by Justin D'Agostino

Everyone is looking at China at the moment, and rightly so. It’s a very exciting place to be. Many MNCs are already here and many others are determined to get a piece of the action. But where there’s business, there are disputes. And where there’s international business, there’s arbitration.

There is no doubt that the position of the Hong Kong SAR is such that it is uniquely placed to offer foreign parties looking to invest in mainland China (and Chinese parties) a forum for dispute resolution that is more accessible than the mainland itself. Hong Kong continues to enhance its reputation. In November 2008, the ICC opened its first Asian office in Hong Kong of the Court’s Secretariat, in response to increasing demand in the region for its services. And the Hong Kong International Arbitration Centre, which celebrates its 25th Anniversary later this year, recently adopted revised and very modern Arbitration Rules, has seen its caseload increase substantially in recent years and, earlier this year, recruited a new Secretary-General.

Thus, a recent case in Hong Kong on Crown immunity has proved somewhat controversial. The judgment (and a separate judgment on Sovereign Immunity) is particularly important to anyone entering into contracts with Chinese government parties and who might seek to bring proceedings (including by way of arbitration) in Hong Kong or to enforce any judgment or award in Hong Kong.

The historic position is interesting. Crown Immunity subsists as part of the common law of Hong Kong. This is not particularly surprising once you consider Hong Kong’s history. Following the handover in 1997, when Hong Kong was returned to China upon expiry of the famous lease the privilege of Crown Immunity went largely unnoticed. That was until the novel judgment in Intraline Resources SDN BHD v. The Owners of the Ship or Vessel “Hua Tian Long” HCAJ59/2008. The Hong Kong Court of First Instance decided that the English common law doctrine still subsists in Hong Kong after the handover. The privilege has transferred to the Central People’s Government of the PRC (CPG). As a consequence, the Hong Kong courts now lack the legal basis to challenge any act, whether functional or commercial in nature, of an agency of the CPG. In short, Government Agencies of the People’s Republic of China can claim absolute immunity from suit when sued in Hong Kong even for commercial acts.

The case involved a vessel – apparently the largest floating derrick crane-barge based in Asia – which had been promised to a Malaysian-owned engineering company to work on offshore oil platform projects. The owner of the vessel, the defendant in the action, claimed that it was ultimately owned by the CPG and that it should therefore enjoy Crown and/or Sovereign Immunity.

The Sovereign Immunity point was rejected, since the whole premise of such a doctrine is that no state can claim jurisdiction over the affairs of another and Hong Kong and the PRC are not separate states. (See the recent case of FG Hemisphere Associates LLC v. Democratic Republic of the Congo and Others CACV 373/2008 and CACV 43/2009, which is very interesting on the subject of Sovereign Immunity and its restrictive application to non-government entities in Hong Kong, although is, we understand, the subject of an appeal.)

However, the CFI in Hong Kong was clear in its views as to the applicability of Crown Immunity in the Hua Tian Long case. It was held that at all times Crown Immunity remained an attribute of the British Crown’s sovereignty over her colonies (including Hong Kong) and the establishment of the new constitutional order following the handover did not alter this position. In colonial times, Hong Kong courts lacked the legal basis to challenge acts of the British Crown. While statute enabled certain proceedings to be brought against the British Government in Hong Kong, it did not remove the privilege of Crown Immunity available to the British Government in the United Kingdom. Crown Immunity originated from the concept that there was not supposed to be equality between a ruler and those that are ruled, represented by the maxim “the sovereign can do no wrong”. The CFI decided that, under the constitution of the PRC, the Hong Kong SAR was an entity of the CPG and thus Crown Immunity applies to the CPG.

The upshot of all of this makes for interesting work for legal practitioners. In short, PRC Government agencies currently have absolute Crown Immunity in Hong Kong. This applies to both functional acts of state and acts of a commercial character. In practice, this means that unless they grant express waiver of immunity or such an entity submits to the jurisdiction of the Hong Kong courts or an arbitral tribunal seated in Hong Kong, say by actively participating in proceedings, they cannot be sued in Hong Kong or have judgments or arbitral awards executed over assets in Hong Kong. This is far from ideal for parties doing business with such state agencies. The potential solution of course is that contracts with these parties must contain express waivers of Crown Immunity over suit and execution. Alternatively, parties need to look at bringing such proceedings (or commencing arbitration) in other jurisdictions both in respect of the substantive proceedings or in relation to enforcement.

One obvious question in dealing with all of this is the extent to which it is possible to determine whether a contracting party is likely to be an entity of the CPG. This may be far from easy to ascertain, and there is no clear guidance on the extent to which this applies. In fact, it remains an open question and one which is likely to be decided on a case by case basis.

As ever when contracting with businesses in this region, it is a good idea to undertake as much due diligence as possible, and to do so as early as possible. In Hua Tian Long, the court considered evidence regarding the fact that the defendant crane owner had no shareholders; was registered with the State Administration of Industry and Commerce; and was under the control of the Ministry of Communications. The way in which an entity was set up; how it is able to run its business; and which Ministry of the PRC Government oversees it, are all relevant questions. From experience, it is not always possible to answer all of these questions, but it worth giving them some serious consideration at the time a contract is entered into. If in doubt, make sure you give that dispute resolution clause a bit more thought!

Justin D’Agostino
Partner
Herbert Smith, Hong Kong

Sarah Munro
Senior Consultant
Herbert Smith LLP, Shanghai

• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Concise International Arbitration by Loukas A. Mistelis
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port

by Andrew Newcombe

On 31 August 2010, a group of over 35 academics (not including the current author), published a Public Statement on the International Investment Regime (Statement).  The preamble to the three-page Statement outlines why the Statement has been issued:

We have a shared concern for the harm done to the public welfare by the international investment regime, as currently structured, especially its hampering of the ability of governments to act for their people in response to the concerns of human development and environmental sustainability.

The Statement highlights a number of concerns, including that investment treaties have been given unduly pro-investor interpretations; the award of damages as a remedy of first resort poses a serious threat to democratic choice; and investment treaty arbitration as currently constituted is not a fair, independent, and balanced method for the resolution of investment disputes.

The Statement recommends that governments:

should review their investment treaties with a view to withdrawing from or renegotiating them in light of the concerns expressed above; should take steps to replace or curtail the use of investment treaty arbitration; and should strengthen their domestic justice system for the benefit of all citizens and communities, including investors.

I will focus my comments in this blog on my objection to the guiding premise in the Statement’s preamble—that the regime hampers “the ability of governments to act for their people in response to the concerns of human development and environmental sustainability” and will discuss concerns regarding threats to environmental protection.

Since the mid-1990s, beginning with the first NAFTA investment arbitrations, critics have argued that investment protection standards are a threat to environmental law and protection.  Many of the critiques focused on the early NAFTA cases that involved environmental issues:  Azianian, Ethyl, Metalclad and S.D. Myers.  Later, critics highlighted the claims in Methanex and Glamis as confirming their worst fears.  Yet, these concerns simply have not been reflected in the final results of the cases.  On the whole, tribunals have done a good job distinguishing between legitimate environmental legislation and arbitrary and discriminatory government conduct. In the NAFTA context, there have only been two awards—Metalclad and S.D. Myers—where tribunals have found respondent states, Mexico and Canada respectively, in breach of NAFTA.  In Metalclad, among other things, a cacti reserve was created and Mexico had to pay for the expropriation of the investment.   In S.D. Myers, the border ban on PCB waste was motivated by pure protectionism, not environmental protection.  Although one can criticize aspects of the reasoning in both awards, the tribunals reached the correct result.  In the one other high profile environmental case under an investment treaty (Tecmed), the tribunal’s findings were that Mexico took the measures based on public pressure and not because of environmental infractions.

Overall, the trend is towards a definite rejection of claims challenging environmental measures—Methanex, Glamis and, on 2 August 2010, the award in Chemtura Corporation v. Canada, another NAFTA claim.  All of Chemtura’s claims with respect to the regulatory treatment of lindane, a pesticide primarily used on canola seed, were rejected.  Chemtura was ordered to pay the costs of the arbitration and an additional CAD 2.8 million—half of Canada’s fees and costs.  In Chemtura, the tribunal recognized that its role was not to second judge science-based decision-making (para. 133); characterized the minimum standard requirement under NAFTA as one of “regulatory fairness” (para. 179); and also recognized that valid exercises of a state’s police powers do not constitute an expropriation (para. 266).

Although I have argued elsewhere that the investment treaty regime could do more to promote sustainable development, I do not agree with the Statement’s assessment that the regime has done more harm than good.  The regime has and is serving an important and key role in securing the rule of law—a vital function in a global economy.  Although there have been a number of recent high-profile withdrawals from investment treaties and ICSID, states on the whole appear to continue to have confidence in the system.  The number of new treaties (over 100 in 2009 according to World Investment Report 2010), overwhelms the few terminations.  State support for the system is also reflected in other developments, such as negotiations on a Latin American Advisory Facility on Investor-State Disputes and UNCTAD’s work programme on international investment agreements.  It seems doubtful that many states are going to take up the call in the Statement to withdraw from the current system.  Nor, in my view, should they.

• Concise International Arbitration by Loukas A. Mistelis
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port
• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage

by Barry Leon

So far in 2010, at least two jurisdictions have established specialized courts to handle international arbitration matters ─ Australia (in the state of Victoria) and India (in Bombay).

Australia: Within Australia’s federal structure, international arbitration matters are in the jurisdiction of state supreme courts. In 2009, Australia’s Parliament gave the Federal Court concurrent jurisdiction over international arbitration. In addition, a practice note recommended the appointment of an “Arbitration Coordinating Judge” for each registry. In January 2010, the Supreme Court of Victoria made such an appointment, creating an arbitration list (“List G”) that centralizes arbitration matters. The list is managed by a judge with international arbitration experience who, along with several other commercial judges, will hear all arbitration-specific cases.

India: At the beginning of August 2010, Bombay’s High Court announced the creation of a court dedicated to arbitration-related applications and petitions. The decision was taken when the new Chief Justice realized that there is an immense backlog of applications to appoint arbitrators because a judge hears these applications only one day a week.

These two recent developments highlight the issue of how a national court system should handle proceedings relating to international arbitration, and specifically, the debate whether there should be specialized courts to determine issues arising in international arbitration that go to the courts.

While international arbitration may be an international system of justice not tied to any state’s legal system, there can be no question about the importance that national court decisions have on arbitration proceedings and the development of a jurisdiction’s international arbitration law. Court decisions are critical to whether a jurisdiction develops and maintains an independent and effective arbitration regime.

It is worth remembering the number of pivotal issues that ultimately are in the hands of national courts ─ from what is arbitrable as a matter of policy, to what words must be used to define the scope of issues submitted to arbitration, to the availability of interim relief and orders in support of an arbitration, to the treatment of non-signatories, to challenges to awards, and to the recognition and enforcement of awards.

In the words of McGill University Professor Frédéric Bachand in 2008, international arbitration “is very much a hybrid process, an international system of justice in which private adjudicators and the courts are partners rather than competitors” [in his paper presented to the ADR Institute of Canada’s 2008 annual conference and published in Canadian Arbitration and Mediation Journal].

Indeed, a major problem can arise for international arbitration in a given jurisdiction if the judicial partner in that jurisdiction is not up to the task.

A lack of arbitration knowledge and expertise among generalist judges or judges specialized in other areas can produce decisions that are wholly inconsistent with global arbitration jurisprudence. Even in jurisdictions in which appellate courts are supportive of arbitration, aberrant lower court decisions can create international uncertainty and may disproportionately damage the jurisdiction’s reputation in the field of international arbitration.

Some countries have thus created specialized courts, or specialized procedures, to deal with international arbitration issues in a centralized manner, enabling a limited number of judges to maintain expertise and creating consistency.

