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Chinese Investments in Latin America: Disputes along the Non-Conventional Belt and Road

Kluwer Arbitration Blog - Thu, 2018-12-13 17:00

Guilherme Rizzo Amaral

Introduction

In October 1865, Sir Robert Hart, a former British diplomat and by then an official in the Qing Chinese Government, wrote to Empress Dowager Cixi expressing his opinion that China should desperately seek progress through investments in mining, the telegraph, the telephone and especially in railways. The reaction of Empress Cixi’s closest advisors was harsh. The words of Earl Li well describe the mood of Chinese officials towards the measures Hart advocated: “they deface our landscape, invade our fields and villages, spoil our feng-shui, and ruin the livelihood of our people”.1)This episode is described in the biography “Empress Dowager Cixi: The Concubine Who Launched Modern China”, by Jung Chang. jQuery("#footnote_plugin_tooltip_3930_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3930_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Who could imagine that, 150 years later, China would be the world’s most passionate advocate of the same progress it once admonished. With the Belt and Road Initiative (BRI), China unleashes a bold plan to invest between US$ 1 and 8 trillion in infrastructure and other means to connect over 65 different countries which collectively represent more than 60% of the global population and 30% of global GDP.

Conventionally, the BRI refers primarily to the terrestrial belt linking China to Central and South Asia and onward to Europe, and the maritime road linking China to the nations of South East Asia, the Gulf Countries, North Africa and on to Europe. And yet recent statements by President Xi Jinping and a declaration signed during the Second China-CELAC Ministerial Forum in January 2018 indicate that Latin America is a “natural extension” of the Maritime Silk Road. In fact, over the past 10 years, Latin America has been second only to Asia as a destination of Chinese investments. This is why one can also think of a non-conventional BRI, one more associated to a mindset than to a strict geopolitical plan of investments.

The purpose of this article is not to offer a one-size-fits-all dispute resolution method for conflicts arising from the non-conventional BRI, but rather to raise some of the issues that might be addressed in the future on a case-by-case basis.

Judiciary or Arbitration?

The less likely dispute resolution mechanism to be sought in BRI disputes is the Judiciary. With the exception of Mexico, no Latin American country has ratified the Hague Choice of Court Convention. China, on the other hand, signed it in 2017, but has not yet ratified it. That means that starting proceedings in the court of choice will not prevent any of the parties from starting proceedings in the courts of their own state.

What is more, the choice of court is a “tough sell”, especially when it falls upon the national courts of one of the parties’ state. Lack of impartiality will often be raised, be it because of the weak civil justice system in some Latin American countries, be it, in the case of China, because of the direct submission of the Supreme People’s Court (SPC) to the Standing Committee of the National People’s Congress (article 67[6] of the Constitution of the People’s Republic of China).

With the recent creation of the China International Commercial Courts (CICC) in Shenzhen and Xi’an, China proposes a one-stop platform for BRI disputes. However, these courts hardly qualify as “international”: they have no foreign judges and only Chinese law-qualified lawyers are allowed to represent the parties. Besides, saving rare exceptions, even if the parties choose the CICC to solve their conflicts, there is a threshold of RMB 300 million (approximately USD 42 million) for a case to be heard.

Regardless, the CICC will still play an important role in BRI disputes, especially given their jurisdiction to hear cases “involving applications for preservation measures in arbitration, for setting aside or enforcement of international commercial arbitration awards” (article 2[4] of the CICC provisions).

That leaves the parties with arbitration. Though mediation and other amicable methods of dispute resolution should evidently be encouraged, a provision for arbitration in case those methods fail is highly desirable. Arbitration is perhaps the only stable and predictable framework for solving disputes involving so many different nationalities and geopolitical interests.

Investment and Commercial Arbitration

Despite the fact that most Latin American states offer great resistance to the ICSID state-investor dispute mechanism, many of them have signed Bilateral Investment Treaties with China that are still in force, such as Argentina, Barbados, Bolivia, Chile, Colombia, Cuba, Ecuador, Guyana, Mexico, Peru, Trinidad and Tobago and Uruguay. An important exception is Brazil, China’s largest partner in the region, having received a staggering 55% of all Chinese investment in Latin America over the past 10 years.

Therefore, BRI disputes may give rise to investment or commercial arbitration, depending on the existence of said treaties and on the nature of the dispute.

Seats

BRI disputes will likely have a foreign element, allowing for arbitration either in mainland China or abroad. In addition, the SPC tends to adopt a more liberal interpretation of the term “foreign-related relationship” when faced with BRI disputes (see Typical Case 12, Siemens v. Golden Landmark).

Choosing a seat in mainland China narrows the choice of institutions. Foreign institutions are not considered arbitral commissions according to article 10 of the People’s Republic of China’s (PRC) Arbitration Law. In general, they cannot administer arbitration proceedings on the Mainland, even though case law seems to be evolving towards a more liberal view (see Duferco SA. v. Ningbo Arts & Crafts. Imp. & Exp. Co. Ltd.). Choice of seat also attracts the PRC Arbitration Law to the procedure, which entails relevant differences in relation to the UNCITRAL Model Law (largely adopted in Latin American countries).

The main differences are: (i) no ad hoc arbitration is allowed, (ii) the Kompetenz-Kompetenz principle is a matter for the arbitral institution rather than for the arbitral tribunal (there can be delegation, though), (iii) the time limit to challenge arbitral jurisdiction is until before the first hearing rather than not later than the submission of the statement of defence (Model Law), (iv) applications for interim measures or preliminary orders are submitted by the Parties to the arbitral institution, which shall submit them to the competent court; neither the institution nor the tribunal can issue such orders, (v) the presiding arbitrator is either chosen jointly by the parties or by the chairman of the arbitral institution; not by the co-arbitrators, and (vi) the time period to apply for an award to be set aside is 6 months, instead of the 3 months provided by the Model Law.

Finally, the choice of seat entails the court’s jurisdiction to set aside the award. A Chinese court may not set aside a foreign award (to which enforcement can still be denied), yet it may set aside a domestic award or a foreign-related award issued in mainland China. In either case, for the award to be set aside or denied enforcement, the Prior Reporting System requires a decision from the SPC.

Provided that Latin American parties have the necessary leverage to negotiate arbitration agreements with their Chinese counterparts, traditional seats such as London, Paris, Hong Kong and Singapore will likely be sought (arbitration in a US seat is seldom accepted by Chinese parties). This is especially true given that China is a contracting party to the New York Convention, allowing for foreign awards to be enforced on the Mainland as long as they are issued in the territory of another contracting party.

Institutions

International arbitral institutions soon realised the importance of tending to BRI disputes.

With offices in the Shanghai Pilot Free Trade Zone (FTZ), in Hong Kong and in Singapore, the ICC has created a Belt and Road Commission2)An important disclaimer: the author of this article is an ambassador to said Commission. jQuery("#footnote_plugin_tooltip_3930_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3930_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); to raise awareness of the Court as “the go-to” institution for BRI disputes.

After opening a representative office in Shanghai FTZ in 2016, SIAC has recently signed a MOU with CIETAC to promote joint efforts to provide services to BRI players.

HKIAC has a Belt and Road Advisory Committee in place and extensive experience administering arbitrations involving Chinese and non-Chinese parties.

If the LCIA lags behind in terms of specific efforts to market itself as an option to BRI countries, it still draws particular strength from the fact that parties in all regions see London as a preferred seat, according to recent research.

On the other hand, when it comes to the non-conventional Belt and Road, especially when Latin American parties are involved, the ICC is by far the institution with the closest connection to the region.

In 2017, none of the top 10 foreign users of SIAC or of the LCIA were from Latin America. The same goes for the HKIAC in 2016 (last available report). At the ICC, however, parties from Latin America and the Caribbean held an impressive share of 15.8% in 2017, with Brazil ranking fourth with 115 parties and Mexico holding the twelfth place with 55 parties. Furthermore, it is the only institution with an office in Latin America (São Paulo), not to mention its national committees in 15 Latin American countries.

