamber of Commerce, which at the time of the conclusion of the contract provided arbitration services but had ceased doing so? Holding:
The Court granted the petitioner motion to arbitrate. It ordered arbitration before an ad hoc tribunal and asked the parties to submit the names of possible alternate arbitrators, saying that in the event the parties fail to agree on one arbitrator, the Court would designate one. The reasoning of the Court was the following: o An arbitration agreement was made and the making of such agreement was not in issue in the present case. o The parties intended the New York Chamber of Commerce (and not the ICC office in New York). o Since the New York Chamber of New York no longer operates as an arbitral institution, the court had to set the details of the arbitration, in particular regarding the appointment of the arbitrators. In view of the federal policy to construe liberally arbitration clause and to resolve doubts in favor of arbitration, the court relied on section 5 of the 9 U.S.C., which provides for assistance when the arbitrator selected by the parties cannot or will not perform. This rule was extended to a situation
45 in which the institution selected by the parties cannot perform arbitration functions. According to Prof. von Mehren, 9 U.S.C. section 5 does not really apply to this case (the situation where an institution disappears is quite different from the situation where a party fails to appoint an arbitrator). In this situation you get an ad hoc (not an institutional) arbitration and you get one arbitrator instead of three. The case shows the court’s willingness to save arbitration if it is reasonable. b) YugoslaviaCo v. PDR Korea CO (Arbitration Court of the GDR, 1982, p. 197) Facts: The arbitration clause provided for arbitration in China, in Poland or in Germany (those countries had state arbitration courts): “If no mutual consent is reached the arbitration of People’s Republic of China, the People’s Republic of Poland and the GDR will be adopted.” The Plaintiff filed a petition with the Arbitration Court of the GDR. He mentioned that it had filed the same petition with the Polish Arbitration Court before, which had declared himself incompetent after the Defendant had challenged its competence. As Defendant refused to participate in the arbitration proceedings, the Plaintiff moved for the issue of an interim award concerning the competence of the Arbitration Court. Issue: The issue is whether the arbitration clause may be regarded as an effective arbitration agreement and thereby as a basis for the competence of the arbitration court. The Defendants argues that the parties agreed upon a “twostep procedures, i.e. that the clause is a preliminary agreement to arbitrate, but that it required a further agreement in order to be effective. Holding:
The Court found the arbitration clause as being valid and effective and interpreted it as an optional one which allows the Plaintiff the choice of applying to any arbitration court of the three mentioned countries.
c) Comments Split arbitration clauses were often used in the CMEA. A split arbitration clause is a clause providing that different institutions have jurisdictions over different issues of the case. The allocation criterion in split arbitration clauses is typically the position of the parties in the lawsuit or the nature of the dispute (e.g. technical v. legal or non-technical disputes). Other distinguishing criteria are also used. One of the main problems in connection with split arbitration clauses is the inherent difficulty in drawing the dividing line. Difficulties also arise in case of counterclaims.
Changed Circumstances a) Partial decision of April 2, 1992 (Landgericht Kassel) Facts: The contract provided for arbitration in Belgrade. By the time the dispute arose between the parties, the Socialist Federal Republic of Yugoslavia (SFRY) had broken up and war turmoil made it impossible to get to Belgrade, so that the Claimant decided not to file its claim before the arbitration tribunal in Belgrade but before the German Court. At the same time, Claimant informed the defendant that it terminated the arbitration agreement for cause. Issue: The question is whether the Claimant can terminate the arbitration agreement because of the changed circumstances. Holding:
The Court found that claimant had the right to terminate the contract because of the changed circumstances. The court’s reasoning was the following: o Should an arbitration agreement become – for whatever reason – practically unfulfillable, each party shall have the right to terminate it for cause. Although by concluding an arbitration agreement a party renounces to a large extent the legally guarantied judge, this does not yield, however, a renunciation of legal protection of state courts in the event the arbitration clause becomes impossible to carry out. o In the present case, an effective legal protection from arbitration can no longer be expected because of the totally changed circumstances (all telephone and postal communications with Belgrade were interrupted; it was almost impossible for claimant to get to Belgrade; SFRY was in a state of war).
It should be noted that another German Court was also faced with the impact of the breakup of Yugoslavia on arbitration. The Belgrade Tribunal rendered an arbitral award in favor of a Croatian Claimant against the German Respondent after the breakup. The Claimant sought recognition and enforcement in Germany. The Court did not accept Respondent’s argument that the arbitration agreement lost its validity after Croatia became a separate state. II.2 •
LIMITS ON ARBITRABILITY National decision-makers (legislatures or courts) have essentially been left to their own discretion in defining the disputes that can be settled by arbitration. Indeed, the NY Convention (see articles II(1), II(3) and V(2)) and the UNCITRAL Model Law (see articles 8(1), 34(2)(b) and 36(1)(b)) both acknowledge that non arbitrability
47 may defeat an arbitration agreement or prevent enforcement of an award, but they do not attempt to define the concept. •
Countries have traditionally been reluctant to allow arbitration in spheres where there is a strong public interest at stake, i.e. in areas regulated by mandatory rules of law designed to protect important public interest.
Civil-law countries rely largely on legislation to mark the borderline between what is – and what is not – arbitrable. The touchstone in this legislation is often the distinction between claims that are, and those that are not, within the free disposition of the parties (see the French Code Civil: “rights of which one can dispose freely”; Swiss Private International Law Act: “any dispute involving an economic interest”).
Common-law countries rely largely on case law to delimit arbitrability (see the US cases discussed below).
In both civil-law and common-law countries court disputes in the following areas, which are generally regulated by mandatory rules of law designed to protect important public interest, have sometimes been found nonarbitrable: o Antitrust o Securities law o Intellectual property o Damage from unilateral termination of exclusive distributorship agreements o Political embargoes o Damage to cargo carried under a bill of lading (COGSA claims) o Bankruptcy o Administrative contracts.
The trend in most legal systems is in the direction of sharply limiting the nonarbitrability doctrine.
The arbitrability issue can arise at 4 points in the life of an arbitrated dispute: o Before a national court deliberating whether to enforce an arbitration agreement o Before the arbitrators as they try to decide the scope of their competence o Before a court, generally in the country where the arbitration has taken place, in an action to set aside the award o Before a court asked to recognize and enforce the award.
II.2.b Statutory Definitions of Arbitrability and Their Interpretation See pp. 210-212 for examples of statutory definitions of arbitrability.
48 a) Fincantieri-Cantieri v. Ministry of Defense of Iraq (Court of Appeal of Genoa, 1994) Facts: This case involved a number of contracts concluded between the Republic of Iraq and Italian shipbuilders for the supply of corvettes (ships). All contracts contained a standard ICC arbitration clause. Embargo legislation against Iraq was then issued by the European Union and Italy. The Italian parties commenced proceedings against Iraq in the Court of Italy, alleging frustration of contract and seeking termination and damages. The Iraqi ministry objected to the court’s jurisdiction arguing that the dispute should have been referred to arbitration. Issue: In light of the newly adopted Italian embargo legislation, is the dispute arbitrable? Holding:
The Court hold that the dispute was not arbitrable due to Italian embargo legislation. The court’s reasoning was the following: o It is beyond doubt that the rights deriving from those contracts could be freely disposed at the time when the arbitral clause was stipulated. It is equally beyond doubt that they could not when this action was commenced because of the embargo legislation. But is this dispute arbitrable in the circumstances of this case? o The answer to the question whether the arbitral clause contained in the contracts was “null and void, inoperative or incapable of being performed” under article II(3) of the NY Convention must be sought in Italian Law (article 806 Code of Civil Procedure), as this question directly affects jurisdiction, and the court can only deny jurisdiction on the basis of its own legal system. o The court found that under Italian law the dispute was not arbitrable. The court did not agree with the lower court’s reasoning that any dispute on the validity or the termination of the contract, which does not lead to a decision on diritti indisponibility (rights of which the parties may not freely dispose) cannot be deemed to fall outside the jurisdiction of the arbitrators. In this case, referral of the dispute to arbitrators could have affected rights which international and national embargo legislation had made indisponibili. Also, an hypothetical arbitral award against the claimants, denying termination of the contract, would have recognized the continuing validity of the contracts, thereby affecting dritti indisponibili.
It seems that the court says that Italian law invalidates any arbitration clause under which arbitrator might reach a result inconsistent with Italian mandatory law. b) Covem SpA v. Compagnie Française des Isolants (Court of Appeal of Bologna, 1993, p. 219) Facts: In Covem an exclusive distribution contract barred the distributor in Italy from selling similar products for a period of 2 years after the termination of the
49 contract. It provided for ICC arbitration in Paris under French substantive law. After termination of the distribution contract, the Italian distributor sued before the Court of first instance in Bologna to have the non-competition clause declared invalid, arguing that it violated European antitrust law. Issue: Is this antitrust dispute arbitrable? Holding:
The Court of first Instance applied Italian Law to the question of arbitrability (following the lex fori principle), noted that European antitrust law is mandatory and found that Italian law barred arbitration. The reasoning was similar to that in Fincantieri. On appeal however, the Court of Appeal reversed and referred the parties to arbitration. The reasoning was the following: o The court applied Italian Law not based on a lex fori principle, but because the French party had not shown that French law differed form Italian Law. o The court said that according to a recent Supreme Court decision, for the arbitral clause concerning disputes on diritti indisponibili to be null and void - and consequently for the contract to be null and void- it is necessary that the contract containing the arbitration clause affect the diritti indisponibili by transferring, waiving them etc, thereby disposing of them in violation of the law. Therefore, all other disputes, including those disputes concerning the validity of a contract having as its object diritti indisponibility, are arbitrable – just as are arbitrable all other disputes concerning the contract’s validity- insofar as they do not affect diritti indisponibili. o Since the arbitral clause is autonomous with respect to the contract, the court hold that the disputes concerning the contract’s validity (more specifically the validity of the non-competition clause) were arbitrable.
The Covem and Fincantieri decisions both discussed the following Italian Supreme Court decision: c) Italian Supreme Court Decision of May 19, 1989 (p. 220) Facts: Epargne had agreed to sell its business to Quarker, including know-how and an important trademark. In return, Quarker had agreed to pay royalties to Epargne. Under Italian mandatory law, it is forbidden to sell a trademark without also selling the firm that make the product to which the trademark attaches. The agreement was not carried out and the parties went to arbitration. Epargne asked for execution of the contract and payment of royalties. Quarker sought to avoid performance under the agreement, but without challenging the validity of the agreement under Italian Law. The arbitral tribunal, considering the validity of the agreement not in question, rendered an award in favor of Epargne ordering the payment of royalties. Quarker sought to set aside the award.
50 Issue: Should the arbitral award be set aside on the ground that the dispute was not arbitrable and that the arbitration agreement was invalid? Holding:
The court did not set aside the award for the following reasons: o First, the arbitration would be invalid , if two conditions were met: (i) the container contract, in which it was found, actually transferred rights that the law prohibited to be transferred and (ii) any party settlement or arbitral award concerning the contract actually transferred a nondisposable right. o Second, the arbitration clause would be invalid if it expressly authorized the arbitrators to decide whether the container contract transferred a non-disposable right and hence was invalid. o Because the award in that case only ordered the payment of royalties and because the arbitration clause was of a generic, non-specific nature, the court found the arbitration agreement valid. o The court also noted that if arbitration proceeds under a valid, general arbitration clause and in that proceeding a party raises a claim of invalidity because a non-disposal right has been transferred, then the award will be annulled if the arbitrators do not apply the mandatory law correctly.
Which court of appeal decision, Coveme or Fincantieri, seems more consistent with this Italian Supreme Court decision? II.2.c Arbitrability Tested in Court Practice The following case is the leading United States decision on arbitrability. a) Mitsubishi Motors Corporation v. Soler Chrysler-Plymouth (US Supreme Court, 1985, p. 221) Facts: Soler entered into an exclusive distributor and sales agreement with CISA, a Swiss company wholly owned by Mitsubishi and Chrysler. The agreement contained a choice-of-law clause providing for application of Swiss law. A dispute arose that led Mitsubishi to file a request for arbitration before the Japan Commercial Arbitration Association, as provided in the arbitration clause contained in the agreement. Mitsubishi also brought an action before the US Courts seeking an order to compel arbitration.
51 Soler responded by making antitrust counterclaims under that the Sherman Act2. It alleged that Mitsubishi and CISA had conspired to divide markets in restraint of trade by refusing to permit Soler to resell cars to buyers in other areas 3. The District Court ordered the parties to arbitrate. The Court of Appeal hold the antitrust counterclaims nonarbitrable. Issue: The Issue is the arbitrability, pursuant to the Federal Arbitration Act and the NY Convention, of claims arising under the Sherman Act and encompassed within a valid arbitration clause in an agreement embodying an international commercial arbitration. Holding:
The Supreme Court considered Soler’s antitrust claims arbitrable. o The court of appeal, which found that the antitrust claims were nonarbitrable, based its decision on the American Safety Equipment case. In American Safety Equipment, which involved domestic arbitration, the 2nd District Court found that antitrust claims are nonarbitrable for the 4 following reasons: 1. Private parties play a pivotal role in aiding the government enforcement of antitrust law by means of the private action for treble damages (the Sherman Act provides that damages are 3 times the amount that the fact-finder determines is owed). Indeed, the Sherman Act provides for two kinds of enforcement: private enforcement (by parties) and public enforcement (by judicial system). 2. The strong possibility that the contracts which generate antitrust disputes may be contracts of adhesion militates against automatic arbitration. Review should proceed before the courts rather than the arbitrators. 3. Antitrust issues tend to be complicated and require sophisticated legal and economic analysis and thus are illadapted to strengths of the arbitration process (i.e. expedition, simplicity, minimum requirements, common sense, equity). In other words, the arbitrators’ skills may not be sufficient to deal with antitrust issues. 4. The antitrust law is too important to be decided by private arbitrators, especially if they are foreign.
Under the Sherman Act, the validity of territorial restrictions in exclusive distribution agreements is governed by what is called the “rule of reason”. Under the rule of reason, a court must weight the anticompetitive tendencies of a given agreement against the procompetitive and other welfare-enhancing aspects of the transaction. Antitrust law is violated only if on balance the anticompetitive aspects predominate. 3
Soler did this to improve its bargaining position by increasing pressure on the other side to settle. If there is any merit to the antitrust action, the proceedings in the courts could potentially result in large damages.
52 o The Supreme Court expressed skepticism regarding the American Safety doctrine, saying that there is no reason to assume at the outset of the dispute that international arbitration will not provide an adequate mechanism. It further said that the tribunal is bound effectuate the intentions of the parties. Where the parties have decided that the arbitral body is to decide a definite set of claims, which includes claims arising from the application of American antitrust law, the tribunal therefore should be bound to decide that dispute in accord with the national law giving rise to the claim. o The Supreme Court noted that having permitted the arbitration to go forward, the national courts of the US will have the opportunity at the awards-enforcement stage to ensure that the legitimate interest in the enforcement of the antitrust laws has been addressed (see article V(2)(b) of the NY Convention, which reserves public policy of the country where enforcement is sought). In the present case, the parties’ agreement also included a choice-of-law clause providing for application of Swiss law. The Supreme Court is in fact saying that it is perfectly permissible to arbitrate foreign antitrust claims so long as the arbitrators will, no matter what the law chosen by the parties for governing their dispute says, apply US laws to such claims. Otherwise enforcement of the award may well be denied. This is the so-called “Second-look doctrine”: We will let these issues go to arbitration, but we reserve the right to review the award if they don’t respect the public policy of the national law. Prof. von Mehren notes however that, as a practical matter, it is not likely that the US courts will have a “second look” at the stage of the enforcement of the award. Once there is an arbitral award, the distributor would have to pursue further litigation which is unlikely to happen. Commenting the Mitsubishi decision, J. Werner said that it is very unlikely that arbitrators would accept to apply US antitrust law to claims to be ruled, according to the parties’ clear will, by Swiss law. The ICC said however that it is more likely (but not sure) that arbitrators would consider the antitrust claims under US law because “according to leading German and French authorities, there is a growing tendency of international arbitrators to take into account the antitrust laws and other mandatory legal rules expressing public policy enacted by a state, even though that state’s law does not govern the contract by virtue of the parties’ choice or applicable conflicts rules”. Some commentators said after Mitsubishi that it was likely that litigants in international arbitration would be tempted by the Court’s reference to the possible invalidation of awards that improperly resolve antitrust claims to raise antitrust claims and defenses with the intention of using them in later attacks upon the award. But apparently there has been no particular increase in the assertion of antitrust claims. It should also be noted that the Court of Justice of the European Communities (ECJ), in Benetton, held that a Dutch court was required to annul an award (and in a relevant case to refuse to recognize or enforce such an award) where it violated European Union antitrust
53 law, even though the parties and the arbitrators did no raise antitrust issues during the arbitration proceedings, and even though under Dutch law an award’s inconsistency with Dutch antitrust law would not have risen to the level of public policy needed to annul the award.
