Yearbook of Private International Law: Volume XVII Yearbook of Private International Law Vol. XVII - 2015/2016 9783504385163

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YEARBOOK OF PRIVATE INTERNATIONAL LAW

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sellier european law publishers

YEARBOOK OF PRIVATE INTERNATIONAL LAW VOLUME XVII – 2015 / 2016

Founding Editors PETAR ŠARČEVIĆ † PAUL VOLKEN Editors ANDREA BONOMI

GIAN PAOLO ROMANO

Professor at the University of Lausanne

Professor at the University of Geneva

Published in Association with SWISS INSTITUTE OF COMPARATIVE LAW LAUSANNE, SWITZERLAND

The Deutsche Nationalbibliothek lists this publication in the Deut­sche Na­tio­nalbibliografie; detailed bibliographic data are available on the Internet at http://dnb.dnb.de. Verlag Dr. Otto Schmidt KG Gustav-Heinemann-Ufer 58, 50968 Köln Tel. +49 221 / 9 37  38-01, Fax +49 221 / 9 37  38-943 [email protected], www.otto-schmidt.de ISBN (print)  978-3-504-08009-9 ISBN (eBook)  978-3-504-38516-3

© 2017 by Verlag Dr. Otto Schmidt KG, Köln All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior per­mis­sion of the publisher. The paper used is made from chlorine-free bleached materials, wood and acid free, age resistant and environmentally friendly. Printing and binding: Kösel, Krugzell Printed in Germany.

Advisory Board JÜRGEN BASEDOW Hamburg

RUI MANUEL GENS DE MOURA RAMOS Lisbon / Coimbra

GENEVIÈVE BASTID-BURDEAU Paris

LUKAS HECKENDORN URSCHELER Lausanne

MICHAEL BOGDAN Lund

YASUHIRO OKUDA Tokyo

SIR LAWRENCE COLLINS London

GONZALO E. PARRA-ARANGUREN The Hague / Caracas

DIEGO P. FERNÁNDEZ ARROYO Paris

SYMEON C. SYMEONIDES Salem (Oregon)

HUANG JIN Wuhan

THOMAS KADNER GRAZIANO Geneva

EVA LEIN London

RICHARD FRIMPONG OPPONG Kamloops (British Columbia)

HANS VAN LOON The Hague

Production Editors AZADI ÖZTÜRK Ass. iur., PhD Candidate, University of Lausanne Research Assistant, University of Geneva

ILARIA PRETELLI Legal adviser, Swiss Institute of Comparative Law

Assistant Editors AGNIESZKA SZCZEGÓŁA Research Assistant, University of Geneva

Production Assistants FRANÇOISE HINNI Swiss Institute of Comparative Law

English Revision SHAHEEZA LALANI PhD, University of Lausanne

IAN CURRY-SUMNER PhD, LLB, Freelance Legal Translator / Editor

VICTORIA GARRINGTON Attorney-at-Law, Fribourg

CHRISTOPHER BOOTH Research Assistant, University of Geneva

TABLE OF CONTENTS ________________

Foreword ......................................................................................................... ix Abbreviations .................................................................................................. xi Doctrine Andrea BONOMI Courage or Caution? A Critical Overview of the Hague Preliminary Draft on Judgments ................................................................ 1 Eva LEIN Unchartered Territory? A Few Thoughts on Private International Law post Brexit ................................................................... 33 Pascal DE VAREILLES-SOMMIÈRES Notes on an Unstable Couple: Party Autonomy and Public Policy in the Hague Principles on Choice of Law in International Commercial Contracts ............................................................................. 49 Charalambos PAMBOUKIS The Annulled Arbitral Award – Jurisdictio facit arbitrum ........................ 83 Vivienne BATH Overlapping Jurisdictions and the Resolution of Disputes before Chinese and Foreign Courts.......................................................... 111 Mihail DANOV / Paul BEAUMONT Measuring the Effectiveness of the EU Civil Justice Framework: Theoretical and Methodological Challenges............................................ 151 Koji TAKAHASHI Unmasking Anonymous Online Infringers of Personality Rights: Questions Arising in International Contexts ............................................ 181 Massimo V. BENEDETTELLI Five Lay Commandments for the EU Private International Law of Companies ................................................................................... 209 Gian Paolo ROMANO Remarks on the Impact of the Regulation No 650/2012 on the Swiss-EU Successions .................................................................. 253 Developments in Cross-Border Insolvency Stefan REINHART The European Insolvency Regulation 2015 ............................................. 291 Valentin RÉTORNAZ Cooperation in the New EU Regulation on Insolvency Proceedings: an Unfinished Transition from Status to Contract ................................... 319

Niklaus MEIER / Rodrigo RODRIGUEZ Recast of the Swiss International Insolvency Law .................................. 355 Vincent JEANNERET / Louis BURRUS Cross-Border Insolvency Law – Experiences and Perspectives ............. 371 Faraz Ahmed ALI / Erik RØSÆG New Rules on Cross-Border Insolvencies in Norway.............................. 385 National Reports Marc M. ARKIN OBB Personenverkehr A.G. v. Sachs: Continuity and Unanswered Questions for Foreign Sovereign Immunity in the United States ............ 395 Elena RODRÍGUEZ PINEAU International Child Abduction: New Developments in Spain .................. 427 Mónica HERRANZ BALLESTEROS Cross-Border Placement of Children: the Current Situation in Spain...... 449 Marie-Claude NAJM The Enforcement of Foreign Judgments in Lebanese Private International Law......................................................................... 463 Court Decisions Thomas KADNER GRAZIANO The Law Applicable to Tort Claims Brought by Secondary Victims – The Florin Lazar v. Allianz SpA and Germanwings Cases ...................... 477 Alexia PATO Collective Redress for Cartel Damage Claims in the European Union after CDC v Akzo Nobel NV and Others .................................................. 491 Pontian N. OKOLI Subject Matter Jurisdiction: the Recognition and Enforcement of English Judgments in Nigeria and the Need for a Universal Standpoint. 507 Forum Aleksandar JAKSIC An Essay on Inconsistency of the Method of Adjustment in the Conflict of Laws ................................................................................ 527 Signe VEST Crowdfunding of SMEs: Geographical Implications and Private International Law Aspects ........................................................... 551 Index ............................................................................................................. 579

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FOREWORD _____________

Year 2015 and the first half of 2016 have seen so tremendous developments that it would make little sense to try and mention the whole content of the present volume in a few opening lines. Negotiations for a worldwide convention on mutual recognition of judgments have been resumed – at long last – and it is to expect, and to hope, that they will achieve some measure of success in the not too distant future. The Hague Principles on choice of law in international commercial contracts are a further testament to the vitality of the works under way in The Hague. On the other hand, the result of the Brexit referendum is, we feel, to bemoan and we have thought it useful to explore, or rather speculate on, the forms that implementing it might take as well as the practical consequences that this might have on the human relationships and interactions involving the UK and the (other) Member States. Be that as it may, the activity of the European Union is not only moving forward at a steady pace – which sometimes suggests pausing and assessing the theoretical and methodological challenges increasingly raised by European private international law – but is also driving change in some non-EU countries, as shown by the Swiss and Norwegian proposed legislation on insolvency, both of which largely modelled on the Recast Insolvency Regulation. A comprehensive set of papers is indeed devoted to cross-border insolvency, which is not only a subject of increasing practical importance but also has come over the years to serve as a laboratory where new forms of inter-country and inter-jurisdictional cooperation are tested and innovative solutions shaped. The customary section on national developments – reporting on such diverse subjects as immunity from jurisdiction in the United States, the new Spanish legislation on cross-border child abduction, and recognition of foreign decisions in Lebanon as well as Nigeria – bears witness to the ongoing global reach of our Yearbook. Andrea Bonomi

Gian Paolo Romano

ABBREVIATIONS ________________

Am. J. Comp. L. Am. J. Int. L. Clunet ECR I.C.L.Q. I.L.M. id. IPRax OJ PIL RabelsZ Recueil des Cours

Rev. crit. dr. int. pr. REDI Riv. dir. int. priv. proc. Riv. dir. int. RIW RSDIE

American Journal of Comparative Law American Journal of International Law Journal de droit international European Court Reports International and Comparative Law Quarterly International Legal Materials idem Praxis des internationalen Privat- und Verfahrensrechts Official Journal Private International Law Rabels Zeitschrift für ausländisches und internationales Privatrecht Recueil des Cours de l’Académie de la Haye de droit international = Collected Courses of The Hague Academy of International Law Revue critique de droit international privé Revista española de derecho internacional Rivista di diritto internazionale privato e processuale Rivista di diritto internazionale Recht der Internationalen Wirtschaft Revue suisse de droit international et européen = Schweizerische Zeitschrift für internationales und europäisches Recht

DOCTRINE ________________

COURAGE OR CAUTION? A CRITICAL OVERVIEW OF THE HAGUE PRELIMINARY DRAFT ON JUDGMENTS Andrea BONOMI*

I. II. III.

IV.

Introduction The Chances of Success for the Renewed Project The General Architecture of the Draft A. The Scope of Application 1. Material Scope 2. Geographical Scope B. Non-Exclusivity of the Future Convention C. General Provisions on Recognition and Enforcement D. Conditions for Recognition and Enforcement, in Particular the Grounds for Denial E. Procedure The Bases for Recognition A. Jurisdiction Based on Habitual Residence 1. Habitual Residence Instead of Domicile 2. Habitual Residence of the Person “against Whom Recognition or Enforcement is Sought” B. Jurisdiction Based on (Express or Tacit) Consent 1. Express Consent 2. Implicit Consent Based on Appearance 3. Recognition or Enforcement against the Claimant or the Cross-Claimant C. Judgments in Contractual Matters 1. Place of Performance a) Place of Performance of the Obligation in Question b) Determination of the Place of Performance 2. A Purposeful and Substantial Connection 3. Criticism D. Consumer and Employment Contracts E. Judgments in Tortious Matters 1. Non-Contractual Obligations Relating to Death, Physical Harm, Damage or Loss of Tangible Property *

Professor at the University of Lausanne. Yearbook of Private International Law, Volume 17 (2015/2016), pp. 1-31 © Verlag Dr. Otto Schmidt & Swiss Institute of Comparative Law

Printed in Germany

Andrea Bonomi

V. VI. VII.

2. Infringements of IP Rights F. Exclusive Jurisdiction Punitive Damages Awards The Lack of Provisions against Parallel Proceedings Concluding Remarks

I.

Introduction

From 1st to 9th June 2016, a Special Commission of The Hague Conference of Private International Law was convened in The Hague to prepare a draft convention on the recognition and enforcement of judgments in civil and commercial matters. A preliminary draft convention (hereinafter “the Draft”), largely based on a previous draft text elaborated by a Working Group in November 2015,1 has since been posted on the website of The Hague Conference.2 Thus, almost twenty years after the failure of the first attempt to set up a global instrument on recognition and enforcement of civil decisions, the Hague Judgments Project is again well underway. The Draft is only a preliminary draft and will be further discussed at a second meeting of the Special Commission, to be held in February 2017. This notwithstanding, it is nevertheless important to briefly present the proposed rules in order to launch a discussion among scholars that will certainly be very animated in the next months. The remarks below shall focus particularly on the relationship between Europe and the US. Although the future convention is to have global effect, nobody will contest that the creation of a bridge across the Atlantic is of particular importance, and that the US and the European Union shall play a central role in the negotiation process. It is therefore crucial to measure the advantages and drawbacks of the project in view of the European and American expectations and interests.

1 On the basis of the “Conclusions and Recommendations of the Experts’ Group on Possible Future Work on Cross-Border Litigation in Civil and Commercial Matters” (Work. Doc. No 2E of April 2012), a Working Group met between 2013 and 2015 and drafted a preliminary text (“Report of the fifth meeting of the Working Group on the Judgments Project and proposed draft text resulting from the meeting”, Prel. Doc. No 7A of November 2015). All documents relating to the Judgments Project mentioned in this article are available on the website of The Hague Conference at the address . 2 “2016 Preliminary Draft Convention”.

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The Hague Preliminary Draft on Judgments

II.

The Chances of Success for the Renewed Project

After the glaring failure of the 1999 and 2001 Drafts,3 the first question that crosses everybody’s mind is whether the new attempt has a real opportunity to succeed. Much like the negotiators at The Hague, this author remains optimistic and believes that the odds are now in favour of the project. This prognosis relies in particular on two grounds. First, the new project is far less ambitious and, therefore, more realistic than the previous one. Drawing from experience, the Experts’ Group, followed by the Council on General Affairs and Policy of the Conference,4 has quickly realised that an agreement on a “double convention” regulating both the courts’ jurisdiction and the recognition and enforcement of judgments based on the Brussels and Lugano model was extremely unlikely to succeed. The main ground for the 2001 failure had been the European attempt to prohibit the use of certain jurisdictional grounds, such as the “doing-business jurisdiction”, that were – at least at that time – widely used and entirely acceptable from the US perspective. Regulating international jurisdiction as a premise for a smoother circulation of judgments has proved to be a very successful recipe in the European context, but is not workable on a global scale, at least in the present circumstances, because it entails a too far-reaching intrusion into each national law conception of jurisdictional fairness. We only need to glance at Europe and the US to see that their jurisdictional systems reflect very different philosophies. While the jurisdictional analysis by the US Supreme Court, based on the due process principle and on the crucial notions of “minimum contacts” and “purposeful availment”, clearly focus exclusively on the protection of the defendant, the Brussels Convention and its progeny try to combine this same concern with other important goals, such as access to justice and a sound administration of justice. Such divergences are deeply rooted in the respective legal traditions, and the attempt to wipe them out by way of a treatyimposed unification is still bound to raise very emotional reactions. “Preliminary Draft Convention on Jurisdiction and Foreign Judgments in Civil and Commercial Matters”, adopted by the Special Commission on 30 October 1999 (Prel. Doc. No 11 of August 2000). The 2001 Interim Text, on which no consensus was reached at the Diplomatic Conference, is included in the “Summary of the Outcome of the Discussion in Commission II of the First Part of the Diplomatic Conference 6 – 20 June 2001.” 4 In its “Conclusions and Recommendations” (note 1), the Experts’ Group stated that “[t]he possibility remains open at this stage of making further provision in relation to matters of jurisdiction (including parallel proceedings). The desirability and feasibility of providing for such matters requires further study, and should be the subject of further discussion.” The Council on General Affairs and Policy of the Conference endorsed the recommendation of the Working Group that “matters relating to direct jurisdiction (including exorbitant grounds and lis pendens / declining jurisdiction) should be put for consideration to the Experts’ Group of the Judgments Project with a view to preparing an additional instrument.” In our opinion, if a convention on recognition and enforcement is actually adopted, the chances that issues of direct jurisdiction and lis pendens might successfully be addressed in an additional instrument are very slim. 3

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Andrea Bonomi For these reasons, the Special Commission (and before it the Experts’ Group and the Working Group, which previously worked on the project) has resolutely opted for a more traditional “simple convention.” In such an instrument, judicial jurisdiction is only regulated as a condition for recognition and enforcement, i.e., as “indirect jurisdiction.” This approach ensures that the courts of the Contracting States will continue to apply their national jurisdictional rules, even when these are perceived as unreasonable by other countries, the only sanction being then that their own judgments will have no effect abroad. In such a context, plaintiffs will have to decide whether they wish to bring proceedings on such “unreasonable” jurisdictional grounds, knowing that, if they do so, they will be unable to take advantage of the future convention. The other ground for optimism in the success of the revived project lies in the fact that recent developments in US case law have significantly reduced the traditional gap between the two Atlantic shores, and thus paved the way for an international agreement. This is, of course, a reference to the well-known Goodyear and Daimler cases:5 in these decisions, the US Supreme Court put an end to the widespread use of the “doing-business” jurisdiction, which had found its authority in some rather vague dicta in the seminal International Shoe decision of 1945.6 As mentioned above, “doing business” was, over the years, one of the main sources of disagreement with respect to jurisdiction between the US and Europe. According to the new case law, general jurisdiction over a corporate defendant can only be asserted in a State where the company is “essentially at home;” as the Supreme Court suggested, this is effectively only the case at the place of incorporation and at the company’s principal place of business. This very closely resembles the restrictive stance to general jurisdiction which is normally taken in Europe, in particular by the Brussels Regulation.7 These developments facilitate the task of the negotiators at The Hague, and it is not surprising that the Draft does not even need to mention the “doing-business” jurisdiction. Under these new circumstances, one might even wonder whether the European Union is really still interested in a global convention with the US. As a matter of fact, recognition and enforcement of foreign decisions in the US is already relatively easy nowadays. In the absence of a federal statute,8 the existing state regulations are very often based on one of two Uniform Acts, the 1962 Uniform Foreign Money-Judgments Recognition Act and the 2005 Uniform

5 Goodyear Tires v. Brown, 131 S. Ct. 2846 (2011); Daimler AG v. Bauman, 134 S. Ct. 746 (2014). For a discussion of these cases see, among many others, L.J. SILBERMAN, The End of Another Era: Reflections on Daimler and its Implications for Judicial Jurisdiction in the United States, 19 Lewis & Clark L. Rev. 675 (2015). 6 International Shoe Co. v. Washington, 326 U.S. 310 (1945). 7 Under the Brussels Regulation, general jurisdiction can only be asserted at the defendant’s domicile (Article 4). For corporations and other legal persons, the domicile is deemed to be situated either at the registered seat, or at the central administration, or at the principal place of business (Article 63(1)). 8 So far, the 2005 ALI Proposal for a Federal Statute on the Recognition and Enforcement of Foreign Judgments has not been successful.

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The Hague Preliminary Draft on Judgments Foreign-Country Money Judgments Recognition Act.9 These texts both take a very open stance towards recognition and enforcement. The same is also true of the traditional, “comity”-based common law principles applicable in the remaining states that have not adopted the uniform acts, and to those judgments that are not covered by them.10 Nevertheless, the personal jurisdiction of the foreign court (“indirect” jurisdiction) – which is under all applicable rules a condition for recognition and enforcement – is assessed under US jurisdictional standards, i.e. due process, “minimum contacts” and “purposeful availment.”11 This is a constant source of uncertainty and litigation, which an international convention would attempt to prevent. Also, it goes without saying that both Europeans and Americans are not only interested in the mutual recognition and enforcement of their judgments, but also in the effects of such judgments in many other foreign jurisdictions, some of which still have very restrictive recognition rules and practices (this is the case for China and Russia, among others). A global instrument would be extremely helpful in this respect.

III. The General Architecture of the Draft The structure of the Draft is quite traditional and does not present any surprises as such. Many general provisions reflect the solutions adopted by previous Hague Conventions on recognition and enforcement, and many of them are in conformity with the recognition systems that are currently applied in most recognition-friendly countries. Therefore, this section will skim through the Draft without going into too much detail. The following sections will then focus on the most important and controversial issues. A.

The Scope of Application

1.

Material Scope

Articles 1(1) and 2 define the material scope of application of the future convention. Using a well-known technique – adopted notably in several EU Regulations, but also in the 2005 Choice of Court Convention (Articles 1 and 2) – they do so by 9 The 1962 Act has been enacted by more than thirty states and the 2005 Act by around fifteen states. See D.P. STEWART, Recognition and Enforcement of Foreign Judgments in the United States, 12 YPIL 179 (2010), at 182-184; R.A. BRAND, Recognition and Enforcement of Foreign Judgments, Federal Judicial Center International Litigation Guide, April 2012. 10 The common law principles on recognition have their historical roots in the seminal decision Hilton v. Guyot, 159 U.S. 113 (1895). 11 D.P. STEWART (note 9), at 186.

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Andrea Bonomi first positively defining in Article 1(1) which judgments are to be covered: in this respect, the reference to judgments “in civil and commercial matters” is clearly modelled on the Brussels Regulation and on the Choice of Court Convention. Then, the same Article 1(1) goes on to exclude revenue, customs, and administrative matters: these expressions are also borrowed from the same precedents. Article 2 then lists several matters that are specifically excluded from the material scope. Most of them mirror the “laundry-list” included in Article 1(2) of the Brussels Regulation (status and capacity of natural persons, maintenance obligations, other family matters, wills and succession, insolvency). Some exclusions, however, go further and address matters that would normally be included in the category of civil and commercial matters, such as the carriage of passengers and goods, marine pollution and other maritime law claims, and liability claims for nuclear damages. These exclusions, which were already provided in Article 2 of the Choice of Court Convention, are mainly motivated by the existence of other specific international instruments in the relevant areas. For the same reason, arbitration and arbitration-related proceedings, which are governed by the 1958 New York Convention, are also excluded from the material scope of the future instrument (Article 2(3)). Prior experiences with the comparable exclusion provided by the Brussels Regulation will certainly help in defining its exact boundaries.12 The exclusion of defamation is based on completely different grounds: it is well known that this is a very sensitive area because of the strong US policy favouring freedom of expression under the First Amendment of the Constitution. Since the approval of the 2010 Speech Act,13 foreign libel decisions face a very high hurdle to be recognised in the US.14 Because of the exclusion of such judgments from its material scope, the future instrument will not change anything in this regard. The broad definition of “judgments” included in Article 3(1)(b) also serves to specify the material scope of the convention. While all judgments on the merits should be covered – including non-monetary judgments, default judgments and determinations of procedural costs or expenses – the Draft is not intended to apply to interim measures. Although such exclusion may be understandable in light of the disparities existing here between the various national systems, it is nevertheless disappointing since they have great practical importance.15 On the other hand, the recognition of judicial settlements – i.e., settlements approved by, or concluded before a court – is ensured by Article 10. See Recital 13 of the current Brussels Regulation. 28 U.S.C. §§ 4101-4105. 14 In particular, under title 28 U.S.C. § 4102(a)(1), recognition and enforcement are possible only if the court addressed “determines that (A) the defamation law applied in the foreign court’s adjudication provided at least as much protection for freedom of speech and press in the case as would be provided by the first amendment to the Constitution of the United States and by the constitution and law of the State in which the domestic court is located […].” See L.E. LITTLE, Internet Defamation, Freedom of Expression, and the Lessons of Private International Law, 14 YPIL 181 (2012/2013), at 196 et seq. 15 Note that the 1999 Draft was applicable to interim measures ordered by the court having jurisdiction to determine on the merits (Article 13). 12 13

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The Hague Preliminary Draft on Judgments 2.

Geographical Scope

Article 1(2) makes clear that the future convention will only apply to the recognition and enforcement of judgments in one Contracting State of a judgment given in another Contracting State. As with all existing conventions and regulations in the area of recognition and enforcement, the new instrument will be based on reciprocity and will thus only apply inter partes. B.

Non-Exclusivity of the Future Convention

Instead of following the order of the Draft, it is best to immediately point out the principle of non-exclusivity, as enshrined in Article 16. According to this provision, the future convention will not prevent the recognition and enforcement of judgments under national law. This reflects a classic approach followed in most international instruments for the recognition and enforcement of foreign judgments: since the goal of such instruments is to facilitate the transnational circulation of decisions, they normally do not prevent the application of national rules, whenever these better serve that objective. Even though this principle is widely accepted, it is nevertheless important that the Draft includes express language, as do other well-known international instruments – the most cited example doubtless being Article VII of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.16 This prevents possible misunderstandings on the exclusive or nonexclusive application of the instrument, such as those generated, for instance, by the 1970 Hague Evidence Convention.17 Moreover, seen from a European perspective, we know that the future convention – if ratified by the European Union – will become part of EU law. As such, and in the absence of a provision like Article 16, it might therefore be interpreted by the ECJ (or by the national courts) as preempting national recognition rules of the single Member States. The explicit statement of non-exclusivity is particularly important because this principle will probably be very relevant in practice. As a matter of fact, the future instrument might prove on several points (and in particular with regard to indirect jurisdiction) to be less recognition-friendly than the law of some Contracting States.18

16 Pursuant to Article VII of the New York Convention, “[t]he provisions of the present convention shall not […] deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon.” 17 Contrary to most European Contracting States, US courts consider that the Hague Evidence Convention does not exclude the application of national procedural rules: see Société Nationale Industrielle Aérospatiale v. U.S. District Court, 482 U.S. 522 (1987). 18 The Draft does not include a provision such as Article 5(1)(k) of the Working Group’s draft of November 2015, pursuant to which recognition and enforcement would also be possible if the court of origin “would have had jurisdiction in accordance with the

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Andrea Bonomi C.

General Provisions on Recognition and Enforcement

Several general principles on recognition and enforcement, mostly drawn from the Choice of Court Convention, are contained in the Draft: some of them in Article 4, others in the final provisions (Articles 14 to 16). Most of these are by now well-established in the law of many recognitionfriendly countries: –

recognition or enforcement may be refused only on specific grounds outlined in the convention (Article 4(1));

–

there will be no revision of the foreign judgment on the merits (Article 4(2));

–

recognition is only possible if the judgment has effect in the State of origin, and enforcement only if it is enforceable in that State (Article 4(3));

–

a judgment recognised or enforceable will be given the same effect it has in the State of origin (Article 14, first sentence);

–

recognition or enforcement of a severable part of a judgment shall be granted where recognition or enforcement of only that part is applied for, or when only a part of the judgment is capable of being recognised or enforced under the convention (Article 15).

Only the following points require further expansion: a) Similar to the Brussels Regulation, but contrary to what is provided for in several national recognition systems, the Draft does not require a judgment to be final. This means that even a judgment that is still subject to review in the country of origin is capable of recognition or enforcement, provided respectively that it has effects and is enforceable in that country. However, when the judgment is still subject to review, or when the time limit for seeking ordinary review has not expired, the court addressed in the State ad quem can discretionally opt to take one of three possible decisions (Article 4(3)): –

it can immediately grant recognition or enforcement, and by doing so it can make enforcement conditional on the provision of such security as it shall determine;

–

it can postpone recognition or enforcement until the final judgment;19

–

it can refuse recognition or enforcement; obviously, such a refusal does not prevent a subsequent application for recognition or enforcement once the judgment has become final.

national law of the requested State.” Nevertheless, Article 16 will probably have the same effect. 19 This possibility is also granted in the US by the 1962 and 2005 Uniform Recognition Acts (§ 6 respectively § 8) and in Europe by Article 38(a) of the Brussels Regulation.

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The Hague Preliminary Draft on Judgments This wide range of possible options will allow the courts of the Contracting States to choose the solution that best fits the particular case. However, national practices will also have an impact: thus, it is likely that courts in the EU Member States will be more easily prepared to grant immediate recognition or enforcement under a security provision, because this possibility is already provided for within the Brussels systems, while the courts in other less recognition-friendly countries will probably more easily opt for a refusal or a stay of proceedings. This might result in some disparities in the application of the future instrument. b) Another interesting provision is that of Article 14, second sentence,20 although its practical impact will probably be quite limited. If the relief provided for in the foreign judgment is not available under the law of the requested State, that relief should, “to the extent possible, be adapted to relief with effects equivalent, but not going beyond,” those provided by the law of the State of origin. To a certain extent, this entails a limited derogation from the prohibition of a révision au fond: when a simple “extension of the effects” (Wirkungserstreckung) of the foreign judgment to the requested country is not feasible, the relief provided in the judgment will have to be slightly modified and “adapted” to the extent necessary for recognition to be effective. This might be useful, for instance, for certain kinds of injunctive relief available in common law jurisdictions, but ignored in the civil law systems, or, vice-versa, for an order of “astreintes” as practiced by French courts, which does not have an exact equivalent in other countries. D.

Conditions for Recognition and Enforcement, in Particular the Grounds for Denial

Articles 5 to 7 which determine the (positive and negative) conditions for recognition and enforcement are the core of the Draft. In the next section, we will have a closer look at the bases for recognition provided by Articles 5 and 6. The grounds for denial, as listed in Article 7, shall not be covered in any great depth. To begin with, two general remarks. First, the list of Article 7 is exhaustive, as clearly stated in Article 4(1), subject only to Article 9 (the provision concerning punitive damages, which will be analysed separately). Second, all the listed grounds are discretional and non-mandatory (“[r]ecognition or enforcement may be refused […]”): although different from many national systems and from the Brussels Regulation, this solution is perfectly in line with most international conventions concerning recognition and enforcement of foreign judgments or foreign awards. Unsurprisingly, the grounds for denial include: –

insufficient notice (Article 7(1)(a));

–

the manifest incompatibility of the judgment with the public policy of the requested State (Article 7(1)(c)), which includes fundamental principles of

20 This provision is clearly modelled on Article 54 of the Brussels Regulation and on similar provisions included in other EU regulations.

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Andrea Bonomi both substantive and procedural law (“fundamental principles of procedural fairness”); –

the fact that the judgment was obtained in breach of a forum-selection agreement or a forum-selection designation in a trust instrument (Article 7(1)(d));

–

inconsistency with a judgment given between the same parties, either in the requested State or in a third State (Article 7(1)(e-f)); in the latter case, the third-country judgment must have been given earlier and, obviously, be capable of recognition in the requested State.

These grounds for refusal correspond almost word for word to those provided in the Brussels Regulation (present Article 45). The only differences concern the definition of insufficient notice: this covers not only the case when the defendant did not receive service of process “in sufficient time and in such a way” as to enable him to defend himself (as also provided in the Brussels Regulation), but also a notice given in a way that is “incompatible with the fundamental principles of the requested State concerning service of process.”21 The Draft also allows a denial of recognition or enforcement in two other cases that are not provided under the Brussels system. a) First, recognition and enforcement can be denied when the foreign judgment was obtained by fraud (Article 7(1)(b)). This rule is found in several national systems and international conventions, although its exact meaning may vary. In the US, courts have recognized that only “extrinsic” fraud is a ground for denial, i.e., a fraud that deprives a defendant of an adequate opportunity to present his case.22 That being so, it would appear that these situations already fall under the public policy exception, in particular its “procedural” facet (lack of procedural fairness). The public policy exception also covers corruption and, more generally, the lack of independence or impartiality of the foreign court. This is generally accepted with respect to arbitral awards, and there is no reason why it should be different for State courts. The same also applies for situations of “systemic” lack of due process, a situation that (understandably) is not yet referred to in the Draft, while being specifically contemplated as a mandatory ground of denial by both the 1962 and 2005 US Uniform Recognition Acts.23 US case law confirms that courts are very reluctant in invoking such grounds, unless they can rely on very clear and unmistakable governmental reports.24 That being so, public policy may very well be used for the same purpose. If a more effective mechanism is desired, it would probably be better to include in the future convention a safeguard clause allowing each Contracting State to “suspend” the application of the treaty in relation to those

21 This provision is modelled on Article 9(c) of the 2005 Choice of Court Convention. 22 D.P. STEWART (note 9), at 188; R.A. BRAND (note 9), at 20-21. 23 § 4(A)(1) of the 1962 Act; § 4(b)(1) of the 2005 Act. 24 See R.A. BRAND (note 9), at 13 et seq.; D.P. STEWART (note 9), at 185-186.

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The Hague Preliminary Draft on Judgments countries that do not guarantee an impartial judicial system and the observance of the rule of law.25 b) Second, refusal is also possible under the Draft when proceedings between the same parties on the same subject matter are already pending before a court of the requested State (Article 7(2)). Although the new Draft, contrary to the one of 1999,26 does not specifically address parallel proceedings, it contemplates them as a possible ground for denial. However, Article 7(2) sets two additional conditions. First, the proceedings in the requested State can hinder recognition only if they were instituted before those that have led to the foreign judgment. A similar rule is included in a number of national and international recognition systems.27 In such circumstances, if a lis pendens rule was applied in the State of origin, the foreign judgment is deemed to have not even been rendered: the refusal is therefore entirely justified. By contrast, if the proceedings in the requested State had been initiated after those in the State of origin, a denial of recognition would unjustly reward one of the parties’ abusive attempts to elude the effects of the foreign judgment. The second condition is that the dispute was closely connected with the requested State. Without this requirement, recognition or enforcement of a judgment could be prevented by proceedings initiated by one of the parties in an unreasonable forum, lacking any significant connection with the dispute. This requirement makes sense in the framework of an instrument that does not address “direct” jurisdiction and leaves in this regard full discretion to the Contracting States. However, its practical application leaves to be seen. At least in the civil law jurisdictions that are not acquainted with the forum non conveniens doctrine, it does not seem very likely that the courts – which have been seized first and have jurisdiction to hear the case under their national rules – will be prepared to give priority to a foreign judgment on the ground that the dispute is not closely connected to the forum. E.

Procedure

With respect to the recognition and enforcement procedure, the basic principle is that the law of the requested State is applicable, unless the convention provides otherwise (Article 12 (1)). Contrary to the 2007 Child Support Convention (Article 23), no attempt has been made to introduce a uniform procedure for recognition and enforcement. This prudent approach is reasonable, in that it prevents a too far-reaching interference 25 Such a mechanism might operate in combination with some restriction to the “openness” of the future convention, as mentioned in the Explanatory Note to the Working Group’s draft, Prel. Doc. No 2 of April 2016 (at No 243). Among the various suggested options, the present author favours an “opt-out approach,” pursuant to which the convention would only enter into force between the acceding State and those Contracting States which have not raised an objection. 26 A lis pendens rule was included in Article 21 of the 1999 Draft. 27 For instance, see Article 27(2)(c) of the Swiss PIL Act, Article 64(1)(f) of the Italian PIL Act, or Article 22(c) of the 2007 Hague Child Support Convention.

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Andrea Bonomi with the national systems in an area – that of civil and commercial matters – where speedy and streamlined enforcement procedures, although important, are less crucial than in the child-support context. The Draft, in essence, merely contains rules on the documents to be produced by the party seeking recognition or enforcement (Article 11) and on the cost of proceedings (Article 13). These are standard provisions that do not deserve any particular comment. Much more interesting is the provision of Article 12(2), which states that recognition or enforcement shall not be refused on the ground that they should be sought in another State. The practical effect of this is to dispense with any particular requirement of personal jurisdiction to hear a recognition or enforcement action, contrary to the approach followed by courts in some US states.28 Under the future instrument, the court seized for recognition or enforcement will not be allowed to decline its jurisdiction, and thus challenge the choice of the requesting party to seek recognition or enforcement in the forum State.

IV. The Bases for Recognition The bases for recognition and enforcement are listed in Article 5. This provision is probably the most important of the Draft. The main jurisdictional grounds provided therein shall be briefly reviewed below. A.

Jurisdiction Based on Habitual Residence

Pursuant to Article 5(1)(a), a judgment is eligible for recognition and enforcement if the person against whom such recognition or enforcement is sought was habitually resident in the State of origin at the time that person became a party to the proceedings. This is one of the few “general” recognition bases included in the Draft. As such, it is meant to apply to all kind of judgments within the scope of application of the future convention, the only exception being those rendered in violation of an exclusive jurisdiction rule under Article 6. Being the expression of the widely-accepted principle actor sequitur forum rei, this provision mirrors jurisdictional grounds that are accepted in most national legal systems and international instruments. However, it does present some original features.

28 See R.A. BRAND (note 9), at 10. However, the courts in some US jurisdictions (notably New York) have held that the debtor does not need to be subject to personal jurisdiction in the enforcement State.

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The Hague Preliminary Draft on Judgments 1.

Habitual Residence Instead of Domicile

A first particularity is that – contrary to similar provisions currently applicable both in Europe and in the US29 – Article 5(1)(a) does not refer to a party’s domicile, but to his/her habitual residence. This solution rests on the often voiced concern that the notion of domicile could be interpreted in different ways in the single Contracting States based on traditional local understandings. The same concern has led to the surge in popularity of habitual residence in the Hague Conventions as well as in most European Regulations. While habitual residence has widely preempted domicile in the family and succession law areas, the shift is still not complete in civil and commercial matters. In Europe, the Brussels Regulation is still based on the notion of domicile, contrary to most other private international law regulations, and the same is also true in the national jurisdictional systems of several European States. Similarly, in the US, jurisdiction over natural persons still rests on the defendant’s domicile and not on his habitual residence, although some commentators have suggested, in the aftermath of the Daimler case, that this connection should perhaps become the prevailing jurisdictional basis.30 It is also interesting to highlight that, according to the Draft, corporations and other legal persons also have a “habitual residence.” Of course, this use of the notion of habitual residence is not completely novel: in Europe, we find it in the Rome I and Rome II Regulations.31 And in the US, this notion seems to be in line with the “essentially at home” metaphor used by the Supreme Court in the Goodyear and Daimler cases – language that undoubtedly reminds the notion of habitual residence. The habitual residence of a natural person is not defined in the Draft, and this reflects the practice followed both in the Hague Conventions and in several European Regulations. The general understanding is that a person has his/her habitual residence in the place where the main centre of his/her interests is situated.32 By contrast, the Draft provides for a definition of a legal person’s habitual residence (Article 3(2)). This definition, which is drawn from the Choice of Court Convention (Article 4(2)), very closely resembles that included in current Article 63 of the Brussels Regulation, with the only, slight difference that – besides the statutory seat, the central administration and the principal place of business – it also refers to the country “under whose law the person was incorporated or formed.” The place of incorporation is expressly referred to in the Goodyear and In Europe, the equivalent is obviously Article 4(1) of the Brussels Regulation. For the US, see § 5(a) of the 2005 Uniform Recognition Act and § 5(a) of the 1962 Uniform Recognition Act. 30 J.T. PERRY, Rethinking Personal Jurisdiction after Bauman and Walden, 19 Lewis & Clark L. Rev. 607 (2015), at 613. 31 See Rome I Regulation (No 593/2008), Article 19; Rome II Regulation (No 864/2007), Article 23. 32 However, it might be helpful to include some indications (at least in the Report) to avoid misunderstandings. Note, for instance, that in the Explanatory Note drafted by the Permanent Bureau (note 25), it is stated (at No 76) that it is possible for natural persons to have more than one habitual residence, which does not correspond to the approach set out in the EU regulations. 29

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Andrea Bonomi Daimler decisions as one of the places where the company is “essentially at home,” in accordance with the new paradigm for general jurisdiction. Of course, this place will almost always coincide with the place of the registered seat, if there is one. The separate reference to both the central administration and the principal place of business makes clear that the latter does not always fall together with the corporation’s headquarters. This is a significant indication, also in light of the current US debate where, in the aftermath of Daimler, it has been warned that courts might construe the notion of “principal place of business” in the sense of the socalled “nerve center theory”, as adopted some years ago by the Supreme Court for the purpose of “diversity” jurisdiction.33 As rightly pointed out by some commentators,34 it would be unfortunate if the same restrictive reading were followed for the purpose of personal jurisdiction, because this would make it excessively difficult to sue a corporation in a State other than that from where it is directed. If the future convention is ratified by the US, its language could perhaps help preventing this unwanted interpretation. Of course, this should also not lead to revive the notion of “doing-business” jurisdiction, as it was widely used (and sharply criticized) in the pre-Goodyear and Daimler era. “Doing business” in a State is not the same as having the “principal place of business” there: the threshold for a court to render a decision capable of recognition or enforcement under the future convention should be distinctly higher. Similarly, the simple fact that the defendant has a branch, agency, establishment, i.e. a “place of business” in the forum State will not be sufficient to assert general jurisdiction. Following the approach of the Brussels Regulation (Article 7(5)), the Draft allows in Article 5(1)(d) the recognition or enforcement of a judgment given at the place of a defendant’s branch, agency, or other establishment, but only if “the claim on which the judgment is based arose out of the activities of that branch, agency, or other establishment.” As this condition makes clear, this is not a rule of general jurisdiction, but only one of specific jurisdiction. 2.

Habitual Residence of the Person “against Whom Recognition or Enforcement is Sought”

Another peculiar feature of the proposed Article 5(1)(a), is that it refers not to the habitual residence “of the defendant,” but to “the person against whom recognition or enforcement is sought.” This terminology makes sense because, as we know, the Draft does not deal with (direct) jurisdiction but only provides for bases of recognition and enforcement. Obviously, recognition and enforcement of a judgment can be sought not only against the original defendant, but against everyone who has become a party in the foreign proceedings (including cases of joinder, intervention, impleader, interpleader, subrogation, and succession).35 However, to avoid misunderstandings one should be aware that some of the cases, in which recognition or enforcement is sought against a person other than Hertz Corp. v. Friend, 599 U.S. 77 (2010). J.T. PERRY (note 30), at 611. 35 See the Explanatory Note (note 25), No 81. 33 34

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The Hague Preliminary Draft on Judgments the defendant, are already covered by other provisions of the Draft. Thus, on one side, Article 5(1)(c) provides that a judgment is entitled to recognition or enforcement “if the person against whom recognition or enforcement is sought is the person that brought the claim on which the judgment is based,” i.e., the original plaintiff. This provision is broader than Article 5(1)(a), since there is no requirement that the judgment was rendered in the country of the plaintiff’s habitual residence: this makes sense, because by filing the action the plaintiff implicitly (and sometimes even expressly) consents to the court’s jurisdiction. This obviously applies to all co-plaintiffs (even when they decide to intervene in the action and when they assert cross-claims against each other) as well as to defendants that bring thirdparty claims (also known in the US as “impleader”). The same rule should also apply to a defendant that brought a counterclaim against the plaintiff, at least when he wasn’t indirectly forced to do so by risk of waiving his rights (“compulsory counterclaim”, see Article 5(1)(n)(ii)). Although the Draft does not say anything about it, one may wonder whether the particular language used is also meant to deal with the specific jurisdictional problems raised by class actions.36 In these kinds of actions, there are normally no particular problems in asserting jurisdiction over the defendant: the general rules apply. The same is also true of the named class representatives and those class members who individually decide to intervene in the action: they must be treated as ordinary plaintiffs. Much more problematic is jurisdiction over the “absent” class members, i.e., those who did not directly participate in the proceedings, but may nevertheless be bound by the judgment (or by a judicial settlement). Of course, the question is not so important for enforcement purposes, because enforcement is virtually never sought against the absent class members. By contrast, the issue of the judgment’s recognition becomes relevant when absent class members decide to file an independent action against the defendant in a different country. Are they bound by the judgment (or by the settlement)? This depends, inter alia, on the court’s jurisdiction. Now, if the expression “person against whom recognition is sought” is also meant to cover absent class members, recognition would be possible at least against those persons who had their habitual residence in the State of origin at the time of the claim. Of course, this would not rule out other possible objections against recognition, as those deriving from the violation of the public policy principle of res judicata relativity. B.

Jurisdiction Based on Consent

1.

Express Consent

Article 5(1)(e) provides a ground of recognition based on the defendant’s explicit consent to jurisdiction. Like habitual residence jurisdiction, consent also has a general scope, i.e., it applies to all judgments covered by the Draft with only some limited exceptions resulting, on one hand, from the consumers’ and employees’ 36 The Draft does not refer to judgments rendered in class action proceedings. According to the Explanatory Note (note 25, at No 53), these judgments were covered by the Working Group’s draft of November 2015.

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Andrea Bonomi protection (Article 5(2)) and, on the other, from the rules on exclusive jurisdiction (Article 6). This provision is intended to cover situations where a party (normally the defendant) expressly consents to a particular jurisdiction before the court or through an exchange of documents made during the course of proceedings. By contrast, it is not intended to apply to a choice-of-court agreement, which entails anticipated consent to the selected court’s jurisdiction.37 In this author’s opinion, this restrictive approach is not entirely convincing. Although specifically regulated by the 2005 Hague Choice of Court Convention, forum-selection agreements should not be ignored by the new future instrument, and for several reasons. First, because under the future convention, an exclusive choice-of-court agreement can be invoked as a ground of refusal against a judgment given by a non-selected court (see Article 7(1)(d) of the Draft); that being so, the convention should also ensure that judgments by the selected court are actually recognised and enforced. Of course, this result is guaranteed by the Choice of Court Convention, but this instrument is in force in only a limited number of countries:38 while this will hopefully change in the future, it cannot be ruled out that some countries may wish to adhere to the future judgment convention without becoming a party to the 2005 instrument. Second, it should be stressed that, while the 2005 Convention ensures the circulation of judgments rendered on the grounds of an exclusive choice-ofcourt agreement, non-exclusive court-selection agreements – whose validity is generally less controversial – should also be regarded as good bases for recognition and enforcement. 2.

Implicit Consent Based on Appearance

Implicit consent is governed by Article 5(1)(f) of the Draft, a provision that remains drafted inside brackets. According to this proposed rule, a foreign judgment is entitled to recognition and enforcement if the defendant entered an appearance before the court of origin “without contesting jurisdiction at the first opportunity to do so.” This mirrors a widely-accepted jurisdictional ground (see in particular Article 26 of the Brussels Regulation) that should also find its way into the future convention. This author therefore recommends that the brackets around this provision be deleted. Contrary to what has been held by some US courts,39 the defendant can avoid tacit acceptance by contesting the court’s jurisdiction “at the first opportunity to do so.” If he did so, he can then proceed to defend on the merits without being deemed to have waived the right to resist recognition or enforcement. The fact that See the Explanatory Note (note 25), Nos 87-88. Besides the Member State of the European Union, the Convention is currently in force only in Mexico and Singapore. 39 In several cases, New York state and federal courts have considered that, by choosing to defend on the merits, defendants had waived their jurisdictional objections: see CIBC Mellon Trust Co. v. Mora Hotel Corp., 100 N.Y.2d 215, 792 N.E.2d 155 (2003); R.A. BRAND (note 8), at 18 et seq. 37 38

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The Hague Preliminary Draft on Judgments the foreign court dismissed the jurisdictional objection does not change this result, because its decision is not based on the recognition grounds under the convention, but on the foreign national jurisdictional rules. The Draft adds, however, a qualification that is absent from most national or international systems: according to the proposed language, uncontested appearance entails consent only “if the defendant would have had an arguable case that there was no jurisdiction or that jurisdiction should not be exercised under the law of the State of origin.” The rationale of this condition is clear: uncontested appearance should not be regarded as implied consent to jurisdiction when the defendant did not have good grounds to contest the foreign court’s jurisdiction. At first sight, this seems to make sense. At a closer look, however, the described mechanism is not convincing. It is important to recall that the choice for a “simple” convention necessarily implies that “direct” jurisdiction will continue to be governed by each country’s national law. Now, whenever a national jurisdictional ground is satisfied (even though it differs from the admissible bases for recognition under the convention), the defendant has no “arguable case” to contest it; therefore, under the proposed rule, his appearance cannot amount to tacit acceptance of the foreign court’s jurisdiction. It follows that a defendant’s appearance can entail acceptance only when the national jurisdictional grounds are not satisfied. Such result is ironic: why should the defendant’s passive attitude be able to cure a court’s lack of jurisdiction when (and only when) the jurisdictional rules of the country of origin are not respected, but not when they are satisfied? Of course, it is true that in the absence of an “arguable case” against the court’s jurisdiction, the defendant cannot be required to raise a formal defence which is devoid of any success possibility. Nevertheless, nothing prevents him from making a reservation against the court’s jurisdiction in order to preserve his right to contest recognition or enforcement of the future judgment abroad. It is worth noting that this possibility exists even though it is not specifically provided by the procedural law of the country of origin: no national procedural law prevents the defendant from including in his defence arguments on the chances of recognition of the future judgment. In any case, the right to make such a reservation will ensue directly from the future convention once it is in force in the State of origin. In conclusion, it is advised that the last “if” sentence be deleted, together with the brackets surrounding the provision. 3.

Recognition or Enforcement against the Claimant or the Cross-Claimant

As previously mentioned, implicit consent is also the rationale for the recognition basis of Article 5(1)(c), which allows recognition and enforcement of the judgment against the plaintiff without any further requirement. The plaintiff’s implicit consent also acts in favour of a counterclaimant, but only if the counterclaim arose out of the same transaction or the same occurrence as the original claim (Article 5(1)(n)). On the other hand, if the judgment on the counterclaim were to rule against the counterclaimant, its recognition could rely on the counterclaimant’s implied

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Andrea Bonomi consent, but only when he freely decided to assert his claim as a counterclaim instead of bringing a separate suit (“permissive counterclaim”). By contrast, no consent can be presumed when the law of the country of origin required the counterclaim to be filed in order to avoid preclusion (“compulsory counterclaim”, Article 5(1)(n)(ii)).40 C.

Judgments in Contractual Matters

Article 5(1)(g) provides for a specific basis for recognition and enforcement of a judgment ruling on a contractual obligation. Pursuant to this provision, such judgment is entitled to recognition or enforcement if it was given in the State in which “performance of that obligation took place or should have taken place under the parties’ agreement, or, in the absence of an agreed place of performance, under the law applicable to the contract.” Even when this condition is satisfied, recognition or enforcement can still be denied if “the defendant’s activities in relation to the transaction clearly did not constitute a purposeful and substantial connection” to that State. This provision is an interesting attempt to find a compromise between the diverging jurisdictional philosophies in Europe and in the US. While the Brussels Regulation, through its rules on specific jurisdiction based on proximity and predictability, tries to promote a sound administration of justice, US courts are primarily committed to the defendant’s protection under a strict understanding of due process requirements. The Draft tries to conciliate these goals by combining two distinct conditions. 1.

Place of Performance

The first condition, based on the place of performance of the contractual obligation, obviously echoes the European rules of specific jurisdiction in contractual matters (Article 7(1) of the Brussels Regulation). However, the proposed rule only partially corresponds to those included since 2001 in the Brussels Regulation, and more closely resembles the original Brussels Convention, as interpreted by the ECJ. a)

Place of Performance of the Obligation in Question

The most obvious difference with the Brussels Regulation is that the relevant obligation is not the “characteristic” obligation (as it is the case for sales of goods and provisions of services under Article 7(1)(b) of the current Brussels system), but “the obligation on which the judgment has ruled.” The meaning of this language seems to point to no other than the “disputed obligation” or the “obligation in question”, as it is called in Europe since 40

18

For example, see Rule 13(a) of the US Federal Rules of Civil Procedure.

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The Hague Preliminary Draft on Judgments the 1976 De Bloos decision41 (which is of course still relevant today under Article 7(1)(a) of the Brussels Regulation, but only for contracts other than those for the sale of goods or the provision of services). This means that under the future convention, the determination of place of performance will depend on which party has brought the claim (e.g. the place of delivery if the claim was brought by the buyer, the place of payment if it was brought by the seller). It also means that, even in contracts for the sale of goods or the provision of services, the place of payment may be relevant for jurisdictional purposes. Due to this difference, it is possible that a foreign judgment will be entitled to recognition or enforcement under the future convention, even though rendered by a court that – if subject to the Brussels Regulation – would lack jurisdiction. Such enlargement of the range of judgments potentially eligible for recognition or enforcement is not particularly problematic. It is not uncommon today in national recognition systems that “indirect” jurisdiction rules stretch further than those on “direct” jurisdiction: this is a reasonable expression of pro-recognition bias. What’s more, nobody could consider that the jurisdictional grounds such as those embodied in the original Brussels Convention are unreasonable. And finally, one should remember that a wider notion of place of performance will benefit not only third countries’ judgments, but will also facilitate the recognition in third countries of a Member State’s judgment rendered on national jurisdictional grounds broader than those of the Brussels Regulation.42 Much more problematic is the opposite situation. i.e., when a judgment rendered by a Member State court that would have had jurisdiction under the Brussels Regulation’s standards will not be capable of recognition or enforcement under the future Hague instrument. This will happen whenever the courts at the place of performance of the characteristic obligation (i.e., at the place of delivery of goods or at the place of performance of services) rules on a distinct obligation under the contract (typically, on the payment obligation). Note that this can happen either when the court’s jurisdiction was actually governed by the Brussels Regulation43 or, even more frequently, when the court’s jurisdiction was based on national rules equal to those of the Regulation.44 In such cases, the future convention will not be of any assistance: the judgment’s recognition or enforcement could only rely, if ever, on the national rules of the requested State (Article 16 of the Draft).

ECJ, Case 14/76, De Bloos, ECR [1976] 1497. As we well know, national jurisdiction rules are applicable under Article 6(1) of the Brussels Regulation when the defendant is domiciled in a non-Member State. 43 E.g. enforcement of a judgment rendered by a French court against an English defendant on the debtor’s assets in the US. 44 E.g. enforcement of a judgment rendered by an Italian court against a US defendant on the debtor’s assets in the US (under Article 3(2) of the Italian PIL statute, jurisdiction over a defendant domiciled in a non-Member State is governed by the rule of the Brussels system). 41 42

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Andrea Bonomi b)

Determination of the Place of Performance

A further divergence from the Brussels Regulation is that according to the Draft the place of performance should be determined – in the case of non-performance and in the absence of an agreed place of performance – by reference to the law applicable to the contract (lex contractus). This mirrors the well-known Tessili case law of the ECJ45 – which once again is still relevant under the current Brussels Regulation for contracts governed by Article 7(1)(a), but not for the sales of goods and provisions of services under Article 7(1)(b). This solution might raise quite complicated issues. First, the applicable law is not always easy to determine for the court and it is unfortunate that recognition or enforcement should depend on it. Moreover, contrary to the situation in Europe since the entry into force of the Rome Convention (then followed by the Rome I Regulation), the choice-of-law rules (and therefore the lex contractus) might not be the same in the State of origin, on one hand, and in the requested State, on the other. It may be the case, therefore, that recognition or enforcement is denied because the requested court holds – contrary to the court of origin – that the place of performance was not situated in the country of origin. Seen from the European perspective, the reference to the lex contractus might also lead to some disparities with the current Brussels regime. Thus, if a dispute arises out of a contract for sale at distance governed by the Vienna Sales Convention, the future judgment convention will probably point to the courts of the place where the goods were handed over to the first carrier,46 while the Brussels Regulation would confer jurisdiction to the courts at the place of the goods’ final delivery.47 It is possible, therefore, that a judgment rendered by the court having jurisdiction under the Regulation will not be capable of recognition or enforcement under the future convention. 2.

A Purposeful and Substantial Connection

Under the proposed Article 5(1)(g), recognition and enforcement of a judgment rendered at the place of performance is nevertheless excluded, if “the defendant’s activity in relation with the transaction clearly did not constitute a purposeful and substantial connection to that State.” This second condition obviously echoes the US jurisdictional approach: according to the well-established case-law of the US Supreme Court, jurisdiction can be predicated only when the defendant “purposefully availed” himself of the privilege of conducting activities within the forum State, in other words, when the defendant purposefully established minimum contacts with that State.48 This 45 ECJ, Case 12/76, Tessili, ECR [1976] 1473; ECJ, Case C-288/92, Custom Made, ECR [1994] I-2913; ECJ, Case C-440/97, Groupe Concorde, ECR [1999] I-6307. 46 See Article 31(a) of the Vienna Sales Convention. See also the Explanatory Note (note 25), No 95. 47 ECJ, Case C-381/01, Car Trim, ECR [2010] I-1255. 48 The “purposeful availment” requirement was first set out by the Supreme Court in the 1958 decision Hanson v. Denckla, 357 U.S. 235, as a refinement of the International

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The Hague Preliminary Draft on Judgments requirement applies to all kind of disputes, including those arising out of a contractual relationship. Certainly, the language of the Draft (“a purposeful and substantial connection”) is slightly different to the terminology that is commonly used in the US, the likely purpose being to make this condition easier to understand and to apply for other States’ courts. This notwithstanding, the US paternity of this condition cannot be concealed. Contrary to the European approach, the focus here is not on the “proximity” between the dispute and the court, but on the connections between the defendant’s activities and the forum State. With respect to contractual disputes, US courts have clarified that “purposeful availment” can result from a wide range of contacts. As the Supreme Court put it in the Burger King case, probably the most significant among its scarce selection of decisions concerning personal jurisdiction in contractual matters, “parties negotiations and contemplated future consequences, along with the terms of the contract and the parties’ actual course of dealing, must be evaluated in determining whether the defendant has purposefully established minimum contacts with the forum.”49 This language has been repeated in a long line of lower courts decisions. This rich case-law shows that a great variety of elements are taken into consideration for the purpose of establishing jurisdiction in a contractual dispute, including not only performance but also all circumstances that led to the conclusion of the contract (such as the place of pre-contractual negotiations, that where the contract was actually entered into, and the fact that the defendant “deliberately reached out” beyond his State in order to enter into a contractual relationship with his counterparty).50 What will be the effect of the “purposeful and substantial connection” requirement in relation to judgments rendered at the place of performance, as defined above? Seen from the US perspective, such judgments will probably satisfy in several cases the “purposeful and substantial connection” test. This will more easily be the case when the performance entails a plurality of acts to be performed in the forum State, and the defendant actually accomplished at least some of these acts there (or expressly agreed to do so). However, there might also be cases where the fact that performance has taken (or should take) place in the forum State is not sufficient. As mentioned, “purposeful availment” – at least in the US conception of the term – is the result of a multitude of significant contacts and is only rarely satisfied by one single factor, important as it may be. Thus, US courts will likely more often than not consider that the second condition under Article 5(1)(g) is not satisfied, when performance in the forum State consists of one single act (e.g. the delivery of the goods), unless the defendant created other purposeful Shoe’s “minimum contacts” test. The rationale behind it is that the contacts between the defendant and the forum should not be “random, fortuitous, or attenuated”, nor be a result “of the unilateral activity of another party or a third person,” but be created from purposeful actions of the defendant himself. 49 Burger King Corp. v. Rudzewicz, 105 S. Ct. 2174 (1985). 50 H. VAN LITH, International Jurisdiction and Commercial Litigation, Uniform Rules for Contractual Disputes, The Hague 2009, at 278 et seq.

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Andrea Bonomi contacts with that State. A fortiori, in the absence of other contacts, a purposeful connection will probably be considered to be lacking when the place of performance does not result from actual acts accomplished by the defendant, nor from the express contractual terms, but only from subsidiary rules of the lex contractus. In these and other cases, recognition or enforcement might be refused under the future convention, even if the judgment was rendered at the place of performance. In any case, contrary to one of the intended goals of the future instrument,51 predictability is not guaranteed.52 3.

Criticism

While being an interesting attempt to reach a compromise between two different jurisdictional philosophies, the likely effects of the proposed rule will probably be disappointing, at least in regard to the mutual recognition of judgments between the US and Europe. With respect to European judgments rendered at the place of performance, the suggested provision does not guarantee that they will be recognised and enforced in the US. As mentioned above, the notion of place of performance does not always correspond to the one embodied in the Brussels Regulation. And even when it is the case, the judgment may not meet the “purposeful and substantial connection” test. This does not seem to represent any kind of real progress, if compared with the national rules on recognition and enforcement that are currently applicable in the US. Furthermore, by focussing on the place of performance, the Draft rules out other potential connections that in the US perspective could satisfy the “purposeful availment” test. Of course, judgments based on such contacts will still be able to benefit from the US national recognition rules, but this obviously does not represent any improvement with respect to the present state of the law. In the opposite situation, recognition and enforcement in Europe will also be limited to US judgments rendered at the place of performance, thus excluding other jurisdictional bases that might satisfy the US standards. This might well correspond to the European policy, but once again it does not represent any real improvement if compared to the present state of the law. On the other hand, European courts will have to apply the “purposeful and substantial connection” test, which does not correspond to their tradition and might result in quite disparate results. It is still uncertain as to whether in the present stage of the negotiations Article 5(1)(g) is still open to improvement. If this is the case, more promising results might well be achieved by attempting to spell out some jurisdictional bases that – while formulated in traditional and predictable European terms – could satisfy the US “purposeful availment” paradigm. Thus, the fact that the defendant See the Explanatory Note (note 25), No 64. The unpredictability of the purposeful availment test is very often criticized by US commentators: see e.g. H.S. NOYES, The Persistent Problem of Purposeful Availment, 45 Conn. L. Rev. 41 (2012-2013). 51 52

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The Hague Preliminary Draft on Judgments has expressly agreed in a negotiated contractual term to perform his contractual obligations in the forum State could probably be accepted as a sufficient connection, even by US standards: if so, the uncertainties of the “purposeful and significant connection” test could be avoided in this case. Other circumstances could also be regarded as acceptable recognition bases both from a US and a European perspective: for example, the fact that the defendant “reached out” to the other party, or clearly “targeted” the forum State, or accepted involvement in lengthy and substantial pre-contractual negotiations in that State. Negotiation could thus perhaps lead to a list of jurisdictional bases (a “laundry list”) that could satisfy both US and European expectations.53 Of course, this list of grounds could always be complemented by an open clause based on the “purposeful availment” test. D.

Consumer and Employment Contracts

In partial derogation from the recognition bases discussed above, the Draft contains some special rules for consumer and employment contracts.54 According to Article 5(2), if recognition or enforcement is sought against a consumer or an employee in matters related to such contracts, the recognition basis of Article 5(1)(e) (express consent) applies only if consent was given before the court, while that of Article 5(1)(g) (place of performance) does not apply at all. The first rule is similar (although not identical) to those embodied in Articles 19 and 23 of the current Brussels Regulation, two provisions that rule out choice-of-court agreements entered into before the dispute by a consumer or an employee, respectively.55 On this point, the Draft clearly diverges from the US case law that largely allows forum-selection agreements even though concluded by weak parties.56 The second part of the provision also corresponds in its outcome to the Brussels system, where the special jurisdiction at the place of performance is traditionally reserved to B2B disputes but inapplicable to consumer contracts, in order to prevent the strongest party from indirectly influencing the courts’ jurisdiction by selecting the place of performance. The approach consisting in having protective jurisdictional rules for weak parties clearly reflects the European philosophy (and that of several other systems, like for instance some South-American countries), but sharply differs from the US 53 This approach has also been followed, with some success, in the 2007 Child Support Convention (see e.g. Article 17(1)(d), which is an attempt to formulate a concrete rule in order to reconcile the European and the US diverging positions). 54 Such contracts are excluded from the scope of the 2005 Choice of Court Convention (Article 2(1)(a-b)). 55 The Draft is even more protective than the Brussels Regulation because, by only referring to consent given “before court”, it rules out all kinds of extrajudicial jurisdictional agreement, even though entered into after the dispute. 56 See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991). This and other decisions relating to choice-of-court agreements find an equivalent in well-established case law upholding mandatory arbitration agreements even though they are entered into by employees or consumers: the seminal decisions are Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) and AT&T Mobility LLC v. Concepción, 563 U.S. 333 (2011).

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Andrea Bonomi approach, where the general jurisdictional test, based on “minimum contacts” and “purposeful availment”, is indistinctly applicable to businesses and individuals. This probably explains why the rules included in the Draft only partially resemble those of the Brussels Regulation. The first difference is that the provisions of Article 5(2) only apply when recognition or enforcement are sought against a consumer or an employee, but not in the opposite situation. When the weak party is seeking recognition or enforcement of a favourable judgment, the general rules are applicable. This means that such a judgment can be recognized if it was rendered in the home State of the trader/employer (Article 5(1)(a)), or at the place of performance of the contractual obligation (Article 5(1)(g)), or if the trader/employer has expressly or tacitly consented to jurisdiction (Article 5(1)(e-f)). Of course, if the judgment is in favour of the consumer or the employee, there is no reason to exclude the ordinary recognition bases. All these jurisdictional bases are not particularly “friendly” to the weak party: the first and third one for obvious reasons; the second one, because it focuses on the place of performance of the disputed obligation, which can easily be manipulated by the strongest contractual party. By contrast, and this is a second, important divergence from the European rules, recognition and enforcement is not granted under the Draft to judgments obtained by a consumer or an employee in his country of domicile, which is the standard jurisdictional rule under the Brussels system. Since the Recast, this jurisdictional ground has also been available when the defendant (trader or employer) is domiciled in a non-Member State.57 This recent reinforcement of the weak parties’ protection will lose much of its interest if the judgments rendered on such jurisdictional premises are not capable of recognition and enforcement outside the EU under the future Hague instrument. With respect to consumers, this is ironic because the jurisdictional rules applicable to these disputes under the Brussels Regulation are those which, within the EU system, probably most closely resemble the US jurisdictional approach. As we well know, the courts at the consumer’s domicile are granted jurisdiction under Article 17(1)(c) of the Regulation only if the trader directed his activities to the consumer’s country: this “targeting” requirement, which only applies in this particular area (as opposed, for instance, to tortious claims), is very similar to the US “purposeful availment” paradigm. That being so, the inclusion of such a recognition basis into the future convention would probably be quite easily accepted on the other shore of the Atlantic: with any luck, the Draft will still be able to be amended in this sense. E.

Judgments in Tortious Matters

The Draft Convention also includes several jurisdictional bases for judgments relating to various kinds of torts.

57 Articles 18(1) and 21(2) of the current Brussels Regulation: this was one of the few 2012 modifications to the Regulation’s jurisdictional rules.

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The Hague Preliminary Draft on Judgments 1.

Non-Contractual Obligations Relating to Death, Physical Harm, Damage or Loss of Tangible Property

The first and most general rule, Article 5(1)(j), states that judgments based on noncontractual obligations relating to death, physical injury, damage or loss of tangible property is entitled to recognition and enforcement “if the act or omission directly causing such harm occurred in the State of origin, irrespective of where the harm occurred.” This provision reflects a jurisdictional ground that is widely accepted, both in Europe and in the US, as well as in many other countries. Remarkably, this provision does not include any additional condition based on the defendant’s “purposeful and substantial connection” with the State of origin: this seems to indicate that, in the view of the US delegation and in line with the existing case law, the defendant’s harmful conduct meets as such the US “purposeful availment” standard. By contrast, the provision clearly states that the place of the harmful event, i.e. the place of the damage, does not constitute a sufficient recognition basis. While in contrast with the broad jurisdictional approach of the Brussels Regulation and of several European countries, this is in line with US case law. Although the exact reach of the US courts’ jurisdiction in tortious cases is still not exactly determined and, in some respects, highly controversial, it is quite clear that the place of the harmful event does not satisfy in itself the “purposeful availment” standard. This plainly follows from several, well-known decisions by the US Supreme Court in product liability cases, such as World-wide Volkswagen, Asahi, and McIntyre.58 In these decisions, the jurisdiction of the US courts at the place of the harm was constantly denied. Even though the Supreme Court was often divided on the outcome and/or grounds of these decisions,59 none of the judges ever suggested that the place of the harmful event could be as such a good ground for jurisdiction. As was also mentioned with respect to contractual disputes, this reveals the divergent philosophy that inspires European and US jurisdictional systems: while the Brussels Regulation favours a sound administration of justice by promoting proximity and predictability, US courts are primarily concerned with the defendant’s protection. 58 World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286 (1980); Asahi Metal Industry Co. v. Superior Court, 480 U.S. 102 (1987); J. McIntyre Machinery, Ltd. v. Nicastro, 131 S. Ct. 2780 (2011). 59 In Asahi (motorcycle accident in California allegedly caused by a defective tyre valve manufactured by a Japanese company and assembled with the tyre by a Taiwanese company) the court was split on the question of whether the so-called “stream-ofcommerce” doctrine was actually sufficient to establish minimum contacts with the forum. In McIntyre (personal injury caused in New Jersey by a machine manufactured by an English company that “ended up” in New Jersey), while the majority agreed that there was no good basis for the New Jersey court’s jurisdiction in the particular case, only four judges actually discarded the stream-of-commerce doctrine as such, while two others only rejected jurisdiction on the specific facts of the case: see A.N. STEINMAN, The Lay of the Land: Examining the Three Opinions in J. McIntyre Machinery, Ltd. v. Nicastro, 63, S. C. L. Rev. 481 (2012).

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Andrea Bonomi Though entirely consistent with US jurisdictional theory, Article 5(1)(j) will not allow for recognition and enforcement of European decisions rendered at the place of the harmful event, even if they only rule on local damages.60 In this respect, the Draft better conforms to US interests. Of course, it cannot be excluded that, in a particular case, the defendant’s contacts with the State of the harmful event will be regarded, even by US courts, as a sufficient jurisdictional basis. Indeed, if this is the case, a foreign judgment rendered at the place of the event will obviously be recognised and enforced in the US based on the national recognition rules. This is already the case today and the future convention will not see any change made. By excluding recognition of judgments rendered at the place of the harm, the Draft invites victims to bring their claims either at the defendant’s home or at the place of the harmful conduct. However, problems may arise when these places are located in the US, because such liability claims might be dismissed on forum non conveniens grounds. In the last few decades, at least since its seminal Piper decision,61 the US Supreme Court has endorsed an extensive use of the forum non conveniens doctrine as a mean to dismiss liability cases brought before US courts by foreign plaintiffs and based on harm caused abroad, and this remains the case even when the defendants are US corporations acting in the US.62 This problem is not addressed by the Draft: as all issues of direct jurisdiction, forum non conveniens will not be regulated by the future convention and will therefore continue to be the exclusive prerogative of each Contracting State’s courts.63 If the future convention rules out the place of the event as a recognition basis, as required by the US jurisdictional approach, it should, in this author’s view, at least try to put some limits on the US courts ability to dismiss a claim on forum non conveniens grounds based on the fact that the place of the harm was abroad. 2.

Infringements of IP Rights

Articles 5(1)(k) and 5(1)(l) apply to judgments ruling on infringements of intellectual property rights. The first of these provisions concerns patents, trademarks, designs, and other similar rights required to be deposited or registered, while the latter applies to copyrights and other intellectual property rights not required to be 60 This limitation is based on the so-called “mosaic” approach, adopted by the ECJ since the Shevill case: ECJ, Case C-68/93, Shevill, ECR [1995] I-415. 61 Piper Aircraft Co. v. Reyno, 454 U.S. 235 (1981). 62 The Piper court established that a foreign plaintiff’s choice of forum is entitled to less deference than that of a home plaintiff. It follows that the defendant’s burden to obtain a forum non conveniens dismissal is lower in these cases: see the criticism by M. DAVIES, Time to Change the Federal Forum Non Conveniens Analysis, 77 Tul. L. Rev. 309 (2002-2003), at 368 et seq. The fact that decisions rendered at the foreign place of the harm will not be recognised under the future convention will not always preclude the use of forum non conveniens by US courts, because those decisions might still be recognised under national rules. 63 By contrast, see the rather restrictive forum non conveniens rule that was included in Article 22 of the 1999 Draft.

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The Hague Preliminary Draft on Judgments deposited or registered. In both cases, a judgment is entitled to recognition and enforcement if it was rendered in the State where the right was protected: this is the country of the place of registration in the case of a registered right, and the country of origin of the right in the case of a non-registered right. In the European conception, these places correspond to the place of the harmful event, as the ECJ has clarified in several recent decisions concerning infringements of IP rights via the Internet.64 However, contrary to the Brussels Regulation, and also contrary to the aforementioned Article 5(1)(j), the suggested provisions of the Draft do not refer to the place of the harmful conduct: decisions rendered at that place will not be capable of recognition under the future convention. F.

Exclusive Jurisdiction

Article 6 provides a number of rules on exclusive jurisdiction that closely resemble some of those included in Article 24 of the Brussels Regulation. A judgment ruling on one of the matters covered by this provision (validity or registration of patents, trademarks, and other deposited or registered IP rights, rights in rem in immovable property, tenancy of immovable property for a period of more than 6 months) will be capable of recognition or enforcement “if and only if” it is rendered by the courts of the State designated in the convention.

V.

Punitive Damages Awards

Seen from the particular perspective of the relationship between the US and Europe, Article 9 of the Draft deserves particular attention. According to this Article, recognition and enforcement of a judgment may be refused if, and to the extent that, the judgment awards damages, including exemplary or punitive damages, that do not compensate a party for the actual loss or harm suffered. This provision – which is drawn from Article 11 of the Choice of Court Convention – obviously reflects the traditional hostility to punitive damages in jurisdictions outside the US, and in particular in civil law countries.65 However, the provision tempers the rejection in two ways. First, Article 9(1) makes clear that recognition or enforcement denial is possible only “to the extent that” the foreign judgment awards non-compensatory damages. In other words, the court in the requested State cannot reject the foreign judgment as a whole on the ground that (among other points) it includes a noncompensatory damages award. In the absence of other refusal grounds, the other 64 ECJ, Case C-523/10, Wintersteiger; ECJ, Case C-170/12, Pinkney; ECJ, Case C-441/13, Pez Hejduk. 65 Specific provisions against punitive damages are included in various national PIL codifications: e.g. Articles 135(2) and 137(2) of the Swiss PIL Act and Article 40(3) of the German EGBGB.

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Andrea Bonomi parts and effects of the judgment must be recognised or enforced: this may apply, for instance, to a declaration of liability, to a (positive or negative) injunction and, obviously, to the award of compensatory damages.66 Strictly speaking, this might already be deduced from the rule on severability of Article 15 of the Draft, which requires recognition and enforcement of the severable part of a judgment when “it is capable of being recognised or enforced.” Nevertheless, Article 15 only applies to a “severable part” of a judgment, while a punitive damages award is not always clearly severable from the compensatory damages award included in the same judgment. Arguably, Article 9(1) goes further than Article 15, requiring from the court of the requested State that the line be drawn between the two kinds of damages, even when this distinction does not clearly emerge from the foreign judgment itself. A second qualification results from Article 9(2) that obliges the petitioned court to take into account “whether and to what extent the damages awarded serve to compensate costs and expenses relating to the proceedings.”67 One of the arguments often advanced in the US to justify punitive damages is that they serve to counterbalance the effects of the so-called “American rule”, pursuant to which a party – though winning the case – cannot normally claim compensation for the procedural expenses and attorneys’ fees. This considered, it makes sense (at least in theory) that the court is required, before refusing recognition or enforcement of the punitive damages award, to verify whether and to what extent that award serves in reality to compensate procedural costs. That being said, the practical operation of this rule might prove problematic at least with respect to attorneys’ fees. Typically, such fees are liquidated in the US on the basis of a contingency fee agreement that entitles the attorney to get a percentage (30-40%) of the awarded amount, including of course punitive damages. It remains unclear as to how the court is supposed to take this into account under Article 9(2). Obviously, it cannot enforce the part of the punitive damages award that is designed to pay the attorneys, while rejecting the enforcement of the remainder… This question should be clarified. Notwithstanding the silence of Article 9(2), the rationale of this provision should also apply when a punitive damages award in reality “hides” other “compensatory” functions. Besides their punitive goal, these awards often also aim at indemnifying the victim for certain kinds of harm that cannot be compensated under the applicable law, or that are particularly difficult to prove or to liquidate (typically, pain and suffering, moral and psychological harm). In many countries, the fundamental principle of full compensation has led the courts to widely enlarge the range of the damages that are capable of judicial compensation. Such principle would ultimately be betrayed if a punitive damages award that (on top of this) has the function of compensating these new kinds of harm is denied recognition. This idea can implicitly be deduced from the definition of exemplary or punitive damages that results from Article 9(1) (“damages […] that do not compensate a party for the actual loss or harm suffered”). For the sake of clarity, however, it might be better to spell this out in a provision similar to Article 9(2). 66 67

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See also the similar rule included in Article 33(1) of the 1999 Draft. A similar rule was included in Article 33(3) of the 1999 Draft.

Yearbook of Private International Law, Volume 17 (2015/2016)

The Hague Preliminary Draft on Judgments In this author’s opinion, Article 9 could also be improved by granting the court the power to mitigate a punitive damages award. As it is currently drafted, Article 9 only contemplates two alternative solutions: the obligation to enforce if, and to the extent that, the judgment awards compensatory damages, or the right to deny if, and to the extent that, the judgment awards punitive damages. Recent decisions by European courts show, however that, at least in certain countries, public policy precludes the recognition and enforcement of a punitive damages award only if the awarded amount is excessive. To a certain extent, this resembles the position of the US Supreme Court, according to which punitive damages are contrary to the “substantial” due process-principle only when they are “grossly excessive”.68 This considered, the recognition and enforcement of such judgments could be promoted if the court addressed could opt for an intermediate solution between full recognition and denial, consisting in reducing the size of the award.69 Of course, such a rule would entail a limited derogation from the prohibition of révision au fond, but it would probably not be the only one (Article 14 on the “equivalent effect” also derogates from that principle). In any case, principles are not always written in stone…

VI. The Lack of Provisions Against Parallel Proceedings Contrary to its 1999 antecedent,70 the new Draft does not include any rules on lis pendens and parallel proceedings. At first glance, this might seem justified, because the Draft does not address (direct) jurisdiction. However, if one considers that pending proceedings and irreconcilable decisions represent very serious obstacles to the recognition and enforcement of foreign judgments (as it also clearly results from the Draft),71 the inclusion of some mechanism capable of preventing or at least reducing parallel proceedings would certainly be desirable. This would be particularly important in the relationship between Europe and the US in order to correct the current imbalance resulting from the diverging approaches on the two Atlantic shores. In Europe, the Brussels Regulation contains, since the 2012 Recast, both a lis pendens rule and a rule on related actions designed to tackle parallel proceedings even when they are pending before the courts of a non-Member State (Articles 33 and 34). Albeit not mandatory, these provisions allow the court to stay proceedings, thus preventing irreconcilable decisions. By contrast, US courts do not dispose of an equivalent tool. Lis pendens BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996); State Farm Mutual Automobile Insurance Company v. Campbell, 538 U.S. 408 (2003). 69 Such a possibility was provided by Article 33(1)(a) of the 1999 Draft, but only “[w]here the debtor […] satisfies the court addressed that [..] grossly excessive damages have been awarded.” 70 See Article 21 of the 1999 Draft. 71 See Article 7(1)(e-f) and Article 7(2). 68

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Andrea Bonomi rules do not apply in international situations. The rare attempts to develop a doctrine of “international abstention,” similar to the doctrine of abstention that is sometimes applicable in domestic situations, have not been successful.72 As a consequence, parallel proceedings can only be prevented when the condition for a forum non conveniens dismissal are satisfied. This situation is often criticized by US scholars,73 and several proposals have been made for the adoption of an international lis pendens rule, some of which are not so different from Article 33 of the Brussels Regulation.74 Also, the lis pendens rule that was included in the 1999 Draft did not raise particularly fundamental objections from US commentators. Why should a new attempt not be made in the framework of the current project?75

VII. Concluding Remarks Burnt by the bitter failure of the original project, the negotiators of the new Draft are displaying great prudence and realism. This commendable attitude certainly enhances the chances of success for the current project. In particular, this author wholeheartedly approves of the decision to opt for a “simple” convention, limited to recognition and enforcement of judgments and without rules on direct jurisdiction. However, excessive caution can also be counterproductive. A future convention is expected to bring about some substantial improvements in the recognition and enforcement of judgments, and not simply repeat or codify the status quo. Regretfully, after a first quick review of the proposed rules, it is difficult to clearly assess what progress the future convention would make in promoting the circulation of judgments between Europe and the US. Many provisions of the Draft plainly correspond to current rules or practices on both sides of the Atlantic. This is the case for most general provisions on 72 In Royal and Sun Alliance Ins. Co. Of Canada v. Century Int’l Arms, Inc., 466 F.3d 88, for instance, the US Court of Appeals for the Second Circuit took a very restrictive stance with respect to international abstention, holding that US federal courts are, as in domestic cases (see Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976), under a “virtually unflagging obligation” to exercise their jurisdiction. See A.L. PARRISH, Duplicative Foreign Litigation, 78 Geo. Wash. L. Rev. 237 (2009-2010), at 247 et seq. 73 See inter alia A.L. PARRISH (note 72); N. JANSEN CALAMITA, Rethinking Comity: Towards a Coherent Treatment of International Parallel Proceedings, 27 U. Pa. J. Int’l Econ. L. 601 (2006). 74 See in particular § 11 of the 2005 ALI Proposal for a Federal Statute on the Recognition and Enforcement of Foreign Judgments. 75 In this author’s view, a lis pendens rule should be included in the convention on recognition and enforcement. As previously mentioned, it is not very realistic to believe that such question could successfully be addressed in an additional instrument, as recommended by the Council on General Affairs and Policy of the Conference (see note 4).

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The Hague Preliminary Draft on Judgments recognition and enforcement, and for most grounds for refusal. Many recognition bases, in particular those based on habitual residence and consent, also mirror rules that are widely accepted in both Europe and in the US, with only some minor differences or clarifications. Several provisions fall short of what is already possible today under national law. Thus, the special recognition basis in contractual matters does not allow recognition in the US of judgments that – while satisfying the “purposeful availment” standard – are not rendered at the place of performance. Conversely, in European countries, it might hinder recognition of judgments rendered in a foreign place of performance if the defendant’s activities do not reveal a “purposeful and substantial connection” with the forum State. Also, the Draft does not cover judgments in tort that might be rendered by a US court at the place of the harm should the purposeful availment test be satisfied, although their recognition is also possible under the national rules of most European States. In addition, the Draft does not substantially improve the circulation of judgments between Europe and the US when the current rules or practices hinder it. Thus, judgments rendered in defamation cases are excluded from the material scope of the future instrument. Judgments rendered in Europe by the court at the place of the harmful event will not be capable of recognition in the US under the convention. Conversely, European courts will still be able to refuse US punitive damages awards without having the possibility to reduce them. Balancing the pros and cons, it would also seem that, contrary to the very “pro-European” 1999 Draft, the new text is more favourable to the US than to the European Union. To appreciate this, one should consider that the current US recognition system is already quite open. With respect to the few problematic areas, the Draft seems to bring only limited improvement. The exclusion of defamation awards, the provision of a “purposeful availment” requirement for judgments in contractual matters, the non-recognition of judgments rendered at the place of domicile of consumers and employees and of judgments in tort rendered at the place of the harm, the absence of any attempt to restrict the extensive use of forum non conveniens by the US courts, as well as the lack of rules on international lis pendens or related actions: all these points are disappointing from a European perspective. By contrast, as seen from the US perspective, the future convention will entail at least the very relevant advantage of unifying the recognition and enforcement rules in all EU Member States, some of which currently have a very restrictive system. A prudent and slightly imbalanced convention is perhaps – after the 2001 failure – the price to pay in order to convince the US to first sign a judgment convention and then ratify it, which is not always easier as shown by the experience with the 2005 Choice of Court Convention. Also, one shouldn’t lose sight that our criticisms are essentially based on the relationship between Europe and the US. By contrast, the Draft already entails, as it stands, very clear progress for the recognition and enforcement of judgments in the many jurisdictions that presently have restrictive rules or practices. Nevertheless, this author remains optimistic that the Draft will still be open to improvement and that the future convention will contribute to the establishment of a more effective cross-border dispute-resolution framework. Yearbook of Private International Law, Volume 17 (2015/2016)

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UNCHARTERED TERRITORY? A FEW THOUGHTS ON PRIVATE INTERNATIONAL LAW POST BREXIT Eva LEIN

I. II.

III. IV. V. VI.

Introduction Civil and Commercial Matters A. Jurisdiction and Free Movement of Judgments 1. Mind the Gap 2. Revival of the Brussels Convention – A Trip Down Memory Lane? 3. Lugano Convention – Chop and Change? 4. Hague Convention and Judgments Project – To the Rescue? 5. Bilateral Agreements – An Outdated Patchwork 6. Bespoke Solution – The Ideal Way B. Applicable Law C. Other Areas Cross-Border Family Law Transitional Provisions Brexit and the UK Litigation Market Conclusions

I.

Introduction

Although unthinkable for many, the outcome of the referendum on the continued EU membership of the United Kingdom has ended with a narrow pro Brexit majority (51.9%). Whilst the terms of withdrawal and the future relationship between the UK and the EU are yet uncertain, the EU treaties and any EU secondary legislation will cease to have legal force in the UK in the near future.1 The impact will be massive, as EU law has infiltrated legislation in Britain for decades and has shaped the relations between the UK and the other EU Member States. The legal void that the UK’s exit will create needs to be filled, and a mammoth task lies ahead. A vast body of EU law rules that will vanish concerns the area of civil justice, notably  Herbert Smith Freehills Senior Research Fellow in Private International Law, British Institute of International and Comparative Law, London. 1 See Art. 50 TEU. Internally this also requires the repeal of the European Communities Act 1972. Whilst the Treaties and EU Regulations will cease to apply, internal legislation stemming from transposed EU directives will still apply but can be amended as it no longer needs to comply with EU law parameters.

Yearbook of Private International Law, Volume 17 (2015/2016), pp. 33-47 © Verlag Dr. Otto Schmidt & Swiss Institute of Comparative Law

Printed in Germany

Eva Lein cross-border civil and commercial litigation, insolvency law, company law and family law.2 In these fields, EU law has created a system based on mutual trust, assuring legal certainty, cross-border recognition and enforcement in speedy procedures and cross-border cooperation. Changes to this well-established legal framework will affect the day-to-day business of corporates and lawyers dealing with cross-border transactions and litigation, but it will also touch upon each citizen, from the online consumer to the international couple filing for divorce. Brexit will put an end to an era of legal certainty that is hard to reinstate by whatever will take the current system’s place. This short paper provides a few reflections on the private international law landscape post Brexit both from a UK and EU perspective. It will mainly focus on cross-border dispute resolution, is by no means comprehensive and remains speculative, as the future framework for private international law in EU-UK relations will depend on the outcome of the Brexit negotiations.

II. Civil and Commercial Matters A.

Jurisdiction and Free Movement of Judgments

In civil and commercial matters, the Brussels Regime, supplemented by a variety of ancillary instruments3 has revolutionised cross-border proceedings and is the Naming only the key legislative acts, see Regulation (EC) No 1215/2012 of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) ([2012] OJ L351/1) (2012 Brussels I Regulation); Regulation (EC) No 593/2008 of the European Parliament and of the Council on the law applicable to contractual obligations (Rome I) ([2008] OJ L177/6), as applied to the UK by Commission Decision 2009/26/EC ([2009] OJ L10/22); Regulation (EC) No 864/2007 of the European Parliament and of the Council on the law applicable to noncontractual obligations (Rome II) ([2007] OJ L199/40); Council Regulation (EC) No 1206/2001 on cooperation between the courts of the Member States in the taking of evidence in civil or commercial matters ([2001] OJ L174/1); Regulation (EC) No 1393/2007 of the European Parliament and of the Council on the service in the Member States of judicial and extrajudicial documents in civil or commercial matters (service of documents) ([2007] OJ L324/79); Council Regulation (EC) No 1346/2000 on insolvency proceedings ([2000] OJ L160/1), now to be replaced by Regulation (EU) No 2015/848 of 20 May 2015 on insolvency proceedings (recast) ([2015] OJ L141/19); Council Regulation (EC) No 2201/2003 concerning jurisdiction and the recognition and enforcement of judgments in matrimonial matters and the matters of parental responsibility, repealing Regulation (EC) No 1347/2000 ([2003] OJ L338/1); Council Regulation (EC) No 4/2009 on jurisdiction, applicable law, recognition and enforcement of decisions and cooperation in matters relating to maintenance obligations ([2009] OJ L7/1), as applied to the UK by Commission Decision 2009/451/EC ([2009] OJ L149/73). 3 Regulation (EC) No 805/2004 of the European Parliament and of the Council of 21 April 2004 creating a European Enforcement Order for uncontested claims ([2004] OJ L143/15); Regulation (EC) No 861/2007 of the European Parliament and of the Council of 11 July 2007 establishing a European Small Claims Procedure ([2007] OJ L199/1). 2

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Private International Law post Brexit cornerstone of the EU Civil Justice System. Based on the idea of mutual trust between the judicial systems of the Member States it found its origin in the 1968 Brussels Convention,4 a public international law treaty, which was subsequently integrated in a revised form in EU secondary legislation (44/2001 Brussels I Regulation, and recast 1215/2012 Brussels Ibis Regulation). It developed over the years into a very well-functioning framework to the benefit of citizens, lawyers and judges alike.5 With the UK’s exit from the EU, what will take its place?6 1.

Mind the Gap

Post Brexit, a well-functioning replacement system governing civil and commercial litigation in UK-EU relations seems quite crucial. If there is no jurisdiction and enforcement agreement between the UK and the EU, EU Member States will consider the UK to be a third State, subject to the third state regime provided for by the Brussels Ibis Regulation 1215/2012 alongside national autonomous private international law rules. In the area of jurisdiction, this implies that UK defendants might be subject to exorbitant national grounds of jurisdiction, e.g. based on the nationality or domicile of the claimant.7 A judgment rendered in such proceedings would be enforceable in other Member States. Furthermore, and more importantly for London as a centre of commercial litigation, choice of court agreements in favour of English courts would be less protected. There is no certainty as to whether EU courts would stay proceedings based on a choice of court agreement in favour of the English courts. While Art. 31(2) Brussels Ibis Regulation requires any other court than the one chosen in an exclusive forum selection clause to stay proceedings in favour of the chosen court, the Regulation accepts no supremacy of choice of court agreements in favour of Brussels Convention of 27 September 1968 on jurisdiction and the enforcement of judgments in civil and commercial matters [1972] OJ L299/32, as amended by the subsequent accession conventions (Conventions on the accession of Denmark, Ireland and the United Kingdom (1978) Greece (1982), Spain and the Portugal (1989), Austria, Finland and Sweden (1996), see the consolidated version in [1998] OJ C27/1. 5 The UK ministry of Justice has organised events in conjunction with the British Institute of International and Comparative Law in which the usefulness of EU Private International Law Regulations has been overwhelmingly confirmed, in particular in the areas of civil and commercial litigation, cross-border family law, insolvency and the applicable law. 6 This contribution will not assess required changes to the internal legislation of the UK. For details on UK implementing legislation see A. DICKINSON, Back to the future: the UK’s EU exit and the conflict of laws, JPIL 2016, 195, 200 ff. 7 See Art. 6 Regulation 1215/2012 (Brussels Ibis), especially para. 2. Exorbitant grounds of jurisdiction are available in litigation involving foreigners domiciled in the concerned State, as Art. 6(2) shows, even if such grounds are based on nationality such as Art. 14 of the French Civil Code. Consequently, a German national domiciled in France can sue a UK defendant in France based on Art. 14 French Civil Code and Art. 6(2) Brussels Ibis Regulation. 4

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Eva Lein third states. While to date, choice of court agreements in favour of the English courts can create a bespoke and predictable solution for the parties, this will no longer be the case post Brexit, if no Brussels Regime style replacement agreement is found. Any uncertainty in this respect could have a negative effect on the London litigation market. Even more importantly, the cross-border recognition and enforcement of judgments which is now possible under Brussels Ibis without the burden of exequatur proceedings8 would not be secured. Enforcement abroad is crucial in crossborder cases and uncertainty as to whether and how an English judgement can be enforced abroad will have a huge impact on the parties’ litigation choices. There would be many more points to make, but the above examples sufficiently demonstrate that a lack of common coordinating rules is no viable option. 2.

Revival of the Brussels Convention – A Trip Down Memory Lane?

A currently debated issue9 is whether the 1968 Brussels Convention in its latest version of 1996 (forth accession convention) would be the default regime once the UK’s withdrawal from the EU becomes effective. Although subsequently superseded and considerably modernised by the Brussels I and Ibis Regulations, it is arguable that the Brussels Convention has not been terminated by the creation of its successors, and that its revival post Brexit is possible.10 This revival would also encompass the 1971 Protocol supplementing the Brussels Convention11 which authorises the CJEU to rule on preliminary questions concerning matters within the scope of the Convention, similar to Article 267 TFEU. Art. 71 Brussels Ibis Regulation would regulate the precedence of the Convention in relations between the UK and Member States.12 Several arguments advocate in favour of this conclusion: first, the Brussels Convention was intended to be replaced by the Brussels I (and then Ibis) Regulation “as between the Member States” that are subject to the Regulation.13 It See Arts. 36 ff. Regulation 1215/2012 (Brussels Ibis). See A. DICKINSON (note 6), 195 ff.; B. HESS, IPRax 2016, forthcoming; M. LEHMANN and D. ZETZSCHE, EBLJ 2016, forthcoming and J. UNGERER, GPR 2016, forthcoming. 10 Cf. Art. 1 and 2 of the 1982 Civil Jurisdiction and Judgments Act which show the hierarchy between the Brussels Convention, its Accession Conventions and the Regulation from the UK perspective. 11 Protocol of 3 June 1971 on the interpretation by the Court of Justice of the Convention of 27 September 1968 on jurisdiction and the enforcement of judgments in civil and commercial matters. 12 A. DICKINSON (note 6), 195, 205. 13 See Art. 68 Regulation 44/2001 (Brussels I) and Art. 68 Regulation 2015/2012 (Brussels Ibis): “This Regulation shall, as between the Member States, supersede the Brussels Convention, except as regards the territories of the Member States which fall within the territorial scope of that Convention and which are excluded from this Regulation pursuant to Article 299 of the Treaty [now Art. 355 TFEU].” 8 9

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Private International Law post Brexit originally continued to apply in the former relationship with Denmark (which does not take part in EU civil justice measures and was not automatically bound by the Brussels I Regulation)14 and in civil and commercial relations with overseas territories of Member States, who are not bound by the EU Treaties but were bound by the Convention15 (although these are now subject to the 2007 Lugano Convention,16 see its Art. 69(7)).17 The latter situation is comparable to the UK’s position post Brexit – bound by the Convention but not subject to the EU Treaties and EU secondary law. Furthermore, international conventions need to be terminated through mechanisms provided for by public international law. There is no rule in the Vienna Convention on the Law of Treaties18 indicating the automatic termination of the Brussels Convention through the creation of its successor Regulations. Article 59 Vienna Convention provides for the implied termination of a treaty by conclusion of a later treaty relating to the same subject-matter (which is not what happened when the revised content of the Convention was transformed into a Regulation) and acknowledges that an earlier treaty shall be considered as only suspended in operation if it appears from the later treaty or is otherwise established that such was the intention of the parties (the Brussels I and Ibis Regulations consider the Brussels Convention to be “superseded” “as between Member States”).19 There is also no rule providing for an automatic termination of the Convention if a contracting State leaves the EU. The relationship with the UK would therefore be a 14 Based on the Protocol on the position of Denmark (now Protocol 22), Denmark did not take part in the Brussels I Regulation, unlike the UK which could and did opt into both the Brussels I and Brussels Ibis Regulations, see Recitals 20 Regulation 44/2001 (Brussels I) and 40 Regulation 1215/2012 (Brussels Ibis). On 19 October 2005, an agreement was concluded between the EU and Denmark that extended the Regulation’s scope to Denmark; see also Council Decision 2006/325/EC. The agreement entered into force on 1 July 2007. By letter of 20 December 2012, Denmark has notified the Commission of its decision to implement the Brussels Ibis Regulation. 15 French overseas territories, Aruba, Mayotte. See Recital 9 of the Regulation 44/2001 (Brussels I) which stated that “A defendant not domiciled in a Member State is in general subject to national rules of jurisdiction applicable in the territory of the Member State of the court seised, and a defendant domiciled in a Member State not bound by this Regulation must remain subject to the Brussels Convention.” 16 Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters of 15 October 2007, OJ L339/3, 21 December 2007 (2007 Lugano Convention). 17 Pursuant to Art. 69(7) 2007 Lugano Convention, “Insofar as the relations between the Member States of the European Community and the non-European territories referred to in Article 70(1)(b) are concerned, this Convention shall replace the [1968 Brussels Convention] and [the 1971 Protocol], as amended by the Conventions of Accession to the said Convention and the said Protocol by the States acceding to the European Communities, as of the date of the entry into force of this Convention with respect to these territories in accordance with Article 73(2).” 18 United Nations Convention on the Law of Treaties, signed at Vienna on 3 May 1969, entered into force on 27 January 1980. 19 Art. 68 Regulation 44/2011 (Brussels I) and 1215/2012 (Brussels Ibis).

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Eva Lein reproduction of the former relationship with Denmark and the overseas territories and the relationship would need to be structured as it was in relation to the latter. That said, the Convention could still be terminated in the withdrawal agreement pursuant to Art. 50(2) TEU and Art. 54 Vienna Convention on the Law of Treaties (the exclusive competence for the termination of the Convention being conferred to the EU)20 or even unilaterally by the EU on the basis of Art. 62 Vienna Convention. Art. 62 permits a Contracting State to invoke a fundamental change of circumstances as a ground for terminating or withdrawing from a treaty. Art. 62 presupposes that (a) the existence of those circumstances constituted an essential basis of the consent of the parties to be bound by the treaty; and (b) the effect of the change is radically to transform the extent of obligations still to be performed under the treaty. A fundamental change of circumstances can be argued in case of a Convention based on mutual trust, reciprocity and continuous EEC/EC Membership. The 1968 Convention sprang from the desire “to implement the provisions of Article 220 [of the Treaty establishing the European Economic Community] by virtue of which the [contracting parties] undertook to secure the simplification of formalities governing the reciprocal recognition and enforcement of judgments of courts or tribunals” and from an anxiousness “to strengthen in the Community the legal protection of persons therein established”.21 A UK withdrawal from the EU is a fundamental change of the circumstances that were at the origin of the 1968 Convention and a precondition for its signature – no third State was allowed to join, as demonstrated by the need for a parallel Lugano Convention extending the Brussels Regime to EFTA States. Hence, the Brussels Convention might ultimately not survive Brexit, whichever stance one takes on its revived applicability. But putting the question of its revival aside – subjecting cross-border relations to the Brussels Convention after the considerable revision its content underwent in the subsequent Brussels I and Ibis Regulations would have substantial disadvantages. The list of Brussels Convention States is much shorter than the list of Member States applying the Brussels I(bis) Regulation. Only 14 Member States are parties to the Convention. States that joined the EU after the Brussels I Regulation entered into force have never acceded to the 1968 Brussels Convention but applied the Brussels I Regulation from the start. Although the Convention would cover civil and commercial dispute resolution in the relationship with major jurisdictions, the UK would remain a third State for the Member States that never signed the Convention. The application and usefulness of the Brussels Convention would be limited and the coexistence of multilateral regimes would not be a welcome result. Moreover, there are considerable differences in substance between the Brussels Convention and the Brussels Ibis Regulation. The Convention’s content is outdated, the cross-border enforcement of judgments under the Convention still requires exequatur proceedings, there is no supremacy of exclusive choice of court agreements unlike Art. 31(2) Brussels Ibis Regulation and various rules, e.g. on the forum contractus or on jurisdiction in consumer cases, diverge from the current recast regime.

20 21

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See Art. 216 TFEU and CJEU, Lugano Opinion 1/03 of 7 February 2006. See the preamble to the 1968 Brussels Convention, [1972] OJ L299/32.

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Private International Law post Brexit 3.

Lugano Convention – Chop and Change?

As shown, the revival of the Brussels Convention is neither certain nor satisfactory. Another potential post Brexit scenario might be that the UK joins the 2007 Lugano Convention. The Lugano regime was created as a parallel regime to the Brussels framework, open to EFTA States. Today, it covers the EU, Switzerland Norway and Iceland. The UK was an individual signatory of the original 1988 Lugano Convention, but the latter has since been replaced by the revised 2007 Lugano Convention to keep pace with the Brussels I Regulation. In contrast to the chronology of the Brussels Regime, the 2007 Lugano Convention replaced its predecessor convention under the law of treaties,22 although its current members are not the same: EU Member States with the exception of Denmark are no longer individual signatories to the 2007 Lugano Convention, as this role has been taken by the EU itself. The Lugano 1/03 Opinion confirmed that the conclusion of the 2007 Lugano Convention fell within the European Community’s exclusive competence.23 This implies that the 2007 Lugano Convention binds the EU, Denmark, Switzerland, Norway and Iceland, but not the UK as a Member State in its own right. It is only bound through its current EU membership. Leaving the EU therefore also involves exiting the Lugano Regime. However, this does not prevent the UK from re-joining the Convention as an individual State, provided that it complies with the accession requirements. These, however, are not that easy to meet. Article 70 of the 2007 Lugano Convention allows States to accede which become Members of EFTA under the merely formal conditions laid down in Art. 71 (lit. a), or permits the accession of any other non EFTA or non EU State, under the conditions laid down in Art. 72. Most importantly, Art. 72 presupposes the unanimous agreement of all Contracting Parties. The UK therefore either needs to join EFTA or depends on the goodwill of the Lugano States, i.e. in particular of the EU. Also, the Contracting States might take up to one year to grant that consent, leading to uncertainty in the meantime.24 Signing the Convention also requires adherence to the Protocols, in particular to Protocol No 2 on its uniform interpretation. Again, this solution is not as good as the status quo. While creating a uniform regime for the UK, the EU and the other Lugano States, the Convention has not yet been revised in light of Brussels Ibis, still requires far more enforcement formalities and does not offer enhanced protection of choice of court agreements.

22 See Art. 69(6) of the 2007 Lugano Convention. See also Art. 1 of Council Decision 2009/430/EC of 27 November 2008: “The conclusion of the Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, which will replace the Lugano Convention of 16 September 1988, is hereby approved on behalf of the Community.” 23 See CJEU, Lugano Opinion 1/03 of 7 February 2006. 24 Cf. Art. 72(3) 2007 Lugano Convention.

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Eva Lein 4.

Hague Conventions and Judgments Project – To the Rescue?

The UK could also join the 2005 Hague Convention on Choice of Court Agreements which entered into force on 1 October 2010. Similarly, to the 2007 Lugano Convention, the Hague 2005 Convention was signed by the EU. The UK is to date bound by the Convention through its EU membership, but is no signatory in its own right. Post Brexit, the UK would no longer be bound, but could sign up to the Convention according to its Art. 27(3), which states that it is “open for accession by all States”, without any consensus requirement from the existing signatories, including the EU. The Convention protects exclusive choice of court agreements and would secure the effectivity of exclusive forum selection clauses in favour of English courts. Compared to the Brussels Ibis Regulation, the UK would still be worse off, as the Hague 2005 Convention contains no unconditional lis pendens rule in favour of the chosen court but allows an exception from a stay in a whole variety of scenarios listed in its Art. 6. According to Art. 6 lit. c for instance, a stay can be prevented if giving effect to the choice of court agreement would “lead to a manifest injustice” or if a party to the agreement lacked capacity to conclude such agreement under the law of the State of the court seized. Post Brexit, the Hague Service and Evidence Conventions will become relevant in the relationship between the UK and the EU, as the Evidence and Service Regulation will cease to have effect.25 The UK will also have an interest to closely follow the Hague Judgments Project.26 Its idea is the creation of a global convention to overcome the disparities between national rules on the recognition and enforcement of judgments in civil and commercial matters and the patchwork of bilateral, regional, or international instruments in the area. The Convention is currently being negotiated, but negotiations are not going to be terminated any time soon. Whilst the Hague Judgments project is to be strongly supported, it needs to be noted from the outset that a global convention extending beyond a vastly regulated regional integration zone such as the EU will be subject to a less liberal enforcement regime than the current EU private international law has to offer. Expectations that Hague Conventions could fully replace the Brussels Regime and its ancillary instruments should therefore not be too high. 5.

Bilateral Agreements – An Outdated Patchwork

It should be added that in absence of any multilateral regime for jurisdiction, recognition and enforcement (i.e. in the hypothesis that Brexit happens without the UK remaining subject to the Brussels Convention and without signing the Lugano Convention), bilateral enforcement treaties might re-emerge which have been

25 Convention of 18 March 1970 on the Taking of Evidence Abroad in Civil or Commercial Matters; Convention of 15 November 1965 on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters. 26 See .

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Private International Law post Brexit superseded by the Brussels Regime.27 Such conventions exist between the UK and Austria, Belgium, Germany, France, Italy and the Netherlands.28 They have been concluded before the 1968 Brussels Convention entered into force and establish more cumbersome and outdated regimes than the speedy and simplified system that governed the relations between Britain and the EU until now.29 Consequently, if no multilateral regime applies, these treaties would govern enforcement of judgments in relations between Britain and each of the abovementioned six Member States, while the rest of the EU would treat the UK as a third State. The disadvantages are obvious. 6.

Bespoke Solution – The Ideal Way

The ideal solution for the UK (and the EU) would be to negotiate an agreement (similar to the EU-Denmark agreement on the Brussels I and Ibis Regulation)30 which provides for a UK-EU treaty identical with the Brussels Ibis Regulation. In that case, the status quo could be maintained and a multiplicity of diverse jurisdiction and enforcement regimes could be avoided. This option depends on the goodwill of the EU and presupposes the willingness of the UK to accept Brussels Ibis as it stands. The UK would be required to continuously acknowledge the CJEU’s interpreting power and to renounce to anti-suit injunctions, which are not permitted in a system of mutual trust. Whether this option is realistic, remains to be seen. As opposed to Denmark, the UK will cease to be a Member State and negotiations start from a significantly different perspective. B.

Applicable Law

Seemingly less complex is the area of applicable law but again, appearances are deceptive. The EU has adopted the Rome I and II Regulations concerning the applicable law in contractual and non-contractual obligations.31 To date, Member See Art. 69 Regulation 44/2001 (Brussels I) and Art. 69 Regulation 1215/2012 (Brussels Ibis Regulation). 28 See the following treaties on the enforcement of judgments in civil and commercial matters between Britain and: Austria (14 July 1961); Belgium (2 May 1934); France (18 January 1934); Germany (14 July 1960); Italy (7 February 1967); the Netherlands (17 November 1967). There is also a bilateral enforcement treaty with Norway (12 June 1961). 29 For instance, the conventions are limited to the cross-border enforcement of superior court judgments. 30 Agreement between the European Union and the Kingdom of Denmark on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters [2005] OJ L299/62 and [2015] OJ L182/1. 31 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) [2008] OJ L177/6 and Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II) [2007] OJ L199/40. 27

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Eva Lein State judges apply these instruments to determine the applicable law which can also be the law of a third State, either by choice of the parties or by default. Post Brexit, the Rome II Regulation would no longer bind the UK, but Member State judges would continue to apply it in proceedings running in their courts even if its rules lead to the application of English law. Judges in the UK would no longer be bound by Rome II post withdrawal from the EU and would apply their autonomous conflict of laws rules on non-contractual obligations. Yet, nothing would hinder the UK to copy the Rome II Regulation into their national law thus recreating uniformity in the area of cross-border torts. This is to be highly recommended. The UK would not be bound by CJEU decisions on the interpretation of the Rome II Regulation, but should closely follow the Luxemburg rulings to ensure continued uniformity. More complex is the situation with respect to contractual obligations. The Rome I Regulation replaced the Rome Convention 1980,32 yet again a public international law treaty binding the UK and the Member States. Contrary to the Brussels Convention, Member States acceding the EU in 2004 and 2007 have signed the Rome Convention as the Rome I Regulation was not yet in force. According to its Art. 25, the Rome I Regulation replaced the Rome Convention as between the Member States,33 except as regards their overseas territories which are not bound by the EU Treaties and as regards Denmark, which does not take part in the adoption of Regulations in the area of Civil Justice. The Rome Convention therefore lives on in relation to Denmark and Member States’ overseas territories and could be revived in relation to the UK. Art. 20 Rome Convention also advocates for this conclusion as the Rome Convention itself provides for a subsequent creation of EC/EU conflict of laws rules. Post Brexit, the UK would therefore in principle be bound by the Convention and the Protocols on its interpretation by the CJEU.34 To fulfil their international obligations, the Member States would also need to apply the Convention, rather than the Rome I Regulation despite its universal application.35 Fortunately both instruments are very similar in content. However, the Rome Convention could be terminated post Brexit. It provides specific rules for its validity period, its tacit renewal and denunciation in its Art. 30.36 Contracting States are explicitly allowed to denounce, with the denunciation 32 Convention on the law applicable to contractual obligations opened for signature in Rome on 19 June 1980 (80/934/EEC), [1980] OJ L266/1. 33 The English version is unfortunately less clear than the French which uses the same wording than Art. 69 Brussels Ibis Regulation: “Le présent règlement remplace, entre les États membres, la convention de Rome, sauf en ce qui concerne les territoires des États membres qui entrent dans le champ d’application territorial de cette convention et qui sont exclus du présent règlement en vertu de l’article 299 du traité.” 34 First Protocol on the interpretation of the 1980 Convention by the Court of Justice (consolidated version) [1998] OJ C27/47 and Second Protocol conferring on the Court of Justice powers to interpret the 1980 Convention (consolidated version) [1998] OJ C27/ 52. 35 Art. 20 Rome Convention who accords supremacy to EU conflict of laws rules would not lead to the applicability of the Rome I Regulation if a case that is connected to the UK comes before Member States courts. 36 See also Art. 54 lit. a Vienna Convention on the Law of Treaties.

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Private International Law post Brexit having effect only in relation to the State which has notified it. The Convention will remain in force as between all other Contracting States. Post withdrawal from the EU, the UK could terminate the Convention. As to the Member States (with the exception of Denmark and the overseas territories of Member States), such denunciation will fall under the exclusive competence of the EU.37 Consequently, the EU could terminate the Convention with effect for all Member States. In addition, the Convention could either be terminated according to Art. 54 lit. b (by mutual consent) or pursuant to Art. 62 of the Vienna Convention on the Law of Treaties (due to Brexit as a fundamental change of circumstances). C.

Other Areas

Other areas of private international law that will be considerably affected by Brexit concern cross-border insolvencies and the status of companies established under English law in other Member States or vice versa. To date, the Insolvency Regulation (EC) No 1346/2000, now recast as Regulation 848/2015, establishes a common framework coordinating insolvency proceedings and avoiding the cross-border transfer of assets. The Regulation, in which the UK participated,38 establishes rules on jurisdiction, applicable law, coordination of proceedings and recognition of judgments to simplify cross-border insolvencies. From June 2017, it will apply as Recast Insolvency Regulation 848/2015. The UK will therefore have to apply the 2000 Regulation as well as the Recast 2015 Regulation before the withdrawal from the EU becomes effective and EU instruments cease having effect. Post Brexit, the UK will be in a similar situation as Denmark, to which the Regulation does not apply. Exiting the common rules on cross-border insolvencies will, in default of an international convention in the area, lead to the application of national autonomous conflict of laws rules39 which complicate the cross-border coordination of insolvency proceedings. To date, EU courts have to recognise insolvency proceedings as the main proceedings that were commenced in the jurisdiction where the debtor has his COMI. In the future, there is a risk of conflicting insolvency proceedings elsewhere. Further questions will arise, e.g. regarding restructuring through schemes of arrangement and the recognition and enforcement of judgments approving such schemes under the Brussels or Lugano Regimes.40 Schemes of arrangement have proven popular but might become less appealing to European companies if they are not likely to have effect in the relevant jurisdictions. See Art. 216 TFEU and the Lugano 1/03 Opinion. Recital 32 Regulation 1348/2000 and Recital 87 Regulation 848/2015 (Recast). 39 In the UK, the national conflict of laws rules are based on the 1997 UNCITRAL Model Law on Cross-Border Insolvency, cf. the Cross-Border Insolvency Regulations 2006. (See also s. 426 Insolvency Act 1986 and the common law recognition rules). Only a few other Member States follow the UNCITRAL Model Law in their national insolvency regimes (Greece, Poland, Romania and Slovenia). 40 M. BRINKMANN, in K. SCHMIDT, InsO, 19th ed. 2016, § 335 No. 10. For details see also J. UNGERER, GPR 2016, forthcoming. 37 38

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Eva Lein Similarly, Brexit will create many challenges for the freedom of establishment of foreign companies. A much debated issue is the fate of limited companies incorporated under English law but established in Member States and of European companies established in the UK.41 Company forms of English law such as a “Limited (Ltd.)” or “Public Limited Company (PLC)” have become popular across Member States.42 As the creation of a Limited under English law requires no minimum capital stock it is, to many, a more viable company form compared to continental limited companies such as the German “GmbH”. The freedom of establishment under the TFEU which encompasses the freedom to choose company forms under English respectively other Member States’ laws while being established on the continent respectively in the UK will end with Brexit, unless freedom of establishment is maintained in the UK-EU relations. Without this fundamental freedom, the status of businesses operating in Member States with English company forms becomes doubtful. If their status is not secured in the exit negotiations, they risk to be governed by the company law of the State in which they have their seat. This could lead to them being considered as companies with unlimited personal liability and, to prevent this, oblige the company to transform into a “continental limited” with all the costs and inconvenience this entails. Whether this is viable depends on internal company and tax law. Similarly, companies based in the UK would face considerable difficulties without freedom of establishment.

III. Cross-Border Family Law In parallel to the Brussels I (bis) Regulation, the EU harmonised rules on jurisdiction and the recognition and enforcement of judgments in matrimonial matters and matters of parental responsibility. Regulation (EC) 2201/2003 (Brussels IIbis)43 , to date applicable in the UK,44 will cease having effect in British courts with Brexit. In matrimonial matters, Brexit will leave a gap and there is no international convention that could fill it. The UK would need to apply autonomous private international law rules when cross-border divorce proceedings are brought within its territory. EU Member States would apply the Brussels IIbis Regulation alongside autonomous private international law rules, depending on the case scenario. In matters of parental responsibility, the UK and Member States are bound by the Hague Conventions of 198045 and 1996.46 The relation between these

For details see S. STIEGLER, GPR 2016, forthcoming. E.g. in Germany as “Ltd.”, “Ltd. & Co. KG” or “PLC & Co. KG”. For instance, the German Airline Air Berlin is a PLC & Co. KG. 43 Formerly Regulation (EC) No 1347/2000. 44 Recital 30 Brussels IIbis Regulation. 45 Convention of 25 October 1980 on the Civil Aspects of International Child Abduction. 41 42

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Private International Law post Brexit Conventions and the Brussels IIbis Regulation is coordinated by the latter’s Art. 60 and 61. As to the Hague 1996 Convention, Art 61 gives Brussels IIbis precedence where the child concerned has his or her habitual residence on the territory of a Member State (Art. 61 lit. a) and concerning the circulation of Member State judgments in other Member States, even if the child is resident in a third State which is a contracting party to the Hague Convention (Art. 61 lit. b). While the precedence of Brussels IIbis ends in a lit. a scenario, lit. b would still apply, with the UK now being a third but a “Convention” State. In matters relating to maintenance, Regulation 4/200947 will no longer apply to the UK,48 with the consequence that maintenance obligations would fall again under the Brussels Convention, see its Art. 5 No. 2. As the UK was not bound by the 2007 Hague Protocol, exequatur proceedings were maintained for decisions given in the UK,49 in future their recognition and enforcement could again be subject to the Brussels Convention rules. Again, it is speculative how the future landscape in cross-border family law will look like in relation with the UK, as bespoke solutions might (and should) be found during the Brexit negotiations.

IV. Transitional Provisions Further difficulties will follow from intertemporal conflicts between the applicable regimes before and post withdrawal. Transitional provisions are of particular importance for civil and commercial or family law proceedings that started before the withdrawal from the EU became effective and continue afterwards; and for judgments rendered before Brexit for which enforcement is sought after withdrawal. It might well be that specific transitional provisions are negotiated between the EU and UK to that effect across the various areas of private international law. By default, the transitional provisions for the entry into force of the respective Regulations that cease to apply post Brexit should be applied in analogy.50

46 Hague Convention of 19 October 1996 on Jurisdiction, Applicable Law, Recognition, Enforcement and Co-operation in Respect of Parental Responsibility and Measures for the Protection of Children. 47 Council Regulation (EC) No 4/2009 on jurisdiction, applicable law, recognition and enforcement of decisions and cooperation in matters relating to maintenance obligations ([2009] OJ L7/1), as applied to the UK by Commission Decision 2009/451/EC ([2009] OJ L149/73). 48 Cf. [2009] OJ L149/73. 49 See Arts. 17 ff. and 23 ff. Regulation 4/2009. 50 For a detailed account see B. HESS, IPRax 2016, forthcoming.

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V.

Brexit and the UK Litigation Market

In practical terms, the perspective of a Brexit will have and already has negative effects on the UK litigation market. London has been a major centre for dispute resolution, notably for commercial, insolvency and divorce proceedings. Many of the cases litigated there involve parties from abroad, including from other Member States,51 who estimate the renowned quality of the English judiciary, notably of the Commercial Court, and the pragmatism of English law. The simplified recognition and enforcement of judgments rendered by the English courts contributed further to the attractiveness of London as a forum, even when assets were located abroad. Yet, the expectedly long duration of negotiations between EU and UK will lead to a period of uncertainty that might urge litigants to look for alternatives. Whilst already facing competition from other main litigation centres such as New York or increasingly Singapore, the Brexit uncertainty will lead to increased competition from other Member States, particularly those where proceedings can be brought in English, such as the Netherlands. Also, Brexit will expectedly prompt an increase in arbitration, as enforcement of awards is secured under the New York Convention52 while the post Brexit enforcement of judgments abroad is still tainted with doubt. Also, in the area of family law, it remains to be seen if London will still be the divorce capital. In addition, the content of English substantive law will supposedly change if legislation based on EU directives is amended post Brexit. This might have an impact on the frequency of choice of the English law, which goes hand in hand with forum selection. The current situation complicates the assessment of and advice on litigation risks and it can only be hoped that there will be more clarity soon.

VI. Conclusions The EU instruments in the area of Civil Justice have worked well in practice and have considerably simplified cross-border relations. In the area of Civil Justice, the UK had a unique and influential position due to its special status which enabled them to negotiate and consider each EU instrument and to declare its opt-in, where the regime was assessed as useful. This will now all change. Even so, both the UK and the EU have a huge interest in preserving the past cooperation as far as possible. It will be down to the negotiations how the legal framework for their future relationship will be forged. Private international law is See the BIICL study on Factors Influencing International Litigants’ Decisions to Bring Commercial Claims to the London Based Courts, available at , p. 10 ff. 52 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958). 51

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Private International Law post Brexit not amongst the most controversial areas and solutions which work to the benefit of both sides are a realistic perspective. Nonetheless, this requires goodwill, reasonableness and flexibility on both sides. If the UK plans to ignore CJEU rulings and to reintroduce anti-suit injunctions, or if the EU tries to exclude the UK from multinational conventions, the quest for good solutions will become burdensome. If both sides acknowledge the benefits of the greatest possible preservation of the status quo, the future looks brighter for private international law.

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NOTES ON AN UNSTABLE COUPLE: PARTY AUTONOMY AND PUBLIC POLICY IN THE HAGUE PRINCIPLES ON CHOICE OF LAW IN INTERNATIONAL COMMERCIAL CONTRACTS Pascal DE VAREILLES-SOMMIÈRES*

I. II.

III.

IV.

Introduction What Autonomy? A. Acknowledging the Disorder 1. Choice of Law Autonomy 2. Restricted Autonomy a) Restricted Autonomy, a Back-Up Solution b) Restricted Autonomy, an Alternate Solution 3. Plenary Substantive Autonomy B. An Attempt to Put Things in Order 1. The Cardinal Principle: Choice of Law Autonomy 2. What Becomes of the Other Types of Autonomy? a) Adjustments b) A Disavowal What Public Policy? A. “International” Public Policy (Public Policy of the Forum or Ordre Public) B. “Connecting-Factor-Related Public Policy” C. The Public Policy of the lex contractus 1. The Public Policy of the lex contractus Chosen by the Parties 2. The Public Policy of the lex contractus Objectively Applicable D. “Choice of Law” Public Policy Conclusion

* Professor at Sorbonne Law School (Université Paris 1). This contribution is an edited version of an article published in French in Clunet 2016, doctr. 4, p. 409 et seq. under the title “Autonomie et ordre public dans les Principes de La Haye sur le choix de la loi applicable aux contrats commerciaux internationaux”. The author thanks the publisher of the French version for authorising the publication of this edited version in English. Author’s thanks also go to IRJS and to SERPI for their financial help enabling the publication of this edited version in English. Abbreviations in the footnotes are the conventionally used abbreviations in this Yearbook, completed as follows: Brooklyn Journal of International Law: Brook. J. Int’l L; Droit et Pratique du Commerce International: DPCI; Recueil Dalloz: D.; Revue des Contrats: RDC; Travaux du Comité français de droit international privé: Trav. Com. Fr. DIP.

Yearbook of Private International Law, Volume 17 (2015/2016), pp. 49-82 © Verlag Dr. Otto Schmidt & Swiss Institute of Comparative Law

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Pascal de Vareilles-Sommières

I.

Introduction

1. On 19 March 2015,1 the Hague Conference on Private International Law approved the “Hague Principles on Choice of Law in International Commercial Contracts”. A designer of international contracts would probably describe this instrument as the counterpart to the Unidroit Principles of International Commercial Contracts, as both can be seen as framing international contracts – with the same form but not the same setting. Let us look first of all at the different settings: when it comes to contractual matters, the Hague Principles focus on conflicts of laws, whereas the Unidroit Principles essentially focus on aspects of substantive law. However, these two frameworks also have the same form because the rules drawn up by each instrument are expressed as “Principles” – in terms popularised by the Unidroit Principles. In other words these rules belong to “soft law”, designed to interact with the legal status of issues covered otherwise than an instrument formally ratified by a State. 2. In fact, immediately after advancing this parallel, a significant substantive clarification must be added: whereas the area of substantive issues covered by the Unidroit Principles is designed to be very large, the area of choice of law issues covered by the Hague Principles is deliberately restricted because – and this is not clearly stated in the title – the Hague Principles only cover choice of law by the parties, whether explicitly or implicitly, and set aside the case where, failing any choice by the parties, it is left to the court to choose the applicable law, either by following the conflict rule with an objective connecting factor (hereinafter: objective conflict rule) in force in its country or by identifying which of all possible substantive laws should prevail over others. In this case, the Principles recognise that the conditions for developing uniform choice of law rules under a soft law instrument have not yet been met, and they therefore leave unanswered the issue of the content of the applicable objective conflict rule.2

1 The Hague Conference website mentions this date as the date of entry into force of the Principles. See the Conclusions and recommendations adopted by the Council at its meeting of 24-26 March 2015. Point 3 of “New Legislative Instrument – Hague Principles” states: “The Council noted with satisfaction that the Principles on Choice of Law in International Commercial Contracts had been approved on 19 March 2015 in accordance with the procedure established by the Council in 2014 [...]”. See also Principles on Choice of Law in International Commercial Contracts, The Hague 2015, p. 12; M. PERTEGÁS/ B.A. MARSHALL, Party Autonomy and its Limits: Convergence through the New Hague Principles on Choice of Law in International Commercial Contracts, Brook. J. Int’l L, Vol. 39, Issue 3, 2014, p. 975-1003, esp. p. 981. 2 See Commentary, point 2.2 under Art. 2 of the Principles: “2.2 The Principles do not provide for the method of determining the law applicable to an international commercial contract in the absence of a choice of law (express or tacit) by the parties.” Some regret the timorousness of the Principles in this regard: see for example O. LANDO, The Draft Hague principles on the choice of Law in International contracts and Rome I, Essays in Honour of Hans Van Loon, Intersentia 2013, p. 299 et seq.

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law 3. The phenomenon of choice of law by contracting parties is so widespread in practice that the situations encountered vary hugely, meaning that there is little leeway for drawing up common principles. It has become classic to ask if the principles covering an ordinary international commercial contract are actually suited to govern an international contract entered into by persons where one is disproportionately weak compared to the other3 – such that, in terms of contractual justice standards, party autonomy is seen as a threat rather than an opportunity. On another note, the question arises as to whether it would be preferable to handle the choice of law by parties to domestic contracts by applying different principles to those prevailing for international contracts. The authors of the Hague Principles were aware of the heterogeneity of choice of contract law and opted, no doubt wisely, not to run the risk of biting off more than they could chew. Therefore, even when limited to cases of choice of law by contracting parties, the substantive scope of work when drafting the Principles was still deemed too large by the Hague negotiators. In order to focus on contracts for which party autonomy is less objectionable, they opted to doubly reduce the scope of the Principles through exclusions set out in Article 1. Restricted to commercial contracts, the scope of the Principles excludes employment and consumer contracts (Art. 1(1)). Restricted to international contracts, the scope retains a very wide conception of this type of contract because, according to the Principles, all contracts are international unless they qualify as domestic under the conditions laid down in these same Principles (Art. 1(2): “a contract is international unless each party has its establishment in the same State and the relationship of the parties and all other relevant elements [...] are connected only with that State”). 4. At the initial stage of the work envisaged by the Conference on establishing uniform rules for international contracts, the options for Conference intervention were very open, from negotiating a convention to producing simple principles of the same type as the Unidroit Principles, through drawing up instruments such as a model law or even a code of best practice, which countries were meant to draw on when drafting their own legislation. Eventually, the “Principles” idea won out, as their drafting and potential popularity were seen as being facilitated by this form, due to the non-binding character for countries of this instrument and because there was no need for State ratification to ensure that the instrument became legally valid.4 It is true that the procedure for drafting the Hague Principles, even though much of it was left to an expert group with no capacity as state representatives,5

3 The specific fate reserved for party autonomy under European law by the Rome 1 Regulation is in favorem autonomy in employment or consumer contracts, demonstrating that a specific regime may sometimes be necessary. 4 M. PERTEGÁS, Les travaux de la Conférence de La Haye sur un instrument non contraignant favorisant l’autonomie des parties, in S. CORNELOUP/ N. JOUBERT (eds.), Le règlement Communautaire Rome I et le choix de la loi dans les contrats internationaux, Litec 2011, p. 19 et seq. 5 See B. FAUVARQUE-COSSON/ P. DEUMIER, “Un nouvel instrument de droit souple international. Le projet de Principes de La Haye sur le choix de la loi en matière de contrats

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Pascal de Vareilles-Sommières involved the countries more than the procedure followed for Unidroit,6 such that the Conference Member States can be seen as having approved the Hague Principles, albeit implicitly. This does not, however, elevate them to the rank of rules of law with binding force on Member States. They were solely approved for their own purpose and were not designed to be binding, as mentioned in point I.8 of the Introduction to the Principles7 and paragraphs 2, 3 and 4 of the Preamble.8 A hybrid that is part model law (by virtue of the function assigned to them),9 part convention (by virtue of the international organisation that oversaw the drafting and by a sort of implicit approval by the Member States of that organisation), part restatement (by virtue of the scholarly character of the work and composition of the expert group), the corpus of the Principles is, finally, if not a formal source of private international law, at least a possible source of inspiration for any lawmaker drawing up formal rules of private international law. 5. The purpose of this article is not to take a stance on whether the concept of “soft law” is itself operable, nor on the extent to which the Hague Principles exemplify this concept – which would presuppose that it is effectively operable.10 One may simply note that the initial commentaries on the Principles readily classify them (albeit with nuance) in the category of “soft law”.11 In parallel this classification maintains an ambiguity, combining an anaesthetizing rhetoric on the non-binding

internationaux”, D. 2013, p. 2185 et seq., who mention “a working group composed mainly of law professors with no mandate from their State” (Translation is ours). 6 See B. FAUVARQUE-COSSON/ P. DEUMIER (note 5): “The procedure followed to adopt the project saw significant contributions from the Hague Conference and Member States.” (Translation is ours). 7 “As their title suggests, the Principles do not constitute a formally binding instrument such as a Convention that States are obliged to directly apply or incorporate into their domestic law.” 8 “2. They may be used as a model for national, regional, supranational or international instruments. 3. They may be used to interpret, supplement and develop rules of private international law. 4. They may be applied by courts and by arbitral tribunals.” See in this respect, J.L. NEELS, The Nature, Objective and Purposes of the Hague Principles on Choice of Law in International Contracts, YPIL 2013-2014, p. 45 et seq., esp. p. 48-56. 9 See Preamble, §2: “They may be used as a model for national, regional, supranational or international instruments”; reducing the Principles to a “model law” would be moving away from their authors’ intentions, as shown in point I.8 of the Introduction: “Nor is this instrument a model law that States are encouraged to enact.” 10 See B. FAUVARQUE-COSSON, Entre droit souple et droit dur: les “Principes” en droit des contrats internationaux, in Etude annuelle 2013: le droit souple: rapport adopté par l'assemblée générale du Conseil d'État, Conseil d’État, Paris 2013, p. 255 et seq. 11 See S.C. SYMEONIDES, L’autonomie de la volonté dans les principes de La Haye (…), RCDIP 2015, p. 813 et seq.; B. FAUVARQUE-COSSON, Règles impératives et instruments de droit souple, in Mélanges Pierre Mayer, Lextenso 2015; compare with B. FAUVARQUE-COSSON/ P. DEUMIER, (note 5), I-B, who suggest a hybridization between soft and hard law, thus distancing themselves from the notion of soft law retained elsewhere in their article.

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law nature of the Principles12 and an invigorating rhetoric, indicating that they could serve as a legal basis for genuine rights and obligations in favour of private contracting parties. In this respect, one should note the considerable ambiguity of the function of “guidelines” set out in § I-20 (c) of the Introduction to the Principles as regards their “envisaged users”, i.e. “parties and their legal advisors”. This vocabulary gives parties the impression that they can deduct their rights from the Principles,13 whereas this is not actually the case. 6. Their particular status makes it problematic to use the concept of “entry into force” for the Hague Principles. However, this did not stop the Conference from using this terminology, and its website proudly states “Entry into force 19-III2015”. 14 This term appears somewhat ill-chosen and misleading and it is part of the invigorating rhetoric already mentioned concerning the Principles. Giving them a date of entry into force nudges the reader into believing that this “force” is a binding force, as with an act of parliament or other formal sources. This is not the case: the non-binding nature of the Principles has already been pointed out. Some scholars, to take this into account, go so far as to mix water with fire by using the euphemism – or even oxymoron – of “non-binding force” in relation to the Principles.15 The only force the Principles have is a certain “authority” afforded to them through their method of drafting (at the Conference, choice of experts, approved by States, etc.) – which is more persuasive than obligatory. To use a classic phrase, one could say that their influence is more auctoritate rationis than ratione auctoritatis.16 Therefore, when it comes to choice of law rules in force in EU Member States, the Rome I Regulation and the law to which it relates still regulate party autonomy in international commercial contracts. 7. The issue remains of how to identify which documents are covered by this “entry into force”. The texts themselves (including the Preamble and the articles of the Principles) are black letter rules and hence obviously covered, as is the

12

As already noted (note 7), the Preamble clearly shows that the Principles are non-

binding. See Feasibility study on the choice of law in international contracts – Report on work carried out and preliminary conclusions – Note drawn up by the Permanent Bureau (General Affairs and Policy, Preliminary Document No 22 A of March 2007), §32, p. 11: arguing in favour of using the form of principles over other competing forms such as a convention or model law in that “[t]he advantage of principles is that they can serve [as a] (3) binding set of rules in contracts between private parties”; compare with Permanent Bureau of the Hague Conference on Private International Law, Choice of Law in International Commercial Contracts: Hague Principles?, Uniform Law Review, Vol. 15, 2010, p. 883 et seq., esp. 885-886; M. PERTEGÁS (note 4), at 20. 14 (see especially: ). 15 B. FAUVARQUE-COSSON/ P. DEUMIER (note 5). 16 On the Unidroit Principles, see B. ANCEL, Auctoritate rationis. Le droit savant du contrat international, in Clés pour le siècle, Dalloz 2000, p. 265 et seq. 13

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Pascal de Vareilles-Sommières explanatory Commentary.17 The Introduction itself is problematic, because point I.21 does not refer to it as a source for interpreting the Principles. The preparatory work, easily accessible on the Conference website, is also problematic because of its status compared to the Commentary as a source of soft law. Is the authority of this preparatory work inferior to that of the Commentary when it comes to understanding an obscure point dealt with in a black letter rule? In terms of persuasive reasoning, no positive response is certain. Actually, the question of scope raised by the “entry into force” of the Principles is undoubtedly secondary in importance insofar as this entry into force, as we now know, does not mean that the provisions covered have any binding force in contrast to those not covered, but is rather a sort of authority of reason, for which the formalities are obviously less important. Ideally, authority of reason depends on quality of substance, and for the Principles to enjoy such authority, they must be deemed to deserve it. This article hopes to provide some elements of response in this regard. 8. In substance, it is unfortunate that the Principles do not offer clarification on what party autonomy means in international contracts when it comes to choice of law and on what limits are encountered by this autonomy, but rather a political project to increase party autonomy, assumed indistinctly to be a good thing as long as it is accompanied by reasonable limitations.18 Perhaps even the difficulties they engender show that a number of political projects were being pursued at the same time: developing party autonomy in comparative choice of law to enable it to win over legal systems that do not attach enough – if any – importance to it; and strengthening party autonomy to increase this autonomy where it is already afforded by national legislature.19 As we can see, this involves combining the consolidation of achievements and the promotion of innovation. However, this combination brings with it certain ambiguities, which are reflected in the eventual solutions, where compromise and elision are apparent. 9. The acquis need clarification, not consolidation or dusting off. The old couple “autonomy/public policy”, considered consensual, is actually problematic in international contracts. Even if we eliminate – at least as a solution in principle – the most restrictive approach, according to which party autonomy is only that awarded by the lex contractus designated by objective choice of law rules (a few traces of this conception survive in the Principles, as we will see20), the question remains 17 See point I.21 of the Introduction: “Users of the Principles are encouraged to read the articles in conjunction with the Preamble and Commentary. The Commentary accompanies each article and serves as an explanatory and interpretative tool [...]”. 18 Introduction, Point I.11: “reinforce party autonomy […] subject to clearly defined limits”. 19 See points I.16 and I.17 of the Introduction to the Principles, which distinguish between provisions that “reflect an approach that is the subject of wide, international consensus” and provisions that reflect the view of the Hague Conference as to best practice and provide helpful clarifications for those States that accept party autonomy”. 20 See Nos. 20 et seq. below.

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law whether the solution envisaged allows parties to do what they wish within the limits of the public policy of the forum (as understood in the conflict of laws), or whether the law applicable to contracts determines what parties can do in substance – even if this means leaving the parties free to choose this law by mutual agreement and, if the law chosen is foreign, if it is blocked at the forum’s border each time the solution it provides is contrary to the public policy of the forum (within its meaning in the conflict of laws).21 10. As it was not previously clarified appropriately, the couple “autonomy/public policy” has been seriously confused by the proposed innovations, whereas mere additional details have not really improved things, because much essential data remains implicit. This is why we propose to flush out the ambiguities in the Principles – which make it a problematic instrument in terms of content even more than format – by going back to the fundamental concepts of autonomy on the one hand, and of public policy, on the other.

II.

What Autonomy?

11. When they met at The Hague to determine the principles on choice of law as applicable to contracts, the experts were tasked by the Council on General Affairs and Policy of the Conference to work “to promote party autonomy”.22 They translated this goal in the first paragraph of the Preamble to the Principles, which states that they “affirm the principle of party autonomy”. 12. While traditional if not universal in the arena of international contracts, the autonomy principle itself, if one examines it closely, is rather ambiguous, to the extent that its application is likely to result in diametrically opposing solutions, depending on the version retained, and the Principles themselves do not avoid this trap, as we shall see.23 Three major conceptions compete when it comes to party autonomy in international contracts: restricted autonomy, plenary autonomy and choice of law autonomy. 13. Restricted autonomy is rather uncommon in comparative choice of law: under such a system, the autonomy granted to parties to an international contract only amounts to the autonomy provided by the substantive law applicable under the relevant choice of law rules (lex contractus). The choice of law rule regarding contract does not grant any direct role to the parties when it comes to determining 21 This debate is not new; among French-speaking scholars, see B. MERCADAL (Ordre public et contrats internationaux, DPCI 1977, p. 457 et seq.), and P. LAGARDE’s response (RCDIP 1978, p. 247). 22 See Council on General Affairs and Policy of the Conference (1–3 April 2008), “Conclusions and Recommendations”, Section “Preparatory Work” on the Conference website pages () dedicated to the Principles, p. 1. 23 See Nos. 25 and 26 below.

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Pascal de Vareilles-Sommières the applicable law. The autonomy of parties to an international contract is hence restricted to that granted to the contracting parties by the law objectively applicable to the contract and can thus be termed “restricted autonomy”. This restricted autonomy is first of all substantive insofar as it is granted by the lex contractus, i.e. by rules whose applicability has been established, meaning that conflict of law issues have been definitively settled and the only remaining questions relate to the substance, on which the autonomy potentially granted to the parties is itself a substantive autonomy. This autonomy is then framed in the sense that it is only gained by the parties to the extent provided for under the lex contractus. Brazil seems to be one of the rare countries with this conception of the autonomy of parties to an international contract.24 In such a system, any choice of law clause agreed upon by the parties may, at best,25 play the role of a clause on the incorporation of the law chosen in the contract; the provisions of the law chosen are only binding upon the parties as contractual clauses and as such must comply with the law objectively applicable to the contract under the relevant choice of law rule for them to be fully effective. In France, this conception of autonomy in international contracts has been propounded by NIBOYET.26 14. In another version, the parties are granted “plenary” autonomy as their contract in principle is not subject to the law of any country liable to strike out a particular clause or the contract in toto. In such a system, a choice of law clause in the contract still amounts to an incorporation of the chosen law in the contract but while this incorporation by reference converts the law into a contractual clause in the relations between the parties it does not imply that the contract is subject to any objectively applicable law. The contract does not need to be supported by a law to be valid and party autonomy thus deserves the term “plenary autonomy”. Some have spoken of “conflictual incorporation”27 to differentiate this type of incorporation by reference to the incorporation following a choice of law clause 24 See Permanent Bureau of the Hague Conference, “Feasibility study on the choice of law in international contracts”, Preliminary Document No 7 of March 2009, §9. The report details a 2004 Brazilian draft law qualifying “party autonomy as a connecting factor in the field of contracts”. Art. 9 of the Introductory Law to the Brazilian Civil Code of 1942 provides that “obligations are governed by the law of the country where they were entered into”. S.C. SYMEONIDES, Codifying Choice of Law around the World, OUP 2014, p. 114, mentioning Ecuador, Paraguay and Guinea as countries whose choice of law provisions over the last fifty years have ruled out the freedom of parties to choose which law applies to their contract. Paraguay has since reversed its position (Act 5393 of 2015 on the law applicable to international contracts, inspired by the Hague Principles). On the legislative position taken by Louisiana and Oregon in the US, see No. 40 below. 25 At worst, the clause would be deprived of any effectiveness as it would have been drawn up contrary to the applicable choice of law rule, an irregularity that is liable to be sanctioned by invalidity. 26 J.-P. NIBOYET, La théorie de l’autonomie de la volonté, Recueil des Cours, Vol. 16 (1927), esp. p. 59 et seq. 27 J.-M. JACQUET, L’incorporation de la loi dans le contrat, Trav. Com. Fr. DIP 1993-1995, Pedone 1996, p. 23 et seq., esp. p. 26-28.

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law as it works in a restricted autonomy system, for its part called “substantive incorporation”: the main thing to understand here is that in a system with plenary autonomy, incorporation, once noted, ends the conflict of law issue and does not require the application of objective choice of law rules to determining which law applies to the contract. On the contrary, in a restricted autonomy system, the law incorporated is valid only as a substantive clause (or set of clauses) in the contract, which remains open to challenge if it does not comply with the law designated by the objective choice of law rules. The conflictual incorporation of the law in the contract – and the plenary autonomy to which it relates – maintain strong links to the doctrine of contract devoid of lex contractus (contrat sans loi), because ultimately it means that the law chosen does not govern the contract but merely supplements it on points not covered by the common will of the parties. A recent comparative law study28 showed that this doctrine of contract devoid of lex contractus has not been systematically enshrined in any country’s private international law, and that its supporters have now rowed back somewhat on their claims by proposing an updated version: contract with no governing state-made law (meaning that the contract can be governed by non-state law, particularly if the parties so choose), which the Hague Principles themselves seem to favour – a point to which we will return29. This revised version of the doctrine of contract devoid of lex contractus, while remaining attached to the idea that a contract can be exempted from any state law, nonetheless significantly distances itself from the idea inasmuch as the contract remains governed by a “law” – not the “law” of a country, to be sure, but a law all the same – such that party autonomy is not plenary in the sense defined above but remains framed to some degree, in that contractual clauses must comply with this “law” to be valid and have a claim to full effectiveness. 15. Whether restricted or plenary, autonomy as envisaged above still has an essentially substantive dimension: the parties are authorised to contractually determine the contents, the substance of their respective rights and obligations. They can do this directly by drawing up a substantive clause or indirectly by incorporating a law in a clause in the contract. Where substantive autonomy is restricted, the parties can be said to have a framed substantive autonomy (via the applicable law according to the conflict rules). Otherwise, they can be said to have plenary substantive autonomy.30 And yet, alongside substantive autonomy, the law of international contracts also provides for choice of law autonomy, which does not directly concern the substance of the rights and obligations agreed upon by the contracting parties but 28 L. GANNAGÉ, Le contrat sans loi en droit international privé et droit non étatique, in K. BOELE-WOELKI/ S. VAN ERP (eds.), General Reports of the XVIIth Congress of the International Academy of Comparative Law, Utrecht, 16-22 July 2006, Brussels/ Utrecht 2007. 29 See No. 29 below. 30 See our articles, Autonomie et ordre public (note *), Clunet 2016, Nos. 25 et seq. and Autonomie substantielle et autonomie conflictuelle en droit international privé des contrats, in Mélanges Pierre Mayer, Lextenso 2015, p. 869, esp. p. 871.

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Pascal de Vareilles-Sommières rather solving conflicts of laws relating to the contract.31 Choice of law autonomy allows the parties to choose the law governing their contract, while substantive autonomy allows the parties to determine the contents of their rights and obligations under the contract. The first, on which we shall focus particularly here, is obviously at the heart of the Hague Principles. 16. Given these three major conceptions of party autonomy in international contracts, the Hague Conference might have been expected, in its preparatory feasibility study on an instrument for choice of law in international contracts, to organise its comparative law questionnaires to show exactly which autonomy is retained in comparative choice of law in the various countries surveyed. Unfortunately, questions on the notion of autonomy remained rather vague, as the countries surveyed were never asked to explain exactly what kind of autonomy or scope thereof were retained in their system.32 The apparent consensus shown by comparative choice of law on the principle of autonomy could therefore be nothing but tokenism, if the different countries were shown to have retained a different conception of autonomy.33 It is hardly surprising that the instrument developed on unclear bases is a little all over the place as regards the autonomy it has been calling for. We will first establish that there is disorder and then we will set out about putting it right. A.

Acknowledging the Disorder

17. The Principles do contain solutions based on the three major conceptions of autonomy in the law of international contracts: choice of law autonomy, restricted autonomy and plenary autonomy. An examination of these solutions will show that their cumulative application in a given case is not always consistent. 1.

Choice of Law Autonomy

18. In defining autonomy as understood in the Hague Principles as “the power of contracting parties to choose the law that governs that contract”,34 Article 2 of the Principles opts for a choice of law conception. The autonomy granted deserves this definition inasmuch as the freedom to which it refers is the freedom to choose the law that governs the contract, not the freedom to determine the contract contents. Indeed, the wording used to define party autonomy in the Principles quite clearly shows that this autonomy does not relate to the power of parties to a contract to 31 This author has previously attempted to clarify the distinction between these two autonomies: see Autonomie substantielle et autonomie conflictuelle (note 30), at 869. 32 Prel. Doc. No 22 A, (note 13), Nos. 4-12, p. 5 et seq. 33 On the heterogeneity of autonomy established in American private international law by the Restatement (second) of the Conflict of laws and by the legislative provisions in force in certain sister states compared to autonomy as established in the Rome I Regulation or the Mexico Convention, see in particular Nos. 40 and 25 ad notam. 34 Emphasis added.

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law determine directly in the contract the substantive rights and obligations agreed to but rather to “choose the law that governs the contract”: in other words, the issue here is to settle conflicts of laws in line with what the parties have agreed in this regard,35 not to settle directly the substantive conflict that divides the parties in their contractual relationship. 19. Another indication that the Hague Principles favour choice of law autonomy lies in the fact that they follow “an approach that is the subject of wide, international consensus”.36 Studies carried out by the Conference when drawing up the Principles are unfortunately of no use to us in this regard as they do not mention the distinction between substantive autonomy and choice of law autonomy and do not provide any evidence that the countries listed as pro-autonomy effectively grant choice of law autonomy to parties as mentioned above.37 Nevertheless, it is worth pointing out that a number of supranational instruments38 allow parties to an international contract to choose the law governing their contract – and they consequently adhere to the concept of choice of law autonomy – thus supporting the view that the above-quoted assertion of the authors of the Principles points toward their supporting choice of law autonomy. 2.

