II. United States: Interpretation and Enforcement of Contractual Arbitration Provisions in U.S. Courts
Continuing the trend of recent years, the interpretation and enforceability of arbitration provisions in contracts under U.S. federal law remained the subject of both U.S. Supreme Court and federal appellate court decisions in 2022. The U.S. Supreme Court issued a decision clarifying how and when U.S. courts should interpret and enforce arbitration clauses in contractual disputes and a decision on the availability of U.S. discovery in contractual disputes involving foreign arbitration. Also of note was a split decision from the U.S. Court of Appeals for the Third Circuit. That case highlighted the uncertainties that still exist under U.S. law in interpreting whether contracts containing arbitration provisions should be interpreted to apply to third- party non-contract signatories and whether disputes regarding the interpretation of such contracts should be made by a court or an arbitrator.
In Morgan v. Sundance, Inc., the U.S. Supreme Court addressed the issue of when a contractual right to arbitrate has been waived. In so doing, it held that the interpretation of contractual provisions governing arbitration under the Federal Arbitration Act (FAA) are to be reviewed and enforced in the same manner as other contractual disputes. It clarified that the FAA “policy favoring arbitration” “is merely an acknowledgement of the FAA’s commitment to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.”
Under Section 3 of the FAA, a defendant is entitled to file a stay of application in a lawsuit if it is subject to a contractual arbitration procedure. In Sundance, the issue decided by the Supreme Court was at what point a party to litigation has waived the right to seek enforcement of a contractual arbitration clause. The case involved a nationwide collective action lawsuit brought by a fast-food franchise worker for alleged nationwide violations of the U.S. Fair Labor Standards Act by the defendant employer. After litigating the case for eight months in a U.S. district court, the defendant employer filed a motion to stay the litigation and compel arbitration, stating that when applying for her job, the plaintiff employee had contractually agreed to “use confidential binding arbitration instead of going to court” to resolve any employment dispute.
Applying U.S. Court of Appeals for the Eighth Circuit precedent, the district court found that the defendant employer had waived its contractual right to arbitration because it knew of the right and “acted inconsistent with that right” and “prejudiced the other party by its inconsistent actions.” On appeal, the Eighth Circuit, in a split decision, reversed and remanded the finding, holding that the plaintiff had not been prejudiced and the case should go to arbitration. Noting a split between the U.S. federal circuits as to whether a waiver of arbitration required a showing of prejudice, the U.S. Supreme Court granted certiorari and, on appeal, held that the Eighth Circuit was wrong to condition a waiver of a contractual right to arbitrate on a showing of prejudice.
Noting that under the federal rules of procedure, waiver “is the intentional relinquishment or abandonment of a known right[,]” the U.S. Supreme Court stated that outside of the arbitration context the federal courts do not generally ask about prejudice and seldom consider the effects of a waiver of a contractual right on the other party. It found that the circuit courts that required a finding of prejudice to the other party in the context of waiving a contractual arbitration clause did so due to what they stated was a “liberal national policy favoring arbitration.” But the U.S. Supreme Court disagreed, stating that any “policy favoring arbitration” [did] not authorize federal courts to “invent special, arbitration-preferring procedural rules.” The Court clarified that the purpose of the FAA was to make “arbitration agreements as enforceable as other contracts, but not more so.”
Remanding the case back to the Eighth Circuit, the U.S. Supreme Court held that an appellate court could not make up a new procedural rule based on the FAA’s “policy favoring arbitration” but instead needed to focus on the defendant’s conduct to determine whether the defendant had knowingly relinquished a contractual right to arbitrate by acting inconsistently with that right.
In another 2022 ruling, the U.S. Supreme Court also emphasized that private contractual agreements to arbitrate disputes outside of the United States are private in nature and, as such, are not entitled to the benefit of 28 U.S.C. § 1782(a), “a provision authorizing a district court to order the production of evidence “for use in a proceeding in a foreign or international tribunal.” In ZF Auto. US, Inc. v. Luxshare, Ltd., the U.S. Supreme Court addressed two different cases in which parties to a non-U.S. based contractual arbitration filed applications to seek information from their counterparties in a federal court for use in the non-U.S. arbitration. The first case, which is discussed in this article, involved allegations of fraud in a sales transaction by Luxhsare, Ltd., a Hong Kong-based company, against ZF Automotive US, Inc. (ZF), a Michigan-based automotive manufacturer and subsidiary of a German Company. The sales contract signed by the parties provided that all disputes would be resolved by three arbitrators under the Arbitration Rules of the German Institution of Arbitration e.V., a Berlin-based private dispute resolution organization.
