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2021 in Review: Commercial Arbitration Highlights in LatAm

20 hours 11 min ago

In 2021, Latin American countries continued to struggle with the adverse effects of the COVID-19 pandemic.  Accordingly, legislative and jurisprudential developments on arbitration-related issues were also affected given that the governments were focused on reactivating local economies, vaccinating their citizens, and launching tax and labor reforms.  In addition, presidential elections also marked political shifts for countries such as Ecuador, Peru, and Chile, thereby moving the focus on the new administrations’ new policies.

Notwithstanding this, the private sector was still eager to promote the use of arbitration in the region.  In fact, several arbitral institutions in the region launched new arbitration rules to ‘catch up’ with international arbitration rules and reflect the use of technologies in arbitration proceedings amidst the ‘new normal’.

Below, we will discuss the most relevant developments in the region.

 

Proactiveness from local arbitral institutions

In June 2021, the Arbitration Center of the American-Peruvian Chamber of Commerce (AMCHAM Peru) published new Arbitration Rules, which entered in force in July 2021, replacing the 2013 Arbitration Rules.  The rules incorporate provisions on the scrutiny of awards, multiparty and multiple-contract arbitrations, publication of awards, and the composition of arbitral tribunals.  Likewise, the Arbitration Center of the American-Ecuadorian Chamber of Commerce (AMCHAM Ecuador) also launched new Arbitration Rules in July 2021, which replaced its 2010 Arbitration Rules. Among other changes, the new rules (i) include the possibility to consolidate two or more arbitrations under certain circumstances; (ii) set forth a procedure to appoint arbitrators absent an agreement between the parties; (iii) amend the procedure to challenge arbitrators providing for a ten-day term to challenge any arbitrator following the notification of the acceptance of the appointment; (iv) provide for the possibility to resort to the IBA Guidelines on Conflicts of Interest in International Arbitration and the IBA Rules on the Taking of Evidence in International Arbitration when appropriate; (iv) include the possibility to conduct the arbitration proceedings virtually; and (v) set forth the possibility to appoint an emergency arbitrator.

In addition, as Renata Steiner and Carlos Selias reported, in November 2021, the Center for Studies and Research in Arbitration from the University of São Paulo published a report on challenges to arbitrators in domestic proceedings in Brazil. The initiative analyzed data from ten challenges in arbitral proceedings that the Câmara de Mediação e Arbitragem Empresarial – Brasil (CAMARB) administered, and has provided the Brazilian arbitral community with transparency on the standards applicable to arbitrator challenges in the country.

Paraguay and Uruguay similarly experienced developments in arbitration rules.  On November 12, 2021, the Paraguayan Arbitration and Mediation Center (CAMP) issued new Arbitration Rules which now incorporate emergency arbitration proceedings, rules for expedited procedures, and procedures for multi-party and multi-contract arbitrations.  Likewise, the Center of Conciliation and Arbitration of the Stock Market of Uruguay issued new Arbitration Rules, focusing on new procedural issues very much in line with modern arbitration rules and displacing the old rules contained in the Uruguayan Procedural Code.  The rules now address (i) the issuance of Terms of Reference, the conduct of a case management hearing, and the issuance of a procedural calendar; (ii) the possibility to request interim measures before local courts, the arbitral tribunal, and an emergency arbitrator; (iii) submitting written witness statements and expert reports; and (iv) expedited procedure applicable to matters up to US$ 200,000, and other matters where the parties opt in.

 

Brazil: surprisingly active despite being one of the countries most impacted by the COVID-19 pandemic

In 2021, Brazil reported the highest number of legislative and judicial developments, confirming that it is a hot spot for arbitration disputes in the region.  Our interview with Eleonora Coelho, President of the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada (CAM-CCBC), revealed how Brazil is an attractive forum for Portuguese language arbitration disputes and how the Center has successfully increased the numbers of domestic and international disputes it administers in the last thirty years.

Unlike the rest of the region, Brazil did face a series of legislative and jurisprudential developments, which were reported in 2021:

  • On January 23, 2021, the New Brazilian Insolvency Act entered into force, which for the first time, regulated the interaction between insolvency and arbitration. As Andre Luis Monteiro discussed here, the act adopts an arbitration-friendly approach clarifying that the commencement of a judicial reorganization proceeding or the issuance of a winding-up order (i) does not permit the trustee/liquidator to discharge the arbitration agreement, or prevent arbitrations from starting or continuing; and (ii) does not negate the arbitrability of claims made against the insolvent party.
  • Thiago Marinho Nunes reported on a controversial decision dated March 2, 2021 from the Appellate Court of São Paulo, which found that Article 189(IV) of the Brazilian Civil Procedure Code, which provides for the confidentiality of court documents relating to arbitration proceedings, was unconstitutional. Although the decision may still be reversed in the future, its holding affects one of the essential features of commercial arbitration, i.e. confidentiality.
  • In a case introduced by Maúra Guerra Polidoro earlier this year, the courts considered a party’s request for a supplemental arbitral award, on the basis that a prior arbitral award was issued infra petita. The case arose from a request for emergency relief that a party filed to suspend ongoing arbitral proceedings before CAM-CCBC, until the First Corporate and Arbitration Conflicts Court decided if the supplemental award was necessary. While the first instance court rejected the petition, the appeals court granted it. The case is awaiting a final decision from Brazil’s Superior Court of Justice.
  • On July 30, 2021, the 2nd Civil Court of the District of São Paulo hearing an annulment petition issued an interim decision partially staying enforcement of an ICC partial award on the basis of a conflict of interest allegation against Mr. Anderson Schreiber.1)The annulment action is under court secrecy, hence the decision is not publicly available. jQuery('#footnote_plugin_tooltip_39486_3_1').tooltip({ tip: '#footnote_plugin_tooltip_text_39486_3_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The annulment action followed an arbitral award rendered in February 2021 in favor of CA Investments SA, a subsidiary of Paper Excellence B.V., in a dispute over the sale of pulp producing company Eldorado Celulose Paper, against respondent J&F Investimentos.  The respondent sought the annulment of the partial award alleging that claimant’s appointed arbitrator, Mr. Schreiber, failed to disclose the fact that his previous law firm shared the same office space with claimant’s former counsel.  Brazilian courts have yet to finally decide on the annulment. The outcome will certainly represent an important development for discussions over arbitrators’ disclosure duties in the country, which we look forward to reporting on in 2022.

 

Ecuador’s pro-arbitration wave: But is the Lasso Administration trying too hard?

The current regime of President Lasso has made a clear statement that it is willing to showcase Ecuador as a reliable jurisdiction for foreign investment.  The first step taken this year was the country’s re-accession to the ICSID Convention.  This initiative was followed by the enactment of Regulations to the 1997 Arbitration and Mediation Law, which as Andrés Larrea reported, seek to limit judicial intervention, reinforce party autonomy, and promote Ecuador as a seat for international arbitration.

In addition, Hugo García and Bernarda Muriel reported that on November 23, 2021, in an effort to audit and reduce the costs the Ecuadorian government has spent in defending international lawsuits, the Office of the Attorney General launched the “Institutional Strengthening of the Attorney General’s Office Project”, an institutional framework for handling disputes brought against the state and state entities.

Despite the new administration’s clear-cut efforts to turn away from the country’s anti-arbitration policy of the last decade, Ecuador still faces challenges given that President Lasso does not have control over other institutions such the National Assembly.  In addition, the government’s pro-investment policy was recently questioned given the Constitutional Court’s recent ruling on the Los Cedros case, where environmental permits granted to Canadian mining company Cornerstone were revoked based on environmental protection concerns.

 

Colombia: Council of State equates arbitrators to judges 

In a decision from October 11, 2021, the Council of State of Colombia (the “Council”) declared that arbitrators are state agents and the Judiciary may be held liable for jurisdictional errors incurred in arbitral awards. The decision arises from a claim filed against the Judiciary for damages arising from a jurisdictional error that a three-member tribunal allegedly committed. The first instance court dismissed the claim on the grounds that the Judiciary could not be held liable for any error attributable to arbitrators who are not state officers and could not be equated to judges. Although the Council upheld the lower court’s decision, it did so on different grounds. The Council confirmed the dismissal of the claim because it found no evidence of the existence of a jurisdictional error but it repudiated the lower court’s reasoning. It held that arbitrators are agents of the state, and that the Judicial Branch is formally and materially accountable for the damages caused by jurisdictional errors contained in arbitral awards. In particular, the Council held that arbitrators may be equated to judicial agents for the purposes of liability for damages and that the Judiciary was entitled to seek reimbursement from them where it is held liable for errors committed in the course of arbitral adjudication.

 

Argentina: a positive note on the enforcement of foreign arbitral awards

During New York Arbitration Week, María Inés Corrá reported on a favorable decision from Argentina’s Supreme Court, which rejected a lower court’s unorthodox application of the grounds to deny the recognition and enforcement of foreign arbitral awards under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “NY Convention”).

Milantic Trans S.A. (“Milantic”) (a Panamanian company) obtained a favorable award against Astillero Río Santiago (a public entity owned by the Province of Buenos Aires, “Astillero”) in an arbitration seated in London. Milantic requested enforcement of the award before Buenos Aires courts and Astillero opposed the petition arguing that the construction contract containing the arbitration clause was invalid because it lacked the legislative authorization required from the government of Buenos Aires. The first instance court dismissed Astillero’s objection and granted the enforcement. Astillero then filed an appeal only against the court’s award of costs. Absent Astillero’s appeal of the court granting the enforcement, the decision became final. The Court of Appeals, however, reversed the first instance decision sua sponte, based on the absence of a valid arbitration clause duly approved by law. The court based its ruling on Article V(2) of the NY Convention, which grants courts the power to review ex officio violations of international public order. The decision was upheld by the Supreme Court of Buenos Aires.

The case ultimately reached the Federal Supreme Court, which reversed the decision on the grounds that the power to consider ex officio the grounds for refusing recognition and enforcement of awards under the New York Convention cannot be exercised in violation of other essential principles such as res judicata, which are also part of international public order.  This decision is clearly a good precedent for the country’s practice on the enforcement of foreign arbitral awards.

 

Conclusion

2021 promised to be different from 2020, but in reality, not many things changed.  With Latin American governments’ ongoing focus on fighting the economic crisis the COVID-19 pandemic caused, and political changes in the region, arbitration-related developments fell short (when compared to prior years).  However, this situation seems to have given arbitral institutions the opportunity to update their arbitration rules to meet internationally accepted practices.

References[+]

References ↑1 The annulment action is under court secrecy, hence the decision is not publicly available. function footnote_expand_reference_container_39486_3() { jQuery('#footnote_references_container_39486_3').show(); jQuery('#footnote_reference_container_collapse_button_39486_3').text('−'); } function footnote_collapse_reference_container_39486_3() { jQuery('#footnote_references_container_39486_3').hide(); jQuery('#footnote_reference_container_collapse_button_39486_3').text('+'); } function footnote_expand_collapse_reference_container_39486_3() { if (jQuery('#footnote_references_container_39486_3').is(':hidden')) { footnote_expand_reference_container_39486_3(); } else { footnote_collapse_reference_container_39486_3(); } } function footnote_moveToReference_39486_3(p_str_TargetID) { footnote_expand_reference_container_39486_3(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_39486_3(p_str_TargetID) { footnote_expand_reference_container_39486_3(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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The New York Convention in the United Arab Emirates: Fifteen Years On

Sat, 2022-01-15 00:53

The United Arab Emirates (“UAE”) adhered to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention (“New York Convention”) in 2006. Joining the New York Convention was done through Federal Decree No. 43 of  2006. This post examines how the New York Convention has been implemented by the Dubai courts fifteen years on.

 

Refusal to Recognize the Foreign Award

In Dubai Court of Cassation No. 403/2020 (Civil), the Dubai Court of Cassation (“Court”) refused the enforcement of an award issued in China on the grounds of public policy. The Court explained that the New York Convention has become part of the country’s legislation and that foreign arbitral awards should be enforced unless one of five instances set out in Article V of the New York Convention is triggered.1)Article V contains the grounds for which the recognition and enforcement of the award may be refused. jQuery('#footnote_plugin_tooltip_39963_6_1').tooltip({ tip: '#footnote_plugin_tooltip_text_39963_6_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  One such ground is where the award violates the public policy of that country. The Court then cited Article III of the New York Convention which provides for enforcement in line “with the rules of procedure of the territory where the award is relied upon”. In this regard, the Court found that “the rules of procedure” refers to any law which governs proceedings and is not limited to the Federal Civil Procedures Law. It was the Court’s view that the Federal Arbitration Law No. 6 of 2018 (“Arbitration Law”) is a procedural law given that  it contains the procedural rules of arbitration and is therefore part of “the rules of procedure” envisaged in Article III of the New York Convention. Article 41.3 of the Arbitration Law stipulates that the arbitrators shall sign the award. The Court was of the opinion that signing an award means signing both the dispositive and the reasoning sections of the award. If the signature has not been placed in both of the sections of the award, the award is deemed to be invalid and this invalidity is one of the reasons to refuse the recognition and enforcement of the award as part of UAE’s public policy. The award in this case contained the signature of the arbitrator on the last page only and not on any parts of the reasoning or the dispositive sections of the award and as such, the Court concluded that the award could not be enforced. The requirement to sign the reasoning and the dispositive has been consistently applied by Dubai courts.

As previously discussed on the Blog here and here, the UAE courts have a rather conservative approach on the issue of a representative’s authority to conclude an arbitration agreement. For example, in Dubai Court of Cassation No. 400/2014 (Commercial), the Court refused the enforcement of an award that was rendered in London on the basis that the signatory of the arbitration agreement was not authorized to agree to arbitration. The Court held that the New York Convention should apply to the recognition and enforcement of the award and found that the award debtor provided evidence demonstrating the lack of capacity of the signatory. Accordingly, the Court relied on Article V(1)(a) of the New York Convention to refuse its recognition and enforcement.

 

Recognition of a Foreign Award

In Dubai Court of Cassation No. 5/2020 (Commercial), the Court reversed the decision of the lower court which had refused enforcement on the basis that the award had not become final in the country of the seat of the arbitration.  The lower court had relied on Article 85.2(d) of the Implementing Regulations of the Civil Procedures Law (“Implementing Regulations”), which requires finality of the judgment in order to enforce a foreign judgment, in its decision refusing enforcement of the award. In particular, the lower court reached this conclusion on the basis of a certificate issued from the Court of Appeal in Beirut demonstrating that the case is still being heard. The lower court concluded that the award is being appealed. The Court clarified that this was an error as the award is not subject to appeal. It appears that the award debtor had filed an action for annulment. One can conclude from the reasoning of the Court that ratification and enforcement would not have been granted If the award was subject to appeal. This is in line with Article V.1(e), which states as one of the grounds for refusing ratification and enforcement, the instance where “The award has not yet become binding on the parties.” When the case was heard before the Court, the award debtor argued that the award was not enforced in the country of the seat, in Lebanon. The Court explained that enforcement in the country of the seat was not a prerequisite and only one of the five instances set out in Article V of the New York Convention can prevent enforcement. The Court explained that the provisions of the international treaties concluded by the UAE take precedence over local legislation. As such, the lower court should have decided the application to enforce the award in line with the New York Convention and not the Implementing Regulations.

In Dubai Court of Cassation No. 693/2015 (Commercial), the award debtor had argued that the arbitration agreement was signed by a person who was not authorized to sign the contract, that the award debtor was not given proper notice of the arbitral proceedings and was unable to present its case. The award debtor argued that the arbitral tribunal had served notice of the proceedings on a commercial agent who was not related to the award debtor and that the latter is an Emirati company, which should be served as per the convention on judicial cooperation concluded between the UK and the UAE. Accordingly, the award debtor argued that the award should not be recognized and enforced on the basis of Articles V.1(a) and (b) of the New York Convention. The Court found that there was no evidence on the incapacity of the signatory under the laws of the award debtor and that it was clear that the debtor had participated in the proceedings. Accordingly, the Court ordered the enforcement of the award under the New York Convention.

In Dubai Court of Cassation No. 384/2016 (Commercial), the Court ordered enforcement of the award in a case that was extensively reported and criticized in the arbitration community (See prior discussion on the Blog here). This case related to an ICC award, which the lower courts refused to recognize on the basis that the UAE and the country of the seat of the arbitration, the United Kingdom, should be members of the New York Convention and that there was no evidence in the casefile that the United Kingdom was a member of the New York Convention. The decision was subsequently reversed by the Court as the Court explained that the United Kingdom had become a member of the New York Convention on 24 September 1975.  It is noteworthy in this decision that the Court highlighted the importance of respecting the international conventions entered into by the UAE with respect to the enforcement of foreign court judgments and arbitral awards amongst which the New York Convention. In this context, the Court reiterated the requirement that a country member to the New York Convention should not impose more burdensome requirements on the enforcement of foreign awards.

In Dubai Court of Cassation No. 132/2012 (Commercial), the award creditor had filed an application for the recognition and enforcement of two awards issued in London while the award debtor filed for the nullification of the awards on multiple grounds such as the incapacity of the signatory of the arbitration agreement, irregularities in the formation of the arbitral tribunal, etc. The Court granted the enforcement  of both the awards dismissing the objections raised by the award debtor. The Court explained that as the UAE was a signatory of the New York Convention, ratification of foreign awards should be in line with the New York Convention. As such, a court may only refuse the recognition of an award if one of the grounds set out in Article V are met and the award debtor in this case had not been able to demonstrate any of the grounds contained in Article V. The Court further explained that there is an assumption that the requirements of arbitral proceedings have been observed and whoever alleges the contrary should provide evidence of such allegations. The Court then dealt with the challenges raised by the respondent and found that these allegations were not proven.

In Dubai Court of Cassation No. 434/2013 (Commercial), the Court rejected the various objections raised by the award debtor and enforced the award issued in Germany on the basis that  foreign awards should be enforced in line with the New York Convention, which the UAE was a member of, and that the enforcement of an award could only be rejected if one of the instances set out in Article V has been met. The decision is discussed in more detail in a prior post. It is worth noting here that the Court mentioned that the award is issued in Germany, which is a country member to the New York Convention and that as such, the requirements of implementing the New York Convention have been met. This indicates that the Court considers it a requirement that the country of the seat be a member of the New York Convention.

 

Final Remarks

It is clear from the reviewed decisions that the courts have a very clear understanding of the application of the New York Convention and that they are consistently implementing its provisions. There seems to be only one issue that the courts are unclear on; It appears from the decisions rendered in Dubai Court of Cassation No. 384/2016 (Commercial) and Dubai Court of Cassation No. 434/2013 (Commercial) that the courts require that the country of the seat be a member of the New York Convention in order to grant ratification and enforcement of the foreign arbitral award. However, the UAE has not entered such a reservation and therefore such a requirement does not apply. Having said that, 169 countries are currently member to the New York Convention. Therefore, the chances of there being an award issued from a country that is not a member and consequently refusing ratification are very low.

It is commendable how strictly the Dubai courts are applying the New York Convention and how errors of lower courts are being rectified at the Cassation level. It is also noteworthy that the courts generally presume that the arbitral proceedings have been conducted correctly unless a party can prove otherwise and they implement Article V in the narrowest way possible. All of this is praiseworthy and demonstrates that the UAE has taken steps in the right direction.

References[+]

References ↑1 Article V contains the grounds for which the recognition and enforcement of the award may be refused. function footnote_expand_reference_container_39963_6() { jQuery('#footnote_references_container_39963_6').show(); jQuery('#footnote_reference_container_collapse_button_39963_6').text('−'); } function footnote_collapse_reference_container_39963_6() { jQuery('#footnote_references_container_39963_6').hide(); jQuery('#footnote_reference_container_collapse_button_39963_6').text('+'); } function footnote_expand_collapse_reference_container_39963_6() { if (jQuery('#footnote_references_container_39963_6').is(':hidden')) { footnote_expand_reference_container_39963_6(); } else { footnote_collapse_reference_container_39963_6(); } } function footnote_moveToReference_39963_6(p_str_TargetID) { footnote_expand_reference_container_39963_6(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_39963_6(p_str_TargetID) { footnote_expand_reference_container_39963_6(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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2021 in Review: Australia, New Zealand and the Pacific Islands

Fri, 2022-01-14 00:00

Last year saw positive movements in Australia, New Zealand and the Pacific Islands to better promote the use of arbitration in the region. Arbitral institution rules were modernised and domestic legal frameworks were introduced all to stimulate arbitration activity. The year also saw a sharp focus on the benefits of empirical studies to understand how arbitration is being used, recent trends, and where improvements can be made.

This post highlights some of the key arbitration-related developments in 2021.

 

Australia

 

Australian Arbitration Report

In March 2021, the findings of Australia’s first empirical study on the use of commercial arbitration were released in the Australian Arbitration Report (Report). The Report outlines the results of a survey of 111 respondents covering 223 unique domestic and international arbitrations involving Australian parties, projects, or expertise between 2016 and 2019.

Some of the key insights of the Report include:

  • The highest number of reported domestic and international arbitration cases was in the construction, engineering and infrastructure industries, accounting for almost 50% of all reported arbitrations.
  • The ICC, SIAC, and UNCITRAL arbitration rules were the most frequently used for international arbitrations, with almost three times as many reported international cases under the UNCITRAL rules as under the Australia Centre for International Commercial Arbitration (ACICA) rules. The most common arbitration rules used for domestic arbitrations were those of the Resolution Institute, ACICA, and UNCITRAL.
  • Singapore was the most frequently recommended and included arbitration seat for international arbitration contract clauses, followed by London and Hong Kong.
  • There remains significant room for improvement in achieving gender diversity in arbitrator appointments and in unlocking greater efficiency in arbitral proceedings.

The Report provides valuable insights on the nature and extent of arbitration activity across Australia. Importantly, it also lays the foundation for more detailed research to come – setting a benchmark that future trends and developments in arbitration activity in Australia can now be measured against.