54 II.2.d Law Applicable to Arbitrability a) MSA (Belgium) v. Company M (Switzerland) (Court of Appeal of Brussels, 1985) (p. 247) Facts: This case involved an exclusive distributorship agreement having its effects, inter alia, in Belgium and containing an arbitration clause and a choice-of-law clause saying that Swiss law applies. The Belgian party stated court proceedings in Belgium. The Swiss party objected to the Court’s jurisdiction on the basis of the arbitration clause. The Tribunal de Commerce found the arbitration clause invalid under Art. II(1) of the NY Convention, on the ground that under mandatory Belgian law the matter was not arbitrable (under the Statute on Unilateral Termination of Concessions for Exclusive Distributorship agreement, Belgian Court are competent and Belgian Law applies). The Swiss party appealed and the lower court decision was reversed. Issue: Is this dispute arbitrable? Holding:
The Court held that the dispute was arbitrable and that Swiss law applied to this question. The court’s reasoning was the following: o The arbitrability of a dispute must be ascertained according to different criteria, depending on whether the question arises when deciding on the validity of the arbitration agreement or when deciding on the recognition and enforcement of the arbitral award. o When the arbitrability of the dispute is considered only from the point of view of the validity of the arbitration agreement, i.e. when the issue arises before the arbitral tribunal or before a court requested to decide only on this issue (and hence independently from any enforcement proceedings), it is sufficient – for the arbitrator or the court - to ascertain whether the law of autonomy authorizes the submission of the dispute to arbitration. o According to the NY Convention, the arbitrability of the dispute under the law of the forum must be taken into consideration only at the stage of recognition and enforcement of the award and not when examining the validity of the arbitration agreement (article II(1)). o In casu, the parties have agreed that the contract is governed by Swiss Law. Swiss law therefore applies to the question of arbitrability.
NOTE: The Cour de Cassation has overruled the decision of the Court of Appeal. Thus, arbitrability can only be decided under Belgian law. An issue can not be found arbitrable unless the parties agree that the issue be governed by Belgian law (Maude). Would the Belgian courts be required under the NY Convention to recognize an award rendered in such a case? No. In a case with facts similar to those of the above-mentioned
55 case, a German manufacturer sought recognition of a Swiss arbitral award to bar a Belgian distributor’s court action in Belgium based on mandatory Belgium Law. The Belgium Supreme Court relied on Article V(2)(a) to refuse to recognize the award on the ground that under Belgian Law the matter was not capable of settlement by agreement and that Belgian law was mandatory. Van den Berg has criticized the solution adopted in MSA v. Company. His position is the following: For the enforcement of the arbitral award, the NY Convention refers in Article V(2)(a) to the law of the country where the enforcement is sought, i.e. the lex fori. For the enforcement of the arbitration agreement, the Convention is silent to this point: Article II (2) merely states that the agreement must concern a subject matter capable of settlement by arbitration. Notwithstanding this silence, it is must be presumed that for the enforcement of the arbitration agreement also the lex fori governs the question of arbitrability. b) Consultant (France) v. Egyptian Local Authority (ICC arbitral award, 1990) Facts: The parties entered into a contract according to which the consultant had to make technical and financial studies to prepare the book of a tender for a construction project in Egypt. The contract provided for arbitration in Geneva under the ICC Rules and for Egyptian Law to be applicable. The Egyptian authority argued that the contract was an administrative contract and that the administrative courts well exclusively competent, the dispute being therefore non-arbitrable. Issue: Is this dispute arbitrable? Holding:
The Arbitral Tribunal held that the dispute was arbitrable. Wihtout determining whether the parties’ contract was an administrative contract, the arbitrator concluded that because the seat of the arbitration was Geneva, it is necessary to determine to which extent the Swiss rules governing international arbitration apply to decide the issue of arbitrability and enable an arbitral tribunal to refuse to apply foreign legal provisions according to which the dispute would not be arbitrable. Applying Article 177(2) Swiss Private International Law Act, the arbitrator concluded that it was not possible to invoke Egyptian Law to contest the arbitrability of the dispute.
CHAPTER III : THE ARBITRATORS III.1
The Arbitators - Qualifications, rights and responsibilities
Arbitration can provide a truly neutral ground for the settlement of dispute. One of the most important elements of this neutrality is the arbitrators. The parties can choose their arbitrators and in doing so may combine or choose between the two main types of fairness in third-party decision making: impartiality or balance. Neutrality is not synonymous with impartiality. It is an exterior sign or an indication of likely impartiality. There are 2 dimensions in the neutrality: the personal level (the absence of family and business ties) and the general level (based on the group of affiliation, e.g. Nationality, religion, ethnic background). Arbitral institutions often discuss those issues in practical guidelines. Guidelines may also be found in the lex arbitri. Legislators have generally refrained from posing requirements based on groupaffiliation, in particular nationality (see e.g. aricle 11(1) UNCITRAL Model Law: no person shall be precluded by reason of his nationality from acting as arbitrator). Institutional rules have shown more sensitivity to appearance of bias on the ground of nationality (e.g. Article 9(5) ICC Rules provides that the sole arbitrator or the third arbitrator shall be chosen from a country other than those which parties are nationals). Often, potential arbitrators are expected to help the parties in their choice by disclosing any circumstances which may give rise to justifiable doubts as to their impartiality (see on p. 270, an example of the statement of independence arbitrators often have to sign). The number of arbitrators: In the majority of countries, the number of arbitrators must be uneven. The Cour d’appel the Paris held that an arrangement of the parties to submit the dispute to 2 arbitrators and to engage a third one (an umpire) only in the event that the 2 arbitrators could not agree is contrary to French mandatory law. 1 or 3 arbitrators? The relative merits of these 2 options are still debated. According to Redfern/Hunter, arbitrations are usually most effective when the arbitral tribunal is composed by 3 arbitrators. It may be more expensive, it may take longer, but a tribunal of 3 arbitrators is likely to prove more satisfactory to the parties and the ultimate award is likely to be more acceptable to them. The ICC Rules give a certain priority to the sole arbitrator (see article 8(2)), contrary to the UNCITRAL Rules (see article 5). If 3 arbitrators are to be appointed, the predominant practice it that each party appoints one of the three and that the 2 appointed arbitrators select the presiding arbitrator. Once selected, the arbitrators enjoy rather wide powers, which are not limited by appellate level scrutiny. Under many national laws, an award can only rarely and with difficulty be vacated on the ground of improper or unskilled behavior of the arbitrators (note that the NY Convention does not govern vacation of an award). The safeguards are: scrutiny before choice, challenge procedure, and a limited number of grounds for setting aside or refusing recognition of the award. Some questions emerging in the context of standards of expected behavior, as well as rights and responsibilities of the arbitrators have an answer in the lex arbitri, while other are beyond the legal norms. Codes of Ethics also play an important role.
57 III.1.c Considerations on neutrality, independence, and disclosure a) Bernini: “Report on Neutrality, Impartiality and Independence” •
Independence is the result of the two following basic features, traditionally referred to the arbitrators, which are not univocally appraised in different arbitral environments : Neutrality, which is an objective status, the likelihood for the arbitrator to be and remain wholly equidistant in thought an action during the whole process. and Impartiality, which is a subjective status to be actually tested on the context of the concrete relations existing between the arbitrators and each party. This can only happen as the outcome of some conduct carried in bad faith. Thus, one can be impartial without being neutral; conversely, no arbitrator may be deemed neutral if he is behaving partially. Lacking such perquisites, the arbitrators should decline the appointment as arbitrator. But should the requirements of neutrality, impartiality and independence also be referred to party-appointed arbitrators? According to Bernini, impartiality is expected from both the partyappointed arbitrators and the presiding arbitrator, unless the parties have agreed otherwise beforehand. As to neutrality however, in the light of the existing practices, a margin of discretion in allowing departure from the basic canon of neutrality is possible. It is acceptable that one party seek, in terms of legal and cultural extraction, greater intellectual propinquity with its appointed arbitrator. In other words, the parties are free to set their rules and can choose that the arbitrators may not be neutral and therefore may not be expected to remain totally impartial and independent of the appointing party. However, if the parties elect not to depart from the classic criteria of neutrality and impartiality, the arbitrators are strictly duty-bound to comply with this choice and remain fully independent. Note that the US position is that the party-appointed arbitrators are not fully neutral. Unless the parties have agreed otherwise, it’s appropriate for a certain amount of favorable consideration on the part of party appointed arbitrator toward the appointing party. Examples touching on independence: Generally speaking, attention should focus on the existence of personal, affective or financial interests and ties with one party. The mere negative appearance may also be harmful. The sole subjective conviction of the arbitrator that a given circumstance is not going to alter his independence is not sufficient. If the arbitrator has rendered a prior opinion on specific points, without possible variables concerning special factual details or circumstances, and such points are clearly the object of the award to be rendered, it is proper
that the designated arbitrator decline the appointment. Pending the proceedings, the arbitrator shall also have to refrain from expressing opinions on issues which are before him for decision. The presiding arbitrator should not be a so-called arbitrator-dictator, i.e. an arbitrator who tends to act alone without prior consultation with the parties and the other co-arbitrators. The duty of impartiality demands that all arbitrators and parties enjoy the same opportunity to participate in all procedural activities, and therefore implies a minimum of prior consultation and agreement. Communications with the parties: No arbitrator should entertain direct relations with the parties. Written communications should be sent in copies to all arbitrators who should also be privy to any oral exchanges between the arbitrator(s) the party/parties. As a rule, without the delegation of special powers, the presiding arbitrator is to be deemed a “primus inter pares”. The need for impartiality reaches its peak at the moment of the decision (arbitrators should resist any pressure from external sources; the award should remain secret before it is handed down; an arbitrator should not slow down the decision by adopting dilatory tactics).
c) Lowenfeld, “The party-appointed arbitrator in international controversies: some reflections” (p. 263) • •
An arbitrator is a judge, not a member of a party’s team. While he is expected to be receptive to the position of the party that appointed him, an arbitrator is not supposed to approach a controversy with mind made up. Often, when a party-appointed arbitrator seems too zealous in the defense of the party that nominated him, he looses credibility with the chairman, which may lead the chairman to rely on the analysis and advice of the other party-appointed arbitrator who is trying to sort out the facts and the law fairly. Once the party-appointed arbitrators are chosen, one of their first tasks it to select the presiding arbitrator. While the selection of the president is in the first instance for the party-appointed arbitrators, there seems to be an unwritten rule saying that consultation between counsel and arbitrator concerning a prospective chairman is permissible, so long as it is limited in time and in subject matter (e.g. they should not discuss how a candidate would react to a specific argument of the case). Lowenfeld suggests that it would be helpful if the various rule-making authorities would provide expressly a) that contacts concerning the selection of a chairman are permissible and b) that contacts after the tribunal is finally constituted are not permissible except as directed by the presiding arbitrator. The role of the party-appointed arbitrator: The presence of a party-appointed arbitrator gives some confidence to the party (and its counsel) who appointed him that at least one of the members of the arbitral tribunal will listen to his case carefully and sympathetically. Moreover, the party-appointed arbitrator can serve as a “translator” of legal culture, when matters that are self-evident to lawyers from one country are puzzling to lawyers from another.
III.1.c How to get (or not to get) the right arbitrator (p. 273)
a) Hacking, “Well, did you get the right arbitrator?” (p. 273) •
In international arbitrations, arbitrators are either appointed by the parties or by one of the international arbitration institutions (e.g. ICC, LCIA, AAA). When appointing arbitrators, the institutions go trough a similar process on the line of: Is the appointee neutral and independent? Does he have the right linguistic skills? Does he have the right knowledge for applying the governing law of the arbitration? Does he have the right professional expertise in the subject matter of the arbitration? Most arbitration institutions rules provide also that the appointee shall be suitable for being appointed in the arbitration in question (art. 9.1 ICC, art. 6.4 AAA, art. 7.1 LCIA). But according to the author, there is a dissatisfaction in the appointment of arbitrators by arbitration institutions for the following reasons: While the arbitration institutions know more than the parties about the arbitrators, they don’t know as much as the parties about the dispute (e.g. is technical expertise needed). There is insufficient information known about the availability of the arbitrators for conducting the arbitration on a reasonable timetable. There is a lack of knowledge about the personal qualities of the prospective arbitrator (does he have good management skills, is he good on procedural issues, is he sound in judgment, is he up to the job of being arbitrator in this arbitration?). Some of the difficulties arise out of the different ways institutions select the arbitrators: The ICC works through national committees: for example, when a French arbitrator is requested, the ICC national committee of France makes the recommendation. Some national committees are good, other not. (Von Mehren does not like this system, in particular because the ICC appoints the arbitrators without really knowing the facts of the case.) As to the AAA, the Secretariat of the AAA, after having consulted the parties on the qualities they are seeking in the arbitrator, provides a list to the parties from which they are invited to select their preferences (a list of 10 arbitrators if a sole arbitrator must be appointed and a list of 15 arbitrators if a three person arbitral tribunal must be set up). Each party is given the opportunity to strike out 3 (or 5 in the case of a 3 person panel) without giving reasons. Then, the parties must select in order of preference their preferred arbitrators (1st, 2nd, etc). The arbitrator with the lowest count is selected. According to the author, the drawback in such a system is that, rather than selecting the arbitrators on the basis of the highest common denominator, it can end up by selecting them on the lowest common denominator. Also, the AAA has no power to refuse to make the
appointment of the “party-chosen arbitrator” even if it knows that he is a lousy arbitrator, which Hacking considers as a lacuna of the AAA Rules. The LCIA runs its selection on a consultation process in which the Secretariat proposes to its Board its preferred choice and the Board then decides. This make it hard for new younger and more innovative arbitrators to be selected. The same problem prevails when the parties must appoint a sole arbitrator or a third arbitrator. The basic problem in the selection process of the arbitrators is that there is not enough information available to the parties and their advisers. There are directories, it is possible to ask for resumes, but the community of arbitrators can provide more help in the following ways: all potential arbitrators should be willing to be interviewed by the parties wanting to appoint them. But the meeting should take place in a neutral place, the merits of the case should not be argued and the arbitrator should, after the interview, make a note and disclose it to his fellow arbitrators. Parties can ask to see examples of awards written by the potential arbitrator. Parties should ask for references. Parties should consider the written publications of a potential arbitrator.
Note: Lord Hacking views the selection process in an institutional setting. In ad hoc arbitrations, methods of appointment may be different, but the qualities and characteristics that make an arbitrator acceptable are essentially the same. Von Mehren’s comments about the possibility to interview potential arbitrators: You can certainly ask general questions (education, previous experience in arbitration etc), but no questions about the facts of the case. The arbitrator should avoid answering hypothetical questions related to the case, because this would involve a kind of psychological commitment toward such position. Can the parties ask if the arbitrator believes in a strict interpretation of the statutes? Arbitrators generally refrain from answering such questions, because it may be considered as a kind of psychological commitment to take such position in the arbitration. Von Merhen says that it is now a universal practice for prospective arbitrators to be willing to meet with and be interviewed by the parties who whish to select them. b) Nathan, “Well, did you get the right arbitrator?” (p. 278) •
Nathan criticizes the fact that arbitrators from developing countries and women are underrepresented in the arbitration world. What makes a successful arbitration is not the fact that arbitration proceedings and deliberations went smoothly because all were from the same club, but that justice was done although the deliberations were rough an bumpy. What are the right linguistic skills to qualify as arbitrator? The ability to address rally with clarity and precision and in perfect grammar, but one should not confuse
• • •
advocacy skills with judicial skills. Listening, observing and writing skills are far more important to an arbitrator than oral skills. Often, arbitrators from Academia are better qualified to be arbitrators. Titles should not be used at all in an international arbitral context because the recognition of these titles places both arbitrators and counsels from developing countries in a disadvantaged position. Rather than management skills, what an arbitrator needs is good inter-personal skills.