Conclusion

As Confucius teaches us, “[r]eal knowledge is to know the extent of one’s ignorance”. It is still early to assess the future of BRI disputes and thus it is quite important to keep an open mind at this point. The sage also said that wisdom may be learned by three methods: “first, by reflection, which is noblest; second, by imitation, which is easiest; and third, by experience, which is the most bitter”. This may be a good beacon to the (belt and) road that lies ahead.

References   [ + ]

1. ↑ This episode is described in the biography “Empress Dowager Cixi: The Concubine Who Launched Modern China”, by Jung Chang. 2. ↑ An important disclaimer: the author of this article is an ambassador to said Commission. 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: Arbitration in Belgium: A Practitioner’s Guide
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Lessons from Perú’s Legacy in Public Procurement: A Successful Approach to Follow and Mistakes to Avoid

Kluwer Arbitration Blog - Thu, 2018-12-13 16:05

Alonso Bedoya

The recent Petrobras – Lava Jato government fraud scandal that hit Brazil hard and swept through other Latin American countries has also greatly affected Perú. According to Marcelo Odebrecht (a Brazilian businessman and the former CEO of Latin America’s largest construction company), more than US$29m was paid in bribes between 2005 and 2014 in Perú (US$788m in the whole of the Latin American region). It is publicly known that Odebrecht, a large infrastructure company, acted as the agent to bribe high-level government authorities in order to win tenders. However, in Perú , the introduction of a mandatory private dispute resolution framework for public procurement using conciliation and arbitration has helped to contain corruption for the most part.

Perú has greatly evolved during the past two decades in the context of its arbitration laws and policymaking, to the extent that by the latter part of 2014, the Lima Chamber of Commerce alone had administered more than 3,000 cases with a total combined value of US$ 4,435,535,355.20.1)Roger Rubio, María Belén Saldaña, Arbitration World (international series), Perú Arbitration P. 739, Fifth Edition, Thomson Reuters UK. jQuery("#footnote_plugin_tooltip_3509_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3509_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. This reflects the vast array of circumstances in which arbitration has been used to solve conflicting issues.

Responsively, Perúvian legislators decided to implement arbitration as a means of bypassing national judicial courts in order to settle governmental and private entity disputes. The result was that in 1998, Perú enacted the now-repealed Public Procurement Act Nº 26850, which prescribed in Article 41 2)Law No. 26850. Article 41 °. – “When a discrepancy arises between the parties in the execution or interpretation of the contract, this will be defined through the extrajudicial conciliation or arbitration procedure, as agreed by the parties.” jQuery("#footnote_plugin_tooltip_3509_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3509_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); that any government-private party disputes under public procurement contracts be mandatorily resolved through conciliation or arbitration processes. Today, the original Act Nº 26850 (now Public Procurement Act Nº 30225, amended by Legislative Decree Nº 1444) still seeks to embody an effective conflict resolution procedure in order to encourage generous national and international investment.

Current Law

Public Procurement Act 30225 establishes the following key provisions: a) contracting parties are free to decide the means by which they will resolve their disputes regarding the execution of public procurement contracts, and may choose between conciliation or arbitration (this is non-negotiable between the parties) to solve matters such as the execution, interpretation, resolution, non-existence, ineffectiveness or invalidity of any given contract, with the provision that cases in which the nullity of the contract is discussed must be submitted to arbitration, b) public officials are liable to administrative sanctions if they do not use arbitration to resolve disputes, c) the government allows two types of arbitration: ad hoc and institutional; the latter being conducted by an institution accredited by the Supervisory Body of Public State Procurement (OSCE), d) for a lawyer to perform as ad-hoc arbitrator, the practitioner needs to be registered in the National Registry of Arbitrators (RNA) under OSCE administration, and meet all its requirements. The lawyer must also be specialized in arbitration and public procurement contracts as well as in administrative law.

Highlights of Mandatory Arbitration in Public Procurement Contracts

As arbitration is mandatory, the mechanism has spread to the extent that even the smallest municipality in Perú is required to use arbitration to resolve disputes. This condition and other pro-investment measures have greatly benefited the Perúvian government, as private domestic and foreign investment has greatly increased. Arbitration has also allowed for the resolution of public procurement disputes to be expedited. This is demonstrated by the research that has been carried out by the PUCP (Pontificia Universidad Católica del Perú), which shows that in 2014 the duration of public procurement arbitrations was less than a year in 70% of cases, and only 6% of cases continued beyond 24 months. The short time periods for resolving disputes and the fact that the Perúvian government was considered a private party within public procurement disputes (and thus equal to any other private entity), incentivised foreign investors to do business in Perú, by promoting a sense of stability and predictability. Foreign investors involved in complex contracts such as EPC or turnkey agreements for the engineering and construction of large-scale, infrastructure projects such as hydroelectric plants, reservoir dams and highway systems do not need to be members of a BIT-signatory state with Perú in order to use arbitration as a dispute resolution mechanism, thus avoiding the unpredictability of the Perúvian court system.

Errors to Avoid

As mentioned above, the Perúvian legislation in public procurement gives parties the opportunity to choose between ad hoc and institutional arbitration. Even though arbitral institutions provide many benefits to parties that cannot be found in ad hoc arbitration, the vast majority of parties prefer ad-hoc arbitration. More than 70% of public procurement arbitrations are resolved by ad hoc arbitration, with only 30% conducted by an institution.
This continuous growth of arbitration for public procurement disputes may be due to the fact that arbitration is regarded as a pro-private contractor system, as most cases are decided in favour of the company rather than the Perúvian government as per the studies conducted by the PUCP. However, arbitration is not immune from accusations of corruption.
The main issue facing Perúvian ad hoc arbitrations is the absence of rules on how arbitrators have to conduct procedures in line with the standards of fairness and impartiality. By failing to issue awards in a timely manner, failing to restrict ex parte communications, failing to limit document production and failing to clarify the number of hearings that will be required, they undermine the stability and predictability of procedures and outcomes. Other issues include a lack of transparency and exorbitant fees being charged by arbitrators which do not correlate either to the time invested or to the complexity of the dispute.

As a result of a lack of institutional oversight, the Lava Jato influence was able to taint some public procurement arbitrations involving Petrobras/Odebrecht by nominating inexperienced arbitrators who welcomed ex parte engagements to deal with affairs of public interest.

Final thoughts: Amendment

It has been 20 years since Perú first introduced a mandatory legal framework for public procurement disputes. In general terms, this measure has successfully brought a stable legal framework to the country by generating predictability and transparency in relation to the outcome of a dispute. In fact, given the special characteristics of arbitration and in particular its expeditiousness, there is no doubt that it has become the mechanism that currently provides greater advantages to individuals and even to the State itself. However, there is still room for improvement when it comes to Perúvian arbitration. Institutional Arbitration should be prioritized over ad hoc arbitrations, to prevent future Lava-Jato scenarios in arbitration proceedings. In addition, the Perúvian State role during the execution of public procurement contracts ought to be intensely monitored. More than 95% of public procurement disputes originate due to the lack of contractual management of the State (not for example, failing to make payments on time or not honouring other contractual terms), thus bringing claims against the State.

On reflection, it would be a solid step forward for Perú to ensure transparency by removing ad hoc arbitration as an option for resolving public procurement disputes, despite the fact that doing so will entail making drastic modifications to the current arbitration regulations and public procurement laws. Further, it is of utmost importance to promote training in public procurement and in arbitration, particularly in regions where large infrastructure projects are being procured. Hopefully, similar mandatory private dispute resolution frameworks for public procurement can be used throughout Latin America, Europe and Asia to promote arbitration and combat corruption, emulating the successes and avoiding the mistakes experienced in the Perúvian model.

