Yearbook of Private International Law: Volume III, 2001

YEARBOOK OF PRIVATE INTERNATIONAL LAW YEARBOOK OF PRIVATE INTERNATIONAL LAW VOLUME III – 2001 EDITORS PETAR ŠARČEVI...

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YEARBOOK OF PRIVATE INTERNATIONAL LAW

YEARBOOK OF PRIVATE INTERNATIONAL LAW VOLUME III – 2001

EDITORS

PETAR ŠARČEVIĆ

PAUL VOLKEN

Professor at the University of Rijeka

Professor at the University of Fribourg

PUBLISHED IN ASSOCIATION WITH SWISS INSTITUTE OF COMPARATIVE LAW LAUSANNE, SWITZERLAND

Sellier. European Law Publishers

Sellier. European Law Publishers ISBN 978-3-935808-49-1 Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über http://dnb.d-nb.de abrufbar. © 2001 Kluwer Law International und Swiss Institute of Comparative Law. © für den Nachdruck 2007 Sellier. European Law Publishers GmbH und Swiss Institute of Comparative Law. Dieses Werk einschließlich aller seiner Teile ist urheberrechtlich geschützt. Jede Verwertung außerhalb der engen Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verlages unzulässig und strafbar. Das gilt insbesondere für Vervielfältigungen, Übersetzungen, Mikroverfilmungen und die Einspeicherung und Verarbeitung in elektronischen Systemen. Herstellung: Karina Hack, München. Druck und Bindung: AZ Druck und Datentechnik, Kempten. Gedruckt auf säurefreiem, alterungsbeständigem Papier. Printed in Germany.

ADVISORY BOARD JÜRGEN BASEDOW Hamburg GENEVIÈVE BASTID-BURDEAU Paris/The Hague LAWRENCE COLLINS London HUANG JIN Wuhan HANS VAN LOON The Hague FERENC MÁDL Budapest

RUI MANUEL GENS DE MOURA RAMOS Luxembourg/Coimbra YASUHIRO OKUDA Sapporo GONZALO E. PARRA-ARANGUREN The Hague/Caracas SYMEON C. SYMEONIDES Salem (Oregon) PIERRE WIDMER Lausanne

ASSISTANT EDITOR AND ADRESSEE FOR MANUSCRIPTS AND CORRESPONDENCE ANDREA BONOMI Swiss Institute of Comparative Law Dorigny, CH – 1015 Lausanne

ENGLISH REVISION SUSAN ŠARČEVIĆ Faculty of Law, Rijeka

TABLE OF CONTENTS ________________

Foreword ............................................................................................................ ix Abbreviations..................................................................................................... xi Doctrine Harry DUINTJER TEBBENS Judicial Interpretation of the 1988 Lugano Convention on Jurisdiction and Judgments in the Light of its Brussels Matrix: the Convergence Confirmed .......................................................................... 1 David GODDARD Rethinking the Hague Judgments Convention: A Pacific Perspective ..................................................................................... 27 Christoph BERNASCONI Indirectly Held Securities: A New Venture for the Hague Conference on Private International Law ........................................... 63 Bertrand ANCEL The Brussels I Regulation: Comment ............................................................ 101 Private International Law Issues in World War II Era Litigation Yasuhiro OKUDA The Law Applicable to Governmental Liability for Injuries to Foreign Individuals during World War II: Questions of Private International Law in the Ongoing Legal Proceedings before Japanese Courts ............................................................................................. 115 Kent ANDERSON Issues of Private International Law and Civil Procedure Arising out of the U.S. Civil Suits for Forced Labor during World War II: To What Extent Do U.S. Conflict and Procedural Rules Obstruct Private Liability for Wartime Human Rights Violations?.............................. 137 Jan VON HEIN The Law Applicable to Governmental Liability for Violations of Human Rights in World War II: Questions of Private International Law from a German Perspective............................................... 185

National Reports Gerhard HOHLOCH & Cecilie KJELLAND The New German Conflicts Rules for Registered Partnerships ..................... 223 News from The Hague J.H.A. VAN LOON The Hague Conference on Private International Law – Work in Progress (2000-2001)....................................................................... 237 Forum Frank GERHARD The Extraterritorial Judicial Penalty – New Instrument for the Transnational Enforcement of Extraterritorial Injunctions?........................... 245 Texts, Materials and Recent Developments Council Regulation (EC) No. 44/2001 of 22 December 2000 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (‘Brussels I’) ........................... 301 Council Regulation (EC) No. 1206/2001 of 28 May 2001 on Cooperation between the Courts of the Member States in the Taking of Evidence in Civil or Commercial Matters ..................................... 333 CHINESE SOCIETY OF PRIVATE INTERNATIONAL LAW: Model Law of Private International Law of the People’s Republic of China (Sixth Draft, 2000)........................................................... 349 James A.R. NAFZIGER Oregon’s Conflicts Law Applicable to Contracts .......................................... 391 Book Review Mario GIOVANOLI (ed.), International Monetary Law, Issues for the New Millennium (Petar ŠARČEVIĆ) .......................................................... 419 Books Received .................................................................................................. 427 Index ................................................................................................................... 431

viii

FOREWORD ________________

Our main goal, as stated in the first volume, is to make the Yearbook an international podium for the intellectual exchange of scientific and practical ideas between specialists of private international law. The intention is to include contributions by scholars from all parts of the world. As readers will witness in this volume, the Yearbook is becoming more international; however, contributions from Africa are still missing. Hopefully this continent will also be represented in the near future. Again we encourage contributions on new developments in private international law in countries and regions around the globe. Discussions of important court decisions are particularly welcome. As earlier, we closely follow developments at the Hague Conference on Private International Law. Regarded as a European institution not long ago, the Hague Conference has grown into a worldwide organization with 55 Member States and several applicant countries. Although its membership has greatly expanded, this does not mean that conventions are automatically accepted and ratified on a global scale. The fate of the future Judgments Convention shows that conflicting interests on crucial issues often stand in the way of progress. Despite the present deadlock, the mere fact that a forum has been convened to study the problems and is attempting to reconcile differences, especially those between common law and civil law countries, is of major importance. Bilateral dialogues, such as those between EU and US experts, will certainly play a role in resolving the issues at stake. Whether this will be achieved now or in the near future does not diminish the value of such efforts. For the first time, the same topic – forced labor during World War II – is discussed by scholars from three different continents. As the reports show, there has been much activity in this area on the judicial front in Germany, Japan and the US. The disputes have also raised a number of difficult private international law issues. In light of the pending cases and new decisions, such as that of 19 October 2001 by of the California Superior Court in Orange County, it appears that, after more than 50 years, the courts will continue to be confronted with such issues. National and state legislators continue to be active as well. The draft Model Law of Private International Law of the People's Republic of China and Oregon’s Conflicts Law Applicable to Contracts are published in the present volume. Reports on new developments in other jurisdictions will be included in future volumes. As regards the situation in Europe, concurrence between EU and national legislation is still unresolved in the field of private international law. One of the best examples is the new EC directive on jurisdiction and enforcement in family matters, on the one hand, and the new German conflicts rules for registered partnerships, on the other. We remain committed to informing readers, promptly and accurately, about new developments that are shaping the future of private international law. This, of course, is the purpose of the Yearbook. Petar ŠARČEVIĆ

Paul VOLKEN

ABBREVIATIONS ________________

Am. J. Comp. L. Am. J. Int. L. Clunet I.C.L.Q. I.L.M. id. IPRax OJ PIL RabelsZ Recueil des Cours

Rev. crit. dr. int. pr. REDI Riv. dir. int. priv. proc. Riv. dir. int. RIW RSDIE

American Journal of Comparative Law American Journal of International Law Journal de droit international International and Comparative Law Quarterly International Legal Materials idem Praxis des internationalen Privat- und Verfahrensrechts Official Journal Private International Law Rabels Zeitschrift für ausländisches und internationales Privatrecht Recueil des Cours de l'Académie de la Haye de droit international = Collected Courses of The Hague Academy of International Law Revue critique de droit international privé Revista española de derecho internacional Rivista di diritto internazionale privato e processuale Rivista di diritto internazionale Recht internationaler Wirtschaft Revue suisse de droit international et européen = Schweizerische Zeitschrift für internationales und europäisches Recht

DOCTRINE ________________

JUDICIAL INTERPRETATION OF THE 1988 LUGANO CONVENTION ON JURISDICTION AND JUDGMENTS IN THE LIGHT OF ITS BRUSSELS MATRIX: THE CONVERGENCE CONFIRMED *

Harry DUINTJER TEBBENS** I.

II.

III.

Introduction A. Interpretation of the Brussels Convention B. Interpretation of the Lugano Convention C. Outline of Article Interpretation of the Lugano Convention: The Legal Framework A. Protocol 2 on Uniform Interpretation B. Reciprocal Declarations of EU and EFTA States Practise of Lugano Convention Interpretation A. Courts of European Union States 1. Tendency Towards Assimilation 2. The Peculiar Problem of lis pendens (I) B. Courts of EFTA Member States 1. General Features of Case-Law 2. Supreme Court Cases Dealing Extensively with the Parallel Brussels/Lugano Interpretation a) Scope of Convention: Notion of ‘Civil and Commercial Matters’ b) Scope of Convention: Bankruptcy Exception c) Notion of ‘Maintenance Obligation’ d) Conditions for Recognition and Enforcement

* This paper is the revised and updated text of a contribution made to a seminar in Brussels on 8-9 November 1999 on recent developments and perspectives of private international law and judicial cooperation in Community law, organised by the Academy of European Law, Trier, for the Legal Service of the European Parliament. ** The author is Head of Division, Legal Service, European Parliament, previously Head of Unit, Research and Documentation Service, European Court of Justice, and is Member of the Netherlands Standing Government Committee on Private International Law. The views expressed in this paper are purely personal and do not necessarily reflect the official position of the European Parliament.

Yearbook of Private International Law, Volume 3 (2001), pp. 1-25 © Kluwer Law International & Swiss Institute of Comparative Law

Printed in the Netherlands

Harry Duintjer Tebbens

3.

V.

Significant Examples of Parallel Interpretation a) The ‘Obligation in Question’ under Article 5(1) b) Validity of Choice of Court Clause c) The Problem of lis pendens (II) 4. Possible Incongruous Results a) Commercial or Bankruptcy Action b) Place of Pure Economic Loss c) Notion of ‘Consumer Contract’ The Court of Justice and the Lugano Convention A. Multistate Employment Contracts B. Discrimination in Civil Procedure Concluding Remarks

I.

Introduction

A.

Interpretation of the Brussels Convention

IV.

Compared to other international conventions, a well-known distinctive feature of the Brussels Convention on jurisdiction and the enforcement of judgments is that its application is subject to the harmonising, if not unifying interpretation of the European Court of Justice (ECJ). Pursuant to the Interpretation Protocol of 3 June 1971,1 at the request of national courts, the ECJ has given over one hundred preliminary rulings concerning the interpretation of the Brussels Convention. In its very first ruling on the Convention, the Court was cautious in its approach to the question whether to interpret the terms of the Convention by reference to national law (presumably the law of the court seized or the law applicable to the substance of the case), or by an independent concept to be drawn from the scheme and purpose of the Convention itself. It stated in Tessili2 that the choice had to be made for each provision or term separately, having regard to the need to give the optimal effet utile to the Convention. In its later case-law it becomes clear that, but for a few notable exceptions, the independent or ‘autonomous’ interpretation prevails. This is particularly clear in the 1993 judgment in Mulox,3 where the Court held that only that interpretation could ensure the uniform application of the Convention in all Member States, thus offering the necessary legal certainty to litigants. Having built up consistent case-law on numerous specific questions, the Court decided in 2001 for the first time to give a simplified ruling under its Rules 1

Official Journal of the European Communities (OJEC) 1975, L 204, p. 28. Tessili v. Dunlop [1976] ECR 1473, point 11. 3 Mulox IBC v. Geels [1993] ECR I-4075, points 10-11. 2

2

Yearbook of Private International Law, Volume 3 (2001)

Judicial Interpretation of the 1988 Lugano Convention

of Procedure concerning the interpretation of the exclusive head of jurisdiction for rights in rem in immovable property.4 One might say that the national courts now have, as it were, a common annotated version of the Brussels Convention as their companion for its application.

B.

Interpretation of the Lugano Convention

The situation is different regarding the 1988 Lugano Convention,5 which in substance reproduces the scheme for jurisdiction and enforcement of judgments of the Brussels Convention for a wider range of countries, in particular the EFTA States. No common interpretation mechanism comparable to the one attached to the Brussels Convention exists for the Lugano Convention. During the negotiations, neither the European Community Member States nor those of EFTA wanted to confer jurisdiction to interpret this Convention to the European Court of Justice, though for different reasons. The option to set up a distinct judicial body and entrust it with this task was equally rejected.6 Finally, the solution adopted was to add a number of protocols and declarations to the Convention with the purpose of reducing to the greatest extent possible the risk that the Lugano Convention would be interpreted and applied differently than the Brussels Convention.7

C.

Outline of Article

This paper first examines these ‘second-best tools’ for interpreting the Lugano Convention (II), before sketching in a bird-eye’s view the initial response of courts to this challenge (III), in European Union States (A) and, in greater detail, in some other Contracting States as far as their supreme courts are concerned (B). Attention is then given to the European Court’s perception of the Lugano Convention (IV). Finally, some conclusions are drawn about the practice of the Convention’s interpretation (V).

4

Order of 5 April 2001, Case C-518/99 Gaillard v. Chekili, nyr, made under Art. 104(3) Rules of Procedure. 5 OJEC 1988, L 319, p. 9. 6 See DUINTJER TEBBENS H., ‘Die einheitliche Auslegung des LuganoÜbereinkommens’, in: REICHELT G. (ed.), Europäisches Kollisionsrecht - Die Konventionen von Brüssel, Lugano und Rom, Frankfurt am Main etc. 1993, pp. 49-64, at pp. 49-50. 7 See the Jenard/Möller Report on the Lugano Convention, OJEC 1990, C 189, p. 57, paras 111-119.


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II.

Interpretation of the Lugano Convention: The Legal Framework

Set up by its drafters as a parallel instrument to the Brussels Convention, the Lugano Convention follows the scheme and drafting of that Convention as closely as possible, as well as its judicial interpretation by the European Court of Justice.8 Upon conclusion of the Lugano Convention, a number of differences remained; however, several of them disappeared when the Brussels Convention itself was modified in 1989 for the accession of Spain and Portugal.9

A.

Protocol 2 on Uniform Interpretation

The very preamble of the Lugano Convention bears witness to this close relationship by ‘taking into account the Brussels Convention’ and extending its principles to the Lugano Contracting States. Moreover, Protocol 2 on the uniform interpretation of the Convention is attached to the Lugano Convention and deemed an integral part thereof by virtue of Article 65 of the Convention. The Protocol’s preamble recalls the substantial link between both Conventions, in particular the fact that the negotiations leading to the conclusion of the Lugano Convention were based on the Brussels Convention, as interpreted by the European Court up to that conclusion (on 16 September 1988). Protocol 2 also states two aspects of the objective to achieve a uniform interpretation: (i) as regards the Lugano Convention in and for itself, as well as (ii) in relation to the corresponding provisions of the Brussels Convention (preamble, last paragraph). i) As to the internal uniformity of the Lugano Convention, Protocol 2 obliges in its Article 1 the courts of all Convention States ‘to pay due 8

See the Jenard/Möller Report (note 7), para. and the summary of ECJ case-law, ibid., paras. 130 et seq.; STONE P.A., ‘The Lugano Convention on Civil Jurisdiction and Judgments’, in: Yearbook of European Law 1988, p. 105 et seq.; TRUNK A., Die Erweiterung des EuGVÜ-Systems am Vorabend des Europäischen Binnenmarktes, Munich 1991, p. 91 et seq.; MÖLLER G., ‘The Outlook for the System for the Free Movement of Judgments created by the Brussels Convention’, in: Civil Jurisdiction and Judgments in Europe (colloquium at the ECJ, March 1991), London etc. 1992, p. 215 et seq., pp. 217-220; DUINTJER TEBBENS H., ‘The European Jurisdiction and Enforcement Conventions: interpretation, concurrence and prospects’ in: Netherlands International Law Review 1993, p. 471 et seq., 474-477. 9 See SCHMIDT-PARZEFALL T., Die Auslegung des Parallelübereinkommens von Lugano, Tübingen 1995, p. 21; DROZ G., ‘La Convention de San Sebastian alignant la Convention de Bruxelles sur la Convention de Lugano’, in: Rev. crit. dr. int. pr., 1990, p. 1 et seq.

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account to the principles laid down by any relevant decision’ delivered by courts of the other States parties to it. In order for the courts to be able to discharge this duty the Protocol makes provision for an exchange of information concerning the relevant case-law (Article 2). ii) The external uniformity is also addressed in Article 2, but only indirectly, by the range of judicial decisions to which the exchange of information applies. Indeed, not only are the most important cases concerning the Lugano Convention itself to be included in this exchange, but also the rulings given by the European Court on the interpretation of the Brussels Convention and the most important cases decided by national courts involving the latter Convention. A detailed examination of how this exchange of information is carried out by the Registrar of the European Court as the central body under Article 2(2) is not necessary here. It suffices to mention that the relevant data are collected and selected by the Court’s Research and Documentation Service and sent periodically in hard copy to the national authorities designated under Article 2. This includes the original text of judgments without translation but with a short keyword description in French and English. The coverage started in 1992 when the Lugano Convention came initially into force between France, the Netherlands and Switzerland. As of 1997, the selected decisions are also placed on the Court’s website.10 In addition, the documentation covering the first five years has been reproduced in publications by the Swiss Institute for Comparative Law.11 This should enhance their availability, especially for those for whom the exchange of information has been primarily set up, viz. the judges of national courts who are obliged to take proper notice of relevant decisions of their brethren under Article 1 of the Protocol.

B.

Reciprocal Declarations of EU and EFTA States

Attached to the Final Act of the Diplomatic Conference adopting the Lugano Convention are two Declarations that further provide body to the uniform interpretation mechanism. According to the Declaration of the Member States of the European Communities, they consider as ‘appropriate’ that, when interpreting the Brussels

10

http://www.curia.eu.int, under ‘Research and Documentation’. Under the slightly unbalanced title (leaving out any reference to the Brussels Convention) of Collection of jurisprudence of the European Court of Justice and of the highest courts of the States Parties concerning the Lugano Convention, Vols. I-V (Years 1992-1996), Zurich 1996-2000. 11


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Convention, the European Court of Justice pay due account to the rulings contained in the case-law of the Lugano Convention.12 In the Declaration given by the EFTA Member States, the latter invite their courts to pay due account to the case-law of the European Court, as well as that of the national courts of EC Member States, when interpreting provisions of the Brussels Convention reproduced in the Lugano Convention.13 It should be noted that these Declarations are not strictly reciprocal: When applying the Lugano Convention, the national courts of the European Union States are not required to take into account the European Court’s rulings on the interpretation of the Brussels Convention.14 This is probably because a statement to that effect was considered superfluous since the Court’s rulings in preliminary reference proceedings – in this area as in Community law proper – have a persuasive authority in the legal order of the Member States, which is also reflected in the interpretation of the Lugano Convention in those States. After this summary presentation of the legal framework for the interpretation of the Lugano Convention, we turn to an assessment of the relevant judicial practice, particularly in relation to the body of existing case-law on the Brussels Convention.

III. Practise of Lugano Convention Interpretation Since the Lugano Convention entered into force for an initial group of three States on 1 January 1992, a substantial number of cases applying the Convention has been decided. A database kept at the European Court’s Research and Documentation Service, containing reported as well as some unreported cases, listed some 350 in 2001.15 Our main interest is directed to those decisions of superior or supreme courts that specifically and at some length deal with the parallelism between the two Conventions and its effect on interpretation. Although attention will be focused particularly on judgments of EFTA States within this category of cases, it appears useful to first summarise briefly the experiences of national courts of the European Union Member States with the phenomenon of parallelism. 12

OJEC 1988, L 319, p. 37. OJEC 1988, L 319, p. 40. 14 See MINOR J., ‘The Lugano Convention, some problems of interpretation’, in: Common Market Law Review 1990, p. 507 et seq, at p. 512. 15 Despite the fact that Protocol 2 provides that the national authorities shall transmit the relevant judgments to the central body, most cases are in fact taken from legal journals and law reports. 13

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A.

Courts of European Union States

1.

Tendency towards Assimilation

The case-law on the Lugano Convention in these States gives the general impression that it is handled as if it were the Brussels Convention. Often the courts briefly mention the fact that both Conventions are almost identical, or that the particular article in issue is entirely identical in either text.16 They then proceed to ‘dress up’ their judgment in the way characteristic of their jurisdiction, referring to the case-law of the Court of Justice, to domestic cases or legal writings concerning the Brussels Convention or the Lugano Convention, as the case may be. Thus the impression is one of clear convergence, even going towards complete assimilation of both Conventions. There is, however, a built-in limit for national courts that may or must refer to the Court of Justice for a preliminary ruling when the interpretation of the Brussels Convention is at stake: They cannot take that course if the issue to be clarified arises under the Lugano Convention, even if the wording of the article(s) involved is completely identical.17 The tendency towards assimilation sometimes goes too far, for instance, in cases that are decided under the Lugano Convention, but upon closer scrutiny of the factual circumstances, it becomes clear that the Brussels Convention should have been applied. Errors of this kind have occurred especially in EU Member States where both Conventions entered into force on the same day.18 Surely, such formal confusion of both instruments does little harm if the relevant rules are strictly identical.

2.

The Peculiar Problem of lis pendens (I)

The picture given above is of course a simplification, which does not apply to some of the more complex cases. In one case, for example, the result reached by the court was largely due to a marked difference between the two Conventions, relating precisely to their interpretation. This case, Polly Peck International plc v.

16

For a recent example, see the House of Lords, judgment of 17 February 2000, Agnew ao v. Lansförsäkringsbølagens, [2000] 1 All England Law Reports 737, [2000] 2 Weekly Law Reports 497. 17 This impossibility appears to be confirmed by the ECJ ruling in: Kleinwort Benson v. City of Glasgow District Council, C-346/93 [1995] ECR I-615, concerning an interregional jurisdiction conflict within the United Kingdom. 18 E.g., Portugal. Cf. the judgment of the Coimbra Appeal Court of 14 December 1993, in: Colectânea de Jurisprudência XVIII (1993), t. V., p. 51, purporting to apply the Lugano Convention to a German judgment.


7


Citibank NA,19 decided by the English High Court, concerned a dispute between an English company, on the one hand, and United States and Swiss companies, on the other. The American and Swiss defendants argued that the Swiss courts had been first seized with a claim involving the same parties and the same cause of action. They invited the English court to decline jurisdiction in favour of the Swiss courts under Article 21 of the Lugano Convention. However, the English plaintiff contended that the English, not the Swiss court had been seized first. Thus the court had to answer the question on which date the Swiss courts had been seized of the action. The court noted that the rule on lis pendens was identical in the Brussels and Lugano Conventions and that the English court would be bound by rulings of the European Court concerning the lis pendens rule in the Brussels Convention, whereas the Swiss courts were merely required, under Protocol 2 of the Lugano Convention, to pay due account to such rulings. Now, the European Court has ruled in Zelger v. Salinitri (II)20 that the court first seized is the one where the requirements for proceedings to become definitively pending are first fulfilled, and that such requirements must be determined in accordance with the national law of each of the courts concerned. Therefore, the English court might well have felt obliged, in the case before it, to ascertain when those requirements had been met under the relevant laws of Switzerland, in order to determine which court had been first seized. However, ‘after some hesitation’ the court came to the conclusion that it should not do so. Instead, noting that the purpose of the Lugano Convention was to avoid conflicts of jurisdiction, it observed that the Swiss court would be bound, under Article 21, to decide whether it became seized of proceedings on the date alleged by the American and Swiss companies, but it would not be bound by a decision of an English court as to that date. The English court went on to say: ‘It follows that the only way in which a possible conflict can be avoided is for the courts of this country to adjourn the application until the Swiss courts have finally decided whether the District Court of Zurich became seized of the proceedings in that jurisdiction on 8 February, and if the Swiss courts decide that the District Court of Zurich was so seized, to decline jurisdiction. …[T]he courts of this country should, I think, as a matter of comity, decline to answer a question of Swiss law if it is one which must necessarily be decided by the Swiss courts, albeit that under the protocol the Swiss court

19 Judgment of 14 October 1993 of the High Court, Chancery Division, [1994] International Litigation Procedure 71. 20 Judgment of 7 June 1984, 129/83 [1984] ECR 2397.

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would have to take into account, without being bound by, the decision of this Court.’21 Besides the ‘comity’ invoked by the English court, it probably also had in mind an element of practicality or convenience which would militate against it attempting itself to come up with the correct answer under Swiss law, i.e., the English procedural tradition of hearing expert evidence by both parties concerning the content of foreign law. As a matter of fact, the question turned out to be extremely delicate, requiring an in-depth analysis of Swiss federal law relating to international civil procedure,22 as well as a particular pre-contentious conciliation procedure in the cantonal law of procedure in Zurich. This question, which divided not only the parties to the dispute in Switzerland, but also academic writers in that country,23 kept the Swiss courts occupied up to the last instance. The final answer of the Swiss Federal Supreme Court came four years later24 and was to the effect that the Swiss court had been seized after the English court. As a result, after having suspended proceedings all that time, the English court found itself in the odd situation of learning that it had been under no duty to suspend pursuant to Article 21 after all.

B.

Courts of EFTA Member States

1.

General Features of Case-Law

Judicial practice in the Lugano States Parties outside the Brussels Convention Membership is in keeping grosso modo with the interpretation of the latter Convention, as was mentioned above in connection with the judicial practice in countries where both the Brussels and the Lugano Convention are in force.25 This can be concluded by examining the relevant decisions in the former countries,26 21

International Litigation Procedure [1994] at p. 80 (para. 29). Federal Private International Statute of 18 December 1987, English translation in: International Legal Materials 1990, p. 1244, Article 9 (cited in full in the English judgment). 23 See infra at III.B.3 c) for the final Swiss judgment in this litigation, citing all relevant literature. 24 Judgment of 26 September 1997, infra III.B.3 c). 25 See, e.g., JAYME E./KOHLER Ch., ‘Europäisches Kollisionsrecht 1989 – Die Abendstunde der Staatsverträge’, in: IPRax 1999, p. 401 et seq, at p. 410; ID., ‘Europäisches Kollisionsrecht 2000 – Interlokales Privatrecht oder universelles Gemeinschaftsrecht?’, in: IPRax 2000, p. 454 et seq., at p. 463. 26 I.e., Austria, Sweden, Finland (before their transition to the Brussels Convention at the end 1998/beginning 1999), Norway and Switzerland. No Icelandic decision appears as 22


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included in the exchange of information set up under Protocol 2. The period covered for the purpose of the present paper is 1992-2000. Although the scope of this paper does not permit us to mention a large number of cases, some supportive case-law materials can be found in the research done under the auspices of the Standing Committee of the Lugano Convention, set up under Article 3 of Protocol 2. In order to better fulfil its mission to examine the functioning of the Convention and the development of the case-law reported under the exchange of information system (Article 4(1) of the Protocol), in 1998 the Standing Committee decided to have a study conducted of the case-law materials distributed through the system from 1992 through 1998. A large majority of cases examined in the Report on this case-law concerns decisions given by courts in EFTA States and thus its conclusions would appear to be relevant in the present context. Focusing on the interpretation of the thorny Article 5(1) concerning an optional forum for contractual disputes, one of the conclusions of the Report stated ‘that the case-law on the Lugano Convention is developing in a similar manner to that relating to the Brussels Convention, whilst sometimes allowing greater clarification and a more in-depth research into the subject’.27 The last point brings out, rightly in our opinion, that it might very well occur that a national court could be confronted with a situation governed by the Lugano Convention but for which the corresponding case-law of the Court of Justice under the Brussels Convention offers only scant guidance.28 This would give the national courts an opportunity to further develop solutions that could be valid for both Conventions, on the basis of the initial Brussels Convention precedents. These conclusions are confirmed in a second report covering decisions distributed by the central body in 1999.29

2.

Supreme Court Cases Dealing Extensively with the Parallel Brussels/Lugano Interpretation

Turning to Supreme Court decisions that give principled and extensive attention to the interpretation of the Lugano Convention, we find that almost all of them were yet to have been reported on the Lugano Convention. Poland acceded to the Convention only as of 1 February 2000. 27 Report on the national case-law relating to the Lugano Convention drawn up in performance of the task entrusted to the Spanish, Greek and Swiss delegations at the 5th session of the Lugano Convention’s Standing Committee (Interlaken, 18.9.1998)’, in: IPRax 2001, p. 262 et seq., at p. 268. 28 An example is Agnew ao v. Lansförsäkringsbølagens (note 16) concerning the duty of good faith as ‘obligation in question’ for the purpose of the contract forum in Art. 5(1). See also the Swiss judgment discussed infra, III.B.4 c). 29 Second Report on National Case-law on the Lugano Convention, by H. Bull, G. Musger and F. Pocar, part V (to be published in: IPRax).

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handed down by the Swiss and Austrian highest courts in 1997 or 1998. Their counterparts in the Nordic countries have surely dealt with this matter too; however, in line with the more concise style of judgments prevailing in those countries, rather than setting out the guiding principles or dogmatic underpinings of the parallel interpretation, they simply apply it.30 Not purporting to give an exhaustive review of all such cases, this chapter selects some illustrative ones. In the following presentation, the cases are grouped by topic.

a)

Scope of Convention: Notion of ‘Civil and Commercial Matters’

aa) In a case before the Swiss courts involving Swiss and Italian parties and the State of Paraguay, the jurisdiction of the court depended on whether or not the dispute had to be classified as a ‘civil and commercial matter’ under Article 1(1) of the Lugano Convention. In its judgment of 20 August 1998,31 the Swiss Federal Supreme Court held that the ‘context’ of the interpretation of the Lugano Convention within Article 31(2)(a) of the Vienna Convention on the Law of Treaties was formed in particular by the Contracting Parties, acknowledging the fact that the convention was substantially linked to the Brussels Convention. In this connection, it referred to the various passages in Protocol 2 and other texts (set out above, II) and to one of its earlier decisions on the Lugano Convention in the Polly Peck case.32 The Court then spelled out the preliminary rulings delivered by the ECJ (up to September 1988) on the concept of ‘civil and commercial matters’ and that Court’s insistence on an independent construction of the concept. It continued by saying that ‘there is no reason whatsoever not to follow this line of interpretation for the purpose of applying the Lugano Convention’,33 recalling also that the main advantage of any ‘autonomous’ treaty interpretation lies in it avoiding legal uncertainty. It was true that, by virtue of its basis in Community law, the Brussels Convention has a fonctionnalisme communautaire to it and that it could happen that the concurrent application, for example, of the prohibition of discrimination on the ground of nationality in EC law, would influence the interpretation of the Brussels Convention, preventing that 30 E.g., Swedish Supreme Court 23 February 1994, Nordic Water Products / S. Håkanson, English translation in [1995] International Litigation Procedure 766, on the scope of exclusive jurisdiction for patent claims, simply citing the relevant ruling of the ECJ. 31 Banque Bruxelles Lambert (Suisse) a.o. / République du Paraguay et Sezione speciale per l’assicurazione del credito all’esportazione, BGE (Federal Court Reports) 124 III 382. 32 Infra, III. B.3. c). 33 At BGE 124 III 395, letter e).


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interpretation from being adopted by non-EC States. But, the Court added that such situations would be rare and that it was proper to consider the territories of all the Lugano Contracting States as a common judicial area that required the greatest uniform application possible. Thereupon the Swiss Court applied the criteria laid down by the ECJ for the notion of civil and commercial matters. bb) In an almost simultaneous judgment another chamber of the same Swiss Court tackled the same issue in a dispute on export credit insurance. This judgment of 19 August 1998 34 equally adopts the approach that the Lugano Convention is to be considered as international uniform law, requiring an autonomous interpretation, which should be parallel to the Brussels Convention interpretation. The Court concluded from Protocol 2 that case-law of the ECJ on that convention and preceding the conclusion of the Lugano Convention was binding authority (‘als verbindliche Entscheidungsgrundlage zu berücksichtigen’) for the interpretation of the Lugano Convention, but that subsequent case-law of the ECJ according to the EFTA Declaration (supra, II.B.) had (only) to be duly taken into account. In fact, the court relied on such a subsequent ECJ ruling for its interpretation of the notion of ‘civil and commercial matters’ in Sonntag v. Waidmann.35 This ruling adopted a very broad interpretation by using a narrow concept of a public authority’s exercise of its public prerogatives. Remarkably enough, this Swiss judgment does not contain a reservation concerning the possibility of the interpretation of the ECJ being too communautaire, as distinct from the judgment mentioned under (i). The salient point about this is that the Sonntag ruling it relied upon did in fact contain reasoning influenced by Community law, in particular concerning the status of teachers in a public or private school.36

b)

Scope of Convention: Bankruptcy Exception

Another Swiss Supreme Court judgment of 23 December 199837 confirmed its position favouring a uniform interpretation of the two Conventions. The case concerned a claim for payment of commission arising out of a contract preceding the opening of insolvency proceedings concerning the debtor.

34

Dresdner Forfaitierungs AG / Sezione Speciale per l’Assicurazione del Credito all’Esportazione (SACE), BGE 124 III 436. 35 Judgment of 21 April 1993, C-172/91 [1993] ECR I-1963. 36 See para. 24 of Sonntag (previous note), citing the judgment of 3 July 1986, 66/85 [1986] ECR 2120, Lawrie-Blum/Land Baden-Württemberg, points 26-28. 37 Sorelec SA / Saleh Radwan, BGE 125 III 108.

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Although the Court did mention that taking over the ECJ’s interpretation of the bankruptcy exception could result in an undesirable influence of Community law, it flatly dismissed this possibility without further explanation in the present case. The only ECJ case involving the meaning of the phrase on bankruptcy and analogous proceedings in Article 1, paragraph 2(2) of the Brussels Convention, Gourdain v. Nadler,38 had not resorted to any consideration of Community law proper and, moreover, had not covered exactly the same issue as was before the Swiss Court.

c)

Notion of ‘Maintenance Obligation’

The Austrian Supreme Court 39 dealt with the issue whether an action by a woman against her father seeking payment of a dowry (Heiratsgut) could be brought by invoking the notion of ‘maintenance obligation’ in Article 5(2) of the Lugano Convention. Citing Protocol 2 and the Declarations referred to earlier, the Court affirmed – by apparently deducing from Article 1 of Protocol 2 – that courts of the Lugano Contracting States are obliged to find, on their own motion and take into account the important decisions handed down in other Contracting States, i.e., only the decisions reported to the national authorities under the exchange of information system. It added that the courts would have to discuss the merits of such decisions – as regards the Convention’s interpretation – if they intended to deviate from their essential reasoning, but that obiter dicta did not matter in this respect. Having regard to the EFTA Declaration, the Court noted that ECJ case-law dating from after the signature of the Lugano Convention merely had to be taken into consideration, as opposed to pre-1988 case-law that constituted an ‘authentic interpretation’ of Lugano provisions insofar as they were identical to Brussels Convention provisions. Turning to the notion of ‘maintenance obligation’, the Court found that there were no national decisions or rulings of the ECJ on Article 5(2) of the Conventions. Thus it took it upon itself to develop an independent interpretation of that notion. Apparently, the two preliminary rulings given by the ECJ some months before on that very notion40 had not come to the Court’s attention in time to be considered in the judgment. In any event, after carefully analysing the history of Article 5(2) of the Brussels Convention and insisting that an autonomous notion was preferable over 38

Judgment of 22 February 1979, 133/78 [1979] ECR 733. Judgment of 28 August 1997, Nr. 3 Nd 506/97, in: Zeitschrift für Rechtsvergleichung, internationales Privatrecht und Europarecht 1998, p. 39. 40 Judgments of 27 February 1997, C-220/95 [1997] ECR I-1147, Van den Boogaard v. Laumen, and of 20 March 1997, C-295/95 [1997] ECR I-1683, Farrell v. Long. 39


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one derived from national law, even if that would cause friction with the systematic structure of the forum’s national law, the Court arrived at a broad interpretation of ‘maintenance obligation’. Although the Austrian provisions on dowry are found in the chapter on marriage contracts, it was clear that they did not pertain to matrimonial property. This result appears to fully comply with the interpretation given by the European Court. Moreover, the independent interpretation of the Austrian Court allowed it to overcome certain dogmatic constraints inherent in its domestic law.

d)

Conditions for Recognition and Enforcement

The Austrian Supreme Court’s judgment of 24 June 199841 also reveals that the Court’s intention was to arrive at parallel interpretations of the Conventions to the greatest extent possible. The issue before it was whether the prohibition to review a foreign judgment as to its substance (Articles 29 and 34(3) of the Conventions) extended to situations where the court in the State addressed was asked to check whether the person against whom enforcement is sought is the same as the judgment debtor. The Court developed the same reasoning as in its judgment of 28 August 1997 (cited supra, under c) favouring an international and parallel approach and stressing the importance of consulting national and ECJ decisions communicated under Protocol 2. However, as it found none of these decisions helpful in resolving the issue at stake, the Court held that it could also consider other decisions not (yet) so communicated, provided that: 1) they arrive at a uniform interpretation of the Convention, 2) they are accessible to the national courts, without particular difficulty, through sources other than the exchange of information scheme, and 3) there are no convincing substantive grounds not to adopt the essential reasons of those decisions. Applying these criteria, the Court then reviewed some German superior court judgments in which the Brussels Convention was applied and cited German and Austrian legal writers. Therefore, it appears that the accessibility referred to under (ii) had a linguistic flavour, thus raising the question whether research of French or English language sources (let alone other languages of Lugano States) would have been conducted with the same thoroughness. Finally, the Court checked that the German case-law and scholarly literature on this point corresponded to the prevailing view in Austrian law on the enforcement of judgments. This being so, it affirmed the possibility to verify the identity of the respondent to the application for an enforcement order. 41

14

Case Nr. 3 0b 129/98m, in: Juristische Blätter 1998, p. 729.



3.

Significant Examples of Parallel Interpretation

Some of the cases applying the uniform interpretation approach deserve attention because of the result achieved, more so than because of their treatment of principles underlying that interpretation. A few of these cases are outlined below.

a)

The ‘Obligation in Question’ under Article 5(1)

Ever since the well-known judgment of the ECJ in De Bloos,42 the question of which obligation should be taken into account for the purpose of identifying the forum having jurisdiction under Article 5(1) has reappeared in the context of commercial agency contracts. The question arose in a dispute before the Swiss Supreme Court between a Danish principal and his Swiss agent.43 After the principal started to sell his products through other Swiss merchants as well, the agent maintained that the contract was a sole distributorship and claimed damages on that basis. The issue at stake was whether the principal’s obligation to respect the distributorship agreement was the sole obligation in question or whether the obligation to supply the agent in Switzerland with products also came into play. The court deemed itself bound by the pre-1988 case-law of the ECJ, including the judgment in Shenavai,44 which had refused, in case of a plurality of obligations forming the basis of the action, to allow a single localisation at the place of performance of the characteristic obligation (which in the present case would point to Switzerland where the agent performed his sales activities). Moreover, the Court took due account of the post-1988 ECJ judgment in Stawa,45 where the European Court had explicitly confirmed its earlier case-law to the effect that in principle each obligation is to be treated separately for the purpose of Article 5(1). However, the Court then cited at some length criticism in scholarly literature, as well as Advocate General Lenz’s suggestion to change the established case-law (but rejected by the ECJ). Although it conceded that this criticism appeared worthy of consideration (beachtlich) in certain circumstances, the Court noted that it did not feel compelled to interpret the notion of ‘obligation’ in Article 5(1) of the Lugano Convention differently than the European Court. In doing so, it took into account the Stawa judgment and the need to ensure parallelism between the Brussels and Lugano Conventions. 42

Judgment of 6 October 1976, 14/76 [1076] ECR 1497, De Bloos v. Bouyer. Judgment of 9 March 1998, A. AG / B., BGE 124 III 188. 44 Judgment of 15 January 1987, 266/85 [1987] ECR 239, Shenavai v. Kreischer. 45 Judgment of 29 June 1994, Custom Made Commercial v. Stawa Metallbau, C288/92 [1994] ECR I-2913. 43


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As for the substance, the Supreme Court maintained that the obligation linked to the distributorship (not to the ensuing sales contracts) was the only relevant obligation of the defendant principal and had to be performed at the seat in Denmark.

b)

Validity of Choice of Court Clause

A judgment rendered on 23 February 1998 by the Austrian Supreme Court is a good illustration of the uniform interpretation approach.46 The case concerned a transport contract between an Austrian company and a Turkish road carrier for transport from Berlin to Uzbekistan. The Austrian plaintiff relied on a choice of court clause for Vienna, thus raising the question whether the validity of the clause was to be judged by Article 17 of the Lugano Convention or by Austrian national law. The Court noted first that the issue raised a disputed question in German and Austrian legal literature: Does Article 17 (of both Conventions) require that, in order to be applicable, the case must have a connection with a second Contracting State, in addition to the forum state, such as, in particular, the fact that one of the parties is domiciled in another Contracting State or that the choice of court clause ousts the jurisdiction of a court or courts in such State. However, it added that legal doctrine was not the only criterion; the principle of international harmony was inherent in the interpretation of multilateral conventions and against that background one had to consider Protocol 2 and the relevant Declarations. The Court recalled its earlier views47 on the duty of courts in Lugano Contracting States to examine ex officio pertinent decisions from other Contracting States and to cite objective reasons for not following such decisions. As to the issue before it, the Court found that the ECJ had not given any ruling on it, but it cited three national decisions in point, all involving the Brussels Convention. Only one of them had fully discussed the issue;48 another one had taken a position implicitly, and the third had done so by way of obiter dictum. However, all three pointed towards requiring a connection with a second Contracting State. This convergence led the Supreme Court to prefer that solution for the sake of avoiding any possible divergence in the Lugano and Brussels Contracting States, despite the fact that two of the three precedents had not engaged in a full discussion of the arguments representing the other approach to the question. 46 3 Ob 380/97x, in: Juristische Blätter 1998, p. 726, and in: Zeitschrift für Rechtsvergleichung, internationales Privatrecht und Europarecht 1998, p. 159. 47 Supra, III. B. 2 c). 48 Oberlandesgericht Munich, 20 September 1989, in: IPRax 1991, p. 46, and in: Europäische Zeitschrift für Wirtschaftsrecht 1991, p. 59.

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The striking feature of this judgment is that, instead of making its own assessment of the best solution having regard for the substance of the issue, it candidly prefers to follow the concurring available precedents. Hence, it favours interpretative harmony over individual (procedural) justice. Between the lines of its judgment, the Austrian Court seems to suggest that the other courts should have examined the relevant views in scholarly literature in greater detail. This is rather ironical in view of the fact that it itself did not discuss the merits of those views. Moreover, the Court favoured the solution of a mere dictum in one of the decisions in point, yet it had stated before that dicta were not pertinent.

c)

The Problem of lis pendens (II)

In the above-mentioned litigation involving Polly Peck,49 the Swiss and English courts were both seized with proceedings concerning the same dispute. The Swiss proceedings turned on the question which procedural act was to be regarded as bringing about the seizing of the Swiss court under Article 21 of the Lugano Convention. At stake was whether the answer to that question should be derived from a recently adopted rule of Swiss law or from the ruling of the ECJ in Zelger v. Salinitri (II).50 The Court noted in its judgment of 26 September 199751 that the Lugano Convention was intended to create a common uniform area for all litigants in the EU and EFTA Member States, and that the interpretation of international uniform law required the courts to be mindful of the fact that such law did not necessarily conform to the institutions and dogmatic constructions of its domestic legal order. It referred to the directives for interpretation laid down in Protocol 2 of the Convention and highlighted the binding character of the pre-1988 case-law of the ECJ on the Brussels Convention. Turning to the question of the date of the seizing of a court for the purpose of Article 21 of the Lugano Convention, the Court discussed extensively the ECJ judgment in Zelger v. Salinitri (II), the lis pendens rule recently introduced in the Swiss federal Private International Law Act (Article 9), as well as some national case-law on Article 21 of the Brussels Convention. It decided not to follow the opinion of a part of Swiss legal doctrine, according to which the Zelger judgment is interpreted as implying that the question when a court is ‘definitively’ seized is to be resolved entirely in accordance with the domestic law of that court. Instead it held that the ECJ had given a partial autonomous interpretation in that judgment, requiring a minimal commitment of the plaintiff to proceed with his action. Since the Swiss federal rule did not require such a commitment in order for the court to 49

Supra, III.A.2. Supra, note 20. 51 BGE 123 III 414. 50


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be definitively seized, that rule had to be discarded in favour of the interpretation adopted in the ECJ judgment. The Court thus came to the conclusion that the later of the two possible dates of seizing of the Zurich court was decisive for the application of Article 21 and that the English court had been seized earlier. This judgment shows that the Court was willing to let the international interpretation of lis pendens prevail over a more restricted harmonisation of cantonal laws of procedure, which the Swiss federal statute attempted to achieve at the national level.

4.

Possible Incongruous Results

The various rulings presented above bear ample witness that the Swiss and Austrian Supreme Courts attempted to achieve the greatest possible uniform interpretation of both Conventions by following the body of rulings of the ECJ and, lacking such guidance, the prevailing views expressed in national case-law.52 However, this approach does not always lead to the desired result. A few rulings of national courts of last instance might not entirely correspond to the ECJ’s actual or presumed position. As was observed,53 such discordance may not be attributable to the specific nature of the Lugano Convention and could have arisen in the context of the Brussels Convention as well. It should be added, however, that in the framework of the Brussels Convention, the preliminary reference mechanism could have ironed out the differences. Three such ‘non aligned’ cases may be cited as examples.

a)

Commercial or Bankruptcy Action

The Norwegian Supreme Court54 had to rule on the scope of the exception in Article 1(2) concerning bankruptcy, winding-up of insolvent companies and analogous proceedings. A Norwegian supplier filed a claim for the remaining debt arising out of contracts it had performed before the defendant buyer, an Italian 52 On the Swiss jurisprudence, see DONZALLAZ, Y., ‘L’interprétation de la Convention de Lugano (CL) par le Tribunal fédéral: étude de jurisprudence’, in: Revue de droit suisse, 1999, I.1, p. 22 et seq., who (with dislike) calls the Swiss Federal Court a model pupil of the ECJ’s case-law. 53 ‘Report on the national case-law relating to the Lugano Convention drawn up in performance of the task entrusted to the Spanish, Greek and Swiss delegations at the 5th session of the Lugano Convention’s Standing Committee (Interlaken, 18.9.1998)’, in: IPRax 2001, p. 262 et seq., at p. 268. 54 Judgment of 18 January 1996, Norsk Hydro / Alumix s.p.a., in: Norsk Retstidende 1996, 25, English summary in: [1996] International Litigation Procedure 461.

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state-owned company (and others belonging to the same State enterprise), had been ordered by a Italian decree to wind-up and not to pay its debts. The Court simply stated that the relevant provision was identical in both Conventions and, citing the Jenard Report and the ECJ ruling in Gourdain v. Nadler,55 concluded that the purpose behind the bankruptcy exception was to have proceedings concentrated in the country where the insolvency was opened and that accordingly, in the present case, the Norwegian courts should not interfere with the Italian proceedings. This was a majority decision, the minority being of the opinion that the claim itself did not relate to bankruptcy and could be decided under the contract forum of Article 5(1), albeit that eventually – at the enforcement stage – an Italian court might not accept the applicability of the Lugano Convention. However, a future Norwegian judgment should possibly be open to enforcement in other Contracting States. In our submission, the minority opinion sits better with the prevailing view in national case-law and legal literature, according to which only typical bankruptcy actions – like the one brought by the liquidator in Gourdain – come under the exception, while ordinary commercial claims would not.56 b)

Place of Pure Economic Loss

A second example is an Austrian decision of 24 February 199857 concerning the place where an economic tort is committed for the purpose of identifying the competent court under Article 5(3) of the Conventions. The Austrian plaintiff brought action against the general manager of a German company, whose malversations had left the plaintiff unpaid for goods sold and delivered to Germany and resold there despite a retention of title clause. The Austrian courts would have jurisdiction only if the tort could be considered to have been committed in Austria. The Supreme Court referred to the authentic interpretation of the Lugano Convention offered by the ‘methodical principles’ contained in the case-law of the ECJ. Under the established case-law, the plaintiff had the option to sue either at the place where the damage occurred or at the place of the event giving rise to that damage. The defendant relied on the Marinari judgment of the ECJ58 to show that the realisation of a pure economic loss in the patrimony of the plaintiff was not 55

See note 38. See GAUDEMET-TALLON H., Les Conventions de Bruxelles et de Lugano, Paris 1996, p. 27, and cited case-law; DYER A., ‘Remarks on Bankruptcies and Money Judgments: The Practice under the [Brussels] Convention’, in: Contemporary International Law Issues: Conflicts and Convergence, The Hague 1996, p. 125 et seq., at p. 131. 57 1 0b 319/97m, in: Juristische Blätter 1998, p. 517, and in: Zeitschrift für Rechtsverleichung, internationales Privatrecht und Europarecht 1998, p. 170. 58 Judgment of 19 September 1995, C-364/93 [1995] ECR I-2719, Marinari v. Lloyd’s Bank. 56


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sufficient to establish jurisdiction of the court at the latter’s domicile in Austria. However, the Supreme Court rejected this reasoning and considered that the initial loss, as distinct from further consequences occurring in a different state, had indeed been suffered at the plaintiff’s domicile. In its view, the Marinari case did not solve the question before the court because it did not concern pure economic loss. When concluding that the courts of the place where the loss was suffered have jurisdiction, the Court noted that the same solution had emerged in certain English and Italian cases in which the Brussels Convention is applied.59 Although this Austrian decision appears to comply with the parallel interpretation method, there may be a basic flaw in its treatment of the Marinari case. In fact, one could argue that the loss was caused by the unauthorised reselling of the goods in Germany, and that the diminution of the plaintiff’s patrimony was the further consequence of the initial loss of property. In this analysis, the Marinari judgment would be pertinent and should have directed the court to apply the restrictive approach adopted in that judgment, viz., that only the place of the initial damage is material for the purpose of Article 5(3) of the Conventions.

c)

Notion of ‘Consumer Contract’

One of the first Lugano decisions of the Swiss Federal Supreme Court dealt with the notion of ‘consumer contract’.60 A stamp collector domiciled in England was sued in Switzerland for the balance due resulting from a long-standing relationship; the claimant (a Swiss company) sold the defendant’s stamps at auctions and advanced the expected price; the excess advance payments were periodically reimbursed by the defendant. A complication arose because the defendant himself was also a professional stamp dealer, but ran his business separately from his private collection. The Federal Supreme Court noted at the outset that the Lugano Convention had to be interpreted by taking into account the principles of international treaty law, as well as foreign legal scholarship and foreign judicial decisions on the Lugano and the Brussels Convention. After conducting an extensive survey of the concept of consumer contract by consulting various legal sources, it finally held that the relationship between the parties could be classified as such a contract. In so doing, the court had some doubts because of certain particularities of the sales offers made on behalf of the defendant; however, it decided to give the benefit of the doubt to the alleged consumer. 59

The relevant judgments of the English Court of Appeal and the Italian Supreme Court had been communicated through the exchange of information system referred to supra, II.1. 60 Judgment of 4 August 1995, Corinphila / Jaeger, BGE 121 III 336.

