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Ticking Bomb of ICSID Awards’ Enforcement in Ukraine: Successful but Incorrect

Kluwer Arbitration Blog - 9 hours 54 min ago

There have been six Ukrainian proceedings concerning the enforcement of ICSID awards to date. All have been successful, but Ukrainian courts have erroneously applied the New York Convention’s regime for this purpose. In this post, the authors analyze the inconsistency of such an approach with the ICSID Convention regime and related implications, suggesting options to stimulate Ukrainian courts’ compliance with the Convention. On a separate note, potential alternatives to resist enforcement of ICSID awards under Ukrainian law are also considered.

 

Ukrainian Jurisprudence and Legal Framework for Enforcing ICSID Awards

In all of the Ukrainian court proceedings concerning ICSID awards that have been resolved to date, the courts have ignored the ICSID Convention’s provisions on the enforcement of the awards. They have instead examined the grounds for the refusal of enforcement of arbitral awards set forth either in Article V of the New York Convention and/or in Article 478 of the Civil Procedure Code of Ukraine (“CPCU“) and Article 36 of the Law of Ukraine “On International Commercial Arbitration (“Law on ICA“). These latter two instruments mirror the grounds specified in the New York Convention, with the only difference being that Article 478 of the CCU, unlike the New York Convention’s discretionary “may”, frames these grounds as mandatory for the courts to apply.

In fact, only two court rulings concerning the enforcement of ICSID awards in Ukraine have contained a direct reference to the ICSID Convention’s provisions. In particular, both the Kyiv Court of Appeal in its ruling on enforcement of the award in City-State N.V. and others v Ukraine and the Solomianskyi District Court in its ruling on enforcement of the award in Bosh International, Inc and others v Ukraine referred to Article 53 of the ICSID Convention in concluding that “an award shall be final and binding on the parties“. However, in neither case did the court take an opportunity to elaborate any further on the peculiarities of the enforcement of ICSID awards, instead immediately accompanying the above reference with an ordinary analysis under the New York Convention and Ukrainian procedural law.

In our opinion, there are at least two potential facts which explains such attitude of Ukrainian courts.

First, the moving parties often themselves rely on the New York Convention and Ukrainian ordinary procedural law to enforce ICSID Awards. For example, Сity-State N.V. in substantiating its application to the Kyiv Court of Appeal directly referred to the absence of any grounds for refusal of enforcement provided in the New York Convention.

Second, the Ukrainian procedural framework does not differentiate between ICSID and non-ICSID awards. Instead, the enforcement of all foreign awards is conducted under the CPCU, Law on ICA and the New York Convention.

 

Consistency with the ICSID’s Self-Contained Regime

The self-contained regime established by the ICSID Convention is considered to be the most conspicuous feature of the ICSID Convention, often making it a preferable pick for foreign investors. Unlike in the non-ICSID setting, for ICSID awards national courts of the seat of arbitration do not have set aside powers over the awards. Instead, an autonomous procedure for the review and enforcement of the awards applies. Article 53 of the Convention famously says that an ICSID award “shall not be subject to any appeal or to any other remedy except those provided for in this Convention“. This means that, at the stage of enforcement, the grounds for rejecting recognition and enforcement set forth in the New York Convention and like instruments are not available for ICSID awards. Instead, the ICSID Convention by Article 54(1) mandates the Contracting States to enforce the pecuniary obligations imposed by an ICSID award as if it was a final judgment of a court in the respective State.

Moreover, Ukrainian law itself mandates Ukrainian courts to apply the ICSID Convention regime to ICSID awards, instead of the ordinary enforcement procedure. Namely, both Article 9 of the Constitution of Ukraine and Article 3(2) of the CPCU provide that international treaties duly ratified by the Ukrainian Parliament, including the ICSID Convention, have a higher legal force than the legislation (albeit not higher than the Constitution of Ukraine). Consequently, the ICSID Convention’s provisions on the recognition and enforcement of ICSID awards trump procedural rules set forth in the CPCU in case of a conflict. As such, under Ukrainian law, Ukrainian courts faced with an ICSID award should treat it as a final judgment of Ukrainian courts, as required by Article 54 of the ICSID Convention, and so should avoid applying the New York Convention and CPCU’s ground for the non-enforcement.

Unfortunately, Ukrainian courts have not reflected the ICSID self-contained regime in their case law so far.

Although this deficiency has never resulted in a non-enforcement decision to date, the status quo carries risks that it will happen in the future. This problem may be especially sensitive for foreign investors in cases in which there may be arguable grounds to reject enforcement under the New York Convention like, for example, public policy violations.

 

Alternatives to Bring Ukrainian Jurisprudence in Line with the ICSID Regime

To redress the developing situation in Ukrainian case law, the best option would be for the legislator to direct courts toward compliance with the ICSID Convention. It could do this, first, by clearly stating in the CPCU that ICSID Awards are not subject to Article 478 of the CPC of Ukraine and should instead be treated as final court judgments for enforcement purposes.

It could, otherwise, at least provide that Article 478 with its mandatory wording is subject to exceptions that may exist in treaties ratified by Ukraine, including the ICSID Convention. In this way, Ukrainian courts will not be tied with mandatory wording of Article 478 of the CCU, which currently encourages the courts to apply the New York Convention-like grounds for not enforcing arbitral awards. Instead, Article 478 will explicitly mandate Ukrainian courts to directly rely on the ICSID Convention in this regard.

 

Potential Proper Recourse against ICSID Awards under Ukrainian law

When Ukrainian courts shift their jurisprudence in compliance with the ISCID Convention, counsel at the place of enforcement may still potentially rely on certain extremely narrow remedies to resist the enforcement of ICSID awards. This includes potential remedies under municipal rules applicable to final court judgments, or under constitutional law, public international law, and sovereign immunity rules1)Edward Baldwin, Mark A. Kantor, et al., “Limits to Enforcement of ICSID Awards”, Journal of International Arbitration, 2006, Volume 23, Issue 1. jQuery("#footnote_plugin_tooltip_8966_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8966_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

First, as mentioned above, the Constitution of Ukraine still has a higher legal force than the international treaties of Ukraine. Consequently, if an ICSID Award or the process of its issuance contradicts the constitutional rules one way or another, this may be a ground for the Ukrainian court to deny enforcement. However, this should be something rather extraordinary to trigger the violation of the Constitution. Considering the supremacy of the Constitution, the mentioned logic is equally applicable in the context of the New York Convention, where the constitutional violations would be likely to be characterized as public policy violations under Article V of the New York Convention.

Second, Article 55 of the ICSID Convention directly says that it does not shield ICSID awards from the rules on immunities of states from execution. Consequently, Article 79 of the Law of Ukraine on Private International Law providing immunities to foreign state’s property would still apply. Sovereign immunities and relevant exceptions under Ukrainian law are analyzed in more detail in this post by Oleksii Maslov.

Third, the ICSID Convention requires municipal courts to treat ICSID awards as final judgments in the respective jurisdictions, and so it is sometimes suggested that the national recourse against final judgments might be available against ICSID awards.2)Ibid. jQuery("#footnote_plugin_tooltip_8966_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8966_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In Ukraine, as per Article 423 of the CPCU, a final judgment can be reconsidered due to newly-discovered or exceptional circumstances, inter alia, when the court did not establish material circumstances of the case and the moving party was not aware and could not have been aware about them . This, if applied by Ukrainian courts to ICSID awards, potentially leaves room for the reconsideration of awards on the merits, which is not available under the New York Convention. Although it would operate only in rare cases, the mere opportunity of such a challenge likely goes against the ICSID Convention’s spirit. The conventional provisions providing that remedies against ICSID awards are limited by the four corners of the ICSID Convention should preclude Ukrainian courts from applying the mentioned grounds for reconsideration.

 

Concluding Remarks

Although all attempts to enforce ICSID awards in Ukraine have been successful to date, the current erroneous approach of Ukrainian courts creates risks for negative developments in the future. The primacy of international treaties over the CPCU’s provisions suggests that Ukrainian law as it now stands allows Ukrainian courts to fully comply with the ICSID Convention and in fact mandates them to do so. Yet, given the practice of the courts to date, more direct wording in the CPCU saying that the grounds for non-enforcement in Article 478 of the CPCU do not apply when the applicable international treaty such as the ICSID Convention says otherwise would be welcome. The question arises, then, who will initiate a change: the Parliament by calibrating Article 478 of the CPCU or Ukrainian courts by turning their jurisprudence in compliance with the ICSID Convention? In our view, the author of the change makes little difference as long as the change occurs prior to the first investor being hurt.

References   [ + ]

1. ↑ Edward Baldwin, Mark A. Kantor, et al., “Limits to Enforcement of ICSID Awards”, Journal of International Arbitration, 2006, Volume 23, Issue 1. 2. ↑ Ibid. 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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Varig Case and Implied Consent: Is the Signing of an Amendment Sufficient?

Kluwer Arbitration Blog - Sat, 2020-09-26 01:00

On August 11th, 2020, the Cayman Islands Court of Appeals overturned the decision that denied the enforcement of the arbitral award that ordered the MatlinPatterson Global Opportunities Partners private investment fund (“MP Funds”) to pay approximately USD 55 million to Gol Airlines. The amount refers to the purchase of the airline Varig by Gol.

 

The Underlying Dispute

After Varig’s purchase operation was completed, it came to Gol’s attention that the balance sheet that served as parameter for establishing the final price had been tampered with. The matter was discussed in the International Chamber of Commerce arbitration No. 15372, leading to the MP Funds’ condemnation.

The procedural issue addressed by the Arbitral Tribunal and that is now once again discussed in the Cayman Islands’ courts regards the extension of the arbitration agreement and implied consent, a recurring subject in arbitrations.

 

The Issue of Implied Consent

It is common knowledge that arbitration agreements bind only the ones who consent to them. Be that as it may, there are some occasions when parties seek to extend this consent, to reach so-called third parties. This is usual, for example, in groups of companies, when a party seeks to extend the arbitration agreement to bind companies of the same group as one of the signatories.

