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Copyright © International Chamber of Commerce (ICC). All rights reserved.
( Source of the document: ICC Digital Library )
1. Much has been written about the contribution of the International Chamber of Commerce ('ICC') and its International Court of Arbitration ('Court') to the resolution of disputes involving states and state entities. Writings have concentrated largely, if not exclusively, on how the Court has adapted the ICC Rules of Arbitration ('Rules'), which were created above all for the settlement of private disputes, to the resolution of disputes involving states and state entities.2
2. Literature on ICC arbitration often states that, when applying the Rules, the Court gives special consideration to notions of public interest, public policy or public service in disputes between public entities and private contractors, doubtless under the influence of the French legal system, home to the ICC, where these notions have particular strength. That special consideration is well illustrated in the Court's prima facie analysis of arbitration agreements3 in cases where a private contractor attempts to extend the effects of the agreement to a non-signatory state. Here, the Court normally sets a higher threshold than would otherwise be the case for proof of the participation of the non-signatory state in the negotiation, execution, performance or termination of the contract containing the arbitration agreement.4
3. The special consideration the Court gives to cases involving states and state entities has recently evolved. In 2012 the ICC published a report prepared by a special task force set up within its Commission [Page402:] on Arbitration and ADR,5 in which, among other things, the Court's practices in cases involving states and state entities are described. With regard to the Court's prima facie analysis of arbitration agreements, the report noted that the Court's rigorous analysis of requests to extend an arbitration agreement to a non-signatory state should also apply in situations where the non-signatory is a private entity.6 With regard to transparency, the report recommended that if parties to an ICC investment treaty arbitration so agree, the Court shall depart from Article 11(4) of the Rules by providing reasons for contested decisions on the confirmation, non-confirmation, challenge and replacement of arbitrators.7 This recommendation has been accepted by the ICC. I believe that these two proposals (among many others) will be to the benefit of states, state entities and private contractors that use ICC arbitration to resolve their disputes.
4. As President of the Court, John Beechey played an important role in helping the task force to achieve its results, including the two proposals described above. President Beechey's search for a balance between public and private interests had a considerable influence on the task force's recommendations for ICC arbitrations involving states and state entities. In particular, his stance on transparency helped to ensure acceptance of the idea that the Court should provide reasons for certain decisions relating to the constitution of ICC arbitral tribunals in cases brought pursuant to investment treaties. The task force's report must be seen as part of the legacy of John Beechey's presidency.
5. Much less has been written about the contribution of ICC arbitrators (including John Beechey) to the development of theories and arguments often relied upon in arbitrations involving states and state entities. ICC arbitration has been a laboratory in which many very prestigious jurists and advocates have proposed or accepted principles that have made arbitration with states and state entities legally and practically possible. The apparent opposition between state sovereignty and the adjudication of disputes involving public entities by private arbitrators needed to overcome many legal - not to mention, political - hurdles. Even today, it is still unthinkable for some people that a private individual, or panel of private individuals, should be entrusted with the adjudication of a dispute involving sensitive public concerns such as health, the environment or taxation. It would go far beyond the scope of this modest paper to describe all the principles and theories that have emerged from ICC arbitration in such cases. Instead, our remarks will be confined to explaining and criticizing the most important of these principles and theories from the perspective of private entities, [Page403:] namely the rule that states and state entities cannot rely on provisions of their domestic law to avoid the application of international arbitration agreements ('Rule').8
6. This Rule arose from situations such as the following. Although prohibited from doing so by its domestic law, a state or state entity enters into an international contract that contains an arbitration clause. When a dispute subsequently arises, the state or state entity challenges the jurisdiction of the arbitral tribunal on the grounds that under its domestic law it was not entitled to agree to arbitration. The domestic law invoked by the state or state entity usually provides that the approval of an organ of the state such as its parliament was necessary before executing an international contract containing an arbitration agreement,9 or that the state or state entity could not submit disputes arising from 'administrative contracts' or 'administrative acts' to arbitration.10 The Rule was frequently applied in situations where the Iranian state, or one of its offshoots, objected to the jurisdiction of an arbitral tribunal on the basis of Article 139 of the 1979 Iranian Constitution, which provides that:
The resolution of disputes concerning state property, or the submission of such disputes to arbitration, shall in each case be subject to approval by the Council of Ministers and must be notified to Parliament. Cases in which one party to the dispute is foreign, as well as important domestic disputes, must also be approved by Parliament.
