• It is the spirit and not the form of law that keeps justice alive.
    Earl Warren

THE FUTURE OF ARBITRATION AND LITIGATION IN EUROPE

International arbitration is growing in commercial practice and London is a significant player. However, London’s central role for resolving international disputes through arbitration may be diminishing and all of Europe may soon follow suit. This article will assess the possibilities that as a result of the decision of the European Court of Justice in Allianz SpA v. West Tankers Inc and the decision of the English Court of Appeal in National Navigation Co v. Endesa Generaction SA , international arbitration may be replaced by cross-border litigation or alternatively, the centers of arbitration may shift from Europe to venues more appealing for commercial practitioners.

In West Tankers, the vessel owned by West Tanker and chartered by Erg Per collided in Syracuse, Italy with a jetty owned by Erg, causing damage. Erg claimed compensation from its insurers Allianz and Generali up to the limit of its insurance cover and initiated arbitration proceedings in London against West Tankers for the excess amount. Allianz and Generali, having paid Erg compensation under the insurance policies and therefore acting as subrogated insurers, brought legal proceedings against West Tankers in Italy to which West Tankers opposed for want of jurisdiction, given the existence of an arbitration agreement. In return, West Tankers applied to the English courts to issue an anti-suit injunction restraining the insurers from continuing the Italian proceedings by raising the argument that the dispute arose out of the charterparty and that the insurers were bound by the arbitration clause the charterparty incorporated.

The question referred to the ECJ in West Tankers was whether it is consistent with EC Regulation 44/2001 for a court of a Regulation state to make an order to restrain a person from commencing or continuing proceedings in another Regulation state on the ground that such proceedings are in breach of an arbitration agreement. The ECJ held that to determine whether a dispute falls within the scope of the Regulation, reference must be made solely to the subject matter of the proceedings, that the exclusion provided in Article 1(2)(d) of the Regulation applies to legal proceedings the subject matter of which is arbitration and that arbitration is the subject matter of proceedings where they serve to protect the right to determine the dispute by arbitration. In short, the ECJ held that proceedings to enforce/preserve arbitration, such as proceedings for anti-suit injunctions, are outside the scope of the Regulation because they have the “right to arbitrate” as their subject matter. However, the ECJ also held that even though proceedings (anti-suit injunctions) do not come within the Regulation’s scope, they may have consequences which undermine the effectiveness of the Regulation (the so-called “effet utile”). Therefore, the ECJ went on to see whether the proceeding, which the anti-suit injunction was trying to restrain, was itself within the scope of the Regulation. Since the Italian proceedings involved damages, Article 5(3) of the Regulation was invoked, which clearly meant that the Italian proceedings were within the Regulation’s scope. As such, the ECJ reached a vital conclusion of great consequence: because the Italian proceedings were within the Regulation’s scope, a “preliminary issue” concerning the applicability of an arbitration agreement, including in particular its validity, also came within the Regulation’s scope. By relying on the dictum of Erich Gasser , i.e. that every court seized must itself determine whether it has jurisdiction, the ECJ held that anti-suit injunctions are incompatible with the Regulation.

West Tankers may greatly affect the future of arbitration in Europe, particularly in London, in two ways. First, the decision unequivocally ruled out the possibility of English courts’ issuing anti-suit injunctions against those who have brought proceedings in another Regulation state, even if such injunctions aim to protect the parties’ common will to arbitrate their disputes. Second, the decision clearly enables the courts of a Regulation state, which was not endowed jurisdiction by the parties, to exercise jurisdiction by being able to rule that an arbitration agreement is invalid.

The decision of the Court of Appeal in Endesa epitomizes the application of the second pillar of West Tankers. In Endesa, the vessel Wadi Sudr failed to discharge its cargo in breach of a bill of lading. Endesa (the cargo owner) brought proceedings in Spain for damages despite a London arbitration clause in the bill of lading. Applying Spanish Law, the Spanish court held that the arbitration clause was not incorporated into the bill of lading. NNC (the ship-owner) thus applied to the English court seeking a declaration that the clause was in fact incorporated. The ability of the English court to hear the case depended heavily on whether it was bound to recognize the Spanish judgment as a Regulation judgment which in return begged the question whether the Spanish judgment fell within the arbitration exception of the Regulation. The Court of Appeal, by applying West Tankers, held that inasmuch as the Spanish judgment concerned the validity of an arbitration clause, the validity of the arbitration clause was ancillary to the proceedings whose substance, namely the liability of NNC, was clearly within the Regulation. The Court of Appeal ruled that proceedings are to be characterized as a whole and that whether they fall within or outside the Regulation depends on the essential nature of the substantive dispute and the rights which the proceedings are brought to protect. Since the Spanish judgment, which incorporated a ruling on the validity of a London arbitration clause, also involved a substantive claim, the judgment fell within the Regulation’s scope. Hence, the English court could not intervene.

