Who decides the arbitrators' jurisdiction? Separability and competence-competence in transnational perspective.

• Author: Barcelo, John J., III

TABLE OF CONTENTS I. INTRODUCTION II. THE "WHO DECIDES?" QUESTION AT DIFFERENT STAGES OF THE COURT-ARBITRATION PROCESS III. DEFENDING PRIMA PAINT AND SEPARABILITY A. Prima Paint and Ordinary Contract Interpretation B. Do First Options and Howsam Affect Separability? IV. COMPETENCE-COMPETENCE A. Positive and Negative Competence-Competence B. The Negative Effect Doctrine in Transnational Law 1. The French Approach 2. The 1961 Geneva Convention 3. The UNCITRAL Model Law 4. The British Variation on the Model Law 5. The German Variation on the Model Law 6. The American Approach to Negative Competence-Competence a. Domestic Arbitration b. International Arbitration V. CONCLUSION I. INTRODUCTION

Separability and competence-competence (1) are two of the best known concepts in international commercial arbitration. They are different, but often linked, because they share a common goal: to prevent early judicial intervention from obstructing the arbitration process. Both concepts address the question, "Who decides arbitrability-courts or arbitrators?" but in different ways. I will discuss those differences later in this comment.

In his excellent paper delivered at this Symposium, Everything You Really Need to Know About "Separability" in Seventeen Simple Propositions, (2) Professor Rau focuses principally on separability. His purpose is to defend separability in U.S. arbitration law from the surprisingly common and even recent attacks leveled at it by U.S. scholars and commentators. (3) His defense is penetrating and convincing.

This comment takes a different tack. It focuses primarily on competence-competence and discusses the "who decides" problem from a transnational perspective. Whereas the separability principle has been adopted, with very much the same content, in most of the world's legal orders, (4) competence-competence functions differently from country to country, though a general consensus may be emerging. This comment focuses on competence-competence because it is controversial and has more to say about the "who decides" issue.

I stress a transnational perspective out of the conviction that international commercial arbitration can (and should) be studied, and in fact is practiced, as a body of transnational law. One of the field's most striking and fascinating features is that, in any given dispute, the parties, their counsel, the arbitrators, and the applicable law are generally drawn from several different national jurisdictions, and the award's enforcement often involves legal proceedings in more than one country. The field has transnational coherence, however, because a surprisingly large number of countries apply the same major principles and concepts. That uniformity derives principally from the wide acceptance of the New York Convention (5) and the influence of the UNCITRAL Model Law. (6) The New York Convention now boasts 133 parties, (7) and the Model Law has served as the paradigm for most recently enacted national arbitration statutes. (8)

Of course there are areas of disuniformity, and they deserve special attention. Variability can have advantages, for example, in disclosing the potential benefits of mutations from the norm and in allowing room for the expression of different national values and cultures. Nevertheless, scholars and commentators can also be expected to seek some form of informed consensus respecting the most desirable direction the general uniformity in the field should take. This comment strives for a modest contribution to that goal.

Section II introduces a simplifying framework and briefly reviews well-known terrain: the policy concerns that underlie the separability and competence-competence doctrines. Section III takes up separability, in particular Professor Rau's penetrating defense of it in U.S. law. Section IV turns to competence-competence, which addresses the truly controversial aspects of the "who decides" question in transnational arbitration law. Section V states a brief conclusion.

When the United States adopts a modern arbitration statute (which we can hope will be sooner rather than later) (9) competence-competence will inevitably be on the agenda. What approach to the doctrine should the United States take? As UNCITRAL continues to review the efficacy of the Model Law in practice, should it consider revising the Model Law's treatment of competence-competence? To aid scrutiny of these issues, this comment seeks a better understanding of how various legal orders approach the competence-competence principle and the policy justifications underlying the differences.

