Koki Yanagisawa and Takiko Kadono

Under the Japanese Arbitration Act, which was established based on the UNCITRAL Model Law on International Commercial Arbitration in 2003, parties may file a petition with a court requesting the court to set aside an arbitral award under certain circumstances. In such petition, parties frequently assert, among others, that “the terms of the arbitral award violated the public policy of Japan” under Article 44-1-8 of the Arbitration Act or that “the composition of the arbitral tribunal or arbitration proceeding violated Japanese laws and regulations” under Article 44-1-6 of the Arbitration Act, as grounds for setting aside the arbitral award.

Recently, the Tokyo High Court referred to the construction of Article 44-1-8 and Article 44-1-6 in a case where Company X (an appellant) filed a petition with a court in Japan, requesting the court to set aside an arbitral award that was rendered in accordance with the rules of the Japan Commercial Arbitration Association (JCAA) (Company X v Company Y, the Tokyo High Court, 2016 (RA) 497, August 19, 2016). In this case, the arbitral tribunal rendered an arbitral award ordering X to pay Company Y (an appellee) a certain amount of money for, among others, compensation for damage arising from X’s breach of its obligations under a distributor agreement between X and Y. X filed the aforementioned petition, asserting that (1) the arbitral tribunal’s construction of the distributor agreement violated the EU competition law and therefore violated the public policy of Japan and (2) the arbitral tribunal’s construction of the burden of proof was not justified under Japanese law, the governing law of the distributor agreement, and therefore the arbitration proceeding violated Japanese law. However, the Tokyo District Court rendered a decision dismissing X’s petition and, in response to the appeal against such decision filed by X, the Tokyo High Court rendered a decision affirming the decision of the Tokyo District Court.

Parties who received an unfavorable arbitral award tend to make an attempt to set aside such award based on the theory of “a breach of public policy” before the Japanese courts. It is also common for such parties to argue that the “arbitration proceeding was in breach of Japanese laws and regulations.” Over the past 15 years since the Arbitration Act came into force, Japanese courts have had opportunities to deal with the issue regarding to what extent the aforementioned grounds should be accepted in determining whether to set aside arbitral awards. Japanese arbitration practitioners have been closely monitoring the court’s construction on this issue since it would indicate to what extent arbitral awards could be set aside by Japanese courts, which would seriously affect the issue as to whether or not Japan is considered as an “arbitration-friendly” jurisdiction in the world.

We envisage that the Tokyo High Court decision reasonably affirmed the district court decision based on a view that not all breaches of a governing law or mandatory laws by an arbitral tribunal constitute “public policy” grounds for the court to set aside an arbitral award under the Arbitration Act. More specifically, the Tokyo High Court took a position that the EU competition law should not constitute the public policy of Japan and the arbitral tribunal’s mere misconstruction of a distributor agreement in violation of mandatory laws would not necessarily constitute a breach of the public policy of Japan under Article 44-1-8 of the Arbitration Act.

Furthermore, we believe it is important for the court to reasonably limit the scope of “issues concerning arbitration proceeding” in order to avoid the situation where parties can readily make an attempt to expand the scope of such issues to make it easier to set aside arbitral awards based on the ground that the arbitration proceeding violated Japanese laws and regulations under Article 44-1-6 of the Arbitration Act. In the present case, while it was discussed by the parties whether or not the construction of the burden of proof is an issue of arbitration proceeding, the Tokyo High Court reasonably concluded that it is a matter of substantive law and therefore the arbitral tribunal’s misconstruction of the burden of proof does not mean that the arbitration proceeding violated Japanese laws.

In Japan, the number of petitions to set aside arbitral awards filed with the court is relatively small and even a single court decision on this issue would significantly affect the construction of the Arbitration Act and arbitration practice in Japan. From that perspective, the Tokyo High Court decision in the present case has made a meaningful contribution in solidifying a reasonable construction of the definition of “public policy” as well as the scope of the “issues concerning arbitration proceeding” in relation to the grounds for setting aside arbitral awards under the Arbitration Act and thereby establishing sophisticated arbitration practice in Japan. We firmly believe that a series of such decisions rendered by Japanese courts will further consolidate Japan’s position as an arbitration-friendly jurisdiction and is expected to attract global business entities to select Japan as the situs of arbitration in arbitration agreements in their international business transactions.

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S.I. Strong

Critics of international arbitration often express concerns about the quality of legal reasoning in arbitration, even though conventional wisdom within the international community suggests that international arbitral awards reflect relatively robust reasoning that is often on a par with that of decisions rendered by commercial courts.  Why the discrepancy?

I have written elsewhere about how unconscious biases may work against the perception of international arbitration (see “Truth in a Post-Truth Society: How Sticky Defaults, Status Quo Bias and the Sovereign Prerogative Influence the Perceived Legitimacy of International Arbitration”, 2018 University of Illinois Law Review), but other factors may be at play in this case.  In particular, the problem may simply be that very few empirical studies exist regarding legal reasoning in arbitration.

The situation may have been very different if Soia Mentschikoff, the first woman to teach at Harvard Law School (1947) and a former dean of the University of Miami School of Law (1974-82), had been able to complete her ground-breaking empirical work in the area of commercial arbitration.  During the 1950s and 1960s, Mentschikoff conducted empirical studies using hypothetical disputes resolved by arbitrators from a variety of backgrounds.  The goal was to determine whether and to what extent legal reasoning differed according to the arbitrator’s professional experience.   Although Mentschikoff never wrote up her final conclusions, a number of preliminary observations are reflected in “Commercial Arbitration” (1961) 61 Columbia Law Review 846 and “The Significance of Arbitration – A Preliminary Inquiry” (1952) 17 of Law and Contemporary Problems 698.

The University of Chicago has kept Mentschikoff’s working papers and it is possible that an aspiring young researcher could eventually complete Mentschikoff’s work.  However, contemporary scholars are currently developing a number of new studies that appear quite promising.

One major project involves a large-scale, international study conducted by the University of Missouri’s Center for the Study of Dispute Resolution.  The research seeks to improve our understanding of how judges and arbitrators resolve complex commercial disputes in both national and international settings by exploring potential differences between (1) judicial and arbitral decision-making; (2) national and international decision-making; and (3) common law and civil law decision-making.  The study will not only help parties make more informed choices about where and how to resolve their legal disputes, it will also assist judges and arbitrators in carrying out their duties by improving counsel’s understanding about how to best to craft and present legal arguments and submissions.  The study also helps providers of judicial and arbitral education offer educational programming that better meets the needs of judges and arbitrators.

The study includes several different elements, including a series of semi-structured interviews of domestic and international judges and arbitrators; a detailed survey of domestic and international judges and arbitrators; and a coded (qualitative) analysis of judicial decisions and arbitral awards involving domestic and international commercial disputes.  All of the various components focus on legal reasoning, including factual reasoning as it affects legal reasoning, and thereby provide key insights into previously unstudied issues.  The research is funded in part by a grant from the AAA-ICDR Foundation, although neither the Foundation, the AAA nor the ICDR plays any role in the gathering or analysis of the data so as to ensure the objectivity and independence of the study.

The research is currently ongoing, and those with experience serving as judges or arbitrators in national or international commercial disputes are invited to complete an anonymous electronic survey that can be found here: < https://www.surveymonkey.com/r/commercial-dispute-strong >.  The survey should take approximately twenty minutes to complete, and participation is entirely anonymous.  The survey will remain open until 11:59 p.m. Central Daylight Time (CDT) on May 1, 2018.  Only those with experience serving as judges or arbitrators in national or international commercial disputes are eligible to participate, although there are no restrictions relating to nationality or the level of seniority.

As the preceding suggests, empirical research in international arbitration has a bright future, and it will be interesting to see where the field moves next.  Although Soia Mentschikoff is no longer with us, she would doubtless be pleased with current developments relating to legal reasoning in commercial arbitration.

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Felipe Sperandio

Clyde & Co.

Mr Daniel Kahneman is a Nobel Prize winner in Economic Sciences, and the author of the bestselling book “Thinking, Fast and Slow”. His book focuses on behavioural science, and explains how cognitive biases fool us into making suboptimal decisions. In December 2017, PwC updated its International Arbitration damages research (“PwC Research”). It reviewed multiple international arbitration proceedings with the view of establishing a correlation between the value of damages calculated by parties’ experts and the value of damages actually awarded by tribunals.

Critical questions arise when we compare Mr Kahneman’s work with the PwC Research’s findings. In particular, questions relating to whether parties in international arbitration are able to influence the value of damages in awards, by (mis)leading arbitrators into cognitive biases.

Anchoring effect

Mr Kahneman describes “anchoring effect” as a cognitive bias phenomenon. It occurs when a person is asked to consider a particular initial value, relating to an unknown quantity, before estimating that quantity. What follows is that the person’s estimate tends to remain close to that value initially considered; even in situations where the latter bears no correlation with the former.

Any number we are asked to consider as a possible solution to an estimation problem will induce an anchoring effect. Mr Kahneman illustrates the power of anchors through an experiment conducted with German judges with an average of 15 years of experience. The judges reviewed a case relating to a woman who had been arrested for shoplifting. The judges were then asked to roll a rigged dice, which would stop at either three or nine. Right after, the judges were asked whether they would sentence the woman for a term in jail longer or shorter, in months, than the number showing on the dice. The judges were then instructed to hand down the sentence to the shoplifter. On average, those who rolled a nine would sentence her to eight months; those who rolled three would sentence her to five months. The anchoring effect in this case translated into a difference in jail time of more than 50% – even though the dices were obvious random anchors.

Compatible results have been found in experiments with other experienced professionals asked to consider an initial value; such as real estate agents asked to estimate the price of houses, and investment fund managers asked to estimate the price of companies’ shares.

It turns out the anchoring effect is one of the most reliable phenomena in experimental psychology. And anchors that are obviously random can be just as effective as potentially informative anchors.
On the basis the anchoring effect has been proved by scientific research, the questions that follow in international arbitration are:

(i) Are claimants incentivised to set out an inflated amount for damages at the outset of the arbitration, in order to anchor tribunals? and;

(ii) Should respondents assume that claimants usually attempt to anchor tribunals and, for that reason, equally attempt to anchor tribunals on the lower side of the spectrum?

PwC Research

PwC Research reviewed 116 publicly available awards. It draws a correlation between the value of the damages claims calculated by parties’ appointed experts, and the value of damages actually awarded by tribunals (in the cases where claimants obtained a favourable award). The PwC Research is interesting in a number of fronts. For the purpose of this post, the relevant findings are:

(iii) Tribunals awarded on average 36% of the value of damages calculated by claimants’ experts.

(iv) Respondents’ experts on average assess a claim at 12% of the value calculated by claimants’ experts.

(v) In situations where respondents’ positions move closer to the claim value calculated by claimants’ experts, the tribunal’s award does the same.

How is it possible that skilled and impartial experts calculate values so far apart? The PwC research rightly explains that often (a) experts answer to different questions; (b) experts are instructed to treat facts differently; and (c) experts genuinely have different opinions.

But even where tribunals instruct experts to consider the same legal and factual assumptions in their calculations; in many cases, experts find significantly distant values. This is caused by, amongst other things, the application of different (seemingly valid) complex mathematical models, which tribunals may or may not understand.

In any event, should it be acceptable to leave tribunals to their own devices? As the PwC Research shows that tribunals have been asked to consider values with a delta of 88% between claimants and respondents’ experts’ damages calculations?

Moreover, does point (iii) above suggest that claimants have inflated their claims? Does point (v) above suggest that respondents have an incentive to depart wildly from the value of damages put forward by claimants?

Discussion

Comparing Mr Kahneman’s work with the PwC Research’s findings raises difficult questions. In international arbitration, could parties influence the conclusions of tribunals by anchoring strategies?

If the answer is yes, there is (arguably) a risk of international arbitration becoming a dysfunctional process. Should tribunals, therefore, seek to deter anchoring strategies? If yes, should tribunals consider such strategies as parties’ misconduct?

One could argue that tribunal’s power to allocate the costs of the arbitration should per se discourage parties from deploying anchoring strategies. For example, if claimant does exaggerate the value of its damages claim, with the view of anchoring the tribunal; even if claimant succeeds in the arbitration, tribunals are (usually) empowered to allocate costs according to the proportion of claimant’s success.

That argument is potentially flawed, because tribunals generally pay particular attention to the outcome of the arbitration when allocating costs. If the outcome of the arbitration was tainted by anchoring strategies (i.e., the damages awarded were based on a distorted valuation); then the basis for allocating costs would be artificial.

Alternatively, should tribunals focus exclusively on parties’ conduct to allocate the costs of the arbitration? Besides denying the recovery of the arbitration costs, tribunals may order successful claimants – that have deployed anchoring strategies – to pay the costs of the defeated party on an indemnity basis (e.g., ICC Rules and LCIA Rules empower tribunals to do so, if the arbitration agreement does not provide otherwise).

That may also be insufficient to deter anchoring strategies. Parties willing to adopt such strategies could calculate the cost of the potential penalty (i.e., not recovering its costs and even paying the costs of the other side); and compare it with the potential reward (i.e., anchoring the tribunal on value substantially higher or lower than the actual value of damages).
If the risk does not outweigh the reward, the party deploying the strategy could take a commercial decision on the basis of a cost benefit analysis.

Lastly, the most difficult question: how can tribunals detect anchoring strategies deployed by parties in international arbitration?

Way forward

While scientific research has proven the anchoring effect, many will be confident that they understand such phenomenon, and can temper their decisions accordingly. This is caused by another cognitive bias namely “an illusion of explanatory depth”; which deserves a separate post.
This post advances more questions than answers, and hopes to raise the debate as to whether cognitive biases have critical implications for international arbitration.

Compelling indications, especially after the PwC Research, suggest that anchoring strategies could influence the value of an award on damages (at least for the time being, before human arbitrators are substituted by robots).

The invitation is out for the international arbitration community to discuss whether anchoring effect could (unduly) impact the conclusions of a tribunal. If we are prepared to accept that premise, we should then proceed to the second step and propose measures to counteract cognitive biases – with the overriding aim of increasing consistency in international arbitration.

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Ava Borrasso

ArbitralWomen

The importance of memorializing a settlement agreement into a consent award was recently highlighted in Transocean Offshore Gulf of Guinea Vii v. Erin Energy Corp., Case No. H-17-2623 (S.D. Tex. March 12, 2018). There, a Texas district court addressed whether a consent award is subject to confirmation in the United States pursuant to the New York Convention, as codified in the Federal Arbitration Act. The underlying case involved a contract dispute over drilling equipment and services located in waters off the Nigerian coast culminating in an arbitration before the London Court of International Arbitration.

The parties ultimately agreed to resolve their dispute prior to final hearing and asked the arbitrator to enter a consent award (as well as a partial award on costs that was not challenged). After the respondent failed to pay pursuant the terms of the award, the claimants sought to confirm the award in the Houston district court. The respondent moved to dismiss for lack of subject matter jurisdiction based on the contention that consent awards are not subject to New York Convention because the Convention is silent on the treatment of settlement awards. The respondent cited to a 2016 United Nations Commission on International Trade Law Secretariat Guide on the Convention which noted the silence of the New York Convention as well as the absence of any treatment in case law. The respondent also argued that the LCIA rules, absent other agreement of the parties, require the issuance of a reasoned award. Because the consent award lacked reasons, the respondent contended that it did not constitute an “award.”

However, prior to the court’s decision, an intervening decision by a New York district court addressed a similar argument which it handily rejected. In Albtelecom SH.A v. UNIFI Communs., Inc., Case No. 16 Civ. 9001, 2017 U.S. Dist. LEXIS 82154 (S.D.N.Y. May 30, 2017), the court confirmed a consent award arising from an ICC proceeding. The Texas district court therefore relied on Albtelecom and held that “[n]o binding or persuasive statutory language or case law requires a court to hold that a tribunal must reach its own conclusions, separate from the parties’ agreement, to make a valid, binding award subject to the Convention” and that such a rule “would dissuade parties from seeking arbitration in the first place or benefitting from the efficiencies it is meant to provide.”

The court also noted the rationale discussed in Albtelecom that the parties could have simply resolved their dispute by private settlement agreement but instead elected to request a consent award. As the remedies for breach of a settlement agreement culminating from an arbitration proceeding are generally more cumbersome than confirmation of a consent award, both decisions highlight the advantages of taking this further step to memorialize settlement agreements through issuance of a consent award when feasible.

