The Availability of Damages in the EUROPEAN UNION for Breach of the Arbitration Agreement

Article excerpt

An issue of great interest in view of the unavailability of anti-foreign-suit injunctions in the EU.

Clauses providing that any dispute shall be referred to an arbitral tribunal are nothing special in international commercial contracts. However, some parties decide to breach the arbitration clause, perhaps believing that it might stand a better chance before its home court, or that it might gain time by doing so.1

An efficient remedy to prevent the continuation of such a breach in the European Com - munity (EC) is an anti-foreign-suit injunction, which prevents a party from continuing a foreign court proceeding so that arbitration can take place. However, in Allianz SpA v. West Tankers,2 the European Court of Justice (ECJ) held that it is incompatible with Regula tion 44/2001 (known as Brussels Regulation I), and inconsistent with the arbitration agreement, for a court of an EC member state to make an order to restrain a person from commencing or continuing proceedings before the court of another member state. This means that once a party has started proceedings at a court of an EC member state-even if in breach of an arbitration agreement-the nonbreaching party cannot ask any other court in an EC member state to order an anti-suit injunction. Hence, that party is forced to file an application with the foreign court asking for a dismissal or a stay of the proceedings on the ground that the arbitration agreement is binding and should be enforced.

Only in rare cases will a dismissal be denied, e.g., when non-parties to the arbitration agreement are involved in the dispute. However, foreign proceedings can be very time consuming and costly for the non-breaching party. Hence, in this situation the question arises as to whether the party that breaches the arbitration agreement can be held liable for the costs incurred by the non-breaching party in seeking to enforce the arbitration clause in the foreign court.

European Rule on Recovery of Costs

Unlike in the United States, where the prevailing party generally cannot recover its litigation costs from the losing party, in most European countries, the losing party bears the costs of the proceedings. Thus, theoretically, a prevailing party would not incur any damages through the foreign proceedings. However, empirical studies have shown that decisions on costs awarded to the prevailing party only rare ly cover all costs of the prevailing party.3 One reason could be that the law of the jurisdiction where the breaching party commenced the lawsuit might not allow the court to award full compensation for costs. For example, in a German case, the court held that a party could not recover all costs incurred in that proceeding as the hourly fee charged by the foreign lawyer was much higher than German law allows.4 Therefore, a prevailing party will be eager to recover in the arbitration the costs not awarded by the foreign forum. The only way to recover this cost in the arbitration is to make a claim for damages for breach of the arbitration agreement.

This article discusses the availability of an award of damages for breach of an arbitration agreement, whether such an award would comply with the Brussels Regulation, and the enforceability of that award.

Remedy for Breach of an Arbitration Agreement

Various courts and arbitral tribunals have awarded damages for breach of an arbitration agreement. The strongest argument for allowing an award of damages for breach of an arbitration agreement is pacta sunt servanda (meaning agreements must be kept). This is a fundamental principle of European law.5 An arbitration clause is basically a contractual promise by the parties that, in case a dispute arises, they will select an arbitral tribunal and submit the dispute to that tribunal for a binding decision. However, by filing a claim in court, instead of with the arbitral tribunal, a party breaches that promise.6 Hence, commencing a legal action in any forum other than the one agreed on constitutes a breach of contract for which damages should be available. …