Juan Pablo Hernández*
*Founder of The Treaty Examiner and Moot coach at Universidad Francisco Marroquín (Guatemala).
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The Treaty Examiner, Issue 2 (May 2020), pp. 49-55.
The COVID-19 crisis has become a popular justification to excuse contractual obligations. Such grounds to suspend performance, exempt from damages, adapt terms or even terminate contracts, are extensively recognized in contract law. One further ambit where the effects of the crisis could become relevant is international arbitration, due to its contractual character.
Due process requires having a reasonable opportunity to present one’s case (1). It follows that undue obstacles to that right may make a change in the procedure necessary. For that reason, some legal systems allow inconvenience to justify changing the forum, under specified circumstances (2). However, justifying a change of the arbitral seat due to mere inconvenience has not received a sympathetic ear in international arbitration (3).
On the other hand, what happens when the problem escalates beyond a mere inconvenience and becomes a real obstacle to due process or an existential threat to the arbitration itself? In our present times, given the extraordinary obstacles to human interaction and threats to human life and health, the doctrine of changed circumstances becomes relevant in all ambits, including the arbitral procedure. This article addresses the applicability, requirements and effects of the rebus sic stantibus principle on the selection of arbitral seat in international arbitration.
The Importance of Selecting an Arbitral Seat
Beyond the physical place where the parties and the tribunal will meet, the arbitral seat is the ‘juridical domicile’ of the arbitration (4). The selection of the arbitral seat brings with itself not only the physical venue of the arbitration, but also the legal system that makes the proceedings effective. The arbitration law of the seat normally operates as lex arbitri, i.e., the law governing the arbitration (5). These laws determine the extent to which national courts at the seat can intervene into the arbitration, exercising supervisory jurisdiction (e.g., to select an arbitrator in absence of an agreed default mechanism) (6).
Additionally, the selection of the seat determines which courts have the power to annul the resulting award, and under which conditions (7). This is crucial, since annulment at the seat is a ground for refusing to enforce an award under Article V(1)(e) of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and Article 36(1)(a)(v) of the UNCITRAL Model Law of International Commercial Arbitration (Model Law). The closeness between the seat and the arbitration also has effects in the choice of law for the arbitration agreement: in absence of party selection, the law of the arbitral seat normally governs the substantive validity of the agreement to arbitrate (Article V(1)(a) of the New York Convention).
Thus, selecting the seat has central importance in the way arbitration will be conducted and the effectiveness of the resulting awards.
Changing the Seat?
In general, the parties are free to change the arbitral seat (8). Arbitration is consensual and the arbitration agreement is a contract, so parties can modify its terms. A change in the place of arbitration should follow the same formal characteristics as required by the lex arbitri for the original arbitration agreement.
Whether a third party can change the arbitral seat is less certain. Countries with pro-arbitration regimes (such as those adopting the Model Law or ratifying the New York Convention) are under an obligation to recognize the parties’ choice of arbitral procedure. Articles II and V(1)(d) of the New York Convention point out that arbitration agreements must be enforced in their totality and that the non-compliance with the parties’ selected procedure is a ground to refuse enforcement of the resulting award. If the parties selected a seat, changing it could result in an unenforceable arbitral award.
On the other hand, the arbitration agreement is still a contract. As with other classes of contracts, a change of circumstances can result in the need to ‘revise’ or ‘adapt’ the agreement and allow it to display its full effects (rebus sic stantibus) (9). It is recognized that this principle is generally applicable to arbitration agreements and the selection of arbitral seat, although the circumstances in which it can apply are strict and exceptional (10). Examples cited of cases that would justify changing the seat include changes in the seat’s legal framework making the arbitration unworkable, or factual developments making the right to present one’s case unduly difficult to implement, for one or both parties. In the words of Professor Gary Born, changing the seat is reasonable ‘where a state undergoes radical political and/or legal transformation, fundamentally altering the statutory and judicial regime for international arbitration and raising serious questions about one party’s ability to securely or fairly present its case, either in the arbitral proceedings or a subsequent annulment action’ (11).
An example that illustrates the exceptional character of this measure is the Himpurna case (12). A court in Jakarta issued an order enjoining an arbitration proceeding and setting a fine of US$ 1 million per day if this order was breached. In response, the arbitral tribunal changed the physical venue from Indonesia to the Netherlands, without changing the juridical seat of the arbitration.
