Arbitrability and its application in Portugal

Can a dispute between two parties be decided by a non-state tribunal? The answer to this question depends on whether the dispute is arbitrable or non-arbitrable. When we speak of arbitrability, we are referring to the possibility of a particular dispute being examined and decided by an arbitral tribunal rather than being analysed and decided by a state court.

The requirement of arbitrability is generally present throughout the entire life cycle of an arbitration: from the outset, in the arbitration agreement (as a validity requirement), through to the end, at the award stage (as a ground for setting aside the award and an obstacle to its enforcement).

As arbitration is an alternative means of dispute resolution based on party autonomy, it is normal and desirable for the legislator to establish certain mandatory and non-waivable limits and principles. Arbitrability constitutes one of those limits, allowing the legislator to determine which disputes may be removed from the jurisdiction of judges and entrusted to arbitrators. More or less restrictive arbitrability criteria make it possible to identify legal systems that are more or less favourable to arbitration.

Voluntary arbitration in Portugal is governed by Law No. 63/2011 of 14 December, the Voluntary Arbitration Law (VAL), which sought to transpose the UNCITRAL Model Law (1985, as amended in 2006) into the Portuguese legal system and thereby adopt a regime aligned with the legal framework of countries with a strong arbitral tradition.

The VAL established proprietary rights and the possibility of settlement as criteria for arbitrability: a dispute is arbitrable insofar as it concerns interests of an economic nature (i.e. interests that can be assessed in monetary terms) and is not subject exclusively to the jurisdiction of state courts or mandatory arbitration; a dispute that does not involve interests of an economic nature is also arbitrable, provided that the parties are able to enter into a settlement regarding the disputed right (i.e. provided that it concerns rights over which the parties may freely dispose and does not relate to unlawful transactions).

The private or public nature of the parties to the arbitration agreement is irrelevant from the perspective of arbitrability because, as a general rule, any natural or legal person with the capacity to enter into contracts may conclude an arbitration agreement. Under the VAL, the State and other public legal entities may be parties to arbitration agreements, provided that they are authorised by law or where the dispute concerns matters of private law.

In Portugal, arbitral proceedings may therefore be found in matters as diverse as disputes relating to company acquisitions, construction contracts, public service concessions, consumer issues, corporate disputes, among others.

Furthermore, the VAL also provides that the parties may submit to arbitration, in addition to contentious matters in the strict sense, other matters requiring the intervention of an impartial decision-maker, particularly those relating to the need to review long-term contractual arrangements.

It may therefore be concluded that, in Portugal, the legislator has chosen to encourage recourse to arbitration by defining arbitrability in such broad terms.

However, that same legislator has not dispensed with creating mechanisms to control how the parties apply this requirement. Firstly, an arbitration agreement is null and void if its subject matter concerns non-arbitrable disputes. Secondly, an award rendered on the basis of a null arbitration agreement may be challenged through setting-aside proceedings and may also constitute grounds for opposing its enforcement.

The arbitration agreement is often described as the midnight clause, as it is frequently negotiated at the last moment, without much care or time for analysis, copied from other contracts without due consideration and adaptation to the specific case. One of the risks associated with this last-minute clause is defining as arbitrable a dispute that is in fact not arbitrable, thereby compromising the validity and effectiveness of the entire arbitration. Care must therefore be exercised in the drafting, interpretation and application of the arbitration agreement.

The VAL does not provide for public policy as a criterion of arbitrability. However, an arbitral award that violates the principles of Portuguese international public policy may be set aside.

In the context of international arbitration, the VAL provides that an award rendered in an international arbitration subject to non-Portuguese law may be set aside if it leads to a result that is manifestly incompatible with the principles of international public policy. Similarly, recognition of foreign arbitral awards may be refused on the grounds that they violate the international public policy of the Portuguese State.

Disputes involving third parties who are not party to the arbitration agreement cannot, in principle, be decided by an arbitral tribunal. Indeed, as arbitration is based on an agreement of wills, the arbitration agreement is binding only upon its parties.

The existence of third parties does not make the dispute between the parties to the arbitration agreement non-arbitrable, but the arbitration will be limited to those parties.

However, practice has shown that disputes often arise between signatories to an arbitration agreement and third parties, and there is a clear interest in having those disputes decided by a single tribunal in a single set of proceedings. Examples include disputes involving employers, contractors and subcontractors, or disputes involving groups of companies.

Under the VAL, the intervention of such third parties in arbitration depends on the consent of all parties and their acceptance of the tribunal’s composition.

It is important to distinguish cases involving the participation of third parties in arbitration from situations in which it may be said that those third parties are not, in fact, third parties, but should instead be regarded as parties to the arbitration agreement. This may occur in situations involving the piercing of the corporate veil or the extension of the arbitration agreement.

Here too, the hasty and rushed negotiation of an arbitration clause may jeopardise the success of arbitral proceedings, rendering a dispute non-arbitrable from a practical perspective: if it is not possible to include all parties to the dispute within the arbitration proceedings, the parties may be faced with a futile process that resolves nothing or provides little value to the signatories of the arbitration agreement.