III.1.e Codes of Ethics (p. 284) a) The IBA Rules of ethics for international arbitrators, Introductory note (p. 284) • • • •
International arbitrators should be impartial, independent, competent, diligent and discreet. These rules seek to establish the manner in which these abstract qualities may be assessed in practice. The Rules reflect internationally acceptable guidelines developed by practicing lawyers from all continents. The Rules cannot be binding either on arbitrators or on the parties, unless they are adopted by agreement. The IBA takes the position that international arbitrators should in principle be granted immunity from suit under national laws, except in cases of willful or reckless disregard of their legal obligations. The normal sanction for breach of an ethical duty is removal from office, with consequent loss of entitlement to remuneration.
b) Coulson, “An American Critique of the IBA Ethics for int’l arbitrators” (p. 285) •
The IBA Rules of Ethics state that they reflect internationally acceptable guidelines developed by practicing lawyers from all continents. Coulson says however that some of the IBA rules are in conflict with US practice and the AAA-ABA Code of Ethics. For example US parties tend to be skeptical about the impartiality of party appointed arbitrators. The AAA-ABA code provides for neutral and non-neutral party appointed arbitrators, but it states a general presumption of non-neutrality for party-appointed arbitrators unless other specified. Thus, in the US, some party-appointed arbitrators are expected to favor their appointing party’s point of view. They are not strictly neutral. In Vantage v. Commerce Tanker Corp., the court held upheld an award in a case in which the arbitrator was an attorney for the party, a stockholder for the party, related to the president of the corporation and had advised on the contract. The AAA-ABA code does not impose certain minimum obligations upon nonneutral arbitrators. A party-appointed arbitrator can be predisposed towards a party, but he is obliged to act in good faith, with integrity and fairness. The party-
appointed arbitrator’s disclosures need be sufficient only to describe the general nature and scope of any interest or relationship. Neutral arbitrators should be independent and impartial. Facts that might lead to reasonable doubts about their impartiality should be disclosed. The IBA rules require disclosures about past or present business relationships with a party or with potentially important witnesses. The AAA-ABA code goes further, including existing or past financial, business, family or social relationships which are likely to affect impartiality or which might reasonably create an appearance of bias. The AAA-ABA code states that when all parties request an arbitrator to resign, the arbitrator should do so. Where one party makes such a request, the arbitrator should withdraw, unless the parties agreement provide for challenge procedure or the arbitrator decides that reason for the challenge is not substantial and that withdrawal would cause unfair delay or expense to another party and would be contrary to the end of justice. The IBA Rules contain no such procedures. Note: If an arbitrator withdraws, it is necessary to start the proceedings over again with the new arbitrator if a party so wishes. The same applies in case an arbitrator dies. It can therefore be costly and time-consuming. The IBA Rules instruct a potential arbitrator who is approached by one of the parties to make sufficient enquiries in order to determine whether there may be any justifiable doubts about his impartiality or independence. But would not such a conversation oblige a prospective arbitrator to discuss the merits of the case? The IBA Rules instruct the party-appointed arbitrator to avoid unilateral communications about the case with the parties. If such communications occur, he must inform the other arbitrators and parties of its substance. In case of violation of this rule, the appropriate initial course of action is to request the arbitrator to refrain form making such communications. If such unilateral communications continue, the remaining arbitrators may inform the innocent party. But is it an accurate picture of current practice? How many party-appointed arbitrators have resigned because of unilateral communications? The AAA-ABA code, with its non-neutral arbitrators, reflects a more pragmatic approach. Where the IBA rules state that no unilateral arrangements should be made for arbitrators’ fees, the AAA-ABA code allows party-appointed arbitrators to negotiate compensation with their party. Note: In case of institutional arbitration, institutional rules generally provide for rules regarding fees. According to von Mehren, if there is no provision for the fees, fees should be discussed by the parties before the appointment of the arbitrators. He also thinks that allowing separate fee arrangements between a party and that party’s appointed arbitrator is not appropriate. Another difference concerns arbitrators’ participation in settlement discussion. A neutral arbitrator under the AAA-ABA code should not initiate proposals for settlement, discuss settlement with one party in the absence of another, but may act as mediator or conciliator if asked to do so by the parties. Party-appointed arbitrators, on the other hand, are free to discuss possible settlements with their party, unless the parties agree otherwise. The IBA Rules provide that the arbitrators can make proposals for settlement. If an arbitrator discusses settlement terms
• • •
unilaterally with one party, he should normally be disqualified from any further participation in the arbitration. Both the IBA Rules and the AAA-ABA code impose a duty of confidentiality upon the arbitrators, during and after the arbitration. Arbitrators are directed not to assist in post-arbitration proceedings. Will these rules encourage litigation against the arbitrators? The question will be answered through experience. It will also be interesting to see whether the fiction that party-appointed arbitrators are totally impartial will survive in practice.
b) Lutz, “Partisan arbitrators and the case against bias in int’l arbitration” (p. 291) •
The current AAA-ABA code provides for neutral and non-neutral party appointed arbitrators, but it states a general presumption of non-neutrality for party-appointed arbitrators unless other specified. The revision of the AAA-ABA code, still in draft form, recognizes and allows the existence of non-neutral arbitrators in commercial arbitration. The continued sanctioning of non-neutral arbitrators creates both practical and ethical problems; allowing an arbitrator to act as an advocate for the party that appoints him has adverse practical solution because it directly conflicts with the international trend against bias in commercial arbitration Holding all arbitrators to the same standard of neutrality helps to ensure the fairness of the process and at the validity of arbitral awards, and enhances confidence in the system The proposed revision would create different standards for arbitrators in domestic commercial arbitration than for those in international ones Permitting party-appointed arbitrators to act as non-neutral advocates for one side is contrary to the established and respected ethical norms of fair and impartial decision making.
64 October 16, 2003 Rights and Responsibilities of the arbitrators Fouchard – article: Relationships between the arbitrator and the parties and the arbitral institution - assesses the relationship btwn the parties and the arbitrator – says that the arbitrator is really a judge by virtue of a contract - Fouchard describes it as a triangular relationship – btwn all three parties a. Responsibilities of the arbitrator towards the parties i. Equality & Impartiality: When the parties appoint arbitrators there’s a contract. The arbitrator assumes obligations to the parties and is bound to behave equitably and impartially throughout the proceeding. He must ensure that they have the opportunity to plead the case. ii. The arbitrator has the duty to fulfill his responsibilities with due diligence (ie reasonable time limits - page 295 – this does not require that the arbitrator be available for an indefinite time in the future – it is not simply there for the convenience of the parties but nonetheless, must be done within a reasonable time period) VM says that in practice, the chairman of the panel is the one that really has the most control over the schedule. If the parties agree that they would like to have a matter dealt with in a certain period of time – does that mean that the arbitrators must carry this out even if it is not convenient for their schedule? No. iii. The arbitrators must carry out his task until completion unless some grave excuse (for example: he dies!). iv. The arbitrator must respect the confidentiality of the arbitration. b. The parties have three main responsibilities to the arbitrator v. The parties must pay the arbitrator’s fees. (pecuniary obligation). This includes both expenses and fees. This can at times, be regulated under National laws, other times it can be the actual institution that has rules regarding fees – schedule of fees. In this regard, it is worth noting that most institutions use a scale of fees that take into account the commercial amount in dispute and possibly, the difficulty of the case and the time spent by the arbitrators in deciding it (page 297). Fundamental principle: prohibition of any unilateral financial arrangement between the arbitrator and the party who nominated him. Less certain whether, if requested by the parties, a national judge could check, and where applicable, reduce the amount of the arbitrator’s fees (page 298). Text states that the parties would have
65 to maintain that the pre-established provisions of standard form contract were imposed on them by economic abuse. Errors: arbitrator’s fees may be reduced or refunded in whole or in part. This is a consequence of the bilateral nature of the arbitration agreement and there are several French and Italian decisions to this effect. VM states that it would have to truly be a clear case of error – a party cannot simply allege error because they don’t like the ultimate decision. vi. The parties acting alone may not dismiss the arbitrators. The party who appoints the arbitrator does not continue to have control over the arbitrator. vii. The arbitrator has the right to continue the work until completion. Agency theory: VM does not seem to like this theory – he states that there is a question as to whether the relationship between the parties and the arbitrator is contractual – certain systems assume that the relationship is really one of agency but VM says that unless the arbitrator is really performing nothing more than administrative tasks, this seems incompatible with the arbitrator’s role as adjudicator. For certain kinds of special problems, this may be done in practice but as arbitration has developed, this has become less of a possible way in which to define the relationship between the parties and the arbitrator. b. When there’s an institution involved, then there is a relationship among the arbitrators, the parties and the institution. i. Institution/Arbitrator: The institution is bound to carry out its obligations of organization, administration, and supervision of the arbitration, and to pay the arbitrator’s fees, provide technical assistance and provide technical support (there are questions as to how far these obligations go – he notes that even if the institute goes quite far in assisting in these matters, it should not be perceived as a problem at all). It must treat the arbitrator accordingly and respect the arbitrator’s distinct provisions – ie. the institution should allow the arbitrator to rule on all matters – there would be an inherent interest for the ICC to get involved in matters of competence/kompetenz as the ICC has a clear interest in seeing the matter arbitrated. There is a question as to whether this relationship is actually a contractual one – can be interpreted as the center being the agent of the parties charged with the simple mandate of naming the arbitrator – OR – in other circumstances, it has been interpreted as a contractual relationship between the center and the arbitrator in which both are bound by the applicable arbitration rules. VM says remember: the institute does not actually arbitrate. We accept that the institution does not perform any acts in the
66 adjudicative sense (and he at this point refers to article 27 of the ICC whereby the decision must be reviewed before the ICA for purposes of control that article 27 provides – can only review the decision with respect to the form and not the substance – ICA is only competent as to modifications to the form). VM states that this review is not judicial but more of an administrative review and it is permissible as long as the review does not go to the merits. What about the arbitrator? He guarantees that he will remain impartial and that he will perform all of his duties and see the matter through to the end. At the end of the article, Fouchard discusses the manner in which the relationship btwn the arbitrator and the institution is contractual. He states that it is based on twofold consent: consent of the institution that names the arbitrator and sends him the rules and the consent of the arbitrator when he reads the rules and agrees to fulfill his task. Fouchard goes on to describe it as an innominate contract in which party, separately “undertakes to provide and does provide the other with intellectual services” (page 302). Arbitrator’s Fees K/S Norjarl v. Hyundai Heavy Industries – Queen’s Bench Commercial Court 1991 ii. FACTS: Contract between Korean company to build a drilling rig for the Norwegian limited partnership. Norwegian limited partnership rejected the rig. The parties go to arbitration. The arbitrators seek commitment fee. iii. Commitment fee: Assume there is an arbitration contract, and the arbitrators are appointed but the parties settle. The arbitrators who were appointed don’t have any claim for compensation unless it was specified in the agreement. Arbitrators are upset by this (they have to keep their schedule open, they have to turn down other opportunities because of the expectation they would be arbitrating this case). To protect themselves, arbitrators ask for a payment regardless of whether the parties settle- this is a commitment fee (a fee for agreeing to be available for the arbitration, whether or not the case actually goes to arbitration). Such an arrangement would be enforceable. iv. ISSUE: Are the arbitrators entitled to a commitment fee? v. HOLDING: There wasn’t a provision for a commitment fee in the agreement. Therefore it is difficult to make a claim for a commitment fee. On the other hand, they may not be obligated to set aside time to arbitrate the case two years later. They simply have to do the best they can do to accommodate the parties (the original terms). But it would be appropriate for the arbitrators to ask for a
67 commitment fee to set aside a specific amount of time for the parties (this goes above and beyond the original terms). So they are not entitled to a commitment fee under the original contract, but it is not wrong for them to ask for a commitment fee now. vi. ISSUE 2: One party is prepared to pay a commitment fee, the other party is not. The Norwegian party is willing to pay the commitment fee upfront, the Korean party objects out of fear that the arbitrators will be biased in favor of the Norwegian party. Is it permissible for one party to pay the commitment fee vii. HOLDING 2: No obligation to pay a commitment fee. It would probably be acceptable for the Norwegian party to pay the commitment fee, but that is not what is requested. The arbitrators decided they would not accept the commitment fee from Norwegian party unless Korean party agrees so as not to expose themselves to the perception of bias. Therefore the arbitration could not go forward. 1. The judge releases the arbitrators from the agreement and approves of what the arbitrators are saying. viii. NOTE: Judge says that more precise contractual arrangements are needed for the service contracts with the arbitrators. Once an arbitrator has been appointed it is highly undesirable to negotiate fees or anything that affects him personally with one party, especially if the other party objects. ix. NOTE: the judge applies the principles of contract to the case at hand. Von Mehren thinks there might be another framework to apply, but the judge doesn’t say what it is (p. 305) VM states that the judge is emphatic about one thing: (bottom of page 308 and top pf page 309) – an arbitrator should not agree with one party re his fees and not with the other. Court says that this is not desirable before the arbitrator is nominated and it is even less desirable once he has been nominated. 2. Note on Arbitrator’s fees (Varady) a. The issue of renumeration usually is not addressed openly. When the party representative or the arbitration institution approaches the potential arbitrator, there is usually no discussion of fees at this stage. b. If it’s an institutional arbitration, then there are clear rules on compensation. c. If it is an ad hoc arbitration under the UNCITRAL Rules, then there are no fee scales. There’s a suggestion that fees should be reasonable taking several factors into account. In reality, the arbitrators usually announce their fees to the parties but they do so after the agreement has been concluded. This is problematic for the parties- if they object, they must rely on the language of the UNCITRAL rules and they might prevail, but they probably do not want to object out of fear that it will anger the arbitrators. As a result, parties are stuck paying whatever the arbitrators demand (and fees seem to be higher than they would be under the ICC pay scale).
68 d. The arbitrators can decide their own fees and what is appropriate according to the award. They cannot decide if there is a dispute over the fees as they are one party to the dispute- there is no neutral third party. It does not have the qualities of the adjudication, so the issue cannot go to the arbitrators. Negotiation is allowed but the authority cannot be delegated to them to make a binding decision. e. The applicable law for the arbitration may provide for the adjustment of the arbitral fees. f. There is a similar problem as that of Hyundai with respect to the practices of the arbitral tribunals of institutions. ICC requires deposits be made to cover the costs of the tribunal. Provisions in the tribunal say that where one party refuses to make a payment the other party may put up the advance so the arbitration can go forward. Is this inconsistent with Hyundai? No because it has been accepted by the parties before hand so it is part of the original contract if they agree to abide by the ICC provisions. This may cause potential prejudice of the arbitrators. The alternative it to allow the unwilling party to stop the arbitration. Rights and Responsibilities of the Arbitral Institution Cubic Defense Systems v. ICC – Court of Appeal of Paris, 1998 (page 317) i. Article 27 of the ICC Rules (Supplement p. 197) requires the ICA to scrutinize the award and point out elements of substance. The purpose is to avoid having a technical defect render the award void. ii. ISSUE: Is it appropriate for the ICA to review the award? Yes- the ICA is not a “court” and they are not determining the substance of the award so they are not adjudicating. iii. FACTS: Parties agreed on ICC arbitration. Cubic argues that the ICC did not show promptness in resolving the dispute (it took 5 years to arbitrate the case). The ICA is supposed to extend the time limits when it is appropriate to do so. In this case, the task was performed mechanically, which is what dragged out the arbitration. iv. There is also an argument that Art. 27 mandates that the administrative functions be kept separate from the adjudicatory tasks. States that the fundamental principle of separating the administrative and judicial tasks have been violated. Cubic states that article 27 breaches this separation. v. The French Court of first instance concluded that there was no liability on the part of the ICC and that the ICC had fulfilled all of its obligations. vi. Cubic appealed on a number of grounds. vii. Now there is a provision in the ICC Rules that provides there should be no liability on the part of the arbitrators or the ICC for issues relating to the conduct of the arbitration. In most countries arbitration is like a court proceeding- cannot sue the court for bad
69 decisions. Cannot impose liability on the arbitrators because they did not handle the arbitration well. A few recent cases have overcome this presumption which is why the rules now contain the provision. October 23, 2003 Begins class by asking what is a truncated tribunal? Situation in which one of the arbitrators does not complete his functions. This can happen for a valid reason or for an invalid reason – by invalid, we mean a situation in which the arbitrator steps down or refuses to sign the award (as we will see herein) because he does not agree with the decision taken by the other arbitrators. Once the award has been taken and then – one of the arbitrators refuses to sign the award, the refusal does not go to the substance of the matter – in other words, this would not “put the award in question”. There are 2 situations in which we seem to have universal rules: A - at the very end of the arbitration – once the award has been taken – we are then in a situation as above B – before evidence has been taken 1. Can Arbitrators Abandon their function? a. Ivan Milutinovic v. Deutsche Babcock i. FACTS: Arbitration that was scheduled to be in the final hearing. One of the parties moved to re-introduce some testimony and present some new evidence. The arbitrators decided, 2-1, that this additional information should not come in before the arbitrators rendered their award. The dissenting arbitrator withdrew from the arbitration. The Yugoslavian professor felt that the majority had sacrificed truth for simplicity in light of the fact that new evidence had come to light. ii. ISSUE: What should happen now? iii. HOLDING: The Swiss Federal Court held that the matter had not been decided pursuant to the agreement of the parties. The decision required an arbitration tribunal composed of three arbitrators, the actual decision was only made by two arbitrators. Therefore they did not carry out the arrangement that was contemplated by the arbitration agreement. The award is not valid. A new tribunal was therefore established under the ICC and they had to begin over again. VM – what consideration should we give due process in this case? iv. NOTE: Generally, one arbitrators’ refusal to sign an award is not ground for saying that the arbitration was not concluded, the
70 arbitration is to be considered valid. This case is different because a two-person tribunal was never contemplated by the parties, they provided for a three person tribunal. v. REMEDY: To get an enforceable award, the resigning arbitrator either had to reconsider or he had to be replaced. If you replaced the arbitrator, you couldn’t proceed immediately to an award. The parties would either have to start over or they would have to agree on a way for the new arbitrators to catch up. VM asks the question as to whether the arbitrator could be forced to continue? Specific performance seems to be an impossibility in this type of a situation. vi. RULES ABOUT THIS PROBLEM – VM asks the question whether there are any rules that regulate the matter? – there are rules in the ICC that deal with the resignation of an arbitrator but there are no rules that deal with the situation in which an arbitrator refuses to sign an award. 1. Why isn’t this kind of problem (truncated tribunals) regulated in the arbitration agreement? It’s impossible to recreate a comparable arbitral tribunal, you have to start over. It’s a nasty problem which parties and institutions have failed to address. 2. Art 13 1998 London Court of Arbitration- includes a specific provision on truncated tribunals. Two remaining arbitrators have the right to continue and make decisions and awards. In determining whether to continue the arbitration, the two other arbitrators should consider the stage of arbitration and the reigning arbitrator’s reason for resigning. If the two remaining arbitrators determine not to continue the arbitration, then the two arbitrators should inform the parties and the London Court of Arbitration. 3. No comparable provisions in the ICC Rules. 4. Article 12: leaves it in the hands of the reconstituted tribunal to replace the arbitrator or decide to what extent the arbitration can continue. What solution do the ICC and Schwebel propose in this situation? VM - You can’t say that Schwebel’s argument of estoppel really fits anywhere here. After all, what can you say was their conduct in this matter that would favor estoppel? The fact that the party did not challenge the resignation? How can you argue the application of the New York convention in this case? Article 5 (1)(d) – you can argue that it was not constituted pursuant to the agreement of the parties once the arbitrator stepped down. VM – says that it is worthwhile looking at the Swedish attempts to deal with the problem. (page 341): the new (1999) Swedish Arbitration act directly deals with with the issue of truncated tribunals at section 30. The problem (according to VM)
71 is the use of the terms “without valid cause”. The other problem arises in the situation of the chairman walking out – section 30 states that if one of the arbitrators walks out and no clear majority has been attained, the decision will then rest with the chairman. No consideration is made of the fact that he may the arbitrator that ultimately walks out. VM – states that there are numerous differences between the various national laws regarding the manner in which appointment is dealt with. 2. Appointment and Appointing Arbitrators (p. 357, #5) a. FACTS: There was an arbitration in which neither the seat was in France nor was it governed by French procedural law. (These are the two conditions for a court to deal with an arbitration). May the French organization appoint an arbitrator? The arbitration clause provided for the appointing authority, the President of the ICC, to only have the authority for the third arbitrator. The parties were to appoint the other two arbitrators. They sought a remedy in Israel, but that court refused to exercise its authority and make an appointment. It was not considered feasible to ask the Iranian court to make an appointment. b. ISSUE: Does the Paris court have the power to appoint the second arbitrator? c. HOLDING: French court can make the appointment. Judge can intervene where there is a denial of justice as long as there is some connection with France. The right of arbitration is a matter of public policy and using ICC creates the link with France. d. Analysis: Under Article 1493 of the French Code, court intervention is allowed if there is difficulty in constituting and arbitral tribunal. The conditions are: (1) arbitration is taking place in France or (2) French Code applies. Nonetheless, the French Court made the appointment on the grounds that a “denial of justice” had taken place in another country and there were ties to France. The right of a party to submit their dispute to arbitration is a matter of public policy, since they designated the ICC as the authority for the third arbitrator, and since the ICC has its seat in Paris, a link to France was established. So Israel could nominate its arbitrator and the court would make the appointment if Israel failed to do so. e. COMMENT: Von Mehren thinks that the links to France through ICC does not satisfy the requirement of Article 1493 of French law. Could the ICC make the default appointment? Under Article 8(4) of the ICC Rules (See Supplement p. 188), if a party fails to nominate an arbitrator, a nomination shall be made by the ICC. But Article 9(6) provides that when this comes about, the appointment should be made by the national committee, which in this case would have been the Israeli committee. So the solution provided by the ICC Rules is not satisfactory. Using the ICC would take the matter back to Israel , but Israel has already to cooperate. Nonetheless, this approach would avoid the criticism that what was done in this case puts in the hands of the French an issue which should have bee regulated under the
72 law of the seat of arbitration or under the law which governs arbitration proceedings (which in this case was not covered by international law). f. COMMENT 2: The Belgian Code imposes certain conditions with respect to the substantive provisions of their procedural devices. The Belgian Code requires that there be formal validity and that the arrangement cannot provide a privileged position in the appointment process for the arbitration agreement. See p. 358 #7. The Yugoslav requirement insists that one member of the arbitral tribunal should be from Yugoslavia. Does this place one of the parties (the foreign party) in a privileged position? This is an unusual requirement, usually there is no special requirement with respect to substantive validity. 3. Appointing Arbitrators Chosen by the Parties. a. Sapphire International Petroleum v. National Iranian Oil Company (page 358) What we have here is a decision made by a sole arbitrator. He asks what is the problem that arises here: we have a request to the Swiss federal court i.
