Mediation as an instrument to solve conflicts in compliance related issues and international contracts
9 April 2025
- Alternative Dispute Resolution
- Arbitration
- Litigation
Summary: Companies with international projection and global presence can count on mediation and its benefits in the different contexts of their business, both in the compliance of the code of conduct and internal rules as well as in the compliance of contracts and projects with third parties or public authorities. In the same way, it facilitates access to a saturated justice system, while at the same time improving the relationship between the parties, as they do not have to face the wear and tear of the judicial phase, which leads to emotional wear and tear.
I will focus on the intersection between compliance and mediation, as international corporations are increasingly interested in the potential of Mediation applied to compliance frameworks. Although there are a few important challenges that we need to mention, the benefits of international mediation are clear: costs savings, quick solutions and a good understanding between the parties. International mediation and compliance go hand in hand and, although they may not seem to have much in common, they complement each other. The purpose of this article is to illustrate with some practical examples the advantages of compliance mediation for small and medium-sized enterprises operating internationally, in order to demonstrate the potential that exists in this combination.
Mediation is a form of alternative dispute resolution (ADR) that involves the intervention of a neutral third party, known as the mediator, to help disputing parties reach a mutually acceptable agreement. Unlike litigation, which involves a judge making a binding decision, mediation allows the parties to control the outcome, facilitating a more collaborative and flexible approach to resolving disputes.
In the context of compliance issues and international contracts, mediation offers a unique advantage by addressing both legal and non-legal aspects of disputes, such as cultural differences, business practices, and organizational relationships. This flexibility is particularly important when dealing with international contracts, where cross-cultural understanding and respect for diverse legal systems are essential.
The key is still the same recipe as the initial negotiation of a contract. The parties objectively and in a neutral atmosphere and collaborative approach, find ‘solutions’ to their disagreements where both parties win. The so-called win-win is still the best scenario in which the parties should meet again in dispute resolution. I always insist on the word ‘reconnect’ because of its positive connotation in any relationship. Mediation allows the parties to negotiate a mutually acceptable outcome, preserving the relationship between them, with the additional value of cost and time efficiencies and confidentiality guaranteed throughout the process.
Mediation benefits compliance programmes in two keyways.
Resolving internal compliance issues
This is accomplished through facilitating communication and conflict resolution among employees, promoting a culture of dialogue, transparency and accountability. When a company uses mediation to resolve conflicts arising from internal compliance-related situations, it helps to prevent a conflict from escalating in proportions both in the form of legal action and disputes that may involve the public administration.
A clear example is conflicts related to the code of conduct, where disputes often arise at the HR level. Another example is that arising from conflicts of interest. In both cases the connection lies in the common goal of promoting ethical behaviour, improving communication and resolving conflicts in a way that helps the employee and the company to follow its internal rules and achieve the required standards.
Mediation opens a space for dialogue and amicable conflict resolution, facilitating employees’ professional and personal growth in a sustained way over time.
Another example can be conflicts related to cross-border labour issues applicable to the same company, whether private, non-governmental organisation or conflicts between private and public companies. The reasons for the conflict may be related to harassment issues or pay inequality issues. For example, the internal pay system within an international organisation should consider the following elements:
- Remuneration represents by far the most important and controversial element of the employment relationship and is of equal interest to the employer and the employee.
- The remuneration system should be based on and consistent with the principles of the organisation.
- The criteria for determining remuneration should be objective and measurable.
- The system should be equitable.
Conflicts often arise around these elements and companies should be transparent, through comprehensive policies, about their position on non-discrimination, harassment or inclusion of their employees within their organisation and the markets in which they operate.
Mediation can be a channel to help find solutions to equality and non-discrimination issues between employees within the same organisation. It also obliges companies to consider the standards of international legislation (e.g. CSRD) when implementing their policies. We are seeing that it is not a ‘nice to have’ but a ‘must have’.
Resolving disputes with external parties
Mediation can be used to enforce commercial contracts or in projects. It helps prevent disputes between companies or between companies and regulators, foster better relations, and ensure compliance standards are met without resorting to litigation. Mediation promotes cooperation between the parties and helps reduce the risk of future contractual violations.
A clear example of the benefits of the use of mediation in compliance arises in the international context where legal certainty is required for both parties, as well as fair and reasonable management of a long-term project. In some cases, there is a public-private element to the dispute as the public sector is involved (either in licensing issues or as a regulatory authority). This may create some confusion in the roles and rights of the parties, which makes perfect sense when the interests of the investor (private equity) and the community or private parties are very diverse.
For context, we might think of environmental, social and governance issues that are receiving serious attention from governments and regulators, given the impact on the planet and the people within the communities where they live. Mediation offers a way to resolve these conflicts by facilitating open communication between the parties involved. For instance, if a company is accused of breaching a country’s environmental regulations, mediation can provide a platform for the company and regulatory authorities to discuss the issues, share concerns, and negotiate a solution that satisfies both parties. Instead of pursuing punitive measures or resorting to lengthy legal battles, mediation can help parties find common ground and craft a solution that supports compliance while preserving business relationships.
A concrete example is mining activities, which contribute greatly to the involvement of foreign entities in resource-rich countries, involving, on a large scale, both foreign and domestic interests, and potentially resulting in pollution and damage to the environment. In addition, there are various problems, especially the use of land for mining activities, which causes friction between mining companies, communities and local governments where mining activities take place. Since these projects take place over a long period of time and involve various interests of both private and public actors as well as communities, mediation is undoubtedly a good way to prevent disputes during the whole process of project development and implementation, offering in conflict situations not only a quick solution for both parties but also a fair and reasonable management of a project in the long term.
Another tool, with elements of mediation, which is recommended for the successful completion of large projects, as for instance construction projects, are Dispute Boards, a panel of one to three members with extensive experience in the field of the contract, who accompany the execution of the contract until the work is completed on time and on budget. This method is not a pure and simple mediation, although it resembles it, because the Dispute Boards, in particular the so-called DAAB (Dispute Avoidance and Adjudication Board), permanently seek to avoid conflict and, if it arises, to encourage the parties to find a solution or to make it binding. I will go into more detail on this subject in another article.
Hereby, we can also mention internal control and auditability towards third parties, be they customers or suppliers. The EU directive (CSDDD) puts the emphasis on indirect suppliers in the supply chain. It is therefore important that when establishing a business or investment partnership, all parties involved have a similar level of compliance with standards. In this regard, framework compliance agreements, which are compliance agreements that regulate the compliance obligations of both parties’ subject to a service contract, are very common.
Aspects of compliance in such contracts may include, among others, anti-corruption policy, fee evasion, international sanctions, trainings, reporting requirements and ways to audit the compliance clauses agreed in the service contract, as well as the escalation clause to resolve disputes amicably, using the various existing ADR modes.
In the context of commercial contracts, mediation is used to resolve disputes related to non-performance, late deliveries, payment problems, interpretations of clauses or any other dispute arising from a commercial agreement, including any aspect of the compliance agreement as referred to above.
