The Impact of Internationally Mandatory Laws on the Enforce Ability of Arbitration...

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2009

Volume 3, No. 2


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World Arbitration & Mediation Review (WAMR), Vol:3, No:2, 91-120, copyright JurisNet LLC

THE IMPACT OF INTERNATIONALLY

MANDATORY LAWS ON THE ENFORCEABILITYOF ARBITRATION AGREEMENTS

Jan Kleinheisterkamp*

I. INTRODUCTION

Internationally mandatory rules of law are by definitionproblematic: they are statutory provisions enacted by nationalparliaments in order to protect (or applied by courts toimplement) specific public policies. These are not just any publicpolicies, however; internationally mandatory laws enforce onlythose policies that are deemed to be so strong that even in thesituation of an international contract the national statutoryprovisions must take precedence over any foreign law that wouldnormally govern the contract.1 These provisions are mandatory

* Lecturer of Law at the London School of Economics. All passages cited fromGerman and Belgian court decisions are my translations. I would like to thankMr. Gary Born as well as the participants of the ITA Academic Council Retreatof January 30, 2009, for their insightful observations and remarks on an earlierversion of this paper, entitled Reconciling Public Interests with Arbitrations

Efficiency: Coping with Internationally Mandatory Rules, and especiallyProfessors Alan Rau and Tai-Heng Cheng for their comments in this issue. Allerrors are, of course, exclusively mine.

1 Cf. RESTATEMENT (SECOND) OF CONFLICTS OF LAWS, 187 (1971):

The law of the state chosen by the parties to govern their contractualrights and duties will be applied, even if the particular issue is one whichthe parties could not have resolved by an explicit provision in theiragreement directed to that issue, unless . . . (b) application of the law ofthe chosen state would be contrary to a fundamental policy of a statewhich has a materially greater interest than the chosen state in thedetermination of the particular issue and which, under the rule of 188,would be the state of the applicable law in the absence of an effectivechoice of law by the parties.

See also European Parliament and Council Regulation (EC) 593/2008 (June 17,2008) on the law applicable to contractual obligations (Rome I), art. 9:

Overriding mandatory provisions are provisions the respect for which isregarded as crucial by a country for safeguarding its public interests,


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in effect not only domestically in the sense of voiding contraryagreements by parties to domestic transactions but alsointernationallyin the sense that they impose a domestic solutionextraterritorially even for international transactions that wouldnormally be governed by foreign law.

The significance of such internationally mandatory laws inarbitration and the related questions of the subject matterscapable of being settled in arbitration are highly controversial.2Since the U.S. Supreme Courts path-breaking Mitsubishi decisionin 1985 and its broad repercussions, especially in Europe, 3courts and scholars alike have struggled with finding a coherentanswer to the following question: Under which circumstancescan parties entrust arbitrators with disputes that concern publicpolicies protected by internationally mandatory laws that arenot part of the law chosen by the parties to govern theirtransaction?

such as its political, social or economic organisation, to such an extentthat they are applicable to any situation falling within their scope,irrespective of the law otherwise applicable to the contract under thisRegulation.

For a basic overview of the notion of internationally mandatory rules, see

Thomas G. Guedj, The Theory of the Loi de Police, A Functional Trend inContinental Private International Law A Comparative Analysis With Modern

American Theories, 39 AM.J.COMP.L. 661 (1991).

2 For some key publications on this problem see, e.g., Marc Blessing,Mandatory Rules versus Party Autonomy in International Arbitration, 14 J.INTLARB. 23 (1997); Thomas E. Carbonneau, The Exuberant Pathway to QuixoticInternationalism: Assessing the Folly ofMitsubishi, 19 VAND.J.TRANSNATL L. 265(1986); Andrew T. Guzman, Arbitrator Liability: Reconciling Arbitration andMandatory Rules, 49 DUKE L.J. 1279 (2000); Pierre Mayer, Mandatory Rules ofLaw in International Arbitration, 2 ARB. INTL 274 (1986); Philip J.McConnaughay, The Risks and Virtues of Lawlessness: A Second Look atInternational CommercialArbitration, 93 NW. U. L. REV. 453 (1999); Eric A.

Posner,Arbitration and the Harmonization of International Commercial Law: ADefense of Mitsubishi, 39 VA. J. INTL L. 647 (1999); see also the numerouscontributions to the colloquium at Columbia Law School on this topic,published in 18 AM.REV.INTL ARB. 1 (2007).

3 Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614(1985); for the European Community, see Case C-126/97, EcoSwiss China TimeLtd. v. Benetton IntlNV, 1999 E.C.R. I-3055.


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2009] THE IMPACT OF INTERNATIONALLYMANDATORY LAWS 93

This paper focuses on two 2006 European cases, one Belgianand one German,4 which illustrate the courts struggle betweenrespecting the original intention of the parties to arbitrate and thecommand of their legislatures to protect specific public interests.5In particular, these cases concern the impact of mandatory rulesfor the protection of sales intermediaries on arbitrationagreements. This paper addresses the different approacheschosen by national courts regarding the impact of internationallymandatory rules of law and illustrates how their arguments areproblematic both in terms of their foundations and outcomes. Inboth cases, the arbitration clauses were eventually held to beineffective because of the danger that internationally mandatorylaws designed to govern the situations at hand would becircumvented by the use of arbitration. This paper aims to shedmore light on the nature of the inherent tension betweenarbitration and public interests. It shows that the traditionalproblem of subject-matter arbitrability is often better framed asone of the impact of internationally mandatory rules i.e., one ofconflict of laws and proposes a practical solution that wouldenable courts to ensure both protection of the relevant publicinterests and the efficiency of the parties choice for arbitration.

II. THE EUROPEAN CASES

The German and the Belgian cases have almost identical factpatterns. What is striking is their resemblance to the highlycontroversial Ingmar case of the European Court of Justice of2000,6 which is at the heart of the courts dilemma and ispresented below. In both the German and the Belgian cases,

4 In Belgium: Cour de cassation [Cass.] [supreme court], Nov. 16, 2006, VanHopplynus Instruments S.A. v. Coherent Inc., 2007 REVUE BELGE DE DROITCOMMERCIAL 889 (Belg.); in Germany, Oberlandesgericht [OLG] Mnchen[superior regional court], May 17, 2006, 2006 WERTPAPIER MITTEILUNGEN 1556,2007 PRAXIS DES INTERNATIONALEN PRIVAT- UND VERFAHRENSRECHTS 322 (F.R.G.).

5

For a recent comparable case in the U.S., see Thomas v. Carnival Corp., 573F.3d 1113 (11th Cir. 2009) (regarding a claim by an injured seaman, based onthe remedies provided to injured seamen in the Seamans Wage Act, where thecontract provided for arbitration in the Philippines and Panamanian law asgoverning the contract).

