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Hidden Impediments Await Foreign Parties Seeking to Enforce Arbitral Awards in Kazakhstan

Kluwer Arbitration Blog - 1 hour 53 min ago

The overwhelming weight of opinion among legal practitioners is that enforcement of foreign arbitral awards in Kazakhstan is theoretically possible under the New York Convention (“NY Convention”), albeit problematic in practice due to ambiguity in the Kazakh legislations. Many problems associated with the recognition and enforcement of foreign arbitral awards in Kazakhstan and the application of the NY Convention have already been discussed by Kazakh legal scholars. However, existing research works on such topics are often dated.

This post aims to familiarise foreign parties with up-to-date laws and procedures of the enforcement of arbitral awards in Kazakhstan, and thus identify the most prevalent impediments which await foreign parties seeking enforcement of arbitral awards in Kazakhstan. Three major issues in this regard are discussed: 1) status of the NY Convention in Kazakhstan; 2) inconsistences with the NY Convention; and 3) public policy as a ground to refuse enforcement.

 

Status of the NY Convention in Kazakhstan

Kazakhstan joined the NY Convention by Presidential Decree-No-2485 dated 4 October 1995. In accordance with Article 4(3) of the Kazakh Constitution, international agreements ratified by Kazakhstan should take priority over its domestic laws and should be implemented directly.

Kazakhstan has acceded to but has not ratified the NY Convention. In this regard, there are divergent opinions between Kazakh lawyers about the application of the NY Convention within Kazakhstan’s legislative framework. One school of thought is that the NY Convention only has the status of non-ratified treaties under the Kazakh Constitution and has no priority over municipal law. Due to the lack of ratification, Kazakhstan should execute foreign arbitral awards only on the basis of reciprocity.

The other school of thought is that the Convention arguably still applies through direct implementation as its status is equal to that of the enacting decree. According to Article 1(7) of the ‘On-Legal-Acts’ law, the definition of ‘legislation’ includes all normative legal acts adopted regarding established procedure. Thus, the decree and the NY Convention form a part of the national legislations, which in turn permit the recognition and enforcement of foreign arbitral awards in accordance with Article 501 of the Kazakh Civil Procedure Code (“CPC”).

From an international legal perspective, Kazakhstan is bound to observe its obligations under the NY Convention and cannot plead a conflict with domestic laws to escape from such obligations. The practical effect is that, where an arbitral award has been lawfully rendered in a third country and is thereafter brought in Kazakhstan for enforcement, Kazakh courts cannot refuse enforcement on the basis that the NY Convention contravene domestic laws, for this may entail breach of state as well as contractual responsibility by Kazakhstan. There appear to be no previous cases of refusal to issue a writ of execution in Kazakh courts on the ground of lack of ratification of the NY Convention. Therefore, it can be understood that the Kazakh courts consider the NY Convention to be valid and binding in Kazakhstan.

 

Inconsistencies with the NY Convention

As Kazakhstan is a signatory of the NY Convention, provisions of the CPC and the Law on Arbitration should align with the NY Convention. In this regard, the grounds for refusal of recognition and enforcement of arbitral awards provided in Article V of the NY Convention are listed in Article 255 of the CPC and Article 57 of the Law on Arbitration.

However, there is a difference between the wording in Article V of the NY Convention and Article 255 of the CPC, and that in Article 57 of the Law on Arbitration. This creates ambiguity on the scope of judicial discretion. Under the NY Convention, the enforcing court is not obliged to refuse enforcement even if it is satisfied that the recognition or enforcement of the award would be contrary to the national public policy. This is reflected by the employment of permissive wording of “may” in Article V of the NY Convention. Therefore, national courts have discretion to enforce the award even if a ground for refusal is established. However, provisions of Kazakh law are mandatory and Article 52(2) of the Law on Arbitration obliges the court to reject an application for enforcement in the event of conflict with Kazakh public policy. As such, it is arguable that the grounds for refusal of recognition and enforcement of arbitral awards under national laws are inconsistent with the grounds under the NY Convention.

Further Article 51 of the Law on Arbitration provides an additional ground to revise an arbitral award based on the discovery of new facts. Under Article 51(1), a party is entitled to apply for an award to be reviewed if the Kazakh Constitutional Council finds that the legislation applied by the arbitral tribunal in writing its award is unconstitutional. Article 51(2) provides that an application for revision of an arbitral award under Article 51(1) shall be filed and considered by the arbitral tribunal that rendered the award, within three months from the date of the establishment of facts constituting a ground for revising the award, unless another timeline is established by the rules or agreement of the parties. This provision is problematic because the Kazakh courts appear to have substantial discretion to revise arbitral awards, thereby giving rise to doubts as to whether an arbitral award is indeed final and binding on the parties.

 

Public Policy as a Ground to Refuse Enforcement

The broad and inconsistent interpretation of public policy adopted by the Kazakh courts has caused many problems in practice since the enactment of the Law on Arbitration in 2016.

The principles of public order are accounted for in the general provisions and Section II on ‘Person-and-Citizen’ of the Kazakh Constitution. Further, Article 2(1) of Law on Arbitration defines public policy as the fundamentals of law and order which are enshrined in the legislative acts of Kazakhstan, while Article 1090(2) of Kazakh Civil Code and the Law on Arbitration shed light on the principles of ‘public policy’.

Although the general definition of public policy is provided by Kazakh law, its precise application remains unclear and judges are granted discretion when assessing this ground. In this respect, two observations may be made:

  1. If other grounds for refusal have failed, the party resisting enforcement often misuses the public policy ground; and
  2. Some courts have annulled arbitral awards on public policy ground on the basis of contradiction of the ‘rule of law’, which might not be accurate as reflected in the 2017 ruling of the Supreme Court of Kazakhstan discussed below.

Until the Supreme Court resolved it with its ruling in 2017, the lower courts of Kazakhstan often applied a broad and inconsistent interpretation of public policy.

In one case, a Chinese company entered into a preliminary agreement with a Panamanian company in which Kazakh businessmen were involved, for the purchase of subsoil use rights for two gold mines. In such case, the Specialized Inter-District Economic Court of Almaty city (“SIDEC”) referred to Article 52 of the Law on Arbitration in its decision and found the award violated public order.

On 10 August 2016, the Civil Division of Astana City Court (“Appeal Court”) upheld the decision issued by SIDEC. The Appeal Court considered public policy as the basis of the rule of law embodied in the legislation of Kazakhstan and that the fundamental principle of the entire legal system of Kazakhstan is based on the principle of legality. As such, the Appeal Court appears to have applied the repealed principle of legality under the former arbitration law “On Arbitration Courts” which is arguably incorrect.

However, on 16 May 2017 the Supreme Court of Kazakhstan reversed the lower courts’ rulings because it concluded that the lower courts were guided by an inaccurate interpretation of public policy. The Supreme Court gave the following recommendation to lower courts in the Recommendations of the Round Table on Application of the Law on Arbitration:

“It should be noted that the application of the ground of public policy is possible only in exceptional cases where the enforcement of an arbitral award offends the basis of the public policy of the RoK. In connection with the foregoing, the courts when annulling arbitral awards on such ground, should explain which specific public policy is violated and how.”1)Translation provided by the author. jQuery("#footnote_plugin_tooltip_9109_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9109_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Recommendations

To resolve the legal ambiguities discussed above, it is recommended that: 1) the status of the NY Convention within the Kazakh legal system be clarified; 2) the inconsistences between the NY Convention and Articles 255 and 57 of the CPC and the Law on Arbitration be regularised; 3) legal practices of enforcement and recognition of foreign arbitral awards be standardised; and 4) explanatory notes concerning the public policy ground are formulated for judges.

References   [ + ]

1. ↑ Translation provided by the author. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Moving US Courts Online

ADR Prof Blog - Tue, 2020-03-31 14:43
From my colleague, Amy Schmitz, forwarding (with permission) information about how courts are responding to the crisis: Paul Embley with the National Center for State Courts put together this nice synopsis on some things happening here in the U.S. with respect to courts moving online.  It is amazing how individuals have had to work together … Continue reading Moving US Courts Online →

Ireland Reflections 2020–Border Tours & Femanagh

ADR Prof Blog - Tue, 2020-03-31 09:48
While Tuesday gave us a pretty clear view of the Troubles from the perspective of the Catholic community, Wednesday was the opposite and brought us face to face with the pain of the Protestants in Northern Ireland. A quick two-hour bus ride out of Belfast led us to the office of the South East Fermanagh … Continue reading Ireland Reflections 2020–Border Tours & Femanagh →

A Right Without a Remedy? The Recent US Decision to Not Enforce the Shell/Exxon Award

Kluwer Arbitration Blog - Tue, 2020-03-31 05:00

On September 4, 2019, Esso, a subsidiary of the Exxon Mobil Corporation, and Shell Nigeria, a subsidiary of the Shell Oil Company (collectively “Esso”), attempted to enforce a $1.799 billion arbitral award in the U.S. District Court for the Southern District of New York after it had been annulled in the courts of Nigeria (Esso Opinion). In the arbitration proceedings, the tribunal had found that Nigeria’s state oil company, Nigerian National Petroleum Corporation (“NNPC”), had breached its oil production contract with Esso and awarded Esso the amount of the lost production. When Esso attempted to enforce the award in Nigeria, the Nigerian courts declined to enforce the award. Although the Nigerian courts recognized the tribunal’s finding that the NNPC had breached its oil production contract, it nevertheless found the calculation of damages to be a non-arbitrable issue, and therefore, unenforceable.

In response to the unfavorable outcome, Esso brought the dispute to the United States District Court for the Southern District of New York claiming that the Nigerian court did not grant it a fair process and did not properly recognize the arbitral tribunal’s award as required under the New York Convention. U.S. courts have long held themselves to be the guardians of due process and procedural protections. They are generally skeptical when a party’s liability is determined but there is no remedy to make the harmed party whole. Indeed, this ancient Roman legal maxim, ubi ius, ibi remedium (where there is a right, there is a remedy), was echoed in one of the United States’ earliest landmark cases. Marbury v. Madison, 5 U.S. 137 (1803) (“The very essence of civil liberty certainly consists in the right of every individual to claim the protection of the laws, whenever he receives an injury.”)

