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Controversial Court Decisions. Forthcoming Legislation. An Opportunity to Change?
Last year we finished our comment saying that in Argentina it is not very clear if the trend of Court cases is to uphold arbitration in general. We will now discuss two decisions of the National Courts of the City Buenos Aires. The first decision is a promising one as it suggests a positive trend towards higher recognition of the autonomy of parties to rely on arbitration as a dispute-resolution alternative. The second decision is not quite so promising, as it seriously limits the arbitration panel’s powers to decide upon its own jurisdiction.
In our comment last year we made reference to and discussed the decision issued by Panel D from the National Court of Appeals for Commercial Matters in the case Sociedad de Inversiones Inmobiliarias del Puerto SA v Constructora Iberoamericana SA,1 which confirmed that a waiver to appeal contained in an arbitration clause is perfectly valid under Argentine law and does not violate any public policy principle.
We then remembered that the same court had issued a decision in the case Mobil Argentina SA v Gasnor SA on Arbitration Award (Mobil),2 which started to reverse the trend so far established by the quite criticised Federal Supreme Court decision in José Cartellone Construcciones Civiles SA v Hidroeléctrica Norpatagónica SA or Hidronor s/ proceso de conocimiento (Cartellone).3 Without doing any reference regarding the procedural details that allowed the Federal Supreme Court, the highest court of law in Argentina, in deciding the case, stated in an obiter dictum that arbitral awards may be annulled by both a court of law based on sections 760 and 761 of the National Code of Procedure (mainly based on violations of due legal process) and also if found to be ‘unconstitutional, illegal or unreasonable’ notwithstanding the existence of a waiver to appeal.
The Cartellone Supreme Court decision had raised justified concerns in the arbitral community. Thereupon we commented that, fortunately, later on came the Mobil decision, where, although the defendant cited Cartellone as a precedent supporting its view, the Commercial Court of Appeals held that a waiver to appeal contained in an arbitration clause is valid, as the freedom of the parties to contract should prevail.
Let us also briefly mention that the Argentine Congress is now debating a comprehensive reform of our Civil and Commercial Codes, which will be unified into one single body. As part of this reform, a new chapter will be introduced concerning arbitration, under the denomination of ‘Contract of Arbitration’. Despite the many well-founded objections that are being raised concerning the in-depth changes that shall be introduced in our civil and commercial laws, in case this reform is passed - as it seems it will be - the impact regarding arbitration appears to be a positive one, although there are authorised opinions that it would be better to try to pass a more comprehensive and globally accepted legislation on arbitration as the UNCITRAL Model Law.
The Wallaby case
Court decisions in Argentina, even if favourable to arbitration, generally include expressions such as ‘arbitration is an exceptional procedure for the resolution of disputes’. As a result, some sort of principle has been established indicating that arbitration clauses should be narrowly construed; in other words, in case of doubt about the existence of an agreement to submit a dispute to arbitration, the opinion is that the jurisdiction of ordinary courts of justice should prevail. Although there are no constitutional or legal basis to support this ‘case law doctrine’, it is usually remembered in arbitral cases submitted to judicial revision.
Auspiciously, in Wallaby, this interpretation principle was not followed and instead the Court turned to the application of an adequate contract interpretation doctrine.
In a services agreement between Wallaby SA and Despegar.com.ar SA, the following arbitration clause was included:
Any controversy arising between the parties in connection with this agreement or its application, interpretation, performance or termination, shall be settled by an arbitrator appointed by mutual agreement of the parties or by an ordinary court of justice in the absence of such mutual agreement.4
When the conflict appeared, the parties failed to appoint by mutual agreement an arbitrator in charge of deciding the case. Consequently, Wallaby appeared before a commercial court of law5 alleging that negotiations to appoint the arbitrator between the parties had failed and, therefore, the court should appoint the arbitrator, as set forth in the arbitration clause.
The defendant objected the plaintiffs request, arguing that the dispute resolution clause should be interpreted as establishing the direct jurisdiction of ordinary courts in the event of failure of the negotiations for appointing an arbitrator.
The judge hearing the case understood that the text of the arbitration clause was somewhat misleading as it could be construed to be supporting the view of the defendant if read separately from the entire agreement.