For an internationally developing company it would be advisable to promote mediation as the type of dispute resolution in conflicts with third parties. One way to promote mediation as an effective means of dispute resolution could be through a clause of voluntary submission to mediation in all transactions with third parties, followed by arbitration or submission to the courts of a certain jurisdiction, known as a tiered dispute resolution clause. These clauses provide for a gradual system of dispute resolution following various alternative methods of resolving disputes, usually culminating in arbitration if the outcome of the first alternative methods is unsuccessful.
The choice of conflict resolution through mediation is a ‘win-win solution’, whose confidentiality is guaranteed in the face of public attention. Based on these advantages, mediation is considered more suitable to be implemented (agreed, including with the escalation clause) in a contract.
Challenges of Mediation in International Contract Disputes
Despite its many advantages, mediation is not without its challenges. Some of the key obstacles include:
Lack of Enforcement Mechanisms: Mediation agreements are typically non-binding, meaning that parties are not legally required to adhere to the terms of the settlement. While mediation can result in a mutually agreed-upon solution, enforcing the agreement may require the parties to enter into further negotiations or even resort to litigation if one side fails to honour the agreement.
Cultural and Language Barriers: In international contract disputes, cultural differences and language barriers can complicate the mediation process. It is important to select mediators who have experience with cross-cultural communication and who understand the legal systems involved. Without such expertise, the mediation process may be ineffective.
Reluctance to Mediate: Some parties may be reluctant to mediate, especially if they perceive it as a sign of weakness or if they are unfamiliar with the process. This reluctance can be overcome with proper education and a clear understanding of the benefits of mediation.
Although we can say that there is a growth of mediation around the world and the level of satisfaction of the use of mediation is based on its core values, which are impartiality, confidentiality and self-determination, the promotion of the mediation is still an important challenge.
Conclusion
In the case of internal compliance, mediation usually takes a more reactive role, i.e. when the conflict has already surfaced within the company or organisation; whereas, in the case of third party compliance, mediation takes a preventive role, such as in the case of Dispute Boards, although it also helps to resolve a commercial conflict between parties who wish to continue to maintain a business relationship. In both cases the objective is the same, to try to find common ground between the interests of the parties in order to resolve or avoid a conflict that could lead the parties to a legal dispute.
As international trade continues to grow and the complexity of global regulations increases, businesses and organizations can benefit from adopting mediation as a strategic method for resolving conflicts. By fostering cooperation and understanding, mediation can help build stronger, more resilient business relationships and ensure long-term success in a global marketplace.
Companies need to adhere to their own compliance programmes, but also to the programme of their customers, suppliers or banks with whom they collaborate. Not only is there a need for expertise to know the legal framework applicable to the industry, but there is also a need for conflict resolution when conflicts arise or even to act pre-emptively. Legal battles are expensive, time-consuming and damaging to business relationships. Many jurisdictions and industries are already demanding an obligation for parties to exhaust alternative dispute resolution methods before moving to the litigation phase.
Arbitration is a procedure for resolving disputes between parties that is very successful in the Anglo-Saxon legal system. But much less in our country.
Arbitration has advantages and disadvantages; it is more expensive than the Courts, but it is much quicker; and speed is essential for justice to be such.
Typically, an arbitration lasts six months plus a couple of months for the appointment of the arbitrator; in total, a dispute, however important and difficult it may be, can be definitively resolved in eight months.
To compare with the Courts, in Spain today it takes on average eighteen months to obtain a judgement at first instance and another eighteen months for an appeal; without considering the possibility of an appeal to the Supreme Court.
The cornerstone on which arbitration rests is that the arbitral award is final and definitive and cannot be reviewed or appealed; this statement has certain exceptions, mainly of a formal or procedural nature: basically, the legality of the arbitration agreement, the arbitrability of the matter and the procedural regularity in the conduct of the arbitration proceedings. These defects can be attacked by means of an action for annulment, which is heard by the ordinary courts.
But in addition to the possible “formal” defects, the action for annulment can be based on the allegation of a breach of “public order”, which the Constitutional Court has defined and outlined as “those public and private, political, moral and economic legal principles which are absolutely obligatory for the preservation of society in a given people and at a given time”.
As this definition of “public order” is undoubtedly broad and unspecific, the use of the violation of public order as a tool for declaring the nullity of arbitral awards by the ordinary courts has produced an “overflow” effect that has required, in the words of the Constitutional Court, “a restrictive interpretation of it, on pain of violating the autonomy of the will of the parties and their waiver of judicial protection”.
This is what the Court has proclaimed in the very important judgement of 15 February 2021, which is the reason for this legal note.
In recent years, the High Court of Justice of Madrid has resorted to the argument of “public order” in an extensive and “overwhelmed” manner to annul arbitral awards and “supplant the arbitral tribunal in its function of applying the law”, becoming “a second instance reviewing the facts and rights applied in the arbitral award, a control mechanism for the correct application of jurisprudence”.
And this expansive and “overwhelmed” interpretation of public order as a tool for annulling arbitral awards by the High Court of Justice of Madrid had become a serious problem for the arbitral institution and for the confidence of the contracting parties when including arbitration agreements in their contracts.
The principle that the arbitral award was the final and definitive solution to the dispute it was intended to resolve, except for procedural breaches or breaches of public order limited to those cases in which the arbitral award was arbitrary, illogical, absurd or irrational, was called into question and was a clear deterrent to contracting parties deciding to resolve their discrepancies through arbitration.
Well then, the Constitutional Court, in a categorical and explicit manner, repeating what it had already stated in its judgement of June last year, confirms that the need for the arbitral award not to contravene public order cannot result in the judicial body replacing the arbitrator in his function of applying the law, nor can it become a second instance reviewing the facts and legal grounds applied in the arbitral award, nor a mechanism for controlling the correct application of case law.
The principle of party autonomy prevails; and this means that when there is submission to arbitration, the parties have agreed that it should be through this channel that disputes between them are to be resolved, by means of the arbitrator’s decision, which can only be annulled through the strict channels that the Arbitration Act regulates; we insist, for procedural reasons or for violating public order in the restricted interpretation explained in the judgement we are commenting on; but in no case, by way of a second instance where the facts and legal grounds applied are re-evaluated once again.
In short, Spanish arbitration is to be congratulated, and will be able to recover the momentum that caused it to lose, in part, the extensive interpretation of public order defended by some High Courts of Justice. From now on, the Courts will not be able to ignore the Constitutional Court’s interpretation, which is a breath of fresh air for Spanish arbitration.
In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.
The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as “competence-competence”, Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427).
The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).
It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.
The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643).
The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the “weak” party.
Unfair commercial behaviours between professionals are sanctioned in Sections L442-1 and seq. of the French Commercial Code. French Courts tend to consider that those dispositions of the Commercial Code are mandatory, in particular Section L442-1, II of the Code on abrupt termination of commercial relationships. Based on this section, an operator can be held liable if he terminates a commercial relationship without respecting a prior notice which duration depends on the duration of the relationship.
