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On 13 July 2023, the Court of Justice of the European Union ruled in case C-87/22 that the court of a Member State where children were wrongfully removed by one of their parent can be requested to assume jurisdiction as a better place court than the court of their formal habitual residence, but that an application for return of the child suspends such decision.

Background

The case was concerned with the custody of two children born in 2012 from a couple of Slovak nationals in Slovakia. In 2014, the family moved to Austria, where the children went to daycare and then school for a few years. In 2017, however, the children started going to school in Slovakia, commuting daily from Austria. As the result, they spoke only limited German.

In 2020, the couple separated, and the mother took the children to Slovakia with her without the father’s consent.

The father sought an order for the return of the children under the 1980 Convention in Slovakia, and brought proceedings for custody of the children in Austria under the Brussels II bis Regulation.

The mother challenged the jurisdiction of the Austrian court on the ground that their habitual residence had been in Slovakia, where they went to school and were socially integrated. She won in first instance, but lost in appeal.

Transfer of the Case to the Place of Wrongful removal?

After loosing on jurisdiction, the mother then applied to the Austrian court for a transfer of the case to Slovakia as a better placed court under Article 15 of the Regulation.

She argued that Slovakian courts were better placed because multiple proceedings were pending in Slovakia (initiated by both parents), and extensive evidence was already available in these proceedings. The Austrian court granted the application in first instance, adding that because the children did not speak German, hearing them in Austrian proceedings would result in additional costs as interpreters would have to be involved.

The appeal court, however, saw a problem with the fact that the children had been wrongfully removed to Slovakia, and wondered whether this was a bar to resorting to Article 15. It referred the matter to the CJEU.

Judgment

The CJEU answers that the court of a Member State where a child was wrongfully removed could be transferred a case under Article 15 as a better placed court, but that an application for return of the child lodged with the competent authorities of the Member State of removal suspends any decision of transfer under Article 15.

This is a remarkable solution. As the judgement recalls, a major objective of the Regulation is to deter parents from removing wrongfully children to other Member States. This is why the return procedure exists, which should lead to a return of the child to the State where s/he was habitually resident. This is also why Article 10 of the Brussels II bis Regulation maintains the jurisdiction of the court of the old habitual residence of the child even if the removal results in a new habitual residence in another State (unless the parents have somehow consented to the removal).

Yet, the CJEU notes that, in practical terms, the court which might be considered as a better placed court under Article 15 will precisely be the court of the State where the child will have been wrongfully removed. Recall that, unlike doctrines such as forum non conveniens, the better placed court doctrine under the Brussels II Regulation is only available to transfer a case to a court which does not have jurisdiction under the Regulation.

The CJEU concludes, therefore, that Article 15 must be considered, in principle, to be available even for transfer to a court of the place of wrongful removal. The Court insists that given that one of the three prongs of the test to decide on a transfer is the best interests of the child, the decision should ultimately be “a balanced and reasonable assessment, in the best interests of the child, of all the interests involved, which must be based on objective considerations relating to the actual person of the child and his or her social environment”.

The CJEU then moves to the test for deciding a transfer under Article 15. It rules that the test remains the same in the context of a potential transfer to the court of the place of wrongful removal but that the existence of an application for return of the child suspends the decision for the six weeks time period for ruling on the application.

Assessment

The case was quite remarkable, in so far as the children were not well integrated, if at all, in the place of their habitual residence.

The judgement, however, addresses the issue from a general standpoint, and it is hard to avoid concluding that it might give additional hopes to parents that their strategy to abduct children might succeed, including in more common cases of child abduction from a country where they are socially integrated to another where they are not. The filing of an application for return of the child will, however, be an even more important move for the parent fighting against the removal and likely the transfer.

The important point that should be underlined, and which is an important safeguard, is that the decision will ultimately be made by the court of the original habitual residence. It is this court which will have to make the assessment of whether a transfer might be beneficial. The court of the place of wrongful removal may also request a transfer, but it will still have to be allowed by the court of the original habitual residence (see Article 13 of the Brussels II ter Regulation).

A collection of essays on the Hague Judgments Convention of 2 July 2019 has recently been published by Hart, in its Studies in Private International Law Series, under the title The HCCH 2019 Judgments Convention – Cornerstones, Prospects, Outlook.

Edited by Matthias Weller, João Ribeiro-Bidaoui, Moritz Brinkmann and Nina Dethloff, the book has been presented and discussed at conference that wtook place at the University of Bonn on 9 and 10 June 2023.

This book analyses, comments and further develops on the most important instrument of the Hague Conference on Private International Law (HCCH): the HCCH 2019 Judgments Convention. The HCCH Convention, the product of decades of work, will have a transformative effect on global judicial cooperation in civil matters. This book explores its ‘mechanics’, i.e. the legal cornerstones of the new Convention (Part I), its prospects in leading regions of the world (Part II), and offers an overview and comment on its outlook (Part III). Drawing on contributions from world-leading experts, this magisterial and ambitious work will become the reference work for law-makers, judges, lawyers and scholars in the field of private international law.

The contributors include Paul Beaumont, João Bidaoui-Ribeiro, Adeline Chong, Marcos Dotta Salgueiro, Beligh Elbalti, José Angelo Estrella-Faria, Pietro Franzina, Wolfgang Hau, Xandra Kramer, Cristina Mariottini, Chukwuma Okoli, Verónica Ruiz Abou-Nigm, Ilja Rumenov, Geneviève Saumier, Linda Silberman, Andreas Stein, Zheng Tang, Hans van Loon, Abubakri Yekini, Lenka Visoka, and Ning Zhao.

For more information, including the table of contents, see here.

On 26–28 October 2023, the University of Kiel will be hosting a conference on ‘EU Insolvency Law and Third Countries: Which Way(s) Forward?’. It is part of a research project coordinated by Professors Alexander Trunk (University of Kiel) and Jasnica Garasic (University of Zagreb), which is endorsed by UNCITRAL and supported by the Fritz Thyssen Foundation. It is conducted in cooperation with representatives of the European Commission and the Hague Conference on Private International Law.

At the conference, the first results from the project will be presented and discussed with a larger professional and academic public. The conference will also include a Young Researchers Forum on the morning of 26 October.

The organizers have kindly shared the following documents with us:

• Conference Announcement (and Application Form)
• YRF Announcement (and Application Form)

Further information can also be found at the project website.

 

The third edition of Fabrizio Marrella’s textbook on international business law has recently published by Wolters Kluwers/Cedam.

The author (Vice-Rector and Chair of International Law at “Cà Foscari” University of Venice, Italy) has kindly provided the following summary for our readers:

After an historical introduction and a clear systematic analysis of key actors and sources of International Business Law, the book focuses on transnational contracts and commercial relationships of companies by deepening international sales (including the first applications of Incoterms ® 2020), contracts of international transport, insurance, commercial distribution, payments and bank guarantees. The leading methodology used by the Author is that of private international law and best operational practices.

The book also sets out the regulation of foreign direct investment in the light of the latest new regulatory and case-law developments. In the final part, the work examines, in one section, ADR mechanisms together with international arbitration and, in the final section, the most relevant international civil procedure rules for businesses.

The book can be found at the publisher’s website here.

X v Coinbase Ireland Ltd ECLI:NL:RBNHO:2023:5305 is of interest to the blog for its imho shaky finding on the law applicable to the claim. The case is a so-called pig butchering scam, a term I had never before heard of. Sites like these will tell you what it means. Essentially, in the case at issue the claimant had acquired cryptocoins on a Coinbase account and was subsequently tricked into transferring those into a ‘wallet’ over which she lost control.

Coinbase is defendant, for the fraudsters clearly are nowhere to be found. The claim in a variety of ways attempts to have Coinbase cover the €170,000 or so damage. Jurisdiction is established per A17 ff Brussels Ia (the consumer title). [4.2.4] its activities are found to have been directed at The Netherlands even without it having a Dutch banking licence: it facilitated use of the Dutch iDEAL payment option; it listed The Netherlands as one of the countries in which crypto coin exchange services were available; it offered a Dutch app and a Dutch website; it had paid for Coinbase to appear in Dutch-instructed search engine queries for coinbase and for a link to its website following up on such queries.

Applicable law is held to be Dutch law, applying Rome I. The court first asks itself whether the claim is covered by Rome I or Rome II. With reference to the need for consistency between Brussels Ia and the Rome Regulations (regular readers of the blog know that I am not convinced; see eg tag ‘consistency’ or ‘reading across’ in the search box of the blog) and to CJEU Reliantco, the court holds it is Rome I that is engaged. This is despite the claim largely being based on unfair trading, a statutorily circumscribed tort in The Netherlands. In that respect the claim echoes CJEU Winkingerhof, yet the Dutch court here opts for contract in Sharpston AG Ergo style: [4.3.4] without the contract between the parties there would not currently have been a claim.

The court’s application of Article 6 Rome I then cuts many corners: it notes Coinbase’s argument that its GTCs identify Irish law as the lex contractus, acknowledges that per Rome I (only) mandatory Dutch law trumps Irish law, yet then [4.3.7] rules out the entire application of the lex voluntatis in the GTCs merely on the basis that applying Irish law would be ‘too onerous’ for the consumer, ‘if only’ because it is much more difficult to find legal advisers in The Netherlands with knowledge of Irish law. All of that is sloppy at best.

The remainder of the judgment then dismisses the claim on the basis of Dutch law.

Geert.

Platform liability, 'Pig Butchering Scam'
Consumer's claim against Irish 'Coinbase' fails (essentially on lack of causal link)
Of interest: shaky Rome I, II finding of Dutch law as lex causaehttps://t.co/MejK4lSVTw

— Geert Van Calster (@GAVClaw) June 13, 2023

Leuven term is finally wrapping up and I am hoping to post more of the promised updates over the course of the next few weeks.

In Stichting Massaschade & Consument [SMC] v Airbnb Ireland UC ECLI:NL:RBDHA:2023:8562, the Hague court of first instance held the Dutch courts do not have jurisdiction in a collective claim under the  Dutch WAMCA (mass torts managed by a collective claim).

SMC on behalf of the class members, claims a refund of the service costs which Airbnb charged to the short-term tenants (the claim is not related to the landlords using the platform).

Airbnb’s GTCs include inter alia

“As a consumer, you may bring any judicial proceedings relating to these Terms before the competent court of your place of residence or the competent court of Airbnb’s place of business in Ireland.”

The court first of all reviews the application of the consumer title in particular Article 18(1):

“A consumer may bring proceedings against the other party to a contract either in the courts of the Member State in which that party is domiciled or, regardless of the domicile of the other party, in the courts for the place where the consumer is domiciled.”