FACTS: There had been a contract of development and production between Sapphire and NIOC. A problem arose and they went to arbitration. But a problem arose with the request to the selection of arbitrators. NIOC was supposed to appoint one arbitrator and Sapphire was supposed to appoint one, and the two were supposed to agree on a chair. But in reality, Sapphire appointed an arbitrator. NIOC did not appoint an arbitrator. Sapphire withdrew its arbitration the grounds that that the default mechanism had been invoked. The default mechanism was that the President of the Swiss Federal Court should appoint a sole arbitrator. After the President made the appointment NIOC was supposed to appoint an arbitrator but they argued that there was a problem because there wasn’t proper notice given for the time delay due to the replacement of one party by another. So the provision providing for the appointment of the sole arbitrator should not have come into play. ii. ISSUE: What should the sole arbitrator have done? Did he have the power to examine the issue himself. iii. HOLDING: The sole arbitrator has no authority to review an order of the court. He has received the authority as a result of a binding judicial decision, whose correctness it is not for him to question, and since he is also bound to decide the merits of the plaintiff’s claim. iv. QUESTION: Why didn’t the sole arbitrator have the ability to answer the question of whether the default provision was correctly applied? The NIOC position is that the time sequence is such that the default provision was applied prematurely. Why didn’t the sole arbitrator to decide whether he had the power or whether the default
73 provision was applied prematurely. This decision did not have the nature and character of a judicial decision because it was made by a judge not in his official authority but in his individual authority. So didn’t the sole arbitrator have a duty to evaluate the competence? Von Mehren thinks one answer is in 1967, the law was unclear as to whether the arbitrators had the kompetenz-kompetenz power to question his authority. Another possible answer (the one Von Mehren believes is accurate) is that the sole arbitrator really wanted to be the arbitrator so he glossed over the issue of his competence. It was convenient for him to avoid the issue, although he shouldn’t have used this technique to avoid the issue of whether under the facts of the case the appointment provision was operative. The stronger argument is that the provision has not yet come into force, although it could potentially become available. v. JUDICIAL v. PRIVATE CAPACITY: If the arbitration seat had been in France and the President of the Chamber of Cassation has been asked to make the appointment, then when the arbitration agreement spoke of the appointment by the President, then it is ambiguous if the appointment is being made in his judicial or private capacity. If he makes the appointment in his judicial capacity, would he have a duty to make a determination with respect to the validity of the appointment (ie. If his appointment will be binding, shouldn’t he have to analyze whether the use of the provision was in accordance with the parties’ agreement)? Von Mehren thinks that yes, he does have a duty to make this determination If he doesn’t make this determination, then one of the important obligations has not been satisfied and therefore is not res judicata. vi. Even if the judge was in an official capacity, should the arbitrator rule on his authority under the arbitration agreement if the appointer did not address the issue? Aren’t arbitrators authorized to determine their adjudicatory authority? Just because a case is referred to arbitration, that doesn't mean the arbitration should go ahead. It may still be appropriate for the arbitrators to address the issue of whether they have authority under the arbitration clause. vii. Von Mehren thinks the analysis in the Sapphire case is incomplete and unsatisfactory. b. Elf Aquitane Iran v. NIOC – (page 364) i. The difference between the two cases. In Sapphire, there was no attack on the validity of the contract or the arbitration clause, it’s simply a question of whether the clause on default appointments had been properly carried out. In Elf, the underlying contract has been set aside so the question is whether the arbitration clause must also be set aside.
74 ii. FACTS: When NIOC refused to appoint its arbitrator, the President of the Danish Supreme Court appointed a sole arbitrator. NIOC objected on various grounds to the sole arbitrator’s competence. The underlying had been declared void, so NIOC claimed the arbitration clause was also void. iii. ISSUE: Is it up to the judge to determine whether the arbitration clause was valid, or should he just appoint someone. iv. HOLDING: The Danish judge said it was not up to him to decide whether the arbitration clause was void, he was just appointing the arbitrator. v. NOTE: The arbitrator then rejected NIOC’s objections and declared himself competent to decide the issue. Conclusion: So the issue is whether the judge is supposed to assess the validity of the arbitration agreement or whether he is just supposed to appoint someone, and the arbitrator will then, under the principle of Kompetenz-Kompetenz, determine whether he has the authority to arbitrate. Under Sapphire, the court held that if judge appoints an arbitrator, that implies that the arbitrator has the authority and the arbitrator should not analyze whether in fact he does have the authority. Von Mehren thinks that decision was based more on the idea that the arbitration wanted to arbitrate the case than on the relevant law. 4. An appointing authority no relied upon a. Philips Hong Kong (HK) v. Hyundai Electronics (HK) He begins by asking what is the peculiarity in this case? States that there are 2 appointing authorities – this can raise a problem depending on the manner in which it is framed. In other words, is it framed in such a manner as to make it alternative? If not, which one will have precedence over the other? He says that this case is somewhat unusual because there are questions that arise regarding how long they should wait prior to requesting for the assistance of the ICC. There are complications that arise based on the payment of the fees. i. FACTS: Contract with an arbitration clause that provides that if a dispute arose, there are two default procedures: (1) HK institution makes an appointment of (2) ICC makes an appointment. One party requested that the local HK institution make the appointment, and the institution failed to do so. Then there was a discussion about the ICC, but the ICC was never asked to make an appointment. Instead, one party has gone before the HK Court and asked the court to step in as a default mechanism for the appointment of the arbitrator. The court does not look at the validity of the agreement to arbitrate, but it does examine the operative provisions as far as the ICC is
ii. iii. iv.
concerned. One party challenges the default ICC because its provisions are inconsistent with the provisions agreed to by the parties. But the court does not have to decide this because the ICC rules provide that the ICC can appoint arbitrators without the ICC rules applying. ISSUE: Does the court have the authority to make an appointment? Should the ICC have made the appointment? HOLDING: The court did not have the authority to make the appointment. The parties had to turn to the ICC before they could come to court. NOTE: If the ICC did not have the provisions for appointment outside the rules, then the court might have been willing to step in to appoint an arbitrator. But if the default mechanisms can be used then they must be exhausted. This is a split default provision. Either the HK Court or the ICC can make appointments. What if one party goes to one and the other party goes to another? Might create difficulties about who has primacy in the appointing process. Probably be the HK Court because it is first in the agreement. What id the ICC was requested to make an appointment but it hasn’t done so because it hasn’t received its fee? Court will not step in because the parties should have known about the fee when they contracted.
5. An appointing authority that ceased to exist a. Gatoil International (Panama) v. NIOC (Iran) i. FACTS: Contract between Gatoil and NIOC with contract providing that if the two party appointed arbitrators would agree on a third arbitrator, but they cannot agree. The President of the Appeal Court of Tehran supposed to be the default arbitrator but that court has not existed since the revolution. Gatoil argues that the arbitration clause has been null and void since it was written (since the Appeal Court no longer existed) therefore the arbitration should be in England. Also Gatoil says that there are no appropriate arbitrators that are willing to go to Tehran to do the arbitration. ii. ISSUE: was the arbitration clause valid? iii. HOLDING: Yes iv. ANALYSIS: The argument that Gatoil cannot find arbitrators to go to Tehran is premature- Gatoil has not exhausted its attempts to find acceptable arbitrators who are willing to go to Tehran. The parties’ mutual intentions was to arbitrate. (the standard form contract worked into their files and they were not careful about adapting the technical provisions of the arbitration clause). Only after all feasible opportunities have been exhausted will the court allow the arbitration in London. Court feels Gatoil did not try hard enough to find someone.
76 6. Multi-Party Arbitration and the Selection of Arbitrators. a. Siemans AG and BKMI v. Dutco Construction i. Set aside the decision of the Paris Court of Appeals. ii. Two parties who are respondents were forced to share a single arbitrator even though their positions were not exactly the same. In the arbitration clause, the parties seem to agree to three arbitrators under the ICC rules. iii. ISSUE: Must the respondents share an arbitrator? iv. HOLDING: No, ANALYSIS: Parties can agree to situation by expressing agreement that relates to the multi-party context, but it is not open to the arbitrators to reach the conclusion that by agreeing to one context you are also agreeing to another. The clause did not contemplate the situation in which they found themselves, so the agreement of the other context did not carry over.
77 III.3 CHALLENGES Reports on the Challenge Procedure, van den Berg (p. 379) ⇒ The arbitrator should always try to avoid the challenge: first, he must decline the invitation to be an arbitrator if there is any objective ground to question his impartiality or independence. Second, if he plans to accept, he must disclose all relevant information to the parties and institutions involved, if there is a serious challenge, he must then resign. ⇒ The reasons for the increase of challenge procedures: 1. Interpretation of what constitutes impartiality and independence has become stricter. 2. Parties, who are not used to arbitrate, may misconceive the requirements of impartiality and independence. 3. The challenge of an arbitrator can be a powerful delaying tactic. And also may influence the further conduct of the challenged arbitrator. 4. International arbitration became more litigious in procedural aspects. ⇒ The law of the place of arbitration governs the challenge procedure. Also, when there is an institution involved, the challenge procedure is provided by the arbitral agreement and the governing institution, in accordance with the law governing the procedure of the arbitration (law of the place of arbitration). Exception: the ICSID system stands outside the general rules. ICSID is an international convention dealing with investment by private companies in a state system. Investment can be submitted to arbitration under ICSID as it is designed to provide a neutral international form of dispute resolution for these prospects because ordinary arbitration doesn’t give the same degree of protection. It seeks to disconnect the process from national law and national courts. There can be no challenge to the award at the level of recognition. Once the process has concluded a final award, then the award is enforceable everywhere. ⇒ A. The Court Control: Most arbitration laws provide that a party can challenge an arbitrator during the arbitration before a court. However, in the US, courts generally do not remove arbitrators before or during the arbitration proceeding, although they have an inherent power to do so. In practice, judicial review of the qualifications of arbitrators usually occurs after an award has been rendered, when one party seeks to set aside the award. To avoid delaying tactics, modern arbitration laws provide that the court decision on the challenge is not subject to appeal. In Sweden, a party may bring a challenge before the arbitral tribunal itself and that if the arbitral tribunal rejects the challenge, the impartiality or independence of the arbitrator can be questioned before a court only after the award. 1. Advantages: delay in the arbitration proceeding is minimized. Especially if the arbitral tribunal accepts the challenge, since no further proceeding will take place. 2. Disadvantages: if the arbitral tribunal rejects the challenge, a court may have a different view, resulting in a refusal to enforce it, or even a setting aside of the award. It is preferable to avoid direct confrontation between the arbitral tribunal and one of the parties, therefore, it is better if a third party judges the question.
The control of such issue is not confined to the courts of the country where the arbitration is taking place, it can also be analyzed by the foreign courts where the enforcement is attempted (NY Convention, art. V (2)(b)). However, there is no account of a decision that refused enforcement based on lack of independence or impartiality of an arbitrator. ⇒ B. Institutional Challenge Procedures Most arbitral institution provide for a challenge procedure within the framework of the institution, which must be compatible with the applicable arbitration law (law of the place of arbitration). Challenges can be decided: 1. Exclusively by a court: (Swiss Concordat Court) the advantage is that it will not have two instances. The disadvantage is that, in international arbitration, a court from one country can have different views on the impartibility compared to a court of a different country. There will be no uniformity. 2. Exclusively by arbitral institutions: (French law) the same advantage of a oneinstance decision. If more countries adopted this rule, uniformity could be obtained more easily. The disadvantage is that the legal status of the institution’s decision may be uncertain, especially if enforcement is going to be in a different country. The author believes that the State court should have a final word after the award is made, due to the importance of the topic. 3. Arbitral institution with possibility of an appeal to a court: usually the challenge can be brought before the court, since the examination cannot be excluded by agreement of the parties (UNCITRAL, art. 13). The court will be able to do its own examination. The advantage is that in case of respectable institution it is likely that the court will follow the decision. Also, after the court has decided this issue will no longer arise during arbitration and after the award. The disadvantage is that there will be delay due to the two instances decision. The author prefers this system. ⇒ C. Other Procedural Aspects Some arbitration acts contain a time limit for bringing a challenge against an arbitrator. Others allow this constrain to be decided by the parties. Pros and cons of the timing issue: - The challenge process is important to maintain the integrity of the tribunal and the confidence in its neutrality and impartiality. - But the challenge process can be used as a delaying tactic. If the challenge could be made at any time and should be decided by the courts, then a recalcitrant party could challenge, the proceedings would have to be stayed and the process would be extended indefinitely. Party appointed arbitrators: 1. There are limits on parties challenging the arbitrators that they appointed, unless information is discovered after the appointment is made. 2. This view might be theoretically wrong, if you take the position that the arbitrator has no connection to the party that appointed. Should be treated no different that third party arbitrator.
79 3. The ICC rules are silent on the issue. The French Act is also silent on the issue. The arbitral tribunal has a discretionary power to suspend the proceedings in the case of a challenge. When are the challenges to arbitrators permitted and where? 1. The basic issue is whether the control should be exercised during the arbitral proceeding. If court control is exercised during the arbitration proceeding, should the proceeding be stayed or not. 2. The best solution would be to have the arbitral tribunal have the right to determine whether or not a proceeding should be stayed during the challenge. If the arbitration goes on, the tactical delay is avoided. But if the arbitration continues and the challenge is valid, then you have to start the arbitration over again, making the process costly.
Location of the Challenge: where the arbitration is located, where the award is sought to be enforced: 1. Most arbitration laws allow for control during the arbitration. The FAA does not explicitly provide for judicial control, but it is viewed as an inherent power of the court so a statutory provision is not necessary. 2. Courts can control the exercise not only by the state where the arbitration is conducted, but also where the recognition of the award is sought. This is rare in practice, though. Standard of Review in Challenge 1. If the challenge fails, then the issue remains and the model law provides for control by the court. 2. If such control is exercised, what is the nature of the review that the court will conduct under Art. 13(3): is it de novo, or whether there is a significant basis for the conclusion that there should have been a challenge. a. Usually the court reviews the challenge de novo. This is because this is an important issue. If you leave the issue in the hands of the arbitral institution, that institution would naturally be based in favor of continuing the arbitration. Courts should have greater objectivity. Most systems use de novo b. Need to be strict on theses issues because they go to the integrity and the reason for the process.
