Kluwer Arbitration Blog
The Arbitrator Intelligence Questionnaire (AIQ) is a feedback questionnaire that will be used by Arbitrator Intelligence (AI) to collect information on case management and decision making practices of international arbitrators. After pilot testing and extensively vetting the AIQ, we are now asking for public comments to help us further refine it.
A demonstration version of the draft AIQ is now available for review on our website. There, you will also find an interactive annotation tool that will allow you to register your comments directly onto the text of the AIQ. Come give us your input!
Why Is the AIQ Needed?
The AIQ is a potential solution to some of international arbitration’s most salient challenges. For example, a recent survey by Berwin Leighton Paisner investigating the lack of diversity in international arbitration found that a staggering 92% of respondents wanted more information about new and less well-known arbitrators, and a whopping 81% of respondents wanted to give feedback about arbitrators at the end of cases.
Respondents to the 2015 Queen Mary Survey on Improvements and Innovations in International Arbitration identified the third worst characteristic of international arbitration as the “lack of insight into arbitrators’ efficiency.” Meanwhile, most responses to the Survey about how institutions could improve international arbitration involved providing more information about arbitrators, how they are appointed, and their decision making.
Finally, and most recently, three out of the 10 Hot Topics in International Arbitration for 2017 identified in a Kluwer blog post – transparency, the arbitrator selection process, and diversity – go to the heart of AI’s mission.
The AIQ is our means to accomplish these aspects of our mission. The idea behind the AIQ is relatively simple: to replicate through systematically gathered feedback the kinds of information that are currently obtainable only through ad hoc, person-to-person phone calls during the arbitrator selection process. More, and more accurate, information about how arbitrators decide cases will empower parties, counsel, and institutions to make better informed choices in selecting arbitrators. It will also reduce information asymmetries that undermine the fairness of arbitrator appointments and facilitate greater diversity by allowing newer arbitrators meaningful opportunities to establish reputations based on their actual performance.
Challenges in Creating the AIQ
To effectively replicate the essential characteristics of telephone research, we faced tremendous challenges in developing both the content of the AIQ and a strategy for implementing it. For starters, when you conduct telephone research about arbitrators, you can ask case-specific questions and follow up questions to fill in details. By contrast, the AIQ must cover all the topics that may be relevant in any particular case and anticipate potentially relevant follow up questions.
Meanwhile, when you make telephone inquiries, you know the identity of the person on the other side of the line and can assess the quality of responses in light of your confidence in that person’s experience and judgment. For the AIQ, we have to develop alternative means for determining relevance and ensuring confidence in the quality of responses, while still maintaining the confidentiality of the responder and of identifying details of the case.
Another challenge in developing the AIQ is preventing what we might call “The Disgruntled Losing Party Problem.” The concern is that, instead of providing fair and objective feedback, disappointed parties might misuse a survey to exact revenge against arbitrators who rendered an unfavorable award. To avoid this problem, our AIQ has to include control questions and other mechanisms to reduce the potential for unfair or inaccurate responses.
Ultimately, all these challenges must be met, but the questionnaire can’t be too long! Meeting these various challenges forced us to think and rethink details of the AIQ, and find innovative solutions to protect confidentiality while assuring quality.
To meet these challenges, we worked for months refining and redrafting questions in consultation with the Penn State Survey Research Center and other experts who are trained in empirical research methodologies. We then extensively pilot tested the AIQ with advisors and friends of AI, and we previewed the AIQ to select groups of in-house counsel, arbitrators, law firms, and representatives from arbitral institutions. The result is a draft version of the AIQ, which is now posted for public comment. Through this process, we hope to get additional feedback from around the globe so we can further refine and improve the AIQ.
Overview of the AIQ
The AIQ is divided into two phases. The first Phase focuses on general background about the case, and can be completed by anyone who has access to the arbitral award or case file. Key data from Phase I will then be prefilled into in the questions in Phase II. For example, the arbitrators’ names will be input in Phase I, along with key dates (like the date the request for arbitration was filed, the date the proceedings were closed, and the date the award was rendered). These data then will be incorporated into the questions in Phase II, which seek more evaluative and analytical feedback and are designed to be completed by an attorney or party involved with the case.
There are several reasons we divided the AIQ into 2 phases. First, it soon became clear that we could not ask all the essential questions we needed to ask and still have a questionnaire that would not be unduly burdensome. Now, each phase can be completed in 15 minutes or less.
Second, because Phase I seeks only objective information derived from awards, it can be used not only to gather information an ongoing basis, but also to extract data from past awards collected by AI. This data from past awards will provide a valuable starting point for analytics about arbitrator decision making.
Give Your Feedback on the AIQ
We need you! Come visit the AI website, where a static presentation version of the AIQ is posted along with annotation software that will enable you and others in the international arbitration community to provide us with interactive comments on the AIQ. Is there any question or response that is unclear? Are we missing a question you think should be included? Or are there questions you think are superfluous, unnecessary, or simply unhelpful?
Our website features Phase II for comment because it asks the most nuanced and complex questions—the questions on which your input will be most valuable. If you only have time to review one of the AIQ’s phases, Phase II is it! But we also welcome your feedback on Phase I, which is available here.
You can also find additional information about the AIQ in our answers to Frequently Asked Questions, which are available here.
