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Supreme Court of Canada Deals Blow to Uber, Declares Arbitration Clauses Invalid as a Result of ‘Surge Pricing’

Kluwer Arbitration Blog - Wed, 2020-07-01 04:00

On June 26, 2020, the Supreme Court of Canada (“SCC”) released a decision with significant implications for international businesses by placing significant limits on the application of arbitration clauses.

 

Background

The case, Uber Technologies Inc. v Heller (2020 SCC 16 ) (“Heller”), involved a challenge to Uber’s standard agreement with drivers requiring disputes to be resolved by private arbitration pursuant to the International Chamber of Commerce’s (“ICC”) rules and in accordance with Netherlands law.

Mr. Heller, an Uber driver, commenced a class action against Uber alleging that it breached the Ontario Employment Standards Act, 2000 (SO 2000, c 41) (“ESA”) by not treating drivers as employees and not providing them the benefits and protections employees are entitled to under the ESA. He sought over $400 million CAD in damages. Uber moved to stay the class action on the basis that the service agreement between Mr. Heller and the company required all disputes to be resolved by arbitration under the ICC rules. The agreement designated Amsterdam as the place of arbitration and was governed by Dutch law. The administrative fee to commence such a claim before the ICC arbitration is approximately $14,5000 USD, which did not include further administration of the proceedings by the ICC, attorney’s fees, or other costs.

The Ontario Arbitration Act, 1991 (SO 1991, c 17) requires all court proceedings in respect of matters subject to arbitration to be stayed except in limited circumstances – reflecting Ontario’s longstanding policy of promoting itself as an arbitration-friendly jurisdiction. One such exception is if the arbitration agreement itself is invalid (ss 7(1) and 7(2), para 2).

Mr. Heller asserted that his arbitration clause with Uber was invalid because it was unconscionable. In the normal course, under Canadian law, a dispute about an arbitrator’s jurisdiction would first be resolved by the arbitrator. There are limited exceptions to this rule, including for so-called “pure” questions of law and questions of mixed fact and law that could be resolved with only “superficial” consideration of the record.

 

The SCC’s Decision

Until Heller, Canadian courts were divided on the proper test to determine whether a contract or contractual provision is void for unconscionability, including on the extent of unfairness required and whether a party has to know and actively take advantage of the other party. The majority at the SCC seemingly resolved the dispute in Heller, holding that a party challenging a contract as unconscionable need only show an inequality of bargaining power that results in an improvident bargain.

Applying this test, the majority at the SCC held that the Uber arbitration clause was unconscionable and set it aside. First, it held that there was an inequality of bargaining power, pointing to the fact that the agreement was a standard form “contract of adhesion.” Mr. Heller had no say into the terms of and that there was a gulf in sophistication between individuals like Mr. Heller and large, multi-national companies like Uber. In particular, the majority found that a person in Mr. Heller’s circumstances likely would not appreciate the financial and legal implications of the arbitration clause, noting that the Uber agreement did not attach a copy of the ICC rules and that Mr. Heller therefore would not have known of the commencement fee even if he had read the agreement in its entirety.

Second, the majority held that the agreement was improvident because the cost to arbitrate effectively deterred any meaningful resolution of the dispute. It noted that the $14,500 USD fee to commence a claim was close to Mr. Heller’s annual income and that the costs of traveling to Amsterdam, the place of the arbitration, to assert the claim would generally be well beyond the means of someone in his circumstances.

In arriving at its conclusion, the majority engaged in a lengthy discussion of the traditional bases for respecting freedom of contract generally, noting that the classic paradigm underlying freedom of contract is the “freely negotiated bargain”, which presumes a semblance of equality between contracting parties such that the contract is “negotiated, freely agreed, and therefore fair” (Heller, at para 56, citing Mindy Chen-Wishart, Contract Law (6th ed 2018), at p 12 (emphasis in original)).

Regarding arbitration clauses specifically, in addition to freedom of contract arguments, the majority also held that,

“Respect for arbitration is based on its being a cost-effective and efficient method of resolving disputes. When arbitration is realistically unattainable, it amounts to no dispute resolution mechanism at all.” (Heller, at para 97)

Accordingly, the majority held, when these implicit preconditions are absent, the court need not enforce an arbitration clause. The court can refuse to stay a court proceeding if there is a “real prospect” that referring a challenge to an arbitrator’s jurisdiction to the arbitrator would result in the challenge never being resolved, such that the arbitration clause functions to insulate against any meaningful dispute resolution rather than facilitate it. This could occur, for example, because of high commencement fees, if a claimant cannot reasonably reach the physical location of the arbitration, or because other practical factors render the likelihood of resolving the challenge through arbitration unlikely. Notably, it could also be the result of a foreign choice of law clause that circumvents mandatory local policy, such as the clause in Uber’s agreements with its local drivers that would prevent an arbitrator from giving effect to the protections in the ESA by rendering the agreement subject to the law of the Netherlands.

In separate reasons, the lone dissenting member of the SCC observed that the majority’s analysis depended on the kind of individualistic, factual analysis regarding the dispute that the SCC has routinely eschewed in assessing whether to stay a court proceeding in lieu of arbitration. These factors included Mr. Heller’s income, his circumstances in entering into the Uber agreement, the likely value of his claim relative to the cost of arbitration, and the extent to which providing for Amsterdam as the place of arbitration would actually require him to travel to Amsterdam for the arbitration. She also observed that, even if the majority’s analysis was correct, its concerns could be addressed by conditionally staying the arbitration unless Uber paid the commencement fee or by severing the provisions requiring the arbitration to proceed according to the ICC rules and the place of arbitration such that it was unnecessary to declare the entire arbitration clause invalid and greenlight a court proceeding when the parties expressly agreed to resolve their disputes by private arbitration.

 

Impact of the Decision on Canadian Law and Policies

At a conceptual level, Heller pitted the SCC’s historical pro-consumer protection and pro-class action stance against its historic respect for and promotion of arbitration as an alternative dispute resolution mechanism that complements the work of courts. In seemingly prioritizing the former over the latter, the majority held that the courts’ respect for arbitration is based on it being a cost-effective and efficient procedure, such that when it does not provide those benefits, arbitration provisions need not be enforced. Notably, this ignores other reasons parties frequently incorporate arbitration clauses into their agreements: ensuring decision makers with appropriate expertise, the legitimacy of decisions arising from party-controlled processes, and confidentiality.

There is no denying that Heller deals a blow to the breadth and strength of arbitration clauses under Canadian law. The inevitable consequence of the SCC’s decision will be more frequent challenges to arbitration clauses as a result of the individual and fact-specific nature of the factors Canadian courts will now need to consider in deciding whether to stay court proceedings in lieu of arbitration.

At the same time, one should resist the temptation to be melodramatic. Heller is not a death knell for arbitration clauses in Canada. If anything, the decision provides a roadmap for parties to strengthen arbitration clauses and ensure their validity going forward. The SCC’s decision is highly fact-specific and future cases will be determined on their own facts. The majority was clearly off put by the notion that an Uber driver should be required to pay close to $20,000 CAD (which, the evidence suggested, was close to Mr. Heller’s annual income) and travel to Amsterdam merely to challenge the validity of the arbitration clause in the first place. One may well ask whether the outcome in Heller would have been different if the arbitration clause provided for a seat (or even merely place) of arbitration in the same jurisdiction as where the driver was located or virtually, that the commencement fee would be fully recoverable in the event that the claimant was successful, or even, perhaps, if the agreement attached the ICC rules and fee schedule and expressly drew the driver’s attention to them. There are, of course, numerous other ways in which the arbitration clause could have been tailored to ensure that arbitration provided an accessible and pragmatic way for disputes to be resolved.

In that respect, Heller’s true legacy is to remind drafters of commercial agreements to give equal consideration to dispute resolution provisions as they do to the main clauses in their agreements and to challenge and provide an opportunity for arbitral institutions to develop specific rules that promote the underlying policy goals of arbitration relating to flexibility, accessibility, and efficiency.

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Painting the Complete Picture: Issues Surrounding Art Arbitration in India

Kluwer Arbitration Blog - Wed, 2020-07-01 03:00

The Status of Art Arbitrations in India

As per a 2018 report, the Indian art industry is plagued by legal ambiguities, forgeries and lack of transparency, and infrastructural support, making it a fertile ground for disputes. A steady increase in the number of high-net-worth individuals and a surge in online auctions have contributed to the growth of the Indian art market, which is estimated to reach a global turnover of USD 195-260 million in the 2020s. In December 2014, Justice Gururajan delivered an 81-page arbitral award, ending a four-year-long legal battle concerning the authenticity of a 126 years old Raja Ravi Varma painting in a one-of-its-kind arbitral precedent on art disputes in India.

Art lawyers and other stakeholders have time and again iterated the suitability of arbitration for resolving art disputes. Contracts signed between stakeholders in the Indian art industry frequently have arbitration clauses. Moreover, Indian legal practitioners expect an exponential increase in the popularity of such arbitrations owing to the opening of the Court of Arbitration for Art (“CAfA”) at the Hague in 2018, and the option to include a CAfA arbitration clause in art contracts. This raises an inescapable question: will the existing arbitral jurisprudence in India provide a foundation strong enough to meet the requirements of the stakeholders in the art industry?

Sections 34 and 48 of the Arbitration and Conciliation Act (“1996 Act”) render an award arising out of an ‘inarbitrable’ dispute unenforceable in India. Art disputes generally include title and authenticity disputes, disputes arising out of testamentary matters, art fraud as well as copyright issues. In light of Booz-Allen, art disputes arising out of testamentary and succession matters are inarbitrable in India. Further, arbitrability of a dispute involving art fraud would depend on the facts as judicial precedent favours arbitrability of art fraud involving internal affairs of the parties while going against arbitrability of criminal charges and other complex art fraud cases.

While there is clarity regarding these issues, a few other potential issues arising out of art disputes merit a detailed analysis in light of the conflicting Indian arbitral jurisprudence.