Restricted Autonomy

20. A restricted autonomy system would be established by the Hague Principles if they acknowledged substantive party autonomy as framed by the lex contractus, not as a supplement to some choice of law autonomy granted elsewhere, but as the only possible autonomy accorded to parties to an international contract.39 In this case, the contract would be governed not by the law chosen by the parties but by the objectively applicable law, which would, where appropriate, afford framed substantive autonomy to the parties.40 Under this autonomy, if ever the parties agree to designate a law as determining the contents of their rights and obligations, this law would not strictly speaking be the law “applicable” to the contract but would merely become a contractual clause insofar as it would be incorporated into the contract by the parties. As a contractual clause in a framed substantive autonOn the conflict of law rule applicable in the absence of choice, see our article, Autonomie et ordre public (note *), Clunet 2016, Nos. 20-22. 36 Introduction, I-16 expressly refers to Art. 2(1) of the Principles as illustrating solutions that are largely consensual. 37 See No. 16 above. The same difficulty exists with the overview presented by S.C. SYMEONIDES (note 24), at 114. 38 Internationally, a number of instruments deserve a mention here (non-exhaustive list): e.g. The Hague Convention on the law applicable to international sales of goods (1955), Art. 2 and The Hague Convention (1986) Art. 7 and 8. At regional level: – Europe: Rome Convention of 19 June 1980, Art. 3 and 4; and Rome I Regulation of 17 June 2008, Art. 3 and 4. – Latin America: Mexico Convention of 17 March 1994, Art. 7 and 9. 39 See No. 13 above. 40 On this idea, see No. 15 above. 35

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Pascal de Vareilles-Sommières omy system, the law chosen would only prevail on a particular issue to the extent provided for by law legally framing the contract: not the law chosen (because the parties do not have choice of law autonomy), but the law objectively applicable. Officially, the Hague Principles dismiss this monopolistic version of framed substantive autonomy. It corresponds to a choice of law system in which the applicable law is determined without reference to party agreement, with these latter having merely the right to incorporate a law in their contract to the extent provided for by the law objectively applicable. The Principles also explain reasonably well why this conception of autonomy should be dismissed. Point I.2 of the Introduction to the Principles states: “Determination of the law applicable to a contract without taking into account the expressed will of the parties to the contract can lead to unhelpful uncertainty because of differences between solutions from State to State.” As each State has its own objective connecting factor regarding contractual matters, the choice of law rule can vary depending on the court before which the dispute is brought, which encourages forum shopping, with attendant detrimental consequences on the foreseeability of solutions for the parties. However a number of provisions show, albeit unequally, that the Principles do not absolutely exclude recourse to restricted autonomy. In certain cases, restricted autonomy is used as a back-up. In other, more surprising cases, the Principles allow framed substantive autonomy to develop in international contract law as a true alternative to choice of law autonomy. a)

Restricted Autonomy, a Back-Up Solution

21. While the Hague Principles clearly intend to support true choice of law autonomy by giving parties the power to choose the law governing their contract, this policy does not extend to unrealistically prohibiting any imperative connecting factor in contractual matters. The experience of countries that have choice of law autonomy shows that some questions raised by a contract may require a mandatory choice of law system – in which the connecting factor used to designate the applicable law is imposed on the parties, which are not allowed to contract out of this choice of law. The Principles cope with this by resorting to the legal category of overriding mandatory rules, as in the recent west European tradition.41 22. Article 11(1) of the Principles states that “These Principles shall not prevent a court from applying overriding mandatory provisions of the law of the forum which apply irrespective of the law chosen by the parties”. This amounts to acknowledging that when a contract law issue is covered by an overriding mandatory rule in force in the forum, the law applicable to this issue may be, for the forum in question, the overriding mandatory rule rather than the law chosen by the parties. An example is provided by the Berty42 case, involving a franchise See Rome I Regulation (2008), art. 9, entitled “overriding mandatory provisions”; comp. Rome Convention (1980), art. 7, entitled “mandatory rules”; on whether the notion of overriding mandatory rules used in the Principles is the same as in the European instruments, see S.C. SYMEONIDES, who tends to the negative (note 11), esp. at 825. 42 Paris, 25 Oct. 2011, 10/24023, RDC 2012, 563, obs. J.-B. RACINE. 41

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law contract with a choice of law clause designating “les lois de la Province de Québec” (the laws of the Province of Québec). In this case, the French court applied Art. L 330-3 of the French Commercial Code (imposing a time frame on the pre-contractual information document) as the “overriding mandatory provision applicable to the contract concluded with a French company to set up and develop a franchise network in France under a foreign licence”. The principle of choice of law autonomy has an exception here as regards contractual issues covered by a forum’s overriding mandatory rules, where the issue of their applicability is resolved by a special applicability rule whose connecting factor is imposed on the parties – i.e. by an applicability rule that exemplifies restricted autonomy in this instance43 (here the applicability rule was derived by the court of appeal based on analysis of the substantive regulations involved and the public policy pursued by its author). 23. It should also be noted that this exception is itself confined, due to the particular status of foreign overriding mandatory rules. These rules are not recognised by the Principles as being necessarily applicable to the case each time the question arises. In fact, Article 11(2) states that “[t]he law of the forum determines when a court may or must apply or take into account the overriding mandatory provisions of another law”. The Principles do not therefore take a stance on the issue of the applicability of foreign overriding mandatory rules but leave it up to the forum’s private international law to determine whether and to what extent the foreign overriding mandatory rules could hold the lex contractus in check even though it has been chosen by the parties. This points to a possible maintenance of choice of law autonomy when confronted with foreign overriding mandatory rule, as well as to a possible exception to this autonomy: ultimately it will be up to the forum to decide, assuming it refers to the Hague Principles when drawing up a choice of law system for contractual matters, whether and under what conditions to give effect to the foreign overriding mandatory rules. 24. Lastly, it should be noted that as the forum’s overriding mandatory rules become foreign overriding mandatory rules when examined in another forum, the indeterminate status of the foreign overriding mandatory rules under Article 11(2)44 of the Principles have a knock-on effect on the forum’s overriding mandatory rules. According to the Principles, the overriding mandatory rules of a country only prevail over the law chosen by the parties in that country. Before other fora (foreign court, arbitral tribunal), their applicability depends on the position taken in this regard by the forum in question.45 The foreign forum to which the matter is referred is free to take account of it or not. 43 Hence, the only autonomy that the parties can have is the framed substantive autonomy allowed by the overriding mandatory rules to provide for the substance of their agreement. 44 According to Art. 11(5), the same applies to a certain extent when the overriding mandatory rules of a forum are examined to determine their applicability to a case referred to an arbitral tribunal. 45 Art. 11(2) (State forum) and Art. 11(5) (arbitral forum).

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Pascal de Vareilles-Sommières When viewed from the parties’ perspective, the solution for foreign overriding mandatory rules provided by the Principles thus means that when there is a mandatory rule covering a given contract concluded by the parties, their choice of law autonomy as set out in Article 2 of the Principles is not necessarily challenged each time their contract is brought to the attention of a forum other than that where the overriding mandatory rule originates. The same solution reserved by the Principles to foreign overriding mandatory rules amounts to acknowledging, viewing the issue from the perspective of the country in which an overriding mandatory rule originates, that, under the Principles, the rule only prevails over the lex contractus as chosen by the parties if a contract-related dispute is referred to the courts of the country in which the overriding mandatory rule originates. Therefore, for a country, acknowledging the autonomy system as conceived by the Principles amounts to acknowledging that the parties can legitimately evade (and in a way with its blessing) its overriding mandatory rules by bringing the matter before the relevant court in a foreign country which denies enforcement of these rules.46 The notion of semi-mandatory rule47 is certainly relevant here to translate the reality of overriding mandatory rules as envisaged by the Principles. If we follow these, choice of law autonomy can be legitimately maintained by a country and legitimately claimed by parties before the courts of that country to hold in check the overriding mandatory rules of another country.48 Hence we see that the phenomenon of overriding mandatory rules, although analysed at the outset as a case where choice of law autonomy is ruled out by the country in which such a law originates, is not strictly irreconcilable with maintaining some element of choice of law autonomy, including in relation to contractual issues covered by the relevant overriding mandatory rules. b)

Restricted Autonomy, an Alternate Solution

25. The Principles do not confine themselves to tempering the principle of choice of law autonomy by implementing an exceptional system excluding this, at least partially, where there are overriding mandatory rules. They go so far as to offer countries the option of retaining a solution that, upon analysis, appears to be a real 46 For things to be different, the Principles would have to include a provision allowing the country in which the overriding mandatory rules originate to thwart party autonomy as conferred by Art. 2(1) through its enforcement of foreign judgements and arbitral awards regime, and more especially through a provision subjecting enforcement of the judgement or award to its complying with any forum’s relevant overriding mandatory rule. 47 L.G. RADICATI DI BROZOLO, Mondialisation, juridiction, arbitrage: vers des règles d’application semi-nécessaires, RCDIP 2003, p. 1 et seq.; and in English, H. MUIR WATT/ L.G. RADICATI DI BROZOLO, Party Autonomy and Mandatory Rules in a Global World, International Law FORUM du droit international 6: 90-96, 2004. 48 On the risk that this solution could discourage countries reluctant to adopt autonomy from opting to apply the solutions of the Hague Principles, see our article, Autonomie et ordre public (note *), Clunet 2016, No. 33.

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law alternative to the principle of choice of law autonomy, in that it seems to culminate in its replacement by an autonomy that limits itself to a framed substantive autonomy, at least for countries opting to implement it. Article 11(4) of the Principles states: “The law of the forum determines when a court may or must apply or take into account the public policy (ordre public) of a State the law of which would be applicable in the absence of a choice of law.” What is immediately striking on reading this provision is that, although listed under “overriding mandatory rules and public policy” in Article 11, it has barely any affinity with the conventional mechanism of the public policy defence set out under Art. 11(3).49 The mechanisms diverge on three essential points, to the extent where they prevent public policy from giving them anything other than superficial unity. Firstly, Article 11(3) is positioned as a mechanism where public policy is the exception to the application of the lex contractus (the text refers to excluding “the application of a provision” of the law chosen as the lex contractus), whereas Article 11(4) is designed as a mechanism that tends to confirm the public policy authority of the lex contractus over the provisions of the law chosen by the parties (“to apply or take into account the public policy” of the law objectively applicable, possibly foreign, notwithstanding any choice of law by the parties). Next, there is a difference between protected public policies (“public policy [...] of the forum”, in the case of a public policy defence as in Article 11(3); “public policy [...] of a State the law of which would be applicable in the absence of a choice of law”,50 that is to say the public policy of the lex contractus objectively applicable, which can therefore be foreign law under the public policy enforcement mechanism provided in Article 11(4)). Lastly, there is another contrast between the composition of the public policies protected by these two texts: whereas Article 11(3) refers to the possible play of the “fundamental principles” of the public policy of the forum as an obstacle to the application of the law chosen by the parties, Article 11(4) organises the primacy of this law over that chosen by the parties by referring to “the public policy [...] of a State the law of which would be applicable in the absence of a choice of law” with no restrictive reference to the sole “fundamental principles” of that country. 26. The result of this is that, far from being designed as an original variant of the public policy defence mechanism that would grant an occasional role to public policy (in the sense in which these words are used in the expression “public policy defence”) of the law objectively applicable in the eyes of the forum, Article 11(4) seems rather to be a mechanism that guarantees the enforcement of public policy of the law objectively applicable, taken as a true lex contractus, against the provisions of the law chosen by the parties. These latter provisions, like contractual clauses, defer to rules objectively applicable to the contract and which would contradict them. From this point of view, Article 11(4) can readily be seen,51 as allowing a On the link between Art. 11(3) and the public policy defence, see No. 43 below. See No. 53 below. 51 An excerpt from the Commentary (point 11.29) prevents us from saying “without any hesitation” because, ambiguously in relation to the rest of the text, this point states: 49 50

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Pascal de Vareilles-Sommières State envisaging the take inspiration from the Hague Principles to set out its private international law of contracts to opt for a restricted autonomy system in which any choice of law clause subscribed by the parties would at best count as a clause to incorporate the substance of the law in the contract, and remains incapable of frustrating the public policy pursued by the provisions of the law objectively applicable.52 Here the solution directly conflicts with the choice of law autonomy principle displayed elsewhere by the Hague Principles.53 27. When faced with a contract subject to a certain law by the parties, Article 11(5) sets up the public policy regime and overriding mandatory rules for a dispute brought before an arbitral tribunal. As the issue of overriding mandatory rules has already been examined,54 it remains here to investigate that of public policy. In this respect, Article 11(5) is flawed and ambiguous in a manner similar to that of the status of public policy before State courts. The relevant provisions of Article 11(5) can be summarised as follows: “These Principles shall not prevent an arbitral tribunal from applying or taking into account public policy [...] of a law other than the law chosen by the parties, if the arbitral tribunal is required or entitled to do so”. Here again, one notes that in giving a role to “public policy [...] of a law other than the law chosen by the parties”, viz. “to be applied or taken into account” by the arbitral tribunal, the Principles maintain the ambiguity of the notion by allowing it to be interpreted as relating to public policy of the real lex contractus as referred to, as we have seen, in Article 11(4), without preventing it from being seen as referring to the fundamental principles of the public policy of a forum as referred to in Article 11(3) under the public policy defence as defined in private international law.55 Each time the arbitral tribunal has opted in favour of the first meaning, Article 11(5) clearly appears as a provision of the Principles in turn illustrating restricted autonomy. “[s]ubject to any further restrictions imposed by the law of the forum, the category of public policy (ordre public) to which reference may be made and the limits on its application are to be understood as being subject to the same requirements and restrictions as the exclusionary principle in Article 11(3) (see para. 11.26)”. However, the phrase is cryptic because in referring to point 11.26 of the Commentary under Art. 11, it fails to refer to point 11.24 on limiting the control of public policy solely to “fundamental principles” of public policy, demonstrating that this is not the category of public policy as used in the “exclusionary principle” (i.e. public policy defence) of Art. 11(3) referred to in Art. 11(4). 52 All the more so since the example given by the Commentary to the Principles under Article 11(4) relating to §4 (see Commentary, under Art. 11, illustration 11.6) specifically refers to a public policy of the law objectively applicable to cancel a contractual clause that is valid under the law chosen by the contracting parties, this latter law is not treated differently from the clause it validates: incorporated substantively in the contract, it becomes invalid when required by a public policy of the objectively applicable lex contractus. 53 On the difficulty of resolving this contradiction, see Nos. 39 and 40 below. 54 See No. 24 above, ad notam. 55 The Commentary under Art. 11(5) provides no help in removing the doubt that becomes apparent when reading points 11.30 to 11.32, essentially focused on the issue of the arbitral tribunal’s powers.

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law 3.

Plenary Substantive Autonomy

28. The acceptance of dépeçage in Article 2(2), subjecting separate parts of the contract to different laws, is the initial manifestation of a thread favouring plenary autonomy running through the Principles. According to this text: “The parties may choose a) the law applicable to the whole contract or to only part of it; and b) different laws for different parts of the contract.” The Commentary to Article 2(2) justifies the acceptance of dépeçage by stating that “such partial or multiple choice is by its very nature one of the forms of exercise of party autonomy”.56 Here we see again the ambiguity maintained by the Principles when it comes to the type of autonomy promoted, because where Article 2(1) emphasises choice of law autonomy, here plenary substantive autonomy is favoured. We have emphasised elsewhere57 that the acceptance of unbridled dépeçage more or less leads to the application of a plenary autonomy principle insofar as it allows the parties to tailor a substantive legal regime to their contract using the provisions of different conflicting laws, none of which can ultimately claim that its authority as the lex contractus is respected in the contract. It is certainly tempting to retain that Article 2(2) of the Principles curbs the powers of dépeçage it grants to contracting parties by limiting its possible effect to the subjecting of “parts of the contract” to different laws, thus intimating that dépeçage is only justified if the contract is made up of several distinct blocks that are relatively autonomous and can therefore be governed by different laws.58 However, the Commentary leaves little room for doubt: in referring to “parts of the contract”, Article 2(2) is meant to allow severance of at least one particular clause thereof without this clause needing to constitute a single autonomous “block” compared to the other parts of the transaction to form a “fragment” of the contract subject to a separate law, as explained by point 2.9 of the Commentary, which states: “In practice, such partial or multiple choices may concern, for example, the contract’s currency denomination, special clauses relating to performance of certain obligations, such as obtaining governmental authorisations, and indemnity / liability clauses.”59Arguably, the Principles authorise parties to form a substantive legal regime in patchwork form from laws applicable to different clauses of their Commentary, point 2.6. See our article, Autonomie substantielle et autonomie conflictuelle (note 30), esp. at No. 15. 58 For an interpretation in favour of the dépeçage option granted by the Rome Convention (1980), see M. Giuliano/ P. Lagarde Report, OJEU C 282, 31/10/1980 p. 0001 – 0050, Art. 3(4). Furthermore, the Commentary on the Principles gives some credit to the idea of that they do curb dépeçage where it states (in a development curiously placed under Article 11 on public policy and overriding mandatory rules, whereas it relates to Art. 2) “[i]t does not, however, allow the parties to «pick and choose» within the applicable substantive law so as to exclude the application of certain rules, while applying others” (Commentary, Point 11.14). 59 Permanent Bureau of the Hague Conference on Private International Law (note 13), esp. at 898: “But on the basis that dépeçage is by nature a form of accomplishing party autonomy (footnote omitted), it seems preferable for the future Hague Principles to allow the parties the opportunity to use this device unrestrictedly.” 56 57

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Pascal de Vareilles-Sommières contractual relations, and thus leans quite significantly towards the principle of plenary substantive autonomy. 29. The same applies to the acceptance by Article 3 of choice of law clauses where the parties opt for non-state law. This text states: “The law chosen by the parties may be rules of law that are generally accepted on an international, supranational or regional level as a neutral and balanced set of rules, unless the law of the forum provides otherwise.” In allowing parties to choose a non-state law (such as the Unidroit Principles), the provision does not go so far as to enable them to contract out of any law (by agreeing upon a contract with no lex contractus [contrat sans loi], the archetype of plenary substantive autonomy,60 but it is all the same one of those that in the Hague Principles express avant-garde rather than consensual views,61 providing greater liberty to the parties than what they get with basic choice of law autonomy.62 This cutting-edge stance certainly explains that the scope of the text underlying it is considerably reduced by the final reservation,63 which suggests that this issue is not yet ripe for a uniform solution, and that the countries that have not so far confirmed this solution cannot be deemed behind the curve. Regardless, the option given to parties to choose non-state law is not ruled out, which the proponents of plenary substantive autonomy will assuredly welcome as progress favourable to their positions. They would be right insofar as the option afforded to parties to substitute non-state law for state law designated by the objective conflict rule amounts to an authorisation to avoid the reach of, if not any law, at least any state law, which establishes the (plenary autonomy oriented) possibility for the parties, at least in principle, to bring forth a substantive legal regime for their contractual relations that falls outside the influence of any state law.64

See No. 14 above. It might be tempting to commend the avant-garde and visionary spirit shown by the Principles (for a measured opinion on this, see G. SAUMIER, The Hague Principles and the Choice of Non-State “Rules of Law” to Govern an International Commercial Contract, Brook. J. Int’l L, Vol. 40, Issue 1, 2014, p. 1-29, esp. p. 29; comp. S.C. SYMEONIDES’ less than enthusiastic response to the solution of Art. 3 (note 11), esp. at 832-835). Nevertheless, from a more critical perspective it could be said that it would be suicidal for a soft law instrument such as the Hague Principles, building on this to exercise its influence, to deny any effect to the regimes set up by other soft law instruments such as the Unidroit Principles. 62 As exemplified by Art. 3 of the Rome 1 Regulation, which according to prevailing opinion, prohibits the choice by parties of a non-state law as governing the contract. See for example, P. LAGARDE/ A. TENENBAUM, De la Convention de Rome au règlement Rome I, RCDIP 2008, p. 767 et seq., esp. No. 9, p. 736; C. HAHN, La liberté de choix dans les instruments communautaires récents Rome I et Rome II. L’autonomie de la volonté entre intérêt privé et intérêt général, Trav. Com. Fr. DIP 2006-2008, Pedone 2009, p. 187 et seq., esp. p. 190-191; contra, for example B. AUDIT, Le choix des Principes d’Unidroit comme loi du contrat et le droit international privé, Mélanges C. Jauffret-Spinosi, Dalloz, 2013, p. 13 et seq. 63 “unless the law of the forum provides otherwise.” On the history of the drafting of Article 3 and the introduction at the final stage of this reservation, see G. SAUMIER (note 61). 64 See No. 14 above. 60 61

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law 30. Another example of a solution conveying the idea that the Principles are not irreconcilable with the notion of plenary substantive autonomy is provided by the provisions on arbitration. The overriding mandatory rules and public policy of a law other than the law chosen by the parties are often perceived as the ultimate bulwark against the detrimental effects of a plenary autonomy solution in the field of contracts.65 Yet remarkably, in accepting the possible application or consideration of public policy and overriding mandatory rules of a law other than the law chosen “if the arbitral tribunal is required or entitled to do so”, Article 11(5) suggests that the converse, whereby the arbitral tribunal has neither the power nor the duty to accept the enforcement of the overriding mandatory rules or public policy, is also feasible. By thus doing away with the last legal bastion against party autonomy, the provision seems to help consolidate the idea of autonomy as plenary substantive autonomy. Faced with the Hague Principles that appear caught between the different conceptions of choice of law autonomy, restricted autonomy and plenary autonomy, we shall attempt to put things in order to avoid the gist of the Principles from being split asunder. B.

An Attempt to Put Things in Order

31. With the different types of autonomy presented in the Principles, the only way to maintain any kind of consistency is to organise the whole system. To this end, where possible, we will follow the directives that emerge when we read the texts. This approach tends to promote choice of law autonomy above the others – which turn out to be only used as relatively exceptional adjustments, since if they had a stronger status, they would ultimately induce self-contradiction in the Principles. 1.

The Cardinal Principle: Choice of Law Autonomy

32. Even if we overlook the positioning of Article 2 within the instrument – it ranks first among the provisions on the purpose of the Principles (the provisions of Article 1 relate only to the scope of the Principles) – the prime importance of the rule imposed by this text (and hence of choice of law autonomy above all other types of autonomy accorded to parties by the Principles) emerges from the spirit of the Principles as evidenced in the ancillary documents connected to the Principles by their authors. See for example, P. MAYER/ V. HEUZÉ, Droit international privé, 11th edn. 2014, No. 738: “The chief criticism levied against subjectivism – the impossibility of escaping mandatory provision through a declaration of intent – is ultimately only justified in respect of overriding mandatory rules and to avoid this criticism, all that is needed is to recognise that party autonomy does not enable the parties to avoid the application of these rules” (Translation is ours). On public policy in general, comp. S. FRANCQ, L’ordre public: limite ou condition de l’autonomie dans l’Union européenne?, in C. KESSEDJIAN (ed.), Autonomie en droit européen – Stratégie des citoyens, des entreprises et des Etats, Panthéon-Assas, 2013, p. 223 et seq. 65

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Pascal de Vareilles-Sommières Thus, the Commentary under Article 2 highlights the fact that this provision “reflects the Principles’ primary and fundamental purpose of providing for and delineating party autonomy in the designation of the law governing international commercial contracts”. Insofar as we know that “party autonomy in the designation of the law governing international commercial contracts” is nothing other than choice of law autonomy66, we can therefore infer from this Commentary that “the Principles’ primary and fundamental purpose” is to set up the legal regime of choice of law autonomy and that this purpose is particularly “reflected” in Article 2. In other words, the rule laid down in this provision is essential and other provisions on autonomy are merely supplementary rules. Moreover, point I.16 of the Introduction states that the provisions on “the fundamental ability of the parties to choose the applicable law” – with an explicit reference to Article 2(1) – “reflect an approach that is the subject of wide, international consensus”, meaning that, again according to the Introduction, “[i]t is to be expected that a State that adopts a regime that supports party autonomy would necessarily adopt rules consistent with these provisions”. Here again, is a hint of the particular importance given to Article 2(1) by the experts. Some coherence could be expected between the principle of choice of law autonomy retained by the Principles and the system of law chosen as regards the contract and the parties thereto. Fortunately, this coherence can be found in certain points addressed by the Principles, particularly67 the issue of a possible invalidity of the contract under the chosen law. 33. A conception favouring plenary autonomy would entail the precedence of the contract over the law chosen in the event of total or partial variance. In fact, in a plenary autonomy system, the legal provisions merely supplement the agreement and do not occupy a higher position in the hierarchy of norms. Fortunately, Article 9(1)(e) does not retain this view; it states: “1. The law chosen by the parties shall govern all aspects of the contract between the parties, including but not limited to […] e) validity and the consequences of invalidity of the contract”. The law chosen by the parties for their contract is thus perceived as capable of resulting in the invalidity of the contract. This is a consequence of the fact that it “governs” the contract instead of simply “supplementing” it. The view of the authors of Article 9(1)(e) is thus in perfect harmony with the choice of law autonomy, in which the law chosen governs the contract.68 See No. 18 above. “particularly” because another point dealt with by the Principles with an obvious preference for choice of law autonomy compared to plenary substantive autonomy, namely the issue of what law applies to the validity of the choice of law clause in relation to consent. In deciding that “whether the parties have agreed to a choice of law is determined by the law that was purportedly agreed to”, Article 6 can be seen as a complement to Article 2. Combined, these texts show that the role afforded to the law “purportedly” chosen when answering the question of whether the parties have agreed on choice of law is provided for by choice of law regulations from the perspective of choice of law autonomy rather than by party common intention (from a plenary autonomy perspective). On this issue, see our article, Autonomie et ordre public (note *), Clunet 2016, No. 44. 68 See No. 18 above. 66 67

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law 34. Where a change occurs in the content of the law chosen between the time when the contract is entered into and the time when a contract-related dispute arises between the parties, the content of the law on the date of the agreement does not necessarily prevail. Stating that the law chosen governs the contract means that if the legislature enacting that law repeals the law and replaces it with a new one, it would be up to this legislature to point out which of the former or the latter law applies to the contract through the temporal conflict of law rules. Notwithstanding the silence of the Principles, this solution should prevail, given the priority underlined above of the principle of choice of law autonomy.69 If the will of the parties were to prevail over that of the legislature enacting the law chosen in this respect, the solution based on choice of law autonomy would be replaced by a plenary autonomy solution. 35. Regarding the option given to the forum by Article 3 to prohibit choice of nonstate law, this shows that the Principles’ view of autonomy goes as far as considering that subjecting an international commercial contract to a non-state law is normal if the parties have chosen this law to govern their contract. We have seen70 that the mere fact that Article 3 allows a contract to be made subject to non-state law by the parties if the country of a court to which a dispute is referred so decides, does not actually mean that the Principles refer to the “contract with no lex contractus” doctrine (or to the corresponding plenary substantive autonomy), because the contract needs to be based on a non-state body of law to stand up as a norm binding on the parties. Therefore the question remains open as to the fate, under the Principles, of an international commercial contract designed by the parties as not governed by any law, even non-state law (the pure contract devoid of any lex contractus). The acceptance by Article 2 of choice of law autonomy as a cardinal principle, and the setting of (very loose) limits to this autonomy by Article 3 as regards the issue of the type of law (state law or not) that can be chosen by the parties, suggest that this type of “pure” contract devoid of any lex contractus does not comply with the Principles: it would be governed by nothing other than itself due to common will of the parties in this regard, which, however, is not given this role by Article 2(1), even combined with Article 3. 2.

What Becomes of the Other Types of Autonomy?

a)

Adjustments

36. Plenary autonomy as delineated by Article 2(2) due to this provision’s enshrining of the dépeçage option, seems to play the role of a back-up autonomy since it must be combined with the choice of law autonomy of Article 2(1) and this provision limits the exercising by the parties of their dépeçage option: partial or 69 On the reasons for choosing the new law over the old law, notwithstanding the fact that the content of the first was unknown to the parties when they made their choice, see our article, Autonomie et ordre public (note *), Clunet 2016, No. 45. 70 See Nos. 14 and 29 above.

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Pascal de Vareilles-Sommières multiple choice of law should not prevent the applicable laws, to which different parts of the contract are subject, from governing it. This limits the parties in setting up the legal patchwork for their contract: thus, an indivisible clause in the contract cannot be made subject to a law other than the law governing the contract elsewhere.71 On the contrary, it should be possible to divide complex contractual relations containing several distinct, relatively independent phases between several laws through voluntary dépeçage on the basis of Article 2(2).72 37. The same solution should prevail for plenary autonomy as it emerges from Article 3, and the legalisation by this text of the choice of non-state-made law. The provision should not be seen as reversing the choice of law autonomy principle set out in Article 2(1) but as including non-state law in the range of conflicting substantive rules. To the extent that the corpus of non-state law eventually chosen as the governing law is more than a mere set of default rules and actually deserves the title of “rules of law that are generally accepted on an international, supranational or regional level as a neutral and balanced set of rules”, the switch to plenary autonomy is not complete and choice of law autonomy still ranks first. 38. In turn, inasmuch as it is enshrined by Article 11 of the Hague Principles,73 restricted autonomy does not undermine the principle of choice of law autonomy set out in Article 2(1), but simply provides an exception to it,74 justified by the particular nature of overriding mandatory rules and limited by these rules.75 This combination of restricted and choice of law autonomy in the same instrument does not therefore challenge its consistency, particularly since, as we have seen76 the regime retained by Article 11(1) and (2) of the Principles for overriding mandatory rules does not “necessarily” affect party autonomy in choice of law.

71 On this, see the Commentary on the Principles, point 11.14 (No. 28 above, ad notam). We do not agree with M. PERTEGÁS/ B.A. MARSHALL (note 1), esp. at 994 in their interpretation of the dépeçage option offered by the Principles “as a means of giving the greatest scope to party autonomy”, which propound switching to plenary autonomy. 72 On the acceptance of this type of dépeçage by Art. 3(1) of the Rome Convention (and hence by the same article in the Rome I Regulation), see M. Giuliano/ P. Lagarde Report (note 58), esp. Art. 3(4). 73 On the extent of this measure, see No. 21 above. 74 On the manner in which this exception strengthens autonomy, see the Commentary on the Principles, esp. point 11.9, p. 75. (comp. P. MAYER, Les lois de police, Trav. Com. fr. DIP, Journée du cinquantenaire, ed. CNRS 1989, p. 105 et seq., esp. p. 108). 75 On the exceptional nature of the overriding mandatory rules method compared to the bilateral Savignian method (where the autonomy principle is merely a variant, more particularly positive when it comes to contracts), see our remarks, Lois de police et politiques législatives, RCDIP 2011, p. 207 et seq., esp. p. 235-243. 76 See No. 24 above.

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law b)

A Disavowal

39. The option of restricted autonomy set out in Article 11(4) appears to be a concession made to schools of thought more or less consciously unfavourable to choice of law autonomy in international contracts that favour maintaining the applicability of the law objectively selected, even if a choice of law clause in the contract points in another direction. Therefore, even though the preparatory work of the Principles singles out Brazil for its ordinary choice of law rules in contractual matters as exemplifying restricted autonomy,77 Article 11(4) seems to provide the basis for stating that Brazil does not need to change anything in its current choice of law rules to bring its system in line with the Hague Principles. As we have already seen,78 the solution retained by Article 11(4), clashes with the principle of choice of law autonomy laid down in Article 2(1) of the Principles, with the result that a forum using the option offered by 11(4) to its full extent would remove all substance from choice of law autonomy recognised in Article 2(1) (with no option for a country to go in the opposite direction). Whether intended or not, Article 11(4) ultimately amounts to allowing a forum wishing to preserve the applicability of its own law when designated by its objective choice of law rules to claim that this solution complies with the Hague Principles. 40. It may seem strange that the negotiators of the Principles accepted the overlaying of Article 11(4) in their corpus, notwithstanding the major contradiction opposing this provision with the most essential rule coined by the Principles and favouring choice of law autonomy. It may have been deemed appropriate to retain this wording because Article 11(4) of the Principles illustrates a solution accepted by certain American codifications79 and hence these did not need to be amended to bring them into line with the Principles. For example, the choice of law rules of Louisiana and Oregon in the United States of America retain a similar solution to that provided by Article 11(4).80 Due to lack of space, we will limit ourselves here to examining the Louisiana codification81 as enacted in 1991 in articles 3537 to 3540 of the Civil Code of Louisiana. More specifically, Article 3540 states that “[a]ll other issues of conventional obligations are governed by the law expressly chosen or clearly relied upon by the parties, except to the extent that law contravenes the public policy of the state whose law would otherwise be applicable under Article 3537”.82 Given that the state whose law “would otherwise be applicable” See No. 13 above. See No. 26 above. 79 On this issue, see S.C. SYMEONIDES (note 11), esp. at 823-824. 80 More generally, S.C. SYMEONIDES (note 11), esp. at 821 also cites the American Restatement (second) of the Law (Conflict of Laws), and the Peruvian codification in South America. 81 On Oregon, see Act Relating to Conflict of Laws Applicable to Contracts (H.B. No. 2414 of 2001, §§ 7 to 9) and S.C. SYMEONIDES’ comments (note 11), esp. at 821; Idem Codifying Choice of Law for Contracts: The Oregon Experience, RabelsZ. 2003, p. 726 et seq., esp. p. 739-742; Idem (note 24), at 159. 82 Louisiana Civil Code, Art. 3540. 77 78

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Pascal de Vareilles-Sommières under Article 3537 is the state whose law would be applicable failing any choice, due to its relevant objective links with the contractual situation in question, and if we also take account of the fact that the “public policy” of this state is not the one that comes under the public policy defence83 but also includes mere mandatory rules,84 the only possible conclusion is that under the Louisiana codification the law chosen by the parties may be prevented from affecting mere mandatory provisions of the state, whose law would be objectively applicable to the contract, failing any choice. Hence what appears to be a disavowal of the autonomous credo of Article 2 may well be explained by a sort of persistent latent confusion in the Principles between public policy of the lex contractus and public policy under the public policy defence.85 This confusion is due to the fact that in inserting Article 11(4) into the Principles, the negotiators may have thought they were setting up a particular version of the public policy defence mechanism, possibly giving a role to foreign public policy,86 rather than a solution that contradicted the essential aim of the Principles as hammered out in the Introduction thereto87. We have already highlighted88 why this supposed feeling is mostly a sham, as public policy under Article 11(4) is far removed from public policy as detailed in the public policy defence set out in Article 11(3). It is also true that in emphasising this point, the focus switches imperceptibly from the autonomy issue to the issue of public policy in the Hague Principles.

III. What Public Policy? 41. The bedrock on which the Principles are based and balanced is not just autonomy; public policy also plays a part, as noted at the outset: “Some provisions reflect an approach that is the subject of wide, international consensus. These include the fundamental ability of the parties to choose the applicable law (Preamble, para. 1 and Art. 2(1)) and appropriate limitations on the application of the parties’ chosen law (see Art. 11).”89 The reference to Article 11 alongside that S.C. SYMEONIDES (note 11), esp. at 821, note 54. S.C. SYMEONIDES (note 24), at 159. 85 On this potential confusion, see No. 25 above; comp. S.C. SYMEONIDES (note 24), at 159-160 (on the laws of Louisiana and Oregon). 86 For an illustration of this confusion, see point 11-11 of the Principles, which states that “situations in which application of the chosen law is blocked because its application in a particular case is repugnant to the fundamental policies of the forum or another legal system whose law would apply to the contract absent the parties’ choice” (our italics) are attached to the “application of ordre public”. 87 Point I.11 of the Introduction states “[t]he overarching aim of the Principles is to reinforce party autonomy […]”. 88 See No. 25 above; see also No. 53 below. 89 Introduction, I.16. 83 84

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law of Article 2(1) thus intimates that accepting public policy as a counterbalance to autonomy is the subject of “wide consensus”, justifying their inclusion in the Principles. 42. However, there is reason to wonder whether this place accorded to public policy is not itself somewhat mitigated by the same type of ambiguity encountered with autonomy. Does the word itself not hide a multitude of differing legal realities, all contained in the Principles under the same label? An initial answer to this can be found in the very title of Article 11, which combines overriding mandatory rules and public policy without subsuming the first in the second. Instead, the two words are placed side by side, intimating that they cover two different legal realities. The text thus distinguishes two types of public policy: the public policy at work in overriding mandatory rules and the public policy at work in the public policy defence. Furthermore, as we have seen, the basic conception of autonomy retained in the Principles is that the contract is “governed” by the law chosen, and this inevitably leads to an additional public policy: that of the lex contractus, which could run counter to a contrary clause in the contract. Faced with this public policy, whose role is accepted by the Principles, albeit implicitly, one has to wonder whether and to what extent it is different to the public policy at work in overriding mandatory rules or in the public policy defence. Finally, the notion of public policy surfaces fourth time in the Principles, through the construction of a legal regime for choice of law autonomy itself. Indeed, parties are not allowed to “anything and everything” when choosing what law applies to their contract, some constraints are imposed on them when exercising the freedom of choice afforded them by the Principles. Although the term “public policy” is not used by the Principles for the relevant provisions retained, there is room here for a true “choice of law public policy” which would in its own way be involved with and hold sway over choice of law autonomy. There are no fewer than four different mentions of public policy in the Principles, which each require individual examination. A.

“International” Public Policy (Public Policy of the Forum or Ordre Public)

43. The expression “international public policy” does not belong to the vocabulary of the Principles, which prefers to use the phrase “public policy” – see for example the heading for Article 11 and the wording retained by the third paragraph of this provision, which enshrines the conventional mechanism known in French private international law as exception d’ordre public (public policy defence) and from which the term “ordre public international” (“international” public policy) has been derived90. According to Article 11(3), “[a] court may exclude application of a 90 For more recent developments, criticisms and justifications of this, see our Hague course: L’exception d’ordre public et la régularité substantielle internationale de la loi étrangère, Recueil des Cours, vol. 371 (2014), Nos. 39-46.

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Pascal de Vareilles-Sommières provision of the law chosen by the parties only if and to the extent that the result of such application would be manifestly incompatible with fundamental notions of public policy (ordre public) of the forum.” This clearly exemplifies the conventional mechanism of the public policy defence. The provision indicates what should be done if a court, having identified what law is applicable, determines that the application of this law would culminate in an unacceptable outcome as regards the fundamental values underlying the legal order under which that court dispenses justice. And the solution it brings to this problem is to absolve the court of responsibility for denying applicability to the law selected by the choice of law rule. Here we can see, when the public policy defence is triggered – due to an infringement, by the applicable law, of the essential principle of the forum – the base effect produced by the same public policy defence, known as the “negative effect”: the neutralisation of the substantive provision, applicable in principle due to its being designated by choice of law rules.91 44. The affinity thus established between Article 11(3) of the Principles and the public policy defence would mean an internationalist trained in the French school could express surprise at not finding any reference in this provision to international public policy but only the term “public policy”. French-speaking scholars have felt the need to characterise as international the public policy of the forum as it operates in the public policy defence to distinguish it from public policy as used in the notion of domestic public policy, starting from the observation that it would be inconsistent to allow foreign law designated by the choice of law rule to apply in the forum under the condition that it complies with the domestic provisions of the forum that are mandatory due to their enacting a public policy – because this would amount to requiring compliance with all domestic public policy enacted in the lex fori in a case where it was previously decided that the provisions did not apply because they were not designated by the choice of law rules. From this it can be deduced that the contradiction of the foreign law designated by the choice of law rules with a domestic public policy of the forum is not enough to absolve the court of that forum from its responsibility to apply the designated law.92 This deduction gives rise to the opportunity to specify that public policy protected under the public policy defence is not the domestic public policy of the forum but another public policy, specific to private international law, known in French-speaking jurisdictions as the “international” public policy of the forum.93 In trading this particular terminology for the simple term “public policy” retained in Article 11(3), the Principles run the risk of giving rise to confusion between domestic public policy of the forum and “international” public policy of the forum as detailed above. And yet, when parties choose the law of a country for their contract, they deliberately rule out the laws of other countries. If a contractual dispute is brought See our recent study (note 90), at Nos. 97-101. Permanent Bureau of the Hague Conference on Private International Law (note 13), esp. at 902: “A mere difference between the two laws [the chosen law and the lex fori] cannot be sufficient to dismiss the law chosen.” 93 On the legitimacy of this practice, see our Hague course (note 90), at No. 42. 91 92

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law before a court in another country than the country whose law was chosen by the parties, the law of that other country is thus non-applicable to the facts, as it has been ruled out by the parties. With that in mind, let us assume that before applying the law chosen by the parties, the court checks that each provision of the law chosen complies with the regulations in force in its forum that cover this type of contract and that are mandatory as enacting a domestic public policy: it would become hard to say that the law of the forum has the status of law ruled out by the parties and that the law chosen enjoys the status of lex contractus. 45. It is true that to overcome this difficulty, the authors of the Principles specified that only the “fundamental notions of public policy (ordre public) of the forum” must be complied with by the law chosen by the parties (and not any provision enacting a public policy in the forum). This means that, under Article 11(3), the public policy of the forum that must be complied with by the law chosen does not strictly match the domestic public policy of the forum but rather to its most important components. Nevertheless, we maintain that even thus restricted, the wording is not satisfactory because determining which, among the provisions of the forum that enact a public policy, enshrine a “fundamental principle” and which are merely “simple regulations” is a real challenge. For example, faced with a chosen law that does not provide any particular protection to a weaker contracting party thus deemed to be fully bound by the contract, should we say that the legislation of the forum which protects weaker parties from contracts that are contrary to their interests enshrines a “fundamental principle” or merely lays down a “simple regulation”? It would be a smart person who could foresee how the court of a country in which such provisions are in force would deal with this issue. The likely truth is that the answer is unpredictable and, all things considered, rather arbitrary. 46. The double effect, negative and positive, of the public policy defence is often emphasised. The first effect is characterised by the ejection of the law that is normally applicable. The second involves connecting the situation to the law (normally that of the forum) that will apply instead of the rejected law. The Hague Principles are clearly interested in the negative effect of public policy defence,94 since Article 11(3) fully exemplifies it, and it would be curious if they remained silent on this aspect given that, in cases where public policy is violated, it holds sway over the parties’ provisions by depriving the law they chose of any effect over their contract. Conversely, on the issue of the positive effect following the ejection of the law chosen, Article 11(3) gives freedom to the country in whose name the court rules. Here again, the silence of the Principles on this point is unquestionable as once the law chosen has been deemed repugnant, party autonomy is no longer an issue. But if we take a closer look, even if we disregard the positive effect traditionally imputed to the public policy defence, the Principles

94 Indeed, Art. 11 of the Commentary (point 11.29) mentions an “exclusionary principle” when referring to the system set up by Art. 11(3), a description that is quite evocative of a negative effect.

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Pascal de Vareilles-Sommières nevertheless give a certain positive role to the public policy of the forum95 as expressed in its fundamental principles: these are enforceable under the Hague Principles, even though not chosen by the parties, when evaluating the law chosen, since this assessment ought to be done in relation to whether the solution borne by the law chosen complies with the public policy of the forum. Lastly, one could ask whether the specific nature of this matching of the public policy of the forum and the law chosen by the parties, as part of the public policy defence organised by Article 11(3) has been sufficiently perceived. The public policy of the forum is asked to take a stance not on the direct case in hand, as would be the case if it had a positive effect subsequent to ejection, but on a question on whether the law chosen is in some way regular in view of the solution it contains in the case.96 47. With this in mind, even more than the nature of a provision enacting a public policy (is it a fundamental principle or not?), it is the function and purpose of the public policy defence that should have been clarified by the Principles.97 Function: is the purpose of the defence to enable the application of a forum’s provision enacting a public policy to the contract in question, or is it to prevent the application of a provision of the lex contractus chosen by the parties that contravenes fundamental requirements, a summum jus in the eyes of the forum? Purpose: Does this summum jus, (the “fundamental principle of the public policy of the forum” in the vocabulary of the Principles) apply directly to the contractual relationship of private law? Or does it apply to the law applicable to the private law contract at issue to assess whether it is in order in the eyes of the forum in the contractual context in question, and to hold it in check if it is not? And yet, the wording of Article 11(3) – even with the specification that only infringement of the “fundamental principles of the public policy of the forum” by the results achieved by the lex contractus chosen can neutralise this law – maintains the possibility of seeing in this article a vehicle for the effectiveness of the fundamental principle concerned by the situation at hand. In other words, Article 11(3) is drafted in terms that are compatible with a reading of this text in terms of the positive effect of the public policy defence (this would be a mechanism to apply the lex fori to the contract, even in relation only to its fundamental principles) and not essentially a negative effect (it is a mechanism for neutralising the applicable foreign provision, drawing on the consequences that the result obtained comes up against the public policy of the forum). However, this ambiguity that for too long has marked the public policy defence and clouded the debate should have been clarified by clearly showing how the Principles view its function and purpose. This 95 On the idea that this kind of minimum positive role of the public policy defence, comp. A. BUCHER, La dimension sociale du droit international privé, Recueil des Cours, Vol. 341 (2009), p. 173. 96 On the analysis of the public policy defence in terms of checking whether the applicable foreign law is regular, see our Hague course (note 90), at Nos. 16-37. 97 See (note 90), at No. 62 on this specific feature of public policy at work in public policy defence.

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law is why it would have been preferable to set aside the shield and sword,98 with the shield of public policy defence as a means of protecting the forum against external action in one corner and, in the other corner, overriding mandatory rules that settle the relevant issue of substantive law with a blade whose sharpness is reinforced by a “connecting factor public policy”, as we will now see. B.

“Connecting-Factor-Related Public Policy”

48. Overriding mandatory rules are sometimes termed in French-speaking countries “lois d’ordre public international” (“international public policy laws”), probably to translate the idea, particularly valid in contractual matters, that contrary to provisions enacting merely domestic public policies, they are imposed on parties in the legal relationships they cover and the parties are not able to evade them by choosing another law contractually. This means that the applicability rule of overriding mandatory provisions, because it cannot be derogated from contractually, can be brought under the category of “laws relating to public policy” as defined in Article 6 of the French Civil Code.99 This is how the mechanism of overriding mandatory rules comes into contact with the notion of connecting factor-related public policy. 49. We have already seen how Article 11(1) and (2) compares overriding mandatory rules to choice of law autonomy.100 This restricts choice of law autonomy somewhat, reflecting the fact that for the Principles, the phenomenon of overriding mandatory rules does indeed come under a connecting-factor-related public policy,101 insofar as choice of law autonomy does not emerge unscathed from the clash with overriding mandatory rules as perceived by the Principles: cases where the overriding mandatory rules of the forum or foreign overriding mandatory rules prevail over the law chosen by the parties are not negligible and demonstrate that on these occasions the special applicability rule for overriding mandatory provisions and the connecting factor it entails do indeed come under a public policy, which for this reason may be called “connecting-factor-related public policy”. 50. The Commentary claims that they are treated separately in the Principles, particularly Article 11 on public policy and overriding mandatory rules.102 It is highly Here we are borrowing the classic common law metaphor of law as a shield and law as a sword; for application to public policy in private international law, see A. BRIGGS, Public Policy in the Conflict of Laws: a Sword and a Shield?, Singapore Journal of International and Comparative Law 2002-6, p. 953-979. 99 Art. 6, French Civil Code: “On ne peut déroger, par des conventions particulières, aux lois qui intéressent l’ordre public et les bonnes mœurs,” (“One may not by private agreement derogate from laws that concern public policy and good morals”). 100 See No. 38 above. 101 V.P. HAMMJE, L’ordre public de rattachement, Trav. Com. Fr. DIP 2006-2008, p. 153 et seq. 102 Commentary, Art. 11, point 11.11. 98

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Pascal de Vareilles-Sommières unfortunate that this article contains both provisions on the public policy within the meaning of the legal mechanism of overriding mandatory rules and provisions on the public policy within the meaning of the public policy defence. The fact that these provisions are placed so closely together in the text could generate or at least perpetuate confusion between these two different types of public policy.103 Understanding Article 11(3) in particular could suffer from its proximity to Articles 11(1) and 11(2). Similarly, Article 11(5), which deals with how overriding mandatory rules and public policy are handled before an arbitral tribunal, maintains this proximity between the two types of public policy and indeed merges or even confuses the legal regime before this type of tribunal. Brandishing this threat is not just the simple gesture of a doomsday merchant. We have already seen104 how Article 11(3) could give rise to slippage concerning the “fundamental principles of the public policy of the forum”, leading to provisions inspired by a mandatory public policy being seen as applicable to the contract without regard for the law chosen by the parties. Yet replaced in the context of the study of the system of overriding mandatory rules, this assertion shows to what extent it can be tempting to use the “fundamental principles of the public policy of the forum” as a springboard for classifying the overriding mandatory rules of the law of the forum. This would consummate the confusion between the public policy defence of Article 11(3) and the mechanism for protecting the overriding mandatory rules of the forum set out in Article 11(1). It would hence have been preferable to handle overriding mandatory rules and the public policy defence separately in two distinct provisions to clarify concepts and distinguish between solutions.105 C.

The Public Policy of the lex contractus

51. Obviously, once the lex contractus is determined, its own public policy must be respected by the contracting parties. Respect for the applicability of the lex contractus requires it and extremely powerful arguments would be needed (including the higher respect for the public policy of the forum against a foreign lex contractus) to evade it. Although concentrating primarily on the applicability of the lex contractus chosen by the parties, Article 2(1) of the Principles implicitly confirms the role of the public policy of the lex contractus thus chosen, while Article 11(4) questionably confirms the role of the public policy of the lex contractus objectively applicable when confronted with a choice of law clause, the law chosen being swallowed up as substantively incorporated by reference in the contract.106 103 The Commentary is not exempt from this confusion – for example when it states “[t]here is no doubt that the categories of overriding mandatory provisions and public policy are ‘closely connected’. They may be considered to share the same doctrinal basis and, in effect, to be two sides of the same coin” (Commentary, Art. 11, point 11.11; see also point 11.13 which prolongs the confusion). 104 See No. 45 above. 105 See No. 47 above. 106 On this idea, see No. 26 above.

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law 1.

The Public Policy of the lex contractus Chosen by the Parties

52. We have already seen107 that Article 2(1) implies that the law chosen by the parties when exercising their autonomy plays a particular role: the law chosen governs the contract. It plays the classic role of law in this regard and this includes the legitimacy of the claim of a country whose law has been chosen by the parties as the lex contractus to ensure that the public policies enacted in that law are respected by the contracting parties. This is reflected in particular by the solution expressly accepted by the Principles (Article 9(1) [e]) of the possible invalidity of the contract or one of its clauses if a provision of the lex contractus chosen by the parties is violated and cannot be voluntarily waived by them. Here we see how the public policy of the lex contractus chosen by the parties acts differently either from public policy as it is implemented in the public policy defence or from connectingfactor-related public policy – at the heart of the mechanism of overriding mandatory rules. Public policy as implemented in the public policy defence opposes the application of any infringing foreign lex contractus108 (while the public policy of the lex contractus opposes the contractual clause that infringes it). And when it comes to connecting-factor-related public policy, it prohibits the parties from waiving the applicability of overriding mandatory rules where these latter must be applied109 (while the public policy of the lex contractus prohibits the parties from waiving the substantive provision of the lex contractus which constitutes this same public policy). 2.

The Public Policy of the lex contractus Objectively Applicable

53. When we compared110 the public policy of Article 11(3) and Article 11(4) above, we saw that, for countries opting for the formula left open by Article 11(4), the autonomy granted to the parties could only be labelled as restricted autonomy. Any “choice of law clause” inserted in the contract would then become a clause entailing the substantive incorporation of the law in the contract and, as such, would keep the contract subject to the lex contractus objectively applicable. Therefore, the public policy pursued by the objectively applicable provisions of the lex contractus ought to be respected by the contractual clauses, whether these clauses directly regulate the issue that is their purpose or whether they regulate it indirectly, by reference to the provisions of the law substantively incorporated and having this point as their purpose. In this case, it must be admitted that the public policy the parties ought to respect is first and foremost the public policy of the lex contractus objectively applicable.111 It is only after this, if a dispute is brought before a foreign court (or arbitral court) in relation to the law chosen, that the question of

See No. 18 above. See Nos. 43 et seq. above. 109 See Nos. 48 et seq. above. 110 See No. 25 above. 111 See No. 25 above. 107 108

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Pascal de Vareilles-Sommières respect, by the lex contractus objectively applicable, of the relevant public policy can be posed under the public policy defence. D.

“Choice of Law” Public Policy

54. The concept of “choice of law” public policy does not belong to the usual vocabulary of private international law or even, for that matter, to the law of international contracts. We used this terminology in previous work to denote the regulatory framing imposed on the parties when they exercise their choice of law autonomy.112 Thus the question whether the parties can or not, when exercising their choice of law autonomy, choose a law unrelated to the situation covered by their contract may, in certain countries, receive a negative response, which would entail the parties being prohibited from choosing a law unrelated to their transaction.113 In this case, the parties are prohibited from choosing an unrelated law by the author of the choice of law rule, and it behoves that author to state whether and to what extent the parties may jointly waive this prohibition. Each time authorisation is denied, the rule imposing the prohibition is seen as mandatory as a consequence of the choice of law public policy it pursues (the notion of choice of law public policy being used here as opposed to the previously examined notions of public policy of the lex contractus, “connecting-factor-related public policy” and the public policy of the forum (ordre public) within the meaning of public policy defence). 55. Choice of law autonomy is regulated relatively loosely in the Hague Principles and the rules the parties ought to respect when exercising this autonomy are therefore relatively reduced. Nevertheless, there are some limitations that cannot be exceeded. In rejecting the principle of plenary autonomy, the Principles excluded the solution of the pure contract devoid of lex contractus,114 and if the parties agree in their contract that it will evade any law of any nature, the clause would have to fall as infringing the prohibition of contract devoid of lex contractus resulting from Article 2(1) combined with Article 3.115 Similarly, the limitations we detected in Article 2(1) regarding the dépeçage option116 could be perceived as framing this option in a way the parties would not be authorised to set aside by joint agreement. On the contrary, the fact that the Article 2(4) of the Principles expressly authorise the parties to choose a law that is unrelated to their transaction shows that in this respect, there is no choice of law public policy issue under the Principles. The same applies as regards the relatively theoretical rule set out in Article 8 which in 112 See our article: L’ordre public, in T. AZZI/ O. BOSCOVIC (eds.), Quel avenir pour la théorie générale des conflits de lois? Droit européen, droit conventionnel, droit commun, Symposium of 14 March 2014, Bruylant 2015, No. 7. 113 According to the above-mentioned Feasibility study on the choice of law in international contracts – Note drawn up by the Permanent Bureau (General Affairs and Policy, Preliminary Document No 22 A of March 2007), §6, p. 5. 114 See No. 35 above. 115 See No. 35 above. 116 See No. 36 above.

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Party Autonomy and Public Policy in the Hague Principles on Choice of Law principle excludes renvoi in the event of choice of law by the parties; in expressly accepting that the parties can agree to depart from this exclusion, Article 8 shows that the solution it poses does not involve choice of law public policy. 56. Furthermore, even though some provisions in the Principles do not serve to set out choice of law public policy, they can interfere indirectly with it. The case occurs with the mechanisms of the public policy defence and of overriding mandatory rules. The first is mentioned117 in Article 11(3) of the Principles. In allowing courts to not apply the law chosen if it provides for a solution contrary to the fundamental principles of the public policy of the forum, this article indirectly signals to the parties that they would do better not to choose a law contrary to the fundamental principles of the public policy of the forum if they wish to increase the chances of their choice being enforced.118 Moreover, as regards the system of overriding mandatory rules which can restrict party autonomy,119 interference of the same type can be perceived with the framing of choice of law autonomy: in choosing the law of a country other than the one where the overriding mandatory rules apply, the parties’ choice is rejected – as if the author of the choice of law rule granting autonomy was telling them: “for your contract, don’t choose a law other than the mandatory rules that the court having jurisdiction over your case could make effective despite your choice, otherwise your choice will be rejected”.120

IV. Conclusion 57. Attentive examination of the concepts of autonomy and public policy as they exist in the law of international contracts gives a better measure of the consistency of the Hague Principles. Apart from the clash identified in the option offered by Article 11(4) compared to the solution in principle offered by Article 2(1), we have noted that the text retains a degree of coherence. This is fortunate but probably not the main issue. On the other hand, it is regrettable that party autonomy is treated by the Principles as a unique concept when we have identified no less than three distinct concepts, each requiring different treatment. The different types of public policy are also not differentiated enough, despite the different systems applicable See No. 43 above. On the neutralisation in France of party choice of Californian law due to a Californian judgement (which ordered a French company to pay punitive disproportionate damages) being contrary to French “international” public policy, see Cass. civ. 1, 1 Dec. 2010, 09-13.303, Sté Fountaine Pajot, RCDIP 2011, p. 93, H. GAUDEMET-TALLON, Clunet 2011-3, p. 614, note O. BOSKOVIC. 119 See Nos. 21-24 above. 120 For example, see CJEU, 17 Oct. 2013, C-184/12, UNAMAR (United Antwerp Maritime Agencies) c. Navigation maritime bulgare, Clunet 2014, 625, note J.-M. JACQUET, and 931, obs. J.-S. BERGÉ, D. 2014, p. 60, note L. D’AVOUT (Bulgarian law chosen by the parties, dispute referred to Belgian court, Belgian overriding mandatory rules accepted as prevailing over the Bulgarian law chosen). 117 118

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Pascal de Vareilles-Sommières in each case. Lastly, while we concur with the idea that “the Hague Principles will undoubtedly strongly influence future comparative research in this field”,121 it is likely less due to the fact that they attempt “to reflect current best practice […] with some innovative provisions where appropriate”, than to the ambiguity maintained by the Principles in the law of international contracts as regards the concepts of party autonomy and public policy, and to the subsequent need for clarification. We hope this article has provided a more accurate view of the relationship between the two halves of what remains an unstable couple in the Hague Principles: party autonomy and public policy.

121

82

See J.L. NEELS (note 8), at 56.

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THE ANNULLED ARBITRAL AWARD JURISDICTIO FACIT ARBITRUM Charalambos PAMBOUKIS*

I.

II.

III.

A Re-Reading of the Terms of the Problem A. Identification of the Problem and Solutions that Have Been Proposed 1. Identification of the Problem 2. Solutions that Have Been Proposed B. The Analysis of the Terms of the Problem 1. The Ambiguous Positive Law: Construction of the 1958 New York Convention 2. Notion of an “International Arbitral Award” 3. The Notion of the Arbitral Seat 4. The Notion of the Annulment with Regard to Recognition The Proposed Solution: the Jurisdictional Approach and the Conflict of Judgments A. The Fate of the Annulled Arbitral Award 1. The Jurisdictional Approach of the Annulled Arbitral Award 2. Application of this Approach B. Conflict between Judgments and Arbitral Awards A Statement and a Proposal Instead of a Conclusion

1. The problem constituting the subject of the present contribution is the fate of an arbitral award that has been annulled by the courts of the arbitral seat according to their law.1 Is it possible that an annulled arbitral award remains effective despite *

Professor at the National and Kapodistrian University of Athens. This article which actually addresses a problem arising from lack of harmonisation has been written in honour of M.-J. BONELL, who himself has immensely contributed to the unification of law. I would like to thank Mrs. MARAZOPOULOU, Doctor in Law and Mr. VARESIS, LL.M., for their assistance with collection of the material. Among a vast relevant bibliography see G. CARBONE, Interference of the Court of the Seat with International Arbitration, Journal of Dispute Resolution (2012), Issue 1, 217 et seq.; R.Y. CHAN, The enforceability of Annulled Foreign Arbitral Awards in the United States – A critique of Chromalloy, 17 B.U. Int. LJ (1999), 141 et seq.; K.R. DAVIS, Unconventional Wisdom: A New Look at Articles V et VII of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Texas International Law Journal (2002), 43 et seq.; T. EINHORN, The Recognition and Enforcement of Foreign Judgments on International Commercial Arbitral Awards, YPIL (2010), 43 et seq.; E. GAILLARD, Il est interdit d’interdire: réflexions sur l’utilisation des anti-suit injunctions dans l’arbitrage commercial international, Rev. Arb. (2004), 47 et seq.; G. HORVATH, What Weight should be given to the Annulment of an Award under the Lex Arbitrii? The Austrian and German Perspectives, 27 J. Int. Arb. 1

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Charalambos Pamboukis annulment and may it still be recognised in other States? This issue is not only for practical interest. In answering this question, it necessarily means favouring the interests of either the award debtor or the award creditor. The issue also has a theoretical component, as it constitutes part of the discussion on whether arbitral awards are delocalised or national. This discussion is actually a debate regarding the liberty of international arbitration, a debate which has marked and continues to mark modern international arbitration. The problem is not a new one. An impressive array of relevant literature already exists, as well as a number of judgments, which provide various answers to this issue. These answers are sometimes nuanced, therefore constituting a chaotic landscape. First of all, this contribution shall focus on the analysis of the terms of the problem, (I) prior to an analysis of the jurisdictional approach (II).

I.

A Re-Reading of the Terms of the Problem

The identification of the problem and the proposed solutions (A) shall be followed by an analysis of the terms on which it has been posed (B).

(2009), 249 et seq.; C. KOCH, The Enforcement of Awards Annulled in their Place of Origin, Journal of International Arbitration (2009), 267 et seq.; P. MAYER, The Trend Towards Delocalization in the Last 100 Years, in The Internationalisation of International Arbitration, LCIA Centenary Conference 1996, 230 et seq.; F.A. MANN, Lex Facit Arbitrum, in Liber amicorum Martin Domke, La Haye 1967, 157 et seq. L. MISTELIS/ D. DI PIETRO, UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards, in Concise International Arbitration, 2nd ed., 2015, 19 et seq.; A. NUYTS, La refonte du Règlement Bruxelles I, Rev. crit. dr. int. pr. 2013, 1 et seq.; Ch. PAMBOUKIS, International jurisdiction, recognition and enforcement of judgments in civil and commercial matters – the new Brussels I bis Regulation 1215/2012, Athens 2014, 302 (in greek); W. PARK, Arbitration in International Business Disputes, 2006; L.G. RADICATI DI BROZOLO/ L. MALINTOPPI, Unlawful Interference with International Arbitration by National Courts of the Seat in the Aftermath of Saipem v. Bangladesh, in Liber Amicorum Cremades, 2010, 993 et seq.; L.G. RADICATI DI BROZOLO, The Control System of Arbitral Awards. A Pro-Arbitration Critique of Michael Reisman’s “Architecture of International Commercial Arbitration”, in Arbitration – The Next Fifty Years, ICCA Congress Series 2012, 74 et seq.; L.G. RADICATI DI BROZOLO, The Enforcement of Annulled Awards: an important step in the Right Direction, Cahiers de l’arbitrage (2013), 1027 et seq.; M. SCHERER, Effects of Foreign Judgments Relating to International Arbitral Awards: Is the Judgment Route the Wrong Road? 4 J. Int’L. Disp. Settlement (2013), 587 et seq.; L. SILBERMAN/ M. SCHERER, Forum shopping and Post Award Judgments, PKU Transnational Law Review (2014), Vol. 2:1, 115 et seq., also published in F. FERRARI (ed.), Forum shopping in the International Commercial Arbitration Context, 2013, 313 et seq.

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The Annulled Arbitral Award – Jurisdictio facit arbitrum A.

Identification of the Problem and Solutions that Have Been Proposed

In order to provide a general overview of the problem, after having put forth the identification thereof (1), a brief exposé of the relevant solutions that have been proposed will be discussed (2). 1.

Identification of the Problem

2. Identification of the problem is relatively simple. May an annulled arbitral award (such annulment having most often been effected by the state of the seat) nonetheless be recognised in another state? It should easily be understood that the answer to this question is directly linked to the value to be attributed to the annulment of the foreign judgment. If the latter is recognised, the arbitral award would be regarded as null and void, having therefore no existence and thus not being able to be recognised (pursuant to Art. VIe, New York Convention). If, on the contrary, the forum of recognition does not accord any value to a foreign annulment judgment, an arbitral award may still be recognised if it satisfies the criteria of Art. V, New York Convention (or of the more favourable national law pursuant to Art. VII of the Convention). In light of this problem, at least two views have been initially supported: the view of those who accept the value of the foreign judgment of the state of the arbitral seat2 and the view of those who do not accept such value,3 and instead consider recognition as a unilateral process, independent from the annulment. 3. A compromise view, a median position, seems to gradually become predominant in current legal doctrine, although it is not grounded on positive law. This view is encountered in various versions, the most appealing of which is the so-called “judgment approach”.4 This approach adopts in principle the recognition of the annulment judgment of the country of the seat of the arbitral award. It is actually a median position between the: “I recognize everything” and the “I do not recognise anything”. Although this approach is certainly of interest, its disadvantage rests mainly in its complexity as compared to the two previous views. However, this remark should not be considered as crucially detrimental to its adoption. 2.

Solutions that Have Been Proposed

4. Basically three approaches have been proposed, along with their various versions. (i) The first approach, the territorial approach, favours the recognition of the annulment judgment of the state of the arbitral seat. This approach is based on the well-known theory that has been vigorously proposed – arguably initially – by Territorialist approach, see infra Nos. 4 et seq. Internationalist approach, see infra Nos. 11 et seq. 4 Proposed by L. SILBERMAN/ M. SCHERER (note 1). 2 3

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Charalambos Pamboukis F.-A. MΑΝΝ.5 Pursuant to this view, arbitration does have a forum, just like state justice has a forum. The forum of the arbitration is that of the arbitral seat. It rests on the idea that the power of the arbitral tribunal derives from the state that exercises its powers, i.e., the state of the arbitral seat. This is justified because the arbitral power emanates in a final analysis from a state order, according to this approach. It is based on the idea that the power of the arbitral tribunal emanates from the state where it exercises its duties, which is the state of the seat;6 because the power of the arbitral tribunal emanates in a final analysis from the legal order of one (state) legal order.7 It follows from this that the imperative rules of the law of the arbitral seat (especially the lois de police) must be respected by the arbitral tribunal.8 5. This doctrine, which has the advantages of simplicity and clarity (since the arbitral seat is easily determinable and all international arbitrations have a seat, the latter being a legal notion), actually confers to the arbitral seat the significance of a forum. In addition, it is based solidly on the will of the parties, a well-respected principle in international commercial arbitration, especially in case the parties have directly chosen the arbitral seat. 6. This approach has been adopted by a number of other influential authors, such as VAN DEN BERG. Although at first sight it would appear that it is adopted in the almost globally accepted New York Convention 1958, actually, the latter Convention defines annulment as a specific annulment ground for non-recognition, a ground included in Art. VIe of the Convention. This article may be read as establishing an indirect jurisdictional basis based on the links of the arbitral seat and of the applicable law. However, this reading seems to be too extravagant since the New York Convention is a simple Convention and no direct jurisdictional bases are to be found therein. It seems to me that the most appropriate reading is that this article is interpreted based on the simple idea that we may not recognize an annulled arbitral award without nevertheless introducing control elements and without referring to indirect jurisdictional bases. 7. The substantive law of a number of States such as Russia,9 Germany, Austria,10 Switzerland, Israel11 and Chile12 seem to adopt such an approach and to consider the F.A. MANN (note 1), passim. G. CARBONE (note 1), at 219, 220. 7 It should be noted that the point that raises critical issues is the underlying parallelism between an international arbitral award which adheres to the private will of the parties and a state judgment which must conform to the imperative rules of a certain sole legal order with which it has a fundamental, organic link. It is exactly from this point of view that we would ask whether an arbitral award has a forum and in any case if the arbitral seat could play such a role and, finally, to what extent that would be appropriate. 8 P. MAYER (note 1), passim. 9 Ciments Français, No 17458 /11, Vestn. Vas, 2012, see L. SILBERMAN/ M. SCHERER (note 1), at 118-119. It concerned an arbitral award that was pronounced in Turkey and was annulled due to the infringement of the Turkish public policy. Recognition of the arbitral award was refused in Russia because recognition of an annulled arbitral award 5 6

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The Annulled Arbitral Award – Jurisdictio facit arbitrum annulment of the arbitral award a ground for non-recognition. The underlying thought is that the annulled arbitral award is non-existent and as a consequence it may not be recognised. Annulment is the power to erga omnes vacate an arbitral award by according to it (the vacating) an international value. 8. In this context, it is interesting to note that it is not at all determined which legal order has the power to annul arbitral awards (in compared to others having the power to not recognize). In fact, a more careful reading of Art. VIe (pursuant to which “The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made”) seems to reveal that both the state of the seat (the state where the arbitral award was issued), as well as the state pursuant to the laws of which the arbitral award was rendered, have annulment power. If this article is read as introducing an indirect jurisdictional rule, it also imposes a rule for non-recognition in favour of the state of the arbitral seat. This latter disposition may be read as the applicable procedural law, which shall in most cases coincide with the law of the state of the arbitral seat and will therefore normally not cause any problems. Yet, it could also refer to the applicable law on the merits of the case which may lead to a conclusion in favour of one additional legal order, that of the arbitral seat. 9. Of course such an extensive approach favours the non-recognition of an already existing arbitral award contrary to the spirit and the wording itself of the New York Convention (Art. VII). As a consequence, it favours the interests of the debtor of was held to violate Russian international public policy. This argumentation reminds us of the comity doctrine integrated in to the public policy reservation. 10 The position of German law seems stable in favour of non-recognition of an annulled arbitral award by the state of the arbitral seat even without control of the annulment judgment, see G. HORVATH, What Weight should be given to the Annulment of an Award under the Lex Arbitrii? The Austrian and German Perspectives, 27 J. Int. Arb. (2009), 249. The priority of the state of the arbitral seat reaches the point of overturning a judgment that did not recognise an annulled arbitral award, but which subsequently was confirmed by a supreme Russian court; BGH, 22 February 2001, Y.B. Com. Arb. (2004), 724. 11 T. EINHORN (note 1), at 45, who refers to a judgment of the Supreme Court of Israel of November 2009 in Pickholz v. Sochaskesky case which had recognized a Californian annulment judgment of an arbitral award issued in California. Professor EINHORN supports the view in favour of conditional recognition only of the annulment judgments issued by the state of the arbitral seat but no other category of annulment judgments, which rule on an arbitral award (by actually extending the barrier of exequatur sur exequatur ne vaut to the recognition or non-recognition of foreign arbitral awards. 12 EDF International S.A v. Endessa Internacional SA. The Court decided not to recognise an annulled arbitral award by the state of the arbitral seat in Argentina, Corte Suprema de Justicia, 8 septembre 2011, Revista de Arbitraje Commercial de Inversiones, 915. L. SILBERMAN/ M. SCHERER (note 1), at 120 who report and analyse this judgment correctly note that it would seem that the Chilean High Court imposes a double exequatur despite the fact that this is prohibited by the New York Convention (which does not require for the recognition, the confirmation of the arbitral award by the jurisdiction of the arbitral seat).

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Charalambos Pamboukis the arbitral award, who may practice forum shopping tactics (even if they are limited). It is true that such an approach supports recognition of the annulment if it is effected only by the state of the arbitral seat. In this sense it directly supports the territoriality theory. It, therefore, implies that the international arbitral award does nevertheless have a nationality, namely the nationality of the arbitral seat. However, nothing indicates that this should be limited to the power of the state of the seat; this limitation would seem arbitrary, all the more if it lacks any further justification. 10. However, even if such power should be limited only to the law of the state of the arbitral seat, this approach still ignores the fact that the arbitral seat is sometimes fictitious in the context of international arbitration and that in addition it is not certain that the parties have intended to confer such a crucial importance to it. Especially in the context of the New York Convention (a Convention that tends to favour recognition rather than non-recognition), it is inappropriate to adopt an approach that confers an erga omnes effect so drastic (i.e., legal non-existence), and furthermore does so in a quasi-automatic way. Furthermore, this approach does not in principle provide any protection against an inequitable judgment of the state of the seat (Chromalloy case) or against a purely local judgment (TermoRio case13). It is, in any case, important to underline the captivating power of territoriality. A consequence thereof is that, at least in the arbitral phase, an arbitral tribunal may not disregard the power of the legal orders of the state courts of the arbitral seat. Moreover, this is a result, as RADICATI DI BROZOLO and MALINTOPPI underline with regard to the common law countries,14 a recognition of the institution of contempt of court. Following this understanding, it is correct to confirm that territoriality is intrinsically at least in the arbitral phase.15 In the post-arbitral phase, the decisive element in favour of this approach is the construction of the will of the parties (in an analogous manner to the indirect or implicit prorogation of jurisdiction). The parties have thus, by virtue of the fact of their choice, conferred jurisdictional power of annulment in favour of the tribunals of this state.16 11. (ii) On the contrary, the second approach, i.e., the delocalization approach,17 considers that once the arbitral award is rendered, it rests upon each legal order to See infra (note 21). Unlawful Interference with International Arbitration by National Courts of the Seat in the Aftermath of Saipem v. Bangladesh, in Liber Amicorum Cremades, 2010, 996, 997. 15 For other intervention means such as the anti-suit injunction see G. CARBONE (note 1), at 228 et seq. 16 It actually concerns a subjective element to consider among others the indirect control of the jurisdictional power (see infra Nos. 46 et seq.), which for instance distinguishes the case of the choice of the arbitral seat by the parties or its determination by the Arbitral Tribunal. 17 The term “internationalisation” is preferable. True, since an arbitral award does not have and may not have a legal existence per se at least one legal order recognising its legality is necessary (more appropriately it is necessary that it falls within at least one legal 13 14

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The Annulled Arbitral Award – Jurisdictio facit arbitrum unilaterally recognise it without taking into consideration the conduct of any other legal order in this respect. Technically this view amounts to accepting, as E. GAILLARD has usefully noted18 not that the arbitral award is a floating norm, but that it attracts its possible legality from more than one legal order. It is in this sense that an arbitral award is really international, i.e., that it does not have any “nationality”. 12. This approach also has a number of important followers19 and it has been followed by settled French case law. France – a signatory state to the 1958 New York Convention – applies, by virtue of Art. VII of the Convention, its own domestic law which is more favourable to recognition (especially Art. 1502 Nouveau code de procédure civile, NCPC20). The favourable approach to the recognition of an annulled arbitral award by the state of its seat is also in principle followed by the United States, with serious hesitations,21 the Netherlands,22 Belgium23 and England.24 order as Santi Romano explains). In addition, one should also note that internationalisation does not indicate the phenomenon of belonging to an international legal order, but, as GAILLARD has correctly confirmed, that it potentially and in parallel belongs to more state legal orders. Therefore, the arbitral award does not draw its legality from a sole legal order but from multiple legal orders. This seems in any case to be the difference between the territorialist approach and the internationalist approach. 18 E. GAILLARD, L’exécution des sentences annulées dans leur pays d’origine, JDI (1998), 674. 19 See L.G. RADICATI DI BROZOLO, The Control System […] (note 1), at 74 et seq. 20 The most well-known cases are the Norsolor case (Cour de cassation, 3 October 1984), the Polish Ocean Line case (Cour de cassation, 10 March 1993); the famous Hilmatron case (Cour de cassation, 23 March 1994, recognition of an annulled arbitral award by the Court of Appeal of Geneva and refusal of recognition of the second arbitral award rendered between the same parties after annulment of the first); the Bechtel case (nonrecognition in France based on the merely territorial effect of an annulment judgment which was simply territorial, the annulment judgment having been annulled by the Supreme Court of Dubai) and the important Putrabali case (Cour de cassation, 29 June 2007, which in summary declared that as a principle an arbitral award is international in the sense that it is not perfectly “rooted” in any national legal order. These judgments demonstrate that the positive French law, after a long and interesting journey which started by the favourable application of the French law to recognition and reached the declaration that an arbitral award is really international without any links with a legal order certainly stays firmly attached to the doctrine favouring the recognition of awards. This approach, which is called “internationalist” denies in principle any international effect to the annulment judgment. The aforementioned judgments have been the cause of a rich international legal literature (see, among others. for a simple preview, C. KOCH (note 1), at 267 et seq.). This case-law seems constant (see the recent judgment of the Paris TGI dated 16 May 2012 which recognized a Russian arbitral award which was annulled in Russia in the Maximov case, case reported by L. SILBERMAN/ M. SCHERER (note 1), at 123. 21 Taking into consideration the case law of this State, as a whole, it would be without doubt more appropriate to classify it at the third category of states which conditionally accept recognition of the annulment judgment. If however this state is to be classified among those namely follow the second approach it will certainly be due to the most famous (leading) judgment which is the Chromalloy v. Arab Republic of Egypt (939 E

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Supp. 907 [D.D.C. 1996) 22 Y.B. Com. Arb. (1999), 265 judgment. In this judgment the District Court of Columbia refused to recognise a judgment of the Cairo Court of Appeal, which had annulled an arbitral award issued against the Republic of Egypt. The Cairo Court of Appeal reached its judgment by applying the New York Convention. It is worth noting that in the case under discussion, the Cairo Court of Appeal was at least suspect for impartiality in favour of the Egyptian state. The conditions that the arbitral awards must comply with (regardless of any annulment judgment) in order for them to be recognised in the United States amount to satisfaction of the criteria of section 10 of the FAA, as well as the non-infringement of the American public policy. To a certain extent these prerequisites may be found in the Alghanim case (which does not apply Art. VII directly, but leaves the FAA room to manoeuvre); Baker Marine (the Court of Appeal refused to give effect to Art. VII, because, among others, it does not present links with the United States, being in this respect distinguished by Chromalloy); Spier (the Court refused to apply Art. VII and gave effect to the annulment effected in Italy, which was the arbitral seat); Pertamina (which was interpreted by GAILLARD as confirming the Chromalloy case [E. GAILLARD (note 1), at 47 et seq.], albeit probably in an exaggerated manner [C. KOCH (note 1), at 284] and TermoRio (recognition of a Columbian annulment judgment which annulled the arbitral award in an arbitration between Colombian parties, one of which was a state electricity entity, on the grounds that the ICC arbitration clause was contrary to Columbian law). However, this latter affair seems subject to criticism because the invocation of “technicalities” of internal law at the post arbitral phase was contrary to the conduct of the state entity at the arbitral face. The Greek Supreme Court (Areios Pagos) has ruled that formalities of the internal law with regard to the binding effect of an arbitration in which the State participates are not valid in international commerce; by such ruling Areios Pagos has created an ad hoc international substantive rule as an exception, see relatively Ch. PAMBOUKIS, Note on the judgment issued by Areios Pagos (Plenary Session) No. 8/1996, EpiskED (1997), 95 et seq. For a summary analysis of such affairs see among others C. KOCH (note 1), at 278 et seq. It seems that the tribunals of the United States apply a test between their policy in favour of arbitration, although not at the expense of public policy and of comity, which is applicable with respect to foreign judgments in principle and without prejudice to the violation of the American public policy. In my view it is worth noting that these judgments actually applied a jurisdictional test at first but in the sense of a proximity link with the United States. This test reminds us of the “Inlandsbeziehung doctrine”. This control consists in the test whether the annulment judgment infringes or not the public policy of United States. All judgments seem to indicate that the United States applies Art. VII exceptionally, especially when the annulment judgment of the state of the arbitral seat infringes upon the public policy of this state. The very interesting question of the links with the United States does not seem to have been clearly decided because Baker Marine was marginalised at this point by the Spier judgment. It is also worth noting that an important place has been given to the majority of the aforementioned decisions to the will of the parties that was interpreted from a territorialist point of view as an agreement of the parties, which may confer power of annulment to the state of the arbitral seat. The important and recent Commissa v. PEP judgment (on which see L.G. RADICATI DI BROZOLO, The Enforcement […] (note 1), at 1027 et seq.) seems to confirm the aforementioned conclusions regarding the stance of the United States as concerns the under discussion issue. In this case the District Court of New York has recognized an annulled arbitral award at the state of its seat, Mexico, by denying to give effect to the annulment judgment because it infringed the fundamental notions of justice and decency of the United States. It should also be noted that a double (favourable) possibility is open to the creditor of the arbitral award in the United States (and more generally the Common law states, see L. SILBERMAN/ M. SCHERER (note 1), at 138) and in a parallel way; either to directly recognise

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The Annulled Arbitral Award – Jurisdictio facit arbitrum As it has been correctly previously said, this approach is set back by a disadvantage to the contrary, i.e., the possibility (among others) of forum shopping in favour of the creditor of the arbitral award. In addition, this approach does not satisfactorily resolve the problem, which is inherent notwithstanding the variety of the arbitral award or to recognise the state judgment which confirms it, such being the case in England. In the Commission Export v. Republic of Congo decision the judgment of the District of Columbia (916 F Supp. 2d 48, [Jan.8, 2013]) has placed doubt on this system (as L. SILBERMAN/ M. SCHERER (note 1), at 140); however in a final analysis it did not matter because this judgment was recently overturned by the D.C. Circuit of Appeals (757 F. 3d 321, 326 [D.C. Cir. 2014]). The parallel entitlement could arguably be justified under a twofold condition; the jurisdictional power (mostly grounded on the arbitral seat) of the Arbitral Tribunal which is of a confirmatory nature; and on the other hand distinction between judgment formalities (even without control, without legal value, enforceability in an automatic manner) and control judgments which apply a real control, such control being similar to a large extent to the conditions of Art. V of the New York Convention. The first ones are not worth recognition while the second ones must in principle be taken into consideration by the recognition judge [in this sense see DICEY, MORRIS & COLLINS, The Conflict of Laws, 14th ed., Sweet and Maxwell, 2006, p. 902, para. 16-163, but critical L. SILBERMAN/ M. SCHERER (note 1), at 145-146 145-146]. However, in my view I do not see why one should distinguish within the “judgment approach” between judgments controlling and confirming an arbitral award, on the one hand, and judgments controlling and annulling an arbitral award, on the other. No difference may be traced that could justify in this approach the exclusion of one category from the other, although their exclusion solely in favour of the recognition of arbitral awards may seem more convenient and simple (and certainly closer to the 1958 New York Convention which in any case does not exclude such a possibility). 22 In the case Yukos Capital SARL (Hof’s Amsterdam, 28 April 2009, XXXIV YB. Com. Arb. (2009), 703) the Amsterdam Court of Appeal recognised four Russian arbitral awards which were judicially annulled based on the verification that the annulment judgment was impartial. However, in the aforementioned Maximov case the Court of Appeal refused to give effect to a Russian arbitral award and recognised it in France because the requesting party did not prove that the annulled judgment was impartial. In this context it is appropriate to consider that the Netherlands follows a median approach. 23 It is interesting to note that Belgium has adopted a jurisdictional proximity system in the form of an opt-out from Art. 1717 Belgian Code Judiciaire. Pursuant to this provision the Belgian courts do not have jurisdictional power to annul an arbitral award rendered in Belgium if the two parties (or all parties) were foreign. 24 For historical reasons in England, (DICEY, MORRIS & COLLINS, The Conflict of Laws, 14th ed., Sweet and Maxwell, 2006, p. 736), a party that obtains a judgment that renders an arbitral award enforceable may also recognise this judgment in England provided that the latter is not a mere formality. However, in this respect reference should be made to a well-known case in England before the Supreme Court dated 3 November 2010, Dallah Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan, ([2010] UKSC 45), which refused to give effect to an arbitral award rendered in Paris. Such refusal was grounded on the reason that the Government of Pakistan had never wanted to become part of the arbitration; however, the Paris Court of Appeal recognized it. In any case, the aforementioned judgment mostly designated a conflict of judgments, as P. MAYER understood such conflict (Conflicting decisions in international commercial arbitration, YPIL (2012/2013), 37 et seq.

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Charalambos Pamboukis fundamental views with regard to international arbitration. The issue revolves around the fate of the second arbitral award rendered in the same case, following the annulment by the legal order of the state of the seat of the first order, which was recognised. The renowned Hilmarton case illustrates this hypothesis very well. 13. (iii) It is exactly for the purpose of eliminating these inconveniences of the absolutist approaches that a series of intermediate, median, approaches25 have been proposed. The common departing point of the latter approaches is the possibility of the recognition of an annulment judgment of the seat, under certain conditions. In this respect, it has been proposed to take advantage of Art. V rather than Art. VII of the New York Convention by applying thereto a discretionary based test (referring to the verb may in the text). Such discretion shall include, among others, consideration of the reasons for the annulment.26 However, this approach is subject to criticism, on the one hand because it does not give reasons for this preference in favour of Art. V and, on the other, because it seems that Art. VII does not leave room for such a discretionary approach.27 It has, therefore, been suggested by Jan PAULSSON28 that the annulment judgment should not be taken into consideration if the annulment grounds are not included in Art. V of the New York Convention. In a similar manner, Gary BORN offers additional criteria for refusing effect to an annulment judgment of the arbitral award emanating from the jurisdiction of the arbitral seat.29 Finally, in a remarkable relative study, SILBERMAN & SCHERER seem to adopt the view that the annulment judgment which emanates from the jurisdiction of the arbitral seat may not be ignored.30 Furthermore, the American Law Institute Restatement of the Law Third on International Commercial Arbitration has also adopted this approach (Section 4-16 b). 14. It, therefore, seems that the most recent and dominant view in legal doctrine is the one that favours recognition, under certain conditions, of the judgment of the courts of the state of the arbitral seat that annulled an arbitral award. The criteria vary, they may in essence be summarised in the following two categories: “national” criteria (i.e., annulment is effected for reasons not included in the non-recognition criteria of the New York Convention; such criteria limit the annulment procedure and transform it in a non-recognition procedure) and criteria of fairness and violation by the annulment judgment of the principles of a truly international public policy.

Centrists pursuant to K.R. DAVIS (note 1), at 81. S.T. OSTROWSKI/ Y. SHANY, Chromalloy: United States Law and International Arbitration at the Crossroads, 73 N.Y.U.L. Rev. (1998), 1680. 27 K.R. DAVIS (note 1), at 82. The same writer also refers to the similar positions of Schwartz & Park, at 82, 83. 28 Enforcing Arbitral Awards notwithstanding a Local Standard Annulment, 9 ICC Int’L Ct. of arb. Bull. (1998), 14. As noted by L. SILBERMAN and M. SCHERER, this approach is similar to the one taken by Art. IX (1) of the European Convention (note 1), at 126. 29 International Commercial Arbitration, Vol. 5, 2014, 3622 et seq., esp. at 3638. 30 Idem, at 128. 25 26

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The Annulled Arbitral Award – Jurisdictio facit arbitrum The latter approach is probably the dominant tendency in the Netherlands and in my view also in the United States.31 This approach guarantees solid force and international harmony of solutions, as well as international integrity of legal relations. Such international integrity of legal relations is at any rate one of the fundamental bases of private international law. In addition, it has the advantage of partially avoiding forum shopping. B.

The Analysis of the Terms of the Problem

15. In essence, the ambiguous positive law (i.e., the New York Convention of 1958) authorises the adoption of all the solutions proposed above (1). For this reason, it is proper to analyse the most important relevant parameters, namely the notion of the arbitral award, (2) the notion of the arbitral seat, (3) and the notion of annulment in relation to recognition (4). 16. It should be noted in this respect that European law has adopted a position not to interfere in principle with arbitration. After long debates, which were provoked by the judgment of the European Court of Justice in Luxembourg in the West Tankers case,32 this position was subsequently implemented in the Brussels I-recast Regulation in Art. 73(2), and referred to in recital 12 of the Preamble. It should, however, also be noted that the application of the aforementioned provision remains to be seen, since the Luxembourg Court has not yet issued a judgment on these provisions.33 1.

The Ambiguous Positive Law: Construction of the 1958 New York Convention

17. There is no doubt that among the texts of positive law, most dominant and important is the text of the New York Convention. However, the New York Convention adopts an ambiguous position in the matter under discussion. It is, therefore, necessary to examine whether construction of the New York Convention authorises adoption of the views that have been outlined above and especially of the view favouring recognition of the annulled arbitral award by the state of its seat. This well-known problem relates to the prima facie incompatibility of Art. V and Art. VII.34 The construction question, which is in essence posed, is whether the provision of Art. V imposes an obligation of non-recognition of the annulled We have classified them in the internationalist approach because they recognise, even in an exceptional way that an arbitral award, although it may actually seem that the median approach of the conditional recognition of the annulment judgment, is depicted as having become the majority view. 32 ECJ, 10.2.2009, C-185/07, ECR [2009] I- 663. 33 See among others, A. NUYTS (note 1), at 16; Ch. PAMBOUKIS (note 1). 34 See K.R. DAVIS (note 1), at 43 et seq. 31

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Charalambos Pamboukis arbitral award by the state of the arbitral seat. In this respect, a textual argument is often set forth; this argument is based on the wording of Art. V, the English (at least) version of which, adopts the term “may”.35 This wording may indicate a possibility in case of annulment of the arbitral award provided by Art. VIe, i.e., recognition may be refused because of the annulment of the arbitral award, but no obligation exists. This view is reinforced by Art. VII, which provides an obligation to apply the more favourable regime regarding recognition, by way of application of the principle of maximum efficiency. It is well known that settled French caselaw applies this favourable system by putting forward its internal domestic law, which is very favourable to international arbitration; Art. 1502 et seq. French Code of Civil Procedure) in comparison to the stricter regime of Art. V. 18. Pursuant to Art. I(1) of the New York Convention, the latter applies to signatory states and to foreign arbitral awards, i.e., in the sense of arbitral awards rendered in the territory of a State other than the State of recognition, as well as to arbitral awards which are not considered to be national by the state of recognition. It follows that the Convention applies only to foreign arbitral awards. As such these awards are treated differently than an award from the State of recognition. As a consequence, the regime of internal law (especially annulment) remains open for the arbitral awards either such awards are issued in the territory of the forum or if they are considered as internal, pursuant to the same law. Pursuant to this article which concerns the determination of the application scope of the Convention, the quality of the foreign arbitral award is connected to the territorial criterion. This, despite the fact that this criterion according to today’s standards would appear to be out-dated (following the arbitral seat criterion and the territoriality principle), for the reasons explained above. Arguably a Protocol is necessary which would follow a distinction not with regard to the arbitral award, but with regard to the arbitration in accordance with the criteria of the UNCITRAL Model law. In any event we must conceive this article as simply delineating the scope of application of conventional law and internal law and nothing more. 19. Article V of the Convention provides in a limited manner the control criteria of the foreign arbitral award in view of its recognition. It is also clearly stated in Art. VIe that recognition and enforcement of the arbitral award would not be refused, unless it was annulled or suspended by a competent authority of the state in which, or pursuant to the laws of which, it was rendered. However, the same article, as it has soundly been observed by PARK36 – and this is an important lacuna, as well as a source of confusion – remains silent on the issue of the annulment conditions of the arbitral award; such conditions are left in principle to the arbitral seat. The above has as a result an unfortunate source of complications (and of forum shopping). Article V clearly states the grounds for refusing recognition of the annulled arbitral award by indirectly conferring this power to the state in which the arbitral award was rendered (normally the state of the arbitral award in the legal sense) and

35 36

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The Annulled Arbitral Award – Jurisdictio facit arbitrum probably also to the state pursuant to the law of which the arbitral award was rendered (the latter seems to be the applicable law in the substance of the case). 20. The validity and clarity of this article (an article partly consistent with Art. I of the Conventions mentioned hereinabove) have been moderated by Art. VII. Pursuant to Art. VII, the provisions of the New York Convention do not deprive any interested party of any rights that may have to release themselves from an arbitral award (even an annulled one?) in a manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon. This provision in favour of profiting from the arbitral award, actually establishes a preferential rule to be applied in case of conflict of recognition regimes in favour of the application of the most favourable rule to recognition. This principle is in any case well-known by the work of F. MAJOROS,37 as the rule of maximum efficiency. Pursuant to this rule, a Treaty or a Convention is to be interpreted in the most efficient way towards the objective intended by the Treaty or Convention. It is beyond any doubt that in case of incompatible provisions included in a recognition Convention, it is the most favourable provision to the objective pursued (by the Convention) that should prevail. 21. Although this reading is not universally38 accepted, it is however the most satisfactory one. It actually gives priority to internal law, if internal law is more favourable towards recognition. “More favourable” means that recognition is subject to fewer conditions under the internal laws as compared to the conditions provided in Art. V. The meaning of the latter would, therefore, be to impose an obligation on the signatory States of the Convention not to establish more conditions than those provided for in Art. V. At the same time, it is not prohibited that internal law establishes fewer conditions than the Convention. 22. Criticism to this approach puts forward the argument that Art. VII applies to all the other conditions of Art. V, with the exception of non-annulment. The underlying argument is undoubtedly that we may not examine an arbitral award for the purpose of ascertaining recognition thereof, already due to the fact of its annulment.39 This view neglects a necessary intermediary step, namely the step of the recognition of the annulment of the arbitral award. In any case, it is arguable that the Convention has made a mistake in Art. V by placing the examination of the recognition on an equal footing with the preliminary examination of the annulment for the purposes of ascertaining its acceptance. From this point of view, annulment does not constitute a ground of non-recognition like all the others; it rather constitutes a preliminary control. There is no further need to proceed with the examina37 Les Conventions internationales en matière de droit privé – Abrégé théorique et traité pratique, 253 et s. 38 See K.R. DAVIS (note 1), at 57; R.Y. CHAN (note 1), at 149, 149. 39 A.J. VAN DEN BERG, Annulment of Awards in International Arbitration, in B. LILLICH/ C.N. BROWER (eds.), International Arbitration in the 21st Century: Towards “Judicialization” and Uniformity?, 1994, 113 et seq.

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Charalambos Pamboukis tion of the other grounds included in Art. V with regard to an annulled arbitral award. In fact, recognition of the annulment is a recognition of its non-existence; therefore verification of the other conditions of Art. V is pointless. In any case this restrictive approach, which as already explained actually upholds double exequatur as a condition,40 does not prevent preference to the more liberal approach, which is more consistent with the principle of maximum efficacy. 23. The more liberal approach has the advantage of modernising the Convention by allowing it to avoid the redundancies of the territoriality principle, which itself is based on the understanding of the arbitral seat as a jurisdictional basis.41 We may, therefore, conclude that the New York Convention is also permissive of a more favourable system to the recognition of foreign arbitral awards, including those annulled by a competent authority of the state where they were issued. As a consequence, positive law does not provide a certain solution to the problem under discussion. 24. In reality, a confusing situation is the result, caused by the inclusion of the annulment of the arbitral award in Art. V. We should, however, distinguish between the conditions of non-recognition of an existing arbitral award and the recognition of its annulment; the latter constitutes a necessary preliminary question to the recognition of the arbitral award. The first perspective presumes recognition, essentially as a matter belonging to the international jurisdictional power of the state of the annulment decision, by the state of recognition (forum recognitionis). The second view understands control in the sense described in Art. V. 25. From this point of view we should in any case note that the New York Convention, which is a simple convention, did not aim to render the arbitral seat (i.e., the territory in which the arbitral award was rendered) as a jurisdictional basis. Furthermore, it is exactly in this approach that we should also consider the efficiency of the jurisdictional link of the arbitral seat to exclusively establish jurisdictional power for the annulment of an international arbitral award. In more general terms, we should conclude that the state of the arbitral seat is not the only legal order which confers legality to the arbitral award. This view has also been confirmed by GAILLARD.42

K.R. DAVIS (note 1), at 58. K.R. DAVIS (note 1), at 58. 42 E. GAILLARD, Enforcement of Awards Set Aside in the Country of Origin: The French Experience, in Improving the Efficiency of Arbitration Agreements and Awards: 40 Years of Application of the New York Convention, The Hague 1999, 505, 506. 40 41

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The Annulled Arbitral Award – Jurisdictio facit arbitrum 2.

Notion of an “International Arbitral Award”

26. The arbitral award is first and foremost a judgment from a substantive point of view, since its function is to resolve a dispute.43 As a judgment, the international arbitral award has jurisdictional characteristics. However, it is not prima facie an enforceable title, due to the fact that it lacks state origin. This view is supported by positive law and first of all by the universal 1958 New York Convention; it is therefore difficult to doubt it. In any case it is widely admitted that the institution of arbitration constitutes an alternative dispute resolution method, parallel to state justice. 27. The difference is not found in the function, but in the state or non-state origin (private origin) of the arbitral award, because the arbitral award is a document rendered by individuals who have been appointed by the interested parties with a particular jurisdictional power. It follows that the origin of the arbitral award – in the sense of the “nationality” of the arbitral award – was not determined by the fundamental link between the jurisdictional organ and the given legal order, but by the jurisdictional power conferred by the parties. Seen from the point of view of its function, the arbitral award is a jurisdictional tool, but, if seen from the point of view of its origin, then this is not the case. What is pronounced by the arbitral award as law, i.e., the justice rendered, is not rendered in the name of a determined legal order in which the arbitral tribunal organically belongs. 28. Based on the aforementioned conclusions, it further follows that the arbitral award does not have a “nationality”, as from its origin. This may be regarded as a given, but it does not automatically exclude the possibility that the arbitral award is bound to not acquire a nationality based on other elements. On the contrary, one could take into consideration a number of indications, such as the degree of foreignness of the arbitral award. This indication is in any case important for the purposes of distinguishing an international award from an internal award. 29. This does not seem to cast doubt on the case of an arbitral award all elements of which are localised in the same legal order (applicable law, substantial procedure, seat of the arbitral award, nationality limits regarding the arbitrators etc.). In such a case, we refer to an internal arbitral award pursuant to the dual system, which is not accepted by all legal orders. In this hypothesis, we refer to an internal award because it is “rooted” in a sole legal order. In this case the fact that recourse to the annulment procedure is exclusively organised by this state is justified because it is only this state that has a jurisdictional legitimisation for such a control, given the absence of links with other states. It is in any case this “rooting” that confers such legitimate jurisdictional power in a given state to annul the arbitral award (with an erga omnes effect).

43 On this issue see S. BOLLÉE, Les méthodes du droit international privé à l’épreuve des sentences arbitrales, Paris 2004, passim.

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Charalambos Pamboukis 30. Therefore, research should focus on the determination of the criteria of such “rooting”, since such criteria constitute the basis of the jurisdictional power of a given state to annul the arbitral award and to further claim the universal effect of such an annulment. We should also note here that such a system of uniform criteria does not exist and each legal order is free to consider itself whether an arbitral award is national or international. Therefore, the problem arises of whether recognition of the annulment shall have an erga omnes effect. It follows that annulment may only have a relative effect, depending on how a legal order conceives reception of the recognition. Positive law mostly ignores the aforementioned conclusion. This is explained by a lacuna (intended?) of the 1958 New York Convention (i.e., the most important positive law in international arbitration by far) that fails to produce criteria of internationality of an arbitral award and leaves this aspect to the law of each signatory state. The UNCITRAL Model Law is the most important text providing criteria for the determination of what constitutes international arbitration (and as a consequence criteria for the internationality of the arbitral award which shall be issued). Some of these criteria (establishment of the parties, arbitral seat, place where performance takes place) may constitute a palette of indications of an indirect jurisdictional proximity. Such an indirect jurisdictional proximity serves to control the intensity of the links of the annulment forum with the arbitration in accordance with the concept of the forum recognitionis. This analysis establishes a connection between the annulment power and the jurisdictional power of each state, which is also connected to the degree of foreignness of the arbitral award. 3.

The Notion of the Arbitral Seat

31. In his famous article “Lex facit arbitrum”,44 which was very influential for the doctrine of his time and the positive law of some countries (especially for England),45 MANN proposed to consider the arbitral seat as the equivalent to the arbitration forum. Both his analysis, as well as the criticism thereto are well known.46 It is true that the arbitral seat has a number of advantages, including legal certainty and legitimatisation, especially in cases where the seat was determined by the parties and not by the arbitral tribunal. If this approach is to be followed, the arbitral forum (the seat) attracts its legitimacy from the agreement of the parties. Of course, the will of the parties is the cornerstone of arbitration

44 Liber amicorum Martin Domke, La Haye 1967, 157 et seq. = 2 (3) Arb. Int. (1986), 241. 45 Sir R. GOODE, The Role of the Lex Loci Arbitri in International Commercial Arbitration, 17 Arb. Int. (2001), 19. W.M. REISMAN, Systems of Control in International Adjudication and Arbitration, 1992, 113-20. 46 P. FOUCHARD, L’arbitrage commercial international, 1965, 401 et seq.; A.T. VON MEHREN, Limitations on Party Choice of Governing Law: Do they exist for International Commercial Arbitration, 1986, 19; E. GAILLARD, Legal Theory of International Arbitration, 2010, 35.

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The Annulled Arbitral Award – Jurisdictio facit arbitrum 32. The question posed from the point of view of this contribution is to assess whether the seat may be held as an arbitral forum conferring an uncontested jurisdictional power to the state of the seat regarding the annulment of an arbitral award. In order to answer this question, the function of the arbitral seat should be determined. It is doubtful at the arbitral stage that the arbitral seat designates a legal order to assist and support such a phase. It is known that arbitral panels often seek recourse to state justice for the resolution of various problems that may appear at the arbitral phase. But the question here is whether the arbitral seat also assumes a jurisdictional function by assuming jurisdiction for annulment at the post-arbitral stage (i.e. once the arbitral award is rendered). This function is doubtful. First of all, it is not clear that once the parties choose the arbitral seat, they also intend to confer such power to the seat of the arbitral tribunal. On the contrary, we may legitimately think that parties in an international arbitration establish a presumption of recognition of the arbitral award, such recognition superseding a legal order.47 Furthermore, the choice of the arbitral seat by the parties may also be a random one and not correspond to an intention to confer jurisdictional power to a certain state, as regards the annulment of the arbitral award to be issued. The reasons for such a choice of arbitral seat may vary (commodity, neutrality, annulment too of course). Therefore, to conclude that the will of the parties when they choose an arbitral seat also extends to the issue of the annulment of the arbitral award, seems to be at least random and most certainly subjective (if not merely a matter of the hypothetical will of the parties).48 For these reasons it would seem correct to affirm that the arbitral seat certainly plays a jurisdictional role which involves the power to assist and support at the arbitral phase. However, this does not per se provide legitimisation to the jurisdictional power of the state of the seat to internationally annul the arbitral award at the post-arbitral phase. 33. The jurisdictional power of the state of annulment shall only be based on objective elements (including the arbitral seat). However, to consider the arbitral seat as an exclusive connecting link and, thus confer international legitimisation to an annulment judgment of the courts of the arbitral seat, is not feasible. This being said, nothing prevents a given state (most often the state of the seat) to annul an arbitral award. However, such an annulment shall be relative in the sense that it shall be attached to that particular legal order. On the contrary, its recognition in other legal orders would necessarily presuppose admission by them of the former’s jurisdictional power (to annul the arbitral award). In such a hypothesis, in case that international jurisdictional power (to annul) is absent, it would be more appropriate to assess an annulment, albeit that such an assessment shall take place in the context of non-recognition of the annulment grounds that have been a priori determined and only with regard to the legal effects attributed by the legal order pronouncing the annulment.

The parties aim in principle at the recognition of the arbitral award and not to its annulment. 48 See E. GAILLARD (note 18), at 672. 47

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Charalambos Pamboukis It follows that the jurisdictional power to annul an arbitral award is linked to an invocation of erga omnes annulment. The arbitral seat may be one of the criteria of such jurisdictional proximity. Arguably this is not in itself sufficient to ground such a powerful, erga omnes international effect. If this analysis is followed (logically imposed analysis, which does not differ from the corresponding analysis with regard to judgments), then recognition of an annulment judgment presupposes control of the jurisdictional power of the state of the seat by the legal order of the state of recognition in order for it to primarily satisfy the criterion of the jurisdictional proximity. Therefore, what this approach supports is that the arbitral seat is not sufficient to ground such an indirect jurisdictional power. 4.

The Notion of the Annulment with Regard to Recognition

34. One usually distinguishes annulment from non-recognition by stating that annulment has an erga omnes effect on the arbitral award, while the annulment has a relative effect, which consists in not accepting the legal effects of the arbitral award in the forum recognitionis. This of course rests on the issue whether a legal order assumes such power (i.e., the power of annulment), which must in principle be respected by other legal orders. What is not determined, are the jurisdictional grounds of such power. Pursuant to the territorialism approach the annulment power is attributed to the state of the arbitral seat; thus this approach presupposes the affirmation that the arbitration has a forum not only in the arbitral phase (an initial affirmation which seems difficult to contest), but also in the post-arbitral phase (which is seriously contested for reasons explained above). It is true that the arbitral seat is a forum or more precisely, it functionally assumes the role of a forum in order for it to provide assistance at the arbitral phase. But this does not necessarily lead to the establishment of a jurisdictional basis (all the more of an exclusive one) concerning the annulment power at the post-arbitral phase. 35. This does not in effect provided under any text included in positive law nor under any international law rule. A rule that would have been formulated as follows: “the state of the arbitral seat has jurisdictional power to annul the arbitral award” and even in an exclusive way would open such a possibility to the benefit only of the jurisdictions of the arbitral seat. In any case, no such rule exists in an international text which would be applicable to all States or at least to some of them. On this issue the international doctrine seems to be right in proposing that there is not one single forum for an international arbitration, but many potential fora. An arbitral award is not naturally “rooted” in a legal order in the absence of a fundamental connecting link thereto; this undoubtedly distinguishes it from state court judgments. 36. In addition, the New York Convention does not prevent a reading of Art. V that would suggest that an arbitral award may not be recognised if it has been annulled by the state of the arbitral seat, provided that the annulment judgment has been properly issued, from the point of view of the forum recognitionis.

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The Annulled Arbitral Award – Jurisdictio facit arbitrum Each legal order is, therefore, responsible for whether the annulment judgment, which is pronounced by another legal order, is recognised. In addition, nothing prohibits a legal order from annulling an arbitral award based on any other jurisdictional basis that would seem justified. The above is not contested in a system of relative legal orders. However, this power, which would lead to the annulment, would not actually have the meaning of an erga omnes annulment, unless all other legal orders would recognise such an annulment. And in the absence of rules that would constraint a given legal order to proceed with annulment, it is necessary to conclude that the annulment (although we should make sure to avoid an international fragmentation of the legal relation) is not necessary and in reality it has the meaning of the non-recognition by the state of the seat. 37. One may, therefore, legitimately ask oneself whether annulment has a meaning from an international point of view or if, in reality, from the point of view of other legal orders, it is nothing more than a non-recognition. What seems to better correspond to practice, is that in the presence of an international arbitral award which potentially attracts its legality from multiple legal orders, each of them having the right not to recognise the decision without, however, being in a position to confirm this, there are some legal orders which may annul it in a way that such an annulment is imposed on all other legal orders. If this analysis is correct, it is difficult to regard this as the annulment of an international arbitral award. The legal orders, including the legal order of the arbitration seat, simply have a power not to recognise. 38. From this point of view nothing prohibits a legal order to legally take into consideration the non-recognition of an arbitral award by another legal order49 (even under the form of annulment). However, this has two consequences. On one hand the legal order of the state of recognition may set conditions for the recognition or non-recognition of an arbitral award issued by another legal order and on the other hand, any kind of non-recognition (and not only annulment) may potentially be taken into consideration. In fact, even if the principle exequatur sur exequatur ne vaut does not apply in the context of annulment, nothing prevents its application in the context of non-recognition (i.e., when for instance when an international award would not be recognised due to ultra petita). Of course, a rule of jurisdictional power (only the annulment judgments of the state of the seat of the award will be put to the test of the control of the jurisdictional power and the other conditions) may delimitate the plausible a priori proposition of a foreign nonrecognition judgment regarding any international arbitral award (by virtue of the application of the control-of- jurisdictional power test). 39. In other words, the important element in the analysis is not the foreign annulment judgment or the foreign judgment on non-recognition, but whether the legal order of the state of recognition, recognises its jurisdictional power, and if so under what conditions (and subsequently the conditions and the extent of this judgement). It can, therefore, be concluded that the foreign annulment judgment 49

See similarly S. BOLLÉE (note 43), at 286 et seq.

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Charalambos Pamboukis (or the non-recognition decision) being a preliminary question as to the question of recognition of the arbitral award, shall be subject to proper control. This central question seems to not have been sufficiently underlined at present.

II.

The Proposed Solution: the Jurisdictional Approach and the Conflict of Judgments

40. Within this complex problem, which requires a balance to be struck as far as possible between the principle of legal certainty and the “fair balance” between the (more) legitimate interests of the creditor50 by virtue of the arbitral award, two different kinds of problems need to be identified. These are often dealt with together, but they appear to be distinct from one another. On the one hand, the problem of the annulled arbitral award by a state judgment (most often by the arbitral seat) (A.) and, on the other, the conflict of decisions and awards (B.), which include more types than those illustrated by the famous Putrabali case. The difference between these two problems continues to be that recognition of an arbitral award or recognition of an annulment judgment remains a unilateral procedure of control in the absence of any conflict.51 On the contrary, if we are confronted with two irreconcilable judgments (judgment and arbitral award) the simultaneous recognition of which is requested, then a conflict arises, which must be resolved and it must be resolved Take for instance the Hilmarton case. At the recognition phase of the arbitral award, two foreign judgments were presented to the recognition forum (i.e., before the German courts), the one having annulled the arbitral award (a judgment of the Geneva Court of Appeal), the other having recognized it (a judgment by the French Supreme Court). The question which solution should be preferred will be discussed in the following section. A.

The Fate of the Annulled Arbitral Award

41. On the basis of analysis provided above, the problem of the recognition of the annulment of an international arbitral award is essentially a problem of preliminary control of unilateral jurisdictional power. In the end, this thesis is close to the “judgment approach” theory, with some obvious variations. It shall be subsequently presented in principle (1.) before examining its application (2.).

The arbitral award also enjoys a presumption of regularity as from its existence as the state court judgments do. 51 See the classic doctoral thesis of P. MAYER, La distinction entre règles et décisions et le droit international privé, Paris 1974. Regarding the issue of conflicts of judgments, see also P. MAYER, Conflicting decisions in international commercial arbitration, YPIL (2012/2013), 37 et seq. 50

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The Annulled Arbitral Award – Jurisdictio facit arbitrum 1.

The Jurisdictional Approach of the Annulled Arbitral Award

42. The jurisdictional approach52 is limited to the legal consideration of the annulment judgment53 and requires preliminary control of the recognition of the jurisdictional power of the legal order of the annulment of the arbitral award. Seen from this point of view, it is, therefore, mentioned together with intermediate approaches, because in principle it does not deny value to the annulment judgment. Due to the radicalism of denying an entire arbitral procedure (i.e., a procedure often expensive both in terms of time and cost), it is submitted to a strict control of three steps, namely (1) the control of jurisdictional power (which is equivalent to a control of jurisdictional proximity); (2) the fulfilment of the conditions of recognition (but only taking into consideration objective reasons and not reasons influenced by the control exercised by the judge who annulled the arbitral award), and (3) the crucial public policy test with regard to this judgment (which is reserved for the control of the violation of the imperative rules of the forum recognitionis, such as impartiality or autonomy of the parties in international commercial arbitration). This approach includes three decisive steps with regard to its scope: (a)

exclusion of exequatur judgments is only limited to annulment judgments of the arbitral seat,

(b)

two stages of control of the jurisdictional power, and

(c)

public policy of the forum recognitionis in the broad sense thereof, thus only taking into consideration the internationalised grounds (e.g., excess of power, per se invalidity of the arbitration clause etc.) and not the particular reasons (e.g., public policy, invalidity of the arbitration clause due to infringements imposed by the national law of the state of the seat etc.).

43. Its major difference is that it introduces control of the jurisdictional power as a preliminary phase in the sense of control of the “rooting” (and especially the degree of such rooting) of the arbitral award in the legal order of the state of the annulment. On the contrary, the other median theories propose to distinguish between annulment reasons that have national causes and those that are regarded as proper/crucial at the annulment legal order, and international causes, a kind of international potential res judicata that constitute a subsequent step of the control. These perspectives are not contradictory to each other; in fact, they should be combined.

Our propositions are in the same line with the proposition of SILBERMAN (L. SILBERMAN/ M. SCHERER (note 1), at 136), i.e. to follow for the annulment judgments what is called the “judgment route”, with some slight differences though. The difference in the approach herewith proposed is the enactment of a control of the jurisdictional power of the annulment. This seems to me to be the first element that should be taken into consideration while assessing a foreign annulment judgment. 53 With the exception of exequatur judgments to the extent that they may produce a res judicata effect for the recognition judge. 52

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Charalambos Pamboukis 44. The proposed approach responds, at least from a substantive point of view, to the forum shopping concern, as well as to the concern that in the absence of coordination, the substantive legal relationship under discussion shall be divided. In addition, this approach properly favours the legitimate interests of the creditor of the arbitral award. Why recognise an annulment judgment that emanates from a forum with only a few links with the arbitration, when arbitration is to be regarded as a whole? One should also consider that the creditor of the arbitral award has in principle a superior legitimate right in relation to the debtor of the award. This is essentially due to the fact that the arbitral award enjoys a certain presumption of recognition, which is based on the necessity not to disregard arbitration proceedings, which have been costly both in terms of expenses and in terms of time. Such an approach is also in line with the principle of efficacy of international arbitration, while in addition its application also has the advantage of being simple in principle. 2.

Application of this Approach

45. In view of the problem of recognition or non-recognition of a foreign state judgment, which pronounced the annulment of an international arbitral award, it would be proper to determine first of all the preliminary issue of international jurisdiction. The question to be answered during this investigation is whether the state of the seat had the jurisdictional power before the eyes of the forum of recognition to annul the arbitral award. This is what sets the problem of jurisdictional criterion of the annulment. Given the present state of affairs, it should be admitted that no international uniform criteria exist for the appreciation of the jurisdictional link with the legal order of the arbitral seat. Therefore, each State is free to apply its own legal system and adopt its own criteria. The principle remains the same as in the field of foreign state judgments. However, in this context we should take into consideration the level of control of the specificity of such a judgment, especially when the object of which is exclusively the control of an arbitral award. 46. In this respect two systems are conceivable. The first one is rigid and should be based on the criteria of indirect jurisdictional power (such as for example the arbitral seat or the procedural law, or the substantial law which was applied). The second is based on an evaluation regarding the ad hoc jurisdictional proximity, i.e., whether the legal order at the annulment presented serious links with the arbitration under question.54 Actually, such control aims to the resolution of the preliminary question whether the foreign annulment judgment is to be taken into consideration or not at a first preliminary stage. In order to answer this question a system of criteria for the control of jurisdictional proximity shall be adopted, while it is presupposed that the arbitral seat does not itself suffice in order to confer to it an Of the Simitch type as per the well-known judgment of the French Cour de cassation 1re Civ., 6 February 1985, Bull., I, No. 55, which favours a flexible control of the indirect international jurisdiction as in the doctoral thesis of D. HOLLEAUX, Compétence du juge étranger et reconnaissance des jugements, Paris 1970. 54

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The Annulled Arbitral Award – Jurisdictio facit arbitrum erga omnes jurisdictional power. In this hypothesis each legal order is free to choose its own system. 47. If in principle the recognition forum (forum recognitionis) recognised the jurisdictional power of the state of the seat, one should proceed to a second stage. This second stage is also preliminary, as it regards the extent of the recognition of the annulment, as already proposed by more authors as a median approach, in order for one to distinguish the annulment causes, national or international. As it has correctly been noted, the annulment for reasons of international public policy infringement (such reasons being in reality relative and national) or for violation of an overriding mandatory rule of the forum of the arbitral seat, would not in principle be taken into consideration unless it coincides with the forum recognitionis. As to the rest, we should follow the internationalized non-recognition grounds of Art. V of the New York Convention as well as the legal force resulting if not from res judicata, at least from the foreign judgment as a means of proof. 48. One could develop two objections at the second stage of the preliminary control. First of all, it is questionable as to why the recognition procedure should be complicated; a procedure which is in essence unilateral and of territorial efficacy.55 Instead, one could propose the adoption of the maxim exequatur sur exequatur ne vaut (a dominant doctrine in the foreign judgments recognition field) in the field of international arbitration as well.56 It should also not be admonished that this second stage introduces a complication, which may provoke abusive techniques from the part of the award debtor, although the award creditor has in principle a more legitimate recognition title. This second objection may in fact be partly limited, if one accepts, as proposed here, that the preliminary jurisdictional control will operate during the same proceedings of the arbitral award recognition. 49. On the contrary, and in response to the first objection, it is necessary to affirm that it is actually well-founded and that in reality it will depend on each forum recognitionis whether it will introduce this complicated stage of control to the extent of the persuasive value of the annulment judgment of the foreign arbitral award. However, it does not seem that one could confirm that the unilateral essence of the control necessarily results in its territorial efficacy.57 Therefore, it is equally impossible to confirm whether and the extent to which it is taken into conJ.-F. POUDRET/ S. BESSON, Comparative Law of International Arbitration, 2nd ed. 2007, 812, G. KEGEL, Exequatur sur exequatur ne vaut, in Festschrift für Wolfram MüllerFreienfels, 1986, 377. 56 Correctly observed by L. SILBERMAN, The New York Convention After Fifty Years: Some Reflections on the Role of National Law, 38 GA.J.Int’l & Comp.L. (2009), 25, 36. 57 See in the same vein, L. SILBERMAN (note 1). Compare also M. SCHERER (note 1), at 587. It is necessary to affirm that two “unilateralites” are to be detected and they may form an internationality. This in order to say in a more simple way that the efficacy of the exequatur judgment is necessarily territorial and It seems to me that in each judgment (i.e. an act which properly deserves this name) the added legal value by the jurisdictional element (if such element is reasonable) aims to internationalize it. 55

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Charalambos Pamboukis sideration in another forum. In fact, the modern tendency to take into consideration the annulment judgment (and in certain cases even the recognition judgment in another state58) is based on the idea of the vehicle of the old internationalist “comity” doctrine. I am, however, afraid that such an approach complicates the exercise under discussion, despite the fact that these theories do settle the balance between comity and the imperative national rules. Moreover, by virtue of this limited coordination, forum shopping is also avoided, at least to a certain extent. Nonetheless, it is necessary to affirm that international cooperation in the form of recognition of the reasonable foreign element under the strong impetus of the “comity” doctrine undermines or limits the old saying exequatur sur exequatur ne vaut, as well as the unilateral character of the control. As a consequence and despite any complication, which has been ruled abroad regarding control of an arbitral award (by way of annulment or of non-recognition) is not indifferent, on the condition that it would cover international and not national conditions, such as public policy. This constitutes a tendency towards cooperation and it seems to me that without affirming it, this approach is indeed to be found in positive law. This having been said, the task of admitting foreign norms in a domestic legal order is in essence unilateral. In this sense, the relativity of legal orders is unavoidable in the present state of affairs. The conditions of admission are necessarily different in each legal order and may therefore also arise at a second degree too. The problem with the judgment approach is that it a priori complicates the task without any power to nevertheless confirm that it has succeeded in 58 As we have stated above we do not see any difference either of legal nature, or in the function between these two categories, and there is no reason not to take into consideration the recognition judgments or the non-recognition judgments as well. Their difference is in their effect (the claim for universality of the annulment) or in the power which each one is grounded on (this latter logically entailing control of the jurisdictional power). On the contrary a recognition or a non-recognition judgment is in essence unilateral, which justifies in this field the exequatur sur exequatur ne vaut maxim. However, we should not forget, as already underlined that the field of recognition of foreign arbitral awards benefits from an important unification of the relevant conditions. Reference is herewith made to the unification effected by the 1958 New York Convention. Given such unification, no reason exists for some of the conditions set by it (i.e. the internationalized conditions) to not be taken into consideration in another case of recognition. Comity favours such task of taking into consideration of the reasonableness of the internationalized conditions of control. English case law offers some limited examples to this respect. In this vein, in the Chantiers de l’Atlantique S.A. case ([2011] EWHC Comm. 3883 Eng.) the High Court has reinforced its decision by referring to the non-recognition of an English arbitral award by the French tribunals by also referring to an obiter dictum (J. FLAUX) of an issue estoppel (in the form of exception to res judicata). The same obiter was repeated by the Supreme Court in the words of the distinguished judge Lord MANCE in the well-known case Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan ([2010] UKSC 46 Eng.). However, we may not confirm that such tendency constitutes positive law today. This may be inferred by another case, the Yukos case. In this case the English Court of Appeals ([2012] EWCA Civ 855 [151] Eng.) ruled that the Netherlands’ judgment which had recognized that arbitral awards annulled in Russia due to partiality of the Russian judge, did not constitute an issue estoppel for the English courts, because public policy differs in each State and it would not be the same. For the analysis of this hypothesis see L. SILBERMAN/ M. SCHERER (note 1), at 146 et seq.

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The Annulled Arbitral Award – Jurisdictio facit arbitrum obtaining a better coordination and avoiding forum shopping. It may thus be confirmed that it must be solely limited to annulment judgments, which would render it more functional and this would probably constitute a median and wiser approach.59 Yet it is necessary to affirm that the “parallel unilateralism” may not create a totally satisfactory uniformity and as a consequence this problem may not be resolved, without the adoption of an international unifying instrument. The danger is that the quest for simplification may end up simply complicating matters further. 50. The stage that follows control of the jurisdictional power is simple. If the preliminary jurisdictional control seems positive in concluding that the jurisdiction of the arbitral seat had jurisdictional power to annul pursuant to the forum recognitionis the arbitral award, it shall also be accepted as annulled in such for as well. If, on the contrary, the respondent to the preliminary jurisdictional test is negative, then subsequently, the arbitral award shall satisfy the recognition conditions of Art. V of the New York Convention in most cases (or those of a more favourable to the recognition national regime). We therefore affirm that this approach is rather easy (especially if we take into consideration the ratio of the annulment grounds of the control) and guarantees a legitimate coordination of the objective elements which establish or not the jurisdictional power of the annulment of the arbitral seat forum. B.

Conflict between Judgments and Arbitral Awards

51. P. MAYER60 distinguishes between three hypotheses of conflict of judgments in international arbitration: (i)

the conflict between two state jurisdictions with regard to the same arbitral award;

(ii)

the conflict between a judgment and an arbitral award, and

(iii)

the conflict between two arbitral awards regarding the same case.

52. It seems, therefore, that one may in any case find two relevant paradigms in a forum: (a)

a conflict between two or more annulment judgments or non-recognition judgments or

(b)

a conflict between arbitral awards. The third paradigm regarding a conflict between an arbitral award and its annulment or non-recognition judgment is

This is at the end the preferred option of L. SILBERMAN/ M. SCHERER (note 1), at 156. Although the exclusion of exequatur judgments is not justified if we follow this way, in my view no essential differences may be detected between one (annulment) and the other (exequatur). This is therefore in essence an argument of commodity. 60 Conflicting decisions in international commercial arbitration, YPIL (2012/2013), 37 et seq. 59

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Charalambos Pamboukis not dealt with, because the latter is a (possible) preliminary condition to the recognition of the former. 53. (i) The first paradigm supposes that in the presence of an international arbitral award before the forum recognitionis two or more annulment judgments, judgments of recognition or of non-recognition are issued. In light of this problem two questions arise. Firstly, if this forum generally takes foreign judgments into consideration, either on the presence or lack of legal value of an international arbitral sentence and in this case the problem does not appear because the forum recognitionis will directly proceed to a discussion of the control of the arbitral award with a view to establishing whether it can be recognised. Secondly, if the first issue is answered affirmatively, according to which criteria does it confer jurisdictional power to foreign judgments (the jurisdictional test). By the latter it should be understood that pursuant to the forum, this jurisdiction had a legitimate power (which must therefore be taken into consideration) to pronounce the arbitral award under discussion. It is, however, permitted to ask oneself whether the old (and wise) saying exequatur sur exequatur ne vaut generally applies to the field of judgments on arbitral awards. It is clear that in the field of judgments’ recognition the saying exequatur sur exequatur ne vaut, which expresses the necessarily unilateral character of control, does apply. As a consequence, the forum recognitionis is not at all interested at the control operated by another forum on the judgment because each forum has its own autonomous and independent rules for recognition. The problem in international arbitration mainly appears with regard to foreign annulment judgments61 of the arbitral award, although the phrase exequatur sur exequatur ne vaut seems to equally apply to non-recognition judgments as well. Therefore, the delicate question remains, if its application only extends to annulment judgments. This brings us back again to answering the question whether arbitration has a forum, a legal order where we recognise such an important “rooting” that it becomes the arbitral forum. In the hypothesis that such a paradigm was able to exist, a conflict may arise between annulment judgments (e.g., between the state of the arbitration seat which annuls the arbitral award and the state of the applicable procedural law which does not annul it). Although such a hypothesis is purely theoretical, a response to such conflict could not be provided, other than to apply a jurisdictional test. This test will provide an answer as to which of the two annulment judgments is more legitimate with regard to the forum recognitionis pursuant to its own criteria of jurisdictional power. This could also result in the non-recognition of either of them. Furthermore, in the extraordinary case that a forum recognitionis recognises jurisdictional power of two annulment judgments, the temporal priority rule would provide the solution in favour of the annulment judgment that was first issued (supposedly that it was regularly issued). 54. (ii) The question of the conflict of arbitral awards appears when an arbitral award was annulled by a judgment of the arbitration seat and subsequently a new 61 As to the kind of non-annulment judgments, of confirmation ones, see L. SILBERMAN/ M. SCHERER (note 1), at 137 et seq.

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The Annulled Arbitral Award – Jurisdictio facit arbitrum award was rendered at the same case and between the same parties, which is irreconcilable with the former. In contrast to the previous hypothesis, this one is not theoretical, as we well know from the Hilmarton case. The question also depends, in this hypothesis on the fate to be reserved by the forum recognitionis to the annulment judgment and in this case two paradigms may be produced. Either it is recognised (annulment) and therefore the second award (non-annulment) shall prevail over the former (the annulled decision), or it will not be recognised. In the latter case, it seems that one should apply the rule of temporal priority by giving priority to the first arbitral award (if it has been regularly issued and satisfies the recognition criteria).

III. A Statement and a Proposal Instead of a Conclusion 55. On this basis of the aforementioned analysis, it is necessary to affirm that, with the exception of purely internal arbitral awards (accepted as being purely internal by the states of recognition of the annulment judgment), the annulment (and as a consequence the dualistic system) does not have a proper understanding for the arbitral awards (except for its function as recognition method). The latter may often have no forum at all, at least a forum that would justify an erga omnes annulment of the arbitral award. This is in part due, as has already been confirmed, because it does not have any international effect. This does not mean that the international arbitral award is a floating norm; on the contrary, it enjoys a pluralistic legality, despite the fact that it may be conditional or potential). Yet even if one accepts the tendency of the median or central theories, which seem to prevail in academic circles, one must apply a proper preliminary jurisdictional test to each forum recognitionis, as the jurisdictional power to annulment seems to me to be the important point, which is often omitted.62 It would, therefore, be useful – or even necessary - for the unification of international arbitration to adopt a Protocol to the 1958 New York Convention,63 which could determine, depending on the option, which system will prevail, either (a) an arbitral award is international and therefore necessarily falls within the application scope of the Convention, without entailing that the award be subject to an annulment recourse. In this hypothesis, its recognition shall rest only on the criteria of Art. V by excluding the annulment, as a case of refusal of non-recognition, or (b) the direct jurisdictional basis thus adhering to Art. VIe.

But in this hypothesis, the non-automatic admission of the annulment judgment (due to the absence of jurisdictional power or for other reasons, such as partiality etc.) we may ask ourselves, in view of the relativity of its criteria by the various fora recognitionis, if it succeeds in reality to better coordinate or if on the contrary it does not enter a complication which, if not unnecessary, is, in any case, quite useful. 63 Also proposed by L. SILBERMAN/ M. SCHERER (note 1), at 135. 62

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Charalambos Pamboukis This would constitute a modest modernisation of the New York Convention, with such a document certainly being the most successful instrument in international arbitration, and which as a consequence triggers many discussions on every effort to amend its terms. However, a complex problem of the kind of arbitral award shows that it is time to dare to revitalise this Convention, which has achieved immense success. And perhaps to try to render it, even for limited purposes, double instead of simple.

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OVERLAPPING JURISDICTIONS AND THE RESOLUTION OF DISPUTES BEFORE CHINESE AND FOREIGN COURTS Vivienne BATH*

I. II.

V.

Introduction The Issues – Parallel and Overlapping Proceedings A. Exclusive Jurisdiction Clauses and the Litigation between Compania Sud Americana De Vapores S.A. (CSAV) and Hin-Pro International Logistics Ltd (Hin-Pro) B. The Chinese Approach to Jurisdiction and Jurisdiction Clauses 1. Approach of Courts – Procedural v Substantive Law 2. Exclusive v Non-Exclusive 3. Choice of Neutral Third-Party Forum 4. Interpretation and Incorporation C. Refusing Jurisdiction – Parallel Proceedings and forum non conveniens D. Enforcement of Foreign Judgments in China Dealing with Conflicting Proceedings Discussion A. The Role of the Maritime Courts B. The Concept of Judicial Sovereignty and the Question of Comity C. The Role of China’s Rules on Enforcement D. Practical Issues and Prospects for Change Conclusion

I.

Introduction

III. IV.

The rapid expansion of the Chinese economy since 1979 is reflected in the growth in Chinese and foreign interactions through trade and investment in China and a major increase in the operations of Chinese companies overseas. As a result, the prospects – and implications – of China-related legal disputes have become increasingly important to both foreign and Chinese enterprises. Jurisdictional conflicts and parallel proceedings in cross-border cases are certainly not a new * Professor of Chinese and International Business Law at the University of Sydney. I would like to thank the Max-Planck-Institut für ausländisches und internationales Privatrecht (particularly Dr. Benjamin Knut PISSLER) for the use of their library and resources, Ms. Susan Finder (author of the Supreme People’s Court Monitor) for her advice and suggestions on resources, and Mr. Philip Peng (editor of the Maritime and Civil Law Blog) for identification of relevant Chinese cases.

Yearbook of Private International Law, Volume 17 (2015/2016), pp. 111-150 © Verlag Dr. Otto Schmidt & Swiss Institute of Comparative Law

Printed in Germany

Vivienne Bath problem in international business. However, the approach taken by the Chinese courts, which constitute an increasingly significant participant in the area of transnational litigation, raises important issues in the areas of comparative private international law, Chinese civil procedure law and policy, and international business law.1 This article examines a range of recent foreign and Chinese commercial and maritime cases which have presented the issue of overlapping or conflicting jurisdiction. It also looks at recent developments in Chinese law and practice in relation to jurisdiction in cross-border cases, focussing on the Civil Procedure Law of the People’s Republic of China, as revised in 2012 (Civil Procedure Law),2 and the 2015 Supreme People’s Court Interpretation on the Civil Procedure Law (Interpretation).3 It considers, first, circumstances in which parallel and overlapping proceedings in Chinese and non-Chinese court have arisen; secondly, how the issues of choice of jurisdiction and conflicts between jurisdictions have been handled by the Chinese courts and, thirdly, the issues that these cases and practices present in terms of efficient and final resolution of disputes. The article concludes that, despite recent reforms, Chinese law and practice in relation to these issues is unduly restrictive, and it presents a number of suggestions as to how these issues could be more efficiently handled. The Chinese legislative and court system has traditionally made a distinction between “foreign-related” matters and cases which involve only Chinese interests.4 This reflects the legal and regulatory division between foreign enterprises and entities, foreign-invested partnerships and companies and Chinese entities. In the Chinese legal and judicial systems, “foreign-related” matters continue to be treated

1 This discussion focuses mainly on cases in China, England, Hong Kong, United States and Australia, although there are undoubtedly other cases that may be relevant. Although many Chinese cases are now available online, it has not always been possible to locate the original judgment in the relevant Chinese court decision paralleling the overseas case and, if so, I have relied on the summary in the relevant foreign judgment. While Chinese court cases do not have precedential value (or only to a limited extent in “guiding” and “model” cases), the decisions and reasoning of the Chinese courts are of considerable interest because they reflect how Chinese judges view these issues. I have generally translated the names of the parties to Chinese cases, but kept the citation in Chinese. 2 Civil Procedure Law of the People’s Republic of China, issued by the National People’s Congress (NPC) on 9 April 1991, amended effective 1st April 2008 and 1st January 2013. 3 Interpretation on the Application of the “Civil Procedure Law,” issued by the Supreme People’s Court (SPC) on 30 January 2015, [2015] Fa Shi No. 5. 4 Some clarity in relation to the term “foreign-related” is provided by Article 1 of the Interpretation on Certain Issues concerning the application of the “Law of the People’s Republic of China on the Application of Laws to Foreign-Related Civil Relations,” issued by the SPC on 28 December 2012, [2012] Fa Shi No. 24, and Art. 522 of the Interpretation, which provide that a civil case may be treated as foreign-related if one or both parties are foreigners, stateless or foreign organizations or resident outside China; where the subjectmatter of the dispute is outside China or the facts relating to the civil relationship arise outside China or in other situations that may be recognized as foreign-related civil relations.

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Overlapping Proceedings before Chinese and Foreign Courts separately under the Civil Procedure Law, as well as under the Arbitration Law.5 These include matters to which foreign companies, foreign investment enterprises and foreign-owned Chinese entities are parties, as well as cases where the subjectmatter of the dispute or the other facts in the case are in or arise outside China. They also include recognition and enforcement of foreign arbitral awards and foreign judgments.6 In practical terms, this is a division which is becoming increasingly difficult to sustain at an operational level as foreign investment becomes more integrated in every level of Chinese business and Chinese businesses add international investments and overseas companies to their group structures. The artificiality of this distinction is illustrated by the case of Impala Warehousing and Logistics (Shanghai) Co. Ltd v Wanxiang Resources (Singapore) Pte. Ltd.7 in which the parties to litigation in Shanghai and England were the Chinese incorporated subsidiary of the Trafigura Group (with its “consolidating entity” now incorporated in Singapore),8 arguing for litigation in England, and a Singapore incorporated subsidiary ultimately owned by the Wanxiang Group, a Chinese multinational,9 arguing for litigation in Shanghai. Outside China there has also been an increase in cases involving Chinese interests and companies. Cases include litigation by and against Chinese or Chinese owned companies and enterprises, both private and state-owned; regulatory action involving Chinese entities; overseas arbitrations relating to disputes arising in China or outside China and investor-State arbitrations.10 Thus there has been an increase in cases where there are potentially conflicting proceedings before Chinese and foreign courts (or arbitral tribunals), with the courts showing different degrees of readiness to surrender or refuse jurisdiction over cross-border disputes. Although there are some limitations under Chinese law on the selection of foreign law in certain types of contracts,11 Chinese law generally recognizes the autonomy of the parties in foreign-related civil and commercial contracts to choose the governing law. Similarly, although there are some areas in which Chinese 5 Arbitration Law of the People’s Republic of China, issued by the Standing Committee of the NPC 31 August 1994, effective 1 September 1995, as amended effective 27 August 2009, Chapter 7. 6 Civil Procedure Law, Part 4, “Special Provisions for Civil Proceedings of Foreignrelated Civil Matters.” 7 [2015] EWHC 811 (Comm). 8 Trafigura website, Financials, 2015 Annual Report, available at . 9 Wanxiang Resources website, 2016, About us, Company Overview, available at . 10 Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v Kingdom of Belgium (ICSID Case No. ARB/12/29). See also Ministry of Justice for the PRC v Top International Ltd [2011] NZHC 630 and cases discussed in this article. 11 See Contract Law of the People’s Republic of China, issued by the NPC on 15 March 1999, effective 1 October 1999, Article 126, which provides that Chinese-foreign joint venture contracts and natural resources exploration and development contracts to be performed in China must be subject to Chinese law.

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Vivienne Bath courts are considered to have exclusive jurisdiction,12 there is some recognition in Chinese law that parties should have a degree of autonomy to choose the court in which a dispute should be heard. The scope for international arbitration is considerably wider, and includes all foreign-related disputes arising from economic trade, transport and maritime matters disputes. This extends to joint venture contracts and Chinese natural resources agreements over which the jurisdiction of foreign courts is not recognized.13 Traditionally, foreign parties have preferred to nominate arbitration of China-related disputes (due to doubts about the Chinese legal system, difficulties in enforcing foreign judgments, the wider scope for arbitration and China’s early accession to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards,14 facilitating the enforcement of foreign arbitral awards). Nevertheless, there is considerable scope for the litigation of disputes between foreign and Chinese parties before the Chinese courts.

II.

The Issues – Parallel and Overlapping Proceedings

The issue of parallel and overlapping proceedings between Chinese and foreign courts (that is, cases which deal with the same issues and parties, or involve issues arising from the same factual matrix or transaction and the same – or some of the same – parties) arise in a number of different circumstances. First, there are cases where it is claimed that the parties had agreed to the exclusive jurisdiction of the courts of a designated country, but a party brings proceedings in a court of a different country (generally, but not always, China),15 which accepts jurisdiction over the case.16 A separate but equally problematic category of cases is where there is Civil Procedure Law, Articles 33 and 266. Civil Procedure Law, Article 271. 14 330 U.N.T.S. 38. See New York Convention website (2016), List of Contracting States, available at . 15 See, for example, the United States cases of Intercontinental Industries Corp. v. Wuhan State Owned Industrial Holdings Co., Ltd., 619 Fed. App’x 592 (9th Cir. 2015) (lower level court abused discretion when it enforced the Chinese forum selection clause despite allegations of fraud); Jiangsu Hongyuan Pharmaceutical Co., Ltd. v DI Global Logistics v DI Global Logistics No. 15-22306-CIV-GAYLES, 2016 WL 455347 (S.D. Florida, February 5, 2016 (Chinese forum selection clause enforced). 16 Compania Sud Americana v Hin-Pro International Logistics Ltd [2015] EWCA 401 (Civ) and related Chinese, English and Hong Kong cases (see below); Impala Warehousing and Logistics (Shanghai) Co. Ltd v Wanxiang Resources (Singapore) Co. Ltd [2015] EWHC 811 (Comm); Morgan Stanley & Co International Plc v China Haisheng Juice Holdings Co. Ltd. [2009] EWHC 2409 (Comm); Spliethoff’s Bevrachtingskantoor BV v Bank of China Limited [2015] EWHC 999 (Comm). See also the United States and Chinese litigation in Fellowes, Inc. v Changzhou Xinrui Fellowes Office Equipment Co. Ltd., No. 11 C 6289, 2012 WL 3544841 (N.D. Illinois E.D, Aug. 16, 2012), rev’d 759 F. 3d 787 (7th Cir. (III), 2014) on the basis that there was no international diversity jurisdiction, 12 13

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Overlapping Proceedings before Chinese and Foreign Courts alleged to be an arbitration agreement which provides for arbitration overseas, but a party brings a case in a Chinese court nonetheless. This includes cases where the court decides that there is no valid arbitration clause, or the arbitration clause is invalid for some reason such as fraud, resulting in concurrent proceedings if both the court case and the arbitration go ahead.17 Secondly, there is a non-exclusive jurisdiction clause or there is no agreement on jurisdiction and both parties bring – or propose to bring – proceedings in the courts of different countries, thus giving rise to an application for a court to refuse to take jurisdiction over the case.18 Often, both the Chinese and the foreign court clearly have concurrent jurisdiction over the case under their own rules. Examples here are admiralty cases where the jurisdiction arises from the presence of a ship within the jurisdiction of the maritime or admiralty court.19 Potential problems include the issue of competing orders and awards; the grant by the court, Chinese or foreign, of interim orders or remedies in an attempt to delay or restrain the competing litigation and the enforceability of those orders overseas, and, ultimately, the enforceability of arbitral awards and foreign judgments. This article focuses on a number of recent cases that highlight the issues that arise from overlapping court proceedings. A.

Exclusive Jurisdiction Clauses and the Litigation between Compania Sud Americana De Vapores S.A. (CSAV) and Hin-Pro International Logistics Ltd (Hin-Pro)

There are a considerable number of cases involving parallel proceedings, generally in the maritime area, where a contract or transport document contains a clause choosing a governing law and agreeing on the exclusive jurisdiction of a nominated court (often English). Private international law issues arise when a Chinese court takes jurisdiction despite the existence (or alleged existence) of the exclusive jurisdiction clause. The CSAV/Hin-Pro litigation is an excellent example of this. CSAV is a major international carrier, based in Chile. Hin-Pro is a Hong Kong company with operations in China which entered into a number of transactions with CSAV for the shipment of goods from various ports in China to Venezuela. The cargo was shipped in each case pursuant to approximately 70 straight (that is, non-transferable) bills of lading issued by CSAV on its standard form, which contains a clause providing for English law and jurisdiction. The dispute between the parties relates to numerous actions before the Maritime Courts of and Changzhou Xinrui Fellowes Office Equipment Co. Ltd v Fellowes Inc., guiding case on contracting contract dispute jurisdiction [2015] Minshenzi No. 978 (SPC). 17 See cases discussed below. 18 Bankhaus Wolbern & Co (Ag & Co Kg) v China Construction Bank Corporation, Zhejiang Branch [2012] EWHC 3285 (Comm). 19 Atlasnavios Navegacao, LDA v The Ship “Xin Tai Hai” (No 2) [2012] FCA 1497 (Federal Court of Australia; Qingdao Maritime Court); CMA CGM SA v Ship “Chou Shan” [2014] FCAFC 90 (Federal Court of Australia; Ningbo Maritime Court).

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Vivienne Bath Wuhan, Guangzhou, Qingdao, Tianjin, Ningbo and Shanghai, in which Hin-Pro claimed that the cargoes had been released without the production of the original bill of lading. These cases were contested by CSAV both on the basis of the jurisdiction clause and the merits. In 2012, Hin-Pro brought 5 cases against CSAV in the Wuhan Maritime Court. In English proceedings brought by CSAV,20 an interim injunction was issued restraining Hin-Pro from continuing the proceedings in any court other than the High Court of England and Wales. Subsequently, a contempt order was issued against the legal representative and sole director of Hin-Pro, together with a writ of sequestration against Hin-Pro, for breach of the injunction. Hin-Pro, in the meantime, notwithstanding the English court order, commenced proceedings in the Maritime Courts of Guangzhou, Qingdao, Tianjin, Ningbo and Shanghai. In late 2013, CSAV commenced proceedings in the Commercial Court in London seeking a declaration that Hin-Pro was obliged by the jurisdiction clause to pursue claims under the 70 bills of lading in England, damages and a permanent injunction ordering Hin-Pro to desist from the Chinese proceedings. An anti-suit injunction was issued against Hin-Pro,21 followed by a world-wide freezing order in June 2014. In May 2014, the Ningbo Maritime Court awarded Hin-Pro damages and legal costs, which were paid by CSAV.22 In the meantime, CSAV had receivers appointed in Hong Kong and a freezing order issued in relation to Hin-Pro’s assets. A permanent injunction was issued in England in 2014, together with an order that Hin-Pro discontinue the Chinese proceedings and repay CSAV all funds paid under the Chinese judgments by way of damages. Hin-Pro’s appeal was rejected by the English Court of Appeal in 2015. In the Chinese proceedings, CSAV argued that the Chinese courts did not have jurisdiction over the disputes as the bills of lading contained an exclusive jurisdiction clause nominating the English High Court. This argument was unsuccessful, with the decision of the Qingdao Maritime Court subsequently upheld by the Shandong People’s High Court23 and the decision of the Ningbo Maritime Court on jurisdictional grounds upheld by the Zhejiang People’s High Court.24 It appears that CSAV also proceeded to defend at least some of the Chinese cases on

20 Compania Sud Americana De Vapores S.A. v Hin-Pro International Logistics Limited [2013] EWHC 987 (Comm); followed by: Compania Sud Americana De Vapores S.A. v Hin-Pro International Logistics Limited [2014] EWHC 3525 (Comm); Compania Sud Americana De Vapores S.A. v Hin-Pro International Logistics Limited [2014] EWHC 3632 (Comm); Hin-Pro International Logistics Limited v. Compania Sud Americana De Vapores S.A. [2015] EWCA Civ 401. Summary taken from the Court of Appeal decision at [2015] EWCA Civ 401, decision of CLARKE LJ. 21 Ibid. 22 [2014] EWHC 3632 (Comm) 13. 23 Hin-Pro International Logistics v Compania Sud Americana De Vapores S.A, case on maritime transport contract dispute [2013] Zheguan zongzi Nos. 135, 136,137, 138,139, 143, 145, 146. 24 Hin-Pro International Logistics v Compania Sud Americana De Vapores S.A. [2014] lumen guan zongzi No. 158.