 

ACICA’s new Arbitration Rules

Along with the appointment of a new President in 2021, ACICA had a busy year releasing an updated version of its Arbitration Rules and Expedited Arbitration Rules in 2021. The rules apply to arbitrations commenced from 1 April 2021.

The rules have been updated since their previous iteration in 2016 to reflect best practice in international arbitration and to reduce costs and delays. Among others, the key changes include:

  • Introducing an express provision for the commencement of a single arbitration dealing with claims under multiple contracts.
  • Requiring tribunals to raise with the parties the possibility of using mediation or other alternative dispute resolution mechanisms.
  • Requiring the disclosure of third-party funding agreements.

The new rules are a welcome change to enhance the arbitration experience for all users, a core focus of the institution.

 

News Media and Digital Platforms Mandatory Bargaining Code

In March 2021, the Australian Parliament introduced a world-first News Media and Digital Platforms Mandatory Bargaining Code (Code).

The Code seeks to support the sustainability of the Australian news media sector by addressing bargaining power imbalances between Australian news businesses and digital platforms (such as Facebook and Google) in the payment for news content shared online. The Code only applies to digital platforms explicitly designated by the Australian Government.

One of the main elements of the Code is the use of compulsory arbitration to resolve disputes, after a failed mediation. Where the parties cannot agree on the remuneration to be paid for news content to be shared on the digital platform, the Code requires the parties to engage in the novel system of “final offer arbitration” (otherwise known as “baseball arbitration”). This system allows each party to submit their final offer to an arbitral tribunal which then determines the remuneration amount.

Despite dismissing strong initial opposition to the Code, the Australian Government has not yet designated any digital platforms to participate in the Code. It remains unclear why this is the case. However, commercial content agreements are reported to have been concluded by Facebook and Google with Australian news businesses outside of the Code.

A review of the Code is expected in early 2022.

 

 Australian case law developments

Last year saw important case law developments at Australia’s intermediate appellate court level for both investor-state and international commercial arbitrations.

In February 2021, the Full Court of the Federal Court of Australia published its decision in Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. [2021] FCAFC 3. The Court upheld an appeal against a decision to recognise and enforce two awards of ICSID against a foreign State under Australia’s International Arbitration Act 1974 (Cth) (IAA). The Court’s decision provides useful clarity on the distinction between the ‘recognition’ of an arbitral award, and its ‘enforcement’ and ‘execution’, and why that distinction matters in response to claims of foreign state immunity from ICSID awards in Australia.  A detailed summary of the decision is available here.

In June 2021, the decision of Hub Street Equipment Pty Ltd v Energy City Qatar Holding Company [2021] FCAFC 110 was handed down by the Full Court of the Federal Court of Australia. The Court considered an appeal against a decision to enforce an arbitral award under Australia’s IAA that was brought primarily on the basis that the constitution of the tribunal was improper. The Court provided useful guidance on a range of matters, including re-iterating the applicable standard of proof for a party seeking to oppose the enforcement of a foreign award under section 8(5) and (7) of the IAA. The Court also considered the bounds of judicial discretion to enforce an arbitral award, where a ground to refuse enforcement is established under section 8(5) of the IAA.

 

New Zealand

In New Zealand, foundations were laid in 2021 for several important arbitration-related developments to come in 2022.

 

Statutory class action and litigation funding regimes

In 2019, New Zealand’s Te Aka Matua o te Ture | Law Commission began its review into whether, and to what extent, class action and litigation funding should be explicitly regulated in New Zealand. The Law Commission released an Issues Paper in December 2020 outlining its “preliminary view” that litigation funding and a statutory class action regime were both desirable. It requested public feedback over the first quarter of 2021 on this view, and the scope and design of any regulation.

The Law Commission is currently reviewing the submissions received and is preparing a final report, which is expected to be released in the first half of 2022.

Arbitration was not expressly cited in the terms of reference of the review. However, it is referenced throughout the Issues Paper, particularly in comparative analysis of class action and third-party funding regulations in jurisdictions such as Singapore, Hong Kong and the United Kingdom.

This year should reveal whether (and, if so, how) any regulatory responses proposed by the Law Commission will specifically address international and domestic arbitration in New Zealand.

 

New Zealand Arbitration Survey

The New Zealand Dispute Resolution Centre is currently analysing the results of a 2021 survey about the practice of arbitration in New Zealand.

The New Zealand Arbitration Survey asked arbitrators to respond to a series of questions about their demographics, background and experience, and the number and kind of arbitrations undertaken in New Zealand in the 2019 to 2020 period.

The responses will feed into a report detailing the findings of the survey – although an expected release date is not yet known.  

 

The Pacific Islands

Over the past five years, the South Pacific has seen ongoing efforts to promote arbitration reforms to spur economic growth and development and encourage a more investor-friendly climate.

There are currently six Pacific Island States that have acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘New York Convention’). Three of those States acceded to the Convention in the past three years – Papua New Guinea (2019), Palau (2020) and Tonga (2020).

In Tonga, 2021 saw the commencement of a domestic legislative framework based on the UNCITRAL Model Law, albeit with some key differences that contributors to this blog have highlighted. These reforms follow similar efforts by Fiji in the enactment of its International Arbitration Act 2017, and by Papua New Guinea with its draft Arbitration Bill 2019 (which has not yet passed its National Parliament).

Back in November 2016, the Asian Development Bank outlined its regional technical assistance support to promote international arbitration reform in the South Pacific. Among other initiatives, this led to the Third South Pacific International Arbitration Conference held in Sydney, Australia in March 2021 – which was described as the “culminating event” of the regional technical assistance. The conference explored the topic of de-risking investment in the South Pacific through a world-class international arbitration disputes regime.

The above arbitration reform efforts and developments also run parallel to broader trade and investment initiatives to strengthen economic development in the region. In December 2020, the Pacific Agreement on Closer Economic Relations Plus (‘PACER Plus’) entered into force – a multilateral trade and development agreement involving Australia, New Zealand, and six Pacific Island States (Samoa, Kiribati, Tonga, Solomon Islands, Niue and Cook Islands). Three additional States (Nauru, Tuvalu and Vanuatu) have signed but have yet to ratify the agreement. All Pacific Islands Forum members (18 in total) have been encouraged to join.

In short, momentum is building in the South Pacific to establish and modernise the practice of arbitration. It will be exciting to watch this region over the years to come as it actively pursues the economic benefits and investor confidence to be gained from arbitration reform.

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Regime Interaction in Investment Arbitration: EU Law; From Peaceful Co-Existence to Permanent Conflict.

Thu, 2022-01-13 00:30

Once upon a time, not so long ago, the two legal orders of on the one hand, international investment law (i.e., International Investment Agreements (IIAs) and investor-State arbitration provisions (ISDS)), and on the other hand, EU law, were peacefully co-existing next to each other with only occasional contact.

Indeed, it was the time when the EU Member States were responsible for the conclusion of roughly half of the 3,000+ IIAs worldwide. It was also the time when the EU and its Member States unconditionally signed up to the Energy Charter Treaty (ECT) and its ISDS provisions. It was also the time when the EU was actively encouraging its candidate members to sign IIAs in order to provide additional legal stability and thereby attracting desperately needed foreign investments before acceding to the EU.

So, while the number of concluded IIAs steadily continued and as a consequence, also the number of ISDS disputes to more than 1,100 according to the UNCTAD investment policy hub, significant changes took place within the EU legal order, which rather abruptly ended the harmonious time by ushering in the current status of permanent conflict between those two legal orders.

 

The Journey of Creating and Escalating a Conflict that did not Exist Before

The first signs of a potential conflict between these two legal orders emerged in the Eastern Sugar case decided in 2007. In that case, the Czech Republic had raised several EU law objections against the jurisdiction of the arbitral tribunal, which, however, were all rejected.

It was the 2018 Achmea judgment by the Court of Justice of the EU (CJEU), which provided the justification of the EU Member States to sign the Termination Agreement in 2020  aimed at terminating almost all intra-EU BITs. It should be noted that not all 27 EU Member States have signed the Termination Agreement.

In parallel, the European Commission continued to escalate the conflict by intervening in practically all intra-EU disputes (both based on intra-EU BITs and the ECT) as amicus curiae before arbitral tribunals as well as before domestic courts. However, so far, the European Commission has not been successful in convincing arbitral tribunals of its position that EU law prevents them from exercising their jurisdiction.

In contrast, domestic courts of EU Member States are applying the Achmea judgment, as the Frankfurt Court and the German Federal Supreme Court have done in the Austria’s Raiffeisen Bank v. Croatia case.

Moreover, in an unprecedented act, the European Commission prohibited Romania to fulfil its international obligations by paying out the Micula award because that would supposedly constitute new, illegal state-aid. The Micula brothers have successfully brought an action against the European Commission before the General Court of Justice of the EU. However, the European Commission has appealed, which means a final decision is still pending. Meanwhile, Advocate General Szpunar has opined that the General Court’s judgment should be set aside.

Most recently, the European Commission has launched infringement proceedings against several EU Member States (Austria, Sweden, Belgium, Luxembourg, Portugal, Romania and Italy) for their failure to terminate their intra-EU BITs.

 

The Spill-Over Effect onto the ECT

Whereas until the CJEU’s Komstroy judgment one could confidently argue that the impact and fallout of the Achmea judgment and the post Achmea actions taken by the EU Member States remained limited to intra-EU BIT situations, it has now been confirmed by the Komstroy judgment that the fallout of Achmea equally applies to ECT disputes having a connection in the EU.

I am deliberately referring to cases “having a connection in the EU” since Komstroy did not involve an EU investor nor an EU Member State. Also, no EU law question was at issue. The only connecting factor was the fact that Paris was the seat of arbitration. Consequently, Komstroy is not an intra-EU ECT dispute, and therefore it cannot be equalized with Achmea, despite the fact that this is what the CJEU did.  Instead, Komstroy was an extra-EU ECT dispute, and the Komstroy judgment of the CJEU has effectively extra-territorial impact onto the rights and obligations of non-EU ECT Contracting Parties, and by extension, their investors.

Obviously, the CJEU is not competent to diminish the rights and obligations of non-EU ECT Contracting Parties and/or their investors. Therefore, the Komstroy judgment is an example of an extraterritorial overreach of the CJEU’s powers.

In any event, the message of the CJEU is clear: ISDS arbitration based on the ECT is banned within the EU – irrespective of whether it concerns intra-EU disputes or not.

This sweeping approach is unsurprisingly congruent with the Political Declaration that was signed by the majority of the EU Member States in 2019, which also extended the Achmea judgment to ECT disputes (see Points 1 and 9). However, the Political Declaration was a legally non-binding statement, whereas the legally binding Termination Agreement signed in 2020 explicitly states in the Preamble that it does not apply to the ECT. 1)CONSIDERING that this Agreement addresses intra-EU bilateral investment treaties; it does not cover intra-EU proceedings on the basis of Article 26 of the Energy Charter Treaty. The European Union and its Member States will deal with this matter at a later stage; […] Available at:https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:22020A0529(01)&from=EN jQuery('#footnote_plugin_tooltip_38720_12_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38720_12_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); This is because currently the ECT is being renegotiated, so the EU Member States decided not to deal with the ECT in the Termination Agreement itself.

Hence, the Komstroy judgment even overreached the intentions of the EU Member States, if one agrees with this author, that Komstroy was in fact an extra-EU ECT dispute.

 

The Autonomy, Uniformity and Supremacy of EU Law are Alien Principles to Public International Law

After having described on a very high level the journey of the creation and escalation of the conflict between international investment law and EU law, it is equally important to take a step back and identify the root cause of this dilemma.

Essentially, it all boils down to the protection of the principles of autonomy, consistency, uniformity, full application and supremacy of EU law, and by extension, the ultimate interpretative authority of the CJEU as the highest court of the continent – at all times and in all cases. The CJEU referred to these principles in Achmea, Komstroy and PL Holdings as the main reasons for banning ISDS.

This is not the first time that the CJEU considered it necessary to rely on the most fundamental principles of EU law in order to protect its final authority against public international law influences. Indeed, a decade earlier in the seminal Kadi case concerning the alleged supremacy of UN Security Council Resolutions based on Article 103 of the UN Charter, the CJEU clearly stated that the autonomy and supremacy of the EU legal order cannot be affected by any international treaty. In fact, the CJEU has displayed a similar attitude towards the European Court of Human Rights (ECHR) and the WTO Appellate Body.

Coming back to investment law, the question that needs to be asked is: Can an international arbitral tribunal that is deciding a specific case be able to endanger the autonomy, consistency, uniformity, full application or supremacy of the EU legal order to any discernible level? A legal order developed over the past 50 years with such a solid constitutional foundation and a supreme court that is more powerful than any other (international or constitutional) court in the world. Could the Achmea or Komstroy arbitral tribunals seriously have been ever in a position to be the slightest threat to these fundamental principles of EU law?

Even if, for the sake of argument, we would assume that this would have been theoretically possible, Advocate General Wathelet proposed in his Opinion in Achmea the simple solution for avoiding this permanent conflict: namely, to allow or even require arbitral tribunals to request preliminary rulings from the CJEU in case EU law issues are at stake.

In fact, this is precisely the solution that the Andean Community Court of Justice, the equivalent of the CJEU, adopted. Accordingly, this conflict between EU law and international investment law could have easily been avoided.

The simple point is that all these EU law principles work very well internally but are alien at the public international law level where all international treaties are treated equally (with the exception of Article 103 UN Charter). In other words, the horizontal nature of public international law simply clashes with the vertical, supremacy, and autonomy-loaded, EU legal order.

 

The Frantic Search for Alternatives

Obviously, the CJEU, the European Commission and the Member States will not change their quest to significantly modify or even completely eradicate ISDS arbitration. That quest is already ongoing at the UNCITRAL Working Group III on ISDS reforms with the proposal of replacing ISDS with a permanent multilateral investment court (MIC).

As Gary Born warned years ago, winter has come for investors and the arbitration community. At the same time, the Rule of Law level is backsliding – not only in Europe. Thus, investors remain in need of investment protection and effective dispute settlement tools.

 

So, What are the Alternatives?

First, the main advice is to stay out of the EU – for both – structuring investments and using European IIAs. Instead, commercial arbitration could theoretically provide an alternative for some investors and for certain investments based on contracts with State entities.  However, the PL Holdings judgment may have already crushed any such hopes in this regard.

Second, the seat of arbitration should preferably be outside of the EU to avoid the interference of the CJEU and the European Commission.

Third, and for the same reasons, enforcement and recognition of awards should be sought outside the EU.

Thus, while the EU is rapidly becoming an arbitration-hostile jurisdiction, other more arbitration-friendly jurisdictions such as the UK, Switzerland, Singapore, and the US are increasingly benefitting from these developments.

Nonetheless, despite these potential alternatives, the fact remains that those may only be available for a select group of large investors, while for the vast majority of the investors, investment protection and access to arbitration have been effectively and permanently curtailed by the very same EU, which –ironically – as per Article 21 (1) of the TEU:

[…]seeks to advance in the wider world: democracy, the rule of law, the universality and indivisibility of human rights and fundamental freedoms, respect for human dignity, the principles of equality and solidarity, and respect for the principles of the United Nations Charter and international law.

 

 

To read our coverage of regime interaction in investment arbitration, click here.

 

References[+]

References ↑1 CONSIDERING that this Agreement addresses intra-EU bilateral investment treaties; it does not cover intra-EU proceedings on the basis of Article 26 of the Energy Charter Treaty. The European Union and its Member States will deal with this matter at a later stage; […] Available at:https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:22020A0529(01)&from=EN function footnote_expand_reference_container_38720_12() { jQuery('#footnote_references_container_38720_12').show(); jQuery('#footnote_reference_container_collapse_button_38720_12').text('−'); } function footnote_collapse_reference_container_38720_12() { jQuery('#footnote_references_container_38720_12').hide(); jQuery('#footnote_reference_container_collapse_button_38720_12').text('+'); } function footnote_expand_collapse_reference_container_38720_12() { if (jQuery('#footnote_references_container_38720_12').is(':hidden')) { footnote_expand_reference_container_38720_12(); } else { footnote_collapse_reference_container_38720_12(); } } function footnote_moveToReference_38720_12(p_str_TargetID) { footnote_expand_reference_container_38720_12(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38720_12(p_str_TargetID) { footnote_expand_reference_container_38720_12(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Regime Interaction in Investment Arbitration: Looking Forward, Looking Back on the Vienna Convention on the Law of Treaties as a Disciplining Force in International Investment Disputes

Thu, 2022-01-13 00:00

In 2011, in an article titled ‘W(h)ither Fragmentation? On the Literature and Sociology of International Investment Law’, Professor Stephan Schill reflected on the prior decade of scholarly and practical developments in international investment law (IIL). He referred to the boom in specialised scholarship and the more than 400 investor-State disputes then in existence as reasons to reflect on the status of the field.

Today, a further decade later and at the dawn of a new year, his words and efforts seem even more poignant. The quantity and quality of IIL scholarship has continued to dramatically grow, which is unsurprising with more than 1,100 investor-State disputes now recorded by UNCTAD – a figure that is current as of December 2020 and reflects that more than half of the recorded disputes came into existence after Schill’s article was published.

Each newly registered dispute presents a fresh opportunity to question whether the investor-State dispute settlement (ISDS) system remains fit for purpose – as both a system and a mechanism. Indeed, as presaged in a post by Maria José Alarcon and Sebastian King last week, the field is at a crossroads. Many of its criticisms are actively under debate at ICSID as part of its Rule Amendment Project. A parallel and broader initiative for modernisation and reform continues through UNCITRAL Working Group III, where the discussion has now turned to establishment of a standing first instance and appellate multilateral investment court, with full-time judges, as a solution to the risk of fragmentation of the discipline.

A common impetus for these efforts is the concern articulated by the International Law Commission of the United Nationals (ILC) in its 2006 report, ‘Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law’ (ILC 2006 Report). In his 2011 article, Schill examined the ILC 2006 Report and focused on fragmentation within IIL, a phenomenon that is not monolithic. There is fragmentation that arises out of regime interaction, where each of the various public international law disciplines (such as trade law, human rights law, and law of the sea) progresses, grows, and dovetails with one another. There is also fragmentation that emerges from the interaction of the multitude of instruments, approaches, and piecemeal decisions within each of these defined disciplines. The ILC 2006 Report sought to examine both categories of ‘conflict’ to present avenues for harmonisation and systemic integration.

While these forward-looking efforts are crucial to maintenance of a transnationalist approach to the international legal order, it is also worthwhile to reflect on the existing public international law toolkit. Accordingly, this post shines the spotlight on the Vienna Convention on the Law of Treaties (VCLT) as a disciplining force in ISDS. It argues that the VCLT, as demonstrated through the path to its preparation, and its text, evidences that the ILC foresaw the risk of fragmentation and the VCLT’s rules of interpretation, in particular Articles 31 and 32, provide an effective means for harmonisation and systemic integration in IIL.

 

The Post-World War II International Legal Order: The Winding Road To the VCLT

Following World War II, the international community crafted a new worldview. Driven by a philosophy of transnationalism, States designed a modern framework for international relations.1) See generally Barry E. Carter, Making Progress in International Institutions and Law, in PROGRESS IN INTERNATIONAL LAW 51–68 (Russell A. Miller & Rebecca M. Bratspies ed., 2008). jQuery('#footnote_plugin_tooltip_38716_15_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38716_15_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); They collectively agreed to no longer tolerate unilateral tactics and instead adopted transnational rules, derived from multilateral and bilateral agreements, systems of global trade, established international norms, and decisions by international tribunals.2) See generally Myres S. McDougal & Florentino P. Feliciano, International Coercion and World Public Order: The General Principles of the Law of War, 67 YALE L.J. 771 (1958). See also Thomas G. Weiss, The United Nations: Before, During and After 1945, 91 INT’L AFF. 1221, 1226–29 (2015). jQuery('#footnote_plugin_tooltip_38716_15_2').tooltip({ tip: '#footnote_plugin_tooltip_text_38716_15_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Key institutions emerging from this new legal order included the United Nations, the World Trade Organisation, and various international courts and tribunals. Decades later, this transnational system is the backbone of our international law toolkit. It informs approaches to international affairs, human rights, foreign policy, business transactions, and related disputes. ISDS mechanisms, embodied in more than 3,300 independent bilateral and multilateral investment agreements (collectively, international investment agreements, IIAs), form a part of this transnationalist system.

As discussed in a prior post co-authored with Dr Esmé Shirlow, at its first session in 1949 the ILC identified the law of treaties as a high priority topic. At that time, the customary international law rules relevant to the negotiation, validity, and interpretation of treaties had grown to become a fairly comprehensive body of rules and it seemed opportune to codify these rules. The ILC appointed four successive Special Rapporteurs for the topic and kept the topic of the law of treaties on its agenda from 1949 through to 1966. In its sessions, the ILC considered the Special Rapporteurs’ research and work product, information provided by governments, and documents prepared by the United Nations Secretariat.

It was only under Sir Humphrey Waldock’s leadership that it was determined that the best way forward would involve draft articles capable of serving as a basis for an international convention. His six reports enabled the Commission in 1966 to submit a final draft to the UN General Assembly and to recommend that the Assembly convene an international conference to conclude a convention on the subject. The Vienna Conference on the Law of Treaties was thus held from 26 March to 24 May 1968 and 9 April to 22 May 1969. As a result, the VCLT  was adopted and opened for signature on May 23, 1969, and entered into force on January 27, 1980.