Although this is considered to be a mandatory law, the French Supreme Court considers that it does not preclude to bring a dispute before foreign Courts in compliance with a jurisdiction clause (Civ.1, 8 July 2010, Doga, n°09-67013). Moreover, Courts have ruled for a long time now that arbitrators are entitled to apply national mandatory laws (Court of Appeal of Paris, 19 March 1993, Labinal, n°9221091). In the case Doga above quoted, the Court concluded that arbitrators are also entitled to apply Sections 442-1, II of the Commercial Code related to the conditions of termination of commercial relationship. Therefore, if a contract contains an arbitration clause, the judge is obliged to give priority to the arbitrators to decide on their own jurisdiction to decide on the case (principle « compétence-compétence ») in conformity with Section 1465 of the French Procedural Code. This solution was confirmed in a recent decision rendered on 5 September 2019 by the Court of Appeal of Paris in Charlivari v. Sté Equivalanza, n°17/03703.
It is noteworthy to underline that two sets of sanctions are considered under Sections 442-1 and seq. of the Commercial Code: the first sanction allows the victim of unfair practice to seek damages (for instance for abrupt termination of commercial relationship) against the author of unfair practices; the second sanction is decided by the public administration, under the authority of the Ministry of Economics : the Ministry is entitled to bring the case to Courts, which can then decide to fine the party who is liable of unfair practices (the fine can be up to 5% of the turnover made in France by the person liable or 5 Million EUR).
Therefore, one single matter can give rise to two procedures at the same time, the first one initiated by the victim and the second one at the request of the Ministry of Economics (Section L442-4 of the Code). In a case Apple v. Ministre de l’Economie, the Supreme Court (Civ.1, 6 juillet 2016, n° 15-21811) considered that the action of the Ministry of Economics cannot be decided by arbitrators, even if the contract contains an arbitration clause, because of the specificity of this action, which is not based on the contract by itself but on powers that the Ministry draws from the law.
Therefore, a clear distinction must be made between the two procedures: one is subject to the application of the dispute resolution clause (either national Courts, even foreign, or arbitration tribunals), when damages are sought from the author of unfair practices, including abrupt termination; the other one can be brought only before French national Courts, and the dispute resolution clause has no effect, in cases which are brought by the Ministry of Economics for administrative sanctions against the same author.
The arbitration procedure in Spain is characterized, and constitutes one of its great advantages, by the difficulty of judicially annulling or revoking the award; the parties know that the award that is issued is in most cases firm and final and ends the conflict.
The art. 41 of the Spanish Arbitration Law only allows the annulment of the award for formal reasons (nonexistence or invalidity of the arbitration agreement, failure to notify any of the parties of the appointment of the arbitrator or of the arbitration proceedings, improper appointment of the arbitrators or that the arbitrators have ruled on matters that were not or could not be arbitrated by rule of law). And additionally the award is also voidable when it is contrary to “public order“.
That “public order” is such as to give rise, in case of violation, to the annulment of the award, is a matter that has always been controversial and debated; already in the 1958 New York Convention, “public order” is alluded to as a cause of refusal to recognize foreign awards. As the Constitutional Court (“CC”) recalls in the judgment that we commented, citing its own jurisprudence, “the material public order is the set of public and private, political, moral and economic legal principles that are absolutely obligatory for the preservation of society in a town and in a certain time and the procedural public order is configured as the set of formalities and necessary principles of our procedural legal order and only arbitration that contradicts any or some of such principles may be considered null and void for violation of public order”.
As an example, during 2018, 38 requests for annulment of awards were filed before the Superior Courts of Justice (“SCJ”), of which 31 were based on violation of public order; 8 of the lawsuits (21%) were estimated, 5 for violation of public order, and 3 for invalidity of the arbitration agreement.
The Madrid SCJ has been maintaining in recent times a very “expansive” interpretation of public order, which has generated doubts and fears in the institutions and Arbitration Courts, due to the dissuasive effect that this position could have when choosing Madrid as the seat of arbitrations, national or international.
And in the interpretative line to which we refer, the Madrid SCJ has maintained the following and surprising criterion: once an award was made and a request for annulment was filed by one of the parties, the litigants reached an out-of-court agreement and jointly requested the filing of the cancellation request; that is to say, both gave the award as good and final; the SCJ rejected the petition and continued to issue a judgment annulling the award, arguing that since the application for annulment was based on the violation of public order, then the matter was no longer available to the parties and was not, in the opinion of the Court, subject to transaction or resignation.
This was not the first time that the SCJ of Madrid had adopted this position: impeded the annulment of an award as being contrary to “public order”, the parties no longer had the possibility to compromise and renounce the demand for annulment.
For the first time the matter has reached the Constitutional Court (CC): in a recent ruling on June 15, 2020, the CC has been clear and resounding; recalls in its ruling that the civil process is based on the principle of “the parties’ willingness to regulate their private interests, that is, to initiate jurisdictional activity, determine the purpose of the process and end it when they deem appropriate”. It is what we call “justice begged for”; and this principle applies not only to civil proceedings before ordinary courts but also to arbitration proceedings. The judgment also affirms that arbitration is configured by law as a heteronomous mechanism for conflict resolution, to which the minimal intervention of the judicial bodies in favor of the autonomy of the will is essential.
And it concludes by stating that the annulment action must be understood as a process of external control over the award that does not allow a decision on the merits of the arbitrators’ decision, since the causes are assessed, which justifies that “the control of the awards are limited and annulment of the award can only be obtained in exceptional cases”.
Summarizing, the CC understands and proclaims that it is contrary to the right to effective judicial protection protected by art. 24 of the Constitution, the Court’s refusal to recognize the validity of an agreement reached between the litigants based on the parties’ power to act without a prohibitive norm authorizing it, and imposing a decision that subverts the “justice” principle that inspires the civil process; reason why it grants the requested protection and orders to roll back the proceedings to the moment before the order that denied validity to the joint request for file, so that the SJC dictates another resolution accompanied by the CC’s criteria.
Therefore, the SCJ will no longer be able to prevent litigants from settling and ending a claim for annulment of the arbitration award (as it usually occurs peacefully and with appeals or cassation remedies) and it must also take into consideration the restrictive interpretation of the concept of public order that the CC has established in this important judgment. Indeed, Spanish arbitration is greatly reinforced by this judgment of the CC.
Are arbitration and jurisdiction clauses contained in insurance contracts enforceable against a third party which is acting directly against the insurer in third party liability insurances?
Such direct action is admitted by French law in liability insurances, as defined in article 124-3 of the Insurance Code.
In just a few months two radically different approaches have been taken by the French Cour de cassation (Civ.1, 19 December 2018, n°17-28.951) and the ECJ in Assens Havn v. Navigator Management UK Ltd (13 July 2017, C-368/16) and KABEG v. MMA IARD (20 July 2017, C-340/16).
The case submitted to the Cour de cassation represented a third party exercising a direct right of action before French Courts against the insurer of a floating barge which had caused him a damage. The Supreme Court accepted that the insurer could validly oppose the arbitration clause, which was in the policy against the third party, and therefore judged that French Court had no jurisdiction to decide on the case. The Supreme Court applied the well-established principle of Compétence-Compétence – materialized in article 1448 of the French Code de Procédure Civile – to stay the case, considering that the arbitration clause could not be set aside. The Court therefore judged that the applicability of the arbitration clause should be determined by the arbitrators by priority.
