A. LEGISLATION AND RULES
A.1 Legislation
A.1.1. No new legislative amendments to the New Code of Civil Procedure in relation to arbitration
International arbitration continues to be governed by article 1224 to 1249 of the New Code of Civil Procedure (NCCP), second part, book III, title I. These provisions were introduced by the law of 19 April 2023 revising the NCCP Title on Arbitrations with the aim of reforming arbitration in Luxembourg. This law entered into force on 25 April 2023 and reflects a well-established national policy strongly favoring arbitration as an alternative dispute resolution mechanism.
A.1.2. Luxembourg has effectively withdrawn from the Energy Charter Treaty since 17 June 2024
On 17 June 2024, the Grand Duchy of Luxembourg has officially withdrawn from the Energy Charter Treaty (ECT) to which it was a contracting party for over 26 years. The ECT is a multilateral investment treaty which provides a framework for international cooperation in the energy sector between contracting states. To this end, the treaty incorporates substantive investment protection provisions, including an offer to arbitrate investment disputes between states and foreign investors.
Along with some other contracting states, Luxembourg criticized the ECT as being too investor-friendly and for undermining the state policy initiatives to promote the transition to greener economies. To address the criticism, a modernization process of the ECT was initiated but some of the contracting states expressed discomfort with the result of the modernized version of the ECT. In June 2023, the Luxembourg government triggered the process to withdraw from the ECT, stating that the revised ECT test was not aligned with Luxembourg’s energy commitments. According to the energy minister, the treaty was still not compatible with the goals of the Paris Climate Agreement[1] to which Luxembourg is a contracting party, and the European Green Deal[2].
A second reason of the Luxembourg’s withdrawal is the conflict that arises from intra-European Union (“intra-EU“) claims under the ECT. Since 2 September 2021, and the Komstroy decision[3], the Court of Justice of the European Union has found that intra-EU ECT-based arbitration infringed EU law, making clear that the latter overrides EU member states’ obligations under the ECT.
However, while arbitral tribunals have faced many objections based on intra-EU claims, many arbitral tribunals have continued to maintain their jurisdiction over these intra-EU disputes. Primarily, they found that their competence derives from an international treaty and are therefore subject to public international law.
Similarly, growing tensions in the recognition and enforcement of intra-EU awards the ECT were observed. For instance, in a judgment dated 3 April 2024, the Swiss Supreme Court rejected Spain’s challenge of the jurisdiction of the arbitral tribunal. First, the Supreme Court ruled that the Komstroy decision does not bind the Swiss courts since Switzerland is a not a member state of the EU. Then, the Supreme Court found that article 26 ECT (dispute settlement provision) encompassed intra-EU disputes according to public international law. It held that the language of article 26 ECT was clear and the consent of the ECT contracting parties to arbitration was unconditional apart from the exceptions exhaustively listed in the ECT. None of these exceptions involved intra-EU disputes.
Therefore, to avoid legal uncertainty, Luxembourg withdrew from the ECT.
A.2 Institutions, rules, and infrastructure
Arbitration proceedings continue to be governed by the Luxembourg Arbitration Centre Rules of Arbitration which entered into force on 1 January 2020.
B. CASES
B.1 Luxembourg case law on arbitration
B.1.1. An arbitration clause contained in a contract does not apply to a dispute arising out of a more specific related contract which contained a jurisdiction clause
In a decision dated 24 October 2023[4], the Court of Appeal held that an arbitration clause contained in a shareholder agreement does not prevail over a jurisdiction clause contained in a loan agreement concluded under the first agreement and from which the dispute arose.
In the context of the acquisition of a German company (“German Company 1“), another German company (“German Company 2” or “Shareholder“) acquired a stake in the capital of a Luxembourg company (“Lux Company“). The latter was set up for the very purpose of this acquisition and the shareholders of the Lux Company entered into a shareholder and investment agreement (“Shareholder Agreement“). Under this agreement, the shareholders agreed to finance the acquisition by shareholder loans of EUR 102,870,755.83 and included an arbitration clause to settle any disputes arising out of, or in connection with it.
On 7 November 2019, German Company 2 entered into a Shareholder Loan Agreement (“Loan Agreement“) with the Lux Company for a loan in an amount of EUR 7,413,612.87. Unlike the Shareholder Agreement, the Loan Agreement contained a jurisdiction clause granting exclusive jurisdiction to the Luxembourg court.
On 20 January 2021, German Company 2 sent the Lux Company a formal notice requesting the payment of accrued and unpaid interest of the loan.
On 5 March 2021, German Company 2 notified the Lux Company of the occurrence of an event of default and filed a petition with the District Court of Luxembourg claiming the payment of the interest due in an amount of EUR 8,038,244.70. The District Court awarded the damages claimed to the German Company 2.
