Construing Arbitrability: Method & Technique

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CONSTRUING ARBITRABILITY: METHOD & TECHNIQUE ANIL  OZTURK     Arbitration, “a form of private jurisdiction based on the parties’ will, expressed in an agreement, and which vests ın private individuals the power to determine private law disputes instead of the state courts”1 is a popular alternative of litigation. In the recent past, due to the ease in recognition and enforcement of arbitral awards 2 and high degree of party autonomy provided in the choice of the adjudicators, procedure, substantial law and place of arbitration, it gained prominence over other alternative dispute resolution methods. Arbitration has two essential requirements: an arbitrable dispute, and a valid arbitration agreement covering that dispute. 3 In this work, the point at issue is the first requirement, arbitrability, which quintessentially implies whether a difference is capable of being resolved by arbitration4 under the relevant national law.5 Deciding on arbitrability is a complex pursuit; especially due to the variability and multiplicity of these national laws. The first part of this work; thus, intends to untangle arbitrability and provide a methodology for deciding on arbitrability of a given dispute: the second part ıncludes discussion on the arbitrability of company and competition law disputes.

                                                                                                                1

Jean-François Poudret and others, Comparative Law of International Arbitration (Second edn, Sweet &

Maxwell 2007) 2 2

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958, United

Nations Treaty Series, vol. 330, No. 4739 [hereinafter NYC or the Convention] is a widely recognized and uniue tool that guarantees recognition and enforcement of foreign arbitral awards. 3

United Nations Commission on International Trade Law, UNCITRAL Model Law on International Commercial

Arbitration 1985: with amendments as adopted in 2006 (Vienna: United Nations, 2008), Art. 7(1). 4

Laurence Shore, 'Defining ‘Arbitrability’' [2009] accessed 22 December 2016 5

Gary Born, International Arbitration: Law and Practice (Second edn, Kluwer Law International 2016) 90. The

relevant national law might be the law of the country in which enforcement of an award would be sought, the law of the seat of arbitration or the chosen substantial law. Non-arbitrability might result in arbitrators’ declining jurisdiction under the chosen law, setting aside of an award under the law of the seat of arbitration, and refusal of enforcement under the law of enforcement country, pursuant to NYC Art. V(2)(a).

 

OZTURK,   2  

I. Untangling Arbitrability I.1. General Requirements For a dispute to be arbitrable, its subject matter, before anything else, has to meet the general requirements of arbitrability, which provide a layout of subject matters that are capable to be resolved by arbitration. Accordingly; if the subject matter of a dispute does not meet the general requirements of arbitrability, it is inarguably non-arbitrable; however, meeting them does not directly deem the dispute arbitrable, as it is subject to further limitations of the relevant national law – general requirements serve as a template of boundaries. The immediate pointer of the general requirements perhaps is in the universally accepted features of arbitration. Arbitration being a “confidential, private proceeding”, involving a “high degree of party autonomy in choice of applicable law, procedural law and the adjudicators”, it is clear that the preliminary scope of arbitrability is to be consonant with the limits of party autonomy: The disputes whose subjects affect interests of non-consenting third parties or which are related to non-contractible issues (e. g. Criminal cases), are intrinsically non-arbitrable. It is discerned that many lawmakers have also incorporated this into their national laws, albeit with wording differences. For instance; arbitrability primarily requires the dispute’s subject matter to be concerned with “the rights parties can freely dispose of” in Turkish6 and French7 laws and appertain to a claim that has a financial value in Swiss8 law, whereas German9 law embodies both as alternative general requirements. US law, unlike those, adopting a more specific language states that; “disputes arising from contract, commerce or maritime transactions” 10 shall be capable of being resolved by arbitration. Bringing all these together, it can be asserted that, when (and if) making general requirements about subject matters into rules, lawmakers were cognisant of the commonly accepted features of arbitration and the scope has been set as to ensure that arbitration does not branch off from individual interests of the parties into the public law.

                                                                                                                6

Turkish International Arbitration Act (‘TIAA’), Law no: 4886, Art. 1.

7

Code Civil, Art. 2059. (France)

8

Loi fédérale sur le Droit International Privé (Federal Private International Law Act - ‘FPILA’), Art. 176.