References   [ + ]

1. ↑ Roger Rubio, María Belén Saldaña, Arbitration World (international series), Perú Arbitration P. 739, Fifth Edition, Thomson Reuters UK. 2. ↑ Law No. 26850. Article 41 °. – “When a discrepancy arises between the parties in the execution or interpretation of the contract, this will be defined through the extrajudicial conciliation or arbitration procedure, as agreed by the parties.” 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: Arbitration in Belgium: A Practitioner’s Guide
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Intra-EU ECT Claims Post-Achmea: Vattenfall Decision Paves the Way

Kluwer Arbitration Blog - Thu, 2018-12-13 03:00

Kirstin Schwedt and Hannes Ingwersen

The Court of Justice of the European Union’s (CJEU) judgment in Slovak Republic v. Achmea B.V. (Achmea) on arbitration under intra-EU BITs has been broadly discussed (on this blog, see e.g. here, here, here, here, here, here and here). Nine months after the Court’s ruling, some tribunals have had the opportunity to react. Food for thought and a strikingly straightforward solution comes especially by way of a detailed 72-page procedural decision confirming jurisdiction in the ICSID arbitration between Swedish power company Vattenfall and Germany regarding claims under the multilateral Energy Charter Treaty (ECT) following the state’s phaseout of nuclear power in the wake of the Fukushima disaster (ICSID Case No. ARB/12/12).

The Vattenfall-tribunal’s rejection of Germany’s Achmea-based jurisdictional objection warrants closer analysis: First, Achmeas reach to ECT-based claims has been hotly debated, not least because of the practical significance and number of pending ECT-claims. The European Commission recently communicated in unequivocal terms that it sees intra-EU ECT-claims as barred by Achmea. Second, the tribunal delves deep into the complex and arguably uneasy relationship between EU law and investment treaties as part of public international law.

Tribunals Take Different Roads, Yet All Roads Lead to Rome

Various Achmea-based jurisdictional objections have found different treatment by tribunals. In Masdar Solar v Spain (ICSID Case No. ARB/14/1), the tribunal denied Spain’s request to reopen the arbitration following Achmea, briefly addressing the issue and concluding that the “Achmea Judgment is simply silent on the subject of the ECT.” An ICSID tribunal in Gavrilovic v Republic of Croatia (ICSID Case No. ARB/12/39) under the Austria-Croatia BIT dismissed Croatia’s intra-EU objection after Achmea for being late and refrained from an ex officio review of the issue.

In contrast, the Vattenfall-tribunal found Germany’s objection – not raised prior to Achmea – to be timely. The “very existence” of the CJEU’s judgment amounted to a new fact that was previously unknown to Germany in terms of ICSID Rule 41(1). The tribunal further highlights its ex officio authority to consider jurisdictional issues under the ICSID Rules, remarking that it would have seen fit to consider the intra-EU issue, even if Germany had not raised the objection.

Recently, a tribunal in UP and C.D Holding Internationale v. Hungary (ICSID Case No. ARB/13/35) under the France-Hungary BIT rejected Achmea-based objections on grounds similar, yet not identical, to those relied on by the Vattenfall-tribunal: Hungary could not, says that tribunal, rely on EU law and Achmea to escape its public international law obligations under the ICSID Convention (not the BIT).

In conclusion: Tribunals have unanimously remained unimpressed by Achmea, while the underlying reasons to uphold jurisdiction are manifold.

Vattenfall: No Primacy of EU Law

The Vattenfall tribunal identifies the dispute resolution provision of the ECT, Article 26, as the starting point for its jurisdictional analysis, and queries whether EU law has consequences for the meaning of that provision when interpreted in accordance with the principles of international law. While the tribunal acknowledges that the EU Treaties and the CJEU’s judgments interpreting them form part of international law, it does not accept EU law as means to interpret Article 26 ECT.

In the tribunal’s view, there is no room within Article 31 of the Vienna Convention on the Law of Treaties (VCLT) to draw from EU Treaties (and thus indirectly from Achmea) to interpret another treaty, the ECT. It concludes that EU law does not constitute “principles of international law which may be used to derive meaning from Article 26 ECT, since [EU law] is not general law applicable as such to the interpretation and application of the arbitration clause in another treaty such as the ECT”.

The Vattenfall tribunal is concerned about potentially different interpretations of the same ECT provision if EU law was used for interpreting the multilateral treaty. This would result in an “incoherent and anomalous result” that would be inconsistent with the object and purpose of the ECT. Instead, “pacta sunt servanda and good faith require that the terms of that treaty have a single consistent meaning”. Article 31(3)(c) VCLT, which states that any relevant rules of international law applicable in the relations between the parties should be taken into account when interpreting a treaty, could not be relied upon to “rewrite the treaty being interpreted, or to substitute a plain reading of a treaty provision with other rules of international law, external to the treaty being interpreted, which would contradict the ordinary meaning of its terms”.

Vattenfall: Article 16 ECT as a Simple Route to Jurisdiction

The arbitrators notably accentuate Article 16 ECT, which states that no provisions concerning the subject matter of Part III or V of the ECT in prior or subsequent international agreements between two or more parties to the ECT shall be construed to derogate from i.a. Article 26 ECT, where the provision in the ECT is more favourable to the investor or investment. If EU law were to prohibit arbitration, says the tribunal, it would concern the same subject matter as Article 26 ECT, the latter allowing for arbitration and thus being “more favourable to the Investor” in terms of Article 16 ECT. Article 16 ECT would thus require Article 26 ECT to prevail. Article 16 ECT is identified by the arbitrators as “a simpler and clearer route to the answer to the jurisdictional challenge” than other reasons provided. Similarly, but slightly less prominently, the tribunal in Masdar Solar v Spain also relied on Article 16 ECT (cf. para. 332 of the Masdar award).

The arbitrators do not see a conflict between Article 26 ECT and Articles 267, 344 TFEU, but remark obiter dictum that even if such a conflict existed, EU law would not prevail over the ECT, applying a variety of conflict rules – lex posterior pursuant to Article 30(4)(a) VCLT, modification of the ECT in light of Article 41(1) VCLT, or lex specialis with a view to Articles 16 ECT and 351 TFEU. Returning to Article 16 ECT, the tribunal considers the provision to be lex specialis, once more concluding that “Article 16 poses an insurmountable obstacle to Respondent’s argument that EU law prevails over the ECT”. This view is not effectively countered by arguing that Article 16 ECT is not a suitable conflict rule because it is itself part of one of the conflicting regimes. The (general) public international law rule enshrined in Article 41 VCLT, limiting the cases in which multilateral agreements can be bilaterally modified, leads to the same result and reinforces the effectiveness of Article 16 ECT.1) Andrej Lang, Regime Collision between EU Law and Investment Law: New Developments in the Vattenfall Case, www.verfassungsblog.de, last accessed 8 October 2018. jQuery("#footnote_plugin_tooltip_8724_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8724_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Additionally, the tribunal emphasises that it sees a critical role with drafters to define the scope of the obligations established by the investment treaty. In case of the ECT, there was ample opportunity to carve out intra-EU claims, since it would have been a simple matter to draft the ECT so that Article 26 does not apply to disputes between an Investor of one EU Member State and another EU Member State as respondents. That was not done”.

Commentary

Tribunals still grappling with the intra-EU question, especially those in ECT cases, are certain to pay great attention to the carefully crafted Vattenfall decision. Its reasoning may well serve as a blueprint for further decisions and awards in similar cases.

Reading the CJEU’s judgment side-by-side with the Vattenfall decision puts the spotlight on the starkly different perspectives from which the EU institutions and international arbitral tribunals look at the issue. The CJEU’s principal task is to interpret and ensure the primacy of EU law, whereas arbitral tribunals are obliged to put into effect the mutual obligations of states under their respective investment treaties. These distinct viewpoints necessarily shape reasoning and methodology of the different actors: The CJEU relies on principles of EU law, whereas arbitral tribunals base their decisions on public international law. For intra-EU ISDS, this has resulted in norm conflicts that are now paid for by states and investors alike.