The court [4.7] is wrong in my opinion to hold that Article 18 only applies when the consumer him /herself brings the claim. Dutch courts most certainly in my view have jurisdiction.

The Court finds support for its argument that A18 only applies when the consumers bring the claim themselves in CJEU Schrems,

Rather, in Schrems the CJEU [48] with reference indeed to Bobek AG’s Opinion in the case, holds “an assignment of claims such as that at issue in the main proceedings cannot provide the basis for a new specific forum for a consumer to whom those claims have been assigned.” Meaning, in my view, the assignee must bring the claim (presuming it does not bring it in the defendant’s domicile, here Ireland) as A18 instructs “in the courts for the place where the consumer is domiciled”. A18(1) as far as the consumer is concerned, assigns not just national but also territorial jurisdiction (see also Mankowski, BIbis, 2nd revised ed., p.516), vide “the courts for the place where the consumer is domiciled” as opposed to, for the business, “the courts of the Member State in which that party is domiciled” (emphasis added)

This of course is inconvenient for SMC which for that reason [4.4] had suggested that all Dutch courts have jurisdiction and that seeing as a considerable part of the claimants are domiciled in The Hague, that is where the claims ought to be consolidated. That does not follow in my view from Article 18 and /or Schrems.

The court then rejects A19’s possibility for a more generous choice of court purely because SMC is not a consumer, misapplying Schrems again. Some kind of SMC-favourable choice of court clause under A25 linked to Airbnb’s GTCs is rejected (the judgment seems to suggest it was not even prompted by SMC). SMC had it seemed subsidiarily argued A7(1) jurisdiction, I think (but the judgment is brief on this issue) arguing that the service charge element of the agreement somehow is different from the consumer contract. Here, with reference to CJEU C-19/09 Wood Floor Solutions, the competing arguments of ‘place of performance’ viz A7(1) BIa are Ireland as the place from which the platform is run (Airbnb) and The Netherlands as the place to which that platform is directed, in Dutch (SMC, [4.17]). Here, [4.19], the court goes with Airbnb’s suggestion as the one element that is predictable, while looking at it form the user’s points of view leads to unpredictability seeing as the platform can be used by anyone anywhere in the world. On this I think more can be said.

Overall however as noted, the court in my view misapplied Article 18. Whether that may lead on appeal to consolidation at The Hague, is a different matter.

Geert.

EU private international law, 3rd ed. 2021, 2.222 ff.

Dutch court finds it does not have jurisdiction in 'WAMCA' class action v @Airbnb
Rejects A19, 25, 7(1) BIa jurisdictionhttps://t.co/ZcGaEcjUIj#Airbnb

— Geert Van Calster (@GAVClaw) June 26, 2023

Thursday’s Court of Session’s rejection of the defendant’s forum non conveniens objection to jurisdiction in Hugh Campbell KC v James Finlay (Kenya) Ltd [2023] CSOH 45 means the class action lest appeal can now go ahead . More than 700 workers are suing James Finlay Kenya Ltd (despite its name, a Scotland-incorporated company) under a class action suit. As BHRRC summarise, the former tea pickers claim they suffered serious neck and back injuries due to the poor working conditions on the company’s tea farms in Kericho.

Scotland is the home of forum non conveniens and the case is important with a view to the future direction of the doctrine.

Lord Weir first of all dealt at length and with the help of expert evidence on Kenyan law, with a number of issues under Kenyan law, essentially suggesting exclusive jurisdiction for the Kenyan courts as a result of choice of court in the employment agreements and /or by implication of mandatory Kenyan collective labour law. Eventually he rejects that suggestion and then deals more succinctly [146 ff] with the forum non challenge, which requires defendants show it is clearly and distinctly more appropriate that the group members’ claims be heard in Kenya.

[150] He is unpersuaded on the pleadings and the evidence led that there are significantly complex and disputed issues of Kenyan law (which he holds at the level of general duties is similar to Scots common law) that would require to be resolved in dealing with the group members’ substantive claims.

Other arguments cited pro forum non, are [151]

that the proceedings were likely to raise issues which required an  understanding of Kenyan culture, behaviour and custom.

At an important, though practical level, investigations would require to be undertaken locally.

There was uncertainty over the enforceability of any order made by the Scots court concerning the inspection of property, including judicial accessibility for site inspections.

It was unsatisfactory, from the point of view of assessing credibility and reliability of evidence, that interpreters would be required to translate
evidence, the nuances of which could be lost.

The requirement for translation would inevitably prolong proceedings.

Moreover, there was also no certainty that the evidence of numerous witnesses to fact could be heard remotely.

The attitude of the Kenyan state had to be considered and the correct processes followed. (The evidence of witnesses heard remotely from Kenya could only be granted without objection by the Kenyan state).

[152] Kenya is held clearly to be an appropriate forum. Again, Gleichlauf (Kenyan courts applying their own law, the lex causae) was not considered to be very relevant. Other issues though, were: The group members all live in Kenya. They all sue on the basis of having sustained injury on tea estates in Kenya as a result of the defenders’ breach of duty there. The defenders, although retaining a registered office in Scotland, have no other operations, factories or other discernible business in Scotland. They operate as a branch in Kenya. Senior officers are all based, and live, in Kenya. The circumstances giving rise to the claims, including the processes said to have given rise
to injury, will inevitably require to be investigated in Kenya. Moreover, the defenders have raised practical but nonetheless important issues about the extent to which orders normally pronounced as a matter of routine (eg specifications of documents and property, and the taking of evidence remotely) could be enforced in Kenya.

[153] Yet eventually the balance tilts in favour of Scotland: the judge holds there is cogent evidence of a material risk that the group members may not obtain justice if they are obliged to litigate their claims in Kenya. Lord Weir conducts that exercise at a very practical level, not as a systemic critique of the Kenyan legal system:

“(i) The group members’ duties involve tea harvesting on the defenders’ tea estates. The evidence, derived from the specimen contract, was that tea harvesters earned about Kshs 11,616/=. Although I was not furnished with a direct sterling equivalent Mr Nderitu’s evidence, which I accept, was that Kshs 15,000 was worth about £100 at current rates (March 2023). …a medical report might cost around Kshs 10,000. That…would suggest that a tea harvester who was looking to source their own medical report for litigation purposes would have to spend an entire month’s salary to meet the cost of doing so.
(ii) Tea harvesters working on the defenders’ tea estates were afforded
accommodation but required to purchase their own food. Their
remuneration can properly be described…. as subsistence pay.
(iii) It is probable that many of the group members cannot read or write. …
(iv) It is unlikely that any non-governmental organisation in Kenya would be in a position to fund litigation of the nature and character of these proceedings in Kenya.

(v) Although a Legal Aid Act came into force in Kenya in 2016 it is not yet fully implemented and the group members are unlikely to be able to secure legal aid and assistance in representation to advance their claims in Kenya.
(vi) Contingency fees are prohibited under Kenyan law and group  members would be potentially liable for adverse awards of costs.
(vii) Although there are provisions within the Kenyan Civil Procedure Rules 2010 which permit a group’s interests to be canvassed through a single pursuer or defender …, there are no provisions equivalent or
comparable to the rules governing group proceedings in Scotland. The group members’ claims do not fall into any of the limited categories of claim which would allow for the pursuit of such proceedings, there being no formal procedural basis to enable that to be done.
(viii) There are few lawyers in Kenya who would have the skills and resources to handle mass litigation of this kind. For those larger farms (sic) which could theoretically do so, there are likely to be a commercial disincentives because of (i) the likelihood that such firms would be looking for payment of fees and disbursements as and when they occurred, and (ii) the commercial undesirability of litigating against substantial commercial entities in Kenya.
(ix) In the foregoing circumstances, it is unlikely that the group members would be able to prosecute their claims, individually or collectively and whether or not represented, to a conclusion and to secure justice.”

This is an important finding and it emphasises the importance of practical achievability of properly bringing a claim (that is an echo of Lord Briggs’ ‘substantial justice’ considerations in the forum non conveniens part of UKSC Vedanta, which is not referred to in current judgment).

Geert.

 

Court of Session rejects exclusive jurisdiction for KEN courts and forum non conveniens defence. judge finds against forum non essentially on grounds of substantive justice

More soon

For background to the jurisdictional tussle see https://t.co/64kZyfDuOK

via @StevePeers https://t.co/ufOy1sUG3v pic.twitter.com/RHVWih2MtH

— Geert Van Calster (@GAVClaw) July 13, 2023

 

The first issue of 2023 of the Rivista di diritto internazionale privato e processuale (RDIPP) is out. In addition to recent case law and other materials, it features three contributions.

Francesco Salerno, L’impatto della procedura di interpretazione pregiudiziale sul diritto internazionale privato nazionale (The Impact of the Preliminary Rulings of the Court of Justice on National Private International Law)

The European Court of Justice’s uniform interpretation of private international law concerns mainly – even though not only – the EU Regulations adopted pursuant to Art 81 TFEU: in the context of this activity, the Court also takes into account the distinctive features of EU Member States. The increasing number of autonomous notions developed by the Court greatly enhanced the consistency and the effectiveness of the European rules. Against this background, the Italian judicial authorities implemented such a case-law even when it ran counter well-established domestic legal principles. Moreover, the European institutions rarely questioned the case-law of the Court, but when they did so, they adopted new rules of private international law in order to “correct” a well-settled jurisprudential trend of the Court.

Cristina Campiglio, La condizione femminile tra presente e futuro: prospettive internazionalprivatistiche (The Status of Women between Present and Future: Private International Law Perspectives)

One of the Goals of the U.N. 2030 Agenda for Sustainable Development is gender equality (Goal 5), which can also be achieved through the elimination of “all harmful practices, such as child, early and forced marriage” (Target No 3) and the protection of women reproductive rights (Target No 6). This article addresses these two issues in a conflict-of-laws perspective, identifying the legal mechanisms through which legal systems counter the phenomenon of early marriages celebrated abroad and tackle the latest challenges related to the so-called reproductive tourism. After analyzing the role played by public policy exceptions and by the principle of the best interest of the child, it summarizes the Court of Justice’s case-law on the recognition of family situations across borders. In fact, the recognition of the possession of an EU status – meeting the social need to have a personal status which accompanies individuals anywhere within the EU area – is gaining ground. Such status is a personal identity merely functional to the exercise of EU citizens’ freedom of movement (Art 3(2) TEU, Art 21 TFEU and Art 45 EU Charter of Fundamental Rights). The result is the possession, by EU citizens, of a split personal identity – one functional to circulation, while the other one to its full extent – whose compatibility with the EU Charter of Fundamental Rights principles and with the ECHR may be called into question.

