ABOUT TDM
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Solutions offered by transnational rules in case of interference by the courts of the seat[1]
Constantine Partasides, Freshfields, Paris
Introduction
There exists a growing corpus of arbitral case law that witnesses arbitral tribunals continuing with their proceedings and rendering awards notwithstanding injunctions issued by the courts of the place of arbitration enjoining their proceedings. These cases make for provocative reading. On the theoretical level, they raise fundamental questions as to the legal basis of an international arbitration. On the practical level, they often involve arbitral tribunals using great ingenuity to push their autonomy to the limit.
This note is divided into two parts. First, we describe two recent cases in which, in varying circumstances, Tribunals disregarded injunctions enjoining their proceedings at the place of arbitration, and the methods they used to do so. Secondly, we make some observations as to when it might be appropriate - and inappropriate - for tribunals to make use of such methods.
two recent cases
The two cases that we discuss share some common features. They both involved claims brought by foreign investors against state or municipal authorities. They both had their seats in the state party’s own jurisdiction. And they both involved the local courts imposing injunctions enjoining the arbitrations from proceeding. Finally, in both cases the Arbitral Tribunal chose to ignore the injunction, continued their proceedings and, ultimately, rendered awards.
One of the awards has already been published, and the other is about to be.
Himpurna California Energy Ltd v The Republic of Indonesia[2]
The circumstances of this arbitration are well known. The dispute originally arose from an Energy Sales Contract (ESC) by which CalEnergy was to develop and exploit geothermal resources in Indonesia and sell the resulting energy to PLN, the Indonesian State Electricity Corporation. The ESC was priced in dollars. In the wake of the South East Asian financial crisis of the late 1990s, and the collapse of the Indonesian Rupiah, PLN defaulted on its payment obligations under the ESC. Pursuant to an UNCITRAL arbitration clause in the ESC, CalEnergy brought arbitral proceedings and obtained an award in its favour.
Following PLN’s failure to make payment pursuant to the award rendered against it, CalEnergy commenced further arbitral proceedings against the Republic of Indonesia itself under letters of comfort issued by the Minister of Finance as security for PLN’s obligations under the ESC. It is the subsequent arbitrations that give rise to the circumstances that are relevant to my subject today.
These were also UNCITRAL proceedings, and the seats were Jakarta.
Following the commencement of proceedings, the national oil company of Indonesia, Pertamina, which although a party to the original ESC had not been a party to the PLN arbitration and was not a party to the Republic of Indonesia arbitration, applied to the Central Court of Jakarta seeking an injunction suspending the arbitral proceedings on grounds that were less than entirely clear. To paraphrase, Pertamina alleged that its rights as a third party would be affected by the arbitration.
The Jakarta court duly issued an injunction, which in many respects was anomalous. First, Pertamina had questionable locus standi to bring an application in respect of arbitral proceedings in which it was not involved. Secondly, Pertamina named the Republic of Indonesia as a defendant in those domestic proceedings even though, as a matter of fact, the President of Indonesia appoints and dismisses its board and managing directors and, as a matter of law, one of the stipulated grounds for dismissing a managing director was that he or she was acting in a manner “inconsistent with the interests of the government”. Thirdly, the Indonesian court injunction imposed a monetary sanction for breach that was priced in US dollars, specifically US$ 1 million per day that the arbitration proceeded.
For reasons that we describe below, the Arbitral Tribunal declined to suspend the arbitration, and convened witness hearings in The Hague. Following a failed attempt to obtain an injunction suspending the proceedings in the Netherlands, agents of the Republic of Indonesia intercepted one of the three arbitrators, an Indonesian national, at Schipol airport on the eve of the witness hearing in The Hague. In circumstances that are described at length in the Final Award rendered by the Tribunal in those arbitrations, and which leave no doubt that the arbitrator was in no position to resist the pressures being brought to bear upon him, he was accompanied back to Jakarta. In the face of these events, the Arbitral Tribunal proceeded in truncated form to render final awards against the Republic of Indonesia.
The basis upon which the two remaining arbitrators were able to proceed in truncated form to issue an award would itself make for an interesting note. However, we consider here the ways in which the Arbitral Tribunal was able to continue its proceedings notwithstanding the injunctions imposed by the courts at the place of arbitration.
