Local Court Intervention in International Arbitration

In June of 1985, the United Nations Commission on International Trade Law (UNCITRAL) approved the Model Law on International Commercial Arbitration. Since the approval of the Model Law, international arbitration as a means of dispute resolution has become increasingly more acceptable in all regions of the world. Middle Eastern and Latin American states have abandoned their reluctant positions in respect of the arbitral process and ratified the New York Convention on the recognition and enforcement of foreign arbitral awards as well as bilateral investment treaties, thereby compelling themselves to recognize and enforce international arbitration agreements and awards.

The adoption of the UNCITRAL Model law, has been carried out predominately by common law jurisdictions, and adopted as a frame of reference by several civil law jurisdictions. Hong Kong was one of the first common law jurisdictions to adopt the Model Law. In the Middle East, Bahrain, Egypt, Jordan, Iran and Oman have adopted the Model Law. In Canada, the UNCITRAL Model law has been adopted at the federal level, New Zealand has adopted the UNCITRAL Model Law for both domestic and international arbitrations, and in Africa, Nigeria and Zimbabwe have both implemented legislation shaped on the Model Law. The English Arbitration Act 1996 provided a comprehensive codification of the law governing international arbitration in England, modeled broadly on the UNCITRAL Model Law. Other countries that have adopted the Model Law include Kenya, India, Scotland, Australia, Singapore, Germany, Russia and Spain.

Traditionally, one of the main concerns with arbitrating a dispute is whether the tribunal can deal effectively with all of the issues that may arise without the need for interference from the local courts. In all of the above instances, new legislative developments have enhanced the enforceability of international arbitration agreements and awards, while confirming the extent of party autonomy and limiting the scope of national court intervention in the arbitral process. A hearing dealt with by an arbitral tribunal alone allows the natural process of arbitration to flow, and tends to be more efficient. The neutrality of the process, as the prime reason for choosing arbitration over litigation, may suffer if the involvement of the local court come becomes overarching. In addition, the confidentiality of a case is more subject to public scrutiny with continued referral to the courts and flexibility, informality, control, and procedural predictability all start to disintegrate with too much court interference. In short, an arbitration where the courts are used to interfere with (as opposed to support) the arbitral process is unlikely to give full effect to the parties’ intention or arbitral agreement.

UNCITRAL Model Law and Events of Court Intervention

It is important to note that even where the parties have agreed to resolve their dispute before an arbitral tribunal, they may nevertheless go to national courts for interim or conservatory relief. Unfortunately, while these measures are a regular part of arbitration meant to support the process, they have been used as a device for procedural delay. The provisions of the Model Law firmly state limitations imposed on court intervention by providing in Article 5 that “In matters governed by this Law, no court shall intervene except where so provided in this Law.” The main purpose of Article 5 is not to preclude court intervention altogether, but rather that the power to intervene is limited to certain circumstances. No arbitration is possible in a vacuum, and the support of the courts, and at times the intervention of the courts is a necessary and integral part of the arbitration system. In fact, no arbitration law or institutionalized arbitration rule in existence precludes court intervention altogether. Rather, the arbitral process is legitimized by the very enforcement role of the courts. This is the precise purpose of the existence of the New York Convention. Aside from the considerations of enforcement, it must also be noted that it is in the public interest that a certain standard of due process and justice be maintained, and accordingly, arbitral tribunals should not be given the right to do as they choose. Intervention by the courts, at the very least on the level of enforcement, ensures that the arbitral process and the award meet certain minimum standards of justice. (Broches A, “Commentary on the UNCITRAL Model Law on International Arbitration”, Kluwer Deventer 1990)

Two very important and related doctrines have been developed which impact on the integrity of the tribunal: competénce de la competence and separability. Article 16(1) of the Model Law adopts these principles. The doctrine of competénce de la competence promotes the inherent power of the arbitration panel to rule on its own jurisdiction. The arbitral tribunal’s competence to rule on its own jurisdiction, i.e. on the very foundation of its mandate and power, is, of course, subject to court control. Where the arbitral tribunal rules as a preliminary question that it has jurisdiction, Article 16(3) of the Model Law provides for instant court control in order to avoid unnecessary waste of money and time. Secondly, the doctrine of separability provides that an arbitration clause within a contract is distinct from the main contract, and therefore continues to be valid even if the main contract is void. The doctrine supports the intention of the parties and acts to keep the dispute within the tribunal by allowing it to rule on the validity of the main contract. (Mark Hunter & Alan Redfern, Law and Practice of International Commercial Arbitration 23 (2d ed. 1991).

