Jurisdictional Challenges

The lack of jurisdiction of the tribunal, whether due to invalidity of the arbitration agreement or action by the tribunal in excess of the parties’ consent to arbitration, is frequently contended when parties invoke the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) to challenge the validity of an arbitral award. As a preliminary matter, it is well settled in most – if not all – jurisdictions that a tribunal is generally competent to rule on its own jurisdiction, under the principle of Kompetenz-Kompetenz.^[2] Virtually all arbitral rules also recognise this principle.^[3] This cardinal rule of modern arbitration law is fundamental to the stability of the arbitral process. By the same token, however, it offers a window of opportunity for award-debtors to challenge an award. They will often argue that the tribunal was not vested with the powers to adjudicate the way it did, or at all. Post-award challenges to the tribunal’s jurisdiction are common, as are challenges to the jurisdiction of the enforcing court. This chapter briefly examines these categories of challenges in turn.

Challenges to the tribunal’s jurisdiction

As regards jurisdictional grounds to challenge an award, enforcement of a foreign arbitral award ‘may be refused’ when, inter alia, (1) the arbitration agreement ‘is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made’ or (2) ‘the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration’.^[4]

Invalid or non-binding arbitration agreement

Given the contractual nature of arbitration (whether based on a private agreement in the case of commercial arbitration or an international treaty in the case of investment-based arbitration), it is axiomatic that there can be no valid award if the agreement on the basis of which the award was rendered did not exist. For example, a mammoth US$50 billion award in the Yukos arbitration was set aside by The Hague District Court on the basis that it was premised on the determination by the tribunal that Russia had agreed to arbitrating disputes with investors under the Energy Charter Treaty when, in fact, it had never ratified the treaty.^[5]

The question as to whether an arbitration agreement is valid can be resolved with reference to the law governing the arbitration agreement, if any,^[6] or the law of the seat of arbitration. To illustrate the importance of this choice-of-law question regarding the validity of an arbitration agreement, one can look at the jurisprudence of the US Supreme Court. In First Options,^[7] a tribunal upheld its jurisdiction even though the parties had not signed the contract containing the arbitration clause on the basis of which the arbitration was brought. The New York courts held that there was no valid arbitration agreement and thus no valid award; the Supreme Court confirmed this holding. The ruling seems obvious. What is less obvious is that, in reaching it, the Supreme Court reasoned that, absent a party’s ‘clear and unmistakable’ consent to grant the arbitrators power to determine ‘arbitrability’,^[8] it was for the courts themselves to make that determination, without any deference to the arbitrators’ decision on the same. Although, in this particular instance, the correct result was achieved, the method employed to achieve the result, which was in denial of the implicit power of the arbitrators to determine their competence, is viewed by some commentators as unfortunate. For the practitioner, it is a potentially critical consideration when selecting the applicable law and seat of arbitration. The position of the US Supreme Court regarding the ‘gateway issue’ of arbitrability expressed in First Options has been confirmed as good law.^[9] Parties to arbitrations seated in the United States (often, New York) ought to pay attention to the risk that a court’s scrutiny may jeopardise the finality of the award. One solution may be for the parties simply to agree in the famous Procedural Order No. 1 for the tribunal to determine its own jurisdiction. Another solution is to include language to that effect in the arbitration clause itself – or by selecting arbitral rules that do. For example, the authors are aware that some arbitral institutions in the United States are in the process of amending their arbitration rules to ensure that tribunals enjoy the exclusive competence to determine their jurisdiction.

