Legal Framework and Recent Developments of International Commercial Arbitration*
* This is a summary of the autor’s speech at the International Commercial Arbitation Conference (Almaty, 11th June 2002).
The beginning of the article is available in the previous issue of the magazine.
Sigvard Jarvin, Member of the Bars of Sweden and Paris, Jones, Day, Reavis & Pogue (Paris)
I. Legal Framework of International Commercial Arbitration
Two multilateral conventions were drawn up under the auspices of the League of Nations in Geneva following World War I. They removed a number of obstacles then facing international arbitration. However, the progress made by those instruments has been confirmed and extended by the New York Convention, and its two forerunners are no longer relevant, except in relation between countries which are not bound by the New York Convention.
The 1958 New York Convention
Following World War II and the subsequent growth of international trade, the weaknesses of the 1927 Geneva Convention, which neither the United States nor the Soviet Union had ratified, became very apparent. It needed to be revised if arbitration was to become an efficient means of resolving international disputes. The International Chamber of Commerce was aware of this and began work on a new instrument, and in 1953 it submitted a Draft Convention on the enforcement of international arbitral awards to the United Nations.
The convention on the Recognition and Enforcement of Foreign Arbitral Awards was open for signature in New York from June 10, 1958. It entered into force on June 7, 1959.
On March 31, 1999, a total of 121 countries were bound by the Convention, through ratification, accession or succession. This constitutes a resounding success, and the convention has become the universal instrument that its proponents intended it to be. Success came gradually, though, because Jt was not until the 1970s and 1980s that a number of important countries ratified it: the United States in 1970, the United Kingdom in 1975, Canada in 1986, China in 1987, Algeria and Argentina in 1989, Saudi Arabia in 1994, Venezuela and Vietnam in 1995, and Lebanon in 1998. The cases of Argentina, Saudi Arabia, Venezuela and Vietnam are particularly significant, as those signatory countries have traditionally, for various political or legal reasons, been hostile towards international arbitration.
As regards the conditions for recognition and enforcement of awards, the New York Convention makes significant progress in two areas as compared to the 1927 Geneva Convention. First, the burden of proof is reversed: once the award and arbitration agreement have been submitted by the party applying for recognition and enforcement of the award (Art. IV), the party opposing enforcement must prove why the award should not be enforced against it (Art. V). Second, there are fewer grounds on which an application resisting enforcement will be admissible, and these are defined in more restrictive terms. For example, it is no longer necessary that the award should be final in its country of origin; the award must simply be binding. Although that term may create difficulties of interpretation in some countries, the existence of an action to set aside no longer prevents enforcement abroad, and a double exequatur, in the country of origin as well as in the country of enforcement, is no longer necessary. The procedure governing recognition and enforcement (Arts. Ill and IV) is still determined by each contracting state, although contracting states agree not to impose on the recognition and enforcement of foreign awards substantially more onerous conditions than those imposed on the recognition end enforcement of domestic awards.
As far as arbitration agreements are concerned, Article II of the New York Convention usefully sets forth a general principle of their recognition. It also determines the conditions of form and the effects of all arbitration agreements, again by means of a substantive rule.
Article I, paragraph 3 of the convention provides for two reservations which restrict the Convention’s territorial and substantive scope.
The first of these is known as the reciprocity reservation. Any signatory may on the basis of reciprocity declare that it will apply the Convention to the recognition and enforcement of awards made only in the territory of another Contracting State.A second reservation is also provided for in Article I, paragraph 3: any State may also declare that it will apply the convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration. Forty member states had made this reservation as of March 31, 1999. They draw a distinction between commercial and civil relationships and consider that disputes arising from the latter should not be entrusted to private judges to the same extent as the former.
Article VII, paragraph 1 contains the final limitation of the scope of the New York Convention. The provisions of the Convention shall not affect the validity of multilateral or bilateral agreements concerning the recognition and enforcement of arbitral awards entered into by the Contracting States nor deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon.
This rule, which is also contained in Article 5 of the 1927 Geneva Convention, can be referred to as the more-favourable-right provision. It ensures that whenever the New York Convention proves to be less favorable to the recognition and enforcement of a foreign award than the treatment provided for in another treaty, or in the law of the host country, the more favorable treatment shall prevail over the rules of the New York Convention.
This more-favourable-right provision resolves conflicts between international conventions: the convention which prevails is neither the most recent, nor the most specific, but instead that which is most favorable to enforcement of the award. This ties in with the idea of the maximum effectiveness of each treaty.
