Arbitral tribunal, state court – who is allowed to decide?

Where a dispute concerns conflicting decisions made by courts of EU Member States one of the first things that springs to mind is “Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters” (Regulation (EC) No. 44/2001), frequently abbreviated as “Brussels I”. Until early 2015 this was the Regulation governing international jurisdiction as well as the recognition and enforcement of certain decisions as regards defendants domiciled in an EU Member State.

The wording of “Brussels I” presented very few difficulties in situations where the courts of more than just one EU state are seized of a matter. Article 1(1) provided that Regulation was to apply in all civil and commercial matters whatever the nature of the court or tribunal and that jurisdiction was thus settled. Even cases where only arbitral tribunals were involved did not result in significant difficulties, as Brussels I” stated that it “shall not apply to […] arbitration” (Article 1(2)(d)).

But what is the role of European law in situations where state courts find themselves faced with arbitral tribunals that have a different understanding of jurisdiction and which legal regime should determine the all-important question of practical and legal enforceability?

Clarification by the European Court of Justice was eagerly awaited. When the Supreme Court of Lithuania requested a preliminary ruling pursuant to Article 267 TFEU in May 2015 (C-536/13) the Grand Chamber of the Court ECJ had an opportunity to provide an answer.

“Gazprom” versus Lithuania – the case at issue in the Baltic gas dispute

The case referred to the Court of Justice (C-536/13) not only brought with it a number of very tricky legal questions, the setting in which it arose was politically charged. An agreement on the supply of natural gas had been in place between the Republic of Lithuania and the Russian stock corporation “Gazprom”, in which the Russian state held a majority stake, since 1999. The gas was bought by a Lithuanian company (“Lietuvos”), whose shareholders were “Gazprom”, “E.ON Ruhrgas” and the Republic of Lithuania.

The Lithuanian Ministry of Energy was of the opinion that it was being unjustifiably required to pay natural gas prices which were among the highest in the EU. It suspected collusion between certain members of its board of directors and in March 2011, acting on behalf of the Republic of Lithuania it brought an action against “Lietuvos” and the “Gazprom” appointees before the Regional Court, Vilnius requesting an order under Lithuanian law requiring “Lietuvos” to enter into renegotiations and to agree new gas prices, and seeking initiation of an investigation under national law.

However, a shareholders’ agreement entered into among the shareholders in 2004 contained an arbitration clause, according to which “[a]ny claim, dispute and contravention in connection with this Agreement and its breach, validity, effect and termination, shall be finally settled by arbitration”.

In August 2011, “Gazprom” reacted to the action brought by Lithuania before the Lithuanian courts by initiating arbitration proceedings before the Arbitration Institute of the Stockholm Chamber of Commerce. The aim was to obtain an award requiring the Lithuanian Ministry to withdraw from or end the national proceedings because of the breach of the arbitration clause.

In July 2012 the arbitral tribunal declared that the arbitration clause had been breached and ordered the Lithuanian Ministry to withdraw and limit some of the claims which it had brought before the Regional Court, Vilnius.

In September 2012 the Lithuanian Regional Court ordered that the investigation requested by the Ministry be initiated. At the same time it also emphasized that an application for investigative measures fell within its jurisdiction and was not arbitrable.

“Lietuvos” and the members of the board of directors appointed by “Gazprom” challenge that decision by bringing an appeal before the Court of Appeal. The appeal was unsuccessful and it was held that an arbitral award limiting the Lithuanian State’s capacity to bring proceedings before the Lithuanian courts is incompatible with the Lithuanian Constitution and the principle of the independence of the judicial authorities enshrined in that constitution.

At the same time “Gazprom” also applied for recognition and enforcement of the arbitral award of July 2012 under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, again before the Lithuanian Court of Appeal. The Court of Appeal refused the application in December 2012, holding that the arbitral tribunal had not had the power to rule on an issue already examined by the Regional Court, Vilnius. The arbitral award was said to have limited the Ministry’s capacity to bring proceedings before a national court and also to have denied that court the power which it possesses to determine whether it has jurisdiction. This infringement was also held to have been contrary to public policy, so that recognition of the arbitral award had to be refused according to New York Convention as well (Article V(2)(a)).

In February 2013, the Court of Appeal confirmed that the Lithuanian courts had jurisdiction to hear the case and dismissed the appeal brought by “Lietuvos” and the “Gazprom” appointees to the board against the decision to initiate an investigation.

“Lietuvos” and “Gazprom” challenged the court rulings by appealing to the Supreme Court of Lithuania. The Supreme Court then referred the matter to the ECJ inter alia with regard to the question of the division of competences between national courts and arbitral tribunals in the event that the arbitral tribunal undermines the jurisdiction of the national court by requiring one of the parties to take or not to take certain actions.