The Model Law does envision court involvement in certain circumstances. These can be divided into two groups: A first group comprises matters related to the arbitrators themselves as well as setting aside an award. These include the appointment, challenge and termination of the mandate of an arbitrator (articles 11, 13 and 14), jurisdiction of the arbitral tribunal (article 16) and setting aside of the arbitral award (article 34). According to Article 6 these instances should be entrusted, for the sake of administration, specialization and efficiency, to a specially designated court or, as regards articles 11, 13 and 14, possibly to another authority (e.g. arbitral institution, chamber of commerce). A second group comprises matters related to discovery, security and enforcement. In these matters court assistance is sought in taking evidence (article 27), recognition of the arbitration agreement, including its compatibility with court-ordered interim measures of protection (articles 8 and 9), and recognition and enforcement of arbitral awards (articles 35 and 36). (Bernstein R., Tackaberry J. & Mariott A. “Handbook of Arbitration Practice 3rd ed.”, Sweet & Maxwell, London 1998).

In terms of the procedural application of court intervention during the arbitral process, essentially, the role of the court can be distinguished by three different periods of the arbitral process. At the commencement of the referral to arbitration, the courts could render powers of assistance, during the arbitration process the court would render powers of supervision and intervention, together with powers of assistance, and after the award is granted, the court would render powers of recognition and enforcement.

At the commencement of the arbitral process a party typically forwards a letter to the other party declaring a dispute, specifying the substance and the basis of dispute, specifying the order sought by the party making the referral, and requesting the other party to commence with the arbitral process by commencing with the appointment procedures agreed to by the parties in their arbitration agreement. It is at this stage that the court’s powers of assistance come to play, particularly if the parties have failed to adopt procedures that cover issues of appointment, location, choice of law, or if one of the parties refuses to accept the referral to arbitration. Alternatively, one of the parties may proceed straight to court without recourse to the provisions of the arbitration agreement, and the other party will thereafter have to request a stay of the proceedings until such time as the issues have been resolved through arbitration. In respect of such applications for the stay of legal proceedings in court, the Model Law allows a court very little discretion to reject such an application. The Model Law provides that the court shall refer the parties to arbitration unless the arbitration agreement is null and void, inoperative, or incapable of being performed. [Article 8(1), Model Law.] It must be noted that the Model Law gives no discretion to the presiding court as is evidenced by the use of the word “shall”.

One tactic that is often adopted by the reluctant party is stalling the procedure of appointing arbitrators by either refusing to co-operate in the arbitration process, refusing to make a choice, or by raising unreasonable objections to the arbitrators proposed by the other party. In the event of the parties being unable to reach a decision as to the appointment of the arbitrator or arbitrators, and in the event that they have failed to nominate an appointing authority to appoint such arbitrator(s), the parties will have to request a court to make such appointment. On the other hand, if the appointing authority makes the choice of an inappropriate arbitrator, then the parties must be able to object by way of a specified procedural challenge. By allowing such court intervention, the party that requests arbitration can at least secure the appointment of an arbitral tribunal and thereby commence with the process of arbitration, despite the stalling tactics employed by the other party.

Other assistance that may be required of the court, either prior to the commencement of the arbitral process, or during the proceedings, would be in the form of interlocutory orders, such as orders for discovery, security for costs, interim applications maintaining the status quo, orders for the inspection or production of evidence, and other applications of this nature. Article 27 of the Model Law provides the court the power to assist the tribunal in taking evidence. More particularly, subsection (2) (a) states that the registrar of the High Court or the clerk of a magistrate’s court in the area of jurisdiction in which the arbitration takes place may on the application of the arbitral tribunal or a party with the approval of the arbitral tribunal, issue a subpoena to compel the attendance of a witness before an arbitral tribunal to give evidence or to produce documents.