The issue remains in flux: In the context of an action to annul an ECT award at the Svea Court of Appeal (SCC Case No. 063/2016, Novenergia v Spain), Spain has asked the Swedish court to seek a preliminary ruling on the ECT’s compatibility with EU law from the CJEU. Such decision would bring clarity with respect to the CJEU’s position on the multilateral treaty. In parallel, on the other side of the Atlantic, the US District Court of the District of Columbia is called to decide on Spain’s motion resisting enforcement of the Novenergia award based on Achmea. Beyond a “thumbs up” or “thumbs down” for the ECT, one may curiously expect a ruling on the public international law implications of the overlap between EU law and (other) public international law when it comes to intra-EU investment protection.

The views expressed in this blog post are those of the authors alone and do not reflect the opinion of Linklaters LLP.

References   [ + ]

1. ↑ Andrej Lang, Regime Collision between EU Law and Investment Law: New Developments in the Vattenfall Case, www.verfassungsblog.de, last accessed 8 October 2018. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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The Prague Rules: The Real Cultural War Isn’t Over Civil vs Common Law

Kluwer Arbitration Blog - Wed, 2018-12-12 00:59

Michael McIlwrath

The Prague Rules on the Efficient Conduct of Proceedings in International Arbitration will be officially launched this week (December 14). This set of rules of evidence and procedure formulated from civil law practices has already generated a substantial and healthy debate within the international arbitration community, including here on the Kluwer blog, on whether they are needed to overcome a perceived common law orientation of the IBA Rules of Evidence.1) See, e.g, whether the Prague Rules are a viable alternative to the IBA Rules of Evidence, whether civil law lawyers genuinely desire a set of rules that embody civil law concepts for international arbitration, and whether that the Prague Rules’ prohibition on any form of e-discovery is unrealistic as a means to restrain excessive discovery in international arbitration. jQuery("#footnote_plugin_tooltip_3447_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3447_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Leaving aside whether the Prague Rules are truly representative of the civil law world or just certain legal systems within it (that would be a separate debate of its own), the biggest cultural divide in international arbitration is not civil versus common law approaches.

 

Where cultures really clash:  predictability versus flexibility

There is no doubt that, as the Prague Rules state, parties to international arbitration usually desire an efficient and speedy process. Just as much – and perhaps even more – they want predictability. They will want to know how the arbitrators will conduct the proceedings, how they will weigh the evidence, what legal issues they will focus on, and how long it will take to obtain a final award.

By contrast, the hallmark of international arbitration is the tribunal’s ability to formulate procedures that are suited to the particular parties and their disputes.  This flexibility is largely what distinguishes international from domestic arbitration, with tribunals in the latter case generally applying a “one size fits all” approach copied from local litigation practices.

In terms of setting up the procedure for an international arbitration, the concepts of predictability and flexibility are polar opposites. And in resolving this tension, it is predictability that typically loses out.  This is natural.  Arbitrators, once appointed, are not bound to follow the parties’ expectations. In fact, they may not even know what the parties’ expectations are.

 

The most common source of party dissatisfaction is not the rules

Unlike the standard procedures applied in domestic arbitration or court litigation, parties to an international arbitration will usually need to wait for Procedural Order n. 1 before they can advise their business clients on how the proceedings will unfold.

And when it arrives, parties often find the arbitration will not be what they expected when the tribunal was appointed.  The range of procedural approaches that different arbitrators will bring to the same set of rules can be a source of either criticism or praise, depending on one’s point of view. In 20 years of representing my company in disputes around the world, I have experienced international arbitrations firmly rooted in the extremes of civil and common law procedural approaches, all with tribunals purportedly referring to the IBA Rules. This is usually over the protests of at least one unhappy side.

Fancy that:  a service profession where a paying customer could not predict what service they would receive until it was too late to change course.

Not surprisingly, parties often sour on the arbitration before the proceedings are fully underway.

 

A set of rules based on national practices is not a realistic solution for international cases

As with the IBA Rules of Evidence, the Prague Rules cannot be more effective than the arbitrators called to interpret and apply them.

In cases where both sides agree to apply the Prague Rules because they share common procedural values, there will be no pressing need for them. If the arbitrators apply expansive procedures that clearly neither side wants, the parties have a problem that no set of rules will fix.

Where, by contrast, the parties are from different legal cultures and have divergent views of procedure, the Prague Rules will be put to the same test as the IBA Rules the moment either party accuses the tribunal of failing to provide a fair opportunity to present their case.  Some arbitrators will default to more expansive procedures, going a considerable distance to avoid any semblance of denial of due process and to maximize international enforceability of the award.

There will be no speedy proceedings with these arbitrators, especially since the Prague Rules give them reasons to be concerned about enforcement. In contrast to the balanced approach of the IBA Rules, some parts of the Prague Rules may strike foreign courts as per se violations of due process. These include the tribunal’s ability to pronounce its preliminary views on the disputed issues at the initial case management conference (article 2.3(e));2) The Prague Rules anticipate that this is likely to pose a problem and seek to address it through a disclaimer in article 2.3(e) that, “such preliminary views shall not by itself be considered as evidence of the arbitral tribunal’s lack of independence or impartiality, and cannot constitute grounds for disqualification.” It is open to question whether any enforcing jurisdictions would treat the right to assert lack of an arbitrator’s impartiality as being waivable by a party. Further, as a recent Kluwer post noted, however, the language of article 2.3 is likely unworkable given that almost all documents today are in electronic form and, notably, the rules do not define what they mean by “e-discovery.” jQuery("#footnote_plugin_tooltip_3447_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3447_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); avoiding “any form of discovery, including e-discovery” (article 4.2); the ability of a tribunal “to give as much evidential value as it deems appropriate” to the statement of a witness who is not called to testify (article 5.8); or the tribunal’s raising legal issues not pleaded by the parties (article 7.2).

Other arbitrators, of course, will be more restrictive, and will not feel they must accommodate the demands of the party that cries the loudest.  These proceedings will indeed be more efficient. This occurs today under the IBA Rules.

The main difference is not driven by the rules adopted for the proceedings, but how the arbitrators choose to apply them (or not) and how they otherwise conduct the proceedings.

 

But the concept of the Prague Rules points in the right direction

While parties will use the civil/common law distinction as a way to reduce the guessing-game when appointing arbitrators, this dichotomy is simply a proxy for assessing whether the arbitrator will likely adopt restrictive or expansive approaches to procedure, ie, to create predictability.  It is not always an accurate proxy, however. There are many civil law arbitrators who will easily indulge a party’s excessive and expensive document requests.  And there are many common law arbitrators who would never tolerate this.

If the Prague Rules were to adopt the terminology of “restrictive/expansive” or an equivalent, instead of relying on outmoded characterizations of regional procedures, they would stand a greater chance of influencing international practice by helping to overcome the tension between the desires for predictability and flexibility.

Here are four ways a future iteration of the Prague Rules could have a broad impact without ever being adopted as the rules of evidence or procedure in a single international arbitration.

1. A “menu” approach to the IBA Rules of Evidence. Instead of keeping parties in the dark about the likely procedure to be followed, why not offer explicitly the broad range of procedural approaches available under the IBA Rules? The Prague Rules could be revised to complement the IBA Rules this way, or the IBA Rules could be revised to offer a “Prague Option”, among others, for parties and tribunals to expressly consider at the earliest opportunity.

2. An ala carte approach to procedural devices. A serious shortcoming of the Prague Rules for international cases is that they are a full set of procedures to be accepted or rejected in their entirety. This is a pity, since it means they will often be rejected in cases where parties are from different backgrounds, but might be amenable to some portions but not others.  For example, my business would not be well served if all of our disputes were to be entirely under civil or common law procedures, and I hope we will never be forced to make this choice. For most cases, we will prefer a mix that we believe is best for a given dispute, such as the front-loading of pleadings (civil law), a willingness to dispose of key issues early (common law), more evidentiary weight given to documents than witnesses (civil law), limited or at least tightly focused discovery (hybrid of civil and common law), and party-appointed experts (common law). If proposed as discrete tools instead of a full set of procedures, the Prague Rules would likely find greater acceptance and use.