Specialization is not new. Well-known jurisdictions for international arbitration have implemented some specialization in their courts in one way or another, particularly concerning attacks on and enforcement of awards:

France: All applications in France to set aside arbitral awards go directly to the court of appeal at the seat of the arbitration. Given that most international arbitrations in France are seated in Paris, the Cour d’appel de Paris hears most of these applications. Other arbitration-related matters, however, go to courts of first instance.

England: Court applications concerning arbitration-related matters may only be brought within a limited range of courts in England (as provided in the Practice Direction to Part 62 of the Civil Procedure Rules (CPR)). These are, generally speaking: the Commercial Court (general), the Technology and Construction Court (TCC – only for construction/engineering-related disputes), and the Business List of regional mercantile courts (such as in Manchester, Leeds, Bristol and Birmingham) including the Central London County Court business list (which is the only county court that can accept arbitration applications). In practice, the focus is even narrower, as the two main funnels for arbitration-related matters in England are the Commercial Court in London and the TCC in London, which between them probably handle the vast majority of applications.

Switzerland: All applications to set aside arbitral awards made in Switzerland must be brought before the Swiss Federal Tribunal, the country’s highest court. No further appeal or recourse is available. The Swiss legislature established this legal framework to minimize the time and cost for the resolution of these applications and so that a coherent jurisprudence would develop. As a matter of practice, all setting aside applications are assigned to the First Civil Court of the Swiss Federal Tribunal. While this is a generalist civil court, this group of judges has developed considerable experience and expertise in deciding arbitration-related cases.

Other court applications relating arbitration, however, are generally heard by the Cantonal court of first instance at the place of arbitration in Switzerland. The practice on the assignment of arbitration matters within the Cantonal courts of first instance varies considerably from one canton to another.

Sweden: The Svea Court of Appeal has exclusive first instance jurisdiction to hear summary procedures relating to the enforcement of foreign arbitral awards. The parties can appeal to the Supreme Court.

China: China has brought increased uniformity to applications to enforce foreign arbitral awards by instituting a specialized procedure. A lower court decision not to enforce is automatically submitted to a higher court for review, and in turn its decision not to enforce must be reviewed by the Supreme People’s Court.

Whether by placing arbitration issues solely in the hands of higher level courts, or placing them initially in the hands of specific judges in lower courts, these jurisdictions have centralized arbitration-related matters in the hands of specialized judges who it is expected can deal with arbitration issues consistently, competently and in a manner supportive of international arbitration.

In advocating for Canadian jurisdictions, particularly Québec, to implement in their courts greater centralization of international arbitration cases in the hands of a relatively small number of judges who would acquire experience and develop expertise, Prof. Bachand recalled that the drafters of the Model Law contemplated such centralization.

The drafters noted in the Analytical Commentary regarding Article 6 that “[t]o concentrate these arbitration-related functions [appointment; challenges; termination; setting aside of awards] in a specific Court” would have two benefits: “Even more beneficial [than enabling parties to locate the correct court] would be the expected specialization of that Court.” While the drafters considered that full centralization would be best, they noted that it need not be one individual court in each State, and that particularly in larger countries, a type or category of courts might be designated such as a commercial court or chambers, and that it need not necessarily be a full court or chamber but it might well be the president or presiding judge of a chamber.

While centralizing the handling of one type of matter may not fit the legal culture and traditions of all jurisdictions, jurisdictions without specialized courts should assess whether they should be established in one form or another. In assessing the desirability of centralization and specialized courts, a jurisdiction must ask what alternatives are available to achieve consistently international arbitration decisions in its courts that meet or exceed globally accepted norms. As well, jurisdictions should consider what judicial education regarding arbitration should be provided to the judges hearing arbitration matters.

As well, there are roles for international arbitration institutions and organizations. Those roles include judicial education and the development of norms and model approaches to assist international arbitration’s judicial partners in all jurisdictions to perform their roles in this partnership consistently and effectively. This will serve well the interests of a well-functioning global international arbitration regime.

Barry Leon (bleon@perlaw.ca) and Andrew McDougall (amcdougall@perlaw.ca) are Partners in the International Arbitration Group with Perley-Robertson, Hill & McDougall LLP (www.perlaw.ca).

• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port
• Concise International Arbitration by Loukas A. Mistelis

by Michael Wietzorek

In an analysis published last year, the Georgian authors Mgalobishvili and Kiknavelidze concluded that “there is no doubt that Georgia needs a lot of time and efforts in order to be finally established as a country friendly towards arbitration […].” 1 They identified measures which, in their opinion, should be taken by Georgia in order to accomplish this goal. Among these measures, they listed the adoption of legislation based on the 1985 UNCITRAL Model Law.

Less than a year later, it can be announced that Georgia has successfully taken this step: On 19 June 2009, the Parliament of the Republic of Georgia passed a new law “On Arbitration“, which came into force on 1 January 2010 (Official Journal of the Republic of Georgia, 1280-Is). So far, this law – as well as a detailed analysis by a Georgian author 2 – is publicly only available in the Georgian language. It is expected that there will be an official translation of the Law on Arbitration into English on the official internet site of the Parliament soon. 3 Recently, UNCITRAL included Georgia in its list of countries which enacted legislation based on the Model Law. 4

The previous Georgian legislation, contained in the 1997 Private Arbitration Act and the 1997 Civil Procedure Code, had been critisized for having “quite serious gaps” and for not meeting contemporary requirements. In particular, it was repeatedly stated by Georgian as well as foreign authors that the old legislation seemed to apply only to domestic arbitration, there was no express right of the tribunals to rule on their own jurisdiction, and the provisions on the recognition and enforcement of foreign arbitral awards were uncommon, at best.

The new Law on Arbitration consists of 48 articles, divided into ten chapters, which in their general structure and content follow the Model Law. It covers both domestic and international arbitration. The rules about the composition of the arbitral tribunal at large correspond to the Model Law; the appointing authority is the Rayon Court (Court of First Instance). The parties may be represented by lawyers. The arbitral tribunal may rule on its own jurisdiction. Unless otherwise agreed by the parties, the languages of the proceedings as well as the seat of the tribunal will be determined by the tribunal. Hearings may be held at a place different from the seat. The arbitral tribunal may request evidence from the parties at any stage of the proceedings; it can call witnesses, nominate experts, and request the parties to produce documents.

Probably the most important change from the view of the international arbitration community is that there are now clear provisions on setting aside domestic arbitral awards and on recognition and enforcement of foreign arbitral awards. The reasons why an arbitral award can be set aside and why recognition and enforcement can be refused have been brought into accordance with the Model Law and the New York Convention. Under the old law, the Supreme Court of Georgia examined the issues of recognition and enforcement of foreign arbitral awards, without a provision in any of the laws of Georgia establishing its jurisdiction. 5 The 2010 Law on Arbitration now establishes, in its Art. 2 Sec. 1 a) in conjunction with Artt. 42, 43, Artt. 44, 45 respectively, that the jurisdiction for the setting aside of domestic awards lies with the Courts of Appeal, and for the recognition and enforcement of foreign arbitral awards with the Supreme Court of Georgia.

The new Law on Arbitration is a contemporary legislation which reflects international standards, and a significant step for the further development and promotion of international commercial arbitration within the Republic of Georgia and the entire Caucasus region. 6

• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port
• Concise International Arbitration by Loukas A. Mistelis

by David Goldberg

The clearest indication of a shift in the approach of the Russian arbitrazh (commercial) courts* came in April 2010, when the Presidium of Russia’s Supreme Arbitrazh (Commercial) Court issued a precedential decision, holding that interim relief measures may be ordered by Russian arbitrazh courts in aid of foreign arbitration. The ruling has resolved an ongoing debate over the issue in the lower courts, and has suggested a positive shift in the attitude of the Russian judiciary towards supporting foreign dispute resolution proceedings.

In the underlying case, proceedings in Russia arose in connection with an arbitration commenced in 2009 in the London Court of International Arbitration (“LCIA”) by a Cypriot company “Edimax” against the Russian businessman Shalva Chigirinsky. Edimax is claiming approximately $32 million from Chigirinksy for debts allegedly owed by companies under his control, on the basis that he had issued a personal guarantee in the companies’ favour. In an effort to ensure any future enforcement of a potential LCIA award, Edimax applied to the Moscow Arbitrazh Court for interim relief in the form of an attachment over Chigirinsky’s Moscow apartment.

The issue of whether such relief may be ordered by Russian arbitrazh courts to support foreign arbitration has remained unclear for some time. Article 90(3) of the Russian Arbitrazh Procedure Code states that a party to arbitral proceedings may apply to an arbitrazh court to seek relief at either the place of arbitration, the debtor’s place of residence, or the place where the debtor or the debtor’s assets are located. Although the statutory provision does not on its face limit the availability of interim relief to a particular kind of arbitration, it was previously uncertain whether it extends to an international arbitration with a seat outside Russia.

Indeed, the lack of clarity on the availability of interim relief in such a scenario was illustrated by the progression of the Edimax v. Chigirinsky case through the Russian court hierarchy. The first instance arbitrazh court refused to grant Edimax interim relief on the basis that the request was not justified under the requirements of Article 90 of the Russian Arbitrazh Procedure Code. The Ninth Court of Appeal disagreed and reversed the decision, issuing the order of attachment. Chigirinsky then appealed to the Moscow Circuit Cassation Court, which annulled the decision below on the basis that the case did not involve a “commercial” element. The Cassation ruling stated that such a “commercial” element is necessary since Article 27(1) of the Procedure Code of the Russian Federation limits the jurisdiction of the arbitrazh (commercial) courts to matters involving entrepreneurial or other economic/commercial activities. In the opinion of the Cassation Court, Chigirinsky provided the personal guarantee in his private capacity, and not as an entrepreneur engaged in a business activity, and this placed his assets outside the jurisdiction of the arbitrazh (commercial) courts.

The issues in the proceedings were finally resolved by the Supreme Commercial Court, Russia’s highest court of commercial jurisdiction. The Presidium of the court decided that an individual in Chigirinsky’s position could be considered as an entrepreneur acting in his economic interests when issuing a guarantee against the debts of companies under his control. As such, Russia’s arbitrazh courts are competent to order provisional relief against him as a personal guarantor of corporate debts. Perhaps most significantly, the Supreme Commercial Court set a precedent in concluding that Russian arbitrazh courts can rely on Article 90(3) of the Arbitrazh Procedure Code to provide interim relief, such as an order of attachment over assets located in Russia, in aid of foreign arbitration.

The decision is a clear demonstration of a recent trend within the Russian judiciary towards greater support of arbitration and litigation taking place abroad. In the past, Russian authorities have exhibited some reluctance to enforce arbitration awards or court decisions rendered outside Russia against Russian entities. Although Russia is a party to the 1958 New York Convention and is therefore bound to enforce valid arbitration awards, domestic courts have previously refused enforcement on the basis of very broad interpretations of public policy. In the realm of litigation, Russia is not bound by any international obligation to recognize and enforce foreign judgments, and Russian courts have in the past commonly refused enforcement of judgments rendered abroad. However, the Russian Supreme Commercial Court appears to be changing its stance. In a 2009 decision, Rentpool BV v. Podyemnye Tekhnologii LLC, the court enforced a Dutch judgment in the absence of a treaty obligation to do so, citing international law principles of “comity” and “reciprocity.” On the arbitration side, following the ruling of the Supreme Commercial Court in Edimax v. Chigirinsky, Russia’s Ministry of Economic Development has reportedly requested information from Russian Embassies in Europe on other nations’ practices on granting provisional measures. Russian authorities are also said to be considering the adoption of the UN Model Law on International Commercial Arbitration that, with amendments as adopted in 2006, includes extended provisions on interim relief.