After an award has been granted by the tribunal, the courts have powers of enforcement in the event that one of the parties is reluctant to abide by the terms of award. The parties seeking to effect the award would then make an application to court in order to make the award an order of court. Failure to comply with the order, then has the effect of a contempt of court by the party in breach of the order. Furthermore, and under certain conditions to be later discussed in detail, the court may set aside the award or remit the award back to the arbitrators in order to rectify defects in the award. (Article 34 (2)-(5) of the Model Law.] (Mark Hunter & Alan Redfern, Law and Practice of International Commercial Arbitration 23 (2d ed. 1991).

Effect of Venue and Choice of Law

Important considerations in international arbitration are the venue and choice of law selected for the arbitration, as remedies from the local court will always play a significant role. If the transaction and/or related assets are in the arbitral host State, the host State will have increased jurisdiction over the arbitral process. In order for a court to apply interim measures, a court must have personal jurisdiction over a company against whom the court action or interim measure is sought. Unless the company is present in the territory of the court‟s jurisdiction or has submitted to the court‟s jurisdiction, this may present a problem. The venue and choice of law selected for arbitration can have either a positive or negative impact on the arbitral process. For instance, in order for a court to be able to rule on a party‟s request for an interim security measure, the property which is the subject of the search order or freezing injunction must also lie within the court‟s jurisdiction. At the same time, by selecting the venue and law for the arbitration in the same location as the transaction could have negative impacts. (Mark Kantor, “Local Court Intervention in International Arbitration”, Oil & Gal Law Intelligence, Volume 1, Issue 2 March 2003)

In cases wherein local laws govern a transaction, the risk of changes in local law and broader local interpretations of force majeure protections are inherent. In addition, if the contracting party has been organized under the local law, the argument of the strength of the jurisdiction of the local courts over the claimants is strengthened. The same laws that govern the establishment of the entity, including regulatory, tax, environmental, health & safety and other prudential requirements can also be utilized by the host State to assert mandatory jurisdiction over related disputes. Furthermore, selecting the host State as the seat of the arbitral proceedings further strengthens these claims. The international treaty governing enforcement of international arbitration awards recognizes the ability of a local court to set aside or suspend an arbitration award that was made “in,” or “under the law of,” that country. (Mark Kantor, “Local Court Intervention in International Arbitration”, Oil & Gal Law Intelligence, Volume 1, Issue 2 March 2003)

Case Studies

Unfortunately, there is no shortage of specific instances of abuse of court intervention in international arbitration. Rulings by local courts in various jurisdictions from Indonesia and India, to the Middle East, and even to western states including Canada and South Africa demonstrate the limits of arbitration. In such circumstances, parties and government agencies have employed local court orders to delay or block international arbitration proceedings in favor of judicial review of claims ranging from the validity of the contracts to arguments of public policy, force majeure, fraud and corruption.

Indonesia

In Indonesia, the state-owned electric company PT Perusahaan Listruik Negara (PLN), entered into Energy Sales Contracts (ESCs) with two project companies, which were established as subsidiaries of MidAmerican Energy Holdings (formerly CalEnergy), the primary foreign sponsor of these projects. MidAmerican‟s two project companies were Himpurna California Energy Ltd. (Himpurna) and Patuha Power Ltd. (Patuha). Under the Himpurna ESC, Himpurna agreed to develop a multi-unit power project at Dieng geothermal field in Java. PLN, in turn, committed to pay a tariff for available electricity from the project for a period of thirty years. Similarly, Patuha agreed under its ESC to develop a generating facility at the Patuha geothermal field, also in Java, with PLN again agreeing to pay a tariff for available electricity from the project. In 1997, the Indonesian economy collapsed under the impact of the Asian financial crisis and, shortly thereafter, in early 1998, the Suharto regime, which ruled Indonesia for decades, also crumbled under the weight of this economic instability. Faced with huge exchange rate fluctuations as a result of the crisis, PLN considered its obligations to purchase power from projects like Himpurna and Patuha impossible to perform. Himpurna and Patuha initiated arbitration proceedings against PLN, claiming breach of the ESC contracts. PLN argued that the contracts were not breached but only “suspended as a result of non- discriminatory governmental measures taken in response to unprecedented economic adversity.” The arbitration was conducted under the UNCITRAL Arbitration rules and, on May 4, 1999, the three-member panel awarded $391 million in damages to Himpurna and $180 million to Patuha.