A year before, the ECJ had ruled in the opposite direction in a case where a jurisdiction clause was applicable in the insurance policy. In Assens Havn v. Navigator Management UK Ltd, the ECJ stated that the clause could not be opposed to the third party acting directly against the insurer. According to the Court, the insurers’ liability towards the insured has a contractual nature when based on the policy, whereas it is extra-contractual when the liability is based on a direct action from a third party. In a previous ruling the Court had considered (Sté financière et industrielle du Peloux (12 May 2005, C-112/03) that the jurisdiction clause cannot be opposed to the beneficiary of an insurance policy if he is not the policyholder (for instance in a collective insurance).
One sees a clear difference in treatment between arbitration clause and jurisdiction clause when it comes to deciding on their opposability to the victim exercising a direct action against the insurer.
Article 2061 paragraph 2 of the Civil Code states that an arbitration cannot be opposed to a party which has not contracted for the purpose of its business activity. The French Cour de cassation grounded its decision on the fact that the clauses of the main contract could be opposed to the third party. If the latter was entitled to apply the insurance contract, it was therefore entitled to invoke article 2061 paragraph 2 of the Civil Code.
On 29 March 2019 new amendments to the federal law “On arbitration in the Russian Federation” entered into force. This law regulates the order of establishment and activities of arbitration courts and permanently acting arbitration institutions (PAAI) in Russia and applies to resolution of both international and local disputes by arbitration in Russia.
The key amendments relate to granting of rights to foreign arbitration centers to perform functions of PAAIs in Russia. Earlier such rights were granted by the government, but as from 29 March 2019 such functions were transferred to the Ministry of Justice. Ministry of Justice grants the rights to perform functions of PAAIs in Russia to foreign arbitration centers based on recommendations received from the Council on improvement of arbitrations.
As of 31 March 2019, there are only 4 (four) PAAIs authorized to administer disputes by arbitration in Russia and all of them are Russian organizations. In accordance with the latest news the Hong Kong International Arbitration Center (HKIAC) is the first international arbitration center that has recently received a recommendation from the Council on improvement of arbitrations to establish PAAI in Russia and has been approved by the Ministry of Justice to establish PAAI in Russia. In accordance with the law an arbitration center is included in the list of PAAIs in Russia within 15 days from the date of approval by the Council, i.e. by the end of April 2019 HKIAC could become the first international arbitration center authorized to administer international disputes in Russia.
Another issue that should be carefully considered by choosing an arbitration center relate to resolution of disputes between companies established in Russia (local disputes) by international arbitration centers not included in the list of PAAIs in Russia and not authorized to consider local disputes in Russia.
Though there is no direct prohibition established by the Russian law to settle disputes between Russian companies by foreign arbitration centers with the seat of arbitration outside of Russia, the possibility of referral of local disputes to foreign arbitration centers is still questionable. In one of the court decisions that caused disputes in legal community (case# А40-219464/16-52-430) the Russian court of first instance ruled that resolution of local disputes by the foreign arbitration institutions violates public policy in Russia. Notwithstanding the fact that such ruling was dismissed by the higher court instance the risk that the Russian courts might deny recognition of awards of foreign arbitration institutions not included in the list of PAAIs in Russia and not authorized to consider local disputes in Russia cannot be excluded.
Therefore, in situations when the disputes arise between companies established in Russia it would be reasonable to choose arbitration institution included in the list of PAAIs in Russia and authorized to administer local disputes in Russia or, alternatively, agree on resolution of disputes by the Russian commercial courts.
Takeaways
- if you agree in international contracts that the seat of arbitration is in Russia, it would be reasonable to choose the arbitration center included in the list of PAAIs in Russia and authorized to resolve international disputes in Russia.
- If you agree in local contracts to resolve disputes by arbitration, it would be reasonable to choose the arbitration center included in the list of PAAIs in Russia and authorized to resolve local disputes in Russia.
Arbitration is a well-known system for dispute resolutions, and works as an alternative to judicial procedures. Parties are free to choose this system and to submit their conflicts to specific arbitrators or institutions.
It is usually considered that arbitration is a good way to solve conflicts but preferable to those arisen between big corporations or involving important amounts of money. Although this assumption is generally accepted, there is an alternative for distribution disputes suitable for smaller companies and cases with lower amounts claimed.
And here is the essential question: why a manufacturer/franchisor or a distributor/agent/franchisee should choose a specialized arbitration for their agreements instead of a more general one or, even, a judicial procedure? The answer seems clear: an arbitrator with knowledge not only in procedural questions but in substantive matters will be able to better understand the conflict between the parties and, therefore, to grant a better award. Take into account that, for instance in my Country, Spain, a Judge of First instance can deal in the same day with a distribution contract, a construction case, a conflict between heirs, and a discussion in a community of owners. All of this requires the analysis of different facts and completely different legislations and it is true that specific commercial problems do not usually have judges experts in international trading. But, how to choose a good specialized arbitrator? And, how to choose the arbitral procedure and the institution in terms of organization, neutrality, costs and time?
The IDArb was created in 2016 by the International Distribution Institute (www.idiproject.com) in collaboration with the Chambre de Commerce d’Industries et de Services de Genève (CCIG www.ccig.ch) and the Swiss Chambers’ Arbitration Institution (SCAI www.swissarbitration.org) and offers to the distribution sector (distribution, agency, franchising, selective distribution) a specialized, expedited and affordable arbitration procedure, not only for big international corporations but also for smaller cases. In fact, the expedited procedure is particularly foreseen for amounts below one million CHF (approx. 880.000 €).
The objectives and main characteristics of IDArb which make it suitable for all the distribution disputes are:
- A list of specialized arbitrators experts in this particular field is available for ad hoc or institutional arbitration and IDArb is able to assist the parties to choose one of them.
Specialized arbitrators from different countries and legal cultures have been appointed by a Selecting Committee reviewing their experience in one or more fields of distribution law. Therefore, parties can trust that the arbitrator will have concrete skills in the business with an in-depth understanding of the disputed issues. This is not a general knowledge on commercial law, but a concrete one on distribution, expressly verified by the Committee. Parties can even examine some examples of cases in which every arbitrator has been involved in.
- In order to maintain its high quality, the IDArb organizes training seminars for its appointed arbitrators. In these seminars, they are able to discuss about the general management of the arbitration, the procedural aspects and how to solve possible incidents in collaboration with the Institutions and their Rules. This will make all the proceedings more manageable and the possible difficulties more easily solved. Last seminar took place in Geneva in November 8, 2018 and participants have discussed, amongst other subjects, on evidences, witnesses and document production.
- The expedited arbitration procedure permits the parties to have a tailored procedure managed by SCAI under the Swiss Rules of International Arbitration, specially adapted for small disputes in the field of distribution.
- Time is also an essential element: the award in the expedited procedure will be issued in a maximum term of six months (only exceptional circumstances permit the Court to extend such time-limit), and, if parties agree, it can be decided only on documentary evidence.
- Costs are reasonable and known in advance.
- And, as final but important remark, IDArb has also adopted some recommendations where, upon request of the parties, mediation is favoured, the arbitrator my consider giving a preliminary non-binding and provisional assessment of the dispute and should have a pro-active position in order to facilitate an amicable settlement.