6 Case C-381/98, Ingmar GB Ltd. v. Eaton Leonard Tech. Inc., 2000 E.C.R.1-9305.


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European nationals concluded contracts with California producersfor the exclusive sale of high-tech equipment in multiple countries.7The contracts contained a choice-of-law clause in favor ofCalifornia and U.S. law, and in addition differing from the contractin Ingmar provided for American Arbitration Association(hereinafter AAA) arbitration in California. In both cases, theCalifornia producers unilaterally terminated the contracts, afterwhich their European counterparts initiated proceedings in theirhome courts in order to obtain compensation or indemnificationunder domestic legislation, respectively. In both cases, theCalifornia defendants objected to the courts jurisdiction on thebases of the arbitration clauses. The European claimants counteredthat these clauses would be ineffective or invalid due to theapplication of internationally mandatory rules put in place by theirdomestic jurisdictions to guarantee their rights.

A. The Belgian Decisions

The claim in the Van Hopplynus case8 was based on a legislativeact of 1961, which provides for mandatory indemnification for theconcessionnaire if its exclusive sales concession of unlimitedduration is terminated unilaterally by the concdant, i.e., theprovider.9 The quantification of the indemnification is dependenton the concessionnaires success in increasing the number ofclients, its business investments, and its expenses suffered inconsequence of the termination. The Act also provides that itsprovisions apply notwithstanding any contrary agreementsconcluded before the end of the contract granting theconcession.10 Moreover, in order to secure its guarantees, the Actprovides that the concessionnaire, in case of termination of asales concession having its effects entirely or partially on Belgian

7 In the German case: semiconductor elements from Santa Clara for Germany,Austria, Hungary, Slovenia, the Czech Republic and Poland; in the Belgian case:laser technology from Palo Alto for the Benelux and Congo.

8 Supra note 4.9 Loi relative la Rsiliation Unilatrale des Concessions de Vente Exclusive Dure Indtermine (Law on the Unilateral Rescission of Exclusive SalesConcessions Concluded for an Unlimited Period of Time) of 27 July 1961, art. 3,MONITEUR BELGE (Oct. 5, 1961) (Belg.).

10 Id. art. 6.


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territory, may always sue the provider in Belgium . . . [and] if theclaim is brought before a Belgian court, this court will applyexclusively Belgian law.11 It is uncontested that the provisions ofthe 1961 Act constitute internationally mandatory rules in thesense described above (lois dapplication immdiates/ncessaire).12

1. The Question Regarding the Law Governing Subject-Matter Arbitrability

The court of first instance, the Tribunal de commerce ofBrussels,13 approached the problem as one of the law governingthe arbitrability of the dispute under Article II(3) of theConvention on the Recognition and Enforcement of ForeignAwards the New York Convention (1958) (hereinafter NYC).Previous case law and doctrinal writing had been and still were,until recently deeply divided on this question.14 The court readNYC Article V(1)(a) as allowing the parties to submit theirarbitration agreement to the law of their choice. It also held thataligning Article II(3) with Article V(2)(a) would oblige eachcountry to apply its lex fori, which would result in potentiallyconflicting decisions on the validity of the arbitration agreement.Invoking the principle of favor arbitrandum, the court held contrary to the internationally prevailing understanding15 thatthe lex contractus, and not the lex fori, would govern the issue ofarbitrability under NYC Article II(3), i.e., California law. Thisreasoning then allowed the court to deny any impact of the

11 Id. art. 4.

12 See e.g., F. RIGAUX & M. FALLON, DROIT INTERNATIONAL PRIV 1342 (2d ed.1993); for the definition of internationally mandatory rules see above textaccompanying note 1.

13 Tribunal de commerce [Com.] [commercial court] Bruxelles, Oct. 5, 1994,Van Hopplynus Instruments S.A. v. Coherent Inc., cited in 1995 REVUE DELARBITRAGE 310-316, note B. Hanotiau.

14

For further detail, see Pascal Hollander,LArbitrabilit des Litiges Relatifs auxContrats de Distribution Commerciale en Droit Belge, in L'ARBITRAGE ET LADISTRIBUTION COMMERCIALE 26, 29 (Du Jardinet al.eds., 2005).

15 For the application of the lex fori under both NYC Article V(2)(a) and II(3),see ALBERT JAN VAN DEN BERG, THE NEW YORK ARBITRATION CONVENTION OF 1958:TOWARD A UNIFORM JUDICIAL INTERPRETATION 152-53 (1981), and the comparativereferences provided therein.


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Belgian Act of 1961. It referred to the primacy of internationallaw over autonomous Belgian law16 and, based on itsinterpretation of NYC Article II(3), deduced that it was obliged bythe NYC to enforce the arbitration agreement because Californialaw allowed the dispute to be arbitrated.17

The Cour dappel de Bruxelles upheld the referral to arbitrationin 2002.18 In line with its previous case law,19 it confirmed theview that Articles II(3) and V(1) and (2) of the New YorkConvention leave no space for the application of the forum stateslaws for determining the question of arbitrability of the dispute,and that this solution must be governed by the law applicable tothe contract. The court noted that, if one were to stick to the[conflict] rules of internal law, the principle of party autonomycould never allow opting out of lois dordre public. However, thecourt argued rather confusingly that the Act of 1961 wasmerely internationally mandatory (dapplication immdiate),and not of public policy (dordre public), likely meaning that theAct would not represent a public policy so essential as to stand inthe way of the application of the result purportedly commandedby an international treaty.20

This decision was quashed by the Cour de cassation, however.In its usual laconic way it rejected the lower courts categoricalexclusion of the lex fori under NYC Article II(3):

This treaty provision does allow the judge to examinethe question [of arbitrability] according to the law ofthe forum and to determine to what extent arbitrationcan be admitted for certain subject-matters. If the

16 For this primacy, see Cass., May 27, 1971, 1971 PASICRISIE I 886 (Belg.).

17 Com. Bruxelles , supra note 13, at 315.

18 Cour dappel [CA] [appellate court] Bruxelles, Feb. 7, 2002 (unreported,extracts cited in the Cour de cassation decision cited infra note 21).

19 See also CA Bruxelles, Oct. 4, 1985, 1986 JOURNAL DES TRIBUNAUX 93 (Belg.).

20 Id. For this somewhat confusing qualification of the Acts provision as beingdapplication immdiate but notdordre public,see also Pascal Hollander, Note LArbitrabilit des Litiges en Matire de Rsiliation de Concessions de VenteSoumises La Loi du 27 Juillet 1961: Fin de la Controverse, 2005 REVUE BELGE DEDROIT COMMERCIAL 498, 502-03 (Belg.).


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arbitration agreement is, like in the present case,subject to foreign law, the judge requested to declineits jurisdiction must exclude the arbitration if, by virtue

of the lex fori, the dispute cannot be subtracted fromthe state courts jurisdiction.21

2. The Arbitrability of the Claims under Belgian Law

By shattering the lower courts lex contractus construction ofArticle II(3), the Cour de cassation also destroyed the shieldagainst the Belgian internationally mandatory rules. Theargument that superior international law would bar theirapplication has now lost its foundation. The resulting question istherefore: Does Belgian law prohibit disputes relating to the

indemnification of exclusive distributors to be settled byarbitration? Unfortunately, the decision of the Cour de cassationdid not answer this question.