In addition to the positive court decisions coming out of the arbitrazh courts, as discussed above, there are other factors that support the view of the positive developments in the Russian courts, at least as far as the arbitrazh (commercial) courts are concerned. In particular, the Chairman of the Supreme Arbitrazh Court has issued clear instructions to the lower courts to treat decisions of the more senior courts as precedents. This combined with the recent practice of placing decisions of the Supreme Arbitrazh Court on-line is likely to be another major step in developing transparency and consistency in the arbitrazh court system in Russia.

One other development that is taking place is the introduction of electronic document systems into the arbitrazh courts, whereby it is possible to file court documents through electronic means. This system is in the process of being developed and, once the system is fully operational, it will arguably put the Russian commercial courts ahead of the latest accepted technological practices in the leading courts around the world.

While it remains to be seen whether the positive trend of Russian judicial co-operation with international dispute resolution will continue, the recent position of the Supreme Commercial Court and the other developments highlighted above certainly signal a positive message for foreign investors seeking to do business in Russia.

By David Goldberg and Eugenia Levine

* Arbitrazh courts in Russia are a system of State courts within the Russian judiciary with jurisdiction over most commercial disputes and various business entities. These arbitrazh courts are not arbitration tribunals and do not resolve arbitral disputes. They are commercial courts in the general sense of the phrase.

• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port
• Concise International Arbitration by Loukas A. Mistelis
• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage

by Alexis Mourre

Is there a duty to arbitrate in good faith? Is there a need for a Code of Ethics in international arbitration? Those are certainly amongst the most important questions for the future development of the law and practice of arbitration. They have been hotly debated in occasion of certain recent and much publicized cases. And in its keynote address to the last ICCA Congress in Rio, Doak Bishop argued that existing codes of conduct for lawyers are not up to the task. There is no doubt that this debate will strongly develop in coming years.

In 2008, the Arbitration Committee of the International Bar Association has formed a Task Force on Counsel Ethics in International Arbitration for the purpose of investigating the different and often contrasting ethical and cultural norms, standards and disciplinary rules that may apply to counsel in international arbitrations. As part of the Task Force’s information-gathering mission, it has prepared a survey to solicit the input and experiences of international arbitration practitioners – including the the users of arbitration, members of arbitral institutions, counsel and arbitrators – regarding specific cases where ethical conflicts and other issues arise and whether the lack of international guidelines in counsel ethics undermines the fundamental protections of fairness and equality of treatment and the integrity of international arbitration proceedings.

The survey of the Task Force on Counsel Ethics in International Arbitration is available here . Answers to the survey should be provided by September 15, 2010.

I urge all practitioners to contribute to this important project.

Alexis Mourre

• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port
• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Concise International Arbitration by Loukas A. Mistelis

by Alexander Muranov

It is well known that the New York Convention is widely recognized as a foundational instrument of international arbitration. In addition to this Convention, there are also international bilateral agreements in which Paragraph 1 of Article VII of the New York Convention specifically refers to and determines the relationship between its provisions and other agreements.

One interesting and noteworthy bilateral agreement is the Trade and Payments Agreement concluded between the USSR and Sweden in Moscow on 7 September 1940 (the “Agreement”). Although this agreement was entered into during the Soviet time, it still continues to operate in Russia, particularly with regard to Article 14 of the Agreement with the Annex “Agreement on Arbitration Courts” and Article 15 dealing with arbitral awards’ enforcement. (The articles are quite lengthy; therefore, their texts were omitted from the note).

This Agreement was signed 70 years ago during the Soviet era, yet after the collapse of the USSR, Sweden and new Russia decided to retain it. On 29 September 1993, a Protocol was signed in Stockholm on the termination of application with regard to the relations between the two countries concerning certain previous agreements. However, according to Article 3 of the Protocol, that termination did not affect the legal force of Articles 14 and Article 15 of the 1940 Agreement. The Protocol was ratified in Russia by Federal Law № 18-FZ on 17 February 1995 and became effective on 1 May 1995.

I would like to note five reasons why, in my opinion, the provisions of the 1940 Agreement require particular consideration.

Firstly, Stockholm is probably the city where the majority of arbitration cases to which Russia is a party to are considered, and the awards are subsequently enforced in Russia. This situation is inherited from the Soviet period.

Secondly, the provisions concerning recognition and/or enforcement of arbitral awards contained in the 1940 Agreement differ from the New York Convention’s provisions as they are less generous to the prevailing party. Accordingly, it should make quite a difference for such a party, as well as for debtors under such awards, whether the provisions regarding arbitration and enforcement of arbitral awards in the 1940 Agreement are applicable or not. This issue is also very important for Russian courts, especially for the High Arbitrazh Court which is responsible for shaping a uniform judicial practice.

Thirdly, the Agreement concerns provisions which have prevailing force over domestic Russian regulations. Their correct application by Russian courts do not merely constitute controversial issues which are imperative and sensitive for society, economy and state but also form a sphere which has not been completely mastered in Russia so far, and which involves a multitude of issues and problems.

Fourthly, the provisions of the Agreement are unique: there are no other ones of a like nature in any other international agreement to which Russia is a party to.

Finally, the analysis of such provisions results in rather curious and even somewhat unexpected legal conclusions.

There are two important points in the effective provisions of the 1940 Agreement: (1) the special procedure of constituting the arbitral tribunal according to the provisions of the Annex and; (2) the two grounds for refusal to recognize and enforce an arbitral award which differ from the grounds provided for in the New York Convention and the Russian Law “On International Commercial Arbitration”. The first ground for refusal to enforce an arbitral award under the Agreement is when an application to set aside an arbitral award is being considered at the seat of arbitration. This is sufficient ground to refuse recognition and enforcement of the award in Russia under Article 15 of the Agreement. A similar ground for refusal can be the fact that the time for challenging the arbitral award in its seat has not yet expired.

The second ground for refusal is “the award being contrary to the state legal principles of the country where arbitral award enforcement is requested”. The concept of “state-legal principles” is used in Article 15 along with the concept of “public order”, and not as a synonym to the latter. The concept of “state-legal principles” is distinct from the traditional public policy exception. The concept of “state legal principles of Russia” is similar to the “constitutional legal principles of Russia”, which is broader than the concept of “public order of Russia”, and would aggravate problems of enforcement of arbitral awards.

In 1940 nobody in the USSR thought there was a difference between the concepts of “public order” and “state legal principles”, except perhaps that the former was considered more acceptable for foreign states and the latter as more suitable for the USSR. From the viewpoint of modern Russian domestic law, the recognition of the two concepts as “separate” was confirmed in 1993. It is obvious that the possibility of using the concept as is in legal practice creates the risk that fewer awards will be enforced in Russia.

Despite highlighting the relevant provisions of the Agreement and their legal force as confirmed by the 1993 Protocol, it is high time for such provisions to be abolished. It is an outdated Agreement that most lawyers in Russia and Sweden are not aware of, and if they were aware of it, it would almost certainly lead to a movement to abolish the articles in effect.

• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Concise International Arbitration by Loukas A. Mistelis
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port

by Lisa Bench Nieuwveld

It is rather interesting to read in the news about how some governments have chosen to “fund” their own government. One government went so far as to simply clear out the checking accounts of small businesses and not-for-profit organizations (”NGOs”). Another government, not necessarily seeking funding but presumably disagreeing with the purpose and/or presence of the affected NGO went and seized all of its property and no longer allowed it to remain in its territory.

I am sure that many possible motivators exist for governments to go after organizations not seeking profit but instead seeking to pursue some social or other mission within its borders. Then I was left wondering – would these organizations benefit from investment treaty protections? Obvious hurdles would exist based on jurisdictional reasons, such as whether their investment in the foreign country satisfies the definitions found in investment treaties. In other words, do their investments need to be for a commercial purpose versus just contributing to the economical development of the foreign country at question? Another issue of concern is whether the definition of “national” encompasses organizations which are not-for-profit. Are these also “companies”?

I found a rather interesting article on the matter co-authored by Luke Eric Peterson and Nick Gallus. I found their analysis both thorough and clear with respect to the jurisdictional hurdles in question. What I found interesting, however, was a lack of discussion on the all important practical questions – is it worth it? What would really be the damages and how much of these damages would justify the expense involved in arbitrating the claim?

I see an obvious difference with human rights claims. Then it can simply be a matter of principle and stopping governments from harming basic rights, etc of people. However, when it comes to looking more to the monetary aspect of an NGO’s presence in a foreign country – would the investment (if found as one under the relevant treaty and/or ICSID rules) be large enough to arbitrate? The article does mention NGOs acting as investors in order to receive returns that may be invested back into the NGO and help it further its cause. Should such an investment reach a substantial level (not looking, of course, at the cause and state action aspects also necessary to violate a treaty and at the specific clauses which may be involved) as to justify the rising costs of arbitration. Therefore, it is likely a possible good route for NGO’s to consider in the sense of an added protection, but practically speaking is it realistic?

Another practical consideration not mentioned is the relationships between the NGOs and the governments themselves. It is logical to assume that should a foreign government directly target an NGO, the relationship is already looking bad. Does that automatically mean, however, that the NGO won’t seek to improve its relationship? But what about those actions which qualify for possible treaty protection but do not target a specific organization? Would the NGO want to “rock the boat” with the government any further than necessary? Examples of such actions are what are referred to frequently in reports issued by The International Center for Not-For-Profit Law. It frequently refers to governments changing laws which control how, when and from whom an NGO may receive funding. This type of action may arguably lead to damages in the form of loss funding, etc. Of course, an entirely separate analysis is required to even determine whether past damages precedence would include these, but before even getting that far an NGO may simply not want to further affect its own direct relationship (and hopefully some influence) with the government.

I find the topic fascinating and the article which Luke Eric Peterson and Nick Gallus wrote excellent and thorough with respect to the jurisdictional legal areas. What I am wondering is, would NGOs truly seek this path?

• Concise International Arbitration by Loukas A. Mistelis
• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port

by Andrew de Lotbinière McDougall

A significant majority of countries in the world have demonstrated that they see benefits in being a member of ICSID by ratifying the ICSID Convention (Convention on the Settlement of Investment Disputes Between States and Nationals of Other States). 144 states have ratified the treaty, and an additional 11 – including Canada – have signed but not yet ratified it.

Lawyers and many business people involved in the world of international trade and investment are well aware of the benefits of ICSID. Whatever operational shortcomings that ICSID has had – or may still be in the process of fixing – few would question that ICSID is the leading institution for investor-state disputes.

Many have asked why Canada has not yet ratified the ICSID Convention. It has been 45 years since the Convention came into existence and over three and a half years since Canada signed in December 2006. Canada is a G-8 and G-20 country and a country that stands to benefit more than many others from ICSID. The Secretary General of ICSID is a Canadian.

Yet, Canada remains the only G-8 state and one of only three OECD states that has not ratified the Convention.

Canada’s economy needs and benefits significantly from incoming investment, and Canadian companies are significant international investors. It seems obvious that ratification of ICSID would enhance Canada’s image abroad as an investment-friendly country and foster Canada’s economic prosperity. Conversely, it seems obvious that Canada’s failure to ratify has the opposite reputational effect.

The availability of binding ICSID arbitration would increase investor confidence in Canada, making it an even more attractive location for foreign investment by reducing the risk, and therefore the cost, to the incoming investor. This would benefit Canada’s economy.

Even more significantly, Canadian companies would have reduced risk, and therefore reduced cost, in their foreign investment activities, in which they are engaging with increasing frequency and vigor. This too would be beneficial to Canada. The majority of countries in which Canada’s companies invest most frequently and most heavily are ICSID members (notably excluding Mexico, India and Brazil).

One need not search hard for examples of Canadian companies that might have been able to utilize ICSID to their advantage. An example is the highly publicized, recent complaints made by First Quantum Minerals, a Canadian mining company, against the Democratic Republic of the Congo. When Canada’s Prime Minister raised these complaints at the recent G-20 Summit in Toronto, one might have thought that the gap in Canada’s investor protection caused by Canada’s failure to ratify the ICSID Convention would have been highlighted, leading Canadian businesses to urge ratification and governments in Canada to spring into action and take the necessary steps to ratify. However, two months after the Toronto Summit that still does not appear to be happening.