 

The VCLT’s Universal Rules of Interpretation

In the intervening decades, the VCLT has become universally regarded as one of the most important instruments of treaty law. It has been ratified by 116 States and even some non-ratifying States (such as the United States) recognise parts of the VCLT as a restatement of customary international law. Along these lines, the VCLT offers solutions to modern concerns over the fragmentation. With respect to interpretation, Article 31 sets out the so-called ‘general rule of interpretation’, while Article 32 provides for ‘supplementary means of interpretation’ and allows reference to an IIA’s travaux préparatoires and the ‘circumstances of its conclusion’.

In the ILC 2006 Report, the VCLT, and in particular its interpretive rules, are presented as a centralised tool for legal interpretation, legal reasoning, and systemic relationships. In the face of regime interaction and ‘conflict’, these tools provide a common baseline:

‘articles 31 and 32 of the VCLT are always applicable unless specifically set aside by other principles of interpretation. This has been affirmed by practically all existing international law-applying bodies’. (2006 ILC Report, pp. 92-93)

Indeed, VCLT Articles 31 and 32 are commonly employed as core interpretive tools in ISDS cases. For example, in HOCHTIEF Aktiengesellschaft v. Argentine Republic, the arbitral tribunal matter-of-factly noted that interpretation of the applicable treaty ‘must be conducted in accordance with the law of treaties … and in particular in Articles 31-33 of the VCLT, which are familiar to all involved in investment arbitration’ (Decision on Jurisdiction, 24 October 2011, para. 26). Similarly, Professor Brigitte Stern noted in her dissenting opinion in Yukos Capital v. Russia that ‘[t]he rules of interpretation of an international treaty are well known and embodied in Article 31 of the VCLT’ (Dissenting Opinion of Professor Brigitte Stern, 18 January 2017, para. 14).

Yet, this baseline does not automatically result in uniform understanding or application of the VCLT’s interpretive rules. For example, in Eskosol v. Italy, the arbitral tribunal explained that ‘VCLT Article 31(3)(a) is not […] a trump card to allow States to offer new interpretations of old treaty language, simply to override unpopular treaty interpretations based on the plain meaning of the terms actually used’. (Decision on Italy’s Request for Immediate Termination, 7 May 2019, para. 223) Meanwhile, Judge Charles Brower has advocated in various settings, including in his dissenting opinions, for a hierarchical approach to employing the VCLT’s Articles 31 and 32. Thus, even with common interpretive tools, the risk of fragmentation remains. Some of these challenges and opportunities were explored in a previous series on the Blog. A post by Dr Esmé Shirlow and Professor Michael Waibel focused on the practical difficulties associated with ascertaining the existence of travaux préparatoires and regulating its production in arbitral proceedings per VCLT Article 32. Similarly, a post by Dr Julian Wyatt explored how investment tribunals have used the principle of contemporaneity in treaty interpretation. Of special relevance to concerns about fragmentation, he highlighted how the same principles of treaty interpretation might be used by different international courts and tribunals in quite distinct ways.

 

W(h)ither Harmonisation and Systemic Integration?

Despite these tensions, as reflected in its 2006 Report, the ILC remains resolute that the VCLT and its interpretive tools are the north star to address fragmentation and conflict in public international law:

‘most of the VCLT – at least its customary law parts – including above all articles 31 and 32 – automatically, and without incorporation, is a part of the regime: indeed, it is only by virtue of the VCLT that the regime may be identified as such and delimited against the rest of international law’. (2006 ILC Report, p. 94)

It is therefore not surprising that a solution for harmonisation and systemic integration can also be found within the VCLT. Article 31(3)(c), in particular, provides that a further interpretive vehicle is to draw upon ‘any relevant rules of international law applicable in the relations between the parties’. As such, Article 31(3)(c) offers an opportunity to reconcile the various interpretive techniques explored in the 2006 ILC Report (eg lex specialis; lex posterior; or lex superior). Application of each – and whether it is the correct mode for a particular circumstance – is dependent on what is considered ‘relevant’ to that specific circumstance.

In the ISDS context, this means that the question is not whether a specific rule, custom, or terms of an IIA would ever be irrelevant, but rather ‘whether a rule’s speciality or generality should be decisive, or whether priority should be given to the earlier or to the later rule depended on such aspects as the will of the parties, the nature of the instruments and their object and purpose as well as what would be a reasonable way to apply them with minimal disturbance to the operation of the legal system’ (2006 ILC Report, p. 207). As such, harmonisation can be achieved without rendering any instrument of public international law irrelevant. To the contrary, the ‘norm that will be set aside will remain as it were “in the background”, continuing to influence the interpretation and application of the norm to which priority has been given’. (Id.) This is an especially useful framework for concerns arising from regime interaction.

Even more, this approach has special relevance to the ISDS regime. The latest debates on fragmentation arise out of the now more than 1,100 investment disputes in existence and different approaches to and interpretations applied where the same or similar IIAs and/or the same or similar facts are issue. Indeed, stakeholders’ interest in the establishment of a multilateral investment court, appellate mechanism, and a standing roster of full-time arbitrators is primarily driven by demands for coherence and harmonisation. While such innovations may be fruitful for the goals of legitimacy and transparency, it is important to bear in mind that even that body would draw upon the existing public international law toolkit. As discussed by Dr Mary Mitsi in a prior post, ISDS tribunals must always engage in the interpretive process, which involves first identifying norms and then applying them. This is the case no matter how those tribunals are constituted, even if comprised of full-time judges under the umbrella of a permanent multilateral investment court. This concern was also expressed by Professor José E Alvarez in a keynote address at the International Trade Administration’s (ITA’s) March 2021 virtual conference.

 

Concluding Remarks

While there are no easy solutions to the challenge of regime interaction and fragmentation in public international law, the optimistic view is that this challenge exists primarily because the transnationalist approach to the international legal order has been successful. Continued growth, especially within the ISDS regime – which includes a multitude of instruments, stakeholders, and decisions – is a signal that the system continues to react to the needs of the global community in an effort to serve those needs in a seemingly effective manner. Within this context, as advocated by the ILC and numerous ISDS tribunals, the VCLT’s interpretive tools, especially its Article 31(3)(c), remain instructive and offer a solution to the ‘systemic’ objective, allowing decisionmakers to downplay ‘conflict’ and read relevant materials holistically to achieve harmonisation and systemic integration.

 

The importance of the VCLT to international arbitration is the focus of the forthcoming book The Vienna Convention on the Law of Treaties in International Arbitration: History, Evolution, and Future, Dr Esmé Shirlow and Kiran Nasir Gore (eds) (Kluwer, 2022).

To read our coverage of regime interaction in investment arbitration, click here.

References[+]

References ↑1 See generally Barry E. Carter, Making Progress in International Institutions and Law, in PROGRESS IN INTERNATIONAL LAW 51–68 (Russell A. Miller & Rebecca M. Bratspies ed., 2008). ↑2 See generally Myres S. McDougal & Florentino P. Feliciano, International Coercion and World Public Order: The General Principles of the Law of War, 67 YALE L.J. 771 (1958). See also Thomas G. Weiss, The United Nations: Before, During and After 1945, 91 INT’L AFF. 1221, 1226–29 (2015). function footnote_expand_reference_container_38716_15() { jQuery('#footnote_references_container_38716_15').show(); jQuery('#footnote_reference_container_collapse_button_38716_15').text('−'); } function footnote_collapse_reference_container_38716_15() { jQuery('#footnote_references_container_38716_15').hide(); jQuery('#footnote_reference_container_collapse_button_38716_15').text('+'); } function footnote_expand_collapse_reference_container_38716_15() { if (jQuery('#footnote_references_container_38716_15').is(':hidden')) { footnote_expand_reference_container_38716_15(); } else { footnote_collapse_reference_container_38716_15(); } } function footnote_moveToReference_38716_15(p_str_TargetID) { footnote_expand_reference_container_38716_15(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38716_15(p_str_TargetID) { footnote_expand_reference_container_38716_15(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Regime Interaction in Investment Arbitration: Crowded Streets; Are Human Rights Law and International Investment Law Good Neighbors?

Wed, 2022-01-12 00:30

Globalization has diversified the actors, institutions, norms, and instruments on the international legal stage. With diversification comes increased specialization and, in turn, organization around so-called regimes. The notion that international legal regimes can exist autonomously has long been refuted; indeed, each regime draws from general international law to some degree. If regimes are not autonomous, then how do they interact?

Here, we briefly consider the interaction between two such regimes, international investment law (“IIL”) and international human rights law (“IHRL”). We argue that ‘interaction’ should be conceived broadly, which contrasts with the prevailing view of interaction as synonymous with conflict.

In this post, we provide a four-part model for defining the interactions between IIL and IHRL. First, IIL and IHRL interact at a foundational level with regard to what each regime seeks to protect—foreign investors under IIL and individuals under IHRL. Second, they interact in the context of investment treaties and, narrowly, the drafting of preambular text and operative provisions. Third, they interact—and perhaps conflict—at various stages in international disputes. Fourth, and finally, they increasingly interact in procedural contexts, such as ISDS reform efforts.

 

1) Interactions in Relation to Fundamental Protections

IIL is defined by a system of protections for investors in their bilateral business relationships with foreign governments. Investors may be individuals but, given the quantum of investment in typical foreign direct investment projects, they are more likely to be legal entities, such as corporations, established under the auspices of the corporate legal structure of a foreign jurisdiction. In contrast, IHRL is defined by a system of protections for individuals—more specifically, the various legally prescribed rights that attach to all human persons on the international plane.

As such, IIL and IHRL establish fundamentally different protections. Even where an investor under IIL is an individual, the protections that attach are specific to that individual qua investor, not as a human person in the sense of fundamental rights under IHRL. Many foreign direct investment projects directly or indirectly impact human rights, yet individuals qua human persons have no recourse under IIL through which to seek remedies. Correspondingly, an investor has no recourse under IHRL by which to seek remedies because human rights do not attach to investors.

Nonetheless, IIL and IHRL do overlap to a degree regarding certain human rights. For example, the right to property is foundational to both IIL and IHRL. Similarly, the right to due process plays an integral procedural role in dispute resolution and is protected under both regimes. This is of course only a small subset of the numerous rights under IHRL, but it does evidence an integral interaction.

 

2) Investment Treaties

As we have detailed elsewhere, IIL and IHRL can and do interact in the context of investment treaty drafting across both preambular text and operative provisions. Regarding preambular text, references to human rights are increasingly common, such as affirming the parties’ “commitment to the respect for human rights”. In contrast with this broad, open-textured language, some investment treaties directly reference specific instruments in the preamble, such as to affirm the parties’ commitment to the principles in the Universal Declaration of Human Rights. While the practical effect of such references is debatable, articles 31 and 32 of the Vienna Convention on the Law of the Treaties (VCLT) indicate that preambular text may at the very least inform the interpretation of operative provisions.

Regarding operative provisions, interactions become rather more complex. Interactions may occur in the context of investor responsibilities, such as striving to conduct business in accordance with the OECD Guidelines. They may further occur in the context of general exceptions, such as carving out measures taken for the maintenance of “public order” or to protect human life or health. They may further still occur in the context of provisions seeking to preserve regulatory autonomy, where such provisions have the effect or maintaining regulatory “space” for domestic policymaking in service of fulfilling State obligations regarding human rights.

 

3) International Investment Disputes

IIL and IHRL can and do interact in the context of disputes. This occurs at all stages in the proceedings, as well as in the context of third-party participation. This graphic illustrates these complexities, which are in turn discussed below.

 

a) Jurisdiction

Where human rights considerations may be at play in a dispute, the first question that a tribunal must resolve is whether it has jurisdiction to even consider such issues. As highlighted by the tribunal in Strabag v. Poland, the burden to establish a tribunal’s jurisdiction – while ultimately subject to a tribunal’s own satisfaction – will fall on the party alleging a breach of human rights by its counterparty.

The wording of the dispute resolution clause will determine whether human rights norms are within the scope of a tribunal’s jurisdiction and, relatedly, whether they may permit counterclaims based on human rights. As affirmed by the Tribunal in Gavazzi v. Romania, a narrowly worded dispute resolution clause will not permit consideration of human rights issues.

Investment tribunals do not have the mandate to determine human rights claims as independent claims. In Biloune v. Ghana, for example, the tribunal ruled that the parties agreed to “arbitrate only disputes in respect of’ the foreign investment” and, therefore, “lacks jurisdiction to address, as an independent cause of action, a claim of violation of human rights.”

 

b) Applicable Law

Interactions in the context of the applicable law become even more complex. The applicable law will determine which human rights a tribunal may consider. As emphasized by the tribunal in Siemens v. Argentina, a tribunal is not obligated to examine human rights, even if it can do so, if it does not view human rights as directly impacting the core issues of the dispute.

If a tribunal decides to examine human rights, it has discretion to decide which human rights norms, obligations, or instruments apply and what weight is to be ascribed to them, perhaps most notably illustrated by the tribunal in Urbaser v. Argentina. As illustrated by confusion over the deliberative weight given to such matters by the tribunal in Yukos v. Russia, even if a tribunal introduces human rights norms, obligations, or instruments, it is not always fully clear what role they play in the final decision.

 

c) Merits and Damages

Certain human rights norms might also be implicated indirectly during the merits and damages phases, even if a tribunal may not expressly refer to it as a human rights norm.

During the merits phase, tribunals commonly rely on interpretative techniques, such as Article 31(3)(c) of the VCLT, which permits a tribunal to consider “any relevant rules of international law” (often referred to as “systemic integration”). As in Urbaser v. Argentina, this may permit consideration of human rights norms, obligations, or instruments. The exact scope of such an interpretative process is subject to a tribunal’s discretion. Furthermore, certain human rights norms like the right to property, right to a fair trial, and due process considerations may be considered by tribunals more readily as being directly relevant to a tribunal’s mandate under investment agreements, as underlined by the annulment committee in Tulip v. Turkey.

During the damages phase, investor conduct might also be a basis for a tribunal to reduce damages awarded through the doctrine of “contributory fault”, as discussed in a partial dissenting opinion in Bear Creek v. Peru. This may be significant where the conduct implicates human rights obligations like the right to water.

 

d) Third-Party Participation 

The role of third parties, such as indigenous communities affected by investment projects, has been contentious. Traditionally, such third parties could not participate in an investor-state arbitration.  This has now changed with the acceptance by many investment tribunals of amicus curiae submissions.

While tribunals have accepted amicus curiae submissions, this is ultimately subject to a tribunal’s discretion and subsequent reliance by the tribunal on such submissions is not fully certain. Tribunals also greatly limit the role of amicus not permitting attendance to the hearing or accessing files of the case, as in Philip Morris v. Uruguay. While amicus submissions do permit greater access, the interaction between human rights and investment arbitration is probably mixed.

 

4) Procedural Issues in the Reform Process

As we have written earlier, there have been three notable ISDS reform efforts: (i) UNCITRAL Working Group III, (ii) the amendment to ICSID Rules, and (iii) the European proposal of a multilateral investment court. All these reform efforts are focused on the procedural issues, such as reducing costs and time of arbitration, increasing transparency, and allowing greater amici participation.

While these efforts will not address contentious substantive issues in investment disputes, such as the right to water or the right to health, they will promote certain human rights considerations. For example, by focusing on procedural improvements to ISDS, such efforts advance fundamental IHRL protections within the IIL regime beyond the right to property, such as the right to trial, access to justice, and due process. While only relative to a narrow subset of procedural rights, such efforts further reflect an incorporation of IHRL into IIL.

 

Conclusions

We have argued that regime interaction, especially between IIL and IHRL, is complex and stretches beyond a narrow view of interaction as only occurring in the context of disputes. A broader view, as we have delineated, surfaces the connective tissue between the two regimes and provides a rubric for assessing the perceived tensions between them. If regime interaction is a fundamental reality of the increasing diversification of international law—and we would argue that it is—it is necessary to define the contours of these interactions, so as to consider how best to generate alignment on the international legal plane between the actors, institutions, norms, and instruments of each regime.

That said, interactions between IIL and IHRL have been strained. If interactions are to become more commonplace, we would argue that efforts should be devoted to identifying shared goals regarding investment treaty drafting, as well as more robust involvement of human rights experts in relevant investment disputes. Because both regimes draw from general international law, the foundation no doubt exists for pursuing more harmonious interactions.

 

The views expressed herein are the authors’ personal views, and do not necessarily reflect the views of the authors’ affiliated institutions or clients.

 

To read our coverage of regime interaction in investment arbitration, click here.

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Regime Interaction in Investment Arbitration: Climate Law, International Investment Law and Arbitration

Wed, 2022-01-12 00:00

Nearly 30 years have passed since world leaders signed the UN Framework Convention on Climate Change (“UNFCCC”), agreeing to combat “dangerous human interference with the climate system.” For many of those years, nobody seemed to take that commitment very seriously. But things look different now: climate law has hit its stride.

At COP26 in November 2021, world leaders signed the Glasgow Climate Pact, which aims to reduce unabated coal usage and fossil subsidies, and finalized the “rulebook” that operationalizes the 2015 Paris Agreement. Also in Glasgow, private-sector finance pledged billions of dollars toward climate change mitigation and adaptation. Meanwhile, regulators worldwide work around the clock to translate lofty Net Zero goals into concrete policy at the national level, and the EU is legislating at breakneck speed to become the first climate-neutral continent.

It is a new reality out there. In the words of US climate envoy John Kerry, the world has embarked on the “biggest economic transformation since the industrial revolution.”

International investment law, however, seems at odds with these developments. Not only are international investment agreements (“IIAs”) still largely silent on climate issues, but the very regulations that are necessary to meet climate law obligations may trigger liability under investor-protection provisions. Various processes to update the investment law framework is underway, but progress is slow and hampered by politics. Therefore, as this short overview will explain, it will be necessary for arbitration practitioners to consider the interaction between the current IIA regime and the climate law regime, and to interpret states’ obligations to protect investors in harmony with obligations to reduce carbon emissions.

 

Climate Law in a Nutshell

At the center of the international legal framework of climate change is the 2015 Paris Agreement. It has been ratified by 191 states and the European Union, which signals a near-universal global consensus on its main goal: to limit global average temperature rise to well below 2°C (preferably 1.5°C) above pre-industrial levels. As the Paris Agreement requires, most state parties have set ambitious emissions-reduction targets – known as Nationally Determined Contributions (“NDCs”) – typically aimed at cutting emissions significantly by 2030 and achieving Net Zero carbon emissions by mid-century.

Before Paris, there was the 1997 Kyoto Protocol – the first treaty to stipulate that big emitters should take the lead in slowing climate change by reducing greenhouse gas emissions. The 2012 Doha Amendment extended Kyoto, but ratification took so long that it rendered the treaty obsolete. The Paris Agreement has now largely superseded these previous commitments and mechanisms.

Around the world, governments have taken legislative action to implement their commitments under the Paris Agreement. In Europe, climate action is at the heart of the European Green Deal – a package of policy measures that aim to transform the European economy and decouple growth from resource use. The European Climate Law was passed in June 2021 and enshrines into law the goal of Net Zero by 2050. Another recent development was the European Commission’s adoption of “Fit for 55,” a series of legislative proposals setting out how the EU intends to cut carbon emissions by 55% by 2030.

Globally, there has been a veritable explosion of climate-related laws and policies, putting pressure on corporations and other actors to take concrete steps to reduce carbon emissions and invest in measures to adapt to the effects of climate change. A parallel development can be seen in the rise in climate litigation in national courts. Most such court cases have demanded government action on climate change. Recently, however, several cases have also been filed against corporations.

So, that is climate law in a nutshell. Let us juxtapose it with international investment law and investor-state arbitration.

 

The Clash between Climate Law and Investment Law

In simple terms, the clash is obvious: Legislative and regulatory measures necessary to meet obligations under climate law are likely to trigger liability claims under international investment law. States have two main tools – a carrot and a stick – to accomplish reductions in greenhouse gas emissions. Both are accompanied by risks under investment law.

  • The carrot involves incentivizing investments in low-carbon technologies. This creates new regulatory frameworks upon which foreign investors may base legitimate expectations of stability and profit, which (as we know from the Spanish saga) may lead to investor claims in the event of future amendments.
  • The stick involves regulating emissions and phasing out fossil fuels. This changes the existing legal framework and regulatory environment for foreign investors and affects the value of foreign investments, which may lead to claims of indirect expropriation or breach of the fair and equitable treatment (“FET”) standard.

Nowhere is the fault line between climate law and investment protection clearer than in the energy sector, which accounts for two-thirds of all greenhouse gas emissions. To meet their emissions targets, most countries will need to significantly alter their energy mix and limit the extraction, transportation and combustion of fossil fuels. The Glasgow Climate Pact explicitly requires countries to reduce fossil subsidies and “phase down” unabated coal (changed from “phase out” as a last-minute semantic compromise forced by coal-reliant China and India). Such measures will turn many fossil investments into stranded assets, which may lead investors to seek compensation under applicable investment treaties.

The most important treaty in the energy sector is the multilateral Energy Charter Treaty (“ECT”), which, despite years of “modernization” negotiations, still protects all investments regardless of climate impact. As will be shown in a forthcoming report, none of the 70+ awards rendered under the ECT has considered the host state’s climate law obligations, weighed the investor protections against the state’s right to regulate for emissions reduction, or in any other way analyzed the interaction between these two legal regimes.

ECT tribunals have, of course, considered the host state’s right to regulate in other contexts – confirming, for example, that states may exercise this right as long as it does not affect “the fundamental stability in the essential characteristics of the legal regime relied upon by the investors in making long-term investments” (Antin v. Spain). They have also analyzed the interaction between the ECT and other legal regimes – ruling, for example, that in the event of an inconsistency between the ECT and EU law, the ECT will prevail (based on Article 16 ECT). It remains to be seen how tribunals will apply these standards in cases challenging state regulations to phase out fossil fuels; the first so-called “phase-out cases” were filed by foreign investors against the Netherlands in 2021.

