Voices from the Sylff Community

Nērika Lizinska, a Sylff fellow at the University of Latvia, used her Sylff Research Abroad (SRA) award to research state participation in international commercial arbitration in 2014. She conducted her research at the Swiss Institute of Comparative Law. It was in Switzerland that the European Convention on International Commercial Arbitration—which plays a significant role on this issue—was signed. A summary of her research regarding Article 2 of the convention is presented below.

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Introduction

Everything starts with an idea. Parties then enter into a commercial contract with the hope of profiting from it in an optimistic frame of mind. At this stage, unfortunately, not all parties think that a dispute might someday arise and that a mechanism would be needed to resolve it. However, international trade and commercial transactions are specific and linked to particular legal systems (which laws are to be applied and which court will hear the case, etc.), that need to be agreed upon between the parties in any contract.

Businesses mainly choose arbitration (arbitration is the “settlement of a dispute by the decision of a person or persons chosen and accepted as judges”)¹ as a mechanism for dispute resolution, instead of litigation (litigation is “a formal process whereby claims are taken through court and conducted in public. Judgements are binding on the parties subject to rights of appeal” ² ) due to its neutrality (parties can choose the seat of arbitration), flexibility (“parties may control the manner of the proceedings having regard to the nature of the dispute and to their precise needs”), ³finality (there is no appeal), confidentiality, and speed of resolution. “Parties in cross-border disputes may be unfamiliar with the complicated procedure of litigation and the language of the national court. . . . [M]ost businesses want a quick and efficient remedy and are reluctant to wait for an extended period for their disputes to be resolved through national courts.”⁴

Nowadays, it is internationally accepted that a state, too, can conclude international commercial contracts with a private party (for example, to purchase goods) and can choose arbitration as a dispute resolution mechanism by adding an arbitration clause in a commercial contract. This means that in the case a dispute that cannot be otherwise resolved between the parties (for example, by negotiation or mediation, which “is essentially a negotiation facilitated by a neutral third party”)⁵, a claimant can seek arbitration⁶ . Although a state can act like a private party and has similar rights, there are plenty of issues and risks for contracting parties. The main risk is that when a state becomes a contractual party, dispute resolution can take a considerably different course from general procedures. This is why the inclusion of an arbitration clause for a commercial party in such agreements has become a precondition for concluding a commercial contract with the state. The state, too, has many considerations in this regard.

History and Application

At the international level, a document governing the capacity of states to conclude arbitration agreements is the European Convention on International Commercial Arbitration⁷ (hereinafter called the European Convention), signed on April 21, 1961, in Geneva at a meeting convened by United Nations Economic Commission for Europe. More than 30 countries are currently party to the European Convention, including Cuba, Burkina Faso, the Russian Federation, and Turkey,⁸ which became contracting parties in accordance with the provisions of Article 10 (1) and (2) of the European Convention.

Provisions regarding the application of the European Convention are stated in Article 1 (1), according to which “this Convention shall apply: (a) to arbitration agreements⁹ concluded for the purpose of settling disputes arising from international trade between physical or legal persons having, when concluding the agreement, their habitual place of residence or their seat in different Contracting States; (b) to arbitral procedures and awards based on agreements referred to in paragraph 1 (a) above.” This means that if arbitration agreements concluded for the purpose of settling disputes arising from international trade between physical or legal persons having, when concluding the agreement, their habitual place of residence or their seat in countries that are not contracting states—such as the United Kingdom, the Netherlands, and Switzerland—the European Convention will not apply.

Historically, “the intention of the European Convention was to introduce the first uniform set of rules concerning international arbitration in order to remove the obstacles created by widely differing national arbitration laws. With its scope focusing on Europe, the aim was to facilitate and promote European trade between the (back then) Eastern and Western block.”¹⁰ “When the European Convention was signed, . . . Europe was still dominated by the East-West conflict. The different political and economic systems made trade between parties coming from the two blocks very difficult. Each side had little confidence in the courts of the other side with the consequence arbitration was often the only option for dispute settlement acceptable to all parties. . . . The main purpose of the European Convention was to overcome these psychological barriers and the legal problems which were affecting arbitration in the East-West trade in Europe.” ¹¹In addition, it should be noted that “in certain countries that were to become Contracting States of the European Convention, public corporate bodies were not allowed to enter into arbitration agreements. This led the draftsmen of the European Convention to include Article 2 (1).”¹²

Right of States to Resort to Arbitration

With regard to the historical circumstances, Article 2 (1) of the European Convention states as follows: “. . . legal persons considered by the law which is applicable to them as ‘legal persons of public law’ have the right to conclude valid arbitration agreements.” The term “legal persons of public law” is used here instead of “state” in order to cover a broader scope of state institutions, such as state agencies, public entities, and governmental institutions.