What is holding Canada back, and what will it take to achieve ratification of the ICSID Convention? We cannot justify the delay, but we can try to explain it.

In a nutshell, the reason for the delay seems to be Canada’s particular federalist structure. As in all federal states, powers are allocated by Canada’s constitution between its federal government, and its 10 provinces and three territories. Canada’s constitution, like in most if not all federal states, allocates treaty-making authority to the federal level. However, when the subject matter of a treaty is in a field in which Canada’s provinces and territories have authority, the provinces and territories may have a say.

Generally speaking, whether constitutionally or by practice, provincial and territorial concurrence is sought when the subject matter of a treaty is a subject matter wholly or partly within their jurisdiction. ICSID relates to one or more areas of provincial and territorial jurisdiction, so it has been generally assumed that provincial and territorial implementing legislation is needed or at least desirable.

Canada’s federal government signed the ICSID Convention in December 2006 and passed implementing legislation in March 2008. The implementing legislation has not yet been brought into force, our understanding being that this has been awaiting provincial and territorial implementing legislation. So far, only four of 10 provinces (British Columbia, Newfoundland and Labrador, Ontario and Saskatchewan) and two of three territories (Nunavut and Northwest Territories) have passed implementing legislation.

Of the provinces and territory remaining, Alberta and Québec are most notable. The benefits of ICSID membership to these provinces’ economies and companies would appear to be significant because of the nature of their economies and the international involvement of their companies. These provinces have vast natural resources such as in oil and gas, power and forestry. They also have companies active around the world in these sectors plus others such as aerospace and engineering.

It is suspected by some that implementing legislation is being used as a bargaining chip in federal-provincial negotiations on other issues. Another possibility is that putting forward ratification legislation on an international treaty such as ICSID in the face of crowded legislative agendas is not a priority. And a reality may be that treaty ratification is not a vote-getting issue.

Whatever the reasons for the lack of implementing legislation, it appears that concern about the merits of ICSID has never been, and is not now, the problem. When ratification legislation was being considered in Canada’s federal House of Commons, Members of Parliament generally agreed that ratification is in Canada’s interest. Indeed, in the many years since ICSID came into existence, Canada’s federal government has been trying at least intermittently to get its provincial counterparts to commit to act, and since signing the treaty, to actually act.

There is some indication that Canada’s federal government may move ahead with ratification of ICSID without waiting for the remaining provinces and territory. This is consistent with comments made during parliamentary debates and hearings when the federal implementing legislation was being considered. Citing provisions of ICSID as authority, parliamentarians and officials stated that Canada could designate provinces and territories that so wish to be a part of ICSID as “constituent subdivisions” under the Convention. Provinces and territories that have not passed implementing legislation could be designated if and when they do so. Article 70 of the ICSID Convention would allow Canada to identify by written notice the provinces and territories to which the treaty would not apply.

For example, then Senior General Counsel and Director General of Canada’s Trade Law Bureau, Meg Kinnear, now Secretary General of ICSID, testified before the Parliamentary Committee considering the federal implementing legislation:

What the federal government has said to all the provinces is that if you want to be what’s called “designated” as a constituent subdivision, just tell us and we will do that. … So we have said that this is up to you, and if at any time later you decide that you would like to be designated, just tell the federal government. There is no problem with that, but it’s totally up to the province to decide when they would like to do that. (November 22, 2007, Hansard, 39th Parliament, 2nd Session)

This approach is not without dissent. Some opposition members in the federal Parliament countered that the “constituent subdivision” approach would violate Canada’s constitutional division of powers and would constitute “wrongful arrogation” of the federal government’s control over international relations.

Another point raised was whether Canada, by ratifying without implementing legislation in all provinces and territories, would be violating its treaty obligations under the Vienna Convention on the Law of Treaties. Article 26 of that treaty states that “[e]very treaty in force is binding upon the parties to it and must be performed by them in good faith”, while Article 27 states that “a party may not invoke the provisions of its internal law as justification for its failure to perform a treaty”. The counter-argument to this point appears to be that the ICSID Convention itself has created the “constituent subdivision” approach so that ratification relying on it is not a violation of any treaty obligation.

Lastly, moving forward with ratification without full provincial and territorial concurrency could be seen as deviating from Canadian treaty implementation practice and might have political implications. Few would disagree that unanimous provincial and territorial ratification is preferable in Canada’s federal state environment. Also, partial applicability of ICSID in Canada could complicate investment transactions and distort economic relations among different provinces and territories.

In any case, in the absence of unanimity after an unduly prolonged time and considerable effort, the alternative of utilizing the “constituent subdivisions” approach appears to many to be the best achievable option in the interests of the Canadian economy and Canadian businesses that invest internationally.

For those who have scratched their heads in disbelief wondering why Canada has not ratified the ICSID Convention, we hope that this provides an explanation.

Barry Leon (bleon@perlaw.ca) and Andrew McDougall (amcdougall@perlaw.ca) are Partners in the International Arbitration Group with Perley-Robertson, Hill & McDougall LLP ( www.perlaw.ca ).

• Concise International Arbitration by Loukas A. Mistelis
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port
• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage

by Lisa Bench Nieuwveld

Often viewed as one of the leading locations for international arbitrationss, why doesn’t the state of New York have a separate arbitration act for international arbitrations? Is it simply unnecessary? It is interesting to note in my 2 previous articles, that other states have found it absolutely necessary. Recently, as previously discussed, the state of Florida enacted the UN Model Law on International Commercial Arbitrations (“Model Law”), following the lead of 5 other U.S. states and several leading world jurisdictions. I already discussed some of the points made with respect to replacing the Federal Arbitration Act with the Model Law in my previous articles, but what about New York?

I recently sat in a meeting in which local arbitration professionals were discussing this very topic, briefly. It made me think, why not? As a newly relocated international arbitration practitioner to NYC after spending some years practicing with the Europeans, I thought it was an interesting idea. Certainly, as I heard frequently from my civil law counterparts in Europe, using New York (and even the U.S. altogether) makes many clients and their attorneys apprehensive, to put it lightly. I think most, if not all, of the readers will already know why: discovery. The fear of the fishing games breaking into mainstream international commercial arbitrations located in the US or even using US arbitrators is very real. While practicing abroad, even US attorneys who had spent years practicing abroad would express those same concerns. Sometimes the concerns were expressed to them by clients, others were directly concerned themselves.

Is this a reality? Not in truly international arbitrations with experienced international arbitrators and practitioners, but the fear remains. However, that is not the purpose of this article – yet it is connected. Why not enact the Model Law? Whether it is truly necessary due to the FAA, institutional arbitration rules and other mechanisms that prevent much of New York law playing a large role in the international arbitration itself….still, would it send a good message? Likely yes. So, what am I advocating here? Not just creating a separate international arbitration act to re-enforce the message that the state of New York is a serious player in the international arbitration arena, but to enact specifically the Model Law.

As my previous articles mentioned, the Model Law attempts to reflect a sort of marriage between the civil law and common law perspectives. It is a “known entity”, a familiar environment if you will for those unfamiliar with the realities of choosing the US, and specifically, the state of New York as the situs for the international arbitration.

Could it happen? I heard comments from those arbitration practitioners that were concerned with the reality of getting it through the legislator, but what I did not hear were substantive expressions of concern that it was a bad idea. I cannot say they do not exist anymore than I could read these practitioners’ minds. I can say, no solid argument was presented, but it wasn’t the main purpose of the meeting either. So – what are the reasons? In this economy, are we not all trying to “send the right message”? For that purpose alone – marketing – is it not a viable idea? Please, share your comments to this experienced practitioner, freshly minted in NYC.

• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Concise International Arbitration by Loukas A. Mistelis
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port

by Chido Dunn

Following the controversial land reform programme first introduced by President Robert Mugabe in July 2000, Zimbabwe has found itself in hot water of late, with a number of international disputes being brought by dispossessed farmers against the State.

The first of these disputes was mounted at ICSID in 2005 by a group of 13 Dutch farmers who alleged that Zimbabwe, by depriving them of their agricultural landholdings and other property, had breached various provisions of the Netherlands-Zimbabwe bilateral investment treaty (BIT). In April 2009 an ICSID tribunal issued an award in Funnekotter et al. v Zimbabwe, finding that Zimbabwe had breached its obligations under Article 6 of the Netherlands-Zimbabwe BIT (which sets out the conditions for a lawful expropriation), and ordered Zimbabwe to pay the Claimants €8,220,000 plus interest as compensation for the lands expropriated by the Zimbabwean Government. (*)

A second dispute was brought before the Southern African Development Community (SADC) Tribunal in October 2007 by Mike Campbell and 77 other farmers who had received compulsory acquisition notices from the Zimbabwean Government. The farmers had initially applied to the Supreme Court of Zimbabwe for a protection order to prevent any forced eviction, but this was denied, with the Supreme Court finding that (i) despite the farmers’ submission that they were targeted exclusively because of their race, race was not an issue given that the relevant provisions of the Constitution did not make any reference to race; (ii) the Government had an inherent right to compulsorily acquire property; and (iii) the legislature had full power to change the Constitution to allow agricultural land to be confiscated without compensation ‘for resettlement and other purposes’.

However, the Campbell claim before the SADC Tribunal was more successful. In November 2008 the Tribunal held that (i) the Tribunal had jurisdiction to hear the case because the amendments that had been made to the Zimbabwean Constitution had eliminated the farmers’ access to the domestic courts; (ii) the farmers had been deprived of their right to a fair hearing before being deprived of their rights to their land; (iii) the actions of the Zimbabwean Government constituted indirect discrimination because it affected white farmers only; and (iv) the farmers were entitled to compensation for the expropriation of their lands.

Most recently, a Swiss-German family has brought a claim before ICSID, seeking damages for the expropriation of three large estates, including forestry and agricultural businesses. In a claim registered at ICSID on 8 July 2010, the von Pezold family alleges that Zimbabwe has breached its treaty obligations with Switzerland and Germany by failing to provide fair and equitable treatment and full protection and security.

While it is evident that there is some groundswell of resistance to Zimbabwe’s land reform programme, what will be telling is whether any awards rendered are actually enforced against the State. In Funnekotter, Zimbabwe was ordered to pay the ordered compensation to the farmers within three months. This did not occur, so in January 2010 the Southern District Court of New York, which had jurisdiction under Section 1650a of the United States Code to enforce an ICSID award, confirmed the award for the full amount of US$25 million. Likewise, the Campbell award was confirmed in the South African High Court in February 2010, and in March 2010 the title deeds to four Cape Town houses belonging to the Zimbabwean Government were handed over to the farmers. Although the houses were due to be auctioned at the end of July 2010, this was postponed following the Zimbabwean Government’s challenge to the legality of the sale. Sources close to the case have explained that the Zimbabwean Government is arguing that the properties are protected by diplomatic immunity. Zimbabwe’s application will be heard in September 2010.

Perhaps as a result of this resistance, in August 2009, Zimbabwe formally withdrew its SADC membership, stating that it would not be bound by any of the Tribunal’s past or future orders. Neither the SADC Treaty nor the Protocol on the Tribunal contain a safeguard mechanism. In a further development, the South African Justice Minister has recently requested a legal opinion on the scope of the SADC Treaty and the enforceability of the SADC Tribunal’s rulings in both Zimbabwe and South Africa. As the South African courts are the only courts to have enforced a SADC ruling, South Africa’s compliance with SADC is vital to ensuring the enforceability, and thereby legitimacy, of the SADC Tribunal.

(*) The SADC is an economic community in Southern Africa with fifteen member states (Angola, Botswana, DRC, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, Zimbabwe). Originally founded in 1980, it gained full legal status with the signing of the SADC Treaty in 1992. It aims to promote economic cooperation and free trade between the member states.

• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port
• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Concise International Arbitration by Loukas A. Mistelis

by Georg von Segesser

In a landmark decision of 13 April 2010 (4A_490/2009, published on 2 July 2010), the Swiss Federal Supreme Court confirmed that the principle of res judicata is part of procedural public policy, and it set aside a CAS award for violation of that principle. At first sight, the decision of the Federal Supreme Court seems to weaken the primacy of the arbitral tribunal to decide on its jurisdiction as stipulated under Article 186(1)bis of the Swiss Private International Law Act (”PILA”). A closer look on the decision however reveals that the case before the Federal Supreme Court was not only one concerning the principle of res judicata, but in particular one dealing with the erga omnes effect of a court decision annulling a resolution of an association (the FIFA).

The case originated in 2000, when a Portuguese soccer player terminated his contract with Sport Lisboa E Benfica (Benfica) and transferred to the soccer club Atlético de Madrid SAD (Atlético). Based on the then applicable FIFA Regulations for the Status and Transfer of Players (FIFA Rules), Benfica claimed in 2001 a compensation from Atlético. The FIFA Special Committee upheld the claim and awarded Benfica USD 2.5 million, which decision Atlético appealed to the Commercial Court of the Canton of Zurich (Commercial Court). On the basis that the FIFA Rules were void as violating antitrust laws, the Commercial Court annulled in a decision of 21 June 2004 the decision of the FIFA Special Committee. A few months later, Benfica again sought a decision from the FIFA Special Committee as to payment of a compensation by Atlético Madrid, but this time the FIFA rejected Benfica’s claim. Benfica appealed the second FIFA decision to the CAS (i.e., not to the Commercial Court) as in the meantime the FIFA had introduced an arbitral review procedure for the decisions of the FIFA Special Committee. Notwithstanding the fact that Atlético opposed Benfica’s appeal by, inter alia, relying on the res judicata effect of the earlier judgement of the Commercial Court, the CAS upheld the appeal in part and ordered Atlético to pay a compensation in the amount of EUR 400′000. Atlético filed a petition with the Federal Supreme Court claiming that the CAS award violated public policy as it disregarded the binding effect of the previous ruling of the Commercial Court.

The Federal Supreme Court followed Atlético’s argumentation. By relying on previous case law, it confirmed that the principle of res judicata is part of procedural public policy and set aside the CAS award. The Supreme Court found that the proceedings in front of the Commercial Court did not involve an appeal against the first decision of the FIFA Special Committee, but the proceedings dealt with the annulment of a resolution of an association (the FIFA) under Article 75 of the Swiss Civil Code. Once a challenge of a resolution of an association is upheld and the resolution is annulled, this decision (as opposed to its rejection) has effect not only between the parties to the proceedings (that is the FIFA and Atlético) but erga omnes, which consequently put an end to Benfica’s claim for compensation on the ground of res judicata although Benfica was not a party to the proceedings before the Commercial Court. The fact that the FIFA subsequently introduced an arbitral review procedure for the decision of the FIFA Special Committee does not change the fact that the issue in front of the CAS had already been decided by the Commercial Court. In the same way as the Commercial Court would have been bound by its previous decision on the same issue, also the CAS obtaining jurisdiction for the second challenge could not examine anew an issue which had already been decided. The CAS award consequently disregarded the binding effect of the judgment of the Commercial Court.

Although this is not the first time that the Federal Supreme Court has held that the principle of res judicata is part of Swiss procedural public policy (see, e.g., the decision 4P.98/2005 of 10 November 2005, at consid. 5.1), this is the first time that the Federal Supreme Court has set aside an arbitral award on this basis. The Federal Supreme Court did so notwithstanding the fact that under Swiss law res judicata requires an identity of the parties in the previous and the subsequent proceedings which however was not the case in the proceedings before the Commercial Court and the CAS. Still, the decision should not be interpreted to open the door to the doctrine of “issue estoppel” known in the United States, under which, in certain circumstances, third parties may be precluded from re-litigating issues of fact and law that have been actually determined in the prior litigation. The Federal Supreme Court’s decision has to be read in light of the singular issue of the erga omnes effect of the previous decision of the Commercial Court, a fact which seems has not been sufficiently stressed by the Supreme Court. Taking this particularity into consideration, it remains to be seen to what extent (if at all) this decision will have the effect of weakening the principle set out under Article 186(1)bis of the PILA.

Georg von Segesser / Patrick Rohn

• Concise International Arbitration by Loukas A. Mistelis
• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port

by Lisa Bench Nieuwveld

Many leading jurisdictions in international arbitration have adopted all or part of the UN Model Law on International Commercial Arbitration (“Model Law”). The question that remains is: Why Hasn’t the United States?

The Federal Arbitration Act does provide many similarities to the Model Law. They both address enforcement of an arbitral award, grounds for setting aside the arbitral award, who has power to determine an arbitral tribunal’s competence, etc. However, it is also within these same categories that the FAA and the Model law differ. Wouldn’t aligning the FAA to the more commonly used Model Law provide greater transparency with the international community?

I have heard many arguments against aligning the FAA with the Model law. Some argue that the FAA’s relationship with the several state arbitration laws make it unnecessary or even inappropriate to modify the FAA to match the Model law. Others argue that with over 80 years of case law history, why change it now? Finally, often when parties opt for institutional rules, any discrepancies are cleared out, resulting in the same or almost the same outcome.

These are viable arguments for sure. Possibly, it wouldn’t be necessary to modify the FAA. However, there is still a matter of perception. Although the United States still enjoys large numbers of international arbitrations being filed here, many attorneys and their respective clients hold a fearful opinion of conducting an international arbitration within the United States. This may very well be premised on the idea of fishing discovery techniques and the fear of those practitioners who do not truly appreciate the difference between the developed hybrid international arbitration system and those more common law influenced domestic arbitration proceedings.

Nonetheless, knowing that the FAA laws also vary in several ways or even leaves items open for the attorneys/clients to then be concerned with state provisions can create a psychological negative reaction. Local counsel, of course, provides the assistance necessary in understanding and applying the FAA and, if appropriate, state laws; however, the decision to arbitrate and under what rules can be made possibly years in advance by other attorneys when the original arbitration clause is inserted in the applicable agreement.
Key areas in which the FAA and the Model Law differ are with respect to the actual grounds available for setting aside an award, who determines the tribunal’s competence, the power to modify or correct an award and appointing arbitrators. Under the Model Law, there are four grounds for setting aside an award which the FAA fails to address altogether, such as when the subject matter of the dispute falls outside of the scope of the arbitration agreement or violating public policy (which has successfully been used in some model law countries). The FAA, in turn, has grounds which the Model Law does not based on corruption and fraud or the “manifest disregard of the law” provision.

Ultimately, although I agree that utilizing institutional procedural rules can truly assist in rectifying any areas of difference, I feel that there are negative perceptions of conducting an international arbitration in the United States. Although possibly ill-founded, the opinion remains and foreign parties often work hard to navigate the choice of law and location for an arbitration agreement away from the United States. The fact that the United States has several years of history, and otherwise appears to flow well, may not greatly influence attorneys who are not comfortable with or sufficiently educated about the benefits of conducting international arbitrations in the United States.

• Concise International Arbitration by Loukas A. Mistelis
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port
• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage

by Barry Leon

It is true that Canada did not qualify for FIFA’s World Cup and did not dominate at the Winter Olympics. However, when it comes to the UNCITRAL Model Law on Commercial Arbitration, Canada is a leader.

This year marks the 25th anniversary of the Model Law. Since becoming the first state signatory to the Model Law in 1986, Canada has played a key role in the Model Law’s development and judicial interpretation. Indeed, of the 316 decisions reported by the UNCITRAL Secretariat on the Model Law, over one-third (112) emanate from Canadian courts.

At this silver anniversary of the Model Law, it is timely to reflect on the significance of Canada’s contributions, and on what the Canadian experience tells us about the prospects for the Model Law.

In 1985, the UN General Assembly expressed the conviction that the Model Law “significantly contributes to the establishment of a unified legal framework for the fair and efficient settlement of disputes arising in international commercial relations.” When it was made in 1985, that declaration may have been premature. The optimism, however, has proven to be warranted.

UNCITRAL succeeded in creating a model statute that reflects an international consensus on the requirements of a modern arbitration regime. It has helped – and continues to help – guide many states, and sub-national territories, in reforming and modernizing their laws on arbitral procedure, both domestic and international. It has helped carry forward the fundamental principle, set out in Article 8(1) of the Model Law – and in Article II(3) of the New York Convention – that courts must refer parties to arbitration except where their arbitration agreement is found to be “null and void, inoperative or incapable of being performed.”

Canada’s federal government and all 13 provinces and territories have essentially adopted the Model Law, either as a schedule to a short statute, or as the substance of their international arbitration statute or codified law, and generally, as the core of their domestic arbitration law. In Ontario, for instance, the Model Law was implemented in the International Commercial Arbitration Act, and in Québec, most provisions of the Model Law were implemented in substance through amendments to the Civil Code of Québec and the Code of Civil Procedure. Given this early and decisive commitment to the Model Law, it is perhaps unsurprising that a strong judicial policy in favor of arbitration has emerged in Canada since 1986 (which is also when Canada ratified the New York Convention).

With 14 jurisdictions all featuring a long history of application of the Model Law and over one-third of the decisions reported by the UNCITRAL Secretariat coming from Canadian courts, Canada is no spectator in the development of international arbitration law. To some degree, where Canada goes, so goes the Model Law.

The ‘scorecard’ of the Canadian appellate courts and the Supreme Court of Canada indicates they have taken a broad, pro-arbitration approach on almost all aspects of the Model Law, and arbitration generally, to come before them. They have been deferential to arbitration agreements – particularly international commercial arbitration agreements – by construing them broadly, staying court proceedings, deciding that almost all matters are arbitrable, and enforcing arbitral awards.

The following key cases are of particular interest:

In Desputeaux v. Éditions Chouette (1987) inc. [2003] 1 S.C.R. 178, http://www.canlii.org/en/ca/scc/doc/2003/2003scc17/2003scc17.html, the Supreme Court of Canada ruled that most types of disputes, in particular intellectual property disputes – in this case, copyright – are arbitrable. It stated that “[i]f Parliament had intended [in the Copyright Act] to exclude arbitration in copyright matters, it would have clearly done so…” The Court affirmed that legislation “cannot be assumed to exclude arbitral jurisdiction unless it expressly so states,” and ruled “[t]he parties to an arbitration agreement have virtually unfettered autonomy in identifying the disputes that may be the subject of the arbitration proceeding.” The enactment of the Model Law is cited as an indication of Parliament’s recognition of the legitimacy and importance of arbitration.

In Dalimpex Ltd. v. Janicki, (2003) 64 O.R. (3d) 737 (Ont. C.A.), http://www.canlii.org/en/on/onca/doc/2003/2003canlii34234/2003canlii34234.html, the Ontario Court of Appeal accepted that courts should defer to the judgment of the arbitrator as to whether a dispute is arbitrable: “… it is at least arguable that the disputes, in … arbitration proceeding in Poland, fall within the scope of the arbitration agreement and that the preferable approach is to leave any definitive pronouncement on the scope of the agreement to be determined by the arbitral tribunal as decision-maker of first instance [Court of Arbitration in Poland].” This approach “is consistent with the wording of the legislation and the intention of the parties to review their disputes to arbitration.”

In Woolcock v. Bushert, (2004) 246 D.L.R. (4th) 139; 192 O.A.C. 16, (Ont. C.A.), http://www.canlii.org/en/on/onca/doc/2004/2004canlii35081/2004canlii35081.html, the Ontario Court of Appeal concluded that the words “relating to” in the arbitration clause enjoy “…a wide compass. So long as the matter in dispute is referable to the interpretation or implementation of some provision of the Agreement, it is arbitrable [under the arbitration clause].” It held that claims under the statutory “oppression remedy” (a statutory corporate law remedy empowering a court to grant broad remedies to shareholders, creditors, directors, officers, and others for conduct that is oppressive, unfairly prejudicial, or unfairly disregards the interests of the complainant) can be brought in an arbitration and statutory remedies can be granted by an arbitral tribunal.

