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Lizardi rule and arbitration

2009 March 19
by Hein Kernkamp

Defence Industries Organisation of the Ministry of Defence and support for Armed Forces of the Islamic Republic of Iran v. International Military Services Limited

Court: Netherlands Supreme Court

Date: January 28th, 2005

LJN number: AR3645

Case: In 1978, the parties entered into a turn key agreement for the construction of a combat vehicles maintainance facility for the price of GBP 84.82 million. The parties agreed in writing to submit disputes to ICC Arbitration. Later IMS cancelled the contract due to non-payment by DIO and initiated arbitration proceedings against DIO in which it claimed damages. The arbitration took place in The Hague. The arbitrators rendered an award against DIO, condemning it to pay GBP 4.5 million plus costs and interest. DIO subsequently asked the Court of The Hague to quash the arbitral award, which it did. The decision of the Court of The Hague was then reversed by the Court of Appeal in the Hague. The Court of Appeal ruled that it is an internationally recognized rule that a government or governmental body cannot rely on its national law to invalidate an agreement of international arbitration and that the IMS acted in good faith as to the capacity of DIO to enter into the arbitration agreement. Before the Supreme Court of The Netherlands DIO once again argued that the arbitration agreement was invalid because Art. 130 of the Iranian Constitution stipulates arbitration agreements between government bodies and foreign parties shall only be valid if approved by Parliament. This approval has never been given. Moreover, under the articles of association of DIO, similar agreements need previous approval from DIO's board of directors and should be signed by DIO's managing director, which formalities have never been met.

Held: The Netherlands Supreme Court refers to a 1861 decision of the French Cour de Cassation in the Lizardi case, where a juvenile Mexican who would be an adult under French law bought for a furtune of jewels in Paris, but when it came to payment he declined, relying on his lack on capacity under Mexican law. The French Cour de Cassation ruled that a party cannot rely on its lack of capacity, where the other party cold legitimately have been unaware of that incapacity. With respect of capacity, the rule now appears in Article 11 of the 1980 Rome Convention on the Law Applicable to Contractual Obliations. The unwritten Lizardi rule nowadays extends to a party's absence of power and forms part of Dutch Private International Law. The Netherlands Supreme Court ruled that the Court of Appeal was correct where it decided that DIO could not rely on its lack of capacity, the ruling being implicitly based on the assumption that IMS could legitimately have believed in the capacity of power of the signatory of the arbitration agreement.

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