The NY Convention 1. Grounds for the challenge procedure in Art. V(1)d: if an arbitration was biased by an arbitrator’s lack of impartiality, then you can argue that the arbitral tribunal was not constituted according to the agreement of the parties (to have an unbiased tribunal). 2. Art. V(2)(b): public policy objection could also be involved. Challenges and Court Control * Refineries of Homs and Banias v. ICC, Court of Appeal, Paris, 1986 (p. 389) - Facts: The ICC granted a request for the removal of the party nominated arbitrator. The party filed a suit to annul the ICC decision and claimed for damages. - Legal issue: whether the rules of the ICC were properly observed. The ICC provides for final determination of the challenge by the arbitrators. Would that determination be binding on the courts, or could the French Courts address the issue of bias? - Decision: The court determined that the parties chose to have the ICC to decide their arbitration controversies. Therefore, the court had only to reassure if all the ICC rules were followed to remove the arbitrator. The rules were followed, the parties agreed to the rules so the decision is binding. ⇒ The French Court gives a lot of deference to the ICC, which is very influential in the French legal system. The Court will likely accept decisions as long as they are not unreasonable. ⇒ The result is not a final answer to whether or not a court must respect the determination that the tribunal can reach a verdict that the court cannot then analyze. When you accept a challenge, there is no prejudice to the party by a decision by a biased arbitrator. Perhaps the ICC rule was not properly followed, but the objective does not go to the question whether there was bias that affected the rights of the party. The only issue that remains is whether we should fault the ICC because it leads to this result. But that is a question of the ICC institutional arguments, not of the bias of the arbitrators. * State of Qatar v. Creighton LTD, Supreme Court, France, 1999 - Facts: There was a construction contract between Qatar and Creighton, which provided for settlement of all disputes by arbitration following Qatar law. Dispute and ICC arbitration. There were three awards in Creighton’s favor. Creighton sought to enforce the awards in France and US. US refused on jurisdiction. In France, Qattar sought to prevent enforcement because of the bias of the arbitrator appointed by Creighton. The challenge failed. The reason for the challenge was that the arbitrator helped Creighton’s lawyer and Creighton appointed the arbitrator in another arbitration and that these contacts constituted at least a basis for the appearance of bias. - Legal issue: Was the arbitrator bias in his decision? - Decision: The French court took jurisdiction to review the issue but it was, again, very deferential towards the ICC determination that the arbitrator was sufficiently neutral and objective to withstand the challenge that was made. The only analysis
81 was if the, in the end, the award had any trace of lack of independence or impartiality. Therefore, the actual conduct of the arbitrator was not questioned. Does this suggest that national courts are hesitant to intervene in regards to a decision made by the ICC? CHAPTER IV FOCAL POINTS IN THE ARBITRATION PROCESS IV.1. PROCEDURE BEFORE ARBITRATION TRIBUNALS Selected Elements of Procedure before arbitration tribunals. a. The governing principle with respect to the nature of the arbitral process depends on party autonomy. But usually the parties’ choice is not made through the pre-existing norms such as the rules of arbitral institutions or rules such as UNCITRAL. There are also provisions of municipal law, but these are generally less important. b. Lex arbitri can also be relevant. Lex Arbitri is the law that governs the procedure of the arbitration, which is most of the time the law of the place of arbitration. The Scope and Relative Importance of Lex Arbitri * India v. McDonnell Douglas, award, 1992 (p. 412) - Facts: Arbitration between India and McDonnell Douglas. The parties chose the law of India to govern the contract and affirmed that the arbitration shall be conducted in accordance with the procedure provided by the Indian Arbitration Act. However, the place of arbitration was London. - Legal issue: What law governed the arbitration proceedings? - Decision: The lex arbitri should be the law of the seat of the arbitration. Indian law would apply when it is not inconsistent with English law. ⇒ To the extent that you choose the law, various laws come into play. There’s the law applicable to the contract (basic choice of law with respect to substantive issues). There’s the law applicable to the arbitration proceeding. There’s the law applicable to the external proceeding. ⇒ It is normal for the substantive law to differ from the law of the proceedings (which are usually based on the seat of the arbitration). ⇒ When dealing with the law regulating the arbitral procedure, more than one law could be involved. There could be internal procedure (internal deadlines, hearings, how to deal with evidence — everything procedural in the sense that a procedural code would specify who had to do what and the admissibility and weight of the evidence) and the external procedure (i.e. the external controls/monitoring on the arbitration). In this case, where the arbitration is in London, if you say that the law of India governs the external proceedings, it would be very impractical. You’d have to stop the proceedings in London so you could go to India and argue there, and there could be conflicting local rules on party agreement. The
82 administrability of such a decision would be so inconvenient and impractical, therefore, should be avoided. ⇒ The contract can import certain things into English law (supervisory law) by party agreement. It needs to be done with the approval of the English Court. If there is a conflict between party choice of law and public policy convenience by the court, the court will like to go against the agreement. The parties could refuse to arbitrate in the event the Lex Arbitri can’t be chosen, but otherwise it would just be considered a defect on the contract. ⇒ There are three kinds of law: 1. The one that governs the contract. 2. The one that governs the arbitration 3. The one that governs the procedure of arbitration, which are divided into two: a) internal – which can be chosen by the party. In the case was the Indian Act, and the b) external – which is the national law of the place where the arbitration is being held. It is the supervision enforced by the courts. ⇒ The internal law chosen by the parties cannot go against the public policy of the external law of the place of the arbitration. Guide to the UNCITRAL Model Law – H. Holtzmann & J. Neuhaus (p. 418) Article 19 establishes the principle of the autonomy of the parties and the arbitrators in governing the procedural conduct of arbitration. It contains 3 rules: 1. The parties are free to agree on the arbitral procedure to be followed, subject to the mandatory provisions of the Model Law; 2. Absent such an agreement, the arbitral tribunal may conduct the arbitration as it considers appropriate; 3. The arbitral tribunal power includes the power to determine the admissibility, relevance materiality and weigh of evidence, unless the parties have agreed otherwise. As a result, if the parties agree that certain evidence should be inadmissible, it should be respected. During the deliberations of article 19, it was pointed out that the Article might be thought to conflict with Article 28, which allows the parties to choose the substantive law that will govern the dispute. Under some legal systems, the issues regarding evidence are considered substantive law. The question was if the tribunal would be bound to follow the substantive rules of evidence or could it decide differently. It was decided that the discretion of the arbitrators, determined in art. 19 (2), should not be affected by the choice of law applicable to the substance of the dispute under art. 28.
The Flexibility of Evidentiary Rules – Roger Ward (p. 428) International trade dispute arbitration uses the civilian procedures in the admission of evidence, which can make things quite difficult for American-trained lawyers. The differences are the following:
83 1. Inquisitorial nature of the proceedings – the judges are not passive, but rather an active participant in the proceedings. 2. The relative absence of discovery, such as interrogatories and depositions. Terms of Reference A particularity of the ICC procedure: the institution is proud of having them. The analogue in other institutional arbitration is pre-trial meetings to the extent that you shape the procedure and organize the case. 1. How did the ICC come to develop the terms of reference procedure? In the days before the clause compromisoire was enforceable, you needed a compromis to establish the authority of the arbitrator. The term of reference was the contract of the specific dispute that gave the arbitrator authority. 2. The terms of reference also serve the function of getting the claims and attaching amounts to then to determine the costs and charges of the ICC for the parties. Help in terms of compliance and enforcing the award. 3. The disadvantages of the terms of reference: a. Limits the flexibility of the arbitration to deal with new issues as they come up. This problem has been removed by the 1998 ICC Rules, Art. 19, which gives the tribunal the ability to provide for more claims. 4. How the terms of reference are drawn up: they’re supposed to be drawn up by the tribunal (by the third party arbitrator). This raises a significant problem: the third party arbitrator only has a very general idea of what the dispute is about, less amount of knowledge. Having the parties to propose the terms of reference to the tribunal solves this problem. The tribunal discusses the proposals and then drafts the official terms of reference for the parties to sign. Of course, even the parties haven’t gone through the full process, so they might not even understand all the issues that are going to arise. Also the process could take a long time, especially if the parties are not fully cooperative. 5. Art. 18 has a description of what the terms of reference covers. Unless the tribunal considers it to be inappropriate, there should be a list of the issues to be determined. Today, it requires a summary of the claims and the relief sought. 6. Timetable: 1998 Rules contain an innovation (compared to the 1988 Rules): the procedural timetable. While drawing up the terms, or immediately thereafter, the tribunal should establish a timetable. 7. One of the problems of arbitration is the problem of blame. In arbitration it becomes difficult to impose strict time limits. It depends on how the parties deal with each other and how the tribunal exercises its discretion. So the provisional timetable becomes a hope rather than a reality.
* Carte Blanche (Singapore) v. Carte Blanche International, NY (1998) (p. 443) - Facts: Carte Blanche Singapore could have asked the tribunal to admit a new claim for consequential damages. If the tribunal had done that, it would have been ok and the tribunal could have made an award on the claim. But under the old rules, the tribunal could only add claims if the parties agreed to add them.
Legal issue: Has a new claim been made by Carte Blanche Singapore, or whether one can interpret the terms of reference to encompass one particular claim. - Decision: The new claim did fall under the terms of reference. They interpret the terms of reference as especially broad so as to accommodate this claim of consequential damages (damages were provided for in the terms of reference). ⇒ The terms of reference were very general. So the new claim could be determined to fit in the terms of reference. But if the ’98 Rules had been in force, it would have been easier to include a new claim because it wouldn’t have required the consent of the other party. ⇒ The decision does not raise the question formally may have been based on the desire to save the parties money. But it turned out to be a good thing for Carte Blanche Singapore. a. P. 449, #2. Under the ’98 Rules, the arbitrators can accept claims that fall outside the terms of reference, even if the parties had initially signed the terms of reference. Is this good, or is the ’88 system better? b. P. 449, #3. If the terms of reference are broader than the scope of the arbitration clause, which is governing? Probably the terms of reference govern because they are agreed to by the parties after the arbitration clause. The terms of reference have the effect of amending the parts of the arbitration agreement that are extended. If the terms of reference broaden the scope of the arbitration it is enforceable because the parties agreed to it. Records and Minutes of the Hearing (p. 450) ICC Comparative Arbitration Practice and Public Policy in Arbitration (extract from project discussing the different legal systems) 1. Countries have various approaches: a. US: there tends to be a stenographic record. This produces a transcript. It could be very expensive and a skilled group of specialists. Unrealistic in a location outside of NY or London that does not have the conditions available in major centers. Will not work very well. b. England: mainly a question of expenses. c. ICC: No stenographic record in the majority of the cases. Only evidence would likely get a transcript. d. Poland: Minutes kept by the proceeding arbitrator which indicate who was present, what business was accomplished, what pieces of evidence were submitted. 2. If you are not in the common law arena and the parties do not have the money for stenographers. What record would be most useful? a. Minutes- gives a record of what happened and who was present. Far from a record of the proceedings. b. The Cairo Approach- tape recording provided and a summarized minutes dictated by the arbitrators of what the witness says. That will be looked at by the arbitrators and the parties who suggest changes. Once that is done you have a statement signed by the parties that gives a good summary of what was said and done. c. The German court system is similar- judge gives summary of what the witness says which is showed to the witness who
85 makes the appropriate changes. Lawyers and judges can also comment before it is finalized. d. In some respects it is more manageable than transcripts but it might have some defects. Presentation of the Case — Problems with Discovery (p. 455) Application of Technostroyexport, a foreign economic association under the laws of the Russian Federation. - Facts: Russian seller petitioned SDNY with respect to discovery that the party wants for use in arbitration proceedings pending in Russia and Sweden. If there were discovery proceeding in US court, the discover proceeding would be initiated by each party. There would be no need to go to court because each party could go out and do discovery. This procedure is consistent with a partydriven system for getting evidence. If this were in a continental European court, discovery would be initiated by the judges. The parties would have to get an order from the court in order to get evidence. This is a court-driven system for getting evidence. Lawyers cannot talk to witnesses for the other side. When it comes to arbitration, in the continental European system, evidence would be arbitrator driven. It would be appropriate for the arbitral tribunal to determine the contact between the party and its counsel and witnesses. If the particular system in question says that there should not be direct contact between the counsel and the witnesses, then that should be respected. Using this as the background, shouldn’t it follow that the court should be prepared to give judicial assistance to a request by the arbitrator. Discover is regulated by the rules of the arbitral tribunal, it is not permissible to do what the claimant would like (ie. To go without an order of the arbitral tribunal and to take testimony). - Legal issue: In arbitration, the arbitral tribunal should determine whether discovery is available and the form and extent of the discovery. Until the tribunal requests judicial assistance, self-help by the parties is not appropriate. Self-help is not appropriate- need to go through the appropriate channels. Rejected the Malev decision. Experts (p. 462) The use of experts in regular court proceedings 1. Types of systems a. In the US, the parties choose the experts who present their findings and opinions through written reports and testimony (direct and crossexamination). b. In continental Europe it is the court that chooses the experts and asks them different questions. The parties can ask them additional questions if needed. It is a less adversarial process. c. These different approaches derive from the adversarial system vs. inquisitorial system. 2. Paying the experts
86 a. In continental Europe, the losing party pays for the experts called by the court. b. Court in the US cannot name experts and charge the parties. You need special legislation to establish such a situation. In the US system the losing party does not have to pay the expenses of the winner. Each party bears their own costs. i. The existence of the jury The same arguments for ordinary evidence (that it should be presented by direct and cross-examination when a jury is present) applies for experts. 3. The difference between arbitration and court proceedings a. Practices in arbitration used to mirror the practices in litigation. But this is no longer the case. (UNCITRAL Art. 26,27, AAA Art. 22) b. Common law: shift from party appointed experts to where the tribunal will appoint the experts and the parties would split the costs. The question remains whether the parties’ requests are honored. i. After the tribunal appointed experts have testified, the parties have the option of questioning this expert and appointing their own experts. (UNCITRAL Art. 26, AAA Art. 22) ii. Thus we see an international standard emerging that makes the role of the tribunal vis-à-vis experts much more significant than the role of the court in expert proceedings in the US. 4. Conclusion: the version of the continental European approach to experts has become the norm in ICA. Representation in the proceedings: Is local counsel required? (p. 486) 1. To represent someone in court, you must be a member of the bar of that country (although this is breaking down in the EU). But this is not the case for arbitration. 2. The local bar seeks to deny the right of lawyers who have not been admitted to the local bar to proceed before the local court. Policy for this: lack of legal background, possible incompetence, not subject to disciplinary control, protection of the public, economic (local bar wants a monopoly). 3. Generally, to represent someone in an arbitration, you do not have to be a member of the local bar. a. But in Singapore, you have to be a member of the local bar (Turner Case) This case created quite an international uproar because it went against the common view and could influence other countries. Singapore was trying to become an arbitration center and this shut it down before legislation was passed. This has been legislated out to allow foreign lawyers. November 7 and 13, 2003 Privacy and Confidentiality (p. 495)
87 b. General proposition that arbitrations are confidential. c. The arbitration hearing is confidential and must be conducted in private (this has been clearly established). d. Hassneh Insurance v. Mew, QBD 1992 (p.495) i. FACTS: An arbitral tribunal rendered an interim award in which the def. was substantially unsuccessful → Defendant wanted to continue its claim against a third party and, therefore, wanted to disclose the interim award and its reasons as well as proceedings transcripts of witness statements, pleadings, and other documents from the arbitration. → Plaintiff sought an injunction to restrain disclosures on the grounds that it would be a breach of confidence by the defendant. ii. HOLDING: In general, arbitration is conducted in private based on an implied obligation (implied term of the contract). BUT exception to the duty of confidentiality: If reasonably necessary for the protection of an arbitrating party’s rights vis-à-vis a third party that the award should be disclosed to that third party, so disclosure is possible (including its reasons). BUT Pleadings, witness statements, disclosed documents in the arbitration and transcripts should remain private. Otherwise, breach of duty of confidence. → Limited exception to the principle of confidentiality. iii. ANALYSIS: 1. Award is an identification of the parties respective rights & obligations. 2. For awards to be enforced there has to be a judgment. → Thus courts reproduce contents of the award in the judgment which will be public. iv. NOTE: Why does the court set the line where it does? Why does it allow the reasoning of the award to be public (in such circumstances, i.e. when necessary for the protection of a party’s rights) but keeps the rest of the arbitration private? 1. The court wants to have an easily administered rule that deals with the most common needs with respect to relaxing the confidentiality. The award and the reasoning for the award are the only two aspects of the arbitration that justify breaking the confidentiality principle. 2. The line drawing is purely efficiency. Confidentiality should be observed where it is compatible with the needs of real life. v. NOTE: Who is bound by the obligation of confidentiality? The parties in the arbitration & other people participating in the arbitration proceeding. BUT arbitrators and third parties are normally not bound (However, arbitrators may be obliged to respect confidentiality under institutional or ethical rules).
