On the rise or on the rack? The potential impact of the Hague Convention on Choice of Court Agreements on the use of international arbitration
29 June 2016
Arbitration is often lauded as the most popular method for resolving international commercial disputes, no doubt thanks to the success and near-universal coverage of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Hague Convention on Choice of Court Agreements (the Hague Convention), concluded in June 2005, attempts to recreate this success in the context of court litigation. First, it requires the courts of contracting states to give effect to exclusive jurisdiction clauses in favour of the courts of another contracting state. Secondly, it seeks to create a similar worldwide automatic recognition and enforcement regime for the court judgments of contracting states. However, until recently, only Mexico had acceded to the Hague Convention and it appeared as though it might be “on the rack”.
But on 1 October 2015 the member states of the EU (with the exception of Denmark) became contracting states and the Hague Convention entered into force, ten years after its conclusion. More recently, on 2 June 2016, the Hague Convention was also ratified by Singapore. Whilst the geographical scope of the Hague Convention is still very limited (indeed, within Europe the provisions of the Brussels I Recast will probably take priority) its stock appears to be “on the rise”. If the United States, one of the principal actors during the Hague Convention’s negotiation and a signatory since 2009, chooses to ratify, the Hague Convention may well reach a critical mass whereby other signatures and ratifications will quickly follow. In this scenario, the question for arbitration lawyers and their transactional colleagues will be whether this represents an erosion of international arbitration’s traditional advantage over court litigation: the comparative ease of enforcement.
The Hague Convention will undoubtedly increase in significance with each state that becomes a party, but there are important differences between the two recognition and enforcement regimes (even assuming an otherwise level playing field between arbitration and litigation).
First and foremost is the issue of geographical scope. The New York Convention’s geographical coverage is virtually complete (indeed, according to the UNCITRAL website at the time of writing, 156 of the world’s countries have acceded) and it will undoubtedly take time for the Hague Convention to catch up. In this sense, arbitration has a significant “first-mover advantage”.
Secondly, the Hague Convention is also more limited in its scope of application than the New York Convention. In particular, Article 2 specifically excludes consumer and employment contracts, before providing an extensive list of other subject matter exclusions. These include insolvency, the carriage of goods, and the validity and infringement of certain intellectual property (IP) rights. By contrast, the New York Convention will apply to all agreements “in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.” Whilst there are examples of non-arbitrable subject matters, the list of exceptions is undoubtedly smaller than under the Hague Convention.
Thirdly, in circumstances where a matter comes before a forum other than the one selected in an exclusive jurisdiction clause, both conventions require that the parties’ choice should be enforced. However, whilst the only exception to this rule under the New York Convention is where the arbitration agreement is “null and void, inoperative or incapable of being performed”, Article 6 of the Hague Convention contains a more extensive list of potential exceptions, including exceptions based on the nebulous concepts of “manifest injustice” and “public policy”. The latter, which the New York Convention recognises as a ground for refusal of enforcement of an arbitral award, has proved complex, with differing and sometimes undesirable interpretations of what constitutes “public policy” emanating from national courts.
Finally, both conventions contain an exclusive list of grounds for denial of recognition and enforcement. Like the New York Convention, the Hague Convention provides that recognition or enforcement may be refused in cases of invalidity, incapacity, procedural unfairness or impropriety, and, as noted, public policy. However, unlike the New York Convention, the Hague Convention also allows a court to refuse to recognise or enforce a judgment on the basis that it is inconsistent with a domestic judgment involving the same parties (but not necessarily the same subject matter or cause of action). In this sense, the list of grounds for refusal of recognition or enforcement is longer than under the New York Convention.
Of course, arbitration and litigation have well-known advantages and disadvantages beyond the comparative ease of enforcement, and parties may choose to give more or less weight to these considerations depending on the circumstances. But, even if all other things were equal, the Hague Convention does not provide a complete alternative to the New York Convention, and some parties will still prefer arbitration. Putting aside the issue of geographical scope, the list of excluded subject matter in Article 2 of the Hague Convention means that some of the most frequent users of arbitration, both traditional (such as in the shipping world) and more contemporary (such as in IP), are unlikely to turn their backs on arbitration and switch to the courts. Moreover, the rules governing deference to the chosen forum and grounds for refusing recognition or enforcement are, under the New York Convention, well-known and well-tested. The same cannot be said for the Hague Convention. Unless there is an avalanche of ratifications, it will be some time before the Hague Convention is able to make serious inroads into the enforcement advantage enjoyed currently by arbitration and the New York Convention.
*This article first appeared on the Practical Law Arbitration Blog on 28 June.