The new Arbitration Act 2023 marks Luxembourg's return as a centre of international arbitration

Luxembourg prides itself on offering a competitive and liberal legal framework that fosters business. One area, however, where Luxembourg in the past could not take pride was its archaic arbitration law. This has now been rectified with the 19 April passage of the Arbitration Act 2023 that reforms the nation's arbitration law and establishes a modern, simple and complete legal framework, heavily influenced by French international arbitration law and the UNCITRAL Model Law.

Background

Prior to the Arbitration Act 2023, the rules governing arbitration in Luxembourg dated for the most part from 1806 when the Napoleonic Code of Civil Procedure was enacted. Some key reforms took place, in particular in 1939 when the validity of arbitration clauses was recognised, and in 1981 with the modernisation of the rules governing the annulment and recognition of arbitral awards. Luxembourg also ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1983.

However, Luxembourg had largely failed to adopt a competitive legislative framework in support of arbitration. It was acknowledged by the Luxembourg Conseil d’ Etat in as early as 1981 that Luxembourg was unable to capitalise on its numerous advantages, including economic and political stability, multilingualism, and the large number of legal practitioners accustomed to dealing with international matters, and develop into a choice place for arbitration.

To pave the way for the modernisation of Luxembourg arbitration law, a think tank made up of academics, judges and practitioners was created in 2013. It compared legislation from various jurisdictions and the UNCITRAL Model Law and considered the rules of arbitration of the most recognised arbitration institutions in order to identify the pros and cons of these models.

This work led the Luxembourg government to include, in the governmental programme for 2018-2023, a promise to modernise Luxembourg arbitration law. A draft bill to that effect was introduced in 2020.

The authors of the draft bill were transparent about the objectives for reform:

• The first was to make sure that the approach and concepts of the new system was coherent with existing sets of rules, which are internationally recognised and have proven to be effective. In this regard, the authors of the draft bill copied entire articles from French international arbitration law and the UNCITRAL Model Law, indicating when the wording of the draft bill departs from these rules and why. One clear advantage of this method is to limit the uncertainty arising from the introduction of an entirely new set of rules, as Luxembourg courts and arbitral tribunals will be able to refer, where appropriate, to existing case-law and doctrine, even when foreign and not binding.¹
• The second was to strike a balance between a liberal system favourable to arbitration and the protection of weaker parties. Certain types of disputes such as those concerning consumer protection, employment matters, and residential leases are therefore non-arbitrable.  
• The third was to reject the distinction made in French law between international and domestic arbitration.

We will not review here all the features of the Arbitration Act 2023 but instead focus on the scope of intervention of the Luxembourg judicial courts in the arbitration process.

The “compétence-compétence” principle

One noteworthy addition of the Arbitration Act 2023 is the introduction of the French law principle of “competence-competence”. As in French law, this principle has a positive effect in that the arbitral tribunal can rule on its own jurisdiction, including in relation to the existence or validity of the arbitration agreement. It also has a negative effect. A court seized with a dispute covered by an arbitration agreement must decline jurisdiction, although there are limited exceptions.

These exceptions include where the arbitration agreement is invalid as a result of the non-arbitrability of the subject matter or where, for any other reason, it is manifestly null or inapplicable. Contrary to French law, the composition of the arbitral tribunal is not an obstacle to a Luxembourg court finding that it has jurisdiction on the basis of this exception.

Another exception relates to interim measures (of a probational, provisional or conservatory nature) where the arbitral tribunal has not yet been composed or where the arbitral tribunal is unable for any reason to make such orders (e.g. third-party attachment measures).

“Juge d’appui”

Also imported from France, the “juge d’appui” or supporting judge has jurisdiction to resolve procedural difficulties arising from the arbitration process.

