On September 15, 2020, the Luxembourg government addressed the modernisation of the country's arbitration law by tabling bill No. 7671 to the Chamber of Deputies. Since their incorporation in France's Napoleonic-era Code of Civil Procedure of 1806, the rules relating to arbitration procedures have been modified only occasionally, with a major change in 1981 that notably updated the regime for appeals against awards. The current reform comes at the right time because the grand duchy has manifest advantages as a hub for arbitration, in particular the favourable attitude of judges toward international law.
The modernisation of arbitration has multiple goals, not only to relieve the national courts of some cross-border disputes but also to make Luxembourg more attractive as a jurisdiction by providing parties to a dispute access to legal expertise. Many operating companies and holding entities have their headquarters in Luxembourg and incur additional costs when their disputes are heard in arbitration forums abroad. Additional risks arise when the legal advisers and judges in annulment proceedings are not specialists in Luxembourg law.
The draft legislation is inspired by French law and the model law of the United Nations Commission on International Trade Law, and seeks to provide liberal and arbitration-friendly provisions. Within the seven new chapters that will be integrated into Luxembourg's New Code of Civil Procedure (NCPC), the draft does not make a distinction between national and international arbitration.
Its principles are widely accepted in comparative law: they notably include a broad scope of whether disputes can be settled by arbitration, the absence of formalism for the arbitration agreement, the principle of autonomy of the arbitration clause, the positive and negative effect of the principle of competence-competence – whether a legal body has jurisdiction to rule on its own competence in matters before it – as well as the obligation of disclosure on the arbitrator (economic links with companies, former mandates, appointments as arbitrator or as lawyer of a party involved) in order to minimise the risk of conflicts of interest.
Nevertheless, the draft legislation innovates on certain points by comparison with French law, notably by introducing an obligation of confidentiality, sanctioned by the award of damages. It also strengthens the powers of the support judge and requires collaboration between the state judge and the arbitral tribunal to maximise the effectiveness of the arbitration proceedings.
The legislation also aims to extend the international jurisdiction of Luxembourg judges by giving him or her a jurisdictional head in the name of denial of justice. The arbitration award has the force of res judicata – a settled matter that may not be relitigated – regarding the dispute it resolves and must include its reasoning.
Regarding recourse against the award, the proposal distinguishes between awards made in Luxembourg and those made abroad:
- Awards handed down in Luxembourg may be subject to an action for annulment on the basis of the new article 1238 of the NCPC, which lists seven grounds for annulment. Article 1243 adopts the revision system in French law, and article 1244 deals with third-party opposition.
- For awards delivered abroad, it is impossible to initiate annulment proceedings, but revision of the award is permissible. The innovation of the Luxembourg law is the introduction of a preventive action for unenforceability (recours préventif en inopposabilité), as required by French doctrine. It allows a party to an award to oppose the exequatur – recognition and enforcement of a foreign judgment – procedure at an early stage, provided it can demonstrate a sufficient interest.
Scope of eligibility for arbitration
Art. 1224. (1) All persons may compromise on rights which they freely dispose of.
(2) Compromises may not be made in matters concerning the status and capacity of persons, marital relations, the representation of incapable persons, the causes of incapable persons and those of absent or presumed absent persons.
(3) The arbitral tribunal shall apply the rules of public policy.
Art. 1225. The following may not be submitted to arbitration: 1° disputes between professionals and consumers; 2° disputes between employers and employees; 3° disputes relating to residential leases. This prohibition remains applicable even after the end of the contractual relations referred to above.
The new article 1224 of the NCPC refers to the nature of the disputes that can be settled by arbitration, which excludes weaker parties who must be protected, as in consumer law. In labour law, the question of whether disputes relating to an employment contract may be settled by arbitration is not resolved and is still the subject of parliamentary debate. Finally, disputes arising from bankruptcy proceedings cannot be adjudicated by an arbitral tribunal. However, the receiver of a company may, for example, conclude an arbitration agreement to settle a dispute with a debtor. Similarly, an arbitral tribunal may hear a dispute covered by an arbitration agreement stipulated in a contract that was to be performed before the initiation of bankruptcy proceedings.