The question of determination of the validity of an arbitration agreement under the applicable law arises with particular force in the context of investment treaty claims within European nations. In the landmark Achmea decision,^[10] the Court of Justice of the European Union ruled that the arbitration clause contained in the Netherlands–Slovakia bilateral investment treaty (BIT), on the basis of which an arbitral award had been rendered against Slovakia, was incompatible with EU law. The stated basis was the primacy of EU law over the law of individual Member States of the European Union. Because the arbitral award in Achmea was not subject to review by a court of an EU Member State, as was held to be required by the Treaty on the Functioning of the European Union, it was rendered on the basis of a mechanism incapable of ensuring the proper application and full effectiveness of EU law. The award was later struck by the German Federal Court of Justice.^[11] Although the ramifications of Achmea for treaty protections extended by EU Member States remain unclear, the question was perhaps partially mooted when, in May 2020, a majority of EU Member States signed a treaty that terminates their intra-EU BITs.^[12]

Investment claims based on intra-EU treaties thus can be expected to be argued to be without a valid agreement to arbitrate. Practitioners wishing to resort to investment arbitration may need to turn to other available instruments. In that respect, the availability of protections under the Energy Charter Treaty, to which all EU Member States are parties, remains an open question.^[13]

Collective claims is another matter that has came to the fore with respect to validity of the arbitration agreement. In Abaclat,^[14] for example, a tribunal determined that it had jurisdiction to hear the claims of more than 60,000 Italian investors against Argentina under the 1965 Convention on the Settlement of Investment disputes between States and nationals of other States (the ICSID Convention) and the Argentina–Italy BIT. Despite the silence of these two instruments regarding the permissibility of mass claims, the tribunal’s view was that, to the extent that there may be an issue regarding the number of claimants, that issue was not one of jurisdiction but one of admissibility of the claims (i.e., determined as part of the merits of the case).^[15] Applying the Abaclat tribunal’s approach, an obvious issue, given the ordinary deference given on the matter to the tribunal, is whether the reviewing court could even reach the issue as to the propriety of the decision to uphold jurisdiction where the point of contention was ‘kicked out’ to the merits of the case, which are typically unreviewable in a set-aside action.^[16] Here again, the law applicable to the review of the award may provide some useful guidance, as collective arbitration may be a question of public policy for the enforcement court. In the United States, for example, the position regarding collective arbitration has evolved from a complete rejection based on the idea that collective arbitration subverts the privity of the arbitration agreement, to a general acceptance, at least so long as the tribunal ‘construes the contract’ in allowing it.^[17]

Excess of authority

It follows from the principle that arbitral jurisdiction derives from the parties’ consent that the scope of the tribunal’s authority also is limited by the parties’ consent. Typically, a party challenging an award based on a violation of the scope of the tribunal’s authority will do so because of an excess of power – or ultra petita. On rare occasions, a party will take the view that the tribunal failed to discharge its mandate by refusing jurisdiction over certain, or all, of that party’s claims – or infra petita.

Ruling ultra petita

It is often the case that, in enforcement or set-aside proceedings, an award-debtor will raise the argument that the issues or claims decided in an award exceeded or differed from those presented for adjudication by the parties to the tribunal, or where the tribunal determined sua sponte issues or claims not raised by the parties. In practice, however, these arguments tend to be difficult to sustain, provided the arbitration agreement is sufficiently broad to encompass these issues or claims, such as in a clause providing for arbitration of ‘any dispute or controversy’. To the extent that the issues or claims are properly briefed or orally argued during the proceedings, these issues and claims should be seen, in most instances, as properly within the purview of the tribunal.

There are instances, of course, when a tribunal will have squarely exceeded its mandate. For example, the Hong Kong Court of First Instance has found that a sole arbitrator had exceeded its powers by issuing an award on a basis that neither party had advanced during the arbitration.^[18]

These arguments may gain more traction with respect to matters that are arcane and for which arbitrators may be less attuned to risks, such as damages quantification. In Rusoro v. Venezuela, the Paris Court of Appeal^[19] upheld Venezuela’s argument that the tribunal exceeded its jurisdiction under the Canada–Venezuela BIT when it awarded compensation for expropriation of gold mining interests in an amount that did not reflect the value of the interests at the time of the expropriation. The award had calculated the compensation without taking account of an intervening decline in value resulting from restrictions on gold exports. These restrictions, the tribunal had concluded, were outside the scope of its jurisdiction ratione temporis. The Court disagreed and determined that there had been an excess of authority by the tribunal.^[20]