3. As a means for arbitrators to publicly declare their preferences. There is no reason to make parties guess about the procedures a proposed arbitrator prefers for most cases. If an arbitrator appears at a conference and declares that they are willing to apply the Prague Rules, this may provide parties with a considerably greater sense of predictability when appointing them (or not).3) Even better, the arbitrators may issue written declarations of their support for the Prague Rules or any of the procedural devices they include. Encouraging arbitrators to be more forthcoming with their procedural preferences was proposed in the article, Puppies or Kittens: How to Better Match Arbitrators to Party Expectations. jQuery("#footnote_plugin_tooltip_3447_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3447_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

4. Prompting better conversations between parties and tribunals on procedure. Rather than relying on unstated and inaccurate presumptions of what the parties want, arbitral tribunals may consider using the Prague Rules as a source of conversation for shaping the procedure to fit their real expectations. They may do this even while applying the IBA Rules of Evidence.  The desire for better “conversations” over the means of resolving disputes was a key finding of the Global Pound Conference, which surveyed dispute stakeholders in 28 cities between 2016 and 2017.4) See the GPC Report on Data Trends and Regional Differences. A full report of all Global Pound Conference survey results and findings will be published in early 2019. jQuery("#footnote_plugin_tooltip_3447_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3447_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Exploring the parties’ procedural expectations is simply good practice that arbitrators should engage in more frequently.5) The value of more discussion with parties about their procedural expectations is forcefully set out in Carita Lindholm Wallgren’s Predictability of Proceedings in International Commercial Arbitration – And is there a Nordic Way?, Festschrift to Gustaf Möller, Tidskrift utgiven av Juridiska Föreningen i Finland (JFT) 2011. jQuery("#footnote_plugin_tooltip_3447_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3447_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

The Prague Rules should occupy a bigger tent

 The initial draft of the Preamble to the Prague Rules stated that they were drafted as a response to the IBA Rules of Evidence, accused of being “closer to common law traditions, as they follow a more adversarial approach regarding document production, fact witnesses and Party-appointed experts. In addition, the parties’ entitlement to cross-examine witnesses is almost being taken for granted.”

The preamble was recently revised to remove this criticism, and any mention, of the IBA Rules of Evidence. It now states more broadly that, although “initially intended to be used in disputes between companies from civil law countries, [the Prague Rules] could in fact be used in any arbitration proceedings where the nature of the dispute or its amount justifies a more streamlined procedure actively driven by the tribunal.”

This change is a step in the right direction, away from a small tent inhabited by those from a shared legal culture, and towards the bigger tent of international arbitration.

References   [ + ]

1. ↑ See, e.g, whether the Prague Rules are a viable alternative to the IBA Rules of Evidence, whether civil law lawyers genuinely desire a set of rules that embody civil law concepts for international arbitration, and whether that the Prague Rules’ prohibition on any form of e-discovery is unrealistic as a means to restrain excessive discovery in international arbitration. 2. ↑ The Prague Rules anticipate that this is likely to pose a problem and seek to address it through a disclaimer in article 2.3(e) that, “such preliminary views shall not by itself be considered as evidence of the arbitral tribunal’s lack of independence or impartiality, and cannot constitute grounds for disqualification.” It is open to question whether any enforcing jurisdictions would treat the right to assert lack of an arbitrator’s impartiality as being waivable by a party. Further, as a recent Kluwer post noted, however, the language of article 2.3 is likely unworkable given that almost all documents today are in electronic form and, notably, the rules do not define what they mean by “e-discovery.” 3. ↑ Even better, the arbitrators may issue written declarations of their support for the Prague Rules or any of the procedural devices they include. Encouraging arbitrators to be more forthcoming with their procedural preferences was proposed in the article, Puppies or Kittens: How to Better Match Arbitrators to Party Expectations. 4. ↑ See the GPC Report on Data Trends and Regional Differences. A full report of all Global Pound Conference survey results and findings will be published in early 2019. 5. ↑ The value of more discussion with parties about their procedural expectations is forcefully set out in Carita Lindholm Wallgren’s Predictability of Proceedings in International Commercial Arbitration – And is there a Nordic Way?, Festschrift to Gustaf Möller, Tidskrift utgiven av Juridiska Föreningen i Finland (JFT) 2011. 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: Arbitration in Belgium: A Practitioner’s Guide
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David Aven v. Costa Rica: An Aftershock of Urbaser v. Argentina?

Kluwer Arbitration Blog - Wed, 2018-12-12 00:21

Andreea Nica

Introduction

The assessment of human rights within an investment arbitration framework, typical for the investor-state dispute resolution (ISDS) mechanism, is one of the topics which has gained significant momentum in the past years, and has led even to the establishment of a Working Group on International Arbitration of Business and Human Rights. Arbitral tribunals often find it difficult to hold an investor accountable for breach of human rights during the operation of an investment because traditionally only States are considered to have the responsibility for their observance and enforcement. Although the idea of individuals and corporations acting as holders of rights on the international plane has been long accepted, no multilateral convention has yet recognized private entities’ general obligation to respect human rights.

 

Investors’ obligation to respect human rights – quo vadis?

The increased role and impact transnational investments play support the creation of a system of investor due diligence obligations at the international level, subject, of course, to the practical obstacles and the political will. A first step in this direction could be found in the 2014 initiative of the Human Rights Council entrusted to the Open-ended Intergovernmental Working Group on transnational corporations and other business enterprises with respect to human rights. Paragraph 4 of the concept note proposed by the Ecuadorian chair of the group expressly acknowledged that “the international legal system reflects an asymmetry between rights and obligations of transnational corporations (TNCs); while TNCs are granted rights through hard law instruments, such as bilateral investment treaties and investment rules in free trade agreements, and have access to a system of investor-state dispute settlement, there are no hard law instruments that address the obligations of corporations to respect human rights”. Although far from imposing direct international obligations upon investors in its current form, this initiative has the potential of being developed into a powerful instrument, with echoes into the ISDS arena as well.

The current state of affairs seems to suggest that, in lack of specific language inserted in international investment agreements (IIAs), a tribunal has its hands tied when it comes to asserting an investor’s liability for breach of human rights. Even when such language exists, the range thereof might differ, as a mere preamble statement1) The preamble of the Norwegian Model BIT (2015) encourages Sates to “reaffir[m] their commitment to democracy, the rule of law, human rights and fundamental freedoms in accordance with their obligations under international law, including the principles set out in the United Nations Charter and the Universal Declaration of Human Rights”. jQuery("#footnote_plugin_tooltip_8543_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); or a corporate social responsibility clause2) Article 810 [Corporate Social Responsibility] of the Canada-Peru Free Trade Agreement states: [e]ach Party should encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate internationally recognized standards of corporate social responsibility in their internal policies, such as statements of principle that have been endorsed or are supported by the Parties. These principles address issues such as labor, the environment, human rights, community relations and anti-corruption. The Parties therefore remind those enterprises of the importance of incorporating such corporate social responsibility standards in their internal policies”. jQuery("#footnote_plugin_tooltip_8543_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); might not be as effective as the incorporation of specific human-rights-related obligations.3) Article 15(1) [Minimum Standards for Human Rights, Environment and Labour] of the SADC Model BIT states: “Investors and their investments have a duty to respect human rights in the workplace and in the community and State in which they are located. Investors and their investments shall not undertake or cause to be undertaken acts that breach such human rights. Investors and their investments shall not assist in, or be complicit in, the violation of the human rights by others in the Host State, including by public authorities or during civil strife”. jQuery("#footnote_plugin_tooltip_8543_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); New generation IIAs seem to follow the latter approach but, as explained in another post, a number of issues relating to the enforcement of such obligations remain open.

