Arbitration is an adjudicatory process wherein parties to a contract agree that if any dispute arises out of or in connection with the contract, that same shall not be brought to national courts for resolution but would be resolved by an arbiter of their choice. The parties agree to oust the jurisdiction of national courts as it relates to their contract and confer same on arbitrators/arbitral tribunal. This discuss focuses on contemporary jurisdictional issues especially as it concerns international arbitration.

An arbitral tribunal’s jurisdiction is germane to its authority and decision making power as awards rendered without jurisdiction lack legitimacy.  A tribunal who has received the mandate must remain within the terms of such mandate and must satisfy itself that it has jurisdiction before deciding substantive issues. Arbitrators may request that parties confirm their jurisdiction with regards to the issues before proceeding.  Contemporary arbitration laws provide that objections to jurisdiction of the arbitral tribunal should be raised early in the proceedings and that participating in proceedings without challenging jurisdiction is tantamount to submission to arbitration. See Article 16(2) Uncitral Model Law on International Commercial Arbitration, Section 31 English Arbitration Act, Article 1052(2) Netherlands Code of Civil Procedure, Section 1040(2) German ZPO, S.12(3) Nigerian Arbitration and Conciliation Act, CAP A18 LFN 2004.

Determination of Jurisdiction: Whose prerogative? 

The question of whose prerogative it is to determine jurisdiction of arbitrators is crucial. Is it the parties, the tribunal, the arbitration institution, an appointing authority or the court? To the extent that the arbitral tribunal derive its legitimacy from the party’s agreement, the parties determine the jurisdiction of the arbitral tribunal. However, because this agreement often takes place long before a dispute arises, there may then be questions regarding a tribunal’s jurisdiction after it has been constituted. Who determines jurisdiction at this point?

An arbitral tribunal may decide its own jurisdiction, although that decision may be subject to review by the courts. A decision on the jurisdiction of the tribunal is required when one party expressly contests it or refuses to take part in proceedings.  If arbitrator’s jurisdiction is challenged upon commencement of proceeding, they are entitled to enquire into the merits of the issue whether they have jurisdiction or not, for the purpose of satisfying themselves as a preliminary matter about whether they ought to go on with the arbitration or not. (Per Devlin J., Christopher Brown Ltd v Genossenschaft Oesterreichischer Waldbesitzer Holz-wirtschaftsbetriebe Registrierte GmbH [1954] 1 Q.B. 8 at 12 and 1). The arbitrators’ decision on jurisdiction may take the form of a preliminary decision or may be contained in the final award.

Arbitrators’ decision on their jurisdiction is subject to full review by courts. This is not so for awards on the merits where review is limited to public policy issues. Such a complete review is predicated on the fact that it would be contrary to public policy to bind a party to the decision of a tribunal to which it never agreed. (See J.D.M. Lew, L.A. Mistelis, S.M. Kroll, Comparative International Commercial Arbitration, 2003 Kluwer Law International, par. 14-28). National courts may also be required in the course of the arbitration proceeding or after an award has been rendered to determine the jurisdiction of arbitrators. This usually happens when one party brings a claim in court on the merit and the other party relying on an arbitration agreement asks the court to stay its jurisdiction. Certain arbitration laws also allow parties to apply to courts for a declaration that an arbitrator has or lacks jurisdiction. Jurisdiction of arbitrators may also be an issue in court proceedings in support of arbitration as would be the case in an application for the appointment of an arbitrator. In some modern arbitration laws it is the position that appeals or challenges in opposition to awards or actions for enforcement can only be instituted in designated courts. This is the position in England, Sweden and Germany. See English Arbitration Act S. 105, Swedish Arbitration Act S. 56, and the German ZPO S. 1062.

