In the European Union, competence of courts is harmonized and regulated by Brussels Ibis regulation No. 1215/2012 (the “Regulation”). The competence of courts determined by the Regulation is protected and applies unless the Regulation stipulates otherwise. Arbitration is not subject to EU harmonized regulations. It is governed by international treaties, most notably the New York Convention.
The protection of court competence under the Regulation is also obvious from the choice of court agreements. The choice of EU courts has priority over the choice of courts of a third, non-EU state. For example, a Brazilian and a German company may agree in a contract on the competence of New York courts over their disputes, but if the German company is sued before German courts (as the courts competent according to the company’s registered office), German courts will handle the case despite the existence of the agreement on the competence of NY courts. On the other hand, if competence of French courts is contractually agreed upon, the situation is different. In such a case competence of French courts has preference over that of German courts.
The same applies to arbitration clauses. Arbitration clauses define the solution of disputes outside of state courts, and parties agree on such clauses to take advantage of the traditional benefits of arbitration proceedings, such as expeditiousness, expertise of the decision-making body with the relevant industry, and each party’s ability to influence the choice of arbitrators.
What happens if one of the parties changes its mind and decides, for any reason, not to observe the arbitration clause? In such a case, the party may initiate proceedings before a state court. If the court has competence under the Regulation, it is competent to decide on the case.
The question is what the other party, which wants to solve the matter before the arbitration court and not the state court, may do. How may this party enforce the valid arbitration clause?
First, the second party may object to proceedings held before the court by referring to the existence of the arbitration clause. Based on this objection the court checks the validity of the arbitration clause. If the court decides not to take the arbitration clause into account, it decides on the merits. Under the Regulation, this decision is directly enforceable in all EU Member States.
Alternatively, the party may promptly initiate arbitration proceedings and postpone, as much as possible, the decision of the state court. In such a case, there is a chance that the final award will be rendered earlier and will be an obstacle to the enforcement of a subsequent court decision. The problem with this option is that the reference to a breach of public order is the only way to apply this obstacle. This procedure may be used if both (court and arbitral) decisions are seriously inconsistent, though there is no guarantee in this respect.
The opinion of certain experts who say that the principle of free movement of judgments should not apply to decisions rendered by a court despite the existence of valid arbitration clauses may also be used as an argument. This opinion is based on the doctrine of broad interpretation of the exclusion of arbitration from the Regulation’s scope of applicability and the decision of the European Court of Justice in the matter of Marc Rich. There is, however, no guarantee that this argument will be accepted.
In light of the foregoing, it is possible that two decisions on the same matter – one by a state court and one an arbitration award - may exist in the EU. If the decisions are consistent, there is no major issue. The problem arises if the decisions are inconsistent. Which one will be overruled? This is difficult to say, as these decisions are enforced under different rules. EU court decisions are enforced according to the Regulation; international awards are enforced according to the New York Convention. Preference of the decision rendered first may be a possible solution.
Finally, why should parties to a contract want to ignore the stipulation on arbitration? They may decide to do so for many reasons, such as wanting to strengthen their position in future negotiations on settlement or to complicate court proceedings.
In short, parties wishing to rely on arbitration clauses should be aware of risks of parallel proceedings and decisions resulting from EU law.
By Barbora Urbancova, Partner, Peterka & Partners Czech Republic
This article was originally published in Issue 3.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.