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Overlapping Proceedings before Chinese and Foreign Courts the merits, and succeeded in late 2015 in having the Ningbo judgments overturned on the merits by the Zhejiang High Court.25 Actions were also brought in Hong Kong by CSAV in support of its case against Hin-Pro.26 In March 2015, however, the Hong Kong Court of Appeal handed down a decision rejecting CSAV’s applications for orders in support of the English anti-suit injunctions.27 (Leave to appeal this decision has been given by the Court of Final Appeal.)28 In a subsequent decision, Leung J enforced an order against Hin-Pro for costs in certain of the proceedings in England.29 The legal issues under Chinese law which are highlighted by these cases relate to the jurisdiction of the Chinese courts in light of what was alleged to be an exclusive jurisdiction clause; the interpretation of the jurisdiction clause, and the ability (and willingness) of the Chinese court to refuse jurisdiction. Other issues which come out of this litigation include the efficacy of court orders issued in an attempt to deal with the parallel proceedings, the ability of the courts to enforce them and the practical steps which a party can take in order to deal with the issue of overlapping jurisdiction. B.

The Chinese Approach to Jurisdiction and Jurisdiction Clauses

CSAV’s jurisdiction clause read (in relevant part): This Bill of Lading and any claim or dispute arising hereunder shall be subject to English law and the jurisdiction of the English High Court of Justice in London. If, notwithstanding the foregoing, any proceedings are commenced in another jurisdiction, such proceeding shall be referred to ordinary courts of law […]. CSAV encountered two hurdles in China. The first was the question whether the Chinese court would take jurisdiction even if the clause was exclusive. The second was the question whether the clause was in fact exclusive. Chinese law follows the civil law model by dealing with jurisdictional questions under the Civil Procedure Law, while choice of law is handled under a separate regulatory regime. These two legal regimes have developed – and are treated by the courts – separately. Article 34 of the Civil Procedure Law now provides as follows:

25 See Compania Sud Americana De Vapores S.A. v Hin-Pro International Logistics Limited; unrep. DCCJ3986/2014. 26 Compania Sud Americana De Vapores S.A. v Hin-Pro International Logistics Limited; unrep. HCMP1449/2014; HCMP1932/2014; on appeal: CACV 243/2014 (reported in [2015] 2 HKLRD 458); 31 July 2015 (reported in [2015] 4 HKLRD 388); FAMV33/2015; In the matter of Hin-Pro International Logistics Ltd DCCJ3986/2014. 27 Note 26, [2015] 2 HKLRD 458. 28 Note 26, FAMV33/2015. 29 Note 26, DCCJ3986/2014; 17 November 2015; leave to appeal to the Court of Appeal refused in June 2016 (HCMP 664/2016).

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Vivienne Bath Article 34 – A party to a contract or other property dispute may choose by written agreement to be under the jurisdiction of the people’s court in the location of the defendant’s domicile, in the location where the contract is performed or signed, in the location of the plaintiff’s domicile, in the location of the subject matter or in another location which has an actual connection [shiji lianxi] with the dispute, provided that the provisions on hierarchical jurisdiction and exclusive [mandatory] jurisdiction are not violated.30 This provision is extended to foreign-related disputes pursuant to Article 259. Pursuant to Article 33, the mandatory jurisdiction of the Chinese courts extends to real estate, harbour operations and questions of succession. In addition, in relation to foreign-related disputes, all cases in relation to performance of Chinese-foreign joint venture contracts or Chinese-foreign contracts for the exploration or exploitation of natural resources in China are subject to the mandatory jurisdiction of the Chinese courts (Article 266). Article 34 has its origins in Articles 25 and 244 of the 1991 Civil Procedure Law,31 which provided that parties to a foreign-related contract or property rights dispute could enter into a written agreement to submit the dispute to the jurisdiction of a court in a place with an actual connection to the dispute (defined in Article 25 as the courts of the place where the defendant or plaintiff had its domicile, where the contract was signed or is to be performed, or where the subjectmatter of the contract is located). Article 25 of the 2007 version of the Civil Procedure Law32 was in the same terms as the 1991 law, while Article 242 referred generally to an “actual connection” between the court nominated and the foreignrelated dispute. In 2005, the Supreme People’s Court (SPC) gave further consideration to the issue of jurisdiction. The Minutes of the Second National Working Conference on the Trial of Foreign-related Commercial and Maritime Cases33 reiterated the concept of actual connection but extended it slightly to include places of registration and business and possible additional factors. In the 2012 Civil Procedure Law, there is no equivalent to Article 242, resulting in foreign-related disputes becoming subject to Article 34. An initial difficulty here is that Article 34 allows parties to submit to the jurisdiction of a people’s court which, on its face, would prevent parties from nominating a court outside

30 In Chinese, the term zhuanshu guanxia is used to designate subject-matter where the Chinese courts are considered to have sole jurisdiction by law, and the term paitaxing refers to the exclusion of the jurisdiction of other courts. For the purposes of this article, I have used the term “mandatory” in relation to subject-matter jurisdiction. 31 Promulgated by the NPC on 9 April 1991. 32 Promulgated by the Standing Committee of the NPC, 28 November 2007. 33 Issued by the SPC on 26 December 2005, [2005] Fa Fa No. 26, Art 1(4). The Minutes are not binding, but are highly authoritative for lower level courts.

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Overlapping Proceedings before Chinese and Foreign Courts China.34 The courts have continued, however, to apply the Article to foreign-related cases on the basis set out in the Minutes. In 2015, the SPC issued a very comprehensive Interpretation of the Civil Procedure Law.35 The Interpretation clarifies a number of points in relation to Article 34, making clear, for example, that a jurisdiction agreement must be entered into in the relevant contract or prior to litigation (Article 29). Art 531 of the Interpretation provides that parties to disputes over foreignrelated contracts or other property rights may enter into a written agreement selecting the following foreign-related courts as the competent court: a foreign court at the domicile of the defendant, in the place where the contract is performed or signed, at the domicile of the plaintiff, at the location of the contract subjectmatter, at the place of infringement or in any other place that has an actual connection to the dispute. This provision thus reiterates the “actual connection” test in Article 34, but adds the concept of the place of infringement as a connecting factor. Article 34 has been the subject of considerable litigation within China in the context of domestic agreements.36 There also appear to be an increasing number of cases which involve foreign-related disputes, as discussed below. 1.

Approach of Courts – Procedural v Substantive Law

Article 34 is essentially a mechanism for the allocation of jurisdiction between domestic courts. It acknowledges the right of the parties to choose a domestic court, but only if that court would have jurisdiction over the dispute, determined on the basis of an actual connection. The private international law analysis, therefore, is that Article 34 presents a jurisdictional question, which is procedural and should therefore be decided under the law of the forum. Thus Chinese law as the law of the forum is applied in order to determine the validity or effectiveness (xiaoli) of the jurisdiction clause and the governing law of the contract is applied in relation to

34 See comments in B. CHENG, Shewai xieyi guanxia gu shiji lianxi yuanze, China Law wenxue guan (2012), p. 40 [with English translation: Foreign-related Jurisdiction by Agreement and the Principle of Genuine Link]. 35 Note 3. The Legislation Law of the People’s Republic of China issued and effective 15 March 2015, Article 104, recognizes the ability of the SPC to issue interpretations on specific legal provisions, although they must be consistent with “legislative purposes, principles and intent.” The Law does not set out the status of the Interpretations but the courts see this as confirming that the SPC can issue interpretations which regulate the way in which courts will apply the law to which the interpretation relates. 36 See, for example, China Merchants Bank v. Huaibei Thermal Power Co. Ltd., Guangdong Jinhai Investment Co., Ltd. and Jinhai Holdings Ltd., SPC [2013] min si zhong zi No. 49, cited and summarised in Q. HE, Chronology of Practice: Chinese Practice in Private International Law in 2013, Chinese Journal of International Law (2015). A quick search of the legal database in Westlaw China (which is comprehensive but not complete) on Article 34 found a total of 111 cases in which Article 34 was argued since 2010, most of which were domestic.

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Vivienne Bath other aspects of validity and interpretation. One commentator37 divides the legal aspects of jurisdiction clauses into two categories: matters which are legal requirements under the law (that is, the Civil Procedure Law) which must be satisfied before the case can be heard (procedural), and matters of establishment and invalidity of the jurisdiction clause (to be determined under the substantive law governing the contract). The first category includes the determination of whether the case fits the criteria, i.e., whether it is a contract or property rights dispute;38 the scope of the nominated court (actual connection with the dispute); the form of the jurisdiction clause (written); the content of the agreement (whether it breaches hierarchical requirements of Chinese courts or mandatory jurisdiction requirements) and content requirements (whether the chosen court is clearly indicated).39 In addition, it is clear from the approach taken by the courts that a determination must also be made as to whether the clause is exclusive or non-exclusive. This approach makes clear that the Chinese court must apply its own rules for the purpose of deciding whether the jurisdiction of the relevant Chinese court is excluded in favour of the designated court.40 In applying the provisions of Article 34 to foreign-related disputes, the court examines the choice of court provision, determines whether it is exclusive or nonexclusive and complies with the criteria (written agreement; civil or property related dispute) and whether there is an actual connection between the dispute and the place of the nominated court. Thus in 2015 the SPC confirmed that the Chinese courts did not have jurisdiction to hear a case where the parties had entered into an exclusive jurisdiction clause which referred disputes to the Federal Court of Illinois, Northern District, or Illinois Cook County Court. Illinois was the state in which the foreign party had its business and there was therefore an actual connection between the nominated court and the dispute.41 Similarly, in the 2015 Decision in the Retrial Application in the Share Transfer Dispute between Xu Zhiming v Zhang Yi Hua,42 the SPC held that a contract between the two parties (both of whom appeared to be Chinese) to litigate disputes before a Mongolian court satisfied the criteria in Article 34 in relation to an “actual connection,” as the contract was signed in Mongolia, and Mongolia was the place in which the obligations under the contract were to be carried out. 37 C. ZHOU, Xieyi guanxia wenti yanjiu: dui di 34 tiao he di 127 tiao di 2 tiao de jieshi [Research on Questions on Agreements on Jurisdiction: In relation to the interpretation of Article 34 and Article 127(2) of the Civil Procedure Law], 26(2) Zhong Wai Faxue [Peking University Law Journal] 458 (2014). 38 The cases discussed in this article are all clearly contract or property disputes. It should, however, be noted that the category of foreign-related disputes which, under the Civil Procedure Law, can be referred to foreign courts is relatively narrow. 39 Note 37, p. 463. 40 S. TANG, Effectiveness of Exclusive Jurisdiction Clauses in the Chinese Courts – A Pragmatic study, 61(2) I.C.L.Q. 459 (2012), p. 473 et seq. cites a number of cases which suggest that a Chinese court has the discretion to take jurisdiction notwithstanding an exclusive jurisdiction clause and will, or may, do so, if enforcement can only be effected if the case is heard in China. 41 Changzhou Xinrui Fellowes Office Equipment Co. Ltd v Fellowes Inc. (note 16). 42 [2015] Minshenzi No. 471.

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Overlapping Proceedings before Chinese and Foreign Courts 2.

Exclusive v Non-Exclusive

One issue with the drafting of the jurisdiction provision throughout the various manifestations of the Civil Procedure Law and its related documents is that Article 34 and its equivalents do not make clear what the implications are if a party establishes that the parties have indeed agreed to the jurisdiction of a foreign court which satisfies the actual connection test. In a purely Chinese internal case, the application of Article 34 resolves the question of jurisdiction and case acceptance by directing the case to the appropriate Chinese court pursuant to Article 127 of the Civil Procedure Law. In the case of a jurisdiction clause which refers the dispute to a place with an actual connection to the dispute, the case should presumably be directed to the foreign court on the basis that the Chinese court does not have jurisdiction over the case. Thus, in the two cases referred to above, the decision of the lower level court to refuse to accept the case was affirmed.43 Neither the Civil Procedure Law nor the Interpretation refer to the concept of “exclusive jurisdiction” in relation to this question, but both the scholarly analysis and the cases proceed on the basis that the provision applies only if the jurisdiction clause is exclusive. Indeed, in the CSAV appeal from the Ningbo Maritime Court’s decision on jurisdictional grounds, the Zhejiang People’s High Court avoided the issue of whether there was an actual connection by construing the jurisdiction clause as non-exclusive.44 3.

Choice of Neutral Third-Party Forum

Conceptually, a major issue with this approach is that it potentially excludes courts in neutral fora which have been nominated by the parties, even if there is a good reason for one party to do so (for example, to achieve consistency in the interpretation of its standard form (as in CSAV)), or both parties prefer to refer the dispute to a neutral forum, or a particular forum with expertise in a particular area of law. This is clearly not because the Chinese court needs to be satisfied that the case will be referred to a court which has jurisdiction over the dispute. The question is therefore whether a neutral location such as England or New York can have the required “actual connection” with the dispute. In Hin-Pro, the Shandong High Court, on appeal from the Qingdao Maritime Court, agreed that there was no actual connection between the dispute and England.45 Although the governing law was English law, the jurisdiction clause Note, however, that Art 1(10) of the Minutes suggests that the court may have some discretion whether to enforce exclusive jurisdiction clauses and in a recently issued annual report of the Guangzhou Maritime Court, the court referred to the recognition of jurisdiction clauses under Article 34, “after taking into account equality, mutual benefit, parallel jurisdiction, convenience and other factors.” Guangzhou Maritime Court, Guangzhou Maritime Court Report on Trials 2013, available at (English version). See also S. TANG (note 40). 44 See note 23. 45 Note 23. 43

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Vivienne Bath is independent of the contract; the question of jurisdiction is procedural and must be dealt with under the law of the forum.46 It appears from the English judgment in Impala Warehousing47 that the Shanghai No. 1 People’s Intermediate Court (at first instance) reached a similar conclusion in that case in relation to the exclusive jurisdiction clause nominating the English courts. Other cases in which the exclusive jurisdiction clause was ruled to be ineffective include a dispute between a Korean company and a Chinese company nominating the courts of Singapore;48 a case involving a bill of lading for a shipment from China to Baltimore nominating the courts of New York;49 a bill of lading case relating to a shipment from China to Turkey nominating the courts of Genoa, Italy;50 and a case in which an Australian company successfully invalidated an exclusive jurisdiction clause nominating the courts of England in a shipping contract with a Chinese company.51 This approach has been criticized by a number of Chinese commentators, on the basis that parties should have autonomy of the parties to choose the court which will hear their dispute.52 The factors which are set out in Article 34 and the Interpretation refer to a tangible connection between the contract or the parties and the dispute. A longstanding issue, therefore, in cases where the parties have deliberately nominated a neutral third party court, is whether a connection with the nominated court can exist by virtue of the chosen governing law. This is a controversial question among Chinese scholars. The view of the SPC on this issue also seems to have changed over time.53 On the “objective actual connection” view, there must be an objective external link between the chosen court and the dispute, such as the domicile of a party, place of signing or performance, place of infringement, place of shipment or Ibid. Note 7. [2015] EWHC 811 [32] [33] per BLAIR J. 48 Shandong Jufeng Wanglao Co. Ltd. v Korea MGAME Co., third party Tianjin Fengyun Wanglao Technical Co. Ltd. Internet games agency and licensing contract jurisdictional objection appeal case (MGAME) ((2009) SPC 50 Model Intellectual Property Cases, No. 44). 49 Ocean goods transport contract dispute between Shanghai Yanliu Goods Transport Agency Co. Ltd and Evergreen Marine [2011] Mintizi No. 301 (SPC) 50 Cangzhou Qiancheng Steel-Pipe Co, Ltd, Ye Thai International Freight Forwarders Ltd Tianjin Branch v Tabo Lai International Freight Forwarders (Shanghai) Co., Ltd., COSCO Container Lines Co., carriage of goods contract dispute case [2014] Jin Hai Fa Shang Chu Zi No. 81-1 (Tianjin Maritime Court). 51 Atlas Iron Ltd v China Railway Materials Import & Export Co. Ltd [2015] Qinghaifa haishang chuzi No. 25-1 (Qingdao Maritime Court). See also Jilin Xinyuan Muye Youxian Gongsi yu Ouhang (Shanghai) Guoji Huoyun Daili Youxian Gongsi Shanghai, tonghai shuiyu huowu yunshu hetong jiufen guanxia dingyian [Case on a dispute relating to a water transport contract jurisdiction dispute], [2013] Mintizi No. 243 (SPC), in which the SPC applied the actual connection test to an exclusive jurisdiction clause nominating the Hong Kong courts. 52 Note 34, p. 40. 53 B. CHENG (note 34) cites an earlier case in which the SPC recognised a choice of Swiss law as constituting an actual connection between Switzerland and the dispute. 46 47

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Overlapping Proceedings before Chinese and Foreign Courts destination and so on. Pursuant to the “choice of law” standard of connection, an actual connection is constituted by the practicability of selecting a court that can apply the applicable law. Thus in Atlas Iron Ltd v China Railways Material Import & Export Co.54 it was argued that since the governing law to interpret the contract was English, it would be advantageous to have the English High Court monitor and apply the law, and this should constitute an actual connection for the purposes of Article 34. The Qingdao Maritime Court, however, took the view that this did not constitute an actual connection. This reflects the decision of the SPC in Dongming Zhongyou Fuel Petrochemical Co Ltd v Delixy Energy Pte Ltd,55 which held that there was no connection between the dispute and England despite the choice of English law. The Commentary issued by the SPC on the Interpretation56 also states specifically that governing law does not constitute an actual connection between the place of the court and the dispute. In contrast, Article 3 of the Law of the PRC on the Application of Laws to Foreign-related Civil Relations states that parties may, in accordance with law, expressly choose the law applicable to foreign-related civil relations. Article 7 of the Interpretation of the SPC on the Law of the PRC on the Application of Laws to Foreign-related Civil Relations57 states that the court shall not uphold an argument by a party that the selection of a governing law should be held to be ineffective on the basis that the law chosen by the parties has no actual connection (shiji lianxi) with the dispute. Under Article 532 of the Interpretation, one of the grounds for a Chinese court refusing to exercise jurisdiction on forum non conveniens grounds is the fact that the chosen law is foreign and therefore difficult for a Chinese court to administer, which suggests that the choice of governing law is indeed relevant to jurisdiction. The SPC, in MGAME, however, made clear that there are two different tests to be applied:58 “[…] an agreement selecting the applicable law and an agreement selecting the court with jurisdiction are two completely dissimilar forms of legal behaviour […]. In relation to the validity of a clause choosing the court with jurisdiction, the decision must be made in accordance with the law of the forum; the reasoning of the decision of the original court that in relation to the agreement the jurisdiction clause must comply with the law of the country indicated by the governing law is wrong.”

Note 51. [2011] zui gao renmin fayuan, mintizi No. 312. 56 D. SHEN, Zui gao renmin fayuan, minshi susong fa sifa jieshi, lijie yusheyong, xia [SPC, Civil Procedure Law Judicial Interpretation, Comprehension and Application, volume 2] People’s Court Press 2015 (Commentary). 57 Note 4. 58 Note 48 (case based on the 2007 Civil Procedure Law). 54 55

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Interpretation and Incorporation

The question whether the rules of the forum or the putative proper law of a contract should be applied to determine whether a jurisdiction clause has been incorporated in a contract is a difficult issue regardless of the jurisdiction.59 In the admiralty area, where multiple bills of lading, charter-parties and other documents tend to accumulate in the ordinary course of a ship’s journey, the common law relating to the incorporation of jurisdiction and arbitration clauses in maritime documents has taken on its own distinct features.60 It is therefore not surprising that there are differences in outcome in cases in China and other jurisdictions in relation to the question of incorporation. There does not seem to be a clear legal resolution of this problem, although, in practical terms, clearer drafting and the specific incorporation of dispute resolution clauses would obviously be of assistance. Tang comments that the Chinese cases do not on the whole address the question of which law should be applied to interpret a jurisdiction clause, although she considers that the better approach would be to apply the law governing the contract.61 Indeed, this would seem to follow from the comment of various courts that the choice of law and jurisdiction clause is independent of the main contract. However, since the courts consider that the determination on the effectiveness of the jurisdiction clause relates to the jurisdiction of the Chinese courts and is therefore procedural, Chinese courts appear in practice to construe the clause based on their own principles of interpretation. This necessarily extends to the determination whether the clause is exclusive or not. Thus in the Xu Zhiming case, the SPC held that the clause in question was exclusive (without referring to the applicable law), because the contract did not say that the Mongolian courts had non-exclusive jurisdiction, the parties had agreed that an application could be made to seize assets of the Mongolian company, and thus it could not be inferred that the parties intended to allow other courts to hear the case.62 In Fellowes, the SPC (again without citing principles of interpretation under the law of Illinois) cited the wording of the jurisdiction clause that the parties “shall” (spelled out in English) initiate any suit in the US Federal Court, Northern District, Eastern Division, or the Cook County Circuit Court of Illinois to hold that this set out the intention of the parties, did not contravene Chinese law, and therefore excluded the jurisdiction of the Chinese courts.63 In Hin-Pro, the Zhejiang High People’s Court in Hin-Pro, stated – without referring to English law - that the parties did not say that a party could not sue in another court

See, for example, discussion in M. DAVIES/ A.S. BELL/ P.L.G. BRERETON, Nygh’s Conflict of Laws in Australia (9th ed.), Australia 2014, p. 151 et seq. S.C. SYMEONIDES, What Law Governs Forum Selection Clauses, Oxford Commentaries on American law: Choice of Law, Oxford 2016, p. 442. 60 M. ÖZDEL, Incorporation of Charterparty Clauses into Bills of Lading: Peculiar to Maritime Law?, in M. CLARKE (ed.), Maritime Law Evolving, Oxford 2013, p. 181. 61 S. TANG (note 40), p. 463. 62 Note 42. 63 Note 16. 59

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Overlapping Proceedings before Chinese and Foreign Courts and the clause was therefore non-exclusive.64 There is a marked contrast between the detailed review of the scope of the contested clause under English principles of construction in the English Court of Appeal decision, where the court looked in detail at the clause, its use and its context, and the terse one sentence addressed to the issue of exclusivity in the Zhejiang High Court.65 A related question is the generally difficult issue of incorporation of jurisdiction clauses (and arbitration clauses) in a contract. In the dispute between Impala and Wanxiang, both the English and the Chinese courts66 considered the question whether an exclusive jurisdiction clause had been incorporated in the contract between the parties through inclusion in Impala’s standard terms and conditions, which were to be found online. On appeal, the Shanghai People’s High Court concluded that “there was no evidence to prove that Impala Shanghai and Wanxiang had reached a consensus in respect of the jurisdiction clause.”67 The English court, however, applied principles of interpretation under English law as “required by the applicable rules in this jurisdiction,” after considering the reasoning of the Shanghai court, to find that the jurisdiction clause was incorporated.68 In the SPC decision in Fellowes, the SPC held that the exclusive jurisdiction clause providing for dispute resolution in the courts of Illinois was incorporated into the contract, but did not refer to the law of Illinois in forming this conclusion.69 C.

Refusing Jurisdiction – Parallel Proceedings and forum non conveniens

An important question in relation to jurisdiction is whether a party sued in a Chinese court can persuade the Chinese court not to exercise jurisdiction in a particular case. The Interpretation, in Article 533 (described in the Commentary as a rule to resolve questions on international parallel proceedings)70 provides that where both Chinese and foreign courts have jurisdiction over a case, and one party sues in the foreign court while the other party sues in a Chinese court, the Chinese

Note 24. Hin-Pro International Logistics Ltd. V Compania Sud Americana De Vapores S.A. [2015] EWCA Civ 401. The fact that this was not a straight-forward question of construction can be seen from the fact that CSAV, the other parties and the court had proceeded in a previous case on the basis that a similar clause was in fact non-exclusive: Import Export Metro Limited v CSAV [2003] 1 Ll R 405 (stay refused on the basis that no facts were shown justifying departure from the bargain struck even under a non-exclusive jurisdiction clause). 66 Note 7; [2015] EWHC 811 (Comm). Comments on the Chinese cases are based on the summary in the English court decision. 67 Id, [33]. 68 Id, [106]. 69 Note 16. 70 Note 56, p. 1396. 64 65

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Vivienne Bath court may nevertheless accept the case.71 After a judgment is rendered by the Chinese court, a foreign judgment will not be recognized in the Chinese court unless international treaties in which the countries of both parties participate or to which they are parties provide otherwise. However, where a judgment by a foreign court has been recognized by a Chinese court, the court cannot accept a case over the same dispute. The Commentary makes clear that this means that the question is not whether the Chinese court accepted the case before the foreign court, but whether the Chinese court rendered a judgment first.72 The foreign judgment can only be given priority if it was recognized in China before the Chinese judgment was handed down.73 In practice, because of the difficulty of obtaining recognition of a foreign judgment (discussed further below), the Chinese court is generally effectively under no obligation under this provision to refuse jurisdiction or terminate proceedings before it.74 The use of the term “may accept the case” suggests that a Chinese court could decide not to take jurisdiction in such a case. Article 1(10) of the 2005 Minutes provides that the Chinese court should decide whether or not to accept the case in light of the actual circumstances. This was not incorporated in the Interpretation, however, and the Commentary states that, in accordance with the principle of judicial sovereignty,75 Chinese courts will exercise jurisdiction in accordance with the stipulations of the Chinese Civil Procedure Law, and are not influenced by the question whether the foreign court has already taken jurisdiction over the case.76 The Commentary also notes that the issue whether the courts are hearing the same dispute is a difficult question which should be considered and weighed in the course of the case pursuant to many factors, including the parties, the application for litigation, the facts and the reasons. In summary, Chinese law provides no real encouragement or guidance to a court to refuse to hear a case on the basis that a foreign court is seized of the same matter or any assistance in a case which is not identical but which overlaps in significant respects. Thus, in the Symantec This reiterates the terms of Article 306 of the 1992 Opinions on Certain Issues Concerning the Application of the Civil Procedure Law of the PRC, issued by the SPC on 14 July 1992; no longer in effect. 72 Note 56, p. 1396. 73 Note J. HUANG, Interregional recognition and enforcement of civil and commercial judgments: lessons for China from US and EU law, Oxford 2014, p. 117, states that a number of the bilateral treaties, as well the Arrangement between the Mainland and the Macau Special Administration Region on the Mutual Recognition and Enforcement of Civil and Commercial Judgments, provide that recognition can be refused if there are ongoing proceedings in the home court which commenced prior to the date of the judgment for which enforcement is sought. 74 G. TU, Private International Law in China, Singapore 2015 p. 133, states that “one cannot find any rule in Chinese law that can generally authorize a Chinese court to discretionarily transfer a case over which it has jurisdiction to another court, whether in a domestic or international context.” 75 Note 56, p. 1396. 76 See also cases cited by G. TU (note 74) in relation to the firm view taken by Chinese courts on lis pendens. 71

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Overlapping Proceedings before Chinese and Foreign Courts litigation,77 in which, following criminal proceedings in the United States, Symantec brought actions against a number of the same defendants in both the United States (US District Court for the Central District of California) and Shanghai, the Shanghai courts noted that there were parallel proceedings but stated that the court had jurisdiction under the 1992 SPC Opinion and could accept the case, particularly since the cases were not completely identical. In any event, on the basis of judicial sovereignty, which limits the scope of judgments to the territory of each court, Symantec could not enforce the US judgment in China in the absence of a reciprocal judicial assistance agreement. The defendant’s objection to jurisdiction therefore could not succeed. Notwithstanding the civil law origins of Chinese civil law, the Chinese courts have developed a concept similar to forum non conveniens pursuant to which the Chinese court may refuse jurisdiction and despatch the case to a foreign court.78 In the 2005 Minutes, the SPC set out the basic criteria for the refusal of jurisdiction over a case on the grounds of forum non conveniens (bu fangbian fayuan yuanze) (FNC). These grounds, with some changes, appear in Article 532 of the Interpretation. The Interpretation does not, however, refer to forum non conveniens but sets up a structure which is more analogous to the Hong Kong forum conveniens test. Under Article 532, a Chinese court may dismiss a foreignrelated case and direct the plaintiff to a more convenient foreign court if (i) the defendant requests that the case be heard by a more convenient foreign court or objects to jurisdiction; (ii) there is no choice of court agreement selecting a Chinese court; (iii) the case does not involve the mandatory jurisdiction of the Chinese courts; (iv) the case does not involve Chinese national interests (added by the Interpretation), the interests of Chinese citizens, legal persons or other organizations; (v) the important facts in the dispute did not occur in China and Chinese law is not applicable, and a Chinese court accepting the case would have great difficulty in determining the facts and applying the law and (vi) a foreign court has jurisdiction over the case and it would be more convenient for that court to hear the case. The decision of the Chinese court to reject the case and inform the parties that they should sue in a more convenient foreign court is discretionary, but may be made only if all of the criteria above are satisfied. The Commentary notes that the concept does not come from Chinese civil law, but is a principle of English and American civil procedure.79 The Commentary’s explanation and comments on issues for courts to pay attention to, strike a note of caution, emphasizing that the use of FNC should be strictly limited although it can be used at an appropriate time. It stresses that the approach of some 77 Symantec Co. Ltd. V Ma Jingyi, Li Xi and Wang Xiaodong; computer software infringement dispute appeal case [2011] hugaomin san (zhi) zongzi No. 88 (Shanghai People’s High Court). For a summary of the facts, see Y. YOU, Symantec Corporation Uses both Criminal and Civil Methods to Defeat Piracy in China, Bridge IP Law Commentary, 9 April 2014, available at . 78 G. TU, Forum Non Conveniens in the People’s Republic of China, 11 Chinese JIL 341. 79 Note 56, p. 1394.

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Vivienne Bath courts in seeking to avoid taking jurisdiction when the use of foreign law is difficult is in error. It reiterates that all criteria must be satisfied and the use of the discretion to refuse jurisdiction should not be used indiscriminately. Studies on the use of the doctrine of forum non conveniens in Chinese cases suggest that although FNC is often raised, it is rare that a Chinese court sends a case to a foreign court on forum non conveniens grounds.80 The requirement that the case cannot involve the interests of China, a Chinese citizen, legal person or organisation is potentially a major bar to the use of the provision, as the domicile of a party in China appears to be highly relevant to a decision to retain jurisdiction. Neither the Interpretation nor the Commentary spell out what factors are relevant in terms of determining convenience, but since the doctrine cannot be utilized if Chinese law applies and the difficulty of applying foreign law is a factor for the court in refusing the case, the applicable governing law is clearly a relevant factor. The existence of a non-exclusive jurisdiction clause referring to a foreign court does not appear to be significant, although FNC would not apply if there were a jurisdiction clause (exclusive or non-exclusive) nominating a Chinese court.81 One relevant factor is the difficulty for a party of enforcing a foreign judgment in China.82 The existence of ongoing foreign litigation, however, does not seem to be relevant. In a recent case (Beijing Dishi Law Firm and Century Acquisition Corporation v Chinachem Financial Services Ltd.), the SPC stated that the fact that a foreign court (in this case, a Hong Kong court) had accepted the case or rendered a judgment did not influence the Chinese court. However, in ruling whether or not to accept the case the court must look at concrete circumstances, including FNC factors. In Chinachem, the SPC considered the fact that the place of performance, the facts giving rise to the dispute and distrainable assets were in China. Having a domestic Chinese court exercise jurisdiction, the court said, would be more advantageous in reaching the civil procedure objective of a timely judgment in the case and protecting the lawful interests of the parties. The fact that Hong Kong law was the applicable law, some of the documents were in English and witnesses might be located in Hong Kong, were not sufficient factors to make a Chinese court substantially and clearly inconvenient. The arguments on parallel proceedings and forum non conveniens were therefore not a sufficient reason for the original court to refuse to take jurisdiction.83 The cases, when combined with the narrow scope of the provisions, thus strongly suggest that Chinese courts are likely to apply FNC only in cases where the parties and the case have very little connection with China.84 TU describes this as a “clearly inappropriate forum” test.85

G. TU (note 78). G. TU (note 74), p. 149. 82 G. TU (note 78). 83 [2014] Minsi zongzi No. 29. 84 G. TU (note 78), p. 359. 85 This should not be confused with the Australian “clearly inappropriate forum” test. See discussion in M. DAVIES/ A.S. BELL/ P.L.G. BRERETON (note 59), p. 186 et seq. 80 81

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Overlapping Proceedings before Chinese and Foreign Courts In terms of cross-border and international litigation, the Chinese adoption of FNC represents an important step forward. However, the limited scope for Chinese courts to refuse jurisdiction, when combined with the restrictive provisions relating to parallel proceedings, suggests that in its present form it is unlikely to have a major impact on the problem of overlapping proceedings. The essence of forum non conveniens in common law (and Chinese) courts is that it is a unilateral formulation applied by the court in deciding whether or not to hear a case over which it has jurisdiction.86 Thus although there have been a number of cases before common law courts (both successful and unsuccessful) where a party in the case has attempted to persuade the foreign court to stay or dismiss the proceedings before it on the basis that the case should be heard by a Chinese court, the principles to be applied differ from jurisdiction to jurisdiction, but do not mirror the principles applied by the Chinese courts. In particular, the emphasis placed by Chinese courts on the domicile of a party in China, when combined with the Chinese approach to parallel proceedings, means that the Chinese approach is unlikely to be reflected in a foreign court decision even where the foreign court takes a balancing approach in considering whether to refuse jurisdiction. This can easily result in both courts concluding that they should continue to hear the case.87 For example, when the Chinachem case referred to above came before the Hong Kong court, it was submitted to the Hong Kong court that in its decision in the Chinese proceedings, the SPC “had weighed up the connecting factors […] and had made [a] final decision on the issue of forum non conveniens by favouring the PRC courts, so it must be implicit in such decision that the Hong Kong courts were less convenient.”88 NG J took the view that the SPC judgment did not constitute a final and conclusive judgment on the question whether the Hong Kong action should be litigated in Hong Kong or a decision that the Hong Kong courts were an inappropriate forum. The judge applied the Hong Kong forum conveniens test, which requires the defendant to show that China was overall a more appropriate forum for the proceedings than Hong Kong and concluded that the defendant had failed to present arguments (including the existence of parallel proceedings) which outweighed the importance of holding the parties to the bargain agreed to in the Contrast efforts to deal with this issue through bilateral or multilateral means, such as (in the European Union), the Brussels Regulation Recast, which generally favours the court with jurisdiction first seized in a case (see note 116) and, as between Australia and New Zealand, the Agreement between the Government of Australia and the Government of New Zealand on Trans-Tasman Court Proceedings and Regulatory Enforcement [2013] ATS 32, Article 8 of which imposes a “more appropriate court” test. 87 See Morgan Stanley & Co International Plc v China Haisheng Jiuce Holdings Co. Ltd. [2009] EWHC 2409 (Comm) [37] per TEARE J (“doubtful that a careful weighing of “forum conveniens” factors will now constitute a strong reason for not enforcing an exclusive jurisdiction clause”); Bankhaus Wolbern & Co (Ag & Co Kg) & Anor. v China Construction Bank Corporation, Zhejiang Branch [2012] EWHC 3285 (Comm) [16] per FIELD J (“in light of the non-exclusive jurisdiction clause CCB cannot assert that the process of litigating in England rather than in China is unjustly inconvenient”). 88 Chinachem Financial Services Ltd v Century Venture Holdings Ltd HCA 410/2013 [69] (8 January 2015; leave to appeal refused 21 April 2015). 86

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Vivienne Bath non-exclusive jurisdiction clause pursuant to which the plaintiff commenced litigation in Hong Kong.89 In the Australian cases of Atlasnavios Navegacao, LDA v The Ship “Xin Tai Hai” (No 2)90 (a case involving a collision between two ships in the Straits of Malacca) and CMA CGM SA v Ship “Chou Shan”,91 an admiralty case arising from a collision in the Chinese EEZ, in which the courts of both Australia and China had jurisdiction over their own rules, the Federal Court of Australia applied its rules (which involve a complex analysis to determine whether the foreign (or local) proceedings are vexatious or oppressive)92 in order to determine whether the Australian forum was clearly inappropriate, deciding in one case to keep jurisdiction and in the other to refuse jurisdiction on the basis that the Federal Court was a clearly inappropriate forum for the case. In neither case did the Chinese court refuse to take jurisdiction. In the appeal case in Chou Shan, the Zhejiang High People’s Court referred to Art 306 of the 1992 Opinion and the fact that China was not a party to the relevant international conventions and did not have a bilateral agreement with Australia to support the trial court’s decision to accept jurisdiction in relation to the case notwithstanding the Australian litigation.93 The United States federal and state courts apply a balancing test to the question of forum non conveniens, and there are a number of cases in which a party has attempted to persuade a US court to dismiss a case in favour of a Chinese court on forum non conveniens grounds.94 Amongst these are a number of cases in which a Chinese party pursued the United States defendant to the United States, and the US defendant then argued that China would be a more convenient forum. In Jiangsu Hongyuan Pharmaceutical Co., Ltd v DI Global Logistics Inc.,95 for example, the defendant, a Florida distributor, successfully argued, on the basis of an exclusive jurisdiction clause nominating China as the forum for all disputes and forum non conveniens principles, that the case by the Chinese manufacturer should be dismissed, notwithstanding Hongyuan’s arguments both that the Chinese courts constituted an inadequate forum and that it would be practically very difficult to enforce a judgment against DI Global in China, where it had no assets. A similar

Id, [101] et seq. per NG J. [2012] FCA 1497. 91 [2014] FCAFC 90 on appeal from CMA CGM v Ship “Chou Shan” [2014] FCA 74. 92 See CSR Ltd v Cigna Insurance Australia Ltd (1997) 189 CLR 345, 401 per DAWSON, TOOHEY, GAUDRON, MCHUGH, GUMMOW and KIRBY JJ. 93 Rockwell Shipping Co and CMA Ferries Ltd (owner of Provence 2008-ltd) ship collision damage compensation dispute, second instance civil ruling [2013] zhe guan zongzi No. 118. 94 See, for example, Sinochem Int’l Co., Ltd v Malaysia Int’l Shipping Co., 549 U.S. 422 (2007). This paper does not go into the complex rules or reasoning related to forum non conveniens in United States federal and state courts. 95 Note 15. 89 90

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Overlapping Proceedings before Chinese and Foreign Courts decision was made in NiburuTech Ltd v Andrew Jang,96 where a Chinese plaintiff brought an action in California against a Californian defendant. 97 This highlights the fact that there are a number of models on which Chinese policy-makers could draw in drafting rules on refusing jurisdiction. The present formulation of FNC is, however, likely to be of only limited assistance in resolving issues of parallel proceedings. D.

Enforcement of Foreign Judgments in China

Recognition and enforcement of foreign judgments in China has for many years presented major problems for parties in China-related litigation. There were no significant modifications or improvements in the 2012 Civil Procedure Law or the Interpretation. Recognition and enforcement is essentially tied to the existence of a judicial assistance agreement between China and the relevant state. According to TU, China has entered into more than 30 treaties for, or including civil and commercial matters, including treaties with civil law countries such as France, Argentina, Spain, Tunisia, Poland and Cuba, of which 20 or so include provisions for the reciprocal enforcement of judgments.98 Studies suggest that the Chinese courts take a very strict view of the formalities of service as a pre-condition for recognition, which casts doubt on the efficacy of these agreements in practice. ZHANG comments, for example, that the insistence of the Chinese courts on the strict satisfaction of a requirement for “due service” has resulted in a refusal to recognize foreign judgments even in cases where recognition and enforcement should be possible under a bilateral judicial assistance agreement.99 China has not signed the Hague Convention on Choice of Courts Agreements,100 which provides for the enforcement of judgments made as a result of an exclusive jurisdiction clause. Indeed, to do so, would require substantial changes to its current approach to jurisdiction clauses. 75 F. Supp. 3d 1076 (N.D. California 2015). See, however, BP Chemicals v Jiangsu Sopo Corporation (Group) Limited 429 F. Supp. 2d 1179 (E.D.Mo. 2006). 98 G. TU (note 74), p. 175 et seq. See also Ministry of Justice Department of Judicial Assistance and Foreign Affairs (sifabu sifa xiezhu yu waishi si), sifa xiezhu tiaoyue (list of judicial assistance treaties), 2015, . According to Linklaters, International Comparative Law Guide, Enforcement of Foreign Judgments 2016 , there are currently 36 bilateral judicial assistance treaties relating to civil matters. 99 W. ZHANG, Recognition and Enforcement of Foreign Judgments in China: A Call for Special Attention to Both the “Due Service Requirement” and the “Principle of Reciprocity,” 12(1) Chinese Journal of International Law (2013), p. 143. 100 30 June 2005, 44 I.L.M. 1294. However, the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region Pursuant to Choice of Court Agreements between Parties Concerned, signed in Hong Kong on 14 July 2006 (China-Hong Kong Agreement) draws heavily on the Choice of Courts Agreement. 96 97

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Vivienne Bath China also has regional agreements and/or legislation providing for the enforcement of judgments in and from Hong Kong, Macau and Taiwan. These are based on different criteria to each other, and have had varying degrees of success.101 The China-Hong Kong Agreement102 provides for recognition and enforcement of judgments for the payment of money in civil and commercial cases given pursuant to a written exclusive jurisdiction clause. There appear, however, to be very few cases in which a judgment has been recognized in Hong Kong or China under the agreement.103 In the case of Taiwan, the 2015 Provisions of the Supreme People’s Court on the Recognition and Enforcement of Civil Judgments Rendered by Courts in the Taiwan Region104 provide for recognition and enforcement of civil judgments, with limited defences related mainly to procedural failures or conflicts with arbitral awards or foreign judgments on the same case. However, the other party to the case can forestall recognition by commencing proceedings in China at any time before the application for recognition is lodged (Art 11). As is the case with foreign proceedings generally under the Civil Procedure Law and the Interpretation, therefore, enforcement options are limited. For countries which do not have such agreements, enforcement of a foreign judgment by a Chinese court is predicated on the existence of reciprocity in relation to enforcement between China and the foreign state where the judgment was rendered. Satisfying the Chinese court that there is reciprocity is generally agreed to be very difficult.105 It is thought that Chinese courts will consider that there is reciprocity only if a court of the state has already recognized or enforced a Chinese court judgment, although instances of them doing so appear to be rare.106 In a number of the cases cited in this article, the Chinese court simply notes that there is no bilateral agreement and does not consider the question of possible reciprocity at all. Overseas courts, however, often do not require reciprocity before recognizing foreign judgments and there appears to be an increased readiness of overseas courts to enforce Chinese judgments which could potentially result in the satisfaction of the reciprocity requirement. Thus in Splietoff’s Bevrachtingskantoor v Bank of China Ltd.107 the Chinese judgment was recognized by the English court. Chinese judgments have also been recognized and held to be enforceable in several

See discussion in J. HUANG (note 73). Note 100. 103 See G. JOHNSTON, The Conflict of Laws in Hong Kong (2nd ed.), Hong Kong 2012, p. 660. See, however, Wu Zuocheng et al v Allat Holding Company Limited et al, HCMP 2080/2015 and The Export-Import Bank of China v Liu Qingping HMCP 1684/2015 (application for interim relief in support of an application for registration). 104 Issued 29 June, 2015 and effective 1 July 2015; [2015] Fa Shi No. 13. 105 G. TU (note74), p. 170, states that there appear to be no example of cases where the Chinese courts have decided that reciprocity exists between China and the foreign state where the judgment was rendered. 106 G. TU (note74), p. 171 and 172. 107 [2015] EWHC 999 (Comm), per CARR J. 101 102

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Overlapping Proceedings before Chinese and Foreign Courts states of the United States, Singapore, New Zealand and Germany,108 under common law principles or the relevant legislation. The general difficulty in obtaining recognition and enforcement of foreign judgments extends to the role which findings of fact and evidence in foreign litigation can play in Chinese cases. In practice, the presentation of foreign judgments as evidence of facts appears to be very difficult.109 In a recent well-publicised decision of the SPC,110 however, the court upheld a judgment of the Jiangsu High People’s Court in which the court had accepted as new evidence a judgment of the South Korean courts. In response to an argument that this constituted an improper recognition of a foreign judgment, the SPC ruled that the Jiangsu court was right to accept it as new evidence. The court had not recognized the judgment and there was no breach of procedural rules because the court had comprehensively considered all of the evidence. In a recent decision of the Beijing People’s High Court,111 the court held that although in the absence of formal recognition and enforcement a Korean judgment could not be directly used as evidence of the facts in the case, where the parties approved the foreign court’s decision, the decision could be confirmed as the parties’ self-recognized evidence on the facts. Otherwise, however, there is little suggestion that Chinese courts take into account the decisions of foreign courts. As a matter of practice, Chinese court decisions tend to be brief, and have not in the past included detailed findings of fact, or explanations of holdings on law, although this appears to be changing, particularly in appeal courts. This would increase the difficulty for foreign courts in applying Chinese decisions, should they be prepared to do so. In principle, however, there is no reason why foreign courts should not treat Chinese judgments as res judicata, if they are prepared to enforce the judgments under statute or common law principles. The Hong Kong Mainland

108 Hubei Gezhouba Sanlian Industrial Co. Ltd. v Robinson Helicopter Co., Inc., No. 2:06-cv-01798-FMC.SSx, 2009 WL2190187 (C.D.Cal. 22 July 2009) and Hubei Gezhouba Sanlian Indus., Co., Ltd. v Robinson Helicopter Co., Inc., 425 Fed. App’x. 580 (9th Cir. 29 March 2011); Global Material Technologies v Dazheng Metal Fibre No. 12 CV 1851, 2015 WL 1977527 (N.D. Illinois E.D. May 1, 2015); Giant Light Metal Technology (Kunshan) Co Ltd v Aksa Far East Pte Ltd [2014] SGHC 16; Chen v Lin [2014] NZHC 1727; German Zublin International Co. Ltd versus Wuxi Walker General Engineering Rubber Co., Ltd. 18 May 2006, document number: 20 S ch 13/04 (Court of Appeal, Berlin). 109 See Sompote Saengduncha, Chaiyo Productions Co., Ltd. v. Tsuburaya Productions Co. Ltd., Shanghai Yugu Planning Co. Ltd., et al [2011] min shen zi No. 259, cited and summarised in Q. HE (note 36). 110 WooshinmtCo v Fusheng Guangdian (Wujiang) Company Limited [2013] Minshenzi No. 2360. Summarized Chen, Ivy, “Case of the Day: WooshinmtCo v Fu Sheng Optelectronics,” 13 January 2015, Letters Blogatory, available at . 111 Shewen Ruizhi (Beijing) Guoji Jiaoyu Keji Youxian Gongsu yu Tianjin Jushe Wenhua tushu Xiaoshou youxian Gongsi, Wuhan Chuban She, Fangyuan Dianzi Yinxiang Chubanshe Youxian Zeren Gongsi, Wanjuan Chuban youxian Zeren Gongsi, Liong ning Dianzi Chubanshe youxian Zeren Gonsie deng qinhai zhaozuo jiufenan [2015] gaomin (zhi) zongzi No. 1072.

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Vivienne Bath Judgments (Reciprocal Enforcement) Ordinance,112 for example, specifically provides that nothing in the Ordinance prevents a Hong Kong court from recognizing a Chinese judgment as conclusive of any matter of fact or law decided in the judgment if that judgment would be recognized as conclusive under the common law.113 In the recent case of First Laser Limited v Fujian Enterprises (Holdings) Company Limited,114 the Hong Kong Court of Final Appeal held that the decision of the SPC on the governing law and validity of the contested agreements was final and conclusive, on the merits and between the same parties and therefore created an issue estoppel under the common law preventing the appellant from contesting these issues again before the Hong Kong court.115 This contrasts with the reluctance of Chinese courts to give similar credence to the decisions of foreign courts.

III. Dealing with Conflicting Proceedings A party which finds itself embroiled in overlapping legal cases has some options: it may attempt to stop the party pursuing the Chinese litigation, either by seeking to persuade the Chinese court not to take the case, or by seeking an anti-suit injunction or other order from a foreign court aimed at restraining the other party from pursuing the Chinese proceedings. In the case of the English courts, although antisuit injunctions are no longer available within the European Union,116 they are still available and have been quite extensively sought in relation to Chinese litigation. 117 Requests for anti-suit injunctions to restrain a party from proceeding with parallel litigation in China, or from breaching an arbitration clause, have been Cap 597, s16 (3). There are no similar provisions in the China-Hong Kong Agreement (note 100). 114 (2015) 15 HKCFAR 569. See also G. JOHNSTON (note 103), p. 664. 115 Contrast the position of the Taiwanese courts, which will enforce Chinese awards and judgments, but does not give them res judicata effect. H. CHEN, Enforcement of Chinese judgments and arbitral awards in Taiwan: the res judicata problem, 6 May 2015 . 116 Y. FARAH/ S. HOURANI, Frustrated at the interface between court, litigation and arbitration? Don’t blame it on Brussels I! Finding reason in the decision of West Tankers, and the recast Brussels I, in P. STONE/ Y. FARAH (eds.), Research handbook on EU private international law, Cheltenham 2015, p. 116. 117 For example, Impala Warehousing and Logistics (Shanghai) Co Ltd v Wanxiang Resources (Singapore )Pte Ltd [2015] EWHC 811; Splietoff’s Bevrachtingskantoor (note 121); Southport Success SA v Tsingshan Holding Group Co Ltd [2015] EWHC 1974; Crescendo Maritime Co & anor v Bank of Communications Company Ltd [2015] EWHC 3364; Hin-Pro International Logistics Ltd v Compania Sud Americana De Vapores S.A. [2015] EWCA Civ 401 and related litigation; Beijing Jianlong Heavy Industry Group v (1) Golden Ocean Group Limited 2) Golden Zhejiang Inc (3) Ship Finance International Limited & Anor. [2013 EWHC 1063 (Comm) (anti-suit orders issued by an arbitral tribunal in respect of Chinese litigation); Niagara Maritime SA v Tianjin Iron & Steel Group Company Ltd [2011] EWHC 3035. 112 113

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Overlapping Proceedings before Chinese and Foreign Courts granted by a range of courts in addition to the English courts. In Australia, the Federal Court of Australia in Atlasnavios118 granted an anti-suit injunction to restrain the defendant from proceeding with a case relating to the collision in question before the Qingdao Maritime Court. In Hong Kong, anti-suit injunctions are rarely issued, particularly in Chinese-related proceedings.119 In Liaoyang Shunfeng Iron and Steel Co Ltd v Sunny Growth Enterprises Group Ltd,120 however, the Court of Appeal did grant an anti-suit injunction restraining the defendant from pursuing proceedings in the Liaoning High People’s Court, which was followed by a contempt order for breach of the injunction.121 Successful applications for anti-suit injunctions or other orders in respect of Chinese litigation have also been made in the United States.122 In Eastman Kodak Co. v Asia Optical Co. Inc.,123 an injunction was issued restraining the defendant from pursuing proceedings in China the purpose of which was to recover damages awarded against the defendant in a previous US case. In Vringo, Inc. v ZTE Corporation124 a prohibitory injunction was issued enjoining ZTE (which had brought proceedings against Vringo in Shenzhen) from disclosing confidential information in current or pending litigation in breach of a Non-Disclosure Agreement between the parties. Notwithstanding the number of anti-suit injunctions which have recently been issued in relation to Chinese proceedings, it is a remedy which the common law courts are – at least in theory – reluctant to apply. It may be refused under English law, for example, in cases of delay125 or in the absence of a strongly arguable case.126 Other remedies may however be available to a party aggrieved by the Atlasnavios Navegacao, LDA v The Ship “Xin Tai Hai” [2012] FCA 715. G. JOHNSTON (note 103), p. 135. Applications refused in Chan Shu Chun v Right Margin Ltd [2015] 3 HKLRD 409 and Zhang Xiuhong v Liu Wenchen HCA2118/2012. 120 CACV 234/2011 (15 March 2013). 121 Liaoyang Shunfeng Iron and Steel Co. Ltd & anor v Sunny Growth Enterprises Group Ltd & anor HCMP667/2013 (15 May 2013). 122 The criteria for the issuance of an anti-suit injunction vary across the different common law jurisdictions. No attempt has been made to summarize or discuss the bases on which such an injunction or otherwise interim measure will be granted by the courts of the different jurisdictions. 123 118 F.Supp.3d 581 (2015). 124 2015 WL3498634, US District Court, S.D. New York (prohibitory injunction in relation to disclosure of information covered by a Non-disclosure Agreement in pending or future litigation); but also see TSMC North America v Semiconductor Mfg. Intern. Corp. 161 Cal.App.4th 581 (2008) (state court) (anti-suit injunction refused on the basis that “protection of the California trial court’s jurisdiction and effectiveness of rulings did not constitute exceptional circumstances”). 125 See Essar Shipping Ltd v Bank of China Ltd [2015] EWHC 3266; followed in Hong Kong in Sea Powerful II Special Maritime Enterprises (ENE) v Bank of China Ltd. HCMP 2399/2015 (12 January 2016), per Chan J. (application for anti-suit injunction in respect of proceedings before Qingdao Maritime Court allegedly in breach of an arbitration clause); appeal dismissed by Court of Appeal, CACV36/2016. 126 Transfield Shipping Inc v Chiping Xinfa Huayu Alumina Co Ltd [2009] EHWC 3629. 118 119

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Vivienne Bath decision of a party to commence a case in China and the decision of the Chinese court to take a case in breach of an exclusive jurisdiction clause in the form of damages for breach of the exclusive jurisdiction clause or the arbitration clause. In Hin-Pro, for example, CSAV promptly paid the damages awarded against it by the Ningbo Maritime Court. It then obtained from the English court a judgment for this full amount as damages.127 The remedy of damages for breach of an exclusive jurisdiction clause is not, however, a remedy which is universally available and such an award would not be enforceable in China, as discussed above.128 A major issue with injunctions and orders issued by a foreign court in respect of Chinese proceedings is effectiveness. An anti-suit injunction is of course limited in jurisdictional effect to the jurisdiction of the issuing court. The theory behind the issue of an anti-suit injunction, therefore, is that the party will comply with an order of the court. In the case of Hin-Pro and CSAV, CSAV obtained an anti-suit injunction, a judgment from the English court including these amounts as damages recoverable from Hin-Pro, and a range of protective orders - with which Hin-Pro did not – at least initially - comply. Hin-Pro is a Hong Kong company which apparently does not have assets in England; the officer against whom contempt orders were made has not ventured into England and Hin-Pro did not withdraw its Chinese proceedings. The process of dealing with Hin-Pro’s Chinese litigation through the English and Hong Kong courts has been a long and expensive one. In Crescendo Maritime Co v Bank of Communications Company Limited/ Alpha Bank A. E. v Bank of Communications Company Limited,129 an argument was made to Tier J that an anti-suit injunction (ordering the Bank not to proceed with litigation before the Qingdao Maritime Court instituted in breach of an arbitration agreement) would not be useful because foreign judgments are very difficult to enforce in China. He responded that it was indeed useful because the Bank could be expected to comply with the order and had in fact complied with earlier orders of the court.130 It appears, however, that the bank did not comply with the order, as, when an action for enforcement was brought before the United States District Court, Southern District New York,131 the Bank of Communications argued (unsuccessfully) that China would be a more appropriate forum for the proceedings because the Bank was pursuing related fraud claims against Crescendo in the 127 Compania Sud Americana De Vapores S.A. v Hin-Pro International Logistics Ltd [2014] EWHC 3632, per COOKE J; confirmed by the decision of the Court of Appeal in HinPro International Logistics Ltd v. Compania Sud Americana De Vapores S.A. [2015] EWCA Civ 401. See also Essar Shipping (note 125), [76] per WALKER J (applicant for antisuit injunction for breach of arbitration agreement refused on basis of delay; plaintiff “left to its claim in damages”). 128 A. DINELLI, The Limits on the Remedy of Damages for Breach of Jurisdiction Agreements: The Law of Contract Meets Private International Law, 38 Melbourne University LR 1023 (2015).

[2015] EWHC 3364 (Comm) [53]. Ibid. 131 Crescendo Maritime Co. v Bank of Communications Co. Ltd Case 2016 A.M.C. 679 (S.D.N.Y. ). 129 130

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Overlapping Proceedings before Chinese and Foreign Courts Qingdao Maritime Court – presumably the same proceedings in respect of which the anti-suit injunction had been granted. The US court noted, in fact, that the status of that action was in doubt, due to the issue of the permanent anti-suit injunction.132 In Impala Warehousing, the argument was strongly pressed that an English judgment would not be enforceable in China and this was a strong ground for not issuing an anti-suit injunction. The judge, however, concluded that since both parties were members of major international commercial groups, both of which are aware of the importance of dispute resolution clauses and could be expected to be aware of difficulties with enforcement when the clause was entered into, an antisuit injunction should nevertheless be granted.133 It may be possible to obtain the assistance of courts in other jurisdictions, although this is not necessarily an easy matter. In Australia, for example, the courts are not obliged to give effect to foreign anti-suit injunctions.134 However, the High Court has recently confirmed the jurisdiction of the state courts (in this case, the Western Australian Supreme Court) to give sweeping relief in order, among other things, to protect a prospective foreign enforcement process.135 In the Hin-Pro litigation, CSAV’s attempts to obtain assistance from the Hong Kong courts to enforce its interim orders from the English court in Hong Kong against Hin-Pro have so far had limited success, although they did result in Hin-Pro paying the amount of the Chinese judgments into court in Hong Kong and an order for recovery of some of the English court costs.136 In particular, the Hong Kong Court of Appeal137 declined to provide assistance to CSAV in its application for interim relief in aid of the English proceedings. It refused on grounds of judicial comity to become involved in what it described as a conflict between the Chinese and English courts over the application of their own principles of conflict of laws to the CSAV jurisdiction clause. Finally, the foreign party may be able to resist enforcement of the Chinese judgment if the court proceeded against a foreign defendant over whom it did not (arguably) have jurisdiction under the rules applied by the foreign court, particularly where the court proceeded notwithstanding an exclusive jurisdiction clause or arbitration clause, or in breach of an anti-suit injunction.138 However, Ibid. Note 7, [142] per BLAIR J. 134 Commonwealth Bank of Australia v White (No 4) [2001] VSC 11. 135 PT Bayan Resources TBK v BCBC Singapore Pte Ltd [2015] HCA 36 [46] per FRENCH CJ, KIEFEL, BELL, GAGELER and GORDON JJ. 136 DCCJ 3986/2014. 137 Compania Sud Americana De Vapores S.A. v Hin-Pro International Logistics Ltd [2015] 2 HKLRD 458. 138 Philip Alexander Securities and Futures Ltd v Bamberger [1997] ILPr 73, cited by G. JOHNSTON (note 103), p. 128 – Hong Kong courts will not enforce a foreign judgment given as the result of breach of an anti-suit injunction; doubted in Spliethoff’s Bevrachtingskantoor, note 145). In Australia, see Foreign Judgments Act 1991 (Cth) (court of the country of the original court deemed not to have had jurisdiction if judgment given contrary to an agreement to settle dispute other than by proceedings before that court, except 132 133

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Vivienne Bath under English (and other) rules, if a party contests jurisdiction in the Chinese courts and loses, and then contests the merits, it may also lose the right to seek remedies in the foreign court, as it will be deemed to have submitted to the jurisdiction of the Chinese courts. Thus in Spliethoff’s Bevrachtingskantoor BV v Bank of China Limited,139 the court held that even though the Chinese party had breached the relevant arbitration clause by contesting the underlying case in a Chinese court, Spliethoff’s Bevrachtingskantoor had ultimately submitted to jurisdiction in China by contesting the case on the merits. The Chinese court judgment was therefore enforceable in England notwithstanding the arbitration clause. The enforcement of interim orders is not, however, solely a problem for litigants in courts outside China. The Chinese courts are also faced with the issue of attempting to protect the integrity of their own proceedings when there is a concurrent overseas court case or arbitration. Thus in a number of cases, Chinese courts have attempted to reinforce their own jurisdiction in multinational disputes by issuing stop orders to Chinese parties directing them not to make payment on negotiable instruments or guarantees issued in support of a principal contract which is the subject of litigation. In the case of a Chinese bank with international interests and assets and an international reputation, this puts the bank in a very difficult situation. Such a measure also suffers from the problem that a foreign court, applying its own private international law rules, will not necessarily give effect to such an order outside China. Orders by a Chinese court to stop payment of letters of credit were enforced by the foreign court in the Singapore case of Sinotani Pacific Pte Ltd v Agricultural Bank of China140 and the Hong Kong case of Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. v Bank of China141 on the basis that the governing law of the letter of credit was Chinese and therefore arguments for illegality under the proper law of the credit had been made out. In contrast, where Chinese law is not the governing law and the contract in question is not to be performed in China, the English courts have not been inclined to give effect to the Chinese courts’ preservation or freezing orders.142 Thus, in Splietoff’s Bevrachtingskantoor, where an application was made by the Bank of Communications for a stay of execution under a guarantee until a Chinese freezing order expired, it was common ground that there was no defence on the basis of illegality, as the guarantee was legal under its proper law (English) and the place of performance (London). Illegality in the performing party’s place of business or

in case of submission); s7(4)(b). See also the Foreign Judgments (Restrictions on Recognition and Enforcement) Ordinance (Cap. 46) s.3 (foreign judgment will not be recognized or enforced in Hong Kong if brought in breach of an agreement that the dispute be resolved elsewhere than the foreign court (unless the party submitted to the jurisdiction of the foreign court)). 139 [2015] EWHC 999 (Comm). 140 [1999] SGCA 53. 141 [2004] 3 HKLRD 477. 142 See Bankhaus Wolbern (note 18); Crescendo Maritime (note 117).

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Overlapping Proceedings before Chinese and Foreign Courts domicile was irrelevant. An argument that a stay should be granted on the basis of principles of international comity was rejected.143 In cases of this kind, China’s restrictive regime in relation to enforcement of judgments is of no assistance to the Chinese bank, as an international bank undoubtedly has substantial assets outside China against which a judgment or award can be enforced.144 Indeed, this is presumably the basis upon which the banks were asked to give guarantees in the first place. The choice of foreign law and foreign dispute resolution is therefore specifically designed – and in this case effective – to avoid the issues presented by litigation in China and China’s restrictive rules on enforcement.

IV. Discussion The discussion above highlights some of the issues in cross-border cases that arise in relation to China’s rules on jurisdiction and enforcement. While China is not the only country in which the courts are protective of their jurisdiction, it is certainly arguable that Chinese legislation and jurisprudence is not keeping up with the rapid expansion in international trade and investment and related legal disputes involving China and Chinese companies. The slow pace of reform, it is argued, has an adverse impact on both foreign and Chinese litigants, as well as on the international standing of the Chinese judicial system. A.

The Role of the Maritime Courts

A large number of the cases referred to above relate to decisions of one of the Chinese maritime courts. This is not surprising, as it can be expected that these courts will hear a considerable number of foreign-related cases.145 In addition, in cases relating to carriage of goods by sea and collisions on the high seas, there are often multiple courts internationally which can legitimately claim to have jurisdiction over the matter pursuant both to contract and to domestic concepts of admiralty jurisdiction. The fact that China has not acceded to any of the international conventions on carriage of goods by sea, or to the Convention on Limitation of

Note 139, [215] per CARR J. See note 131. 145 According to the 2015 SPC Report, the maritime courts heard 16,000 cases in 2015, which the report claims was the largest number of maritime cases in the world. Zhou Qiang, President of the SPC, Zuigao renmin fayuan gongzuo baogao, 20 March 2016, available at ; see also summary at S. FINDER, Takeaways from the SPC 2015 work report, 15 March 2016, SPC Monitor, available at . 143 144

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Vivienne Bath Liability for Maritime Claims 1976 or the 1996 LLMC Protocol,146 also potentially offers parties opportunities for a form of judicial arbitrage.147 Another reason for the number of cases involving the maritime courts is the expansive jurisdiction of the courts, which includes contracts relating to shipbuilding cases and the related bank guarantees (which have also given rise to significant amounts of international litigation and arbitration in the aftermath of the global financial crisis).148 The recent decision of Chinese authorities further to expand the jurisdiction of the maritime courts, with a view to building up China as an international maritime centre, will, it can be anticipated, result in these courts hearing a higher proportion of foreign-related cases.149 This raises the question whether a factor in the failure of the SPC to accept the principle of the autonomy of the parties to select a neutral forum to resolve disputes is the objective of building up the Chinese maritime courts – at the expense particularly of the English courts.150 After all, the maritime courts, unlike the general courts hearing civil matters, are able to accept and hear foreign-related cases if the parties so agree even though there is no place with an actual connection to the dispute within China.151 This is in marked contrast to Article 34 of the Civil Procedure Law, which refuses recognition to such an agreement in the absence of a connection between the dispute and the foreign location.

146 1511 U.N.T.S. 3 and 77. China’s accession applies only to the Hong Kong Special Administrative Zone. See International Maritime Organization, IMO Documentation, 2015 available at . 147 In Atlasnavios (note 19)19, the juridical advantage sought in the Australian court was the higher limitation fund and wreckage removal costs available in Australia due to Australia’s accession to the LLMC Protocol. See also Chinese People’s Property Insurance Co., Ltd. Shenzhen Branch v. Shenzhen-Rui International Freight Forwarding Co. Ltd., Mitsui OSK Lines carriage of goods contract dispute [2014] Guanghai fa chuzi No. 487-3 (establishment of limitation fund by Japanese court not recognized; forum non conveniens principles not applicable). 148 P. MURRAY/ J. LIN, PRC Shipbuilding Disputes in London Arbitration: The Threat of Parallel Proceedings in China and the Consequences and Possible Alternatives, 39 Tulane Maritime LJ 183 (2014-2015). 149 SPC, Regulations on the Scope of Cases to be accepted by the Maritime Courts, issued 24 February 2016, effective 1 March 2016, [2016] Fa shi No. 4. 150 S. FINDER, China’s Maritime Courts: Defenders of “Judicial Sovereignty,” The Diplomat, 5 April 2016, available at . 151 Special Maritime Procedure Law of the People’s Republic of China, Issued by the Standing Committee of the NPC on 25 December 1999, effective 1 July 2000, Article 8. Generally, a Chinese court’s jurisdiction over foreigners extends to contract and property disputes brought against a defendant with no domicile in China only if the contract was signed or performed in China, the subject-matter of the action is in China, the defendant has distrainable property in China, or the defendant has a representative office in China (Article 264, Civil Procedure Law) or, potentially, if a foreign party fails to object to jurisdiction under Article 127 of the Civil Procedure Law.

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Overlapping Proceedings before Chinese and Foreign Courts It is true that a number of states take a restrictive view in relation to jurisdiction in maritime matters. S11 of Australia’s Carriage of Goods by Sea Act 1991 (Cth), for example, not only prescribes that the law of the port of departure applies to all contracts of carriage for goods leaving Australia, but also provides that the parties cannot validly exclude the jurisdiction of an Australian court in relation to contracts of carriage where the goods leave or arrive in Australia, even in cases where the parties have agreed to international arbitration outside Australia. The Rotterdam Rules, if adopted, could significantly limit the scope of exclusive jurisdiction clauses in bills of lading and other transport documents.152 The application of Article 34 of the Civil Procedure Law and other provisions protecting the jurisdiction of the Chinese courts are not, however, limited to maritime matters. The United States cases involving Chinese parties and courts appear to be focussed on trade secrets and intellectual property, as well as trade disputes. The Hong Kong cases often involve Hong Kong corporate law. Similarly, the English law cases are not limited to bill of lading disputes but include issues of general commercial law and sale of goods. The protective policies pursued by the Chinese legislature and SPC cannot therefore be attributed solely to the wish to strengthen Chinese maritime jurisdiction. B.

The Concept of Judicial Sovereignty and the Question of Comity

An important conceptual problem is presented by the attitude which Chinese courts take to foreign courts and decisions. Chinese cases and judicial documents dealing with international legal matters tend to refer both to the important concept of judicial sovereignty (sifa zhuquan) and to the more general idea of reciprocity. The phrase “judicial sovereignty” is used in connection with the protection from foreign encroachment of the jurisdiction and autonomy of Chinese courts. Thus the Commentary uses it as a justification for the refusal to take into account the fact that a foreign court has accepted a case or deal with parallel proceedings.153 The concept also encompasses protection of the mandatory jurisdiction of the Chinese courts154 and the refusal to enforce foreign judgments or foreign awards which are considered to be overreaching or in breach of a treaty.155 Generally it relates to the preservation of the territorial jurisdiction of the courts and the protection of the Chinese courts from foreign infringements on their autonomy. Reciprocity, in the context of enforcement, is in practice limited to responding to steps first made by foreign courts. Thus both concepts are essentially inward-looking and focussed on United Nations Convention on Contracts for the International Carriage of Goods Whollyor Partly by Sea, New York, 2008, Chapter 14; See also discussion in Y. BAATZ, Thirty Years of Europeanisation of Conflict of Laws and Still all at Sea?, in M. CLARKE (ed.), Maritime Law Evolving (Hart, 2013), p. 237. 153 Commentary (note 56), p. 1396. 154 G. TU (note 74), p. 148 and 151. 155 See Response of SPC in relation to the civil decision on the enforcement and recognition of a judgement issued by the Fargona Regional Court of the Republic of Uzbekistan in relation to Chorvanaslxtzmat Co Ltd. [2011] minsi tazi No. 18. See also text to notes 75 and 77. 152

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Vivienne Bath the defence of the integrity of the Chinese court system from perceived threats and encroachments. The concept of judicial sovereignty does not appear to involve respect by Chinese courts for the judicial sovereignty of foreign courts or deference to their decisions.156 This contrasts with the concept of international or judicial comity (the idea of respect for foreign courts and their jurisdiction), which is often raised as an argument in foreign courts (which can also be jealous of their jurisdictional power), including in China-related cases, generally with a view to persuading the foreign court not to exercise jurisdiction. It does not arise generally in relation to the issue of an anti-suit injunction in English courts, because the rationale is that comity is not offended as the order is addressed to the party and not to the foreign court.157 In addition, where there is an agreement relating to dispute resolution, the consensus of the English courts appears to be that comity is not particularly relevant. In Starlight Shipping, for example, the judge stated that: “Whilst this court proceeds with the utmost respect for any foreign court and the exercise of its jurisdiction in accordance with its law, questions of comity play a small role where a party has agreed to the jurisdiction of a particular court or to arbitration.”158 In the Hong Kong Court of Appeal decision in Hin-Pro,159 however, the Court considered that the principle of judicial comity was engaged in the court’s consideration of an application for interlocutory relief in aid of CSAV’s English proceedings. The court refused relief because it considered that there was in essence a conflict between the application by the Chinese courts of Chinese law on the effect of the jurisdiction clause and the effect of the application of English law by the English courts on the clause. Comity plays a much more significant role in United States jurisprudence and, in the private international law context, is particularly significant in terms of the formulation of doctrines relating to judicial restraint, that is, deferring to foreign courts by restraining the exercise of the jurisdiction of the United States courts.160 It is thus an important consideration in cases involving parallel proceedings. In the US case of Jiangsu Hongyuan, for example, where the Chinese plaintiff made a spirited attack on the Chinese legal system, the court noted that

156 See, however, text and notes 110 and 111, which suggest the possibility that Chinese courts may be moving towards taking account of the content of foreign judgments. 157 Crescendo Maritime Co v Bank of Communications Company Limited/ Alpha Bank A. E. v Bank of Communications Company Limited [2015] EWHC 3364 (Comm) [53]. 158 Starlight Shipping Co & anor v Tai Ping Insurance Co. Ltd., Hubei Branch [2007] EWHC 1893 [44] per Cooke J (application for interim anti-suit injunction in relation to proceedings before Wuhan Maritime Court in breach of arbitration clause). 159 Compania Sud Americana de Vapores S.A. v Hin-Pro International Logistics Limited [2015] 2 HKLRD 458. This question is one of the issues to be addressed in the appeal before the Court of Final Appeal. See Compania Sud Americana de Vapores S.A. v Hin-Pro International Logistics Limited FAMV No. 33 of 2015. 160 See discussion in W.S. DODGE, International Comity in American Law, 115 Columbia LR 2071 (2015), p. 21-5 et seq.

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Overlapping Proceedings before Chinese and Foreign Courts considerations of comity preclude a court from “adversely judging the quality of a foreign judicial system.”161 In the hotly contested parallel Chinese and United States cases on the trade secrets dispute between Sino-Legend and SI Group, where directly conflicting judgments on the same factual matrix have been issued by the US and Chinese courts,162 the amicus curiae brief filed by the Trade Remedy and Investigation Bureau of the Ministry of Commerce (TRB) in the ultimately unsuccessful petition for rehearing in Sino Legend (Zhangjiagang) Chemical Co. Ltd v International Trade Commission163 draws on the concepts of both judicial sovereignty and comity. The brief states that the TRB appears as amicus as “the Chinese government has a substantial interest at stake in this case, as it relates to the judicial sovereignty of China.” It argues “that the astonishing ruling in this case – that the decisions of Chinese courts on the identical issue between the same parties are totally irrelevant and, therefore, can simply be ignored by the ITC – frustrates the respect properly due to the judicial sovereignty of any nation and treaty partner” and urges the court “to respect comity.” The brief goes on to say that “[C]entral to the orderly conduct of international trade and the stable conduct of international relations is the premise that courts of each nation respect the rulings of foreign courts, especially the judicial decisions of treaty partners on issues of their own domestic commercial law.”164 Significantly, the brief does not state that this is the approach required of Chinese courts in dealing with foreign court decisions under Chinese law,165 and there is little suggestion in the Interpretation or the recent Chinese cases that the TRB’s argument on the role of comity reflects the approach of the Chinese courts. The concept of judicial sovereignty is much more likely to stand in the way of Chinese courts surrendering or refusing jurisdiction in favour of foreign courts than to encourage respect for their judgments and rulings.

161

Jiangsu Hongyuan Pharmaceutical Co., Ltd. v DI Global Logistics Inc.

(note 15). 162 See SINO LEGEND (CHINA) CHEMICAL COMPANY LTD, The Supreme People’s Court of China overrules SI Group’s Retrial Request, 1 March 2016, ; C. POWELL, ITC Asks Fed. Circ. To Keep Import Ban On China Co’s Resin, 15 April 2016 . 163 Sino Legend (Zhangjiagang) Co., Ltd v International Trade Commission and SI Group, Petition for Rehearing, Amicus Curiae Brief of the Trade Remedy and Investigation Bureau of the Ministry of Commerce of the PRC in Support of Rehearing en banc; decision aff. 623 Fed. App’x 1016 (Mem)(Fed. Cir. 2015). 164 Ibid, p. 7. 165 This is possibly implied by the comment that “The question would be whether a Chinese court could properly re-litigate the issues of misappropriation when the products were later imported into China […] surely it would be difficult for the United States to accept such an outcome.” Ibid.

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Vivienne Bath C.

The Role of China’s Rules on Enforcement

The stringency of Chinese rules relating to enforcement has had the undesirable side-effect of making the difficulty of enforcing judgments in China a strategic factor in both Chinese and foreign litigation. First, it has led to attempts by counsel to use the difficulty of enforcing judgments in China as grounds to persuade the foreign court to stay the foreign proceedings in favour of China on forum non conveniens grounds. In the English cases, these have generally been unsuccessful. In Impala, for example, it was strongly argued that the English court should not give effect to the exclusive jurisdiction clause because it was common ground that the judgment of the English court would not be enforceable in China. BLAIR J, however, noted that there were few cases in support of this proposition, presumably because it was foreseeable at the time the clause was entered into that this would be the case. In this case, both parties were part of major international commercial groups and both were aware of the significance of international dispute resolution provisions.166 Nevertheless, Impala made significant efforts to deal with this concern and there were suggestions in the case that the court might ultimately impose a condition that the parties arbitrate the dispute in order to resolve it.167 In the US, the difficulty of enforcing judgments in China has also been raised as a relevant factor in forum non conveniens applications. In Coach, Inc. v Di Da Import and Export, Inc., Coach argued that if Di Da diverted assets and monies to China, Coach would be without an adequate legal remedy.168 In Warner Technology & Inv. Corp. v Hou,169 the court regarded it as relevant to the forum non conveniens argument that if the New Jersey court heard the case, the plaintiff would then need to pursue the judgment in China. The difficulty of enforcing foreign judgments in China also plays a tactical role in Chinese decisions to retain jurisdiction. Tang argues, for example, that the ability to enforce judgments in China can be a significant factor in the decision of Chinese courts to take jurisdiction over cases where there is an exclusive jurisdiction clause.170 According to Tu, the difficulty of enforcing a foreign judgment in China is also a relevant factor in refusing forum non conveniens applications, even though it is not included in the list of factors in either the 2005 Minutes or the 2015 Interpretation.171 The issue of enforcement thus plays into and reinforces the already protective view of the Chinese courts in relation to jurisdiction over foreign-related matters. China’s restrictive approach to enforcement may, however, have unexpected consequences outside China. In a recent Singapore case, the Chinese appellant against a Singapore arbitral award was required (unusually) to put up security for its appeal in large part because of the difficulty of enforcing judgments against Id, [142]. Id, [146]. 168 Coach, Inc. v. Di Da Import and Export, Inc., No. 13 C 7165 15 December 2015 (U.S. Dist Ct, N.D. Illinois, E.D.). 169 CA No. 13-7415 (MAS (DEA) 31 December 2014 (U.S. Dist Ct, Dist NJ). 170 Note 40. 171 Note 78, p. 351. 166 167

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Overlapping Proceedings before Chinese and Foreign Courts it in China.172 In Jiangsu Hongyuan v DI Global, the Chinese plaintiff attempted unsuccessfully to use the fact that the U.S. defendant had no assets in China and a judgment could therefore not be enforced as an argument against moving the case to China in accordance with the jurisdiction clause.173 In Herman Miller, Inc. v Alphaville Design,174 the plaintiff put forward the ingenious, but unsuccessful, argument that it should be awarded maximum statutory damages against the defendant on the basis that enforcing a judgment in China “was notoriously difficult.” Another consequence is the adoption by foreign parties of structures and arrangements designed to avoid the problem of enforcement. The cases involving guarantees given by Chinese banks show that where Chinese parties with assets outside China are involved, enforcement in China can be avoided by the inclusion of a clause which provides for foreign law and jurisdiction. Where a Chinese company holds assets outside China, a foreign judgment may well be enforceable in another foreign jurisdiction where the company holds assets. Arbitration can be nominated as an alternative to litigation. As a practical issue, where Chinese multinational companies are building up their businesses and reputations internationally, restrictions on the enforcement of judgments in China are often not relevant or useful. Conceptually, the inwardlooking nature of China’s restrictive regime in relation to enforcement lends itself to a perception that its main purpose is to protect the interests of Chinese companies. D.

Practical Issues and Prospects for Change

Neither the Interpretation nor the Commentary provides any real explanation for the slow rate of change in Chinese approaches to dealing with exclusive jurisdiction clauses, parallel litigation and enforcement. The economic and hence legal relationships between China and the world have changed markedly since 1991, when these measures first appeared in the Civil Procedure Law. Chinese companies, as a necessary consequence of their increased international engagement, are increasingly involved in litigation outside China, both as defendants and as plaintiffs. They sign agreements agreeing to the jurisdiction of foreign courts and, as the cases make clear, where they consider it tactically appropriate or advantageous, make a conscious choice to litigate or arbitrate outside China. Their multiple subsidiaries and business partners are fully subject to jurisdiction of courts outside China. The issues highlighted in this article in relation to the Chinese approach to jurisdiction and enforcement thus do not merely affect foreign parties. As a practical matter, there are various ways in which Chinese and foreign parties can and do deal with these legal difficulties, just as they deal with court and Zhong Da Chemical Development Co Ltd v Lanco Industries Ltd [2009] SGHC 112. 173 Note 159. 174 Herman Miller Inc. v. Alphaville Design Inc., No. C 08-03437 WHA, 16 July 2008 (U.S. Dist. Ct, Californian N. D. C). 172

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Vivienne Bath jurisdictional rules. Many of the issues addressed in this article can be resolved by the anticipation of difficulties, better tactics and clearer drafting. Even if the issue of the autonomy of the parties to choose the court for resolution of disputes cannot be resolved under current rules, the availability of international arbitration provides another option for specialist dispute resolution. The availability of assets overseas increases options for contracts which provide for foreign law and jurisdiction. After all, the issue of parallel proceedings is one which frequently arises in crossborder transactions and international litigants need to be prepared to deal with it. At an international level, however, there are considerable advantages for business in reducing the options for forum-shopping and facilitating the international enforcement of both judgments and awards.175 In this context, given China’s major role in international trade and investment, there is no clear rationale for China’s delay in improving the participation of the Chinese courts in the international legal system. In the case of Article 34 of the Civil Procedure Law, in particular, there is no real justification for the requirement that an exclusive jurisdiction clause have an actual connection with the chosen forum, other than its longevity. If China took the view that China had a strong public policy interest in having cases involving shipment of goods from China heard in a Chinese court, it could follow the Australian approach in relation to mandatory jurisdiction over disputes of that kind, just as it does with other issues which are considered to come within the mandatory jurisdiction of the Chinese courts. If the justification is that, as a general policy matter, cases should only be heard by courts with a connection to the dispute regardless of the decision of the parties, it is not clear why the Chinese maritime courts are free to accept cases with which China has no connection if the parties so agree. Although China has not signed the Hague Convention on Choice of Courts Agreements (and would need to amend Article 34 in order to do so), the ChinaHong Kong Agreement provides for mutual recognition and enforcement of judgments only when the parties have specifically agreed to the exclusive jurisdiction of the Chinese or Hong Kong courts.176 There is no mention in the Agreement of a requirement for any connection between the case, the parties and the dispute and the validity of the exclusive jurisdiction clause is determined under the law of the court nominated under the clause.177 In addition, it is not clear why, if parties are free to choose the governing law for their contracts, with no requirement for an “actual connection,” the same should not apply in relation to the choice of courts. It is true that Chinese law, like 175 For a contrary view, see P. K. BOOKMAN, The Unsung Virtues of Global Forum Shopping (May 6, 2016). 92 Notre Dame Law Review, (Forthcoming); Temple University Legal Studies Research Paper No. 2016-21. Available at . 176 Note 100. 177 See Agreement, Article 9(1). See, however, the decision of the SPC in Jilin Xinyuan Muye youxian Gongsi yu Ouhang (shanghai) guoji Huoyun Daili youxian gongsi Shanghai, Tonghai shuiyu Huowu yunshu hetong Jiufen Guanxia Dingyi an [Case on a dispute relating to a water transport contract jurisdiction dispute] [2013] mintizi No. 243 (SPC) (between two Chinese parties), which seems to suggest that an actual connection would be required even if the chosen court was Hong Kong.

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Overlapping Proceedings before Chinese and Foreign Courts the German civil law system on which it is based, deals separately with choice of law and choice of forum, and a number of SPC cases have reiterated that the choice of law does not constitute an actual connection with a court in the country of the proper law. Art 532 of the Interpretation, however, which sets out the principles relating to refusal of jurisdiction on forum non conveniens grounds, clearly recognizes the significance of the ability of the court hearing the case to apply the proper law to the case. In reality, there is no reason why a Chinese court should care whether the chosen foreign court has jurisdiction or not, as it is surely a matter for the foreign court to determine whether or not it has jurisdiction over the case. In any case, this should be outweighed by the disadvantage for foreign parties of having to litigate in China, in Chinese, and hire Chinese lawyers, when both parties had agreed to litigation elsewhere. There are a number of ways in which this issue could be dealt with. The SPC could state that choice of law does constitute an actual connection, in view of the fact that it is easier for a case to be heard in the court of the proper law than in a Chinese court. It would be preferable, however, for jurisdiction in foreign choice of court cases to be de-linked from Article 34, subject to limitations relating to mandatory jurisdiction. The court would acknowledge the ability of the parties to choose both governing law and court, and, as with arbitration clauses, apply the proper law of the dispute resolution clause to its interpretation and application. China could also accede to the Hague Convention on Choice of Court Agreements.178 A truly difficult issue is presented by parallel – or overlapping – proceedings. The introduction of the concept of forum non conveniens represents a welcome addition to the powers of the Chinese courts to accommodate overlapping or parallel proceedings. In practice, however, the extremely limited scope of the formulation, particularly when combined with the China’s restrictive approach both to refusing jurisdiction on the basis of parallel proceedings and to enforcement of foreign judgments, significantly restricts its usefulness. First, the list of the factors in Article 532 which must be satisfied is very restrictive. In particular, the requirement that there be no interests of the Chinese state, citizen, enterprise or organisation involved in order for a Chinese court to refuse jurisdiction suggests that the courts must – or will - hear any case which involves a Chinese party. The studies on the application of the doctrine support this interpretation.179 This is not the case in the common law jurisdictions on whose law the doctrine is based. In addition, it is not clear why the fact that the dispute is subject to Chinese law should automatically disqualify another jurisdiction as distinct from being a relevant factor for the court to consider. Chinese courts can apply foreign law and, correspondingly, foreign courts are able to (and do) apply Chinese law. See G. TU, The Hague Choice of Court Convention: A Chinese Perspective 55(2) American Journal of Comparative Law 347. 179 In the Mitsui case (note 147), for example, the Guangzhou Maritime Court cited the Interpretation but said that forum non conveniens did not apply because the plaintiff (the insurer) was a Chinese legal entity with a branch office in the jurisdiction and the place of departure of the goods was Shenzhen. 178

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Vivienne Bath Secondly, Article 532 gives no assistance on what factors should be relevant in the court determining whether another court would be a more convenient forum. However, the concept of forum non conveniens does provide a potentially useful method for the court to deal with parallel proceedings, rather than ignoring the very real issues for parties which arise from being involved in conflicting litigation in different parts of the world. While the concept of allowing courts to exercise their own discretion presents difficulties for China’s civil law jurisdiction, the SPC could set out a list of factors that the court could take into account, drawn from the extensive jurisprudence of common law jurisdictions. Such a list could include the existence, status or continuation of parallel proceedings before a foreign court with jurisdiction over the case and the impact upon the parties; factors relating to convenience such as the location of witnesses and evidence; connections with China and the alternative forum such as the residence of a party or parties; the applicable law; the desirability of having the whole of a multi-faceted international dispute heard before one competent tribunal and other factors drawn from a consideration of international practice, such as available remedies, convenience, expense, juridical advantage, language of witnesses and proceedings, availability of the alternative forum and so on.180 Underlying this is the need for Chinese courts to move away from a purely protective approach to their own jurisdiction under the principle of judicial sovereignty towards a more outward-looking and reciprocal approach of respecting the capability and jurisdiction of courts of other legal systems. The willingness of the Chinese courts to accept cases regardless of the existence of foreign proceedings, and the lack of an adequate mechanism for the courts to refuse jurisdiction where a foreign court is hearing the same or a related dispute, increases opportunities for tactical litigation manoeuvres in cross-border disputes.181 Finally, China’s approach to enforcement generally presents a major obstacle in terms of transnational litigation. As a practical matter, this is not in the long term necessarily to the advantage of Chinese parties. It encourages the choice of arbitration over litigation where enforcement is likely to be sought in China, as well as a preference for foreign law and foreign jurisdiction where Chinese companies have assets outside China and enforcement in China can be avoided. It is difficult to understand China’s continued reliance on judicial assistance treaties, since Chinese authorities have negotiated only a small number of civil judicial assistance agreements, of which very few are recent. The difficulty of persuading Chinese courts that foreign courts do recognize their judgments as a condition for reciprocal recognition ensures that enforcement continues to be very difficult, despite the increase in foreign cases where foreign courts have indeed recognized and 180 See F.M. MANOLIS/ N. J. VERMETTE/ R.F. HUNGERFORD, The Doctrine of Forum Non Conveniens:Canada and the United States Compared, FDDC Quarterly Fall 2009, p. 2; M. DAVIES/ A.S. BELL/ P.L.G. BRERETON (note 59), p. 192-195; G. JOHNSTON (note 103), p. 114-125. 181 See M. COHEN, When IP Systems collide – True Adventures in Foreign-Chinese Judicial Interaction, October 2015, US-China IP Conference – Best Practices for Innovation and Creativity .

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Overlapping Proceedings before Chinese and Foreign Courts enforced Chinese judgments. This contrasts unfavourably with China’s long-term acceptance of the enforceability of foreign arbitral awards.

V.

Conclusion

Chinese courts are not alone in struggling with the appropriate way to deal parallel and overlapping litigation. The English courts take a very inflexible view to the enforcement of exclusive jurisdiction clauses nominating England, which reflects the role of the English courts as neutral jurisdiction of choice in many cases; the Australian courts ascribe to an approach to forum non conveniens which results in few cases being sent away by the courts; the Hong Kong courts rarely appear to stay proceedings in favour of the Chinese courts on forum non conveniens grounds and the US courts have been criticized by the Chinese for their willingness to rehear cases which have already been heard in China. Nevertheless, all of these courts do attempt to recognize the issues presented by parallel and overlapping proceedings. The US courts have referred cases to the Chinese courts on forum non conveniens grounds; common law courts generally have begun to enforce Chinese judgments and all of them recognize the right of parties to choose the jurisdiction in which disputes will be resolved. The United Kingdom and the other countries of the European Union have ratified the Choice of Courts Agreement; the United States has signed it,182 and Australia has started formalities for accession.183 The revisions to the Civil Procedure Law in 2012 and the approach of the SPC in the 2015 Interpretation to the issues of choice of court, parallel litigation (with the exception of the formal introduction of a forum non conveniens concept) and enforcement have been excessively cautious. Given the length and substance of the Interpretation, which contains 552 articles and is longer than the Civil Procedure Law itself, it may be that foreign-related issues simply did not receive adequate attention. Indeed, 3 months after the issue of the Interpretation, the SPC issued the Several Opinions on the Provision by the People’s Courts of Judicial Services and Safeguards for the Construction of “One Belt One Road,”184 which recognized that there are ongoing problems in relation to jurisdiction and enforcement. The Several Opinions state that the right of Chinese and foreign market participants in the countries along the One Belt One Road to choose judicial jurisdictions should be respected and that, through friendly consultations and deepened legal cooperation, international jurisdictional conflicts in foreign-related matters should be minimised and problems of international parallel proceedings should be 182 Note 100. See HCCH, Convention of 30 June 2005 on Choice of Court Agreements, Status table, available at . 183 Parliament of Australia, Australia’s Accession to the Convention on Choice of Court Agreements (The Hague, 30 June 2005) . 184 Issued 16 June 2015, Fa fa [2015] No. 9, Articles 5 and 6.

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Vivienne Bath resolved. They also state that while China’s jurisdiction should be protected, the jurisdiction of foreign courts should also be respected (Art 5). In relation to the recognition and enforcement of judgments, Article 5 raises the possibility that even where no judicial assistance agreement has been entered into, if a country has committed to extend reciprocity, the Chinese courts could consider providing judicial assistance first in order to contribute to the development of reciprocity and the growth of international legal assistance. Although an advance on the Interpretation, these are very general suggestions and statements of principle on which no subsequent substantive progress appears to have been made. In summary, the cautious approach on jurisdiction and enforcement in the 2012 Civil Procedure Law and the Interpretation fails to reflect the realities of the growth of foreign-related cases in China and the increased involvement of Chinese parties overseas. Expanding the jurisdiction of courts, improving procedures and improving the quality of judges and providing support for international arbitration are important steps to improve the Chinese legal system, but do not deal with the realities of cross-border litigation. If China’s aim is to become an international maritime law centre, or a major international law centre generally, this will be achieved by providing high quality courts rather than by restrictive and protective jurisdictional rules. China is certainly not required to adopt foreign rules or practices (which are in any event not cohesive internationally and are often far from perfect). However, in an era of “going out,” China needs to create a legal framework for foreignrelated litigation which facilitates working with foreign courts and supporting overseas litigation and other methods of dispute settlement. This requires the recognition that the concept of judicial sovereignty can extend to respect for the judicial sovereignty of foreign courts without undermining the power and autonomy of the Chinese courts, and, secondly, that the full participation of Chinese parties in a globalised world may require Chinese courts to recognize the autonomy of parties and foreign courts to make decisions with which the home court disagrees.

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MEASURING THE EFFECTIVENESS OF THE EU CIVIL JUSTICE FRAMEWORK: THEORETICAL AND METHODOLOGICAL CHALLENGES Mihail DANOV* / Paul BEAUMONT**

I. II. III. IV. V.

Introduction PIL Theory: Defining Justice in Cross-Border Private Disputes in the EU Theoretical Challenges: Administration of Justice in the EU Methodological Challenges: Measuring the Effectiveness of the EU Civil Justice System Conclusions

A number of harmonised private international law instruments appear to be the foundation of the whole EU civil justice framework, which primarily aims to provide effective remedies for litigants in cross-border cases. Given the level of diversity across the EU, a major feature of the EU legal landscape is the triangular relationship between the allocation of jurisdiction and identification of applicable law, on the one hand, and the available remedy, on the other hand. It appears that, when it comes to the administration of justice in a crossborder context within the EU, this triangular relationship encompasses the ability of the Member States’ courts to deal with cross-border disputes which may be important for the forum selection process. An EU model of administration of justice, which allows litigants to choose where to litigate, may result in some jurisdictions being promoted as dominant. This can only happen, of course, because the EU has already created free movement of judgments in large areas of commercial and family law. Once a judgment has been secured in any one EU Member State it should be enforceable in all others with little or no hindrance. However, litigants may have to consider where a judgment is to be actually enforced given that the rules on actual enforcement are not harmonised in the EU (this may be particularly significant in relation to family law disputes). The dominant jurisdictions could be attracting more cross-border cases, and thus some jurisdictions may become a venue of choice for the high value cross-border disputes. It is important to assess, on the basis of relevant empirical data, how the current EU Civil Justice framework is shaping the litigants’ strategies and */ **

Respectively, Associate Professor in Law, University of Leeds, and Professor of European Union and Private International Law and Director of the Centre for Private International Law of the University of Aberdeen. This paper is written within the framework of research project JUST/2013/JCIV/AG/4635 on “Cross-Border Litigation in Europe: Private International Law Legislative Framework, National Courts and the Court of Justice of the European Union”. The project, which includes also Professor Stefania BARIATTI (University of Milan, Italy), Professor Jan VON HEIN (University of Freiburg, Germany), Professor Carmen OTERO (Universidad Complutense de Madrid, Spain), Professor Thalia KRUGER (University of Antwerp, Belgium) and Dr Agnieszka FRĄCKOWIAK-ADAMSKA (University of Wroclaw, Poland), attracted over €730,000.00 in financial support from the EU Commission Civil Justice Programme. The usual disclaimers, including the disclaimer excluding the Commission’s responsibility, apply. Yearbook of Private International Law, Volume 17 (2015/2016), pp. 151-180 © Verlag Dr. Otto Schmidt & Swiss Institute of Comparative Law

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Mihail Danov / Paul Beaumont whether the objectives of the EU PIL legislative instruments are effectively pursued in a cross-border context. An empirical study is underway in several Member States, with different legal traditions/heritages.

I.

Introduction

It is well established that there is free movement of workers, goods, capital and services in a growing and diverse European Union which consists of 28 Member States, sharing different legal heritages. The diverse nature of the legal systems across the European Union indicates that private law in Europe is difficult to harmonise. The main reason being that “[o]nly in legal fields where considerable harmonization had taken place already would it be productive to implement the unification or uniformity of positive law”.1 Given the character of the Union, a number of private international law (PIL) instruments were adopted on the basis of Article 81 of the Treaty on the Functioning of the European Union.2 The role of private international law, which does not have an ambition to harmonise national substantive laws and may only harmonise national procedural laws in a very limited way to achieve certain goals of private international law harmonisation including administrative and judicial cooperation, is very important in the EU. The EU PIL Regulations are legislative tools used by the EU legislature to promote a level of judicial cooperation in civil and commercial matters between the diverse legal systems within the EU.3 Sets of EU private international law mechanisms are adopted to facilitate all cross-border litigation arising out of private relationships. These sets of rules have put in place administrative and judicial cooperation mechanisms which are intended to facilitate the administration of justice in cross-border family cases and to a much lesser extent in civil and commercial law disputes arising in an intra-EU context. The harmonised private international law instruments are the foundation of the whole EU civil justice frame-

1 D.J. GERBER, Sculpting the agenda of comparative law: Ernst Rabel and the Façade of Language, in A. RILES (ed.), Rethinking the Masters of Comparative Law (Hart Publishing, Oxford 2001), p. 190, 216. 2 See more P. BEAUMONT/ M. DANOV, The EU Civil Justice Framework and Private Law: “Integration through [Private International] Law” (2015) 22 Maastricht Journal of European and Comparative Law 706-731. 3 H. MUIR WATT, Integration and diversity: The conflict of laws as a regulatory tool, in F. CAFAGGI (ed.), The Institutional Framework of European Private Law (OUP, Oxford 2006), p. 107; L. TICHY, A new role for private international law and procedural law in European Integration? A critical comment, in R. BROWNSWORD et al. (eds.), The Foundations of European Private Law (Hart Publishing, Oxford 2011), p. 393-412. See also European Council, The Stockholm Programme – An open and secure Europe serving and protecting the citizens, [2010] OJ C 115/1, p. 15; Recital 3 of the Brussels I (Recast) Regulation; Recital 1 of the Brussels IIa Regulation.

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Measuring the Effectiveness of the EU Civil Justice Framework work, which primarily aims to provide effective remedies4 to the parties in crossborder civil and commercial law cases across the EU.5 At present, there is a growing number of harmonised EU private international law mechanisms which form part of the Member States’ legal orders. In particular, EU private international law rules are relied upon by the EU policymakers to allocate jurisdiction between the Member States’ courts and identify the applicable laws to the merits of civil and commercial law disputes (including family law disputes) with an international element. Council Regulation 1215/2012 (“Brussels I Recast”) is to be used by national courts when assuming jurisdiction in civil and commercial matters as well as when another Member State’s court judgment is sought to be registered and enforced. Council Regulation 593/2008 (“Rome I”) and Council Regulation 864/2007 (“Rome II”) are intended to designate the national law which should apply to the merits of cross-border disputes of a contractual and/or non-contractual nature. Council Regulation 2201/2003 (“Brussels IIa”) and Council Regulation 4/2009 (“Maintenance Regulation”) are relevant for a Member State court, assuming jurisdiction in certain family law disputes, as well as for the other Member States’ courts where the rendered judgment in such disputes is sought to be registered and enforced. However, the EU legal landscape is somewhat more complex and diverse with regard to the law applicable in matrimonial and maintenance matters. Council Regulation 1259/2010 implementing enhanced cooperation in the area of the law applicable to divorce and legal separation (“Rome III”) and the Hague Protocol on the law applicable to maintenance obligations apply in some Member States, but not in others.6 Moreover, different sets of private international law instruments do achieve a level of harmonisation with regard to such procedural aspects as, for example, P. BEAUMONT, Interplay of Private International Law and European Community Law, in C. KILPATRICK/ T. NOVITZ/ P. SKIDMORE (eds.), The Future of Remedies in Europe (Hart Publishing, Oxford 2000), p. 197. See also C. HARLOW, A Common European Law of Remedies, in C. KILPATRICK/ T. NOVITZ/ P. SKIDMORE (eds.), The Future of Remedies in Europe (Hart Publishing, Oxford 2000), p. 69. 5 Article 47(1) of the EU Charter of Fundamental Rights of the European Union; Communication from the Commission, The EU Justice Agenda for 2020 – Strengthening Trust, Mobility and Growth within the Union, COM(2014) 144 final, para. 4.1(ii); Recital 38 of Brussels I Recast Regulation. 6 The Brussels I Recast [2012] OJ L 351/1 and the Maintenance Regulation [2009] OJ L 7/1 apply in all Member States (in Denmark – by an international agreement between the EC and Denmark of 19 October 2005 [2005] OJ L 299/62 and subsequent notifications by Denmark on Maintenance [2009] OJ L 149/80 and the Brussels I Recast [2014] OJ L 240/1; in the UK the Maintenance Regulation was opted in to by the UK after its adoption see [2009] OJ L 149/73); Brussels IIa [2003] OJ L 338/1, Rome I [2008] L 177/6 and Rome II [2007] L 199/40 apply in all Member States, except Denmark; Rome III is a product of enhanced cooperation [2010] OJ L 343/10 and only applies in Belgium, Bulgaria, Germany, Greece (see [2014] OJ L 23/41), Spain, France, Italy, Latvia, Lithuania (see [2012] OJ L 323/18, Luxembourg, Hungary, Malta, Austria, Portugal, Romania and Slovenia. The Hague Maintenance Protocol applies in all Member States except Denmark and the UK, see Council Decision 941/2009 on the conclusion by the EC of the Hague Protocol of 23 November 2007 on the law applicable to maintenance obligations [2009] OJ L 331/17. 4

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Mihail Danov / Paul Beaumont avoidance of parallel proceedings,7 transfer of parental responsibility proceedings within the EU,8 service of documents,9 taking of evidence across borders.10 The adoption of so many private international instruments indicate that, in order to ascertain whether there are effective remedies for litigants in cross-border cases, one may consider the implications of the EU private international law mechanisms on the administration of justice across the EU. In theory, some analogies may be drawn with the developments in England and Wales. In a domestic context, Sir Jack JACOB11 has used the concept of “civil justice”, in order to “describe the entire system of the administration of justice in civil matters.”12 In a broader European context, the Brussels I regime inter alia was set “to facilitate the sound administration of justice”13 in the EU. In England, Dame Hazel GENN14 has submitted that “[t]he civil justice system is partly about substantive rights,15 but perhaps more importantly it is about the provision that society makes for citizens and business to bring civil suits – the right of action and the machinery to make good that right.”16 In Europe, the EU Justice Agenda for 2020 has expressly provided that “[t]here are no rights without effective remedies”.17 Hence, in the EU context, it could be argued that the institutional framework in the EU would be central to providing private parties with effective remedies in cases with an international element. The theoretical and practical issues are important because remedies in a cross-border context may be necessary not only for businesses, but also for consumers as well as for particularly vulnerable people (e.g. maintenance creditors and children who have been abducted) which poses important questions about access to justice and remedies in the EU. Therefore, it is important to consider the effectiveness of the current EU civil justice system and in particular the effectiveness of the 7 E.g. Articles 29 – 32 of the Brussels I Recast Regulation; Article 19 of the Brussels IIa Regulation; Articles 12 and 13 of the Maintenance Regulation. 8 Article 15 of the Brussels IIa Regulation. 9 Council Regulation (EC) No 1393/2007 of 13 November 2007 on the service in the Member States of judicial and extrajudicial documents in civil or commercial matters (service of documents), and repealing Council Regulation (EC) No 1348/2000 [2007] OJ L 324/79. 10 Council Regulation (EC) No 1206/2001 of 28 May 2001 on cooperation between the courts of the Member States in the taking of evidence in civil or commercial matters [2001] OJ L 174/1. 11 J.I.H. JACOB, The Fabric of English Civil Justice (Stevens & Sons, London 1987). 12 Ibid., p. 2. 13 Recital 16 of Regulation (EU) 1215/2012 (“Brussels I Recast”). 14 H. GENN, Judging Civil Justice (CUP, Cambridge 2010). 15 See the discussion by J.A. JOLOWICZ, On the nature and purpose of civil procedure law, Chapter 3, in J.A. JOLOWICZ, On Civil Procedure (CUP, Cambridge 2005) cited in H. GENN, Judging Civil Justice (CUP, Cambridge 2010), p. 11. 16 H. GENN, Judging Civil Justice (CUP, Cambridge 2010), p. 11. 17 Communication from the Commission, The EU Justice Agenda for 2020 – Strengthening Trust, Mobility and Growth within the Union, COM(2014) 144 final, para. 4.1(ii).

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Measuring the Effectiveness of the EU Civil Justice Framework harmonised private international law instruments, which are being drafted and applied in a diverse Union. A major concern in the EU is that many of the legislative instruments may be a result of a compromise achieved at EU level. It has been submitted by KERBER18 that: “collective decision-making implies large costs such as knowledge, rent-seeking problems, inefficiencies, or inflexibility, it might be that considerable costs through market failure must also be accepted before it is advisable to turn to centralization or mobility barriers.”19 One might question the effectiveness of legislative instruments which may be affected by a level of political pressure from Member States as well as from the EU policy-makers. BEAUMONT and MCELEAVY have made the following observation, which captures well the issues which must be carefully considered: “[PIL m]easures are adopted in pursuit of short-term goals, in accordance with what is politically expedient or achievable at a particular moment in time. This in turn has led to a disjointed, piecemeal approach to law making, in which the replacement or constant revision of instruments has become an accepted norm. But of course this is a practice with significant costs, both for Member States, which are continually engaged in legislative reform, and for individuals and their legal advisers who must grapple with constantly changing legal frameworks.”20 The ineffectiveness of the legislative process may result in the adoption of private international law instruments which generate a level of uncertainty/ambiguity for cross-border litigants. The level of uncertainty may be significantly amplified, if the current EU institutional framework does not ensure that the adopted private international law instruments are consistently and swiftly applied by 28 Member States’ courts. The issues would be significant because there is a level of complexity that characterises the cross-border cases which, by their very nature, would have a connection with more than one legal system. An ineffective EU civil justice system, which is not adjusted (or is not capable of swift adjustment) to effectively cope with abusive litigation tactics, would inflate the litigation costs even further. In other words, an ineffective EU civil justice system would inevitably have an impact on litigants’ strategies and the relevant settlement dynamics, making it even harder for parties (or for certain parties which have no access to finance) to obtain effective remedies in cross-border cases. There is a need for considering answers to the following research questions: (1)

Do national courts deal appropriately with harmonised private international law instruments?

W. KERBER, Interjurisdictional competition within the European Union (1999-2000) 23 Fordham International Law Journal S217. 19 Ibid., S229. 20 P. BEAUMONT/ P. MCELEAVY, Anton’s Private International Law (3rd edn., W. Green, Edinburgh 2011), p. 71. 18

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Mihail Danov / Paul Beaumont (2)

Does the CJEU deal appropriately with private international law issues?

(3)

Is the institutional architecture in the EU suited to providing an “effective remedy” for cross-border litigants whose rights have been violated?21

(4)

Is there a need for reform? If so, what should be the direction of any potential reform?

It has been noted by the EU policy-makers that: “There has to be an evaluation of the effectiveness of the legal instruments adopted at Union level. Evaluation is also necessary to determine any obstacles to the proper functioning of the European judicial area”.22 That said, measuring the effectiveness of the current EU Civil Justice framework – with a view to providing answers to the above research questions – presupposes for the authors to evaluate how effectively and consistently the current EU PIL framework is functioning in different EU Member States. The criterion of effectiveness will be used when doing the assessment for the purposes of this project. It is well established that the effectiveness “refers to the relationship between the anticipated effects of a policy and those that actually emerge in social reality.”23 The research findings should help to indicate how the EU civil justice framework should evolve, so that “a Europe of law and justice”24 can be created. To this end, the authors are undertaking an evaluation research project,25 measuring whether the objectives, which are set in the recitals of the harmonised PIL instruments, are effectively pursued in the EU. It should be noted that the researchers do not aim to compare the situation before and after the entry into force of the PIL instruments, but rather analyse in depth how the EU PIL framework is functioning in a sample of Member States26 while attempting to obtain less comprehensive reports on how the framework is functioning in most if not all the other Member States. In this context, it should be considered how the current private international law regime, which is being applied by different Member States’ courts across the EU, is shaping the private litigants’ strategies in the EU.

Compare Article 47(1) of the Charter for Fundamental Rights. European Council, The Stockholm Programme – An open and secure Europe serving and protecting the citizens, [2010] OJ C 115/1, p. 6. 23 See more F. VARONE/ B. RIHOUX/ A. MARX, A New Method for Policy Evaluation? Longstanding Challenges and the Possibilities of Qualitative Comparative Analysis (QCA), in B. RIHOUX/ H. GRIMM, Innovative Comparative Methods for Policy Analysis (Springer, 2006), p. 213, 215. 24 European Council, The Stockholm Programme – An open and secure Europe serving and protecting the citizens, [2010] OJ C 115/1. 25 See more F. VARONE/ B. RIHOUX/ A. MARX, A New Method for Policy Evaluation? Longstanding Challenges and the Possibilities of Qualitative Comparative Analysis (QCA), in B. RIHOUX/ H. GRIMM, Innovative Comparative Methods for Policy Analysis (Springer, 2006), p. 213, 215. 26 M. ADAMS/ J. BOMHOFF, Comparing Law; Practice and Theory, in M. ADAMS/ J. BOMHOFF (eds.), Practice and Theory in Comparative Law (CUP, Cambridge 2012), p. 1, 6-9. 21 22

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Measuring the Effectiveness of the EU Civil Justice Framework The aim of this paper is to outline the central theoretical and methodological aspects which need to be carefully considered when measuring the effectiveness of the current EU PIL framework.

II.

PIL Theory: Defining Justice in Cross-Border Private Disputes in the EU

The theoretical question that the authors aim to address is about the concept of justice in cross-border cases arising in an intra-EU context. The PIL scholars have extensively considered the concept of “conflicts justice”,27 “the problem of justice presented by multistate cases”28 and “the principles of justice at the choice of law level”.29 “Conflicts justice” has been defined as “a peculiar brand of justice that is readily satisfied by the application of the law most closely connected with a particular transaction.”30 The importance of identifying the law which is most closely related to a particular legal relationship has been reflected in Rome I, Rome II, Rome III and the Hague Maintenance Protocol. The main objective, which the EU policy-makers appear to pursue, is to enhance the level of legal certainty31 and predictability32 for litigants in cross-border cases. In civil and commercial cases, this has been achieved by ensuring that the same national law applies irrespective of where the parties litigate their cross-border disputes.33 For example, it is well established that “[t]he princip[le] of closest connection remains the basic connecting factor

27 G. KEGEL, Internationales Privatrecht (6th edn., C.H. Beck, München 1987), p. 186-187, 193 cited in F.K. JUENGER, Choice of Law and Multistate Justice (Martinus Hijhoff Publishers, Dordrecht 1993), p. 69. 28 A.T. VON MEHREN, Conflict of Laws in a Federal System: Some Perspectives (1969) 18 I.C.L.Q. 681. 29 A.J.E. JAFFEY, Topics in Choice of Law (BIICL, London 1996), p. 14. 30 F.K. JUENGER, Choice of Law and Multistate Justice (Martinus Hijhoff Publishers, Dordrecht 1993), p. 69. Conflicts justice underlies the notion of “justice” referred to in Recital 14 of Rome II. 31 Recital 16 of Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I Regulation), [2008] OJ L 177/6; Recital 6 of Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II Regulation), [2007] OJ L 199/40; Recital 3 of the Council Decision on the Conclusion by the EC of the Hague Maintenance Protocol. 32 Recitals 9 and 21 of Council Regulation (EU) No 1259/2010 of 20 December 2010 implementing enhanced cooperation in the area of the law applicable to divorce and legal separation (Rome III Regulation) and Recital 3 of the Council Decision on the Conclusion by the EC of the Hague Maintenance Protocol. 33 Recital 6 of Rome I Regulation; Recital 6 of Rome II Regulation.

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Mihail Danov / Paul Beaumont underpinning all of [the] eight categories of Article 4(1)”34 of Rome I which applies in cases where the parties have not chosen the law which should apply to their contract. Similarly, by way of another example, it should be noted that “[t]he draftsmen of the Rome II Regulation have assumed that damage always takes place in a country.”35 However, the theories “assign[ing] each legal relationship to one particular state”36 may not easily work in practice.37 Although the EU legislation has expressly provided, under Rome II, for a set of special rules38 to be applied in cases where “the harmful event and damage typically occur in different countries,”39 there is a risk that the various EU Member States’ courts might somewhat inconsistently apply the EU PIL rules. VON MEHREN has stated that “[s]peaking realistically, such rules and principles can only be achieved by entrusting their interpretation and application to international authorities.”40 In addition, there may be difficult issues in cases where one EU Member State’s court is willing to apply the law of another Member State.41 FENTIMAN has submitted that “[…] there remains a nagging doubt that no legal rule can be uniformly applied in another court because a judge applying foreign law will always lack the necessary «internal attitude».”42 The practical hurdles in this context appeared to shape the litigants’ strategies in Sheraleen Boyd Munro v Ian Munro.43 In this case, Mr Justice BENNETT made the following observations: “5 […] if proceedings are begun in Spain, it is common ground […] that the Spanish court will apply English law to determine the real issue in this case, which is what financial provision, if any, is to be 34 M. MCPARLAND, The Rome I Regulation on the Law Applicable to Contractual Obligations (OUP, Oxford 2015), p. 361. See also R. PLENDER/ M. WILDERSPIN, The European Private International Law of Obligations (Sweet & Maxwell, London 2015), p. 176-178, 185. 35 R. PLENDER/ M. WILDERSPIN, The European Private International Law of Obligations (Sweet & Maxwell, London 2015), p. 522. 36 E. SCOLE/ P. HAY/ P. BORCHERS/ S. SYMEONIDES, Conflict of Laws (4th edn., St. Paul, West 2004), p. 17, discussing SAVIGNY’s System des heutigen Römischen Rechts (Veit, Berlin 1849), p. 108. 37 A.T. VON MEHREN, Adjudicatory Authority in Private International Law: A Comparative Study (Martinus Nijhoff Publishers, Leiden 2007), p. 5. 38 E.g. Article 6(3)(a) and (b) of Rome II. 39 R. PLENDER/ M. WILDERSPIN, The European Private International Law of Obligations (Sweet & Maxwell, London 2015), p. 522. 40 A.T. VON MEHREN, Adjudicatory Authority in Private International Law: A Comparative Study (Martinus Nijhoff Publishers, Leiden 2007), p. 5. 41 S. GEEROMS, Foreign Law in Civil Litigation: A Comparative and Functional Analysis (OUP, Oxford 2003). 42 R. FENTIMAN, Methods and approaches – Choice of Law in Europe: Uniformity and Integration (2007-2008) 82 Tul L Rev 2021, 2035-6. See also H.L.A. HART, The Concept of Law 89 (3rd edn., OUP, Oxford 2012), p. 89; R. DWORKIN, No Right Answer?, in P.M.S. HACKER/ J. RAZ (eds.), Law Morality and Society: Essays in Honour of H.L.A. Hart (Clarendon Press, Oxford 1977), p. 58. 43 Sheraleen Boyd Munro v Ian Munro [2007] EWHC 3315 (Fam).

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Measuring the Effectiveness of the EU Civil Justice Framework made by the husband for the wife. The Spanish judge will thus, most likely, need the assistance of expert evidence on behalf of the parties as to what financial provision an English judge would be likely to make, applying English law. The parties would thus not have the most suitable body to decide upon financial provision under English law, namely an English court. This of course is not a criticism of the Spanish court, merely, I would have thought, a statement of the obvious. 6 […] I must say that I have to suspect that […] the husband’s attitude may be driven by tactical considerations, namely either to wear down the wife and/or in an expectation that a Spanish judge would award the wife significantly less financial provision than an English judge.”44 Moreover, a particular theoretical challenge in the European Union context with the concept of “conflicts justice”, as defined above, is that it ignores the concept of “procedural conflicts justice”45 which, in the light of Brussels Ia and IIa, is central to the administration of justice in the EU. The success of the Brussels regime in the EU strongly suggests that a different definition of justice in the EU may be needed. The deduction could be strengthened by putting forward that the level of harmonisation, which has already been achieved for some procedural aspects relevant to cross-border private disputes in the EU, is a truly unique feature which characterises the EU civil justice system. The point is captured well by GARNETT46 who noted that: “In the area of procedural law, given the strong connections between procedure and the social, political, and economic mores of a country and the consequent greater differences in procedural laws between countries,47 harmonization has proved difficult with only a few, limited regional examples such as the EU Council Regulation on Jurisdiction and Judgments.”48 The Brussels I Recast Regulation (which is the most recently adopted PIL instrument) went further, aiming to guarantee the litigants’ right to an effective remedy and to a fair trial in cross-border cases.49 These developments suggest that, in order to define justice for the purposes of the EU civil justice framework, an analysis of Ibid., [5-6]. A.T. VON MEHREN, Adjudicatory Authority in Private International Law: A Comparative Study (Martinus Nijhoff Publishers, Leiden 2007), p. 29. 46 R. GARNETT, Substance and Procedure in Private International Law (OUP, Oxford 2012). 47 A. LOWENFELD, Introduction: The Elements of Procedure: Are they separately portable? (1997) 45 AJCL 649, 652; C. HODGES, Europeanisation of Civil Justice: Trends and Issues (2007) 26 Civil Justice Quarterly 96, 109. 48 R. GARNETT, Substance and Procedure in Private International Law (OUP, Oxford 2012), p. 67-68. 49 Recital 38 of Brussels I Recast Regulation. 44 45

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Mihail Danov / Paul Beaumont Member State courts’ practice under the Brussels Ia, Brussels IIa, Rome I and Rome II and Maintenance Regulations is needed. This analysis should consider, in a European Union context, what the relationship is between allocation of jurisdiction before an appropriate Member State court and identification of applicable law, on the one hand, and substantive outcomes (including some aspects of the recognition and enforcement of foreign judgments which may need to be considered) in a cross-border dispute, on the other hand. The need to do such analyses could be strengthened by way of making analogy with the domestic civil and commercial disputes, where it is well established that there is a link between the procedure and the substantive outcome.50 GENN has submitted that “[i]f substantive justice lies in the correct application of legal principles to a factual situation, then procedures that increase the likelihood of a correct decision being reached are vital.”51 In other words, the concept of justice in an EU context does indicate that the availability of an effective remedy in cross-border cases may depend on the place where the proceedings are initiated as well as on the applicable substantive and procedural laws. The fact that, under the EU civil justice framework, a private party might need to carefully consider the relationship between the relevant procedural rules and the available remedy was recently noted in Wall v Mutuelle de Poitiers Assurances52 where Mr Justice TUGENDHAT held that: “16 […] some practices in the common law states are unknown in most civil law states. Rules of evidence also differ widely. Practices specific to common law states include an obligation on litigants to disclose documents which adversely affect their own case or support another party’s case (CPR r 31.6(b)), the preparation and exchange of witness statements for use at trial (CPR r 32.4), and the crossexamination of witnesses, both witnesses of fact and expert witnesses. 17 The adversarial procedures in common law states are designed to assist the court to arrive at the truth. But they require more work to be done by litigants and their lawyers (often with correspondingly less work to be done by the judge) than is required under most civil law inquisitorial systems. The result is that the direct costs of litigation which have to be borne by the parties are much higher in the common law states. This is so, even when the comparison is between a civil law and a common law state where rates of remuneration charged by lawyers are at comparable levels. On the other hand, in the common law states fewer judges are required, and fewer cases are actually tried, instead of being settled. These facts may help to keep down the cost to the common law states of providing for the administration of justice. Having regard to the differences of procedure, it is not surprising that outcomes are different, even in those

H. GENN, Judging Civil Justice (CUP, Cambridge 2010), p. 14. Ibid. 52 [2013] EWHC 53 (QB). 50 51

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Measuring the Effectiveness of the EU Civil Justice Framework cases where there is no significant difference between the provisions of the substantive laws of the states in question.”53 In theory, there is a strong case that the EU legislative developments do indicate that the EU concept of justice in cross-border private cases would need to be broadened, in order to cover certain procedural aspects which are dealt with in the EU PIL instruments. Indeed, the triangular relationship between the relevant set of procedural laws, the governing substantive laws and the available remedy may well be among the primary considerations which are affecting the parties’ litigation tactics and settlement dynamics in cross-border cases. In other words, the need for the parties to obtain an effective remedy in such cases may be determinative for the parties’ decision where to sue as well as for parties’ strategies regarding governing law. There are a number of examples which illustrate that this triangular relationship has a significant impact on the litigants’ strategies and any settlement dynamics in the EU. First, a research project on Cross-Border EU Competition Law Actions54 demonstrates that, due to the level of variation in the area of private antitrust enforcement in Europe, there could be legitimate advantages (mostly procedural law advantages, but also substantive law advantages) for sophisticated claimants who may be in a position to choose whether to establish jurisdiction in one jurisdiction rather than another. Although the EU legislature has recently adopted a Directive55 in the area, there is a strong case that private antitrust claimants, who are prepared to pay the high litigation costs, may well use the relevant PIL framework in place to their advantage, with a view to obtaining an effective remedy in a cross-border context.56 The way in which the current framework shapes the litigants’ strategies in cross-border EU competition law actions may be demonstrated by a number of cases57 where the issue of jurisdiction has been subject to heated debates as well as by a recent case58 in which Article 6(3)(b) of the Rome II

Ibid., [16-17]. M. DANOV/ F. BECKER/ P. BEAUMONT (eds.), Cross-Border EU Competition Law Actions (Hart Publishing, Oxford 2013). 55 Directive 2014/104/EU on Antitrust Damages Actions. 56 See M. DANOV/ F. BECKER, Governance Aspects of Cross-Border EU Competition Law Actions: Theoretical and Practical Challenges, (2014) 10 Journal of Private International Law 359-401. See also I. LIANOS/ P. DAVIS/ P. NEBBIA, Damages Claims for the Infringement of Competition Law (OUP, Oxford 2015), p. 374. 57 Roche Products Limited, Roche Vitamine Europe AG (Switzerland), F. HoffmannLa Roche AG (Switzerland) v Provimi Limited [2003] EWHC 961 (Comm); SanDisk Corporation v Koninklijke Philips Electronics and others [2007] EWHC 332 (Ch), [2007] Bus LR 705; Cooper Tire & Rubber Company v Shell Chemicals UK Limited [2009] EWHC 2609 (Comm); Cooper Tire & Rubber Company Europe Limited & Others [2010] EWCA Civ 864; Toshiba Carrier UK Ltd and Other v KME Yorkshire Limited & Others [2011] EWHC 2665 (Ch); Toshiba Carrier UK Ltd and Other v KME Yorkshire Limited & Others [2012] EWCA Civ 169; Ryanair Ltd v Esso Italiana Srl [2013] EWCA Civ 1450. 58 DSG Retail Ltd & Ors v Mastercard Incorporated & Ors [2015] EWHC 3673 (Ch). 53 54

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Mihail Danov / Paul Beaumont Regulation and the relevant limitation periods were central to the defendants’ unsuccessful strike-out application. Secondly, the case law does suggest that there may be an even wider room for tactical manoeuvring in cross-border family law disputes, in which the economic consequences of divorce are at stake in court. This was explicitly acknowledged by Mr Justice MOSTYN who stated that: “[…] the Brussels 2 regulation, in my view, certainly permits forum shopping. It could be argued that it encourages forum shopping, inasmuch as it does not contain, in relation to a suit for divorce, a provision to transfer the suit to a court better placed to hear the case unlike proceedings in relation to children, where such a provision exists under Article 15 […].”59 If an EU Member State court is not prepared to apply foreign substantive law in cross-border matrimonial disputes, then the financial remedies in such cases will be pre-determined by establishing jurisdiction in one Member State rather than another. This may be an important factor in cross-border cases because an English court will normally not apply foreign law/s in cross-border family law disputes. However, even in England, the need for factoring in the implications of a foreign matrimonial regime in cross-border family law disputes was acknowledged by the Court of Appeal in Radmacher v Granatino60 where Lord Justice THORPE held: “the judge should give due weight to the marital property regime into which the parties freely entered. This is not to apply foreign law, nor is it to give effect to a contract foreign to English tradition. It is, in my judgment, a legitimate exercise of the very wide discretion that is conferred on the judges to achieve fairness between the parties […].”61 There is certainly a need for a fairer solution for litigants in a cross-border context. The approach endorsed by Lord Justice Thorpe is somewhat in line with PIL theory, making a case for “special substantive rules for multistate problems”62 which were so thoughtfully considered by VON MEHREN63 over 40 years ago. However, the UK Supreme Court did not go that far in the Radmacher case. The majority decision said that: “In summary, the issues in this case are governed exclusively by English law. The relevance of German law and the German choice of law clause is that they clearly demonstrate the intention of the parties CC v NC [2014] EWHC 703 (Fam) [14]. Katrin Radmacher (formerly Granatino) v Nichola Joseph Jean Granatino [2009] EWCA Civ 649. 61 Ibid., [53]. 62 A.T. VON MEHREN, Special Substantive Rules for Multistate Problems: Their role and significance in contemporary choice of law methodology (1974-1975) 88 Harvard Law Review 347. 63 Ibid. 59 60

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Measuring the Effectiveness of the EU Civil Justice Framework that the ante-nuptial agreement should, if possible, be binding on them.”64 Therefore an improvement in the account given to foreign law agreed to by the parties in the family law area will require legislative changes in the UK. Thirdly, there could be multiple (and often expensive) proceedings between the same parties in cases where the parties had not considered the importance of the relationship between the laws of the forum and the available financial remedies in cross-border matrimonial disputes. This point may be illustrated by making reference to the judgment of the English High Court in AA v BB.65 In this case, the English proceedings were initiated under the Maintenance Regulation. The wife sought financial remedies in respect of a marriage which was dissolved in Slovenia on 8th November 2011. The parties to the proceedings were both born in Kosovo. In 1991, they moved to live in Slovenia where they remained until 2008, when the wife and the children moved to England. The parties had to litigate in both England and Slovenia because “the Slovenian court ha[d] no jurisdiction to deal with the parties’ assets located outside Slovenia.”66 The point was noted by Mrs Justice KING who stated that “the parties are in the unfortunate position of having to litigate in two countries. That, however, is a consequence of the limitation of the Slovenian court’s powers.”67 Therefore, given the level of diversity across the EU, a major feature of the EU legal landscape is the triangular relationship between the allocation of jurisdiction and identification of applicable law, on the one hand, and the available remedy, on the other hand. With this in mind, a definition of the concept of justice in the EU presupposes finding a response to the following question: What is “the impact of social facts on the development, operation and effect of legal rules”68 which form part of the harmonised EU PIL instruments? In his analysis of the sociological dimensions of private international law, ZWEIGERT has noted: “If you go through the classical principles of conflict of laws, you will detect very few rules where the impact of social facts, some substantive points of view, are involved. The strongest substantive point of view is to be found in the institution of public policy. This is, however, a purely negative point of view which denies the whole play of conflict rules in exceptional cases; where an applicable rule 64 [2010] UKSC 42, para 108 (Lords PHILLIPS, HOPE, RODGER, WALKER, BROWN, COLLINS and KERR). Lady HALE in a minority judgment also limited the relevance of the foreign element but in a slightly different way: “The relevance is not as to the effect of a foreign agreement in English law because, by the time the case gets to the divorce court, it has none. The relevance is as to the parties' intentions and expectations at the time when they entered into it.” (para. 183). 65 AA v BB [2014] EWHC 4210 (Fam). 66 Ibid., [25]. 67 Ibid., [89]. 68 K. ZWEIGERT, Some Reflections on the Sociological Dimensions of Private International Law or What is Justice in Conflict of Laws (1972-1973) 44 University of Colorado Law Review 283, 290.

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Mihail Danov / Paul Beaumont is not applied because it offends too strongly indispensable values of the lex fori.”69 That said, an entirely different set of objectives characterises the current EU civil justice framework. As already noted, the right to an effective remedy appears to be at the heart of the EU Justice Agenda 2020 and the newly adopted Brussels I Recast Regulation which puts them in line with the EU Charter of Fundamental Rights. Moreover, the Brussels I Recast Regulation, for the first time, sets out “the aim of making cross-border litigation less time-consuming and costly”.70 Such an EU objective strongly suggests that it is very important for an effective remedy to be awarded without delay at reasonable cost in cross-border cases. The latter deduction could be strengthened by noting that the Brussels I Recast does now inter alia aim to “avoid abusive litigation tactics”71 which may further inflate the litigation costs, flying in the face of the EU policy-makers’ objective to provide an effective remedy in such cases. With this in mind, one should note that the Brussels Ia, Brussels IIa, Rome I, Rome II and the Maintenance Regulations (once regarded as a legislative package which implements the EU policy objectives in the area) appear to pursue the following objectives: (1)

to set up jurisdictional rules which are unified72 and highly predictable;73

(2)

to create effective mechanisms dealing with parallel proceedings;74

(3)

to ensure that the same law is applied regardless of which court in the EU hears the case (while recognising that this objective will only be followed by some Member States in relation to family law matters)75 and

(4)

to ensure that judgments given in a Member State are swiftly recognized and enforced across Europe.76

It could be argued that if the foregoing objectives were not effectively pursued, the whole EU justice framework would be ineffective because a number of parties who Ibid., p. 291. Recital 26 of Brussels I Recast Regulation. 71 Recital 22 of Brussels I Recast Regulation. 72 Recital 4 of Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels I Recast Regulation), [2012] OJ L 351/1. See also Recital 12 of Council Regulation (EC) No 2201/2003 of 27 November 2003 concerning jurisdiction and the recognition and enforcement of judgments in matrimonial matters and the matters of parental responsibility, repealing Regulation (EC) No 1347/2000 (Brussels IIa Regulation), [2003] OJ L 338/1. 73 Recital 15 of Brussels I Recast Regulation. 74 Recital 21 of Brussels I Recast Regulation. 75 Recital 6 of Rome II, Recital 6 of Rome I, Recital 3 of the EC Council Decision Concluding the Hague Maintenance Protocol and Recital 9 of Rome III. 76 Recital 4 of Brussels I Recast Regulation. See Article 19 of Brussels IIa Regulation. 69 70

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Measuring the Effectiveness of the EU Civil Justice Framework need a remedy in a cross-border context may decide that the risks of litigation outweigh the benefits.77 It could be further questioned whether there would be effective remedies for all litigants in cross-border cases across the EU, if the EU Member States (or some of the Member States courts) are not in position to consistently and swiftly apply the Brussels Ia, Brussels IIa, Rome I, Rome II and Maintenance Regulations. This poses the following questions: How is justice administered in cross-border cases in the EU? How ought it to be administered in theory?

III. Theoretical Challenges: Administration of Justice in the EU Devising an appropriate EU institutional framework would be very important, in order to shape the development of the PIL instruments in a way which allows for the effective administration of justice in cross-border cases. The Stockholm programme expressly provides that “[t]he achievement of a European area of justice must be consolidated so as to move beyond the current fragmentation. Priority should be given to mechanisms that facilitate access to justice, so that people can enforce their rights throughout the Union.”78 In this context, one should consider the multi-level “governance”79 model which is central to the successful implementation of the Union’s policies in private law as well as to the effective functioning

See the economic literature: J.A. ORDOVER, Costly litigation in the model of single activity accidents 7 (1978) Journal of Legal Studies 243; S. SHAVEL, Suit, settlement and trial: A theoretic analysis under alternative methods for the allocation of legal cost (1982) 11 Journal of Legal Studies 55; S. SHAVEL, The social versus the private incentives to bring suit in a costly legal system (1982) 11 Journal of Legal Studies 333; H.S.E. GRAVILLE, The Efficiency Implications of Cost Shifting Rules (1993) 13 International Review of Law and Economics 3; C.F. BECKNER III/ A. KATZ, The Incentive Effects of Litigation Fee Shifting When Legal Standards Are Uncertain (1995) 15 International Review of Law and Economics 205. 78 The Stockholm Programme, – An open and secure Europe serving and protecting the citizens [2010] OJ C 115/1, 4 and 11-2. 79 It has been submitted that “The term “governance” is used in relation to national, European and international orders, and it crosses the public-private divide. (…) Governance (…) encompasses all stages of the policy chain, from drafting to enacting to implementing to enforcing rules.” M. DE VISSER, Network-Based Governance in EC Law (Hart Publishing, Oxford 2009), p. 4. See more C. JOERGES, European challenges to private law: On false dichotomies, true conflicts and the need for a constitutional perspective (1998) 18 Legal Studies 146; C. JOERGES, The impact of European integration on private law: Reductionist perceptions, true conflicts and a new constitutional perspective, in C. JOERGES/ O. GERSTENBERG (eds.), COST A7 – Private governance, democratic constitutionalism and supranationalism (Office for Official Publications of the European Community, 1998), p. 69. 77

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Mihail Danov / Paul Beaumont of the EU civil justice framework. The European Commission80 has identified the five principles, which would be essential for a good governance system, as being “openness, participation, accountability, effectiveness and coherence.”81 The principles of effectiveness and coherence are very important for designing a well-functioning EU civil justice system which presupposes that all the 28 Member States’ courts will effectively and consistently apply a number of harmonised PIL instruments adopted at EU level. The private international law theory indicates that the EU civil justice system could only achieve its objectives, if the adopted PIL instruments are “uniformly administered”82 across the EU. However, the Union does not have a “unified and centralized administration of justice”83 in disputes with an international element arising in the EU. Since there is no supranational court84 which hears and determines all the jurisdictional disputes in the EU, the Union relies on the EU Member States’ national systems to dispense justice in cross-border cases. In other words, the national courts may be regarded as Union courts,85 when assuming jurisdiction and applying the EU PIL instruments. Bearing in mind the fact that the PIL instruments are the foundation of the EU civil justice system, the “institutional arrangements and traditions that we have”86 in the European Union must be considered with a view to effectively administering justice in the EU. The problem of consistent application of the harmonised PIL instruments would be particularly acute because the EU has now expanded to integrate not only a number of Member States representing the two

80

The European Commission, European Governance – A White Paper, COM(2001)

428 final. 81 Ibid., p. 10. See also The New Modes of Governance Project – T.L. BRUNELL/ C. HARLOW/ A.S. SWEET, Litigating the Treaty of Rome: The European Court of Justice and Articles 226, 230, and 234, available at ; K. ARMSTRONG, The character of EU law and governance: From “Community method” to new modes of governance (2011) 64 Current Legal Problems 179. 82 A.T. VON MEHREN, Choice of law and the problem of justice (1977) 41 Law & Contemporary Problems 27, 32. 83 A.T. VON MEHREN, Choice of Law and the Problem of Justice (1977) 41 Law and Contemporary Problems 27, 28. 84 M. KAHLER/ D.A. LAKE, Economic Integration and Global Governance: Why so little supranationalism?, in W. MATTLI/ N. WOODS (eds.), The Politics of Global Regulation (Princeton University Press, Princeton 2009), p. 242. See also R.H. GRAVESON, Problems of Private International Law in Non-Unified Legal Systems, in R.H. GRAVESON, Comparative Conflict of Laws: Selected Essays (Vol. 1, North-Holand Publishing, Amsterdam 1977), p. 305, 337. 85 P. CRAIG, The Jurisdiction of the Community Courts Reconsidered, in G. DE BURCA/ J.H.H. WEILER (eds.), The European Court of Justice (OUP, Oxford 2001), p. 177, 178. See also J. KOMAREK, Federal Elements in the Community Judicial System: Building Coherence in the Community Legal Order (2005) 42 CMLRev 9, 10; J. KOMAREK, In the court(s) we trust? On the need for hierarchy and differentiation in the preliminary ruling procedure (2007) ELRev 467, 468. 86 A.T. VON MEHREN, Conflict of Laws in a Federal System: Some Perspectives (1969) 18 International and Comparative Law Quarterly 681, 684.

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Measuring the Effectiveness of the EU Civil Justice Framework major legal traditions – the common law and the civil law,87 but also some of the former communist countries. DE BOER has noted that an important “factor reducing the effectiveness of uniform law – private international law […] – is the possible disparity in interpretation. […] It must be feared that uniform law is doomed to be nationalized.”88 It has been also argued that if there is no “certain affinity between the legal systems amongst which unification is to be achieved […], the provisions of the uniform laws run the risk of being substantially altered when they are adapted to the various internal legal systems.”89 In view of that, one could submit that the use of harmonised PIL instruments could raise the level of uncertainty/ambiguity and inflate both public and private litigation costs, posing particular challenges for national judges and litigants in private disputes with an international element. Therefore, the role of Member States’ courts is particularly important for the resolution of disputes with an international element arising in the European Union context. The way the national courts apply the PIL instruments is of primary importance for the effective administration of justice in cross-border cases in the EU. It should be noted that Rawls had submitted that “the conception of formal justice, the regular and impartial administration of public rules, becomes the rule of law when applied to the legal system.”90 Two of the key features of a legal system were defined by Rawls as: the existence of rules which are directly applicable and have direct effect; and the existence of adequate enforcement mechanisms because “[l]aws and commands are accepted as laws and commands only if it is generally believed that they can be obeyed and executed.”91 Difficulties may arise because the EU relies on individual Member States’ legal orders, which share different legal traditions and heritages, to uniformly apply its harmonised PIL instruments that are adopted at EU level. The national judges across the EU would have to “interpret and apply a fairly large set of [EU PIL rules] in a sufficiently harmonised manner”92 which is a major challenge in the already very enlarged European Union. The level of diversity across the Union indicates that there a number of problems which one should consider when considP. LEGRAND, Against a European Civil Code (1997) 62 Modern Law Review 44. T. DE BOER, The relation between uniform substantive law and private international law, in A.S. HARTKAMP et al. (ed.) Towards a European Civil Code (Martinus Nijhoff Publishers, Dordrecht 1994), p. 51, 59. 89 M. MATTEUCCI, The Methods of the Unification of Law, in Unidroit International Institute for the Unification of Private Law, Unification of Law (Vol. 2, UNIDROIT, Rome 1957), p. 87. 90 J. RAWLS, Theory of Justice – Revised Edition (OUP, Oxford 1999), p. 206. 91 Ibid., p. 208. Compare T.C. HARTLEY, National Law, International Law and EU Law – How Do They Relate?, in P. CAPPS/ M. EVANS/ S. KONSTADINIDIS (eds.), Asserting Jurisdiction: International and European Legal Perspectives (Hart Publishing, Oxford 2003), p. 65, 70. 92 L. TICHY, A new role for private international law and procedural law in European Integration? A critical comment, in R. BROWNSWORD/ H-W. MICKLITZ/ L. NIGLIA/ S. WEATHERILL (eds.), The Foundations of European Private Law (Hart Publishing, Oxford 2011), p. 393, 412. 87 88

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Mihail Danov / Paul Beaumont ering the administration of justice in cross-border cases in the EU. First, some national judges might be naturally biased and interpret the PIL instruments in a way which allows them to assume jurisdiction and apply their national laws. Secondly, Member States’ courts might give different interpretations to the harmonised private international law instruments. One may disagree with such a deduction by noting that Member States’ judges are empowered to make reference requests to the Court of Justice of the European Union for preliminary rulings, regarding the interpretation of the PIL instruments, under Article 267 TFEU.93 However, the CJEU preliminary reference procedure is not without problems which may be adversely affecting the legal landscape in the European Union. First, the timeline within which the CJEU would opine on the PIL issues means that there could often be a further level of delay and significant costs for the parties who seek to obtain a remedy in cross-border cases. The most recent statistics data from the CJEU does suggest that “[i]n the case of references for a preliminary ruling, the average duration amounted to 15 months, which is a record.”94 Although the CJEU can be proud of this achievement, the problem would be significant in cross-border cases where the preliminary ruling had been made on an issue of jurisdiction, indicating that the merits of the disputes were, most likely, not even considered at this stage. Second, bearing in mind the level of delay, some of the Member States’ judges may be reluctant to make such reference unless absolutely necessary.95 In spite of the possibility for the EU Member States’ court to make preliminary references to the CJEU, the diverse legal landscape in the European Union indicates that the jurisdictional divergences may make a difference for litigants, seeking to obtain an effective remedy in an enlarged European Union. As a result, private parties (especially parties that are able to cover the high litigation costs, affording sophisticated legal advice) may become very selective when deciding where to sue in cross-border cases. Therefore, when it comes to the administration of justice in the EU, the triangular relationship, allocation of jurisdiction – identification of governing law – the available remedy, would further encompass the ability of the Member States’ courts to deal with cross-border disputes. The latter factor may be important for the forum selection process which may have significant implications for the current model for administration of justice in cross-border cases.

Case 283/81, CILFIT [1982] ECR 3415. Court of Justice of the European Union, Press Release No 27/15, Luxembourg, 3 March 2015. See also Court of Justice of the European Union, Annual Report 2014, Luxembourg 2015. 95 E.g. I (A Child) (Contact Application: Jurisdiction), Re [2009] UKSC 10 [35, 76 and 92]; Cooper Tire and Rubber Co Europe Ltd v Shell Chemicals UK Ltd [2010] EWCA Civ 864 [46]; M v M [2013] EWCA Civ 1255 [50]; Canyon Offshore Ltd v GDF Suez E&P Nederland BV [2014] EWHC 3801 (Comm) [54]; Lady Christine Brownlie v Four Seasons Holdings Incorporated [2015] EWCA Civ 665 [92]. 93 94

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Measuring the Effectiveness of the EU Civil Justice Framework That said, there is a recent view96 that national policies in promoting certain jurisdictions as leading litigation centres may have a bearing on the interpretation of the EU PIL by the courts. In particular, it has been recently stated that: “The substantial economic flows generated by commercial litigation justify the existence of a longstanding national policy promoting the UK – and London in particular – as a capital for international dispute resolution. [...] Choice of law is not alien to this concern. It was mentioned above that the law applicable to the transaction can play an important role in the determination of jurisdiction, particularly when the test is conducted under common law rules.”97 This view is a very controversial one because, despite any campaign undertaken by the UK Ministry of Justice98 and/or the Law Society,99 one should not forget that the EU PIL instruments are applied by the national judges. The judiciary is indeed independent in the UK. Furthermore, as Fons himself acknowledges, the “policy [promoting London as a litigation capital] has never been spelt out in English judgments.”100 In spite of that, Fons has argued that “[t]he data provided in [his] study supports [the] theory that an “open door policy” might have underpinned many of the choice of law determinations by English courts under the Rome instruments.”101 However, a closer look at the data shows that the research findings in question are based on 66 cases,102 which were dealt with by the English courts for a period of nearly 20 years. Drawing on a small sample of the highly contested cases that had been decided over a period of nearly 20 years, and concluding that “the overarching economic policy prevails […] and pervades the application of the European choice of law instruments”103 is like “generalizing about war from the details of the most bloody and hard fought battles.”104 M.P. FONS, Commercial Choice of Law in Context: Looking Beyond Rome (2015) 78 Modern Law Review 241-295. Compare a similar view expressed in a different context by J.J. FAWCETT, Trial in England or Abroad: The Underlying Policy Considerations (1989) 9 Oxford Journal of Legal Studies 205, 218. 97 Ibid., p. 259-260. 98 UK Ministry of Justice and UK Trade and Investment, Plan for Growth: Promoting the UK’s Legal Services Sector (30th March 2012 available) at . 99 The Law Society of England and Wales, England and Wales: The Jurisdiction of Choice available at . The initiative appears to be sponsored by Herbert Smith, Norton Rose and Eversheds. 100 M.P. FONS, Commercial Choice of Law in Context: Looking Beyond Rome (2015) 78 Modern Law Review 241, 260. 101 Ibid., p. 263. 102 Ibid., p. 279. 103 Ibid., p. 263. 104 H. GENN, Preliminary Analysis of Costs Data, Review of Civil Litigation Costs, Seminar 26 June 2009, available at (accessed 4 January 2016). 105 M. KAHLER/ D.A. LAKE, Economic Integration and Global Governance: Why so little supranationalism?, in W. MATTLI/ N. WOODS (eds.), The Politics of Global Regulation (Princeton University Press, Princeton 2009), p. 242. 106 Ibid. 107 Executive Summary of the Impact Assessment, SWD(2013) 204 final, para. 7. 108 N. ROWLES-DAVIES/ J. COUSINS, Third Party Litigation Funding (OUP, Oxford 2014). 109 G. PALUMBO/ G. GIUPPONI/ L. NUNZIATA/ J.S. MORA SANGUINETTI, The Economics of Civil Justice: New Cross-country Data and Empirics (2013) OECD Economics Department Working Papers, No. 1060, OECD Publishing available at . 110 COM(2015) 116 final. 111 G. PALUMBO/ G. GIUPPONI/ L. NUNZIATA/ J.S. MORA SANGUINETTI, The Economics of Civil Justice: New Cross-country Data and Empirics (2013) OECD

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Measuring the Effectiveness of the EU Civil Justice Framework factor to be taken into account when considering as to how justice should be administered in cross-border cases arising in the EU. In England, ZUCKERMAN has noted: “It is not enough to ask whether the system produces correct judgments. We have also to ask how timely judgments are, because a judgment given too late may amount to denial of justice even though it involves correct application of the law to true facts. Cost too is relevant to the assessment of procedural systems. The resources available to the system will influence its global level of rectitude of decision. Cost will affect access to justice and, lastly, high litigation costs may enable rich litigants to acquire a procedural advantage against their opponents. Each of these aspects is clearly relevant to the assessment of any system of civil justice.”112 In other words, ZUCKERMAN’s observations strongly suggest that issues of “delay” and “costs” are two important factors which any system for effective administration of justice would need to consider. It should be noted that a comparative study,113 which was conducted by a research consortium, has addressed “how different jurisdictions approach the two linked subjects of litigation funding and costs.”114 Thus, the EU Member States could well have legitimate incentives to make their national systems functioning effectively, which would allow their law firms to attract litigants from other EU Member States, providing cross-border legal services across the EU. How do the cross-border complexities/implications of claims affect the litigants’ strategies of the parties and the settlement dynamics in the EU? HARTLEY115 has recently noted that: “the outcome of a case depends much more on jurisdiction than choice of law. This has become clearly apparent, at least in leading centres of litigation, in recent times. It explains why the parties will fight tooth and nail on jurisdictional issues; then, once these are decided, settle the case without further litigation. This in turn accounts

Economics Department Working Papers, No. 1060, OECD Publishing available at . 112 A.A.S. ZUCKERMAN, Justice in crisis: Comparative dimensions of civil procedure, in A.A.S. ZUCKERMAN (ed.), Civil Justice in Crisis: Comparative perspectives of Civil Procedure (OUP, Oxford 1999), p. 3, 10-1. 113 C. HODGES/ S. VOGENAUER/ M. TULIBACKA (eds.), The Costs and Funding of Civil Litigation: A Comparative Perspective (CH Beck and Hart, Oxford 2010). 114 C. HODGES/ S. VOGENAUER/ M. TULIBACKA, Introduction, in C. HODGES/ S. VOGENAUER/ M. TULIBACKA (eds.), The Costs and Funding of Civil Litigation: A Comparative Perspective (CH Beck and Hart, Oxford 2010), p. 3. 115 T.C. HARTLEY, International Commercial Litigation (2nd edn., CUP, Cambridge 2015).