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This judgment is a good example of the efforts made by courts in Lugano States when confronted with a novel question, for which the ECJ case-law offered no solid guidance at the time. From this point of view, the judgment should by no means be criticised because of its result, although, of course, commentators may chose to dissent.61 However, at the time the Swiss Court had to answer this question, certain rulings of the ECJ did point towards a restrictive interpretation of the special jurisdiction rules in Articles 13 et seq. of the Brussels Convention. In particular, in Shearson Lehmann Hutton,62 it considered that the protective role of those provisions implies that their application should not be extended to persons for whom such protection is not justified, and that the Convention appears clearly hostile towards conferring jurisdiction to the courts of the plaintiff’s domicile.63 Also, it is doubtful whether the collector in the case at hand had really been acting ‘for a purpose which can be regarded as being outside his trade or profession’ under Article 13(1) of the Lugano Convention. Finally, the restrictive approach taken by the ECJ in respect of the scope of special consumer jurisdiction was subsequently confirmed in its judgment in Benincasa v. Dentalkit.64 Accordingly, though admittedly a posteriori, it appears that the Swiss judgment is not completely in harmony with the interpretation given to the same notion in the Brussels Convention.

IV. The Court of Justice and the Lugano Convention Because of the lack of interpretative jurisdiction for the Lugano Convention (supra, I.B.), the Court of Justice may only indirectly consider that Convention.

A.

Multistate Employment Contracts

Rather soon after the conclusion of the Convention and well before its entry into force, the ECJ had to interpret Article 5(1) of the Brussels Convention in an employment dispute.65 A deputy project manager residing in France worked for a 61 Cf. the comment by VOLKEN P., in: Schweizerische Zeitschrift für internationales und europäisches Recht 1996, p. 84 et seq. 62 Judgment of 19 January 1993, C-09/91 [1993] ECR I-139, Shearson Lehmann Hutton v. TVB. 63 Ibid., para. 22. 64 Judgment of 3 July 1997, C-269/95 [1997] ECR I-3767. 65 Judgment of 15 February 1989, 32/88, [1989] ECR 341, Six Constructions / Humbert.


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contractor’s enterprise having an office in Belgium. His duties were exclusively performed in several African and Middle-East countries. The dispute turned on the question how to apply the criterion of the characteristic obligation laid down in earlier ECJ case-law (i.e., to perform the work) when the employee performs all his work outside EC territory. In the version of the Brussels Convention relevant to the case, there was no provision on labour contracts and the above-mentioned judge-made criterion did not offer a solution either. However, the Lugano Convention innovated on this point by providing a subsidiary rule conferring jurisdiction on the courts at the place where the business engaging the employee was situated.66 This would make the Belgian courts competent and, in fact, several Member States intervening in the preliminary reference proceedings invited the Court to adopt that solution. The ECJ declined to follow this approach, which, in their view, would not take due account of the need to protect the weaker party, i.e., the employee; namely, if the employer were the plaintiff, the forum provided under the Lugano Convention would amount to an undesired forum actoris. Having ruled out resorting to this solution, the Court had no choice but to conclude that the optional forum of Article 5(1) was not available in any Convention State and that only the general forum of the defendant’s domicile remained. (Since this was in a MiddleEast country in the present case, jurisdiction would under Article 4 not be governed by the Convention at all, but by national law). Therefore, somewhat paradoxically, the ECJ approach may lead to less employee protection in cases where the employer had engaged the employee at a place where it would be convenient for the latter to file a suit, in fact more convenient than the employer’s domicile or principal establishment. The Court’s rejection of the solution in the new rule of the Lugano Convention may have been influenced not only by the judges’ concern for employee protection, but also by the squarely negative position taken by the Advocate General in this case. In his view, it was out of the question that the Lugano Convention and the annexed Declaration directed at the European Court (which he found ‘surprising’) should directly influence the interpretation of the Brussels Convention.67 Surely, the Court was not obliged to follow the subsidiary rule of the Lugano Convention: The Declaration only refers to case-law concerning that Convention, which of course did not yet exist before its entry into force. Nevertheless, the Court could have adopted the connecting factor of Article 5(1), in fine, of the Lugano Convention; and yet, as a means of protecting the consumer, could have confined its application to actions brought by, but not against, the employee. This balanced solution was actually adopted in the Accession

66 67

22

Art. 5, first para., in fine. Opinion of Advocate General Tesauro, paras. 7-8, [1989] ECR at p. 351.



Convention for Spain and Portugal to the Brussels Convention68 a few months after the Six judgment.

B.

Discrimination in Civil Procedure

Another opportunity for the Court to consider not so much the case-law concerning the Lugano Convention but simply its existence – regarded as an ‘extension of the principles of [the Brussels] Convention’, as it is called in the preamble of the Lugano Convention – arose in a preliminary reference made under the EC Treaty involving the scope of the prohibition of discrimination on grounds of nationality (see Article 7, now Article 12 of the Treaty). The case, Mund & Fester,69 concerned a rule of German civil procedure which required that certain conditions be met for authorising conservatory seizure of assets if the subsequent judgment had to be enforced in Germany, but which deemed these conditions fulfilled if enforcement was to take place in another country,70 thus making it easier to obtain seizure against foreign debtors than against debtors residing in the country. The ECJ held that this rule was indeed discriminatory against debtors residing in other EC Member States. In its reasons the ECJ emphasised that all Member States were parties to the Brussels Convention and could thus be regarded as forming a single entity for matters covered by the Convention. As a result, the conditions for enforcing judgments were substantially the same in all Member States. Therefore, applying the discriminatory rule to secure claims against debtors in other EC States was not justified, whereas it was justified if the ensuing judgment would have to be enforced in a third country. In so holding, the ECJ was silent on the fact that the Lugano Convention, which had come into force by then, created substantially the same regime of recognition and enforcement as contained in the Brussels Convention. The Court could therefore very well have made a reservation for third countries belonging to the Lugano Convention group. Although this was not strictly necessary, a note to that effect would certainly have been supportive of the spirit of parallelism between the two Conventions. And indeed, a broader perspective than the mere dichotomy of Member States and other States was adopted by national legislators who took account of the impact of the Mund & Fester judgment. Several of those legislators in EC Member States, inter alia, Germany, Netherlands and Austria, adapted their legislation that 68

Convention of 26 May 1989, OJEC L 285, p. 1, Art 4. Judgment of 10 February 1994, C-398/92 [1994] ECR I-467, Mund & Fester v. Hatrex Internationaal Transport. 70 § 917(2) of the Zivilprozessordnung (text prior to the modifying Act of 6 August 1998). 69


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was found incompatible with the judgment, with a view to excluding the discrimination of debtors not only in other Member States, but also in other States parties to the Lugano Convention.

V.

Concluding Remarks

The preceding presentation shows that by and large the Brussels and Lugano Conventions are interpreted uniformly and with due regard to the parallelism existing between them. In current practice, judgments applying the Lugano Convention frequently cite rulings of the European Court on the Brussels Convention, as well as views of legal writers on that Convention. Sometimes decisions of national superior or supreme courts are referred to as well, when no guidance can be drawn from the ECJ. Citations in the other direction are less frequent, but this may well be explained by the much larger body of case-law involving the Brussels Convention.71 Protocol 2 of the Lugano Convention and the Declarations on uniform interpretation have been implemented by the courts of EFTA States in a very constructive manner. The particular focus placed on the Swiss and Austrian supreme courts in this paper warrants special mention of their consistent approach favouring a uniform interpretation of both Conventions. In some cases they seem to have followed ECJ precedents even contre-coeur72 or preferred uniformity over a choice based on a substantive assessment of the options.73 Though some have expressed less enthusiasm about this convergent trend,74 our conclusion is positive, recalling the scepticism with which the second-best tools for uniform interpretation were received when the Convention was concluded.75 Of course, there have been some instances where doubts can be entertained about whether a Lugano Convention interpretation follows the line laid down by the ECJ for the Brussels Convention.76 However, no clear-cut and 71

The database kept at the ECJ shows a ratio of roughly 5:1 for Brussels and Lugano Convention decisions registered per year. 72 Supra, III.B.3 a). 73 Supra, III.B.3 b). 74 See DONZALLAZ Y. (note 52), at p. 29. 75 See STONE P.A. (note 8), at p. 117; PELLIS L., ‘All roads lead to Brussels: Towards a Uniform European Civil Procedure’, in: Netherlands International Law Review 1990, pp. 372 et seq., at p. 395; MCCAFFREY E.M., ‘The Lugano and San Sebastian Conventions: General Effects’, in: Civil Justice Quarterly 1992, p. 12 et seq., at p. 25. For more optimistic views see, e.g., MÖLLER G., (note 8), at p. 220; WAHL N., The Lugano Convention and Legal Integration, Stockholm 1991, at p. 76; DUINTJER TEBBENS H., (note 6), at pp. 60-61. 76 Supra, III.B.4.

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deliberate deviation from that case-law by courts of non-EU States was detected, not even where a ruling of the ECJ was supported, inter alia, by arguments drawn from European Community law.77 The EFTA States have lived up to the criterion for a successful uniform interpretation, which Droz aptly summarised as reciprocal esteem and good will of the various courts involved.78 The national courts in EU-Member States have contributed to this success. As for the European Court of Justice, it has not yet had the opportunity to draw inspiration from solutions developed in the case-law on the Lugano Convention for problems that had not yet arisen under the Brussels Convention. On the other hand, at one or two occasions, the Court could have been somewhat more receptive to the existence of an emerging judicial area for civil and commercial disputes larger than the one coinciding with the membership of the European Union. This would have been welcome, if only as a sign of encouragement for the courts of EFTA countries in their efforts to ensure a convergent interpretation. In the not-too-distant future the European Court will have to acknowledge this wider dimension. Under Article 65 of the European Community Treaty and following the transformation of the Brussels Convention into a Community Regulation,79 a revised Lugano Convention is to be concluded by the Community and/or the Member States, having regard to the special position of Denmark, with a view to aligning it to that Regulation on the basis of the joint revision operation undertaken in 1998-1999.80 This new Lugano Convention will become part of Community law by virtue of Article 300(7) of the Treaty. As such, it will fall within the general interpretative mission of the European Court under Article 234 (ex-Article 177) of the Treaty, or, possibly, the more restricted scope of its intervention in regard to measures within Title IV (Article 68). The Court can then build on the solid basis of convergent case-law already in existence.

77

See the Sonntag judgment, supra III.B.2 a). DROZ G., ‘La Convention de Lugano parallèle à la Convention de Bruxelles, concernant la compétence judiciaire et l’exécution des décisions en matière civile et commerciale’, in: Rev. crit. dr. int. pr. 1989, p. 1, at p. 12. 79 Regulation (EC) Nr. 44/2001 of the Council of 22 December 2000 on jurisdiction and the enforcement of judgments in civil and commercial matters, in: OJEC 2001, L 12, p. 1 (‘Brussels I Regulation’). 80 Recital No. 5 of Regulation No. 44/2001 (previous note). 78


25

RETHINKING THE HAGUE JUDGMENTS CONVENTION: A PACIFIC PERSPECTIVE David GODDARD*

I.

II.

III.

IV.

Taking Stock A. Clarifying the Goals of the Judgments Convention B. Identifying the Core of the Convention C. Drafting Provisions to Address the Core Issues D. The Process for Completing the Convention Whence a ‘Pacific Perspective’? A. Elements of a Pacific Perspective B. The Emphasis of a Pacific Perspective C. New Rules Should Not Increase the Risks and Costs of Cross-Border E-Commerce D. The Importance of Widespread Ratification by the Region’s Trading Partners Priority Issues for the Judgments Convention A. Key Benefits from the Judgments Convention – Reducing Barriers to Trade B. Contract Disputes 1. The Benefit of Addressing Contract Disputes 2. Giving Effect to Forum Clauses 3. Default Jurisdiction in a Defendant’s Home Jurisdiction 4. Default Jurisdiction Based on Place of Performance, or Activity? 5. Summary – Contract Disputes C. B2C and C2C Contracting D. Tort Claims and Other ‘Imposed Obligation’ Claims E. The Risk of Addressing Jurisdiction in ‘Stranger’ Claims F. Restitution Claims G. Trusts H. The Black List The Core of the Convention A. The Core B. Other Topics

* Barrister, New Zealand. The author was a member of the New Zealand delegation which attended (as an observer) the first session of the Diplomatic Conference on the Judgments Convention in June 2001, and participated in meetings of the Special Commission in 1999 and in informal meetings in 1999 – 2001. The views expressed in this paper are the personal views of the author, and do not represent the views of the New Zealand Government.



David Goddard

V.

VI.

Rules to Give Effect to the Core of the Convention – Some Suggestions A. Drafting a ‘Choice of Forum’ Convention B. Providing for Default Jurisdiction in Claims Between Contracting Parties Future Directions

I.

Taking Stock

It seems timely, following the first session of the Diplomatic Conference on the Judgments Convention in June 2001, to step back and reflect on the goals of the Convention, and on progress towards those goals. The immediate product of that meeting was an ‘Interim Text’ which poses as many questions as it answers.1 Consensus on many of the issues discussed proved elusive. A careful review of the text shows that a great deal has been achieved: some very important questions have been resolved, and in other areas substantial progress has been made in identifying more clearly the issues that would need to be resolved in order to complete a wide ranging convention of the scope envisaged by the project’s original framers. But it is equally plain that we are still a long way from agreement on the text of a convention, and that some very significant differences remain to be addressed. The meeting which produced the Interim Text was followed by a meeting to consider, among other matters, the Hague Conference’s future work programme. The Chair of the second meeting put to Member States the question whether, in the light of this result, the project should be pursued. The answer from each delegation that spoke was strongly positive. But beneath that apparent consensus, there remain real differences about what ‘the project’ should be – differences about its purpose, about its scope, and about the relative importance of various aspects of the proposed convention.

A.

Clarifying the Goals of the Judgments Convention

If the project is to succeed – if we are to conclude a text, and see it widely ratified and implemented – the starting point must be to achieve a measure of consensus on what we are trying to achieve, and why. This may sound trite: but work on the judgments convention to date has largely assumed the need for a wide-ranging instrument which applies to all civil and commercial disputes, with certain specific exclusions. The genesis of the project was a conception of a world-wide judgments convention equal in substantive scope to the Brussels and Lugano conventions: that has been the implicit goal throughout. There has been some discussion about the need for such a convention at a general level, but little or no empirical analysis of the nature and 1

28

The Interim Text is available at ftp://hcch.net/doc/jdgm2001draft_e.doc.


Rethinking the Hague Judgments Convention : A Pacific Perspective

number of cross-border cases which raise the type of jurisdiction or enforcement issues with which the project is concerned. The focus has been on making provision for civil and commercial disputes generally, rather than on identifying particular areas where practical problems are especially common, or acute. This is not a criticism of the initial approach: if a comprehensive convention could readily be achieved, it would be very attractive indeed. But if significant difficulties are encountered, as they have been, it becomes necessary to reassess the breadth of our aspirations. Plainly some issues are more practically important than others. And some are more difficult to tackle – technically, or politically, or both – than others. Those categories may not be the same in a world-wide context, moreover, as within Europe, or other regional groupings. The objectives of a worldwide project on jurisdiction and judgments need to be clarified in order to ascertain whether all the difficulties that have been encountered to date really do need to be addressed. Participants in the project need criteria for distinguishing between core issues that must be resolved, and issues that are of secondary importance, but which may pose disproportionate difficulties. This highlights the need for each of the participating countries to identify and prioritise its goals for the convention, followed by discussion and agreement on shared goals. In this paper, I have been asked to provide a Pacific perspective on the Judgments Convention. For the reasons explained above, it seems to me that any national or regional perspective on the Convention needs to start from a clear conception of its practical rationale. What are the economic and social benefits which the convention would deliver, if successful? And how would it deliver them? What risks does such a convention create? How can these risks be avoided, or managed? So I will begin, in section II of this paper, by attempting to provide a view from the southern reaches of the Pacific on why we need the convention. In summary, it seems to me that the main objective for the project, from a Pacific perspective, should be to conclude a convention that will be very widely ratified within the region and by the region’s key trading partners, which: (a) reduces the risks and costs associated with cross-border trade, by reducing uncertainty and reducing litigation costs in relation to disputes between businesses dealing across borders; (b) enhances access to goods and services from other countries for the region’s businesses and consumers, enabling them to participate more fully in the global economy; (c) does not impede access to e-commerce for the region’s businesses and consumers. The potential benefits from the ‘weightless economy’, and the promise it brings of some release from the ‘tyranny of distance’, are too important to be undermined: any risk of doing so must be avoided. I suspect that these goals will be common to many (if not most) other regions. Other regions will probably have additional goals, reflecting differences in the nature and extent of cross-border dealings in those regions. But these should prove to be a common core.


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B.

Identifying the Core of the Convention

Once the project’s objectives are established, the next step is to identify clearly the issues which must be addressed, if the convention is to achieve its central goals, and those which – however desirable – are of less practical importance, and should not be permitted to jeopardise the project. Section III of this paper explores, topic by topic, the relative importance of various aspects of the current Interim Text for the goals identified above. This task requires us to identify the topics that might be addressed – such as jurisdiction and enforcement of judgments in contract disputes, or tort claims, or restitution claims, or prohibited grounds of jurisdiction – and a suggested approach to each topic, at a level of principle. Whether the Convention should address a particular topic is then determined by a matrix of factors: (a)

the economic and social benefits that could be obtained from addressing the topic in the convention – in particular, the extent to which addressing the topic will facilitate cross-border trade; (b) the technical difficulty of addressing the topic; (c) the political complexity of addressing the topic; (d) the risk of unanticipated or undesirable consequences from addressing the issue in the convention. I suggest in section IV that applying this matrix leads to the conclusion that the core of the convention – the subject-matter that must be addressed if it is to be a practically successful instrument – is confined to claims arising out of or in connection with contracts between businesses. The convention should: (a)

provide default rules permitting such claims to be brought in the defendant’s habitual residence, or in the State where a branch, agency or establishment which entered into the contract is situated; (b) give effect to choice of court clauses in such contracts – with the chosen court having jurisdiction, and the courts of other countries declining to exercise jurisdiction (unless the choice is non-exclusive); (c) provide for enforcement of judgments based on these heads of jurisdiction. There are many other topics that it would be useful to address. We should continue to explore the possibility of reaching agreement on a wider range of issues, and reducing still further the costs and risks associated with cross-border activity. But the need for world-wide solutions on these topics is less clearly demonstrated, and in many cases achieving workable and widely endorsed solutions is more difficult. If agreement cannot be reached reasonably readily on these secondary topics, this should not be permitted to imperil achievement of the project’s core goals. The case for restraint in relation to the scope of the convention can be put still more strongly in some respects. Attempting to address some issues – such as cross-border torts committed using electronic means – may actually run counter to

30



one of the basic goals identified above, namely avoiding the risk of imperilling the development of cross-border electronic commerce. If we are not confident that we understand the implications of a proposed jurisdictional rule in the fast-evolving world of information and communications technology (‘ICT’), we should not risk undermining the economic promise of these developments. There are some issues in respect of which our goals require us to be less ambitious.

C.

Drafting Provisions to Address the Core Issues

Having clarified the convention’s goals, the core topics that must be addressed, and appropriate approaches to those issues, we need to draft provisions giving effect to those approaches. Much of this work has already been done – I would go so far as to say that the Interim Text gets us 90% of the way there. But more work is needed to perfect the relevant provisions. In section V of this paper I comment briefly on these issues.

D.

The Process for Completing the Convention

The Hague Conference needs to adopt a process which will enable delegations to focus on the core issues – the ‘must haves’ – while continuing to explore the possibility of reaching agreement on less critical topics. Section VI of this paper concludes by exploring some avenues for completing work on the convention.

II.

Whence a ‘Pacific Perspective’?

The first task for an author who has been asked to provide a Pacific perspective on the Convention is to ask what distinctive features of his home country, and the region, might give rise to a unique perspective in relation to the Convention. Whence a distinct ‘Pacific’ perspective, which: -

is to some degree likely to be common to the many different countries of the region? differs from a European perspective, or from a North American perspective, or even from an Asian perspective?

I should make clear, at the outset, that I cannot and do not purport to speak for all Pacific States – or even for the Government of my own country, New Zealand. Nor is there any reason to expect that the region would have a single, homogenous view on each and every issue relevant to the proposed convention. What I hope to do is to identify some characteristics of the region which are likely to colour the views


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David Goddard

of Pacific States in relation to the convention – and to explore where, in my personal opinion, those observations might take us. I should also note that in many contexts, a Pacific perspective would encompass the large North American and Asian States that form the rim of the Pacific ocean. But for the purposes of this Yearbook, other commentators have been asked to address North American and Asian perspectives – I will focus on the region of the Pacific that is sometimes referred to as Oceania.

A.

Elements of a Pacific Perspective

What, then, is special about the Pacific – what shared characteristics of the States in this region might influence their aspirations for the convention? The first clue is found in the region’s name: while other regions such as Europe or North America are named after land masses, ours is named for an ocean. A Pacific perspective is a perspective of relatively small, distant, countries, with ocean borders.2 Populations are tiny by world standards. Australia, far and away the largest Pacific nation,3 has some 19.5 million inhabitants. My own country, New Zealand, has but 3.8 million. These are large Pacific States – consider Fiji, with a population of approximately 850,000, New Caledonia with some 200,000, Samoa with around 180,000, Vanuatu, with around 190,000, the Cook Islands with about 20,000, or selfgoverning Niue with fewer than 2,000 residents. And distances are vast: from Wellington, where I sit writing this article, the nearest city with more than a million inhabitants is Sydney, almost 2,500 km away. A circle with a 2,000 km radius drawn around Wellington would include some 4 million people. If I were sitting in Paris, and drew the same circle, it would include most of the EU – and a population in excess of 300 million. Centred on Toronto, a circle of this size would take in many large Canadian and US cities, and a population in the hundreds of millions. Returning to the Pacific, that same circle, centred on Apia, would encompass fewer than 1.5 million people. The Pacific, then, is a region of small, distant countries, dependent for their economic livelihood and for many of the amenities of modern life on trade across the ocean that gives the region its name. It is no accident that this is the corner of the world that gave us the phrase ‘the tyranny of distance’.4 The region’s geography explains why cross-border dealings have, until recently, largely been confined to commercial dealings between businesses. Consumers cannot drive across New Zealand’s borders! Employees do not cross borders each day to go to work. It is not common for a tort committed in one Pacific state to have effects in another. Private international law issues in the 2

This is immediately apparent from a glance at a map of the region. As noted above, I am excluding the Pacific rim States for present purposes. 4 Taken from the title of a history of Australia published in 1966: see BLAINEY G., The Tyranny of Distance: how distance shaped Australia's history, Melbourne 1966. 3

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Pacific (outside the family law sphere) arise mainly in the context of commercial transactions. What do the firms engaged in cross-border trade look like, in the Pacific? Small countries typically have small economies, populated primarily by small and medium sized enterprises (‘SMEs’). There is something of a dilemma here. Small domestic markets mean that for a firm to grow large, it needs to export. But economic studies suggest that the fixed costs of exporting goods or services (including costs of managing currency risk and legal risk) are significant, and that those costs may be increased by distance.5 This creates a barrier to exporting by smaller firms – and a strong incentive for small countries to work to reduce those costs, where possible, to assist their SMEs to access export markets. The Pacific is also a region that has been dependent primarily on commodity exports – and has seen a decline in the value of those exports over time which has had a significant impact on standards of living. New Zealand, for example, has slipped from being one of the richest countries in the world in the 1950s to 15th in the OECD in terms of real per capita GDP in the 1970s, and 20th in 1999. Even Australia – which over the same period has had a far healthier economy than New Zealand – has experienced growth rates below the OECD median over the last 30 years. Attempts to increase volumes of traditional exports, and to add more value to products in New Zealand, have had limited success in arresting this relative decline. One possible solution for Pacific economies, some suggest, lies in the export of high value services to the rest of the world, using modern technologies. The hope is that the Internet, and ICT developments generally, will overcome the tyranny of distance, and enable businesses in New Zealand and other Pacific states to compete on equal terms with firms in other countries despite our geographical remoteness and the size of our domestic markets. A great leap in New Zealand’s economic performance came with the introduction of refrigerated shipping in the late nineteenth century. New Zealand Government policy statements a few years back described the Internet as ‘the freezer ship of the 20th century’ – enabling us to get our products (in this case, services and content) to markets on the far side of the ocean, or the world. Certainly the Internet has had a huge impact on access to information and products of many kinds in the region. A huge range of software can be purchased 5 See SKILLING D., ‘The Importance of Being Enormous: Towards an Understanding of the New Zealand Economy’ (unpublished paper, on file with author), citing inter alia BALDWIN R. & KRUGMAN P., ‘Persistent Effects of Large Exchange Rate Shocks’, in: Quarterly Journal of Economics 1989, pp. 635-654; BERNARD A.B. & BRADFORD JENSEN J., ‘Why Some Firms Export’, in: NBER Working Paper 8349, July 2001; ROBERTS M. & TYBOUT J., ‘An Empirical Model of Sunk Costs and the Decision to Export’, in: American Economic Review, 1997, pp. 545-564. For the impact on trade of borders, over and above the impact of distance, see HELLIWELL J.F., How Much Do National Borders Matter?, Washington (DC) 1998.


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David Goddard

over the Net. Music and texts can be downloaded – or ordered electronically, and received by post a week or two later. A researcher in Wellington can access an extraordinary wealth of data and can interact with colleagues more easily than ever before. ICT developments over the last decade or so mean, from a practical perspective, that: -

-

-

businesses in the region can learn about, and acquire, the tools (software, information etc) that they need to operate more efficiently, and to develop new products and implement new business methods; businesses can more readily identify new market opportunities worldwide; businesses are better able to reach customers domestically (even within countries, distances and physical barriers are significant in the Pacific, and populations are dispersed, which poses problems for traditional distribution methods) and internationally; businesses and researchers in the Pacific can collaborate with businesses and researchers in other countries more effectively, and at lower cost; the region’s consumers have access to a much wider range of goods and services than ever before, faster and at lower cost. Products (eg books or software) that would never be found on the shelves of a local store can be located and purchased in moments. Local competition, which may be limited, is supplemented by competition from overseas suppliers, in some cases dramatically reducing prices.

The reduction in the physical cost of doing business across borders in the ‘weightless economy’, and the ease of identifying new market opportunities abroad, puts even more focus on the fixed costs associated with entering foreign markets, and in particular the cost of managing legal and regulatory aspects of cross-border trade.

B.

The Emphasis of a Pacific Perspective

What does this tell us about a possible ‘Pacific perspective’ on cross-border legal coordination? It is a perspective that emphasises the importance of trade across borders. The drive to increase the volume and value of exports means that the primary concern – though not the sole one – is to reduce transaction costs for cross-border commercial activity, by increasing predictability and reducing the costs of cross-border dispute resolution, and facilitating the management of risk (for example through insurance). In particular, the goal is to reduce uncertainty and unnecessary risk and cost for businesses (especially SMEs) trading across borders, without compromising other important social goals such as consumer protection. The deterrence of civil wrongs that have cross-border effects, and providing compensation for those wrongs, is an important policy goal: however it is of less practical significance, at least in the Pacific region. Physical torts with cross-border

34



effects are rare, for obvious reasons of geography. Even product liability claims against overseas defendants are few and far between. Claims arising out of nonphysical torts – such as defamation claims, or claims for infringement of intellectual property – more commonly raise cross-border issues. But the vast bulk of cross-border disputes, at least in New Zealand, arise between parties to commercial transactions. Increased trade, and the use of ICT to communicate across borders, or to misappropriate content across borders, will undoubtedly increase the frequency with which cross-border tort claims arise. But there is no reason to expect that the ratio of contract cases to other cases will alter significantly. More fundamentally, the economic challenges faced by most countries in the region mean that these are secondary concerns, compared with the overriding goal of maintaining and increasing living standards through sustainable economic growth. They are concerns that it would be good to address, if possible. But addressing them should not be the primary goal of work on cross-border coordination of rules on jurisdiction, and enforcement of judgments. Nor should difficulties in addressing these concerns prevent the conclusion of a convention which could deliver real benefits through facilitating cross-border trade.

C.

New Rules Should Not Increase the Risks and Costs of Cross-Border E-Commerce

An important facet of these goals which deserves separate mention is the importance of ensuring that the legal environment for e-commerce is as predictable and as consistent with other forms of cross-border dealing as possible – or at least, that it is not appreciably less certain or more costly to do business on-line. A related concern is to avoid a legal ‘balkanisation’ of the Internet in response to differences in legal regimes. The future welfare of consumers, and the participation of Pacific businesses in a world-wide knowledge economy, depends on maintaining access to the widest possible range of online services for businesses and consumers in the Pacific. A convention that put these potential benefits at risk would be very much contrary to the interests of the region.

D.

The Importance of Widespread Ratification by the Region’s Trading Partners

One further element of the Pacific perspective which must not be overlooked is that the convention will be useful only if it is ratified by a significant proportion of the countries with which Pacific States conduct most of their trade. In practice, that means that in addition to attracting widespread ratification within the region, the convention needs to be ratified by our Asian neighbours (in particular Japan), and by the United States. And while ratification by individual States within the


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European Union would not have the same economic significance as ratification by the United States or Japan, ratification by the entire EU would be a very important step.

III. Priority Issues for the Judgments Convention What are the implications of this perspective for the judgments convention? In particular, what does it tell us about the scope of the convention – that is, about the topics that should be addressed if the convention is to be useful in practice? A ranking of topics would be useful – from the essential ‘core’ requirements, through the highly desirable, and on to the ‘nice if we can do it without too much difficulty’ list. A simple matrix in respect of each topic sheds some light on how it should be ranked. Factors that need to be reflected in that matrix include: (a)

(b)

(c)

36

the economic and social benefits that could be obtained from addressing the topic in the convention – in particular, the extent to which addressing the topic will facilitate cross-border trade. This in turn depends on: - the frequency with which the issue arises (or is likely to arise in the future). The more common the issue, the more important it is for the law to be clear on the point; - the extent to which there is currently a ‘problem’, in the sense that rules in relation to jurisdiction and enforcement of judgments are unclear or inappropriate, or are the subject of significant conflicts, and give rise to practical difficulties. There is no point expending time and resources if an issue is not a problem in practice; - the extent to which the convention can effectively address the current problems in the field. However common or significant a problem may be, if the convention is unlikely to provide a practical solution, there is little to be gained from addressing the topic; the technical difficulty of framing a rule which is clear and simple, and leads to appropriate outcomes. The technical difficulty, in other words, of successfully addressing the issue. If an issue is of moderate importance, but very complex, work on it is less likely to pay off than work on equally important but more tractable issues. If there is real uncertainty about the ‘right’ approach to a particular issue, it may be better to refrain from attempting an answer in the short term, and risking undesirable outcomes; the political complexities inherent in the issue. Where rules on jurisdiction are politically sensitive, or where there are significant differences in the substantive law that is likely to be applied depending on the place of trial, it may be difficult to devise a rule which is not controversial, and does not



(d)

A.

excite significant opposition. If the result of that opposition is likely to be non-ratification by significant trading States, the issue might be better avoided; the risk of undesirable outcomes if the convention adopts an inappropriate rule. Some legal rules do little damage, even if they are not optimal – this is especially true of default rules that apply to dealings between sophisticated parties, who can adopt different rules if they want to depart from the default rule. But other rules have the potential to cause serious economic or social harm, if they are framed or applied inappropriately. Much greater caution is required before making rules of the latter kind – the prerequisite to doing so should be a high degree of confidence that we have accurately diagnosed the problem, and identified an appropriate and durable solution.

Key Benefits from the Judgments Convention – Reducing Barriers to Trade

I suggested above that the touchstone in identifying priority topics for the convention should be its potential to facilitate trade, and reduce costs of doing business across borders. The New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards is an excellent example of an international instrument which facilitates trade by reducing uncertainty and reducing the costs of resolving cross-border disputes, thus facilitating the making of credible commitments to distant trading partners. How might a convention on jurisdiction and enforcement of judgments advance this goal? It is important, when asking this question, to do so from the perspective of firms engaged in day to day commercial activity, rather than the more limited perspective of firms already engaged in cross-border disputes. Once disputes arise, plaintiffs want broad jurisdictional rules which give them maximum choice, and easy enforcement of judgments; defendants on the other hand prefer rules on jurisdiction to be stringent and narrow, and favour a restrictive approach to enforcement of judgments. These perspectives are not easy to reconcile. And when it comes to ‘stranger claims’ – especially torts, including breach of IP rights – there are some firms that are generally plaintiffs, and others that are more commonly defendants. We should not be surprised to find that their views differ on the jurisdictional rules for such claims. But when it comes to contracting, all businesses agree that certainty is important, and that reducing the costs of resolving disputes is important. They agree that it is desirable to have clear default rules that apply if an issue is not dealt with in a contract, and to have the ability to contract for a different result if that is more appropriate.


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B.

Contract Disputes

1.

The Benefit of Addressing Contract Disputes

If the primary objective of the convention is to facilitate cross-border trade, the obvious starting point when looking at its scope is the contractual relationships which underpin that trade. And within that set of relationships, let us begin by focusing on contracts between businesses: the special issues raised by consumer contracts and employment contracts are examined in more detail below. Risks and costs will be reduced if the Convention: (a)

(b) (c)

enables parties engaged in cross-border contracting to predict in advance where their disputes will be resolved, and to focus their expenditure on legal advice about that jurisdiction; enables them to make credible commitments about where they can be sued, and where an enforceable judgment can be entered against them; reduces the long run costs associated with disputes because it is simpler and cheaper to resolve any difference about where a dispute will be heard, and about whether the resulting judgment is enforceable elsewhere.

Contractual disputes are far and away the most common class of cross-border claim. So the ‘frequency’ criterion in the decision matrix is certainly satisfied. The next question is whether there is a problem in practice. This needs to be tackled in two stages. First, are practical difficulties encountered in connection with jurisdiction or enforcement of judgments in cases where there is a forum clause in the contract? Will these difficulties be resolved if the convention provides for jurisdiction in the chosen forum, and for the enforcement of resulting judgments? Second, are practical difficulties encountered where there is no forum clause? If so, how might the convention tackle these issues?

2.

Giving Effect to Forum Clauses

It seems to me that there are real practical difficulties in relation to jurisdiction and enforcement even where there is a forum clause, based on the caselaw and my experience in legal practice. Most countries’ courts will accept jurisdiction based on a forum clause, but in many common law countries it is possible to ask the chosen forum not to exercise jurisdiction, on grounds of forum non conveniens. Similarly while most (though not all) courts will decline jurisdiction if there is a forum clause selecting the courts of another country, the national law of New Zealand and many other countries treats this as a factor which is highly persuasive but not decisive – so there is still room for doubt, and for tactical manoeuvring involving considerable delay and cost.

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Still more significant practical difficulties arise at the enforcement stage. Many countries enforce foreign judgments where jurisdiction was founded on a forum clause. But: -

this is not universally the case. In some States, enforcement depends on the existence of a treaty with the State of the court of origin;6 more importantly still, most countries will not enforce foreign judgments for specific performance of a contract, or other forms of nonmoney relief. A significant proportion of commercial disputes involves non-money relief. As the economic importance of information and technical know-how increases, this proportion seems likely to grow, since the ‘value’ associated with confidential information and technical processes can often only be preserved through mandatory orders requiring the return of information or equipment, or preventing the copying or dissemination of information. Yet enforcing non-money orders made in one country in other countries poses a host of technical and practical difficulties.

I have already mentioned the New York Convention on Arbitration, ratified by some 125 countries at the time of writing.7 Does this widely ratified convention mean that there is no problem in practice? If businesses can manage uncertainty in relation to where disputes will be resolved simply by agreeing to arbitration, and ensure that the resulting decision is enforceable in some 125 countries, do we need a parallel convention in relation to court-based dispute resolution? There are two principal reasons for pursuing such a convention, as a complement to the New York convention: (a)

(b)

such a convention would enable the parties to agree to refer disputes to a court rather than to arbitration, where that is more appropriate for their dealings (for example, the parties may wish to preserve access to courts to determine questions of law, and appeal rights, or court-based dispute resolution may be expected to be less costly). Many domestic contracts do not provide for arbitration for this very reason: the same option should be available to parties in cross-border transactions, rather than forcing them to agree to arbitration to achieve predictability in relation to dispute resolution; more importantly still, there are many situations in which claims are brought to enforce clear obligations – to pay for goods, for example, or to 6

Such as Finland (see OLDORFF B., ‘Finland’ in: CAMPBELL D. (ed), International Execution Against Judgment Debtors, New York 2001) or Vietnam (see Ordinance on the Recognition and Enforcement of Foreign Judgments and Civil Decisions of Foreign Courts of 17 April 1993, and Circular No 04-TTLN dated 24 July 1993 of the Ministry of Justice, Supreme People’s Court, and Supreme People’s Procuracy). 7 For an updated list of current parties to the New York Convention, see http://www.uncitral.org/english/status/status-e.htm.


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return confidential information following the expiry of a contract – where there is no dispute of substance between the parties. There is no point in incurring the cost and delay involved in setting up an arbitral tribunal, then taking steps to enforce the award. The plaintiff will want to go to court and get an enforceable judgment, using a low cost summary procedure. A convention on jurisdiction and judgments will reduce the cost of enforcement procedures of this kind, by clarifying where such a claim can be brought in order to maximise prospects of enforcement, and reducing the opportunity for the defendant to delay enforcement through opportunistic challenges to jurisdiction. A further factor that should not be overlooked is the relative ease and low cost of confirming that a State is a party to the convention, and will therefore respect forum clauses and enforce judgments given by the chosen forum, as compared with the current need to seek local legal advice on such issues. This is relevant both at the stage of negotiating a contract, and when it comes to bringing a claim or seeking enforcement of a judgment. Because national laws differ in some respects, despite a high degree of convergence on this point, there is a non-trivial cost associated with ascertaining the legal position in different countries, and modifying contracts accordingly. The convention would reduce these costs. For these reasons, it seems to me that a convention that gives effect to forum clauses – effectively paralleling the New York convention – would make a very valuable contribution to the goals identified above. It should be a high priority.

3.

Default Jurisdiction in a Defendant’s Home Jurisdiction

Would it be valuable to go further still, and provide in the convention for a default jurisdiction that applied in the absence of a forum clause? Cross-border contracts often fail to address questions of jurisdiction, and this seems likely to become more common still. The number of relatively low value contracts entered into by less sophisticated parties such as SMEs across borders is likely to increase dramatically, as cross-border e-commerce develops, and these contracts are less likely to address such issues. And where there is no forum clause, there are often difficult issues both at the jurisdiction stage, and in connection with the enforcement of resulting judgments. The key question is how the convention might address this issue. There would be little difficulty in reaching agreement that in the absence of a forum clause, a defendant should be able to be sued in that defendant’s home jurisdiction – its habitual residence, or the State in which the branch, agency or establishment that made the contract is situated – with the resulting judgment enforceable in other Contracting States. But would this achieve anything useful? It would have little or no impact on direct jurisdictional practices: I am not aware of any country that

40



does not provide for the exercise of jurisdiction in respect of its habitual residents under national law. And the State in which a defendant is habitually resident is the State in which enforcement is most commonly sought, and is usually most effective – so questions of enforcement in other States are relatively rare. But there does appear to be some value in ensuring that a judgment given in the defendant’s home jurisdiction can be enforced against assets situated elsewhere, and that in personam orders (such as an injunction restraining disclosure of confidential information) can be enforced wherever the defendant may relocate. Providing for jurisdiction in the defendant’s home jurisdiction raises a series of additional complexities that would be avoided if the convention were confined to forum clauses. In particular: -

-

the Convention would need to address the question of whether other Contracting States would decline to exercise jurisdiction under national law, if another Contracting State is seized under this head of jurisdiction; default provisions along these lines could confer jurisdiction under the Convention on more than one State. For example, where a contract is made through a branch in State A of a company incorporated in State B, both State A and State B would have jurisdiction. The Convention would need to provide priority rules for this situation.

But these are not insuperable difficulties. Articles 21 and 22 of the Interim Text set out an approach to these issues which, though not free from difficulties, seems to embody a solution that would, with a little refinement, be acceptable to most delegations. And in this context, such provisions would be of limited practical relevance, so should not be too hotly contested. In the absence of any reliable empirical work on the relative importance of this issue, and the extent to which real practical problems would be resolved by a default rule of this kind, it is not self-evident that a default rule of this kind is essential for the convention. My suspicion is that it would be very useful indeed, and that we should strive very hard to resolve the additional complexities that such a rule brings in its train. Rules along these lines almost certainly form part of the core of the convention. But this conclusion is vulnerable to a clear demonstration that the issue is of less practical importance than I have assumed, or that resolving the associated questions (in particular, questions of lis pendens and declining jurisdiction) is more difficult than I anticipate, and would create real barriers to widespread ratification.

4.

Default Jurisdiction Based on Place of Performance, or Activity?

The next question is whether the convention should go further still, and provide for an additional default jurisdiction in contract disputes tied in some way to the making or performance of the contract. Most States have a rule of this kind under


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national law, permitting jurisdiction to be exercised in that State if a contract (or its ‘characteristic obligation’) is performed there, or if a breach occurs there, or if significant activity was conducted in that State or directed to that State in the course of making or performing the contract.8 It is difficult to see the value of such a rule, in the contractual context. In particular, if there is a default forum in the defendant’s home jurisdiction, and parties can contract for a different forum, it adds very little indeed. If a party places significant value on being able to sue in the place of performance, or some other place linked to the contract by virtue of activity conducted in that place, that party can seek to contract for that jurisdiction, either exclusively or as a supplement to the default jurisdiction. If the contract is silent on the question of jurisdiction, I have suggested above that there is some merit in having a default forum – but this need is met by allowing proceedings to be brought in the defendant’s home jurisdiction. Does an additional default jurisdiction based on contract-related activity (such as performance) add anything of significance, from a practical perspective? The starting point for considering this question must be that multiple fora are not in and of themselves a good thing – there is no gain simply from adding another possible forum to the list. Another default forum is valuable if and only if it is likely to be more useful – more appropriate – than the existing default fora. In some cases, the place (or places) where a contract is performed will have advantages as a forum – access to evidence in relation to performance, for example, or the ability to grant effective interim relief in relation to the subjectmatter of the contract. So sometimes an additional default forum along these lines would be of some value. But these advantages are not always present, and the advantage in relation to grant of interim relief does not depend on jurisdiction to determine the substantive dispute being available under the convention, as well as under national law. There are real difficulties in providing for a meaningful jurisdiction of this kind in the context of on-line contractual formation and performance. Despite many lengthy discussions about where a contract should be treated as performed, where for example software is purchased and downloaded online, no resolution has been reached.9 No resolution has been reached because there is no meaningful answer. There is no place which has the juridical advantages mentioned above, and 8

See for example Article 5(1) of the Lugano Convention, Article 5(1) of the Brussels Regulation (Council Regulation (EC) No 44/2001 of 22 December 2000), or Ord. 11 rule 1(1)(d) and (e) of the Rules of the Supreme Court of England and Wales. 9 See ‘Electronic Commerce and International Jurisdiction’, a report of an informal meeting organised by the Hague Conference and the Canadian Ministry of Justice in Ottawa from 28 February to 1 March 2000, Hague Conference Preliminary Document No. 12 (August 2000) available at ftp://hcch.net/doc/jdgmpd12.doc; GODDARD D., ‘Does the Internet Require New Norms?’, in: International Law Forum du droit international 2000, pp. 183-195, at 188-190.

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thus no place which has special merit as a forum. While it is possible to deem some place – the physical location of the buyer, or of the seller, or of some computer – to be the place of performance, this is an artificial exercise that does not lead to an additional forum of real practical value to the parties. A slightly different and potentially helpful way of looking at this issue is to think of the default jurisdiction in contract cases as a default term of the parties’ contract – the term that is implied by law, if they have not addressed the issue expressly. Recasting the issue in this way enables us to draw on both legal and economic scholarship in relation to the selection of default terms. Traditional common law tests for implying a term require us to ask what the parties would have agreed, had they turned their minds to the issue. Does it go without saying that they would have consented to claims being brought in the forum in question? This test is clearly satisfied by the default rule permitting claims to be brought in the defendant’s home jurisdiction. It is difficult to imagine contracting parties responding in the negative, if asked whether this was permitted, in the absence of any express agreement to the contrary. But there is no other forum I can think of which can be described with some specificity, and is selfevidently appropriate and likely to command agreement in all cases. Economic analysis also sheds some light on the selection of default terms. In most cases, transaction costs will be reduced if the law specifies as default terms the terms that would be agreed to by the majority of contracting parties, if bargaining on the issue were costless and if they had full information. Transaction costs are increased, on the other hand, if the law specifies a default term that is not acceptable to most contracting parties – since more parties will need to contract out expressly, or bear the cost of an inefficient allocation of risk. It is difficult to identify terms in relation to jurisdiction which would be agreed in the majority of cases. It is less difficult to conclude that most parties would not agree to a very general ‘place of performance’ or ‘place of significant activity’ test, because such a test would be seen as too vague, or the designated forum as not especially relevant. Still less are the majority likely to agree to an arbitrarily selected ‘buyer’s forum’ or ‘seller’s forum’ term. An additional default jurisdiction of this kind is likely to require more parties to include a forum clause in their contracts to achieve greater certainty, or to achieve a more appropriate outcome – thus increasing the transaction costs of cross-border contracting. This is directly counter to the goals I have suggested for the convention. There are circumstances in which it may be efficient for the law to specify as a default term a term which would not be agreed to in the majority of cases. In particular, it may be efficient to specify a term which will not be adopted in most contracts where one party has superior information about the relevant risks, and selection of a ‘penalty default’ will force disclosure of information that there would otherwise be an incentive to withhold, resulting in inefficient allocation and pricing


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of risk.10 To the extent that this line of reasoning is of assistance here (and its relevance is debatable), it points towards an approach under which a contracting party can say ‘I expect to be sued in my home jurisdiction – if you want to sue me elsewhere, you should specify this so I can price for the associated risk’. It does not support inclusion in the convention of any other default jurisdictions. In summary, an additional default jurisdiction of this kind is of little importance, and it is difficult to see how it can be specified other than in terms which are highly indeterminate (or in some cases meaningless), or artificial. The risk that it would be counterproductive is much greater than the prospect of such a rule being beneficial.

5.

Summary – Contract Disputes

In summary, appropriate provisions in relation to jurisdiction and enforcement of judgments in contract disputes should be a high priority for the convention. The convention should include: (a)

(b)

(c)

clear and simple default rules which permit claims under or in connection with a contract to be brought in the defendant’s home jurisdiction, in the absence of a forum clause; a provision permitting claims to be brought in a forum selected by contract, with other courts deferring to the chosen court (unless of course the choice is non-exclusive); provision for enforcement in other Contracting States of judgments (including non-money judgments) given by a court with jurisdiction under the convention.

This would give contracting parties the tools to manage jurisdictional risks. It does not matter where they choose to litigate, or where those judgments end up being enforced – the key is that they know what the position will be if they are silent on the issue, and can select an alternative forum with certainty by contract, if they wish to do so. In discussing these issues I have however left to one side the aspects of cross-border contracting which give rise to the most acute technical and political difficulties. A great deal of time has been spent in discussions in the Hague in relation to jurisdiction in disputes between businesses and consumers (‘B2C 10

See AYRES I. & GERTNER R., ‘Filling Gaps in Incomplete Contracts: an Economic Theory of Default Rules’, in: (1989) 99 Yale Law Journal 87; TREBILCOCK M.J., The Limits of Freedom of Contract, Cambridge (Mass.) 1993, pp. 120-124. The example that is explored by AYRES and GERTNER is the restriction found in many common law jurisdictions on recovery of damages for loss that is not reasonably foreseeable, such as loss of the benefit of particularly lucrative downstream contracts, unless this unusual exposure has been disclosed at the time of contracting.

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contracts’ in the current jargon). In this context, and possibly also in relation to contracts between individuals where neither party makes the contract in the course of carrying on a business (often referred to as ‘C2C contracts’, perhaps less appositely), the extent to which forum clauses should be given effect is highly controversial – and attempts to steer a middle course are technically complex. Similar concerns arise in relation to employment contracts. To address these difficulties, we need to refine our examination of the importance of ‘contract disputes’, looking more closely at the practical case for the convention to address B2C disputes, and other “non-commercial” dealings such as C2C contracts and employment contracts.

C.

B2C and other “non-commercial” Contracts

How useful would it be for Pacific states for the convention to address jurisdictional rules in B2C contract disputes, bearing in mind the important and complex issues associated with such rules? The volume of B2C commerce across borders, especially in the Pacific, is still tiny. It is dwarfed by B2B dealings both in value and in volume of transactions. But it will undoubtedly grow in the future, especially as Internet commerce develops.11 And reducing costs and risks for consumers is always desirable. Enhancing the access of consumers to meaningful remedies in crossborder contexts is also an important element in building consumer confidence in electronic commerce – and in achieving the social and economic benefits that this may bring. So the answer is that there is some value in addressing jurisdiction in B2C contract cases – though much less than in relation to B2B dealings – and that value is increasing rapidly. However there are two important qualifications to that positive response. The first is that most consumer transactions do not involve large sums. A breach by the seller – even one as fundamental as non-delivery of goods, or entirely defective goods or services – will not justify taking court proceedings in one jurisdiction, let alone taking proceedings in one jurisdiction then seeking to enforce the judgment elsewhere. The reality is that only a tiny proportion of consumer transactions will ever raise the cross-border enforcement issues with which the convention is concerned – the main examples being high value personal injury claims against the seller, or class actions. For the vast bulk of cross-border consumer dealings, online or offline, the only relevant remedies in contract disputes will be the seller’s 11

For a survey of available data and projections, which suggests that B2B dealings make up around 85% of e-commerce transactions by value, and that this sector is likely to grow faster than B2C in the near future, see COPPEL J., ‘E-Commerce: Impacts and Policy Challenges’ (OECD Economics Department Working Paper No 252, June 2000) available at http://www.olis.oecd.org/olis/2000doc.nsf/linkto/eco-wkp(2000)25.


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internal complaints process, or ADR mechanisms, supported by reputational sanctions (including trust mark based systems).12 Second, the convention will not play an important role in encouraging consumer confidence in electronic commerce. The contribution the convention can make to reducing risk for consumers in dealing online is very limited: -

-

-

there will always be many countries that are not parties to the Convention. The Convention will not assist a consumer dealing with such businesses. Consumers will not consult a list of contracting states (even one conveniently available on the Net!) before buying software online – so they will not know which countries are safer to deal with than others, and should assume that in every case it will be hard to enforce local court orders against a foreign supplier; even where the consumer and the business are both in Contracting States, the convention will almost never be relevant when it comes to resolving disputes, as the cost of taking steps in two jurisdictions will be prohibitive, in the context of a low value transaction; enforcement risk is tiny compared with more fundamental risks facing consumers, such as identifying and locating the other party, or the creditworthiness of that other party.