The second type of conflict avoided through the application of the more-favourable-right provision is that between the rules of the New York Convention and those of the law of the contracting state in which the award is to be enforced. The traditional solution to such a conflict, whereby international treaties prevail over national laws, is thus rejected. The contracting states clearly intended that the Conventions provide only the minimum level of protection for the beneficiary of the award.
The Moscow Convention of 1972
Under the auspices of the council for Mutual Economic Assistance (CMEA), the convention on the Settlement by Arbitration of Civil Law Disputes Resulting from Economic, Scientific and Technical Co-operation was prepared and then signed in Moscow on May 26, 1972. Until 1992, most of its members remained bound by it.
The aim of the Convention was to allocate jurisdiction between the Arbitration Courts attached to the Chambers of Commerce of each socialist country over disputes between the economic organizations of those countries. However, the Moscow convention has not survived the dismantling of the CMEA. Beginning in 1994, most of the countries bound by the convention repealed it, and the new states of the former Soviet Union have generally refused to recognize it. In theory, countries such as Cuba and Mongolia may still be bound by the convention, although most commentators consider’s that it is no longer in effect.
The OHADA Treaty of 1993
The organization for the harmonization of business law in Africa (OHADA) was established by a treaty signed by fourteen African countries in Port-Louis, Mauritius, on October 17, 1993. Those signatory countries are Benin, Burkina-Faso, Cameroon, the Central African Republic, Chad, the Comores, the Democratic Republic of Congo, the Ivory Coast, Gabon, Equatorial Guinea, Mali, Niger, Senegal, and Togo. Two other countries (Guinea and Guinea-Bissau) later joined the organization. Under this Treaty, which entered into force on September 18, 1995, several uniform laws have been adopted. A uniform law on arbitration, repealing all contrary provisions in national legislation, was adopted by the OHADA Council of Ministers on March 11, 1999. The convention also established a Joint Court of Justice and Arbitration, which plays the dual role of an arbitral institution and a court empowered to review awards. The regime thus devised, which applies to both domestic and international arbitration, remains voluntary, but the Court administering the arbitration and approving the draft award is a true international jurisdiction, which subsequently orders enforcement of the award.
The 1965 Washington Convention
Under the auspices of the International Bank for Reconstruction and Development (the World Bank), the Convention on the Settlement of Investment Disputes between States and Nationals of other States, opened for signature in Washington, D.C. on March 18, 1965. It created an institutional arbitration mechanism specially adapted to foreign investment disputes: the International Centre for Settlement of Investment Disputes (ICSID).
By January 1, 1999, it had been signed by 146 countries, 131 of which have ratified it. In addition, over nine hundred bilateral investment treaties and four major multilateral treaties (NAFTA, MERCOSUR, the Cartagena Free Trade Agreement, and the Energy Charger Treaty) have selected ICSID as an arbitral institution to which disputes may be submitted. For many years, ICSID cases were few and far between. It is only over the past fifteen years that new cases have been submitted to it on an annual basis.
ICSID arbitration is specific in a number of respects: it was created by international treaty and is used only to resolve investment-related disputes; it also has specific rules governing jurisdiction, arbitral procedure and the authority of awards. In particular, although awards can be set aside by ad hoc committees which have sometimes construed their powers of review very broadly there can be no action to set aside before national courts. In addition, pursuant to the treaty, an ICSID award has to be treated in each member state as if it were a final judgment of the courts of that state. The awards made, which are almost always published, are particularly helpful in the creation of a body of international investment law.
II. Recent Developments of International Arbitration
Confidentiality of the Arbitral Proceedings
Confidentiality and privacy have been widely assumed to be fundamental principles for international commercial arbitration. Privacy is concerned with limiting the right of persons other than the arbitrators, the parties and witnesses, to attend meetings and hearings and to know about the arbitration. Confidentiality is the obligation on the arbitrators and parties not to divulge or give out information relating to the contents of the proceedings, documents or the award (see Dr Julian Lew, Expert Report of Dr. Julian D.M. (in Esso/BHP v. Plow/man) (1995) 11 Arbitration International 3, p. 285).