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Mihail Danov / Paul Beaumont for the fact that in England today there are far more reported cases on international jurisdiction and procedure than on choice of law.”116 The quoted view is indeed interesting, but not fully substantiated, indicating that further empirical evidence is needed in the EU context. On the one hand, the empirical evidence from the U.S. demonstrates that “forum really does affect outcome”.117 Similarly in the EU the empirical research project on Cross-Border EU Competition Law Actions118 appears to support Hartley’s view that litigants regard the procedural aspects as an important factor when deciding where to sue. Indeed, tactical jurisdictional challenges and settlements are very common in cross-border EU competition law disputes.119 On the other hand, it is well established that, in England, many cases settle before trial even in a domestic context.120 Hence, the parties may embark on the jurisdictional battles because they want (or do not want, as the case may be) to establish jurisdiction in England where most of the cases settle, anyway. However, achieving a settlement, after jurisdiction had been established, would not necessarily mean that the choice-of-law rules were not important (or less important) for the outcome. It simply could be that the governing law aspects were factored into the settlement negotiations. In other words, empirical evidence is needed with a view to identifying the factors which lead the cross-border cases to settle. That said, there may be significant methodological challenges, which need to be considered. A recent empirical study121 (involving questionnaires being sent out to legal practitioners) demonstrates that there are various difficulties and multiple factors which appear to pose problems for parties, on the one hand, and drive the settlement behaviour in competition cases, on the other hand. In this context, Ibid., p. 5-6. K.M. CLERMONT/ T. EISENBERG, Do case outcomes really reveal anything about the legal system? Win rates and removal jurisdiction (1997-1998) 83 Cornell Law Review 581, 607. See also K.M. CLERMONT, Jurisdictional Salvation and the Hague Treaty (1999) 83 Cornell Law Review 89, 108-109, W.E. O’BRIAN Jr, The Hague Convention on Jurisdiction and Judgments: The Way Forward (2003) 66 Modern Law Review 491, 497. 118 M. DANOV/ F. BECKER/ P. BEAUMONT, Cross-Border EU Competition Law Actions (Hart Publishing, Oxford 2013). 119 S. SALOP/ L. WHITE, Private Antitrust Litigation: An Introduction and Framework, in L. WHITE (ed.), Private Antitrust Litigation, New Evidence, New Learning (MIT Press, Cambridge 1988), p. 1, 23. See also B. RODGER, Private enforcement of competition law, the hidden story: competition litigation settlements in the United Kingdom, 2000-2005 (2008) 29 European Competition Law Review 96. See also B. RODGER, Competition law litigation in the UK courts: a study of all cases 2005-2008: Part I (2009) 2 GCLR 93; B. RODGER, Competition law litigation in the UK courts: a study of all cases 2005-2008: Part II (2009) 2 GCLR 136; B. RODGER, Private enforcement of competition law, the hidden story: Part II: competition litigation settlements in the United Kingdom, 2008-2012 (2015) 8 GCLR 89-108. 120 H. GENN, Judging Civil Justice (CUP, Cambridge 2010), p. 21. See the Civil Justice quarterly statistics available at . 121 B. RODGER, Private enforcement of competition law, the hidden story: Part II: competition litigation settlements in the United Kingdom, 2008-2012 (2015) 8 GCLR 89. 116 117

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Measuring the Effectiveness of the EU Civil Justice Framework when discussing the difficulties for the parties to bring a case and when comparing it to the factors which encourage settlements in the UK, RODGER identified the following methodology hurdles: “[…] the responses make it difficult to relate particular cases and types of disputes to specific difficulties. [e.g.] Legal uncertainty was cited as a difficulty in 15 cases overall (33.3 per cent) although strangely not all of the cases match with those where the uncertainty of litigation was considered to be a factor motivating settlement (in 33 cases, 73.3 per cent). […]”122 Therefore, bearing in mind the nature of the empirical evidence which is needed, an appropriate research methodology123 is central to successfully determining how the EU model of administration of justice is functioning in the EU.

IV. Methodological Challenges: Measuring the Effectiveness of the EU Civil Justice System In the light of the objectives of the EU civil justice system, the first methodological challenge was to specify what empirical evidence is necessary to test the effects of the harmonised PIL instruments on the litigation strategies of those who need a remedy in cross-border cases.124 It has been submitted that: “Although there are many ways in which outputs and outcomes assessment can be conducted, these methodological options are not all equivalent: some produce more credible estimates of policy effects than others. Therefore, it is not surprising that there is still a deep divide and fierce academic struggle among the advocates of quantitative versus qualitative methods of policy evaluation.”125 Accordingly, in terms of research design, an important methodological aspect concerns the question what research methods (or what mix of research methods) are to be used. In view of the foregoing, the authors’ view is that one should measure the effectiveness of the EU civil justice framework after collecting data for the following aspects of cross-border litigation: What are the most common types of crossborder disputes (e.g. contractual, tortious, child abduction, parental responsibility)? Ibid., p. 100-1. See more P. CANE/ H. KRITZER (eds.), The Oxford Handbook of Empirical Legal Research (OUP, Oxford 2012); L. EPSTEIN/ A.D. MARTIN, An Introduction to Empirical Legal Research (OUP, Oxford 2014). 124 Ibid., p. 219-221. 125 F. VARONE/ B. RIHOUX/ A. MARX, A New Method for Policy Evaluation? Longstanding Challenges and the Possibilities of Qualitative Comparative Analysis (QCA), in B. RIHOUX/ H. GRIMM, Innovative Comparative Methods for Policy Analysis (Springer, 2006), p. 213-4. 122 123

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Mihail Danov / Paul Beaumont What are the most common remedies sought in a cross-border context? What are the factors that private parties consider when deciding whether and where to sue in cross-border cases? How does the court-first-seized rule shape the litigants’ strategy in cross-border cases? Is cross-border litigation more expensive than domestic litigation? What are the factors that affect the litigants’ strategies and settlement dynamics in the different types of cross-border cases?126 How do the cross-border implications (which might include higher levels of uncertainty and higher litigation costs) of claims affect the suing decisions of the parties and settlement negotiations? What are the main factors that affect the settlement negotiations in cross-border cases? SNYDER’s study on effectiveness puts forward that “[a] commonly used approach to the effectiveness of Community law is that of implementation theory.”127 Hence, the way in which the harmonised PIL measures are applied by the Member States’ courts must be considered in order to evaluate the effectiveness of the current private international law framework. Analyses of the Member States’ case law must be undertaken. To this end, the authors will compile “datasets”128 for the cases before English and Scottish courts for the period since 1 March 2002 (entry into force of the Brussels I Regulation). The Member State datasets include the following information: the harmonised PIL instrument; the Member State court; the year when the proceedings were initiated; the remedy sought (declaratory, injunctive, monetary); the value of the claim; the domicile (or habitual residence) of the claimants which will enable us to measure the mobility of the claimants (e.g. corporations; SMEs; consumers; family members); the PIL issue raised and addressed (e.g. the relevant jurisdictional rule/s, the national law/s applied); important factors influencing the judgment (e.g. choice of court/law agreements etc.); and the date of the judgment. Since the CJEU has an important role to play when it comes to the interpretation of the harmonised PIL instruments in Europe, another dataset for the preliminary references before the CJEU is being done. In the latter context, the researchers are using a similar research methodology to the one utilised by SWEET and BRUNELL in their “Note on the Data Sets: Litigating EU Law under the Treaty of Rome”.129

126 J.E. CALFEE/ R. CRASWELL, Some effects of uncertainty on compliance with legal standards (1984) 70 Virginia Law Review 965; R. CRASWELL/ J.E. CALFREE, Deterrence and uncertain legal standards (1986) 2 Journal of Law, Economics and Organisation 279; A.M. POLINSKY/ S. SHAVELL, Legal error, litigation and the incentive to obey the law (1989) 5 Journal of Law, Economics and Organisation 99. See also DANOV and DNES. 127 F. SNYDER, The effectiveness of European Community law: Institutions, processes, tools and techniques (1993) 56 Modern Law Review 19. See also S. KRISLOV/ C.D. EHLERMANN/ J. WEILER, The political organs and the decision-making process in the United States and the European Community, in M. CAPPELLETTI/ M. SECCOMBE/ J. WEILER, Integration Through Law: Europe and the American Federal Experience (Walter de Gruyter, Berlin 1986), p. 3-112. 128 For those purposes, a dataset is defined as “a collection of data that someone has organised in a form that is susceptible to empirical analysis.” See L. EPSTEIN/ A.D. MARTIN, An Introduction to Empirical Legal Research (OUP, Oxford 2014), p. 66. 129 See ref. number: LTF II/D06a1.

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Measuring the Effectiveness of the EU Civil Justice Framework The datasets should allow the researchers to engage with the relevant cases and identify the litigation pattern in Scotland, England and Wales. However, empirical evidence from other Member States is also needed because there is a strong case that any research, seeking to identify what the appropriate direction of possible reforms would be, should consider how the EU private international law framework is functioning in countries representing different legal traditions in Europe. Social science researchers130 have recently noted that: “The methodological challenge is […] to compare one (similar) European program, its implementation by domestic actors and its effects in a > design, with a limited number of various countries, regions and/or administrations implementing the same (causal mechanism of the) European program in various political, administrative, economic and social contexts. The methodological issue consists in identifying all the conditions (at the European level as well as at the domestic level) leading or not leading to the expected policy outputs and outcomes.”131 Belgium, England and Wales, Germany, Italy, Poland, Scotland and Spain have been deliberately, and not randomly, sampled. The purposive sampling has allowed us to include a range of jurisdictions (civil law, common law, mixed legal systems), having a large number of businesses as well as a large number of immigrants and/or emigrants. The quantitative data about the reported PIL cases from the sampled jurisdictions would be useful with a view to comparing the litigation pattern in cross-border cases brought in the sampled countries. CHALMERS and CHAVES132 have submitted that “[m]ost recent accounts accept that no single narrative fully explains European Union (EU) judicial politics [...]. Research will accordingly need to consider the conditions under which one narrative holds rather than another. Comparison of patterns of litigation or adjudication across sectors or from different territories will go some way towards answering this.”133 Indeed, comparing the aspects which affect the litigants’ strategies in various cross-border matrimonial disputes (where Rome III and the Hague Maintenance Protocol are not applicable in all Member States), on the one hand, and the litigants’ tactics in cross-border civil and commercial interests would be important. However, any quantitative data is bound to be insufficient for the purposes of a study measuring the effectiveness of the EU civil justice framework. First, it is well established that not all judgments rendered in cross-border cases will be reported or be accessible to researchers through electronic databases. Secondly, F. VARONE/ B. RIHOUX/ A. MARX, A New Method for Policy Evaluation? Longstanding Challenges and the Possibilities of Qualitative Comparative Analysis (QCA), in B. RIHOUX/ H. GRIMM, Innovative Comparative Methods for Policy Analysis (Springer, 2006), p. 213. 131 Ibid., p. 224. 132 D. CHALMERS/ M. CHAVES, The reference points of EU judicial politics, in S. K. SCHMIDT/ D. KELEMEN (eds.), The Power of the European Court of Justice (Routledge, London 2013), p. 25. 133 Ibid. 130

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Mihail Danov / Paul Beaumont issues of jurisdiction and choice-of-law may not necessarily be subject to heated debates in all cross-border cases, so that some judgments in such cases may not refer to the relevant PIL instruments.134 Thirdly, any judgments on preliminary PIL issues are likely to be rendered in cases where the jurisdictional and/or choice-oflaw aspects have been heavily contested by the parties. It may not be particularly helpful if the case for reform is based only on the highly contested PIL cases. Fourthly, it is well established that many cases settle before trial (or even before action) in England.135 GENN has noted: “Because claims are settled without any court formalities there is no official source of information about the claims settlement process. No records of settlements are publicly available, nor are there any official statistics relating to the volume of claims pursued and compromised, the level of settlements, or the costs involved in achieving settlements.”136 Therefore, it will be necessary to do a qualitative research project, turning to the views of legal practitioners. In this context, the researchers will need to test the effect of the harmonised PIL instruments by discussing with legal practitioners key questions concerning cross-border litigation. Accordingly, as a part of the project, the researchers will be undertaking qualitative interviews137 with legal practitioners. Legal practitioners are well placed to provide us with information about litigation strategies.138 The legal practitioners would have some useful insights as to how the current EU Civil Justice framework is shaping the litigants’ strategies. In particular, some important issues which may need to be explored, as part of the qualitative interviews with legal practitioners, relate to the remedies sought, the level of legal uncertainty and the settlement dynamics in the cross-border context. Bearing in mind the EU legal landscape, it would be useful to identify the factors which affect the litigants’ strategies and settlement dynamics in cross-border cases, making a difference between settlement as a tactical device in cases where an action has been initiated, on the one hand, and settlement as a dispute resolution mechanism which is used before an action has been started, on the other hand. Research studies,139 undertaken in a domestic context, do suggest that “claimants signifi-

134 E.g., Emerald Supplies Ltd & Others v British Airways v Air Canada & Others [2014] EWHC 3513 (Ch). 135 H. GENN, Judging Civil Justice (CUP, Cambridge 2010), p. 21. 136 H. GENN, Hard Bargaining: Out of Court Settlement in Personal Injury Actions (OUP, Oxford 1987), p. 13. 137 H.J. RUBIN/ I.S. RUBIN, Qualitative Interviewing: The Art of Hearing Data (SAGE Publications, Thousand Oaks CA 1995), p. 3-4. See also A. BOGNER/ B. LITTIG/ W. MENZ (eds.), Interviewing Experts (Palgrave Macmillan 2009). 138 S.C. SALOP/ L.J. WHITE, Private Antitrust Litigation: An Introduction and Framework, in L.J. WHITE (ed.), Private Antitrust Litigation: New Evidence, New Learning (MIT Press, Cambridge 1988), p. 3, 16. 139 H. GENN, Central London Pilot Mediation Scheme, Evaluation Report (Department for Constitutional Affairs, 1998) p. 71; L. WEBLEY/ P. ABRAMS/ S. BACQUET,

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Measuring the Effectiveness of the EU Civil Justice Framework cantly discount their claims in reaching mediated settlements. There is a price to pay in terms of substantive justice for early settlement.”140 This might be even more of an issue in cross-border cases where the lengthy jurisdictional challenges would inflate the cost of litigation which taken together with the level of uncertainty generated by the current institutional framework might force significantly discounted settlements. Therefore, an appropriately conducted study would pre-suppose the collection of empirical evidence which will help to explain the litigation pattern in Europe. There is a need for such an empirical study to be conducted in several Member States, with different legal traditions/heritages, with a view to assessing the effectiveness of the current PIL institutional framework. This would allow the researchers to measure how the current PIL framework is affecting the litigants’ strategies in different jurisdictions.141 That said, a main challenge in doing a comparative qualitative research project in law is recruiting interview participants from a number of jurisdictions, representing different legal systems. Central to the process of conducting qualitative interviews with legal practitioners is drawing a sampling framework142 which is to be used when selecting interview participants. In this context, it should be noted that drawing a sampling framework in various jurisdictions should factor in the national characteristics. In addition, the researchers are conducting qualitative interviews with policy-makers from Brussels. The project examines possible proposals for the reform of the European Union Civil Justice system. The views of EU officials from Brussels are therefore very important; indeed, in view of the cross-border nature of the disputes any legislative reform is likely to be most effective at the EU level.143 The non-schedule standardised (or unstructured schedule)144 type of interview is being employed for the purposes of this research project. This allows researchers to take into account the specific experience and the viewpoint of each respondent. A structure to the interviews is created, but the interviewer and/or Evaluation of Birmingham Fast and Multi Track Mediation Scheme (Department for Constitutional Affairs), p. 70-71. 140 H. GENN, Judging Civil Justice (CUP, Cambridge 2010), p. 113. 141 J. DE CONINCK, Comparisons in private patrimonial law: towards a bottom-up approach using (cross-cultural) behavioural economics, in M. ADAMS/ J. BOMHOFF (eds.), Practice and Theory in Comparative Law (CUP, Cambridge 2012), p. 258, 267. 142 A. WILMOT, Designing sampling strategies for qualitative social research: with particular reference to the Office for National Statistics' qualitative respondent register (2005), Paper on qualitative sampling strategies presented to QUEST 2005, Office of National Statistics, available at . 143 See Article 81 TFEU. See also P. BEAUMONT/ P. MCELEAVY, Anton’s Private International Law (3rd edn., W. Green, Edinburgh 2011), p. 16-17. 144 S.A. RICHARDSON/ B.S. DOHRENWEND/ D. KLEIN, Interviewing: its forms and functions (Basic Books, New York 1965), p. 45; R.K. MERTON/ P.L. KENDALL, The Focused Interview (1946) 51 American Journal of Sociology (1946), 541, 541-2; N.K. DENZIM, The Research Act: A Theoretical Introduction to Sociological Methods (Prentice Hall, Englewood Cliffs, NJ 1989), p. 105.

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Mihail Danov / Paul Beaumont interviewee is always free to depart from the structure if the participants’ viewpoints and experience were thereby better expressed. The interview questions focus on key areas: 1) 2) 3) 4) 5) 6) 7)

General questions about cross-border disputes; Interpretation of the EU Regulations; Jurisdictional issues; Applicable law issues; Procedural issues; Settlement Alternative Dispute Resolution.

Due to the large data (quantitative and qualitative), the way the data is organised will be central to an effective and comparative data analyses. In this context, BAZELEY has submitted: “Often, in funding proposals, there will be a lengthy description of how qualitative data are going to be gathered, but the only thing said about how these data are going to be managed or analysed is that “themes will be identified in the data”. Similarly, writers of journal articles often simply identify and discuss four or five “themes” as their analysis of the qualitative data in the study, with no attempt to link these themes into a more comprehensive model of what they have found.”145 In view of this, the authors carefully planned how the data should be organised. The following pre-determined themes were considered important with a view to organising and analysing data: 1)

Parties (e.g. legal entities, individuals) and their relationship (e.g. contractual, non-contractual, matrimonial);

2)

Remedies and their value;

3)

Legal landscape (e.g. first-seized-rule, different procedures, different length of proceedings, preliminary rulings);

4)

Litigants strategies (e.g. where to sue, jurisdictional challenges, negative declarations, parallel proceedings, legal uncertainty, costs, legal aid, litigation funders);

5)

Settlement dynamics – factors (e.g. cost shifting, level of uncertainty) affecting the settlement negotiations and the use of ADR mechanisms. The data analysis should allow researchers to identify how the remedies sought and the legal landscape affect the litigants’ strategies and any settlement dynamics in different types of cross-border cases, initiated in different Member States.

145 P. BAZELEY, Analysing Qualitative Data: More Than “Identifying Themes” (2009) 2 Malaysian Journal of Qualitative Research 6.

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V.

Conclusions

The EU civil justice system is based on a set of PIL instruments which are used to allocate jurisdiction between the different Member States’ courts, identify the applicable law in cross-border private disputes, provide administrative cooperation in sensitive fields of cross-border family law (e.g. child abduction, maintenance and parental responsibility) and provide a system for the recognition and enforcement of final judgments given in one Member State in all other Member States. The authors argue that a harmonised and effective PIL framework may have no alternative (both in terms of what is desirable and of what is possible) in a system of multi-level governance characterised by the diversity of the EU Member States’ legal orders, representing different legal traditions and heritages.146 However, the nature of private international law is not and should not be confined to the traditional spheres of jurisdiction, applicable law and the enforceability of foreign judgments if it is to fulfil its role as the glue that holds the European Union together in the private law sphere. A well-functioning EU civil justice system will be based on PIL instruments which accommodate a level of diversity in cross-border family law, insist on minimum standards of administrative cooperation in much cross-border family litigation, accommodate a high level of party autonomy in commercial and family matters, respect reverse subsidiarity by interlinking well with global Hague Conference on PIL instruments (e.g. on child abduction, intercountry adoption, parental responsibility, maintenance, protection of adults, trusts, choice of court and what emerges from the current judgments project) and improve actual enforcement of final decisions. Evaluating the way the harmonised private international law framework is functioning at the moment in the light of the EU policy-makers’ objectives is important for measuring the effectiveness of the EU civil justice framework. This poses the following questions: Do some Member State courts attract more crossborder disputes (or some types of cross-border disputes) than others? Can all EU Member States’ courts, within a reasonable time and at a reasonable cost, determine jurisdiction? Can national judges identify swiftly applicable laws when applying the EU PIL instruments? Do national courts and other relevant institutions co-operate effectively, in line with the principle of mutual trust, in crossborder cases? Does the current EU civil justice system provide private parties with an effective remedy as a fundamental right in cross-border cases?147 Empirical evidence will be needed, in order to fully explain how the EU civil justice framework, 146 Compare some other views expressed by R. NICKEL, From Integration through law to integration through conflict, in D. AUGENSTEIN (ed.), “Integration through Law” Revisited: The Making of the European Polity (Ashgate, Farnham 2012), p. 121-135; M. DAWSON, Integration through soft law? New Governance and the Meaning of Legality in the European Union, in D. AUGENSTEIN (ed.), “Integration through Law” Revisited: The Making of the European Polity (Ashgate, Farnham 2012), p. 137-156. 147 See Recital 38 of the Brussels I Recast Regulation. See more P. BEAUMONT and M. DANOV, The EU Civil Justice Framework and Private Law: “Integration through [Private International] Law” (2015) 22 Maastricht Journal of European and Comparative Law 706-731.

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Mihail Danov / Paul Beaumont based on harmonised PIL instruments, is functioning at present. Therefore, the authors make a case that empirical evidence is necessary to test the effects of the harmonised PIL instruments on those who need a remedy in cross-border cases. The diverse legal landscape in the EU, including the various national traditions/regimes, means that the jurisdictional divergences may make a difference for litigants, seeking to obtain an effective remedy. In the EU context, there is a triangular relationship between allocation of jurisdiction before an appropriate Member State court and identification of applicable law, on the one hand, and substantive outcomes in a cross-border dispute, on the other hand. Furthermore the recognition and enforcement of that substantive judgment is a fifth freedom in EU law (“free movement of judgments”) but like the original four freedoms is often not legally absolute and even where it purports to be absolute (e.g. in Brussels IIa in relation to access rights and the overriding of a non-return order in child abduction cases) in terms of recognition and enforceability may not in fact be actually enforceable in every EU Member State where it needs to be enforced. Hence, qualitative data is required in order to identify the important issues which appear to be affecting and shaping the litigants’ strategies, settlement dynamics and enforcement efforts under the current PIL regime. Once these issues have been identified, then it will be possible to address head on the question whether the current PIL framework is effectively pursuing its objectives in cross-border cases. If justice is not administered effectively in cross-border cases, then the empirical data might suggest which issues may need to be addressed by the EU legislator and/or national legislators.

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UNMASKING ANONYMOUS ONLINE INFRINGERS OF PERSONALITY RIGHTS: QUESTIONS ARISING IN INTERNATIONAL CONTEXTS Koji TAKAHASHI*

I. II. III.

VIII.

Introduction Stakeholders Japanese Approach A. Choice of Law Question B. Jurisdictional Question French Approach A. UEJF v. Twitter B. Comments US Approach A. Jurisdictional Analysis before Identification of Defendant B. Where to Sue English Approach A. Personal Jurisdiction 1. Lockton Companies International v. Persons Unknown, Google 2. Bacon v. Automattic and Others 3. Comments B. Jurisdiction to Prescribe Cross-Border Enforcement of Disclosure Orders A. Necessities for Cross-Border Enforcement B. Enforcement of Foreign Disclosure Orders in California Conclusions

I.

Introduction

IV.

V.

VI.

VII.

When a defamatory content has been posted on a website (① in FIGURE below), the injured person may wish to seek an injunction or damages against the author1 Professor, Doshisha University Law School (Japan). The injured person may also demand, if possible under the applicable law, the host of the server or website on which the offending content has been published to delete it. It is, however, not always an effective remedy since the infringer often repeats posting offending contents. * 1

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Printed in Germany

Koji Takahashi (④ in FIGURE). But if the author has acted anonymously or pseudonymously,2 the injured person may first need to unmask him or her by seeking orders against the internet service providers (ISPs)3 demanding disclosure of the information which allows for the identification of the author. More specifically, it may be necessary to demand the content provider (the host of the server or website) to reveal the internet protocol (IP) address used to post the offending content and the time stamps of the post (② in FIGURE). With a query and response protocol called WHOIS,4 the IP address allows for the identification of the internet access provider used. That provider may then be requested to check its log of IP addresses and time stamps5 to ascertain the matching subscriber and to reveal his or her name (③ in FIGURE), the idea being that the subscriber is likely to be the author.6 This article will consider questions related to conflict of laws which may arise in the international dimensions of the process outlined above. They are questions of choice of law, personal jurisdiction, jurisdiction to prescribe and the crossborder enforcement of disclosure orders. What questions arise and how they arise differ depending on the precise approach taken in the process outlined above. This article will, therefore, compare and contrast the approaches taken in Japan, France, United States and England. The analysis of this article is equally applicable to the online infringement of other personality rights such as the right to privacy, portrait rights and publicity rights.7

2 In some cases, the author impersonates the injured person and posts contents which damage the latter’s reputation. 3 In the present article, the word “ISPs” is used to cover both hosting service providers, i.e. the hosts of the server or website on which the infringing content is published, and internet access providers. 4 E.g. . 5 Other details may also be useful. If, for example, the author’s e-mail address is registered with the hosting service provider and it has been disclosed, the injured person may request the provider of that e-mail address to reveal the name of the holder of that address. 6 They are not always the same. Where, for example, the subscriber is an internet café making its internet access generally available to its customers, the café is unlikely to be the author. The subscriber may dispute that he or she is the actual author once an action for damages or injunction is brought against him or her. 7 Much of the analysis is also applicable to the cases of online infringement of intellectual property rights such as illegal downloading and file sharing. Reference will, therefore, be made to such cases insofar as they are informative.

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Unmasking Anonymous Online Infringers of Personality Rights FIGURE

    Website   board) (e.g. bulletin     Server Hosting service provider

  ① posting of offending contents   Internet access provider

Anonymous or pseudonymous author

② Disclosure of IP address and time stamps ③ Disclosure of the subscriber’s name ④ Injunction or damages

Injured person

II.

Stakeholders

Before embarking on the comparative analysis, it is worth examining the respective interests of the stakeholders involved in the process of unmasking an anonymous online author since the consideration of questions arising in the process should take such interests into account. The injured person obviously has interest in vindicating his or her personality rights. But the interest which matters in the context of the present analysis is that of obtaining access to justice to vindicate those rights. The author has interest in anonymously exercising his or her right to freedom of expression. 8 Once his or her identity has been revealed, the unmasked To protect this interest, each legal system sets a substantive threshold for obtaining information which allows for the identification of the anonymous author. For the purpose of the present analysis, it will be sufficient to mention a few examples of such thresholds. Thus, in the United States, the most influential test is known as the Dendrite test, according to which “the plaintiff must produce sufficient evidence supporting each element of its cause of action, on a prima facie basis” and “the court must balance the defendant's First Amendment right of anonymous free speech against the strength of the prima facie case presented and the necessity for the disclosure of the anonymous defendant’s identity to allow the plaintiff to properly proceed” (Dendrite International v. Doe, 775 A.2d 756 (N.J. Super. Ct. App. Div. 2001)). Japanese law sets a more stringent standard, as stated in the text reproduced infra, note 13. 8

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Koji Takahashi author may face embarrassment and may have to contend with a suit brought by the injured person.9 The author also has interest in opposing disclosure in a forum which would not be remote or otherwise inconvenient. The ISPs do not have inherent interest in maintaining the author’s anonymity nor are they in a good position to defend his or her publication since they have no knowledge of the factual correctness of the infringing material and the author’s belief in it. Their interest lies in avoiding liability towards the author for breaching their duty of confidentiality. The duty may be based on a contract with the author or any applicable statutes or case law. The ISPs may be exempted from liability and penalty for breaching the duty if they obey a court order for disclosure.10 But they face double jeopardy if the disclosure order is not recognised in a state where their liability is pursued.

III. Japanese Approach Under Japanese law, the legal basis for a disclosure order is a statutory right against ISPs. The statute 11 essentially says that disclosure may be demanded of ISPs12 if (1) the alleged infringement has clearly taken place and (2) there is a justifiable reason for obtaining the disclosure, as in the cases where the information sought is necessary to claim damages from the anonymous author.13 Being a substantive (non-procedural) right, it may be asserted in and outside courts. While those consequences are the same in the cases of infringement of copyright, M. FULLER in his article, Jurisdictional Issues in Anonymous Speech Cases (2015) 31 Communications Lawyer 24, observes that the right to anonymity is negligible in such cases unlike the cases involving the right to free speech. 10 As made explicit by, for example, s. 8 of the Irish Data Protection Act 1988, which provides: “Any restrictions in this Act on the disclosure of personal data do not apply if the disclosure is – […] (e) required by or under any enactment or by a rule of law or order of a court, […].” 11 The Act on the Limitation of Liability of the Providers of Specified Telecommunication Services and the Right to Demand the Disclosure of Information Enabling the Identification of the Sender. 12 The ISPs against whom disclosure is sought must seek the opinion of the author unless the latter cannot be contacted or there are special circumstances (Art. 4(2) of the Act, ibid.). 13 Art. 4(1) of the Act, ibid., which reads in pertinent part (the present author’s translation): “Any person alleging that his or her rights were infringed by the circulation of information via specified telecommunications may, only in the cases falling within both the following items, demand the service provider of the specified telecommunications […] (hereinafter referred to as the “provider of disclosure-related services”) to disclose information enabling the identification of the sender pertaining to the infringement of the rights (namely, information, including the name and address, contributing to the 9

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Unmasking Anonymous Online Infringers of Personality Rights A.

Choice of Law Question

Being a substantive right, this right may be asserted only where Japanese law is applicable. Under the Japanese choice-of-law rules, it is generally assumed by commentaries that the claim based on this right is characterised as tort,14 with the result that Japanese law is normally applicable in the cases where the person injured from defamation is habitually resident in Japan. 15 But the tort characterisation is somewhat awkward since the claim is not meant to pursue tort liability of ISPs themselves. It is only a preliminary step to claiming the author’s tortious liability. It seems preferable to see this statutory right as emanating from an overriding mandatory rule of the forum which is applicable irrespective of any choice-of-law rules.16 It is possible that where an ISP is subject to the obligation of disclosure under Japanese law, its relationship with the anonymous author is governed by a different legal system. To avoid double jeopardy, it must be possible to interpret the latter as allowing the ISP’s duty of confidentiality towards the author to be discharged by reason of its obligation of disclosure towards the injured person. To avoid double jeopardy in other states, the recognition of the Japanese order of disclosure would have to be sought there.

identification of the sender of the offending information as stipulated by the applicable ordinance of the Ministry of Internal Affairs and Communications […]) which is possessed by the provider of disclosure-related services if: (i) there is clear evidence that the rights of a person demanding disclosure have been infringed by the circulation of the offending information; and (ii) the information enabling the identification of the sender is necessary for the person demanding disclosure to exercise his or her rights to claim damages or where there is any other justifiable reason for that person to obtain disclosure.” 14 E.g. TELECOMMUNICATIONS CONSUMER POLICY DIVISION OF THE TELECOMMUNICATIONS BUREAU IN THE MINISTRY OF INTERNAL AFFAIRS AND COMMUNICATIONS, Act on the Limitation of Liability of the Providers, enlarged and revised edition 2014, p. 102 (in Japanese) and K. IIDA, Commentary on the Act on the Limitation of Liability of the Providers, 2002, p. 116 (in Japanese). 15 This results from Art. 19 of the Japanese choice-of-law legislation, Hô no Tekiyô ni Kansuru Tsûsoku Hô (Act Concerning the General Rules for the Application of Laws), which provides that liability for defamation is governed by the law of the injured person’s habitual place of residence (or, if the injured person is an association or a foundation which is incorporated or unincorporated, the law of its principal place of business). An exception is stipulated in Art. 20. For details, see K. TAKAHASHI, A Major Reform of Japanese Private International Law (2006) 2 J Priv Int L 311, 331. 16 In Japan, there is no statutory definition of the concept of overriding mandatory rules. The present author favours a broad definition of the concept, understanding it to mean the rules which by legislative intent are applicable to any situation falling within their scope irrespective of the law otherwise applicable pursuant to the choice-of-law rules.

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Jurisdictional Question

Where this statutory right is asserted in court, the question of jurisdiction arises. Since the ISPs keep an access log (IP addresses and time stamps) for only a limited duration, the usual practice in Japan is to seek a disclosure order corresponding to ② in FIGURE above under an expedited procedure for interim relief of protection.17 To obtain such orders against foreign ISPs18 such as Twitter and Facebook, a ground of jurisdiction known as the “doing business” jurisdiction has proven to be useful.19 It is contained in Art. 3-3 of the Code of Civil Procedure (Minji Soshô Hô), which provides in the relevant part (the present author’s translation): “The suits set out in each item below may be filed with the courts of Japan in the circumstances described in each of them. […] (v) a suit against a person doing business in Japan (including a foreign company (as defined by Article 2(2) of the Companies Act (Act No. 86 of 2005)) which continuously carries out transactions in Japan): in the circumstances where the suit relates to the business in Japan.” This head of jurisdiction is available for proceedings on the merits but it is also capable of providing jurisdiction for interim proceedings since, according to the Civil Interim Relief Act (Minji Hozen Hô),20 the Japanese courts have jurisdiction to grant interim relief where they would have jurisdiction should the same relief be sought in proceedings on the merits. Since this head of jurisdiction does not prescribe the method of “doing business,” it is a broad ground of jurisdiction capable of capturing defendants who have no fixed place of business in Japan but conduct business in Japan by online means from outside Japan. Foreign ISPs come within 17 An order corresponding to ③ in FIGURE above may only be sought in proceedings on the merit since the subscriber’s name is more sensitive information than the IP address. 18 A writ of summons for interim proceedings need not be served but may be notified in appropriate means (Art. 3 of the Civil Interim Relief Rules (Minji Hozen Kisoku)). In practice, they are often sent through an international postal channel, a method which cannot be used for the cross-border service of documents under the Japanese Code of Civil Procedure (M. NOMURA, Actual Practice of Handling Interim Proceedings in InternetRelated Cases at the Civil 9th Division of the Tokyo District Court (2014) 1395 Hanrei Times 25, 34 (in Japanese)). 19 According to various news sources, disclosure orders were issued by the Tokyo District Court against FC2 (Nevada company) on 6 February 2013, Twitter (California company) on 4 July 2013 and on 30 September 2015 and Facebook (Irish company) on 19 August 2014. None of those orders has been published in law reports but the text of the order against Twitter dated 4 July 2013 is to be found at (accessed on 19 February 2016). 20 Article 11 of the Act provides (the present author’s translation): “A petition for an order of interim relief may be made only where a suit on the merits can be filed with the courts of Japan or where the property to be provisionally seized or the object of the dispute is present in Japan.”

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Unmasking Anonymous Online Infringers of Personality Rights this jurisdiction if they conduct business in Japan by providing their internet services to Japanese residents, the use of Japanese language being a good indicium.21 Without this head of jurisdiction, it would be difficult to find jurisdictional grounds to obtain disclosure orders against foreign ISPs. Thus, the home-court jurisdiction,22 for example, is not available if the ISP is a foreign company.23 Among the claim-based jurisdictional rules, the rule for contractual claims 24 is inapplicable since there is no contract between the injured person and the ISP. The jurisdictional rule for tort claims25 is not available since the claim for disclosure is founded on a special statutory right.26 The “doing business” jurisdiction, on the other hand, is available irrespective of the legal nature of the claim, provided that the suit relates to the business in Japan.27 Typical suits envisaged by this head of jurisdiction are 21 The availability of this head of jurisdiction in such circumstances in the practice of Tokyo District Court is confirmed by Judge M. NOMURA, writing extra-judicially in his article mentioned in supra (note 18), at 27. 22 The Japanese courts have general jurisdiction, i.e. jurisdiction available irrespective of the cause of action, where the defendant’s principal place of business is situated in Japan (Art. 3-2(3) of the Code of Civil Procedure). 23 Where the foreign ISP has a Japanese subsidiary, the latter is subject to the homecourt jurisdiction. But a disclosure order cannot be obtained if, as is often the case with foreign ISPs providing hosting services, the Japanese subsidiary is only engaged in marketing and has no control over the information sought. 24 It is contained in Art. 3-3 of the Code of Civil Procedure, which provides in the relevant part (the present author’s translation): “The suits set out in each item below may be filed with the courts of Japan in the circumstances described in each of them. (i) An action for the enforcement of a contractual obligation, [ …]  or any other action relating to a contractual obligation: – when the place of performance of the obligation as specified in the contract is located in Japan or when the place of performance of the obligation is located in Japan according to the governing law chosen in the contract. […].” 25 It is also contained in Art. 3-3 of the Code of Civil Procedure, which provides in the relevant part (the present author’s translation): “The suits set out in each item below may be filed with the courts of Japan in the circumstances described in each of them.  […]  (viii) a suit relating to a tort: when the tort occurred in Japan (except where the result of a harmful act committed abroad has occurred in Japan and the occurrence of that result in Japan would not have been normally foreseeable).” 26 For the same view, see M. FUKUSHIMA, Internet related cases viewed from the standpoint of a judge in charge of interim proceedings II (2013) 13(9) LIBRA (The Tokyo Bar Association journal) 9, 13 (in Japanese); TELECOMMUNICATIONS CONSUMER POLICY DIVISION OF THE TELECOMMUNICATIONS BUREAU IN THE MINISTRY OF INTERNAL AFFAIRS AND COMMUNICATIONS, supra (note 14), at 102 (in Japanese). Interestingly, the latter shows no discomfort in adopting the tort characterisation for choice-of-law purposes; See supra (note 14). 27 Compared to the traditional US version of “doing business” jurisdiction, the Japanese version is more restrictive as it requires the suit to relate to the defendant’s business in Japan. For a fuller comparison, see K. TAKAHASHI, The Jurisdiction of Japanese Courts in a Comparative Context (2015) 11 J Priv Int L 103, 113.

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Koji Takahashi those based on contractual obligations arising from “doing business” in Japan. But it is not impossible to regard a suit seeking disclosure of information enabling the identification of an anonymous author as relating to the ISP’s business in Japan.

IV. French Approach In French law, disclosure orders may be based on a provision in the Trust in Digital Economy Act,28 promulgated in 2004. Article 6 II reads as follows:29 “(1) The persons mentioned in the first and second paragraphs of I [which may be understood to signify ISPs – note by the present author] hold and retain the information enabling the identification of any person who has contributed to the creation of the content of services of which they are providers. [...] (3) The judicial authority may require the providers mentioned in the first and second paragraphs of I to disclose the information mentioned in the first paragraph.” To obtain disclosure, another possibility is to rely on a general rule of civil procedure. Article 145 of the Code of Civil Procedure (Code de procédure civile) provides for preparatory inquiries (mesures d’instruction in futurum), and reads as follows:30 “If there is a legitimate reason to preserve or to establish, before any legal process, the evidence of facts upon which the resolution of a dispute may depend, legally permissible preparatory inquiries may be ordered at the request of any interested party, by way of an ex parte application or summary procedure.”

“Loi n° 2004-575 pour la confiance dans l’économie numérique”. The present author’s translation. The original French text reads in the corresponding part: “(1) Les personnes mentionnées aux 1 et 2 du I détiennent et conservent les données de nature à permettre l’identification de quiconque a contribué à la création du contenu ou de l’un des contenus des services dont elles sont prestataires”. […] “(3) L’autorité judiciaire peut requérir communication auprès des prestataires mentionnés aux 1 et 2 du I des données mentionnées au premier alinéa”. 30 The original French text reads: “S’il existe un motif légitime de conserver ou d’établir avant tout procès la preuve de faits dont pourrait dépendre la solution d’un litige, les mesures d’instruction légalement admissibles peuvent être ordonnées à la demande de tout intéressé, sur requête ou en référé”. 28 29

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Unmasking Anonymous Online Infringers of Personality Rights The application of those rules became an issue in a recent case seeking disclosure from Twitter. A.

UEJF v. Twitter31

In UEJF v. Twitter, the French Union of Jewish Students (UEJF) complained of numerous anti-Semitic tweets and sought disclosure from Twitter. Twitter, a California company, did not contest the French jurisdiction. But it argued that it was not subject to the obligation to retain information under the French Trust in Digital Economy Act, stating that it was doing no more than required by the law of California. Twitter also contended that the provisions of this Act were not overriding mandatory rules (loi de police) within the meaning of Article 3 of the Civil Code (Code civil).32 The Paris High Court noted that under a relevant decree, the retention of the information enabling the identification of authors was subject to another Act, the 1978 Act on Computers, Files and Liberties,33 which was in its terms subject to the principle of territoriality. In that regard, it was not demonstrated that Twitter used material or human means in the territory of France to retain the information sought. The Court also acknowledged that for a rule to qualify as the loi de police, its application must be uncontestably mandatory for safeguarding the nation’s socioeconomic structure, remarking that the fact that the breach of the rule would attract criminal sanctions was not sufficient. Having regard to all the circumstances, the Court concluded that it was not demonstrated, with sufficient evidence required of a summary procedure, that Article 6 II of the Act was applicable in the present case. The Court instead relied on Article 145 of the Code of Civil Procedure to order disclosure, making a brief remark that the provision was applicable in international cases. On appeal, the Paris Court of Appeal affirmed the decision of first instance without considering the questions of choice of law and jurisdiction. B.

Comments

It is regretful that the Court of Appeal did not take the opportunity to clarify the circumstances in which Article 6 II of the Trust in Digital Economy Act would be

31 TGI Paris, 24 janv. 2013, n° 13/50262, (2013) D. 300 An appeal lodged by Twitter was rejected by CA Paris, 12 juin 2013, n° 13/06106, (2013) D. 1614. 32 Art. 3(1) provides (translation taken from the site of (accessed on 4 January 2016)): Statutes concerning public policy and safety are binding on all those living on the territory. The original French text reads: “Les lois de police et de sûreté obligent tous ceux qui habitent le territoire”. 33 “Loi n° 78-12 relative à l’informatique, aux fichiers et aux libertés”.

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Koji Takahashi applicable to foreign ISPs.34 A few commentators have doubted the correctness of the High Court’s reliance on the territoriality principle provided by the 1978 Act, questioning whether it has any bearing on the disclosure, as distinguished from retention, of information sought under the Trust in Digital Economy Act.35 Another commentator, apparently on the understanding that the Trust in Digital Economy Act imposes the obligation to disclose information as retained under the same Act, contrasts it with Article 145 of the Code of Civil Procedure which, according to her interpretation, requires disclosure of so much of the information as retained under the applicable, possibly foreign, law.36 Being a procedural rule, Article 145 of the Code of Civil Procedure should raise no choice-of-law question. It should be applicable as forming part of the lex fori where the French courts have jurisdiction as to the substance of the matter.37 Where jurisdiction as to the substance exists under the Brussels I-bis Regulation,38 this view finds a few supporting remarks in the case law of the CJEU (Court of Justice of European Union).39 Where the court is not yet seized of the substance, the question to be asked is whether it would have jurisdiction when it is seized.40 By hypothesising a suit against the author, it would be possible to see whether the French courts have jurisdiction on the basis that the offending online content could be viewed in France.41

34 For the same view, see F. CHAFIOL-CHAUMONT/ A. CANIVEZ, Affaire Twitter c/ UEJF: suite et fin? (2013) 97 Revue Lamy Droit de l’Immatériel 31. 35 C. MANARA, Twitter: communication de données d’identification [2013] Recueil Dalloz 300; A. COUSIN, Twitter peut-elle échapper à la loi française? [2013] Recueil Dalloz 696. 36 F. CHAFIOL-CHAUMONT, Messages racistes sur internet: Twitter devra communiquer les données permettant d’identifier les auteurs des tweets antisémites (2013) 91 Revue Lamy Droit de l’Immatériel 26. 37 For the same view, see H. GAUDEMET-TALLON, Compétence et exécution des jugements en Europe: règlement 44/2001, conventions de Bruxelles (1968) et de Lugano (1988 et 2007), 4th ed. 2010, p. 322. 38 Regulation (EU) No 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters [2012] OJ L351/1. 39 Case C-391/95, Van Uden v. Deco-Line, [1998] ECR I-7091, para. 22; Case C-99/96, Mietz, [1999] ECR I-2277, para. 41. 40 A. NUYTS, Le règlement communautaire sur l’obtention des preuves, un instrument exclusif? [2007] Rev. crit. dr. int. pr. 53, 65; E. PATAUT [2005] Rev. crit. dr. int. pr. 742, 748 (Note on St Paul Daily).

Case C‑161/10, eDate Advertising and Others, [2011] ECR I‑10269, according to which the courts of each Member State in the territory of which the online content infringing personality rights is or has been accessible have jurisdiction in respect of the damage caused in the territory of that Member State. The same conclusion seems to result from the French national rules of jurisdiction. Thus, commenting on the UEJF v. Twitter case, Th. FOURREY, Twitter et le droit de la presse (2014) 109 Revue Lamy Droit de l’Immatériel 67, 68, has argued that the application of Art. 145 would have been better justified on the basis that the French courts had jurisdiction under Art. 46 of the same Code, reasoning that damage had been suffered in France in the sense that the offending tweets had been received there. 41

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Unmasking Anonymous Online Infringers of Personality Rights Even if the courts of another EU Member State have, and the French courts do not have, jurisdiction as to the substance of the matter, “such provisional, including protective, measures” as may be available under French law may be sought in France pursuant to Article 35 of the Brussels I-bis Regulation. Do the preparatory inquiries under Article 145 of the French Code of Civil Procedure constitute “provisional, including protective, measures” within the meaning of that provision? According to the CJEU in Reichert and Kockler, that notion refers to “measures which […] are intended to preserve a factual or legal situation so as to safeguard rights the recognition of which is sought elsewhere from the court having jurisdiction as to the substance of the matter.”42 But according to another CJEU decision, St. Paul Dairy Industries v. Unibel Exser, it does not cover “a measure ordering the hearing of a witness for the purpose of enabling the applicant to decide whether to bring a case, determine whether it would be well founded and assess the relevance of evidence which might be adduced in that regard.”43 When the latter decision was given, the question referred to the CJEU mentioned, in particular, orders enabling the advance clarification with regard to the identification of the party against whom proceedings must be instituted.44 It might, therefore, be inferred from this ruling that orders for disclosure of information allowing for the identification of anonymous authors do not constitute “provisional, including protective, measures.”45 This interpretation might seem supported by Recital 25 of the Regulation which states, “[t]he notion of provisional, including protective, measures should include, for example, protective orders aimed at obtaining information or preserving evidence as referred to in Articles 6 and 7 of Directive 2004/48/EC […] on the enforcement of intellectual property rights.” It does not mention Article 8 of the same Directive which refers to orders aimed at obtaining such information as the name of the producer of goods infringing an intellectual Art. 46 provides in the relevant part (translation taken from the site of (accessed on 4 January 2016)): “The plaintiff may bring his case, at his choosing, besides the court of the place where the defendant lives, before: […] - in tort matters, the court of the place of the event causing liability or the one in whose district the damage was suffered; […].” The original French text reads in the corresponding part: “Le demandeur peut saisir à son choix, outre la juridiction du lieu où demeure le défendeur: […] - en matière délictuelle, la juridiction du lieu du fait dommageable ou celle dans le ressort de laquelle le dommage a été subi; […].” 42 Case C-261/90, [1992] ECR I-2149, para. 34. 43 Case C-104/03, [2005] ECR I-3481. 44 A Dutch disclosure order. No further detail of the order is given in the judgment or the Advocate General’s Opinion. 45 The Supreme Court of Ireland, too, held that a measure designed to disclose the identity of persons who might be sued could not be regarded as the type of measure which fell within this expression: Ryanair Ltd v. Unister GmbH and by order Aeruni GmbH [2013] IESC 14, para. 10.3.

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Koji Takahashi property right, a type of order similar in purpose to those for the disclosure of information enabling the identification of infringers of personality rights. It seems, however, that Recital 25 in its entirety should be read as confirming the distinction introduced by the decision in St. Paul Dairy between measures aimed at preserving evidence and measures intended merely to obtain evidence.46 In this regard, where the identity of anonymous online authors is sought to be uncovered, the disclosure of the time stamps of the anonymous posts and the IP addresses used may be sought in interim proceedings to preserve the log of those details which might otherwise be deleted by the internet access provider after a period of time. In such cases, the orders should be considered to constitute “provisional, including protective, measures” since they are “measures which […] are intended to preserve a factual or legal situation.”47 If this interpretation is accepted, it should be noted that the granting of provisional or protective measures under Article 35 of the Brussels I-bis Regulation is conditional on “the existence of a real connecting link between the subject matter of the measures sought and the territorial jurisdiction of the [Member] State of the court before which those measures are sought.”48 Though exactly what is required by this condition is unclear when the measure does not concern the seizing of property, 49 it would hardly be met if the ISP stores the information sought to be disclosed outside the jurisdiction. Even where the French courts have jurisdiction over a potential suit against the author, a separate question arises: whether the French courts have power to make an extraterritorial order, 50 requiring ISPs to disclose information located abroad. Such an order might seem contrary to the spirit of the French blocking statute.51 It provides as follows in Article 1bis:52 46 For the same view, see F. WILKE, The impact of the Brussels I Recast on important “Brussels” case law (2015) 11 J Priv Int L 128, 139. 47 Reichert and Kockler (note 42). E. PATAUT (note 40), at 750 and 751, considers that preparatory inquiries under Art. 145 are largely excluded from “provisional, including protective, measures” but acknowledges that there can be exceptions justified by the imminent risk of destruction of evidence, noting that Art. 145 has dual objectives, namely to avoid the deterioration of evidence and to assess the chances of success at trial, the first of which attracts the application of what is now Art. 35 of the Brussels I-bis Regulation. 48 Case C-391/95, Van Uden [1998] ECR I-7091. 49 For the same view, see the Commission Report on the application of Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (COM(2009) 174 final) para. 3.6. 50 This corresponds to the question addressed infra (heading VI.B. “jurisdiction to prescribe”) in the context of English law. 51 “Loi n° 68-678 du 26 juillet 1968 relative à la communication de documents et renseignements d'ordre économique, commercial, industriel, financier ou technique à des personnes physiques ou morales étrangères” (Act relating to the communication of documents or information in economic, commercial, industrial, financial or technical matters to foreign natural or legal persons). 52 The present author’s translation. The original French text reads: “Sous réserve des traités ou accords internationaux et des lois et règlements en vigueur, il est interdit à toute personne de demander, de rechercher ou de communiquer, par écrit, oralement ou sous toute autre forme, des documents ou

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Unmasking Anonymous Online Infringers of Personality Rights “Subject to any treaties or international agreements and Acts and regulations in force, it is prohibited for any person to request, to investigate or to communicate in writing, orally or by any other means, documents or information in economic, commercial, industrial, financial or technical matters leading to the establishment of proof for the sake of foreign judicial or administrative proceedings or in the context of such proceedings.” It seeks to ensure with a threat of criminal penalty53 that recourse be made to the French Code of Civil Procedure54 or the Hague Evidence Convention55 of which France is a Contracting State, in order to collect information from France for the sake of foreign proceedings.56 This Act is, however, hardly invoked in practice and has been described as “ineffective et obsolète.”57 It is, in fact, not unprecedented for the French courts to order Article 145 inquiries to be conducted outside France without resorting to the Hague Evidence Convention.58

renseignements d’ordre économique, commercial, industriel, financier ou technique tendant à la constitution de preuves en vue de procédures judiciaires ou administratives étrangères ou dans le cadre de celles-ci.” 53 Provided in Art. 3. 54 Arts. 736 to 748 of the French Code of Civil Procedure. 55 Hague Convention of 18 March 1970 on the Taking of Evidence Abroad in Civil or Commercial Matters. 56 The French government views recourse to the Hague Evidence Convention as mandatory where the evidence is located in another Contracting State: France’s response to the Questionnaire of May 2008 drawn up by the Permanent Bureau of the Hague Conference on Private International Law relating to the Hague Evidence Convention (2008), p. 13. 57 B. CARAYON, Rapport fait au nom de la commission des lois constitutionnelles, de la législation et de l’administration générale de la république sur la proposition de loi (N° 3985) de M. Bernard Carayon visant à sanctionner la violation du secret des affaires, Assemblée Nationale No. 4159 (2012), p. 22. 58 Apart from UEJF v. Twitter, examined above, see e.g. Societe Luxguard v. Societe SN Sitraco and Another [1996] I.L.Pr. 5, in which the Versailles Court of Appeal affirmed an order appointing an expert to go to a building and inspect its works in Spain (criticised by G. COUCHEZ [1995] Rev. crit. dr. int. pr. 80, 87). The Court considered that the Hague Evidence Convention, though regulating letters rogatory, was not applicable to a probative measure (mesure d’ordre probatoire), provided that it would not infringe the sovereignty of another Contracting State. On that basis, the Court found that the task of the appointed expert, being purely technical, would not amount to the administration of evidence which would involve the danger of infringing the sovereignty of Spain. It should be noted that this case preceded Regulation No 1206/2001 on cooperation between the courts of the Member States in the taking of evidence in civil or commercial matters ([2001] OJ L174/1), which prevails over the Hague Evidence Convention in relations between the EU Member States (Art. 21(1)) and recourse to which has been held non-mandatory (Case C-332/11, ProRail v. Xpedys and others (2013)).

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V.

US Approach

The approach in the United States, though not uniform in detail, is strikingly different from those in Japan and France. The anonymous author may be sued in the name of “John Doe” 59 and then a non-party discovery order, called “Doe subpoena,” may be issued to the ISPs to unmask “John Doe.” As it is a procedural order, it gives rise to no choice-of-law question. The US debate is focused on jurisdiction and, unlike the Japanese debate, jurisdiction over Doe rather than ISPs. The debate centres on whether it is premature to require any jurisdictional analysis before the identity of the defendant is revealed and, if not, where the injured person should bring his or her suit to make a sufficient showing of jurisdiction over Doe. A.

Jurisdictional Analysis before Identification of Defendant

It appears that the only decision at the appellate level of federal courts which has squarely addressed this question is AF Holdings v. Does 1–1058.60 In this case, the Court of Appeals for the DC Circuit acknowledged that to bring an action, a plaintiff has no obligation to establish personal jurisdiction until the defendant raises that defense. The Court, however, emphasized that different principles applied where a plaintiff did not just file a complaint but also sought a non-party discovery order to reveal the identity of the Doe defendants. It held that discovery would be denied unless the plaintiff has “a good faith belief that such discovery will enable it to show that the court has personal jurisdiction over the defendant.”61 In the Court’s reasoning, absent such a threshold showing, there would be little reason to believe that the information sought would be “relevant to the subject matter involved in the action,” a general requirement for a discovery order62 as provided by the Federal Rules of Civil Procedure 26(b)(1). 63 The Court explained that the identity of 59 The practice of bringing a suit against “John Doe” is well established in federal courts as well as in a vast majority of state courts. The Federal Rules of Civil Procedure are largely silent or unclear on the practice but a majority of states have express provisions for it. For details, see C. RICE, Meet John Doe: It Is Time for Federal Civil Procedure to Recognize John Doe Parties (1996）57 U. Pitt. L. Rev. 883. 60 752 F.3d 990 (2014). This is a case on copyright infringement but the point discussed here would equally apply to cases involving the infringement of personality rights. 61 For an earlier decision to the same effect, see Nu Image v. Does 1-23, 322, 799 F. Supp. 2d 34 (D.D.C. 2011) at 37 (a case on copyright infringement). 62 The Court noted that where no party had yet been specifically named as a defendant, the only potential avenue for discovery was the Federal Rules of Civil Procedure 26(d)(1), which provided for discovery “by court order.” 63 Rule 26(b)(1) has been amended with effect from 1 December 2015 and no longer contains the quoted wording. The amendment narrowed the scope of discovery by requiring it to be “proportional to the needs of the case.” In the context of the present discussion, the amendment will, if anything, only give a stronger support for the ruling that the plaintiff must “have at least a good faith belief that such discovery will enable it to show that the court has personal jurisdiction over the defendant.”

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Unmasking Anonymous Online Infringers of Personality Rights prospective defendants who would not be amenable to jurisdiction could be of little use. It should be noted that what the Court required the plaintiff to do was not to demonstrate that the trial court had personal jurisdiction over the anonymous defendant. Rather, it was merely to show a good faith belief that the trial court had jurisdiction. The state courts follow the civil procedure rules of their own states. The Rules of Civil Procedure of Ohio, for example, permit pre-suit discovery that “is necessary to ascertain the identity of a potential adverse party” (Rule 34(D)(3)). Texas authorises the broadest form of pre-suit discovery, granting “a proper court” power to “investigate a potential claim” (Rule 202 of the Texas Rules of Civil Procedure). In a recent Texas case, John Doe a/k/a “Trooper”,64 a petition was filed, requesting Google to disclose the identity of a pseudonymous blogger under Rule 202. The plaintiff sent notice to the blog email address.65 The blogger filed an appearance without revealing his identity, asserting that his only contact with Texas was that the blog could be read on the Internet there. The Texas Supreme Court, in a 5-4 split decision, held that “a proper court” must have personal jurisdiction over the potential defendant. It acknowledged that the burden on the plaintiff could be heavy where the potential defendant’s identity was unknown. But the Court refused to “interpret Rule 202 to make Texas the world's inspector general.” On that reasoning, the Court concluded that the trial court's order authorising discovery exceeded its authority under Rule 202. But the Court did not articulate the jurisdictional standard applicable in this context. The dissenting opinion held that the question of personal jurisdiction was premature and impossible to answer when it was directed at an anonymous individual.66 In its reasoning, a “court’s exercise of personal jurisdiction over a party is predicated on an analysis of his connections with the forum state” and “when a party chooses to remain anonymous, a court is powerless to evaluate his connection to the forum state.” This observation seems incontestable. It logically follows that the majority’s ruling that “a proper court” must have personal jurisdiction over the potential defendant could not be taken as insisting on a full-fledged jurisdictional analysis.

57 Tex. Sup. Ct. J. 1440 (2014). In the United States, the plaintiffs are generally required to make efforts to notify the anonymous author. Thus, in the Dendrite International case, the decision which established the most influential substantive test for disclosure in the United States (See supra (note 8)), it was held: “[…] the trial court should first require the plaintiff to undertake efforts to notify the anonymous posters that they are the subject of a subpoena or application for an order of disclosure, and withhold action to afford the fictitiously-named defendants a reasonable opportunity to file and serve opposition to the application. These notification efforts should include posting a message of notification of the identity discovery request to the anonymous user on the ISP’s pertinent message board.” 66 The dissenting opinion cited some federal courts’ decisions which had made the same point. They are AF Holdings, LLC v. Does 1–162, 2012 WL 488217 (S.D.Fla. 2012); Bloomberg, L.P. v. Does 1–4, 2013 WL 4780036 (S.D.N.Y. 2013); First Time Videos, LLC v. Does 1–76, 276 F.R.D. 254 (N.D.Ill. 2011); and Call of the Wild Movie, LLC v. Does 1– 1,062, 770 F.Supp.2d 332 (D.D.C. 2011). 64 65

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Where to Sue

Then, the next question which must be addressed is where the injured person should bring his or her suit to make a sufficient showing of jurisdiction over John Doe. In the cases of copyright infringement through file sharing, prior to filing suits against “John Doe” infringers, the record companies often know them by their IP addresses. This is because in order to facilitate file sharing, their IP addresses are distributed to fellow users, which the record companies can get hold of by monitoring the P2P network. Then, it is possible to approximately determine the infringer’s location through what is known as a geolocation service, a kind of service which makes it possible to estimate the location of internet users based on their IP addresses. Thus, in AF Holdings v. Does 1–1058, a DC circuit case examined above, the plaintiff conceded that “the only conceivable way that personal jurisdiction might properly be exercised over these Doe defendants is if they are residents of the District of Columbia or at least downloaded the copyrighted work in the District.”67 The DC Circuit Court of Appeals held that the plaintiff abused the discovery process by not limiting its inquiry to those defendants who might actually be located in the District by using a geolocation service.68 In the same way, in the cases involving the infringement of personality rights, if the injured person has got hold of the IP address used by the anonymous author and demands the internet access provider to reveal the name of the subscriber (③ in FIGURE above), it will not be difficult to estimate the area where the author has posted the online content and establish on a prima facie basis the jurisdiction of the courts there by relying on a rule giving jurisdiction to the courts where a tortious conduct has been committed (loci actus). Then, could a sufficient showing of jurisdiction over an anonymous defendant be made where the IP address of the defendant is not known to the plaintiff, as is typically the case where the injured person seeks disclosure from the host of the server or website where infringing material has been posted (② in FIGURE above)? Firstly, could such a showing be made by filing in the State where the tortious conduct was committed (loci actus)? In Melvin v. Doe,69 the Virginia Circuit Court granted a motion to quash a subpoena against America On Line (AOL), a Virginia company. The Court found that the defendant, an anonymous author, fell within the loci actus rule of the Virginia Long Arm Statute by using AOL’s server in Virginia when publishing the defamatory content. But it held that the “minimum contacts” requirements of the Due Process Clause of the Fourteenth Amendment were not satisfied since the defamatory posting did not target Virginia but involved issues of local interest in Pennsylvania. This ruling may suggest that a sufficient showing cannot be made by suing an anonymous author in the State where the ISP’s server used to post the offending material is located. Such a conclusion, A reference was made to the DC long-arm statute providing for personal jurisdiction over a person “causing tortious injury in the District of Columbia.” 68 This ruling was followed in other cases, e.g. Malibu Media v. John Doe, 2015 WL 5173890 (District Court for the District of Columbia). 69 1999 WL 551335 (Va. Cir. Ct.). 67

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Unmasking Anonymous Online Infringers of Personality Rights however, will not be inevitable since the court might not require a full-fledged jurisdictional analysis. Thus, in Malcolm et al. v. Doe 1 et al.,70 a suit was filed in California to seek third party discovery against WordPress.com, a California company, which hosted an offending blog. The plaintiffs argued that the court had personal jurisdiction over Does because they had “purposefully avail[ed] themselves of the services of a company located in the State of California.” The California Court of Appeal affirmed the trial court’s decision to deny a motion to strike under the Californian anti-SLAPP statute. The Court, not discussing the plaintiff’s jurisdictional argument, apparently accepted it. This was notwithstanding that the plaintiffs were English local politicians and their aim was to learn if their political rival in England was the author of the blog. Then, could a sufficient showing be made of jurisdiction over John Doe by filing in the State where the injury from tortious conduct was sustained (loci damni)? It has been suggested71 that in defamation cases, knowledge of the defendant's identity will not always be essential to a plaintiff’s prima facie showing of personal jurisdiction since the substance of the challenged publication may contain sufficient indicia of the defendant's forum contacts. Thus, in Melvin v. Doe, examined above, after the Virginia Court granted a motion to quash the subpoena, the suit was re-filed in Pennsylvania, which the defendant’s publication targeted, and the court there took jurisdiction.72

VI. English Approach In England, the legal basis for a disclosure order for unmasking an anonymous online infringer of a personality right is the Norwich Pharmacal order. 73 In the leading case, unrelated to online infringement of personality rights, the House of Lords held:74 “If through no fault of his own a person gets mixed up in the tortious acts of others so as to facilitate their wrong-doing he may incur no personal liability but he comes under a duty to assist the person who has been wronged by giving him full information and disclosing the identity of the wrongdoers.”

2013 WL 1278957 (California Court of Appeal). M. FULLER (note 9). 72 S. SPENCER, Cyberslapp Suits and John Doe Subpoenas: Balancing Anonymity and Accountability in Cyberspace (2001) 19 John Marshall Journal of Computer & Information Law 493, fn. 108. 73 This is also true in Canada. See e.g. York University v. Bell Canada Enterprises [2009] O.J. No. 3689 (Ont. Super. Ct.). 74 Norwich Pharmacal Co. v. Customs and Excise Commissioners [1974] AC 133, 203. 70 71

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Koji Takahashi In England, unlike in the United States, pre-trial disclosure cannot be sought from non-parties to proceedings under what is known as the “mere witness” rule. The Norwich Pharmacal principle constitutes an exception to this general rule. 75 To obtain a Norwich Pharmacal order,76 the person mixed up in the tortious acts of others can be named as a defendant solely for the purpose of obtaining discovery and without there being any cause of action against it.77 Thus, to obtain information enabling the identification of an anonymous online author, the ISP may be named as a defendant.78 With respect to personal jurisdiction, unlike the cases of the United States where the debate is concentrated on jurisdiction over the anonymous author, the question of jurisdiction over ISPs was considered in a few English cases discussed below. In a few other cases, no question of jurisdiction was discussed as the ISPs did not resist the Norwich Pharmacal orders made against them.79 There appears to be no discussion of the choice-of-law question, presumably due to the procedural character of the Norwich Pharmacal order. What arises instead is the question of jurisdiction to prescribe, i.e. the territorial limit to the subject matter which English law as administered by an English judge can regulate.80

The Norwich Pharmacal decision was greeted with astonishment in the legal profession as it had been felt to be “un-British” to allow litigants to trouble non-parties (L. HOFFMANN, Changing Perspectives on Civil Litigation (1993) 56 Modern Law Review 297, 300). 76 The power to grant this order is based on the court’s inherent jurisdiction (J. O’HARE/ K. BROWNE, Civil Litigation, 14th ed. 2009, para. 30.026), which is preserved by the Civil Procedure Rules (CPR) 31.18. 77 Mackinnon v. Donaldson Lufkin & Jenrette Securities [1986] Ch. 482, 498 per HOFFMANN J. 78 There appears, however, to be an unreported decision involving Facebook as the Norwich Pharmacal defendant, in which it was indicated that issuing a claim form against the defendant was unnecessary (A. CADDICK, An effective global remedy 160 (2010) New Law Journal 211). 79 E.g. Applause Store Productions & Firsht v. Raphael [2008] EWHC 1781, para. 10 stating that a Norwich Pharmacal order was obtained against Facebook without discussing any jurisdictional question; G v. Wikimedia Foundation [2009] EWHC 3148, para. 38, the lawyers for the respondent stating, “[w]ithout waiving our insistence that no court in the United Kingdom has proper jurisdiction over us as a foreign entity, we nevertheless are willing to comply with a properly issued court order […]”; Daniel Hegglin v. Person(S) Unknown, Google Inc [2014] EWHC 2808, para. 22, with Bean J stating, “Google were and remain willing to comply with any indication from me that a Norwich Pharmacal order would be justified without prejudice to their general arguments about service out of the jurisdiction. They raised no separate dispute under this heading.” 80 Referred to by HOFFMANN J. in Mackinnon v. Donaldson Lufkin & Jenrette Securities [1986] Ch. 482, 493 as “subject matter jurisdiction.” 75

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Unmasking Anonymous Online Infringers of Personality Rights A.

Personal Jurisdiction

1.

Lockton Companies International v. Persons Unknown, Google81

In Lockton Companies International v. Persons Unknown, Google, a Norwich Pharmacal order was sought against Google, a company incorporated in Delaware and located in California. The court upheld jurisdiction over Google as “a necessary and proper party”82 to the claim against the anonymous authors who constituted the first defendants.83 Since the content of the offending e-mails related to an English company and to its employees, the court saw no difficulty in assuming jurisdiction over the first defendants, finding it reasonable to infer that that once they were identified, service would be effected on them within the jurisdiction. The court accepted the claimant’s submission that it would be necessary to obtain an order against Google to acquire information which would lead to the identification of the anonymous author. 2.

Bacon v. Automattic and Others84

In Bacon v. Automattic and Others, a Norwich Pharmacal order was sought against the defendants, US companies, who hosted the websites publishing defamatory statements. The anonymous author was not sued as a defendant. The claimant applied for permission to serve the claim forms out of the jurisdiction on the ground that a “claim [was] made for an injunction ordering the defendant to do […] an act within the jurisdiction,” 85 namely, in the instant case, disclose the information sought in England. The court granted permission but did not discuss [2009] EWHC 3423. Para. 3.1(3) of Practice Direction 6B, supplementing CPR Pt 6 provides in the relevant part: “The claimant may serve a claim form out of the jurisdiction with the permission of the court under rule 6.36 where – […] (3) A claim is made against a person (‘the defendant’) on whom the claim form has been or will be served (otherwise than in reliance on this paragraph) and – (a) there is between the claimant and the defendant a real issue which it is reasonable for the court to try; and (b) the claimant wishes to serve the claim form on another person who is a necessary or proper party to that claim.” 83 It became possible to sue an unknown person in England by the 17th century: see C. RICE (note 59), at fn. 20. 84 [2012] 1 W.L.R. 753. 85 Para. 3.1(2) of Practice Direction 6B, supplementing CPR Pt 6 provides in the relevant part: “The claimant may serve a claim form out of the jurisdiction with the permission of the court under rule 6.36 where – […] (2) A claim is made for an injunction ordering the defendant to do or refrain from doing an act within the jurisdiction.” 81 82

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Comments

It has been suggested that the English courts may issue a Norwich Pharmacal order only if they have personal jurisdiction over the person against whom the order is made.87 This is also the assumption taken by the decisions examined above. Where the defendant is not domiciled in any EU Member State, jurisdiction may be obtained under the common law by service of a claim form. This is possible where the defendant is present in England, though the exercise of jurisdiction is subject to the principle of forum non conveniens. Whether the claim form could be served out of the jurisdiction has been doubted.88 In particular, it has been questioned whether the head of jurisdiction for “an injunction ordering the defendant to do […] an act within the jurisdiction” should be available to Norwich Pharmacal orders as it would give the English courts unlimited personal jurisdiction to make such orders. 89 In the cases involving online infringement of personality rights, however, it would seem possible to effect service on the ISP by regarding it as a necessary party to a claim against the anonymous author. The interest of the author, who has a greater stake in the case than the ISP,90 is protected by being made the first defendant and by the requirement that “there is between the claimant and the defendant a real issue which it is reasonable for the court to try”91 as well as the requirement that a claim form will be served on the defendant. Although it is not possible to conclusively determine whether the last requirement is fulfilled while the defendant remains anonymous, a reasonable inference, as made in the Lockton Companies International case, should be considered sufficient. Where the defendant against whom a Norwich Pharmacal order is sought is domiciled in England, the English courts have jurisdiction under Article 4(1) of the Brussels I-bis Regulation. If the defendant is domiciled in another EU Member State or Contracting State of the Lugano Convention, it would seem difficult to find applicable jurisdictional rules in the Brussels I-bis Regulation or Lugano Convention 92 since there is no cause of action against the Norwich Pharmacal defendant. Like the English common law rules, the Regulation does contain a jurisdictional rule for multiple defendants. 93 It seems, however, less likely to be 86 This issue arose because of the need for expeditious handling of the case. See supra (note 18) for the way things are done in Japan. 87 T. HARTLEY, Jurisdiction in conflict of laws – disclosure, third-party debt and freezing orders (2010) 126 LQR 194, 203. 88 Ibid. 89 Ibid. This view was expressed prior to the Bacon decision, examined above. 90 As discussed under supra (heading II). 91 Para. 3.1(3)(a) of Practice Direction 6B (note 82). 92 For the same view, see T. HARTLEY (note 87). 93 Art. 8(1). Article 8 provides in the relevant part:

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Unmasking Anonymous Online Infringers of Personality Rights available since it requires that “the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings,” a requirement which is unlikely to be satisfied by a claim seeking a Norwich Pharmacal order. B.

Jurisdiction to Prescribe

It is well established that parties to proceedings in England are not excluded from the obligation to disclose documents in their “control” (as defined by CPR 31.8(2)) just because those documents are in a foreign state.94 On the other hand, the power to obtain disclosure from non-party banks under section 7 of the Bankers' Books Evidence Act 1879 95 cannot, save in exceptional circumstances, be exercised to require the production of documents situated in a foreign state as it would involve the infringement of the sovereignty of the foreign state.96 It has been argued that the latter principle should apply when making a Norwich Pharmacal order on the reasoning that although in form such an order requires disclosure by a party, in substance it is an order against a non-party.97 It should be noted, however, that in the decisions examined above, no territorial limitation was placed on the Norwich Pharmacal orders.

“A person domiciled in a Member State may also be sued: (1) where he is one of a number of defendants, in the courts for the place where any one of them is domiciled, provided the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings; […].” 94 Mackinnon v. Donaldson Lufkin & Jenrette Securities [1986] Ch 482, 494 with HOFFMANN J. stating, “[i]f you join the game, you must play according to the local rules.” 95 It provides: “On the application of any party to a legal proceeding a court or judge may order that such party be at liberty to inspect and take copies of any entries in a banker’s book for any of the purposes of such proceedings. An order under this section may be made either with or without summoning the bank or any other party, and shall be served on the bank three clear days before the same is to be obeyed, unless the court or judge otherwise directs.” Unlike Norwich Pharmacal orders, orders under this provision are available only where proceedings have been commenced: see W. KENNETT, The enforcement of judgments in Europe (2000) p. 117. 96 Mackinnon v. Donaldson Lufkin & Jenrette Securities [1986] Ch 482. 97 LORD COLLINS et al. (ed.), Dicey, Morris & Collins on the Conflict of Laws, 15th ed. 2012, para. 8-073; HOFFMANN J. in the Mackinnon case, ibid., seemed to have the same view, observing at 498 “for the purposes of the jurisdictional rules now under consideration, the Norwich Pharmacal case is much more akin to the subpoena directed to a witness than the discovery required of an ordinary defendant.”

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VII. Cross-Border Enforcement of Disclosure Orders With the questions of choice of law and jurisdiction having been examined, the following analysis will address the enforcement of disclosure orders. A.

Necessities for Cross-Border Enforcement

It may be necessary to enforce disclosure orders abroad for two reasons. Firstly, ISPs may refuse to comply with a disclosure order unless it is issued by the courts of their home country. 98 Thus, in the English case of Bacon v. Automattic, examined above,99 one of the defendants was Wikimedia, a California foundation. It stated:100 “Unfortunately, the Wikimedia foundation does not disclose personally identifying information regarding its users absent US subpoena. Please note that we do not comply with foreign subpoenas101 absent and [sic] immediate threat to life or limb, due to the varying standards and requirements of courts from country to country. There is a This is not always the case. In UEJF v. Twitter, examined supra (note 31), after the disclosure order was affirmed by CA Paris, Twitter disclosed the information sought (F. CHAFIOL-CHAUMONT/ A. CANIVEZ (note 34)). This is notwithstanding that Twitter, being a California company and maintaining its servers in the United States, was subject to the law of the United States and consequently benefited from the guarantee of the freedom of expression under the First Amendment of the US Constitution, which is perceived to be more extensive than under French law (J. FRANCILLON, Messages racistes ou antisémites postés sur le réseau social Twitter (2013) Revue de sciences criminelle et de droit pénal comparé 566). An example of elaborate terms indicating the possibility of complying with a foreign court order can be found in the Privacy policy statement of Instagram, a California company (, last accessed on 22 February 2016), which states: “We may […] share your information in response to a legal request (like a search warrant, court order or subpoena) if we have a good faith belief that the law requires us to do so. This may include responding to legal requests from jurisdictions outside of the United States where we have a good faith belief that the response is required by law in that jurisdiction, affects users in that jurisdiction, and is consistent with internationally recognized standards.” 99 Supra (note 84). 100 At para. 13. 101 Another episode of non-compliance is presented in RAJAH & TANN LLP, Preaction Interrogatories and Discovery (April 2013 , last accessed on 22 February 2016). According to this source, a footballer involved in newspaper reports obtained an injunction to protect him from being identified. After his name was revealed on Twitter in breach of the injunction, the footballer sought a Norwich Pharmacal order against Twitter to reveal the identities of those who had breached the injunction. Twitter, being based in the United States, refused to comply and the footballer abandoned to pursue his claim against the Twitter users. 98

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Unmasking Anonymous Online Infringers of Personality Rights procedure by which you can have a foreign subpoena recognized by US courts. Should you choose to pursue this course of action, please send the US subpoena to me and we will comply with the subpoena to the best of our ability.”102 Another reason for the need to enforce a disclosure order abroad is the limitation which exists on enforcement jurisdiction in the State in which the order is made. While courts may make extra-territorial disclosure orders, 103 the enforcement of such orders is another matter.104 The limitation on enforcement jurisdiction protects the non-party witness since non-compliance with disclosure orders could otherwise result in sanctions.105 Thus, in a recent case,106 the Virginia Circuit Court held Yelp, a California company, in civil contempt for refusal to comply with a Doe subpoena which had been issued earlier in Virginia. On appeal, the Virginia Supreme Court vacated the contempt order, holding that the Virginia courts lacked authority to compel non-resident 107 non-parties to produce documents located outside of Virginia.108 But the Court did not quash the subpoena, reasoning that the plaintiff might choose to seek enforcement of the subpoena in California. B.

Enforcement of Foreign Disclosure Orders in California

The conditions and procedure for the enforcement of foreign disclosure orders depend on the law of the requested state. The present article focuses on the law of

102 As will be examined below, it is possible to have a subpoena issued in California on the basis of a foreign discovery order. But it is also possible to file a motion to quash the resulting California subpoena. The quoted statement of Wikimedia does not seem to rule out the possibility of filing such a motion. 103 As discussed at the text accompanying supra (note 50) in the context of French law and at supra (heading VI.B.) in the context of English law. 104 F. MANN, The Doctrine of Jurisdiction in International Law (1964) 111 Recueil des Cours 1, 137, states: “There is, it is true, no objection to a State, by lawful means, […] requiring a foreign witness to appear for the purpose of giving evidence. But the foreign witness is under no duty to comply, and to impose penalties upon him and to enforce them against his property or against him personally on the occasion of a future visit constitutes an excess of criminal jurisdiction and runs contrary to the practice of States in regard to the taking of evidence as it has developed over a long period of time.” 105 M. FULLER (note 9). 106 Yelp v. Hadeed Carpet Cleaning, 770 S.E.2d 440 (2015). 107 Yelp did not have an office in Virginia. The Court left open the position with respect to a non-party foreign corporation maintaining an office in Virginia. 108 This ruling is consistent with the Brief of Amici Curiae filed in support of Yelp by Automattic, Facebook, Google, Tripadvisor and Twitter (2015). They argued in one voice that “[t]he territorial limitation on states’ subpoena power has always been and remains well-grounded in law and sound as a matter of public policy.”

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Koji Takahashi California as it is home to many major ISPs, as demonstrated by the facts of many cases discussed above. Where a subpoena has been issued in a state of the United States, it is enforceable in California under the Interstate and International Depositions and Discovery Act,109 which entered into force in 2010. The Act eliminates the need for obtaining letters rogatory (letters of request) and establishes a simple clerical procedure, under which a California subpoena is issued, incorporating the terms of a subpoena issued in another state by way of the submission of the latter to a court clerk in California.110 As it is not necessary to obtain local counsel,111 the procedure is cost-effective. The newly issued subpoena is enforceable in California but it is also challengeable there by a motion to quash under the law of California.112 The Act is modelled on the Uniform Interstate Depositions and Discovery Act113 which was created in 2007 and has been enacted in a majority of the states of the United States. The Californian Act, however, departs from the Uniform Act on the scope of application. The prefatory note of the Uniform Act states:114 “The [drafting] committee decided not to extend this Act to include foreign countries […] The committee felt that international litigation is sufficiently different and is governed by different principles, so that discovery issues in that arena should be governed by a separate act.” The Californian Act, on the other hand, clarifies through the definition of the words “foreign jurisdiction”115 that it is applicable not just to subpoenas of other states of the United States but also to those of other nations. Accordingly, in the English case of Bacon v. Automattic, examined above,116 a California counsel gave a statement stating, “a Norwich Pharmacal order may be enforced in California as provided in the recently enacted […] Act.” If, however, a motion to quash the resulting California subpoena is filed, it is not clear how it is to be decided under the law of California. No authority seems as yet to have developed on the point. It is not unimaginable for such a motion to be granted in favour of the right to

§§ 2029.100 et seq. of the California Civil Procedure Code. § 2029.300. 111 § 2029.300 (a), stating “[a] request for the issuance of a subpoena under this section does not constitute making an appearance in the courts of this state.” 112 § 2029.600. 113 § 2029.700(a) provides that the Act “may be referred to as the «California version of the Uniform Interstate Depositions and Discovery Act».” 114 Prefatory Note and Comments (2008), p. 6. 115 § 2029.200 provides in the relevant part: In this article: (a) “Foreign jurisdiction” means either of the following: (1) A state other than this state. (2) A foreign nation. 116 Supra (note 84). 109 110

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Unmasking Anonymous Online Infringers of Personality Rights anonymously exercise freedom of expression. 117 Furthermore, it seems unclear whether this Act is also applicable to a foreign judgment ordering disclosure which is based on a substantive (non-procedural) right such as the right created by the Japanese Act.118 The Act is applicable to a foreign “subpoena,” which may be taken as implying that the Act is an instrument of cross-border judicial assistance rather than an instrument for the enforcement of foreign judgments. If so, it may not cover foreign judgments based on a substantive right.119 On the other hand, the Act defines the word “subpoena” by referring to a “document, however denominated,”120 which lends support for a broad interpretation.

VIII. Conclusions The foregoing analysis has revealed various approaches to unmasking anonymous online authors. Those approaches are still evolving, as apparent from the fact that almost all cases examined in the present article were decided within the past ten years. But it seems worth comparing and contrasting those diverse approaches at this stage of development to consider their implications for the questions related to conflict of laws which may arise in international contexts. A disclosure order is based on a substantive right under Japanese law. It is presumably so under the French Trust in Digital Economy Act. Accordingly, both choice-of-law and jurisdictional questions are raised. With respect to choice of law, the question arises whether the claim should be characterized as tort or whether the right should be regarded as emanating from an overriding mandatory rule (loi de police). With respect to jurisdiction, if no jurisdictional ground similar to the Japanese version of “doing business” jurisdiction is available, it may be necessary to resort to the jurisdictional ground for tort claims, however awkward it may be, to 117 F. CHAFIOL-CHAUMONT, supra (note 36), though not referring to the Californian Interstate and International Depositions and Discovery Act, cites the importance attached to the freedom of expression in the United States as a reason for stating her view that the enforceability of a French discovery order in California is uncertain. 118 See supra (note 13). 119 As regards the converse question of whether a procedural order for taking evidence is entitled to be enforced under an instrument for the enforcement of foreign judgments, a negative answer has been given by the CJEU in the context of what is now the Brussels I-bis Regulation in Case C-332/11, ProRail v. Xpedys and others [2013], para. 39. 120 § 2029.200 provides in the relevant part: In this article: […] (e) “Subpoena” means a document, however denominated, issued under authority of a court of record requiring a person to do any of the following: […] (2) Produce and permit inspection, copying, testing, or sampling of designated books, documents, records, electronically stored information, or tangible things in the possession, custody, or control of the person.

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Koji Takahashi obtain jurisdiction over a foreign ISP. The enforcement of a disclosure order abroad would, to the extent that it is based on a substantive right, have to rely on the mechanism for the enforcement of foreign judgments. In the United States, England and France, procedural disclosure orders are available. 121 As procedural orders, they are subject to the lex fori and raise no choice-of-law questions. On the other hand, jurisdictional questions do arise. In the United States, the debate is focused on personal jurisdiction over a suit against the anonymous author whereas in England, personal jurisdiction over a suit against the ISPs featured in a few cases. Either way, the jurisdictional analysis is not straightforward. In the United States, the difficulty arises from the anonymity of the defendant author. In England, the difficulty relates to finding bases of jurisdiction for a claim having no cause of action. Besides the question of personal jurisdiction, the question of jurisdiction to prescribe arises. While courts may make extraterritorial disclosure orders (as discussed above in the context of the French and English orders), the enforcement of such orders with coercive measures could infringe the sovereignty of other States. Being procedural orders, their enforcement abroad would have to rely on the mechanism for cross-border judicial assistance as available under international instruments (e.g. Hague Evidence Convention) or the domestic law of the requested State (e.g. Californian Interstate and International Depositions and Discovery Act). When the identity of an anonymous online author is sought to be revealed, the stake of the author is greater than that of ISPs.122 The author may wish to resist disclosure by relying on the applicable substantive threshold for disclosure, 123 maintaining, for example, the factual correctness of the material posted or their belief in it. Since the ISPs do not have such information, they cannot adequately represent the author’s interest nor do they have inherent interest in protecting the latter. It would, therefore, seem necessary to protect the interest of anonymous authors not only by setting a substantive threshold for disclosure, but also by giving them procedural, including jurisdictional, safeguards. To achieve this goal while at the same time opening an avenue for relief for the injured person, a legal scheme consisting of the following elements seems ideal: (1)

allow a suit to be filed against an anonymous author;

(2)

allow a procedural disclosure order of, if necessary, extra-territorial scope to be made against the ISPs;

(3)

require jurisdiction over a claim against the anonymous author to be established at least on a prima facie basis, so that the injured person, as the plaintiff, can show a good faith belief that the disclosure would conclusively establish the jurisdiction;

121 The Japanese Code of Civil Procedure contains provisions for the collection of evidence prior to filing a suit (Ch. VI of Part I of the Code). But they are not available unless an advance notice of the filing of a suit has been given to the putative defendant. Accordingly, they are unhelpful where the identity of the putative defendant is unknown. 122 As discussed under section II. above. 123 See supra (note 8).

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Unmasking Anonymous Online Infringers of Personality Rights (4)

require the plaintiff and the ISPs to notify, to the extent possible, the anonymous author of the application for disclosure and allow the latter to contest the jurisdiction as well as other prerequisites for disclosure without revealing his or her identity;

(5)

allow a foreign disclosure order to be enforced with a light-touch review of jurisdiction and procedure; and,

(6)

exempt ISPs from liability towards the author for the breach of their duty of confidentiality provided that they have complied in good faith with a disclosure order or an enforcement decision thereof.

Some comments on each of these elements seem due. With respect to Element (1), while it is possible to bring suits against unnamed defendants in England and the United States, it is not universally so.124 If a suit cannot be filed against an anonymous author, it may be necessary to take the cumbersome step of instituting two separate proceedings to make two claims for disclosure: the first against the host of the server or website (② in FIGURE above) and the second against the internet access provider (③ in FIGURE above). If the author is not party to the proceedings, the ISPs may not be able to adequately represent his or her interest. With respect to Element (2), it would not be necessary to make a substantive (non-procedural) right of disclosure available. A claim based on a substantive right, as available in Japanese law, could be made in and out of court. But there is little point in allowing an out-of-court claim for disclosure since the ISPs would invariably resist such a claim in order to avoid liability towards the author. A claim based on a substantive right would also give rise to a difficult choice-of-law question, which is not raised by a procedural disclosure order. The latter instead raises the question of jurisdiction to prescribe. It is often necessary to make an order of extra-territorial scope but it would not violate the sovereignty of other states unless a coercive measure of enforcement is additionally taken.125 Element (3) is necessary to give the author jurisdictional protection, allowing him or her to oppose disclosure in a forum which would have jurisdiction over substantive proceedings. It must be admitted that where the defendant’s identity is unknown, a complete jurisdictional inquiry is not possible. Thus, while the defendant’s place of domicile or habitual residence is a ground of jurisdiction in many 124 Thus, in Japan, the civil procedure rules generally do not allow an unnamed defendant to be sued. Art. 133(2) of the Japanese Code of Civil Procedure provides in the relevant part (the present author’s translation): “A claim form shall state the following matters: (i) the parties and their statutory agents;” […] It has been discussed whether to introduce the John Doe type suits for the cases of anonymous online authors but has been concluded to be difficult since it would have farreaching implications for all aspects of civil procedure from the commencement of suit to the effect of judgments: WORKING GROUP ON THE REVIEW OF THE ACT ON THE LIMITATION OF LIABILITY OF THE PROVIDERS OF SPECIFIED TELECOMMUNICATION SERVICES, Recommendation of the Working Group on the Review of the Act on the Limitation of Liability of the Providers of Specified Telecommunication Services (2011), p. 40 (in Japanese). 125 See supra (note 104).

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Koji Takahashi states, it will often be impossible to ascertain (or even guess) where such places are situated if the defendant is anonymous. Jurisdiction may, however, be founded under the loci damni rule on the basis of accessibility of the offending online content in the forum state126 or under the loci actus rule by way of geolocation of the IP address (where known to the plaintiff) used to post the content.127 Again, where the law requires an overall assessment of factual circumstances, as does the US minimum contacts test, a full-fledged jurisdictional inquiry is not possible. It should, therefore, be considered to be sufficient to establish jurisdiction on a prima facie basis, a low threshold test which can be satisfied by showing a good faith belief that the disclosure would conclusively establish the jurisdiction.128 Element (4) is necessary to give, to the extent possible, the author an opportunity to anonymously oppose the application for disclosure. As seen above, while in the United States, the plaintiffs are generally required to make efforts to notify the anonymous author of their claim,129 Japanese law makes it mandatory for the ISP, from whom disclosure is sought, to consult with the author unless the latter cannot be contacted.130 Among the different types of ISPs, the administrator of the website used by the author may only know the IP address used, whereas the internet access provider is more likely to be able to contact the author. It would be possible for the author to oppose disclosure without revealing his or her identity by, for example, submitting a written response or retaining counsel. Element (5) would be useful since the ISPs may not be willing to comply with a disclosure order unless it is recognised or enforced in the states, such as their home state or the state in which they store the information sought, where a suit is likely to be brought to pursue their liability towards the author for breach of their duties of confidentiality. While the simplicity of the Californian Act for the enforcement of foreign subpoenas is attractive, an express provision on jurisdictional and procedural review would be helpful to improve clarity. The review should have a light touch because a full-fledged jurisdictional inquiry is not possible while the defendant author is anonymous and because notice to the author cannot always be given. Element (6) would be useful to avoid double jeopardy for the ISPs. To come up with a suitable expression for good faith compliance, the Privacy policy statement of some ISPs131 may offer helpful guidance.

See supra (note 41). See the text reproduced supra note 68. 128 See the text reproduced supra note 61 for a ruling applying a similar test. 129 See supra (note 65). 130 See supra (note 12). 131 See supra (note 98) for an example. 126 127

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FIVE LAY COMMANDMENTS FOR THE EU PRIVATE INTERNATIONAL LAW OF COMPANIES Massimo V. BENEDETTELLI*

I. II. III. IV. V.

VI. VII.

I.

Foreword: the Need for Guiding Principles to Coordinate the Legal Systems of the EU Member States in the Field of Company Law “Know Thyself” or: Understanding Functions and Limits of the EU Harmonization of the Private International Law of Companies “Nothing in Excess” or: Subsidiarity and Proportionality as Foundations for the European Market of Company Laws “Thou Shalt not Take the Name of Company Law in Vain” or: the Fundamental Preliminary Issue of Characterization “Thou Shalt not Have Fora other than the State of Incorporation” or: the Jurisdictional Approach Method for Solving Conflicts of Laws and Jurisdictions on Company Law Matters “Honour thy Shareholders” or: Respecting the Will of the Parties to the Corporate Contract Conclusions: the EU as Framework for a Virtuous Forum and Law Shopping in the Field of Company Law

Foreword: the Need for Guiding Principles to Coordinate the Legal Systems of the EU Member States in the Field of Company Law

Since the very first years of the European integration process a paradox has accompanied, as a sort of unpleasantly dissonant basso continuo, the efforts of the European Community (now, the European Union) to coordinate the legal systems of the Member States in the field of company law. Companies are among the main players of the “internal market”, i.e. the “area without internal frontiers” where the free movement of goods, persons, services and capital is ensured and whose establishment and correct functioning is instrumental to achieving the objectives of the EU. Indeed, they benefit from the fundamental freedom of circulation through which the internal market is supposed to achieve higher efficiency levels, while being the addressees of the obligations

*

Professor of International Law, University “Aldo Moro”, Bari.

Yearbook of Private International Law, Volume 17 (2015/2016), pp. 209-251 © Verlag Dr. Otto Schmidt & Swiss Institute of Comparative Law

Printed in Germany

Massimo V. Benedettelli which EU competition law lays down for the purpose of guaranteeing that the internal market works properly.1 Companies, however, do not exist in nature. In contrast to individuals, they are “creatures” of the law, mostly State law. As a result, when a company which came into existence under the law of a given State enters into a contact with one or more other States, the coordination of the relevant legal systems become necessary. Indeed, it must be determined whether and on which conditions such a company “exists” as a distinct legal subject and is consequently entitled to take part in legal commerce, as well as to what extent laws other than the company’s law of incorporation can apply to its organization and activities. This means that the governance of companies doing business on a cross-border basis inevitably carries with it a private international law dimension which needs to be considered before delving into any regulation of issues of substance. Indeed, this was already clear to the “founding fathers” of the European integration. Back in 1957, when drafting the Treaty establishing the European Economic Community, they were certainly aware that the different content of the private international law of companies in force within the six original Member States could give rise to problems. However, they decided to deal with this matter through the “soft” provision of Article 220, according to which the Member States were requested to enter into negotiations with each other “so far as is necessary”, with a view to securing “the mutual recognition of companies or firms within the meaning of the second paragraph of Article 58, the retention of legal personality in the event of transfer of their seat from one country to another, and the possibility of mergers between companies or firms governed by the laws of different countries”. Quite likely, the drafters of the Treaty of Rome were led into this solution by the irreconcilable clash between Member States that support the doctrine of “incorporation”2 and Member States that support the doctrine of “real seat”.3

1 See Treaty on the Functioning of the European Union (“TFEU”), Arts. 26(2), 54, 49, 56, 101, 102, Treaty on European Union (“TEU”), Art. 3(3). See also Charter of the Fundamental Rights of the European Union, Art. 16 (protecting as a fundamental human right the freedom to conduct a business). 2 Pursuant to this doctrine companies are governed by the law of the place where their registered office is located (Gründungsorttheorie) or by the law of the State under the laws of which they have been incorporated (Gründungstheorie): on the quite different meaning of these two versions of the doctrine see E. BRÖDERMANN, Das Europäische Gemeinschaftsrecht als Quelle und Schranke des Internationalen Privatrechts (Primärrecht, Verordnungen, Richterrecht), in Europäische Gemeinschaftsrecht und Internationalen Privatrechts, Tübingen 1994, p. 62. 3 Under this doctrine companies are governed by the law of the place where they are actually managed (i.e., where their administrative bodies normally take their resolutions) or where they entertain most of their dealings with third parties. These two connecting factors do not necessarily coincide. See G. KEGEL, Internationales Privatrecht, Munich 1995, p. 416.

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Five Lay Commandments for the EU Private International Law of Companies However, the setting-up of an obligation to enter into an international treaty without providing for any deadline by which such obligation had to be fulfilled, or any remedy in case negotiations stalled, proved to be an inefficient tool. It is true that on 29 February 1968 the Member States were already able to reach agreement on the text of a Convention on The Mutual Recognition of Companies.4 It is also true, however, that the refusal of one Member State, The Netherlands, to proceed with the ratification of this treaty was enough to lead to the abandonment of the project. The provision of Article 220 was eventually repealed.5 The task of filling the resulting gap has been taken over by the Court of Justice of the European Union (the “ECJ”). As is well known, the starting point has been the ECJ’s landmark judgment in the Centros case,6 followed by the decisions in the cases Überseering,7 Inspire Art,8 SEVIC,9 Cartesio10 and VALE,11 where the ECJ’s position on how to coordinate the legal systems of the Member States in the field of company law (hereinafter, the “Centros doctrine”) has been clarified and overhauled. This has not been enough, though. Court decisions are by definition episodic and constrained by the facts of the dispute that is at hand. Moreover, the succinct, sometimes hermetic style of the ECJ’s decisions does not facilitate the building up of consistent and complete legal theories unless one manages to bring to light the assumptions and corollaries often hidden within the ECJ’s reasoning. Moreover, the need for a better coordination of the Member States’ legal systems through the tools of private international law has been exacerbated by the “minimal harmonization” approach adopted by the EU institutions in recent years in relation to company law and related matters.12 In Bulletin of the European Communities, Supplement 2/69, p. 7 et seq. Treaty of Lisbon, amending the TEU and the Treaty Establishing the European Community (“TEC”), Art. 280. 6 ECJ, March 9, 1999, C-212/97, Centros Ltd, [1999] ECR I-1459. 7 ECJ, November 5, 2002, C-208/00, Überseering B.V., [2002] ECR I-9919. 8 ECJ, September 30, 2003, C-167/01, Inspire Art Ltd, [2003] ECR I-10195. 9 ECJ, December 13, 2005, C-411/03, SEVIC Systems AG, [2005] ECR I-10825. 10 ECJ, December 16, 2008, C-210/06, Cartesio Oktatò és Szolgàltatò bt, [2008] ECR I-9641. 11 ECJ, July 12, 2012, C-378/10, VALE Épitési kft, [2012] ECR I-440. 12 See High Level Group of Company Law Experts, Report on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, available at . See also M.M. SIEMS, Convergence in Shareholder Law, Cambridge 2007, p. 243 et seq; C. GERNERBEUERLE, United in diversity: maximum versus minimum harmonization in EU securities regulation, Capital Markets Law Journal 2012, p. 317 et seq.; S. DEAKIN, Two Types of Regulatory Competition: Competitive Federalism versus Reflexive Harmonization, Cambridge Yearbook of European Legal Studies 1999, p. 231 et seq; K. HOPT, Company Law in the European Union: Harmonization and/or Subsidiarity?, International Comparative Corporate Law Review, 1999, p. 41 et seq; F. M. MUCCIARELLI, Problemi aperti in tema di offerte pubbliche d’acquisto transfrontaliere, Banca, borsa, titoli di credito 2009, p. 396 et seq. 4 5

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Massimo V. Benedettelli In fact, Directives and Regulations which impose upon Member States only a few rules of uniform substantive law, and otherwise safeguard their freedom to regulate a certain matter as they deem more appropriate, result in the coexistence within the EU territory of many different regimes which may apply to the same matter and thereby give rise to conflicts. Those same Directives and Regulations, however, often set out in parallel “hard-and-fast” rules for the purposes of allocating jurisdictional powers among the Member States, determining the law that their institutions have to apply when such powers are exercised, and requiring that measures thus enacted are automatically recognized throughout the EU.13 In this sense it could be said that the minimal harmonization actually morphs into a “maximal” harmonization when it comes to private international law. Against this background it is then unfortunate that for a long time the EU institutions have not realized the importance of addressing the private international law dimension of company law in a more structured, reasoned and coherent manner.14 This lack of care continues to affect the EU legislative action. In December 2012, the Commission published its “Action Plan” on company law and corporate governance,15 which sets out three main objectives16 13 This is what happened, e.g., with the Takeover Directive (Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids, E.C.O.J., L 142, 2004, 12), the MiFID Directive (Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, E.C.O.J, L 145, 2004, 1, recast through Directive 2014/65/EU of the European Parliament and Council of 15 May 2014, E.U.O.J, L 173, 2014, 349), the Cross-Border Insolvencies Regulation (Council Regulation (EC) 1346/2000 of 29 May 2000 on insolvency proceedings, E.C.O.J., L 160, 2000, 1). An analysis of the private international law dimension of these three instruments is set out, respectively, in M.V. BENEDETTELLI, Offerte pubbliche d’acquisto e concorrenza tra ordinamenti nel sistema comunitario, Banca, borsa, titoli di credito 2007, p. 551 et seq and Id., Le opa transfrontaliere nell’ordinamento italiano, Rivista delle società, 2011, p. 221 et seq; Id., Profili internazionalprivatistici della disciplina comunitaria dei mercati finanziari: la Direttiva MiFID tra conflitti di legge e conflitti di giurisdizione, Rivista di diritto societario 2010, p. 35 et seq; “Centro degli interessi principali” del debitore e forum shopping nella disciplina comunitaria delle procedure di insolvenza transfrontaliera, Riv. dir. int. priv. proc. 2004, p. 499 et seq and Id., “Centre of Main Interests” of the Debtor under EU Regulation 1346/2000 and Insolvency of Cross-Border Groups: a Private International Law Perspective, in Bank of Italy, Insolvency and Cross-Border Groups. UNCITRAL Recommendations for a European Perspective? 2011, p. 122 et seq. 14 In August 2014, in reaction to a resolution of the European Parliament of 14 June 2012 on the future of company law (available at ) in which the European Parliament took the view that “conflict-of-law issues also need to be tackled in the field of company law”, the European Commission launched a tender for a study on the law applicable to companies with the aim of a possible harmonisation of the relevant conflict of laws rules. The study, which is expected to focus on issues of applicable law only without dealing with other related private international law issues such as international jurisdiction and recognition of foreign judgments, has not yet been published. 15 EU Commission, Action Plan: European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable

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Five Lay Commandments for the EU Private International Law of Companies and identifies various initiatives that the Commission intends to pursue in that regard. Most of these initiatives have private international law implications. This is obvious for the areas of cross-border mergers, cross-border divisions and transfers of the company’s registered office abroad, but is also true for many of the other possible reforms therein contemplated.17 It is surprising then that not a single line of the 2012 Action Plan was dedicated to the private international law of companies. A possible explanation may be that the document largely draws on a prior “Report on the future of EU Company Law” drafted by the so-called “Reflection Group”.18 This was a body established by the Commission in 2010 and composed exclusively of distinguished scholars and practitioners of company and capital markets law. As a matter of fact, in its report the Reflection Group was comfortable to touch briefly upon what it calls “international private law”19 to then state, in a slightly contradictory fashion, that any examination of conflict issues “should be undertaken on its own by experts well versed in this particular field with a view to providing a coherent outcome”.20 Even more surprising has been the Commission’s recent decision to set up another group of experts for the purpose of studying improvements to the regime regulating cross-border mergers and its possible extension to cross-border divisions without requesting input from private international law scholars, despite

companies, December 12, 2012, COM (2012) 740 final, available at . 16 They are: “enhancing transparency”, “engaging shareholders” and “supporting companies’ growth and competitiveness through the simplification of their cross-border operations”. 17 When dealing with “shareholders’ control over related-party transactions, transparency and conflict-of-interests frameworks applicable to proxy advisors, investors’ cooperation and acting-in-concert rules” or with “the recognition of the concept of group interest” one should also consider that (i) companies can be incorporated under the law of a Member State different than the Member State under whose laws the capital market where the company is listed is organized, (ii) company groups can be composed of companies incorporated under different laws, (iii) the remedies for guaranteeing and enforcing the relevant regulations can be potentially activated before courts and authorities of different Member States. Similarly, in order to “improve the awareness of the potentials of the European Company” the EU legislator must clarify, and simplify, the complex interplay among the different EU and domestic law sources which determine the lex societatis applicable to the European Company (on which see infra, fn. 91). As to the “enhancement of the legal certainty by codification” it obviously requires also a clarification of the principles and rules of private international law applicable to companies which are active within the internal market. 18 See European Commission, Report of the Reflection Group On the Future of EU Company Law, April 5, 2011, Brussels, available at . 19 This seems a literal (and unusual) translation from the German Internationales Privatrecht. 20 Ibid., p. 23.

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Massimo V. Benedettelli the many issues of conflict of laws and jurisdictions to which these corporate transactions inevitably give rise.21 As such, “European company law” continues to reflect a paradox. Those same EU institutions which praise it as “a cornerstone of the internal market”22 often seem to ignore the very foundations on which such cornerstone stand, i.e. those issues of competent jurisdiction, applicable law, recognition of judgments and other measures which in cross-border situations determine whether instruments of company EU law can actually achieve their objectives and whether companies can exercise their freedom of establishment in a context where “transparency, legal certainty and control of their operations”23 is ensured. This paradox can be overcome only if one achieves clarity on what the EU private international law of companies really is and how the EU institutions have to behave if they want to properly handle it, eventually through the enactment of a new “Rome III” instrument focusing on company law. This article seeks to contribute to this long-awaited process of clarification by proposing guidelines designed to inspire legislative bodies, administrative agencies, courts and practitioners when dealing with this rather peculiar area of the law. These guidelines are proposed in the form of “lay commandments”. The suggested commandments are “lay” not only because their number is five, rather than the customary ten, and their formulas draw from the different cultural traditions of Europe. They are lay also because, far from being intended as enshrining absolute truths, they are tendered as a possible platform for that longawaited debate on the function, contents and tools of the EU private international law of companies which, in this author’s opinion, should precede any legislative reform in this complex area of legal theory and practice.

II.

“Know Thyself” or: Understanding Functions and Limits of the EU Harmonization of the Private International Law of Companies

Γνώθι Σεαυτόν (Know Thyself). The maxim inscribed in the pronaos of the temple of Apollon in Delphi – a sort of ante litteram psychoanalytic suggestion that any action should be grounded See M.V. BENEDETTELLI/ G. RESCIO, Note on Cross-Border Mergers and Divisions, filed in the context of the Consultation on cross-border mergers and divisions launched in 2014 by the EU Commission/DG Market and published in Rivista di diritto societario, 2014, p. 600 et seq. The Summary of the responses to such consultation (available at ) was published in October 2015. 22 Commission, 2012 Action Plan, (note 15), at p. 3 et seq. 23 Ibid. 21

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Five Lay Commandments for the EU Private International Law of Companies on a prior self-reflection on one’s own true identity – may well be invoked as a first commandment for anyone dealing with the EU private international law of companies. Indeed, any initiative seeking to coordinate the regulation of companies that operate throughout the EU is, by definition, at the cross-road of three very distinct areas of legal discourse and practice, namely private international law, EU law and company law. Scholars and experts in either of them may not necessarily be fully versed in the others, and this may be the source of misunderstandings and lack of communication when issues of company regulation are handled from any one of such different perspectives. At the risk of stating the obvious, it is worth starting with a recap of some basic, mostly uncontroversial, notions about the scope of these three different disciplines. Very broadly speaking, private international law is that branch of a State’s legal system which deals with “international” or “cross-border” private relationships. It aims to coordinate the regulation which a State (the “forum”) gives to such private relationships with the regulation that they receive in foreign States with which such legal relationships are actually or potentially connected, so as to shun “conflicts of laws” and/or “conflict of jurisdictions”. This is done by way of an integrated system of rules which typically (i) set up limits to the forum’s judicial jurisdiction, (ii) determine whether the forum’s courts have to apply domestic or foreign law and (iii) identify the conditions upon which foreign proceedings, judgments or other public measures can be given effect within the forum. Without prejudice to any provision of uniform law contained in international treaties, each State remains in principle free to shape its private international law as it sees fit in its sovereign autonomy for the purpose of protecting the needs of its national community and fulfilling its policy objectives. Indeed, experience shows that private international law may vary from State to State, and even within the same State with respect to different private law institutions. As pointed out by the most advanced legal scholarship,24 this is the reflection of different “methods” which the forum may rely upon in pursuing the general aim of coordination with foreign legal systems in the regulation of private matters. The specific objectives that the forum may try to achieve in different areas of the law when pursuing such general aim of coordination may, in fact, be different, and such difference may trigger the need for recourse to different legal techniques. Company law is one sector of legal commerce whose peculiarities may justify reliance on a specific method for better achieving coordination between the forum and foreign legal systems. As to EU law, this is the law of an international organization set up by a group of States that wish to “integrate” their economic, social and legal systems while keeping their status of sovereign entities. On the different private international law methods used by contemporary legal systems See the seminal work by P. PICONE, Les méthodes de coordination entre ordres juridiques en droit international privé, Recueil des Cours 276, 1999, p. 9 et seq. See also the authors cited infra, fn. 95, on the “unilateralist” trend in private international law. 24

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Massimo V. Benedettelli This objective is pursued through means that make the European Union a unique-in-its-kind international organization. Among such special features of the EU are (i) the partial transfer of normative powers from the Member States to the common EU institutions, (ii) the direct regulation of private parties by way of rules and measures which apply directly to them, (iii) the “higher status” of EU law which, in the event of conflicts, automatically prevails over national law, (iv) the EU’s lack of power of coercion, so that the enforcement of rules or measures of EU law over defaulting parties ultimately falls on the judicial and administrative apparatus of the Member States. These special features may be of great relevance in understanding the scope and limits of the EU harmonization of the company laws of the Member States, including with respect to their private international law dimension. Finally, company law is the law regulating entities which, in the ECJ’s words, “unlike natural persons… exist only by virtue of the varying national legislation which determines their incorporation and functioning”.25 This seemingly circular definition is quite telling. It focuses attention on a peculiar feature of companies as legal institutions. In fact, companies were “invented” in the early days of modern capitalism when States decided to foster the raising of funds for running large-scale businesses by granting to individuals who wanted to carry on entrepreneurial activities the “privilege” of keeping their personal assets and liabilities separate from the assets and liabilities of their joint enterprise. Whether the result of acts of incorporation issued on an ad hoc basis by governments in the exercise of their political discretion (as it was originally the case) or the automatic effect stemming from the execution of standardized contracts (as it happens today), such privilege basically turns into the setting up of a special legal regime (the lex societatis). Indeed, the lex societatis is a system of special rules which derogate from the “general” private law rules regulating the responsibility of private parties for their contractual or tortious obligations as well as the modalities by which such obligations can be undertaken or generated. In this sense, company law is lex specialis vis-à-vis the law of contracts or the law of torts. One could even say that companies as legal fictions actually are nothing but the very special set of rules under which certain collective entrepreneurial activities are organized. States are free to determine the contents of such lex specialis, i.e. the extent to which deviations from the general law of contracts or tort are necessary. In particular, States can devise different “models” of corporate organization, also as a reflection of different policy judgements about the right balance to be established between the different categories of stakeholders which are directly or indirectly affected by a company and its operations (managers and other corporate bodies, majority shareholders, minority shareholders, investors in financial instruments, creditors, employees, etc.).

ECJ, September 27, 1988, 81/87, The Queen ex parte Daily Mail and General Trust Plc, [1988] ECR I-5505, § 19. 25

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Five Lay Commandments for the EU Private International Law of Companies When laying down different “types” of companies, States can also restrict the scope of company law rules which can be disposed of by the founders and shareholders.26 Mandatory rules can, in fact, be set out for the protection of “unwilling/un-adjusting” creditors (such as tax authorities and tort victims)27 as well as contractual counterparties that are deemed to be “weak” in terms of bargaining power (such as employees and retail investors in financial instruments). In cross-border scenarios these mandatory rules of company law shall be effective as long as the State of incorporation is able to react to their possible circumvention by entrepreneurs through forum and law shopping practices. All this is relevant to understand the true function, and the ensuing limits, of the EU private international law of companies. First, it must be highlighted that, technically speaking, an “EU private international law” stricto sensu does not, and cannot, exist, for the simple reason that the EU is not a State, not even a federal one.28 The EU can certainly provide rules, or principles, for the harmonization of the private international laws of its Member States, but such private international laws remain different and autonomous. Indeed, a full “absorption” by the EU of regulatory powers in this field would not only run counter to the EU “constitutional” principles of conferral, subsidiarity and proportionality.29 It would also be impossible, since the EU lacks its own complete regulation of private law matters and therefore does not face the same general problem of coordination with foreign law in cross-border situations which is typically faced by sovereign States. Thus, notwithstanding the existence of several Directives and Regulations providing for uniform rules on jurisdiction, applicable law and recognition of judgments and other measures, private international law as a system remains within the realm of the Member States. This holds true also for the subject at hand. The private international law regulation of companies is still largely a matter of domestic law and it varies, sometimes substantially, from one Member State to another, depending on the specific private international “method” chosen30 and the way in which this is applied to solve all the questions which arise in the coordination of different legal systems. This problem is often reduced to a mere contraposition between conflictof-law rules following the “incorporation theory” and conflict-of-law rules following the “real seat theory”, but this is simplistic and naîve. In fact, even Member States sponsoring the same theory may end-up with different or even

See D. CORAPI, Mandatory and Non Mandatory Rules in Corporate Law, in Convergence of Legal Systems in the 21st Century, Bruxelles 2006, p. 655 et seq. 27 J. ARMOUR/ W.G. RINGE, European Company Law 1999-2010: Renaissance and Crisis, Common Market Law Review 2011, p. 173 et seq. 28 See amplius M.V. BENEDETTELLI, Connecting factors, principles of coordination between conflict systems, criteria of applicability: three different notions for a “European Community private international law”, Diritto dell’unione europea 2005, p. 421 et seq. 29 See infra, sub III. 30 See supra, fn. 24 and related text. 26

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Massimo V. Benedettelli opposing solutions31 because of a variety of elements such as the different meaning given to the relevant connecting factor,32 exceptions and mitigations to the way in which the conflict-of-law rule operates,33 differences in the handling of general issues (such as characterisation, preliminary questions, renvoi, proof of foreign law), differences in the applicable rules of civil procedure. Moreover, the contraposition between “incorporation theory” and “real seat theory” focuses only on the question of the applicable law, as if the questions of competent jurisdiction and recognition of foreign judgments would be immaterial, what is clearly mistaken. Ignoring the peculiarities of the Member States’ private international law of companies can be prejudicial to the effectiveness of any EU provision regulating companies and their activities within the internal market. First, the enforcement of any EU company law rule ultimately depends on which court or other authority will retain jurisdiction in any relevant dispute, whether such court or authority will apply its domestic law, the law of another Member State or the law of a non-Member State, which effect will be granted in

31 See M.V. BENEDETTELLI, Società ed altri enti, in R. BARATTA (eds.) Diritto internazionale privato, Milano 2010, p. 450 et seq. This point is not considered by P. PASCHALIDIS, Freedom of Establishment and Private International Law for Corporations, Oxford 2012, p. 4-14, who misses the fact that the connecting factors of the “place of incorporation” and of the “administrative seat” (see supra, fn. 2 and 3, and infra, fn. 32), as well as the renvoi of the forum to foreign private international law (see infra, fn. 93), may be given different meanings and may work very differently in different legal systems. 32 On the multiple notions, and on the different functions, which in contemporary legal systems the “seat” of a company can have, see M.V. BENEDETTELLI, Sul trasferimento della sede sociale all'estero, Rivista delle società 2010, p. 1251 et seq. 33 It is not unusual to find “mixed systems”. See, e.g.: Art. 25(1) of the Italian private international law statute (law 31 May 1995, n. 218), providing that companies are governed by the law of the State “in the territory of which the proceedings for their formation have been perfected”, but that Italian law applies to such entities when “the seat of their administration or their principal scope of business” is located in Italy (on the working of these provisions, See M.V. BENEDETTELLI, La legge regolatrice delle persone giuridiche dopo la riforma del diritto internazionale privato, Rivista delle società 1997, p. 39 et seq.); Arts. 2 and 6 of the Dutch private international law statute (law 17 December 1997), providing respectively, that companies are governed by the law of the State where in accordance with its contract or other instrument of incorporation the company has its registered office or, failing that, where the company maintains the centre of its external operations in the State under the law of which it was formed, without prejudice to the law on formally foreign companies of 17 December 1997 which commands the application of certain rules of Dutch company law to foreign companies which do most or all of their business in The Netherlands; Art. 18 of the Hungarian private international law statute (Decree-law no. 13 of 1979) according to which the law applicable to a legal entity is the law of the State in the territory of which it is registered, while, if the same entity has been lawfully registered under the laws of several States, or if registration is not required under the rules applicable in the place where the seat designated in its articles of association is located, the applicable law shall be that of the State of the seat, and if no seat is designated in the articles or the entity has seats in different States, of the State where the company’s central administration is situated.

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Five Lay Commandments for the EU Private International Law of Companies the relevant forum to judgments of other courts or measures of other authorities, including courts or authorities of non-Member States. Moreover, harmonization Directives and Regulations in the field of company law often refer to notions of domestic law, so that their operation is often affected by the solution given to the prior question of what law must be applied for determining the meaning of such notions. Thus, the EU institutions would be well advised to preliminarily address all such issues when enacting instruments in this field. Second, as a result of the abovementioned peculiar features of the EU as an international organization, the harmonization of the Member States’ private international laws will function in a very different way when the relevant crossborder matter is internal to the EU, in the sense that it involves the legal systems of two or more Member States only, as opposed to when it involves the legal systems of third party States that are not EU members. In the first scenario the “supremacy” which EU law enjoys over national law allows the EU to better achieve the objective of coordinating the relevant legal systems, in a sort of quasi-federal “inter-local” law perspective, since all Member States must comply with whatever provision is enacted by the EU for the purpose. This is even truer when such coordination is predicated on provisions of the founding Treaties, as it occurs when the ECJ draws principles on the private international law of companies from Article 49 TFEU regulating the freedom of establishment. In this case, in fact, even acts of EU secondary law, such as Directives and Regulations – including harmonization Directives pursuant to Article 50(2)(g) TFEU and Regulations laying down uniform rules of private international law of the kind of Regulations “Brussels I”,34 “Rome I”35 and “Rome II”36 – must be construed and applied consistently with the relevant provisions of EU primary law. Third, the fact that the EU enjoys only a limited set of competences granted to it by the Member States for the attainment of a limited set of objectives37 always triggers the preliminary question of whether any given provision of EU law is intended to apply to a given situation or not. EU law usually addresses this issue by relying on pre-determined criteria, the presence of which makes the situation relevant for EU objectives and triggers the application of a given provision. These “criteria of applicability” can easily be mistaken with the “connecting factors” laid

34 Council Regulation (EC) 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters in the European Union, E.C.O.J., L 12, 2001, 1, as recast through Regulation (EU) 1215/2012 of the European Parliament and of the Council of 12 December 2012, E.U.O.J., L 351, 2012, 1. 35 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations, E.U.O.J., L 177, 2008, 6. 36 Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations, E.U.O.J., L 199, 2007, 40. 37 See Art. 5 TFEU.

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Massimo V. Benedettelli down by conflict-of-law rules for determining the applicable law,38 but they are not the same.39 Indeed, they play the entirely different function of unilaterally fixing the scope of application of EU law. They do not deal with the (logically subsequent) private international law questions of whether EU law has to be applied at all in cross-border situations involving non-Member States, which among the various Member States has jurisdiction to enforce EU law and which among the various Member State laws implementing EU law has to be applied for the purpose by the competent court. For instance, contrary to what some authors missing this distinction have argued,40 Article 54 TFEU, whereby companies “formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union” are to be treated as natural persons who are nationals of Member States, provides only for a criterion of applicability of the provisions on the freedom of establishment and free movement of services and not also for a conflict-of-law rule, be it express or caché, on the applicable lex societatis. Fourth, the personification of companies as “creatures” of the law should be taken for what it really is, just a good rhetorical device indicating in a synthetic and quick way that special legal regime which in a certain jurisdiction applies to the carrying out of collective entrepreneurial activities in an organized form, and nothing more. In this respect the equation of natural and legal persons may be misleading if one does not appreciate that, as opposed to individuals who exist in nature before and irrespective of any regulation by a legal system, companies (as

This confusion may have been generated by the fact that the ECJ, when interpreting the provision of Art. 49 TFEU, often refers to registered office, central administration and principal place of business as “connecting factors with the legal system of a particular State” (see Centros, (note 6), § 20; Inspire Art, (note 8), § 97). However, the ECJ is also very clear in pointing out that such “connecting factors” play the same function of nationality for natural persons, i.e. they are a quality by virtue of which an entity enjoys the benefit of the freedom of establishment, rather than a criterion to determine the law applicable in cross-border matters (see Centros, ibid.). Indeed, Member States could use other connecting factors stricto sensu for the purpose of creating companies governed by their own law, and such entities would also be entitled to the freedom of establishment if their registered office, central administration and principal place of business happens to be located within the EU. On the other hand, as clarified by the General Programme for the abolition of restrictions on freedom of establishment of 18 December 1961 (in O.J E.C., 15 January 1962, no. 2), the fact that a company has been validly created under the law of a Member State and maintains its registered office within the EU is not sufficient to make it a beneficiary of the freedom of establishment if its central administration and principal place of business are outside the EU. 39 See M.V. BENEDETTELLI, (note 28). See also M. FALLON, Les conflits de lois et de jurisdictions dans un espace économique intégré. L’expérience de la Communauté Européenne, in Recueil des Cours, 1995, 9, p. 195 et seq. 40 E. BRÖDERMANN, (note 3), p. 75 et seq.; E. WYMEERSCH, Il trasferimento della sede della società nel diritto societario europeo, Rivista delle società 2003, p. 723 et seq and p. 748; P. PASCHALIDIS, (note 31), at p. 34. 38

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Five Lay Commandments for the EU Private International Law of Companies other legal persons) are just organizations of individuals and assets in accordance with a pre-established set of rules.41 These theoretical premises evidence that the private international law dimension of the regulation of companies within the EU is threefold. At the outset, and obviously, in order to enjoy the freedoms of movement guaranteed by EU law, and to be subject to the obligations that EU law imposes on market operators, a company must first of all… exist, and must be recognized as existent throughout the entire EU.42 The provision of Article 49 TFEU would be emasculated if, as a result of the interplay between the different private international laws (in particular, due to the adoption of different connecting factors or different rules on renvoi), “positive” or “negative conflicts” were to arise between two or more Member States as to whether a company has or has not been validly created and under which law it is organized. Moreover, it is also quite evident that the effectiveness of EU law could be jeopardised if a Member State, after having recognized legal capacity to a company originally incorporated under a foreign law, were to consider it as a domestic company, e.g. as a result of its re-qualification into a partnership governed by the law of the forum.43 This approach, in fact, would overshadow the cross-border nature of such a company’s activities. It would entail the risk, on the one hand, of wrongly considering the activities of such a company as “situations purely internal to a Member State” a priori out of the scope of EU law44 and, on the other hand, of denying such a company the benefit of those provisions of EU law which prohibit discriminations on the ground of nationality. Finally, it is also a source of problems, perhaps less evident ones, the situation which materializes when a State, while recognizing a company as a foreign entity, submits it in total or in part to its own company law.45 This, in fact, See amplius M.V. BENEDETTELLI, Libertà comunitarie di circolazione e diritto internazionale privato delle società, Riv. dir. int. priv. proc. 2001, p. 573 et seq. 42 See ECJ, Überseering, (note 7), § 59 (“a necessary precondition for the exercise of the freedom of establishment is the recognition of those companies by any Member State in which they wish to establish themselves”). 43 E.g., under German law a foreign company having its “real seat” in Germany is re-characterised either as an offene Handelsgesellschaft or as a Gesellschaft bürgerlichen Rechts, depending on whether it has carried on commercial activities: See F. KÖSTERS, Rechtsträgerschaft und Haftung bei Kapitalgesellschaften ohne Verwaltungssitz im Gründunsstaat, Neue Zeitschrift für Gesellschaftsrecht 1998, p. 241 et seq. 44 ECJ, February 28, 2008, C-398/05, Commission v. France, [2008] ECR I-5397; November 30, 1995, C-134/94, Esso Española, [1995] ECR I-4223; October 3, 1990, C-54/88, C-91/88 and C-14/89, Nino et al., [1990] ECR I-3537. 45 To put it in the ECJ’s own words in Überseering, (note 7), § 81, “the very existence” of a company “is inseparable from its status as a company incorporated under” a given law since “a company exists only by virtue of the national legislation which determines its incorporation and functioning”, so that to require a company incorporated under the law of a Member State to reincorporate itself under the law of another Member State “is tantamount to outright negation of freedom of establishment”. This joint application of the company laws of two different Member States has been expressly prohibited by the ECJ in Inspire Art, (note 8), §§ 99-101. 41

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Massimo V. Benedettelli results in the creation of a Frankenstein-like monster, in disregard of both the will of the founders/shareholders when executing the deed of incorporation, or other equivalent acts, and the policy pursued by the State of incorporation when granting effect to such a contractual instrument. This kind of monster deserves no place in the EU,46 even less when, as will be argued below, the right of the entrepreneurs to choose the law of incorporation is elected as a protected freedom on its own.47

III. “Nothing in Excess” or: Subsidiarity and Proportionality as Foundations for the European Market of Company Laws On the opposite side of Apollon’s temple in Delphi another maxim offered ethical guidance to old Greeks and other Westerners: Μηδέν άγαν (Nothing in Excess). This invitation to moderation should hold true also for the European legislator when it faces issues of private international law, in particular in the field of companies and business activities. As mentioned previously, the EU is an international organization with a limited set of competences. Under the principle of conferral, the EU is required to act only when competences have been conferred on it through the Treaties to attain the relevant objectives. In all other cases the Member States keep sovereign powers to regulate the relevant matter,48 with the only, important limit that their exercise must not jeopardize the effet utile of EU law.49 Competences are conferred by the Treaties to the EU on an exclusive or shared basis. In areas which do not fall within the EU’s exclusive competence, the EU must comply with the principles of subsidiarity and proportionality. The first commands that the EU shall act “only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level”, the second requires that “the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties”.50 Subsidiarity and proportionality are essential elements of the European contrat social since they act as important counterweights to the “deepening” of the

Indeed, this is one of the corollaries of the Centros doctrine: See infra, § 59. See infra, sub VI. 48 TEU, Art. 5(1) and 5(2). TFEU, Art. 2(1). 49 ECJ, July 3, 1974, 91/74, Casagrande, [1974] ECR 773. 50 TEU, Art. 5(3) and 5(4), TFEU, Art. 2(2). 46 47

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Five Lay Commandments for the EU Private International Law of Companies European integration, providing legitimacy to the action of the Brussels institutions. They must be taken seriously.51 The establishment of an “area of freedom, security and justice” is a case of shared competences between the EU and the Member States. It includes the development of “judicial cooperation in civil matters” which have cross-border implications. Such cooperation may require measures for the “approximation of the laws and regulations of the Member States” when (i.e.: only if) this is “necessary for the proper functioning of the internal market”. These include measures aimed at ensuring, inter alia, “the compatibility of the rules applicable in the Member States concerning conflicts of laws and of jurisdiction” and “the mutual recognition and enforcement between Member States of judgments and decisions in extrajudicial cases”.52 These words of the TFEU clearly indicate that in the current phase of the European integration the existence of different systems of private international law within the 28 Member States should be taken as a datum, and that EU law can only play the role of making them compatible by approximating the relevant laws and regulations. Far from justifying a full “absorption” of competences by the EU, the TFEU then calls just for measures of harmonization of the Member States’ private international law. This appears quite reasonable as concerns the private international law of companies. Domestic company law often reflects the peculiarities of the different economic and social structures of the various Member States, and the relevant rules on conflict-of-laws and conflicts-of-jurisdictions follow suit. It is obvious, e.g., that the effectiveness of the “co-determination” model for the corporate governance of large enterprises is one of the main drivers of the German preference for the “real seat theory”,53 as the desire to offer the City of London as an efficient service platform for all businesses,54 irrespective of any link with the UK, may nowadays motivate the English preference for the “incorporation theory” (while, at the time of the British empire, it quite likely served the different purpose J. ARMOUR/ W.G. RINGE, (note 27), at p. 126 and 150, arguing that also the EU Commission, in its 2003 Company Law Action Plan, showed its willingness to take the principle of subsidiarity more seriously than before. 52 TFEU, Arts. 4(2)(j), 81(1), 81(2)(c), 81(2)(a). 53 See the arguments made by the Bundesgerichtshof in its request for a preliminary ruling in Überseering, (note 7), as reported in the ECJ’s judgment, §§ 15-16. Whether the “real seat” theory is really helpful to avoid circumventions of the rules on co-determination is a different matter, particularly in the globalization era when people and information can easily move cross-border: one can well imagine that a company whose plants and workforce are all located within the German territory may be “really” managed from another country, where all its board and shareholders meetings are “really” held and its top level management is “really” based. See EFTA Surveillance Authority arguing that “it is increasingly difficult to identify a company’s actual centre of administration in an international, computerized economy, in which the physical presence of decision-makers becomes increasingly unnecessary”, as reported in ECJ, Überseering, (note 7), § 51. 54 See J. ARMOUR, Who Should Make Corporate Law? EC Legislation versus Regulatory Competition, Current Legal Problems 2005, p. 369 et seq. 51

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Massimo V. Benedettelli of creating a common legal framework of reference for all domestic entrepreneurs doing business in the colonies). It will be shown later why, and within what limits, the Centros doctrine may be considered instrumental to the development of a European “market of company law”.55 For the moment it is enough to note that this objective implies that the EU, on the one hand, protects the Member States’ right to elaborate different models of corporate organization (including with respect to their private international law dimension, i.e. as to the scope of application of the lex societatis and to the means for its enforcement in cross-border situations), on the other hand, grants to entrepreneurs the freedom to choose the corporate model that from time to time better fits their business needs, thereby carrying out a “virtuous” forum and law shopping. This is a further reason for taking in this area an approach inspired by the subsidiarity and proportionality principles, and characterized by legislative selfrestraint. Proposals to enact a sort of “Rome III” Regulation in the field of company law should then be handled with great care. If the intention is to provide for a comprehensive set of rules of uniform law that would completely wipe out all existing differences in the private international law of companies of the Member States, the EU legislator should preliminarily wonder whether the strong compression of the Member States’ sovereignty that it would ensue is, in principle, legitimate. Even if the scope of the EU instrument were narrower, being confined to a mere harmonization, it would still be necessary to check whether each single provision of EU uniform law is really necessary for the proper functioning of the internal market and proportionate to its purported objective. One could also wonder whether the Centros doctrine as it stands would not already be sufficient for the proper coordination of the legal systems of the Member States in the field of company law. This is not the case. An EU legislative instrument in this area would still be very useful, not only because it could overcome the inevitably random approach of the ECJ by putting all different pieces of the puzzle together in a consistent framework. What is more important, it could also serve the important function of filling those gaps of regulation which still exist, as well as of bringing to light many implied assumptions and corollaries which are still hidden in the ECJ’s reasoning.

IV. “Thou Shalt not Take the Name of Company Law in Vain” or: the Fundamental Preliminary Issue of Characterization An area in respect of which there seems to be a gap in EU law regulation is what private international scholars call “characterization”, i.e. the identification of what 55

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Five Lay Commandments for the EU Private International Law of Companies constitutes a company law issue as opposed to an issue falling into other domains of the regulation of private relationships. It is in this sense that legislators, courts, public authorities and practitioners should be warned “Not to Take the Name of Company Law In Vain”. Companies normally come into existence as a result of acts of party autonomy, be it the execution of a deed of incorporation or a partnership agreement, or conclusive behaviours wilfully maintained by two or more subjects in jointly carrying out an entrepreneurial activity. Contracts may also be relevant for the internal organization and the development of a company. This is the case with contracts regulating the relationship between the company’s founders or shareholders (investment agreements, shareholders’ agreements), between the company and its administrative or controlling bodies (employment or mandate agreements with the managers, service contracts with auditing firms), between a holding and its affiliates (“domination” agreements, “profit sharing” agreements), between parties to transactions affecting a company’s corporate structure (capital increases, mergers, divisions). More generally, in the pursuance of their objectives companies may enter into all sort of agreements with a multitude of third parties (employees, lenders and other creditors, suppliers, clients, States hosting their investments, etc.). Companies may also be active within capital markets for the purpose of raising funds or acquiring control over other companies. As a result, they become subject to the rules on the basis of which such markets are organized or which in such markets regulate the relationships which listed companies establish with the relevant counterparties (financial investors, intermediaries, market authorities). When facing situations of financial distress, companies and their directors become the addressees of the special regimes which States lay down for the purpose of regulating insolvencies and corporate restructurings with a view to protecting various public interests. As individuals and other legal persons, companies and their officers can commit wrongdoings and therefore be liable in tort. Companies may also issue negotiable instruments (shares, debentures, warrants), whose circulation may be subject to special rules. And they may hold rights in rem over assets, in particular over goods which have been contributed in kind by way of subscription of capital increases, as well as over “businesses as a going concern”, or parts thereof, whose circulation in certain jurisdictions is governed by a special transfer regime. All this evidences why the regulation of companies is not just a matter of company law. It can also be a matter of contract law, capital markets law, insolvency law, tort law, negotiable instruments law, property law. Drawing the line among these different branches of the law is not an easy task, even within the same legal system.56 However, this is a necessary task, considering that each of such laws has its own, often different logic, premises, theoretical underpinnings, syllabus, scholarly tradition, and that these differences can materially affect the solution of any given legal issue. 56 See J. ARMOUR/ W.G. RINGE, (note 27), at p. 126, admitting that the boundaries between company law and capital markets law are “not always clear.”

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Massimo V. Benedettelli Some examples can clarify this point. One may wonder, e.g., whether a right of first refusal over transfers of shares provided for in a published shareholders’ agreement is also enforceable visà-vis the company and a third party buyer or whether it binds only the relevant contracting parties. One may also wonder whether the rules on disclosures, super-majorities, related-parties transactions, etc. which apply to listed companies are evidence of a special type of “company model” set out by the relevant State of incorporation or are rather market rules set out by the State under whose laws the market is organized, these two States not being necessarily one and the same. It is also questionable whether a director whose negligence creates or worsens a situation of financial distress of the company should be liable in contract or in tort, rather than under ad hoc rules set out by company law, capital markets law (if the company is listed) or insolvency law. Similarly, it is not clear whether the formalities for the contribution in kind of an immovable good or for the granting of a pledge over shares must be determined by company law, property law or the law of negotiable instruments. And so on. This problem becomes even more delicate in a cross-border context, when the legal systems of two or more States are involved. Indeed, to consider a given issue as one of lex societatis, rather than one of lex contractus, lex mercatus, lex fori concursus, lex commissi delicti, lex cartae sitae or lex rei sitae, triggers the application of different private international law regimes, which may in turn contain different solutions on whether the forum courts have or not jurisdiction, which law, domestic or foreign, they have to apply and whether foreign proceedings and judgments have to be given effect in the forum. This is much more than an abstract theoretical exercise. Within the European internal market it may well happen that a company is incorporated under the laws of Member State A, while being listed in a financial market regulated by the laws of Member State B. The same company may have the “centre of its main interests” in Member State C, while its directors may be domiciled in Member State D, and its shares may be deposited or registered with an intermediary located in Member State E. In carrying out its business such company or its directors may commit a harmful event in Member State F, submit their contractual relationships to the laws of Member State G and the settlement of the relevant disputes to the courts of Member State H or to arbitral tribunals seated in Member State I. It is then obvious that the question of characterization should be put and correctly answered from the very outset when any private international law issue needs to be solved. Serious analytical flaws may otherwise ensue. Traditionally, characterization is done lege fori, i.e. by reference to notions or categories which each court draws from the legal system to which it belongs.57 However, in the context of an integrated polity, such as the one set out by the EU, characterization acquires special features. See E.G. LORENZEN, The Characterization, Classification or Qualification Problem in the Conflicts of Law, Yale Law Journal (1940-1941), p. 743 et seq. 57

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Five Lay Commandments for the EU Private International Law of Companies In fact, should a rule or principle on characterization be dictated by EU law, it would uniformly apply throughout the entire European legal area and prevail over any conflicting position taken by the Member States’ domestic law. The first question is therefore whether any such rules or principles already exist, or can be reasonably elaborated by way of interpretation. If not, then the question becomes how rules on characterization can be developed so as to ensure that proper balance between European uniformity and Member States’ legislative autonomy, which, as maintained before, subsidiarity and proportionality require in the field of the EU private international law of companies. Indeed, instruments of EU law do sometimes contain provisions which more or less expressly work as rules on characterization. This is the case, e.g., with the provisions of the Takeover Directive which consider as company law issues those relating “to the information to be provided to the employees of the offeree company, … the percentage of voting rights which confers control and any derogation from the obligation to launch a bid, as well as the conditions under which the board of the offeree company may undertake any action which might result in the frustration of the bid”, and as capital markets law issues those relating “to the consideration offered in the case of a bid, in particular the price,… the bid procedure, in particular the information on the offeror’s decision to make a bid, the contents of the offer document and the disclosure of the bid”.58 The Cross-Border Insolvencies Regulation also characterizes for private international law purposes when it lists matters falling within the scope of the lex fori concursus and matters falling within the scope of other laws (be it the lex contractus, the lex mercatus, the lex rei sitae, etc.).59 As for the Rome I and Rome II Regulations, a sort of indirect “negative” characterization results from their parallel provisions according to which the uniform regime on the law applicable to contractual and extra-contractual obligations does not apply to questions such as “the creation, by registration or otherwise, legal capacity, internal organisation or winding-up of companies and other bodies, corporate or unincorporated,… the personal liability of officers and members as such for the obligations of the company or body, whether… an organ [is able] to bind a company or other body corporate or unincorporated, in relation to a third party” as well as “the personal liability of auditors to a company or to its members in the statutory audits of accounting documents”.60 More often, however, EU law is just silent on characterization. This leaves room for diverging interpretations of EU instruments of harmonization61 and, more generally, can give rise to both positive and negative conflicts of jurisdictions and/or laws. Again, it may be worth giving some examples. Takeover Directive, Art. 4(2)(e). Cross-Border Insolvencies Regulation, Art. 4(2) and Arts. 5-15. 60 Rome I Regulation, Art. 2(1)(f) and (g) (which restates verbatim the corresponding provision of Art. 1(2)(e) and (f) of the 1980 Rome Convention), Rome II Regulation, Art. 2(2)(d): the two carve-outs are identical, but for the reference to the personal liability of auditors which is set out in the Rome II Regulation only. 61 See infra, § 42. 58 59

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Massimo V. Benedettelli When someone buys shares of a company which is incorporated under the laws of Member State A but listed in a financial market regulated by Member State B in breach of the applicable mandatory tender offers regime and to the detriment of shareholders domiciled in Member State C, an array of quite different sanctions could be conceived (damages, invalidity of the purchase, duty to sell the purchased shares, inability to exercise the voting rights attached to the acquired shares). The competence to set up and enforce such sanctions could be invoked at once by Member States A, B and C, should they characterize this as an issue of lex societatis, of lex mercatus, of lex commissi delicti, respectively. On the other hand, should it occur that Member State A characterizes the imposition of sanctions as an issue of lex mercatus (or lex commissi delicti), Member State B as an issue of lex societatis (or lex commissi delicti), and Member State C as an issue of lex mercatus (or lex societatis), the result could be that none of those Member States would consider this matter as falling within the scope of its jurisdiction/law, and the wrong-doer would get away with the infraction. Similarly, the lack of an express rule on characterization with respect to the regime of “wrongful tradings” carried out by a director of a company which is incorporated under the laws of Member State A but whose “centre of main interests” is in Member State B could result in positive or negative conflicts, depending on whether the two Member States characterize it as an issue of lex societatis rather than lex fori concursus.62 How to deal de lege lata with this lacuna? A possible solution, which appears to be consistent with both the need to respect the EU constitutional principles of subsidiarity, proportionality and effet utile63 and with the ECJ’s Centros doctrine,64 is set out below. First, one has to check whether a certain characterization is imposed by a proper construction of the relevant EU law instrument, also in light of the objectives which the EU is pursuing in the field and of the paramount need to guarantee their effet utile. Should this be the case, then such characterization would apply uniformly throughout the entire EU legal space, prevailing over any different view taken by one or the other Member State. For instance, it is true that the provision on characterization contained in Article 4(2)(e) of the Takeover Directive is silent about the “breakthrough rule” set out by Article 11, and that under Article 11(5) it is up to (apparently, all) “the Member States” to determine the equitable compensation which is due to the holders of rights which have been removed thereunder. It is also true, however, that Article 12 allows Member States to determine that companies “which have their registered office within their 62 See L. HÜBNER, Kollisions- und europarechtliche Einordnung von § 64 S. 1 GmbHG, IPRax 2015, p. 297 et seq.; S. SHRANDO, The Risks of Using Pseudo-Foreign Corporations in Germany, American Bankruptcy Institute 2006, p. 30 et seq.; M. GELTER, Centros, the Freedom of Establishment for Companies, and the Court’s Accidental Vision for Corporate Law, ECGI Law Working Paper no. 287/2015, at p. 25, speaks about the “relabelling” or “insolvencification” of matters, once regulated under company law, that took place in Germany as a reaction to the Centros case-law. 63 See supra, sub III. 64 See infra, sub V.

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Five Lay Commandments for the EU Private International Law of Companies territories” are not subject to Article 11, thereby indirectly confirming that for the EU legislator this is a matter of lex societatis rather than one of lex mercatus.65 This uniform EU-wide characterization, however, is not a viable solution in all instances when EU law does not offer to the interpreter any element on the basis of which to prefer one or the other solution.66 In particular, this is the case when EU law, after having selected different Member States as those which are exclusively competent to regulate different aspects of a same matter, leaves them with a wide margin of freedom as to the substance of such regulation, also in compliance with the subsidiarity and proportionality principles. Three examples of the latter type of situation can be drawn again from the Takeover Directive and the Cross-Border Insolvencies Regulation. As already pointed out, the Takeover Directive allocates regulatory powers, alternatively, between the Member State of the lex mercatus and the Member State of the lex societatis depending from the kind of issue at hand. It also sets out some uniform rules of substance. Such rules of substance include those whereby the board of the offeree company is required to draw up a document setting out its opinion on the bid (Article 9(5)), the offeror is granted “squeeze-out” rights (Article 15) and the holders of securities are granted “sell-out” rights (Article 16). Since these rules are not complete, and have in any case to be enforced by a court or authority, the Takeover Directive requires “the Member States” to enact provisions so as ensure that they are complied with (Article 17). The generic formula of Article 17 cannot be literally construed as a reference to all Member States, irrespective of any link they may have with a given tender offer. On the contrary, the approach followed by the European legislator when adopting this harmonization instrument leads to the conclusion that only one Member State should be competent, the choice being between the Member State of the lex mercatus and the Member State of the lex societatis.67 Indeed, as there is no indication in the Takeover Directive, the board report on the bid, the “squeeze-out” rights and the “sell-out” rights could be deemed to pertain both to the organization of the corporate entity object of the bid (since they affect the rights of its minority shareholders and of its employees or the contestability of its control) and to the organization of the capital market where the company is listed (since they affect the value of its shares and the protection of investors). Scholars hold opposing views on this point on the basis of equally robust and convincing arguments68 and Member States could exercise their EU-protected autonomy by addressing these issues either in the regulation of their companies or in the regulation of their capital markets. The latter position is maintained by J. RICKFORD, Takeovers in Europe – Shareholders Decisions and Open Markets: a UK Perspective, in J. GRANT (eds.), European Takeovers: The Art of Acquisition, London 2005, p. 74 et seq. 66 For a contrary view with respect to the Takeover Directive, see F.J. GARCIMARTÌN ALFÈREZ, Cross-border Listed Companies, Recueil des Cours, vol. 328/2007, at p. 159. 67 M.V. BENEDETTELLI, (note 13), at p. 238. 68 See P. MÜLBERT, Umsetzungsfragen der Übernahmerichtlinie – erheblicher Änderungsbedarf bei den heutigen Vorschriften des WpÜG, NZG 2004, p. 638 et seq.; K. HOPT, Wertpapiererwerbs – und Übernahmegesetz, ZHR 2002, p. 425 et seq.; F.J. GARCIMARTÌN ALFÈREZ, (note 55), at p. 154. 65

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Massimo V. Benedettelli In cross border situations, when a company incorporated under the laws of Member State A is listed in a capital market organized under the laws of Member State B, it could well happen that the characterization made by the two Member States of the rules on board reports, “squeeze-out” and “sell-out” rights coincide. In such a scenario there is no reason why the Takeover Directive should be construed so as to run counter to what two Member States, in a perfectly consistent and harmonized way, consider to fall within the scope of their company law and capital markets law, respectively. On the other hand, problems could arise when the relevant characterizations differ, since this could result in both positive and negative conflicts between the Member State of incorporation and the Member State of the lex mercatus. A second example can also be taken from the Takeover Directive. This instrument grants a high degree of autonomy to national legislators when it loosely provides that effective, proportionate and dissuasive sanctions for the infringement of domestic law measures adopted in its implementation must be determined by the Member States (Article 17), that it is up to the Member States to designate judicial or other authorities responsible for dealing with disputes and for deciding on irregularities committed in the course of bids and that Member States must also regulate the possible liability of supervisory authorities (Article 4(6)). Sanctions assisting the regulation of takeovers may be not only criminal or administrative, but also civil, and that the latter may include mandatory sales of shares, inability to cast a vote in the shareholders’ meeting, damages. Experience also shows that takeover related disputes may arise among a variety of subjects (the offeror, the target company, their directors, the target’s shareholders, the market authorities) and on a variety of grounds, including contractual, precontractual and tortuous liability.69 Many of these disputes could be characterized as “civil and commercial matters”, with the result of falling, in principle, within the scope of application of the Brussels I Regulation so that (i) courts of Member States other than those of the lex societatis and of the lex mercatus could possibly have jurisdiction on the basis of the relevant jurisdictional criteria70 and (ii) the uniform rules on lis pendens, disputes on connected matters and recognition of foreign judgments could also possibly apply. Moreover, the characterization of a claim related to a tender offer as contractual or extra-contractual could trigger the applicability of the Rome I and Rome II Regulations, respectively, with the result that laws other than the law of incorporation of the target company or the law under which the relevant capital market is organized would have to be applied in order to settle the relevant dispute.