Turner, West Tankers, Gazprom: The ECJ case law

“Interference” by one court with the jurisdiction of another court by means of a corresponding anti-suit injunction against one of the parties had already been considered in earlier ECJ proceedings. Anti-suit injunctions are aimed at preventing applicants from selecting alternative venues (“forum shopping”) and at “bundling” the proceedings in a dispute so that they are heard before the same court or arbitral tribunal. This makes them prone to be accompanied by disputes as to the party’s standing to bring an action and indirectly relating to the question of “Kompetenz-Kompetenz”, i.e. whether the court has the power to decide whether it possesses jurisdiction.

The ECJ had already ruled in the earlier case of Gasser v. MISAT (C-116/02) and even more clearly inTurner v. Grovit (C-159/02) that anti-suit injunctions between the state courts of different Member States are incompatible with European law and thus inadmissible. It left open the question as to the extent to which anti-suit injunctions were admissible for the purpose of facilitating arbitration. The question was answered by the Court in 2009 when it considered the case of Allianz and Generali v. West Tankers (C-185/07). It held that, even if the anti-suit injunction is intended to make arbitration possible it remains incompatible with “Brussels I” as the EU Member State court issuing the anti-suit injunction is thus interfering with the powers of a court of another EU Member State to decide itself, on the basis of Regulation (EC) No 44/2001, whether it has jurisdiction.

Did that mean all the open questions as to the scope of European law had been resolved? Not quite all. Both in Turner and in West Tankers the ECJ was dealing with cases where the anti-suit injunctions originated from state courts. The situation in “Gazprom” was different in that it was an arbitral tribunal that had made the order that one of the parties to court proceedings before a court of an EU Member State was required to withdraw or limit certain claims. How would the ECJ decide when faced with this constellation?

Does the will of the parties trump the sovereignty of the state? – The ratio decidendi in Gazprom

When answering the referred question the Court of Justice focused on the wording as well as on the rationale of the “Brussels I” Regulation.

It began by reaffirming the determinations it had made earlier in West Tankers (some of which the Advocate-General had called into question in his Opinion) and justified the finding of incompatibility with European law by referring to a general principle that every court seized itself determines whether it has jurisdiction to resolve the dispute before it.

However, it then went on to point out that the Regulation was intended to prevent only conflicts of jurisdiction between courts of the EU Member States and not conflicts between a court and an arbitral tribunal. For Article 1(2)(d) of the “Brussels I” Regulation expressly excludes arbitration from the scope of that regulation.

The ECJ based this on the “principle of mutual trust — accorded by the Member States to their respective legal systems and judicial institutions” and held that this principle was not affected inGazprom, as the case did not involve a tussle for jurisdiction between state courts. Neither the arbitral award itself nor an order by a Lithuanian court declaring the enforceability of the (foreign) arbitral award would thus be capable of shaking the foundations of the mutual trust between the courts of the Member States.

In brief: the Court took the view that these circumstances meant that the case was quite simply not within the scope of Regulation (EC) No 44/2001.

Practical significance and outlook

Does this mean that arbitral awards that include anti-suit injunctions or other content requiring parties to proceedings before a court of an EU Member State to withdraw or limit certain claims exist in some kind of legal vacuum? No. The question of recognition and enforceability of arbitral awards is governed by the provisions of the respective national law and by international treaties and conventions, above all the New York Convention.

The replacement of Brussels I by Regulation (EU) No 1215/2012 does not change the relevance of the judgment as the changes introduced in “Brüssel Ia” do not affect either the exclusion of arbitration from the scope of the Regulation or the reference to the New York Convention (recital 12; Article 1(2)(d).

Has Gazprom cleared up all the questions of demarcation? In all events the decision does shed some light on the relationship between European procedural law and arbitration, and leads one to what at first glance appears a somewhat remarkable conclusion, namely that the powers available to state courts with regard to anti-suit injunctions relating to proceedings before courts of the EU Member States are fewer than those available to arbitral tribunals. It should, however, be recalled that an arbitral tribunal can directly exert an effect only on the parties to the arbitration (and not on the state courts) and that it has such power precisely because it has been granted by those parties. It would have been very interesting to see what would have happened if the Lithuanian Ministry had applied to the competent Swedish state court for an annulment. Under those circumstances, the Swedish court and possibly the ECJ – upon referral – would have had to decide whether in an annulment scenario Brussels I would preclude a state court from making a ruling that upholds an arbitral award and at the same time interferes with the competence of a court of another EU Member State. A constellation of that kind would bring with it a much greater risk of a deterioration in the mutual trust existing between the courts of the EU Member States.

This article (German version) was originally published in Dispute Resolution magazine.