Worldwide: Restraints On The Arbitrability Of Disputes In International Arbitration

I. Introduction

In order to understand the captioned issue, it may be worthwhile to shed some light on the broad concept of 'Arbitrability'¹. In the ordinary sense, arbitrability involves the issue of whether specific category of disputes can be barred from arbitration or whether it belongs exclusively to the domain of state courts.² If the subject matter of the dispute is non-arbitrable, the parties cannot confer jurisdiction upon the Arbitral Tribunal vide an arbitration agreement or otherwise.³ In recent times, the trend towards expansion of arbitrability along with a host of other favourable factors have played a crucial role in making arbitration an attractive competitor to court based adjudication.⁴ Arbitrability has assumed varied significance under different national laws and in the United States, it is often given a broader connotation than the prevailing international understanding and includes the whole issue of tribunal's jurisdiction.⁵ Arbitrability is further classified into 'subjective' rationae personae and 'objective' rationae materiae arbitrability where the former denotes the subjective capacity of a person or party to validly conclude a binding arbitration agreement and to be a party to arbitration proceedings, whereas the latter refers to limitations or restrictions on arbitrability based on subject matter of the dispute.⁶

The issue of arbitrability and the law applicable thereto usually depends on what stage of the proceedings the said issue arises. The state courts may apply a different standard at the post award stage than the Arbitral Tribunal would at the pre-award stage. It could also be treated as a gateway problem or a threshold issue depending on when the question of arbitrability is raised.⁷ The international understanding of arbitrability is based on the provisions of the New York Convention⁸ and the Model Law⁹, however both appear to be restricted to disputes 'capable of settlement by arbitration' and do not define arbitrability in precise terms nor does it encapsulate provisions prescribing any category of dispute as non-arbitrable. It is notable that the Model Law in Article 36(1)(b)(i), mirrors the approach adopted in Article V(2)(a) of the New York Convention and provides for issues of arbitrability to be determined by the laws of the state where recognition is sought. Commenting on the international limits on non-arbitrability doctrine, eminent scholar Gary Born, points out the existence of an 'escape valve' in the New York Convention despite the universally applicable choice-of-law rule provided in Article V(1)(a) of the Convention; since, Articles II(1) and V(2)(a) of the Convention envisages the application by Contracting States of their own law to refuse enforcement on the grounds of non-arbitrability only in exceptional circumstances, particularly when the arbitration agreement or the award is otherwise valid and binding.¹⁰

According to the deans of international arbitration, the domain of arbitration as opposed to that of the local courts is established by national laws and each state based on its own political, social and economic policy decides which matters may or may not be capable of being resolved by arbitration.¹¹

II. Limits on Arbitrability & The Law Governing the Issue of Arbitrability

Most restrictions or limits on arbitrability of disputes are founded on public policy considerations and these evolve with time and often vary across jurisdictions. The restrictions may also be influenced by the state's general attitude towards arbitration and whether the business community considers it an effective tool to promote trade and commerce. The notion of arbitrability might also differ for international transactions as compared to purely domestic ones.¹²

As mentioned in the preceding section of this note, possible restrictions on arbitrability exists in two ways i.e. subjective and objective arbitrability restrictions. Subjective arbitrability usually concerns deficiencies in contractual capacity and has a direct bearing on the validity of the arbitration agreement¹³. It envisages allocation of rights to individual or legal entity's right to enter into arbitration agreement and that such rights must hold ground under the applicable law. It is also reflected in Article V(1)(a) of the New York Convention.¹⁴ Some scholars endorse the view that generally restrictions that preclude state or public entities from settling dispute through arbitration does not apply to international arbitrations and some go a step further by asserting that it is no longer a real issue and that the specific impact of public entities involvement is in the determination of rules governing the merits of the dispute and in the enforcement of award rather than the arbitral proceedings.¹⁵ This argument has in many ways been reaffirmed by the evolution and success of investment arbitration.¹⁶

Objective Arbitrability restrictions are based on the subject matter of the dispute. Interestingly, the issue of non-arbitrability of the subject matter of a dispute could also arise if the same is not stipulated in the contract and the Arbitral Tribunal entertaining such a dispute could be acting beyond the Terms of Reference, thereby, potentially rendering the awards amenable to challenge during the enforcement stage.¹⁷ The eminent commentator Bernard Hanotiau, in his incisive work on the law applicable to arbitrability states that "the interpretation of the scope of the arbitration agreement does not generally raise questions of applicable law. In most cases, it is a plain "common sense" process. And if the question arises as to which rule of interpretation is applicable in a particular case, it should be resolved in accordance with the law governing the arbitration clause, i.e., in a majority of cases the law governing the disputed contract."¹⁸