Put another way, any general confidence in electronic commerce that consumers derived from the convention would be misplaced. These two qualifications suggest that though there is undoubtedly a problem in this field, it is unlikely that the convention could do much to remedy it. That conclusion is reinforced by considering how the convention might attempt to address B2C dealings – and the technical and political complexity of doing so. The model suggested for B2B contract cases – a simple, clear default rule and an ability to contract out – cannot be used for B2C dealings. Most countries limit, or exclude entirely, the ability of consumers to enter into binding forum clauses. And certainly there is room for concern about whether consumers understand the implications, and practical significance, of forum clauses. Nor, on the other hand, is there general acceptance that consumers should always be permitted to bring proceedings in their home jurisdiction, and enforce the resulting judgment world-wide. Views differ on whether such a rule is beneficial to consumers, or to the many SMEs looking to the Internet to expand their businesses across borders:

12

For a very useful discussion of these issues, see the report prepared by the OECD of a recent conference organised by the OECD, the Hague Conference on Private International Law, and the International Chamber of Commerce on ‘Building Trust In The Online Environment: Business-To-Consumer Dispute Resolution’ at http://www.oecd.org/ dsti/sti/it/secur/act/online_trust/hague-adr-report.pdf.

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(a)

(b)

(c)

the concern, for small remote countries in particular, is that exporters of goods and services based in larger countries – especially content providers – might respond to any increased risk of being sued in unfamiliar and distant countries which provide limited market opportunities by deciding not to invest in compliance with local requirements, or the ability to defend proceedings in that jurisdiction. The simplest way to do this is to decline to provide goods or services to purchasers in those countries.13 This ‘balkanisation’ of the Internet has the potential to reduce access to services for both consumers and for businesses; alternatively, costs may increase for users in small remote countries, as suppliers of content price for the increased risk and cost of dispute resolution; from the perspective of SME suppliers in all countries, but especially small remote countries, being exposed to the risk and cost of defending proceedings in many distant countries is an additional barrier to selling goods and services over the Internet. The value of the Net, for SMEs, is that it provides access to world-wide markets at relatively low cost: but if this access brings with it significant legal risk, their ability to use it will be impeded.

There is a plausible argument that these negative effects should not be exaggerated, because the risk of liability is so small. But this is another way of saying that the convention hardly ever matters in cross-border B2C cases. There does not seem to be any objection to providing for claims by or against consumers to be brought in the State in which the defendant is habitually resident, and for enforcement of the resulting judgments elsewhere, at least where there is no forum clause requiring proceedings to be brought in a different court. The value of including such a rule in the convention is limited, since national law will always (so far as I am aware) provide for this forum, and enforcement will normally be sought in that forum. But it is not without significance. However this immediately raises difficult questions in relation to the effect of a forum clause. Should such a clause preclude access to the defendant’s home forum, even if the clause is not given any broader effect?

13

There are limits to the ability of suppliers to identify the country in which an Internet customer is based, and decline to deal with some countries’ residents. But a mix of technological indicators and simple inquiry will enable the supplier to pinpoint the honest and the unsophisticated – and this is enough to do most of the economic harm associated with refusals to deal based on location. Commercial providers of geolocation services claim a high degree of accuracy in identifying the country of origin of web users, and a report prepared for the French court by a panel of experts in the recent Yahoo! litigation suggested that the country in which an Internet user is located can be identified accurately in 90% of cases: see ‘Putting it in its place’ in: The Economist, 11 August 2001, also available at http://www.economist.com/displayStory.cfm?Story_ID=729808.


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This leads into the more general issues of whether the convention should provide for jurisdiction in the consumer’s habitual residence, in certain circumstances, and the extent to which the convention should give effect to a forum clause in a B2C contract. The most that is likely to be found in any widely ratified convention, by way of special provision for B2C contract disputes, is a default jurisdiction in the consumer’s habitual residence that is available if certain conditions are met (e.g. promotional activity by the business in, or directed to, that State), and provided there is no forum clause designating a different court. This approach could in principle be coupled with provisions: -

-

establishing a protective jurisdiction in the consumer’s habitual residence that overrides any forum clause, if both that State and the State in which the business is located (and where enforcement will ultimately be required) consider that this is an appropriate policy outcome; giving effect to forum clauses in B2C contracts, if and only if the consumer’s habitual residence considers that this is an appropriate policy outcome.

Variations on these themes are found in the alternative Articles on jurisdiction in consumer cases set out in the Interim Text. Such provisions would not be valueless. Nor, however, are they of far-reaching practical importance. Such an Article is desirable, other things being equal, but does not constitute a ‘must have’. The difficulty that is being encountered in drafting a reasonably simple and clear provision that embodies this sort of middle road suggests that the challenge of framing such a provision may prove insuperable. Even if the various alternatives in the Interim Text achieve an appropriate result, they are far from being clear and accessible. And even their most ardent supporters could not describe them as concise or elegant. It is worth continuing to pursue this work: but if we cannot craft a provision which is reasonably clear and accessible, and acceptable to most delegations, the topic of jurisdiction in B2C contract claims might better be left for another day. Many of the same issues arise in relation to other non-commercial contracts, such as employment contracts and C2C contracts. There are real difficulties in framing provisions that will be widely accepted. And in any event, the convention will almost never be relevant. The practical value of addressing these classes of contracts is not great. They should not be a priority topic.

D.

Tort Claims and Other ‘Imposed Obligation’ Claims

The next candidate for inclusion in the convention is jurisdiction in tort claims between non-contracting parties, and other claims for breach of obligations imposed by law, rather than being voluntarily assumed by contract. How useful,

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from a Pacific perspective, would it be for the convention to address jurisdiction in such claims? In the Pacific context, physical torts are rarely committed across borders. The most common type of cross-border physical tort claim seems likely to be product liability claims, as products are widely traded across borders in the region. Yet such claims are extremely rare, even between countries like New Zealand and Australia which trade together a great deal (there is a single trans-Tasman market for goods, supported by mutual recognition laws), and recognise each other’s judgments reasonably readily. For example, I am not aware of a single case of enforcement being sought in New Zealand for a personal injury judgment given in Australia, even though enforcement of money judgments from Australia is a relatively simple and inexpensive process.14 Defamation claims, claims for infringement of intellectual property rights, and other ‘non-physical’ cross-border wrongs are more common in the region. But the number of such claims is small compared with the number of cross border contract disputes, based on my experience in practice and a review of the New Zealand caselaw. In New Zealand, for example, a (simple, and rather unscientific) review of recent High Court decisions suggests that cross-border disputes between contracting parties outnumber claims between strangers by more than 5 to 1.15 And this statistic reflects the proportion of contentious cases: if (as seems likely, based on experience in practice) contract cases are underrepresented in the judgments databases because there is rarely a challenge to NZ jurisdiction where there is an applicable forum clause, the ratio of contract cases to other cases would be much higher still. I would be surprised if this ratio was significantly different in other countries in the region – or for that matter in other parts of the world. So the ‘frequency’ rating is relatively low. Do these cases pose problems, though, when they do occur? Are there difficulties with existing jurisdictional rules, and enforcement of resulting judgments? Plainly there are real difficulties – and these are being exacerbated by the rise of the Internet and other forms of ICT

14

Since New Zealand has replaced tort claims for personal injury in almost all contexts with a broad ‘no fault’ scheme, the reverse scenario is very unlikely to arise. 15 This admittedly imperfect review involved searching the Briefcase database, which indexes virtually all High Court decisions (reported and unreported) for decisions over the last decade which referred to the provisions of the High Court Rules relating to service of proceedings out of NZ, and identifying the nature of the claim which was the subject of the proceedings. Quite apart from questions concerning the coverage of the database, it needs to be borne in mind that if there was no challenge to service out of the jurisdiction the rule would not necessarily be referred to (so most cases where jurisdiction is founded on a forum clause would not appear, since a challenge is usually pointless). The review does however indicate the classes of case in which service out of NZ has proven contentious.


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which extend the reach of wrongdoers across borders.16 Both the conceptual basis for exercise of tort jurisdiction, and the application of the relevant rules in the context of the Internet and e-commerce generally, are hotly debated within many countries. And conceptual frameworks and applicable rules differ significantly from country to country. This brings us squarely face to face with the complexity of making provision for jurisdiction in cross-border tort cases. It seems to be generally accepted that a tort claim should be able to be brought in the defendant’s home jurisdiction – the defendant’s habitual residence, or the situation of a branch, agency or other establishment whose activities gave rise to the claim. But as noted above, this is not the most practically important of forums to provide for in the convention, since it is usually available under national law, and the resulting judgment can often best be enforced in the forum. And as recent experience in The Hague demonstrates, it is very difficult to craft an appropriate and widely accepted rule providing for special jurisdiction in tort cases, both technically and politically. The technical complexity stems from several factors. Not least of these is the intense debate about appropriate connecting factors for jurisdictional purposes in connection with dematerialised torts. The courts of many countries, and academic commentators, are still in the early stages of analysing and understanding the implications for traditional tort jurisdiction tests of the Internet, and high capacity and low cost communications generally. There is certainly no consensus – or even widespread agreement – on appropriate jurisdictional rules in such cases. Approaches based on ‘activity’ engaged in in the forum, or directed to the forum, provide little guidance in practice – at least without an extensive caselaw to flesh out their application in particular contexts. They have led courts to attempt to develop a range of guidelines for evaluating the jurisdictional significance of dealings with persons in the relevant forum of varying kinds and intensity, none of which are readily reduced to provisions in a convention. Approaches that are more familiar in many common law countries and Europe look to where the wrongful act was done: but in the context of on-line dealings tests of this kind lead to arcane, and somewhat sterile, debates about where services purchased online are supplied, and where information obtained through ‘pull’ technologies rather than ‘push’ technologies has been provided. Tests based on where the effects of wrongful conduct are felt lead to a multiplicity of available fora and many opportunities for forum shopping by plaintiffs – but all attempts to impose limits on the availability of these fora have proved to some extent arbitrary and controversial. The political complexity stems from several sources. The principal source of difficulty is that tort rules are mandatory rules which differ from country to country, reflecting different values, different social choices, or different legal 16 An excellent collection of papers surveying the difficult issues that arise in crossborder tort disputes can be found in MCLACHLAN C. and NYGH P. (eds.), Transnational Tort Litigation: Jurisdictional Principles, Oxford 1996. See in particular the useful overview by MCLACHLAN C. in Chapter 1.

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techniques for pursuing similar policy goals. Some countries impose tort liability for statements or acts which are not actionable in other countries. The approach to awarding damages, and costs, varies enormously between countries. Different rules exist in relation to recovery of economic loss, of legal costs, of punitive or exemplary damages. And approaches to non-money relief – such as injunctions restraining publication of defamatory statements – vary significantly between countries. Concern about liability under the domestic tort law of country A translates very swiftly into concern about providing for jurisdiction in country A, and enforcement of the resulting judgment in other Contracting States. Some areas where these concerns are particularly acute include: -

-

-

liability for speech/freedom of expression rules. Publication on the Internet results in speech being accessible – and potentially actionable – in many countries. Liability rules differ significantly between countries, and raise sensitive issues at the intersection of freedom of expression principles on the one hand, and on the other hand policy goals relating to hate speech, protection of reputation, public order, and protection of religious and cultural sensitivities; the boundaries of intellectual property protection, in particular copyright. Differences in the scope of such protections, in the parties liable for infringements, and in the defences available to infringement claims, have raised concerns about increased exposure associated with global distribution of content, in particular through the Internet. While enhanced protection of intellectual property through reduced enforcement costs can make an important contribution to the underlying policy goals of intellectual property law, there is a concern that content owners will invoke the laws of the most protective jurisdictions in which copyright material can be accessed to prevent or deter legitimate uses of that material in other countries; the extent to which infrastructure providers in the ICT sector are protected from liability. In some countries, notably the United States, legislation limits the exposure of infrastructure providers in respect of content which they store or transmit.17 Similar protections are not available elsewhere. The difference in substantive laws inevitably results in increased focus on questions of jurisdiction, and on the possibility of a judgment being enforced in a Contracting State for a liability that would have been excluded under that State’s substantive laws.

Another source of political complexity stems from active lobbying by groups with vested interests in extending liability in certain sectors, or in restricting liability in certain sectors. In the absence of substantive limits on their liability in many 17

See section 512 of the US Copyright Act, enacted by the Digital Communications Millennium Act 1998.


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jurisdictions, for example, infrastructure providers hope to limit their exposure to the exercise of jurisdiction in a wide range of States. On the other hand, content providers seek to establish jurisdiction (and an option as to where to pursue their claims) in as wide a range of fora as possible. Each group claims that acceptance of its arguments is critical for the future of the on-line economy. The answer seems likely to be more nuanced: governments the world over are striving to find an appropriate balance in this area, and a period of experimentation and of differences in approach seems inevitable. The challenge of addressing these issues even at the domestic level suggests that it is implausible that a single world-wide solution will be arrived at in the near future. Continuing differences in substantive laws will ensure continuing sensitivity and controversy in respect of jurisdictional rules. Still further political complexities arise from the intersection between some of the novel channels that are being used to pursue claims in respect of human rights violations, and the prohibited grounds of jurisdiction on the ‘black list’. This is another issue that has yet to be resolved in a manner that commands widespread support. Moving on to other facets of the convention, another source of both technical and political complexity stems from the inevitability of special jurisdiction rules in tort providing for multiple fora in many cases – for example where wrongful acts occur in several States, or where effects are felt in several states (consider, for example, a defamation claim based on a publication on a website). This means that the convention needs to contain priority rules which determine which of the available convention fora will proceed to hear the claim, and which will defer to that ‘priority forum’. (And the practical relevance of these priority rules will be much greater than in the context of rules permitting contract claims to be brought in the defendant’s home forum.) Significant steps have been made towards resolving this issue in Articles 21 and 22 of the Interim Text. But it remains an additional layer of complexity and political sensitivity which would, if avoided, reduce the difficulties of finalising the convention, and the barriers to its ratification. It is also in the field of tort claims that the most difficult and controversial issues arise in relation to the extent to which a judgment should be enforced. Many States have expressed concern about the possibility of being required to enforce non-compensatory or ‘excessive’ damages awards from other Contracting States. The Interim Text addresses this issue in Article 33, and provides for partial enforcement in such cases. The draft Article 33 may well provide the basis for a workable compromise on this difficult issue. But if omission of tort claims from the scope of the convention would enable that issue to be avoided, or reduce the frequency with which the issue arose and thus the practical importance of the relevant provision, that would undoubtedly be an advantage. In summary, the social and economic benefits that could be achieved by addressing jurisdiction in tort claims seem comparatively small, especially from a Pacific perspective where cross-border physical tort cases are rare. The difficulties associated with attempting to do so seem considerable. While further work is

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justified on some of the categories of claim that raise fewer technical or political difficulties – such as personal injury claims, or damage to tangible property, where the technology issues are less acute and policy approaches in most countries are similar – none of these appear to be ‘must have’ topics.

E.

The Risk of Addressing Jurisdiction in ‘Stranger’ Claims

The discussion of tort claims above raises a general issue of considerable importance in framing this convention which was touched on earlier. ‘Imposed obligations’ such as those created by tort law apply whether or not the parties are in a contractual relationship. Typically the parties do not have the opportunity to contract in respect of their interactions before the claim arises. Just as the parties cannot contract in relation to the substance of the obligation, they will often not have the ability to contract in relation to jurisdiction before the claim arises. It seems to me that we should be wary of attempting to address the question of jurisdiction in ‘imposed obligation’ cases between strangers in the convention, unless we are very confident that the rules we are prescribing are appropriate. There is the world of difference between default rules that can be contracted out of at a relatively low cost, and mandatory rules, or rules that apply as between strangers where contracting costs are prohibitive. The content of default rules in the contractual context is important – but the consequence of getting them wrong is in most cases simply an increase in transaction costs. The cost of getting mandatory rules wrong, or stranger rules wrong, is inappropriate outcomes, and significant economic distortions. Where a problem is not well understood, or where there is real doubt about the appropriate outcome, the risk of making a mandatory rule or a stranger rule is much greater than the risk of making a default rule. A higher degree of caution and restraint is warranted.

F.

Restitution Claims

Despite the practical importance of cross-border restitution claims in a world where assets are easily moved from one country to another, the topic of restitution has attracted little discussion by the Special Commission, or at the Diplomatic Conference. The reason may be that European participants have assumed that restitution claims were covered by the ‘torts’ article, consistently with the European jurisprudence on the Brussels Convention18, while it has never occurred to most other participants that a restitution claim is a ‘tort’, and that Article 10 of the Interim Text should be considered in that light. As each group of participants has been comfortable with its (inconsistent!) assumptions, the issue has not arisen for debate. 18

See Kalfelis v. Schroder [1988] ECR 5565.


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Putting this history (or its absence) to one side, how important is it, from a practical perspective, for the convention to address jurisdiction in cross-border restitution claims? Or, to be precise, in restitution claims between strangers – for if contractual disputes are covered by the convention, that will catch restitutionary claims arising out of contractual relationships, for example where a contract is frustrated, or affected by a mistake as to its subject-matter, or where there is a failure of consideration. In the Pacific region, at least, cross-border restitutionary claims between strangers remain rare compared with contract claims. But experience in practice suggests they may be more common in this region than cross-border tort claims, especially if tracing claims in respect of the proceeds of fraud or other wrongs are included under the ‘restitution’ rubric. The frequency with which cross-border enforcement issues arise in connection with restitution claims is likely to continue to increase, moreover, as it becomes ever easier for funds to be moved between jurisdictions, and converted into different forms. Turning to the second element in our matrix, cross-border restitution cases raise a number of difficult problems in practice, such as: - problems in establishing jurisdiction in a State in which assets against which recourse is sought are located, where no proprietary claim can be made in respect of those assets, and where there is no other connection between that State and the defendant or the substantive dispute. While the courts of some States (such as Germany) exercise general jurisdiction based on the presence of assets of the defendant in the State, this is not the case in many other States; - the need for access to effective interim relief, often in several jurisdictions, none of which need have any connection with the substantive dispute. Interim relief may be sought to freeze assets, to prevent the defendant dealing with assets in other jurisdictions, or to obtain disclosure of the whereabouts of assets. The extent to which interim relief is available in support of foreign proceedings varies considerably from country to country, and is very limited in many common law countries;19 - the need, in many cases, for multiple proceedings in order to ensure that effective relief is obtained against assets held in several jurisdictions. Some (though not many) of these difficulties would be addressed by providing for jurisdiction in the defendant’s home jurisdiction, and enforcement in all Contracting States of the resulting judgment. Such a rule seems uncontroversial in this context, as in others. But the issues relating to interim relief would require a more complex set of solutions. At the least, a provision would be required conferring jurisdiction on the courts of Contracting States to grant interim relief in support of proceedings in 19

54

See eg Mercedes-Benz AG v. Leiduck [1996] 1 AC 284 (PC).



another Contracting State. It would be possible to go further, and require interim relief to be granted in support of such proceedings. But even the less ambitious approach has been strongly resisted by some delegations, and has proven technically difficult to draft in a way which does not give rise to concerns that the convention is intruding too far into domestic rules of procedure, and questions of substantive law. It has been argued, with some force, that this is an issue better addressed in domestic legislation – perhaps in the implementing legislation giving effect to the convention that would be required in the common law states for which this is a particularly acute problem. The current problems in this field are of sufficient practical importance that further work towards a widely acceptable solution is clearly justified. But if a clear, effective and appropriate rule which is widely accepted cannot be crafted, this too is an issue which is better left for another day, rather than permitting it to imperil the core of the convention.

G.

Trusts

If cross-border tort claims are rare in the Pacific, cross-border disputes concerning express trusts of an ‘internal’ nature are rarer still. Nor is it easy to point to significant problems that have been encountered in litigation of this kind, which cry out for resolution in a multilateral convention. And while trusts are often used for commercial purposes, it would be difficult to argue that addressing jurisdiction and enforcement of judgments in relation to internal trust disputes – in particular, trust disputes which cannot also be framed as contract disputes – will make a meaningful contribution to reducing the costs of cross-border trade. The importance of addressing this issue is, therefore, slight. The only reason for persisting with work on this point appears to be that it is not very controversial – as the relative absence of square brackets in Article 11 of the Interim Text attests. However the absence of controversy in relation to jurisdictional rules masks the fact that if default rules are prescribed for internal trust disputes, they will inevitably point to multiple fora, requiring the convention to address the priority issues discussed above in connection with tort claims. If this could otherwise be avoided, the benefits of making provision for trust claims would not justify embarking on that difficult topic. In summary, internal trust claims are not part of the convention’s core. But if it is relatively simple to reach consensus on providing for such claims, it may be worthwhile to address this topic.

H.

The Black List

So far we have been considering the importance of providing for the exercise of jurisdiction in certain cases, and for the enforcement of the judgments which result.


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David Goddard

How important is it for the convention to provide for a ‘black list’ of prohibited grounds of jurisdiction, seen from a vantage point in the southern Pacific? The goal of reducing uncertainty and unnecessary risk and cost for businesses trading across borders would presumably be enhanced by limits on the exercise by foreign States of exorbitant grounds of jurisdiction. In the context of contract disputes, a black list is not very important at all. By agreeing on a forum, the parties to a contract render the black list entirely irrelevant. The chosen forum will be available, and all other courts in contracting states will decline to hear the case without any need to refer to a black list. The goal of reducing uncertainty is achieved by other means. Even where there is no forum clause, a plaintiff deciding where to bring proceedings: -

has some incentive to sue in a convention forum, to facilitate enforcement; has some incentive not to sue in a court in a Contracting State with no significant connection with either the defendant or the claim. There is no point in choosing a court in a country that is not a convention forum, unless the judgment can be enforced there (or elsewhere, under national law). This will be enough to exclude many inappropriate fora, in many cases.

Of course there will be some cases where the strategic benefit of suing in a forum seen as ‘friendly’ to the plaintiff’s claim will outweigh these factors. And the defendant will then be faced with the difficult choice of whether to appear and defend the proceedings – and risk enforcement in many other countries under national law, as well as in the forum, if the claim succeeds – or to let judgment be entered by default, and be exposed to enforcement in the forum state. But it must be borne in mind that the defendant could have avoided this dilemma by contracting for a particular forum, or for arbitration: if the risk is an important one, contracting parties have the tools to manage it. Because the parties to a contract will have the ability to solve this problem for themselves, if the convention provides for forum clauses to be effective, there is no compelling need for the convention to go further and provide default rules prohibiting certain fora. It seems to me that the first factor in the matrix identified earlier in this section – the degree of benefit to be obtained from addressing the issue in the convention – suggests there would be little point in having a black list in a convention that is concerned solely with disputes between contracting parties. And when the difficulty of settling the content of a black list is taken into account, this strongly tips the balance against trying to do so, if the convention is so confined. Outside the realm of contract cases, the black list is likely to be more significant, for two reasons: (a)

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there is not usually an opportunity to contract in relation to the forum for resolving the dispute, before that dispute arises;



(b)

variations in the substantive law applied in different fora are much greater, and can reflect very different policy choices.

There are some heads of jurisdiction which are difficult to justify on any principled basis – such as the ‘tag’ jurisdiction exercised in New Zealand and many other common law countries. If the convention ranges more widely than contract claims, it seems sensible to exclude these heads of jurisdiction, if doing so is not likely to be controversial. This would be consistent with the convention’s basic goals. But where inclusion of a ground of jurisdiction on the black list is likely to jeopardise ratification of the convention in any major trading State, we should only buy that fight if there is clear, reliable, empirical evidence of the practical problems caused by the relevant rule. Hard policy choices with significant practical implications need to be founded on something more robust than abstractions and anecdotes. While I have an open mind on this point, nothing I have seen in the negotiation process to date establishes that the problem that an extensive black list would be ‘solving’ is worth the risk of excluding a major trading partner from the convention.

A Red Herring in Relation to the Black List It is sometimes suggested that there is little benefit for other States in entering into a convention with the United States unless there is an extensive ‘black list’ that prevents US courts from exercising exorbitant grounds of jurisdiction – in particular, general ‘doing business’ jurisdiction. There is no benefit in agreeing white list grounds of jurisdiction with the United States, the argument runs, because the US already takes a relatively generous approach to enforcing foreign judgments. Thus other States should hold out for an extensive black list – and refrain from entering into a convention with the US, if agreement on this issue cannot be reached. This analysis misconceives the basic policy goal of the convention, as explained above. It is not about relations between States, with State A ‘gaining’ if more of State A’s judgments are enforced elsewhere, and ‘losing’ if it has to enforce more of the judgments granted by other States. It is about the costs to firms of doing business across borders. Seen from this level, a convention with the US that clarifies jurisdictional rules in contract cases, and simplifies enforcement of judgments, is of real benefit to non-US businesses. As mentioned above, at present there is abundant room for interlocutory wrangles over jurisdiction, and conflicting judgments. And real difficulties arise in relation to enforcement of non-money judgments. It is these inefficiencies which need to be addressed by the Convention. If uncertainty and risk and legal costs are reduced, all traders in all participating States will benefit. The prospect that uncertainty and risk might be reduced further still by a more far-reaching – but unachievable – convention is not a sound reason for rejecting significant achievable gains


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IV. The Core of the Convention A.

The Core

The analysis in section 3 above suggests that the focus of the convention should be on contractual activity, excluding B2C and C2C contracts. The primary benefit to the Pacific region will come from a convention that applies to disputes between parties to contracts (other than B2C and C2C contracts), which: (a)

(b)

provides simple, clear, appropriate default rules where there is no forum clause. The only default rules that meet these criteria are rules providing for jurisdiction in the defendant’s home jurisdiction – its habitual residence, or the place where a branch, agency or establishment through which the contract was made is situated; gives effect to forum clauses, ensuring that the chosen court will hear the claim, other courts will not disregard the clause, and the resulting judgment will be enforced in other Contracting States.

These are both the most valuable topics, and the most tractable. They should form the core of the convention.

B.

Other Topics

Well behind contractual disputes in terms of practical importance for Pacific States come, in no particular order, the following types of cross-border dispute: (a)

(b) (c) (d)

tort claims between non-contracting parties, including intellectual property infringement claims. Claims in relation to physical torts seem most likely to be capable of being successfully addressed; restitution claims, including claims in connection with money taken dishonestly or paid by mistake; B2C contract claims; disputes concerning trusts, to the extent this is not covered by the other heads of jurisdiction.

It is certainly worth trying to achieve agreement on these – but not at the expense of the core. The black list falls into much the same category, at least on the current evidence.

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V.

Rules to Give Effect to the Core of the Convention – Some Suggestions

It seems logical to begin the process of preparing a draft convention by drafting the provisions that would be required to address the core identified above. The desirability and feasibility of addressing additional topics can then be examined by looking at what would need to be added to the core draft if those topics were to be covered – both in terms of additional jurisdictional provisions, and additional provisions relating to procedure or enforcement.

A.

Drafting a ‘Choice of Forum’ Convention

The simplest convention would focus on choice of forum clauses alone. It would provide that where parties to a contract (other than a B2C or C2C contract) agreed to refer a dispute (whether contractual or otherwise) to a particular court, that court would have jurisdiction to decide the dispute. It would also provide that where such a clause was exclusive, all other courts would decline jurisdiction. The Interim Text goes further and provides that forum clauses are to be treated as exclusive unless they expressly provide otherwise. This probably accords with the expectations of most contracting parties, and does not appear to be controversial. Article 4 of the Interim Text provides a good basis for this provision. What else would be required in a convention confined to the topic of forum clauses? There would be no need for any other Articles relating to jurisdiction. Nor would there be any need for provisions in relation to: -

-

-

lis pendens and declining jurisdiction (on grounds such as forum non conveniens). At most, the convention might confirm that the chosen forum cannot decline to exercise jurisdiction;20 prohibited grounds of jurisdiction; the ‘grey list’. At most, the convention would confirm that it did not affect the exercise of jurisdiction based on national law, in cases where there is no forum clause; appearance without protest (except to confirm that this did not amount to a choice of forum for the purposes of the convention); authentic instruments;

20

While the possibility of multiple fora cannot be ruled out, if a contract provides for claims to be brought in any of several States, this is most unusual. If the convention provided that a chosen forum cannot decline to exercise jurisdiction unless another forum is also chosen by the contract, and is seised, that should be sufficient to deal with even the most exceptional cases.


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David Goddard

-

-

bilateralisation, or other provisions designed to limit the States whose judgments would be enforced (see Article 42 of the Interim text). If the parties have chosen the forum, they can hardly complain if its judgments are given effect by other Contracting States; legal aid – this is much less of an issue in the commercial context; non-compensatory damages or grossly excessive damages: if the parties have chosen the forum, they cannot reasonably object to its damages rules. No such objection is available in proceedings to enforce an award under the New York Convention – there is no case for a more restrictive approach here.

Most of the Interim Text provisions in relation to the process for enforcement of judgments could be carried across without modification. (The detailed provision the convention would make for enforcement matters would be one of the principal differences between the draft convention and the Hague Convention of 25 November 1965 on the Choice of Court, which has never come into force.) Provisions in relation to substantive scope,21 territorial scope, and relationship with other conventions would all be substantially simplified. A draft convention along these lines could be finalised relatively easily, and without much delay.

B.

Providing for Default Jurisdiction in Claims Between Contracting Parties

What would need to be added to the provisions described above in order to provide for a default jurisdiction in claims arising under or in connection with a contract (other than B2C or C2C contracts) in the defendant’s habitual residence, or in the State where the relevant branch, agency or establishment is situated? Jurisdiction provisions along the lines of Interim Text Articles 3 and 9 (without any reference to ‘regular commercial activity’) would be required. The scope of this default jurisdiction would need to be set out – either in these Articles, or in the provision concerned with the substantive scope of the convention. Provisions in relation to lis pendens and declining jurisdiction would also be required – Articles 21 and 22 of the Interim Text would provide the starting point. To avoid serious asymmetry and injustice, it would also be necessary to provide that a court with jurisdiction under these rules had jurisdiction in related counterclaims – a provision along the lines of Article 15 of the Interim Text would be appropriate. I doubt that any other additions would be essential. A defendant with its habitual residence or a branch, agency or establishment in a State can hardly be 21

The matters in respect of which Article 12 of the Interim Text provides for exclusive jurisdiction would be excluded from the scope of the convention.

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heard to complain about enforcement of judgments rendered by the courts of that State, whether in that State or in other Contracting States. So there would be no additional concern in relation to bilateralisation, or excessive or non-compensatory damages. This is a slightly more ambitious work programme. But it is still confined to topics that are the subject of near consensus, and that are in my view eminently resolvable with a little time and attention. One of the main reasons that more progress was not made on these issues in June 2001 was the shortage of time – and this was a product of the significant amount of time consumed by other, more complex but less critical, issues.

VI. Future Directions Finally, if we are to take a practical approach to this convention we need to adopt a process that ensures we focus on perfecting the core, and do not jeopardise the core through disagreement on other issues, or through spending large amounts of time on less significant issues. We should be open to the possibility of a broader agreement, if it proves achievable: but pursuit of this broader agreement must not take place at the expense of achieving the core. It seems to me that there are several approaches that might work. In each case we should begin by perfecting the core, and preparing a draft convention which would give effect to that core. Until this is done, we should not permit ourselves the luxury of devoting scarce time and resources to less critical issues. This would constitute stage one. For stage two of this work there are three basic options. The Hague Conference could: (i)

work on a wider range of topics, but drop back to the core if agreement on these topics cannot be reached on a consensus basis; or (ii) work on a wider list of topics, with a view to incorporating them in an optional Chapter. Consensus might not be essential in relation to this Chapter, which could contain both additional grounds of jurisdiction and a black list of prohibited grounds; or (iii) decide not to pursue a wider range of topics at present (ie dispense with a stage two, and move straight to stage three). Approach (ii) is at first sight appealing. It allows those countries that can reach a more extensive agreement to piggyback on the core convention, and its enforcement provisions, without compromising the core. It also provides a ‘pressure valve’ for addressing issues seen by a subset of participants as important elements of a successful convention. On balance, however, I suspect it is less desirable than approach (i), for two reasons:


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David Goddard

(a)

(b)

the chapter on enforcement may become more complex, and more contested, if it also needs to accommodate enforcement of judgments based on optional heads of jurisdiction. So the risk of States deciding not to ratify the core because of concerns about enforcement provisions would be increased; if topics are addressed inappropriately, it may be more difficult to revisit them in later years than it would be if the territory remained untrodden.

The flexibility that approach (ii) would provide should not however be underestimated. It merits careful consideration and further debate. Stage three would take place five to seven years after the convention comes into force. The Judgments convention is best seen as a continuing process of rapprochement of jurisdictional practices, in the light of experience with the convention and with cross-border dispute resolution generally. The core convention should provide for delegations to meet again in the future to review the convention, with a view to addressing further topics. The importance of stage three cannot be overstated. We should not attempt to resolve everything now, and risk achieving nothing in practice. A staged approach is more likely to succeed, and less likely to do harm, especially in fields we do not yet fully understand such as ecommerce. The next meeting in relation to the judgments convention is scheduled for January 2002. Participants should attempt to reach agreement on the process to be followed at that meeting. Work on identifying the core issues, and addressing them, should follow – first policy decisions on outstanding issues, then detailed drafting. Next would come work on possible additions. The second half of the Diplomatic Conference would then: -

determine the core by consensus, building on preparatory work that should largely have resolved these issues; explore what (if anything) can be added to that core by consensus; if approach (b) is adopted, settle the content of the optional chapter (perhaps on some basis short of consensus).

The recent history of the judgments project has tested the enthusiasm and commitment of many participants. It would be easy to give up, and conclude that the issues are too difficult and the politics too intractable. But seen from this end of the world at least, that would be a tragic waste: a waste of an important opportunity, and a waste of a great deal of valuable work by some of the world’s leading private international lawyers. We must not let competing conceptions of an ideal convention prevent us from achieving a worthwhile one – one that meets a real practical need, and contributes, albeit indirectly and in a small way, to increasing prosperity and economic and social development. That is the real challenge: if we keep it firmly in our sights, we will have a reliable guide for settling our priorities, and for resolving our differences.

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INDIRECTLY HELD SECURITIES: A NEW VENTURE FOR THE HAGUE CONFERENCE ON PRIVATE INTERNATIONAL LAW Christophe BERNASCONI*

I. II.

III.

IV. V.

Introduction Purpose of the Project: Updating Conflict of Laws Principles to Reflect Market Reality A. Introduction B. Indirect Holding System C. Why Bother? An Example D. Scope of the Project: Limited to Proprietary Rights 1. The Issues Covered 2. The Issues Not Covered The Search for the Appropriate Connecting Factor A. Introduction B. ‘Looking-Through’ – An Inappropriate Substitute C. PRIMA – A Modern Reflection of the Traditional Lex Rei Sitae Principle Application of PRIMA and How to Identify the Relevant Intermediary The Pièce de Résistance: How to Locate the Relevant Intermediary? A. Introduction B. The Principles Agreed Upon 1. ‘Place of the Relevant Intermediary’ = ‘Place Where the Securities Account Is Maintained’ 2. The Need for ex ante Certainty and How To Achieve It 3. The Compromise Reached at the January 2001 Experts Meeting C. The ‘Principal Rule’ in Intermediate Drafts D. The Fall-Back Test 1. The Objective Balancing Test vs. The Single Factor or Cascade Approach 2. Single Factor Fall-Back Tests, in Particular the ‘Legally Established’ Test E. The ‘Black List’

* Dr. iur. utr. (Fribourg), LL.M. (McGill). First Secretary at the Permanent Bureau of the Hague Conference on Private International Law, in charge of the project on indirectly held securities; the opinions expressed are strictly personal and not to be attributed to the Hague Conference or to its Permanent Bureau.



Christophe Bernasconi

F.

VII.

Is There a Need for a ‘Super PRIMA’? The Case of a Fact Pattern Involving Several Intermediaries G. Existing Agreements The Insolvency Issue in Particular A. Introduction B. Respect of Validly Perfected Interests (Paragraph 1) C. The Qualifications (Paragraph 2) 1. Draft UNIDROIT Convention on International Interests in Mobile Equipment 2. The European Insolvency Regulation D. Conclusion on the Insolvency Issue Conclusions

I.

Introduction

VI.

The Hague Conference on Private International Law is exploring a new field of activity: in May 2000, its Special Commission on General Affairs and Policy recommended, among other things, that the Conference start working on a new Convention on the question of the law applicable to proprietary aspects of dispositions of securities held with an intermediary. The basic purpose of this project is to provide financial markets with legal certainty for dealings in indirectly held securities – dealings worth several billion US dollars a day. Agreement on a convention that produces a uniform and rational rule for determining the proprietary aspects of a transfer or pledge of indirectly held securities would bring very important benefits to market users, market participants and the financial system as a whole. Given the enormous economic and practical importance, the project may also help to firmly engrave the name of the Hague Conference – whose biggest success so far has been in the fields of family law (in particular child protection) and judicial co-operation – on the commercial map too. The importance of the project is also underlined by the fact that it is being developed on the basis of a fast track procedure: a Working Group of Experts, which met in January 2001 pursuant to a Recommendation made by the Special Commission on General Affairs and Policy of May 2000, unanimously agreed that a Convention could and indeed should be prepared on an accelerated timetable. During the first part of the 19th Diplomatic Session of the Hague Conference, which was held in June 2001, the Member States unanimously decided to add this topic to the agenda of the organisation, with a view to adopt the Convention during the year 2002. In other words, if the Convention is completed as planned, the work on this project will have lasted approximately two years – a very short period to develop an international instrument which raises difficult technical issues and which obviously has to suit the needs and interests of business practice.

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Indirectly Held Securities

This Article intends to describe the purpose, the basic features and the scope of the project (II) and includes in particular an analysis of the principal legal questions raised by the topic (III-VI).1 The comments reflect the status of work and discussion as of July 2001.2

II.

Purpose of the Project: Updating Conflict of Laws Principles to Reflect Market Reality

A.

Introduction

Traditionally, securities were held, traded and settled in a direct holding system in which owners of securities had a direct relationship with the issuer – the investors would either be recorded on the issuer’s register or be in physical possession of

1

The Article is mainly based on the three following documents: BERNASCONI Chr., The Law Applicable to Dispositions of Securities Held Through Indirect Holding Systems, Preliminary Document No 1 of November 2000 for the attention of the Working Group of January 2001 (hereinafter: BERNASCONI, Report); Report on the Meeting of the Working Group of Experts (15 to 19 January 2001) and Related Informal Work Conducted by the Permanent Bureau on the Law Applicable to Dispositions of Securities Held with an Intermediary, prepared by the Permanent Bureau, Preliminary Document No 13 of June 2001 for the attention of the Nineteenth Session (hereinafter: Report on the Meeting of the Working Group of Experts (15 to 19 January 2001); Tentative Text on Key Provisions for a Future Convention on the Law Applicable to Proprietary Rights in Indirectly Held Securities, Suggestions for further amendment of the text contained in Working Document No 16 of the January 2001 experts meeting, submitted by the Permanent Bureau, Preliminary Document No 3 of July 2001 for the attention of the Special Commission of January 2002 (hereinafter: annotated July 2001 draft; see also the following footnote for more comments on this document). All these documents are available on the website of the Hague Conference on Private International Law (http://www.hcch.net), under the heading Work in progress, sub-heading Indirectly held securities. 2 In July 2001, the Permanent Bureau submitted an annotated draft of key provisions for a future Convention on the law applicable to proprietary rights in indirectly held securities (see the reference in the previous footnote). This draft was submitted to all Member States of the Hague Conference and to all observers who participated in the experts Working Group meeting of January 2001, with a view to prepare as effectively as possible the Special Commission meeting in January 2002. The Member States and observers, as well as any interested parties, were invited to submit written comments to the Permanent Bureau. On the basis of the comments received, a new draft will be prepared which should then serve as the basic working document for the Special Commission meeting.


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bearer securities certificates.3 Within this traditional holding system, transfers of securities had to be settled through the physical delivery of paper certificates and instruments of transfer, making such transactions labour-intensive, time-consuming and expensive. They were also risky, because the paper documents could be lost, mislaid, stolen or counterfeited. The costs of protecting against such risks and of delivering documents across long distances made the transfer of securities in a direct holding system an expensive process. Furthermore, while in transit to the transferee, the securities were not available for use or investment, causing what has been referred to as ‘pipeline liquidity (or illiquidity) risk’.4 In the 1960s, a sharp increase in trading volumes overwhelmed the system. The gigantic amount of paper that had to be physically moved around the globe began to pose insurmountable logistical problems, eventually leading to what became the famous ‘paperwork crisis’ on Wall Street in the late 1960s: for a while, the New York stock exchange was forced to close one day a week in order to process the backlog of paperwork!5 This provided the impetus for a number of legal, regulatory and operational innovations to clearance and settlement systems. One of the most important objectives of the restructured system was to immobilise the vast amount paper, if not eliminate it altogether. This goal was achieved by introducing the indirect or multi-tiered holding system.

B.

Indirect Holding System

As its name suggests, this structure is made up of various tiers, often with an increasing number of entities involved in each of the tiers, thus making the

3 In many cases, holders of registered securities will also be issued a certificate, which may merely evidence ownership only or may be a document of title, delivery of which is capable of creating proprietary rights in the securities. 4 See GOODE R., ‘The Nature and Transfer of Rights in Dematerialised and Immobilised Securities’, in: ODITAH F. (ed.), The Future for the Global Securities Market: Legal and Regulatory Aspects, Oxford 1996, pp. 108-109; GUYNN R.D., ‘Modernizing Securities Ownership, Transfers and Pledging Laws’, A Discussion Paper on the Need for International Harmonization, Capital Markets Forum, Section on Business Law, International Bar Association 1996, p. 16, and the further reference there given (this paper is available in pdf format on the Internet at http://www.dpw.com/iba/modernization.pdf). 5 Whereas in 1960 the average trading volume on the New York Stock Exchange was around 3 million shares per day, by 1968 this had more than quadrupled to almost 13 million shares per day (Securities Industry Study, Report of the Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign Commerce, House of Representatives, 1972, pp. 1 and 3). As a comparison, in 1999 the combined trading volume on Nasdaq and the New York Stock Exchange averaged more than 2.8 billion shares every single trading day (see http://www.dtcc.com/2000annual/clearance.htm).

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structure look like a pyramid.6 The top tier comprises national and international central securities depositories (CSDs and ICSDs, respectively), where large pools of securities of different issuers are immobilised or otherwise concentrated. Most (if not all) of the issues of many governments and major corporations are held by such institutions.7 In the case of certificated issues, the actual certificates 6

See GOODE R. (note 4), p. 22. For a practical example, see the comments below,

under C. 7 The oldest CSD was the Wiener Giro- und Cassenverein, founded in 1872 in Austria, which was later followed by the German Kassenverein, now part of Clearstream International (see below). The predecessor of Sicovam, the French CSD (which is now called Euroclear France, see below), was established during World War II. Plans of the New York Stock Exchange to set up a similar entity in the United States before World War I did not materialise; it was only after the paperwork crisis that The Depository Trust Company (DTC) was established. In September 1999, The Depository Trust & Clearing Corporation (DTCC) was established as a new holding company that has as its subsidiaries DTC and the National Securities Clearing Corporation (NSCC). Today, DTC is the world’s largest CSD, holding nearly $ 20 trillion in assets for its participants and their customers. During 1999, DTC processed more than 189 million book-entry deliveries valued at more than $ 94 trillion. Increasingly, DTC is servicing non-US issues as well as US issues, and non-US participants as well as US participants. NSCC processes practically all broker-to-broker equity and corporate and municipal bond trades in the US. For more information, see the websites of DTCC (http://www.dtcc.com), DTC (http://www.dtc.org) and NSCC (http://www.nscc.com). The most important ICSDs are Euroclear and Clearstream (formerly Cedel). Founded in 1968 by the Brussels office of Morgan Guaranty Trust Company of New York following the ‘paperwork crunch’, the Euroclear System has become one of the world’s largest clearance and settlement systems for internationally traded securities. The Euroclear System is operated by the market-owned Euroclear Bank, which is governed by more than 1500 user shareholders. In September 2000, Euroclear and Sicovam signed an agreement to fully merge the two entities. This merger became effective in January 2001 by the exchange of shares. Sicovam SA, now a wholly owned subsidiary of Euroclear Bank, adopted the name Euroclear France. Similar mergers are currently implemented with CIK and Necigef, the CSDs of Belgium and the Netherlands, respectively. In 2000, Euroclear Bank and Euroclear France had a combined turnover of about 100 trillion euros, while the total value of securities held in custody was over 7.4 trillion euros. For more information, see the website of the Euroclear group (http://www.euroclear.com). The European clearing house Clearstream International was formed from the merger of the former Cedel International and Deutsche Börse Clearing. The new company is one of the world’s largest international clearing and settlement organisation, having EUR 7 trillion in assets under custody and handling in excess of 80 million transactions per annum. Cedel stands for Centrale de Livraison de Valeurs Mobilières and was incorporated in 1970 as a limited company under Luxembourg law by 66 financial institutions from eleven countries as a neutral and independent capital markets infrastructure. It is owned by more than 90 financial institutions from Europe, the Americas and Asia. In 1999, Cedel International, the parent company of the Cedel group, announced a merger with Deutsche Börse Clearing AG to create Clearstream International. At the beginning of 2000, Cedel International


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evidencing or representing the securities are kept either in the vault of the CSD itself or in the vault of the CSD’s custodian or subcustodian. Registered securities held by the CSD are entered in the issuer’s records under the name of the CSD or a nominee.8 The next tier consists of a limited number of financial institutions, brokers, depositories and other professional investors who have direct contractual relationships with the CSDs and who hold their interests in securities in book-entry accounts with a CSD.9 These intermediaries are called the participants of the CSD.10 These participants, in turn, hold in their accounts interests in or in respect of securities either for themselves or for their customers, such as institutional or retail investors or further intermediaries, and so forth until accounts are held for the investors. As a result, there may be a variable number of tiers between the investors at the bottom of the structure and the securities themselves located with or registered in the name of the CSD (or its custodian, sub-custodians or nominees). This structure allows the issuer to deal with a single entity, the CSD.11

contributed its entire clearing, settlement and custody business to Clearstream International in return for a 50 % participation. Cedel International remains as a holding company representing the interests of its shareholders. Under the new corporate structure, clearing and settlement activities are conducted by two subsidiaries, Clearstream Banking Luxembourg and Clearstream Banking Frankfurt. Clearstream International has over EUR 7 trillion in assets under custody and expects to handle over 150 million transactions in 2001. During the year 2000, Clearstream International acquired a 7% stake in Monte Titoli, the Italian CSD. For more information, see the website of Cedel International (http://www. cedelinternational.com). 8 In the United States, the shareholder records of large corporations whose shares are publicly traded generally show a single entity – CEDE & CO. – as the registered owner of approximately 83% of all shares listed on the New York Stock Exchange, 72% of all shares traded on Nasdaq and 91% of all corporate debt securities listed on the New York Stock Exchange. CEDE & CO. is the nominee name used by DTC, see THE AMERICAN LAW INSTITUTE, NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS, Uniform Commercial Code, Official Text – 2000, Revised Article 8 (1994 Revision), Prefatory Note, p. 655 (hereinafter: U.C.C. 2000). 9 For more details on the holding pattern in Nordic countries in particular, see Art. 2, para. 4 of the annotated July draft, with accompanying comments. 10 By way of example, DTC’s network links more than 11,000 broker/dealers, custodian banks, and institutional investors, as well as transfer agents, paying agents, and exchange and redemption agents for securities issuers. Euroclear has more than 2,000 participants located in more than 80 countries. 11 In some instances, for example, Daimler-Chrysler shares issues may be structured so that the securities are held through two or more CSDs. See e.g., SCHEFOLD D., ‘Grenzüberschreitende Wertpapierübertragungen und Internationales Privatrecht – Zum kollisionsrechtlichen Anwendungsbereich von § 17a Depotgesetz’, in: IPRax 2000, p. 470, note 18 and accompanying text.

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The CSD, in turn, deals with a limited number of large players, who in turn will deal with a greater number of smaller participants, and so on through the pyramid. The investors do not appear on any register of ownership maintained by or on behalf of the issuer,12 nor do they have actual possession of certificates. The records of a CSD show the securities held on behalf of its various participants, and the records of each such participant show the securities held on behalf of their individual customers. Within an indirect holding system, it becomes apparent that it is the account rather than the certificates that is the source of the investor’s entitlement.13 This, in turn, has of course a major impact in determining the most appropriate connecting factor.14 The efficiency of the indirect holding system is further improved by the practice of most CSDs and intermediaries of holding securities in fungible pools. Under this structure, participants or customers lose the right to call for delivery of specific securities and have instead the right to call for securities of the issue, type and quantity corresponding to their book-entry holdings.15 This concept of 12 However, rules of corporate law may entitle or require an issuer to obtain details of the identity of persons entitled to, or interested in, securities – for example, for purposes of voting or of ascertaining the level of particular holdings. Such rules do not form part of the rules governing ownership and will not determine the position as regards proprietary rights. Matters between the issuer and its members, such as voting rights, do not fall within the scope of the Hague project and remain governed by the lex societatis. 13 See, e.g., GOODE R. (note 4), p. 23, and DE VAUPLANE H., De la détention nationale à la détention internationale de titres: où sont les titres ?, Annexe au Rapport du Conseil National du Crédit et du Titres, Problèmes juridiques liés à la dématérialisation des moyens de paiement et des titres, Paris, May 1997, p. 157. 14 See the comments below, under III. 15 In a traditional direct holding pattern, the owner’s interest is a direct property right: in the case of bearer securities, the owner has direct possession of the certificates, and in the case of registered securities, the owner’s name is recorded on a register of the securities maintained by the issuer or by a third party on the issuer’s behalf. The concept of a direct property right, however, becomes difficult to apply in the context of indirect holding systems. This is because under traditional legal principles commingling fungible property terminates direct property rights of owners of the individual commingled items. According to traditional principles which apply under both common law and civil law legal systems, and whose origins are rooted in Roman law, a person who deposits property with a depository retains whatever property rights that person has in the property, as long as the deposited property is not commingled with similar property of the depository or of other depositors. If, however, the property is commingled, the consequences will depend on the precise terms on which deposits are made. The depositor may have only a contractual claim for the return of the same amount and type of property initially deposited; alternatively, the depositor whose property has been commingled may have some form of common or coproprietary interest with other depositors in the commingled bulk. For the reasons of efficiency explained above, depositories that hold securities for investors generally do so through commingled omnibus customers accounts. The effect of such commingling is to


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fungibility is critical to ensure liquidity of issues.16 Fungibility also reduces the administrative costs associated with the custody of securities. Today, the vast majority of actively traded securities are held through a system of intermediaries. The system caters to the needs of a global marketplace: it reduces the processing and settlement costs and risks of loss, theft and counterfeiting associated with a direct holding system, and the transfer of interests in securities by mere accounting entries on the books of one or more intermediaries also allows for a rapid and efficient disposition of those interests, both domestically and across borders. The fact that the settlement time frames have shrunk and that these interests can be rapidly transferred enhances the efficiency of the indirect holding system compared to a traditional direct holding structure. The velocity of transactions has grown and continues to grow. The efficiency of the indirect holding system is further enhanced by the practice of netting,17 under which market participants are able to limit their credit exposure, and by the fact that transactions within indirect holding systems are usually settled on the basis of delivery versus payment (DVP).18 preclude the continuing existence of direct property rights of individual owners in the specific securities held prior to the commingling and to give each investor either a mere contractual right to the delivery of equivalent securities or co-ownership of the commingled fund of securities, according to the terms of the agreement between the investor and the depository. For an extensive legal analysis of these two models, see BERNASCONI, Report, pp. 19-26. 16 Some CSDs and intermediaries also agree to hold interests for participants or customers on a non-fungible, that is, identifiable basis. In Canada, securities held in such an account and actually registered or in the process of being registered in the name of the customer are known as ‘customer name securities’ in contrast to securities held on a pooled basis, which are known as ‘customer pool fund securities’. 17 Netting is an agreed offsetting (compensation) of mutual positions or obligations by trading partners or participants in a settlement system so that a large number of individual positions or obligations are reduced to a smaller number of positions or obligations, GUYNN R.D. / MARCHAND N.J., ‘Transfer of Pledge of Securities held through Depositaries’, in: VAN HOUTTE H. (ed.), The Law of Cross-Border Securities Transactions, London 1999, p. 55, note 21. Within a netting system, total buy and sell obligations for a particular security are paired off into one net position. The debits and credits from these net positions are likewise consolidated into one net money position for each firm. At the end of the day, instead of making and receiving hundreds or even thousands of payments, firms have only a single payment obligation. Netting is a technical and complex subject, a full description of which is beyond the scope of this article. It is, however, an extremely effective tool. For example, on the peak trading day in 2000, the value of transactions processed by DTCC for the industry exceeded $722 billion; by netting all the transactions, the clearing corporation was able to shrink the $722 billion in trades to a final payment obligation of only $21.7 billion – a reduction of a staggering 97% (see http://www. dtcc.com/2000annual/clearance.htm). 18 This means that cash and securities are exchanged simultaneously in electronic book-entry form. The fact that DVP is simultaneous eliminates the risk of a seller delivering

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In sum, within an indirect holding system, the investor no longer has a direct relationship with the issuer. Rather, the investor’s interest in respect of the underlying securities is recorded on the books of an intermediary, which in turn has its interest recorded with another intermediary and so on up the chain until some intermediary either (i) is recorded as the registered owner on the books of the issuer or the issuer’s official recordholder or (ii) holds the certificates or other documents of title representing the securities.19 Thus, this indirect holding system has one or more tiers of intermediaries between issuer and investor, and interests in respect of underlying securities are recorded by book entries at various levels in the chain. Transfers of such interests often occur through book entries without any form of delivery, whether constructive or actual.20 In most jurisdictions, however, neither the substantive laws governing securities transactions nor the rules determining the law applicable to such transactions have been updated adequately to reflect this market reality. In other words, in most countries the legal regime currently in place to cope with the indirect holding system dates back, to a greater or lesser extent, to a time when securities were still directly held in certificated form by investors. The concepts of (physical) possession and delivery, however, do not operate satisfactorily in the context of the modern indirect holding system, as there can be no actual possession or delivery of the intangible property interests arising under that system.21

C.