Art. 1227. (1) An arbitration agreement is an agreement by which the parties decide to submit to arbitration all or some of the disputes which have arisen or may arise between them in respect of a particular legal relationship, whether contractual or not. It is not subject to any formality requirements.
(2) It may be concluded in the form of an arbitration clause or a settlement agreement. An arbitration clause is an agreement by which the parties to one or more contracts undertake to submit to arbitration any disputes which may arise in connection with that contract or those contracts. An arbitration agreement is an agreement by which the parties to a dispute submit it to arbitration.
The arbitration clause or arbitration agreement is not subject to any requirement regarding form; it can be concluded orally.
Art. 1227-2. The arbitral tribunal may rule on its own jurisdiction, including any objection to the existence or validity of the arbitration agreement. For this purpose, an arbitration clause which forms part of a contract shall be treated as an agreement separate from the other terms of the contract. It is not affected by the nullity, lapse or termination of the contract. Where it is null and void, the arbitration clause shall be deemed not to have been written.
The Luxembourg legislation enshrines the principle of competence-competence, which is universally accepted in comparative law. It also refers to the principles of severability and autonomy of the arbitration clause, by which the dispute resolution clause is independent of the main contract and is not affected by the defects of the latter or its possible nullity. The effect of such a provision is to protect the power of arbitrators to rule on their own jurisdiction in a matter to override delaying tactics.
Art. 1227-3. Where a dispute arising out of an arbitration agreement is brought before a state court, the latter shall declare that it lacks jurisdiction, unless the arbitration agreement is unlawful because of the non-applicability of arbitration the case, or if it is void or unenforceable for any other reason. The state court may not declare at its own initiative that it lacks jurisdiction. If the arbitral tribunal declares itself incompetent, or if the arbitration award is set aside for a reason that excludes resubmission of the case to an arbitral tribunal, the case shall be continued before the court to which it was originally submitted as soon as one or more of the parties has notified the registry and the other parties of the relevant event.
The legislation enshrines the positive effect of the jurisdictional principle, which prevents the judge from reviewing the applicability of an arbitration agreement. The second element of the jurisdictional principle is the negative effect, under which the arbitrators must be the first (but not the only) judges of their own jurisdiction; the oversight of the Luxembourg judge is postponed to the stage of any action involving enforcement or annulment of the arbitration award made on the basis of the arbitration agreement.
When a dispute to be resolved by arbitration is addressed to a national court, it will decline jurisdiction only if one of the respondents invokes this exception, unless the arbitration agreement is manifestly null and void or unenforceable. The wording of Article 1227 (3) of the draft legislation nevertheless appears confusing and could jeopardise the arbitration process. The first paragraph of article 1227-3 of the bill misleadingly extends this exception with the clause "if for any other reason it is void or unenforceable", which could undermine the effectiveness of the arbitration procedure.
It is not yet certain whether the Chamber of Deputies will correct this article or take inspiration from French law and the opinion of the Association Luxembourgeoise d'Arbitrage, which in its opinion of July 27, 2021 recommended enshrining in law the negative effect of the jurisdictional principle to the maximum extent.
Art. 1227-4. As long as the arbitral tribunal has not yet been constituted or once it appears that the arbitral tribunal cannot grant the relief sought, the existence of an arbitration agreement shall not prevent a party from bringing an action before a court or tribunal with jurisdictional competence for the purpose of obtaining a measure of inquiry or an interim measure of protection.
Before the constitution of the arbitral tribunal, only the state court may order urgent measures. Certain measures, such as garnishments, cannot be granted by an arbitral tribunal because of its lack of enforcement powers, in particular against third parties.