In reversing the lower court decisions holding that Luxshare was entitled to discovery against ZF in U.S. federal court, the U.S. Supreme Court held that discovery under Section 1782 is available only for governmental or intergovernmental dispute resolutions and does not apply to arbitrations before private adjudicatory bodies. Applying its ruling to the ZF litigation, the Court noted that disputes resolved pursuant to private arbitration panels pursuant to the terms that private parties agreed to in a private contract are formed by the parties. It rejected the argument of Luxshare that a private arbitration panel would qualify as being governmental under Section 1782 simply because the law of the country where the panel would sit governs some aspects of the arbitration and that courts would play a role in enforcing the arbitration agreements. It held that a private adjudicative body formed pursuant to the terms of a private contract for purposes of resolving contractual disputes did not qualify as a governmental body so as to allow the application of Section 1782.
Finally, the “‘mind-bending issue’ of arbitration about arbitration” (in the Court’s own words) was the subject of a split decision by the U.S. Court of Appeals for the Third Circuit in the case of Zirpoli v. Midland Funding, LLC. Noting a previous holding that “questions about the making of the agreement to arbitrate are for the courts to decide unless the parties have clearly and unmistakably referred those issues to arbitration in a written contract whose formation is not in issue[,]” the two judges in the majority in Zirpoli reversed a district court decision holding that because an assignment of a contract was illegal and void, a contract assignee could not invoke the contract arbitration provisions to compel arbitration of claims asserted against it.
The majority found that under Section 4 of the FAA, the right to petition for arbitration under a written agreement refers to the party to a litigation, not a party to the contract. Over a vigorous dissent, the two majority judges held that while the courts have the authority to adjudicate formation challenges to a contract even if the contract delegates the question of arbitrability to an arbitrator, if a contract applies to assignees and delegates the question of arbitrability of claims to an arbitrator, then the question of whether the contract was legally assigned to a third party so as to allow the third party to compel arbitration under the contract is a question to be determined and resolved by arbitration, not the court.
In reaching their decision, the majority relied, in part, on the language of the contract, which stated that the arbitrability of any claim pursuant to the agreement, including defenses, would be resolved by binding arbitration. They also relied on provisions in the contract stating that claims included any alleged violations of state laws. Because the question of whether an assignment was valid if it violated state laws was a defense to enforcement of any claims under the contract, the majority held that the case needed to be referred to arbitration.
In stating that he would have upheld the lower court’s decision on the grounds that the contract had not been legally assigned to the third-party seeking to enforce the contractual arbitration provision, the dissenting judge wrote the following: “Today’s holding confuses how we analyze the formation of arbitration agreements. Courts cannot start by asking, ‘Was an agreement formed?’ Rather, they must ask, ‘Was an agreement formed between these parties?’ Because the majority does not, I respectfully dissent in part.”
III. Sweden: Carrier Liability Under International Contract for Carriage of Goods
In a recent ruling the Swedish Supreme Court was faced with a case of stolen cigarettes, excise duty, and carrier liability under the United Nations Convention on the Contract for the International Carriage of Goods by Road (CMR).
The facts of the case were as follows:
In October 2018 B & S Paul Global International assigned H.Z. Logistics B.V., a Dutch company, to transport a cargo of cigarettes from the Netherlands to Sweden. In turn, H.Z. Logistics entered into a carrier agreement with Thomsen & Streutker Logistics B.V., another Dutch company, to carry out the delivery. On October, 6, 2018, the cargo had reached the port of Helsingborg in Sweden and was stored there until October 8, 2018, awaiting further transportation to the final destination. Sometime during this transit storage most of the cargo was stolen by person or persons unknown.
Under European Union (EU) legislation, manufactured tobacco products—including cigarettes—are subject to an excise duty. Tobacco excise duties are paid at the final point of consumption. While in transit to their final destination, these goods are in duty-suspension, i.e., no excise duty has yet been paid on them. As a consequence of the theft, the cigarettes were considered to have been released for consumption in Sweden, triggering an obligation for B & S Paul Global International to pay the applicable excise duty.
B & S Paul Global International claimed compensation from H.Z. Logistics for the loss of the cigarettes and the excise duty and the parties subsequently reached a settlement whereby H.Z. Logistics agreed to pay a total of EUR 154,565 to B & S Paul Global, out of which EUR 19,240 related to the value of the goods and EUR 135,325 to the excise duty
Based on the provisions in CMR, H.Z. Logistics then initiated legal proceedings against Thomsen & Streutker claiming damages with the same amount that H.Z. Logistics had agreed to pay to B & S Paul Global under the settlement, i.e. EUR 154,565 in total. Thomsen & Streutker agreed to pay the amount attributable to the value of the goods, EUR 19,240, but refuted the claim as regards the amount relating to the excise duty
Setting aside the matter of applicable law for the purposes of this article, the relevant matter that was finally referred to the Swedish Supreme Court for a ruling was whether the cost for excise duty caused by the theft of duty-suspended goods during transit shall be included in the concept “other charges incurred in respect of the carriage of the goods” pursuant to Article 23.4 of CMR and thus be paid by the carrier.