Albtelecom further underscores the complications of enforcing a settlement agreement arising from international arbitration proceedings. In that case, the petitioner sought to confirm a consent award issued by an arbitrator from an ICC proceeding. Even more, the petitioner sought damages for breach of the award pursuant to its terms. The respondent sought to dismiss or stay the case, first arguing that the consent award was issued outside of the arbitration and not subject to confirmation under the New York Convention.

The court rejected that argument stressing that the parties requested that the arbitrator enter the award, reviewed and commented on a draft form of the award, and otherwise operated within the context of the arbitration. The court confirmed the consent award as within the scope of the New York Convention.

The next issue was more problematic. In addition to seeking confirmation of the award, the petitioner sought damages for its breach. The consent award included a clause that, if breached, the petitioner was entitled to recover a greater amount, and also provided that disputes unrelated to payment required resolution through arbitration in Switzerland. The respondent next argued that factual circumstances had changed following issuance of the award that excused payment and advised the court that it had instituted an ICC arbitration in Switzerland to resolve those issues.

The court decided it lacked a sufficient record to resolve the damages claim and asked the parties to provide further briefing in the event that the petitioner decided to pursue the claim in the district court. The court also asked the parties to provide briefing as to the proper forum to resolve the pending damages issues.

Albtelecom and Transocean Offshore appear to resolve whether consent awards are subject to confirmation pursuant to the New York Convention in the United States. In doing so, they not only demonstrate the advantage of memorializing a settlement agreement into a consent award when the tribunal is inclined to do so, they also highlight issues that may arise post settlement. Despite the agreement of the parties, these cases demonstrate the care required in fashioning consent awards and details for subsequent proceedings in the event of breach.

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Peter Hirst

Clyde & Co.

Two recent pieces of recent research raise the question of whether arbitration users really value finality in arbitration or take it for granted. Is it time (again) to discuss whether s69 Arbitration Act 1996 is meeting users’ needs?

Arbitration Act 1996, s69

Section 69 of the Arbitration Act 1996 (AA 1996, s 69) is a non-mandatory section which provides that an arbitral award may be appealed on a point of law in limited circumstances. Permission to appeal can be obtained by either the agreement of all parties to the proceedings (which is unusual) or granted by the court where the court is satisfied that:

· The determination of the question will substantially affect the rights of one or more of the parties

· The question was one which the tribunal was asked to determine

· That on the basis of the findings of fact in the award:

• The decision of the tribunal was obviously wrong or
• The question is one of general public importance and the decision of the tribunal is at least open to serious doubt, and
• That despite the agreement of the parties to resolve the matter by arbitration it is just and proper in all the circumstances for the court to determine the question

On the appeal the court may confirm or vary the award or remit the award to the tribunal in whole or in part for reconsideration, or set aside the award.

Clearly, given the parties’ agreement to arbitrate, the use of the courts to ultimately determine the dispute (though not this is on law only and even then the court can decide to remit the award to the tribunal) is a significant step as, arguably, it makes the court the ultimate legal arbiter of the arbitration.

Commercial Court statistics

The Commercial Court Users’ Group Meeting Report from 13 March 2018 available here gives statistical insight into the number applications made for permission to appeal arbitral awards and even lower success rates for those who are granted permission.

The s69 statistics show that:

• 2015: 20 out of 60 permission granted, 4 successful appeals
• 2016: 0 out of 46 permission granted, 0 successful appeals
• 2017 (to date): 10 out of 56 granted, 1 successful appeal

While the levels of permission granted have fluctuated 2015 to 2017 from 33% to 0% to 18%, there is really no discernible trend to indicate that permission is becoming easier or harder to obtain.

The number of successful appeals remains low with a ‘high’ of 4 successful appeals in 2015 appearing unusual.

The 2017 statistics are stated as being ‘to date’ but it is not clear which date in 2017 they run to. Already in 2018 there have been successful s69 applications including recently in Agile Holdings v Essar in which the award was set aside in its entirety (as the decision was binary the court decided there was no reason to remit it to the tribunal). (Agile Holdings Corporation v Essar Shipping Ltd [2018] EWHC 1055 (Comm)).

These statistics bear out what those who participate in arbitration already know – that it is difficult to obtain permission to appeal and even more difficult to appeal successfully. One potential reason for the low number of applications for permission is the exclusion of s69 incorporated into leading institutional rules such as those of the LCIA and ICC. Under these institutional rules parties exclude the right to appeal which, as it is not a mandatory rules under the Arbitration Act 1996, is permitted.

Do users want a route of appeal?

The recent Queen Mary/White & Case 2018 International Arbitration Survey: The Evolution of International Arbitration showed that only 16% of respondents viewed finality as one of the three most important characteristics of arbitration. This is interesting as finality is often thought/stated to be one of the greatest benefits of arbitration over traditional litigation routes. Perhaps the survey result shows that parties assume finality because of the exclusion of s69 either voluntarily or by incorporation of major arbitral rules. Alternatively, they can see the benefit of some form of appeal process which is a common feature to court systems and therefore ‘arbitration finality’ is not important to them.

It is worth remembering that the inclusion of s69 was controversial at the time of drafting the Arbitration Act 1996 (notably the DAC Report), not least because it is a departure from the UNCITRAL Model Law on which the Arbitration Act and many other international arbitration laws are based. Indeed, it is in large part due to this controversy that s69 is couched in such narrow terms and designed to be so difficult to obtain both the permission to appeal and appeal itself.

More recently the low numbers of cases on appeal has been cited by the Lord Chef Justice Lord Thomas as detrimental to the development of English law as points of law are determined in private by tribunals which then precludes them from becoming of precedential value and thus developing the law (notable several other senior judicial figures disagreed). While for many this is not sufficient reason to widen the scope for arbitral appeals it has opened the door to discussions around what is best for arbitrating parties and whether decisions by tribunals which are not subject to review under law provide fair outcomes for parties.

Where now?

The Commercial Court’s statistics demonstrate that the DAC’s intentions of the Arbitration Act 1996 and the narrow gateway to the court have been successful (most likely aided by arbitral institutional rules). While it is not possible to say for certain, if s69 was not precluded by the ICC and LCIA it is not unreasonable to predict that the number of applications for permission to appeal would rise significantly, though the proportion of successful appeals would not as the ‘high bar’ for success would remain. One interesting side effect of such a change however would be to see the impact it had in other areas of arbitration:

• Would the public nature of an appeal by which the previously secret arbitration comes into the public eye undermine one of the fundamental benefits of arbitration (confidentiality was rated by 36% of the Queen Mary respondents as one of the three most important characteristics of arbitration)?
• Would parties then simply decide to litigate (though 60% of Queen Mary respondents valued avoiding national courts)?
• Would parties ‘opt out’ of s69 in their arbitration agreements (as they are currently free to do) if the institutional rules did not already incorporate this option?
• Would arbitrators feel a greater weight of responsibility on decided the law knowing that it may be open to judge’s scrutiny?

The questions are endless and many an arbitration conference will no doubt continue to address them.

A key point to be left with is to focus on party autonomy and the parties’ right to choose the arbitration procedure they want. Parties need to be aware of the mon-mandatory nature of s69 and their choice of institutional rules’ impact on their ability to appeal an award on a point of law. This choice should be consciously made and fully understand by all involved.

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Maja Stanivukovic

Enforcement for some may be a chimera, an overrated factor in choosing the dispute resolution methods.¹⁾Cameron Ford, The Enforcement Chimera, Kluwer Arbitration Blog, May 10. 2018. Yet, efforts that have been invested in enforcement of judgments within the Hague Conference on Private International Law²⁾See the Draft Judgments Convention and of international commercial settlement agreements reached in mediation within UNCITRAL³⁾See materials of the UNCITRAL Working Group II suggest that enforcement is not an entirely fictional animal. The topic of this post is how enforceability of judgments can indirectly affect enforcement of a domestic arbitral award in Serbia.

Efforts to improve efficiency of enforcement in Serbia

On 1 July 2016, the 2015 Enforcement and Security Act (ESA) came into force in Serbia.⁴⁾Zakon o izvršenju i obezbeđenju, “Official Journal,” 106/2015. This is the fourth Enforcement and Security Act in row since 2000. It introduces significant changes in the enforcement procedure.⁵⁾One of the major changes introduced by the 2015 ESA is that most enforcement procedures including those based on arbitral awards are now conducted by public enforcement agents, under the supervision of the court. Public enforcement agents are graduated lawyers appointed by the Minister of Justice to exercise public powers entrusted to them under the law, in particular enforcement of judgments. They were introduced as a new legal profession by the 2011 Enforcement and Security Act. The most important reasons for its adoption are: low efficiency in enforcement procedures,⁶⁾The European Court of Human Rights has found on numerous occasions that Serbia has committed violations of Art. 6(1) of the Convention and Art. 1 of Protocol no. 1 due to the failure to timely enforce final judgments. See one of the latest cases Vukosavljević v. Serbia, Application no. 23496/13, Judgment dated 27 September 2016. a large backlog of enforcement cases pending in courts, and general dissatisfaction of creditors.

Article 15(1) of the ESA provides that enforcement proceedings are urgent. Articles 41 and 42(1) expressly recognize domestic arbitral awards as valid legal bases for the institution of enforcement proceedings.⁷⁾Article 64(1) of the Arbitration Act provides that a domestic arbitral award shall have the force of a final domestic judgment. This means domestic arbitral awards may be enforced in accordance with the provisions of the statute regulating enforcement procedure, which is currently the 2015 ESA.

A final domestic arbitral award is enforceable after the time for voluntary execution has expired, or other conditions specified in the award have been fulfilled. If no time is specified, the time for voluntary execution is eight days (ESA, Art. 47(1)).

The public enforcement agent has a duty to rule on the request for enforcement of a domestic arbitral award within eight days from the date of lodging of the request for enforcement in ex parte proceedings (ESA, Art. 15(4)). The debtor then has eight days to appeal the decision to the court (Art. 25(1)).

As a rule, lodging of the appeal does not suspend enforcement (ESA, Art. 25(3)). Execution against assets may be obtained as soon as the decision granting enforcement is rendered.

Suspension of enforcement

The sole remedy against the domestic arbitral awards is the action for annulment (setting aside) which must be filed within three months of the receipt of the award (Arbitration Act, Art. 59(1)). It may happen that an enforcement proceeding has been initiated while the action for setting aside is pending. The debtor in such case may wish to request suspension of the enforcement proceedings until the decision on the setting aside is made.

The Arbitration Act does not provide for suspension of enforcement proceedings because an action for setting aside of the domestic award has been filed. Furthermore, the 2015 ESA does not envisage it, either.

Nevertheless, the 2015 ESA provides that the enforcement proceedings may be suspended at the request of the debtor if the debtor establishes likelihood that enforcement would cause him irreparable or near-irreparable harm exceeding the harm caused to the creditor due to suspension (Article 122).⁸⁾It should be noted that the possibility of suspension of enforcement proceedings at the request of the debtor was not provided by the previous 2011 Enforcement and Security Act. Additionally, the debtor is required to show that the suspension is justified by special reasons which the debtor can substantiate with an authentic or duly certified document. Further, suspension may be conditioned upon deposit of security by the debtor.

The proposal for suspension may be filed only once during the enforcement proceedings (Article 122(1)). The public enforcement agent must decide on the proposal within five days of receipt (Article 124(1)). This decision is subject to a review by the court upon the debtor’s objection (Article 124(2)). The time for which enforcement is suspended is determined by the public enforcement agent, following the request of the debtor.

How it works in practice

Although suspension is envisaged as an exceptional remedy, the practice confirms a case where the suspension was granted.⁹⁾Rešenje Privrednog suda u Beogradu, Posl. br. 8 IPV (I) 375/17 Ii 639/17 Veza 8 Ipv (I) 255/17 dated 22 January 2018. The case, unpublished, has been reported by Nikola Bodiroga, Odlaganje izvršenja domaće arbitražne odluke, Privreda i pravo no. 4-6/2018, pp. 277-281. See also, Nenad Tešić, Odlaganje izvršenja arbitražne odluke – Periculum in Mora ili Ultima ratio u odbrani dužnika od neopravdanog osigromašenja, soon to be published. In this case, an Austrian creditor sought enforcement of a domestic award against a Serbian debtor. The creditor sought enforcement by blocking the debtor’s business account and by attaching debtor’s real estate for sale. The debtor requested suspension for at least two years or until the setting aside proceedings initiated before the Commercial Court in Belgrade were finalized.

The public enforcement agent initially rejected the debtor’s request. The debtor then filed an objection to the Commercial Court in Belgrade.

The grounds for the objection were that the attached property was of considerably higher value compared to the amount of the debt, that the blocking of the debtor’s business account prevented the debtor’s operation and could eventually lead to its bankruptcy, and that the creditor was domiciled in Austria and had no property in Serbia or abroad from which the collected amount could be recuperated in case the award was eventually set aside.

The court found that the debtor’s objection was well-founded. In the opinion of the court, the debtor had established likelihood that enforcement would cause him irreparable harm, and that such damage would exceed the harm that would be caused to the creditor due to suspension.

The court attributed particular importance to the fact that there was no treaty on enforcement of judgments between Serbia and Austria, Austria being known as a country requiring a treaty with the judgment country. Therefore, the debtor would not be able to recover the collected amount from the creditor if the award was subsequently annulled. On the other hand, the creditor’s claim was secured by an entry of the decision on enforcement in the real property cadastre. By making an entry, the creditor obtained priority over any other creditor that might later acquire claims against the same debtor. The court therefore quashed the decision that rejected the request of the debtor for suspension and ordered the public enforcement agent to reconsider the grounds for suspension taking into account the holding of the court. Acting upon the court’s decision, the public enforcement agent then granted the request for suspension.

Conclusion

The fact that judgments of Serbian commercial courts are not enforceable in Austria has been critical to the court’s decision to suspend the enforcement proceedings based upon the domestic award. The irony of it is that the prime motive for selecting arbitration in commercial contracts between Austrian and Serbian partners may often be to circumvent the non-enforceability of judgments.

The case indicates that under the 2015 ESA there may be a greater risk than before of delay in enforcement of domestic awards rendered in international cases if the award debtor is established abroad, in a country with which reciprocity in enforcement of judgments is lacking.

The potential duration of the suspension is considerable. The setting-aside proceedings can last up to a year and appeal proceedings for another year and a half. The procedure for setting aside, although usually unsuccessful, can thus indirectly affect the efficiency of the domestic arbitration proceedings, and undermine one of the goals set by 2015 ESA, as well as the 2006 Arbitration Act: efficient enforcement of domestic arbitral awards.¹⁰⁾In 2010 Serbia has been held liable for a violation of Article 1 of Protocol No. 1 of the European Convention on Human Rights due to the partial non-enforcement of a domestic arbitration award. Kin-Stib and Majkić v. Serbia, no. 12312/05, ECtHR (Second Section), Judgment (Merits and Just Satisfaction) 24 April 2010. For this reason alone, courts should administer this remedy sparingly.

Professor Stanivukovic is the author of the ICCA Handbook National Report on Serbia, recently completely revised and updated, and now available here. With thanks to prof. Milena Đorđević for helpful comments.

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Mintewab Afework

The cassation bench of the Supreme Court of Ethiopia, whose decisions have precedential value, in National Motors Corp. v. General Business Development case has ruled that parties’ final intention to be bound by an arbitration award shall be final and may not be subject to review by courts, including the cassation bench. The bench, however, reversed the favourable precedent in the National Mineral Corp. Pvt. Ltd Co. v. Danni Drilling Pvt. Ltd Co. (“National Mineral case”), where the parties have agreed to submit their disputes to arbitration and waived their right of appeal on the final arbitral award. The bench ruled that it still has the power to review the award on fundamental error of law grounds despite parties’ express agreement on the finality of the arbitral award.

In the recent arbitral award in the famous case of the government of Ethiopia and Djibouti (represented by the Chemin de Fer Djibouto-Ethiopien (“CDE”)), and Consta Joint Venture (“Consta”) the majority of the tribunal under the Permanent Court of Arbitration awarded Consta in excess of 20 million Euros, rejecting all of CDE’s defenses and counterclaims. The governing law was Ethiopian while arbitration was conducted under the Procedural Rules on Conciliation and Arbitration of Contracts Financed by the European Development Fund (“EDF Rules”). This award was challenged before the cassation bench on the precedent set by the National Mineral case. The bench, on 24 May 2018, ruled that it not only has the jurisdiction to review an EDF arbitral award for fundamental errors of Ethiopian law but also that such errors existed in the case.