U.S. courts have also repeatedly espoused a pro-arbitration policy. Enforcement of annulled arbitration awards raises familiar topics in U.S. law, such as the opportunity to be heard, procedural fairness, and public policy considerations that arise from the application of foreign laws. Hence, proceedings have been brought before U.S. courts to enforce annulled arbitral awards, and international parties closely watch the results of such complex enforcement actions.

Despite the above, the U.S. District Court for the Southern District of New York declined to enforce the award. This decision seems to be at odds with Pemex, a previous U.S. Second Circuit Court of Appeals case in 2016, (discussed in detail below).

 

The Precedent: The Pemex Case

In Corporación Mexicana de Mantenimiento Integral v. Pemex Exploración y Producción, the Second Circuit enforced an award that a court in Mexico had annulled (Pemex Opinion). In annulling the award, the court in Mexico relied on a 2007 law that was passed by Mexico’s legislature while the arbitration proceedings were still ongoing. The new law vested the authority for hearing claims raising issues related to public contracts exclusively in the Mexican Tax and Administrative Court. Mexico’s legislature also made disputes like the one in Pemex non-arbitrable tax issues. Pemex had argued before the arbitral tribunal that the claims raised had turned into a non-arbitrable dispute. However, the arbitral tribunal rejected the argument and issued a final award in favor of Corporación Mexicana de Mantenimiento Integral (“Commisa”) in 2009, finding there was a breach of contract. Pemex sought to set aside the award by submitting that the new law made the dispute non-arbitrable. Mexico’s Eleventh Collegiate Court for the First Circuit annulled the award in 2011.

Commisa turned to the U.S. courts for the enforcement of the annulled award. After the Mexican court annulled the award, the Southern District of New York decided to enforce the arbitral award, and on appeal, the U.S. Second Circuit Court of Appeals found that the annulment was a procedural violation, depriving Commisa of predictability and fair process. Under the New York Convention, enforcement may be refused if the award was set aside by the courts of the seat. Nevertheless, the Second Circuit held it would be against public policy to deprive the parties of a forum to fairly hear the case and, as a result, the court granted enforcement.

 

Abandonment or Not: What Happened in Esso?

The Esso case also involved a production agreement with a state oil company. Esso claimed that NNPC had extracted more oil than their contract had allowed and therefore breached the agreement. In the arbitration, Esso alleged the NNPC engaged in the overlifting, which was purely a contractual issue. The NNPC conversely argued that the differentiation in revenue was remitted to the Nigerian tax authority and their refusal to submit the tax documents prepared by Esso made it a tax issue at its core. For some time prior to the arbitration commencing, tax issues have been held to be non-arbitrable under Nigerian law, which was the law governing the agreement. The arbitral tribunal found that the matter was contractual, however, confirming its jurisdiction to hear the matter, which resulted in a $1.799 billion award for Esso.

In proceedings both before and after the award, Nigerian trial-level courts found the underlying dispute was a tax issue and therefore non-arbitrable. The Nigerian Court of Appeals affirmed that finding. Yet, the Court of Appeals also found that the issues of liability and the related assessment of damages were contractual in nature. These issues should have been separated from the tax issue at the trial level. The Court of Appeals held not only that these were separable issues, but also if the tribunal or the trial courts had properly separated them, they would have found that liability did exist in the amount that Esso had claimed. In other words, the Court of Appeals held that there was a breach of contract, but because the damages were exclusively related to tax, an arbitral tribunal could not legally provide the remedy.

With this unfavorable outcome, Esso sought to enforce the arbitral award in the U.S. courts, emphasizing the dissonance between finding a breach of contract while denying damages due to non-arbitrability. Yet despite this troubling position, the U.S. court declined to enforce the award and thus to provide a route to damages for Esso. So what has changed? Observers of U.S. courts might be wondering whether this is a step backward in enforcing arbitral awards, siding more with the traditional litigation systems.

The court emphasized that Esso had a right to pursue the enforcement of the annulled award. Procedurally, the court held that it had jurisdiction to hear the case and had the power to enforce an annulled arbitral award. However, the New York court felt that the Nigerian courts—the chosen forum of the seat interpreting their own law—provided an adequate opportunity to be heard. Esso did have a remedy; one available through Nigerian law and through the Nigerian tax tribunals. The Nigerian decisions adhered to existing law known to the parties during the drafting of their agreement and at the commencement of arbitration.

This predictability of process distinguished Esso from Pemex: In Pemex, the retroactive law interfered with the parties’ chosen process. Here, the annulment was based on existing and well-known law in the chosen forum. Although the New York Convention permits enforcement of annulled awards, this did not warrant it. The court’s focus was on the opportunity to be heard within the confines of the forum and legal regime that the parties themselves chose.

 

Enforcement of Annulled Awards Moving Forward

The takeaway is that U.S. courts remain open to enforcement of annulled awards and to providing a forum to parties that have otherwise been deprived of a place to fairly enforce their award. This does not depart from the doctrine of pro-enforcement, but it adds nuance. Courts will continue to avoid the substantive issues, while focusing more so on weighing the procedure for fairness.

Questions remain such as whether procedure can affect the substance so much that it transcends a mere opportunity to be heard leading to the unfairness of the outcome being reviewed even if the process was predictable. That said, practitioners bringing annulled awards before U.S. courts should be comforted that the opportunity to enforce annulled awards remains, however, they should focus their petitions on the procedural nuances.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
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A Right Without a Remedy? The Recent US Decision To Not Enforce the Shell/Exxon Award

Kluwer Arbitration Blog - Tue, 2020-03-31 02:00

On September 4, 2019, a subsidiary of the Shell Oil Company, Esso, attempted to enforce a $1.799 billion arbitral award in the U.S. District Court for the Southern District of New York after it had been annulled in the courts of Nigeria (Esso Opinion). In the arbitration proceedings, the tribunal had found that Nigeria’s state oil company, Nigerian National Petroleum Corporation (“NNPC”), had breached its oil production contract with Esso and awarded Esso the amount of the lost production. When Esso attempted to enforce the award in Nigeria, the Nigerian courts declined to enforce the award. Although the Nigerian courts recognized the tribunal’s finding that the NNPC had breached its oil production contract, it nevertheless found the calculation of damages to be a non-arbitrable issue, and therefore, unenforceable.

In response to the unfavorable outcome, Esso brought the dispute to the United States District Court for the Southern District of New York claiming that the Nigerian court did not grant it a fair process and did not properly recognize the arbitral tribunal’s award as required under the New York Convention. U.S. courts have long held themselves to be the guardians of due process and procedural protections. They are generally skeptical when a party’s liability is determined but there is no remedy to make the harmed party whole. Indeed, this ancient Roman legal maxim, ubi ius, ibi remedium (where there is a right, there is a remedy), was echoed in one of the United States’ earliest landmark cases, Marbury v. Madison, 5 U.S. 137 (1803) (“The very essence of civil liberty certainly consists in the right of every individual to claim the protection of the laws, whenever he receives an injury.”)

U.S. courts have also repeatedly espoused a pro-arbitration policy. Enforcement of annulled arbitration awards raises familiar topics in U.S. law, such as the opportunity to be heard, procedural fairness, and public policy considerations that arise from the application of foreign laws. Hence, proceedings have been brought before U.S. courts to enforce annulled arbitral awards, and international parties closely watch the results of such complex enforcement actions.

Despite the above, the U.S. District Court for the Southern District of New York declined to enforce the award. This decision seems to be at odds with Pemex, a previous U.S. Second Circuit Court of Appeals case in 2016, (discussed in detail below).

 

The Precedent: The Pemex Case

In Corporación Mexicana de Mantenimiento Integral v. Pemex Exploración y Producción, the Second Circuit enforced an award that a court in Mexico had annulled (Pemex Opinion). In annulling the award, the court in Mexico relied on a law that was passed by Mexico’s legislature while the arbitration proceedings were still ongoing. The new law vested the authority for hearing claims raising issues related to public contracts exclusively in the Mexican Tax and Administrative Court. Mexico’s legislature also made disputes like the one in Pemex non-arbitrable tax issues. Pemex argued before the arbitral tribunal that the claims raised had turned into a non-arbitrable dispute. However, the arbitral tribunal rejected the argument and issued a final award in favor of Corporación Mexicana de Mantenimiento Integral (“CCMI”), finding there was a breach of contract. Pemex sought to set aside the award by submitting that the new law made the dispute non-arbitrable. The court in Mexico annulled the award.

As a result, CCMI turned to the U.S. courts for the enforcement of the annulled award. After the Southern District of New York decided the matter, on appeal, the Second Circuit found that the annulment was a procedural violation, depriving CCMI of predictability and fair process. Under the New York Convention, enforcement may be refused if the award was set aside by the courts of the seat. Nevertheless, the Second Circuit held it would be against public policy to deprive the parties of a forum to fairly hear the case and, as a result, the court granted enforcement.

 

Abandonment or Not: What Happened in Esso?

The Esso case also involved a production agreement with a state oil company. Esso claimed that NNPC had extracted more oil than their contract had allowed and therefore breached the agreement. In the arbitration, Esso alleged the NNPC engaged in the overlifting, which was purely a contractual issue. The NNPC conversely argued that the differentiation in revenue was remitted to the Nigerian tax authority and their refusal to submit the tax documents prepared by Esso made it a tax issue at its core. For some time prior to the arbitration commencing, tax issues have been held to be non-arbitrable under Nigerian law, which was the law governing the agreement. The arbitral tribunal found that the matter was contractual, however, confirming its jurisdiction to hear the matter, which resulted in a $1.799 billion award for Esso.