7. The rationale underlying the jurisdictional challenges mentioned in the preceding paragraph is often left unexplained. It may be assumed, however, that such prohibitions stem from a belief that certain types of disputes should not be entrusted to private justice. Unlike state courts, private arbitrators are not expected to consider public interest, public policy or public services in their decisions. Simply put, private arbitrators are creatures of contract whereas judges are organs of the state. The Tapie case in France provides a good illustration of this point. The media11 suggested that the French state would have obtained a better decision in its case against Bernard Tapie had the parties to the dispute not resorted to arbitration but to the competent state courts. It was assumed, rightly or wrongly, that a French judge would never have ordered the French state to pay Tapie damages as high as those awarded by the arbitral tribunal in the circumstances. Arguments of this kind are belied, however, by the fact that state courts often hand down rulings against their own state and entities under its control.
8. The first ICC award to affirm the Rule appears to have been in case 1939 in 1971,12 where the tribunal held that:
international ordre public would vigorously reject the proposition that a State organ, dealing with foreigners, having openly, with knowledge and intent, concluded an arbitration clause that inspires the cocontractant's confidence, could thereafter, whether in the arbitration or in execution proceedings, invoke the nullity of its own promise.
9. Since then, many other ICC arbitral tribunals have adopted and applied the Rule.13 Although they have described the Rule in similar or identical terms, the explanations they have given for it have varied. Such differences may be due to the fact that counsel in those cases argued for the Rule on the basis of various legal theories. Some, for instance, have invoked good faith (I) while others have preferred to rely on what they call international 'ordre public' or public policy (II). Both theories, however, are defective. As will be seen below, reliance on good faith does not explain why mandatory rules or domestic public policy could be disregarded, while reliance on international public policy would lead to unqualified liability and the risk of unfairness.
I. Good faith as an explanation for the Rule
10. Some tribunals have said that it would be contrary to good faith for a state or state entity to invoke a prohibition under its domestic law on recourse to arbitration by public entities as a way of escaping the effects of an arbitration agreement in an international contract that it freely executed with a private contractor.14
11. Good faith would here appear to be equivalent to the principle that parties should not contradict themselves in their contractual dealings (venire contra factum proprium).15 In other words, a state or state entity should not be allowed to (i) secure the consent of a private contractor to enter into an international contract by agreeing to the inclusion of an arbitration clause in that contract, and then (ii) when a dispute arises, [Page405:] object to the jurisdiction of the arbitral tribunal on the grounds that an internal law prevented it from submitting disputes to arbitration. This, in our opinion, is what the award in ICC case 1939 meant, despite its reference to 'international ordre public'. As described in ICC case 4381, the Rule seems to flow from common sense:16
Whereas it results from the documents produced in these proceedings that the defendant in its capacity as a state company under Art. 139 of the Constitution of the Islamic Republic of Iran, could not enter into an arbitration agreement without being authorized by the competent authority; nevertheless, one must take into account the fact that the defect which affected the arbitration agreement had not been brought to the knowledge of the claimant at the time the agreement was entered into. Whereas it has been recognized by arbitral precedents that international public policy would strongly oppose the fact that a government entity, while dealing with a party not belonging to its country, might knowingly and willingly enter into an arbitration agreement which creates confidence in the other contracting party and that later, once the arbitration proceedings or the enforcement proceedings are in process, it might avail itself of the nullity of its own commitment and that the defendant, in its capacity as a State company, has manifestly failed in its duty to mention the requirements of the Iranian law concerning the conclusion of contracts by public entities.
12. Good faith would require the state or state entity to disclose to the private contractor that an internal law prevented it from submitting disputes to arbitration. If it did not, only a private party who was unaware that the public entity with which it was contracting was acting in bad faith would be entitled to invoke good faith to resist the jurisdictional challenge raised by that entity. Common sense dictates that if the private contractor knew that the public entity was acting in bad faith and did not question this at the first possible opportunity, it waived its right to rely on good faith and the attendant principle enshrined in the Rule. Two different situations should be distinguished.
