International Commercial Arbitration

Avv. Niccolò Landi, LL.M.Avv. Niccolò Landi, LL.M.Rio de JaneiroOctober 2010

Why arbitrate?

Main reasons

• Neutrality: a reference to arbitration means that the dispute is likely to be determined in a neutral forum (or place of arbitration) rather than on the home ground of one party or the other.

• Enforcement: the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards made in New York, on 10 June 1958 (New York Convention)– entered into force in Brazil on 5 September 2002 – available at http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention.html

• Flexibility: an arbitration can be tailored to meet the specific requirements of the dispute, rather that having to be conducted in accordance with fixed rules of civil procedure.

• Confidentiality

Why arbitrate?

Main disadvantages

• Costs of arbitration

• Limits of arbitrator’s power: the power to require the attendance of witnesses under penalty of fine or imprisonment, or to enforce awards by the attachment of a bank account or the sequestration of assets, are powers which form part of the prerogative of the State.

• Conflicting awards: there is no system of binding precedents in international arbitration – that is to say, no rule which means that an award on a particular issue, or a particular set of facts, is binding on arbitrators confronted with similar issues or similar facts. CME v. Czech Republic (http://ita.law.uvic.ca/documents/CME-2003-Final_001.pdf)

International

• The term international is used to mark the difference between arbitrations which are purely national or domestic and those which in some way transcends national boundaries and so are international (Redfern & Hunter).

• 3 different approaches:

(i) nature of the dispute;

(ii) nationality of the parties;

(iii) 1985 - UNCITRAL Model Law on International Commercial Arbitration, with amendments as adopted in 2006.

International

Article 1(3) of UNCITRAL Model Law:

An arbitration is international if:(a) the parties to an arbitration agreement have, at the time of the

conclusion of that agreement, their places of business in different States; or

(b) one of the following places is situated outside the State in which the parties have their places of business:

(i) the place of arbitration is determined in, or pursuant to, the arbitration agreement;

(ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject-matter of the dispute is most closely connected; or

(c) the parties have expressly agreed that the subject-matter of the arbitration agreement relates to more than one country.

Commercial

In a footnote of Art. 1(1) of the UNCITRAL Model Law, it is stated that

The term “commercial” should be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature, whether contractual or not. Relationships of a commercial nature include, but are not limited to, the following transactions: any trade transaction for the supply or exchange of goods or services; distribution agreement; commercial representation or agency; factoring; leasing; construction of works; consulting; engineering; licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture and other forms of industrial or business cooperation; carriage of goods or passengers by air, sea, rail or road.

Commercial

The word commercial was considered by the High Court of Ontario in Re Carter and McLaughlin (1996) 27 OR (3rd) 792, OJ No 328, in a case involving two families regarding the sale of a domestic property.

The court held that this word should be given a broad interpretation so as to embrace matters arising from all relationships of a commercial nature and that the broad interpretation for the term commercial would mean inclusion of commercial relationships, irrespective of whether the parties are commercial parts or merchants under any given national law.

The same approach is applied in the U.S. (Prograph International Inc v Ralph Barhydt, 1998, XXIII Ybk Comm Arbn 901), in France (Zanzi v de Coninck, 1999, Rev Arb 260, Cour de cassation, Chambre civile no 1, 5 January 1999) and in India (Union of India v Leif Hoegh & Co., 1982, IX Ybk Comm Arbn 405).

Types of arbitration

• Ad Hoc: Where the parties decide to have their arbitration under the arbitration laws/rules of the place where the arbitral tribunal would sit and not under the rules of any arbitration institution then, their arbitration proceedings is said to be ad hoc.

• An institutional arbitration is one that is administered by a specialist arbitral institution (for instance, International Chamber of Commerce ICC - American Arbitration Association AAA - International Centre for Dispute Resolution ICDR – London Court of International Arbitration LCIA), under its own rules of arbitration.

Types of arbitration

• A distinct advantage of an ad hoc arbitration is that it may be shaped to meet the wishes of the parties and the facts of the particular dispute: in particular, where a State or State entity is involved and issues of public policy and sovereignty are likely to arise.