There have often been cases in which the state argues that in accordance with its domestic laws, it is not entitled (lack of capacity issue) to enter into an arbitration agreement, thus an agreement, even if legally concluded, does not have legal force. There have also been cases where a state party concludes an agreement but then relies on its national (internal) law to prove that a contract is null and void, as its national law prohibits resorting to arbitration. For example, Article 2060 of the Civil Code of France prohibits French state public bodies and institutions from concluding arbitration agreements.¹³ Article 487 of the Latvian Civil Procedure Law states, “any civil dispute may be referred for resolution to an arbitration court, with the exception of a dispute: . . . 2) in which a party, albeit even one, is a State or local government institution or the award of the arbitration court may affect the rights of State or local government institutions.”¹⁴ In Hungary, Act CXCVI of 2011 on National Assets, which came into force on January 1, 2012, states in Article 17 (3) that “in civil law agreements concerning national assets located on the territory of Hungary, the governing language may only be Hungarian, the governing law may only be Hungarian and the jurisdiction for the settlement of disputes may only be that of the Hungarian state courts.” ¹⁵At the same time, for example, Article 177 (2) of the Swiss Private International Act contains advanced regulation stating, “if a party to the arbitration agreement is a state, a stateheld enterprise or a state owned organization, 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.”¹⁶

Belgium also has special regulations.¹⁷ In fact, Belgium was involved in one of the first cases¹⁸ in which the court had to decide whether a state can invoke its domestic laws to avoid arbitral jurisdiction. “Benteler v. Belgium provides further authority for the proposition that a commercial arbitration between a [s]tate and a private party cannot be avoided simply by the [s]tate’s invoking a prohibition in its own law against arbitration by the [s]tate.”¹⁹ After this ad hoc decision, Belgium chose to use its rights provided in Article 2 (2) of the European Convention.

Declarations

Article 2 (2) of the European Convention stipulates, “On signing, ratifying or acceding to this Convention any State shall be entitled to declare that it limits the above faculty to such conditions as may be stated in its declaration.” “The content of Article II met strong opposition from Civil Law countries where public entities are, generally, prohibited from resorting to arbitration. To accommodate these States, which otherwise would have not ratified the Convention, a second paragraph providing for the possibility of a reservation was added to Art. II.”²⁰

One may say that to some extent the European Convention has reached the objective set out in its Preamble,²¹ because at the present time only Belgium has such a declaration, as provided for in Article 2 (2). After the Benteler v. Belgium case, Belgium stated that “in accordance with article II, paragraph 2, of the [European] Convention, the Belgian Government declares that in Belgium only the State has . . . the faculty to conclude arbitration agreements” ²²to avoid similar cases in the future.

When Latvia ratified the European Convention, it also made a declaration in accordance with Article 2 (2). It stated that Latvian state and local government authorities have no right to conclude arbitration agreements. At a time when there were discussions and debates about the withdrawal of the declaration, one of the draft laws stipulated that “local government authorities before concluding the arbitration agreement shall transmit a draft to the Ministry of Environmental Protection and Regional Development to obtain opinion from the State Chancellery that the arbitration agreement is in conformity with the state interest.”²³ Accordingly, if such a law were to be adopted, the State Chancellery would need to assess whether the arbitration clause included in international commercial contracts (between a local authority and a private party) is consistent with the public interest. The questions this gave rise to were, what is the state interest (common good), how to determine it, and is it possible only from the content of the arbitration agreement to determine whether the state interest will be protected?

On December 23, 2013, Latvia notified the Secretary General of the United Nations of its full withdrawal of the declaration under Article II (2), made upon accession in 2003. Accordingly, these fundamental changes can be considered a new page for Latvian state and local government authorities and practitioners to record their experiences in the history of international commercial arbitration and for scientific researchers to document new ideas and findings in the field of arbitration.