To have further information about the clause to use in the contracts, the list of specialized arbitrators, their skills, experience and complete CV, and the recommendations for expedited arbitration, you can follow the link: https://www.idiproject.com/content/idarb-idi-arbitration-project
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- Arbitration
Summary: Companies with international projection and global presence can count on mediation and its benefits in the different contexts of their business, both in the compliance of the code of conduct and internal rules as well as in the compliance of contracts and projects with third parties or public authorities. In the same way, it facilitates access to a saturated justice system, while at the same time improving the relationship between the parties, as they do not have to face the wear and tear of the judicial phase, which leads to emotional wear and tear.
I will focus on the intersection between compliance and mediation, as international corporations are increasingly interested in the potential of Mediation applied to compliance frameworks. Although there are a few important challenges that we need to mention, the benefits of international mediation are clear: costs savings, quick solutions and a good understanding between the parties. International mediation and compliance go hand in hand and, although they may not seem to have much in common, they complement each other. The purpose of this article is to illustrate with some practical examples the advantages of compliance mediation for small and medium-sized enterprises operating internationally, in order to demonstrate the potential that exists in this combination.
Mediation is a form of alternative dispute resolution (ADR) that involves the intervention of a neutral third party, known as the mediator, to help disputing parties reach a mutually acceptable agreement. Unlike litigation, which involves a judge making a binding decision, mediation allows the parties to control the outcome, facilitating a more collaborative and flexible approach to resolving disputes.
In the context of compliance issues and international contracts, mediation offers a unique advantage by addressing both legal and non-legal aspects of disputes, such as cultural differences, business practices, and organizational relationships. This flexibility is particularly important when dealing with international contracts, where cross-cultural understanding and respect for diverse legal systems are essential.
The key is still the same recipe as the initial negotiation of a contract. The parties objectively and in a neutral atmosphere and collaborative approach, find ‘solutions’ to their disagreements where both parties win. The so-called win-win is still the best scenario in which the parties should meet again in dispute resolution. I always insist on the word ‘reconnect’ because of its positive connotation in any relationship. Mediation allows the parties to negotiate a mutually acceptable outcome, preserving the relationship between them, with the additional value of cost and time efficiencies and confidentiality guaranteed throughout the process.
Mediation benefits compliance programmes in two keyways.
Resolving internal compliance issues
This is accomplished through facilitating communication and conflict resolution among employees, promoting a culture of dialogue, transparency and accountability. When a company uses mediation to resolve conflicts arising from internal compliance-related situations, it helps to prevent a conflict from escalating in proportions both in the form of legal action and disputes that may involve the public administration.
A clear example is conflicts related to the code of conduct, where disputes often arise at the HR level. Another example is that arising from conflicts of interest. In both cases the connection lies in the common goal of promoting ethical behaviour, improving communication and resolving conflicts in a way that helps the employee and the company to follow its internal rules and achieve the required standards.
Mediation opens a space for dialogue and amicable conflict resolution, facilitating employees’ professional and personal growth in a sustained way over time.
Another example can be conflicts related to cross-border labour issues applicable to the same company, whether private, non-governmental organisation or conflicts between private and public companies. The reasons for the conflict may be related to harassment issues or pay inequality issues. For example, the internal pay system within an international organisation should consider the following elements:
- Remuneration represents by far the most important and controversial element of the employment relationship and is of equal interest to the employer and the employee.
- The remuneration system should be based on and consistent with the principles of the organisation.
- The criteria for determining remuneration should be objective and measurable.
- The system should be equitable.
Conflicts often arise around these elements and companies should be transparent, through comprehensive policies, about their position on non-discrimination, harassment or inclusion of their employees within their organisation and the markets in which they operate.
Mediation can be a channel to help find solutions to equality and non-discrimination issues between employees within the same organisation. It also obliges companies to consider the standards of international legislation (e.g. CSRD) when implementing their policies. We are seeing that it is not a ‘nice to have’ but a ‘must have’.
Resolving disputes with external parties
Mediation can be used to enforce commercial contracts or in projects. It helps prevent disputes between companies or between companies and regulators, foster better relations, and ensure compliance standards are met without resorting to litigation. Mediation promotes cooperation between the parties and helps reduce the risk of future contractual violations.
A clear example of the benefits of the use of mediation in compliance arises in the international context where legal certainty is required for both parties, as well as fair and reasonable management of a long-term project. In some cases, there is a public-private element to the dispute as the public sector is involved (either in licensing issues or as a regulatory authority). This may create some confusion in the roles and rights of the parties, which makes perfect sense when the interests of the investor (private equity) and the community or private parties are very diverse.
For context, we might think of environmental, social and governance issues that are receiving serious attention from governments and regulators, given the impact on the planet and the people within the communities where they live. Mediation offers a way to resolve these conflicts by facilitating open communication between the parties involved. For instance, if a company is accused of breaching a country’s environmental regulations, mediation can provide a platform for the company and regulatory authorities to discuss the issues, share concerns, and negotiate a solution that satisfies both parties. Instead of pursuing punitive measures or resorting to lengthy legal battles, mediation can help parties find common ground and craft a solution that supports compliance while preserving business relationships.
A concrete example is mining activities, which contribute greatly to the involvement of foreign entities in resource-rich countries, involving, on a large scale, both foreign and domestic interests, and potentially resulting in pollution and damage to the environment. In addition, there are various problems, especially the use of land for mining activities, which causes friction between mining companies, communities and local governments where mining activities take place. Since these projects take place over a long period of time and involve various interests of both private and public actors as well as communities, mediation is undoubtedly a good way to prevent disputes during the whole process of project development and implementation, offering in conflict situations not only a quick solution for both parties but also a fair and reasonable management of a project in the long term.
Another tool, with elements of mediation, which is recommended for the successful completion of large projects, as for instance construction projects, are Dispute Boards, a panel of one to three members with extensive experience in the field of the contract, who accompany the execution of the contract until the work is completed on time and on budget. This method is not a pure and simple mediation, although it resembles it, because the Dispute Boards, in particular the so-called DAAB (Dispute Avoidance and Adjudication Board), permanently seek to avoid conflict and, if it arises, to encourage the parties to find a solution or to make it binding. I will go into more detail on this subject in another article.
Hereby, we can also mention internal control and auditability towards third parties, be they customers or suppliers. The EU directive (CSDDD) puts the emphasis on indirect suppliers in the supply chain. It is therefore important that when establishing a business or investment partnership, all parties involved have a similar level of compliance with standards. In this regard, framework compliance agreements, which are compliance agreements that regulate the compliance obligations of both parties’ subject to a service contract, are very common.
Aspects of compliance in such contracts may include, among others, anti-corruption policy, fee evasion, international sanctions, trainings, reporting requirements and ways to audit the compliance clauses agreed in the service contract, as well as the escalation clause to resolve disputes amicably, using the various existing ADR modes.
In the context of commercial contracts, mediation is used to resolve disputes related to non-performance, late deliveries, payment problems, interpretations of clauses or any other dispute arising from a commercial agreement, including any aspect of the compliance agreement as referred to above.
For an internationally developing company it would be advisable to promote mediation as the type of dispute resolution in conflicts with third parties. One way to promote mediation as an effective means of dispute resolution could be through a clause of voluntary submission to mediation in all transactions with third parties, followed by arbitration or submission to the courts of a certain jurisdiction, known as a tiered dispute resolution clause. These clauses provide for a gradual system of dispute resolution following various alternative methods of resolving disputes, usually culminating in arbitration if the outcome of the first alternative methods is unsuccessful.