However, the judge did not rule in favour of the defendant’s view. On the contrary, the judge considered that, even though the basic interpretation principle is set forth in section 1198 of the Civil Code, which states that agreements should be executed, construed, and performed in good faith and according to what the parties reasonably understood or could have understood exercising due care and caution, in deciding, section 218(2) of the Commercial Code could not be ruled out. This section establishes that all terms and conditions contained in an agreement must be consistently interpreted; that is, searching for the sense that reasonably results from the general context.
In this sense, the judge noted that a comprehensive reading of the Services Agreement indicated that the parties had anticipated that arbitrators could be designated by a court of law. In Clause 10, the domiciles of the parties are first established, and thereupon it states that, in case the arbitrator is ‘designated by a Court of Law, such an arbitrator shall be an arbitrator of law’.
The correct interpretation made by the judge hearing the case set aside the literal interpretation criteria purported by the defendant, and gave relevance to a basic interpretation rule, in other words, that the provisions in an agreement cannot be examined as separate unrelated terms and should be considered entirely and any interpretation doubts should be solved referring to the overall spirit of the agreement.
The decision of the lower court judge was appealed by the defendant, which expressly requested the Appeals Court the application in the case of a narrowly construed interpretation stating:
...the lower court judge, although considering that the arbitration clause was ambiguously drafted, failed to apply a narrow criteria and gave preponderance to the arbitration jurisdiction instead of the court jurisdiction, thus making a broad interpretation of the agreement, which would be rejected both by legal scholars and by application of prior court decisions. In this sense, both legal authors and court decisions are clear: in the event of doubt as to the sense of the arbitration clause, the view that courts of law should prevail to solve the dispute.6
Fortunately, the Court of Appeals (Panel A) did not rely on the defendant’s arguments to issue a decision. Instead, it reviewed the applicable interpretation rules and arrived at the same conclusion as the lower court judge did. However, we must say that the Court of Appeals did consider that the arbitration clause had been ambiguously drafted, and that such an ambiguity could have misled the defendant. Consequently, the judge ruled that each party had to bear its own costs. The lower court had understood that costs should be borne only by the defeated party.
Although this appears to be a case in which it would have been easy to rule in favour of upholding the validity of the arbitration clause, both the lower court and the court of appeals felt compelled to make a thorough analysis to support their view that the arbitration clause should not be interpreted narrowly. Although the courts avoided expressly saying that arbitration clauses should be subject to the same interpretation rules as any other contractual clauses, this is what transpires from these decisions.
We welcome the fact that in both instances the arbitration clause was upheld, avoiding the application of the so called ‘narrow interpretation’ principle.
Papel del Tucumán case
An Argentine company undergoing a bankruptcy proceeding, Papel del Tucumán SA, commenced an arbitration case against Argentina under ICC rules.7
Argentina appeared before the arbitration panel filing certain defences concerning the existence, validity and scope of the Arbitration clause. Such defences were dismissed by the Arbitration panel on the grounds that it had jurisdiction to hear the case.
Against such a decision from the arbitration panel, Argentina filed an annulment request based on Section 760 of our Civil and Commercial Code of Procedure directly before the Federal Court of Appeals for Administrative Contentious Matters. Argentina understood that such a court had jurisdiction over the case based on the provisions of section 763 of the Civil and Commercial Code of Procedure, which sets forth that the court with jurisdiction over annulment proceedings is ‘the appeals court corresponding to the court who would have heard the matter if the matter had not been submitted to arbitration’.
However, the Court of Appeals, due to other reasons, found that it had no jurisdiction over the subject matter of the case.
To arrive at this conclusion, the Court of Appeals examined the various rules contained in the chapter referring to arbitration in our local procedural laws and found that its jurisdiction was limited to review any annulment requests filed against the ‘arbitration award’ as set forth in section 758 of the Civil and Commercial Code of Procedure. The Court’s interpretation was that the meaning of ‘arbitration award’ in the clause meant an arbitration award that puts an end to the arbitration process. As Argentina wanted the Court of Appeals to review a preliminary decision on jurisdiction, ie, one which clearly did not end the arbitration process, such a request from Argentina was outside the scope of the Court of Appeals’ jurisdiction.