(Switzerland) 9

Bundesgesetzblatt, ‘BGBl’ (Federal Civil Procedure Code), Section 1030. (Germany)

10

 

US Arbitration Act (Federal Arbitration Act), Section 1.

OZTURK,   3  

I.2. Further Limitations In addition to meeting general requirements, of beıng capable of being resolved by arbitration; the subject matter of a dispute should not be subscribed to certain limitations prescribed in the relevant national law. The layout for arbitrability –which is provided by the general requirements, either inferred from the features of arbitration or prescribed in the relevant national law- is expounded for each national law through these further limitations. These further limitations are brought because of “the public importance or the perceived judicial need for protection”11 of the subject matter of the dispute: This does not mean that the dispute subject to further limitation is always governed by public law or based on public policy. In fact, disputes governed by public law or grounded on public policy are often excluded from the domain of arbitration due to the abovementioned general requirements. In this regard, further limitations primarily serve to pick the disputes involving public interest out of the pool of disputes that meet general requirements.12 Considering that the scope and content of “public interest” is different not only by country but also by time; it is not possible to produce an authoritative list of further limitations to arbitrability here. Still, there are some recurring themes. One of these is the protection of the weaker party: Recognizing that the weaker party can neither repudiate nor negotiate the arbitration agreement imposed by the larger party and aiming to prevent exploitation of the weaker party; many lawmakers or courts have restricted or proscribed arbitrability in labor or consumer law disputes. For example, in English Law, binding arbitration on employment matters (except for exceptional situations) is not possible; both by statutory13 and case law14. Likewise, Turkish case law has the provısıon that ın order to provide the weaker party the essential judicial protection; labor law disputes are not capable of being submitted to arbitration by the employer15. When it comes to consumer arbitration, undergirded by EU legislation16, most member states either straightforwardly interdicted consumer arbitration17 or

                                                                                                                11

Born (n5) 87.

12

Born (n5) 88.

13

Employment Rights Act 1996 Section 203(5). (UK),

14

Clyde & Co LLP, John Morris v Krista Bates van Winkelhof [2011] EWHC 668 (QB) (UK), [39].

15

Y. 9. HD 14.9.1964 t. 4938/5429 (Court of Appeals, Turkey)

16

Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts [1993] OJ L95/29, Art.

3(3); Annex 1(q).

 

OZTURK,   4   barred pre-dispute consumer arbitration agreements. 18 Another important theme is the protection of third parties: Accepting that arbitration is an exclusively bipartite proceeding and there are private affairs whose resolution would affect the interests of third parties with whom one of the parties is in a relationship with; legislators tend to reserve resolution of this kind of affairs to national courts and public domain, for the purpose of allowing third parties to have their says. Such theme can be seen in the non-arbitrability of bankruptcy and insolvency claims under numerous national laws19 for the sake of protection of other creditors. A third theme is protection of the regal prerogatives: States, in order to maintain authenticity of official records, to preserve national interests or as a result of paternalism; hold the warrant of legitimizing certain transactions or bestowment of some rights exclusively to themselves, hence; when a dispute related to those transactions or rights arises, it is in national courts’ prerogatives to resolve them. In numerous national laws, this is the case for disputes arising from family law,20 21 transfer of title in real estate,22 or disputes related to validity or grant of intellectual property rights. 23 In most of the cases, these themes concur; yet their outcome is the same: procuring admissible further limitations to the subject-matter arbitrability. Although the themes might be recurring; their usage and content are still variant; deeming the inquisition of relevant national law for further limitations essential before deciding on the question of arbitrability.

                                                                                                                                                                                                                                                                                                                                                            17

Code Civil, Art 2061; deeming that domestic arbitration agreements are “valid if concluded by reason of a

professional activity”, makes consumer contracts domestically non-arbitrable. 18

The Swedish Arbitration Act (SFS 1999: 116)', from accessed 22 December 2016, Section 6 (Sweden) 19

Nigel Blackaby and others, Redfern and Hunter on International Arbitration (Student Version) (Six edn,

Oxford University Press 2015), 117-119 20

Indicating the Family Law disputes which require changes in official records; such as divorce or guardianship

rights, excluding alimony and marital property. 21

Wendy Kennett, 'It’s arbitration, but not as we know it: Reflections on family law dispute resolution' (2016)

30(1) International Journal of Law, Policy and the Family 1–31; 6-7. 22

TIAA (n 6), Art. 1.