 

Arbitration of Artists’ Resale Royalty Disputes

Since the monetary value of artwork generally grows with subsequent resale, visual artists remain at a huge disadvantage if they are not paid a share of the resale price. With the growing recognition of resale royalties around the world as a moral right of visual artists, resale royalty can also be incorporated as a contractual obligation in the sales contract. India has statutorily recognized the right to resale royalties under Section 53A of its Copyright Act which gives the Intellectual Property Appellate Board (“IPAB”), a quasi-judicial body, the power to resolve disputes concerning resale royalties. However, IPAB has remained dysfunctional for the majority of its existence and lacks the requisite infrastructure and personnel to effectively resolve disputes. Although IPAB’s incompetence acts as an additional impetus for stakeholders in the art market to resolve disputes concerning resale royalties via arbitration, there are few hurdles in the path.

In Booz-Allen & Hamilton Inc v. SBI Home Finance Ltd., the Indian Supreme Court (“SC”) ruled that disputes involving adjudication of action in rem, and disputes whose adjudication is exclusively reserved for public forums as a matter of public policy, are both inarbitrable. The question is whether contractual disputes concerning resale royalties pass the ‘Booz-Allen test’.

Despite the lack of clarity on arbitrability of IP disputes, the recent judicial trend suggests that IP disputes arising out of contracts are arbitrable as long as the rights of third parties are not affected by the decision of the arbitrator. High Courts 1)EROS International v. Telemax Links India Pvt. Ltd., 2016 (6) Arb L.R. 121 (Bom.), ¶ 16; H.D.F.C. Bank Ltd. v. Satpal Singh Bakshi, (2013) I.L.R. 1 Delhi 583, ¶ 14. jQuery("#footnote_plugin_tooltip_4862_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4862_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); have also held that mere creation of forums under special enactments would not oust the jurisdiction of arbitral tribunal unless that particular enactment gives ‘special powers to the tribunals which are not with the civil courts’. These decisions augur in favour of arbitrability of resale royalty disputes.

However, the SC seems to have disregarded this line of reasoning while determining arbitrability of trusts disputes. The Indian Trusts Act does not expressly confer ‘exclusive jurisdiction’ on the civil courts to adjudicate trust disputes. Nonetheless, the SC referred to several provisions of the Trusts Act that specifically conferred jurisdiction on civil courts to rule that the scheme of the Trusts Act was of such nature that it impliedly excluded arbitration of trust disputes.2)see paras 54-58 of the decision. jQuery("#footnote_plugin_tooltip_4862_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4862_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); One can draw a similar analogy to IPAB as several provisions of the Copyright Act specifically confer jurisdiction on IPAB to adjudicate various copyright issues.3)See for example, Copyright Act, ss. 6, 11, 12, 19A, 31, 31A, 31B, 31C, 31D, 32, 33A and  53A. jQuery("#footnote_plugin_tooltip_4862_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4862_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Further, on some instances, courts have employed the same reasoning to rule that the Copyright Act impliedly confers ‘exclusive jurisdiction’ on IPAB to deal with matters entrusted to it by the Copyright Act.4)Data Infosys Ltd. and Ors. v. Infosys Technologies Ltd., 2016 S.C.C. OnLine Del. 617; Music Choice India Private v. Phonographic Performance, 2009 S.C.C. OnLine Bom. 121. jQuery("#footnote_plugin_tooltip_4862_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4862_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); These decisions go against the arbitrability of resale royalty disputes, bearing testimony to the obscurity in the law on this issue.

 

Art Arbitration and the Antiquities and Art Treasures Act, 1972 (“AATA”)

The Government of India enacted the AATA in 1972 to regulate the trading of antiquities and art treasures in India. Pantings older than 100 years have been classified as ‘antiquities’ under AATA. The age of the painting or artefact can be a decisive factor in resolving certain authenticity disputes.

Section 24 of AATA makes it incumbent on the Archaeological Survey of India (“ASI”) (or an Expert Advisory Committee in the proposed 2017 bill) to determine whether an object is antiquity or not. In fact, in the arbitration concerning the Raja Ravi Varma painting, the arbitrator while deciding the question of authenticity gave precedence to the ASI certification over the opinion of the buyer’s experts.

The ASI’s incompetence is apparent from a number of cases where it did not employ any forensic tests to check the age of the artifact and declared certain items as ‘antique’ by ‘merely looking at them’. It has also been criticised for being short-staffed and riddled with red tape. In light of the above, parties ought to have the freedom to appoint experts who employ techniques that stand up to the parameters of the art market. Section 26 of the 1996 Act gives the parties and the arbitral tribunal the power to appoint an expert for assistance in deciding specific issues. However, in cases where the tribunal fails to refer the question of authenticity to ASI or does not rely on ASI’s opinion, there is a likelihood of the resultant award being successfully challenged.

In 2019, the SC ruled that in case of conflict, provisions of AATA will override the provisions of a general enactment covering the same aspect. In that case, the SC gave primacy to the ASI’s power under Section 24 in case of a prosecution under the Customs Act. The SC has previously ruled in favour of special enactments while dealing with conflicts with the 1996 Act (see here and here). Following this line of reasoning, Section 24 of AATA, being a special provision, would override the right to appoint experts under Section 26 of the 1996 Act. Consequently, reliance upon any expert opinion on the age of the concerned work will be in contravention of the ASI’s statutory power. Now, the question arises whether such contravention would be fatal to the validity of the award? It is settled law that a ‘mere contravention of substantive laws of India’ does not amount to a breach of public policy of India. However, if a law relates to ‘core values of India’s public policy’ or protects its national interest, its violation would constitute a violation of India’s public policy. In the authors’ opinion, the correct view would be to not elevate Section 24 of AATA to the pedestal of public policy. Despite this, in April 2020, the SC in NAFED v. Alimenta refused to enforce a foreign award as it was made in contravention of a government order prohibiting exports, which, according to the SC was part of India’s ‘public policy relating to export’. A similar argument can be made on these lines to bring AATA within the ambit of public policy. AATA was enacted in line with India’s policy to preserve its cultural heritage. The government intended to exercise control over the trading of antiquities5)See, ss. 3, 7, 13, 14, 19, 24 of AATA. jQuery("#footnote_plugin_tooltip_4862_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4862_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and conferred the power to determine whether an object is an antiquity on ASI. Thus, a future court may rely on NAFED to opine that the power of the ASI to decide the status of antiquities is a matter within the fundamental policy of India in preserving its cultural heritage. Such a view amounts to excessive judicial interference and is bound to harm the future of art arbitration in India.

 

Conclusion

A major step towards tapping into the economic potential of Indian art is understanding and strengthening the dispute resolution mechanism for dealing with it. Courts themselves are of the opinion that they are not best suited to resolve art authenticity issues.6)Thome v. The Alexander & Laura Calder Foundation, 890 N.Y.S.2d 16, 26 (N.Y. App. Div. 2009). jQuery("#footnote_plugin_tooltip_4862_6").tooltip({ tip: "#footnote_plugin_tooltip_text_4862_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); A decision given by a specialised art tribunal is far more likely to be revered and accepted by the art market.

Unfortunately, the existing arbitral jurisprudence in India is woefully inadequate to support the art industry. The newly added Section 42A in the 1996 Act on confidentiality of arbitral proceedings has been rightly criticized for being marred by vagueness. Considering how much people “prize their anonymity” in the art world, such equivocal provisions will prove to be a dampener for parties wishing to arbitrate their art disputes.

Such ambiguities undermine the utility of arbitration agreements in art transactions. Thus, art lawyers need to factor in these considerations while advising their clients on contractual terms. Further, positive legal developments in areas such as expert training and confidentiality will go a long way in supporting the incipient art industry of India.

References   [ + ]

1. ↑ EROS International v. Telemax Links India Pvt. Ltd., 2016 (6) Arb L.R. 121 (Bom.), ¶ 16; H.D.F.C. Bank Ltd. v. Satpal Singh Bakshi, (2013) I.L.R. 1 Delhi 583, ¶ 14. 2. ↑ see paras 54-58 of the decision. 3. ↑ See for example, Copyright Act, ss. 6, 11, 12, 19A, 31, 31A, 31B, 31C, 31D, 32, 33A and  53A. 4. ↑ Data Infosys Ltd. and Ors. v. Infosys Technologies Ltd., 2016 S.C.C. OnLine Del. 617; Music Choice India Private v. Phonographic Performance, 2009 S.C.C. OnLine Bom. 121. 5. ↑ See, ss. 3, 7, 13, 14, 19, 24 of AATA. 6. ↑ Thome v. The Alexander & Laura Calder Foundation, 890 N.Y.S.2d 16, 26 (N.Y. App. Div. 2009). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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That Other Crisis: Extraterritorial Application of Investment Standards During Occupation and Annexation

Kluwer Arbitration Blog - Tue, 2020-06-30 06:00

The Crimea crisis has received attention by UNCLOS and investment tribunals, as well as by the Swiss Federal Tribunal in appeals and annulment proceedings. However, their analyses have been limited to jurisdiction. The implicated issue was whether the (bilateral) investment treaties (BIT) of the occupying, and a fortiori annexing, State could be applied extraterritorially. These bodies have held so, at least implicitly. Most authors, including this one, have agreed and tried to provide some reasoning. As most jurisdictional hurdles have been overcome, this post will highlight some substantive issues for the upcoming merits phases and future cases of occupation/annexation.

 

Which treaty should apply in cases of occupation and annexation? 

The claimant in formulating its claim will have to elect an applicable BIT. Thus far, only Ukrainian claimants have claimed under Article 9 of the Russia-Ukraine BIT. As Russia’s occupation and subsequent annexation cannot be recognised legally, they have alleged interference with their investments by the acting de facto sovereign. Accepting that the aggressor-State’s treaties apply may lead to a straightforward application of their provisions/obligations. Yet, applying treaties extraterritorially may create important dilemmas. First, it seems counter to the very concept of investor-State arbitration, namely that investors of one contracting State invoke a BIT against the other State.

