When is an arbitration "null and void, inoperative and incapable of being performed"?

The phrase “null and void, inoperative and incapable of being performed” (the “Phrase”) is contained in Article II.3 of the Convention On The Recognition and enforcement of Foreign Arbitral Awards a.k.a the New York Convention (“Convention.”)

If two parties, A & B, A located in Albania, and B located in Burkina Faso have an arbitration agreement in places (most often because of an arbitration clause in an commercial agreement between them) and a dispute arises between them, party A may start legal proceedings  in a national court in Albania where it feels it has "home-court advantage" At that point, the B may approach the court in Albania showing evidence of the arbitration agreement and seek a stay on the legal proceedings so as to allow arbitration to proceed. 

Article II.3 of the Convention specifies that a national court of a state that is a party to the Convention, has a positive obligation to stay its proceedings, and direct the parties towards arbitration unless it finds that the arbitration agreement is  “null and void, inoperative and incapable of being performed.” 

      When is the test applied?

A court applies the test only after it determines that the arbitration agreement exists (the clause is not constructed in a problematic and covers the dispute between A and B.) In an UK case,  Claxton Engineering Services Ltd v TXM Olaj-Es Gazkutato Kft ("Claxton"), the court refused to apply the same test ( included verbatim in the UK's Arbitration Act 1996) because it determined the arbitration agreement didn't exist. In an Indian case, Gas Authority Of India Ltd. vs Spie Capag, S.A. And Others ("Gail"), the Delhi high Court considered the Phrase as it was reproduced in section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961. In Gail, the appropriate point of application of the Phrase was determined to be before arbitration proceedings commence or during the arbitration proceedings.

      Who bear the burden of proof before the court

In an UK case, JSC BTA Bank v Mukhtar Ablyazov, Ildar Gayarevich Khazhaev, CJSC Tekhinvest, Konvis LLC, Paladioexport LLC, Citybestplus LLC, Colligate Investments Limited, ("JSC"), the court said that the burden of proof of showing that the agreement satisfies the test is on the party resisting such the stay of court proceedings, in our example A party A in Albania needs to convince the Albanian court that it shouldn't stay proceedins because the arbitration agreement between party A  and party B is "null and void, inoperative and incapable of being performed." [in the Gail case, for some reason, in spite of the clear language in the Indian statute, the court reversed the burden of proof on to the party arguing for arbitration, but this is very much against the prevalent trend.]

      Meaning of the phrase 

Often it is easier to know what something is not rather than what it is and you will see that in this blog entry. According to Lew in "Comparative International Commercial Arbitration": “null and void” is “where the arbitration agreement is affected by some validity right from the beginning”, “inoperative” is where the arbitration agreement ceases to have effect at some point, and “incapable of being performed” is where the arbitration cannot be set in motion.

      The entire phrase

In Bautista v. Star Cruises, ("Bautista"), an US Court of Appeal commented, the Phrase is only applicable to arbitration agreements where there is fraud, mistake, duress and waiver, and that the meaning of the words will be narrowed  to interpretations as may be shared across many international jurisdictions.

      The components

            Null and void

In Seidel v. TELUS Communications Inc., the Supreme Court of Canada held an arbitration agreement to be null and void where it attempted to waive a person’s statutory right (especially when the statute in question clearly stated as void any agreement attempting to do so.) Therefore when legislation says a right may not waived by contract, the court says that an arbitration on that issues is"null and void" (the court appears to have mixed up public policy criteria applicable at the enforcement stage in to the early arbitration referral stage but that is worthy of a separate article. 

            Inoperative

In a case in Alberta, Canada, Kaverit Steel and Crane Ltd. v. Kone Corporation ("Kaverit"), the Court of Appeal said if a dispute is between a number of parties and only two of them are parties to an arbitration agreement, inconvenience, splitting of a dispute between forums, or overlapping litigation, cannot be a valid criterion for assessing whether an arbitration is “inoperative.” 

            Incapable of being performed

In Travelport Global Distribution Systems  B.V.  v.  Bellview Airlines Limited, the United States District Court ruled that an arbitration agreement was not “incapable of being performed,” even though an arbitration clause referred to a non-existent governing institution and said that the party "may" use arbitration (i.e. the language indicated that arbitration was not a mandatory dispute resolution mechanism.) In Pacszy v Haendler & Natermann GmbH ("Pacszy"), the English Court of Appeal said the phrase “incapable of being performed” doesn't apply just because a party is unable to take part in or to attend proceedings. Going in the other direction, it appears that German courts take the pecuniary inability of one party to participate in an arbitration proceeding as rendering the agreement to be incapable of being performed. In a famous set of US cases, an arbitration clause was seen as unenforceable because of the agreement between and Iranian and US entity specified Iran as the seat of arbitration.

            The arbitration agreement versus the main agreement (the "Separability" doctrine)

Courts in various countries have formulated the "Separability" doctrine that separates the arbitration clause from the rest of the agreement as it had been entered into between parties A and B entirely separate from the main agreement (which is important otherwise a party could just attack the main agreement neutralising the arbitration clause it finds inconvenient.)  In an UK case, El Nasharty v J Sainsbury Plc, an English court stated that when a party is seeking to establish that an arbitration agreement is null and void, inoperative, or incapable of being performed, on account of duress, the party must establish it specifically for the arbitration (clause) agreement itself rather than of the main agreement .  The same reasoning was used by the Alberta Court in Kaverit, where the judge said that the arbitration clause will not be inoperative just because the main agreement that contained it is terminated.

            Degree of Review

Finally, the depth of review that courts conduct when they assess whether a request for a stay meets the conditions set out in the Phrase in the ARticle II(3) of the Convention. The arbitration friendly French civil code allows only a prima facie review. The Swiss courts will undertake a limited review for arbitrations conducted in Switzerland.  The UK and Canadian courts, including in the cases examined here, may conduct an in-depth examination of the validity of an arbitration agreement. 

            Conclusion

The phrase “null and void, inoperative and incapable of being performed” embodies certain conditions under which the arbitration process may be attached or delayed. It affords courts to grab jurisdiction from the arbitration process (for good or bad reasons) and parties to delay the arbitration process by engaging courts in this analysis. However, generally across the board, barring some exceptional situations, courts adopt a fairly narrow approach to its interpretation.