There are two principal ways to reconcile the apparent conflict between international investment law and climate law: (1) by reforming IIAs to integrate climate principles or hierarchy clauses stipulating which obligations take priority, and (2) by reinterpreting current treaty provisions through general conflict norms, such as the principle of systemic integration. The former option involves lengthy political negotiations, whereas the latter requires only invocation by arbitral tribunals.

 

Reforming IIAs to Resolve the Conflict with Climate Law

Reform of the framework of international investment law and treaty arbitration is underway – not least in UNCITRAL’s Working Group III, the ECT modernization process, and the revision of the ICSID arbitration rules – but progress is limited and slow, and the integration of climate principles is not necessarily a main focus.

Some countries have developed model BITs that include climate and sustainable development provisions. These treaties typically alter the traditional IIA structure, in which states have obligations but no rights, and investors have rights but no obligations. The Dutch model BIT, for example, requires investors to comply with domestic laws and to conduct environmental impact assessments. And the Pan-African Investment Code, a template treaty developed by the African Union, omits the FET standard and allows states to submit counterclaims in arbitral proceedings.

Some observers may insist that amending IIAs to align with climate law will reduce investment protection and impede the flow of FDI; others may contend that IIAs never really served to incite FDI in the first place. Either way, the investment law regime is not inherently incompatible with climate law, and there are many good ideas on how to reconcile the two through treaty revision. But the process to renegotiate IIAs is slow – and there are 3000 of them. Moreover, in the case of multilateral treaties like the ECT, the unanimity needed for amendments may be entirely unattainable. Therefore, it is necessary to consider how to reconcile current IIAs with climate law through general treaty-conflict norms, such as the principle of systemic integration.

 

Working With What We’ve Got – Reinterpreting Current IIAs

The principle of systemic integration embodies a normative preference for a coherent international legal system. It is codified in Article 31(3)(c) of the Vienna Convention, which requires tribunals to take into account “any relevant rules of international law applicable in the relations between the parties” when interpreting treaties. Some IIAs include similar provisions. For instance, Article 26(6) of the ECT provides that tribunals “shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law.” This now includes the Paris Agreement, the Glasgow Climate Pact, and EU climate law. It may also soon include environmental law principles: Just as past claims have been dismissed based on the principle of good faith, future claims might be dismissed based on the polluter-pays principle.

Although tribunals already have the mandate to do so, systemic integration has rarely been invoked in investment arbitration. More often, tribunals rely on the lex specialis doctrine to hold that the IIA, as a specialized legal instrument, prevails over more general rules and principles of international law. This could be because investment law, while part of public international law, belongs to international economic law and is implemented primarily by commercial lawyers who may be unaware of (or disinclined to consider) public interests or the broader public international law perspective.

Arbitral tribunals are not bound by precedent. This means that prior interpretations of investor protection provisions are not set in stone – even seemingly entrenched standards can be reinterpreted in alignment with climate law. For example, a 2019 ICC Report on resolving climate-related disputes through arbitration emphasized that arbitrators can consider climate law when interpreting the FET standard. Accordingly, a tribunal might reject the argument that an investor in a coal-fired power plant had legitimate expectations of regulatory stability, if at the time when the investment was made, the Paris Agreement made it foreseeable that the host state would soon regulate to phase out coal.

Ultimately, successfully integrating investment law and climate law will depend on the lawyers and arbitrators working the system. As John Kerry recently put it, all lawyers are climate lawyers now. This includes, of course, investment arbitration practitioners.

 

In Sum

With the signing of the Paris Agreement in 2015, climate law reached a tipping point. Since then, countries have been legislating and regulating to reduce emissions, and private actors have pledged to invest billions in climate change mitigation and adaptation. In its current iteration, international investment law is not fully aligned with this new reality. But if adequately renegotiated and revised, IIAs can support global climate goals and give effect to the Paris Agreement. That process, however, might take a while. In the meantime, arbitration practitioners can use the principle of systemic integration to reinterpret current IIAs in coherence with climate law.

 

 

To read our coverage of regime interaction in investment arbitration, click here.

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Regime Interaction in Investment Arbitration: Counterclaims

Tue, 2022-01-11 00:30

This post deals with the conceptual underpinnings and theoretical justification for the practice of counterclaims in investment arbitration. First, it is important to delineate this post from an analysis of counterclaims case-law in investment arbitration, as ample accounts of the counterclaim debate in practice can be found here, here, and here.  Equally, this post does not deal with regime interaction as such. For a fuller account of regime interaction in investment arbitration, see for example here and here.

To understand the conceptual underpinning of counterclaims and the theoretical justification for allowing such practice, one must not look only at the practice and evolution of international investment law (“IIL”) and investment arbitration, but also to conflicting interests as manifested in other regimes of public international law (“PIL”) and the practice of other international courts and tribunals. International investment agreements (“IIAs”) are formulated with the exclusive intention to provide protection to investors and to facilitate and promote foreign investments. As such, these instruments impose one-way obligations on states towards investors. Thus, it is important that the discussion on enforcing investor obligations through, for example, counterclaims, starts from the right end, i.e., with a discussion of PIL per se, in the light of the asymmetrical nature of IIL, and the adjudicatory mission of enforcing a holistic and all-encompassing (“thick”) global rule of international law in mind.

Put simply, it is impossible to understand the adjudicatory mission of investment arbitration without understanding PIL more broadly. Those who try otherwise, fail. The time is ripe for investment arbitrators to shift their focus from the norm-hierarchical viewpoint and instead approve the interaction of other equally specialized regimes in their decision-making process. Meanwhile, the arbitral procedure should seek ways to optimize the procedure’s efficiency without undercutting the fundamental elements of international arbitration.

This inevitable need for a perspective shift culminates in a reform debate, generally, and more specifically in a discussion of reinterpreting current IIAs and arbitration rules, on the one hand, and the long-term mission of redrafting IIAs and investment arbitration rules to align with “conflicting” regimes, on the other hand. As was explained in the Introduction to the IISD Model International Agreement on Investment for Sustainable Development in 2005:

“[T]he model for IIAs developed 50 years ago no longer meets the needs of the global economy in the 21st century. … We believe the time is ripe to propose a new model for IIAs, a new direction that is consistent with the goals and requirements of sustainable development and the global economy of the 21st century.” (p. 11)

All in all, it is evident that some reform is necessary. This is especially prevalent in light of the current backlash against IIL and investment arbitration. Such reform is welcomed and should be aligned with constitutional values of democracy, the rule of law, and fundamental liberal values (e.g., human rights and environmental law). There are many ways of reforming IIL and investment arbitration without undercutting its fundamental elements and therefore its adjudicatory mission of enforcing a liberal and pragmatic global rule of law, for example, by: (a) redrafting IIAs, (b) adopting and redrafting investment arbitration rules, and (c) broadening host states’ defences where IIL clashes with other regimes of PIL.

This post deals with one out of a handful of possible and sensible reforms, namely, the heightened standing and increased currency of counterclaims in investment arbitration. The ongoing dialogue on regime interaction further entrenches the enhanced role of counterclaims.

 

Counterclaims in Investment Arbitration

Filing a counterclaim can serve both as an independent claim for liability and damages, as well as a tool (incidentally) focused on the dismissal or set-off of the investor’s legal action. A counterclaim can be explained as a fundamental element of the respondent state’s right to present its case on an equal footing with the investor. It is, therefore, to be treated as a general principle of law that rests on reasons of fairness. Moreover, counterclaims can be said to promote procedural economy and consistency in decision-making, contributing to a better administration of justice by creating reciprocal obligations for parties. For example, judicial economy would be preserved and the procedural integrity, too, when the procedure deals with all connected claims collectively. In so doing, counterclaims could potentially facilitate the enforcement of a thick global rule of law.

As has been mentioned on this blog, there are several bases upon which an investment tribunal might find that it has jurisdiction over a counterclaim; for example, it can find jurisdiction on the basis of: (1) an IIA explicitly, (2) an IIA implicitly, or (3) on agreed-upon arbitration rules, (4) consent.

For example, the ICSID Convention expressly maintains the right to file a counterclaim. Article 46 of the ICSID Convention reads as follows:

 Except as the parties otherwise agree, the Tribunal shall, if requested by a party, determine any incidental or additional claims or counterclaims arising directly out of the subject-matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre.

Treating a state claim as “incidental” or “additional” to, or as “arising directly out of” the subject-matter and yet “within the scope of consent” is a cumbersome threshold to square with regime interaction, unless some proactive decision-making is conducted and rooted in a broader understanding of PIL. It is this threshold that has allowed investment tribunals to treat counterclaims conservatively.

The jurisdictional hurdle is followed by the question of the source of an investor’s alleged obligation. Such an obligation can arise from either a domestic law or an international law. But should an investment tribunal allow for counterclaims pursuant to both types of alleged obligations? The most controversial types of counterclaims include where (a) the state is seeking to enforce the rights of third parties, (b) the counterclaims are based on domestic law obligations, and (c) the states could instead request commercial arbitration or litigation pursuant to an investor-state contract.

 

The Standing and Currency of Counterclaims in the Current and Future Web of IIAs

Today, there are approximately 3,000 IIAs in force, for which the majority fails to provide guidance as to how issues of, for example, human rights and environmental protection should be exhaustively addressed in the context of investment promotion and protection. IIAs are frequently narrowly defined and limited in their IIL scope, focusing on attracting, promoting, and finally protecting FDI and thereby enforcing only state obligations. This can be redressed by harmonizing otherwise conflicting regimes through systemic interpretation. This technique – embedded in Article 31(3)(c) Vienna Convention on the Law of Treaties (“VCLT”) – allows for the interpretation of international rules holistically.

The emphasis on and importance of counterclaims is indeed an expression of regime interaction. If regime interaction is properly facilitated through either the redrafting of IIAs, arbitration rules, or systemic interpretation, investment tribunals would be empowered to enforce investor obligations by allowing for counterclaims on legal bases outside IIL.

Investment arbitration must accommodate the changing times. As much as the imbalance between investors and states constituted the foundation of investment arbitration, the perceived reversed imbalance in the current IIA and investment arbitration landscape is at the heart of today’s backlash and legitimacy crisis. For that reason, the investment arbitration community is currently considering proposals concerning whether investor obligations should be enforced through investment arbitration. However, the current ISDS reform is limited to procedural aspects without addressing core issues of rights and obligations of both investors and states. As such, a holistic consideration of counterclaims as a tool for ensuring a balanced system is somewhat limited. Undoubtedly, counterclaims have the potential to rebalance IIL and the investment arbitration procedure by enforcing investor obligations. The threat of a counterclaim may indeed incentivize investors to operate in a more sustainable manner (a reasonable “counterclaim-chill”), and it may likewise discourage investors from challenging state decision-making aimed at regulating public policy concerns (and thereby avoid the supposed “regulatory-chill”).

All in all, it has rightly been noted that the case-law on counterclaims “clearly points to the poor performance of respondent states’ counterclaims in investor-state dispute settlement (“ISDS”), which were ultimately upheld in just two cases out of 25 investment arbitration cases”. Beyond the case-law, which has been, thus far, rather restrictive, IIAs and investment arbitration procedural rules further, generally speaking, exclude a respondent state’s right to submit a counterclaim under most of the current web of IIAs. Arbitration stemming from investor-state contracts falls within an entirely different discussion, along with counterclaims on behalf of third parties. We are not dealing with those scenarios here.

 

The Continued Adjudicatory Mission of Investment Arbitration through Regime Interaction

IIL is facing both fragmentation from within, as well as being part of a fragmented international law web. Regime interaction is needed to provide for a coherent and effective global rule of law and that investment arbitration is best equipped to enforce such rules. Domestic courts (and court-like institutions) routinely enforcing domestic law cannot, as such, properly handle such matters of global concern.

Thus, arbitral tribunals should not view IIL in isolation but should instead integrate conflicting legal regimes through systemic interpretation. If a proper approach to systemic interpretation were to be employed, both legitimacy and effectiveness of international law and investment arbitration would stand to benefit. Systemic interpretation would help deal with fragmentation by reconciling or integrating otherwise conflicting legal regimes. In this broader quest, arbitral tribunals should allow counterclaims by integrating  other international law regimes, including human rights and environmental law. While it is true that states have found ways to counteract IIA’s general lack of substantive obligations for investors by, for example, asserting that investors have obligations under customary international law or otherwise asserting breaches of domestic law, it is vital that reform of IIL and ISDS takes a comprehensive approach.

Providing a mechanism for respondent states to counterclaim is an important development in investment arbitration and ensures that there is an appropriate balance between states and investors by promoting equality of arms, democracy, liberal values manifested in and protected through public international law, fairness, and finally by facilitating the enforcement of a thick global rule of law.

 

To read our coverage of regime interaction in investment arbitration, click here.

 

 

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Regime Interaction in Investment Arbitration: An Introduction

Mon, 2022-01-10 00:30

Debates about the fragmentation of international law and the sometimes conflicting relationship between a state’s and investor’s obligations under international investment law (“IIL”), on the one hand, and public international law and domestic law, on the other, have gained renewed relevance for investment arbitration. Issues related to the interactions between these regimes have featured in discussions about the proper application of the VCLT to investment treaties and in reform work in, for example, the UNCITRAL Working Group III and the Energy Charter Conference. Yet, despite the extensive discussions and reform work, many questions remain.

In the light of this trend, we are devoting this week on the Kluwer Arbitration Blog to exploring the regime interactions in investment arbitration and the ongoing debate on the fragmentation of international law and conflicts with other regimes of public international law and domestic law. As part of our series, we will hear from expert contributors on the regime interactions between investment arbitration and other functional areas of international law, including treaty interpretation (Kiran Gore), counterclaims (Crina Baltag and Ylli Dautaj), climate law (Anja Ipp), human rights law (Kabir Duggal and Nicholas Diamond), and EU Law (Nikos Lavranos).

 

Introduction

The interactions between IIL and other regimes of international law (such as human rights law, environmental law, and so on) illustrate the so-called normative and institutional fragmentation of international law. Through regime interaction, IIL comes into contact and sometimes conflicts with other regimes of public international law. Meanwhile, IIL as lex specialis under public international law comes in conflict and frequently clashes with domestic law and EU law. These tensions raise nuanced issues of treaty interpretation before investment tribunals. As a result, there is an active and ongoing debate about whether investment arbitration should merely be a venue for enforcing international economic law (“IEL”) or is instead an appropriate venue for addressing and redressing issues centered in other regimes of international and domestic law, including grievances of broader public interest.

 

What should investment arbitrators do when fragmented and specialized regimes conflict? What are the jurisdictional limits of an investment tribunal? What law is directly applicable to an investment treaty dispute, and what law could be indirectly applicable through treaty interpretation? Should investment tribunals enforce only a narrow set of IEL, namely, IIL, or should tribunals consider public international law more broadly (e.g., human rights law, environmental law, labor rights, etc.)? If investment tribunals should indeed interpret and apply public international law broadly, should respondent states be able to invoke such conflicting (or now interacting) regimes as a defense to an alleged breach of an international investment agreement (“IIA”) containing investor and investment protection (e.g., as a “shield” against a fair and equitable treatment or indirect expropriation claim, etc.)? Should the respondent state even be permitted to make a counterclaim based on an investors’ obligations, thereby turning public international law into a “sword” for states too? Should such counterclaims be limited to public international law obligations or include domestic law ones? In a word: should the fragmented, specialized regimes be harmonized and accounted for by investment tribunals to enforce a global rule of law?

 

Answers to these questions are long overdue. In fact, addressing these issues of interaction and overlap between investment arbitration and other areas of international law may become increasingly pressing to respond to contemporary backlash against international investment law and arbitration. Critics claim that investment arbitration is inherently unfair and must be rebalanced, while its proponents claim that investment arbitration increases foreign direct investment (“FDI”) and itself contributes to providing a level playing field between investors and their host states. As a result, or incidentally, the proponents claim, increased economic activity improves the lives of those less fortunate, promoting economic development. Critics add that economic development should be complemented by sustainable development. Both positions are indeed reconcilable and proper approaches to regime interaction could facilitate such non-binary positioning.

 

How can the adjudicatory mission of investment arbitration meet sustainable development challenges? Can IIAs be redrafted to align with broader public international law concerns in mind, e.g., by imposing investor obligations? Should such obligations be enforced through elevating domestic law obligations? Should states be free (or freer) to regulate in areas of public policy concerns without the fear of liability (avoiding the so-called “regulatory-chill”)? What about renewable energy investments that rely on green commitment incentives? What about investments that improve human rights and rely on state undertakings and specific promised incentives? For example, what about a water management investment, funded by the World Bank in an underdeveloped country to facilitate the states’ commitment to honor Goal 6 of the UN Sustainable Development Goals to ensure water and sanitation availability and sustainable management of this resource? What about the fact that, for example, “the OECD estimated that US $6.3 trillion of investment is needed annually until 2030 to meet development goals, increasing to US $6.9 trillion annually to make this investment compatible with the goals of the Paris Agreement, of which only a small proportion will be met by States”?

 

In other words, the protections under IIL protect not only the “evil” tycoons and billionaires but also the well-intended yet profit-driven corporations. Thus, we should look at how to improve investment arbitration by reconciling the benefits of IIL with the constitutionalist values embedded in other liberal regimes of public international law (and possibly as implemented by domestic laws) through regime interaction.

 

In this series, we will hear from highly esteemed authors on regime interaction in investment arbitration, generally, and how it may translate into necessary reform, redress legitimacy concerns, and improve the adjudicatory mission of investment arbitration as a result.

 

Dr. Crina Baltag and Ylli Dautaj will address how regime interaction opens-up the possibility to allow states to counterclaim against an investor for the failure to honor their commitments under, for example, environmental or human rights law. They explain that the increased appreciation of systemic interpretation and integration will lead to a heightened standing and increased currency of counterclaims in investment arbitration. In turn, such a development will help combat the backlash against ISDS by redressing some outstanding legitimacy concerns.

 

Anja Ipp will address the role that ISDS and IIL plays in climate law and consequently climate change. In her post, she explains how investments in the energy sector (renewable as well as fossil fuels) can lead to investor-State arbitration and how such arbitration interacts with the global commitment to combat climate change. She concludes that if “properly negotiated and revised, investment treaties can support global climate goals and give effect to the Paris Agreement” and that until this happens “arbitration practitioners can use the principle of systemic integration to reinterpret current IIAs in coherence with climate law”.

 

Dr. Kabir Duggal and Nicholas Diamond will address the much-debated interaction between ISDS and IIL and human rights. The authors identify the different spheres of interaction between the two regimes and highlight each system’s fundamental purposes and protections to identify how both systems can be harmonized. The authors argue that despite interaction between the two regimes being strained at present, efforts should be devoted to identifying shared goals”. Focusing on express references to human rights in investment treaties, the authors also illuminate the ways in which IHRL may permeate the various aspects of investment disputes (jurisdiction, applicable law, merits and damages, third party participation).

 

Nikos Lavranos will clarify the interaction between ISDS, IIL and EU Law. He explains the previously harmonious coexistence of both regimes to briefly outline how escalating tensions have led to the current ban on ISDS in intra-EU disputes from an EU law perspective. The author examines how various judgments of the CJEU have had a ¨spill- over effect” on the ECT and all disputes connected to the EU. He will further explain how certain principles of EU law are alien and perhaps even contrary to general principles of public international law. His post concludes by proposing possible approaches to harmonizing both regimes.

 

Kiran Gore focuses on the Vienna Convention on the Law of Treaties (“VCLT”) as a disciplining force in international law. Its rules of interpretation, in particular Articles 31 and 32, are commonly cited by investment tribunals as reflecting universal rules of interpretation. She elaborates on the VCLT’s drafting history evidencing that the International Law Commission foresaw that the VCLT would serve as an effective means to create systemic integration. In this light, she explains the role of systemic integration in investment arbitration

 

Our Own Reflection

It seems that ideological underpinnings and extreme positions taint the reform debate and remove it from a place of constructive dialogue. One thing is clear, the lack of agreed directions to the questions underscored above are indeed to be treated with heightened urgency and seriousness. Regime interaction plays a vital and instrumental role in investment arbitration reform. Sensible reform must take shape soon, and concessions between the various poles of the debate are, therefore, indispensable. The global community stands to benefit from an investment arbitration regime that categorically and unequivocally enforces a holistic IIL, which should also include interacting regimes of public international law and possibly domestic law obligations.

 

This series will underscore the continued importance of investment arbitration by informing this Blog’s readers about the regime interaction debate, with the hope that it is them who will then actively get involved in maintaining and re-shaping the institution of investment arbitration for the generations to come. We believe that the regime interaction debate is instrumental for both improving the legitimacy of investment arbitration and for enforcing the rule of law globally.

 

To read our coverage of regime interaction in investment arbitration, click here.

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The Three Steps in Appointing Arbitrators, And Which One is Most Important

Mon, 2022-01-10 00:04

In most cases, arbitrator selection follows a basic 3-step process: (1) Start with a Long List of Potential Arbitrators; (2) Pare it down to a Short List of Suitable Arbitrators; and then (3) Pick The Arbitrator to appoint.

At first, research is very broad. Parties focus on fundamental elements of the case, such as applicable law, seat, industry, and such. Many of these qualities can be found in directories, rosters, or on the CVs of individual arbitrators.

To narrow down the long list, parties seek out every published case, every scholarly article, every treatise authored by the arbitrators on their list. From these publicly available sources, parties seek both to understand arbitrators’ experience and to identify various connections with other parties, arbitrators, or counsel. As databases and directories become more detailed and sophisticated, this process has become much easier.

However, the single most important and difficult decision remains the last step: Which arbitrator do you ultimately pick for the tribunal? Ironically, this last, most important decision is when the most guesswork comes in.

Publicly available awards and academic publications run out of useful information on the most nuanced questions. Meanwhile, personal and professional networks are showing more limitations when researching newer and less well-known arbitrators from outside the traditional hubs. Parties need deeper insights on topics that are not in publicly available sources and outside the ambit of their personal networks.