69 Indeed, the offer launched by a bidder, being a unilateral act intended to have legal effect in connection with the execution of a contract, could arguably fall within the scope of the Rome I Regulation ex Art. 11(3): see M.V. BENEDETTELLI, (note 13), at p. 233 et seq. 70 Be it the domicile of the defendant, the place of performance of the contractual obligation, the place where the harmful event occurred or may occur: See Brussels I Regulation, Arts. 4, 7(1)(a), 7(2).

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Five Lay Commandments for the EU Private International Law of Companies Once again, drawing the line among all such potentially competent courts and applicable laws is not an easy task and conflicts of regulation among the Member States, whether positive or negative, may ensue. A third example can be drawn from the Cross-Border Insolvencies Regulation. As it is known, it provides, in principle, that the Member State where the centre of the main interests of the debtor is located has exclusive jurisdiction over insolvency-related proceedings, that such State shall apply its own law, that insolvency-related judgments of the courts of such Member State must be automatically recognized in all other Member States.71 It also sets out quite a detailed rule on characterization when it clarifies that it is up to the law of the Member State where insolvency proceedings are opened to determine the relevant conditions, their conduct and their closure, and when it lists 13 different issues that “in particular” fall within the scope of the lex concursus.72 The scope of the lex concursus is then indirectly limited by various other uniform conflict-of-laws rules whereby the Cross-Border Insolvencies Regulation mandates that the law of other States, which may be different than the Member State of the lex concursus, shall apply.73 When the debtor is a company, its insolvency, or even its pre-insolvency situation of distress, may change its legal status and organization in various regards. In particular, it can give rise to additional obligations on the company’s administrative bodies, the breach of which may be sanctioned differently, including through the payment of damages. The Cross-Border Insolvencies Regulation does not expressly address this matter. Therefore, it remains open whether this issue belongs to the lex concursus, the lex societatis, the lex mercatus (when the insolvent company is listed), the lex contractus or the lex commissi delicti, with all consequent implications as to the competent jurisdiction and applicable law. All these problems, and similar ones which may result from the lack of uniform EU law rules on characterization, could (and should) receive a uniform answer throughout the EU. It is submitted that this is possible if characterization is carried out in all Member States on the basis of the approach outlined below.74 This approach builds on three premises that, in this author’s opinion, have not been sufficiently appreciated in the doctrinal debate so far. First, not only company law, but also insolvency law and capital markets law are “special” laws in the sense that they entail various derogations to principles and rules set out by the general law of obligations, which the legislator deems necessary in the pursuance of specific interests and policies.

See Cross-border Insolvencies Regulation, Arts. 3(1), 4(1), 16, 25(1). See Cross-border Insolvencies Regulation, Art. 4(2). 73 See Cross-border Insolvencies Regulation, Arts. 5-15. 74 See M.V. BENEDETTELLI, Offerte pubbliche etc. (note 13), at p. 568 et seq.; Id., Profili internazionalprivatistici della disciplina comunitaria dei mercati finanziari etc., (note 13), at p. 57 et seq. 71 72

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Massimo V. Benedettelli Second, when dealing with these matters the EU legislator tends to allocate exclusive competences among the Member States, in the sense that the Member State where the centre of the debtor’s main interests is located, and only such Member State, is empowered to regulate insolvency matters; the Member State in whose market shares are listed, and only such Member State, is empowered to regulate capital markets matters; and the Member State under the laws of which the company is incorporated, and only such Member State, is empowered to regulate company law matters. Third, in these three areas EU law accords the relevant Member States ample regulatory freedom, there being various matters on which the EU does not dictate uniform substantive rules. In light of the above it can be argued, first, that the characterization given by the Member State of the lex concursus in connection with insolvencies falling within its jurisdiction should prevail over any conflicting characterization given by other Member States (including the Member State of the lex mercatus and the Member State of the lex societatis). This prevalence would be justified by the special status a company acquires when it becomes insolvent (or at risk of insolvency) and by the peculiar mandatory public interests that insolvency or preinsolvency law aims to protect in such a case. Second, when no situation of insolvency or pre-insolvency is at stake, possible conflicts between the State of the lex mercatus and the State of the lex societatis should be solved in favour of the former. Indeed, a company who decides to list its shares or debentures in a market which is regulated under the laws of a Member State other than its Member State of incorporation is freely accepting to submit to the rules and enforcement powers of the Member State of the lex mercatus, even when such rules and powers may trigger deviations from the company’s lex societatis and from the jurisdiction of the State of incorporation. Third, if a company is not listed in a foreign market, no problem of defining the borders between the regulatory powers of the Member State of the lex mercatus and those of the Member State of the lex societatis will exist, so that the competence of the latter will extend to all matters that it considers to be part of the ad hoc regulation of collective entrepreneurial organizations. It follows that the characterization of a given issue as contractual or extracontractual, with the consequent applicability of the relevant criteria of jurisdiction and connecting factors, including those set out in EU uniform private international law instruments such as the Brussels I, Rome I and Rome II Regulations, will be possible only if allowed, respectively, by the Member State of the lex concursus, the Member State of the lex mercatus, the Member State of the lex societatis, if any of them is competent. Then, if the company is not insolvent, it is not listed in any regulated capital market, and the issue is not one that the Member State of incorporation regulates sub specie legis societatis, Brussels I, Rome I and Rome II will find direct application on the basis of their own criteria.75 The fact that conflicts-of-law provisions contained in EU law instruments dealing with particular matters trump provisions set out in in general instruments of harmonization of the private international law of the Member States is expressly recognized by the latter: 75

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Five Lay Commandments for the EU Private International Law of Companies Whether this solution to the problem of conflicting characterizations is a workable one can be tested by reference to the three examples illustrated above. Starting with the first example, should it occur that both the Member State of the lex mercatus and the (different) Member State of the lex societatis consider to be entitled to regulate the board’s report on the bid, the “squeeze-out” rights and the “sell-out” rights, then the position taken on this point by the Member State of the lex mercatus will have to prevail throughout the entire EU legal space so that such Member State shall be the only one entitled to exercise jurisdiction on those matters. As to the sanctions assisting the regime on take-over bids and the resolution of disputes thereto related, the relevant competence will have to be allocated between the Member State of the lex mercatus and the Member State of the lex societatis so as to parallel the competence each of them has to regulate the relevant matter. Of course, these Member States may decide that a certain matter does not deserve a special regulation and can be submitted to the general law of obligations, and therefore to the relevant private international rules on contracts and torts. For instance, the relevant lex mercatus or lex societatis can contemplate that the offeror’s failure to launch a mandatory bid, or the board’s failure to comply with disclosure duties or with the “passivity rule” may trigger a liability for damages, in contract or in tort. Further, they may provide that the law applicable to such an issue can only be the lex fori or may allow for the application of a foreign law, as identified on the basis of the conflict-of-law rules set out in the Rome I and Rome II Regulations. They may also provide that the jurisdiction on any ensuing dispute shall belong exclusively to the Member State of the lex mercatus or the Member State of the lex societatis, as the case may be, or that such jurisdiction can concur with that of other Member States on the basis of any of the multiple jurisdictional criteria set out in the Brussels I Regulation.76 Similarly, the Member State of the lex concursus could deal with the directors’ liability for “wrongful trading” by characterizing it as a source of contractual or tortious liability and by admitting the applicability of a foreign law and the jurisdiction of a foreign court. In the same vein, the Member State of the lex societatis could consider that certain issues relating to the internal organization of a company or to the relationships the company establishes with third parties do not deserve a special company law rule. For instance, this could be the case for the regime applicable to acts performed ultra vires by a director, which could be regulated by the same rules which under the law of contracts apply to acts performed by an agent who acts beyond the limits set out by the principal. As a result, the “negative characterization” resulting from the provisions which limit the scope of the Rome I and Rome II Regulations77 could be overcome and the uniform private international

See Brussels I Regulation, Art. 67, Rome I Regulation, Art. 23, Rome II Regulation, Art. 27. 76 See M.V. BENEDETTELLI, Le opa transfrontaliere etc., (note 13), at p. 233. 77 See supra, sub IV.

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Massimo V. Benedettelli law regime set out by these EU instruments could apply also to those company related matters. These rules, or principles, on characterization could be codified in an EU instrument on the private international law of companies.

V.

“Thou Shalt not Have Fora other than the State of Incorporation” or: the Jurisdictional Approach Method for Solving Conflicts of Laws and Jurisdictions on Company Law Matters

Through the Centros doctrine the ECJ has developed quite a consistent body of case-law directly or indirectly affecting the coordination of the legal systems of the Member States in the field of company law. The Centros doctrine, however, is at risk of misunderstandings if one does not correctly reconstruct its methodological foundation and does not unearth certain assumptions and corollaries sometimes hidden in the ECJ’s reasoning.78 Indeed, what is at work in Centros and its progenies is a set of principles, rather than rules, and such principles seem to be lato sensu inspired by a peculiar method for the coordination of legal systems, the “jurisdictional approach” method.79 Were they to be synthesised as a commandment, this method may correspond to the maxim: “Thou Shalt Not Have Fora other than the State of Incorporation”. The starting point for a correct reading of Centros and its progenies is that they are all judgments rendered by the ECJ in interpreting, by way of preliminary rulings, Article 49 TFEU on the freedom of establishment.

78 This interpretation of Centros has been first suggested in M.V. BENEDETTELLI, (note 41), at p. 585 et seq., and further elaborated in Id., Diritto internazionale privato delle società e ordinamento comunitario, in P. PICONE (eds.) Diritto internazionale privato e diritto comunitario, Padova 2004, p. 205 et seq. 79 See P. PICONE, (note 23), at p. 143 et seq. More specifically, See P. PICONE, Il metodo dell’applicazione generalizzata della lex fori, in P. PICONE, La riforma italiana del diritto internazionale privato, Padova 1998, at p. 422 et seq., arguing that the “jurisdictional approach” method: (i) aims to achieve the highest degree of effectiveness in the implementation of a given law of the forum; (ii) covers exclusively legal relationships which are strictly connected with the forum because of their objective link with the policies pursued by the relevant law; (iii) regulates such relationships by submitting them to the forum’s jurisdiction, by determining that such jurisdiction is exclusive, and by applying, in principle, the lex fori, irrespective of any cross-border element that may link the matter with one or more other States, and (iv) consistent with its “unilateralist” rationale, accepts that a foreign legal system may regulate the same legal relationship with respect to features which the forum does not intend to govern and to the extent that the relevant rules do not conflict with the forum’s law and policy.

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Five Lay Commandments for the EU Private International Law of Companies This has important implications, not always fully appreciated by commentators. It means, in fact, that in all such cases the ECJ is using the same, well consolidated analytical model which, starting from the seminal decisions in the cases Dassonville80 and Cassis de Dijon,81 it originally developed with respect to the cross-border circulation of goods and then extended to the other fundamental freedoms of movement.82 This analytical model is strongly inspired by a free market ideology, reflecting the axiom that factors of production should be free to move across the Member States in accordance with the “demand/supply law” and that any rule regulating such movement triggers, in principle,83 an illegitimate restriction. These restrictions are presumed to be illegitimate to the extent they may, even only potentially, prohibit, hinder or render less attractive the exercise of the relevant freedom of circulation. The burden then falls on the relevant Member State to prove that its measure can be justified on the ground of either one of the express derogations contemplated in the TFEU84 or because it is a suitable, nondiscriminatory, necessary and proportional means of protecting the “overriding/imperative mandatory requirements in the general interest” (so called “rule of reason”85). As is well known, these exceptions to the operation of the freedoms of circulation are interpreted by the Court quite restrictively. In particular, the Court draws conclusions against the existence of a true regulatory interest of the Member State which invokes the “rule of reason” when the good, service or activity in question is validly marketed or conducted, as the case may be, in accordance with the laws in force in another Member State.86

ECJ, July 11, 1974, 8/74, B. et G. Dassonville, [1974] ECR 837. ECJ, February 20, 1979, 120/78, Rewe Zentrale v. Bundesmonopolverwaltung für Branntwein, [1979] ECR 649. 82 According to Advocate General La Pergola in Centros, (note 6), § 20, the ECJ must ensure that “the spirit of the Treaty prevails by applying the “Cassis de Dijon” doctrine on mutual recognition in a consistent manner to corporate mobility”. See also Advocate General Jääskinen’s conclusions in VALE, (note 11), § 68. 83 This “radical” position has been somewhat softened with respect to the free movement of goods: See ECJ, November 24, 1993, C-267/91 and C-268/91, B. Keck and D. Mithouard, [1993] ECR I-6097. 84 Public morality, public policy, public security, protection of health and life, national artistic, historical or archaeological treasures, industrial and intellectual property: See TFUE, Arts. 36, 45(3), 52. 85 This doctrine was first developed in the field of the freedom of services in ECJ, November 30, 1995, C-55/94, R. Gebhard v. Consiglio dell’Ordine degli avvocati e procuratori di Milano, [1995] ECR I-4165. 86 See Cassis de Dijon, (note 81), § 15. Such Member State normally, but not necessarily, is the Member State “of origin” or the “home State”: See M.V. BENEDETTELLI, (note 41), at p. 597 et seq. (where reference is made to ECJ, April 20, 1983, 59/82, Schutzverband, [1983] ECR 1217, a case in which the provision found to be in conflict with the EU freedom of movement belonged to the State where the good had been originally manufactured). 80 81

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Massimo V. Benedettelli The novelty with the Centros doctrine, however, is that it refers to situations which do not actually involve the movement of any factor of production within the internal market, its “anchorage” to the EU fundamental freedoms of circulation being based on a creative, more than an extensive, interpretation of Article 49 TFEU. Indeed, Article 49 prohibits restrictions on the freedom of nationals of a Member State to establish a business activity in the territory of another Member State. In Centros, the ECJ instead considered the case of two Danish citizens that wanted to use a corporate form to conduct a business in their own country of origin, Denmark, and for that purpose decided to set up a company under English law rather than under their national law, basically because of the lower amount of minimum mandatory capital required. Nothing then really moved across the borders of the Member States, but for… a “legal product”, a particular model of corporate organization devised by the English legislator. Indeed, such “legal product” circulated only in the figurative sense that two individuals active in another Member State elected to “use” it by exercising their party autonomy. It follows that the expression “company mobility” through which commentators often refer to the phenomena considered in the Centros case-law should not be taken literally. Indeed, it has nothing to do with any physical displacement of persons (directors, employees) or goods (plants, assets) from the territory of one Member State to the territory of another Member State. Rather, it synthetically refers to two completely new and self-standing “fundamental rights” that EU law grants to the beneficiaries of the freedom of establishment. The first is the right to choose among the company laws of the Member States the one under which to carry on entrepreneurial activities in an organized way (one could call it the “right to incorporate”).87 The second is the right to change the company law which applies to an existing entity without proceeding to its liquidation and to the incorporation of a new company, be it by a cross-border merger, cross-border division, transfer of the registered seat abroad, or by any other form of company conversion allowed by the laws of the relevant Member States (one could call it the “right to reincorporate”).88 Both such dimensions of the right to company mobility within the EU legal space inevitably require a certain level of coordination among the legal systems of the Member States in the field of company law. However, the fact that this right is recognized by the ECJ through a “Dassonville-Cassis de Dijon” argumentative

87 See ECJ, Centros, (note 6), §§ 17-18, 27, 29, Inspire Art, (note 8), §§ 95-96, 138. See also ECJ, September 21, 1999, C-307/97, Saint-Gobain ZN, [1999] ECR I-6161, § 43 (the freedom of establishment includes also the freedom “to choose the most appropriate legal form for the pursuit of activities in another Member State”). 88 See ECJ, SEVIC Systems, (note 9), §§ 19, 21, Cartesio, (note 10), § 111-112, VALE, (note 11), §§ 24, 49. The expression “cross-border reincorporation” is used by Advocate General Jääskinen in her conclusions to VALE, (note 11), §§ 3, 34 to refer to the transfer of the seat of a company in view of the change of its lex societatis.

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Five Lay Commandments for the EU Private International Law of Companies model means that the focus is on avoiding restrictions to the exercise of a freedom, rather than on positively imposing a set of uniform rules throughout the EU. This explains why the terror panicus felt by many German-speaking commentators when predicting the “death” of the real seat theory as a result of Centros89 was unjustified. In fact, the Centros doctrine contemplates only a set of principles which impact on the working of the private international law of the Member States only indirectly, while still leaving room for the enactment by the various Member States of different rules on jurisdiction, applicable law, recognition of judgments. Many of these principles are merely implicit in the Court’s reasoning (while being consistent with the approach followed by the EU legislator in neighbouring fields). An EU law instrument on the private international law of companies should state them expressly. They are the following: First, the EU guarantees each Member State the right to autonomously determine the content of its company law as long as no uniform rules are provided by harmonization Directives or other instruments of EU secondary law.90 Indeed, the obvious pre-requisite for allowing beneficiaries of the freedom of establishment to exercise their “right to incorporate” and their “right to reincorporate”, and therefore choose among different models of corporate organization, is that such a variety of models exist and that such models are offered to their potential users. Also for subsidiarity and proportionality reasons, and without prejudice to the possibility for the EU to set-out its own “types” of companies,91 in the current phase of the European integration process the power to legislate in this area remains, to a great extent, within the Member States’ domain.

See, among the hundreds of German and Austrian, mostly critical, commentaries Centros, F. EBKE, Das Schicksal der Sitztheorie nach dem Centros-Urteil des EuGH, Juristenzeitung 1999, p. 656 et seq; W.-H. ROTH, Gründungstheorie, ist der Damm gebrochen?, Zeitschrift für Wirtschafstrecht, 1999, p. 861 et seq; D. ZIMMER, Mysterium “Centros”: von der schwierigen Suche nach der Bedeutung eines Urteils des Europäischen Gerichtshofes, Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht 2000, p. 23 et seq. For a sharp criticism of the idiosyncrasies which inspire most of such critical commentaries see H. HALBHUBER, National Doctrinal Structures and European Company Law, Common Market Law Review 2001, p. 1385 et seq. 90 This is implicit in the ECJ’s finding that companies “are creatures of national law” (Daily Mail, (note 25), § 19; Überseering, (note 7), § 40). See also ECJ, June 20, 2013, C-186/12, Impacto Azul, [2013] ECR I-412. 91 Such as the Societas Europaea or the European Private Company. These European company “types” give rise to very peculiar problems of coordination of the legal systems of the Member States, depending on whether one considers the Societas Europaea or the European Private Company as companies incorporated by the EU (with ample references to the company law of the Member State of the seat) or rather as companies incorporated by the Member State of the seat (though pursuant to an harmonized model which originates within the EU). These problems have been examined more in detail in M.V. BENEDETTELLI, (note 78), at p. 282 et seq. 89

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Massimo V. Benedettelli Second, the Member States’ legislative discretion in the area of company law also extends to determining when such law applies in cross-border situations.92 Member States enjoy this legislative discretion with respect to all general questions which are normally addressed by domestic private international law. Indeed, in the absence of uniform EU rules (as it is most often the case), each Member State remains free to characterize a certain issue as one of lex societatis rather than lex contractus, lex loci commissi delicti, lex mercatus, lex concursus, etc., to select different connecting factors (be it the registered seat, the administrative seat, a combination of the two, or other ones), to make or not make use of the technique of renvoi in one of its many different forms,93 to assert the jurisdiction of its courts (be it exclusive or concurrent) on company law disputes, and to recognize judgments rendered by foreign courts on such matters. This means, in particular, that for the EU it is irrelevant whether a Member State follows the “incorporation theory” rather than the “real seat theory”.94 The only, important limit that EU law imposes on the private international law of the Member States is that, whatever conflict rules they decide to adopt, such rules must work in a “unilateral “and “introvert” way,95 i.e. they must be used only to determine when domestic company law applies and not also to decide whether a foreign company must be recognized and/or foreign company law must be applied.96 What EU law forbids, in fact, is that a Member State substitutes its point 92 See ECJ, Überseering, (note 7), § 40 (acknowledging “the right of the Member State of incorporation to set rules on the incorporation and legal existence of companies in accordance with its rules of private international law”, such right covering also the regulation of those requirements that domestic companies must continue to observe if they wish to retain the legal personality conferred to them by such State), Cartesio, (note 10), § 109, VALE, (note 11), § 29; ECJ, November 29, 2011, C-371/10, National Grid Indus, [2011] ECR I-12273, § 27. See also Advocate General Ruiz-Jarabo in his conclusions to Überseering, (note 7), § 40 (EU law “still does not directly affect the ability of Member States each to organize its rules on the conflict of laws as it wishes”, provided that its principles and substantive rules are respected) and Advocate General Poiares Maduro in his conclusions to Cartesio, (note 10), § 30 (“Member States are free to choose whether they want to have a system of rules grounded in the real seat theory or the incorporation theory”). 93 On the very peculiar way in which renvoi works within Italian private international law with respect to the regulation of companies see M.V. BENEDETTELLI, (note 33), at p. 71 et seq. 94 This point was already maintained by this author back in 2001 (M.V. BENEDETTELLI, (note 41), at p. 585 et seq. and p. 605) and has since been confirmed by the subsequent decision of the ECJ in Cartesio, (note 10), § 110. 95 “Unilateralism” has been considered a trend in contemporary private international law: See P. GOTHOT, Le renouveau de la tendence unilatéraliste en droit international privé, Rev. crit. dr. int. Privé 1971, p. 209 et seq.; Y. LOUSSOUARN, Cours general de droit international privé, Recueil des cours 1973, p. 269 et seq. On the relevance that unilateralism can have in the field of company law, see G.P. ROMANO, L’unilateralismo nel diritto internazionale privato moderno, Zurich-Basel-Geneva 2014, at p. 558 et seq. 96 See M.V. BENEDETTELLI, ibid. Similar conclusions are now reached by H.J. SONNENBERGER, Etat de droit, construction européenne et droit des sociétés, Rev. crit. dr. int. privé 2013, at p. 104 et seq., and G.P. ROMANO, ibid.

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Five Lay Commandments for the EU Private International Law of Companies of view, so to speak, for the point of view of another Member State by dictating when a company is to be deemed incorporated under the foreign lex societatis of such other State and to what extent such foreign company law must apply. But this leads to the next principle of coordination of the legal systems of the Member States that can be drawn from Centros. Third, Member States are bound to cooperate with each other for the enforcement of their respective company laws throughout the EU legal space. In particular, Member States must recognize companies which are incorporated under the laws of another Member State for the mere fact that they have validly come into existence as a legal entity within that other legal system.97 In this respect, “recognition” should not only mean that foreign companies enjoy legal capacity and standing also in the forum.98 Rather, it should encompass the duty for all Member States to give full effect to the whole regulation the Member State of incorporation gives to the company that it has created. This means that the other Member States must apply the foreign lex societatis to the extent that it “wants” to be applied99 and must recognize judgments or other decisions in company law disputes when issued by courts or other authorities of the Member State of incorporation (or when issued by courts or authorities of other States, if, and only if, such measures are recognized by the Member State of incorporation). Fourth, there may still be situations where the abovementioned principles trigger the regulatory competence of two (or more) Member States at once. This may happen when a company law issue affects the relationship between companies incorporated under the laws of different Member States (cross-border mergers, 97 See ECJ, Überseering, (note 7), § 40 (stressing that the right of each Member State to determine through its private international law when a company governed by its law is created and can retain legal personality does not extend to the different question of whether a company formed under the law of another Member State must be recognized within the first Member State’s legal system). 98 See ECJ, Überseering, (note 7), § 82. 99 See ECJ, Inspire Art, (note 8), §§ 100-104, and Advocate General Alber’s conclusions in the same case (§§ 99-101: the application of forum company law rules to a foreign company “negates the effect of the foreign law by which the company has already come to existence” and triggers an “incomplete recognition”). A different and quite singular view is maintained by P. Paschalidis, (note 31), at p. 70 et seq., 85, 191, arguing that the Centros case-law has no impact whatsoever on the private international law of the Member States since it only requires an analysis of the content of the substantive provisions of the different lege societatis from time to time at bar aiming to check whether their cumulative application creates obstacles to the freedom of establishment. For Paschalidis, such a situation would not materialize when the provisions of the law of the State of the real seat are “more enabling or less detrimental” than the corresponding provisions of the law of the State of incorporation, as e.g. it would happen if the former law allows the filing of derivative actions against a company’s director to shareholders holding a shareholding interest lower than the one required by the latter law. This theory, apart from being grounded on the quite frail distinction between more or less “enabling” rules (see infra, fn. 134 and related text), is in stark contrast with the decisions of the ECJ in Centros and its progenies (in particular, with the Inspire Art judgment that, in fact, the author fails to consider in his analysis).

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Massimo V. Benedettelli cross-border divisions, relationships between companies belonging to the same group, cross shareholdings) or when a company wishes to “reincorporate” itself in another jurisdiction and is therefore making use of two different leges societatis for implementing the relevant transformation (whether by transferring the registered seat abroad or otherwise). In such situations, from an EU law perspective all the relevant Member States of incorporation (or re-incorporation) should enjoy an “equal right” to have their company law applied. This may lead to “false conflicts” when the two regulations are identical, or similar, or when they can be combined without any sacrifice to the substantive interests they pursue.100 This may also lead to truly conflicting regulations. In such a case, in absence of ad hoc harmonization rules, EU law can only reduce such conflicts by applying the fundamental EU law prohibition of discriminations on the ground of nationality, i.e. it can forbid that a Member State regulates a transaction more restrictively for the sole reason that it takes place in a cross-border rather than purely domestic context.101 Fifth, Member States other than the Member State under the law of which a company has been incorporated may still be entitled to apply to such company their own law (including rules set out by their lex societatis). This, however, will be possible only if this is done in the pursuance of a true and legitimate overriding/mandatory public interest (the protection of public and private creditors, the safeguarding of minority shareholders and employees, the effectiveness of fiscal supervision, the fairness in business dealings, the avoidance of fraudulent transactions)102 and the relevant measure completely satisfies the “rule of reason” requirements (suitability, non-discrimination, necessity, proportionality).103 As already outlined, the ECJ tends to be rigorous in checking whether this exception to the basic principle commanding the recognition of foreign companies is justified in the circumstances.104 These checks are particularly strict when the For practical examples relating to the regulation of cross-border mergers see M.V. BENEDETTELLI, Le fusioni transfrontaliere, in G. ABBADESSA/ G. PORTALE (eds.), Il nuovo diritto delle società, Torino 2007, p. 365 et seq. 101 See ECJ, SEVIC Systems, (note 9), §§ 20, 22, VALE, (note 11), §§ 32-33, 36, 46 (national legislation which enables national companies to convert, but does not allow companies governed by the law of another Member State to do so, can trigger a restriction to the freedom of establishment: this clarifies the broader statement of the ECJ in its obiter dictum in Cartesio, (note 10), § 112, which could be misread to mean that the Member State of incorporation cannot prevent cross-border company conversions even when no such element of discrimination exists). That Cartesio’s obiter entailed only a non-discriminatory prohibition to cross-border company transformations along the lines of the SEVIC judgement was argued in M.V. BENEDETTELLI, (note 32), and after VALE has been maintained also by other commentators (e.g., J. ARMOUR/ W.-G. RINGE, (note 27), at p. 141). 102 See ECJ, Centros, (note 10), §§ 32 and 35, Überseering, (note 7), § 92, Inspire Art, (note 8), § 140, SEVIC Systems, (note 9), § 28, VALE, (note 11), § 39; September 12, 2006, C-196/04, Cadbury Schweppes, [2006] ECR I-7995, §§ 54-55. 103 See ECJ, Centros, (note 6), § 34. 104 See ECJ, Centros, cit. (note 6), § 35-37. 100

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Five Lay Commandments for the EU Private International Law of Companies relevant measure impinges upon essential features of the internal organization of the company (e.g., rules on capital formation, limitation of liability, directors’ duties, etc.).105 In this respect, derogations from the law of incorporation appear to be more readily accepted when the measure relates to acts that the company has willingly performed in the pursuance of its business objectives,106 e.g. by entering into a foreign capital market or by establishing its “centre of main interests” in another Member State. It can be said, then, that EU law coordinates the regulatory powers of Member States in the field of company law by granting a position of prominence to one legal system only. This is the legal system of the Member State under the laws of which private parties who are beneficiaries of the freedom of establishment have chosen to incorporate (or reincorporate) their company. It is in this peculiar sense that, as mentioned above, courts and other authorities, practitioners, private parties doing business within the internal market, should behave in accordance with the commandment: “Thou Shall Not Have Fora other than the State of Incorporation”. Indeed, it is not just a question of determining the applicable law. The legal system of the Member State of incorporation should be taken “as a whole” (including its rules of private international law) as the main reference point for the solution of all conflicts issues which may arise out of the cross-border nature of a given matter, including issues of competent jurisdiction and circulation of judgments and other measures. It must be stressed that this approach is consistent with the one followed by the EU in the neighbouring fields of insolvency and capital markets where the EU also (i) allocates regulatory powers in cross-border situations by selecting one Member State which, in principle, enjoys an exclusive competence, (ii) provides that the institutions of such Member State shall, in principle, apply the lex fori, (iii) obliges all other Member States to automatically recognize judgments and other measures issued by such institutions.107 The model for coordinating the company laws of the Member States which results from this reading of the Centros doctrine has many important implications, which an EU law instrument on the private international law of companies could expressly set out. First, it commands that the problem of characterization highlighted above be solved throughout the EU legal space in accordance with the solution given to it See ECJ, Inspire Art, (note 8), §§ 134-141. See ECJ, Centros, (note 6), § 26, and Inspire Art, (note 8), § 121 (differentiating rules governing the formation of companies from rules concerning the carrying on of certain trades, professions or businesses) and § 38 (reserving the right of a Member State where a branch of a company formed under the law of another Member State is located to adopt any appropriate measure for preventing or penalising fraud of the company itself or of its members to the damage of public or private creditors). See also the conclusions of Advocate General La Pergola in Centros, (note 6), § 20 (where it is pointed out that foreign companies remain subject “in respect of the exercise of activities by a branch opened in another Member State to binding rules of that State applicable to national companies”: emphasis in the original). 107 See supra, fn. 13. 105 106

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Massimo V. Benedettelli by the Member State of incorporation. This means that the approach suggested earlier as to the handling within the EU of possible conflicts of characterization is also mandatory under Article 49 TFEU. Second, it sheds light on the allocation of jurisdictional powers within the EU as to the settlement of disputes involving companies, including disputes on company law issues. Indeed, the relevant provisions of the Brussels I Regulation, i.e. Article 63(1) and (2) and Article 24 no. 2 of Reg. 1215/2012, have been long since criticised by commentators for their ambiguity and have given rise to different interpretations.108 To read them now by reference to the primary rules of Article 49 TFEU, and to the “right to incorporate” that the ECJ draws from it, would help in achieving a more solid and consistent construction.109 Pursuant to Article 63(1) and (2) Brussels I a company is domiciled “at the place where it has its statutory seat, its central administration, or its principal place of business”, while “for the purposes of Ireland, Cyprus and the United Kingdom” statutory seat is intended to mean “the registered office or, where there is no such office anywhere, the place of incorporation or, where there is no such place anywhere, the place under the law of which the formation took place”. One wonders whether these distinct criteria of localization apply on a cumulative or an alternative basis. One may also question the scope and true meaning of the special rules involving Ireland, Cyprus and the United Kingdom. As for Article 24 no. 2, it grants exclusive jurisdiction to the courts of the Member State in which a company has “its seat”, regardless of the domicile of the parties, with respect to “proceedings which have as their object the validity of the constitution, the nullity or the dissolution of companies or other legal persons or associations of natural or legal persons, or the validity of the decisions of their organs”, further providing that “in order to determine that seat, the court shall The meaning of these provisions, and of the corresponding ones set out in the 1968 Brussels Convention, has been widely debated: See G.A.L. DROZ, Compétence judiciaire et effets des jugements dans le Marché Commun, Paris 1972, p. 241 et seq; R. GEIMER/R.A. SCHÜTZE, Internationale Urteilsanerkennung, I – Das EWGÜbereinkommen über die gerichtliche Zuständigkeit und die Vollstreckung gerichtlicher Entscheidungen in Zivil- und Handelssachen, München 1983, p. 720 et seq; P. GOTHOT/ D. HOLLEAUX, La Convention de Bruxelles du 27 Septembre 1968. Compétence judiciaire et effets des jugements dans la CEE, Paris 1985, p. 84 et seq; P. KAYE, Civil Jurisdiction and Enforcement of Foreign Judgments, Oxford 1987, p. 1019 et seq; A.L. CALVO CARAVACA, Comentario al Convenio de Bruselas relativo a la competencia judicial y a la ejecuciòn de resoluciones judiciales en materia civil y mercantil, Madrid 1995, p. 335 et seq; J. KROPHOLLER, Europäisches Zivilprozeßrecht. Kommentar zum EuGVÜ und Lugano Übereinkommen, Heidelberg 1998 (VI Aufl.), p. 213 et seq; L. MARI, Il diritto processuale civile della Convenzione di Brussels. I – Il sistema della competenza, Padova 1999, p. 540 et seq; M. VIRGÒS SORIANO/F. GARCIMARTÌN ALFÈREZ, Derecho procesal civil internacional – Litigaciòn internacional, Madrid 2000, p. 190 et seq. 109 As already argued in M.V. BENEDETTELLI, Criteri di giurisdizione in materia societaria e diritto comunitario, Riv. dir. int. priv. proc. 2002, p. 879 et seq; Id., Responsibility of Corporate and Supervisory Bodies within the European “Market of Company Laws”: Issues of Conflicts of Jurisdictions and Conflicts of Laws, Zeit. Schweizerisches Recht 2005, p. 486 et seq. 108

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Five Lay Commandments for the EU Private International Law of Companies apply its rules of private international law”. Commentators have long since debated on which company seat (statutory, administrative or “real”) this provision refers to, how to handle positive and negative conflicts of jurisdiction to which such a provision may give rise because of the lack of harmonization of the relevant rules of private international law of the Member States and whether the list of disputes subject to exclusive jurisdiction is exhaustive or not. By reading Brussels I in light of the Centros doctrine110 one may find a consistent answer to all these questions. Starting with the definition of a company’s domicile, Article 63(1) and (2) clarifies that this definition is given “for the purposes” of the Regulation, i.e. both in order to determine whether the Brussels I regime applies in lieu of the Member States’ rules on national jurisdiction,111 and for the implementation of the general criterion which grants jurisdiction to the courts of the Member State where the defendant is domiciled.112 With respect to the first of these two different purposes, an extensive interpretation seems to be preferred. This means that in order to trigger the applicability of Brussels I to a given company (whether incorporated under the laws of a Member State or of a non-Member State) it should be enough that one among the three localization criteria – statutory seat, central administration, principal place of business – happens to be located within the territory of the EU. In fact, this would ensure a wider application of the Brussels I regime, in line with the general objectives pursued by the EU legislator with this instrument of harmonization.113 With respect to the second purpose, a restrictive interpretation seems rather to be preferred. This means that it should be up to the lex societatis under which the company is organized to choose whether the company can be sued before the courts of the Member State where it has its statutory seat, and/or its central administration and/or its principal place of business, or any combination of the above. In fact, the general criterion of jurisdiction of Article 4(1) is grounded on the assumption that in a litigation the defendant is the “weak” party and that such a “weak” party must be protected by concentrating the relevant litigation in a forum which is “closer” to it and predictable.114 It then falls within the discretion of each national legislator when fixing the features of its company law to decide whether to concentrate disputes involving national companies before a single court, or whether to allow for the forum shopping which the existence of multiple company domiciles under Brussels I may generate. In both cases, the Centros doctrine will require, when the relevant company is incorporated under the laws of a Member State, that incidental questions to which the application of Article 63(1) and (2) may give rise – e.g., whether the 110 This approach is mandated by the fact that instruments of EU secondary law, such as the Brussels I Regulation, rank lower than provision of EU primary law, such as Art. 49 TFEU from which the ECJ derives the Centros doctrine. 111 See Brussels I Regulation, Arts. 4, 5 and 6(1). 112 See Brussels I Regulation, Art. 4(1). 113 See M.V. BENEDETTELLI, (note 109), at p. 900 et seq. 114 See ibid., at p. 909 et seq.

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Massimo V. Benedettelli company exists, if it has a statutory seat, where its central administration is located, etc. – be solved by the courts of all Member States always by making application of the lex societatis of the Member State of incorporation. Under the same rationale, the special provision of Article 63(2) will have to be interpreted as referring only to companies governed by the company laws of Ireland, Cyprus and the United Kingdom, irrespective of whether the court before which the relevant dispute is brought is an Irish court, a Cypriot court, a British court or a court of another Member State.115 The Centros doctrine also provides guidance for a proper construction of Article 24 no. 2. Consistent with Centros, the jurisdictional criterion of the “seat” should be deprived of any “territorial” meaning and should rather be read as a reference to the law under which the relevant company is incorporated. This means that the ground of exclusive jurisdiction should work to the benefit of the Member State of incorporation, even when its lex societatis does not require companies to have a registered seat (as can be the case for partnerships) or allows the company’s seat (be it statutory or administrative) to be placed abroad without any impact on the company’s governing law.116 Moreover, the rules of private international law of the forum to which Article 24 no. 2 refers will be relevant only in the sense that in cross-border scenarios they will determine when a company validly exists under the forum’s company law or when a company must be recognized in the forum for the reason that it is validly in existence under a foreign company law. As to the list of disputes falling within the scope of the exclusive jurisdiction of the courts of the State of incorporation, Centros requires it to be extended to cover any other matter that under the applicable lex societatis pertains to the internal organization of the company, as the European legislator believes to be the case for those expressly mentioned in Article 24 no 2. In this way Article 24 no. 2 would be subject to a teleological interpretation.117 Apparently, such interpretation is contrary to the position taken to date by the ECJ in two different respects. On the one hand, the ECJ has interpreted restrictively all grounds of exclusive jurisdiction, including the one under Article 24 no. 2, on the argument that they constitute derogations to the “proper” forum of the defendant’s domicile.118 On the other hand, the ECJ often prefers to grant an See ibid., at p. 905 et seq., p. 910. See ibid., at p. 912 et seq. 117 See ibid., at p. 912. 118 Art. 24 no. 2 has been deemed not to cover various types of company law-related disputes: ECJ, October 17, 2013, C-519/12, OTP Bank, [2013] ECR I-674 (action brought against a holding company on the ground of its joint liability for debts of its subsidiary under a company law rule applicable to the latter); May 12, 2011, C-144/10, BVG, [2011] ECR I-3961 (assessment incidenter tantum of the validity of a decision of corporate bodies in the context of a contractual dispute); October 2, 2008, C-372/07, Hassett and Doherty, [2008] ECR I-7403 (action brought by a shareholder on the ground that corporate powers had been exercised in breach of its rights); March 10, 1992, C-214/89, Powell Duffryn, 115 116

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Five Lay Commandments for the EU Private International Law of Companies “autonomous” meaning to the expressions used in the Brussels I Regulation, rather than making reference to the domestic law of the Member States, on the premise that the latter approach could defeat the harmonization objective which underlies the Brussels I regime as a whole.119 It must be noted, however, that the same ECJ held that different methods are available for the interpretation of the rules of Brussels I and that among them preference must be given to the one which makes more sense in light of the purported aim of each single rule.120 If one takes this path, the suggested construction of Article 24 no. 2 is that which better fulfils the rationale of the exclusive forum for company law disputes. This ground of jurisdiction was, in fact, originally conceived by the drafters of the 1968 Brussels Convention with the peculiar aim of ensuring coincidence between the adjudicating court and the applicable law in consideration of the special expertise which is required when issues of lex societatis are in issue.121 Moreover, due to the coordination among the legal systems of the Member States which results from the Centros doctrine, this construction would not create the risk of variances resulting from the application of different domestic laws since in any given matter all courts of all the Member States would end-up by referring to one and the same lex societatis. Conflicts of jurisdiction, both positive and negative, would then be avoided. Third, the Centros doctrine may also have a positive, though indirect, impact on the circulation of judgments. Among the very limited grounds on which a Member State is entitled to refuse recognition and enforcement to a judgment of another Member State, Article 45(1)(e)(ii) Brussels I includes the case in which the judgment conflicts with one of the exclusive grounds of jurisdiction set out by Article 24. Article 45(1)(2) then provides that in the examination of such grounds of jurisdiction the requested court is bound by the findings of fact on which the court of origin based its jurisdiction. This means that the requested court remains free to reassess issues of law already decided by the court of origin, leaving open the possibility that two (or more) Member States may find that they have exclusive jurisdiction over one and the same dispute, with the risk of conflicting judgments. By interpreting Brussels I in light of the Centros doctrine, this risk disappears in the field of company law disputes since all courts of all Member States will necessarily come to the same conclusion. This is so because all courts of all Member States will identify with respect to each company one, and only one, State of incorporation, solely entitled to exercise jurisdiction over the disputes covered by Article 24 no. 2 and whose lex societatis will have to be applied for the [1992] ECR I-1745 (action brought by a company for the recovery of a credit vis-à-vis a shareholder for payments due in subscription of a capital increase). 119 ECJ, February 22, 1979, C 133/78, Gourdain, ECR 1979 I-733, § 4. 120 ECJ, October 6, 1976, 12/76, Tessili, [1976] ECR 1473, §§ 10-11, Powell Duffryn, (note 118), §§ 11-12; July 19, 2012, C-154/11, Mahamdia, [2012] ECR 491, § 42. 121 See among the authors cit. supra, fn. 108, G.A.L. DROZ, at p. 103, J. KROPHOLLER, at p. 213, A.L. CALVO-CARAVACA, at p. 321, M. VIRGÒS SORIANO/ F. GARCIMARTÌN ALFÈREZ, at p. 188.

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Massimo V. Benedettelli solution of all legal issues to which the implementation of such provision may give rise.

VI. “Honour thy Shareholders” or: Respecting the Will of the Parties to the Corporate Contract The “jurisdictional approach” method for the coordination of the legal systems of the Member States in the field of company law, which lato sensu inspires the Centros doctrine, still leaves room for conflicts of laws and jurisdictions. The fact that such an approach is “unilateralist-introvert”, in the sense that its main concern is to safeguard the implementation of the lex fori, implies that Member States could follow it by making use of different connecting factors,122 be it the registered seat, the administrative seat, a combination of the two, or other ones. And this, in turn, could result in situations where one and the same entrepreneurial organization is incorporated under, or is otherwise regulated by, different company laws and is simultaneously submitted to the jurisdiction of different courts or other authorities.123 As indicated, the Centros doctrine provides a solution to this problem. The answer is that in principle, i.e. failing a “mandatory requirement” for the safeguard of a public interest, precedence must be given to the legal system which has been chosen by the members of the collective enterprise as if their will were sacred.124 One could say that in these cases the commandment should be: “Honour Thy Shareholders”. So construed, the Centros doctrine may be seen as instrumental to the building of a European “market of company law” similar to the one which has developed within the US federal system. And indeed, suggestions in this direction have been put forward not only by scholars125 but also by Advocates General.126 As now expressly admitted by the ECJ in Cartesio, (note 6), § 30. For examples see M.V. BENEDETTELLI, (note 33). 124 See ECJ, Centros, (note 6), § 18, Inspire Art, (note 8), § 96. See also Advocate General Jääskinen’s conclusions in VALE, (note 11), § 49, as to the primary importance to be attributed to the shareholders’ ultimate intentions when approving resolutions for the transfer of the company’s seat abroad. 125 S. WOOLCOCK, Competition among Rules in the Single European Market, in W. BRATTON/ J. MCCAHERY/ S. PICCIOTTO/ C. SCOTT (eds.), International Regulatory Competition and Coordination, Oxford 1996, p. 300 et seq.; E. KIENINGER, Wettbewerb der Privatrechtsordnungen im Europäischen Binnenmarkt, Tübingen 2002; M.V. BENEDETTELLI, Mercato comunitario delle regole e riforma del diritto societario italiano, Rivista delle società 2003, p. 699 et seq; Id., L’autonomia negoziale tra lex contractus, lex societatis e lex mercatus mel “mercato comunitario delle regole”, Rivista di diritto societario 2007, p. 39 et seq.; G. PORTALE, “Armonizzazione” e “concorrenza” tra ordinamenti nel diritto societario europeo, in G. CAMPOBASSO (eds.) Armonie e disarmonie nel diritto comunitario delle società di capitali, Milano 2003, I, XIII. 122 123

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Five Lay Commandments for the EU Private International Law of Companies This statement, however, needs to be qualified. “Legal products” are not like physical goods, and their “trade” takes place in a quite figurative and peculiar sense, particularly in the field of company law. If one looks at the European experience this seems to be true on both the “supply” and the “demand” side of this “market”. Indeed, there is no empirical evidence that when enacting their company laws and shaping different models of corporate organization the EU Member States are driven only by the wish to “compete” with each other with respect to the use by entrepreneurs of their laws and of their courts, with the final objective of maximising company-related taxes and revenues deriving from company-related services. A Delaware-like activism in promoting one’s own legal system as a “heaven” for the regulation of company law matters and for the settlement of the relevant disputes is not a common phenomenon in Europe.127 When determining the contents of domestic company law, as well as its scope of application in cross-border situations, national legislators seem more oriented by interests of other kinds, consistent with the main features of their socio-economic systems and with the public policies from time to time pursued. Generally, company law reflects what each State considers the right balance among the interests of all the parties which interact with the relevant entrepreneurial organization, both within the company (managers, controlling shareholders, minority shareholders, employees, bondholders) and outside the company (lenders, other private and public creditors, actors within the regulated financial market where company’s instruments are listed, NGOs and other carriers of public interests). It is with a view to safeguarding such interests that company law, together with the related private international law rules, sets out the limits beyond which party autonomy cannot deviate from the relevant model of corporate organization. As a matter of fact such interests are the same as those often considered by the European legislator when enacting harmonization instruments and by the ECJ when making application of the “rule of reason” exception to the freedom of establishment. Of course, this is not to say that national legislators do not take into account developments of foreign company law, and it does happen sometimes that they do “import” regulatory solutions which have been devised abroad.128 But this is one among many other factors which orientate the legislative choice, not the main one. 126 See the conclusions of Advocate General La Pergola in Centros, (note 6), at § 20 (“in the absence of harmonization, competition among rules must be allowed free play in corporate matters”, such freedom being “part of the material content” of the right of establishment, referring to C.-D. EHLERMANN, Compétition entre système réglementaires, Révue du Marché Commun 1995, p. 220 et seq.). 127 E. KIENINGER, The Legal Framework of Regulatory Competition Based on Company Mobility: EU and US Compared, German Law Journal 2005, p. 742 et seq. 128 V. CARIELLO, Sensibilità comuni, uso della comparazione e convergenze interpretative: per una “Methodenlehre” unitaria nella riflessione europea sul diritto dei gruppi di società, Rivista di diritto societario 2012, p. 273 et seq.; J. ARMOUR, (note 54), at p. 370.

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Massimo V. Benedettelli The existence of mandatory limits to party autonomy in the field of company law explains also the peculiar way in which the “market of company law” works on the demand side. Contrary to what the vulgata often suggests, when entrepreneurs elect to organize their activities under the laws of a given State they are not just choosing a certain law of incorporation (as they could choose the law applicable to a contract). Rather, due to the peculiar nature of companies as legal entities,129 they are submitting to the legal system of the State of incorporation “taken as a whole”. This means that the “product” they are “buying” necessarily includes the rules that the State of incorporation dictates on issues such as: the jurisdiction (whether exclusive or concurrent) of its courts on company law disputes or matters; the arbitrability of such disputes; characterization (i.e., the limits of application of company law vis-à-vis neighbouring disciplines); whether the company’s seat (be it the registered seat or the administrative seat) can be transferred abroad while keeping the company under its original law of incorporation; whether in crossborder contexts domestic company law can give way to foreign law; and the recognition of foreign judgments and other measures. This means that party autonomy can be exercised in the field of company law for forum and law shopping purposes, but only within the abovementioned boundaries. Because of these boundaries, in order to be effective such forum and law shopping requires a certain degree of coordination among the relevant State legal systems. As indicated above, the Centros doctrine, as the same may be clarified, and codified, through an EU legislative instrument, may indeed achieve such coordination within the EU legal space. It can also ensure that the exercise of party autonomy results into higher levels of efficiency without being detrimental to the protection of other overriding interests of a public nature. In fact, in absence of rules of EU uniform law, the Member States may protect such interests not only by relying on the “rule of reason” exception to the freedom of establishment, but also by shaping the contents of their private international law, which EU law still largely leaves to their legislative discretion. This may be done by choosing the connecting factor which triggers the application of their lex societatis, by determining which issues must be characterized as company law issues (rather than as capital markets law issues, insolvency issues, contract or tort issues, etc.), by asserting the exclusive jurisdiction of their courts on company law disputes and by determining which rules of company law are mandatory or even “peremptory” or part of the forum’s public policy. The forum and law shopping opportunities stemming from the Centros doctrine are confirmed by various anecdotal evidence. Companies incorporated under the law of a Member State have converted into companies governed by the law of another Member State by transferring their seat abroad with the purpose of moving their centre of main interests to another

129

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Five Lay Commandments for the EU Private International Law of Companies Member State so as to trigger the application of an insolvency law which allowed it to carry out a debt restructuring and thus avoid liquidation.130 Managers of investment funds with assets and operations located in a continental Member State whose lex societatis allows limited liability companies to be managed by a legal entity have often chosen as their general manager an English partnership or an English plc, so as to benefit from the relevant liability and corporate governance regime.131 Entrepreneurs running small businesses have decided to incorporate English limited liability companies to carry out their activities in another Member State, because of the minimal amount of nominal capital required by English law.132 Further forms of corporate mobility could certainly be engineered. Indeed, the entrepreneurial talent in conducting normative arbitrages could work as an additional instrument to increase competitiveness within the internal market.

VII. Conclusions: the EU as Framework for a Virtuous Forum and Law Shopping in the Field of Company Law It can been questioned whether the forum and law shopping opportunities created by the Centros doctrine are really “virtuous”, the concern being that this could eventually result in the lowering of the qualitative standards of company law or could even jeopardize the Member States’ right to govern their markets and economies. The problem with this question - as well as with the old American debate, which such question resonates,133 on whether the “market for corporation laws”

See the Schefenacher, Hans Brochier, PIN Group, Hellas Telecommunications and Nickel Group cases analysed by H. EIDENMÜLLER, Free Choice in International Company Insolvency Law in Europe, Europe Business Organization Law Review 2005, p. 423 et seq.; W.G. RINGE, Forum Shopping under the EU Insolvency Regulation, Europe Business Organization Law Review 2008, p. 579 et seq.; P. PASCHALIDIS, (note 31), at p. 235 et seq. and p. 249 et seq. On forum shopping in the field of insolvencies see in general, L. ENRIQUES/M. GELTER, Regulatory Competition in European Company Law and Creditor Protection, Europe Business Organization Law Review 2006, p. 418 et seq; M.V. BENEDETTELLI, (note 13). 131 See the Air Berlin case analysed by A. JOHNSTON, EC Regulation of Corporate Governance, Cambridge 2009, p. 208 et seq. 132 As shown by Centros. For some quantitative data as to the “migration” from Germany to England See S. SICK/L. PÜTZ, Die deutschen Unternehmenmitbestimmung entzogen: Die Zahl der Unternehmen mit ausländischer Rechtsform wächst, WSI Mitteilungen 2011, p. 34 et seq. On the increase of applications to the UK register of companies by “foreign” limited companies after Centros see J. ARMOUR, (note 54), at p. 386. 130

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Massimo V. Benedettelli results into a “race to the bottom” rather than “a race to the top” - is that any given rule of company law may be “good” or “bad” depending on the parameters under which it is evaluated. A rule may enhance the managerial autonomy at the detriment of the control powers of shareholders, employees, or other stakeholders,134 may make a company less or more contendable, may protect the confidentiality of information on a company’s business by restricting its transparency vis-à-vis the market, and so on. States can legitimately give a different importance to all such opposing interests, but they may also elaborate different models of company law which reflect a different balance among all such interests, leaving then to the entrepreneurs to adopt the one which better fits their business needs and to their counterparties to decide whether or not to entertain relationships with a company so organized. Moreover, States dispose of a variety of tools through which recourse to forum and law shopping for illegitimate purposes of fraude à la loi may be discouraged or made simply ineffective. Be it by affirming the exclusivity of their jurisdiction over company law disputes or by refusing to recognize foreign judgments or arbitral awards on company law matters, by characterising certain provisions of their company law as “peremptory norms” or expression of their public policy, by requiring that companies incorporated under their laws maintain their administrative seat within their territory, States may ensure that entrepreneurial attempts to regulatory “transnational lifts-off” are doomed to fail as a result of the unavoidable “jurisdictional touch-downs” that the relevant disputes will have before courts or other authorities of the forum.135 What really counts, then, is that party autonomy is exercised in a conscious and informed way, within the limits which the relevant State of incorporation, and other States with which the company enters into contact, may lay down for the protection of public interests. When entrepreneurs use their self-regulation power to choose the State of incorporation of a new company, or to “re-incorporate” an existing company under a different law, or to select among different potentially competent courts the one where to bring their claim and among different applicable laws the one to be applied, a conscious and informed exercise of party autonomy requires that the rules under which this “forum and law shopping game” is conducted be clear from the outset. In the context of the European integration such clarification can be achieved through a better understanding of the Centros doctrine, which, in turn, requires a 133 See NOTE, Competition among Jurisdictions in Formulating Corporate Law Rules: An American Perspective on the “Race to the Bottom” in the European Communities, Harvard International Law Journal 1991, p. 423 et seq. 134 This means, e.g., that a company law rule which requires a lower shareholding interest for the filing of derivative actions may be “more enabling and less detrimental” for the relevant shareholders but certainly is “less enabling and more detrimental” for the relevant directors: this point is missed by P. Paschalidis, (note 31), at p. 85 and 191. 135 I draw this elegant and smart formula from R. WAI, Transnational Liftoff and Jurisdictional Touchdown: The Regulatory Function of Private International Law in the Era of Globalization, Columbia Journal of Transnational Law 2002, p. 209 et seq.

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Five Lay Commandments for the EU Private International Law of Companies deeper analysis of functions, techniques and limits of the regulation of conflicts of jurisdictions and laws in the context of the European integration. The experience to date shows that there is still a long way to go to achieve these objectives. Hopefully, the 5 “commandments” proposed in this essay could give some guidance to anyone wishing to start this journey, possibly in view of the enactment of an instrument for the codification of the EU private international law of companies.

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REMARKS ON THE IMPACT OF THE REGULATION NO 650/2012 ON THE SWISS-EU SUCCESSIONS Gian Paolo ROMANO*

I. II.

III.

Progress within the European Union: Three Stories The Swiss-EU Successions A. Domicile and Habitual Residence Compared B. Jurisdiction 1. Potential Jurisdictional Contest 2. Means to Avoid a Contest Turning into a Conflict C. Law Applicable to the Succession D. Recognition E. The European Certificate of Succession Conclusions

As evidenced by the attention it has already received among Swiss academics and practioners, Regulation No 650/2012 will have a momentous impact on the successions that have ties with Switzerland and one or more Member States. Provisions of the Regulation and the Swiss Act (“LDIP”) on applicable law are largely the same, with domiciliary nexus – habitual residence and domicile respectively – playing a pivotal role while the joint recognition of the de cujus’ ability to select the law of his or her nationality promises to inject a welcome flexibility and allow for real choices. Those shared principles and values will enable the EU and Swiss citizens and residents to anticipate and shape with greater certainty how their property will devolve upon death, which should result in less crossborder litigation among their survivors. With respect to jurisdiction, however, situations of parallel proceedings are likely to increase. The ordinary regime of the Regulation does not apply when habitual residence is outside the European Union – and all three subsidiary grounds for jurisdiction will have a hard time being accepted on the Swiss side – nor do the lis pendens-friendly and the recognition-friendly regime embraced by the Regulation. The fact that Switzerland has “third State” status restricts the ambit of ordinary European rules under the perspective of the Member States themselves, which threatens to cause poor Professor at the University of Geneva. The text is based on a speech I delivered at the 2015 STEP Conference held in Geneva on 27 April 2015. The spoken style has largely been maintained. The present tense, which was used at the conference to refer to the patchwork quilt of mono-national conflict rules still applicable at the time, has also been preserved although the paper was intended to be published after the entry into force of the Regulation. I want to thank Professors S. BARIATTI and F. VILLATA for allowing me to be part of their research project on a study on the Succession Regulation and for allowing me to simultaneously publish this paper in the Yearbook. I am much indebted to A. SZCZEGÓŁA and A. ÖZTÜRK for their precious assistance in collecting the material. The customary disclaimer applies. *

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Gian Paolo Romano coordination as well as unnecessary costs and hassle with no discernible benefit for anybody. An agreement between Switzerland and the European Union – which may take varying forms – is likely to prove beneficial to EU and Swiss citizens and residents while simplifying the task of their authorities and saving their taxpayers’ money. Be that as it may, the coming together of the two instruments will stimulate greater “cross-fertilization” and common progress for their nations. Some solutions forged by the Regulation – e.g. with respect to dual citizens, administration of estates, acceptance of the succession and pactes successoraux – seem to be better crafted and more advanced than under the corresponding Swiss provisions and may offer some inspiration for the proposed revision of the LDIP.

This paper focuses on the impact that the Regulation 650/20121 will have on the successions that present contacts with Switzerland, on the one side, and one or more Member States, on the other.2 Those contacts are typically through naRegulation (EU) No 650/2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European Certificate of Succession (the “Regulation”). 2 This is the subject of a growing corpus of scholarly work which attests to the significance of the Regulation under a Swiss perspective. See A. BONOMI, Le Règlement européen sur les successions et son impact pour la Suisse, in P.-H. STEINAUER/ M. MOOSER/ A. EIGENMANN (eds.), Journée de droit successoral 2015 (Stämpfli 2015) 64ff = [2014] Semaine judiciaire 392ff; A. BONOMI/ A. ÖZTÜRK, Auswirkungen der Europäischen Erbrechtsverordnung auf die Schweiz unter besonderer Berücksichtigung deutschschweizerischer Erbfälle [2015] ZVglRWiss 3ff; P. FRÉSARD, Le règlement européen sur les successions, dispositions pour cause de mort et cas pratiques, in Aktuelle Themen zur Notariatspraxis (Cosmos 2015) 63ff; M. DEVISME, Les conséquences pratiques du règlement (UE) no 650/2012 du 12 juillet 2012 dans les successions franco-suisses, in, P.-H. STEINAUER/ M. MOOSER/ A. EIGENMANN (eds.), Journée de droit successoral 2015 (Stämpfli 2015) 115ff; C.G. MEYER/ T. SPRECHER, Aspekte der neuen EU-Erbrechtsverordnung und ihres Bezugs zur Schweiz [2015] Revue suisse du notariat et du registre foncier 145ff; N. WILLIMANN/ G. FOTIOU, Le Règlement européen sur les successions vu de Suisse [2015] L’expert-comptable suisse 341ff; K.M. WEISS/ M. BIGLER, Die EU Erbrechtsverordnung – Neue Herausforderungen für die internationale Nachlassplanung aus Schweizer Sicht [2014] Successio – Revue de droit des successions 163ff; I. SCHWANDER, Die EU-Erbrechtsverordnung: Auswirkungen auf die Nachlassplanung aus schweizerischer Sicht [2014] AJP 1084ff; B. CHAPPUIS/ J. PERRIN, Le Règlement (UE) N° 650/2012 du Parlement européen et du Conseil du 4 juillet 2012 relatif à la compétence, la loi applicable, la reconnaissance et l’exécution des décisions et l’acceptation et l’exécution des actes authentiques en matière de successions et à la création d’un certificat successoral européen [2014] Not@lex, Revue de droit privé et fiscal du patrimoine 1ff; A. DORMANN, Das schweizerische internationale Privatrecht und die europäische Erbrechtsverordnung im Vergleich, in DACH, Die EU-Erbrechtsverordnung Nr. 650/2012 und deren Auswirkungen auf diverse Länder (Schulthess 2014) 79ff; D. Naz/ J.–M. RUBIDO, Questions pratiques en droit successoral France-Suisse et le règlement européen sur les successions [2013] Not@lex 49ff; B. HÖSLY/ S. DEBRUNNER, Rechtswahl Schweizer-Deutscher Doppelbürger bei der Nachlassplanung unter Berücksichtigung der EU-Erbrechtsverordnung [2013] Anwaltsrevue/Revue de l’Avocat 272ff; M. KALT/ M. UHL, Die EU-Erbrechtsverordnung und die Schweiz in Europäisierung der schweizerischen Rechtsordnung (Dike 2013) 103ff. See E. LEIN, Die Erbrechtsverordnung aus Sicht der Drittstaaten, in A. DUTTA/ S. HERRLER (eds.), Die Europäische Erbrechtsverordnung (C.H. BECK 2014) 199ff. On the proposal by the Commission, see A. BONOMI/ C. SCHMID (eds.), Réflexions autour du futur règlement 1

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Impact of the Succession Regulation on the Swiss-EU Relationships tionality, domicile, habitual residence of the de cujus3 – and, to a lesser extent, of his or her prospective heirs, legatees, beneficiaries of lifetime gifts, executors or administrators, creditors – as well as the place of his or her assets. By the term “Member State”, I will be referring to the Member States bound by the Regulation, which notoriously do not include the UK, Ireland and Denmark (II). But before turning to those “Swiss/EU successions”, I want to try and briefly assess the progress that the Regulation is expected to bring with it in terms of enhanced justice and increased opportunities for the EU citizens and residents as well as in terms of shared prosperity for their nations. Reflecting on that progress may help determine whether Switzerland may not be well-served in considering taking advantage of some of those opportunities and improved justice, typically by entering into some form of agreement with the EU on this matter (I).

I.

Progress within the European Union: Three Stories

In order to identify the improvements that the Regulation should bring about with respect to intra-European successions, it is best to rely on some real stories. I would like to mention three of them. The first story is about a German lady in her late seventies who is been living in Strasbourg, France, since the early nineties and happens to be the grandmother of a good friend. She owns bank assets in both Germany and France. A européen et de son impact pour la Suisse. Actes de la 22e Journée de droit international privé du 19 mars 2010 à Lausanne (Schulthess 2010). In the first article-by-article commentary on the Regulation – A. BONOMI/ P. WAUTELET, Le droit européen des successions – Commentaire du Règlement n° 650/2012 du 4 juillet 2012 (2nd edn., Bruylant 2016) – A. BONOMI and I. PRETELLI often refer to Switzerland for third state-related hypotheticals while mentioning the Swiss experience under the Swiss Private International Law Act of 1987 when addressing some of the new European rules. On the proposal by the Commission, see A. BONOMI/ C. SCHMID (this note). 3 I will use the Latin term de cujus – which is common in civilian terminology although uncommon in English legal parlance – rather than the terms “decedent” or “deceased” when addressing the tools that the Regulation and the Swiss Private International Law Act make available to whomever intends to shape or contribute to shaping how his or her estate will devolve after his or her demise and, generally, when adopting the perspective of the “estate planner”. The “deceased” cannot do any of this and, more particularly, the “deceased” cannot “plan” nor “choose”, the applicable law or the forum (in a way, he or she has been chosen). The term “testator” generally refers to “any person who makes a will”. And a person who makes a choice-of-law or a choice-of-forum does not have to make a will, to the extent that the term “will” refers to substantive dispositions upon death, as is generally the case, including in lay terminology. As to “estate planning”, it is common to say that the Regulation has facilitated it. This, however, should not lead us to believe that “estate planning” for the purposes of the Regulation is something different than what “law of wills” – which forms a significant part of inheritance law in nearly all countries – as well as “law of gifts” or, for the jurisdictions that allow them, “law of trust”, aim to facilitate, i.e. that men and women take advantage of the freedom that law offers to pursue the ends – here essentially post mortem ends – of their choice.

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Gian Paolo Romano couple of years ago, she approached her grandson, who is also a lawyer, saying: “I want to start getting my affairs in order for the time I will no longer be of this world. Can you help me? What law am I supposed to abide by? What law may I rely on?” Now, Germany and France have for a long a time disagreed over what justice requires in terms of the most appropriate connecting factor for cross-border successions. When movables are at stake, according to the French view, it is the decedent’s domicile that should define what law applies,4 while according to the German view, it is his or her nationality.5 As a consequence, our German lady and her estate are caught up in a French-German conflict of laws. For France regards French law as applicable to the distribution of all her movable assets, including German assets, while Germany regards German law as applicable, including to the French assets. When she wonders whether she is allowed to make an Erbvertrag – something that is permitted under German law6 and prohibited under French law – when she wonders whether she is entitled to make a testament-partage based on French substantive law,7 the answer is… there is no answer. There is virtually no way for her to know ante mortem how the conflict of laws that strikes her assets will be settled. To have some chances of knowing which law she can adjust to when shaping her last will, she has first to die.8 Some years ago, I was in a meeting with a German member of the European Parliament. The works for the Succession Regulation were in their infancy and we came to discuss about the state of people-to-people relationships in Europe. I asked: “Are you aware that your fellow citizens who are domiciled in France are bound to die without knowing what law governs their succession?” He was not a lawyer and it took him some time to grasp the point. Once he fully understood it, he could not hide his indignation: “How can it still be possible in Europe?”9 “This has got to change”. Coming back to our German lady, her grandson told her that I might be the right person to assist her. And she did indeed give me a call. My only advice to her Instead of many, see B. ANCEL/ Y. LEQUETTE, Les grands arrêts de la jurisprudence française de droit international privé (5th edn., Dalloz 2006) 159ff. 5 Art. 25 EGBGB, in the version in force until 17 August 2015. 6 Bürgerliches Gesetzbuch, § 1941 “Erbvertrag”: “(1) Der Erblasser kann durch Vertrag einen Erben einsetzen, Vermächtnisse und Auflagen anordnen sowie das anzuwendende Erbrecht wählen (Erbvertrag). (2) Als Erbe (Vertragserbe) oder als Vermächtnisnehmer kann sowohl der andere Vertragschließende als ein Dritter bedacht werden”. 7 Art. 1075 of the French Code civil: “Toute personne peut faire, entre ses héritiers présomptifs, la distribution et le partage de ses biens et de ses droits. Cet acte peut se faire sous forme de donation-partage ou de testament-partage […]”. 8 See P.S. ATIYAH, Justice and predictability in common law (1992) 15 U.N.S,W.L.J. 450: “A law of wills which did not make it easy to predict what would be treated as a valid will, for instance, would be worse than useless”. A conflict of “laws of wills” such as the one hitting the fate of the assets of our lady any time before her death – to the extent that those laws differ, which is the premise of private international law – makes it impossible for her to predict what would be treated as valid will. 9 “Wie kann es in unserem Europa immer noch möglich sein?”. 4

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Impact of the Succession Regulation on the Swiss-EU Relationships was: “Tenez le coup, because there will soon be a Regulation that will do you justice by solving the conflict between German and French laws in a way that allows you to fashion your affairs accordingly”. But she didn’t seem prepared to wait. And so she ventured to ask: “What if I move my residence back to Germany? Would I benefit from greater certainty?” I said: “Yes, because France will then accept that German law applies to all your movables, including the French ones”. So, to receive a little illumination about the law applying to her, she has to give up the cross-border element of her life, she has to “play domestic”. Now the European Union is about your freedom to establish yourself in other Member States, to buy or move assets across intra-community borders. But if the consequence of your taking advantage of those freedoms is that you are losing control of what will happen to your estate after your death that your estate will slip into a kind of a legal no-man’s land, you may think twice before taking actual advantage of those freedoms. Those freedoms may become ineffective.10 My second story is about the succession of Italians who die intestate domiciled in France. Assume an Italian lady living in Paris who, contrary to our German lady, passes away without thinking about the way her wealth will devolve after her death. Her next-of-kin are her husband, a Frenchman, and a son, Italian, from an earlier marriage. After mourning her, her surviving spouse and her son wonder what their respective claims to her estate are. That is an entirely legitimate question. How can one possibly exercise a right if he or she does not know whether he or she has such right? They are on no friendly terms, as often happens in those situations. But they both would rather have a clear answer, whatever it is, than to embark in a long litigation that will eat up part of the estate funds. The trouble is here again that there is no prelitigation answer. For, much like in the FrenchGerman case, French law should apply according to France based on domicile of the de cujus while Italian law should apply according to Italy based on her nationality.11 The surviving spouse may be tempted to rush to the Italian courts and have them declare that Italian law, which entitles him to half of the estate, is controlling. The child may be encouraged to seize French courts that will adjudicate based on French law, which turns out to be more favourable to him, the portion devolving on the surviving spouse being one fourth.12 As a consequence, this disagreement See P. LAGARDE, Les principes de base du nouveau règlement européen sur les successions [2012] Rev. crit. 691, 697: “Le futur défunt pourra régler à l’avance sa succession et éviter la remise en cause de ses dispositions. Il ne sera pas freiné pour des raisons d’ordre successoral dans son désir de circuler d’un Etat membre dans un autre”. 11 Art. 46(1) of the “legge di riforma”, n° 218 of 31 May 1995. 12 Compare Art. 581 of the Italian Codice civile: “Concorso del coniuge con i figli – Quando con il coniuge concorrono figli legittimi o figli naturali, o figli legittimi e naturali, il coniuge ha diritto alla metà dell’eredità, se alla successione concorre un solo figlio, e ad un terzo negli altri casi” with Art. 757 of the French Code civil: “Si l’époux prédécédé laisse des enfants ou descendants, le conjoint survivant recueille, à son choix, l’usufruit de la totalité des biens existants ou la propriété du quart des biens lorsque tous les enfants sont issus des deux époux et la propriété du quart en présence d’un ou plusieurs enfants qui ne sont pas issus des deux époux”. In the words of J. HARRIS, The proposed EU regulation on succession and wills: prospects and challenges [2008] Trust Law International 181ff, “the share allocated to the surviving spouse” represents “a question which gives rise to the 10

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Gian Paolo Romano between Italy and France is likely to fuel disputes between the French spouse and the Italian child. Now, this is inconsistent with the shared concerns of those two countries.13 The first purpose of their private law, including inheritance law, is to avert conflicts between human beings, to ensure harmony among them to the extent possible by informing them about their substantive rights and obligations that is to reduce litigation, not to provide an incentive for it, not to stimulate races to the courthouse. What is even more sobering, what runs even more contrary to their common interests, is that this dispute may never be settled legally to the extent the FrenchItalian conflict of laws may lead to a French-Italian conflict between judges and their decisions. The Italian judge may rule that the assets in dispute belong to the widower. The French judge may rule that those assets – the same assets – have passed on to the son. So, who has legitimate title over them? The conflicting decisions annihilate each other. Legally, it is a standstill. The dispute is not settled by Law. The human relationship at stake does not benefit from the Rule of Law. There no justice for the people involved but denial of justice, which is itself an injustice and runs clearly against the founding documents of the European Union.14 The question as to who is going to be able to enjoy those assets may then depend on a kind of state-of-nature behaviour. The individual who is faster in securing possession of the assets and in transferring them to the most favourable forum, the one who shouts louder, the most robust, physically or psychologically, may prevail. As a consequence, France and Italy ultimately fail in their core mission to protect their citizens, to provide them with a legal order, and they are instead creating a legal mess. And they risk squandering French and Italian taxpayers’ money for conflicting proceedings that may turn out to be largely ineffective because they result in conflicting, mutually exclusive judgments rather than spending that public money to build schools, bridges, and clean energy facilities. Now, as has been recently noted, albeit in a different context, “when something hasn’t worked [effectively] for 50 years, you don’t just keep doing it, you try something new”.15 And the Member States have indeed been trying something new. They have decided to transfer the power to accommodate the conflicting views among them on what private international law justice demands to a higher entity,

greatest number of proceedings in matters of succession because of the clash of interests involved”, this share “differ[ing] enormously from country to country”. 13 I have made this point in the book Le dilemme du renvoi en droit international privé – La thèse, l’antithèse et la recherche d’une synthèse (Schulthess 2015). 14 Particularly Title V of the Treaty on the Functioning of the European Union which is concerned with an “Area of freedom, security and justice”. Needless to say, denial of justice is at the antipodes of justice. 15 President OBAMA, Town Hall Youth Leaders in Jamaica, 9 April 2015, Kingston, Jamaica, with respect to the US policy towards Cuba: “We don’t want to be imprisoned by the past. When something doesn’t work for 50 years, you don’t just keep on doing it; you try something new” available at (visited on 16 February 2016).

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Impact of the Succession Regulation on the Swiss-EU Relationships the European Union.16 Each Member State had the opportunity to state its own opinion as to which is the most appropriate connecting factor. The national parliaments have thoroughly participated in this debate.17 The disagreement among the Member States about how best to identify the law applicable to cross-border successions was laid bare and extensively debated. This has resulted in a majority view, which is the one that the Regulation upholds and has become the common view.18 The Regulation will then ensure that the thousands of EU citizens and residents who now wonder hopelessly about the law they are entitled to rely on, will have most of the time a reasonable clarity. They will be able to arrange their earthly affairs and prepare in peace for their heavenly return. The thousands of EU citizens and residents who are stripped off their right to know what their legitimate inheritance claims are, who are forced to run to the judge while they are still mourning their loved ones – and the one who mourns longer might be penalized19 – those people will, after 17 August 2015, in a sizeable amount of cases, be able to exercise their rights and honour their obligations without having to litigate. And each of the Member States and their communities will obviously benefit from this increase in smooth and consensual devolution of estates and the correlated decrease in judicial proceedings. The public money that is saved in this way may be invested more constructively in improving other public services and infrastructures. So, to the extent that the Regulation averts the conflicts between the Member States as to which law applies to any given succession, as to which law defines the rights and obligations of the individuals involved, and empowers the individuals involved to identify this law without having to fight against each other,

16 As of the Treaty of Amsterdam. See J. BASEDOW, 15 years of European Private International Law: Achievements and Outlooks, in Liber amicorum Alegría Borrás (Marcial Pons 2013) 174ff. 17 A. DAVÌ/ A. ZANOBETTI, Il nuovo diritto internazionale privato delle successioni nell’Unione europea (2013) 2 Cuadernos de Derecho Transacional 5, 15. 18 The procedure was indeed the ordinary one, the reason being that succession – it was held – does not relate directly to family law for which unanimous vote is required under Art. 81(3) TFEU. 19 Three times over the last two years I was asked to assist in comparing two sets of substantive laws on succession on behalf of clients prepared to exploit any differences to their advantage. In one case, the would-be heir was so desperate to be the first to file lawsuit that, having lost contact with the de cujus, who was still alive, albeit old and ill, bribed an “insider” of her close entourage to keep him informed of her state of health. His counsels had prepared the statement of claim long before her death – which, as far as I know, has not yet occurred. I believe it is safe to assume that most of the “big money” succession cases filed with courts do not result in actual adjudications and, as a consequence, never come to appeal nor reach the Supreme Court. For all people involved have ultimately a strong incentive to settle – including to avoid unveiling any potential fiscal misconducts of the de cujus – but the settlement reached is at least in part based on the legal background offered by the forum first seized.

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Gian Paolo Romano there is little doubt that the Regulation will contribute to a more just, more peaceful and more prosperous Europe.20 My third story is about British citizens owning immovable property in Spain or having retired there. According to some statistics, no less than six hundred thousand UK retirees have taken up a permanent residence in Spain to enjoy the sun, the Spanish food and the Spanish way of life, and no less than two hundred thousand own property there.21 Now, those Brits do care about the law governing their succession. This matters to them.22 For English substantive law and Spanish substantive law differ even more widely than French and German or Italian laws. To name but a well-known example, there is no forced heirship under English law while the Spanish Civil Code protects the closest next-of-kin by reserving a portion of the estate for their benefit.23 Spanish common law in turn provides for some dispositions upon death that English law ignores, like the fideicommissus. Now, those Brits are faced with a conflict of legal systems that takes an even more paradoxical form. UK says to Spain: “Your law [Spanish law] applies to those people based on domicile or situs”. Spain says to the UK: “Your law [English or Scottish] applies based on nationality”. That’s the notorious renvoi problem. One of the most iconic descriptions offered to visualize this problem is through Alphonse & Gaston, two gentlemen of French origin who were the protagonists of an American comic strip of the early twentieth century. Gaston was tall and grotesque. Alphonse was short and grotesque. Much like Laurel and Hardy.24 And they were extremely polite to each other. So much so that every time they stood before a door, they 20 R. GEIMER, Die europäische Erbrechtsverordnung im Überblick, in J. HAGER (ed.), Die neue europäische Erbrechtsverordnung (Nomos 2013) 9, 37 goes as far as defining the Regulation as “ein epochales europäisches Gesetzeswerk” (emphasis in original). A. BONOMI, in A. BONOMI/ P. WAUTELET, Le droit européen des successions (2nd edn., Bruylant 2016), 31, also celebrates the “progrès certain dans la réglementation des successions transfrontières au sein de l’Europe” favoured by a text which “ends a cacophony” (at 32) and brings harmony. The “harmony of solutions” is at last largely ensured. 21 See for example the statistics published by the BBC on the “Brits abroad”, available at . 22 So the case at stake is not like when chefs are debating about whether a particular salad tastes better with French dressing or Italian dressing, which – according to one Swiss sarcastic author – is the impression that debate on private international law sometimes conveys: C. BRÜCKNER, Internationale Ehegüter- und Erbrechtsfragen in der schweizerischen Notariatspraxis, in Aktuelle Themen zur Notariatspraxis (Cosmos 2013): In IPR-Debatten wird zuweilen locker von der Anwendung dieses oder jenes ausländischen Rechts geredet, ähnlich wie Köche vom Anrichten des Salats mit italienischer oder französischer Sauce reden. 23 See Art. 806: “Legítima es la porción de bienes de que el testador no puede disponer por haberla reservado la ley a determinados herederos, llamados por esto herederos forzosos”. Art. 807 identifies those “forced heirs”: “Son herederos forzosos: 1. Los hijos y descendientes respecto de sus padres y ascendientes. 2. A falta de los anteriores, los padres y ascendientes respecto de sus hijos y descendientes. 3. El viudo o viuda […]”. 24 To whom Alphonse and Gaston are sometimes compared. See e.g. M.A. MOSS, Giant: Georges Stevens, A life on film (University of Wisconsin Press 2015), at 19.

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Impact of the Succession Regulation on the Swiss-EU Relationships were constantly deferring to each other. “After you, Alphonse! No, you first, my dear Gaston”.25 And none of them went through the door. Now, the United Kingdom chose to stay aside of the Regulation.26 And I do not want to comment on this. But I feel that, by doing so, the United Kingdom might be causing some prejudice to its own citizens and residents. Take a Brit who is still domiciled in England but owns a realty in Spain. Assume he wants to leave it to a UK-based charity along with all his estate. Further assume he has an adult child. So, who will inherit the Spanish property? According to Spanish substantive law, at least part of it will probably pass on to the child as forced heir. According to English law, the charity would be entitled to the whole of the estate to the extent that the testator so provides in his will. So the critical question for the people involved – the de cujus as well as his son and the charity – is whether English law or Spanish law controls.27 Our man wants to know. The Regulation, which is binding on Spain, designates English law as law of habitual residence. English private international law designates Spanish law as the law of situs. But the Regulation seems to require Spain to “accept renvoi” and regard Spanish substantive law as ultimately applicable. And if you read standard works on English conflict of laws, you may arrive at the conclusion that, based on English private international law, English substantive law is ultimately controlling because of the foreign conflict rule referring back to the UK.28 In which case the negative conflict of laws has turned into a positive conflict. I think our Englishman would be happier if he could rely on the Regulation only rather than being caught up in an inextricable conflict between English and Spanish laws, those laws being, to the extent that they differ, because they neutralize each other, for him worse than useless. His succession would then be governed by English law as the law of habitual residence. He would be able to let the Spanish asset pass to the charity without fearing Spanish law might interfere and shatter his expectations and desires. The time has come to look at the Swiss-EU successions.

II.

The Swiss-EU Successions

The first thing that ought to be mentioned is that the Regulation leaves unaffected the bilateral treaties to which Switzerland and a Member State are party,29 whether E. GRISWOLD, Renvoi revisited (1937-1938) 51 Harv. L. Rev. 1165, 1169. This paper has been completed some months before the Brexit-referendum and I was unable to adapt it since. 27 See recently A.Y. BORES, La sucesión mortis causa de ciudadanos ingleses residentes en España: problemas y nuevas perspectivas, (2015) 1 Cuadernos de Derecho Transnacional 226ff. 28 See e.g. DICEY/ MORRIS/ COLLINS, The Conflict of Laws (15th edn., Sweet and Maxwell 2012) 84-85. This is what happened in two similar Anglo-Spanish cases, in re Adams High Court, Ch., 31 July 1985, available at and in re Wellington (1948) Ch. 118. 29 Art. 75(1) of the Regulation. 25 26

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Gian Paolo Romano they relate to jurisdiction, law applicable, lis pendens or recognition of foreign decisions. As a consequence, and to name the quantitatively most significant example, the succession of Italians who live in Switzerland as well as that of Swiss citizens who live in Italy are still covered by the Swiss-Italian Consular Treaty of 1868,30 which is one of the oldest in force in Switzerland, and probably one of the oldest in Europe.31 Take an Italian domiciled in Lausanne who owns an apartment in Venice and wants to make a pacte successoral – something which is permissible under Swiss law32 but prohibited under Italian law33 – and to contractually undertake to bequeath his Italian flat to a friend. He might then wonder whether he is entitled to choose Swiss substantive law that would allow him to fulfil his aspiration. The Italian legge di riforma, the Swiss loi de droit international privé (“Swiss Act” or “LDIP”) as well as now the Regulation would all three essentially make it possible for him to designate Swiss law as the law of his domicile and habitual residence.34 But based on the way that it has consistently been interpreted, the Swiss-Italian Treaty, which is still binding on Switzerland and Italy and, consequently, on the individuals concerned, provides for the applicability of Italian law of nationality while not expressly contemplating the de cujus’ ability to choose Swiss law of domicile or habitual residence.35 Faced with this paradox, the Federal Tribunal wisely ruled that a designation of Swiss law by an Italian who is domiciled in Switzerland is not inconsistent with the Treaty and should be upheld. It is to be expected that the Swiss courts will also take the view that the Treaty does not According to the Swiss office of statistics (“OFS”), the Italians who live in Switzerland were 306.000 in 2014 (the dual citizens are not included), the Italian community being still today the largest foreign community in this country, available at . I also fit within the category and so does A. BONOMI, Professor at the University of Lausanne. If one thinks about all heroic efforts A. BONOMI has gone through in order to modernize Swiss, Italian and European private international law, it is somewhat surprising that his own succession still falls under the grip of a 148-year old treaty. On this treaty, see recently T. BALLARINO/ I. PRETELLI, Una disciplina ultracentenaria delle successioni [2014] Rivista ticinese di diritto 889ff. The Swiss living in Italy are, according to the Italian office of statistics (“ISTAT”), around 8.000 (the dual citizens are not included), available at . 31 The oldest of the 4.902 international treaties to which Switzerland is signatory (as of 18 February 2016) is the Swiss-American Treaty of 1850 which also governs crossborder successions (Art. VI). See T. WÜSTEMANN/ R. CICA, Der schweizerischamerikanische Erbfall [2013] Successio 161ff. 32 Arts. 494ff Swiss Code civil. 33 Art. 458 Italian Codice civile. 34 Art. 46(2) of the Italian legge di riforma and Art. 90 of the Swiss Act. Art. 21 of the Regulation provides for applicability of the law of habitual residence, so that a specification by the de cujus that the law governing his or her succession is that of the country where he or she is habitually resident is not necessary under the Regulation. Nothing prevents the de cujus from specifying it unambiguously in his or her dispositions upon death and I think it is advisable to encourage him or her to do so. 35 ATF 98 II 88, 92. 30

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Impact of the Succession Regulation on the Swiss-EU Relationships prevent a Swiss who is domiciled and habitually resident in Italy to select Italian law to govern the distribution of his or her property.36 After the entry into force of the Regulation, I guess this will also be the Italian view, all the more so that this solution flows from the European conflict rules that represent now the Italian ones.37 More complex is the question whether the law of nationality would still apply by virtue of the bilateral Treaty in the absence of a professio iuris now that Italy and Switzerland share a preference for a domiciliary nexus – habitual residence and domicile respectively – over nationality. Part of the difficulty comes from one of the alternative grounds relied on by the Federal Tribunal to uphold the designation of Swiss law by an Italian who is domiciled in Switzerland, i.e. that the Treaty might be regarded as referring to the Italian conflict rule rather than to the Italian substantive rule.38 In a later decision rendered in the same dispute,39 the Swiss highest court seems, however, to have disavowed that interpretation and encouraged to read a choice-of-law option for the de cujus into the Treaty itself without the detour through the conflict rule of the State of his or her nationality.40

36 ATF 136 III 461, 465 (“La professio iuris va di conseguenza ammessa anche nell’ambito del campo di applicazione del Trattato italo-svizzero”) and ATF 138 III 354. 37 T. BALLARINO/ I. PRETELLI (note 30), at 904. 38 ATF 136 III 461, 465: “[…] oppure considerando semplicemente che il rinvio al diritto italiano che esso [= the Treaty] prevede include la possibilità di una professio iuris permessa dall’art. 46 cpv. 2 della […] legge italiana”. 39 After having stated that a professio iuris is allowed under the 1868 Treaty, the Federal Tribunal had remanded the case back to the Cantonal authority – Ticino appellate court in Lugano – requiring it to assess whether such professio iuris had indeed been made. That was in essence ATF 136 III 461. The Cantonal decision had once again been appealed before the Federal Tribunal which handed down ATF 138 III 354. The succession in dispute – reported to be worth five billion Swiss francs – involved the second wife of an Italian citizen who died domiciled in Lugano and the three sons of an earlier marriage whom the decedent had named as heirs in equal shares in a will done in Switzerland and incorporating a designation of Swiss law. The Swiss proceedings had been initiated by the surviving spouse against a Swiss bank, Lugano branch, to seek disclosure of information about the assets held by the deceased, including as “economic beneficiary”, while various actions were simultaneously pending before Italian courts as well as in other countries. There was some suggestion that rights to obtain information about assets are more expansive under Italian law than under the Swiss law – although this fundamental part of inheritance, banking and contractual law is in a state of flux in Switzerland and elsewhere. Hence the importance of identifying the law applicable to the succession, the surviving spouse claiming that it was Italian law and the defendant bank supported by the sons claiming that it was Swiss law. Another reason why it might have been important to resolve the conflict between Swiss and Italian law is because the action en réduction to obtain the reserved portion, which was the same under Italian and Swiss law, one fourth, was 1 year under Swiss law, which term had probably elapsed, and 10 years under Italian law, which term was still running. Finally, Italian law allows the “claw-back” of gifts regardless of how far back in the past they were made by the decedent, while “claw-back” actions under Swiss law only cover the 5 year-period prior to the demise, except in case of fraud. In other words, the reserved portion is the same under Swiss and Italian law – one fourth of the estate – but the determination of the estate to calculate it may yield widely different results.

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Gian Paolo Romano Be that as it may, it is easy to predict that the Swiss and the Italian authorities will soon have to grapple with this issue. Let us turn to the situations that, under the perspective of the Member States, are caught by the Regulation and, under the Swiss perspective, fall within the LDIP. How well the two regimes are likely to get along with each other? To which extent will they harmonize and to which extent will they collide, producing inconsistency and uncertainties for the men and women involved in the Swiss-EU successions and generating unnecessary costs for the Swiss and European taxpayers? As a general comment, the Regulation should have a welcome “spill-over effect”, that is “positive externalities”, for both estate planning and estate distribution purposes with respect to those successions. And this is so for a variety of reasons. First, Switzerland – the Swiss citizens, the Swiss domiciliaries and residents, their advisors and ultimately Swiss authorities, whether administrative or judicial – will no longer have to seek coordination with each domestic system of the Member States, which sometimes is just mission impossible because of the irreconcilable idiosyncrasies of those systems, but with one system only, the one laid down by the Regulation. Second, the Regulation and the Swiss Act share, substantively, a common vision. Otherwise stated, the European multilateral regime, in terms of its basic inspiration and the individual solutions that it embraces, is much more similar to the Swiss regime than to the German, French, Spanish, Polish, etc. “mono-national” regimes which the Regulation forces into oblivion. Third, and perhaps more importantly, the coming together of European and Swiss sets of rules offers greater opportunities for those who engage in estate planning, largely because of the choice-of-law options that they jointly offer. I would like to address a number of selected points. The first one is to which extent the notions of domicile under the Swiss Act and habitual residence under the Regulation overlap (A). The second is about the jurisdictional conflicts that the Regulation and LDIP seem to fuel, which is likely to prove to be the Achilles’ heel of their interaction (B). The third addresses the substantive law governing the Swiss-EU successions (C). The fourth deals with the mutual recognition of foreign decisions and public acts, including the so called “European Certificate of Succession” (D). A.

Domicile and Habitual Residence Compared

While the main connecting factor that the Regulation relies on is habitual residence, the LDIP is centered around domicile. To which degree are the two concepts consistent with each other? The first example that is on my mind is about my neighbour. He is Hungarian and is currently serving under a 3-year contract with the Hungarian Permanent Mission at the WTO. His wife and children live in Budapest, where he flies back on average twice a month. As Recital 24 of the Regulation quasiATF 138 III 354, 357: “questo Tribunale […] non ha affatto rinviato al diritto italiano e alla legge sul diritto internazionale privato di tale Stato”. With all respect owed to the Federal Tribunal, I believe this passage is hardly consistent with the passage of the earlier decision reproduced in footnote 38 above. 40

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Impact of the Succession Regulation on the Swiss-EU Relationships definitionally directs, we need to figure out where the “centre of interests of his family and his social life” is located. I think this is probably Hungary because he has no family in Geneva and apparently little social life there apart from occasional beers with his colleagues and myself.41 But where is he domiciled in the eyes of Switzerland? Art. 20(1)(a) of the LDIP defines domicile as a combination of two elements: the fact of living in a country, sometimes referred to as the objective factor, and the “intention to settle there”, sometimes referred to as the subjective or psychological factor.42 Interestingly, this two-fold test seems consistent with the traditional notion of domicile under English law. But contrary to English law, for which “any one person has one domicile and one domicile only”, according to Swiss law, a person may very well have no domicile at all. And this is typically so for persons who live in a country without intending to establish permanent residence in that country. In which case, based on Art. 20(2), “habitual residence” controls.43 Habitual residence is defined under Art. 20(1)(b) as the place where a person “lives during a certain period of time, even if this period initially appears of limited duration”. Now, our man has no real “intention to permanently settle” in Geneva nor may he be regarded as “habitually resident” in Hungary because he spent most of his time in Switzerland. So my guess is he has no “domicile” in either Switzerland – for the subjective element is lacking – nor Hungary – for the objective element is lacking – nor in any other countries. We are then referred to his “habitual residence” as fall-back connection. Such residence is, for the purposes of the Swiss Act, I feel, rather in Switzerland because this is where he is currently physically present most of his time.44 If my understanding is correct, we are then faced with a conflict of habitual residences: Our Hungarian is habitually resident in Geneva for Switzerland while he is habitually resident in Budapest for Hungary.45 Here is the text of Recital 24: “In certain cases, determining the deceased’s habitual residence may prove complex. Such a case may arise, in particular, where the deceased for professional or economic reasons had gone to live abroad to work there, sometimes for a long time, but had maintained a close and stable connection with his State of origin. In such a case, the deceased could, depending on the circumstances, be considered still to have his habitual residence in his State of origin in which the centre of interests of his family and his social life was located”. 42 The French version of Arts. 20(1) and (2) LDIP reads as follows: “(1) Au sens de la présente loi, une personne physique: a. A son domicile dans l’Etat dans lequel elle réside avec l’intention de s’y établir; b. sa résidence habituelle dans l’Etat dans lequel elle vit pendant une certaine durée, même si cette durée est de prime abord limitée […] (2) Nul ne peut avoir en même temps plusieurs domiciles. Si une personne n’a nulle part de domicile, la résidence habituelle est déterminante […]”. 43 The rule is not that a person preserves his or her domicile as long as he or she does not create a new one, contrary to what the Swiss Civil code prescribes with respect to domestic domicile as opposed to international domicile. ATF, 12 May 2011, 5A_725/2010. 44 See however A. BONOMI (note 2), at 82. 45 One may be tempted to think that the international civil servants (“fonctionnaires internationaux”) should be regarded as domiciled in the “sending country” for the purposes of Art. 20 LDIP. See e.g. M. DEVISME (note 2), at 123. But first, it is not always clear who actually enjoy that status. Second, international civil servants do not have necessarily a 41

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Gian Paolo Romano Other categories that may raise challenges include the cross-border commuters, typically the ones who work in Switzerland but live in one of the neighbouring countries (France, Germany or Italy),46 as well as the wealthy retirees, celebrities or members of the international élite who live in Switzerland – some of them benefitting from tax advantages – but may nonetheless be regarded as “objectively more connected” with the country of their nationality for the purposes of the Regulation.47 Besides, let’s face it, an increasing number of people are so cosmopolitan as to their cultural background and so globe-trotting in their lifestyle that the way a prospective court will identify domicile or habitual residence is hard to guess. Let me report the case of two “spouses – I am quoting the Federal Tribunal – who spent their winter months travelling between their residence in Gstaad, their countryside mansion in Southampton (USA), their apartment in Paris, and Athens (Greece), where they owned two properties, while from April and October they were permanently living on their yacht”.48 As a matter of fact, the Swiss case law shows that the question whether the decedent was domiciled may be highly controversial and extensively litigated,49 with the Federal Tribunal being often reluctant to overturn the factual conclusions reached by the lower, “cantonal” courts50. The bottom-line is that situations of Swiss/EU dual domicile/habitual residence may prove a rare but regrettable occurrence.51 A “conflict of jurisdictions” in the truest sense of the term may then arise, with the authorities of two countries advancing claims to deal with the distribution of the same property according to potentially different laws.52 Something of this sort threatened to happen in a SwissFrench case where the Tribunal de première instance in Paris affirmed jurisdiction “sending country”. Third, many of them live in Switzerland for years or decades and plan to continue to live here after retirement. Be that as it may, if our Hungarian citizen were employed by one of the multinational companies trading commodities that are based in Geneva, or by the Swiss branch of a Hungarian bank, the problem will arise in the terms I described in the text. 46 According to the Swiss office for statistics (“OFS”), as many as 297.458 frontaliers travel into Switzerland every working day (as of September 2015). This figure does not include the people, including Swiss citizens, who are actually living beyond the border but are registered as Swiss residents to benefit from some tax and social security advantages or simply, in case of Swiss citizens, to avoid having to cast their ballot through distant Swiss consulates in France or Germany. On those situations where the résidence officielle is in one country and the résidence réelle in another, see D. NAZ/ J.-M. RUBIDO (note 2), at 59. 47 ATF, 7 June 2007, 5C_289/2006. See the analysis by P. MANKOWSKI, Der gewöhnliche Aufenthalt des Erblassers unter Art. 21 Abs. 1 EuErbVO [2015] IPRax 39, 44. 48 ATF, 7 June 2007, 5C_289/2006. 49 ATF, 12 May 2011, 5A_725/2010 (Switzerland or the United States?), ATF, 19 April 2010, 5A_171/2010 (Switzerland or Morocco?), ATF, 8 March 2005, 5C_263/2004 (Switzerland or Monaco?). 50 ATF, 12 May 2011 (note 49), para 2.2 (“De jurisprudence constante, le Tribunal fédéral se montre réservé dans ce domaine, vu le large pouvoir qu’il reconnaît en la matière aux autorités cantonales”). 51 See the examples offered by A. DORMANN (note 2), at 84. 52 See B. CHAPPUIS/ J. PERRIN (note 2), at 35.

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Impact of the Succession Regulation on the Swiss-EU Relationships based on domicile in Paris, ordered the “interim administration” of the estate and subsequently authorized a charity to take possession of the assets based on French law, whereas the Geneva Cour de justice – the Cantonal appellate court – concluded that Swiss court had jurisdiction based on domicile in Geneva and appointed an administrator.53 This brings me to the second point I want to address. B.

Jurisdiction

Let me first remind that the term “court” within the Regulation covers not only the judicial bodies that have the power to settle disputes, but also the non-judicial authorities, typically public notaries, or “legal professionals” that have the ability, under the control or supervision of a court, to conduct non-contentious operations, such as preparing inventory of the assets or overseeing the amicable division of the estate.54 This appears to match the Swiss approach to the extent that the jurisdictional provisions within the LDIP consistently mention the “judicial or administrative authorities”.55 Now, after 17 August 2015, the situations where there might be concurrent jurisdiction of the Swiss and Member States’ authorities are likely to increase (a), which is why it is fitting and appropriate to explore how coordination may be achieved (b). 1.

Potential Jurisdictional Contest

Assume a Frenchman who is domiciled in Switzerland and owns assets both in Switzerland and in France, including an apartment in Paris or Megève. When the habitual residence of the de cujus is in a third country, the Regulation allows several alternative heads of jurisdiction. The jurisdictional claim that the European Union advances as against the outer world reaches farther than under most of the “mono-national” rules displaced by the Regulation. The nationality of the propositus coupled with the location of part of his property is one of those subsidiary grounds.56 As a result, French authorities are empowered by the Regulation to deal with the estate at hand. And this power essentially extends to reach out to Swiss assets, including immovables, as a consequence of the “unity principle” that the Regulation embraces. On the Swiss side, Swiss authorities would also see themselves as entitled to rule on the succession based on the decedent’s domicile at death. With an important caveat though. For Art. 86(2) requires them to defer to the “exclusive jurisdiction” as vindicated by the State of situs of real property.57 ATF, 19 March 2002, 5C.171/2001. The Federal Tribunal reversed the Geneva decision in that it failed to dismiss jurisdiction. 54 Art. 3(2) of the Regulation. 55 Arts. 86(1), 87(1), 88(1) LDIP. 56 Art. 10 of the Regulation. 57 For some of the problems raised by this provision, see M. LIATOWITSCH, Ausländische Grundstücke im internationalen und im materiellen Erbrecht der Schweiz, in 53

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Gian Paolo Romano And France used to claim exclusive, sovereign control over the French immovables, which is why the Swiss authorities have consistently refused to deal those immovable.58 But what will happen now that the reach as well as the nature of the French jurisdiction are defined by the Regulation? The notion of “exclusivity” suggests we project ourselves to the stage of recognition. Now the Regulation – it is true – has not attempted to unify the recognition law across the Member States when it comes to decisions emanating from third States, and, as a consequence, the recognition of Swiss decisions will continue to be assessed based on French domestic rules on recognition. But because of the change in French “direct” jurisdiction rules, and because the Regulation sensibly refrains from characterizing any of them as “exclusive”, I expect France would be prepared to enforce a Swiss decision – Switzerland being last domicile of the de cujus – which also covers French immovables.59 And if my prophecy proves correct, a French-Swiss jurisdictional contest arises in our French-Swiss case study, with authorities at either side of the border being willing to rule on the distribution of all assets regardless of their character or situs. And this also applies to the property left by any EU national domiciled in Switzerland: Germans, Portuguese, Swedes, Poles… How can such jurisdictional contest be prevented from turning into a jurisdictional conflict, which might lead to a decisional conflict which is contrary to the well-understood, bona fide interests of everyone? 2.

Means to Avoid a Contest Turning into a Conflict

A desirable coordination may be attempted in a number of ways. The first is the choice of court by the parties. Which leads us to ask: Who are the parties? The de cujus comes obviously first to mind. But is it appropriate to allow a person to try and avoid parallel proceedings that are likely to cause difficulties, delays, unnecessary costs and confusion when it comes to the administration and distribution of his or her estate? This has caused some conceptual difficulties to many. When the question of the forum effectively arises, that’s because the de cujus has become the deceased. Why should he or she be permitted ante mortem to be interfering with the post mortem forum and to direct where his or her family or entourage should have his or her property administered and any potential disputes settled?60 A similar reasoning may explain why the choice of forum by the de cujus has ultimately been excluded by the drafters. For those countries which allow the testator to select H. HEISS/ A.K. SCHNYDER, Aspekte des internationalen Immobilienrechts (Dike 2011) 35ff; P. GROLIMUND, Verfahrensrechtliche Fragen zu Art. 86 Abs. 2 IPRG (Dike 2011) 49f. 58 See e.g. ATF, 25 June 2004, 5P_49/2004. The Geneva court while abstaining from adjudicating rights on the immovable, attributed the debts incurred to buy it to one of the parties, who asked for review before the Federal Tribunal violation of Art. 86(2). A brilliant Swiss attorney recently said to me: “The French immovable always raises problem”. 59 So does I. PRETELLI, in A. BONOMI/ P. WAUTELET (note 2), at 624, para 10, as well as B. CHAPPUIS/ J. PERRIN (note 2), at 22ff and E. LEIN (note 2), at 216 (“Es ist daher anzunehmen, dass die Ausnahme des Art. 86 Abs. 2 IPRG gegenüber Verordnungsstaaten nicht mehr zum Tragen kommt”). 60 See e.g. P. LAGARDE (note 10), at 723.

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Impact of the Succession Regulation on the Swiss-EU Relationships arbitration to settle disputes among his survivors, such a concern is not entirely convincing.61 Interestingly, the Brussels I and Lugano regimes offer an example of one-sided designation of a forum, an example of choice-of-court that is not the product of an agreement.62 The settlor of a trust has the ability to designate the forum where all litigation relating to trust law issues is to be brought, and one may wonder whether this covers trust litigation arising after his or her death. Incidentally, Art. 149e of the Swiss Act goes a step further for it empowers the settlor to authorize somebody else – typically the trustee or the proctor – to select the trust forum and one is left to ask whether this designation by a third party may also be made post mortem.63 Coming back to our hypothetical, let’s assume that our Frenchman has designated the French authorities as exclusively competent to deal with both contentious and non-contentious issues arising out of his succession. Art. 5 of the Swiss Act, which provides for choice of court in matters “involving an economic interest”,64 if read in conjunction with Art. 87(2) – which permits Swiss people domiciled abroad to designate Swiss authorities: I will come to that65 – is likely to lead to this unilateral choice being upheld on the Swiss side. This means that if one of the parties raises the existence of choice of French forum by the deceased, Swiss authorities may be willing to decline jurisdiction in favour of their French counterparts. This is my guess but, to the best of my knowledge, there is no direct precedent by the Federal Tribunal so far. What if our Frenchman selects the Swiss forum of his domicile coupled with a choice of Swiss law? He may have had in the past some issues with the French tax authorities and he may be rather willing to have distribution of his estate be conducted in Switzerland. It would seem however that the French courts are under no obligation to defer to such a designation of Swiss forum. The provisions that may allow taking into account of such a choice of forum – I think about Arts. 5 and 6 – circumscribe it to situations where the designated forum is that of a Member State. But what if our Frenchman includes in his last will a provision along those lines: “All disputes relating to my succession shall be brought before the Swiss courts. Whoever, in breach of this will of mine, seizes 61 There is a growing interest in Switzerland for arbitration with respect to inheritance matters: see U. HAAS, Schiedsgerichte in Erbsachen und das New Yorker Übereinkommen über die Anerkennung und Vollstreckung ausländischer Schiedssprüche [2011] SchiedsVZ 289ff, H.R. KÜNZLE (ed.), Schiedsgerichte in Erbsachen (Schulthess 2012). 62 F. GUILLAME, in A. BUCHER (ed.), Commentaire Romand – Loi sur le droit international privé – Convention de Lugano (Helbing Lichtenhahn 2011) 1233. 63 Art. 149b LDIP provides for “the choice of forum or the authorization to choose the forum contained in the trust deed”. 64 That’s the case in succession matters, including, as the Supreme Court has recently ruled, any ancillary proceedings such as the one for revocation of an executor (ATF, 19 May 2014, 5A_55/2014, para 4.4). The consequence is that voluntary submission through failing to challenge also establishes jurisdiction, which was indeed what happened in the case mentioned, with the executor being sued in Switzerland and having failed to challenge jurisdiction before the lower court, and trying to challenge, unsuccessfully, based on Art. 6 LDIP. 65 See below in this section II.A.2.

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Gian Paolo Romano the courts of another country will lose any and all rights that I have conferred upon him or her through the present will and testament”. Would such a testamentary clause be enforceable? Let me turn to the possibility for the prospective heirs and legatees to agree on a choice-of-court, which would then be a veritable choice-of-court agreement. Suppose that, after the death of our protagonist, all those who make claims with respect to his estate agree to have inheritance disputes, should they arise, settled by the Swiss authorities (or the French authorities). Would such an agreement be binding on those people and, as a result, on the courts of the two countries involved, particularly the non-designated forum? In a Swiss-Italian case, the Federal Tribunal had to rule on the validity of choice-of-forum designating the first instance tribunal in Geneva.66 The choice-of-forum was incorporated in an out-ofcourt settlement entered by the spouse and the daughter of the deceased, an Italian domiciled in Italy.67 The Swiss Supreme Court specified that this postmortem agreement between the parties is enforceable on the ground that inheritance disputes are “patrimonial in character” within the meaning of Art. 5 of Swiss Act.68 I guess anyone who’s not a party to that choice-of-court – such as the creditors – should not be bound by it. On the French front, the Regulation lays down in Arts. 5 through 7 a whole bunch of provisions on choice-of-court agreements. But here again the validity of those agreements is conditional upon those agreements pointing to the courts of a Member State, not that of a third country. And I do not think that, in order to uphold such agreements”, the domestic law of the Member State may be relied upon subsidiarily. So, if the parties agree on Swiss authorities, and one of them has second thoughts and brings the dispute to the French authorities, those French authorities are likely to disregard the choice-of-forum and affirm jurisdiction. The second mechanism which may contribute to the quest for coordination is lis pendens. Recently, the Federal Tribunal was faced with three inheritance cases – a Swiss-Greek case,69 the Swiss-Italian case that I have mentioned,70 a Swiss-Monegasque case71 – where the defendant at the Swiss proceedings had filed a motion for stay or dismissal based on lis pendens. In the first, a charity claiming inheritance rights under the will left by the deceased sued a legatee before the Athens tribunal to have her declared divested of her status as legatee and ordered to return the assets in her possession, whereas the legatee sued the charity in Lausanne to obtain delivery of assets in possession of the charity. The Federal ATF 138 III 570. Who happened to be G. Agnelli, the prominent Italian industrialist who died in Turin, where he was domiciled. Both domicile and nationality pointing to Italy, the SwissItalian Consular Treaty did not apply. 68 “En matière patrimoniale – in the English version, « in matters involving an economic interest » – les parties peuvent convenir du tribunal appelé à trancher un différend né ou à naître à l’occasion d’un rapport de droit déterminé”. 69 ATF, 7 June 2007, 5A_289/2006. 70 ATF 138 III 570, case comment by S. PESTALOZZI, Internationale Litispendenz in erbrechtlicher Streitigkeit [2013] Successio 227ff. 71 ATF, 29 October 2015, 5A_296/2015, para 5.2. 66 67

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Impact of the Succession Regulation on the Swiss-EU Relationships Tribunal retained the identity of proceedings and stayed the Swiss action based on Art. 9 LDIP by concluding that “what is material is the fact that the fate of the two claims will depend on a controversial question which is common to both, that is whether one of the parties is legatee or not”.72 In the case involving Italy, an action seeking recovery of part of the assets – pétition d’hérédité – was filed in Turin by the daughter of the deceased against the surviving spouse. The surviving spouse strikes back in Switzerland and requests the Geneva Tribunal to state and declare that a prior settlement entered with her daughter and encompassing the assets claimed by her daughter in Italy is valid and enforceable. Her daughter successfully files a motion for dismissal based on lis pendens.73 According to the Swiss Supreme Court, the test to determine whether the Swiss action is identical with the foreign action requires assessing whether the “Swiss and foreign decisions will be incompartible”, “regardless of whether one of the parallel claims is preliminary to the other and regardless whether one of them has been made as a principal claim or as an alternative or subsidiary claim”.74 So the Federal Tribunal embraced a large, comprehensive notion of “identity of actions”, which draws some inspiration from the one developed by the Court of Justice of the European Union in the context of the Brussels I Regulation which is likely to be the one under the Regulation for inheritance matters. Now, coming back to our hypothetical and assuming there is identity of actions before Swiss and French authorities, is such an identity sufficient to trigger the stay of the second-in-time proceedings? Now, Art. 9 LDIP requires the Swiss court to assess the prospect of the French decision being recognized in Switzerland.75 The trouble is, decedent’s nationality, even if coupled with the situs of part of the estate, is not part of the list of bases for jurisdiction that Switzerland is prepared to accept unless the de cujus has chosen French law.76 I will come shortly to applicable law and recognition. Let us assume for a moment that our Frenchman has failed to make a choice of French law, in which case the French decision has virtually no chance to qualify for recognition in Switzerland and the Swiss court seems to have no choice but to disregard the prior-in-time action filed in France and continue proceedings. What if the French court is seized second? Art. 17 of the Regulation which provides for a strict regime of lis pendens only applies to intra-European lis pendens, contrary to the approach taken by the Brussels I Recast. This probably means that the French domestic rules and principles on international lis pendens, still control. The domestic principles are generally less liberal and, more uncertain, than the European ones.77 To conclude on this ATF, 7 June 2007, 5A_289/2006, para 3.2. Based on Art. 9 of the 1933 bilateral Convention on recognition and enforcement. 74 ATF 138 III 570. 75 Art. 9(1): “Lorsqu’une action ayant le même objet est déjà pendante entre les mêmes parties à l’étranger, le tribunal suisse suspend la cause s’il est à prévoir que la juridiction étrangère rendra, dans un délai convenable, une décision pouvant être reconnue en Suisse”. 76 Based on Art. 96 LDIP. See section II.D. below. 77 That the Regulation prevents the Member States to take lis pendens into account is an option that is contrary to the coordination that should be achieved. 72

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Gian Paolo Romano point, the French lis pendens is not likely to be observed by the Swiss court and it is not certain whether French courts will be prepared to defer to Swiss authorities if seized earlier. This leads to the third way in which parallel proceedings may be accommodated. Art. 12 of the Regulation provides that, when the estate includes assets located in third countries, the Member State’s court of competent jurisdiction may refrain from ruling on those foreign assets “if it may expected that its decision in respect of those assets will not be recognized and, where applicable, declared enforceable in that third State”. So if the French court is satisfied that the chances of the French decision qualifying for recognition in Switzerland are low, the French court may be well-advised to leave the Swiss segment of the estate out of its reach and let the Swiss authorities deal with them. As is apparent from the analysis so far, to the extent that Switzerland and a Member State both claim jurisdiction on the whole property based on the “unity” or “universality” principle, including on the assets located on the territory of the competing country, this is likely to produce the “jurisdictional fragmentation” of the estate (morcellement juridictionnel). But this result is inconsistent with the common inspiration and shared aspiration of the European and the Swiss regimes. This also may generate some well-known difficulties and other less familiar difficulties. For example, how should the liabilities of the estate be treated? In a SwissFrench case, a significant debt incurred by the deceased in order to buy an apartment in France was part of what he had left to his next-of-kin. In those circumstances, should the creditor – who is often a bank – try and enforce its claim against the French part of the estate, i.e. before the French authorities only? This was the view ultimately taken by the Federal Tribunal.78 A Swiss author has recently suggested that, in case of fragmentation of the estate (scission), any debt which is part of it, however and wherever arisen, should be enforceable before the authorities of any of countries involved.79 Another issue that has attracted comparatively little attention so far is how to identify the situation of assets for the purposes of jurisdiction. This includes determining the relevant time: time of death, time of filing a suit, time of the decision? Bank funds may through a couple of clicks on a keyboard be transferred from one country to another. Immovables may be disposed of by way of conservative measure and the proceeds moved out of the situs jurisdiction. I was recently advised to buy some shares in a non-listed Germany company that purchases, refurbishes and resells commercial immovables. This small investment has been done via a Swiss bank that is actually taking care of those shares. Where is the portion of my wealth represented by them? Have I become owner of real property in Germany?80 Suffice it to have mentioned the problem. 78 See e.g. ATF, 25 June 2004, 5P_49/2004. A brilliant Swiss attorney recently said to me: “The French immovable always raises problem”. 79 Y. LEUPIN, La prise en compte de la masse successorale étrangère en droit suisse (Schulthess 2010), Les effets de la scission successorale en droit suisse [2011] Successio 150ff. 80 For difficulties arising out of the localisation of assets, see E.T. MENDIOLA, La determinación de los bienes del concursado: las acciones de sociedades anónimas, in Liber amicorum Alegría Borrás (Marcial Pons 2013) 833ff.

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Impact of the Succession Regulation on the Swiss-EU Relationships I would like to briefly turn to the converse scenario, that of a Swiss who lives in a Member State. Think about those Swiss retirees who move to Spain to live closer to the true beaches.81 Spanish authorities of habitual residence have jurisdiction under Art. 3 of the Regulation. The reach of their adjudicatory and administrative powers in principle extends over Swiss assets, realty included. As a result, there is no need for the Swiss authorities to engage in lengthy enquiries to ascertain whether the foreign courts of domicile deal with the Swiss part of the estate within the meaning of Art. 87 LDIP. The answer is now the same for all Member States: an emphatic “yes”.82 So it would seem that no Swiss-Spanish jurisdictional contest may arise here, which is good news.83 This is only true, however, as long as our de cujus does not make a choice of Swiss forum. For Art. 87(2) LDIP indeed offers the Auslandschweizer such an option while specifying that designation of Swiss law entails designation of Swiss courts.84 If the propositus typically directs in his last will that he wants to have his property dealt with by Swiss authorities, not only will the Swiss authorities have to take care of the Swiss segment of his property, but they are likely to regard their jurisdiction over those assets as exclusive.85 If this is so, any Spanish decision pretending to distribute the Swiss assets will not be enforced in Switzerland of the Regulation. The Spanish courts would have then discretion to refrain from ruling on those assets under Art. 12. This will ultimately lead once again to splitting the estate in two shares for the purpose of jurisdiction depending on the location of the individual assets.

The Swiss living in Spain were, in 2014, 13.670, available at . 82 See for a recent example involving Morocco, ATF, 19 April 2010, 5A_171/2010 and another more recent one involving Monaco ATF, 26 May 2015, 5A_313/2015. A welcome consequence is that, if a Swiss (or foreigner) is habitually resident and domiciled in France and leaves an immovable in Switzerland, the Swiss authorities will not have to deal with this because their jurisdiction is subsidiary and conditional upon the French authorities not dealing with the immovable abroad. Now there are a number of French decisions that have accepted to deal with the immovable abroad. Cass (1e Ch. civ.), 23 June 2010, Tassel; Cass. (1e Ch. civ.), 20 June 2006, Wildenstein; Cass (1e Ch. civ.), 21 March 2000, Ballestrero. For an analysis of those cases, Le dilemme du renvoi (note 13), at 401f, 431f, with further references. See ATF, 28 June 2010, 5A_754/2009, who retained the lack of jurisdiction of French authorities and asserted jurisdiction based on place of immovable under Art. 88 LDIP. 83 See A. MAEDER, Der schweizerisch-spanische Erbfall [2013] Successio 242ff. 84 “Les autorités du lieu d’origine sont toujours compétentes lorsque, par un testament ou un pacte successoral, un Suisse ayant eu son dernier domicile à l’étranger soumet à la compétence ou au droit suisse l’ensemble de sa succession ou la part de celle-ci se trouvant en Suisse”. 85 See ATF 28 October 2002, 5P.274/2002, para 4.1 (“Die gewählte Zuständigkeit ist eine ausschliessliche”, although this may have been stated obiter). See A.K. SCHNYDER/ M. LIATOWITSCH, Basler Kommentar, Art. 87 IPRG, para 9, and further references. B. CHAPPUIS/ J. PERRIN (note 2), at 23. 81

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Law Applicable to the Succession

I have so far referred in the main to a litigation scenario. We should not lose sight, however, of an almost universal truth. When he or she starts thinking about how his or her property will devolve upon death, any person of good will and good faith does not want his or her loved ones or close members of his or her entourage to tear each other apart in litigation. People generally hope that, when they will no longer be of this world, there will be at least some consensus among their survivors.86 They want peace among them, and not war. Harmony not fight. Nor is a person likely to relish the idea that part of his or her property may be squandered in long and costly disputes among his or her next-of-kin. A testator often works on the orderly and efficient disintegration of his or her estate in order to prevent the disintegration of his or her family. The après moi le déluge prospect is generally not appealing to him or her. And so, if a conflict arises among those who are supposed to continue his or her personality, and if such conflict pushes them to fight judicially against one another, this often means that things have not gone the way the decedent wanted. This often means that one of his or her most cherished wishes has not been fulfilled. Now, facilitating the orderly, non-contentious distribution of property from estates is one of the underlying objectives of the Regulation. In the Swiss-EU area, such an objective is favoured by the coming together of the Regulation and the Swiss Act. They promise to live harmoniously with each other in this respect.87 For they share common guiding principles. I will mention three of them. The first is that the basic connecting factor they both embrace when it comes to the law defining who is entitled to inherit and which share in both testate and intestate successions is a domiciliary nexus – domicile and habitual residence88 – whereas a number of EU Member States, such as Germany, Sweden, Spain, Austria, used to rely on nationality. The second is that the domiciliary nexus also extends to immovables, while some EU Member States, most notably France, were subjecting immovables to the law of situs. The third is that the ability of the de cujus to choose whether to have his or her succession governed by law of his or her nationality, on the one side, and domicile or habitual residence. While such an option has been recognized in Switzerland for over a century, it was ignored across vast expanses of the European judicial area. Let me offer some examples of how things will be improved. The first hypothetical that is on my mind is about the successions of Swedish nationals who die intestate domiciled in Switzerland and leave a spouse and child from an earlier union. Before the entry into force of the Regulation, Swedish law used to apply according to Sweden to all his movable property based on nationality. Switzerland 86 This does exclude that some are dissatisfied with what they received. To be dissatisfied does not mean you are going to fight to obtain more. 87 For similar conclusions, I. SCHWANDER (note 2), at 1096 and A. BONOMI (note 2). 88 Except in case of bilateral treaty providing otherwise: this is the case of the 1868 Swiss-Italian Treaty as well as the treaty between the Empire of Persia and Switzerland, that is also defines an Iranian domiciled in Switzerland as submitted to Iranian law (see ATF, 2 April 2014, 5A_947/2013).

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Impact of the Succession Regulation on the Swiss-EU Relationships took – and still takes – a different view: Swiss law should apply to all movable assets, including the Swedish ones, based on domicile.89 Now, Swedish substantive law favours the surviving spouse and Swiss substantive law favours the child. A Swedish decision was unlikely to qualify for recognition in Switzerland because, as already mentioned, nationality of the deceased represents no appropriate basis for foreign jurisdiction under Swiss recognition law.90 Therefore, Swedish lis pendens had little chance of triggering a stay of Swiss second-in-time proceedings. The disagreement between Sweden and Switzerland on who should inherit the estate and for which part was ultimately encouraging disputes between the spouse and the child, with the spouse being tempted, including ante mortem, to get everything she could – paintings that adorn the Swiss matrimonial home, jewels, everything her husband kept in his safe box – and bring them to Sweden in order to be able to secure title over a greater proportion of them. The Regulation being now in force, Sweden and Switzerland agree on Swiss law of habitual residence and domicile applying to the devolution of the property of our Swede. The place of location of the assets have in principle no influence on the law defining the respective share of the decedent’s next-of-kin. So this kind of law-of-the-jungle behaviour will no longer be profitable. And because of the choice-of-law option which is offered by both Regulation and the Swiss Act, our Swede is effectively free to choose between Swedish and Swiss law. Before 17 August 2015, in order to achieve harmony between the countries with which he had the closest ties and as a consequence between the persons with whom he had the closest ties, his wife and his son, he was forced to choose Swedish law. And a “forced choice” is no real choice. The bottom line here again is that harmony between the two countries involved will promote harmony between the individuals involved, remove incentives for litigation and reduce costs for everybody. And everything I said about Swedes holds true for Germans living in Switzerland.91 Needless to say, the German community domiciled in Switzerland is significantly larger than the Swedish community.92 It should be noted that the bouquet of options that the Regulation offers the de cujus is greater than the one available to him or her under the Swiss Act. First, let us think about dual citizens, whose number is significant and ever increasing. Now, the Regulation does not make any difference between the two nationalities that the de cujus may hold even when one of those nationalities is that of a third state. If one think about the widespread propensity of the domestic systems to give preference to the nationality of the forum, this impartiality is a tremendous innovation. As a result, the dual French-Swiss citizen who is domiciled in Paris may subject his succession to Swiss law even if he has never lived in Switzerland. By contrast, the French-Swiss who is domiciled in Geneva is not permitted, under the Swiss Act, to designate French law. For the LDIP does not view him as “foreigner” Art. 90 LDIP. Art. 96 LDIP does not include nationality apart from choice of law by the de cujus: see section II.D. below. The bilateral treaty between Sweden and Switzerland of 1936 does not provide for nationality as sufficient basis to justify recognition. 91 See E. LEIN (note 2), at 216. 92 298.027 versus 7.992 according to 2014 statistics. 89 90

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Gian Paolo Romano for the purpose of professio iuris. The same is true for people holding German and Swiss citizenship who are domiciled in Zurich or Basel, with the Regulation allowing them to choose German law while Switzerland does not.93 As a result, it is advisable not to encourage Swiss nationals who also hold the nationality of a EU country and live in Switzerland to rely on the generosity of the Regulation. Second, the choice of law of nationality is, under the Regulation, valid although the nationality of the country whose law has been chosen has been subsequently relinquished by the testator – it is kind a perpetuatio professionis iuris. According to the LDIP, a professio iuris in favour of the law of the State whose nationality has been subsequently dismissed becomes void. The third, and more important point relates to what the Regulation terms “dispositions of property upon death”.94 According to the Regulation, the law of habitual residence at the time when the disposition is made governs both admissibility and substantive validity. The Swiss Act does not provide for exceptions to the law of domicile at the time of death (but for pactes successoraux – I will come in a minute).95 Let us assume a Portuguese that lives in Spain and makes a fideicommissus relying on Spanish law. He then moves to Switzerland without changing his last will. He dies a Portuguese national domiciled and resident in Switzerland. He had made no professio iuris in favour of Spanish law nor could he have done so under the Swiss Act. For Art. 90 refers either to Swiss law as the law of his last domicile, which is Switzerland, or to the law of nationality, which is Portugal. Law of domicile at the time of choice is not an option. Based on the Swiss Act, this fideicommissus is not enforceable because Swiss law applies to its admissibility and substantive validity. Based on the Regulation, that defines the law in Spain and Portugal, Spanish substantive law of habitual residence at the time when the disposition was made is applicable. Spanish law upholds this testamentary disposition and honours the expectations of the testator as to its validity. Regrettably, the Swiss and European regimes conflict on this point and this conflict incentivizes conflicts between individuals involved in the succession. The solution adopted by the Regulation seems to be more appropriate and fairer. As to the formal validity of a professio iuris, Art. 22 of the Regulation requires a choice to “be made expressly in a declaration in the form a disposition of property upon death” or “demonstrated by the terms of such a disposition”. While the language of the Swiss Act seems to be more restrictive on this point – Art. 90 requires the choice to be made “in a will or inheritance agreement” (pacte successoral) –, the case law shows that a “tacit choice” may be a valid choice under the LDIP. The question then arises as to which circumstances suggest the de cujus has made a tacit choice. Swiss precedents might also prove of some interest for the purpose of construing Art. 22 of the Regulation. In an inter-cantonal case, the de cujus, who was domiciled in Ticino, had dual Canton of origin, Basel and Soleure. She had disposed of her property in favour of six nephews and nieces – named as heirs – while excluding her brothers and sisters. The Swiss federal law at that time 93 B. HÖSLY/ S. DEBRUNNER (note 2), at 276, who suggest considering making the LDIP more liberal on this point. 94 Art. 22 of the Regulation. 95 Art. 94 LDIP.

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Impact of the Succession Regulation on the Swiss-EU Relationships provided for a reserved portion (réserve héréditaire) in favour of the brothers and sisters while allowing the Cantons to abolish such reserved portion, which Soleure and Basel had done. The de cujus had the ability to choose the legislation of his or her Canton of origin or of one of his or her Cantons or origin. The issue was then whether the de cujus had chosen the law of Basel or Soleure, in which case her testamentary dispositions were fully enforceable based on cantonal law, whereas, in the absence of such a choice, the sister of the de cujus was entitled to 1/8 of the estate based on federal law. The Federal Tribunal held that “it is not necessary that the testator makes a formal, solemn declaration in favour of [a particular law] but may refer to it in vague and even tacit terms, provided that the text of the provision contains non-ambiguous indications”.96 However, “mere substantive concordance of the will with one of his or her laws of origin is not sufficient”.97 A professio iuris was ultimately discarded. In a later Swiss-German case, the Federal Tribunal reached the opposite conclusion.98 A German citizen domiciled in Ticino had left the whole of her property to a lady domiciled in Germany while excluding her daughter, also domiciled in Germany. The daughter sued the testamentary heir in Switzerland claiming her reserved portion under Swiss law, which was threequarters of the estate. The testamentary heir relied on German law – according to which the forced share was one half – by virtue of a choice of law. The Federal Tribunal held that relying on circumstances “outside the testamentary act” is also permissible provided the will contains some “indications” to this effect. The testatrix had used the term Alleinerbin, which – the Supreme Court held – makes greater sense under German law, for which persons entitled to a forced share are not “heirs” but “creditors”, than under Swiss law, where they are characterized as “heirs” in their own right (héritiers réservataires). This textual element was corroborated by a bunch of factors which suggested that the de cujus had German law in mind: Not only had the will been drafted before a notary in Germany in the forms prescribed by German law, but German law was applicable according to German private international law based on nationality, and so no express mention of German law was necessary for German law to govern the succession under the perspective of that country. The fact that the will is drafted before the notary public of a country is however per se not sufficient to presume the intention of the testator to rely on the substantive law of that country. In a Swiss-Mexican case, a Mexican citizen had made a first will at a time when he was domiciled in Mexico and had no contacts with Switzerland. Ten years later, he made a second will in Switzerland before a Swiss notary public where he disposed of an immovable in Montana (Valais),99 indicating that he was resident in Switzerland although he had “Non è necessario […] che il testatore si pronunci in termini solenni […]: può anche riferirvisi in modo approssimativo o persino implicito, purché il testo della disposizione a causa di morte contenga indizi univoci, gli elementi estrinseci potendo servire semmai a interpretare le indicazioni che emergono dal testo, ma non è supplire o a sostituire il medesimo” (ATF 109 II 403, 406, para 2b). 97 “La semplice consonanza sostanziale di un testamento con la normativa d’un cantone di cui il disponente ha l’attinenza non basta ancora […]” (109 II 403, 407). 98 ATF 125 III 35. 99 ATF, 24 June 2002, 5P.198/2002. 96

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Gian Paolo Romano retained a “legal domicile” in Mexico, which may not have reflected the reality at the time when he passed away. The Federal Tribunal upheld the analysis of the lower court which had found for a professio iuris of Mexican law with respect to the first will even if the testator was not aware of any conflict of laws nor of his ability to choose between them. This seems to confirm that the de cujus does not need to be aware of a choice of law – Rechtswahlbewusstsein in German – not to be faced with a conflict of laws as a precondition for a professio iuris. More interestingly, the lower court concluded that the testator also implicitly intended to rely on Mexican law in his second will, based on a number of arguments: On the one hand, the second will had dealt with the Swiss immovable only, while confirming the first will for the remainder; On the other, the manner the second will was drafted was identical with that of the first will; Finally, “the testator was unlikely to have intended to submit the devolution of the Swiss immovable to a different law than the law governing the remainder of his succession”. It was ultimately the bond existing between the two wills – just as in case of two “related contracts” – that, in the eyes of the Swiss court, justified submitting the second will to the law tacitly chosen – to be more accurate: tacitly relied on – to govern the first. The analogy with the contractual context readily occurs to mind because a choice of law incorporated in a contract is presumed to extend to related contracts subsequently entered into by the parties absent any indication to the contrary. And, by the way, had the Federal Tribunal refused to conclude in favour of a professio iuris with respect to the Swiss will, Swiss substantive law would likely have been applicable to the Swiss immovable based on last domicile, which would have raised the question of validity of a professio iuris with respect to the part of the estate only. This is a complex question. There is no blunt prohibition under the LDIP, which expressly allows a Swiss national domiciled abroad to designate Swiss law as applicable to Swiss assets only.100 Under the Regulation – which sounds more stringent on this point – “a person may choose” the law of his nationality “as the law to govern his succession as a whole”,101 but the consequences of a choice of law included in a will dealing with some assets only are probably to be determined based on the circumstances of the case and particularly the presumed intent of the testator.102 Let me also specify that, according to Swiss jurisprudence, the law that has been chosen by the testator further governs the circumstances that entail revocation of the will which incorporates such a choice.103 A recent case allows to appreciate this point. A British national domiciled in Switzerland had designated English law in a will made in 1968 to which he had made a codicil in 1970. He got married – for the third time – in 1972. According to English substantive law, “a will shall be revoked by the testator’s marriage”, subject to some exceptions that were not relevant in the case at hand.104 The Federal Tribunal paid heed to what I am tempted to Art. 87(2) LDIP. Art. 22(1). 102 A. BONOMI, in A. BONOMI/ P. WAUTELET (note 2), at 316-317. 103 Art. 22(3) provides that the “substantive validity of the act whereby the choice of law was made shall be governed by the chosen law”. 104 Section 18 of the Wills Act 1837. 100 101

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Impact of the Succession Regulation on the Swiss-EU Relationships call the “principle of severability” of the testamentary clause incorporating the professio iuris from the remainder of the dispositions upon death and concluded that the law designated by the testator may well invalidate the will containing such a designation. This triggered intestacy. The question then arose as to whether the law applicable to intestate succession was that chosen by the de cujus in the will that was null and void, i.e. English law, or that applicable in the absence of a valid choice of law, i.e. Swiss law. The Federal Tribunal took the first option. And I believe right so. If the choice of the law of a particular country is relied on to invalidate a will, it is hard to see why it should not be relied to determine consequences of such invalidity, including intestacy. This appears once again consistent with the choice of law in contracts. The law chosen by the parties may cause the contract to be null and void, in which case it is nonetheless for the law chosen to govern the consequences of invalidity, typically when it comes to restitutionary claims. Speaking about estate planning, one ought to mention what the English version of the Regulation designates as “agreements as to succession”. The French version uses the term pactes successoraux,105 which is likely to be more familiar to most. For the jurisdictions that allow them, this is an important estate planning tool. Because the quintessential characteristic of a pacte successoral is to be concluded by two or more people, this is “concerted planning”, bilateral or multilateral, including “family planning”, as opposed to “unilateral planning”. Now, Swiss substantive law is probably one of the most supportive of this kind of arrangements. A number of domestic legislations prohibit them altogether, such as the Italian and the Spanish common law. Others allow them to a limited extent, like Austria, which only permits Erbverträge between spouses, or France, which only authorizes a forced heir to undertake vis-à-vis the de cujus not to file “claw-back” action (so-called “RAAR”).106 Now, the “agreements as to succession” established in conformity with Swiss law of nationality or domicile of the person whose succession is at stake may circulate with greater certainty and freedom across the European Union than they used to do.107 Take a dual Swiss and French national who is domiciled in Paris. He should be able to conclude with the members of his family a pacte successoral in reliance on Swiss law to the extent that he is allowed to designate Swiss law as that of one of the countries of his or her nationality. And it is little realistic to imagine that Member States will allow successful challenge of the validity of the Swiss law-based agreements on the ground of public policy. Here again the Regulation promises to be more liberal that the Swiss Act for it provides for “severing” the law applying to the “agreement as to succession” and the law applying to the succession itself. And parties to “agreements of several persons”, such as mutual or joint wills, are, under the Regulation, free to designate the law of the nationality of one of them while the LDIP only allows designation of the law of common nationality as a substitute for the law of domicile at the time of the agreement. For example, two spouses – he is German and she is Swiss – domiciled in Switzerland should, under the Regulation, be able to choose German law

Art. 25 of the Regulation. Loi n° 2006 du 23 juin 2006. 107 See N. WILLIMANN / G. FOTIOU (note 2), at 344; A. DORMANN (note 2), at 105. 105 106

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Gian Paolo Romano which allow for gemeinschaftliches Testament, whereas that kind of “mutual will” is unlikely to be upheld under Swiss law. D.

Recognition

No more than any of the instruments adopted by the European Union so far, the Regulation does not deal with recognition of decisions or public deeds or acts emanating from third States. Domestic recognition law of the individual Member States remains unaffected on this point. Does this mean that the Regulation is devoid of any influence when it comes to recognizing or not recognizing decisions entered in third States? To the extent that one of the requirements for recognition is to make sure that authorities of the “State of origin” had proper jurisdiction in the view of the State addressed, that this requirement tends to be regarded as satisfied if the authorities of the State of origin affirmed jurisdiction based on standards or rules equivalent to those in force in the “State addressed”, that the Regulation has removed the old jurisdictional standards and rules in force in the individual Member States and replaced them through common ones, the Regulation is likely to have indirect ramifications on recognition of third States decisions with respect to the first traditional limb of the recognition test. But let me first note that a host of bilateral conventions on mutual recognition are still binding on Switzerland and some of the Member States: Germany, Austria, Belgium, Spain, Italy, Sweden, Tchech Republic and Slovakia.108 To the extent that those treaties are less recognition-friendly than the domestic recognition law of the signatory States, the latter should arguably take precedence over the former based on the doctrine of favor recognitions. This is at least the attitude prevailing among Swiss scholars109, absent any compelling ruling by the Federal Tribunal so far,110 unless perhaps, I venture to say, the court of the State party from which the decision originates may be regarded as having breached such a treaty, typically by affirming jurisdiction. Be that as it may, those bilateral agreements rarely encompass specific provisions on inheritance matters. Regarding some of those treaties, it is not even clear whether decisions relating to inheritance are effectively covered. But some of them do expressly provide for succession. The example that comes to my mind is here again offered by Swiss-Italian relations.111

For further detail see A. BUCHER, in A. BUCHER (ed.), La loi sur le droit international privé – Convention de Lugano (Helbing Lichtenhahn 2011) 317. 109 A. BUCHER (note 108), at 317-318, with further references. 110 ATF, 30 March 2015, 4A_604/2014, merely says by way of obiter that the Convention between Switzerland and Liechtenstein “devrait normalement prévaloir sur la disposition légale [i.e. on Arts. 25f. of the Swiss Act] en vertu de l’art. 1er al. 2 LDIP, à plus forte raison s’il devait s’avérer plus favorable à la reconnaissance de la décision liechtensteinoise que la LDIP”. 111 Another example is the 1936 Convention between Switzerland and Sweden, which provides that recognition of inheritance decisions, is conditional upon the decision “not being based on a law whose provisions are contrary to those of the law applicable under the private international law of the State addressed”. Under the Swiss Act, there is no 108

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Impact of the Succession Regulation on the Swiss-EU Relationships The 1933 Swiss-Italian Convention on mutual recognition lays down a list of bases for proper jurisdiction. With respect to successions, the nationality of the de cujus is the only basis upheld by the Convention. This reflects the bilateral solution enshrined in the 1868 Swiss-Treaty in the area of “direct” jurisdiction.112 It remains to be seen whether a Swiss decision based on last domicile of an Italian citizen will be recognized in Italy, and conversely. But let us leave aside those treaties aside, that are for the most part antiquated and of little use.113 A Swiss decision based on decedent’s domicile will meet with favour in the Member States, typically in those where part of the estate is situated, to the extent at least that decedent’s habitual residence within the meaning of the Regulation was also in Switzerland.114 As mentioned earlier, because of the jurisdiction over immovables is not exclusive under the Regulation, Swiss decisions, at least when they are based on the decedent’s domicile, may also stretch over realty abroad, including for example in France or Belgium. If a Swiss citizen is domiciled in a foreign country which is not a Member State and selected Swiss forum or Swiss law, and if a decision is entered in Switzerland with respect to his or her succession based on Art. 87(2) LDIP, this is likely to qualify for recognition in the Member States, including those which used to regard or treat the decedent’s nationality with disfavour.115 As to the recognition procedure, the Regulation considerably simplifies it following the Brussels I model, yet maintaining the exequatur. It is also possible that some of the Member States will ultimately make the recognition procedure as against third States decisions quicker and cheaper. If there is an increased “mutual trust” between, say, Spain and Romania in the area of inheritance decisions, Spain and Romania may see no compelling reason why not they should not unilaterally step up their trust towards decisions emanating from Switzerland.116 This would constitute another positive spill-over effect of the Regulation. There is a priori no ground for holding that a Swiss decision upholding the validity of an “agreement as to succession” or ordering the decedent’s son as heir-in-law to pay an amount of money to the deceased’s father as legatee is less “trustworthy” than a Swiss decision upholding the validity of a distribution agreement or ordering the father to pay an amount of the money to the child as child’s support, which both benefit from the simplified recognition procedure shaped by the Lugano Convention. Let us turn to the European decisions presented for recognition in Switzerland. Apart from any bilateral convention, Art. 96 LDIP lists the heads of

control of the foreign decision being based on the substantive law that designated by the Swiss conflict rule and the favor recognitionis may prevail. 112 Art. 2 n. 6. See I. PRETELLI, in A. BONOMI/ P. WAUTELET (note 2), at 621, note 4. 113 Rather, that part of the European Union that is bound by the Regulation. 114 See I. SCHWANDER (note 2), at 1100-1101. 115 For the Regulation in the converse scenario empowers the courts of the Member State of nationality to deal with the succession. I. PRETELLI, in A. BONOMI/ P. WAUTELET (note 2), at 625. 116 A. BONOMI (note 2), at 73-74.

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Gian Paolo Romano acceptable foreign jurisdiction with respect to inheritance.117 Those heads include the decedent’s last domicile, country of situs of an immovable – to the extent that country claims exclusive jurisdiction, and this should no longer be the case for Member States118 – and nationality of the de cujus but only to the extent that the de cujus made a professio iuris which is enforceable under the Swiss Act. If he or she failed to make such a professio iuris, nationality of the de cujus, although a good subsidiary basis for direct jurisdiction in the eyes of the Regulation, is no good basis for indirect jurisdiction in the eyes of the Swiss Act. Nor is the ultrasubsidiary basis for jurisdiction under Art. 10(1)(b) of the Regulation – the second last habitual residence of the deceased if terminated less than five years prior to institution of proceedings119 – echoed within Art. 96 LDIP. This is no surprise. For basing jurisdiction on the second last habitual residence is an innovation solution developed by the drafters. However pivotal, Art. 96 LDIP is not the only provision to look at, because Arts. 5, 6 and 87(2) on choice of court and voluntary submission may also be part of the analysis. If the Swiss citizen domiciled in a Member State has chosen Swiss forum to deal with the Swiss assets, the foreign decision based on domicile may not be recognized in Switzerland with respect to the part of the estate located in Switzerland. If the jurisdiction of the Member State was positively or tacitly accepted by the parties to the foreign proceedings, foreign jurisdiction should be regarded as “proper” in the eyes of Switzerland with respect to those parties unless the defendant refrained from challenging jurisdiction before the foreign court only because it would have been useless to do so. Let us resume some of the earlier examples. If the de cujus is a Frenchman who was domiciled in Switzerland and failed to choose French law to govern his succession, any French decision would fall short of what Art. 96 LDIP requires and should be denied recognition unless there was an explicit or tacit choice of court among the parties to the French proceedings. The same also applies to a German decision if the decedent was German domiciled in Switzerland. If the succession was that of an American citizen who had last habitual residence in Argentina and second last habitual residence in France, the French courts may have been able to affirm jurisdiction if the French residence ended less than five years before start of the French proceedings. The French decision would not meet the test of Art. 96 LDIP unless Argentina is prepared to recognize it, in which case Switzerland

Art. 96 LDIP: “(1) Les décisions, les mesures ou les documents relatifs à une succession, de même que les droits qui dérivent d’une succession ouverte à l’étranger, sont reconnus en Suisse: a. lorsqu’ils ont été rendus, pris, dressés ou constatés dans l’Etat du dernier domicile du défunt ou dans l’Etat au droit duquel le défunt a soumis sa succession ou s’ils sont reconnus dans un de ces Etats, ou b. lorsqu’ils se rapportent à des immeubles et ont été rendus, pris, dressés ou constatés dans l’Etat dans lequel ces biens sont situés ou s’ils sont reconnus dans cet Etat. (2) S’agissant d’un immeuble sis dans un Etat qui revendique une compétence exclusive, seuls les décisions, mesures ou documents émanant de cet Etat sont reconnus”. 118 See section II.A above. 119 Why not prior to death? The reason is unclear: A. BONOMI, in A. BONOMI/ P. WAUTELET (note 2), at 219. 117

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Impact of the Succession Regulation on the Swiss-EU Relationships would also ultimately recognize it indirectly via recognition granted by Argentina.120 The recognition test also includes consistency with Swiss public policy and finality of the decision.121 As to public policy, a question that has often been discussed in Switzerland is to which extent the Swiss authorities would be prepared to give effect to an inheritance order emanating from an Arab country that is treating differently male and female next-of-kin, typically descendants, based on Islamic law. This will probably depend on whether or not any of the persons involved, and typically the female heirs, have a substantial connection with Switzerland. The question has not been brought to the attention of the Federal Tribunal so far and has ultimately little to do with the Swiss-EU successions.122 A foreign adjudication that is based on the law of a country that ignores a “reserved share” is unlikely to be regarded as contrary to Swiss public policy even if strong ties with Switzerland exist.123 A problem that is bound to arise in future is a whether a foreign inheritance decision based on a family status that is not recognized in Switzerland because of Swiss public policy is also inconsistent with Swiss public policy. The Federal Tribunal has recently ruled that recognition of foreign birth record indicating as legal parents of child born through surrogacy a couple who had concluded a surrogacy agreement is contrary to Swiss public policy with respect to the parent who is genetically unrelated with the child. The parent-child relationship established abroad – in the United States – is not therefore denied recognition in Switzerland.124 The intentional parents were in both cases Swiss living in Switzerland. Would the answer be the same as against a foreign decision awarding inheritance rights based on the child status created or recognized in the State of origin but not recognized in Switzerland? Take a Swiss woman and a Greek man who resort to a surrogate in Greece. If the child has no genetic link with the intentional mother, the intentional mother is unlikely to be regarded as the legal mother in the eyes of Switzerland. Assume she dies domiciled in Greece leaving part of her assets in a Swiss bank. Assume that a Greek tribunal awards the whole of her property to the child as legitimate descendant. Further assume the decedent’s brothers and sisters – who are the next-of-kin in the absence of descendants – challenge this Greek decision before the Swiss recognition court based on the ground of public policy. How would a Swiss court respond? As law stands today, that is hard to predict. Suffice it to note that the same problem arises in the relationship between the Member States themselves.125 120 See I. SCHWANDER, Anerkennung ausländischer Entscheidungen auf prozessrechtlicher und auf kollisionsrechtlicher Grundlage, in K. SPÜHLER (ed.), Internationales Zivilprozessrecht- und Verfahrensrecht (Schulthess 2005) 351ff. 121 Arts. 25(b) and 27(1) LDIP. 122 See the decision by the Federal Tribunal in Hirsch v Cohen, ATF 102 II 136. 123 For other situations where recognition may be controversial on the grounds of non-discrimination, see I. PRETELLI, in A. BONOMI/ P. WAUTELET (note 2), at 645ff. 124 ATF, 14 September 2015, 5A_443/2014, ATF, 21 May 2015, 5A_748/2014. 125 I. PRETELLI, in A. BONOMI/ P. WAUTELET (note 2), at 647ff; G.P. ROMANO, Conflicts and Coordination between Family Statuses – Towards their Recognition in the EU?, 1st December 2015, available at .

