The June of 1958 was one of the coolest and wettest in New York’s history. And it was under a grey sky that a diplomatic conference at the UN building in Manhattan signed a treaty that would become one of the vital foundations of international trade: The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, better known as the ‘New York Convention’.
The Convention commits the courts of signatory states to enforce awards made by arbitration tribunals in other signatory states. It has become the basis on which arbitration has developed in recent years: the attractiveness of arbitration depends on a certainty that it will be possible to enforce an arbitral award wherever necessary (e.g., wherever the party required to pay the award has the appropriate assets). Arbitration also depends on the support of courts during the tribunal itself, to provide injunctive relief to demand evidence or compel witnesses.
But the relationship between the courts and arbitration remains far from straightforward. Case law continues to evolve on questions of the enforcement of foreign arbitral awards. And even in jurisdictions which are party to the Convention, court support for arbitration is by no means guaranteed.
In theory, the basic principles of how courts should deal with arbitration awards granted in other jurisdictions are well established. However, a range of recent decisions have drawn attention to the uncertainties in the system. One area of uncertainty is over whether the courts of the country where an arbitration is heard have primacy over other jurisdictions’ courts in deciding the fate of an arbitration award.
The French courts have repeatedly proven willing to enforce arbitration awards which have been set aside in the original seat of the arbitration, arguing that an arbitration award is a private, transnational decision which requires the support of no one country’s courts to exist.
In the UK, by contrast, the courts have typically declined to enforce awards which have been set aside in the seat of arbitration. “If you wished to prevent enforcement of an award, you would normally start by challenging the award in the seat of the arbitration, as a successful challenge would prevent enforcement elsewhere,” explains Amal Bouchenaki, an associate at Orrick Rambaud Martel in Paris.
Recently the case of Dallah v Pakistan has seen the English courts addressing the issue of courts’ jurisdiction over arbitrations heard elsewhere from a different angle. The case arose out of a US$345 million contract between Dallah and a trust controlled by the Pakistan government to build housing facilities near Mecca for hajj pilgrims.
Neither side fulfilled their obligations, the housing was never built, and the matter went to an arbitration in Paris in 1998. However, the original contract and its arbitration clause were with the trust, not the government of Pakistan itself, and the government argued that it was not bound by the arbitration clause. The tribunal disagreed, and ordered the government of Pakistan to pay $20 million to Dallah. Dallah began enforcement proceedings in London.
The government of Pakistan resisted enforcement, on the grounds that it was not a party to the original arbitration agreement. The English courts decided that this was correct. In reaching this decision, they conducted a full rehearing of the issue. Dallah appealed, arguing the English courts were not entitled to conduct a full rehearing of this issue.
According to Dallah, under the New York Convention only the courts of the seat of the arbitration had such a power, because of the principle – implied, they argued, by the wording of the New York Convention – of primacy of the seat of arbitration. In July 2009 the Court of Appeal rejected the appeal. It’s not yet clear whether Dallah will seek leave to appeal to the Supreme Court of England and Wales.
The full effects of the case are not yet clear, but it establishes that the English courts do not consider themselves obliged under the New York Convention to defer to the courts of the seat of arbitration. “Arbitral tribunals are, in principle, competent to decide their own jurisdiction, but in practice that question is also decided by the court of the seat or an enforcing court later on,” explains one London-based arbitration practitioner. “The question at stake was: does the extent of control vary between the court of the seat and an enforcing court?”
A second area of uncertainty involves the place of arbitration under Brussels Regulation 44/2001, which requires the courts of EU member states to enforce decisions made by other EU members’ courts.
In September 2008, the European Court of Justice delivered its opinion on this issue in the case West Tankers Inc v RAS Riunione Adriatica di Sicurtà SpA. The dispute arose when a vessel operated by West Tankers collided with a jetty owned by Italian company Erg, prompting a charter party arbitration between Erg and West Tankers in London. Erg’s insurers Allianz SPA, however, initiated litigation against West Tankers in Italy to recover their costs.
The UK courts granted an injunction to stop the Italian case, arguing that Allianz, in acting for its client Erg, was bound by the arbitration clause between Erg and West Tankers; but the question of whether arbitration qualified as basis for an anti-suit injunction under Regulation 44/2001 was referred to the European Court of Justice. In her decision, the Advocate General of the ECJ ruled that anti-suit injunctions cannot, in fact, be applied between EU states on the basis of an arbitration agreement.Member states’ courts should consider any existing arbitration agreements when deciding whether to accept a case, but the final decision is theirs.
The case, and others preceding it, have provoked debate as to whether Regulation 44/2001 should be amended to apply to arbitration. The European Commission ordered a report on the issue, written by three professors from the University of Munich. The professors accepted that the legal basis for excluding arbitration from the Regulation – that arbitration is best served by the New York Convention, which requires the courts of signatory countries to recognise awards made in other signatories – was sound.