The Luxembourg juge d’appui² will have jurisdiction where the seat of arbitration is in Luxembourg or, if no seat was agreed upon, where (i) the parties have elected Luxembourg procedural law to govern the arbitration process; (ii) the parties have conferred jurisdiction to Luxembourg judicial courts to resolve disputes relating to the arbitration process; or (iii) there is a significant connection with Luxembourg, such as where the defendant has its seat in Luxembourg or where the place of performance of the contract is Luxembourg. The juge d’appui will also have jurisdiction in any case where there is a risk that justice may be denied.

Its jurisdiction extends to disputes relating to the appointment and recusation of arbitrators, the extension of the time limit for the award to be made (for these, the juge d’appui will only have jurisdiction if the arbitration institution does not intervene) and to ordering (upon invitation of the arbitral tribunal) a third party to disclose evidence.

Challenging arbitral awards made in Luxembourg

The only recourse before the Luxembourg courts available to the parties against an award made in Luxembourg is the action for annulment.³ It is available as soon as the award is issued and within one month of its due service/notification. An annulment will only be granted if:

• the arbitral tribunal has wrongly declared itself competent or incompetent;
• the arbitral tribunal was improperly constituted;
• the arbitral tribunal has ruled without complying with its terms of reference;
• the award is contrary to public policy;
• the award is not reasoned, unless the parties have exempted the arbitrators from giving reasons; or
• there has been a violation of the rights of the defence.

Under the previous regime, this action for annulment was brought before the District Court and was subject to an appeal. It also had a suspensive effect, meaning that the award was not enforceable during this procedure. This action is now brought directly before the Court of Appeal with no appeal available. In addition, it does not suspend the enforceability of the award unless the Court of Appeal specifically orders such suspension upon request of the Claimant.

A recourse named “tierce-opposition” is, however, available to persons who were not parties to the arbitration but who were negatively impacted by the arbitral award. It is brought before the court, which would have had jurisdiction if no arbitration had taken place.

Enforcement of foreign awards in Luxembourg

Arbitral awards made in Luxembourg or abroad are recognised and enforceable in Luxembourg only after having received the “exequatur” by an order of the President of the competent District Court sought on an ex-parte basis. This can usually be obtained in a matter of days.

Regarding foreign awards, the only available recourse for the party resisting enforcement is an appeal against the exequatur order.

The Arbitration Act 2023 also provides for limited grounds for denying the exequatur whether at the level of the application for exequatur or at the appeal level, although these provisions remain subject to the application of the New York Convention to which Luxembourg is a party and which therefore applies in most cases.

Conclusion

The success of Luxembourg as a seat of arbitration is not something that can be legislated. This Arbitration Act 2023, however, removes most legal obstacles to this success and strongly enhances the attractiveness of arbitration in Luxembourg by reinforcing the enforceability of awards made in Luxembourg.

Nonetheless, the choice between commercial arbitration and litigation is also a question of balance between time, cost, and confidentiality on which the Arbitration Act 2023 has little to no impact.

Litigation has traditionally been the preferred choice for resolving disputes in Luxembourg in most situations, mostly due to the low cost of litigation.

One factor that could tip the scale is the increasing complexity of commercial disputes in Luxembourg, which is proportionally related to the increasing complexity of regulations and business/financial practices.

Luxembourg courts often struggle to deal with these highly complex disputes, resulting in situations where both the process and the outcome can be frustrating for litigants (and the judges).

The development of arbitration in Luxembourg is inevitable for high-stakes complex commercial disputes.

¹ Under Luxembourg law, there is no concept of a binding precedent.

² By default, this will be the President of the District Court of Luxembourg City, unless the parties have specifically elected the President of the District Court of Diekirch for the role.

³ There is also the possibility of making an application for a review of the award (recours en révision), which is brought before the arbitral tribunal but, if such arbitral tribunal cannot be re-composed, can be brought before the Court of Appeal. The scope of such recourse is, however, limited to instances of (i) fraud, if revealed after the award is made; (ii) the discovery of crucial evidence undisclosed by the other party; and (iii) where evidence or testimonies are judicially declared as false after the award is made.