In the matter at hand, the airline initiated the proceedings not only against the sellers, but also against MP Funds. MP Funds was not a signatory to the share purchase agreement that contained the arbitration clause and therefore could not be part to the proceedings. Nonetheless, it had signed one of the Contract Amendments. The Amendment did not mention arbitration. Its objective was to provide a non-compete obligation for the signatories and thus integrate it into the Contract, which is supported by the expression “including amending the terms of the Contract”.

As a result, the Claimant requested the Arbitral Tribunal to declare that it had jurisdiction to hear the case against MP Funds on the grounds that it became a signatory to the arbitration agreement when it signed the Amendment even though it was not a direct signatory to the Contract.

But would the signature of an Amendment suffice to constitute implied consent to the arbitration clause?

Well, the guiding principle of arbitration is consent. Yet it will not always be expressed. It may be that the parties’ behavior demonstrates a genuine intention to participate in the arbitration procedure.1) FOUCHARD, Philippe; GAILLARD, Emmanuel; GOLDMAN, Berthold. Fouchard, Gaillard, Goldman on International Commercial Arbitration. The Hague: Kluwer Law International, 1999, p. 281. jQuery("#footnote_plugin_tooltip_8310_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8310_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It is the so-called implied consent.

 

The Arbitral Tribunal’s Ruling on the Procedural Issues

When analyzing the issue in 2007, the Arbitral Tribunal recognized that the subjective limits of the arbitrator’s jurisdiction did not impose any obstacle. In this sense, the arbitrators ruled that they had jurisdiction over MP Funds in its partial award.

The reasoning behind the decision was that the Amendment constitutes part of the main Contract. For this reason, the arbitration agreement provided for in the Contract is binding on all signatory parties, whether in the main Contract or in the Amendment. In view of that, all disputes between the parties of the contractual relationship had to be resolved through arbitration.

 

MP Funds’ Attempts to Annul the Award before the Brazilian Courts

After the final award on the merits, which ordered MP Funds to pay USD 55 million to Gol, the latter filed an annulment action of the arbitration award, on the grounds that it had not signed the Contract containing the arbitration clause and therefore the Arbitral Tribunal would have no jurisdiction over it. Although it had already brought these arguments before the Arbitral Tribunal in the beginning of the arbitration proceedings, once again the arbitrators’ consent and jurisdiction were brought to discussion.

Notwithstanding, the trial judge recognized that MP Funds consented to the arbitration clause for having signed the Amendment, which rendered the award valid. The case was also subsequently analyzed by the São Paulo Court of Appeals and by the Brazilian Superior Court of Justice and, likewise, the award remained unchanged. Nevertheless, there still was a pending appeal before the Brazilian Supreme Court.

 

Gol’s Attempts to Enforce the Award

However, the obstacles did not stop there. Gol still needed to enforce the award. The company’s first attempt in the United States was unsuccessful. The United States Court of Appeals for the Second Circuit ruled that the Amendment was only an annex to the Contract and thus did not link MP Funds to the arbitration clause.

The second attempt was in the Cayman Islands. The enforcement of the arbitration award was challenged on four grounds: (i) MP Funds was not party to the arbitration agreement relied on; (ii) if they were, the claims were outside the scope of the arbitration agreement; (iii) the Arbitral Tribunal decided the case on a legal argument not raised by the Claimant, which was contrary to Cayman Islands public policy; and (iv) the legal basis relied on by the Arbitral Tribunal was not within the Terms of Reference of the arbitration procedure and so had never been submitted to the Arbitral Tribunal for decision.

On the other hand, Gol’s argument was based mainly on estoppel due to the Brazilian Courts’ decisions. However, the Grand Court rejected Gol’s claims for estoppel. It agreed with MP Funds’ reasoning on all four grounds and refused to enforce the award.

 

The Cayman Islands Court of Appeals Ruling

The Court of Appeals accepted Gol’s submissions, entirely reversing the decision of the Grand Court, and allowing the enforcement of the arbitration award. The Court of Appeals’ decision addressed all the arguments brought up by MP Funds. As to those related to implied consent, which is the focus of this article, it ruled that “once it is decided that the Brazilian judgments in this case are decisions on the same issues as lie before this court, plainly within this appeal, it is impossible to go behind them as a matter of Brazilian law”. Thus, it held that MP Funds are estopped from challenging the Brazilian law decisions regarding the validity of the arbitrators’ jurisdiction.

Ultimately, the Court of Appeals decision represented a “light at the end of the tunnel” in the Varig Case. Ten years after the proceedings were concluded, it allowed the arbitral award to be enforced.

However, since it was possible that MP Funds succeeded in their remaining outstanding appeal before the Brazilian Federal Supreme Court, the Court of Appeals granted a stay of execution pending the outcome of the Brazilian proceedings. It considered that, in this scenario, it would be difficult to conceive that the award should still be enforced in the Cayman Islands. Therefore, it established that if the appeal were to be successful, MP Funds would be entitled to return to the Cayman Islands’ courts and have the stay made permanent.

Nonetheless, after the Cayman Islands Court of Appeals decision, the Brazilian Federal Supreme Court judged the remaining appeal. It upheld the decisions of the Brazilian lower courts. On 29th August the Supreme Court’s decision became res judicata. Thus, given that the stay of execution was associated with the judgement of this appeal, Gol should now be allowed to enforce the arbitral award.

 

Conclusion

The analysis of this case demonstrates how controversial the issue of implied consent is on international arbitration. Although the Arbitral Tribunal’s understanding was that MP Funds demonstrated its intent to submit to arbitration when signing the Amendment, the perception of the United States Court of Appeals and of the Cayman Islands Grand Court was different. Conversely, the interpretation of the Brazilian courts was consistent: the signing of the Amendment is sufficient to characterize implied consent.

The Amendment contained a specific provision establishing that it intended to modify the Contract. In this sense, it is part of the contractual relationship and thereby binds all its signatories to the arbitration agreement.

After all, a company that, in the exercise of its autonomy, signs one of the amendments to a share purchase agreement is clearly aware of the context of the operation, of the main contract’s provisions and of the legal consequences of its signature. Thus, it cannot later argue that it did not intend to participate of the arbitration procedure. In another words, the signing of the Amendment can and should be considered as implied consent. 

References   [ + ]

1. ↑ FOUCHARD, Philippe; GAILLARD, Emmanuel; GOLDMAN, Berthold. Fouchard, Gaillard, Goldman on International Commercial Arbitration. The Hague: Kluwer Law International, 1999, p. 281. 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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Future of AI in Arbitration: The Fine Line Between Fiction and Reality

Kluwer Arbitration Blog - Fri, 2020-09-25 21:21

Artificial Intelligence (“AI”) follows the logic that if all attributes of learning and intelligence is accurately traced in-depth, it can be simulated through a computer program. In other words, ‘what holds good for [Human Intelligence], also applies to AI’.1)See H.J. Snijders, Arbitrage en AI: Van arbitrage naar robotrage en van menselijke arbiter naar robotarbiter?, Tijdschrift voor Arbitrage 3 (2019). jQuery("#footnote_plugin_tooltip_7418_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); AI is increasingly being used for in the legal industry for various tasks, including practice management (e.g., Smokeball and Clio), conflicts management (e.g., Conflicts Manager), contract review and due diligence (e.g., ThoughtRiver and Leverton), legal assistance (e.g., Blue J L&E, KNOMOS, and Voicea), e-discovery review (e.g., EDR), and outcome prediction (e.g., Motions). At the outset, AI tools can be categorized into four based on their functional complexity.2)See also Cecilia Carrara, Chapter IV: Science and Arbitration, The Impact of Cognitive Science and Artificial Intelligence on Arbitral Proceedings Ethical issues, in Austrian Yearbook on International Arbitration 520 (K. Christian et al. (eds.), 2020). jQuery("#footnote_plugin_tooltip_7418_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

First, simple AI tools used for accurate and efficient legal research (e.g., LexisNexis, DoNotPay, ExaMatch, and Ross Intelligence). Second, AI tools used for selecting suitable experts, counsels, and arbitrators (e.g., Arbitrator Intelligence and BillyBot). Third, AI tools used for facilitating procedural automation by translating, transcribing, summarizing evidence, and even drafting compilatory parts of legal documents and arbitral awards (e.g., Opus2, NDA, and Property Contract Tools). Fourth, AI tools used for their use in the adjudication process (including the ‘tools of predictive justice’). The scope and limitations of AI in the first three levels are well-defined. In fact, it is said that ‘80% of Top 10 firms have already established or begun piloting artificial intelligence solutions’.3)Joanna Goodman, Interview: Meet the in-law, The Resolver (CIArb, Vol. 2018, Issue 1), at 14. jQuery("#footnote_plugin_tooltip_7418_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

This blog discusses the use of AI in arbitration (and, legalities thereof), and fear of this so-called ‘disruptive technology’ vis-à-vis resilience of arbitration as against AI.

 

 1. Understanding the Basics of AI

The difference between AI and other tools for automation and legal tech is their ability to learn and evolve each time they are deployed. There are primarily two types of AI mechanisms: rule-based learning and machine learning. Instead of the former, which is ideal for static and slowly-changing scenarios, most AI tools today use machine learning, wherein the AI identifies patterns and varies its algorithm based on already-existing data and user feedback. A subset of machine learning is deep learning models (or, artificial neural networks), which are inspired by the structure of a human brain. It identifies features without human intervention by learning from heavy volumes of pre-existing data. It is the most effective for unstructured data. AI tools today often make use of deep learning and natural language processing to perform tasks that require human intelligence and present them in comprehensible form.4)Temitayo Bello, Online Dispute Resolution Algorithm: The Artificial Intelligence Model as a Pinnacle, 84(2) Int’l J. of Arb. Med. & Disp. Man. 159, 161 (2018). jQuery("#footnote_plugin_tooltip_7418_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Figure A: How machine learning works?

 

Another subset is the classical machine learning models, which make use of probabilities to make predictions, wherein statistical methods are used to obtain the output. The expression ‘tools of predictive justice’ comes from predictive analytics, wherein historic and current facts are used to predict unknown future values or provide actionable insights. Amongst the most commonly used models of predictive analytics is the decision tree model, which determines a course of action, derives possible outcomes of a decision, and consequences thereof (e.g., TreeAge).

Figure B: Overview of AI

 

Regardless of the model employed, there are two universal assumptions in regard to the use of AI: first, the model performance will improve only with the increase in available data for training and testing, and second, there will always be a trade-off between computational efficiency and interpretability, i.e., automation will require more reliance on data analytics, which would inevitably imply lesser human intervention and domain knowledge that experts contribute. Thus, AI developers will have to strike the right balance between the two, particularly in law. These assumptions are crucial in determining the resilience of arbitration as against AI.

 

2. Using AI in International Arbitration

The first- and second-level AI tools are very beneficial to arbitration. For example, Arbitrator Intelligence produces AI Reports, which are generated by analysing the data from awards and Arbitrator Intelligence Questionnaires, to accurately assess the arbitrator’s inclinations from its decision-making at different stages of arbitrations in the past. This, coupled with tracing the relevant experience of the arbitrators on various types of issues and disputes, provides for a reliable resource for arbitrator selection. In fact, pre-selecting potential arbitrators based on subject-matter, required expertise, and other defined criteria can lead to better arbitrator selection and efficient resolution of the dispute. The procedural autonomy accorded to parties in arbitration also allows for the use of third-level AI tools (See UNCITRAL Model Law, arts. 19(1), 19(2)). Translation and transcribing programs are widely used in arbitrations, drastically augmenting the efficiency of arbitration processes. Further, text-mining is used during document production to scan and process documents to assess their contents.5)Falco Kreis & Markus Kaulartz, Smart Contracts and Dispute Resolution – A Chance to Raise Efficiency?, 37(2) ASA Bulletin 337, 350 (2019). jQuery("#footnote_plugin_tooltip_7418_5").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This way, heavy volumes of evidence can be summarized by simple classification and clustering models. Similarly, the relevant excerpts of facts, common and disputed positions of the parties, and procedural history can be inserted to assist in drafting the award with the help of AI tools.6)Kreis & Kaulartz jQuery("#footnote_plugin_tooltip_7418_6").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The use of AI tools in this manner can, perhaps, go a long way in resolving the problem of ‘user disappointment’ caused due to lengthy and costly proceedings, judicialisation of arbitration, and inflexible formalities.7)See George Bermann, International Arbitration: Out of the Shadows, 21(2) Asia Dispute Review 49, 51 (2019). jQuery("#footnote_plugin_tooltip_7418_7").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, as Prof. Dr Scherer puts it – ‘[t]ech-savvy arbitrators are as rare as vegan butchers’.

The use of AI tools in the decision-making process can become problematic when technology is allowed to ‘interfere excessively with the adjudication process’.8)Carrara, at 526. jQuery("#footnote_plugin_tooltip_7418_8").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The US courts have even used AI tools in criminal proceedings – predictive analytics has been used to determine bail and parole cases.9)See Richard M. Re & Alicia Solow-Niederman, Developing Artificially Intelligent Justice, 22(2) Stan. Tech. L. Rev. 242, 244 (2019). In Wisconsin v. Loomis, the sentencing court relied on COMPAS – AI-powered case management and decision support tool – to deny the possibility of parole and sentenced the defendant to six years in prison based on recidivism. jQuery("#footnote_plugin_tooltip_7418_9").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); While arbitration only concerns private rights, there are still certain mandatory requirements in place – both procedural and formal – to protect the interest of parties and integrity of arbitration. Using AI tools in adjudication risks violation of due process rights and public policy of the seat. Thus, AI’s use in adjudication process should be very limited. It can be used to research and summarise law, process and analyse parties’ submissions, and cross-check tribunal’s decision against that of the AI.10)Carrara, at 527. jQuery("#footnote_plugin_tooltip_7418_10").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); AI tools must only be deployed with both parties’ consent and appropriate protocols in place, and without causing any disadvantage (resulting in unequal treatment) to either of the parties in the arbitration.

One of the areas where AI has made a huge impact is e-discovery, wherein AI tools based on predictive coding are employed for efficient document production and review. In Pyrrho Investments Ltd. v. MWB Property Ltd.,11)See also Brown v. BCA Trading Ltd. [2016] EWHC 1464 (Ch). jQuery("#footnote_plugin_tooltip_7418_11").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); predictive coding for e-discovery was allowed for the first time in the U.K. This involved sorting documents according to their relevance determined on set parameters and criteria in the protocol agreed by the parties (e.g., TeCSA/SCL/TECBAR eDisclosure Protocol and CIArb’s eDisclosure Protocol), and narrowing down from millions of documents. It was observed that the cost of technology must be proportionate and the final determination must be done on a case-by-case basis.12)Pyrrho Investments Ltd. v. MWB Property Ltd. [2016] EWHC 256 (Ch), ¶¶ 33, 34; See also Dorchester Group Ltd v. Kier Construction Ltd. [2015] EWHC 3051 (TCC) ¶ 27; See, for e.g., Triumph Controls UK Ltd. v. Primus International Holding Co. [2018] EWHC 176 (TCC) ¶¶ 20, 27, 36, 42 (Predictive coding for e-discovery was disallowed as it was undertaken without consulting the defendants and in an unreliable manner. Further, it was not proportionate, as manual review of the documents in question would take only three weeks). jQuery("#footnote_plugin_tooltip_7418_12").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

3. AI as ‘Most Disruptive Technology’: Myth or Reality?

Despite its benefits, it is notoriously known as the ‘most disruptive technology’ in the sector, effects whereof will be seen over the next decade. This is a result of the resistance that has its roots in the lingering fear that AI will give us a run for our jobs. It is speculated that in the coming years, AI will be performing the tasks of paralegals and associates.13)E.M. Zorrilla, Towards a Credible Future: Uses of Technology in International Commercial Arbitration, 16(2) SchiedsVZ German Arbitration Journal 107 (2018). jQuery("#footnote_plugin_tooltip_7418_13").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_13", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The credibility of this assertion cannot be ascertained, as it is not ruled out in toto. However, as J. Goodman puts it – ‘[y]ou may or may not like your mother-in-law, but she’s going to have an influence on your relationship one way or another’.14)Goodman, at 14. jQuery("#footnote_plugin_tooltip_7418_14").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_14", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The case of AI in arbitration is no different.

In order to address this fear, we must note that AI necessarily requires a large data set and user feedback (as discussed earlier). This is particularly relevant in the context of arbitration, as most of the documents are confidential, and exist in much smaller data sets in comparison to other practices. The multiplicity of laws and diverse practice areas further limits the scope of training and testing. Further, there is no system of precedents in arbitration, and cases are decided on individual circumstances of the case. Another relevant consideration is that the practical understanding and domain knowledge of experts in specialised fields cannot be fully substituted, as AI tools will process information in a manner which is closer to inductive reasoning, rather than deductive reasoning.15)Zorrilla, at 113. jQuery("#footnote_plugin_tooltip_7418_15").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_15", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); All of the aforesaid factors make it extremely difficult for AI to mimic many aspects of arbitration.

Thus, we can safely conclude that arbitration has proven to be particularly resilient as against AI. While it has automated many processes to the benefit of the practitioners, it is not enough to replace junior associates. As Hugh Carlson puts it, the disruption would arrive when one could say: ‘Alexa, prepare for me three to four paragraphs explaining why cash flow is an inappropriate valuation methodology in this case and send me highlighted PDFs of the authorities upon which you rely’, and the AI would reliably complete such a task.16)Technology as Facilitation: Transcript of the Session, in 20 Evolution and Adaptation: The Future of International Arbitration 814, 831–832 (J. Kalicki & M. Raouf (eds), 2019). jQuery("#footnote_plugin_tooltip_7418_16").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_16", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In recent times, the possibility of AI-arbitrators (or, machine arbitrators) replacing human arbitrations is also widely discussed. In brief, legal decision-making requires cognitive and emotional capabilities that AI does not possess (and, perhaps, never will). Nevertheless, assuming such a possibility for the sake of argument, current laws across the globe are centred towards natural persons and do not allow for such a possibility.17)See James Hope, Chapter 7: Can a Robot Be an Arbitrator?, in Stockholm Arbitration Yearbook 104, 104–111 (2019). jQuery("#footnote_plugin_tooltip_7418_17").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_17", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Additionally, parties prefer understanding the reason why arbitrators arrived at a decision, which is rarely done away with. AI cannot satisfy this requirement of giving reasons for the award, as it’s better suited to provide a binary response based on probabilistic inference, which would lack legitimacy.18)Maxi Scherer, Artificial Intelligence and Legal Decision-Making: The Wide Open?, 36(5) J. Int. Arb. 540, 556 et seq. (2019). jQuery("#footnote_plugin_tooltip_7418_18").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_18", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); As a result, it may obscure many controversies under the guise of objective analysis.19)Zorrilla, at 113. jQuery("#footnote_plugin_tooltip_7418_19").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_19", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Thus, reasoning will always be inherently and uniquely a human task.20)Carrara, at 528. jQuery("#footnote_plugin_tooltip_7418_20").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_20", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Further, the limits of AI dictate that the datasets would often include selective information only; algorithms could be based on discriminatory assumptions; and AI tools, though well-designed, can be used in a dysfunctional manner.21)Carrara, at 528. jQuery("#footnote_plugin_tooltip_7418_21").tooltip({ tip: "#footnote_plugin_tooltip_text_7418_21", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Some commentators believe that AI can result in absolute independence and impartiality. However, data bias would prove to be a far greater problem than arbitrator bias, as the latter can be inferred and the arbitrator challenged. For example, if most arbitrators inherently favour the investors in investor-state arbitrations, so will the AI. Similarly, data bias may even result in racist or gender-biased machine arbitrators.

 

4. Concluding Remarks

We must keep in mind that AI is not magic, just glorified statistics. The attempt to automate law (particularly, the time-consuming and labour-intensive processes) has been ongoing for decades. So far, it has only been successful in performing bespoke legal tasks and aiding the practitioners. AI has revolutionised many processes like e-discovery, and greatly improved procedural efficacy. Thus, practitioners and law firms should adapt to the changes to increase their efficiency. At the same time, technological interference in adjudication should be very limited, as otherwise would do more harm than good. This makes it pertinent for one to be apprised of the many limitations of AI. AI cannot substitute human practitioners and arbitrators. The much-discussed concept of machine arbitrator, following from a contrary belief, is merely fiction. The day technology would allow decision-making by machine arbitrators, we can safely assume it to be the opening of the seventh seal. 

 

The author of this blog post is the joint first prize winner of the inaugural Arbitrator Intelligence Ambassadors’ Essay Competition. Many congratulations! Arbitrator Intelligence recently collaborated with the Kluwer Arbitration Blog on our summer quiz, the results of which provide data-driven insights about international arbitration across the globe.

References   [ + ]

1. ↑ See H.J. Snijders, Arbitrage en AI: Van arbitrage naar robotrage en van menselijke arbiter naar robotarbiter?, Tijdschrift voor Arbitrage 3 (2019). 2. ↑ See also Cecilia Carrara, Chapter IV: Science and Arbitration, The Impact of Cognitive Science and Artificial Intelligence on Arbitral Proceedings Ethical issues, in Austrian Yearbook on International Arbitration 520 (K. Christian et al. (eds.), 2020). 3. ↑ Joanna Goodman, Interview: Meet the in-law, The Resolver (CIArb, Vol. 2018, Issue 1), at 14. 4. ↑ Temitayo Bello, Online Dispute Resolution Algorithm: The Artificial Intelligence Model as a Pinnacle, 84(2) Int’l J. of Arb. Med. & Disp. Man. 159, 161 (2018). 5. ↑ Falco Kreis & Markus Kaulartz, Smart Contracts and Dispute Resolution – A Chance to Raise Efficiency?, 37(2) ASA Bulletin 337, 350 (2019). 6. ↑ Kreis & Kaulartz 7. ↑ See George Bermann, International Arbitration: Out of the Shadows, 21(2) Asia Dispute Review 49, 51 (2019). 8. ↑ Carrara, at 526. 9. ↑ See Richard M. Re & Alicia Solow-Niederman, Developing Artificially Intelligent Justice, 22(2) Stan. Tech. L. Rev. 242, 244 (2019). In Wisconsin v. Loomis, the sentencing court relied on COMPAS – AI-powered case management and decision support tool – to deny the possibility of parole and sentenced the defendant to six years in prison based on recidivism. 10. ↑ Carrara, at 527. 11. ↑ See also Brown v. BCA Trading Ltd. [2016] EWHC 1464 (Ch). 12. ↑ Pyrrho Investments Ltd. v. MWB Property Ltd. [2016] EWHC 256 (Ch), ¶¶ 33, 34; See also Dorchester Group Ltd v. Kier Construction Ltd. [2015] EWHC 3051 (TCC) ¶ 27; See, for e.g., Triumph Controls UK Ltd. v. Primus International Holding Co. [2018] EWHC 176 (TCC) ¶¶ 20, 27, 36, 42 (Predictive coding for e-discovery was disallowed as it was undertaken without consulting the defendants and in an unreliable manner. Further, it was not proportionate, as manual review of the documents in question would take only three weeks). 13. ↑ E.M. Zorrilla, Towards a Credible Future: Uses of Technology in International Commercial Arbitration, 16(2) SchiedsVZ German Arbitration Journal 107 (2018). 14. ↑ Goodman, at 14. 15, 19. ↑ Zorrilla, at 113. 16. ↑ Technology as Facilitation: Transcript of the Session, in 20 Evolution and Adaptation: The Future of International Arbitration 814, 831–832 (J. Kalicki & M. Raouf (eds), 2019). 17. ↑ See James Hope, Chapter 7: Can a Robot Be an Arbitrator?, in Stockholm Arbitration Yearbook 104, 104–111 (2019). 18. ↑ Maxi Scherer, Artificial Intelligence and Legal Decision-Making: The Wide Open?, 36(5) J. Int. Arb. 540, 556 et seq. (2019). 20, 21. ↑ Carrara, at 528. 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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Standardising Technology’s Contractual Relationships and Alternative Dispute Resolution – The Construction Industry as a Model

Kluwer Arbitration Blog - Fri, 2020-09-25 01:00

Over the past decade, technology has been seeping into our everyday life at an exponential rate. Accordingly, much like any other industry with rapid growth, contractual agreements are required to form the framework in which lasting relationships can be maintained and provide for mutually beneficial dispute resolution mechanisms (“DRMs”). As we introduce technology into almost every sector, including legal practice, the requirement for a standardised form of contract for the tech industry grows.

It is essential first to understand the existing types of technology and contractual relationships. Technology refers to both the hard (physical) machinery and equipment, such as computers and semiconductors, as well as soft tools, such as software, created using specialised and scientific knowledge. Physical technology has been prevalent in various industries for quite some time; however, soft technology’s inclusion is more recent. Accordingly, the contracts relating to technology in already developed sectors, such as the construction industry, are far more advanced than those of soft technology.

Given the large increase in companies requiring online tools in their everyday operation, the need for various contracts – whether it be teaming agreements, sale and purchase agreements, cloud contracting, licensing agreements, support and maintenance agreements, open-source software agreements, or non-disclosure agreements – will also be on the rise. Therefore, this article explains how the use of standard form contracts (“SFCs”) within the construction industry can act as an example for the tech industry. Such SFCs not only assist in providing a framework for contractual relationships that are inclusive of dispute resolution procedures but also encourage a more cohesive working environment in the industry by building lasting relationships between stakeholders.

 

Construction SFCs

As early as 1945, the construction industry has used SFCs for varying types of projects, including plant, design-build, turnkey, dredging and reclamation works, minor works, and electrical and mechanical works, as well as subcontract, consultancy, and joint venture agreements. Typically, these SFCs have been used by either the parties filling out or amending where necessary, and then executing the contract or incorporating such into the letter of award.

Providing the stakeholders with the options to use the SFCs not only helps ensure that there is a template inclusive of the relevant provisions for software development contracts; it also means that when a dispute arises, there is a reduced chance that the parties will disagree on the meaning of a particular clause. In using the same contracts, the global construction industry has become familiar with the terms and conditions, thereby lessening the chance of confusion between the parties, which can easily result in disputes.

Additionally, the SFCs have been created by industry experts such as the International Federation of Consulting Engineers (“FIDIC”), Joint Contracts Tribunal, or Association of Consultant Architects. The involvement of industry experts in the creation of the contracts ensures that the contacts contain less legalese – which reduces the chance of confusion by those using the SFCs – and the information vital to the project is included and indicated. Moreover, these SFCs can assist in balancing the risk, obligations, and liabilities of the various stakeholders.

 

Importance of SFCs in DRMs

A benefit of SFCs is the creation of standard DRMs. One example of such is the FIDIC’s inclusion of a Dispute Adjudication Board, to which parties to the contract can refer disputes throughout the contract period. Other contracts will appoint a third-party neutral to determine all disputes throughout the duration of the contract. In contrast, some contracts will designate the architect, employer, or contract administrator, i.e., the Asian International Arbitration Centre’s (AIAC) Standard Form of Building Contracts 2018, as the stakeholder tasked with determining disputes. These mechanisms aim to ensure the project is completed without causing undue delays.

However, some argue that the creation of layered DRMs can lead to more problems than solutions. For example, in layered DRMs, also known as waterfall clauses, there may be mandatory pre-conditions to commencing arbitration. Therefore, parties who are not aware of the specific pre-conditions of the SFC may expend additional monies and time by failing to meet the pre-conditions. Further, the process of mandatory pre-conditions may delay the resolution process rather than promote negotiation or mediation as forms of DRMs.

While having mandatory pre-conditions may create hurdles for those not familiar with the process, when used correctly or made optional, it can help promote a less adversarial process for resolving disputes. To cater to the needs of the relevant stakeholders, some contracts include the use of expert determination or contractual adjudication in their DRMs. These processes allow for a third-party neutral to decide on an issue related to extensions of time/delays, payments, etc. in an expedited manner compared to litigation, mediation, and arbitration, while at the same time allowing the parties to continue with the projects. Additionally, in small-value or Minor Works contracts, the use of expedited procedures such as the AIAC’s Fast Track Arbitration Rules can be included for the resolution of disputes.

 

Implementation of SFCs in the Tech Industry

The creation of SFCs for the tech industry would not only assist stakeholders when contracting with one another, but it would also assist in standardising the DRMs within the industry. Currently, for building, civil, electrical, mechanical, and chemical engineers, various SFCs such as the New Engineering Contract, Joint Institute of Electrical Engineers and Institution of Mechanical Engineers Model Forms of General Conditions of Contract, and Institute of Chemical Engineers contracts already exist. However, these SFCs are heavily intertwined with the construction industry. As for other types of technology, such as software development, while templates are available, there is no standardised form akin to those in the construction industry.

As explained above, by having DRMs that are industry-specific, it can allow for the use of specialised methods such as adjudication, expert determination, and expedited procedures, amongst others, to resolve disputes while the project is ongoing or after the termination/completion of the project. Disputes related to software development are similar to those encountered in construction, the primary difference being that the project in the former is created online or virtually rather than physically. Common disputes which arise in both fields, throughout the project, include those relating to late payments, extensions of time, or delays, all of which could be resolved by having DRMs that allow for the making of interim decisions by either appointing a neutral for the term of the contract or creating a panel like the DABs in FIDIC. Additionally, like in construction contracts, stakeholders in the tech industry are likely to have ongoing relationships, and sometimes multiple projects take place at the same time. Therefore, the creation of holistic DRMs can assist in ensuring those relationships are maintained and not strained through drawn-out disputes which may lead to an incomplete project.

Another feature of having a standardised DRM through SFCs is that stakeholders can ensure that those determining the dispute have industry knowledge. In the 2016 Queen Mary International Dispute Resolution Survey: Unveiling Technology, Media and Telecoms (TMT) Disputes (2016 QMUL Survey), IT and Telecoms suppliers preferred litigation and expert determination, respectively, over arbitration. However, arbitration was overall the preferred method with 92% believing international arbitration was well suited for TMT disputes and would continue to grow. The Silicon Valley Arbitration & Mediation Center’s Technology Dispute Resolution Survey also echoed these results. To make international arbitration more appealing, one of the top three changes suggested was appointing more industry experts. One method of ensuring that those appointed as experts have industry knowledge would be to require the same in the arbitration clause that is included in SFCs.

 

Conclusion

Given the success of the SFCs in the construction industry and the use of SFCs for tech-related construction projects, other areas of the tech industry are well suited for the use of similar SFCs. Specifically, the tech industry could benefit from a standardised DRM that would provide not only for interim decisions to be made while the project is ongoing, but also to ensure that the neutrals appointed in arbitration (or other ADR mechanisms) have industry knowledge. Premised upon this, the AIAC has launched its Tech Expert Committee (AIAC TEC) to spearhead initiatives related to ADR and the tech industry. The AIAC TEC aims to create a community in which lawyers and key players within the tech industry can discuss recent developments and brainstorm solutions, project collaborations, and knowledge transfer initiatives for the advancement of ADR within the tech industry. The AIAC TEC activities will include publications of articles and white papers, creation of standard form contracts, promotional roadshows, opportunities to pitch new technology to end-users, and seminars and workshops. The first initiative of the AIAC TEC is to create a SFC for software development – a survey is on foot to gain insight from industry players in this regard, and input is welcome from industry players. As the world becomes more digitised, disputes surrounding software and other various technology will also rise, thereby creating a need for the standardisation of the contracts used and DRMs implemented.

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Online Dispute Resolution Platforms: Cybersecurity Champions in the COVID-19 Era? Time for Arbitral Institutions to Embrace ODRs

Kluwer Arbitration Blog - Fri, 2020-09-25 00:00

The COVID-19 pandemic has led to an increase in the interest in alternative dispute resolution, especially arbitrations conducted online. The greater utilization of online platforms and digitization has coincided with the growing frequency and sophistication of cyber-attacks. Reportedly, by 2021 a business will fall victim to cyber-attacks every 11 seconds. Therefore, it is critical for these platforms to provide secure digital environments where the exchange of communications, storage of evidence and files, and virtual hearings can be conducted remotely and securely. The necessity of providing easily accessible platforms apt to handle complex disputes has brought to light the importance of online dispute resolution (ODR) platforms. Some of these platforms have taken the initiative to encompass robust security measures through which they implement standards consistent with the existing protocol on cybersecurity (2020 Protocol). Such measures may shift the arbitration landscape, in which these platforms may play an important role in institutional and ad hoc arbitration globally.

This note highlights some of the good practices of security measures, which mirror standards enshrined in the 2020 Protocol. In doing so, we make references to notable ODRs that embody these features. We then underscore the role of arbitral institutions in giving greater recognition to cybersecurity needs as they embark on the digitization of their services.

 

A. Online dispute resolution platforms: a viable alternative to ensure cybersecurity?

There has been a surge in the number of ODRs in the recent years. There platforms leverage sophisticated software that allows them to handle several simultaneous uploads and downloads of files in real time, and the technological advances of ODRs render these platforms suitable to addressing the emerging needs of security in the face of many cyber threats. Platforms have taken practical measures to apply and embody some of the distinctive features proposed by various cybersecurity instruments, including 2020 Protocol and international standards (ISO).

The following will outline some of the features that increase the security of online platforms by inhibiting potential hackers from deciphering and accessing sensitive information, and ultimately damaging the confidentiality, integrity, or availability (i.e., “CIA triad”) of different arbitration phases.

Multi-factor authentication

Two-step verification is a salient feature of many ODRs that limits the potential for data exposure. This feature provides an additional layer of security so that only authorized individuals are accessing sensitive information. Principle 7 (b) of the 2020 Protocol recognizes “access controls” as one of the important considerations in an arbitration. This principle states that in considering the specific information security measures to be applied in arbitration, consideration should be given to issues such as “asset management” “access controls” “encryption”, and “information security incident management”.   This is of substantive importance, as most ODRs run on browsers that leave some form of digital footprint, thereby rendering them prone to hackers who can access vulnerable browser details. Thus, it is important to control access on a “need to know” basis, which has an advantage over self-made passwords. For instance, eArbitration, an ODR platform, has established two-factor authentication in which each participant obtains a unique ID associated with their user profile called a “token”, which has to be validated by a second factor/device upon login – e.g., on a phone or via e-mail. This allows them to access only the information they are privy to and is important given that some platforms like Zoom, which are currently being employed by some virtual hearings, had episodes of susceptibilities, with unauthorized users accessing meetings for the purpose of disrupting their security. Due to  by a New York Attorney General’s recent investigation, Zoom has committed, among other things,  to implement various security measures including penetration-testing, which aims to identify and solve vulnerabilities in cyber security. In doing so Zoom also included features like default passwords, pre-entry waiting rooms and enhanced encryption to keep malicious users at bay.

Encryption of data

Encryption is a cybersecurity measure that protects information by using extremely complex and unique codes that mix up data and prevents unauthorized users from deciphering sensitive information. “Encryption” is also a standard enshrined in principle 7 (c) of the 2020 Protocol. It helps to prevent the discovery of confidential information, including trade secrets, financial information, and personal identifiable information. In the absence of this feature, such sensitive data may be prone to attack, and, as a result, will amount to the breach of confidentiality, which is an important pillar of arbitration. Encryption requires routine audits during which the platform is tested to face potential security vulnerabilities. For instance, both eArbitration and Immediation ODRs conduct routine verifications to determine and ensure the encryption of sensitive data.

Collecting and storing of information

“Asset management” is another important standard in the process of collecting and storing all sorts of information during the case management of arbitral proceedings, which is encapsulated in principle 7 (a) of the 2020 Protocol. Under this standard, information disseminated should be identified, classified, and controlled. In this regard, retention and destruction is an important component of this principle, in which data is initially stored securely, and after the conclusion of arbitral proceedings, is destroyed in compliance of applicable privacy rules. Another integral part of asset management is providing a platform that allows the secure exchange of information. For instance, Immediation and eArbitration embedded an integrated “live” chat box similar to the platform Slack  uses, in which all parties who are privy to the arbitration proceeding, including the arbitrators, counsels and secretary can use to communicate with respect to the case. Such a feature captures the standards of “communications security” stipulated in principle 7(d) of the 2020 Protocol.

Managing breach incidents

Despite robust security measures, sometimes the breach of information might be inevitable, and has been especially notable during the COVID-19 era, where many online businesses have observed spike in fishing attacks, malspams, and, ransomware attacks.  In these occasions, these platforms ought to act promptly to mitigate a data breach and recover lost or stolen information. This standard has also been captured in principle 7 (h) of the 2020 Protocol as “Information Security Incident Management”. This can be achieved through routine platform audits to perform a studied plan of actions in order to respond to an incident. Both Immediation and eArbitration have devised periodic audits in order to detect new security vulnerabilities or potential threats.

 

B. Heralding institutional involvement in cybersecurity

Many arbitral institutions have pivoted towards digitizing their services in light of the demands emerging from the COVID-19 era to resolve their disputes expeditiously and efficiently, both of which are duties many arbitral institutions strive to uphold. However, these institutions have not adequately addressed essential security measures needed for virtual hearing.  For instance, the ICC, SIAC, and LCIA have introduced comprehensive rules regarding how virtual hearings ought to be conducted. According to these rules, parties are entitled to incorporate measures they deem necessary to safeguard the proceedings. For instance, under 22.3 of the ICC Rules, a party can invoke confidentiality in order to protect sensitive and confidential information. Similarly, the HKIAC under Article 3.1 (e) recognizes and the AAA-ICDR Article 37.2 primarily grant parties the discretion to select the necessary measures or a secured online repository to protect sensitive and confidential information. However, the above institutions’ rules are silent regarding issues including case management, exchange of communications, and virtual hearings. No hard guidance has been provided regarding what cybersecurity measures entail.

The lack of hard guidance may bear significant consequences. A breach of the security of sensitive data may amount to the violation of confidentiality. This may undermine the integrity and viability of international arbitration, and the whole proceedings by inflicting reputational damage to arbitral institutions, arbitrators, and counsels, as well as to the system of international arbitration overall. It is now becoming increasingly important for arbitral institutions to embrace ODRs or other platforms that incorporate necessary security measures.

 

Concluding remarks:

In this new era of COVID-19, as more arbitration proceedings move into digitized platforms, the need to identify instances of security breaches is becoming clear. In particular, for the users of international arbitration whose primary concerns are protecting their trade secrets and confidential information while having their disputes resolved in an expeditious and cost-effective manner.  Thus, most stakeholders in arbitration, in particular, arbitral institutions have the onus to acknowledge the threat and explore the nature of cybersecurity because a cyber-threat may undermine the integrity of arbitration. In doing so, stakeholders shall take proactive steps in adopting tailored automatized safeguard tools that encompasses essential security measures.  Effectively, instituting an ODR platform that would embody the necessary features, such as multi-tiered authentication, encryption, secured collection and storage, as well as managing breach incidents in order to minimize the risk of a security breach during online proceedings.

Without a doubt, COVID-19 crisis will serve as a catalyst for improvement, as it will underline the aptitude of ODRs in navigating the obstacles presented by this new circumstances and will perhaps garner more significance to address cybersecurity concerns.

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The New Landmark African Investment Protocol: A Quantum Leap for African Investment Policy Making?

Kluwer Arbitration Blog - Thu, 2020-09-24 01:00

Negotiations on the Investment Protocol of the African Continental Free Trade Area (AfCFTA) are set to start later this year. An AfCFTA Investment Protocol would provide significant opportunities for African countries. However, the negotiations will be complex, taking place amidst a backdrop of existing African international investment agreements (IIAs) already negotiated at the bilateral and regional level. Since 1961, African countries have signed 861 bilateral investment treaties (BITs), of which 171 are intra-African. These agreements are in addition to regional agreements dealing with investment such as the Southern African Development Community Protocol on Finance and Investment and the Economic Community of West African States Supplementary Act on Investments. All of these international and regional investment commitments build on existing national laws and regulations on investment in force in most African countries. Indeed, the bulk of the network of IIAs signed over 30 years ago include provisions drafted in a broad and unspecified manner with an eye to maximizing investor protection while inadvertently constraining the ability of governments to put in place national safeguards, notably in relation to the regulation and implementation of public policy measures. This is of special concern today in the wake of the global COVID-19 pandemic, which has required bold and rapid action on the part of governments to mitigate the pandemic’s impact on national economies and on public health.

The global COVID-19 pandemic has highlighted how commitments found in IIAs may come into play in relation to policy responses taken by governments in times of crisis. Broadly drafted investor protection clauses in existing agreements can lead to perceived violation of commitments in these existing treaties which may result in expensive investor-State dispute settlement (ISDS) proceedings. To date, African countries have responded to some 121 (ISDS) claims. This issue is particularly important in the African context, where many governments lack the necessary financial, technological, and human resources to deal with crises of such magnitude. There is a real risk that measures adopted by African countries to address the health and economic impact of the COVID-19 pandemic may be challenged by foreign investors through arbitration proceedings under IIAs.

But it isn’t all bad news. Over the past 5 years a number of African countries and regional economic organizations have been working hard to reform their IIA regimes in order to make them more conducive to sustainable development, and less prone to ISDS. This trend is evident in the increasing number of countries reviewing their stance on BITs, new methods of drafting BIT models, and the adopting of alternative approaches, notably through regional investment initiatives. However, these developments have created a new challenge – African countries are reforming their existing investment treaties unilaterally, without conferring amongst themselves. While some countries have opted for BIT termination or a moratorium on the conclusion of new treaties, others are engaging in the renegotiation of existing treaties or favoring regional approaches to investment treatymaking. In terms of substantive content, there is little or no consultation among African countries as to how best to approach individual IIA provisions. While these initiatives all seek to make the IIA framework more balanced and oriented towards sustainable development, the lack of coordination risks creating a fragmented approach to IIA reform, with each country favoring a different approach.

It is against this challenging backdrop that the new Investment Protocol of the AfCFTA presents an exceptional opportunity for Africa. In the best-case scenario, the Investment Protocol could result in a “quantum leap” for Africa by effectively modernizing, consolidating, and harmonizing the international legal framework of investment in Africa. Below is a brief overview of such a best-case scenario.

 

A modern continental investment framework  

The AfCFTA Investment Protocol has the potential to include clear and precise provisions ensuring a balance between investment protection and the right of African states to regulate their public interests. This includes options to refine and narrow down the definition of investment to only cover assests that contribute directly to the economic development of African countries; to clarify or circumscribe key protection standards (e.g. most-favoured nation (MFN) treatment and indirect expropriation); to balance State commitments with investor obligations and promoting responsible investment; and to strengthen the right to regulate (e.g. exceptions for public policies). In doing so, the protocol would move away from the traditional “investment protection only” model prevalent in the 1980s and the 1990s in favor of a more modern approach that places sustainable development at the core of investment policies. The COVID-19 pandemic could also influence negotiators to include stronger general exceptions provisions, especially those relating to the protection of public health.

 

A consolidated and less fragmentated framework

The AfCFTA Investment Protocol has the potential to streamline the complex framework of intra-African investment by replacing the existing 171 intra-African BITs with a single treaty that would regulate all intra-African investments. Recent EU agreements with third parties have included a provision noting that upon entry into force of the new agreement, the BITs between the parties, including the rights and obligations derived therefrom will cease to have effect, and shall be replaced and superseded by the new agreement. See for example Article 4.2 of the EU – Viet Nam Investment Protection Agreement (2019). A similar approach would create a more manageable network of commitments between African countries and encourage intra-African FDI flows and broader continental economic integration. It remains to be seen how the Investment Protocol would interact with existing African regional IIAs. The inclusion of clear relationship clauses would be important to avoid possible contradictions and to establish a hierarchy of obligations arising from regional African IIAs.

 

A harmonized and coordinated approach to investment policymaking

Once concluded, African countries could use the AfCFTA Investment Protocol as a basis for future IIA negotiations, including for agreements with non-African countries. In this way, the Investment Protocol would be an important benchmark agreement that could be used to formulate and facilitate a common African approach to international investment policymaking. Such a framework would also allow for more regular and structured consultations among African countries on issues related to IIAs. To do so in an effective manner, the negotiators should consider the establishment of an institutional framework or a committee to ensure that the agreement operates properly; to supervise and facilitate the implementation and application of this Agreement, and to create a regular dialogue among African countries on investment policy issues.

Landmark international treaties are negotiated and concluded in exceptional times. The global COVID-19 pandemic has highlighted the incongruity of the current international investment system with measures needed to respond quickly and effectively to crises of a global magnitude. The ongoing legitimacy crisis of the system will deepen if ISDS claims begin to emerge as a result of measures taken for the protection of public health. Furthermore, other global challenges relating to climate change and the stability of the global financial system are also creating a sense of urgency for a comprehensive and holistic reform of the IIA regime. African countries can and should seize this opportunity to negotiate a landmark continental Investment Protocol that places sustainable development and the right to regulate in the public interest on an equal footing with investment protection.

 

The views are those of the author and do not necessarily represent those of UNCTAD.

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Opening of Mainland China Arbitration Market to Foreign Institutions: Is It Happening, Really?

Kluwer Arbitration Blog - Wed, 2020-09-23 21:00

Since the enactment of the People’s Republic of China (“PRC”) Arbitration Law (1994), Chinese arbitration commissions have had exclusive access to the mainland China arbitration market. This is primarily because the establishment and operation of arbitration institutions are subject to the prior approval of the “administrative department of justice of the relevant province, autonomous region or municipality directly under the central government”, creating a legal obstacle for foreign arbitration institutions administering cases within mainland China.

On 7 September 2020, the PRC State Council issued a reply approving a joint application by the Beijing Municipal Government and the PRC Ministry of Commerce (“MOFCOM”) concerning several reforms to promote the Beijing business environment and the further opening-up of the PRC market. The following section of the State Council’s reply is particularly interesting to the arbitration community: “Allowing well-known foreign arbitration and dispute resolution institutions to set up, after registering with the administrative department of justice of the Beijing Municipality and filing with MOFCOM, operational entities in designated areas of Beijing, to provide arbitration services for civil and commercial disputes in international business and investment sectors” (“Beijing Policy”).

This wording seems to affirm a trend beginning in Shanghai in 2019 (“Shanghai Policy”, discussed in a previous blog) and revive the question of whether the mainland China arbitration market is opening up to foreign arbitration institutions. In addition, the 6 August 2020 decision from the Guangzhou Intermediate People’s Court (“Guangzhou IPC”) for the first time expressly deals with how to enforce awards issued based on an arbitration clause providing for a place of arbitration in mainland China by a foreign institution (“Mixed Clause”) and seems to further point towards an opening up of the Chinese arbitration market.

 

Place of Arbitration in Mainland China and a Foreign Arbitration Institution Used to Be “No-Go”

As a starting point, Article 10(3) of the PRC Arbitration Law (1994) provides that an arbitration institution only qualifies as such if it is duly registered with the relevant administrative department of justice. However, no law or regulation explicitly deals with the registration process for foreign arbitration institutions. It seemed that only Chinese arbitration commissions are entitled to administer arbitrations with a place of arbitration in mainland China. Therefore, for many years, Chinese courts have considered that Mixed Clauses are invalid since a foreign institution could not abide by Article 16 of the PRC Arbitration Law (1994). Article 16 provides that a valid arbitration agreement must designate an “arbitration commission”.

That said, as early as 2013, the PRC Supreme People’s Court (“SPC”) issued ground breaking “Replies” through the Prior Reporting System (see this post on the Prior Reporting ) in Ningbo Oil v. Formal Venture (2013) and Longlide Printing v. BP Agnati (2013), confirming the validity of arbitration clauses opting for ICC Rules with a place of arbitration in mainland China. However, whilst the SPC found the choice of the ICC Rules was an indirect selection of the ICC as arbitration institution and thus fulfilled the third requirement of Article 16(2) (the choosing of an “arbitration commission”), the SPC carefully refrained from discussing whether the ICC as a foreign institution was eligible to be considered an “arbitration commission” within the meaning of Article 10(3).

Although the SPC seems to be upholding the validity of Mixed Clauses, it has not provided any guidance on how to implement the resulting awards. In particular, it has not specified whether such an arbitral award would be considered a “Chinese award” (based on a place of arbitration in the PRC), a “foreign award” (relying on the choice of a foreign arbitration institution), or a “non-domestic award” (based on a PRC place of arbitration and a foreign arbitration institution). This distinction is important because it determines the framework for challenging and/or enforcing the award, namely, a Chinese award is subject to the PRC Arbitration Law (1994) and the PRC Civil Procedure Law (2017), and a foreign or non-domestic award is subject to the New York Convention and/or other treaties.

In view of the uncertainty arising from Article 10(3) of the PRC Arbitration Law (1994), it has been extremely difficult to persuade Chinese courts to treat any award issued under such a Mixed Clause as a “Chinese award”. The authors are not aware of any case in which a PRC court has adopted such an approach. In contrast, there are cases where the parties have successfully persuaded the lower courts to enforce the award by treating it as “non-domestic” (see Züblin International v. Woke Rubber (2006) and Duferco S.A. v. Ningbo Imp. & Exp. (2009)).

Yet, these decisions were based on a misunderstanding of the “non-domestic award” concept, which is not found in Chinese law and instead derived from Article I(1) of the New York Convention (1958). Under the New York Convention, “non-domestic awards” are awards issued within a State which involve foreign elements. To apply the New York Convention to these awards, contracting States must not have invoked the reciprocity reservation. However, China has made a reciprocity reservation under Article I(3) of the New York Convention (1958) and declared that “it will apply the Convention to the recognition and enforcement of awards made only in the territory of another Contracting State”. The concept of a “non-domestic award” arguably has no place under Chinese law.