• Debate in Brazil about whether State entities could participate in arbitration. Case law favorable to such participation: see, Espolio Lage v Federal Union (Brazilian Supreme Court, Interlocutory Appeal 52.181-GB, reporting Justice Bilac Pinto, judged on 14 November 1973, Revista Trimestral de Jurisprudência, V. 68, 391); Copel v Energética Rio Pedrinho (Interlocutory Appeal 174.874-9, reporting Judge Fernando César Zeni, judged on 10 May 2005); and Compagágas v Consórcio Carioca-Passarelli (Civil Appeal 247.646-0, 7th Civil Chamber, reporting Judge Lauro Laertes de Oliveira, judged on 11 February 2004).

• The principal disadvantage of an ad hoc arbitration is that it depends for its full effectiveness on cooperation between the parties and their lawyers.

Types of arbitration

Institutional Arbitration

Advantages• Rules laid down by the established arbitral institutions.

• Arbitral institutions can act as an appointing authority.

• Trained staff to administer the arbitration.

• The institution itself reviews the arbitral tribunal’s award in draft form, before it is sent to the parties. Such a review, which is undertaken with particular attention to detail by the ICC, serves as a measure of “quality control”.

Disadvantages• It may be less expensive to conduct the arbitration ad hoc.

• The need to process certain steps in the arbitral proceedings through the machinery of an arbitral institution inevitably leads to delay in the proceedings.

Types of arbitration

Institutional arbitration clauses [Examples]

• ICC: All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.

• Hong Kong International Arbitration Centre HKIAC: Any dispute, controversy or claim arising out of or relating to this contract, including the validity, invalidity, breach or termination thereof, shall be settled by arbitration in Hong Kong under the Hong Kong International Arbitration Centre Administered Arbitration Rules in force when the Notice of Arbitration is submitted in accordance with these Rules.

• Chamber of Arbitration of Milan CAM: Any dispute arising out of or related to the present contract shall be settled by arbitration under the Rules of the Chamber of Arbitration of Milan (the Rules), by a sole arbitrator / three arbitrators **, appointed in accordance with the Rules.

Anatomy of the arbitration agreement

• The arbitration agreement can be drafted as a dispute resolution clause in the body of the main contract. This agreement is pre-dispute (clause compromissoire).

• The parties can equally enter into a submission agreement (compromise) when the dispute arises.

• In either case, the parties must agree on a valid arbitration agreement.

• Almost all international conventions and national laws and rules on international arbitration now recognize the efficacy of a pre-dispute arbitration clause embodied in a substantive contract.

Anatomy of the arbitration agreement

In writing

Article III of the New York Convention

1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

2. The term “agreement in writing” shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.

3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

Anatomy of the arbitration agreement

In writing: the notion of written agreement in light of the use of new media

• “[…] noting that the increased use of electronic communications improve the efficiency of commercial activities, enhances trade connections and allows new access opportunities for previously remote parties and markets, thus playing a fundamental role in promoting trade and economic development, both domestically and internationally” (2005 – United Nations Convention on the Use of Electronic Communications in International Contracts).

• “The requirement that an arbitration agreement be in writing is met by an electronic communication if the information contained therein is accessible so as to be useable for subsequent reference; “electronic communication” means any communication that the parties make by means of data messages; “data message” means information generated, sent, received or stored by electronic, magnetic, optical or similar means, including, but not limited to, electronic data interchange (EDI), electronic mail, telegram, telex or telecopy” (Article 7(4), Option I, of the UNCITRAL Model Law).

Anatomy of the arbitration agreement

Arbitrability

• No internationally accepted opinion as to what matters are arbitrable.

• Arbitrability relates to the issues in dispute and whether they are capable of settlement by arbitration. There are some disputes which, in the words of Article II(1) of the New York Convention, concern a subject matter which is not “capable of settlement by arbitration”.