If one were to seek the answer in the literal wording of Article4 of the 1961 Act (the distributor . . . may always bring an actionagainst the provider in Belgium), the answer would have to be inthe affirmative, as arbitration clauses aim at subtracting theseclaims from the Belgian courts. The Cour de cassation, however,as early as its 1978 landmark decision in Audi NSUsuggested aninterpretation that was surprisingly liberal for the time:

These mandatory provisions aim at ensuring that theconcessionnaire always has the right to invoke theprotection of the Belgian law, except if he hasrelinquished [this protection] in an agreementconcluded after the termination of the contract. . . . Adispute arising out of the termination by the party thatgranted the exclusive sales concession that produced itseffect totally or partially on the Belgian territory is,consequently, not capable of settlement by arbitrationthat was agreed before the termination of the contractand that has the aim and the effect of leading to the

application of a foreign law.22

21 Cass., Nov. 16, 2006, Van Hopplynus Instruments S.A. v. Coherent Inc., 2007REVUE BELGE DE DROIT COMMERCIAL 889, note L. Mertens (Belg.).

22 Cass., June 18, 1979, Audi NSU v. Adelin Petit S.A., 1979 PASICRISIE I 1260;1979 JOURNAL DES TRIBUNAUX 626; 1981 REVUE CRITIQUE JURIDIQUE BELGE 332(1981), note R. Vander Elst (Belg.)(emphasis added).


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This decision only concerned an objection to enforcement of aforeign award rendered in Switzerland under NYC Article V(2)(a).Nevertheless, its significance also for the question of subject-matter arbitrability at the stage of enforcing the arbitrationagreement becomes clearer when read in the light of anotherdecision rendered just a few months earlier. In the Bibby Linecase, Belgiums highest court upheld the effectiveness of a choice-of-forum clause in favor of Swedish courts in which the partieshad pointed explicitly to the internationally mandatory Belgianprovisions as the applicable law.23 Noting that the respondent hadnot even alleged that Swedish law would prohibit the applicationof the chosen Belgian law, the Cour de cassation dismissed theappellate courts vague speculations on the uncertainty as towhether the Swedish court would apply Belgian law.

The spirit of these two decisions can also be found in theGutbrot v. Usinorp decision of 1988.24 This case concerned theenforcement of an International Chamber of Commerce(hereinafter ICC) arbitration clause, not under NYC Article II(3),but under the unambiguous Article 6 of the European Conventionof 1961, where the question of subject-matter arbitrability isexplicitly submitted to the lex fori.25 The lower courts hadinterpretedAudi NSUas meaning that an arbitration clause couldonly be valid if it specified that the arbitrators are obliged toapply the Belgian law [and] that, if that is not the case, the clausecould not stand because the distributor has no guaranteewhatsoever regarding the applicable law and could thus lose thebenefit to which he is entitled under the Act of 27 July 1961. Thelower courts had refused to enforce the arbitration clausebecause it appeared clear to them from the negotiations that theforeign party had inserted an arbitration clause in order to avoidthe application of Belgian law. The defendant then soughtcassation because the appellate court had failed to consider that

23 Cass., Feb. 2, 1979, Bibby Line v. Ins. Co. of N. Am., 1979 PASICRISIE I 634 (Belg.).

24 Cass., Dec. 22, 1988, Gutbrod Werke GmbH v. Usinorp de Saint-Hubert etSaint Hubert Gardening, 1988 JOURNAL DES TRIBUNAUX 458 (Belg.).

25 European Convention on International Commercial Arbitration art. 6(2),Apr. 21, 1961: The courts may also refuse recognition of the arbitrationagreement if under the law of their country the dispute is not capable ofsettlement by arbitration.


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the arbitrators, in absence of a choice-of-law clause, could haveselected Belgian law as the applicable law. The Cour de cassationrejected this argument, finding that the lower courts judgmentdid contain some reasoning on the law to be applied by thearbitrators and therefore did not violate the law. Nevertheless,the fact that the Cour de cassation considered and then rejectedthe argument as unfounded and did not merely dismiss the claimout of hand shows that it accepted this type of claim as notcategorically excluded from settlement by arbitration.26

Accordingly, the impact of the Belgian mandatory rules of the1961 Act on the arbitration agreement can be summarized asfollows. As a rule, the literal reading of the provisions prevail sothat all disputes to which the 1961 Act is intended to apply are

excluded from settlement by arbitration, subject to one exception:an arbitration agreement can be given effect if the party invokingthe arbitration agreement can show that the arbitral tribunal isbound to apply the Acts provisions.27

B. The German Decisions

In the German case before the OberlandesgerichtMunich,28 theparties had defined their relationship not as an exclusivedistributorship but as a commercial agency.29 Accordingly, theGerman claim was based on 89b German Commercial Code

26 In this vein, see also the rather imprecise obiter dictum in Cass., Oct. 15,2004, Colvi S.A. v. Interdica, 2005 REVUE BELGE DE DROIT COMMERCIAL 488 (Belg.)(only Flemish version): If an arbitration clause is subject, according to theintention of the parties, to foreign law, the judicial authority requested todecline its jurisdiction can exclude the possibility to resort to arbitration if thiswould violate its public policy (emphasis added).

27 See Hanotiau, supra note 13, at 318, 323-24. But see Hollander, supra note14, at 502-03 (attempting to construe the arbitrability of claims based on the1961 Act on the basis of the courts distinction between merelyinternationally mandatory rules and loi dordre public, arguing that it isaccepted that the 1961 Act does not belong to the Belgian ordre public).

28 Oberlandesgericht [OLG] Mnchen [superior regional court], May 17, 2006,2006 WERTPAPIER MITTEILUNGEN 1556, 2007 PRAXIS DES INTERNATIONALEN PRIVAT-UND VERFAHRENSRECHTS 322 (F.R.G.).

29 Furthermore, the parties had included not only an arbitration clause but alsoa parallel choice-of-forum clause aimed at conferring exclusive jurisdiction tothe courts of Santa Clara in California, which was not relevant for the outcome.


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(Handelsgesetzbuch, hereinafter HGB), which obliges theprincipal to pay equitable compensation to the commercial agentin case of termination of the contract (based upon criteria similarto those appearing in the Belgian law).

