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A Black Swan Event? Implications of COVID-19 for Damages and Valuations in International Arbitration

Kluwer Arbitration Blog - Mon, 2021-03-15 00:52

The onset of COVID-19 has brought significant volatility to financial markets and increased uncertainty for investors and businesses of all classes. In the arena of international arbitration, where stakes can be in the multibillions, the ability to assess damages despite this uncertainty is of paramount importance.

This post will address some insights from the webinar organised by FTI Consulting and Freshfields Bruckhaus Deringer, as part of the Delos Guide to Arbitration Places (GAP) Symposium 2020, in navigating damages and valuations amidst COVID-19, specifically:

  • COVID-19 as a Black Swan or force majeure event;
  • Shifts in dispute strategy in response to COVID-19;
  • Challenges in valuation resulting from COVID-19; and
  • Lessons and parallels to be drawn from the Great Financial Crisis (GFC), in 2008.

 

Black Swans and Pandemics

“Black Swan” is a term coined by Lebanese author and former NYU professor Nassim Taleb to describe an event with extreme impact that defies regular expectations, but that is, in hindsight, rationalised as predictable rather than an outlier. When the onset of COVID-19 took most of the world by surprise early in 2020, many were quick to label it as the Black Swan of the decade.

Taleb dismisses this notion. He points to individuals, such as Bill Gates, who have long discussed the possibility of a global pandemic. Indeed, large pandemics have occurred regularly throughout history, and most governments have had some form of pandemic response plan for many years.

COVID-19 is perhaps better viewed through legal lenses as a force majeure event. Notwithstanding the lack of definition of force majeure under most common law jurisdictions, COVID-19 could fall within standard force majeure provisions in commercial contracts.

The key question is one of legal causation: how immediate or remote is the chain of events leading from the onset of COVID-19 to the losses suffered by the claimant? The question may arise more particularly in claims relating to (1) breaches due to parties pulling out of M&A transactions, joint ventures, or supply agreements; (2) delays in construction projects; or (3) price adjustment in long-term supply contracts.

Bilateral investment treaty (BIT) claims may also be brought by foreign investors who have been impeded by restrictions put in place by governments in reaction to COVID-19, although tribunals are likely to give significant leeway to governments for actions perceived to have been taken in the public interest (see prior discussion on the Blog of possible investment claims here and here).

 

COVID-19 and Disputes Strategy

Traditionally, damages are assessed at the date of breach, disregarding events arising after that date. However, due to the high degree of uncertainty in markets brought about by COVID-19, the value of the assets at the heart of a dispute may have changed in significant and unexpected ways by the time of an award.

Tribunals may therefore prefer to consider all available information and apply their judgement in selecting the right mix of data and inputs to produce a reliable assessment. This may imply a shift in the date of assessment away from the date of breach and towards the date of award, thereby incorporating full knowledge of the pandemic, actual events post-breach, and current expectations of future developments.

This approach to the date of assessment is not without legal precedent. The Chorzów Factory (1928) case is seminal in international law for articulating a principle of full reparation for unlawful expropriation – that is, damages must wipe out all actual consequences of the illegal act and are not limited to just the value of the dispossessed asset at the date of breach, plus any interest to the date of award. On the basis of this principle, tribunals evaluating certain BIT claims have ruled for damages to be assessed at the date of award, first in ADC v Hungary (2006), and recently in ConocoPhillips v Venezuela (2013).

An analogue is found in English contract law in the form of the compensatory principle – the principle that damages should only be awarded for losses actually suffered. Despite an accepted practice of valuing damages at the date of breach, the compensatory principle often prevails in limiting damages when events arising after the date of breach have the effect of reducing or erasing the claimant’s losses. In Golden Strait Corp v NYKK (2007), NYKK repudiated its contract with Golden Strait Corp before it was certain that the Iraq War would break out in March 2003, but was liable for no damages after March 2003 on the basis that the Iraq War would have allowed NYKK to exercise an early termination clause (for a relevant analysis of Golden Strait see, e.g., Bunge SA v Nidera BV (2015), at paras. 64 et seq., which refers to the Golden Strait case as The Golden Victory).

The legal approach of assessing damages at the date of award may therefore compensate claimants more fully under the scenario in which COVID-19 leads to larger losses after a date of breach, and protect respondents against compensating for temporary losses that have been reversed by the date of award. However, this may introduce additional strategic complexity when negotiating the procedural calendar of an arbitration. For example, claimants may choose to delay initiating a claim until there is greater visibility of the long-term financial impacts from COVID-19 (e.g., insolvency triggered by delays or failed agreements), in contrast to the typical preference to proceed quickly. Tribunals may choose to bifurcate proceedings, so that issues of quantum can be addressed separately once more information has emerged.

There are also implications for the giving of expert evidence. Uncertainty amidst COVID-19 implies that expert assessments and opinions will evolve over the course of a case. To streamline expert evidence under such variability, it may be desirable to have experts draw up an initial joint report setting out their areas of agreement, and liaise privately with tribunals to resolve residual disagreements. The use of a single tribunal-appointed expert may further reduce the procedural inefficiencies. Such procedural innovations, however, involve parties giving up control and may be resisted.

 

COVID-19 Infected Valuations

In valuing a business, the three classical approaches are: (1) the income approach, which considers future cash flows the business can generate; (2) the market approach, which considers the valuations at which comparable businesses are traded; and (3) the asset approach, which considers the value of its constituent assets, or the cost to replace them. In light of COVID-19, there are increased difficulties to applying these classical valuation approaches in an uncontroversial manner.

Claimants may project a quick recovery in their businesses’ cash flows and suggest immunity to various sources of risks, while respondents may take a view that the adverse effects of COVID-19 will drag on and reduce the claimants’ losses to a minimum. Such arguments imply that valuations based on the income approach will be even more hotly contested than usual. There may also be few transactions in comparable businesses that occurred under market conditions sufficiently similar to those on the date of breach to act as reference points for the market approach.

Despite these difficulties, tribunals arguably have a mandate to arrive at a reasonable quantum of damages, and may consider lowering the bar for what can be considered reasonable certainty in the current environment. After all, stock market participants and investment bank analysts have continually valued businesses even amid such uncertainty. There is no doubt, of course, that assessing damages under such circumstances requires hard thinking. Given that losses may extend beyond a date of assessment, there is the need to have a reasonable forecast for the post COVID-19 world, as well as to model the scenario that would have materialised in such a world but-for the occurrence of a breach.

The use of normalised performance metrics, such as normalised earnings, has been proposed as one answer to the above challenges. The idea is that the valuer would ‘strip out’ the effects of COVID-19 from the business’s current performance, to estimate how it will perform in a post-COVID-19 world. Such metrics are sometimes used in other valuation contexts including post-acquisition disputes following allegations of fraud. They should be employed with caution, however, as they represent an approximation that may not be warranted if the business in question is pending restructuring or even liquidation, or if the pandemic’s effects are longer-lasting and more severe than assumed in the valuation.

Finally, there is evidence that, in the face of significant uncertainty, tribunals exhibit anchoring bias. That is, tribunals are influenced by the reference points provided in each party’s damages assessment. Such bias could be reduced however, if and as tribunals provide more detailed explanations for the rationale behind their decisions.

 

Financial Crisis and COVID-19 Crisis

Some parallels can be drawn with the situation during and after the Global Financial Crisis (GFC), in 2008. For example, in their initial phases, there were similar delays in initiation of claims given that potential claimants were occupied with more immediate issues in their businesses.

The spike in volume of claims reported since by various arbitral institutions also mirrors the experience of the GFC. Another similarity is the apparent tendency for a greater proportion of disputes to proceed to a final award. These trends can be explained by claimants being less willing to walk away from a dispute when they are cash-constrained and see the values of their other assets in decline. As with the GFC, however, there will likely be difficulties in securing payment of an award amidst the financial distress caused by COVID-19.

Another parallel with the GFC is that state and corporate actors have taken advantage of the rapidly changing circumstance to modify their contractual and commercial relationships. For example, both after the GFC and in response to more recent events, various governments reduced their financial support for renewable energy projects to manage public spending. After the GFC, these changes triggered a series of disputes in which investors challenged the validity of the states’ changes to their renewable energy regimes. It seems likely that similar issues will arise in relation to state actions amidst COVID-19.

Both crises have also given rise to an environment of extensive governmental support. While there is typically no need to factor such governmental support into a damages calculation, there are instances where the level of support received by a business may become relevant, for example, if a business received a government bailout to address impending insolvency resulting from a failed contract which it would not have received had the contract been performed. Here too, careful thinking is required.

 

The Only Certainty is Uncertainty

Despite the uncertain and difficult context that COVID-19 has presented, the usual principles for valuation and damage quantification continue to apply. The fact is, uncertainty has always been present in damages and valuations, and the scale of COVID-19 has merely highlighted the need for more thoughtful and rigorous attention to issues of quantum. Perhaps wisdom requires accepting that uncertainty is the only certainty for those dealing in damages.

 

This article draws on insights from a webinar organised by FTI Consulting and Freshfields Bruckhaus Deringer, as part of the Delos Guide to Arbitration Places (GAP) Symposium 2020. The webinar was moderated by Hafez Virjee (Delos Dispute Resolution / Virjee Arbitration, London / Paris). Speakers included Lucy Martinez (Martinez Arbitration, Australia / UK), James Nicholson (FTI Consulting, Asia), and Noah Rubins QC (Freshfields Bruckhaus Deringer, Paris). The speakers thank Oliver WATTS and Quan Wei KOA of FTI Consulting Singapore for their excellent help in preparing this post.

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To What Extent Will the AfCFTA Impact the Number of ISDS Cases Involving African States?

Kluwer Arbitration Blog - Sun, 2021-03-14 01:00

Cases involving African parties contribute to a significant number of International Centre for the Settlement of Investment Disputes (ICSID) cases. Indeed, 15% of ICSID cases involve parties from sub-Saharan Africa and 18% of ICSID cases involve parties from Middle East and North Africa. The UNCTAD database of Investor State Dispute Settlement (ISDS) cases records 145 cases in which one of the parties is African, which translates into 13.7% of the total number of ISDS cases.

The express provisions of the dispute resolution clauses under the ICSID and the African Continental Free Trade Agreement (AfCFTA) along with its annexures, suggest that the dispute resolution bodies under both agreements have distinct functions and jurisdictions. ICSID’s jurisdiction involves disputes arising directly out of an investment between a contracting state and a national of another contracting state (ICSID, Chapter II, Article 25 (1)), while AfCFTA’s jurisdiction involves disputes between member states in relation to the AfCFTA agreement (AfCFTA Article 20 (1) — (3); Protocol on Rules and Procedures on the Settlement of Disputes, Article 3 (1)). This key difference between the nature of the disputes administered under each instrument suggests that the AfCFTA would not have any significant impact on the number of ICSID and ISDS cases in general.  However, there are factors which are uncertain for now, i.e the proposed Investment Protocol (currently undergoing negotiations) and unratified BITs, which may determine the impact that AfCFTA may have on ICSID cases in the future.

This post will discuss the potential impact AFCFTA may have on ISDS cases involving African States.