As a practical matter, the Tribunal was able to move the location of the witness hearing to The Hague, without changing the seat of the arbitration, pursuant to Article 16(1) of the UNCITRAL rules. The theoretical grounds upon which the Arbitral Tribunal declined to suspend its proceedings are, however, more interesting. They included the following.
Ground 1 – Article 28 of the UNCITRAL rules allows a tribunal to proceed with an arbitration notwithstanding one party’s default whenever the defaulting party has failed to show “sufficient cause” for its default. In this regard, the Arbitral Tribunal found that the Indonesian injunction did not constitute “sufficient cause” because (1) it was sought and obtained by a state agency that was under the de jure control of Government of Indonesia, and (2) the Government of Indonesia had de facto made no attempt to rein in those actions that were inconsistent with its obligations under the parties’ arbitration agreement.
Ground 2 – As its starting point, the arbitral tribunal held that the very existence of an arbitration agreement, and the involvement of a state party, entitled the Tribunal to apply international law. As a matter of international law, the actions of the Indonesian Courts were attributable to the Republic of Indonesia. In Benteler v Belgium[3] an international Tribunal had held that “a state which has signed an arbitration clause or agreement would be acting contrary to international public policy if it subsequently relied on the incompatibility of such an obligation with its internal legal system”. The Arbitral Tribunal held that no distinction should be drawn between a legislative enactment and a court injunction, and that it would constitute "a denial of justice for the courts of a State to prevent a foreign party from pursuing its remedies before a forum to the authority of which the State consented".. In this regard, it relied on the writings of Judge Jiménez de Aréchaga, a former president of the International Court of Justice, who noted that:
“…the judgement given by a judicial authority emanates from an organ of the State in just the same way as a law promulgated by the legislature or a decision taken by the executive”.[4]
Ground 3 – An international arbitral tribunal is not “unconditionally subject” to the jurisdiction of the courts at the seat of the arbitration. Specifically, the “adjudicatory authority” of an international tribunal “does not emanate from a discrete sovereign but rather from an international order”.
Ground 4 – The legal basis for the injunctions rendered by the Indonesian courts was at best unclear. Moreover, and in any event, the Arbitral Tribunal found that there was a lack of proof that the injunction even purported to constrain the Tribunal itself as it appeared to be directed at the parties to the arbitration alone.
ICC Case No. 10623
The second case we discuss was somewhat less dramatic, although it raises issues of similar importance. This was an arbitration between a European construction company and an Ethiopian municipal authority. It related to an infrastructure project to be undertaken in Addis Ababa. It arose under a FIDIC contract that, in the normal way, comprised a number of the FIDIC “general conditions”, which were supplemented by “special conditions” specifically negotiated by the parties.
Confusingly, one of the FIDIC general conditions that was adopted was a standard ICC arbitration clause providing for ICC arbitration in Addis Ababa, while one of the parties’ special conditions was a separate arbitration clause that provided for arbitration in Addis Ababa pursuant to the Civil Code of Ethiopia.
Here is where the problem lay.
When a dispute arose between the parties, and the European contractor commenced ICC proceedings, the Ethiopian municipal authority raised jurisdictional objections. It argued that, in specifically negotiating an arbitration agreement that did not make reference to the ICC in their “special conditions”, the parties had evinced a clear intention not to refer disputes to ICC arbitration.
Events unfolded as follows.
The Tribunal ordered the parties to exchange briefs on the jurisdiction issue and on the merits. Prior to a decision on jurisdiction, a hearing on the merits – including the appearance of a number of witnesses resident in Ethiopia - was scheduled in Paris, even though the seat of the arbitration, pursuant to both arbitration clauses, was Addis Abbaba. In holding the hearing on the merits in a place other than the seat of the arbitration, the Tribunal relied on Article 14(2) of the ICC Rules that allowed it to conduct hearings at any location it considered “appropriate” (a provision that had been restated in the parties’ Terms of Reference).
The Ethiopian party was outraged, and, without prejudice to its jurisdictional objection, applied to the ICC Court to remove the arbitrators claiming that in having regard to its own convenience, and that of the Claimant alone, the Tribunal’s decision to hold hearings outside of Ethiopia gave the Respondent reason to doubt the Tribunal’s impartiality. This application was rejected by the ICC Court. Following this, and pursuant to the Ethiopian arbitration code, the Ethiopian party applied to the Ethiopian Courts to remove the arbitrators. Pending its decision on the challenge, the Ethiopian Supreme Court issued an injunction enjoining the proceedings.