1. The Role of European Law

To date, the European Community has only enacted twodirectives for the harmonization of European commercialcontract law, the first being the 1986 European Directive on Self-Employed Commercial Agents.30 Implemented in Germany via 89b HGB, Article 17 of the Directive obliges all Member States ofthe European Community to provide for mandatoryindemnification of (the German model) or compensation to (theFrench model) commercial agents.31 The European Court ofJustice (hereinafter ECJ) addressed the mandatory nature ofArticle 17 of the Directive in the controversial Ingmardecision of2000.32 Like the German case, Ingmar also involved thetermination of a European (English) commercial agent by itsCalifornia principal under a contract providing for the applicationof California law (but not containing a forum-selection orarbitration clause). In Ingmar, the ECJ was asked by the EnglishCourt of Appeal to give a preliminary ruling on the question ofwhether the national provision transposing Article 17 of theDirective would prevail over the law of a non-EC country chosenby the parties.33 The ECJ answered in the affirmative by resortingto the distinction between merely domestically mandatory rulesthat protect group interests and internationally mandatory rulesthat protect institutional interests:

30 Council Directive 86/653/EEC on the Coordination of the Laws of theMember States Relating to Self-Employed Commercial Agents, (Dec. 18, 1986)[O.J. L382/17] (hereinafter the Directive). The other directive is EuropeanParliament and Council Directive 2000/35/EC on Combating Late Payments inCommercial Transactions, (June 29, 2000) [O.J. L200/35].

31 For the rationale behind the alternative remedies, see F.REYNOLDS,BOWSTEADAND REYNOLDS ON AGENCY 707 (18th ed. 2006).

32 Case C-381/98, Ingmar GB Ltd. v. Eaton Leonard Technologies Inc., 2000E.C.R. I-9305.

33 Ingmar GB Ltd v. Eaton Leonard Technologies Inc., 1998 EWCA Civ 1366(CA).


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The purpose of the regime established by Articles 17and 18 of the Directive is . . . to protect, for allcommercial agents, freedom of establishment and the

operation of undistorted competition in the internalmarket. . . . It must therefore be held that it is essentialfor the Community legal order that a principalestablished in a non-member country, whosecommercial agent carries out activity within theCommunity, cannot evade those provisions by thesimple expedient of a choice-of-law clause. The purposeserved by the provisions in question requires that theybe applied where the situation is closely connected withthe Community, in particular where the commercialagent carries on his activity in the territory of a MemberState, irrespective of the law by which the parties

intended the contract to be governed.34

The ECJ thereby left no doubt that choice-of-law clauses thatwould undermine the solution intended by the Europeanlegislation must be deprived of their effect because of theinternationally mandatory character of the national lawtransposing the Directive.

2. The Impact of 89b HGB on Jurisdictional Issues

Ingmar only concerned the effectiveness of choice-of-law

clauses; but what about the impact the internationally mandatorycharacter of the national law transposing the Directive has onchoice-of-forum and arbitration clauses? Ironically, it was also in1961 the year in which Belgium explicitly enacted internationallymandatory legislation to protect Belgian distributors that thehighest German court, the Bundesgerichtshof(hereinafter BGH),frustrated the claim of a German commercial agent by confirmingthe effectiveness of a clause providing for the jurisdiction of Dutchcourts and the application of Dutch law.35 This decision confirmedthe former understanding that the largely identical predecessor of 89b HGB was not internationally mandatory. The situation in

1961 was thus different from that in 2004, the year in which thepresent case started: the provision has, due to its new European

34 Ingmar, C-381/98 (2000), 24-25.

35 Bundesgerichtshof [BGH] [federal court of justice], Jan. 30, 1961, 1961 NEUEJURISTISCHE WOCHENSCHRIFT 1061 (F.R.G.).


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pedigree and its supposedly strategic role for the internal market,grown into an internationally mandatory rule.

In the German case, the court of first instance, the LandgerichtMunich, enforced the arbitration clause by referring the parties toarbitration.36 It merely held that its jurisdiction could not dependon speculation about whether some other court would eventuallygrant indemnification, even if such indemnification is mandatoryaccording to European Community law.

The Oberlandesgericht Munich quashed the decision onappeal. The appellate court did not question the possibility ofentrusting the dispute to arbitrators as such, since this possibilitywas clearly confirmed in the legislative materials for the reform of

the German arbitration law of 1998.37 It did, however, assess theimpact of 89b HGB on the effectiveness of the arbitrationagreement quite differently than the Landgericht. TheOberlandesgericht rejected the defendants argument that theprovisions internationally mandatory nature would affect onlychoice-of-law issues but not jurisdictional issues. Rather, thecourt accepted the claimants reference to a line of German caselaw looking at the combined effects of choice-of-law andjurisdiction clauses, despite their theoretically distinct nature.38The court found that the purely effects-oriented character ofinternationally mandatory rules would require protecting them

against any contractual construction that could undermine thelegislatures intended result. Accordingly, the necessity to ensurethe application of the internationally mandatory rule couldrequire prohibiting contractual derogations from the forumsjurisdiction. The court went on to reject the defendants argumentthat the arbitrators would not necessarily ignore the Germanprovisions. In view of the provisions objective to protect agents,the court could not give effect to jurisdictional or arbitral clauses

36 Landgericht [LG] Mnchen [lower regional court], docket no 15 HKO23703/04, Dec. 5, 2005 (unreported, summarized in the appellate decision

cited supra note 4) (F.R.G.).37 Bundesregierung, Entwurf eines Gesetzes zur Neuregelung desSchiedsverfahrensrechts (Draft Bill for the Revision of the Law of Arbitrationof the German Federal Government), BT Drucksache 13/5274 of 12 July 1996,at 34 (referring explicitly, inter alia, to 89b HGB).

38 BGH, Jan. 30, 1961, supra note 35, at 1062.


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if there was a likely danger that the selected tribunal would notapply the mandatory German provision. The court doubted that acourt or arbitral tribunal sitting in California would apply Germanlaw despite the parties choice of California law, and ignoringCalifornia conflict-of-law rules assumed that Californiasubstantive law would prevail. Consequently, it denied thearbitration agreements effectiveness and remanded the case tothe Landgerichtfor a decision on the merits of the claim.

On the basis of the decision of the OberlandesgerichtMunich,the German position regarding the impact of internationallymandatory rules on the effectiveness of arbitration agreementscan be summarized as follows: Disputes can be decided byarbitrators, unless it cannot be reasonably expected that Germaninternationally mandatory provisions designed to govern theclaim will be applied. It is the claimant seeking protection inGerman courts who bears the burden of proof of demonstratingthat there is a substantial risk that the provisions will not beapplied. The combination of clauses providing for arbitration orjurisdiction of a foreign court and for the application of foreignlaw, however, will usually suffice as prima facie evidence toestablish a presumption that German internationally mandatoryrules will probably be deprived of their effectiveness.39 In thatcase, the burden of proving the contrary is shifted to the partyrelying on the arbitration agreement.

III. CRITICISM OF THE BELGIAN AND GERMAN CASES

The Belgian line of case law has not given rise to much truecriticism but rather in line with the French tradition to somespeculation as to the real meaning of the somewhat Delphiclanguage of the Cour de cassation.40 The final German decision, incontrast, albeit welcomed by some authors without muchcomment,41 has been the object of severe criticism by several

39 See the courts explicit reference to BGH, Jan. 30, 1961, supra note 35, at

1062 (stating that, in case of doubt, the parties will probably have intended thelaw of the chosen forum to apply).