The relevant provision reads as follows in the official English-language version (the CMR in its English and French official versions was incorporated into Swedish law in 1969):
1. When, under the provisions of this Convention, a carrier is liable for compensation in respect of total or partial loss of goods, such compensation shall be calculated by reference to the value of the goods at the place and time at which they were accepted for carriage.
[. . .]
4. In addition, the carriage charges, Customs duties and other charges incurred in respect of the carriage of the goods shall be refunded in full in case of total loss and in proportion to the loss sustained in case of partial loss, but no further damages shall be payable.
The Swedish Supreme Court first established that CMR was applicable on the carrier contract and its provisions are mandatory for the contractual parties. As a general principle, the carrier is strictly liable for losses during transportation under CMR, save for events of force majeure. This strict liability is to some degree mitigated by “limitations as regards the compensation to be paid.” Loss of profit and consequential damage are excluded from the carrier’s liability, by way of example.
In interpreting Article 23.4, the Swedish Supreme Court first analysed national case law and jurisprudence in a variety of states that are signatories to and have ratified CMR. Beginning with “carriage charges,” these were determined by the court to be the freight costs agreed between the parties. In relation to the term “Customs duties,” the court found that neither excise duties nor value added tax are generally considered to constitute customs duties. Finally, “other charges incurred in respect of the carriage of the goods” were interpreted by the Supreme Court, based on the wording, to mean charges that are not customs duties but of a similar type of costs, being directly related to the actual transportation itself.
Pursuant to the Swedish Supreme Court, case law in CMR convention states relating to Article 23.4 can be broadly divided into two categories, one which gives a broad definition of “other charges,” and one which gives a more restrictive one. The former provides that the carrier is liable for all costs attributable to the transportation as it has actually been carried out, which would then include excise duty as a result of the goods having been stolen. In the latter, more narrow definition, only costs directly attributable to what would have been an ordinary completion of the transportation, i.e., without irregularities in the form of theft, for instance, are compensated. In other words, only costs that have become unnecessary for the owner due to the loss of the goods are compensated. Excise duties due to theft of the goods are thus not included in the carrier’s payment obligation under Article 24.3.
In summary, the Swedish Supreme Court found that especially the systematics and purpose of the relevant provisions indicate that Article 23.4 in CMR shall be interpreted so that the carrier’s obligation to compensate the owner of the goods shall not include excise duties when the goods have been stolen during transportation. Nor are there any noteworthy reasons against such interpretation. H.Z. Logistics’ claim for compensation was therefore dismissed.
IV. The Netherlands: The Hague Dean Ordered to Appoint Counsel to Russian Federation
The Ukraine war has disrupted the Dutch legal landscape. The latest “victim” is the Hague Dean (Deken) of Advocates (President of the Hague Bar).
As a result of adverse publicity, the major Amsterdam “Zuidas” (similar to London’s Golden Circle) firms have taken leave of their (until now very profitable) Russian clients. But there is still ongoing litigation before the Dutch Courts, in those echelons where representation of an attorney (advocaat) is mandatory.
According to the Dutch Advocatenwet (Attorneys Act), a litigant who cannot find an advocaat willing to assist him, at all or timely, can apply to the Dean in the District where the litigation takes place to have an attorney appointed. The appointee cannot refuse to provide his services.
The Russian Federation (RF) was involved in five sets of proceedings before the Hague Court of Appeal, leading to one decision on June 28, 2022, and four decisions on July 19, 2022. Of these decisions an appeal to the Hoge Raad (Dutch Supreme Court) is possible (but, as in other jurisdictions, only on points of law, the proceedings being called cassatie). In all proceedings the attorneys assisting in the case had withdrawn and because the RF could indeed not find an attorney willing to assist it in the cassatie-proceedings, it applied to the local Dean (the Hoge Raad is seated in The Hague) to appoint one.
The Dean refused (as she can on “serious grounds.”). These included (1) that Article 13 of Advocatenwet does not apply to foreign powers who are without attorney because they are involved in a war, while the disputes only concern its economic interests; (2) the sanctions issued by the European Union forbid assistance of the RF; (3) attorneys have sworn an oath that they will not handle cases that they do not consider just and there are ethical objections within the Hague Bar against handling a case on behalf of the RF, a number of firms have signed the “Stand Firm Declaration”; (4) the Hague Bar does not have both the required specialist knowledge for these highly complex cases and sufficient capacity to handle them properly; (5) an attorney so appointed might face a diminished reputation or loss of clients if it becomes known that he assists the RF; (6) he might face problems with his liability insurer or banks; and (7), if the case goes against the RF, the attorney might face threats and security risks.