 

Factors that imply that AfCFTA will not affect the number of ISDS cases

As mentioned above, the AfCFTA provides for inter-state dispute settlement concerning and in relation to the rights and obligations of the states party to AfCFTA (i.e., trade of goods and services, investments, and intellectual property), while ICSID strictly deals with investment disputes.

Only state parties have access to resolution of disputes under the AfCFTA Dispute Settlement Body (DSB), i.e., the 55 member states of African Union (AfCFTA, Article 20(1)). In this context, member states refer to other member states of the African Union that have ratified or acceded to the AfCFTA and for which the AfCFTA is in force (AfCFTA, Article 1 (v)). Private parties do not, in their own right, have access to AfCFTA dispute settlement mechanisms. However, most trade transactions involve private entities, and home States may be willing to protect their rights in order to ensure certainty and predictability. In this sense, private parties will only be protected if their home State is a party to the AfCFTA, and in cases where the home State is willing to bring a claim.

ICSID, on the other hand, deals with disputes between states and foreign investors. It is also important to note that most of the African ISDS cases were or are being administered by ICSID. As stated above, the ICSID Caseload Statistics show that only 15% of ICSID cases are from sub-Saharan Africa and 18% of ICSID cases are from Middle East and North Africa. The UNCTAD database also records that 127 investor-state dispute claims have been filed against African countries since 1987. However, from the ICSID 2017 Statistics focused on Africa, of the 135 cases which represent cases involving African parties registered in ICSID, as at 31 May 2017, 79% were commenced by investors from States outside Africa. Likewise, from the UNCTAD database on ISDS cases, of the 127 investor claims filed against African countries since 1987, 96.8% were commenced by investors outside Africa. These figures demonstrate that a significant number of disputes submitted to ICSID and/or ISDS claims in general, involving African parties, were between African parties and . Disputes of this nature will most likely continue to be submitted to the ICSID or other institutions to which African states are parties, as AfCFTA does not currently have jurisdiction to deal with these sorts of disputes. Interestingly, only 21% of cases administered by ICSID involve African investors. Although these figures show that most claims were not brought by African investors, this may change with the introduction of AfCFTA, and we may then begin to see more disputes involving African investors and African states.

 

Factors that imply that the AfCFTA may affect the number of ISDS cases

The first factor is that, considering the reservations and concerns regarding ISDS, AfCFTA member states may decide to opt for an active state-state dispute settlement mechanism as an alternative or strong complement to an ISDS mechanism.1)African countries have, in recent times, raised concerns about the traditional investor-state dispute settlement including lack of legitimacy and transparency, exorbitant costs of arbitration proceedings and arbitral awards as well as inconsistent and flawed decisions. Countries have also complained that the system allows foreign investors to challenge legitimate public welfare measures of host states before international arbitration tribunals. jQuery('#footnote_plugin_tooltip_36514_6_1').tooltip({ tip: '#footnote_plugin_tooltip_text_36514_6_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); An example is South Africa, which ratified the AfCFTA on 31 January 2019 and is the only country in Africa that has openly rejected international investment arbitration.2)Following a multi-year review of its BIT framework, the South African Government terminated some of the country’s first generation BITs, decided to refrain from concluding new BITs in future unless warranted by compelling economic and political reasons, and put in place a domestic policy framework for resolving investment disputes. jQuery('#footnote_plugin_tooltip_36514_6_2').tooltip({ tip: '#footnote_plugin_tooltip_text_36514_6_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The use of State-State dispute settlement mechanisms as an alternative to ISDS is becoming popular and is increasingly found in BITs. While it may be argued that this factor may not affect the cases settled by ICSID because ICSID deals with cases involving a foreign investor and an African host state, there are instances where a State may decide to file a claim on behalf of an investor. Also, in cases where both states are African States, there may be a preference to submit disputes to the AfCFTA DSB. The possibility of this happening is likely as the number of intra-African BITs are increasing. For example, Morocco has concluded BITs with seven other countries in Africa, and South Africa has BITs in force with Zimbabwe, Nigeria, Senegal and Mauritius.

In this instance, where there are disagreements between member states, they will likely be more willing to submit to the dispute resolution body under AfCFTA than ICSID, particularly because there might be an assumption that the former is better suited to handle African cases. This is further strengthened by the fact that although most AfCFTA member states may have signed and ratified the ICSID, dispute resolution under the ICSID only applies where contracting states consent and there is no binding obligation to use dispute resolution under ICSID (ICSID, Chapter II, Article 25). It should however be noted that in instances where the disputes are not covered by the AfCFTA, the AfCFTA DSB will not have the jurisdiction to administer and govern the dispute.

There is however the concern that an arbitral tribunal may interpret dispute resolution clauses in BITs strictly, particularly BITs entered into before the AfCFTA. In this case, arbitrators may hold that the earlier treaty, in this instance, the BITs, and thus ICSID will be applicable.This is supported by the express wording of Article 30(3) of the Vienna Convention on the Law of Treaties, but will only apply where the provisions of the BIT are compatible with the AfCFTA. The provisions of the AfCFTA are also silent on what occurs in relation to conflict issues involving international treaties and only discusses conflict issues involving regional agreements (AfCFTA Article 19).

The second factor is that it has been suggested that most African states may use the AfCFTA Investment Protocol as a basis for future investment agreement negotiations, including for agreements with non-African countries. The question of whether the Investment Protocol, when finalized, will provide for an ISDS mechanism is likely to prove very controversial. A number of factors work together to muddy the landscape.

Notwithstanding this, the AfCFTA Investment Protocol has the potential to streamline the complex framework of intra-African investment by replacing existing intra-African BITs with a single treaty that would regulate all intra-African investments.

 

Conclusion

In view of the above, it is clear that once the AfCFTA becomes fully operational, it will introduce changes into the investment landscape. However, how far these changes will go to impact existing ISDS is yet to be seen. It is however hoped that both ICSID and AfCFTA are able to work in parallel to resolve investment disputes without encroaching on each other’s jurisdiction, and granting parties the distinct dispute resolution mechanisms needed at a time.

 

The author wishes to acknowledge the assistance of Professor Maxi Scherer of WilmerHale in the preparation of this article. This article is based on a speech delivered at the Chartered Institute of Arbitrators, Nigeria Branch conference on ‘Free Trade Regimes and Investor State Disputes: Intersection between ICSID and AfCFTA’, on 26 November 2020.

References[+]

↑1 African countries have, in recent times, raised concerns about the traditional investor-state dispute settlement including lack of legitimacy and transparency, exorbitant costs of arbitration proceedings and arbitral awards as well as inconsistent and flawed decisions. Countries have also complained that the system allows foreign investors to challenge legitimate public welfare measures of host states before international arbitration tribunals. ↑2 Following a multi-year review of its BIT framework, the South African Government terminated some of the country’s first generation BITs, decided to refrain from concluding new BITs in future unless warranted by compelling economic and political reasons, and put in place a domestic policy framework for resolving investment disputes. function footnote_expand_reference_container_36514_6() { jQuery('#footnote_references_container_36514_6').show(); jQuery('#footnote_reference_container_collapse_button_36514_6').text('−'); } function footnote_collapse_reference_container_36514_6() { jQuery('#footnote_references_container_36514_6').hide(); jQuery('#footnote_reference_container_collapse_button_36514_6').text('+'); } function footnote_expand_collapse_reference_container_36514_6() { if (jQuery('#footnote_references_container_36514_6').is(':hidden')) { footnote_expand_reference_container_36514_6(); } else { footnote_collapse_reference_container_36514_6(); } } function footnote_moveToAnchor_36514_6(p_str_TargetID) { footnote_expand_reference_container_36514_6(); 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 * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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How labels affect communication + conflict resolution

Communication and Conflict Blog - Sat, 2021-03-13 08:29
This page considers the impact of labels and preconceptions on the effectiveness of communication and conflict resolution.

A Conversation with Claudia Salomon: Rising Arbitrators and the Developing World of International Arbitration

Kluwer Arbitration Blog - Sat, 2021-03-13 00:16

On 21 January 2021, the Rising Arbitrators Initiative (RAI) had the opportunity to speak with Claudia Salomon, the incoming first woman President of the ICC International Court of Arbitration (ICC Court), with closing remarks by Yves Derains, a former ICC Secretary General.

RAI founders Rocío Digón (White & Case), Ana Gerdau de Borja Mercereau (Derains & Gharavi), and Alexander Leventhal (Quinn Emanuel) led the interview, which was opened by Flávia Mange (Mange Gabbay) from RAI’s Executive Committee. The interview was divided in three parts: (i) career advice for rising arbitrators; (ii) plans for her presidency with the ICC Court; and (iii) thoughts about the developing world of international arbitration.

 

Introduction

Mr Leventhal asked Ms Salomon, about how she became acquainted with the practice of international arbitration. Recalling her period at Harvard Law School, she noted that she was actually very interested in election law and voting rights. During her interviews for litigation positions, the notion of international arbitration was introduced, and, later, her practice at Squire Sanders involved some international arbitration work mixed with the litigation practice. During that time, after the events of 9/11, she took an opportunity to go to Prague to represent the firm’s clients in an arbitration against financial institutions, and there she stayed for three years, thence consolidating her practice and passion for international arbitration.

 

Tips for Young Arbitrators

Moving on to her first experience as arbitrator, Ms Salomon highlighted the fact that conflicts of interest were the main issue preventing her from taking appointments, being an associate in a big law firm. The first appointment came from an institution. Ms Salomon pointed out how important the role of institutions is in appointing young and first-time arbitrators, fact which is confirmed by institutional statistics.

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An important aspect of having a breakthrough moment in terms of a first appointment is building a good rapport/profile with arbitration institutions, which can be done in various ways. Giving the example of one of her younger associates at Latham & Watkins, she told listeners how an internal seminar elaborated by the said associate went on to become an article picked up and published by Global Arbitration Review, which then led the associate to become involved with an ICC YAF panel discussion. This in turn led him to a position of leadership within the ICC YAF and, moments later, he was appointed a sole arbitrator by the ICC Court.

Acting alone as a sole or emergency arbitrator, can come with certain challenges for the first-time arbitrator. She praised initiatives like RAI’s as “phenomenal” solutions to assist younger arbitrators to tackle these challenges, by thinking about and discussing these issues before they appear. Her advice for any first-time arbitrator facing these challenges is to confront the problems right away. She elaborated that, as counsel, we are used to discussing in a team, relying on others by working together, but as an arbitrator, one has to do it by oneself. Also, she indicated in passing that the irony of first-time arbitrators, appointed by institutions, is often to act in low value disputes as sole/emergency arbitrators, which often involve complex points of procedure, but involving inexperienced counsel, with no guidance from more experienced members to rely on. Ms Salomon added that we should not be paralysed by the normal fear that may arise in the context of a challenge, and get the job done.

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These challenges will also be faced by younger arbitrators who will need to balance their counsel work with their arbitrator work, usually on a strained timeframe at both ends. Younger arbitrators need, she advised, to focus on the case management conference and think about the process, and the prospect of being able to draft the award in a short period of time. Nonetheless, this comes with a sure recognition from clients, who value the experience that lawyers have once they have sat at the other side of the table.