40 See, e.g., Hollander, supra note 14.

41 K.H. Thume,Anmerkung zu OLG Mnchen, Urteil vom 17.5.2006 7U 1781/06,INTERNATIONALES HANDELSRECHT 160 (2006); R. Emde, Kurzanmerkung zu zu OLGMnchen, Urteil vom 17.5.2006, EUROPISCHES WIRTSCHAFTSRECHT 621 (2006).


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scholars.42 This criticism is directed against the courts simplicityof reasoning and lack of doctrinal foundation, as well as againstthe entire idea of rendering arbitration agreements ineffectivebecause of internationally mandatory rules.

A. Public Policy as Defined for the Stage of Enforcement

1. A Carte Blanche for Courts to Strike Down ArbitrationAgreements?

The solution of the Oberlandesgericht Munich has beenattacked on the basis that it relies, without any jurisprudentialfoundation, on the vague criterion of a likely danger that theforums internationally mandatory rules will not be applied by thecourt or tribunal chosen by the parties. The critics have rightlypointed out that the established pre-Ingmar case law, which theMunich Court of Appeal purports to follow, was based on adifferent criterion. Earlier German decisions had adopted a testfocusing on the consequences of giving effect to the choice-of-forum or arbitration clause: The clause would not be enforced if itcould be anticipated that the enforcement of the foreign decisionmade in disregard of German internationally mandatory rulescould be refused for being contrary to the German ordre public.43

By abandoning this more restricted criterion, theOberlandesgericht, according to the critics, has created a kind ofcarte blanche for its appreciation of the actual danger for theeffectiveness of the German mandatory rules of law. By confiningitself to the likeliness of the non-application of Germanmandatory law, the court left itself with an intuitive and, in fact,sloppy prognosis of the probability that a foreign court or arbitraltribunal would disregard them. In order to illustrate the

42 G. Rhl, Extending Ingmar to Jurisdiction and Arbitration Clauses: The End ofParty Autonomy in Contracts with Commercial Agents?, 2007 EUR.REV.PRIVATE

LAW 891; D. Quinke, Schiedsvereinbarungen und Eingriffsnormen, 2007SCHIEDSVZ 246; accord N. Horn, Zwingendes Recht in der internationalenSchiedsgerichtsbarkeit, 2008 SCHIEDSVZ 210, 217.

43 Quinke, supra note 42, at 248 and Rhl, supra note 42, at 896-897, referring,inter alia, to: BGH, Jan. 30, 1961, supra note 35, at 1062; BGH, May 30, 1983,1983 NJW 2772; BHG, Feb. 26, 1991, 1991 NJW-RR 757, 758; BGH, Sept. 21,1993, 1993 NJW-RR 1519, 1520 (F.R.G).


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superficiality of the new approach, the critics rightly attack theOberlandesgerichtfor completely ignoring that a Californian court,on the basis of RESTATEMENT (SECOND) CONFLICT OF LAWS 187(2),might give the (European) fundamental policy underlying 89bHBG much more attention than the German court everimagined.44

2. Focusing on Public Policy at the Enforcement Stage

The second reproach related to the departure from thepreviously accepted criterion is more important. Rather thandifferentiating between the likely application or non-applicationof German mandatory rules of law, the previous criterion focusedon whether the expected actual outcome of foreign proceedingswould be incompatible with the German ordre public. Indeed, thecriterion of the Oberlandesgericht and, for that matter, of theBelgian courts disregards the possibility that the foreign courtor arbitral tribunal may well come to an acceptable result even inapplication of a totally different law. The likeliness of non-application criterion actually falls short of capturing the realnature of an internationally mandatory rule: its instrumentalityfor implementing the legislatures eventual intention to impose aspecific result to a given situation and to prohibit the parties toagree on a materially different result.45 It follows from both

44 See Rhl, supra note 42. See also RESTATEMENT (SECOND) CONFLICT OF LAWS 187(2), supra note 1 (which orders the court to have regard to thefundamental policy of the law that would be applicable in the absence of achoice); for its application in California see, e.g., Nedlloyd Lines B.V. v. SuperiorCourt of San Mateo County, 3 Cal. 4th 459, 466 (Cal. 1992) (especially at note5). But see Northrop Corp. v. Triad Intl Marketing S.A., 811 F.2d 1265, 1270(9th Cir. 1987) (where the court brushed aside the necessity to apply clearlymandatory Saudi Arabian law despite the choice of California law by citingfrom the Supreme Courts decision in Scherk v. Alberto-Culver Co., 417 U.S.506, 516 (1974): Choice-of-law and choice-of-forum provisions ininternational commercial contracts are an almost indispensable preconditionto achievement of the orderliness and predictability essential to any

international business transaction, and should be enforced absent strongreasons to set them aside.).

45 The EC Directive, as well as the Belgian Act of 1861, merely imposes aspecific method of determining the indemnification or compensation.However, the method is imposed only for the sake of guaranteeing the agent orthe distributor a variable merits-based benefit depending on the investmentsand achievements that actually profit the disloyal principal or provider.


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Belgian and German constitutional law, as well as from primaryEuropean Community law (which applies when a court of aMember State gives effect to Community law, even if only byapplying national law that transposes a directive), that theparties freedom of contract can only be restricted to the degreeactually necessary for implementing a given public policy.46Refusing to enforce an arbitration agreement under the pretextthat, in combination with the choice of foreign law, it would leadto an award that is not rendered on the basis of internationallymandatory European law may well be disproportionate (and thuscontrary to constitutional or Community law) if the court fails toconsider whether the foreign law affords a protection equivalentto that which is internationally mandatory by the lex fori.

3. Critique of the Critics

These arguments, however, are much less compelling thanthey may seem at first, even if they are mostly quite pertinentfrom a theoretical point of view. Regarding the first reproach, it ishighly doubtful, as a matter of fact, that the Oberlandesgerichtwould have been less sloppy in its assumptions on Californiaconflicts rules had it stuck to the more considerate pre-Ingmarcriterion of German case law. Furthermore, the criticismdisregards that the courts seeming superficiality reflects nothingelse but the weakness of the arguments presented by thedefendant who could have made the effort to show that theeffectiveness of German mandatory rules would not be imperilledby the combined choice-of-forum and choice-of-law clause. In anycase, the argument that California courts would be obliged by

46 For the constitutional principle of proportionality as a restriction tolimitations of contractual freedom, see: in Germany, Bundesverfassungsgericht[BVerfG] [federal constitutional court], Nov. 12, 1958 (Preisgesetz), 8 BVerfGE274 (1958) at 328 (F.R.G.); in Belgium, e.g., Cour darbitrage, Oct. 28, 2004, SALes AP Assurances v. G. Van Leekwijck et H. Wouters, 10 REVUE DE DROITCOMMERCIAL BELGE 1052, 1054 (2005) (Belg.). For the recognition of contractualfreedom as protected by fundamental rights and thus subject to the principle ofproportionality under EU law, see Case 151/78, Sukkerfabriken Nykbing v.Ministry of Agriculture, 1979 E.C.R. 1, 22 (obiter); Case C-292/97, KjellKarlsson and Others, 2000 E.C.R. I-2737, 45, as well as generallyEC Treaty,art. 5(3), which also binds judges of the Member States acting as Communityjudges by applying national law that transposes EC law: Any action by theCommunity shall not go beyond what is necessary to achieve the objectives ofthis Treaty.