That is where Arbitrator Intelligence’s innovative new tools come in.

These tools provide essential, unrivaled insights about arbitrators on the most crucial issues. They help take some of the guesswork out of the most important decision about which person on the short list makes it to the arbitral tribunal.

 

Revolutionary New Sources of Information about Arbitrators

Arbitrator Intelligence collects both factual and evaluative feedback about arbitrators from parties and counsel in past cases (contribute your feedback here). This feedback goes well beyond what is available in published awards. Arbitrator Intelligence’s unique feedback extends to cases that remain confidential and provides insights about arbitrators that cannot be gleaned from published awards.

Arbitrator Intelligence recently released a new Arbitrator Perspectives Survey. In the Survey, arbitrators themselves provide details about their approach to issues such as how they improve efficiency, respond to alleged counsel misconduct, manage document production, approach substantive interpretation, and award costs and fees. At a time when pre-appointment interviews are increasing circumscribed, responses to the Survey give parties and counsel valuable answers to key questions that they cannot ask arbitrators directly in an interview.

Arbitrator Intelligence’s Reports and Arbitrator Perspectives Survey ensure that parties and counsel have the information that they need to make informed decisions about which arbitrators to appoint to a tribunal.

Let’s look at a few examples.

 

Efficiency in Proceedings

For virtually all parties, fairness and efficiency are top of mind. But if only a few awards are public, how can you understand an arbitrator’s track record on these issues?

These topics are an important focus of feedback collected by Arbitrator Intelligence. For example, from Arbitrator Intelligence feedback you could learn that an arbitrator sat on a tribunal that “used a chess clock during the hearings to promote fairness and efficiency.” Or you can learn that an arbitrator, when sitting as chair, was described as “efficient and well-organized” and as “in absolute control of the hearings and paying attention, with a likable personality, well-humored and approachable. …[A] very impressive performance.”

If you anticipate requesting or opposing dispositive motions, you might want to know how an arbitrator proceeded when “the Respondent’s defense included a Request for Expeditious Dismissal of Manifestly Unmeritorious Claims,” namely that “[i]n spite of being a provision not commonly applied in proceedings [sic], the Arbitrator was exceptional in acting in accordance with the relevant standards of said concept.”

Another fundamental concern that affects efficiency is whether arbitrators are prepared and familiar with the record. Even a published award can’t tell you much about an arbitrator’s diligence—only feedback can. That is why Arbitrator Intelligence collects information about an arbitrator’s questions during the hearings as indicia of preparedness.

Specific comments can add to general assessments, such as the following comment, which explains that all “panel members, particularly the chair and [one co-arbitrator] clearly demonstrated that they read and synthesized the material submitted and the issues of the case.”

This crucial feedback about efficiency is complemented by perspectives offered by arbitrators themselves through Arbitrator Intelligence’s Arbitrator Perspectives Survey.

For example, arbitrators identify in our Survey their perspectives on the efficacy of:

  • Tribunal efforts to encourage settlement
  • Use of Redfern Schedules
  • Page limits on parties’ submissions
  • “Documents only” arbitration
  • Online hearings even over party objection
  • Broad and/or electronic document production

These topics can be important in picking the right arbitrator from your short list, or in assessing proposed chairpersons. But for the most part, an arbitrator’s approach to these topics cannot be readily assessed from public sources.

 

Responding to Guerilla Tactics

As allegations of so-called guerilla tactics have been on the rise, those who have been (or anticipate being) on the receiving end may want to know arbitrators’ approach to dealing with alleged counsel or party misconduct.

Concerns have been expressed that some arbitrators take a passive approach during arbitral proceedings. This more laissez-faire approach is sometimes presumed to be a way of avoiding time-consuming fact-finding and procedures or potential backlash.

Whatever the explanation, if avoiding potential guerilla tactics is on your list of concerns when picking arbitrators, past awards can’t tell you much about arbitrators’ handling of such matters. Most often, arbitrators’ assessments to such alleged misconduct are behind the shield of tribunal deliberations or clandestinely embedded in the assessment of evidence or allocation of costs and fees.

In sum, most alleged guerilla tactics and arbitrator responses are hidden from view, even in published awards.

Again, that is where Arbitrator Intelligence comes in.

Through the feedback AI collects, you can find out that one arbitrator on your short list was described, while sitting as a sole arbitrator, as having “issued general admonitions to dissuade further instances of allegedly improper conduct and made specific findings regarding the allegedly improper conduct.” That source also added: “During the hearing, the Arbitrator was quick to identify objections and resolve them efficiently and fairly.”

From AI Reports, you can also know that an arbitrator on your shortlist was on a tribunal that “showed great professionalism and courtesy in dealing with unexpected challenges to their own decisions by one of the parties when they walked out of the proceedings, the tribunal showed great professionalism in continuing forward in completing their task of hearing the remainder of the arguments and issuing the award.” Not surprisingly, the person provided this information concluded “I highly recommend the case management skill shown by this panel.”

By contrast, you may also find that an arbitrator you were considering “did not give much attention to the allegations” that the opposing party engaged in “[o]bstructionist, uncooperative behavior, making outrageous allegations.”

Meanwhile, in responding to our Perspectives Survey, arbitrators identify which kinds of behavior they consider cross the line from zealous advocacy to improper misconduct: continuously interrupting opposing counsel or witnesses, unfounded refusal to produce documents, continuously raising untimely new arguments, using unprofessional language, etc.

The Perspectives Survey also invites arbitrators to indicate which, in appropriate circumstances, they regard as appropriate tribunal responses to alleged counsel misconduct: oral admonitions, drawing negative inferences, considering when awarding costs and fees, referring counsel to national bar associations, etc.

 

Substantive Interpretation

Arbitrator Intelligence Reports and its Perspectives Survey also provide innovative new tools to assess arbitrators’ approaches to substantive interpretation.

Historically, legal education and nationality were used as rough proxies for how an arbitrator might approach contract interpretation. But today, those assumptions are not always good predictors—arbitrators from similar backgrounds may use strikingly different approaches. Foreign graduate degrees, working for multi-national firms or foreign clients, or sitting with other tribunal members from other backgrounds may affect an arbitrator’s allegiance to interpretative traditions from their national legal background.

These differences can become quite clear from feedback about specific arbitrations and awards, including those that are not publicly available to compare. For example, Arbitrator Intelligence has feedback about these two cases with similar tribunal compositions and applicable law, but very different approaches to interpretation:

  • In an arbitration governed by Russian law, a tribunal relied on the contract’s “plain meaning and interpretation of INCHOATE terms
  • In an arbitration governed by Ukrainian law, a tribunal applied a “flexible interpretation” and “consider[ed] the award considers previous amendments to the contract

To supplement feedback from individual cases, our Perspectives Survey asks about arbitrators’ approach to interpretation: In interpreting contracts, statutes, and treaties, when do you believe it is appropriate to look outside the “plain meaning” of the relevant language? Please check all that you believe may potentially be applicable, recognizing that specifics will depend on the details of individual cases.

Below are two actual but anonymized arbitrators’ responses from the Perspectives Survey:

Arbitrator A:

Arbitrator B:

If your client’s case relies on a plain meaning interpretation of contract language, other things being equal, you might be more inclined to pick Arbitrator A. On the other hand, if your client’s case relies on a more flexible interpretation that takes considers commercial realities that have changed since signing the contract, you might be more inclined toward Arbitrator B.

Given that only a tiny percentage of arbitral awards become publicly available in any particular year, this kind of indirect assessment can be invaluable in assessing an arbitrator’s approach to interpretation.

*     *     *

To be sure, these tools won’t necessarily tell you how an arbitrator will rule in your particular case. No source can (or should purport to). But these new sources of information can help you make better-informed decisions and reduce inaccurate guesses about which person you should appoint from your shortlist to your tribunal.

As the pool of arbitrators expands both in size and geography, traditional research exclusively through public sources and professional networks is not enough. These limited sources can leave you and your client unaware of crucial insights about an arbitrator’s track record and perspectives.

Arbitrator Intelligence’s innovative new sources provide one-of-a-kind insights that can mean the difference between picking the right arbitrator or the wrong arbitrator, between winning and losing.

 

 

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Air Canada’s Win Against Venezuela: Some Guidance for Future Tribunals?

Sun, 2022-01-09 01:49

Bilateral investment treaties depend upon international arbitration as the mechanism to resolve disputes between sovereign states and investors. Although offering obvious advantages over litigation before national courts, investors are not immune from the risk of proceedings becoming destabilized by external factors. A recent example involved Air Canada, the country’s flag carrier, and the Bolivarian Republic of Venezuela (“Venezuela”). An International Centre for Settlement of Investment Disputes (“ICSID”) Tribunal heard the airline’s claim under the 1996 Canada-Venezuela BIT (“BIT”), and on 13 September 2021 awarded Air Canada repatriation of profits which had been held up by Venezuela.  In resolving the dispute, the Tribunal had to confront external challenges arising from the current political conflict in Venezuela, and the procedural implications of US sanctions.

Numerous problems have affected the South American country in recent years – from hyperinflation and a mass exodus of 5.6 million citizens, to a protracted leadership crisis and punitive US sanctions. A new currency was launched in October 2021 with six fewer zeros as the one-million bolivar note became one new Venezuelan bolivar. Air Canada’s investment treaty claim centred on the bolivar’s exchange rate against the US dollar: in particular, the repatriation of outstanding profits by way of exchange between the two currencies.

Submissions were made during the ICSID proceedings about Venezuela’s political turmoil and the impact of sanctions.  The impact of economic and other sanctions on arbitration proceedings is a topic that is gaining currency amongst practitioners, not least because of the practical difficulties that may arise as a result in the conduct of proceedings. The Tribunal’s findings provide valuable insight for international arbitration practitioners, first, into how potentially destabilising obstacles were navigated in determining the award, and secondly, into the application of the fair and equitable treatment (“FET”) provisions in investment treaties – on which arbitral tribunals have taken different approaches.

 

The Discussion on Repatriated Profits

The airline had a long history of repatriating profits on its Venezuelan earnings by converting bolivars into US dollars via a Venezuelan State commission. Following a significant devaluation in 2014, the bolivar’s exchange rates were altered by the commission. Air Canada suspended its flights to Venezuela shortly afterwards and later initiated arbitration pursuant to the BIT under the ICSID Additional Facility Arbitration Rules. The airline alleged a breach of the protection relating to the free transfer of funds (Art. VIII, BIT), breach of the fair and equitable treatment standard (Art. II, BIT), and expropriation (Art. VII, BIT).

The Venezuelan commission altered exchange rates which had been previously agreed between Canada and Venezuela. The commission had failed to process several of Air Canada’s pending applications for an Authorization for Foreign Currency Acquisition (AAD) to repatriate profits. The Tribunal found that the commission’s unjustified failure to sufficiently address Air Canada’s AAD requests meant that Air Canada were restricted from its right to freely transfer its investments or earnings under the BIT. The Tribunal therefore awarded Air Canada US$ 20,790,574 for repatriation of revenues, ruling that the airline was entitled to this sum (after set off against money owed to Venezuela as part of the currency exchange) as well as costs and interest. Because there was no finding of expropriation, no additional compensation was awarded.

The Tribunal also awarded damages, finding that Venezuela had breached the protection of the free transfer of funds by failing to process Air Canada’s numerous currency exchange requests and, held that this right was central to the international regime for promotion and protection of investments. Although the Tribunal’s FET discussion was largely obiter, the Tribunal’s approach is worth considering alongside procedural issues relating to political factors and international sanctions, which have become more commonplace in international arbitration. Because there was no finding of expropriation, no additional compensation was awarded.

 

Determination on FET Violations

The parties offered different interpretations of the FET protection under Article II of the BIT. Venezuela argued that the threshold for finding a violation of FET should be assessed in line with customary international law principles, and when considering the reasonableness of state decisions, the Tribunal should take into account public policy reasons. Venezuela thus argued that overall the threshold for violation of the FET standard was high, requiring a more restrictive interpretation. In rejecting it, the Tribunal adopted a purposive approach instead:

“Rather, international law requires this Tribunal to interpret the concept of fair and equitable treatment in a manner consistent with the context of investor-State arbitration and the purpose of the BIT itself: namely investment protection. In this regard, the more liberal approach, which focuses on the broadly consistent elements of “fair and equitable”, is appropriate”.

Recognising that a BIT is designed to provide investment protection, the Tribunal decided that, as an investor, Air Canada should be able to rely on it for relief. Venezuela’s actions were found to be arbitrary, lacking in transparency and, by failing to process the airline’s requests for repatriation, the state did not meet the investor’s legitimate expectations.1) This is another example, if needed, of a Tribunal finding in favour of an investor because of a sovereign state’s failure to comply with previous representations and follow established processes. For example, ESPF Beteiligungs GmbH & others v Italy, involved a claim under the Energy Charter Treaty the state was held to have breached the legitimate expectations of a German investment company through measures that substantially reduced the benefits of a previously established incentive regime in Italy, the Conto Energia Decrees (discussed here). jQuery('#footnote_plugin_tooltip_39961_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_39961_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

Impact of Venezuela’s Crisis

Unusually, the Tribunal was confronted with issues stemming from Venezuela’s political difficulties, in particular, the legitimacy of President Maduro, which has been disputed since the country’s 2019 elections. The international community is divided. Notably, the USA, Canada, the UK and the European Union, have extended some form of recognition to opposition politician Juan Guaidó. Claiming to be Venezuela’s Attorney General with exclusive responsibility for the country’s legal representation, one of Mr Guaidó’s representatives argued that the ICSID Tribunal should no longer grant standing to Venezuela’s legal counsel on record, who were appointed by the Maduro government.  This issue is considered in a previous post discussing the potential difficulties arbitrators face when deciding who to recognise as Venezuela’s legal representative.

The Tribunal rejected this position, which permitted the proceedings to continue with Venezuela’s existing counsel.2) This approach was consistent with decisions reached by other international tribunals faced with a similar issue. See, for example, Venezuela Holdings, B.V. & others v Venezuela (ICSID Case No. ARB/07/27), Decision, 1 March 2021.  In Global Values v. Venezuela, the Tribunal rejected the request by the Special Attorney appointed by Mr Guaidó to exclude Venezuela’s (Maduro-appointed) Attorney General. The Tribunal held that it had not shown that Mr Guaidó’s Special Attorney had been appointed by a government with authority and control over Venezuela. jQuery('#footnote_plugin_tooltip_39961_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_39961_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Venezuela’s complex political dynamics do, however, have potential implications for future international arbitration proceedings. Venezuela sought to rely on a quantum expert’s report to rebut Air Canada’s quantum expert evidence. However, because of the stringent economic sanctions imposed by the US, the Venezuelan quantum expert could not corroborate the contents of a report or be available for examination at the hearing. Nevertheless, the Tribunal dismissed Air Canada’s attempt to exclude the report and did consider the evidence, albeit giving it less weight. Circumstances could arise in another Tribunal hearing which might think it inappropriate to admit disputed forensic evidence that cannot be fully examined at a hearing

 

Keeping Politics out of the Proceedings

Tribunals routinely have to balance the legislative and policy choices of states with investors’ rights, but should external political factors be permitted to disrupt arbitration of BIT claims?

Notwithstanding Venezuela’s complex political situation, the arbitrators reached a decision consistent with international law principles, focusing their analysis primarily on the BIT provisions. Significantly, they did not order Venezuela to replace its counsel and permitted the country to rely on its quantum expert.  By doing so, the arbitrators prevented sanctions or other political considerations from undermining the proceedings.

 

Conclusion

The Tribunal’s flexibility in this case and its reticence to allow the proceedings to be disrupted should reinforce investors’ confidence in the investor-state dispute settlement process. The case also illustrates how the integrity of an arbitration proceeding can be preserved despite the potentially disruptive effect of sanctions. Tribunals may increasingly be called upon to resolve procedural obstacles created by sanctions, and it remains to be seen whether the system is sufficiently flexible for a similar approach to be followed in future cases.

References[+]

References ↑1 This is another example, if needed, of a Tribunal finding in favour of an investor because of a sovereign state’s failure to comply with previous representations and follow established processes. For example, ESPF Beteiligungs GmbH & others v Italy, involved a claim under the Energy Charter Treaty the state was held to have breached the legitimate expectations of a German investment company through measures that substantially reduced the benefits of a previously established incentive regime in Italy, the Conto Energia Decrees (discussed here). ↑2 This approach was consistent with decisions reached by other international tribunals faced with a similar issue. See, for example, Venezuela Holdings, B.V. & others v Venezuela (ICSID Case No. ARB/07/27), Decision, 1 March 2021.  In Global Values v. Venezuela, the Tribunal rejected the request by the Special Attorney appointed by Mr Guaidó to exclude Venezuela’s (Maduro-appointed) Attorney General. The Tribunal held that it had not shown that Mr Guaidó’s Special Attorney had been appointed by a government with authority and control over Venezuela. function footnote_expand_reference_container_39961_30() { jQuery('#footnote_references_container_39961_30').show(); jQuery('#footnote_reference_container_collapse_button_39961_30').text('−'); } function footnote_collapse_reference_container_39961_30() { jQuery('#footnote_references_container_39961_30').hide(); jQuery('#footnote_reference_container_collapse_button_39961_30').text('+'); } function footnote_expand_collapse_reference_container_39961_30() { if (jQuery('#footnote_references_container_39961_30').is(':hidden')) { footnote_expand_reference_container_39961_30(); } else { footnote_collapse_reference_container_39961_30(); } } function footnote_moveToReference_39961_30(p_str_TargetID) { footnote_expand_reference_container_39961_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_39961_30(p_str_TargetID) { footnote_expand_reference_container_39961_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Challenging Arbitrators in Brazil: a Practical Guideline from the CEPArb-USP Digest

Sat, 2022-01-08 00:20

The Center for Studies and Research in Arbitration from the University of São Paulo (“CEPArb-USP”) has recently made public the findings of its pioneer empirical research on challenges of arbitrators in domestic proceedings in Brazil. The initiative analyzed data from challenges in proceedings administered by the Câmara de Mediação e Arbitragem Empresarial – Brasil (CAMARB).

The outcome of the working group is documented in the Digest of challenge proceedings in arbitration before the Câmara de Mediação e Arbitragem Empresarial – Brasil (CAMARB) – Portuguese version available here.  The Digest encompasses a chronological analysis of ten institutional arbitrator challenge decisions rendered between 2008 and 2021. A uniform methodology was applied in the analysis of all ten cases: only the final decision was analyzed, in an objective way, meaning that the Digest does not contain the team’s opinions on the related matters. Confidentiality was preserved and no information on the parties or arbitrators involved were disclosed throughout the analytical process.

The initiative is unique in Brazil. As clarified by the advisors of the team of researchers in the forewords of the Digest, it is of foremost importance for the Brazilian arbitral community to know the standards applicable to arbitrator challenges. This community englobes not only arbitration practitioners, but also state courts, which may eventually deal with the issue in set aside proceedings. Foreign parties unfamiliar with Brazilian arbitration rules and law also benefit from the Digest. As a matter of fact, there is a worldwide concern on transparency regarding the outcomes of challenges related decisions. In this context, it is worth recalling previous efforts from the LCIA challenge digest, discussed here and here.

To provide the international arbitral community with a general view of the Digest, below is a sneak peek of the factual grounds for challenge in each of the ten cases. The report contains raw data that may be subject to different kind of analysis.

  • Case 1 (2008): Chairman appointed by co-arbitrators was challenged based on previous academic relationship with one of the party’s counsel. The challenging party invoked the existence of an intimate friendship between them grounded on such previous relationship. The challenge was rejected.
  • Case 2 (2011): All arbitrators were challenged on the grounds of an alleged prejudgment of the case and lack of impartiality after issuing a procedural order rejecting a party’s request for leave to produce certain evidence. Furthermore, one co-arbitrator was challenged based on previous work as supervisor for one of the party’s counsel in an academic endeavor. The challenge was rejected.
  • Case 3 (2015): All members of the tribunal were challenged by both parties after rendering a partial award which allegedly violated due process and the Brazilian law applicable to the dispute. The Board of CAMARB rejected the challenge as it considered that the violation of due process allegation is a valid ground for setting aside the award, but not for challenging an arbitrator.
  • Case 4 (2014): Party-appointed arbitrator was challenged based on the existence of a professional relationship with counsel for the appointing party as well as the fact that a relative of said arbitrator had been a partner of the counsel in a law firm many years before the challenge was made. The challenge was rejected.
  • Case 5 (2014): Party-appointed arbitrator was challenged by the same party who appointed them after disclosing that their law firm represented a company from the same corporate group of that party. The challenge was rejected.
  • Case 6 (2015): Chairman appointed by the co-arbitrators was challenged after disclosing he had previously acted as an arbitrator in a panel presided by one of the parties’ counsel. In that case, the presiding arbitrator was chosen by CAMARB. The challenge was rejected.
  • Case 7 (2016): Sole arbitrator was challenged after disclosing that his former law firm, but not him personally, had acted for one of the parties to the arbitration. The challenge was rejected.
  • Case 8 (2017): Party-appointed arbitrator was challenged on the grounds of an alleged commercial relationship with the law firm representing one of the parties and due to alleged lack of experience in the related matter. The challenge was accepted based on the first issue. The appointed arbitrator had constantly acted as representative in judicial hearings on behalf of the party’s law firm. The decision considered that the relationship with the party’s law firm gave grounds to justifiable doubts regarding the arbitrator’s independence and impartiality. The reasoning expressly referred to the IBA Guidelines on Conflict of Interests.
  • Case 9 (2020): Party-appointed arbitrator was challenged based on their previous employment, in a company that was not a party to the arbitral proceedings. The challenging party alleged that, due to arbitrator’s previous experience, they would be predisposed to accept the arguments of the opposing party on a subsidiary claim which involved interests of this third party. Said employment relationship ended more than 3 years before the appointment, but the same company was, at the time of the challenge, a client of the arbitrator’s current law firm. The challenge was accepted, as it was considered that the current relationship between the company and the arbitrator’s law firm could jeopardize the trust required between the parties and the arbitrator. As for the former employment relationship, the reasoning expressly referred to the possible application by analogy of the three-year period provided for in the IBA Guidelines on Conflict of Interests to discard it as a circumstance from the Orange List.
  • Case 10 (2021): Party-appointed arbitrator was challenged based on an alleged intimate friendship with one of the party’s counsel, their participation in academic events with some of the counsel for the appointing party, a professional relationship with counsel and also previous professional contacts with the party itself. The challenge was accepted. The reasoning was based on that none of these facts alone would suffice to challenge an arbitrator, but their combination led to justifiable doubts as to the arbitrator’s impartiality. Again, the reasoning expressly referred to the IBA Guidelines on Conflict of Interests.