The arbitral tribunal
Art. 1228. The parties are free to determine the seat of the arbitration or to delegate this determination to the person entrusted with the organisation of the arbitration. In the absence of such determination, the seat shall be determined by the arbitral tribunal, taking into account the circumstances of the case, including the convenience of the parties. The arbitration shall be deemed to be legally conducted at the seat of the arbitration. Unless otherwise agreed, the arbitral tribunal may hold hearings, take evidence, certify its decisions and meet at any place it considers appropriate. Arbitration decisions shall be deemed to have been handed down at the seat of the arbitration.
This article echoes the practice of delocalisation of arbitration: fixing the seat of the proceedings in Luxembourg does not necessarily require holding the hearings in Luxembourg. But by determining the seat of the arbitration, the parties agree on the place where the award is deemed to be made, which has a direct impact on remedies and review of the award.
Art. 1228-3. Any dispute relating to the constitution of the arbitral tribunal shall be settled, in the absence of agreement of the parties, by the person responsible for organising the arbitration or, failing that, by the support judge.
Art. 1228-4. In the absence of an agreement of the parties on the modalities for the appointment of an arbitrator, the following procedure shall apply:
- In the case of arbitration by a sole arbitrator, if the parties do not agree on the choice of the arbitrator, the arbitrator shall be appointed by the person in charge of organising the arbitration or, failing that, by the support judge.
- In the case of arbitration by three arbitrators, each party shall choose one arbitrator and the two arbitrators so chosen shall appoint the third arbitrator; if a party fails to choose an arbitrator within one month of receipt of the request by the other party or if the two arbitrators fail to agree on the choice of the third arbitrator within one month of acceptance by the last arbitrator of their appointment, the person responsible for organising the arbitration or, failing that, the support judge shall make the appointment.
- Where the dispute is between more than two parties and they do not agree on the modalities of constitution of the arbitral tribunal, the person responsible for organising the arbitration or, failing that, the support judge, shall appoint the arbitrator(s).
- All other disagreements concerning the appointment of arbitrators shall likewise be settled by the person responsible for organising the arbitration or, failing that, the support judge.
As noted during the preparatory work on the draft legislation, the one-month period stipulated for a party to choose an arbitrator, after which the support judge may proceed to appoint them, seems more appropriate than the eight-day period provided for in the current Luxembourg law.
Art. 1228-7. An arbitrator may be challenged only if there are circumstances likely to raise legitimate doubts as to their impartiality or independence, or if they do not possess the qualifications required by the parties. In the event of a dispute over a challenge to an arbitrator, this shall be resolved by the person responsible for organising the arbitration or, failing that, decided by the support judge, who shall refer the matter to the court within a month of the disclosure or discovery of the contentious information.
This article imposes a disclosure obligation on arbitrators. This is a welcome provision in order to prevent potential conflicts of interest.
Art. 1228-8. An arbitrator may be dismissed only with the unanimous consent of the parties. In the absence of unanimity, the decision shall be taken by the person in charge of organising the arbitration or, failing that, by the support judge, who shall refer the matter to the court within a month of the disclosure or discovery of the contentious information.
As regards the time limit for lodging an objection, the Luxembourg draft law takes its inspiration from the French model by extending the period to one month, contrary to the United Nations Commission on International Trade Law model legislation, which provides for a time limit of 15 days.
The support judge
Art. 1229. The support judge of the arbitration proceedings is the Luxembourg judge when the seat of the arbitration has been fixed in Luxembourg, or, if the seat has not been fixed, when:
- The parties have agreed to submit the arbitration to Luxembourg procedural law;
- The parties have expressly given jurisdiction to the Luxembourg courts to hear disputes relating to the arbitral proceedings; or
- There is a significant link between the dispute and Luxembourg. The Luxembourg support judge always has jurisdiction if one of the parties is exposed to a risk of denial of justice.