Marco Farina, I procedimenti per il riconoscimento e l’esecuzione delle decisioni straniere nella recente riforma del processo civile in Italia (Proceedings for the Recognition and Enforcement of Foreign Judgments in the Recent Italian Reform of Civil Procedure)

In this article, the author comments on the new Art. 30-bis of Legislative Decree No 150/2011, introduced by Legislative Decree No 149/2022 reforming Italian civil procedure and aimed at regulating “proceedings for the recognition and enforcement of foreign judgments provided for by European Union law and international conventions”. The author analyses the new provision, focusing on the different procedural rules applicable, depending on the relevant EU Regulation or international convention concerned, to the proceedings that the EU Regulations listed in Art. 30-bis of Legislative Decree No 150/2011 provide for obtaining the recognition and enforcement of the judgments rendered in a Member State other than the one in which they were rendered. In commenting on this new provision, the author offers a reasoned overview of the problems generated by it with the relative possible solutions.

Written by: Aditya Singh, BA.LL.B. (Hons) student at the National Law School of India University(NLSIU), Bengaluru and line editor at the National Law School Business Law Review (NLSBLR)

 

I. INTRODUCTION

The debate surrounding the composite approach i.e., the approach of accommodating the application of both the law applicable to the substantive contract and the Lex Fori to the arbitration clause has recently resurfaced with Anupam Mittal v Westbridge Ventures II (“Westbridge”). In this case, the Singapore Court of Appeal paved way for application of both the law governing substantive contract and the Lex Fori to determine the arbitrability of the concerned oppression and mismanagement dispute. The same was based on principle of comity, past precedents and s 11 of the International Arbitration Act. The text of s 11 (governing arbitrability) does not specify and hence limit the law determining public policy to Lex Fori. In any event, the composite approach regardless of any provision, majorly stems from basic contractual interpretation that extends the law governing substantive contract to the arbitration clause unless the presumption is rebuttable. For instance, in the instant case, the dispute would have been rendered in-arbitrable with the application of Indian law (law governing substantive contract) and hence the Singapore law was inferred to be the implied choice.[1]

The test as initially propounded in Sulamérica CIA Nacional de Seguros v Enesa Engenharia (“Sulamerica”) by the EWCA and later also adopted in Singapore[2] states that the law governing the substantive contract will also govern the arbitration clause unless there is an explicit/implicit choice inferable to the contrary. The sequence being 1) express choice, 2) determination of implied choice in the absence of an express one and 3) closest and the most real connection. The applicability of Lex Fori can only be inferred if the law governing the substantive contract would completely negate the arbitration agreement. There have been multiple criticisms of the approach accumulated over a decade with the very recent ones being listed in (footnote 1). The aim of this article is to highlight the legal soundness and practical boons of the approach which the author believes has been missed out amidst the rampant criticisms.

To that end, the author will first discuss how the composite approach is the only legally sound approach in deriving the applicable law from the contract, which is also the source of everything to begin with. As long as the arbitration clause is a part of the main contract, it is subject to the same. To construe it as a separate contract under all circumstances would be an incorrect application of the separability doctrine. Continuing from the first point, the article will show how the various nuances within the composite approach provide primacy to the will and autonomy of the parties.

II. TURE APPLICATION OF THE ‘SEPARABILITY’ PRINCIPLE

The theory of separability envisages the arbitration clause to be separate from the main contract. The purpose of this principle is to immunize the arbitration clause from the invalidity of the main contract. There are various instances where the validity of a contract is contested on grounds of coercion, fraud, assent obtained through corruption, etc. This, however, does not render the arbitration clause inoperable but rather saves it to uphold the secondary obligation of resolving the dispute and measuring the claims arising out of the breach.[3]

It is imperative to note from the context set above that the doctrine has a specific set purpose. What was set as its purpose in seminal cases such as Heyman v Darwins Ltd has now been cemented into substantive law with Article 16 of the UNCITRAL Model law which has further been adapted by multiple jurisdictions such as India, Singapore and the UK also having a version in s 7. The implication of this development is that separability cannot operate in a vague and undefined space creating legal fiction in areas beyond its stipulated domain. Taking into consideration this backdrop, it would be legally fallacious to strictly follow the Lex Fori i.e., applying the substantive law of the seat to the arbitration clause as a default or the other extreme of the old common law approach of extending the law applicable to the substantive contract as a default. The author submits that the composite approach which was first taken in Sulamerica and recently seen in Westbridge to determine the law applicable to arbitrability at a pre-award stage, enables the true application and effectuation of the separability doctrine.

A. Lex Fori

To substantiate the above made assertion, the author will first look at the Lex Fori paradigm. Any legal justification for the same will first have to prove that an arbitration clause is not subject to the main contract. This is generally carried out using the principle of separability. However, when we examine the text of article 16, Model law or even the provisions of the impugned jurisdictions of India and Singapore (in reference to the Westbridge case), separability can only be operationalised when there is an objection to the validity or existence of the arbitration clause. It would be useful to borrow from Steven Chong, J’s reading of the doctrine in BCY v BCZ, which is also a case of the Singapore High Court that applied the composite approach of Sulamerica. Separability according to them serves a vital and narrow purpose of shielding the arbitration clause from the invalidity of the main contract. The insulation however does not render the clause independent of the main contract for all purposes. Even if we were to examine the severability provision of the UK Arbitration Act (Sulamerica’s jurisdiction), the conclusion remains that separability’s effect is to make the arbitration clause a distinct agreement only when the main contract becomes ineffective or does not come into existence.

To further buttress this point, it would be useful to look at the other contours of separability. For instance, in the landmark ruling of Fiona Trust and Holding Corp v Privalov (2007), both Lord Hoffman and Lord Hope illustrated that an arbitration clause will not be severable where it is a part of the main contract and the existence of consent to the main contract in itself is under question. This may be owing to the fact that there is no signature or that it is forged, etc. To take an example from another jurisdiction, arbitration clauses in India seize to exist with the novation of a contract and the position remains even if the new contract does not have an arbitration clause. In these cases, the arbitration clause seized to be operational when the main contract turned out to be non-est. However, the major takeaway is that as a general norm and even in specific cases where the arbitration clause is endangered, it is subject to the main contract and that there are limitations to the separability doctrine. Hence, it would be legally fallacious to always detach arbitration clauses from the main contract and apply the law of the seat as this generalizes the application of separability, which in turn is contrary to its scheme. It is also imperative to note that the Sulamerica test does not impute the law governing the substantive contract when the arbitration clause is a standalone one hence treating it as a separate contract where ever necessary.

B. Compulsory Imposition of Law of Substantive Contract

Having addressed the Lex Fori approach, the author will now address the common law approach of imputing the law governing the main contract to the arbitration clause. The application and reiteration of which was recently seen in Enka v Chubb and Kabab-ji v Kout Food Group. If we were to just examine the legal tenability of a blanket imposition of the governing law on the main contract, the author’s stand even at this end of the spectrum would be one that the approach is impeding the true effectuation of separability. While it is legally fallacious to generalize the application of separability, the remark extends when it is not operationalized to save an arbitration clause. There may be circumstances as seen in Sulamerica and Westbridge wherein the arbitration clause will be defunct if the law of the main contract is applied. In such circumstances the arbitration clause should be considered a distinct contract and the law of the seat should be applied using a joint or even a disjunctive reading of prongs 2 and 3 of the Sulamerica test i.e., ‘implied choice’ and ‘closest and most real connection’. Although, in the words of Lord Moore-Bick, J, the two prongs often merge in inquiry as “identification of the system of law with which the agreement has its closest and most real connection is likely to be an important factor in deciding whether the parties have made an implied choice of proper law” [para 25]. In any event, when the law governing substantive contract is adverse, the default implication rendered by this inquiry is that the parties have impliedly chosen the law of the seat and the arbitration clause in these circumstances has a more real connection to the law of the seat. This is because the reasonable expectation of the parties to have their dispute resolved by the stipulated mechanism and the secondary obligation of resolving the dispute as per the contract (apart from the primary obligation of the contract) can only be upheld by applying the law of the seat.

When we specifically look at Enka v Chubb and Kabab-ji, it is imperative that these cases have still left room for the ‘validation principle’ which precisely is saving the arbitration clause in the manner described above. While the manner in which the principle was applied in Kabab-ji may be up for criticism, the same is beyond the scope of this article. A narrow interpretation of the validation principle is nonetheless avoidable using the second and third prongs of the Sulamerica test as the inquiry there gauges the reasonable expectation of the parties. Irrespective, Kabab-ji is still of the essence for its reading of Articles V(I)(a) of the New York Convention(“NYC”) r/w Article II of the NYC. Arguments have been made that the composite approach (or the very idea of applying the law governing substantive contract) being antithetical to the NYC. However, the law of the seat is only to be applied to arbitral agreements referred to in Article II, ‘failing any indication’. This phrase is broad enough to include not just explicit choices but also implicit choices of law. The applicability of Lex Fori is only mentioned as the last resort and what the courts after all undertake is finding necessary indications to decide the applicable law. Secondly, statutory interpretation should be carried out to give effect to international conventions only to the extent possible (para 31, Kabab-ji). An interpretation cannot make redundant the scheme of separability codified in the statute. Lastly, even if the approach were to be slightly antithetical to NYC, its domain of operation is at the enforcement stage and not the pre-arbitration stage. Hence, it can never be the sole determining factor of the applicable law at the pre-arbitral stage. While segueing into the next point of discussion, it would be imperative to mention amidst all alternatives and criticisms that the very creation of the arbitral tribunal, initiation of the various processes, etc is a product of the contract and hence its stipulation can never be discarded as a default.

III. PLACING PARTY AUTONOMY & WILL ON A PARAMOUNT PEDESTAL

The importance of party autonomy in international arbitration cannot be reiterated enough. It along with the will of the parties constitute the very fundamental tenets of arbitration. As per Redfern and Hunter, it is an aspiration to make international arbitration free from the constraints of national laws.[4] There will always be limitations to the above stated objective, yet the aim should be to deliver on it to the most possible extent and it is safe to conclude that the composite approach does exactly that. Darren Low at the Asian International Arbitration Journal argues that this approach virtually allows party autonomy to override public policy. Although they state this in a form of criticism as the chronology in their opinion is one where the latter overrides the former. However, even they note that the arbitration in Westbridge was obviously not illegal. It is imperative to note that the domain of various limitations to arbitration such as public policy or comity needs to be restricted to a minimum. When the parties are operating in a framework which provides self-determining authority to the extent that parties the freedom to decide the applicable substantive law, procedure, seat, etc, party autonomy is of paramount importance. The Supreme Court of India in Centrotrade Minerals v Hindustan Copper concluded party autonomy to be the guiding principle in adjudication, in consideration of the abovementioned rationale.