Experts say that this jurisdictional ruling could be a groundbreaking precedent affecting existing and future EDF cases in many profound ways and hence calls for a further study. This article, however, is based on the previous National Mineral case on which the Consta’s case was based upon.

With the sweeping precedence in the National Mineral case, parties are denied of their right to waive appeal. This creates another wide avenue of review of final arbitral awards besides appeal and annulment (set-aside) under the existing Ethiopian laws of arbitration. Such approach is not consistent with the legislative and judicial approach followed by many contemporary jurisdictions that are progressively abandoning judicial review on substantive grounds including on grounds of error of law.

Jurisdictions like the United States are moving away from ‘manifest disregard of the law’ as a ground of annulling awards in the Hall Street Associates v. Mattel case. Many other jurisdictions such as France, Switzerland and countries that have modelled their national laws after the UNCITRAL Model law International Commercial Arbitration do not allow appeal on international arbitral awards on the point of law. Only limited numbers of jurisdictions allow appeal on a mistake of law. One such example is the 1996 English Arbitration Act, §69, which provides that, in a limited category of cases, an award may be subject to appellate review by the English courts for substantive errors of law. However, the right is subject to several restrictions and most importantly allows the parties to waive their rights of appeal by agreement. The English Courts, in practice, have taken a very restrictive approach to allow challenges on error of law ground.

One cannot deny the merit of judicial review in order to guard against mistakes of law. It is to safeguard against unjust and arbitrary awards and avoid the risk of inconsistent decisions to ensure uniform application of the law. Such argument is in line with the cassation bench’s rationale in the National Mineral case. However, international arbitral practice dictates that this public interest of ensuring consistency and predictability has been significantly weighed down in favor of the need for finality of awards, except in very limited circumstances.

Interference in a private agreement is contrary to the fundamental goals of international arbitration as it frustrates parties’ choice of arbitration as a neutral and independent forum with no risk of national bias or political pressure. Allowing parties to agree on a neutral playing field promotes international business transactions, while protracted multi-stage litigation through appeals and retrials discourages such involvement in the state. A national legal framework hampered by excessive court intervention could negatively affect the effort to attract foreign investment and participate in international commerce. The restrained intervention also makes courts more efficient by avoiding unnecessary diversion of judicial resource.

As we speak, Ethiopia’s arbitration regime makes final arbitral awards susceptible to review by the cassation bench for error of law. This position has been solidified by the recent cassation bench’s annulment of the PCA’s award.

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Emma Morales

Linklaters

On 5 April 2018, the Civil and Criminal Chamber of the Madrid High Court of Justice (Tribunal Superior de Justicia de Madrid, TSJM) set aside an arbitral award as contrary to public policy, because the challenged award contained “an unreasonable assessment of the evidence and unreasonable failure to apply applicable rules”.¹⁾ Competent Court to deal with the challenge of awards of arbitration proceedings with seat in Madrid. The influence of the award is due to the fact that a large part of the arbitrations based in Spain have its seat in Madrid.

In this case, the applicable arbitration clause, which provided for arbitration with seat in Madrid²⁾ It was a domestic arbitration for more than 10M€ in dispute and with a tribunal of three arbitrators. was valid. The parties were duly notified and were able to assert their rights. The arbitrators resolved matters that could be and were submitted to their arbitration. The arbitration clause was respected in terms of the appointment of arbitrators and in the procedure.

Despite all of the above, the Madrid court decided to invoke public policy to annul the award. The approach of the court, as discussed below, is problematic as, if followed, it risks perverting, in Spain, the process of application for annulment of an award.

How did the court end up ruling in such a way? First, the Madrid court permitted itself to get into a discussion of all the disputed matters, procedural and substantive, originally before the tribunal and within these considered the appropriateness and suitability of the legal grounds contained in the award. It also allowed itself to review all findings relating to the tribunal’s overall assessment of the evidence. In fact, in the judgment itself (fifth point of law, page 31) the court acknowledges openly, when referring to the authority it considers itself to have, that: “what it is for this court to do is to check whether the probatory assessment that was made in the arbitral award is not arbitrary because it is deviates markedly from the probatory result or by unjustifiably omitting assessment of evidence that is essential to resolve the matters discussed”.

From this starting point, the Madrid court went on to annul the award because in its view it is relevant that “in view of a singular deviation from the wording of the provisions of an agreement (…) which appear to be an expression of the parties’ intentions, drawn up after a long negotiating process as the award highlights, the content of certain emails and not others is taken as the sole basis to substantiate a transactional intention different to that stated in the agreement, without explaining in any way why no reference is made to the emails that apparently do not support the majority thesis accepted by the arbitral tribunal”.

Faced with this conclusion, one may ask what all this has to do with public policy. It is worth recalling that public policy is a delineated concept which, applied strictly, should be prevented from becoming a catch-all through which the Madrid court, with clearly defined authority for annulment, gives itself the prerogative for review.

The well-known Spanish Supreme Court judgment of 5 April 1966 [RJ 1966/1684] states that public policy is “the set of legal, public and private, political, economic, moral and even religious principles, which are absolutely obligatory for the preservation of social order in a population and in a particular time”.

More recently, in its judgment of 5 February 2002(54/2002), the Supreme Court expanded on this a little further and updated the concept, to declare that public policy

“is formed by the legal, public and private, political, moral and economic principles, which are absolutely obligatory for the preservation of social order in a population and in a particular time (Supreme Court judgments of 5 April 1966 and 31 December 1979) and further, an obvious scientific approach finds it to be the principles or directives that inform legal institutions from time to time; a modern position of legal science also indicates that public order is the expression given to the function of general principles of law in the realm of private autonomy, consisting of limiting its development where it violates these principles. Essentially, what must be taken into account today, as forming part of public order, are the fundamental rights contained in the Spanish constitution”.

In the reasoning given in the judgment, there is not a single reference to this concept or to the legal principles necessary to preserve the social order that are threatened because the overturned award did not mention “why no reference is made to the emails that apparently do not support the majority thesis accepted by the arbitral tribunal”. In its fifth point of law (pages 28 to 34 of the judgment), which is the only one in the whole ruling in which annulment of the award is discussed, there is no reasoning which justifies setting aside the award on the basis of public policy.

In view of such absence of thorough legal grounds, this leads to the conclusion that the court’s decision is one whose legal basis is difficult to understand. Furthermore, it is not one which is necessarily helpful to Madrid’s status as a seat of arbitration as parties, of course, choose arbitration to be free of court interference. For both reasons, it represents an approach which seems hard to justify.

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Sadaff Habib (Assistant Editor for Africa)

Five years after filing the Permanent Court of Arbitration (PCA) Case No. 2013-32 under the European Development Fund Arbitration Rules (EDF Rules), the claimant, Consta JV (an Italian contractor), would have hoped for a successful award against the CDE (a joint enterprise between the Ethiopian and Djibouti government) that would be upheld by the local court.

All such hopes were crushed when, on 24 May 2018, the Supreme Court of the Federal Democratic Republic of Ethiopia (Court) (i) ruled that it has jurisdiction to review an arbitral award issued under the EDF Rules, (ii) found fundamental errors in law in the arbitral award and (iii) set aside the arbitral award.

The dispute involved a breach of contract claim arising out of a repair works contract financed by the EDF relating to rehabilitation works being performed on the Ethiopia-Djibouti Railway. The dispute was brought before a tripartite tribunal and the award issued by the majority. Co-arbitrator, Professor James Thup Gathii dissented.

Several issues arise from the Court’s decision:

1. Did the Court have jurisdiction and authority to decide on the nullification of an arbitral award issued under the EDF Rules?

2. Did the Tribunal err on a point of law?

3. What is the impact of the Court’s decision on arbitration in Ethiopia and on EDF cases?

 Did the Court have jurisdiction and authority to decide on the nullification of an arbitral award issued under the EDF Rules?

The EDF is an intergovernmental fund outside the EU budget with most of its resources being managed by the European Commission. Countries that receive EDF funding include parts of Africa, the Caribbean etc., and are signatories to the Cotonou Agreement. In 1990, the Council of Ministers of the African, Carribean and Pacific Group of States (ACP States) and the European Economic Community approved a new set of rules for the settlement of disputes arising out of construction, supply and service contracts funded by the EDF. The EDF covers disputes between the private sector executing the contract and authorities of the ACP States.

The EDF Rules

The EDF Rules provide that the law applicable to the substance of the dispute and the lex arbitriare those of the State unless otherwise agreed by the Parties. Furthermore, an award rendered under the EDF Rules is final and binding and parties are required to carry out the award without delay. There is a requirement for an award to be recognised and enforced under the EDF Rules and enforcement of the award is regulated by the law relating to the enforcement of judgments which is in force in the State in whose territory the enforcement is to be carried out.

The seat of the PCA arbitration was Addis Ababa and the governing law of the arbitration was Ethiopian law. The Court had jurisdiction to enforce and recognise the award.

The Court’s rationale

The Court determined that the EDF Rules give arbitral awards rendered under such rules the status of a final court judgment of the ACP States. This is not incorrect. The Court appears to have taken into cognisance Article 33.3 of the EDF Rules which require each ACP State to recognise an award under the EDF Rules as binding and ensure it is enforced in its territory as if it were a final judgment of one of its own courts or tribunals. The Court goes further to reason thatbecause the Ethiopian Constitution grants the Court of Cassation the jurisdiction to review final court judgments of all Ethiopian courts for fundamental errors of Ethiopian law, the Court has jurisdiction to review this EDF award as it is analogous to an Ethiopian court judgment under the EDF Rules.

Notably, Ethiopia developed most of its current codes on private law in the last century. Its arbitration law can be found in its Civil Code and Civil Procedure Code. It is generally perceived that Ethiopia’s arbitration law applies to domestic arbitration as opposed to international arbitration.

It is unsurprising that the Court adopted the above approach in finding jurisdiction for itself to decide on whether the law had been applied correctly to the EDF award which in the Court’s eyes under the EDF Rules is akin to an Ethiopian court judgment.

Did the Tribunal err on a point of law?

The CDE challenged the award on the basis that the majority of the Tribunal had seriously erred in deciding on a point of law in their decision.

The Court annulled the award on a number of substantive grounds. Most importantly, it stated that the Tribunal disregarded evidence of fraudulent bidding by the claimant. Interestingly, it is on this point that Professor James Thup Gathi issued his dissenting award.

The Ethiopian Civil Code provides that a contract may be invalidated based on fraud if the other party would not have entered into the contract had it known of the deception.  Without going into detail of the dissenting award and the arbitration case, Professor Gathi relies on this provision and dissents in that he views that CDE would not have entered into the contract if it had known that the joint venture partner in Consta JV, GCF who was to provide technical expertise on railway projects, reduced its share in the JV and its responsibility as a JV partner was significantly and considerably reduced such that it disavowed the responsibility for design. Objectively, this would understandably be an issue for any client in CDE’s position particularly where it is relying on the JV partner’s skills in a project.

The Court reasoned that under the Ethiopian Civil Code, a contract entered based on fraud is invalidated and as such Consta JV’s breach of contract claim cannot be sustained. The Court found that the majority of the Tribunal omitted to address this. The Court went on to say that the only remedy to the parties in such a situation is that they are restored to the position they were in before the contract and they may seek such recourse through a subsequent arbitration. Interestingly, the Court appears to uphold the principle of separability of the arbitration agreement and does not invalidate it.

On the face of it, the Court’s reasoning appears legally sound. However, there is concern that the Court opening up the award could potentially attract more challenges counterintuitive to the arbitration process. Would a better approach have been for the Court to revert the award back to the Tribunal for the Tribunal to re-determine on the issue?

What is the impact of the Court’s decision on arbitration in Ethiopia and EDF cases?

Undoubtedly, the Court’s decision is seen as one of the first of such decisions issued by the highest court of the ACP countries. It is anticipated this will be a ground-breaking precedent that may well affect future EDF cases particularly in Ethiopia.

As of date, Ethiopia is not a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958.  This, together with the Court’s decision, may cause private sector companies to reconsider and proceed cautiously in choosing arbitration as a mode of dispute resolution where Ethiopia is the seat of arbitration.

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Mikhail Samoylov

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) has its own scope – it states that it “shall apply to the recognition and enforcement of arbitral awards”. Only decisions made by arbitrators are to be considered “awards” within the meaning of the New York Convention¹⁾UNCITRAL Secretariat Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (2016) para 22., rather than decisions handed down by judges. As one prominent academic notes: “[t]here is no universal international treaty governing the recognition and enforcement of foreign court judgments.”²⁾Gary B. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing (Fifth Edition) (Kluwer Law International 2016) p. 129 Despite that, Russian courts are invoking the New York Convention in the exequatur proceedings of foreign court judgements.

This blog post will first briefly reveal the results from the research conducted by the author on the issue (I). The next part of this contribution then discusses some possible reasons why Russian courts apply the New York Convention erroneously (II), and some consequences of such practices (III). The author summarizes conclusions in a final part (IV).

I. A Case Study of Erroneous Practice

Research carried out by the author shows that in at least 81 cases, which were considered in recent years, Russian courts invoked the New York Convention in the exequatur proceedings of foreign court judgements.

The table below reveals (i) the countries where foreign court judgements were rendered (the nationality of a foreign court judgement); and (ii) the number of exequatur proceedings in Russian courts in which the New York Convention was applied to such judgements:

Moreover, Russian courts apply the New York Convention even in cases where a foreign judgement was rendered in a State (a territory) that is not a party to the New York Convention. For instance, in case No А41-55167/16, the New York Convention was invoked for the recognition and enforcement of the Nampkhosky court on sea matters of the Democratic People’s Republic of Korea in Russia.

II. Prerequisites for Erroneous Practice

There might be several possible explanations for such erroneous practice. First, there is a dual meaning of the word “arbitrage” in the Russian language. The word “arbitrazh” in Russian comes from “arbitrage” in French. While in French, “arbitrage” is an alternative method of dispute settlement (“[r]èglement d’un différend ou sentence arbitrale rendu par une ou plusieurs personnes, auxquelles les parties ont décidé, d’un commun accord, de s’en remettre.” ³⁾Le Nouveau Petit Robert. Dictionnaire alphabétique et analogique de la langue française ; texte remanié et amplifié sous la direction de Josette Rey-Debove et Alain Rey (Dictionnaires Le Robert, Paris 2009), p. 129), in the terms of Russian law and the language, the word has a dual meaning, and it means :

(i) dispute resolution by a state court – an arbitrazh court;

(ii) dispute resolution by arbitral tribunals.

This dual meaning confuses Russian courts and foreign courts. For example, a Sweden court in the exequatur proceedings, confused by a translation of “an arbitrazh court” from Russian to Swedish, applied Sections 54-55 of the Swedish Arbitration Act (which correspond to Article V of the New York Convention) and declared the ruling of a Russian arbitrazh court enforceable.⁴⁾ Eric Johnson, ‘The “Award” Not Recognized – and Rightfully So’ (10 April 2017). However, the Swedish Supreme Court corrected the lower court, clarified that in the case at hand, the enforcement was sought for a court ruling, rather than for an arbitral award (Swedish Supreme Court decision on 30 March 2017, Case No. Ö 5209-13).

Further misunderstanding can be possibly caused by the wording of Russian procedural law. Article 241 (1) of the Arbitrazh Procedure Code of the Russian Federation reads as follow:

“foreign courts judgements <…>, and awards of arbitral tribunals and international commercial arbitration courts are recognized and enforced in the Russian Federation by arbitrazh courts, if the recognition and enforcement of such decisions are stipulated in an international treaty of the Russian Federation and in federal law.” (emphasis added).

In 1996, the Supreme Arbitrazh Court of the Russian Federation clarified that the New York Convention deals only with arbitral awards, whereas the recognition and enforcement of foreign court judgements are governed either by an international treaty to which Russia is a party to, or by Russian law. The notion of “a foreign court judgement” is not equal to the notion of “an arbitral award”.