Second, such claims place before tribunals several issues, including the assessment of the occupation’s (il)legality and thus legitimisation of an illegal but acquiesced status quo, over which they have respectively no jurisdiction nor competence. Inter-State arbitration for the “interpretation and application” of e.g. “territory” could offer a way out in that regard (exceptionally provided for in Article 10). Moreover, the latter could restore the concept of heightened damages for serious breaches of international peace and security (Chorzów Factory), now prevalent in investor-State arbitration, to its former glory. Likewise, heightened competence of arbitrators, preferably versed in general international law, should also be required.

This post suggests that, to overcome these issues, the question could be reframed. Instead of adopting jurisdictional legal fictions to apply the Russia-Ukraine BIT to Russia as de facto sovereign of Crimea, one could apply the obligations of the Russia-Ukraine BIT to Russia extraterritorially. This would obviate the need, and ius cogens prohibition, of recognising Russia’s de facto effective control. Crimea could thus still be considered territorially part of Ukraine. The difference would be that Russia would be argued to have violated its investment obligations extraterritorially on that soil rather than within its own territory. This could, moreover, circumvent the Soviet/Russian practice of limiting arbitral jurisdiction to the assessment of damages (Renta 4 v Russia, Preliminary Objections, §§17–67), by postponing the responsibility decision to the quantum phase.

An investor seeking to invoke a BIT to make a claim about (Russia’s) extraterritorial conduct (in Crimea) might invoke the provisions protecting against expropriation, fair and equitable treatment (FET), or provisions applicable to armed conflict, such as full protection and security (FPS) and ‘war’ clauses. This post considers the potential extraterritorial reach of each of these obligations in turn.

 

Expropriation

The prohibition of (in)direct expropriation without compensation seems the most obvious – and popular – choice. In Ukrnafta, claimants alleged that Russia’s economic measures after the Crimea Accession Treaty constituted expropriation of petrol investments under Articles 5 and 9(2(c) Russia-Ukraine BIT. Such a direct expropriation would normally presuppose legal sovereignty over the territory, triggering questions of recognition (see e.g. Wichert v Wichert, Swiss Federal Tribunal, 1948). Any finding of a direct expropriation (or confiscation: Article 46 Hague Rules of Land Warfare) during occupation/annexation might therefore indirectly also recognise Russia’s sovereignty over the territory. It ought to be noted that many expropriation provisions (including Article 5(1)) limit the prohibition to expropriations in “the territory of” the host State. However, a less territorially-based argument might be a claim of indirect expropriation. Leaving an object/purpose and evolutionary approach aside, the concept of indirect expropriation – a substantial deprivation of the investor’s investment – could encompass remote expropriation. The analysis in such a case would turn on attribution rather than an argument that the tribunal has competence based on a given territorial jurisdiction. A parallel for the Crimea situation could be drawn from the Loizidou case before the European Court of Human Rights (Preliminary Objections, §62), only awarding damages for the denial of ownership and access by the aggressor-State’s or separatist forces (cfr. Judgment, §13). Likewise, Ukrainian investors would still be considered the legal owner in this scenario.

 

Fair and Equitable Treatment

FET comes into play for situations outside physical violence (FPS) and substantial economic deprivation (expropriation). It includes the availability of a stable and predictable legal framework, non-discrimination, and due process. FET provisions usually state that protection is granted “at all times” and should thus subsist during occupation/annexation. FET’s language  is indeed the easiest to apply extraterritorially. Occupation and annexation may raise additional challenges like asset-freezing and new laws, including re-registration of companies. Crimean banks had to stop their operations under Russian law of April 2014 with almost immediate effect (Privatbank). FET will thus probably be invoked as an additional basis to expropriation, possibly permitted under the language of Articles 2 and 4 Russia-Ukraine BIT.

It has been argued that domestic investors whose State no longer controls the territory of the investment can be discriminated against if one excludes occupied territory from the BIT’s definition of “territory”, triggering the underlying non-discrimination standard of FET. All claims regarding Crimean investments have been filed by Ukrainian investors. Such a prima facie intraterritorial application seems a factually desirable rather than a legal solution. Furthermore, arguably re-registration is a requirement for intuitu personae investments in Russia as host State. Under this post’s alternative, however, the original BIT still applies, without the need to include former intra-State investors: all investments are covered, whether or not they have re-registered, as long as they have a material investment in Crimea within the definition of Article 1.

 

Full Protection and Security

The most significant protection for investments in occupied/annexed territory is the FPS standard. Often cited in one breath with FET, FPS could overlap or be interpreted separately. Prima facie, there is no FPS provision in the Russia-Ukraine BIT, at least not in the usual wording of “full [legal] protection and security”. However, imposing “complete and unconditional legal protection of investments” (Article 2(2)) could support legal rather than mere physical protection (e.g. Siemens §303). If so, the re-registration requirement could fall within its scope, especially since FPS continues after armed hostilities have ended (Wena Hotels v Egypt, §§82-95).

No matter who has legal sovereignty, investors enjoy full and physical protection through the host State’s due diligence obligations. The related duty to take precautionary measures places not only the occupying State’s population, but also foreign investors and other temporary subjects “under its control” (cfr. Article 58 Additional Protocol II to the Geneva Conventions), implying mere de facto rather than legal control over the territory. The presumption is that having no control over territory (anymore) will lead to the lack of responsibility of the State, and vice versa. However, a FPS claim against the occupied State, Ukraine, will be unlikely as it could invoke force majeure.

In the Crimea scenario, rather than whether the State has failed its due diligence obligations, the question is one of which State has to offer the protection (attribution of responsibility). In terms of evidence, the American Manufacturing & Trading Inc. v Zaire tribunal (§6.13) held the fact that soldiers wore official uniforms irrelevant, “without any one being able to show either that they were organized or that they were under order, nor indeed that they were concerted” (§§7.08-7.09). Requiring the claimant to prove the absence of military necessity, as in Asian Agricultural Products Ltd. v Sri Lanka (§56-64) seems too high a burden of proof for investors in Crimea. At the outset, the aggressor-State’s actions are often difficult to trace. The solution seems to lie in the Corfu Channel case, allowing the use of inferences when territorial control precludes the victim from providing direct proof.

 

‘War’ Clauses

The basic ‘war’ (or armed conflict) clause prohibits discrimination between investors in armed conflict areas and investors of the most-favoured nation (Article 6 Russia-Ukraine BIT), the host State’s nationals, or both, but only if reparations are paid (distinguishing them from compensation-for-loss clauses). The claimant should prove that (s)he has received less than others, less than e.g. German investors in the Crimea. The development of war clauses further supports the claim that (investment) treaties stay in place during armed conflict, and a fortiori occupation/annexation. Moreover, arguably ‘free-transfer-of-funds’ clauses (Article 17 Russia-Ukraine BIT), heavily depending on a functioning financial market, become operative again during a stabilised occupation.

To conclude, although a “straightforward” extraterritorial application of treaties would be preferred, this proposal circumvents the ius cogens prohibition of (recognising) annexation and gives Ukrainian investors non-artificial standing. This solution does not preclude foreign claims under respective BITs with Russia (though those seem unlikely given that 60% of foreign direct investment in Crimea was Russian). However, arguing that investment provision can apply extraterritorially does not mean that those obligations are necessarily violated, and the burden of proof may be higher.

 

The views expressed in this post are solely those of the author. They do not necessarily reflect the views of any institution with which he is or has been affiliated. Nor do they necessarily reflect the views of any of his current or former clients.

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The LCIA 2019 Annual Report: An Analysis of the Developments in International Arbitration

Kluwer Arbitration Blog - Tue, 2020-06-30 05:00

On 19 May 2020 the London Court of International Arbitration (hereinafter the LCIA or the Court) issued its annual casework report for 2019.

This paper aims to present and analyse the numbers revealed in the report. The focus will be on the development of international arbitration in terms of market, diversity and inclusion, and applicable law and seat.

 

International Arbitration Market

A record number of 406 cases were reported by the LCIA (346 arbitrations administered pursuant to the LCIA Rules). This is the highest number of cases to be ever received by the Court and a 25% increase from 2018. These numbers reflect the consistent popularity of the reliance on international arbitration as a dispute resolution mechanism, also seen in the reports provided by other leading arbitration institutions such as the ICC Court of Arbitration1)The ICC Court announced that 869 new cases in 2019, compared to 842 cases administered by the ICC Court in 2018. The full statistical report for ICC Dispute resolution will be published in the coming months. See relevant communications here and here. jQuery("#footnote_plugin_tooltip_4293_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4293_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Singapore International Arbitration Centre (SIAC).2)The SIAC 2019 Annual Report announces a record of 479 new case fillings 2019, compared to 402 in 2018 (report available here). jQuery("#footnote_plugin_tooltip_4293_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4293_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Interestingly, the LCIA also registered that it has provided mediation and other alternative dispute services for 11 cases. This rate represents an increase compared to 9 requests in 2018. As with international arbitration, these numbers suggest a rise in the use of mediations, particularly bearing in mind the recent release of the Singapore Convention of International Commercial Mediation, discussed previously on the blog, which will enter into force on 12 September 2020.

This convention has the potential to become a relevant tool for the applicability of international commercial mediation in avoiding conflicts arising from business relationships, including when affected by the Coronavirus outbreak. An increase in the number of conflicts due to the impossibility or hardship of companies to comply with their contractual obligations is expected, so it will be interesting to see if and how the 2020 Annual Report will reflect the pandemic and the users resorting to international arbitration and mediation.

 

Diversity and Inclusion

First, the LCIA reported a 29% rate of female arbitrator appointments in LCIA arbitrations (162 out of 566), compared to 23% in 2018.

This gender diversity increase is also a result of the institution’s initiatives to promote diversity, since 48% of all arbitrators selected by the LCIA were female arbitrators (5% more than in 2018). Female candidates selected by parties and co-arbitrators also increased to 12% and 30% (from 6% and 23% in 2018), respectively.