The data indicates that the standard to accept a challenge is very high and suggests two major initial findings.

The first one refers to the fact that all three cases in which a challenge was accepted expressly referred to the IBA Guidelines on Conflict of Interests. That is particularly relevant because, as pointed out in the Digest’s foreword, those Guidelines were not construed bearing in mind the Brazilian domestic arbitration reality but more experienced and consolidated communities such as the US and Europe. Despite that, praxis shows that, in the absence of any other standard, this soft law instrument is commonly invoked and relied upon to rule on arbitrators’ challenges.

The second one is that, in these three cases, the ground for granting the challenge was the existence of a business or professional relationship between the arbitrator (or his law firm) with the counsel for one of the parties (or their law firm). A relation-based allegation was also the most frequent ground for filing a challenge.

 

Conclusion

Noting that different approaches analyzing the data are possible, we can only hope this Digest to be a starting point towards a much-appreciated consolidation of the guidelines applicable to domestic proceedings in Brazil, promoting foreseeability and transparency and, therefore, legal certainty to all its players.

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P.R.I.M.E. Finance Launches Revised Arbitration Rules

Fri, 2022-01-07 00:56

On 15 November 2021, P.R.I.M.E. Finance launched its revised P.R.I.M.E. Finance Arbitration Rules (the Rules). A launch event was held on 6 December at which Georges Affaki, Martin Doe of the Permanent Court of Arbitration (PCA) and Secretary-General of P.R.I.M.E. Finance Kasper Krzeminski gave an overview of the Rules. A recording is available here.  P.R.I.M.E. Finance stands for the “Panel of Recognised International Market Experts in Finance”.

The Rules offer arbitrators and users a comprehensive, clear, and straightforward set of procedural rules specially designed for the arbitration of a broad range of financial and banking disputes. Non-bank parties and financial institutions conducting ordinary business transactions, with no distinctive credit component, can also choose to submit their disputes to P.R.I.M.E. Finance.

The Rules came into effect on 1 January 2022 and can be downloaded here.

 

Introduction to P.R.I.M.E. Finance

P.R.I.M.E. Finance was established in the wake of the 2008 global financial crisis to help resolve disputes concerning complex financial products. From the outset, P.R.I.M.E. Finance recognised the need for a specialised forum to hear such disputes. As a result, the P.R.I.M.E. Finance Arbitration Rules were developed and designed to offer a framework containing features of particular interest to the financial industry.

Concurrently, P.R.I.M.E. Finance has also kept expanding its Panel of Experts. This group of international finance, legal and regulatory experts now numbers close to 250 individuals. This coincides with the needs of financial institutions which have consistently ranked technical expertise in banking and finance of sitting arbitrators as key when considering an alternative dispute resolution mechanism.

In 2015, the PCA joined forces with P.R.I.M.E. Finance. Arbitrations brought under the P.R.I.M.E. Finance Arbitration Rules (and mediations brought under its Mediation Rules) would henceforth be administered by the PCA. The PCA is the world’s oldest arbitral institution, with over a century of experience in administering complex international proceedings. The aim of the co-operation is to combine the PCA’s efficiency in administering arbitral proceedings with the subject-matter expertise of P.R.I.M.E. Finance’s Panel of Experts.

 

Overview of Review Process

The review of the Rules, which were last updated in 2016, began in 2020. The guiding aim was to ensure that the Rules were fit-for-purpose for users, reflected current best practice in arbitration and contained features of particular interest to financial market participants. A two-tier rule structure for the review was established, comprising a Drafting Group and a Consulting Group. The Drafting Group was chaired by Professor Georges Affaki. The Consulting Group was chaired by Carolyn Lamm, Senior Partner and Co-Chair International Disputes Americas, White & Case LLP, and Heikki Cantell, General Counsel of the Nordic Investment Bank.

The following distinguished arbitrators and finance experts all contributed their time and experience: Yas Banifatemi, Chiann Bao, Paula Costa e Silva, Whitney Debevoise, Felix Dasser, Martin Doe, Grant Hanessian, Bernard Hanotiau, Arthur Hartkamp, Ulf Koping-Hoggard, Kasper Krzeminski, George Liakopoulos, Camilla Macpherson, Ali Malek QC, Romina Martinez, Wendy Miles QC, Loukas Mistelis, Philippe Pinsolle, Kathryn Sanger, Hon. Elizabeth Stong, Gaetan Verhoosel and Marcus van Bevern.

A comprehensive draft set of revised Rules was issued for public comment in January 2021. Three virtual public consultations were held, aimed at audiences in Asia, the Americas and EMEA. Comments were received from many leading law firms and practitioners around the world, ensuring the geographical and sectoral representation that is essential to global rule-setting.

 

Key Features of the Revised Rules

  1. The PCA and the P.R.I.M.E. Finance Panel

The PCA plays a greater role throughout the arbitral process than in the previous version of the Rules. It enjoys all the customary prerogatives of an administering institution, with particular discretion in relation to the fixing of time limits. Particular new features of interest include a confirmation procedure, whereby in exceptional situations, the PCA is granted the power to decline the confirmation of arbitrators nominated by the parties or a tribunal president nominated by co-arbitrators, such as when the agreed nominee and/or nomination process creates a risk of unfairness and endangers the enforceability of the award. The PCA will also henceforth undertake a limited review of draft awards.

P.R.I.M.E. Finance’s Panel of arbitrators is to be referenced, when appropriate, for the purpose of nominations or appointments. This recognises that finance disputes are often complex and can benefit from specialised arbitrators. The combination of the PCA’s efficiency in administering arbitral proceedings and the Panel’s subject-matter expertise brings significant advantages for users in the banking and finance sectors.

  1. Transparency

There is a focus on transparency throughout the Rules. By way of example, parties are required to disclose the identity of any third party with a significant interest in the outcome of the dispute. This is a new element to the Rules.

The provisions on amicus curiae have also been updated, with arbitral tribunals sitting under the Rules having the power to invite or grant leave to an industry body to appear before it as amicus curiae and make submissions on relevant issues. This reflects the fact that banking is a highly standardised sector, with syndicated lending generally following the template of bodies such as the Loan Market Association (LMA) or the Loan Syndications and Trading Association (LSTA) and derivatives using the International Swaps and Derivatives Association (ISDA) Master Agreement. Such bodies might well have an interest in making submissions in certain cases.

Finally, the rules on publication of awards have been clarified, with awards to be published in anonymised form (subject to party agreement), to permit the emergence of a body of jurisprudence similar to the case law of courts in major financial centres. This will increase predictability and transparency of the arbitral process and further P.R.I.M.E. Finance’s mission to reduce legal uncertainty and systemic risk, and to foster stability and confidence in, and a more settled and authoritative body of law for, world finance.

  1. Complex arbitrations

Complex financial transactions may involve many parties, sometimes with adverse interests, and multiple contracts. One of the pitfalls in the arbitral process is that expediency often requires that all claimants, on the one hand, and all respondents, on the other, be treated alike regardless of their interests. The previous version of the Rules dealt only in passing with joinder. The new Rules include detailed provisions not only on joinder but also on consolidation, as well as a provision enabling separate arbitrations that are not eligible for consolidation to be coordinated in certain cases.

  1. Emergency and expedited rules

The Rules comprehensively address emergency situations both before and after the tribunal is constituted, with updated provisions on emergency arbitration and  a new provision on interim measures. As to expedited proceedings, the previous version of the Rules simply noted that the parties might agree to shorten any time lines. Now, in response to financial institutions’ requests for efficiency in the rendering of awards, there is a very complete process for expedited proceedings. The new expedited rules will apply automatically to arbitrations with an amount in dispute of EUR 4 million or less, with a sole arbitrator expected to render the final award within 180 days of the constitution of the tribunal.

  1. Efficiency

The Rules introduce a range of new provisions designed to create efficiency. By way of example, tribunals are expected to convene a case management conference with the parties within 30 days of their constitution. The convening of additional procedural conferences is encouraged throughout the proceedings. Tribunals are also given deadlines to ensure the rendering of final awards in a timely fashion. Tribunals with three or more members are required to render the final award within 90 days of the closing of the hearing (or the receipt of the last submissions authorised by the tribunal); for sole arbitrators, the time limit is 60 days. Tribunals are also explicitly empowered to assist the parties in discussing a settlement when appropriate.

One concern raised by financial institutions is the need for tribunals to be decisive in dismissing evidently unmeritorious claims or defences, without having to go through the full procedure on the merits. Early determination is a power expressly conferred upon tribunals in the Rules.

Last but not least, parties can choose whether fees are calculated on a time-based system or in proportion to the value of the dispute. Absent agreement, the Rules default to a time-based fee system.

 

Conclusion

The Rules offer a highly attractive arbitration mechanism to financial institutions, their customers, and counterparties. It is hoped that all finance parties, and those advising them, consider arbitration in accordance with the P.R.I.M.E. Finance Arbitration Rules, and adopt P.R.I.M.E. Finance’s model clause in their contracts accordingly.

 

The author, Camilla Macpherson, is Head of Secretariat of P.R.I.M.E. Finance and a member of the P.R.I.M.E. Finance Arbitration Rules Review Drafting Group. For more information, contact [email protected].

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The Contents of the Yearbook Commercial Arbitration, Volume XLVI (2021)

Fri, 2022-01-07 00:00

Subscribers to KluwerArbitration.com enjoy access to the ICCA Yearbook Commercial Arbitration.

The final upload of materials for the 2021 volume of ICCA’s Yearbook Commercial Arbitration is now available on the KluwerArbitration website. The upload consists of a selection of six awards rendered under the rules of the International Chamber of Commerce (ICC), dealing with issues such as the application of the United Nations Convention on Contracts for the International Sale of Goods (CISG), various Incoterms, interest, and the allocation of costs. Here are two of my favourites.

One ICC award presented highly practical procedural issues under the ICC Rules. It held that claims brought under two sales contracts could be heard in a single arbitration, for reasons of efficiency, because the wording of the arbitration agreements in the two contracts were identical and because there was no reason to disregard the expectation that parties to a business transaction wished their disputes to be resolved as quickly and as efficiently as possible, saving additional costs. Further, contrary to the respondent’s contention, it was both provided for in the ICC Rules, and best international practice, that the request for arbitration was filed by counsel, rather than by the claimant itself.

In another ICC award, concerning the lawful termination of a sales contract under the CISG, the arbitrator dealt with the interaction of the CISG with domestic private law, the question here being whether contractual penalty clauses were enforceable under German law concerning “standard business terms” The arbitrator found that, while the clauses in question had not been negotiated in detail by the parties, their wording and contents differed in various draft versions circulated between the parties during the negotiation of the contract. This was a strong indication that the clauses had been drafted specifically for this transaction and were not the buyer’s standard business terms.

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“Forward, but be Careful”: Italy and Interim Measures Issued by Arbitrators

Thu, 2022-01-06 00:03

Pedro, adelante, con juicio“: this Spanish exhortation comes from a famous Italian novel, “I Promessi Sposi” by Alessandro Manzoni. The Spanish governor of Milan gives these ambiguous instructions to his coachman Pedro, who is steering the carriage amidst a rioting mob: “forward, but be careful“. It became proverbial for describing an uneasy balance between action and caution. As such, it captures quite well the recent developments of Italian arbitration law.

On November 25, 2021, the Italian Parliament approved a bill delegating the Government to reform the Italian Code of Civil Procedure (the “Delegation Act“), including the arbitration chapter. Within one year, pursuant to the guidelines set out in the bill, the Government will implement the reform by enacting a legislative decree. The Delegation Act already heralds significant changes for Italian arbitration law. This post outlines some of the major alterations to be introduced (which will be then presented in more detail by a follow-up post), before focusing on interim measures.

An Overview of the Upcoming Reform

The reform seeks to increase guarantees of impartiality and independence for arbitrators by (i) re-introducing, among the grounds for challenging an arbitrator, the notion of “serious grounds of appropriateness” that before 2006 was applicable as consequence of the general reference to the discipline for court judges; and (ii) expanding the arbitrator’s duty of disclosure, by introducing a written declaration disclosing all circumstances relevant for impartiality and independence. On this latter point, the law is giving general application to something already common in arbitral proceedings seated in Italy, also considering the express requirements found in several sets of rules (e.g. Article 11 of the ICC Rules; Article 20 of the Arbitration Rules of the Milan Chamber of Commerce).

The reform will also explicitly provide that: (i) the judicial decrees recognizing foreign awards are immediately enforceable; and (ii) the parties are free to choose the law applicable to the merits. Here the reform is expressly clarifying what is already widely taken for granted in practice.

The reform will also reduce, from one year to six months, the time limit for filing a set-aside petition when the award has not been notified to the challenging party: a reasonable compromise between the different interests at stake.

The Traditional Prohibition of Interim Measures Issued by Arbitrators

In the perspective of international arbitration, the main change concerns interim measures issued by arbitral tribunals. Currently, arbitral tribunals sitting in Italy are not empowered to grant interim measures. Under Article 818 of the Italian Code of Civil Procedurearbitrators may not grant attachments, or other protective measures, unless otherwise provided by the law“. There is only one significant exception based on a lex specialis, applicable when the dispute is based on arbitration clauses incorporated in companies’ by-laws. In this specific scenario, when the validity of a shareholders’ resolution is challenged, the arbitral tribunal can provisionally suspend the resolution.

In the international landscape, the Italian prohibition is peculiar. In recent decades, most jurisdictions have granted to arbitral tribunals significant powers with respect to issuing interim measures: we see this not only in common law jurisdictions such as England, Singapore or Hong Kong, but also in civil law jurisdictions. For example, arbitral tribunals can order interim measures in France (Article 1468 of the French Code of Civil Procedure), Switzerland (Article 183 of the Federal Act on Private International Law) and Germany (Article 1041 of the German Code of Civil Procedure).

The Italian approach, still echoing an ancient suspicion towards arbitration, can discourage the choice of Italy as seat of arbitration. Quite understandably, the issue has been subject to many debates within the arbitration community, with most voices asking for a reconsideration.

Arbitrators Empowered to Issue Interim Measures (with Some Requirements)

At first glance, the reform is going in the auspicated direction. Pursuant to Article 1, paragraph 15 of the Delegation Act, the reform of the Italian Code of Civil Procedure will grant to arbitrators “the power to issue interim measures in the event of express will of the parties, manifested in the arbitration agreement or in a subsequent written act, unless otherwise provided by the law“.

In implementing this guideline, the reform will finally overcome the general prohibition under Article 818 of the Italian Code of Civil Procedure. The arbitrators’ power to issue interim measures will no longer be a very limited exception. However, this power will not be as broad as some might hope: the Delegation Act sets specific requirements in relation to the grant of interim measures.

First, it will be limited to “arbitrato rituale“. We will not discuss here the peculiar differentiation between “arbitrato rituale” (leading to an enforceable award) and “irrituale” (where the award has merely contractual effects) under Italian law. Practically speaking, in the context of international arbitration, where parties choose arbitration as an alternative to court proceedings, the choice is invariably for “arbitrato rituale“.

More significantly, the power to issue interim measures will require the “express will of the parties“. Such an opt-in mechanism is unusual: in many jurisdictions the arbitrators’ power to issue interim measures is of general application (e.g. in France, see Article 1468 of the French Code of Civil Procedure) or, at most, it can be “opted-out” if the parties so agree (e.g. in Switzerland, see Article 183 of the Federal Act on Private International Law). An opt-in system is not ideal because it works properly only when the parties ponder this issue when negotiating the arbitration clause: arguably, this does not occur often. Conversely, it is unlikely that the parties will agree on this after the dispute has arisen.

Furthermore, the revised regime requires the will of the parties to be “express”, which can prove to be a high threshold, especially if we construe express as explicit. Before delving into interpretative gimmicks, we should wait and see how the revision of the Italian Code of Civil Procedure will implement this requirement.

As noted by Carlevaris 1)Andrea Carlevaris, La riforma della disciplina dell’arbitrato nella legge delega, un commento in Newsletter AIA – N. 7/2021, pages 3-4. jQuery('#footnote_plugin_tooltip_39917_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_39917_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });, a major question revolves around institutional arbitration: can we argue that the parties, merely by choosing arbitration rules which provide for interim relief issued by arbitrators, manifested an “express will” on this specific matter?

If the revised provisions will simply reiterate the notion of “express will” without further clarification, it is easy to foresee many real-life situations in which there will be reasonable support for opposite interpretations. Such interpretive dilemmas (fascinating as they might be for lawyers), do not bode well for the overall efficiency and attractiveness of the system. Therefore, we should hope that the implementation will clarify what qualifies as “express will of the parties“, and possibly address the matter of institutional arbitration.

The Dilemma Between Exclusive and Concurrent Power

Another relevant issue in relation to interim measures involves the coordination between state courts and arbitral tribunals. The Delegation Act provides that state courts will have power to issue interim measures only when the request has been made before the arbitrators’ acceptance of the appointment. It means that arbitral tribunals will enjoy an ample sphere of exclusivity in issuing interim measures. This is a bold step forward, especially considering the general prohibition under the current regime.

However, exclusivity is not necessarily the best solution. In many jurisdictions, parties are allowed to choose freely between courts and arbitrators even after the tribunal’s constitution, for all or at least some category of interim measures (see, e.g., Article 1033 of the German Code of Civil Procedure, expressly providing that state courts retain a concurrent power to issue interim measures). Moreover, the guidelines provide that it will be possible to appeal the interim measures before state courts, but such appeal will be limited to the grounds of invalid arbitration agreement and violation of public policy.

Logically, state courts will retain a decisive role in enforcing any interim measures issued by arbitral tribunals. On this very point, the Delegation Act is much vaguer, only providing that the legislative decree issued by the Government “will discipline the manners of enforcement of the interim measure always under the supervision of the court judge“.

An Important Step Forward, But…

Overall, the Italian turnaround on interim measures is a long-awaited step forward. However, for the reasons discussed above, we might expect some criticism targeting the opt-in mechanism based on the parties’ consent and, possibly, the exclusive power of arbitral tribunals once they are constituted.

Moreover, even if the reform is still to be implemented by revising the Italian Code of Civil Procedure, in some key areas the guidelines set by the Delegation Act are fairly detailed, and therefore the Government will not have much discretion. For example, the requirement of “express will of the parties” is rather specific and cannot be dispensed with. However, as discussed, we might hope for some additional clarification, especially to address the issue of institutional arbitration and other potential interpretive quandaries.

In conclusion, the opening quote “forward, but be careful” is a fair takeaway of this reform. By allowing arbitral tribunals to grant interim measures Italy is truly going “forward“, arguably even too far in granting them ample exclusive power. However, the requirement of “express will of the parties” betrays a residual suspicion: here we see the “being careful“. Considering the goal of making Italy an attractive forum for arbitration proceedings, excessive caution might turn a good reform into a missed opportunity.

References[+]

References ↑1 Andrea Carlevaris, La riforma della disciplina dell’arbitrato nella legge delega, un commento in Newsletter AIA – N. 7/2021, pages 3-4. function footnote_expand_reference_container_39917_30() { jQuery('#footnote_references_container_39917_30').show(); jQuery('#footnote_reference_container_collapse_button_39917_30').text('−'); } function footnote_collapse_reference_container_39917_30() { jQuery('#footnote_references_container_39917_30').hide(); jQuery('#footnote_reference_container_collapse_button_39917_30').text('+'); } function footnote_expand_collapse_reference_container_39917_30() { if (jQuery('#footnote_references_container_39917_30').is(':hidden')) { footnote_expand_reference_container_39917_30(); } else { footnote_collapse_reference_container_39917_30(); } } function footnote_moveToReference_39917_30(p_str_TargetID) { footnote_expand_reference_container_39917_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_39917_30(p_str_TargetID) { footnote_expand_reference_container_39917_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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2021 in Review: From Fragmentation to Harmonization through Investment Treaty Arbitration (ITA) Reform

Wed, 2022-01-05 00:00

The year 2021 has been perhaps the most controversial year for investment arbitration. From the profound structural reform work with respect to the ICSID and UNCITRAL rules, through the complete ban and termination of intra-EU investment arbitration in the European Union, to the ECT modernization process, this year has been marked by change and reform of the institutions, treaties, and procedural rules that make-up a large part of investment arbitration. This post will examine the most important structural reforms in ITA to consider how they aim to overcome the legal fragmentation of ITA and address the concerns of all stakeholders involved in investment arbitration.

 

ECT Modernization

In 2021, the fourth (2–5 March), fifth (1–4 June), sixth (6–9 July), seventh (September 28–October 1), eighth (9–12 November), and ninth (December 13) ECT modernization rounds were finalized. Despite the ongoing efforts to address the list of modernization topics approved by the ECT Secretariat in 2018, there are still difficult discussions that have yet to be resolved in light of the recent modernization rounds.