Ruling infra petita

It is uncontroversial that an award exhibiting an excess of authority from the tribunal may be annulled, or refused enforcement. It is less so when a tribunal declines to rule based on its determination that it lacks jurisdiction. In particular, it remains debatable whether Article V(1)(c) of the New York Convention allows challenges on infra petita grounds at all.^[21] In the few instances when a party was even able to argue that an award should be annulled on infra petita grounds, it has been based on the provisions of the applicable law as opposed to an interpretation of the New York Convention’s protections.

Even more rare are instances of arguments based on infra petita in the context of investment arbitrations. Although most of these arbitrations are conducted under the ICSID Convention – therefore not subject to any court supervision – some are brought on an ad hoc basis under UNCITRAL or other rules. In these arbitrations, the tribunal will typically select a formal seat for the proceedings, after consultation with the parties, therefore subjecting the ensuing award to a potential court review. A question following from seat selection by tribunals after they are seized with jurisdiction is whether it is the tribunal, or the courts of the seat designated by the tribunal, that are competent to determine the tribunal’s jurisdiction under a BIT. In GPF v. Poland,^[22] Mr Justice Bryan set aside an award rendered under the auspices of the Stockholm Chamber of Commerce, in which the tribunal had declined to hear claims for indirect or creeping expropriation and breach of the fair and equitable treatment standard under the BIT between the Belgium-Luxembourg Economic Union and Poland. In an unprecedented decision, Justice Bryan substituted his own determination that the BIT did confer jurisdiction to an arbitral tribunal to hear such claims and thus set aside the tribunal’s findings to the contrary. It should be noted that the basis for this decision is Section 67(1)(a) of the 1996 English Arbitration Act, which states that a party to arbitral proceedings ‘may (upon notice to the other parties and to the tribunal) apply to the court . . . challenging any award of the arbitral tribunal as to its substantive jurisdiction’. This broad language, on its face, gives leeway for a court to reach the sort of conclusion Justice Bryan did. In Clorox, the Swiss Supreme Court has interpreted de novo whether the tribunal was correct in declining jurisdiction under the Spain–Venezuela BIT.^[23] The Court disagreed with the UNCITRAL tribunal that the claimant had no qualified investment and set aside the award. Again, the relevant provision in Swiss law was broad enough to reach that conclusion, as international awards can be set aside if ‘the arbitral tribunal erroneously held that it had or did not have jurisdiction’.^[24] It remains to be seen to what extent similar decisions may be handed down in other jurisdictions.^[25] In that respect, these decisions rest on a direct application of provisions of law created to ensure the proper conduct of the arbitral process in a commercial context. A key distinction that has not been the focus of these courts is that parties to an ordinary arbitration are subjects of national law, and therefore by default fall within national court jurisdiction. For that reason, there may be tension as regards the ability of the tribunal to determine whether a party has consented to arbitrate and waived its right to seek court relief. In contrast, states are subjects of public inter­national law, as sovereign members of the community of nations, and the default mechanism for resolution of disputes between private parties of any given nation and other nations is through diplomatic channels. In this light, it may be argued that a state’s open invitation in a BIT to arbitrate with investors of another state, without privity, is not akin to a submission to the jurisdiction of the courts of any and all seats that an arbitral tribunal may later select.

Challenges to enforcing court jurisdiction

Under most legal regimes, a foreign or international award is presumptively enforceable wherever the award creditor wishes to seek enforcement.^[26] Two issues arise with respect to the jurisdiction of the enforcing court:

• when the award was annulled at the seat of the arbitration; and
• when a sovereign defends against enforcement on the basis of its immunity from suit.