When asked what she thinks about professional marketing goals, that is, whether it would be advisable (or not) to market oneself in a particular area of the law when putting oneself in the market as an arbitrator, Ms Salomon noted this is actually something that all legal practitioners have to think about during their entire careers. Ms Salomon suggested that practitioners be open to change, and be able to strike a fine balance between focusing and being open to a wide variety of opportunities. She added that while it was not a good idea to specialise too young, one should find strength in one’s particular backgrounds, using them to highlight one’s practice. “‘What do you want to get hired to do?’ You need to highlight this particular experience,” she declared.

Likewise, when dealing with balancing workload between counsel jobs and arbitrator jobs, Ms Salomon mentioned Ms Lucy Reed’s speech on David Caron’s “Rule of ‘X’” in the 25th Goff Arbitration Lecture in Hong Kong, “which, in simple form, is that each arbitrator should set a number – X – as the upper limit of cases that he/she is capable of managing responsibly at the same time, while also balancing his/her own life outside arbitration.

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Projects for the ICC Court of International Arbitration

One of RAI’s Executive Committee members, Dr Crina Baltag, asked what can be done to foster the concerns around diversity of arbitrators with users of arbitration. According to Ms Salomon, this is the issue that needs to be confronted in 2021. The ICC Arbitration Rules are based on user choice, she said; thus, users are demanding that arbitration reflect the actual community of users.

Drawing Ms Salomon’s attention to the recently published ICC Rules 2021, Ms Digón asked her whether there is anything in the Rules that would need modification to further expand the role of diversity and the arbitrator selection process. Ms Salomon promised as the future ICC Court President not to say it is not her problem, and that, should insufficiencies be pointed out, it shall be her task to find a solution for them. She is eager to explore said solutions in the broader landscape of diversity and wants to put the ICC in a leadership position in this respect.

Answering a question from Jose Sanchez about the perceived image of arbitration as accessible only to the elites, Ms Salomon identified how this question is intrinsically related to the issue of legitimacy of the arbitration process, one she wishes to espouse during her presidency. Legitimacy should be achieved through the exposure of new names and more diversity, which will allow for arbitration to become the “antithesis of a club,” she declared.

Moreover, Ms Salomon identified her main objective during her tenure to be twofold. According to Ms Salomon, among her objectives within the ICC Court is to ensure that people see the ICC as the most trustworthy institution, an institution that connects with them and assures their values. Ms Salomon also said that paramount to her objectives is the users’ experience with ICC arbitration and to ensure that such experience exceeds expectations every day. She noted that the arbitration process needs to be predictable, and that it is essential for the ICC to communicate issues such as timing and costs to the parties.

Intrigued about the efforts that arbitration practitioners are now faced in terms of cybersecurity, RAI member Sebastian Kneesel asked Ms Salomon which steps institutions and arbitrators should be taking to tackle these issues. Among the many points raised, Ms Salomon noted the possibility of institutions hosting platforms where documents are shared, but also whether security standards should be imposed on parties when there is no third-party handling documentation, including, for example, the use of free email hosting providers when sharing sensitive information.

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Evolving Arbitration World

Moving to the third part of the conversation, led by RAI’s Dr Gerdau de Borja Mercereau, Ms Salomon had the stage to answer some questions regarding the evolution of the arbitration practice. Echoing Mr Derains’ own observations, she was asked about her opinions on the growing professionalism of arbitrators and what developments could be seen in recent times over this trend. Ms Salomon addressed the flexibility of the role, one which the New York Convention of 1958 makes no express delimitations to, and how important it is to find distinct people with a variety of backgrounds to act as arbitrators. In terms of the professionalism of the practice developed by arbitrators, an increase in such professionalism can only result in the increase in quality of arbitration, generally. Referring to the situation of arbitrators who may not have large experience as counsel, she points that it is a mixed experience, noting how many different backgrounds (such as young judges, in-house lawyers, and those in academia) can bring positives, and sometimes negatives, to the issue of professionalism.

In another question regarding the usage of arbitrators lists, Ms Salomon brought interesting statistics from the AAA experience, where in about 50% of their cases, the parties would opt-out of their list system, therefore emulating the ICC system for selection of arbitrators. Regarding the ICC experience, she pointed to the new ICC Note to the Parties and its express language on the assistance that the ICC Secretariat can give to help with the constitution of arbitral tribunals, whilst still allowing the parties to engage in the selection process.

While making reference to the book “Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order” by Bryant G. Garth and Yves Dezalay, Dr Gerdau expressed how much arbitration and its sociology has changed. Also, by making reference to Paulsson’s “The Idea of Arbitration”, she asked Ms Salomon about her opinions on how both commercial and investment arbitration are evolving. Ms Salomon stated how commercial arbitration is a rather enduring institution, whilst investor-State disputes have seen a rising questioning over its legitimacy, one she looks forward to discussing during her tenure. She mentioned having current initiatives to foster diversity in arbitration in high regard, applauding such initiatives, as she identifies that the world is “craving connections”, and that the development of new ideas within the market will not come from the top, but rather from a wide variety of voices, voices which she will be open to hear what they have to say.

On a question about institutional stance (and overall arbitration practice) on double-hatting, and the prominence of practitioners acting as both counsel and arbitrators, Ms Salomon expects for more independent arbitrators to appear, as law firms dealing with the international arbitration market have over the time gotten larger, further increasing the already problematic issue of conflicts.

 

Closing Remarks by Yves Derains

In his concluding remarks, Mr Derains started stating how impressed he was that Ms Salomon had really learned her arbitrator work the hard way, that is, by starting as an emergency arbitrator. As put by Mr Derains, to be a sole arbitrator is always a difficult task. He indicated his personal preference for three-member tribunal positions instead of acting alone, identifying that having other people to talk to can create better discussions, contradictions can be spotted, and that these features are very difficult to come by when acting alone. An impressive way to start as an arbitrator, he said, as he found it surprising that institutions were/are appointing younger arbitrators as sole arbitrators, often in his experience in smaller cases, sometimes with inexperienced counsel, with hard questions being asked for an arbitrator to decide with no support of more experienced practitioners.

On the bright side, he commended young initiatives such as the RAI for they bring better exposure to young arbitrators, to whom it is essential to show the qualities that are expected from arbitrators in their very first appointment to have better chances at securing future appointments. A first experience sitting as an arbitrator can be frightening, but one must be able to decide. Mr Derains indicated the ability to decide is not really a skill that one learns during law school or in any training courses, but it is rather a skill that is developed through practice and self-assurance. One must be able to take the risk to be wrong, and not only get the trust of the parties, but also the trust of one’s professional colleagues: developing a good reputation is important in the arbitration market. Another important feature for young arbitrators to show is cultural neutrality; and by that, he meant that an arbitrator must be open to any culture and must be sure he knows very little, and therefore learn from the parties, listen to them, and pay attention to the case.

Mr Derains concluded by saying he believes the future of arbitration is not in danger, because international arbitration is, really, a need of international trade. Although we have seen in recent years the reappearance of nationalism and receding international trade throughout many places, Mr Derains is of the optimistic opinion that such stances shall not last very long.

Finally, Mr Derains pointed out that the main obstacle for rising arbitrators is that there are possibly too many of them, sharing a word of advice: one is not to choose to develop one’s career as an independent arbitrator because of the perception of it being glamourous, but out of passion and conviction of having the needed skills.

Final words were shared by Ms Mange, wishing the best for Ms Salomon and her incoming challenges as the next president of the ICC Court.

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An Appealable ‘Decision’ Before CAS: What Exactly Are We Talking About?

Kluwer Arbitration Blog - Fri, 2021-03-12 04:39

In accordance with S20.C of the Code of Sports-Related Arbitration (the Code), the Appeals Arbitration Division (AAD) of the Court of Arbitration for Sports (CAS) has jurisdiction “to resolve disputes concerning the decisions of federations, associations or other sports-related bodies insofar as the statutes or regulations of the said sports-related bodies or a specific agreement so provide.” Almost identical wording is also repeated in R27 and R47 of the Code. The Code, however, is silent on the meaning and characteristics of a “decision” as referred to in relevant provisions of the Code, which has raised some controversies among scholars as to what may be called a ‘decision’ appealable before AAD and what formal or substantive requirements are necessary for a document to be considered as such.

Previously, CAS had dealt with the issue when deciding on its jurisdiction to engage with an appeal (see for example CAS 2009/A/2000, or CAS 2018/A/5933). Nevertheless, the most recent decision of the CAS in Karim Safaei v. World Archery Federation & I.R. Iran Archery Federation (CAS 2018/A/5871) – issued on 20 November 2020 – is a notable example as to what shall be considered as an ‘appealable decision’.

 

Relevant Facts of the Case

The case concerned an appeal filed by Mr. Karim Safaei (Appellant), the former president of I.R. Iran Archery Federation, against World Archery (1st Respondent / WA) and I.R. Iran Archery Federation (2nd Respondent / IAF). The Appellant challenged a letter issued by WA on July 31st, 2018. In the letter, WA accepted the outcome of I.R. Iran Archery Federation presidential election, in which the Appellant had applied to be a candidate, but was not qualified as such.

The challenged letter was issued in response to Mr. Safaei’s complaint to WA. Mr. Safaei believed that the election was not held in conformity with the WA rules and regulations and that he was wrongly disqualified to become a candidate in the election. The WA, after investigating the matter and studying all the relevant documents, issued a letter, which, in relevant parts, read as follows:

the World Archery Executive Board looked at all papers submitted and came to the conclusion noting especially that none of the people that submitted the complaints were present at the assembly.

In his submissions, the Appellant referred to the letter as WA’s “decision” (para. 43), while WA considered it as merely a “letter” and “not a “decision” (para. 44), and accordingly, WA requested the Soler Arbitrator to declare the appeal as inadmissible (para. 45).

The Appeal was rejected by CAS Sole Arbitrator, Michael Beloff QC, on the grounds of a lack of jurisdiction with regard to both Respondents, since the letter in dispute was not among the decisions subject to CAS jurisdiction under the Statutes of WA and IAF. Thus, the Sole Arbitrator did not deal with the substantive submissions of the Parties. The award, nevertheless, contains a remarkable ruling on the meaning of a “decision” which may be appealed before CAS AAD.

 

The Meaning of an Appealable Decision

In deciding on jurisdiction, the Sole Arbitrator referred to R47 of the Code and recalled that for the CAS AAD to have jurisdiction in a given case, there must be, inter alia, an “appealable decision” (para. 49.1). The Sole Arbitrator, therefore, as a primary requirement of its jurisdiction, was required to determine whether WA’s letter of July 31st, 2018 could be qualified as an “appealable decision”.

In doing so, the award is based on the criterion recognized in Swiss case law related to administrative procedure that a decision

is an act of individual sovereignty addressed to an individual, by which a relation of concrete administrative law, forming or stating a legal situation, is resolved in an obligatory and constraining manner. The effects must be directly binding both with respect to the authority as to the party who receives the decision.” (para. 51)

Therefore, in the view of the Sole Arbitrator, for a document to be considered as a ‘decision’ it must have ‘legally binding effect’. In other words, if a communication may have the effect to bind the addressee or the issuer in the legal sense of the word, it will be considered as a ‘decision’ appealable before CAS AAD.

On this basis, since WA’s communication of July 31st, had, inter alia, confirmed the conformity of I.R. Iran Archery Federation election with WA’s rules and regulations, it could be considered as a ‘decision’. In the Sole Arbitrator’s view, the fact that the letter constitutes a ‘decision’ would be better understood if one bears in mind that had the letter not approved the outcome of the election, IAF would have faced certain sanctions based on WA’s Statute (para. 53).