Most national arbitration laws do not necessarily regulate the law governing the issue of arbitrability but rather determine which disputes are arbitrable.¹⁹ Some national laws refer to broad notions²⁰ of arbitrability while some are confined to a narrower concept.²¹ The substantive rules on objective arbitrability varies under different national laws depending on the approach adopted to arbitration by each state and whether the state intends to bring certain subjects within the exclusive domain of the state courts. Generally, the questions of arbitrability may arise for certain categories of disputes²² e.g. criminal cases and matters such as insolvency and bankruptcy, however, there are several other areas like Intellectual Property Rights,²³ Competition laws, ²⁴ Securities transactions,²⁵ Bribery and Corruption,²⁶ etc. where the issue of arbitrability could arise and often exhibit an inconsistent treatment by different states either through legislation or case law.²⁷

An intricate review of both theory and practice of international arbitration suggests that the issue of what law governs arbitrability is a complex one, and that the answer to it may depend upon the stage at which it is raised.²⁸ The issue of arbitrability may be raised at least at four distinct stages i.e. at the beginning of arbitration, before the arbitral tribunal; before a state court after being referred by a party to determine whether the arbitration agreement relates to a subject matter which is arbitrable; during setting aside proceedings and finally during the stage of recognition and enforcement of the award.

The law governing arbitrability depends on the stage and the forum i.e. when and where the issue is invoked by one of the parties.²⁹ However, if the parties have not invoked the issue, the arbitrator will invoke the issue ex officio only in case of a violation of international public policy, particularly of the country of the seat of the arbitration or when the applicable rule is mandatory in nature.³⁰ When the question is raised before the Arbitral Tribunal, arbitrator usually determines the same by the application of the law governing the arbitration agreement³¹ but often the tribunal could also be tasked with determining whether a different threshold for arbitrability exists for international disputes³² and whether an issue of partial arbitrability also arises.³³ Other relevant factor could be the occasional incidence of lex arbitri on arbitrability and foreign policy laws of the probable place of enforcement of the award.³⁴

The national court before which the matter has been concurrently brought deeming the dispute to be non-arbitrable would usually place reliance upon national law, in the absence of an applicable international convention. However, in the event of the forum state being party to an international convention where the dispute could be declared capable of arbitration, the principle of favour arbitrandum assumes great significance.³⁵ Furthermore, when the courts are seized of the matter during a setting aside or enforcement proceeding, the court determines the same by considering the prevailing public policy by often confining it during enforcement stage to possible violation of the forum states most basic notions of morality and justice.³⁶

III. Concluding Remarks

The realm of arbitrability is expanding and the complexity surrounding questions of law applicable to arbitrability has been considerably settled by international conventions, national laws, judicial dicta and international best practices. However, a long line of incoherent court decisions has contributed to the vague standards of international public policy and uncertainty over notions of arbitrability despite global voices in favour of arbitration. An internationally concerted effort towards aligning the scope of public policy would go a long way in brining uniformity and predictability to the international arbitral process and its future.

Footnotes

1 For a terminological analysis of the term 'arbitrability', see Natalja Freimane, Arbitrability: Problematic Issues of the Legal Term,'(Master's Thesis, Riga Graduate School of Law 2012) http://www.sccinstitute.com/media/56097/arbitrability-problematic-issues.pdf, last accessed on 30th April, 2017.

2 "Arbitrability ... involves the simple question of what types of issues can and cannot be submitted to arbitration and whether specific classes of disputes are exempt from arbitration proceedings. While party autonomy espouses the right of parties to submit any dispute to arbitration, national laws often impose restrictions or limitations on what matters can be referred to and resolved by arbitration.'' Loukas A. Mistelis, Arbitrability Internationaal and Comparative Perspectives: Is Arbitrability a National or International Law Issue?, Arbitrability: International & Comparative Perspectives, Loukas A. Mistelis & Stavros L. Brekoulakis eds., 2009; also see, Jean-François Poudret and Sébastien Besson, Comparative Law of International Arbitration, 2nd Edition, Sweet & Maxwell, London 2007, ¶ 326-366; Nigel Blackaby, Constantine Partasides, Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration, (Oxford University Press, 6th ed. 2015), ¶ 2.29-2.30; Savage and Gaillard (ed.) Fouchard Gaillard Goldman on International Commercial Arbitration, (1999), ¶ 559- 589.1; Gary B. Born, International Commercial Arbitration, Wolters Kluwer, Second edn. Volume I, p. 944.

