- Summary of the case
In June 2002, a Portuguese company (herein as “Claimant”) and a Italian company (herein as “Respondent”) entered into a distribution agreement that became effective for an indefinite period from March 2014. The contract contained an arbitration clause whereby the parties agreed that any and all disputes relating to its object would be discussed amicably and, if not resolved within 30 days, would be submitted to arbitration under the rules of the International Chamber of Commerce (herein “ICC”) and seated in Bologna, Italy. The applicable law was Italian law, excluding the CISG.
After the contract was terminated by the Respondent on May 2016, the Claimant filed a suit in the first instance court of Lisbon seeking a compensation of circa EUR 354,000 for “intérêt de clientèle” damages. However, the Respondent invoked a jurisdictional objection based on the existence of an arbitration clause, and the judge dismissed the case, recognizing the exclusive jurisdiction of the arbitral tribunal.
The Claimant appealed this decision, alleging that it was in a situation of impecuniosity, not imputable to it, which made it impossible to bear the arbitration costs. This was because the commercial relation maintained with the Respondent was the company’s main source of income. This weak financial situation was demonstrated also, Claimant argued, by the first instance’s judge order to grant its request for partial legal aid. Despite acknowledging the existence of the arbitration agreement, Claimant raised two relevant legal arguments.
First, arbitration could only go forward if, under the ICC Rules, if the Respondent agreed to advance the initial expenses. Since there was no other mechanism to start the arbitration without the necessary means, there was a conflict between the right of access to justice and party autonomy (Articles 20(4), 26(1) and 61(1) of the Portuguese Constitution), leading to the inoperability of the arbitration agreement under Article II(3) the New York Convention.
Second, the contractual termination was a unilateral right of Respondent, and was, thus, not attributable to Claimant. This constituted an abnormal change of circumstances and an objective impossibility of fulfilling obligations agreed under the arbitration clause, allowing for its modification as per Articles 437(1) and 790(1) of the Portuguese Civil Code.
Respondent denied Claimant’s arguments, proposing that impecuniosity was insufficient to deem the arbitration agreement invalid.
- Main issues addressed in the decision
This decision analyzed the possibility of declaring the unenforceability of the arbitration agreement due to impecuniosity pursuant to the New York Convention.
Under Article II (3) of the New York Convention, “the court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed”[1]. The same provision is also included in Article 8 of the UNCITRAL Model Law on International Commercial Arbitration[2].
When interpreting this rule, the court invoked Portuguese doctrine[3] and jurisprudence[4] discussing the negative effect of the competence-competence principle to conclude that, as the arbitral tribunal has priority in judging its own jurisdiction, which meant that the court proceedings could only continue if the arbitration agreement was manifestly null, invalid or ineffective. The court concluded there was no manifest ineffectiveness at play, and that the principle of competence-competence should prevail. This would only not be the case if the arbitral institution’s rules expressly provided that the impossibility of bearing the procedural costs constituted an obstacle to access the arbitral tribunal.
In this case, and addressing Claimant’s first argument, the ICC Rules (Articles 6(1) and 37(5)) provided that the provisioned arbitration costs could be readjusted at any time during the procedure, with the possibility of payment in advance by the Respondent or payment in installments by the Claimant, which would be enough to conclude that this regulation contemplated situations of economic incapacity in order to guarantee access to arbitral justice.
Additionally, and addressing Claimant’s second argument, the court concluded also that there was insufficient evidence of a permanent economic deterioration to the point of preventing the Claimant to comply with the arbitration agreement. As required, under the Portuguese law, no extraordinary or unforeseeable change of circumstances existed, as the possibility of reduction of business volume attached to a distribution contract concluded with exclusivity and for an indefinite period by unilateral termination was not only foreseeable when the Claimant celebrated the arbitration agreement, but also a risk inherent to the very nature of the contract.