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Gian Paolo Romano The “finality” requirement has been causing some troubles with respect to non-judicial acts that fall under Art. 96 LDIP. “Measures and documents relating to… an inheritance estate in a foreign country” are also, alongside “decisions”, entitled to recognition provided that the relevant requirements are satisfied. One may think of an inventory prepared and executed by a foreign notary public or foreign letters of administration.126 Now, foreign acts or deeds resulting from noncontentious procedure are subject to the same requirements as decisions, including “finality”, although “by way of analogy” only.127 The question has been discussed with respect to foreign “certificates of succession”. Which brings me to my last point. E.

The European Certificate of Succession

The question of what kind of foreign documents other than court decisions may be relied upon by entities having custody of inheritance assets is a momentous one in Switzerland as elsewhere. Banks and insurance companies holding cash, investment portfolios or other types of funds on behalf of the deceased are concerned with escaping liability they might face if they deliver those funds to individuals having no title to collect them in the eyes of Switzerland. That is why those entities often wonder whether they may, or have to, rely on a foreign public document or record they are presented with, typically by a person who is mentioned in it as being the legitimate heir and requests delivery. The Swiss Institute of Comparative Law is often mobilized to determine whether a particular piece of paper – coming from public authorities of countries as diverse as Chile, Luxembourg, Trinidad and Tobago, Russia and so on – is sufficiently trustworthy and may justify or even require delivery of the assets to the holder.128 In case of doubt, the banks in Switzerland prefer not to take any risk and recommend the applicants to initiate proper recognition proceedings before the Swiss courts and seek a judgment removing any uncertainty – which often makes applicants unhappy because it takes time and money. With respect to Swiss immovables, it is the federal offices of the land registry (offices du registre foncier) that have to appreciate the reliability of typically “succession certificates” granted abroad. Being public authorities, they have, over the years, developed a practice which is “restated” in some official “guidelines”.129 Here again, in case of any uncertainty, the land registry tends to refer the applicants to the Swiss courts of competent jurisdiction. ATF 138 III 728. Art. 31 LDIP (“Les art. 25 à 29 s’appliquent par analogie à la reconnaissance et à l’exécution d’une décision ou d’un acte de la juridiction gracieuse”). 128 M. DEVISME (note 2), at 132: “la pratique montre que régulièrement, les banques et les compagnies d’assurance suisses sont réticentes à accepter des documents en provenance de l’étranger”, who points out that this skepticism by Swiss bankers has contributed to the fonds en déshérence. 129 Office fédéral de la justice, Certificats d’hérédité étrangers servant de pièces justificatives pour des inscriptions au registre foncier suisse, Berne, October 2001, available at , in the process of being reviewed. 126 127

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Impact of the Succession Regulation on the Swiss-EU Relationships The Regulation requires the Member States to make a “European certificate of succession” available to “heirs, legatees having direct rights in the succession and executors of wills or administrators of the estate”.130 As a result, the European certificate serves not only as “heir certificate” in the strictest sense of the word (certificat d’héritier), i.e. a document reporting the identity of the heirs,131 but also as “certificate of executor” as exists for example in Germany (Testamentsvollstreckerzeugnis)132 or “letters of administration”.133 More importantly, the European certificate seems to be intrinsically more reliable than virtually all similar certified documents, attestations, affidavits or self-declarations that may be issued by the authorities of the Member States or accepted for use by the Member States. This is so in view not only of the information that the applicant has to provide, but also of the scale and depth of the enquiries the authority has the power to conduct before issuing the certificate as well as of the accuracy of the indications that are featured in it. No wonder that some Swiss scholars regard the European certificate, and the procedure to deliver it, as complying with “higher quality standards” than the Swiss certificat d’héritier134 and the underlying procedure, which is largely defined by local – Cantonal – law just as is the identity of the competent authority.135 To the extent that “the issuing authority shall take all necessary steps to inform the beneficiaries of the application for a Certificate” in order to “giv[e] other possible beneficiaries the opportunity to invoke their right”,136 this looks, and sounds, a quasijurisdictional procedure. The question is whether the European certificate may be used in Switzerland, typically to collect assets located here. Let me start with noting that the European certificate “is delivered with a view to being used in another Member State”.137 This is, however, merely a self-limitation prescribed by the Regulation. Once the certificate is delivered, nothing should prevent the beneficiary to use it in

Art. 63(1) of the Regulation. Or legatees: P. WAUTELET, in A. BONOMI/ P. WAUTELET (note 2), at 722. 132 In Switzerland, case law allows for the delivery of a “certificat – ou attestation – d’exécuteur testamentaire”: ATF 91 II 177 and ATF, 19 May 2014, 5A_55/2014. See D. NAZ/ J.-M. RUBIDO (note 2), at 70. 133 Although one can assume that, if the administrator of an estate has been appointed by a court, a copy of the decision appointing him or her is sufficient for the purposes of collecting the assets. 134 I. SCHWANDER (note 2), at 1103: “[…] die EU-Erbrechtsverordnung mit ihrer Regelung in Art. 63ff. einen weit höheren Qualitätsstandard für Nachlasszeugnisse als Art. 559 Abs. 2 ZGB und die derzeitigen kantonalen Regelungen setzt”. The Author suggests a reform of Swiss substantive law modelled on the European law (“Es zeigt sich hier ein dringender Reformbedarf im schweizerischen Recht”). See C.G. MEYER / T. SPRECHER (note 2), at 155. 135 Notary public in Geneva (although the endorsement, homologation, by the Juge de Paix is required in case of testate successions), and Neuchâtel, Juge de Paix in Lausanne, Juge de la Commune in Sion: D. NAZ/ J.-M. RUBIDO (note 2), at 75. 136 Art. 66(4) of the Regulation. 137 Art. 62(1) of the Regulation. 130 131

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Gian Paolo Romano his or her dealings with entities and before the authorities of third States.138 So, for example, if the Italian authorities deliver a European certificate “for use in Germany” but the estate also includes assets in Switzerland, the beneficiary may present the certificate not only to the German banks but also to the Swiss banks. What if the succession has contacts with Italy and Switzerland only? It is – I believe – not entirely clear whether the authorities of a Member State have to make sure there are or might be assets in another Member State as a precondition to grant the certificate. Be that as it may, the Regulation does not seem to – nor could – prohibit Italy from allowing its authorities to make a European certificate available for use in third States. And practice may well move into this direction. So, if they are faced with a European certificate, it is ultimately up to the Swiss authorities to determine the effects that they are willing to award.139 That’s the crux of the matter. I anticipate that the first Swiss banks and non-judicial authorities confronted with this issue will encourage the holder of the European certificate to seek formal recognition by the Swiss courts. Two difficulties may stand in the way. The first is here again “indirect jurisdiction”. The European certificate ranks among the “documents established abroad” for the purposes of Art. 96 LDIP. In order for it to be recognized in Switzerland, the European certificate has to originate from the authorities of the State of competent jurisdiction under the Swiss perspective, i.e. essentially those of the decedent’s last domicile. As we have seen, decedent’s nationality justifies indirect jurisdiction in case of choice of law only.140 So, a European certificate issued by German authorities based on Art. 10 a) LDIP with respect to the estate left by a German citizen domiciled in Switzerland does not seem to be eligible for recognition.141 One may wonder, however, whether this is still so in case of a choice-of-forum based on Arts. 5 and 26-a) b) LDIP, i.e. if there has been an agreement of all potential heirs and legatees on the issuance of the European certificate. The second difficulty lies in the fact that the European certificate may be challenged in the issuing Member State under a “redress procedure”. This procedure is laid down by the Regulation. As I mentioned, Art. 25 LDIP lit. b) requires the foreign decision to be “final”. The “Guidelines concerning foreign inheritance certificates” to be produced in order to obtain the registration in the land registry remind applicants of the finality requirement and point out that “[t]he absence of ordinary means of review is satisfied when the decision may no longer be challenged or modified in the same proceedings by way of judicial review”.142 Now, according to the Regulation, the “challenge shall be lodged before a judicial authority in the Member State of the issuing authority”. If the judicial authority is satisfied that “the certificate issued is not accurate”, shall “rectify, modify or K.M. WEISS/ M. BIGLER (note 2), at 193. A. BUCHER (note 108), n° 3i; A. BONOMI, [2014] Semaine Judiciaire (note 3) 399ff; I. SCHWANDER (note 2), at 1103ff. 140 K.M. WEISS/ M. BIGLER (note 2), at 193. 141 K.M. WEISS/ M. BIGLER (note 2), at 192. 142 “Le défaut de recours ordinaire est admis lorsque la décision.... ne peut plus être attaquée ou modifiée dans la même procédure par un moyen juridictionnel”. 138 139

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Impact of the Succession Regulation on the Swiss-EU Relationships withdraw the Certificate or ensure that it is rectified, modified or withdrawn by the issuing authority”. It would make little sense to refuse to recognize the European certificate as long as the “redress procedures” under Art. 72 of the Regulation have not been initiated and completed, which obviously may never occur. But how can the letter of the provisions be escaped from? Should recognition be granted, the question arises as the effects that flow from it. Those attaching to the European certificate as between the Member States are laid down in the Regulation itself.143 The information set out in the European certificate are presumed to be accurate. In particular, any person may be relied on as having the status, rights and powers evidenced in the certificate. As a result, third parties who make good faith payments or hand over property to him or her are considered as having transacted with a person having the proper authority. Those effects do not look substantially different from the ones attached to Swiss certificate.144 So the question as to whether recognition of a foreign certificate that has greater effects under the law of the issuing State than a Swiss certificate under Swiss law entails recognition of those greater effects or the limited effects attaching to a Swiss certificate may ultimately be left unanswered.145

III. Conclusions For people having ties with both Switzerland and the European Union, anticipating and shaping how their property will devolve upon death is now simplified because of the striking similarities that exist between the two regimes that might claim control over their succession – European and Swiss – as well as the facilities that those two regimes jointly make available to those people. The citizens of a Member State living in Switzerland just as the Swiss citizens living in a Member State will be able to effectively choose between the law of their nationality and that of their domicile or habitual residence. They may then opt for the one that offers the greater substantive freedom and more effective estate planning tools. A comparative analysis between the laws that may be selected is likely to be of assistance to the “chooser” and his or her advisor. Everything suggests that comparative law of succession will gain importance. Law of nationality may be a preferred option in case of difficulties to identify place of domicile or habitual residence. Some bona fide indications by the de cujus about his or her domicile or habitual residence, typically in his or her last will, may not be altogether irrelevant in case the de cujus has multiple places of abode. As for European citizens domiciled in Switzerland, the designation of the law of the Member State of nationality will facilitate recognition of both prior lis pendens and the decision to Art. 69 of the Regulation. When it comes to evidence, to the extent that the European certificate is a “titre authentique” under Art. 9 Swiss Civil Code, which should normally be the case: K.M. WEISS/ M. BIGLER (note 2), at 193. 145 I. SCHWANDER (note 2), at 1103; see C.G. MEYER/ T. SPRECHER (note 2), at 155. 143 144

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Gian Paolo Romano be issued by the Member State. For the dual citizens – Swiss and EU – domiciled in Switzerland, the designation of Swiss law is today a safer bet. I believe that the choice of forum of the EU Member State of nationality, particularly if combined with a choice of law of that country, will be upheld on the Swiss side. On the other hand, the choice of Swiss forum for the Swiss citizens domiciled in the EU Member State should not be too light-heartedly recommended. The major weak point affects jurisdiction and recognition. Not so much because the Swiss and EU rules differ on these points – they in fact do not. But because Switzerland has third State status. Now, the fact that Switzerland has third State status not only means that the EU rules on jurisdiction and recognition do not apply in Switzerland, i.e. before Swiss authorities. This also means that the EU ordinary rules are not applicable in the Member State involved alongside Switzerland. So, neither the people concerned – which includes the de cujus, his or her prospective heirs, legatees, executors, administrators and creditors – nor their counsels, nor the Swiss authorities may rely on that Member State applying the EU ordinary regime. This is observable at three levels. First, when it comes to jurisdiction, third State status means greater reach of Member State’s jurisdiction based on special – as opposed to ordinary – rules under the Regulation that do not apply as between Member States. Second, when it comes to lis pendens, third State status means that the Regulation does not apply on the Member State’s side. Third, when it comes to recognition, third State status also means that the Regulation does not apply on the Member State’s side. If Switzerland were to be treated on a par with a State bound by the Regulation on any of those points, the Member State would apply the Regulation with respect to EU-Swiss successions. And I think everyone would be better off. This is why, I believe, we should ponder whether Switzerland and the European Union may not be well-advised in entering into a bilateral agreement to enhance coordination between their jurisdiction and recognition systems for the common benefit of their people and their authorities. Such an agreement may take various forms. Let me just give a tentative sketch of those forms. A softer form would typically provide that the term “Member State shall be interpreted as referring to Member State or Switzerland” for the purpose of a number of provisions, most prominently Arts. 10 and 11, but possibly also Arts. 5 and 6, of the Regulation. This may be supplemented with a mutual recognition regime that may substantially reproduce the recognition part of the Regulation (Arts. 34-58) – which is modelled on the recognition part of the Lugano Convention – with the adjustments that Switzerland may require. A more comprehensive agreement would encompass common rules on jurisdiction. Their geographical scope will have then to be defined. It would make sense to include the succession of the Swiss citizens who are habitually resident in a Member State and that of Member State citizens who are domiciled in Switzerland – provided that Switzerland is keen on maintaining “domicile” rather than giving in to “habitual residence”. This jurisdictional part of the agreement may also replicate the jurisdictional part of the Regulation as adjusted to satisfy any legitimate Swiss needs, for example on the subject of the ability of Swiss citizens living in the EU to choose Swiss forum for the Swiss assets. These options would leave applicable law aside. This is indeed what Lugano Convention does. One may wonder, however, whether it would not 288

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Impact of the Succession Regulation on the Swiss-EU Relationships be sensible for Switzerland to align with the Regulation which, on a number of points, seems to embrace more advanced, better crafted solutions – which is ultimately no surprise, because the LDIP was developed thirty years earlier – just as the Regulation has aligned with some Swiss approaches, typically the professio iuris. Of course, policy-makers may prefer to wait a while and prioritise more pressing issues, including with respect to cross-border relationships in other fields. That’s what the Swiss Parliament recently decided.146 That’s understandable. Practice is likely to help us gain a better understanding of what needs to be done. Let us not forget that it took Switzerland and the European Community twenty years after the Brussels Convention to forge the Lugano Convention. I guess the time needed will be shorter this time. In trying out the multilateral path, we would be fulfilling “the glorious task that we are given, to continually try to improve this great [Continent] of ours”.147

146 On 19 March 2015, the “Council of States” (Conseil des Etats), the “higher chamber” of the Swiss Parliament representing the Cantons, upheld a “motion” made on 12 December 2014 by one of its members, Luc RECORDON, urging the Swiss government – “Federal Council” (Conseil federal) – to explore the feasibility and desirability of a SwissEU instrument. In its opinion of 18 February 2015, the Federal Council suggested the time was not ripe for taking any such step, also because “tribunals may be able to soften certain frictions between the two texts” (“Le Conseil fédéral est en train d’analyser s’il est nécessaire de prendre des mesures. Cela ne semble pas encore être le cas, d’autant plus qu’il n’est pas exclu que la jurisprudence atténue certaines frictions entre les textes normatifs. Le Conseil fédéral est toujours ouvert au dialogue au niveau international pour éviter des difficultés juridiques dans des cas de successions transfrontalières. Il n’est cependant pas possible aujourd’hui d’apprécier l’opportunité et la faisabilité de la création d’un instrument international ou de toute autre mesure”). On 29 September 2015, the “National Council” (Conseil national) – the “lower” chamber of the Swiss Parliament representing the people – rejected the motion based on the recommendation of its Legal Committee (Commission des affaires juridiques) of 29 August 2015. Such recommendation emphasized three points: 1) The timing is inappropriate, Switzerland having, in the words of one articulate spokesman of the Legal Committee, Maître Ch. LÜSCHER, “other cats to whip” – which is the French idiomatic expression for “bigger fishes to fry” – including in its relationship with the EU (“Pour être un peu trivial, la Suisse a en ce moment d’autres chats à fouetter dans le cadre de ses relations avec l’Union européenne et il serait probablement nuisible de lui imposer une obligation supplémentaire dans les discussions qui portent sur des questions beaucoup plus fondamentales”); 2) A revision of the Swiss substantive inheritance law is under way and some points may already be addressed in the context of that revision (see remarks by S. LEUTENEGGER OBERHOLZER, the German-speaking spokesman of the Legal Committee); 3) Private international law of successions within the LDIP is also in the process of being reviewed, which the President of the Confederation, S. SOMMARUGA, confirmed while she anticipated a first draft bill to be circulated by the Federal Council during the second half of 2016 (“Der Bundesrat plant, in der zweiten Hälfte des nächsten Jahres eine Vernehmlassungsvorlage zum internationalen Erbrecht vorzulegen”). All quotes in this note are taken from the official records available at . 147 Rephrasing B. OBAMA, Address on the 50th Anniversary of the Selma, Alabama March, delivered, 7th March 2015, Edmund Pettus Bridge, Selma, Alabama, who spoke of (American) “Nation” rather than (European) “Continent”.

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DEVELOPMENTS IN CROSS-BORDER INSOLVENCY ________________

THE EUROPEAN INSOLVENCY REGULATION 2015 Stefan REINHART*

I. II. III.

IV.

V.

VI.

Introduction The EIR 2000 as a Success The New Regime on International Jurisdiction A. The COMI Dispute B. A New COMI Definition and Procedural Rules for Its Determination C. Jurisdiction for Actions Arising Directly from Insolvency Proceedings Secondary Proceedings A. Introduction B. Allowing Rescue Proceedings within a Secondary Proceeding C. Codified Cooperation and Communication Duties D. Undertakings to Avoid Secondary Proceedings 1. Content and Effect of the Undertaking 2. Approval of the Undertaking 3. Decision to Open Secondary Proceedings 4. Subsequent Compliance with the Undertaking E. Conclusion Insolvency Proceedings for a Group of Companies A. Cooperation and Communication Duties B. Group Coordination Proceedings 1. The Opening of Group Coordination Proceedings 2. Tasks and Rights of the Appointed Coordinator 3. Non-Obliging Nature of the Group Coordination Plan 4. Analysis of the Rules The Way Ahead

* Honorary Professor at the Frankfurt University of Applied Science, Dr. iur. (Goethe Univ. Frankfurt), Rechtsanwalt and solicitor (England & Wales). The author would like to thank C.H. GALANIUK, P.D., LL.M., Rechtsanwalt, attorney-at-law (Fl.), solicitor (England & Wales), as well as M. UZÜMBAG, cand. iur. for editorial assistance.

Yearbook of Private International Law, Volume 17 (2015/2016), pp. 291-318 © Verlag Dr. Otto Schmidt & Swiss Institute of Comparative Law

Printed in Germany

Stefan Reinhart

I.

Introduction

Cross-border insolvency is one of the most fascinating areas of private international law because of the multiple important and intermingled issues covered, including international procedural issues, conflict of laws issues, as well as many substantive law issues (e.g. company law, labour law, credit securities, law of obligations, etc.). When the European Insolvency Regulation No 1346/2000 (“EIR 2000”) came into force in 2001, it was a result of three decades of ongoing attempts to regulate a field that had so far eluded codification.1 By then, all parties involved in the legislation process realized they did not have solutions to all issues relevant to international insolvencies. Hence, Art. 46 EIR 2000 directed the Commission to present the European Parliament, the Council and the Economic and Social Committee with a report on the application of the Regulation by June 1st 2012. On December 12th 2012, the Commission adopted the report with the conclusion that the EIR 2000 had served its function well but that it should be recast in the interest of clarity.2 The input of various academics and practitioners followed.3

See for attempts to introduce a European wide codification: Preliminary Draft of 1970, E Comm Doc 3.327/1/XIV/70-F (for the English version of the document substitute the suffix-letter “E” in place of “F”); a further draft by the Commission in 1980, E Comm Doc III/D/72/80; the 1980 draft by the Commission was found to be too complex; a more simplified draft was attempted through the so-called Istanbul Convention, see ETS No. 136 and I.F. FLETCHER, Insolvency in Private International Law, 2nd edn., Oxford 2005, Ch. 6; a more sophisticated draft was once again attempted through the EU Convention on Insolvency Proceedings of November 23rd 1995 see (1996) 35 ILM 1223 and I.F. FLETCHER, Insolvency in Private International Law, 1st edn., Oxford 1999, App. II. 2 See the EU Commissions’ Recommendation of March 12th 2014, available at as well as IILR 2013, p. 179; The Commission’s report was partly based on the findings of the so-called Vienna Report (Heidelberg-Luxembourg-Vienna Report), a report by Prof. B. HESS, Dr. Ch. KOLLER, Dr. B. LAUKEMANN, Dr. R. MAGNUS, Univ.-Prof. P. OBERHAMMER, Prof. Th. PFEIFFER, Prof. A. PIEKENBROCK and M. SLONINA, LL.M. (general reporters); published by Prof. B. HESS, Prof. Th. PFEIFFER, 2014, available at Univ.-Prof. P. OBERHAMMER, . 3 S. TAYLOR, Conference on Reform of the European Insolvency Regulation, IILR 2011, p. 242; S. BUFFORD, Revision of the European Union Regulation on Insolvency Proceedings – Recommendations, IILR 2012, p. 341; A. PIEKENBROCK, The future scope of the European Insolvency Regulation, IILR 2014, p. 424; Proposal for a Regulation of the European Parliament and of the Council amending Council Regulation (EC) No 1346/2000 on insolvency proceedings, IILR 2013, p. 179; B. WESSELS, On the Future of European Insolvency Law, IILR 2014, p. 310; Ch. THOLE, Die Reform der Europäischen Insolvenzverordnung – Zentrale Aspekte des Kommissionsvorschlags und offene Fragen, ZEuP 2014, p. 39; Ch. KELLER/ M. PRAGER, Der Vorschlag der Europäischen Kommission zur Reform der EuInsVO, NZI 2013, p. 57; P.M. REUß, Europäisches Insolvenzrecht 3.0 oder doch nur Version 1.1? Der Vorschlag der Kommission vom 12.12.2012 zur Reform der Europäischen Insolvenzverordnung, EuZW 2013, p. 165; H. EIDENMÜLLER, A new Framework for Business Restructuring in Europe: The EU Commission’s Proposals for a 1

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The European Insolvency Regulation 2015 After consultation with other European legislative bodies,4 the European Parliament on May 5th 2015 passed the new European Insolvency Regulation (EU Regulation No 848/2015, subsequently referred to as EIR 20155), which will substitute the EIR 2000 and enter into force on June 26th 2017.6

II.

The EIR 2000 as a Success

Overall, the EIR 2000 has been a success. The starting point was the introduction of a unified jurisdiction rule for insolvency proceedings, accompanied by the automatic recognition of the effects of such proceedings throughout the member states.7 In practice, such mechanism enabled the insolvency practitioner to act abroad and to administer assets situated in other member states. It also protected the assets in other member states from disruptive enforcement proceedings that were still going on or had just been commenced by creditors. A set of conflict of laws rules provided for a consistent treatment of legal issues, irrespective of in which member state such issues were to be decided.8 As a general rule, the EIR 2000 provided for the application of the lex fori concursus. Recognizing that the application of the lex fori concursus is inappropriate for certain issues (such as security rights, set off, labour law, avoidance claims etc.), other conflict rules governed here.9 Finally, the EIR 2000 endorsed a concept accepted in all member states, by providing an independent secondary proceeding governed by the lex fori concursus

Reform of the European Insolvency Regulation and Beyond, Maastricht Journal 2013, p. 133. 4 See Statement from the Data Security Administrator of the EU of March 27th 2013, available at ; Statement of the Economic and Social Committee of May 22nd/23rd 2013, OJ EU C 271/55; Legislative decision of the European Parliament of May 2nd 2014, P7_TA-PROV(2014)02-05; Proposal for amendment of the Council from February 12th 2014, Inter-Institutional Dossier 2012/0360 (COD) 5910/14; The Council’s general orientation of June 3rd 2014, InterInstitutional Dossier 2012/0360 (COD) 10284/14 ADD 1; First reading of the Council of November 20th 2014, Inter-Institutional Dossier 2012/0360 (COD) 15414/14 ADD 1; Position of the Council after the 1st reading of February 26th 2015, Inter-Institutional Dossier 2012/0360 (COD) 16636/14; Adopted texts of the Council (EU) No 7/2015 on the proposal of the Commission and of the Parliament of March 12th 2015, OJ EU C 141/55. 5 See Regulation (EU) No 848/2015 of the European Parliament and of the Council of May 20th 2015 on insolvency proceedings (recast), OJ EU L 141/19. 6 See Art. 92 EIR 2015. 7 See Arts. 3 and 15 EIR 2000. 8 See Arts. 4 to 15 EIR 2000. 9 See Art. 4 EIR 2000 for the lex fori concursus rule and Arts. 5-15 EIR 2000 for the exceptions.

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Stefan Reinhart secundarii, i.e. the insolvency law of the secondary proceeding.10 However, such secondary proceedings were only allowed if the debtor had an “establishment” in another member state. Establishment meant any place of operations where the debtor carries out a non-transitory economic activity with human means and goods.11 These three basic concepts, which are found in most jurisdictions, have in principle worked well. They have only been subject to minor amendments and corrections. Inter alia, in Art. 1 EIR 2015 the scope was extended to preinsolvency proceedings in order to promote reorganization proceedings. Art. 1 EIR 2015 also now clarifies the conflict between an insolvency proceeding, as defined in Art. 1 EIR 2015 and Annex A, and the list of specific proceedings (the latter prevails). In Art. 2 EIR 2015, new definitions were added, in particular a more detailed definition of where assets are situated. Among the conflict rules, which remain mostly unchanged, Art. 15 EIR 2015 only updates its predecessor (Art. 11 EIR 2000) by making reference to a “European patent with unitary effect”.12 For the lodging of claims (formerly Art. 41 EIR 2000), Art. 55 EIR 2015 now provides a simpler method by using a standard claims form that will be established in accordance with Art. 88 EIR 2015. Finally, the legislator has introduced a publicly available insolvency register within the member states with mandatory information on the debtor and the proceeding.13 Since such publicity also raises issues of data protection, the legislator has also introduced various rules on how these issues shall be taken into consideration when establishing the insolvency register.14 However, three fundamental changes need some further consideration. The first area of significant amendment relates to “jurisdictional matters”. Many of the court cases that were referred to the European Court of Justice dealt with issues of international jurisdiction for the main insolvency proceeding, and – even further reaching – the international jurisdiction for disputes that typically arise within the context of insolvency proceedings. The second significant change refers to “secondary proceedings”. Under the old regime problems existed due to the competition between the main proceeding and the secondary proceeding and the lack of means to coordinate both proceedings to benefit creditors. Under the new regime, the reformers aimed to resolve this tension and to ensure that secondary proceedings do not continue as a potential obstacle to the main proceeding’s efficient and smooth administration, in particular if the latter was aimed at rescuing the debtor’s business. The same arguments and the same objective apply to the issues of the “insolvency of a group of companies”. The liquidation, as well as the reorganization of the companies within the group, lacked means to coordinate. Since every See Arts. 27 to 38 EIR 2000. See the definition in Art. 2(h) EIR 2000. 12 Art. 15 EIR 2015 adopts the wording of the Regulation No 1257/2012 of December 17th 2012 implementing enhanced cooperation in the area of creation of unitary patent protection. 13 See Arts. 24-30 EIR 2015; the provisions outlined in Art. 24(1) and Art. 25(1) will enter into force on June 26th 2018 and June 26th 2019 respectively. 14 See Chapter VI (Arts. 78-83) EIR 2015. 10 11

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The European Insolvency Regulation 2015 company within the group triggered a separate proceeding, with – potentially – another administrator (and additionally with secondary proceedings applicable to some of the companies), a coordinated liquidation of the assets or even a reorganization of the business of the group was hardly achievable in practice.

III. The New Regime on International Jurisdiction A.

The COMI Dispute

The definition of the connecting factors in Art. 3(1) EIR 2000 for determining the jurisdiction of the main insolvency proceeding has been at the centre of the academic discussion15 and at the centre of court disputes16 for the last decade. The applicable law (see Art. 4 EIR 2000 and the incorporated lex fori concursus principle) and what kind of (creditor – or debtor-friendly) proceeding may be used depends on this determination. It is thus one of the central issues of international insolvencies. It has of course also been an issue for the insolvency industry and its advisors interested in taking up insolvency-related work. Many court cases addressed whether the “centre of main interest” of a company or a group of companies (generally referred to as “COMI”) was determined by the so called mind-of-management theory or the head-office test,17 until the Court of Justice clarified the interpretation in various court decisions.18 Such clarifications have now been adopted by the EIR 2015. 15 See Ch. THOLE, in Münchener Kommentar zur Insolvenzordnung: InsO, Band 4, 3rd edn., Art. 3 EuInsVO 2000, Nos. 17 et seq. for the extensive discussion on the subject in Germany; see also G. MOSS/ I. FLETCHER/ S. ISAACS, The EU Regulation, 3rd edn., Nos. 3.11 et seq. 16 See ECJ, 2.5.2006, C-341/04, Eurofood IFSC Ltd., ECR [2006] I-3813; ECJ, 20.10.2011, C-396/09, Interedil, ZIP 2011, p. 2153 = EU:C:2011:671; High Court of Justice Birmingham, 18.4.2005, MG Rover Overseas Ltd. [2005] EWHC 874 (Ch); High Court of Justice, 11.5.2005, MG Rover España SA [2005] BPIR 1162; High Court of Leeds, 16.3.2003, Daisytek-ISA Ltd. [2004] BPIR 30; ECJ, 15.12.2011, C-191/10, Rastelli Davide, NZI 2012, p. 147 = EU:C:2011:838; ECJ, 17.1.2006, C-1/04, Susanne Staubitz-Schreiber, ECR [2006] I-701. 17 See the cases on Enron Directo Sociedad Limitada, ISA/Daisytek, Crisscross Telecommunication Group, Automold GmbH, Hettlage, Collins & Aikman, Parmalat/Eurofood (the latter leading to the first Court of Justice decision mentioned above (see Eurofood IFSC Ltd.), BRAC Rent-A-Car-International Inc., MPOTEC GmbH, Zenith, Hukla Werke, MG Rover, EMBIC, AvCraft International Ltd. 18 See the cases above, note 16; see also Ch. THOLE (note 15), at Art. 3 EIR 2000, Nos. 21 et seq.; see further C. HONORATIO/ G. CORNO, A double lesson from Interedil: higher courts, lower courts and preliminary ruling and further clarifications on COMI and establishment under EC Insolvency Regulation, IILR 2013, p. 18; M. FEHRENBACH, Die Rechtsprechung des EuGH zur Europäischen Insolvenzverordnung: Der Mittelpunkt der hauptsächlichen Interessen und andere Entwicklungen im Insolvenzrecht, ZEuP 2013, p. 353.

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A New COMI Definition and Procedural Rules for Its Determination

Art. 3 EIR 2015 now contains three presumptions regarding COMI, depending on the kind of debtor. For a company or legal person, it is the place of the registered office.19 For an individual exercising an independent business, it is the individual’s principal place of business.20 And for any other individual, it shall be the place of the individual’s habitual residence.21 As a side note, these connecting factors differ slightly (and unnecessarily) from the connecting factors under the Regulation No 1215/2012 on jurisdiction and recognition and enforcement of judgments in civil and commercial matters.22 Since the decisive moment for determining jurisdiction is the date of the application,23 such presumption shall only apply if the debtor has not changed such place within a certain period of time prior to the insolvency application (i.e. 3 months, or 6 months for any other individual). The continuity requirement aims to prevent fraudulent or abusive forum shopping by the debtor.24 Even though the defined time period seems arbitrary, it provides for a clearer requirement than other concepts discussed in this context, such as fraus legis which is difficult to determine in practice and thus not appropriate in the context of determining jurisdiction at the outset of a proceeding. The presumption, however, can be rebutted by a COMI test applicable for each of the three kinds of debtor. Under Art. 3(1) subpara. 1 sent. 2 EIR 2015, the COMI “shall be the place where the debtor conducts the administration of its interest on a regular basis and which is ascertainable by third parties”. The latter phrase is taken from Recital 13 EIR 2000 which has also been stressed by the Court of Justice in Eurofood and Interedil. Art. 4 EIR 2015 had no predecessor and is a rule of procedural law. It deals with how the court shall examine whether it has jurisdiction. In some countries, courts do not determine jurisdiction ex officio. This has led to some cases where debtors successfully misled the court about its jurisdiction. Art. 4 EIR 2015 therefore provides that the seized court shall “of its own motion examine whether it has jurisdiction pursuant to Art. 3 EIR 2015”.25 This obligation will in future override any conflicting rule under national law. Since Art. 4 EIR 2015 furthermore requires the court to specify in its judgment on which grounds the jurisdiction is based, the Art. 3(1) subpara. 2 EIR 2015. Art. 3(1) subpara. 3 EIR 2015. 21 Art. 3(1) subpara. 4 EIR 2015. 22 For companies, the connecting factor is the statutory seat, the central administration, or the principal place of business, and for individuals their domicile, see Arts. 62 and 63 Regulation No 1215/2012. 23 See ECJ, Susanne Staubitz-Schreiber (note 16), at para. 29. 24 See Recital 31 EUR 2015; for further case law on insolvency tourism see G. MOSS/ I. FLETCHER/ S. ISAACS (note 15), at No. 3.16; see also ECJ, Susanne StaubitzSchreiber (note 16). 25 The German Federal Court has nevertheless already stressed such principle as a matter of German insolvency law, in two decisions, see BGH, NZI 2008, p. 121 and BGH, NZI 2012, p. 151. 19 20

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The European Insolvency Regulation 2015 courts must observe its obligations under Art. 4 EIR 2015 in basically all cases. Finally, Art. 5 EIR 2015 introduces rules on the judicial review on the court’s decision on international insolvency. Even though Art. 4 EIR 2015 may in practice be helpful for the insolvency practitioners to prove their powers in other member states (see Arts. 21 et seq. EIR 2015), the Regulator’s idea to include such substantive procedural rules in the Regulation is unfortunate. Arts. 4 and 5 EIR 2015 are rules of substantive procedural law and have to be applied concurrently with similar rules of local law. Such substantive rules may cause various conflicts when applied and may need further rules in the local laws of the member states to be operational (such as – with Art. 5 EIR 2015 – further rules on the time limit in which judgements may be challenged and how that time limit is to be calculated). Art. 5 EIR 2015, for example, introduces rules on the judicial review on the court’s decision in its jurisdiction. Such rules should not be a part of the EIR. If the European legislator intends to harmonize national law in the context of the application of the EIR, then directives that allow the member states to integrate such standards in their local laws would be more appropriate. C.

Jurisdiction for Actions Arising Directly from Insolvency Proceedings

The most questionable change in the EIR 2015 appears in Art. 6 EIR 2015, which adopts the evolving case law commenced by the European Court of Justice with its decision in Seagon v. Deko Marty Belgium.26 Art. 6 EIR 2015 provides that courts of the member state in the main proceeding shall also, according to Art. 3(1) EIR 2015, “have jurisdiction for any action which derives directly from the insolvency proceeding and which is closely linked with them, such as avoidance actions”. The issue at stake is as old as the Brussels Convention of 1968 on jurisdiction and the enforcement of judgments in civil and commercial matters.27 The Brussels Convention excluded from its application matters relating to “bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings” (see Art. 1(2)(b) of the Convention). In the well-known case Gourdain v. Nadler, the Court 26 See ECJ, C-339/07, Seagon/Deko Marty Belgium NV, ECR [2009] I-767= EU:C:2009:83; see also ECJ, C-111/08, SCT Industri AB i likvidation/Alpenblume AB, ECR [2009] I-5655 = EuZW 2009, p. 610 = EU:C:2009:419; ECJ, C-292/08, German Graphics Graphische Maschinen GmbH/Alice van der Schee, EuZW 2009, p. 785 = EU:C:2009:544; ECJ, C-157/13, Nickel & Goeldner/UAB, NZI 2014, p. 919 = EU:C:2014:2145; ECJ, C213/10, F-Tex SIA/Lietuvos-Anglijos UAB “Jade-cloud-Vilma”, ZIP 2012, p. 1049; see also the decisions by German courts on the subject: BGH, NJW 2009, p. 2215; OLG Naumburg, ZIP 2011, p. 677, 678; BGH, ZIP 2011, p. 1775; OLG Köln, NZI 2010, p. 1001; OLG Frankfurt, ZIP 2013, p. 277; BAG, NZI 2012, p. 1011; BGH, NJW 2011, p. 3784; see further the case Byers/Yacht Bull Corp. [2010] EWHC 133 (Ch) as well as the case Polymer Vision R&D Ltd./Van Dooren [2011] EWHC 2951 (Comm). 27 See the Brussels Convention on jurisdiction and the enforcement of judgments in civil and commercial matters of September 27th 1968, available at .

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Stefan Reinhart of Justice found that all cases that “derive directly from bankruptcy or winding up and [are] closely connected with” such proceedings fall under the exclusion in Art. 1(2)(b) of the Brussels Convention.28 The Court of Justice decided that a French action en comblement de passif social, comparable to the English concept of wrongful trading or the German Insolvenzverschleppung, was such an insolvencyrelated matter excluded from the Brussels Convention 1968. However, that decision must be read in the context of its historical background. In 1979, when the decision was taken, the European Union was already discussing a European wide Insolvency Convention. Both drafts, the draft of 1970 and the subsequent draft of 1980, contained provisions for jurisdiction on insolvency-related actions.29 Anticipating that the intended Insolvency Convention would provide specific jurisdiction rules on insolvency-related matters, the Court of Justice interpreted the exclusion of insolvency issues in the Brussels Convention broadly, to avoid potential conflict with the Insolvency Convention.30 However, the jurisdiction rules of the two drafts, in particular the application of a vis attractiva concursus concept in a cross-border context, was heavily criticised.31 Consequently, when the EIR 2000 was passed, unlike its preliminary drafts the legislator did not include any provisions on jurisdiction for insolvency-related matters. It only regulated the jurisdiction of insolvency proceedings, i.e. the collective proceeding of the debtor with all his creditors, but not individual actions between the insolvent debtor and individual creditors.32 Thus, the European Legislator created a loophole regarding insolvency-related matters between the Brussels Convention, on the one hand, and its successor Regulation33 and the EIR 2000 on the other. When recasting the EIR, the legislator had two options to fill the loophole and to provide a seamless application of both Regulations: one could limit the exclusion contained in the Brussels Convention and its successors to the collective proceedings that were intended by Art. 3(1) EIR 2000; or – alternatively – one could extend the EIR 2000 to insolvency-related actions that are covered by the broad interpretation of the Court of Justice in Gourdain v. Nadler, as the European Court of Justice had done in the Seagon v. Deko Marty Belgium case. Art. 6 imple-

See ECJ, C-133/78, Gourdain/Nadler, ECR [1979] I-733. See Arts. 17 et seq. of the 1970 Draft and Arts. 15 et seq. of the 1980 Draft. 30 See the decision Gourdain/Nadler (note 28); see also the Schlosser Report, 601, 121 note 53, also published in OJ EC C 59, of 5 March 1979, p. 71-151. 31 See for the German position on vis attractiva concursus, the statement by G. JAHR, in G. KEGEL/ J. THIEME, Vorschläge und Gutachten zum Entwurf eines EGKonkursübereinkommens, Tübingen 1988, p. 305 et seq.; see also the final findings of the Sonderkommission des Deutschen Rats für IPR, in G. KEGEL/ J. THIEME (note 31), at 411. 32 The only reference to such issues can be found in Recital 7 EIR 2000, in which it is merely stated that insolvency proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings are excluded from the Brussels Convention. 33 See the modern day Regulation No 1215/2012 of December 12th 2012 on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters, OJ EU L 351/1. 28 29

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The European Insolvency Regulation 2015 ments the latter approach thereby extending the jurisdiction of the EIR beyond matters of the insolvency proceeding as a collective proceeding. This solution is misguided when viewed under the jurisdiction rules incorporated in the Regulation No 1215/2012. Recital 15 of the Regulation No 1215/2012 states the fundamental principle for the European regime on jurisdiction, i.e. that the rules of jurisdiction should be highly predictable and founded on the principle that jurisdiction is based on the defendant’s domicile, save in a few well-defined situations in which the subject-matter of the dispute or the autonomy of the parties warrants different connecting factors. Art. 6 EIR 2015 complies with neither of those two requirements. First, it neglects the “connecting factor principles”. Avoidance actions, for example, can be diverse and may have various connecting factors to various Member States. Suppose that the main proceeding has been opened in France and, prior to the application, the debtor transferred goods to a creditor without proper or sufficient consideration. The creditor resides in Germany and the transfer – as contractually agreed – physically took place in Germany. There is no connection at all to France, beside the fact that the debtor himself resides in France. Based on the concept within Regulation No 1215/2012, all connecting factors point to Germany: the defendant’s domicile is in Germany, the place of performance was in Germany (Art. 7(1)(a)), and – if such transfer would qualify as a quasi-tort – the place where the harmful event occurred also points to Germany (Art. 7(2) Regulation No 1215/2012). The problematic new rule can further be illustrated where rights in rem are disputed. For example, suppose that the French debtor has granted further securities to his German creditor – subject to German law – and the securities relate to real estate property situated in Germany. The creditor may want to execute his rights under the German security agreement (which Art. 5 EIR 2000 and Art. 8 EIR 2015 would allow). The insolvency practitioner may have various arguments against the execution of the creditor’s rights. He may argue that the transfer is subject to an avoidance claim; he may additionally argue that the assets are not situated in Germany but rather in France (the latter, obviously not successful in this case). On the conceptual basis of the Regulation No 1215/2012, only German courts could assume jurisdiction: it is the defendant’s domicile, and perhaps the exclusive jurisdiction under Art. 24(1) Regulation No 1215/2012 should apply. However, under Art. 6 EIR 2015, the insolvency practitioner is now (oddly) entitled to challenge the transaction as voidable in the French courts as the courts of the main insolvency proceeding. Contrary to the conceptual considerations of the Regulation No 1215/2012 and its predecessors, the new rule neglects the application of the jurisdiction concept of “connecting factors” to justify why the insolvency practitioner should now have the opportunity to bring such actions before the courts of the member states of the main proceeding. Second, the rule is not foreseeable as required by the Regulation No 1215/2012. The rule of inclusion, namely “any action which derives directly from the insolvency proceeding and is closely linked with them” is ambiguous. If an action “derives directly” from the insolvency proceeding, it is by definition “closely linked” with them – or else what other link might be intended? Additionally, Yearbook of Private International Law, Volume 17 (2015/2016)

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Stefan Reinhart each part of the definition does not in particular define what the link or connection shall be. The terms “directly” or “closely” are not proper terms for describing connecting factors in law. Consequently, it is no surprise that various authors have already tried to analyse those definitions in more detail, but have not found legal grounds for their interpretation – the results appear to be arbitrary.34 The flawed nature of this new rule can be illustrated by way of a further example. If the claim of a creditor lodged in the main proceeding is disputed, insolvency laws provide for a possibility to settle such dispute via a declaratory action. Whether such a dispute is covered under Art. 6 EUR 2015 is unclear, but the majority tend to agree.35 Because such an action may contain various legal issues, blanket coverage may lead to inequity. The claim itself may be disputed (which is merely a civil law issue). Alternatively, the ranking of the claim may be questioned. Indeed, both issues may be disputed at the same time. Despite the preference to have one court decide both questions, there is no reason justifying why a creditor should lose his forum, if only the civil law grounds of his action are in dispute. Third, Art. 6 EIR 2015 raises more questions than it answers and fails to avoid the regulatory loophole between the two Regulations stated in Recital 7 of the EIR 2015. On the contrary, it raises additional questions. By its wording, Art. 6 EIR is not drafted as a rule for exclusive jurisdiction. For a jurisdiction rule to be exclusive, the rule must explicitly state so. However, Art. 6 para. 2 EIR 2015 provides that where the action is related to an action in civil and commercial matters against the same defendant, the insolvency practitioner may “also” bring an action before the courts of the Member state where the defendant is domiciled provided that the court has jurisdiction under the Regulation No 1215/2012. If Art. 6 para. 1 EIR 2015 were non-exclusive, such rule for an alternative jurisdiction would not have been necessary. Thus, it has been concluded that Art. 6 EIR 2015 is a rule of exclusive jurisdiction.36 Art. 6 para. 2 EIR 2015’s exception to this purported exclusivity raises further questions. According to its wording, the insolvency practitioner may only bring the action at the court of the defendant’s domicile if such court would “have jurisdiction pursuant to Regulation (EU) 1215/2012”. Since the Regulation is not applicable to insolvency-related actions, this reference can only apply to the second part of the action, i.e. the civil and commercial issue.37 However, the domicile is the place where a defendant can generally be sued according to Art. 4 Regulation No 1215/2012, except where the jurisdiction is exclusive according to Art. 24 or 34 See Ch. WILLEMER, Vis attractiva concursus und die Europäische Insolvenzverordnung, Phd. Univ. Hamburg 2005/2006. 35 See Ch. THOLE (note 15), at Art. 3 EuInsVO 2000, No. 125; Ch. WILLEMER (note 34), at 319 et seq., 350; J. KEMPER, Die Verordnung (EG) Nr. 1346/2000 über Insolvenzverfahren, ZIP 2001, p. 1609; S. SMID, Internationales Insolvenzrecht, Berlin 2009, Art. 25, No. 13; P. OBERHAMMER, Europäisches Insolvenzrecht in Praxis – “Was bisher geschah”, ZinsO 2004, p. 761, 766; Vienna Report (note 2), at No. 366 with further information. 36 Ch. THOLE (note 15), at Art. 6 EuInsVO 2015, No. 3. 37 Ch. THOLE (note 15), at Art. 6 EuInsVO 2015, No. 8.

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The European Insolvency Regulation 2015 has been validly prorogated by the parties according to Arts. 25 et seq. Regulation No 1215/2012. By virtue of these exceptions, the insolvency practitioner shall be restricted to the exclusive jurisdiction of Art. 6 para. 1 EIR 2015. There is no reason for such distinction, which may be shown by adding the following facts to the example initially set out above: the debtor (seated in France) has granted a land charge over the real estate in Germany to a Dutch bank. The civil validity of the security is in dispute; furthermore, the insolvency practitioner purports to have a valid avoidance action against the Dutch bank. He may pursue his avoidance action according to Art. 6 para. 1 EIR 2015 in France. He may not, however, sue the Dutch bank in the Netherlands for either cause of action since he would have no jurisdiction in the Netherlands pursuant to the Regulation No 1215/2012. He would – unfortunately – also have no jurisdiction in Germany for both actions since Art. 6 para. 1 EIR 2015 is exclusive. The results are inconsistent. Finally, the EIR provides no sufficient framework for all the subsequent issues that may arise in insolvency related actions. Whilst the Regulation No 1215/2012 prescribes how related actions are handled, EIR 2015 does not. If the Dutch bank has already instigated proceedings against the debtor in Germany prior to the insolvency based on their exclusive jurisdiction under Art. 24 Regulation No 1215/2012, how does the commencement of the insolvency affect the jurisdiction? Whilst the Regulation No 1215/2012 has various answers on questions regarding how counterclaims are treated, the EIR does not. Similar problems may arise in the context of the recognition of insolvencyrelated actions. Whilst Art. 32 para. 1 subpara. 2 EIR 2015 refers to Arts. 39 et seq. Regulation No 1215/2012 for the enforcement of judgments relating to insolvency actions, no such reference is made for the recognition of such judgments, since the EIR provides in general for recognition without further formalities (which has been tailored to afford immediate effect to the judgment to open a proceeding). For insolvency-related matters, however, an analogous application of Art. 36 Regulation No 1215/2012 would have been adequate. Thus, neither the concept of special jurisdiction rules on insolvency-related matters, nor the concrete draft of the provisions prove to be convincing.

IV. Secondary Proceedings A.

Introduction

The assets of a debtor that are distributed over various jurisdictions can be administered via one of two options. The first option is to have a single proceeding to administer and distribute the assets. In this case, the interests of the local creditors are considered by separating sub-estates for each jurisdiction and by distributing the proceeds of such assets according to the local law. Such concept was adopted by the drafts for an EU Insolvency Convention in 1970 and 1980.38 However, this See note 1; see also the Noel-Lemontey Report, EU Commission Doc No III/D/222/80; on such concepts of universality see S. REINHART, in Münchener Kommentar 38

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Stefan Reinhart concept proved to be too complicated in practice and was never adopted.39 The EU legislator instead chose the second method, i.e. to allow secondary proceedings. However, the EU legislator restricted secondary proceeding to cases where the debtor has an “establishment” in that member state.40 In order to meet the establishment test, a place of operations where the debtor carries out a non-transitory economic activity with human means and goods is required.41 The fact that the debtor has assets in a member state is not sufficient.42 Despite such a restrictive approach, secondary proceedings are still accused of hampering the efficient administration of the insolvent estate. Some authors even purport that the possibility of a secondary proceeding is used by creditors, in particular actively managed hedge funds, as a means to threaten the main proceeding’s insolvency practitioner.43 The EU legislator has reacted and has amended the concept of secondary proceedings in three respects. First, if a secondary proceeding is opened, it will not be restricted, as under the EIR 2000, to liquidation proceedings. The secondary proceeding will be open to any type of proceeding available under local law (see IV.B.). Second, if a secondary proceeding is opened, the courts and insolvency practitioners involved will be subject to extensive rules on communication and coordination (see IV.C.). Third, the insolvency practitioner for the main proceeding may hinder any additional secondary proceeding by giving the creditors an undertaking to treat them as if such a proceeding had been opened (see IV.D.).

zur Insolvenzordnung: InsO, Band 4, 3rd edn., Vor Art. 1 EuInsVO 2000, Nos. 3 et seq.; G. MOSS/ I. FLETCHER/ S. ISAACS (note 15), at Nos. 1.08 et seq. 39 See e.g. J. THIEME, RabelsZ 45 (1981), p. 459, 490 et seq.; see also the critical comments of the Deutscher Rat für IPR, in G. KEGEL, Stellungnahmen und Gutachten; G. MOSS/ I. FLETCHER/ S. ISAACS (note 15), at No. 1.17: “The sheer complexity of the exercise was truly horrifying”. 40 See Art. 3 para. 2 EIR 2000; for the definition of an establishment see Art. 2 let. (h) EIR 2000. 41 See Art. 2(h) EIR 2000; Ch. THOLE (note 15), at Art. 2 EuInsVO, Nos. 29 et seq.; see also AG Köln, NZI 2004, p. 151; ECJ, Interedil (note 16); AG München, ZIP 2007, p. 496; BGH, IX ZB 101/08, BeckRS 2010, p. 14046; BGH, NZI 2012, p. 377; OGH, ÖJZ 2007, p. 325; BGH, ZIP 2011, p. 389, 390; BGH, NZI 2012, p. 377; AG München, NZI 2007, p. 358; LG Hildesheim, NZI 2013, p. 110; LG Hannover, NZI 2008, p. 631; OLG Karlsruhe, NZI 2002, p. 387; UK Supreme Court, Trustees of the Olympic Airlines SA Pension & Life Assurance Scheme/Olympic Airlines SA [2015] 1 WLR 2399 at [13]; ECJ, C-327/13, Burgo Group SpA/Illochrama SA; see also G. MOSS/ I. FLETCHER/ S. ISAACS (note 15), at Nos. 3.24 and 8.37 et seq. 42 See ECJ, Interedil (note 16); Higher Regional Court (Court of Appeal) of Vienna, 9.11.2004, 28 R 225/04w (Re Stojevic); G. MOSS/ I. FLETCHER/ S. ISAACS (note 15), at No. 8.43; Ch. THOLE (note 15), at Art. 2 EuInsVO, Nos. 32 et seq. 43 See P. MANKOWSKI, Zusicherungen zur Vermeidung von Sekundärinsolvenzverfahren unter Art. 36 EuInsVO – Synthetische Insolvenzverfahren, NZI 2015, p. 961, 971 with reference to a presentation by S. MADAUS; similar D. FRITZ, Die Neufassung der Europäischen Insolvenzverordnung: Erleichterung bei der Restrukturierung in grenzüberschreitenden Fällen?, DB 2015, p. 1882, 1885.

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The European Insolvency Regulation 2015 B.

Allowing Rescue Proceedings within a Secondary Proceeding

The EIR 2000 had a number of legal obstacles that were identified by many authors for cases in which a rescue of the debtor’s business was intended. Art. 27 sent. 2 EIR 2000 provided that the secondary proceeding must be a liquidation proceeding according to Annex B. Consequently, those proceedings that were intended to rescue the business of the debtor, were excluded. Such restriction has now been deleted.44 Any type of insolvency proceeding that is admissible under the lex fori concursus secundarii may be opened by the court.45 The insolvency practitioner for the main proceeding has even been granted the right to request a conversion of the opened secondary proceeding into another type of insolvency proceeding listed in Annex A, provided that the opening requirements are fulfilled and the other type of proceeding is most appropriate as regards the interests of the local creditors and coherence between the main and the secondary insolvency proceeding.46 However, the second existing obstacle to cross border business rescues remains. Art. 34(2) EIR 2000 provides that any restriction of creditors’ rights may not have effect without the consent of all the creditors having an interest. The rule prohibits an arrangement or insolvency plan in the secondary proceeding according to the national rules (which usually provide for majority voting), since every single creditor has to consent. Academics and practitioners have developed a potential solution to the problem of getting arrangements or schemes in place where parallel proceedings exist: One alternative provides for a uniform scheme that needs to be approved in each jurisdiction according to its local rules.47 This may be difficult in practice if the two laws are to some extent incompatible. As an alternative, it has been suggested that an arrangement in the secondary proceeding could be made on the basis that it must be accepted by the local creditors, if the local creditors suffer no loss from the insolvency plan in the main proceeding (thus extending the cramdown provisions of the best interest test of Chapter 11 US Bankruptcy Code to a cross-border situation).48 Both potential solutions would have required that the legislator eliminate the rule in Art. 34 sent. 2 EIR 2000. However, the rule unfortunately reappears in Art. 47(2) EIR 2015.

See criticism in the Vienna Report (note 2), at Nos. 932 et seq. See Art. 34 EIR 2015 and Art. 38(4) EIR 2015; according to the latter provision, the insolvency practitioner may even ask the court to open another type of proceeding if it is appropriate and coherent with the main proceeding. 46 See Art. 51 EIR 2015. 47 See the case of Maxwell Communication Corporation; for further comments see J.L. WESTBROOK, The Lessons of Maxwell Communication, Fordham Law Review 64 (1996), p. 269 et seq., M. HOMAN (one of the joint administrators in the case), Managing default by a multi-national corporation, unpublished paper, Texas International Law Journal Symposium 1997; S. REINHART, Sanierungsverfahren im internationalen Insolvenzrecht, Phd. Univ. Frankfurt 1994, p. 270 et seq. 48 For a detailed analysis see S. REINHART (note 47), at 300 et seq. 44 45

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Stefan Reinhart Given that the legislator intended to promote the rescue of economically viable but distressed businesses,49 he did not pursue his objective with the necessary vigour. Rescue proceedings that are now allowed to be opened in secondary proceedings in the future, are futile as long as the usual tool of a rescue proceeding, i.e. the arrangement with creditors, cannot be achieved in the secondary proceeding. C.

Codified Cooperation and Communication Duties

Secondary proceedings naturally lead to conflicts with the main proceeding. Such conflicts are to a certain extent legal conflicts. Both insolvency laws involved may not follow the same economic policy. Some countries are more creditor or debtor friendly than others. In some countries the state intervenes more actively in order to rescue failing businesses than other more laissez-faire states. Such conflicts are inherent and unavoidable in international cases. Most conflicts described in evaluating the EIR 2000 were, however, conflicts of the administrators in not communicating and coordinating sufficiently. Such conflicts are not legal conflicts. They do not arise out of badly drafted Articles in the EIR 2000. Such problems have to be solved by sanctioning the insolvency practitioner’s conduct. If the insolvency practitioner is in breach of his duties imposed on him under his local law, he may be liable for his conduct. However, if he complies with such duties, the conflict is a legal one between the two proceedings and must be accepted as such. In order to stress the importance of such duties to cooperate, the legislator has now introduced extensive rules on the communication and on cooperation between the courts and the insolvency practitioners involved. Art. 41 EIR 2015 provides that the insolvency practitioners shall cooperate with each other to the extent compatible with the rules applicable to their proceeding, including the conclusion of agreements or protocols. In order to do so, they shall communicate any relevant information between themselves, explore the possibility of restructuring the debtor’s assets and coordinate the administration of the realization of the debtor’s assets. Similar rules exist for cooperation and communication between the courts (Art. 42 EIR 2015) and cooperation and communication between the insolvency practitioners and the courts (Art. 43 EIR 2015). One may ask why such blanket clauses need to be introduced via a regulation, since they only express what in many countries would be regarded as market standard for administering the estate.50 However, not all insolvency regimes of the Member States seem to be flexible enough to allow the insolvency practitioners and the courts involved a flexible approach to the challenges of cross border

As appears in various Recitals, see e.g. No. 10. See the so-called Co-Co Guidelines on the communication and cooperation for cross border insolvencies, produced by INSOL Europe and available at . 49 50

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The European Insolvency Regulation 2015 insolvency cases.51 Therefore, the rules seem to be unnecessary, but will however put at least some pressure on insolvency practitioners to actively cooperate. One concern was additional costs. Late in the legislation procedure, the Council suggested a provision on costs.52 Art. 44 EIR 2015 now provides, that “the requirements laid down in Arts. 42 and 43 shall not result in courts charging costs to each other for cooperation and communication”. The provision is not carefully drafted and needs some interpretation. Whilst it is clear that courts may not charge other courts (“to each other”), the wording itself does not prohibit courts to charge the insolvency practitioner of another proceeding for costs. However, if courts were allowed to charge the insolvency practitioners of another insolvency proceeding, the reference to Art. 43 EIR 2015, which deals with duties between courts and practitioners, would be obsolete. Thus, Art. 44 EIR 2015 prohibits that the courts generally charge other proceedings for costs. This would be in accordance with the rule on costs for the coordination and communication concerning the members of a group of companies. Even though the coordination and cooperation duties are almost identical, Art. 59 EIR 2015 provides that such costs “shall be regarded as costs and expenses incurred in the respective proceedings”. Even though the wording is different, both provisions intend the same, i.e. that the costs shall be borne by the proceeding in which the costs are incurred. D.

Undertakings to Avoid Secondary Proceedings

Art. 36 EIR 2015 adopts a mechanism that has already been tested by English courts in order to avoid the sometimes disruptive effect of opening a secondary proceeding.53 Under this mechanism, the insolvency practitioner for the main proceeding extends to the creditors an undertaking to respect the local distribution and priority rules with respect to the local assets. Since the administrator for the main 51 See the Vienna Report (note 2), at No. 919; however, the report mainly cites cases where communication and cooperation were successfully accomplished by the courts, see Nortel Group, [2009] EHWC 206 (Ch); OLG Wien, judgment of November 9th 2004, case No. 28 R 225/04 = NZI 2005, p. 56; see for the PIN group case AG Köln, NZI 2008, p. 388; there are however also examples of non-cooperation, see OLG Wien, judgment of July 14th 2006, case No. 28 R 15/06; AG Hamburg, judgment of February 11th 2009 = ZInsO 2009, p. 539. See also the detailed analysis by A. GEROLDINGER, Verfahrenskoordination im Europäischen Insolvenzrecht – Die Abstimmung von Haupt- und Sekundärinsolvenzverfahren nach der EuInsVO, Phd. Univ. Vienna 2010, p. 126 et seq. 52 Council’s amendment of June 3rd 2014, 10284/14 ADD1 (as Art. 31c). 53 See the cases MG Rover, High Court of Justice (Birmingham), NZI 2005, p. 515; see also regarding the denial of the secondary proceeding of the Court d’appel de Versailles, Dalloz 2006, p. 654; see further regarding the denial of the secondary proceeding MG Rover Belux SA/NV, High Court (Chancery Division), NZI 2006, p. 415 with notes of P. MANKOWSKI; Collins & Aikman, NZI 2006, p. 654; see also P. MANKOWSKI, EWiR 2006, p. 623; see also Re Nortel Networks, High Court of Justice London, NZI 2009, p. 451 with notes of P. MANKOWSKI; S. MOCK, Handlungsoptionen bei ausufernden Sekundärverfahren ZInsO 2009, p. 895; regarding the English commentary literature see R. SHELDON, CrossBorder Insolvency, Nos. 2.170 et seq.; G. MOSS/ I. FLETCHER/ S. ISAACS (note 15), at Nos. 8.373 et seq.

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Stefan Reinhart proceeding “simulates” a secondary proceeding, such undertakings are often called “synthetic secondary proceedings”. Art. 36 EIR 2015 is a rule of substantive law (rather than a conflict rule), which overrides any provision of national law.54 If the court seized in the secondary proceeding is satisfied that the given undertaking adequately protects the general interest of the local creditors, it may decline to open a secondary proceeding.55 However, when studied in detail, the mechanism is more complex than one would expect. Art. 36 EIR 2015 was significantly modified various times during the legislative process.56 The final result still raises many questions; its successful application remains questionable. 1.

Content and Effect of the Undertaking

Art. 36(1) EIR 2015 defines the content of the undertaking: the unilateral undertaking has to be given “in respect of the assets located in the Member State in which secondary insolvency proceedings could be opened, that when distributing those assets or the proceeds received as a result of their realization, it will comply with the distribution and priority rights under national law that creditors would have if secondary insolvency proceedings were opened in that Member State.”57 In practice, the insolvency practitioner will have to separate the local assets of that Member State and apply the local rules on the distribution and priority rights.58 The requirement to comply with the local “distribution and priority rights” regarding assets that would have been assets of the secondary proceeding, raises various questions. First, with respect to secured creditors, the situation is different from the situation of unsecured creditors. Without a secondary proceeding, their rights in rem would not be affected according to Art. 8 EIR 2015. Only when a secondary proceeding is opened, do their rights in rem become subject to insolvency laws and insolvency related restrictions.59 The intention of the undertaking is, however, to 54 Even though the concept has already been tested by English courts, there was a widespread view that many countries would not allow the insolvency practitioner to offer such undertakings to creditors, since it deviates from the distribution rules of the main proceeding, see G. MOSS/ I. FLETCHER/ S. ISAACS (note 15), at Nos. 8.654 et seq.; see also the Collins/Aikman case [2007] 1 BCLC 182 as well as the Nortel case [2009] BCC 343. 55 See Art. 38(2) EIR 2015. 56 See the opinion of the European Parliament and Council regarding the revision of Regulation (EC) No 1346/2000 of the Commission about Insolvency Proceedings, COM(2012) 0744 final, IILR 2013, p. 179 et seq.; see also regarding the revision of Regulation (EC) No 1346/2000 S. REINHART (note 38), at Art. 1 EIR 2000, Nos. 34 et seq. 57 Art. 36(1) sent. 1 EIR 2015. 58 See for a similar concept under the Draft EU Insolvency Convention 1970 and 1980, the Noel-Lemontey Report (note 38), at Nos.105 et seq. 59 See S. REINHART (note 38), at Art. 5 EuInsVO 2000, No. 17; G. MOSS/ I. FLETCHER/ S. ISAACS (note 15), at Nos. 8.213 et seq.; M. VIRGOS/ F. GARCIMARTIN, European Insolvency Regulation: Law and Practice, The Hague 2004, p. 104; M. VIRGOS/ E. SCHMIT, Rapport explicatif de M. Virgós et E. Schmit sur la convention relative aux

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The European Insolvency Regulation 2015 secure the creditors’ rights under a secondary proceeding instead of subjecting them to a main proceeding (in which they could be made worse off). For secured creditors, it is the exact opposite. The undertaking can by definition not “impose” restrictions on creditors’ rights that would never exist if no secondary proceeding had been opened at all. The unilateral undertaking can only be a promise to deviate from the applicable law of the main proceeding and to respect the creditors’ better position under the lex fori concursus separatii. Such a unilateral undertaking can only grant additional rights, but not impose restrictions. Consequently, the undertaking may not address secured creditors who can still realize their security as if no insolvency proceeding had existed at all. The result is probably not what the legislator intended, but the mechanism of a unilateral undertaking does not allow restrictions on the recipients of the undertaking. However, without including the secured creditors in the concept, it is doubtful whether avoiding the secondary proceeding is attractive at all for the main proceeding’s insolvency practitioner. Second, with respect to unsecured creditors, the rule seems to be simple, but only at first sight. From its wording, the ranking of claims must be entirely governed by the lex concursus secundarii. That includes the existence and characterization of claims as priority rights, ordinary insolvency claims, and subordinate insolvency claims. However, issues such as set-off, avoidance claims and the effect on current contracts are also included by the scope of the provision. In cases where the insolvency law applicable to the debtor’s claim60 does not allow a set-off, such set off may only be possible if permitted under the insolvency law of the insolvency proceeding.61 If the lex fori concursus of the main proceeding would also not permit such set-off, whilst the set-off is permitted under the law of the secondary proceeding, the question of whether a secondary proceeding is opened will in fact determine whether the counter-party may validly declare a set-off against amounts it may owe to the debtor. Even though set-off is not a distribution rule, the effect of the set-off is that the creditor can recover the nominal amount of his claim in kind, rather than to receive a (usually much smaller) dividend. Hence, the application of a local set-off insolvency rule is also a legitimate interest of a local creditor. Third, similar considerations apply to detrimental acts according to Art. 16 EIR 2015. If such a claim of the insolvent estate would be part of the assets of the secondary proceeding,62 the law of the secondary proceeding decides whether the procédures d’insolvabilité du 3 mai 1996, Council document 6500/96, DRS 8 (CFC), Nos. 91 et seq.; see e.g. in the context of the BGH, NZI 2011, p. 420; S. REINHART, Die Durchsetzung im Inland belegener Absonderungsrechte bei ausländischen Insolvenzverfahren oder Qualifikation, Vorfrage und Substitution im internationalen Insolvenzrecht, IPRax 2012, p. 419. 60 Of course, the debtor’s claim must belong to the secondary proceeding in order to allocate such issue to the secondary proceeding, see Art. 34 sent. 3 EIR 2015 and Art. 2(9)(viii) EIR 2015. 61 See Art. 9 EIR 2015 (former Art. 6 EIR 2000) stating that the insolvency proceeding shall not affect the rights of creditors to demand a set-off if such set-off is permitted by the law applicable to the debtor’s claim. 62 See for the problems to allocate such claim in cases of parallel proceedings S. REINHART (note 38), at Art. 13 EuInsVO 2000, No. 19.

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Stefan Reinhart insolvency practitioner may challenge the detrimental act. It is in fact a distribution rule since it reverses the inequality of treatment caused by the detrimental act. Thus, the undertaking of the insolvency practitioner for the main proceeding must also include the promise of challenging the detrimental act as if the secondary proceeding had been opened. This means in practice that the unjustly benefitted party must be able to use unavoidability under the lex fori concursus secundarii as a defence according to Art. 16 EIR 2015 (even though the secondary proceeding has not been opened). Furthermore, the undertaking must also extend to jurisdictional issues. If the secondary proceeding had been opened and the claim to challenge the detrimental act part of the assets of the secondary proceeding, the insolvency practitioner would have to sue the counter-party in the Member State of the secondary proceeding.63 If the rights of the creditors have to be respected, they have to be respected in full. Otherwise no practical distinction could be drawn. Fourth, the effect of the insolvency on current contracts is also an issue of distribution. The question of whether such contracts can be terminated as well as the question of the consequences of termination (or continuation) of the contract and the consequences for the counter-party with respect to its claim against the debtor has distributive effects. For example, the lex fori concursus secundarii may provide different treatment for employees’ claims after the commencement of the insolvency proceeding. There is no reason, why they should not also be protected by the insolvency administrator’s undertaking. This protection also includes jurisdiction issues. Finally, the content of the undertaking is unclear. Art. 36 EIR 2015 only provides that the undertaking has to specify the factual assumptions on which it is based, in particular in respect to the value of the assets and the option to realize such assets.64 Depending on the size of the establishment, such description may be extensive. However, the question remains whether it is sufficient for an undertaking to simply repeat that the creditors will be treated as if the secondary proceeding would have been opened (and leaving its interpretation to the court) or whether the written undertaking must contain specific rules for the foreseeable situations and conflicts. The requirement to further specify the undertaking could be doubtful since Art. 36(2) EIR 2015 provides that, where an undertaking has been given, the law applicable to the distribution, the ranking of creditors’ claims, and the rights of creditors in relation to the assets shall be that of the lex fori concursus secundarii. One could argue that this rule sufficiently describes the undertaking. However, the provision does not describe the legal effect of an undertaking in general, but rather describes the legal standard with which the insolvency practitioner’s undertaking has to comply by specifying that the undertaking has to be tested against the standard of the lex fori concursus secundarii. Furthermore, Art. 36(7), (8) and (9) EIR 2015 all refer to the “terms of the undertaking”. Consequently, the legislator must have implicitly assumed that the content of the 63 See Art. 6(1) EIR 2015 for the jurisdiction of insolvency-related claims, which is also applicable to secondary proceedings since the provision generally refers to “proceedings opened according to Art. 3” EIR 2015 without specifying the reference to the different types of proceedings covered by Art. 3 EIR 2015. 64 Art. 36(1) sent. 2 EIR 2015.

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The European Insolvency Regulation 2015 undertaking is not a mere repetition of the wording of Art. 36(1) EIR 2015, but must be more detailed. Given how complicated and unforeseeable matters may become during administration, it may become a real challenge to draft an undertaking that covers all potential issues. 2.

Approval of the Undertaking

In order to become binding, the undertaking has to be approved by the local creditors. Local creditors are by definition only those creditors whose claim arose from or in connection to the operation of the establishment in that Member State.65 All other creditors are excluded from the approval process. Such restriction is justified since the secondary proceeding may only protect the interest of the creditors who had a legitimate interest in the application of the local insolvency law. However, for the approval procedure, Art. 36(5) EIR 2015 refers to rules of the lex fori concursus secundarii. It provides that “the rules on qualified majority and voting that apply to the adoption of restructuring plans under the law of the Member State where secondary insolvency proceedings could have been opened, shall also apply to the approval of the undertaking.” The scope of the wording leaves unanswered which rules of local law shall be applied and which rules can be ignored.66 If, for example, the local law requires that different classes of creditors be established for the voting procedure and to calculate the majority required, such rules are also applicable. However, if according to the local law restructuring plans need to be approved by the insolvency court, such rules are not contemplated by reference to Art. 36(5) EIR 2015. Since the insolvency court seized in the secondary proceeding must evaluate and provide its approval of the creditors’ undertaking when deciding on the opening of the secondary proceeding, there will be sufficient judicial control of the approval process. 3.

Decision to Open Secondary Proceedings

If the court seized is satisfied that the undertaking adequately protects the general interests of the local creditors, the court shall decline to open a secondary proceeding.67 Such adequate protection is achieved if the undertaking respects the ranking of the creditors’ claims and the rights of creditors in relation to the assets of the potential secondary proceeding according to the lex fori concursus secundarii. Such test, however, will only be applied in relation to the local creditors.68 As discussed above, such test raises a variety of questions as to which

65 See Art. 2(11) EIR 2015; the definition should be read in line with Art. 7(5) Regulation No 1215/2012 which refers to disputes arising out of the operation of a branch. 66 For the complications in applying such rule to the German Insolvenzplanverfahren, see S. REINHART (note 38), at Art. 36 EIR 2015, Nos. 23 et seq. 67 Art. 38(2) EIR 2015. 68 See above, note 65.

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Stefan Reinhart interests shall be protected and whether the undertaking was validly approved by the local creditors. If the court declines to open the secondary proceeding, Art. 39 EIR 2015 entitles the insolvency practitioner for the main proceeding to challenge such decision. The absence of an equivalent rule for creditors does not mean they should be denied the opportunity to be heard, if the court dismisses the application to open a secondary proceeding. Art. 59 EIR 2015 only intends to clarify the rights of the insolvency practitioner for the main proceeding but does not intend to restrict procedural rights the creditors may have under local law to challenge or appeal the dismissal of an application. 4.

Subsequent Compliance with the Undertaking

The undertaking given by the insolvency practitioner is binding. He may be sued to comply with the terms of the undertaking and – in case of non-compliance – is liable for any damage caused to local creditors as a result of non-compliance.69 However, such remedies were not sufficient for the EU legislator. The local creditors may even seek further protection. They may apply to the courts of the Member State of the main proceeding and require the court to take “any suitable measures available under the local law”.70 Alternatively – or additionally – they may apply to the courts of the Member State in which a secondary proceeding could have been opened “for provisional or protective measures”.71 Both provisions do not describe the requirements for such a court order. Both provisions only state that the order shall be made to ensure compliance by the insolvency practitioner within the terms of the undertaking. Consequently, such compliance must be in doubt because the insolvency practitioner is either already in breach of his obligation or such breach is imminent. Whether such requirements are to be read into the provision of the Regulation or whether the rule shall be complemented by equivalent provisions under local law, is unclear. Since both provisions only intend to grant the creditors a specific remedy for the situation, the requirements for such remedies are to be complemented by the applicable law, i.e. the insolvency law of the main proceeding and the insolvency law of the (declined) secondary proceeding. Complementing both remedies will lead to many legal uncertainties. E.

Conclusion

Even though the concept of an undertaking to avoid a secondary proceeding has already worked in English courts, it is doubtful whether the codification of the idea in Art. 36 EIR 2015 will survive in practice. The rules are similar to what the

Art. 36(10) EIR 2015. Art. 36(8) EIR 2015. 71 Art. 36(9) EIR 2015. 69 70

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The European Insolvency Regulation 2015 legislator had in mind when drafting an EU Insolvency Convention in 1970 and 1980 and are equally complex. The concept of the undertaking should have been complemented in a different manner. Art. 36 EIR 2015 is in fact a choice of law rule. By permitting an undertaking (and following the courts’ subsequent decision to dismiss the application for a secondary proceeding) the general rule of the lex fori concursus contained in Art. 7 EIR 2015 has been modified. The lex fori concursus of the main proceeding will not apply to the distribution of the assets of the potential secondary proceeding to which local insolvency law will apply. It would have been sufficient for the insolvency practitioner to simply give a standardized undertaking to the court to treat the assets as if the secondary proceeding had been opened and then to leave the potential disputes to the creditors if they believed that the insolvency practitioner was in breach of his obligation. In any event, there is one other solution which perhaps remains easier for the insolvency practitioner. He may ask the secondary proceeding court if he may also be appointed in the secondary proceeding. Such personal consolidation has been mentioned with respect to the appointment of the insolvency practitioners within in a group of companies72 but can be applied equally in the situation of a secondary proceeding. In this case, he also has to comply with local law, yet with a greater legal security of how to treat the creditors.

V.

Insolvency Proceedings for a Group of Companies

The local insolvency laws of all member states lack rules pertaining to the insolvency of groups of companies, even though in practice corporate insolvencies often involve a group of companies.73 If the business of the group extends beyond the national borders – as is often the case nowadays – some or even many of the group’s companies will have their COMI in various member states. As the European Court of Justice has already confirmed in obiter dictum, each corporate entity is subject to a separate COMI determination.74 When the EIR 2000 was drafted, the legislator purposely refrained from optimizing group insolvency rules.75 However, national legislators as well as the UNICTRAL Model law have begun to address the issue of “efficient administration” of group insolvencies.76 The most far-reaching concept prefers a See Recital 50 sent. 2 EIR 2015. E.g. the MG Rover case, with a production company and national distribution units, organised in separate corporate entities; for a case involving such a group see MG Rover, Belux SA/NV [2006] EWHC 12976 (CH). 74 See ECJ, Rastelli case, Nov. 15th 2011, C-191/10 = NZI 2012, p. 148, No. 25 = IILR 2012, p. 284 et seq. 75 See M. VIRGOS/ E. SCHMIT (note 59), at No. 180. 76 See L. BECK, Das Konzernverständnis im Gesetzesentwurf zum Konzerninsolvenzrecht, DStR 2013, p. 2468; E. BRAUN/ J. HEINRICH, Auf dem Weg zu einer (neuen) Insolvenzplankultur in Deutschland – Ein Beitrag zu dem Regierungsentwurf für ein 72 73

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Stefan Reinhart substantial consolidation of the assets of all group companies, thus merging the asset into one insolvency proceeding.77 Other academics argue for a procedural consolidation, by pooling the procedures within the competence of one insolvency court and pooling the procedure’s administration in the hands of one insolvency practitioner.78 The least far-reaching concept refrains from any consolidation measures, but concentrates on improving the communication between its players (courts, insolvency practitioners) and the coordination of the administration of the

Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen, NZI 2011, p. 505; Ch. BRÜNKMANS, Entwurf eines Gesetzes zur Erleichterung der Bewältigung von Konzerninsolvenzen: Kritische Analyse und Anregungen aus der Praxis, ZIP 2013, p. 193; Ph. FÖLSING, Konzerninsolvenz: Gruppen-Gerichtsstand, Kooperation und Koordination – Stellungnahme zu dem Diskussionsentwurf des Bundesjustizministeriums für ein Gesetz zur Erleichterung der Bewältigung von Konzerninsolvenzen vom 03.01.2013, ZInsO 2013, p. 413; K. SIEMON, Plädoyer zur Gründung einer überparteilichen und verbandsunabhängigen Expertenkommission zur Fortentwicklung des deutschen Insolvenzund Konzerninsolvenzrechts, ZInsO 2014, p. 1318; see also Vienna Report (note 2), at Nos. 584 et seq.; UNCITRAL Model Law on Cross-Border Insolvency of 1997, ZIP 1997, p. 2224 available at ; for a comparative view on the group issue, see also K. HOPT, Group of Companies – A Comparative Study on the Economics, Law and Regulation of Corporate Groups, ECGI Law Working Paper No. 286/2015. 77 See the so called “substantive consolidation”, as termed in US Insolvency Law, Ch. PAULUS, Überlegungen zu einem modernen Konzerninsolvenzrecht, ZIP 2005, p. 1948 et seq., H. SCHEEL, Konzerninsolvenzrecht, Köln 1995, p. 241 et seq., Ch. BRÜNKMANS, in Münchener Kommentar zur Insolvenzordnung: InsO, Band 3, 3rd edn., Konzerninsolvenzrecht, Nos. 15 et seq.; Ch. SCHMOLLINGER, Der Konzern in der Insolvenz, Berlin 2013, p. 314 et seq.; L. FLÖTHER/ Ch. THOLE, Handbuch zum Konzerninsolvenzrecht, München 2015, § 2, Nos. 57 et seq.; regarding the UNCITRAL Model Law on Cross-Border Insolvency (see note 76); see J. HOLZER, Die Empfehlungen der UNCITRAL zum nationalen und internationalen Konzerninsolvenzrecht, ZIP 2011, p. 1894, 1896; Ch. BRÜNKMANS, Die Koordinierung von Insolvenzverfahren konzernverbundener Unternehmen nach deutschem und europäischem Insolvenzrecht, Berlin 2009, p. 93 et seq.; see also UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW, Working Group V (Insolvency Law), Thirty-eight session, New York, 19-23 April 2010: UNCITRAL Legislative Guide on Insolvency Law, Part three, Treatment of enterprise groups in insolvency, para. 106, available at . 78 When this concept was tested for a corporate group in Collins/Aikman [2007] 1 BCLC 182; Re Nortel Networks SA [2009] BCC 343, the Court over-interpreted the COMI provision in Art. 3 EIR 2000, a decision which was later restricted by the European Court of Justice; see also Ch. BRÜNKMANS (note 77), at No. 18; see also Ch. BRÜNKMANS, Die koordinierte Verfahrensbewältigung von Insolvenzverfahren gruppenangehöriger Schuldner nach dem Diskussionsentwurf zur Konzerninsolvenz, Der Konzern 2013, p. 169, 172 as well as H. EIDENMÜLLER/ T. FROBENIUS, Ein Regulierungskonzept zur Bewältigung von Gruppeninsolvenzen: Verfahrenskonsolidierung im Kontext nationaler und internationaler Reformvorhaben, Annex to ZIP 2013/22, p. 6.

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The European Insolvency Regulation 2015 group of companies.79 The Vienna Report has also identified the need for improvements but suggested only the introduction of coordinative measures.80 The EU legislator has acknowledged that rules to harmonise the group’s practices may be helpful. Thus, the EIR 2015 contains a new Chapter V with 21 Articles (Arts. 56-77 EIR 2015). Chapter V is divided into two sections: a section on the communication and corporation duties of the group members, and a section on a separate coordination proceeding. Notably, the rules lack a substantial or procedural consolidation. A.

Cooperation and Communication Duties

The rules on communication and coordination (Arts. 56-60 EIR 2015) are similar to those between the main and the secondary proceeding (Arts. 41-47 EIR 2015). Thus, these Articles do not contain conflict rules, but rather rules of substantive law which are, by virtue of the Regulation, directly applicable upon the insolvency practitioners and the courts. Art. 56 EIR 2015 first imposes a set of duties upon the insolvency practitioners. The insolvency practitioners shall communicate with each other, consider the possibilities to coordinate the administration and supervision of each member of the group, and consider the possibility to restructure the members of the group and establish a coordinated restructuring plan. Art. 56 EIR explicitly mentions that the coordination may be implemented by the conclusion of agreements or protocols, thereby approving the way in which various insolvency practitioners have agreed their coordination in the past.81 Art. 57 EIR 2015 extends the cooperation duties between the insolvency courts, and Art. 58 EIR 2015 between the insolvency practitioners and the insolvency courts. Art. 59 EIR 2015 allocates the costs for communication and coordination to the proceedings in which these costs are incurred, thus enlarging the categories of permitted expenses under the national laws. Art. 60 EIR 2015 grants specific powers to the insolvency practitioners of group members to participate and to be heard in the other proceedings of group members and to request a stay of realization measures of the assets. Those powers are similar to the powers granted to the insolvency practitioner for the main proceeding for the secondary proceeding.82 Even though, some of these provisions contain additional specific powers granted to the insolvency practitioners, most of the provisions simply describe best practices to be followed by practitioners to enhance assets in their respective proceeding. Given that the Regulation contains substantive law provisions, conflicts with the local laws of the member state may ensue. Furthermore, the rules are only

See Ch. BRÜNKMANS (note 77), at Nos. 14 et seq. See Vienna Report (note 2), at Nos. 584 et seq. 81 See S. REINHART (note 38), at Art. 31 EuInsVO 2000, Nos. 39 et seq. 82 See Art. 46 EIR 2015. 79 80

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Stefan Reinhart applicable as long as the cooperation is not incompatible with the rules applicable to such proceedings and does not entail any conflict of interest.83 Both requirements are difficult to interpret and simply illustrate the dilemma of such rules within the context of a regulation. The requirement that there should be no conflict of interest is in itself contradictory, as conflict of interests must necessarily arise in the process of coordination. The insolvency practitioner of each proceeding will have to judge whether a coordination measure is to the advantage of all – or sometimes only to certain – creditors of “his” proceeding. Successful coordination will be the result of the balancing between the interests of the group and those of each single insolvency proceeding. Additionally, limiting the coordination duty under the Regulation when “incompatible” with the insolvency practitioner’s local law merely convert communication and coordination from a permissive act to a duty. B.

Group Coordination Proceedings

Chapter V, section 2 (Arts. 61-77 EIR 2015) introduces a new separate “group coordination proceeding” for which a coordinator shall be appointed to identify, outline and propose recommendations for the coordinated conduct of the insolvency proceedings and a group coordination plan. These Articles also constitute rules of substantive law. 1.

The Opening of Group Coordination Proceeding

Such group coordination proceedings may be requested in any court having jurisdiction over a group member by any insolvency practitioner appointed in an insolvency proceeding of such member.84 The application shall be accompanied by a proposal detailing who is to be nominated as coordinator, an outline of the proposed group coordination, a list of the insolvency practitioners appointed for the other group members, as well as an outline of the estimated costs.85 The court seized shall notify the other insolvency practitioners of group members about such application.86 Subject to exceptions, jurisdictional issues between courts are settled by the first to file rule: any court other than the court first seized shall decline jurisdiction in favour of the other court.87 However, if two-thirds of all insolvency practitioners of group members agree that the court of another Member State shall have jurisdiction, such court shall have exclusive jurisdiction.88 83 See Arts. 56(1), 57(1), Art. 8 EIR 2015; for compatibility with respect to a stay see Art. 60 para. 2 subpara. 2 EIR 2015. 84 Art. 61 para. 1 EIR 2015. 85 Art. 61 para. 3 EIR 2015. 86 Art. 63 EIR 2015. 87 Art. 62 EIR 2015. 88 Art. 66 EIR 2015.

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The European Insolvency Regulation 2015 Faced with such an application, each insolvency practitioner of a group member has two potential reactions. He may object to the choice of person proposed as coordinator.89 In this case, the court may refrain from appointing that person and may invite the objecting insolvency practitioner to submit a new request.90 Alternatively, the insolvency practitioner may even object to the inclusion of “his” insolvency proceeding in the group coordination proceeding.91 In this case, the insolvency proceeding of the objecting insolvency practitioner shall not be included in the group coordination proceeding which follows, and none of the powers or costs of the court or the coordinator in the group shall have any effect on that member. However, the objecting insolvency practitioner has the option of a subsequent opt-in: he may request – at any time after the opening of the group coordination proceeding – to be included in such proceeding. The subsequent inclusion is subject to the coordinator’s approval.92 After the time period of 30 days objection period has lapsed, the court shall decide on the application for a group coordination proceeding. The court may open such a proceeding if it is satisfied that (a) the opening of such proceedings is appropriate to facilitate effective administration, (b.) no creditor is likely to be financially disadvantaged, and (c.) the proposed coordinator fulfils the requirements laid down in Art. 71 EIR 2015, namely eligibility under the law of a Member State to act as an insolvency practitioner93 and the requirement that there be no conflict of interest regarding the group members, their creditors, and the insolvency practitioners of group members. Under certain circumstances, the appointment may be revoked by the court.94 2.

Tasks and Rights of the Appointed Coordinator

Art. 72 EIR 2015 outlines the powers and tasks of the coordinator. His main tasks are to identify and outline recommendations for the coordinated conduct of the insolvency proceedings and propose a group coordination plan.95 Such plan may include the measures (i.) to re-establish the economic performance of the group or any part of it, (ii.) the settlement of intra-group disputes as regards intra-group transactions and avoidance actions, as well as (iii.) agreements between the insolvency practitioners of insolvent group members.96 Additionally, the coordinator has similar further rights comparable to rights granted to the insolvency practitioner of a main proceeding within the secondary proceeding, i.e. the right to be heard in any Art. 64 para. 1 let. (b) EIR 2015. Art. 67 EIR 2015. 91 Art. 64 para. 1 let. (a) EIR 2015. 92 Art. 69 EIR 2015. 93 Art. 71 para. 1 EIR 2015. 94 See Art. 75 EIR 2015 for details. 95 Art. 72 para. 1 EIR 2015. 96 Art. 72 para. 1 let. (b), (i)-(iii) EIR 2015. 89 90

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Stefan Reinhart creditors’ meeting, to request information from any insolvency practitioner, and to request a stay for a period of up to six months.97 The coordinator is also entitled to promote and present the coordination plan to the competent persons or body according to the respective national laws.98 Finally, the coordinator may also mediate disputes between the group members.99 The insolvency practitioners of group members participating in the group coordination proceeding are obliged to cooperate and communicate with the coordinator.100 Whilst the coordination duties are subject to the compatibility with national rules, no such restriction applies for the communication duties.101 Thus, the insolvency practitioner has to provide any information that the coordinator requests. Contrary to some opinions invoked in the academic discussion of how group insolvencies should be treated in general, the new rules do not empower the coordinator to recommend any consolidation of proceedings or insolvency estates. Thus, each proceeding will remain a separate proceeding. The administration of the group is restricted to a coordination of the proceedings involved. 3.

Non-Obliging Nature of the Group Coordination Plan

However, the implementation of the group coordination plan does not become mandatory by order of the court deciding on the group coordination proceeding, nor does it become binding by resolution of a majority of the participating group members. The group coordination plan remains only a recommendation. Consequently, the coordinator’s recommendations or the group coordination plan do not bind the individual insolvency practitioners. The insolvency practitioners are only obliged to consider the recommendations or the group coordination plan when conducting their insolvency proceeding. However, the non-complying insolvency practitioner has to give reasons for his decision to the coordinator as well as to the competent persons or bodies under his national law. Upon rejection of the coordinator’s recommendations or of the group coordination plan, the coordinator only has the option to return to the national law of the non-complying insolvency practitioner and to seek options provided for under national law to compel compliance with such recommendations or the group coordination plan. 4.

Analysis of the Rules

The group coordination proceeding has been criticized already by various academics and practitioners, in stating in particular that the European Legislator has See Art. 72 para. 2 let. (a), (d), (e) EIR 2015. Art. 72 para. 2 let. (c) EIR 2015. 99 Art. 72 para. 2 let. (b) EIR 2015. 100 Art. 74 EIR 2015. 101 See Art. 74 para. 1 and para. 2 EIR 2015. 97 98

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The European Insolvency Regulation 2015 adopted a “soft law measure” rather than a radical approach by introducing a procedural or substantive consolidation approach.102 However, the European legislator was wise to restrict the rules on the insolvency of groups to coordination measures. None of the national laws of the member states so far provide for a procedural or substantive consolidation. Consolidation concepts contradict long existing and basic principles of company and insolvency law. Outside insolvency, company law strictly distinguishes between corporate identities. A complicated set of rules determine the relations between companies in order to uphold the concept and policies of limited liability. Only under certain and well-defined circumstances will the corporate veil be pierced and/or the shareholder be obliged to pay more than agreed when the company was set up. Similar considerations apply for the creditors. Apart from collateral pooling and cross collateral arrangements under structured financings, a creditor can only rely on the assets made available by the respective debtor company. He has no access to assets of other companies of the group. He may not care about the obligations of other companies of the group so long as his debtor has not given any security for such obligation. The question of who the debtor is and whose assets may also be liable for a debt should not be altered by more flexibility as often requested in the context of group insolvencies. Procedural consideration also supports a non-consolidation approach. One could of course concentrate all insolvency procedures at the competent court of the holding company (or any other defined company, such as the company with the most valuable assets according to their accounts). However, one would have to give up the concept of secondary proceedings in order to achieve such concentration, since the creditors of the subsidiary companies could then apply for secondary proceedings in the member states where the actual COMI of the subsidiary company is. One may argue that groups are often centrally financed by a consortium of banks who receive securities for their loan from all or most of the group companies. However, they are not the only creditors and, given that they are the biggest creditor, they may use their influence in the national proceedings to support a coordinated administration of the group.

VI. The Way Ahead The recast of the Insolvency Regulation proves how difficult and complex this area of law is. It eludes simple solutions. As far as jurisdictional issues are concerned, the introduction of a “jurisdiction” for insolvency related proceedings within the Regulation somehow contradicts the concept of jurisdiction contained in the Regulation No 1215/2012 on jurisdiction issues. The rule gives preference to the insolvency practitioners and A. MERLINI, Reorganisation and Liquidation of Group of Companies: Creditor’s Protection vs. Going concern Maximisation, the European Dilemma, or simply a misunderstanding in light of the new EU Insolvency Regulation No 2015/848, IILR 2016, p. 119, 135. 102

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Stefan Reinhart disregards the justified expectations of the defendant under the Regulation No 1215/2012. With regard to “secondary proceedings”, the EU legislator should try not to become a better legislator than the national legislator and try to fill the Regulation with substantive law which prevails over national law. Even if the European legislator’s conceptual understanding were better, substantive law provisions within a Regulation that only complement and/or amend specific issues of national insolvency laws become so complex that nothing is achieved in the end. To amend substantive law, the legislator should rather use the instrument of directives which can be appropriately implemented by the national legislator. With respect to “group insolvencies”, the legislator seems to have accepted that restricting the Regulation to a soft concept of coordination is all that he can sufficiently do without entering into conflict with the equally complex rules of corporate and shareholders’ liability.

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COOPERATION IN THE NEW EU REGULATION ON INSOLVENCY PROCEEDINGS: AN UNFINISHED TRANSITION FROM STATUS TO CONTRACT Valentin RÉTORNAZ*

I. II.

III.

Introduction Why Is it Necessary to Cooperate? A. Specificities of International Insolvency 1. Exequatur as “Border Control” 2. Inadequacy of a Pure “Exequatur-Based Approach” in Bankruptcy a) The Common Distinction between “Adjudication” and “Enforcement” b) The Inaccuracy of such a Distinction in Insolvency Matters B. “Universality” and “Territoriality”: a First Attempt to Reconcile Insolvency Law with Exequatur 1. The Two Ways of Solving the Issue 2. The Lack of Comprehensive Solutions C. The European Mixed Approach: Cooperation as a Dialectical Way Out 1. The Combination of “Universality” and “Territoriality” a) Relative Universality without Cooperation as a Matter of Principle b) Cooperative Universality in Case of Groups of Companies c) Cooperative Territoriality in Case of Secondary Proceedings 2. The Specific Role Assigned to Cooperation in the New Regulation No 848/2015 a) The Position of Regulation No 1346/2000 b) Cooperation in the Regulation No 848/2015 The Ambit of Cooperation A. The Overriding Objective of Cooperation 1. Vertical Cooperation a) The Peculiar Relation between Main and Non-Main Proceedings b) Consequences on Cooperation

PhD, Assistant Professor for civil and comparative law; Galatasaray University (Istanbul). I want to thank my dear friend Prof. Gian Paolo ROMANO for having accepted to publish this paper in the Yearbook of Private International Law. All errors and insufficiencies being mine, I would be grateful to open a discussion at [email protected]. *

Yearbook of Private International Law, Volume 17 (2015/2016), pp. 319-354 © Verlag Dr. Otto Schmidt & Swiss Institute of Comparative Law

Printed in Germany

Valentin Rétornaz 2.

VI.

Horizontal Cooperation a) Cooperation between Non-Main Proceedings b) Group of Companies B. The Panorama of Cooperation 1. Exchange of Information (Communication) a) Between Insolvency Practitioners b) Between Insolvency Practitioners and Courts c) Between Courts 2. Mutual Assistance (Cooperation) a) Between Insolvency Practitioners b) Between Courts c) Between Courts and Foreign Insolvency Practitioners 3. Coordinated Decision-Taking a) Decisions Taken by the Insolvency Practitioners b) Decision Taken by the Courts The Limits to Cooperation A. Material Limitation to the Cooperation 1. Limitation Contemplated by the Regulation No 848/2015 Itself a) Confidentiality b) Procedural Rights c) Conflicts of Interests 2. Material Restrictions Based on National Law a) Admissibility b) Compatibility of the National Legislation with the Spirit of European Law B. The Almost Complete Lack of any Formal Requirement of Cooperation 1. Informal Cooperation 2. Protocols of Cooperation Dispute Resolution as regards Cooperation A. Remedies against the Lack of Cooperation 1. Supervisory Remedies 2. Damages B. Appeal of Single Acts Conclusion: From Cooperation to Harmonization?

I.

Introduction

IV.

V.

The recast of European private international law regulation has become a firmly embedded habit. With the new Regulation No 848/2015,1 which replaces the Regulation No 1346/2000 in 2017, the rules on cross-border insolvency will be partially modified. The aim of the present contribution is to focus on a specific issue, namely the “cooperation” between all the actors involved in an international 1

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OJ L 141, 5 June 2015, p. 19-72.

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Cooperation in the New EU Regulation on Insolvency Proceedings case. Basically, cooperation can be explained as the replacement of a set of fixed rules designed for solving a specific problem by a more casuistic approach based mainly on communication between the actors involved.2 Cooperation has sometimes been considered as a way to change the way the issues linked to transnational litigation are addressed.3 It is linked to the more general phenomenon of contractualization of legal relationship. It embodies a form of transition from status that is from abstract rules that are applied to solve a conflict, to contract. Even if the concept of cooperation is not specific to insolvency law,4 it has been intensively discussed in this field for many years.5 So it seems quasi “natural” to have a closer look at the European Regulation. The main goal of this study will be to examine whether the changes proposed by the new Regulation are compatible with the present realities of insolvency law in Europe. Namely, we will try to see if the specific provisions of the Regulation dealing with the issue are coherent and if they can insert themselves in the different insolvency laws existing in Europe. A more comprehensive approach of the issue is necessary in order to identify the core mechanism of European Law. For this reason, we will first deal with the issue of the justification of cooperation in itself (II.). Then we will go into the debate, examining first the ambit of cooperation in the Regulation No 848/2015 (III.) and then the limits posed to cooperation (IV.). Lastly, we will address the issue of dispute resolution (V.) before reaching a conclusion (VI.).

II.

Why Is it Necessary to Cooperate?

The necessity to further cooperation between all the actors involved in an insolvency proceeding is a consequence of the specificities of international insolvency (A.). These specificities have led to the construction of a theoretical model based on the opposition between “territoriality” and “universality” of insolvency proceedings (B.). This being explained, we will deal the particular solutions adopted in European insolvency law (C.). A.

Specificities of International Insolvency

1.

Exequatur as “Border Control”

For a long time, the international dimension of insolvency has been dealt in the same way as other issues concerning the recognition and enforcement of foreign See S. CHALAS-KUDELKO, La cooperation en droit international privé – Originalité d’une methode, PhD Dissertation, University of Paris Ouest-Nanterre-La Défense, unpublished, 2014, p. 3 (available at ). 3 S. CHALAS-KUDELKO (note 2), at 160 et seq. 4 See the other examples quoted by S. CHALAS-KUDELKO (note 2), at 62 et seq. 5 B. WESSELS/ B.A. MARKELL/ J.J. KILBORN, International Cooperation in Bankruptcy and Insolvency Matters, Oxford 2009, p. 68-70. 2

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Valentin Rétornaz decision. The key issue was whether the foreign bankruptcy decree could be first recognized and then enforced in another country than the one where he had been issued. As far as the conditions were concerned, there might have been differences between the enforcement of a bankruptcy decree and the one of a court decision, say, in contractual matters, but the concept of “exequatur” was still the same. In both cases it was considered as a bridge between two legal orders, a way to incorporate a judicial decision coming from a foreign legal order within the legal order of destination. The exequatur proceeding did not question the strict separation between the two legal orders, nor did it try to reconcile them. It may be compared with a sort of “judicial border control” in the way that it constitutes a “gateway” through which the foreign decision could pass after having been subjected to the “custom clearance” of a national court acting on the basis of national law. 2.

Inadequacy of a Pure “Exequatur-Based Approach” in Bankruptcy

a)

The Common Distinction between “Adjudication” and “Enforcement”

In accordance with the traditional approach, as soon as exequatur is granted, the recognized court decision ceases to be a foreign decision which is only subject to the rules of its national legal order of issuance. In the same way as it is expected of a foreign national that he respect the legal order of his place of domicile, the foreign court decision is also subject to the legal order in which it has been rendered. To stay with our emigrational comparison, the enforcement of judgments concerning pecuniary issues is similar to the emigration of individuals who leave their countries, after having liquidated all their belonging there, and definitively settle in another country. As a matter of principle, the consequences of the foreign court decision within the national legal order will only be decided by the latter. This means these consequences may be different from those within the foreign legal order in question. In many cases, this is not a problematic issue for a strict separation line can be drawn between the court decision as such and its enforcement.6 When a decision ordering the debtor to pay a sum of money is granted exequatur, the fact that the enforcement proceeding will not follow the same pattern as in the legal order of This separation is clear as far as private law is concerned, but the whole issue may be different under public law. The European Court of Human Rights considers namely that the enforcement of a court decision is a part of the whole judicial process covered by Art. 6 § 1 of the European Convention on Human Rights (see among many others, Hornsby v. Greece, application No. 18357/91, judgment (Chamber) of 19 March 1997). In some cases, the Court has considered that the enforcement of a foreign decision is also covered by Art. 6 § 1 ECHR and should not be denied arbitrarily (McDonald v. France, application No 18648/04, inadmissibility decision of 29 April 2008). The ECtHR has (still) not decided that the right to access to a court implies that the court which has delivered the judgment shall always be competent for its enforcement and that this shall always be done in accordance with the rules of the said court. 6

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Cooperation in the New EU Regulation on Insolvency Proceedings origin may be unsatisfactory for the parties7 but it does not generate per se any legal conflict. Adjudication and enforcement are sufficiently well separated to take place in two different legal orders, at least as long as the later decision is not in blatant contradiction with the first decision delivered.8 b)

The Inaccuracy of such a Distinction in Insolvency Matters

The situation in bankruptcy matters is totally different from the one existing in the “ordinary” case we mentioned previously. The bankruptcy decree is usually a decision taken by a court after a summary adjudication process, frequently on the sole basis of evidence given by the debtor.9 Far from being a culmination, it is the beginning of an intricate process involving courts, public administration and individuals. However, when a party petitions a foreign court for exequatur, the situation has generally not yet crystallized. For this precise reason, it is almost impossible to draw a line between “adjudication” and “enforcement”. Adjudication on some important matters will always take place after the recognition of the bankruptcy decree has been decided. A contemporary trend in insolvency law has put this issue under a new light. For a long time, insolvency proceedings were mainly oriented towards the liquidation of the assets of the debtor.10 When a reorganization was envisaged, this

7 It is not possible to assess in abstracto the situation. The creditor may be unhappy because the enforcement rules in the legal order of destination are less efficient, or protect more the debtor, than the legal order of origin. The debtor may be worried by the fact that, to the contrary, the legal order of destination is not granted him the same level of protection he would be entitled to if the enforcement were taking place in the legal order of origin. 8 This may happen if the enforcement implies the application of legal concept unknown to the legal order of destination. For instance, it may be difficult to enforce a decision recognizing a right in rem unknown in the country in which exequatur has been requested. Until the adoption of the Hague Convention of 1985 the recognition of trusts by legal orders based on jus civile was a frequent issue of this type. A similar issue can be encountered in family matters, for instance when divorced parents are granted joint guardianship and shared custody of their common child although those institutions are not known in their country of citizenship. 9 Since bankruptcy is no longer considered as a dramatic failure, or even a sign of dishonesty, the vast majority of cases begin at the request of the debtor himself, or after a declaration of bankruptcy made by its director if it is a company. Under U.S. Law, the wellknown Chapter 11 bankruptcy proceeding is even considered as a sort of waterproof umbrella for the debtor who traditionally “puts himself under the protection” of the reorganization proceeding. 10 This is still noticeable in Swiss, Turkish and Italian insolvency legislation. In the three countries, such legislation was enacted more than fifty years ago, that is, before the shift in mentality. Thus, the liquidation proceeding (faillite/iflâs/fallimento) constitutes the normal proceeding. See Arts. 159 et seq. of the Swiss Loi sur la poursuite pour dettes et la faillite of 1889; Arts. 154 et seq. of the Turkish Icra ve Iflâs Kanunu of 1934; Arts. 5 et seq. of the Italian Legge fallimentare of 1941.

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Valentin Rétornaz peculiarity was either noticeable from the very beginning11 or it was considered as an exceptional evolution within the liquidation proceeding.12 Recent pieces of legislation have relinquished this approach, which led to the frequent liquidation of businesses that could have been reorganized. The decision to liquidate or reorganize is no more taken at the opening of the proceeding. A “period of uncertainty” is explicitly accepted by many13 bankruptcy laws.14 This means that the recognition of the opening decision may take place before the decision on the very nature of the proceeding is taken. Thus it is totally impossible in this case to make a clear distinction between “adjudication” and “enforcement”. The only way to manage the situation is to consider that the opening decision cannot be subject to an exequatur proceeding before a decision on the nature of the proceeding has been taken, a clearly unsatisfactory position. B.

“Universality” and “Territoriality”: a First Attempt to Reconcile Insolvency Law with Exequatur

1.

The Two Ways of Solving the Issue

Territoriality of insolvency proceeding is based on the assumption that each State is exclusively competent for the administration, and eventually for the liquidation, of all assets located on its soil. Pushed to its logical conclusion, this approach See concerning contractual reorganization schemes, Arts. 293 to 331 of the Swiss Loi sur la poursuite pour dettes et la faillite (concordat); Arts. 285 to 307 and 309a to 309l of the Turkish Icra ve Iflâs Kanunu (konkordato); Arts. 160 to 186bis of the Italian Legge fallimentare (concordato preventivo and accordo di restrutturazione dei debiti). 12 See Art. 332 of the Swiss Loi sur la poursuite pour dettes et la faillite (concordat dans la faillite); Art. 309 of the Turkish Icra ve Iflâs Kanunu (iflâstan sonra konkordato); Arts. 124 to 141 of the Italian Legge fallimentare (concordato). 13 The United States Bankruptcy Code of 1978 and the British Insolvency Act of 1986 are the most striking exceptions in this respect. Both pieces of legislation require that the proceeding be identified from the very beginning. However it is still possible under American law to transform a reorganization proceeding (Chapter 11) into a liquidation proceeding (Chapter 7) and vice-versa (§§ 706, 707(b)(1) and 1112). Under the British Insolvency Act, a court may treat an administration application as a winding-up petition (Schedule B1, para. 13(1)(e)). If the winding-up has been decided by the shareholders of the company then it is automatically transformed into a “creditors’ winding-up”, very close to a genuine bankruptcy proceeding, if no declaration of solvency has been made (s. 90 and 96 of the Insolvency Act). Being split between different legal instruments (Loi sur les faillites of 1997 and Loi relative à la continuité des entreprises of 2009, largely revised in 2013), Belgian insolvency law also clearly distinguishes its procedures. The only coordination between them is secured by the rule according to which no debtor cannot be ruled bankrupt before the commercial court has delivered its judgment on the application for judicial reorganization (Art. 22 of the Loi relative à la continuité des entreprises). 14 See for instance Arts. L. 622-10 and L. 631-15(2) of the French Code de commerce (période d’observation); § 157 of the German Insolvenzordnung (Entscheidung über den Fortgang des Verfahrens); Arts. 142 and 143 of the Spanish Ley concursal (apertura de la liquidacíon). 11

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Cooperation in the New EU Regulation on Insolvency Proceedings denies every consequence to a foreign bankruptcy decree and makes the recognition and exequatur unnecessary.15 However, legal orders applying the territoriality principle generally tend to accept that the mere existence of a foreign bankruptcy decree is a sufficient ground to open a proceeding, at least in order to make sure that all assets of a single individual are subject to the same status.16 But the importance given to the foreign bankruptcy decree is limited to the opportunity to open a separate proceeding at a national level. Thus, national law governing all the consequences of the recognition of the foreign decision and generally the proceeding is the same as for insolvencies without an international dimension.17 This leads to the existence of many parallel proceedings, which evolve independently of each other. In contrast to the principle of territoriality, the universality of insolvency aims to centralize all the proceedings applicable in any given State.18 This is justified by the fact that the management of the assets of one single debtor should be put under the jurisdiction of one State, a single set of public authorities and insolvency practitioners being entrusted with it. With the recognition of the foreign bankruptcy decree, all the effects of the foreign proceeding are extended to assets localized in the State of exequatur. The foreign insolvency practitioner may have access to them and the courts of the State of origin may adjudicate disputes related to them. 2.

The Lack of Comprehensive Solutions

Both universality and territoriality principles cannot be considered as giving a clear and definite answer to the challenges. For the national authorities, the principle of territoriality may be very comfortable since they do not have to take into consideration events taking place abroad. They can focus on the application of their respective legal dispositions, without being required to have regard to the situation in another jurisdiction. From an economic point of view, territoriality of insolvency involves a high risk of uncoordinated management of the assets causing losses in value to the prejudice of the creditors.19 Inequalities among them can also occur.20 Moreover, many steps, like the verification of claims filed by the creditors, may take place more than one time with the risk of conflicting decisions. Lastly, the localization of intangible assets, like unregistered rights in personam, may also give rise to diverging opinion in different countries. For instance, shall a bank account be considered as localized with its holder or at the place where the bank B. WESSELS/ B.A. MARKELL/ J.J. KILBORN (note 5), at 40. See for instance Arts. 166 et seq. of the Swiss Private International Law Act. 17 Art. 170 of the Swiss Private International Law Act. 18 B. WESSELS/ B.A. MARKELL/ J.J. KILBORN (note 5), at 48-49. 19 P.J. OMAR, The Landscape of International Insolvency Law, 11 International Insolvency Review (2002), p. 177. 20 M. FEHRENBACH, Haupt- und Sekundärinsolvenzverfahren – Zur sachgerechten Verfahrenskoordination bei grenzüberschreitenden Unternehmensinsolvenzen, Tübingen 2014, p. 58-59. 15 16

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Valentin Rétornaz has its business premise?21 The answer to this question is especially difficult within the ambit of international insolvency law. If the bank account is deemed to “stay” with its holder, this implies that the bank may be involved in a foreign insolvency proceeding if the holder is located abroad, with the result being that the proceeding is not particularly territorial.22 Universality is traditionally considered as being convenient for the creditors, since the value of the estate is likely to be maximized by the centralized administration of it.23 Besides this, costs related to the proceeding may be reduced by avoiding the same repetitive operations. The centralized administration of the insolvency proceeding involves that it is performed in accordance with the laws of one single State even if assets are located within the realm of another country. This may involve the indirect application of foreign legislation within the sovereignty of the other States where the assets are located. Simultaneously, the existing venues for the litigation of various issues related to the assets are gradually replaced by a general competence of the court which opened the centralized bankruptcy, a phenomenon generally called vis attractiva concursus.24 Both aspects, material and 21 This issue has recently been raised in a case decided by the Court of Justice of the European Union concerning the definition of “the place where the harmful event occurred” in the meaning of Art. 5(3) of the Regulation No 44/2000 when the damage is the consequence of a payment made from a bank account: CJEU, Judgment of 16 June 2016, C-12/15, Universal Music International Holding BV v. Michael Tétreault Shilling, Irving Schwarts and Josef Brož, EU:C:2016:449. The situation will not be different under the Regulation No 1215/2012, see its Art. 7(3). However, as far as the localization for the purpose of the insolvency proceeding is concerned, Art. 2(9)(iii) of the Regulation No 848/2015 considers that the bank accounts are located within “the Member State indicated in the account’s IBAN”. On the difference between the new Regulation and Regulation No 1346/2000, see G. MOSS, A very decent proposal: the European Commission’s proposals for reforming the EC Regulation on insolvency proceedings 1346/2000, Insolvency Intelligence (2013), p. 57. 22 The localization of intangible assets frequently gives rise to contradictory decisions by the same national jurisdictions. For instance, the Swiss Federal Tribunal has decided that a bank account held by the foreign branch of a Swiss bank was deemed to be localized on Swiss soil for the purpose of a freezing order (ATF 140 III 512). However, it previously considered that the hereditary share into the estate of a deceased person could not be frozen by Swiss courts if the heir was not domiciled in Switzerland (ATF 118 III 62). The difference is based on the fact that the heirs’ estate cannot be considered as a “debt of the debtor” (Drittschuldner; see Federal Tribunal, 21 October 2014, case file No. 5A_435/2014, unreported, at § 3.2), an approach that does not take sufficiently into consideration the fact that the real issue is not the nature of the intangible moveable, but rather its localization, or more precisely the linkage with a specific legal order. A similar issue may be identified in European law when Art. 2(9)(iii) of the Regulation No 848/2015 is compared with the case law on the localization of assets in tort litigation (see the previous footnote). 23 For a restatement of the economic arguments, see P.J. OMAR (note 19), at 179; See also, L. CZAJA, Umsetzung der Kooperationsvorgaben durch die Europäische Insolvenzverordnung im deutschen Insolvenzverfahren, Frankfurt am Main 2009, p. 29-31. 24 On this concept, see Ch. WILLEMER, Vis Attractiva Concursus und die Europäische Insolvenzverordnung, Tübingen 2006, p. 8 et seq.; J. WEBER, Gesellschaftsrecht und Gläubigerschutz im Internationalen Zivilverfahrensrecht, Tübingen 2011, p. 61 et seq.

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Cooperation in the New EU Regulation on Insolvency Proceedings formal, of the centralization of the insolvency proceeding lead to a de facto hegemony of the legal order to which the opening decision is related.25 Such a consequence may not coincide well with core legal or economic policies of the other implicated countries. This is especially noticeable when rules about the management of the insolvency estate are aimed at protecting special interests. For instance, in some jurisdictions, the management of the insolvency estate sometimes implicates stakeholders other than the creditors and the trustee. A good example of such an extension is the implication of workers’ committee elected by employees working the insolvent company under French law.26 If the company assets are subject of a foreign insolvency proceeding, let’s say in England, a similar level of participation will not be granted since English law does not provide for it.27 In this case, it is highly probable that policy concerns will make more difficult the enforcement of the principle of universality.28 Besides, if the assets are, more or less, equally dispersed among many countries, it may be difficult to manage them in a centralized way. The principle of universality is specifically suitable when the majority of the assets are localized within the jurisdiction of the court which opened the proceeding. C.

The European Mixed Approach: Cooperation as a Dialectical Way Out

Following a general tendency of international insolvency law,29 the European approach is based on a mixed approach combining “universality” and 25 M. FEHRENBACH (note 20), at 48; L. CZAJA (note 23), at 31. See also, P.H. ZUMBRO, Cross-border Insolvencies and International Protocols – an Imperfect but Effective Tool, 11 Business Law International (2010), p. 160-161. 26 M. FEHRENBACH (note 20), at 48-49. French law involves workers in the management of the insolvency proceeding not only because they are creditors, but also because the law provides for the consultation of the people entrusted with the defence of their interests. So, the workers’ representative (représentant des salariés) is regularly consulted during the verification of the claims made by employees (see, Arts. L. 625-1, 6252 and 625-4 of the Code de commerce). Furthermore, the workers’ committee (comité d’entreprise) is also consulted before any decision is taken to rescue the business (Art. L. 626-8 of the Code de commerce). 27 On the difficulties of English law to address the issue of workers’ rights in the framework of insolvency law, E.Z. GEVA, Convergence and Persistence in Corporate Insolvency Law: Employee Participation in Corporate Insolvency Restructuring, 12 European Business Organization Law Review (2011), p. 339 et seq. 28 It is indeed one of the difficulties linked to the application of Regulation no. 1346/2000 in France. In cases where English courts consider that the centre of the main interests of a French company was in England, this leads to a general bypassing of the above mentioned organs. For this reason it has sometimes been claimed that an English bankruptcy decree on the estate of a French company should be considered, for this single reason, as being contrary to French “public order” in the meaning of Art. 26 of the Regulation No 1346/2000, which corresponds to Art. 33 of the Regulation No 848/2015. 29 See R.B. CHAPMAN, Judicial Abstention in Cross-Border Insolvency Proceedings: Recent Protocols in Simultaneous Plenary Cases, 7 International Insolvency Review (1998), p. 2.

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Valentin Rétornaz “territoriality” as a dialectical way out of the debate (1.).30 The European regulatory framework accepts parallel proceedings. One of them is universal, and dominating; it is called the main proceeding. The other(s) being territorial and subordinate, are called territorial, secondary or, more simply, non-main proceedings.31 This makes coordination of the proceedings very important in order to avoid the difficulties created by the concession made to territoriality. This situation assigns thus a special task to cooperation between all the actors involved in the process (2.). 1.

The Combination of “Universality” and “Territoriality”

a)

Relative Universality without Cooperation as a Matter of Principle

Both the present and the future Regulation on Insolvency proceedings are based on the principle of universality of the insolvency proceeding.32 As a general principle, a single insolvency proceeding should be opened at the place where the debtor has his main centre of interest (the so-called COMI).33 The courts of the place of the opening of the insolvency proceeding are also competent to deal with all related issues, in accordance with the principle of the vis attractiva concursus,34and the law of the place of opening is applicable to legal issues related to the insolvency proceeding as a general principle.35 However, this application of the principle of universality does not apply without some limitations. In order to avoid practical difficulties,36 the application of As stated by M. FEHRENBACH (note 20), at 59: “[…] during the creation of the international insolvency law one befreed himself from the obsession on these two principles […]” (“[…] hat man sich zur Ausgestaltung des internationalen Insolvenzrechts von einer Fixierung auf diese Prinzipien befreit […]”). 31 This model is sometimes called “controlled universalism”, Á. ESPINIELLA MENÉNDEZ, The Ancillary Insolvency Proceeding, 19 International Insolvency Review (2010), p. 100. 32 See Recital 23 of the Regulation No 8348/2015 which corresponds to Recital 12 of the Regulation No 1346/2000. 33 Art. 3(1) of the Regulation No 848/2015 which corresponds to Art. 3(1) of the Regulation No 1346/2000. 34 See Art. 6 and Recital 35 of the Regulation No 848/2015. Under the Regulation No 1346/2000, the issue is controversial (see the references at footnote 24). The case law of the Court of Justice of the European Union has admitted, as a matter of principle, the vis attractiva concursus: CJEU, Judgment of 19 April 2012, C-213/10, F-Tex SIA v. LietuvosAnglijos UAB “Jadecloud-Vilma”, § 27, EU:C:2012:215; CJEU, Judgment of 12 February 2009, C-339/07, Christopher Seagon v. Deko Marty Belgium NV, § 21, EU:C:2009:83, ECR [2009] I-00767. 35 Art. 7 of the Regulation No 848/2015; Art. 4 of the Regulation No 1346/2000. 30

36 See two following excerpts of Recital 22 of the Regulation No 848/2015: “this Regulation acknowledges the fact that as a result of widely differing substantive laws it is not practical to introduce insolvency proceedings with universal scope throughout the Union” and “the application without exception of the law of the State of opening of proceedings would, against this background, frequently lead to difficulties.” For more

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Cooperation in the New EU Regulation on Insolvency Proceedings the law of the place where the insolvency proceeding has been opened is excluded in some cases, mainly as far as rights in rem,37 set-off,38 labour contracts,39 some aspects of intellectual property,40 systems of payments,41 the issue of voidable transactions42 and the consequences of the insolvency proceeding on a pending trial or arbitration proceeding.43 In the same way, the application of ordinary rules of competence is not totally excluded when the issue at stake can be both considered as falling under the vis attractiva concursus and the Regulation No 1215/2012, as it is explicitly stated at Article 6(2) of the Regulation No 848/2015. In view of these restrictions to the application of the principle of universality, it seems more adequate to consider the European regulatory framework as applying a “relative universality” principle.44 As a result of the above, when the debtor is subjected to one single insolvency proceeding, the application of the principle of “relative universality” renders unnecessary any debate about transnational cooperation between courts or insolvency practitioners. The insolvency practitioner of the main proceeding has locus standi before all courts or authorities of any Member State,45 at least as long as the opening decision is not considered as being contrary public policy.46 Other decisions following the opening decision are also recognized and should be executed in accordance with the rules normally provided for the execution of foreign court decisions in civil and commercial matters.47 b)

Cooperative Universality in Case of Groups of Companies

The existence of a group of companies is one of the situations where the issue of cooperation may arise in spite of the application of the principle of universality. Since every company member of the same group is a distinct legal entity, there will be the same number of main proceedings as there are companies. However it is always abstract and against the economic realities to consider that the members of a group have the same level of independence as, say, partners to a joint venture explanations, Ch.G. PAULUS, Die Europäische Inzolvenzverordnung und der deutsche Insolvenzverwalter, Neue Zeitschrift für Insolvenz und Sanierung (2001), p. 507. See Arts. 8, 10, 11, 14 and 17 of the Regulation No 848/2015. Art. 6 of the Regulation No 848/2015. 39 Art. 13 of the Regulation No 848/2015. 40 Art. 15 of the Regulation No 848/2015. 41 Art. 12 of the Regulation No 848/2015. 42 Art. 16 of the Regulation No 848/2015. 43 Art. 18 of the Regulation No 848/2015. 44 For the various expressions (eingeschränkte Universalität; kontrollierte Universalität) used to describe this situation: L. CZAJA (note 23), at 32-33. 45 Art. 21 of the Regulation No 848/2015. 46 Art. 33 of the Regulation No 848/2015. 47 Art. 32(1) of the Regulation No 848/2015. 37 38

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Valentin Rétornaz contracts. As soon as the group is not following a pure financial scope, like a holding for tax purpose, it should be considered a single economic entity. In order to take into consideration the economic unity of the group, the different insolvency proceedings create a special coordination proceeding for the insolvency of group of companies.48 Cooperation between the different insolvency practitioners is prescribed,49 as well as cooperation between courts50 and between courts and foreign insolvency practitioners.51 A special coordination proceeding is also created in order to ensure the effective management of the different insolvency proceedings.52 c)

Cooperative Territoriality in Case of Secondary Proceedings

Aside from the application of the principle of universality, the European Regulation also admits that some insolvency proceedings may have a limited scope. The main reason for this option is to avoid the negative side-effects of the universality principle in some precise situations. A “secondary or territorial proceeding” may be opened at the place where the debtor is doing business, even if this is not the centre of his main interest.53 This possibility is subject to special conditions when the secondary proceeding is opened before the main proceeding.54 The scope of the secondary proceeding is limited to the assets located within the jurisdiction of the opening court.55 It entails the application of the principle of territoriality with a corresponding limitation to the relative universality of the main proceeding. In order to avoid the side-effects produced by the application of the territoriality proceeding, the European Regulation imposes a form of coordination between the main and the secondary proceeding. Again, the Regulation No 848/2015 is innovating in this respect. The previous regulatory framework only provided for the cooperation between the insolvency practitioners, mainly as exchange of information.56 The Regulation No 848/2015 provides not only for 48 See Arts. 56 et seq. of the Regulation No 848/2015. Previously, coordination was achieved by the conclusion of protocols even in absence of any legal basis in national law: Á. ESPINIELLA, Los protocolos concursales, 10 Anuario de Derecho Concursal (2007), p. 166-167. 49 Art. 56 of the Regulation No 848/2015. 50 Art. 57 of the Regulation No 848/2015. 51 Art. 58 of the Regulation No 848/2015. 52 Arts. 61 et seq. of the Regulation No 848/2015. 53 Art. 3(2) of the Regulation No 848/2015. 54 See Art. 3(4) of the Regulation No 848/2015. 55 Art. 34 in fine of the Regulation No 848/2015. 56 See Art. 31 of the Regulation No 1346/2000. For a literal analysis of the relevant provision, see B. SANTEN, Communication and cooperation in international insolvency: on best practices for insolvency office holders and cross-border communication between courts, 16 ERA Forum (2015), p. 230-231.

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Cooperation in the New EU Regulation on Insolvency Proceedings cooperation between insolvency practitioners,57 but also for cooperation between courts58 and between a court and foreign insolvency practitioners.59 In addition, cooperation is no longer limited to the exchange of information, but it is extended to the coordinate decision taking of courts60 and management of the assets.61 It also encompasses the situation of debtors in possession.62 2.

The Specific Role Assigned to Cooperation in the New Regulation No 848/2015

a)

The Position of Regulation No 1346/2000

Cooperation in transnational bankruptcy matters is not an absolute novelty. The Regulation No 1346/2000 already contains a number of rules in this respect. As far as the cooperation between the main proceeding’s and the secondary proceeding’s insolvency practitioners, otherwise called liquidator, the regulatory framework already provides for a general “duty to cooperate and to communicate”.63 However, the extent of this duty is not clearly circumscribed and is limited to the exchange of information and the right to be consulted before any decision is taken. The legal provision mentions the information “which may be relevant to the other proceedings, in particular the progress made in lodging and verifying claims and all measures aimed at terminating the proceedings”64 and the obligation to hear the representations made by the liquidator of the main proceeding before any decision “on the liquidation or use of the assets in secondary proceedings”.65 Outside of those specific questions, the Regulation does not give any clue as to the extent of information that should be exchanged, or the degree of involvement of foreign insolvency practitioners in decision taking processes. For this reason, a nonbinding guideline was elaborated by two academics within the frameworks of INSOL Europe in 2007,66 colloquially called the “CoCo-Guideline”. This piece of soft-law has brought many interesting propositions and we will discuss them further.

Art. 41 of the Regulation No 848/2015. Art. 42 of the Regulation No 848/2015. 59 Art. 43 of the Regulation No 848/2015. 60 Art. 42(3) of the Regulation No 848/2015. 61 Art. 41(2) of the Regulation No 848/2015. 62 Art. 41(3) of the Regulation No 848/2015. 63 Art. 31 of the Regulation No 1346/2000. 64 Art. 31(1) of the Regulation No 1346/2000. 65 Art. 31(3) of the Regulation No 1346/2000. 66 B. WESSELS/ M. VIRGÓS, European Communication and Cooperation Guidelines for Cross-border Insolvency, INSOL Europe, 2007, available at . See also, L. CZAJA (note 23), at 8. 57 58

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Valentin Rétornaz Aside from the overly general treatment afforded to cooperation between insolvency practitioners,67 the Regulation No 1346/2000 quickly appeared to be problematic in a different aspect. In the Model Law, from which the Regulation No 1346/2000 borrowed many features,68 cooperation is suggested not only between insolvency practitioners, but also between the latter and foreign courts,69 and solely between courts.70 No such possibility is directly provided by the Regulation No 1346/2000,71 Recital 20 mentioning only cooperation between “liquidators”.72 Lastly, the Regulation No 1346/2000 does not address the issue and practitioners encountered many practical difficulties when dealing with large-scale insolvencies of highly integrated groups. This last point is particularly striking, especially in view of other European instruments making compulsory the consolidation of the accounts of companies belonging to the same group.73 b)

Cooperation in the Regulation No 848/2015

Even if the basic features of the European regulatory framework remain the same, the Regulation No 848/2015 is particularly innovative as far as cooperation is concerned.74 As a general principle, it encourages the effective cooperation between all the actors.75 A special stress has been given to this point in the drafting of the new text. Now, the Recital calls for the “proper cooperation of between the actors For an in-depth analysis, see B. HESS/ P. OBERHAMMER/ Th. PFEIFFER, European Insolvency Law – The Heidelberg-Luxembourg-Vienna Report, Munich/ Oxford/ BadenBaden, 2014, p. 244 et seq. 68 Like the combination of universality and territoriality principles through the acceptance of secondary proceedings. See Art. 28 of the Model Law. 69 Art. 26 of the Model Law. 70 Art. 25 of the Model Law. 71 S.L. BUFFORD, Revision of the European Union Regulation on Insolvency Proceedings – Recommendations, International Insolvency Law Review (2012), p. 354-355; L. CZAJA (note 23), at 241-243. However, this did not refrain some courts from engaging in court-to-court communication on an informal basis, see B. WESSELS, A Glimpse into the Future: Cross-border Judicial Cooperation in Insolvency Cases in the European Union, 24 International Insolvency Review (2015), p. 97. 72 See the following excerpt, “The main condition here is that the various liquidators must cooperate closely, in particular by exchanging a sufficient amount of information. In order to ensure the dominant role of the main insolvency proceedings, the liquidator in such proceedings should be given several possibilities for intervening in secondary insolvency proceedings which are pending at the same time.” 73 See the Directive 83/349/CEE of 13 June 1983 as last amended by the Directive 2009/49/EC of 18 June 2009. 74 S. BEWICK, The EU Insolvency Regulation Revisited, 24 International Insolvency Review (2015), p. 183-184; B. SANTEN (note 56), at 233 speaks even of a “huge extension of the present obligation formulated in Article 31”. 75 J. PARZINGER, Die neue EuInsVO auf einen Blick, Neue Zeitschrift für Insolvenz und Sanierung (2016), p. 67; I. FLETCHER, The European Insolvency Regulation recast: the main features of the new law, 28 Insolvency Intelligence (2015), p. 102. 67

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Cooperation in the New EU Regulation on Insolvency Proceedings involved in all the concurrent proceedings”,76 proclaiming even that “mandatory rules of coordination with the main insolvency proceedings satisfy the need for unity in the Union”.77 As far as the lack of preciseness is concerned, the new Regulation follows a pragmatic pattern. Instead of giving too much detail, it invites all the implicated actors to “take into account best practices for cooperation in cross-border insolvency cases, as set out in principles and guidelines on communication and cooperation adopted by European and international organizations active in the area of insolvency law, and in particular the relevant guidelines prepared by the United Nations Commission on International Trade Law (UNCITRAL)”.78 In doing so, the problem caused by the lack of detail on the ambit and practical modalities of cooperation will be easily overcome. Changes in practices will also be easily implementable. At the same time, the European Regulation will more closely approximate the Model Law as was the case for the Regulation No 1346/2000.79 This is a good way to bring European law in harmony with world tendencies in insolvency matters, ensuring that Europe is not isolating itself from global tendencies. As to the material content of the Regulation No 848/2015, we observe that cooperation between courts80 and between national courts and foreign insolvency practitioners81 is now formally introduced. Even if the regulatory framework is more detailed than the Regulation No 1346/2000 it still remains rather abstract. However, the call in favour of good-practices has already been heard. A joint project of the Universities of Leiden and Nottingham, under the guidance of the European Union, has made possible the publication in 2015 of a set of principles and rules concerning the court-to-court cooperation under the last draft, a text that is very close to the adopted Regulation No 848/2015.82 Following the same pattern as the aforementioned “CoCo-Guidelines” of 2007, this document has already been nick-named by its authors the “JudgeCo Project”. Since the project also involved many judges from various European countries, this gives a particular importance to its final products which give it a much greater impact than pure academic soft-law. It would not be surprising if in the near future the suggestions hereby put forward were strictly followed by the national courts.83 Here it is also worth mentioning the “Global Principles for Cooperation in International Insolvency Cases”.84 76 Recital 48 of the Regulation No 848/2015. As explained by B. SANTEN (note 56), at 232, “cooperation is the farthest stage of tuning”. 77 Recital 23 of the Regulation No 848/2015. 78 Recital 48 of the Regulation No 848/2015. 79 B. WESSELS (note 71), at 99. 80 Art. 42 of the Regulation No 848/2015. 81 Art. 43 of the Regulation No 848/2015. 82 For a concise presentation of the rules, P. OMAR, La coopération entre les juges et les tribunaux: le nouvel enjeu à l’échelle européenne, Revue des procédures collectives civiles et commerciales (novembre 2015), étude 22; B. SANTEN (note 56), at 237-238. 83 There is a wide consensus in favour of the use of the soft law by the courts: P. BUSCH/ A. REMMERT/ S. RÜTZ/ H. VALLENDER, Kommunikation zwischen Gerichten in grenzüberschreitenden Insolvenzen – Was geht und was nicht geht, Neue Zeitschrift für Insolvenz und Sanierung (2010), p. 618; P. KINDLER/ Z.S. SAKKA, Die Neufassung der

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Valentin Rétornaz Lastly, the Regulation No 848/2015 provides for a very detailed coordination procedure in case of insolvency of group of companies.85 The first five articles introduce the same principles as for cooperation and coordination between principal and secondary and/or territorial proceedings.86 The following articles create a distinctive “coordination procedure” which is without an equivalent in the case of principle and secondary proceedings. This shall not be discussed in great detail at this point.

III. The Ambit of Cooperation Before dealing with the extent of cooperation between all the actors involved in the insolvency proceeding, we will examine the overriding objective of cooperation (A.). This being done, we will draw up a general panorama of cooperation under the Regulation No 848/2015 (B.). A.

The Overriding Objective of Cooperation

In determining the overriding objective of cooperation, a distinction should be made between two categories.87 The first one concerns situations where cooperation has a hierarchical component, for this reason we prefer to speak of “vertical cooperation” (1.). The second category regroups cases where such a hierarchical component is not present; we will label them as “horizontal cooperation” (2.). 1.

Vertical Cooperation

a)

The Peculiar Relation between Main and Non-Main Proceedings

Even if the secondary or territorial insolvency proceeding is a concession made to the principle of territoriality in European law, this does not mean that it is totally independent from the main proceeding. Recital 48 underlines, as far as cooperation Europäischen Insolvenzverordnung, Europäische Zeitschrift für Wirtschaftsrecht (2015), p. 464; Th. MASTRULLO, La coopération entre les acteurs intervenant dans les procédures d'insolvabilité après la révision du règlement (CE) n° 1346/2000, Revue des procédures civiles et commerciales (janvier 2015), dossier No. 7, § 4; J. PARZINGER (note 75), at 67; B. SANTEN (note 56), at 234-235. In addition, English courts increasingly tend to integrate softlaw into their decisions on international insolvency law (see the cases quoted by B. WESSELS (note 71), at 105-106), an approach that may be soon followed in the whole Europe. 84 See I. FLETCHER/ B. WESSELS, Global Principles for Cooperation in International Insolvency Cases, International Insolvency Law Review (2013), p. 2 et seq. 85 Art. 56 of the Regulation No 848/2015. 86 Arts. 56 to 60 of the Regulation No 848/2015. G. MOSS (note 21), at 57. 87 Implicitly in this direction: Th. MASTRULLO (note 83), at §§ 2 and 3.

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Cooperation in the New EU Regulation on Insolvency Proceedings is concerned, the “dominant role of the main insolvency proceeding”. Even if the Regulation No 1346/2000 does not contain such a clear statement, the same idea has already been expressed.88 This means in particular that the necessities of the main proceeding should be paramount in the managing of the non-main proceeding. The non-main proceeding should be adjusted to the greatest possible extent in order to avoid conflicts with the main proceeding. This being said, it should not be forgotten that non-main proceedings are not a mere extension of the main proceeding.89 They are subject to the local insolvency legislation,90 which may differ a lot from the one applied to the main proceeding. Furthermore, their raison d’être lies in the peculiar interests they should specially protect.91 In a casuistic way, Recital 46 explains that “the insolvency practitioner in the main insolvency proceedings should not be able to realise or relocate, in an abusive manner, assets situated in the particular Member State where the establishment is located, with the purpose of frustrating the possibility that such interests can be effectively satisfied if secondary insolvency proceedings are opened subsequently”. In other words, local creditors implicated in a non-main proceeding are vested with special interests that should be taken into consideration.92 If the main proceeding is to dictate the direction for every single step, then such protection will not be granted in a sufficient way. This indicates that a certain margin of appreciation should be recognized to the actors of the non-main proceedings in order to enable their actors to take into considerations the main characteristics of the situations. However, this should not be used as a pretext to manage the secondary proceeding as a totally autonomous process. For this reason, it would appear to be more appropriate to speak of “vertical collaboration” rather than of subordination.

88 B. WESSELS/ B.A. MARKELL/ JJ. KILBORN (note 5), at 143-144; K.S. STAAK, Mögliche Probleme im Rahmen der Koordination von Haupt und Sekundärinsolvenzverfahren nach der Europäischen Insolvenzverordnung (EuInsVO), Neue Zeitschrift für Insolvenz und Sanierung (2004), p. 480-481. For a dissenting opinion, see M. FEHRENBACH (note 20), at 374-376. An overview of the various opinions on the issue can be read in L. CZAJA (note 23), at 48-51. 89 B. POGACAR, Rechte und Pflichten des Hauptverwalters in Sekundärverfahren, Neue Zeitschrift für Insolvenz und Sanierung (2011), p. 47-48; L. CZAJA (note 23), at 63-65 speaks even of “sovereignty claims” (Hoheitliche Ansprüche) of the State where the secondary proceeding is opened. 90 Art. 35 of the Regulation No 838/2015. 91 See Recitals 23 (“to protect the diversity of interests this Regulation permits secondary insolvency proceedings to be opened to run in parallel with the main insolvency proceedings”) and 40 (“secondary insolvency proceedings can serve different purposes, besides the protection of local interests”). See also S. BEWICK (note 74), at 181-182 concerning the case of MG Rover and L. CZAJA (note 23), at 66-67. 92 Á. ESPINIELLA MENÉNDEZ (note 31), at 9-11.

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Consequences on Cooperation

Since the relationship between main and non-main proceedings is a complex one, cooperation between all the actors implicated should aim at maintaining a balance between the dominance of the main proceeding and the protection of local interests in the non-main proceeding. This implies the identification of the reasons why the non-main proceeding has been opened. When this has been dictated only by the necessity of a better management of the assets of the debtor, this task is not difficult to fulfil. It is possible to conduct the whole procedure almost exclusively in the interests of the main-proceeding. In this case, the actors of the non-main proceeding should show a great deference towards the guidelines and directions adopted by the actors of the main proceeding. Cooperation will look in this case more like subordination. This does not totally exclude a certain degree of independence when the assets belonging to the nonmain proceeding shall be severed as soon as possible from the whole process, for instance with the creation of a separate company which is taking them over. In this case, the interest of the main-proceeding is only a financial one that is to get the best price for them. This justifies that the actors of the non-main proceeding shall have the widest margin of appreciation, as soon as they comply with the overriding interest of the main proceeding. The situation is very different when the non-main proceeding has been opened in order to protect special local interests, like those of workers93 or other privileged creditors, or if they “are made apparent” during the management of the non-main proceeding.94 In this case, the cooperation cannot be granted only in the interests of the main-proceeding. The more predominant the special interests are, the more they will have to be taken into consideration. When interests of socially weak parties are at stake, it is almost certain that cooperation cannot be granted against them.95 In this case, the actors of the nonmain proceeding should refrain from cooperation when it may be detrimental in a precise situation. For instance, a request made by the insolvency practitioner of the main proceeding to close a production unit, to sell a particular asset, or to terminate an important contract may be turned down if they will destroy any reasonable prospect of reorganization of the business. However, when the local interests are not correlated to a special vulnerability, like the privilege of the State Treasury, they should not constitute an obstacle to cooperation. If the tax expectancies of the State This was the case in the Nortel case, where the French secondary proceeding was a reaction to the fact that the English main proceeding did not sufficiently protect the interests of workers: R. DAMMANN/ M. MENJUCQ/ Ph. ROUSSEL GALLE, Le nouveau règlement sur les procédures d’insolvabilité, Revue des procédures collectives civiles et commerciales (janvier 2015), étude 2, § 20. 94 The non-main proceeding may have been opened for another reason, namely as a territorial proceeding because it was then not possible to open the main proceeding at the COMI (see Art. 3(4)(a) of the Regulation No 848/2015). 95 For a different approach, see A. GEROLDINGER, Die Koordinierung von Parallelverfahren nach der EuInsVO, in S. CLAVORA/ Th. GARBER (eds.), Grenzüberschreitende Insolvenzen im europäischen Binnenmarkt – die EuInsVO, Vienna 2010, p. 128. 93

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Cooperation in the New EU Regulation on Insolvency Proceedings are diminished by any particular operation, the courts of the non-main proceeding should not refrain from cooperating because of their duty to preserve the interests of the State. 2.

Horizontal Cooperation

a)

Cooperation between Non-Main Proceedings

The duty to cooperate only exists between the actors of the main and the non-main proceedings, but also between the actors of two non-main proceedings.96 In many cases, this cooperation will be granted by a centralization of the whole communication and decision making process with the actors of the main proceeding. But it is not totally inconceivable that the actors of two non-main proceedings are requested to cooperate directly in order to reach a special objective, for instance the delocalization of any activities from one proceeding to the others. When cooperation occurs between non-main proceedings, no hierarchy exists between them. So the cooperation is a horizontal one. However, this should not amount to a reduction of the obligation to cooperate with the actors of the main proceeding. b)

Group of Companies

In case of the insolvency of a group of companies, an independent main proceeding is opened for each of them.97 This does not exclude that many companies that are member of the group are subjected to non-main proceedings. In the latter, the ordinary principles concerning the relationship between main and non-main proceedings are applicable.98 Even if the special rules concerning the “coordination process” may be extended to the non-main proceedings, at least in this author’s view, this does not change the fact that non-main proceedings remain dependent on the main proceedings to which they are related. Concerning the various main proceedings, they should still be considered as independent of each other.99 Even if the European Regulation is applying the same principles of cooperation as for the “vertical cooperation”,100 this does not mean 96 See B. WESSELS/ M. VIRGÓS (note 66), at 13 (GUIDELINE 15: Coordination between Secondary Proceedings). The issue is however a controversial one, for an overview of the different points of view with a negative conclusion: L. CZAJA (note 23), at 66-69 and 122-123. 97 S. BEWICK (note 74), at 185. 98 P. KINDLER/ Z.S. SAKKA (note 83), at 464-465; M. WEISS, Bridge over Troubled Waters: The Revised Insolvency Regulation, 23 International Insolvency Review (2014), p. 208. 99 Ch. THOLE/ M. DUEÑAS, Some Observations on the New Group Coordination Procedure of the Reformed European Insolvency Regulation, 24 International Insolvency Review (2015), p. 215. 100 S. BEWICK (note 74), at 186. See Arts. 56 to 60 of the Regulation No 848/2015.

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Valentin Rétornaz that this is the tacit recognition of the dominance of one company over the whole process. In this author’s view, the peculiarities of the “coordination process” enshrined in Arts. 61 to 77 of the Regulation No 848/2015 show clearly how the drafters of the text were careful not to artificially create a sort of dominance. For instance, the coordinator of the insolvency proceedings “shall not be one of the insolvency practitioners appointed to act in respect of any of the group members, and shall have no conflict of interest in respect of the group members, their creditors and the insolvency practitioners appointed in respect of any of the group members”.101 He shall “propose a group coordination plan that identifies, describes and recommends a comprehensive set of measures appropriate to an integrated approach to the resolution of the group members’ insolvencies”,102 and “mediate any dispute arising between two or more insolvency practitioners of group members”103 and is duty bound to “perform his or her duties impartially and with due care”.104 Lastly, the insolvency practitioners appointed for the various members of the group should cooperate with the coordinator of the group.105 The general principle behind these specific situations may be identified as the obligation of the coordinator to take into consideration the interest of the group as such, and not the interests of the member companies taken separately. In the same way, the dismissal of the coordinator is possible only when he “acts to the detriment of the creditors of a participating group member”.106 This implies that the interests of the creditors of one group member are never above those of the others. Nevertheless, it may be doubted whether the strict equality of the members of a group of companies under the interest of the group, as contemplated by the Regulation No 848/2015, is always in harmony with the reality. In many groups, a hierarchy exists between the different members, at least from an economic point of view.107 For instance, some member companies may be created only in order to provide services, mainly for tax reducing purposes,108 to the other members of the group. During the course of the insolvency proceeding, it seems unrealistic to consider this member as being on an equal footing with, say, an autonomous subsidiary entrusted with production and commercialization of the products in a single country. In this case, the interests of the internal service company should be considered as being subordinated to those of the other members of the group. Moreover, in some countries, like Germany, company law establishes a hierarchy between the members of a group,109 making the controlling company, under some Art. 71(2) of the Regulation No 848/2015. Art. 72(1)(a) of the Regulation No 848/2015. 103 Art. 72(2)(b) of the Regulation No 848/2015. 104 Art. 72(5) of the Regulation No 848/2015. 105 Art. 74 of the Regulation No 848/2015. 106 Art. 75(a) of the Regulation No 848/2015. 107 On this topic, see A. DÄHNERT, The Threat of Corporate Groups and the Insolvency Connection, 18 International Insolvency Review (2009), p. 3-4. 108 The example of “patent box” companies, whose existence has been strongly criticized recently, comes to mind. 109 §§ 308 and 311 of the Aktiengesetz of 1965. 101 102

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Cooperation in the New EU Regulation on Insolvency Proceedings conditions, liable for the debts of its subsidiaries.110 Again, it seems difficult not to take this situation into consideration when dealing with the insolvency of such a group.111 B.