23

William Grantham, '‘The Arbitrability of international Intellectual Property Disputes’ (1996) 14(1) Berkeley

Journal of International Law, 173–221, 183.

 

OZTURK,   5  

I.3. Deciding Arbitrability Consequently, it can be suggested that, arbitrability of the subject matter of a dispute could be determined by employing a basic proposition: The dispute is arbitrable when its subject matter meets the general requirements of arbitrability and when the said subject matter does not fall under the scope of further limitations of the relevant national law. Having explained the general requirements and further requirements above; it is also important to stress that, when deciding on the question of arbitrability, a distinction must be made between the subject matter of the dispute and the preliminary issues that should be necessarily evaluated to resolve it. For instance; whether a party has committed a crime is clearly nonarbitrable, however; a question on whether a contract is invalid as it is contrary to a rule of criminal law might be accepted as arbitrable.

II. Arbitrability in Practice II.1. Company Law Company law; being the category of law under which the establishment24, governance, and dissolution of a company is regulated; 25 encompasses both administrative and interpersonal transactions. Hence, it is not possible to reach a single conclusion for arbitrability all disputes arising from company law, necessitating examination of its several components. To begin with, some matters under the company law are subject to either authorization or ordinance of public authorities, such as registration or abrogation of a company. A dispute arising from those matters is not within the discretion of parties; on the contrary, parties have little or no say. Thus, they do not meet the general requirements of arbitrability and are obviously non-arbitrable. Beside these, disputes arising from commercial transactions between two companies, or a company and an individual, such as the sale of shares -as they are purely contractual and resolvable by settlement- can intrinsically be considered as arbitrable. The main discussion here arises when it comes to corporate governance issues; namely disputes between the shareholders (or the company) and the board or conflicts related to resolutions of shareholders’ meetings. In both of them, the disputes are fundamentally                                                                                                                 24 25

formation, registration, incorporation etc. Cambridge

Dictionary,

'Company

law'

(21

December

accessed 24 December 2016

 

2016)

OZTURK,   6   arising from performance of a contract, the corporate charter. In addition, both the shareholders and the members of the board of directors are free to withdraw or amend their decisions in the same way they made them, rendering disagreements arising from those resolvable at the parties’ disposal. As a consequence, in the absence of further limitations in the relevant national law, they should be assessed as arbitrable. In line with this assessment, in many states, parties can submit disputes arising from corporate governance issues to arbitration. A backing to this statement can be provided through the UK law, where this stance is documented in the landmark Fulham Football Club decision. In that decision, LJ Patten affirms, “A dispute between members of a company or between shareholders and the board about alleged breaches of the articles of association or a shareholders’ agreement is an essentially contractual dispute […]”26. Furthermore, in the same decision, LJ Longmore points the lack of further limitations by stating he “cannot see that it is necessary in the public interest that agreements to refer disputes about the internal management of a company should in general be prohibited”27. The French approach to both disputes arising from shareholders’ meetings resolutions and differences between the shareholders and board members is the same, even when a single shareholder brings the claim against a board member.28 Nonetheless, further limitations on the arbitrability of corporate governance disputes exist. For example; in Germany, until 2009, resolutions of shareholders’ meetings were considered non-arbitrable, on the basis that awards on those not only affect “the very parties to the dispute but also in relation to each and any shareholder, management or supervisory board member”.29

                                                                                                                26

Fulham Football Club (1987) Ltd v. Richards [2011] EWCA Civ 855 [77].

27

ibid. [99]

28

Alexander Brabant, Maxime Desplats, and Serena Salem, 'Arbitration and Company Law in France' (2015)

12(3) European Company Law, 144–150, 149. 29

Frank Roth, ‘Arbitration and Company Law in Germany’ (2015) 12(3) European Company Law, 151–153,

152.