GreCon Dimter inc. v. J.R. Normand inc., [2005] 2 S.C.R. 401, http://www.canlii.org/en/ca/scc/doc/2005/2005scc46/2005scc46.html, is a Supreme Court of Canada decision concerning the parties’ choice of a dispute resolution forum for a contract dispute. Based on the legislative context, which includes Québec’s codification of principles of private international law such as the Model Law, the Supreme Court of Canada held that the rule of the autonomy of the parties to choose a forum for dispute resolution prevails over the procedural rule of the single forum. It noted “…there are numerous provisions [of the Québec Civil Code] that allow the parties considerable freedom of choice regarding the law that will be applicable to specific juridical acts or situations, including provisions on … arbitration agreements.” The Supreme Court confirmed “the legislature’s tendency toward recognizing the existence and legitimacy of the private justice system, which is often consensual and is parallel to the state’s judicial system.” The Court stated that arbitration and choice of forum clauses are important to foster the “certainty and foreseeability required for purposes of the critical components of private international law, namely order and fairness.”

In Dell Computer Corp. v. Union des consommateurs, [2007] 2 S.C.R. 801, http://www.canlii.org/en/ca/scc/doc/2007/2007scc34/2007scc34.html, consumers attempted to bring a class action suit against Dell. The Supreme Court of Canada ruled that the claim should be referred to arbitration pursuant to an arbitration clause in the terms and conditions of sale. The Court framed the “competence-competence” principle as a general rule that a challenge to the arbitrator’s jurisdiction must first be resolved by the arbitrator. The only exception is where the challenge is based solely on a question of law, in which case the court’s expertise prevails. The test is set out as follows: “[i]f the challenge requires the production and review of factual evidence, the court should normally refer the case to arbitration, as arbitrators have, for this purpose, the same resources and expertise as courts. Where questions of mixed law and fact are concerned, the court hearing the referral application must refer the case to arbitration unless the questions of fact require only superficial consideration of the documentary evidence in the record.”

In Coderre v. Coderre, 2008 QCCA 888, http://www.canlii.org/en/qc/qcca/doc/2008/2008qcca888/2008qcca888.html, the Model Law is cited by the Québec Court of Appeal as a tool to interpret the arbitration provisions of Québec’s Code of Civil Procedure. Significant reforms were made to the Code of Civil Procedure in 1986. The Court confirmed that the “… reform as a whole was inspired by the Model Law … and its spirit infuses the provisions devoted to arbitration in the Civil Code and the Code of Civil Procedure”. The Court ruled that “… arbitration agreements and the powers of arbitrators must be interpreted broadly and generously.”

In Jean Estate v. Wires Jolley LLP, 2009 ONCA 339, http://www.canlii.org/en/on/onca/doc/2009/2009onca339/2009onca339.html, the Ontario Court of Appeal dealt with a dispute concerning the validity of a law firm’s contingency fee agreement. First, the Court held that the court could rule on arbitrability, but only because the case fell within a narrow exception established in Dell (see above). Second, the Court held that “[g]iven the strong policy of deference afforded to arbitration agreements,… simply because the Solicitors Act refers to a Superior Court judge as having the jurisdiction to protect clients’ rights, this does not mean that disputes arising between a solicitor and a client may not be submitted to arbitration. The Act simply identifies the person within the judicial system empowered to make a decision. The right to have an independent decision maker who can interpret the agreement and make a decision respecting a contingency fee dispute is preserved through arbitration and hence the public policy of the Act, the provision of a forum for legitimate dispute resolution, is not undermined.”

In Dancap Productions Inc. v. Key Brand Entertainment Inc., 2009 ONCA 135, http://www.canlii.org/en/on/onca/doc/2009/2009onca135/2009onca135.html, the Ontario Court of Appeal followed the approach to the interpretation of the Model Law adopted in Dalimpex and Dell, and found that the lower court judge erred “… in ruling on the scope of the arbitration clause rather than leaving the issue to the arbitrator.” This was not a case where it was clear and obvious that the arbitration clause did not apply.

Most recently, in Yugraneft Corp. v. Rexx Management Corp., 2010 SCC 19, http://www.canlii.org/en/ca/scc/doc/2010/2010scc19/2010scc19.html, the Supreme Court recognized that “[h]aving adopted both the [New York] Convention and the Model Law, …, there is no doubt that Alberta is required to recognize and enforce of eligible foreign arbitral awards.” The Court also re-stated what it held in Dell that “an arbitral award is not a judgment or a court order … ‘[a]rbitration is part of no state’s judicial system’ and ‘owes its existence to the will of the parties alone’.”

Soon the Supreme Court of Canada will issue its judgment in Seidel v. Telus Communications Inc., on appeal from the British Columbia Court of Appeal, (2009) 304 D.L.R. (4th) 564, http://www.canlii.org/en/bc/bcca/doc/2009/2009bcca104/2009bcca104.html. The Court’s judgment may decide how a court faced with a motion to stay under Article 8(1) of the Model Law should react when the action is a proposed class action, whether certification can be considered concurrently with the motion to stay (refer the parties to arbitration), and whether the arbitration clause is rendered “inoperable” if the action is certified.

These court decisions are examples of Canada’s contribution to the interpretation, application and development of the Model Law and to helping it achieve the UN General Assembly’s conviction that the Model Law “significantly contributes to the establishment of a unified legal framework for the fair and efficient settlement of disputes arising in international commercial relations.”

The consistency of the Canadian appellate and Supreme Court decisions indicates that we can anticipate from Canadian courts a continued stream of pro-arbitration jurisprudence interpreting, applying and developing the Model Law consistent with the Model Law’s objectives.

Barry Leon (bleon@perlaw.ca), and Andrew McDougall (amcdougall@perlaw.ca) are Partners in the International Arbitration Group with Perley-Robertson, Hill & McDougall LLP (www.perlaw.ca).

• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Concise International Arbitration by Loukas A. Mistelis
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port

by Jennifer Thornton

In 1924, the League of Nations launched a worldwide effort to codify three important subjects of public international law: Nationality, Territorial Waters, and the Responsibility of States for Damage Caused in Their Territory to the Person or Property of Foreigners. These efforts culminated in the First Conference for the Codification of International Law, which took place at The Hague from March 13 to April 12, 1930 and was attended by representatives of forty-seven States. In the view of the United States Delegate to the Conference, Green H. Hackworth, then Solicitor for the Department of State, the need for codification of the principles of State responsibility that govern the treatment of aliens was vital, in light of its significance for the development of international trade, commerce, and travel at that time. See Green H. Hackworth, Responsibility of States for Damages Caused in Their Territory to the Person or Property of Foreigners: The Hague Conference for the Codification of International Law, 24 AM. J. INT’L L. 500 (1930). Furthermore, given the numerous mixed-claims commissions of the 19th and 20th centuries, there was more international jurisprudence to guide the efforts of the “Third Committee” charged with codifying these principles of State responsibility, than there was available to the other two committees. See Manley O. Hudson, The First Conference for the Codification of International Law, 24 AM. J. INT’L L. 447, 459 (1930).

Notwithstanding these facts, as well as four years of preparatory work that elicited commentary from over thirty States on the subject, the Third Committee “confessed its inability to arrive at a convention” on the eve of the closing of the Conference. Edwin M. Borchard, “Responsibility of States,” at the Hague Codification Conference, 24 AM. J. INT’L L. 517 (1930). The reasons for this failure are varied, but the preparatory materials and minutes of the Third Committee are useful for identifying the principles of State responsibility that were accepted and disputed by the delegations at that time, which is relevant for investment arbitration practitioners trying to discern the limits of State responsibility today. See LEAGUE OF NATIONS, ACTS OF THE CONFERENCE FOR THE CODIFICATION OF INTERNATIONAL LAW, Vol. IV, Minutes of the Third Committee (1930).

On the first day of the conference, the French delegation proposed a foundational article that revealed deep disagreement among the delegates about the sources of international law from which the principles of State responsibility could be derived. The proposed article, which became Article 1 of the tentative convention, established simply that international liability in this area flows from a failure “to carry out the international obligations of the state which causes damage to the person or property of a foreigner on the territory of the state.” Borchard at 518 (emphasis added). Even though this principle was adopted unanimously, the Salvadoran and Romanian delegations subsequently insisted that the concept of “international obligation” to which it referred be defined. Id. at 520-21. They proposed further that the sources of international law from which those obligations could be derived be limited to “those arising from treaty or from established custom recognized as law by all states,” because they feared that “existing law had gone beyond what they considered just.” Id. at 521 (emphasis added).

A considerable number of delegates objected to this proposition on the grounds that any attempt to define “international obligations” would unnecessarily limit the evolution of those obligations and their application by courts. See Borchard at 521. The U.S. Delegate, Green Hackworth, noted that the proposed limiting language on sources was also untenable, as very few rules of international law were universally accepted by the international community. See Hackworth at 504. In the end, an overwhelming majority of the delegates approved the following compromise, which became Article 2 of the tentative convention: “The expression ‘international obligations’ in the present Convention means obligations resulting from treaty, custom or the general principles of law which are designed to assure to foreigners in respect of their persons and property a treatment in conformity with the rules accepted by the community of nations.” Minutes of the Third Committee, Annex IV, “Texts Adopted By the Committee in the First Reading as Revised by the Drafting Committee” at 236 (“Tentative Convention”). The Italian delegate indicated that he supported the article only because he believed it to be meaningless, but Professor Borchard characterized it as designed to identify the sources of law from which the minimum standard of civilized treatment owed to foreigners could be divined at that time. See Borchard at 522.

The Committee was able to adopt several additional foundational principles by simple majority, including that international responsibility: implies a duty to make reparation for damage sustained (tentative Article 3); cannot be avoided by the invocation of municipal law (tentative Article 5); and can flow from the acts and omissions of the legislative, executive, and judicial branches of government (tentative Articles 6, 7, and 9). See Tentative Convention at 236-37. The Article codifying the local remedies rule (tentative Article 4) was adopted almost unanimously, but not without controversy, which the delegates ultimately resolved by creating an express exception for denial of justice claims in which local remedies cannot be exhausted because access to judicial review is hindered or refused. See Borchard at 527; Tentative Convention at 236-37.

Negotiations became more heated when the delegates took up the issue of international responsibility for damage sustained by foreigners due to the acts or omissions of officials. The question of whether international responsibility should lie for unauthorized acts of officials, acting within the scope of their employment, but in contravention of a State’s international obligations, was among the most contentious. See Hudson at 460. At the time, such liability was recognized in the French and German civil codes, but expressly disavowed in the municipal law of many countries, including the United States and England. See Borchard at 529-30. Notwithstanding this fact, many countries that expressly disavowed the rule in their municipal codes actually supported its inclusion in the tentative convention, because they recognized that it had been embraced in international practice by claims commissions. See Hackworth at 507; see also Borchard at 530, n.17. Consequently, the rule was adopted in tentative Article 8(2) by a significant majority, with numerous abstentions. See Borchard at 530.

Negotiations subsequently ground to a halt when the delegates considered the circumstances under which States can be responsible for damage to the person or property interests of foreigners caused by private persons. A slight majority of the Committee proposed that a State is responsible for such injury only in such instances “where the damage sustained by the foreigners results from the fact that the State has failed to take such measures as in the circumstances should normally have been taken to prevent, redress, or inflict punishment for the acts causing the damage.” See Tentative Convention at 237 (tentative Article 10) (emphasis added). While in the view of Professor Borchard the article merely enacted “the due diligence rule which claims commissions have applied on innumerable occasions,” numerous delegations objected to it on the grounds that the only level of diligence owed by States in such circumstances is the one they extend to their own nationals. Borchard at 536-38.