As stated in Fiona Trusts, the insertion of an arbitration clause gives rise to a presumption that the parties intend to resolve all disputes arising out of that relation through the stipulated mechanism. This presumption can only be discarded via explicit exclusion. An arbitration clause according to Redfern and Hunter gives rise to a secondary obligation of resolving disputes. Hence, as long as the parties intend to and have an obligation to resolve a dispute, an approach that facilitates the same to the most practicable extent is certainly commendable.

This can be further elucidated by taking a closer look at the line of cases on the topic. The common aspect in all these cases is that they have paved way for the application of laws of multiple jurisdictions which in turn has opened the gates to a very pro-validation approach. For There are multiple reasons for parties to choose a particular place for arbitration, including but not limited to neutrality, quality of adjudication, cost, procedure applicable to arbitration, etc. And while it may be true that an award passed by a following arbitration may not be enforceable in the venue jurisdiction, it can still be enforced in other jurisdictions. There are 2 layers to be unravelled here – the first one being that it is a well settled principle in international arbitration that awards set aside in one jurisdiction can be enforced in the others as long as they do not violate the public policy of the latter jurisdiction. This was seen in Chromalloy Aeroservices v Arab Republic of Egypt, wherein the award was set aside by the Egyptian Court of Appeal yet it was enforced in the U.S.A. The same principle although well embedded in other cases was recently reiterated in Compania De Inversiones v. Grupo Cementos de Chihuahua wherein the award for an arbitration seated in Bolivia was annulled there but enforced by the Tenth Circuit in the U.S.A. The second ancillary point to this is the practicality aspect. The parties generally select the law governing the substantive contract to be one where the major operations of the company, its assets related to the contract are based and hence that is also likely to be the preferred place of enforcement. This is a good point to read in Gary Born’s proposal of imputing the law of a jurisdiction that has “materially closer connections to the issue at hand”.[5]

Apart from the pro-validation approach which upholds the rational expectation of the parties, there are other elements of the composite approach that ensure the preservation of party autonomy and will. For instance, the courts will firstly, not interfere if it can be construed that the parties have expressly stipulated a law for the arbitration clause. Secondly, as has been mentioned above, the courts will impute the law governing the substantive contract as the applicable law when the arbitration clause is a standalone one. What can be observed from here is that the approach maintains a proper degree of caution even while inferring the applicable law. And lastly, the very idea of maintaining a presumption of the same law being applicable to both the main contract and the arbitration clause also aligns with upholding the will and autonomy of the parties. Various commentators have observed that parties in practice rarely stipulate a separate clause on the substantive law applicable to the arbitration clause. As observable, model clauses of the various major arbitral institutions do not contain such a stipulation and certain commentators have even gone as far as to conclude that the inclusion of such a clause would only add to the confusion. In light of this background, it was certainly plausible for Steven Chong, J in BYC v BCZ to conclude that “where the arbitration agreement is a clause forming part of a main contract, it is reasonable to assume that the contracting parties intend their entire relationship to be governed by the same system of law. If the intention is otherwise, I do not think it is unreasonable to expect the parties to specifically provide for a different system of law to govern the arbitration agreement” [para 59]. However, it has been shown above that the composite approach has not left any presumption irrebuttable in the presence of appropriate reasoning, facts and will trigger separability if necessary to avoid the negation of the arbitration agreement.

IV. CONCLUDING REMARKS

In a nutshell, what can be inferred from this article is that the composite approach keeps at its forefront principles and characteristics of party autonomy and pro-arbitration. The approach is extremely layered and well thought out to preserve the intention of the parties to the most practicable extent. It delivers on all of this while truly effectuating the principle of separability and ensuring its correct application. Hence, despite all the criticisms it is still described as a forward-looking approach owing to its various characteristics.

 

FOOTNOTES:

[1] For recent literature and more detailed facts, See Darren Jun Jie Low, ‘The Composite Approach to Issues of Non-Arbitrability at the Pre-Award and Post-Award Stage: Anupam Mittal v. Westbridge Ventures II Investment Holdings [2023] SGCA 1’, in Lawrence Boo and Lucy F. Reed (eds), Asian International Arbitration Journal (Kluwer Law International 2023, Volume 19, Issue 1), 83 – 94; Khushboo Shahdapuri and Chelsea Pollard, ‘Dispute over Matrimonial Service Website: Singapore Adopts Composite Approach in Declaring Dispute to be Arbitrable’, (Kluwer Arbitration, 2023) < Dispute over Matrimonial Service Website: Singapore Adopts Composite Approach in Declaring Dispute to be Arbitrable – Kluwer Arbitration Blog>; Nisanth Kadur, ‘Determining Arbitrability at the Pre-Award Stage: An Analysis of the Singapore Court of Appeal’s “Composite Approach”’, (American Review of International Arbitration, 2023) <Determining Arbitrability at the Pre-Award Stage: An Analysis of the Singapore Court of Appeal’s “Composite Approach” – American Review of International Arbitration (columbia.edu)>

[2] See BCY v BCZ [2016] SGHC 249; BNA v BNB [2019] SGHC 142; Anupam Mittal v Westbridge II [2023] SGCA 1.

[3] Martin Hunter and others, Redfern and Hunter on International Arbitration, (6th edn, 2015 OUP) [2.101 – 2.104].

[4] Redfern and Hunter (n 1) [1.53].

[5] Gary Born, International Commercial Arbitration, (3rd Ed, Kluwer Law International 2021) §4.05 [C] [2].

 

 

Some EAPIL members are reporting they receive e-mails allegedly sent on my behalf requesting help for the Association.

These e-mails were not sent either by me or any EAPIL official.

Please ignore them.

 

 

The European Parliament on 11 July 2023 adopted its negotiating position on the proposal for a directive on the protection of persons who engage in public participation from manifestly unfounded or abusive court proceedings, also known as strategic lawsuits against public participation (SLAPPs).

The Parliament will now start discussions on this basis with the European Council, whose first position has been analysed by Pietro Franzina in a previous post on this blog.

The text resulting from the Council’s general approach departs from the initial proposal (analysed by Marta Requejo in a previous post on this blog), in various respects.

The most significant innovations include the following.

Subject Matter

Parliament specified that the directive poses a set of minimum standards of protection and safeguards against manifestly unfounded or abusive court proceedings in civil matters, as well as the threats thereof, with cross-border implications brought against natural and legal persons engaging in public participation. No specification on journalists and human rights defenders is provided.

Scope

The scope of the proposed directive should apply to matters of a civil or commercial nature having cross-border implications, including interim and precautionary measures, counteractions or other particular types of remedies available under other instruments, whatever the nature of the court or tribunal. Parliament, then, specified the directive tool as posing minimum requirements. Member States, indeed, may introduce or maintain more favourable provisions than the safeguards provided for in this directive against manifestly unfounded and abusive court proceedings in civil matters. As a result, the implementation of this directive shall in no circumstances constitute grounds for a reduction in the level of safeguards already afforded by Member States in the matters covered by this directive.

Definitions

Parliament clarified the definition of ‘public participation’ to mean any statement or activity by a natural or legal person expressed or carried out in the exercise of the right to freedom of expression and information, academic freedom, or freedom of assembly and association, and preparatory, supporting or assisting action directly linked thereto, on a matter of public interest. This includes complaints, petitions, administrative or judicial claims, the participation in public hearings, the creation, exhibition, advertisement or other promotion of journalistic, political, scientific, academic, artistic, satirical communications, publications or works.

Also the ‘matter of public interest’ is deepened by the Parliament, adding fundamental rights including gender equality, media freedom and consumer and labour rights, as well as the already indicated public health, safety, the environment or the climate. Activities of a person or entity in the public eye or of public interest includes governmental officials and private entities too. Allegations of corruption and fraud are extended, comprising also embezzlement, money laundering, extortion, coercion, sexual harassment and gender-based violence, or other forms of intimidation, or any other criminal or administrative offence, including environmental crime. All activities aimed to protect the values enshrined in Article 2 TEU, the principle of non-interference in democratic processes, and to provide or facilitate public access to information with a view to fighting disinformation are included.

The ‘fully or partially unfounded’ element related to these proceedings is better explained, that is when characterised by elements indicative of a misuse of the judicial process for purposes other than genuinely asserting, vindicating or exercising a right and have as their main purpose to abusively prevent, restrict or penalize public participation. Indications of such a purpose are added and further clarified, as follows. It is added the misuse of economic advantage or political influence by the claimant against the defendant, leading to an imbalance of power between the two parties. Intimidation, harassment or threats on the part of the claimant or his or her representatives can occur before or during the proceedings, as well as any previous history of legal intimidation by the claimant. It is then added also the use in bad faith of procedural tactics, such as delaying proceedings, and choosing to pursue a claim that is subject to the jurisdiction of the court that will treat the claim most favourably, or the discontinuation of the cases at a later stage of the proceedings.

Matters with Cross-Border Implications

The aim is to cover as many cases as possible, working on the cross-border notion in order to enlarge it. Cross-border implications, indeed, occur for the Parliament if the act of public participation is relevant to more than one Member State, either due to the cross-border dimension of the act itself or due to the legitimate interest which the public may take in the matter concerned by the act, including if the act is accessible via electronic means. The other element, i.e. the filing of concurrent or previous proceedings against the same or associated defendants in another Member State, is confirmed by the Parliament.

Application for Procedural Safeguards

Providing expeditious court proceedings is outlined. Member States shall ensure that courts or tribunals seised with an application for procedural safeguards in the proceedings in relation to which the application has been sought using the most expeditious procedures available under national law, taking into account the circumstances of the case, the right to an effective remedy and the right to a fair trial.

According to the Parliament, then, Member States shall (not ‘may’) provide that measures on procedural safeguards in accordance with chapters on early dismissal and remedies can be taken by the court or tribunal seised of the matter ex officio.

Assistance to natural or legal persons engaging in public participation is added. Member States shall ensure that natural or legal persons engaging in public participation have access, as appropriate, to support measures, in particular the following: (a) comprehensive and independent information and advice which is easily accessible to the public and free of charge on procedures and remedies available, on protection against intimidation, harassment or threats of legal action, and on their rights; and (b) legal aid in accordance with Directive 2003/8/EC, and, in accordance with national law, legal aid in further proceedings, and legal counselling or other legal assistance; (c) financial assistance and support measures, including psychological support, for those targeted by abusive court proceedings against public participation.

