The autonomy of parties to agree on an arbitral procedure is a basic principle of international commercial arbitration. This principle is recognised in Article 19(1) of the United Nations Commission on International Trade Law Model Law, which states that "subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings". Article 19(1) of the Chilean International Commercial Arbitration Act follows the same model.
However, parties occasionally try to deny the recognition of awards issued according to agreed rules, claiming that they are unfair or contrary to due process. This is what happened in Bakalland v Agroprodex Internacional SA, decided by the Chilean Supreme Court on November 29 2016.(1)
The parties executed two sale contracts with identical arbitration agreements, whereby any conflict arising from them was to be brought before the arbitral tribunal of the Polish Chamber of Commerce according to the procedures of that institution and in Polish.
Due to breaches of contract, Bakalland sued Agroprodex before the arbitral tribunal and won. The notice of arbitration was served to the defendant in Polish and the award ordered it to pay damages to the plaintiff.
The plaintiff sought recognition of the award in Chile which the defendant opposed – invoking Article V(1)(b) of the New York Convention – claiming that it "was not given proper notice" of the arbitration proceedings and was unable to defend itself. Although the negotiations and contract were in English, it argued that the notice was served in Polish, which was contrary to due process and public policy.
The Chilean Supreme Court rejected the opposition and held that the award had been issued according to the procedure and language agreed on by the parties. The court established that there were no grounds to assert that the notice of arbitration had affected due process, because it was served in accordance with what the parties had agreed in relation to the language of the arbitration, which included all procedural acts. Further, as the defendant had been given notice of the arbitration in due time, it had been able to undertake all necessary measures to discover the content of the document and initiate its defence in Poland. Hence, the notice was deemed apt.
This ruling has two salient aspects:
- it helps to circumscribe the concept of 'proper notice'; and
- it protects parties' procedural autonomy, which will ensure the continuing development of international commercial arbitration.
The concept of 'proper notice' amounts to the idea that defendants should receive notice of the proceedings against them in a language that they can understand. However, the parties' arrangements in this respect should not be disavowed.
The defendant in Bakalland attached to his submission an article by C Helmer and J T Wang,(2) which commented on landmark cases in which specific duties were imposed regarding the language of the notice of judicial proceedings. These cases deserve a close look, because they present some contrasts with Bakalland.
In Julen v Larson(3) and Mullane v Central Hanover Bank & Trust Co,(4) in which foreign awards were deemed unenforceable in the United States because the services which initiated those proceedings were not informative – the notices in question emanated from an ordinary state court and not an arbitral tribunal. The contrast with Bakalland is not trivial: in Julen and Mullane no procedural autonomy was involved, because the parties had no chance to choose the notice's original language.
The decision in Qingdao Free Trade Zone Genius Int'l Trading Co, Ltd v P and S International, Inc was a further step towards the expansion of the concept of 'proper notice' under the New York Convention. A petition to enforce a foreign award did not prosper because the notice did not state:
- the pendency of an arbitration;
- the amount of the dispute; or
- the date to appear at the initial hearing.
In addition, the court stressed that no agreement was in place in which the defendant had agreed to serve notice in a foreign language.
This was also considered in CEEG (Shanghai) Solar Science & Technology Co, Ltd v LUMOS LLC(5) – referred to by the defendant in Bakalland – in which the notice's language contravened a previous agreement which specified a choice-of-language provision.
These cases clearly show that the concept of 'proper notice' has expanded in recent decades, providing for specific requirements pertaining to language and content. However, this progress has come with the fundamental recognition of parties' essential autonomy regarding the procedural rules of arbitration.
An essential feature of international commercial arbitration is a fair and neutral procedure that is efficient and tailored to international disputes. Therefore, it is essential for courts to show deference to the rules agreed by the parties without submitting them to the formalities of national procedural law.
Commercial arbitration is at the disposition of the parties' autonomy, except with regard to mandatory limited restrictions that are imposed on the parties to agree on the arbitral procedure. Such limits include those imposed by due process.
However, even the limitations imposed by due process must be interpreted narrowly due to the deferential approach to the parties' procedural autonomy in international arbitration. Therefore, only truly unfair and arbitrary procedures should not be allowed. This is consistent with the approach of other jurisdictions, as Gary Born argues:
"In most jurisdictions, mandatory national law imposes only limited restrictions on the parties' autonomy to agree upon arbitral procedures. In general, only agreements to egregiously unfair, unconscionable, or wholly arbitrary procedures will be held unenforceable. As one U.S. decision, which adopted a particularly robust view of the parties' autonomy, put it:
'Short of authorizing trial by battle or ordeal or, more doubtfully, by a panel of three monkeys, parties can stipulate to whatever procedures they want to govern the arbitration of their disputes; parties are as free to specify idiosyncratic terms of arbitration as they are to specify any other terms in their contract'."(6)
This deferential approach is consistent with the New York Convention's pro-enforcement objectives, under which exceptions to the recognition of awards (eg, violations of due process) should be construed narrowly. Born has also highlighted this:
"In one court's words, 'the exception arising from an inability to present one's case 'should be narrowly construed' in light of the Convention's goal of encouraging the timely and efficient enforcement of awards.'… This pro-enforcement approach to the application of Article V (1) (b) is consistent with the recognition of the parties' procedural autonomy (discussed above), which makes courts hesitant to interfere with the parties' agreed arbitral procedures … Consistent with this, courts have very frequently rejected efforts in recognition proceedings by parties to challenge the fairness of arbitral procedures to which they had agreed (either in institutional rules or otherwise)."(7)
Therefore, the ruling is a laudable decision that respects the freedom of the parties to agree on procedural rules by making a narrow interpretation of exceptional due process violations.
For further information on this topic please contact Francisco Gonzalez or Javier Maturana at González & Rioseco Abogados by telephone (+56 228 400 400) or email ([email protected] or [email protected]). The González & Rioseco Abogados website can be accessed at www.gonzalezrioseco.cl.
(2) Helmer, Christie and Wang, Jovita T, "Enforcement of Foreign Arbitration Awards in the United States: English Language Notification of Initiation of Proceedings May Be Needed to Satisfy Due Process".
(5) 15-1256, 2016 WL 3909579 (10th Cir July 19 2016).
(6) Born, Gary, International Arbitration: Law and Practice (Wolters Kluwer 2012) 153. See Baravati v Josephthal, Lyon & Ross, 28 F3d 704 (7th Cir 1994).
(7) Born, p390. See Generica Ltd v Pharm Basics, Inc, 1996 US Dist LEXIS 13716 (ND Ill 1996) and Baravati v Josephthal, Lyon & Ross, 28 F 3d 704 (7th Cir 1994).