In the 1995 decision by the High Court of Australia in Esso/BHP v. Plowman a majority of the court rejected the then prevailing English judicial view that a general duty of confidentiality existed, albeit subject to limited exceptions and qualifications. (Esso Australia Resources Ltd and Others v. Plow/man (Minister for Energy and Minerals) and Others (1995) 128 ALR 391). There had been a number of cases in England during the 1980s and early 1990s where the view had been taken that arbitration is a private process of dispute resolution and that arbitral proceedings are confidential, albeit that the duty of confidentiality is not absolute, but subject to limited qualifications or exceptions (Oxford Shipping Co. Ltd v. Nippon Yusen Kaisha (the Eastern Saga)  3 All ER 835; Dolling’Baker v. Merrett  1 WLR 1205; Hassneh Insurance v. Mew/  2 Lloyd’s Rep. 243).
The subsequent English court decision in AH Shipping corp: v. Shipyard Trogir ( 2 All ER 136) reconfirmed the English position that there is a general obligation of confidentiality by implication of law.
In the foot steps of the ‘dramatic’ Australian High Court decision in the Esso case, the Stockholm City Court startled the international arbitration community by rendering a judgment in September 1998, declaring in the Bulbank v. AIT case that an arbitration agreement gave rise to an inherent duty of confidentiality between the parties. Bulbank appealed to the Svea Court of Appeal, which concluded that neither the ECE Rules nor the Swedish Arbitration Act explicitly impose a duty of confidentiality.
On 27 October 2000 the Supreme Court of Sweden gave its decision, declaring that there is no legal duty of confidentiality implied or inherent in an arbitration agreement. The Supreme Court held that arbitration is based upon an agreement, from which it generally follows that the proceedings will be private. The statutory framework provided to arbitral proceedings does not change its contractual nature, but is there to give the procedure a certain stability and quality and is necessary to give the award legal consequences, e.g. in relation to enforcement. However, the fact that arbitration is regulated by statute does not of itself give rise to a duty of confidentiality upon the parties.
The private nature of arbitration will exclude any outsider from being present during the proceedings or receiving any of the documents produced during the proceedings. Furthermore, the arbitrators have to uphold confidentiality when performing their duties and counsel for the parties are restricted by professional rules. Sweden’s Supreme Court recognized that many commercial enterprises prefer arbitration because the proceedings are not open to the public. However, the court did not consider that there was necessarily any contraction between this aspect and the right of a party to provide a third party with information about the arbitration.
In most instances both parties are interested in restricting the information provided to others, but that might not always be the case. The Court stated that an inferior party may wish to put pressure on a superior party by publicising the dispute and there might be instances where a party will have a duty to provide information about a pending arbitration and its outcome.
However, to say that the parties normally recognize confidentiality is totally different from holding that there is a legal duty of confidentiality combined with legal sanctions - normally damages.
The Court surveyed the international scene and found that international opinion is divided, citing on the one hand the Australian High Court case declaring that one of the parties to an arbitration could use information obtained from the arbitral proceedings in court proceedings outside the scope of the arbitration, and on the other hand English and French cases upholding the general principle of confidentiality in arbitration (reference was made to the English case of Ali Shipping Corp. v. Shipyard Trog/r 2 All ER 136, and the French court of appeal case of F. Ai’ta c. A. Ojjeh, Revue de I’Arbitrage 1986, No. 4, p. 583).
Assignment of Contracts - what Happens to the Arbitration Clause?
In the context of domestic and international business transactions, parties routinely assign to third parties legal rights arising from their contractual relationships. While the assignment of such contractual rights and their eventual enforcement by third parties usually pose no specific procedural problems, several issues are likely to emerge in case the contract concluded between the original parties (the ‘main contract’) contains an arbitration clause. Questions arising in this instance are not only whether the arbitration clause travels automatically with the assigned contractual right to the assignee, but also what law is applicable to this issue, and who - arbitrator or domestic court - is competent to rule on the matter.
There are no uniform standards concerning the issue of transfer of the arbitration clause, neither with respect to domestic, nor with respect to international transactions. Rather, there seem to be two competing rules on the question, one stating that the assignee is automatically bound to arbitrate with the obligor any dispute arising in connection with the assigned right (the automatic assignment rule), the other one holding on the contrary that the assignee is not bound by the arbitration agreement unless he clearly consents to be bound by it (the express assignment rule). A review of common law and civil law jurisdictions has shown that the choice between those two rules is usually not well substantiated, but rather the result of formal as opposed to policy-oriented reasoning.