The Court of Appeals seems to have applied the Kompetenz-Kompetenz principle that gives arbitrators the power to decide upon objections raised concerning their own jurisdiction, therefore excluding courts of law from making such a decision, at least until the arbitration proceeding has been completed and, as the case may be, until courts of law may gain jurisdiction based on appeals or annulment defences as filed by the parties.
This decision could have set a valuable precedent to reinforce the applicability of the Kompetenz-Kompetenz principle, especially with the Argentine Republic as one of the parties to the arbitration. But that could be precisely the reason why the correct decision on lack of jurisdiction was followed by a further paragraph in the same decision that totally invalidated what would have been a valuable precedent.
The Court of Appeals understood that ‘there is no express regulation in our procedural laws governing the review or challenge by a court of law of the existence, validity and scope of an arbitration clause, or about the decision made regarding jurisdiction of an arbitration panel to hear a case’.8
Such a lack of regulation should have resulted in a dismissal of the annulment requested by Argentina allowing the arbitration panel to continue with the proceeding. This would have been an effective application of the Kompetenz-Kompetenz principle, which would have avoided court interference in the development of the arbitration process.
However, after finding that it lacked jurisdiction, the Court of Appeals decided that, ‘given the lack of express regulations on the matter, the proceeding and the decision concerning the dispute should be carried out by a lower court judge’.9 The Court of Appeals based such a decision on section 319 of the Civil and Commercial Code of Procedure, which authorises a Court to order what kind of process is applicable when the dispute is related to any rights other than a monetary claim.
This portion of the Court of Appeals’ decision is totally unfortunate. The application of section 319 of the Civil and Commercial Code of Procedure is purported for a dispute that may be heard by courts of law. The Court of Appeals itself stated that the matter was at the time completely outside the jurisdiction of courts of law so the decision resulted inconsistently.
The consequence of the last part of the Court of Appeals’ decision is clearly negative. The arbitration case was turned into an ordinary court action and the panel from the Court of Appeals would have given itself jurisdiction to eventually hear the case in the likely scenario that the lower court decision is appealed. The logic behind this decision is hard to understand, and we have to come to agree with our colleague Roque Caivano, who, discussing this same case, concluded that the problem seems to be the outdated legislation on arbitration in force locally.10
To further complicate the Court interference in the arbitration process, the Commercial Appeals Court in charge of the bankruptcy proceeding of Papel del Tucumán claimed to have jurisdiction to hear the appeal filed by Argentina against the decision of the arbitral panel. The Lower Court on Administrative and Contentious Matters concurred and decided to send the file to the Commercial Courts. However, this decision was appealed by Argentina, and the Court of Appeals on Administrative and Contentious Matters reaffirmed its ruling that the case should remain within the Contentious and Administrative Courts.11
As there is a conflict between two Courts of Appeals, the conflict should now be decided by the Federal Supreme Court. Perhaps this might be a good opportunity for the Federal Supreme Court to declare that neither of the Appeals Courts is competent to hear the case as the decision of the arbitral panel is not subject to appeal on the basis of the Kompetenz-Kompetenz principle, at least until the moment when the Courts of Justice are empowered to review the award.
The unification of the Civil and Commercial Codes. The ‘Contract of Arbitration’
The Federal Government has recently submitted to the National Congress a Bill for the unification of the Civil and Commercial Codes that have been separate pieces of legislation for the last 150 years. This has obviously motivated a big national discussion regarding many of the purported innovations contained in the draft. One of those innovations, quite unexpectedly, is the inclusion of a chapter under the name of ‘Contract of Arbitration’.
The arbitration community had to face many difficulties when courts of law become involved in an arbitration process due to the absence of a specific legislation on arbitration. This has been repeatedly pointed out by authors and commentators, and the recommendation to our National Congress that they should adopt the UNCITRAL Model Law on Arbitration as the most practical and direct way to solve these difficulties is unanimous.12
One of the reasons why a federal law similar to the UNCITRAL Model Law on Arbitration has not been passed was the fact that Argentina is organised under a federal government. Under such organisation, the National Constitution establishes the distribution of powers between the federal government and the provinces to enforce legislation stating that:
The provinces reserve to themselves all the powers not delegated to the Federal Government by this Constitution, as well as those powers expressly reserved to themselves by special pacts at the time of their incorporation.13
The section where the powers of the National Congress are listed state:
Congress is empowered to... 12. To enact the Civil, Commercial, Criminal, Mining, Labor and Social Security Codes, in unified or separate bodies, provided that such codes do not alter local jurisdictions, and their enforcement shall correspond to the federal or provincial courts depending on the respective jurisdictions for persons or things...14
The result of this distribution is that Argentine provinces have never delegated to the federal government the power to enforce general procedural laws applicable in the provincial jurisdictions; this power has always been exercised exclusively by the provinces themselves. As a result, each province has enacted its own procedural codes and, in many cases, specific rules on arbitration have been passed at the provincial level.