In an interim award in which it simultaneously found that it did have jurisdiction over the parties’ dispute, the ICC Tribunal found that it also had the discretion - indeed the duty - not to comply with the Ethiopian Supreme Court’s injunction.
How was the Tribunal able to reach this decision?
As a practical matter, the arbitrators were personally insulated from the effects of the injunction. As a result of the Tribunal’s procedural ruling that formed the subject matter of the Ethiopian allegation of partiality, the hearing took place outside of Ethiopia. Moreover, unlike in Himpurna, none of the three arbitrators were Ethiopian nationals.
The theoretical basis of their decision was, once again, more interesting. There was no question of the Arbitral Tribunal changing the juridical seat of the arbitration. How then did the Tribunal justify ignoring the orders of the courts that had supervisory jurisdiction over the arbitration? At least four grounds were given, many of which are similar to – if not the same as – the grounds relied on by the UNCITRAL Tribunal in the Republic of Indonesia arbitrations.
Ground one - the Tribunal noted that it was not an organ of state, but a creature of contract. As a result, it held that its primary duty was to the parties to ensure that their agreement to arbitrate was not frustrated.
Ground two - the Tribunal found that an agreement to submit disputes to international arbitration “is not anchored exclusively in the legal order of the seat … [rather it is] validated by a range of international sources and norms extending beyond the domestic seat.” As to what these international sources were, the Tribunal referred in particular to the New York Convention, which it suggested “embodied principles of general [recognition]”.
Ground three - the Tribunal held that although Article 35 of the ICC Rules imposes a duty on tribunals to “ensure” that their awards are “enforceable at law”, and that in this case the likely place of enforcement was Ethiopia, this did not mean that an Arbitral Tribunal “should simply abdicate to the courts of the seat the tribunal’s own judgement about what is fair and right… In the event that the arbitral tribunal considers that to follow a decision of a court would conflict fundamentally with the tribunal’s understanding of its duty to the parties, derived from the parties’ arbitration agreement, the tribunal must follow its own judgment, even if that requires non-compliance with a court order”.
Ground four - the Tribunal concluded that to comply with the injunction would lead to a denial of justice. Specifically, it held that, in the same way that a state can not rely on changes in its own laws to justify breach of contract, a state entity cannot resort to the State’s courts to frustrate an arbitration agreement.
Observations
These awards provide strident examples of how international arbitral tribunals can take steps to protect their own proceedings. In doing so, tribunals are not only empowered by the major sets of institutional and ad hoc rules, but also it seems by international law.
The common legal basis upon which the two tribunals found themselves able to disregard the orders of the courts of the place of arbitration can be summarised as follows:
· Principle 1 - international arbitral tribunals are not unconditionally subject to the jurisdiction of the courts of the seat of the arbitration. In the words of the Republic of Indonesia tribunal, the jurisdiction of an international tribunal “does not emanate from a discrete sovereign”, but rather from “an international order”. In the words of the ICC Tribunal, as an arbitral tribunal is not an organ of the state but a creature of contract, its “primary duty” is to the parties to ensure that their agreement to arbitrate is not frustrated; and
· Principle 2 - as a matter of international law, judicial acts are imputable to the state in the same way as legislative acts and, therefore, cannot be relied upon by a state party to an arbitration to justify its non-performance of an agreement to arbitrate.
As broad statements of principle, these rules provide commendable starting points. But are they complete? To answer this question, let us consider some problem areas; both theoretical and practical.
On the theoretical level, ignoring orders of the courts of the place of arbitration on grounds of enforcing the arbitration agreement might invite the charge of selectivity.[5] If the parties’ arbitration agreement provides for arbitration in country X, then they have agreed (1) to resolve their disputes by arbitration, and (2) to do so under the supervisory jurisdiction of the courts of country X. Why should a tribunal only enforce the first half of the parties’ agreement to arbitrate, and ignore the second?
Moreover, if one’s starting point is the arbitration agreement itself, why should the parties’ agreement to arbitrate in country X - thereby under the supervisory jurisdiction of the courts of country X - be ignored just because one of the parties to that agreement is a state corporation of country X?