Therefore, contrary to WA’s submissions, the Soler Arbitrator ruled that the letter of July 31st, 2018 was a ‘decision’ within the meaning of R47, although he further held that the decision was not appealable due to limitations under article 1.30.1 of WA’s statute.

 

A Step Too Far?

CAS jurisprudence, specifically in this most recent case of Karim Safaei v. WA & IAF has taken a substantive approach, rather than a formalistic one, when deciding on the nature of documents to be considered as a ‘decision’. The logical implication of such approach is that unlike presumptions that a decision is a document which has satisfied some formal or administrative requirements, it suffices for the CAS panels that the said document may be characterized, in whole or in part, as a “legally binding” communication for the issuer or the addressee, regardless of its form as a letter, memo, report, notice or other similar forms.

In the author’s view, although the formalistic approach is not defensible when dealing with appealable decisions before CAS, in the case of Karim Safaei v. WA & IAF, the sole arbitrator neglected the fact that the WA’s communication of July 31st was addressed to IAF, and not to Mr. Safaei. Moreover, the WA’s communication was only an administrative communication between WA and IAF without any animus decidendi (i.e. an intention to decide on the matter). In other words, the door was wide open for Mr. Safaei to raise his case before competent bodies within WA or before any other national or international judicial body, meaning that the said communication was not a decision of any kind, especially for the purposes of R47 of the Code. In Al-Hilal Club v. FIFA, for instance, the CAS panel held that a letter issued by FIFA for the execution of points deduction, would not constitute a ‘decision’, since it was merely an ‘administrative letter’ and “there was no animus decidendi in the said letter (para. 67). This was the same, at least in WA’s view, for the letter of July 31st issued by WA’s secretary, since it was only of an ‘informative’ nature without affecting the rights of the Appellant, or even IAF to follow the matter by resorting to competent bodies within WA. The fact that the WA’s letter contained certain recommendations for IAF to improve clarity in the election was another indication that the letter was only an ‘administrative’ communication, without any animus decidendi.

In any event, the ruling in this case may be considered as a stricter approach when compared to the previous jurisprudence of CAS arbitrators mentioned above. It leaves no doubt for further cases that the term ‘decision’ must be construed in a broad sense and what is crucial in characterizing an instrument as a ‘decision’ is whether it affects, or intends to affect, the rights of the addressee(s). Therefore, sports bodies shall think twice of the content of their communications towards athletes, coaches or other recipients, since regardless of the form of such communications, and regardless of the genuine intention of the said sport body to issue a decision or not, in the view of CAS arbitrators, they may constitute a ‘decision’ appealable before CAS.

***

The author of this post was a Legal Counsel for I.R. Iran Archery (second respondent) in the case discussed above.

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Anna Howard’s New Book Examines Why Businesses Don’t Use Mediation – And Other Issues

ADR Prof Blog - Thu, 2021-03-11 19:51
Anna Howard‘s new book, EU Cross-Border Commercial Mediation: Listening to Disputants – Changing the Frame; Framing the Changes, provides valuable insights about business disputing.  It reports the findings of her study about mediation of EU cross-border commercial disputes, but the dynamics she describes occur in the US and probably many other countries as well. Anna … Continue reading Anna Howard’s New Book Examines Why Businesses Don’t Use Mediation – And Other Issues →

Be Open like Oprah and Candid like Chrissy

ADR Prof Blog - Thu, 2021-03-11 10:50
Let me start off this post with a caveat–I promise that I had already decided on this as the subject of the post before Sunday’s royal interview expose–really really.  But, if the timing works for you in understanding why Oprah gets all these interviews, I’m happy for your attention too! I started this week talking … Continue reading Be Open like Oprah and Candid like Chrissy →

What Has Changed in Six Years Since the Latvian Arbitration Law “Reform” and What Needs to Be Changed?

Kluwer Arbitration Blog - Thu, 2021-03-11 00:43

Latvia is an infamous unicorn in the field of arbitration because of its record-number of institutional arbitration courts. In November 2013, there were 214 arbitration courts in Latvia. Regretfully, this is not because we as a nation love arbitration that much. Liberal regulations have allowed any legal entity to establish an arbitration court which to a large extent has been misused by creating the so-called “pocket” arbitration courts. This term reflects that, in practice, the Latvian courts have frequently dealt with cases involving  legal entities (or their subsidiaries) that at the same time were the founders of the arbitration court. In other words, on many occasions, the operation of an arbitration court raised questions regarding its impartiality.

Since the entry into force of the newly adopted Arbitration Law, the number of institutional arbitration courts in Latvia has dropped to 68 in February 2021. Although this number is still extremely high, the Latvian Parliament’s efforts to combat the “pocket” arbitration courts and to raise society’s trust in arbitration have generally been effective.

This post illustrates why Latvia nevertheless has a mile to go to be considered as an arbitration-friendly country. Furthermore, I suggest five areas that the Latvian Parliament must immediately address to raise the credibility of Latvian institutional arbitration courts and Latvia as a country for the safe recognition and enforcement of foreign arbitral awards. Overall, this post demonstrates why currently Latvia cannot be considered as a potential seat of international arbitration.

 

Area 1: Form of the Arbitration Agreement

Latvian law only allows arbitration agreements signed by hand (wet ink) or with a secure electronic signature. Although the legislator’s initial aim was to follow Article 7 of the UNCITRAL Model Law on International Commercial Arbitration, it appears that the fear of “pocket” arbitration courts misusing their powers was decisive in the exclusion of arbitration agreements concluded over e-mail. Accordingly, parties to the arbitration agreement from Latvia (or from states which are not parties to the 1960 European Convention on International Commercial Arbitration) will find that their arbitration agreements concluded over e-mail are treated under Latvian law as void. If a Latvian arbitration court accepts its jurisdiction under an arbitration agreement in an e-mail format, recognition and enforcement of an arbitral award in such a case would still be impossible. In Latvia, the state ensures control over the local institutional arbitration courts at the setting aside stage, which means that in such a scenario the Latvian state courts would deny recognition and enforcement. Likewise, it is likely that such an arbitral award would not be recognised and enforced under the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958).

 

Area 2: Appointment of the Arbitrators

The Latvian arbitration courts operate on the basis of closed arbitrator lists. Each arbitration court must have a list of at least 10 arbitrators from which the parties must appoint an arbitrator for their dispute. 60% of the arbitration courts have listed 10 arbitrators, 31% have listed up to 15, and only 9% have listed more than 16 (with the maximum being 58) arbitrators. Accordingly, in almost all cases the parties will have a very limited choice of arbitrators for their dispute. The choice narrows down even more if most of those potential arbitrators are not attorneys-at-law or do not speak the language chosen by the parties to be used in their arbitral proceedings.

 

Area 3: Court Support for Arbitration

Latvian arbitration courts do not have the competence to grant interim (provisional) measures. This power lies only with the Latvian state courts and is limited in time. The Latvian state courts can grant interim measures in support of local (or international) arbitration only prior to the commencement of arbitral proceedings. This means that the Latvian state courts will not provide any support in terms of interim measures after the case is already in the arbitration court.

The legislator’s reasoning behind this set-up was to maintain the speed and, thus, efficiency, of arbitration as a means of dispute resolution. According to the Latvian legislator, if state courts had the competence to grant interim measures during the arbitral proceedings, courts would have to request the case file from the arbitration court to make such a decision. As the legislator argued, this would extend the arbitral proceedings which would decrease their efficiency. Moreover, the Latvian state courts would not be able to request the case file and make a decision on interim measures in the 10 days prescribed by law.

Regrettably, Latvian state courts will not provide any support also at the recognition and enforcement stage. The law only allows to secure the enforcement of a Latvian court decision on recognition and enforcement of a foreign arbitral award. In practice, this is most often when the most valuable assets have already disappeared due to the simple fact that, in Latvia, the recognition and enforcement of foreign arbitral awards is decided in an open court hearing with the participation of parties.

Enforcement of partial (separate) international arbitration court awards, such as awards on advance payment of costs, is likely possible in Latvia. This is not explicitly addressed in the law and the Latvian court practice is very undeveloped in this respect.

 

Area 4: Witness Evidence

The law does not recognise party-appointed expert witnesses or any fact witnesses at all. The legislator has been of the opinion that, once more, the main advantage of arbitration, as opposed to litigation, is the speed of proceedings. Examination of witnesses, in the opinion of the Latvian legislator, is nothing more than a waste of time. Accordingly, written witness statements, which are commonplace in international arbitration, are also not allowed under Latvian law. In practice, this flaw in the law may be partially circumvented by a party authorising a fact witness through a power of attorney (e.g., a company management board member or an accountant) to give explanations as their authorised representative.

When it comes to experts in the arbitration, the law only allows experts appointed by the arbitral tribunal. The parties can submit expert reports, e.g. on quantum, as written evidence. However, the examination of a party-appointed quantum expert is not possible, unless the quantum expert appears in the arbitration court hearing as an authorised representative of a party.

Therefore, you will be able to properly argue your case in a Latvian arbitration court with fact witnesses and expert witnesses appearing as authorised representatives. An arbitral tribunal composed of attorneys in law experienced in international arbitration will obviously treat such authorised representatives as who they really are.

 

Area 5: Other Procedural Aspects

The procedural rules on recognition and enforcement of foreign arbitral awards are overly formalistic in respect of determining the Latvian court’s jurisdiction and the compensation of legal costs.

The law states that the application on recognition and enforcement of a foreign arbitral award must be submitted to a district (city) court based on the place of enforcement of the arbitral award or the declared place of residence (or legal address) of the defendant. Therefore, if you apply to the Latvian court because the non-Latvian defendant may own assets in Latvia, you must provide credible evidence regarding the location of the assets in Latvia. If you have merely a suspicion that the defendant may have a bank account in Latvia, this surprisingly will not be enough for the Latvian court to establish its jurisdiction.

As regards legal costs, the law does not prescribe compensation of attorney fees incurred as a result of the recognition and enforcement proceedings of a foreign arbitral award in Latvia. Although the state fee is symbolic (max. EUR 285) and it is awarded to be compensated by the defendant, the claimant must take into account that he will have to bear the attorney fees himself.

 

Conclusion

The current arbitration situation in Latvia is an example of how a very liberal regime may severily undermine the trust in arbitration as an effective and generally recognised means of dispute resolution. This loss of trust in arbitration has further resulted in an overly restrictive regime for conducting arbitration in Latvia. The procedure is far from how the international arbitration courts operate. Bringing Latvia closer to the international arbitration community should take at least six more years, but it is not impossible, provided that the legislator initiates reform in the areas outlined in this post.

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Welcome to the New Arbitrate.com

ADR Prof Blog - Wed, 2021-03-10 12:34
My colleague, Amy Schmitz, and mediate.com CEO Colin Rule announced that they have re-built and re-designed the arbitrate.com website from the ground up to offer a powerful set of updated features and capabilities. Take a look. [Click on the title of this post to access the website.]