Second, there was a rise in the number of appointments by the Court of non-British arbitrators. The LCIA appointed arbitrators from 40 different countries (compared to 34 in 2018), and appointments of British arbitrators dropped from 65% in 2018 to 51% in 2019. In comparison, the parties and the co-arbitrators selected non-British arbitrators 51% and 34% of the time, respectively.

The authors welcome these findings. It suggests an increase in appointments of a number of well-skilled international arbitration professionals coming from jurisdictions which are not among the ones traditionally appointed in respect of international arbitrations.

However, it is important to also highlight that there is room for improvement. It appears that some geographic regions are still misrepresented, such as Latin America and Africa. This can be due to the existing geographic representation in terms of party origin and choice of seat with the LCIA. In any case, considering the growing number of practitioners, professional associations, well-established arbitral institutions and academic courses originals from or/and focusing on Latin America and Africa, it is expected that appointments of international arbitration actors coming from such regions will continue to grow over time.

Third, there was an increase in first-time appointees. 19% of arbitrators appointed in 2019 (105 of 566) in LCIA arbitrations were first-time appointees. This represents an increase from 14% in 2018. For these first-time appointments, the parties selected the arbitrator in 51% of cases, the LCIA in 31% of cases, and the co-arbitrators in 17% of cases.

Moreover, 60% of all arbitrators appointed in LCIA arbitrations in 2019 were only appointed once during the same calendar year, 23% of arbitrators were appointed twice, and 8% of arbitrators three times. The average number of appointments per arbitrator was one, regardless of gender.

This change also evidences efforts to implement diversity in international arbitration. In this case, it relates to diversity in the level of openness of the market for new professionals acting as arbitrators. The relevance of these numbers cannot be understated. As mentioned, the number of international arbitrations is also increasing, so the flexibility of the market to welcome new professionals is crucial for its dynamism and avoidance of the traditional scenario in which well-established arbitrators handle several proceedings. This could compromise procedural efficiency and hinder other well-suited professionals from being able to develop expertise. This is particularly detrimental if we consider the global nature of disputes involved in international arbitration.

 

Applicable Law and Seat

First, among the 352 agreements under which disputes arose which resulted in LCIA arbitrations in 2019, 62% were entered into between 2015 and 2019.

These numbers show a modest increase in the number of claims based on older agreements, compared to 2018, where 70% of LCIA arbitrations arose from agreements entered into between 2014 and 2018.

Second, English law remained the most frequently chosen lex causae, governing 81% of arbitrations administered pursuant to the LCIA Rules (compared to 76% in 2018). Besides this, the LCIA administered 10 cases applying Mexican law, 6 cases with Pakistan law, UAE law in 5 cases, BVI law in 4 cases, and Russian law in 3 cases.

Although arguably showing a less diverse case range, the preference for English law also reflects the relevance of this law in international trade and in some of the sectors represented in the LCIA’s caseload, notably banking and finance, which experienced growth in cases from 29% in 2018 to 32% in 2019. Similarly, there was an increase in the number of loan or other facility agreements seen in LCIA arbitrations, representing 30% of all agreements (rising by 8% compared to 2018).3)For a discussion of the factors that lead or influence parties to opt-in or opt-out of certain governing contract laws, see Gustavo Moser, Rethinking Choice of Law in Cross-Border Sales, Eleven Publishing, 2018, pp. 93-116. jQuery("#footnote_plugin_tooltip_4293_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4293_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Third, although users continued to select a range of seats, England remained the most frequently chosen arbitral seat, in 89% of cases under the LCIA Rules (similar to 88% of cases in 2018). However, the LCIA verified a wider range of combination between seats and applicable laws, which demonstrate the parties’ willingness to “mix and match” their choice of law and seat.

 

Looking to the Future

The LCIA report shows an encouraging effort to promote diversity and inclusion by the LCIA, by encouraging gender diversity, geographical diversity and “new blood” in arbitration panels. This effort in maintaining record and statistics of gender and ethnic diversity is welcomed, since it allows for transparent scrutiny from the general public, and demonstrates a conscientious policy regarding appointments, at least from the institution’s side. This is in line with the role of arbitral institutions on this issue.

Moreover, the data also shows that English law and England remained the most chosen applicable law and seat for LCIA users in 2019, despite Brexit preparations. However, the report does not indicate which governing law and seat were selected in the contracts concluded after 23 June 2016, the date of the Brexit referendum.

Of course, only long-term data can confirm whether or not London will be able to rely on the consistency and predictability of English courts, and the wide adoption of English law generally due to the perception of it being contract-friendly.4)for a previous reflection on this issue, see Ana Coimbra Trigo and Gustavo Becker, ‘Rethinking Choice of Law and International Arbitration in Cross-Border Contracts: A Roundtable with Stakeholders’, in João Bosco Lee and Flavia Mange (eds), Revista Brasileira de Arbitragem, Kluwer Law International 2020, Volume XVII Issue 65 pp. 221 – 223). jQuery("#footnote_plugin_tooltip_4293_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4293_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Finally, the LCIA also noted on its webpage that in the first quarter of 2020, it experienced a spike in new cases. In addition, it is expected that in the medium-term, the COVID-19 crisis may lead to additional cases. We look forward to the reports that will follow to see how the current crisis may impact international arbitration cases.

References   [ + ]

1. ↑ The ICC Court announced that 869 new cases in 2019, compared to 842 cases administered by the ICC Court in 2018. The full statistical report for ICC Dispute resolution will be published in the coming months. See relevant communications here and here. 2. ↑ The SIAC 2019 Annual Report announces a record of 479 new case fillings 2019, compared to 402 in 2018 (report available here). 3. ↑ For a discussion of the factors that lead or influence parties to opt-in or opt-out of certain governing contract laws, see Gustavo Moser, Rethinking Choice of Law in Cross-Border Sales, Eleven Publishing, 2018, pp. 93-116. 4. ↑ for a previous reflection on this issue, see Ana Coimbra Trigo and Gustavo Becker, ‘Rethinking Choice of Law and International Arbitration in Cross-Border Contracts: A Roundtable with Stakeholders’, in João Bosco Lee and Flavia Mange (eds), Revista Brasileira de Arbitragem, Kluwer Law International 2020, Volume XVII Issue 65 pp. 221 – 223). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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EU Terminates all Intra-EU Bilateral Investment Treaties

International Arbitration Blog - Mon, 2020-06-29 11:55

On May 5, 2020, 23 of the Member States of the European Union signed the Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union. This move invalidates all Bilateral Investment Treaties between these EU Member States and disallows any future claims from being made thereunder.

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U.S. Supreme Court Applies International Law Without Saying So: GE Energy v. Outokumpu Stainless

Kluwer Arbitration Blog - Mon, 2020-06-29 03:00

On June 1, 2020, the United States Supreme Court issued its opinion in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA. The Court held that the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) does not prohibit a Contracting State from applying the domestic law doctrine of equitable estoppel to allow enforcement of an arbitration agreement by a non-signatory.

Commentators have noted that the Court’s decision is “narrow,” and “make[s] no mention of international law,” despite purporting to apply an international treaty.

However, in the author’s view, this decision is noteworthy because it applies (implicitly) a cornerstone doctrine of public international law known as the Lotus principle. Under this principle, a state is free to engage in certain conduct unless it can be shown that international law prohibits that conduct. In other words, international law does not need to affirmatively permit certain conduct for that conduct to be legal; it is enough that international law does not prohibit it.

 

The Lotus principle: States can engage in any conduct that is not prohibited

The Lotus principle comes from a 1927 decision by the Permanent Court of International Justice (“PCIJ”) in a dispute between France and Turkey. That dispute arose after Turkey arrested, imprisoned, and convicted a French captain for causing a fatal collision with a Turkish ship on the high seas. France argued that Turkey’s exercise of criminal jurisdiction over a French national under the circumstances violated international law. (pp. 5, 10-11.) It argued that in order to have jurisdiction, Turkey needed to “point to some title to jurisdiction recognized by international law,” and none existed. By contrast, Turkey argued that it was free to exercise jurisdiction unless France could prove that such exercise was prohibited under international law. (p. 18.)

The PCIJ sided with Turkey. It found that Turkey’s “way of stating the question is . . . dictated by the very nature and existing conditions of international law,” under which states are sovereign. The only limits on their sovereignty are those that they voluntarily assume, by including in their treaties or accepting as custom. “Restrictions upon the independence of States cannot therefore be presumed.” (Id.)

Thus, under international law, states are free to engage in conduct unless it can be shown that that conduct is prohibited.

The PCIJ’s successor, the International Court of Justice (“ICJ”), has often reaffirmed this principle. For example, in 1986, it rejected the United States’ claim that Nicaragua’s military build-up was unlawful, because the United States had not identified any applicable rule of international law that limited a state’s permissible level of armaments. (p. 135 ¶ 269.) Likewise, in 1996, the ICJ analyzed the legality of the threat or use of nuclear weapons. It found that while international law did not specifically “authorize” the use of nuclear weapons, “state practice shows that the illegality of the use of certain weapons as such does not result from the absence of authorization but, on the contrary, is formulated in terms of prohibition.” (p. 247 ¶ 52 (emphasis added)). It then went on to analyze whether a prohibition on nuclear weapons existed. Finally, in 2008, the United Nations General Assembly asked the ICJ to render an advisory opinion on whether “the unilateral declaration of independence by the [authorities] in Kosovo [was] in accordance with international law.” The ICJ found that, “[T]he answer to that question turns on whether or not the applicable international law prohibited the declaration of independence.” (pp. 407, ¶ 1, 425, ¶ 56 (emphasis added)).1)But see Anne Peters, Does Kosovo Lie in the Lotus-Land of Freedom, 24 Leiden J. Int’l L. 95, 100-01 (2011), (questioning whether the Kosovo advisory opinion should be viewed as a strict application of the Lotus principle, in part because that principle applies only to the conduct of states and not non-state entities like the Kosovar authorities). jQuery("#footnote_plugin_tooltip_7975_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7975_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

A critical caveat to this principle is that the prohibition of the relevant conduct need not be explicit. A rule of international law could prohibit certain conduct even if the rule does not address the specific conduct by name. For example, in the aforementioned opinion on nuclear weapons, while the ICJ found that no rule of international law “specifically proscrib[ed]” the threat or use of nuclear weapons “per se,” it nonetheless analyzed whether the threat or use of such weapons would be inconsistent with principles of international humanitarian law and thus prohibited. (p. 256, ¶ 74.)