In proceedings both before and after the award, Nigerian trial-level courts found the underlying dispute was a tax issue and therefore non-arbitrable. The Nigerian Court of Appeals affirmed that finding. Yet, the Court of Appeals also found that the issues of liability and the related assessment of damages were contractual in nature. These issues should have been separated from the tax issue at the trial level. The Court of Appeals held not only that these were separable issues, but also if the tribunal or the trial courts had properly separated them, they would have found that liability did exist in the amount that Esso had claimed. In other words, the Court of Appeals held that there was a breach of contract, but because the damages were exclusively related to tax, an arbitral tribunal could not legally provide the remedy.

With this unfavorable outcome, Esso sought to enforce the arbitral award in the U.S. courts, emphasizing the dissonance between finding a breach of contract while denying damages due to non-arbitrability. Yet despite this troubling position, the U.S. court declined to enforce the award and thus to provide a route to damages for Esso. So what has changed? Observers of U.S. courts might be wondering whether this is a step backward in enforcing arbitral awards, siding more with the traditional litigation systems.

The court emphasized that Esso had a right to pursue the enforcement of the annulled award. Procedurally, the court held that it had jurisdiction to hear the case and had the power to enforce an annulled arbitral award. However, the New York court felt that the Nigerian courts—the chosen forum of the seat interpreting their own law—provided an adequate opportunity to be heard. Esso did have a remedy; one available through Nigerian law and through the Nigerian tax tribunals. The Nigerian decisions adhered to existing law known to the parties during the drafting of their agreement and at the commencement of arbitration.

This predictability of process distinguished Esso from Pemex: In Pemex, the retroactive law interfered with the parties’ chosen process. Here, the annulment was based on existing and well-known law in the chosen forum. Although the New York Convention permits enforcement of annulled awards, this did not warrant it. The court’s focus was on the opportunity to be heard within the confines of the forum and legal regime that the parties themselves chose.

 

Enforcement of Annulled Awards Moving Forward

The takeaway is that U.S. courts remain open to enforcement of annulled awards and to providing a forum to parties that have otherwise been deprived of a place to fairly enforce their award. This does not depart from the doctrine of pro-enforcement, but it adds nuance. Courts will continue to avoid the substantive issues, while focusing more so on weighing the procedure for fairness.

Questions remain such as whether procedure can affect the substance so much that it transcends a mere opportunity to be heard leading to the unfairness of the outcome being reviewed even if the process was predictable. That said, practitioners bringing annulled awards before U.S. courts should be comforted that the opportunity to enforce annulled awards remains, however, they should focus their petitions on the procedural nuances.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


From Zero to One: How the Vis Moot is Shaping Arbitration in Afghanistan

Kluwer Arbitration Blog - Mon, 2020-03-30 19:00

Afghanistan, in January 2007, enacted its Commercial Arbitration Law to facilitate prompt, fair and neutral resolution of commercial and economic disputes through arbitration. However, despite enactment of the Law, Afghan courts exhibited reluctance to defer to dispute resolution clauses in contracts which directed parties to arbitration. Consequently, till 2013, arbitration was neither considered a viable option to resolve disputes nor was there any progress in arbitral jurisprudence. This lack of development can probably be attributed to the then prevailing armed conflict and volatile political situation. However, after 2014, some focus returned to arbitration. Although slowly, discourse on arbitration, over the past six years, has grown so much that the arbitration circuit’s chatter is now audible even outside Afghanistan. Interestingly, this current renaissance has its roots in the 11th Willem C. Vis East International Commercial Arbitration Moot (Vis East).

In 2014, Commercial Law Development Program (CLDP), a division of the U.S. Department of Commerce, sponsored Kabul University’s all-women team to participate in the 11th Vis East. This marked the first time that any team from Afghanistan participated in the Vis East. The competition influenced the participants so much that they decided to pass on the baton and along with CLDP’s support conducted, in 2015, the 1st Afghan Vis Pre-Moot at the US Embassy in Kabul. That year, CLDP supported three teams (consisting of twenty students) that participated in the Afghan Pre-Moot by taking them to the 5th Vis Middle East Pre-Moot in Jordan and the 12th Vis East in Hong Kong. These initiatives fairly piqued the country’s younger generation’s interest in arbitration but the turning point was the release of the documentary titled ‘Afghan Dreams’ which showcased how the 2014 all-female team of four had overcome cultural and systemic challenges to compete in one of the world’s most prestigious moot court competitions.

This set the stage for establishment of the Afghanistan Vis Alumni Network (AVAN). AVAN was established as a voluntary group for the purpose of better preparing students for the competition through trainings and shoulders the mantle of conducting the Afghan Pre-Moot annually. CLDP continues to sponsor teams to the Middle East Pre-Moot and Vis East, but the Afghan Pre-Moot serves as the battleground where teams have to fight for the top spot. In its 6th year, the latest edition of the competition witnessed participation of eleven teams from across Afghanistan. The contributions of AVAN and CLDP have been such that at least three Afghan teams have participated in Vis East every year since the 12th edition in 2015. In fact, the American University of Afghanistan even broke into the elimination rounds of the 13th edition and were semi-finalists in the Pan Asia Division.

Simultaneously, other developments, separate from field of academics, have been critical in bringing focus on the practice of arbitration. In June 2015, Afghanistan Chamber of Commerce and Industries (ACCI) and Afghanistan Investment Climate Facility Organization (AICFO) set up Afghanistan Center for Commercial Dispute Resolution (ACDR), the country’s first arbitral institute. ACDR’s portfolio of services, besides administering arbitrations, includes issuing certifications for arbitrators, conducting international and domestic trainings for Afghan lawyers, judges and Ministry of Justice employees, and providing technical assistance in reviewing the arbitration law in force. In July 2018, ACDR signed a memorandum of understanding (MoU) with AVAN to use their resources to improve future use of ADR, specially arbitration. In August 2019, ACDR successfully issued its first arbitral award.1)As on March 2020, ACDR has issued 4 arbitral awards. jQuery("#footnote_plugin_tooltip_5332_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5332_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); On the other hand, in February 2017, Afghanistan International Chamber of Commerce (ICC-Afg) officially launched its operations in Afghanistan. In 2018, ICC-Afg established an Arbitration & ADR Commission which annually conducts the ICC Young Arbitrators Forum (YAF) conference.2)The 3rd ICC YAF Conference on Arbitration in Afghanistan was held in May 2019. jQuery("#footnote_plugin_tooltip_5332_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5332_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In August 2019, ICC-Afg and AVAN signed a MoU under which ICC-Afg will host trainings and provide internship opportunities to Vis Moot participants.

It is pertinent to highlight that ACDR’s incumbent Executive Director, ICC-Afg’s incumbent Head of Dispute Resolution & Policy and a considerable number of members on ICC-Afg’s Arbitration & ADR Commission, are former Vis East participants. This not only evidences the Moot’s contribution to the arbitration eco-system in Afghanistan but also provides context to why two competing institutions, ACDR and ICC-Afg, are, at least so far, cooperating with each other to overcome obstacles and improve national arbitration practice.

The combined efforts of AVAN, ACDR and ICC-Afg have over the past couple of years led to the following:

  • Presidential assent for bringing into effect the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards;3)Presidential Decree No. 31 dated 1398/11/23 (Hijri Calendar). jQuery("#footnote_plugin_tooltip_5332_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5332_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • Proposal to the Ministry of Justice to amend the 2007 Commercial Arbitration Law;
  • Proposal to the Ministry of Commerce and Industry to lay down guidelines regulating enforcement of arbitral awards;
  • Addition of arbitration and mediation modules in Afghanistan Independent Bar Association’s 6-month legal course;4)Pursuing which is a mandatory prerequisite for obtaining a Bar license. jQuery("#footnote_plugin_tooltip_5332_4").tooltip({ tip: "#footnote_plugin_tooltip_text_5332_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • Lobbying for amendment of Article 27 of the Law on the Manner of Acquisition of Rights5)The Law on the Manner of Acquisition of Rights, Gazette Number 1309, 2018. jQuery("#footnote_plugin_tooltip_5332_5").tooltip({ tip: "#footnote_plugin_tooltip_text_5332_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); to include arbitral awards in the list of documents so that the General Directorate of Rights can enforce an arbitral award as if it were a court order;
  • Plans to establish a task force which will identify barriers to arbitration and develop an operative framework to eliminate them; and
  • Proposal to create a single-stop section for arbitration related affairs in local commercial courts.

Afghanistan has, over the past decade, gone through a transitional period in the field of arbitration i.e. from a barely active to an active stage. This initiative that kickstarted by virtue of Vis East was taken forward by AVAN, ACDR and ICC-Afg. Although the initial headway has been substantial, continued efforts would be required to move towards a comprehensive arbitral regime. This would necessitate not only seasoned national experts but also increased interest of business houses in arbitration and, most importantly, governmental support. Going ahead, the question that arises is not whether the new arbitration brigade has the potential to bring about meaningful change in the arbitration landscape, rather is, whether it will get support from the government in the aftermath of the US-Taliban peace deal.

References   [ + ]

1. ↑ As on March 2020, ACDR has issued 4 arbitral awards. 2. ↑ The 3rd ICC YAF Conference on Arbitration in Afghanistan was held in May 2019. 3. ↑ Presidential Decree No. 31 dated 1398/11/23 (Hijri Calendar). 4. ↑ Pursuing which is a mandatory prerequisite for obtaining a Bar license. 5. ↑ The Law on the Manner of Acquisition of Rights, Gazette Number 1309, 2018. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Ireland Reflections 2020–Derry Girls (and Boys) Part 2

ADR Prof Blog - Mon, 2020-03-30 10:17
Happy Monday to all–this continues the Ireland blog posts which I’ll have for the rest of this week! The visit to Derry was so filled with content that I divided this into two posts.  The morning (as outlined in the last post) was a walking tour of the neighborhoods and visiting the museum.  After a … Continue reading Ireland Reflections 2020–Derry Girls (and Boys) Part 2 →

COVID-19 and Investment Treaty Claims

Kluwer Arbitration Blog - Mon, 2020-03-30 01:30

At the time of writing, the number of confirmed cases of COVID-19 passed 600,000, across more than 200 countries and territories. The World Health Organization (the WHO) declared a Public Health Emergency of International Concern on 30 January 2020, i.e. an ‘extraordinary event’ which is ‘serious, unusual or unexpected’ carries trans-national implications, and may require immediate international action. On 11 March 2020, the WHO declared it a pandemic.