88 vi. NOTE: Von Mehren finds that this English theory is not solid enough because puts too much weight on the idea of implied obligation. vii. NOTE: Published awards often delete identifying information of the parties because of the confidentiality principle. 1. Some countries keep confidential the facts of court cases that are not legal issues or omit the names of the parties (ex. in Germany). → So idea of privacy is one that has application also in the field of judicial adjudication. e. As a result of the confidentiality, there is no satisfactory official collection of arbitral awards. a. Esso Australia v. Plowman, Supreme Court of Victoria, 1993 (p.501) i. FACTS-ISSUE: Question whether information disclosed by a party in the course of an arbitration is subject to an obligation of confidence. → Question to what extent the arbitration proceedings are confidential? ii. Lower court: The law doesn’t provide that disclosure of information arising in an arbitration is restricted. → Appeal. iii. Supreme Court HOLDING: Australian court takes a different approach than the English court did (in the Hasnneh case). Both courts agree that the issue of confidentiality is determined in part by the customs of the country. Both agree that the hearing is confidential. Australian court doesn’t base this on an implied obligation but on Australian customs clearly established.→ Australian court rejects the “implied obligation” analysis of confidentiality. iv. Australian analysis is different from the English system. The Australian concern is that it is hard to draw the line between what ought to be confidential and what not. The hearing is confidential but the confidentiality requirement does not extend further unless it can be clearly defined and it is thought by the community that the disclosure is confidential. This standard is not clearly defined and too vague (objection that Australian court makes to the English court). v. English vs. Australian Analysis 1. English analysis seems more stringent & extends the scope of confidentiality, where the Australian analysis seems more circumstantial (based on community standards, based on facts of each case) and reluctant to confidentiality (as long as no clearly defined standard). b. Von Mehren thinks confidentiality problem is overblown. Party will be able to disclose if it wants to. Arbitrators assume obligation not to disclose confidentiality because they made a contract. c. Von Mehren thinks UK position is idiosyncratic. Most national courts take position of Australian court. → Nowadays, other than the hearing, all the
89 rest is not really confidential. But of course, if arbitrators run around giving out all the information on a specific arbitration, there reputation will be wounded (real sanction for breach of confidentiality). d. If parties sign special agreement with arbitrators on obligation of confidentiality, does that provide the parties with a more solid ground if violation of this obligation by the arbitrators? Not really. WHY? I) Cause this violation wouldn’t prevent the award to be enforced under the NY Convention, ii) Cause it would be difficult to obtain damages under general contract law for breach of the confidentiality obligation. How would these damages be quantified? ⇒ Realistically, the violation of such an obligation would have as an effect to affect the arbitrator’s reputation. Choice of law issues before the arbitrators (p. 550) 1. Choice of arbitration simplifies some of the problems of private international law that arise in disputes before courts (eg. Issue of jurisdiction over the parties) BUT the choice of law problems may be more complicated in arbitration. → WHY? → Because of the anational character of international arbitration (i.e. because of the absence of a specific forum). • Applicable procedural law: Most problems solved through party autonomy (or institutional arbitration rules) → Party procedural arrangements are usually subject to the basic standards of due process. • Applicable law to the agreement: Mainly problems are solved through private autonomy. BUT question of the validity of the agreement is usually resolved by application of the law of the country were the award was made (under influence of art. V, I, a of NY Convention). • Applicable substantive law: Mainly party autonomy. • Role of the lex arbitri: Facilitates & supervises the arbitration proceedings. → In principle, parties are free to choose the lex arbitri but rarely do. So, usually courts & arbitrators apply the lex arbitri of the place of arbitration (as a vestige of the jurisdictional theory of international arbitration). • The problem of mandatory law of country A (when parties have chosen law of country B). 2. Focus on applicable substantive law → Basically, the parties are given possibility to choose substantive applicable law. → If we were talking about this 75 years ago, we would say that ICA DOES have a forum (jurisdictional theory), and that forum would be the place of the arbitration. a. 1961 European Geneva Convention on ICA, Article 7: Freedom of the parties to agree on applicable substantive law. If no such agreement, arbitrators apply the law designated by the choice-of-law rules that the arbitrators deem applicable. → Arbitrators may also act as amiables compositeurs under certain conditions. b. 1998 ICC Rules of arbitration, Article 17: Freedom of the parties to agree on applicable substantive law. If no such agreement, arbitrators apply the law under the choice-of-law rules that the arbitrators deem appropriate. →
90 Parties may give power to arbitrators to act as amiables compositeurs or to decide ex aequo et bono. c. Uncitral Model Law, Article 28: Freedom of the parties to agree on applicable substantive law. If no such agreement, arbitrators apply the law under the choice-of-law rules that the arbitrators deem applicable. →Parties may give power to arbitrators to act as amiables compositeurs or to decide ex aequo et bono. i. Holtzmann Commentary on Model Law: Problem of selecting the rules applicable to the substance of the dispute is more complicated in ICA than it is for a domestic court or for an arbitral tribunal in a purely domestic arbitration (because in the latter case there is generally a single set of choice of law rules that govern the choice). → Model Law (like other international conventions on ICA) provide guidelines on determination of applicable substantive law. 1. Paragraph 1: Allows the parties to make a binding choice of law to govern the dispute. The working group adopted view that under this provision the parties could choose not only the body of law in force in a particular jurisdiction but also parts of other legal codes or sets of rules not in force as such elsewhere. → That’s why §1 uses term “rules of law” (as opposed to simply “laws”). Expression “rules of law” covers: national law(s) of one or many States, rules embodied in a convention (even if not in force) BUT expression doesn’t extend to general legal principles or law developed in arbitration awards. → Why limit the parties’ choice? To ensure that the rules chosen are reasonably ascertainable by the arbitral tribunal. 2. Paragraph 2: Arbitral tribunal’s power to choose the applicable law in the absence of a designation by the parties. → Working group decided that arbitrators have to have recourse to choice of law rules, which in turn command application of a law. → This approach was chosen to provide greater predictability & certainty & help ensure that the arbitral tribunal gave reasons for its choice of law. 3. Paragraph 3: Gives effect to the parties’ agreement to have the arbitral tribunal decide ex aequo et bono or as amiables compositeurs. → Even if this type of arbitration is not known in all legal systems, provision seemed appropriate in the Model Law for several reasons. 4. Paragraph 4: Arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction. → Occasionally reservations raised about the appropriateness of having a provision to this effect ( i) because reference to contract terms might be misleading when they are conflicting with mandatory provisions & ii) because
91 reference to trade usage considered redundant and dangerous). → But Working Group finally decided to keep this provision. → Why? i) Because provision well known, ii) Provision which appears also in the Geneva Convention & iii) provision that ensures that the parties’ expectations were fulfilled. 3. The role of Lex Mercatoria (p.574) Norsolor (France) v. Pabalk (Turkey), p. 574 a. FACTS: Norsolor, French corporation, terminated an agency agreement with Pabalk. → Pabalk started arbitration against Norsolor in Vienna under the ICC rules & won an award for damages. In this award, arbitrators did not apply the law of a particular country but they based their award on the lex mercatoria and relied on equity for certain issues. → Pabalk sought enforcement of the award in France by the Tribunal de Grande Instance de Paris. Norsolor argued violation of art. 13 ICC because allegedly arbitrators had acted as amiables compositeurs without the agreement of the parties. b. ISSUE: Can the arbitrators apply the lex mercatoria as substantive law to an arbitration? If yes, when they choose so, to they act as amiables compositeurs? c. Tribunal de Grande Instance Holding (1981) : Arbitrators can apply the lex mercatoria as substantive law to an arbitration. By doing so they do not act as amiables compositeurs. Therefore, art. 13 ICC has not been violated. d. Court of Appeal of Paris Holding (1981, 1982): Norsolor appealed & also sought a a stay of the French proceedings pending the outcome of the decision of the Court of Appeal of Vienna (where Norsolor had instituted a parallel proceeding to set the award aside). → Court of Appeal of Paris granted Norsolor’s request for a stay on the ground that if the award were annulled by the Court in Vienna, the action for leave to enforce would be deprived of its purpose. → Court of Appeal of Vienna set aside the award & therefore the Court of Appeal of Paris rescinded the order for leave to enforce the award. e. Cour de cassation (1984) Holding : Reversed the decision of the Court of Appeal of Paris on the ground that –under NY Convention & French procedural law – the Court of Appeal had to determine whether French law would allow enforcement of the award independently of the Austrian ruling. f. NOTE: French courts have ruled that in the inverse situation (i.e. where the arbitration agreement expressly grants the power to the arbitrators to decide as amiables compositeurs, but they instead apply a national law) the award should be set aside. (c.f. Halbout et societe Matenec v. Epoux Hanin, 2001). g. NOTE: At the time the case was decided, it was very controversial to apply rules that did not derive from a sovereign legal system of rules. → Question if the idea that there has to be a connection with a sovereign still persists. According to the Vienna Court (in this same case), YES. → But then,
92 further question if such setting aside of the award prevents other courts from enforcing the award. French Court says NO. 4. The Problem of Mandatory Law a. Should arbitrators ever apply the mandatory laws of a country other than the proper law of the contract? b. When third country law involves strong public policy issues, then those laws should be applied along with the appropriate law of the contract. c. Principal (Italy) v. Distributor (Belgium), ICC Award, 1990 (p. 585) i. FACTS: Exclusive distributorship agreement between an Italian & a Belgian party containing an arbitration clause. → Arbitration → The award is given by a arbitral tribunal sitting in Germany. The contract provided for application of Italian law and jurisdiction clause refers to rules of ICC and recourse to court is excluded. ii. ISSUE: Should Belgian mandatory law be applied even though the contract provided for application of Italian law? iii. HOLDING: Arbitrator held that Italian law applied to the contract & that he should disregard mandatory Belgian law provisions. iv. ANALYSIS: The parties provided that the controlling law is that of the seat of the manufacturer. The common intention of the parties cannot be disregarded except in exceptional circumstances. This is not an exceptional circumstance. According to Italian law, Belgian law does not prevail. Therefore the arbitration clause is valid. v. Is there anything illogical with the theory that the parties can exclude the application of mandatory law of states, even if the states have a connection with the underlying transaction? 1. A mandatory rule will be observed by the court even if the parties agree otherwise. Here we are talking about the application of a mandatory rule in an arbitration when the choice of law does not include the mandatory law. vi. The arbitrators apply the law that the parties have chosen. The question then becomes whether the award is enforceable. It may not be enforceable in countries where mandatory law has not been applied, or where public policy has been violated by this award. d. Award introduces as dictum the “Lando” approach (theory exposed on p. 602, Art. 9): Arbitrators have a right to go beyond the designation of applicable law made by the parties when there is a serious policy objection on the ground of a legal order that has not be chosen by the parties but that arises in connection with the case. e. There are some cases where there is actual fraud or offense against the law that the parties are trying to reach by their choice of the applicable law, and the arbitrator knows it. What should he do? The appropriate thing would be for the arbitrator to resign. When there is a conflict between what you think is morally right and proper and enforcing the clause, then it would be appropriate to withdraw.
5. Lando (Ole), Conflict-of-laws rules for arbitrators, 1981 → Proposal on the Law Applicable to Int’l Contracts prepared by the ICC Working group. (p.600) a. First proposal → Question raised: Should arbitrators act like parties and have the autonomy to choose the applicable law OR should they be governed by rules on how to choose the applicable law? i. Lando suggests that the parties choose the applicable law, otherwise the tribunal would choose it with a provision that governs how it would select the law. This, however, would change the UNCITRAL Rules because the arbitrators would not fill in the rules determining the applicable law. It would also change the result under the ICC rules whereby the arbitrators can determine directly the rules of law. 1. This (1) prescribes a methodology and (2) takes from the arbitral tribunal the ability to directly choose the applicable rules of law (which the ICC allows). ii. This proposed change would make the arbitrators more like judges. By analyzing through the general approach, the arbitrators would determine the applicable law. iii. The results of this will be case-specific. iv. Is it preferable to have the ICC version of the rules, which puts the arbitrators in the position of the parties (selecting the rule of law), OR to have an approach whereby the arbitrators must follow a rule that governs how to choose the applicable law? 1. Von Mehren thinks it’s an advantage to have the most significant connection test (proposed art.2, p. 601). It will avoid a lot of discussion as to what system should be used, it’s pretty flexible, and it’s an approach that’s used by a lot of court systems, which makes it more likely that the results will be accepted by the courts. b. Second proposal i. This proposal permits the arbitrator to take into account and give effect to the mandatory rules of the applicable law as determined by the most significant connection test and also give effect to laws of other legal orders that have a direct and real concern with a particular situation. ii. Von Mehren dislikes this idea; he thinks it is important to maintain discipline over arbitrators. iii. Lando’s Article 9 is controversial because it says that the arbitrator can give effect on mandatory rules of the country if the contract or the parties have close contact to that country. → Arbitration might suffer if it becomes known that it is being used as a device for evading the public policy of states which have a governmental interest in regulating certain business transactions. → Von Mehren: Art. 9 is essentially another version of Article 7 of the Rome
94 convention. In Europe there is a prevailing rule that the parties should not be as in control of the situation. Chapter V: The effects and limits of awards rendered in ICA 1. There would be self-contained finality of arbitral awards if i) award in principle enforced AND ii) award not able to be set aside or refused enforcement by any court. ⇒ The present status of ICA satisfies in general the 1st requirement (awards have in principle effects from the moment they are rendered; requirements of confirmation are very rare nowadays) BUT not the second one (awards can always be set aside or refused enforcement) although the more you see judicial review to be deferential to arbitrators, the more we advance towards a full status of selfcontained finality of arbitral awards. 2. Question if ICA will ever become independent of national courts? Not likely. → The real question is that of the depth & degree of control that national courts exercise over awards. → Today, tendency to defer more and more to arbitrators but national courts are still careful with matters of strong public policy & jurisdictional issues (of the arbitral tribunal). 3. Recognition & enforcement can take place in all contracting states of the NY Convention without prior confirmation in the country of origin. 4. In most countries, awards must be confirmed to be enforceable but have preclusive effects without court scrutiny. → But the lex arbitri may pose a time-limit within which confirmation can be sought. If this time-limit has expired, holder of the unconfirmed (and unconfirmable) award may not even be able to restart an arbitration proceeding upon the same claim (cf. “In Protocom Devices Inc. v. Antonio Figueroa, App. Div.1991). 5. Standard that is very much advocated for independence of the arbitration is: “the award is enforceable and has preclusive effects without court scrutiny”. (standard c, p. 608). 6. Domesticity of Arbitral Awards a. Should awards be considered domestic, or not? If the award is domestic then it is judged according to the laws of the state not the NY Convention (because art. I,1 of the NY Convention excludes domestic awards from its scope of application). b. Domestic award OR award’s home country: Each national law has different criteria for determining whether an award is domestic or not. In general, home’s country award is that where award was handed down OR that under whose lex arbitri the award was rendered. → But, national legal systems may be very severe with the qualification of “home country” and, thus, an award may have no home country at all. → But even if there is no home country, award can be set aside under art. V,I,e by the court of which law was applied. c. At the time NY Convention was adopted, there was a 2ble exequatur of arbitral awards: i) recognition of the award in the country were it was made (based on jurisdictional theory), ii) recognition of this foreign judgment that emerged from the arbitration award. ⇒ 2ble exequatur.
95 d. Since NY Convention, we do not look at arbitral awards as if they exercise a sovereign’s power. NY Convention steps in & provides authority that the arbitration process can claim. One part of the NY Convention supports the idea that the award can be set aside: privilege the courts of the situs of the arbitration. We continue to recognize setting aside jurisdiction : because it is desirable to have one legal order to determine whether award can be recognized & enforced. → Question if other states can recognize an award which has been set aside in another country: Art. 5 (I,e) says that the recognition and enforcement may be refused if there is proof that the award has been set aside. → Setting aside is not regulated by the NY Convention but by national law. e. Judicial control over the award: setting aside i. In most countries, judicial control over the award occurs in 2 settings: i) opposition to recognition & enforcement in a country in which the winner chooses to rely on the award, & ii) claim for setting aside in a country in which the award was made or that considers the award to be domestic. 1. Grounds for challenge in recognition & enforcement proceedings are specified in art. V of NY Convention & have practically become world law. 2. Grounds for setting aside: no international treaty exists but strong trend toward convergence anchored in the Uncitral Model Law (Art. 34). → These grounds for setting aside are more or less the same as the grounds for refusing recognition & enforcement set out in art. V of NY Convention (for recognition and enforcement). → But standards for setting aside are not regulated by NY Convention. f. Problems pertaining to setting aside (p. 645). i. Which awards are domestic awards? 1. If the award is domestic then it is judged according to the national laws of that country. NY Convention doesn’t apply (Art. I-1). 2. NY Convention indicates only indirectly the criteria for determining “domesticity”→ Art. V-I-e seems to indicate that an award may be domestic in the country where award made OR under the law of which the award was rendered (but the NY Convention doesn’t provide for grounds for setting aside an award). → However, these implicit criteria for domesticity lack clarity (eg. in which country is an award exactly “made”, does “under the law of which” refer to substantive or procedural law or to the law applicable to the arbitration agreement?). 3. Model Law: opts for the territorial criterion (place of arbitration) for defining domestic awards. → Most national laws have opted for the territorial criterion.
96 4. (added from note n. 4, p. 675) Although both NY Convention & the Model Law use the territorial criterion, they formulate it differently. The Model Law stresses “the place of the arbitration” whereas the NY Convention refers to “the country in which the award was made”. → But the country where arbitration takes place and the country where the award may need not be the same. ii. What decisions may be subject to setting aside? 1. By its nature, setting aside applies to awards with respect to which the arbitration process has been completed (i.e. final awards even if partial, as long as the process is completed with regards to that particular subject). 2. Problem with interim awards that settle a preliminary question, such as that of jurisdiction. → National Arbitration Acts deal with the problem differently. iii. The issue of standard of review 1. Usually, scrutiny is restricted essentially to a listed number of procedural issues. But the question is whether a court is free to substitute its own view of the facts – and of the law – for those of the arbitrators. iv. Is the right to seek setting aside waivable ? 1. This is a question of national law. → Tendency towards permission of waiver. 2. The Swiss, Tunisian, Belgian & Swedish acts allow for such a waiver (under different conditions). v. Is the right to seek setting aside expandable ? 1. Question whether the parties are allowed to broaden options of recourse → French courts have been hostile to such an expansion. vi. The consequences of setting aside 1. An award set aside has no effects in the country where it was vacated. 2. The award may not have effect in all State-Members of NY Convention if setting aside occurred in a country in which, or under the law of which, the award was made. 3. Question whether the arbitrators are functus officio after the setting aside is pronounced or whether they retain jurisdiction to rehear the case. → Different national solutions. vii. Are there relevant procedural standards superior to those of national courts? 1. In rare cases, courts have invoked the norms embodied in human rights convention sin connection with arbitration proceedings. g. Is there of setting aside to judicial decisions? Perhaps.