Why Bother? An Example

In order to assess both the importance and the usefulness of the Hague project, one may consider the following example:22

securities without receiving payment from the purchaser, or of a purchaser making payment without receiving securities from the seller. 19 This Article uses the term ‘intermediary’ as a general term including all the various kinds of financial institutions through which the investors’ interests are held, for example, brokers, nominee companies, banks and other custodians, settlement systems and depositories. 20 For a more detailed presentation of the indirect holding system, see BERNASCONI, Report, pp. 12 et seq. For a very instructive presentation of the commercial and legal developments on both the money and the securities sides of transactions, see GUYNN R.D. (note 4), pp. 16-21 and 21-25. See also GOODE R. (note 4), pp. 112-115. 21 See, e.g., UNIFORM LAW CONFERENCE OF CANADA (ULCC), Tiered Holding System – Uniform Legislation Project, Report of the Production Committee, April 30, 1997, drawn up by SPINK E. (Reporter), with updates presented on 1999 and 2000. The Report and the updates are available on the ULCC’s website (http://www.ulcc.ca/en/cls/index.cfm?sec= 2&sub=2x). 22 For a schematic illustration of the example, see BERNASCONI, Report, p. 15.


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Australian Investor is a corporation formed in Sydney, Australia. It holds an interest in respect of 500,000 Illinois Inc. shares through the indirect holding system. Illinois Inc. is incorporated in Illinois in the United States. Illinois Inc. has 5,000,000 shares outstanding. They are all held through DTC, which is incorporated and has its principal place of business in New York. DTC keeps the actual physical certificates representing the Illinois Inc. shares in its vault in New York. Illinois Inc. maintains a share register in Newark, New Jersey, with a registrar, NJ Registrar, located there. DTC’s nominee, Cede & Co., is recorded in the share register as the registered owner of the 5,000,000 outstanding Illinois Inc. shares. Australian Investor’s ownership interest in respect of the 500,000 Illinois Inc. shares is reflected by a book entry credited to an account entitled ‘Australian Investor Account’ at its intermediary, French Bank, located in Paris. French Bank, in turn, holds interests in respect of the Illinois Inc. shares corresponding to Australian Investor’s interest, together with interests of other customers of French Bank, through book entries credited to an account entitled ‘French Bank Omnibus Customers Account’ on the books of a European ICSD. In total, French Bank holds for all its customers (including Australian Investor) interests in respect of 1,200,000 Illinois Inc. shares. European ICSD, in turn, holds interests corresponding to French Bank’s interests in respect of the Illinois Inc. shares, together with interests of other participants in the European ICSD system, through book entries credited to an account entitled ‘European ICSD Omnibus Customers Account’ on the books of the ICSD’s sub-custodian in the United States, California Subcustodian, located in Los Angeles, California. In total, European ICSD holds for all its customers (including French Bank) interests in respect of 2,500,000 Illinois Inc. shares. California Sub-custodian, in turn, holds interests corresponding to European ICSD’s interests in the Illinois Inc. shares, together with interests of other customers of California Sub-custodian, through book entries credited to an account entitled ‘California Sub-custodian Omnibus Account’ on the books of DTC. In total, California Sub-custodian holds for itself and all its customers (including European ICSD) interests in respect of 3,000,000 Illinois Inc. shares. Each of the intermediaries in this indirect holding system holds interests in securities on an unallocated, fungible or pooled basis – that is, on terms that none of its account holders has an interest in any specific securities held by the intermediary at a higher level. Thus, for example, French Bank’s custody agreements provide that Australian Investor and French Bank’s other customers are not entitled to any specific securities held in the ‘French Bank Omnibus Customers Account’. Similarly, European ICSD’s Terms and Conditions specify that no European ICSD account holder has any interest in any specific securities held by European ICSD with sub-custodians or central securities depositories.

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In this situation, if Australian Investor wishes to provide its interests in the Illinois Inc. shares to a credit provider under a pledge mechanism23 the contractual aspects of which have been submitted by the parties to English law, the credit provider needs to know before entering into the transaction which requirements have to be fulfilled so as to ensure that the credit provider will receive a perfected interest, i.e., an interest that will prevail over the interests of third parties (including the interests of the liquidator should Australian Investor enter insolvency). In order to assess this question, the credit provider (collateral taker) needs to ascertain which jurisdiction’s law will govern the proprietary aspects of the transaction. In the current fact pattern there are a number of possibilities – among others, is it: (i)

Illinois law, as the law of the place of incorporation of the issuer of the underlying securities? (ii) New Jersey law, as the law of the place of the register for the underlying securities? (iii) New York law, as the law of the place where the underlying security certificates are kept?

23

In this article, the word ‘pledge’ is used as a generic term and includes not only possessory security interests but also non-possessory forms of security interests (such as mortgages and charges). It also covers title transfers by way of security. The term ‘pledge’ is preferred to the alternative generic term ‘security interest’ because of the inevitable confusion with ‘interest in securities’. The term ‘security interest’ is used in particular in the Uniform Commercial Code (U.C.C.) of the United States; see Art. 1-201(37), which defines a security interest as ‘an interest in personal property or fixtures which secures payment or performance of an obligation’, and Art. 9 U.C.C., which sets out the actual rules on ‘security interests’ in investment securities. This being said, we fully recognise that the term ‘pledge’ originally was limited to possessory interests in physical property only. Because of the potential confusion surrounding the expression ‘security interest’ in an international (and multilingual) context, we nevertheless prefer to use the term ‘pledge’ and deliberately extend its traditional meaning so as to cover non-possessory interests as well. Under a pledge, the collateral provider retains ownership of the securities pledged. In today’s economy, however, there are numerous ways of raising money and obtaining protection against credit exposure, and not all the ways of obtaining such protection utilise the pledge mechanism: some use a title transfer mechanism, under which ownership of the collateral is transferred to the collateral taker, who only has a contractual obligation to redeliver equivalent securities. Examples of such title transfer arrangements include ‘repurchase agreements’, ‘buy/sell-back’ transactions, ‘securities loans’, and swap transactions collateralised by means of a title transfer structure. Such title transfer arrangements are widely used to fulfil a security function, and where they do so, they are to be regarded as collateral transactions, even if – technically speaking – they do not create a pledge over collateral. Again, to be clear, in the future Convention and in this article, the term ‘pledge’ is used to include transfer by way of security even though this is a broader definition than in some jurisdictions.


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(iv) New York law, as the law of the place of the national CSD? (v) California law, as the law of the place of European ICSD’s subcustodian? (vi) the law of the place where European ICSD is located? (vii) French law, as the law of the place of Australian Investor’s intermediary? (viii) English law, as the law chosen by collateral provider and collateral taker in the pledge agreement? (ix) English law, as the law of the place of the collateral taker (creditor)? (x) Australian law, as the law of the place of the collateral provider (debtor)? Given the great variety of possible answers and the huge value of the transaction that is often at stake, one can easily assess the benefit that a Hague Convention on this issue could generate: It would provide ex ante certainty and allow the collateral taker to determine beforehand the legal order whose perfection requirements it will have to fulfil to get a good, i.e., perfected interest.

D.

Scope of the Project: Limited to Proprietary Rights

1.

The Issues Covered

The proposed Convention will only deal with the identification of the appropriate law to govern proprietary aspects of dealings in securities24 held with an intermediary. These dealings include in particular a pledge, a title transfer by way of security or an outright transfer (e.g., sale) of such securities.25 If an investor’s interest in the securities is merely of a contractual nature, the Convention will have no effect on this interest as such, but if, for example, the interest is provided as collateral or transferred to a purchaser, the proprietary rights arising from the transfer of purely contractual rights will be covered by the Convention. Also, the Convention will not interfere with the nature of an investor’s interest in securities held with an intermediary, nor impose any change on a State’s substantive law in this regard. Consequently, the interests which an investor holds in the securities under local law, prior to providing these interests as collateral or transferring them to a purchaser, will not be altered by the proposed regime. The conflict of laws rule

24 For an extensive analysis of the term ‘securities’, see the Report on the Meeting of the Working Group of Experts (15 to 19 January 2001), pp. 8-10. 25 See the comments in note 23.

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adopted should apply rationally and consistently to an investor’s interest irrespective of the form the interest takes.26 More precisely, the Convention will identify the appropriate law to govern proprietary aspects of a disposition of interests in securities, in particular:27 (a) the legal nature of the rights derived from the credit of securities to a securities account; (b) the legal nature and proprietary effects of a disposition of securities held with an intermediary; (c) the requirements for perfection of a disposition of securities held with an intermediary; (d) whether a person’s title to or interest in securities held with an intermediary is overridden by or subordinated to a competing title or interest;28 (e) the duties of an intermediary to a person who asserts a competing claim to securities held with that intermediary;29 and (f) the steps required for the realisation of a disposition of securities held with an intermediary. 26

One may recall that there are always two components to a collateral transaction or transfer of property: first, the contractual element, describing the parties’ obligations under the transaction and, secondly, the proprietary element, dealing with the transfer of rights in the property. Whatever the nature of the investor’s interest, the Convention will not determine the law applicable to the contractual or other non-proprietary aspects of rights or duties with respect to securities held with an intermediary (unless such interests are provided as collateral or transferred to a purchaser, see the comments in the text). In particular, the Convention will not determine the law applicable to the contractual rights and duties of parties to a transaction in securities, the contractual rights and duties arising from relations between an intermediary and an account holder, the rights and duties of an issuer of securities, or the rights and duties of a registrar or transfer agent (see Art. 1, para. 2 of the annotated July 2001 draft). The contractual aspects of an agreement under which a disposition of securities is made are covered by separate conflict of laws rules. These rules are usually straightforward and allow the parties to choose the applicable law. Within the context of transactions in respect of indirectly held securities, these rules do not create specific problems which would need to be addressed in the proposed Convention. 27 See Art. 4, para. 2 of the annotated July 2001 draft. 28 This should make clear that the applicable law governs all forms of dispute between or among claims of any property interest to securities held with an intermediary. This would include priority disputes among conflicting security interests. It would also include issues commonly described as adverse claim issues or issues of the rights of bona fide purchasers, such as whether the title or interest of a person who holds securities with an intermediary is subject to or may be defeated by an assertion that some other claimant is in fact the true owner of the securities or has some other form of claim to them. 29 This provides that the applicable law also determines the duties of an intermediary to a person who asserts a competing claim. Because the indirect holding system is the mechanism for settlement of enormous volumes of securities trading, many systems of substantive law are designed to ensure that the settlement system cannot be disrupted by assertions of claims by persons other than the person recorded on the intermediary’s records as the account holder. The suggested language is intended to make clear that an intermediary’s obligations with respect to such issues are governed exclusively by the law of the intermediary’s jurisdiction.


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2.

The Issues Not Covered

As we have seen, the Convention will not deal with the nature of an investor’s interest and method of transfer. The proposed Convention will also not address the substantive law issue of so-called ‘upper-tier attachment’ – that is, the problem that arises where a person with an interest at a lower level in the chain of holdings (for example, an investor or a person claiming to have acquired rights from an investor) seeks to attach or otherwise claim an interest in securities or an interest in securities held at a higher level where there is no record of that person’s entitlement.30 Furthermore, the proposed Convention is not intended to alter the rules governing the creation and issue of the underlying securities or the rights and duties of the issuer as against direct holders of such securities and third parties. Finally, it could be argued that the issues raised by indirect holding systems for securities also apply where other property (for example, physical commodities) is held in a similar way. However, it is not suggested that the scope of the proposed Convention should extend beyond the securities area. The delicate issue of the effects of a bankruptcy procedure on a transaction whose proprietary aspects are governed by the substantive law designated by the Convention deserves a more extensive comment and will be discussed below.31 To sum up, the proposed Convention should enable financial market participants to ascertain readily and unequivocally which law will govern the proprietary aspects of dispositions of interests in respect of securities held through indirect holding systems. The proposed Convention is thus intended to provide certainty and predictability on a limited but crucial aspect of such dispositions. Also, the fact that the Convention addresses a very specific, well defined and limited topic ensures that the project as such remains within clearly circumscribed boundaries, which in turn makes the administration of the project more lenient and predictable.

30

See, e.g., Fidelity Partners, Inc. v. First Trust Co., 1997 U.S. Dist. LEXIS 19287, No. 97 Civ. 5184, 1997, WL 752725 (S.D.N.Y., Dec. 5, 1997). In this case, a judgment creditor sought to execute against an interest in bonds held by a judgment debtor through an indirect holding system; the bonds were payable in New York, but the judgment debtor’s interest was recorded only on the books of an intermediary located abroad (Philippines). The court refused to order execution in New York. Claims of this nature are often referred to as ‘upper-tier attachment’ claims. Whether such a claim has such a prospect of success will depend on the substantive law of the jurisdiction in which the claim is asserted. Although therefore the possibility of upper-tier attachment may be a problem that ought to be addressed in some countries, as a matter of substantive law, it is not one with which the proposed Convention can deal. 31 See below, under VI.

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III. The Search for the Appropriate Connecting Factor A.

Introduction

The traditional conflict of laws rule for determining the enforceability of a transfer of property or a pledge of securities effected in the direct holding system is the lex rei sitae (also referred to as the lex cartae sitae or the lex situs).32 Under this rule, the validity of the transfer is determined by the law of the place where the security is located.33 In the case of bearer securities, this is taken to be the law of the See, e.g., DICEY & MORRIS, The Conflict of Laws, 13th ed., London 2000, pp. 915937; BATIFFOL H./ LAGARDE P., Traité de droit international privé, Paris 1983, Vol. II, pp. 163-173; AUDIT B., Droit international privé, 3rd ed., Paris 2000, pp. 630-658; DE VAUPLANE H. (note 13); the principle of the lex rei sitae in respect of collateral is enshrined in the second para. of Art. 3 of the French Civil Code which provides that French law governs the legal regime of real estate property (immeuble) located in France, even when title to such property is held by a foreign person; this principle has been extended by the French Supreme Court to movable property (Cour de cassation, Req. 19 March 1872, Craven, in: Dalloz Pér. 74. I. 465, and in: Sirey 72. I. 238; see also Cour de cassation, Req. 24 May 1933, in: Sirey 935. I. 253, note BATIFFOL H., and in: Rev. crit. dr. int. pr. 1934, p. 142, note J.P.N.); since then, the principle has been confirmed by the French Supreme Court on several occasions (Cour de cassation, 1ère civ., 8 July 1969, Société DIAC, in: Clunet 1970, p. 16, note DERRUPPÉ J.; Cour de cassation 1ère civ., 3 May 1973, in: Clunet 1975, p. 74, note FOUCHARD Ph.); FIRSCHING K./VON HOFFMANN B., Internationales Privatrecht, 4th ed., Munich 1995, pp. 422-432; KREUZER K., ‘Die Vollendung der Kodifikation des deutschen Internationalen Privatrechts durch das Gesetz zum Internationalen Privatrecht der ausservertraglichen Schuldverhältnisse und Sachen vom 21.5. 1999’, in: RabelsZ 2001, pp. 442 et seq.; DUTOIT B., Commentaire de la loi fédérale du 18 décembre 1987, 2nd ed., Basle & Frankfurt 1997, ad Art. 100. For further references, see GUYNN R.D. (note 4), note 41. See also ROTT Th., Vereinheitlichung des Rechts der Mobiliarsicherheiten, Tübingen 2000, pp. 3-5, with numerous comparative law references. 33 The lex rei sitae principle can be traced back to the work of the statutists, more precisely to Magister ALDRICUS (late 12th/beginning 13th century), and, in particular, to BARTOLUS (13th/14th century). The principle was first applied to immovables and those movables which by their origin belong to the territory (res in territorio natae). In the 19th century, SAVIGNY confirmed the rule, without retaining however the ‘origin’ qualification suggested by the statutists. For a most recent reference to these issues, see KROPHOLLER J., Internationales Privatrecht, 4th ed., Tübingen 2001, p. 12 and in particular pp. 519-520. Some authors have tried to trace the origin of the lex rei sitae rule back to Roman law. The author of this article respectfully disagrees. In fact, it does not appear appropriate to refer to Roman law when it comes to explain the origin of any PIL concept. The origin of PIL is to be found neither in the writings of the great Roman jurists from Mucius Scaevola to Modestin nor in the Byzantine law of the sixth century. PIL is a product of the Italian universities of the 12th and in particular the 13th century. The corpus iuris civilis, which either answers, or suggests an answer to practically every conceivable legal question – says next to nothing on the subject of the application of foreign laws. PIL can only establish itself 32


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jurisdiction where the transferee (collateral taker or purchaser34) takes possession of the securities certificate at the time of transfer. In the case of registered securities, the lex rei sitae is either the law of the issuer’s jurisdiction or the law of the jurisdiction where the securities records of the issuer or its official record holder are located at the time of transfer.35 But how does the lex rei sitae apply to a system where the securities are held through multiple tiers of intermediaries located in different jurisdictions? Which of the several possibilities enumerated above is to be regarded as ‘the’ lex rei sitae? Is there another connecting factor which is more appropriate in these circumstances?

B.

‘Looking-Through’ – An Inappropriate Substitute

Historically, many jurisdictions have attempted to apply the traditional lex rei sitae principle to indirectly held securities by ‘looking through’ the tiers of intermediaries to the laws of one or more of the following: the jurisdiction of incorporation of the issuer, the location of the issuer’s register or the location of the actual underlying securities certificates (the ‘look-through’ approach). However, there are severe conceptual, legal and practical difficulties potentially arising from the application of this approach in the modern context of indirect holding patterns for securities. Where – as is often the case – a diversified portfolio of securities is provided as collateral, the collateral taker would have to satisfy the laws of the jurisdiction of each issuer, register and/or physical custodian of the securities. In addition, in many jurisdictions it is uncertain exactly what the legal rule is when applying the look-through approach: Is it the law of the place of the issuer, the place of the register or the place of the underlying securities? Finally, even if the collateral taker did know the relevant test, often it is not possible to obtain the necessary information to ascertain how to apply the test. For example, a holding through various tiers of intermediaries may not enable the collateral taker to where respect is shown for foreign law, where there is an atmosphere of equality such as pervaded legal thinking in the Italian city-states from the 12th century onwards. Roman jurists were very far indeed from entertaining this conception. Their justifiable admiration for their own law may have induced in many of them such a contempt for all foreign law, including the Greek, that it never occurred to them to set up rules for the application of such ‘inferior’ productions. 34 The expression ‘purchaser’ is used without specifying whether it is limited only to ‘buyers’ or extends to other recipients of consensual transfers, e.g., a donee. 35 GUYNN R.D./MARCHAND N.J. (note 17), pp. 49 and 55. A third possibility is that, where the certificate issued in respect of a registered security is treated as representing the security (e.g., as being a negotiable instrument) the lex rei sitae will be the law of the jurisdiction where the collateral taker takes possession of the certificate at the time of the transfer.

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discover where the national central securities depositary actually stores the certificates, if any exist. In some circumstances, the collateral taker may not be able to point to a single jurisdiction, even if it had access to information, where the underlying certificates of a single issue are kept in more than one jurisdiction. Uncertainties as to the approach to be adopted and as to the effect of the ‘look-through approach’, if applicable, lead to significant expense for market participants (including collateral providers, because the expense of investigating perfection requirements is likely to be passed on to them by collateral takers). Moreover, because the position in many cases cannot be satisfactorily determined, there remains an element of risk, which, given the size of transactions involved and the identity and importance of the relevant financial institutions, must prudently be regarded as systemic in character. For these reasons, the look-through approach is considered by many neither to provide the necessary certainty, nor to be practicable in the modern context.

C.

PRIMA – A Modern Reflection of the Traditional Lex Rei Sitae Principle

Because of the deficiencies of the ‘look-through’ approach explained above, it is necessary to develop another approach, one that reflects the reality of the indirect holding system and follows the sensible legal principle that the law applicable to proprietary matters should be the law of the place where the record of title is maintained and where, therefore, orders in respect of the property can be effectively enforced. In indirect holding systems based on fungible accounts, the record of an investor’s title is maintained by the intermediary with whom the investor has an immediate relationship and it will be on the books of the investor’s immediate intermediary that any disposition of the investor’s interest in favour of a collateral taker or purchaser will be recorded. This suggests an approach that looks to the law of the place where that intermediary is located. This has become known as the ‘place of the relevant intermediary approach’ or ‘PRIMA’.36 36

PRIMA has already been statutorily adopted in Belgium, Luxembourg, France, Germany and the United States (see BERNASCONI, Report, pp. 50-52; for Germany, see the references in ibid., note 75). It is presently also being considered for enactment in a number of other jurisdictions (including, at least, Australia, Canada, Japan, Bermuda, the British Virgin Islands and the Netherlands Antilles; see BERNASCONI, Report, pp. 53-54). At a regional level, the EU Settlement Finality Directive of 1998 (Directive 98/26/EC of the European Parliament and of the Council of May 1998 on settlement finality in payment and securities settlement systems, OJEC 1998, L 166/45; referred to as the EU Settlement Finality Directive) has adopted PRIMA in all EU Member States, although implementation has not been entirely uniform. In some Member States, PRIMA has been adopted only in relation to central banks, the European Central Bank and certain settlement system participants as collateral takers, while in others it has been adopted more broadly to protect commercial counterparties as well (for more details, see IBA/CMF Bulletin No 2 of


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During the January 2001 experts meeting, the experts unanimously supported PRIMA as the appropriate connecting factor to be included in the future Hague Convention, and no support was given to the ‘look-through’ approach. In other words, there is little doubt that PRIMA is the connecting factor to be embodied in the future Hague Convention.37 October 1999). In the United Kingdom, PRIMA has been adopted narrowly in Regulation 23 of the Financial Services and Insolvency (Settlement Finality) Regulations 1999 SI 1999/2979. It only applies in respect of collateral provided to central banks in connection with their functions, or to participants in certain designated clearing systems (intended to cover the International Central Securities Depositories and national payments and securities systems in EU Member States) in connection with their participation in that system. However, Her Majesty’s Treasury (HMT) is currently attempting to extend the application of PRIMA by amending Regulation 23. The first attempt was withdrawn in early April due to concerns with the language used. In July, HMT published a Consultation Document on Domestic and International Initiatives Concerning Conflict of Law Issues Relating to Securities, which would amend Regulation 23 to apply PRIMA in all contexts where securities are taken as collateral. The proposal is open for consultation until October 17, 2001 (see the document at http://www.hm-treasury.gov.uk/docs/2001/hague_condoc/). Under the proposed Directive of the European Parliament and of the Council on financial collateral arrangements (often referred to as the EU Collateral Directive), PRIMA is to be applied as a general rule to all situations where securities held through indirect holding systems are provided as collateral (see Art. 10 of the EU Collateral Directive as proposed by the European Commission on 27 March 2001, COM (2001) 168 final, 2001/0086 (COD); formerly Art. 11 of the Working Document on Collateral from the Commission to relevant bodies for consultation, First Preliminary Draft Proposal for a Directive, Document number C4/PN D(2000), dated 15 June 2000). See also the following note. 37 In substance, this position has now also been adopted by the textbook DICEY & MORRIS, The Conflict of Laws, 13th ed., London 2000, in Rule 118, note 24-064: ‘If it is accepted that the expectation of all parties to the transaction is that the investor has a proprietary interest which is capable in principle of being assigned, and that the rules for choice of law should seek where possible to accommodate this reasonable expectation, the better view [that is, better than applying Art. 12 of the Rome Convention or traditional common law choice of law rules] would be that the investor’s proprietary rights are located at the place where his account with the depository is maintained, and that the law which governs dealings with these rights is the law which governs his relationship with the broker. This will be the law governing the relationship between investor and broker, under which the rights of the investor arose, and it will often be the lex situs of the rights the investor has against the broker. For present purposes it is submitted that choice of law rules designed in the nineteenth century for the assignment of policies of life insurance and interests under trusts should not be applied uncritically as the basis for regulating the assignment of intangibles of a kind, and by processes, then unknown.’ [footnote omitted] The references in this passage to ‘depository’ and ‘broker’ are perhaps not entirely clear. It seems reasonably clear from the context in which the passage quoted appears, however, that both terms refer to the intermediary with which the investor maintains the account (shortly before the passage quoted, reference is made to investors maintaining an account with ‘an intermediary or broker’).

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The major advantage of PRIMA is that the question of whether the collateral taker receives a perfected interest will be governed by the law of one jurisdiction even where a portfolio of securities of issuers from different countries is involved. Furthermore, the application of PRIMA can be seen as an appropriate extension of the lex rei sitae principle – the location of the collateral taker’s interest in securities credited to a securities account is (and the beneficial ownership of the securities themselves is most likely only recorded) where the securities account is located. Against this background, PRIMA may legitimately be regarded as an updated application of the traditional lex rei sitae principle. This applies even to situations where certificates have been issued and are kept in the CSD’s vault located in a different jurisdiction to that of the intermediary. It is true that in such a situation, one might argue that the physical location of the certificates determines the lex rei sitae. Such a deduction, however, can legitimately be challenged by reference to the ultimate justification of the lex rei sitae principle, i.e., the application of the law of the place where orders in respect of the property can be effectively enforced. Within an indirect holding structure, this place can only be the place of the relevant intermediary, i.e., the place of the account (see infra comments under V.B.1., not the place of the location of the physical certificates, where the investor is not even known and the transaction not recorded or reported.38 The principal attributes of PRIMA may be summarised as follows: - PRIMA dictates that questions of creation, perfection (rights against third parties) or completion, priorities and realisation of interests in respect of securities, be governed by the law of the place of the immediate intermediary on whose books the relevant interest is recorded; - PRIMA situates all of an investor’s interest with respect to a portfolio of securities in one single jurisdiction, even where the issuers and certificates evidencing such underlying securities are situated in many different countries; - PRIMA applies irrespective of whether a transfer is made by way of sale or by way of a collateral transaction, and in the case of a collateral transaction, irrespective of whether the transaction takes the form of a pledge or of a transfer of title; - PRIMA applies irrespective of the particular legal status of the collateral provider or collateral taker; - PRIMA applies irrespective of the jurisdiction in which the collateral provider, the collateral taker or any intermediary is formed or located; - Where a collateral taker acts as the collateral provider’s intermediary (that is, the collateral provider holds through the 38

See BERNASCONI, Report, pp. 27 et seq.


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collateral taker prior to the provision of collateral) and is also the secured party, the law of the relevant intermediary will be the law of the place of the collateral taker.

IV. Application of PRIMA and How to Identify the Relevant Intermediary In order to illustrate how PRIMA works, and in particular which intermediary is the ‘relevant’ intermediary, one may consider the following example:39 An Australian Investor holds an interest in respect of 500,000 shares of Illinois Inc. through its intermediary, French Bank. French Bank, in turn, holds through European ICSD, which holds through California Sub-custodian, which holds through DTC. DTC’s nominee, Cede & Co., is recorded as the registered owner of the securities in the register maintained by NJ Registrar in New Jersey. The physical share certificates representing the Illinois Inc. shares are kept by DTC in a vault in New York. Australian Investor wishes to borrow money with the Illinois Inc. shares to be provided as collateral for the loan. Australian Investor seeks a loan from London Bank, an international investment bank incorporated in the United Kingdom and based in London. London Bank, the collateral taker, does not hold its interests in respect of Illinois Inc. securities through French Bank but rather holds through a different intermediary, Swiss Bank, which is incorporated in Switzerland and located in Zurich. In turn, Swiss Bank maintains an account entitled ‘Swiss Bank Omnibus Customers Account’ on the books of European ICSD in which it holds 100,000 Illinois Inc. shares for its customers. When Australian Investor asks for the loan, London Bank requires that Australian Investor move its interest in respect of the Illinois Inc. shares to Swiss Bank, with the pledge to be recorded on the books of Swiss Bank. By moving the shares to the books of an intermediary that London Bank trusts, London Bank is avoiding any exposure to French Bank, in particular, to the possible consequences of administrative error, wrongdoing or insolvency of French Bank (or the likely influence that Australian Investor may have with French Bank). Thus, prior to the pledge, Australian Investor’s interest in respect of the 500,000 Illinois Inc. Shares would be debited to the ‘Australian Investor Account’ at French Bank and credited to an ‘Australian Investor Account’ at Swiss Bank. The transfer from French Bank to Swiss Bank of interests in respect of 500,000 Illinois Inc. shares will result on the books of European ICSD in a debit to the ‘French Bank Omnibus Customers Account’ and a corresponding credit to the 39

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The example is schematically depicted in BERNASCONI, Report, pp. 33-35.



‘Swiss Bank Omnibus Customers Account’. Australian Investor pledges its interest in the Illinois Inc. shares to London Bank under a pledge mechanism, the contractual aspects of which are governed by English law. The pledge is represented on the books of Swiss Bank by a debit to the ‘Australian Investor Account’ of 500,000 in respect of the Illinois Inc. shares and a corresponding credit to the new ‘Australian Investor Pledge to London Bank Account’. The pledge does not result in any change on the books of European ICSD (because both these accounts are accounts in the books of Swiss Bank and there is no change in the ‘Swiss Bank Omnibus Customers Account’) or on the books of California Subcustodian or DTC. After executing the Pledge Agreement in favour of London Bank, Australian Investor again enters into a pledge agreement in respect of the same 500,000 Illinois Inc. shares with Italian Bank. The second pledge is valid under Italian substantive law (the governing law chosen by Australian Investor and Italian Bank in their pledge agreement). Australian Investor then enters insolvency in Australia. The liquidator asks the Australian court to rule on whether the pledges in favour of London Bank and Italian Bank should be treated as valid and, if both pledges are to be treated as valid, how they should be regarded as ranking against each other. In this fact pattern, under PRIMA, proprietary issues, such as whether London Bank received a perfected interest in respect of the Illinois Inc. shares and whether London Bank has priority over the interest of Italian Bank, would be governed by Swiss law, as the law of the place of Swiss Bank, the intermediary on whose books the pledge in favour of London Bank is recorded.40

V.

The Pièce de Résistance: How to Locate the Relevant Intermediary?

A.

Introduction

Once the relevant intermediary has been identified on the basis of the PRIMA rule, one still has to determine where the relevant intermediary is actually located for purposes of PRIMA. As a matter of fact, this question rapidly turned out to be the authentic pièce de résistance of all the discussions relating to this project. The crucial role of this question is hardly surprising and indeed had to be expected, as 40

This fact pattern was considered by experts in 28 jurisdictions surveyed by Richard POTOK, Legal Expert to the Permanent Bureau for this project. The state of confusion in the current law in many jurisdictions can be seen in the results. The multitude of probable and possible answers under current law are shown in schematic form in Figure 1 (perfection of pledge) and Figure 2 (priorities) in Appendix B to the BERNASCONI Report.


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the determination of the intermediary’s actual location will eventually put the PRIMA concept in a concrete form and lead to the designation of the law applicable. The problem of how to locate the intermediary is therefore at the very heart of the project. The discussion during the January experts 2001 meeting showed that several aspects need to be distinguished. These aspects will be addressed separately in the following comments.

B.

The Principles Agreed Upon

1.

‘Place of the Relevant Intermediary’ = ‘Place Where the Securities Account Is Maintained’

First, the experts agreed that the localisation of the relevant securities intermediary should be linked to the place of the account to which the securities are credited.41 It is indeed on the account that the collateral taker’s or transferee’s interest will be recorded and where this interest may therefore eventually be enforced. As the ultimate place to look at is the place of the account, some experts suggested that any reference in the Convention to the place of the relevant securities intermediary should be deleted and replaced by an explicit reference to the place of the securities account. While this might be perceived as a welcome simplification, focusing directly on the rationale underlying the main issue of the Convention, one may equally wonder if the deletion of the only express reference to PRIMA would not introduce an element of uncertainty and cause experts and practitioners to hesitate as to which approach has actually been taken in the Convention. PRIMA has become so widely accepted that experts and practitioners will presumably look for an explicit reference to it in the Convention itself. Against this background, the deletion of the reference to the place of the relevant intermediary may turn out to be counter-productive and the ‘two stage approach’ may well be acceptable.

2.

The Need for ex ante Certainty and How To Achieve It

Secondly, there was consensus among the experts on the need for ex ante certainty, i.e., the need for the parties to a transaction to be in a position to establish beforehand where the account is being maintained. This ex ante certainty is essential to meet the needs of market participants, who need to know which law applies to the proprietary aspects of the transaction and hence determines the perfection requirements to be fulfilled. Initially, there was however no full agreement among the experts on how to achieve this goal. Some delegations wanted the test to be the jurisdiction of the law chosen by the parties to the custody agreement or of the place specified by the parties to the custody agreement as the 41

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See, however, infra note 46.



location of the account; along with this principle, one delegation stressed that the ability to designate the law applicable should not be subject to any requirement for a connection between the place designated in the agreement and the other facts of the transaction. Other delegations, however, explained that they could not accept a test that would allow parties freely to choose the law applicable to the proprietary aspects of a transaction and to invoke this choice against third parties. As a matter of fact, it is worth noting that although some civil law jurisdictions allow for party autonomy to apply to the proprietary aspects of a transaction, none of these jurisdictions seems to allow for this choice to be invoked against third parties.42 Against this argument, one has however to point out that in the present context use of the term ‘party autonomy’ is not appropriate, as it could imply that the parties to the collateral transaction or sale could determine by agreement the law governing the proprietary aspects of the transaction. This, however, has never been suggested, not even in the domestic legislation of those jurisdictions which were in favour of a test leading to the application of the law chosen or of the place specified by the parties to the custody agreement.43 Against this background, it does appear that it is not appropriate to refer to the concept of ‘party autonomy’ in the context of the proposed provision on the determination of the place of the relevant intermediary. Under this provision, the parties who are designating the law applicable by localising the account are the investor (account holder) and its intermediary. Under the concept of party autonomy, however, it would be the investor and the collateral taker or transferee who would be offered the possibility to choose the law applicable to the various aspects of their transaction. Such a choice, however, is not what is being suggested in the future Convention: it simply offers to the investor and its intermediary the possibility of localising their account.44 It has to be stressed though that such a localisation does of course have a ‘reflex effect’ (effet réflexe) on the actual transaction concluded between the investor and the collateral taker or transferee, as it is the law that would be governing the proprietary aspects of this transaction. But to refer to it under the heading of ‘party autonomy’ would be misleading. In order to avoid further misunderstandings, the author of the present article has suggested that the proposed solution be placed under the heading ‘consensual approach’, as it reflects the agreement and understanding of the investor and its intermediary.

42

See, e.g., Art. 104 of the Swiss PIL Statute. ‘Party autonomy’ in the UCC, for example, refers only to the relation between the investor and the intermediary, not the relation between the investor and the secured party. 44 Some experts have drawn a parallel with an investor choosing to do business with an intermediary located in State A rather than with an intermediary located in State B, and suggested that, although this ‘choice’ would lead to the application of a different law, it would not be accurate to refer to it as an example of ‘party autonomy’. 43


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3.

The Compromise Reached at the January 2001 Experts Meeting

As a result of the discussion, the following compromise emerged during the January 2001 meeting: the parties to the custody agreement should be able to designate an agreed place as the location of the account, but such an agreed designation would not be conclusive unless it satisfies one of a number of specified tests that indicate that the designated place is where the account is actually maintained. This is in order to prevent third parties being prejudiced by the use of an artificial designation which would conflict with the natural assumptions about the location of the account. Only under those conditions would PRIMA be regarded – and accepted – as a modern reflection of the traditional lex rei sitae approach. Ignoring the lex rei sitae principle for the sake of an unrestricted consensual approach would, however, be seen as having severe implications for long-standing private international law traditions of several countries. This compromise, it is submitted, bridges the position initially advocated by those who favoured an unrestricted consensual approach (i.e., parties should be allowed to designate any location of the account) with the position initially taken by those who argued that no contractual liberty should be left to the parties in relation to the issue of location, with only objective factors used. The precise wording of the provision embodying this test still needs to be found. Again, the following section reflects the status of discussion as of July 2001.

C.

The ‘Principal Rule’ in Intermediate Drafts

In the light of the discussions mentioned above, the principal rule embodied in all intermediate drafts for the future Convention is based on the consensual approach with a nexus test as a reality check. It was in particular embodied in the draft proposed by the Drafting Group at the January 2001 meeting (Article 4) and in a new draft reflecting the results of the subsequent informal working process (Article 5 of the annotated July 2001 draft). In the annotated July 2001 draft, the relevant provision (Article 5) has the following structure. Paragraph 1 specifies that the relevant intermediary is located ‘where the securities account with that intermediary is maintained’. The draft then goes on to suggest two options for the regulatory nexus test. Under the first option, the designation of an account location is effective only if the intermediary’s maintenance of the account is subject to regulatory supervision in the place so agreed. It has been suggested that in at least some countries ‘custodial accounting rules’ exist that would satisfy this requirement. Others, however, have suggested that regulatory structures may not focus on the manner in which the intermediary maintains securities accounts, but on the requirements that an intermediary must satisfy, such as capital requirements, in order to engage in the business of maintaining securities accounts. Accordingly,

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the second option states the regulatory nexus test in terms of regulation of the intermediary.45 46

D.

The Fall-Back Test

If the principle rule – i.e., the consensual approach with a nexus test as a reality check – does not work, either because there is no designation in the custody or other agreement or because the nexus conditions embodied in the proviso are not fulfilled, then a fall-back test is needed. It has to be mentioned though that this fallback test is intended to deal with a very small number of cases, as the bulk of the cases will presumably fall within the scope of the principal rule. 45

The annotated July 2001 draft also contains a third option which takes a completely different approach and allows the relevant intermediary to designate unilaterally the place of the account. This approach is based on the idea that the facts needed to make that determination may be knowable only to the intermediary that is maintaining the account. Third parties may have no way of independently determining whether the nexus test had been satisfied, even in cases in which the securities have been moved into a special pledge account that the intermediary maintains for the pledgee. The third option responds to this concern by giving complete protection to third parties who rely upon an intermediary’s certification of the location of the account. In these broad terms, however, the third option does not appear to be acceptable on a consensus basis, as it would allow the intermediary to designate any possible location, including a location that is completely divorced from the realities of the facts at stake and which is even inconsistent with the actual operation of the account in practice. This is why the Permanent Bureau has added bracketed language to the third option with a view to subject, similarly to the first two options, the intermediary’s ability to designate a location to some ‘reality check’ requirements. This approach has not been the subject of much discussion since the January 2001 experts meeting. 46 The annotated July 2001 draft also contains a specific proposal that departs from the equation ‘place of the relevant intermediary’ = ‘place of the account’, and instead suggests that the governing law is the law of the office or branch of the relevant intermediary as determined by the appropriate test. The reasoning underlying this ‘branch/office approach’ is the following: Because an account is an intangible legal relationship, it cannot, literally, have a geographical location. Rather, in speaking of the location of an account, one typically has in mind particular activities that an intermediary carries out in connection with maintaining the legal relationship of a securities account. Against this background, it may well be that retaining the concept of geographical location of an account causes more difficulties than it solves. However, the drawback of the ‘branch/office approach’ is that by dropping the reference to the account – i.e., to the place where orders in respect of the property can be effectively enforced – it does not seem to be based on the lex rei sitae principle anymore and would therefore be a rather dramatic departure from longstanding principles. This might render this approach less attractive to all those who believe that the lex rei sitae principle – although adapted to the new market realities – should serve as the basic rule to assess proprietary rights in indirectly held securities.


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1.

The Objective Balancing Test vs. the Single Factor or Cascade Approach

In the most recent draft (i.e., the annotated July 2001 draft), the proposed Article 5, paragraph 3, uses an objective balancing of factors test rather than a rule based on a single specified factor or a cascade of single specified factors. The balancing test, although not providing complete ex ante certainty, appears acceptable for two reasons. First, the strength of the principal rule means that commercial parties will be able to determine with certainty the law that will govern perfection in the great majority of cases. Therefore, if the fall-back test applies, this will normally be because the parties did not consider the issue of the location of the account; hence, it appears appropriate that the question of its actual location be decided by considering all the objective evidence. Secondly, the envisaged ‘black list’ (see infra under E) makes clear the factors that are not to be considered and this will provide far greater certainty than currently exists. In the July 2001 proposal, the factors that may be considered in determining the place of the relevant intermediary are: (a) the location of the office or branch where the relevant intermediary treats the securities account as being maintained for regulatory, accounting or internal or external reporting purposes; (b) the location of the office or offices of the relevant securities intermediary with which the account holder deals; (c) the terms of the custody agreement, account agreement or any other agreement relating to the securities account between the relevant securities intermediary and the account holder; (d) the terms of account statements or other reports prepared by the relevant securities intermediary that reflect the balance of the account holder’s interest in the securities account; and (e) the State whose law governs the agreement establishing the securities account. Letter (a) would simply reflect the main element embodied in the general rule. Sub-paragraph (a) and its components would certainly seem to be an important factor as part of a balancing test; what is less clear is whether the subparagraph’s components would make sense as a single fall-back rule. For example, using a test that looks to the place where the account is maintained for regulatory purposes will not provide certainty in cases where there is more than one State that has jurisdiction over it. Letter (b) may be useful in situations where other documentation has not expressly designated the location of the account, but the account holder regularly deals with a certain office or offices with respect to the custodial services provided by the intermediary. Letters (c) and (d) permit reference to the general terms of account agreements or statements. Both subparagraphs can be expected to lead over time to a change in industry practice. As a competitive matter, custodians will ensure that their account agreements and account statements clearly indicate where the account is maintained to provide certainty for their customers. Some experts questioned the inclusion of letter (c), as this factor is already contained in the principle rule. There are, however, two reasons for suggesting that it remains appropriate to refer to the same factors in both places. First, if no place is designated in the custody or other agreement, the terms of the agreement should still be relevant in evaluating the expectations of the

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parties as to the location of the account. Similarly, if a place has been designated in the custody or other agreement but the conditions embodied in the principal rule are not satisfied, the terms of the agreement between the parties might still be of relevance in determining the location of the account. Letter (e) has provisionally been included in the balancing test as one of the potential fall-backs proposed at the January experts meeting. This test had the support of some delegations. As one of the factors it would be an additional indication of a connection with a particular place. As a single factor fall-back test, however, it seems unlikely to be acceptable because it leads to an answer that may be divorced from the lex rei sitae rule.

2.

Single Factor Fall-Back Tests, in Particular the ‘Legally Established’ Test

As mentioned above when considering the balancing test, the factors specified in letters (a) and (e) do not seem appropriate as single factor tests. During the informal process, some experts have made it clear that they would prefer the use of a single fall-back test rather than a balancing test if a suitable single fall-back test can be found. The challenge has been trying to find a test that provides a single answer that is linked to the location where the account is actually maintained. Experts continue to strive for such a solution and it is expected that new and different suggestions will be considered as the process continues. One suggestion that was discussed at the January 2001 meeting was to locate the relevant intermediary at the place where that intermediary signing the custody agreement was ‘legally established’. Proponents of this test have suggested that it has the advantage of being clear cut. Others, however, have suggested that it may pose problems due to the varying treatment under different legal systems of the status of branches of multinational organisations, and have questioned whether it will always be feasible to determine whether the contracting party is a branch or the entity as a whole. In such cases, the application of the ‘legal establishment of the signing party’ test could result in the law of the place of incorporation or formation, statutory seat or central administration even though the securities account is not located in that jurisdiction. It has been suggested that this difficulty could be overcome, without abandoning the ‘legally established’ formula, by additional wording making it clear that in cases where the intermediary is dealing through a branch it is to be regarded for this purpose as legally established where the relevant branch is located. This however would lead back to the problem of identifying in each case which branch was the ‘relevant’ branch. Since there may be factors pointing to connections with two or more branches, it does not appear that the use of an expanded ‘legally established’ test of itself provides any greater clarity or certainty.


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E.

The ‘Black List’

Early in the process, it was suggested to expressly enumerate in the Convention black-listed factors that should not be taken into account in determining the location of the accounts. According to the annotated July 2001 draft, the following factors shall not be taken into account in determining the location of the relevant intermediary: (a) the places where certificates representing or evidencing securities are located; (b) the place where any register of holders of securities maintained by or on behalf of the issuer of the securities is located; (c) the place where the issuer of the securities is organised or incorporated or has its statutory seat, central administration, principal place of business or its registered office; (d) the place where any intermediary other than the relevant intermediary is located; or (e) the places where the technology supporting the bookkeeping or data processing for the securities account is located. No reference is made to the relevant securities intermediary’s place of formation or incorporation, statutory seat or principal place of business. It was thought unlikely, but not inconceivable, that this would have been of any relevance and that accordingly the best course was not to include it in either list.

F.

Is There a Need for a ‘Super PRIMA’? The Case of a Fact Pattern Involving Several Intermediaries

Throughout the working process, various experts stressed that the Convention should specifically address the situation where several intermediaries are involved in a transaction, in particular where a collateral provider and collateral taker hold through different intermediaries and the collateral is provided by way of title transfer. Under such a holding pattern, the collateral provider’s (transferor’s /seller’s) interest is not transferred directly to the collateral taker (transferee/purchaser), since the collateral provider never holds an interest with the same intermediary as the collateral taker. Instead, the collateral provider instructs its intermediary to transfer interests to the collateral taker’s intermediary, with a request to the latter to credit the collateral taker’s account.47 While the experts referred to above agree that PRIMA will simplify the choice of law issue and improve certainty at each level of the multi-tiered holding system by substituting a single law (i.e., the law of PRIMA) for the multiple possibilities that must now be considered at each level (e.g., law where certificates are located, law of issuer’s incorporation, law of the forum, PRIMA, etc.), they also argue that PRIMA should 47

This fact pattern is generally referred to as the ‘page 37’ problem, by reference to the page number of the BERNASCONI Report on which this problem is dealt with. See also the Report on the meeting of the Working Group of Experts (15 to 19 January 2001), pp. 1516, and the annotated July 2001 draft, Art. 2, para. 1, definition of the relevant intermediary, with accompanying comments.

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go further. They urge that, in the interests of clarity and simplicity, the Convention should provide that a single law governs proprietary aspects of all stages of a transfer between parties who use different intermediaries. Other experts, including the author of the present article, have expressed strong doubts about this proposal. They argue that while the simplicity of the proposal might be attractive at first sight, it also poses serious problems. They are not persuaded that it is necessary or desirable to have a sort of ‘Super-PRIMA’ that trumps all the individual PRIMAs at each level of the multi-tiered holding system. They believe that PRIMA should provide as much simplicity and certainty in the world of book-entry holdings and transfers as the traditional lex rei sitae rule provides for physical possession and transfers of bearer securities. In other words, PRIMA should provide a single answer to what law governs the proprietary issues arising out of book-entry holdings and transfers of securities at each level of the multi-tiered holding system, i.e., the PRIMA at that level. But there is no need for a ‘Super-PRIMA’ to trump these individual PRIMAs. An additional problem identified by these experts is that the parties involved in the early or middle stages of such a transfer may not be aware of the ultimate transferee or the location of its intermediary. Against this background, it would seem contrary to principle, and to the certainty and predictability which the Convention aims to produce, that parties in this position should be exposed to the effect of rules of property law of a jurisdiction of which they are unaware. Moreover, the suggestion would appear to have the result that the law governing the proprietary aspects of the earlier stages of the transfer is fixed only retrospectively; at the time that each stage occurs it will appear to be governed by one law, but this will be replaced by a different law when it becomes clear that an ultimate transferee holding through an intermediary in a different jurisdiction is involved. A further difficulty mentioned by the opponents to the ‘single law’ proposal arises from the fact that some intermediate transfers will be composite transfers of securities in the course of transmission to a number of different ultimate transferees who hold through intermediaries in different jurisdictions. In such a case it may not be possible to identify which securities are attributable to which ultimate transferee, leaving the position on governing law quite unclear.

G.

Existing Agreements

All the tentative drafts of the Convention produced so far (including the annotated July 2001 draft) do not specifically address the issue of pre-existing documentation (account or custody agreements), i.e., agreements concluded before the Convention’s entering into force. As this is a very important question to a large segment of the industry, it seems important to promote discussion of this issue also, even if at this stage no draft provision is suggested. The following comments are merely designed to highlight the issue and to generate reactions.


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The approach reflected in the comments above (in particular Article 5 of the annotated July draft) should accomplish the objective of providing ex ante certainty for future transactions. However, during the informal working process, it has been suggested that, at least in some situations, it might be difficult to amend pre-existing agreements and to bring them in line with the provisions of the Convention. In other words, the certainty provided by the Convention may not necessarily have a retroactive effect. It has therefore been suggested that consideration be given to adding provisions which would address this problem. One possibility could be to adopt – for pre-existing agreements – the ‘conclusive certificate’ approach suggested by some experts, even if that approach were not thought generally acceptable for future agreements.48 Another possibility would be to provide that for the purposes of Article 5, paragraph 2, where a pre-existing agreement does not contain an explicit reference to the location of the account, certain other terms can be taken into account as determining or indicating the location agreed by the parties. By way of illustration, a statement that the intermediary is acting through a given branch could be treated as an agreement, or as an indication of an agreement, that the account is located at that branch; another example of such an ‘interpretative clause’ could be to say that a choice of law clause shall be treated as an agreement that the account is located in the jurisdiction whose law is selected. Parties drafting agreements after the entering into force of the Convention can be expected to comply with the requirement of the specific provision of the Convention and to expressly specify the location of the account – this is why the possibility of the ‘interpretative clause’ might indeed be regarded as exclusively restricted to pre-existing agreements. During the informal working process, however, it has been suggested that such a provision could be beneficial for new agreements as well and that it should therefore apply generally. One may wonder, however, if such an approach would not be viewed as reintroducing through the back-door the concept of the ‘unlimited consensual approach’ (i.e., without reality check) that had been excluded by consensus. For many civil law countries and for all those who believe that the (modernised) lex rei sitae approach should be the principle underlying the connecting factor embodied in the Convention, the idea of an ‘interpretative clause’ that applies to new agreements too, may therefore not be acceptable. Furthermore, if the second example of such an interpretative clause mentioned above (i.e., a choice of law clause contained in the agreement) were eventually adopted for new documentation as well, its relationship with the existing paragraph 3, sub-paragraph (e), would presumably have to be examined.