But they argued that the risk of practical problems – for example that two EU countries might come to concurrent, contradictory opinions about the validity of an arbitration agreement – mean that the Regulation should be amended to put arbitration within its remit.
The recommendation has been met with shock by many arbitration practitioners. A questionnaire distributed amongst cross-border litigation practitioners across Europe produced a response strongly against the reform. The Commission is expected to decide on the reform during 2010. “It’s impossible to predict which way the Commission will rule,” says José Rosell of Hughes Hubbard. “There is intense lobbying from both sides.”
Whatever the commission decides, in practice, support for arbitration by the courts will likely continue to vary widely across Europe. Support from state courts is vital for international arbitration. Indeed, the historic dominance of Paris in Europe’s arbitration scene is in large part down to the French courts’ historically positive attitude towards arbitrations.
France’s judiciary has tended to only challenge arbitral decisions under rare circumstances. Recent research by British barrister V.V. Veeder QC found that in the 1980s French courts only set aside or varied arbitration awards in 16% of the cases where an award was appealed. In the last decade, however, other European countries have taken steps to increase court support for arbitration, with mostly successful results.
Spain, for example, enacted a new arbitration law in 2001, bringing Spain into line with international standards. Since then, a group of pro-arbitration practitioners have worked to bring the attitudes of the judiciary to arbitration in line with international norms.
David Arias, a partner at Perez-Llorca in Madrid, is the secretary-general of the group. “It is a Spanish tendency to go from one extreme to another,” says Arias. “Before the Arbitration Act, the courts were reluctant to support arbitration.We’ve done a lot of work since then, publishing articles and holding educational events. Now, the courts are extremely supportive and there are many cases granting interim relief and enforcing arbitration awards.”
In Central and Eastern Europe, too, progress is being made on educating courts about arbitration. “Ten to fifteen years ago the Bulgarian courts viewed arbitration with scepticism,” says Alexander Katzarsky of Georgiev, Todorov & Co in Sofia. “Attitudes have significantly improved since then.” In Hungary, too, according to Dr András Szecskay of Szecskay Attorneys at Law, “arbitrators are respected, and the state courts dismiss most challenges to arbitration awards.”
Bartosz Kruzewski, a partner at Clifford Chance in Warsaw, says that similar progress has been made in Poland. “In the past there have been worrying cases of the courts struggling with the independence of arbitration,” he says. “But in recent years there has been real progress and for the most part, the courts now see arbitration as an ally, rather than a competitor.”
However, it is not only antipathy towards arbitration that can cause problems, but simple inexperience. “Polish courts are not often well equipped to deal with arbitration enforcement cases, which can be quite complex,” says Kamil Zawicki, a partner at Warsaw’s Kubas Kos Gaertner. “The result is that, despite the New York Convention, there are real obstacles to the collection of arbitration awards.”
Western European practitioners remain sceptical that the courts in Central and Eastern Europe have really improved in terms of their attitude to arbitration. “There are still problems. Too many courts in Eastern European jurisdictions still see arbitration as a strange animal,” says Markus Meier of Hengeler Mueller in Germany.
Stockholm and Vienna have grown in popularity as arbitration venues as companies doing business in CEE try to avoid arbitrating disputes in the region. “Clients have learned to avoid arbitrating in jurisdictions where there is no tradition of arbitration, such as some jurisdictions in Eastern Europe,” says Christoph Stippl of Vienna’s Dorda Brugger Jordis. “In Austria the courts assist arbitration by granting provisional relief and in the evidentiary process, for example by summoning witnesses. They very rarely grant challenges to awards.”
Outside the EU the situation is more mixed still. In Serbia, for example, a new arbitration law in 2006 produced a legislative regime friendly to arbitration. “The Serbian Chamber of Commerce and the ICC are doing a lot to promote arbitration in Serbia,” says Ivana Rackovic, head of dispute resolution at Belgrade’s Karanovic & Kincolic. But the court’s attitudes have not yet been tested. “So far we have not had a case where the courts have been asked for help in furnishing evidence for an arbitration, so it’s impossible to judge their attitude.”
In Latin America, the courts have still to adjust to arbitration. “There are some Latin American countries, like Mexico, which are party to the New York Convention but where in practice the courts can’t be relied upon to enforce arbitration awards,” says José Vicente Roldán of Broseta Abogados of Spain. But in Brazil, “changes in legislation and in the attitude of the courts mean that arbitration has become more popular in recent years,” says José Rosell of Hughes Hubbard & Reed.
More than half a century since the signing of the New York Convention, it now has 142 signatories, including emerging powers such as China, India and the UAE. But there remain many jurisdictions which, though they are party to the Convention, have some way to go in providing a secure base for arbitration. And, even in countries where arbitration is well established, complex questions over the interpretation of the Convention remain outstanding.With luck, the next 50 years of the Convention should see it fufil its goals of universal judicial support for arbitration.