PLN argued (1) that the project companies failed to satisfy the contractual requirements in the ESC to engage in good faith settlement negotiations prior to initiating arbitration; (2) that Indonesian law prevented an arbitral tribunal from ruling on a claim for termination of a contract but instead that only a judge could order such termination; (3) that decrees of the government of Indonesia in 1998 suspending the projects excused PLN from breach; and (4) that the doctrines of changed circumstances, force majeure, and good faith excused non-performance by PLN. These arguments were rejected by the tribunal and PLN was required to pay the arbitral awards to the project companies but failed to do so. Consequently, Himpurna and Patuha filed a second arbitration against the government of Indonesia on June 6, 1999, to enforce the guarantees that the government provided. PLN retaliated against these actions by filing a motion to vacate the arbitration award in civil court in Jakarta. The project companies unsuccessfully motioned to dismiss and the civil court refused to enforce the award. As a result, PLN was successful in obtaining an injunction suspending execution of the awards in civil court.

With this injunction in hand, the Indonesian government refused to participate in the second arbitration initiated by the project parties scheduled to take place in The Hague, Netherlands. The Indonesian government also filed suit in The Hague to block the tribunal from going forward with the arbitration. That request was denied and the hearings took place. The arbitral panel subsequently issued an award stating that the Indonesian government, as a result of its guarantee in the project agreements, was obliged to pay the awards that were issued in the first arbitration. (Mark Kantor, International Project Finance and Arbitration with Public Sector Entities: When is Arbitrability a Fiction? 24 Fordham Int’l L.J. 1122, 1125 (2001).

United Arab Emirates

Use of courts to delay proceedings is a common tactic used by parties and despite a positive outcome, such actions, while permissible, can delay arbitration hearing in excess of two years. In the United Arab Emirates, a petitioner filed an interlocutory claim with Court of First Instance in Dubai requesting that the Court appoint an auditor to audit the accounts of the company it had formed with the respondent. The request was made to the court despite the fact that the parties had agreed to refer any disputes arising from their contract to arbitration. The court of first instance declared that it had no jurisdiction to review the case in light of the contract’s arbitration clause. The petitioner then appealed to the Dubai Court of Appeal. The Court of Appeal rejected the petitioner’s appeal and upheld the lower court’s judgment. The petitioner then appealed to the Court of Cassation arguing that the law had been misapplied in that the parties’ agreement limited arbitration to disputes arising from the agreement, not to the appointment of an auditor. The Court of Cassation disagreed, referring to Article 203 of the UAE Law of Civil Procedures. The court ruled that the appointment of an auditor fell within the scope of a dispute arising from the joint agreement, which must be settled through arbitration and conducted in accordance with the rules of the International Chamber of Commerce. The court also rejected the petitioner’s argument that the appointment of an auditor is a summary matter. Accordingly, the petitioner’s appeal was rejected.

South Africa

In South Africa the South African Arbitration Act allows a wide and discretionary power of intervention to the South African judiciary. Essentially, South African courts are entitled to intervene in arbitral proceedings on application by one of the parties, and may even set-aside an agreement referring a dispute to arbitration, on “good cause shown”, and have certainly not shown themselves reluctant to do so. [Section 3 (2) of Act 42 of 1965.] Alternatively, a court can refuse to refer the matter to arbitration if there are sufficient reasons to do so.