Considering the above, the court dismissed the appeal, concluding that the mere fact that a party is in a situation of impecuniosity does not automatically compromise the enforceability of the arbitration agreement. This judgement is in line with most of the Portuguese case law regarding this matter and, consequently, follows a recent trend of deviating from a controversial decision rendered by the Portuguese Constitutional Court in 2008, that will be discussed below[5].
- The state of art: how the issue of impecuniosity has been addressed by national and international courts
When it comes to “inoperability or incapacity [for an arbitration agreement] to be performed”, authors propose that this argument is more frequently raised in situations of “pathological” arbitration agreements, where the clause is so poorly drafted that it legally impedes the commencement of the proceedings[6].
Some greater difficulties arise when the clause is formally valid, but there are other external circumstances capable of influencing its performance. In any case, two different approaches regarding the consequences of impecuniosity are highlighted in international jurisprudence: the majority position seems to adopt a pro-enforcement regime in compliance with the objectives of the New York Convention and the principle of pacta sund servanda, whereas the minority position tends to a broader interpretation allowing the impecuniosity defense, in order to avoid a resulting denial of access to justice[7].
As regards national courts, the German Federal Courts have consistently held that the lack of funding renders an arbitration agreement “incapable of being performed”, emphasizing that obliging a party to arbitration despite its incapacity to afford the costs would deprive it of the effective legal protection guaranteed in Article 6 of the European Convention of Human Rights[8]. The same logic is adopted, for example, in the Indian Courts[9].
In contrast, the English Court of Appeal has stated that an impecunious party could not “rely on his own inability to carry out his part of the arbitration agreement as a means of securing a release from the arbitration agreement”[10]. For the U.S. Courts, even the economic chaos resulting from the Islamic Revolution in Iran was not enough to compromise the arbitration agreement, since the expenses and possible inconvenience of international arbitration are “risks inherent in an agreement to submit to arbitration”[11].
Likewise, following a contractual view of the arbitration agreement, French jurisprudence has not accepted economic insufficiency as a basis for withdrawing its binding effects[12]. Interestingly, both the Paris Cour d´appel and later the Cour de cassation annulled a decision that ordered the ICC to continue an arbitration that was suspended due to non-payment of advances on costs by a party that was considered manifestly impecunious[13]. These courts established that the juge d´appui, a judicial entity of the French legal system that aids arbitration, exceeded his authoritative powers by replacing the arbitral institution in the application of its own rules on this matter[14]. In this case, the ICC had successively increased the initial costs provision due to the abnormal delay caused by the conduct of the parties during the proceeding, that was ongoing for 7 years and demanded the intervention of 8 arbitrators.
This raised serious concerns in the arbitration community about the validity of this type of regulation and the possibility of holding arbitral institutions liable for refusing to proceed with disputes whose costs are not duly provisioned because of the impecuniosity of a party. In the face of this triple conflict of interests – from the impecunious party, the counterparty, and the arbitral tribunal itself – it does not seem fair that the constitutional right of access to justice is implemented at the expense of private entities, by imposing the provision of their services for free. Thus, scholars conclude that the institutional rules that allow refusing the management of the procedure cannot be considered illicit, and that the institutions cannot be held liable for this refusal[15].
In Portugal, the existing decisions lean generally towards giving effect to the principle of competence-competence, so it will first be up to the arbitral tribunal to rule on the inapplicability of the arbitration agreement for financial reasons, so that the interested party may then resort to the judicial courts to challenge the arbitrator´s decision on their jurisdiction, pursuant to Article 18 (9) of the Portuguese Arbitration Law[16].
In 2008, the Portuguese Constitutional Court rendered a controversial decision on the impossibility of upholding an arbitration agreement in relation to a party in a supervening situation of economic insufficiency that justified full legal aid. The court held that because the subject-matter of the dispute referred precisely to the other party’s conduct that allegedly led to this impecuniosity, in this case, the wrongful termination of a franchise agreement. Since there is no provision for legal aid in arbitration, as exists in the national judicial system, the court concluded that, were the arbitration agreement to be upheld, that party would be fully deprived of its access to justice[17].