The choice of conflict resolution through mediation is a ‘win-win solution’, whose confidentiality is guaranteed in the face of public attention. Based on these advantages, mediation is considered more suitable to be implemented (agreed, including with the escalation clause) in a contract.
Challenges of Mediation in International Contract Disputes
Despite its many advantages, mediation is not without its challenges. Some of the key obstacles include:
Lack of Enforcement Mechanisms: Mediation agreements are typically non-binding, meaning that parties are not legally required to adhere to the terms of the settlement. While mediation can result in a mutually agreed-upon solution, enforcing the agreement may require the parties to enter into further negotiations or even resort to litigation if one side fails to honour the agreement.
Cultural and Language Barriers: In international contract disputes, cultural differences and language barriers can complicate the mediation process. It is important to select mediators who have experience with cross-cultural communication and who understand the legal systems involved. Without such expertise, the mediation process may be ineffective.
Reluctance to Mediate: Some parties may be reluctant to mediate, especially if they perceive it as a sign of weakness or if they are unfamiliar with the process. This reluctance can be overcome with proper education and a clear understanding of the benefits of mediation.
Although we can say that there is a growth of mediation around the world and the level of satisfaction of the use of mediation is based on its core values, which are impartiality, confidentiality and self-determination, the promotion of the mediation is still an important challenge.
Conclusion
In the case of internal compliance, mediation usually takes a more reactive role, i.e. when the conflict has already surfaced within the company or organisation; whereas, in the case of third party compliance, mediation takes a preventive role, such as in the case of Dispute Boards, although it also helps to resolve a commercial conflict between parties who wish to continue to maintain a business relationship. In both cases the objective is the same, to try to find common ground between the interests of the parties in order to resolve or avoid a conflict that could lead the parties to a legal dispute.
As international trade continues to grow and the complexity of global regulations increases, businesses and organizations can benefit from adopting mediation as a strategic method for resolving conflicts. By fostering cooperation and understanding, mediation can help build stronger, more resilient business relationships and ensure long-term success in a global marketplace.
Companies need to adhere to their own compliance programmes, but also to the programme of their customers, suppliers or banks with whom they collaborate. Not only is there a need for expertise to know the legal framework applicable to the industry, but there is also a need for conflict resolution when conflicts arise or even to act pre-emptively. Legal battles are expensive, time-consuming and damaging to business relationships. Many jurisdictions and industries are already demanding an obligation for parties to exhaust alternative dispute resolution methods before moving to the litigation phase.
Arbitration is a procedure for resolving disputes between parties that is very successful in the Anglo-Saxon legal system. But much less in our country.
Arbitration has advantages and disadvantages; it is more expensive than the Courts, but it is much quicker; and speed is essential for justice to be such.
Typically, an arbitration lasts six months plus a couple of months for the appointment of the arbitrator; in total, a dispute, however important and difficult it may be, can be definitively resolved in eight months.
To compare with the Courts, in Spain today it takes on average eighteen months to obtain a judgement at first instance and another eighteen months for an appeal; without considering the possibility of an appeal to the Supreme Court.
The cornerstone on which arbitration rests is that the arbitral award is final and definitive and cannot be reviewed or appealed; this statement has certain exceptions, mainly of a formal or procedural nature: basically, the legality of the arbitration agreement, the arbitrability of the matter and the procedural regularity in the conduct of the arbitration proceedings. These defects can be attacked by means of an action for annulment, which is heard by the ordinary courts.
But in addition to the possible “formal” defects, the action for annulment can be based on the allegation of a breach of “public order”, which the Constitutional Court has defined and outlined as “those public and private, political, moral and economic legal principles which are absolutely obligatory for the preservation of society in a given people and at a given time”.
As this definition of “public order” is undoubtedly broad and unspecific, the use of the violation of public order as a tool for declaring the nullity of arbitral awards by the ordinary courts has produced an “overflow” effect that has required, in the words of the Constitutional Court, “a restrictive interpretation of it, on pain of violating the autonomy of the will of the parties and their waiver of judicial protection”.
This is what the Court has proclaimed in the very important judgement of 15 February 2021, which is the reason for this legal note.
In recent years, the High Court of Justice of Madrid has resorted to the argument of “public order” in an extensive and “overwhelmed” manner to annul arbitral awards and “supplant the arbitral tribunal in its function of applying the law”, becoming “a second instance reviewing the facts and rights applied in the arbitral award, a control mechanism for the correct application of jurisprudence”.
And this expansive and “overwhelmed” interpretation of public order as a tool for annulling arbitral awards by the High Court of Justice of Madrid had become a serious problem for the arbitral institution and for the confidence of the contracting parties when including arbitration agreements in their contracts.
The principle that the arbitral award was the final and definitive solution to the dispute it was intended to resolve, except for procedural breaches or breaches of public order limited to those cases in which the arbitral award was arbitrary, illogical, absurd or irrational, was called into question and was a clear deterrent to contracting parties deciding to resolve their discrepancies through arbitration.
Well then, the Constitutional Court, in a categorical and explicit manner, repeating what it had already stated in its judgement of June last year, confirms that the need for the arbitral award not to contravene public order cannot result in the judicial body replacing the arbitrator in his function of applying the law, nor can it become a second instance reviewing the facts and legal grounds applied in the arbitral award, nor a mechanism for controlling the correct application of case law.
The principle of party autonomy prevails; and this means that when there is submission to arbitration, the parties have agreed that it should be through this channel that disputes between them are to be resolved, by means of the arbitrator’s decision, which can only be annulled through the strict channels that the Arbitration Act regulates; we insist, for procedural reasons or for violating public order in the restricted interpretation explained in the judgement we are commenting on; but in no case, by way of a second instance where the facts and legal grounds applied are re-evaluated once again.
In short, Spanish arbitration is to be congratulated, and will be able to recover the momentum that caused it to lose, in part, the extensive interpretation of public order defended by some High Courts of Justice. From now on, the Courts will not be able to ignore the Constitutional Court’s interpretation, which is a breath of fresh air for Spanish arbitration.
In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.
The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as “competence-competence”, Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427).
The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).
It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.
The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643).
The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the “weak” party.
Unfair commercial behaviours between professionals are sanctioned in Sections L442-1 and seq. of the French Commercial Code. French Courts tend to consider that those dispositions of the Commercial Code are mandatory, in particular Section L442-1, II of the Code on abrupt termination of commercial relationships. Based on this section, an operator can be held liable if he terminates a commercial relationship without respecting a prior notice which duration depends on the duration of the relationship.
Although this is considered to be a mandatory law, the French Supreme Court considers that it does not preclude to bring a dispute before foreign Courts in compliance with a jurisdiction clause (Civ.1, 8 July 2010, Doga, n°09-67013). Moreover, Courts have ruled for a long time now that arbitrators are entitled to apply national mandatory laws (Court of Appeal of Paris, 19 March 1993, Labinal, n°9221091). In the case Doga above quoted, the Court concluded that arbitrators are also entitled to apply Sections 442-1, II of the Commercial Code related to the conditions of termination of commercial relationship. Therefore, if a contract contains an arbitration clause, the judge is obliged to give priority to the arbitrators to decide on their own jurisdiction to decide on the case (principle « compétence-compétence ») in conformity with Section 1465 of the French Procedural Code. This solution was confirmed in a recent decision rendered on 5 September 2019 by the Court of Appeal of Paris in Charlivari v. Sté Equivalanza, n°17/03703.