 

Framing the issue in GE Energy v. Outokumpu as one of international law

The issue at the heart of GE Energy v. Outokumpu was one of international law, to which the Lotus principle applied. In the author’s view, a proper statement of the issue was the following:

Whether the New York Convention prohibits a Contracting State from applying the domestic doctrine of equitable estoppel to permit the enforcement of arbitration agreements by non-signatories.

However, in its petition seeking Supreme Court review, GE Energy described the “Question Presented” in the following way:

Whether the [New York Convention] permits a non-signatory to an arbitration agreement to compel arbitration based on the doctrine of equitable estoppel. (p. i.)

This framing arguably ignores the international law nature of the issue in the dispute in two ways. First, it suggests that the relevant conduct is that of private parties, namely a non-signatory to an arbitration agreement. However, as an international treaty, the New York Convention establishes obligations for Contracting States and their courts; the relevant inquiry is therefore the extent to which the Convention constrains state conduct. Second, the framing suggests that the New York Convention must affirmatively “permit” certain conduct for that conduct to be allowed. However, under the Lotus principle, the relevant inquiry is only whether the New York Convention prohibits certain actions by Contracting States.

Writing for the Supreme Court, Justice Thomas framed the issue as follows:

The question in this case is whether the [New York Convention] conflicts with domestic equitable estoppel doctrine that permit the enforcement of arbitration agreements by non-signatories. (slip op. at p. 1.)

While Justice Thomas abandoned the problematic “permits” language from the petition, his framing does not bring into relief the fact that the relevant conduct here is that of a state party to an international treaty. That framing would have made more obvious the applicability of the Lotus principle.

 

The Supreme Court implicitly followed the Lotus principle

In any event, Justice Thomas’s approach was ultimately consistent with the Lotus principle (although he cited neither that principle nor any other part of international law). He observed that the New York Convention “does not address” and “is simply silent” on non-signatory enforcement. He then concluded that “this silence is dispositive here because nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.” Furthermore, while Article II(3) requires Contracting States to enforce arbitration agreements in certain circumstances (i.e. when requested by a signatory), “it does not state that arbitration agreements shall be enforced only in the identified circumstances.” (pp. 6-7.)

Thus, Justice Thomas correctly recognized that the relevant inquiry was not whether the New York Convention contained “permission” for Contracting States to engage in the relevant conduct (to allow the enforcement of arbitration agreements by non-signatories). Rather, the relevant inquiry was whether the Convention prohibited them from doing so. Since the Convention did not contain such a prohibition, Contracting States remain free to apply domestic law doctrines allowing the enforcement of arbitration agreements by non-signatories.

 

Conclusion

The GE Energy Power Conversion v. Outokumpu Stainless USA case serves as a reminder for litigants and courts to identify the international law issues before them, and apply the correct international law principles to these issues. Here, the Lotus principle ensures that, unless a prohibition can be shown in a treaty or customary international law, states are free to adopt and apply policies that are hospitable to international arbitration.

References   [ + ]

1. ↑ But see Anne Peters, Does Kosovo Lie in the Lotus-Land of Freedom, 24 Leiden J. Int’l L. 95, 100-01 (2011), (questioning whether the Kosovo advisory opinion should be viewed as a strict application of the Lotus principle, in part because that principle applies only to the conduct of states and not non-state entities like the Kosovar authorities). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Open Position: Assistant Editor of Kluwer Arbitration Blog

Kluwer Arbitration Blog - Sun, 2020-06-28 22:16

The Editorial Board of Kluwer Arbitration Blog announces the opening of the following position with Kluwer Arbitration Blog: Assistant Editor for East and Central Asia.

 

The Assistant Editor reports directly to the coordinating Associate Editor and is expected to (1) collect, edit and review guest submissions from the designated regions for posting on the Blog, while actively being involved in the coverage of the assigned regions; and (2) write blog posts as contributor. You have the opportunity to work with a dynamic and dedicated team and liaise with the arbitration community and various stakeholders.

 

For this position specifically, we prefer the Assistant Editor to be based in Japan and be effectively bilingual in English and Japanese.

 

The Assistant Editor will work remotely. Please note that this is a non-remunerated position. If you are interested, please submit a resume and cover letter by email to [email protected], with cc to Dr Crina Baltag, [email protected]. We will only reach out to shortlisted candidates for an interview.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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The USMCA/CUSMA/T-MEC’s Entry into Force: Evolution, Innovation, and Reform

Kluwer Arbitration Blog - Sat, 2020-06-27 21:00

Throughout this week, our contributors from around the globe have offered insights into the USMCA/CUSMA/T-MEC, which enters into force next week. Our contributors have contextualised USMCA against both regional and global developments. Many of them noted the link between USMCA and NAFTA, between USMCA and regional politics, and between USMCA and broader global trends related to investment treaty reform. Consistently, they engaged with the idea that USMCA is an “evolutionary,” and in some respects, “innovative” treaty. Today we pull these threads together to contextualise USMCA further by examining its additional dispute resolution features, to draw connections between USMCA and broader investor State dispute settlement (“ISDS”) reform efforts, and to offer forward-looking thoughts.

 

Chapter 31 of USMCA: Innovations to the State to State Dispute Settlement Framework

In addition to the unique features of the USMCA ISDS mechanism that have been highlighted by our contributors this week, USMCA also provides noteworthy innovations in State-to-State arbitration. USMCA Chapter 31 (Dispute Settlement) provides a mechanism that largely adopts the approach of NAFTA Chapter 20, while also addressing some of its flaws, which many commentators believe led to its infrequent use.

The scope of dispute settlement under USMCA Chapter 31 is narrower than NAFTA’s State-State dispute settlement framework. NAFTA Chapter 20 permitted panels to be convened to hear both violation complaints and nullification and impairment cases (non-violation cases) for all substantive NAFTA rights, except trade remedies and the labour and environment side agreements. Meanwhile, USMCA Chapter 31 denies panels the ability to hear violation cases for trade remedies, and it further excludes non-violation cases for claims under USMCA’s chapters on labour, environment, digital trade, financial services, telecommunications, alongside a number of other chapters. Procedurally, once a Party identifies a dispute, consultation with technical experts and the Free Trade Commission is required. Upon failure of such consultations, a binational panel may be convened to assist the Parties to resolve their dispute.

Chapter 31 further offers detailed rules and procedures to govern the establishment of a roster of panellists, their necessary qualifications, and how panellists are then selected from the roster to hear disputes. A key critique of NAFTA was the ability of a State to engage in “panel blocking”, employing its own failure to maintain an active and complete roster of candidates to prevent panel formation. This issue is resolved in USMCA through a commitment among the States to establish their rosters by the date USMCA enters into force (July 1, 2020). To protect from any future lapse in appointments, roster members maintain their position for a minimum of three years or until the Parties constitute a new roster. To this end, for example, in March this year the U.S. concluded its open call for applicants to the roster.

Once a panel is appointed, Chapter 31 provides detailed guidance on the conduct of proceedings, including requirements for evidentiary submissions, hearing format, e-filing, third-party participation, and the use of experts. This detailed guidance is unique to Chapter 31 and is not mirrored in Chapter 14’s ISDS mechanism. In large part, this detail was added to USMCA through the December 2019 Amendment, which immediately preceded the Parties’ rapid and successive domestic ratification processes. Finally, Chapter 31 indicates processes for release and implementation of panel decisions, as well as the consequences of non-implementation of such decisions.

The nuances and details of Chapter 31 are welcome additions to USMCA and reflect a thoughtful evolution of NAFTA’s Chapter 20. However, many commentators question the efficiency of both the negotiating process and even of the dispute settlement mechanism itself. An obvious alternative path would have been to draw upon the dispute settlement provisions of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Both Canada and Mexico are already parties to the CPTPP. CPTPP negotiations also took into account American input, as the U.S. was involved with Trans-Pacific Partnership (TPP) negotiations until President Donald Trump signed an executive order to withdraw prior to domestic ratification. The TPP provisions were negotiated to account for flaws in NAFTA Chapter 20 that were well-known to American, Mexican, and Canadian TPP negotiators. As explained by Jennifer Hillman the approach of the TPP dispute settlement system was “designed to be broader, deeper, faster, and more transparent than either the WTO’s Dispute Settlement Understanding or [NAFTA Chapter 20.]”1)Jennifer Hillman, “Dispute Settlement Mechanism” in Assessing the Trans-Pacific Partnership, Jeffrey J. Schott and Cathleen Cimino-Isaacs, eds, Peterson Institute of International Economics (2016), p. 214. jQuery("#footnote_plugin_tooltip_7637_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7637_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Where Does USMCA Fall in the Spectrum of Broader Global ISDS Reform?

TPP is also relevant to USMCA’s position with respect to global ISDS reform discussions. Many will recall that the TPP’s ISDS mechanism and the “risks” it posed to State sovereignty were among the U.S.’ reasons for withdrawing from the TPP. This position aligned with the “America First” rhetoric, which inspired the American negotiating position in USMCA. Yet, USMCA remains evolutionary in that it does not dispense with ISDS altogether. As Dr. Sheargold explained in yesterday’s post, the approach adopted in USMCA as between the U.S. and Canada is comparable to that adopted by Australia and the U.S. in their free trade agreement, where the exclusion of ISDS was justified – at least in part – by reference to the developed domestic legal systems of both States.

Compared to other more radical reform efforts, such as the European Commission’s proposal to implement a multilateral investment court, USMCA is not particularly revolutionary in its approach to structuring ISDS. It nonetheless incorporates many of the substantive and procedural reforms that differentiate new generation investment treaties from earlier models. As our contributors this week have noted, this includes various innovations concerning the scope and availability of ISDS itself. The treaty also imposes certain procedural safeguards for USMCA host States, including a requirement for would-be ISDS claimants to pursue local remedies for 30 months prior to filing their USMCA claim. Such innovations are reminiscent of reforms adopted in other contexts, including for example the inclusion in the 2015 Indian Model investment treaty of a five-year recourse to domestic remedies requirement.