Article 241 (1) of the Arbitrazh Procedure Code of the Russian Federation, which became law in 2002, rests upon the mentioned rationale. One would say that the same approach should have been true regarding its application by Russian courts. Notwithstanding the clarification of the highest court, Russian courts often consider the notions “a foreign court judgement” and “an arbitral award” as the synonyms of a common notion – a court judgement. For example, in case No А40-187536/2015 the Arbitrazh court of the city of Moscow threated a LCIA award as a foreign court judgement. Opposite, in case No A53-11372/2017, the Arbitrazh court of the Rostov region treated a foreign court judgement as an arbitral award, and stated:

“Grounds for refusing the recognition and enforcement of a decision of the Economical court of the Kharkov region [Ukraine] <…> providing for Article V of the [New York] Convention are not established <…> the petition [for the enforcement] shall be satisfied.”

Finally, recognizing that Russia may not have an international treaty on the recognition and enforcement of court judgements with a country where a court judgment was rendered, Russian courts often use the New York Convention instead of such an international treaty, or use the New York Convention simultaneously with an international treaty (see, e.g., the decision of the Arbitrazh court of the Pskov region dated 16 February 2017 in case No A52-2950/2016).

III. The Consequences of Erroneous Application

The erroneous application of the New York Convention in the exequatur proceedings of foreign court judgements may, and, in fact, leads to the adverse effects to judgment creditors. At the outset, in 23 of 81 examined cases, Russian courts refused the recognition and enforcement of foreign court judgements and based its conclusions on the provisions of the New York Convention. Articles V(1)(b) and V(2)(b) of the New York Convention were the article most frequently applied by Russian courts in those cases.

(a) Proper Notice

Article V(1)(b) of the New York Convention requires that the party against whom the award is invoked was properly notified of the appointment of the arbitrator and of the arbitral proceedings. Although Russian procedural law contains similar provisions regarding foreign court judgements, Russian courts apply Article V(1)(b) of the New York Convention instead of a relevant provision of a procedural law. For example, in case No А47-2947/2010, the Arbitrazh court of the Orenburg region refused the enforcement and recognition of a Kazakhstan court judgement having established that the judgement debtor was not properly notified of a court proceeding in Kazakhstan.

(b) Public Policy

The public policy defence is one of the most often invoked by the parties against whom arbitral awards, or foreign courts decisions, are invoked.

Russian procedural law entitles Russian courts to refuse the enforcement of a foreign court judgement if the enforcement of such judgement would violate of the Russian public policy (Article 244 (1)(7) the Arbitrazh Procedure Code the Russian Federation). Hence, recourse to the New York Convention is not needed. Nevertheless, Russian courts invoke Article V(2)(b) of the New York Convention, instead of a relevant provision of the Arbitrazh Procedure Code of the Russian Federation. One among numerous examples of such application is the following statement given by the Arbitrazh court of the city of Moscow in the case No А40-29792/15:

“[t]he court considers that consideration on the territory of the Republic of Moldova of a dispute that falls under the exclusive competence of a Russian arbitrazh court, violates sovereignty of the Russian Federation, Article V(2)(b) of the New York Convention, <…>, therefore the recognition and enforcement of such decision should be rejected due to violation of the public order of the Russian Federation.”

IV. Conclusion

The application of the New York Convention to foreign court judgments is undoubtedly an erroneous practice of Russian courts, and such practice should be discontinued by the Russian Supreme Court. Until that moment, the following guidance may be useful for a party seeking enforcement of a foreign court judgment in Russia:

1. All procedural requests submitting to Russian courts shall be drafted clearly, stressing that enforcement of the foreign court judgment is the aim of exequatur, rather than enforcement of an arbitral award;
2. The party shall keep in mind that Russian courts can invoke Article V (1) of the New York Convention by its own discretion. For example, in case No А51-14965/2016, the Arbitrazh court of the Primorsky Krai faced with the recognition and enforcement of a court judgement rendered by a Hong Kong court. Despite the fact that a judgement debtor had no objections to the enforcement of the judgement, the court, guided by Article V(1)(b) of the New York Convention, examined whether the judgement debtor was properly notified of a court proceeding at the Hong Kong court;
3. Legal arguments showing to a court that the New York Convention is not applicable in the exequatur proceedings shall be put into the case at an early stage of the proceedings. A reference to the Russian Supreme Arbitrazh Court letter of 1996 is a useful argument.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Egorov Puginsky Afanasiev & Partners, its affiliates, or its employees.

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Margaret Moses

Institute for Transnational Arbitration (ITA)

On the 60^th anniversary of the New York Convention, we can generally conclude that the public policy basis for refusing to enforce an arbitration award has for the most part worked as the drafters intended. The drafters knew that by permitting courts to refuse to enforce foreign arbitral awards based on public policy, they were opening the possibility that courts might use idiosyncratic local rules to undermine the broad enforcement goals of the Convention. Nonetheless, they believed this exception to enforcement was a necessary safety valve that would prevent intrusion on state sovereignty if a foreign award was irreconcilable with the enforcing country’s legal structure. Today, although there are some idiosyncratic decisions where foreign arbitral awards are not enforced because of local rules, the trend is toward a more international and even transnational understanding of the proper application of the public policy exception.

The language of Article V(2)(b) of the Convention, redrafted several times by the Working Group, ultimately provided that the enforcing court could refuse enforcement if it found that

(b) The recognition or enforcement of the award would be contrary to the public policy of that country.¹⁾ The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), 330 United NationsTreaty Series 38, no. 4739, Art. V(2)(b)  (emphasis added).

“That country” refers unequivocally to the country where recognition and enforcement is sought. The plain language of the clause and the drafters’ intent indicate that public policy means national public policy, the public policy or ordre public of the state of the enforcing court. This interpretation is warranted because the purpose behind the exception was to permit a country to refuse to enforce an award that was contrary to its own system.

However, in practice, courts have varyingly used national, international and even transnational interpretations of the public policy exception. The Convention itself does not define public policy. So the public policy of one country will not be exactly same as that of another country. Different countries have different standards undergirding their national public policy, and these can result in quite different interpretations of the term.  In addition, public policy is not necessarily static, and over time may continue to evolve.

But there are some similar understandings and common principles that have, for the most part, prevented the public policy exception from creating a large loophole undermining Convention enforcement, and have encouraged courts not to refuse enforcement based on local, parochial standards.

There are two main reasons why, for the most part, courts do not often refuse enforcement of a foreign arbitral award. First, domestic public policy has traditionally been interpreted narrowly. Second, a number of countries have both a domestic public policy and an international public policy, and they have tended to apply their own states’ international public policy with respect to foreign awards.

In a case in Colombia, Tampico Beverages Inc. v. Productos Naturales,²⁾ Tampico Beverages Inc. v. Productos Naturales de la Sabans S.Z. Alqueria, SC9909-2017, Case N° 11001-02-03-000-2014-01927-00. for example, the Supreme Court of Colombia was asked to enforce an ICC award that had been challenged as a violation of public policy because of an arbitrator’s conflicts of interest. Although the court acknowledged that enforcement under these particular circumstances might violate Colombia’s domestic public policy, it concluded that the country’s international public policy was different, and that the court should look to international authorities to determine if there was a violation. It then turned to the 2014 IBA Guidelines on Conflicts of Interest as representative of international practices. Thus, the court looked outwardly, toward international practices, relying on an international soft law instrument to help it determine that its country’s international public policy was not violated.

A state’s international public policy tends to be interpreted more narrowly than its domestic public policy, such that a foreign arbitral award is less likely than a domestic one to be refused enforcement. But a state’s international public policy is not what commentators call a “truly international public policy,” or a transnational public policy. Rather, it is a policy viewed through the lens of the state’s own laws or standards for dealing with a foreign arbitral award. Thus, even though it is an international public policy, it is defined at the state level. It is still the public policy of that country, that is, the country of the enforcing court.  But it is the international public policy of that country.

“Truly international” is how commentators view transnational as opposed to international public policy. Transnational public policy is not the public policy of any one state, but rather involves public policy that transcends state boundaries. Such public policy is defined as arising out of an international consensus regarding universal standards as to norms of conduct that are generally recognized and agreed upon as unacceptable in most civilized countries, such as slavery, bribery, piracy, murder, terrorism, and corruption. It is generally agreed that transnational public policy has an even more restrictive scope than international public policy.

Commentators note that support has been steadily growing for the development of a body of transnational public policy. Most nations these days find that an award fundamentally tainted by fraud or corruption should not be enforced. To the extent that there is a general, widely held perception among nations that this is the case, there are likely to be fewer outliers among courts who may proceed to enforce an award tainted by fraud or bribery.

Thus, it may be that transnational public policy, with its carefully defined terms representing “fundamental moral or legal principles recognized in all civilized countries,” may have some influence on a court’s perspective in enforcing arbitral awards. But probably more influential than transnational public policy is simply a transnational perspective that could influence a court’s conception of what the scope of its state’s international public policy should be.

A transnational perspective can substantially broaden a court’s approach to its state’s international public policy. Rather than simply viewing the policy through the lens of the state’s own laws or standards for dealing with a foreign arbitral award, a transnational focus can encourage courts to adopt broader perspectives which, although not recognized in all civilized countries, tend to be accepted as best practices in the international arbitration community. By incorporating into their conception of international public policy this more transnational, best practices perspective, courts can help to unify the international framework for deciding on enforcement of foreign arbitral awards.

Incorporating a transnational perspective into this framework could encourage courts to become less parochial. For example, India has recently moved away from a position of refusing to enforce a foreign award that violated Indian law. At least part of India’s reason for changing its approach was likely that its decisions were out of step with what other countries were doing. Thus, an incentive to incorporate a more transnational perspective may come from a pragmatic perception that when a country is an outlier with respect to what other countries are doing, there are economic costs. The Indian government has expressed a desire to make India a hub for international arbitration. It understands that to do this, it must change its reputation as a country unfriendly to arbitration.

Countries interested in change should understand that a transnational perspective is one that embraces the practices of the international community of nations.  For the arbitration community, when courts treat enforcement of foreign arbitral awards with some consistency across borders, international awards can become more predictable and more likely to be enforced.

At this time of the 60^th Anniversary of the New York Convention, the public policy exception appears to have worked well. However, it could be better. Although it is not realistic to expect uniform cross-border application of the public policy exception, nonetheless, today better communication and technology make it possible to know both how courts in different countries are dealing with the public policy exception, and also what the international arbitration community views as best practices with respect to enforcement of foreign arbitral awards. Thus, courts in different jurisdictions are more able to understand and meet expectations in the arbitration community with respect to enforcement of foreign arbitral awards.

A transnational public policy, defined as “norms agreed upon by all civilized nations,” was not envisioned by those who drafted the language of Article V(2)(b) of the Convention.  Such a policy, however, can inform court decisions dealing with issues of bribery and corruption.  A transnational perspective, on the other hand, is different. It is a perspective that encourages the application of public policy in a way that is reasonably congruent with the international public policy of a broad community of nations. A transnational perspective can thus strengthen both the pro-enforcement bias of the Convention, and the safety valve for ensuring that only meritorious awards are enforced.³⁾ An expanded version of this topic can be found in Fach Gómez K, Lopez Rodriguez AM (eds), 60 Years of the New York Convention: Key Issues and Future Challenges, Wolters Kluwer, forthcoming, 2019.

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Sharad Bansal

Background

The Indian Arbitration and Conciliation Act, 1996 (“Act”) provides, in Section 37(2)(b), for an ‘appeal’ from an arbitral tribunal’s order on interim/provisional measures (“interim order”). It, however, does not stipulate the standard of review that the court must apply while reviewing an interim order. Sans any prescribed legislative standard, courts have two alternatives available: test interim orders on the same grounds as those applicable for annulment of awards, laid down in Section 34 of the Act; or treat Section 37(2)(b) proceedings as an appeal and assess the legality of interim orders on merits.

Discussion on the applicable legal standard in court decisions rendered under Section 37(2)(b) is sparse and loose. While some judgments simply observe that the scope of courts’ interference in interim orders passed by arbitral tribunals is limited (Subhash Chander Chachra v. Ashwani Kumar Chachra), others have conducted a full-blown enquiry on merits to test the legality of the tribunal’s interim orders (Sanjay Gambhir v. BDR Builders and Developers Pvt. Ltd., Intertoll ICS Cecons O & M Co. Pvt. Ltd. v. National Highways Authority of India, NTPC Ltd. v. Jindal ITF Ltd.). A third category of decisions applies the same standard of review to Section 37(2)(b) proceedings as that applicable to appeals against a court’s order on provisional measures (A. Jayakanthan v. J.R.S. Crusher).

The Supreme Court’s Judgment in National Highways Authority of India v. Gwalior Jhansi Expressway Limited

Recently, the Supreme Court of India in National Highways Authority of India v. Gwalior Jhansi Expressway Limited dealt with a challenge to an interim order of an arbitral tribunal which was subsequently upheld by the High Court under Section 37(2)(b). As in the earlier decisions concerning ‘appeals’ against interim orders under Section 37(2)(b) of the Act, the Court did not dwell on the standard of review for interim orders. Even the parties’ submissions (as noted in the Court’s judgment) did not address this issue. The Court nevertheless set aside the interim order on the basis that the arbitral tribunal’s approach and ruling were in contravention of the fundamental policy of Indian law.

According to Explanation 1 to Section 34(2)(b)(ii) of the Act, introduced through a legislative amendment in 2015, ‘fundamental policy of Indian law’ constitutes one of the three elements of the public policy of India. As in other jurisdictions, breach of public policy is one of the grounds for setting aside an arbitral award. It may, therefore, be argued that the Supreme Court in Gwalior Jhansi Expressway Limited assessed the legality of the arbitral tribunal’s interim order on the same grounds as those applicable for setting aside of arbitral awards. The application of the ‘fundamental policy of Indian law’ standard necessarily excludes any possibility of review on merits, since Explanation 2 to Section 34(2)(b)(ii) mandates that “the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute”.

The appropriate standard of review for appeals against interim orders

The Supreme Court’s application of the ‘fundamental policy of Indian law’ standard cannot be said to conclusively resolve the issue, as the Court did not take into account the provisions of the Act while applying this standard. Nor did it comment on the other grounds available for setting aside an interim order under Section 37(2)(b). A party challenging an interim order under Section 37(2)(b) can rely on two textualist arguments in support of a broader standard of review: First, Section 37(2) uses the term ‘appeal’, as opposed to the phrase ‘setting aside’ used in Section 34 (for ‘awards’). Second, ‘appeal’ in Section 37(2) is common to Section 37(2)(a) and Section 37(2)(b). Section 37(2)(a) concerns an appeal against an order of an arbitral tribunal declining its jurisdiction, which would require a review on merits. Arguably, therefore, it should have the same connotation in Section 37(2)(b). Nonetheless, for reasons submitted below, it is submitted that the Court’s approach in Gwalior Jhansi Expressway Limited is preferable.

 A full review of an interim order by a court is an invitation to all losing parties to seek recourse under Section 37(2)(b) of the Act and is plainly against the objective behind the amendments made to Sections 9 (power of courts to grant interim reliefs) and 17 (power of an arbitral tribunal to order interim measures) of the Act in 2015.  Section 17(1) now empowers an arbitral tribunal to pass all orders which a court may pass and Section 17(2) provides teeth to a tribunal’s interim orders by making them enforceable in the same manner as an order of a court. Once an arbitral tribunal has been constituted, courts can grant interim relief under Section 9 only in exceptional circumstances. The Law Commission of India’s 246^th Report, which recommended these amendments, stated that the modifications were aimed at reducing the role of courts in the grant of interim measures once an arbitral tribunal is in place. The Supreme Court’s decision in Gwalior Jhansi Expressway Limited is aligned with this intent. Courts in subsequent cases can rely on purposive interpretation to follow this approach, notwithstanding the textualist arguments against it highlighted above.

Testing the legality of an interim order and an arbitral award on the same grounds is also in consonance with the provisions of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”). Although the Model Law does not provide any recourse against interim orders, it lays down the grounds on which recognition or enforcement of an interim order may be denied (Article 17I(1) of the Model Law). These grounds are identical to the grounds for refusal and enforcement of awards (a few additional grounds specific to interim orders are also included). In fact, Article 17I(2) of the Model Law specifically states that “[t]he court where recognition or enforcement is sought shall not, in making that determination, undertake a review of the substance of the interim measure”. Thus, one finds that under Model Law, the approach regulating review of awards and interim orders is consistent and an enquiry into the merits of the case is discouraged.

