What are the tools to aid the arbitral process to combat the undesirable effects of parallel litigation?

Of particular importance is the intervention of the courts in aid of arbitration when one of the parties to the arbitral process is either (i) endeavouring to avoid the application of the arbitration agreement to settle disputes by arbitration and instead lodge proceedings before a court (i.e. lis pendens) or (ii) endeavouring to ensure that the other party to the arbitral proceedings ceases its litigation process before a court in order to avoid the application of the arbitration agreement to resolve disputes by arbitration (i.e. anti-suit injunction).

The existence of concurrent jurisdiction of an arbitral tribunal and national courts is an exception to the cardinal principle that arbitration is a party-driven dispute resolution mechanism wherein party autonomy “is the ultimate power determining the form, structure, system and other details of the arbitration” ¹ . As Bermann has put it “parallel arbitration entirely mirrors parallel litigation ²’’ because “a single situation may also give rise to both commercial and investment treaty arbitration. ” In his view, “the competition that most strikingly characterises arbitration is …/… [the] competition between an arbitral tribunal and one or more courts, and it is a competition that typically revolves around, or at least implicates, questions of jurisdiction. ⁴”

PARALLEL LITIGATION

Definitions and Scope

Parallel litigation derives from the court system and denotes the scenario by which the parties who are involved in the same or closely related dispute over the same subject matter, have seized different courts, often one national or domestic and another international, in order to resolve their disputes. The reasons are mostly strategic i.e. seeking the forum which is more favourable to a party and which offers better prospects of succeeding in their claim or simply to ensure that they have the widest protection ⁵. As Bermann has aptly put it, “[o]ften used as a strategic tool, parallel proceedings are viewed as mostly undesirable inasmuch as they entail a duplication of resources, increase the risk of contradictory and have a potential for harassment ⁶’’.

The inherent risk of this phenomenon is that conflicting judgments are issued with the effect that the dispute is effectively back to square one between the parties as they have been resolved with different outcomes each favourable to either party. The rationale for this according to Bermann is that “_{[e]ach of the competing courts stands to perform the same basic function, namely to adjudicate the underlying claim on the merits ⁷”}.

Its reach has extended to the domain of international arbitration in respect of which they have been qualified as being “more troublesome when they involve arbitration rather than litigation because parties that select international arbitration likely have done so on account of its specific advantages over national court litigation (including, but not limited to, a presumed neutrality) ⁸”.

The succinct analysis by Bermann in this respect is noteworthy. First, parallel litigation is not standard even though it is not new, and “[m]ost cases proceed to judgment in a national court without actual or even potential interference by foreign courts” ⁹. Secondly, when parallel litigation involves national courts, this means that an assessment is made mean that there is of “the adjudicatory authority of two or more jurisdictions, each one determining that authority, …/… according to its own respective jurisdictional standards ¹⁰.” Finally, they are ‘’troublesome” when they “involve arbitration rather than litigation because parties that select international arbitration likely have done so on account of its specific advantages over national court litigation (including, but not limited to, a presumed neutrality). Those advantages are by definition compromised when the same or similar disputes are brought in some fashion before both an arbitral tribunal and a national court ¹¹”

What are the tools to aid the arbitral process combat the undesirable effects of parallel litigation?

The New York Convention and the Geneva Convention have both remained silent on the question and take similar approaches.

Under Article II(3) of the New York Convention, there is a duty on courts to refer a dispute to arbitration namely, “the court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable or being performed.”

Article II(3) has been interpreted differently:

• First, it is enabling in nature as it limits itself to creating a positive obligation on national courts to refer a dispute to arbitration;
• Secondly, it is empowering as a national court is entitled to “review the dispute and the arbitration agreement and, thus, raises a lis pendens issue as soon as an arbitral tribunal is seized of the same dispute and a res judicata issue as soon as either a state court or an arbitral tribunal has rendered a final decision concerning jurisdiction;’’ ¹² and
• Thirdly, it has failed to provide “any co-ordination mechanism apt to solve the delicate problem of the interface between arbitration and courtadjudication”¹³.

In view of the common law and civil backgrounds of parties to international arbitration juxtaposed with the absence of any legislative framework to deal with the issue of conflicting awards, national courts have understandably turned to the principles which apply to their legal system in order to deal with the issue namely, (i) the doctrines of lis pendens which will prevail once what are known as identity requirements are satisfied, forum non conveniens and anti-suit injunctions (ii) the ‘fork in the road’ clauses and waivers which are included in certain international investment agreements.