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their conflict-of-laws rules to be sensitive to German public policyis of little support with respect to the arbitration clause.Arbitrators are simply not bound by the conflict-of-laws rulesbinding judges. It is far from clear on what basis the arbitratorswould and should ignore the parties explicit choice of Californialaw and apply the European laws on which the claims are based.47Ingenious arbitrators might even think that, if they opted forapplying California conflicts rules, they would be obliged (underRESTATEMENT (SECOND) OF THE CONFLICT OF LAWS 187(2)) to takethe European laws into consideration, but that they would beobliged to ignore them (under Article 9 of the Rome I Regulation)if they found that the European conflicts rules were the mostappropriate ones for the question.48

Furthermore, with respect to the eventual rendering of afuture award in the sense of being more predictable or faithful tothe parties intentions, it is doubtful that the ordre public criterionwill actually lead to substantially less speculation. Despite the factthat it is commonly accepted that the notion of public policyunder NYC Article V(2)(b) has to be interpreted restrictively, it ishighly questionable that the court would have come to a differentconclusion had it relied on a prognosis that the arbitral awardwould violate German public policy. It is true that the courtsanalysis was somewhat short-sighted insofar as it only speculatedabout the application of German mandatory rules, instead ofconsidering the possibility of an equivalent outcome based on theapplication of foreign law. However, predictability is hardlyenhanced if the court, at the preliminary stage of deciding onwhether to stay proceedings, first has to anticipate not only thearbitrators decision but also its own subsequent decision on

47 For the complex problems related to the application of mandatory rulesfrom an arbitrators perspective, see Alan S. Rau, The Arbitrator andMandatory Rules of Law, 18 AM.REV.INTL ARB. 51-89 (2008).

48 Under Rome I Regulation, art. 9(3), supra note 1, the possibility of applyingoverriding mandatory rules is restricted to those of the law of the country ofthe performance of the contract which render the contract unlawful. However,Article 1(2)(e) explicitly excludes arbitration from its scope of application and,in any case, 1297.283 of the Californian Code of Civil Procedure, as well asArticle 28(1) of the ICDR/AAA Rules dispense arbitrators from having to applynational conflict of law rules for determining the applicable law. ForRESTATEMENT (SECOND) OF CONFLICT OF LAWS 187(2), see supra note 1.


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commonly accepted principle of comptence-comptence? Thiswas apparently the understanding of the lower German court, aswell as explicitly that of the lower Belgian courts who relied onthe lex contractus solution in the context of NYC Article II(3).56Indeed, the arguments in favor of this solution are powerful: Itwould be much more respectful of the parties free choice tosubmit to arbitration; it would be more respectful of arbitratorswho would be given a chance to do their job correctly; and, at firstsight, it nevertheless seems to safeguard the Europeandistributors eventual benefit required by the forumsinternationally mandatory rules.

1. Why It Could Work

The solidity of this hands-off solution seems to be confirmedby a look at the worst-case scenario, i.e., when the arbitratorssimply ignore the European protective provisions andconsequently reject the European partys claim on the basis ofCalifornia law.57 In such a case, there is simply nothing to beenforced in Belgium or Germany, not even costs.58 It is worthnoting that this scenario is much more likely than commonly

56 For the application of the second look doctrine to awards involving

competition law issues, see: in Germany, OLG Dresden, Apr. 20, 2005, 2005SCHIEDSVZ 210, 211; in Belgium, Trib. com. Bruxelles, Mar. 8, 2007, SNF v. Cytec,2007 REVUE DE LARBITRAGE 303 (F.R.G). But see the opposite position taken byFrench courts in the same case: Cour de cassation [Cass.] [supreme court], June4, 2008, 2008-I Bull.civ. no 162 (Fr.); see also the ECJ in Case C-126/97,EcoSwiss China Time Ltd. v. Benetton Intl NV, 1999 E.C.R. I-3055, at 32(where questions of Community law are raised in an arbitration resorted to byagreement, the ordinary courts may have to examine those questions, inparticular during review of the arbitration award, which may be more or lessextensive depending on the circumstances and which they are obliged to carryout in the event of an appeal, for setting aside, for leave to enforce an award orupon any other form of action or review available under the relevant nationallegislation.).

57 For California law, seesupra note 50.

58 This would be the case, except if the parties have previously agreed on, orthe institutional rules allow for, the recovery of attorney fees from theunsuccessful party, Cal. Civ. Code 1717. For the insufficiency of the AAACommercial Arbitration Rules in this respect, see Asturiana De Zinc Mktg. v.LaSalle Rolling Mills, 20 F. Supp. 2d 670, 675 (S.D.N.Y. 1998).


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admitted:59 The few published awards on cases of the kind showthat arbitrators have preferred to respect the parties choice andnot to apply the foreign internationally mandatory rules.60

Recognition of a purely California award refusing to giveeffect to 89b HGB or the Belgian Act of 1961 would be rejectedin Germany and Belgium, respectively, on the basis of NYC ArticleV(2)(b): Such a refusal would constitute a violation of eachcountrys strong public policy as enshrined in its internationallymandatory rules which guarantee indemnification orcompensation to commercial agents irrespective of the lawchosen by the parties.61 Moreover, once the award has beenrendered, the public policy exception would also allow theGerman or Belgian court to reject the arbitration agreementseffect since, at that stage, it would be clear that the combinedarbitration and choice-of-law clause leads to the non-applicationof the internationally mandatory rule of the forum. This meansthat the court would now entertain the agents or distributorsclaim and grant indemnification or compensation according to itslegislatures intention. Those European judgments may beunenforceable in California, however, due to the res judicata effectof the earlier California award, which will certainly not be setaside in California. The threat of execution measures against theCalifornia merchandise coming into Europe, however, may wellprove sufficiently persuasive for obtaining payment.

59 See J. Erauw, The Arbitrability of Disputes Concerning the Termination ofDistribution Agreements under Belgian Law in Light of European Community

Law, in LIBER MEMORIALIS PETAR SARCEVIC: UNIVERSALISM, TRADITION AND THEINDIVIDUAL 411, 434 (Erauw et al. eds., 2006) (it is unlikely that arbitratorswould be so inconsiderate towards the legal system of a country where theparties will inevitably request enforcement of the award).

60 ICC Case No. 6379, XVII YB Comm. Arb. 212 (1990) (refusing to apply

Belgian law despite the fact that an action in Belgian courts was also pending).See also Cour dappel [CA] [regional court of appeal] Paris, Nov. 24, 2005, 2006REVUE DE LARBITRAGE 717 (Fr.) (rejecting the Belgian partys request for settingaside which invoked the non-application of the Belgian provision oncommercial agency).