13. First, the private contractor might have known that the state or state entity with which it was contracting was prevented from submitting disputes to arbitration under its internal law. Before entering into contracts with or investing in a state, private contractors normally hire competent local counsel in the host state to undertake due diligence work, including investigating whether the state or the state entity is entitled to submit disputes to arbitration. It is my belief - and one that Judge Lagergren17 would no doubt have shared - that if the private contractor knew about the prohibition, it is not entitled to invoke good faith and the Rule to insist that the dispute be resolved by arbitration. It is submitted that in such circumstances the parties implicitly waive their right to arbitration, so the dispute would have to be referred to the competent national courts.
14. Second, the private contractor might not have known that the state or state entity with which it was contracting was prevented from submitting disputes to arbitration by its internal law, but arguably [Page406:] should have known this. Such a situation can arise, albeit rarely, when (i) the private contractor does not hire local counsel, (ii) local counsel fails to identify any arbitrability issue, or (iii) local counsel states in its due diligence report that the arbitrability of disputes has given rise to contradictory decisions by courts in the host state. In these three situations, it seems to be clear that the private contractor has acted negligently by failing to hire local counsel, or by hiring incompetent local counsel, or by failing to give sufficiently serious consideration to the inconsistent case law in the host state. It may be argued that through its negligence the private contractor waives its right to rely on the principle of good faith and the Rule to ensure that the dispute is submitted to arbitration. It is a well-established principle in law that private contractors acting as international merchants are assumed to be competent professionals.18 As a consequence, such negligence is inexcusable.
15. Given the importance of knowledge and awareness when applying the good faith principle and the above-mentioned exceptions to the Rule, one may conclude that the concept of good faith does not provide an adequate explanation for the Rule. As a consequence, other ICC arbitral tribunals have relied on international public policy instead.
II. International public policy as an explanation for the Rule
16. The problem with considering good faith as the foundation of the Rule is that such a vague principle and its corollaries cannot be allowed to prevail over mandatory provisions in a state's internal law that prevent it and public entities from resorting to arbitration. From a legal perspective, good faith cannot override mandatory law or public policy.
17. Consequently, ICC arbitral tribunals have preferred to rely on international public policy to justify the application of the Rule.19 Some, as in case 1939, even seem to consider the good faith principle described above as a component of international public policy. Tribunals have placed international public policy in a hierarchy, giving it precedence over internal or domestic public policy. They take the view that an international arbitration clause derives its force from pacta sunt servanda, which is a principle of international public policy, and therefore prevails over provisions of the host state's internal law preventing it and entities under its control from submitting disputes to arbitration.
18. The origin of this second explanation for the Rule remains uncertain. It is likely that the counsel and arbitrators who argued and relied upon this theory were inspired by provisions in the Vienna Convention on the Law of Treaties ('Vienna Convention'), Article 46(1) of which provides that:
A State may not invoke the fact that its consent to be bound by a treaty has been expressed in violation of a provision of its internal law regarding competence to conclude treaties as invalidating its consent …
This second explanation for the Rule raises two issues.
19. First, an application by analogy of Article 46(1) of the Vienna Convention ignores the second part of the clause, which reads as follows: 20
A State may not invoke the fact that its consent to be bound by a treaty has been expressed in violation of a provision of its internal law … unless that violation was manifest and concerned a rule of its internal law of fundamental importance.
Consider, for example, the possibility that the provision preventing a state or an entity under its control from resorting to arbitration forms part of the state's constitution. Is the constitution not an internal norm of fundamental importance?
20. Second, reliance on international public policy often ignores the question of whether the parties to the arbitration agreement knew or should have known that the state or state entity was not permitted to submit disputes to arbitration. Hence, the state or state entity is denied the opportunity of arguing that the private contractor acted negligently because it knew or should have known of the prohibition, and thereby waived its right to arbitration. The consequence of such an approach is that the Rule will be automatically applied as the state or state entity will systematically be found liable.
21. This unqualified approach to liability seems to have been adopted by legislators in a number of jurisdictions, such as Switzerland, Spain and Colombia.21 Some courts, too, seem to subscribe to it, including the Paris Court of Appeal.22
22. We are therefore led to the unsatisfying conclusion that an ill-defined notion of international public policy is superior to the domestic or internal public policy pursuant to which mandatory prohibitions on arbitration were enacted, creating a regime of unqualified liability in the event that the state or state entity seeks to elude the arbitration agreement. This explanation for the Rule is therefore as defective as the explanation of good faith was found to be.