48

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See the comments in note 45.



VI. The Insolvency Issue in Particular A.

Introduction

The delicate issue of the effects of a bankruptcy procedure on a transaction – in particular a collateral transaction – whose proprietary aspects are governed by the substantive law designated by the Convention deserves a more extensive comment.49 At the outset, it should be noted that insolvency laws might have an impact in two ways on the law applicable to the taking of securities as collateral. First, insolvency laws might impact whether a proprietary interest has been properly created and perfected. Secondly, insolvency laws might jeopardise the effects of such interest within a bankruptcy procedure. In its current version (July 2001), the proposed Convention addresses both these issues in Article 6.50 It aims at finding the delicate balance between preserving the effectiveness of an interest perfected under the substantive law designated by the Convention, while not vitiating rules in bankruptcy that affect secured parties.51

B.

Respect of Validly Perfected Interests (Paragraph 1)

During the January 2001 meeting, a large number of experts endorsed the principle that an interest validly perfected under PRIMA should be respected under the provisions of specific insolvency laws. This is stated as a general principle in Article 6, paragraph 1 of the annotated July 2001 draft. The general principle is 49 As a matter of fact, the crucial question with respect to a pledge is its efficacy in the event of the debtor’s insolvency. This being said, States have always been very sensitive to any possible intrusion into their domestic insolvency law regime. It is against this background that in the BERNASCONI Report, p. 5, we suggested that the proposed Convention should not interfere with national insolvency rules. This issue had not been discussed in full detail during the informal discussions prior to the January meeting; the matter was in fact deliberately left for discussion at the January 2001 experts meeting. Further discussions on this core issue are needed. 50 This provision reads as follows: ‘(1) The opening of an insolvency proceeding shall not affect the validity of proprietary rights in respect of indirectly held securities that have been constituted and perfected in accordance with the law of the place of the relevant intermediary. (2) Nothing in this Article affects the application of: (a) any rules of insolvency law relating to the [ranking of categories of claim or to the] avoidance of a transaction as a preference or a transfer in fraud of creditors; or (b) any rules of insolvency procedure relating to the enforcement of rights to property which is under the control or supervision of an insolvency administrator.’ 51 The provision is currently drafted without specifying against whom the insolvency proceedings are brought. This way, it covers any relevant insolvent debtor, including the intermediary.


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subject to exceptions, the scope of which raises important policy issues which are discussed further below. It was, however, generally agreed that the exceptions should not be phrased so as to permit the insolvency court to apply a conflicts rule different from PRIMA in identifying the law to govern proprietary issues such as creation and perfection. The approach taken in paragraph 1 is based on both the Council Regulation (EC) No 1346/2000 on Insolvency Proceedings (Article 5(1)),52 and on the Draft UNIDROIT Convention on International Interests in Mobile Equipment (Article 29(1) and (2).53

52

This Regulation (see this Yearbook 2000, pp. 241-264), which will enter into force on 31 May 2002, has been adopted with a view to developing more uniform procedures that will avoid incentives for the parties to transfer assets or judicial proceedings from one Member State to another in order to obtain a more favourable legal position. The proposed solutions rely on the principle of proceedings with universal scope, while retaining the possibility of opening secondary proceedings within the territory of the Member State concerned. The Regulation applies ‘to collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator’ (Art. 1, para. 1). It applies equally to all proceedings, whether the debtor is a natural person or a legal person, a trader or an individual. However, it does not apply to insolvency proceedings concerning insurance undertakings, credit institutions, investment undertakings which provide services involving the holding of funds or securities for third parties, and collective investment undertakings (Art. 1, para. 2). The courts with jurisdiction to open insolvency proceedings are those of the Member State where the debtor has his centre of ‘main interests’ (Art. 3, para. 1; in the case of a company or legal person, this is the place of the registered office, in the absence of proof to the contrary). Secondary proceedings may be opened subsequently to liquidate assets located in another Member State (Art. 3, para. 2; these secondary proceedings are restricted to the assets of the debtor located in the other Member State). The law of the Member State in which proceedings are opened determines all the effects of those proceedings (Art. 4; conditions for the opening of the proceedings, their conduct and closure, questions of substance such as the definition of debtors and assets, effects of proceedings on contracts, individual creditors, claims, etc.). However, the in rem rights of third parties in respect of the debtor’s assets located in another Member State are not affected by the opening of an insolvency proceeding in another Member State (see further comments on this issue in the text). Art. 5, para. 1 reads as follows: ‘The opening of insolvency proceedings shall not affect the rights in rem of creditors or third parties in respect of tangible or intangible, moveable or immoveable assets – both specific assets and collections of indefinite assets as a whole which change from time to time – belonging to the debtor which are situated within the territory of another Member State at the time of the opening proceedings.’ One may add, however, that this immunisation is only partial, as the liquidator may request secondary proceedings to be opened in the State where the assets are located if the debtor has an establishment there. Finally, decisions by the court with jurisdiction for the main proceedings are, in principle, recognised immediately in the other Member States without further scrutiny (Art. 16). 53 Article 29 of this Draft Convention (as approved by the UNIDROIT Governing Council at its 79th session, held in Lisbon from 10 to 13 April 2000) reads as follows:

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The creation, validity and scope of in rem rights are governed by their own applicable law (in general, the lex rei sitae, or, in the specific context of indirectly held securities, PRIMA). The fundamental policy pursued in paragraph 1 is to give effect to a right created under the law of the State where the assets are ‘situated’ and hence can eventually be enforced. In other words, the system preserves legal certainty of the rights over these assets. Rights in rem can only properly fulfil their function if they are not more affected by the opening of insolvency proceedings in other States than they would be by the opening of national insolvency proceedings.

C.

The Qualifications (Paragraph 2)

In the annotated July 2001 draft, the principle stated in Article 6, paragraph 1 is subject to two important qualifications embodied in paragraph 2. These qualifications are based on the Draft UNIDROIT Convention on International Interests in Mobile Equipment.

1.

Draft UNIDROIT Convention on International Interests in Mobile Equipment

Like Article 29, paragraph 3, of the Draft UNIDROIT Convention on International Interests in Mobile Equipment, the February 2001 draft of Article 6, paragraph 2, aims at: (1) preserving certain rules relating to insolvency proceedings such as the ranking of categories of claims and avoidance rules, and (2) avoiding interfering with rules about the enforcement of real rights or security interests pending reorganisation. The basic reasoning underlying sub-paragraph (a) is to preserve insolvency rules which may declare that certain types of claims (e.g., wages and taxes) should have priority over any other interest. Several experts stated that in their respective jurisdictions such insolvency rules would have public policy character and hence would have to prevail over any other interest. Another group of experts expressly questioned this conclusion. Furthermore, to ensure that reorganisation proceedings do not collapse (because, for example, a secured party seizes crucial assets), sub‘(1) In insolvency proceedings against the debtor an international interest is effective if prior to the commencement of the insolvency proceedings that interest was registered in conformity with this Convention. (2) Nothing in this Article impairs the effectiveness of an international interest in the insolvency proceedings where that interest is effective under the applicable law. (3) Nothing in this Article affects any rules of insolvency law relating to the avoidance of a transaction as a preference or a transfer in fraud of creditors or any rules of insolvency procedure relating to the enforcement of rights to property which is under the control or supervision of the insolvency administrator.’


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paragraph (b) is designed to subject the security interest to such procedures (e.g., a stay). A first group of experts agreed with the principles underlying Article 6. Another group, however, questioned the qualifications in paragraph 2 and its effect of submitting the interests in the pledge to the lex concursus. In their opinion, the effects of paragraph 2 would be too far-reaching. Instead, these experts suggested that the proprietary rights of the beneficiary in cases of insolvency should be determined exclusively in accordance with PRIMA. This approach, which expands the effects of PRIMA to the detriment of the lex concursus, is inspired by the European Insolvency Regulation. During the January meeting and in subsequent informal discussions, a number of experts have stressed that it was important to ensure compatibility between the proposed Hague Convention and the European Legislation. The general focus of the proposed Convention, however, should remain on PRIMA and it may be worthwhile not to bee too ambitious on insolvency issues so as not to lose sight of the principal aim of the project.

2.

The European Insolvency Regulation

As already mentioned, Article 5, paragraph 1, of the European Insolvency Regulation (EIR) excludes from the effects of the proceedings rights in rem of third parties and creditors in respect of assets belonging to the debtor, which, at the time of the opening of proceedings, are situated within the territory of another Contracting State.54 Similar to the Draft UNIDROIT Convention, the EIR does not ‘immunise’ rights in rem against the debtor’s insolvency altogether.55 According to Article 5, paragraph 4, the principle of protection embodied in paragraph 1 ‘shall not preclude actions for voidness, voidability or unenforceability as referred to in Article 4(2)(m).’56 Pursuant to the latter provision, these actions are governed by 54

See supra, note 52 and accompanying text. If the assets are situated in a nonContracting State, Art. 5 is not applicable. 55 It has to be noted that the EIR does not define what ‘rights in rem’ are. If it were to impose such a definition, it would indeed run the risk of describing as rights in rem legal positions which the law of the State where the assets are located does not consider to be rights in rem, or of not encompassing rights in rem which do not fulfil the conditions of that definition. Hence, the classification of a right as a right in rem must be sought in the national law which, according to the general conflict of laws principles, governs rights in rem (i.e., in general, the lex rei sitae, or in the context of indirectly held securities, the PRIMA jurisdiction). 56 Furthermore, if the law of the State where the assets are located allows these rights in rem to be affected in some way, the liquidator (or indeed any other person thus empowered) may request secondary proceedings to be opened in that State if the debtor has an establishment there. The secondary proceedings are conducted according to national law and allow the liquidator to affect these rights under the same conditions as in purely domestic proceedings.

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the lex concursus. So far, the system is comparable to the one embodied in the Draft UNIDROIT Convention. Article 5, paragraph 4, however, has to be read in conjunction with Article 13 of the EIR. Article 13 is indeed crucial, as it states that the possibility of an action for voidness, voidability or unenforceability under the lex concursus ‘shall not apply where the person who benefited from an act detrimental to all creditors provides proof that: the said act is subject to the law of a Member State other than that of the State of the opening of proceedings, and that law does not allow any means of challenging that act in the relevant case.’ Hence, if prior to the opening of the debtor’s insolvency proceedings, a collateral taker has fulfilled all the perfection requirements under PRIMA, and the collateral taker’s interest is not subject to further challenge under the PRIMA jurisdiction’s law, the collateral taker’s interest should be given full effect and not be affected by the lex concursus. Accordingly, if the conditions for an actio pauliana would be fulfilled under the lex concursus, but not under the PRIMA jurisdiction (because, for example, the suspect period is shorter in the latter than in the former), the collateral taker’s interest would remain protected. If, on the other hand, the PRIMA jurisdiction’s law does allow for the act to be challenged, the appropriate steps may be taken to set aside the acquisition or disposition of the account right concerned. Article 13 represents a defence against the overriding application of any provision of the lex concursus invalidating the collateral taker’s interest in circumstances where it is not possible to invoke a corresponding invalidating provision under the law of the PRIMA jurisdiction. This mechanism is said to be ‘easier to apply than other possible solutions based on the cumulative application of the two laws’ and to ‘uphold legitimate expectations of creditors or third parties of the validity of the act in accordance to the normally applicable national law, against interference from a different lex concursus’.57 For the collateral taker, this system enhances certainty and thus represents an advantage: he only has to look at one single law for both the perfection requirements and the extent of protection offered in case of the debtor’s insolvency and his expectations would be respected.58 57

These quotations are from the Explanatory Report on the European Convention on Insolvency Proceedings prepared by Prof. VIRGÓS (Spain) and Mr SCHMIT (Luxembourg). In essence, the Regulation is a mere transcript of the Convention and hence the Explanatory Report may still be consulted with benefit. 58 A similar solution is proposed in the Draft UNCITRAL Convention on Assignment of Receivables in International Trade. In the case of investment securities held through a securities intermediary, the characteristics and priority of the assignee in proceeds are governed by PRIMA (Art. 24, para. 1, sub-para. b; Art. 31), except in two situations: first, where the substantive provision of the PRIMA jurisdiction would be manifestly contrary to the public policy of the forum State, and secondly, where non-consensual preferential rights (such as wages and tax) are given priority in the forum State (Arts. 25 and 31).


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D.

Conclusion on the Insolvency Issue

This brief analysis indicates that there seems to be agreement on the principle that local insolvency rules should not be permitted to apply a principle different from PRIMA to identify the law applicable to proprietary issues such as whether an interest has been validly created and perfected. There is, however, no consensus as yet as to the extent of any further protection which should be given to any rules of the PRIMA jurisdiction against the application of differing rules of the insolvency, for example, in relation to matters such as the invalidation of transactions on the grounds of preference or fraud on creditors. Two concepts are proposed: one that is guided by the aim of preserving the effects of the local insolvency law,59 and another that aims at preserving the collateral taker’s interest by giving PRIMA the greatest possible effect in the debtor’s insolvency procedure. No consensus has yet been reached on this crucial question and further discussions are needed.

VII. Conclusions As of today, financial market participants are not in a position to ascertain readily and unequivocally which law will govern the proprietary aspects of dispositions of interests in respect of securities held through indirect holding systems. The exposures involved are extremely large, as each day indirectly held securities worth hundreds of billions of dollars, Euro and yen are provided as collateral under arrangements involving a cross-border element. The problem thus appears to be extremely important for the international financial markets and urgently needs to be addressed. Against this background, the Hague Conference on Private International Law is to be congratulated for having taken up this project. Also, in light of the characteristics of the project, the adoption of new working methods – which proved to be extremely valuable – is welcome, in particular the conducting of numerous informal discussions with delegations, market participants, practitioners and experts.60 This informal working process, whose results have been extensively 59

During informal discussions subsequent to the January meeting, a group of experts stressed that the proposed Hague Convention should refrain from interfering with local insolvency laws. As a result, they suggested that para. 2 should be deleted altogether and that Art. 6 should be limited in stating the principle embodied in para. 1 only. 60 Given the tight agenda suggested by the Member States for this project and the need to act on the basis of a ‘fast track’ procedure, the Permanent Bureau organised prior to the January 2001 experts meeting a series of three telephone conference calls with 30-50 participating experts. The aim of these conference calls was to identify the main issues to be tackled by the Working Group and to propose possible answers. Similarly, after the January 2001 experts meeting, the Permanent Bureau continued to discuss with legal experts on an

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reflected in official documents prepared by the Permanent Bureau,61 is crucial to finalise the project within the envisaged timeframe. There is indeed no doubt that if the goal of formally adopting the Convention during 2002 is to be realised, the informal working process has to be continued. At the 19th Diplomatic Session of the Hague Conference, whose first part was held in June 2001, the Member States were extremely supportive of this informal working process, taking into account in particular that the various conference calls provided a forum in which to identify and – where necessary – to clarify potential concerns and to explore possible solutions. There is no reason to believe that this support will cease, as long as the informal work remains subject to the same strict conditions of transparency applied until now. In this context, it is worth mentioning that during the Diplomatic Session in June 2001, numerous delegations invited the Hague Conference, and in particular its Permanent Bureau, to reflect on the possibility of adopting these new working methods for other projects currently under preparation or to be tackled in the future. On a personal note, we are convinced that the consensus principle, which is now prevailing at the Hague Conference’s negotiation procedures, is only workable if accompanied by extensive informal discussions between two ‘official’ meetings in the Hague. The steadily increasing number of Member States of the Hague Conference appears to give even more impetus to this trend,62 as ‘official’ negotiations in a room packed with 200 experts are becoming more and more difficult and unlikely to produce substantive results. The second element allowing this project to be dealt with on a fast track procedure is its limited scope. Not only is the future Convention limited to conflict of laws issues (in other words, the Convention will not address issues of jurisdiction and the effects of foreign judgments), but the subject matter of the Convention is also rather limited, as it will only identify the appropriate law to unofficial basis the tentative text prepared in January and to work closely with market participants to ensure that the future convention incorporates a solution which is both practicable and provides the required level of certainty. A fourth conference call was held in April 2001 in order to discuss the numerous comments on a previous draft and new suggestions submitted by a large number of experts. Around 45 experts from 15 different States participated in this fourth call. 61 See in particular the Report on the meeting of the Working Group of Experts (15 to 19 January 2001), mentioned in note 1. 62 As of 6 August 2001, the following 54 States were Members of the Conference: Argentina, Australia, Austria, Belarus, Belgium, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, Chile, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Ireland, Israel, Italy, Japan, Jordan, Republic of Korea, Latvia, Luxembourg, The former Yugoslav Republic of Macedonia, Malta, Mexico, Monaco, Morocco, Netherlands, Norway, Peru, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Suriname, Sweden, Switzerland, Turkey, United Kingdom of Great Britain and Northern Ireland, United States of America, Uruguay, Venezuela, Yugoslavia.


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govern proprietary aspects of a disposition of interests in indirectly held securities. The fact that the Convention addresses a crucial, but very specific, well defined and limited topic ensures that the project as such remains within clearly circumscribed boundaries, which in turn makes the administration of the project more lenient and predictable. Here again, the future will tell us if there are some lessons to be learned from a less ambitious, but more manageable approach to the selection of topics to be taken up by the Hague Conference.

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THE BRUSSELS I REGULATION: COMMENT Bertrand ANCEL∗

I. II.

A Brief Historical Introduction The Brussels I Regulation A. Reinforced Grounds of Jurisdiction 1. Protective Rules of Jurisdiction. a) Employment Contracts b) Consumer Contracts 2. Jurisdiction in Matters Relating to Contracts. B. Increased Mutual Trust. 1. Trust Imposed on the Judge of the State Addressed a) Substantive Grounds for Non-Recognition b) Procedural Grounds for Non-Recognition 2. Trust Imposed on the Judge Seized of the Action a) Chronology of Concurrent or Related Actions b) Inadmissibility of Forum Non Conveniens

I.

A Brief Historical Introduction

Council Regulation (EC) No. 44/2001, of 22 December 2000, will enter into force on 1 March 2002. Given that the true content of a law is revealed only by its application, this paper should talk about the future. Nevertheless, it starts with a glance at the past. This brief historical note is justified as the purpose is to examine the doctrine of the juge naturel.1 The idea is that the model of the movement of decisions found in this doctrine could directly or indirectly help clarify the Regulation adopted by the Council. Not long ago, the doctrine of the natural judge was said to govern SwissFrench relations in matters of jurisdiction and recognition of judgments, i.e., before the Lugano Convention altered the traditional legal links between France and the

∗ Professor of law at the University Panthéon Assas (Paris II), rédacteur en chef of Revue critique de droit international privé. 1 HOLLEAUX D., Compétence du juge étranger et effets des jugements, Paris 1970, No. 201.



Bertrand Ancel

cantons dating from the fifteenth century. The Convention of 15 August 18692 was the most modern expression, if not the most true, of the model of natural judge in bilateral relations. The central characteristic of this model is a close linkage between the notions of jurisdiction and the enforcement of foreign judgments. In theory, every decision of a competent authority is due enforcement in an addressed State. Based on a kind of division of judicial tasks between jurisdictions, this doctrine aims to guarantee that every decision rendered and announced in conformity with aforementioned division will be recognized and given effect in all countries participating in the division, with a reservation in the case of execution. In cases where execution is demanded, the discontinuity between jurisdictions requires, in addition to the condition of the original court’s competence, a procedure for a local authority to order local agents to bring about, by coercion if necessary, the concrete result required by the foreign judgment. Such procedure is precisely to confirm that the executory judgment indeed originates in the jurisdiction designated by the rules creating the division of judicial tasks. The Convention of 1869 followed this doctrine, albeit with some requirements to assure that the laws and rules of public order and administration in the addressed State are respected and, in addition, that defendant’s rights and protection are safeguarded. The latter condition reflected a concern with private interests and a preoccupation with procedural justice, which could seem rather unusual within the context of the natural judge’s doctrine. Meanwhile, as a corollary, the Convention granted power to declare enforceability to either a judge (in France and some cantons) or an administrative official (in other cantons). The latter alternative, which appears to limit the judicial discretion over ultimate enforcement, is the closest to the original model of natural judge. This is clearly shown by the treaties which preceded that of 1869, that is to say, the treaties of 1715 and 1777;3 these two provided in some sense that executory capacity would only follow an essentially administrative procedure aimed at confirming the origin of the decision and nothing more. There would be no other formalities or required pleading to obtain enforceability. Thus it would suffice to check that the judge of origin is the natural judge. This was a decisive feature: it expresses the relationship between the State where the judge of origin sits and the party against which the decision was taken. The sovereignty of a State over individuals – personal ties of such party to its State – is the key to the mechanism. As the agent of the sovereign State, the natural judge may act against the interests of an individual by exercising the power to judge, punish and constrain. At the same time, the decision will be recognized as a sovereign act and will be supported in foreign countries by the paradigm of 2

For this Convention, see FLATTET G., ‘Un traité centenaire: la Convention francosuisse du 15 juin 1869 sur la compétence judiciaire et l’exécution des jugements’, in: Rev. crit. dr. int. pr. 1969, p. 577. 3 FLATTET G. (note 2), p. 595.

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Brussels I Regulation

sovereignty: foreign sovereigns have no interest in a relationship of allegiance where they have no part; however, for the sake of reciprocal treatment, they do have an interest in welcoming and, if necessary, actively executing foreign decisions on their territory. There is nothing more required than to register the foreign decision when its origin is confirmed. This sovereignty of a State over its own people is powerful, by definition, and its exercise is not subject to any form of restriction. Once accepted, it is limitless in its power; it is a power that has no known limit.

II.

The Brussels I Regulation

Does the Regulation of 22 December 2000 lean towards this model? Like the Brussels and Lugano Conventions, it provides that decisions of other Member States should be recognized and given effect in the addressed Member States, without any special procedure being required. In addition, in respect of executory judgments, it states in Article 41: ‘The judgment shall be declared enforceable immediately on completion of the formalities provided for in Article 53 without any review under Articles 34 and 35. The party against whom enforcement is sought shall not at this stage of the proceedings be entitled to make any submissions on the application.’ This suggests that, based on the official text of the foreign decision and a certificate evidencing its nature and origin, the addressed State will declare a judgment from another Member State enforceable on its territory, thus abandoning the simplified procedure of exequatur under the Brussels and Lugano Conventions. Albeit summary and ex parte, this was indeed a judicial procedure requiring a local judge to ascertain that the foreign decision had been rendered in conformity with the requirements of Articles 27 and 28 or, more precisely, that no ground for nonenforceability existed. Nothing of this sort is in the Brussels I Regulation, which, one may say, leads back to former French law and its system of pareatis,4 i.e., an administrative act that the court officers of the addressed jurisdiction are obliged to observe once presented with rogatory letters from the judge of origin; such rogatory letters – like the certificate required by Article 53 of the Regulation – should confirm the origin of the judgment. 4 LAINÉ A., ‘Considérations sur l’exécution des jugements étrangers en France’, in: Revue critique de législation et de jurisprudence 1904, p. 95; HUDAULT J., ‘Les conflits de juridictions dans le droit international privé des trois derniers siècles de l’Ancien Régime’, in: Cours d’Histoire du droit privé du Moyen Age et des Temps Modernes, Paris 1971, p. 26.


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Of course, the Regulation admits judicial contest, an appeal affording an opportunity to observe the judicial maxim audi alteram partem and to hear both parties to the case, but only against a decision that declares or refuses enforceability. The same opportunity existed formerly under the regime of the natural judge; this regime is known by those recourses to parliaments. However, it is uncertain whether the rehabilitation of pareatis sets the stage for an inevitable reappearance of the juge naturel doctrine. In fact, the coupling of immediate recognition and pareatis – the declaration of enforceability (in the language of the Brussels I Regulation) – is not necessarily linked to the natural judge doctrine and the notion of sovereignty. It is rather the broad influence – not the essence – of sovereignty that results in the choice of treatment for foreign judgments. Another paradigm could replace the notion of sovereignty in its function of driving force behind the recognition and enforcement of judgments. Under the Ancien Régime in France, pareatis fulfilled an internal function more often than an international one;5 it was used to assure the prorogation of enforceability from one jurisdiction to another within the realm, where all jurisdictions derived their powers from a single sovereign source. Sovereignty did not intervene in this device of internal pareatis. A glance at the subsequent history of French law makes the judicial politics set in motion by today’s Regulation strikingly clear. Pareatis signals the dismantling of borders between jurisdictions. Until 1 March 2002, sovereign States will survive in a judicial context which links them in a federal fashion to the Union; afterwards they will disappear to make room for a single or common judicial system within which even the executory power of decisions will, in principle, circulate freely. The notion of sovereignty is thus progressively effaced and replaced by a regime defining judicial competence within a net of judicial courts of the same and equal quality. In this respect, the Brussels I Regulation follows the outline of the Brussels and Lugano Conventions, which already privileged a privatiste notion of judicial power. Of course, this notion still maintains some division of jurisdictions; however, it combines a number of elements – some of which are subjective (defendant’s rights or protection of weak parties) and others objective (sound administration of justice or procedural efficiency) – so as to offer a variety of solutions that differ according to the type of litigation, and in principle, favour a private interests-oriented procedural justice. As the motor driving the free movement of decisions within the Community, it is necessary that these combinations of elements, incarnated in a set of jurisdictional rules, be well balanced, stable and solid. Only then will the objective – the effective judicial protection of plaintiffs within the Union – be achieved in a manner that will also encourage every Member State to give full faith and credit to a judgment from another Member State. If the rules of jurisdiction were to leave any doubt about whether the original judge had treated a case fairly, it would be unthinkable to reduce the requirements for the reception of foreign judgments. 5

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HUDAULT J. (note 4), eod. loc.



Consequently, it was understandable that the Brussels I Regulation chose pareatis attempts to reinforce grounds of judicial competence (I); however, the task is difficult and, since it was uncertain whether the unconditional support of every Member State or their courts would be obtained in all circumstances, the Regulation makes the best of a voluntary policy that requires reciprocal confidence within the Union (II).

A.

Reinforced Grounds of Jurisdiction

While following the general structure of the Brussels Convention on the matter of judicial competence, the Regulation also adds (sometimes quite subtly) some improvements, which could be regarded as lessons from the past as well as concerns for the future. It is unnecessary and would be tedious to catalogue and evaluate each of these in detail; thus it seems reasonable to select some areas where improvement was clearly intended. These involve, on the one hand, devices of ‘unequal competence’ intended to protect the ‘weak party’, and, on the other, the rule of special jurisdiction in matters relating to a contract (Article 5(1)), which has been the subject of much, sometimes radical, criticism.

1.

Protective Rules of Jurisdiction.

Two types of modifications are noteworthy. The first is a change of structure: Chapter II (Title II of the Conventions) includes a section on individual contracts of employment, which is inserted between the sections on insurance and consumer contracts, and a section on exclusive judicial competence. The second modification is less noticeable in terms of form, but has a significant impact on consumer contracts.

a)

Employment Contracts

Cases involving individual employment contracts are deleted from Article 5 and moved to the section dealing with protective jurisdiction. This change is symbolic or narrative. It is clearer than ever that salaried employees benefit from a system of judicial competence favourable to them, tending to assure their access to justice and to guarantee effective redress against violations of their rights. This orientation, which guides judicial interpretation, is not new – it harks back to the Convention of Donostia-San Sebastian of 1989 and even to the Convention of Lugano of 1988; but it is emphasized. From now on, jurisdiction in employment contracts is not covered by Article 2 or the related rules of Articles 5 and 6 (within the exception of Article 5(5) which applies by virtue of the new Article 18). As a result, links to actor sequitur forum rei are weakened.


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Of course, the essence of the protective regime for salaried employees has not been significantly altered; many elements intended to help 'weak parties' have been borrowed from the sections on consumer and insurance contracts and are already included in Article 5(1). Therefore, a salaried employee has the option of using the forum rei (the courts of the Member State where the employer is domiciled) or the forum laboris (the courts of the place where the work is performed). While an employer has no such option and must always file a complaint at the forum rei, the salaried employee’s option is protected against the prorogation of jurisdiction agreements, which will be effective only if concluded post litem natam or ad augendam tutelam. The most novel but not very significant change is the slightly increased possibility for the rules of judicial competence to cross borders of the common territory of Member States. This possibility is already available under the Brussels Convention when a plaintiff salaried employee prefers the forum laboris over the forum rei. The forum of the employee’s service is determined by the place in a Member State where this service is habitually performed, or as Article 19 adds, by the last place where it was habitually performed. However, if the employee does not or did not habitually carry out his work in any one country, the forum laboris is the place in a Member State where the business that engaged the employee is or was situated. The latter solution is maintained even if the services are performed outside the common judicial area on the territory of non-Member States. In a territoriality stained matter, such a forum laboris challenges third States’ jurisdiction. Article 18(2) could lead to a similar border-crossing issue by attaching to employment contracts’ litigation an assimilation mechanism that already serves successfully for insurance and consumer contracts. If an employer that is not domiciled in the common judicial area installed a permanent operation centre in a Member State, it is deemed, for the purpose of disputes arising out of the operations of the centre, to be domiciled in that Member State. As a result, the jurisdiction of its courts will be well founded both by means of forum rei or forum laboris – the latter being the prevailing forum laboris of Article 19(2)(b). Without doubt this is the most remarkable consequence of the creation of Section 5, Chapter II. Though not a large change, it brings the regime of judicial jurisdiction over individual contracts of employment closer to the other protective regimes. But it is still not equivalent. In fact, the protective system of unequal judicial competence enjoyed by salaried employees is not sheltered at the recognition and enforcement level by Article 35 of the Regulation, which updates Article 28 of the Convention. Without such shelter, breaches of the rules of Section 5 will be an obstacle to the free movement of judgments in other Member States. Therefore, in contests against a decision declaring or denying enforceability, the court of the addressed State does not proceed in the same manner if the judgment dealt with an employment contract as he would if the matter involved an insurance or consumer contract. It is true that the Brussels Convention already made this expediency measure. Moreover, experience shows that, to date, the

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examination was not indispensable and that, as a result, there is less reason to weigh down the conditions for foreign recognition if, in the vast majority of cases, the judgment will lead to a result favouring the plaintiff salaried employee. The logic is astonishing, nevertheless, in so far as it devalues a judicial competence that it proposes to reinforce.6 Finally, we may suspect that there is more partisanship or ideological fervour than rationality behind Section 5’s conception of autonomous judicial competence, if this formal modification in the system of jurisdiction is to have real consequences.

b)

Consumer Contracts

By virtue of Article 15 (replacing Article 13 of the Brussels Convention), unequal competence is, for some contracts, granted to a consumer, the type of which has not changed. These contracts are as previously sales of goods on instalment credit terms or loans repayable by instalments, or any other form of credit, made to finance the sales of goods (Article 15(1)(a) and (b)). On the other hand, subsection c of this section alters Article 13 of the Convention, whence the rest of the section is derived. Subsection c no longer restricts its range to other contracts providing services or goods when their conclusion or premises occurred within the territory of the Member State where the consumer is domiciled. The nature of the object of the performance and the original links of the contract with the country of the consumer are no longer conditions for protection. Henceforth, the protective system still largely benefits consumers. It applies as soon as a consumer is domiciled in a Member State and has concluded a contract with a person who pursues commercial or professional activities in the territory of a Member State, or whose activities are specially if not exclusively directed toward the market of such Member State. The second branch of the latter alternative could include electronic commerce. This is not only an aggiornamento aiming to adjust the protection to the level of the temptations to which consumers are exposed by the latest communication and marketing techniques; it is also an important step toward a generalization of consumer protection. The Brussels I Regulation firmly takes the position that unequal judicial competence is fair and justified in favour of the ‘weak party’.

6

BRUNEAU Ch., ‘Les règles européennes de compétence en matière civile et commerciale’, in: Juris-Classeur Périodique 2001, I, 104, n°20


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2.

Jurisdiction in Matters Relating to Contracts

There was a pressing need to redraft Article 5(1) of the Convention if not to suppress it entirely , as some recommended.7 This Article grants a specific judicial competence in contracts separate and as an alternative to that based on the domicile of the defendant, by giving the plaintiff the option of access to ‘the courts for the place of performance of the obligation in question’. This formulation, according to the interpretation given by the Court of Justice, generates serious difficulties both concerning the determination of the obligation that is to be taken into account and concerning the determination of the location of its performance. On the one hand, the analytical approach required by the decision in de Bloos8 ignored the unity of contract and threatened to disperse among several states the various contested issues concerning distinct obligations under the contract. On the other hand, the reference to the law applicable to the contract in order to determine the place of performance of the obligation under Tessili9 requires a complicated and uncertain exercise which consists of resolving the question of judicial competence by application of a law, the choice of which presupposed that this question has been resolved. Furthermore, in practice, this interpretation has produced mediocre results: disregarding procedural efficiency, it responds only imperfectly to the principle of proximity which is supposed to assure the sound administration of justice, and Mr. Droz has shown that where the claim is for payment, either it offers a bad option, if according to the lex causae the payment is moveable to the creditor’s domicile, or it obviates any option if the payment is due at the debtor’s domicile. In the first case, the place of performance of the obligation in question will be the forum actoris, anathema to the Brussels system; in the second case, it will be the same as the forum rei, which, as a practical matter, gives the same result as under Article 2. The Regulation did not dare to completely reform this disappointing system. Instead, it amended the system as if it did not wish to overrule the Court of Justice, which, for its part, seems however recently to have expected a reform or reformulation of Article 5(1) that could help it to escape the constraints of its own unfortunate jurisprudence. Nonetheless, it is simply a modified Article 5(1) that will govern jurisdiction in contractual matters in the future. This it will do in accordance with a formula whose wording is relatively complicated – no model of literary skill – but which should nonetheless reduce the uncertainty and 7 DROZ G., ‘Delendum est forum contractus’, in: Recueil Dalloz 1997, chr. 351; HEUZÉ V., ‘De quelques infirmités congénitales de droit uniforme: l’exemple de l’article 5. 1 de la Convention de Bruxelles du 27 septembre 1968’, in: Rev. crit. dr. int. pr. 2000, p. 595; see also, less radical, MUIR WATT H., ‘Peut-on sauver le for européen du contrat? ’, in: Revue générale des procédures 1998, p. 371; ANCEL M.-E., La prestation caractéristique du contrat, Paris 2001, No. 36. 8 European Court of Justice (ECJ), 6 October 1976, [1976] ECR 1497 9 ECJ, 6 October 1976, [1976]. ECR 1473

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unforseeability that currently results from the jurisprudence of the Court of Justice. The formula does not condemn the jurisprudence but intends to confine it to a subsidiary role within a narrow perimeter, giving the revived Brussels Convention rule a specific interpretation for two types of contracts: ‘…unless otherwise agreed, the place of performance of the obligation in question shall be, in the case of the sale of goods, the place in a Member State where, under the contract, the goods were delivered or should have been delivered [and] in the case of the provision of services, the place in a Member State where, under the contract, the services were provided or should have been provided’ (Article 5(1)(b)). One might say, then, that the place where the characteristic performance of the contract has been (or should have been) executed is deemed to be the place of performance of all other obligations freely assumed between the parties pursuant to the contract and that, in order to determine this place, it is no longer necessary to examine the applicable law, but it is sufficient to examine the contract itself. The Tessili-de Bloos jurisprudence was not by this means entirely replaced. It is possible that the contract itself does not allow an identification of the place of execution of the characteristic performance and, in such a case, it is tempting to turn back to the lex contractus for the determination. The difficulty is reduced but not eliminated. At any rate, the simplification delivered by the Regulation encounters limits that are inherent to the nature of contracts and the will of the parties. Curiously, only two types of contracts were considered. Sales of goods and service contracts are doubtless the principal instruments of international trade. But there are other types of contract in the field of the Regulation. Moreover, it appears that the advantage of promoting the characteristic performance is available in litigation in commercial matters only. Is the sale of the Rembrandt that hangs on the wall of the seller’s living room to a private individual buyer a ‘sale of goods’ (‘vente de marchandises’)? Does the mandate to collect the rent given by a landlady to her husband or her brother result from a service contract as defined in litt. b? It is doubtful that these sorts of contracts will be covered; and this doubt will add to the inherent uncertainty of the categories used by Article 5(1)(b) and the qualification of these types of contracts thereunder. Consequently, a potentially large area remains open to the application and to the disadvantages of the general rule inherited from the Brussels Convention.10 ANCEL M.-E., Comment of decisions from French Cour de cassation, Civ. 1re, 8 February 2000 (3 judgments), 30 may and 27 june 2000 (2 judgments) and Com., 16 May, 20 June and 11 July 2000, in: Rev. crit. dr. int. pr. 2001, p. 148, p. 162. 10


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Moreover, the general rule – if I do not misinterpret Article 5(1)(b) – could be overridden by the parties’ own agreement concerning the place of performance of the obligation in question. In this case, the characteristic performance will lose its powers of consolidation over other contractual obligations and the analytical approach of de Bloos will be applied. As underthe doctrine of the Court of Justice in Tessili, the agreement of the parties renders the reference to lex causae useless. In summary, the re-evaluation and re-balancing of the elements that determine jurisdiction appears to have been quite timid. The new wording of Article 5 manifests a significant effort to modify optional jurisdiction to enhance predictability and simplicity; it also seeks to reconcile the requirement of proximity for a sound administration of justice with the consolidation of litigation, which the objective of procedural efficiency demands. Only its application to specific cases will demonstrate whether the Regulation can achieve these goals. The Brussels I Regulation reinforces the unequal rules of competence to the benefit of salaried employees and consumers in an apparently more assertive manner. In this way it favours the protection of weak parties, without being divided by various potentially contradictory objectives. Nevertheless, the reformatting of these rules of competence does not guarantee that it will establish solid and incontestable jurisdiction for all proceedings such that it justifies and legitimates, at the international level, the decisions of judges thus empowered. And, as if to offset potential weaknesses in jurisdiction and the resulting diminished authority that could jeopardise the recognition of decisions abroad, the Regulation establishes as part of its system a number of solutions that presuppose a heightened reciprocal trust between Member States.

B.

Increased Mutual Trust.

The Brussels I Regulation’s choice of the technique of pareatis, offered immediately, without re-examining the analysis of the foreign judge, attests to the high level of mutual trust expected between jurisdictions within the Union. This represents a great step forward, which nevertheless represents no more than a first step in a more ambitious program. The mutual trust is already, if less intensely, indicated by conventional law in Article 28, which prohibits the judge addressed from re-examining the competence of the foreign judge. The irrebutable presumption of judicial competence is linked to the origin of the decision: no European judge could be so mistaken or so malicious as to hear and decide a claim arbitrarily. As soon as there are reasonable grounds for jurisdiction and serious judges, fears of abuse dwindle and mistrust gives way to trust. In the Regulation, this trust goes farther, at a forced march. It is required not only of the judge of the State addressed, but also of the judge seized of the action.

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1.

Trust Imposed on the Judge of the State Addressed

The requirement for trust manifests itself by a reduction of the permitted grounds for rejecting a foreign judgment as enumerated in Article 34 (which replaces Article 27 of the Brussels Convention).

a)

Substantive Grounds for Non-Recognition

First, among requirements of substantive nature, the repeal of the rule of Article 27(4) must be pointed out. This rule provided for an examination of the choice of law made by the foreign judge to resolve a preliminary question concerning the status of natural persons, matrimonial property or succession, which is sometimes necessary before he can decide the principal issue. This choice-of-law test in personal and family matters was widely accepted in the law of recognition of judgments of the founding Members of the Community who were the first signatories of the Brussels Convention of 27 September 1968. The rule survived various redrafts of the treaty and even made it into the Lugano Convention. Perhaps it was not really a problematic rule because it was not really observed. In truth, inside the Community, it was falling into disuse. Following the example of Council Regulation (EC) of 29 May 2000 on jurisdiction and recognition and enforcement of judgments in matrimonial matters and in matters of parental responsibility for children of both spouses (Brussels II), Brussels I Regulation eliminates this rule thereby relieving the courts of the Member States whose national system excluded the requirement from any scruples they might have had concerning either ignoring or circumventing it. Among the substantive grounds for non-recognition and non-enforcement, it must also be noted that that of protecting the public order has been weakened. Henceforth, the conflict with the public order in the Member State addressed must be manifest. Actually this change is not revolutionary. It seems rather to lie along the lines of a general evolution in the Union, even though it must be remarked that many Member States appear to increasingly consider both procedural and substantive issues which concern human rights and fundamental liberties as immediately raising a question of public order. Thus the modification of the wording of Article 27(1) can be supposed to encourage moderation as well as an invitation to each State to realign its sensitivities in this field with the canons of the Community public order…

b)

Procedural Grounds for Non-Recognition

Second, concerning requirements of a procedural nature, the Regulation brings precision to the requirements of notification in foreign default judgments.


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Article 27(2) of the Convention that set this condition only defined it by means of its satisfaction, without specifying its purpose. According to this provision, the document that instituted the proceedings must have been served to the defendant in sufficient time to enable him to arrange for his defence and in a regular manner according to a timetable and form set by the law where the judge seized with the action sits. If this double condition is met, there can be no doubt that the default of the defendant manifests a refusal to defend his interests before the court; such a voluntary default does not merit protection after the decision is handed down and so cannot constitute grounds for non-recognition. Only an involuntary default can raise suspicion and lead to the rejection of the decision in the State addressed. But the failure to respect the timetable and form imposed by the law of the foreign judge – which according to Article 27(2) leads to nonrecognition – can mask a voluntary default. There have been cases in which a defendant took advantage of irregularities in the service of documents that instituted the proceedings to obstruct the circulation of the decision.11 Formally, the requirements of Article 27(2) were not satisfied; but in reality, such conditions are met as soon as the defending party who knows of the proceedings voluntary neglects them. Thus, the means do not fit well with the ends. In addition it is quite odd to ask the court addressed to review the decision of the foreign judge for the appropriateness of the latter’s authority to hear the case: in cases of default, the judge seized of the action must, according to Article 20 of the Convention, verify his own competence and stay the proceedings until it can be determined if the defendant was in a position to receive proper service. The power given to the court of the State addressed to review this verification is exorbitant. This constitutes an expression of distrust, which the Brussels I Regulation could have eliminated. The Regulation did not go so far as to prohibit this review, but did limit the subject matter of the investigation. Article 34(2) removed the condition requiring that notice be given in accordance with the law of the foreign judge, preferring effective notice to formal notice; thus it protects only such defendant who either was never made aware of the proceedings or, having not been notified in a timely fashion, could neither defend himself nor obtain any recourse against an unfavourable decision. In such conditions, the review by the court addressed does not lead to a reconsideration of the issues decided by the foreign judge. Undoubtedly, the Regulation could have gone farther in trusting the foreign judge, but this already represents significant progress.

2.

Trust Imposed on the Judge Seized of the Action

If the rules of jurisdiction of Chapter II are solid, no European judge should be afraid to exercise the powers these rules confer. There are, however, some hard 11

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ECJ, 12 November 1992, [1992] ECR 5661, Minalmet.



cases where a conscientious judge may hesitate. There are even some circumstances where he is specifically ordered, or permitted, to refuse to hear the case. This does not suggest however that the judge’s authority is too weak; rather it may be that another judge, competent to judge under rules of jurisdiction of equal value, is concurrently hearing the same claim, between the same parties on the same facts, or that another judge must hear a different claim that is so closely connected to the first that their resolution should be consolidated to prevent the risk of irreconcilable judgments resulting from separate proceedings. In such concurrent or interfering cases, so-called cases of lis pendens or of related actions, the judge must or may have confidence in the rival court where the case was first submitted.

a)

Chronology of Concurrent or Related Actions

Article 30 will henceforth facilitate this exercise of trust through its ‘autonomous’ provision that determines the order in which cases are submitted. The purpose here is to resolve a practical problem of chronology. Apparently, the Court of Justice succeeded in overcoming this difficulty by referring judges of concurrent or connected actions back to their respective national laws. This solution, however, assumes that a judge will consult the law of the foreign judge to determine the date that court was seized; but the variety and complexity of national rules concerning the means of submission to a court in fact makes this exercise delicate and uncertain. It was thus necessary to establish a ‘clear and automatic mechanism’ of uniform determination of the date on which a case is regarded as pending. Article 30 of the Regulation makes an attempt, in language that is a bit complex, concentrating the whole process of submission on the day when the first step was taken – on condition that the process was carried through to its conclusion. By not using the later date on which service of documents has been perfected, the Regulation forecloses the possibility of abusive later submission, which might be simply tactical or unfair. Above all, the judge in a related or lis pendens case benefits from this mechanism, and will be less likely to hesitate to refer a file to the judge reviewing the concurrent or connected action.

b)

Inadmissibility of Forum Non Conveniens

The Regulation relies on the trust of foreign judges more generally as well, if the Explanatory Memorandum preceding the Regulation’s provisions is binding. Paragraph 11 of that Exposé des motifs appears, for example, to condemn the


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Court of Appeals’ use of the forum non conveniens doctrine a dozen years ago12 to permit an English judge of the defendant’s domicile to decline jurisdiction in favour of a court in a third State, not signatory of the Brussels Convention. This discretionary decision by a judge whose competence was based on the Convention was certainly already forbidden if it presented a risk of a Member State’s court declining jurisdiction in favour of a court of another Member State. Such discretion could destroy the predictability and security, which is at the heart of the Brussels I system. Paragraph 11 of the Explanatory Memorandum is based on the same consideration when it renders jurisdiction under Article 2 imperative with regard to the judge seized: regardless of whether the most appropriate court will be that of a Member State, ‘primary jurisdiction […] based on the defendant’s domicile […] must always be available’. To the extent that the rules of special jurisdiction and derogatory jurisdiction supplant primary jurisdiction, they cannot be supposed to be less solid. The fragility of judicial competences granted under the Brussels I Regulation is therefore averted less by the rationality of their content than by the authority of the Council. Thus the judge seized of the case need not show more circumspection than the court of the State addressed concerning the quality and appropriateness of fora defined by the Regulation. A regime of forced full faith and credit aims to make up for the inevitable weaknesses and defects of some competences which, combining and balancing multiple values and objectives, will never have the monolithic structure of the old natural judge jurisdiction. The pareatis or declaration of enforceability of Article 41 does not signal a revival of the juge naturel doctrine, nor does it restore the device of recognition and enforcement fuelled with a notion of sovereignty indifferent to private justice and interest. On the contrary, it confirms the lessening of importance of the national sovereignties inside a common judicial area and emphasizes consideration for effective judicial protection of private interests within the Union.

12

Re Harrods (Buenos Aires) Ltd, [1992] Ch. 72 (C.A.); see GAUDEMET-TALLON H., ‘Le forum non conveniens, une menace pour la Convention de Bruxelles? (A propos de trois arrêts anglais récents)’, in: Rev. crit. dr. int. pr., 1991, p. 491; CHALAS C., L’exercice discrétionnaire de la compétence juridictionnelle en droit international privé, Paris 2000, No. 604.

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PRIVATE INTERNATIONAL LAW ISSUES IN WORLD WAR II ERA LITIGATION ________________

THE LAW APPLICABLE TO GOVERNMENTAL LIABILITY FOR INJURIES TO FOREIGN INDIVIDUALS DURING WORLD WAR II: Questions of Private International Law in the Ongoing Legal Proceedings before Japanese Courts Yasuhiro OKUDA∗

I. II.

Introduction Preliminary Analysis of Public International Law A. Agreements on Reparation and the Practice in Japan B. Compensation of Individuals under the 1907 Hague Convention Respecting the Laws and Customs of War on Land III. Law Applicable to Governmental Liability A. Practical Implications of Analysis B. Rules Governing Governmental Liability in General C. Rules Governing Wrongs Committed during World War II D. Article 11 of the Horei 1. Lex Loci Delicti 2. Cumulative Application of the Lex Fori to Requirements of Claims 3. Cumulative Application of the Lex Fori to Effects of Claims IV. Conclusion Post Scriptum

∗

Professor of the School of Law, Hokkaido University; Councilor of the Private International Law Association of Japan. The author thanks Professor Kent Anderson for revising the English text.



Yasuhiro Okuda

I.