Enforcement of an award that was annulled at the seat

Article V(e) of the New York Convention allows an award-debtor to challenge enforcement where ‘the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made’. The problem thus becomes whether a court to which the award-creditor applies for recognition and enforcement is vested with the jurisdiction to do so in the event that another court at the seat has set aside the award. On that specific question, there are two schools of thought.

Under the classic approach, the annulment decision by a court at the seat is given deference and the award is deemed unenforceable in any jurisdiction. In other words, the decision of the court of primary jurisdiction deprives any other court on a universal plane of jurisdiction to hear enforcement applications of the same award. This position, or variations thereof, is the most widely adopted. An example of this approach is Pemex v. Commisa, in which the Luxembourg Court of Appeal refused to enforce a US$300 million ICC award against the Mexican state-owned company on the basis that the award had been set aside at the seat. Seized of a request to enforce the same award, the US Court of Appeals for the Second Circuit had previously ruled that the award was enforceable despite having been annulled in Mexico. The Second Circuit’s position does not reflect an outright rejection of the classic approach, however, but rather a nuanced view balancing the interests of the courts at the seat with its own.

For example, in Baker Marine v. Chevron,^[27] it affirmed that enforcement may be refused in the United States if the award has been set aside by a competent authority in the place where it was made but, at the same time, was careful not to deny itself the discretion to enforce an award that has been annulled at the seat. The court noted the permissive language of the New York Convention (‘may’) but declared that, in this instance, Baker Marine had not shown ‘adequate reason’ for refusing enforcement.^[28]

The tentacular Thai-Lao Lignite case showcases the variety of approaches in different jurisdictions. In that case, the claimant launched a multidirectional enforcement campaign for its US$56 million award against Laos in New York, London, Paris and Singapore. While Laos’s request for set-aside at the seat in Malaysia was pending (it had failed to file its request within the time allotted), the claimants obtained confirmation in Paris, and enforcement orders in New York and London.^[29] After the award was vacated at the seat in December 2012,^[30] however, the Second Circuit reversed itself in a move that was unprecedented (the circumstances were, also, unprecedented with an annulment that post-dated the enforcement order).^[31] Singapore had stayed the proceedings pending the decision of the Malaysian court and dismissed them after the vacatur decision.^[32] The Commercial Court in London also overturned the enforcement orders it had previously issued.^[33] The last piece of the puzzle is the French proceedings, where confirmation of the award was also overturned.^[34] The reason the Paris Court of Appeal did so, however, was not out of deference to the Malaysian court, but because it independently determined that the tribunal had exceeded its authority.

The Paris Court of Appeal’s decision epitomises the second school of thought, dubbed by some commentators as the internationalist approach, under which no primacy is given to the seat; instead, every court where enforcement is sought assesses the validity of an arbitral award autonomously. The theory is that international awards belong to a supra­national plane, given their subjection to international instruments, and not any given national juridical order. The New York Convention’s permissive language regarding enforcement of an annulled award (that courts ‘may’ refuse) reinforces the internationalists’ stance that they review an award’s validity autonomously.

France leads the internationalist school of thought.^[35] In the words of the Court of Cassation, under French law:

a French court may not deny an application for leave to enforce an arbitral award which was set aside or suspended by a competent authority in the country in which the award was rendered, if the grounds for opposing enforcement, although mentioned in Article V(1)(e) of the 1958 New York Convention, are not among the grounds specified.^[36]

A number of decisions have confirmed this view. For example, in the Chromalloy case, the Paris Court of Appeal recognised an award made in Egypt, despite it having been annulled at the seat. This is because ‘the award made in Egypt is an international award which, by definition, is not integrated in the legal order of that State so that its existence remains established despite it being annulled and its recognition in France is not in violation of international public policy’.^[37] In another example, the French Court of Cassation upheld the enforcement of a Cairo-seated arbitration that had been annulled by the Cairo courts, notwithstanding that the arbitration was domestic, not international, and thus did not implicate the interests of international commerce.^[38]

As the foregoing suggests, the selection of an arbitral seat should not be overlooked; neither should the determination of the jurisdictions in which to seek enforcement of an award.