The legal fiction of ‘Competence-competence’ and the doctrine of Separability

It is prudent to clarify that legally speaking if a tribunal decides that no valid arbitration agreement exists, such a decision can be said to be defective as it could safely be assumed that because there is no valid arbitration agreement, there is then no basis for the tribunal to decide on anything including deciding on its own jurisdiction.  The doctrine of competence-competence is therefore a legal fiction that allows arbitration tribunals to rule on their own jurisdiction. It is the arbitrators’ competence to decide on their own competence. Many institutional rules make provision for arbitrators’ competence to rule on their own competence, See Article 36(6) Statute of the International Court of Justice (ICJ), ICSID Convention Article 41(1), European Convention Article V (3), Article 21 of UNCITRAL Rules, ICC Arbitration Rules Art 6.4. Nonetheless, where such provisions are non-existent, arbitral tribunals would implicitly assume the right to decide on their jurisdiction. This was the basis for the preliminary award rendered by the sole arbitrator in the ICJ case of Texaco Overseas Petroleum Company/California Asiatic Company v The Government of the Libyan Arab Republic, preliminary award on jurisdiction, 27 November 1975, and the decision of the Bermuda Court of Appeal considering an enforcement application for a USSR arbitral award in Sojuznefteexport (SNE) v Joc Oil Ltd, (1990) XV Yearbook Commercial Arbitration 31. 

Closely related to competence-competence is the doctrine of separability. A contract may contain a clause recording an agreement to arbitrate any dispute arising out of or in connection with that contract. That agreement to arbitrate is widely accepted to represent a separate and independent contract from the main contract itself. Consequently, even though the arbitrators may consider that the main contract is invalid and/or unenforceable, they may decide that the arbitration agreement is valid and enforceable. In most jurisdictions, including those that have adopted the UNCITRAL Model law, the two principles have been embraced. (S.30 of the English 1996 Act establishes Competence-competence whilst S.7 establishes Separability)

The Effects of Arbitration Clauses that are ‘Null and Void’, ‘Inoperative’ or ‘Incapable of Performance’ on Jurisdiction

It is trite that award made without jurisdiction is a nullity. Also most arbitration laws exempt national courts from referring a matter to arbitration if they conclude that the arbitration agreement is ‘null and void, inoperative or incapable of being performed’. (See German, ZPO S. 1032(1), Switzerland, PIL Article 7(b), England, Arbitration Act S. 9(4), Bermuda, Arbitration Act S. 8, European Convention Articles V(1), VI(3), US,FAA S.3, Netherlands, CCP S. 1022(1), France, NCPC Article 1458, Belgium, Judicial Code Article 1679 (1)). However, these terms are usually not interpreted strictly in arbitration friendly jurisdiction such that courts are wont to save the clause by looking beyond the pathology in the language so long as the intention to arbitrate is demonstrated in the clause.

An arbitration clause can be termed null and void if it is invalid from the beginning, and will be deemed so if it does not refer to a defined legal relationship, if there was no consent or if same was obtained under duress or misrepresentation, or if it provides that the dispute be settled by an arbitration institution that is unknown or one that does not exist. An arbitration agreement is inoperative when it has not always been invalid but which over time lost its effect, and this would be so, when for instance the agreement has been terminated by the parties or an award or judgement has been rendered in an equivalent proceeding which then has a res judicata effect. This would also be the case where the arbitration agreement provides for a time frame within which the award must be rendered and the time has elapsed.  Where the arbitration cannot practically be set in motion due to supervening circumstances, same would be said to be ‘incapable of being performed’. This would be the case when the arbitration cannot be carried out at the place of arbitration or where the arbitrator appointed by the agreement declines the appointment or cannot carry out the role.

Would the impecuniosity of a party render an arbitration agreement inoperable or incapable of being performed?