In Professor Borchard’s view, this position was clearly inconsistent with international law, which had already “properly established the rule that certain exceptional types of injury transgressing the requirements of civilized justice or administration would justify an international claim, even though nationals might for lack of a remedy have to tolerate them.” Borchard at 537. A slim majority of the delegates appear to have agreed with Borchard’s assessment, and the principle was codified in Article 10 of the tentative convention. But the debates that preceded the vote revealed such divisions that the delegates feared the tentative convention would not be approved by the requisite two-thirds majority. See Hackworth at 514-15. After several days of horse-trading designed to keep the negotiations going, the Committee unanimously agreed that they could provide no report to the Conference and that the Chairman would simply announce at the plenary session “that the Committee on Responsibility of States had been unable to complete its work.” Id. at 515.

The Rapporteur of the Third Committee, Charles de Visscher, attributed this failure to a lack of time and noted that the continued settlement of cases by international tribunals would ultimately lead to a convention on the issue. See Minutes of the Third Committee, Annex V, at 238. Others speculated that the Third Committee simply lacked a sufficient number of skillful negotiators to bridge the “sharp divergence of views” on fundamental aspects of the subject. Hudson at 459. Regardless of the reason for the Third Committee’s failure to arrive at a convention, it was not able to take up a number of important issues of State responsibility on which numerous governments had opined in preparation for the Conference, which are extremely relevant today. These included State responsibility for (1) the wrongful acts of political subdivisions, (2) repudiation of contracts and public debts, and (3) damage resulting from civil disturbances; as well as various grounds for disclaiming responsibility such as necessity. See Minutes of the Third Committee, Annex I, “Bases of Discussion Drawn up by the Preparatory Committee” at198-202. Nevertheless, in the preparatory work and minutes of the Third Committee one can still glean a significant amount about the principles of State responsibility that were widely, if not universally, accepted at that time.

Jennifer Thornton is an Attorney-Adviser in the Office of the Legal Adviser at the United States Department of State, Office of International Claims and Investment Disputes. The views in this article are expressed by the author solely in her personal capacity and do not necessarily represent those of the U.S. Government.

• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port
• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Concise International Arbitration by Loukas A. Mistelis

by Roger Alford (Editor)

The ongoing saga regarding Chevron’s legal travails in Ecuador took an interesting twist this week. As I reported earlier, Chevron has secured key outtakes of the movie Crude that appeared to show alarming collusion between the plaintiff lawyers and the Court-appointed expert. According to pleadings filed yesterday pursuant to 28 U.S.C. 1782, the outtakes include some amazing communications caught on tape. The purpose of the filing was to secure the court’s assistance with additional discovery of Crude outtakes to facilitate the arbitration and secure preservation of all relevant evidence “related to the fraudulent ‘Global Expert’ scheme as documented in the Crude documentary and the outtakes produced to date.” (p. 21).

The film outtakes include some choice excerpts of a March 3, 2007 meeting that included plaintiffs’ counsel (Steve Donziger and Pablo Fajardo), plaintiffs’ experts (Charlie Champ, Ann Maest, Dick Kamp) and the soon-to-be court-appointed expert, Richard Cabrera. The apparent purpose of the meeting between the plaintiffs and Cabrera was to develop a plan for the drafting of the independent expert’s report that Cabrera would write as Special Master for submission to the Ecuadorian court. According to Chevron’s filing, the tapes include some pretty damning evidence.

For example, Plaintiff lawyer Fajardo tells the assembled group—which includes the soon-to-be court-appointed expert Richard Cabrera– that the court-appointed expert is going to “sign the report and review it. But all of us [the plaintiff lawyers and experts] … have to contribute to the report.” Toward the end of the meeting Donziger brags: “We could jack this thing up to $30 billion … in one day.” (p. 2). Fajardo says that the team must “[m]ake certain that the expert constantly coordinates with the plaintiffs’ technical and legal team” and the plaintiffs’ team must “support the [court-appointed] expert in writing the report.” (p. 8). “Our entire technical team … of experts, scientists attorneys, political scientists, … will contribute to that report—in other words—you see … the work isn’t going to be the expert’s.” (p. 9).

In clarifying what role the plaintiffs and defense counsel will have in drafting the court-appointed expert report, Fajardo confirms that it will be written “together” with the plaintiffs. The idea of Chevron having a role in drafting the court-appointed report was met with collective laughter. (p. 9). Donziger proposes the plaintiffs establish a “work committee” to present a “draft plan” for the report and then says to the soon-to-be court-appointed expert, Richard Cabrera, “and Richard, of course you really have to be comfortable with all that.” (p. 11).

The next day, in a lunch meeting with just the plaintiffs’ lawyers and plaintiffs’ experts, one expert, Charlie Kamp, said “Having the perito [Cabrera] there yesterday in retrospect … that was bizarre.” Donziger replies, “Don’t talk about it” and tells the camera crew “And that’s off the record.” (p. 12). In responding to concerns from their own experts that there was not evidence of groundwater contamination, Donziger replies, “This is all for the Court just a bunch of smoke and mirrors and bullshit.” (p. 12). That’s right, Donziger is caught on tape saying that the evidence he is gathering for inclusion in the court-appointed expert report about groundwater contamination is just smoke and mirrors and bullshit.

I would rarely advise our readers to read a court filing they don’t have to, especially during the summer recess. But this one is explosive.

• Concise International Arbitration by Loukas A. Mistelis
• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port

by Lisa Bench Nieuwveld

This year, the State of Florida, with significant help from the many international practitioners working in Florida, proposed and passed a bill changing the Florida Arbitration Act to substantially match the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”). On May 12, 2010, Governor Crist signed into law Bill CS/HB 821 modifying Florida Statutes Chapter 684. Effective on July 1, 2010, Florida has joined the 6 other US states in becoming a Model Law jurisdiction (Illinois, Texas, California, Connecticut, Oregon, and Louisiana).

With over 50 countries enacting the Model Law, it is a widely accepted and highly regarded model law which in turn provides greater uniformity and predictability in the international commercial arbitration context. In fact, even the list of countries which the UNCITRAL.org provides as having accepted and enacted the Model Law doesn’t provide an accurate reflection of just how universal this Model Law has become. Some countries, such as The Netherlands, were greatly influenced by its principles, enacting its core principles even if the differences remain substantial enough to not be listed on the UNCITRAL’s website.

The Model Law’s aim is to provide greater transparency for international parties seeking arbitration as its dispute resolution mechanism. Through past case law as well as incorporating both civil law and common law elements, foreign players can better understand how the process may work. Specifically, the Model Law standardizes what constitutes an arbitration agreement. It ensures existence of the compentence-compentence principle, and provides a uniform treatment of awards regardless of the country of origin, procedural rules involved, etc. amongst other standardizing attributes. With many jurisdictions having embraced the Model Law, there is a wealthy source of case law interpreting and applying its principles.

The question remains, to be addressed in my next blog: Why don’t more US states follow Florida and the other 6 states’ examples? Even more important is the question: Why the Federal Arbitration Act? Why not, instead, replace it with the Model Law? Hopefully, these questions will invoke opinions and answers as undoubtedly the practitioners worldwide have diverse and varying views on this point. My thoughts will be saved for my next blog, but I wanted to put the idea out there. If these US states and such countries as Australia and the United Kingdom (also common law jurisdictions) fell compelled to enacted its precepts, why not the United States?

The Federal Arbitration Act pre-dates the Model Law by some 60 years, being enacted in 1925. Over the years it has developed its own case law following and wealth of interpretive resources. I have heard comments that the Model Law simply wouldn’t work within the federal structure of the United States Clearly, that is not the case with the individual states (as others have already successfully incorporated the Model Law), but is that true from the federal perspective? Arguments to be considered in the next round include the argument, if it is not broken, why fix it, and why replace the FAA of 80 years of experience with something having only 25 years experience?

• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port
• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Concise International Arbitration by Loukas A. Mistelis

by Andrew Newcombe

The 14 July 2010 Award in Saba Fakes v. Turkey (Fakes) is notable because it expressly disapproves of the approach taken by the Tribunal in Phoenix Action v. Czech Republic, which found in its 15 April 2009 Award that good faith and legality are jurisdictional requirements for access to ICSID arbitration. Fakes is a welcome addition to a growing body of investment treaty awards that supports a minimalist approach to the interpretation of investment for the purposes of Article 25, ICSID Convention and that does not consider good faith or legality as jurisdictional requirements under Article 25.

The dispute in Fakes arose out of “various investigations and lawsuits brought against the Uzans, a prominent family in Turkey who controlled a vast group of companies in a variety of business sectors including banking, electricity, television and telecommunication.” (para. 28)  Turkish authorities ultimately froze and sold various assets held directly or indirectly by the Uzans, including Telsim Mobil Telekomunikayson Hizmetleri A.S. (Telsim), a leading Turkish telecommunications company.  The Claimant submitted that, as a result of series of share sale agreements, on 3 July 2003 he became the legal owner of 66.96% of the shares in Telsim shortly before the Turkish conduct at issue.  He claimed an astronomical US$ 19 billion in damages.

The Tribunal ultimately disposed of the claim on the basis that although there were formal share sale agreements for the Telsim shares, Mr Fakes did not hold legal title over the Telsim share certificates because the parties never had any intention to transfer any rights to Mr Fakes nor did they actually transfer any rights.  In coming to this conclusion, the Tribunal highlighted four points.  The Tribunal found that the purpose of the arrangement was to use the name of Mr Fakes as “bait” to attract potential purchasers who might be hesitant to deal with the Uzans.  Second, the low purchase price (US$ 3,800) could not be reconciled with the acquisition of legal rights to the majority of shares in a major telecommunications company, even assuming the amount was paid.  Third, Mr Fakes never obtained possession of the share certificates and was not in a position to obtain possession.  Fourth, Telsim appeared to be unaware of the share transfer.  The Tribunal concluded that, as the parties did not intend to give effect to the alleged share transfer, there was no investment (para. 147).

In defining investment for the purposes of Art. 25, ICSID Convention, the Tribunal noted that two distinct approaches have been taken by tribunals.  On the one hand, some tribunals have identified a number of benchmarks, yardsticks or characteristics that can be used as examples to facilitate the recognition of the objective meaning of investment in any given case.  On the other hand, other tribunals have found that an objective definition of investment must include a certain number of elements.  The Tribunal noted that some decisions, in addition to the four criteria indentified in Salini ((i) a contribution, (ii) a certain duration, (iii) an element of risk, and (iv) a contribution to the host State’s economic development) had added a fifth criteria (regularity of profit and return) and that Phoenix Action had identified two other requirements—that the assets be invested in good faith and in accordance with host State law.  The Tribunal then noted that the ever increasing list of criteria has resulted in some tribunals taking the view that the notion of investment is to be viewed solely through the prism of consent and that, as the ICSID Convention does not define investment, consent to arbitrate an investment dispute is based on the definition of protected investment in the underlying treaty.

The Fakes Tribunal takes the minimalist middle road in this debate.  It affirms that there is an objective definition of investment in the ICSID Convention that cannot be defined simply through the parties’ consent (para. 108).  Second, it finds that the criteria of (i) contribution, (ii) a certain duration, and (iii) an element of risk, are both necessary and sufficient to define an investment within the framework of the ICSID Convention (para. 110).

