Breach of the arbitration clause: lessons from the West Tankers saga

On 4 March 2014, the Court of Appeal of Douai restated the traditional position of French International Arbitration Law as regards the negative effect of the kompetenz-kompetenz principle, set out in Article 1448 of the French Code of Civil Procedure, and pursuant to which French courts are to decline jurisdiction in presence of an arbitration agreement, “except if an arbitral tribunal has not yet been seized of the dispute and if the arbitration agreement is manifestly void or manifestly not applicable”, the arbitral tribunal having the power to assess its jurisdiction in priority.

However, this restrictive application of the negative effect of the kompetenz-kompetenz principle is not widely spread and, thus, the situation where a party brings action in a jurisdiction less protective of arbitration may arise.  In such a case, is it possible for the party whose right to arbitrate is frustrated to claim damages to repair the harm suffered?

Courts from two different jurisdictions have responded by the affirmative.

First, on 4 April 2012, the English High Court of Justice has upheld the appeal formed in the West Tankers saga against an arbitral award which had denied the right to claim damages for breach of a party’s obligation to arbitrate by bringing the proceedings in “ordinary” courts.

The West Tankers dispute had already given rise to a landmark decision by the ECJ, in 2009, which had declared anti-suit injunctions issued by a court of a member State to restrain proceedings in another member State incompatible with the EU jurisdictional rules as set out in Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the “Brussels Regulation”), thus voiding anti-suit injunctions of effect within the EU.

Subsequently, an arbitral tribunal rendered an award denying jurisdiction to award West Tankers equitable damages for breach of the opposing party’s obligation to arbitrate. In order to do so, the tribunal relied on the reasoning of the ECJ’s decision and its interpretation of the Brussels Regulation, explaining that:

  • It followed from the 2009 ECJ decision that a predominance of EU law was implicitly recognized over domestic laws and that an arbitration clause under a domestic law should give way before the right to bring disputes before courts having jurisdiction under the Brussels Regulation;
  • Therefore, a party may not be condemned to pay damages for exercising its right to have the dispute resolved by the court having jurisdiction under the Brussels Regulation.

West Tankers appealed the award before the High Court of Justice.

On 4 April 2012, the High Court upheld the appeal, finding that an arbitral tribunal has jurisdiction to award damages for breach of an arbitration agreement for several reasons, including the fact that (i) awarding a party damages for breach of its right to arbitrate is not contrary to the Brussels Regulation, (ii) the Brussels Regulation establishes the jurisdiction of courts, as opposed to the existence of a substantial right for a party to request damages, and (iii) the purpose of the 2009 ECJ decision in relation to anti-suit injunctions was precisely to encourage the application of the kompetenz-kompetenz principle by giving judges (or arbitrators) the exclusive power to decide on their jurisdiction to hear a case.

In Italy, the Court of Verona seems to have come to the same conclusion in November 2012, finding that a party which had brought a dispute to State courts despite the existence of a valid and binding arbitration agreement had acted in bad faith by not accepting the other party’s objection of lack of jurisdiction to the benefit of the arbitral tribunal.  However, the Court relied on different grounds to award the aggrieved party damages, namely, Article 96 of the Italian Civil Code, pursuant to which a party having participated in a procedure in court with negligence or fraud is liable to pay the other party damages.

In France, it seems that State courts have yet, to our knowledge, to decide whether an arbitral tribunal may award damages for breach of a party’s right to arbitrate.  However, French law offers a mechanism similar to that of Italian law referred to as “abuse of procedure”.  Indeed, under Article 32-1 of the French Code of Civil Procedure, “A person who acts in justice in a dilatory or abusive way may be condemned to a civil fine of a maximum of € 3,000, in addition to the reparation of damages that would be claimed.”  Such damages could be claimed on the basis of Article 1382, pursuant to which “Any act whatever of man, which causes damage to another, obliges the one by whose fault it occurred, to compensate it.

Allowing damages for breach of an obligation to arbitrate discourages stalling tactics by bad faith parties to start the proceeding before a State judge in breach of an arbitration agreement and thus, enhance the efficiency of arbitration agreements.  It remains to be seen whether French courts would, in fact, apply the abuse of procedure mechanism to arbitration.

%d bloggers like this: