Greece will go bankrupt. The struggling Greek economy will collapse. Probably, Greece will leave the Euro-Zone. New state laws will come into force stipulating the conversion of all Euro-denominated contracts into a local currency, the new drachma. This scenario is more likely than ever and it will impact existing contracts between Greek companies and their foreign counterparts. It does not take the proverbial crystal ball to foresee that the Greek companies will invoke the “doctrine of frustration” plus “undue hardship” and “act of god”-arguments to have their contractual obligations set aside or adjusted (= eased) to the changed circumstances. The foreign companies are unlikely to accept that without a fight. In sum, there is a wave of disputes approaching fast.
Where will these disputes be tried? Most transnational contracts contain an arbitration clause referring the dispute to an international arbitral tribunal instead of to local courts. In the current doomsday-scenario, it is certainly preferable for the non-Greek party to keep it that way. Greek courts do not only have a general reputation of being slow and of meager quality. The foreign party will fear – rightly or not – that a Greek state court is more likely to accept the argument that the Greek crisis does indeed frustrate the contract, requires its adaption or provides a special termination right to the Greek party.
Do those arbitration agreements stay valid if the contract’s validity as such is attacked under the doctrine of frustration? Or does the arbitration clause automatically share the fate of the challenged contract, following some sort of a “live & die together”-concept? The answer lies in the doctrine of separabilty, a long established and widely recognized principle of international arbitration law. It states that the validity of the arbitration clause must be dealt with separately from the validity of the contract itself even if, on the face of the document, the arbitration clause forms an integral part of the contract. The principle rests on the implicit intentions of the contracting parties who are supposed to agree on arbitration for all sorts of conflicts under a given contract. Sometimes, the parties make this intention clear when conferring jurisdiction upon the arbitral tribunal with regard to “all disputes arising out of or related to the contract, including its validity“. The UNCITRAL Model Law on Arbitration, which most countries (including Greece) have adopted at least for international arbitration proceedings recognizes the separability doctrine in its Art. 16. In addition, Greece is since July 16, 1962 a signatory to the Convention on Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). According to Art. II of the New Convention, a signatory country must recognize the validity of an arbitration agreement so that state courts are compelled to deny jurisdiction in the presence of an arbitration agreement.
In a perfect world, the foreign party to a contract with a Greek counterpart can therefore rest at ease with regard to the jurisdiction issue: If the Greek crisis leads to turbulences impacting the contract, an arbitration agreement stays valid. Hence, an international arbitral tribunal, not a Greek state court, has jurisdiction to decide whether the contract must be adjusted or can be prematurely terminated due to Greece’s insolvency and its aftershocks. Two procedural scenarios can materialize in this context: If the dispute is initially brought before the arbitral tribunal, the tribunal has so-called competence-competence to rule on its own jurisdiction; and it will confirm this jurisdiction based on the separability doctrine. Or the Greek party tries its luck at a state court but will then be confronted with a jurisdictional objection upon which the state court must then, on the basis of Art. II New York Convention, deny its jurisdiction clearing the road to the agreed upon arbitration.
The world, however, is not perfect. The past months have demonstrated that Greece does not always play according to the rules and in conformity with obligations accepted earlier. It might well be that the Greek state and Greek courts will do everything to safeguard Greek citizens in the Greek crisis, including a violation of Greek obligations under the New York Convention. Consequently, foreign parties to contracts with Greek companies are well advised to monitor the further development closely. Hopefully, Greece will follow international standards with regard to arbitration agreements and their enforceability. If not, a different sort of arbitrations might be the consequence, namely investment arbitrations under bilateral investment treaties (“BIT”) arguing that denial of a neutral forum under the arbitration clause does violate principles of fair and equal treatment and due process protected under the BIT.
