The Brussels Regulation governs the jurisdiction and enforcement of judgments in civil matters in the EU. The basic rule is that a defendant should be sued in the courts of the EU Member State in which it is domiciled. The jurisdictional rules of the Brussels Regulation are stated to apply to court proceedings only and not to arbitration. Conflicts of jurisdiction have, however, arisen where proceedings are commenced in an EU member state, contrary to a contractual arbitration clause providing for arbitration in another Member State. Recent revisions to the Brussels Regulation, due to come into force in January 2015, seek to address these conflicts. Our article considers the revisions relating to the “arbitration exception” in the Brussels Regulation and the practical effect they might have for parties agreeing to arbitrate their disputes in an EU country.
Council Regulation (EC) No. 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the Brussels Regulation) governs jurisdictional issues between EU courts and provides for the mutual recognition of court judgments within the EU. The cross-border recognition and enforcement of arbitration awards is governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention) rather than the Brussels Regulation; as a result, the Brussels Regulation expressly excludes arbitration from its ambit.
Since it came into force in March 2002, however, a number of concerns have arisen in relation to the practical application of the Brussels Regulation, not least the meaning and scope of the arbitration exception and whether court proceedings related to arbitration were governed by the Brussels Regulation.
As a result, a number of revisions to the Brussels Regulation were approved by the Council of the European Union in December 2012. Whilst the revised Regulation (EU Regulation 1215/2012) came into force on 9 January 2013, the majority of the reforms will only take effect as of 10 January 2015.
The key changes are aimed at:
- Reinforcing the arbitration exception and making it clear that it extends to court proceedings surrounding or in support of arbitration;
- Reinforcing jurisdiction agreements and preventing so-called “torpedo” actions, by requiring a Member State court to stay its proceedings where there is an exclusive jurisdiction clause in favour of another Member State’s court;
- Streamlining the process of enforcing Member State court judgments across the EU; and
- Extending the rules relating to jurisdiction agreements to non-EU parties in certain cases.
This article deals only with the revisions relating to the arbitration exception (point 1 above) and how they might work in practice. A future article, to be published in our Spring 2014 Shipping E-Brief, will consider the practical implications of the other key changes.
The arbitration exception
The case law
The uncertain relationship between arbitration and the Brussels Regulation has been highlighted in at least four cases, the Atlantic Emperor, Van Uden, the Front Comor and the Wadi Sudr (the latter two both Ince shipping cases).
In a sale contract dispute in 1992, the Atlantic Emperor, the Italian defendant commenced proceedings in Italy for a declaration of non-liability, notwithstanding a London arbitration clause in the sale contract, and refused to participate in London arbitration proceedings. Pursuant to an application by the claimant to the English Court to appoint an arbitrator in view of the defendant’s lack of co-operation, an application that would have required the English court to also consider the validity of the arbitration agreement, the matter was referred to the European Court of Justice (ECJ). The ECJ considered whether the arbitration exception in the Brussels Regulation applied to court proceedings concerning the appointment of an arbitrator and the arbitration process. It held that by excluding arbitration from the scope of the Regulation on the ground that it was already covered by the New York Convention and other international conventions, the Regulation excluded arbitration entirely, including court proceedings in which arbitration is the subject matter.
In 1998 in Van Uden, the ECJ endorsed the Atlantic Emperor and concluded that the subject matter of court proceedings is arbitration, if the proceedings serve to protect the right to have the dispute determined by arbitration.
Then came the Front Comor. In broad terms, the Front Comor involved a collision in Italy of a vessel under charter to the (oil refinery) owners of the jetty with which the vessel collided. Although the charterparty provided for disputes to be referred to London arbitration, the jetty owners’ subrogated underwriters commenced court proceedings in Italy. In 2009, the ECJ held that, notwithstanding the London arbitration agreement in the charterparty, the English Court could not grant an anti-suit injunction to restrain the Italian proceedings in favour of English arbitration as this would be incompatible with the Brussels Regulation. Rather, it was for the Italian Court to rule on its own jurisdiction because “a preliminary issue concerning the applicability of an arbitration agreement, including in particular its validity, also comes within the scope of application” of the Brussels Regulation.
Also in 2009, in the Wadi Sudr, the claim was for damages for delivery of cargo short of destination. The bills of lading provided for English law and London arbitration but nonetheless, the cargo interests commenced court proceedings in Spain. The Spanish Court held that, as a matter of Spanish law, no arbitration agreement was validly incorporated into the bills of lading. The English Court of Appeal subsequently held that the Spanish Court judgment was within the scope of the Brussels Regulation and that it was bound to recognise it.
Notwithstanding the arbitration exception, therefore, conflicts have arisen between upholding a party's right to arbitrate pursuant to a contractual arbitration agreement and the obligation to permit courts in EU Member States to rule on their own jurisdiction.