Interim Reliefs

The award of interim reliefs in the context of parallel proceedings is one which is fraught with uncertainty. Indeed, this is an area where there is no universal approach in jurisdictions.

In the words of Redfern and Hunter, “whilst an uneasy truce may have been signed between the courts and arbitral tribunals in the developed arbitral jurisdiction, a ‘turf war’ continues to rage in other parts of the world’ on the question of whether anti-arbitration injunctions are to be granted.

Thus, on 06 January 2010, the Paris Court of First Instance held in SA Elf Acquitaine and Total v Matterei Lai, Kamara and Reiver that French courts are not empowered to interfere with arbitral proceedings.

However, the US and English courts have been unwilling to issue anti-arbitration injunctions. This is particularly characteristic in investor-state disputes in which a state or a state-owned company have entered into arbitration agreements. Typically, states will attempt to avoid arbitral proceedings by having recourse to courts for dispute settlement by lodging an application for an injunction to challenge the jurisdiction of the arbitral tribunal by which the arbitrator and the party to the arbitral proceedings either suspend or abandon the arbitral proceedings altogether.

As Redfern and Hunter have aptly summarised the situation, “this problem has raised serious challenges to the modern arbitrator: should such orders be obeyed, even when patently the product of improper government intervention, or should the arbitrator seek to ensure justice in the individual case, often at risk of monetary penalties (or worse)? ”

LIS PENDANS IN INTERNATIONAL ARBITRATION

The term ‘lis pendans’ is often referred to as a ‘certificate of pending litigation’ ¹⁷ (i.e. suit pending). It is a characteristic feature of civil jurisdictions and amounts to “a notice that a lawsuit has been filed in civil court, which may affect the title to, or ownership of, a piece of real estate. ¹⁸” As suggested by its definition, it presupposes the existence of a legal dispute and serves as a notice to the public which warns potential buyers that there is an on-going dispute concerning the legal title of the real estate in question.

In international law, the doctrine of lis pendans refers to disputes which are pending before two different states in respect of the same claim but before courts of different states.

In this regard, Article 27 of Council Regulation (EC) 44/2001 which replaced Article 21 of the Brussels Convention on the recognition and enforcement of judgments in civil and commercial matters creates an obligation on national courts to either decline proceedings or stay their proceedings when the jurisdiction of the first forum has been established. The Council Regulation (EC) 44/2001 goes further as captures the reach of litis pendans to ‘related actions’ in its Article 28 which replaced Article 22 of the Brussels Convention. Thus, national courts must stay its proceedings whenever related actions ‘are pending in the courts of the different Member States’ in order to avoid conflicting results.

In international arbitration, lis pendans also refers to pending proceedings and is the procedure designed to avoid the result of conflicting decisions where the same parties have been involved in the same dispute before different jurisdictions on the same subject-matter on the same legal basis. It operates as a cease order in respect of the second or subsequent proceedings which have been brought in order that these are stayed as the matter is already being considered in the forum which was seized first. However, unlike the situation in international law, national courts cannot by themselves stay proceedings as the rules of international law do not automatically apply to international arbitration.

Nevertheless, it is for a party to the proceedings before the national court to raise the issue of lis pendans based on the legal basis that the arbitration agreement expresses the parties’ consent to exclude national courts from determining the merits of the dispute between them. Hence the basis for challenging the jurisdiction of the national courts.

This is fully supported in the language of Article II(3) of the New York Convention which recites that “that “the court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable or being performed.”

The terms of Article II(3) of the New York Convention are reflected in both Article VI(1) of the Geneva Convention and Article 8(1) of the UNCITRAL Model Law and other national laws in an endeavour to avoid a party to an arbitration proceeding from attempting to resolve their disputes before a national court as a ‘dilatory tactic ¹⁹ ’. Unless of course the dispute before the national court is non-arbitrable or the arbitration agreement is null and void as a result of which the national court will be fully entitled to hear and determine the dispute between the parties.

The party requesting the stay of proceedings before the second forum must satisfy the forum that the elements of the triple identity test have been satisfied namely (i) the parties are the same (ii) the relief sought must be the same as the first forum which is hearing the matter and, (iii) the same grounds or set of facts must be alleged in the second forum.