Third Party Intervention

The third party intervention is strengthened: in addition to widening the audience of interveners, their role is increased. Member States shall take the necessary measures to ensure that a court or tribunal seised of court proceedings against public participation may accept that associations, organisations and other collective bodies, such as trade unions, and any other legal entities which have, in accordance with the criteria laid down by their national law, a legitimate interest in safeguarding or promoting the rights of persons engaging in public participation may take part in those proceedings, either on behalf or in support of the defendant, with his or her approval or to provide information, in any judicial procedure provided for the enforcement of obligations under this directive. This provision is without prejudice to existing rights of representation and intervention as guaranteed by other Union or national rules.

Security

Security for procedural costs, or for procedural costs and damages, is remodelled as security for costs of the proceedings, including the full costs of legal representation incurred by the defendant and damage. Where national law provides for such possibility, security may be granted to the defendant at any stage of the court proceedings.

Early Dismissal

Member States shall (not ‘may’) establish time limits for the exercise of the right to file an application for early dismissal. The time limits shall be also reasonable.

Award of Costs

The claimant who has brought abusive court proceedings against public participation is to be ordered to bear all the costs. Where national law does not guarantee the award in full of the costs of legal representation beyond statutory fee tables, Member States shall ensure that such costs are fully covered by other means available under national law, and, where appropriate, through compensation of damages in accordance with Article 15.

Compensation of Damages

Full compensation for harm is clarified covering material or non-material harm, including reputational harm, without the need to initiate separate court proceedings to that end.

Penalties and National Register

Parliament added that Member States shall ensure that courts or tribunals imposing penalties take due account of: (i) the economic situation of the claimant; (ii) the nature and number of the elements indicating an abuse identified.

In addition, Member states shall take appropriate measures to establish a publicly accessible register of relevant court decisions falling within the scope of this directive, in accordance with Union and national rules on the protection of personal data.

Jurisdiction for Actions Against Third-Country Judgements

Parliament modified this matter, stating that the concerned person shall (not ‘may’) have the right granted under Article 18.

Jurisdiction, Applicable Law and Relations with Union Private International Law Instruments

On jurisdiction matters, a new article has been included stating that in defamation claims or other claims based on civil or commercial law which may constitute a claim under this directive, the domicile of the defendant should be considered to be the sole forum, having due regard to cases where the victims of defamation are natural persons. With the exception of the latter new added Article, this directive then shall not affect the application of the Brussels I bis Regulation.

On the applicable law, in claims regarding a publication as an act of public participation, the applicable law shall be the law of the place to which that publication is directed to. In the event of it not being possible to identify the place to which the publication is directed, the applicable law shall be the law of the place of editorial control or of the relevant editorial activity with regard to the act of public participation. With the exception of the latter new added Article, this directive shall not affect the application of the Rome II Regulation.

Union Register

The Commission shall take appropriate measures to establish a publicly accessible Union register, on the basis of the information provided in accordance with the Article concerning the national register, of relevant court decisions falling within the scope of this directive, in accordance with Union rules on the protection of personal data.

Awareness-Raising

A new addition by the Parliament. Member States shall take appropriate action, including via electronic means, aimed at raising awareness about strategic lawsuits against public participation and the procedural safeguards set out in this directive against them. Such action may include information and awareness-raising campaigns and research and education programmes, where appropriate in cooperation with relevant civil society organisations and other stakeholders.

One-Stop Shop

Parliament included a new article establishing a ‘one-stop shop’ comprising dedicated national networks of specialised lawyers, legal practitioners and psychologists, which targets of SLAPPs can contact, and through which they can receive guidance and easy access to information on, and protection against SLAPPs, including regarding legal aid, financial and psychological support.

Training of Practitioners

To foster prevention of the initiation of SLAPPs and protection of targeted natural or legal persons, it is crucial to promote relevant information, awareness-raising, campaigns, education and training, including on their rights and protection mechanisms. Parliament proposed that, with due respect for the independence of the legal profession, Member States should recommend that those responsible for the training of lawyers make available both general and specialist training to increase the awareness of strategic lawsuits against public participation and the procedural safeguards against them provided for in this directive. Training should also be provided to legal professionals in order to increase awareness of abusive court proceedings and be able to detect them at a very early stage.

Cooperation and Coordination of Services

Member States should take appropriate action to facilitate cooperation between Member States to improve the access of those targeted by manifestly unfounded or abusive court proceedings against public participation to information on procedural safeguards provided for in this directive and under national law. Such cooperation should be aimed at least at: (a) the exchange of current practices; and (b) the provision of assistance to European networks working on matters directly relevant to those targeted by manifestly unfounded or abusive court proceedings against public participation.

Deontological Rules for Legal Professionals

Member States shall, with due respect for the independence of the legal profession, encourage the adoption by professional associations of deontological rules that guide the conduct of legal professionals to discourage the taking of abusive lawsuits against public participation, and where appropriate, considering measures to address any violation of those rules.

Data Collection

Member States shall, taking into account their institutional arrangements on judicial statistics, entrust one or more authorities to be responsible to collect and aggregate, in full respect of data protection requirements, data on abusive court proceedings against public participation initiated in their jurisdiction. Data referred to shall include, in particular, many specified criteria.

Transposition into National Law

Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this directive according to the Parliament by 1 years, compared to the 2 years of the original Commission text.

In addition, Member States shall apply this directive also to cases pending before a national court at the time of entry into force of the national rules transposing this directive.

I have reported before on the European Commission’s reasoning to refuse to support the UK’s accession to the Lugano Convention. Leigh Day and Daniel Leader in particular report here on a recent initiative of note: a letter by Dr Yeophantong, Chair-Rapporteur of the Working Group on the issue of human rights and transnational corporations and other business enterprises, has written to the European Commission asking it to explain its refusal to endorse the UK request to join.

Dr Yeophantong suggests the EC recalcitrance “may limit the legal accountability of UK domiciled businesses’ behaviour outside the UK, for which she refers in particular to the expected trend post Brexit, for even UK incorporated business to try and deflect jurisdiction in the UK courts viz claims pursuing these corporations for their or others’ business and human rights record outside the UK. The vehicle for this to happen is of course forum non conveniens. As readers know (otherwise try ‘CSR’ or ‘forum non’ or ‘Article 34’ in the search box), the UK have for a long time applied forum non conveniens, a mechanism not known in the Brussels regime other than in the reduced form of Articles 33-34 Brussels Ia, and not known at all in the Lugano Convention.

As Leigh Day summarise, Dr Yeophantong posed six questions in her letter, including asking Ms Von der Leyen, Commission President:

• • To explain how its refusal to allow the UK to join the treaty conforms to the EU’s support for the UN Guiding Principles;
  • For clarification on the processes within the EU which have led to the UK being refused accession to the Lugano Convention;
  • What process will be used to consider the UK’s request to re-join Lugano, and whether the European Commission is the competent authority to oversee this process; and
  • For an explanation how the Hague Conventions can provide the same protection as the Lugano Convention from the behaviour of UK businesses operating in other countries.

At first sight it may seem odd to ask the EU to justify its actions vis-a-vis a mechanism (forum non) that is part of all of the UK’s common laws: rather, one might say, the obvious target is UK law itself. However politically speaking, it is most certainly correct that EU support for UK Lugano accession would with one swoop pull the carpet from underneath an important mechanism for UK corporations to try and avoid discipline for human rights abuses abroad. This is arguably in line with the EU’s committments under human rights law. Moreover, there is as I suggested here, inconsistency in the Commission’s approach to external judicial cooperation policies of relevance to Lugano.

To be continued.

Geert.

EU private international law, 3rd ed. 2021, Heading 1.7.

Working Group is concerned that the EC’s refusal to the UK’s accession to the Convention “may limit the legal accountability of UK domiciled businesses’ behaviour outside the UK https://t.co/MLCgbWIUlr

— Geert Van Calster (@GAVClaw) July 4, 2023

The author of this post is Lydia Lundstedt, who is a Senior Lecturer at Stockholm University.

The United States has long differed from other countries by applying its trademark law (Lanham Act) to acts of infringement in foreign countries. Indeed, in the seminal case, Steele v. Bulova Watch Co., Inc., 344 U.S. 280 (1952), the Supreme Court of the United States (SCOTUS or Court) upheld the application of the Lanham Act to acts of infringement in Mexico when a U.S. defendant took essential steps in the U.S. and caused consumer confusion in the U.S. and injured the right holder’s reputation in the U.S. and abroad. In Abitron Austria GmbH v. Hetronic International, decided on 29 June 2023, the Court put an end to this and held that § 1114(1)(a) and §1125(a)(1) (the infringement provisions) of the Lanham Act are not extraterritorial and apply only to infringing uses of protected marks in U.S. commerce.

Facts

Hetronic International, Inc (Hetronic), a U.S. company, manufactures radio remote controls for heavy-duty construction equipment. For many years Hetronic had a distributorship agreement with six foreign related parties (collectively Abitron) to distribute Hetronic’s products in Europe. The relationship soured when Abitron claimed ownership to much of Hetronic’s intellectual property rights and began manufacturing their own products—identical to Hetronic’s—and selling them using Hetronic’s trademarks. Abitron mostly sold its products in Europe, but it also made some sales to buyers in the U.S. Hetronic sued Abitron alleging infringement under the Lanham Act seeking worldwide damages and a global injunction. Abitron argued that the Act could not apply to its foreign sales. The district court rejected this argument and Hetronic was awarded approximately 96 million dollars in damages. Abitron was also enjoined from using Hetronic’s trademarks anywhere in the world. The Court of Appeals affirmed the judgment, apart for narrowing the injunction to the countries in which Hetronic actually markets or sells its products. Abitron appealed to SCOTUS.

SCOTUS

The Court applied its longstanding presumption against extraterritoriality, which holds that, unless the U.S. Congress has clearly instructed otherwise, U.S. legislation applies only within the U.S. territory. The Court recalled that this presumption serves to avoid international discord with foreign countries and recognizes that Congress generally legislates with domestic concerns in mind.

The Court’s modern extraterritoriality framework consists of two steps. First, the Court determines whether there is a clear indication that Congress intended to rebut the presumption with respect to the provision at issue. If the answer is no, step two determines whether the case involves a domestic (permissible) application of the provision or a foreign (impermissible) application of the provision. This involves identifying the statute’s focus and whether the object of the focus is located in the U.S.

While all the justices agreed that the answer at step one was no, the justices were almost evenly divided (5-4) at step two in how to draw the dividing line between a domestic and a foreign application of the Lanham Act’s infringement provisions.