3 'Arbitrability is indeed a condition of validity of the arbitration agreement and consequently, of the arbitrators' jurisdiction', Bernard Hanotiau, The Law Applicable to Arbitrability in Albert Jan van den Berg (ed.), Improving the Efficiency of Arbitration Agreements and Awards: 40 Years of Application of the New York Convention, ICCA Congress Series, Volume 9 Issue, Kluwer Law International; Kluwer Law International 1999), pp. 146 – 167.

4 See e.g. L. Yves Fortier, Arbitrability of Disputes, in Gerald Aksen, Karl-Heinz Böckstiegel, Paolo Michele Patocchi and Anne Marie Whitesell (eds), Global Reflections on International Law, Commerce and Dispute Resolution, Liber Amicorum in honour of Robert Briner (ICC Publishing, 2005) 269-284.

5 See e.g. First Options of Chicago v. Manuel Kaplan et and MK Investment, Inc, 115 S Ct 1920, 1943 (1995), Smith Enron Cogeneration Limited Partnership, Inc et al v Smith Cogeneration International Inc, XXV YBCA 1088 (2000) ¶ 28 (2d Cir); see also, William W. Park , The Arbitrability Dicta in First Options v. Kaplan : What Sort of Kompetenz - Kompetenz Has Crossed the Atlantic?, Arbitration International, Kluwer Law International 1996, Vol. 12, Issue 2, p. 137 – 160; Laurence Shore, Defining 'Arbitrability' The United States vs. the rest of the world, New York Law Journal, Monday, June 15, 2009; Laurence Shore, The United States' Perspective on Arbitrability, Arbitrability: International & Comparative Perspectives, Loukas A. Mistelis & Stavros L. Brekoulakis eds., 2009, 69-84; Carbonneau and Janson " Cartesian Logic and Frontier Politics: French and American Concepts of Arbitrability", 2 Tul J Int'l & Comp L 193 (1994) 194.

6 See generally, Kirry, Arbitrability: Current Trends in Europe, 12 Arb Int 373 (1996) 381 et seq.; B. Berger & F. Kellerhals, International and Domestic Arbitration in Switzerland, ¶ 365 (2nd ed. 2010); Savage and Gaillard (ed.) Fouchard Gaillard Goldman on International Commercial Arbitration, (1999), ¶ 533; Julian D. M. Lew, Loukas A. Mistelis, and Stefan Kröll, Comparative International Commercial Arbitration, 355-375, The Hague, London: Kluwer Law International, 2003, p. 187-198.

7 George. A. Bermann, The "Gateway" Problem in International Commercial Arbitration, Yale Journal of International Law, Vol. 37, Issue 1, Article 2, 2012.

8 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 330 UNTS 3, Art. II (1): Each Contracting State shall recognise 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; Art. V(2)(a): Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that- The subject-matter of the difference is not capable of settlement by arbitration under the law of that country; For practical comments on the Convention and the said provisions, see P. Sanders (ed.), ICCA's Guide To the Interpretation of the 1958 New York Convention: A Handbook for Judges, ICCA , 2011, p.62-64; UNCITRAL Secretariat, Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), 2016 edn., pp. 42-48 and 131-150; Albert Jan van den Berg, The New York Arbitration Convention of 1958: Towards a Uniform Judicial Interpretation, Kluwer, 1981.

9 UNCITRAL Model Law on International Commercial Arbitration of 25 June 1985, with amendments as adopted in 2006, Art. 34(2)(b)(i): Application for setting aside as exclusive recourse against arbitral award- the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State, Art. 36(1)(b)(i): Grounds for refusing recognition and enforcement- the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State.

10 Gary B. Born, International Commercial Arbitration, Wolters Kluwer, Second edn. Volume I, p. 955.

11 Nigel Blackaby, Constantine Partasides, Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration, (Oxford University Press, 6th ed. 2015), ¶ 2.127; Julian D. M. Lew, Loukas A. Mistelis, and Stefan Kröll, Comparatdelive International Commercial Arbitration, 355-375, The Hague, London: Kluwer Law International, 2003, p. 199.

12 See e.g. The decision of the United States Supreme Court declaring antitrust disputes arbitrable in Mitsubishi Motors Corp v Soler Chrysler Plymouth Inc. 473 US 614, 105 S Ct 3346, 3355, whereas in American Safety Equipment Corp v J P Maguire & Co, 391 F 2d 821, 826 et seq (2d Cir1968), it was held non-arbitrable in a domestic context.