The Panorama of Cooperation

1.

Exchange of Information (Communication)

a)

Between Insolvency Practitioners

Exchange of information between insolvency practitioners is the easiest aspect of cooperation in European insolvency law. It may occur in a very informal way, by email or by phone call. Since the insolvency practitioners are bound to such an exchange of information both in cases implying vertical112 or horizontal cooperation within a group of companies,113 no distinction should be made between them. The same standard should always apply even if the legal instrument has not been drafted in the same way. Concerning the extent of communication, the Regulation provides that for vertical cooperation114 and cooperation in a group of companies outside of a coordination process,115 the insolvency practitioners should “as soon as possible communicate to each other any information which may be relevant to the other proceedings”. For the above reason, the same standard should be applied to communication between the coordinator of the group and the insolvency practitioners appointed to each member company. Communication may potentially concern any information in the possession of the insolvency practitioners and should not be limited to the facts related to the insolvency proceeding116 he is currently managing. Information on a pending trial to which the insolvent debtor is party, even if the insolvency practitioner is not participating in it, is covered by this disposition. This also includes criminal prosecution that may be instituted against managers or other persons. An administrative proceeding may also be deemed to fall under this duty to communicate if it is likely to have a potential impact on the economic situation of the debtor. For instance, the potential risk that the license to operate a business may be revoked, in this § 317 Aktiengesetz of 1965. On a similar mechanism in New-Zealand, I. MEVORACH, Appropriate Treatment of Corporate Groups in Insolvency: A Universal View, 8 European Business Organization Law Review (2007), p. 191-192. 111 Of the same opinion, A. DÄHNERT (note 107), at 227-228. 112 Art. 41(2)(a) of the Regulation No 848/2015. 113 Arts. 56(2)(a) and 74(1) of the Regulation No 848/2015. 114 Art. 41(2)(a) of the Regulation No 848/2015. 115 Art. 56(2)(a) of the Regulation No 848/2015. 116 B. WESSELS/ B.A. MARKELL/ J.J. KILBORN (note 5), at 145. For a list of those information, G. MOSS/ I.F. FLETCHER/ S. ISAAC, The EC Regulation on Insolvency Proceedings – A Commentary and Annotated Guide, 2nd edn., Oxford 2009, p. 330, No. 8.356 (ad Art. 31 of the Regulation No 1346/2000); L. CZAJA (note 23), at 81-84. 110

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Valentin Rétornaz author’s view, constitutes such a potential impact justifying the communication of its opening. The fact that the legal text uses the expression “as soon as possible” implies that information may be communicated even it has not been requested. The insolvency practitioners should not systematically wait to be consulted by their colleagues. However, in order to avoid excessive bureaucracy, this obligation to communicate immediately without waiting a request should be limited to key factors117 such as an imminent strike of all the employees, or the opening of an important case concerning a voidable transaction. Secondary issues,118 such as a court proceeding involving small amounts, may be communicated only after request. It may difficult for the insolvency practitioners to identify the relevant information without knowing too much of the proceeding abroad.119 It is always better if the insolvency practitioners seek contact as early as possible, preferably immediately after having been appointed.120 As we will see hereinafter, the parties may agree upon protocols in order to give a concrete framework to the obligation of communication.121 Concerning translation, it seems more pragmatic to leave this up to the recipient of the information.122 b)

Between Insolvency Practitioners and Courts

As far as the relationship between an insolvency practitioner and the court before which he usually appears is concerned, the matter is regulated by national insolvency law. The European Regulation deals only with communication between a court and a foreign insolvency practitioner. It provides for communication between the actors of the main and non-main proceeding, independently of whether such proceedings are opened, or merely requested123 and whether a group of companies is involved or not.124 Exchange of information may also occur between the court competent for a particular non-main proceeding and the insolvency practitioners managing another non-main proceeding.125 The standard of disclosure is “to facilitate the effective 117

L. CZAJA (note 23), at 80; B. POGACAR (note 90), at 47; K.S. STAAK (note 88),

at 481. For a better identification of principal and secondary issues, see the criteria suggested by L. CZAJA (note 23), at 87-94. 119 K.S. STAAK (note 88), at 481. 120 L. CZAJA (note 23), at 86. 121 L. CZAJA (note 23), at 85. 122 K.S. STAAK (note 88), at 482. L. CZAJA (note 23), at 98-99 suggests to send the informations with a short summary in the language of the recipient, in order to avoid unnecessary translation costs, or the use of a common language which may not be the one used before national authorities. 123 See the three occurrences at Art. 43(1) of the Regulation No 848/2015. 124 Art. 58 of the Regulation No 848/2015. 125 Art. 43(1)(c) of the Regulation No 848/2015. 118

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Cooperation in the New EU Regulation on Insolvency Proceedings administration”.126 The same approach should perhaps be taken as concerning communication between insolvency practitioners, with the exception of spontaneous communications in order to avoid courts having to deal with a great number of transnational cases where they are flooded with unnecessary information. Exchange of information between the court and the foreign insolvency practitioners may be as informal as between insolvency practitioners themselves. The courts are not obliged to formally summon the practitioners to appear127 and they may also request information by email or by phone. The only restriction should be that the courts may not ask the practitioners to provide information in a language he does not master. For instance, a Polish court shall not claim that the practitioner of a non-main proceeding may send a report drafted in Polish. Art. 73(2) regulating the communication between the coordinator of a group’s insolvency proceeding and the court, and obliging the former to use the language of the latter, should not be extended to other configurations in this author’s view. By accepting his appointment, the coordinator undertakes to do everything in order to facilitate the work of the every actor, including the courts. Such a commitment may not be expected of an insolvency practitioner appointed in a specific proceeding. His obligation should be limited to the deliverance of information in a language he masters. c)

Between Courts

Communication between courts is also made possible with the Regulation No 848/2015. The modalities are basically the same as those explained above in regards to communication between a court and a foreign insolvency practitioner128 and may also take place in an informal way. For instance, a judge may phone a colleague in another country in order to ask whether an application in order to open an insolvency proceeding concerning a specific company has already been made.129 He may also ask information about pending cases related to the proceeding he is administering, even if they do not fall under the vis attractiva concursus or constitute mere ordinary commercial cases to which the Regulation No 1215/2012 is applicable.130 When the peculiarities of the case justify it, the court may appoint a specific person, for instance an insolvency practitioner admitted in both countries, in order to receive the information and to forward it.131 Arts. 43(1) in limine and 58 of the Regulation No 848/2015. The UNCITRAL, Legislative Guide on Insolvency, p. 353, stresses the necessity of avoiding “the use of time-consuming procedures traditionally in use, such as letters rogatory”. This is even truer for European cross-border insolvencies. 128 See Arts. 42(1) and 57(1) of the Regulation No 848/2015. 129 For an example in a German-Luxembourgian case, see P. BUSCH/ A. REMMERT/ S. RÜNTZ/ H. VALLENDER (note 83), at 420. The issue is controversial under the Regulation No 1346/2000: L. CZAJA (note 23), at 80-81. 130 See also P. BUSCH/ A. REMMERT/ S. RÜNTZ/ H. VALLENDER (note 83), at 427. 131 See the last sentence of Art. 57(1) of the Regulation No 848/2015. 126 127

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Valentin Rétornaz 2.

Mutual Assistance (Cooperation)

a)

Between Insolvency Practitioners

Mutual assistance between insolvency practitioners may be considered as an extension of the exchange of information. It may involve the identification of persons or of their place of residence or the tracing of assets through the consultation of public records. Mutual assistance may also concern the management of the estate. For instance, when the practitioner in the main proceeding asks his counterpart in the secondary proceeding whether he could help to find a potential buyer. It is also possible to agree that the creditors will make their declaration of claim with the practitioner of their place of domicile and that he will then forward the declaration to his colleague if the claim does not relate to a proceeding with which he is entrusted.132 Even if it is not totally inconceivable, it is not likely that mutual assistance implies that the insolvency practitioner has the duty to commence a proceeding before a court on behalf of his counterpart. However, nothing prohibits him from accepting this task. Otherwise, his duty should be limited to the help in finding an appropriate lawyer, or to an adequate warning if a time-limit is about to expire. b)

Between Courts

Mutual assistance between courts, as provided by the Regulation No 848/2015133 may be used in order to perform abroad all the tasks a court may have to do in an insolvency case. So it may have recourse to it for notification, taking evidence or direct enforcement of judgment, including the interim measures. The provisions of the Regulation No 848/2015 could be considered a substitute for the European regulatory framework concerning mutual assistance in civil and commercial matters. The court receiving the request for mutual assistance will dispose of it in accordance with its national legislation as far as specific formalities are concerned. c)

Between Courts and Foreign Insolvency Practitioners

The mutual assistance between courts and foreign insolvency practitioners is perhaps one of the most potentially controversial issues raised by the new Regulation on insolvency. It is highly probable that in the near future, the Court of Justice of the European Union will be asked to deliver a great number of preliminary rulings on the issue. If mutual assistance is requested by the foreign insolvency practitioners, its locus standi should not give rise to too much controversy. Some aspects of this 132 For instance, A. BIENVENU, Le traitement juridique de la faillite des entreprises d’investissement: réflexions à partir d’un exemple franco-italien, Revue des procédures collectives civiles et commerciales (juillet 2012), étude 31, §§ 33-34. 133 Arts. 42(1) and 57(1) of the Regulation No 848/2015.

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Cooperation in the New EU Regulation on Insolvency Proceedings category of mutual assistance are codified separately in the Regulation No 848/2015, such as the stay of the realization of the assets belonging to the secondary proceeding,134 the power to propose restructuring plans135 or the right to ask for preservation measures.136 They exist already under the Regulation No 1346/2000137 without being too controversial. The Regulation No 848/2015 is thus building on something pre-existent and the extension of the power of courts should not cause any trouble. The situation is totally different when mutual assistance is requested by the court to the foreign insolvency practitioner. This is an absolute novelty without any antecedent in the Regulation No 1346/2000.138 It is giving wide powers to the courts. Should a court, for instance during the course of the administration of the main-proceeding, give instructions or directions to the foreign insolvency practitioner in his capacity as manager of the non-main proceeding? At first glance, it might be concluded that such a possibility should exist, at least in order to ensure the dominant role of the main proceeding on the non-main proceeding. But a positive answer is also linked with many constitutional and administrative concerns. The right of the courts to give instructions to the insolvency practitioners is a consequence of their supervisory functions, a task mainly rooted in public law which remains territorial. Even if a court decision delivered on the basis of the Regulation No 848/2015 should be executed in other countries without review,139 this does not yet create a supervisory function of the various courts within the European Union on all the insolvency practitioners admitted on European soil. So it is difficult to justify their right to deliver injunctions to foreign insolvency practitioners. The issue should have been solved by the Regulation itself. In absence of a clear statement, it will be up to the Court of Justice of the European Union to answer to the question. 3.

Coordinated Decision-Taking

a)

Decisions Taken by the Insolvency Practitioners

i)

Feasibility of a Reorganization

The Regulation No 848/2015 directs special attention to the rescue of the insolvent debtor.140 Thus it is not a surprise that insolvency practitioners are invited to examArt. 46 of the Regulation No 848/2015. Art. 47 of the Regulation No 848/2015. 136 Art. 52 of the Regulation No 848/2015. 137 See Arts. 33, 34 and 38 of the Regulation No 1346/2000. 138 For instance, B. POGACAR (note 89), at 48 explains that “the competent insolvency court is exercising its supervisory function only on «its» insolvency practitioner.” (“Dem jeweils zuständigen Insolvenzgericht kommt nur dann ein Aufsichtsrecht über «seinen» Verwalter zu”). 139 Art. 32(1) of the Regulation No 848/2015. 140 M. WEISS (note 98), at 196. See also Recital 10. 134 135

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Valentin Rétornaz ine the feasibility of reorganization within the framework of their cooperation both concerning non-main proceeding141 and insolvency of groups of companies.142 The coordinated decision taking in this respect should not, in this author’s view, be purely perfunctory. So it should go beyond the simple mutual information and consultation on a specific project drafted by one of the insolvency practitioners, as was the case for the Regulation No 1346/2000.143 A real and genuine commitment toward rescuing the business should be demonstrated by the insolvency practitioners.144 ii)

Management of the Assets

The management of assets of the proceeding subject to cooperation should no longer be left to the different insolvency practitioners without any implication of their colleagues,145 at least unless this has been considered as being the most efficient way to do so. In order to avoid excessive bureaucracy and the paralysis of the whole proceeding, it is necessary to accept a wide discretion of the actors as far as the management of assets having no systemic relevance.146 When the asset may be vital, especially for a reorganization proceeding, no decision should be taken without the agreement of the other insolvency practitioners. The cooperative management of assets is not limited to the decisions to sell or not to sell some specific items.147 It should also encompass the management of important contractual relationships, like license contracts or loans of a substantial amount.148 Litigation having a potential influence on the quantity of assets belong-

Art. 41(2)(b) of the Regulation No 848/2015. Art. 56(2)(b) and (c) of the Regulation No 848/2015. 143 See Arts. 31(1) and 31(3) of the Regulation No 1346/2000. 144 See on the practical difficulties created by the opening of a secondary proceeding H. BOURBOULOUX/ M. LOISEAU, Le règlement insolvabilité européen et les groupes, bilan et perspectives – La construction conjointe des tribunaux et praticiens français, Revue des procédures collectives civiles et commerciales (novembre 2013), dossier No. 51, §§ 7-8; L. CZAJA (note 23), at 160. 145 Art. 41(2)(c) of the Regulation No 848/2015. 146 The insolvency practitioners may agree upon a value threshold: Á. ESPINIELLA (note 48), at 173. 147 A situation which is precisely mentioned at Art. 41(2)(c) second sentence of the Regulation No 848/2015. However, this should be considered as a mere example illustrating the wider principle enshrined in the first sentence. Some decisions may have a specific character, like the decision to agree upon a kalte Zwangsverwaltung in German law, where the insolvency practitioner postponed the decision to sell an immoveable asset and agreed to have it managed by a third party, see U. KELLER, Die Voraussetzungen und der rechtliche Rahmen zur Durchführung einer so genannten kalten Zwangsverwaltung, Neue Zeitschrift für Insolvenz und Sanierung (2014), p. 265 et seq. 148 L. CZAJA (note 23), at 141. 141 142

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Cooperation in the New EU Regulation on Insolvency Proceedings ing to the debtor,149 or to the existence of vital contractual relationships should also be coordinated between the insolvency practitioners. The transfer of assets between main and non-main proceedings may also be a part of the management of assets, especially when aimed at rescuing a business.150 However, it should not be forgotten that a transfer justified only by the desire to avoid leave some debts abusively unpaid may be challenged151 and should not be protected by the duty to cooperate in the management of the assets.152 iii)

Verification of the Claims

When the same debtor is subjected to both a main and a non-main proceeding, there is no single verification of the claims.153 A claim submitted in the mainproceeding shall be submitted again in the non-main proceeding, either by the creditor himself154 or by the insolvency practitioners who received the first claim.155 In order to avoid inconsistent decision making, the decision concerning the admission should be taken in a coordinated way by the insolvency practitioners.156 Even if such a coordination is not mentioned for the groups of companies, mainly because every member of the group is a distinct legal entity with its own rights and obligations, a coordinated decision taken should also be envisaged when the member of the groups are joint debtors of a same debt or if the claims are related to specific transaction having a systemic impact on the whole process. Should the coordination take place by delegation of the proof of claims from one insolvency practitioner to his colleague? This may be a very pragmatic way of dealing with claims related to highly specific issues. By creating a sort of specialization between the insolvency practitioners they could act in a more efficient way. Unfortunately, this is likely to be unfeasible under the present state of the European Regulation. The decision taken by the insolvency practitioners may be challenged before the court which opened the proceeding,157 and in some countries the verification is made jointly by the administrator and the court,158 or directly Such as avoidance claims, see L. CZAJA (note 23), at 151. L. CZAJA (note 23), at 153. 151 See what happened in the famous French and European Nortel saga: R. DAMMANN/ M. BOCHÉ-ROBINET, Le volet européen de la faillite internationale de Nortel – Les enseignements de l’arrêt de la Cour de Justice de l’Union Européenne du 11 juin 2015, Dalloz 2015, p. 1514 et seq. 152 Cooperation in this respect should not inflict any harm whatsoever to the creditors, see L. CZAJA (note 23), at 154-155. 153 On this issue, see A. GEROLDINGER (note 95), at 138-140. 154 Art. 45(1) of the Regulation No 848/2015. 155 Art. 45(2) of the Regulation No 848/2015. 156 Art. 41(2)(a) of the Regulation No 848/2015. See already under the Regulation No 1346/2000, L. CZAJA (note 23), at 179; A. GEROLDINGER (note 95), at 140. 157 § 180(1) of the German Insolvenzordung. 158 Arts. 65 to 67 of the Belgian Loi sur les faillites; Arts. 500 to 503 of the Luxembourgian Code de commerce. 149 150

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Valentin Rétornaz by the court itself.159 A delegation from one practitioner to the other would entail as a consequence a change in the court that may be competent. This is not compatible with the principle of the vis attractiva concursus.160 However, nothing prevents the insolvency practitioner from considering himself bound by the advice given by his colleague on a specific set of claims.161 b)

Decision Taken by the Courts

Coordinated decision taking is expressly prescribed by the Regulation No 848/2015 for the appointment of insolvency practitioners,162 the administration and supervision of the assets and affairs,163 the conduct of hearings164 and the approval of protocols.165 However this does not mean that coordination is limited to those rather administrative decisions. As indicated in the legal text itself, these are only examples166 and coordinated decision taking may occur even before a decision on the application to open an insolvency proceeding has been decided.167 The coordination of decision taking may imply the organization of a joint hearing of both courts through videoconference.168 It can reach a more substantial level when judges have discretion whether or not to admit a claim. In this case, consultations may be openly performed in order to maintain the consistency of their respective decisions.169 In our view, coordination of decision taking by the court should be envisaged as soon as possible, namely when the courts are aware of the fact that the insolvency may have a sufficiently important transnational component. This occurs when the insolvency of a whole international group of companies is evident even before a single proceeding has been opened, or when the likeliness of the opening 159 Arts. L. 624-1 and L. 624-2 of the French Code de commerce; Arts. 95 and 96 of the Italian Legge Fallimentare. 160 Art. 6(1) of the Regulation No 848/2015. See Á. ESPINIELLA (note 48), at 183-184. 161 In this direction, see L. CZAJA (note 23), at 183-184. 162 Arts. 42(3)(a) and 57(3)(a) of the Regulation No 848/2015. 163 Arts. 42(3)(c) and 57(3)(c) of the Regulation No 848/2015. 164 Arts. 42(3)(d) and 57(3)(d) of the Regulation No 848/2015. 165 Arts. 42(3)(e) and 57(3)(e) of the Regulation No 848/2015. 166 See Arts. 42(3) in limine and 57(3) in limine of the Regulation No 848/2015: “It may, in particular, concern […].” 167 Arts. 42(1) and 57(1) of the Regulation No 848/2015. 168 When the Regulation No 848/2015 enters into force, this is then unlikely to prove to be a violation of State sovereignty. See also, P. BUSCH/ A. REMMERT/ S. RÜNTZ/ H. VALLENDER (note 83), at 423. 169 This has been, for instance, the case in the famous Maxwell case, where the English judge refused to entertain a request for an anti-suit injunction against a potential avoidance claim before an American court, which, in turn, rejected it for being strongly linked to the English component of the insolvency: R.B. CHAPMAN (note 29), at 5-6.

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Cooperation in the New EU Regulation on Insolvency Proceedings of non-main proceedings is very high in view of the amount of assets located abroad. In those cases, the court should try to immediately coordinate their decision. This is especially important for the rescue of a business, because national legislation may make the transformation of a liquidation proceeding into a reorganization proceeding more difficult. The coordination of court decisions does not only extend, in this author’s view, to proceedings aimed directly at opening or closing an insolvency proceeding, or to those falling under the vis attractiva concursus. Civil and commercial proceedings indirectly related to the insolvency, like claims based on contracts or torts against third parties, may also be included in the cooperative network. As far as administrative and criminal proceedings are concerned, coordination may be impossible for internal procedural reasons. In those cases, exchange of information between the insolvency practitioners and the courts may be the only available means of cooperation.

IV. The Limits to Cooperation Even if cooperation has been widened with the adoption of Regulation No 848/2015, it is not unlimited. Various limitations exist, which will be categorized below. A first group encompasses material limitations (A.). These limitations constitute a real or potential obstacle to cooperation. Besides these, the question should also be raised as to the possible formality requirement, even if we will see that the Regulation No 848/2015 is very effective in this respect (B.). A.

Material Limitation to the Cooperation

1.

Limitation Contemplated by the Regulation No 848/2015 Itself

a)

Confidentiality

Confidentiality of information is accepted by the Regulation No 848/2015 as being a potential obstacle to cooperation in transnational insolvency proceeding. Specific statements can be read in the Regulation, both as far as the relation between the main and non-main proceeding,170 and the relations between main proceedings within a group of companies, are concerned.171 Since the Regulation No 848/2015 do not define what is confidential or not, this issue is left open to national legislation.172 However, it should not be forgotten that the protection of confidentiality is not an irredeemable impediment to cooperation. The Regulation No 848/2015 Arts. 41(2)(a) and 42(2) of the Regulation No 848/2015. Art. 56(2)(a) of the Regulation No 848/2015. 172 Th. MASTRULLO (note 83), at § 8. For an application of the German Law on Data Protection, see L. CZAJA (note 23), at 101 et seq. 170 171

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Valentin Rétornaz invites the actors to take adequate steps to protect confidential information.173 This should enable the actors to subordinate the communication of information, or the granting of further cooperation, to special engagements, even if those engagements are not contemplated by the national legislation. They may concern, for instance, the non-disclosure of information to third parties, including State agencies. If national law prohibits such engagements or makes them unenforceable, the question should be referred to the Court of Justice of the European Union in order to obtain a preliminary ruling on the compatibility of national law with European law before any decision is taken on the request for cooperation, the same being true if the definition of confidential information by national law is so wide that it makes cooperation illusory.174 b)

Procedural Rights

The safeguard of procedural rights is made as a condition for cooperation on behalf of courts.175 No further provision explains what is understood by “procedural rights”. These would look to encompass not only the safeguard provided by national law against inopportune cooperation, like the legal remedies, but also, in a more general way, the right to a totally adversarial insolvency proceeding. This means that every step undertaken by the courts should be duly documented in the case file and the parties duly informed of the content of any informal discussion.176 Unless the cooperation is urgent, the parties should be given notice of it before it is executed.177 If the extent of cooperation is challenged before national courts, mainly by the debtor himself, or by other actors, the cooperation should be suspended until a definitive decision has been accepted. Otherwise, the execution of the cooperation decision may cause irreparable damage. c)

Conflicts of Interests

The Regulation No 848/2015 explains that courts and foreign insolvency practitioners in main and non-main proceedings should refrain from cooperation when it may lead to a “conflict of interest”.178 No further indication is given as to the inter-

See the expression “provided appropriate arrangements are made to protect confidential information” used both at Arts. 41(2)(a) and 56(2)(a) of the Regulation No 173

848/2015. 174 Naturally, an adequate effort to address the situation through a careful interpretation of national law should be made beforehand. On the question of limiting confidentiality rules via interpretation, see A. GEROLDINGER (note 95), at 133. 175 Arts. 42(2) and 57(2) of the Regulation No 848/2015. 176 P. BUSCH/ A. REMMERT/ S. RÜNTZ/ H. VALLENDER (note 83), at 421. 177 Th. MASTRULLO (note 83), at § 8. As explained by L. CZAJA (note 23), at 134 cooperation is aimed at avoiding fait accompli. 178 Art. 43(1) in fine of the Regulation No 848/2015.

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Cooperation in the New EU Regulation on Insolvency Proceedings ests at stake, thus leaving space to a national conception of it.179 In this author’s view, this provision should be interpreted in a restrictive way, in order to avoid a mere theoretical obstacle making cooperation impossible. It should be limited to cases where the denial of cooperation is justified by the fulfilment of particular ethical duties imposed by national law. The denial of cooperation should be justified only when the execution request would amount to a breach of the said duties. The mere fact that cooperation may have detrimental consequences for the State Treasury or reduce the amount that will be paid to the creditors should not be deemed to be a conflict of interest, unless the interested party will be treated less favourably than other creditors.180 A clear example of a conflict of interest would be the situation where a transfer of assets takes place in spite of the fact that the member company is concentrating a heavy burden of liabilities on its shoulders.181 Besides the cooperation between courts and foreign insolvency practitioners, conflicts of interests are mentioned in connection with insolvency proceedings involving a group of companies.182 Again, the concept should be interpreted restrictively. The refusal should only be justified with the necessity to avoid cooperation being used in order to avoid granting overly favourable treatment to one of the member companies. As long as cooperation is justified by the interests of the whole group, it should never be refused, even if it may be contrary to the interests of one precise company. 2.

Material Restrictions Based on National Law

a)

Admissibility

The Regulation No 848/2015 acknowledges at many places that cooperation should be in conformity with the “rules applicable to the proceeding”.183 This means that cooperation should not be granted against the rules of national law.184 Since the European Regulation merely coordinates the proceedings, rather than creating a European insolvency code,185 national law is not at all excluded in transnational issues. It can regulate the way in which cooperation is implemented

Th. MASTRULLO (note 83), at § 9. For a more restrictive statement, S. MADAUS, Insolvency proceedings for corporate groups under the new Insolvency Regulation, International Insolvency Law Review (2015), p. 238. 181 This may be a consequence of a specific plan by the managers of the group, A. DÄHNERT (note 107), at 213-214. 182 Art. 56(1) of the Regulation No 848/2015. 183 Arts. 41(1), 42(1), 43(1) in fine, 56(1), 56(2) in fine, 57(1) and 58 in fine of the Regulation No 848/2015. 184 See concerning a similar expression in the Regulation No 1346/2000, A. GEROLDINGER (note 95), at 135 and L. CZAJA (note 23), at 122. 185 See the Recital 22 of the Regulation No 848/2015. 179 180

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Valentin Rétornaz and create some restrictions. An example of such a restriction may be the fact that cooperation should be implemented within a certain space of time.186 b)

Compatibility of the National Legislation with the Spirit of European Law

The fact that provisions on cooperation do not supersede national law does not however mean that the rules adopted by the national lawmakers can rule it out totally or subject it to such drastic conditions that it becomes unrealistic.187 Art. 10 of the European Union Treaty prohibits state action aimed at undermining European Law.188 The national insolvency law should always leave a sufficient space to the actors so they are able to reasonably cooperate.189 For instance, it may not totally prohibit the conclusion of cooperation protocols.190 In the present state of legislation, however, this is far from obvious. Many legal orders, especially in Continental Europe, still consider insolvency law as a pure “public order” matter based on rules that should be systematically applied without any possibility of adjustment.191 But cooperation is rather based on a contractual approach of insolvency law, rules being constantly adapted to the necessities of each case.192 As long as the national regulatory framework is not modified, there is always a risk that cooperation will be hampered or even totally hindered by national legislation. In this case, courts should be encouraged to petition the Court of Justice of the European Union for a preliminary ruling on the compatibility of the regulatory framework in the spirit of European law.

A. GEROLDINGER (note 95), at 138. A. GEROLDINGER (note 95), at 137. 188 On this point, see H. VALLENDER, Judicial Cooperation within the EC Insolvency Regulation, 20 International Insolvency Law Review (2011), p. 310. 189 Cooperation should be granted as a matter of principle: J. HEYMANN, Le nouveau règlement relatif aux procédures d’insolvabilité: le changement dans la continuité, Europe – Actualités de droit de l’union européenne (décembre 2015), étude 9, § 8. The issue is particularly sensitive as far as the involvement of the creditors in the insolvency proceeding is concerned, since the decisions they take may be detrimental to cooperation: L. CZAJA (note 23), at 125-127. 190 Which are explicitly mentioned at Arts. 41(1), 42(3)(e), 56(1), and 57(3)(e) of the Regulation No 848/2015. 191 P. BUSCH/ A. REMMERT/ S. RÜNTZ/ H. VALLENDER (note 83), at 617-618; A. GEROLDINGER, (note 95), at 134. 192 Some continental jurisdictions, like France, seem to have integrated this new approach without difficulties, for some practical examples, see S. SENECHAL, The implementation of judicial cooperation in the cross-border insolvency French cases – The EMDO and SENDO files: return of experience, International Insolvency Law Review (2015), p. 396 et seq. 186 187

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Cooperation in the New EU Regulation on Insolvency Proceedings B.

The Almost Complete Lack of any Formal Requirement of Cooperation

1.

Informal Cooperation

Cooperation can occur on a totally informal basis that is outside of any framework agreed by the actors and with all type of means of communication.193 This is likely to be the case for cooperation between insolvency practitioners. One of the practitioners may also make an offer of cooperation to his colleague, who tacitly accepts it. Cooperation between courts themselves and between courts and foreign insolvency practitioners is more likely to be performed in a more formal framework, except when it is limited to a punctual exchange of information. 2.

Protocols of Cooperation

In complex cases, actors implicated in proceedings are strongly advised to conclude protocols of cooperation between themselves. They may be drafted separately, or as a whole document which is signed by all the actors, including the courts. Cooperation protocols are binding, but like all contracts they should be modified with the consent of all the parties to it.194 Shall it also be possible without such consent when the circumstances have drastically changed since their adoption? There appears to be a general trend toward acceptance of the clausula rebus sic stantibus in modern contract law,195 and this shall also be true for cooperation protocols.196 There is no reason to enforce a cooperation agreement which no longer fit to the real situation.197

V.

Dispute Resolution as regards Cooperation

As a general observation, dispute resolution is not clearly regulated as regards the extent of duties under the Regulation No 848/2015. This is already the situation

S. BEWICK (note 74), at 185. See also L. CZAJA (note 23), at 97. Á. ESPINIELLA (note 48), at 194. 195 For instance, in France the question was controversial for a long time. Now, with the redrafting of the whole part of the Civil Code dedicated to the law of contracts, the issue has been settled in favour of the clausula rebus sic stantibus. See the new Art. 1195 of the French Civil Code. 196 In the same direction but only for the unilateral cancellation of the protocol, see Á. ESPINIELLA (note 48), at 195. 197 See also P. BUSCH/ A. REMMERT/ S. RÜNTZ/ H. VALLENDER (note 83), at 427-428. 193 194

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Valentin Rétornaz with the Regulation No 1346/2000.198 The issue will still be mainly dealt with in accordance with national legislation, both for the remedies against the lack of cooperation (A.) and the appeal of isolated decisions (B.). A.

Remedies against the Lack of Cooperation

1.

Supervisory Remedies

As far as cooperation within the framework of the insolvency of a group of companies is concerned, the Regulation No 848/2015 provides for a solution to the lack of sufficient cooperation: the “coordination procedure”.199 Even if it is not explicitly stated in the legal text, the idea behind such a procedure is to correct the unsatisfactory situation created when the rules on cooperation provided in the previous articles200 have proved to be insufficient. The coordination procedure leads to the designation of a coordinator who will prepare a coordination plan.201 An insolvency practitioner may refuse to join the coordination procedure.202 Therefore, it is not an absolute remedy to the lack of sufficient cooperation, but it is still a good incentive in favour of cooperation.203 If the creditors of the uncooperative member company receive less than the one who participated to the coordination procedure, it will be easier for them to raise the issue of the liability of the insolvency practitioner.204 Unfortunately, there is no similar procedure for the relations of main and non-main proceedings. If cooperation is not sufficient, there is no remedy other than supervisory remedies before national authorities,205 including the replacement of the insolvency practitioner.206 For this reason, national law should always be interpreted in a way that a door is always open to foreign insolvency practitioners or courts for their claims against the behaviour of an insolvency practitioner. However, this does not solve the issue of the lack of cooperation by the courts themselves. 198 S. BECK, Verwertungsfragen im Verhältnis von Haupt- und Sekundärinsolvenzverfahren nach der EuInsVO, Neue Zeitschrift für das Recht der Insolvenz und Sanierung (2006), p. 611. 199 Arts. 61 et seq. of the Regulation No 848/2015. As perfectly explained by B. SANTEN (note 56), at 234, the European framework does not provide for the “operationalisation” of the cooperation duty. 200 Arts. 56 to 60 of the Regulation No 848/2015. 201 Art. 72 of the Regulation No 848/2015. 202 Art. 64(1)(a) of the Regulation No 848/2015. 203 For a different point of view, see S. BEWICK (note 74), at 188. 204 The same reasoning is valid for the case of insolvency practitioners who do not follow the recommendation of the coordinator, Ch. THOLE/ M. DUEÑAS (note 99), at 217218. However, this is sometimes considered as a potential risk of inefficiency of the coordination procedure, M. WEISS (note 98), at 212. 205 The issue whether the cooperation could be enforced via an ordinary claim (Leistungsklage) is a controversial one: L. CZAJA (note 23), at 216-217. 206 See for the situation under German Law, L. CZAJA (note 23), at 219-220.

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Cooperation in the New EU Regulation on Insolvency Proceedings 2.

Damages

When the behaviour of the insolvency practitioner is so unprofessional, damages inflicted to creditors or third parties may be claimed because of the lack of cooperation.207 The Regulation No 848/2015 does not contain any provision to this respect,208 even if the question of damages has been addressed in other circumstances.209 The question is left to the total discretion of the national court, which merely applies national law to the solution to this question.210 Considering the standard of proof applied in liability cases, it may be difficult to convince a court that there is a causal link between the lack of cooperation and the loss experienced by the creditors.211 B.

Appeal of Single Acts

Appeal may arise not to the cooperation in itself, but to single acts of the insolvency practitioners or to isolated court decisions. It is important in this context that effective remedies are given to foreign insolvency practitioners so that they can challenge those unfortunate decisions.212 Even if the participation of courts to the coordination process is important, allowing courts to contest decisions made by their foreign counterparts may be a step too far. It is somewhat strange, and probably not in accordance with the principles of public international law, to think that a court may act as plaintiff or defendant before a foreign jurisdiction. However, foreign courts can use their supervisory powers and order to an insolvency practitioner to challenge a decision.

VI. Conclusion: From Cooperation to Harmonization? Arriving at the end our study, we can draw the following conclusions. Firstly, the Regulation No 848/2015 is totally coherent, in that it creates a regulatory framework favourable to effective cooperation. The fact that almost no formal requirements are mentioned is particularly revealing. The extension of the duty to cooper207 The point is subject to discussion under the Regulation No 1346/2000, see S. BECK (note 198), at 613-614; L. CZAJA (note 23), at 223-224 and A. GEROLDINGER (note 95), at 138. 208 P. KINDLER/ Z.S. SAKKA (note 83), at 464. 209 See Art. 36(10) of the Regulation No 848/2015 concerning the undertakings given in order to avoid the opening of a secondary proceeding. 210 L. CZAJA (note 23), at 229-230; Á. ESPINIELLA (note 48), at 193 and P. KINDLER/ Z.S. SAKKA (note 83), at 466; K.S. STAAK (note 88), at 482. It has already been proposed to apply the law of the main proceeding, J. PARZINGER (note 75), at 67. 211 L. CZAJA (note 23), at 231; S. MADAUS (note 180), at 240. 212 See B. WESSELS/ M. VIRGÓS (note 66), at 8 (GUIDELINE 5: Direct Access).

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Valentin Rétornaz ate to the courts is in accordance with global tendencies in this respect and brings European law in accordance with international standards. The new set of rules is paving the road to a massive contractualization of international insolvency issues. However, this rather euphoric statement should not make us forget the harsh realities of national insolvency law. Not all the national insolvency codes are following the general trend and there always may be some practical difficulties. The fact that at many places the Regulation makes a direct or indirect reference to national law does not solve the problem. If national law is overly restrictive, or even prohibitive, concerning cooperation, there will be no option other than to ask the question of the compatibility of national law with European law. The European lawmaker, in this author’s view, should have formally called for minimal standards to be followed at a local level. The transition from status to contract is an incomplete one. Even if the issues created by national law are resolved, the question of the coexistence of various legal orders, and the potential conflicts they may give rise to, will not be swept from the table. Therefore, it is not a surprise if the question of a gradual approximation of the national insolvency codes has been raised.213 Let’s wait and see.

213 Th. MASTRULLO (note 83), at § 6; J. THEETHEN, Vers un droit européen de l’insolvabilité ?, Revue des procédures civiles et commerciales (janvier 2015), dossier No. 11. For a more sceptical approach, F.M. MUCCIARELLI, Not Just Efficiency: Insolvency Law in the EU and Its Political Dimension, 14 European Business Organization Law Review (2013), p. 199-200.

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RECAST OF THE SWISS INTERNATIONAL INSOLVENCY LAW Niklaus MEIER* / Rodrigo RODRIGUEZ**

I. II.

III.

IV. V.

VI.

Introduction: Swiss International Insolvency Law – quo vadis? Brief Overview of the Current Swiss International Insolvency Law A. A Regulation Limited to the Recognition of Foreign Insolvency Proceedings B. Requirement for a Recognition Procedure C. Privileges for Local Creditors Shortcomings of the Current Law A. The Non-Recognition Creates More Problems than Advantages B. Procedural Inefficiencies C. Limited Scope of Action for Foreign Insolvency Administrators D. Lack of Coordination with Foreign Insolvency and Other Proceedings Need for a Recast of Chapter 11 PILA Outline of the 2015 Draft Recast A. Simplification of the Conditions of Recognition B. Coordination between Ancillary and Territorial Non-Main Proceedings C. Non-Mandatory Character of the Ancillary Proceedings D. Powers of the Foreign Insolvency Administrator E. Coordination and Cooperation with Foreign Authorities F. Recognition of Avoidance Actions and Other Insolvency-Related Proceedings G. Claims Pending Abroad and their Consideration in Swiss Main Proceedings H. Relevance of the PILA Provisions for the Banking Sector Conclusions A. Swiss Law “Catching up” with International Developments B. Would the Recast Be an Implementation of the UNCITRAL Model Law?

* Dr. Niklaus MEIER, attorney at law, LLM (Harvard), co-head of the Private International Law Unit of the Swiss Federal Office of Justice (FOJ) and lecturer at the University of Neuchâtel. ** Prof. Dr. Rodrigo RODRIGUEZ, University of Lucerne, attorney at law, head of the Federal Supervisory Authority for Debt Enforcement and Bankruptcy, senior legal counsel at the FOJ and lecturer at the Universities of Berne and Fribourg (Switzerland). The views expressed are those of the authors and do not reflect the position of the FOJ or the aforementioned Universities. All webpages last visited on 10 March 2016. Most webpages are accessible via a shortened Internet link, starting directly with goo.gl (i.e. , the short reference to be inserted after the last dash).

Yearbook of Private International Law, Volume 17 (2015/2016), pp. 355-369 © Verlag Dr. Otto Schmidt & Swiss Institute of Comparative Law

Printed in Germany

Niklaus Meier / Rodrigo Rodriguez

I.

Introduction: Swiss International Insolvency Law – quo vadis?

International insolvency law1 is a rapidly changing field. Where the territoriality principle dominated until two decades ago, with siloed proceedings limited to national borders, many countries have since adopted a more cooperative and open approach, recognising the effects of foreign insolvency proceedings. The United Nations Commission on International Trade Law (UNCITRAL) adopted its Model Law on Cross-Border Insolvency (hereinafter: “UNCITRAL Model Law”)2 in 1997, and was shortly followed by the European Union in 2000 with the Insolvency Regulation (EuInsReg).3 Countries such as Germany have extended the recognition of insolvency proceedings beyond the geographical scope of application of the European Insolvency Regulation to an international, worldwide level.4 Even in the Swiss banking sector, an efficient recognition mechanism for foreign insolvencies was introduced in 2004.5 In a nutshell: a lot of things have changed during these last decades in international insolvency law – except the general Swiss international insolvency law itself.6 Chapter 11 (Arts. 166-175) of the Federal Act on Private International Law

1 “Insolvency” is used here as an umbrella term for both bankruptcy and restructuring proceedings (such as the Swiss Nachlassverfahren/procédure concordataire, commonly translated as “composition” or “judicial probate agreement”), in order to avoid the redundant “bankruptcies and compositions or similar proceedings”. However, as the Swiss Federal Act on Private International Law of 18 December 1987 (Systematic collection of Federal Law [SR] Nr. 291; hereinafter: “PILA”) only refers to “bankruptcy”, specifying in its Art. 175 that the bankruptcy rules apply by analogy to restructuring proceedings, the term “bankruptcy” will nevertheless appear sometimes in this article, especially when excerpts from the PILA are quoted. All Swiss laws can be found at , by searching for their SR number. 2 Comp. , direct link . 3 Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, OJ L 160, 30 June 2000, p. 1-18, replaced since by Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings, OJ L 141, 5 June 2015, p. 19-72. 4 § 343 of the German Insolvenzordnung of 5 October 1994 (Federal Law Gazette [BGBl.] I p. 2866), last amended on 20 November 2015; comp. , direct link . 5 Art. 37f and 37g Federal Banking Act (BankA) of 8 November 1934, SR 952.0, with amendments as per 1 January 2016, available at , as well as Art. 10 Swiss Financial Market Supervisory Authority Banking Insolvency Ordinance (FINMABankInsO) of 30 August 2012, SR 952.05, with amendments as per 1 January 2016, available at . 6 The “general” Swiss international insolvency law only refers to the PILA, excluding the special statutory provisions for the banking sector and other areas such as insurance institutions.

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Recast of the Swiss International Insolvency Law (hereinafter: “PILA”)7 has not been modified since its enactment in 1989, despite the aforementioned legislative trend towards more openness. Is it time to act now? The answer is yes. Not because all other countries and the Swiss banking sector have moved already, but because the current general Swiss international insolvency law has some shortcomings which require legislative action. A first step towards this was taken in October 2015, when the Swiss Federal Council published a preliminary draft and explanatory message for a new chapter 11 PILA.8 We are hopeful that the main parts of the recast proposal will survive the legislative process. Before explaining the preliminary recast draft in detail (V), this article starts with a brief overview of the current Swiss international insolvency law (II), then illustrates the shortcomings of the current law (III) and explains the need for a recast (IV). The conclusion (VI) reiterates the need for legislative action and places the draft recast in its international context.

II.

Brief Overview of the Current Swiss International Insolvency Law

A.

A Regulation Limited to the Recognition of Foreign Insolvency Proceedings

The general Swiss international insolvency law is set out in chapter 11 PILA. Due to the territorial concept of the Swiss approach, only the recognition of foreign proceedings is regulated explicitly. Questions of international direct jurisdiction are not mentioned; they are only indirectly tackled by the Federal Act on Debt Enforcement and Bankruptcy (hereinafter: “DEBA”),9 which uses the domicile or seat of the debtor as the relevant jurisdictional connecting factor (Art. 46 DEBA). As to the applicable law, the general (unwritten) rule of the applicability of the lex fori concursus applies to insolvency matters, whereas matters of substantive law are subject to the applicable (substantive) law under the provisions of chapters 1-10 of the PILA. In spite or because of the lack of explicit regulation, the two questions of direct jurisdiction and applicable law have not given rise to problems. As such, the

7 Act of 18 December 1987, SR 291, with amendments as per 1 July 2014; comp. for the official text and for an unofficial English translation. Where this article refers to the PILA, the English translation is based upon Prof. Andreas BUCHER’S version. 8 The preliminary draft and explanatory report are available online at ; see also . 9 Act of 11 April 1889, SR 281.1, with amendments as per 1 January 2016; available at .

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Niklaus Meier / Rodrigo Rodriguez recast proposal and the present article focus mainly on the PILA and its recognition procedure without addressing questions of direct jurisdiction and applicable law. B.

Requirement for a Recognition Procedure

According to the concept of territoriality, which, in a weakened form, still dominates chapter 11 of the current PILA, foreign insolvency proceedings have as a matter of principle no effects in Switzerland. If the debtor in insolvency has assets in Switzerland, these are not affected by the opening of the foreign proceedings. In order to get access to these assets, the foreign insolvency administrator must first request the formal recognition of the foreign insolvency decree. Article 166 PILA allows only for the recognition of decrees rendered in the state of the debtor’s domicile, i.e. the state of the registered office for companies (Art. 21 PILA), and requires (among other conditions)10 that reciprocity is accorded in the state where the decision was rendered. The conditions and the proceedings for recognition apply both to foreign liquidation as well as restructuring proceedings.11 C.

Privileges for Local Creditors

Local creditors are heavily protected under the current chapter 11 of the PILA. Upon recognition of a foreign insolvency decree, a mandatory ancillary proceeding (“Hilfskonkursverfahren”/“procédure ancillaire”) follows.12 The assets located in Switzerland are collected and distributed amongst the secured creditors and those recognised privileged creditors (e.g. workers) who have their domicile in Switzerland (Art. 172 PILA). Administration and distribution of those assets as well as the assessment of claims are conducted by the competent public insolvency office (“Konkursamt”/“office des faillites”). It is only after this distribution that a remaining balance is remitted to the foreign insolvency administrator, and only if the foreign schedule of debts fairly includes the non-privileged creditors domiciled in Switzerland. In addition, creditors of a foreign insolvency debtor with a branch in Switzerland can require the opening of a territorial non-main proceeding (“Nieder-

See Art. 27 of the PILA (enforceability, no violation of ordre public, lack of contradicting decisions, proper service), which applies through a reference in Art. 166. 11 See Art. 175 PILA. 12 An exception to the mandatory ancillary proceeding is admitted solely where, in restructuring proceedings, no creditors authorised to do so have filed claims in the local proceedings and thus such proceedings would serve no purpose (see Decision of the Swiss Federal Supreme Court (Supreme Court decision, SCD) 140 III 379). No such decision exists, however, so far in respect of liquidation proceedings. The Supreme Court decisions are available online at (link “Index der Bundesgerichts- (BGE) und EGMR-Entscheide“). 10

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Recast of the Swiss International Insolvency Law lassungskonkursverfahren”/“procédure au lieu de la succursale”)13 covering the assets pertaining to the economic activity of that branch (Art. 50 DEBA) for claims that are related to these branch activities.

III. Shortcomings of the Current Law The current international insolvency law of Switzerland has given rise to significant practical problems and to an extensive doctrinal14 and jurisprudential15 critique. A.

The Non-Recognition Creates More Problems than Advantages

Due to the restrictive requirement of indirect jurisdiction, insolvency decrees rendered at the centre of main interests (COMI) cannot be recognised unless the latter also corresponds to the place of the registered office. This is problematic, as throughout the EU, i.e. the main commercial partner of Switzerland, the COMI is used as the criterion for direct jurisdiction (Art. 3 EuInsReg). Thus, whenever a debtor is declared insolvent at a COMI that isn’t located in the country of the debtor’s registered seat, the decree cannot be recognised in Switzerland. This can create contradictory situations, where the foreign insolvency administrator is not entitled to seize assets in Switzerland because of the non-recognition of the foreign proceeding, although the insolvency debtor no longer disposes of organs that would allow him to have access to these assets.

13 In this article, the term ancillary proceeding is used for the proceeding opened upon recognition of the foreign insolvency decree and which has a supporting/servicing function for the foreign proceedings. The term territorial non-main proceeding is used for proceedings related to branches located in Switzerland and which are unrelated to the foreign insolvency proceedings. 14 Amongst many other authors, cf. S. MARCHAND, in F. BOHNET/ P. WESSNER (eds.), Mélanges en l‘honneur de François Knoepfler, Basel 2005, p. 111-128; D. STAEHELIN, Konkurs im Ausland - Drittschuldner in der Schweiz, in H.M. RIEMER et al. (eds.), Schweizerisches und Internationales Zwangsvollstreckungsrecht, Festschrift für Karl Spühler zum 70. Geburtstag, Zürich 2005, p. 407 et seq.; I. SCHWANDER, Die Anerkennung ausländischer Konkursdekrete, Nachlassverträge und Kollokationspläne in der Schweiz, in Ch.J. MEIER-SCHATZ/ R.J. SCHWEIZER (eds.), Recht und Internationalisierung: Festgabe der Juristischen Abteilung der Universität St. Gallen zum Juristentag 2000, Zürich 2000, p. 331345; A. SCHNYDER, Internationales Insolvenzrecht Deutschlands und der Schweiz – unter Einbezug der EG-Verordnung 1346/2000, in P. GOTTWALD (ed.), Aktuelle Entwicklungen des europäischen und internationalen Zivilverfahrensrechts, Bielefeld 2002, p. 385 et seq. 15 SCD 137 III 570 of 21 September 2011, p. 576, where the question is raised as to whether the Swiss international insolvency law is still up-to-date and still makes sense; the Supreme Court does not answer this rhetorical question, but continues by mentioning that it would be the duty of the legislator to recast the PILA.

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Niklaus Meier / Rodrigo Rodriguez Some authors have criticised this as a new category of “dormant accounts”,16 something that Switzerland should evidently try to avoid. The condition of reciprocity in the current chapter 11 of the PILA requires that evidence is submitted to the recognising court in order to prove that the laws of the foreign main proceedings would allow for the recognition of a Swiss proceeding in the reverse case. This condition has similar negative consequences as the non-recognition of COMI-proceedings mentioned above. In addition, the examination of the foreign country’s reciprocity delays the recognition procedure and requires costly legal research, which has prohibitive effects in cases where the assets located in Switzerland are not of considerable value. The non-recognition of foreign insolvency proceedings is especially problematic as it creates inequalities amongst the creditors. Individual enforcement proceedings remain possible (as the debtor is not legally considered to be insolvent in Switzerland), with the consequence that the better informed creditors can still satisfy their claims, to the detriment of the other creditors, in general weaker parties. B.

Procedural Inefficiencies

The idea behind the current mandatory ancillary proceeding in Switzerland is the protection of secured and privileged local creditors. However, in practice, there are often no such creditors at all. In these cases, the ancillary proceeding is simply useless. Regarding composition agreements (“Nachlassverfahren”/“procédure concordataire”), the Supreme Court has recognised that in cases where no secured and privileged local creditors exist, the ancillary proceeding can be foregone because Articles 166-170 PILA only apply “by analogy” to these restructuring proceedings.17 However, this is not possible for bankruptcy proceedings. According to Article 166 paragraph 2 PILA, if the debtor has a branch in Switzerland, a territorial non-main insolvency proceeding according to Article 50 DEBA may be opened even after the opening of an ancillary proceeding involving the same debtor (such request may be filed at any time until the schedule of debts of the ancillary proceeding becomes final). Unlike the “transformation” rule of the EuInsReg (Art. 36), such a territorial non-main proceeding is conducted as a parallel proceeding to the ancillary proceeding, creating complicated asset-separations and a privilege for the creditors of the branch that is difficult to justify. C.

Limited Scope of Action for Foreign Insolvency Administrators

In order to protect local creditors, foreign insolvency administrators are currently not allowed to seize assets of the foreign insolvency debtor in Switzerland. The entire ancillary proceeding has to be conducted first, even if, for instance, the M. GEHRI/ G. KOSTKIEWICZ, Anerkennung ausländischer Insolvenzentscheide in der Schweiz – ein neuer Réduit National?, RSDIE 2009, p. 220. 17 SCD 140 III 379 para. 4.2.1 p. 383. 16

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Recast of the Swiss International Insolvency Law administrator only wants to open an avoidance action (“Anfechtungsklage”/ “action en contestation”) against a debtor in Switzerland, as this potentially could reduce the assets and claims located in Switzerland. However, such a precaution is useless where there are no such creditors.18 D.

Lack of Coordination with Foreign Insolvency and Other Proceedings

Currently, the PILA does not contain specific rules for the cooperation of local authorities with their foreign counterparts in insolvency matters. In a field of law where coordination and cooperation is fundamental in order to preserve the value of assets, this is all the more problematic. Another problem pertains to actions which derive directly from insolvency proceedings and which are closely linked with them, such as avoidance actions. Currently, these actions cannot be recognised in Switzerland;19 a new proceeding has to be opened in Switzerland. Finally, in Swiss main insolvency proceedings, it is currently impossible to take into account claims against the debtor that are pending in court proceedings abroad.20 In these cases, a procedurally inefficient additional proceeding has to be opened in Switzerland.

IV. Need for a Recast of Chapter 11 PILA The above-mentioned problems could be partly resolved with a parallel instrument to the European Insolvency Regulation, similar to the Lugano Convention that extended the Brussels Convention and later the Brussels I Regulation to the EFTA States.21 However, this would only address the inner-European proceedings and not all problems on a worldwide basis. In addition, the European Insolvency Regulation also addresses issues that are currently of no concern in Switzerland (direct jurisdiction, applicable law); a parallel agreement would therefore go beyond the objective of resolving the existing problems of chapter 11 PILA. Given the specificities of the Swiss debt enforcement and bankruptcy system, a total copy-paste of the UNCITRAL Model Law seems inappropriate in

18 The only exception to the mandatory opening of ancillary proceedings (see note 17) is limited to restructuring proceedings. 19

SCD 140 III 320; 135 III 127.

20

SCD 140 III 320; 133 III 386.

Convention of 16 September 1988 on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, replaced by the Convention of 30 October 2007 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, SR 0.275.12, available at . 21

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Niklaus Meier / Rodrigo Rodriguez Switzerland, though the recast project (see below V.) draws important inspiration from the UNCITRAL Model Law. Meanwhile, legal scholars and parties have suggested creative solutions to cope with the described shortcomings of chapter 11, such as a judicial appointment of an administrator in cases where the foreign proceedings cannot be recognised.22 The Swiss Supreme Court’s answer in this regard remains the same: “[w]here the legislator has created a detailed and consistent system, the court cannot modify it in its case law. Such a modification is the task of the legislator”.23 Since neither international solutions, nor creative case-law approaches can, on their own, provide satisfactory solutions to these shortcomings, the only way forward is a recast of chapter 11 PILA.

V.

Outline of the 2015 Draft Recast

The calls for a recast have been heard. In October 2015, the Federal Council launched a regular legislative procedure in order to recast chapter 11 PILA. A preliminary draft (hereinafter: “PD-PILA”) was sent into the consultation process, together with an accompanying report.24 The main elements of this preliminary report are summarised hereafter. A.

Simplification of the Conditions of Recognition

The most straightforward solution to ensure a broader recognition of foreign insolvency decrees provided by the draft is the abolition of the reciprocity requirement (Art. 166 PD-PILA). Originally conceived as a means to enhance cooperation amongst different legal systems, reality has shown that the objective of the reciprocity requirement has not been achieved. On the contrary, the reciprocity requirement simply punishes creditors for the more restrictive legislation of the country where the foreign proceedings have been opened. Taking into consideration the negative effects of non-recognition,25 there seems to be no future and no further need for the reciprocity requirement. The question of indirect jurisdiction is more complex. In the European Union, the courts of the State within whose territory the centre of the debtor’s main interests (COMI) is situated have jurisdiction to open insolvency proceedings. This COMI is considered to be the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties.26 In the SCD 137 III 570. Translated from SCD 137 III 570, p. 576. 24 The press release with draft proposal and explanatory report is available at . 25 Supra III.A. 26 Art. 3 EuInsReg. 22 23

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Recast of the Swiss International Insolvency Law case of companies, this may or may not correspond with their statutory seat. Despite a legal presumption that the COMI is located at the stautory seat (an essential element of the COMI concept), such a criterion is much less certain than the currently required domicile/registered office of a company-approach of the current PILA. However, Swiss law has to acknowledge the fact that insolvency proceedings are opened in the EU and in many other States at the debtor’s COMI, regardless of whether or not this is wise. Where both the country of the registered seat as well as the COMI State (where they differ) accept such jurisdiction, there is no reason for a third country (like Switzerland with respect to EU proceedings opened in accordance with Art. 3 EuInsReg) not to recognise COMI-proceedings. For the protection of debtors with domicile/registered offices in Switzerland, recognition of foreign COMI-proceedings would, however, be refused in order to protect creditors’ reasonable expectations regarding the application of Swiss insolvency law (Art. 166 para. 1 let. c PD-PILA). This expectation is based on the traditional importance of the principle of incorporation in Swiss (company) law and on the ascertainability of such place thanks to easily accessible public registers.27 The draft’s move toward COMI is thus a prudent one: the main criterion for both direct and indirect jurisdiction remains – for companies – the registered seat, irrespective of the place of administration. However, foreign proceedings opened at a COMI that is not the company’s registered seat can nevertheless be recognised, as long as they do not concern a company registered in Switzerland. B.

Coordination between Ancillary and Territorial Non-Main Proceedings

Territorial non-main proceedings protect the interests of creditors of a debtor’s branch in Switzerland. Unlike the ancillary proceedings (limited to secured and privileged local creditors), any unsecured und unprivileged local creditor of the branch is admitted to file a claim and participate in the proceedings. In case of a late opening long after the beginning of the ancillary proceeding, such territorial non-main proceedings can cause considerable procedural inefficiencies.28 An easy (but only partial) solution in order to counter this problem is a different time limit regarding the opening of the territorial non-main proceeding, restraining these proceedings to the period before the request for an ancillary proceeding. After that moment, non-privileged and non-secured creditors would have to register their claims against the insolvency debtor (even if related to a debtor’s branch) in the foreign proceeding abroad. As the creditors can inform themselves about a debtor’s foreign-registered office due to the fact that the commercial registers are public, they have other means to protect their interests, such as asking for advance payments or securities. This is the option chosen by the proposed recast 27 The website as well as the websites of the cantonal commercial registers offer information on any company registered in Switzerland, including its statutory seat. 28 Supra III.B.

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Niklaus Meier / Rodrigo Rodriguez (Art. 166 para. 2 PD-PILA), which de facto reverses the current priority of the territorial non-main proceedings over the ancillary proceeding. On the other side, it may be argued that such a restriction of territorial nonmain proceedings ultimately harms the interests of both the debtor and the creditors, as the former gets fewer business opportunities due to higher risks for the creditors, and the latter lose some of their securities. Others may argue that local creditors should always receive preferential treatment where no reciprocity of an equal treatment with foreign creditors is granted. This is a political decision, which ultimately has to be made by the legislator when assessing the draft proposal in Parliament, which has the choice between procedural simplicity versus substantive protection of local creditors. Given that the general Swiss bankruptcy law (applicable to purely national proceedings) does not know such a privilege for branch creditors, the procedural argument may have some importance, although the existence of creditor-friendly territorial non-main proceedings for branches in foreign legal orders29 seems to indicate the need for a branch-creditor privilege. In any case, insolvencies of financial institutions would be excluded from this part of the recast.30 C.

Non-Mandatory Character of the Ancillary Proceedings

Pursuant to its goal – the protection of secured and privileged local creditors –, ancillary proceedings should be limited to situations where such creditors exist. Consequently, under the recast proposal (Art. 174a PD-PILA) ancillary proceedings would no longer be mandatory in all cases. In the absence of secured and privileged local creditors, the assets located in Switzerland could be remitted to the foreign bankruptcy administrator without triggering local ancillary proceedings. In order to ensure the protection of the creditors, the waiver of the ancillary proceeding would have to be requested by the foreign insolvency administrator, and examined by the court. The courts would have to ensure that despite the publication of the recognition request and the public notice to the creditors, no secured and privileged local creditors have produced their claims. If such claims were produced or if it were likely that the creditors domiciled in Switzerland would not be fairly included in the foreign insolvency schedule, an ancillary proceeding would have to be opened. This solution seems preferable to others, such as making ancillary proceedings contingent upon a formal request of the creditors. Indeed, the creditors may not always be informed about their rights, and their status as creditors may be challenged. In addition, an ancillary proceeding upon request of the creditors would raise the question as to whether they should bear the costs of this procedure, which would harm their interests. Therefore, a waiver of the ancillary proceeding upon request of the foreign insolvency administrator, subject to the control of

E.g. Art. 3 para. 2 EuInsReg. They would thus retain the de facto priority of the territorial non-main proceeding, over the ancillary proceedings. 29 30

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Recast of the Swiss International Insolvency Law Swiss courts regarding the interests of secured and privileged local creditors, as proposed by the draft recast, seems indeed preferable. D.

Powers of the Foreign Insolvency Administrator

In the aforementioned case (supra, 0) where the Swiss court both recognises the foreign insolvency proceedings and grants the request to renounce to an ancillary proceeding, the foreign insolvency administrator will receive, under the recast proposal (Art. 174a para. 2 PD-PILA), more rights than he currently has under the PILA. The rationale behind his currently restricted rights is the protection of secured and privileged local creditors (protection that could be bypassed if the administrator could simply take the assets and send them abroad). However, if there are no such creditors and therefore no ancillary proceeding takes place, the foreign administration should be entitled to seize the Switzerland-based assets of the foreign debtor, in the same way as the latter has previously been entitled to dispose of his assets. This would include the right to file suits pertaining to these assets, initiate debt enforcement proceedings, and request information in the same way the debtor has previously been entitled to do. If needed, these new competences of the foreign insolvency administration could be subject to conditions and obligations, such as a duty to render due accounts regarding the assets or to inform the court regarding the foreign insolvency proceeding. Its powers would, however, not encompass any exercise of public authority or constraint. E.

Coordination and Cooperation with Foreign Authorities

Cross-border coordination and cooperation is fundamental in international insolvency law in order to preserve the value of assets. The draft proposal (Art. 174b PD-PILA) suggests a very broad coordination rule, allowing the local authorities to cooperate with their foreign counterparts regarding proceedings that have an intrinsic connection with the local proceeding. The clause is inspired by Article 25 of the UNCITRAL Model Law. Forms, conditions and modalities of such cooperation will have to be developed by practice, taking into account existing regulatory frameworks, such as Part III of the UNCITRAL Legislative Guide on Insolvency31 as well as Guidelines developed by insolvency professionals.32 Hopefully, the draft proposal will encourage Swiss courts and administrators to make broader use of insolvency protocols, a tool that has yet to develop its full potential in Switzerland as well as in civil law jurisdictions in general.33 Available at . See European Communication and Cooperation Guidelines for Cross-border Insolvency, Developed under the aegis of the Academic Wing of INSOL Europe by Professors B. WESSELS and M. VIRGÓS, July 2007, available at . 33 See the examples and explanations in the UNCITRAL Practice Guide on CrossBorder Insolvency Cooperation (2009), available at . 31 32

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Recognition of Avoidance Actions and Other Insolvency-Related Proceedings

While most proposals in the preliminary draft refer to a reform of existing concepts and provisions of the current PILA, the recast also contains a completely new provision on the recognition of insolvency-related foreign decisions, including (but not limited to) avoidance actions. Both the PILA and the Lugano Convention do not apply to insolvency-related judgments. While within the EU, Article 25 para. 2 of subpara. 1 of the EuInsReg (Art. 32 of the recast EuInsReg 2015) covers the recognition of such judgments, no corresponding provisions on recognition of such decisions exist in Switzerland. The current chapter 11 PILA has a strictly territorial approach to avoidance actions regarding assets in Switzerland: the action has to be filed in Switzerland (in the framework of the ancillary proceedings), and Swiss law applies. There is no such thing as cross-border effects of avoidance actions. The recast (Art. 174c PD-PILA) will abandon that paradigm and allow for the recognition of avoidance actions under restrictive conditions: –

that the foreign insolvency proceeding in which the decision was made is recognised in Switzerland; and

–

that the foreign decision is issued at the defendant’s forum or another forum to which the defendant has consented.

The inclusion of other insolvency-related claims opens the door for the recognition of other claims than avoidance actions, such as claims for misconduct of directors in the insolvency context or similar claims that are found in many jurisdictions and in many varieties. To define “insolvency-related claims”, reference can be made to the rich jurisprudence of the Court of Justice of the European Union.34 Any assets recovered as a result of such recognition would first fall within the estate of the ancillary proceedings (if such proceedings are opened), thereby guaranteeing the priorities of (some) local creditors. Though the proposal is an important innovation, many issues around its implementation will need further development and clarification. G.

Claims Pending Abroad and their Consideration in Swiss Main Proceedings

An additional issue is raised by the wide interpretation that the Swiss Federal Supreme Court gives to the concept of “insolvency-related claims”: In the context of the litigation following the insolvency of the former Swissair Group, the Supreme Court has refused recognition of Belgian proceedings against Swissair companies based on the argument that the mere insolvency of the defendant See ECJ, 22 February 1979, C-133/78, Gourdain v Nadler; ECJ, 12 February 2009, C-339/07, Seagon v Deko Marty Belgium NV; ECJ, 2 July 2009, C-111/08 SCT, Industri v Alpenblume; ECJ, 10 September 2009, C- 292/08, German Graphics v van der Schee. 34

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Recast of the Swiss International Insolvency Law (Swissair) made those claims “insolvency-related” and as such not (any more) subject to the Lugano Convention nor to any other recognition regime.35 As a consequence of that jurisprudence, even commercial claims may end up being excluded from recognition following the insolvency of the respondent, even when that insolvency proceeding was initiated after the filing of the claim. To resolve the legal uncertainty resulting from that jurisprudence, the recast proposal also specifies up to what point in time a foreign civil proceeding pending against an insolvent debtor may be taken into consideration (and therefore admitted in the schedule of claims) in the framework of a Swiss insolvency proceeding.36 The time limit is set at the point of the opening of insolvency proceedings in Switzerland: any claims filed abroad after that point in time cannot be recognised, whereas any proceedings already pending at that point in time might be recognised, under specific conditions. The consequence of any refusal to recognise (for instance if a claim is filed abroad against the debtor after insolvency proceedings were initiated against the latter in Switzerland) would be that the claim filed abroad and any resulting award would be ignored, and the claim would exclusively be assessed by Swiss authorities in the framework of the establishment of the schedule of claims. Also this proposal is susceptible to further amendment. H.

Relevance of the PILA Provisions for the Banking Sector

The proposed recast would be of only limited relevance for the banking sector. This is due to the fact that most of the proposed amendments of the draft recast were already introduced into the relevant banking legislation a few years ago.37 In fact, the proposed draft recast relies heavily on the revised provisions regarding cross-border insolvency of financial institutions. The new Article 166 para. 2 PDPILA would not apply to the banking sector.38

35 See R. RODRIGUEZ, Belgium vs. Switzerland on Airline Insolvencies – High noon at The Hague called off, International Insolvency Law Review 2011, p. 423-431, as well as the most recent decision in the matter SCD 141 III 382. 36 Art. 244a DEBA as proposed by the draft recast. 37 See Art. 37g of the Federal Act on Banks and Savings (SR 952.0, as well as the Banking Insolvency Ordinance (references in note 5); for general information on the (wide) powers of the Swiss Financial Market Supervisory Authority (“FINMA”) in the field of insolvencies of financial institutions see . 38 Art. 37g para. 4bis of the draft proposal regarding the Federal Act on Banks and Savings, as annexed to the PD-PILA.

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VI. Conclusions A.

Swiss Law “Catching up” with International Developments

In the last 30 years since the current Swiss PILA was enacted, important developments in international insolvency law have taken place, most notably the enactment (and recent recast) of the EuInsReg and the UNCITRAL Model Law. The proposed recast refrains from bluntly copying any of those concepts. Instead, it takes a prudent and selective approach, based more on practical experiences with insufficiencies of the PILA than on international standard-setting instruments. Despite that approach, the proposed recast would align the Swiss PILA with international standards such as the UNCITRAL Model Law, even if it does not go as far in terms of “generosity” towards foreign administrators than the national laws of neighbouring countries like Germany and Austria. The draft recast, as a mere legislative proposal, still has a long way to go before it can eventually (or not) become a part of a revised Swiss PILA. It may also undergo substantial changes in the months to come. What seems essential in the authors’ view is that the core elements of the recast “survive” the legislative procedure, these being: –

the deletion of the reciprocity requirement;

–

the expansion of indirect jurisdiction (recognising COMI-proceedings); and,

–

the provision of a simplified proceeding to avoid mandatory ancillary proceedings in simple cases.

Be it only with the implementation of these three issues, the revised chapter 11 of the PILA would stand good chances to “serve” for another 30 years. B.

Would the Recast Be an Implementation of the UNCITRAL Model Law?

As indicated above, the draft recast is partly a response to international developments and standards such as the UNCITRAL Model Law, as it also draws, in certain aspects, inspiration from that instrument. Consequently, the draft recast would implement key elements of the Model Law, namely as: –

COMI would be accepted as a ground of indirect competence and would allow for recognition of a foreign main proceeding (see Art. 16 f. of the Model Law),

–

essentially no other grounds for refusal than the ordre public exception (and other accepted grounds such as a pre-existing res iudicata, excluding, however, reciprocity) would be retained (Art. 6 and 17 of the Model Law), and, ultimately,

–

a specific provision would provide for the possibility to coordinate and cooperate with foreign administrators and courts (Art. 25 of the Model Law).

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Recast of the Swiss International Insolvency Law One could, however, also argue that the recast’s opening towards COMI is too prudent, as the registered seat of Swiss companies would still prevail over their hypothetical foreign COMI. One could also recall that the recast – like virtually all civil-law inspired concepts – does not provide for cross-border recognition of nonmain proceedings.39 In view of these arguments, would the draft recast make Switzerland one of the countries having “implemented” the Model Law? A look into the UNCITRAL Secretariat’s list of countries that have implemented the Model Law40 demonstrates that the mark to be met is, by far, not that of a full and complete implementation of the Model Law, either formally or substantially. For instance, several “Model Law compliant”-jurisdictions still require reciprocity.41 Compared to such deviations from the key principles of the Model Law, the prudent approach towards COMI, chosen in the draft recast should not constitute grounds to refuse Switzerland’s status (once it had adopted the recast) as a “Model Law-implementing” (or better: “compliant”) jurisdiction.

39 Neither does the Model Law require that effects are given to non-main proceedings; see article 21. 40 See the status chart available at . 41 This is the case, for instance, for Mexico or South Africa.

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CROSS-BORDER INSOLVENCY LAW EXPERIENCES AND PERSPECTIVES Vincent JEANNERET*/ Louis BURRUS**

I. II.

V.

Introduction Selection of Issues Encountered in Noteworthy Cases A. The Kaupthing Bank Case B. The Petroplus Case C. Decision of the Federal Tribunal 5A_408/2013 of 8 November 2013 (also published under DFT 139 III 504) D. Decision of the Federal Tribunal 5A_952/2013 of 25 July 2014 Selection of Procedural Law Issues A. Absence of Procedural Provisions within the PILA Bankruptcy Provisions B. Publicity of Recognition Proceedings C. Admission of Third Party Objections in the Recognition Proceedings D. Protective Measures E. Standing of a Party Subject to a Foreign Bankruptcy Decision in Swiss Court Proceedings 1. As a Claimant 2. As a Defendant 3. Impact of the Timing of the Recognition of the Foreign Bankruptcy Selection of Substantive Law Issues A. Reciprocity Requirement (Article 166(1)(c) PILA) – status quo, Removal or Amendment B. COMI with the Exception of Swiss-Based Entities C. Absence of Ancillary Bankruptcy Proceedings D. Voidable Preferences E. International Cooperation Conclusion and Perspectives

I.

Introduction

III.

IV.

In 1989, Switzerland adopted an additional chapter to its Private International Law Act (“PILA”) which would specifically govern cross-border insolvency matters

*

Attorney, Partner, Schellenberg Wittmer Ltd, Geneva and Zurich. Attorney, Solicitor (England & Wales), Partner, Schellenberg Wittmer Ltd, Geneva and Zurich.

**

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Printed in Germany

Vincent Jeanneret / Louis Burrus (the “PILA bankruptcy provisions”).1 The rationale behind the recognition of foreign insolvency proceedings was one of judicial cooperation. In each case, recognition would involve the initiation of an ancillary proceeding administered by the Swiss authorities (i.e. a local bankruptcy office: Office des poursuites et des faillites). One of the requirements for recognition would be reciprocity from the foreign state in which the main bankruptcy is located.2 This article has been published shortly after the release of the outcome of the consultation process (Vernehmlassung) relating to a draft bill issued by the Swiss Government on 14 October 2015 (hereinafter, the “Draft Bill”) which proposes to amend the PILA bankruptcy provisions. The objective of this article is to analyse selected cases of cross-border bankruptcy proceedings and suggest potential improvements, in particular with regard to several procedural aspects. Although the number of cases on the recognition of foreign bankruptcies is fairly limited,3 many of them have been challenged, frequently resulting in leading court decisions. In this context, a further objective of this article is to examine whether the revision proposal addresses the relevant issues under the current legislation and whether it covers all issues frequently arising in practice. A diverse range of positions were expressed during the consultation process and a number of concerns were outlined.4 As of the date of this publication, the authors clearly do not know what will be the outcome of the Draft Bill and in particular whether it will be amended by the legislator, adopted, rejected or simply not submitted at all.

Chapter 11, Articles 166 to 175 PILA. Reciprocity is granted if the law of the foreign state recognises the effects of Swiss bankruptcy proceedings on similar (but not necessarily on identical) grounds. 3 Approximately 50 petitions for recognition were filed between 2010 and 2014 in Switzerland, see §1.1.4 Statistiques, in Rapport explicatif concernant une modification sur le droit international privé (faillite et concordat), available on the website of the Swiss Federal Office of Justice . 4 For example, the Swiss corporate union “economiesuisse” and the Government of the Canton of Geneva generally support the Draft Bill. By contrast, the Governments of the Cantons of Zurich and Vaud have expressed doubts as to its necessity and how feasible it is to revise the current provisions. Vaud has also expressed a negative opinion on several of the changes, inter alia the removal of the reciprocity requirement. The Centre Patronal, another corporate union, takes a similar view. The Association Suisse des magistrats de l’Ordre judiciaire also takes a negative view in regard to the removal of the reciprocity requirement and on the introduction of the centre of main interests (“COMI”) clause. The opinions of various Faculties of Law are also fairly divided. 1 2

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Cross-Border Insolvency Law – Experiences and Perspectives

II.

Selection of Issues Encountered in Noteworthy Cases

Below, four recent cases will be summarised underlining issues frequently encountered in cross-border insolvency practice. A.

The Kaupthing Bank Case

The global insolvency of the Icelandic group Kaupthing led the Swiss Financial Market Supervisory Authority (FINMA) to impose preventive measures on the Swiss branch of Kaupthing Bank Luxembourg, which was a wholly owned subsidiary of the Icelandic mother company. Subsequently, the Swiss branch was declared bankrupt. In the meantime, Kaupthing Bank Luxembourg applied to FINMA to have ancillary proceedings opened in response to the assets that it alleged to have deposited with other Swiss banks. This case demonstrates the complexity of having two parallel insolvency proceedings in Switzerland (a Swiss main bankruptcy and an ancillary bankruptcy) and the difficulty of determining which of the two banks owned the particular assets in Switzerland. It also evidenced the difficulty for the two teams of liquidators in each respective jurisdiction to cooperate whilst abiding by the requirements of their respective legal systems, such as in response to confidentiality duties and banking secrecy. The liquidators in Luxembourg were also entrusted with liquidating the assets of the Swiss branch. This was seen by Switzerland as a potential breach of sovereignty.5 B.

The Petroplus Case

Petroplus was a major actor in the oil refinery network of Europe. The group owned one or several refineries in many Western European countries, always through local subsidiaries. The holding company and the service company of the group, together with a small refinery and a storage facility, were all located in Switzerland. The global collapse of the group led the different administrators appointed by each local insolvency court to attempt a global rescue plan, only to realise that their efforts would be in vain. The main difficulty when a group of companies collapses is that the shareholder power in each company is replaced by the creditor power and the local insolvency courts. The main reason was the impossibility of reconciling the respective interests of the local creditors as well as the different regimes protecting creditors in each jurisdiction involved, which all had different timelines and legal constraints. Only a centralised restructuring authority at the supranational level could have imposed a global solution. Unfortunately, such authority did not exist (and does not to this day). 5 For further information, see e.g. Decision of the Federal Administrative Court B-1374/2009 and Decision of the Federal Tribunal 2C_237/2009 of 28 September 2009.

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Vincent Jeanneret / Louis Burrus In the Petroplus case, each of locally appointed administrators did its best to maximise the sale of existing assets and to reduce any potential liabilities. For instance, the sale of the Swiss refinery as a single asset required the cooperation of a number of different liquidators. This is because no less than five Swiss and French entities were involved, i.e. the two Swiss entities of the group together, a Swiss company which owned the storage facility in Switzerland, as well as a French company and another Swiss company which together owned the oil pipeline supplying the refinery. This global sale required the execution of a complex purchase agreement which had then to be approved by two Swiss district courts under a very strict time schedule. C.

Decision of the Federal Tribunal 5A_408/2013 of 8 November 2013 (also published under DFT 139 III 504)

This decision of the Federal Tribunal relates to an appeal against a lower court decision to recognise an Israeli liquidation order in Switzerland under the PILA bankruptcy provisions. The underlying dispute involved a creditor domiciled in Israel who had registered a claim in the bankruptcy of a Swiss company. The Swiss bankruptcy administrator had assigned an avoidance claim against a Belgian company on this foreign creditor. On this basis, the Israeli creditor, along with other creditors, commenced a lawsuit before the Swiss courts against the Belgian company. Some time after the initiation of the lawsuit, the Israeli creditor was itself placed in receivership and ultimately in liquidation upon the request of its two largest creditors, both of them Israeli banks. The Belgian Company then raised the issue of whether the Israeli creditor had standing – as a foreign entity in liquidation – in the Swiss avoidance action in the absence of a recognition based on Articles 166 ff PILA. In order to avoid a challenge for lack of standing, the Israeli creditor separately filed a request for recognition of its own liquidation in Israel. At this point, the Belgian company asked the court for permission to intervene in the recognition proceedings in order to challenge it, mainly on the reciprocity condition. The two lower instances recognised the ability of the Belgian company to intervene in the recognition proceeding but dismissed its challenge on the merits. The Belgian company filed an appeal to the Federal Tribunal where the case was ultimately dismissed. In its decision, the Federal Tribunal ruled that the fact that the Belgian company was a defendant in the avoidance claim was an indirect – and therefore insufficient – ground to intervene in the recognition proceedings. D.

Decision of the Federal Tribunal 5A_952/2013 of 25 July 2014

This decision from the Federal Tribunal relates to an appeal brought in the course of debt collection proceedings brought by a foreign judgment creditor against a Swiss debtor. A foreign bank sued a Swiss bank with which it had deposited assets. The foreign bank succeeded in its claim and the Swiss bank was ultimately ordered to pay several million francs to its former client. In the course of the litigation proceedings, the foreign bank was placed in receivership and then ultimately in 374

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Cross-Border Insolvency Law – Experiences and Perspectives liquidation. None of the parties raised the issue of the impact of the liquidation on the ongoing proceedings. The name of the claimant was simply amended by the addition of “in liquidation”. On the basis of the final decision ordering the Swiss bank to pay several million Swiss francs, the foreign bank petitioned the Swiss bank to pay the sum. At the summary hearing, during which the judge had to decide whether to set aside the debtor’s objection to the summons to pay (mainlevée), the Swiss bank raised for the first time the issue of standing of the foreign bank. It was emphasized in particular that the foreign bank had been placed in liquidation by a foreign bankruptcy court. The First instance court initially ruled that the foreign bank in liquidation was prevented from taking any action in Switzerland in the absence of recognition proceedings. It therefore entirely dismissed its application to set aside the debtor’s objection. The decision was appealed before the Federal Tribunal, which ultimately returned back to the lower instance court with the instruction to further investigate whether or not this foreign liquidation was to be treated as a bankruptcy under the PILA bankruptcy provisions.6 This case offers a good example of how difficulties frequently arise in practice: one must determine whether foreign proceedings fall under the definition of the Swiss Debt Collection and Bankruptcy Act (“DEBA”)7 and the PILA, since only proceedings falling under this definition can be recognised. In this case, the difficulty resided in the fact that the receivership and the liquidation had been ordered by a bankruptcy court. However, there was a discussion by the court as to whether in fact the circumstances of the liquidation really did correspond to a situation of insolvency.

III. Selection of Procedural Issues A.

Absence of Procedural Provisions within the PILA Bankruptcy Provisions

The PILA bankruptcy provisions only contain a single procedural provision. This provision, Article 167, provides simply that the Swiss court where the assets are located has jurisdiction to recognise the foreign bankruptcy. Swiss law is silent on the procedure applicable to the recognition, on the publicity of the proceeding, on the evidentiary threshold, and on who can or must be heard. Since the adoption of the Code of Civil Procedure hereinafter, the “CCP”) in January 2011, Swiss courts have considered that the general provisions on the enforcement of judgments are applicable to recognition proceedings. Accordingly, they typically rule on petitions for recognition in the context of summary proceedings (Article 335(3) and Article 339(2) CPC). 6 In a previous decision (5P.246/2000 of 29 August 2000), the Federal Tribunal ruled for instance that a winding up order issued by an English court can only be recognised if it resulted from a situation of insolvency. 7 For a definition of bankruptcy, see Articles 197, 171 and 204 DEBA.

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Vincent Jeanneret / Louis Burrus Unfortunately, the Draft Bill fails to produce any significant improvement in clarifying the procedural situation. Nevertheless, a number of new provisions are likely to raise additional questions should the Bill be adopted in its current version. This is particularly the case for Article 174a of the Draft Bill on the possibility to opt out of the necessity of an ancillary bankruptcy. As a condition, the judge will have to verify that the rights of the Swiss creditors are sufficiently safeguarded in the main bankruptcy and that those creditors have the chance to “be heard” in the recognition proceeding. However, the Draft Bill is silent on the way in which this “right to be heard” is to be exercised. Some further difficulties are likely to arise in the context of the third paragraph of the same provision which introduces the potential for the judge to grant recognition upon satisfaction of conditions and charges. This completely new mechanism raises a range of questions8 and the Draft Bill contains no information whatsoever on its procedural implementation. B.

Publicity of Recognition Proceedings

Under the current legislation, a petition for recognition of a foreign bankruptcy is not published at the time of the filing. In these circumstances, it is difficult to see how a potential objector could intervene in the recognition proceedings, except if the requirement to recognise the foreign bankruptcy is linked to a separate litigation between those parties.9 Once the recognition has been granted, Article 169 PILA expressly provides that the opening of the ancillary proceeding be published in the official gazette (Feuille officielle suisse du commerce). The bankruptcy office in charge of the ancillary estate will also publish herein the official call to creditors as well as any subsequent decision related to the ancillary proceeding. In practice, the bankruptcy office often first publishes a pre-notice of the opening of the ancillary proceeding, and after having received an advance for related expenses from the foreign liquidator, then officially publishes the call to creditors. What are the publicity requirements under the Draft Bill, since it provides for the possibility to opt out of the requirement of an ancillary bankruptcy? The opting out of the ancillary proceedings can be decided by the court only in the absence of privilege or any secured creditor. Therefore, practically, it should in fact not affect the existence of both the publication of the opening and the call to creditors, at the very least. A difficult question will be how to handle late filings of claims. Based on the Draft Bill, it seems that the new opting-out mechanism will in fact have the consequence of introducing an exception to the general system in which late filings

8 For example, who should monitor those conditions and charges? What are the consequences in case of breach? Who can challenge the fulfilment of the conditions, before which authority and under which type of action? 9 See for instance the case summarised under II.D. above.

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Cross-Border Insolvency Law – Experiences and Perspectives will simply not be admitted at all.10 However, those creditors might still have the possibility to file their claims in the main foreign bankruptcy. C.

Admission of Third Party Objections in the Recognition Proceedings

Article 167 PILA provides that the main Swiss Private International Law regime governing the recognition of foreign decisions (Articles 29 ff PILA) also applies in respect to the recognition of bankruptcy decisions. More specifically, Article 29(2) PILA provides that parties who are opposed to the recognition should have the right to be heard in the proceeding. However, until the leading decision of the Federal Tribunal summarised under II.D. above, there was no clear definition as to who had standing to challenge the recognition and scholars’ opinions were divided on the topic. The legislator has not used the opportunity of the Draft Bill to provide clearer guidance on this question. D.

Protective Measures

Once the petition to recognise the foreign bankruptcy has been filed, Swiss courts may order interim and protective measures upon request of the foreign liquidator or a creditor (see Article 168 PILA). Such interim measures, ordered by the court that has jurisdiction to recognise the foreign bankruptcy, are meant to prevent the dissipation of assets during the recognition proceedings. One of the most frequent measures is the drawing up of the inventory of assets (Article 162 DEBA). Protective measures will be lifted if the foreign bankruptcy is not ultimately recognised. Article 168 PILA is silent on the possibility to recognise protective measures ordered for instance at the place of the main bankruptcy. It is unlikely that such decisions can be recognised under the main regime of Articles 25 ff PILA, which is only available to decisions in civil matters.11 Practically, this excludes the possibility to recognise foreign protective measures and forces the liquidator of the foreign bankruptcy to apply for such measures within the recognition proceeding. The Draft Bill does not contain any new precision on this issue. E.

Standing of a Party Subject to a Foreign Bankruptcy Decision in Swiss Court Proceedings

1.

As a Claimant

A foreign bankruptcy estate, or the liquidator acting for the estate, is not allowed to initiate a fresh lawsuit in Switzerland. The PILA provides that the powers of a foreign bankruptcy estate in fact be limited to the filing of a petition for recognition Article 251 DEBA provides that claims can be filed until the closing of the bankruptcy proceeding. 11 DFT 129 III 687. 10

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Vincent Jeanneret / Louis Burrus of the main foreign proceeding (Article 166 PILA). The Federal Tribunal has confirmed this position in a number of instances. For examples, in DFT 129 III 683, a foreign liquidator filed a petition to recognise a decision rendered at the place of the main proceedings but against a third party residing in Switzerland. The matter was ultimately brought before the Federal Tribunal. The Federal Tribunal denied the recognition of the decision on the ground that the foreign liquidator had no standing to apply for it and to go after a Swiss debtor outside of the context of the recognition of the foreign bankruptcy itself. More recently, in DFT 134 III 366, a liquidator of a foreign bankruptcy was denied the right to file a lawsuit in Switzerland on the same grounds.12 In this decision, the Federal Tribunal confirmed that a company subject to a foreign bankruptcy is not allowed to initiate any recovery action in Switzerland, whether by debt collection proceedings (application for a summons to pay) or by initiating a full claim on the merits before a court. In the decision summarised under II.D. above, the Federal Tribunal also confirmed that the fact that the claimant was a foreign bank had no impact.13 2.

As a Defendant

The PILA bankruptcy provisions do not provide any information regarding the impact of a foreign bankruptcy on the ability of a bankrupt party to defend a claim before the Swiss courts. Swiss bankruptcy law generally provides that for a bankruptcy of a Swiss person or entity, all civil court actions that may have an impact on the estate are to be suspended (Article 207 DEBA). However, the Federal Tribunal has already denied the application of this provision by analogy with respect to a foreign bankruptcy.14 In other words, a foreign bankruptcy has no impact whatsoever on the standing of a foreign person or entity defending a civil claim before the Swiss courts. There are two main exceptions. First, an automatic suspension (ex lege) could be provided in a bilateral agreement between Switzerland and the State in which the main bankruptcy has been initiated. In addition, the Swiss proceeding would also be suspended if the foreign bankruptcy has been recognised in Switzerland and if the ongoing litigation relates to assets that belong to the ancillary proceedings. In that case only, Article 207 DEBA would be directly applicable (Article 170(1) PILA). The defendant’s foreign bankruptcy would likely also constitute a ground to suspend the proceeding under the regime provided under Article 126 CPC which gives the court the ability to stay proceedings. In practice, in cases where there is See also DFT 137 III 570. Article 37g of the Swiss Banking Act provides that FINMA has the power to rule on the recognition of the bankruptcy of a foreign bank ordered outside of Switzerland. This special regime provides for the possibility to hand over the Swiss-based assets to the foreign bankruptcy estate without the need of a Swiss ancillary proceeding, an idea that has been imitated in the Draft Bill (see Article 174a). 14 DFT 130 III 769. 12 13

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Cross-Border Insolvency Law – Experiences and Perspectives no asset in Switzerland, the position of the claimant will likely be preferable if the latter files such claim in the main bankruptcy, rather than pursuing the litigation before the Swiss courts. 3.

Impact of the Timing of the Recognition of the Foreign Bankruptcy

Another important element to consider is the timing of the recognition, in particular when the person or entity placed in bankruptcy abroad is a party to an ongoing court proceeding in Switzerland. As the foreign liquidator is not permitted to take action on Swiss soil, his standing must be clarified before any further action is taken. If the foreign liquidation falls under the definition of a bankruptcy applicable under the PILA bankruptcy provisions and there is a requirement for the bankruptcy decision to be recognised, then the best course of action is more likely than not to stay the ongoing court case until the recognition is confirmed (Article 126 CPC). Should this course not be taken, there is a risk that actions directed by the foreign liquidator will be considered null and void. There is, to our knowledge, no decision on the validity of the actions taken by a foreign liquidator before the recognition decision. In the leading decision summarised under II.C above, the Federal Tribunal left the question open. In that case, a foreign liquidator had successfully applied for claims to be lodged in the bankruptcy of a Swiss company and obtained the assignments of rights related to an avoidance claim. All this had been done prior to the recognition of the foreign bankruptcy. In obiter dictum, the Federal Tribunal – which had confirmed the recognition – also stated that the validity of those actions would have been called into question had the foreign bankruptcy not been recognised.15 This situation remains unclear under the regime proposed in the Draft Bill, which is still built around the requirement of the recognition of the foreign bankruptcy decision. The main differences will appear in situations where there will be no ancillary proceedings. In those cases, the court which has ruled on the recognition will then be in charge of monitoring (more or less closely) the actions of the liquidator.

15 DFT 140 III 115: “Certes, elle est concernée plus que tout un chacun par la décision attaquée puisque, comme elle l’indiquait dans son recours cantonal, le refus de la reconnaissance de la faillite de C. en Suisse remettrait en cause tant la production de celleci dans la faillite de F. que la qualité de celle-ci pour agir dans l’action révocatoire dirigée contre elle.” (emphasis added).

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IV. Selection of Substantive Law Issues A.

Reciprocity Requirement (Article 166(1)(c) PILA) – status quo, Removal or Amendment

When the current version of the PILA bankruptcy provisions was adopted in the 1980s, the Swiss Parliament was convinced that cooperation among States would be enhanced if the requirement of reciprocity were adopted. At that time, a handful of practitioners were afraid that international bankruptcy cases could be used to circumvent Swiss banking secrecy. The reciprocity requirement, as well as the verification that the foreign proceedings leading to the bankruptcy would respect certain basic procedural requirements,16 were then both implemented as cornerstones of the new PILA bankruptcy provisions governing the recognition of foreign bankruptcy. Times have changed. The current Swiss Government is of the opinion that this criterion often results in unnecessary complexity and delay in the proceedings and that, in the end, the fact that a foreign bankruptcy may not be recognised solely on the basis of this condition could be detrimental to Swiss and foreign creditors. Just a few years ago, the Federal Tribunal mentioned in a leading case that to maintain or remove the reciprocity requirement was a (political) decision to be taken by the Swiss Parliament.17 The possibility offered to any foreign State in the world to enforce a foreign bankruptcy decision against Swiss-based assets is a matter for thorough consideration. Arguably, Switzerland should not mix its foreign policy objectives with the interests linked to the enforcement of foreign claims. The withdrawal of the reciprocity requirement could even to a certain extent jeopardise the strong bonus of foreseeability and security of the law which has always attracted foreign investors to Switzerland. At the same time, it can be observed that courts simply do not have the necessary tools to carry out an in-depth decision on the reciprocity requirement when they have to rule on a petition for recognition of a foreign bankruptcy. It would be misguided to simply remove the reciprocity requirement without at least adopting an appropriate delimitation of the countries whose bankruptcy decisions can generally be recognised. For instance, why could the Swiss Government not simply issue an annual list of countries considered as cooperative and whose bankruptcy decisions will be deemed to meet the standards of Swiss domestic bankruptcy proceedings? For the other non-listed countries, the existing system could be maintained and ultimately it would then still be up to the courts to

Article 27 PILA. DFT 137 III 570 (576): “Inwieweit dieses gesetzgeberische Anliegen tatsächlich in Erfüllung gegangen ist und ob die Regelung gemäss Art. 166 ff. IPRG sinnvoll bzw. noch zeitgemäss ist (gerade auch im Lichte des soeben revidierten Art. 37g BankG), ist vorliegend nicht zu prüfen […]. Hat der Gesetzgeber aber ein detailliertes und abschliessendes System geschaffen, geht es nicht an, dieses richterrechtlich in grundlegender Weise abzuändern. Ein solches Unterfangen fällt in die Kompetenz des Gesetzgebers.” (emphasis added). 16 17

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Cross-Border Insolvency Law – Experiences and Perspectives make the decision upon the demonstration that the reciprocity requirement is satisfied. B.

COMI with the Exception of Swiss-Based Entities

When the PILA bankruptcy provisions were initially adopted, the Swiss legislator was not at this point willing to accept the idea of enforcing bankruptcy judgments rendered by a court in a country where the debtor was not domiciled or incorporated. The main concern was to avoid facing potential conflicting requests of enforcement issued by two or more foreign estates. In the meantime, the EU has adopted specific rules (Insolvency Regulation 1346/2000, followed by 2015/848) which have provided for an alternative criteria of the “centre of main interests (COMI)” of the debtor. This new regime often granted jurisdiction to courts that would not automatically be the court of the place of incorporation. This notion of COMI was discussed in great detail after the first decision rendered in Europe and the imprecision of the notion was quite rightly criticised. This ultimately led to the adoption of more concrete definitions in the most recent European regulation. Following this trend, the Swiss Government is now proposing in the Draft Bill to adopt the notion of “COMI”, using the same criteria as the EU (Article 166(1)(c)(2)). However, a Swiss bankruptcy judgment would still prevail over a foreign bankruptcy decision rendered at the COMI. In other words, the notion of COMI would only apply to bankruptcy decisions of non-Swiss-based insolvent parties. This approach seems both realistic and allows some form of foreseeability to be preserved. It could, however, potentially lead to abusive situations should a foreign natural person transfers his domicile to Switzerland a few weeks before a foreign court declared him bankrupt on the basis of the COMI criteria. In such case, the creditors will need to initiate separate proceedings in Switzerland to recover the debtor’s Swiss-based assets, since the foreign bankruptcy decision could not be recognised in Switzerland. C.

Absence of Ancillary Bankruptcy Proceedings

The requirement to initiate an ancillary proceeding was often perceived as unnecessarily burdensome, in particular when there were no local creditors and when the assets were not subject to any pledge or were mainly constituted of claims against third parties, in particular banking assets. The Swiss Parliament tested another alternative in 2012 when adopting specific regulations regarding the enforcement of bankruptcies in Switzerland and assimilated proceedings of foreign banks and insurance (Article 37g of the Banking Act). In such a situation, FINMA is now entitled to authorise the foreign banking or insurance liquidator to take possession of the Swiss based-assets and repatriate them, provided certain conditions are met. However, in contrast to this system, the new mechanism proposed by the Swiss Government does not allow the opening of an ancillary proceeding to be entirely bypassed. The Draft Bill provides that upon recognition of the bankruptcy decision, the bankruptcy office will still publish a call to creditors who are entitled Yearbook of Private International Law, Volume 17 (2015/2016)

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Vincent Jeanneret / Louis Burrus to file claims in the ancillary proceedings (for secured creditors and privileged creditors domiciled in Switzerland, see Article 172 PILA and Article 169 PILA). It is only in the absence of such claims being filed within a one month time period that the bankruptcy office will revert the matter back to the court which granted recognition. This court will then be entitled, upon request of the foreign liquidator, to waive the ancillary proceeding, provided the rights of Swiss-based unsecured and unprivileged creditors are sufficiently safeguarded in the foreign bankruptcy proceedings. Such creditors will have a right to be heard by the Swiss court before a decision is made. The court may grant the request of the foreign liquidator and authorise him to take possession of all assets located in Switzerland as well as to initiate a lawsuit in order to recover assets belonging to the estate. However, the court may impose specific conditions on the foreign liquidators. It is understood from this Draft Bill that the court will, to a certain extent, have to monitor the activity of the foreign liquidator in Switzerland. The possible waiver of the ancillary bankruptcy in certain circumstances could have an indirect consequence on the application of Swiss law criminal provisions on fraudulent bankruptcies (Articles 163 ff of the Swiss Criminal Code, “SCC”). Although there is no decision on the issue, to our knowledge, some scholars are of the opinion that those provisions are also applicable to ancillary proceedings opened in Switzerland. By definition, when there is no longer an opportunity to commence an ancillary bankruptcy, the bankruptcy and debt collection felonies or misdemeanours provided by the Criminal Code will no longer apply. This could create an undesirable legal environment and divergences in treatment for actions on Swiss soil between a Swiss national bankruptcy and a foreign bankruptcy. In order to rectify this divergence, the legislator could amend Article 171(1) SCC and include that Articles 163 ff SCC will also be applicable on actions taken in Switzerland further to the recognition of a foreign bankruptcy. D.

Voidable Preferences

Article 171 PILA provides that the liquidator of a foreign bankruptcy be expressly empowered to initiate the general avoidance and fraudulent transfer actions existing in the DEBA. In this context, the Federal Tribunal has further confirmed the ability of the bankruptcy office to assign avoidance claims to a foreign liquidator provided that there be no Swiss-national secured or privileged creditors, or that their claims have been paid off.18 In the same decision, the Federal Tribunal has ruled that there were no reasons as to why the foreign liquidator could not be assigned other types of claims. The situation is completely different if the liquidator of the foreign bankruptcy initiates an avoidance action against a Swiss third party at the place of the main bankruptcy. In such a case, there is a very significant reservation on the possible effect in Switzerland of a foreign decision. In DTF 129 III 683, the Federal Tribunal categorically denied the possibility for the foreign liquidator to file for the recognition of a foreign avoidance judgment under the main regime governing 18

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Cross-Border Insolvency Law – Experiences and Perspectives recognition and enforcement of foreign decisions (Articles 25 ff PILA). The Federal Tribunal considered that avoidance claims in respect of Swiss-based assets should always be asserted before Swiss courts and be governed by Swiss law. Enforcing a foreign avoidance decision against Swiss assets outside of an ancillary bankruptcy proceeding would have the effect of defeating the potential claims of Swiss privileged creditors. It is therefore always necessary to first file for recognition of the foreign bankruptcy proceeding, then to file the claim in the ancillary proceeding and finally to have it assigned to the foreign liquidator by the bankruptcy office. Furthermore, if an ancillary proceeding cannot be opened in Switzerland, the foreign liquidator will simply not be in a position to initiate action – directly or through the Swiss bankruptcy office – on an avoidable transaction targeting Swissbased assets. In certain situations, assets located in Switzerland could be immune from any attempt of the foreign liquidator to repatriate them or their counter-value to the bankruptcy estate. In this type of cases, the current system provided by the PILA bankruptcy provisions is unsatisfactory. The Draft Bill corrects this situation by introducing a specific provision (Article 174c) providing that foreign decisions on avoidance claims linked to a foreign bankruptcy that has been recognised in Switzerland can be recognised under the mechanism of Articles 25 ff PILA. E.

International Cooperation

Article 174b of the Draft Bill provides for the possibility, in complex cases, for the various authorities involved to coordinate their actions. This possibility could even extend to foreign authorities. Although this provision could be seen as the most benign addition contained in the Draft Bill, at the same time it might potentially become an important tool in practice. The mere fact that this new provision has been included in the Draft Bill is an acknowledgment of the important need for enhanced coordination and cooperation in the field of cross-border insolvency. When assets are located in various places within the country, it seems absurd to have the various authorities involved dealing separately with potentially the exact same issues. As evidenced in particular in the cases summarised under II.A. and II.B. above, this specific need is even more important on an international level. The way the clause has been drafted in the Draft Bill is on the other hand very general and voluntarily non-binding. This will leave the competent authorities a broad discretion to define how this cooperation can best be implemented in each individual case.

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V.

Conclusion and Perspectives

(1)

The two main amendments introduced by the Draft Bill appear to be (i) the removal of the reciprocity requirement and (ii) the possibility to recognise a foreign bankruptcy decision rendered by a court at the COMI, and no longer just at the place of domicile or incorporation.

(2)

Taken together, these two amendments may lead to significant developments for cross-border insolvency practice in Switzerland. In particular, it is possible that a Swiss court might face two simultaneous requests to enforce foreign judgments regarding the same Swiss-based assets of a single person that has been declared bankrupt in two separate jurisdictions (e.g. registration/COMI or two diverging views on the COMI).

(3)

It cannot be excluded that the Swiss Parliament may seriously reconsider the proposal to remove the reciprocity requirement. The authors would personally favour a situation whereby the requirement would only be fully removed for a specific list of countries that could be established and revised by the Swiss Government on an annual basis.

(4)

The other main elements of the Draft Bill seem to be both adequate and appropriate in solving issues that have been encountered since the introduction of the PILA bankruptcy provisions in 1989.

(5)

One element that has not, however, been mentioned in the Draft Bill, and which could be seen as a potential way of simplifying the handling of foreign bankruptcy recognitions, would be to appoint a centralised federal authority to deal with all the requests, render first instance decisions and monitor implementation by the bankruptcy offices or, as the case may be, the actions taken by the foreign liquidator. The direct consequence of the low number of recognition cases is that few cantonal courts and bankruptcy offices have had the opportunity to establish a uniform practice. It would then be up to the Swiss Parliament to decide whether such new central authority would be a federal court of first instance or an administrative body whose decisions could be challenged before the federal administrative court. This last solution was found to be adequate for all cross-border financial and insurance bankruptcies, which are now handled directly by FINMA.

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NEW RULES ON CROSS-BORDER INSOLVENCIES IN NORWAY Faraz Ahmed ALI*/ Erik RØSÆG**

I. II.

V. VI. VII.

Introduction Scope of the New Rules A. Introduction B. Personal Scope C. Substantive Scope International Jurisdiction Applicable Law A. Starting Points B. Property C. Debts D. Employment Contracts E. Pending Lawsuits or Arbitral Proceedings F. Honoring Obligations to the Debtor G. Powers of the Insolvency Practitioner Recognition and Enforcement Territorial Insolvency Proceedings Concluding Remarks

I.

Introduction

III. IV.

The number of cross-border insolvencies has increased in Europe, so the EU adopted the European Cross-Border Insolvency Regulation (Reg. 1346/2000)1 in 2000, which was recast in 2015 (Reg. 848/2015).2 Reg. 1346/2000 does not apply

* Research assistant at the Scandinavian Institute of Maritime Law, University of Oslo and Associate at Thommessen AS Law Firm. ** Professor at the Scandinavian Institute of Maritime Law, University of Oslo. 1 Council Regulation (EC) No 1346/2000 of 29 May 2000 on Insolvency proceedings. 2 Regulation (EU) No 848/2015 of the European Parliament and of the Council of 20 May 2015 on Insolvency Proceedings (recast).

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Printed in Germany

Faraz Ahmed Ali / Erik Røsæg in Norway, nor will Reg. 848/2015 once it is in full force within the EU.3 The current rule on cross-border insolvency proceedings in Norway does not allow the recognition of foreign proceedings without an international agreement.4 On 1 April 2016, the Ministry of Justice and Public Security proposed new rules on cross-border insolvencies.5 On 17 June 2016, the Parliament unanimously adopted the proposal. The date of entry into force of the new rule is yet to be determined. The new rules amend the Norwegian Bankruptcy Act, Part 4, and concern matters arising from foreign and national cross-border insolvency proceedings. These matters include international jurisdiction, choice of law, and the recognition and enforcement of foreign insolvency proceedings. The aim of this paper is not to provide readers with a complex analysis of the new rules but to give an overview of these rules and, to some extent, compare them to EU law.

II.

Scope of the New Rules

A.

Introduction

The new rules cover judicial collective insolvency proceedings. Most of these rules concern main proceedings as opposed to proceedings with a limited territorial scope (secondary bankruptcies). Such procedures will be briefly discussed in Section V below. B.

Personal Scope

The new rules only cover insolvency proceedings for legal persons and exclude natural persons/consumers and one-man businesses/self-employed persons,6 even if the same types of insolvency procedures apply to them as those to legal persons in 3 Norway is a part of the European Economic Area (EEA), so some EU laws are applicable in Norway. However, the EEA Agreement does not extend to judicial cooperation. 4 Section 161 of (unamended) Bankruptcy Act No. 58/1984. In Rt. 2013, p. 556, the Norwegian Supreme Court rejected a plea to establish such rules without express legislative basis. However, Denmark, Finland, Norway, Sweden, and Iceland are governed by the Nordic Bankruptcy Convention of 1933, which provides for the recognition of Nordic bankruptcies, etc. The convention is referred to in Art. 85(1)(j) of Reg. 848/2015. Available translations of Norwegian legislation can be accessed at . 5 Prop. 88 L (2015-2016) Amendments to the Bankruptcy Act, etc. (Cross-Border Insolvencies). 6 Section 163(1)(e) of the new rules.

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New Rules on Cross-Border Insolvencies in Norway the foreign country (as is the case in Norway). However, these proceedings are to be covered by another proposal that the Nordic States are currently developing.7 In addition, Section 163(2) of the new rules excludes insurance undertakings, credit institutions, investment firms, institutions and undertakings covered by Directive 2001/24/EC as amended as well as collective investment undertakings. This exception is in accordance with Art. 1(2) of Reg. 848/2015. Pension funds are also excluded. C.

Substantive Scope

Section 163(1) of the new rules applies to foreign insolvency proceedings, such as bankruptcy, liquidation and winding-up proceedings, and compulsory or voluntary debt settlement (e.g., restructuring), which include all of the debtor’s assets. Insolvency under Norwegian law does not include the debtor’s inability to pay his debts as they fall due, unless the equity is negative.8 Still, foreign proceedings are included even if they relate to debtors with a positive equity that are in financial difficulties.9 In the following, we will refer to bankruptcy proceedings for the sake of simplicity. The requirement of “debtor’s insolvency” excludes interim proceedings,10 unlike Art. 1(1) of Reg. 848/2015.11 Insolvency proceedings because of “noninsolvency” grounds are not recognized,12 even if the liquidation proceeding is the same as if the debtor were insolvent. This limitation applies, for example, to liquidation under insolvency procedures due to failure to submit annual financial statements or annual reports to the authorities.13 The foreign main insolvency proceeding must be “collective” and include all of the debtor’s creditors,14 which means that individual actions that are commenced by one creditor only for his sole benefit (e.g., execution liens) will be precluded. The requirement of collective proceedings in the new rules differs from Art. 1(1) of Reg. 848/2015 in that it does not allow for debt settlements or reorganization proceedings if these only include “a significant part of a debtor’s creditors.”15 Reviewing whether such a requirement is being fulfilled could be difficult U.R. BANG-PEDERSEN, Nordisk gjældssanering, TemaNord 2010:598 contains a proposal for a Nordic regulation of debt relief. An English summary is available at p. 41-42. 8 Bankruptcy Act, Section 61. 9 Prop. 88 L (2015-2016), p. 59, compare Reg. 848/2015 recital 17. 10 In Prop. 88 L (2015-2016), p. 59, an emphasis that the proceeding must have been “opened” is made. 11 See recitals 10 and 17 of Reg. 848/2015. 12 Prop. 88 L (2015-2016), p. 59. 13 Section 16-15(1)(4) of the Limited Companies Act No. 44/1997. 14 Section 163(1)(b) of the new rules. 15 Art. 2(1) and recital 14 of Reg. 848/2015. 7

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Faraz Ahmed Ali / Erik Røsæg because the term “significant part” is rather vague.16 Moreover, this standard would be consistent with the all-inclusive collective insolvency procedures in Norway.17 Hence, collectiveness makes a separate requirement redundant in Norway that the proceedings should be public.18 Furthermore, a requirement that the debtor must be “totally or partially divested of his assets”19 exists, and this explains the requirement to “appoint an insolvency practitioner” in Section 163(1)(d). This measure causes the debtor to fully or partially lose the power of management that he has over his assets, and the insolvency practitioner will either administer or liquidate these assets. The new rules do not include debtor-in-possession proceedings, in which the debtor keeps control over his assets and proceedings that do not require the appointment of an insolvency practitioner.20

III. International Jurisdiction The new rules introduce a significant change in the area of international jurisdiction and embrace the concept of center of the debtor’s main interests (COMI) in accordance with Art. 3 of Reg. 848/2015. Main insolvency proceedings can only be opened in the COMI of the debtor. Sections 161 and 163(1)(a) of the new rules implicitly refer to the European concept,21 which recognizes that it has an autonomous meaning and must be interpreted in a uniform way.22 This action will unify international jurisdiction between the new rules and Reg. 848/2015 to avoid parallel proceedings. Case law of the European Court of Justice will determine and develop the COMI for both Norwegian and foreign insolvency proceedings.23 However, Norwegian courts may examine the jurisdiction and deny recognition if the state of the opening proceedings does not have jurisdiction in accordance with Norwegian law (e.g., if proceedings have been wrongfully commenced in another state).24 This scrutiny applies even if such proceedings are binding to the Member States of the EU under Reg. 848/2015. The recognition does not depend on the use of any formal procedure, such as an exequatur procedure, so the creditors or debtor would need to challenge the COMI in Norwegian courts with the Prop. 88 L (2015-2016), p. 21. For instance, Sections 23, 30, and 55 of the Bankruptcy Act. 18 See Art. 1(1) and recitals 12 and 13 of Reg. 848/2015. 19 Section 163(1)(c) of the new rules. 20 Likewise, Art. 1(1)(b) and recital 10 of Reg. 848/2015. 21 Prop. 88 L (2015-2016), p. 30. 22 ECJ, C-341/04, Eurofood IFSC Ltd., ECR [2006] I-3813, para. 31. 23 Sections 146 and 161 of the new rules. 24 Prop. 88 L (2015-2016), p. 60. 16 17

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New Rules on Cross-Border Insolvencies in Norway burden of proof that the COMI is located in another state. The court may grant interim measures while examining the jurisdiction in the foreign state. 25

IV. Applicable Law A.

Starting Points

Lex fori concursus governs the rights of the debtor and which assets are a part of the proceedings.26 However, the effect of foreign insolvency proceedings in Norway is, to some extent, still determined by Norwegian law.27 To determine the relevant Norwegian rules if Norwegian law applies in relation to a foreign bankruptcy, one needs to find the Norwegian procedure equivalent to the foreign one. Only a limited number of variants exist. Norwegian bankruptcy proceedings are likely to be analogous to foreign bankruptcy proceedings, as well as to liquidations and winding-up proceedings. Foreign debt settlements and restructuring proceedings are analogous to the Norwegian “debt negotiation” procedure.28 B.

Property

Norwegian law will apply to legal perfection29 and avoidance in bankruptcy30 of property situated in Norway and property registered in a Norwegian register, even if the property is subject to a foreign bankruptcy. Seemingly, even a foreigncountry-registered ship that happens to be in Norway cannot be seized by a foreign bankruptcy estate unless Norwegian law allows it. Similarly, lex rei sitae applies to rights of stoppage in transitu,31 mortgages, and liens. Norwegian law will apply if the property was situated in Norway at the time when the rights were invoked, unless a basis for avoidance in bankruptcy exists.32 These rules are very much in line with EU law.33

Part VII of Dispute Act No. 90/2005. Section 164(1) of the new rules. 27 Ibid. 28 Prop. 88 L (2015-2016), p. 68. 29 Section 164(2)(a) of the new rules, similar to Art. 11 of Reg. 848/2015 on immovable property and some specific rules on movable property. 30 Section 164(2)(b) of the new rules, which differs significantly from Art. 16 of Reg. 848/2015. 31 Chapter 7 of the Satisfaction of Claims Act No. 59/1984. 32 Section 164(2)(c) of the new rules. 33 Art. 8 of Reg. 848/2015. 25 26

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Faraz Ahmed Ali / Erik Røsæg An act of legal perfection is generally necessary under Norwegian law for a disposition to be protected against the bankruptcy of the debtor. The act of perfection depends on the type of disposition and the type of assets involved. Rights in property subject to registration will typically be perfected by registration at the latest at the day before the opening of the bankruptcy.34 By contrast, rights in moveable property typically obtain perfection by delivery from the debtor any time before the opening of the bankruptcy.35 Perfection is required for full and partial rights, such as ownership, a lien, or a mortgage, as well as easements. However, all problems are not solved even if Norwegian law applies. For example, the time of perfection must precede the opening of the bankruptcy, but the commencement of foreign insolvency proceedings may not necessarily be known in Norway. Two rules can address this problem. First, the problem may be that the debtor may enter into agreements and/or other arrangements with his creditors and third parties after having lost his authority. Under the new rules, a party in good faith can rely on the authority of the debtor, even with respect to the assets seized by the insolvency estate, if legal perfection is obtained no later than the day before the announcement of the foreign insolvency proceedings in Norway.36 In domestic matters, third parties are not protected even before the announcement of the bankruptcy. However, in Art. 19 of Reg. 848/2015, a somewhat similar rule limited to registered property can be found. Second, the problem may be the time that defines the period before the bankruptcy, in which dispositions may be more easily avoided than usual by the bankruptcy estate. In Norway, this period is typically the last three months before the filing for bankruptcy.37 The new rules determine that the defining point should not be before the foreign bankruptcy has been announced in Norway.38 Apparently, this applies even if foreign bankruptcy law applies (if a defining point is relevant at all under the applicable law). The new rules disadvantage foreign proceedings because creditors could win the debtor’s assets by individual actions even after the opening of the proceedings. This effect of the rules urges the insolvency practitioner to register and demand an announcement of the foreign proceeding without delay.39

See, for example, Section 23 of the Land Registration Act of 7 June 1935, No. 2, Section 6-11 of the Housing Cooperatives Act No. 39/2003, and Section 3-31 of the Aviation Act No. 101/1993. 35 For example, Section 3-2 of Mortgage Act No. 2/1980. 36 Section 164(1)(3)(a) of the new rules. 37 Sections 1-1 to 1-3 of the Satisfaction of Claims Act. 38 Section 164(1)(3) of the new rules. 39 Section 172 of the new rules. 34

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Debts

The Norwegian rules on a creditor’s right to set-off in bankruptcy are quite liberal. Still, no special choice of law rules that point to foreign law with regard to such set-offs exists.40 Therefore, Norwegian law will be applied quite frequently. Obviously, Norwegian law in this respect will apply in Norwegian bankruptcies. However, if the claim of the creditor demanding a set-off is considered to be in Norway, Norwegian rules apply.41 Such is the case if action must be brought against the creditor in Norway42 or the claim, otherwise, must be considered to be in Norway, for example, because the creditor has his COMI in Norway.43 The travaux préparatoires even suggest that Norwegian insolvency law with respect to set-off should apply if action could have been brought in Norway, save for the creditor’s foreign bankruptcy.44 In Norwegian law, the right to set-off in bankruptcy is limited if the debtor’s estate decides to fulfil the debtor’s unfulfilled current contracts, or if the related transactions are void in bankruptcy.45 The choice of law rule is correspondingly limited. Similarly, no special rule on the applicable law with respect to payment systems exists. The Regulation here points to the law of the payment systems.46 However, the travaux préparatoires assume that this is the same choice of law that follows from the EU law implemented in this field.47 D.

Employment Contracts

The effects of foreign insolvency proceedings on employment contracts and employment relationships shall be governed solely by the law of the state as applicable to the contract of employment.48 The Norwegian choice of law often reflects Rome I Regulation,49 but not always.50 Compare Art. 9 of Reg. 848/2015. Section 164(1)(3) of the new rules, Prop. 88 L (2015-2016), p. 63. 42 There could be a venue in Norway, for example, based on Section 4-4 of the Dispute Act or Section 1-9(1)(d) of the Enforcement of Claims Act of 26 June 1992, No. 86. 43 Prop. 88 L (2015-2016), p. 63. 44 Ibid. 45 Ibid. 46 Art. 12 of Reg. 848/2015. 47 Prop. 88 L (2015-2016), p. 63, referring to Section 4-3 of Payment Systems Act No. 99/1999 and Section 3 of Stock Exchange Act No. 74/2007. 48 Section 169 of the new rules, which is in accordance with Art. 13(1) of Reg. 848/2015. 49 Arts. 8 and 9 of Reg. (EC) No 593/2008 of the European Parliament and of the Council on the Law Applicable to Contractual Obligations (Rome I); Prop. 88 L (20152016), p. 73-74. 40 41

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Faraz Ahmed Ali / Erik Røsæg E.

Pending Lawsuits or Arbitral Proceedings

Section 165 of the new rules is consistent with Art. 18 of Reg. 848/2015, such that foreign insolvency proceedings have the same effects on pending lawsuits or arbitral proceedings in Norway as the equivalent Norwegian procedures. Hence, foreign debt settlement, restructuring proceedings, and analogous proceedings will have no effect on pending cases. However, bankruptcy and analogous proceedings will have an effect on pending cases if “the estate of the claimant is declared bankrupt and the subject matter of the dispute forms part of the bankrupt estate”51; the action should then be stayed. F.

Honoring Obligations to the Debtor

Norwegian law governs situations in which a person honors an obligation to the debtor instead of the insolvency practitioner.52 The obligation is deemed to have been discharged if the person can prove that he did not know nor ought to have known that the insolvency proceedings had commenced.53 This rule also applies to the submittal of a dismissal or a similar notice to the debtor in a case in which such a notice must be entered within a certain time. The provision differs from Art. 31(2) of Reg. 848/2015 but is accordance with Norwegian domestic bankruptcy law. G.

Powers of the Insolvency Practitioner

The insolvency practitioner’s powers are not governed by lex fori concursus in the new rules.54 As a main rule, the insolvency practitioner has the same powers in Norway as a Norwegian insolvency practitioner, and he will be able to administer, control, and liquidate the debtor’s assets.55 Norwegian authorities may require a copy of the document affirming the appointment of the foreign insolvency practitioner.56

50 The Norwegian Supreme Court recently applied the law of the flag in an employment conflict (HR-2016-1251-A). 51 Section 16-16(1)(c) of the Dispute Act. 52 Section 166 of the new rules. 53 Section 100 of the Bankruptcy Act. 54 Sections 164 and 171 of the new rules. 55 Ibid. 56 Section 171(2). Similar rules can be found in Art. 22 of Reg. 848/2015 and Art. 15(2)(b) of the UNCITRAL Model Law.

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V.

Recognition and Enforcement

The foreign insolvency proceedings defined in Section 163 of the new rules are recognized in Norway without the use of any formal procedure, such as an exequatur.57 The same applies to particular decisions in the insolvency proceedings.58 However, the choice of law rules may still give Norwegian law precedence.59 The new rules require that reciprocity should be ensured.60 The reciprocity requirement is fulfilled if the foreign state recognizes the corresponding proceedings that are opened in Norway. Recognition and enforcement may be denied if the effects of such a recognition or enforcement would be manifestly contrary to public policy.61 Such limitations in recognition are in line with Art. 33 of Reg. 848/2015, but the Norwegian exception is wider.

VI. Territorial Insolvency Proceedings In addition to the main insolvency proceedings, a territorially limited proceeding may be opened. The idea is to facilitate and distribute the proceedings and, perhaps, to apply the local law to the best extent possible. Territorial insolvency proceedings in Norway can be opened if insolvency proceedings cannot be opened where the debtor has his main center of interest (COMI) or if a Norwegian creditor of the debtor’s commercial activity62 in Norway requests it. As regards foreign companies registered in Norway, territorial insolvency proceedings can also be opened in Norway if a main insolvency procedure at the debtor’s COMI exists, but only at the request of a Norwegian creditor of the debtor’s commercial activity in Norway or the insolvency practitioner.63 For such insolvency proceedings, ordinary Norwegian insolvency law applies.64 Territorial proceedings in Norway are limited to bankruptcy proceedings,65 so the possibility of territorial debt settlements, as prescribed in Art. 3 of Reg. 848/2015, is excluded. Nevertheless, to ensure uniformity, the foreign insolvency See Section II.C above. Section 167 of the new rules. 59 See Section IV above. 60 Section 163(1)(f) of the new rules. 61 Section 170 of the new rules. 62 What constitutes a relevant activity in this context is not necessarily the same as what constitutes a relevant activity when main insolvency proceedings are established, see Prop. 88 L (2015-2016), p. 56. 63 Section 161 of the new rules. 64 Section 162 of the new rules. 65 This rule is the same as that in Art. 3(3) of Reg. 1346/2000. 57 58

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Faraz Ahmed Ali / Erik Røsæg practitioner may request that the Norwegian secondary proceedings should attempt compulsory debt settlement if this is the outcome of the main proceedings.66 Foreign territorially limited insolvency proceedings are recognized in Norway.67 Thus, Norwegian main insolvency proceedings will not attempt to seize the property seized in the foreign proceedings. Any creditor and insolvency practitioner shall have the right to lodge their claims in any Norwegian main or territorial insolvency proceeding.68 The payments of dividends are coordinated.69 Any surplus remaining assets in a Norwegian insolvency proceeding will be transferred to the foreign insolvency practitioner.70 A duty of cooperation with foreign insolvency practitioners exists.71

VII. Concluding Remarks The new rules are mainly inspired by Reg. 1346/2000 and Reg. 848/2015 (and thereby the UNCITRAL Model Law on Cross-Border Insolvency), but they contain some important differences. Thus, Norwegian courts may rebut international jurisdiction if the COMI is not situated within the jurisdiction of the commencing state. Still, the effect of Reg. 848/2015 is significant in some fields, such as the jurisdiction rule to ensure harmonization and avoid parallel proceedings. The applicability of the new rules is a compromise between Art. 1 of Reg. 1346/2000 and Art. 1 of Reg. 848/2015. As such, debt settlements and reorganization procedures are included, but they leave out some of the key features of Art. 1 of Reg. 848/2015 (e.g., interim proceedings). The reason is to preserve the consistency between national and international proceedings. The Norwegian choice of law rules differ significantly from Reg. 1346/2000 and Reg. 848/2015: lex fori concursus mainly governs the powers of the debtor and which assets are a part of the insolvency proceedings. Norwegian law governs nearly all the other effects and questions relating to Norway, and the foreign insolvency proceeding will have the same effects as an equivalent Norwegian insolvency proceeding. This includes staying of individual procedures to avoid individual actions against the debtor’s assets. Some of the choice of law rules in Arts. 8-18 of Reg. 848/2015 are reproduced in the new rules, but not all. The recognition and enforcement rules mostly operate according to Reg. 848/2015, but the choice of law rules reduce the need for foreign decisions. After all, Norwegian courts will have jurisdiction in most of the cases.

Section 162(2)(3) of the new rules. Section 168 of the new rules. 68 Section 174 of the new rules. 69 Ibid. 70 Ibid. 71 Section 173 of the new rules. 66 67

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NATIONAL REPORTS ________________

OBB PERSONENVERKEHR A.G. V. SACHS: CONTINUITY AND UNANSWERED QUESTIONS FOR FOREIGN SOVEREIGN IMMUNITY IN THE UNITED STATES Marc M. ARKIN*

I. II. III.

VI.

Introduction Background: OBB Personenverkehr A.G. v. Sachs in Context The Foreign Sovereign Immunities Act and the “Restrictive” Theory of Sovereign Immunity A. Case Law Background B. The Tate Letter from the U.S. State Department C. The Foreign Sovereign Immunities Act of 1976 The Supreme Court Decision in OBB Personenverkehr A.G. v. Sachs A. Facts and Lower Court Opinions B. The Supreme Court Opinion Suits against Foreign Sovereigns and Their Instrumentalities after Sachs A. Implications of the “Gravamen” Test B. Choice of Law under the FSIA C. Remaining Questions about Agency and Attribution Conclusion

I.

Introduction

IV.

V.

In OBB Personenverkehr A.G. v. Sachs,1 the first decision of its 2015-2016 term, the Supreme Court unanimously resolved an issue of sovereign immunity that had divided the lower courts, namely when is a lawsuit brought under the United States Foreign Sovereign Immunities Act of 1976 (“FSIA” or the “Act”) “based upon” a * Professor, Fordham University School of Law. My thanks to my research assistant, Brandon R. COYLE, who provided extremely helpful editorial and proofreading assistance on this article. 1 136 S.Ct. 390 (2015).

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Printed in Germany

Marc M. Arkin commercial activity of a foreign state carried out in the United States, rendering the foreign sovereign entity subject to suit in U.S. courts to the same degree as any other commercial actor in the marketplace.2 The lawsuit, brought against Austria’s state-owned railroad, arose from a train accident in Austria, although the California plaintiff had purchased her ticket through the internet from a Massachusetts travel agent that represented a consortium of European railroads, including defendant OBB Personenverkehr (“OBB”). The case presented two issues for consideration. First, when are the domestic commercial activities of an independent entity attributable to a foreign state or its instrumentality for purposes of the FSIA. Second, when is a tort claim for personal injuries “based upon a commercial activity carried on in the United States” under the commercial activity exception to sovereign immunity in the FSIA. Ultimately, the court avoided the first and gave a narrow answer to the second, disappointing those who had hoped for a sweeping resolution to both questions. Instead, the Court repeated its longstanding position that “an action is «based upon» the «particular conduct» that constitutes the «gravamen» of the suit” where the “gravamen” is defined as the “core” or “essentials” of the plaintiff’s claim.3 In doing so, the Court rejected the position, adopted by many lower courts, particularly in actions against foreign common carriers, that suits could be “based upon” any domestic commercial conduct that comprised an “element” of the plaintiffs” claim. The result authoritatively restores a narrow reading of one of the Act’s three commercial exceptions to sovereign immunity and makes it more difficult to bring actions against foreign states or their instrumentalities for conduct or injuries occurring abroad that involve limited elements of commercial conduct in the United States. The result in Sachs also brings the United States into greater conformity with international practice regarding jurisdiction over foreign states when those states cause injury while engaged in commercial activity.4 Indeed, as Professor Andreas Lowenfeld observed, “[o]ne may fairly say that the overall legislative purpose of the Foreign Sovereign Immunities Act is to strike a balance between protecting the rights of litigants by offering them an appropriate forum and avoidance of assertions of jurisdiction that would be perceived as exorbitant abroad.”5 This is particularly important given the well-known plaintiffs’ preference for a

28 U.S.C. §1602 et seq. 136 S.Ct. at 396. 4 See. e.g. Transcript of Oral Argument, October 5, 2015 at 28, et seq., Sachs, (No. 13-1067), European Convention on State Immunity, May 16, 1972, 1495 U.N.T.S. 182, 11 I.L.M. 470 (entered into force June 11, 1976) Articles 4(1). 5(1), 6(1), 7(1), 8, 11, 12, and 14 (requiring a fairly strict link to the forum state). 5 A. LOWENFELD, International Litigation And Arbitration, 743 (3d ed. 2006); see also J.W. DELLAPENNA, Suing Foreign Governments And Their Corporations, 224 et seq. (2d ed. 2003) (“The apparent intention in this first clause [of § 1605(a)(2)] was to authorize jurisdiction over any event occurring within a single integrated transaction having substantial connection with the United States, regardless of where the problem in the transaction might arise”). 2 3

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. U.S. forum.6 In this case, the plaintiffs’ jurisdictional argument came perilously close to a recently rejected and controversial theory of general jurisdiction, namely, “doing business jurisdiction.”7 Personal jurisdiction over OBB was based on business activities within the California forum that were not directly related to the plaintiff’s claim and, ultimately, did not bear the “substantial connection” with the United States required by the FSIA.8 Indeed, on the facts presented, it is unlikely that the defendant’s limited forum activities would be sufficient to sustain suitrelated (or specific) jurisdiction over an ordinary commercial actor, much less general jurisdiction over such an actor. It would be awkward, to say the least, to permit suit over a foreign sovereign or its instrumentality on grounds that would not support personal jurisdiction over an ordinary private defendant, whether domestic or foreign.

II.

Background: OBB Personenverkehr A.G. v. Sachs in Context

In many ways, the result in Sachs was a foregone conclusion given the Supreme Court’s 1993 decision in Saudi Arabia v. Nelson9 which first adopted the gravamen test in the context of the commercial activity exception to the FSIA. Indeed, it initially appeared that the Court had granted review of Sachs in order to clarify the question of attribution – when one entity’s conduct could be attributed to another for purposes of judicial jurisdiction, particularly in the context of internet sales.10 Instead, the Court backed away from the thorny attribution question and resolved the case solely on the ground that the statutory requirement that plaintiff’s claim be “based upon” domestic commercial conduct was not satisfied by the single element of her domestic ticket purchase, even if it was assumed that the sale of the ticket in California was attributable to OBB. In a broader perspective, the case falls within a substantial and growing line of decisions dating from the last quarter of the twentieth century in which the Court has narrowed the window for suit against foreign

6 See, e.g. L.J. SILBERMAN, Developments in Jurisdiction and Forum Non Conveniens in International Litigation: Thoughts on Reform and a Proposal for a Uniform Standard, 28 Tex. Int’l L.J. 501, 502 (1993). 7 E.g. Goodyear Dunlop Tire Operations, S.A. v. Brown, 131 S.Ct. 2846 (2011); A.R. STEIN, The Meaning of “Essentially at Home”, in Goodyear Dunlop, 63 S. Car. L. Rev. 527 (2012); K.M. CLERMONT/ J.R.B. PALMER, Exorbitant Jurisdiction, 58 Me L. Rev. 474 (2006). 8 J.W. DELLAPENNA (note 5), at 224 et seq. 9 507 U.S. 349 (1993). 10 See, e.g. Brief of the Governments of the Kingdom of the Netherlands and the Swiss Confederation as Amici Curiae in Support of the Petitioner at (i), Sachs, 136 S.Ct. 390 (No 13-1067).

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Marc M. Arkin defendants in U.S. courts11 in areas such as forum selection clauses, limitations on personal jurisdiction over defendants, and the revival of the canon of statutory interpretation against the extraterritorial application of U.S. law. Taken together, they represent both an effort to check domestic parochialism and an affirmation of the important role of international comity in U.S. law. For example, as international commerce became a more significant factor in the world economy in the latter part of the twentieth century, the Supreme Court faced the problem of divergence between U.S. domestic practice and international norms regarding negotiated contractual forum selection clauses, a form of consent to personal jurisdiction. In The Bremen v. Zapata Off-Shore Co.,12 the underlying dispute involved a contract between a U.S. drilling company and a German maritime towing company for the transport of an oil drilling rig from the Gulf Coast of the United States to the Adriatic Sea off Italy. The contract specified an English forum but, after the rig was damaged in a storm, the aggrieved U.S. plaintiff brought suit in Florida, where the German ship had sought refuge with its damaged tow, attaching the vessel to obtain jurisdiction under maritime law. Until The Bremen, U.S. decisional law largely disfavored enforcement of forum selection clauses, even in commercial contracts, if the plaintiff had chosen to sue in a court that was otherwise properly vested with jurisdiction over the subject matter and the defendant. Citing “present-day commercial realities and expanding international trade,” the Court held that a forum selection clause in a “freely negotiated private international agreement, unaffected by fraud, undue influence, or overweening bargaining power” should be enforced “absent a strong showing that it should be set aside.”13 In the ensuing years, The Bremen’s approach was extended both to passenger tickets14 and to general domestic practice in both state and federal courts.15 Ironically, as plaintiff herself conceded, her case is now an outlier because OBB and other common carriers responded to her lawsuit by inserting forum selection clauses in their tickets.16 11 See, e.g. L.J. SILBERMAN, Daimler A.G. v. Bauman: A New Era for Judicial Jurisdiction in the United States, in A. BONOMI/ G.P. ROMANO (eds.) Yearbook of Private International Law, Vol. XVI (2014/2015), p. 1. 12 407 U.S. 1 (1972). The case fell within the admiralty jurisdiction of the federal courts and therefore was governed by federal law. 13 Id. at 12. 14 Carnival Cruise Lines v. Chute, 499 U.S. 585 (1991) (extending The Bremen to validate a forum selection clause contained in a ticket sold to a passenger on an ocean cruise). But see Lauro Lines s.r.l. v. Chasser, 490 U.S. 495 (1989) (in a lawsuit by domestic plaintiffs arising from a terrorist incident aboard a cruise ship, declining to enforce the forum selection except on appeal from a final judgment from plaintiffs’ chosen forum). 15 E.g. Atlantic Marine Const. Co., Inc. v. United States District Court for the Western District of Texas, 134 S.Ct. 568 (2013) (detailing enforcement mechanisms in federal court for forum selection clauses); Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22 (1988). 16 Transcript of Oral Argument (note 4), at 54 et seq. (“As the United States told the Court at the cert. stage of this case, all of these tickets now are governed by a forum selection clause provision, so you’ll never see a case like this again, not only in the railroad context, but even in the airline industry.”).

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. When defendant does not consent to suit in the forum, U.S. courts assert personal jurisdiction primarily based on the defendant’s purposeful or foreseeable contacts with the forum, a test ultimately governed by the “due process” guarantees of the U.S. Constitution.17 Recent developments in this area and their limiting effect on suits against foreign defendants in U.S. courts were extensively discussed in last year’s Yearbook, to which the reader is referred.18 To provide a brief summary for present purposes, in the area of “specific jurisdiction” when the lawsuit arises from or is related to defendant’s forum conduct – generally referred to as establishing “minimum contacts” with the forum19 – the Court’s 1987 decision in Asahi Metal Industry Co. Ltd. v. Superior Court of California,20 ushered in a series of cases that stressed the unique burdens faced by a foreign defendant forced to submit its dispute to the U.S. legal system. Asahi initially involved a tort suit arising out of a California motorcycle accident. By the time it reached the Supreme Court, the case was reduced to an action for indemnity between a Taiwanese tire maker and its supplier, a Japanese valve maker, the other parties having settled their claims. Although the justices divided sharply regarding whether the Japanese defendant had established sufficient contacts with the California forum through the sale of its valves to the tire maker – which in turn sold the finished tires to the maker of the motorcycle for potential California distribution – the Court held that it was “unreasonable” to require the Japanese defendant to submit its overwhelmingly foreign dispute to the U.S. courts for resolution and that the California courts accordingly lacked personal jurisdiction whether or not the so-called “minimum contacts test” was satisfied. “Reasonableness” was quickly criticized as a far too open-ended test to act as a significant check on the lower courts.21 Indeed, a separate reasonableness check was necessary in the first place only because courts were pressing the minimum contacts test to its outer limits. Asahi notably failed to resolve the question of the level of contacts necessary to assert personal jurisdiction over participants in the “stream of commerce” (or chain of distribution) and in 2011, the Court revisited the problem in another case with international connections and equally inconclusive results. In J. McIntyre Machinery, Ltd. v. Nicastro,22 a plurality of the Court found that in a lawsuit based on an injurious product, the defendant foreign manufacturer must have aimed its conduct at the domestic forum state in order to be subject to specific personal U.S. Const., Amends. V, XIV (affecting the federal government and the state governments respectively). Note, in the present context it is unclear whether foreign states are entitled to “due process,” Republic of Argentina v. Weltover, Inc., 505 U.S. 607, 619 (1992). 18 L.J. SILBERMAN (note 11), at 1 et seq. 19 International Shoe Co. v. Washington, 326 U.S. 310 (1924). 20 480 U.S. 102 (1987). Asahi and its two-step approach has been extensively criticized. See, e.g. L.J. SILBERMAN, Two Cheers for Inernational Shoe (and None for Ashi): An Essay on the Fiftieth Anniversary of International Shoe, 28 U.C. Davis L.Rev. 755, 760 (1995). 21 A.L. PARRISH, Sovereignty, Not Due Process: Personal Jurisdiction over Nonresident Alien Defendants, 41 Wake Forest L. Rev. 1, 22-24 (2006). 22 131 S.Ct. 2780 (2011). 17

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Marc M. Arkin jurisdiction there;23 personal jurisdiction could not be based on the manufacturer’s undifferentiated efforts to serve the U.S. market as a whole, at least when plaintiff had no cause of action under federal (as opposed to state) law.24 The result in McIntyre was that a British manufacturer of metal recycling machines that ostensibly targeted the U.S. market as a whole through an independent Ohio distributor was not subject to suit in the state of New Jersey for an accident caused there by one of its machines, when its contacts with the state were apparently limited to a single machine shipped to New Jersey by the distributor. The decision effectively insulated the foreign manufacturer from suit anywhere in the United States based on the plaintiff’s claim.25 Although it is difficult to know whether this result will survive the recent change in Supreme Court personnel, both the McIntyre plurality and concurrence expressed concern for the precedent that the case might set in the context of global internet marketing through intermediaries. Concerns were especially strong for small foreign producers who might be swept into the U.S. courts as a result of the activities of mass internet distributors such as Amazon, a concern that initially appeared in Sachs as well. The dissent, for its part, argued that in the mirror image case, European courts would undoubtedly assert jurisdiction over the manufacturer at the place of injury and the asymmetry created a systemic unfairness. Thus, international concerns permeated the opinion; its ultimate resolution strongly favored the foreign defendant at the cost of the domestic plaintiff. Having left the matter without definitive resolution, it is possible that in future cases the Court could again invoke “reasonableness” as a check on both the expansive view of permissible jurisdiction advocated by the dissent and the parade of horribles contemplated by both the plurality and the concurrence just as it did in Asahi. However, such an ad hoc approach provides scant comfort to the international community. Moreover, the Court’s current decisions have not treated considerations of reasonableness as a separate factor when evaluating the more aggressive assertions of jurisdiction by lower state and federal courts. Instead, in its most recent decisions the Court has focused solely on whether the defendant established sufficient contact with the forum for either general or specific jurisdiction, leaving the continued existence of a two-step test in some doubt. In the area of so-called “general jurisdiction” where personal jurisdiction is based on defendant’s forum activities unrelated to the matter under suit the Supreme Court has recently decided two cases involving foreign defendants that appear to have sounded the death knell for so-called “doing business” jurisdiction 23 Since in most suits personal jurisdiction in federal court is based on the jurisdictional rules of the state in which the federal court sits, this rule holds equally for state and federal courts. See Fed. R. Civ. P. 4(k)(1). 24 See Fed. R. Civ. P. 4(k)(2) “For a claim that arises under federal law, serving a summons or filing a waiver of service establishes personal jurisdiction over a defendant if: (A) the defendant is not subject to jurisdiction in any state’s courts of general jurisdiction; and (B) exercising jurisdiction is consistent with the United States Constitution and laws”. 25 It was not subject to general jurisdiction because it was not “essentially at home” anywhere in the United States, see infra note 26 et seq. and accompanying text. At the same time, there was no state where it had established sufficient suit-related activities and the Ohio distributor had gone bankrupt.

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. and raised the bar for asserting personal jurisdiction over foreign corporate defendants in lawsuits arising from activities unrelated to the defendants’ in-state conduct. These cases have the potential for far greater significance in limiting the exorbitant reach of U.S. courts than the Court’s recent specific jurisdiction decisions. The first, Goodyear Dunlop Tires SA v. Brown26 was a lawsuit on behalf of two North Carolina residents who died in an accident in France allegedly caused by the malfunction of a Turkish-manufactured tire. The state of North Carolina asserted personal jurisdiction over the independent foreign subsidiaries of Goodyear, itself a U.S. corporation, based on the continuous and systematic flow of their products unrelated to the suit into North Carolina. The Supreme Court unanimously rejected this assertion of jurisdiction as exorbitant, instead holding that for a corporate defendant to be subject to suit for conduct unrelated to its forum activities, its connection to the forum must be so significant that it is essentially “at home”27 Although the precise contours of this standard remain to be articulated, it appears that absent extraordinary circumstances, a corporation’s “home” is limited to its place of incorporation and its principal place of business, limiting the reach of U.S. process significantly and reducing an area of jurisdictional friction between the United States and its trading partners. More recently, the Court elaborated on Brown in Daimler A.G. v. Bauman,28 a suit in California federal court against the German automaker alleging that it was responsible for international human rights violations committed by its independent Argentine subsidiary in Argentina. Plaintiffs argued that personal jurisdiction in California was properly based on the in-state activities of Daimler’s U.S. distributor, an independent subsidiary of the German carmaker, and the Ninth Circuit agreed. Reversing the Court of Appeals, the Supreme Court held that even if the U.S. distributor’s California activities subjected the distributor itself to general jurisdiction in California and even if those activities were fully attributed to Daimler, party concessions that the Court accepted with scepticism in the context of its world-wide presence, Daimler’s California activities were not sufficient to render the German parent “essentially at home” for the purposes of general jurisdiction.29 As the concurrence pointed out, a test based on worldwide business activity renders large multinational companies virtually immune from suit in the United States unless the claim at issue arises from their domestic conduct in a given state.30 In Daimler the Court again highlighted the international context of the case31 and struck a balance favoring resolution of the claims in a foreign forum more closely related to the dispute. It should be added that in both of these cases involving harm caused by foreign entities outside the United States, the courts – and the parties – also had the discretionary tool of forum non conveniens at their disposal to dismiss

131 S.Ct. 2846 (2011). Id. at 2851. 28 134 S.Ct. 746 (2014). 29 Id. at 758. 30 Id. at 722 (Sotomayor, J. concurring). 31 Id. at 758. 26 27

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Marc M. Arkin the case in favor of a more appropriate forum for resolution should personal jurisdiction have been upheld.32 In fact, had Daimler gone forward to reach the merits, the underlying federal human rights claims would presumably have been subject to dismissal as a result of another restrictive development in international litigation in the United States, namely the Supreme Court’s revival of the presumption against extraterritorial application of U.S. statutory law in the absence of a clear congressional statement giving the law application outside U.S. territory. The presumption explicitly seeks to curtail the reach of American law in the interest of reducing the potential for international conflict and is a further example of the enhanced importance of international comity in U.S. decisional law. It is, of course, textbook law that the U.S. Congress has the constitutional authority to enact laws that reach beyond the territorial boundaries of the United States even in violation of international law.33 Nevertheless, since the early nineteenth century, domestic statutory interpretation has been governed by a dual canon: first, “An act of Congress ought never to be construed to violate the law of nations if any other possible construction remains;”34 and second, “The law of no nation can justly extend beyond its own territories, except so far as regards its own citizens.”35 As is well known, the territorial principle fell into desuetude in both domestic and international practice in the early twentieth century36 and was supplanted by prescriptive jurisdiction based on broader considerations including the effects of defendants’ extraterritorial conduct within the regulating state’s territory.37 However, by the middle of the twentieth century the potential for international conflict had become manifest as a result of the aggressive application of national regulatory regimes.38 Although the lower courts experimented with a variety of limiting doctrines,39 in its 1991 decision in EEOC v. Arabian American Oil Company

See, e.g. Piper Aircraft Co. v. Reyno, 454 U.S. 235 (1981). EEOC v. Arabian American Oil Co., 499 U.S. 244, 258 (1991). 34 Murray v. The Schooner Charming Betsy, 6 U.S. 64, 118 (1804) (Marshall, C.J.). 35 The Appollon, 22 U.S. 362, 370 (1824) (Story, J.). 36 See, e.g. The Case of the S.S. “Lotus” (France v. Turkey), Judgment 9, 1927, P.C.I.J., (ser. A.) No. 19 et seq., (1927) cf.; United States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir.1945); Restatement (First) of Conflict of Laws, § 65 (1934). 37 Restatement (Third) of the Foreign Relations Law of the United States, § 401 to 404 (1987). 38 See. e.g. United States v. Imperial Chemical Industries, 105 F.Supp. 215 (S.D.N.Y. 1952); British Nylon Spinners Ltd. v. Imperial Chemical Industries, Ltd. I, UK Court of Appeal, 1952 [1953] Ch. 19; British Nylon Spinners Ltd. v. Imperial Chemical Industries, Ltd. Chancery Division, 1954 [1955] 1 Ch. 37, otherwise collectively known as the Nylon Patent Cases. See also O. KAHN-FREUND, English Contracts and American Antitrust Law The Nylon Patent Case, 18 Modern L.Rev. 65 (1955). 39 E.g. Timberlane Lumber Co. v. Bank of America, N.T. & S.A., 549 F.2d 597 (9th Cir. 1976) (balancing test for extraterritorial application of antitrust laws). 32 33

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. (“Aramco”),40 the Supreme Court ushered in a renewed emphasis on restraint in the application of U.S. law by relying on the interpretive canon against extraterritoriality for the first time in decades.41 In Aramco, the Court refused to extend the protections of U.S. anti-discrimination laws to a U.S. citizen working in Saudi Arabia for a U.S. company where the allegedly discriminatory acts occurred in Saudi Arabia, stating “«legislation of Congress unless a contrary intent appears is meant to apply only within the territorial jurisdiction of the United States.»”42 Finding no such legislative intent in the language of the statute, the Court declined to extend it to the facts before it. Among other matters, the Court has since used the same canon of statutory interpretation to limit the extraterritorial application of United States patent law43 and, in Morrison v. National Australia Bank44 to overturn a forty-year-old line of cases to limit the anti-fraud provisions of United States securities laws to domestic purchases or sales. Morrison was a case in which foreign plaintiffs sued a foreign corporation in the United States for securities fraud involving shares traded overseas on overseas exchanges. Plaintiffs had based their claim under U.S. law on the allegation that some of the deceptive conduct took place in the United States, a claim that the Supreme Court rejected based on its reading of Section 10(b) of the Securities Exchange Act. Although strictly speaking these cases do not implicate subject matter jurisdiction or personal jurisdiction,45 they effectively limit the types of cases that can be brought against foreign actors for conduct outside the United States that does not directly affect U.S. interests in the absence of clear congressional intent to regulate. Even in cases that arguably have some U.S. effects, the Court has shown significant concern for international comity and for limiting the potential risk of conflict with foreign

40 499 U.S. 244 (1991). The defendants were Delaware corporations. Arabian American Oil Company (“Aramco”) had its principal place of business in Saudi Arabia and was licensed to do business in Texas. Aramco Service Company had its principal place of business in Houston, Texas. 41 See, e.g. American Banana Co. v. United Fruit Co., 213 U.S. 347 (1909) (declining to extend the Sherman Act’s antitrust protections to anticompetitive conduct by U.S. nationals in Panama and Costa Rica aimed at controlling the U.S. market). 42 499 U.S. at 248 (quoting Foley Bros., Inc. v. Filardo, 336 U.S. 281, 285 (1949)). The result was later overruled legislatively. For a case in which language indicating extraterritorial intent appeared, see United States v. Weingarten, 632 F.3d 60 (2d Cir. 2011) involving a statute that criminalized “travel in foreign commerce...for the purpose of engaging in any sexual act...with a person under 18 years of age.” Antitrust laws form a notable exception to the canon against extraterritoriality, Continental Ore Co. v. Union Carbide, 370 U.S. 690 (1968). 43 Microsoft v. AT&T, Corp., 550 U.S. 437 (2007). 44 561 U.S. 247, 248 (2010) (“When a statute gives no clear indication of an extraterritorial application, it has none”). 45 Id. at 273, 254 (clarifying that a challenge to extraterritorial application of U.S. law is a motion for failure to state a claim rather than a motion for lack of subject matter jurisdiction as the Court stated in Hartford Fire Insurance Co. v. California, 509 U.S. 764 (1993)).