The majority (opinion of the Court) held that the relevant criterion was the location of the conduct, that is, the infringing use of the mark must occur in U.S. commerce. They observed that the Court’s previous precedent, Steele v. Bulova Watch Co., which they called “narrow and fact-bound”, implicated both domestic conduct and a likelihood of domestic confusion so it was not helpful when determining which of the two criteria were relevant. Looking instead to the text and context of the infringement provisions, the majority explained that while the conduct must create a risk of confusion, confusion was not a separate requirement but a necessary characteristic of the infringing use. In addition, the majority reasoned that a conduct criterion was easy for the lower courts to apply and it was consistent with the territorial nature of trademarks enshrined in international law.

In contrast, the concurring justices argued that the relevant criterion was consumer confusion. They maintained that the focus of the statute was protection against consumer confusion in the U.S. In their view, an application of the Lanham Act to activities carried out abroad when there is a risk of confusion in the U.S. was a permissible domestic application.

The concurring justices argued that the Court’s precedents do not require a conduct only criterion. They argued that the focus of a statute can be parties and interests that Congress seeks to protect. In addition, they chided the majority for putting aside Steele v. Bulova Watch, which has guided the lower courts for more than 70 years. They also argued that the majority exaggerated the risk for international discord and that applying the Act when there was a likelihood of U.S. consumer confusion was consistent with the international trademark system.

The justices were unanimous in agreeing that the Court of Appeals’ judgment be vacated.

New Questions

The majority opinion raises questions concerning the localization of infringing use. Indeed, its focus on conduct suggests that the location of the actor is relevant. That said, there was no dispute that the Lanham Act applied to the products that Abitron sold directly into the U.S. But what if the products were delivered abroad but marketed to U.S. buyers? Under European Union law, for instance, an infringing use of a trademark takes place in the EU if an offer for sale of a trade-marked product located in a third State is targeted at consumers in the EU (L’Oréal and others (C-324/09).

Now that the Lanham Act no longer applies to foreign infringing acts, right holders will need to rely on foreign trademarks. As many right holders will undoubtably seek to enforce foreign rights in U.S. courts, the question arises whether the U.S. courts will hear foreign trademark claims. Historically, U.S. courts have been reluctant to hear infringement claims based on foreign registered rights for lack of subject matter jurisdiction or forum non conveniens. It will be interesting to see how SCOTUS rules on these questions in the future.

The latest issue of the Dutch Journal on Private International Law (NIPR) has been published.

 

NIPR 2023 issue 2

 

Editorial

C.G. van der Plas / p. 197

 

Articles

K.C. Henckel, Issues of conflicting laws – a closer look at the EU’s approach to artificial intelligence / p. 199-226

Abstract

While newly emerging technologies, such as Artificial intelligence (AI), have a huge potential for improving our daily lives, they also possess the ability to cause harm. As part of its AI approach, the European Union has proposed several legislative acts aiming to accommodate and ensure the trustworthiness of AI. This article discusses the potential private international law impact of these legislative proposals. In doing so, it – inter alia – addresses how the newly proposed legislative acts interact with existing private international law instruments, such as the Rome II Regulation. In addition, it questions whether there is a need for specific rules on the private international law of AI.

Silva de Freitas, The interplay of digital and legal frontiers: analyzing jurisdictional rules in GDPR collective actions and the Brussels I-bis Regulation / p. 227-242

Abstract

The General Data Protection Regulation (GDPR) has provided data subjects with the possibility to mandate representative organizations to enforce rights on their behalf. Furthermore, the GDPR also contains its own jurisdictional scheme for the enforcement of the rights of data subjects. In this context, judicial and scholarly discussions have arisen as to how the procedural provisions contained in the GDPR should interact for properly assigning jurisdiction in GDPR-related collective actions. In this article, I will address this question to argue that both jurisdictional grounds provided by the GDPR are available for representative organizations to file collective actions: the Member State in which the controller or processor is established and the Member State in which the data subjects reside. Furthermore, in order to exemplify the impact of national law on such interaction, I will also assess how some legal provisions contained in the WAMCA may impinge upon the rules on jurisdiction contained in the GDPR.

 

On 6 July 2023 the Court of Justice issued a judgement in BM v LO (C-462/22). The ruling provides guidance as to the interpretation of Article 3(1)(a) of the Brussels II bis Regulation on matrimonial matters and matters of parental responsibility. Specifically, it refers to the sixth indent of the provision, whereby, in matters relating to divorce, legal separation or marriage annulment, jurisdiction lies with the courts of the Member State in whose territory the applicant is habitually resident if he or she resided there for at least six months immediately before the application was made and is a national of the Member State in question.

It is worth noting that the new Brussels II ter Regulation does not bring any changes to the rules on jurisdiction in matrimonial matters. The interpretation by the Court of Justice of those provisions accordingly remain valid under the recast Regulation.

Factual Background

The request for preliminary ruling originated from the German Supreme Court (Bundesgerichtshof). The case concerned the divorce of a couple formed by a German husband and a Polish wife, who had married in Poland in 2000. The couple had twin sons born in 2003.

The facts are as follows.

After initially living in Germany for a number of years, the couple moved to Poland into a house they had built, in which the wife still lives today. They are also the joint owners of a dwelling in Warsaw, which they had rented until September 2012, after which it was at their full disposal.

The husband was a senior executive of a pharmaceuticals manufacturer. Since April 2010, he has been employed as the managing director for the Central Europe region, which includes Poland and the Netherlands, but not Germany. His activity is largely characterised by business trips and working from home. His employer provided him with staff accommodation in Aerdenhout (Netherlands), in which he resided on an occasional basis until the end of 2013. The husband has a self- contained dwelling in a house occupied by his parents, in Hamm (Germany).

The husband filed a divorce application with the District Court in Hamm (Germany) in October 2013. He submitted that his habitual residence had been in Hamm since mid-2012 at the latest. He moved out of the house in Poland in June 2012. Since June 2012, he has deepened his relationship with his new cohabiting partner in Hamm and has been caring for his parents. During his stays in Poland, he was limited to having contact with his two sons, which was always tied in with business trips.

The wife challenged the jurisdiction of the German courts and submitted that the husband did not move out of the house in Poland until the beginning of April 2013 and then lived in the jointly owned dwelling in Warsaw. They took turns picking up the two sons from school in Warsaw during the second semester of the 2012/2013 academic year. The husband resided almost exclusively in the Netherlands or Poland between April and November 2013.

The District Court in Hamm (Germany) considered that the German courts lack  jurisdiction, and it dismissed the husband’s application as inadmissible. His appeal on the merits was dismissed also by the Higher Regional Court. The Higher Regional Court concluded that the husband’s habitual residence had been in Germany at the time when he filed his divorce application in October 2013. However, he had not yet been habitually resident in Germany for six months before he filed his divorce application (in April 2013). The husband’s appeal on a point of law, lodged with the referring court, is directed against the decision of the Higher Regional Court.

Preliminary Question

In the case at hand, the doubt concerns the provision of Article 3(1)(a) sixth indent of the Brussels II bis Regulation.

As the applicant was already habitually resident in Germany at the moment of filing a divorce claim, but not necessarily in the period of six month preceding this date, the Bundesgerichtshof decided to address the Court of Justice. The latter rephrased the preliminary question in the following way:

whether the sixth indent of Article 3(1)(a) of Regulation No 2201/2003 must be interpreted as meaning that that provision makes the jurisdiction of the court of a Member State to hear an application for the dissolution of matrimonial ties subject to the condition that the applicant, who is a national of that Member State, provides evidence that he or she has acquired a habitual residence in that Member State for at least six months immediately prior to the submission of his or her application, or to the condition that he or she shows that the residence which he or she acquired in that same Member State has become a habitual residence during the minimum period of six months immediately preceding the lodging of his or her application.

In simpler words the doubt in the case at hand is whether the applicant must prove habitual residence from the beginning and throughout that minimum period of six months immediately preceding the application.

The Judgment

The Court of Justice ruled that Article 3(1)(a)

makes the jurisdiction of the court of a Member State to hear an application for the dissolution of matrimonial ties subject to the condition that the applicant, who is a national of that Member State, provides evidence that he or she has acquired a habitual residence in that Member State for at least six months immediately prior to the submission of his or her application.

The Court of Justice reminded that the criteria for jurisdiction listed in Article 3 Brussels IIbis Regulation are objective, alternative and exclusive. While the first to fourth indents of Article 3(1)(a) expressly refer to the habitual residence of the spouses and of the respondent as criteria, the sixth indent of Article 3(1)(a) creates a forum actoris [para. 18-19].

The latter rule seeks to ensure a balance between, on the one hand, the mobility of individuals within the EU, in particular by protecting the rights of the spouse who, after the marriage has broken down, has left the MS where the couple had their shared habitual residence and, on the other hand, legal certainty (in particular legal certainty for the other spouse) by ensuring that there is a real link between the applicant and the MS whose courts have jurisdiction [para. 20].

The Court of Justice explained that, of course, for the purpose of relying on the sixth intend, a spouse must show his habitual residence in the territory of the given Member State at the time of lodging the application [para. 24]. The doubt is whether this habitual residence must be established from the beginning and throughout that minimum period of six months immediately preceding the application [para. 25].

As indicated by the Bundesgerichtshof there is a disagreement as to how the sixth indent of Article 3(1)(a) of the Brussels II bis Regulation are to be interpreted. According to first view, the applicant must have already had habitual residence in the MS of the court at the beginning of the six months period (referred to by the Bundesgerichtshof as “waiting period”). Pursuant to this view in order to exclude manipulation of jurisdiction to the detriment of the respondent, the applicant must prove a sufficiently close connection with the Member State of the court by virtue of habitual residence of a certain duration.

By contrast, according to the second standpoint, periods of mere de facto residence of the applicant must be included in the six-month period, as the commented provisions speaks of “residing” (and not “habitually residing”) in a Member State. Here, the Bundesgerichtshof compares the wording of Brussels II bis Regulation to the HCCH 1970 Divorce Convention, which wording is less ambiguous as to the character of residence. While establishing requirement of indirect jurisdiction, its Article 2(2)(a) provides that the requirement is fulfilled if “the petitioner had his habitual residence there and one of the following further conditions was fulfilled”, for example “such habitual residence had continued for not less than one year immediately prior to the institution of proceedings”.

While, agreeing with the first view (and acknowledging slightly different wording of Article 3(1) in the German version) the Court of Justice underlined that the commented provision must be understood in the light of other provisions of Brussels II bis Regulation. The Court of Justice explained that under Article 3(1)(a) second indent the court of the Member State in which the spouses were last habitually resident, in so far as one of them still resides there has jurisdiction. It is clear that the expression “still resides there” implies a temporal continuity between that residence and the place where the spouses were last habitually resident. As a result, the spouse who remained in the territory of the MS concerned has his or her own habitual residence there [para. 30]. This shows that no distinction should be made between the notion of habitual residence and residence in Article 3.