Thus, even in a case where the seat has become a hostile environment to the arbitration and the parties may be in danger of arbitrary action by the State, changing the seat may not be necessary. It is notable that the repercussions of the injunction (as an administrative or penal measure) did not pose an immediate threat to the arbitration itself (such as declaring the illegality of the resulting award or repealing the arbitration law). Thus, it was only necessary to change the physical place for hearings rather than the legal environment of the arbitration.
As explained by Professor Lalive, applying the requirements of hardship or rebus sic stantibus by analogy to arbitration agreements, the circumstances that give rise to the need to adapt the choice of seat must have been (a) reasonably unforeseeable at the time the arbitration agreement was concluded and (b) of such magnitude as to make the conduct of the arbitration unduly burdensome or prevent the normal and orderly course of the proceedings according to general principles of arbitration (13).
It must be pointed out that the selection of a seat does not obligate the parties or the arbitrators to conduct proceedings, physically, in that country. As stated before, the seat is a juridical rather than a physical place. Therefore, if the change of circumstances can be avoided by conducting the arbitration in another country or online, then the principle of rebus sic stantibus would not authorize an adaptation of the arbitration agreement. This requirement of ‘unavoidability’ is not unheard of in the context of contractual hardship (14). This also ensures that in most cases, changing the seat will only be necessary when there is a change in the legal or political environment of the seat. When the change affects the physical suitability or convenience of the seat of arbitration, international law generally recognizes a form of the forum non conveniens doctrine – one allowing the tribunal to change the physical venue rather than the juridical seat (15).
Power to adapt arbitration agreements?
Whether the arbitral tribunal can change the arbitration agreement gives rise to mindboggling questions. The jurisdiction and powers of arbitral tribunals are primarily based on and limited by the arbitration agreement (16). Therefore, to argue that the arbitral tribunal can change its constitutional document is, on its face, a ridiculous proposition. Recognizing a wide power to adapt arbitration agreements would create the malicious incentive that arbitrators can amplify or limit their own competence without regard to the parties’ intent, which ultimately contradicts the most basic principles of international arbitration. In contractual terms, whether all arbitration agreements are subject to an implied clausula rebus sic stantibus is questionable.
However, there is a difference between expanding the tribunal’s jurisdiction and changing the seat. Jurisdiction comes from the parties’ consent to submit the dispute to arbitration. The consent to arbitrate is the central requirement of an arbitration agreement, without which the arbitration has no existence. Therefore, as the consent to arbitrate creates the arbitrator, the arbitrator should never be entitled to change that consent, to modify its own existence. Manifesting consent to arbitrate is a power that only the parties have, and without that consent the arbitral tribunal lacks all authority.
On the other hand, changing the seat entails changing the procedural framework of the arbitration. In general terms, determining the arbitral procedure is a power wielded by arbitrators (17). Selecting the arbitral seat is not an essential requirement for the existence and validity of the arbitration agreement. Most arbitral institutions as well as the Model Law already recognize that arbitrators can select the seat if the parties have not made a choice (18).
The problem arises when a choice has been made. Not respecting the parties’ chosen procedure, including the seat, could make the award unenforceable. The power to adapt the selection of arbitral seat could only be recognized where the change of circumstances all but invalidates the original selection – for instance, if the seat declares arbitration illegal. In those cases, one could argue that there is no ‘valid’ seat selection to speak of, which empowers the tribunal to fill the gap. That way, there would be no need to invoke a so-called ‘implied clausula rebus sic stantibus’. If the supervening event threatens to render the arbitration agreement null and void, inoperative or incapable of being performed, the tribunal should be able to sever the arbitration from the seat to preserve the parties’ consent to arbitrate – replacing the original choice for one that gives full effect to the parties’ intent. The tribunal would not be overriding the parties’ wishes – it would be insulating that intent from the consequences of the changed circumstances. This approach is analogous (though not identical) to the validation principle in the context of choices of law (19).
Changing the seat in most cases is unnecessary and results in unreasonable procedural unfairness from the perspective of international arbitration. If the arbitration has been rendered too difficult or impossible, it would not be hard to convince the parties to make the change themselves. A unilateral decision by the tribunal to change the seat is highly controversial and a procedural chimaera, one that could be prohibited under the applicable laws. Therefore, it should be avoided in most if not all cases.
This discussion could be different if the arbitral institution (20) rather than the tribunal makes the change. Moreover, some institutional rules define a ‘default’ seat (21). This could be a generally good alternative that reduces discretion in the task of selecting the new seat. As can be noted, the power to ‘change’ the seat will depend on the procedural framework of the arbitration itself.
