The arbitration exception simply states: “The Regulation shall not apply to arbitration.” However, the practical application of those seven words has given rise to considerable debate over the last twenty years. Many people saw the re-drafting of the Brussels Regulation as a golden opportunity to rectify past problems and provide clarity for the future. The question is whether the recast Regulation achieves that objective.
What has happened
The Brussels Regulation is designed to provide a straightforward procedure to govern the recognition and enforcement of judgments from the courts of all EU Member States. The Regulation applies in civil and commercial matters but is subject to a number of exceptions, one of which is arbitration. The rationale for excluding arbitration from the scope of the Regulation was that arbitration was already covered by other Conventions, including the New York Convention.
The problem in practice has been how to deal with the interface between arbitration and the Regulation, particularly in proceedings involving a dispute as to the existence or validity of an arbitration agreement.
Prior to the recast Regulation, the test for deciding whether proceedings fell within the arbitration exception was determined by the nature of the main claim. In order to determine whether a dispute fell within the arbitration exception, reference must be had solely to the subject-matter of the dispute and a dispute’s place in the scope of the Brussels Regulation was determined by the nature of the rights which the proceedings in question served to protect.
The practical difficulty with this approach was its circularity. If a court characterised the subject matter of a claim as being a matter within the scope of the Regulation, any issue as to the existence or validity of an arbitration agreement automatically became a preliminary or incidental issue and fell within the scope of the Regulation. The consequences of this were exacerbated by the ECJ’s decision in West Tankers that anti-suit injunctions restraining the pursuit of proceedings in a Member State court were not compatible with the Brussels Regulation.
The West Tankers decision was criticised for extending the scope of the Brussels Regulation to arbitration in a way that undermined the effectiveness of arbitration agreements. Critics argued that the decision allowed parties to escape their obligation to submit disputes to arbitration by selecting their preferred court and commencing a substantive claim (the so-called “Italian torpedo”). The EU Commission took account of this criticism in its proposals for a recasting of the Brussels Regulation.
What are the key points
The recast Regulation retains the arbitration exception and introduces a new recital 12, which explains how the arbitration exception should be interpreted. It also includes a new Article 73(2) which provides that the Regulation shall not affect the application of the New York Convention.
The key points are as follows:
- The arbitration exception covers ancillary proceedings relating to arbitration including the formation of the tribunal, the powers of arbitrators and the conduct of an arbitration and any proceedings concerning the recognition or enforcement of an arbitral award.
- The courts of each Member State are free to determine the existence or validity of an arbitration agreement in accordance with their national law. This makes it clear that a “torpedo” action will not prevent the court of another Member State from considering the validity of an arbitration agreement.
- A ruling by a court of a Member State as to the existence or validity of an arbitration agreement falls outside the Regulation, regardless of whether it is decided as a principal or incidental issue. This makes it clear that the courts of Member States need not be bound by the decision of the court of another Member State as to the validity of an arbitration agreement. Arguably, this removes the need for anti-suit injunctions on the basis that the courts of each Member State are free to consider the validity of an arbitration agreement. However, it also gives rise to a risk of parallel proceedings and conflicting decisions as to the validity of an arbitration agreement.
- The courts of Member States are obliged to recognise and enforce a judgment on the merits of a dispute made pursuant to a negative ruling as to the existence or validity of an arbitration agreement. This, in part, addresses the risk of conflicting decisions as to the validity of an arbitration agreement, but leaves scope for disputes as to whether or not a judgment is a ruling on the merits of a dispute, and is likely to result in a race to obtain a judgment on the merits.
- The New York Convention takes precedence over the Regulation. In the event of a conflict between a court judgment (made pursuant to a negative ruling as to the existence or validity of an arbitration agreement) and an arbitral award, the New York Convention takes precedence. This appears to allow the Member State court to enforce the award (if valid under the New York Convention) in preference to the court judgment, but it is not clear how this rule will operate in practice.
The recast Regulation retains the arbitration exception and provides some welcome clarification as to the application of the exception. However, it has not eliminated the risk of parallel proceedings in cases involving a dispute as to the existence or validity of an arbitration agreement. We may well see more pre-emptive applications for rulings on the validity of arbitration agreements but the real race now will be the race to obtain a judgment on the merits of a dispute. As a result, the advice to those wanting to enforce an arbitration agreement is likely to remain unchanged: move quickly and get your judgment first.