Importantly, the party seeking a stay since litis pendans must ensure that the challenge to the jurisdiction of the national court is made within the applicable rules and timelines failing which it will be deemed, by its conduct, to have tacitly submitted to the jurisdiction of the national court and will be unsuccessful in staying proceedings before the national court. As Cremades and Madalena have aptly summarised it “arbitration proceedings are different in nature from court proceedings and therefore cannot produce real lis pendans.”

In brief therefore in order that lis pendans is successful before a national court, (i) the latter’s jurisdiction must be challenged because of the existence of an arbitration agreement between the parties (ii) within the procedural laws and time limits and, (iii) ensuring that the 3 components of the identity test have been satisfied.

The Swiss cases of ‘Buenaentura ²⁰ and Foemnto ²¹ confirm the above. These are cases which both involved parties in Latin America and both comprised a multi-tiered arbitration clause with arbitration in Switzerland governed by the Rules of Arbitration of the International Chamber of Commerce (‘ICC Rules’). One of the parties triggered arbitration in Switzerland following a dispute between them under the main agreement while the other party lodged litigation suit before the Swiss courts in order to stay the arbitration proceedings on the basis of lis pendans because the parties had already fulfilled certain procedural matters before the Swiss court.

The Buernaventura case

In Buernaventura, the Peruvian company alleged that the French company BRGM breached the main agreement which they had entered into by which the Peruvian company Buenaventura would acquire a stake in BRGM’s subsidiary in Peru. Buernaeventura claimed that BRGM instead sold BGRM-Peru to an Australian company known as Normandy Corporation.

Despite the arbitration clause in the main agreement, Buenaventura sued both BRGM and BRGM-Peru before the Peruvian court on the premise that its call option to acquire BRGM-Peru had been breached.

BRGM-Peru challenged the jurisdiction of the Peruvian court by reason of the arbitral agreement to submit disputes to arbitration in Switzerland. BRGM-Peru thereafter triggered arbitral proceedings in Switzerland before the Swiss Federal Supreme Court (‘SFSC’) against Buenaventura and Condesa in accordance with the ICC Rules.

Buenaventura requested the Swiss tribunal to stay the proceedings on the basis of Article 9 of the Swiss Private International Law Act (‘PIL’) as litigation had already been triggered before the Peruvian court. Under Article 9 of the PIL, there is an obligation on the Swiss court to stay proceedings “when an action having the same subject matter is already pending between the same parties in a foreign country …/… if it is to be expected that the foreign court will, within a reasonable time, render a decision capable of being recognised in Switzerland. ²²”

The Peruvian Court of Appeal set aside the contention by BRGM and BRGM-Peru that the dispute should be resolved by arbitration on the premise that not all the parties involved in the litigation had entered into the arbitral agreement. Nevertheless, the arbitration went ahead as the arbitrators took the view that the Swiss tribunal had jurisdiction because the arbitration agreement was valid and captured the subject-matter of the claim. In motivating their decision, the arbitrators held that the interpretation of an arbitration agreement follows general principles of contract interpretation such that if parties agree on the jurisdiction of an arbitral tribunal, there is no reason for a narrow interpretation of the arbitration agreement. The arbitrators took an adopted an objective approach to their scope despite the existence of the prior proceedings before the Peruvian court which involved the same dispute between the same parties.

The Foemento case

In Foemento, the dispute involved Foemento de Construccciones y Contratas SA, a Spanish company and, a Panama company known as Colon Container Terminal SA (‘Colon Container’) in respect of a contact which they entered into and by which Fomento had commissioned Colon Container to undertake construction work in Panama. Disputes under the contract were to be resolved in Switzerland under the ICC Rules.

Despite the existence of the arbitral clause, Fomento sued Colon Container before the Panama court praying for a declaration that the contract and the performance guarantees thereunder were null and void. Colon Container challenged the jurisdiction of the Panama court on the basis of the existence of an arbitration clause to resolve the parties’ disputes. This was rejected by the Panama Court of First Instance who took the view that Colon Container had lodged its claim outside the time limits.

Nevertheless, Colon Container triggered an arbitration against Fomento in Geneva. The finding of the Panama Court of First Instance was reversed by the Panama Court of Appeal which took the view that Colon Container had lodged its application within the time limits. This was appealed against by Fomento even though the arbitral proceedings were on-going in Switzerland.

On 22 January 2001, the Panama Supreme Court upheld the decision of the Court of First Instance thereby dismissing the challenge to the jurisdiction of the Panama court.