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Marc M. Arkin regulatory regimes.46 As a result, lower courts have become more vigilant in considering the effect of the presumption against extraterritoriality on the application of a wide range of regulatory statutes to actions involving international activity and parties.47 The Court has even applied the presumption against extraterritoriality to the Alien Tort Statute (“ATS”), a law that dates to the Judiciary Act of 1789 and which provides a cause of action to aliens for torts in violation of “the law of nations or a treaty of the United States.”48 In Kiobel v. Royal Dutch Petroleum,49 the Supreme Court rejected a suit brought by Nigerian nationals for conduct by non-U.S. corporations that took place in Nigeria, holding that the presumption against extraterritoriality was not displaced even when the statute in question was explicitly aimed at violations of international law or treaties to which the United States was a signatory. Rather, the Court found that the avoidance of international conflict was a paramount goal in interpreting the statute. Referring to protests by other nations concerning expansive application of the ATS, the Court remarked that the “presumption against extraterritoriality guards against our courts triggering such serious foreign policy consequences, and instead defers such decisions, quite appropriately, to the political branches.”50 Plaintiffs had, in fact, suggested that the case presented a sufficient connection to the United States since the companies had a significant if unrelated economic presence in the United States, permitting both jurisdiction to regulate and to adjudicate. Obliquely referring to this argument, the Court’s majority opinion concluded, “On these facts all the relevant conduct took place outside the United States. And even where the claims touch and concern the territory of United States, they must do so with sufficient force to displace the presumption against extraterritorial application.”51 Thus, the Court stressed restraint even when plaintiffs’ claims had some domestic connection, directly anticipating its approach in Sachs.

46 See F. Hoffmann-LaRoche Ltd. v. Empagran, S.A., 542 U.S. 155, 169 (2004) (finding that it would be unreasonable to apply the Foreign Trade Antitrust Improvement Act to claims of foreign plaintiffs whose losses were “independent” of domestic purchasers’ losses even though that was the “more natural” reading of the statute, and stating “[I]f America’s antitrust policies could not win their own way in the international marketplace for such ideas, Congress, we must assume, would not have tried to impose them, in an act of legal imperialism, through legislative fiat”). 47 See, e.g. RJR Nabisco Co., Inc. v. The European Community, 424 F.3d 175 (2d Cir. 2005), cert. granted Oct. 1, 2015, U.S. No. 15-138, argued Mar. 21, 2016 (extraterritorial application of the civil Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961 et seq.); Fresh Del Monte Produce Inc. v. Del Monte Foods, Inc., 15 Civ. 6820, N.Y.L.J. 120 748 804 492 at *1 (S.D.N.Y. decided Jan. 31, 2016) (declining to extend U.S. Lanham Act’s trademark protections extraterritorially to presumptively valid foreign trademarks). 48 Judiciary Act of 1789, ch. 20, § 9, 1 Stat. 73, 76 et seq. now codified at 28 USC § 1350. 49 133 S. Ct. 1659 (2013). 50 Id. at 1669. 51 Id.

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. OBB Personenverkehr A.G. v. Sachs fits comfortably within the arc of the Court’s restrained approach to the reach of the U.S. legal system. It represents another step in the push back against aggressive jurisdictional decisions on the part of lower courts, now in the context of suits against foreign sovereigns. Indeed, the concerns in many of these Supreme Court cases reappear in Sachs, including lessening international conflict, the complicating reach of the internet, and attribution of conduct from one entity to another. In order fully to understand the context of that decision, it is necessary to understand the U.S. approach to the issue of sovereign immunity currently embodied in the Foreign Sovereign Immunities Act of 1976.

III. The Foreign Sovereign Immunities Act and the “Restrictive” Theory of Sovereign Immunity A.

Case Law Background

According immunity from suit in U.S. courts to foreign sovereigns is a long established feature of domestic law, dating to the earliest days of the republic. Historically, like the rest of the international community, the United States granted foreign nations absolute immunity from suit in domestic courts, an approach based on international law’s recognition of the “perfect equality and absolute independence of sovereigns”52 and the resulting principle that “from this equality, [it follows] that no one [nation] can rightfully impose a rule on another [nation].”53 This rule of absolute immunity bottomed on international law continued in U.S. practice well into the twentieth century. For example, in 1926, in Berizzi Brothers Co. v. The Steamship Pesaro,54 the Supreme Court granted review to what was an otherwise ordinary commercial claim based on the failure of a merchant vessel to deliver a cargo accepted in Italy for carriage to New York. The Supreme Court upheld dismissal of the action on the sole ground that the vessel was owned by the government of Italy, stating that the principles of absolute immunity were “applicable alike to all ships held and used by a government for a public purpose, and that when for the purpose of advancing the trade of its people or providing revenues for its Treasury, a government acquires, mans, and operates ships in the carrying of trade, they are public ships in the same sense that warships are.”55 The Pesaro rested entirely on the Supreme Court’s understanding of international law; it did not contain any reference to foreign policy considerations or to the interests

The Schooner Exchange v. McFaddon, 11 U.S. 116 (1812). The Antelope, 23 U.S. 66, 122 (1825) (“No principle of general law is more universally acknowledged than the perfect equality of nations... It results from this equality that no one can rightfully impose a rule on another”). 54 271 U.S. 562 (1926). 55 Id. at 574. 52 53

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Marc M. Arkin of the U.S. government, which actually was divided on whether to accord immunity on the facts of the case. By the end of World War II as states resumed regular commercial contact with one another, the Supreme Court began to treat sovereign immunity as a matter of domestic foreign policy rather than international law, deferring to the executive branch in evaluating cases that raised the issue. For example, in the 1943 case of Ex Parte Peru,56 the Court ordered the release of a Peruvian vessel, reaffirming its prior holding that vessels owned by a foreign government were immune from suit in the United States, even if both the vessel and the claim were commercial in nature. Rather than relying on principles of international law, however, the Court stated that the U.S. State Department’s certification of the vessel’s immunity “must be accepted by the courts as a conclusive determination by the political arm of the Government that the continued retention of the vessel interferes with the proper conduct of our foreign relations.”57 Two years later, in Republic of Mexico v. Hoffman,58 a lawsuit involving a ship owned by the Mexican government but “in the possession, operation, and control of a private company under a contract with the government,” the Court denied immunity after the U.S. State Department declined to express any opinion about the claim. The Court again framed the issue as one entirely within the executive’s powers: It is therefore not for the courts to deny an immunity which our government has seen fit to allow, or to allow an immunity on new grounds which the government has not seen fit to recognize. The judicial seizure of the property of a friendly state may be regarded as such an affront to its dignity and may so affect our relations with it, that it is an accepted rule of substantive law governing the exercise of the jurisdiction of the courts that they accept and follow the executive determination that the vessel shall be treated as immune. But recognition by the courts of an immunity upon principles which the political department of government has not sanctioned may be equally embarrassing to it in securing the protection of our national interests and their recognition by other nations.59

B.

The Tate Letter from the U.S. State Department

Following the Supreme Court’s deferential approach in Ex Parte Peru and Mexico v. Hoffman, the U.S. State Department assumed substantial power both in enunciating the principles of sovereign immunity for the U.S. courts and in resolving individual cases sub judice. In fact, the State Department adopted a procedure under which it would make initial determinations of immunity based on submissions by foreign states attempting to claim immunity from U.S. jurisdiction. If the 318 U.S. 578 (1943). Id. at 589. 58 324 U.S. 30 (1945). 59 Id. at 35 et seq. 56 57

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. State Department concluded that the foreign state was entitled to immunity it would make a “suggestion” of immunity to the court in which the claims against the foreign state were pending; in turn, looking to Supreme Court precedent, those courts treated the State Department’s recommendations as binding.60 As the post-war era unfolded and international trade continued to grow, the absolute theory of sovereign immunity lost ground in the international community to the so-called “restrictive theory” under which states do not enjoy immunity for their private or commercial activities (jure gestionis) although they retain immunity for their sovereign or public acts (jure imperii). Under the restrictive theory, “immunity is confined to suits involving the foreign sovereign’s public acts, and does not extend to cases arising out of a foreign state’s strictly commercial acts.”61 In 1952, in a frequently cited letter by the Acting Legal Advisor to the Department of State, Jack B. Tate, the State Department abandoned its former foreign policy driven case-by-case approach and adopted the restrictive position. Even as it retained significant control over the evaluative process, the “Tate Letter”62 noted both the growing international acceptance of the restrictive theory and the increased involvement of state-owned enterprises in commercial dealings with private parties who, it was felt, were entitled to have their rights determined in U.S. courts. The Tate Letter concluded, It is realized that a shift in policy by the executive cannot control the courts but it is felt that the courts are less likely to allow a plea of sovereign immunity where the executive has declined to do so. There have been indications that at least some of the Justices [of the Supreme Court] feel that in this matter courts should follow the branch of the Government charged with responsibility for the conduct of foreign relations....63 Although the Tate Letter placed U.S. policy in the mainstream of developing international practice,64 it did not succeed in creating a workable domestic process to govern the resolution of claims against foreign states. First of all, the Tate Letter did not define the crucial distinction between jure imperii and jure actionis, a line 60 T. GUITTARI, The American Law of Sovereign Immunity, 111-121, 143-162, 174187 (New York, 1970) (collecting cases and commentary). 61 Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480, 487 (1983). 62 Letter from Jack B. Tate, Acting Legal Adviser, Department of State to Acting Attorney General Philip B. Perlman (May 19, 1952) reprinted in 26 Department of State Bull. 984 (1952); Alfred Dunhill of London v. Republic of Cuba, 425 U.S. 682, 711 (1976) (Appendix 2). 63 Id. 64 The restrictive theory is currently recognized by a substantial majority of nations, and has been codified in major multilateral treaty regimes. See European Convention on State Immunity (note 4); United Nations Convention on the Jurisdictional Immunities of States and Their Property, GA Res. 59/38 Annex, UN Doc. A/RES/59/38, 44 I.L.M. 803 (December 2, 2004); see also Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. et seq. 682, 701-704 (1976) (referring to the fact that U.S. policy was being brought into line with that of other countries).

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Marc M. Arkin that turned out to be difficult to draw in practice. Indeed, insofar as there was one, the distinction between a sovereign’s public and private actions came to rest on a detailed factual analysis of the transaction on which the claim for immunity was based. The United States became unique among the international community in leaving considerations of sovereign immunity to the diplomatic services rather than the courts and international law. What is more, by placing a factual inquiry at the forefront rather than foreign relations considerations, the Tate approach impinged on the judicial function without providing or following a stable set of background norms. As Justice Douglas pungently observed in a similar context involving the act of state doctrine, the State Department’s reasoning led the Court to become “a mere errand boy for the Executive Branch which may choose to pick some people’s chestnuts out of the fire but not others.”65 Reinforcing this dynamic, the State Department created a formal internal process in order to evaluate the growing number of requests for executive suggestions regarding sovereign immunity. Yet, despite its quasi-judicial aura of impartiality, the process was often captured by political and diplomatic pressures, yielding unpredictable results. In addition, even in cases that clearly fell outside the accepted bounds of sovereign immunity, significant procedural uncertainties remained regarding such mundane matters as how to serve process upon a sovereign, to what extent prejudgment attachments in support of jurisdiction and postjudgment attachments in support of execution were permitted, and what sovereign assets were absolutely immune from judicial process. Within the State Department itself, concern built over the inadequacy of mechanisms set up by the Tate Letter; at the same time, the international community had embarked on a wide-scale codification of sovereign immunity rules.66 Building on these developments, in the late 1960s, the Office of Legal Advisor in the State Department and the Foreign Litigation Section of the Civil Division of the Department of Justice began to study the potential for domestic legislation in the area. After a decade and a half of canvassing the field, study, and revision, the final bill was passed as the Foreign Sovereign Immunities Act of 1976. C.

The Foreign Sovereign Immunities Act of 1976

The FSIA codifies the American approach to the restrictive theory of sovereign immunity, setting forth rules and procedures for adjudicating claims against foreign states and “instrumentalities” in all U.S. courts, both state and federal, whether under state or federal law.67 It provides the exclusive route for both 65 First National City Bank v. Banco Nacional de Cuba, 406 U.S. 759, 773 (1972) (Douglas, J. concurring). 66 The international nature of the codification movement is demonstrated by the fact that the FSIA was soon followed by the UK State Immunity Act of 1978, and the state immunity laws of Singapore, South Africa, Pakistan, Canada, and Australia, as well as numerous multi-lateral efforts. 67 Verlinden v. Central Bank of Nigeria, 461 U.S. 480 (1983). 28 U.S.C. § 1441(d) provides for removal of a suit against a foreign entity claiming sovereign immunity from state to federal court so that the likelihood of a suit actually being heard in state court is

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. personal and subject matter jurisdiction over foreign states68 through a series of exceptions to the underlying norm of sovereign immunity from suit.69 The “most significant” of these exceptions is the commercial activity exception,70 which takes as its starting point the premise that “[u]nder international law, states are not immune from the jurisdiction of foreign courts insofar as their commercial activities are concerned.”71 The commercial activities exception plays a critical role in the FSIA because, unlike the tortious conduct exception, it is not limited to injuries that occur in the United States.72 Unfortunately, despite the decade or more of consideration, drafting, and revision, the FSIA is hardly a model of clarity or precision. The fundamental term “foreign state” – the entity entitled to immunity in the first place – is not defined with any precision in the Act although it is extended broadly to include both “a political subdivision of a foreign state or an agency or instrumentality of a foreign state.”73 These latter in turn are defined as “any entity... (1) which is a separate legal person, corporate or otherwise, and (2) which is an organ of a foreign state or a political subdivision thereof or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof” as long as it is “neither a citizen of a State of the United States...nor created under the laws of any third country.” Since the Act is silent as to the definition of a “foreign state”, courts have relied on The Restatement (Third) of Foreign Relations Law when the sovereign status of the defendant is in question. The Restatement defines a “state” as an “entity that has a defined territory and a permanent population, under the control of extremely limited. The FSIA also provides rules for service of process on foreign sovereigns that are binding in state courts. 28 U.S.C. § 1608. 68 Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 443 (1989); 28 U.S.C. § 1330(a) confers subject matter jurisdiction on the federal courts in cases involving foreign sovereigns without regard to citizenship or amount in controversy of any civil action against a foreign state or its instrumentality. 28 U.S.C. § 1330(b) provides that personal jurisdiction shall exist as to every claim over which there is subject matter jurisdiction under the Act, once service as prescribed in § 1608 of the Act has been effected. Confounding matters slightly, however, § 1605(a)(1) provides that a state may waive immunity even though waiver is not ordinarily available to cure the absence of subject matter jurisdiction. As in ordinary jurisdictional practice, an appearance does not in itself confer personal jurisdiction. § 1330(c). 69 28 U.S.C. § 1604. 28 U.S.C. § 1605 sets forth seven exceptions to immunity: (1) waiver; (2) when the action is based on commercial activity with specified links to the U.S.; (3) when the action is to recover property expropriated in violation of international law that is in the United States in connection with commercial activity carried on in the United States; (4) when rights in property in the United States obtained by succession or gift are at issue; (5) when the action concerns tortious conduct occurring in the United States by a foreign state or an employee of a foreign state acting within the scope of his or her employment, excluding discretionary acts, libel, and similar intentional torts; (6) actions to enforce arbitration agreements; (7) in certain situations involving terrorism. 70 Republic of Argentina v. Weltover, 504 U.S. 607, 611 (1992). 71 28 U.S.C. § 1602 (“Findings and Declaration of Purpose”). 72 28 U.S.C. § 1605(a)(5). 73 28 U.S.C. § 1603(a).

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Marc M. Arkin its own government, and that engages in or has the capacity to engage in, formal relations with other such entities.”74 The commercial activity exception to sovereign immunity has three separate clauses. 75 The first – the one at issue in Sachs – denies immunity in any case “in which the action is based upon a commercial activity carried on in the United States by a foreign state,” which in turn is defined to mean “commercial activity carried on by such state and having substantial contact with the United States.”76 The second denies immunity when the case is based “upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere,” while the third denies immunity when the action is based upon “an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.” The Ninth Circuit delphically explained the connection to the United States required by the three clauses as follows: the first entails a “nexus,” the second a “material connection,” and the third “legally significant acts.”77 Most commentary has simply framed the question as whether the state’s conduct demonstrates a sufficient “nexus” with the United States, often comparing the qualifications of the commercial activity exception to the qualifications for personal jurisdiction over ordinary commercial actors under due process and the minimum contacts test. Until the Supreme Court’s recent decisions on personal jurisdiction, it was possible to align the first clause with general jurisdiction while the other two present variations on specific jurisdiction.78 However, that first reading is now outdated. Suffice it to say that each provision requires a significant connection to the United States and that under current FSIA decisions, the domestic activity must bear a direct relation to the plaintiff’s claim. This, however, still leaves the question of what constitutes “commercial activity.” Unfortunately, the Act’s definition of “commercial activity” is famously unhelpful. It begins by stating that commercial activity “means either a regular course of commercial conduct or a particular commercial transaction or act,” adding that “[t]he commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose.”79 The crucial distinction between the “nature” and 74 The Restatement (Third) of Foreign Relations Law (note 37), § 201. See, e.g, Klinghoffer v. Achille Lauro, 937 F.2d 44 (2d Cir. 1991) (holding the the Palestine Liberation Organization did not meet these criteria.) On the other hand, there appears to be no requirement that the U.S. government have recognized an entity as a state in order for it to qualify as a state under the FSIA. Kadic v. Karadzic, 70 F.3d 232 (2d Cir. 1995), cert. denied 518 U.S. 1005 (1996). The following summary does not do justice to the substantial procedural complexities of the FSIA, including, inter alia, its provisions regarding service of process, attachment of property, avoidance of jury trials, as well as to the remaining enumerated exceptions to sovereign immunity. 75 28 U.S.C. § 1605(a)(2). 76 28 U.S.C. § 1603(e). 77 Terenkian v. Republic of Iraq, 694 F.3d 1122, 1127 (9th Cir. 1992); cert. denied sub nom. Pentonville Developers Ltd. v. Republic of Iraq, 134 S. Ct. 64 (2013). 78 E.g. A.F. LOWENFELD (note 5) (3d ed. 2006), at 740. 79 28 U.S.C. §1603(d).

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. “purpose” of an activity has been left to decisional law. In the leading case of Republic of Argentina v. Weltover, Inc.,80 the United States Supreme Court confronted the question of whether certain bonds issued by the Republic of Argentina as part of a plan to stabilize its currency was a “commercial activity” that had a direct effect in the United States, subjecting Argentina to suit in an American court on claims arising from its default on the bonds. In turning to the critical question of whether the acts in question were commercial, the Court looked back to its 1976 decision in Alfred Dunhill of London v. Republic of Cuba,81 decided shortly after the FSIA took effect. In Dunhill, the Court had found that the restrictive theory of sovereign immunity would not bar a suit based upon a foreign state’s participation in the marketplace in the manner of a private citizen or corporation; a foreign state engaging in commercial activities, “do[es] not exercise powers peculiar to sovereigns” but “only those powers that can also be exercised by private citizens.”82 In Weltover, Court explained that when a foreign sovereign does not act as the regulator of a market, but, rather, “in the manner of a private player within it,” the foreign sovereign’s actions are commercial within the meaning of the FSIA. Focusing on the distinction between the “nature” and “purpose” of activities, the Court noted that the question is not whether the foreign government is acting with a profit motive or with the aim of fulfilling uniquely sovereign objectives, but whether, whatever the motive, the actions in question are the type of conduct by which a private party engages in commercial activity. Referring to the time worn example, the Court stated that, whatever its public purpose, a state’s contract to buy boots or even bullets for its army is a commercial activity because private companies also buy such goods through sales contracts. Following this analysis, the Court had no difficulty dispatching Argentina’s argument that the bonds were a sovereign act because they were issued in order to fulfill its foreign exchange obligations and staunch a domestic credit crisis. Instead, the Court found that the bonds were “in almost all respects garden-variety debt instruments” in that they were held by private parties, they were negotiable, could be traded in the international market and promised a future stream of income.83 Argentina was subject to suit in U.S. courts for the default,84 a result that reverberates to this day. 504 U.S. 607 (1992). 425 U.S. 682 (1976). 82 Id. at 704. 83 504 U.S at 615. In Weltover, the Court repudiated earlier lower court dicta to the effect that the issuance of public debt instruments was always jure imperii. See Victory Transport Inc. v. Comisaria General de Abastecimientos y Transportes, 336 F.2d 354, 360 (2d Cir. 1964), cert. denied 381 U.S. 934 (1965). 84 The Weltover Court found sufficient “direct effect” in the United States from the plaintiffs’ designation of their accounts in New York as the place of payment and the fact that Argentina had made some payments into those accounts before announcing that it was suspending payment. Thus, New York was the place of performance for Argentina’s obligations. In addition the Court found that the connection to the United States was reinforced by the fact that the debt was payable in dollars, and that Argentina had appointed an agent in New York in connection with the bonds. Worthy of note, the Court rejected any requirement that the effect be “substantial” or “foreseeable” to place it within the terms of the Act. 80 81

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IV. The Supreme Court Decision in OBB Personenverkehr A.G. v. Sachs A.

Facts and Lower Court Opinions

In March 2007, Carol Sachs, a resident of the state of California, purchased a Eurail pass over the internet from Rail Pass Experts, a Massachusetts based travel company.85 Limited to non-Europeans, the Eurail pass allows holders unlimited passage on a consortium of thirty European railways (including OBB) that constitute the Eurail Group, which markets and manages the Eurail Pass Program directly and through travel agents such as Rail Pass Experts. The next month, Sachs travelled to Austria and there upgraded her ticket at a local train station. On April 27, 2007, Sachs arrived at the Innsbruck train station and attempted to board a moving train operated by the Austrian state-owned railway, OBB. She fell to the tracks through a gap in the platform and suffered injuries that ultimately required the amputation of both legs above the knee. Upon her return to the United States, Sachs filed suit against OBB in federal court in the Northern District of California. OBB moved to dismiss the action, claiming that the suit was barred by the doctrine of sovereign immunity under the FSIA. Both parties agreed that as an “agency or instrumentality” of Austria,86 OBB constituted a “foreign state” for purposes of the Act. Accordingly, the FSIA provided the sole avenue for suit against OBB in U.S. courts.87 Sachs argued that her claim fell within the FSIA provision that excludes from sovereign immunity actions “based upon a commercial activity carried out in the United States by the foreign state,”88 relying on the purchase of the Eurail pass from Rail Pass Experts. As noted earlier, her claim thus presented two threshold questions which were determinative of both personal jurisdiction over OBB and subject matter jurisdiction over the action: (1) whether the domestic activities of Rail Pass Experts could be imputed to OBB and (2) even if the activities of Rail Pass Experts could be imputed to OBB, whether Sach’s action was “based upon” a commercial activity carried out in the United States. Sach’s claim was cast in this way because of several limitations inherent in the FSIA. In ordinary terms, Sach’s claims centered on OBB’s tortious acts or omissions in connection with its commercial operation of the train and the boarding platform in Austria. Presumably, then, Sachs would have more naturally 85 OBB, along with 29 other European railways, is a member of Eurrail Group, an association responsible for marketing and managing the Eurrail Pass program. Eurail Passes allow their holders unlimited passage for a set period of time. They are available only to non-Europeans who may purchase them either directly from the Eurail Group or indirectly from a worldwide network of travel agents. 86 28 U.S.C § 1603(a) and (b). 87 Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. at 443. 88 28 U.S.C. § 1605(a)(2). Sachs based her claim solely on the first clause of the commercial activity exception and thereby waived consideration under the second or third. 136 S. Ct. at 394 n. 1.

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. asserted jurisdiction under the third clause of the commercial activity exception relating to any case based on an “act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.”89 However, Sachs could not demonstrate the requisite “direct effect in the United States” under existing decisional law interpreting the FSIA. By and large, courts have been reluctant to hold that consequential damages from a personal injury incurred abroad are sufficient to create a “direct effect” in the United States for the purposes of the third commercial activity exception to immunity under the FSIA.90 And, as mentioned earlier, Sachs was unable to assert jurisdiction under the FSIA’s tort exception since that provision “covers only torts occurring within the territorial jurisdiction of the United States.”91 As a result, because she could not bring suit based solely on OBB’s commercial activity in Austria, Sachs argued that her personal injury action was “based upon” the ticket sale in the United States. The lower federal courts divided sharply over the resolution of both threshold questions. In a split decision with a separate opinion on the part of each panel member and no binding rationale, the intermediate federal appellate court, the United States Court of Appeals for the Ninth Circuit, affirmed the trial court finding that the commercial activity exception to immunity did not apply. The full Ninth Circuit then ordered a rehearing en banc, and reversed the panel with three of the twelve circuit judges dissenting. Applying common law principles of agency, the en banc majority held that the sale of the Eurail pass by Rail Pass Experts could be imputed to OBB for the purpose of establishing that it carried on commercial activity in the United States. Further, the en banc court held that Sachs’s action was “based upon” the defendant’s commercial activity in the United States, given the nexus between her claim of injury and the sale of the Eurail pass. The court reasoned that under California law the domestic ticket sale was an essential element of her cause of action because it created the common carrier-passenger relationship that established OBB’s duty of utmost care to its passengers, in this case, Sachs.

28 U.S.C. § 1605 (a)(2). Zernicek v. Brown and Root, 826 F.2d 415, 418 (5th Cir. 1987); Jungquist v. Sheikh Sultan Bin Khalifa Al Hahayan, 115 F.3d 1020 (DC Cir. 1997). The standard is not so stringent in cases involving financial effects. Republic of Argentina v. Weltover, 504 U.S. 607 (1992); cf. M. WERTHAN/J. DEITCH/A. FUOSS, Note, Jurisdiction Over Foreign Governments: A Comprehensive Review of the Foreign Immunities Act, 19 Vanderbilt J. Transnat’l L. J. 119, 146 (1986) (“This interpretation of the direct effects provisions has resulted in courts allowing corporations a chance to recover financial losses incurred as a result of extraterritorial commercial activity of a foreign sovereign. Individuals who have suffered physical, emotional, and financial effects, however, have been denied resolution of their claims against similar entities for equally grievous harms”). 91 Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. at 441 (interpreting § 1605(a)(5)). 89 90

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The Supreme Court Opinion

The U.S. Supreme Court granted review of the decision and unanimously reversed the Ninth Circuit on the second question and therefore found it unnecessary to reach the first. Justice Roberts’s opinion rested primarily on the Court’s 1993 decision in Saudi Arabia v. Nelson.92 In that case, Saudi Arabia recruited Scott Nelson for employment as a monitoring systems engineer in a government-owned hospital in Saudi Arabia; Nelson was both recruited and signed the employment contract in the United States. Shortly after beginning his job in Saudi Arabia, Nelson discovered safety defects in the hospital’s oxygen and nitrous oxide lines and reported the problems to hospital officials. Nelson claimed he was wrongfully arrested, falsely imprisoned, and tortured by agents of the Saudi government in retaliation for his whistleblower activities. Upon their return to the United States, Nelson and his wife sued the Saudi government in federal court. They sought to establish jurisdiction over Saudi Arabia for the overseas torts under the first clause of the FSIA’s commercial activity exception, arguing that their claims were “based upon” the preceding domestic commercial activity, namely Nelson’s recruitment and signing of the contract in the United States, claiming among other things, that the domestic recruiters failed to warn him of the otherwise undisclosed dangers of his job. The Supreme Court rejected Nelson’s jurisdictional theory in language that seems dispositive of Sachs even though the Nelson majority opinion ultimately turned on the sovereign non-commercial character of the acts complained of, namely Nelson’s arrest, detention, and mistreatment by Saudi authorities. In order to reach the characterization issue, Nelson first had to identify the conduct on which the lawsuit was based. Since the FSIA contains no definition of the term “based upon,” the Nelson Court looked to dictionary definitions and lower court decisions for guidance, explaining that a court should identify the “«basis»” or “«foundation»” for a claim and that the “focus should be on the «gravamen» of the complaint.”93 The Court then proceeded to find that while the commercial recruitment activities “led to the conduct that eventually injured the Nelsons,” the suit was actually based on the Saudi sovereign acts of arrest and detention that injured them.94 The Court dismissed out of hand Nelsons’s claim of a separate cause of action based on the Saudi entities’ failure to warn of the “hidden dangers” dangers of his employment at the time he signed the contract in the United States, calling it “merely a semantic ploy” that would permit plaintiffs to “recast virtually any claim of intentional tort committed by a sovereign act as a claim of failure to warn, simply by charging the defendant with an obligation to announce its own tortious propensity before indulging it.”95 While Nelson clearly looked to the overall factual basis of the plaintiffs’ claims, it did not review Nelson’s sixteen causes of action to determine whether some of the claims contained elements that entailed proof of commercial activity in 507 U.S. 349 (1993). Id. at 356-357, quoting Black’s Law Dictionary, Random House Dictionary, and Callejo v. Bancomer, SA, 764 F.2d 890, 893 (5th Cir. 1985), respectively. 94 Id. at 358. 95 Id. at 363. 92 93

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. the United States nor did it engage in the preliminary choice of law inquiry to determine what those causes of action might be. Nevertheless, the opinion did contain some language that could be and was interpreted to support jurisdiction as long as a single element necessary to establish the plaintiff’s claim occurred in the United States. Thus, the Nelson court observed that the FSIA’s “based upon” language “is read most naturally to mean those elements of a claim that, if proven, would entitle a plaintiff to relief under his theory of the case.”96 Although in his opinion, Chief Justice Roberts tartly pointed out that Nelson’s “mention of elements – plural” was hardly an endorsement of the Ninth Circuit’s use of a single element test97 in fact, the confusion was natural. Nelson cited approvingly Santos v. Compagnie Nationale Air France,98 a case that endorsed a single element test at the same time that it rejected plaintiff’s claim that his injury at Orly Airport was “based upon” Air France’s execution of an airplane lease in the United States that required Santos’s employer to supply maintenance workers at Orly. Although the Santos court held that the connection between the domestic lease and the accident was too tenuous to support jurisdiction, it cited approvingly cases “that have held that the national airline of a foreign government is subject to the jurisdiction of United States courts if it or its agents sell a plane ticket or otherwise make travel arrangements in the United States (creating a duty of care in providing safe passage) and the flight crashes during travel outside the United States.”99 Indeed, Santos noted that the “House Report that accompanied the Immunities Act states that the making of a «single contract» in the United States can support jurisdiction,”100 while cautioning that the plaintiff’s mere U.S. citizenship or residence was insufficient to create the necessary degree of contact with the United States. In fact, a distinct line of single element cases involving common carriers both preceded and, more significantly, survived Nelson.101 Whatever the pedigree of the Ninth Circuit’s approach, Justice Roberts rejected the single element test and held that Sach’s suit was plainly based on conduct in Austria: “All of her claims turn on the same tragic episode in Austria, allegedly caused by wrongful conduct and dangerous conditions in Austria, which led to

Id. at 357. Sachs, 136 S. Ct. at 396. 98 934 F.2d 890 (7th Cir. 1991). 99 Id. at 893-94 (citing cases). 100 Id. at 893, citing H.R. Rep. No. 94-1487, at 16 (1976) reprinted in U.S. Code Cong. & Admin. News 6604, 6615. 101 E.g. Kirkham v. Société Air France, 429 F.3d 288, 290 (DC Cir. 2005) (“the ticket sale is necessary to the «duty of care» element of her negligence claim and this is sufficient to trigger the commercial activity exception.”). Kirkham was treated as authoritative in D.P. STEWART, The Foreign Sovereign Immunites Act: A Guide for Judges (Federal Judicial Center International Litigation Guide 2013), p. 49-50. See also Schoenberg v. Exportadora de Sal, 930 F.2d 777, 782 et seq. (9th Cir. 1991); Barkanic v. General Administration of Civil Aviation, 822 F.2d 11, 13 (2d Cir.), cert. denied 484 U.S. 964 (1987); Sugarman v. Aeromexico, Inc., 626 F.2d 270, 272 et seq. (3d Cir. 1980). 96 97

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Marc M. Arkin injuries in Austria.”102 Justice Roberts gave short shrift to Sach’s strict liability claim for failure to warn alleging that OBB should have alerted her to the dangerous conditions at the Austrian train station when she purchased her ticket, finding that it was identical to Nelson’s untenable effort to recast a tort claim as a contractual failure to warn. To allow such recasting would give jurisdictional significance to “«a feint of language»” and thereby “«effectively thwart the Act’s manifest purpose.»”103 The gravamen of the claim was straightforwardly located in Austria and thus OBB was entitled to immunity in U.S. courts. Sach’s case had to go forward in Austria, presumably under Austrian law.

V.

Suits against Foreign Sovereigns and Their Instrumentalities after Sachs

A.

Implications of the “Gravamen” Test

Although the “gravamen” test has a strong intuitive appeal, it is not without difficulty. First of all, its contours are unclear in a complex case. Indeed, the Court expressly avoided giving guidance on how to treat multiple claims with multiple gravamen joined together in a single lawsuit, noting in a footnote that “we consider here only a case in which the gravamen of each claim is found in the same place.”104 Even in an action involving a single tort claim, the test is far from unambiguous. At oral argument, Chief Justice Roberts posed a hypothetical drawn from Respondent’s brief that illustrates at least one weakness in the Court’s approach. An airline employee negligently sets the landing gear of an airplane as it departs from New York. Upon landing in Vienna, the landing gear does not function properly and someone is injured. Where is the gravamen of the suit? Is it where the negligence occurred or where its effects were felt, or, as the justices seemed to argue, could it be both?105 In his opinion for the Court, Justice Roberts made an effort to settle the matter at least when the action presents a single tort by citing a letter from Justice Holmes to then–Professor Frankfurter stating that the “«essentials» of a personal Sachs, 136 S. Ct. at 396. Id. at 396 (quoting Nelson, 507 U.S. at 363). 104 Id. 105 Transcript of Oral Argument (note 4), at 14 et seq. See also Brief for Respondent at 44 et seq., Sachs, (No. 13-1067); cf. Richards v. United States, 369 U.S. 1 (1962) involving a case on more or less identical facts to the hypothetical decided under the Federal Tort Claims Act (“FTCA”). The FTCA specifically provides that the U.S. federal government shall be liable for tortious conduct committed by its employees acting within the scope of their employment “under circumstances where the United States if a private person, would be liable in accordance with the law of the place where the act or omission occurred.” 28 U.S.C. § 1346(b). In Richards, the Court interpreted this provision as requiring reference to the whole law, including choice of law rules, of the place where the government employee’s act or omission occurred. 102 103

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. injury narrative will be found at the «point of contact» “the place where the boy got his fingers pinched.”106 It is not clear whether this “point of contact” is coextensive with the lex locus delictus rule from traditional choice of law practice. But, if it is, as any student of private international law will appreciate, the place of the injury rule is hardly without its own problems. Just to state the obvious, there are substantial uncertainties involved in localizing omissions, as well as injuries to intangibles such as data, reputation, and intellectual property. As the drafters of the Restatement (Second) of Conflict of Laws wrote, “[e]xperience has shown that the last event rule does not always work well. Situations arise where the state of the last event (place of injury) bears only a slight relationship to the occurrence and the parties with respect to the particular issue.”107 In such a case it would be odd to have that location determine the gravamen of an action. And, if the gravamen is not coextensive with the place of the injury rule, the Court has given little guidance as to what it might be. B.

Choice of Law under the FSIA

The Court’s oral argument was further dogged by concerns that seemed drawn from a choice of law textbook. Part of the difficulty is that the Court was struggling with two distinct but interdependent inquiries regarding how to determine which body (or bodies) of law governs attribution and gravamen for purpose of jurisdiction and how to determine which body of law governs the imposition of liability itself once the jurisdictional questions are settled. For example, at oral argument the Court raised the concern of how to determine the law that governs the plaintiff’s claim for purposes of ascertaining where the “gravamen” of the case was located.108 Justice Ginsberg greeted with some incredulity the Ninth Circuit’s determination that California law governed Sachs’s entire lawsuit, including the adequacy of OBB’s boarding protocol and platform design.109 Since OBB had never challenged the use of California law, any potential objection to this rather remarkable conclusion had presumably been waived.110 And, under the gravamen test looking to the center of gravity of the facts underlying the plaintiff’s action, the 106 107

Sachs, 136 S. Ct. at 397. Restatement (Second) of Conflict of Laws (1971), Introductory Note to Chapter 7

at 412. Indeed, Counsel for Plaintiff stated that “all I can do is honestly answer that I’ve never seen this test [gravamen] used in any choice of law analysis.” Transcript of Oral Argument (note 4), at 53. However, New York has long used the “center of gravity” test in choice of law determinations involving contracts without choice of law clauses. See, e.g. Auten v. Auten, 308 N.Y. 155 (1954); In re Allstate Insurance Co. (Stolarz) 81 N.Y.S.2d 904 (1993). 109 Transcript of Oral Argument (note 4), at 53 et seq. 110 E.g. Brief for the United States as Amicus Curiae Supporting Reversal at 28 n.11. Sachs (No. 13-1067). The United States noted in its brief that OBB apparently mentioned the applicability of Austrian law to the substantive liability determination in raising a potential motion to dismiss the action for forum non conveniens in favor of the Austrian forum. 108

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Marc M. Arkin antecedent choice of law issue likely has less significance than under the rejected single element test which analyzes the individual elements that make up each of plaintiff’s causes of action. Nevertheless, a closer examination of the lower courts’ decisions regarding choice of law reveals a remarkably cavalier approach to the question of jurisdiction to regulate and to the source of the choice of law rule in both jurisdictional and liability determinations.111 The FSIA is silent regarding choice of law. However, the FSIA broadly provides that “[a]s to any claim for relief with respect to which a foreign state is not entitled to immunity...the foreign state shall be liable in the same manner and to the same extent as a private individual under like circumstances.”112 In First National City Bank v. Banco para el Commercio de Cuba (“Bancec”),113 the Court glossed the provision in a footnote, stating, “Thus, where state law provides a rule of liability governing private individuals, the FSIA requires the application of that rule to foreign states in like circumstances.”114 Earlier in the opinion, the Court had expanded on this point, stating that the language and history of the FSIA clearly establish that the Act was not intended to affect the substantive law determining the liability of a foreign state,” pointing to the House Report on the FSIA, which stated “«The bill is not intended to affect the substantive law of liability. Nor is it intended to affect...the attribution of responsibility between or among entities of a foreign state».”115 Authority is divided as to whether this mandates the use of state or federal choice of law rules to determine which jurisdiction’s “rule of liability” applies.116 On the one hand, use of state choice of law rules furthers the Act’s aim of treating foreign states like private individuals under similar circumstances, since in U.S. practice most choice of law determinations rely on the choice of law rules of the state in which the suit is brought, rules that vary significantly between states both in their approach and application. Although advancing the goal of parity with the treatment of private individuals, applying state choice of law rules thus raises significant potential for inconsistency between jurisdictions and with it, the usual concerns about forum shopping to seek advantageous legal regimes. This stands in considerable tension with the FSIA’s recognition of “«the importance of 111 S. ENGLE, Note, Choosing Law for Attributing Liability Under the Foreign Sovereign Immunities Act: A Proposal for Uniformity, 15 Fordham Int’l L. J. 1060 (1991). 112 28 U.S.C. § 1606. The FSIA provision is unlike FTCA 28 USC § 1346(b) in that it does not contain choice of law language. See supra note 105. 113 462 U.S. 611 (1983). 114 Id. at 622 n. 11. 115 Id. at 620 (quoting H.R. Rep. No. 94-1487 at 12 (1976) (omission in original). 116 The federal circuit courts are split, with the Ninth Circuit applying the federal choice of law rule, Liu v. Republic of China, 892 F.2d 1419, 1425 et seq. (9th Cir. 1989) (applying the Restatement (Second) of Conflicts of Laws (1971)), and the Second, Fifth, and Sixth Circuits applying the choice of law rule of the state in which the federal court sits. See Barkanic v. General Administration of Civil Aviation of the People’s Republic of China, 923 F.2d 957, 960 (2d Cir 1991) (in Barkanic, state choice of law rules were found to point to the law of the defendant nation); O’Bryan v. Holy See, 556 F.3d 361, 381 (6th Cir. 2009); Northrup Grumman Ship Sys., Inc. v. Ministry of Defense of Republic of Venezuela, 575 F.3d 491, 495 (5th Cir. 2009).

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. developing a uniform body of law» concerning the amenability of a foreign sovereign to suit in United States courts.” 117 This tension is even more significant given the overlap between the questions entailed in liability determinations and those involved in determining whether the foreign state’s conduct falls within one of the enumerated exceptions to immunity, such as whether the action is “based upon” commercial activity carried on in the United States. In fact, the use of state choice of law rules seems to reflect the lingering influence of practice under diversity jurisdiction in which the primary concern is to secure uniformity of outcome between state and federal courts in a single state as a matter of “federalism” unlike the concern under the FSIA which is to implement a consistent rule of decision nationwide.118 A similar inapposite influence favoring state choice of law rules is the Federal Tort Claims Act, which abrogates the sovereign immunity of the United States in cases involving the tortious acts of its employees. The FTCA specifically points to the law of the place where “the act or the injury occurred,” a clause that the Supreme Court has read to require reference to the whole law, including choice of law rules, of the indicated jurisdiction.119 This, too, seems to cut against the predictability and uniformity that is one of the goals of the FSIA in dealing with foreign sovereigns. On the other hand, as Sachs amply illustrates, the use of the federal standard – ordinarily agreed to be the Restatement (Second) of Conflicts of Laws – is no guarantee of uniformity. In Sachs, the Ninth Circuit’s application of the Restatement was roundly criticized on its own terms120 and effectively stacked the deck toward the application of California law to both questions under its single element test. Under the Ninth Circuit’s analysis, had the case proceeded to the merits, California law would have applied to the liability determination as well since the issues obviously overlapped. Although the Restatement provides for presumptive rules that generally look to the place of the injury or the conduct causing the injury121 – both Austria in this case – the Ninth Circuit all but ignored those presumptions in favor of the general choice of law policy principles enunciated in the Restatement’s § 6, principles that were intended determine whether any state other than the presumptive one had “the most significant relationship to the occurrence and the parties.”122 In this case, the Ninth Circuit indulged in naked 462 U.S. at 623 n.11 (quoting H.R. Rep. No. 94-1487, at 32 (1976)). In suits in federal court between citizens of different states or between citizens and foreigners, known as diversity jurisdiction, cf., U.S.C. § 1332, federal courts apply the choice of law rule of the state in which the federal court sits. Klaxon v. Stentor Electric Manufacturing Co., 313 U.S. 487 (1941). Of course, if the claim arises under federal law, there is no choice of law problem. 119 28 U.S.C. § 1346(b); Richards v. United States, 369 U.S. 1 (1962). 120 Brief of the United States as Amicus Curiae Supporting Reversal (note 110), at 28 n. 11. 121 Restatement (Second) of Conflict of Laws (1971) § 145. Similar presumptive rules apply in the case of contracts that lack a choice of law clause. Id. at § 188. 122 Id. at § 6. The factors include “(a) the needs of the interstate and international systems, (b) the relevant policies of the forum, (c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, (d) the protection of justified expectations, (e) the basic policies underlying the particular field 117 118

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Marc M. Arkin favoritism toward its domiciliary, asserting “[a]lthough Sachs was injured in Austria, the purchase of the common carrier ticket occurred in California. California has a strong interest in providing compensation to its residents under its law when those residents buy a common carrier ticket in California and then travel abroad on state-owned transportation.”123 Although the Supreme Court has ordinarily been reluctant to overturn state choice of law decisions, much less to limit the range of state choice of law methodologies,124 considerations in FSIA cases are significantly different from those in the run-of-the mill domestic cases involving private parties. When foreign governmental entities and questions of immunity are involved, the balance of policies toward respecting a wide variation in choice of law methodologies and outcomes tips toward a more exacting scrutiny and a higher standard of review. As noted earlier, the issue takes on added significance because of the bleed between the threshold jurisdictional questions determined by the cause of action and ultimate issues regarding liability. Choice of law for the latter may well determine the former. C.

Remaining Questions about Agency and Attribution

In Sachs, the Court carefully circumvented the issue of whether and when the activities of a juridically independent third party can be attributed to a sovereign for purposes of establishing jurisdiction under the FSIA, giving little or no guidance for future cases. This is an issue that divided the Ninth Circuit, whose decisions regarding attribution in Sachs provided a striking reprise of the same circuit’s reasoning about agency in Daimler A.G. v. Bauman125 the year before. In Daimler, the Ninth Circuit had found that a corporate subsidiary was the parent’s agent because the subsidiary’s services were “important” to the parent and that, if the subsidiary were not performing those services, the parent would have to undertake those activities itself. Accordingly, all the subsidiary’s forum activity was attributable to the parent corporation. Although the Supreme Court rejected the Ninth Circuit’s account of agency in Daimler as overbroad and inconsistent with common law agency principles, it provided little other guidance about the attribution issue in the context of personal jurisdiction, leaving the Ninth Circuit free in Sachs to return to its own expansive approach in the context of the FSIA. In Sachs, the original Ninth Circuit panel divided on whether to attribute to OBB the domestic sale of the Eurail pass by Rail Pass Experts. Judge Tallmans’s panel opinion invoked the Supreme Court’s Bancec decision, which, having found

of law, (f) certainty, predictability and uniformity of result, and (g) ease in determination and application of the law to be applied”. 123 Sachs v. Republic of Austria, 737 F.3d 584, 600 (9th Cir. 2013) (en banc). 124 See, e.g. Allstate Insurance Company v. Hague, 449 U.S. 302 (1981). 125 Bauman v. Daimler Chrysler Corp., 644 F.3d 909, 920 (9th Cir. 2011), rev’d subnom. Daimler A.G. v. Bauman, 134 S. Ct. 746 (2014).

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. the FSIA silent on the law to be applied,126 relied on “principles of equity common to international law and federal common law” to resolve the threshold question of attribution. Bancec explained its choice on the ground that the amenability of a foreign state to suit in the United States deserved a uniform treatment; such “matters bearing on the Nations’s foreign relations «should not be left to divergent and perhaps parochial state interpretations».”127 In Bancec, the question was whether defendant Citibank could set the value of assets expropriated by the Cuban government off against a claim against it by Bancec, a wholly-owned instrumentality of the Cuban government that served as its exclusive agent in foreign trade. Bancec began by establishing a presumption of juridical independence128 that could be negated in two circumstances: (1) “where a corporate entity is so extensively controlled by its owner that a relationship of principal and agent is created” or (2) “the broader equitable principle” where recognizing the presumption “would work fraud or injustice.”129 Thus, a separate juridical entity can be found liable for the acts of another on the basis either of a finding of an agency relationship based on control or because the corporate form has been used as a subterfuge and one entity is really the alter ego of another.130 Applying the Bancec test to Eurail Group and its sales agent Rail Pass Experts, Judge Tallman found that Sachs had nowhere claimed that OBB was involved in the internal day-to-day workings of either Eurail Group or Rail Pass Experts to the degree that would overcome the presumption of independence and impute the domestic ticket sale to OBB nor was there any evidence of fraud or injustice.131 In a dissent that eventually became the basis for the majority opinion en banc, Judge Gould focused directly on the need to afford Sachs a domestic 126 462 U.S. at 622 n.11 614. Bancec, in fact was the mirror image of Sachs since it concerned the question of whether the actions of the foreign state could be attributed to its subsidiary. 127 Id. at 622 n.11 (quoting Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 425 (1964)). 128 Id. at 626 et seq. (“[G]overnment instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such.”). The Court buttressed its opinion by citing the legislative history of the FSIA: “«If U.S. law did not respect the separate juridical identities of different agencies or instrumentalities, it might encourage foreign jurisdictions to disregard the juridical divisions between different U.S. corporations or between a U.S. corporation and its independent subsidiary».” Id. at 628 (quoting H.R. Rep. No. 94-1487, p. 29-30 (1976)). 129 Id. at 629 (quoting Taylor v. Standard Gas Co., 306 U.S. 307 322 (1939)). The Court clearly differentiated between the agency and alter ego theories, placing the latter on “broader equitable” grounds. 130 See, e.g. W.M. FLETCHER et al., Cyclopedia of the law of private corporations (rev. ed. 1999) § 41.10 (differentiating between the principal agent rationale and the alter ego rationale for imputing liability to shareholders for corporate activity). 131 The district court opinion dismissing the action concluded that Sachs had not shown a connection between OBB and Rail Pass Experts sufficient to create a principal agent relationship; as a result Rail Pass Expert’s activity in the U.S. could not be imputed to OBB. No. C08-1840 VRW, 2011 WL 816854 at *4 (N.D. Cal., Jan. 28, 2011) (unpublished).

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Marc M. Arkin forum,132 and thus adopted a rule based on common law agency principles that “where a foreign common carrier, operated by a sovereign entity, purposefully sells tickets for the use of the carrier’s services overseas through a domestic sales agent, the ticket sale is a commercial activity which may be imputed to the foreign common carrier.”133 For the majority en banc opinion, Judge Gould asserted without elaboration that “we think that Congress intended to permit suit in the United States against foreign sovereign common carriers that sell tickets in the United States through agents”134 and again relied on common law agency principles to find that Eurail Group and Rail Pass Experts were OBB’s agents because they had authority to issue valid tickets on the Austrian railroad. He distinguished Bancec on the ground that it was limited to the question of attribution among corporate affiliates or, as Bancec put it, “among the entities of a foreign state.”135 The difficulty with this argument is threefold. On the most basic level, that of common law agency, as Justice Ginsberg observed in Daimler, “Agencies... come in many sizes and shapes: «One may be an agent for some business purposes and not others so that the fact that one may be an agent for one purpose does not make him or her an agent for every purpose.»”136 In the instant case, there is no question that Eurail and Rail Pass Experts had the authority to sell valid tickets for carriage on OBB (and on all the other members of the Eurail pass network). If OBB failed to honor the ticket issued by Rail Pass Experts, any court presumably would have found that an agency relationship existed as part of a breach of contract suit. The question is whether that limited agency was sufficient to satisfy the substantial “nexus” requirement that the Ninth Circuit elsewhere identified between the conduct in the United States and the foreign defendant’s activities in the context of the first clause of the commercial activities exception,137 a point recognized by Judge Brea in his concurring panel opinion.138 132 Sachs v. Republic of Austria, 695 F.3d 1021, 1031 (9th Cir. 2012) (Gould, J. dissenting). 133 Id., at 1033. Judge Gould cited Barkanic v. General Administration of Civil Aviation of People’s Republic of China, 822 F.2d 11 (2d Cir. 1987) and Kirkham v. Société Air France, 429 F.3d 288 (D.C. Cir, 2005). In both cases, agency was assumed and not disputed. See en Banc, p. 4. 134 Sachs v. Republic of Austria, 737 F.3d 584, 593 (9th Cir. 2013); see also id. at 596 et seq. (compiling a list of companies that have state owned carriers and once again concluding without citation either to the legislative history or to the FSIA itself that “we believe that Congress contemplated that the sale of tickets by travel agents within the United States for passage on foreign-sovereign owned common carriers would constitution «commercial activity carried on in the United States by the foreign state».”). 135 462 U.S. at 622 n.11. 136 Daimler A.G. v. Bauman, 134 S. Ct. at 759 (quoting 2A C.J.S., Agency § 43 (2013). 137 Terenkian v. Republic of Iraq, 694 F.3d at 1127. 138 Sachs, 695 F.3d at 1029 et seq. (Bea, J. concurring). Judge Bea assumed that an agency relationship existed but that Sachs failed to allege a breach of duty with a sufficient nexus to the commercial activity in the United States. Judge Bea also assumed without deciding that California tort law applied to define Sach’s claims of negligence and failure to warn.

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. Dissenting, Judge O’Scannlain captured the second difficulty with the use of common law principles: the anomaly between the long established Bancec standard which required either a showing of extensive control or fraud in order to attribute the conduct of a corporate affiliate or instrumentality to the foreign sovereign and using the lower common law agency standard for unrelated entities. Simply put, on the majority’s reasoning, a foreign sovereign would have to dominate an affiliate in order for the affiliate’s conduct to be attributed to it; in the case of an unrelated entity with far looser ties to the foreign sovereign, the sovereign would merely have to authorize the unrelated entity to act on its behalf for that entity’s conduct to be attributed to it.139 This points to the third difficulty with adopting a common law agency approach to attribution. Such reasoning seems inconsistent with the purposes of the FSIA: avoiding international conflict and limiting exorbitant bases of jurisdiction. Indeed, as discussed earlier, in Bancec, the Supreme Court specifically adopted a substantial threshold for the imputation of liability to a sovereign entity based on the acts of another entity, whether related or not, hoping to create a uniform body of law applicable to attribution decisions. Although Bancec nowhere states that it is the exclusive approach to attribution, its emphasis on uniformity in attribution of liability suggests such a result. Superseding Bancec altogether or limiting its reach to foreign sovereigns and their corporate affiliates has the potential for opening the floodgates to jurisdictional litigation against foreign state-owned entities that presently enjoy the presumption of juridical independence from one another or that have a limited commercial presence in the United States through unrelated entities. The plaintiff’s suggestion, supported by the U.S. government acting as amicus curiae, that the common law agency principles contained in the Restatement (Third) of Agency140 would supply sufficient uniformity in lieu of Bancec seems unrealistic; even the Restatement retains the potential for injecting the substantial uncertainty of state law into a jurisdictional inquiry that is currently largely governed by settled federal precedent. The Ninth Circuit largely ignored OBB’s rather strained argument that for all purposes under the FSIA, the only appropriate definition of an agent of a foreign state was the one contained in the FSIA’s definitional section. That section defines agency for purposes of which entities qualify as an “agency or instrumentality of a foreign state” and are thus entitled to immunity.141 The attraction of the argument to OBB obviously rested in the exclusion of U.S. citizens such as Rail Pass Experts (as well as entities created by a third state) from being agents of a Indeed, after McIntyre, there is some question as to whether even the existence of a locally sales authorized intermediary would be enough for jurisdictional attribution in the case of ordinary private actors. 140 Restatement (Third) of Agency (2006). 141 28 U.S.C. § 1603(b): “An «agency or instrumentality of a foreign state» means any entity (1) which is a separate legal entity, corporate or otherwise, and (2) which is an organ of a foreign state or a subdivision therof, or a majority of whose shares or ownership interest is owned by a foreign state or political subdivision thereof, and (3) which is neither a citizen of a State of the United States as defined in section 1332(c) and (d) of this title [diversity jurisdiction]; nor created under the laws of any third country”. 139

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Marc M. Arkin foreign state.142 The difficulty with this argument apart from linguistic implausibility, since not all agents are agencies, is that it is far more restrictive even than Bancec, and carries significant practical problems. Foreign commercial actors, even ones owned by foreign sovereigns, frequently set up domestic subsidiaries to distribute products in the United States or use foreign subsidiaries from other countries to perform the same function.143 OBB’s reading of the FSIA would completely insulate these foreign state-owned parent enterprises from suit based on the commercial activities carried on in the United States on their behalf by domestic companies or third-state companies even if they met the Bancec standard. At the end of the day, the Supreme Court had three options before it with regard to attribution, each of them flawed in some significant way. The first, advocated by OBB, was to limit the agency relationship to entities that fall within the definitional provision of the FSIA, an untenable result that would exclude from agency any but co-citizens of the foreign sovereign, a significantly underinclusive result. The second, advocated by the plaintiff and the U.S. government, was to apply common law principles of agency, lowering the barrier to suit against foreign sovereign entities in U.S. courts and bringing with it the prospect of substantial litigation that now is ordinarily cut off with the presumption of jurisdical independence at the jurisdictional stage. The third was formally to adopt the factors set forth in Bancec, even in situations involving unrelated entities. Although perhaps the least troubling of the results, it carried with it the prospect of unfairness in the case of foreign instrumentalities acting through ordinary corporate agents in the U.S. marketplace, a common scenario. Lurking in the background of all three was the specter of internet commerce with the prospect of worldwide contacts and consumer activity, something that had allowed a California purchaser to buy an Austrian railroad ticket from a Massachusetts company without ever leaving her home. The fourth was to leave those difficult issues for another day and decide the case on other grounds. Discretion being the better part of valor, that is exactly what the Court did.

VI. Conclusion In the end, the whole of Sachs seems less than the sum of its parts. Having accepted certiorari on both the attribution question and the gravamen question, the Court succeeded only in laying to rest the single element test. While this considerably narrows the potential for actions against foreign sovereigns and their instrumentalities in U.S. courts and should act as a restraint on the more aggressive assertions of jurisdiction in the lower courts, it still leaves considerable ambiguity Id. In the context of private corporations, one need only think of Bauman, 134 S. Ct. 746 (2014), and the relationship of Daimler Chrysler, the German parent company with its subsidiary and exclusive distributor, Mercedes Benz USA, a Delaware corporation with its principal place of business in New Jersey. Although the agreement between the two specified no agency was created, Id. at 752, the structure of the relationship is illustrative. 142 143

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Foreign Sovereign Immunity in the U.S. after OBB Personenverkehr A.G. in the commercial exception to sovereign immunity. Meanwhile, the actual problem presented in Sachs – whether a U.S. plaintiff can sue in the United States for injuries sustained in Austria by what was alleged to be the negligence of the stateowned Austrian railroad – has been solved for future cases by the simple expedient of a forum selection clause in the passenger ticket indicating the Austrian forum, a clause enforceable under both U.S. and Austrian law.144

144 Eurail passes now expressly provide that they are covered by the Convention concerning International Carriage by Rail and the Uniform Rules Concerning the Contract of International Carriage of Passengers by Rail. See Eurail Pass Conditions of Use, . Under the Uniform Rules, a plaintiff must file suit in the forum of the defendant carrier’s residence, Convention Concerning International Carriage by Rail: Uniform Rules Concerning the Contract of International Carriage of Passengers by Rail (CIV), Tit. VI, Art. 57, at 34 (July 1, 2006).

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INTERNATIONAL CHILD ABDUCTION: NEW DEVELOPMENTS IN SPAIN Elena RODRÍGUEZ PINEAU*

I. II. III.

VII.

Introduction Scope of Application Some Procedural Rules A. Jurisdiction B. Legal Standing (legitimatio ad processum) C. Time and Substantive Constraints Proceedings A. First Instance Proceedings B. Appeal Proceedings C. Provisional Measures New Features A. Cooperation between Authorities B. Mediation C. New Proceedings to Adopt a Measure in the Sense of Article 15 of the 1980 Hague Convention D. Issuing the Certification of Articles 41 and 42 of the Brussels II-bis Regulation E. Specific Rules on Articles 11(6) and 11(7) of the Brussels II-bis Regulation Missing Issues A. Recognition and exequatur of Decisions on Return or Access Rights B. Enforcement Procedure C. Opposing Enforcement D. Other Issues Related to Child Protection against Abduction Concluding Remarks

I.

Introduction

IV.

V.

VI.

Spain ratified the 1980 Hague Convention on International Child Abduction (hereinafter: 1980 Hague Convention) in 1987, but no implementing legislation was enacted at the time. Hence, for several years the Spanish courts dealt with return cases with the generic tools provided by the – then applicable – Civil Procedural Act (Ley de Enjuiciamiento Civil 1881, hereinafter LEC 1881). Trite as this may Associate Professor at the Universidad Autónoma de Madrid (Spain). This article is part of the research project La evolución de las instituciones jurídicas de protección de menores, DER2015-69261 (MINECO-FEDER). *

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Printed in Germany

Elena Rodríguez Pineau be, one should acknowledge that this resulted in some inconsistencies and sometimes even misapplication of the 1980 Hague Convention. It was only in 1996 that the legislature passed the Ley Orgánica 1/1996, de protección jurídica del menor of 15 January, on the legal protection of the child,1 whereby a broad reform of the legal system was addressed and the issue of the return proceedings was included in Articles 1901 to 1909 LEC 1881. The new Civil Procedural Act 2000 (hereinafter: LEC 2000) entailed a modernization of civil procedure that unfortunately did not address the specificities of non-contentious proceedings (jurisdicción voluntaria). The LEC 2000 prescribed that the works for a new piece of legislation dealing with non-contentious proceedings should be set in motion within one year of its entry into force. In the meantime, the existing rules would be left in force. The abovementioned Articles 1901 et seq. LEC 1881 ranked precisely among those non-contentious proceedings. Unfortunately, it took almost fifteen years for this piece of legislation to see the light. The new Ley 15/2015 de jurisdicción voluntaria, Act on non-contentious proceedings,2 addresses the proceedings on international child return and incorporates three new Articles in LEC 2000: Article 778 quater, Article 778 quinquies and Article 778 sexies. These new Articles build upon the predecessors, Aricles 1901 et seq. LEC 1881, but certainly improve some of the deficiencies that the latter had. Act 15/2015 also includes a new Final Provision No 22 in LEC 2000 that introduces some rules in order to implement Articles 41, 42, 11(6) and 11(7) of Council Regulation No 2201/2003 (hereinafter: Brussels II-bis Regulation).3 These novelties are to be welcome. However, one may regret that the Spanish legislature was not bolder in some respects as it failed to introduce more flexible and modern solutions for this type of proceedings. This contribution is aimed at presenting and evaluating the advantages and disadvantages of this reform. We shall first deal with the scope of application of Act 15/2015 (II), the basic content of the new rules (III) and the return proceedings resulting from the reform (IV). We shall subsequently address the new incorporations that Act 15/2015 has introduced in relation to international child abduction proceedings (V) and some issues that the legislature could have envisaged, but has not (VI).

II.

Scope of Application

Article 778 quater pins down the scope of application of the new rules on return proceedings. According to paragraph (1), these provisions will only be applicable Published in BOE No. 15 of 17 January 1996, p. 1225 et seq. Published in BOE No. 158 of 3 July 2015, p. 54068 et seq. The Spanish Ministry of Justice has produced an unofficial English translation available at . 3 Council Regulation (EC) No 2201/2003 of 27 November 2003 concerning jurisdiction and the recognition and enforcement of judgments in matrimonial matters and the matters of parental responsibility, repealing Regulation (EC) No 1347/2000, OJ L 338/1 of 23 December 2003. 1 2

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International Child Abduction: New Developments in Spain where the petition for restitution or return of the child is done on the basis of an international convention or EU Regulation and the child comes from a State which is either a contracting State of an international convention or a Member State of the EU. This delimitation was already present in old Article 1901 LEC 1881 (although no reference was made to EU texts, which did not address the matter at the time). No objection can be raised to the standpoint of the Spanish legislature; Spain shall collaborate with those States that share common principles regarding the best interest of the child and engage in his or her protection in cases of international abduction. Such engagement results in the signature of or adhesion to international conventions or membership of the EU. On the other hand, where States do not sign or adhere to international conventions on the matter, such undisputed trust does not exist. Hence, no subsequent commitment to help with return demands of abducted children is to be taken for granted. Some voices have criticized this approach on the basis that the position of the abducted child will be made worse off simply due to an external element which is not of his or her choice.4 However, it seems reasonable that the Spanish legislature has not broadened the scope of application of these rules (and the subsequent favoured collaboration with other States) when those States most probably would not help the Spanish authorities where Spain is the requesting State.5 It should be noted that this does not mean that Spain refuses to solve international abduction cases that fall outside this preferential cooperation scheme. It just means that they are to be subject to the general system of international cooperation as results from the new Ley 29/2015 de cooperación jurídica internacional en materia civil (LCJI), the Act on international legal cooperation in civil matters.6 Furthermore, the Spanish legislature has slightly modified the wording of the Act. In fact, Article 1901 LEC 1881 referred only to the restitution of children although this provision was under the heading “Measures relating to the return of children in case of international abduction”. The new Article 778 quater, on the contrary, makes a twofold reference to the restitution of the child or return to the place of origin. This poses the question whether there is a difference between restitution and return, the first referring to the assignment of the child to a specific claimant whereas the return would simply refer to the returning of the child to her country of residence before the removal.7 Indeed, this is the case, and the new text expressly provides what otherwise has been the underlying interpretation of the 4 S. CALAZA LÓPEZ, Los procesos de restitución o retorno de menores en los supuestos de sustracción internacional, La Ley 2015, p. 178-181. 5 E. RODRÍGUEZ PINEAU, Secuestro internacional de menores. Una tarea para el legislador, La Ley- Actualidad, año XXI, 2000, p. 1749-1758. 6 Ley 29/2015 de cooperación jurídica internacional en materia civil, BOE n. 182, of 31 July 2015, p. 65906 et seq. The Spanish Fiscalía General del Estado (the Public Prosecutor Office, which takes part necessarily in all proceedings relating to children) has recently issued an official guide for the Spanish Public prosecutors where this interpretation is expressly confirmed. See Circular 6/2015 sobre aspectos civiles de la sustracción internacional de menores, of 17 November 2015, p. 61, available at . 7 S. CALAZA LÓPEZ, El nuevo régimen de la sustracción internacional de menores, Diario La Ley No. 8564 2015, D-246 at point II.

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Elena Rodríguez Pineau return proceedings, depending on whether the left-behind parent is still living in the State of habitual residence prior to the removal of the child.8

III. Some Procedural Rules Once the scope of application is determined, we may highlight some novelties regarding procedural elements of the restitution or return proceedings as enshrined in Article 778 quater, namely jurisdiction (infra A), legal standing (infra B) and time and substantive constraints (infra C). A.

Jurisdiction

Firstly, Article 778 quater (2) states that jurisdiction on international return cases shall lie with the court of first instance – specialised in family matters (juzgado de primera instancia con competencias en materia de derecho de familia) – of the capital of the province where the child has been brought to or retained.9 If there is no such specialised court in family matters, the case will be assigned to a court according to a rotating system. This is a relevant shift from the previous solution enshrined in Article 1902 LEC 1881 that gave jurisdiction to the court of first instance (juzgado de primera instancia) where the child was present. Article 778 quater (2) also establishes that the court shall examine its jurisdiction of its own motion (ex officio). This proviso will ensure that the defendant (abductor) is deprived of a potential mechanism to lose/gain time by means of challenging the territorial jurisdiction of the court. Two main points need be considered in relation to the legislature’s decision to rely on specialized courts in return proceedings. First of all, even if it is undisputed that this choice for specialization complies with the spirit of the 1980 Hague Convention and the Brussels II-bis Regulation,10 the benefits of this choice may be 8 The Pérez-Vera Report on the 1980 Hague Convention, at No. 110 admits that the Hague Convention is silent on the point whether the child should be returned to the State of habitual residence once the left-behind parent is no longer living there. This silence should be interpreted as allowing the authorities of the requested State to return the child directly to the applicant. This interpretation is expressly confirmed in the Public Prosecutor Office’s Circular 6/2015 (note 6), at 65. 9 Hague Conference (2003) Guide to Good Practice Child Abduction Convention: part II–implementing measures, The Hague, p. 29-30 (, accessed 10th March 2016). The claim for this kind of specialization in abduction cases had been raised years ago by authoritative voices in Spain, such as F.J. FORCADA MIRANDA, Reglamento comunitario 2201/2003 y sustracción internacional de menores. Puntos de conflicto en su aplicación y en la ejecución sobre traslado ilícito de menores, in El Derecho de familia. Novedades en dos perspectivas, Asociación Española de Abogados de familia, Madrid 2010, p. 181-216, at 215. 10 See for instance the Guide to good practice under The Hague Convention 1980 on the civil aspects of child abduction: Part II Implementing measures, at point 5 or the

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International Child Abduction: New Developments in Spain criticized. More precisely, one may concede that the court of local jurisdiction – at the capital of the province – will not necessarily be the closest one to the child and it may encounter further difficulties in obtaining evidence concerning the child. Moreover, it must be conceded that, even when one may support the underlying policy, this new rule may give rise to complicated situations in relation to enforcement of return orders, as we shall see (infra VI.B). Secondly, a centralization of local jurisdiction in the capital of the relevant province makes it more likely that no conflicting interpretations shall arise. Nevertheless, it should be noted that there might be more than one court specialised in family matters when the capital of the province is of a certain size. Even more, this reform does not seem to acknowledge the existence of other specialised courts in family matters which may likely attract civil cases, such as those regarding the return of an abducted child by a mother allegedly fleeing from domestic violence.11 Although it has been contended that the new rule of local jurisdiction would exclude this attraction at any rate, this has not been clearly rejected in Article 778 quater.12 However, despite the fact that several (and perhaps different) courts may hear these cases, in the majority of cases, local jurisdiction will be given to those courts which deal with family matters, and this will assist in building the above-mentioned expertise in international abduction cases. B.

Legal Standing (legitimatio ad processum)

The wording of Article 778 quater (3) reproduces almost exactly the contents of Article 1902 LEC 1881. According to it, the person (either a natural or a legal person) having the right of custody or a right of access/visitation and the Central Authority (or its delegate, namely the Abogado del Estado, i.e. the State solicitor) have legal standing to seize the court. Practice Guide for the application of the Brussels IIa Regulation, at point 4.15. This view has been endorsed by the ECJ, case C-498/14 PPU, of 9 January 2015, Bradbrooke v. Aleksandrowicz, ECLI:EU:E:2015:3. 11 In fact, the Supreme Council of Judges may establish that one or various first instance judges should specialize as “family courts” but there is no predetermined structure of family judges in Spain. Moreover, this specialized jurisdiction concurs also at first instance level with a mixed criminal-civil jurisdiction on “gender-based violence” (as regulated in Article 87ter (3) of the Judiciary Act, Ley orgánica 6/1985, del poder judicial, LOPJ of 1 July 1985, published in BOE n. 157 of 2 July 1985, p. 22752 et seq.). This criminal jurisdiction hears cases related to family-gender offences and under certain circumstances it may attract civil cases related to the victim of the offence (as the abduction cases could be). 12 J. FORCADA MIRANDA, El nuevo proceso español de restitución o retorno de menores en los supuestos de sustracción internacional: La decidida apuesta por la celeridad y la novedosa Circular de la Fiscalía 6/2015 (Parte II), Bitácora Millenium DIPr, p. 40 et seq., at 43, sustains this is the spirit of the reform in line with the previous interpretation of the system. Therefore, he denies the jurisdiction of gender-based violence courts in cases of international abduction although he acknowledges an exception in the recent decision – but previous to Act 15/2015 – of the Audiencia Provincial of 31 March 2015 (ECLI: ES:APM:2015:142A).

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Elena Rodríguez Pineau Two main differences appear between the two texts: on the one hand, the new Article 778 quater makes no reference to the Public Prosecutor (Ministerio fiscal), whose presence in any proceeding referring to children is compulsory under Spanish law. But this omission is not really a relevant one because Article 749(1) LEC 2000 (as amended by Act 15/2015) provides for the involvement of the Public Prosecutor in proceedings relating to international abduction of children. Secondly, and contrary to the previous situation where – as a result of the classification of return proceedings as non-contentious – the parties were not supposed to be assisted by a lawyer, now such assistance is compulsory. Moreover, it is clearly stated that the State shall provide this assistance to the requesting party (in the form of an Abogado del Estado, State attorney-at-law) unless or until this party appoints his or her own lawyer. Although this might have been in actual terms the state of the art before the reform, it is a very helpful indication and reinforces the procedural rights of the litigants in these kind of proceedings that are not only contentious in nature, but also complex in substance. C.

Time and Substantive Constraints

In strict observation of the temporal requirements set forth in the 1980 Hague Convention and the Brussels II-bis Regulation, Article 778 quater (5) establishes that the proceedings should be urgent and preferential (expeditious) and that the judgment shall be issued within six weeks of the application. However, this rule also introduces a final proviso that allows for a relaxation of this time constraint in exceptional circumstances. Despite the potential risk that this provision may be misused, one should be confident that it will not change the reasonable compliance standards that Spanish judges have shown in recent times in relation to the return of abducted children. It should also be borne in mind that this proviso is without prejudice to the obligation imposed on contracting States through Article 11 of the 1980 Hague Convention to state the reasons for the delay, should these explanations be required from the claimant or the requesting State’s Central Authority. Another interesting safeguard incorporated in the text concerns the impossibility to stay the proceedings because of the seizure of a criminal court on the issue of the abduction of the child.13 This guarantees both the expeditious resolution of the case and the safeguarding of the civil nature of these proceedings in a clear-cut system where the decision on the illicit removal or retention of the child is made with no possible interference of a (previous) criminal characterisation of the issue.

These would be the cases where the abductor is charged with the offence of criminal abduction (as of Article 225bis Criminal Code, Código penal). This kind of proceedings is to be distinguished from those referred to supra, note 11, where the allegedly abducting mother is the plaintiff in the gender-based violence proceedings. 13

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International Child Abduction: New Developments in Spain

IV. Proceedings Article 778 quinquies lays down the specific rules for the return proceedings in Spain. The proceedings are organized along six weeks in a two-instance scheme. This model reproduces the one in force under the LEC 1881 but there are nevertheless some relevant changes. A.

First Instance Proceedings

The first paragraphs in Article 778 quinquies are a reminder of the basic elements that the petition should have as required by international conventions. A basic premise for the judge to accept local jurisdiction is the fact that the child is present where the claimant says. If the child cannot be located there, the proceedings are temporarily stayed. If the child is found in another province, the Act foresees that the judge may refer its local jurisdiction to the judge where the child actually is, with due notice to the parties so that they may bring their petition before this second judge.14 Once the writ has been accepted, the defendant has three days to appear with the child before the court. The proceedings will follow either on a noncontentious basis if the abducting parent agrees to return the child or on a contentious basis.15 In order to promote the voluntary return of the child, Article 778 quinquies (4) states that the decision of the abducting parent to return the child once the contentious proceedings have begun will revert the situation into one of voluntary return. Once the abducting parent has agreed to return the child, the judge shall order the return of the child and decide on the costs arising out of the proceedings. Conversely, if the defendant parent opposes the return of the child, the defendant parent may express her opposition in two manners, the first one being by omission, i.e. by not appearing before the court. According to Article 778 quinquies (5), when confronted with such behaviour, the judge must declare the defendant in default and order the proceedings to continue in absentia. Alternatively, according to Article 778 quinquies (6) the defendant may expressly oppose the return of the child on the basis of any of the exceptions foreseen in the applicable international conventions or rules. Should the defendant decide not to As the Public Prosecutor’s Circular clarifies (note 6), at 68, removal of the child to another province does not immediately entail that the seized court is to refer its jurisdiction. The Public Prosecutor Office will call for the perpetuatio jurisdictionis of the seized court when this removal is a strategy aiming at frustrating the celerity of the proceedings. 15 In fact, it should be reminded that these proceedings, although introduced by the Act 15/2015 on non-contentious jurisdiction, are incorporated into the LEC 2000 (the general code of civil – contentious- procedure). However, one may concede that the judgment resulting from this proceeding may hardly be said to have res judicata force. Further insights on the nature of these proceedings as resulting from Act 15/2015 in S. CALAZA LÓPEZ (note 4) and J.R. LIÉBANA ORTIZ, El nuevo proceso relativo a la sustracción internacional de menores, Revista Electrónica de Derecho de la Universidad de La Rioja 13/2015, p. 83-109. 14

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Elena Rodríguez Pineau appear before the court at a later stage, she will be considered to have refused to return the child. All parties shall be heard in court, including the Public Prosecutor and also the child if he or she is considered of sufficient age and maturity. The hearing of the child is to be done separately in presence of the Public Prosecutor and, if necessary, with the support of specialised personnel.16 The judge will decide whether the removal of the child was wrongful and whether he or she should be returned and if so, under which specific conditions. The judge may also order specific measures with a view to preventing a further re-abduction of the child, and he or she shall also decide on the costs of the proceedings (Article 778 quinquies (10)). B.

Appeal Proceedings

Under the LEC 1881 the first instance judge’s decision on the return could be appealed. The LEC at that time stated that the appeal did not prevent the enforcement of the judgment, so that the child had to be sent back to the requesting State once the lower court had ordered the return. This sometimes led to strange situations where the appeal court ultimately reversed the decision of the court of first instance, but the child had already been returned to the requesting State.17 In order to avoid this inconvenience, some devices where conceived, such as the possibility to oppose the provisional enforcement of the return order. Whether it was possible to oppose the provisional enforcement of the return and if so, by which means, was a disputed issue.18 Alternatively, some courts had developed more creative solutions, namely, to protract the date of the enforcement of the return order until the legal six-week period (appeal included) had elapsed.19 Article 778 quinquies (8) introduces this proviso which was absent in the former LEC1881, but that had already been incorporated to LEC 2000 in 2005 in an amendment of Article 770.4ª. 17 By way of example, reference can be made to the judgment delivered by the Spanish Constitutional Court in 2002 (STC 120/2002 of 20 May, BOE n. 146, of 19 June 2002). A Polish mother came to Spain with her daughter, seemingly contrary to the decision of a Polish court that had ordered that the child should be with her father. The first instance court granted the return of the child and the judgment was enforced. By the time the mother had appealed the return, the child was already in Poland and the court simply acknowledged that the first instance judgment actually could not be reversed. The mother appealed for – and won – amparo (a special proceeding to ensure the protection of fundamental rights) before the Constitutional Court. According to the Constitutional Court, not being given a judgment on appeal on the subject matter of the dispute – namely on the illicit nature of the removal – amounted to an infringement of the right to a fair trial set forth in Article 24 of the Spanish Constitution. 18 On these issues see E. RODRÍGUEZ PINEAU (note 5), at 1755 and from another point of view, S. ÁLVAREZ GONZÁLEZ, Desplazamiento internacional de menores, procedimiento de retorno y tutela judicial efectiva, Derecho privado y constitución 2002, No. 16, p. 41-64, at 60-61. 19 Recollecting these possibilities and case law, P. JIMÉNEZ BLANCO, La ejecución forzosa de las resoluciones de retorno en las sustracciones internacionales de menores, in F. ALDECOA LUZÁRRAGA/ J. FORNER I DELAYGUA (eds.), La protección de los niños en el 16

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International Child Abduction: New Developments in Spain Some critical voices had been raised asking for a revision of this situation either by means of eliminating the possibility to appeal the judgment20 or by introducing the “stay” effect and thus waiting until the final decision on the return of the child had been adopted.21 This latter position has now been enshrined in the new Article 778 quinquies (11) and hopefully will remove the thorny questions that arose under the previous system. Last but not least, there is a significant change in the wording of Article 778 quinquies in relation to former Article 1908 LEC 1881 that may have further implications in procedural terms. The latter foresaw that the appeal court should deliver its decision in the form of an order (auto), that is, a decision which may not be reviewed by the Supreme Court. Article 778 quinquies (11) simply refers to a “decision”. Thus, there might be a possibility that the appeal court renders a judgment (sentencia) that might be further appealed in accordance with Article 477 LEC 2000. It is clear that the reform intends to promote the respect of the six-week time limit, but this change leaves a margin of manoeuvre for parties to try another shot against the return order.22 While this possibility might not be welcome on the one hand, on the other it could provide the system with a truly uniform doctrine on return in certain cases. C.

Provisional Measures

Article 778 quater (8) foresees the possibility that provisional and precautionary measures are adopted throughout these proceedings. Such measures may be adopted either by the judge on its own motion (ex officio) or upon the petition of the party who commenced the proceedings or the Public Prosecutor. The reform expressly grants the judge the power to issue these measures, which was not foreseen in the previous Article 1903 LEC 1881 that relied only on the parties or the Public Prosecutor applying for such measures. This omission had not prevented judges from issuing such orders in an attempt to avoid further harm, e.g., further re-abductions.23 derecho internacional y en las relaciones internacionales: Jornadas en conmemoración del 50 aniversario de la Declaración Universal de los Derechos del Niño y del 20 aniversario del Convenio de Nueva York sobre los Derechos del Niño, Madrid 2010, p. 341-366, at 351. 20 Suggesting this choice, M. HERRANZ BALLESTEROS, Nota a la Sentencia del Tribunal Constitucional n. 120/2002, Revista Española de Derecho Internacional 2002-2, Vol. LIV, p. 908-914, at 914. This is the option endorsed in the Belgian Code judiciare (see Article 1322 sexies). 21 This solution, which had been already proposed in E. RODRÍGUEZ PINEAU (note 5), at 1756, is the one enshrined in the German §40(3) IntFamRVG – Internationales Familienrechtsverfahrensgesetz vom 26. Januar 2005 (BGBl. I S. 162), das zuletzt durch Artikel 6 des Gesetzes vom 8. Juli 2014 (BGBl. I S. 890) geändert worden ist. However, more sceptical voices pointed at the potential bad practice that staying the return during the appeal might entail, see P. JIMÉNEZ BLANCO (note 19), at 351. 22 See infra (note 54) and accompanying text. 23 P. GONZÁLVEZ VICENTE, Problemas detectados en la práctica del Convenio de La Haya sobre aspectos civiles de la sustracción internacional de menores, in A. QUIÑONES/

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Elena Rodríguez Pineau There are also slight variations as to the measures envisaged in the text. Article 778 quater (8) refers to whatever provisional and precautionary measures the judge may adopt on the basis of Articles 773 LEC and 158 Civil Code. These concern, among others, those aiming at reducing the chances of a possible re-abduction of the child (such as restricting the issuing of a passport to the child or withholding it should the child have one). It is also foreseen that the claimant may be granted visitation or access rights while the proceedings are pending with due supervision – if needed – when this satisfies the best interests of the child. It is interesting to note that the previous reference (in Article 1903 LEC 1881) to the possibility that the judge granted the provisional custody of the child has disappeared.24 Nonetheless, arguably in spite of the deletion, there is still a discretion for the judge to grant the provisional custody to the alleged abductor on the basis of the abovementioned Articles 773 LEC and 158 Civil Code, inasmuch as the leftbehind parent may be granted visitation or access rights if the measure is in the best interests of the child.

V.

New Features

The new Articles 778 quater and following introduce some features in relation to return proceedings that should be welcome. Some of them endorse or make explicit what was already being done as a result of the developments in this particular area of family law (infra A and B). Other were needed in order to correctly implement the provisions of the Brussels II-bis Regulation (infra C and D). A.

Cooperation between Authorities

The increasing collaboration between judicial (and other) authorities in the context of civil litigation is also reflected in the new text of Article 778 quater (7). This provision underlines the need for direct communication between judicial authorities and provides for the possibility to resort to the assistance of the Central Authorities, the international networks for judicial cooperation, members of the International Hague Network of Judges and the International Network of Liaison judges. This provision also reflects the ongoing process of direct judicial communication in international child protection cases and the development of networks that support this communication as started in 2009 with the Joint EC-HCCH Conference.25 Although this reference to direct communication between authorities does not really introduce added-value into the system, it has the virtue of F. CALVO/ J. ORTUÑO (eds.), Crisis matrimoniales. La protección del menor en el marco europeo, Madrid 2005, p. 209-242, at 227-228. 24 This deletion may result from the cautious approach that such measures have received since the Court of Justice’s decision in Deticek (C-403/09 PPU, of 23 December 2009, Jasna Detiček vs Maurizio Sgueglia, ECLI:EU:C:2009:810). 25 Available at .

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International Child Abduction: New Developments in Spain reminding the judges of the existence of such networks, as well as of the need to collaborate with them – a possibility that is not always envisaged by judges.26 B.

Mediation

Article 778 quinquies (12) foresees the possibility that the parties ask for a stay of the proceedings in order to give mediation a chance. The court of its own motion may also encourage the parties to try this possibility. The mediation proceedings must not exceed the time allowed for the regular judicial proceedings. While Article 778 quinquies does not clearly state who can be the mediator, it proposes nonetheless that such role might be assumed by the public institution in charge of protecting the child27 if this is the request of the parties, the Public Prosecutor or even the judge. The judicial proceedings may resume whenever one of the parties so requests, or when an agreement is reached that must be subsequently authorised by the judge.28 This initiative is to be welcomed, since it sets up a legal framework in Spain for mediation in international abduction cases. However, and to be fair to the efforts made by Spanish judges, it should be pointed out that on some occasions parties have already been referred to mediation in abduction cases – mostly at the stage of enforcing the return of the child in the context of Article 7 of the 1980 Hague Convention, Article 55(e) of the Brussels II-bis Regulation and Article 31(e) of the 1996 Hague Child Protection Convention – so this is not a completely unexpected move.29 This new provision strikes the balance between the possibility to revert to an amicable solution (mediation) and the risk of undue delays (by means of setting temporal constraints). In fact, it is important that the mediation should not be used as a strategic tool.30 However, it is hardly reasonable to expect that any agreement may be reached within the six-week time limit.31 Moreover, it must be borne in For a rather accurate vision on the state of the art as regards cooperation between authorities in Spain see F.J. FORCADA MIRANDA (note 9), at 185-190. 27 Since the protection of children in Spain is a competence devolved to the Regional authorities (Comunidades Autónomas), this Public institution or authority will be identified on the basis of the territory where the proceedings are taking place. 28 It should be taken into account that recourse to mediation is forbidden when a proceeding before criminal courts on the basis of family violence is pending (Article 87 ter Judiciary Act, LOPJ, see supra note 11). 29 SAP Barcelona, 1st October 2013, ECLI:ES:APB:2013:11168. It should also be noted that some Spanish judges have already adhered to the GEMME initiative (Group of European Magistrates for Mediation). 30 Putting forward some of these concerns in relation to mediation, A. HERNÁNDEZ RODRÍGUEZ, Mediación y secuestro internacional de menores: ventajas e inconvenientes, Cuadernos de Derecho Transnacional 2014, Vol. 6 (No. 2), p. 130-146, at 141. 31 In fact the wording is rather ambiguous because it may be understood both that mediation should be concluded within the six-week limit, or that mediation may not take longer than six weeks, and therefore, by adding those weeks to the six weeks foreseen for the judicial proceedings, the whole return proceedings may extend up to twelve weeks. 26

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Elena Rodríguez Pineau mind that the Spanish legal system does not have a single Act on mediation, but that both state and regional legislation coexists in the field of mediation.32 This ensures that the legal panorama is rather a complex, since the possibility to have recourse to mediation will depend on the scope of application of these acts. Furthermore, most of these texts do not consider the cross-border element and, when they do, they provide rather inadequate solutions in order to deal with the return of the child.33 In other words, the good will of the measure may not produce the foreseen results, mostly because such a move would have required adopting further implementation measures as other European States have done. A possibility could have been to emulate the French or the Swiss model in which the Central Authority provides the service.34 An alternative model could have been that utilised in the Netherlands in the form of the Dutch Centre for International Child Abduction, a Mediation Bureau with partial funding by the State which also trains skilled S. CALAZA LÓPEZ (note 4), at 210-211, seems to favour the latter interpretation while criticising the excessive length that proceedings could have in that case. If this was not the intention of the Spanish legislature, then one should conclude that mediation should be concluded within the six-week limit of the judicial proceedings. 32 It is interesting to note how the Circular 6/2015 of the Public Prosecutor’s Office (Fiscalía General, supra, note 6) exclusively refers to the State Act 5/2012 on mediation, which transposes Directive 2008/52 of the European Parliament and the Council on certain aspects of mediation in civil and commercial matters (OJ L136/3 of 24 May 2008). No further reference is made to other regional (from the Comunidades autónomas) pieces of legislation on this matter. It might be on the basis of this Circular that J.R. LIÉBANA ORTIZ (note 15), at 106 refers exclusively to the State Act 5/2012. This is particularly striking bearing in mind that there are thirteen Acts on family mediation adopted by the Regions (Comunidades Autónomas) such as Andalucía (Act 1/2009), Aragón (Act 9/2011), Asturias (Act 3/2007), the Canary Islands (Act 15/2003) and so forth. 33 In this sense, Article 2 of Act 5/2012 states that it shall be applicable to mediations to be held in Spain if at least one of the parties has her domicile in Spain. One may easily understand that while the abducting parent may have Spanish nationality and therefore, may have come back to Spain, he/she will hardly have acquired a domicile – in the terms of this piece of legislation – that triggers the application of the Act. We should consider then whether a regional piece of legislation on mediation is applicable to the return case. In contrast to Act 5/2012, most of these Regional Acts on mediation ground their application on a mere territorial basis, i.e. that the mediation proceedings are initiated within the Region, with no additional requirement as to the residence of the parties. 34 See Articles 3 and 4 of the Loi fédérale sur l’enlèvement international d’enfants et les Conventions de La Haye sur la protection des enfants et des adultes (n. 211.222.32) of 21 December 2007. In France the service is provided by the Cellule de médiation familiale internationale (CMFI), which belongs to the French Central Authority under the 1980 Hague Convention (). Embracing this option would be in line with the idea of having one central reference point for the whole territory of Spain (as there is only one Central Authority in relation to child abduction). Moreover, it could help to avoid the legal dispersion in terms of mediation if – as presumably it could be the case – this State authority would apply Spanish Act 5/2012 on mediation. On the other hand, it is conceded that this Central Authority may not be the closest to the child and its environment and that this option would require an additional training and larger personnel.

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International Child Abduction: New Developments in Spain mediators in cross-border child-abduction cases.35 Maybe funding shortages rendered both options unfeasible. However, one could be optimistic and hope that such solutions might be used by the Spanish authorities in the not too distant future. C.

New Proceedings to Adopt a Measure in the Sense of Article 15 of the 1980 Hague Convention

The main objective of the reform introduced by Act 15/2015 on non-contentious proceedings is to address the specificities of the return proceedings of children abducted to Spain. However, the legislature deals in one punctual term with the opposite situation, i.e. the return proceedings of a child who had her habitual residence in Spain prior to the removal. Furthermore, Article 778 sexies addresses the internal implementation of Article 15 of the 1980 Hague Convention, i.e. the adoption of a decision stating the wrongfulness of the removal of the child from Spain. Article 778 sexies – which is similar to the German §41 IntFamRVG36 – foresees in the possibility to seize the same judicial authority in Spain that has already decided on the (abducted) child’s parental responsibility. In the absence of such a previous decision on parental responsibility, the court of the last habitual residence of the child in Spain before the illicit removal should be seized. This judgment shall be rendered in accordance with the rules laid down in the Spanish Civil Code on the adoption of final or provisional measures over the child. In practical terms this new rule does not introduce any novelty into the system, yet it sets forth the specific provisions that should be applied. It is nonetheless regrettable that the opportunity has not been seized to introduce further clarifications or new features that would have been welcome as the next paragraphs will illustrate. D.

Issuing the Certification of Articles 41 and 42 of the Brussels II-bis Regulation

Last but not least concerning novelties, Final Provision No 3 (19) of Act 15/2015 on non-contentious proceedings introduces a new Final Provision No 22 into the Spanish Civil Procedural Act (LEC 2000). It is by way of Final Provisions in the LEC 2000 that the Spanish legislature usually implements EU civil procedure Regulations. This new Final Provision No 22 incorporates some specific rules regarding the proceedings to obtain a certificate of a decision on the return of a child or ensuring the enforceability of a right of access/visitation. This very brief provision states that the judge will issue the certificate in a separate document using the official standard form annexed to the Brussels II-bis Regulation. Although it is not specified, one may interpret that this judge is the same one that issued the decision that requires certification. Should the certificate need to be rectified, the proceedings for such modification are regulated in Article 267 of the 35 36

Available at . Supra (note 21).

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Elena Rodríguez Pineau Judiciary Act, Ley orgánica del poder judicial, LOPJ. There is no possibility to appeal against the rectified or clarified decision. It is also stated that, should the issuance of the certificate be denied, appeal (recurso de reposición) is possible before the same judge that denied it. E.

Specific Rules on Articles 11(6) and 11(7) of the Brussels II-bis Regulation

The same Final Provision No 22 LEC 2000 introduces two additional rules which aim to implement Articles 11(6) and 11(7) of the Brussels II-bis Regulation. The former refers to the obligations of the requested State, whereas the latter addresses the proceedings at the requesting State if return has been denied. Article 11(6) Brussels II-bis lays down the obligation for the requested State to communicate the decision of non-return to the requesting State if the decision was based on Article 13 of the 1980 Hague Convention, as well as the means to fulfil such an obligation. In order to comply with Article 11(6), Final Provision No 22(6) foresees that such transmission will include both a copy of the non-return order and a copy of the original (image and sound) recording of the proceedings, as well as any other documents the judicial authorities deem necessary. In fact, this provision does not introduce any additional element to those stated in Article 11(6) of the Brussels II-bis Regulation except for the reference to the audio-visual recordings instead of the transcript of the hearings. On the contrary, Final Provision No 22(7) – which addresses how the Spanish system will comply with the requirements of Article 11(7) of the Brussels II-bis Regulation – makes a possibly disputable choice. According to Article 11(7), once the Central Authority (or the judges) in the requesting State receives the information that the child will not be returned, a procedure may be initiated as to the custody of the child before the judge of the habitual residence prior to the abduction. On the one hand, this provision confirms that the rules on custody proceedings (as in LEC 2000) will also be applicable to these proceedings. On the other, it is established that the competent judge will not be the ordinary one in relation to custody cases, but rather the one identified according to the rules of Article 778 quater, which is quite a surprising choice. Indeed, one should bear in mind that this is the rule that governs return proceedings; therefore, it aims at identifying the court that is closest to the abducted child (but see supra III.A). However, in this case, international jurisdiction lies with the Spanish courts because Spain was the State of the habitual residence of the child prior to the removal. One may wonder then whether it is better to assign the territorial competence to the capital of province court instead of the family domicile. While this may make sense in the abduction cases in order to harmonise decisions as to the return, it is not so clear whether this is a good solution for the custody cases.

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International Child Abduction: New Developments in Spain

VI. Missing Issues Despite the minor criticism referred to in previous pages, the new Articles 778 quater, quinquies and sexies are a breath of fresh air for the proceedings regarding the restitution or return of the child following a wrongful removal. This being so, it should also be regretted that the chance has been missed to address some issues both as regards the return proceedings and in relation to other situations that are related to the international abduction of children. A.

Recognition and exequatur of Decisions on Return or Access Rights

While other States have tackled the questions relating to international abduction from a global perspective, i.e. considering both the return proceedings in the requested State, as well as the system of recognition and/or enforcement of decisions relating to child abduction and visitation/access rights, the Spanish legislature has focused exclusively on the return proceedings, leaving aside all those matters related to recognition and enforcement of decisions on return or access rights. It is regrettable that the legislator has not seized the opportunity to offer a comprehensive approach to international abduction cases as other States have done (such as Germany or Belgium).37 This silence may be explained due to the low number of applications of recognition of custody decisions (which entail the return of the child) before Spanish courts under the Luxembourg Convention 1980, the bilateral agreement between Spain and Morocco on custody, access rights and return of children38 or under the 1996 Hague Child Protection Convention on the enforcement of visitation and access rights. However, it would have been salutary that the legislature had made an additional effort and had addressed these issues too, for the sake of clarity and coherence in the understanding of the system that governs return of children and enforcement of access rights. In this scenario, one must resort to the general system of recognition and enforcement, which has also been recently amended through the new Act 29/2015 on international cooperation in civil matters (Ley cooperación jurídica internacional, LCJI).39 Since return orders usually result from contentious (even in absentia) proceedings, it seems quite reasonable to have recourse to the general system of exequatur foreseen in Articles 41 et seq. LCJI. More precisely, 37 IntFamRVG (note 21) and Loi 10 août 1998 (Loi portant assentiment à la Convention sur les aspects civils de l’enlèvement international d’enfants, faite à La Haye le 25 octobre 1980), modifiée par la Loi 52 du 10 mai 2007 (Loi visant la mise en œuvre du Règlement n° 2201/2003 du Conseil du 27 novembre 2003) et par loi 13 du 27 novembre 2013 (Loi visant à assurer la mise en œuvre de la Convention de La Haye du 19 octobre 1996), that introduced Chapter XIIbis – Article 1322 (and its several amendments) into the Fourth book of the Fourth part of the Belgian Civil procedure Code. 38 Convention on the judicial assistance, recognition and enforcement of decisions on custody, access rights and return of children, of 30 May 1997, published in BOE n. 150 of 24 June 1997. 39 See supra (note 6).

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Elena Rodríguez Pineau according to Article 52 LCJI, the homologation procedure must be brought before the court of first instance of the domicile of the person against whom exequatur is sought or of the domicile of the person on whom the resolution produces its effects. In the absence of the former criteria, the claimant may seize the court of competent jurisdiction at the place where the enforcement must take place. This is a very appropriate provision, since it is very likely that the claimant in cases of return or visitation orders will intend to obtain both the declaration of enforceability of the decision and its subsequent enforcement.40 Lastly, as a default clause, the Act foresees that the homologation procedure will proceed before the court of first instance which is seized with the exequatur proceedings. Act 29/2015 also establishes the grounds for refusing recognition and/or enforcement in Article 46, but it does so following very closely the wording of EU Regulation No 1215/2012 that deals with recognition and enforcement of decisions in civil and commercial matters. Again, it is to be regretted that the issues relating to family decisions have not been explicitly addressed. However, it should be noted that the Preamble of Act 29/2015 expressly recognises that hearing the child – where appropriate according to her age – is part and parcel of the public policy contents. Therefore, where this requirement has not been met – except in cases of urgency – recognition or enforcement of the foreign decision should not be granted.41 B.

Enforcement Procedure

Both the 1996 Hague Child Protection Convention and the Brussels II-bis Regulation refer the enforcement procedure to the internal law of the contracting or Member State where enforcement is sought. This procedure applies either when the claimant has obtained exequatur for a judgment ordering the return of the child (or the effective exercise of access rights) or when he/she has a directly enforceable title, such as those granted according to Articles 41 and 42 Brussels II-bis Regulation. The need to address the specificities of the enforcement procedure in cases of international abduction had already been signalled, apparently to no avail.42 In fact, the Spanish legislature did not deem it necessary to tackle the issue, and Article 50 (2) LCJI refers again to the general rules of enforcement as provided in the LEC 2000. Some interpretation concerns arise, however, once LEC 2000 and LCJI are read in conjunction in cases of enforcement of return or visitation orders. The first is about the identification of which court has local jurisdiction to enforce the order. Article 61 LEC 2000 establishes that local jurisdiction is vested with the same court that issued the return order. This has been understood in the sense that in terms of enforcement of foreign decisions on the return of (or access to) the child,

This possibility is now laid down in Article 54(2) LCJI. Ley 29/2015, LCJI (note 6), at 65912. 42 P. JIMÉNEZ BLANCO (note 19), at 348. 40 41

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International Child Abduction: New Developments in Spain jurisdiction should lie with the judge that granted the exequatur.43 This understanding seems to be reinforced by Article 52 LCJI, since it seems to indirectly grant the court issuing the exequatur with the jurisdiction to enforce the return order. However, it is unclear whether this should always be the case (i.e. whenever a foreign judgment has obtained exequatur) or whether this concurring jurisdiction will only apply where the claimant applies for both exequatur and enforcement (i.e. if there is no concurrent petition, local jurisdiction for the enforcement would result from Article 545(3) LEC 2000).44 In practical terms the result is not likely to differ substantially, since the provisions of Article 545(3) LEC 2000 and Article 52 LCJI are quite similar. Nevertheless, it is unfortunate that the legislature has failed to introduce a clear rule. This same regret may be extended to a second situation which is not addressed in Article 52 LCJI, namely, the enforcement of a foreign decision that is directly enforceable, as is the case with Articles 41 and 42 of the Brussels II-bis Regulation. It goes without saying that the previous discussion about granting jurisdiction to the court that issued the order is not possible since the granting court was a foreign one. A flexible interpretation of Article 545(3) LEC 2000 – which refers to the place where the child to be returned is present – could solve the problem.45 This interpretation was favoured prior to 2015 since under Article 1901 et seq. LEC 1881 jurisdiction for the return proceedings lay with the court of first instance of the place where the child was physically present; therefore, it was reasonable that the same court had the power to enforce a decision on return. One could question whether a different approach should be followed in the light of the new Article 778 quater LEC 2000, which grants local jurisdiction to the court of the capital of the province. Despite the fact this court is not necessarily the closest to the child that has to be returned, it arguably has the expertise in terms of returning abducted children, and that may justify granting jurisdiction on functional grounds. However, it could also be understood that the ratio of the rule is that the court which is closest (in physical terms) to the child is the one with jurisdiction for enforcement. This would again mean referring the enforcement to the court in whose district the child is present (Article 545(3) LEC). All in all, from the previous observations it is clear that the Spanish legislature has failed to solve in clear terms which court with local jurisdiction is to enforce a return order, be it the result of an exequatur or a directly enforceable title. However, it could be contended that Article 545(3) LEC still provides an As P. JIMÉNEZ BLANCO (note 19), at 349 reminds, the identification of the court with local jurisdiction to grant the exequatur may become complex, bearing in mind the existence of different courts of first instance that may deal with this kind of proceedings: instance judge, the instance judge with family law competences... 44 F. GASCÓN INCHAUSTI, Reconocimiento y ejecución de resoluciones judiciales extranjeras en la Ley de Cooperación Jurídica Internacional en materia civil, Cuadernos de Derecho Transnacional (Oct. 2015), Vol. 7, No. 2, p. 158-187, at 172-173 reflects on this issue with no definite conclusion, as he sees that both interpretations may be supported within the present legal context. 45 E. RODRÍGUEZ PINEAU, Algunas cuestiones sobre la aplicación del Reglamento CE 2201/2003 en España, Anuario Español de Derecho Internacional Privado 2004, Vol. IV No. 2, p. 261-286, at 277. 43

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Elena Rodríguez Pineau answer which is reasonable in terms of identifying a close court with functional expertise. Leaving aside the issue of local jurisdiction, we may focus on other problems that the absence of a specific legal framework generates when it comes to the enforcement of decisions relating to child abduction, return or access rights. Some of them had already been identified years ago.46 In fact, Articles 538 et seq. LEC 2000, i.e., those that skew the general rules on enforcement – overlook some particularities of the return proceedings such as the compulsory participation of the Public Prosecutor. It may be understood that this is implicitly foreseen since the proceedings refer to the child (in the light of Article 749(1) LEC 2000), but it would have been better to include this explicitly. The text is still silent on the possibility that the judge decides on his or her own motion to initiate the enforcement procedure. In addition, a strict reading of the rules would prevent the judge from directly enforcing the decision of return and would require that a previous order granting the enforcement be issued. In order to overcome this hindrance, a flexible interpretation of the rules had ensured that when the return order was very detailed, direct enforcement would be possible.47 This latter solution seems to have been enshrined in Article 778 quinquies (9), where it is expressly requested that the decision ordering the return shall establish in detail the ways and means and the moment for the return to take place. Lastly, the reform process which the Spanish system has undergone in the past months could have offered a good chance to update the system of enforcement of return orders in the line of the recommendations of the Good Practice Guide to enforcement of the 1980 Hague Convention. Among those, the Guide asks to put forward effective coercive measures that are mostly absent in the Spanish text.48 It has been traditionally the case that social and child protection services (from the Autonomous Regions) may assist in repatriation. This is partially assumed by Article 778 quinquies (13), which refers to the possibility that social and child protection services, together with the security forces of the State, may be called to intervene.49 No further measures have been explicitly embraced, and again it may be regretted that the opportunity to address the regulation of mirror orders – which would have provided Spanish judges with additional flexible and helpful tools to decide on return cases – has been missed. P. JIMÉNEZ BLANCO (note 19), at 349. See the Spanish Ministry of Justice’s answer to the questionnaire of 2004 on the enforcement of return orders under the 1980 Hague Convention (), p. 3. 48 Compare to §44 IntFamRVG that foresees that a coercive fine may be imposed and, should this not be recoverable or successful, the court may order coercive detention. This kind of measures which provide for “personal coercion” or “pecuniary fines” are already set forth in Articles 699 and 776(2) LEC 2000 in case the obligor does not comply with a non-pecuniary obligation (such as the return of the child). However, and again, for the sake of clarity and exemplification in return cases, it would have helped to have it written down in Article 778 quinquies. 49 As it has been noted, enforcement requires further measures to ensure that return will be wholly effective, and it is to be lamented that the reform has not been more detailed on this point. See S. CALAZA LÓPEZ (note 4), at 206. 46 47

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International Child Abduction: New Developments in Spain C.

Opposing Enforcement

The reforms have also failed to address the question of the opposition to the enforcement order to return the child. It is usually understood that a complaint against the admission of compulsory enforcement is possible according to Article 556 LEC.50 This provision foresees two kinds of grounds for opposing enforcement: either the decision has already been enforced or the time limit for enforcement has expired. It is interesting to note that Article 50(2) LCJI has introduced a new rule regarding the time limit, namely by referring the limitation period for enforcement actions to the one established in the Spanish LEC. This makes it necessary to disregard the provisions of the law of the forum where the judgment was granted.51 Setting aside the convenience of this new rule, a more generic reflection on the way the system deals with opposing enforcement in child abduction cases is needed. Understandably, the very limited grounds available to oppose enforcement in these cases ensure the actual and prompt enforcement of the return order. However, one should bear in mind that any proceedings relating to the child should have as the paramount guiding criterion the best interest of the child (even in those cases where this could amount to strengthening the position of the abducting parent). In contrast to other legal systems where the law expressly provides for the possibility of the return order being opposed,52 the Spanish system lacks flexibility to address unexpected developments or to ensure that the best interest of the child is preserved.53 In the absence of such a provision, particularly where it comes to foreign judgments, there is a real risk that parties seek alternative mechanisms to avoid the return of the child, such as resorting to the Spanish Constitutional Court on the basis of a violation of a fundamental right (either of the child or of the Nothing seems to have changed since the Spanish Ministry of Justice provided the Hague Conference with the information that was included in the Preliminary Document No 6 of October 2006 on the Enforcement of Orders Made under the 1980 Convention – A Comparative Legal Study – of 2006 (). At note 112 it is explained how the challenged order before the court that granted the decision may also be appealed at the Audiencia Provincial and subsequently, at the Constitutional court. 51 This is a rather worrying precision since it may run contrary to the general understanding that this is an issue that should be governed by the lex fori of the State where the judgment was given, as part of the effects a judgment may produce. In this sense, F. GASCÓN INCHAUSTI (note 44), at 174. 52 As it is the case, for instance, in the Swiss Act on international child abduction and protection of children and adults, Loi 211.22.32 of 21 December 2007, where Article 13 provides for the modification of the return order where the circumstances have changed in a determining way. 53 In actual fact, on the basis of Article 18(2) LOPJ and Article 22 LEC 2000, as well as some case law from the Spanish Constitutional Court, it has been contended that unexpected circumstances could justify to enervate the enforcement (P. JIMÉNEZ BLANCO (note 19), at 357). However, and for the sake of clarity, it could be more practical that judges and parties could rely directly on a provision where this is stated black in white, as the Swiss legislator has done. 50

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Elena Rodríguez Pineau parent).54 While the right to have recourse to the Constitutional Court is not contested, it seems clear that the LEC 2000 needs to incorporate some escape clauses that allow for opposing the return of the child without relying on the intervention of the Constitutional Court. D.

Other Issues Related to Child Protection against Abduction

It is increasingly acknowledged that the best form to solve child abduction is to prevent it. This has led to recent efforts in terms of securing both peaceful relocation of children and rights of access and visitation. In providing a good answer to these two issues, a rather effective tool against abductions is thus created. In this sense, it should be noted how both the 1996 Hague Child Protection Convention and the Brussels II-bis Regulation have set proceedings to fill the gap of the 1980 Hague Convention in terms of visitation/access rights. Ten years ago the Spanish authorities were unable to give specific answers to the Hague Conference’s questionnaire on the enforcement of the access/ visitation rights, arguing the novelty of these rules and the scarce number of applications received.55 Unfortunately, the Spanish legislature has not seized the opportunity to address some of the internal adjustments that could have been undertaken in order to make these provisions fully effective in Spain. Except for the provisions on the application of Article 41 of the Brussels II-bis Regulation in Spain, there is still no specific answer as to the enforcement of visit/access rights granted in a non-EU jurisdiction (e.g., in the framework of the 1980 Hague Convention or the 1996 Hague Child Protection Convention).56

54 In its very recent judgment 6/2016 of 1 February 2016 (BOE n. 57 of 7 March 2016, Secc. TC, p. 18444-18459), and deciding on an amparo appeal, the Constitutional Court has set forth that respect for due process in return cases entails that the return order is duly reasoned. This imposes that the court considers the best interests of the child, in particular its integration in the social context where the child is. Relying on the case law of the ECtHR, the Constitutional Court considers that – albeit the return petition was filed within three months of the abduction – the length of the proceedings in Spain (about twenty months) required that the integration of the child be evaluated at the time the case was heard. By not having done so, and bearing in mind the tender age of the child and the time elapsed, the Constitutional Court deems that the due process has been infringed and annuls the appeal order. Consequently, the court will have to issue a new order on the return that respects due process as defined in the judgment. With due respect, this decision may send an equivocal message to abducting parents that may see the Constitutional Court – as an alternative to the ECtHR – as the ultimate instance to keep the child. 55 See the answers of the Spanish Ministry of Justice to the Questionnaire on the Enforcement of Return Orders under the 1980 Hague Convention and of Access/contact Orders (), p. 12, where it is acknowledged that the answers to this question need both further developments and an involvement of judicial authorities. 56 As it has been done in other European States such as in Belgium, see namely Article 1322bis (2) Belgian Civil Procedure Code.

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International Child Abduction: New Developments in Spain The same applies to the question of relocation. Unlike other States such as Austria,57 the Spanish legislature has not addressed this question. While the questions relating to local jurisdiction and procedure do not pose particular difficulties,58 assessing the merits of the dispute seems a more complex issue for Spanish courts, as shown by the increasing number of cases brought before them. Moreover, some recent and highly publicised cases have been decided by the Spanish Supreme Court on relocation both at the internal and at the cross-border level.59 Being aware of the complexities of the matter and having in mind that the paramount criterion at this point is the best interest of the child – which admittedly is not easy to handle60 –, it could help to have the guidelines of the Supreme Court incorporated into a normative text.

VII. Concluding Remarks The reforms undertaken by the Spanish legislature in 2015 may receive in general terms a positive assessment in relation to the amendment of the former rules on return proceedings. They also put forward new provisions that are likely to update In 2013, § 162 of the Austrian Civil Code was amended and introduced some rules regarding relocation, which apply also in cross-border cases. The state of the art on this new rule is summarized in the report for Austria in the study for the LIBE Committee of the European Parliament on Cross-border Parental Child Abduction in the European Union, 2015, p. 293-321 at 299, available at . 58 In fact, it seems uncontested that local jurisdiction lies with the court that would have ordinary jurisdiction to deal with the dispute on the custody of the child (i.e. the court of the habitual residence of the child) and the judge would apply the provisions of Articles 769 et seq. of the LEC 2000. Therefore we do not share the view endorsed by J.R. LIÉBANA ORTÍZ (note 15), at 108 that the parent that wishes to relocate may resort to the proceedings of Article 778 sexies. This is a procedure designed to operate once the abduction has taken place. 59 The most relevant and recent decision on cross-border relocation is the Supreme Court’s judgment of 20 October 2014 (ECLI:ES:TS:2014:4072). The Supreme Court stated that the best interest of the child should be the paramount consideration in cases of international relocation and therefore, relocation may be authorized only where it benefits the child in the light of her best interest. In the case, and bearing in mind the young age of the child – who was dependent on the mother – and the fact that the father would not have been granted the custody over the child even if the mother had stayed in Spain, the Supreme Court authorised the relocation of mother and child. 60 It may be contended that a definition of the best interest of the child is already endorsed in another piece of legislation, namely Article 2 of Act 1/996 on the Legal protection of children (note 1) as amended by Act 8/2015 on the protection of infants and adolescents (Ley orgánica de modificación del sistema de protección a la infancia y a la adolescencia, of 22 July 2015, published in BOE No. 175 of 23 July, p. 61871 et seq.). However, we still think that this piecemeal approach to all questions related to child custody and access or visit rights in cross-border cases makes the work of judges and lawyers more complicated than needed. 57

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Elena Rodríguez Pineau the system and fine-tune it to respond to the present demands of return proceedings. However, it is to be regretted that the reforms were not comprehensive and did not address all procedural aspects relating to return and access rights. This missed opportunity may be explained by the piecemeal approach of the new legislation that focused either on non-contentious jurisdiction or on international cooperation in civil matters, as if these were unrelated aspects of the same problem. All in all, the final result is better than before. And even if it could be argued that the system should strive for a comprehensive piece of legislation to effectively implement international legislation on cross-border custody, visitation and access rights of the child – such as the German legislature has done – it should also be acknowledged that its first pillars for doing so have now been laid down.

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CROSS-BORDER PLACEMENT OF CHILDREN: THE CURRENT SITUATION IN SPAIN Mónica HERRANZ BALLESTEROS*

I. II. III.

V.

Introduction The CJEU Ruling in the HSE Case The Importance of the Issue in Spain and the EU A. Regulatory Authorisation and the Authorities Involved in Spain B. The Procedure to Be Followed in Spain as the Required State C. Analysis of the Requirements Established in the Light of CJEU Case Law The Child’s Interests and Rights: Their Promotion in Cases of Cross-Border Placement Further Considerations

I.

Introduction

IV.

The importance of Article 56 of Council Regulation (EC) No 2201/2003 of 27 November 2003 concerning jurisdiction and the recognition and enforcement of judgments in matrimonial matters and the matters of parental responsibility, repealing Regulation (EC) No 1347/20001 (hereinafter “Brussels IIa Regulation”) Professor at the Universidad Nacional de Educación a Distancia. The author is Member of the team of experts of the Study, Cross-border placement of children in the European Union, Policy Department C: Citizens’ rights and constitutional affairs, Committee on Legal Affairs, done by L. CARPANETTO 2016. This paper is part of the Project “La regulación de las crisis matrimoniales internacionales en el Derecho español y de la Unión Europea”. DER 2014-54470-P (2015/2017). 1 OJ L 338, 23/12/2003 P. 0001 – 0029. Article 56 Placement of a child in another Member State: 1. Where a court having jurisdiction under Articles 8 to 15 contemplates the placement of a child in institutional care or with a foster family and where such placement is to take place in another Member State, it shall first consult the central authority or other authority having jurisdiction in the latter State where public authority intervention in that Member State is required for domestic cases of child placement. 2. The judgment on placement referred to in paragraph 1 may be made in the requesting State only if the competent authority of the requested State has consented to the placement. 3. The procedures for consultation or consent referred to in paragraphs 1 and 2 shall be governed by the national law of the requested State. 4. Where the authority having jurisdiction under Articles 8 to 15 decides to place the child in a foster family, and where such placement is to take place in another Member State *

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Printed in Germany

Mónica Herranz Ballesteros is reflected in the figures that certain Member States publish in relation to its application. Data for Germany alone shows that between 2013 and 2014 there were 483 cases in which a cross-border placement of a child was processed under the aforementioned provision.2 There were an additional seven reported German cases where Article 33 of the Convention of 19 October 1996 on Jurisdiction, Applicable Law, Recognition, Enforcement and Co-operation in Respect of Parental Responsibility and Measures for the Protection of Children was applied. It is clear that in practice these are rules of undoubted importance, but it has been since the CJEU ruling in the Health Service Executive (HSE)3 case that more attention has been placed in legal doctrine on the analysis of these rules.4 Our interest results from the figures published by Germany. The website of the German Central Authority indicates that there were 93 cross-border placements involving Spain in 2013 and 86 such placements in 2014.5 Spain does not provide official statistics or at least these are not published. This paper discusses the circumstances giving rise to the application of Article 56 of the Brussels IIa Regulation, the authorities involved, the internal procedures followed in Spain and the conflict between the reality of the measure and the rights of the child. The discussion begins with an analysis of the CJEU’s ruling in the HSE case, which highlights the factors of interest to Spain. and where no public authority intervention is required in the latter Member State for domestic cases of child placement, it shall so inform the central authority or other authority having jurisdiction in the latter State. The European Commission published a Proposal for a Council Regulation on jurisdiction, the recognition and enforcement of decisions in matrimonial matters and matters of parental responsibility, and on international child abduction recast COM(2016) 411/2. The proposal concerning cross-border placements foresees the introduction of the following new rules: Making consent of the receiving State mandatory for all cross-border placements originating from a court or authority in a Member State; introducing uniform requirements for documents to be submitted with the request for consent: the requesting authority has to submit a report on the child and set out the reasons for the contemplated cross-border placement; introducing a rule on translation requirements: the request has to be accompanied by a translation into the language of the requested Member State; channeling all requests through Central Authorities; and introducing a time limit of eight weeks for the requested State to make a decision in relation to the request. 2 The figures may be seen at . 3 CJEU, 26 April 2012, Case C-92, Health Service Executive. 4 A. DUTTA/ A. SCHULZ, First cornerstones of the EU rules on Cross-border child cases: the jurisprudence of the Court of Justice of the European Union on the Brussels IIa Regulation from C to Health Service Executive, Journal of Private International Law 2014, Vol. 1, Issue. 1, p. 1-39. S. ÁLVAREZ, REDI (2012), 2, p. 234-238. F.J. FORCADA MIRANDA, Revision with respect to the cross-border placement of children, N.I.P.R. 2015, Issue 1, p. 36-42. 5 It would appear that, of the 483 cases reported in the German statistics, Spain is involved as the destination country in 179 of them.

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Cross-Border Placement of Children: A Spanish Perspective

II.

The CJEU Ruling in the HSE Case

The facts of the ruling being well known, we will only refer to the main ones. A child in Ireland was under the protection of the Irish authorities, who requested the competent Court to issue an order for the placement of the child in a secure institution in England, where the mother lives. In accordance with Article 56 of the Brussels IIa Regulation, the Irish protection authorities contacted the Irish Central Authority so that the latter would request permission from its English counterpart for the transfer. Although, in principle, it appears that the Article 56 procedure had been complied with, the Irish authorities referred to the CJEU for a preliminary ruling to clarify some issues in relation to this provision. This first issue raises doubts as to whether the measure taken falls within the material scope of the Brussels IIa Regulation given that it deals with detaining a child in a secure institution with deprivation of liberty, and is thus a public law measure. The CJEU finding on this point is fundamental. A response indicating it is within the material scope of the Regulation means submitting such decisions to the parameters of action of Article 56; while if the response is the opposite, the measure would escape the control of the aforementioned precept. In its ruling the CJEU unhesitatingly situates the placement of the child in a secure institution with deprivation of liberty within the material scope of the Brussels IIa Regulation. The second question centres on the interpretation of the obligations arising under Article 56. Under the rules, the Central Authority in England and Wales sends the Irish Central Authority a letter confirming the acceptance by the institution in which the measure is to be enforced. Is the acceptance in accordance with the nature of the obligation arising under Article 56? The CJEU makes it clear that a decentralised system is possible, in the sense that two authorities are involved: One authority during the consultation stage, which would be the Central Authority; and another authority responsible for granting consent for the transfer, which would be the authority deemed to be the competent authority, in accordance with the internal procedure of the requested State. The aforementioned legal arrangements establish who the authorities are in each case and whether or not it is necessary to authorise the transfer of the child. Compliance with this last-mentioned requirement is not negotiable, nor is, in application of Article 56, the time when it must be granted: always before the authority of the requiring State adopts the measure on placing the child.6 The effective compliance with this requirement raises one of the most delicate questions regarding: first, the necessary balance between swift internal procedures for granting authorisation for the transfer of the child – without forgetting the possible refusal; Second, the need to provide the legal security required in such an important choice for a child, the child’s protection measures having to be implemented in a country which, let us not forget, may be completely foreign. One of the important factors in relation to legal security is that the consent to the transfer may not be granted by an authority belonging to the establishment in which the protection measure will be implemented. It is necessary, according to the CJEU that the consent be granted by a public authority that appreciates in an 6

According to the wording of Article 56 and also as reiterated by the CJEU.

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Mónica Herranz Ballesteros entirely independent manner the appropriate nature of said measure. This statement by the CJEU in its judgment is highly significant; later on we will examine the scope of the consent of the authority of the required State (see infra section III.C). It can be said that this communication is not merely for informational purposes and, therefore, it is essential that the consent precedes the transfer. Otherwise, Article 56 itself would be rendered ineffective. This being so, there are two scenarios in relation to the circumstances surrounding the consent of the required State: firstly, the placement may be ordered by the judge of the requiring State, to be enforced abroad, based on the apparent compliance with the requirements of Article 56 – the situation of the HSE case –; secondly, said measure is issued with a complete lack of consent by the authority of the required State. In the first scenario the CJEU is inclined to remedy the situation a posteriori; under the second scenario, the procedure would have to be started again, and the authority of the requiring State would not be able to adopt the measure until it has obtained consent from the required State. In either of the two scenarios what does seem unquestionable is that the child may still not have been transferred to the required State. In the following two questions, the CJEU looks into one of the aspects that has generated the most controversy among legal commentators and within the framework of the ruling itself: the need to recognise and declare the implementation in the required State of the measure adopted by the requiring State before it is implemented in the former. The stances against such requirement were held by the governments of Ireland and Germany, which based their positions on the automatic recognition by law of Article 21 of the Brussels II Regulation and on the respect for the obligations of Article 56. By contrast, the UK and the Commission were inclined to favour the obligatory declaration of enforceability of the measure in order for the ruling to take effect in the required State. The CJEU’s position was, at first, lukewarm in this respect. Its arguments were based on a strict reading of the wording of the Brussels IIa Regulation; however, the CJEU has subsequently moderated its position with a view to seeking solutions making it possible for the measures to be complied with as swiftly as possible.7 Thus, at the beginning, it maintained the mandatory nature of the exequatur procedure for the parental responsibility measures not contained in Chapter III section 4 of the Regulation, such as in the case of a placement to be enforced in another State. Immediately after, it explored solutions that avoid delaying procedures, opting to expedite the internal procedures of declaration of enforceability and ensuring that appeals cannot cause suspension of the procedures. Lastly, the final question focusses on the procedure to be followed in the event that the measure is extended. In this connection there is an interesting change in the arguments of some governments.8 The CJEU is inclined to favour the need 7 Here it already warns of the possible changes that might be included within the framework of future reform thereof in light of implementation of decisions on cross-border placements. 8 Germany, among others, defends new permission and new declaration of enforceability when there is an extension.

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Cross-Border Placement of Children: A Spanish Perspective for new consent by the authority of the required State in the event of the extension of the measure, as well as the need for a new declaration of enforceability in view of this new situation. The CJEU seems to provide a way to avoid such inconveniences: that the measure be adopted for a sufficiently long period to avoid extensions, although there would have to be verification as to whether the measure must be reviewed at specific intervals within the period covered by the declaration of enforceability.

III. The Importance of the Issue in Spain and the EU The statistics published by the German Central Authority, referred to at the beginning of this paper, reveal the importance for Spain of Article 56 of Brussels IIa. Spain is selected in a very notable number of cases as the State in which crossborder placements, as agreed by the authorities of other Member States such as Germany, must be enforced. The first of the questions which arises in the framework of the measures of Article 56 relates to the type of placement for which Spain is selected as the required State. Different scenarios might arise in this context: for example, a placement in a family – making a distinction between foster families and, why not, extended families9 –, and a residential placement, with a distinction also being made between a residential placement in an open institution and in a secure institution.10 The measure is evidently not adopted on the basis of Spain’s body of laws, but rather in accordance with the body of laws of the requiring State. In view of the foregoing, we are especially interested in the German legislation in this context, in particular Sozialgesetzbuch (SGB) – Achtes Buch (VIII) – Kinder – und Jugendhilfe (German Social Code Part VIII), Articles 33 to 35. Under this legislation, it is possible to adopt, with the consent of the biological parents or the legal representatives of the child, placements which may be implemented abroad. These would be intensive socio-educational programmes arranged abroad. The institutional contact between the child and the State in which he/she has been placed is minimal. The German Welfare Office is responsible for placing the child and enters into an agreement with a body recognised as a juvenile services organisation in Germany operating with an establishment in Germany for which permission is required and where socio-educational assistance is provided. Sometimes the German employees of this body are present abroad, accompanying the child or cooperating with a foreign partner who provides care. New regulation in Spain in Law 26/2015, of 28 July, amending the system of protection of childhood and adolescence (“Ley 26/2015, de 28 de julio, de modificación del sistema de protección a la infancia y a la adolescencia”), Official State Gazette No. 180 of 29/07/2015. 10 New regulation in Spain in Organic Law 8/2015, of 22 July, amending the system of protection of childhood and adolescence (“Ley Orgánica 8/2015, de 22 de julio de modificación del sistema de protección a la infancia y adolescencia”), Official State Gazette No. 175 of 23/7/2015. 9

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Mónica Herranz Ballesteros In short, there are two models by which such socio-educational measures for children imported from Germany are implemented in Spain: (a) (b)

cross-border placement of children into institutions in Spain (these institutions are managed mostly by foreign authorities and are under foreign rules); and, cross-border placement of children into foster families in Spain (these families are foreign families, supervised by foreign authorities under foreign rules).

It is true that under Article 56 other forms of cross-border placement of children are arranged, but the types mentioned are the most common in practice, at least where Spain is the required State. Having indicated the type of measure adopted in accordance with German legislation which must be implemented abroad in accordance, therefore, with the prerogatives of Article 56, we can now analyse the processing in Spain as the required State. A.

Regulatory Authorisation and the Authorities Involved in Spain

Unlike what has happened in other States,11 Article 56 has not been implemented in Spain’s body of laws; consequently, there is no specific internal regulation or particular procedure for the cross-border placement of children in Spain. We will analyse below how the Spanish authorities have resolved this issue. The obligation on the competent Spanish public authority to intervene under Article 56 arises from the internal regulatory framework governing placements in Spain. Thus, both in the case of placements in a family – whether extended family or a foster family – and in the case of placements in an institution, the approval of the competent administrative authority is required; the decision taken by such authority may be appealed by the biological parents through the courts. In case of placements in a secure institution, and therefore with measures for the deprivation of the child’s liberty, the involvement of the judicial authority is required. Consequently, it is clear that the prior consent of the competent authority is obligatory when Spain is the country chosen to implement the measure.12 There are States in which the consent of the competent authority – generally the

11 See, for example, Germany. See the website of the Germany Central Authority . 12 On the German Central Authority website it is interesting to read section b) of the regulation on cases of “Placement of children abroad by German Courts and authorities”: “If a child is already in another EU State without the German Court or authority placing the child having carried out the necessary consultation and consent procedure in the State, in general this must be done subsequently without delay”. Therefore, the existence of such cases is taken as read and to this end a solution of sorts is decided on, which is valid for Germany, but what effect does it have for the required State?.

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Cross-Border Placement of Children: A Spanish Perspective administrative authority responsible for child protection – must be approved by a judicial authority.13 It follows that the first question to be clarified is which is the competent Spanish authority to grant such consent. The complexity of the Spanish State leads us first to clarify that competency in the matter of child protection is conferred on the Autonomous Regions under Article 148.1.20 of the Spanish Constitution relating to “social welfare”. Consequently, it will be the public entity of the Autonomous Region in which the placement is going to take place which will have to authorise or deny the consent requested by the foreign authority. Taking the foregoing into account, Spain, within the scope of Article 56 of the Regulation, is an example of a decentralised system of authorities to the extent that: on the one hand, the Spanish Central Authority, which is the Ministry of Justice, is responsible for receiving the consultation from its counterpart in the requiring State, in compliance with Article 56.1; and, on the other hand, in reality, the authority with “competence” to grant the consent is the Public Authority of the corresponding Autonomous Region, thus identifying the authority referred to in Article 56.2. B.

The Procedure to Be Followed in Spain as the Required State

Let us turn now to the procedure for channelling the provisions of Article 56 in Spain as the required State. The precept has not been implemented in Spain’s body of laws.14 The lack of internal regulation has caused confusion outside of Spain, and foreign authorities are unaware as to how to act when dealing with Spain. Cases of confusion have also been noted in the modus operandi of certain of the Autonomous Regions. In addition, the Spanish authorities are alarmed about the increasingly frequent selection of Spain as the State in which cross-border placement has been implemented. The combination of these two factors, led to a meeting of the institutional coordination body of the Spanish Autonomous Regions in matters of children, i.e. the Inter-Regional Committee of Director Generals of Childhood, in order to: address the matter of cross-border placement of children in Spain and to adopt appropriate agreements. The outcome was the Agreement of the Inter-Regional Committee of Director Generals of Childhood of 17 July 201215 (hereinafter “the Agreement”) that was reached among the competent authorities of the various Autonomous 13 This is the case in Italy or Germany, when they act as the required State therefore for incoming children, in accordance with Article 47 of the International Family Law Act (hereinafter IFLA). 14 Unlike other articles of Brussels Regulation II which were implemented through domestic legislation. 15 This Agreement has not been published. I am grateful to the General Directorate of Services for the Family and Childhood for having given me the opportunity to consult the Agreement. Also I am grateful for the information provided regarding the application of Article 56 of the Brussels IIa Regulation in Spain.

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Mónica Herranz Ballesteros Regions and the other authorities involved – such as the Ministry of Justice as the Central Authority. From this Agreement, a recommendation was made for the application of Article 56 to cases in which Spain is the country required to implement cross-border placement of children. The agreements of the Inter-Regional Committee of Director Generals of Childhood are recommendations; therefore, they are not binding. However, previous examples, in other child protection matters, show that the Autonomous Regions apply them once they have been adopted. Moreover, this Agreement is not only useful for the purpose of internal coordination; it would have been very advisable that the foreign authorities were informed, in particular the Central Authorities, as mentioned in Article 56, so that the procedure was known. What are the most noteworthy points of this Agreement? Aware of the current reality in Spain regarding cases of cross-border placement of children, the Spanish authorities have chosen to divide the cases into blocks: on the one hand, measures dedicated to cases of children who are already in Spain; and on the other hand, measures dedicated to processing new requests for the cross-border placement of children. The first block deals with children who are already in Spain. The measures of the Agreements are centred on identifying them in order to ascertain their situation, inspecting and checking the types of “homes” or family placements intended to receive these children, reviewing opening licenses, and other administrative requirements. The schooling of the children is also checked. As regards the measures dedicated to processing new requests for the crossborder placement of children, the Agreement focuses on: (a)

reiterating to the foreign competent authorities the demand that the children are not displaced without the prior approval of the Child Protection Public Entity of the Autonomous Region;

(b)

requiring the foreign Central Authority to attach a series of obligatory documents to the request for the displacement of a child;

(c)

requiring the approval of the displacement by the Autonomous Region in which the placement measure is planned;

(d)

requiring that the foreign Central Authority, in compliance with the ruling of the CJEU of 26 April 2012, requests the declaration of enforceability of the resolution reached in the country thereof, before the corresponding Spanish jurisdictional body, as a prior requirement of its enforcement; and

(e)

requiring the displacement of the child if such recognition is positive.

The scrupulous compliance with the measures adopted to process the procedure of Article 56 in Spain as required State clearly involves lengthening the procedure. The delay has rightly been strongly criticised and it has even been qualified as going against the interest of the child; but should we not ask where the child’s interest lies if the transfer takes place without compliance with the formalities established in the body of laws of the required State, which under Article 56 is the procedure to be followed?

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Cross-Border Placement of Children: A Spanish Perspective C.

Analysis of the Requirements Established in the Light of CJEU Case Law

It is worth examining whether the provisions of the Agreement guarantee compliance with Article 56, and whether they are in accordance with CJEU case law. (1) Approval of the measure by the authority of the required State prior to the transfer of the child. Two elements come into play in a cumulative manner: consent and the prior nature thereof. With regard to consent, it is necessary to determine its scope at this point in the procedure. In the HSE case, when assessing the appropriateness of the authority that consented to the transfer of the child, the CJEU implies, in some of its statements, that the scope of the consent is greater than that which Advocate General KOKOTT granted in her Opinion. Thus, the CJEU states: “[…] An independent assessment of whether the proposed placement is appropriate constitutes an essential measure for the protection of the child […].”16 Consequently, it is clear that the authority of the required State may assess the appropriateness of the placement, and on the basis of such assessment decide whether or not to authorise the displacement. However, the Advocate General insists that such authority cannot review the appropriateness of the placement or whether the placement respects the interests of the child; its decision shall be taken only to govern, in advance, aspects such as the conditions of the stay in the receiving country, in particular immigration laws, or cost-sharing.17 Subsequently the CJEU, when examining the conditions which, for the declaration of enforceability, can be challenged by the authority of the required State, agrees with the position taken by the Advocate General on this issue. The requirements established in the Agreement for dealing with new cases in Spain are in line with the idea of clarifying and resolving in advance any obstacles that may arise after the child’s stay. The Agreement states that a series of mandatory documents must be included with the request for authorisation so that the Spanish authority can make a judgment in relation to the consent.18 It is noteworthy that, as part of the documentation to be sent, the date of entry and exit of the child from the Spanish territory must be expressly shown, and that this Section 88. Sections 37 and 38. 18 Documentation required: Full name and date of birth; Regime of custody or guardianship that applies; Time of stay in Spain, specifying entry and departure dates; Reason that justifies the presence of the child in Spain; Institution with responsibility for the child, and that has taken over his legal guardianship; Personal project and occupation; Document held by the child proving the legality of the child’s stay in Spain (current and valid passport or National Identity. Document, when their stay is less than three months in Spanish territory, or registration certificate certifying Community resident registration in the Foreigners Central Register, if the child’s stay in Spain is for more than three months); Body responsible for the child; Certificate of the father, mother or legal guardian of the child who has given permission for the child to travel and stay in Spain under the legal guardianship of the responsible institution; Address where the child will reside; Documentation verifying the therapeutic and educational support that the child is going to receive. 16 17

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Mónica Herranz Ballesteros therefore involves the exact establishment of the duration of the measure in Spain. Consequently, approximate or incomplete dates cannot be given, though this clearly happens in practice. If such documentation is not complete, the consent of the competent Spanish authority will be conditional on the correct delivery of the same. Therefore, a request will be made through the Central Authorities that the missing documentation be added. This evidently delay the proceedings. But it does not have to mean the denial of authorisation. To avoid such delay, it is very important that the internal procedures are not just speedy but also well-known by the competent authorities of the various States. The German legislation, IFLPA, on the scope of consent to authorise the cross-border placement of children in Germany, is noteworthy in this context. Article 46 thereof states: “consent to the request should as a rule be granted where: carrying out the intended placement in Germany is in the best interest of the child, in particular because he or she has a particular connection with the country.” Therefore, the competent German authority will evaluate, when authorising the transfer, if such measure is in the interest of the child, and taking into account, in particular, the child’s connection with Germany. It does not appear that this is the scope that the CJEU intended to give to consent in the HSE case. It is also surprising that the measures taken by the German authorities on the basis of the Sozialgesetzbuch (SGB) – Achtes Buch (VIII) – Kinder – und Jugendhilfe allow the transfer of children from Germany to, for example, Spain, though there is zero connection between the child and the territory where the measure is going to be implemented. Is this not inconsistent with the pertinent regulations given in the IFLA for incoming children? Are the child’s interests different depending on whether they are incoming or outgoing? In relation to the prior nature of the consent to the transfer of the child, one of the most distorting aspects of the practice analysed in Spain is the extemporaneous manner of the request for consent to the transfer. The request to the Spanish authority has to be made before the adoption of the measure by the requiring State, because the consent will prevent any obstacles – including administrative impediments – that may arise during the child’s stay in the territory. Such request must always be made prior to the actual transfer of the child to Spain. But in practice, children are residing in Spain for months, or even years, and the request for authorisation arrives a long time after the transfer. Nor can it be considered, even if the formality is complied with, that the purpose sought has been achieved by the request for consent when requests for transfer arrive at the Spanish Central Authority just days before the date set for the same. How is the delivery of the request for authorisation channelled to the Spanish authority with the competence to grant it? The complexity of internal laws requires the intervention of the Central Authority in order to clarify the route to be followed. In the case of Spain, the foreign Central Authority sends the request for consent to the Spanish Central Authority within the Ministry of Justice. Requests arriving at the Ministry of Justice shall be sent to the Ministry for Equality, Health and Social Issues, which will send them on to the Public Entity of the Autonomous Region in the territory where the child’s transfer is planned. In this connection the Central Authority’s involvement is crucial. The route for transfer in Spain rules 458

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Cross-Border Placement of Children: A Spanish Perspective out, therefore, any direct contact between the foreign authorities – whether it is the Central Authority or public entities with competence in child protection matters – with the competent public entity of each Autonomous Region in Spain. Requests, therefore, must be channelled through the Central Authority; whereby, the Ministry for Equality, Health and Social Issues serves as a bridge between the Spanish Central Authority and the Autonomous Regions. (2) Of the requirements established in the Agreement, and following the case law of the CJEU in the HSE case, the most controversial is that of the declaration of enforceability of the measure in the required State. In the Agreement adopted by the Spanish authorities, it is a mandatory requisite, and consequently it extends to all the situations in which there is a transfer to Spain within the framework of Article 56.19 Indeed, the cross-border placement decision is a measure in relation to the exercise of parental responsibility that is not contained within those envisaged in Chapter III, section 4 of the Regulation, i.e. those that are exempted from the declaration of enforceability. In practice, various considerations arise: the need to combine the principle of “mutual trust”, the interests of the child and the obligation to comply with the requirements of Article 56. In this context, if the authority of a Member State has already evaluated the child’s interest and this is best served by placement and its implementation in another State, it appears that the declaration of enforceability would not sit very well with the principle of mutual trust.20 The declaration of enforceability does not appear to be compatible with speed and urgency. However, as the CJEU established in its judgment, circumstances of particular urgency may not result in measures for enforcement in a second State being based on a decision in relation to which enforceability has not been declared. Taking the above into account, for the purpose of future progress, it might be useful to evaluate opinions based on the type of placement that is planned in another State. A residential placement in a secure institution in which the child’s fundamental rights such as his/her right to liberty are at play is not the same as a placement in a family, even (as Article 56 has been used on occasions in practice) an extended family. The latter case, which in reality is commonplace in crossborder placements, is generally chosen with the agreement of all parties and involves the child residing with relatives located in other States. For it to be effective it requires speed, as in the other cases; in addition, the prior cooperation of the competent authorities in both States is evidenced, and in particular the Central Authorities, in the adoption process as a result of the obligations under Article 55 of the Brussels IIa Regulation.

19 Among legal commentators there are voices that are very strongly against the requirement for the declaration of enforceability, A. DUTTA/ A. SCHULZ (note 4), at 36-37. 20 With regard to the abolition of the declaration of enforceability prior to the enforcement of a decision of parental responsibility in other Member States, see recital 33 of the Proposal for a Council Regulation on jurisdiction, the recognition and enforcement of decisions in matrimonial matters and matters of parental responsibility, and on international child abduction recast.

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Mónica Herranz Ballesteros Future reform must take into account the current practice under Article 56, and this is a different case from that of placement in extended family or even in institutions under the full control of the authorities of the destination State. It is also our understanding that not only will the review of Article 56 have to take into account the combination of principles and requirements to be met, but it is also essential to promote, in the regulation, the effective compliance with the rights of the children involved.

IV. The Child’s Interests and Rights: Their Promotion in Cases of Cross-Border Placement There is no doubt that when the authority of the requiring State takes a decision in relation to the cross-border placement of a child, it does so because it considers that it is in the child’s interests, but we want to go further by looking at this from the perspective of guaranteeing the child’s rights. The child’s rights have to be respected both in the procedure in which the measure is adopted, when it is being implemented and, also, at the time of the end of the placement, whether through reintegration in the family or, even, because the person has reached adulthood.21 One of the most often talked-about rights is the child’s right to be heard in the procedure. Within the framework of internal legal systems, this involves facilitating the child’s participation in all legal or administrative processes which have to do with that child, without his/her opinion in this regard having to coincide with the evaluation of his/her interests made by the competent authority.22 Otherwise stated, what has to be guaranteed is the child’s exercise of the right to be heard, which may involve taking into account his/her opinion depending on age and degree of maturity. In relation to the actual exercise of this right one has to take special care in the case of a measure that is to be implemented abroad. The placement of the child outside his or her family environment is an exceptional measure;23 and in the event it is in the child’s interests not to remain in the child’s family of origin, there will be a preference for a placement in a family rather than a residential placement. Given that the placement has an exceptional nature, even more so if its implementation must take place abroad, the statistics offered above are worrisome. Within the framework of the child’s right to remain in its family environment, there is an important aspect in the effective development of this right, 21 The following may serve as a foundation for formulating rules that guarantee effective compliance with children’s rights in cross-border placements: SOS Children’s Villages International, “Children and young people in care. Discover your rights – Building a Europe for and with children,”