Measures have been announced by many States – on a daily basis – to attempt to contain and mitigate the spread of the disease, and many have declared states of emergency under their domestic laws. The measures mostly involve social distancing, including quarantines, isolation and travel restrictions. These measures have significant human costs, but they are also having a wider impact on economic interests. Europe, Italy, France and Spain, among others, have imposed nationwide lockdowns, and the UK has also imposed significant restrictions on movement. Businesses are closing across a range of sectors, and more are expected over the coming months.

Looking forward, further measures are likely to be imposed, and sooner rather than later. Economic measures are already being announced which are likely to have a significant impact on banks, such as mortgage suspensions. As economies slow and jobs are lost, energy companies may be asked to discount consumer prices or to suspend charges altogether. Businesses, including those run by foreign investors, may be forced to cease trading and operating, their supplies may be requisitioned, or they could be nationalized.

In these circumstances, States and foreign investors will be considering their positions under applicable investment treaties: will States be insulated for measures taken in response to the emergency presented by COVID-19, or will investors be indemnified for the substantial losses they will likely suffer?

If a COVID-19 measure is challenged by a foreign investor, there will be a threshold issue as to whether the measure is potentially in breach of the substantive provisions of an investment treaty. There may be strong grounds for a State to contend that the measure adopted is not a breach of fair and equitable treatment, or does not amount to indirect expropriation. Provided that it can be established that the measure is incompatible with the relevant obligation, a further question that arises is whether the State has a valid defence to a claim. States can defend against treaty claims by:

  1. treaty exceptions; or
  2. defences under customary international law.1)On the application of these under public international law, see also F Paddeu and F Jephcott, “COVID-19 and Defences in the Law of State Responsibility Parts I and II”, EJIL Talk, 17 March 2020. jQuery("#footnote_plugin_tooltip_8474_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8474_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Treaty exceptions

These are expressly set out in the BIT. If the exception applies, the treaty does not apply to the disputed measure. All will depend on the particular treaty.

In early treaties, specific exceptions were rare, although some included exceptions for measures “necessary for the maintenance of public order”. One could see an argument to bring some measures taken to combat COVID-19 within the scope of measures for “public order”, although ultimately it would depend on the particular circumstances.

Very few BITs contain general exceptions, or incorporate the general exceptions as set out in the GATT and GATS trade agreements. The general exceptions usually provide that the treaty will not prevent a party from adopting or enforcing measures to protect human life or health, provided that the measures are not arbitrary or discriminatory. Where possible, States are likely to seek to rely on these general exceptions provisions in relation to measures taken in response to COVID-19.

More recent investment treaties have stronger specific exceptions, which explicitly exempt non-discriminatory regulatory measures for lawful public welfare objectives, including public health, from indirect expropriation obligations. For example, the Canada-EU Trade Agreement (CETA) specifies that non-discriminatory regulatory measures designed and applied to protect legitimate public welfare objectives, including public health, do not constitute indirect expropriations, except in “rare circumstances”. Those may protect States against indirect expropriation claims, but may not assist in relation to breaches of other provisions of investment treaties.

Some treaties do go further. For example, the recent China-Australia Free Trade Agreement provides that non-discriminatory measures for “legitimate public welfare objectives of public health … shall not be the subject of a claim” by an investor. Provisions such as these are likely to insulate COVID-19 measures from investment treaty claims.

 

Customary international law defences

Customary international law defences are not set out in the treaty, but have been codified in the ILC Articles on State Responsibility (termed “circumstances precluding wrongfulness”). The treaty continues to apply, but States will be exonerated from any claims for breach for as long as the facts giving rise to the defence continue to exist.

There are six circumstances precluding wrongfulness that are recognized under customary international law: of these, three are potentially relevant to COVID-19 measures:

  • force majeure;
  • distress; and
  • necessity.

Necessity figured prominently in the treaty-based cases brought in the aftermath of the Argentine financial crisis, but the other two defences have not featured prominently in investment treaty cases.

 

Force majeure

A successful claim of force majeure must fulfil five conditions:

  1. there must be an unforeseen event or an irresistible force;
  2. the event or force must be beyond the control of the State;
  3. the event must make it ‘materially’ impossible to perform an obligation;
  4. the State must not have contributed to the situation; and
  5. the State must not have assumed the risk of the situation occurring.

The plea of force majeure is a strict one, and States have rarely been successful when invoking it. The outbreak of COVID-19 potentially amounts to an unforeseen event or an irresistible force triggering a situation of force majeure, but States are likely to have some difficulty demonstrating material impossibility of performance (3). This will depend on the specific obligation at issue, and the particular circumstances at play, but in most cases, States are likely to have a choice (even if a difficult one) in respect of compliance.

 

Necessity

To successfully plead the defence of necessity, a State must fulfil four requirements:

  1. a grave and imminent peril;
  2. that threatens an essential interest;
  3. the State’s act must not seriously impair another essential interest;
  4. the State’s act was the ‘only way’ to safeguard the interest from that peril.

In addition, the plea is excluded if:

  1. the obligation in question excludes reliance on necessity; and
  2. the State contributed to the situation of necessity.

On the basis of publicly available information, it seems arguable that the outbreak and spread of COVID-19 meets the requirement of grave and imminent peril (1). It is an unfolding event which poses an imminent threat of a grave harm to the world’s population.

It also appears arguable that it threatens an essential interest (2) of the State, or of the international community as a whole. The well-being of a States’ population and the continued functioning of its public services have been accepted as constituting ‘essential interests’ in investment treaty arbitration (see National Grid v Argentina, §245).

The measure must not seriously impair an essential interest (3) of another State or of the international community as a whole. Investment tribunals have readily accepted that a State’s interest in the well-being of its population outweighs the interests of investor home States (or those of investors themselves). The balance must be considered in the particular circumstances, but it is likely to be arguable, in certain cases, that COVID-19 measures do not seriously impair essential interests of investors.

The measure must be the ‘only way’ (4) to protect the essential interest from the impending harm at the time. If there are other (lawful) ways to address the threat, even if these are more costly or inconvenient, the plea will fail. This sets a high threshold. Whether it is met will ultimately turn on an assessment of the measures adopted, by reference to the information available at the time, and taking account of the whole package of measures, as well as alternative measures which could have the same effect, even if they are more costly.

Whether necessity is precluded by the substantive obligation (5) turns on the obligation in question. Investment treaty obligations are unlikely to preclude reliance on necessity.

There is considerable uncertainty as to the scope of the requirement of non-contribution (6). Some tribunals have approached the requirement as a purely causal one such that ‘well-intended but ill-conceived policies’ are sufficient to exclude reliance on the plea (Impregilo v Argentina, §356). Others have interpreted it more narrowly, as requiring some degree of fault (Urbaser v Argentina, §711). Depending on how broadly this is interpreted, it might be argued that States’ under-funding or under-resourcing of health care systems is a substantial contributing factor, potentially precluding reliance on necessity.

On the basis of the information available at the present time, it might be difficult for States to rely on necessity in respect of measures taken to combat COVID-19. The plea has been interpreted in very restrictive terms by tribunals and it could be difficult for States to establish all of the requisite elements.

 

Distress

To successfully plead the defence of distress, the State must show:

  1. threat to life;
  2. a special relationship between the author of the act, whether this is a State organ or an individual whose acts are attributable to the State, and the persons in question;
  3. that there was no other reasonable way to deal with the threat;
  4. that it did not contribute to the situation; and
  5. that the measures were proportionate.

The element of threat to life (1) is likely to be made out, on the basis of the existing threat posed by COVID-19 to the lives of individuals within the State’s jurisdiction. As to the requisite “special relationship” (2), a tribunal could consider that an important aspect of the ‘special relationship’ between the organ imposing a measure and the individuals whose lives are under threat is control: is the fate of those individuals under the control of the relevant organ? In circumstances where only the central government has the authority to put in place measures of containment or mitigation in these types of emergencies, it appears arguable that there is a special relationship: to some extent, the fate of the population is within the control of the central authorities.

Whether the other requirements are likely to be met will depend on the particular measure adopted, its impact, and the particular circumstances. The requirement of “reasonableness” (3) is a lower standard than for the plea of necessity which requires that the measures be the ‘only way’ to deal with the emergency. This requires a case by case assessment, in an appropriate context, including the whole package of measures adopted. The non-contribution requirement (4) is also a lower standard than for necessity: good faith policies that contributed to the crisis do not exclude reliance on the plea. Finally, the measures must be proportionate (5), comparing the measure against the interest protected. This is likely to require an assessment of the impact of the measure on the investor, compared to the impact on the population overall in the event that the measure was not adopted.

 

The Kluwer Arbitration Blog is closely following the impact of COVID-19 on the international arbitration community, both practically and substantively. We wish our global readers continued health and success during this difficult time. All relevant coverage can be found here

References   [ + ]

1. ↑ On the application of these under public international law, see also F Paddeu and F Jephcott, “COVID-19 and Defences in the Law of State Responsibility Parts I and II”, EJIL Talk, 17 March 2020. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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The Contents of Journal of International Arbitration, Volume 37, Issue 2

Kluwer Arbitration Blog - Sun, 2020-03-29 02:00

We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:

 

Sundaresh Menon, Technology and the Changing Face of Justice

The problem of unequal access to justice, also known as the justice gap, has been worsened by rising levels of inequality over the past half-century. The denial of due compensation and the inability to enforce rights in turn perpetuates and widens the wealth gap, initiating an ever-deepening spiral of inequality that threatens social cohesion and erodes public confidence in the courts. By empowering individuals, organizations and governments, technology and peaceable methods of dispute settlement have the potential to close each dimension of the justice gap and address the large volume of unmet justice needs that do not surface before the justice system. These unmet needs are generally straightforward but require urgent resolution, and therefore require quick and affordable solutions that focus on amicable settlement. In thinking about how we can redesign our justice system to promote solutions of this nature, we need a broader vision of justice: one that seeks to produce just outcomes through practical and proportionate means, and that aspires not merely towards keeping the peace but also building lasting peace. In this manner, our justice system will better promote effective equal access to justice, restore and strengthen communities that are riven by conflict, and help to tilt an unequal society closer towards equilibrium.