Implications for COVID-19
Could the COVID-19 pandemic justify changing a seat of arbitration? This is a case-by-case inquiry into the fulfilment of the three identified requirements (unforeseeability, gravity, unavoidability).
As for foreseeability, if the arbitration agreement was concluded before the first cases of COVID-19 were reported, there is a solid case to argue that the change of circumstances was unforeseeable. The foreseeability of restrictions to the possibility of conducting a regular arbitration would increase as time goes on.
On the other hand, the requirements of gravity and unavoidability would most likely not be met. COVID-19 prevention imposes physical hurdles to the ability to hold hearings and take evidence. These are obstacles that can be avoided by a regular exercise of the tribunal’s power to determine the procedure (e.g., by holding virtual hearings). Changing the seat, as stated above, is necessary almost exclusively when the legal or political environment of the seat changes – for instance, when the seat unexpectedly expands the non-arbitrability doctrine or grounds of annulment, or when a political conflict between the seat and the expected place of enforcement makes the enforcement of the award uncertain. As can be noted, these are rather extraordinary circumstances. Despite its unforeseeability, magnitude and undeniable economic consequences, it is questionable that the COVID-19 pandemic, of itself, could trigger the need to change the arbitral seat.
PIE DE IMPRENTA: Juan Pablo Hernández (editor-in-chief), Guatemala, 19 June 2020.
ENDNOTES
1. Principle 3.1 of the ALI/UNIDROIT Principles of Transnational Civil Procedure, available at https://www.unidroit.org/english/principles/civilprocedure/ali-unidroitprinciples-e.pdf.
2. R Brand, Forum Non Conveniens (MPEPIL, 2019), at 1-3.
3. G Born, International Commercial Arbitration (Kluwer Arbitration Internationa, 2014), p. 2075-2080.
4. See supra note 3, p. 1542.
5. B Nigel, C Partasides, A Redfern, M Hunter, Redfern and Hunter on International Arbitration (OUP, 2015), pp. 166-169.
6. See supra note 5, pp. 167-168.
7. See Article V(1)(e) of the New York Convention and Articles 34, 36(1)(a)(v) of the Model Law.
8. See supra note 3, pp. 2072, 2073.
9. See Articles 6.2.1-6.2.3 of the UNIDROIT Principles of International Commercial Contracts.
10. The availability of hardship or force majeure largely depends on the existence of that defense under the law that governs the substantive validity of the arbitration agreement (lex compromissi). See H Berglin, ‘The Iranian Forum Clause Decisions of the Iran-United States Claims Tribunal’ (1987) Arbitration International, Volume 3, Issue 1, p. 46; G Born, International Arbitration: Cases and Materials (Wolters Kluwer, 2015), p. 421 (stating that the impossibility or frustration of the arbitration agreement is a matter of substantive validity).
11. See supra note 3, p. 2083.
12. For more information on the case, see Himpurna California Energy Ltd v. Persero Perusahaan Listruik Negara, Procedural Order in Ad Hoc Case of 7 September 1999, Yearbook of Commercial Arbitration, Volume XXV (2000).
13. P Lalive, ‘On the Transfer of Seat in International Arbitration’ in J Nafziger, S Symeonides, Law and Justice in a Multistate World: Essays in Honor of Arthur T von Mehren (Brill, 2002), p. 518.
14. See Article 79 of the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG) and the 2020 model hardship clause of the International Chamber of Commerce (ICC).
15. See Article 20(2) of the Model Law; Article 14.2 of the 2018 HKIAC Administered Arbitration Rules; Article 16.3 of the 2014 LCIA Arbitration Rules; Article 21.2 of the 2016 SIAC Arbitration Rules; Article 18(2) of the ICC Arbitration Rules.
16. See supra note 5, p. 71.
17. See Article 19(2) of the Model Law.
18. See Article 14 of the 2018 HKIAC Administered Arbitration Rules; Article 16.2 of the 2014 LCIA Arbitration Rules; Article 21.1 of the 2016 SIAC Arbitration Rules.
19. See Principle XIV:3 of the Translex Principles.
20. Under the ICC Arbitration Rules, it is the ICC Court that selects the arbitral seat in the absence of a choice by the parties. See Article 18(1) of the ICC Arbitration Rules.
21. Under the LCIA Arbitration Rules, in default of party agreement, the seat is London, England, unless the tribunal determines that another seat is more appropriate. See Article 16.2 of the 2014 LCIA Arbitration Rules.
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