• Matters which affect a third party are generally not capable of settlement by arbitration nor are disputes which involve the State imposing a sanction on one of the parties, such as criminal proceedings. For public policy reasons, national laws will regard certain matters as more suitable for settlement by the Courts than by a private system of dispute resolution.

Anatomy of the arbitration agreement

Arbitrability

• In the U.S., in Zimmerman v Continental Airlines Inc., 712 F.2d 55 (3rd Cir. 1983), the 3rd Circuit Court held that bankruptcy proceedings were not capable of settlement by arbitration.

• Patents, trade marks and copyright: whether or not a patent or trade mark should be granted is plainly a matter for the public authorities of the State concerned.

• Brazil: in favor of the arbitrability of agreements with consumers and adhesion contracts, Zamith v Pan 2007 Empreendimentos Imobiliários SA (2nd Civil Chamber of the State Court of Rio de Janeiro, Appeal No. 2009.001.53952, 23 September 2009) / Contra Soter da Silveira v Century de Investimentos Imobiliários (1st Civil Chamber of the State Court of Rio de Janeiro, Appeal No. 2009.001.28186, 30 June 2009): arbitration clauses provided in adhesion contracts involving consumers’ relations are null.

Anatomy of the arbitration agreement

Arbitrability

Antitrust claims: • in the U.S., in Mitsubishi, the Supreme Court affirmed that

allowing arbitration of disputes under the U.S. antitrust law would not violate the U.S. public policy, at least in a case of international commercial transaction (Mitsubishi Motors v Soler Chrysler-Plymouth, 473 U.S. 614, 105, S.Ct. 3346, 1985);

• In the EU, in the case Eco Swiss China Time Ltd. v Benetton International NV, the European Court of Justice seemed to admit the possibility that disputes about antitrust claims may be resolved by means of arbitration (Judgment of 1 June 1999, case C-126/97, European Court Reports 1999, I-3055);

• Italian courts have gradually accepted the opinion that antitrust claims are arbitrable (ex plurimis, Corte di Cassazione No. 7733, 1 August 1996, Giust Civ 1997, 1373). The same approach has been taken by Swiss courts (Tribunal Fédéral, 28 April 1992, ASA Bull. 1992, 368).

Anatomy of the arbitration agreement

Separability

• The arbitration clause in a contract is considered to be separate from the main contract of which it forms part and, as such, survives the termination of that contract

• The Court of Appeal of Bermuda, in Sojuznefteexport (SNE) v JOC Oil Ltd. - (1990) Ybk Comm Arbn 384-435, Court of Appeal of Bermuda, 7 July 1989 - stated that the effect of the doctrine of separability was that the invalidity of the main contract does not, in principle, entail the invalidity of the arbitral clause.

• In the Gosset case, the French Cour de Cassation (Cass. Civ. Lere, 7 May 1963 (Dalloz, 1963), 545) recognized the doctrine of separability as follows: “In international arbitration, the agreement to arbitrate, whether concluded separately or included in the contract to which it relates, is always save in exceptional circumstance […] completely autonomous in law, which excludes the possibility of it being affected by the possible invalidity of the main contract”.

Anatomy of the arbitration agreement

Separability

• The US Supreme Court has recognized the separability of the arbitration clause in Prima Paint Co v Flood Conklin Manufacturing Corp, 388 US 395 at 402 (1967), and, more recently, in Buckeye Check Cashing Inc v John Cardegna, 126 S.Ct. 1204 (2006).

• In China, the courts are also now regularly applying the principle in accordance with international practice (Article 19 of the Arbitration Law of the People’s Republic of China).

• In the Swiss case of Tobler – (1933) 59 Entscheindungen des Schweizerischen Bundesgerichts I 177 at 179 – the Swiss Federal Court stated that: “The nullity of the principal contract does not necessarily result in the nullity of the arbitration agreement, but only if he nullity grounds apply simultaneously to the principal contract and the arbitration agreement”.

Anatomy of the arbitration agreement

Separability

• Article 23.1 of the UNCITRAL Arbitration Rules (as revised in 2010) provides that:

an arbitration clause that forms part of a contract shall be treated as an agreement independent of the other terms of the contract.

