Arbitration: Incapacity of Party

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The types of issues arising under this ground include the “incapacity” defences, such as mental incompetence, physical incapacity, lack of authority to act in the name of a corporate entity or a contracting party being too young to sign (minority). In addition, the term “incapacity” in the context of Article V(1)(a) is interpreted in the sense of “lacking the power to contract” . For example, this may arise where the applicable law prohibits a party, such as a Stateowned enterprise, from entering into an arbitration agreement for certain types of potential disputes: e.g., in some jurisdictions, a State-owned enterprise may be prohibited by law from entering into an arbitration agreement in a contact relating to defence contracts (see, however, Chapter II at IV.6.2, quoting as an example the Swiss Private International Law Act). 1

It must be noted that States, State-owned entities and other public bodies are not excluded from the scope of the Convention purely by reason of their status. The expression “persons, whether physical or legal” in Article I(1) of the Convention is generally deemed to include public law entities entering into commercial contracts with private parties. Courts virtually always deny the defence of sovereign immunity raised by a State against enforcement of an arbitration agreement and recognition and enforcement of an arbitral award by relying on the theory of restrictive immunity and waiver of immunity. They also frequently invoke the distinction between acta de jure gestionis and acta de jure imperii, or rely on pacta sunt servanda and the creation of an ordre public réellement international. This distinction is also made in some cases with respect to execution.
One example is the 2010 Hong Kong case of FG Hemisphere, requesting the recognition and enforcement of two foreign arbitral awards against the assets of a Chinese State-owned enterprise (CSOE), namely entry fees due by CSOE to the Democratic Republic of the Congo in consideration of certain mineral rights (the CSOE Assets). 2 The Chinese Government argued that it currently applies, and has consistently applied in the past, the doctrine of absolute sovereign immunity, and thus the CSOE Assets were immune from enforcement. However, the Court of Appeal held that Hong Kong courts apply the of restrictive immunity and as a consequence the portion of CSOE Assets that were not intended for sovereign purposes were not immune from execution.

The Convention does not indicate how to determine the law applicable to the capacity of a party (“the law applicable to them” ). This law must therefore be determined by applying the conflict-of-laws rules of the court where recognition and enforcement are sought, usually the law of the domicile of a physical person and the law of the place of incorporation of a company.

1. The Swiss Private International Law Act , Article 177(2) provides: “If one party to an arbitration agreement is a State or an enterprise dominated by or an organization controlled by a State, it may not invoke its own law to contestthe arbitrability of a dispute or its capacity to be subject to an arbitration.”

2. Hong Kong: Court of Appeal, 10 February 2010 and 5 May 2010 (FG Hemisphere Associates LLC v. Democratic Republic of the Congo, et al.), CACV 373/2008 & CACV 43/2009 (10 February 2010); Yearbook Commercial Arbitration XXXV (2010) pp. 392-397 (Hong Kong no. 24). At the time of writing, appeal from this decision was pending before the Hong Kong Court of Final Appeal.

Author: international

Mentioned in these Entries

Private International Law.