13 French Civil Code, Article 2060: 'Disputes involving public entities may not be subject to arbitration'; Iranian Constitution, Article 139: 'Authorisation to public entities to enter into arbitration agreement which is valid on specific conditions, namely, that the reference of disputes concerning public property requires an authorisation of the Cabinet of Ministers'.

14 "recognition and enforcement of the award may be refused, (...) if the parties to the agreement (...) were, under the law applicable to them, under some incapacity, (...)."

15 Supra 5; also see R. Briner, 'Dallas Workshop 2001: The Iran-United States Claims Tribunal and Disputes Involving Sovereigns' (2002) 18 Arbitration International 299, 302; Fouchard Gaillard Goldman, supra 3 at ¶ 72.

16 Departing from the established position supporting the investment arbitration process, strict application of subjective arbitrability can be witnessed in the recent trend of a few Latin American countries denunciation the Washington Convention, 1965 and terminating the Bilateral Investment Treaties (BITs) thereby completely insulating the state or state entity from being sued or dragged into arbitration. See e.g. Ecuador's New Constitution of 2008, Art. 422: Treaties or international instruments where the Ecuadorian State yields its sovereign jurisdiction to international arbitration, in contractual or commercial disputes, between the State and natural persons or legal entities cannot be entered into ..., Ecuador terminated almost all BITs pursuant to the new constitution and a binding opinion issued by its Constitutional Court and approved by the National Assembly; For a brief discussion on the denunciation of the ICSID Convention and termination of BITs and its subsequent legal consequences, see generally, Sachet Singh and Sooraj Sharma, "Investor State Dispute Settlement Mechanism: The Quest for a Workable Roadmap," 29 Utrecht Journal of International and European Law, pp. 88-101, 2013.

17 See e.g. In MSK Projects India (JV) Ltd. v. State of Rajasthan, (2011) 10 SCC 573, the Supreme Court of India reiterated the principle that the arbitral tribunal cannot go beyond the terms of reference and any attempt to do so would be without any jurisdiction; see Supra n. 5, p.274, "at issue in First Options was not 'objective arbitrability' per se but rather 'arbitrability' in the sense of whether the subject matter in question fell within the scope of a parties' agreement to arbitrate. However, the court's reasoning could apply equally to the issue of 'objective arbitrability', in which case the relevant question would be: did the parties agree to submit the issue of 'objective arbitrability' itself to arbitration?"; also see Hawsom v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002).

18 Supra note 4, p. 146

19 Julian D. M. Lew, Loukas A. Mistelis, and Stefan Kröll, Comparative International Commercial Arbitration, 355-375, The Hague, London: Kluwer Law International, 2003, p.194.

20 'Dispute involving economic interest or property', see e.g. Swiss PILA, Article 177: 1. Any dispute involving property can be the subject-matter of an arbitration. 2. If a party to the arbitration agreement is a state or an enterprise held, or an organisation controlled by it, it cannot rely on its own law in order to contest its capacity to be a party to an arbitration or the arbitrability of a dispute covered by the arbitration agreement; Fincantieri- Cantieri Navali Italian SpA and Oto Melara SpA v M and arbitration tribunal, XX YBCA 766 (1955), covering any claim having pecuniary value for the parties; also see, Germany, ZPO section 1030(1).

21 'Capability of parties to reach an agreement', see e.g., Belgium Judicial Code Article 1676(1): Any dispute which has arisen or may arise out of a specific legal relationship and in respect of which it is permissible to compromise may be the subject of an arbitration agreement; also see, Netherlands, CCP Article 1020(3).

22 Nigel Blackaby, Constantine Partasides, Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration, (Oxford University Press, 6th ed. 2015), ¶ 2.130.

23 Usually; any dispute concerning grant or validity of such rights are outside the domain of arbitration but several national laws and judicial pronouncements have adopted a different approach, see e.g. Desputeaux v Editions Chouette (1987) Inc. [2003] 1 SCR 178; Liv Hidravlika v Diebolt, No. 05-10577, Paris Cour d' Appel, 28 February 2008; also see Blessing, Arbitrability of Intellectual Property Disputes, 12 Arbitration International 191, (1996) 200; Lew, Intellectual Property Disputes and Arbitration: Final Report of the Commission on International Arbitration (ICC, 1997); For a detailed exposition on the hybrid system developed for non-judicial settlement of domain name disputes see Davis, The New New Thing: Uniform Domain Name Dispute Resolution Policy of the Internet Corporation for Assigned Names and Number, 17 (3) Journal of International Arbitration (2000) 115.