97 i. Analogy for setting aside would be judicial review. → But not very clear analogy. ii. Von Mehren thinks that the issue should not be whether an award should be set aside but whether there is enforcement and recognition. → Historically, when there was a territorial notion of arbitration, then it was logical to say that there was a hierarchy with respect to the work of the arbitral tribunal, which consisted of the arbitrators as well as the courts of the seat of arbitration. But now that the arbitration may not have any connection in the law of the place where the arbitration takes place it doesn’t make any sense to say that you can explain the phenomenon of setting aside in the same way we explain reversal in judicial proceedings. →The reversal would have to be within the arbitral system itself, not within the national courts. Once the arbitration is seen as independent and self-sufficient, the question becomes not reversal but simply, is it appropriate to recognize and enforce. iii. One possible solution is to eliminate the setting aside mechanism (except in very rare situations, when there is an appellate arbitral tribunal who can review the work of the arbitral tribunal of the first instance) and rely solely on the recognition and enforcement mechanism. This is not what has developed under the NY Convention however. iv. NY Convention allows for setting aside- Von Mehren thinks it is bad. 7. International Standard Electric Corp v. Bridas, US District Court, 1990, p. 651 i. FACTS: ISEC petitioned to have the award (arbitration took place in Mexico and award rendered in Paris) set aside by the US courts & to refuse recognition & enforcement. Its argument was that under the NY Convention, the court of the place where the substantive law has been applied can set aside the award. And since US law applied, US courts can set aside the award → Bridas: cross-petitioned to dismiss ISEC’s petition to vacate on the grounds that this Court lacks subject matter jurisdiction to grant such relief under the Convention. ii. ISSUE: Whether the phrase in the NY Convention “the country under the laws of which that award was made” refers to procedural law or to substantive law? iii. HOLDING: The phrase in the NY Convention “the country under the laws of which that award was made” refers to procedural law and not to substantive law. → Here, the situs of the arbitration is Mexico & the governing procedural law is that of Mexico. So, only Mexican Courts have jurisdiction under the Convention to vacate the award. → Court adds that any suggestion that this phrase refers to the substantive law defies the logic both of the Convention debates & of the final text. The whole point of arbitration is that the
98 merits of the dispute will not be reviewed in the courts, wherever they be located. iv. NOTE: If they had held that the curial law that could be applied was that of another state, what would have happened? If that third state had set aside the award, but the state where the award was made had not set aside the award, then what? Can the award be enforced by the US courts or not under the NY Convention? Does one of these jurisdictions have priority? 1. The Convention does not give priority to either jurisdiction 2. The state that chooses to enforce the award may do so, even if the other state has set the award aside. 3. The general view is that the setting aside need not be recognized. It’s left to the discretion of the court. b. SUMMARY i. If you are either the territorial situs (ie the seat of the arbitral tribunal) or the curial situs (ie the country whose procedural law has been applied, then you can use your own national law to trump Art. V (i.e. Your courts can set aside the award). ii. If an award is not considered a domestic award (ex: rendered in the US but not domestic because French law applied to the arbitration), under Art. V(1)e, those non-domestic awards could still be set aside by the domestic courts. c. NOTE: The tendency to use setting aside as a way to avoid recognition of the award is a problem that occurs more frequently in emerging countries. This leads to tow issues: are these complications all the heritage of a different philosophy of arbitration? Does one really need setting aside or is it just a burden on the international system? 8. Standard of Review a. Transport Vekoma (Netherlands) v. Maran Coal (USA), Swiss Federal Court, 1995, p. 694. i. FACTS: Language of the arbitration agreement said that dispute “may be referred to arbitration” This suggests that the arbitration is a possible (with a certain time limit of 30 days after end of settlement attempts) but not obligatory. But at what point has the time limit for arbitrating expired? Seller petitioned the Swiss Federal Court to set aside the award on several grounds, mainly claiming that the arbitration was time barred because the buyer had not met the 30 day contractual deadline for resorting to arbitration. ii. ISSUE: Question whether the arbitration was time barred and therefore ought to be set aside. Did the Swiss tribunal exceed its power of review? Is this an issue of law under the authority of the Swiss tribunal or is it a question of fact so that the factual finding made by the arbitrators is to be respected?
99 iii. HOLDING: the 30-day time limit for arbitration starts running as soon as it becomes obvious to the parties from an objective point of view that no amicable settlement can be reached. iv. NOTE: This case, once again, suggests the importance of clear drafting. The best arbitration clauses are those that eliminate all ambiguities. v. NOTE: Was what the court did correct? Is the court re-examining objective facts or is the court evaluating the meaning of these events? 1. The court adopted all the facts of the arbitration tribunal, they simply gave them a different meaning. It was a mixed question of law and fact- accepted the facts and determined the law. This is more than mere factual determination. → Paul Friedland criticized the Swiss Supreme court for doing a sort of “second guessing” since it disagreed with the arbitrators (on the question of whether the arbitration was time barred) without having heard the testimonies. 2. Von Mehren: What one could say in favor of Swiss approach is that the court wants to be sure that the parties had agreed upon arbitration. b. Egypt v. Southern Pacific Properties, Paris Court of Appeals, 1984, p. 698. i. FACTS: Contract signed by the Minister of Tourism of Egypt. Question whether the Egyptian state was a party to the arbitration. → ICC Award held that the Egyptian state WAS bound by the arbitration clause contained in the contract between SPP & EGOTH. → Question before the Paris Court of Appeals. ii. ISSUE: Was the state a party to the arbitration? If Egypt is a party in the arbitration, does it lose the right to deny the arbitral tribunal’s jurisdiction on the basis of its State immunity jurisdiction? iii. HOLDING: Court of Appeals ruled that the minister’s signature did not express a commitment by the State to enter into the contract but rather a simple approval by the supervising authority. Therefore, there was no arbitration agreement binding on the State. → Sets aside the award. iv. ANALYSIS: 1. Part of the argument is based on the participation of Egypt in the arbitration. Making the analogy to judicial proceedingsif you participate without objections then you lose the right to state immunity jurisdiction. Here, Egypt objected all along, but it did participate. York. v. Texas held that if you wanted to object, you had to submit to general jurisdiction. If you participated you were taken to have waived your jurisdictional immunity. Current law: no state in the US that
100 takes this position. You can simultaneously object to jurisdiction and defend against the claim. 2. The issue of whether the parties agreed to arbitrate is so crucial that unless the parties agreed otherwise it should be decided by the courts not by the arbitrators. v. NOTE: This is a de novo determination of the jurisdictional issue. The court didn’t feel bound by any finding of the arbitration tribunal & absolutely no deference to the arbitrators. vi. NOTE: However, Dutch courts were also seized of the matter & followed the arbitrator’s judgment finding that Egypt was bound by the agreement signed by its minister (≠ French Court). 9. Can the parties provide for heightened judicial scrutiny of arbitral awards? a. Lapine Technology v. Kyocera Corp, US Court of Appeals, 1997, p. 706. i. FACTS: Parties entered into an agreement that provided for arbitration and that the courts should apply a heightened judicial scrutiny in reviewing the award (review for errors of fact or law). Basically, the parties provide for control by the confirming court that goes beyond what is required by the FAA. ii. ISSUE: Is federal court review of the arbitration agreement necessarily limited to the grounds set forth in the FAA OR can it apply greater scrutiny if the parties have so agreed? iii. District Court: Held that its review of the award is necessarily limited to the grounds set forth in the FAA, even the parties had provided for a heightened judicial scrutiny standard. → However, the parties agreement on heightened standard of review doesn’t invalidate the arbitration provision because the part of it dealing with the heightened standard of review was separable of the rest. → Court confirmed the award. iv. Court of appeal’s HOLDING: The court is not bound by the FAA, so it can apply greater scrutiny if the parties have so agreed. v. ANALYSIS: Three different views expressed in the opinion. 1. Party autonomy should govern 2. The standard is known to the court (it’s the same as for bankruptcy courts) Given the policy behind the FAA (to ensure enforcement of private agreements in accordance with the agreement’s terms), Court should not object to this agreement. → Arbitration under the FAA is a matter of consent, not coercion and parties are generally free to structure their arbitration agreement as they see fit. 3. Dissenting opinion: Parties can decide whether, what, how and when to arbitrate. But they can not dictate how a court may review an arbitration decision. vi. NOTE: If we accept the majority’s opinion, result would be that the process of arbitration wouldn’t have an effective result. And would go against the general tendency to defer to arbitration & limit
101 review. → This decision leads to great complications & doesn’t fit into pre-established patterns. vii. Model Law: precludes use of such a clause in an arbitration agreement. viii. French Case law: Agreements seeking to expand the grounds for judicial review would be rejected in France as against public policy. Judicial control over the award: Recognition and Enforcement Awards subject to the NY Convention -
Awards have practical value only if they are recognized & enforced in national courts. Major purpose of the NY Convention: to ensure the efficacy of awards by limiting the grounds upon which a national court could refuse to recognize or enforce an award. Question: Which awards are governed by the NY Convention? Under art. 1, two types of awards: i) those made in the territory of a State other than the State where the recognition & enforcement of such awards are sought & ii) those not considered as domestic awards in the State where their recognition and enforcement are sought. → 2 standards of applicability of the Convention, which don’t necessarily coincide. This arrangement came around because some of the European Countries had tradition that applicable law wasn’t place of arbitration but a different one. Germany & France didn’t want to give up that situation. → So, Convention adopted both criteria. → The effect of that is to expand the scope of the NY Convention. NY Convention is a Universal Convention: No reciprocity requirement in principle, unless if a contracting state chooses to make the reservation of reciprocity allowed under art. I-3. Sigval Bergesen v. Joseph Muller Corporation, US Court of Appeals, 1983, p. 734. o FACTS: Dispute between two contracting parties (one Norwegian & one Swiss). Arbitration takes place in NY & the award is in favor of Norwegian party, which seeks to enforce the award in the US, pursuant to the NY Convention. →Party had been trying to enforce the award for over 2 years outside the US. So, now, effort to enforce the award within the US. → The other party contends that the NY Convention doesn’t cover enforcement of an award made in the US because neither territorially a foreign award nor a non domestic award. o ISSUE: Whether the NY Convention is applicable before a US Court with regards to an award rendered in the US but involving two foreign entities. o District Court: Held that the NY Convention applies to arbitration awards rendered in the US involving foreign interests. o US Court of Appeals: Examines whether the NY Convention covers the enforcement of the award under art. I: i) Since the award was rendered in the US and enforcement was sought in the US, the award doesn’t meet the territorial criterion → The award was not rendered outside the country
102 where enforcement is sought. ii) But this award is not domestic, and therefore Convention applies. The Court held that awards “not considered as domestic” denotes awards which are subject to the Convention not because made abroad but because made within the legal framework of another country. Here, the case involves 2 foreign entities, therefore, the award is not domestic. → Court adds that the fact that this award could also have been enforced under the FAA is not significant because there is no reason to assume that Congress did not intend to provide overlapping coverage between the Convention & the FAA. o NOTE: Court extends scope of NY Convention. o NOTE: Party sought enforcement under the NY Convention because longer statute of limitations (3 years to bring an action) than the FAA ( 2years). o German Act 1961 which implemented the NY Convention (no longer in force) dealt with the issue of 2ble criteria → But new act uses only the territorial standard. - German Supreme Court, Dec. of Oct. 8, 1981, p. 741. o Facts: Action brought before German Courts under the NY Convention to enforce an award rendered in Italy in an arbitrato irrituale. o Court of 1st instance: Denied recognition of the award. o Court of Appeals: Recognized the award. o Supreme Court: Denied recognition because an award rendered in an arbitrato irrituale is not an arbitral award for the purposes of the NY Convention. → The language of the Convention supports not applying its provisions to proceedings that, though similar to arbitration, produce only the effects of an obligation, and the award in question has only such effects. → Applying the Convention to an irrituale award would jeopardize uniformity, since the award would be recognized under the NY Convention but under Italian law the irrituale award engenders only obligational effects. → The Convention can not go beyond the national laws & create additional arbitral awards which are incapable of execution in their state of origin. o NOTE: Arbitrato irrituale: Provides for a procedure which is arbitral in nature but doesn’t result in an award but in a contract. One could say that there is room to accommodate the first stage of this process under the NY Convention (the process of ordering the arbitration to proceed but not the process of the award rendering). → Very theoretical exposition with no practical benefits. → BUT Von Mehren thinks that these awards can not benefit at all of the NY Convention. o NOTE: These arbitrato irrituale awards are different than mediation. Because in mediation the parties are not obliged to accept the result whereas here they are. NOTE: Italian Supreme Court (decision of Sept. 18, 1978) held that irrituale awards DO fall under the NY Convention. → (note n°4, p. 744) But if we hold such awards to be within the scope of the NY Convention, then art. V, 1,e which speaks of the need for a binding award would still serve as a ground for not recognizing & not enforcing the award, if binding in the NY Convention denotes a “judgment-effect” rather than just a “contractual effect”.
Nov. 14, 2003 1. Grounds under the Convention for refusing recognition and enforcement a. Parsons & Whittemore v. RAKTA, US Court of Appeals, 1974 i. FACTS: Parsons had entered into a contract with Egyptian company. They were well along on the work when the 6-day war broke out. Most Parsons employees returned to the US rather than get the special visas necessary to stay in Egypt. The war ended quickly. → Egyptian company claims breach of contract. → Parsons argued that the force majeure clause allowed them to leave and not remain on the job. → Parties went to arbitration. → Award recognized breach of contract & held Parsons liable to Egyptian corporation. ii. US District Court: Confirmed the award holding Parsons liable for breach of contract. → Appeal. iii. US Court of Appeals: Affirms lower court’s decision. iv. ANALYSIS: 1. Bases on which enforcement could be denied (but it is finally granted). a. Public Policy (Art. V.2.b): The public policy exception should be read very narrowly, given the general pro-enforcement aim of the NY Convention. Enforcement should only be denied when it violates the state’s most basic notions of morality and justice. → Violation of national policy (not reason to deny enforcement) ≠ violation of public policy (reason to deny enforcement). i. Note: if the US had ordered Parsons not to return to Egypt, perhaps then the public policy exception would have applied. b. Non-arbitrability (V.2.a): The concept of nonarbitrability is different in international agreements than in domestic agreements. Court takes a favorable position towards the enforcement of the award. c. Inadequate opportunity to present a defense (i.e. due process) (V.1.b): Argument rested on the availability of a major witness for the construction company due to a conflicting engagement. Court says that this is a weak argument. You must recognize the difficulty of scheduling a hearing that everyone will be able to attend. The court should not have to change the scheduling decisions once they have been made. Further, there are other ways that evidence could have been made available.
104 d. Arbitration in excess of jurisdiction (V.1.c): This defense should also be narrowly interpreted. District court properly refused to second guess the arbitrator’s decision that it had subject matter jurisdiction. This was a question of interpretation of the contract which is the domain of the arbitrator. e. Award in “manifest disregard” of the law: Raises the issue whether the defense, which had been developed under the FAA, is available under the NY Convention. In the context of the FAA, manifest disregard of the law is a grounds for setting aside. But the court here says that this is clearly not a case of manifest disregard for the law so it doesn’t address the decision of whether the NY Convention allows for this defense. v. NOTE: One of the 1st awards handed down by a US court after ratification by the US of the NY Convention.→ Very pro-arbitration decision. → Court construes very narrowly all the grounds for nonenforcement claimed by the plaintiff. → Indicates that clearly the direction of thinking of the US judiciary was and is pro-arbitration. vi. NOTE on “manifest disregard of the law” argument: Court rejects a close scrutiny for errors of fact or law. 2. Procedural Grounds under the Convention for refusing enforcement and recognition a. These grounds are listed in Art. V 1 & 2. b. Art. V2: → De novo review. → The enforcing court is to apply its own law on these questions – regardless of the law the arbitrators applied in rendering their award – one might conclude that the enforcing court will be forced to consider these issues de novo, w.o. deference to the arbitrator’s decision. c. Art. V1: No de novo review. → But question what standard of review should be applied. How much deference should be given to the arbitrator’s decision? d. Basic change btw Geneva Convention 1927 & NY Convention 1958: While the Geneva Convention placed the burden of proof on the party seeking enforcement of a foreign arbitral award & did not circumscribe the range of available defenses to those enumerated in the Convention, the 1958 Convention clearly shifts the burden of proof to the party defending against enforcement & limited his defenses to 7 set forth in article V. e. American Construction Machinery v. Mechanized Construction of Pakistan, US District Court, 1987 i. FACTS: Motion to confirm a foreign arbitration award. → Party challenging the award raised several grounds for refusal of recognition or enforcement of the award.