Th RF appealed to the Hof van Discipline, the highest disciplinary court for attorneys, (the Court), and the Court made short shrift of those arguments. As to (1), whether Article 13 applied to foreign powers, the answer is yes. Not only natural persons, but also corporate ones, including warring foreign powers can invoke that article. As to (2), the EU Sanctions Regulations make clear that assistance necessary for access to a Court is exempted from their prohibitions.
As to (3), that a number of firms have expressed objections to assisting Russian institutions and companies, does not mean that all of them have done so and if so, that would not stand in the way of the Dean appointing one, nor does the professional oath. As to (4) through (7), they are not sufficiently made plausible to count as “serious grounds,” allowing her the denial of the application.
So, the complaint is allowed and the Dean is ordered (implicitly) to appoint an attorney to assist the RF in the five proceedings before the Hoge Raad. Interestingly, the June 28, 2022, June Court of Appeal Decision was one in Kort Geding (summary proceedings), in which the appeal deadline is eight weeks, ending on Tuesday, August 23, 2022 (in the other four cases the deadline is the regular one of three months). The decision of the Hof van Discipline was given on Thursday, August 18, 2022, August and in proceedings in cassatie all complaints against the appealed decision must be brought within the deadline. So, if another attorney was appointed in time, he had a very busy weekend.
V. Italy: Incoterms and the Italian Corte di Cassazione—A Rollercoaster Relationship
Since the European Court of Justice’s (ECJ) issuance of the seminal Electrosteel case, the Italian Corte di Cassazione (the Italian Supreme Court in civil and criminal matters) seemed to have a love-hate relationship with the Incoterms in determining jurisdiction pursuant to EU Regulation 1215/2012 (Bruxelles I bis).
The point is perfectly illustrated by two orders recently issued by the Italian Corte di Cassazione deciding two motions for lack of jurisdiction of the Italian courts on international supply agreements.
While lower courts and scholars thought that the Electrosteel case has placed a nail in the coffin on jurisdictional cases on Brussels I and Brussel I Bis litigation by (1) giving clear instructions and tests to be performed to ascertain which member state has jurisdiction or better which is competent as we Europeans like to say), and (2) granting substantial importance to Incoterms and their delivery terms in the jurisdiction determination process, the Italian Corte di Cassazione seems to have backed-off, at least in part, from its original majority opinion that the key element in determining jurisdiction is the place delivery and not the place of final destination.
The first order concerns a case whereby a decreto ingiuntivo (motion for summary judgment in lieu of a complaint) was granted by the Court of Treviso against a British company based upon an Ex Works-delivery inserted in the seller documentation but lacking a formal acceptance by the buyer. The buyer filed a motion for lack of jurisdiction of the Italian court. In the order the Corte di Cassazione held that the case should be dismissed the Treviso court lack jurisdiction on the ground that a party cannot unilaterally insert delivery terms in the contractual documentation without a clear and objective acceptance by the other party. In its dicta while stating that Electrosteel controls the matter and this case, based upon the aforementioned recent new jurisprudence, the court stated that (1) Incoterms regulate passage of risks and cost of transportation but cannot have an impact on the determination of jurisdiction and, moreover; (2) the criterion of the place of final destination/actual final delivery of the goods is a preferable criterion because it is highly predictable and allows (a) to meet a tight connection between the agreement and the court that will decide on it, because, at least in principle, the goods subject matter of the agreement will normally be located there after the execution of the agreement; and (b) the purpose of a purchase and sale agreement is that the goods will arrive at destination; (3) the place where the seller delivers the goods to an independent freight-forwarder is irrelevant because it cannot equally guarantee the needs of simplification, uniformity, and predictability of the decisions.
Needless to say, the decision has generated a lot of criticism by the scholars mainly because it (1) disapplies Electrosteel, after having proclaimed adherence to it; and (2) shows a subtle mistrust of the Incoterms by some of the judges of the court, maybe generated by the fact that Incoterms are not issued by governmental body, but rather by a “private” organization.
The second case is more aligned to the Electrosteel case. Again, a lack of jurisdiction motion was raised against a decreto ingiuntivo issued by the Italian court of Trani by a Rumanian company claiming that Bucharest should have been the lawful form to hear the case and that the parties did not agree to jurisdiction clause. The Corte di Cassazione dismissed the motion on procedural grounds. But it reported in the order the entire holding of Electrosteel case to explain which are the criteria that a court must take into account whether or not the place of delivery has been determined in the contractual documentation, noting that in light of the aforesaid ECJ jurisprudence the moving party has failed to provide evidence enabling to understand the main agreements reached by the parties and, consequently, also those that may clearly identify the agreed place of delivery.
Only the future will tell the whether the Italian Corte di Cassazione will fully go back to Electrosteel or, on occasion, it will continue to drift away from it.