Where ISDS is provided, USMCA builds on the legacy of NAFTA and the broader context of modern ISDS reform efforts to endorse a number of procedural safeguards and innovations. USMCA contains, for instance, detailed guidance as to the transparency frameworks applicable to ISDS proceedings. USMCA does not adopt the UNCITRAL Transparency Rules by reference, but nonetheless contains many of the same disclosure requirements set out in those Rules and in some cases, like other modern treaties, USMCA signals a willingness to go beyond the provisions on transparency contained in the UNCITRAL Rules. It imposes, for instance, obligations upon respondent States to make available to the public and the non-disputing USMCA State various documents associated with the proceeding (subject to certain safeguards). This includes the notice of intent, notice of arbitration, pleadings, memorials and briefs, minutes and transcripts of tribunal hearings and orders, awards, and decisions of the tribunal (Article 14.D.8). The USMCA further provides for the holding of open hearings and filing of amicus curiae submissions.

While USMCA provides for significant elements of procedural transparency for ISDS, it misses others. This includes certain more specific elements of transparency, including for example transparency associated with third party funding arrangements (a topic currently under discussion in UNCITRAL’s Working Group III). USMCA nevertheless addresses other aspects of transparency even if indirectly. Article 14.D.6, for instance, governs the selection of arbitrators, including to stipulate that arbitrators shall comply with the IBA Guidelines on Conflicts of Interest in International Arbitration “or any supplemental guidelines or rules adopted by the Annex Parties”. It is therefore possible that additional guidance could be provided by the USMCA Parties for assessment of arbitrator conflicts, including in the event Mexico and the U.S. endorse the recently-published Draft Code of Conduct for Adjudicators in ISDS.

USMCA also confronts the increasingly divisive issue of “double hatting”, where arbitrators also serve in other roles linked to ISDS proceedings (most commonly, as counsel). Would-be Chapter 14 arbitrators, once appointed, are prohibited from acting as counsel or in any other capacity in another pending USMCA Chapter 14 arbitration while the arbitrations in which they sit as arbitrators remain pending. Some critics suggest that banning “double hatting” may, as a side effect, decrease diversity among the pool of prospective arbitrators in ISDS proceedings, claiming that a ban effectively limits opportunities available to younger emerging arbitrators who are “transitional” in their practice and working to move to full-time arbitrator practices, while still acting as counsel.

There are no easy answers to the arbitrator diversity problem, but commentators agree that the system itself is only one piece of the puzzle. Counsel and their clients maintain decision-making power and should select (or at least consider) diverse candidates. Important projects are being developed in relation to diversity in ISDS more broadly, and stakeholders should continue to monitor appointment practices under USMCA to ensure appropriate diversity is achieved. Even broader ISDS reform efforts focused on diversity only can go so far. For example, the roster approached recently adopted by Comprehensive Economic and Trade Agreement between Canada, the European Union and its member states (CETA) failed to reflect diversity goals, that failure was acknowledged, and improvement efforts are apparently underway. In this respect, the selection criteria of USMCA Article 14.D.6 are helpful. Arbitrators are not required to have any specific experience or training (e.g., in public international law and/or in international investment and trade law), thereby creating avenues for entry by diverse and/or emerging arbitrators who may provide complementary expertise, for example, in international commercial arbitration or in specific relevant industries.

USMCA is noticeably silent on a range of other matters, particularly when compared to the ISDS mechanisms developed in other new generation treaties. This includes on the issue of potential investor obligations, a topic gaining increased traction in other negotiation settings. While a corporate social responsibility clause is included in USMCA Article 14.17, the clause focusses upon the responsibilities of each USMCA party and is likely too permissive to result in a legal obligation on investors to make or operate their investment consistently with such standards. Further, while the ISDS Annex between the U.S. and Mexico refers in passing to possible “counterclaims” by respondent States (Article 14.D.7), it is largely structured to focus upon claims filed by investors against their host State and not vice-versa.

 

What’s Next?

Placing USMCA amongst these broader discussions on evolution and innovation highlights the many challenges associated with modern treaty negotiation and ISDS reform. Yet, USMCA’s entry into force remains a historic and encouraging development regionally and globally. As mentioned in the introductory post to this series, NAFTA, despite the unprecedented trade flows it heralded, needed modernization because global commerce has changed dramatically over the past quarter century. USMCA thus brings North American regional trade into the 21st century in a manner that, at the very least, takes into consideration emerging global trends in treaty law and ISDS.

While today in 2020 our focus is on NAFTA’s termination and legacy claims provisions, soon it will be time to reconsider USMCA’s efficacy and future. A sunset provision at Article 34.7 provides that the agreement is subject to review and renewal by mutual agreement after six years (in 2026). At that time, its Parties would need to agree to a further 16-year extension, and absent mutual assent, USMCA would expire in 2036. The six-year review deadline is promising as it may provide an opportunity to revisit the challenges and opportunities already hotly debated among commentators, some of which are also discussed in this week’s series. We will continue to watch these North American developments closely in the months and years to come. For now, we thank you and our contributors again for helping us mark this momentous occasion on the Blog!

 

For the full scope of our coverage of USMCA to date, click here.

References   [ + ]

1. ↑ Jennifer Hillman, “Dispute Settlement Mechanism” in Assessing the Trans-Pacific Partnership, Jeffrey J. Schott and Cathleen Cimino-Isaacs, eds, Peterson Institute of International Economics (2016), p. 214. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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The USMCA/CUSMA/T-MEC’s Entry into Force: USMCA as Part of a Global Trend Away From ISDS – An Australian Perspective

Kluwer Arbitration Blog - Sat, 2020-06-27 03:00

The investor-state dispute settlement (ISDS) arrangements provided in Chapter 14 of the United States-Mexico-Canada Agreement (USMCA) are a radical shift from those that have been in force for the past 25 years under Chapter 11 of the North American Free Trade Agreement (NAFTA). As explored in Wednesday’s post, Canada has effectively opted-out of ISDS under USMCA with the exception of legacy claims and any pending NAFTA claims (see USMCA Annex 14-C). Although the United States (US) and Mexico have consented to ongoing ISDS under USMCA, the scope of obligations which can be the subject of a claim under Annex 14-D is highly restricted (although a wider range of claims can be brought with respect to government contracts covered by Annex 14-E).

In an early examination of Chapter 14 of USMCA on this blog, Robert Landicho and Andrea Cohen asked whether, in light of contemporaneous developments in Europe, USMCA is ‘part of a global trend away from investor-state arbitration?’ In a subsequent post Nikos Lavranos continued this inquiry, situating USMCA within a trend in recent North American and European treaty practice which he aptly termed ‘ISDS à la carte.’ This contribution offers an Australian perspective on USMCA’s unique ISDS arrangements and whether there is a global trend away from ISDS. Australia’s evolving position on ISDS shows increased caution about consenting to investor-state arbitration, but also that the exclusion or limitation of access to arbitration under one treaty does not necessarily signal a permanent rejection of ISDS.

 

A Brief History of Australia’s Evolving Approach to ISDS

Although Australia was a relative latecomer to the world of bilateral investment treaties (BITs), its approach to ISDS has undergone several significant shifts. From 1988 through to the early 2000s, Australia concluded BITs with twenty-one states in the Asia Pacific, Europe and Latin America. These BITs were based on a model agreement, and all included consent to ISDS.1)However, in the Australia – China BIT this consent was ostensibly limited by article XII:2(b) to disputes concerning the amount of compensation payable for expropriation. jQuery("#footnote_plugin_tooltip_7702_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7702_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In the mid-2000s Australia’s approach to ISDS became more varied, as it began to enter into free trade agreements (FTAs) with chapters on investment. In 2004, Australia rejected the inclusion of ISDS in the Australia – US Free Trade Agreement (AUSFTA), making Australia something of a pioneer of the à la carte approach to ISDS.

In April 2011 the government of then-Australian Prime Minister Julia Gillard issued a trade policy statement which pledged that Australia would not pursue the inclusion of ISDS in any future trade or investment agreement. At that time ISDS was a relatively prominent domestic political issue, in large part because of the arbitration brought by Philip Morris regarding Australia’s tobacco plain packaging rules. However, the absolute rejection of ISDS by Australia was short-lived. A change of government in September 2013 saw a return to the policy of considering whether to consent to ISDS in each treaty on a case-by-case basis. All but one of the FTAs which Australia has concluded since 2013 have incorporated ISDS mechanisms,2) ISDS was absent from the 2014 Japan – Australia Economic Partnership Agreement (JAEPA), which states in article 14.19.1 that the parties may consider adopting an ISDS mechanism as part of a review of the agreement. However, ISDS is available as between Australia and Japan under Chapter 9 of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). jQuery("#footnote_plugin_tooltip_7702_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7702_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and concerns about the impact of these treaties on regulatory sovereignty has been addressed through other international investment agreement (IIA) reforms, such as clarifying that ‘distinguish[ing] between investors or investments on the basis of legitimate public welfare objectives’ will not violate the national treatment obligation, and by providing general exceptions for measures that may be found to be in breach of an obligation (such as Articles 18 and 19 of the Hong Kong – Australia Investment Agreement (2019)).

 

Non-Participation in ISDS: Canada’s Approach under USMCA Compared to Australia’s Treaty Practice

The USMCA marks a notable shift in Canadian policy, since all previous Canadian IIAs have included ISDS mechanisms. As USMCA is a tripartite agreement, Canada’s non-participation in the ongoing ISDS mechanisms established by Annexes 14-D and 14-E has been achieved by defining a ‘qualifying investment dispute’ as ‘a dispute between an investor of an Annex Party and the other Annex Party’, where ‘Annex Party’ means only the US or Mexico. Mexican investors will still have a potential avenue for claims against Canada under the Comprehensive Agreement on Trans-Pacific Partnership (CPTPP) (and vice-versa for Canadian investors). But, by opting-out of ISDS under the USMCA, Canada will no longer face claims from US investors once the period for legacy claims expires three years after the termination of NAFTA under paragraph 3 of Annex 14-C.