However, the Supreme Court of Justice later decided that the simple granting of partial legal aid concerning court fees and procedural expenses was not sufficient to modify or extinguish the arbitration agreement[18]. An amendment to the rules of legal aid in Portugal entailed restrictions on this regime regarding for-profit corporate entities[19]. Thus, the rule that existed in 2008 no longer did when the Supreme Court ruled.
In addition, scholars alert that arbitration costs are not always higher than judicial costs[20], since arbitration may turn out to be more economical depending on the amount in dispute, and is faster, private and with a higher degree of flexibility and specialization. Arbitration has the advantage of allowing one of the parties to support the other’s costs (Article 17(5) of the Portuguese Arbitration Law), so it may be even more favorable to corporate entities dealing with cash issues.
Since this more “traditional” mechanism of shifting institutional costs is not always feasible in practice, other creative solutions have been brought by specialists, such as the transformation of institutional arbitration into ad hoc arbitration – if the parties and arbitrators agree to it –, in order to reduce the procedural costs and allow the dispute to continue[21]. Third-party funding has also become a trend in international arbitration, allowing another means to solve this conflict between access to justice and the binding force of arbitration[22].
- Conclusion
Although the issue of access to justice is indisputably relevant, it may be raised as a reasonable argument to put into question the effectiveness of an arbitration agreement. However, this will only be the case if the arbitration costs are much higher than the judicial ones and if the arbitration rules do not prescribe any mechanisms to protect a situation of manifest economic insufficiency.
Since this was not the case in the decision under analysis, the judgment seems to be in line with the principles of party autonomy and competence-competence and, ultimately, compatible with the very purpose of the New York Convention, which is precisely to bring effectiveness and legal certainty to arbitration. If a broader perspective of Article II(3) had been adopted, forcing the submission to judicial courts due to one party’s economic weakness, this could not only drastically harm trust of the arbitration system, but also encourage the strategic misuse of this argument to avoid arbitration and pursue allegedly more favorable national rules.
Indeed, reducing arbitration to a simple “preferential” means of conflict resolution that will always turn to the judicial system as the standard solution if and when the slightest difficulty arises, would pave the way to the abandonment of the effectiveness of the arbitration agreement[23], to be avoided.
[1] Available on: https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/new-york-convention-e.pdf.
[2] Available on: https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/06-54671_ebook.pdf.
[3] Mariana França Gouveia e Jorge Morais Carvalho, Convenção de Arbitragem em Contratos Múltiplos, Cadernos de Direito Privado, nº 36, 2011, p. 36-49; Manuel Pereira Barrocas, Lei de Arbitragem Comentada, Coimbra, Almedina, 2013, p. 83 e ss.; Sampaio Caramelo, A Reforma da Lei da Arbitragem Voluntária, 2009, p. 145.
[4] Ac. STJ de 12.11.2019, Proc. 8927/18.7T8LSB-A.L1.S1, Rel. Pedro de Lima Gonçalves; Ac. STJ de 21.06.2016, Proc. 301/14.0TVLSB.L1.S1, Rel. Fernandes do Vale; Ac. STJ de 20.01.2011, Proc. 461/14.0TJLSB.L1.S1, Rel. Álvaro Rodrigues.
[5] Ana Coimbra Trigo and José Miguel Júdice, ‘M., Lda. v. F., S.p.A. Soc. Unipersonale, Court of Appeal of Lisbon, 415/18.8T8SNT.L1-2, 05 March 2020′, A contribution by the ITA Board of Reporters, Kluwer Law International, 2023.
[6] International Council for Commercial Arbitration, ICCA’s guide to the interpretation of the 1958 New York Convention: A handbook for judges, 2011, p. 53.