23. It is dangerous to seek the basis of rules in vague and ambiguous concepts like good faith and international public policy. Positivism provides a simpler, practical solution. Hence, many states have avoided [Page408:] the issue by enacting arbitration provisions in their legislation or by establishing equivalent principles in their case law. This is not the end of the matter, however. Without a fundamental explanation for the Rule, it remains unclear whether, even when enacted without any allowance for exceptions, it should apply when the private contractor knew or should have known about the prohibition on arbitration.
24. Basic justice argues against allowing a private contractor to have access to arbitration when it knew or should have known that its public counterparty was forbidden by its internal law from entering into an arbitration agreement. International trade and investment is no longer an arena where states are more powerful than multinationals. It is quite the opposite in many instances. As a result, the Rule should not be absolute and protect international merchants unconditionally. Given these considerations, perhaps a combination of international public policy, good faith (both already associated in the decision reached in ICC case 1939) and the principle that international merchants are assumed to be competent professionals may provide a balanced explanation for the Rule.
Partner, Dechert (Paris) LLP; professor of international law at Rosario University (Bogotá, Colombia); lecturer on international contracts and international arbitration at Sciences Po (Paris); lecturer on international arbitration at Paris-Dauphine University.
See e.g. E. Silva Romero, 'ICC Arbitration and State Contracts' (2002) 13:1 ICC International Court of Arbitration Bulletin 34; see also E. Silva Romero, 'The Dialectic of International Arbitration Involving State Parties' (2004) 15:2 ICC International Court of Arbitration Bulletin 79.
See Article 6 of the Rules.
See § 60 of the report referred to in the following paragraph.
'Arbitration Involving States and State Entities under the ICC Rules of Arbitration', available at http://www.iccwbo.org/about-icc/policy-commissions/arbitration/commission-rules,-reports-and-guidelines/.
Ibid., § 61.
Ibid., § 21.
On the adoption of the Rule in Swiss law, see E. Silva Romero, 'Requiem for the Rule of Article 177(2) of the Swiss Private International Law Act?' in G. Aksen et al., Global Reflections on International Law, Commerce and Dispute Resolution, Liber Amicorum in honour of Robert Briner (2005) 825.
Ibid. at 827.
See e.g. E. Silva Romero, 'ICC Arbitration and State Contracts' (2002) 13:1 ICC International Court of Arbitration Bulletin 34; see also E. Silva Romero, 'The Dialectic of International Arbitration Involving State Parties" (2004) 15:2 ICC International Court of Arbitration Bulletin 79.
See e.g. Le Monde (17 February 2015).
J. Paulsson, 'May a State Invoke its Internal Law to Repudiate Consent to International Commercial Arbitration? Reflections on the Benteler v. Belgium Preliminary Award' (1986) 2 Arbitration International 90, quoting and translating an extract from the award in ICC case 1939, cited by Y. Derains, 'Le statut des usages du commerce international devant les jurisdictions arbitrales (à la lumière de l'expérience de la Chambre de commerce internationale)', Revue de l'arbitrage 1973.122 at 145.
See e.g. the following ICC cases: no. 1526, Journal du droit international 1974.915; no. 1939, Revue de l'arbitrage 1973.122 at 145; no. 2521, Journal du droit international 1976.997; no. 3896, Journal du droit international 1983.914; no. 5103, Journal du droit international 1988.1206; no. 7263, (1997) XXII Yearbook Commercial Arbitration 92 at 100; no. 7373, discussed in H.A. Grigera Naón, 'Choice-of-Law Problems in International Commercial Arbitration', Collected Courses of the Hague Academy of International Law, vol. 289 (2001) 9 at 78, 79; no. 7375, (1996) 11:12 Mealey's International Arbitration Report A-1.
See J. Paulsson, supra note 12.
Ibid.; see also Article 1.8 of the UNIDROIT Principles of International Commercial Contracts.
Journal du droit international 1986.1102 at 1106.
In ICC case 1110, (1994) 10 Arbitration International 282.
See Y. Derains, supra note 12.
See § 8 above.
See Article 177(2) of the Swiss Private International Law Act, Article 2(2) of the Spanish Arbitration Act and Article 62 of the Colombian Arbitration Act.
Paris Court of Appeal, 17 Dec. 1991, Société Gatoil v. National Iranian Oil Company, Revue de l'arbitrage 1993.281.