The automatic assignment rule supported by courts in civil law countries, while protecting the obligor’s and the assignor’s legal positions and encouraging the use of arbitration, tends to disregard the autonomous nature of the arbitration clause and the fact that the arbitration agreement is a compound of rights and duties, and it entirely neglects the interests of the assignee insofar as the latter is bound to arbitrate without proper notice. In contrast, the express assignment rule favoured in some common law jurisdictions protects the assignee’s legal position insofar as he is not bound to arbitrate in the absence of his express consent, thereby implicitly respecting the autonomous nature of the arbitration clause and also the purpose of the writing requirement, but it disregards the obligor’s interests insofar as the obligor foregoes his right to arbitrate the assigned claim. In addition, the express assignment rule might restrict the use of arbitration and encroach upon the assignor’s possibility freely to assign his contractual rights.
A recent case has cast light on the problem under Swedish law. The Dutch dockyard Scheepswerf Ferus Smit BV (“Ferus”) in February 1989 entered into a contract to build a vessel. In January 1990 the German shipping company MS Emja Braack Schiffahrts KG (“EmJa”) through a contract called “Transfer Agreement” acquired all the rights and obligations vis-a-vis Ferus, i.e. Emja bought the vessel under construction.
For the actual construction of the vessel Ferus subcontracted with another dockyard, Scheepswerf Bijisma BV (“Bijisma”). Bijisma in turn contracted with the Swedish manufacturer of Diesel engines Wartsila Diesel Aktiebolag (“Wartsila”). The written delivery agreement of February 1990 for the engine referred to the general terms and conditions ECE 188 and Marine Equipment Addendum 1987; furthermore, as far as technical personnel was involved, reference was made to the general terms and conditions TP 73 E. Both ECE 188 and TP 73 E contain an arbitration clause. Both general terms and conditions provided for the application of Swedish Law.
After the ship was delivered to Emja in 1991, problems with the diesel engine arose. In February 1992 while the vessel was transporting iron-ore from Narvik to Gunness, it had to enter a Norwegian port for repair. The lost rent for the charter and the costs for repair were considerable.
To enable Emja to recover its damages against Wartsila, both. Ferus and Bijisma assigned to Emja their rights with respect to the engine. The assignment was executed in a written contract called “Deed of Transfer of Assignment” in December 1993.
Based on the assignment Emja brought suit against Wartsila in a Swedish court of first instance (Trollhattans tingsratf). Wartisila objected and invoked the arbitration clauses included in the general terms and conditions ECE 188 and TP 73 E. The court of first instance, as well as the Court of Appeals for Western Sweden (Hovratten for Vastra Sverige) declined jurisdiction on grounds of the arbitration agreement. The case was heard by Sweden’s Supreme Court, who concluded that Emja was bound to arbitrate.
Pursuant to the October 15, 1997, decision, Sweden’s Supreme Court settled a question of the highest importance not only under Swedish law. In doing so, the Court showed a strong bias in favor of commercial arbitration. Although the ruling was tendered for an international contract subject to Swedish law, the Court’s reasoning is a significant contribution to the search for fair and viable rules with universal validity on the issue of succession in the field of international commercial arbitration.
By holding the assignee bound to the arbitration agreement included in the original parties’ contract, the Supreme Court followed the “automatic transfer doctrine”. The court’s rationale here stems from the necessary protection of the remaining party to the original contract. Through the assignment of contractual rights to third parties, the assignor cannot invalidate the remaining party’s entitlement to arbitrate eventual disputes arising in the context of the assigned right. The assignor cannot unilaterally weaken the legal position of the remaining party.
The very fact that the remaining party would have the possibility to protect itself against the adverse consequences of the “express consent doctrine”, i.e., the loss of its right to arbitrate in the case of the assignee not consenting to the arbitration agreement, by inserting specific clauses in its original contract with the assignor, was not even discussed by the Court. The possibility of such precautionary clauses in the original contract providing for the remaining party’s remedies in the case of assignment of rights without transferal of the arbitration agreement, was expressly mentioned by the Swedish Government Committee’s report (cf. SOU 1994:81, 91, 94).
Thus, the court established the principle, according to which an assignor cannot escape an arbitration agreement by merely assigning to a third party a contractual right which among the original parties was subject to arbitration: The assignee will be bound to the arbitration agreement.
In addition, the second issue at stake - whether the remaining party continues to be bound - was brought to a satisfying end. As a result, the Court formulated a general rule according to which the remaining party stays bound by the arbitration agreement absent any “special circumstances” justifying an exception. The court refrained from offering any more words or any examples as to what shape these “special circumstances” could possibly take.
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