South African courts have on many occasions in the past exercised their discretion in favour of refusing to refer matters to arbitration and in favour of setting aside agreements. In the past, „good cause shown‟ has been applied in situations where legal issues were central to the dispute between the parties, to situations where joinder against second defendant or plaintiffs were appropriate, and generally, where it could be shown that any of the parties to the dispute would be inconvenienced or prejudiced by a referral to arbitration. Furthermore, it is submitted that South African arbitral tribunals do not have the jurisdiction to adjudicate issues directly relating to their own jurisdiction, or to the initial invalidity of the arbitration agreement, or the main agreement to which the arbitration agreement is related. Whilst in most international jurisdictions the issue of competence-competence is liberally applied in order to give jurisdiction and confirm jurisdiction to arbitral tribunals, this is not the case in South Africa. Furthermore, the Act also provides that the courts are not obliged to enforce referrals to arbitration tribunals, if either of the parties can show that sufficient reasons exist as to why the matter should not be referred to arbitration. Problems have arisen in respect of the interpretation of such “sufficient reason”, and the courts have often imposed interpretations which were unnecessarily wide, in order to secure the court’s jurisdiction to preside over the dispute in question. Courts are generally overzealous in guarding the ambit of their jurisdiction, and often display a hostile attitude towards all attempts to circumscribe or limit their jurisdiction to intervene in matters with a connection to their legal system, or concerning their citizens. (Butler DW, “South African Arbitration Legislation – the Need for
Reform” 1994).

Canada

In the matter of Deco Automotive Inc. v. G.P.A. Gesellschaft Fur Pressenautomation MbH, Deco, after having agreed to arbitrate any disputes before the International Chamber of Commerce (ICC), subsequently challenged the jurisdiction of the ICC by claiming that the agreement had involved fraud by GPA. Deco then commenced proceedings in Ontario against GPA. GPA responded with a motion to stay the proceedings in Ontario. The basis of the motion was that the parties had agreed to arbitrate any differences in their original contract and that there was arbitration at that time pending before the ICC; and secondly, that Ontario was not the convenient forum to try the dispute. The judge concluded that the subject matter of the action commenced by Deco which included damages for misrepresentation (fraudulent or otherwise), breach of contract, inherently defective equipment and negligent performance of contract were not covered by an arbitration clause. Despite the fact that the ICC arbitrator was already dealing with the jurisdictional issue, the Court refused to wait for its decision, holding that art. 16 of the Model Arbitration Law (MAL) did not apply. This conclusion was based on the territorial limitation in art. 1(2), and the fact that art. 5 and art. 16 are not listed as exceptions to this territorial limitation. Since the ICC arbitration was taking place in London, England, the Ontario court concluded that the question of the stay was to be decided solely in accordance with the common law and not according to principles expressed in the MAL. Since the Court concluded that there was no agreement to arbitrate included in the agreement between the parties, the judge refused to order a stay of proceedings despite the existence of the arbitral proceedings at the ICC (UNITED NATIONS Document: “General Assembly: Distr. GENERAL: A/CN.9/SER.C/ABSTRACTS/34: of, 12 June 2001.)

Conclusion

Parties may deplore the intervention of local courts, but, as described in this article, such courts are employing widely supported legal doctrines as a basis for their interventions. While careful decisions about the terms of transactional agreements may reduce the force of the legal arguments, the presence within the host State of the parties‟ assets or project facilities assures that local court intervention in arbitration cannot be completely neutralized.

In order for a party to protect itself against local court intervention in an international arbitration, certain measures can be taken. First, and most importantly, significant recoverable assets must exist outside the host State. Second, the arbitrators must be protected against the impact of local court orders by sitting in a neutral location and residing in countries other than the host State. It is therefore, preferable to select a country other than the host State as the seat of the arbitration, in order to limit the impact of a local court intervention and any decision annulling the final arbitration award when that award is to be enforced in the courts of other countries.

Last but not least, It is important for arbitral systems to attempt to establish a harmonious balance between the independence of the arbitral process and the jurisdictions of national courts over the arbitral process. Despite the desire to achieve autonomy over the arbitral process, arbitrators are aware of the limitations of arbitral tribunals, more particularly, in that they have no coercive powers. A healthy co-existence between the national courts and arbitral tribunals is necessary to promote speed, cost efficiency, due process, and considerations of equity.

About the author:

Ashraf El Motei heads the dispute resolution practice at Motei & Associates, a Dubai based law firm since 2002. Ashraf specializes in commercial and corporate disputes before local courts and international arbitration centers. He is a listed arbitrator at DIAC and registered practitioner before DIFC Courts. For further info on the article, please contact the author at: a.motei@motei.com