 

New Developments

In this context, the 6 August 2020 ruling by the Guangzhou IPC in Brentwood Industries v. Faanlong Complete Engineering (2020) appears groundbreaking. In 2011, the Guangzhou IPC confirmed the validity of the arbitration clause in this case, which was a Mixed Clause providing for “arbitration by the International Chambers of Commerce’s Arbitration Commission in accordance with international customs at the place where the project is located” (which is Guangzhou, China). In 2020, the Guangzhou IPC now had to decide on the enforcement of the arbitral award arising from an arbitration pursuant to that clause. The Guangzhou IPC ruled that the ICC award could be enforced as a “foreign-related Chinese award”. At this stage, it is unknown whether the case was subject to the Prior Reporting System and thus approved by the SPC. However, it would appear that the Guangzhou IPC would likely have issued this ruling after having, at least informally, consulted the higher courts and in particular the SPC.

The next step to open up mainland China arbitration market fully would logically be to allow foreign arbitration institutions to also physically administer cases in mainland China.

In this regard, the above-mentioned Shanghai Policy was the pioneering attempt to move in such direction by allowing foreign arbitration institutions to “carry out arbitration activities” in a specific Pilot Free Trade Zone (“FTZ”). In contrast, though most of the wording is identical, the Beijing Policy does not require the “operational entity” (of the foreign arbitration institution) to be inside an FTZ.

The Beijing Policy could be interpreted as allowing foreign arbitration institutions to register an entity with no such geographical restriction. In other words, the Beijing Policy could be understood as providing the Beijing municipal government with the authority to allow a foreign arbitration institution to set up an “arbitration commission” (under Article 10(3) of the PRC Arbitration Law (1994)) in Beijing. After all, according to Article 10(2) of the PRC Arbitration Law (1994), it is precisely the municipal government’s role to coordinate with local chambers of commerce to set up arbitration commissions. Parties would no longer have to worry about the lack of compliance with Article 10(3) of the PRC Arbitration Law (1994), as local branches of foreign arbitration institutions would qualify as arbitration commissions in the meaning of Article 16 of the PRC Arbitration Law (1994).

 

Concluding Remarks

These new developments clearly demonstrate political will to bring the dispute resolution environment in the PRC to the next level by gradually opening the market to foreign arbitration institutions. A key question is whether this opening up will come through piecemeal approaches such as local policies and court decisions, or whether the Chinese central government will revise the PRC Arbitration Law (1994) at some point soon.

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ADR Prof Blog - Wed, 2020-09-23 19:00
I have had some wonderful conversations in my LIRA book tour and made videos of some of them. Considering the challenges of synchronous instruction these days, faculty may want to assign some of these videos as asynchronous “guest lectures” and/or make-up assignments if students or faculty have to miss some classes. Here’s a list of … Continue reading More LIRA Videos →

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For Whom The Bell Tolls: Is The Red-Flags Standard’s Application Enough To Prove Corruption In International Arbitration?

Kluwer Arbitration Blog - Wed, 2020-09-23 01:00

The Rutas de Lima v. Metropolitan Municipality of Lima case shows how arbitral tribunals deal with corruption allegations in disputes related to government contracts. The tribunal, chaired by current ICC International Court of Arbitration President, Alexis Mourre, issued its Award this May, which came to light when the Metropolitan Municipality of Lima (the “Municipality”) requested and sustained an annulment application before the US District Court for the District of Columbia this August.

The dispute revolves around a commercial case where the claimant requested compensation for uncollected tolls under a toll concession agreement, which provided for compensation mechanisms that the respondent allegedly failed to apply. The Municipality argued that the concession agreement was null and void due to the presence of corruption, among other grounds. Ultimately the Tribunal held that there were insufficient red flags directly related to the concession agreement and rejected the corruption allegations. This award demonstrates that the presence of red flags is not enough to prove corruption. The proponent must prove a causal link between those flags and the event under analysis.

 

Navigating through the case

The concession agreement resulted from an unsolicited proposal submitted on April 16, 2010 by the Lineas Viales de Lima Consortium for the “Vias Nuevas de Lima” Project, which contemplated the design, construction, operation, and maintenance of certain highways in Lima, Peru (the “Project”). On September 18, 2012, the Project was awarded to the Consortium. On January 9, 2013, the Municipality and Rutas de Lima S.A.C. (“RdL”) (a company incorporated by the members of the Consortium) concluded a Concession Agreement (the Concession Agreement) under which the Municipality was obliged to grant possession to RdL of the land in the area, the toll booths, and the right of way under concession.

The parties agreed that within 30 days of completion of the required works, the Municipality had to install a new toll in the Chillon district (the “Chillon Toll”). Clause 10.4 of the Concession Agreement provides that if RdL was prevented from collecting tolls due to social unrest, the Municipality must compensate RdL for uncollected tolls.

In June 2016, after certain interferences with RdL’s possession, the parties signed an agreement to implement the Chillon Toll by December 2016 (the “June 2016 Agreement”). On December 29, 2016, the Municipality implemented the Chillon Toll and RdL began collecting the toll. However, toll collection was suspended almost immediately due to unrest that led the Municipality to remove the toll permanently.

During 2017, the Municipality and RdL unsuccessfully sought alternatives to restore the economic equilibrium of the Project. RdL notified the Municipality of its intention to trigger the compensation mechanism under Clause 10.4 of the Concession Agreement and eventually submitted the controversy to arbitration claiming damages due to the interference with its right to collect the Chillon Toll.  Among other things, the Municipality argued that the Concession Agreement and the June 2016 Agreement were null and void.

 

Corruption allegations and the standard of proof

The Municipality submitted that RdL received the Project and the Concession Agreement through corrupt means and obtained illegal benefits during performance of the Concession Agreement. The Municipality did not, however, request the Tribunal to declare the nullity of the Concession Agreement based on these allegations.

The first issue the Tribunal analyzed was whether it had the duty and power to decide on the legality of the Concession Agreement and related documents based on corruption allegations, even when this had not been requested by either party. Based on Mr. Lagergren’s famous award on the ICC Case No. 1110 (which stated that a case such as this, involving such gross violations of good morals and international public policy, can have no countenance in … any arbitral tribunal”), the Tribunal argued that under both Peruvian legislation and international public policy, it has the duty to make an assessment of the incidences of corruption that could affect the object of the arbitration and decide on the civil consequences of these incidences with respect to the validity of the Concession Agreement.

The Tribunal undertook this not as a criminal judge, but rather as the ‘judge of the contract.’ Therefore, the declaration of nullity required not only sufficient indications of corruption, but also a showing of a corrupt conduct related to the contract. It was not enough that one of the parties made illegal payments to public officials. The Tribunal must find a causal link between these payments and the contract.

Further, the tribunal decided that in accordance with the current trend in international arbitration it was bound to apply a preponderance of evidence standard. Based on the alleged circumstances and existing indications of corruption, the Tribunal had to decide whether it was more likely than not that the Concession Agreement and/or the June 2016 agreement were obtained through corrupt means.

While not described in the Award, for the sake of this post it is important to briefly delve on how the standard of proof applicable to corruption allegations in commercial and in investment arbitration has evolved over time. In EDF v. Romania, the tribunal considered that there was a “general consensus among international tribunals and commentators regarding the need for a high standard of proof of corruption,” requiring “clear and convincing” evidence. The same reasoning is found in Belokon v. Kyrgyz Republic, where the tribunal required “concrete and decisive evidence.”

Throughout the years, these criteria evolved to reflect the complexity of proving corruption. In Oostergetel v. Slovak Republic, the tribunal acknowledged that “for obvious reasons, it is generally difficult to bring positive proof of corruption. Yet, corruption can also be proven by circumstantial evidence.” This argument was then taken by the Metal-Tech v. Uzbekistan tribunal (discussed in here) noting “that corruption … can be shown through circumstantial evidence.”

Further, the Churchill v. Indonesia tribunal decided to apply a “standard of balance of probabilities or intime conviction,” taking into account that more persuasive evidence is required for implausible facts and weighing the available evidence as part of relevant circumstances. The Libananco v. Turkey tribunal expressed that “[allegations of fraud] may simply require more persuasive evidence, in the case of a fact that is inherently improbable, in order for the [T]ribunal to be satisfied that the burden of proof has been discharged.”

As has been stated, circumstantial evidence is nothing other than a list of red flags that provides the tribunal with “a valuable tool to analyze whether or not the direct evidence available was sufficient to establish a reasonable inference that the elements of an act of corruption were more likely than not present.”

 

Ruling and Importance of the Award

In the case under analysis, the Tribunal used the red flags method to reach a decision based on the preponderance of evidence, stating that the flexibility allowed by this standard does not entail a failure to require sufficient evidence of particular incidences of corruption to reasonably establish that corrupt payments were made and their connection to the Concession Agreement or the June 2016 agreement.

The Tribunal began its analysis stating that considering the ongoing international investigations, the fact that companies investigated for corruption were members of the Consortium and that they continue to have interest in the Project is evidence of the possibility of corruption in the Project. However, the Tribunal did not conclude that the sole presence of such companies in a contract necessarily entails corruption. The mere presence of general red flags should not make a tribunal lean towards finding corruption. If a specific party is known for being more tolerant to corruption, it should be considered a general red flag. Nevertheless, in order to tip the scale towards the existence of corruption in a particular case, red flags must be found with regards to a specific fact under the contract, and the tribunal should give each red flag a proportional weight, depending on the inference it provides.

The Tribunal concluded that no allegation or evidence proved that the investment in this case was obtained through corrupt means, considering that the Consortium was the only bidder, RdL submitted 5 versions of the proposal reflecting comments made by the Municipality before it was approved, and the execution of the Concession Agreement is the natural result of the declaration of public interest with respect to the proposal and its subsequent award. Applying the same standards, the Tribunal concluded that the allegations of corruption made by the Municipality with respect to political contributions made to mayor Susana Villaran’s campaign against her removal were not a red flag, given that the campaign began two months after the Project was awarded. While the Contract was awarded in September 2012, the events that gave rise to Villaran’s removal request only began in November 2012. In that context, the Tribunal found no reasons for RdL to need to pay bribes in November 2012 for a contract that it had already obtained in September that year.