Article 1229 sets out four connecting factors and grounds for international jurisdiction of the Luxembourg judge in arbitration, primarily when the seat is located in Luxembourg. The other three criteria are alternative: by the will of the parties in choosing Luxembourg law as procedural law for the arbitration (lex curia; where there is a significant link between the dispute and Luxembourg, such as the place of performance of a disputed contract or the domicile of a defendant; or in the event of the risk of denial of justice.
The arbitration proceedings
Art. 1231. The arbitral tribunal shall decide the dispute in accordance with the applicable rules of law. In the case of an international dispute, the applicable rules are those chosen by the parties or, failing that, those which the tribunal considers appropriate. The tribunal shall decide the dispute as an 'amiable composition' if the parties have entrusted it with this task.
According to the preparatory work on the legislation, "international matters" should be understood not with reference to the French definition of international arbitration, but the ordinary rules of private international law. The arbitrator(s) will be able to rule as in the capacity of amiable compositeur – with the power to seek an equitable solution to the dispute, by setting aside if necessary the legal rules otherwise be applicable or the strict application of a contract – offering an opportunities for the renegotiation of contracts, for example.
Art. 1231-3. The arbitral tribunal shall always guarantee equality of the parties and respect of the adversarial principle.
This enshrines in Luxembourg arbitration law the principle of equality of opportunity to present one's case and respect for the adversarial process. This principle must be applied in the light of Article 6 § 1 of the European Convention on Human Rights and may be applicable in particular in matters of clandestine evidence.
Art. 1231-5. In the absence of legal obligations to the contrary or unless otherwise agreed by the parties, the arbitration proceedings shall be confidential.
This is one of the main advantages of the reform, which addresses the preference of economic players regarding business secrets or banking and financial transactions. It is specified in the preparatory work that this obligation will not invalidate the procedure and that breaches may be sanctioned by damages.
Art. 1231-6. If the arbitration agreement does not set a time limit, the duration of the mission of the arbitral tribunal shall be limited to six months from acceptance of the mission by the final arbitrator to do so. The legal or contractual time limit may be extended by agreement of the parties or by the person in charge of organising the arbitration if they have been authorised to do so by the parties, or, failing that, by the support judge.
Once the arbitrators accept their mission, the time limit for rendering an arbitration award is six months, as in France; Belgian law does not impose a time limit.
The arbitration award
Article 1232 establishes the principle that the deliberations of arbitration tribunals are secret and may be accompanied by a separate or dissenting opinion.
Art. 1232-2. The arbitration award shall state the reasons on which it is based, unless the parties have given the arbitral tribunal a dispensation from stating the reasons.
Unless the parties have agreed otherwise, the failure to state reasons for an arbitration award shall result in the award being null and void.
Art. 1232-3. The arbitration award shall have the force of res judicata as soon as it is made. The arbitral tribunal shall deliver a signed copy of the award to each party. The award may be served by a party. Such service shall start the time limits provided for in the following articles. The parties may, however, agree that this effect shall be attached to another method of service designated by themselves.
As soon as it is made, the arbitral award is res judicata in relation to the dispute that it settles.
Enforcement of the award and remedies
Arbitration awards handed down in Luxembourg
Art. 1233. An arbitration award may be enforced only through an enforcement order issued by the president of the district court in whose jurisdiction the award was made. The procedure relating to application for enforcement is not adversarial. The application must be filed by the earliest party at the registry of the competent court together with the original or a copy of the award and the arbitration agreement. The claimant must elect domicile in the district of the court addressed. Service on the claimant relating to enforcement of the award or recourse may be carried out at the address elected. A copy of the award shall be attached to the enforcement order.
Under the new article 1233 of the NCPC, the judge of exequatur for awards made in Luxembourg is the president of the district court in whose jurisdiction the award was handed down, of Luxembourg or Diekirch. The exequatur order must state the court's reasoning and may be appealed against under the new article 1235 of the code.
Art. 1234. Enforceability may not be granted if the award is manifestly contrary to public policy. No appeal may be accepted to an order granting enforcement.