Conclusion

The issue concerning the applicable standard of review of an interim order assumes particular significance after the 2015 legislative amendments to the Act since, save in exceptional circumstances, parties are bound to approach the arbitral tribunal for seeking interim relief. National Highways Authority of India v. Gwalior Jhansi Expressway Limited takes the appropriate stance on this subject and is the latest addition to a series of judgments of the Supreme Court of India seeking to minimize court intervention in arbitration proceedings.

(The author would like to thank Mr. Sulabh Rewari for his comments on the piece.)

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Neil Newing, Ryan Cable and Johnny Shearman

A little under ten years ago Sir Rupert Jackson proposed significant reforms to reduce the costs of litigation in England and Wales. It is fair to say that while his reforms have received both praise and criticism over the past decade, they are largely considered to have been a success in curtailing the costs of litigating in England. As this anniversary of reforms in English litigation approaches, it is an opportune moment to consider whether lessons can be learnt concerning the way in which costs are dealt with in international arbitration, without, crucially, undermining the advantages associated with the flexibility of arbitration as a dispute resolution method.

Costs in English Litigation

The fundamental principle in English civil litigation is that costs follow the event (i.e. the unsuccessful party pays the costs of the successful party). However, the court has a discretion as to the final amount awarded and it is, on a standard basis, typical for a successful party to recover approximately sixty per cent of its costs from the other side.

While the above principle has not changed, since Jackson’s reforms the approach taken by the English courts in respect of costs has. Costs management is now a significant component of case management in litigation. Costs budgets, one of Jackson’s more controversial reforms, are fixed early on in proceedings and consistently monitored and reviewed. Any request to increase the budget requires a party to convince the court why such an increase is reasonable and necessary in the circumstances. As such, costs have become a primary consideration from the outset.

With that being said, unless the parties otherwise agree, the court usually determines the final costs award in a separate hearing following the substantive judgment on the merits of the dispute. Costs are then determined on the basis of what is reasonable and proportionate, also taking into account the conduct of the parties. This requires the parties to provide each other, and the court, with a large amount of detail in respect of how their costs were incurred. As such, there are often two separate judgments: one dealing with the substantive dispute and one dealing with costs.

Costs in International Arbitration

Costs in arbitration usually fall into two broad categories: (i) costs of the arbitration (i.e. the costs of the tribunal and institution (if any)), and (ii) legal costs. The approach to these costs adopted in international arbitration largely mirrors that in English litigation in so far as costs are generally recoverable by the successful party. Commonly, the “costs of the arbitration” are awarded in full, whereas the legal costs may be reduced on the grounds of “reasonableness”. However, when it comes to the tribunal assessing these costs, this tends to be a far less forensic exercise than in costs proceedings in English litigation.

In determining costs, the tribunal may take into account various aggravating or mitigating factors such as; the level of success of a claim, the behaviour of the parties towards the efficient conduct of the arbitration, or the pursuit of unfounded arguments. See for example Articles 38(4) and (5) of the ICC Rules and Article 28.4 of the LCIA Rules. In this regard, it is notable that efficiency and cost-effectiveness appears to have been at the forefront of recent updates to institutional rules. For example, the new Vienna International Arbitral Centre (“VIAC“) rules which came into force in January 2018, place an explicit obligation on the parties and the tribunal to conduct proceedings in an efficient and cost-effective manner, with tribunals expressly permitted to take into consideration the parties’ efforts in this regard in making their decisions on costs (Articles 16.6, 28.1 and 38). Additionally, in what is a first under institutional rules, the VIAC secretary general is also able to consider the tribunal’s contribution to the conduct of efficient proceedings in determining the arbitrators’ fees. The VIAC secretary general has the authority to increase and decrease arbitrators’ fees by up to forty per cent in light of the efficient (or inefficient) conduct of the proceedings (Articles 16.6 and 44.7).

It is standard practice for issues of costs to be dealt with at the end of the arbitration, typically as part of the final award. This includes costs sought for interim applications – whilst it is common to include a request for those costs in the application, tribunals will often defer their determination until the conclusion of the proceedings as a whole, rather than deal with them at the time of ruling on the application.

What Can be Learnt from English Litigation?

Whilst rules driving toward time and cost-efficiency are helpful, they only serve to encourage the tribunal to have consideration to such issues in attempting to manage the conduct of parties. It is down to the tribunal to make clear that costs consequences can, and will, flow from clearly dilatory and unjustified conduct. To reinforce this notion, tribunals must be prepared to make the necessary costs orders in order for parties to take them seriously. The English courts frequently make such costs orders, which leads parties to think carefully before pursuing applications that may be without merit. Arbitral tribunals, on the other hand, commonly leave all issues of costs until the end of the matter and there is often little correlation between a party’s conduct and the final costs order, providing little to no deterrence for bad behaviour.

Tribunals, however, are not required to wait until their final award to deal with the issue of costs. As noted in the 2015 ICC Commission Report, ‘Decisions on Costs in International Arbitration’, most institutional rules and national arbitration legislation permit tribunals to allocate costs in partial awards which determine preliminary issues and to make awards or interim orders in respect of costs, including in connection with applications for interim relief and other procedural applications.

Thus, in instances where an application without merit was most likely made in an effort only to delay the proceedings, counsel can and should make submissions to the tribunal that costs be dealt with at the outcome of the application rather than being deferred. It may well be appropriate for the tribunal to deploy cost consequences at that time to curtail further such behaviour by the parties or to punish the party causing the delay. This is a common feature of English litigation and applications (if brought at all) are often settled before being heard in order to avoid the risks of immediate costs consequences. Arguably, this is an area where arbitral tribunals can learn from the English court’s approach. It is the tribunal’s duty to actively manage proceedings to be cost and time efficient and cost orders are a key tool available to achieve this.

Returning to Jackson (who now sits as an arbitrator), in a recent speech given at the 11^th annual international conference for Law and Alternative Dispute Resolution, he called for cost budgeting to be used to tackle the high costs now associated with arbitration. He acknowledged that such cost management may only be suitable for lower value claims in the first instance, but he noted the success that such a regime can have: a reference to the English litigation system.

A very pared-down version of costs budgeting already exists in maritime arbitrations under the London Maritime Arbitrators Association’s terms. Parties are required to provide an estimate of their costs through to the end of the arbitration. The tribunal can then take this estimate into account when assessing recoverable costs. However, as to whether a more rigid regime should be adopted more widely (as put forward below) there is perhaps a fence to be sat on.

Where Does Arbitration Get It Right?

As already mentioned, English courts often deal with costs in separate proceedings following the substantive judgment. This is necessary due to the detailed nature of the process and often a specialist costs judge is required to determine this stage of the claim. In arbitration, however, costs can and often are dealt with together with the decision on the merits in one final award, saving both time and costs by avoiding lengthy further proceedings.

Here comes the fence. The lack of a rigid costs budgeting regime is an attractive quality of international arbitration. Its introduction would likely undermine the much-touted flexibility enjoyed by users and practitioners alike. The requirement for parties to prepare cost budgets, have them approved and then to slavishly monitor them would likely stymie the adaptability of the arbitration process. Furthermore, the confidential nature of arbitration would make it difficult for tribunals to compare costs when determining what is reasonable.

Therefore, given the existing reluctance of tribunals to consider the costs of even interim applications, it appears Jackson has another uphill struggle in front of him if he is to convince tribunals to consider the entire costs of the arbitration at the outset of the dispute.

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Pelin Baysal and Bilge Kağan Çevik

The Public Policy Exception as an Unruly Horse

There is an ongoing quest for a uniform application of the New York Convention. However, the interpretation of the exceptions to enforcement still varies. Albeit applying the same provisions, national courts continue to adopt different approaches to the enforcement of foreign arbitral awards. This is particularly true where the public policy exception is raised under Art. V(2)(b).

Considerable debate exists as to what the public policy is. To the extent it is capable of definition, the public policy is found to embrace nebulous concepts such as a state’s most basic notions of morality and justice. Due to its vague and unpredictable application; the public policy described by an English judge as “a very unruly horse, and when once you get astride it you never know where it will carry you.”¹⁾Richardson v Mellish [1824]2Bing229, 252.

Driven by the motivation of taking advantage of the ambiguous nature of the public policy, the parties often raise the public policy exception where all other arguments for setting aside or refusing of the enforcement of the foreign arbitral awards have failed. As described by one national court: “the public policy ground is often invoked by a losing party raised to frustrate or delay the winning party from enjoying the fruits of a victory.”²⁾A v R [2009]HKCFI 342.

Partially in reaction to this, in many developed jurisdictions, courts have taken very restrictive and demanding views of public policy. Indeed, some national courts acknowledged that even when their domestic rules were inconsistently applied in arbitration, this was not in itself enough to refuse enforcement provided, i.e., that international public policy was not violated.

On the other hand, the unruly horse has not been fully tamed in some jurisdictions. In those countries, the inconsistent or broad application of the public policy exception may cause a severe infringement of the legal expectations of the parties to the arbitration and significantly decrease those countries’ reliability on legal predictability.

Unruly Horse is not Fully Bridled in Turkey, Especially when the 13^th Civil Division of the Turkish Court of Cassation is in the Saddle

In Turkey, the Turkish Court of Cassation’s interpretation of the public order has changed throughout the years and embraces a trend towards a pro-arbitration approach. Nevertheless, it is still not possible to conclude that the task is complete and that the unruly horse of public policy is fully controlled in Turkey.

Previously, the Turkish Court of Cassation was using the public policy exception as a gateway to examine whether the tribunals correctly applied Turkish law or not. Although this appeal-like role ceased after the entry into force of the International Arbitration Act in 2001, the Turkish Court of Cassation continued to use the public policy exception as a tool to get “desired results”. Indeed, in its previous decisions, the Turkish Court of Cassation found that the ICC arbitrations’ scrutiny process violated Turkish public policy, and as a result refused to enforce arbitral awards with the ICC cache. Similarly, despite the parties having agreed that the seat of arbitration would be Switzerland and that Turkish law would be applicable, the Turkish Court of Cassation refused to enforce the final award stating that the “Turkish law” term also covers the Turkish procedural law, and the tribunal should have applied the Turkish procedural law as opposed to the Swiss procedural law.³⁾Court of Cassation 15^th Civil Chamber, File No:1617, Decision No:1052 dated 10.3.1976.

This perception has been changing, and Turkey has been transforming into an arbitration-friendly country thanks to the new pieces of legislation and change in the national courts’ perception of arbitration. This is especially evident after the Turkish Court of Cassation’s General Assembly on Case-Law Unification decision of 2012, in which it concluded that the lack of reasoning in a court decision or an arbitral award does not constitute a violation of Turkish public policy.⁴⁾Court of Cassation, General Assembly on Case-Law Unification, File No:2010/1, Decision No:2012/1 dated 10.2.2012.

Current predominant practice of the Turkish Court of Cassation suggests that there is a violation of the foundations of Turkish public policy on enforcement of the arbitral awards only in cases where the award is contrary to the principles that underpin the public or commercial life of Turkey, as well as in cases where it is contrary to the fundamental notions of justice. In this context not every violation of the mandatory legal rules can be classified as a violation of the public policy.

However, this arbitration-friendly approach is apparently not endorsed by the 13^th civil chamber of the Court of Cassation. The 13^th civil chamber of the Court of Cassation is still continuing to abuse the public policy exception to not to enforce decisions against Turkey. In fact, the 13^th civil chamber of Court of Cassation consistently sets aside, or refuses the enforcement of foreign arbitral awards, by arguing that “the reduction in an income of the State would clearly violate the economic balance and public policy.”⁵⁾Court of Cassation, 13^th Civil Chamber, File No:2015/16140, Decision No:2017/3322 dated 16.3.2017.

One of the most popular decisions of the 13^th civil chamber of Court of Cassation was dated back to 2012. The dispute was related to a concession agreement concluded between a GSM operator and the Turkish Information Technologies and Communication Authority (“TITCA”). The tribunal concluded that the discounts provided to distributors on wholesales were required to be excluded from the base of the shares. Accordingly, TITCA approached the Turkish courts to set aside this award due to a public policy infringement. The Turkish Court of Cassation held that even though the shares stipulated in the concession agreement did not constitute a tax per se, but that they were an important and continuous source of income for the State. Therefore, the reduction in such an income of the State would clearly violate both economic balance and public policy.⁶⁾Court of Cassation, 13^th Civil Chamber, File No:2015/16140, Decision No:2017/3322 dated 16.3.2017.

Although this decision was believed to be an example of an unfortunate and singular decision, the 13^th civil division of the Turkish Court of Cassation endorsed the same approach also in 2014, 2015, 2016, and 2017. In those decisions, the 13^th civil division of Turkish Court of Cassation either set aside the arbitral awards by arguing that “the reduction in an income of the State would clearly violate the economic balance and public policy”, or overturned the decision of the first instance court by suggesting the first instance court to undertake an evaluation whether such an award results in the decrease of the income of the State and decide accordingly.

In line with the work distribution of the civil chambers of the Turkish Court of Cassation, if the dispute is related to

1. water, electricity, natural gas, phone and internet subscription agreements,
2. waste water prices,
3. joint ventures,
4. invalid contracts, or
5. strict liability provisions,

set aside and/or recognition and enforcement actions are to be brought before the 13^th civil division of the Turkish Court of Cassation. Accordingly, if one of the disputing parties is a state and the award requires a reduction in the income of that state, the recognition and enforcement of the award will likely be rejected, or the award could be set aside.

Suggestions and Future Perspective

The decisions of the 13th civil division of the Turkish Court of Cassation are a reminder that dealing with the public policy exception continues to be a struggle for the Turkish courts. There is no doubt that the decisions of the 13th civil division of the Turkish Court of Cassation are contrary to the nature of the arbitration. These decisions suggest that if an arbitral award touches in the economic gains of a state, it violates its public policy and it is either to necessary to set it aside or deny the enforcement of it.

To circumvent the vexing decisions of 13^th civil chambers of the Turkish Court of Cassation, the parties might refer their disputes to ICSID arbitration rather than other arbitration institutions and/or to ad hoc arbitration. As widely known, the ICSID awards are directly enforceable in contracting states and there is no recourse available to national courts in ICSID arbitrations.

Otherwise, there is a risk that the final award would not be enforced or it would be set aside by the 13^th civil division of the Turkish Court of Cassation. Investors and the arbitration practitioners are eagerly waiting with fingers crossed for one of the first instance courts which will insist on its decision and try to convey the issue to the General Assembly of the Turkish Court of Cassation to finally resolve the issue.

Nevertheless, the re-organisation of the structure of the Turkish Court of Cassation to establish a separate civil division specialised on international arbitration law is under consideration. If this happens, it would avoid any incompatibility among different chambers of the Turkish Court of Cassation, and would make Turkey an even more arbitration-friendly jurisdiction. As an English judge said in response to his distinguished predecessor’s observations: “With a good man in the saddle, the unruly horse can be kept in control.”⁷⁾Enderby Town Fc ltd v. Football Association [1971] Ch 591, 606-7 CA.

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Gabriel Ferreira Labatut Simões

A long-term dispute between Libra Terminais S.A., Libra Terminais Santos S.A., two companies belonging to one of the major port operating groups in Brazil (“Libra”), and the Dock Companies for the State of São Paulo (“CODESP”) seems to have been concluded by a recent arbitral award. The dispute concerned a concession agreement of two terminals in the Port of Santos in São Paulo, Brazil. The historic award is the first decision based on controversial statutes regulating arbitration in the ports sector in Brazil. This decision can provide insights on the practical effects of these statutes and their contentious provisions.

Background

In 1995, Libra and CODESP signed a concession agreement for terminal T-37 (“T-37”) and adjacent areas in the Port of Santos (“T-37 Agreement”). In exchange for the concession, Libra would pay CODESP a monthly fee and would be obligated to expand and improve T-37’s infrastructure.

A few years later, in 1998, Libra and CODESP signed another concession agreement for terminal T-35 and adjacent areas (“T-35 Agreement”, together with the T-37 Agreement, “Concession Agreements”). Similar to the first agreement, Libra would have to pay a monthly fee to CODESP and make investments to expand and improve the terminal.