There are differing opinions as to whether a lack of funding will render an arbitration agreement incapable of being performed. Indeed, it does happen that impecuniosity may cause a party to be unable to pursue its claim in arbitration. In a recent decision, the Swiss Federal Tribunal in setting aside a final award of the Court of Arbitration for Sports ruled on the issue whether and under what conditions a party may unilaterally terminate an arbitration agreement for lack of financial resources to initiate and pursue arbitration proceedings, in order to then bring its case before the state courts, along with a request for legal aid. In doing so, the Federal Tribunal referred to several legal scholars in Switzerland that all acknowledge the impecunious parties’ right to free themselves of an arbitration agreement they have entered into for good cause, to ensure that they can exercise their right of access to justice as guaranteed particularly under Article 6(1) of the European Convention on Human Rights (reference was particularly made to Berger/Kellerhals, International and Domestic Arbitration in Switzerland, 2nd ed. 2010, N 1043; Kaufmann-Kohler/Rigozzi, Arbitrage International, 2nd ed. 2010, N 280; Dasser in: Oberhammer et al. (eds), Kurzkommentar ZPO, 2nd ed. 2013, Article 380 N 3). (“CAS”) (Decision of the Swiss Federal Tribunal (“DFT”) of 11 June 2014, 4A_178/2014). Referred to in Inoperability of Arbitration Agreements due to Lack of Funds? Revisiting Legal Aid in International Arbitration, Georg von Segesser/ January 17, 2015/ published online in Kluwer Arbitration Blog: http://kluwerarbitrationblog.com/2015/01/17/inoperability-of-arbitration-agreements-due-to-lack-of-funds-revisiting-legal-aid-in-international-arbitration/

In Germany the right to terminate the arbitration agreement has since been recognized. The German Federal Court of Justice has also ruled that impecuniosity of a party may render an arbitration agreement inoperative or incapable of being performed and will then permit a party claiming same to justifiably institute proceedings before a state court.   (Bundesgerichtshof, 14 September 2000, III ZR 33/2000, BGHZ 145, 116)

The approach of English courts is however different as it was held in Janos Paczy v. Haenlder & Natermann GmbH [1981] 1 Lloyd’s Rep 302 (CA) that lack of sufficient funding would only justify the rendering of arbitration agreements as “incapable of being performed” or “inoperative”, if the lack of funding is a result of the same breach of contract which is the issue in dispute. See also Wagner, Impecunious Parties and Arbitration Agreements, Schieds VZ 2003, Heft 5, pp. 206 et seq. It does not yet appear that the impecuniousity of party has been universally acknowledged as a ground for rendering an arbitration agreement as incapable of being performed or inoperative. The writer is of the view that if this is to be taken as the law, the approach of the English courts which is that the lack of funding must be a consequence of the same breach of contract in issue, should be a more plausible position of the law. It is further opined that this latter position should be considered for adoption by our legislative draftsmen whilst reviewing the Nigerian Arbitration and Conciliation Act which is overdue for a review as even the Model Law which it was modelled after has since undergone reviews.

Conclusion

I identified that arbitration is an adjudicatory procedure where parties agree that disputes between them would be resolved by an arbiter of their choice, that arbitral tribunals derive their legitimacy from the parties, and that jurisdiction is determined by the arbitral tribunal or the court. Further that when jurisdiction is determined by arbitrators, that such decision is open for full review by national courts. I distinguished a review of the decision of the arbitral tribunal on jurisdiction from the review of the merits of the case, where reviews are limited to public policy issues. The arbitrators’ competence to decide on its own competence was also identified and agreement to arbitrate was identified as a separate and independent contract from the main contract. I identified that arbitration clauses that are null and void, inoperative or incapable of performance may by their nature be unable to confer jurisdiction on arbitrators. I identified finally that whilst in certain jurisdictions the impecuniousity of a party may render an arbitration agreement inoperable or incapable of being performed, in other jurisdictions this would only be the case if the lack of funding is a result of the same breach of contract which is the issue in dispute. The writer also concludes that if this is to be taken as the law, the latter approach would be more plausible and should indeed be adopted in Nigeria. Finally, issues surrounding jurisdiction is one that grave attention must be paid to from the drafting of the arbitration agreement and during the arbitration proceedings to avoid a situation whereby the time and/or resources of the draftsman of an arbitration agreement, the parties to the dispute and arbitrators would have been wasted, should jurisdiction be found to be lacking eventually.

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