 

Moritz Keller & Eric Leikin, A Taxing Endeavour: Addressing the Tax Consequences of Investment Arbitration Awards

The authors proceed from the theoretical rule that where a claimant establishes that the value of its award will be taxed in excess of what its profits would have been taxed absent the respondent state’s breach, it may be entitled to a ‘tax remedy’ in order to prevent under-compensation. They then analyse tribunal practice, with some interesting (and surprising) results. First, despite the taxation of awards often amounting to tens of millions of dollars, tribunals have devoted very little attention to this issue. Second, tribunals have tended to make a distinction between those potential award tax burdens imposed by the respondent state and those imposed by a third state. Whilst requests for tax remedies regarding tax liabilities to third states have been refused in all publicly available decisions, some tribunals have been sympathetic to requests for tax remedies regarding tax liabilities to the respondent state; although importantly, such awarded remedies have been non-monetary in nature. Finally, looking forward, the authors propose that tax remedies be categorized as ‘future losses’, a well-established concept. Mindful of the hurdles such arguments would need to overcome, including the requirements of reasonable certainty and proximate causation, the authors point to existing law and practice to provide a corresponding legal framework, in the hope of moving towards consistent and objective future practice on this point.

 

Yasin Alperen Karaşahin, Contractual Time Limits to Commence Arbitration

Arbitration and multi-tier dispute resolution clauses may contain a time limit to commence arbitration. The expiry of such a time limit could have different legal results. First, it could make the arbitration clause ineffective. Second, it could extinguish the claim or prevent its enforcement through legal proceedings. In the latter case, the contract provision about the time limit would have to be examined with regard to its compliance with mandatory provisions of the law applicable to limitation periods. Even the determination of the law applicable to limitation periods causes considerable difficulty. It is another difficult issue to determine which provisions of the law applicable to limitation periods are mandatory and, if so, whether the contract provision complies with the limits of the law. Once it is established that the contract provision is valid, the acts necessary to prevent the expiry of the time limit would have to be examined.

 

Eloïse Glucksmann & Rüdiger Morbach, Hot-Button Issues in International Arbitration: A Survey Among Arbitrators

International Arbitration has been in the focus of public attention following the fierce debate on the Transatlantic Trade and Investment Partnership (TTIP) and the Comprehensive Economic and Trade Agreement (CETA). A broad public has questioned whether arbitral tribunals should be entrusted with issues of public interest. Some of these issues are particularly controversial. These ‘hot-button’ issues include international sanctions, corruption, money laundering and, to a somewhat lesser extent, antitrust law. The authors wanted to know how arbitrators deal with these issues, should they come up in an arbitration. They set up a survey in the form of a short online questionnaire and invited more than 2,500 arbitrators, listed as members of different European arbitral institutions, to participate. The participants were asked whether they have already encountered hot-button issues in an arbitration, whether they felt prepared to deal with them and whether they have been approached by parties who wanted a hot-button issue to be disregarded in the arbitration. Further questions addressed possible proactive measures to prevent public policy violations, such as a cooperation with public authorities and state courts. The authors compare the results of their survey with recent developments in International Arbitration.

 

Oluwafikunayo D. Taiwo, The Restrictive Approach to Legal Representation in Arbitration Proceedings and Its Unintended Consequences in Nigeria

The issue of legal representation in arbitration proceedings accounts for one of the sub-factors of ‘formal legal structure’ and ‘national arbitration law’ that disputing parties consider before choosing a seat of arbitration. Indeed, the ability of disputing parties in arbitration to freely select their desired representatives is embedded in the foundational principle of party autonomy. In Nigeria, a literal interpretation of the national arbitration rules prevents parties from selecting persons not admitted to the Nigerian bar as their representatives in arbitration proceedings. This article examines the impact of this restrictive approach on the attractiveness of Nigeria as a seat of arbitration. The article identifies scope for reform in the law and makes suggestions to create a more liberal legislative and judicial framework in order to promote Nigeria as a preferred seat for arbitration.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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It’s a F**cking Quarantine!

ADR Prof Blog - Sat, 2020-03-28 15:24
There’s been a bunch of emails circulating about sharing poems or other inspirational sayings to get us through this pandemic.  And, while I have not had any inclination to write something more intellectual, I did get inspired to write a poem!  So, for your Saturday reading pleasure, I offer the following: It’s a F***cking Quarantine By Andrea … Continue reading It’s a F**cking Quarantine! →

UNCITRAL Working Group III: Counterclaims in ISDS – Challenges and Prospects in Light of the UNCITRAL Reform Process

Kluwer Arbitration Blog - Sat, 2020-03-28 02:00

A cursory reading of the mandate of Working Group III reveals that the discussion at UNCITRAL of ISDS (Investor-State Dispute Settlement) reform focuses only on procedural aspects of dispute settlement under investment treaties and excludes any substantive aspects. However, the topic of respondent states’ counterclaims, albeit procedural in itself, is so inextricably intertwined with substantive aspects that it has also been excluded in principle from the ISDS reform mandate. This notwithstanding (and not without some ambiguities) the UNCITRAL Working Group III has indicated that it “would not foreclose consideration of the possibility that a state might bring a counterclaim where there was a legal basis (or an underlying provision) for so doing.”

 

Asymmetries in Investment Law

Investment agreements (IIAs) are formulated to provide protection to investors, and thus mainly impose international obligations on Contracting States towards investors. As such, generally speaking of course, they do not impose direct obligations upon investors. IIAs are therefore characterized by an inherent asymmetry, although this asymmetry is a feature the investment regime shares with many other international forums open to international claims by individuals (such as, for instance, the European Court of Human Rights). The “inherently asymmetrical character” of investment treaties has made counterclaims in ISDS problematic.

Rebalancing this asymmetry by allowing states to file counterclaims, when possible (and provided the ISDS clause at stake so permits), would allow investment tribunals to take a holistic judicial approach in analysing investment disputes. This would allow them to adjudicate (alongside alleged breaches by a host state of its international obligations under IIAs) the consequences of investors’ non-compliance with domestic provisions of paramount importance, including those implementing internationally accepted core obligations related to human rights (such as, for instance, those related to environment protection). This would, in turn, promote “procedural efficiency, fairness, and the rule of law”, as indeed highlighted by several UNCITRAL delegates.

It is in this perspective that states’ right to file counterclaims (and investment arbitral practice thereon) deserves closer scrutiny.

 

Restrictive Approaches to Counterclaims in Existing Investor-State Arbitration Decisions

Tribunals to date have either opined that the consent under the relevant BIT did not include in principle claims by the host state against the investor, even where the relevant BIT contains an umbrella clause, or held that the counterclaim made did not directly arise out of the subject-matter of the dispute under the treaty, thus not meeting the necessary requirement of close connection with the primary treaty-based claim of the investor.

According to the dominant approach in arbitration case-law, respondent states’ counterclaims in the form of reactive claims grounded on a different legal basis than the IIA itself (thus legally unrelated to the investors’ claims based on the breaches of IIA provisions) are in principle either outside the treaty-based jurisdiction of the investment tribunal or inadmissible. This is the case even when such counterclaims are factually connected to the investor’s claim. This holds true unless a specific agreement between the disputing parties extending arbitral jurisdiction to the Respondent’s counterclaims and identifying its domestic law as applicable law is present.

Such a restrictive approach to counterclaims appears to be influenced by the arbitration practice concerning investment contracts. In these cases, respondent states have filed counterclaims based on the violation of domestic law provisions of general application (such as, for instance, tax laws and regulations) in response to investor claims based on an investment contract. In many of these cases, tribunals have held that such counterclaims are in principle either outside the scope of parties’ consent to arbitration or not sufficiently connected (both legally and factually) with the original contractual claim of the investor. Nevertheless, the investment contract framework differs in many respects from the investment treaty one. One of the most prominent differences is related to the applicable rules of interpretation. This casts doubt on whether investment contract arbitration practice related to counterclaims is of great relevance to investment treaty cases.

It might instead be possible that a respondent state’s counterclaim that relies on the same factual matrix of the original treaty claim of the investor, but grounded on a different legal basis than the IIA itself, can be considered as both within the scope of the tribunal’s jurisdiction and admissible, even if no mention of the possibility for the respondent state to file counterclaims is made in the IIA. This would be the case where the ISDS clause of the relevant IIA covers “any” or “all disputes between a Contracting State and an investor of the other Contracting State” concerning a protected investment. Such a counterclaim would be especially likely to be within jurisdiction if the IIA contains a broad definition of covered investment, for example by referring to licenses and concessions conferred by law or under contract. This approach seems to be supported by the widely internationally and domestically accepted concept of counterclaims. Such practice includes set-off claims, and claims of a respondent party, which are responsive to the claims of the claimant even when legally grounded on a different instrument, provided that they are closely factually connected therewith. After all, the right to counterclaim is a core element of a defendant’s right to claim on an equal footing to the original claimant as a general principle of law. Given this, any restrictive interpretation of ISDS clauses that is not explicitly justified by the wording of the treaty would unjustly limit the right of defence of respondent states. Given the status of this general principle of law related to a defendant’s right to counter-claim, the question is why a respondent state should not be able a priori to file a counterclaim against a claimant investor based on the violation by the latter of domestic legal obligations of fundamental importance with which should have been complied with in its business activities in the host state. This is especially so when the ISDS clause is so broadly worded as to encompass any dispute between the investor and the host state on the investment.