2. THE "WHO DECIDES?" QUESTION AT DIFFERENT STAGES OF THE COURT-ARBITRATION PROCESS

   For purposes of analysis, this comment divides the court-arbitration process into three stages. Stage 1 encompasses litigation, generally at the outset of the dispute, over whether the court should hear the dispute or send the parties to arbitration. Stage 2 encompasses decision making by arbitrators concerning whether to hear the dispute or decline jurisdiction. Stage 3 encompasses court review of an award (set-aside or recognition and enforcement) respecting whether the arbitrators had good jurisdiction. The parties may bypass Stage 1 altogether and go directly to Stage 2. Or Stage 1 and Stage 2 may proceed concurrently, with one party urging a court to take jurisdiction and the other, an arbitral tribunal.

   Stage 1 is generally the point at which judges and scholars ask the "who decides" question. Who decides--court or arbitrator--whether a dispute goes to arbitration or stays in court? If the parties go directly to Stage 2, but one of them nevertheless challenges the jurisdiction of the arbitral tribunal, the arbitrators will decide whether they have jurisdiction. This, at a minimum, is what is meant by competence-competence: the arbitrators are authorized to decide their own jurisdiction, at least as an initial matter.

   Sometimes the "who decides" question arises at Stage 3. The arbitrators have decided they have jurisdiction, either in a preliminary award or in the final award itself. When a court reviews that award, in either a set-aside or a recognition and enforcement proceeding, the court must decide how much weight to give the arbitrators' decision upholding arbitral jurisdiction. (10) They may give it no weight at all (de novo review) or various levels of deference (from affirming if the arbitrators' award is reasonable, to affirming if there is any colorable justification for it, to affirming without second guessing the arbitrators at all). Although the discussion below occasionally deals with the "who decides" question at Stage 3, its primary focus will be on Stage 1.

   Stage 1 is crucial concerning whether arbitration is allowed to go forward efficaciously or is obstructed by court intervention. At Stage 1, a party opposing arbitration may raise any of a series of legal issues requiring court, rather than arbitrator, decision. These may include any or all of the following claims: (1) the container contract is invalid (for a reason that would not directly invalidate the arbitration clause); (2) no arbitration agreement came into existence between the parties; (3) an existing arbitration agreement is either formally invalid (for example, not in writing) or materially invalid (for example, violative of mandatory law); (4) a disputed issue is not within the scope of the arbitration agreement; (5) mandatory law prohibits a disputed issue, though within the scope of the parties' arbitration agreement, to be arbitrated (a special type of material invalidity respecting a specific issue fraught with public policy concerns, such as (formerly) antitrust or securities fraud); (6) some precondition for permissible arbitration has not been met (for example, a time-limit on initiating arbitration); (7) the party seeking arbitration has waived its right to arbitrate or is estopped from claiming that right.

   The greater the number of these claims required to be fully litigated at Stage 1, the greater the potential for disruption of the arbitration process--or, in other words, the greater the potential for an obstructing party to frustrate a genuine agreement to arbitrate. Thus at Stage 1, an extremely proarbitration legal order might send all of these questions to the arbitrators, with no, or perhaps minimal (prima facie), judicial scrutiny. But of course arbitration is not the holy grail. Not all parties resisting arbitration are obstructionists. A party should be entitled to its day in court unless it has agreed to arbitrate. That is the competing value. A legal order must decide what weight to give to these competing values and how to structure the process to maximize overall value by reducing opportunities for obstructionism while preserving legitimate claims for reasonably prompt judicial decision. The doctrines of separability and competence-competence operate at this tension point in a legal order.

3. DEFENDING PRIMA PAINTAND SEPARABILITY

   1. Prima Paint and Ordinary Contract Interpretation

      It is easy to see how the Prima Paint separability doctrine relates to the "who decides" question, holding, in effect, that when parties enter a main contract (container contract) and include in it a broadly worded arbitration clause, a court will treat them as having concluded two separate contracts, the container contract and an arbitration agreement. (11) This means that if a party challenges the validity of the container contract (the first of the seven claims listed above), a court should send that issue to the arbitrators as long as nothing in the claim attacks the validity of the arbitration agreement directly.

      Articulated in this way, a challenge to the container contract's validity would not seem ipso facto to question the arbitrators' jurisdiction. Separability discontents see such a claim as challenging the legitimacy of arbitration, however, because they subscribe to the logical proposition that if the container...