Fomento thereafter endeavoured to annul the arbitral award before the SFSC which held that the rules of lis pendans under article 9 of the PIL Act extended to court and arbitral instances which meant that arbitral tribunals seated in Switzerland had had to follow the rules. It therefore followed that the arbitrators ought to have stayed the proceedings in view of the existence of prior court proceedings in Panama and given that the possibility that the Panama court would deliver an award which was enforceable in Switzerland. The SFSC set aside the award by the Swiss tribunal on the premise that by operation of the principle of competence-competence, the arbitral tribunal should have applied the principle of lis pendans.

In brief therefore, even Femento was decided on the basis of the parties’ tacit submission to the jurisdiction of the Swiss courts for having undertaken certain procedural steps, which touched on the merits of the case, before the Panama court, nevertheless the decision of the SFSC raised concerns that parties to a Swiss arbitration could resort to delaying tactics by challenging the validity of the arbitration agreement before Swiss courts.

In Femento therefore, the determining point for the SFSC to ascertain the validity of the arbitration agreement was effectively the parties’ conduct as aforesaid. In so doing, they had gone against their prior consent to arbitrate their disputes. Of importance from the perspective of the New York Convention, the question of whether Colon Container had lost its right to arbitrate was not a matter regulated by the New York Convention but rather by the Panama courts. Hence the ultimate result that the arbitral award had been set aside for want of jurisdiction of the tribunal.

Of interest, the Fomento case led to an amendment to the PIL by which a new Article 186(1 bis) was introduced to Chapter XII effective as from 01 March 2007 by which the principle of competence-competence prevails over lis pendans ²³ arbitrators now have the power to decide proprio motu on their own jurisdiction notwithstanding that a dispute has already been triggered between the same parties before courts of a country or another arbitral tribunal.

ANTI-SUIT INJUNCTION IN INTERNATIONAL ARBITRATION

Anti-suit injunctions are orders by which parties are mandated not to trigger or maintain litigation in a foreign court. It is understood to be among the most controversial practice of international arbitration and is mostly prominent in common law systems.

Under English law for instance, the governing proposition is that a court will issue an anti-suit injunction if it is of the view that court may issue an anti-suit injunction if it considers that the UK “courts have a pronounced interest in the matter, if the foreign proceeding would cause substantial prejudice to the applicant, and if the injunction would not unjustly deprive the claimant of a legitimate advantage that the foreign court offers ²⁴”.

Bermann explains the position with anti-suits very succinctly as follows:
“A scenario in which UK courts seem to find antisuit injunctions especially attractive is that in which a party to an arbitration agreement has brought a covered dispute to a national court instead, and other common law jurisdictions take much the same stand. Nor do courts act exclusively in the interest of arbitrations seated locally. A Bermudan court, for example, issued an antisuit injunction in support of an arbitration seated in Switzerland. US courts, while likewise amenable to issuing anti-suit injunctions in aid of arbitration, are less consistent than English courts in this regard. While some require little more than serious inconvenience and a risk of inconsistent judgments, others subject the issuance of anti-suit injunctions to stricter conditions, namely proof that maintenance of the foreign court proceedings would cause grave and irreparable injury to the applicant and that issuance of the injunction is necessitated by respect for US public policy. ²⁵”

CONCLUSION

The co-existence of parallel litigation and arbitral proceedings are a source of major concern in international arbitration and while the application of doctrine of lis pendans and the practice of anti-suit injunctions have brought some form of certainty and endeavoured to ‘stabilise and uniformise the system, nevertheless the system remains replete with inconsistent results.

The absence of a universal legislation on the issue coupled with the principles of lis pendans, amongst others, has had the positive result of granting discretion and certain powers to the tribunal and state courts to develop an understanding of where the gaps are and what needs to be done to come close to a harmonised system of dispute resolution.

Clearly there is no one size fits all formula to address the growing phenomenon of parallel litigation in the context of international arbitration proceedings in view of the absence of specific legislation towards this end whether at the individual state level or in the international perspective. Hence awards and judgments delivered by state courts and arbitral tribunals. In this respect, the standpoint taken by state courts and arbitral tribunals play a fundamental role in ‘shaping’ the international arbitration environment and providing guidance as to what may be expected.

It is submitted that as much as the background against which international commercial arbitration operates is the global economy ²⁶ and legislation which is international in nature, that the future lies in mandatory consolidation which removes the requirement that there should be an agreement between the parties and which has been adopted already by certain jurisdictions including arbitration rules and international agreements already lay down mandatory joinder and/or provisions for consolidation.