 

New Approaches to Counterclaims in Recent Arbitration Decisions?

The dominant approach described above does not facilitate such counterclaims by respondent states. It has been suggested that the recent trend in arbitration practice on counterclaims, represented by the cases Urbaser and Aven, might be less restrictive. However, these cases do not represent particularly promising developments in light of the objective of balancing IIAs’ asymmetry by way of counterclaims. In these cases, the discussion focussed on the wording of ISDS clauses that are neutral as to the identity of the claimant or respondent, thus allowing in the abstract either the investor or the host State to submit a dispute in connection with the investment to arbitration. These neutrally drafted clauses were interpreted by the Urbaser and Aven tribunals so as to allow arbitral jurisdiction over respondent states’ counterclaims.

However, despite judging the states’ counterclaims as admissible in principle, both tribunals dismissed them on the merits. At the jurisdictional level, to support the counterclaim’s admissibility, it was accepted that “it can no longer be admitted that companies operating internationally are immune from becoming subjects of international law”, including HRs obligations. However, this very same argument was among the factors causing the dismissal of the counterclaims on the merits. In fact, the nature of HRs obligations as state obligations makes it impossible for them to merely shift from states to corporations. Furthermore, HRs obligations related to individuals’ fundamental social, economic, and cultural rights are positive obligations which require states to actively and effectively act, but, within their sovereign discretion and, in most cases, their limited financial resources. The point made here is well illustrated by the Urbaser case where, although declaring Argentina’s counterclaim related to the human right to water as admissible, the Tribunal could not but conclude that:

“…the enforcement of the human right to water represents an obligation to perform. Such obligation is imposed upon States. It cannot be imposed on any company knowledgeable in the field of provision of water or sanitation services. In order to have such an obligation to perform applicable to a particular investor, a contract or similar legal relationship of civil and commercial law is required.”

Respondent states’ right to file counterclaims has therefore proved to be rather inoperative and ineffective in investment arbitration practice until now, even when based on the characterization of investors as subject of international law and thus holders of HRs obligations. In this respect, the observation by Professor Higgins in the late 70s that the traditional debate on natural and legal persons (corporations included) as subject or object of international law “is not particularly helpful, either intellectually or operationally” still retains its validity. Given current trends in investment case-law, the possibility for a state to effectively counterclaim in investment arbitration is contingent upon the presence of specific underlying provisions explicitly permitting it to do so.

 

Should UNCITRAL Working Group III Give Greater Attention to Counterclaims as a Reform Option?

In conclusion, states’ counterclaims against investors in investment disputes can be an effective means of promoting procedural efficiency, fairness, and the international rule of law. These objectives will only be realised if they are supported by explicit policy changes in investment treaty law that operate at not just a procedural but also a substantive level. Such innovation should establish an international jurisdiction not just limited to hearing investors’ claims against Contracting States for breach of their international treaty obligations, but open to adjudication of investment disputes understood in a broad sense so as to include at least violations of human-rights legislation by investors in carrying out their business activities. In other terms, reforms should go beyond the provision of an investor’s general duty to respect the law of the host state, and the putative inadmissibility of its ISDS claims where it fails to do so.

In this respect, the inclusion of specific treaty provisions imposing positive obligations upon investors to respect a host state’s legislation – including legislation implementing internationally accepted core obligations related to human rights (such as, for instance, those related to environment protection, or labour rights) – should be considered by Contracting Parties to IIAs.1)For instance, such innovation is under discussion among Italian competent authorities within the currently pending process of reviewing the Italian BIT model. jQuery("#footnote_plugin_tooltip_3294_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3294_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Such provisions would raise these obligations from the plane of domestic law (and domestic judges’ jurisdiction) to treaty obligations enforceable against investors in ISDS, thus giving respondent states the capacity to file, in such proceedings, counterclaims possessing a tangible legal basis.

Such provisions may, however, present downsides. First of all, the possibility for a respondent state to file a counterclaim will inevitably impact its capacity to advance such claim before other possibly competent fora, including its own judiciary. Since respondent states’ counterclaims are generally governed by domestic law provisions and fall under the competence of the host state’s judiciary, their admissibility and adjudication in ISDS raise sensitive policy issues related to the correct interpretation and application of applicable domestic law, and may risk depriving domestic judiciaries of their natural and general competence. Secondly, the provisions referred to here seems at odds with the most recent approaches in investment treaty drafting, which have delinked Contracting Parties’ international commitments from their domestic legal systems. This is the case with European agreements, where such ‘delinking’ is required pursuant to the case-law of the Court of Justice of the EU in order to safeguard the autonomy of the European legal system (its judiciary included) from interferences by external judicial mechanisms. As a consequence, such ‘delinking’ seems to be, at the moment, a non-negotiable element in European investment relations with third countries. New generation IIAs are thus moving in the opposite direction than the innovation mentioned here: they limit the scope of application of ISDS to just investment disputes based on alleged breaches by Contracting Parties of their international treaty obligations, and make investors’ illegalities relevant to the capacity of investors to submit treaty claims.

Notwithstanding the aforementioned downsides, providing greater scope for counterclaims in ISDS might allow tribunals to take a more holistic approach to investment disputes. This can promote international justice at large, thus curing the widely perceived legitimacy crisis of ISDS.

In light of the above analysis it still remains the case that states’ counterclaims in ISDS pose fundamental issues of substantive law. These issues (together with the implied downsides mentioned above) have potential to become much more contentious than those, strictly procedural, already discussed by UNCITRAL Working Group III. However, the Working Group cannot avoid finally discussing them at its next sessions, where the focus should be on (feasible) reform options, as pointed out by the Secretariat in its note of January 2020 on multiple proceedings and counterclaims. This in turn raises the basic issue of whether Working Group III “…should not address the topic, as its work was to focus on the procedural aspects of ISDS dispute settlement rather than on the substantive provisions in investment treaties”.

Addressing states’ right to counterclaim in ISDS has, certainly, the potential of contributing to a better integration between foreign investment and HRs. Considering counterclaims as a general means of adjudicating human rights-related obligations of investors is, however, too simplistic, as the above analysis of the Urbaser and Aven cases clearly shows. Furthermore, the interplay between investment and human rights goes well beyond the field of foreign investment protection, and also involves purely domestic investors and investments, calling into question effective compliance by states with their HRs obligations in regulating business activities in general. Given this, it is therefore unclear what the rationale behind expanding the framework for respondent states’ counterclaims in ISDS to allow submission of claims by third parties against (presumably just foreign) investors would be. In fact, ISDS is established by interstate agreements for the settlement of investment disputes between the investors of a Contracting State and the other Contracting State. It is alike unclear what the legal basis for such third parties’ claims would be exactly. Moreover, “to regulate, in international human rights law, the activities of transnational corporations and other business enterprises” is now the objective pursued by a UN treaty project. Said UN treaty project, albeit in its initial stage, holds much promise for ensuring HRs protection against corporate abuses. UNCITRAL Working Group III, albeit taking such UN treaty project in due consideration, should avoid unnecessary overlaps therewith, and be reminded of the Italian old maxim according to which “who wants everything, loses everything.”

 

To see our full series of posts on the UNCITRAL WG III reform process, click here.

References   [ + ]

1. ↑ For instance, such innovation is under discussion among Italian competent authorities within the currently pending process of reviewing the Italian BIT model. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Ireland Reflections 2020–Derry Girls (and Boys) Part 1

ADR Prof Blog - Fri, 2020-03-27 11:04
On Tuesday morning of our trip (after a full day in Belfast), we hopped on the bus and headed to Derry… or Londonderry, depending with whom you are talking. (And for a very funny take on the situation in Derry during the Troubles,  see Derry Girls.) From the name(s) themselves, it was clear that this … Continue reading Ireland Reflections 2020–Derry Girls (and Boys) Part 1 →

UNCITRAL Working Group III: Security for Costs – An Inefficient Mechanism to Avert Frivolous Claims in ISDS

Kluwer Arbitration Blog - Fri, 2020-03-27 02:00

Ahead of the thirty-ninth session of UNCITRAL Working Group III (Investor-State Dispute Settlement Reform), the General Assembly Secretariat issued a note on issues to be considered on the topic of security for costs and frivolous claims. Averting frivolous claims has been a recurring topic in the ISDS debate over the past years, not least in the UNCITRAL reform work. The existing concerns are prompted by the fact that States involved in ISDS have testified to frivolous actions from investors being a relatively common occurrence. In addition, States have often found it difficult to obtain reimbursement for their legal fees in case of a successful outcome of the case.

These testimonies are demonstrative of an apparent desire of states involved in ISDS to increase the available remedies against investor-induced frivolous measures. Security for costs has, in many instances, including in the UNCITRAL reform process, been discussed as a mechanism that can be used for the purpose of reducing the risks associated with frivolous claims. However, ISDS practice shows that arbitral tribunals (both under the auspices of the UNCITRAL and ICSID framework) have thus far applied a high standard for granting security for costs. Against this background, one topic for the (now deferred) thirty-ninth session will be “to consider whether work should aim at providing a more predictable framework for security for costs and in that context, […] the conditions to be satisfied in order for the parties to request, and for the tribunal to order, security for costs.”

While the issue of frivolous actions by investors and limited costs recovery for the states is by now a well-known concern, any reform of the standards for ordering security for costs must carefully address the conflict between the interest of adequate costs recovery for States, and policy considerations relating to the interest of not stifling legitimate claims brought by underfinanced investors. Added to this, any prima facie assessment of the frivolousness of a claim exposes arbitral tribunals to the risk of allegations that they have prejudged the case. The restrictive approach taken by arbitral tribunals in deciding applications for security for costs appears to arise out of legitimate policy considerations, and gives rise to the question of whether security for costs – even if subject to loosened standards – can work as an efficient mechanism for averting frivolous claims.