[7] Carolyn B. Lamm and Jeremy K. Sharpe, Inoperative arbitration agreements under the New York Convention, Enforcement of Arbitration Agreements and International Arbitral Awards: The New York Convention in practice, 2008, p. 306-307; Mercan Ipek, Interpretation of Article II (3) of the New York Convention, 2016, p. 715-717; Julian D.M. Lew, Loukas A. Mistelis and Stefan M. Kröll, Comparative International Commercial Arbitral, Kluwer, 2003, p. 14-48.
[8] Bundesgerichtshof, BGH Sept. 14, 2000, III ZR 33/00.
[9] Indian Organic Chemicals Ltd v. Chemtex Fibres Inc., Bombay HC, AIR 1978 Bom 106, (1979) 81 BOMLR 49.
[10] Janos Paczy v. Haendler & Natermann GmbH (1981), 1 Lloyd´s Rep. 302 (CA), IX Y.B. Com. Arb. 445, 448 (1984).
[11] National Iranian Oil Co. v. Ashland Oil Inc. (1986), 817 F.2d 326, 328, 355.
[12] Lola Fleurs v. Société Monceau Fleurs et autres, RCA Paris, Pôle 1 – Chambre 1, 26, G n°12/12953, ASA Bull. 4/2013, p. 900; Société Licensing Projects (LP) et autres v. Société Pirelli & C. SPA et autres, Arrêt n° 392 du 28 mars 2013, Cour de cassation.
[13] Société Projet Pilote Garoubé v. Chambre de commerce internationale, Trib. gr. inst. Paris (ord. réf.), 16 November 2015, Revue de l´Arbitraje, Paris, N. 1, Comité Français de l´Arbitrage, 2016, p. 258-270.
[14] Mariana França Gouveia e Ana Coimbra Trigo. Liability of Arbitral Institutions: A Case Law Overview. In: Revista Brasileira de Arbitragem, N. 60, Ano XV, Out./Dez. 2018, p. 73-75.
[15] Mariana França Gouveia e Ana Coimbra Trigo. L´affaire Garoubé: Responsabilidade das instituições arbitrais e impecuniosidade das partes. In: Revista Internacional de Arbitragem e Conciliação, Vol. XI, Almedina, 2018, p. 65-106.
[16] Ac. STJ de 24.06.2016, Proc. 1212/14.5T8LSB.L1.S1, Rel. Ana Paula Boularot.
[17] Ac. TC 311/08 de 30.05.2018, Proc. 753/07, Rel. Conselheiro Joaquim de Souza Ribeiro.
[18] Ac. STJ de 12.11.2019, Proc. 8927/18.7T8LSB-A.L1.S1, Rel. Pedro de Lima Gonçalves.
[19] Joaquim Shearman de Macedo, Sobre a qualificação civil da incapacidade de suportar os custos do processo arbitral por uma das partes, Themis, Ano IX, nº 16, 2009, p. 240.
[20] Pedro Metello de Nápoles, Efeitos da insolvência na convenção de arbitragem: Insuficiência económica das partes em processo arbitral, V Congresso do Centro de Arbitragem Comercial, Coimbra, Almedina, 2012, p. 152; Catarina Serra, Arbitragem e insolvência: Os efeitos da declaração de insolvência sobre a arbitragem (Direito Português e Internacional), Revista de Direito Comercial, 2017, p. 703.
[21] Mariana França Gouveia e Ana Coimbra Trigo. L´affaire Garoubé: Responsabilidade das instituições arbitrais e impecuniosidade das partes. In: Revista Internacional de Arbitragem e Conciliação, Vol. XI, Almedina, 2018, p. 104-105.
[22] Francisco da Cunha Matos e Maria Beatriz Brito, A superveniente insuficiência económica das partes como alegado fundamento de inoponibilidade da convenção de arbitragem, Revista PLMJ Arbitragem: Jurisprudência Comentada 2016, nº 1, Nov. 2017, p. 38.
[23] José Miguel Júdice, Anotação ao Acórdão 311/08 do Tribunal Constitucional, Revista Internacional de Arbitragem e Conciliação, nº 2, Almedina, 2009, p. 161-190.