Discussions in Dispute Resolution Virtual Book Launch – Round 2 with Jean Sternlight

ADR Prof Blog - Wed, 2021-03-10 12:07
Last week I had the pleasure of starting off the virtual book launch for Discussions in Dispute Resolution: The Foundational Articles (book and book launch details here) by interviewing Carrie Menkel-Meadow.  It was super fun, and the link is here if you missed it or would like to watch it again. What interesting things will … Continue reading Discussions in Dispute Resolution Virtual Book Launch – Round 2 with Jean Sternlight →

To Bifurcate or Not? The Ontario Court of Appeal Prohibits Appeal on a Preliminary Question of Jurisdiction

International Arbitration Blog - Wed, 2021-03-10 12:01
Why This Decision is Important

In United Mexican States v Burr, 2021 ONCA 64 (“Mexico v Burr”), the Ontario Court of Appeal (the "Court") addressed a nuanced distinction for parties seeking to challenge an arbitral tribunal's award on jurisdiction as “a preliminary question” under Article 16(3) of the UNCITRAL Model Law on International Commercial Arbitration (the "Model Law") as opposed to “in an award on the merits” under Article 34 of the Model Law.

Tread Your Arbitral Path in Asia: Navigating the Promise and Perils of Your First Appointments

Kluwer Arbitration Blog - Wed, 2021-03-10 00:39

On 23 February 2021, the Rising Arbitrators Initiative (RAI) and HK45 co-hosted the third installment of the webinar series The Rising Arbitrator’s Challenge: Navigating the Promise and Perils of Your First Appointments.

As the webinar series aims to shed light on different jurisdictions, the third installment focused on Asia. The overarching topic addressed the thorny issues that rising arbitrators encounter in their first appointments. Ms. Joanne Lau, who moderated the webinar, invited the panel, comprising of Professor Joongi Kim, Ms. Yoshimi Ohara, Mr. Andrew Pullen, and Dr. Ling Yang, to share their views on: their first appointment, conflict of interest issues, case management challenges and tips, as well as the impact of cultural differences in arbitration proceedings.

The panelists offered key insights and advice that are of vital importance for young practitioners who wish to begin their arbitrating career. This post provides a synopsis of the views discussed in the webinar.

 

Insights on the First Arbitral Appointment Experience

Ms. Joanne Lau opened the discussion with a retrospective question, asking the panelists to share their experience of their very first arbitral appointment. All panelists received their first appointments through arbitral institutions. Mr. Andrew Pullen began his quest by applying to the panel of arbitrators of SIAC, which in turn gave him his first appointment as a sole arbitrator. Following a similar path, Ms. Yoshimi Ohara was appointed by the JCAA as a sole arbitrator. As for Professor Joongi Kim, he coincidently received two consecutive appointments within days, one through party appointment in an institution in Paris and the other by a local Korean institution; he sat as wing arbitrator in both instances.

However, obtaining their first appointments were not free of obstacles, as the majority of speakers encountered a number of challenges that would delay the process. Conflicts of interest were the first challenge, as may be expected for those practitioners in large firms. In fact, Mr. Pullen and Ms. Ohara were conflicted several times before they actually landed their first appointment. Other thorny issues tend to emerge during the proceedings, for example, if one of the parties is not experienced with international arbitration proceedings, or worse, if they are defaulting.

On the positive side, it was agreed that sitting as an arbitrator provides enriching insights. To name one, when acting as party advocate after serving as arbitrator, advocates become savvier about how to better persuade a tribunal.

 

The Role of HKIAC in Supporting Rising Arbitrators

Dr. Ling Yang discussed the various efforts exerted by HKIAC to support rising arbitrators. First, Dr. Yang explained that in 2020, 50% of the institution’s appointments were arbitrators who had not been previously appointed in the past three years.  This demonstrates the HKIAC’s efforts in avoiding repeat institutional appointments, which in turn expands the pool of new arbitrators.

Second, besides having a panel of experienced arbitrators, HKIAC also has a list of arbitrators that includes practitioners who do not necessarily have achieved their first or multiple appointments. A prerequisite to being on the list, nevertheless, is to have significant experience in arbitration, such as party counsel.

Third, HKIAC is the first institution to offer a Tribunal Secretary Training Programme. It is well established that one of the paths to a career as an arbitrator stems from acting as a tribunal secretary on multiple cases. Thus, aspiring arbitrators may wish to participate in this assessed program which will qualify them to become tribunal secretaries worldwide.

You may find further discussions on the appointment procedure of HKIAC here.

 

Conflicts of Interest Hindering Rising Arbitrators — What to Do?

While rising arbitrators are encouraged to widen their visibility by networking and by building relations with institutions, this, however, raises conflicts issues. First, they may be perceived as biased due to their closeness with the institution(s) or with arbitration practitioners. Second, when coming to disclose, rising arbitrators may not know how much should be disclosed; in this respect, the panelists suggest that it is better to disclose any matter that the arbitrator is hesitant of. Third, Professor Kim added that parties who lack the understanding of disclosure guidelines might exclude independent and impartial arbitrators.

 

What Are the Different Challenges Faced When Sitting as a Sole Arbitrator as Opposed to Sitting in a Three-Member Tribunal?

For rising arbitrators, sitting as a wing arbitrator in three-member tribunals may be easier to handle in the first appointments, yet, the panelists also argued that assuming the sole arbitrator hat can have its unique advantages.

Acting as wing arbitrator allows the person to benefit from the wisdom and experiences of the other members to overcome the complexities of the proceedings, as all panelists suggested. Professor Kim, particularly advised novice arbitrators not to be intimidated and to assist the other tribunal members as much as possible by being diligent, timely and meticulous and to try to create a team effort.

Ironically enough, most of the first appointments are sole arbitrator positions as Dr. Yang indicated and as evident from Mr. Pullen and Ms. Ohara’s experience. However, there is no cause for exaggerated worry, as a sole arbitrator often has special advantages. One apparent benefit is the amount of flexibility in determining the right decision whether on a substantive or a procedural level. Moreover, panelists strongly advised young arbitrators to regularly seek assistance from the institution, as they will clarify the application of the rules and the best practices in managing cases.

 

Cultural Differences and their Impact on Arbitration Proceedings.

The impact of cultural diversity and different legal regimes was addressed; concerning the differences in legal regimes, Dr. Yang offered interesting insights pertaining to proceedings in China.

According to her, the arbitral institutions handle the management of the case mainly; they deal with the procedural issues and then they provide the documents and evidence to the arbitrator(s) who only deals with substantive issues. Another unique trait is that hearings in China typically last for one day only, whereas in other countries they may continue for two weeks.

 

Conclusion

Focusing on Asia, this webinar comprehensively discussed the intricacies of receiving first arbitral appointments. It provided rising arbitrators with tools and insights on how to manage their first cases, whether as sole arbitrators or as part of a tribunal. Additionally, the webinar shed light on how to deal with the perils of conflicts of interest as well as on how to successfully navigate the proceedings in the face of cultural and legal differences.

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Moritz to Host Second WIP Event – March 26

ADR Prof Blog - Tue, 2021-03-09 10:17
The Program on Dispute Resolution at The Ohio State University Moritz College of Law is pleased to host the second “Dispute Resolution Works-in-Progress Consortium” event on Friday March 26, 2021, from 3-4:30 p.m. EST. To register, click here. Andrew Mamo, Assistant Professor of Law at Northern Illinois University will present Against Resolution: Dialogue, Demonstration, and … Continue reading Moritz to Host Second WIP Event – March 26 →

A Roundup of Tech and Dispute Resolution News

Kluwer Arbitration Blog - Tue, 2021-03-09 00:36

Technology continues to transform the practice of law at a blistering pace – something obvious to all of us who suddenly find ourselves holding Zoom meetings from home in professional tops – and pyjama bottoms.  However, technology’s continuing integration into the daily fabric of dispute resolution is much more than endless Zoom meetings, or even e-discovery and technology-assisted review (TAR) software.  Some of the innovations, discussed below, are downright transformational.  At the same time, advances in technology sometimes raise ethical and privacy concerns, bringing the inevitable – but perhaps warranted – scrutiny of legislative bodies. A few newsworthy topics can give a sense of where we are, how far we’ve come, and, most importantly, where we may be headed.

 

A Higher Caliber of Discussion

As the pace of innovation has gone from a trickle to a steady deluge, this has also raised the quality and maturity of the discussion about technology and dispute resolution – we are well past the days of tongue-in-cheek futurist predictions of “robolawyers.”  These days, the discussion is technical, and high-level – for example, whether “on-chain” ADR built on blockchain platforms holds practical advantages over traditional ADR when integrated onto smart contracts, and if so, which types of smart contracts.  (More on this below.)  ArbTech is a global online forum where such discussions take place.  Co-founded by Sophie Nappert (moderator of the hugely successful OGEMID arbitration listserv), ArbTech provides a space for thoughtful debate and collaboration on the application of technology to dispute resolution. (All of the topics below are distilled from recent discussions on the ArbTech forum.)

 

New Kids On The Block(chain): “On-Chain” ADR

The UK Jurisdiction Taskforce (part of the LawTech Panel of the Law Society), which recently published draft rules for resolving disputes arising from new technologies such as cryptoassets, cryptocurrency, smart contracts, distributed ledger technology, and fintech applications. The draft rules opened for consultation with an online event on 26 February. Notably, the draft rules envisage automatic dispute resolution processes being combined into digital asset systems (known as “on chain” dispute resolution), providing an arbitrator, in certain circumstances, with the ability to implement decisions directly on a blockchain or within the system (as opposed to a paper Award).  While the draft rules are clearly cutting-edge and forward-looking, at their heart they still rely on the tried-and-true English Arbitration Act 1996.

 

AI and Litigation Financing: Like Two Peas in a Pod

Artificial intelligence (AI) is increasingly used for predictive analytics – predicting the outcome of disputes.  Not surprisingly, such tools are very attractive for litigation funders, and several funders are betting on the technology giving them a competitive advantage in modelling risk in their case evaluations.  To name but two: Legalist, which claims to use data from millions of court records to help case assessment for litigation funding; and Arbilex, which similarly uses AI and predictive analytics to assess arbitration cases, including the likely costs of a given case, as well as likelihood of success.  The increasing use of AI to predict dispute outcomes raises several interesting issues.  One of these is that the available dataset for court cases is generally much larger than the dataset for arbitration awards.  As the accuracy of AI is directly correlated to the size and quality of the dataset, this poses an interesting question as to whether court litigation may gain a comparative advantage in the future, given potentially greater predictability of dispute outcomes.  Arbitral institutions such as the ICC are sitting on veritable goldmines of raw data; however, selling predictive services to parties might create uncomfortable optics for institutions that are built on a foundation of neutrality and impartiality.  And yet, market pressures could well push institutions to begin mining their own awards data.

 

ODR: Online Dispute Re(v)olution?

There has also been much innovation in online dispute resolution (ODR) platforms – no doubt boosted by the Pandemic.  Perhaps none has garnered as much attention and discussion as Kleros, which uses blockchain technology to create a decentralized arbitration process that relies on crowdsourced adjudicatory expertise.  Very reductively speaking, the Kleros process assigns jurors to cases (the jurors sign up online and are remunerated for their services), and incorporates a point system, inspired by the jury selection system in ancient Greece, and underpinned by game theory concepts.  Jurors are rewarded for deciding cases “coherently,” creating financial incentives for correct adjudication.  (A fascinating, in-depth guide to Kleros can be found here.)  The result, conceptually, is a decentralized adjudication process where anyone can sign up to be a juror, but that nonetheless aims to arrive at correct decisions.