In 2020, the Blog ran a series on the ECT modernization process, followed by an update post in 2021. The modernization process will address both substantive and procedural aspects of ITA under the ECT. As discussed by Dr. Esmé Shirlow and Ylli Dautaj in the update post, the ECT modernization process may be moving closer to protecting “green investments”(and, leaving out the protection of fossil fuels), by redefining the terms “Energy Materials and Products” and “Economic Activity in the Energy Sector.” Similarly, one of the critical objectives of the reform is to balance the interests of investment protection with environmental goals, taking into consideration the EU’s goal to make the ECT the greenest investment treaty of all.

The ECT modernization process has also touched upon valuation of damages in ITA. In the absence of clear guidelines to assess damages under the Charter, this task has been left to the tribunals. The ambiguity of the “express compensation standard” in article 13 of the ECT fails to provide sufficient guidance on compensation and valuation. Thus, the modernization process must provide a comprehensive compensation standard to overcome this issue (see here).

In the latest meeting, among others, the Modernization Group debated the Fair and Equitable Treatment (FET) standard based on a new text proposal. As previously argued on this blog, the protection offered to investors is, yet again, ambiguous: the FET standard may be no more than a reference to the minimum standard of treatment under customary international law.

 

The ECT Modernization Process and the EU: An Alternative to an ITA Ban?

Within the ECT modernization process, the EU has affirmed its support for modernizing the ECT according to its agenda by creating a multilateral investment court for future investment disputes in Europe (see here). Similarly, the European Commission has highlighted that it will closely monitor the ECT modernization process to ensure that the reform aligns with core EU values, including fulfilling the Paris Agreement commitments, even considering withdrawal if necessary.

In parallel with the modernization of the ECT, the EU has also pursued broader systemic reforms. These reforms have been underpinned by several judgments of the CJEU, including the September 2, 2021 ruling in Komstroy v. Moldova. In that decision, the CJEU held that ECT intra-EU arbitrations are contrary to EU law. This decision was built on the Achmea decision, where the CJEU found that intra-EU investment agreements and arbitration provisions are incompatible with EU law (here). Similarly, in the PL Holdings decision, the CJEU extended the reasoning in Achmea (covered here) and Komstroy (blogged here) to ad hoc arbitration agreements identical to arbitration clauses of intra-EU BITs (blogged here). These rulings have had a spillover effect on the ECT modernization process, shifting the negotiations paradigm and casting doubt on the future of ITA within the EU (see e.g., here); thus, reinforcing the EU’s decision to terminate all intra-EU BITs. Despite the Termination Agreement initially not applying to ECT disputes, it shows the EU’s efforts over the past decade to abolish intra-EU investment arbitration proceedings from the European legal order (see here).

 

UNCITRAL Working Group III Update

Since the Blog’s series on UNCITRAL’s Working Group III (“WGIII”) in 2020, WGIII has held three sessions in Vienna, each covering big-ticket items on its agenda of possible reforms; namely, (i) selection and appointment of ITA tribunal members (ii) appellate mechanism and enforcement issues; and (iii) the draft Code of Conduct.

First, WGIII’s discussions during its 40th session in February illuminated how adjudicators would be selected and appointed in an ITA standing mechanism, should it be implemented. For instance, due to the costs and complexity of a “full representation body”, preference was expressed for a selective representation model, whereby not all contracting States would be represented in the pool of adjudicators. In such cases where the respondent State was not represented in the standing body, WGIII has considered whether the respondent State could be involved in the appointment of ad hoc judges familiar with the State’s domestic legal system, in a manner similar to that used in the ICJ, the International Tribunal for the Law of the Sea, and the European Court of Human Rights.

WGIII noted that the number of judges in the selective model should be based on the projected caseload and adjusted as the number of contracting States increased. The options for selection and appointment include: (i) direct appointment by each State; (ii) appointment by a vote of the contracting States; or (iii) appointment by an independent commission. To avoid this process being politicized, it was suggested that it be multi-layered, open to stakeholders, and transparent. However, given WGIII is yet to make any decision on the desirability and feasibility of a standing body, such considerations remain open for further discussion at future sessions.

Second, during its 40th session, WGIII also considered the nature, scope and effect of an appellate mechanism. Recently, WGIII released its revised initial draft provisions, which identify the following grounds of appeal: an error in the application or interpretation of the law; manifest error of fact; an error in the assessment of damages; the tribunal lacked impartiality/independence or was improperly appointed/constituted; the tribunal wrongly accepted or denied jurisdiction; the tribunal ruled beyond the claims submitted to it; and a serious departure from a fundamental rule of procedure. Dr. Margie-Lys Jaime discussed the scope and standard of these grounds of review in-depth, contending that although:

“the appeal proceedings may entail additional time and costs (particularly if the tribunal is vested with the power of reviewing findings of fact), the appeal mechanism would substitute the annulment/set-aside proceedings, without adding an additional layer of control to the process.”

Indeed, WGIII appeared to favor this approach, including by requiring disputing parties to submit a waiver of judicial review, although, given the issues this would raise regarding the independence of domestic courts and the constitutionality of such a waiver, it remains to be seen how this will be achieved.

Thirdly, during the 41st session in November, WGIII discussed the means of implementing and enforcing the Code of Conduct, the second version of which was released earlier this year. The Code is intended to provide a uniform approach to requirements applicable to adjudicators vis-à-vis independence and impartiality. This issue was reignited following the annulment of the Eiser v. Spain award in 2020, in which the claimant-appointed arbitrator omitted to disclose a professional relationship with the claimants’ damages expert (see, here). The delegates at WGIII have indicated that further sanctions for such non-disclosures could be written into the Code as a deterrent, such as reduced remuneration and disciplinary measures. As Professor Chiara Giorgetti previously summarized, the enforcement measures that are ultimately agreed upon by Member States will be “key to the success of the Code.” This enforcement issue continues to be debated, and will largely depend on how the Code is implemented. Currently, the proposed implementation options include implementation through a multilateral instrument, on a treaty-by-treaty basis, by agreement on a case-by-case basis, or through the arbitral institutions themselves, by incorporating it in the procedural rules, adjudicators’ declarations or court rules and regulations. Despite the need for a uniform approach, the Code’s disclosure obligations are not without issue. Fahira Brodlija argues that “[r]adically expanding disclosure obligations in the new Code would inevitably raise the expectations of the parties, resulting in an increase of challenges.” The Code has been further discussed here and here.

WGIII is scheduled to continue these discussions in February 2022 at its 42nd session to be held in New York.

 

Proposal for Amendment of the ICSID Rules

In 2021, the ICSID Secretariat published two working papers containing proposals for rule amendments: Working Paper 5 in June 2021 and Working Paper 6 on November 12, 2021. These papers build on the previous proposals, namely Working Papers 1, 2, 3, and 4, resulting from extensive consultation with stakeholders. WP6 marks the “culmination of the five-year consultative process on updating the ICSID rules for arbitration, conciliation, and fact-finding”. Adoption of these rules requires approval by two-thirds of Member States, and they are expected to be voted on (and adopted) in early 2022. While by no means exhaustive, below we highlight noteworthy features of the amended rules:

  1. Mandatory Disclosure of Third-Party Funding (TPF)

In WP4, ICSID defined third-party funding as situations in which a party ‘has received funds for the pursuit or defense of the proceeding through a donation or grant, or in return for remuneration dependent on the outcome of the proceeding’ (see, here). Similarly, WP5 settled the obligation to disclose TPF and the parties’ obligation to disclose the name and address of any non-party from which they received funding, directly or indirectly. These disclosure obligations apply throughout the proceeding. In this vein, WP6 adds additional disclosure obligations for parties backed by TPF, including the obligation to disclose the names of the persons and entities that own and control a funder that is a juridical person. In case the tribunal needs to request additional TPF information, it can do so under rules14(4) and 36(3) of Arbitration Rules (AR).

  1. Greater Transparency for Proceedings

Transparency has been a significant issue since the consultative process started. Greater transparency is linked to higher accountability of investment tribunals and greater support from civil society. In this regard, the proposed rules have tried to increase transparency through increased publication of awards, decisions, and orders. The current ICSID Rules require consent from both parties to publish the outcome award. The proposed wording of the new Arbitration AR 62 and new Additional Facility Rule 73 would stipulate that absent a clear objection in 60 days, a party will be deemed to have consented to the publication of the award. Orders and decisions would be published according to the same parameters under AR 63 and AFR 73.

The ITA reforms discussed above showcase the efforts of the arbitration community to address stakeholders’ concerns as to the need for transparency, participation and accountability in investment arbitration. These structural reforms, and their relationship with the legal fragmentation of ITA, will be discussed in more detail in our upcoming series on the Blog: Regime Interaction in Investment Arbitration.

 

 

 

 

 

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An Unlikely Couple – The Use of Transfer of Funds Clauses for the Determination of Exchange Rates in Investor State Disputes

Tue, 2022-01-04 00:21

Inconsistent decisions have long been a major criticism in investment arbitration. This does not only pertain to decisions on procedure, jurisdiction or merits but also to quantum issues. This contribution will center around one unlikely connection that has the potential to enhance consistency and predictability in an area of quantification of damages in investment arbitration: the use of transfer of funds clauses (“Transfer Clauses”) to determine the applicable exchange rate. The Tribunal in the case of Casinos Austria v. Argentina (ICSID Case No. ARB/14/32) made this determination to decide between three exchange rate options the parties had submitted. While a seemingly negligible aspect, the way the Tribunal determined the applicable exchange rate by invoking the transfer clause holds promising implications for arbitrators and practitioners.

 

Summary of the Decision

The Claimants were majority shareholders in a local company which was vested with an exclusive, thirty-year license to exploit the gaming sector in the Argentine Province of Salta. The license was revoked after less than thirteen years. While Argentina argued that this step was justified due to “manifold breaches of anti-money laundering regulations” (¶ 257), Claimants invoked a breach of the FET standard and unlawful (direct as well as indirect) expropriation under the Argentina-Austria Bilateral Investment Treaty (“the BIT”).

The majority of the Tribunal found that the revocation of the license constituted an unlawful indirect expropriation (¶¶ 427-429).

The award is notable for many reasons, including its detailed analysis of local administrative decisions based on Argentine law, its formalistic approach to the principle of due process, and its in-depth reasoning of the quantum (in fact, the reasoning of the quantum takes up almost as many pages as the Tribunal’s considerations on liability). With regard to the later, the way the Tribunal determined the applicable exchange rate stands out. But why are exchange rates relevant in investor-state arbitration?

 

The Role of Transfer Clauses

Transfer clauses are one of the most common provisions in BITs: 1,862 of the 2,258 BITs currently in force  include transfer clauses. They guarantee the investor’s ability to transfer capital such as dividends or debt payments in and out of the host state.1)Abba Kolo, ‘Transfer of Funds: The Interaction Between the IMF Articles of Agreement and Modern Investment Treaties: A Comparative Law Perspective’ in S. W. Schill (ed.), International Investment Law and Comparative Public Law (Oxford University Press 2010), p. 346. jQuery('#footnote_plugin_tooltip_39860_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_39860_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  Oftentimes these clauses also include a non-exhaustive list of types of transfers.

Although the guaranteed freedom of capital is vital for foreign investments, Transfer Clauses are invoked rarely. Moreover, such claims have been rejected in the majority of cases, for instance, because the wrongful act was already “absorbed” by an FET violation.2)AES Corporation and Tau Power B.V. v. Republic of Kazakhstan, ICSID Case No. ARB/10/16, Award, 1 November 2013, paras. 423-427. See also Achmea B.V. (formerly Eureko B.V.) v. Slovak Republic I, PCA Case No. 2008-13, Final Award, 7 December 2012, para. 286. The author found that of 17 publicly available awards only three found a violation of the transfer of funds clause. jQuery('#footnote_plugin_tooltip_39860_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_39860_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Now, these neglected treaty provisions might be revitalized by applying them for the sake of damages calculations.

 

The Role of Exchange Rates

Issues of exchange rates regularly arise in investor-state disputes as part of a breach of substantive standards or as part of the calculation of damages. This contribution will focus on the second aspect.

The issue of using an exchange rate in a claim for damages can be separated into three questions: (1) Which currency applies, i.e., must an exchange rate be applied? (2) When is the relevant point in time to establish the exchange rate? and (3) What is the applicable exchange rate?

As to the questions of the applicable currency, its answer is often driven by legal considerations. Converting the amount of damages from one currency to another may become necessary in order to fulfil the requirement of “effective compensation”, which is part of the generally accepted “Hull Formula”. The dominant understanding of “effective” compensation is that “[t]he currency of payment must be freely usable or convertible into a freely usable currency[.]”3)Andreas F. Lowenfeld, International Economic Law (Oxford University Press 2002), p. 484. jQuery('#footnote_plugin_tooltip_39860_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_39860_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); BITs repeat this requirement regularly by providing for compensation to be paid in a “freely transferable currency[.]” Based on such provisions, many arbitral tribunals have converted compensation claims, for instance, in the case of Dunkeld v. Belize (PCA Case No. 2010-13). There, the claimant requested compensation to be payable in US dollars instead of Belizian dollars. It invoked the treaty’s expropriation provision, which stated that compensation shall be made “effectively realizable and be freely transferable” (¶ 317)  The arbitral tribunal followed claimant’s arguments and converted its calculation of the damages into US dollars at the average inter-bank rate (¶ 321).

The principle of full reparation also plays a role in case the currency in which the damage occurred has depreciated since the breach. The Permanent Court of International Justice was faced with the issue of currency conversion in the Lighthouse Arbitration case between Greece and France. There, the Court reasoned that an injured party had “the right to receive the equivalent at the date of the award of the loss suffered as the result of an illegal act and ought not to be prejudiced by the effects of a devaluation”. In AMCO v. Indonesia (II) (ICSID Case No. ARB/81/1), the tribunal decided to convert the claimant’s income between 1980 and 1989 “each year at the appropriate exchange rate” for each year “to put Amco in the position it would have been in had its contract been performed.” (¶ 253)

Once the need for currency conversion is established, a second question arises: what is the relevant point in time to establish the exchange rate? Since investors should not to be burdened with the exchange rate risk, pertinent case law refers to the point in time when the damages occurred.4)Amco Asia Corporation and others v. Republic of Indonesia, ICSID Case No. ARB/81/1, Decision on the Application by Parties for Annulment and Partial Annulment of the Arbitral Award of June 5, 1990 and the Application by Respondent for Annulment of the Supplemental Award of October 17, 1990, 17 December 1992, para. 8.16; Biloune and Marine Drive Complex Ltd. v. Ghana, 95 ILR 183, p. 229; Sempra Energy v. Argentina, Award of 28 September 2007, paras. 475-478; Siemens A.G. v. Argentina, Award of 6 February 2007, para. 361; Dunkeld International Investment Limited v. Belize, Award of 28 June 2016, para. 321; Ripinsky, Damages in International Investment Law, pp. 395-397. jQuery('#footnote_plugin_tooltip_39860_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_39860_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Far more disputed is the answer to the third question, i.e. choosing the applicable exchange rate. The reply to this question is not straightforward. Most BITs do not provide explicitly for an applicable exchange rate. In addition, there are multiple ways to determine the exchange rate. For example, exchange rates can be the rate generally applied for equity investments by a central bank or the rate of exchange determined by the IMF for the host state.5)Josef Gold, Legal Effects of Fluctuating Exchange Rates (IMF 1990), p. 174. jQuery('#footnote_plugin_tooltip_39860_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_39860_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); In the case of Casinos Austria v. Argentina, the Tribunal was faced with three options: (1) the official exchange rate, (2) a forecasted exchange rate; and (3) an implied exchange rate (“Contado con Liquidación” or CCL rate).

In other words, there is no such thing as “the” exchange rate, but a variety of options to choose from. With options, however, comes the risk of inconsistent results. Many BITs provide measures to mitigate such risks in their Transfer Clauses.

 

The Finding in Casinos Austria v. Argentina

The Tribunal was faced with the question of which of the three exchange rates apply. Based on the Parties’ submissions, it considered the issue to boil down to whether an official exchange rate as required by the transfer clause was applicable to calculate Claimants’ compensation (¶ 555). Ultimately, it confirmed the application of the transfer clause to determine the applicable exchange rate.

Notably, the Tribunal was not the first to establish a link between the transfer clause and the exchange rate. The tribunal in Arif v Moldova also made the connection, but without further reasoning (see ¶¶ 625-627). The Casinos Austria award closes this gap. The Tribunal gave two main reasons for applying the transfer clause: (1) the non-exhaustive list of transfer types contained therein and (2) the consideration that the host state must not benefit from a treaty violation.

The transfer clause provided for the application of the exchange rate to be “determined in accordance with the framework of the respective bank system of the territory of each Contracting Party” in case of specific transfer types (¶ 558). While the list of transfer types included inter alia proceeds from the liquidation or sale of the investment and compensation for lawful expropriation, it did not include compensation for wrongful acts. The Tribunal found that extending its scope to compensation for unlawful expropriation was unproblematic due to the non-exhaustive nature of the list.

As a second reason, the Tribunal explained that the transfer clause established the applicable exchange rate in case the host state complied with the BIT. Thus, no less favorable exchange rate could apply in case of unlawful expropriation, as “[o]therwise, compensations for unlawful conduct, such as unlawful expropriations, would be treated worse in respect of the transfer of funds, from the perspective of affected investors, than compensation for lawful expropriations.” (¶ 556) The host state could not benefit from its own wrongful conduct. At the same time, the Tribunal also drew a clear limitation on the investors’ side, since a transfer clause would not allow investors “to invoke an official exchange rate that is more favorable to the investor than that which banks apply to commercial transactions, for instance because of existing foreign exchange restrictions.” (¶ 558)

While not specifically addressed by the Tribunal, it may be noted that this result also accords to the accepted standards of valuation. Valuation is based on the fair market value, which reflects the price a hypothetical willing buyer would pay a hypothetical willing seller when both have reasonable knowledge of the relevant facts and neither is under an obligation to sell.6)Irmgard Marboe, Calculation of Compensation and Damages in International Investment Law (2nd Ed, Oxford University Press 2017), para. 7.06. jQuery('#footnote_plugin_tooltip_39860_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_39860_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Thus, the basis for any compensation valuation is a (hypothetical) selling price. Since, Transfer Clauses regularly apply to actual sales of investments. It would be incoherent to apply them to actual sales, but not to hypothetical ones. Applying a different or even a less favorable exchange rate than in case of an actual sale of the investment would not put the investor in the position it would have been in but for the breach.

Unfortunately, the Tribunal did not pursue its approach rigorously. Instead of an official exchange rate used by banking institutions, it applied the CCL rate as suggested by Argentina (¶ 563).  Simply put, this rate is calculated based on the results of buying securities for Argentine pesos and selling them for dollars on the US market. It is disputable whether this rate falls under the BIT’s wording of “in accordance with the framework of the respective bank system[.]”

 

Conclusion: Potential Use of the Tribunal’s Finding

The use of Transfer Clauses to determine the exchange rate has the potential of bringing more consistency in the decision-making process in three ways:

  1. The wording of the transfer clause can narrow down the options of applicable exchange rate: For instance, a reference to an official exchange rate in a BIT “may mean a fixed rate or a rate quoted by the monetary authorities, but may also mean market rates consistent with the exchange arrangements chosen by a contracting party[.]”7)Josef Gold, Legal Effects of Fluctuating Exchange Rates (IMF 1990), p. 172. jQuery('#footnote_plugin_tooltip_39860_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_39860_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); This can be supplemented by the principle of full reparation to find the exchange rate which represents best the damages actually incurred. The process of determining the applicable exchange rate would thus become more coherent and more predictable.
  2. Complexity is one of the main drivers of incoherent decision making. Allowing counsels to see a legal perspective in a complex, financial topic such as exchange rates would make it more accessible. Counsels could find guidance for instructing quantum experts based on the wording of a transfer clause and enhance their legal and quantum arguments on the correctness of “their” exchange rate.
  3. Transfer Clauses are often similarly worded and are contained in the majority of BITs in force. They could therefore be used in a vast number of cases, establishing a jurisprudence constante for a neglected quantum issue.

Therefore, when faced with issues of exchange rates, counsel and tribunals alike could look at the transfer clause in BITs. In this way, they could bring more consistency into damages calculations and revitalize a long-neglected treaty provision.