It is noteworthy to underline that two sets of sanctions are considered under Sections 442-1 and seq. of the Commercial Code: the first sanction allows the victim of unfair practice to seek damages (for instance for abrupt termination of commercial relationship) against the author of unfair practices; the second sanction is decided by the public administration, under the authority of the Ministry of Economics : the Ministry is entitled to bring the case to Courts, which can then decide to fine the party who is liable of unfair practices (the fine can be up to 5% of the turnover made in France by the person liable or 5 Million EUR).
Therefore, one single matter can give rise to two procedures at the same time, the first one initiated by the victim and the second one at the request of the Ministry of Economics (Section L442-4 of the Code). In a case Apple v. Ministre de l’Economie, the Supreme Court (Civ.1, 6 juillet 2016, n° 15-21811) considered that the action of the Ministry of Economics cannot be decided by arbitrators, even if the contract contains an arbitration clause, because of the specificity of this action, which is not based on the contract by itself but on powers that the Ministry draws from the law.
Therefore, a clear distinction must be made between the two procedures: one is subject to the application of the dispute resolution clause (either national Courts, even foreign, or arbitration tribunals), when damages are sought from the author of unfair practices, including abrupt termination; the other one can be brought only before French national Courts, and the dispute resolution clause has no effect, in cases which are brought by the Ministry of Economics for administrative sanctions against the same author.
The arbitration procedure in Spain is characterized, and constitutes one of its great advantages, by the difficulty of judicially annulling or revoking the award; the parties know that the award that is issued is in most cases firm and final and ends the conflict.
The art. 41 of the Spanish Arbitration Law only allows the annulment of the award for formal reasons (nonexistence or invalidity of the arbitration agreement, failure to notify any of the parties of the appointment of the arbitrator or of the arbitration proceedings, improper appointment of the arbitrators or that the arbitrators have ruled on matters that were not or could not be arbitrated by rule of law). And additionally the award is also voidable when it is contrary to “public order“.
That “public order” is such as to give rise, in case of violation, to the annulment of the award, is a matter that has always been controversial and debated; already in the 1958 New York Convention, “public order” is alluded to as a cause of refusal to recognize foreign awards. As the Constitutional Court (“CC”) recalls in the judgment that we commented, citing its own jurisprudence, “the material public order is the set of public and private, political, moral and economic legal principles that are absolutely obligatory for the preservation of society in a town and in a certain time and the procedural public order is configured as the set of formalities and necessary principles of our procedural legal order and only arbitration that contradicts any or some of such principles may be considered null and void for violation of public order”.
As an example, during 2018, 38 requests for annulment of awards were filed before the Superior Courts of Justice (“SCJ”), of which 31 were based on violation of public order; 8 of the lawsuits (21%) were estimated, 5 for violation of public order, and 3 for invalidity of the arbitration agreement.
The Madrid SCJ has been maintaining in recent times a very “expansive” interpretation of public order, which has generated doubts and fears in the institutions and Arbitration Courts, due to the dissuasive effect that this position could have when choosing Madrid as the seat of arbitrations, national or international.
And in the interpretative line to which we refer, the Madrid SCJ has maintained the following and surprising criterion: once an award was made and a request for annulment was filed by one of the parties, the litigants reached an out-of-court agreement and jointly requested the filing of the cancellation request; that is to say, both gave the award as good and final; the SCJ rejected the petition and continued to issue a judgment annulling the award, arguing that since the application for annulment was based on the violation of public order, then the matter was no longer available to the parties and was not, in the opinion of the Court, subject to transaction or resignation.
This was not the first time that the SCJ of Madrid had adopted this position: impeded the annulment of an award as being contrary to “public order”, the parties no longer had the possibility to compromise and renounce the demand for annulment.
For the first time the matter has reached the Constitutional Court (CC): in a recent ruling on June 15, 2020, the CC has been clear and resounding; recalls in its ruling that the civil process is based on the principle of “the parties’ willingness to regulate their private interests, that is, to initiate jurisdictional activity, determine the purpose of the process and end it when they deem appropriate”. It is what we call “justice begged for”; and this principle applies not only to civil proceedings before ordinary courts but also to arbitration proceedings. The judgment also affirms that arbitration is configured by law as a heteronomous mechanism for conflict resolution, to which the minimal intervention of the judicial bodies in favor of the autonomy of the will is essential.
And it concludes by stating that the annulment action must be understood as a process of external control over the award that does not allow a decision on the merits of the arbitrators’ decision, since the causes are assessed, which justifies that “the control of the awards are limited and annulment of the award can only be obtained in exceptional cases”.
Summarizing, the CC understands and proclaims that it is contrary to the right to effective judicial protection protected by art. 24 of the Constitution, the Court’s refusal to recognize the validity of an agreement reached between the litigants based on the parties’ power to act without a prohibitive norm authorizing it, and imposing a decision that subverts the “justice” principle that inspires the civil process; reason why it grants the requested protection and orders to roll back the proceedings to the moment before the order that denied validity to the joint request for file, so that the SJC dictates another resolution accompanied by the CC’s criteria.
Therefore, the SCJ will no longer be able to prevent litigants from settling and ending a claim for annulment of the arbitration award (as it usually occurs peacefully and with appeals or cassation remedies) and it must also take into consideration the restrictive interpretation of the concept of public order that the CC has established in this important judgment. Indeed, Spanish arbitration is greatly reinforced by this judgment of the CC.
Are arbitration and jurisdiction clauses contained in insurance contracts enforceable against a third party which is acting directly against the insurer in third party liability insurances?
Such direct action is admitted by French law in liability insurances, as defined in article 124-3 of the Insurance Code.
In just a few months two radically different approaches have been taken by the French Cour de cassation (Civ.1, 19 December 2018, n°17-28.951) and the ECJ in Assens Havn v. Navigator Management UK Ltd (13 July 2017, C-368/16) and KABEG v. MMA IARD (20 July 2017, C-340/16).
The case submitted to the Cour de cassation represented a third party exercising a direct right of action before French Courts against the insurer of a floating barge which had caused him a damage. The Supreme Court accepted that the insurer could validly oppose the arbitration clause, which was in the policy against the third party, and therefore judged that French Court had no jurisdiction to decide on the case. The Supreme Court applied the well-established principle of Compétence-Compétence – materialized in article 1448 of the French Code de Procédure Civile – to stay the case, considering that the arbitration clause could not be set aside. The Court therefore judged that the applicability of the arbitration clause should be determined by the arbitrators by priority.
