UK: Giving Weight To Arbitration Clauses

This article was first published in an amended form in Lloyd's List.

Brussels is looking at ways to enforce jurisdictional agreements

When a contract such as a charterparty is being negotiated, it is common for the parties to agree to include either an exclusive choice of court or an arbitration clause to pre-empt jurisdictional disputes that may arise in the future.

However, when a party breaches a clause requiring, for example, disputes to be brought exclusively before an arbitral tribunal in London by commencing proceedings in the court of another European Union Member State, the ability of the other party to enforce the clause has in recent years been severely curtailed.

This curtailment results from a combination of the scope, application and mechanistic operation of the rules Council Regulation 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.

The practical problems faced by legitimate claimants and the opportunities created for recalcitrant debtors as a result of the way in which the Regulation operates in this area has prompted calls across Europe for legislative reform. The end of that process is now in sight following the European Commission's proposal for recasting the Regulation.

To resolve the situation the Commission, which acknowledges the current situation to be too unsatisfactory in its explanatory memorandum accompanying the proposal, proposes a number of changes. These include the addition of article 29(4) to the Regulation, which would read:

"Where the agreed or designated seat of an arbitration is in a Member State, the courts of another Member State whose jurisdiction is contested on the basis of an arbitration agreement shall stay proceedings once the courts of the Member State where the seat of the arbitration is located or the arbitral tribunal have been seised of proceedings to determine, as their main object or as an incidental question, the existence, validity or effects of that arbitration agreement."

Article 29(4) goes on to provide: "Where the existence, validity or effects of the arbitration agreement are established, the court seised shall decline jurisdiction."

An arbitral tribunal is deemed to be seised under article 29(4) when "a party has nominated an arbitrator or when a party has requested the support of an institution, authority or a court for the tribunal's constitution" (article 33(3)).

Article 1(2)(d) of the Regulation is thus amended to provide:

"This Regulation shall not apply to arbitration, save as provided for in articles 29, paragraph 4 and 33, paragraph 3." Article 29(4) is drafted with the intention of giving effect to an arbitration clause in a contract and preventing the undesirable situation of having concurrent arbitral and court proceedings in EU Member States, a scenario which can now result following the decision of the European Court of Justice in the Front Comor.

The Commission's proposal is, however, very different from the suggestion of the European Parliament, which was to strengthen the arbitration exception in article 1(2)(d) of the Regulation by making it "clear that not only arbitration proceedings, but also judicial proceedings ruling on the validity or extent of arbitral competence as a principal issue or as an incidental or preliminary question, are excluded from the scope of the Regulation."

Instead, the Commission proposes to weaken the arbitration exception in article 1(2)(d) of the Regulation. Some Member States will probably be hostile to this aspect of the proposal, as it links arbitration to the control of the court of the seat at the outset of any proceedings.

It should also be noted that article 29(4) does not apply where no seat is chosen by the parties (whether directly or through the choice of a set of arbitral rules). Nor does the proposal deal with the situation when the place of the seat chosen by the parties is not in a Member State.

Presumably it is intended that in this situation the court of a Member State, whose jurisdiction is contested on the basis of an arbitration agreement, should apply its national law to determine how it is to proceed.

The Commission's proposal also precludes a return to the situation where the English court could grant an anti-suit injunction in support of a London arbitration clause and thus does not reverse the effect of the decision in the Front Comor as the European Parliament suggested should happen.

Instead, in order to enforce a London arbitration clause, the Commission proposes that the innocent party should nominate an arbitrator in accordance with the terms of the clause. Once the innocent party informs the court in which the proceedings have been commenced in breach of contract that it has done this, that court would then be obliged to stay its proceedings. The court in question would then have to decline jurisdiction once the "existence, validity or effects of the arbitration agreement are established" (article 29(4)).

With regard to improving the ability of a party to enforce a choice of court clause, the Commission proposes that priority should be given to the chosen court to decide on its jurisdiction. This departs from the current mechanistic "first seised" rule, under which the court second seised, even if it is the court the parties chose to determine any disputes when concluding their contract, must decline jurisdiction until the court first seised has decided whether or not it has jurisdiction.

Article 32(2) accordingly provides that where the court of a Member State has exclusive jurisdiction by virtue of article 23(1) of the Regulation, the "courts of other Member States shall have no jurisdiction over the dispute until such time as the court ... designated in the agreement decline[s] jurisdiction".

Although the regulation is silent on the issue, it is submitted that the court of a Member State allegedly given exclusive jurisdiction by such a clause could proceed under article 32(2). The validity of the clause (if in dispute) will be determined by the law of the Member State (allegedly) chosen.

The Commission has also recognised the commercial difficulties caused by tactical abuse of the court first seised rule (regardless of whether or not there is a jurisdiction/arbitration clause) and has proposed that where proceedings "involving the same cause of action and between the same parties are brought in the courts of different Member States" the court first seised must "establish its jurisdiction within six months except where exceptional circumstances make this impossible" (article 29(2)). However, no guidance is given as to what qualifies as "exceptional circumstances." This will almost certainly require clarification.

Of further note is the Commission's decision not to propose that the Regulation be amended to include special provisions dealing with whether or not a third party bill of lading holder is bound by any jurisdiction clause the bill of lading contains. Paragraph 13 of the European Parliament's resolution provided suggestions for this that were similar to the controversial provisions in the Rotterdam Rules dealing with third parties and jurisdiction clauses in relation to volume contracts.

Finally, the Commission has unsurprisingly not proposed to introduce into the regulation the general concept of forum non conveniens, which would give the courts of EU Member States the ability to decide whether or not to exercise jurisdiction as a matter of discretion. However, article 34 does give the court of a Member State discretion to stay its proceedings where prior proceedings in the court of a non-Member State are "within a reasonable time" expected to give rise to an enforceable judgment and the court is satisfied that it is "necessary for the proper administration of justice to [stay its proceedings]".

Under the ordinary legislative procedure, the proposal must be jointly adopted by the Council of the European Union and the European Parliament. The final approval is expected within two to three years.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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