 

DeFi: Financial Services on the Ethereum Blockchain

Moving on to the FinTech world (but with an obvious impact on our dispute resolution world), the Economic Research Division of the St. Louis Federal Reserve recently published an article by Prof. Fabian Schär, which provides an in-depth analysis of decentralized finance (DeFi), its potentials, and risks.  DeFi refers to an alternative financial infrastructure built on top of the Ethereum blockchain, using smart contracts to create protocols to replicate existing financial services, in a more open, interoperable, and transparent manner.  Potential applications include decentralized exchanges, decentralized debt markets, blockchain derivatives, and on-chain asset management protocols.  The advantage of DeFi is that it does not rely on intermediaries and centralized institutions (which, depending on whom you ask, operate in an opaque manner, are vulnerable to fraud, and require users to trust the institution).  Instead, DeFi is based on open protocols and decentralized applications, where agreements are enforced by code, and transactions are executed in a secure and verifiable manner.  The U.S. Federal Reserve’s interest in DeFi may well augur significant disruption in the financial services space, with an equally significant impact in dispute resolution.

 

Read the AI Label Carefully

Of course, the exciting innovations in technology and the administration of justice are tempered by a number of ethical concerns, revolving broadly around privacy and bias/discrimination.

In this respect, Europe leads the way.  At the end of 2020, the European Commission for the Efficiency of Justice (CEPEJ) of the Council of Europe published a study on the establishment of a certification mechanism for AI tools and services used in the fields of justice and the judiciary. The study begins to implement the CEPEJ Charter on the use of AI in judicial systems and their environment, adopted in late 2018.  Broadly, the CEPEJ proposes certification and labeling criteria for AI tools based on principles outlined in the Charter, including (1) the Principle of respect of fundamental rights; (2) the Principle of non-discrimination; (3) the Principle of quality and security (with regards to the processing of judicial decisions and data, using certified sources and intangible data in a secure technological environment); (4) Principle of transparency, impartiality, and fairness; and (5) Principle of “under user control” (ensuring users are informed actors and in control of their choices).  The proposed CEPEJ certification requirements will likely impact a number of “Legal Tech” areas, such as case law search engines, online dispute resolution, predictive analysis, automated legal drafting, and so on.

 

The Monster Lurking Within: Embedded Bias in AI

The risk of bias in AI was highlighted at the end of 2020, when Timnit Gebru, then co-lead of Google’s Ethical AI team, was fired over her publication of a research paper highlighting bias in large language models (AI trained on large amounts of text data) – which happens to be at the core of Google’s search business.  Ms. Gebru is a pioneer in AI ethics and research, and co-authored a groundbreaking paper that showed that facial recognition software is less accurate at identifying women and people of color, largely because the data the AI software trained on utilized white male pictures.  Ms. Gebru’s paper focused on bias in large language models, noting that the AI is trained on text pulled from the Internet, which contains racist, sexist, and otherwise abusive language that ends up in the training data.  As an MIT article (reviewing Ms. Gebru’s research paper) described, “an AI model taught to view racist language as normal is obviously bad”; and that “a methodology that relies on datasets too large to document is … inherently risky… [and] perpetuates harm without recourse.”  As AI makes its way into the dispute resolution realm, we must obviously guard against all sorts of inherent biases hidden in large datasets.

Indeed, hidden biases may have already found their way into the administration of justice.  Many readers may be aware of a controversial program in the U.S. called COMPAS (Correctional Offender Management Profiling for Alternative Sanctions).  COMPAS is used by certain U.S. courts to assess the likelihood of recidivism in defendants who are up for parole.  In 2016, a defendant challenged the State of Wisconsin’s use of COMPAS, arguing it violated his right to due process because it prevented him from challenging the scientific validity and accuracy of the test.  The COMPAS algorithm uses a “violent recidivism risk scale” calculated by looking at age; age at first arrest; history of violence; vocation education level; history of noncompliance; and a weight multiplier “determined by the strength of the item’s relationship to person offense recidivism observed in study data.”  While this algorithm makes no reference to ethnicity or race, a highly publicized study by Propublica analyzed COMPAS assessments and concluded that the algorithm was biased against African Americans: “Blacks are almost twice as likely as whites to be labeled a higher risk but not actually re-offend… [COMPAS] makes the opposite mistake among whites: they are much more likely than blacks to be labeled lower-risk but go on to commit other crimes.”  (Emphasis added.)  COMPAS’ parent company strongly rebutted this claim, but one very problematic point was that it refuses to release its proprietary software, making it impossible for defendants and third parties to challenge the accuracy of the algorithm. The issues raised in the COMPAS saga have obvious implications for international arbitration and other forms of dispute resolution as AI is increasingly integrated into these processes.

 

Technology and the Future of Justice

These stories scratch the surface of the vast range of innovations affecting the dispute resolution world.  Our dispute resolution community must stay abreast of these developments, and hopefully steer them towards a principled, and ethical application of technology, as opposed to a reactive approach which would allow an unprincipled incursion of technology into our dispute resolution regime.  Circling back to ArbTech, these goals are embedded within the forum’s DNA, and are part of its Mission Statement.  The ArbTech community is composed of legal practitioners, developers, engineers and academics, who discuss, debate, and collaborate on bleeding-edge tech innovation in dispute resolution and “the Future of Justice.”  ArbTech is currently open to new participants.

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Talk Like a Teenager

ADR Prof Blog - Mon, 2021-03-08 10:51
For anyone who has been a teenager–or has faced the blunt wrath of one–there is something about the clarity of belief and total confidence in one’s position that should appeal to all of us when we discuss assertiveness.  In honor of International Women’s Day, I’m using both US and foreign examples of teenage assertiveness. First, … Continue reading Talk Like a Teenager →

When is a “Court” not a Court? A Few Thoughts After Helice Leasing S.A.S. v PT Garuda Indonesia (Persero) TbK [2021] EWHC 99 (Comm)

Kluwer Arbitration Blog - Mon, 2021-03-08 01:25

In a recent High Court case, it was held that a reference in a contract to the “court” did not mean a court at all but meant instead – perhaps alarmingly – arbitration. This decision in Helice Leasing S.A.S. v PT Garuda Indonesia (Persero) TbK [2021] EWHC 99 (Comm) may be a cause of concern for those drafting commercial contracts and dispute resolution clauses. How could the High Court reach such a decision that appears to defy the plain meaning of “the court”? Should drafters be concerned that references in their contracts to a “court” will be construed to mean arbitration? If so, how might they avoid such a conclusion? Below we consider these questions.

The Defendant had become, by novation of a lease agreement, the lessee of an aircraft. The Claimant, the lessor of the aircraft, instituted court proceedings against the Defendant for non- payment of rent. The Defendant then applied, amongst other things, to stay the proceedings under section 9 of the Arbitration Act 1996, on the grounds that the Claimant’s proceedings breached the parties’ agreement to arbitrate.  The lease provided, in clause 15.2, that:

Each of Lessor and Lessee hereby agrees that any dispute arising out of or in connection with this Lease Agreement, including any question regarding its existence, validity or termination, shall be referred and finally resolved by arbitration under the Rules of the London Court of International Arbitration (the “LCIA Rules”), which rules are deemed to be incorporated by reference into this clause.

In response, the Claimant argued that it was not obliged to refer the proceedings to arbitration and that clause 13.2 provided an exception to the arbitration agreement contained in clause 15.2. Under clause 13.2:

If an Event of Default occurs…Lessor may at its option (and without prejudice to any of its other rights under this Lease Agreement or that may arise by operation of Applicable Law), at any time thereafter…proceed by appropriate court action or actions to enforce performance of this Lease Agreement or to recover damages for the breach of this Lease Agreement.

It thus fell on the Court to interpret the contract and to decide whether clause 13.2 carved out from the arbitration agreement a right on the part of the Lessor to bring court proceedings.

 

The Parties’ Arguments

In support of its construction, the Claimant relied on the ordinary meaning of the words, and argued that the reference in clause 13.2 to the “court” permitted the Claimant to proceed by court litigation rather than arbitration.  Clause 13.2 thus was a unilateral option of the lessor to litigate by court, not merely by arbitration, which according to the Claimant made “good commercial sense”. In response, the Defendant contended that the Lessor’s right in clause 13.2 was subject to clause 15.2, and that the “appropriate” action, to use the language of clause 13.2, was arbitral proceedings in accordance with clause 15.2.  The Defendant also noted the reference in clause 13.2 to the “court” was in all likelihood an error, a “remnant” from the original template lease agreement.  That template provided for New York law and New York court jurisdiction.  When the template agreement was amended and arbitration under LCIA rules was adopted, the reference in clause 13.2 to the “court” was erroneously left unchanged.  More importantly though, the Defendant pointed to a circularity in the Claimant’s construction, which “presupposes that which [the Claimant] is required to prove”.  Whether an Event of Default had occurred was one of the issues to be determined in the proceedings, and yet the Claimant could only bring those proceedings if an Event of Default had occurred.

 

Judgement

In granting the stay, Calver J began by noting that clause 15.2 was not expressed to be subject to clause 13.2, which would be expected if clause 13.2 did carve out from clause 15.2 a right of the Lessor to issue court proceedings.  He continued:

in order to give the contract a business common sense construction, I consider that ‘court action’ in clause 13.2(b) must reasonably have been intended by the parties to mean action before the London Court of International arbitration, that is action within clause 15.2.  (Emphasis in original).

That conclusion was supported by clause 2.1 of the lease that appeared also to refer to the LCIA as “the courts” and which “throws some light on what was objectively intended”.

But what was conclusive for the judge was that, on the Claimant’s construction, clause 13.2 was effectively inoperative.  The right under clause 13.2 applied “if an Event of Default occurs”, not “if an Event of Default is alleged.” (Emphasis in original). A dispute over whether an Event of Default had occurred is a “dispute” and could therefore only be resolved by arbitration pursuant to clause 15.2, and not through the courts.

The Claimant’s construction also conflicted with commercial common sense.  If the court could decide whether an Event of Default occurred, that would “emasculat[e]” the agreement of the Parties in clause 15.2 to refer “any dispute” to arbitration.  And if the Claimant had a unilateral right to issue court proceedings, what would happen to any cross-claims brought by the Defendant? Would the Defendant have to bring its cross-claims by arbitration whilst the Claimant sought damages in court? That conclusion, with its potential for “confusion, cost and delay” seemed unlikely and unappealing to the judge.  Since, therefore, it was for the arbitrators to decide whether an Event of Default had occurred, “it makes no sense” for the Lessor to then go to court to enforce the lease, rather than arbitrators themselves enforcing the lease.  To hold that the reference in clause 13.2 to the “court” meant anything other than the LCIA would run counter with the “one-stop shop construction of such arbitration clauses advocated by the House of Lords in Fiona Trust v. Privalov [2007] UKHL 40.

 

A Dangerous Precedent?