 

OZTURK,   7   II.2. Competition Law Competition Law, or Anti-Trust Law; being an area of law aiming to maintain an efficient competition between businesses 30 for economic efficiency and optimization of societal welfare; cannot be subject to a sole conclusion in arbitrability matters, as was the case in company law disputes. As such, in the beginning; it must be stated that most issues arising under the competition law, such as levy of fines or criminal prosecution of perpetrators in cases of breach, supervision of acquisitions or authorization of exemptions are not at free disposal of parties and strictly reserved for the domain of the competition authorities. These issues, as they do not meet the general requirements inferred from the definition of arbitration; are non-arbitrable. In this regard, arbitrability of competition law disputes might be relevant, for two occasions. First of those is the arbitrability of disputes that are not mainly related to competition law; but in whose solution there are preliminary matters that are to be answered through competition law. The importance of making a distinction between the main question and preliminary issues when deciding on arbitrability has been emphasized above; taking that into consideration, it is possible to assert that these types of differences are arbitrable without being subject to further limitations.31 The more contentıous ıssue is whether a party can claim that the contract has anticompetitive implications before arbitration. Arising from a contract, resolutions of the disputes are within parties’ free disposal, however so, the public interest on adjudication of anti-competitive behaviors suggest that there would be further limitations on arbitrability of those on the grounds of the protection of third parties (consumers or other businesses in the sector) This was the case in US law until mid 80’s, for instance; American Safety decision states that a claim arising from anti-trust laws is non arbitrable, as it is “not merely a private matter”, which “can affect […] perhaps millions — of people and inflict staggering economic damage”.32 Despite its reasonability; with the increasing density of international commerce and in order to protect their countries place in international trade; this approach was renounced in Mitsubishi decision for international disputes. In that decision, the Supreme Court agreed                                                                                                                 30

Cambridge

Dictionary,

'Competition

law’

(21

December

2016)

accessed 24 December 2016 31

Deyan Draguiev, 'Arbitrability of competition law issues reinforced' (KluwerArbitration, 10 January 2014)

accessed 24 December 2016 32

 

American Safety Equip. Corp. v. J.P. Maguire Co. 391 F.2d 821 [1968] [19].

OZTURK,   8   that although there might be involvement of a public interest in anti-trust claims, due to, among other reasons, “sensitivity to the need of the international commercial system for predictability in the resolution of disputes33, international anti-trust claims are held arbitrable; postponing the assessment of public policy concerns by national courts to the enforcement stage, in which national courts refuse enforcement if they view the award as contrary to public policy.34 European Court of Justice, in Eco Swiss case, adopted a similar approach, accepting that competition law is a part of public policy; they nevertheless stated that this does not imply non-arbitrability; but arbitrators’ obligation to take competition law into consideration ex officio; their failure to do so might result in enforcement of the award.35 The author, does not find these explanations reasonable; as it might result in courts’ reviewing the case substantially, and extinguish all the characteristics that make arbitration preferable. However, admissible reasoning for arbitrability exists in French and Swiss laws36; in which the courts accepted that those matters are within free disposal of the parties and there were no further limitations in their laws; hence deemed competition law disputes arbitrable.

III. Conclusion In this work; the author tried to provide an understanding of the arbitrability through an analytic method. The method suggested that; arbitrability can be decided through first testing whether the dispute meets the general requirements, and if it does; then assessing whether it is out of the further limitations of the relevant national law. Applying this method to the company law and competition law questions; succinct but substantive answers were produced. Summing up, for the company law; it is possible to assert that although a decreasing number of sensible further limitations on the grounds of the protection of third parties might exist here and there; corporate governance disputes are, in general, considered as arbitrable; likewise the commercial transactions of companies. For competition law, it can be asserted that where the claim is arising from a contract; further limitations that are based on “public” interest are virtually non-existent today, although other methods for enforcing public interest have been employed.

                                                                                                                33

Mitsubishi v. Soler Chrysler-Plymouth 473 U.S. 614 [1985] 615.

34

ibid. 628.

35

Case 126/97 Eco Swiss v Benetton International [1999] ECR I-3080 (3094).

36

Blackaby (n19), 114.

 

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