A clear violation of public policy is the only ground for refusing enforcement. However, there are seven grounds for annulment of the award under article 1238, which must be examined in the annulment appeal. The procedure for appeal to the Court of Appeal against the award has been abolished, leaving as the only recourse against the award an annulment appeal to the Court of Appeal.
Art. 1238. An action for annulment is only available if:
- The arbitral tribunal has wrongly declared itself competent or incompetent.
- The arbitral tribunal has been improperly constituted.
- The arbitral tribunal has ruled without compliance with its terms of reference.
- The principle of adversarial proceedings has not been respected.
- The award is contrary to public policy.
- The award does not state its reasoning, unless the parties have dispensed with the need for the reasoning of the arbitrators.
- There has been a violation of the rights of defence.
Article 1238 lists the seven grounds for annulment through an action for annulment (lack of jurisdiction of the court, the court was improperly constituted, the court ruled without complying with the terms of reference given by the parties, non-compliance with the adversarial process, infringement of public policy, failure to state reasons unless otherwise agreed by the parties, and violation of the rights of the defence).
The ground of failure to state reasons is expressed in a more flexible manner than in French law. Article 1241 provides that this recourse is not suspensive, but that the enforcement of the award may be adjusted by the Court of Appeal. Article 1243 adopts the revision system from French law and Article 1244 enshrines the third-party objection.
Arbitration awards handed down abroad
Art. 1246. A decision on an application for enforcement of an arbitration award made abroad may be appealed. The appeal must be lodged within one month of the service of the decision; the time limit may not be extended because of distance. The Court of Appeal may refuse to enforce the arbitration award only in cases provided for under article 1238, subject to the provisions of international conventions.
Only courts of the territory where the foreign award was made can rule on an appeal for annulment. However, if the award is the subject of an exequatur ruling in Luxembourg, it can be reviewed by the Luxembourg appeal court through an appeal against the exequatur decision. The exequatur ruling of an arbitration award handed down abroad can be refused on the same seven grounds that apply to the annulment of awards delivered in Luxembourg as set out in the new article 1238. Moreover, article 1247 opens up the right to apply for revision of arbitration awards made abroad.
Art. 1248. Provided that it can demonstrate a sufficient interest, each party to an award made abroad may request, as a precautionary measure, that the Court of Appeal declare the award unenforceable against it for one of the reasons for refusing enforcement cited in article 1246 or for revising the enforcement order cited in article 1247, paragraph 1. An appeal for non-enforceability is lodged, investigated and judged according to the rules relating to the procedure of common law before the Court of Appeal sitting in accordance with the civil procedure.
The final innovation of the new Luxembourg arbitration law is the introduction of a preventive action for unenforceability, which allows a party to an award to take preventive action before the courts to avoid the award being granted exequatur, provided a sufficient interest is demonstrated.
Art. 1251. The enforcement order is subject to third-party proceedings under the conditions set out in article 1244, before the Luxembourg court having jurisdiction under article 613 of this code. An arbitration award made abroad cannot itself be subject to third-party proceedings before a Luxembourg court. However, provided they can demonstrate a sufficient interest, a third party against whom the award is likely to be opposed may argue, before the competent Luxembourg court, that the award is ill-founded and cannot be invoked against them.
Third-party proceedings remain available to protect the rights of third parties affected by an arbitral award.
The wide-ranging reform undertaken by the Luxembourg law-maker proposes a coherent regime of rules designed to promote efficient arbitration proceedings in Luxembourg that respect the fundamental rights of the parties choosing this mode of dispute resolution. It should be noted that the issue of the negative effect of the jurisdictional principle needs to be resolved. By introducing more flexibility and balancing the rules on arbitration agreements and proceedings, the objective remains to promote the integrity of the Luxembourg marketplace while ensuring the full effectiveness of awards.
Chevalier & Sciales
Finance and Capital Markets, Partner
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