Although Calver J only made a passing reference to the Fiona Trust decision in his judgment, and although each contract can only be interpreted on its own terms, that case appears to have encouraged the liberal or commercial interpretation of the contract adopted by the judge. Lord Hoffmann, drawing “a line under the authorities to date” on the interpretation of arbitration agreements, and making “a fresh start”, held that, as a presumption, parties to an arbitration agreement “as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered…to be decided by the same tribunal.”  (at para 13) In other words, arbitration agreements should, as a general rule, be interpreted to give effect to arbitration as a “one-stop method” for the resolution of disputes.

In Helice Leasing, even the express words in clause 13.2, that the Lessor had the right to turn to the “court”, were not enough to overturn that presumption. Commercial commonsense dictated that “court” in fact referred to the LCIA, a conclusion that may seem startling. The judge did not refer to any precedent (other than the Fiona Trust) on this point.

But this is not simply a case of the commercial commonsense meaning of the contract – in particular of the broadly-drafted agreement to arbitrate in clause 15.2 – overriding the plain meaning of “court” contained in clause 13.2; for the court was also satisfied that “court” in clause 13.2 was probably a mistake, a “hangover” from the template agreement.  Thus, Calver J would have been prepared to amend the contract to make clause 13.2 consistent with the agreement to arbitrate in clause 15.2, which however he did not find necessary. This error and the circularity in the Claimant’s construction are the peculiar facts of the contract that led the High Court to reach the decision that it did. Drafters need not be too concerned then, barring a similar error in their contracts, that a liberal interpretation will prevail over their express words.

 

Conclusion

The case nonetheless strikes a few notes of caution.  First, if parties do intend to carve out from a broad agreement to arbitrate a unilateral right to bring court proceedings, they should make that abundantly clear: the agreement to arbitrate should be expressly subject to the right of one party (in this case, the Lessor) to bring court proceedings. Secondly, to avoid the accusations of circularity that the Defendant raised in Helice Leasing, that right should not be conditional on an event of default having “occurred”. And finally, the case is a reminder of the pitfalls of precedents and template agreements.  A drafter may blithely amend the jurisdiction clause (and other boiler plate clauses) in the template.  But the rest of the contract must be checked carefully for consistency. Otherwise, the parties risk time consuming, costly applications, or satellite litigation, that could have been avoided by consistent and unambiguous drafting.

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Equality Won’t Fight For Itself

Kluwer Arbitration Blog - Mon, 2021-03-08 00:36

This month, we formed the arbitral tribunal in our billion dollar investment dispute. Against the odds, the parties selected a majority female tribunal. What is more, they chose a female President.

At around the same time, a leading US firm picked a woman as both its chair and managing partner for the first time ever. The UK Supreme Court appointed Lady Justice Rose to its bench, where until now Baroness Hale was the lone female voice amongst a dozen judges. On 15 February, history was made at the World Trade Organization when the General Council chose a black African woman, Ngozi Okonjo-Iweala of Nigeria, as the organization’s seventh Director-General. And last year, the International Chamber of Commerce (ICC) reported that the President of its Court of Arbitration in Paris is tipped to be replaced by a woman, Claudia Salomon.

This is all positive news. But does it mean we should be patting ourselves on the back on this symbolic day, Monday 8 March, International Women’s Day? Is the arbitral community able to celebrate its advances in the recognition of the social, economic, cultural and political achievements of women?

 

Yes, but there is still a long way to go.

 

We can’t deny that progress has been made on the gender diversity front. Given that there is more awareness and encouragement of women’s rights one can hardly go backward. But with the passing of another year we have to ask ourselves, how much has been achieved to promote the equal representation of women in the five years that have elapsed since the introduction of the Equal Representation in Arbitration Pledge? And is it enough?

I could focus on many areas but will select two: arbitral appointments, and partnership.

In 2020, an International Council for Commercial Arbitration (ICCA) taskforce undertook a study on female arbitral appointments across all major and specialist arbitral institutions since the Pledge was signed in 2015. Its data leading up to 2020 showed that, since 2015, the proportion of female arbitrators has almost doubled (from 12.2% in 2015 to 21.3% in 2019). This trend of increasing diversity in arbitral tribunals is reflected in the caseload of individual institutions, as well as when averaged across institutions.

What about female partnerships? At the time of the Pledge’s inception, according to the US Bureau of Labor statistics, law was one of the least diverse professions in the nation with women accounting for only 17 percent of equity partners. This was similar in many other major jurisdictions. In the five years that followed, this slightly improved; in 2020 there was a 7% to 23%; in the UK there was an 8% increase.

 

But folks, it’s not good enough.

 

In terms of arbitral appointments, the figure of 20% is still significantly disproportionate to the percentage of women working in the legal profession. When one looks closer at the figures, it can be seen (at page 17 of the study) that the percentage drops to the single figures in the case of some institutions such as the Permanent Court of Arbitration and the Court of Arbitration for Sport. The latest diversity statistics from the Stockholm Chamber of Commerce (SCC), which reviewed 1250 arbitrator appointments in SCC cases over a five-year period, are similarly disappointing. It found that although the SCC as an institution was taking steps to increase diversity when appointing arbitrators (at least 30% being female), when the parties were left to their own devices (over 62% of the time) they only chose women 14% of the time.

Turning to partner promotions, let’s take the USA as an example. This is the country where Justice Ruth Bader Ginsburg fought for the cause of gender diversity throughout her life. According to the Legal 500, across the Atlantic, 47% of associates at the 200 largest US law firms are women. But this translates to only 20% of equity and 30% of non-equity women partners, according to the National Association of Women Lawyers. This is a story that repeats itself all over the world. In the top roles, men still dominate.

 

Why is this?

 

Unconscious bias is one cause. The Law Society of England & Wales concluded a review of barriers to female lawyer retention across a number of jurisdictions in 2019. It found that out of over 7,700 participants globally, 52% responded that “unconscious bias was the main barrier” to women’s career progression in the law. And if this seems incredible, a small anecdote from the world of classical music from the 1980s that I first mentioned in my Kluwer blog post on this subject five years ago will help to illustrate the problem of bias. A certain Ms. Abbie Conant applied for eleven trombone positions advertised in Germany. The trombone was historically perceived as ‘masculine’. Conant received only one audition invitation, and it was, to add insult to injury, addressed to a “Herr (Mr) Conant”. She auditioned along with 32 men, playing behind a screen. A selection panel listened to her without knowledge of her gender. They were enthralled, and she was picked. To their amazement, Ms Conant was a woman. She would never have been selected had she been in front of the screen.

Unconscious bias cannot, however, take all the blame. Women also need to learn to be more forthright in demanding what they believe they are owed. In Deborah Tannen’s article in the Harvard Business Review in 1995, ‘The Power of Talk: Who Gets Heard and Why’, the author explains that research has shown that women are more likely to downplay their certainty and men are more likely to minimize their doubts. Women are also less likely than men to have learned to blow their own horn. She says that this goes back to childhood, where different patterns of social interaction happen between girls playing together compared with boys. It is vital that we assert ourselves in the workplace, if no one else supports us.

But even if we do, that should not absolve our colleagues from responsibility to uphold the message of the Pledge. The need to promote capable women, including women of colour, across the world needs to happen 365 days a year, not one, because the battle for gender diversity is far from over. It will be over when the hiring of a woman to a top job stops making news headlines, and when there will be no more need for articles like this to be written.

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The Advance on Costs in Construction Arbitration: Strategy Where There is Refusal to Pay a Deposit

Kluwer Arbitration Blog - Sun, 2021-03-07 00:22

Each of the major arbitral institutions requires that parties furnish some form of advance on costs before an arbitration can proceed. The advance on costs is a deposit paid by the parties to cover fees and expenses of the tribunal and the institution’s administrative expenses (“Advance”).

Whilst payment of an Advance is often perceived as one of the more perfunctory steps in an arbitration, in practice it can give rise to strategic considerations, and can have the effect of bringing an arbitration to a standstill. A summary of the main institutional rules addressing the Advance is set out below:

Institution Rule Name Timing for payment Consequences of non-payment International Chamber of Commerce (ICC) Article 37 Advance on Costs Article 37(2): “As soon as practicable…”. Article 37.6: The Secretary General may direct the arbitral tribunal to suspend its work and set a time limit, which must be not less than 15 days, on the expiry of which the relevant claims shall be considered as withdrawn. Hong Kong International Arbitration Centre (HKIAC) Article 41 Deposit for Costs Article 41.1 “As soon as possible…” Article 41.4 but “within 30 days after receipt of the request”.

  Article 41.4: The arbitral tribunal may order the suspension or termination of the arbitration or continue with the arbitration on such basis and in respect of such claim or counterclaim as the arbitral tribunal considers fit.

  Singapore International Arbitration Centre (SIAC) Rule 34.2 Deposit (previously known as Advance on Costs) No specific timing.

  Article 34.6: The Tribunal may suspend its work and the Registrar may suspend SIAC’s administration of the arbitration, in whole or in part.  The Registrar may set a time limit on the expiry of which the relevant claims or counterclaims shall be considered as withdrawn.

  London Court of International Arbitration (LCIA) Article 24 Advance Payment for Costs Article 24(1): “The LCIA Court may direct the parties, in such proportions and at such times as it thinks appropriate…”. Article 24.6: Payment by substitution.

Article 24.8: Failure to pay the Advance is treated by the LCIA Court or the Arbitral Tribunal as a withdrawal from the arbitration of the claim, counterclaim or cross-claim.

 

Approach in the Middle East

In the Middle East, international arbitration is the preferred form of dispute resolution, particularly for resolving construction disputes.  With that said, arbitration is still in its relative infancy compared with more sophisticated markets in the US, UK, Europe and Asia. Accordingly, parties to arbitration agreements in the Middle East still occasionally grapple with the notion that the process is binding.

Certainly in the United Arab Emirates and the Kingdom of Saudi Arabia, respondents tend to treat the payment of the Advance as the claimant’s financial burden to discharge if the claimant wishes to obtain a final award. As such, it is not unusual to encounter a respondent who is unwilling to pay its share of the Advance, a strategy usually only reserved, in other parts of the world, for fervent jurisdictional challenges.

The option of simply waiting for the defaulting party to pay its share of the Advance should be approached with caution. The arbitration will not proceed where the Advance remains unpaid. Aside from causing delays to the timetable and frustrating busy arbitrators, the Court will eventually dismiss the reference without prejudice to either party’s right to bring fresh proceedings concerning the same claims at a later stage. Whilst this may sound superficially appealing to some respondents, thought should be given to the consequences of having a reference dismissed without any conclusion. Where disputes really do need to be fully and finally resolved (such as where the employer is withholding certificates and/or performance security after completion), this uncertainty may not be a satisfactory outcome for either party.

 

Breach of contract without sanction?

The parties’ obligations to make payment of the Advance are an extension of the parties’ obligations in the arbitration agreement. Accordingly, a refusal by either party to pay the Advance will constitute a breach of contract. The usual remedies for breach of contract are available against a party failing to pay its portion of the Advance.

However, the Court or tribunal will not levy any sanction against a party for failing to pay its portion of an Advance. The Court is, at that stage, concerned only with securing payment of its own costs and the costs of the tribunal. Usually, the Court will ask the compliant party whether it wishes to pay in substitution for the defaulting party. A party that elects to pay in substitution has the option of seeking reimbursement, and this is encouraged in the Rules of some of the leading institutions. For example, Article 24(5) of the LCIA Rules provides: “the party effecting the substitute payment may request the Arbitral Tribunal to make an order or award in order to recover that amount as a debt immediately due and payable to that party by the defaulting party, together with any interest.”1) The HKIAC Rules contain a similar provision at Article 41.4. jQuery('#footnote_plugin_tooltip_36439_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_36439_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); These provisions are consistent with the failure to pay the Advance being a breach of contract.