In particular, there has been scope for parallel proceedings, with one party bringing arbitration proceedings pursuant to an arbitration agreement and the other party (very often for purely tactical reasons) challenging the existence or validity of the arbitration agreement in the courts of another Member State. In some instances, it could take many years for those court proceedings to produce a judgment either on the validity of the arbitration agreement and/or on the merits of the case.
Furthermore, while a party could continue with its arbitration proceedings even though court proceedings were also underway, there has been a clear risk of the arbitration award being inconsistent with the court judgment. In that event, a Member State court would face a conflict between enforcing the judgment under the Brussels Regulation and enforcing the arbitration award under the New York Convention.
A major concern has been that the effectiveness of arbitration in the EU might be undermined as a result.
The recast Regulation seeks to reinforce and clarify the arbitration exception by expressly confirming that the Regulation does not apply to any court actions or proceedings ancillary to arbitration. This means that the arbitration exception would extend to, for example, court proceedings relating to the constitution of an arbitral tribunal, the powers of the arbitrators, the conduct of the arbitration, as well as any action or judgment concerning the annulment, review, appeal, recognition or enforcement of an arbitral award. Also covered by the exception will be proceedings seeking or resisting the enforcement of an arbitration agreement, including disputes over the validity or enforceability of an arbitration agreement.
In addition, a Member State court retains the right to rule on the validity and scope of an arbitration agreement even if another Member State court has been asked to consider the issue first and is so considering it.
Finally, it is made clear that the New York Convention takes precedence over the Brussels Regulation. This appears to mean that a Member State court can in principle recognise and enforce an arbitration award even if it is inconsistent with another Member State court’s judgment.
What does this mean in practice?
First, an EU Member State court will not be bound by the decision of another Member State court on the validity and scope of an arbitration agreement. Rather, each court can decide that issue independently and according to its national law. So, for example, in the Wadi Sudr, the Court in England would not be bound to recognise the Spanish court’s decision that the arbitration clause in the bills of lading was invalid under Spanish law but could instead consider for itself whether it was valid and enforceable under English law.
Furthermore, where a party commences court proceedings in a Member State contrary to an arbitration clause and the other party subsequently commences proceedings in the Member State Court of the arbitral seat seeking a declaration that the arbitration agreement is valid and binding, the Court of the arbitral seat does not have to wait for the decision of the Court first seised on the validity of the arbitration agreement before itself making a decision on that issue and referring the parties to arbitration, if appropriate.
At first blush, these are positive changes. Certain difficulties can, however, still be envisaged. There may still be conflicting Member State court decisions on whether an arbitration agreement is valid and binding. A party that is faced with an unfavourable court decision in one Member State may seek a different decision from the courts of another Member State. Neither court’s ruling will take precedence over the other, meaning there will continue to be the risk of parallel, even multiple, proceedings and a question mark over which decision will prevail.
There also remains the possibility of a conflicting court decision and arbitration award on the issue, for example where a Member State court decides the arbitration agreement is invalid but the arbitrators decide it is valid and that they have jurisdiction. A party seeking to enforce the arbitration award in that Member State may find the Court reluctant to enforce an arbitration award that conflicts with its own decision.
Furthermore, a third Member State court, if asked to enforce the conflicting award and/or judgment, will have to choose between the two. It is likely then to have to consider for itself whether the arbitration agreement is null and void or valid and binding. If that were to happen, there will then potentially be three separate findings on whether the arbitration agreement stands or falls. Given the recast Regulation emphasises that the New York Convention takes precedence over the Brussels Regulation, arguably the third Member State should enforce the arbitration award. Whether it will do so, however, remains uncertain because under the recast Regulation, Member State courts remain bound to enforce judgments on the merits of a dispute found not to be subject to a valid arbitration agreement by the courts of another Member State. In addition, the New York Convention sets out certain limited grounds for refusing to enforce an arbitration award e.g. that it would be contrary to public policy to do so, and a third Member State court may choose to rely on one of these exceptions to refuse enforcement. Until such time as a scenario of this type is played out in a Member State court, however, it is difficult to judge what the outcome might be.
Some commentators have suggested that these changes go some way to reversing the impact of the ECJ decision in the Front Comor. How accurate this view proves to be and how successful the attempts to reinforce the arbitration exception will be, remains to be seen after the reforms take effect next year.
In the meantime, it is worth noting that the recast Regulation does not directly address the issue of anti-suit injunctions. Pursuant to the Front Comor decision, an EU Member State court could no longer issue an anti-suit injunction to restrain court proceedings brought in another EU Member State in apparent breach of an arbitration agreement. Although it is not entirely clear, it would appear that anti-suit injunctions remain available only in relation to restraining proceedings brought outside the EU.