Soon after the conclusion of the T-35 Agreement, still in 1998, Libra requested CODESP to suspend the collection of the fee owed by Libra. According to Libra, CODESP had not fulfilled its obligations to renovate terminal infrastructure and ensure minimum depth of the waterway access to the Santos Port, which supposedly allowed Libra to stay the payments. Meanwhile, CODESP was attempting to collect the amounts owed by Libra for the concessions. These discussions lasted decades in Brazilian courts. From 1998 to 2015, the parties initiated more than 10 lawsuits, resulting in different outcomes. While Libra was successful in some of the claims, CODESP was successful in others. However, the dispute had no prospect of ending soon.

In 2015, new legislation regarding dispute resolution mechanisms in the ports sector enabled Libra and CODESP to opt for arbitration to resolve their dispute.

Ports sector dispute settlement legislation

The port concessions sector in Brazil is regulated by Statute No. 12.815 (“Ports’ Statute”). The Ports’ Statute was envisaged to modernise the port concessions sector in Brazil by amplifying private investment and improving competition and efficiency. In what was seen as a positive development at the time; the Ports’ Statute established that – public and private – parties in concession contracts could resort to arbitration to resolve disputes regarding their financial obligations. The caveat was that the Statute did not specify how the arbitration should be conducted.

Therefore, in 2015, soon after the enactment of the changes to the Brazilian Arbitration Act (previously discussed in this Blog), the Federal Government enacted Decree No. 8.465 (Port Arbitration Decree, or “PAD”). PAD regulated and expanded the provision of the Ports’ Statute that allowed use of arbitration to resolve contractual disputes in the sector.

In contrast with the Ports’ Statute, the PAD was not well received (see here, here and here). It seemed that the PAD was a well-intended project but poorly executed. It was seen as an attempt by the Federal Government to manage and engage in new practices of dispute resolution. For example, among the most criticised provisions, the PAD (i) established that all information regarding the arbitration should be publicised; (ii) added time consuming bureaucracy to the process of initiating an arbitration; and (iii) provided that arbitration could only be used to settle disputes regarding the reestablishment of the financial-economic equilibrium of a contract; only if the arbitration was based on a submission agreement and not on an arbitration clause.

Nonetheless, despite criticisms, in 2015, Libra and CODESP signed a submission to arbitration agreement relying on the mechanism provided for in the PAD.

Arbitration and Partial Award

Pursuant to the submission agreement, the Tribunal had the mandate to decide (i) whether CODESP breached its obligations under the Concession Agreements; (ii) which of the parties (CODESP or Libra)  was liable for the performance of the construction works on the public docks in front of T-37; (iii) whether the financial-economic equilibrium of the T-35 Agreement had been affected by CODESP’s actions; (iv) whether Libra was liable to pay the fee originally agreed between the parties in the Concession Agreements; and (v) parties’ liability regarding these issues.

The Terms of Reference were signed in September 2017 and, a year later, the Tribunal issued an Award. The Award dismissed all of Libra’s claims, accepted CODESP’s claims, and ordered Libra to pay the fee originally agreed by the parties, as well as penalties for breach of contract. The Tribunal decided the case through the strict application of the contractual terms and the relevant statutes. However, the true contribution of the Libra v CODESP arbitration award is that it provides valuable insight as to whether initial criticism regarding application of the PAD was justified.

Time consuming bureaucracy?

One of the main criticisms to the PAD is that, in theory, it increases bureaucracy for execution of submissions to arbitrate. PAD requests a case by case preliminary government assessment regarding the benefits of using arbitration in each particular dispute. The PAD also establishes that arbitrators and arbitral institutions should be contracted by direct negotiation, as opposed to public biddings. Although the former is swifter than the latter, it still entails a number of time-consuming administrative burdens.On the other hand, a positive aspect of the PAD is the time requirement to issue an arbitration award within 24 months, which seems to offset, at least partially, the additional bureaucracy.

In Libra v CODESP, the time requirements for issuance of the award seemed to balance out the additional bureaucracy imposed by the PAD. While CODESP had to go through the preliminary government assessment; submission to arbitration was signed by the parties in less than three months from the day that the PAD entered into force. In fact, the dispute was adjudicated in record time, as the Tribunal decided on the liability issues in no more than 16 months from the signing of the Terms of Reference, which is less than the average period of time for an arbitration to be decided in Brazil, and substantially faster than obtaining a final decision in court.

Publicity issues?

Another point of contention regarding the PAD is the protection of sensitive information (e.g. price formation, production methods, formulas) vis à vis the requirement that all information regarding the arbitration must be publicized.

Again, this did not seem to be an issue in Libra v. CODESP. Even though the Federal Government divulged most of the proceedings through a specific website, no sensitive information was published. This is especially important considering that the Tribunal granted Libra’s request to keep confidential certain documents containing information on its commercial practices. Therefore, it seems that the publicity requirement of the PAD is not incompatible with, and can accommodate, existing judicial protection to sensitive information.

Abuse of privileged condition?

The most glaring issue with the PAD is that it grants to the Public Administration the power to decide whether disputes regarding the financial-economic equilibrium of contracts can be submitted to arbitration. According to the PAD, these disputes can only be submitted to arbitration via submission agreements.  This means that public parties can decide, after the dispute has arisen, whether the dispute should be submitted to arbitration or referred to a national court, which clearly puts the Administration in a privileged position as a disputing party and can hinder the “parity of arms” principle.

Nonetheless, there is some reason for optimism; Libra v CODESP has pinned down better arbitration practices for public authorities as disputing parties. For example, it is all very common for state parties in Brazil to challenge the legitimacy of arbitration. However, in Libra v CODESP, the Administration refrained from these unnecessary (and generally unsuccessful) challenges, demonstrating willingness to submit to arbitration even when there was no contractual obligation to do so.

In fact, the Federal Government Attorney’s Office, for the first time in history, has created a department to deal exclusively with arbitration. The department will represent the Federal Government in arbitration proceedings and will be responsible for gathering and managing expertise in the area, which indicates that the government intends to continue to use arbitration to resolve disputes with private parties in the future.

Conclusion

Prior authors in this blog (see here and here) have correctly described Brazil as an arbitration-friendly jurisdiction. Indeed, it does not appear that the PAD, despite accurate and relevant criticism, can challenge that description.

Libra v CODESP has provided strong indications that the Public Administration in Brazil, despite resistance and poorly drafted legislation. Brazil is walking steadily towards fully embracing arbitration as an efficient (and legitimate) dispute resolution mechanism.

Nonetheless, one should not let excessive optimism be a blindfold, as Libra v CODESP does not answer all the problems with the PAD. One question that remains unanswered is whether the prerogatives granted to the Public Administration by the PAD will be abused, especially in cases where future prospects of prevailing on the merits of the dispute might not be so positive.

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Jason Rotstein and Jason Rotstein

Introduction

The enforcement bar is becoming more specialized. This development follows the trend in U.S. litigation towards increasing specialization and the growth of niche practice industries; but it also stems from specific changes to the enforcement regime that are addressed in this article and that have important implications for the life-cycle of an international arbitration.

This trend towards specialization is driven by: (1) the number and average length of enforcement actions; and primarily, (2) recent changes to the enforcement procedure, causing more enforcement cases to be brought in the United States District Court for the District of Colombia (“D.D.C.”).

This article examines enforcement actions in the D.D.C. over the last six months, December 2018 to May 2019. Initial experience indicates several tendencies and trends. It posits that a motion/petition to confirm an arbitral award is no longer an adjunct stage to an ICSID award but a standalone procedure and a tough fight; it also considers whether the D.D.C. has become a default venue and “specialized court” for the enforcement of international arbitral awards.

Background

The goal of every arbitration is to secure a final and enforceable award. The same transaction or occurrence can give rise to awards under the New York Convention (1958) and the Washington (ICSID) Convention (1966). Until recently, commentators observed “[a] striking disparity between the two enforcement systems”, distinguishing between ICSID annulment committees, on the one hand, and domestic court proceedings under the New York Convention, on the other. Kenneth B. Reisenfeld and Joshua M. Robbins writing in Finality under the Washington and New York Conventions: Another Swing of the Pendulum? concluded in 2017 that ICSID is a preferable venue based on “ICSID’s potential finality advantage”.

In 2017, the ICSID enforcement stream experienced a systemic change. Mobil Cerro Negro v. Bolivarian Repub. Venezuela, 863 F.3d 96 (2d Cir. 2017), the first federal appellate court to address the procedure for converting an ICSID award into a federal judgment, held that the ICSID Convention and its enabling statute, 22 U.S.C. § 1650(a), are subject to the procedures under the Foreign Sovereign Immunities Act of 1976 (“FSIA”) for obtaining jurisdiction over a foreign sovereign. Previously, there had been a disagreement between and within district courts in multiple circuits as to the procedure for enforcement and whether an ex parte summary procedure was sufficient.

In Mobil Cerro Negro v. Bolivarian Repub. Venezuela, the Second Circuit held that the FSIA requires a plenary procedure for enforcement even of ICSID awards: petitioners must file a complaint and satisfy service (four methods of service) and venue requirements. In addition, the defendant sovereign must have the opportunity to appear and file responsive pleadings. The enforcement action is completed when a motion to dismiss or a motion for judgment on the pleadings/summary judgment is granted. Finally, under 28 U.S.C. § 1391(f) of the FSIA, the D.D.C. is the default (but not exclusive) venue for actions against foreign sovereigns.

Enforcement Outcomes in the D.D.C.

The Second Circuit’s decision has corralled more ICSID enforcement actions into the D.D.C. and extended the lifetime of an ICSID arbitration. Arguably, the plenary proceeding has resulted in delay, additional costs and affected settlement opportunities and enforcement outcomes. A survey of enforcement actions in the D.D.C. in the past six months reveals such trends. The cases discussed below involve enforcement actions relating to ICSID awards against Venezuela and Spain.

Venezuela Cases

Tidewater Inv. SRL v. Bolivarian Repub. Venezuela, No. 17-1457, 2018 WL 6605633 (D.D.C. December 17, 2018) ended in a default judgment after Venezuela failed to appear or respond to the complaint. The court was satisfied that it had personal jurisdiction after Tidewater attempted all four methods of service on Venezuela under the FSIA. Although Tidewater had initially secured an ex parte judgment in the United States District Court for the Southern District of New York (“S.D.N.Y.”) from a 2015 ICSID award, Venezuela was able to vacate that judgment following Mobil Cerro Negro’s change in the law. The enforcement action was filed in the D.D.C. in July 21, 2017. The time to judgment was more than three years.

Another enforcement action of a 2015 ICSID award against Venezuela, OI European Group BV v. Bolivarian Republic of Venezuela, Case No. 16-1533, was confirmed on May 21, 2019. Venezuela moved for a stay as a result of changes in government, but the court found that this stay was “unnecessary” and “would only serve to delay plaintiff’s entitlement to judgment in a case that has been pending for three years and has already been stayed once before”. The case was originally filed in July 27, 2016. The court granted Venezuela’s earlier motion for a stay pending a decision on annulment, which was rendered on December 6, 2018. A similar action is pending from a 2017 ICSID award, Koch Minerals Sàrl v. Bolivarian Repub. Venezuela, Case No. 17-2559. The complaint was filed on November 28, 2017.

Spain Cases

Eiser Infrastructure Ltd. was granted an ex parte judgment, enforcing its 2017 ICSID award on May 23, 2017 in the S.D.N.Y. The same court later vacated that judgment on November 13, 2017, after the Second Circuit’s Mobil Cerro Negro decision. Eiser Infrastructure Ltd. then re-filed its petition to confirm the arbitral award in the D.D.C. on July 19, 2018, Case No. 18-1686.

The enforcement action in the D.D.C. has gone through multiple rounds of briefing on reciprocal motions to dismiss and for summary judgment. Spain is raising jurisdictional objections to enforcement. Judge Kollar-Kotelly has accepted an amicus brief from the European Commission in support of the Kingdom of Spain, March 18, 2019.

Masdar Solar & Wind Cooperatif U.A. also initiated an action on September 28, 2018 to enforce a 2018 ICSID award against Spain—Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain, Case No. 18-2254. On May 3, the European Commission filed a motion for leave to enter the case as amicus curiae.

Observations and Conclusions

A foreign arbitral award can always be enforced under the New York Convention; but a major advantage of enforcement of an ICSID award under the ICSID Convention is the supposed simple, streamlined, and spontaneous enforcement at the end of the ICSID’s internal review (annulment) process. However, an examination of a small sample of enforcement cases in the D.D.C. from the past six months suggests that enforcement actions under the ICSID Convention are operating on a similar timeline—due in part to  similar procedural practices—to enforcement actions under the New York Convention.

The effects of Mobil Cerro Negro, however, are still being captured. One effect to watch for is whether the D.D.C. will effectively become the default venue for enforcement actions in general.  Another possible effect is the diminution in value of an ICSID award over a non-ICSID award; or a downgrade of the U.S. as the default country for enforcement. Ex parte enforcement procedures for ICSID awards continue to be used in such countries as the United Kingdom; nevertheless, in the United States, the opportunity for responsive pleadings created by the Second Circuit has turned what was intended to be a summary procedure into new rounds of litigation. This activity has led to a robust enforcement practice centered around the D.D.C. (blocks away from ICSID) and is an interesting development viewed in the context of renewed debate over an ICSID appeals facility.

Time will tell the repercussions to and responses of the ICSID system. Under Article 53(1) of the ICSID Convention, an award “shall not be subject to any appeal or any other remedy” and shall only be “stayed pursuant to relevant provisions of this Convention”, such as a stay of enforcement pending an application for annulment (Article 52(5)). These requirements are arguably not being fulfilled as a result of the Second Circuit’s Mobil Cerro Negro decision. As Judge Kelly states, in Tidewater, district courts have only a “perfunctory role” to play in these actions.

The policy concern behind requiring the FSIA procedures, as registered by the Department of State in its third-party submission in Mobil Cerro Negro, is to afford foreign sovereigns proper notice, the same treatment the United States would hope to be afforded in foreign courts. But these recently clarified procedures for enforcement of ICSID awards are having a major impact on the length and life-cycle of an ICSID arbitration and the choice of arbitral venue.

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Veronika Korom

As reported in earlier blog posts on the Kluwer Arbitration Blog, ¹⁾ See, e.g., Zoltán Novák, New Arbitration Act in Hungary, Kluwer Arbitration Blog, 15 October 2017; Alexandra Bognár, Hungary: Are Interim Measures Hard to Enforce?, Kluwer Arbitration Blog, 18 July 2017; Ioana Knoll-Tudor, The 2018 Hungarian Arbitration Act: Implications of the New Setting Aside Provisions, Kluwer Arbitration Blog, 15 July 2018. Hungary’s newly adopted Arbitration Act (Act No. LX of 2017, hereafter the “2017 Arbitration Act”) is based on the UNCITRAL Model Law as amended in 2006 and governs both domestic and international arbitrations within Hungary commencing on or after 1 January 2018. The declared aim of the 2017 Arbitration Act is to reaffirm arbitration as a modern, efficient and effective alternative to state courts and to increase Hungary’s competitiveness as a venue for domestic and international commercial arbitration. ³⁾ Explanatory Note, T/15361 Draft Act on Arbitration, 26 April 2017. Since its adoption, the 2017 Arbitration Act has been amended in important aspects in an effort to further clarify and better align its provisions with international best practice. Most recently, effective as of 10 July 2019, the 2017 Arbitration Act was amended for the third time to revise the rather unusual and highly controversial requirement that arbitrators conducting proceedings in Hungary reimburse all fees if their award is subsequently set aside by the Hungarian courts. This requirement, the result of the somewhat unfortunate codification of existing Hungarian arbitral practice in the 2017 Arbitration Act, has been criticized as a “populist measure” ²⁾ Philippe Cavalieros, Le nouveau droit hongrois de l’arbitrage sous le prisme de la responsabilité de l’arbitre, Revue de l’arbitrage 2018, No. 3, p. 555. and has led some commentators to warn arbitrators against accepting appointments on tribunals seated in Hungary.

This blog post briefly presents the initial wording and origin of the contested provision (1) and revisits some of the main criticisms levied against it (2). It then presents the revised wording of the 2017 Arbitration Act (3) and concludes with considerations for the future (4).