 

Legitimate interests explain the restrictive approach taken by ISDS tribunals with respect to security for costs in practice

So far, UNCITRAL practice (and ISDS practice at large) has shown that arbitral tribunals in investor-state arbitration have subjected security for costs orders to a high standard.

For example, in Guarachi v. Bolivia, the respondent relied upon the existence of third-party funding on the investor’s side as well as evidence that the investor had no real assets in support of a request for security for costs. The arbitral tribunal rejected the reasons invoked by Bolivia as insufficient for demonstrating that the investor would be unable to cover an adverse costs award. The tribunal underlined that an “order for posting of security for costs remains a very rare and exceptional measure”.

Similarly, in SAS v. Bolivia, the investor was a Bermuda shell company with no assets or economic activity. Bolivia filed a request for security for costs in the amount of USD 2.5 million. The arbitral tribunal rejected the request and noted, amongst other things, that:

“In relation to the necessity and the urgency of the measure, investment arbitration tribunals considering requests for security for costs have emphasized that they may only exercise this power where there are extreme and exceptional circumstances that prove a high real economic risk for the respondent and/or that there is bad faith on the part from whom the security for costs is requested.”1)Para. 59. jQuery("#footnote_plugin_tooltip_8398_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8398_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The tribunal further reasoned that: “[i]n sum, the general position of investment tribunals in cases deciding on security for costs is that the lack of assets, the impossibility to show available economic resources, or the existence of economic risk or difficulties that affect the finances of a company are not per se reasons or justifications sufficient to warrant security for costs.” The restrictive view is further elucidated by the fact that there are few ISDS cases in which security for costs has in fact been granted.2)In this context, it should, however, be noted that despite the many instances where arbitral tribunals have entertained a very restrictive approach, there are also recent examples of ISDS tribunals engaging in slightly less strict approach. One such example is Caso CPA No. 2016-08 Manuel Garcia Armas v. Venezuela, Procedural Order No. 9 (20 Jun. 2018). In this case, the arbitral tribunal found that the investor in general had indicated that it possessed a limited ability to cover adverse costs (merely five out of nine claimants had demonstrated any proof of solvency). The arbitral tribunal concluded that this, in combination with the fact that it had been shown that the investor’s third-party funder had not committed to cover adverse costs, was sufficient to order security for costs in the amount of USD 1.5 million. jQuery("#footnote_plugin_tooltip_8398_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8398_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

It is conceivable that a loosening of the standards for ordering security for costs under the UNCITRAL framework may increase the inclination of arbitrators to grant security for costs. However, any reform must factor in the legitimate reasons that lay at the foundation of the restrictive approach demonstrated in international practice thus far.

In the authors’ view, the main explanation for the restrictiveness upheld in international practice is two-fold. First and foremost, it relates to access to justice concerns. Such concerns are triggered by the invasive nature of security for costs as compared to other kinds of provisional relief. Generally, compelling (under the threat of dismissal) a party with limited resources to post security for costs at the outset or during an arbitral proceeding restrains the party’s ability to present its case and may even stifle the party’s substantive claims altogether. Thus, security for costs orders may interfere with a party’s access to justice insofar as the party lacks financial means to comply with the security for costs order and thus is denied the opportunity to be heard.3)Cf. Born G, International commercial arbitration, Second edition (2014), p. 2496. jQuery("#footnote_plugin_tooltip_8398_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8398_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Consequently, from a policy perspective, it is desirable that arbitral tribunals retain their inclination to carefully balance the right of a party to pursue its claim against the right of an opposing party to recover its costs.

Secondly, assessing the merits of the claimant’s claim in investor-state arbitration often involves complex issues of both a jurisdictional and substantive nature. These matters are often difficult (if not impossible) to evaluate in any depth during the early stages of the proceedings. This is illustrated in, among other cases, SAS v. Bolivia where the tribunal concluded that it could not grant security for costs merely on the ground that SAS was used by the “real investor” to bring a claim. Doing so, the tribunal stated, would constitute a prejudgment on a crucial jurisdictional issue, “on which Parties’ submissions are pending”. Arguably, the fear of prejudging crucial issues constitutes a significant contributing factor which explains the hesitance of arbitrators to grant an order for security for costs in general.

 

The reasons for upholding fairly strict standards limits the utility of security for costs as a mechanism for averting frivolous claims and calls for a more holistic approach

It is clear that the occurrence of frivolous actions in investor-state arbitration constitutes a serious concern, particularly in light of the fact that states often times are not in a position to obtain any costs recovery in case of a successful outcome. These concerns arguably justify a loosening of the so far very strict requirements that have generally applied in ISDS practice. Nevertheless, the fact that the restrictive approach adopted by arbitral tribunals stems from legitimate policy considerations sets a limit for how extensive any reform of the applicable standards can be. Moreover, loosening the standards with respect to granting security for costs does not adequately address the second policy concern – that tribunals wish to avoid prejudging the merits of the case in assessing a potentially frivolous claim.

These reasons entail that the situations in which security for costs may be a viable alternative for averting frivolous claims should (and likely will) remain limited to situations where there is a clear case of frivolousness combined with a demonstrable inability to comply with an adverse cost decision. This in turn, gives reason to question security for costs as a sufficiently efficient mechanism for averting frivolous claims. Accordingly, dealing with frivolous action in investor-state arbitration under the UNICTRAL framework arguably requires a more holistic approach.

In this regard, it is interesting to note that the UNCITRAL WG III, following the initiative of the ICSID reform process, is currently considering adoption of an expedited procedure for addressing unmeritorious claims. In essence, introducing such a procedure would aim to enable the dismissal of claims that manifestly lack legal merit at an early stage of the proceedings, before they unnecessarily consume the parties’ resources. In the authors’ view, such an expedited procedure may, if implemented, become a viable alternative (in addition to security for costs) for addressing the issue of frivolous claims. To enable any such procedure to become a useful option, it is key that the employed framework clearly sets out when and under what circumstances the rules may come into play. Moreover, in light of access to justice concerns, it is important that the expedited procedure is designed so that it to requires the State to clearly demonstrate that the claim is frivolous,4)Cf. ICISD Arbitration Rule 41(5), which requires the party requesting for dismissal to specify, “as precisely as possible”, the basis on which the claim is “manifestly without legal merit”. jQuery("#footnote_plugin_tooltip_8398_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8398_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); while still taking due consideration to cost efficiency concerns (limiting, for instance, rounds of written submissions to a minimum). Additionally, the framework should provide for cost allocation mechanisms enabling an adequate risk distribution between the state and the investor, particularly in the event of a decision in favor of the investor.

 

Concluding remarks

The thirty-ninth session of the UNCITRAL Working Group III is likely to have significant impact on the standing of security for costs as a mechanism for addressing frivolous claims brought by investors in UNCITRAL arbitration going forward. While a loosening of the strict standards for granting security for costs so far applied by tribunals in practice may be warranted, legitimate policy considerations sets an outer boundary on how extensive any such revision can be. For this reason, it is desirable that the issue is addressed using a holistic approach, with due regard to the limited utility of security for costs as means for averting frivolous claims in ISDS.

 

To see our full series of posts on the UNCITRAL WG III reform process, click here.

References   [ + ]

1. ↑ Para. 59. 2. ↑ In this context, it should, however, be noted that despite the many instances where arbitral tribunals have entertained a very restrictive approach, there are also recent examples of ISDS tribunals engaging in slightly less strict approach. One such example is Caso CPA No. 2016-08 Manuel Garcia Armas v. Venezuela, Procedural Order No. 9 (20 Jun. 2018). In this case, the arbitral tribunal found that the investor in general had indicated that it possessed a limited ability to cover adverse costs (merely five out of nine claimants had demonstrated any proof of solvency). The arbitral tribunal concluded that this, in combination with the fact that it had been shown that the investor’s third-party funder had not committed to cover adverse costs, was sufficient to order security for costs in the amount of USD 1.5 million. 3. ↑ Cf. Born G, International commercial arbitration, Second edition (2014), p. 2496. 4. ↑ Cf. ICISD Arbitration Rule 41(5), which requires the party requesting for dismissal to specify, “as precisely as possible”, the basis on which the claim is “manifestly without legal merit”. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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€ 167


Ireland Reflections 2020–Belfast and the Peace Walls

ADR Prof Blog - Thu, 2020-03-26 11:07
We were greeted for our first morning in Belfast by both our tour guide and some traditional Irish weather. Our quite rainy walking tour took us through many locations deeply connected to the time of the Troubles. It was during this walking tour we were quickly confronted with the very real and lasting impact of … Continue reading Ireland Reflections 2020–Belfast and the Peace Walls →

Tips on Working Remotely From Home

ADR Prof Blog - Thu, 2020-03-26 10:25
From SFOI Sukhsimran Singh: Dear Colleagues, It has not been easy to work remotely and to coordinate several work tasks and meetings besides teaching from a computer!  I looked up on several resources to find if there are any best practices on working from home, especially for those of us with young or not so … Continue reading Tips on Working Remotely From Home →

UNCITRAL Working Group III: Reforms in the Realm of Investor-State Disputes – UNCITRAL’s Proposals for an Appellate Mechanism and its Impact on Duration and Cost

Kluwer Arbitration Blog - Thu, 2020-03-26 02:00

One of the topics on the agenda of UNCITRAL Working Group III is the establishment of an Appellate Court system. The system of investor-State dispute resolution therefore now faces the fact that WG III is considering, among other matters, the following:

  • the repeal of local law governing the setting aside of an UNCITRAL award giving full jurisdiction to the Appellate Court;
  • permanent appointment by States of adjudicators for this Appellate Court, abolishing the equality of disputing parties;
  • the automatic adjournment of enforcement of awards pending an appeal;
  • authority of the Appellate Court to review the merits of decisions on appeal, including reconsideration of findings of fact and law;
  • the text of a set of rules of an undefined status applicable to the procedure on appeal, possibly detached from national laws; and
  • provision for losing parties in investor-State dispute settlement across the globe to appeal those decisions, without regard to the bottleneck effect when the Appellate Court’s docket reaches capacity.