The combined effect of West Tankers and Endesa is that a potential claimant’s leverage in arbitration is weakened. This is because the insidious defendant in a potential arbitration is able to launch a tactical pre-emptive strike (typically by applying for a declaration of non-liability) in a Regulation state and the claimant cannot restrain them from doing so, now that the claimant’s anti-suit weapon has been disallowed. That an anti-suit injunction is no longer allowed within the Brussels regime is a colossal blow against London since the presence of such injunctions has long been a major reason for the selection of London as the seat of arbitration. Perhaps more importantly, West Tankers and Endesa will diminish the attractiveness of other Regulation states. The West Tankers approach, as applied in Endesa, suggests that courts at the seat of arbitration are stripped of their competence to decide on the status of an arbitration clause if an ill-intentioned defendant (of a potential arbitration) launches a pre-emptive strike at the courts of another Regulation state . All that an evasive party wishing to disable the application of an arbitration clause has to do is to claim the invalidity of the arbitration clause at the courts of a Regulation state (which was not designated as the seat of arbitration by the parties), while making sure to append “such relief to a substantive claim” .

Given the risk and the level of uncertainty associated with West Tankers and Endesa, the logical question to pose is whether the effect of the decisions may be an increased trend towards transnational litigation in lieu of arbitration. Alternatively, the decisions may also suggest that Regulation countries will be replaced by places outside of Europe as seats of arbitration instead of contractual parties opting for litigation.

To start with the second alternative, it seems unlikely that places in close proximity to Regulation states can replace such states as seats of arbitration. Take London for example. The promulgation of Arbitration Act 1996, the attractiveness of the English legal system to foreign businesses contemplating arbitration in terms of its reliability and predictability, and the fact that English law governs most transnational contracts suggest that contractual parties may designate London as the seat of arbitration despite the fact that neither the parties themselves nor the dispute relates to England. Equally important is the reputation of the seat of arbitration for providing swift and reliable service of justice and the existence of arbitrators competent to handle complex multinational issues in English (the president of the arbitral tribunal is commonly chosen from the seat of arbitration and most arbitrations are in English). The lenient approach towards arbitral awards of local courts at the seat of arbitration is also a vital consideration for the parties to a contract; if an arbitral award can be easily stuck down by a local court, that place stands little chance to be designated as the seat of arbitration. The foregoing suggests that the parties may favor not only London but other Regulation cities such as Paris and Stockholm. Currently, cities such as Istanbul, despite Turkey’s promulgation of the International Arbitration Act in 2001 (through the adoption of the UNCITRAL Model Law), cannot replace the Regulation cities as seats of arbitration because they lack the reputation and adequate amount of competent manpower to be the choice of contractual parties. While prominent cities such as New York may fill the gap, such replacements are only viable if the additional expenses incurred by opting for such cities are proportionate to the award sought.

Rather than designating alternative cities as seats of arbitration, can parties opt for litigation in stead? The principles of choice, privacy, and deregulation are the key factors for the selection of arbitration . Since arbitral awards are easier to enforce than court judgments and fewer avenues are available for the appeal of arbitral awards, commercial practitioners may not easily ignore arbitration. Perhaps an action for damages for breach of an arbitration agreement may eliminate the negative effects of West Tankers and Endesa. If a party can seek reparation from the ill-intentioned party who has sought the invalidity of an arbitration clause from another Regulation state, this would certainly avert tactical pre-emptive strikes. The inclusion of a liquated damages clause in a contract would ensure such contingency. However, in Research In Motion UK Ltd v Visto Corp. , Lewison J. held that awarding damages in such case would constitute an indirect interference with the foreign court and was thus incompatible with the Regulation. This ruling is in line with the common belief that awarding damages in such a circumstance would “involve an undesirable assessment of the foreign court’s performance since the damages claim is said to be premised in the foreign court getting it wrong” .

Although arbitration in Regulation states seems somehow risky in light of the above analysis, exclusive jurisdiction clauses, thanks to the ECJ, share a similar risk. This is because in Erich Gasser, the ECJ notoriously held that under the Regulation, a court second seized whose jurisdiction has been claimed under an agreement conferring jurisdiction must nevertheless stay proceedings until the court first seized has declared that it has no jurisdiction. Thus, for instance, if a contract provides for an English exclusive jurisdiction clause and the defendant in a potential English litigation is first to bring an action of non-liability in an Italian court, it will be the Italian court which will decide on the validity of the jurisdiction clause. Evidently, this is liable to complicate and prolong litigation.

Ultimately, this article argued that as a result West Tankers and Endesa, arbitration in the Regulation states has become riskier. However, in the absence of viable alternatives and in light of the accredited benefits of arbitration, it is submitted that neither international litigation nor the designation of other venues as seats of arbitration can replace arbitration in the Regulation states in the foreseeable future. The future of arbitration in the Regulation states will be mainly shaped by the changes in the Regulation following the EU Commission’s proposal in late 2010 and the new approach the ECJ will assume in accordance with the changes in the Regulation, should they ever be made.

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