• The same wording is contained in Article 16(1) of the UNCITRAL Model Law. This provision was considered by the High Court of Hong Kong in Fung Sang Trading Ltd v Kai Sun Sea Products & Food Co Ltd, (1992) XVII Ybk Comm Arbn 289. The court held that the doctrine of autonomy, as set out in this Article, extended to claims of initial invalidity of the contract.

Anatomy of the arbitration agreement

Separability

• Article 16(1) of the UNCITRAL Model Law contains also the principle of competence-competence. The difference between this principle and the principle of separability is made clear by Aron Broches (Commentary on the UNCITRAL Model Law, ICCAs International Handbook on Commercial Arbitration in Supplement 11 of January 1990, 74-5):

[…] separability. It must be carefully distinguished from competence-competence. While the latter recognizes the power of an arbitrator to rule, at least initially, on his own jurisdiction, separability of the arbitration clause is intended to have the effect that if an arbitrator who has been validly appointed and who stays within the limits of the jurisdiction conferred upon him by the arbitration clause concludes that the contract in which the arbitration clause is contained is invalid, he does not thereby lose his jurisdiction.

Anatomy of the arbitration agreement

Capacity

• Any natural or legal person who has the capacity to enter into a valid contract has the capacity to enter into an arbitration agreement.

• The rules governing capacity to contract vary from State to State. Generally, the capacity of the parties to enter into an agreement is usually determined by reference to the law of the place of residence of that party or its incorporation.

• New York Convention: at the beginning of the arbitral process, the requesting party may ask the competent court to stop the arbitration, on the basis that the arbitration agreement is void, inoperative, or incapable of being performed (Art.II(3)). At the end of the arbitral process, the requesting party may ask the competent court to refuse recognition and enforcement of the award, on the basis that one of the parties to the arbitration agreement is under some incapacity under the applicable law (Art. V(1)(a)).

Anatomy of the arbitration agreement

Capacity

• Natural persons & Corporations: the capacity of an individual to enter into a contract within the State of his place of domicile and residence will depend upon the law of that State. The capacity of a corporation to enter into a contract is governed primarily by its constitution and the law of its place of incorporation.

• States: the French Cour de cassation has refused to permit a

State entity to avoid the consequences of an arbitration agreement by relying on its own domestic law. In the Bec Frères case (1995 Rev. Arb.), the court held:The prohibition for a State to submit to arbitration is restricted to domestic contracts; consequently, this prohibition does not pertain to international public policy; in order to validate the arbitration clause contained in a contract, it is sufficient to determine the existence of an international agreement entered into for the needs and according to conditions which conform with the usages of international trade.

Pathological arbitration clauses

• In Mangistaumunaigaz Oil Production Association v United World Trade Inc (1995, 1 Lloyd’s Rep 617) the arbitration agreement stated: “Other terms:-FOB incoterms latest issue-Arbitration, if any, by ICC rules in London-English Law to apply”. The court held that the words “Arbitration, if any, by ICC rules in London” amounted to a valid and binding arbitration clause.

• In Danish firm v Egyptian firm (1989 XIV Ybk Comm Arbn 137) the arbitral tribunal held that an arbitration clause that provided for disputes to be resolved by: “the International Chamber of Commerce, Zurich, Switzerland, in accordance with the Swiss law of the Canton of Zurich” was valid even though there was no International Chamber of Commerce based in Zurich. The arbitral tribunal concluded that the reference must mean “arbitration in Zurich under the ICC Rules with Swiss/Zurich law applicable to the substance of the case”.

Pathological arbitration clauses

• A national court will not always rectify a pathological arbitration clause.

• In Nokia Maillefer SA v Mazzer (Ybk Comm Arbn XXI (1996) 687), the forum selection clause simply referred to “International Chamber of Commerce, Paris”. There was no reference to arbitration. The court stated that an arbitration clause can only be validly concluded where the common intention of the parties was to refer the dispute to arbitration, concluding that:

The jurisdiction of the International Chamber of Commerce in Paris cannot be deemed to be tantamount to the appointment of an arbitrator, as the word arbitrator or arbitration does not appear and the International Chamber of Commerce itself does not act as an arbitrator.