Introduction

Although World War II ended in 1945, a chain of legal proceedings on governmental liability has not stopped since 1952 when the Treaty of Peace with Japan came into force. These proceedings can be divided into three groups:1 The first group includes claims for damages filed by numerous Japanese individuals who contended that the Japanese government was liable for waiver of claims against foreign States for damages and losses under agreements after World War II.2 The second group includes claims filed by numerous Koreans and Taiwanese who had Japanese nationality as a result of the annexation of Korea and Taiwan and who had worked in the Japanese army but could not receive old age pensions or disability pensions. Having automatically lost their nationality in 1952, the plaintiffs claimed this was discriminatory because the pension laws required that applicants have Japanese nationality.3 The third group includes many individuals of various nationalities who claimed damages for violations of the law of warfare by the Japanese army during World War II. These covered such events as the holocaust in Nanking; experiments on humans by Unit 731; forced prostitution of Chinese, Korean, and Philippine women (so-called ‘comfort women’); forced labor of Chinese and Korean men; and mistreatment of English, American, Australian, New Zealand, and Dutch prisoners of war.4 1 See YAMADA M., ‘Saiban Jitsumu kara Mita Sengo Hosho’ [Post-War Compensation from Perspective of Court Practice], in: OKUDA Y./KAWASHIMA S. et al., Kyodo Kenkyu Chugoku Sengo Hosho [Study on Post-War Compensation of Chinese Civilians], Tokyo 2000, p. 219 et seq. 2 As famous examples, see Tokyo District Court, 7 December 1963, in: Hanrei Jiho, No. 355, p. 17; The Japanese Annual of International Law (hereinafter cited as JAIL), No. 8, p. 212 (damages caused by the atomic bombs in Hiroshima and Nagasaki); Supreme Court, 13 March 1997, in: Saiko Saibansho Minji Hanreishu (hereinafter cited as Minshu), Vol. 51, No. 3, p. 1233; Hanrei Jiho, No. 1607, p. 11 (damages caused by the detention and forced labor of Japanese POWs in Siberia). See also Supreme Court, 27 November 1968, in: Minshu, Vol. 22, No. 12, p. 2808; Hanrei Jiho, No. 538, p. 6; Supreme Court, 4 July 1969, in: Minshu, Vol. 23, No. 8, p. 1321; Hanrei Jiho, No. 566, p. 33; Kyoto District Court, 22 November 1968, in: Hanrei Jiho, No. 566, p. 54. 3 See a case involving Taiwanese, Supreme Court, 28 April 1992, in: Hanrei Jiho, No. 1422, p. 91; JAIL, No. 36, p. 182. See cases involving Koreans, Supreme Court, 5 April 2001, in: Saibansho Jiho, No. 1289, p. 7; Osaka High Court, 15 October 1999, in: Hanrei Jiho, No. 1718, p. 30; Kyoto District Court, 27 March 1998, in: Shomu Geppo, Vol. 45, No. 7, p. 1259; Tokyo High Court, 27 December 1999, in: Hanrei Jiho, No. 1659, p. 35; Tokyo High Court, 29 September 1998, in: Shomu Geppo, Vol. 45, No. 7, p. 1355. 4 See Tokyo District Court, 22 September 1999, in: Hanrei Taimuzu, No. 1028, p. 92; JAIL, No. 43, p. 216 (the holocaust in Nanking and experiments on humans by Unit 731); Tokyo District Court, July 16, 1998, in: Hanrei Taimuzu, No. 1046, p. 270 (murder of a Chinese civilian by Japanese soldiers); Tokyo District Court, 9 October 1998, in: Hanrei Jiho, No. 1683, p. 57; JAIL, No. 42, p. 170 (forced prostitution of Philippine women);

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Governmental Liability for Injuries to Foreign Individuals in Japan

The results of these proceedings have not at all been favorable for the plaintiffs. In one case involving comfort women, the court ordered the Japanese government to pay damages amounting to slightly over 300,000 yen (about 3,000 US dollars) per person.5 In four other cases, victims of forced labor and Japanese companies reached a settlement after the courts had ruled against the former laborers.6 As for the Japanese government, it has enacted laws to pay 2,000,000 yen (about 20,000 US dollars) per person to ex-soldiers and Japanese army workers from Korea and Taiwan.7 The government has also established a Tokyo District Court, 30 November 1998, in: Hanrei Taimuzu, No. 991, p. 262; JAIL, No. 42, p. 143 (mistreatment of Dutch POWs); Tokyo District Court, 26 November 1998, in: Hanrei Taimuzu, No. 998, p. 92 (mistreatment of English, American, Australian, and New Zealand POWs); Fukuoka High Court, 1 October 1999, in: Hanrei Taimuzu, No. 1019, p. 155 (forced labor of a Korean); Tokyo District Court, 22 November 1996, in: Shomu Geppo, Vol. 44, No. 4, p. 507 (forced labor of Koreans); Nagoya High Court, Kanazawa Branch, 21 December 1998, in: Hanrei Taimuzu, No. 1046, p. 161 (forced labor of Korean women); Yamaguchi District Court, Shimonoseki Branch, 27 April 1998, in: Hanrei Jiho, No. 1642, p. 24 (forced prostitution and forced labor of Korean women); Tokyo High Court, 30 November 2000, in: Hanrei Jiho, No. 1741, p. 40 (forced prostitution of a Korean woman); Tokyo District Court, 27 July 1995, in: Hanrei Jiho, No. 1563, p. 121 (murder of a Korean man by Japanese soldiers). See also Tokyo District Court, 17 June 1999, in: Shomu Geppo, Vol. 47, No. 1, p. 1; JAIL, No. 43, p. 192 (invalidation of military payment certificate issued in Hong Kong); Tokyo District Court, 17 November 1980, in: Hanrei Jiho, No. 991, p. 93 (invalidation of military payment certificate issued in Taiwan). 5 Yamaguchi District Court, Shimonoseki Branch, 27 April 1998, in: Hanrei Jiho, No. 1642, p. 24. The court held that the Japanese government is liable for its failure to legislate for compensation of comfort women. The Hiroshima High Court reversed this, however, on 29 March 2001, holding that there is no liability for such legislation (http://www.shikoku-np.co.jp/news/kyodo/200103/20010329000180.htm). See similar decisions: Tokyo District Court, 9 October 1998, in: Hanrei Jiho, No. 1683, p. 57; JAIL, No. 42, p. 170; Nagoya High Court, Kanazawa Branch, 21 December 1998, in: Hanrei Taimuzu, No. 1046, p. 161. 6 See http://www5b.biglobe.ne.jp/~mujige/nittetu04.htm (settlement on 18 September 1997 in the case involving Korean workers against Nippon Steel Co.); http:// www.unityflag.co.jp/doc/649/0649_45f.html (settlement on 11 July 2000 in the case involving Korean women against Fujikoshi Co.); http://www.unityflag.co.jp/doc/670/ 0670_23a.html (settlement on 29 November 2000 in the case involving Chinese workers against Kajima Co.). Regarding the settlement on 6 April 1999 in the case involving a Korean worker against NKK Co., see TANIGAWA T., ‘Nippon Kokan Sosho Wakai to sono Imisurumono’ [Impact of the Settlement in the Case against NKK Co.], in: Kikan Senso Sekinin Kenkyu, No. 25, p. 50. 7 The laws for payment of ‘solatium’ [‘chouikin’, i.e., good-will payments rather than technical indemnity] to Taiwanese domiciled in Taiwan are entitled ‘Taiwan Jumin dearu Senbotsusha no Izokuto ni taisuru Choikinto ni kansuru Horitsu’ (Law No. 105, 1987) and ‘Tokutei Choikinto no Shikyu no Jishi ni kansuru Horitsu’ (Law No. 31, 1988). The law for payment of ‘solatium’ to Koreans and Taiwanese domiciled in Japan is entitled ‘Heiwa


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fund to pay 2,000,000 yen per person to ex-comfort women, as well as providing them with other assistance.8 However, many ex-soldiers, workers, and comfort women have refused these offers, maintaining that they are insufficient to compensate their losses and damages. In summary, most World War II victims have lost their cases in the legal arena and have received no alternative remedy from the Japanese government. Why do these victims continue to sue the Japanese government in spite of the results mentioned above? In this context it is important to mention the role of Japanese attorneys, who not only represent the foreign victims in the legal proceedings, but also finance the proceedings. Otherwise, from the practical point of view, the foreign victims could not institute legal proceedings in Japan. For example, the ‘Group of Attorneys for Claims of Chinese Victims’9 was founded in 1994 on the initiative of a few attorneys who by chance had discovered during a visit to China that many Chinese victims wanted to sue the Japanese government but lacked financial support and legal advice. Several hundred attorneys joined the group, which financed eight cases before Japanese courts and also founded the ‘Group of Citizens to Support Claims by Chinese Victims’.10 The attorneys work voluntarily on these cases in Japan and also fly to China, Germany, and the U.S.A. at their own expense for research and exchanging views with foreign lawyers.11 It seems that most other proceedings involving foreign victims were instituted in a similar manner. The Japanese attorneys are willing to finance these cases because they regard it as their moral duty. This thinking is very characteristic of Japanese attorneys. What law do the Japanese attorneys invoke in the grounds of claims filed by World War victims? In cases involving waiver of claims against foreign States under postwar agreements, they contend that the Japanese government is liable above all pursuant to Article 29(3) of the Constitution on government expropriation. In cases on ex-soldiers and workers of the Japanese army, the attorneys argue that the nationality clause in the pension laws is contrary to Article 14(1) of the Constitution and Article 26 of the International Covenant on Civil and Political Joyaku Kokuseki Ridatsushato dearu Senbotsusha Izokuto ni taisuru Choikinto no Sikyu ni kansuru Horitsu’ (Law No. 114, 2000). 8 The fund is named ‘Josei no tameno Azia Heiwa Kokumin Kikin’ and was constituted on 19 July 1995. See the English page of this fund’s site (http://www. awf.or.jp/index_e.html). 9 This group’s name in Japanese is ‘Chugokujin Senso Higaisha Baisho Seikyu Jiken Bengodan’. 10 This group’s name in Japanese is ‘Chugokujin Senso Higaisha no Yokyu wo Sasaeru Kai’. 11 YAMADA M. (note 1), p. 229 et seq. See also the English page of the site of the ‘Group of Citizens for Support of Claims by Chinese Victims’ (http://www. osk.3web.ne.jp/~suopei/suopei-e/index_e.html).

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Rights, both of which guarantee equality under the law. Other attorneys working on cases involving violations of the law of warfare maintain primarily that the victims are entitled to damages under the 1907 Hague Convention respecting the Laws and Customs of War on Land. For the Korean and Taiwanese victims, the Hague Convention is the only possible basis of their claims. The unlawful acts took place in territories belonging to Japan at that time, and a State immunity doctrine was then applied in Japan that exonerated the government from liability for acta jure imperii. On the other hand, the attorneys representing the Chinese and Philippine victims contend that the lex loci delicti applies to acts committed by Japanese soldiers on the mainland of China and the Philippines. Questions of private international law have played a major role in the legal proceedings in the above-mentioned cases of World War victims. Since the proceedings of the Chinese and Philippine victims were instituted later, at the time this article was written only three of the reported decisions address questions of private international law.12 However, as is evident in this article, there are many problems in Japanese private international law that differ from similar situations in other countries.13 Before analyzing the conflict of laws rules, an attempt is made to preliminarily analyze questions of public international law (II). This analysis shows that the agreements between Japan and other States place no obstacles in the way of claims of individuals and that the 1907 Hague Convention cannot support these claims. The main theme of this article is the law applicable to governmental liability (III). The analysis begins with practical implications that could be directly connected with the results of cases (A). Thereafter, rules on governmental liability in general are considered (B) and rules on wrongs committed during World War II (C). In addition, some questions arise concerning the interpretation of Article 11 of the Horei (Japanese Statute on Applicable Law) (D). As a concluding remark, I consider the necessity of establishing international uniform rules on civil liability for war crimes (IV).

12 Tokyo District Court, 22 September 1999, in: Hanrei Taimuzu, No. 1028, p. 92; JAIL, No. 43, p. 216; Tokyo District Court, 16 July 1998, in: Hanrei Taimuzu, No. 1046, p. 270; Tokyo District Court, 9 October 1998, in: Hanrei Jiho, No. 1683, p. 57; JAIL, No. 42, p. 170. 13 For a short essay on this theme in European languages, see YAMAUCHI K., ‘Staatshaftung für Kriegsgeschädigte im japanischen IPR’, in: Festschrift für Otto Sandrock zum 70. Geburtstag, Heidelberg 2000, p. 1057; OKUDA Y./YOKOMIZO D./TOUBKIN N., ‘Chronique de Jurisprudence japonaise’, in: Clunet, 2001, p. 558 et seq. From the perspective of international law, see IGARASHI M., ‘Post-War Compensation Cases, Japanese Courts and International Law’, in: JAIL, No. 43, p. 45.


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II.

Preliminary Analysis of Public International Law

A.

Agreements on Reparation and the Practice in Japan

Signed by forty-eight Allied Powers and ratified by forty-five, the Treaty of Peace with Japan entered into force in 1952. Article 14(a) of the Treaty recognized ‘that Japan should pay reparations to the Allied Powers for the damage and suffering caused by it during the war’. However, ‘it is also recognized that the resources of Japan [were not then] sufficient, if it is to maintain a viable economy, to make complete reparation for all such damage and suffering and at the same time meet its other obligations....’ Therefore, Article 14(b) specified that except ‘as otherwise provided in the present Treaty, the Allied Powers waive all reparations claims of the Allied Powers, other claims of the Allied Powers and their nationals arising out of any actions taken by Japan and its nationals in the course of the prosecution of the war, and claims of the Allied Powers for direct military costs of occupation’. Under this provision, most of the Allied Powers made agreements with Japan on the basis of which Japanese economic assistance was provided to the Allies as reparations in return for their waiver of war claims.14 These agreements in fact often profited Japanese companies because the Japanese government paid them to construct and deliver power plants, dams, waterworks, ships, and trucks to the Allied Powers. In many cases, the war victims were compensated neither by Japan nor by their home country.15 There are a few exceptions. The Japanese government delivered Japan’s foreign assets to the International Committee of the Red Cross, which had them liquidated and then distributed to various Allied nations that distributed them to their prisoners of war pursuant to domestic schemes.16 Additional compensation was granted to English war prisoners on 7 November 2000 and to Australian war prisoners on 22 May 2001 by the respective home countries.17 Compensation money delivered by the Japanese government to the Korean, Philippine, and Dutch governments was distributed partly to war prisoners and other victims under their national laws of the 1950s and 1960s.18 Compensation for property damages was ordered by the arbitration court of Japan and the Allies under the Allied Powers 14

Fifty-four agreements between Japan and the Allies are listed in: ASAHI SHINBUN SENGO HOSHO MONDAI SHUZAIHAN [Team of the Asahi Shinbun Reporting on Post-War Compensation], Sengo Hosho towa nanika [What is the Post-War Compensation?], Tokyo 1994, p. 26 et seq. 15 Ibid., p. 17 et seq. and p. 36 et seq. 16 Ibid., p. 21 et seq. 17 http://www.cnn.co.jp/2000/WORLD/11/08/pow.compensation/ (England POW); Asahi Shinbun, 23 May 2001, p. 23 (Australian POW). 18 TUKAMOTO T., ‘Rippou Shoukai – Kaidai’ [Introductory Note on Translations of Foreign Laws], in: Gaikoku no Rippo, Vol. 34, No. 3-4, p. 4 et seq.

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Property Compensation Act of 1951.19 However, the amount of money was not sufficient to compensate foreign victims for their losses and damages. The Japanese government has never maintained before Japanese courts that the Peace Treaty’s waiver clause could be interpreted to include the waiver of claims of individuals. Conversely, an official of the Foreign Ministry declared in Parliament that the Agreement on Reparation between Japan and Korea was intended to waive only the right to diplomatic protection and did not include claims of individuals.20 The Japan Supreme Court delivered the same ruling in regard to the Treaty of Peace with Japan concerning the waiver to assets of Japanese nationals that remained abroad.21 Most scholarly writings agree with the Supreme Court.22 Since the Japanese government waived their right to diplomatic protection, Japanese individuals have had considerable difficulty receiving any compensation for damages arising during the war. First, Japanese individuals cannot sue foreign States in these matters before Japanese courts because the defendant States enjoy foreign sovereign immunity from the jurisdiction of Japanese courts. Second, they lack the financial assistance and legal advice to sue the defendant State before its own courts. To my knowledge, Japanese victims have not filed claims at American courts for damages suffered as a result of the atomic bomb, nor at Russian courts for damages suffered as a result of forced labor in Siberia. On the contrary, Chinese, Korean, and Philippine victims have been able to institute proceedings before Japanese courts thanks to the financial assistance and volunteer work of Japanese attorneys. This difference between Japanese and foreign victims should be noted, as well as the fact that the agreements between Japan and other States do not concern the claims of individuals.

19 HATANO R./HIGASHI J., Kokusai Hanrei Kenkyu Kokka Sekinin [Study of Case Law on State Liability under International Law], Tokyo 1990, p. 845. 20 ASAHI SHINBUN SENGO HOSHO MONDAI SHUZAIHAN (note 14), p. 20. See also ITO T., ‘Dainiji Sekai Taisengo no Nihon no Baisho Seikyuken Shori’ [Claims and Debts of Japan after the Second World War], in: Gaimusho Chosa Geppo, 1994, No. 1, p. 112 et seq. 21 Supreme Court, 27 November 1968, in: Minshu, Vol. 22, No. 12, p. 2808; Hanrei Jiho, No. 538, p. 6. See also Supreme Court, 4 July 1969, in: Minshu, Vol. 23, No. 8, p. 1321; Hanrei Jiho, No. 566, p. 33; Supreme Court, 13 March 1997, in: Minshu, Vol. 51, No. 3, p. 1233; Hanrei Jiho, No. 1607, p. 11. 22 OHNISHI Y., Case Comment, in: Minshoho Zashi, Vol. 61, No. 2, p. 311 et seq.; HAGHINO Y., Case Comment, in: Kenpo Hanrei Hyakusen I, 3rd ed., Tokyo 1994, p. 217; SAKURADA H., Case Comment, in: Gyosei Hanrei Hyakusen II, Tokyo 1979, p. 313; MIYAZAKI S., Kokusai Ho ni okeru Kokka to Kojin [State and Individuals in International Law], Tokyo 1963, p. 327 et seq.; NAKAGAWA J., ‘Sengo Hosho Sosho to Kokusai Ho’ [Litigation on Post-War Compensation and International Law], in: Hogaku Kyoshitsu, No. 238, p. 43. Contra ASHIBE N., Case Comment, in: Hogaku Kyokai Zashi, Vol. 87, No. 2, p. 286; HIROBE K., Case Comment, in: Juristo, No. 423, p. 199.


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B.

Compensation of Individuals under the 1907 Hague Convention Respecting the Laws and Customs of War on Land

The foreign victims contend that the acts committed by the Japanese army violated the law of nations embodied in the 1907 Hague Convention respecting the Laws and Customs of War on Land and its annexed Regulations. The Hague Convention, which was ratified by Japan in 1911 and entered into force in 1912, states in Article 3: ‘A belligerent party which violates the provisions of the said Regulations shall, if the case demands, be liable to pay compensation. It shall be responsible for all acts committed by persons forming part of its armed forces.’ According to the victims, Article 3 of the Hague Convention entitles them to claim damages directly from the Japanese government, which is liable for acts committed by its own army during World War II. Japanese courts have rejected this argument in all cases.23 For example, in a claim filed by Dutch war prisoners and civilian internees, the Tokyo District Court held on 30 November 1998: ‘It must be said that in general the basic purpose of treaty interpretation is, above all, to ascertain the objective meaning of the terms of the treaty. This being so, Article 3 of the Hague Convention only stipulates that an offending State shall bear an international responsibility to pay compensation. There is no provision regarding issues such as how this compensation shall be effectuated and whether individuals hold a right to claim compensation. No mention is made about individuals. In the light of the Hague Convention as a whole, there is no provision that might suggest that an individual can be the subject of a claim for compensation and that an individual can exercise such a right.’ The Court found this conclusion justified by research that is part of the preparatory work of the Hague Convention, as well as by the subsequent practice of the Contracting States.24 The view also prevails in most scholarly writings that Article 3 of the Hague Convention concerns only reparations between States.25 Thus it follows that the Hague Convention cannot support claims of individual victims.

23 Tokyo District Court, 27 July 1995, in: Hanrei Jiho, No. 1563, p. 121; Tokyo District Court, 22 September 1999, in: Hanrei Taimuzu, No. 1028, p. 92; JAIL, No. 43, p. 216; Tokyo District Court, 9 October 1998, in: Hanrei Jiho, No. 1683, p. 57; JAIL, No. 42, p. 170; Tokyo District Court, 30 November 1998, in: Hanrei Taimuzu, No. 991, p. 262; JAIL, No. 42, p. 143; Tokyo District Court, 26 November 1998, in: Hanrei Taimuzu, No. 998, p. 92. 24 Tokyo District Court, 30 November 1998, in: Hanrei Taimuzu, No. 991, p. 262, at p. 275 et seq.; JAIL, No. 42, p. 143, at p. 146.

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III. Law Applicable to Governmental Liability A.

Practical Implications of Analysis

Acts of the Japanese army committed during World War II could violate not only the law of nations but also the domestic law of the relevant States. Namely, the acts may constitute a tort because indeed murder, rape, abduction, confinement, assault, and so on all occurred. Generally speaking, acts of war do not constitute torts under domestic law if the acts were justified by the law of warfare. This rule, however, does not apply to acts of the Japanese army that resulted in damage and injury to foreign civilians.26 Japanese law, however, had accepted a State immunity doctrine (Kokka Mutouseki no Hori) at the time of the acts in question. According to this doctrine, the Japanese government could not be held liable for acta jure imperii.27 Consequently, if Japanese law governs the acts committed by the Japanese army during World War II and the State immunity doctrine covers these acts, the rules of the Civil Code on tort liability are not applicable. In this context, Japan’s conflict of laws rules come into play. If the acts concerned are not governed by Japanese law but by a foreign law, the Japanese government will not be exempted from tort liability. The State immunity doctrine, which could also be applicable under a foreign applicable law, is regarded as exempting its own government only. Even if Japanese law is applicable, one must determine whether the State immunity doctrine applies to the acts in question. First, one could argue that some of the acts committed during World War II were not acts of the government, acta jure imperii, but acts of a commercial nature, acta jure gestionis. Second, application of the State immunity doctrine to acts committed abroad might not comply with the purpose and objective of this doctrine. Third, the State immunity doctrine could be a procedural rule that is not applicable to legal proceedings instituted after World War II. Finally, the application of the State immunity doctrine to the acts concerned could be contrary to ordre public from the perspective of intertemporal law. 25

YASUI K., ‘Genbaku Kogeki to Kokusaiho jyo no Songai Baisho’ [The Atom Bomb and Compensation under International Law], in: Horitsu Jiho, Vol. 36, No. 2, p. 56; HIROSE Y., Horyo no Kokusaiho jyo no Chii [Status of POWs under International Law], Tokyo 1990, p. 45 et seq.; ASADA M., Case Comment, in: Juristo, No. 1091, p. 246; KOTERA A., Expert Opinion, in: FUJITA H. et al.(ed.), Senso to Kojin no Kenri [War and Rights of Individuals], Tokyo 1999, p. 83 et seq. Contra ABE K., Jinken no Kokusaika [Internationalization of Human Rights], Tokyo 1998, p. 260 et seq.; SHIN H., ‘Kokusaiho kara Mita Sengo Hosho’ [Post-War Compensation from Perspective of Public International Law], in: OKUDA Y./KAWASHIMA S. et al.(note 1), p. 80 et seq. 26 It is likely to be undisputed that the alleged acts of the Japanese army in cases of post-war compensation violated customary international law, as well as the 1907 Hague Convention respecting the Laws and Customs of War on Land and its annexed Regulations. 27 For details of the State immunity doctrine, see below III. D. 2.


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The question of prescription is also relevant in an analysis of the conflict of laws rules. If Japanese law applies to this matter, the right to claim damages in torts has been lost automatically by the fact that the twenty-year period of prescription has elapsed. On the contrary, if a foreign law governs this question, it is possible that the issue of the expiry of the period of prescription would have to be raised by the defendant before the court. This appears to be true with respect to the law of the Republic of China, according to which the Japanese government could be exempted from liability for compensation only if it pleaded before the courts that the period of prescription had elapsed. In such case, given the various circumstances, one could argue that the abuse of rights doctrine does not permit the Japanese government to rely on the argument of prescription.

B.

Rules Governing Governmental Liability in General

Article 11(1) of Japan’s Conflict of Laws Act, the Horei, provides that the requirements and effects of claims arising from unlawful acts are governed by the law of the place where the facts giving rise to the claims occurred. This was ‘the first legislation in the world that included a bilateral provision on the applicability of the lex loci delicti commissi’.28 Until recently, the question whether Article 11 of the Horei also applies when determining the law applicable to governmental liability had not been discussed in the courts and was rarely mentioned in the doctrine. The plaintiff’s attorneys, however, requested application of the lex loci delicti. In former cases involving governmental liability, no one had doubted that Japanese law was applicable because the acts of the civil servants concerned had taken place inside the territory of Japan. This question was dealt with perhaps for the first time in Japan by Professor Takao Sawaki. Focusing on the application of the Governmental Liability Act (Kokka Baisho Ho) of 1947, which contains special rules on governmental liability and provides otherwise for the application of the Civil Code on tort liability, he offered two possible solutions, without firmly advocating either. First, the Governmental Liability Act could apply as part of Japanese law under Article 11 of the Horei, because the Act is part of private law. However, Professor Sawaki found this solution unreasonable, since the Act does not apply to unlawful acts committed by Japanese civil servants abroad. Second, the Act could apply to all acts committed by Japanese civil servants, irrespective of the law specified in Article 11 of the Horei. Professor Sawaki doubted that the Civil Code could apply mutatis mutandis under Article 4 of the Governmental Liability Act, even though Article 11 of the Horei refers to a foreign law.29 28 KELLER M./SIEHR K., Allgemeine Lehren des internationalen Privatrechts, Zurich 1986, p. 358 (English translation by OKUDA Y.). 29 SAWAKI T., Case Comment, in: Shogai Hanrei Hyakusen, Tokyo 1967, p. 205.

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Professor Sawaki’s comments are not convincing since they are concerned only with the results of application or non-application of Japanese substantive rules. According to the doctrine, it is generally understood that the law governing relations with foreign elements as a whole should first be decided and then the substantive rules to be applied as part of the applicable law. If Article 11 of the Horei also determines the law applicable to governmental liability and refers to a foreign law, the Japanese government could be liable under the foreign substantive rules on tort. On the contrary, if governmental liability is governed by the lex fori and not by lex loci delicti, the Civil Code of Japan could be applied on gounds other than those in Article 11 of the Horei.30 Following Professor Sawaki, Professor Ryoichi Yamada similarly suggested other possible solutions for determining the law applicable to governmental liability; however, he too did not firmly adopt any approach. Professor Yamada first addressed Article 6 of the Governmental Liability Act, which requires reciprocity when the Act applies to foreign victims. Categorizing this provision as public rather than private law, Professor Yamada believed it should apply directly to relations with foreign elements. Next, he suggested that all provisions on the status of aliens could be applied only if they are part of the law designated by the conflict of laws rules. This would mean that the Governmental Liability Act should be applied if Japanese law is applicable under Article 11 of the Horei. It could also be argued that, according to an unwritten conflicts rule, an unlawful act by a civil servant should be governed by the law of the State to which he belongs.31 It is unclear whether Professor Yamada addressed only Article 6 of the Governmental Liability Act or whether he was addressing the Act as a whole. In either case, his comments lead, similar to Professor Sawaki’s, to the exclusive application of Japanese substantive rules. This raises the question whether it is really impossible for Japanese courts to apply a foreign law to governmental liability. As mentioned above, the Japanese government could be liable under a foreign substantive rule on tort if Article 11 of the Horei determines the law applicable to governmental liability and refers to a foreign law as the lex loci delicti. A court could also create an unwritten rule specifying that a civil servant’s unlawful act should be governed by the law of the State to which he belongs. Accordingly, if a foreign civil servant committed an unlawful act in Japan, the Japanese court would apply the foreign law of his home country.32 30 See also OKUDA Y., ‘Kokka Baisho Sekinin no Jyunkyoho ni kansuru Oboegaki: Sengo Hosho no Keesu wo Chusin to site’ [Law Applicable to State Liability for Post-War Compensation], in: The Hokkaido Law Review, Vol. 49, No. 4, p. 127. 31 YAMADA R., Kokusai Shiho [Private International Law], Tokyo 1992, p. 160 et seq. 32 See also OKUDA Y., ‘Kokusai Shiho kara Mita Sengo Hosho’ [Post-War Compensation from Perspective of Private International Law], in: OKUDA Y./KAWASHIMA S. et al. (note 1), p. 137.


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As far as acta jure imperii are concerned, a civil servant is permitted to act abroad only with prior agreement of the foreign State or if such acts are authorized by the law of nations.33 The civil servant may exercise his powers according to customary international law or an agreement between his home country and the host country. Furthermore, his acts as a civil servant are subject to the domestic law of his home country. Therefore, the government has an interest in applying its own law to the issue of liability for acts of its civil servants. In principle, this interest should be respected as it creates legal certainty for victims who can then expect to apply the civil servant’s home law. Some victims may be nationals of the civil servant’s home country who had sought but, contrary to the home law, were denied ambassadorial protection. Other victims may be nationals of the host country who had applied to the consul for a visa, but were rejected contrary to the consul’s home law. In this way there is a certain legal relationship between the victim and the civil servant’s home country, thus justifying applying the law of that country.34

C.

Rules Governing Wrongs Committed during World War II

In cases involving Chinese and Philippine victims of World War II, the Court concluded that the Horei did not apply because the State immunity doctrine had been applied at the time of the Japanese army’s unlawful acts. In its ruling of 9 October 1998 regarding Philippine victims, the Tokyo District Court held: ‘Whereas Article 11 of the Horei is supposed to determine the law applicable to matters with foreign elements when there is a conflict between private laws, it is quite doubtful that the Horei should be applied to this case. This is because, as mentioned below, the alleged offenses have a highly public character related to the governmental acts of the State and because general private law was not applicable to governmental acts of the State under the legal system of Japan at the time of the offenses. Additionally, it would also be questionable to include the alleged acts in the category of torts prescribed under Article 11 of the Horei, since the Civil Code could not be applied to governmental acts of the State. That is, governmental acts were out of the range of civil liability under the Japanese legal system at that time.’35 33

UGA K., Kokka Hosho Ho [State Liability Law], Tokyo 1997, p. 365. OKUDA Y. (note 32), p. 138 et seq. Regarding this point I agree with the decision of Austria’s Supreme Court (OGH), 17 February 1982, in: Österreichische Juristenzeitung 1982, p. 462. See the details of this case below at note 38. 35 Tokyo District Court, 9 October 1998, in: Hanrei Jiho, No. 1683, p. 57, at p. 77 et seq.; JAIL, No. 42, p. 170, at p. 178 et seq. 34

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The Court used similar reasoning in its decision of 22 September 1999 against Chinese victims.36 The reasoning of the Court is not at all convincing. Obviously, Article 11 of the Horei includes a bilateral rule for conflicts cases involving torts, under which the applicable law of the lex loci delicti may refer to Japanese law or to a foreign law. The provisions of the Horei were not enacted to bring about exclusive application of Japanese law. Even if Japanese law is designated as applicable by the Horei, it is up to the intertemporal law of Japan to decide whether the State immunity doctrine or the Governmental Liability Act shall apply to the case. In other words, the Horei refers to Japanese law as a whole and not directly to the State immunity doctrine. Therefore, the reasoning of the Court does not justify not applying Article 11 of the Horei.37 The Court also acknowledged that ‘the alleged offenses have a highly public character related to governmental acts of the State’. Indeed, all acts of the Japanese army were closely connected with the interests of the Japanese government. One might conclude that this could justify application of the unwritten rule that an unlawful act of a civil servant shall be governed by the law of the State to which he belongs. According to this rule, Japan’s liability for wrongs committed during World War II would be governed by Japanese law. However, this conclusion ignores the interests of the Chinese and Philippine victims which should also be respected when the decision on the applicable law is made. The plaintiffs had no legal relationship with Japan until the offenses of the Japanese army. Thus, they could not have foreseen the application of Japanese law. Therefore, there is an important difference in the circumstances relating to the wrongs of the Japanese army and the cases of general governmental liability mentioned above. In the former cases it would be unfair to apply Japanese law, even though this is the lex fori. Instead, the lex loci delicti, a neutral law for both parties, should govern Japan’s liability for the acts of the Japanese army.38 36 Tokyo District Court, 22 September 1999, in: Hanrei Taimuzu, No. 1028, p. 92, at p. 128 et seq.; JAIL, No. 43, p. 216, at p. 220 et seq. 37 OKUDA Y. (note 32), p. 129 et seq. See also OKUDA Y., ‘Sengo Hosho Saiban to Savigny no Kokusai Shiho Riron (1) [Litigation on Post-War Compensation and Savigny’s Doctrine on Private International Law (1)], in: The Hokkaido Law Review, Vol. 51, No. 3, p. 251 et seq. 38 OKUDA Y. (note 32), p. 140 et seq. See also OKUDA Y., ‘Sengo Hosho Saiban to Savigny no Kokusai Shiho Riron (2)’ [Litigation on Post-War Compensation and Savigny’s Doctrine on Private International Law (2)], in: The Hokkaido Law Review, Vol. 51, No. 4, p. 343 et seq. As mentioned above in note 34, regarding this point I agree with the decision of Austria’s Supreme Court, OGH, 17 February 1982, in: Österreichische Juristenzeitung 1982, p. 462. In this case, an Austrian ambassador accidentally shot a French ambassador, when both were hunting under the auspices of Yugoslavia’s president. The Court applied Yugoslav law as the lex loci delicti to the question of the liability of the Austrian government.


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D.

Article 11 of the Horei

1.

Lex Loci Delicti

As mentioned above, Article 11(1) of the Horei provides that the lex loci delicti shall govern tort liability. In the case of the Chinese victims, the question arises which law applies as the lex loci delicti; namely, the law of the Republic of China, the law of Manchukuo – the Japanese sponsored State – or the law of the People’s Republic of China. The acts of the Japanese army took place on the mainland of China, which was divided between the Republic of China and Manchukuo at that time, and is now governed by the People’s Republic of China. Manchukuo was established in 1932 in the northeast area of mainland China. This is where Unit 731 of the Japanese Army confined many Chinese civilians and conducted human experiments. As dramatized in the film ‘The Last Emperor’, the Japanese government had designated the ex-emperor of China as executive of Manchukuo, and he later rose to the State’s throne as emperor. In other words, Manchukuo was a puppet government of Japan. Although the Japanese government recognized it as an independent State in 1933, the League of Nations soon declared the recognition premature. As a result, it should be concluded that Manchukuo did not satisfy the requirements of an independent State and its law should not be applied as the lex loci delicti.39 While the mainland of China is now governed by the People’s Republic of China, the wrongs of the Japanese army took place when the law of the Republic of China was in force in that territory. Since it cannot be said that the law of the Republic of China was simply reformed by the law of the People’s Republic of China, the latter cannot be regarded as the lex posterior to the former. Both laws are from different jurisdictions, which could be applied independently as the lex loci delicti. Thus, the law of the Republic of China should be applied as the lex loci delicti because the wrongs of the Japanese army occurred when these laws were in force.40

39 OKUDA Y. (note 32), p. 145 et seq. See also TABATA S., ‘Shonin to Kokunai Saiban’ [Recognition of State and Litigation in National Courts], in: Hogaku Ronso, Vol. 76, No. 1-2, p. 49. As to the premature recognition of the Manchukuo, see SHOJI Y., ‘Manshukoku Fushonin no Hoteki Konkyo ni kansuru Ichikosatsu’ [Study on Legal Grounds of Non-Recognition of the Manchukuo], in: Hogaku Kenkyu Nenshi (Tohoku Gakuin University), No. 10, p. 1. 40 OKUDA Y. (note 32), p. 146 et seq. The Japanese courts applied the law of the Republic of China as the lex loci celebrationis to all marriages contracted in the mainland of China before the creation of the People’s Republic of China. Kyoto District Court, 9 December 1992, in: Hanrei Taimuzu, No. 831, p. 122; Tokyo High Court, 29 September 1988, in: Katei Saiban Geppo, Vol. 41, No. 4, p. 59; Tokyo District Court, 29 July 1987, in: Katei Saiban Geppo, Vol. 41, No. 4, p. 71; Tokyo District Court, 20 November 1986, in: Katei Saiban Geppo, Vol. 39, No. 2, p. 174.

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Incidentally, there were many Chinese civilians who were confined in the mainland of China and transported to Japan where they were forced to work for Japanese companies. In these cases the question also arises as to which law should be applied as the lex loci delicti, Chinese or Japanese law. The wrongs took place both in China and in Japan, and also on the high seas during the transit by ship. However, it was the Japanese government and companies that confined the Chinese civilians and transported them to Japan. If the law of the destination is applied as the lex loci delicti, the Japanese government and companies would be able to choose the law applicable to their own liability. This would be unfair since the lex loci delicti is applicable as a neutral law for both parties. In the cases of forced labor of the Chinese civilians, Chinese law should apply as the lex loci delicti.41

2.

Cumulative Application of the Lex Fori to Requirements of Claims

The principle of lex loci delicti in Article 11(1) of the Horei is restricted by paragraph 2, which provides that, ‘as to unlawful acts, the preceding paragraph shall not apply where the facts occurring abroad are not unlawful under Japanese law’. According to the prevailing view in the doctrine, this provision means that the lex fori is to be applied cumulatively to all requirements of claims.42 Namely, the claims of the Chinese and Philippine victims must satisfy the requirements of both the lex loci delicti and Japanese law. In this context, the question arises as to whether the State immunity doctrine is applicable to the acts concerned. In the case involving Philippine comfort women, the Tokyo District Court answered affirmatively on 9 October 1998: ‘Paragraph 6 of the supplementary provisions of the State Liability Act of 1947 provides that the antecedent law shall apply to damages arising from conduct committed before this Act came into force. At the time of the Second World War, during which the alleged offenses were committed, the State immunity doctrine was effective, so that

41 OKUDA Y. (note 32), p. 147 et seq. See also Matsuyama District Court, 8 November 1994, in: Hanrei Jiho, No. 1549, p. 109 (application of Italian law in the case of a yacht transported from Italy to Japan); Osaka District Court, 6 December 1990, in: Hanrei Taimuzu, No. 760, p. 246 (application of German law in the case of a car transported from Germany to Japan). 42 YAMADA R. (note 31), p. 323; TAMEIKE Y., Kokusai Shiho Koghi [Lecture on Private International Law], 2nd ed., Tokyo 1999, p. 377. Contra ORIMO Y., Kokusai Shiho Kakuron [Private International Law, Individual Parts], 2nd ed., Tokyo 1972, p. 185 (cumulative application should be restricted to the unlawfulness of acts according to the literal interpretation of paragraph 2).


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with regard to acta jure imperii, the Civil Code was not applicable and the Japanese government was not liable to pay compensation.’ In other words, on the one hand, the administrative court dismissed the actions for compensation against the government under Article 16 of the Administrative Justice Act of 1890. On the other hand, the judicial court denied civil liability of the government for acta jure imperii, but applied Article 715 of the Civil Code to acta jure gestionis, making the government liable as employer of the civil servants. The alleged offenses accompanied acts of war of the Japanese army and should be characterized as acts connected with acta jure imperii or as acts of a highly public character. Therefore, the liability of the Japanese government to pay compensation for the offenses should be denied under the State immunity doctrine.43 The court expressed a similar opinion in a decision of 22 September 1999 in a case involving the holocaust in Nanking, the experiments on humans by Unit 731, and the bombing of the non-military area of a Chinese city.44 There are several points at issue concerning the applicability of the State immunity doctrine to cases involving war victims. First, it is doubtful that all acts of the Japanese army during the World War II were acta jure imperii. In a yet to be reported decision of 30 November 2000, the Court of Appeals of Tokyo held in the case of a Korean comfort woman as follows: ‘From application mutatis mutandis of Article 715, paragraph 2 of the Civil Code, one may conclude that as the supervisor of the tortfeasors the Japanese government is liable for the unlawful acts of the employers of the comfort women and the Japanese soldiers. This is because the government was a party to the contracts with, or a business partner of, the employers of the comfort women.’45 The same rule may apply in the forced labor cases where the Japanese government acted as a contracting party and as a partner in the businesses of the Japanese companies that confined and forced foreign civilians to work in Japan.46 Second, it is helpful to consider the purpose and objective of the State immunity doctrine. Boissonade, the French scholar who originally drafted the Japanese Civil Code, provided that public and private administrations were liable 43

Tokyo District Court, 9 October 1998, in: Hanrei Jiho, No. 1683, p. 57, at p. 78; JAIL, No. 42, p. 170, at p. 180. 44 Tokyo District Court, 22 September 1999, in: Hanrei Taimuzu, No. 1028, p. 92, at p. 129. This part of the decision is not translated in JAIL, No. 43, p. 216. 45 Tokyo High Court, 30 November 2000 (Case No. 5333/ne, 1999). 46 AKIYAMA Y., ‘Gyoseiho kara Mita Sengo Hosho’ [Post-War Compensation from Perspective of Administrative Law], in: OKUDA Y./KAWASHIMA S. et al. (note 1), p. 61 et seq.

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for damages caused by their servants or employees. In particular, his draft recognized State liability for all acts of civil servants. However, the wording of his draft was altered by the Parliamentary Drafting Committee, as a result of which the final version of the Civil Code of 1890 was silent about State liability. According to the prevailing theory in the doctrine and case law, these circumstances justify the decision not to apply the Civil Code to acta jure imperii, as a result of which the Japanese government was not liable to pay compensation until enactment of the State Liability Act of 1947.47 However, according to the preparatory work of the Parliamentary Drafting Committee, the members exonerated the Japanese government from liability not simply because the acts of civil servants were deemed acta jure imperii. In their opinion, the ‘people’ should accept the effects of the State immunity doctrine since it was the State’s duty to protect the rights and property of its people by means of acta jure imperii.48 Thus, the State immunity doctrine should be excluded when there is no such relationship between the State and the persons concerned. As mentioned above, a civil servant may carry out acta jure imperii abroad only if the foreign State grants prior approval or if the acts are authorized by the law of nations. This applies both to protecting one’s own nationals and issuing visas to foreigners. However, there was no such protective relationship between the Japanese army and the Chinese and Philippines, who were the victims of the offenses committed by the army in violation of the law of warfare. In this case, the application of the State immunity doctrine does not comply with its purpose and objective. Thus, the Japanese government should be liable for compensation under the Civil Code.49 Third, taking account of the preparatory work of the Administrative Justice Act of 1890, one sees that the jurisdiction of the administrative courts as to the subject matter was regulated differently in several drafts of the Act. Some drafts provided that the administrative courts had jurisdiction over compensation for acta jure gestionis, while others denied it or conferred it upon the judicial courts. With regard to acta jure imperii, some drafts did not mention jurisdiction in matters of compensation, while others expressly denied it. In any case, no draft expressly recognized it or conferred it upon the judicial courts. The final version of the Act provided that the administrative courts should not accept actions for compensation. This rule should be interpreted as denying jurisdiction to the administrative courts 47

On the views in the doctrine and case law, see UGA K. (note 33), p. 15 et seq. OKUDA Y., ‘Kokka Baisho Sekinin to Horitsu Fusokyu no Gensoku’ [State Liability and Principle of Non-Retroactive Application of Law], in: The Hokkaido Law Review, Vol. 52, No. 1, p. 16 et seq. The preparatory materials of the Parliamentary Drafting Committee are reprinted in: HOMUDAIJIN KANBO SHIHO HOSEI CHOSABU (ed.), Horitsu Torishirabe Iinkai Minpo Soan Zaisanhen dai 373 Jyo ni kansuru Iken [Law Research Committee, Opinions on the Draft of Article 373, Title Property, Civil Code], Nihon Kindai Rippo Shiryo Sosho, Vol. 16, Tokyo 1989. 49 OKUDA Y. (note 48), p. 47 et seq. 48


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in matters of compensation for all acts of the government. As for the judicial courts, under the Court Constitution Act of 1890 they had jurisdiction over ‘civil matters’ and ‘criminal matters’ only. Thus it follows that at that time neither the administrative courts nor the judicial courts had jurisdiction in matters of compensation for acta jure imperii. As a result, the government was not liable for compensation. In other words, the State immunity doctrine was a procedural rule.50 After World War II, the Administrative Justice Act and the administrative court were abolished under Article 76(2) of the Constitution and paragraph 2 of the supplementary provisions of the Court Act. As specified by Article 3(1) of the Court Act, judicial courts have jurisdiction over all legal disputes, including, of course, actions against the government for compensation as a result of acta jure imperii. Accordingly, the State immunity doctrine should not apply to actions brought after World War II. It is true that the principle of non-retroactive application of lex posterior is stipulated in paragraph 6 of the supplementary provisions of the State Liability Act; however, this provision applies to substantive rules and not to procedural rules. As a result, since paragraph 6 of the supplementary provisions of the State Liability Act prohibits retroactive application, judicial courts have jurisdiction over ongoing actions of the war victims under the existing Court Act and should apply the Civil Code in such cases.51 Finally, even if the State immunity doctrine is deemed to be substantive law and is applied in cases where the government and foreign victims have had no previous legal relations, the question arises as to whether applying the State immunity doctrine would be contrary to ordre public from the perspective of intertemporal law. The principle of non-retroactive application is based on the policy that legal relations already established between parties should be respected. In other words, the Japanese government should expect that it will not be liable for compensation under the law in force at the time of the acts committed by its civil servants, and the victims should be aware that they are unable to claim compensation under that law. This policy is reasonable in most cases. However, this is not true in regard to cases involving wrongs of the Japanese army during World War II. On the one hand, the war victims continue to suffer physical and psychological pain even sixty years after the offenses had been committed. On the other hand, the Japanese government has enacted laws that grant remedies to former Japanese soldiers and the families of deceased soldiers, as well as to victims of the atomic bomb. This discrimination causes additional pain to the foreign victims. Thus, it can be said that the wrongs of the Japanese government not only occurred in the past but continue to occur now. Furthermore, the acts of the Japanese army, such as the holocaust in Nanking, the experimentation on 50

Ibid., p. 33 et seq. The drafts of the Administrative Justice Act are reprinted in: GYOSEI SAIBANSHO (ed.), Gyosei Saibansho 50 nenshi [History of the Administrative Justice Court in 50 Years], Tokyo 1941, p. 13 et seq. 51 OKUDA Y. (note 48), p. 50 et seq.

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humans by Unit 731, the forced prostitution of Chinese, Korean and Philippine women, and the forced labor of Chinese and Korean men, were all clear violations of humanitarian law that the Japanese government either ordered or did not attempt to prevent. Under these circumstances, the principle of non-retroactive application of lex posterior should be excluded exceptionally, thus allowing the State Liability Act to apply in the cases of the war victims.52

3.

Cumulative Application of the Lex Fori to Effects of Claims

The principle of lex loci delicti in Article 11(1) of the Horei is further restricted by paragraph 3, which provides that, ‘even if the facts occurring abroad are unlawful under Japanese law, the victim shall not claim damages or any other remedy not available under Japanese law’. According to the prevailing view in the doctrine, this provision means that the lex fori should be applied cumulatively to measures and amounts of damages.53 However, the plain meaning of Article 11(3) suggests that it does not apply to matters of prescription governed exclusively by the lex loci delicti. The preparatory materials of the Horei support this conclusion.54 Article 724 of the Japanese Civil Code provides that the right to claim compensation for unlawful acts extinguishes if the victim does not exercise it within three years after he comes to know of the damage and who caused it, or after twenty years from the day the unlawful act was committed. According to case law, this means that the period of prescription is three years and the period for the invalidation of claims 20 years. In other words, a claim for compensation arising from unlawful acts will be invalidated simply after twenty years have elapsed.55 Article 197(1) of the Civil Code of the Republic of China provides that the right to claim compensation for unlawful acts extinguishes when the victim does not exercise it within two years after he comes to know of the damage and who caused it or after ten years from the day the unlawful act was committed. The wording is very similar to the Japanese Civil Code. However, according to the prevailing view in Chinese doctrine, the provision creates a period of prescription 52 Ibid., p. 52 et seq. On ordre public under intertemporal law in general, see SZASZY I., Conflict of Laws in the Western, Socialist and Developing Countries, Leiden 1974, p. 376; HESS B., Intertemporales Privatrecht, Tübingen 1998, p. 396 et seq. 53 YAMADA R. (note 31), p. 324; SAKURADA Y., Kokusai Shiho [Private International rd Law], 3 ed., Tokyo 2000, p. 229. 54 OKUDA Y. (note 32), p. 159 et seq. Nobushige Hozumi, draftsman of the Horei, mentioned only the need to apply the lex fori cumulatively to measures and amounts of damages but not at all to prescription. See HOMUDAIJIN KANBO SHIHO HOSEI CHOSABU (ed.), Hoten Chosakai Horei Ghiji Sokkiroku [Law Research Committee, Preparatory Work of the Horei], Nihon Kindai Rippo Shiryo Sosho, Vol. 26, Tokyo 1986, p. 125. 55 Supreme Court, 21 December 1989, in: Minshu, Vol. 43, No. 12, p. 2209; Hanrei Jiho, No. 1379, p. 76.


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of two years and 10 years, i.e., the elapse of this period only confers the right to reject payment. In other words, the defendant must raise the issue of prescription before the court in order to be exempted from the liability to pay compensation.56 In light of the various circumstances in cases involving Chinese victims, the Japanese government should not be allowed to invoke prescription on the grounds of the abuse of rights principle. This is because these plaintiffs could not exercise their claims for compensation before Japanese courts until 1995. There were neither diplomatic nor factual relations between Japan and the mainland of China until 1972. Moreover, a foreign minister of China declared for the first time in 1995 that the communiqué of 1972 between Japan and China intended to waive reparations between both governments, however, not the compensation of individuals.57 On the other hand, even though fifty years have passed since the end of World War II, it can easily be proven that the offenses committed by the Japanese army caused injuries to the plaintiffs. For example, a film of the holocaust in Nanking by John Magee entitled China Invaded clearly documents one plaintiff’s injuries inflicted by the Japanese army. There are many reports showing that the plaintiffs were confined and transported for human experiments by Unit 731 and forced labor in Japan. Some plaintiffs have appeared before Japanese courts for testimony.58 As a result, the Tokyo District Court recognized the plaintiffs as victims of offenses committed by the Japanese army in a decision of 22 September 1999, although it denied their claims.59 In view of these circumstances, it follows that invoking the right to reject payment on the grounds of prescription should not be allowed because it would represent an abuse of this right.

IV. Conclusion In regard to war compensation, the victims can bring actions only before courts of the defendant State. Claims filed before courts of their home country or a third country will be dismissed as these courts lack jurisdiction due to sovereign immunity. As a result, the lex fori is always the law of the defendant State. If the lex fori applies to war compensation, this is contrary to the administration of justice: A defendant State could enact a law on war compensation, give this law

56 SUZUKI K., ‘Chugokuho kara Mita Sengo Hosho’ [Post-War Compensation from Perspective of Chinese Law], in: OKUDA Y./KAWASHIMA S. et al.(note 1), p. 200. 57 Ibid., p. 205. See also YAMADA M. (note 1), p. 228. 58 YAMADA M. (note 1), p. 243 et seq. Regarding John Magee, see also http://www. arts. cuhk.edu.hk/NanjingMassacre/NMMage.html. 59 Tokyo District Court, 22 September 1999, in: Hanrei Taimuzu, No. 1028, p. 92, at p. 100. This part of the decision is not translated in JAIL, No. 43, p. 216.

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retroactive effect, and thus exclude victims’ claims that would otherwise be recognized under the lex loci delicti. Consequently, the lex loci delicti should be made an international uniform rule for war compensation. This should then be supplemented by rules facilitating access for foreign victims to the courts of the defendant State. In other words, the home State of the victims and the defendant State should cooperate by providing financial assistance and legal advice to the victims, thus making it possible for them to have access to justice. This proposal results necessarily from the experience of the legal proceedings of war victims before Japanese courts.60

Post Scriptum On 13 July 2001, the Tokyo District Court ordered the Japanese government to pay 20 million yen (about 200,000 US dollars) in a Chinese forced labor case. This is the first case where a foreign war victim (in this case his wife and children as successors) has been awarded so much compensation. The Court justifies this conclusion, however, reasoning that the Japanese government is liable for its failure to protect this Chinese laborer, who had escaped from the coal mine and hid out in Hokkaido for 13 years, unaware that the war had ended. On the contrary, the Court denied liability for the abduction and the forced labor for reasons similar to those in the decisions of other cases.61

60

Article 75(2) of the Rome Statute of the International Criminal Court provides that the Court may make an order directly against a convicted person specifying appropriate reparations to, or in respect of, victims, including restitution, compensation and rehabilitation. This provision seems to overcome difficulties for war victims to claim damages but may be not enough for them to receive the full amount of compensation. 61 See http://www.japantimes.co.jp/cgi-bin/getarticle.pl5?nn20010713a3.htm; http:// www.asahi.com/english/national/K2001071301067.html


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ISSUES OF PRIVATE INTERNATIONAL LAW AND CIVIL PROCEDURE ARISING OUT OF THE U.S. CIVIL SUITS FOR FORCED LABOR DURING WORLD WAR II: To What Extent Do U.S. Conflict and Procedural Rules Obstruct Private Liability for Wartime Human Rights Violations? Kent ANDERSON*

I. II.

III.

IV.