24 For the French position see Labinal case of the Paris Cour d' Appel of 19 May 1993 and decision of Cour de Cassation of 5 January 1999; Swiss position has been enunciated in the decisions of Tribunal Federal dated 28 April 1992, [1992] ASA Bulletin 368 and 13 November 1998, [1999] ASA Bulletin 529 and 455; the English position was settled in ET Plus SA v Jean Paul Welter & The Channel Tunnel Group [2005] EWHC 2115 (Comm); see supra note 13 for the position in the United States.

25 Several restrictions may exist in national securities law of various states aimed at safeguarding consumer interest, see e.g. German Securities Trading Act (WpHG), Section 37h; also see for a historical context on the history of judicial hostility towards securities arbitration in the United States in Wilko v Swan, 346 US 427 (1953), for subsequent recognition of claims with an international element see Scherk v Alberto- Culver Co. 417 US 506 (1974), see the US Supreme Court's decision overruling the Wilko rationale in Shearson v McMahon 482 US 220, 107 S.Ct 2332 (1987).

26 The English position was settled in Fiona Trust & Holding Corporation v Yuri Privalov [2007] UKHL 40; the decision was approved in other common law jurisdictions like India in World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd, Civil Appeal No.895 of 2014; also see, Enercon (India) Ltd. & Ors. vs. Enercon GMBH & Anr., Civil Appeal No. 2086/2014; however, a divergent and rather regressive approach was taken by the Pakistan Supreme Court in the much-criticized judgment in HUBCO Power Company v WAPDA, PLD 2000 SC 841.

27 See e.g. United States Arbitration Fairness Act of 2017, the bill prohibits a pre-dispute arbitration agreement from being valid or enforceable if it requires arbitration of an employment, consumer, antitrust, or civil rights dispute.

28 See Robert Briner, The Arbitrability of Intellectual Property Disputes with Particular Emphasis on the Situation in Switzerland, World Intellectual Property Organisation, Worldwide Forum on the Arbitration of Intellectual Property Disputes 77 (1994), ¶ 1.7.1-1.7.3; see Bernard Hanotiau, What Law Governs the Issue of Arbitrability?, Arbitration International, Kluwer Law International, (1996) Volume 12, Issue 4, p. 391 – 404; also see supra note 4.

29 The question of arbitrability when invoked before an Arbitral Tribunal, will be decided by the tribunal in accordance with the well-established principle of 'Kompetenz-Kompetenz' which empowers the arbitral tribunal to rule on its own jurisdiction in the first instance.

30 See Judge Lagergren's comment '...I cannot in the interest of due administration of justice avoid examining the question of jurisdiction on my own motion,' in ICC case no. 1110, Argentine Engineer v. British Company, 3 Arb Int 282 (1987) with note Wetter, 10 Arb Int 277.

31 This position is endorsed by Article II (1) of the New York Convention of 10 June 1958, Article VI (2) of the Geneva Convention of April 1961.

32 See supra note 13

33 See Bernard Hanotiau, What Law Governs the Issue of Arbitrability?, Arbitration International, Kluwer Law International, (1996) Volume 12, Issue 4, p. 391 – 404; also see H. Holtzmann, 'National Report, United States' Yearbook (1977) 116 at p. 122; Craig, Park, Paulsson, International Chamber of Commerce Arbitration (1990, 2nd ed.) at p. 82.

34 See supra note 5; also see Nigel Blackaby, Constantine Partasides, Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration, (Oxford University Press, 6th ed. 2015), ¶ 2.128.

35 Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 103 S Ct. 927 at 941–942 (1983); Mitsubishi v. Soler, United States Supreme Court, 2 July 1985; Yearbook (1986) at pp. 555–558; also see supra note 4; For an approach espousing the application of lex fori to determine arbitrability, see Homayoon Arfazadeh, Arbitrability under the New York Convention: the Lex Fori Revisited, Arbitration International, Vol. 17, No.1, p. 73-87.

36 Generally, the enforcement judge would narrowly construe the grounds available in Art. V (2) of the New York Convention, see e.g. Parsons and Whittermore v. Rakta, 508 F.2d 969 (1974); also see Belgian Supreme Court's decision in Cass., 28 June 1979, Audi-NSU v. S.A. Adelin Petit. Pas., I. 1979. 1260; Yearbook (1980) at p. 257.

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