Only such understanding strikes a fair balance between legal certainty, while preserving the mobility of persons within the European Union and the possibility of obtaining the divorce, without unduly favouring that applicant, even though the forum actoris is a rule already favourable to him [para. 31].

Such strict understandings is needed as the jurisdiction based on the commented provision is not subject either to the agreement of the spouses or to the existence of a particular connection with the place where they lived together, past or present. Hence, requiring the applicant to demonstrate habitual residence in the territory of the Member State of the court seised for at least six months immediately preceding the lodging of the application is based on the need for that applicant to be able to establish a real link with that Member State [para. 33].

If, in contrast, the second view would be the correct one, the sufficiency of the period of habitual residence required of the applicant in the territory of the Member State of the court seised would, by definition, vary from case to case and according to the casuistic assessment of each national court seised [para. 34].

At the same time, the requirement as understood by the Court of Justice does not impose on the applicant any disproportionate burden, which could deter from relying on the commented ground of jurisdiction.

Final Remarks

Given the very favorable to the applicant ground of jurisdiction provided for in Article 3(1)(a) sixth indent of Brussels II bis Regulation, the interpretation provided by the Court of Justice is very reasonable. As suggested by the Bundesgerichtshof in its preliminary question, such interpretation is supported by the fact that the commented rule constitutes a special privileged treatment of the applicant, with the result that there is a need for special protection of the respondent, who in most cases has no connection to the court seised.

In practice, as noticed by the referring court, an ex-post assessment of the question as to whether the residence in the MS was already “habitual” at the beginning of the six-month period might be associated with considerable factual uncertainties and difficulties.

However, such problems are likely to arise only rarely. Usually, a spouse, while separated from the other, leaves the place where the the couple was resident and moves to another MS, which usually entails the return to “home” MS, which is the MS of his / her residence before the marriage or nationality.

Hence, as suggested in the AG’s opinion to IB v FA (C-289/20) it is possible for a spouse to acquire habitual residence almost immediately or at least after a short period of time, with the result that in practice the entire residence in the other MS will constitute habitual residence.

A new volume by Deyan Draguiev on Interim Measures in Cross-Border Civil and Commercial Disputes, based on his PhD thesis supervised by Peter Mankowski, has just been published with Springer.

The blurb reads as follows:

The book focusses on applying a holistic overview of interim measures and associated procedures in the context of cross-border private law (civil and commercial) disputes that are the subject of international litigation and arbitration proceedings. It reexamines key features of said problem and outlines novel findings on interim relief in the area of international dispute resolution. The book analyses the rules of EU law (EU law regulations such as the Regulation Brussels Ibis and the rest of the Brussels regime) as the single system of cross-border jurisdictional rules, as well as the rules of international arbitration (both commercial and investment). In the process, it conducts a complete mapping of interim measures problems and explores the criteria for granting relief under national laws. For this purpose, it includes an extensive comparative law overview of many jurisdictions in Europe, Asia, Africa, the Americas, etc., to reveal common standards for granting interim relief.

Interim relief is a salient problem in dispute resolution, and serious international disputes usually require requests for such measures. This makes a more complete understanding all the more important. For scholars and practitioners alike, there are various ways to seek relief; precisely this complexity calls for a more complex and multilayered analysis, which does not (as is usually the case) adopt the perspective of either litigation or arbitration, but instead weighs the pros and cons and considers the viability and reliability of the different options, viewed from all angles.

Holger Spamann and Daniel Klerman recently conducted a most interesting experiment on judicial behavior in the context of conflict of laws, the results of which have been pre-published by the Journal of Law, Economics, and Organization. They have kindly provided the following summary for the readers of this blog (who may access the full paper here):

Modern American choice of law has been much criticized for giving judges too much discretion. In particular, Brilmayer and others predict that the use of open-ended standards, such as the Restatement Second’s “most significant relationship” test, will enable judges to decide disputes in biased ways, including a bias in favor of plaintiffs. In contrast, critics argue that the more rules-based approach – such as the lex loci delicti principle that prevailed in America before the 1960s and that, in large part, continues to apply in much of the world – would be more predictable and less subject to bias. We designed an experiment involving US federal judges to test whether the modern American, standards-based approach is, in fact, less predictable and more subject to bias. We find that the rules-based approach may constrain more than the modern standards-based approach, although even under seemingly clear rules judicial decisions were less predictable than we expected. Judges under neither the lex loci rule nor that “most significant relationship” standard exhibited a bias towards the more sympathetic party, although we did detect some pro-plaintiff bias under both the rule and the standard. Somewhat surprisingly, we also found that judges who were supposed to apply the modern “most significant relationship” standard tended to decide according to lex loci delicti rule.

On 18 July 2023, The Max Planck Institute for Comparative and International Private Law, Hamburg, will host a ‘Talk’ on ‘The Role of Private International Law in the Adjudication of Cross-Border Civil and Commercial Disputes in BRICS: Some Reciprocal Lessons’ from 11 AM – 12.30 PM (CEST) as a part of their ‘Conflict Club’ which is scheduled every Tuesday. The talk will be delivered virtually by Professor Saloni Khanderia, who, as many may know, is the co-author of the leading commentary on Indian Private International Law that was published in 2021 by Hart/Bloomsbury Publications.

The talk will highlight some of the findings of a project being co-coordinated by Dr Stellina Jolly from South Asian University, Delhi (India) and Prof Saloni Khanderia, which analyses the role of private international law in achieving the aims of the BRICS (Brazil, Russia, India, China and South Africa) as an economic bloc. The findings of this project will be published in 2024 by Hart/Bloomsbury: Oxford, UK and will comprise insights provided by approximately 20 leading scholars and practitioners from the BRICS region – many of whom are also editors of this blog.  The project has currently received funding from the Max Planck Institute, Hamburg and the OP Jindal Global Univesity, Sonipat, India, in the form of a short-term scholarship and a research grant conferred upon Prof Saloni Khanderia.

While the project endeavours to engage in a holistic analysis of the convergences and divergences in the private international laws of BRICS – concerning jurisdiction, arbitration, the identification of the governing law, the recognition and enforcement of foreign judgments and arbitral awards, as well as the regulation of family matters, the ‘talk’ in the Conflicts Club on the 18th of July will chiefly focus on the impact of the principles of private international law in civil and commercial matters in fostering economic cooperation among these nations. In doing so, the talk will touch upon some areas where the BRICS governments, courts and arbitral tribunals may share reciprocal lessons to foster trade and commerce not merely among the bloc but also with non-members.

 

Interested participants may contact Prof Saloni Khanderia for the Zoom link using the contact details available here. The talk will be for 30 minutes followed by one hour of discussion. Hope to see many of you on 18 July at 11 AM!

Maastricht Law Series officially released the recent book edited by Dr Cedric Vanleenhove (Assistant Professor of Private International Law at Ghent University and Maître de Conferences at the HEC Management School of the University of Liège) and Dr Lotte Meurkens (Assistant Professor of Private Law at Maastricht University) titled The Recognition and Enforcement of Punitive Damages Judgments Across the Globe – Insights from Various Continents (Eleven, The Hague, 2023).

The description of the book reads as follows:

Thus far, private international law issues relating to punitive damages have mainly been dealt with from the perspective of several European countries. Systematic research into countries outside Europe was lacking up until

now. There is, however, a continuous discussion in various legal systems worldwide on the recognition and enforcement of foreign punitive damages judgments and, in particular, regarding their compatibility with the

public policy of the country of enforcement.

In October 2021, the Maastricht European Private Law Institute (M-EPLI) organised a Roundtable on the recognition and enforcement of punitive damages across the globe. Experts from different continents reflected on the current position in their jurisdiction(s) and exchanged their understandings and ideas in the Roundtable. This resulting book includes an introductory chapter on the status quo of punitive damages enforcement in Europe, followed by country reports from Russia, China, South Korea, the Philippines and Japan, Commonwealth Africa, Mexico and Argentina, and Brazil. In conclusion, overarching insights from the Hague Conference are formulated.

This book provides an invaluable resource for academics, judges, practitioners and policy makers in the field of private international law, punitive damages, and civil law remedies. It gives an overview of the treatment of punitive damages judgments across continents and may serve as a building block for further research.

 

Table of Content

 Prologue

Enforcement of Punitive Damages in Europe: An Overview

Cedric Vanleenhove

Recognition and Enforcement of Punitive Damages in Russia

Vsevolod Chernyy

Punitive Damages in China: Codification, Developments and Global Cooperation

Wenliang Zhang and Yingqi Zhong

Recognition and Enforcement in Korea of Judgments of Foreign Countries Awarding Punitive Damages

Kwang Hyun Suk

Recognition and Enforcement of Foreign Judgments Awarding Punitive Damages in the Philippines and Japan

Béligh Elbalti

 Enforcement of US Punitive Damages in Commonwealth Africa

Abubakri Yekini and Adeola Adedeji-Adeyemi

 Punitive Damages in Argentina and Mexico – Rethinking the Scope of the Public Policy Exception

María Guadalupe Martínez Alles

 Recognition and Enforcement of Foreign Punitive Damages Decisions in Brazil

Erico Bomfim de Carvalho

Towards an International Standard on the Recognition of Punitive Damages? – The Role of the Hague Conference on Private International Law

Marta Pertegás Sender and Francesco Zappatore

 

About the Maastricht Law Series: Created in 2018 by Boom juridisch and Eleven International Publishing in association with the Maastricht University Faculty of Law, the Maastricht Law Series publishes books on comparative, European and International law. The series builds upon the tradition of excellence in research at the Maastricht Faculty of Law, its research centers and the Ius Commune Research School. The Maastricht Law Series is a peer reviewed book series that allows researchers an excellent opportunity to showcase their work.

The readers of this blog are aware of the pending proposal for a directive of the European Parliament and of the Council on corporate sustainability due diligence. The topic was dealt with in a post that can be found here, and in another post here, with reference to the recommendations by GEDIP, the European Group of Private International Law.

The proposed directive aims to foster sustainable and responsible corporate behaviour throughout global value chains. In-scope companies will be required to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights.

The next steps for the directive proposal will be the trilogue discussions between the European Parliament, the Council of the European Union and the Commission.

The Views of the European Parliament

On 1 June 2023, the European Parliament, at 1st reading/single position, adopted amendments to the proposal. It could be summarized as follows.

