Kompetenz-kompetenz - Estate Agent's Examination Part 1&2

Q.
Kompetenz-kompetenz of an arbitral tribunal is a myth in today’s word. Discuss.

A.
The arbitral tribunal has the power to determine its own jurisdiction under the 2005 Act.

The arbitral tribunal has no equivalent powers under the 1952 Act. Hence, this is a big step forward.

The KLRCA Rules provides that an arbitrator can rule on his own jurisdiction. The challenging party may raise two types of plea under the 2005 Act:

Firstly, is the non-existence of the arbitral tribunal’s jurisdiction;
Secondly, the arbitral tribunal either as a preliminary question or in an award on the merits.

There are time-limits given in the 2005 Act for the raising of such objections and the Act makes it clear that the doctrine of Kompetenz- Kompetenz is now part of Malaysian law.

The so-called "Kompetenz-Kompetenz" principle in essence provides that an arbitral tribunal decides itself whether it has jurisdiction to decide a dispute brought before it. That means that, in principle, a state court has no role to play in a decision of an arbitral tribunal on its own competence.

[Another way to understand "Kompetenz-kompetenz" is "Who decides who decides?"

Take for example, a family of parents and kids are having a dispute on the use of Handphones. The parents disagree with the use of Handphones, but the kids are pointing to the changes in technology that Handphones are necessities in daily life.

So, the two parties go to a fair 'Third Party' - the Grandparents. Now, can the Grandparents be competent enough to decide on the dispute? Who is to decide that they are good enough to be fair and up-to-date on the matter? Are they competent to decide whether themselves are sufficiently equipped with the knowledge and information to deliver a fair trial on this?

The above is an example of "Kompetenz-kompetenz". The State Court (in the above case - the someone higher than the Grandparents) can no more interfere with the decision of the Arbitral Tribunal (Grandparents) as the Grandparents have the final say to the dispute (over the use of Handphones).

That being the case, the who is to decide who decides is really a question of preference. The Grandparents would never admit that they are not competent enough, as they would have their own reasons being bias. The analogy would be like a soap cannot say it is not clean, as its sole purpose is to wash and clean an object - hence itself cannot be dirty!

And, if the Court of the place of arbitration retains its power of the disputed case, arbitration becomes ineffective. When it comes to International Dispute, parties to the dispute would refer to their own Court - e.g. Malaysia to Malaysian Court, and Singapore to Singapore Court. Thus, like in the West Tanker Case below, the dispute became complicated as various Courts would exert their own judgments.

In such manner, the Kompetenz-kompetenz of the Tribunal becomes useless, as it is only by impression that the Tribunal can offer an award, but cannot be carried out. Thus, a myth in today's word.]

Introduction

This principle, however, has never been implemented in its purest form. How far its implementation reaches within the realm of Regulation 44/2001² (the Regulation) has now been clarified by the European Court of Justice (ECJ) in its decision in the matter of Allianz SpA and another v. West Tankers Inc³.

The facts underlying this decision are as follows. A vessel owned by West Tankers collided with a jetty before Siracusa, Italy. The jetty was owned by ERG Petroli SpA, which, coincidentally, had also chartered the vessel from West Tankers. A part of ERG's loss was covered by ERG's insurers. ERG claimed the remaining damage from West Tankers in arbitration according to the arbitration clause in the charter party, which provided for arbitration in London. The insurers sought recourse against West Tankers for the amount paid to ERG before Italian courts in Siracusa. West Tankers applied to English courts for an anti-suit injunction, prohibiting the insurers from proceeding before the Italian courts based on the allegation that also the insurers were to raise claims in arbitration in London. The English courts granted the injunction but referred the question of its consistency with European law to the ECJ.
An anti-suit injunction prohibits a party from pursuing its claims in court proceedings which it initiated in (alleged) breach of an arbitration agreement. They are uncommon in continental Europe but frequently granted by English courts.

The ECJ was then to decide whether the injunction was consistent with the Regulation. One of the focal points of the decision, which is of high practical relevance for the arbitration community, is which body is competent to decide on the jurisdiction of the arbitral tribunal.

The principle of Kompetenz–Kompetenz

In the West Tankers case, the ECJ did not allow the antisuit injunction because it was incompatible with the Regulation. It based its decision primarily on the "first-courtseized" rule enshrined in the Regulation which requires that if a (second) court is addressed to decide a dispute already pending before a court of a EU member state, the second court shall stay its proceedings. Consequently, the Italian court was to decide on its jurisdiction and therefore also on the validity of the arbitration clause relied upon by West Tankers. It was therefore the Italian court deciding on the validity of the arbitration clause in accordance with Italian law, which provided for arbitration in London.