The court therefore concluded that the parties had not entered into a valid and binding arbitration agreement.

7 elements test

Seven basic elements that must be included in an arbitration clause:

• referral of the existing or future dispute to arbitration

• incorporation of rules governing the arbitration

• reference to the place of arbitration

• reference to the place of hearing

• choice of language

• preferred number of arbitrators

• reference to the substantive law of the agreement or contract

Language of the arbitration

• Where the parties are from different States having different languages, it is advisable to agree on the language(s) in which the arbitration proceedings would be conducted and if a translation of documents and proceedings would be necessary.

• It cannot be assumed that simply because the parties’ contract is

written in a particular language, or calls for the arbitral proceeding to be in a particular place, that the proceeding will be conducted in either the contract language or the language of the host country. In this respect, Article 16 of the ICC Arbitration Rules provides that:

In the absence of an agreement by the parties, the Arbitral Tribunal shall determine the language or languages of the arbitration, due regard being given to all relevant circumstances, including the language of the contract.

Language of the arbitration

• The entire arbitral proceedings can be conducted in more than one language and also the award can be rendered in different languages. It goes without saying that this kind of choice increases the costs of the proceedings.

• Sometimes, a contract is made in two languages, each to be of equal authenticity. In such cases, simultaneous translations at the hearing of the arbitration may be unavoidable although it slows down the proceedings and is not inexpensive.

• One of the major cases concerning this issue is Channel Tunnel Group Limited v Balfour Beatty Construction Limited [1993] 2 WLR 262: here the proceedings were conducted using English and French as official languages since both Eurotunnel and the contractors were partly French and partly English.

Language of the arbitration

Article 17 of the LCIA Arbitration Rules

17.1 The initial language of the arbitration shall be the language of the Arbitration Agreement, unless the parties have agreed in writing otherwise and providing always that a non-participating or defaulting party shall have no cause for complaint if communications to and from the Registrar and the arbitration proceedings are conducted in English.

17.2 In the event that the Arbitration Agreement is written in more than one language, the LCIA Court may, unless the Arbitration Agreement provides that the arbitration proceedings shall be conducted in more than one language, decide which of those languages shall be the initial language of the arbitration.

17.3 Upon the formation of the Arbitral Tribunal and unless the parties have agreed upon the language or languages of the arbitration, the Arbitration Tribunal shall decide upon the language(s) of the arbitration, after giving the parties an opportunity to make written comment and taking into account the initial language of the arbitration and any other matter it may consider appropriate in all the circumstances of the case.

17.4 If any document is expressed in a language other than the language(s) of the arbitration and no translation of such document is submitted by the party relying upon the document, the Arbitral Tribunal or (if the Arbitral Tribunal has not been formed) the LCIA Court may order that party to submit a translation in a form to be determined by the Arbitral Tribunal or the LCIA Court, as the case may be.

Production of documents in the proceedings

• There is no practice of automatic discovery in international commercial arbitration. The usual practice is to limit document production as much as possible to those documents that are strictly relevant to the issues in dispute and necessary for the proper resolution of those issues.

• This practice is reflected in the rules of the major arbitration institutions. For instance, pursuant to Article 20(4) of the UNCITRAL Arbitration Rules The statement of claim should, as far as possible, be accompanied by all documents and other evidence relied upon by the claimant, or contain references to them.

• Pursuant to Article 21(2) of the UNCITRAL Arbitration RulesThe statement of defence should, as far as possible, be accompanied by all documents and other evidence relied upon by the respondent, or contain references to them.

Avv. Niccolò Landi, LL.M.

Gianni, Origoni, Grippo & PartnersPiazza Belgioioso, 220121 Milan – Italy

Corso Vittorio Emanuele II, 8310128 Turin – Italy

E-mail: nlandi@gop.it