The Lux Company appealed the first instance judgment. As in the proceedings before the lower court, it challenged the competence of the Court of Appeal on the ground that the dispute should be settled by arbitration. The Lux Company contended that the loan granted by German Company 2 was part of a broader transaction consisting of the acquisition of German Company 1. In this context, the shareholders concluded a Shareholder Agreement that contained an arbitration clause, and this clause should also apply to any disputes arising out of related contracts, such as the Loan Agreement in dispute.
The Court of Appeal rejected the grounds advanced by the Lux Company and held that the Loan Agreement was a specific and separate contract under which the Lux Company and the German Company 2 expressly agreed to grant authority to the Luxembourg court over any disputes arising out of or connected to this contract. In addition, the court found that the parties entered into the Loan Agreement after the conclusion of the Shareholder Agreement.
Therefore, the Court of Appeal upheld jurisdiction on the matter notwithstanding the existing arbitration clause in the Shareholder Agreement.
B.1.2. When the same agreement contains an arbitration clause and a jurisdiction clause, both clauses are invalid
In a judgment dated 9 February 2024[5], the District Court of Luxembourg ruled that when an arbitration clause is in opposition with a jurisdiction clause contained in the same agreement, they are both invalid since the intent of the parties is difficult to determine. Instead, the domestic rules governing the jurisdiction of courts apply.
On 3 June 2020, two companies entered into a service contract to carry out the demolition and the reconstruction of a building. The contract included a dispute resolution clause (article 14). Article 14.2 provided that the parties agreed that any disputes arising out of or in connection with the present contract should be finally settled by arbitration. However, article 14.1 stated that in case of a dispute, the Luxembourg courts had exclusive jurisdiction.
A dispute arose between the parties. The construction company filed a petition before the Luxembourg court against its counterparty requesting the payment of the invoices for the demolition and reconstruction works. The counterparty challenged the competence of the Luxembourg court on the ground that the parties agreed to settle their disputes by arbitration. The Luxembourg court held that since the same contract contained an arbitration clause and a jurisdiction clause, both clauses were deemed invalid. The court was unable to determine whether the parties intended to submit their dispute to arbitration or to Luxembourg courts since both clauses were signed in the initial contract.
As a result, the Luxembourg court applied the domestic rules on jurisdiction to uphold whether it has authority to decide on the contract’s issue.
B.2 Luxembourg as a party of arbitration proceedings
B.2.1. The Grand Duchy of Luxembourg has instituted an arbitration proceeding against Mexico regarding the detention of a vessel flying the flag of Luxembourg
While Luxembourg is a landlocked country, its flag is used by many maritime companies to their benefits.
On 3 June 2024, Luxembourg filed an arbitration request with the International Tribunal for the Law of the Sea against Mexico regarding the unlawful detention of a vessel, the Zheng He, flying the flag of Luxembourg[6].
The Zheng He is a dredger owned by European Dredging Company SA (EDC), a Luxembourg company.
On 11 October 2023, the Zheng He arrived in Tampico, Mexico. On 17 October 2023, while waiting in the anchorage area, the EDC’s agent requested the port authorities an authorization to dock the vessel in the port for a period of approximately 3 or 4 weeks. On 21 October 2023, the authorization was given. On 1 November 2023, the Northeast Regional Office of the Foreign Trade Audit Administration of Mexico (ADACEN) conducted an on-board inspection of the Zheng He and carried out a seizure of the vessel. Luxembourg claimed that the ADACEN seized the vessel on the grounds that it “should be considered as a commodity whose entry in Mexican territory was treated as an import.” By contrast, Mexico contended that, during the board inspection, neither the ADACEN nor its agent “presented customs documentation demonstrating the legal importation, stay, and possession of the Zheng He in national territory, in contravention of the Mexican Customs Law”. On 15 February 2024, ADACEN issued an order (i) fixing the total amount of the tax debt of EDC at MXN 1,616,462,343.63 (ii) and the definitive seizure of Zheng He.
In the meantime, on 22 March 2024, the Tampico District Court issued a judgment on proceedings instituted by EDC, holding that “the customs proceedings against Zheng He were null and void”. The court added that the decision had become final as ADACEN did not appeal in compliance with the statute of limitations. Mexico contested these points.
The dispute arising between Luxembourg and Mexico is centered around whether the detention by the Mexican authorities of the Zheng He was lawful under the United Nation Convention on the Law Of the Sea (UNCLOS) regarding the exercise by foreign-flagged vessels of navigational rights and freedoms, and the obligation of states to exercise the right, jurisdiction and freedoms recognized in UNCLOS in a manner that does not constitute an abuse of right[7].
According to Luxembourg, the detention of the Zheng He in the context of the customs proceedings brought against it in an abusive manner by the Mexican authorities (which continues despite the definitive annulment of the proceedings and the protests of Luxembourg), infringes specific provisions of UNCLOS but also the rules of international law which are compatible with and even complementary to UNCLOS[8]. Luxembourg relies on article 131 of the UNCLOS and the equal treatment in maritime ports for landlocked states which provides that: “Ships flying the flag of land-locked States shall enjoy treatment equal to that accorded to other foreign ships in maritime ports”.