Introduction Factual & Procedural History A. European Litigation B. Asian Litigation Jurisdiction A Personal Jurisdiction B. Subject Matter Jurisdiction 1. State Courts 2. Federal Courts a) Diversity Jurisdiction b) Federal Question Jurisdiction c) Alien Tort Claims Act d) Foreign State Jurisdiction e) Supplemental Jurisdiction C. Forum Non Conveniens D. Summary of Jurisdiction Procedural Bars and Defenses A. Treaty Resolution 1. Japanese Peace Treaty 2. German Peace Treaties B. Statute of Limitations 1. International Law Claims 2. Restitution and Tort Claims 3. State Law Specific Claims 4. Equitable Tolling

* MA, JD (Wash.), MJur (Oxon.). Associate Professor, Hokkaido University School of Law, Sapporo, Japan. From September 2001: Senior Lecturer, The Australian National University, Faculty of Law. I wish to thank Andrew Clayton and Yasuhiro Okuda for their comments and suggestions. As always, all errors are mine alone.



Kent Anderson

C. Political Question (Non-justiciability) D. Comity E. Act of State Doctrine & Foreign Sovereign Immunity F. Accord and Satisfaction & Preemption G. Summary of Procedural Bars and Defenses V. Choice of Substantive Law A. International Law Claims B. Tort Claims C. Restitution Claims D. State Law Specific Claims E. Summary of Choice of Substantive Law VI. Private International Law Implications on Settlement VII. Conclusion Addendum

I.

Introduction

World War II was fought over fifty years ago in Europe and Asia, but much of its final resolution is taking place today in the United States. The fact that a Belgian Holocaust victim’s suit against her German slave masters and an Australian prisoner of war’s (POW) claim against his Japanese prison guards are taking place in American courts surprises few U.S. court watchers. Human rights lawyers assert, ‘It is a tribute to the United States system of justice that our courts can handle claims which originated over fifty years ago in another part of the world.’1 Yet, defendants are ‘bewildered and angry’ that U.S. courts are hearing these suits and ‘blam[e] American trial lawyers for opportunistic greed’.2 Whether bewildered or ecstatic, comparative and international lawyers have an interest in closely following the resolution of the private international law and civil procedure questions involved in these cases because these issues have been outcome determinative, whether it be settlement or dismissal. Stated more broadly, how U.S. courts treat the conflicts and procedural questions in the World War II era lawsuits has serious implications for future international human rights litigation in this forum. This Essay develops a coherent framework for the private international law and procedural issues arising in U.S. international human rights litigation derived from an examination of the U.S. lawsuits against private entities for slave and 1

BAZYLER M.J., ‘Litigating the Holocaust’, in: 33 U. Richmond L. Rev. 1999, p. 603. THARP M., ‘Past-due Bills for Japan: Should Wartime Laborers Collect?’, in: U.S. News & World Rep., 7 Feb. 2000. 2

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U.S. Civil Suits for Forced Labor during World War II

forced labor during World War II.3 The analysis of some issues varies based on the different factual settings of forced and slave labor in Europe and Asia during World War II.4 Thus, I begin by providing a broad sketch of the factual and procedural history of the European and Asian suits. Next, Section III concentrates on the primary question in pursuing this dispute in the United States-jurisdiction. Section IV then assesses procedural questions, which have been dispositive in the court-resolved cases to date. Section V speculates on the choice of substantive law questions raised by the various claims, on which U.S. courts have yet to rule. In Section VI, I consider to what extent private international law and civil procedure rules impact the private and political resolution of international human rights claims. Finally, I conclude by drawing lessons from the World War II era suits regarding future international human rights litigation in the United States. Specifically, I argue that liberal U.S. jurisdictional laws provide a forum for these suits but restrictive procedural rules preclude their substantive claims from being heard, which in turn results in only a limited temporal window available for leveraging political and private settlements.

II.

Factual and Procedural History

A.

European Litigation

Lawsuits for forced and slave labor were the third wave of Holocaust era litigation in the United States. The general trend began in earnest in 1996 with lawsuits against several European banks for claims over World War II bank accounts of Holocaust victims and has moved to cover, among other things, claims over

3 This Essay does not cover a number of related issues. It does not delve into governmental liability because the Japanese and German governments have purposefully not been named in the U.S. suits and because the issue is almost certainly nonjusticiable under the political question doctrine discussed infra Section IV.C. or alternatively barred by the Foreign Sovereign Immunities Act. See, e.g., Princz v. Federal Republic of Germany, 26 F.3d 1166, 1176 (D.C. Cir. 1994); Wolf v. Federal Republic of Germany, 95 F.3d 536, 544 (7th Cir. 1996). I also do not review the World War II era litigation in the U.S. courts against European banks, insurance companies, or art collectors, because the issues in those cases do not appear or are not central to the Asian litigation. Conversely, I do not review the comfort women, Nanjing massacre, or Unit 731 issues pivotal in the Asian litigation. 4 This Essay uses the term ‘European litigation’ or ‘East Coast litigation’ to describe the lawsuits against various entities for their use of forced and slave labor in the European theater of World War II. ‘Asian litigation’ or ‘West Coast litigation’ is used to describe the similar lawsuits over forced and slave labor in the Asian theater. The phrase ‘World War II era litigation’ is used to refer to both the European and Asian litigation collectively.


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insurance policies and suits for lost art works.5 The European labor cases included a handful of state actions and over fifty federal suits, at least 42 of which were class action lawsuits.6 Generally speaking, the plaintiffs in these cases were U.S. citizens and aliens who were formerly forced and slave laborers in privately owned factories in Germany and its occupied territories between 1942 and 1945. During this period, as part of its war effort the German government encouraged and organized the use of members of persecuted groups, as well as civilians from occupied territories and prisoners of war as either expendable (i.e., slave) or involuntary (i.e., forced) workers.7 The defendants to the suits were the companies that bid on and used these laborers and/or their subsidiaries, parent, and related entities. The plaintiffs, in general, based their claims on (1) violations of international law against slavery and forced labor, (2) restitutionary claims for unjust enrichment and quantum meruit, and (3) tort claims for assault, battery, infliction of emotional distress, and false imprisonment.8 Defendants primarily relied upon conflict of laws and procedural defenses, including (1) lack of personal jurisdiction, (2) lack of subject matter jurisdiction, (3) forum non conveniens, (4) treaty resolution, (5) statute of limitations, (6) political question non-justiciability, (7) comity and foreign sovereign immunity, and (8) preemption and accord and satisfaction.9 In September 1999, separate federal courts in New Jersey dismissed five of the class action suits on their pleadings in Iwanowa v. Ford Motor Company and 5 For the most extensive review of the Holocaust litigation in American literature, see BAZYLER M.J., ‘Nuremberg in America: Litigating the Holocaust in United States Courts’, in: 34 U. Richmond L. Rev. 2000, p. 1 (noting modern Holocaust litigation began in 1996 and reviewing the various types of litigation, viz., bank cases, insurance cases, art cases, forced and slave labor cases, and miscellaneous cases). 6 See In re Nazi Era Cases Against German Defendants’ Litigation, 198 F.R.D. 429, 2000 U.S. Dist. LEXIS 18148, *3-*4, app. A (D.N.J. Dec. 5, 2000) (hereinafter: In re Nazi Era Cases I) (naming 49 of the federal cases and noting the others); BAZYLER M.J. (note 5), App. A (listing all state and federal cases); U.S. Department of State, ‘Annex C & D to Joint Statement on the Federal Foundation "Remembrance, Responsibility and the Future"’, 17 July 2000, at http://www.state.gov/www/regions/eur/holocaust/000717-js-annex.c.pdf (noting in Annex C 42 cases in which plaintiffs’ attorneys participated in the Foundation Agreement, infra note 12, and 13 cases in which plaintiffs’ attorneys did not participate in Annex D). 7 See Iwanowa v. Ford Motor Co., 67 F. Supp. 2d 424, 432-33 (D.N.J. 1999). This Essay incorporates the distinction between slave and forced labor used in the Foundation Agreement discussed infra at note 12. However, as others have pointed out ‘slave’ is a misnomer because slave masters valued their workers as property while German slave workers were treated as a disposable and renewable resource. See BAZYLER M.J. (note 5), n. 784 (citing FERENCZ B.B., Less than Slaves: Jewish Forced Labor and the Quest for Compensation, 1979). 8 See, e.g., Burger-Fischer v. Degussa AG, 65 F. Supp. 2d 248, 252 (D.N.J. 1999). 9 See, e.g., ibid., at 250.

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Burger-Fischer v. Degussa AG.10 Forty-nine of the remaining cases were voluntarily dismissed with prejudice in December 2000.11 These dismissals were directly tied to the settlement efforts among the German government, German industry including most of the defendants, a majority of the plaintiffs, various nongovernmental organizations, and the United States and other governments. Their agreement, known as the Foundation Agreement, stipulated the establishment of a DM 10 billion ($5.1 billion) agency to provide compensation for former workers’ claims upon (1) the dismissal of all U.S. labor based lawsuits, (2) funding by the German government and industry, and (3) proof of the individual claims.12 The remaining labor cases that had not been voluntarily revoked were dismissed on the same grounds as Iwanova and Burger-Fischer on 1 March 2001 in In re Nazi Era Cases Against German Defendants Litigation.13 Thus, for the purposes of U.S. courts the European cases have been conclusively resolved.14

B.

Asian Litigation

While the European suits centered around the federal courts on America’s East Coast, the thirty plus cases in the Asian litigation are focused on the state and federal courts of California.15 The plaintiffs in these cases are predominately former Allied POWs and civilians of Japanese occupied areas, rather than persecuted domestic minority groups. The Asian defendants are a close replica of the European defendants and consist primarily of Japanese businesses and their subsidiaries, parents, and related companies. The defendants have asserted substantially the same conflict of laws and procedural defenses. The Asian litigation plaintiffs, however, have not made any claims based on international law and have made additional state law specific claims under 10

Iwanowa, 67 F. Supp. 2d 424; Burger-Fischer, 65 F. Supp. 2d 248. See In re Nazi Era Cases I, 2000 U.S. Dist. LEXIS 18148. 12 See Agreement between the Government of the United States of America and the Government of the Federal Republic of Germany concerning the Foundation ‘Remembrance, Responsibility and the Future,’ 17 July 2000, at http://www.state.gov/www/regions/ eur/holocaust/000717_agreement.html (hereinafter: ‘Foundation Agreement’). 13 129 F. Supp. 2d 370, 2001 U.S. Dist. LEXIS 2018 (D.N.J. 1 Mar. 2001) (hereinafter: In re Nazi Era Cases II). 14 The final Holocaust era cases were dismissed on 21 May 2001, and distributions pursuant to the Foundation Agreement began shortly thereafter. See ‘German Companies Ready to Release $1.3 Billion into Nazi-Era Labor Fund’, in: Japan Times, 24 May 2001, p. 6. 15 For a list of the cases see BAZYLER M.J./SAXA-KANEKO D., ‘World War II-Era Lawsuits Against the Japanese in U.S. Courts’, http://www.law.whittier.edu/sypo/final (last visited 15 Feb. 2001) (hereinafter: BAZYLER M.J./SAXA-KANEKO D., Asian Litigation List) (providing summary as of November 20, 2000, of 18 federal and 14 state cases). 11


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California’s Civil Procedure Code and Business and Professional Code.16 The lynchpin of these causes of action is section 354.6 of the Code of Civil Procedure (‘Section 354.6’) which provides: ‘(b) Any Second World War slave labor victim, or heir of a Second World War slave labor victim, Second World War forced labor victim, or heir of a Second World War forced labor victim, may bring an action to recover compensation for labor performed as a Second World War slave labor victim or Second World War forced labor victim from any entity or successor in interest thereof, for whom that labor was performed, either directly or through a subsidiary or affiliate. That action may be brought in a superior court of this state, which court shall have jurisdiction over that action until its completion or resolution. (c) Any action brought under this section shall not be dismissed for failure to comply with the applicable statute of limitations, if the action is commenced on or before 31 December 2010.’ The statute was drafted with only the European laborers in mind. The bill’s legislative history talks exclusively of ‘Nazi persecution’ and the statute’s definitions of laborers only refer to those who worked for ‘the Nazi regime, its allies and sympathizers, or enterprises transacting business in any of the areas occupied by or under control of the Nazi regime or its allies and sympathizers’.17 Similarly the extension of the statute of limitations was explained with reliance on German court decisions that reportedly held that claims under the German peace treaties were tolled until 1997.18 Nonetheless, the plaintiffs have taken advantage of the broad statutory language and brought suits predominately against Japanese companies and related entities. To date, the resolution of the California cases has diverged from their East Coast cousins. First, a federal district court has dismissed almost half of the cases on similar legal grounds as Iwanowa and Burger-Fischer, but this was of course

16

See, e.g., In re World War II Era Japanese Forced Labor Litigation, 114 F. Supp. 2d 939, 944 (N.D. Cal. 2000). 17 See Cal. Code Civ. Pro., § 354.6(a)-(b) (Deering 2000); S.B. 1245, 1999-2000 Sess. (Cal. 1999), enacted as 1999 Cal. Stat. ch. 216, §§ 1-2. 18 See Cal. Senate Rules Committee Report on S.B. 1245, 1999-2000 Sess. (Cal. 1999), available at http://www.leginfo.ca.gov/pub/99-00/bill/sen/sb-1201-1250/sb-1245-cfa19990526-154116-sen-floor.htm, (summarizing the 1946 Paris Treaty, London Debt Agreement, and 2+4 Treaty, discussed infra, and finding, ‘The statutes of limitations applying to claims arising out of the Second World War were therefore tolled until 7 November 1997, when the first of several German courts ruled that [the moratorium was ended]’).

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based on different factual findings regarding the relevant Asian Peace Treaty.19 Second, there have been no indications of a pending settlement by the defendant Japanese businesses or Japanese government. In fact, both parties have stated their intent to oppose the cases to their fullest.20 Third, one of the fiercest battles in the Japanese-centered cases has been over whether the proper forum was the state or federal courts.21 This issue arises in the Asian cases because, as partially reviewed above, the California legislature has been enacting legislation to assist World War II victims seeking redress as well as calling on Japan to ‘formally issue a clear and unambiguous apology’ and ‘immediately pay reparations to the victims’ of, among other things, forced labor.22 As a result, the defendants have been eager to avoid and the plaintiffs eager to rely on California state courts.23 19

See In re World War II Era Japanese, 114 F. Supp. 2d at 949. See, e.g., ‘Japan to Fight Ex-POWs’ Campaign for Redress’, in: Japan Times, 29 June 2000, p. 2 (noting statement of Japanese Ambassador to the United States that ‘Japan has no option but to counter the campaign [for forced labor compensation] in court’.); ‘Japan’s Murky Past Catches Up’, in: The Economist, 8 July 2000 (noting Japanese industry and government resolve to defend the cases). 21 See, e.g., Jeong v. Onoda Cememt Co., Ltd., 2000 U.S. Dist. LEXIS 7985 (C.D. Cal. 18 May 2000). 22 See A.J.R. 27, 1999-2000 Sess. (Cal. 1999) (calling for apology and reparations); Cal. Civ. Proc. Code, §§ 354.6 (extending statute of limitations for forced and slave laborers); 354.5 (providing jurisdiction for insurance claims); Holocaust Victims Insurance Act, Cal. Ins. Code, §§ 790-790.15 (allowing state Insurance Commissioner to suspend insurer’s license for failing to pay Holocaust claims); 12967 (ordering research on Holocaust insurance claims); 13800-02 (establishing a Holocaust Insurance Registry and extending jurisdiction and statute of limitations to Holocaust survivors); Holocaust Reparations Act, Cal. Rev. & Tax. Code, § 17155 (exempting Holocaust survivor compensation awards from state taxation). 23 In addition to California, fifteen states have enacted legislation to assist Holocaust plaintiffs. See BAZYLER M.J. (note 5), App. A (providing a list and summary of all legislation). However, California is the only state to enact a statute such as Section 354.6 for forced and slave labor claims and to extend the statute of limitations on these claims. A bill to enact a statute essentially identical to Section 354.6 was introduced in Rhode Island, but it failed to pass. See S.B. 2026, 2000 Sess. (R.I. 2000), status and bill text available at http://www.state.ri.us/00SESSION/bills/00-2026.htm. Rhode Island’s House also passed a resolution similar to California’s calling upon the United States, Germany, and German industry to create a fund to compensate forced and slave laborers of World War II. See House Res. 8119, 2000 Sess. (R.I. 2000), available at http://www.rilin.state.ri.us/billtext00/ housetext00/h8119. htm. The most recent legislative activity comes from the U.S. House of Representatives where one of the original sponsors of Section 354.6, now a U.S. representative and joined by 64 other representatives, introduced proposed federal legislation on 22 March 2001 that seeks, in effect, to extend the statute of limitations in the World War II era suits and eliminate the treaty resolution defense discussed below in section IV.A. See Justice for United States Prisoners of War Act of 2001, H.R. 1198, 107th Cong. (sponsored by Rep. Mike Honda). 20


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III. Jurisdiction For many foreign observers, the most fundamental question regarding the United States litigation over World War II era claims is on what basis are the courts asserting authority over disputes between foreigners regarding foreign activities. Under domestic law, U.S. courts may hear cases for monetary damages where they have both personal jurisdiction over the parties and subject matter jurisdiction over the claims.24 Personal jurisdiction relates to a court’s control over the parties and is limited by constitutional protections of due process. On the other hand, subject matter jurisdiction refers to a court’s power to hear or determine the claims of a case, which is generally determined by specific statutory grants. While the standard for personal jurisdiction is the same whether a claim is brought in the federal or state courts, subject matter jurisdiction is complicated by different rules for federal and state tribunals.

A.

Personal Jurisdiction

The due process requirements for personal jurisdiction are notably broad and as a practical matter have not obstructed any of the labor suits. Pursuant to the classical statement of the rule for in personam jurisdiction, a court may exert jurisdiction over a nonresident to the extent that that party has ‘minimum contacts’ with the province and control over that party does not offend ‘traditional notions of fair play and substantial justice’.25 Because in all of the World War II cases the actions on which the complaints are based were conducted outside of the United States, the defendants’ present contacts with the forum must be ‘substantial’ or ‘continuous and systematic’.26 Consistent with this, it has long been held that the presence of a subsidiary alone is not enough to subject a separate and distinct parent to personal jurisdiction.27 The cases, however, have also found personal jurisdiction where the defendants had no actual presence in the forum, but did have a direct agency relationship with a local company.28 Whether a party satisfies this standard will be determined on a case-by-case basis reviewing all the specific facts, but as a The U.S. executive branch has opposed the bill. See ‘U.S. Cool to Bill on Ex-POW Claims’, in: Japan Times, 3 March 2001, p. 3, available in LEXIS, News Library, Japan Economic Newswire. 24 See Restatement (Second) of Judgments, § 1 (1982). 25 See International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). 26 See Helicopteros Nacionales de Columbia, S.A. v. Hall, 466 U.S. 408, 414-16 (1984). 27 See Cannon Mfg. Co. v. Cudahy Packing Co., 267 U.S. 333, 337 (1925). 28 See, e.g., Frummer v. Hilton Hotels Int’l, Inc., 19 N.Y.2d 533 (N.Y. 1967).

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practical matter, the rules mean that courts may control almost any defendant doing nearly any business with the forum no matter how tenuously connected with it. In both the European and Asian portions of the U.S. World War II era litigation, the named defendants are almost all large multinational companies along with their subsidiaries and related companies. As multinational companies, it is extremely likely that they satisfy the due process requirements for personal jurisdiction. That is not to say, however, that personal jurisdiction will not limit whom the plaintiffs may sue.29 Many of the plaintiffs’ lawyers in the European litigation noted that, barring the settlement, they would have expanded their actions to the over 500 firms that were subsequently identified as using forced and slave labor during the war.30 However, the personal jurisdiction standard would most likely only allow suits against those companies that have been successful enough to grow beyond their country’s borders in the post-war years. As a result, the United States forum is only a practical alternative for international human rights cases against U.S. companies or large foreign entities.

B.

Subject Matter Jurisdiction

1.

State Courts

In addition to personal jurisdiction, the plaintiffs in international human rights cases in the United States must establish that the specific court in which they bring their cause has subject matter jurisdiction. Subject matter jurisdiction cannot be created by consent, waiver, or estoppel.31 U.S. state courts generally have subject matter jurisdiction to hear all cases except those specifically withheld from them by state or federal constitutions.32 Thus, state courts have authority over restitution 29 See Cornell v. Assicurazioni Generali S.p.A, 2000 U.S. Dist. LEXIS 11004 (S.D.N.Y., 7 Aug. 2000) (dismissing Holocaust insurance case against Austrian insurer for lack of personal jurisdiction); Cornell v. Assicurazioni Generali S.p.A, 2000 U.S. Dist. LEXIS 2922 (S.D.N.Y., 16 Mar. 2000) (dismissing Holocaust insurance case against French insurer for lack of personal jurisdiction). But see Stahl v. Victoria Holdings AG, 2000 U.S. App. LEXIS 11358, *3 (9th Cir. 18 May 2000) (reversing dismissal of WII era case against European insurance companies for lack of personal jurisdiction connections and remanding for a hearing on the plaintiffs’ ‘novel “enterprise” theory of jurisdiction.’). 30 See FISHER B.A., ‘Japan’s Postwar Compensation Litigation’, in: 22 Whittier L. Rev. 1999, pp. 35, 37-38 (the author was a plaintiffs’ attorney in both the European and Asian litigations). 31 See Insurance Corp. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982). 32 See, e.g., Cal. Const., art. XI, § 10; U.S. Const., Amend. X (providing ‘powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people’).


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and tort claims such as those raised by the plaintiffs in both the European and Asian litigations. Moreover, California’s Section 354.6 expressly provides its state courts with original jurisdiction over whatever claims fall within its definition.33 Though rarely relied upon due to a variety of substantive problems including those reviewed below; in principle, state courts also have concurrent power to hear claims based on violations of international law.34 However, in the Asian litigation the plaintiffs have been particularly careful not to plead these causes of action because in doing so they might give the federal courts jurisdiction.35 Evaluating the exact benefits of state courts versus federal courts is a complex and multifactor calculation that counsel for plaintiffs and defendants will necessarily conclude differently. Nonetheless, given the climate in California where the legislature has condemned the Japanese government and called for it and Japanese businesses to compensate former forced and slave laborers, the plaintiffs’ attempts to limit subject matter jurisdiction to the state courts seems understandable.

2.

Federal Courts

In contrast to state courts, U.S. federal courts are courts of limited, not general, jurisdiction and, thus, it is much more difficult to establish their subject matter jurisdiction over a suit.36 There are two primary bases for federal subject matter jurisdiction-diversity of litigants’ residence and questions of federal law. In

33

See Cal. Code. Civ. Pro., § 354.6(b). Concerning what exactly those substantive claims are see infra section V.D. Section 354.6’s extension of subject matter jurisdiction might arguably be challenged as unconstitutional for violating, inter alia, the foreign affairs power. Section 354.5 of the California Code of Civil Procedure, which gives jurisdiction over World War II era insurance claims and extends the statute of limitations until 2010, has recently been questioned on this ground. See Gerling Global Reins. Corp. of Am. v. Quackenbush, 2000 U.S. Dist. LEXIS 8815, *4 n.2 (E.D. Cal. June 9, 2000), aff’d on different grounds, sub nom., Gerling Global Reins. Corp. of Am. v. Low, 2001 U.S. App. LEXIS 1724, *5 (9th Cir. Feb. 7, 2001) (dismissing challenge of Section 354.5 for lack of ripeness). 34 See U.S. Const., Article III, amend. X; Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S. 473 (1981) (holding unless Congress expressly makes federal jurisdiction exclusive, federal and state courts have concurrent jurisdiction to try federal law claims). This of course raises the unresolved question of whether an individual has a private right of action under international law discussed below in Section III.B.2.b. 35 See, e.g., In re World War II Era Japanese, 114 F. Supp. 2d at 942 (noting ‘plaintiffs’ attempts to plead only state law claims’); Jeong, 2000 U.S. LEXIS 7985, at *2 (conspicuously failing to plead international law claims). 36 See Aldinger v. Howard, 427 U.S. 1, 15 (1978); 13 WRIGHT C.A. et al., Federal Practice and Procedure, St. Paul Minn. 1984 & Supp. 2000, § 3522 (summarizing cases).

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addition, the World War II era cases raise two other rarely used bases for federal court control.

a)

Diversity Jurisdiction

Federal courts have concurrent ‘diversity jurisdiction’ with the state courts for state law claims between citizens of different states (including foreign states) where the amount in controversy exceeds $75,000.37 However, the diversity of the parties must be complete, that is, none of the defendants may be from the same state as any of the plaintiffs.38 This requirement of complete diversity is a difficult standard to meet in cases such as the World War II era lawsuits where numerous class action plaintiffs are simultaneously suing a huge number of primary defendants and a variety of their subsidiaries and related entities.39 This was clearly shown in Jeong v. Onoda Cement Company, Ltd. where the Japanese defendants sought to remove the class action from a California state court to the federal courts based on diversity jurisdiction.40 In Jeong, there was no diversity of the parties on the face of the complaint since one of the named defendants was a California company. Because this company was only a recently acquired subsidiary of one of the primary Japanese defendants though, the defendants asserted that it had been fraudulently named merely to destroy diversity jurisdiction or alternatively that it was the alter ego of its foreign parent and so it should be considered a non-resident for jurisdictional purposes.41 The court refused to accept either argument. It denied the alter ego rationale as a factual matter and found that the broad language of Section 354.6, which covers ‘any entity or successor of interest thereof, for whom that labor was performed, either directly or through a subsidiary or affiliate’, seemed to allow the joining of even remotely related subsidiaries.42 Other courts hearing the World 37

28 U.S.C. § 1332(a) (2001). See Strawbridge v. Curtiss, 7 U.S. (2 Cranch) 267, 267 (1806). 39 Diversity jurisdiction was not addressed in the consolidated case dealing with the majority of the Asian suits. See In re World War II Era Japanese, 114 F. Supp. 2d 939 (conspicuously not addressing diversity jurisdiction). 40 See Jeong, 2000 U.S. LEXIS 7985, at *3-*14. 41 See ibid.; LEUNG S., ‘Suit Will Test State Law on War Labor’, in: Wall Street J., 27 Oct. 1999 (reviewing the 1990 acquisition of the California company by the Japanese defendant and noting that during World War II the U.S. subsidiary was in fact operating solely in the United States and contributed to the war effort against Japan). 42 See Jeong, 2000 U.S. LEXIS 7985, at *3-*14 (emphasis in original). But cf. Gerling Global Reins. Corp. of Am. v. Nelson, 123 F. Supp. 2d 1298, 1304 (N.D. Fla. 2000) (ruling comparable Florida statute unconstitutional specifically because it seemed to allow the joining of even remotely related subsidiaries). 38


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War II era lawsuits have been more willing to find diversity, but these cases have been on the East Coast where it has been primarily the plaintiffs who sought and the defendants who did not object to the diversity basis.43 In other words, depending upon the plaintiffs’ objectives in going to or avoiding federal court, they should be able to create or evade diversity jurisdiction by carefully constructing their complaint and whom it names as parties.

b)

Federal Question Jurisdiction

When diversity jurisdiction cannot be found, the federal court may also take subject matter jurisdiction where the claims raise questions of federal law. That is, ‘federal question jurisdiction’ is met where a cause of action ‘aris[es] under the Constitution, laws, or treaties of the United States’.44 The analysis of whether the World War II era litigation implicates such federal law issues, however, differs between the European and Asian cases. This is because the plaintiffs in the East Coast lawsuits have sought to base jurisdiction upon it, while the plaintiffs in the West Coast cases have purposefully and carefully sought to avoid it. In the Asian litigation, the plaintiffs have not alleged any claims based on violations of federal law, and federal question jurisdiction only exists where a federal claim is ‘presented on the face of the plaintiff’s properly pleaded complaint’.45 Nevertheless, defendants have the right to remove a case from the state courts to the federal courts where the suit alternatively could have been brought in a federal court.46 They may not, however, remove the case if the federal question only arises as part of a defense and not as a basis on the plaintiff’s properly pleaded complaint.47 Relying on this rule, the court in the Jeong case denied the defendants’ attempt to remove that suit to the federal forum. The court found that the federal law questions they asserted did not develop as affirmative claims but only arose as defenses.48 Specifically, the defendants argued that the Japanese Peace Treaty and the War Claims Act, both reviewed below, were federal remedies that preempted any relief based on the plaintiffs’ state law causes. The court found though that only where a federal law ‘completely’ preempts or ‘supplants’ state law claims will it cease to be a mere defense and support federal issue jurisdiction.49 Therefore, it concluded that ‘because neither the Treaty nor the Act gave any forced labor 43

See Iwanowa, 67 F. Supp. 2d at 470; Burger-Fischer, 65 F. Supp. 2d at 250. 28 U.S.C. § 1331. 45 Caterpillar, Inc. v. Williams, 482 U.S. 386, 392 (1987). 46 28 U.S.C. § 1441(a). 47 See Rivet v. Regions Bank of La., 522 U.S. 470, 475 (1998). 48 See Jeong, 2000 U.S. Dist. LEXIS 7985, at *15-*20. 49 See ibid., at *15-*16. 44

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victim a right to bring a suit for compensation in the federal court’, the federal issues raised by the claims were merely defenses upon which federal jurisdiction could not be supported. Shortly after this opinion, the court hearing the remainder of the consolidated Asian cases accepted the Jeong conclusion and yet still found a basis for federal question jurisdiction.50 In In re WWII Era Japanese Forced Labor Litigation, the court held that the lawsuit raised questions of the ‘federal common law of foreign relations’ upon which general subject matter jurisdiction could hang.51 The court explained federal common law of foreign relations is implicated where causes of action, including private party claims, ‘necessarily require determinations that will directly and significantly affect United States foreign relations’.52 Applying this rule to the Asian lawsuits, the court found that because the claims arise out of war and unavoidably involve the policy choices made in settlement, the complaints, ‘on their face, implicate the federal common law of foreign relations and, as such, give rise to federal jurisdiction’.53 Accepting this, defendants in future cases alleging international human rights violations during war and asserted after a negotiated peace appear to have a foundation for removing state lawsuits into the federal courts. In the European cases, because it was the plaintiffs and not the defendants who sought to be in the federal courts, the analysis of whether general federal question jurisdiction existed was quite different. The plaintiffs in these cases asserted general federal question jurisdiction based on their international law claims. International law, whether pursuant to treaties or as customary law, is law of the federal United States, not the separate states.54 Therefore, some courts have simply found that if a plaintiff in the World War II era litigation has relied on international law in making its claims the court has federal question jurisdiction.55

50

See In re World War II Era Japanese, 114 F. Supp. 2d at 943-44, n.1. Ibid. (noting also and quoting Poole v. Nippon Steel Corp., No. 00-0189 (C.D. Cal. 17 March 2000) in which another federal district court found that the Asian litigation satisfied federal question jurisdiction by ‘presenting substantial issues of federal common law dealing with foreign policy and relations’). 52 See Republic of Philippines v. Marcos, 806 F.2d 344, 352 (2d Cir. 1986); Torres v. Southern Peru Copper Corp., 113 F.3d 540, 543 (5th Cir. 1997). 53 See In re World War II Era Japanese, 114 F. Supp. 2d at 943. 54 See Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 415 (1964) (holding the federal courts have jurisdiction over cases arising under international law); Filartiga v. Pena-Irala, 630 F.2d 876, 886 (2d Cir. 1980). But cf. BRADLEY C.A./GOLDSMITH J., ‘The Current Illegitimacy of International Human Rights Litigation’, in: 66 Fordham L. Rev. 1997, pp. 319 et seq. (1997) (arguing that international customary law must be incorporated into federal law). 55 See, e.g., Bodner v. Banque Paribas, 114 F. Supp. 2d 117, 127 (E.D.N.Y. 2000). 51


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Other courts, however, have looked beyond this superficial question and noted that whether international law based jurisdiction exists is necessarily dependant upon whether international law gives rise to claims that a plaintiff may personally assert.56 Stated differently, the courts reason that if plaintiffs do not have an international law claim upon which private rights of action exist, they have no cause of action on which to rest federal issue jurisdiction. The issue is further complicated because there are different standards for U.S. citizen plaintiffs and alien plaintiffs regarding whether a private right of litigation and corresponding jurisdiction exists. Jurisdiction for international claims by aliens is slightly more straightforward since it is covered by a specific statute discussed below. On the other hand, whether citizens have private rights of action under international law is an extremely complex and unsettled area of the law, which incidentally the courts hearing the World War II era claims have largely avoided.57 A citizen’s private rights of action under international law technically may be founded on either treaty law or customary law. However, with regards to treaty law, this proposition has been all but foreclosed by the failure of the United States to ratify self-executing human rights treaties.58 Self-executing treaties are enforceable in courts without enacting legislation, however, the vast majority of treaties are non-self-executing under which individuals have no right to sue.59 Regarding whether citizens hold a private right of action under customary international law, no consensus may be drawn from the decisions to date.60 Most commonly, the federal courts have avoided the question by relying on another basis for federal subject matter jurisdiction or by dismissing on other grounds.61 Thus, whether a U.S. court has general federal question jurisdiction over citizens’ complaints based on international law continues to be an open question.

56 See, e.g., Tel-Oren v. Libyan Arab Republic, 726 F.2d 744, 811 (D.C. Cir. 1984) (Bork, J., concurring). See also BILENKER S.A., ‘In re Holocaust Victims’ Asset Litigation: Do the U.S. Courts have Jurisdiction over the Lawsuits Filed by Holocaust Survivors Against the Swiss Banks?’, in: 21 Maryland J. Int’l L. & Trade 1997, pp. 251, 260-70 (reviewing the issue). 57 Given the private international law focus of this essay, I do not fully address the issue of whether individuals have a private right of action under public international law. For a more comprehensive treatment of that question see, e.g., BRADLEY C.A., ‘Customary International law and Private Rights of Action’, in: 1 Chicago J. Int’l L. 2000, P. 421. 58 See ibid. pp. 422, 425; BILENKER S.A. (note 56), pp. 262-67. 59 See, e.g., Foster v. Neilson, 27 U.S. (2 Pet.) 253, 313-14 (1829); Goldstar (Panama) v. United States, 967 F.2d 965, 968-69 (4th Cir. 1992). 60 See, e.g., Princz v. FRG, 26 F.3d at 1176 (rejecting basis); Forti v. Suarez-Mason, 672 F. Supp. 1531, 1544 (N.D. Cal. 1987) (accepting basis). 61 See Burger-Fischer, 65 F. Supp. 2d at 273 (avoiding issue and relying on diversity jurisdiction); Tel-Oren, 726 F.2d at 823 (Robb, J., concurring) (holding case not justiciable under political doctrine and declining to review jurisdiction issue).

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c)

Alien Tort Claims Act

In contrast, pursuant to the Alien Tort Claims Act (ATCA) the United States has provided the federal courts with subject matter jurisdiction over foreigners’ claims based on international law since 1789.62 Originally drafted to combat pirates, since 1980 U.S. lawyers have increasingly relied on the law to establish U.S. courts’ jurisdiction over claims of international human rights violations.63 The ATCA provides: ‘The [federal] district court shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.’ Given this specific grant of authority it is generally accepted that the federal courts can hear lawsuits by aliens for tort claims based on international law.64 More problematic has been (1) whether the jurisdictional grant of the ATCA also creates a private right of action for violations of international law; and (2) whether the specific cases of slave and forced labor alleged in the World War II litigation violated customary international law. Given the private international law focus of this Essay, I only touch upon the responses to date of these questions.65 Regarding the first issue, there is a split of authority with a strong majority of federal courts, including the court in Iwanowa, finding that the ATCA creates a private right of action along with jurisdiction, and a small minority denying any private rights of action.66 Interestingly, because this majority is more clearly developed than any judicial position regarding the comparable issue of a U.S. citizen’s private rights based on international law, American law seems to produce the ironic result of giving foreigners stronger claims in international human rights litigation than nationals. Regarding the second issue, the court in Iwanowa held 62

See Judiciary Act of September 24, 1789, § 9, 1 Stat. 73, 77, codified at 28 U.S.C.

§ 1350. 63 See BAZYLER M.J. (note 1), pp. 605-06 (citing the 1980 case Filartiga, 630 F.2d 876, as establishing the approach). 64 See, e.g., Kadic v. Karadzic, 70 F.3d 232, 236, 238 (2d Cir. 1995) (finding jurisdiction over ‘suits alleging torts committed anywhere in the world against aliens in violation of the law of nations’). See also MCDONALD K., ‘Corporate Civil Liability under the U.S. Alien Tort Act for Violations of Customary International Law during the Third Reich’, in: St. Louis-Warsaw Transatlantic L. J. (1997), p. 167 et seq. (reviewing ATCA for World War II era labor claims). 65 For greater development of these issues see, e.g., RAMASASTRY A., ‘Secrets and Lies? Swiss Banks and International Human Rights’, in: 31 Vanderbilt J. Transnat’l L. 1998, p. 325; BRADLEY C.A./GOLDSMITH J. (note 54), pp. 319, 357-363. 66 Cf. Iwanowa, 67 F. Supp. 2d at 443; Abebe-Jira v. Negewo, 72 F.3d 844, 848 (11th Cir. 1996); Kadic, 70 F.3d at 236; In re Estate of Ferdinand Marcos, Human Rights Litig., 25 F.3d 1467, 1475 (9th Cir. 1994); Tel-Oren, 726 F.2d at 780 (Edwards, J., concurring); Xucax v. Gramajo, 886 F. Supp. 162, 179 (D. Mass. 1995); Paul v. Avril, 812 F. Supp. 207, 212 (S.D. Fla. 1993); Tel-Oren, 726 F.2d at 810-26 (Bork, J., concurring).


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that ‘case law and statements of the Nuremberg Tribunals unequivocally establish that forced labor violates customary international law’.67 Subject to a hearing of the specific facts of the case, this conclusion should also apply to forced and slave labor claims in the Asian lawsuits. Thus, the ATCA provides foreigners with a basis for federal subject matter jurisdiction in international human rights cases that assert forced and slave labor claims in violation of international law.

d)

Foreign State Jurisdiction

The defendants in the Asian litigation have inventively suggested another route to the federal courts – 28 U.S.C. § 1330, which gives federal jurisdiction over ‘foreign states’. Generally speaking, the governments of Japan, Germany, or anywhere else have not been named in the World War II era litigation; in fact, the whole essence of the suits is that they are against the private companies that used forced and slave labor. The Asian defendants, however, assert that during the war they were agents or instrumentalities of the state, and as a result, they may remove the lawsuits to federal court as well as assert foreign sovereign immunity defenses.68 Specifically, one of the Japanese defendants submitted that it was ‘essentially nationalized’ between 1944 and 1945 under the Munitions Company Law.69 The court in Jeong rejected this as a factual matter stating that they had failed to meet the burden of showing that the plaintiff’s claims related solely to that period while the defendant was allegedly nationalized.70 The court, however, did not foreclose this route of jurisdiction and defense. Rather, it merely noted that it would be factually difficult to establish, which was ‘an unfortunate consequence of the California legislature’s decision to attempt to revive 55-year old claims’.71 Because states frequently nationalize industries as part of the economic efforts in the prosecution of war, this unanswered question of jurisdiction and defense appears to remain an option for defendants and an obstacle for plaintiffs in future forced labor lawsuits.

67

Iwanowa, 67 F. Supp. 2d at 441. See Jeong, 2000 U.S. Dist. LEXIS 7985, at *21-*33. 69 Ibid., at *25. 70 Ibid. at *30-*33. 71 Ibid. at *33, n.14. Regarding the defense of a nationalized or denationalized agency or instrumentality of a foreign state see generally, SIMMONS R.J., ‘Nationalize and Denationalized Commercial Enterprises under the Foreign Sovereign Immunities Act’, in: 90 Columbia L. Rev. 1990, p. 2278. 68

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e)

Supplemental Jurisdiction

If a party can establish subject matter jurisdiction as a federal question, under the ATCA, or as a foreign state, the federal court also has the right to hear any additional state claims raised.72 The state claims must be so related to the federal causes that they form part of the same case or controversy, which means that they ‘derive from a common nucleus of operative facts’ or ‘would normally be expected to be tried in a single judicial proceeding’.73 Relevant to the state claims in the labor litigation, a federal court commented on the inclusion of state causes of action in one of the World War II era bank suits that: ‘It is patently obvious that both conditions, as well as considerations of judicial economy, favor the assertion of supplemental jurisdiction [in these cases].’74

C.

Forum Non Conveniens

Assuming arguendo that jurisdiction existed, the defendants in all the World War II era litigation asked the courts to dismiss the suits as a discretionary measure under the doctrine of forum non conveniens. Pursuant to this doctrine a court may dismiss a case, over which it has jurisdiction, in favor of another, more appropriate forum.75 The rationale behind the policy is to avoid inflicting hardship on the defendant and the court which may result from forum shopping possible under jurisdiction rules.76 The standard places a strong presumption in favor of plaintiff’s selected forum, but allows for dismissal where (1) there is an adequate alternative forum and (2) private and public interests favor the foreign forum.77 At first blush, the World War II era labor litigation would appear to be a prime candidate for forum non conveniens. The courts, however, have been hesitant. None of the decisions in the World War II era litigation cases have addressed the issue, but a federal court reviewed and denied the defense in the related case of Bodner v. Banque Paribas concerning World War II era French bank liability for Holocaust accounts.78 The court in Bodner began by reiterating the strength of the presumption in favor of the local court when a plaintiff is a local

72

28 U.S.C. § 1367(a). See United Mine Workers of Am. v. Gibbs, 383 U.S. 715, 725 (1966). 74 Bodner, 114 F. Supp. 2d at 127 n.7. 75 See Piper Aircraft Co. v. Reyno, 454 U.S. 235 (1981). 76 SCOLES E.F./HAY P., Conflict of Laws, 2d ed., St. Paul Minn. 1992, § 11.9. 77 See Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508 (1947). 78 See Bodner, 114 F. Supp. 2d at 131-33. See also Burger-Fischer, 65 F. Supp. 2d at 254 (declining to address issue). 73


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resident.79 In the World War II era labor litigation, plaintiffs are split between foreigners and American residents, but the presumption applies even where plaintiffs are mixed in class actions and would appear especially compelling in the case of former POW citizens. The key regarding the adequate alternative forum factor is not simply whether there is another court where the lawsuit may be brought, but whether a U.S. court deems that forum adequate. Courts have found that differences under foreign law, such as the lack of punitive damages, no contingent-fee lawyers, and substantive law more favorable to the defendant, should not be given substantial weight in determining whether an alternative court is adequate.80 Nonetheless, in Bodner the court held that the lack of similar remedies and class action procedure in the alternative forum meant that the European venue (France, specifically) was not an adequate court and, therefore, forum non conveniens could not be granted.81 This conclusion may be criticized, but given the inconsistency of existing case law on the subject and the fact-specific nature of the inquiry, the decision seems to lack significant precedential value whatever its outcome. In the World War II era labor cases, the fact that these issues have been or are being litigated throughout Europe and Asia suggests that there is an alternative forum. Whether a U.S. court will find those forums adequate is difficult to predict given the different views on the cognoscibility of claims where the foreign systems lack punitive damages, class action procedures, contingency-fee lawyers, and other substantive law benefits. Despite the court’s preemptive conclusion in Bodner, it went on to review whether private and public interests favored foreign forums over U.S. courts.82 First considering the private factors, the court found that the plaintiffs would have both physical difficulty traveling abroad and financial difficulty securing representation due to the lack of a contingency-fee system. On the other side, the court dismissed or discounted any inconvenience the foreign defendants might encounter reasoning that they were large companies doing business globally who would not be financially burdened by defending in the United States particularly with modern technology such as faxes, email, and the internet. The court continued that the location of evidence and witnesses was an indeterminative factor since most of the foreign evidence had already been collected and was largely available in the United States. In reviewing the public factors, the court reiterated that there was a strong public interest in providing a forum for citizens. This type of governmental interest 79 Bodner, 114 F. Supp. 2d at 131. Accord Piper, 454 U.S. at 255-56; Derenis v. Coopers & Lybrand Chartered Accountants, 930 F. Supp. 1003, 1009 (D.N.J. 1996) (U.S. residents’ selection of local forum entitled to deference even in class action). 80 See Piper, 454 U.S. at 247; SCOLES E.F./HAY P. (note 76), pp. 376-81, 377 n. 4 (providing citations and summarizing). 81 See Bodner, 114 F. Supp. 2d at 132. 82 See ibid., at 132-33.

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rationale might arguably be extended to those foreigners with ATCA or Section 354.6 claims, since these statutes suggest that the legislatures specifically sought to provide a forum for these cases.83 The court in Bodner concluded its analysis by dismissing the significance or challenge of applying a foreign substantive law, such as France’s. The court’s treatment, however, completely failed to consider a number of other factors often weighed by other courts such as the alternative forum’s competing interest in hearing the case and any negative factors in hosting the case such as the overburdening of local courts.84 As a result, the Bodner court’s analysis appears outcome driven. Nonetheless, the strong presumption in favor of local plaintiffs and the arguable governmental interest in providing a forum for foreigners with ATCA and Section 354.6 claims suggest that forum non conveniens may be a doubtful means of escaping jurisdiction for defendants in international human rights lawsuits.

D.

Summary of Jurisdiction

Jurisdiction in the United States is a complex issue, particularly in regard to international human rights cases. Personal jurisdiction restricts the reach of U.S. courts by incorporating constitutional due process requirements, but this is notably broad and generally captures any person doing business in America. The limitation is not meaningless with regards to the World War II era litigation though, as it will likely prevent a court from asserting jurisdiction over any defendant that has not been successful enough to expand beyond its own borders. Subject matter jurisdiction refers to the power of the court to hear a specific complaint. The essence of the World War II era labor suits is restitutionary and tortious, which are subjects clearly within the state courts’ authority. State courts also have subject matter jurisdiction over those unique state statutes such as Section 354.6 and arguably international law based claims. The federal courts will have concurrent jurisdiction over all these state law areas where there is diversity among the parties and over $75,000 in controversy. This provided a clear basis for federal jurisdiction in a number of the European labor suits, but was contested vigorously by plaintiffs in the Asian litigation. The one decision to date on the subject suggests that multinational corporations with numerous U.S. subsidiaries may make diversity jurisdiction difficult to establish. The federal courts also have subject matter jurisdiction over claims based on federal law, including international law. Because the forced and slave labor 83 See Wiwa v. Royal Dutch Petroleum Co., 226 F.3d 88, 103-108 (2d Cir. 2000) (denying forum non conveniens request in ATCA case for human rights violations); Jota v. Texaco, Inc., 157 F.3d 153, 159 (2d Cir. 1998) (noting district court on remand should consider Congress’ intent in providing a forum for aliens in the forum non conveniens balance in an ATCA suit). 84 See, e.g., Stangvik v. Shiley, 819 P.2d 14, 17-18 (Cal. 1991).


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actions are predominately tort and restitution suits, federal question jurisdiction has been largely based on claims of violations of customary international law against slave labor. This is an extremely problematic basis for jurisdiction of U.S. citizens, but more successful for foreigners who may rely on the ATCA. Once federal question jurisdiction is established, state law claims may be heard based on supplemental jurisdiction. Even where a court has jurisdiction, it may decline to hear a case based on the doctrine of forum non conveniens. This, however, is a difficult standard to satisfy particularly where the plaintiff is a U.S. national or the jurisdictional statute specifically extends to aliens. The net result is (with the ironic and uncertain exception of a U.S. citizen’s non-diverse complaint based on international law) U.S. courts will take jurisdiction over almost all forced and slave labor lawsuits and these cases will eventually be heard in the federal courts.

IV. Procedural Bars and Defenses As noted above, most of the U.S. decisions on the World War II era labor litigation have been based on procedural law. The few cases that have passed the litany of procedure obstacles have yet to be heard on their merits. As a result, the courts have provided very little guidance on the vast number of arguments the defendants have made. Despite this, navigating these decisions is the key to the viability or impossibility in the United States of international human rights lawsuits for wartime forced and slave labor.

A.

Treaty Settlement of Claims

Civil procedure in America follows lex fori.85 Civil Procedure Rule 12(b)(6) requires a court to dismiss a lawsuit for failure to state a claim upon which relief may be granted. In both the Asian and European litigation, the defendants have asserted that the plaintiffs have failed to state a claim, because the peace treaties finalizing the war settled finally all disputes for damages by nationals of the Allied nations against nationals of the Axis countries. The courts’ analysis of the legal issues on both coasts is strikingly similar, but due to the different peace treaties the issues must be treated separately.

85

See Restatement (Second) of Conflict of Laws, § 122 (1969) (‘A court usually applies its own local law rules prescribing how litigation shall be conducted even when it applies the local law rules of another state to resolve other issues in the case.’).

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1.

Japanese Peace Treaty

In 1951, the United States, 47 other allies, and Japan signed the Treaty of Peace with Japan.86 Article 14(b) of the treaty provided: ‘Except as otherwise provided in the present Treaty, the Allied Powers waive all reparations claims of the Allied Powers, other claims of the Allied Powers and their nationals arising out of any actions take by Japan and its nationals in the course of the prosecution of the war, and claims of the Allied Powers for direct military cost of occupation.’ The court in In re WWII Era Japanese Forced Labor Litigation concluded that on its face this was a ‘waiver clause … plainly broad enough to encompass the plaintiffs’ [forced labor] claims’.87 The court rested on this conclusion, but went on in dicta to examine the background of the treaty. The court particularly noted comments by U.S. negotiators of the treaty and the Senate ratification debate. At a time when the United States was confronting the beginnings of the Cold War and yet still aware of the effect of World War I reparations on Germany’s interwar development, chief U.S. negotiator John Foster Dulles explained the rationale of the treaty: ‘[I]f the treaty validated, or kept contingently alive, monetary reparations claims against Japan, her ordinary commercial credit would vanish, the incentives of her people would be destroyed[,] and they would sink into a misery of body and spirit that would make them easy prey to exploitation.’88 More directly the Senate Foreign Relations Committee in recommending ratification of the treaty noted that the treaty provisions ‘do not give a direct right of return to individual claimants except in the case of those having property in Japan[;] United States nationals, whose claims are not covered by the treaty provisions … must look for relief to the Congress of the United States.’89 In fact, Congress followed this with a compensation scheme – the War Claims Act –

86

[1952] 3 U.S.T. 3169, T.I.A.S. 2490 (1951). In re World War II Era Japanese, 114 F. Supp. 2d at 945. 88 Ibid. at 946 (quoting U.S. DEPT. OF STATE, Record of Proceedings of the Conference for the Conclusion and Signature of the Treaty of Peace with Japan, 82-83 (1951)). 89 Ibid. (quoting Japanese Peace Treaty and Other Treaties Relating to Security in the Pacific, S. Rep. No. 82-2, 82d Cong., 2d Sess. 13-14 (1952)). 87


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providing for POWs and others.90 Based on all of this, the court in In re WWII Era Japanese held ‘the history of the Allied experience in post-war Japan, the drafting of the treaty[,] and the ratification debate … [all lead to] finding a waiver’.91 The court did not stop there. It continued by dismissing plaintiffs’ various counter-arguments.92 The plaintiffs asserted that the treaty did not cover their forced labor claims since their work was for private companies and, thus, not arising out of the ‘prosecution of war’. The court found that such distinction was not possible. The plaintiffs asserted that the treaty was an unconstitutional settlement of claims by a sovereign. The court found that Dames & Moore v. Regan93 clearly held that the U.S. government could settle claims of its nationals against foreign governments and their nationals. The plaintiffs asserted that Article 26 of the Peace Treaty was a most favored nations clause that should revive their claims. The court found, without addressing whether any later treaty in fact gave better treatment to another country, that any rights arising out of the MFN clause would accrue in the governments, not individuals. In short, the court held that the treaty conclusively settled all possible claims by any Allied national in United States courts.94 This, of course, did not preclude the claims of any Chinese or Korean nationals whose countries did not sign the 1951 Peace Treaty.95

90 See War Claims Act of 1948, 50 U.S.C. app. §§ 2001-2016 (creating War Claims Commission and providing compensation for U.S. POWs, civilian internees, and injured government workers). 91 In re World War II Era Japanese, 114 F. Supp. 2d at 947. 92 See ibid., at 948. 93 453 U.S. 654, 679-80 (1981). 94 See In re World War II Era Japanese, 114 F. Supp. 2d at 948-49. This conclusion is also supported by an unreported 1988 case from the federal court for the Middle District of Florida. See Aldrich v. Mitsui & Co., No.87912 Civ. J12, (M.D. Fla., Jan. 28, 1988) (dismissing U.S. POW’s forced labor suit against Japanese businesses based on preemption by Treaty of Peace with Japan); Jeong, 2000 U.S. Dist. LEXIS 7985, at *16 (noting and distinguishing Aldrich); FENNER P., ‘Prisoner of War’s Case Is on Appeal’, in: St. Petersburg [Florida] Times, 12 April 1988, p. 2 (noting dismissal based on treaty and intended appeal to Eleventh Circuit arguing plaintiff is not seeking ‘damages’ but rather seeks ‘compensation for his labor’). 95 In re World War II Era Japanese, 114 F. Supp. 2d at 942; Shang-Ting Sung v. Mitsubishi Corporation, No. 2:00-3175 (N.D. Cal., filed Feb. 22, 2000) (Chinese nationals class action); Suk Yoon Kim v. Ishikawajima Harima Heavy Industries Co., Ltd., No. 3:995303 (N.D. Cal., filed Oct. 22, 1999) (Korean nationals class action); Jae Sik Choe v. Nippon Steel Corp., No. 3:99-5309 (N.D. Cal., filed 22 Oct. 1999) (Korean nationals class action); Sa Son ‘Sindo’ Sin v. Mitsui & Co., Ltd., No. 8:00-436 (N.D. Cal., filed 30 March 2000) (Korean nationals class action).

