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Supreme Court of Justice (Portugal) | Suspension of the Arbitration Agreement | Restructuring | Impecuniosity | 26-04-2016 | Case #010

Supreme Court of Justice
Date: 26-04-2016
Case No. 1212/14.5T8LSB.L1.S1

RELATED CASE: Decision of the Lisbon Court of Appeal HERE

– A restructuring procedure does not entail the suspension of the arbitration agreement or of the arbitration proceedings
– Nor does that procedure grant the company under restructure an exemption of court or arbitration costs
– The arbitral tribunal retains primary competence to decide upon its own competence.

1. The existence of an arbitration agreement between the petitioner and the defendant, a valid and enforceable mechanism to solve any dispute arising from the contractual framework existing between them is a reflection of the principle that arbitral tribunals are competent to decide upon their competence (so-called principle of kompetenz-kompetenz or competence-competence or even compétence-compétence).
2. This principle entails a positive effect, which is to enable the arbitral tribunal to decide on its own jurisdiction, and a negative effect, which results in the arbitrators being the first “judges” within its jurisdiction. State courts are only compentent to decide on the competence of the arbitral tribunal once an award on jurisdiction is made, via the annulment of an interlocutory decision or as opposition against the enforcement of that decision.
3. According to Art. 7 of the Law 47/2007 of 28 August, legal state aid is not granted to entities with lucrative purposes, since those entities are incorporated and have an organisation that warrants the payment of their own costs, not excluding those deriving from litigation before state courts and arbitral tribunals. Hence, the plaintiff does not have the right to legal state aid in state courts and even less so in arbitration.
4. The plaintiff, being subject to a liquidation and restructure procedure, is entitled to an exemption on state courts’ fees (except in labour disputes). However, the issue of the exemption on state courts’ fees (which does not include the exemption on arbitral costs) is different from the issue of the effects that a liquidation and restructure procedure may produce upon the validity and enforceability of the arbitration agreement.
5. Regarding the effects of the declaration of the insolvency and without prejudice to the provisions of applicable international treaties, Art. 87(1) of the Insolvency and Restructure Code provides for the suspension of the enforceability and operativeness of the arbitration agreements to which the insolvent is a party, provided that the subject matter of the dispute may influence the value of the assets. According to Art. 87(2) of the I&RCode, pending arbitration cases will not be suspended.
6. If that provision were to apply in a restructure procedure case, which we consider in arguendo only, the petitioner could never make use of the mechanism to suspend the arbitration proceedings since the restructure procedure was initiated after the commencement of the arbitration proceedings.
7. On the other hand, in the event of a potential parallel application of Art. 87 of the I&RCode, a possible suspension of the arbitration agreement would be allowed only during the negotiation period, which means that it would only last for a period of three months. The three months period is set forth in Art. 17-D(5) of the I&RCode for the negotiation of the restructuring. However, during such period only proceedings where the company under restructure is defendant or respondent could be suspended, not those where the company is petitioner or claimant, as it happens in the case at hand.
8. In any event, the fact that a commercial company is in a situation of insolvency or under insolvency proceedings does not mean that it does not have the financial means to bear the costs of an arbitration proceeding. Further, even in cases of insolvency, as set out in Art. 87(2) of the I&RCode, arbitral proceedings pending at the time of the decision of the insolvency procedure will not be suspended.
9. The lack of financial means to bear the costs of litigation – judicial or arbitral – will always depend on the allegation and proof of the facts amounting to such a situation, which has not even been done in this case. Our law does not provide for this specific situation, except the special case of the suspension of the arbitration agreement in the particular case of insolvency. The law does not allow the court either to forfeit the enforcement of the arbitration clause. According to Art. 21(1) of the Portuguese Arbitration Act, the court judge is obliged to dismiss the judicial lawsuit if the defendant invokes an arbitration agreement.
10. The Constitution of the Portuguese Republic provides for other means of solving disputes other than judicial courts, such as the case of arbitral tribunals (Art. 209(2) of the CPR), which means that the state forfeits its monopoly on the administration of justice, granting private entities the power to solve the dispute, and setting forth that the decisions made therein are subject to direct enforcement (Art. 705(2) of the Code of Civil Procedure).