While the International Tribunal for the Law of the Sea has not yet issued its final award, it rendered an order on the request for the prescription of provisional measures. In this order, the arbitral tribunal found its jurisdiction on the case as prima facie and dismissed the challenge to its competence as raised by Mexico.
First, Mexico contended that the requirements under article 283 of the UNCLOS[9] were not met since the parties did not exchange their views regarding the settlement of the dispute by peaceful means. Mexico asserted that the exchanges with Luxembourg only referred to the seizure of the vessel, they never involved the unequal treatment. The tribunal rejected the argument on the ground that Luxembourg was not obliged to continue to exchange their views and concluded that the possibilities of reaching agreement had been exhausted.
Second, Mexico contended that Luxembourg did not exhaust local remedies available in Mexico before filing its request to an international arbitral tribunal. Luxembourg specified that Mexico was attempting to introduce a new condition of exhaustion of domestic remedies, which was not applicable to the present proceedings. In fact, according to Luxembourg’s views, article 295 of the UNCLOS required exhaustion of domestic remedies only when this was required under international law. In contrast, here, the remedy involved direct violation of rights which the flag state held under the UNCLOS. The tribunal referred this question to be analyzed at a later stage of the proceedings.
The tribunal found that it had prima facie jurisdiction over the dispute.
Then, the tribunal examined the Luxembourg request for provisional measures but denied them on the ground that there was no real and imminent risk of irreparable harm to the rights claimed by Luxembourg. In relation to this, it noted the assurances given by Mexico during the proceedings, including its commitment regarding the protection of the mental health of the Zheng He crew, its commitment to answer any request for information made by Luxembourg, and its commitment to safeguard the integrity of the vessel, allowing maintenance work on the Zheng He.
B.2.2. Luxembourg is facing its first investment treaty claim filed over the state’s decision to freeze Mr. Mikhael Fridman’s assets.
In August 2024, a Russian oligarch, Mikhael Fridman, filed an UNCITRAL request for arbitration under the Belgium-Luxembourg Economic Union’s 1989 bilateral investment treaty concluded with the Union of Soviet Socialist Republics (BIT).
Following Russia’s invasion of Ukraine, the European Union adopted a range of sanctions against personalities reputed to be close to the president of Russia, Vladimir Putin. These included Mikhael Fridman, who owned numerous assets in Luxembourg. His assets were frozen since he was listed as an individual who supported financially actions which undermine or threaten the territorial integrity, sovereignty, and independence of Ukraine.
However, on 10 April 2024, the Court of Justice of the European Union (CJEU) ruled that Mikhael Fridman had been unjustifiably placed on the list of persons subject to sanctions by the Council of the European Union. The CJEU did not order the unfreezing of M. Fridman’s assets, and the Council of the European Union did not vote unanimously for it.
Mr. Fridman filed an arbitration claim against Luxembourg, with the intent to recover his assets, asserting that he suffered irreparable harm due to the sanctions. In particular, he pointed out that his company was forced out of business after the Luxembourg financial regulatory authority denied it an investment license following the sanctions.
According to him, as Luxembourg voted for and implemented the sanctions while other EU member states did not, it breached the BIT’s fair and equitable treatment standard and protections relating to non-impairment and free transfer of investments.
As a matter of interest, Mikhael Fridman suggested that the UNCITRAL arbitration took place in Hong Kong. No European seat was proposed, and this can be explained by the fact that a seat in an EU member state would have been connected to the EU sanctions and could affect the final award.
[1] The Paris Agreement is a legally binding international treaty on climate change, adopted on November 4, 2016 by 196 Parties. According to its article 2, its goal is to “hold the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change”.
[2] According to the European Council, the European Green Deal aims to create a cleaner, healthier and climate-neutral Europe. It sets up the policy and strategy to make the EU the first climate-neutral area in the world by 2050, to cut pollution and restore a healthy balance in nature and ecosystems.
[3] CJEU, C-741/19, Komstroy v. Moldova, 2 September 2021.
[4] Court of Appeal, No. CAL-2022-00282 of the docket, 24 October 2023
[5] Trib. Arr. Lux., No. TAL-2021-07789 of the docket, 9 February 2024.
[6] International Tribunal for the Law of the Sea, The “ZhenG He” case, Luxembourg v. Mexico, Order on the request for the prescription of provisional measures, 27 July 2024.
[7] Application instituting proceedings brought by Luxembourg before the international tribunal for the law of the sea.
[8] Idem.
[9] Article 283 paragraph 1 states that : “When a dispute arises between States Parties concerning the interpretation or application of this Convention, the parties to the dispute shall proceed expeditiously to an exchange of views regarding its settlement by negotiation of other peaceful means”.