In turn, the Federal Government has enforced the National Code of Procedures applied by federal courts, which we cited above. Such a Code also includes a specific section governing the ‘Arbitration Proceeding’.15
As we indicated above, the draft of the Bill of the new Unified Civil and Commercial Code includes a chapter called ‘Contract of Arbitration’. The incorporation of this chapter into a piece of legislation that has been expressly delegated by the provinces to the federal government would make such chapter binding and applicable by all courts in Argentina and seems to be a good solution to solve the problem of different jurisdictions regulating on arbitration.
Recognised national authors16 have advocated for this solution, arguing that this finds basis on the mixed character of arbitration: on one side the contractual basis of arbitration, and on the other side its procedural nature. This double characteristic is maintained by internationally well-known authors as well.17 These authors do not deny that there is a procedural dimension to arbitration, but they argue that it ‘must be subordinated to the law of obligations and of contracts in general’.18
The problem with this approach is that, although our National Congress is empowered to enact these rules, they would co-exist with arbitration rules already in place in local codes of procedure. These local codes of procedure will not be automatically abrogated, and new discussions could arise as to the applicability (or not) of the new laws.
For example, the principles of autonomy19 and jurisdiction20 included in the projected bill are in no way objectionable. Quite the opposite: they will be well received, as they shall constitute the legal framework to give a sound solution to cases as the ones cited above. But the same is not true for interim or conservatory measures.21 An interim measure is a typical procedural step, and its admittance and enforcement could, in some cases, contradict local procedural laws.
If the bill is passed, it will undoubtedly result in some progress in certain areas related to arbitration. However, we should not lose sight of the ultimate goal of having in our legislation a specific Domestic and International Arbitration Law following the UNCITRAL Model Law. In this way, Argentina could have a modern arbitration law - one that will foster the development of arbitration and help our country to come up to speed with most recent global arbitration trends.
The local community linked to arbitration has been growing steadily over the past two decades and has, for a long time, been seeking a modernisation of the local rules to avoid the constant temptation of Court interference that, in many cases, seems to transpire from their decisions.
The enforcement of the Unified Civil and Commercial Code, including the chapter ‘Contract of Arbitration’ that contains the principles that would allow a friendly environment towards arbitration, might be a starting point that persuades the Courts that alternative dispute resolutions are a valid choice for individuals to solve their disputes away from any abusive interference from the Courts.
In the long run, the adoption of the globally successful UNCITRAL Model Law is the best way to bring Argentinian arbitration to an international level.
- Sociedad de Inversiones Inmobiliarias del Puerto SA v Constructora Iberoamericana SA on Appeal for Annulment, National Court of Appeals for Commercial Matters, Panel D, 7 February 2011.
- Mobil Argentina SA v Gasnor SA on Arbitration Award, National Court of Appeals for Commercial Matters, Panel D, 8 August 2007.
- José Cartellone Construcciones Civiles SA v Hidroeléctrica Norpatagónica SA or Hidronor SA on Hearing Process, National Supreme Court, 1 June 2004.
- Free translation of the author. The clause in Spanish reads:
Cualquier dificultad que se suscite entre las partes en relación con este contrato o con motivo de su aplicación, interpretación, cumplimiento o disolución, será resuelta por un árbitro arbitrador designado de común acuerdo por las partes o por la justicia ordinaria a falta de acuerdo de éstos.
- Wallaby SA c Despegar.com.ar SA s/ordinario, Juzgado Nacional de 1a Instancia en lo Comercial No. 13.