Australia has excluded ISDS arrangements from treaties with some of its close allies and trading partners, most notably the US and New Zealand.3)The 2014 Japan – Australia Economic Partnership Agreement (JAEPA) and the 2012 Malaysia – Australia FTA (MAFTA) also do not include ISDS. However, ISDS is provided for these treaty parties through the CPTPP and, for Malaysia, under the AANZFTA. jQuery("#footnote_plugin_tooltip_7702_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7702_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Prior to the conclusion of USMCA, AUSFTA was the only US IIA which did not allow for recourse to ISDS. AUSFTA contains no consent to ISDS from either party, although Article 11.16 of AUSFTA states that the treaty parties will consult on the possible creation of ISDS procedures if either party ‘considers that there has been a change in circumstances affecting the settlement of disputes.’ To the knowledge of the author, no consultations have been initiated under this provision. Australia has also excluded ISDS from its treaties with New Zealand. The Investment Protocol to Australia and New Zealand’s Comprehensive Economic Relations and Trade Agreement (ANZCERTA) does not make any mention of investor-state arbitration. Australia and New Zealand have used side letters to exclude the operation of ISDS as between themselves under the Australia – New Zealand – Association of South East Asian Nations (ASEAN) FTA (AANZFTA) (2009) and the CPTPP.

The Australian Department of Foreign Affairs and Trade explained the exclusion of ISDS from AUSFTA was a ‘reflecti[on of] the fact that both countries have robust, developed legal systems for resolving disputes between foreign investors and government.’ Although not officially stated, an additional motivation was likely that Australia was not willing to expose itself to the risk of litigation from US investors, having witnessed Canada’s experience as a respondent in early NAFTA Chapter 11 arbitrations.4)See William S Dodge, ‘Investor-State Dispute Settlement between Developed Countries: Reflections on the Australia-United States Free Trade Agreement’ (2006) 39 Vanderbilt Journal of Transnational Law 1. jQuery("#footnote_plugin_tooltip_7702_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7702_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Despite its unwillingness to include ISDS in AUSFTA, in 2016 Australia signed on to the Trans-Pacific Partnership Agreement (TPP), which would have allowed US investors to bring investor-state claims against Australia under Section B of Chapter 9. In the domestic review of the TPP, specific concerns were raised about the prospect of allowing US investors to bring claims against Australia. At the time, ISDS was an issue which received significant public attention due to the high-profile Philip Morris arbitration. However, the decision to sign on to ISDS in the TPP was justified by the government on the basis that the ‘qualifications and definitional limitations in the TPP ISDS process intended to protect Governments that regulate in the public interest [were] sufficient to prevent an ISDS finding against Australia.’ Despite the US later withdrawing from the TPP, the willingness of Australia to sign a treaty that opened up the possibility of claims from US investors was a significant change from the AUSFTA, and demonstrates the potential for opposition to ISDS to fluctuate over time.

 

The Restricted Scope of ISDS Between the US and Mexico Under USMCA

Although USMCA provides Mexican investors with ongoing access to ISDS against the US (and vice-versa), the scope of claims that can be made is relatively restricted. Under Article 14.D.3.1 claims can only be made with respect to expropriations (but excluding indirect expropriations), or for breach of the obligations to accord national treatment or most-favoured nation treatment (but excluding claims relating to the establishment or acquisition of investments). Only Annex 14-E allows claims for breach of any obligation, but that Annex is restricted to claims relating to government contracts in covered sectors (such as oil and gas or electricity generation). Explaining the US’s reticence to include wide consent to investor-state arbitration in the USMCA before a Congressional committee, US Trade Representative Robert E. Lighthizer asked ‘why should a foreign national … have more rights than Americans have in the American court system?’.

Similar concerns to those expressed by Ambassador Lighthizer were part of the motivation for the Gillard government’s policy of rejecting the inclusion of ISDS provisions in future IIAs. But as noted above, Australia’s absolute rejection of ISDS was short-lived. Rather than excluding ISDS, recent Australian IIAs contain a range of other safeguards for regulatory autonomy. In particular, some contemporary Australian IIAs have shielded certain categories of measure from ISDS claims, such as the well-known denial of benefits provisions for tobacco control measures under Article 29.5 of the CPTPP and the exclusion of public health measures from the scope of ISDS under Article 14.21.1(b) of the Indonesia – Australia Comprehensive Economic Partnership Agreement (IA-CEPA).

In contrast to Annex 14-D of USMCA, Australia has generally not sought to protect its regulatory autonomy by limiting the range of obligations which can be the subject of ISDS claims. The notable exception is the China – Australia FTA (2015) (ChAFTA), which states in Article 9.12.2 that ISDS claims can only be brought for breach of the national treatment obligation. However, the investment chapter of ChAFTA is unusual because it only contains a narrow range of obligations – omitting typical IIA provisions such as fair and equitable treatment and expropriation – and it co-exists with the China – Australia BIT (1988).5)Under Article 9.9 of ChAFTA, the parties committed to a future work program to negotiate a more comprehensive investment chapter. To date, no newer investment chapter has been concluded. jQuery("#footnote_plugin_tooltip_7702_5").tooltip({ tip: "#footnote_plugin_tooltip_text_7702_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Under Article 14.6 of the IA-CEPA an investor-state claim cannot be made for breach of the prohibition on performance requirements. Aside from these examples, Australia has generally not sought to minimise the risks of ISDS by limiting the range of substantive obligations which can be the basis for an investor claim. It will be interesting to see whether, in future treaties, Australia is inspired by the approach taken in Annex 14-D of USMCA.

 

Conclusions – USMCA, Australia and the Global Trend Away from ISDS

The ISDS provisions of USMCA are a major departure from NAFTA, and represent part of a wider trend in which states are approaching investor-state arbitration with greater caution. For countries that share at least some concern about the extent to which ISDS impacts on regulatory autonomy, such as Australia, Annex 14-D of USMCA may provide a novel model for future IIAs. However, Australia’s varied approaches to ISDS over the past fifteen years demonstrate that trends away from ISDS are not necessarily linear. Australia rejected ISDS in the AUSFTA back in 2004, but it signed on to the TPP in 2016 – a time at which the global tide had already started to turn against ISDS. It is possible that the USMCA parties may have similar fluctuations in their policy on ISDS in future.

 

For the full scope of our coverage of USMCA to date, click here.

References   [ + ]

1. ↑ However, in the Australia – China BIT this consent was ostensibly limited by article XII:2(b) to disputes concerning the amount of compensation payable for expropriation. 2. ↑ ISDS was absent from the 2014 Japan – Australia Economic Partnership Agreement (JAEPA), which states in article 14.19.1 that the parties may consider adopting an ISDS mechanism as part of a review of the agreement. However, ISDS is available as between Australia and Japan under Chapter 9 of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). 3. ↑ The 2014 Japan – Australia Economic Partnership Agreement (JAEPA) and the 2012 Malaysia – Australia FTA (MAFTA) also do not include ISDS. However, ISDS is provided for these treaty parties through the CPTPP and, for Malaysia, under the AANZFTA. 4. ↑ See William S Dodge, ‘Investor-State Dispute Settlement between Developed Countries: Reflections on the Australia-United States Free Trade Agreement’ (2006) 39 Vanderbilt Journal of Transnational Law 1. 5. ↑ Under Article 9.9 of ChAFTA, the parties committed to a future work program to negotiate a more comprehensive investment chapter. To date, no newer investment chapter has been concluded. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Skills Training in London and UK : Mediation and Conflict Coaching

Communication and Conflict Blog - Fri, 2020-06-26 11:13
Skills training in Mediation, Conflict Coaching and Effective Communication, Conflict Management from CAOS Conflict Management in London, UK

The USMCA/CUSMA/T-MEC’s Entry into Force: Investment Arbitration in the Financial Services Chapter: What Changed and What Remains?

Kluwer Arbitration Blog - Fri, 2020-06-26 03:00

As North America embarks into a post-NAFTA era with the USMCA, it is crucial to analyze the new agreement’s disciplines. The USMCA Investment Chapter, for instance, has been the subject of many articles that have reviewed relevant differences with respect to NAFTA, particularly on investment arbitration. This post will explore the arbitration rules applicable to investment disputes under the USMCA Financial Services Chapter.

 

From NAFTA to the USMCA: Structure and Framework for Financial Services Disputes

The disciplines on investment in NAFTA (including those applicable to arbitration) are mainly encompassed in Chapter 11 (Investment). However, in NAFTA Chapter 14 (Financial Services), Canada, Mexico, and the United States designed a separate chapter that applied to measures of a Party relating to financial institutions of another Party, cross-border trade in financial services, and an investor of another Party, and investments of that investor, in a financial institution in the Party’s territory.

NAFTA Chapter 14 provided, among others, the standards of protection to investors and investments in financial institutions, as well as the rules on investment arbitration. Some of those provisions were incorporated by reference to the NAFTA Investment Chapter, according to Article 1401(2):

Articles 1109 [(Transfers), 1110 (expropriation),] 1111 [(Special Formalities and information requirements)], 1113 [(Denial of Benefits)], 1114 [(Environmental Measures)] … are hereby incorporated into and made a part of this Chapter. Articles 1115 through 1138 are hereby incorporated into and made a part of this Chapter solely for breaches by a Party of Articles 1109 through 1111, 1113 and 1114, as incorporated into this Chapter.

Thus, measures adopted or maintained by a Party that applied to investments in the financial sector were regulated outside Chapter 11 (Investment). NAFTA Article 1101.3 drew that line providing that “Chapter [11] does not apply to measures adopted or maintained by a Party to the extent that they are covered by Chapter Fourteen (Financial Services).” Therefore, a claim against a measure within the scope of Chapter 14 could only be arbitrated according to that chapter.