¹A.S. Hornby & Ruse, Oxford ESL Dictionary, Oxford University Press, 1997, p. 30.
²Peter Fenn, Commercial Conflict Management and Dispute Resolution, Spon Press, 2012, p. 12.
³Ibid, p. 89.
⁴Sameer Sattar, “National Courts and International Arbitration: A Double-edged Sword?” Journal of International Arbitration, 27 (1), Kluwer Law International, 2010, pp. 51-52.
⁵What is mediation? Detailed information available at http://adr.findlaw.com/mediation/what-is-mediation-.html.
⁶State participation in international arbitration can be analyzed from various aspects, for example, whether arbitration as a dispute resolution mechanism is suitable for state contracts in general, is it possible to properly protect state interests in arbitration, and whether an arbitration clause in a state contract automatically implies a waiver of state immunity from jurisdiction and enforcement, etc.
⁷European Convention on International Commercial Arbitration, available at https://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXII-2&chapter=22&lang=en.
⁸Full list of contracting states available at https://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXII-2&chapter=22&lang=en.
⁹Article 1 (2) of the European Convention gives the following definitions: (a) the term “arbitration agreement” shall mean either an arbitral clause in a contract or an arbitration agreement being signed by the parties, or contained in an exchange of letters, telegrams, or in a communication by teleprinter and, in relations between States whose laws do not require that an arbitration agreement be made in writing, any arbitration agreement concluded in the form authorized by these laws; (b) as the term “arbitration” shall mean not only settlement by arbitrators appointed for each case (ad hoc arbitration) but also by permanent arbitral institutions; (c) the term “seat” shall mean the place of the situation of the establishment that has made the arbitration agreement.
¹⁰Alice Fremuth-Wolf, “Issues Specific to Arbitration in Europe: The European Convention on International Arbitration as a Tool to Remedy Pathological Arbitration Agreements—There’s Still Life in the Old Dog Yet!” in Chapter 1 of C. Klausegger, P. Klein, et.al. (eds.), Austrian Yearbook on International Arbitration 2013, pp. 60–61.
¹¹Stefan Michael Kroll, “Issues Specific to Arbitration in Europe: The European Convention on International Commercial Arbitration—The Tale of a Sleeping Beauty,” in Chapter 1 of C. Klausegger, P.Klein, et al. (eds.), Austrian Yearbook on International Arbitration 2013, p. 3.
¹²Nikolaus Pitkowitz, “Issues Specific to Arbitration in Europe: Is There Still a Scope of Application of the European Convention on International Commercial Arbitration?” In Chapter 1 of C. Klausegger, P. Klein, et.al. (eds.), Austrian Yearbook on International Arbitration 2013, p. 106.
¹³Article 2060 of the Civil Code of France, Title XVI of Arbitration Agreements, states, “One may not enter into arbitration agreements in matters of status and capacity of the persons, in those relating to divorce and judicial separation or on controversies concerning public bodies and institutions and more generally in all matters in which public policy is concerned, (Act no 75-596 of 9 July 1975), however, categories of public institutions of an industrial or commercial character may be authorized by decree to enter into arbitration agreements,” available at http://www.legifrance.gouv.fr/Traductions/en-English/Legifrance-translations.
¹⁴Latvian Civil Procedure Law, Civilprocesa likums. 14th edition. Rīga: TNA, 2010.
¹⁵Gabor Bardos, “The Award and the Courts, Hungary: New Rules on Arbitration Related to National Assets” in Chapter 4 of C.Klausegger, P.Klein, et al. (eds), Austrian Yearbook on International Arbitration 2013, p. 181.
¹⁶Swiss Private International Law Act available at https://www.swissarbitration.org/sa/en/rules.php.
¹⁷See Article 1676.2 of Belgium Code Judiciaire, May 19, 1998, available at http://www.jus.uio.no/lm/belgium.code.judicature.1998/1676.2.html.
¹⁸Ad Hoc Award of November 18, 1983, Benteler v. Belgian State, Journal of International Arbitration, 1984, pp.184–90.
¹⁹Jan Paulsson, “May a State Invoke Its Internal Law to Repudiate Consent to International Commercial Arbitration? Reflections On the Benteler v. Belgium Preliminary Award,” Arbitration International, Vol. 2, No. 2 (1986), p. 95.
²⁰Albert Jan Van Den Berg (general ed.), Yearbook Commercial Arbitration, Volume XX, 1995, Kluwer, p. 1017.
²¹The Preamble of the European Convention states as follows: “. . . desirous of promoting the development of European trade by, as far as possible, removing certain difficulties that may impede the organization and operation of international commercial arbitration in relations between physical or legal persons of different European countries, have agreed on the following provisions.”
²²Declarations and reservations are available at https://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXII-2&chapter=22&lang=en
²³Draft law available in Latvian, “Grozījums likumā ‘Par Eiropas konvenciju par Starptautisko komercšķīrējtiesu,’” available at http://titania.saeima.lv/LIVS11/saeimalivs11.nsf/0/ED4CEB6E5CF3B1A5C22579A00044FB8C?.