This result seriously endangers the fundamental principles of arbitration, even if it may be correct from a European law perspective.

The arbitral tribunal's decision on its own competence is not unrestricted. While modern arbitration laws usually grant arbitrators the competence to decide on their own jurisdiction, it is almost always a decision which is subject to the judicial control of the national courts of the place of arbitration⁴. The parties that determined a place of arbitration in their arbitration agreement will have been aware of the judicial control of the award and also (at least implicitly) submitted to the controlling powers of the courts of the place of arbitration⁵. In most jurisdictions, this court is also competent to ultimately decide on the validity of the arbitration agreement.

What, however, happens if a party before or after the initiation of arbitration proceedings submits a claim to a foreign court alleging that the arbitration agreement is invalid? The European Convention on International Commercial Arbitration only deals with cases where a claim is filed with a court after the initiation of arbitration proceedings, and provides in such cases that the court seized shall stay its proceedings until the arbitral award is made.

But this Convention does not provide a solution for cases in which a party submits its claim to a court before the initiation of arbitral proceedings. Both article II(3) of the New York Convention and article 8(1) of the UNCITRAL Model Law provide that in such a case the court seized of the matter shall decide on whether the arbitration agreement is valid or not. It will do so in accordance with its domestic law and not in accordance with the law of the designated place of arbitration.

This result is disappointing for the party which relied on the jurisdiction of an arbitral tribunal subject only to the judicial control of the courts of the place of arbitration as it may be drawn into a dispute in foreign courts arguing on the validity of the arbitration agreement in accordance with foreign law – presumably exactly what it wanted to avoid when concluding the arbitration agreement in the first place. As various jurisdictions seldom have the same rules on the validity of arbitration agreements, the parties will have drafted their agreement in conformity with the rules of the place of arbitration but cannot have done so for every possible legal venue in which a claim may be filed. In this case, there is the immanent danger of the foreign court declaring an arbitration agreement invalid, while the courts of the place of arbitration would have come to the opposite conclusion. In effect, the anti-suit injunction may have prevented this outcome. However, the decision of the ECJ, though criticised, is consistent with European law and the Regulation. European law as it stands simply does not provide a remedy for this situation.

Proposed solution

One solution – at least for European law – proposed by a group of German experts⁶ recommends that court proceedings be stayed once proceedings for declaratory relief on the validity of an arbitration agreement are initiated before the courts of the place of arbitration. This decision should then be recognised by all other EU member states.

This solution is pragmatic and would provide a remedy for situations such as the one in West Tankers. If West Tankers could have initiated proceedings before the English courts, and if the English courts could have finally and in a form also binding on the Italian court decided on the validity of the arbitration agreement, the parties' contractual choice of the place of arbitration would have been given effect. Of course, this solution also further eradicates the principle of Kompetenz-Kompetenz. However, this may be a price the parties would have paid in West Tankers.

Whether this, or a better, solution will be enacted remains to be seen. For the time being, the risk of being drawn into litigation before foreign courts remains.

The principle of Kompetez-Kompetenz vesting an arbitral tribunal with the right to decide on its own competence has been further diluted. The parties may well be surprised that the validity of their arbitration agreement may be decided by national courts other than those of the place of arbitration and which the parties never imagined to be a forum for such decision.

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

Footnotes

^{1 Alan Redfern & Martin Hunter, Law and Practice of International Commercial Arbitration 252 (4th ed., 2004).}

^{2 European Regulation 44/2001 on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters.}

^{3 Judgment of 10 February 2009, Case C-185/07 (2009).}

^{4 See, e.g., section 611(2)(1) of the Austrian Arbitration Act.}

^{5 Sebastian Seelmann-Eggebert & Philip Clifford, Lost at sea? Anti-suit injunctions after West Tankers, SchiedsVZ 139, 142 (2009).}

^{6 Burkard Hess et al., The Brussels I Regulation 44/2001 Application and Enforcement in the EU (2008) (the "Heidelberg Report").}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Ref:

Malaysian Construction Law, available at

https://simplymalaysia.wordpress.com/articles/arbitration/procedures-laws-governing-arbitration-in-malaysia/
Katarina Hruskovicova & Alfred Siwy (Feb, 2010) Austria: Who Decides Who Decides? ECJ Rules On The "Kompetenz-Kompetenz" Of Arbitral Tribunals. Schoenherr Attorneys at Law. Available at,

http://www.mondaq.com/x/93796/Maritime+Transport/Who+Decides+Who+Decides+ECJ+Rules+On+The+KompetenzKompetenz+Of+Arbitral+Tribunals

[X] Own account.