 

Urbaser v. Argentina – the first earthquake

As elaborated here, investment arbitration tribunals have dealt with issues relating to human rights in different ways. The most controversial and impactful one is represented by the formulation of a counterclaim by the host State for breach of human rights by the investor. Notwithstanding that this issue might entail several procedural hurdles – particularly in terms of asserting jurisdiction –  tribunals seem to have become quite innovative in overcoming them considering the salience of human rights in sensitive matters, such as environmental protection. As discussed in a previous post, there are numerous perspectives from which jurisdiction over a counterclaim can be assessed, but this post focuses on probably the most problematic one: the scenario in which consent must be derived from the general wording of the IIA.

The landmark decision rendered in Urbaser v. Argentina4) Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, Award dated 8 December 2016 (Urbaser v. Argentina) jQuery("#footnote_plugin_tooltip_8543_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); was the first one to shake the investment arbitration community on this topic. The investor unsuccessfully claimed that its concession for the supply water and sewerage services in Buenos Aires was adversely impacted by Argentina’s emergency measures adopted in the aftermath of the 2001 financial crisis. Argentina filed a counterclaim alleging that the concessionaire’s failure to provide the necessary level of investment in the concession led to violations of the human right to water, which consequently affected the population’s health and the environment in that region. Quite unsurprisingly, the tribunal dismissed the counterclaim, noting that the investor’s obligation to perform contractual water services had its source in domestic law, and not in general international law, and there was no legal ground under the latter to circumstantiate a claim or the corresponding compensation from a group of individuals for performance of services formulated against a private entity. However, the situation would be different if an obligation to abstain – such as a prohibition to commit acts violating human rights – would be at stake, as this would be of immediate application, not only upon States, but equally on individuals and other private parties (§§1210, 1220). Thus, by numerous obiter dicta, the tribunal proclaimed a revolutionary approach towards the role of human rights in investment arbitration. After being the first tribunal to assert jurisdiction over a human rights counterclaim, it also became the first to declare that non-State actors are under a negative obligation “not to engage in activity aimed at destroying” (§1199) human rights. Stressing upon the integrated nature of the two regimes, the decision signalled that investment tribunals are ready to account for and enforce human rights obligations.

 

David Aven v. Costa Rica – A new shock?

The recent decision in David Aven v. Costa Rica5) David R. Aven and others v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Award dated 18 September 2018 (David Aven v. Costa Rica) jQuery("#footnote_plugin_tooltip_8543_5").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); suggests that an earthquake is almost never an isolated occurrence.6) In Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims dated 7 February 2017, the Tribunal granted almost EUR 40 million for environmental damage concerning pit and non-pit soil remediation, groundwater remediation, and well abandonment causing mud pits following Ecuador’s counterclaim. However, jurisdiction was not disputed, as the parties had concluded an agreement by which Burlington accepted jurisdiction over the counterclaims. Also, in Perenco Ecuador Ltd. v. The Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador), ICSID Case No. ARB/08/6, where a similar counterclaim was brought but the cases were not joined because of Ecuador’s opposition, the jurisdiction was never challenged by the investor. jQuery("#footnote_plugin_tooltip_8543_6").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The tribunal empanelled to hear the dispute had to decide if it had jurisdiction over a counterclaim in relation to the environmental damage caused to undisclosed wetlands during the operation of a real estate project. This was looked at from three stances: (1) the language of the relevant IIA, (2) the investment arbitration case law and (3) procedural economy and efficiency.

First, the relevant treaty environmental language,7) E.g., Article 10.9.3.c and Article 10.11 of DR-CAFTA. jQuery("#footnote_plugin_tooltip_8543_7").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); rather general in nature, was interpreted as representing a source for the investors’ obligation to comply with the environmental domestic laws and regulations, and any corresponding measures adopted by the host State for the implementation of such norms; any breach thereof would amount to a violation of domestic and international law and would trigger liability for the damages caused (§734). The tribunal courageously held that, although the enforcement of environmental law is primarily on the States, it cannot be accepted that a foreign investor could not be subjected to international law obligations in this field (§737).

Second, citing the approach adopted in Urbaser v. Argentina, the tribunal proclaimed that “it can no longer be admitted that investors operating internationally are immune from becoming subjects of international law (…) particularly when it comes to rights and obligations that are the concern of all States, as it happens in the protection of the environment” (§737). Consequently, it found no substantive reasons to exempt an investor from the scope of claims, and interpreted “an investment dispute” as covering disputes giving rise to counterclaims, asserting prima facie jurisdiction for additional reasons of procedural economy and efficiency (§§740-742).

Costa Rica’s environmental counterclaim was ultimately dismissed for non-observance of the procedural requirements set forth under Article 20 and 21 of the UNCITRAL Arbitration Rules governing the proceeding(§§744-747). Also, the tribunal noted in passing and, somewhat contradictory to previous reasoning, that the treaty language did not actually “impose any affirmative obligations upon investors” nor supported a counterclaim for violation of state-enacted environmental regulation (§743). Still, the window opened by Urbaser v. Argentina seems to have been widened with this case. If one decision might be viewed as unique reasoning, two can at least signal the incipience of a trend. Indeed, the assertion of a more tenable link between human rights, on one side, and business and IIAs, on the other side, is just one step forward in the overall movement towards a more balanced approach in the ISDS system, which may also ensure its survival in these times characterized by a legitimacy crisis

References   [ + ]

1. ↑ The preamble of the Norwegian Model BIT (2015) encourages Sates to “reaffir[m] their commitment to democracy, the rule of law, human rights and fundamental freedoms in accordance with their obligations under international law, including the principles set out in the United Nations Charter and the Universal Declaration of Human Rights”. 2. ↑ Article 810 [Corporate Social Responsibility] of the Canada-Peru Free Trade Agreement states: [e]ach Party should encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate internationally recognized standards of corporate social responsibility in their internal policies, such as statements of principle that have been endorsed or are supported by the Parties. These principles address issues such as labor, the environment, human rights, community relations and anti-corruption. The Parties therefore remind those enterprises of the importance of incorporating such corporate social responsibility standards in their internal policies”. 3. ↑ Article 15(1) [Minimum Standards for Human Rights, Environment and Labour] of the SADC Model BIT states: “Investors and their investments have a duty to respect human rights in the workplace and in the community and State in which they are located. Investors and their investments shall not undertake or cause to be undertaken acts that breach such human rights. Investors and their investments shall not assist in, or be complicit in, the violation of the human rights by others in the Host State, including by public authorities or during civil strife”. 4. ↑ Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, Award dated 8 December 2016 (Urbaser v. Argentina) 5. ↑ David R. Aven and others v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Award dated 18 September 2018 (David Aven v. Costa Rica) 6. ↑ In Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims dated 7 February 2017, the Tribunal granted almost EUR 40 million for environmental damage concerning pit and non-pit soil remediation, groundwater remediation, and well abandonment causing mud pits following Ecuador’s counterclaim. However, jurisdiction was not disputed, as the parties had concluded an agreement by which Burlington accepted jurisdiction over the counterclaims. Also, in Perenco Ecuador Ltd. v. The Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador), ICSID Case No. ARB/08/6, where a similar counterclaim was brought but the cases were not joined because of Ecuador’s opposition, the jurisdiction was never challenged by the investor. 7. ↑ E.g., Article 10.9.3.c and Article 10.11 of DR-CAFTA. 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: Arbitration in Belgium: A Practitioner’s Guide
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West coast dispute resolution conversation: Dec. 7 & 8, 2018

ADR Prof Blog - Tue, 2018-12-11 18:58
From FOIs Jean Sternlight and Lydia Nussbaum of UNLV: The first West Coast Dispute Resolution Conversation was held in Las Vegas on December 7 & 8, 2018 at UNLV’s Boyd School of Law and the Saltman Center for Conflict Resolution. The inspiration for the Conversation grew out of the 2018 ABA Dispute Resolution Section Annual Conference … Continue reading West coast dispute resolution conversation: Dec. 7 & 8, 2018 →

Swiss court upholds treaty award against India

The Swiss Federal Supreme Court has rejected India’s challenge to an UNCITRAL award in favour of Deutsche Telekom – marking the second time it has publicly deliberated over an investment treaty case in...