1. The Initial Wording and Origin of the Requirement that Arbitrators Reimburse Fees If the Award is Set Aside

In its initial form, Section 57(2) of the 2017 Arbitration Act provided that

“if the arbitral award is annulled, no arbitrator fee shall be due in respect of the arbitral proceeding that resulted in the annulled award and the members of the arbitral tribunal that rendered the annulled award shall not be entitled to arbitrator fees”.

Based on the premise that arbitrators have a duty to the parties to render an enforceable award, and taking the view that the grounds for setting aside awards are largely aimed at sanctioning egregious irregularities in the conduct of the proceedings and in the rendering of the award by the arbitral tribunal, by introducing Section 57(2) in the 2017 Arbitration Act, the Hungarian legislator meant to increase the accountability of arbitrators and thereby to enhance the attractiveness of arbitration in the eyes of the users.⁴⁾Explanatory Note, T/15361 Draft Act on Arbitration, 26 April 2017. The idea that the parties should not be required to bear the costs of the second proceeding if the award is set aside and the arbitration is resumed has long been part of Hungarian arbitration practice. Although the previously applicable 1994 Arbitration Act did not contain rules on the proceedings to be conducted following the setting aside of an award, the 2011 Rules of Arbitration of the Permanent Arbitration Court attached to the Hungarian Chamber of Commerce and Industry (“HCCI Arbitration Court” and “2011 HCCI Rules of Arbitration”) provided that, following the setting aside of an award, the dispute must be resubmitted to the same arbitral tribunal that rendered the annulled award. It further provided that this tribunal would not be entitled to fees in respect of the second proceeding (Article 20(7) of the 2011 HCCI Rules of Arbitration). Thus, pursuant to the 2011 HCCI Rules of Arbitration, while the arbitrators did not have to reimburse the fees for the proceeding that resulted in the annulled award, they had to conduct the second arbitration and render a second award without additional remuneration.

In 2017, the Hungarian legislator decided to codify the rules on the resumption of arbitration proceedings following the setting aside of awards directly in the 2017 Arbitration Act by adopting a slightly amended version of Article 20(7) of the 2011 HCCI Rules of Arbitration. Contrary to Article 20(7), which had required the resubmission of the dispute following annulment to the same tribunal that had rendered the annulled award, Section 47(5) of the 2017 Arbitration Act allows the parties to choose between resubmitting their dispute to the original arbitral tribunal and submitting to a different tribunal. Rather than requiring the original tribunal to conduct a second arbitration without remuneration (as Article 20(7) of the 2011 HCCI Rules of Arbitration had done), Section 57(2) of the 2017 Arbitration Act provided that the arbitrators who sat on the first tribunal must reimburse the fees for the proceeding that had led to the annulled award. These fees could then be used to fund the second arbitration. By introducing this requirement into the 2017 Arbitration Act, the Hungarian legislator made it applicable not only to proceedings administered by the HCCI Arbitration Court but to all arbitration proceedings seated in Hungary.

2. The Main Criticisms Levied Against the Requirement that Arbitrators Reimburse Fees if the Award is Set Aside

The Hungarian arbitration community largely welcomed the new requirement in Section 57(2), at least in principle, although some criticized its unintended consequences and questioned the practical feasibility of the measure.⁵⁾ Zoltán Novák, New Arbitration Act in Hungary, Kluwer Arbitration Blog, 15 October 2017; Ádám Boóc, Remarks on the New Hungarian Act on Arbitration (Act LX of 2017), Romanian Arbitration Journal, 2019/2, pp. 93-105; Tamás Sárközy, A választottbíráskodás státuszkérdéseiről az új választottbírósági törvény alapján, in: A kereskedelmi választottbíróság évkönyve 2018 (ed.: János Burai-Kovács), HVGOrac Budapest 2019, p. 92; Róbert Szakál, Gondolatok a választottbíráskodás felelősségi kérdéseiről, in: A kereskedelmi választottbíróság évkönyve 2018 (ed.: János Burai-Kovács), HVGOrac Budapest 2019, p. 154. Stronger criticism was formulated by foreign commentators.⁶⁾Philippe Cavalieros, Le nouveau droit hongrois de l’arbitrage sous le prisme de la responsabilité de l’arbitre, Revue de l’arbitrage 2018, No. 3, p. 539-559; Ioana Knoll-Tudor, The 2018 Hungarian Arbitration Act: Implications of the New Setting Aside Provisions, Kluwer Arbitration Blog, 15 July 2018. The main criticisms levied against the Section 57(2) requirement were that it sanctioned all three members of the tribunal equally and irrespective of who was at fault for the setting aside of the award and that the sanction applied even if an arbitrator alerted in a dissenting opinion to certain irregularities which later led to the annulment of the award. The fact that Section 57(2) applied irrespective of the annulment ground retained by the state court was also criticized. Requiring arbitrators to reimburse fees received previously was seen as a practical impossibility, especially for arbitrators based outside of Hungary. The partial annulment of awards and the treatment of arbitrators’ expenses were cause for further concern. In addition, it was pointed out that the Section 57(2) rule could disrupt the collegiality and proper functioning of arbitral tribunals. Some argued that as a consequence of Section 57(2), foreign arbitrators would be particularly reluctant to accept appointments on tribunals seated in Hungary. It was feared that instead of rendering arbitration more attractive by improving the quality of awards and increasing Hungary’s reputation as a seat of arbitration, the obligation to reimburse arbitrator fees would hurt the image of arbitration, decrease the quality of awards and discourage tribunals from choosing Hungary as their seat.

3. The Revised Wording of the 2017 Arbitration Act

Even before Section 57(2) could be tested in practice, in response to the above criticism, the Hungarian legislator decided to amend this controversial provision of the 2017 Arbitration Act. With effect of 10 July 2019, Act No. LXVI of 2019 revised Section 57(2) to read: “if the arbitral award is set aside, in case the proceedings are resumed following the setting aside, the parties shall not be required to pay the fees of the arbitral tribunal…”. The revised wording of Section 57(2) thus no longer requires arbitrators who rendered the annulled award to reimburse their fees. At the same time, the Hungarian legislator did not depart from its earlier position according to which parties cannot be required to pay arbitrator fees twice to obtain a single enforceable award. Thus, a new solution had to be found to fund the costs and arbitrator fees of the second arbitration. The solution eventually adopted by the Hungarian legislator only deals with arbitration proceedings conducted under the auspices of the HCCI Arbitration Court. Section 62 of the 2017 Arbitration Act was amended to task the Presidium of the HCCI Court of Arbitration with establishing a separate reserve fund from which the arbitrator fees of the second proceeding are to be drawn when the arbitration is resumed following the setting aside of the award. The revised Section 62 also provides that where the funds available in the separate reserve fund are insufficient to cover the arbitrator fees of the second tribunal, such fees shall be provided by the Hungarian Chamber of Commerce and Industry. At the same time, in respect of ad hoc and foreign institutional proceedings seated in Hungary, the revised 2017 Arbitration Act remains silent. It is thus not entirely clear what would happen if, for example, an ICC award rendered by a tribunal seated in Budapest were subsequently annulled by the courts and if the parties were to choose to resubmit their dispute to arbitration. Could the parties claim, by reference to Section 57(2) of the 2017 Arbitration Act, that they are not liable to pay the fees of the second tribunal? If so, who would be required to pay the fees for hearing the resubmitted dispute, and with what funds? The revised 2017 Arbitration Act does not answer these questions – it is thus a partial solution at best.

4. Concluding Remarks and Considerations for the Future

As a result of this third amendment to the 2017 Arbitration Act, arbitrators sitting on tribunals in Hungary are no longer at risk of receiving a reimbursement claim for fees from many years previous if their award is set aside, which should come as a relief to many. Although the establishment, funding and functioning of the new separate reserve fund for resumed proceedings administered by the HCCI Court of Arbitration will no doubt face a number of difficulties in practice, the solution adopted by the Hungarian legislator is likely to contribute to improving the HCCI Court of Arbitration’s attractiveness to experienced Hungarian and foreign arbitrators. At the same time, the Hungarian legislator’s partial solution, which leaves ad hoc and foreign institutional proceedings seated in Hungary in a vacuum, is likely to continue to attract criticism from the international arbitration community. If Hungary wishes to secure a place in the ranks of recommended seats of arbitration, a further amendment to the 2017 Arbitration Act may be necessary – one restricting the application of the revised Section 57(2) to arbitrations administered by the HCCI Court of Arbitration.

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Richard Schmidt

This post analyses the decisions of Hungarian courts rendered under the New York Convention (“Convention”) and published in the last two decades. The decisions were initially made available to the international arbitration community in the ICCA Yearbook of Commercial Arbitration series. This case law of 20 years is summarized below by identifying the main directions of the application of the Convention in Hungary.

The “Commercial Nature” Reservation – Liberal Interpretation

While Hungary took an active part in the preparation of and acceded to the Convention in 1962, arbitration played only a marginal role before the 1989-90 change of the political regime. As a result, court decisions in relation to the Convention began to be published from the mid-90s onward.

The main “heritage” from the pre-90s era are the two reservations that Hungary made based on Article I(3) of the Convention. While the narrowing of the Convention’s material scope for awards made in the other Contracting States has not posed problems in court practice, the utility of qualification of commercial relationships under the national law has raised some interpretative problems.

In one case, a commercial agency contract that was subject to Swiss law had to be interpreted by the local court based on Hungarian law. At first, the court concluded that an agreement between two independent persons, without any subordination, could not be qualified as an employment relationship. Then, the court qualified the parties’ relation as commercial since, by setting common business goals, they strived for gaining individual profit.¹⁾Case No. BH 2007.130.

However, in another case the first instance court concluded wrongly that the transfer of ownership would be a relevant factor when assessing the commercial nature of the relationship. The court of the second instance corrected this decision by establishing that a lease agreement with an option for the subsidiary of the tenant to enter into a leasing agreement with the landlord shall be considered as a commercial relationship.²⁾Case No. BH2004.369.

Although Hungarian courts were able to provide an interpretation in favour of the application of the Convention in the above cases, it must be admitted that the legal uncertainty around the concept of “commercial relationship” is still fueled by a “legislative gap”. Indeed, from 1994 this concept is not defined by Hungarian law, and even the new Hungarian Civil Code that entered into force in 2014 fails to provide any interpretative guidance.

For this reason, there are voices not only from practitioners but also from scholars that this reservation should be abandoned.³⁾RAFFAI, Katalin: Interpretation and Application of the New York Convention in Hungary. In: BERMAN, George (ed.): Recognition and Enforcement of Foreign Arbitral Awards. The Interpretation and Application of the New York Convention by National Courts. Springer 2017, p. 435-436.

Formalities and Translations in Article IV – Formalistic Approach

When it comes to Article IV of the Convention, regulating the formalities to be fulfilled by petitioners, we can say that instead of a flexible and pragmatic approach, Hungarian courts turned to formalism in the last years.

Except for a few cases, where, in accordance with Article VII of the Convention, bilateral treaties could take priority over the provisions of the Convention,⁴⁾Case No. BH2004.416. the non-compliance with Article IV(1)-(2) led to the rejection of the application seeking the recognition of foreign awards.

Unlike certain other jurisdictions (for example, Germany), where the arbitration agreement does not need to be submitted at all in the recognition procedure,⁵⁾ICCA’S Guide to the interpretation of the 1958 New York Convention. 2011. International Council for Commercial Arbitration. 75. Hungarian courts did not grant the recognition where the arbitration agreement was missing, or in cases where it was submitted as a simple photocopy, without legalization by a notary public.⁶⁾Case No. BH1999.270., Case No BH2004.19. and Case BH2002.582.

In one particular case, the Supreme Court even stressed that in the recognition procedure the arbitration agreement shall be submitted, and its existence cannot be established on the basis of other evidence, e.g., on the grounds that the award debtor acknowledged the existence of the arbitration clause in its request for arbitration.⁷⁾Case No. BH2004.285. The same approach was taken in those cases where petitioners submitted the arbitral award in a simple copy without legalization.⁸⁾Case No. BH1999.223.

When it comes to translations, although in some countries, like Switzerland or the Netherlands, the translation of the award and the arbitration agreement is not always required,⁹⁾ICCA’S Guide to the interpretation of the 1958 New York Convention. 2011. International Council for Commercial Arbitration. 77. Hungarian courts are conservative in this regard and the recognition was not granted in cases where the arbitral award was submitted in a simple translation, or without an attestation clause from the translator.¹⁰⁾Case No. BH2004.19. and Case No. BH1999.223.

It must be noted that the refusal of recognition due to formalistic approach characterized rather the early years until the mid-2000s, while in the next decade there was no published decision rejecting the application for recognition of the foreign award for reason of non-compliance with formalities.

Lastly, it must be admitted that, in almost all of the above cases, Hungarian judges allowed to cure the formal defects by ordering the lower courts to conduct a new procedure in which the award creditor could satisfy the formal requirements.

Grounds for Refusal in Article V – Pro-Arbitration Approach

While Hungarian courts sometimes can be blamed for excessive formalism and for the lack of pro-arbitration approach in applying Article IV of the Convention, when it comes to the interpretation of the grounds for refusal set forth in Article V, that is certainly not the case.

As a starting point, it was laid down in several decisions that the recognition and enforcement procedure cannot serve as a “remedy” against the arbitral award, so the “review on the merits” is not allowed.¹¹⁾Case No. BH+ 2015.209 and BH+2013.31.

Hungarian courts also confirmed that Article V of the Convention sets forth an “exhaustive list” on which recognition and enforcement may be refused, and therefore they ignored other defences, like the diminution of the claim in other enforcement procedure, or ongoing litigation with third parties.¹²⁾Case No. BH2007.130. and No.1996.375.

While it is commonly accepted that the court of recognition is not entitled to requalify the facts determined by the arbitral tribunal, one could say that some court decisions have gone too far in the application of the principle of “non révision au fond” when they rejected to examine whether an arbitration agreement existed between the parties in case of legal succession in respect of the arbitration clause, or whether the tribunal had jurisdiction to hear the dispute in the context of Article V(1)a)-c) of the Convention.¹³⁾Cases No. BH+ 2015.209 and BH+2013.31.

When it comes to “due process violations” in the context of Article V(1)b), in one particular case, the recognition of the award was granted based on the fact that the summons to the hearing in the arbitration proceedings had been properly served. Even if the debtor returned the mail to the arbitration tribunal with the indication “refused”, later he acknowledged that the summons was duly received by him.¹⁴⁾Case No. BH2004.416.

Another decision highlighted that the “burden of proof” regarding the violation of due process under Article V(1)b) lies on the shoulders of the award debtor.¹⁵⁾Case No.  BDT2006.1315. This principle was applied by other Hungarian courts in respect of the other grounds for refusal set forth in Article V(1), too.

Regarding Article V(1)e) of the Convention, the court confirmed that the “suspended award” defence could not be invoked by the award-debtor based on the pure fact that he started setting aside procedure in the country of origin, where the courts of this country have not suspended the enforceability of the said award.¹⁶⁾Case No. BH+ 2013.31.

It is well-settled case law of Hungarian courts that the recognition may be refused on the basis of “public policy” in accordance with Article V(2)b), if the recognition of the foreign award would have consequences beyond the legal relationship of the parties and it would manifestly or severely violate the fundamental rights, domestic social values and socio-economic order. In one of the analysed cases, the court rightly pointed out that the payment of the high amount awarded by the arbitral tribunal had an impact on the individual situation of the award-debtor, but it did not violate the interest of the society and the public, so the recognition was granted.¹⁷⁾Case No. BH2007.13.

Hungarian courts were also reluctant to rely on public policy to refuse recognition when the award debtor referred to the failure of the arbitral tribunal to postpone the hearing despite its request, or when the debtor relied on ongoing criminal procedures against its former managing director.¹⁸⁾Case No. BH2003.505.and Case No. BH+2015.209.

Finally, we must highlight that, while there were cases where recognition was refused because of non-compliance with formalities under Article IV, it is a telling fact in support of the pro-arbitration approach of Hungarian courts that the award debtors could not successfully resist the recognition and enforcement by invoking the grounds for refusal in Article V of the Convention.

Conclusion

As shown in this post, Hungarian courts can be characterized by a mixture of formalism and pro-arbitration approach when applying the Convention. It is undisputed that a rather strong formalistic approach can be felt in respect of the fulfilment of formalities and translation matters. However, the liberal interpretation of the reservation and the pro-arbitration policy in respect to the grounds for refusal of recognition and enforcement of foreign awards proves that Hungary has its place among the pro-arbitration jurisdictions.