Enforcement of an award involving a sovereign

With the increase in the number of arbitrations involving state and state entities in the past 15 years or so, enforcement of awards against sovereigns has become commonplace. A majority of such arbitrations are practically removed from any meaningful court scrutiny. Indeed, ICSID awards are directly enforceable as if they were ‘a final judgment of the courts of a constituent state’.^[39] But a growing number of such arbitrations are subject to ad hoc proceedings under the UNCITRAL rules or other institutional proceedings, such as by the ICC or the Stockholm Chamber of Commerce. To be enforced, these awards are subject to the same constraints as any other international award, with the added complication that a sovereign party may have the ability to claim immunity from jurisdiction as a defence to enforcement. Contrary to a private party, it seems difficult to enforce a ruling against a state (or a state entity) in its own courts, let alone attach any state assets. As such, an award-creditor is often left with no practical recourse but to try to pursue state assets held somewhere else; hence the need to seek enforcement of the award in a third-party state.

In the Tatneft case,^[40] for example, Ukraine raised sovereign immunity as a defence to enforcement in the United Kingdom, which it claimed was not waived given that it had not consented to arbitrate breaches of the fair and equitable provision in the Russia–Ukraine BIT. The Commercial Court in London disagreed in that instance, but this sort of argument should be expected when facing certain sovereign parties as award-debtor.

Under the US Foreign Sovereign Immunities Act (FSIA), a general principle is that ‘a foreign state shall be immune from the jurisdiction of the courts of the United States and of the State’.^[41] Some exceptions to this principle exist, however, such as the provision under Section 1605(a)(1) of the FSIA that a ‘foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case . . . in which the foreign state has waived its immunity either explicitly or by implication’. Section 1605(a)(6) of the FSIA further provides that a foreign state is not immune from jurisdiction if:

the action is brought, either to enforce an agreement made by the foreign state with or for the benefit of a private party to submit to arbitration all or any differences which have arisen or which may arise between the parties with respect to a defined legal relationship . . . or to confirm an award made pursuant to such an agreement to arbitrate, if (A) the arbitration takes place or is intended to take place in the United States, (B) the agreement or award is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards . . .

US courts have consistently recognised the express exception of Section 1605(a)(6) as foreclosing a state’s ability to raise its immunity of jurisdiction.^[42] Other jurisdictions, such as Switzerland^[43] and Sweden,^[44] have taken a similar approach in denying a state immunity from jurisdiction if the state has agreed to arbitrate.

The issue of sovereign immunity from jurisdiction becomes more pregnant in the presence of sovereigns hailing from former (or current) communist obedience (for example, the Tatneft case, above). One point of reference in that respect is China. Where the distinction acta jure gestionis/acta jure imperii is widely accepted to determine which of a state’s actions shall be immune from suit (or which asset shall be immune from execution), some states, such as China, strictly adhere to the principle of absolute immunity. In the FG Hemisphere case, China indeed explained that ‘the consistent and principled position of China is that a state and its property shall, in foreign courts, enjoy absolute immunity, including absolute immunity from jurisdiction and from execution, and has never applied the so-called principle or theory of “restrictive immunity”’^[45] (that is, immunity attaching only to regalian prerogatives and not commercial actions).

Conclusion

As the foregoing developments suggest, the basis for jurisdictional challenges often intersects with other issues of public policy and due process (both of which are addressed in other chapters). Like most things in arbitration procedure, preparing for jurisdictional challenges, whether on the offence or the defence, requires thoughtful strategy. As highlighted in this chapter, of prime importance in devising a strategy are the location of the seat of arbitration, the type of party in opposition and the location of that party’s assets.

Notes