Despite taking a minimalist approach to defining an objective core meaning of investment for the purposes of Art. 25, the approach in Fakes diverges from what the 30 July 2009 Award in Pantechniki S.A. Contractors & Engineers v. Albania, referred to as an “emerging synthesis”, citing Zachary Douglas’ formulation in The International Law of Investment Claims that: “The economic materialisation of an investment requires the commitment of resources to the economy of the host state by the claimant entailing the assumption of risk in expectation of a commercial return.” (Rule 23)   In Fakes, “a certain duration” is identified as a necessary criterion, while the formulation in Douglas’ Rule 23 includes expectation of commercial return but not duration.  It is unfortunate that the Tribunal in Fakes, in its attempt to set out a definitive test, did not explain in more detail why “a certain duration” is a necessary criterion mandated by the ICSID Convention.  Why should an investment that has been in a host State for a hour not obtain treaty protection?  This would seen to create a perverse incentive for states to expropriate as soon as possible.

On the issue of the definition of investment generally, I find the reasoning in Pantechniki about second-judging state choices persuasive: “For ICSID arbitral tribunals to reject an express definition desired by two States-party to a treaty seems a step not to be taken without the certainty that the Convention compels it.” (para. 42) As the ICSID drafters did not decide to define investments, in my view there are very good reasons for the arbitrator to look solely to the instrument of state consent for the definition of investment, absent very compelling reasons.

The Fakes Tribunal rightly stated that principles of good faith and illegality cannot be incorporated into the text of the ICSID Convention with doing violence to its language.  The requirement to interpret and apply treaties in good faith does not make it a criterion for whether there is an investment for the purposes of the ICSID Convention (para. 112-113).  Likewise, although treaty protection might be conditioned on a requirement of legality, the ICSID Convention does not impose this as a jurisdictional requirement (para. 114).

Although the reasoning in Fakes with respect to the three necessary criteria for an investment under Art. 25, ICSD Convention is not particularly satisfying, Fakes can be commended for providing a succinct and clear rejection of the attempt in Phoenix Action to add further and unwarranted jurisdictional requirements for the purposes of ICSID arbitration.

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• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port

by Romain Dupeyré

Can arbitrators be called to give testimony on the arbitral procedure before the court in charge of annulment or enforcement actions? Courts in England and Norway had to tackle this issue and have given a similar answer to this question: arbitrators can be asked to give testimony as to the elements of facts of the proceedings. Courts have however been careful not to interfere with the arbitrators’ freedom of judgment and refused to hear them on the grounds of their decisions.
These decisions are commented below, and are put in perspective with other cases from the Paris Court of appeal and the practice of the Swiss Federal Tribunal.

England
The question of whether arbitrators can be called as witnesses in subsequent court proceedings is not subject to any provision of the English Arbitration Act 1996.
There is, in the words of Gordon Blanke, “a discrete body of English common law that sheds light on the issue” (“Whether Arbitrators Can be Called as Witnesses: the Position under English Law”, (2008) 74 Arbitration 2, p. 114).
Duke of Buccleuch (1871-1872, L.R. 5 H.L. 418) constitutes the leading case in this area. In that case, the House of Lords held:

“1. That the umpire was a competent witness, like any other person to prove matters material to the issues [i.e. determining the arbitrators’ jurisdiction].
2. That questions might be properly put to him for the purpose of proving the proceedings before him, so as to arrive at what was the subject-matter of adjudication when the proceedings closed, and he was about to make his award.
3. That as regards the effect of the award no questions could properly be put to the umpire for the purpose of proving how it was arrived at, or what items it included, or what was the meaning which he intended at the time to be given to it.”

The court observed that it did not know of any objection to the very possibility to hear arbitrators as witnesses. For the court, the reasons preventing judges from testifying and being cross-examined did not extend to arbitrators. The arbitrator could therefore be questioned as to what took place before him. The House however refused to hear arbitrators on the content of the award. It held:

“As soon as the award is made it must speak for itself . . . but cannot be explained or varied or extended by extrinsic evidence of the intention of the person making it”

There are indeed good reasons for not allowing the arbitrators to give testimony on the content of the award, one of which being that the arbitrator is functus officio once the award is rendered. He can therefore not deviate from or modify the award in any way once it is signed (subject to a limited right to correct and interpret it).
Moreover, admitting testimony on the content of the award would jeopardize its finality:

“The award taken by itself is something certain and fixed, and settles the rights of the parties; but if evidence be admitted of the intention and state of mind of the umpire when he made it, its certainty is destroyed, and its effect depends on his memory . . .”

This early case was confirmed in Dare Valley Railway Co in which the court ruled:

“I can see no reason why the arbitrator should not be just as well called as a witness as anybody else, provided the points as to which he is called as a witness are proper points upon which to examine him” (L.R. Eq. 429 at 435).

English courts have later held that the testimony of arbitrators should only be heard in exceptional circumstances, when the facts of the case could not be ascertained by any other means:

“In the view of the Court this is an exceptional case, and in this exceptional case the Court has arrived at the conclusion that the only way in which it can satisfactorily deal with the matter before it, is by having the assistance of the evidence of the arbitrators, who, being independent persons, can tell the Court what it is unable to ascertain from perusal of the affidavits on one side and the other – namely what are the essential facts of the case” (Leisarch v Schalit [1934] 2 K.B. 353).

This issue has again been dealt with by the House of Lords in a Scottish case in which the Court held that “in proceedings where the award itself was not in issue, it was not incompetent to call the arbiter as witness” (Cooperative Wholesale Society Ltd v Ravenseft Properties Ltd (No.2) (2002) S.C.L.R. 644).

Under English law, arbitrators are therefore not privileged from giving testimony and can be called to testify in setting-aside proceedings. Their testimony is nonetheless limited to the factual account of the arbitration procedure and it is therefore excluded that the arbitrators would have to explain the reasoning that led to the award or provide clarification on their state of mind at the time the award was made.

Norway
The Supreme Court of Norway rendered on 14 March 2008 a decision relating to the right of a party to call an arbitrator as a witness in proceedings brought for the annulment of an award (Trygg-Hansa, Bertrand, “The witnessing arbitrator,” http://avocats.fr/space/edouard.bertrand; Langeland et al., “Supreme Court Rules on Arbitrators as Witnesses,” ILO Newsletter, 10 July 2008).
The dispute related to a reinsurance agreement. The arbitral tribunal had made an award based on a clause which provided that the interpretation of the reinsurance contract would be made “from a practical view and on the basis of equity rather than in a strict legal sense”.The losing party applied to the Norwegian courts for an order vacating the award on the grounds that no party had asserted this interpretation provision in the arbitral proceedings, and the arbitral tribunal had therefore breached due process requirements in applying it without hearing the parties’ arguments in this respect.

In order to establish that this provision had been asserted before the arbitral tribunal, the opposing party requested permission to call the three arbitrators as witnesses.The court of first instance authorized the testimony of the president of the arbitral tribunal. This decision was upheld on appeal and before the Supreme Court.

The Supreme Court noted that, while calling arbitrators as witnesses was in principle prohibited, this prohibition was not absolute. It is permissible under Norwegian law to request the testimony of an arbitrator as to what actually happened during the arbitral proceedings. However, the testimony of an arbitrator may not address his personal view of the case, nor can it be used to clarify or supplement the award.

France
French courts have adopted a different approach and considered that the arbitrators should enjoy a privilege similar to those of judges when it comes to being heard as witnesses. In a case dated 1992, a party challenging an arbitral award requested leave of the court to order the arbitrators to appear before the court. Such request was rejected on the following grounds:

“The arbitrator . . . is not a third party in relation to the dispute which he has decided . . . On accepting his functions, he assumes the status of a judge, as a result of the contract appointing him. He therefore enjoys the same rights and is subject to the same duties as a judge, and it is not legally possible for a judge to be heard in person in proceedings to which he is not a party” (Paris Ct App., May 29, 1992, Consorts Rouny, Rev. arb. 1996.408).

The position of the court was expressed in general terms and has been approved by scholars (Dubarry, Loquin, 1992 RTD Com. 588; Fouchard: “Le statut de l’arbitre dans la jurisprudence française”, Rev. arb. 1996.325).

Switzerland
In Switzerland, the practice concerning testimony of arbitrators further differs. Section 102 of the Federal Law on the Federal Tribunal sets a deadline to the arbitral tribunal to submit its comments on a motion to set its award aside. The arbitral tribunal’s failure to submit any such comments bears no consequence.
The Swiss Federal Tribunal can therefore seek observations from the arbitrators on the way the arbitration was handled. This however constitutes a mere invitation made to the arbitrators who are not bound to appear before the tribunal and remains rare in practice.

Conclusion: A brief analysis shows that testimony by arbitrators in subsequent court proceedings is subject to various practices which differ from jurisdiction to jurisdiction. The extent of the rights and obligations of arbitrators arising in setting-aside or recognition and enforcement proceedings of an international award remains to be defined.

Edouard Bertrand notes that the admissibility of the arbitrators’ testimony raises a number of questions: Is the arbitrator entitled to refuse to testify? Is the arbitrator entitled to receive compensation for the time spent on his testimony? In cases where there are several arbitrators, should the president alone testify? What would happen if the testimonies of the arbitrators differ with one another? Could an arbitrator be subject to cross-examination? Should this issue be dealt with by institutional arbitration rules?
It seems there is at least one point of agreement: the scope of the arbitrators’ testimony is limited and it can only bear on the factual account of the arbitral proceedings. On the contrary, arbitrators’ testimony cannot involve the substance of the award, which cannot be altered in any way. In any case, one may wish that courts would only make arbitrators witnesses in exceptional circumstances, when the evidence cannot be secured by any other means. This could otherwise well become yet another guerrilla tactic in international arbitration.

• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port
• Concise International Arbitration by Loukas A. Mistelis

by Luke Eric Peterson

A string of mainstream media reports are suggesting that Uruguay is looking to compromise with Philip Morris International in relation to a sensitive international arbitration.

On Tuesday, The UK-based Guardian newspaper reported that Uruguay

has promised to water down anti-smoking laws after pressure from the tobacco giant Philip Morris, prompting accusations of corporate bullying.

More specifically, the paper reports that Uruguay will make certain changes to its strict tobacco control laws in order to comply with its “international trade obligations”:

“On some arguments, Uruguay is very strong from a legal point of view and changes aren’t necessary. On other points, we need to make changes to the law or come up with a new law,” the foreign affairs minister, Luis Almagro, said.

Readers of this blog may recognize that these developments come in the context of an arbitration claim initiated by Philip Morris International at the International Centre for Settlement of Investment Disputes (ICSID). For background on the claim, see this report from my Investment Arbitration Reporter newsletter (no subscription required).

It’s not clear on what basis Uruguay has decided that its policy must be amended. According to the ICSID, the country has yet to instruct outside legal counsel. As such, it’s not clear whether the government commissioned external legal opinions (or relied on internal legal advice) following Philip Morris International’s filing of a damages claim under the Switzerland-Uruguay bilateral investment treaty.

If the claim goes forward, it promises to be an extremely sensitive arbitration. Already, a number of NGOs and activist groups have drawn attention to the dispute, and raised concerns about the potential for BITs (and their intellectual property protections) to foreclose the use of certain public health measures.

No doubt both parties are keen for the arbitration to be settled, rather than devolve into a circus. However, if Uruguay is blinking as a result of a conviction that its policies are not compliant with its bilateral investment treaty obligations, such a move may reverberate widely – with governments coming under pressure to create more breathing space in their treaties for public health measures. (Mind you, Uruguay’s new tobacco regulations were some of the strictest in the world, so the arbitration was not necessarily a test-case for more middle-of-the-road measures).

I’m planning to make further inquiries in order to understand what legal advice Uruguay received – and from whom – as part of its recent announcement that it must tweak its tobacco policies.

I’ll update readers if I find anything interesting.

Luke Eric Peterson
http://www.iareporter.com

• Concise International Arbitration by Loukas A. Mistelis
• International Arbitration and Mediation. A Practical Guide by Michael McIlwrath & John Savage
• Recognition and Enforcement of Foreign Arbitral Awards. A Global Commentary on the New York Convention by Herbert Kronke, Patricia Nacimiento, Dirk Otto, Nicola Christine Port