References[+]

References ↑1 Abba Kolo, ‘Transfer of Funds: The Interaction Between the IMF Articles of Agreement and Modern Investment Treaties: A Comparative Law Perspective’ in S. W. Schill (ed.), International Investment Law and Comparative Public Law (Oxford University Press 2010), p. 346. ↑2 AES Corporation and Tau Power B.V. v. Republic of Kazakhstan, ICSID Case No. ARB/10/16, Award, 1 November 2013, paras. 423-427. See also Achmea B.V. (formerly Eureko B.V.) v. Slovak Republic I, PCA Case No. 2008-13, Final Award, 7 December 2012, para. 286. The author found that of 17 publicly available awards only three found a violation of the transfer of funds clause. ↑3 Andreas F. Lowenfeld, International Economic Law (Oxford University Press 2002), p. 484. ↑4 Amco Asia Corporation and others v. Republic of Indonesia, ICSID Case No. ARB/81/1, Decision on the Application by Parties for Annulment and Partial Annulment of the Arbitral Award of June 5, 1990 and the Application by Respondent for Annulment of the Supplemental Award of October 17, 1990, 17 December 1992, para. 8.16; Biloune and Marine Drive Complex Ltd. v. Ghana, 95 ILR 183, p. 229; Sempra Energy v. Argentina, Award of 28 September 2007, paras. 475-478; Siemens A.G. v. Argentina, Award of 6 February 2007, para. 361; Dunkeld International Investment Limited v. Belize, Award of 28 June 2016, para. 321; Ripinsky, Damages in International Investment Law, pp. 395-397. ↑5 Josef Gold, Legal Effects of Fluctuating Exchange Rates (IMF 1990), p. 174. ↑6 Irmgard Marboe, Calculation of Compensation and Damages in International Investment Law (2nd Ed, Oxford University Press 2017), para. 7.06. ↑7 Josef Gold, Legal Effects of Fluctuating Exchange Rates (IMF 1990), p. 172. function footnote_expand_reference_container_39860_30() { jQuery('#footnote_references_container_39860_30').show(); jQuery('#footnote_reference_container_collapse_button_39860_30').text('−'); } function footnote_collapse_reference_container_39860_30() { jQuery('#footnote_references_container_39860_30').hide(); jQuery('#footnote_reference_container_collapse_button_39860_30').text('+'); } function footnote_expand_collapse_reference_container_39860_30() { if (jQuery('#footnote_references_container_39860_30').is(':hidden')) { footnote_expand_reference_container_39860_30(); } else { footnote_collapse_reference_container_39860_30(); } } function footnote_moveToReference_39860_30(p_str_TargetID) { footnote_expand_reference_container_39860_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_39860_30(p_str_TargetID) { footnote_expand_reference_container_39860_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Arbitration Tech Toolbox: Interview with Dr. Gordon Blanke on the New CIArb Technology Guideline

Mon, 2022-01-03 00:18

The Chartered Institute of Arbitrators (“CIArb”) has just issued its fifteenth Guideline, the CIArb Framework Guideline on the Use of Technology in International Arbitration (“CIArb Technology Guideline” or “Guideline”).  To enhance our readers’ Arbitration Tech Toolbox, Kluwer Arbitration Blog has taken the opportunity to interview Dr. Gordon Blanke, who is one of the seven members of the Drafting Group for the Guideline.1)The other members of the Drafting Group are Ben Giaretta (Chair of Drafting Group) (Partner, Fox Williams), Kateryna Honcharenko (Research Executive, CIArb), Paul Kinninmont (Partner, Candey LLP), Mercy McBrayer (Research and Academic Affairs Manager, CIArb), Tunde Ogunseitan (Arbitrator, Ogunseitan Arbitration) and Clare Weaver (Solicitor and Director, Putney Consulting Ltd.). jQuery('#footnote_plugin_tooltip_39848_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_39848_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Dr. Blanke is Founding Partner of Blanke Arbitration, Dubai/London/Paris, and acts as counsel and arbitrator.  Prior to establishing his own firm, Dr. Blanke was a partner in DWF (Middle East) LLP in the DIFC, Dubai.  Qualified in England & Wales, he has extensive experience in both commercial and investment arbitration.

 

  1. First of all, Dr. Blanke, can you please explain for our readers what a CIArb Guideline is? What other CIArb Guidelines exist and where can they be found? 

A CIArb Guideline is a soft law instrument that seeks to provide non-binding, procedural guidance to the international arbitral profession, including both arbitration counsel and arbitrators, as well as to arbitrating parties on particular areas of the arbitration process that are usually not addressed in arbitration rules. Since 2016, apart from the CIArb Technology Guideline, the CIArb has issued a total of fourteen Guidelines (each of which can be accessed here https://www.ciarb.org/resources/guidelines-ethics/international-arbitration/) in relation to topics as diverse as the interviewing of prospective arbitrators, the terms of a tribunal’s appointment, how to deal with jurisdictional challenges, applications for interim relief (including a separate Guideline on security for costs), witness conferencing, the use of expert witnesses, how to deal with situations of default and party non-participation, how to manage an arbitration process (with a focus on the issuance of procedural orders), documents-only arbitration, the use of mediation in arbitration, and the drafting of arbitral awards. These Guidelines have been drafted by arbitration specialists from both common and civil law backgrounds and codify what the CIArb considers to be international best practice in the areas they address.

 

  1. Obviously, in the past two years, there have been numerous guidelines on the use of technology in arbitration issued by various arbitration-related entities. What is the main distinguishing feature of the CIArb Technology Guideline in comparison to the other pre-existing technology guidelines?

The CIArb Technology Guideline is a framework document which seeks to introduce a number of general principles of guidance on the use of technology in arbitration. As such, the Guideline is intended to serve as a stepping stone for more detailed guidelines on the use of specific technologies in arbitration both now and in the future. In this sense, the Guideline provides context to the practice of arbitration as an increasingly technology-driven activity and aims to initiate an ongoing discussion on the use of new technologies to serve the arbitration process.

To that end, Part I of the Guideline proposes a total of four main, overarching principles, each of which is accompanied by practical guidance on how it might best be implemented in practice. These principles include:

  • the arbitrator’s powers and duties with respect to the use of technology;
  • the proportionate use of technology;
  • the fair and transparent use of technology; and
  • the secure use of technology,

which is followed by more specific guidance on the role of cybersecurity in international arbitration in Part II of the Guideline.

 

  1. How did the idea of creating the Guideline come about and what was the process that led to its creation? Were there any surprising parts for you about the process of working on this Guideline or unexpected developments?

The idea of the Guideline originated in what the CIArb perceived to be an urgent need to formalise the role of technology, both old and new, in the world of international arbitration. The CIArb recognizes the increasing use of technology in the conduct of arbitrations over the past decade, not to mention the surge that the use of technology, including in particular video-conferencing and remote document management, has experienced in international arbitration as a result of the pending pandemic over the past couple of years.

In order to explore the relationship between technology and arbitration in a new virtual environment, which has given rise to the creation of a specialist legaltech sector, the CIArb decided in August 2020 to set up an ad hoc Technology Committee to work on and produce specialist guidelines for the use of technology in arbitration. The initial work of the Committee has shown the complexity of the task at hand and that more time will be needed to curate a suite of guidelines that will do justice to the pervasive role that technology has come to play in the field of arbitration of late. The work of the Technology Committee is thus ongoing and likely to continue for some time to come. It has further become evident that to produce guidelines with the relevant level of detail, it will be indispensable to consolidate the involvement of legaltech specialists in the continuing work of the Committee.

 

  1. Focusing more now on the substance of the Guideline, in section 3, the point is made that, while arbitrators generally have the power to conduct the arbitration in the manner they see fit in relation to the use of technology, they may be constrained in this regard by relevant laws applicable to the arbitration. Can you please explain what the Guideline has to say on this important issue, providing an example or two?

It is important to emphasise that the Guideline does not apply in a legal vacuum: Its application is strictly subject to the provisions of the relevant laws applicable to the arbitration, including in particular the laws of the seat. As a result, the proper determination of the scope of a tribunal’s powers and duties to use technology in an individual reference will be informed by the constraints placed upon it by the laws of the seat. By way of example, data protection laws that apply at the seat readily come to mind; so do the requirements for the e-signature of arbitral awards provided, of course, that electronically-signed awards are admissible under the law of the seat in the first place.

Arbitral jurisdictions differ widely in their degree of arbitration-friendliness and what might be permitted in some might be forbidden in others. As a golden rule, arbitrators should avoid any use of technology in circumstances that might jeopardise the safeguard of due process in the arbitration. One way to do so is to hear the arbitrating parties on the use of a particular technology and not to proceed unless there is party agreement and in the event of disagreement, to proceed only if neither party is procedurally disadvantaged by the use of the technology concerned.

 

  1. If someone is sitting as an arbitrator, what essential steps should they take to ensure “proportionate use of technology” and “fair and transparent use of technology”? How does the Guideline help an arbitrator address dilemmas that may be faced in this regard?

The Guideline seeks to provide some initial guidance on the proportionate use of technology by distinguishing between smaller cases that, due to their lack of complexity, may be run entirely online as documents-only arbitrations and those cases that warrant the use of more sophisticated and as such costly technology. In order to promote efficiency, arbitrators will be well advised to consider the involvement of specialist third-party service providers, e.g. to assist in the management of the presentation of documents in real time in a remote hearing.

The fair and transparent use of technology requires the use of technology in an arbitration to comply with the overarching principle of the right to be heard and equality of treatment as well as requirements of transparency. Failure to comply might give rise to considerations of undue process and expose a resultant arbitral award to a challenge or a successful defense to enforcement.

As regards the transparent use of technology in an arbitration more specifically, the Guideline encourages arbitrators to discuss the use of a particular technology with the parties as early as possible, e.g., at the first case management conference. This will allow the arbitrators to address any concerns that the parties may have with respect to the use of a particular technology and allow the parties to veto the use of that technology if there is good reason to believe that such use might cause procedural unfairness.

Last but not least, under the same head, the Guideline invites arbitrators to disclose any technology that they might be using and that might adversely affect their autonomous decision-making process, such as certain analytical software.

 

  1. The ICC Commission Report (2017) stated, “The tribunal should strive to ensure that the use of IT during the arbitration does not interfere with the parties’ rights to equal treatment and a full presentation of their respective cases.” One can imagine a situation in which parties to an arbitration face (even strikingly) unequal access to technology.  In such a situation, does an arbitrator have a duty to the parties to ensure equal treatment in relation to access to technology?  If so, what are the contours of this duty?  Does the Guideline provide any assistance to answer this?

The Guideline addresses the requirement for the arbitrating parties’ equality of treatment and procedural fairness from two complementary angles.

Firstly, from the angle of the arbitrating parties’ accessibility to the relevant technology. Doing so, the Guideline identifies concerns that parties might encounter barriers to access to a particular technology more generally. Such barriers would typically include:

  • A lack of party-specific resources, i.e., a party might not have the hard- or software (that is the IT tools) available to it to make use of a particular technology: This might be a question of physical inaccessibility only, but possibly also one of financial affordability;
  • a lack of knowledge or IT literacy on part of a party, i.e., a party simply does not have the know-how or skill to use a particular technology;
  • a language barrier, whereby some software might not be operable in a language spoken and understood by a party; or
  • a lack of key infrastructure in a party’s country, such that there is insufficient power supply, internet access (or internet bandwidth) or data transmission to operate a particular technology.

Secondly, apart from the accessibility angle, the Guideline identifies the way and manner in which a particular technology is being used in an arbitration as a potential source of procedural unfairness. The bottomline is that the proposed technology must not be used in a way and manner that would create procedural inequality between the parties: an example would be where in a virtual hearing, due to a difference in the parties’ time zones, one party’s witnesses might end up testifying at nighttime, which might, in turn, affect the quality of their oral testimony.

 

  1. Part II of the Guideline (“Guidance on Cybersecurity in International Arbitration”) provides specific advice on a range of cybersecurity best practices. However, it seems that while arbitrators will strive to ensure proper cybersecurity measures are in place in practice, they may face obstacles to achieving this, whether due to the cybersecurity environment they find themselves in (i.e., large firm v. independent practice) or their own relative lack of technical competence.  For those arbitrators operating without the benefit of a dedicated IT team, do you think arbitral institutions or other service providers can play a bigger role to ensure that arbitrators are following the best practices set out in the Guideline?  Are you aware of any such service providers?

Arbitral institutions and other service providers are in an ideal position to assist with the provision of a cybersecure environment within which an arbitration may be conducted. As the Guideline underlines, a number of arbitral institutions provide bespoke, highly secure and efficient digital case management platforms, which allow all participants in the arbitration to communicate, share and store data, such as the parties’ submissions, procedural orders and all other documents relevant to the arbitration. Such platforms also facilitate the holding of procedural meetings and formal hearings. In addition, there are a number of third-party service providers that have started specialising in this space, such as the Abu Dhabi Global Market (ADGM) Arbitration Centre, which is a state-of-the-art hearing facility designed, inter alia, to offer parties in arbitrations seated anywhere in the world a digital framework for the conduct of their arbitration.

 

  1. Do you consider that the Drafting Group achieved its priorities with the final version of the Guideline? Were there any areas that you or other drafters were not able to come to consensus on or topics you felt should be addressed but had to be left out for now because the best practice has not yet solidified or other reasons?

As stated previously, the Guideline is a framework document only, designed to initiate an ongoing discussion on the use of technology in arbitration now and in the future. As such, it is anticipated to be followed by other guidelines addressing the use of specific technologies going forward. For the avoidance of doubt, the future work of the Committee will see an increase in the involvement of contributors from a legaltech background to ensure the provision of technologically relevant guidance.

 

Thank you, Dr. Blanke, for answering our questions.  We appreciate your time and wish you the best.

 

Further posts on our Arbitration Tech Toolbox series can be found here.

The content of this post is intended for educational and general information. It is not intended for any promotional purposes. Kluwer Arbitration Blog, the Editorial Board, and this post’s author make no representation or warranty of any kind, express or implied, regarding the accuracy or completeness of any information in this post.

References[+]

References ↑1 The other members of the Drafting Group are Ben Giaretta (Chair of Drafting Group) (Partner, Fox Williams), Kateryna Honcharenko (Research Executive, CIArb), Paul Kinninmont (Partner, Candey LLP), Mercy McBrayer (Research and Academic Affairs Manager, CIArb), Tunde Ogunseitan (Arbitrator, Ogunseitan Arbitration) and Clare Weaver (Solicitor and Director, Putney Consulting Ltd.). function footnote_expand_reference_container_39848_30() { jQuery('#footnote_references_container_39848_30').show(); jQuery('#footnote_reference_container_collapse_button_39848_30').text('−'); } function footnote_collapse_reference_container_39848_30() { jQuery('#footnote_references_container_39848_30').hide(); jQuery('#footnote_reference_container_collapse_button_39848_30').text('+'); } function footnote_expand_collapse_reference_container_39848_30() { if (jQuery('#footnote_references_container_39848_30').is(':hidden')) { footnote_expand_reference_container_39848_30(); } else { footnote_collapse_reference_container_39848_30(); } } function footnote_moveToReference_39848_30(p_str_TargetID) { footnote_expand_reference_container_39848_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_39848_30(p_str_TargetID) { footnote_expand_reference_container_39848_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Ecuador’s Attorney General’s Office Seeks Modernization: What To Expect?

Sun, 2022-01-02 00:20

On November 23, 2021, Ecuador’s Attorney General (“AG”), Iñigo Salvador Crespo announced the creation of a new institutional framework for handling disputes brought against the state and state entities with the vision of preventing and reducing litigation, particularly costly international arbitrations. The Institutional Strengthening of the Attorney General’s Office Project (“PROFIP” for its initials in Spanish) would initiate its implementation on January 1st, 2022. The AG mentioned that this project intends to: i) safeguard and optimize the state’s resources in proceedings initiated against Ecuador; ii) prevent disputes from arising, thus, the reduction of contentious processes; iii) modernize the office’s technological resources; iv) train public servants in charge of defending the state and implement a ‘career program’ for them; and v) develop a communicational strategy to approach the society.

The announcement was introduced as part of a broader initiative to modernize the system of prevention and early resolution of disputes within the public sector which seeks to reduce the caseload of contentious cases. Nowadays, the AG Office handles more than 102,450 proceedings before domestic courts, 34 international proceedings, which include arbitrations and other cases before international courts and tribunals, and 291 international proceedings related to Human Rights protection. To these numbers, we should add other non-contentious proceedings: 1,160 mediation processes, 540 legal inquiries on the application or interpretation of public laws and regulations, and 350 processes for ex-post legality control of public procurement contracts in their three phases: i) preparatory; ii) pre-contractual; and iii) contractual.

We discuss below how this ambitious project will be developed and what we can expect from it.

 

PROFIP’s background

On October 4, 2019, Ecuador entered into a loan agreement with the Inter-American Development Bank for US$ 43 million, within the framework of the modernization of Ecuador’s financial administration. The third component of this modernization process involves the institutional strengthening of the AG Office. Against this background, on October 23 of the same year, the AG and the Ministry of Economy and Finance entered into an agreement under which the AG Office received US$ 4,9 million to increase the efficiency and transparency on the use of public resources through the implementation of a sustainable project between 2019 and 2023: PROFIP.

 

PROFIP’s implementation process

The AG Office announced that it would take three immediate actions: i) the design of a process for its implementation; ii) major structural changes, such as the creation of the National System for the State’s Legal Defense, comprising a specialized group of lawyers with its own training school, the creation of the National Department for the Enforcement of Decisions and Indemnity Actions, and the creation of the National Department of Audit and Control; and iii) the establishment of strategic partnerships.

The project encompasses five stages of development: i) the socialization of the project sessions; ii) the execution of implementation agreements; iii) a test phase with training; iv) the unveiling of the new institutional management model; and v) the implementation of the project. Currently, the fourth phase has been completed and the last stage of the project is expected to start in January 2022.

 

What to expect?

During the third phase, AG Office personnel received training in different law fields, including investment arbitration, public law, and alternative dispute resolution methods. The AG Office aims to reduce the expenses in international arbitration proceedings and represent the state with its specialized group of attorneys, hence, this was a major step.

Between 2003 and 2018, the Ecuadorian state spent US$ 318,8 million in legal fees, administrative expenses, and experts reports that involved the representation of Ecuador in 77 international arbitration cases. Only between 2017 and 2020, Ecuador spent US$ 52,8 million in consulting, advisory, and research services in international litigation processes. Likewise, until 2018, the state paid US$ 71 million for legal fees that only involved the defense against the Chevron proceedings.

Furthermore, in 2021, Ecuador’s Comptroller General Office carried out an audit of the payments the AG Office made to international law firms between August 2018 and December 2020. This is not the first time the AG Office faced these types of audits. For instance, an audit process was opened in 2019, for the legal fees paid between 2013 and 2018 to the international law firms hired for Ecuador’s defense in the Chevron related proceedings. Accordingly, the AG’s decision to train public servants in order to reduce legal expenses in international arbitrations seems correct. The results are likely to be visible in a mid to long-term period, especially when the training school begins functioning and the AG specialized group of attorneys is formed.

Conversely, the outcomes of the training sessions in public and administrative law should be tangible in a short time basis. The AG informed public servants will receive trainings focused on the review of the legality of public contracts and administrative acts, which should help to reduce and prevent contentious proceedings. This initiative goes by hand with the purpose of the draft bill the AG submitted to the National Assembly in 2019. The AG proposed to reinstate the AG Office faculty to review the legality of administrative acts and contracts through prior processes, which was lost in 2008, due to legislative reforms. The National Assembly has not yet debated this draft bill.

In addition to the initiatives described before, the AG Office announced the creation of the National Department for the Enforcement of Decisions and Indemnity Actions. This specialized department will be in charge of filing indemnity actions against those public officers who caused the state to incur in liability, and, ultimately, will be focused on recovering public funds.

For instance, as a consequence of the enactment of ‘Law 42 and Presidential Decree 662, which caused Perenco, Burlington, and Murphy to bring ICSID proceedings against Ecuador, the state was condemned to pay US$ 738 million. Moreover, the AG has revealed that indemnity actions were also filed on important human rights cases. Despite the fact that these decisions are still pending, their rulings will be decisive for future cases, especially considering the fact that the AG submitted a draft bill to the National Assembly on this subject matter in July 2021. The project aims to implement an efficient recovery process in favor of the state. The bill has not been discussed yet, but, we hope all these efforts will have positive results.

Finally, the new institutional framework involves strategic partnerships. The AG Office reported it will work with other offices such as the President’s Office, the National Assembly, the Comptroller’s General Office, the Ministries of Labor, Telecommunications, Economy and Finance, and others. These institutions will support the AG Office in the following steps: i) proposing legislative reforms for public servants to execute conciliatory agreements; ii) creating specialized monitoring committees; iii) establishing the new National Departments; iv) developing a Digital Agenda; and v) preparing budget reports for major structural changes. We believe cooperation between state institutions is fundamental for PROFIP to be successful. In addition, considering the voices of the private sector and academia would be beneficial too.

 

State’s Legal Defense Handbook

On December 12, 2021, the AG Office published the ‘State’s Legal Defense Handbook as part of PROFIP. The Handbook serves as a vademécum for the AG Office personnel, public servants, private practitioners, and the academic community. The Handbook, which compiles caselaw and AG binding opinions, clarifies the contours and limitations of the powers and prerogatives of the AG Office and aims to avoid the abuse of such prerogatives and ultra vires behavior.

 

Conclusion

We applaud the AG Office initiatives to standardize processes, train public servants, modernize the institution, promote transparency, and reduce public funds expenditure. We also believe that along with these efforts, the culture within the AG Office and public institutions faces important challenges too. More active roles within defending the state and evaluating possible risks are both welcome and desirable, as well as the reduction of bureaucracies, whereby feasible solutions may be reached, saving time and resources to all the parties involved. We trust these endeavors will flourish as long as institutions work efficiently and comprehensively, but only time will tell.

 

The views expressed by the authors do not represent the position of Carmigniani Pérez Abogados or its clients.

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The Contents of the Yearbook Commercial Arbitration, Volume XLVI (2021)

Sat, 2022-01-01 00:00

Subscribers to KluwerArbitration.com enjoy access to the ICCA Yearbook Commercial Arbitration.

The present upload consists of 26 decisions applying the major arbitration Conventions and dealing with issues of general interest to the arbitration community. The following may be of particular interest to our readers.

First, the upload includes three decisions of the European Court of Human Rights in Strasbourg dealing with how the fair trial guarantees in Article 6 of the European Convention on Human Rights apply to international arbitration proceedings. They require, as the judgments point out, inter alia, the independence and impartiality of the arbitral tribunals, as well as due process, and grant a human rights remedy in case of breach after exhaustion of local remedies. In international sports arbitration, one of the Strasbourg judgements held that Article 6 of the Convention requires a public hearing, breaking with the principle of confidentiality.

Second, on 30 June 2021, the Constitutional Court of Ecuador determined by majority decision that Ecuador’s renewed signing of the ICSID Convention did not require the prior approval by the National Assembly, in particular because the Convention did not attribute competences specific to the internal legal system to an international or supranational body.

Finally, in a reflection of the recent world events affecting international arbitration as a whole, a United States District Court found that in an arbitration under the ICC Expedited Procedure Provisions, the arbitrator’s decision to cancel the hearing due to COVID-19 restrictions and decide the case on the record only was not a violation of due process.

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