Scope of application

Parliament addressed the threshold criteria to fall within the scope of the directive. The new rules will apply to EU-based companies, regardless of their sector, including financial services, with more than 250 employees and a worldwide turnover over EUR 40 million, as well as to parent companies with over 500 employees and a worldwide turnover of more than EUR 150 million. Non-EU companies with a turnover higher than EUR 150 million, if at least EUR 40 million was generated in the EU will also be included; the same for non-EU parent companies with a turnover exceeding EUR 150 million, from which at least EUR 40 was generated in the EU.

Definitions

Parliament moves in broadening the definition of ‘value chain’, to include the sale, distribution, transport, and waste management of products.

Companies’ Obligations

Parliament, in Article 8b (new), specified that the directive should lay down rules on companies’ obligations regarding actual and potential negative impacts on human rights and the environment that they have caused, contributed to or are directly involved in, with regard to their own activities, and those of their subsidiaries.
Companies would be required to identify and, where appropriate, prevent, bring to an end or mitigate the negative impact of their activities on human rights and the environment, such as child labour, slavery, labour exploitation, pollution, environmental degradation and loss of biodiversity. They should also monitor and assess the impact of their business partners, not only suppliers, but also sales, distribution, transport, storage, waste management and other areas.

Integration of Due Diligence

Companies covered by the Directive should: integrate due diligence into their corporate policies, identify and, where necessary, prioritise, prevent, mitigate, remedy, eliminate and minimise potential and actual adverse impacts on human rights, the environment and good governance; establish or participate in a mechanism for the notification and out-of-court handling of complaints; monitor and verify the effectiveness of actions taken in accordance with the requirements set out in the Directive; communicate publicly on their due diligence and consult relevant stakeholders throughout this process.
Member States should ensure that parent undertakings can take action to help ensure that their subsidiaries falling within the scope of the Directive comply with their obligations.
Companies should apply a due diligence policy that is proportionate and commensurate to the degree of severity and the likelihood of the adverse impact and commensurate to the size, resources and capacities of the company, taking into account the circumstances of the specific case, including the nature of the adverse impact, characteristics of the economic sector, the nature of the company’s specific activities, products, services, the specific business relationship.
In conflict-affected and high-risk regions, companies should uphold their obligations under international humanitarian law and demonstrate heightened, conflict-sensitive due diligence in their operations and business relationships.

Prevention of Potential Negative Impacts

Companies would be required to take the following steps, as appropriate: consider establishing contractual arrangements with partners with whom the company has a business relationship, obliging them to comply with the company’s code of conduct and, where appropriate, a prevention action plan; take necessary modifications, improvements to, withdrawals of or investments in, the company’s own operations, such as into management, production or other operational processes, facilities, products and product traceability, projects, services and skills; adapt business models and strategies, including purchasing practices, including those which contribute to living wages and incomes for their suppliers, in order to prevent potential adverse impacts, and develop and use purchase policies that do not encourage potential adverse impacts on human rights or the environment; take appropriate measures to ensure that the composition, design and commercialisation of a product or service is in line with Union law and does not lead to adverse impacts, be it individual or collective. In this regard, particular attention shall be paid to potential adverse impact on children.

Mitigating Actual Negative Impacts

Where a company has caused or contributed to an actual adverse impact, it should take steps to remedy or contribute to the remedy of that adverse impact and any harm it has caused to people or the environment. Remedial measures, introduced by Parliament, would aim to restore the affected individuals, groups, communities and/or the environment to a situation equivalent to, or as close as possible to, that which existed prior to the adverse impact.

Exchanges with Stakeholders

The new rules would also require companies to engage in dialogue with those affected by their actions, including human rights and environmental defenders. Companies would also be required to regularly monitor the effectiveness of their due diligence policies. To facilitate investor access, information on a company’s due diligence policy should also be available on the European Single Access Point (ESAP).
Employees and their representatives should be informed by their company of its due diligence policy and its implementation.

Guidelines

To provide support to companies or to Member State authorities, the Commission, in consultation with Member States, the European cross-industry and sectoral social partners and other relevant stakeholders, should issue clear and easily understandable guidelines, including general and sector- specific guidance, in order to facilitate compliance in a practical manner. Each Member State should designate one or more national helpdesks for corporate sustainability due diligence.

Combating Climate Change

Companies should implement a transition plan to limit global warming to 1.5°C. Companies, with more than 1 000 employees on average according to Parliament, should have an effective policy in place to ensure that part of any variable remuneration for directors is linked to the company’s transition plan.

Sanctions

Non-compliant companies will be liable for damages and can be sanctioned by national supervisory authorities. According to Parliament, sanctions include measures such as “naming and shaming”, taking a company’s goods off the market, or fines of at least 5% of the previous net worldwide turnover. Non-EU companies that fail to comply with the rules will be banned from public procurement in the EU.

Single Market Clause

Parliament introduced the single market clause. According to the latter, the Commission and the Member States shall coordinate during the transposition of this Directive and thereafter in view of a full level of harmonisation between Member States, in order to ensure a level playing field for companies and to prevent the fragmentation of the Single Market.

Justice Costs, Injunctions and Third-party Intervention

Parliament require Member States in ensuring that: the limitation period for bringing actions for damages is at least ten years and measures are in place to ensure that costs of the proceedings are not prohibitively expensive for claimants to seek justice; claimants are able to seek injunctive measures, including summary proceedings (these shall be in the form of a definitive or provisional measure to cease an action which may be in breach of this Directive, or to comply with a measure under this Directive); measures are in place to ensure that mandated trade unions, civil society organisations, or other relevant actors acting in the public interest can bring actions before a court on behalf of a victim or a group of victims of adverse impacts, and that these entities have the rights and obligations of a claimant party in the proceedings, without prejudice to existing national law.

The Council’s General Approach of November 2022

Previously, on 30 November 2022, the Council of the European Union had adopted its negotiating position, or general approach. It included the following provisions.

Companies Concerned

In relation to companies concerned (see Article 2), the rules of the due diligence directive would still apply to large EU companies and to non-EU companies active in the EU. For EU companies, the criteria that determine whether a company falls within the scope of the directive are based on the number of employees and the company’s net worldwide turnover, whereas in the case of non-EU companies the criterion is related to the net turnover generated in the EU; if a non-EU company fulfils the criterion regarding net turnover generated in the EU, it will fall under the scope of the due diligence directive, irrespective of whether it has a branch or a subsidiary in the EU.
The Council’s text has introduced a phase-in approach regarding the application of the rules laid down in the directive. The rules would first apply to very large companies that have more than 1000 employees and €300 million net worldwide turnover or, for non-EU companies, € 300 million net turnover generated in the EU, 3 years from the entry into force of the directive.

Definitions

The European Council’s draft limits the scope of the due diligence obligations identified by the Commission in the full life-cycle “value chain” approach towards a more narrowed “chain of activities”: the latter covers a company’s upstream and in a limited manner also downstream business partners as it leaves out the phase of the use of the company’s products or the provision of services and excludes the use of a company’s products by its consumers (see Article 3(g)); then, it leaves it up to the Member States to decide whether regulated financial undertakings (including fund managers) shall be included in the scope of the directive.
The Council’s text also strengthens the risk-based approach and the rules on the prioritisation of the adverse impacts to ensure that carrying out due diligence obligations is feasible for companies (see Article 3, points (e) and (f)).

Combating Climate Change

The text of the provision on combating climate change (see Article 15) has been aligned as much as possible with the soon-to-be-adopted Corporate Sustainability Reporting Directive (CSRD), including a specific reference to that directive, in order to avoid problems with its legal interpretation, while avoiding broadening the obligations of companies under this Article.
Due to the strong concerns of Member States regarding the provision proposed by the Commission linking the variable remuneration of directors to their contribution to the company’s business strategy and long-term interest and sustainability, this provision has been deleted (Article 15(3)). The form and structure of directors’ remuneration are matters primarily falling within the competence of the company and its relevant bodies or shareholders. Delegations called for not interfering with different corporate governance systems within the Union, which reflect different Member States’ views about the roles of companies and their bodies in determining the remuneration of directors.

Civil Liability

The Council’s text provides more clarity to the conditions of civil liability (see Article 22) with a provision that ensures full compensation for damages resulting from a company’s failure to comply with the due diligence obligations, avoiding unreasonable interference with the Member States’ tort law systems.
The four conditions that have to be met in order for a company to be held liable – a damage caused to a natural or legal person, a breach of the duty, the causal link between the damage and the breach of the duty and a fault (intention or negligence) – were clarified in the text and the element of fault was included.
Furthermore, the right of victims of human rights or environmental adverse impacts to full compensation were expressly provided for in the compromise text. On the other hand, the right to full compensation should not lead to overcompensation, for example by means of punitive damages.
Further, clarifications of the joint and several liability of a company and a subsidiary or a business partner and the overriding mandatory application of civil liability rules were made.
All of these clarifications and precisions allowed to delete the safeguard for companies that sought contractual assurances from their indirect business partners after a strong criticism of this provision due to its heavy reliance on contractual assurances.

Directors’ Duties

Due to the strong concerns expressed by Member States that considered Article 25 to be an inappropriate interference with national provisions regarding directors’ duty of care, and potentially undermining directors’ duty to act in the best interest of the company, the Council’s proposal deletes the director’s duties introduced by the Commission.

Annex I

The Annex I to the proposed directive has undergone significant changes with the main objective of making the obligations as clear and easily understandable for companies as possible, while ensuring a legally sound base. The logic of the Annex I is to list specific rights and prohibitions, the abuse or violation of which constitutes an adverse human rights impact (see Article 3, point (c)) or adverse environmental impacts (see Article 3, point (b)). To better understand how these rights and prohibitions should be interpreted, the Annex I contains references to international instruments that serve as points of reference.
To ensure the legitimacy of referring to international instruments that are legally binding only on the States, and following the overall logic of the Annex I, the Annex I covers only those international instruments that were ratified by all Member States. Overall, the Annex I of the compromise text only refers to such obligations and prohibitions that can be observed by companies, not just by States.
As regards the human rights part of the Annex I, it covers only legally binding international instruments that are recognised as a minimum list of instruments in the international framework. Concerning the environmental part of the Annex I, a limited number of additional specific obligations and prohibitions under international environmental instruments have been added, the violation of which results in an adverse environmental impact.
Moreover, the definitions of adverse environmental and human rights impacts have been clarified. Furthermore, the so-called ‘catch-all clause’ included in the Commission’s proposal has been kept in order to safeguard the indivisibility of human rights, but it has been clarified thoroughly to ensure maximum predictability for companies.