To illustrate the point, let us take an extreme example. Let us imagine that in an ad hoc arbitration involving a state agency of country X, that has its seat in country X, evidence comes to light that the sole arbitrator is a non-executive director of the parent company of the non-state party - a fact that he has failed to disclose. Pursuant to the applicable ad hoc arbitration rules, the sole arbitrator himself hears the challenge against him, and rejects it. Pursuant to the applicable arbitration law of country X, the courts of country X have jurisdiction to review the challenge to the arbitrator. Are we seriously suggesting that the state party cannot make an application to remove the arbitration to the courts of country X, pursuant to the law of country X, simply because it is a state corporation?
On a less theoretical level, would an arbitral tribunal reach the same strident conclusion that it “must follow its own judgement” of what is “fair and right”, and ignore the orders of the court of the seat, if the court in question happened to be the Cour d’appel de Paris or the High Court in London, or the Swiss Federal Tribunal?
The problem with the two principles identified above is that they proceed from the starting point that interventions by national courts are inevitably nefarious, and the conduct of arbitrators is always above reproach. But what if the situation were reversed? While the rules that we create may be intended to insulate tribunals from the unreasonable interference of the judicial organs of a party to the arbitration, they may also provide refuge to runaway tribunals seeking to elude the reasonable interventions of a responsible supervisory court.
There are no easy solutions to this conundrum. The least one can say, however, is that the problem must be approached with caution. For the purposes of discussion, we propose three principles.
Principle 1 developed - enforcing the arbitration agreement must also involve recognising the supervisory jurisdiction chosen (perhaps unwisely) by the parties. However, agreeing that the courts of country X have supervisory jurisdiction over an arbitration is not the same as agreeing that the courts of country X can frustrate an agreement to arbitrate.
Principle 2 developed - the fact that one of the parties to an arbitration agreement is a state agency of country X does not vacate, or invalidate, the parties’ agreement that the courts of country X have supervisory jurisdiction. What it does mean, however, is that the state party to the arbitration agreement cannot seek orders from its courts that are inconsistent with a valid agreement to arbitrate. There is nothing unfair or unjust about this. From the state agency’s perspective, just as arbitrating in its own jurisdiction offers certain advantages, it must also involve certain limitations.
Principle 3 - In determining whether the act of a judicial organ of a state frustrates, or is inconsistent with, an agreement to arbitrate, an arbitral tribunal must evaluate the act in question, including
· the identity of the applicant;
· the legal basis of the application;
· the grounds relied on by the court in reaching its decision;
· the effect of the court order on the arbitration; and
· more generally the circumstances in which the order was obtained.
In effect, this is precisely what the UNCITRAL Tribunal did in Himpurna v. Republic of Indonesia. Given that the injunction was obtained by a non-party to the arbitration, that was under the de jure control of the state party, which based its application on grounds that were less than clear, and obtained an injunction that was in many respects anomalous, the Tribunal determined that it was inconsistent with the parties’ agreement to arbitrate - even though they agreed to arbitrate in Indonesia.
Thus, transnational rules do appear to allow a tribunal to evaluate the court order in question, its legal basis, and the circumstances in which it was rendered, to determine whether it frustrates the parties’ agreement to arbitrate and therefore should be overcome. However, they should not, and in my opinion do not, allow an arbitral tribunal to ignore an anti-arbitration injunction by the courts of the place of arbitration as a matter of principle.
To conclude, it may be possible – or even necessary - to ignore a court order in the name of international justice. But as arbitrators look down from the heights of the international legal firmament upon national courts dispensing domestic justice, they would do well to remember this: although international arbitration performs an important function, like any mature jurisdiction it has its limits. Far from being a self-sufficient mechanism, it is ultimately dependent, in one way or another, on national courts to enforce the agreement upon which it is based, and the awards in which it results.
[1] This note is based on a paper Constantine delivered to the Young Arbitration Practitioner's forum in Paris in March 2003.
[2] Extracts of the Interim Award dated 26 September 1999 and the Final Award dated 16 October 1999 are printed in the ICCA Yearbook of Commercial Arbitration (Vol XXV-2000), pages 109-215. Constantine was administrative secretary to the Tribunal in those proceedings.
[3] 8 European Commercial Case (1985) 101
[4] Eduardo Jiménez de Aréchaga “International law in the past third of the century: recueil des cours I – 1978”, page 278
[5] Indeed, it already has. See Roy Goode, "The Role of the Lex Loci Arbitri in International Commercial Arbitration", Arbitration International (Vol. 17 No.1, 2001), page 19 et seq.