105 ii. ISSUE: What degree of weight does the court assign to the arbitrator’s determination for purposes of the action to refuse recognition and enforcement? What standard of review does the court apply (arbitrators will not be reviewed at all, arbitrators will be upheld unless manifestly wrong, deferential to the arbitrators, First Options case: de novo with no weight assigned to the decision)? iii. HOLDING: Court chooses to use a deferential standard → It confirms the award. iv. ANALYSIS: Is the court justified in using a deferential standard with respect to the issue of the applicability of the effects of the agreement on the authority of the tribunal? Should there be judicial de novo review of this issue, or is this the type of issue that should be left to the arbitrators? Basically, it’s a jurisdictional issue (our opinion). Is the arbitrator passing on the tribunal’s authority to deal with the issues? Should the court determine this issue, or should the arbitrator be able to speak with considerable weight? This is really a jurisdictional issue. v. NOTE: “Manifest disregard” goes to issue of validity of arbitration agreement and not to a q of substantive law (as it did in PArsosn’s case). Highly deferential standard in substantive law issues BUT less deferential when q whether parties agreed to arbitration. If it is established that the parties did agree to arbitration, then courts should defer more to arbitrators (since u know that parties wanted their issue to be decided by arbitration). f. Southern Pacific Properties v. Egypt, District Court of Amsterdam, 1984 i. Court of Appeals of Paris had set aside the award in question on the basis that there was no arbitration agreement binding the Egyptian State (the minister’s signature was not binding on the Egyptian State). ≠ Dutch Court found that there was an arbitration agreement binding the Egyptian State. ii. Egypt has asked for refusal to enforce. → Question whether Egypt is justified in invoking the grounds for refusal mentioned in art. V of NY Convention. 1. Egypt claims that there is no valid agreement, so refusal on basis of V,1,a → Court holds that such a contention is not proven but the contrary seems to be proven by the use of the 3 verbs. 2. Egypt claims that the award is not yet binding & that it’s enforcement is suspended within the meaning of art. V,1,e of the Convention because an action for setting aside the award was intitiated before French courts → Court answers that the mere initiation of an action for setting aside doesn’t have as a consequence that the award be considered as not binding. iii. An example of the middle ground approach by the court towards the tribunal.
106 iv. Dutch court takes a halfway / middle-way position: They don’t say that the burden of persuasion falls on the party that wants to establish that the authority of the tribunal included authority over the Egyptian government, but they don’t say that it is de novo review either. They consider a middle range whether it’s a plausible case for saying there wasn’t jurisdiction. v. If the court is involved in setting aside an award, does that affect the standard of review? To the extent that the standard is derived from the NY Convention- even thought he NY Convention does not apply to setting aside except perhaps by analogy- it’s more difficult to challenge a de novo review in the setting aside. It’s a matter for national law of the court. If the national law is more permissive than the NY Convention, then so it goes, you cannot challenge it. g. NOTE: On jurisdictional cases, the court has a higher standard of review (i.e. de novo) h. NOTE: The French CA clearly had a de novo determination of the issue. Did not defer at all to the arbitrators. → French court shows little deference to the arbitrators. ⇒ Matters that depend from one system to another. Scale of different degrees of control. 3. Scope of Parties’ Submissions to Arbitration a. Management & Technical Consultants SA v. Parsons-Jurden Int’l, US Court of Appeals, 1987 i. FACTS: Petition to enforce a foreign arbitral award. Defendant contends that the arbitrators lacked authority to make the award in that they decided subject matter not within the scope of the agreement to arbitrate. → Parties agree that the arbitrators had authority to determine whether the gross billings exceeded $350 million BUT they disagree on whether the arbitrators had the further authority to determine the amount of additional compensation due. ii. District Court : Enforced the foreign award. iii. UC Court of Appeals: Affirms & enforces the award. → Court finds that by agreeing to arbitrate the dec. of whether there had been $350 million in sales & by using such broad language (“any dispute”) in the letter agreement, the parties had conferred arbitral authority to determine the amount of additional compensation. iv. NOTE: Here court doesn’t defer to the arbitrators? → Court stated that they reviewed de novo the contention that the subject matter of the arbitration lies outside the scope of the contract. But they announce that they construe arbitral authority broadly to comport with the enforcement facilitating thrust of the Convention and the policy favoring arbitration. b. First Options v. Kaplan, US Supreme Court, 1995 i. ISSUE 1: How should a district court review an arbitrator’s decision that the parties agreed to arbitrate a dispute. ii. HOLDING 1:
107 1. Who has the primary power to determine arbitrability depends on what the parties decided. a. If the parties submitted the arbitrability questions to arbitration, then the court should give considerable leeway to the arbitrator. b. If the parties did not agree to submit the arbitration question itself to arbitration, then the court should decide the question just as it would decide any other question that the parties did not submit to arbitration, i.e. independently c. Courts should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so. 2. In this case, because the Kaplans did not clearly agree to submit the question of arbitrability to arbitration, the Court of Appeals was correct in finding that the arbitrability of the dispute was subject to independent review by the courts. iii. ISSUE 2: How a court of appeal should review a district court’s decision confirming or refusing to vacate an arbitration award. iv. HOLDING 2: Courts of appeal should apply ordinary standards when reviewing district court decisions upholding arbitration awards. (There’s no review to the facts, but a de novo review on the law). 1. One of the circuits wanted the appellate court to apply a looser standard when the district court upheld the arbitration because of the pro-arbitration stance of the law. But all the other circuits rejected this idea. c. Von Mehren likes this case- clear and makes sense. d. NOTE: Arbitrators tend to want to decide the issue & tend to look to ways to do this. Therefore, less deference to the arbitrators & standard of review should be de novo w/ regards to the q of arbitrability. → Court makes fundamental distinction btw jurisdictional issue & substantive law issue. e. NOTE: Need to strike balance btw i) integrity of the arbitration process & ii) assure that they do their job. → Stimulates arbitrators to think about this problem. 4. An award set aside in “the Country in Which, or Under the Law of Which, That Award was Made” a. Party might prefer to have the award set aside rather than to ask for recognition and enforcement (see p. 787). Van den Berg argues that setting aside has the advantage of erasing the award completely. But this is not the case. b. Company A v. Company b (Slovenia), Supreme Court of Austria 1993 i. Award rendered in Belgrade. → Award was set aside by the Supreme Court of Slovenia. → However, A requested enforcement
108 of the award in Austria. → B, relying on the decision of the Slovene Supreme Court, requested the Court to refuse enforcement. ii. Austrian court of 1st instance granted enforcement → CA refused enforcement → Supreme Court granted enforcement, even though award had been set aside in Slovenia. iii. If you can get a setting aside, you will have the advantage of not being vulnerable to the enforcement acts. → NY Convention only allows (and doesn’t require) a Convention country to refuse to enforce an award that has been set aside BUT doesn’t allow a Convention country to refuse to enforce an award on the basis that another Convention country has refused to enforce it. → So, more chances to avoid enforcement if award is set aside. → But no guarantee. iv. BUT for ex. France has found a way to bypass the NY Convention, Article V-1-e so that it doesn’t operate as a separate ground for refusing to enforce a foreign arbitral award. → The French statute on enforcement of foreign awards does not include the award’s having been set aside in a foreign court as a ground for nonenforcement. v. The advantage may also be that the award will be set aside on grounds that are not recognized by Art. V of the NY Convention (if you had taken the recognition and enforcement route). The award can only be set aside if it is a domestic case. If it is a domestic case, it can apply national law and go beyond the laws of the convention. c. One of the objections of setting aside procedures in Art. V is that they import grounds that are not recognized by the NY Convention but that comes from the recognition and enforcement language in Art. V.2 & from the fact that NY Convention has chosen not to regulate the setting aside grounds (but to defer to national law). d. The 1961 Geneva European Convention endeavors to identify & limit the grounds on which an award can be set aside (since no unified grounds for setting aside in a treaty). It says that if another state has set aside an award, the second state can only accept the setting aside if it was done under Art. V.1.a-d. It requires that a state limits its setting aside procedures to grounds that are recognized in Art. V.1 of the NY Convention. This allows control of the setting aside procedures. i. The complexity of applying the setting aside provisions when there are political and territorial changes such as those that have occurred in Eastern Europe at the end of the last century. What is the law under which the award is rendered? If it is one law when the parties entered into the contract but subsequently changes, what should happen? e. Note (p. 798): Another approach through the national arbitration clauses (ie French clause)
Nov. 20 & 21, 2003 5. Relevance of enforcing State’s national arbitration law a. Chromalloy v. Egypt, US District Court, 1996 i. FACTS: Ct btw Air Force of Egypt & Chromalloy (US Corporation). → Egypt terminated the ct & CAS rejected the cancellation of the contract → Arbitration → Award in favor of CAS → CAS petitioned the court to recognize & enforce an arbitral award. ii. Holding: Court granted the petition. → The NY Convention requires recognition and enforcement unless there it is proven that a ground for denying recognition & enforcement under the Convention is met. Finally, the denial of recognition and enforcement is a matter of the discretion of the court (“recognition & enforcement may be refused”). → Here, award was nullified in Egypt, so US Court may deny recognition & enforcement. But under art. 7 of the Convention, CAS maintains all rights to the enforcement of the award that it would have in the absence of the NY Convention → If Convention didn’t exist, the FAA would provide CAS w/ a legitimate claim to enforcement of the award. → Plus, a decision to recognize the decision of the Egyptian court would violate the clear US policy in favor of final & binding arbitration of disputes. ⇒ Award valid. iii. NOTE: Arbitration clause provided that the award is final & binding & cannot be made subject to any appeal or other recourse → Q if the parties have the right to waive this right. Q what law should decide this q. iv. NOTE: Fce & Netherlands interpret art. 7 of the NY Convention the same way. But, in Italy & Switzerland, art. V is incorporated in substance into their national laws, so this interpretation of art. 7 can no longer stand. v. NOTE: Court cites US public policy in favor of final & binding arbitration of commercial disputes as one of its justifications for refusing to recognize & give res judicata effect to the Egyptian set aside judgment. But on this test, it may never be possible to give res judiciata effect to a foreign court judgment setting aside an award. vi. NOTE: Could the party with the award bring an enforcement action either under the FAA OR under the NY Convention? NY Convention has 3 year statute of limitations; FAA has a 4 year statute of limitations. It’s likely that you could bring an action under either one, so if one is time-barred, you could still bring the other. b. P. 814, #9 Baker Marine i. This court refused to follow the Chromalloy approach. The court refused recognition and enforcement of an award because the award had been set aside where it had been made (in Nigeria).
110 ii. Court agreed with van den Berg’s argument that the setting aside process protects the loser from the risk of enforcement in some court → The loosing party must be afforded the right to have the validity of the award finally adjudicated in one jurisdiction → So, FOR keeping art. V, 1, e in the NY Convention. iii. 2 objections to Van der Berg’s argument: i) BUT art. V, 1, e undermines the limited character of the grounds for refusal of art. V (cause as an award can be set aside in the country of origin on all grounds contained in the arbitration law of that country, including the public policy of that country, the grounds for refusal of enforcement under the Convention may indirectly be extended to include all kinds of particularities of the arbitration law of the country of origin). ii) But does the setting aside process actually put an end to the risk of enforcement of the award against the losing party? No because the Convention provides that enforcement could still be made in some countries (see V(e), “may be”) & several cases prove that discretion of the courts. → So, Van den Berg’s argument of convenience for the loser to have one final dec. on the award isn’t persuasive. iv. Geneva Convention – Art. 9: Makes setting aside limited to grounds V, 1, a-d of the NY Convention. v. NY Convention: Doesn’t regulate grounds for setting aside. At the stade of discussion this issue arose, it was too late to negotiate. Plus, already, art. V, 1, e is a compromise. Plus, at the time very much under the influence of the jurisdictional theory. vi. Another solution to the problem: French system → 1981 legislative reform: same -standards of non enforcement for domestic awards as in NY Convention for non domestic awards. → French treat national & int’l awards under the same standards. vii. Court says that in the present case Baker Marine is not a US citizen and that therefore US court has less interest in refusing to enforce the award. 6. Review of the merits under the Convention Art. V.1 Standards a. Fertilizer Corp of India v. IDI, US District Court, 1981, p. 821 i. FACTS: Action brought under the NY Convention for recognition and enforcement of arbitral award rendered in India. ii. ISSUE: Whether the arbitral tribunal exceeds its authority in awarding consequential damages? The parties’ ct expressly excluded from damages any amount for loss profits BUT the Q of consequential damages was included in the Terms of Reference. → Is the award awarding consequential damages, therefore, unenforceable under Art. V.1.c? iii. HOLDING: 1. On the theory of common law breach, it is as if the whole contract was annulled, so the arbitrator could decide on the
111 damages according to what happened. Doctrine of fundamental breach: it’s as though the contract has disappeared so the limitation of damages clause (to those other than consequential) no longer applied. 2. Is this within the interpretation of the arbitrator? 3. The standard of review is extremely narrow. So long as the theory that the arbitrators chose was reasonable, then the court cannot review it. → The Court found that the arbitrators did not exceed their authority in granting consequential damages. 4. The arbitrators were supposed to interpret the contract. The court cannot second-guess that. In this case the arbitrators interpreted the contract in a certain way (fundamental breach, contract was dissolved, so consequential damages should be applied). 5. What if the arbitral tribunal simply said that it was appropriate to give consequential damages (without explaining that the contract has been dissolved)? a. If their reasoning is plausible, then the court should give deference to the arbitrators. b. But they haven’t given a reasonable explanation then maybe they are acting outside the arbitration agreement and the court wouldn’t give them deference. 6. The court suspended the proceedings until the Indian court reached its decision. → Court concluded that Indian law applied to the arbitration so, if under Indian law, the theory of fundamental breach is erroneous, & Indian court sets aside the award, US Court will defer to the Indian court. → Von Mehren: Court decides to defer to the Indian Court and await to see if they will not defer as much to the arbitrators. → So this shows that although we have been talking of a strong deferral policy to the arbitrators for issues of substantive law (and NY Convention provides very limited grounds for the courts to examine substantive issues), here court seems to accept that the Indian Court might not defer as much. 7. Question here is of substantive law, i.e. how one interprets the contract. →BUT under the NY Convention courts can not examine substantive law issues.→ If parties wanted to exclude from arbitration the issue of consequential damages, they should have inserted the following in the arbitration clause: “The issue of consequential damages is not submitted to the arbitrators”. 7. Review of the merits for manifest disregard for the law. a. Brandeis Intsel v. Calabrian Chemicals, US District, 1987
112 i. FACTS: Petition to confirm an arbitral award. ii. ISSUE: Was the award made in manifest disregard for the law? 1. Can you read into the FAA (manifest disregard) a ground for refusing recognition and enforcement from Art. V (public policy)? They are trying to equate the two. iii. ANALYSIS: The judge refused to read the manifest disregard language into the NY Convention. Manifest disregard of the law does not rise to the level of contravening public policy. → If it did, it would require a US Court to consider whether foreign arbitrators manifestly disregarded the internal, substantive law of a foreign nation by which the parties agreed in their contract to be bound → Even if it were available, the arbitrators in this case did not act in manifest disregard of the law. → Petition to confirm the award was granted. b. Von Mehren: basic philosophy of the NY Convention is that conclusions of law and fact by the arbitrators, unless there is procedural flaw, should not be subject to review (ex. if arbitrators were behaving in a despotic fashion). Manifest disregard can only be a basis for non-recognition if it is brought in as a procedural flaw in the arbitration process (and not as a public policy ground). c. In the Parsons case, this issue was left open. → So, now the question is answered. Manifest disregard of the law is not a ground for non enforcement 8. Review of the Merits under Art. V.2.b- Public Policy Standard a. Hilmarton v Omnium de Traitement/Valorisation v. QBD 1999, p. 832 i. FACTS: Agreement between the parties that compensation would be paid to one party for the party’s assistance in obtaining contacts in Algeria.→ Arbitrator made award valid under Swiss law by not valid under Algerian law (where ct was performed). There was no suggestion of fraud or criminal behavior but it was contrary to the fraud of Algeria. ii. ISSUE: Was such a compensation improper under the public policy ground of NY Convention? iii. HOLDING: There are no public policy grounds on which enforcement of the award could be refused (since Swiss law applicable to the arbitration & under swiss law, award valid). → Court applies it’s International public policy and not it’s internal public policy. → Von Mehren thinks the English Court would have reached a different result if the contract provided for instance bribery or smuggling for obtaining contract.→ But here the English Court says that this situation from the point of view of England doesn’t rise to the dignity of int’l public policy. Court seems to imply that the result might have been different if the award was a
113 domestic award (a UK award) since in that case the Court would apply the internal public policy which is stricter. iv. Lando would probably reach a different result: he thinks that arbitrators should take into account the mandatory laws of the other countries involved in the arbitration. v. This illustrates the tendency to prevent the courts from invalidating the realm of the arbitral decisions. vi. French commentators speak of the standard under NY Convention – Art. V(2)b as requiring a violation of international public policy. ⇒ Question to Prof. Von Mehren on a previous exam question on the distinction between setting aside & recognition and enforcement procedure. - Setting aside: simply permitted by the NY Convention but Convention doesn’t regulate the grounds for setting aside. - Recognition & enforcement: Convention does regulate the grounds for refusing recognition & enforcement (Art. 5) - Should we eliminate this distinction: In other words, should we amend the Convention to eliminate art. V, 1, e (i.e. if we eliminate this article courts will not be able any more to refuse enforcement of an award because this award would have been set aside somewhere else). → Von Mehren thinks that art. V, 1, e should be eliminated because the ground provided for setting aside (court of situs of arbitration) is no longer as relevant. ⇒ Question on distinction between recognition & enforcement - Enforcement: the special procedure of art. 5 has to be followed - Recognition: can be obtained incidentally. ⇒ Question if ICA has really become anational ? Arbitral process is being more and more removed from the connection w/ national systems except for the very last stage (enforcement), which has to be done by national courts.