WSG Article: Arbitration torpedoed? The impact of Brussels 1 (Recast)

On 10 January 2015, new EU rules on jurisdiction and enforcement of judgments in civil and commercial matters came into effect as a result of the Brussels Regulation (recast) (Regulation (EU) 1215/2012) (the recast Regulation). Although the recast Regulation introduces several important changes to the Brussels regime, this article considers the controversial arbitration exclusion to that regime and looks at the likely impact for commercial parties. The changes under the recast Regulation only apply to court proceedings started on or after 10 January 2015.

Arbitration exclusion in original Regulation

The recast Regulation seeks to address certain difficulties with the original Brussels Regulation (Council Regulation (EC) 44/2001) (the original Regulation). During the lengthy reform process, one of the key debates was around the arbitration exclusion in the original regulation, which had created an unhappy and unworkable relationship between the Brussels regime and arbitration. Whilst it was clear that arbitration did not fall within the scope of the original Regulation, the exclusion in practice was difficult to apply and the boundaries between arbitration and the Brussels regime blurred.The biggest risk to arbitration created by the original Regulation and subsequent case law (see below) was where court proceedings were commenced in breach of an arbitration agreement (a so-called Torpedo action). Under the original Regulation (as with the recast Regulation), the commencement of court proceedings in breach of an arbitration agreement did not affect the right to commence arbitration, making parallel court and arbitration proceedings and contradicting decisions a risk, so that many tribunals would in practice suspend the arbitration pending the decision of the member state court.The Torpedo action in the arbitration context was then given added bite by the case of Allianz SpA and Generali Assicurazioni Generali SpA v West Tankers Inc (Case C-185/07), where the ECJ held that the English court could not issue an anti-suit injunction to protect a London arbitration agreement where proceedings had been started in Italy. Significantly, it also found that questions before the Italian court on the validity, applicability and enforceability of the arbitration agreement fell within the scope of the original Regulation if a court characterised the main subject matter of the dispute as coming within its scope (i.e. if the question of the validity, applicability and enforceability of the arbitration agreement was an ancillary/incidental issue rather than the principal one).The implications of this ruling were that the member state court of the arbitral seat would be powerless to protect the arbitration or take any action themselves until whichever court had been first seised as to the validity of the arbitration agreement had determined the issue. It also meant that a ruling by a state court that the arbitration agreement was invalid could be enforced in any member state under the original Regulation, whilst a simultaneous contradictory ruling by an arbitral tribunal would be enforceable in every member state signed up to the New York Convention.The upshot of West Tankers was to allow a party to an arbitration agreement to commence abusive substantive proceedings falling within the scope of the original Regulation before the courts of the member state most likely to find the arbitration agreement invalid, with the courts of the arbitral seat powerless to prevent it.

Enhanced arbitration exclusion in recast Regulation

As with the original Regulation, the recast Regulation provides an express exclusion for arbitration from its scope and also confirms that the recast Regulation shall not affect the applicability of the New York Convention. The scope of the exclusion is then clarified in Recital 12 of the recast Regulation, which helps to address the most major concerns arising from West Tankers. In accordance with Recital 12:

A member state court before which an action in a matter in respect of which the parties have entered into an arbitration agreement has been brought has the right to refer the parties to arbitration, stay or dismiss the state court proceedings or rule on whether an arbitration agreement is null and void in accordance with its national law
A member state court's ruling as to the validity of an arbitration agreement is not subject to the rules of recognition and enforcement of the recast regulation, regardless of whether this is a principal or incidental issue. This is an important revision as it means that a member state court need not wait for the decision of another member state court on the validity of an arbitration agreement before ruling on the question itself, and parties are likely to be discouraged from commencing proceedings in the courts of a 'favourable' member state for an order that the arbitration agreement is invalid.
However, if a member state court gives judgment as to the merits of a claim, having first decided that an arbitration agreement is invalid, this judgment is subject to the rules of recognition and enforcement of the recast Regulation and should be enforced by other member states' courts.
BUT this rule is expressed to be without prejudice to the competence of the courts of a member state to decide on the recognition and enforcement of arbitral awards in accordance with the New York Convention, which is expressed to take precedence over the recast Regulation. So member state courts have the freedom to order that an arbitral award made in one member state takes precedence over a foreign substantive and conflicting court judgment.
Finally, the recast Regulation does not apply to any action or ancillary proceedings relating to, in particular, the establishment of an arbitral tribunal, the powers of arbitrators, the conduct of the arbitration, or to any action or judgment concerning the annulment, review, appeal, recognition or enforcement of an arbitral award.

Practical tips

On balance, the changes to the arbitration exemption in the recast Regulation are helpful and go some way to protecting arbitration in the EU, in that they reduce the scope for and impact of Torpedo actions, as member state courts are no longer required to stay proceedings pending another member state court's decision.However, many practitioners feel that the recast Regulation has not gone far enough, in that there now seems to be a greater risk of parallel proceedings and conflicting decisions. Anti-suit injunctions preventing court proceedings in breach of an arbitration agreement are still not allowed between member states, although the recent opinion of Advocate General Wathelet of the Court of Justice of the European Union in the Gazprom case (Case C-536/13: "Gazprom" OAO) - in particular his suggestion that arbitral tribunals might grant anti-suit injunctions - has offered some hope of a departure from West Tankers as to the availability of anti-suit injunctions within the EU in the future.Parties should review existing agreements to ensure the dispute resolution clause gives them the protection they need and consider whether arbitration or litigation is more appropriate in light of the changes under the recast Regulation.If you are in any doubt about the suitability or applicability of arbitration to your dispute, please contact our arbitration specialists in our Dispute Resolution and Compliance team.