Drafting the arbitration agreement: the importance of express provision about the authority of the arbitral tribunal and the state courts

Eliana Baraldi

Eliana Baraldi Advogados, São Paulo

eliana@elianabaraldi.com.br

Giovanna M Santana

Eliana Baraldi Advogados, São Paulo

giovanna@elianabaraldi.com.br

Paula Akemi Taba Vaz

Eliana Baraldi Advogados, São Paulo

paula.akemi@elianabaraldi.com.br

Caio Henrique de Campos Ramos

Eliana Baraldi Advogados, São Paulo

caio.ramos@elianabaraldi.com.br

The competence-competence doctrine[1] is a perpetually current subject matter in academic and professional discussions among arbitration professors, practitioners and arbitrators all over the world. This doctrine has undergone many developments, and its understanding and application has become of paramount importance to the strengthening of the arbitration in any jurisdiction, serving as grounds for both upholding or refusing to enforce arbitration agreements by arbitrators and state courts.

The IBA Guidelines for Drafting International Arbitration Clauses (‘the Guidelines’) are a practical resource for practitioners to draft an arbitration agreement in accordance with the aforementioned doctrine vis-à-vis the spirit of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘the New York Convention’).

In general, the competence-competence doctrine provides that international arbitral tribunals have the power to analyse and rule on disputes concerning their own jurisdiction.[2] Therefore, it is commonly said that two effects arise out of this doctrine: the positive and the negative effects, [3] the latter being the main subject of discussion.

On one hand, the positive effect of competence-competence grants the arbitrator the power to decide on a first-basis on issues related to the existence, validity and effectiveness of the arbitration agreement, as well as allegations that may entail the premature termination of the arbitral proceedings.[4] On the other hand, the negative effect prevents state courts from deciding on those matters until the arbitral tribunal has had the chance to do so first.[5]

While the positive effect is universally recognised and expressly provided for in many legal systems, [6] with the New York Convention being the main source of this principle, [7] the negative effect finds resistance in some jurisdictions such as the United States, where there are no clear rules as to whether arbitrators have power to determine their own jurisdiction, since it may depend on the will of the parties expressed in the arbitration agreement, as well as the applicable case law. [8]-[9]

Brazil is one of the jurisdictions where the negative effect is recognised. Article 8, sole paragraph of Brazilian Arbitration Act (Law No 9.307/96, as amended in 2015), states that ‘[t]he arbitrator has jurisdiction to decide ex officio or at the parties’ request, the issues concerning the existence, validity and effectiveness of the arbitration agreement, as well as the contract containing the arbitration clause’, which has a domestic interpretation similar to that given by French law, that is, an unconditional priority jurisdiction to the arbitrators.

However, this does not mean that the arbitrators’ jurisdiction is exclusive either in Brazil or in France. The arbitration proceedings must comply with the legal system of the seat of arbitration and relevant case law (lex fori) and, therefore, parties shall give regard to it when drafting an arbitration agreement.

The seat of arbitration is a choice-of-law concept deriving from party autonomy: a jurisdiction selected by parties as the juridical place of the arbitration which consequently determines the procedural framework of the arbitration.[10] In this context, Guideline 4 foresees that when the parties are considering the place of arbitration, they should consider ‘both practical and juridical considerations’.

The commentaries to the Guidelines describe practical aspects that are to be considered when deciding the seat of arbitration: neutrality, availability of hearing facilities, proximity to the witnesses and evidence and familiarity with the language and culture. However, it is very important to consider the juridical influence that the seat of arbitration has on the proceedings and, through an examination of the case law of the desired seat, verify the understanding of state courts towards interference in the proceedings.

Guideline 4 points out that the seat of arbitration influences the powers of arbitrators and the role of the local courts in terms of assistance, implementation and cooperation within the arbitral proceedings.[11] Moreover, the influence includes the extent to which the law of the seat of arbitration and the local courts protects the integrity and gives effect to the arbitration agreement, since those are the courts to be called upon if assistance to the arbitrators or to the proceedings is necessary.

In line with this concern, the third section of the Guidelines recommends that parties expressly address ‘the authority of the arbitral tribunal and of the courts with respect to provisional and conservatory measures’ as an optional but valuable aspect to be provided for in the arbitration agreement. In many jurisdictions, it is understood that the arbitrators are impliedly vested with the authority to grant provisional measures and that an express agreement otherwise is required to withdraw such powers (opt-out).[12]

Parties may explicitly agree on the rules applicable to interim measures by including relevant provisions in their arbitration agreement[13] and, while doing so, parties should consider whether the jurisdiction of the seat of arbitration relies on the arbitral tribunal or on the state courts for such purposes, and also whether the arbitral tribunal’s power to grant interim measures does deprive partes from the option of going to courts.[14]

Hence, should parties wish to ensure that the arbitral tribunal will have the authority to grant or deny provisional and conservatory measures, the Guidelines recommend the following wording:

‘Except as otherwise specifically limited in this agreement, the arbitral tribunal shall have the power to grant any remedy or relief that it deems appropriate, whether provisional or final, including but not limited to conservatory relief and injunctive relief, and any such measures ordered by the arbitral tribunal shall, to the extent permitted by applicable law, be deemed to be a final award on the subject matter of the measures and shall be enforceable as such’.

The Guidelines suggest an additional item if the intention of the parties is to have the option to resort to local courts – and such conduct does not mean preclusion of the arbitration clause:

‘Each party retains the right to apply to any court of competent jurisdiction for provisional and/or conservatory relief, including prearbitral attachments or injunctions, and any such request shall not be deemed incompatible with the agreement to arbitrate or a waiver of the right to arbitrate’.

As it is intuitive that both the arbitral tribunal and the state courts cannot be granted the authority to decide on precautionary matters at the same time, the Guidelines address an extra clause to impose a time limit to the parties’ right to resort to state courts:

‘[…] after the arbitral tribunal is constituted, the arbitral tribunal shall have sole jurisdiction to consider applications for provisional and/ or conservatory relief, and any such measures ordered by the arbitral tribunal may be specifically enforced by any court of competent jurisdiction’.

When inserting the above-mentioned wording in the arbitration agreement, considering the relevant outcomes that arise out of the interpretation of this agreement, it is clearly written how the parties want state courts and arbitrators to address a challenge against the arbitration agreement or when filing for any provisional and interim measure before courts.

Especially when dealing with jurisdictions where the negative effect of the competence-competence doctrine is not clearly accepted or entirely recognised, and to avoid the risk of concurrent jurisdictions in case of interim measures, parties should enumerate the matters to be subject to one and to another jurisdiction and time limits for parties to resort to one and to another venue – in the wording of the arbitration agreement.

Therefore, the negative effect of the competence-competence doctrine should be taken into consideration, with special attention, when drafting an arbitration clause, mainly for purposes of the choice of the seat of arbitration, which should fall on a jurisdiction whose law and state courts are adequately prepared to provide  supportive and necessary coercive powers for full compliance with arbitral interim measures, as well as to ensure a secure environment for the arbitration proceeding to develop harmoniously.

Since the arbitration agreement must contain the unequivocal intention of the signatory parties to submit any disputes to arbitrators’ jurisdiction and considering the relevant repercussions that the absence of a specific provision concerning the authority of arbitral tribunal and the state courts, this recommendation cannot be an optional element but rather an essential one to ensure precise drafting.