Issue Preclusion in the Holiday Season

In celebration of the recent publication (November 30, 2018) of important sections of the American Law Institute’s Restatement (Second) of the U.S. Law of International Commercial and Investment Arbitration (in an as yet not formally ALI-approved Council Draft), concerning the topic of the issue preclusive (collateral estoppel) effect of international arbitration awards in later US litigation, today’s post will report upon findings of a brief excursion into recent US federal case law to see what the courts have actually been doing in this area. As a foundation for the reader’s appreciation of this report, it seems to suitable to set...
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The post Issue Preclusion in the Holiday Season appeared first on Marc J. Goldstein - Arbitration & Mediation.

Indian couple’s claim against Macedonia underway

Nigerian arbitrator Funke Adekoya SAN is presiding over a treaty claim brought against Macedonia by members of a prominent Indian business family who say their mining and quarrying investments were expropriated....

Swissbourgh v Lesotho: Can a Right to Arbitrate be an Investment?

Kluwer Arbitration Blog - Mon, 2018-12-10 16:08

Jack Wass

In a conventional investment dispute, the claimant seeks compensation for the impairment of its substantive investment in the territory of the host state. Swissbourgh Diamond Mines (Pty) Ltd v Lesotho arose out of mining investments made by the claimants in Lesotho in the 1990s. However, this arbitral proceeding was not concerned directly with the impairment of the claimants’ underlying investment. Rather, they alleged that Lesotho was liable for frustrating the claimants’ ability to bring their underlying investment claim in a particular forum.

The claimants alleged that Lesotho had participated in the unlawful dissolution of a tribunal established pursuant to the Treaty of the Southern African Development Community (SADC Tribunal) after the claimants had submitted their expropriation claim to that tribunal, but before the claim was resolved. This prevented them seeking recourse for the underlying expropriation. The claimants brought a separate arbitration, administered by the Permanent Court of Arbitration and seated in Singapore, under Annex 1 to the Protocol on Finance and Investment of the SADC (the Investment Protocol).

The PCA Tribunal granted an order that a new tribunal be established to hear the underlying claim,1) Swissbourgh Diamond Mines (Pty) Ltd v Kingdom of Lesotho (Sir David A R Williams QC, R Doak Bishop and Justice Petrus Millar Nienabar (dissenting in part)). jQuery("#footnote_plugin_tooltip_4723_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Lesotho applied to set aside the award. The Singapore Court of Appeal, in a unanimous judgment delivered by Sundaresh Menon CJ, upheld the High Court’s decision that the PCA Tribunal did not have jurisdiction and that the award had to be set aside.2) Swissbourgh Diamond Mines (Pty) Ltd & ors v Kingdom of Lesotho [2018] SGCA 81. jQuery("#footnote_plugin_tooltip_4723_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The Court of Appeal dealt with four issues:

  • First, it held that where a dispute fell outside the scope of an arbitration clause, then Article 34(2)(a)(iii) of the UNCITRAL Model Law allowed the award to be set aside;
  • Second, it held that Lesotho was not ‘bound to accept’ the jurisdiction of the PCA Tribunal;
  • Third, it held that the PCA Tribunal did not have jurisdiction over the claim; and
  • Fourth, it found that the claimants may not have exhausted local remedies before bringing the arbitral claim.

In this post I will focus on the second issue, and conclude with some brief thoughts on the third.

The claimants alleged that by making various public and private statements, Lesotho committed to accepting the jurisdiction of the PCA Tribunal, and that the respondent should not be permitted to approbate and reprobate on that question. Either Lesotho’s statements constituted binding unilateral declarations to accept the jurisdiction of the Tribunal, or Lesotho was estopped from denying that it had done so. The statements in question fell into three categories: (i) political statements to SADC organs that the claimants would be permitted to pursue their claims in other fora; (ii) submissions in the course of the Tribunal’s hearing phase that the claimants should have the opportunity to pursue their claims if the Tribunal found that it had jurisdiction; and (iii) a freestanding offer to have the claim arbitrated in another SADC state, which was rejected.

In principle, the second and third questions ought to have been addressed in the reverse order: only if the Court found that the Tribunal lacked jurisdiction did any question of relying on Lesotho’s statements arise. The claimants’ case was that if the Tribunal lacked jurisdiction, then Lesotho was precluded from relying on that absence because of the statements it had made.3) Chagos Marine Protected Area (Mauritius v United Kingdom), 18 March 2015, para 437, citing Case Concerning the Temple of Preah Vihear (Cambodia v Thailand) [1962] ICJ Rep 6, Judge Fitzmaurice Sep Op, 63. jQuery("#footnote_plugin_tooltip_4723_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The question of whether a claimant can invoke estoppel (or its related doctrines, acquiescence and binding unilateral declarations) to establish the jurisdiction of a tribunal is unsettled. The International Court of Justice controversially held that the United States was precluded from denying the Court’s jurisdiction in the Nicaragua Case,4) Military and Paramilitary Activities in and Against Nicaragua (Nicaragua v United States of America) (Jurisdiction) [1984] ICJ Rep 392, 410–1 jQuery("#footnote_plugin_tooltip_4723_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and more recently a minority of the International Tribunal on the Law of the Sea argued that Ghana was estopped from denying the Tribunal’s jurisdiction over Argentina’s claim in respect of the ARA Libertad.5) The ‘ARA Libertad’ Case (Argentina v Ghana) (Provisional Measures) [2012] ITLOS Rep 332, Judges Wolfrum and Cot Sep Op, paras 68–9 jQuery("#footnote_plugin_tooltip_4723_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Critics argue that since the jurisdiction of an international tribunal is founded on consent, a respondent by definition cannot be precluded from contesting jurisdiction: either they consented or they did not. In Swissbourgh, the Court did not see anything objectionable in principle to the idea that a respondent state may be precluded from contesting the jurisdiction of an arbitral tribunal. As I have argued elsewhere,6) Jack Wass ‘Jurisdiction by Estoppel and Acquiescence in International Courts and Tribunals’ (2016) 86(1) British Yearbook of International Law 155. jQuery("#footnote_plugin_tooltip_4723_6").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the application of estoppel reinforces rather than undermines the consensual nature of international jurisdiction: where a state has made an unequivocal representation that it will not dispute the jurisdiction of a tribunal, and the claimant has relied upon that representation to its detriment, it would be contrary to the underlying principle of good faith for the respondent to resile from it. Reliance on unilateral declarations can be justified on the same basis.