61 For Germany, see Quinke, supra note 42, at 250; for Belgium, seeAudi NSU,supra note 22.


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2. Why It Would Not Work

This solution la Mitsubishi, however, is not unproblematic. Ifit is foreseeable from the outset that the arbitrators sitting abroadwill likely ignore the internationally mandatory rules, it is highlyproblematic to refer the protected party to an arbitration that isexpensive (requiring the party, among other things, to hire aCalifornia lawyer), time consuming (when the terminationwithout compensation may already put the former agent intoproblems of liquidity) and, moreover, useless because lost inadvance. This solution is plainly contrary to the logic ofprocedural economy. Turning back to the Scherkargument, thissolution would mean that choice-of-law and choice-of-forumclauses would be upheld for the sake of orderliness andpredictability in international contracts, but at the expense of thecertainty that the legislature intended to guarantee to distributorsby defining a stable basis of their operations in an internationallymandatory rule of law.62

However questionable the ECJs policy considerations inIngmar may be, its ruling that the rules on compensation forcommercial agents are internationally as opposed to merelydomestically mandatory is in line with the effects-oriented logicthat defines this controversial category of rules. The EC Directiveof 1986 explicitly introduced the protection of commercial agentsbecause [national] differences [in the protection of commercialagents] are such as to inhibit substantially the conclusion andoperation of commercial representation contracts whereprincipal and commercial agents are established in differentMember States and because trade in goods between MemberStates should be carried on under conditions which are similar tothose of a single market, and this necessitates approximation ofthe legal systems of the Member States to the extent required for

62 See Solman Distribs. v. Brown-Forman Corp., 888 F.2d 170, 172 (1st Cir.1989) (in a U.S. inter-state case on a choice-of-law clause in favor of Californialaw in a Maine distribution contract, (thus not referring directly to Scherk), thecourt held: Defendant merely contends the state recognizes that its businesshas the necessity of certainty. This is to ignore that there would be acorresponding uncertainty on plaintiff's part. A distributor's uncertainty, itseconomic livelihood, may readily be thought at far greater risk, having in mindthat the [producer] can always cancel freely if it is not receiving properperformance.).


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again: Enforcing arbitration and choice-of-law agreements inorder not to imperil businessmens willingness to enter intointernational commercial agreements65 could result in ignoringthat the design of the European internationally mandatory rulesof law, by protecting agents, is precisely to ensure theestablishment and good functioning of the internal market, andthe resulting foreign businessmens opportunity to enter intocommercial agreements for accessing new markets.

Some may question whether the policies underlying the ECDirective or the Belgian Act of 1961 are strong enough (or evenjustified) so as to require their implementation even over explicitchoice-of-law clauses entered into by experienced businessmen.66Maybe the reproach of parochialism is not all that far fetched.However, the ECJs Ingmardecision is the law as it stands and isbinding for, and needs to be given effect by, the national courts ofthe Members States. The same holds true for Belgian courtsregarding the Belgian Act of 1961. Judges are obliged to ensure theeffectiveness of the internationally mandatory rules of their legalorder. It thus seems inevitable that Belgian and German courtsmust not give effect to arbitration clauses where it is reasonablyforeseeable that the outcome of the arbitration will be contrary tothe fundamental policy of the lex fori. Or . . . maybe not?

IV. ALITTLE TWIST THAT COULD DO THE TRICK

In dwelling further on the concepts of European Communitylaw, and especially those regarding the constitutionality ofsovereign acts, it becomes clear that a final answer to thequestion depends on the test of proportionality. A measureimplementing public policy at the expense of individual rights is

Member States shall take all appropriate measures, whether general orparticular, to ensure fulfilment of the obligations arising out of thisTreaty or resulting from action taken by the institutions of theCommunity. They shall facilitate the achievement of the Communitys

tasks. They shall abstain from any measure which could jeopardise theattainment of the objectives of this Treaty.

65 Scherk v. Alberto-Culver Co., 417 U.S. 506, 517 (1974).

66 See Rhl, supra note 42, at 903 (The decision of the OLG Mnchen incurs therisk of seriously undermining party autonomy in Europe. Whether this is inthe best interests of the Internal Market is very much open to doubt.).


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only compatible with fundamental rights (including the freedomof contract) if there is no less restrictive alternative measure thatis equally as effective in obtaining the policy aim.67 Is there suchan alternative solution? In fact, yes, there is one.

The hint to this solution is found in the very decision that wascritical in its departure from general exclusions of certain mattersfrom arbitration towards dealing with public policy by ensuringapplication of mandatory rules: the Mitsubishi decision of the U.S.Supreme Court. What made the Supreme Court reverse an orderby which the United States Court of Appeals for the First Circuitfound that antitrust claims brought by a car dealer in the context ofthe termination of a distribution agreement would not be capableof settlement by arbitration? Why did the Court accept this kind ofdispute, one to which the Sherman Act clearly was intended toapply and which was decided by an arbitral tribunal composed ofthree Japanese arbitrators sitting in Japan and applying Swiss lawas chosen by the parties to govern their contract?

It was not only the manifold policy considerations on whichthe Supreme Court elaborated in its judgment, but also animminently practical one. The Court noted in its highlycontroversial footnote 19 that in the event the choice-of-forumand choice-of-law clauses operated in tandem as a prospectivewaiver of a partys right to pursue statutory remedies for antitrustviolations, we would have little hesitation in condemning theagreement as against public policy.68 This suggests that, at theoutset, the Court took more or less the same position as the Belgianand German courts. However, a factual detail given in the samefootnote shows why the Supreme Court did not feel the need tocondemn the parties agreement providing for arbitration in Japanaccording to Swiss law: At oral argument, however, counsel forMitsubishi conceded that American law applied to the antitrustclaims and represented that the claims had been submitted to thearbitration panel in Japan on that basis.69

67 For the principle of proportionality in German and Belgian constitutionallaw and in European Community law, seesupra note 46.

68 Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637,note 19 (1985).

69 Id.


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would be, as in Mitsubishi, explicitly to accept the application ofthe internationally mandatory rules of the forum state. In such acase, the court can then record this acceptance and, with theconsent of the party resisting arbitration presumed, apply it as anew choice-of-law agreement that is specifically concluded for,and limited to, the question of the application of theinternationally mandatory rules. Such a contractual stipulation bythe parties would thereby become binding upon the arbitrators.This dpeage will allow the court to conclude that the applicationof its internationally mandatory rules is not imperilled by thechoice of arbitration and can thus justify staying proceedingsor which is less fortunate but necessary under German andBelgian law to decline its jurisdiction in favour of the arbitraltribunal.72

V. CONCLUDING THOUGHTS

The intermediate solution proposed here should allow courtsto respect both the original intention of the parties to arbitrateand the intention of the legislature to enforce certain publicpolicies, even in international situations. The underlying difficultyeventually boils down to the parties original fallacy in thinkingthat they could choose both a foreign forum and foreign law fortheir dispute and thereby subtract their dispute from the courtsof the country which has an immediate interest in its outcome,thus evading the application of that countrys internationallymandatory rules. It is a logical consequence from the courtsobligation to give effect to their internationally mandatory rulesthat they are forced to break at least one of the two legs of theagreement. This dilemma can be resolved by focusing on thefundamental nature of internationally mandatory rules: They aredesigned to assure that the parties cannot derogate from the resultsought by the legislature, neither through substantive contractualstipulations (mandatory) nor through the choice of foreign law(internationally). Bearing in mind that state intervention needs to

72 See also in Belgium, CA Bruxelles, June 30, 2006, 2004 RECHTSPRAAKANTWERPEN BRUSSELS GENT 1301 (Belg.) (In view of the effects of the concessionon the Belgian territory and the fact that the parties agree on this, there is noreason that the arbitral tribunal will not apply the mandatory rules of theBelgian act on concessions [despite the general choice-of-law agreement infavour of Dutch law].) See also ARNAUD NUYTS, LA CONCESSION DE VENTEEXCLUSIVE, LAGENCE COMMERCIALE ET LARBITRAGE 19, 73 (1996).