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Viktoria Schneider and Nils Schmidt-Ahrendts

Arbitrators and tribunal-appointed experts are at all times obliged to disclose any and all circumstances that might give rise to doubts as to their impartiality and independence. This is one of the most fundamental duties to safeguard the legitimacy of arbitration. Yet, what are the consequences if they fail to do so?

This question has kept two German courts, the Higher Regional Court Karlsruhe (‘OLG Karlsruhe’) and the German Federal Court of Justice (‘BGH’), busy for six years, but now the question appears to be appropriately solved – better late than never!

Background

The DIS arbitration, which triggered the above-mentioned court proceedings, started as early as 2010 and it involved two parties that were in dispute as to the root cause of the defects of their jointly manufactured products.

In 2011, the DIS tribunal, with the consent of the parties, appointed a publicly certified expert to examine this issue. In 2013, based on the expert’s report, the DIS tribunal issued its award in which it held that the defects were 100% caused by one of the parties.

Still, in 2013, the defeated party requested the annulment of the award before the OLG Karlsruhe. Among others, it argued that the expert on whose report the arbitral tribunal had based its decision had failed to disclose that his direct superior at the expert company had previously been working for more than 20 years for the other party and only recently started to work for the expert company. Moreover, it claimed that it had discovered this former working relationship only after the award had been rendered. The winning party, in turn, opposed the request for annulment by applying for a declaration of enforceability instead.

What followed were joint annulment/enforcement proceedings that ultimately produced not one, but four German court decisions, two by the OLG Karlsruhe and two by the BGH, on the key legal question: What are the consequences for the enforceability of the award if an arbitrator or tribunal-appointed expert fails to disclose circumstances which may call into question their independence or impartiality?

OLG Karlsruhe: Annulment Only in Exceptional Circumstances¹⁾OLG Karlsruhe, Decision of 18 December 2015, 10 Sch 12/13.

In December 2015, after two years of proceedings, the OLG Karlsruhe decided the issue for the first time – it declared the award enforceable and rejected the request for annulment.

In line with a judgement of the BGH from 1999²⁾Bundesgerichtshof, Judgement of 04 March 1999, III ZR 72/98., the OLG Karlsruhe argued that, in light of the res judicata nature of an award, any failure to disclose that becomes known only after the award is issued, warrants its annulment only in very exceptional circumstances, i.e. in a case of obvious and severe bias. The OLG Karlsruhe held that this was not the case here, as only the superior and not the expert himself had worked for a party and the superior’s involvement in the expert report was unclear.

BGH: Overturning Former Jurisprudence³⁾Bundesgerichtshof, Decision of 02 May 2017, I ZB 1/16.

In May 2017, after reviewing the OLG Karlruhe’s decision, the BGH set it aside and remitted the case to the OLG Karlsruhe.

The BGH expressly relinquished its case law from 1999 on which the OLG Karlsruhe had relied. It held that any failure to disclose, regardless when it becomes known, means that the arbitration has not been conducted in accordance with the German lex arbitri and, thus, warrants annulment if it affected the award. According to the BGH, such effect is deemed to exist if the non-disclosed circumstances would have been sufficient to successfully challenge the arbitrator or expert during the arbitration, which is the case if those circumstances give rise to justifiable doubts as to their impartiality and independence. The res judicata principle does not justify retaining the previous threshold of ‘obvious and severe’ bias because an award will only become res judicata once declared enforceable.

However, based on the (undisputed) facts available to the BGH, it could not decide whether there had even been a failure to disclose, let alone one with the required effect on the award. Thus, it remitted the case to the OLG Karlsruhe requesting it to reopen the case in order to establish these, in the BGH’s view, material facts and render a new decision.

OLG Karlsruhe: Annulment Only in Case of Justifiable Doubts⁴⁾OLG Karlsruhe, Decision of 01 June 2018, 10 Sch 12/13.

As requested by the BGH, the OLG Karlsruhe reopened the case. By examining the expert and his superior as witnesses, it established that there actually had been a failure to disclose. When rendering his report, the expert had been aware of his supervisor’s previous work position. However, during the 20 years in which the superior had worked for one of the parties, he had not been involved with the product in dispute. Further, in line with the expert company’s internal rules, the superior had not influenced the expert’s substantive findings in any way, but had for organizational reasons merely signed the letter by which the report was transmitted to the arbitral tribunal and the parties. On this basis, the OLG Karlsruhe held that neither the mere failure to disclose nor the non-disclosed facts give rise to justifiable doubts as to the expert’s impartiality and independence or otherwise justify annulment. Thus, it again declared the award enforceable.

BGH: A Differentiated Approach⁵⁾Bundesgerichtshof, Decision of 31 January 2019, I ZB 46/18.

After yet another legal review, the BGH upheld the OLG Karlsruhe’s decision and, thus, declared the award enforceable for good.

In its decision, the BGH clarified under which circumstances the failure to disclose warrants the annulment of an award.

First, a mere failure to disclose, i.e. irrespective of the non-disclosed facts, only justifies an annulment if already such failure in itself shows the arbitrator’s or tribunal-appointed expert’s bias. In the BGH’s view, this is only conceivable in case of intentional concealment.

Second, in the absence of such intention, enforceability or annulment depends on an ex post analysis by the competent state court as to whether the arbitral tribunal would have decided that the non-disclosed facts give rise to justifiable doubts, if they had been duly disclosed already during the arbitration proceedings. In other words, in the BGH’s view, the standard to assess the enforceability or annulment of an award is, when dealing with a failure of disclosure, the same as the standard to challenge an arbitrator or expert during the arbitral proceedings.

This assessment is to be conducted from a ‘subjective-objective perspective’. Though the court must adopt the subjective perspective of the challenging party, it must thereby assume that, when confronted with the non-disclosed fact, this party would objectively appreciate all relevant facts in order to decide whether justifiable doubts exist. All relevant facts are not only the unduly concealed facts, i.e. the facts which the arbitrator or expert should, but did not disclose. Rather due regard has to be paid to all connected circumstances, i.e., circumstances that the parties and/or the challenged arbitrator/expert would have reasonably disclosed during the ‘challenge procedure’.

Thus, the BGH approved that the OLG Karlsruhe had examined the expert and his superior as witnesses.

Concluding Remarks

The fact that it took the claimant six years to enforce an award that had been issued after three years of arbitration, shows that the German ‘two-instance’ enforceability/annulment regime is not ideal and potentially in need for reform (although the present case is certainly an extreme scenario). Yet, more importantly, the two BGH decisions provide important guidance on the handling of non-disclosure cases.

On the one hand, annulment may well be a consequence of a failure of disclosure. Hence, any arbitrator and expert are well-advised to disclose rather too much than too little.

On the other hand, annulment is not an inevitability. Only in the extreme case of intentional non-disclosure, the non-disclosure in itself warrants annulment. In all other cases, the competent state courts are requested to do precisely what, in the BGH’s view, any arbitral tribunal or arbitral institution is required to do when deciding on challenges. Faced with the disclosure of a fact potentially impairing an arbitrator’s/experts’ independence and impartiality, they must establish, if required by taking evidence, all circumstances connected to the non-disclosed fact and submit them to careful appreciation from the perspective of a reasonably thinking challenging party.

Both BGH decisions are well in line with the IBA Guidelines on Conflict of Interest (2014), which also require a reasonable balance between the parties’ right to comprehensive disclosure and the defence of formalistic challenges. Hence, any party choosing Germany as the place of arbitration can be assured that – although it sometimes may take a while – it is still in the BGH’s truly ‘safe hands’.

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On 11 December 2019, the Advocate General Priit Pikamäe delivered its Opinion recommending the Court of Justice of the European Union (“CJEU”) to declare that it does not have jurisdiction to rule in infringement of European Union (“EU”) law proceedings concerning the long-running border dispute between Slovenia and Croatia, which the CJEU endorsed in the judgement of 31 January 2020.

The main question raised in the case between the two EU member states is whether the CJEU is competent to decide on an action brought by Slovenia under Art. 259 of the Treaty on the Functioning of the European Union (“TFEU”) alleging that Croatia has failed to fulfil its obligations under EU law by refusing to recognise an arbitral award determining the maritime and land boundary between the two states.

Factual Background and Pre-litigation Procedure

The collapse of the Socialist Federal Republic of Yugoslavia (“SFRY”) in the early 1990s uncovered some smouldering issues between its former constituent republics.

Amongst others, the breakup revealed the border dispute between two of the SFRY’s successors –Slovenia and Croatia. After declaring their independence in 1991, between 1992 – 2001 both states unsuccessfully attempted to resolve the dispute regarding the course of their land and maritime boundary.

On 4 November 2009, in the course of Croatia’s accession to the EU, Slovenia and Croatia signed an arbitration agreement (“Arbitration Agreement”) referring their land and maritime border dispute to arbitration. The European Commission and the Swedish EU Council Presidency facilitated the drafting of the Arbitration Agreement, and along with being signed by the parties, the Arbitration Agreement was also signed by the Swedish EU Council Presidency as a witness. During the arbitral proceedings, due to ex parte communication between the arbitrator appointed by Slovenia and one of the Slovenian representatives in the proceedings, in July 2015, Croatia informed Slovenia and the arbitral tribunal of its decision to terminate the Arbitration Agreement claiming a material breach of the Arbitration Agreement by Slovenia under Art. 65, para 1 of the Vienna Convention on the Law of Treaties (discussed on the blog here). After a change in the composition of the arbitral tribunal, the proceedings continued, and on 29 June 2017, the tribunal rendered its final award (“Arbitral Award”) determining the boundary between Slovenia and Croatia. However, Croatia contested the validity of the Arbitral Award and its binding effect.

The border as determined by the arbitral tribunal in the Arbitral Award, page 347

Infringement Proceedings Filed by Slovenia

On 16 March 2018, Slovenia initiated infringement proceedings under Art. 259 TFEU referring the dispute to the European Commission. Since the Commission did not issue a reasoned opinion on the matter within the required three month period, on 13 July 2018, Slovenia brought an action before the CJEU.

In support of its action, firstly, Slovenia claimed that by breaching its unilateral commitment undertaken during the EU accession process to adhere to the Arbitral Award and the boundary determined by that award, Croatia refused to respect the rule of law and the principles of sincere cooperation and res judicata. Secondly, Slovenia maintained that by refusing to comply with the Arbitral Award, Croatia prevents it from exercising its full sovereignty over its land and maritime territory breaching its duty of sincere cooperation and jeopardizing the attainment of the EU’s objectives. Lastly, Slovenia argued that Croatia was preventing it from fulfilling its obligation to implement a number of EU secondary law acts related to the common fishery policy, the border control and the maritime spatial planning.

On 21 December 2018, Croatia submitted a motion arguing that the action brought by Slovenia is inadmissible as the CJEU had no jurisdiction to rule on a dispute concerning the Arbitration Agreement and the Arbitral Award which did not require the application or interpretation of EU law.

Findings of the Advocate General

In his opinion, The Advocate General began his analysis by examining the relationship of the Arbitration Agreement and the Arbitral Award with EU law and determining whether they bound the EU. He found that:

1. The cases where the EU is bound by international law are well-established. Namely, the EU is bound by international conventions concluded by the EU itself or where the EU assumes powers previously exercised by the member states, and by rules of customary international law. Therefore, international agreements which do not fall within the situations listed above, are not EU acts and, therefore, do not bind the EU (§ 104).
2. The territorial scope of the Treaties is an objective fact determined by the member states. As a consequence, the delimitation of national territory does not fall within the jurisdiction of the CJEU (§§ 110-112).
3. The Arbitration Agreement and the Arbitral Award did not fall within any of the hypothesis in which the EU is bound by international law (§ 122).
4. The issues concerning the alleged infringements of the rule of law and the principle of sincere cooperation are ancillary to the issue of determination of the land and maritime boundary between the two member states and therefore, the CJEU does not have jurisdiction to decide on those matters (§ 130, 134, 135).
5. Slovenia’s claims in relation to non-compliance with the EU secondary legislation were based on the assumption that the border between the two member states had been determined by the Arbitral Award. However, the Arbitral Award has not been implemented, and the boundary between the two member states remained undetermined (§ 149).

The Advocate General expressed his view that Slovenia was seeking implementation of the Arbitral Award, which fell outside the competence of the EU and the CJEU’s jurisdiction. He then concluded that the infringements of EU law alleged by Slovenia are ancillary to the issue of the determination of its border with Croatia which is a matter of public international law and therefore falls outside of the jurisdiction of the CJEU (§ 164).

The Judgment of the CJEU

In the judgment of 31 January 2020, examining the issue of whether it has jurisdiction to hear the case, the CJEU noted that it is not within its sphere of competence to interpret an international agreement concluded by member states whose subject is not a matter of EU law. Relying on previous case-law, the CJEU further explained that it lacks jurisdiction to decide on an action under Art. 259 TFEU for failure to fulfil obligations, when the infringement of EU law pleaded in support of the action is ancillary to the obligations stemming from the international agreement at issue (§§ 91-92).

In light of the above, the CJEU found that the infringements of EU law claimed by Slovenia resulted from the alleged failure by Croatia to comply with the obligations under the Arbitration Agreement and the Arbitral Award rendered on its basis or from the false premise that the border between the two member states has been determined by the Arbitral Award (§ 101).

The CJEU clarified that the Arbitral Award was rendered by an international tribunal established under a bilateral arbitration agreement governed by international law the subject matter of which did not fall within the sphere of competence of the EU and the EU was not a party to the Arbitration Agreement, notwithstanding its facilitating role. It further stated that despite the links between the conclusion of the arbitration agreement and the arbitral proceedings conducted on its basis on the one hand and the accession of Croatia to the EU on the other, the Arbitration Agreement and the Arbitral Award could not be considered an integral part of EU law. In this context, the CJEU clarified that the neutral reference made to the Arbitral Award in the Act of Accession of Croatia to the EU did not mean that the commitments made by Slovenia and Croatia under the arbitration agreement were incorporated into EU law (§§ 102-103).

In that regard, the CJEU concluded that the infringements pleaded by Slovenia were ancillary to the alleged failure by Croatia to comply with its obligations under the Arbitration Agreement. As the action for failure to fulfil obligations under Art. 259 TFEU can only apply in case of non-compliance with obligations arising out of EU law, the CJEU found that it lacked jurisdiction to decide on the alleged failure to comply with the obligations stemming from the Arbitration Agreement and the Arbitral Award (§ 104).

The CJEU noted that it is within the competence of each member state to determine its borders in accordance with international law. Therefore, it was beyond its jurisdiction to examine the extent and the limits of the respective territories of Slovenia and Croatia by applying directly the boundary as determined by the Arbitral Award in order to verify the existence of the pleaded infringements of EU law. The CJEU nevertheless reminded Slovenia and Croatia of their obligation to “strive sincerely to bring about a definitive legal solution consistent with international law, as suggested in the Act of Accession” of Croatia to the EU which ensures the application of EU law. One such option could be a submission “to the Court under a special agreement pursuant to Article 273 TFEU” (§§ 107, 109).

The Way Ahead

The Judgment in the case between Slovenia and Croatia is one of the very few where the CJEU had to decide on a dispute between two member states.

Indeed, it is the first case under Art. 259 TFEU where the territorial application of EU law was at stake, and the CJEU had to decide on whether an arbitral award rendered on the basis of an arbitration agreement concluded between two member states has a connection with EU law and thus falls within the sphere of competence of the CJEU.

While the CJEU said its last word and its Judgement is final and cannot be appealed, the boundary between Slovenia and Croatia remained undetermined.

Looking ahead, it is likely that Croatia will call for a mutually acceptable agreement. Slovenia, on the other hand, will more likely demand the implementation of the Arbitral Award. Although the CJEU decided that it had no jurisdiction to rule on the border dispute between the two member states, Slovenia can count on the fact that the Arbitral Award is a binding settlement instrument under public international law.

An important factor which will likely play a key role in finding a definitive solution of the border dispute between the two member states is Croatia’s attempt to join the Euro and the Schengen Area. To become a member, Croatia needs the unanimous consent of all Euro and Schengen Area member states, among which is Slovenia. It is probable that Slovenia will seek a favourable solution of the dispute using its power to cease Croatia’s accession, as it did during the negotiations for Croatia’s accession to the EU.

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