The USMCA preserves the same structure designed in NAFTA by providing a separate framework for investments in the financial sector, and related investment claims, in Chapter 17 (Financial Services). The arbitration rules for investment claims under Chapter 17 are contained in Annex 17-C (Mexico-United States Investment Disputes in Financial Services), which will be reviewed in the next section.

 

The USMCA: Substantive Modifications for Investment Arbitration in the Financial Services Sector

Similar to NAFTA, the USMCA builds an exclusive arbitration regime applicable to the financial services sector by incorporating the investment arbitration framework set out in Annex 14-D and introducing some modifications. Annex 17-C provides that the investment arbitration provisions set out in the Investment Chapter (Annex 14-D) will apply to investment disputes under the Financial Services Chapter, as modified by that annex. This section reviews the main modifications.

ISDS for investments in the financial sector does not include CanadaUnlike NAFTA, in the USMCA, Canada does not consent to arbitrate investment claims under the scope of the Financial Services Chapter, which only involves Mexico and the United States. Therefore, just like in the general ISDS regime contained in Annex 14-D of the USMCA Investment Chapter (discussed in Wednesday’s post), US and Mexican investors will no longer be able to have recourse to investment arbitration in the financial sector against Canada (and vice-versa concerning Canadian investors). However, alternatives remain. Mexican and Canadian investors continue to have the ability to arbitrate disputes against Canada and Mexico, respectively, under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Chapter 11 (Financial Services), Article 11.22. For any disputes involving US and Canadian claims against Canada or the United States, respectively, the only option to settle a dispute under the Financial Services chapter would be the State to State dispute settlement mechanism, as provided in USMCA’s Article 17.21 (Dispute Settlement).

Limited consent to arbitrationThe USMCA Financial Services Chapter incorporates the following obligations from the Investment Chapter: Article 14.6 (Minimum Standard of Treatment), Article 14.7 (Treatment in Case of Armed Conflict or Civil Strife), Article 14.8 (Expropriation and Compensation), Article 14.9 (Transfers), Article 14.13 (Special Formalities and Information Requirements), Article 14.14 (Denial of Benefits), Article 14.16 (Investment and Environmental, Health, Safety, and other Regulatory Objectives).

However, similar to the investment claims allowed under Annex 14-D of the USMCA Investment Chapter examined in other posts, the United States and Mexico limited their consent to arbitrate disputes under the Financial Services Chapter. An investor can only submit to arbitration claims for alleged breaches to the National Treatment (Article 17.3(1) and (2)), and Most-Favored-Nation Treatment (Article 17.4.1(a) to (c)) obligations set out in the Financial Services Chapter (except for the establishment or acquisition of an investment), and Expropriation (Article 14.8), except for indirect expropriation.

In comparison, under CPTPP, Canada and Mexico limited their consent to arbitrate disputes in the financial sector to the following obligations of the Investment Chapter:

Minimum Standard of Treatment (Article 9.6) (Mexico did not consent to the submission to arbitration for a breach of this provision before the seventh anniversary of the date of entry into force of CPTPP); Treatment in the Case of Armed Conflict or Civil Strife (Article 9.7); Expropriation and Compensation (Article 9.8); Transfers (Article 9.9); Special Formalities and Information Requirements (Article 9.14), and Denial of Benefits (Article 9.15).

Under NAFTA, the three States granted the same consent to arbitration to investors of all three States, but not anymore under the USMCA because Canada is not a Party to Annex 17-C. Furthermore, when CPTPP is brought to the analysis, the contrast between the different access to investment arbitration for investors of the three States is more evident.

Litigation in domestic courts. Under the general regime for investment arbitration set out in Annex 14-D, the USMCA imposes the obligation on US and Mexican investors (or the enterprise, when a claim is brought on behalf of it) to pursue domestic litigation before the courts of the host State, before submitting a claim to arbitration (Article 14.D.5.a.). It also requires that the investor or the enterprise obtain a final decision from the court of last resort in the host state, or that 30 months have elapsed from the initiation of the domestic litigation. Under Annex 17-C, the same restrictions apply, except that the 30-month requirement to pursue such domestic remedies is reduced to 18 months (Annex 17-C.4). This requirement did not exist in NAFTA.

Exceptions. In NAFTA, when an investor submitted a claim to arbitration under the Financial Services Chapter, the respondent could invoke as a defense an exception under Article 1410 (prudential exception or monetary and exchange rate policies exception). Upon request of the respondent, the tribunal was required to refer the matter to the NAFTA Financial Services Committee (comprised by the Parties’ financial authorities) for a decision as to whether the invoked exception was a valid defense. This effectively interrupted the arbitration while the matter was being resolved. If the Committee failed to decide the matter within 60 days, an arbitral panel established under the State-to-State dispute resolution mechanism could decide the matter and issue a report. Both the decision and the report were binding for the tribunal. In case no request to establish a panel was made, the tribunal had to decide the matter.

This mechanism in NAFTA was not used. In Fireman’s Fund, the only arbitration under NAFTA’s Financial Services Chapter, Mexico invoked an exception under Article 1410 for measures adopted for prudential reasons, as a defense against an expropriation claim. Mexico, however, did not request the matter to be referred to the Committee for a decision. The tribunal did not assess the validity of the defense in the end, because it found that the challenged measures did not constitute expropriation under the NAFTA.

The USMCA retains the possibility for a respondent to invoke Article 17.11 (Exceptions) as a defense, allowing a careful consideration of the matter while the arbitral procedure is suspended. However, USMCA eliminates the phase of the State-to-State dispute resolution mechanism but includes a more detailed procedure in Annex 17-C.5. Some of the new features are reviewed below.

Once the respondent invokes an exception under Article 17.11, it must submit to the financial authorities of the Party of the claimant, a request for a joint determination by the authorities of both Parties, as to whether and to what extend the exception invoked is a valid defense. The request must include the text proposed for a joint determination. As mentioned above, under NAFTA, the tribunal had to refer the matter to the Committee only upon request of the respondent. Also, NAFTA did not require to propose the text for a joint determination.

Under USMCA, the authorities must seek to agree on a joint determination within 120 days, and in extraordinary circumstances, they can extend the date 60 days. Under NAFTA, the Committee had 60 days to decide the matter.

The following aspects described were also not present in NAFTA and are new features added to the arbitration proceeding under the USMCA. Within 120 or 180 days if an extension is agreed, the authorities of the Party of the claimant must notify the authorities of the respondent whether they agree with the proposed joint determination, offer an alternative resolution, or do not accept a joint determination.

In case no notification is made, it shall be presumed that the authorities of the Party of the claimant, take a position consistent with that of the authorities of the respondent. In that case, a joint determination shall be deemed to be agreed as set out in the proposed joint determination. A joint determination shall be binding on the tribunal.

The arbitration may continue (i) 10 days after the disputing parties and, if constituted, the tribunal, receive the join determination, or (ii) 10 days after the expiration of the 120 days or the extended time agreed. However, if the authorities have not resolved within the 120 days, or the extended time agreed, the tribunal must decide the issue left unresolved by the authorities on the request of the respondent. In that case, the tribunal must decide the issue before the merits of the claim.

Specialized Arbitrators. The USMCA Financial Services Chapter requires that presiding arbitrators of the tribunal “ha[ve] expertise or experience in financial services law or practice such as the regulation of financial institutions.” The same rule applies to the other arbitrators “to the extent practicable” (Annex 17-C.3.a.). This requirement did not exist in NAFTA for investment tribunals, although it existed as a requirement for panelists under the State-to-State dispute settlement mechanism. This approach in NAFTA shows the preference of the three States to decide financial matters by experts in the field of financial services law, either by the Financial Services Committee or State-to-State panels. Although under the USMCA Financial Services Chapter, State-to-State panels will no longer intervene in deciding exceptions invoked by the respondent in investment arbitration, Mexico and the United States favored the NAFTA approach of appointing arbitrators specialized in financial services law in Annex 17-C.

 

Conclusion

In the USMCA, the three States decided to continue the approach agreed in NAFTA and devoted a specific regime to investments in the financial sector. However, only Mexico and the United States consented to arbitrate investment disputes, with limited scope as described above. Despite those limitations, Mexico and the United States designed a more detailed set of rules for investment arbitration in the financial sector, particularly when the respondent invokes an exception under Article 17.11.

In Fireman’s Fund, the investor alleged (unsuccessfully) that the measures challenged were not within the Financial Services Chapter’s scope as an attempt to have access to a broader set of claims under the Investment Chapter (e.g., Minimum Standard of Treatment). Under the USMCA, that situation is unlikely to occur because in both chapters 14 (Annex 14-D) and 17 (Annex 17-C) Mexico and the United States have granted a similar and limited consent to arbitrate investment disputes.

This post was prepared by the author in his personal capacity. The opinions expressed in this post are only the author’s own.

For the full scope of our coverage of USMCA to date, click here.

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Rival Venezuelan governments fight over gold in London

A London court battle between Venezuela’s rival leaders for control of the country’s gold reserves held by the Bank of England will also determine the outcome of an LCIA case over which administration...

ICSID and UNCITRAL release their Draft Code of Conduct for Adjudicators: A Long Road Travelled and Yet A Long Way to Walk

International Arbitration Blog - Thu, 2020-06-25 11:54

On May 1, 2020, the Secretariats of the ICSID and UNCITRAL released their long-awaited draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement (“Draft Code of Conduct”).

This Draft Code of Conduct is the result of the ICSID and UNCITRAL coming together to address an ethical issue which is often the source of criticism in Investor-State Dispute Settlement (“ISDS”), namely “the lack or apparent lack of independence and impartiality of ISDS tribunal members.” In doing so, the Draft Code of Conduct serves to reinforce the legitimacy of the ISDS process. 

The Draft Code of Conduct sets the table for the adoption of a Code of Conduct for Adjudicators which will “contain concrete rules rather than guidelines.” In other words, Member States have yet to come to an agreement on the common standards they share before this Draft Code of Conduct gives place to a binding (or non-binding) corpus of rules.

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