A year before, the ECJ had ruled in the opposite direction in a case where a jurisdiction clause was applicable in the insurance policy. In Assens Havn v. Navigator Management UK Ltd, the ECJ stated that the clause could not be opposed to the third party acting directly against the insurer. According to the Court, the insurers’ liability towards the insured has a contractual nature when based on the policy, whereas it is extra-contractual when the liability is based on a direct action from a third party. In a previous ruling the Court had considered (Sté financière et industrielle du Peloux (12 May 2005, C-112/03) that the jurisdiction clause cannot be opposed to the beneficiary of an insurance policy if he is not the policyholder (for instance in a collective insurance).
One sees a clear difference in treatment between arbitration clause and jurisdiction clause when it comes to deciding on their opposability to the victim exercising a direct action against the insurer.
Article 2061 paragraph 2 of the Civil Code states that an arbitration cannot be opposed to a party which has not contracted for the purpose of its business activity. The French Cour de cassation grounded its decision on the fact that the clauses of the main contract could be opposed to the third party. If the latter was entitled to apply the insurance contract, it was therefore entitled to invoke article 2061 paragraph 2 of the Civil Code.
On 29 March 2019 new amendments to the federal law “On arbitration in the Russian Federation” entered into force. This law regulates the order of establishment and activities of arbitration courts and permanently acting arbitration institutions (PAAI) in Russia and applies to resolution of both international and local disputes by arbitration in Russia.
The key amendments relate to granting of rights to foreign arbitration centers to perform functions of PAAIs in Russia. Earlier such rights were granted by the government, but as from 29 March 2019 such functions were transferred to the Ministry of Justice. Ministry of Justice grants the rights to perform functions of PAAIs in Russia to foreign arbitration centers based on recommendations received from the Council on improvement of arbitrations.
As of 31 March 2019, there are only 4 (four) PAAIs authorized to administer disputes by arbitration in Russia and all of them are Russian organizations. In accordance with the latest news the Hong Kong International Arbitration Center (HKIAC) is the first international arbitration center that has recently received a recommendation from the Council on improvement of arbitrations to establish PAAI in Russia and has been approved by the Ministry of Justice to establish PAAI in Russia. In accordance with the law an arbitration center is included in the list of PAAIs in Russia within 15 days from the date of approval by the Council, i.e. by the end of April 2019 HKIAC could become the first international arbitration center authorized to administer international disputes in Russia.
Another issue that should be carefully considered by choosing an arbitration center relate to resolution of disputes between companies established in Russia (local disputes) by international arbitration centers not included in the list of PAAIs in Russia and not authorized to consider local disputes in Russia.
Though there is no direct prohibition established by the Russian law to settle disputes between Russian companies by foreign arbitration centers with the seat of arbitration outside of Russia, the possibility of referral of local disputes to foreign arbitration centers is still questionable. In one of the court decisions that caused disputes in legal community (case# А40-219464/16-52-430) the Russian court of first instance ruled that resolution of local disputes by the foreign arbitration institutions violates public policy in Russia. Notwithstanding the fact that such ruling was dismissed by the higher court instance the risk that the Russian courts might deny recognition of awards of foreign arbitration institutions not included in the list of PAAIs in Russia and not authorized to consider local disputes in Russia cannot be excluded.
Therefore, in situations when the disputes arise between companies established in Russia it would be reasonable to choose arbitration institution included in the list of PAAIs in Russia and authorized to administer local disputes in Russia or, alternatively, agree on resolution of disputes by the Russian commercial courts.
Takeaways
- if you agree in international contracts that the seat of arbitration is in Russia, it would be reasonable to choose the arbitration center included in the list of PAAIs in Russia and authorized to resolve international disputes in Russia.
- If you agree in local contracts to resolve disputes by arbitration, it would be reasonable to choose the arbitration center included in the list of PAAIs in Russia and authorized to resolve local disputes in Russia.
Arbitration is a well-known system for dispute resolutions, and works as an alternative to judicial procedures. Parties are free to choose this system and to submit their conflicts to specific arbitrators or institutions.
It is usually considered that arbitration is a good way to solve conflicts but preferable to those arisen between big corporations or involving important amounts of money. Although this assumption is generally accepted, there is an alternative for distribution disputes suitable for smaller companies and cases with lower amounts claimed.
And here is the essential question: why a manufacturer/franchisor or a distributor/agent/franchisee should choose a specialized arbitration for their agreements instead of a more general one or, even, a judicial procedure? The answer seems clear: an arbitrator with knowledge not only in procedural questions but in substantive matters will be able to better understand the conflict between the parties and, therefore, to grant a better award. Take into account that, for instance in my Country, Spain, a Judge of First instance can deal in the same day with a distribution contract, a construction case, a conflict between heirs, and a discussion in a community of owners. All of this requires the analysis of different facts and completely different legislations and it is true that specific commercial problems do not usually have judges experts in international trading. But, how to choose a good specialized arbitrator? And, how to choose the arbitral procedure and the institution in terms of organization, neutrality, costs and time?
The IDArb was created in 2016 by the International Distribution Institute (www.idiproject.com) in collaboration with the Chambre de Commerce d’Industries et de Services de Genève (CCIG www.ccig.ch) and the Swiss Chambers’ Arbitration Institution (SCAI www.swissarbitration.org) and offers to the distribution sector (distribution, agency, franchising, selective distribution) a specialized, expedited and affordable arbitration procedure, not only for big international corporations but also for smaller cases. In fact, the expedited procedure is particularly foreseen for amounts below one million CHF (approx. 880.000 €).
The objectives and main characteristics of IDArb which make it suitable for all the distribution disputes are:
- A list of specialized arbitrators experts in this particular field is available for ad hoc or institutional arbitration and IDArb is able to assist the parties to choose one of them.
Specialized arbitrators from different countries and legal cultures have been appointed by a Selecting Committee reviewing their experience in one or more fields of distribution law. Therefore, parties can trust that the arbitrator will have concrete skills in the business with an in-depth understanding of the disputed issues. This is not a general knowledge on commercial law, but a concrete one on distribution, expressly verified by the Committee. Parties can even examine some examples of cases in which every arbitrator has been involved in.
- In order to maintain its high quality, the IDArb organizes training seminars for its appointed arbitrators. In these seminars, they are able to discuss about the general management of the arbitration, the procedural aspects and how to solve possible incidents in collaboration with the Institutions and their Rules. This will make all the proceedings more manageable and the possible difficulties more easily solved. Last seminar took place in Geneva in November 8, 2018 and participants have discussed, amongst other subjects, on evidences, witnesses and document production.
- The expedited arbitration procedure permits the parties to have a tailored procedure managed by SCAI under the Swiss Rules of International Arbitration, specially adapted for small disputes in the field of distribution.
- Time is also an essential element: the award in the expedited procedure will be issued in a maximum term of six months (only exceptional circumstances permit the Court to extend such time-limit), and, if parties agree, it can be decided only on documentary evidence.
- Costs are reasonable and known in advance.
- And, as final but important remark, IDArb has also adopted some recommendations where, upon request of the parties, mediation is favoured, the arbitrator my consider giving a preliminary non-binding and provisional assessment of the dispute and should have a pro-active position in order to facilitate an amicable settlement.
To have further information about the clause to use in the contracts, the list of specialized arbitrators, their skills, experience and complete CV, and the recommendations for expedited arbitration, you can follow the link: https://www.idiproject.com/content/idarb-idi-arbitration-project