But the significant consequences of such a finding demand strict adherence to the elements of estoppel: an unambiguous representation, reliance, and detriment.7)It is sometimes said that benefit to the representor is sufficient, and detriment to the representee is not required; this theory is rejected in Wass at 165. jQuery("#footnote_plugin_tooltip_4723_7").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Court of Appeal rightly found that these elements were not satisfied: most importantly, Lesotho’s statements were not directed at the jurisdiction of the PCA Tribunal, but were directed at the merits question of whether the claimants should have an alternative forum available, and in some cases were expressly conditional on the PCA Tribunal having jurisdiction in the first place. There is an understandable temptation to restrain a state from adopting inconsistent positions generally, but the fundamentality of consent means that a tribunal cannot equate the state’s position on the merits with acceptance of jurisdiction to determine the substance, unless the state has made an unequivocal statement to that effect.8)It was for this reason that I argue the Separate Opinion in the ARA Libertad case was wrong: see Wass at 171. jQuery("#footnote_plugin_tooltip_4723_8").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Since Lesotho was free to deny that the PCA Tribunal had jurisdiction, the Court was then required to determine whether it did so under Annex 1 to the Investment Protocol. It emphasized the need for a territorial nexus between the investment and the host state. Although the Court did accept that an investment consists of a bundle of rights which includes the secondary right to seek remedies and vindicate the primary right, the right to refer the underlying claim to the SADC Tribunal did not have the necessary territorial nexus since it existed only on the international plane and beyond Lesotho’s enforcement jurisdiction; the only investment left was the original mining leases, which did not carry an obligation to guarantee that the SADC claim would be heard. It followed that the PCA Tribunal had no jurisdiction over the claim in relation to the dissolution of the SADC Tribunal, and the award had to be set aside. Although the Court relied on the ‘generally accepted principle in international investment law’ of territoriality, that limitation is usually invoked to ensure that the underlying activity constituting the investment has the necessary economic link with the host state to justify the protection of the treaty.9)See, for example, the decision of the majority in Abaclat v Argentina (Decision on Jurisdiction and Admissibility) ICSID Case No ARB/07/5 (2011, Tercier P, van den Berg & Abi-Saab (dissenting)), para 374. jQuery("#footnote_plugin_tooltip_4723_9").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In the Court of Appeal’s conception, that criterion also serves to distinguish between matters within and beyond the enforcement jurisdiction of the host state.

The result in Swissbourgh may seem harsh. The claimants had a genuine underlying investment. They claimed that the investment had been expropriated and that they had possessed the right to refer that dispute to the SADC Tribunal. Lesotho participated in a process that foreclosed that avenue, leaving the claimants without recourse. In those circumstances it would have been tempting to find a remedy. However, adherence to fundamental principles of international jurisdiction did not allow the Court to do so.

References   [ + ]

1. ↑ Swissbourgh Diamond Mines (Pty) Ltd v Kingdom of Lesotho (Sir David A R Williams QC, R Doak Bishop and Justice Petrus Millar Nienabar (dissenting in part)). 2. ↑ Swissbourgh Diamond Mines (Pty) Ltd & ors v Kingdom of Lesotho [2018] SGCA 81. 3. ↑ Chagos Marine Protected Area (Mauritius v United Kingdom), 18 March 2015, para 437, citing Case Concerning the Temple of Preah Vihear (Cambodia v Thailand) [1962] ICJ Rep 6, Judge Fitzmaurice Sep Op, 63. 4. ↑  Military and Paramilitary Activities in and Against Nicaragua (Nicaragua v United States of America) (Jurisdiction) [1984] ICJ Rep 392, 410–1 5. ↑ The ‘ARA Libertad’ Case (Argentina v Ghana) (Provisional Measures) [2012] ITLOS Rep 332, Judges Wolfrum and Cot Sep Op, paras 68–9 6. ↑ Jack Wass ‘Jurisdiction by Estoppel and Acquiescence in International Courts and Tribunals’ (2016) 86(1) British Yearbook of International Law 155. 7. ↑ It is sometimes said that benefit to the representor is sufficient, and detriment to the representee is not required; this theory is rejected in Wass at 165. 8. ↑ It was for this reason that I argue the Separate Opinion in the ARA Libertad case was wrong: see Wass at 171. 9. ↑ See, for example, the decision of the majority in Abaclat v Argentina (Decision on Jurisdiction and Admissibility) ICSID Case No ARB/07/5 (2011, Tercier P, van den Berg & Abi-Saab (dissenting)), para 374. 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: Arbitration in Belgium: A Practitioner’s Guide
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The Contents of Journal of International Arbitration, Volume 35, Issue 6, 2018

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Maxi Scherer

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

Gordon Blanke, Free Zone Arbitration in the United Arab Emirates: DIFC v. ADGM (Part II)

This is Part II of a two-part article that deals with the phenomenon of free zone arbitration in the United Arab Emirates.  Part I, which was published in the last issue of this journal, discussed in some detail the concept and practice of free zone arbitration in the Dubai International Financial Centre (DIFC).  This Part II discusses free zone arbitration in the more recently established Abu Dhabi Global Market (ADGM) and highlights the main differences between the two.  In doing so, Part II will take a closer look at the judicial and legislative framework of the ADGM, including in particular the main provisions and the operation of the 2015 ADGM Arbitration Regulations, the institutional framework of arbitration in the ADGM, the curial function of the ADGM Courts in ADGM-seated arbitrations and the recognition and enforcement of domestic (non-)ADGM and foreign arbitral awards in the ADGM.  Part II also explores to what extent the ADGM Courts are envisaged to serve as a host or conduit jurisdiction in the terms proposed and practiced by their DIFC counterparts.

Heiko A. Haller & Annette Keilmann, In Claimant’s Hands? Admissibility and Consequences of a Withdrawal of Claim in International Arbitration

The withdrawal of claim is not explicitly dealt with in most arbitral rules.  As a consequence, it can be unclear whether a withdrawal is without prejudice or with prejudice (i.e., a ‘waiver’ of the claims).  Also, it is questionable whether, in case of a withdrawal with prejudice, the respondent is entitled to object to a withdrawal.  Finally, there may be doubt whether a cost decision has to be taken and who decides on the allocation of the costs when a claim is withdrawn.  This article concludes that – unless the claimant clarifies that its withdrawal is one with prejudice – the withdrawal is only without prejudice.  The respondent may object to such withdrawal.  From the moment when the respondent has received the detailed request for arbitration or the statement of claim, even the respondent’s consent is required.  Regarding a withdrawal with prejudice, no consent of the respondent is needed.  Finally, although any effective withdrawal of a claim terminates the arbitration proceedings with immediate effect, the arbitral tribunal remains competent to decide on the allocation of the costs of the proceedings.

Joachim Drude, Fiat Iustitia, Ne Pereat Mundus: A Novel Approach to Corruption and Investment Arbitration

Corruption has existed forever.  Notwithstanding a seemingly universal condemnation as reflected in a number of international conventions, levels of corruption continue to be quite high across the globe.  The public sector is most troubled with it.  There are countries where grand corruption deeply rooted at highest government levels constitutes the very essence of state policy.  This article analyses whether it is appropriate in the investment arbitration context to deny contracts or investments procured by corruption any form of protection as the tribunals in World Duty Free, Metal-Tech and Spentex have done, relying on considerations of international (transnational) public policy.  Based on a comparative analysis of how several jurisdictions deal with the issue, the article concludes that, subject to certain limitations, it is not against international (transnational) public policy to accord protection to contracts and investments tainted by corruption.

NOTES SECTION 

Shaun Pereira, Deferred Challenges to Jurisdiction Under the Model Law

This note discusses a recent decision of the Singapore High Court, which decided that a party’s failure to bring a challenge against an arbitral tribunal’s preliminary ruling on jurisdiction under Article 16 of the UNCITRAL Model Law precluded that party from applying to set aside the merits award on the jurisdictional grounds which could have been challenged earlier.  This note argues that a better interpretation of the Model Law is that parties are entitled to choose between the two alternatives of a challenge under Article 16 or a subsequent setting-aside application on those jurisdictional grounds.  That interpretation is more consistent with the drafting history of the Model Law and makes good practical sense, and any undesirable conduct can be adequately regulated through the cognate doctrines of waiver and estoppel.

BOOK REVIEWS

Patrick Dumberry, A Guide to State Succession in International Investment Law, 1st edition, Edward Elgar Publishing 2018, ISBN: 978-1788116602 (reviewed by Dr Hanno Wehland)

Jose Daniel Amado, Jackson Shaw Kern & Martin Doe Rodrigues, Arbitrating the Conduct of International Investors, 1st edition, Cambridge University Press 2018, ISBN: 9781108415729 (reviewed by Dr Crina Baltag)

More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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