- Wallaby SA c Despegar.com.ar SA s/ordinario, Cámara Nacinaol de Apelaciones, Sala A, sentencia del 28 de febrero de 2012. Free translation of the author. The Spanish text reads:
el juez de grado, si bien consideró que era dudosa la redacción de la cláusula en cuestión, en lugar de aplicar un criterio restrictivo hizo prevalecer la jurisdicción arbitral por encima de la jurisdicción estatal, realizando una interpretación amplia del convenio, lo que sería rechazado tanto por la doctrina como por la jurisprudencia. En ese sentido, indicó que si la cláusula compromisoria no es clara debe estarse siempre por la intervención de la justicia estatal.
- ICC Arbitration No. 12634/KGA/CCA/IRF Papel del Tucumán SA (under bankruptcy proceeding) v the National State (Argentina)
- CNFed. Contenciosoadministrativo, Sala II, 25/10/2012, EN - Procuración del Tesoro de la Nación c Tribunal Arbitral (Arbitraje 12364 CCI-EXP 111-195270/95) s/ proceso de conocimiento. Author’s free translation. The text in Spanish says:
lo atinente a la revisión o impugnación judicial tanto acerca de la existencia, validez y alcance del Acuerdo Arbitral, como respecto de aquello que se resuelva sobre la jurisdicción del Tribunal Arbitral para entender en el caso, carece de una regulación expresa en el ordenamiento procesal.
- CNFed. Contenciosoadministrativo, Sala II, 25/10/2012, EN - Procuración del Tesoro de la Nación c Tribunal Arbitral (Arbitraje 12364 CCI-EXP 111-195270/95) s/ proceso de conocimiento.Author’s free translation. The text in Spanish says:
ante la ausencia de previsión expresa en punto al trámite por asignar, corresponde que el conocimiento y decisión de la articulación aquí planteada sean llevados a cabo por el Sr. Juez de Primera Instancia.
- Roque Caivano, Court Review of Arbitral Decisions About Their Own Jurisdiction, La Ley, 04/26/2012
- CNFed. Contenciosoadministrativo, Sala II, 09/08/2012, EN - Procuración del Tesoro de la Nación c Tribunal Arbitral (Arbitraje 12364 CCI-EXP 111-195270/95) s/ proceso de conocimiento.
- Roque Caivano, La Obsolescencia De La Legislación Argentina Sobre Arbitraje Es Cada Vez Más Evidente, Journal of the Buenos Aires Bar Association, July 2012. Volume 72, Issue 1, pp63-73.
- National Constitution, article 121.
- National Constitution, article 75(12).
- National Code of Civil and Commercial Procedure, Book Six.
- Rivera, Julio César and Parodi, Víctor Gustavo - Possibility to Include the Arbitration Agreement in the Civil Code, La Ley, 28 June 2012.
- Silva Romero, Eduardo, ‘Arbitration Reviewed from the Viewpoint of the Law of Obligations’, ‘The Arbitration Agreement’. Legis Editores SA, Colombia, 2005, pXV and following pages, cited by the authors mentioned in the above note.
- Rivera, Julio César y Parodi, Víctor Gustavo - Possibility to Include the Arbitration Agreement in the Civil Code, La Ley, 28 June 2012.
- Civil and Commercial Code Bill, section 1653, Autonomy. The arbitration agreement is independent from the agreement it relates to. Any ineffectiveness of the latter shall not invalidate the arbitration agreement, and therefore arbitrators shall continue to have jurisdiction, even in the event of nonexistence or nullity of such agreement, to determine the respective rights of the parties and to issue an award on their requests for relief and allegations.
- Civil and Commercial Code Bill, section 1654, Jurisdiction. Except as otherwise provided for, the arbitration agreement shall empower the arbitrators to decide on their own jurisdiction, even concerning defences as to the existence or validity of the arbitration agreement, or regarding any other than substantive defences preventing the merits of the case to be decided.
- Civil and Commercial Code Bill, section 1655, Interim Measures. Except as otherwise provided for, the arbitration agreement empowers the arbitrators to adopt, at the request of any of the parties, precautionary measures as considered necessary with respect to the subject-matter of the litigation. The arbitrators may ask the requesting party to post sufficient bond in connection with such a request. The enforcement of precautionary measures and if applicable of any interim steps, must be made by a court of law. The parties may also request that a judge adopt these measures, and such a request to a judge will not be considered a breach of the arbitration agreement nor a waiver of the arbitration jurisdiction; it does not exclude either any of the powers conferred to arbitrators.