The Tribunal also analyzed general corruption allegations made by the Municipality, including with respect to statements made by the Ad Hoc Prosecutor, which the Tribunal found not to provide material information allowing it to presume that corruption existed before and during the Concession Agreement, especially given the Tribunal’s lack of access to complete records of the criminal investigations surrounding the case. In sum, the Tribunal was not provided with sufficient evidence to identify red flags directly related to the Project.

Finally, the Tribunal considered that even though there were certain elements that could allow a suspicion of corruption with respect to the Concession Agreement, the fact that the Municipality did not request a declaration of nullity of said agreement reflected the absence of sufficient evidence of the allegations made.

In a nutshell, to the authors’ opinion, the importance of this Award is twofold. First, it confirms the trend that since corruption is hard to prove, a preponderance of evidence standard based on red flags should apply. Second, apparent red flags are not enough. The party submitting the presence of red flags has the duty to also show a causal link between such flags and the event under analysis, otherwise those flags will just fly away with the wind.

 

Set aside request before the DC Courts

Based on the above, the Tribunal went to the merits of the case and awarded approximately US$ 68 million to RdL. Consequently, the Municipality requested the Courts of the District of Columbia to set aside the award based on the Tribunal’s alleged incorrect application of Peruvian law and allegedly new evidence of corruption.

A recent IBA Report on annulment of arbitral awards indicates that annulment decisions for procedural reasons heard by national courts of jurisdictions that attract the majority of international arbitration proceedings are not common. US courts are no exception. Let’s stay tuned for the outcome of the Municipality’s application.

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Lithuania’s Aspirations to Become a Preferred Seat of Arbitration: Is It Ready Yet?

Kluwer Arbitration Blog - Tue, 2020-09-22 23:00

Global arbitration centers such as Paris or London are well known and need no introduction. In contrast, there are many other arbitration sites around the world that seek a larger role on the international stage of dispute settlement. Lithuania and its capital Vilnius in particular is no exception.

In 2014 the Vilnius Court of Commercial Arbitration organized an international conference on “Lithuania as a Place for Arbitration” where well-accomplished arbitration practitioners such as Emmanuel Gaillard and Kaj Hober presented an optimistic outlook for the country. Since then six years have passed, making it only right to check whether Vilnius’ ambition of becoming an internationally renowned place of arbitration is getting any closer to reality.

Below we discuss few recent case law of Lithuanian Courts, placing them in the context of the local arbitration law, both of which one might consider before choosing Lithuania as a seat of arbitration.

 

Legal Regulation: A Long Way in a Short Time

Before Lithuania regained its independence in 1990, arbitration was essentially non-existent. However, significant progress was made in 1992 when Lithuania ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, and in 1995, when the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) was ratified as well. Finally, the Lithuanian Law on Commercial Arbitration (“Law on Commercial Arbitration“), based on the 1985 UNCITRAL Model Law, was adopted in 1996.

The 1996 Law on Commercial Arbitration was replaced in 2012 with the current Law on Commercial Arbitration which generally mirrors the UNCITRAL Model Law as adopted in 2006. Article 4(5) of the updated Law on Commercial Arbitration explicitly provides that the law and definitions contained therein must be interpreted in light of the UNCITRAL Model Law including all its amendments and supplements. Thus, it was ensured that not only the current law would be in conformity with the UNCITRAL Model Law, but that future interpretation of the Law on Commercial Arbitration would stand in accordance with international standards and would reflect modern practices in international arbitration.

Even though the Law on Commercial Arbitration is based on the UNCITRAL Model Law, it does not avoid provisions that do not originate from such, which makes Lithuania’s arbitration regulation distinct from other countries.

The main particularity is the fact that Lithuania’s law puts heavy emphasis on confidentiality. Article 8(3) of the Law on Commercial Arbitration provides that arbitration proceedings are confidential, which means that neither parties nor arbitrators can reveal anything about arbitration proceedings to a third party. In 2016 this provision was extended even further by providing that these confidentiality protections also apply to court assistance for arbitration, such as default arbitrator appointments. This means that national courts’ decisions on matters related to assistance to the arbitral tribunal are not publicly available. However, these new confidentiality provisions do not cover court proceedings for the annulment or recognition of arbitral awards, which remain public.

Another particularity relates to arbitrability. According to Article 12 of the Law on Commercial Arbitration, a public body cannot be referred to arbitration without the prior consent of the founder (usually the relevant ministry under which supervision the state’s company operates) of said enterprise, institution, or organisation. This means that public bodies have to receive the founder’s consent in order to conclude a valid arbitration agreement. According to case law, such consent may be verbal, written, or expressed by conduct (Ruling of the Appeal Court of Lithuania in civil case No. 2A-57-241/2016 dated January 26, 2016).

 

Recent Case Law of the Supreme Court: Does One Bad Apple Spoil the Bunch?

Although Lithuanian courts often made procedural and judicial errors as arbitration first took hold in the newly independent nation, in general those courts later developed a history of pro-arbitration case-law. When interpreting the Law on Commercial Arbitration, Lithuanian courts often explicitly rely on foreign doctrine and case-law.1)MIKELĖNAS, Valentinas. Twenty years of Lithuanian Law on Commercial Arbitration: origins, experience of application and perspectives. Arbitražas. Teorija ir praktika, vol. 2, 2016, p. 10. jQuery("#footnote_plugin_tooltip_5913_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5913_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Lithuanian courts do not avoid difficult and modern interpretations of arbitration provisions. Few recent examples are discussed below.

The Supreme Court has formed a clear case-law that the arbitration agreement has a compulsory effect upon the relevant parties (civil case No. 3K-3-545/2009 dated 1 December 2009) and that the principle of favorem contractus prevails (civil case No. 3K-3-431/2013 dated 2 October 2013). However, the Supreme Court also recognizes that when both parties agree to have their dispute examined before national courts, they implicitly terminate that arbitration agreement. This may happen when the claimant initiates court proceedings and the respondent does not object to the court’s jurisdiction. Should one of the parties later claim that the dispute had to be examined before an arbitral tribunal, such a claim normally would not be satisfied (civil case No. e3K-3-255-1075/2019 dated 17 July 2019).

Another interesting and unusual question that the Supreme Court recently dealt with was related to the request for recognition of a foreign court’s ruling refusing the annulment of an arbitral award. After a privatisation agency in Serbia won a dispute in arbitration with a seat in Serbia against three Lithuanian companies, Lithuanian courts refused to enforce the arbitral award in Lithuania. Soon after, the privatisation agency submitted a request to recognize and enforce in Lithuania the ruling of Belgrade Commercial Court refusing to annul said arbitral award. The Supreme Court of Lithuania held that foreign courts’ rulings on the annulment of arbitral awards are not subject to the recognition and enforcement. In the Supreme Court’s opinion, recognition of such a ruling would not mean that Lithuanian courts agree that there are no grounds not to recognize the award (civil case No. e3K-3-173-469/2020, dated 27 May 2020). Conversely, recognition of such a ruling would only mean that Lithuanian courts agree that Serbian courts did not find ground for annulment under Serbian law.

However, as another recent case law shows, even the Supreme Court occasionally adopts controversial decisions in terms of well-established arbitration doctrine (civil case No. e3K-3-343-916-2019, dated 14 November 2019). Recently the Supreme Court ruled that it has jurisdiction to rule on its own jurisdiction to hear a case when the matter includes an arbitration clause. In this example, an Austrian company approached the Lithuanian court in order to recover the debt for the shipment of goods from a Lithuanian company. The defendant’s standard terms of the order contained arbitration clauses and it therefore contested that the dispute could be brought before a national court. The claimant meanwhile denied having accepted the arbitration clause. The Court of First Instance and the Court of Appeal entertained the claim and concluded that the claimant had not accepted the defendant’s standard contract text without any reservations; namely, it disagreed with the arbitration. In the cassation appeal to the Supreme Court, the defendant raised the issue of application of the doctrine of competence-competence and denied the possibility for the court to decide on the competence of the arbitral tribunal. The defendant relied on the right of the arbitral tribunal under Article 19 (1) of the Law on Commercial Arbitration to decide on its own jurisdiction to hear a dispute, including in cases where there are doubts about the existence or validity of an arbitration agreement. However, the Supreme Court in the ruling found that Article 19 of the Law on Commercial Arbitration does not preclude the national court to rule on the validity of an arbitration agreement when (i) the validity of the agreement to arbitrate is being challenged at court, and (ii) arbitration proceedings have not yet commenced. Thus, the Supreme Court’s decision presumably opened a window for any party acting in bad faith to initiate proceedings at a national court in order to avoid resolution by an arbitral tribunal. This decision is arguably inconsistent with the supportive attitude displayed towards arbitration by the Lithuanian Supreme Court.

 

Conclusion

Examples of recent cases examined before Lithuanian courts suggest on the one hand a pro-arbitration approach, yet reveal controversial decision related to the competence-competence principle, which remains the cornerstone of arbitral tribunals’ activities. However, considering the pro-arbitration legal regulation and generally arbitration-friendly case law, there is no certainty that this rule of national courts’ jurisdictional competence will be followed by Lithuanian courts in future cases.

References   [ + ]

1. ↑ MIKELĖNAS, Valentinas. Twenty years of Lithuanian Law on Commercial Arbitration: origins, experience of application and perspectives. Arbitražas. Teorija ir praktika, vol. 2, 2016, p. 10. 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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A Loss And An Opportunity

ADR Prof Blog - Tue, 2020-09-22 22:04
This is a joint message from Nancy Welsh and myself: We at Texas A&M Law have some news to report that is both happy and sad. Let’s start with the sad part.  Our wonderful colleague and friend, Michael Z. Green, is going to be leaving us in Fall 2021 to join Chicago-Kent College of Law … Continue reading A Loss And An Opportunity →

Vedanta award enforced against India

The Indian Supreme Court has enforced a US$278 million UNCITRAL award won by a subsidiary of Vedanta Resources and its partners against India, rejecting the state’s arguments that the enforcement petition...

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