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2.

German Peace Treaties

The extensive diplomatic history of the peace treaties with Germany resulted in much less straightforward reasoning though essentially the same conclusion as the Asian litigation. The courts in Iwanowa and Burger-Fischer both concluded that the treaties left no personal claims upon which relief could be granted. The fundamental holding of both decisions was that war reparations included private civil claims and those claims were conclusively settled by the post-war treaties. After a painstakingly detailed review of the treaties,96 however, the opinions differed on exactly which treaty settled the matter. Arguably five treaties covered settlement between Germany and the Allies for World War II. First, the 1945 Potsdam Agreement signed by the United States, United Kingdom, and Soviet Union covered all reparations of the German State and private entities and was designed to reduce Germany to a ‘pastoral economy’.97 Second, the Paris Treaty of 1946 required Germany to pay reparations to 18 nations covering ‘all [their] claims and those of [their] nationals against the former German Government and its Agencies, of a governmental or private nature arising out of war’.98 Third, in 1953, 35 nations and West Germany agreed in the London Debt Agreement to defer and restructure all ‘claims arising out of World War [II] by countries which were at war with or were occupied by Germany during that war and by nationals of such countries, against the Reich or agencies of the Reich’.99 Fourth, between 1952 and 1954 the United States, United Kingdom, and France agreed in the Transition Agreement that ‘they will at no time assert any claim for reparation against the current production of the Federal Republic’ and yet ‘the [remaining] problem of reparations shall be settled by the peace treaty between Germany and its former enemies’.100 Lastly, in 1990 the United States, United Kingdom, France, and Soviet Union on one side and East and West Germany on

96 The Iwanowa opinion runs 120 pages and the Burger-Fischer decision 78. See BAZYLER M.J. (note 5), pp. *209, *226. 97 See Protocol of the Proceedings, Berlin (Potsdam) Conference, Aug. 2, 1945, 3 Bevans 1207, art. B(111). 98 See Agreement on Reparations from Germany, Establishment of Inter-Allied Reparations Agency and Restitution of Monetary Gold, 14 Jan. 1946, 61 Stat. 3157, T.I.A.S. 1655, Part I, Article 2.A. 99 See Agreement on German External Debts, 27 Feb. 1953, 4 U.S.T. 444, 333 U.N.T.S. 3, Article 5(2) 100 See Convention on the Settlement of Matters Arising out of the War and the Occupation, signed at Bonn on 26 May 1952, as amended by Schedule 4 to the Protocol on the Termination of the Occupation Regime, signed at Paris on 23 Oct. 1954, 332 U.H.T.S. 219, Ch. 6, Article 1.


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the other entered the conclusive peace treaty known as the ‘2+4 Treaty’, which provided for no further reparations.101 The courts in both Iwanowa and Burger-Fischer agreed that all civil claims were covered by the reparations provided for in the Paris Treaty.102 However, Burger-Fischer found the Transition Agreement settled all claims barring further settlement in a final peace treaty, while Iwanowa found that the London Agreement controlled until a final settlement and even then personal claims could only be asserted at the governmental level.103 Regardless of the courts’ reasoning for the interim period, they agreed that the 2+4 Treaty terminated any deferment of or possibility for further reparations.104 In short, following the 1990 Peace Treaty both courts agreed there were no possible personal civil claims against Germany or its nationals and as a result the labor lawsuits did not state claims on which relief could be granted. The European and Asian litigation decisions are consistent in finding that the peace treaties among the Allies and Axis powers settle the issue of reparations. Further, these opinions agree that reparations provided for by the various treaties included all private civil claims against private entities arising during the war years. The courts also were uniform in their methodology, largely basing their holdings on treaty interpretation covering both plain language and contextual approaches. Furthermore, the more subtle underlying rationale for these holdings appears consistent, namely the political nature of and need for finality in peace treaties. Thus, despite the courts’ different factual findings, the precedential message regarding the comprehensiveness and finality of peace treaty reparations appears conclusive.

B.

Statute of Limitations

Civil Procedure Rule 12(b)(6) may also block a claim that is brought outside the statute of limitations.105 Traditionally U.S. conflicts law treated statutes of limitations as procedural and applied the local rules.106 More recently, the trend has been to apply the local rule but allow for application of the substantive law’s 101

Treaty on the Final Settlement with Respect to Germany, 12 Sept. 1990, 29 I.L.M.

1196. 102

Iwanowa, 67 F. Supp. 2d at 460; Burger-Fischer, 65 F. Supp. 2d at 277. Iwanowa, 67 F. Supp. 2d at 461; Burger-Fischer, 65 F. Supp. 2d at 280. 104 Ibid., at 455; Burger-Fischer, 65 F. Supp. 2d at 279. See also Princz v. BASF Group, 1995 U.S. Dist. LEXIS 22104, *12-*14 (D.D.C. 1995) (providing in stipulated dismissal with prejudice of World War II era slave labor case that treaties resolved issues). 105 See, e.g., Cito v. Bridgewater Township Police Dep’t, 892 F.2d 23, 25 (3d Cir. 1989). 106 See Restatement (Second) of Conflict of Laws, § 142. 103

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limitation period in exceptional circumstances.107 Under either approach, the applicable statute is determined by the type of substantive law claim. Thus, in the World War II era litigation there were different limitation periods for the international law claims, the tort claims, the restitutionary claims, and the state law specific claims. Furthermore, the plaintiffs asserted that even if the limitations had expired they were equitably tolled.

1.

International Law Claims

Claims based on the ATCA or customary international law, to the extent they exist at all, do not have a specific statute of limitations. When federal claims do not have limitation rules, the courts apply ‘the most closely analogous statute of limitations under state law’.108 Because these causes of action are limited to tort claims arising under international law, the most analogous state law would likely be the tort limitation periods reviewed below. The general rule to apply the most similar state law, however, also contains an exception that allows the application of another federal limitation period where that ‘clearly provides a closer analogy’.109 In Iwanowa, the court found this exception applicable. In particular, the court relied on the ten-year limitations period contained in the Torture Victim Protection Act of 1991, a statutory note attached to the ATCA. In applying this period the court found that in the European case the statute had been tolled against German defendants until conclusion of the final peace treaty, the 2+4 Treaty, on 15 March 1991.110 The court held, however, that the various treaties did not toll the limitations against non-German entities so these presumably expired ten-years from 1949.111 Pursuant to these conclusions, claims in the European litigation based on international law were timely to the extent that they were filed against German defendants before 14 March 2001. Applying this approach to the Asian cases and the conclusions made there regarding the Japanese Peace Treaty, the statute of limitations on any international law claims in those cases lapsed on 27 April 1962, ten-years after the treaty came into force.

107 See SCOLES E.F./HAY P. (note 76), p. 59 (reviewing, inter alia, the 1988 revision of the traditional Restatement rule). 108 See Del Costello v. International Board of Teamsters, 462 U.S. 151, 152 (1983). 109 See Ree v. United Transp. Union, 488 U.S. 319, 324 (1989). 110 See Iwanowa, 67 F. Supp. 2d at 465-66. 111 See ibid., at 463, 466-67.


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2.

Restitution and Tort Claims

The limitations period for restitutionary and tortious claims is determined by state law whether that be as a matter of forum law or under the exception in which some state’s may follow the rules associated with the substantive law.112 Because of possible state variety, this section discusses the statutes of limitations for restitution and tort claims generally and specifically looks at the laws of New York, New Jersey, and California where the majority of the World War II era litigation was filed. The statute of limitations for restitution claims is six years in New Jersey, six years in New York, and two years in California.113 The statute of limitations for tort claims is two years in New Jersey, one year in New York, and one year in California.114 As reviewed above and applied to the state law claims in Iwanowa, these limitation periods presumably began to run from the effective date of the peace treaties settling all reparations.115 Therefore, at the very latest the Asian litigation restitution and tort claims expired on 27 April 1958, and the European litigation claims on 14 March 1997. No known World War II era labor litigation cases were filed in U.S. courts that would pre-date either deadline.116

3.

State Law Specific Claims

Section 354.6 seeks to extend the statute of limitations for World War II era labor claims to 31 December 2010. Generally speaking, the purpose of statutes of limitations is ‘to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories

112

As a derivate of substantive law this may be the law of a foreign country, however, only the substantive law of the United States is reviewed here. The court in Iwanowa did find that the German statute of limitations was applicable under the exception and that claims were barred under this three-year rule as well. See Iwanowa, 67 F. Supp. 2d at 476-82. 113 See N.J. Stat. Ann., § 2A:14-1 (West 2000); N.Y. C.P.L.P. § 213 (Consol. 2000); Cal. Civ. Proc. Code, § 339 (West 2001) 114 See N.J. Stat. Ann. § 2A:14-2; N.Y. C.P.L.P. § 215; Cal. Civ. Proc. Code § 340. 115 See, e.g., Iwanowa, 67 F. Supp. 2d at 152 (dismissing restitution claims for failure to file within six years of 2+4 Treaty). Cf. Sampson v. Federal Rep. of Germany, 975 F. Supp. 1108, 1122-23 (E.D. Ill. 1997) (denying in dicta Holocaust survivor’s claims in contract, restitution, and tort law as barred by various state statute of limitations). 116 See BAZYLER M.J. (note 5), App. A (noting no slave labor and related claims cases in the European litigation filed before 14 March 1997); U.S. Dept. of State, Annex C & D to Foundation Agreement (note 6) (same); BAZYLER M.J./SAXA-KANEKO D., Asian Litigation List (note 15) (noting no World War II era lawsuits against Japanese filed before 27 April 1968)

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have faded, and witnesses have disappeared’.117 Nonetheless, the Supreme Court has noted that statutes of limitations are not fundamental rights and are necessarily arbitrary.118 Subsequently, other courts have upheld legislatures’ revival of causes of action otherwise barred by a statute of limitations.119 Thus, Section 354.6 appears facially valid. It is arguable, however, that Section 354.6 is only applicable to the European litigation and not to the Asian litigation. As noted above, the statute was drafted in broad terms but only referred to the European lawsuits. This is particularly relevant to the statute of limitations because, according to the legislative history, the basis for the 2010 expiration date was derived from German courts’ findings that European claims were tolled until the conclusion of the 2+4 Treaty.120 In contrast, the Japanese treaties were concluded forty years earlier, thus, the lifting of the bar seems more capricious and ‘unjust’.121 In countering these arguments, however, plaintiffs may point to section 2 of the enacting legislation which suggests a broad reading of the statute by providing: ‘It is the intent of the Legislature … to enact additional public policy in any other case of proven patterns of slave labor employed by firms presently doing business in California.’122 As a 117

Cal. Senate Judiciary Committee Report on S.B. 1245, 1999-2000 Sess. (Cal. 1999) p.7, available at http://www.leginfo.ca.gov/pub/99-00/bill/sen/sb-1201-1250/sb-1245cfa-19990519-144254-sen-comm.htm. See also Order of R.R. Tels. v. Railway Express Agency, Inc., 321 U.S. 342, 348-49 (1944); Jeong, 2000 U.S. Dist. LEXIS 7985, at *33 (‘Defendant’s difficult in investing [possible facts] is, perhaps, an unfortunate consequence of the California legislature’s decision to revive 55-year old claims. Over that span of years, documents naturally will be lost, witnesses will die or forget facts, and languages may even evolve to the point where translations becomes difficult.’) 118 See Chase Securities Corp. v. Donaldson, 325 U.S. 304, 314 (1945). 119 See, e.g., ibid.; Campbell v. Holt, 115 U.S. 620 (1885); Lent v. Doe, 47 Cal. Rptr. 2d 389, 390 (Cal. Ct. App. 1995) (upholding revival of claim for childhood sexual abuse that otherwise was barred by limitations period). 120 See Cal. Senate Rules Committee Report on S.B. 1245 (note 18), p. 4 (‘This legislation . . . merely codifies the position taken by recent German court rulings, that the moratorium imposed by the London Agreement no longer bars the assertion of claims by victims of National-Socialist persecution against their persecutors.’). This legislative finding that the claims were tolled until 7 November 1997, is directly contrary to Iwanowa and substantial U.S. case law which holds that in the United States treaties are effective from enactment. See Iwanowa, 67 F. Supp. 2d at 465-66. 121 See Cal. Senate Judiciary Committee Report on S.B. 1245 (note 117), p. 7 (‘The theory [of statute of limitations] is that even if one has a just claim it is unjust not to put the adversary on notice to defend within the period of limitation and the right to be free of stale claims in time comes to prevail over the right to prosecute them.’) (emphasis added and citations omitted). 122 1999 Cal. Stat. ch. 216, § 2. The legislative history notes that this section encourages ‘turning California into an international court of justice’. See Cal. Senate Judiciary Committee Report on S.B. 1245 (note 117). Taking this rationale to the extreme


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statutory matter, the issue boils down to whether the phase ‘the Nazi regime, its allies and sympathizers’ should include Japan and other parties not in the World War II European theater. Baring acceptance of this argument and for the European cases regardless, Section 354.6 appears to effectively extend the limitations period 56 years for the Asian litigation and 15 years for the European litigation.

3.

Equitable Tolling

The plaintiffs to these suits posit that even if the claims are technically time barred the limitations period should be equitably tolled. Equitable tolling was developed in the fraud context and stops the statue of limitations from running where a defendant has actively misled a party.123 The misrepresentation asserted in these cases is the denying of the use and liability for forced and slave labor by the defendants. In the related World War II era insurance cases, the courts have allowed equitable tolling counter-arguments finding that the defendants may have ‘deceptive[ly] and unscrupulous[ly] depriv[ed] both assets and information sustaining plaintiffs’ and their ancestors’ rights to these [insurance] assets’.124 The court in Iwanowa was unwilling to accept the argument in the European labor litigation, however. The court found any statements made to the plaintiffs regarding their claims were after the statute had already expired and no proof was otherwise provided of the defendants actively misleading the plaintiffs.125 Similarly, in the legislative history to the enactment of Section 354.6 it was noted that though justification for equitable tolling existed to support a statute on World War II era insurance claims, ‘similar justification for the delay in bringing the actions to recover [for WWII era labor] compensation does not appear to exist’ and there is no ‘documentation of repeated attempts to receive compensation that were either systematically denied or delayed as a result of the potential defendants’ conduct’.126 Correspondingly, it is unlikely any statutes of limitations have been equitably tolled in the Word War II era labor cases. one might argue that African-American descendants of slave laborers in the U.S. South might bring suits under this statute against those businesses in California that formerly used slaves. See GHANNAM J., ‘Repairing the Past’, in: American Bar Association J., Nov. 2000, pp. 38, 40 (reviewing recent claims by African-Americans for both government reparations and civil restitution for pre-Civil War slave labor and comparing the claim to those in the European and Asian litigations); DUBOSE J., ‘Racial Reparations Due, Says Lawmaker’, in: Atlanta J. Const., 24 Feb. 2001, p. A-1 (same); SHEPARD P., ‘We Too Built This Country’, in: Japan Times, 25 Feb. 2001, p. 11 (same), from Associated Press Wire, 10 Feb. 2001. 123 See, e.g., Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1387 (3d Cir. 1994). 124 See Bodner, 114 F. Supp. 2d at 135-36. 125 See Iwanowa, 67 F. Supp. 2d at 467-68. 126 See Cal. Senate Judiciary Committee Report on S.B. 1245 (note 117), p. 7.

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C.

Political Question (Non-Justiciability)

Another threshold question that may be addressed even before establishing jurisdiction is whether a matter raises a non-justiciable political question.127 The political question doctrine provides that courts shall decline to hear cases that involve concerns more appropriately treated by the political branches of government.128 The doctrine is not founded on the text of the Constitution, but is based on the basic ideals of separation of powers and limitation of the judiciary.129 The Supreme Court has summarized: ‘The conduct of foreign relations of our Government is committed by the Constitution to the executive and the legislative – the ‘political’ departments of the government, and the propriety of what may be done in the exercise of this political power is not subject to judicial inquiry or decision.’130 Nonetheless, not every case or controversy that involves foreign affairs or foreign relations raises a non-justiciable political question.131 Therefore, to determine whether an issue is within the political question doctrine the Supreme Court has created a six factor test where if any one factor is ‘inextricably’ intertwined in a matter the court should refrain from hearing the case.132 The factors include: (1) a textually demonstrable constitutional commitment of the issue to a political department; (2) a lack of judicially discoverable and manageable standards for resolving the issue; (3) an impossibility of deciding the issue without making a policy determination typically outside judicial discretion; (4) an inability to resolve the issue without expressing a lack of respect to the political departments; (5) an unusual need for unquestioning adherence to a political decisions already made; or (6) a potential for embarrassment from multifarious pronouncements by various departments on one question. The three courts in the World War II era litigation that have addressed the issue have all held that the lawsuits raise a number of these factors. Burger-Fischer found ‘[t]o a greater or lesser extent all of the above indicia are present in the instant case’.133 Iwanowa found ‘at least four of the factors are inextricable from 127

See In re Nazi Era Cases II, 2001 U.S. Dist. LEXIS 2018, *9 n.6. See Atlee v. Laird, 347 F. Supp. 689 (E.D. Pa. 1972), aff’d 411 U.S. 911 (1973) (reviewing the history of the political question doctrine). 129 See, e.g., Powell v. McCormack, 395 U.S. 486, 516-17 (1969). 130 Oetjen v. Central Leather Co., 246 U.S. 297 (1918). 131 See Baker v. Carr, 369 U.S. 186, 211 (1962). 132 Ibid., at 217. 133 See Burger-Fischer, 65 F. Supp.2d at 282, 282-85. See also Princz v. BASF, 1995 U.S. Dist. LEXIS 22104, at *14-*15 (accepting this defense in stipulated dismissal with 128


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[the plaintiff’s] claims’, specifically the first, second, fourth, and sixth factors.134 In re Nazi Era Cases II found ‘prominent on the surface of this case are the fourth factor and the sixth factor’.135 The gist of all three courts’ reasoning was best summarized in Burger-Fischer: ‘Major policy determinations are implicated in the determination of the size and in the allocation of reparations. They are not the subject of judicial discretion. For a court now, in the light of the diplomatic history of the last fifty-five years, to structure a reparations scheme would be to express the ultimate lack of respect for the executive branch which conducted negotiations on behalf of the United States and for the Senate which ratified the various treaties which emanated from these negotiations. These are decisions which were made in the face of serious foreign policy concerns. An attempt by a court to undo them would create the ‘embarrassment for multifarious pronouncements by various departments’ on one question.’136 Other commentators have criticized the courts’ reliance on the political question doctrine in the World War II era cases asserting that the courts erroneously treated these private claims as public reparations matters.137 This argument, however, seems to disregard the courts’ earlier holdings that even private claims arising from World War II are ‘reparations’ under the various peace treaties and as such were dealt with in those agreements.138 The courts have responded to this argument even more plainly stating: ‘The issue is not how Plaintiff has styled his suit [whether as a private or a public claim], but instead what the underlying controversy is. At the heart, the underlying dispute here is one arising from atrocities committed by supporters of and collaborators with [a foreign government during a war].’139 The detractors also note that the U.S. executive branch’s failure to file amicus curae briefs in the European litigation suggests that no political questions were raised. Subsequent events have proven this assertion plainly wrong. The U.S. State and Justice Departments originally declined to file a statement of position in the European litigation, but that silence should not have be interpreted as tacit assent to the non-political nature of the issues. As both the State and Justice prejudice); Kelberine v. Société Internationale, 363 F.2d 989, 995 (D.C. Cir. 1966) (dismissing an early World War II era labor lawsuit based on political question doctrine). 134 See Iwanowa, 67 F. Supp. 2d at 485, 485-89. 135 See In re Nazi Era Cases II, 2001 U.S. Dist. LEXIS 2018, *39. 136 Burger-Fischer, 65 F. Supp.2d at 284-84 (internal citations omitted). 137 See, e.g., BAZYLER M.J. (note 5), pp. *223-*26, *229-*32. 138 See Section IV.A (reviewing courts’ holdings that civil labor claims were included in reparations matters settled by various peace treaties). 139 In re Nazi Era Cases II, 2001 U.S. Dist. LEXIS 2018, *14-*15 (emphasis added).

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Departments later clarified, their silence in the European litigation was a ‘policy’ decision due to the ‘very delicate stage’ of negotiations for a settlement at that time.140 Furthermore, these divisions of the executive branch have subsequently participated in both the Asian and European litigation and stated before Senate Judiciary Committee hearings that reparations include civil claims and the peace treaties resolved these matters.141 Thus, international human rights claims arising from a war that has been settled by a comprehensive peace treaty that the United States has ratified will largely fall within the political question doctrine, and as such will not be justiciable in U.S. courts.

D.

Comity

Falling somewhere between the political question and forum non conveniens principles is the doctrine of comity. Comity is a discretionary policy that allows, but does not require, a U.S. court to decline hearing a case that involves the judicial, executive, or legislative acts of a foreign state.142 In other words, comity encourages or allows a court to dismiss a matter that has been or already is being addressed by another nation’s courts or government.143 The rationale is to encourage international cooperation and reciprocity while discouraging conflicting and limited territorial decisions.144 The courts in the World War II era litigation have rested on this doctrine as an alternative basis for dismissal. In Iwanowa, the court relied solely on Germany’s 140

See ‘Former U.S. World War II POWs: A Struggle for Justice’: Hearing before the Comm. on Judiciary of U.S. Senate, 106th Cong. 585, at 8, 9, 10 (statements of David W. Ogden, Acting Assistant Attorney General, Civil Division, U.S. Department of Justice, and Ronald J. Bettauer, Deputy Legal Advisor, U.S. Department of State). Cf. Kadic, 70 F.3d at 250 (noting the U.S. State Department declined to comment on that case because it believed the political question doctrine did not apply in this case). 141 See ibid., at 9-10, 14-15 (referring to the Japanese Peace Treaty but applicable by analogy to the German peace treaties); In re Nazi Era Cases I, 2000 U.S. Dist. LEXIS 18148, *19-*24; In re World War II Era Japanese, 114 F. Supp. 2d at 947-48; In re Nazi Era Cases II, 2001 U.S. Dist. LEXIS 2018, *22-*24. See also Foundation Agreement (note 12), Article 2(1), Article 3(4), Annex B (requiring United States to file Statements of Interest and otherwise oppose any challenges to Germany’s sovereign immunity in all pending and future European litigation). 142 See, e.g., Hilton v. Guyot, 159 U.S. 113, 164-65 (1895) 143 See, e.g., Laker Airways, Ltd. v. Sabena, Belgian World Airlines, 731 F.2d 909, 937 (D.C. Cir. 1984). 144 See Spatola v. United States, 925 F.2d 615, 618 (2d Cir. 1991). See also ANDERSON K., ‘What Can the United States Learn from English Anti-Suit Injunctions’, in: 25 Yale J. Int’l L. pp. 195, 226-31 (2000) (reviewing the rationale for comity in the anti-suit injunction context).


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executive branch response to the labor claims in refraining from issuing a decision that might contradict that government’s official position.145 The U.S. court’s approach appears perhaps unnecessarily cautious since at the same time the German judicial branch (i.e., the courts) reportedly had both supported and contradicted the government’s position.146 In In re Nazi Era Cases II though, another U.S. court was able to rest its comity concerns more solidly on a recent and seminal German decision holding that the Foundation Agreement was constitutional and created the exclusive remedy for war laborers.147 Though comity has not yet been the basis of a decision in the Asian litigation, the principle also appears applicable in that context where the Japanese government and courts have dealt with the issue even more consistently – if negatively – than their German counterparts.148

E.

Act of State Doctrine & Foreign Sovereign Immunity

Both the act of state doctrine and the Foreign Sovereign Immunity Act (FSIA) provide foreign governments with defenses to lawsuits brought in U.S. courts. The act of state doctrine stipulates that U.S. courts will not judge a foreign state for acts done within its own territory.149 Under the FSIA, foreign states are immune from most suits in the United States.150 In the World War II era labor litigation, the key issue for both of these procedural defenses was whether the private defendants may be considered foreign state actors. As noted above, some of the defendants argued that they were government agencies or instrumentalities to the extent that they 145

Iwanowa, 67 F. Supp. 2d at 489-91. But cf. Bodner, 114 F. Supp. 2d at 129-30 (denying comity argument in World War II era insurance cases against French defendants because no French cases on the same issue had been filed and no governmental compensation plan had been created). 146 See BAZYLER M.J. (note 5), No. 953 (citing various German decisions). 147 See In re Nazi Era Cases, 2001 U.S. Dist. LEXIS 2018, *57-*58 (citing 30 Nov. 2000 decision of Bundesgerichtshof (III ZB 46/00)). 148 See, e.g., OKUDA Y., ‘Law Applicable to Governmental Liability for Damages to Foreign Individuals during Second World War’, in this Yearbook, n. 14-15 (citing ITO T., ‘Dainiji sekai taisen go no nihon no baisho seikyuken shori [Claims and Debts of Japan after the Second World War]’, in: Gaimusho chosa genppo 1994, no. 1., p. 111 et seq.; Supreme Court [of Japan], 4 Nov. 1969, 566 Hanrei jiho 33); IGARASHI M., ‘Post-War Compensation Cases, Japanese Courts and International Law’, in: 43 Japanese Annual of Int’l L. 2000, pp. 45, 73; FISHER B.A. (note 30), pp. *42-*43; ‘Japan to Fight Ex-POWs’ Campaign for Redress’, in: Japan Times, 29 Jun. 2000, p. 2 (statement of Japanese Ambassador to United States that 1951 Peace Treaty provided final and complete resolution of all claims). 149 See, e.g., Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398 (1964); Underhill v. Hernandez, 168 U.S. 250, 252 (1897). 150 See 28 U.S.C. §§ 1330, 1602-1611; Princz v. FRG, 26 F.3d at 1176.

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were nationalized or used forced and slave labor pursuant to official compulsion under the law. The FSIA expressly applies to any ‘political subdivision of a foreign state or an agency or instrumentality of a foreign state’, which can include a separate legal person, a majority of which is owned by the foreign state.151 Whether any of the defendants in the World War II era litigation satisfy this standard, however, is a factual issue that has not been decided and is not abundantly clear. At the very least, the court in Jeong left open the possibility that defendants might be able to establish their status as agents of the state and rely on these defenses.152

F.

Accord and Satisfaction & Preemption

The defenses of preemption and accord and satisfaction, as applicable in these cases, both refer to the idea that the government by providing and the plaintiffs by accepting administrative remedies for their injuries are blocked from also seeking judicial redress. These defenses were raised in the World War II era labor litigation, but have not yet been addressed by the courts. The logic of the defenses is multipart. First, pursuant to the various peace settlements each country took responsibility for compensating its injured nationals. Second, each state developed an administrative remedy to compensate victims of various war injuries. Third, under the preemption defense, those administrative programs created an exclusive remedy under which nationals could make claims for injuries occurring during the war.153 Under the accord and satisfaction defense, anyone who accepted administrative remedies thereby agreed to forego any judicial remedy.154 The preemption defense was addressed indirectly in Jeong with regards to jurisdiction and in more detail in the U.S. Department of State’s response to Senate Judiciary Committee questions.155 Speaking directly to the Asian claims, these sources noted that the peace treaty contemplated the creation of a scheme covering compensation for ‘damage and suffering’ inflicted by Japan and its nationals ‘during the war’. 156 This plan was funded by the seizure and liquidation of $4 billion worth of public and private property located outside of Japan and formerly 151

28 U.S.C. § 1603(a)-(b). See Jeong, 2000 U.S. Dist. LEXIS 7985, at *31-*33, n.14. Cf. Bodner, 114 F. Supp. 2d at *130 (denying act of state doctrine in World War II era French insurer cases because defendants were private parties) 153 See Olson v. General Dynamics Corp., 960 F.2d 1418, 1423 (9th Cir. 1991) (preemption by ERISA). 154 See Bowater North Am. Corp. v. Murray Machinery, Inc. 773 F. 2d 71 (6th Cir. 1985) (discussing accord and satisfaction requirements). 155 See Jeong, 2000 U.S. Dist. LEXIS 7985, at *14-*20; ‘Former U.S. World War II POWs: A Struggle for Justice’ (note 140), at 50-51. 156 See Treaty of Peace with Japan (note 87), Article 14, sec. 1-2; Article 16. 152


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owned by the Japanese government and Japanese companies and individuals. The distribution was made to U.S. citizens (namely, military POWs, civilian internees, and government related employees) pursuant to the War Claims Act, which expressly rejected any recourse to the courts.157 Similar developments also covered claimants from the European theater.158 Thus, the argument goes, Congress purposefully and consciously intended the administrative remedies to preempt any resort to judicial remedies. The accord and satisfaction defense follows the same rationale but only effects those parties who applied for and received compensation pursuant to the War Claims Act.159 These arguments might also be relevant to certain alien defendants. Germany, Canada, United Kingdom, Australia, New Zealand, Isle of Mann, and various other countries have established compensation schemes that explicitly cover forced and slave labor claims.160 As a practical matter, however, these arguments are largely 157 See War Claims Act of 1948, 50 U.S.C. app. §§ 2001-2016. Compensation under the War Claims Act was limited to $1.00 per day for missed meals and $1.50 per day for lost wages. See ‘Former U.S. World War II POWs: A Struggle for Justice’ (note 140), at 2. The State Department notes, however, that in year 2000 dollar payment amounts would be $20,646. See BURRESS C., ‘State is Ground Zero for World War II Lawsuits’, in: S.F. Chronicle, 22 April 2001, p. A-1. This amount compares favorably with the amount available under the Foundation Agreement and other compensation plans, and the amount reportedly sought in private settlement. See infra notes 159, 160. 158 Not all victims, however, were covered by at least one of the various national schemes. See Princz v. FRG, 26 F.3d at 1168 (noting U.S. citizen’s non-coverage by German and U.S. systems). 159 Consistent with the accord and satisfaction defense, compensation under the Foundation Law is reduced by the amount of money the party has received under other compensation schemes and limited to DM 15,000 ($7,000) for slave laborers and DM 5,000 ($2,300) for forced laborers. See In re Nazi Era Cases I, 2000 U.S. Dist. LEXIS 18148, *12*14, n.11 (citing Gesetz zur Errichtung einer Stiftung ‘Erinnerung, Verantwortung und Zunkunft’, §§ 9, 15(2)). 160 See In re Nazi Era Cases I, 2000 U.S. Dist. LEXIS 18148 (reviewing German compensation scheme); ‘Britain to Compensate POWs’, in: Japan Times, 9 Nov. 2000 (noting £10,000 payments to POWs of Japan (but not Germany or Italy) by United Kingdom and British POWs’ concurrent withdrawal of WWII era claims filed in Japan, and compensation made by Canada and Isle of Mann to its Asian veterans); WRIGHT L., ‘55 Years On, POWs Set to Get Compo’, in: Canberra Times, 21 May 2001, p. A-1 (noting POWs and civilian internees of Japan (but not Germany or Italy) to receive AUD$25,000 tax free payments and compensation made by New Zealand). It is arguable that these payments are merely a ‘honorarium’ and as such do not effect an accord or preemption. See ‘Former U.S. World War II POWs: A Struggle for Justice’ (note 140), at 3-4 (statement of Senator Jeff Bingaman characterizing Canadian payments as non-prejudicial to compensation claims). Senator Bingaman introduced a similar ‘honorarium’ bill calling for $20,00 payments to POWs who were forced into labor, but the bill did not emerge from committee. See S.1806, 106th Cong. (1999), status available at http://thomas.loc.gov/ Perhaps coincidentally $20,000 also appears to be the amount POWs are seeking in

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untested and the strength of other procedural defenses likely will ensure that they remain undeveloped.

G.

Summary of Procedural Bars and Defenses

American civil procedural rules construct a minefield difficult to navigate in most international human rights litigation. In the World War II era labor lawsuits, the case law to date suggests that peace treaty resolution, statute of limitations, and the political question doctrine will all result in nearly insurmountable obstacles for claims. Assuming these are cleared, the second line procedural defenses include comity, the act of state doctrine, foreign sovereign immunity defenses, preemption, and accord and satisfaction. These ramparts are mostly untested and appear much less stable, nonetheless, their presence alone adds to the cost and difficulty in trying these cases and the defendants’ overall confidence in their position. The end result is America’s broad jurisdiction policies will allow into court most claims for forced and slave labor during wartime, but the country’s narrower procedural rules will likely keep these cases from being heard on their merits.

V.

Choice of Substantive Law

Because the courts hearing the World War II era litigation have largely held based on procedural matters and because procedural rules in America are automatically lex fori, little discussion of the choice of law rules for forced and slave labor claims has occurred. Some general conclusions, however, may still be drawn.161

A.

International Law Claims

World War II era plaintiffs making claims under the ATCA pleaded international law as a substantive law choice. No consensus has developed among the courts, however, as to whether the applicable law in an ATCA claim is international law settlement from the Asian litigation defendants. See AMEDORI C., ‘Amends Overdue for Bataan Death March’, in: Japan Times, 26 Aug. 2000, p. 21 (reprinted from The Baltimore Sun). 161 As background, private international law in the United States provides that state courts and federal courts sitting in diversity will apply local conflict of laws rules. See Van Dusen v. Barrack, 375 U.S. 612, 645-46 (1964); Restatement (Second) of Conflict of Laws, § 6(1). Characterization of conflict terms is based on local rules and local law subject to the applicable law. See Restatement (Second) of Conflict of Laws, § 7. Renvoi is generally only applied as an exception. See ibid., § 8.


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or municipal law, such as lex fori or lex loci.162 This of course is closely related to the confusion over whether individuals even have a private right of action under international law. To the extent the courts find that under the ATCA the applicable law is municipal law, the analysis of tort and restitution claims reviewed below arises. To the extent the courts hold that international law standards apply, further resolution is not problematic. No conflicts arise in the application of international law, because its entire premise is that it is singular and uniform. As a practical matter, variations may occur in how different states’ courts interpret international law, including whether they find private rights of action under that law. U.S. courts may take notice of these diverging foreign courts’ interpretations; however, because the implementation of international law is a procedural matter following lex fori, they are not bound by any differences.163

B.

Tort Claims

As is well known, the Restatement (Second) of Conflict of Laws and most American jurisdictions follow a most significant relationship approach to choice of tort law.164 In applying the most significant relationship test, the courts consider: (1) the place where the injury occurred; (2) the place where the conduct causing the injury occurred; (3) the domicile, residence, nationality, place of incorporation, and place of business of the parties; and (4) the place where the relationship, if any, between the parties was centered.165 For a large portion of the World War II labor cases, the place of the injury, the tortious conduct, and where the relationship of the parties was centered was Japan and Germany. Further, the defendants’ places of incorporation are predominately Japan and Germany. This strongly suggests that the tort law of Japan should be applied in much of the Asian litigation and German law in the European litigation.166 Moreover, many of the plaintiffs and defendants

162 See Fliartiga, 630 F.2d at 889 (requiring district court to do a traditional choice of law analysis to determine the applicable law); Wiwa, 226 F.3d at 105 (noting the issue is unresolved); Tel-Oren, 726 F.2d at 777, 781-82 (Edwards concurring) (suggesting applicable law for ATCA claim is lex loci delicti); In re Estate of Marcos, 978 F.2d at 503 (approving lower court’s application of lex loci delicti for ACTA claim); Forti, 672 F. Supp. at 1531 (stating applicable substantive law for ATCA claim is international law); Xuntax v. Gramjo, 886 F. Supp. 162 (D. Mass. 1995) (finding both international law and municipal law may be applied as substantive law for ATCA claim). 163 See Beard v. Green, 523 U.S. 371, 375 (1998). 164 See Restatement (Second) of Conflict of Laws, § 145. 165 Ibid. § 145(2). 166 In Iwanowa, under a governmental interest analysis for the applicable statute of limitations the court applied German law. See Iwanowa, 67 F. Supp. 2d at 476-77. Further, the court noted that if called upon it would have applied German substantive restitution law

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in the World War II era litigation appeared to agree on this fact as its application has been pleaded and consented to in a number of cases.167 It is unclear from the remaining cases under which tort law the plaintiffs sought relief, but it is doubtful that a U.S. court, whether state or federal, would apply American tort law given the tenuous connection of the United States to most of these claims.168 A more difficult question is what law should be applied to claims concerning acts and injuries in territories occupied by Japan and Germany, particularly where the plaintiffs are or were domiciled, resident, or citizens of these territories. That is, what tort law should be applied in those lawsuits for forced and slave labor committed in Manchuria, Korea, Poland, Czechoslovakia, and so forth? In these cases the significant relationship factors lead to application of the occupied territories’ law. Occupied territories’ law, in turn, generally means the law at the time of the forced labor, i.e., the occupiers’ law.169 In Kalmich v. Bruno, however, the Seventh Circuit noted that it would apply present, or at least post-occupation, Yugoslav law for torts committed in that territory during German occupation.170 Thus, pursuant to this approach and given the flexibility of the most significant relationship rule, the courts have the ability to apply either the occupiers’ or the pre- or post-occupation law. With this option and given genuine concerns about applying the law of an illegitimate or unrecognized regime, one might expect U.S. courts to more often than not apply the law of the pre- or post-war states.

C.

Restitution Claims

Similar to tort law, the Restatement and a majority of states apply a most significant relationship test for the choice of restitution law.171 In making that determination, the courts consider five factors: (1) the place where a relationship between the parties was centered; (2) the place where the benefit was received; (3) the place where the act resulting in the enrichment was done; (4) the domicile, under a governmental analysis. See ibid., at n. 69. See Xuncax, 886 F. Supp. at 195-196 (applying foreign tort law in ATCA claim under most significant connection analysis). 167 See, e.g., ibid. at 476 n. 69 (noting the parties conceded that German, not New Jersey, substantive law controlled); Burger-Fischer, 65 F.3d at 252, 254 (pleading under German tort law in both the Siemens and Degussa cases). 168 The due process limitations to application of American law is reviewed infra in Section V.D. 169 New statutes are generally applied prospectively unless contrary legislative intent is noted otherwise. See, e.g., Union Pacific R.R. v. Laramie Stock Yards, 231 U.S. 190, 199 (1913). 170 See Kalmich v. Bruno, 553 F.2d 549, 552 (7th Cir. 1977) (noting pursuant to a most significant relationship analysis that the law of the place where the tort occurred, i.e., Yugoslavia under German occupation, should apply). 171 See Restatement (Second) of Conflict of Laws, § 221.


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residence, nationality, or place of incorporation of the parties; and (5) the place where the physical thing that related to the enrichment was situated.172 Paralleling the analysis for tortious acts, in the World War II era labor cases all of these factors with the possible exception of the domicile and residence of the parties point towards the law of Germany, Japan, or the areas these states occupied. Reflecting at least the possibility of the application of the law of a defendant’s domicile, the court in Iwanowa considered not only Germany restitutionary law but also Michigan and Delaware law where one of the defendants, Ford, was based and incorporated.173 Nevertheless, the court suggested in a note, which founded its analysis concerning the applicable statute of limitations, that German law had the most significant relationship to the case.174 Thus, as with tort law the choice of law rules suggest Japanese or German law should apply to most restitution claims though there remains the strong possibility of the application of the domestic law of the previously occupied territory.

D.

State Law Specific Claims

From a choice of laws perspective, California’s Section 354.6 first raises a characterization and interpretation question. It is unclear from the plain language of the statute whether Section 354.6 is merely a jurisdictional and statute of limitations law or whether it creates independent substantive rights. The legislative history is ambiguous regarding the legislature’s intent on this issue, but the statute’s placement in the civil procedure code rather than the state’s civil code, which generally covers substantive obligation matters such as restitution and torts, suggests that the statute does not create new rights but merely provides a forum for existing rights. If the courts read the statute to only relate to jurisdiction and limitations, then no choice of law issue arises beyond the tort and restitution considerations outlined above. The plaintiffs in the Asian litigation, however, have interpreted the section to create new independent rights upon which they have sought damages.175 There is some support for this reading because Section 354.6(3) gives ‘compensation’ a definition independent of the otherwise applicable tort or restitution law.176 If the 172

See ibid. § 221(2). See Iwanowa, 67 F. Supp. 2d at 470-72. 174 See ibid., at 476-77, n. 69. 175 Analysis of the applicable law under the ATCA might by analogy provide some guidance to this question, but as reviewed above there is no consensus whatsoever regarding the applicable law under the ATCA. See note 162 and accompanying text. 176 Damages are usually measured consistent with the applicable substantive law. See Restatement (Second) of Conflict of Laws, §§ 171, 207. Section 354.6(3) provides: ‘Compensation means the present value of wages and benefits that individuals should have been paid and damages for injuries sustained in connection with the labor performed. 173

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courts accept the plaintiffs’ construction and characterize Section 354.6 as an independent cause of action, then they would presumably make and apply new California common law to determine whether liability exists. This is turn may give rise to due process challenges of the law under the Fourteenth Amendment. Due process limits application of lex fori as a choice of laws rule where the matter has no substantive contact with the forum state.177 The analysis is similar to the due process restrictions for personal jurisdiction, however, the tests and the specific application are subtly but significantly different.178 The Supreme Court standard for whether the application of state law violates due process provides: ‘[The] State must have a significant contact or significant aggregation of contacts, creating state interests, such that choice of its law is neither arbitrary nor fundamentally unfair.’179 Consistent with this, a federal district court recently found a violation of the due process clause by part of Florida’s Holocaust legislation package, which extended the limitations period against and the obligations of ‘any parent, subsidiary, or affiliated company’ of a Florida insurer that issued World War II era insurance contracts.180 In cursorily considering whether Section 354.6 might violate the due process protections if substantively applied to the World War II era litigation, it would appear that none of the facts underlying the claims have a connection with California, that the defendants largely have no connection with California or are subsidiaries with no connection to the forced and slave labor. On the other hand, some of the plaintiffs have become residents of California since the underlying events occurred and some of the defendants indirectly or directly conduct business in California. The test is fact-intensive and applied on a case-by-case basis; therefore, it is impossible to make conclusive predictions. Nevertheless, the connections of California with the events and parties are questionable enough to give serious consideration to the argument that applying California substantive

Present value shall be calculated on the basis of the market value of the services at the time they were performed, compounded annually to date of full payment without diminution for wartime or postwar currency devaluation.’ 177 See Home Ins. Co. v. Dick, 281 U.S. 397, 408 (1930). See also SCOLES E.F./HAY P. (note 76), §§ 3.20-3.29 (reviewing and summarizing the due process limitations on choice of law rules). 178 See SCOLES E.F./HAY P. (note 76), §§ 3.27-3.29 (reviewing differences in the tests and outcomes based on the tests). 179 Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 818 (1985) (finding application of lex fori violated due process in a class action suit where 3% of class members were from and 1% of the claims arose inside the forum state and quoting Allstate Ins. Co. v. Hague, 449 U.S. 302, 312-13 (1981)). 180 See Gerling Global Reins. Corp. of Am. v. Nelson, 123 F. Supp. 2d 1298, 1304 (N.D. Fla. 2000).


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law, whether its common law under the statute itself or its codified law such as the claims under California’s Business and Professional Code, violates due process.181

E.

Summary of Choice of Substantive Law

American choice of law rules tend to suggest that Japanese, German, or conceivably international law would be applied to the substantive law issues in the World War II era litigation. However, the flexible approach under the dominant choice of law framework in the United States would allow for selection of other connected laws such as the laws of the areas formerly occupied by aggressor nations. This conclusion also has a pragmatic appeal to the extent that courts find the occupation was illegitimate, unrecognized, or in violation of public international law. Little suggests that substantive American law should be applied. However, given the flexibility of U.S. choice rules, U.S. courts’ frequent failure to consider conflicts issues, and the emotional appeal of U.S. citizens seeking redress for acknowledged harms, that possibility cannot be excluded. If it does occur, recent case law suggests that defendants, at the least, might challenge such application as violating due process protections.

VI. Private International Law Implications on Settlement The European lawsuits for forced and slave labor alone covered anywhere from 700,000 to 2.3 million potential class members.182 This litigation included over fifty federal cases and a handful of state suits.183 It also involved well over a hundred named attorneys.184 The exact amount of damages claimed by all of the lawsuits is incalculable, but almost all sought tortious, restitutionary, and punitive damages as well as attorneys’ fees and costs. In a related case, a single World War II victim

181

Cf. Gerling Global Reins. Corp. v. Low, 2001 U.S. App. LEXIS 1724, *41-*43 (9th Cir. Feb. 7, 2001) (remanding to district court to review whether California Holocaust Victim Insurance Relief Act of 1999 violates due process protections). See also In re Nazi Era Cases II, 2001 U.S. Dist. LEXIS 2018 at *8 n.5 (citing Gerling v. Nelson and stating ‘the Court notes in passing that the California statute upon which plaintiff relies [Section 354.6] is of exceedingly questionable constitutionality’). 182 See BAZYLER M.J. (note 5), p. *192, n. 786 (providing citations). 183 See In re World War II Nazi Era Cases I, 2000 U.S. Dist. LEXIS 18148, at *3-*4, app. A; U.S. Dept. of State, Annex C & D to Foundation Agreement (note 6). 184 Ibid.

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sought over $40 million for his claims alone.185 Thus, it is not surprising that the parties eventually agreed to settle for DM 10 billion (US$5.1 billion).186 The World War II era lawsuits and their settlement most closely resemble mass tort litigation in American courts – the number of parties and the amounts involved are simply enormous.187 Settlement in America accounts for the vast majority of contested cases and is generally about a meeting of the minds on a dispute’s likely outcome, adjusted for risk and less saved expenses.188 In mass tort cases, however, settlement is often not about likely outcome, but rather about the possible outcome. With large plaintiff classes, punitive damages, extensive pretrial discovery, civil juries of laypeople, potential for multiple and lengthy appeals, and other factors contributing to a double punch of unpredictability and potentially enormous damages, defendants often settle to avoid the possible outcome rather than based on a rational estimate of the likely results.189 Nevertheless, settlement negotiations take place in the shadow of the law including the rules of private international law and civil procedure.190 Thus, the more clearly cut the legal questions and resolutions are, the more likely the parties will be able to come to an agreement on the value of the ‘possibility’ factor. This same analysis may be made in economic terms. Settlement generally occurs where the parties’ risk-adjusted approximation of the litigated verdict 185

See D’Amato v. Deutsche Bank, 2001 U.S. App. LEXIS 78, *2 (2d Cir. 4 Jan.

2001). 186

The parties to the Asian lawsuits have not settled any U.S. claims and no known negotiations are underway. 187 Others have made the same conclusion, see BROWN D., ‘Litigating the Holocaust: A Consistent Theory in Tort for the Private Enforcement of Human Rights Violations’, in: 27 Pepperdine L. Rev. 2000, pp. 553, 584-589 (noting that while cases such as BurgerFischer ‘at first blush, appear to impose unseasonable burdens upon defendants, such scenarios would not be unusual considering the cacophonous state of modern tort law’ and going on to compare Burger-Fischer with mass tort lawsuits such as those against dram shops, tobacco companies, and gun manufacturers). 188 See, e.g., OSTROM B.J./ KAUDER N.B., Examining the Work of State Courts 1994, 28 (noting all but 4% of civil cases in state courts settle). 189 For a discussion of a variety of issues involved in settlement of mass tort lawsuits see, Symposium, ‘Mass Torts and ‘Settlement Class Actions’’, in: 80 Cornell L. Rev. 1995, p. 811; ‘Symposium on Mass Torts’, in: 31 Loyola L.A. L. Rev. 1998, p. 437. Some have cynically or critically referred to such lawsuits that capitalize on the possibilities with an objective of settlement as ‘blackmail’ and ‘extortionist’. See, e.g., Castano v. The Am. Tobacco Co., 84 F.3d 734, 746 (5th Cir. 1996). Such characterizations are incorrect and unfortunate, however, because the raison d’être of these lawsuits is that they are possible under the law, rather than outside of the law. 190 See MNOOKIN R.H./ KORNHAUSER L., ‘Bargaining in the Shadow of the Law: The Case of Divorce’, in: 88 Yale L. J. 1979, P. 950 (discussing the impact of legal rules on negotiations and bargaining outside judicial proceedings).


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amount less litigation costs converge.191 The greater the risk or approximation of verdict amount, the wider the divergence on the total estimations of litigation value, and the less likely settlement will occur. Information is a key element in determining both a party’s approximated verdict amount and its risk adjustment. The more information the parties have the more accurate their approximations and the lower their risk adjustments. As a result, the more likely the parties’ total estimation of litigation value less litigation costs will converge and settlement will happen. Private international law and civil procedure rules applicable in international human rights cases are one critical source of information to the parties. The more definitive and predictable these rules are the more likely the parties will be able to settle on mutually acceptable terms. The courts and the U.S. State and Justice Departments, however, purposefully refrained from clarifying these rules during part of the European litigation.192 Their stated justification was that they did not want to derail settlement negotiations.193 As one commentator noted with apparent approval: ‘Judge Korman [in the WWII era Swiss bank litigation] did something brilliant. He did nothing. Rather than ruling on the [private international law and procedure] motions, he sat on them for close to one year and waited for the parties to reach a settlement. Judge Michael Mukasey in Manhattan borrowed Judge Korman’s approach from the Swiss bank cases. In response to the insurance companies motion to dismiss [the WWII era insurance litigation on conflict and procedural grounds], he has not ruled on the motions, hoping the matter will settle instead.’194 191 See POSNER R.A., Economic Analysis of Law, 5th ed., New York 1998, pp. 588589, § 21.5. Thus, where d represents defendant and p plaintiff, and where L equals litigation costs, S equals settlement costs, R(V) equals total estimation of litigation value (i.e., Risk adjustment times approximation of Verdict amount); settlement will occur where: R d (V)-L d +S d

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