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Associate Litigation & Arbitration - Houthoff

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Incapacity Under the New York Convention Article V(1)(a)

I. Introduction

1.

Article V of the New York Convention provides for exclusive1 grounds for non-recognition of (foreign) arbitral awards. Put differently, enforcement of an arbitral award may only be denied if the party against whom the award is invoked proves any of the limited grounds listed in Article V New York Convention. As such, Article V New York Convention can be considered the core of the treaty. 

2.

Although there is a lot of litigation with regard to Article V New York Convention, enforcement courts generally tend to decide in favour of recognition of the respective arbitral award, in line with the “pro arbitration philosophy” which forms the basis of the treaty.2 In this context it should be noted that a party that has failed to establish the basis of the defence during the arbitral proceedings itself, will be precluded from relying on any defence under Article V New York Convention.3

3.

Under the New York Convention, an arbitral award may not be recognized and enforced if a party successfully proves that:

"[t]he parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made (…)."4

This Note focuses on the incapacity of parties under Article V(1)(a) New York Convention. For the validity of the arbitration agreement, see Validity of the Arbitration Agreement. For other grounds of non-recognition and enforcement, see Recognition and Enforcement of non-ICSID awards.

4.

In other words, Article V(1)(a) New York Convention provides for two grounds on which the parties can rely to oppose to the recognition or enforcement of an arbitral award; incapacity of the parties and invalidity of the arbitration agreement. An enforcement court may deny the recognition and enforcement of the respective arbitral award, if (i) the parties were, under the applicable law, not capable to conclude the relevant arbitration agreement or (ii) the relevant arbitration agreement is not valid under the relevant law. These two reasons are discussed in more detail in the sections below.

5.

As for other grounds included in the exhaustive list of Article V(1) New York Convention, this ground will not be raised ex officio by the enforcement court.5 It must be raised by either party.6 Even if the ground is raised and proven by the party resisting enforcement, the enforcement court may still use its discretion to nonetheless enforce the award.7

6.

In general, the party resisting enforcement bears the burden of proof.8 In some cases however, enforcement courts shift this burden to the party seeking recognition or enforcement, requiring it to prove that the arbitration agreement was indeed valid in order to rely on it.9

II. Elements of incapacity of parties under the New York Convention

A. General principle

7.

Article V(1)(a) provides that the relevant party may oppose to the recognition or enforcement of an arbitral award if it proves that the parties to the arbitration agreement were under “some” incapacity according to the applicable law.

8.

Although the New York Convention does not define “incapacity” (let alone “some”), this concept has generally been interpreted as a lack of power to contract.10 The incapacity may relate to a natural person, a legal entity or a public entity.11 This is referred to as “subjective arbitrability.”12

B. Ultra vires doctrine

9.

In addition, commentators support the ultra vires doctrine when interpretating “incapacity.” Accordingly, the incapacity defence may cover situations where legal entities acted beyond their powers pursuant to their constitutional documents, or where the representative powers are invalid.13 However, some authors have questioned the relevance of this doctrine with regard to private entities.14 When it comes to the legal capacity of public entities, such as States and their proxies, it should furthermore be noted that there is a field of tension between on the one hand the sovereign immunity of States and on the other hand the legitimate expectations of their commercial partners.15

C. Applicable law

10.

It is widely accepted that (in)capacity is to be determined based on the party's nationality, independently from the law applicable to the arbitration agreement.16 Hence, for individuals, (in)capacity will be governed by the laws of their State of nationality (civil law jurisdictions) or by the laws of the State of their habitual residence (common law jurisdictions). For legal entities, the applicable law to determine (in)capacity will be the law of the place of incorporation or the place of business.17 The (in)capacity should be assessed at the time of conclusion of (the contract containing) the arbitration agreement.

D. Incapacity and the definition of investor

11.

In the context of investment arbitration, some (host) States argue that the respective claimant does not qualify as an investor under the relevant treaty and that Article V(1)(a) New York Convention therefore stands in the way of recognition and enforcement.18 In this context it is furthermore worthwhile mentioning that commentators argue that a State should not be able to raise an ultra vires defence on the basis of its own laws.19

III. Case law

A. Generalities

12.

With regard to the incapacity of individuals, there is no reported case law concerning the non-enforcement of an arbitral award on the grounds that either party to the arbitration agreement was a minor or otherwise not mentally competent.20 The fact that a party did not have the chance to obtain independent legal advice in the course of the negotiation and conclusion of (the contract containing) the arbitration agreement is no reason to deny recognition and enforcement, according to a Canadian court.21

13.

As to legal entities, enforcement courts have applied the incapacity defence to legal entities whenever they confirmed issues relating to the lack of representative powers, such as those given under a power of attorney,22 and those to act on behalf of the company.23 A successful example of the application of the ultra vires doctrine being raised as an incapacity defence in a case before the German Supreme Court in 1998. The enforcement of an arbitral award between two (private) legal entities was denied, because one of them did not comply with requirements under Yugoslav law to have its statutes duly registered and authorized.24

B. Investor-State arbitration

14.

In the context of investment arbitration, enforcement courts have accepted the incapacity defence in cases where a party was under some kind of legal restriction. For example, a Syrian enforcement court refused to enforce an arbitral award against the Syrian Ministry of Defence because the parties failed to give notice of the referral of the dispute to arbitration to the Council of State, which breached a provision of Syrian public policy.25 However, these defences do not always prove to be successful. See for example the attempt of the Republic of Ghana arguing that the relevant agreement was never approved by the Ghanaian parliament, which was ignored by the arbitral tribunal.26

Bibliography

Born, G., International Commercial Arbitration, 2nd ed., 2014

Wolff, R. (ed.), New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958: Article-by-Article Commentary, 2nd ed., 2019.

Kronke, H., Nacimiento, P., Otto, D. and Port, N.C. (eds.), Recognition and Enforcement of Foreign Arbitral Awards: A Global Commentary on the New York Convention, Kluwer Law International, 2010.

UNCITRAL, UNCITRAL Secretariat Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 2016.

International Council for Commercial ArbitrationICCA's Guide to the Interpretation of the 1958 New York Convention, 2012.

Cheng, T.H. and Entchev, I., State Incapacity and Sovereign Immunity in International Arbitration, Singapore Academy of Law Journal, Vol. 26, 2014.

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