This post considers the proposed appellate mechanism, and highlights the key issues it creates for duration, costs, and certainty in investment arbitration.

 

The Proposal for the Creation of an Appellate Mechanism

The system of investor-State dispute settlement (“ISDS”) has been under sustained scrutiny and has received considerable criticism. In the wake of the Achmea decision, some governments have terminated intra-EU BITs; some tribunals have confirmed the holding of Achmea in subsequent awards (the chilling effect); and commentators continued to criticize the methods of international arbitration. The UNCITRAL Working Group III was established in fall 2017:

At its forty-eighth session, in 2015, the Commission noted that the current circumstances in relation to investor-State arbitration posed challenges and proposals for reform had been formulated by a number of organizations. In that context, the Commission was informed that the Secretariat was conducting a study on whether the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (“Mauritius Convention on Transparency” or “Mauritius Convention”) could provide a useful model for possible reforms in the field of investor-State arbitration, in conjunction with interested organizations.

In addressing the criticism of the current system of ISDS, the Working Group has established two pathways: one is the (total or partial) replacement of the system; and the second is incremental reforms within the system. The first pathway proposes two alternatives. One is the Multilateral Investment Court that replaces the system in toto and the other is the Appellate Mechanism that replaces crucial parts of the system such as annulment mechanisms, enforcement and finality of awards. Both are premised on the idea of abandonment of party autonomy; and with that the right of disputing parties to appoint an arbitrator. Instead, permanent judges will be appointed by the Contracting States. One must bear in mind that the one argument in favor of these efforts was to address the concerns about duration and cost in international arbitration and one wonders if this is the way to do it. Replacing ISDS with a system that eliminates party autonomy, will not give investors confidence. Perhaps it is useful to remind the reader of the reason for States to come together some decades ago to create the Washington Convention to conclude bilateral investment agreements:

As such, early in the first Development Decade, which spanned the 1960’s, it became increasingly clear that if the plans established for the growth in the economies of the developing countries were to be realized, it would be necessary to supplement the resources flowing to these countries from bilateral and multilateral governmental sources by additional investments originating in the private sector. To encourage such investments, the competent international organizations considered several schemes designed to remove some of the uncertainties and obstacles that faced investors in any foreign country.

 

The Appellate Mechanism and its negative impact on duration and costs creates uncertainty

The Appellate Mechanism would be a body of permanent adjudicators with jurisdiction to review arbitral awards on their merits. Arguably this would create consistency in the application of certain substantive norms in bilateral investment treaties. UNCITRAL’s Secretariat submitted a note addressing the possible implementation of the Appellate Mechanism or Court (“the AC”). That note aims to outline the key elements of the AC which must give rise to concerns about both the feasibility of the implementation of the AC and the negative effect it would have on duration and the costs of dispute settlement. Consistency in the application of substantive norms in BITs would contribute to confidence in ISDS. However, the reason for the reforms was to address some of the main criticisms on ISDS – duration and costs. An AC, in fact, will increase duration and costs. Both lead to uncertainty, which tends to have a chilling effect on investment and trade. There are three key issues likely to arise in the implementation of the AC.

The Secretariat suggests that a Contracting Party to the investment treaty could use the AC procedure as the opportunity to be heard on treaty interpretation, or could join with other States Party to the treaty to seek rejection of decisions of the AC through joint statements. This is not an official source of treaty interpretation as prescribed by the Vienna Convention on the Law of Treaties (“the VCLT”). It will not be qualified as a source of interpretation under Article 31(1) of the VCLT and it does not seem to be an interpretive declaration either (the latter have not been well developed in international law). The Secretariat has not yet provided the delegations with other examples or case law demonstrating the value of such statements by Contracting Parties as relevant to treaty interpretation at the time of a dispute. It has not reacted to the case of Pope & Talbot Inc. v. Canada in which the tribunal expressed misgivings about such a statement of interpretation, rendered in the middle of the dispute, made by Canada, US and Mexico about a question of law. If due process and fairness are to continue to be pillars of dispute resolution between investors and States, suggestions of such provenance would seem counterproductive. A unilateral interpretation by a Contracting State during a pending procedure would violate the due process rights of the investor and would create an inherent imbalance between the disputing parties.

The Secretariat makes some suggestions as to the law that could be applicable to the AC procedure. It suggests the following possibilities: (i) the law applied before the first-tier tribunal, (ii) a different law if the seat of the appeal is not the same as in the first instance, or (iii) a completely de-nationalized procedure subject only to international law. The idea of de-nationalizing dispute resolution and creating laws entirely detached from their sovereign base has been tried before, unsuccessfully. Any attempt to do this would be unrealistic: would the sixty Member-States to the UNCITRAL Working Group III have to draft an international procedural law to be applied by the permanent adjudicators of the AC? As I note in my book on the New York Convention, the idea was raised at the occasion of the drafting of the 1958 New York Convention:

Nothing has proven to be as divergent as the rules of procedure. Imposing uniform rules would deter many States from signing the Convention. The inclusion of such detailed provisions … would tend to overburden the text, and might provoke objections based on considerations of national law and lead to lengthy discussion.

As to the scope and standard of review, the Secretariat also looks into the subject of appeal on issues of law and fact and proposes that such review would be more consuming as it would require the disputing parties to present their case again. The Secretariat also considers the idea that the AC could provide for a review of issues de novo or whether it should accord some degree of deference to the findings of the first adjudicator. If the main objective of the reforms is to address issues of cost and duration, the idea of a review on issues of law and fact would constitute a second bite of the apple and inevitably increase cost and duration. In addition, this would lead to more uncertainty, which tends to have a chilling effect on cross-border investment. Even if the Working Group agrees to build in limitations on the scope of appellate review, how might this be done without the treaty language leaving the possibility of AC discretion and interpretation for a de facto review of those issues? The Secretariat appears to envisage that the AC will enable a review on the merits, instead of the review limited to matters of due process as currently provided under both the ICSID and UNCITRAL mechanisms. If the permanent adjudicators of the AC are to allow some deference to the members of the first instance tribunal, the drafters of the instrument creating the AC must consider the role of both (i) the ‘first instance’ arbitrators, with the mandate to consider all issues of law and fact and to decide the entire dispute on its merits; and (ii) the permanent members of the AC, and their appropriate (limited) mandate in appeal. This is complex and will most likely be a source of disagreement and ultimately some ambiguity leading to unpredictability. Additional complexities are introduced by the fact that any rules drafted by the Working Group will ultimately be subject to interpretation. Will the Working Group create an interpretative mechanism or will the delegations defer to the VCLT?

 

Final Remarks

In addition to the above, there are many other elements to consider: in relation to the timing, statutes of limitation, and jurisdiction in relation to national courts. If the UNCITRAL Rules are applicable, who will have jurisdiction to decide on a request for the setting aside of the award? The same applies for ICSID annulment committees. The Secretariat raised the idea for the AC to ‘have the ability to annul awards rendered in first instance’. This would mean that all Contracting Parties to the instrument that creates jurisdiction for the AC to set aside awards will have to amend their national provisions on annulment. Tilting at those windmills of sovereignty will be an ambitious undertaking.

Another matter that has been extensively addressed in the 1958 New York Convention and national laws is the possible adjournment of enforcement. This becomes an issue for consideration for the AC as well. It seems the Secretariat is considering such temporary stay. This would open the floodgates to dilatory tactics. Something that has been a basis for criticism of the current system. What would be the point of these ‘reforms’ if it leads to excessive delays?

Finally, the Secretariat has addressed the applicability of the 1958 New York Convention. However, while addressing this quintessential matter, it does not rely on Article I of the New York Convention, which determines the scope of the treaty. The Secretariat finds that the arbitration law of the place of arbitration determines whether a decision constitutes an award. This is not correct: it is the lex fori since the New York Convention is directed to the court of enforcement (of an arbitration agreement under Article II and arbitral award under Article V). Overall, the proposals for an appeal function lead to many issues that have been left unanswered.

Uncertainty has a chilling effect on investment. Therefore, for those countries with an interest in attracting foreign investment, it is important to reconsider these radical proposals, including how they would work in reality and whether it is in effect yet again one of those unrealistic dreams of the Man from La Mancha.

To see our full series of posts on the UNCITRAL WG III reform process, click here.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Kristen Blankley’s Paper on Online Resources and Implementing Parenting & Financial Plans

ADR Prof Blog - Wed, 2020-03-25 14:25
From BFOI Kristen Blankley: Colleagues, Here is a near-final draft of an upcoming paper that I am publishing in the Fordham Law Review.  It is about Online Resources and implementing Parenting & Financial Plans. Maybe it will give some people new ideas on working with parenting and financial plans in a pandemic. It might give … Continue reading Kristen Blankley’s Paper on Online Resources and Implementing Parenting & Financial Plans →

To stay or not to stay? B.C Supreme Court grants a stay and finds arbitration clause contained in a standard form contract to be valid

International Arbitration Blog - Wed, 2020-03-25 14:00
In a recent case brought before the British Columbia Supreme Court, Williams v. Amazon , the Court had to determine the validity of an arbitration agreement...

Job Announcement – Director of Mediation and Assessment Program

ADR Prof Blog - Wed, 2020-03-25 11:36
From Jill Morris, the Director of the Mediation and Assessment Program, of United States District Court for the Western District of Missouri: The court is hiring Jill’s successor and here’s the job announcement.  The closing date for applications is April 15, 2020.  (Click the title to read the post.)

Simulations for Online Negotiation

ADR Prof Blog - Wed, 2020-03-25 11:26
From Obi-Wan-FOI Noam Ebner: Hi all, Here’s a resource I’ve prepared for simulating negotiation at-a-distance, that some of you might put to good use now that our students and courses are all online.  Fit the fuss to the forum! In AuraCall (Origin), a telecommunication company’s customer service center requires negotiation training in order to improve … Continue reading Simulations for Online Negotiation →
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