 

Separating the Advance

In some Rules,2) Article 37(3) of the ICC Rules, Article 41.2 of the HKIAC Rules and Article 34.2 of the SIAC Rules. The LCIA Rules do not expressly permit separate deposits. jQuery('#footnote_plugin_tooltip_36439_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_36439_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); either party may request the Court to issue separate Advances. That means the Court will split the Advance – quantifying one Advance for the claimant’s claims, and one Advance for the respondent’s counterclaims, and each party will pay the Advance corresponding to its own claims.

In practice, the Court may be reluctant to fix separate advances on costs. An order separating the Advances tends to impose a greater financial burden on both parties. The aggregate amount of separate Advances will generally exceed the original amount of a single Advance.

Nevertheless, there might be some strategic advantages in seeking separate Advances where one party’s claims are disproportionately higher (or perhaps even inflated) when compared with the other party’s claims, or where there is some material benefit to be derived from having the other party’s claims dismissed.

In construction disputes, the distinction between claims and counterclaims (and the separate Advance that should apply to each) is not always clear. For example, a contractor’s claims for extensions of time will arise from the very same factual matrix as an employer’s claim for delay damages. It is likely to be difficult to separate these claims for the purposes of splitting the Advance and dismissing some claims. As such, in construction disputes arising from the same common nucleus of facts, parties should give thought to the consequences of requesting separate Advances.

 

Relationship with security for costs application   

Where one party refuses to pay its share of an Advance, it can be indicative of cash-flow or liquidity issues. This may raise concerns about whether the party in default holds sufficient assets to satisfy an adverse costs judgment.

Parties might wish to consider whether one party’s failure to pay its share of the Advance on time could be raised in a security for costs application as an example of impecuniosity. Security for costs is a form of discretionary relief in most jurisdictions, and accordingly, the tribunal may be inclined to give some weight to one party’s failure to pay its share of the Advance within a reasonable time.

 

Declaratory or unquantified relief

Where one party seeks declaratory relief, it can be difficult for the Court to quantify readily the value of the claim or counterclaim, and accordingly, assess the amount of Advance to levy. The same can be said of monetary claims where it is impossible to quantify the value of the claims. This is particularly the case where the proceedings have been bifurcated, where issues of liability will be determined before quantum (often arising in large construction arbitrations).

Under Article 34.3 of the SIAC Rules, where the claim or counterclaim is not quantifiable, a “provisional estimate” of the costs of the arbitration will be made by the Registrar.3) Appendix III Article 1(2) of the ICC Rules and Schedule 1 Article 2(6) of the HKIAC Rules. jQuery('#footnote_plugin_tooltip_36439_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_36439_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The estimate will be based on the nature of the dispute and the circumstances of the case.

 

Timing

Unlike in litigation, where public resources are finite and there is less tolerance for non-compliance, institutional Courts and tribunals often demonstrate more patience to parties who fail to satisfy their obligations to pay the Advance.

It is not uncommon to receive reminders from the Court for several months to make payment, and the parties will usually be given multiple warnings before the tribunal is finally instructed to suspend work. It may therefore fall to the parties, rather than to the Court or tribunal, to be proactive in ensuring the expeditious resolution of disagreements about payment of the Advance, where this is achievable.

 

Conclusion

It is not uncommon in the Middle East to encounter a party who refuses to pay its portion of the Advance.

Parties arbitrating in the Middle East should be prepared for non-paying respondents, and should be aware of the important strategic considerations of the options available under the relevant institutional rules – whether paying by substitution, splitting the Advance, or raising the issue in a related security for costs application.

References[+]

↑1 The HKIAC Rules contain a similar provision at Article 41.4. ↑2 Article 37(3) of the ICC Rules, Article 41.2 of the HKIAC Rules and Article 34.2 of the SIAC Rules. The LCIA Rules do not expressly permit separate deposits. ↑3 Appendix III Article 1(2) of the ICC Rules and Schedule 1 Article 2(6) of the HKIAC Rules. function footnote_expand_reference_container_36439_30() { jQuery('#footnote_references_container_36439_30').show(); jQuery('#footnote_reference_container_collapse_button_36439_30').text('−'); } function footnote_collapse_reference_container_36439_30() { jQuery('#footnote_references_container_36439_30').hide(); jQuery('#footnote_reference_container_collapse_button_36439_30').text('+'); } function footnote_expand_collapse_reference_container_36439_30() { if (jQuery('#footnote_references_container_36439_30').is(':hidden')) { footnote_expand_reference_container_36439_30(); } else { footnote_collapse_reference_container_36439_30(); } } function footnote_moveToAnchor_36439_30(p_str_TargetID) { footnote_expand_reference_container_36439_30(); 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 * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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ODR Forum Videos

ADR Prof Blog - Sat, 2021-03-06 07:22
My colleague, Amy Schmitz, forwarded links to videos of the 2021 Virtual ODR Forum. Here’s the agenda.  The last page has links to the pre-recorded presentations. Here are the full videos from the forum sessions. March 1 morning sessions March 1 afternoon sessions March 2 morning sessions March 2 afternoon sessions [Click the title of … Continue reading ODR Forum Videos →

The Petrobras Crisis: Arbitrating Investors’ Claims Against the Brazilian Federal Government

Kluwer Arbitration Blog - Sat, 2021-03-06 01:40

The recent crisis between the Brazilian president Jair Messias Bolsonaro and the Brazilian national oil company Petrobras may result in a wave of investors’ claims submitted to arbitration against the Brazilian Federal Government for abuse of controlling power and breach of fiduciary duties under the Brazilian Companies Act 1976.

During a live broadcast on February 18th via Facebook, Bolsonaro expressed his unhappiness with the constant rises in fuel prices charged by Petrobras. The next day, Bolsonaro insisted that, while he would not interfere in Petrobras’ fuel pricing policies, he nevertheless foreshadowed that changes would be made in Petrobras. This announcement led to a sharp drop of the shares negotiated in the Brazilian stock exchange, representing a market value loss of approximately USD 5.4 billion, amid investors’ fears that the Brazilian Federal Government would control fuel prices. Later that evening, after the close of the Brazilian stock exchange, Bolsonaro announced that he had appointed a retired army general to replace Petrobras’ current president. The immediate reaction in the market was a drop by 9.45% of Petrobras’ shares’ depositary receipts (‘ADRs’) negotiated in New York through after-hours trading. After trading on the Brazilian stock exchange resumed the next day, Petrobras suffered a further market value loss of approximately USD 14 billion.

Bolsonaro’s row with Petrobras is not new. Back in April 2019 Bolsonaro ordered Petrobras to cancel a rise in fuel prices. Since then, the decline in international oil prices during the first months of the pandemic avoided new fuel prices hikes and kept Bolsonaro’s disagreement with Petrobras out of sight. But after international oil prices regained pre-pandemic levels and the Brazilian national currency Real fell around 40% against the US dollar during the pandemic, Petrobras increased fuel prices once again. According to the Brazilian press, Bolsonaro fears that fuel prices hikes would affect opinion polling on his administration and reduce his chances of re-election in 2022.

The Brazilian Federal Government controls Petrobras together with the Brazilian federal development bank BNDES, but their shareholding sums around 37% of Petrobras’ total shares. The remaining 63% are negotiated in the market and at least 43% of Petrobras’ shares are held by non-Brazilian investors. Since the company lost in 1997 the monopoly over the exploitation of oil resources in Brazil, Petrobras, under Brazilian law and its corporate bylaws, must follow market-oriented policies and compete on equal footing with other oil companies despite being partially owned by the Brazilian Federal Government. On top of that, the Brazilian Companies Act 1976 provides that controlling entities of companies partially owned by public entities have fiduciary duties to the company and to minority shareholders, and they can be held liable for abuse of controlling power.

Pursuant to the arbitration clause available at Article 58 of Petrobras’ bylaws, disputes between shareholders concerning the application of the Brazilian Companies Act 1976 and the company’s bylaws must be settled in accordance with the rules of arbitration of the Chamber of Arbitration of the Market – CAM, a Brazilian arbitration institute created by the Brazilian stock exchange in 2001. The arbitration clause excludes from arbitration disputes arising out of Petrobras’ business orientations by the Brazilian Federal Government, but such exception is limited to disputes concerning votes casted by the Brazilian Federal Government at the shareholders’ general meetings that are aimed at orienting the Petrobras to meet the public interest that justified the creation of the company. It will not be a surprise, however, if the Brazilian Federal Government alleges that the matter is not arbitrable as a matter of law pursuant to the Brazilian Arbitration Act 1996 and, therefore, that any such disputes must be decided by Brazilian federal courts.

In any case, it is not known how investors who acquired Petrobras’ ADRs in New York would prefer to resolve such disputes. They may choose to submit their claims against the Brazilian Federal Government to arbitration pursuant to Article 58 of Petrobras’ bylaws or to bring lawsuits, including class actions, before American courts. There is precedent for the latter approach. In 2015, the U.S. District Court of the Southern District of New York was presented with a class action brought against Petrobras and other defendants. The class members alleged a mixed set of claims, with some plaintiffs having claims arising under the U.S. Securities Exchange Act of 1934, and others with claims arising under Brazilian law, collectively for liability owing to the sharp decline in Petrobras’ value following the disclosure of fraud and corruption scandals. The Court held that the arbitration clause at Article 58 of Petrobras’ bylaws did not cover claims under the U.S. Securities Exchange Act of 1934, but class members with claims arising under Brazilian law would need to arbitrate their claims (In re Petrobras Securities Litigation, 116 F. Supp. 3d 368, 386–89 (S.D.N.Y. 2015)). In practical terms, the decision excluded from the class action all investors who acquired Petrobras’ shares in Brazil, but allowed the class action to move forward in relation to investors who acquired Petrobras’ ADRs in New York because their claims were based the violation of the U.S. Securities Exchange Act of 1934. Accordingly, under present circumstances, for ADR investors to avoid Petrobras’ arbitration clause, they would have to claim the violation of U.S. Securities Exchange Act of 1934, but not the violation of the Brazilian Companies Act 1976 and of Petrobras’ bylaws.

But litigation before American courts is not easy and free of hurdles. First, ADR investors must establish that the case falls within the “commercial activities” exception of the U.S. Foreign Sovereign Immunities Act 1976, which otherwise provides the Brazilian Federal Government with jurisdictional immunity in U.S. courts. Second, ADR investors would also have to convince American courts not to apply the act of State doctrine, according to which a court should refrain from deciding on the lawfulness of an act of a State performed within its territory.

Arbitrating disputes involving public entities in Brazil is nothing new and Brazilian courts have long recognised that public entities may enter into and be bound by arbitration agreements. But most disputes involving public entities submitted to arbitration in Brazil arise out of contracts, including concession agreements. The possibility of investors of Petrobras arbitrating their claims against the Brazilian Federal Government is something certainly new and is a development that should be closely watched.

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