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be restricted to what is actually necessary to implement the publicpolicy at stake, it is sufficient and thus appropriate first to tacklethe choice-of-law agreement only, and only partially.

The court can expect the party that invokes the arbitrationagreement to guarantee the application ncessaire of theinternationally mandatory rules in arbitration proceedings, i.e., toaccept a new limited choice-of-law agreement acknowledging therules application according to the intention of the forumslegislature. This allows re-establishing the original contractualequilibrium. On the one hand, the (domestic) claimant mustaccept being bound by his original consent to arbitrate, but withthe benefit of the certainty that he can effectively pursue hisstatutory rights (especially as a favorable foreign arbitral awardlikely will be more effective than a domestic court judgment,which will probably prove unenforceable in the defendants homecountry). On the other hand, the (foreign) defendant must acceptthat the choice of a foreign law cannot free him from theobligations imposed on him as conditions of his economic activityin the forum states territory. Yet this acceptance comes with thebenefit of a more neutral and possibly more competent forum; aforum that, when assessing the claims of the European distributors,will not be bound by a pre-determined result, but merely by theperformance-oriented parameters defined by the Europeaninternationally mandatory rules. If the distributors performedpoorly, their rights even under the protective Europeanlegislation may well be minimal or even zero.73 All in all, this re-balanced setting should provide for a healthy stimulus for partiesto strike a mutually fair settlement rather than to return to thelanguage of Scherk invite unseemly and mutually destructivejockeying by the parties to secure tactical litigation advantages.74

In a broader context, a possible objection to the solutionproposed here could be that it puts significant strain on theconception of NYC Article II(3). The aim of the provision is toestablish a presumption of validity of the arbitration agreementand to impose the burden of proving the contrary on the partyopposing arbitration. Burdening the party that seeks arbitration

73 See supra, note 45.

74 Scherk v. Alberto-Culver Co., 417 U.S. 506, 517 (1974).


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to show the equivalence of the protection afforded by the foreignlaw or to accept the application of the mandatory rules may, atfirst sight, seem to undermine the original logic upon whichArticle II(3) was built. This argument, however, falls short of theprevailing and correct view that Article II(3) is to beinterpreted as following the same logic as Article V(2)(a) and (b).Courts may rely on their lex fori for determining whether thedispute is capable of settlement by arbitration, at least when theirown public policy is at stake. It is therefore fully in line with thestructure of the New York Convention that courts can raise theissue ex officio and expect assurance that the effectiveness of theirinternationally mandatory rules will not be cancelled by thearbitration agreement.

Moreover, it must be borne in mind that the New YorkConvention was drafted in a pre-Scherkand pre-Mitsubishi world ofarbitration, in which subject matters touching upon fundamentalpolicies of the forum state were simply not capable of settlementby arbitration. The traditional bright-line solution of lack ofarbitrability enshrined in Article V(2)(a), which excluded virtuallyall sensitive matters from arbitration, is also the justification forthe courts considerable deference to arbitral decisions. It was thisexclusion of sensitive matters that legitimized the extremelynarrow interpretation of the public policy exception under ArticleV(2)(b) and the resulting general exclusion of any judicial review ofthe merits of the award. Scherk and Mitsubishi and theirrepercussions have sensitively brought forth the evolution of theoriginal balance struck between Article V(2)(a) and (b).

The result of the massive liberalisation of arbitrability, i.e., thelowering if not tearing down of the subject-matter filter inArticles II(1) and V(2)(a) comes necessarily at the price of someincrease in judicial ex post control of the compatibility of thearbitrators decision with public policy. The Supreme Courtssketch in Mitsubishi with courts having a second look is mostpersuasive with internationally mandatory rules, designed andenacted democratically to enforce a strong public policy.75 The

75 See the harsh and pertinent criticism against Baxter Laboratories, Inc. v.Abbot Intl, 315 F.3d 829 (7th Cir. 2003) by Richard M. Buxbaum, Public Law,Ordre Public and Arbitration: A Procedural Scenario and A Suggestion, inRESOLVING INTERNATIONAL CONFLICTS: LIBER AMICORUM TIBOR VARADY (Hay et al.eds., 2009). In a similar vein, see Guzman and Posner, supra note 2.


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legitimacy, and thus the success of arbitration itself, might be atstake if courts allow arbitration to become a means forcircumventing such protective public policies, as hinted to by U.S.proposals for a Fairness in Arbitration Act.76 It is all aboutfinding the right balance. And accepting at the stage of judicialcontrol of arbitration agreements under NYC Article II(3) a wellbalanced impact of internationally mandatory rules of law, assuggested in this paper, may well be a good way of fortifying thelegitimacy of international arbitration.

JANKLEINHEISTERKAMP

Jan Kleinheisterkamp, lecturer in law at theLondon School of Economics and PoliticalScience (LSE), received his doctoral title summacum laude from the University of Hamburg(Germany) for his thesis, InternationalCommercial Arbitration in Latin America:

Regulation and Practice in the MERCOSUR and

the Associated Countries (Oceana/OUP 2005).Before joining LSE, he worked as a research fellow at the MaxPlanck Institute for Comparative and International Private Law inHamburg (1998-2004) and was an assistant professor at the HECSchool of Management, Paris (2004-2008). His research focuses ontransnational contracts, with special emphasis on arbitration,conflict of laws, and comparative law. Dr. Kleinheisterkampspublications include Commentary on the UNIDROIT Principles ofInternational Commercial Contracts (co-edited with S. Vogenauer,OUP 2009), Recognition and Enforcement of Foreign ArbitralAwards in The Max Planck Encyclopedia of Public InternationalLaw(OUP 2008), and Comparative Law in Latin America in TheOxford Handbook of Comparative Law (OUP 2006). He is anexperienced consultant in conflict of laws and comparative law,

and has been appointed as arbitrator in various ICC and LCIAproceedings. Dr. Kleinheisterkamp can be reached [email protected].

76 See generallyDavid. D. Caron and Seth Schreiberg, Anticipating the 2009 U.S.Fairness in Arbitration Act,2:3 World Arb. & Mediation Rev. 15 (2008).

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