Your feedback and input will help us finalize our AIQ before we formally launch it later this summer. In addition to annotating the AIQ on our website, you can also submit comments or questions directly to [email protected]
International arbitration is no longer a cozy little practice among an elite group of insiders who can exchange information by telephone. We now see over 10,000 international arbitration cases annually (just among the major institutions), and thousands of arbitrators who regularly sit in those cases. The telephone is simply not a good means for keeping up with the scope of information implicated by these numbers. The result, unsurprisingly, is that even the largest firms and parties report finding themselves forced to consider or appear before arbitrators with whom they are unfamiliar and about whom they have trouble finding information.
The time has come for a technological and informational upgrade to the entire international arbitration regime. Parties, counsel, arbitral institutions, and even arbitrators need a more reliable, neutral, data-driven resource for sharing information about arbitrators and their decisional history. As an academic-based enterprise, Arbitrator Intelligence is uniquely positioned to meet these challenges on behalf of all stakeholders in the international arbitration community.More from our authors:
The post We Need Your Input! on The Arbitrator Intelligence Questionnaire appeared first on Kluwer Arbitration Blog.
The terms ‘Privacy’ and ‘Confidentiality’ had been used in arbitration interchangeably until the latter half of 20th century. While ‘Privacy’ means that no third party can attend arbitral conferences and hearings, ‘Confidentiality’ refers to non-disclosure of specific information in public. Private hearings do not necessarily attach confidentiality obligations to the parties to arbitration. The general assumption that arbitration proceedings are both private and confidential stands corrected in the 21st century. Nevertheless, confidentiality is one of the primary reasons for arbitration being the preferred option for commercial dispute resolution.
The said assumption flows from the traditional understanding of arbitration agreement which is a private contractual arrangement. This changed in the 1990s with Australian and Swedish courts rejecting any implied duty of confidentiality in arbitration. The Swedish Supreme Court in AI Trade Finance held that no implied duty of confidentiality existed in private arbitrations under the UN-ECE rules or Swedish law. The Australian High Court in Plowman observed that private arbitration hearings do not clothe the disclosed information and documents with confidentiality since absolute confidentiality is absent in Australia.
These precedents extend confidentiality protection to only such cases where parties intended to keep particular information private. This led to non-uniform application of confidentiality principle to arbitrations globally. To clarify this, several jurisdictions came out with new arbitration laws and some arbitral institutions amended their rules.
The undesirable publicity of the dispute between US-based consulting firm AlixPartners and financial investor Kingsbridge Capital Advisors has led to a debate over confidentiality of arbitral proceedings (see, for example, Stephan Balthasar’s post on confidentiality in arbitration).
While some nations and arbitral bodies notified that implied confidentiality cannot be assumed in arbitration proceedings, others have followed the traditional approach to impose a duty on the arbitrators, parties or both. The nature of arbitration proceedings and extent of confidentiality is dependent upon:-
- The seat of the Arbitration and;
- The arbitral rules applicable to the Arbitration.
The confidentiality issue is complicated due to the involvement of multiple actors (witnesses, translators, officials of the arbitral institution, etc.) in arbitration who—unlike the arbitrator(s) and parties—are not governed by the arbitral rules or arbitration agreement even though they have access to confidential information.
Confidentiality protection regime- The full picture
There is no uniformity on the confidentiality principle’s scope of application amongst countries and international arbitral institutions. Though the English Arbitration Act 1996 is silent on confidentiality, there are three rules:-
- Arbitration proceedings must be held in private;
- Implied confidentiality in every arbitration;
- Such confidentiality is subject to certain exceptions, namely court order, parties’ consent, public interest and reasonable necessity. The Court of Appeal in Shipyard Trogir formulated these exceptions for the first time.
English courts seek to protect confidentiality as long as it is not conflicting with the delivery of justice. Emmott divided all confidential information into two –
- Information inherently confidential (trade secrets); and
- Information protected by implied duty of confidentiality such that the same finds application only in arbitration. It also followed Shipyard Trogir to recognize the exceptions to implied confidentiality.
South East-Asia is increasingly becoming the center for international commercial arbitration. Singapore is home to the Singapore International Arbitration Centre (SIAC) and the local arbitration laws explicitly provide for confidentiality in court proceedings emanating from arbitration on the parties’ request. The general obligation of confidentiality is implied in the arbitration agreement. In AAY v. AAZ, the Singapore High Court opined that non-disclosure of parties’ identity amounted to protection of confidentiality of arbitral proceedings. The High Court reiterated the respect for confidentiality in arbitration while considering the question of sealing arbitration documents (for more on court’s reasoning, refer to Darius Chan’s post).
The Hong Kong Arbitration Ordinance (HKAO) expressly imposed confidentiality in arbitration proceedings from 2011, mandating non-disclosure of any information pertaining to arbitral proceedings. Where parties do not agree on confidentiality measures, statutory restrictions will apply. Mandatory legal disclosures, disclosure necessary for enforcing a right and disclosure in course of challenging the arbitral award are the three exceptions.
The Philippines Alternative Resolution Act 2004 promotes party autonomy in dispute resolution and explicitly provides for confidentiality in arbitral proceedings. Courts can issue protective orders to prevent disclosure of documents which are proved as confidential (for more information on the protective order regime in Philippines, refer to Ileana Smeureanu’s post).
However, jurisdictions like US and Australia reject any implied confidentiality. Though the US Court of Appeals have affirmed that any question on applicability of confidentiality in arbitration is a question on the very nature of the process, it is erroneous to presume that all information tendered during arbitration will remain confidential. Parties have the autonomy to decide if they wish to disclose the details of arbitration and award. However, confidentiality is frequently violated by parties and witnesses in US. The Australian High Court in Plowman distinguished privacy from confidentiality, observing that the latter is not an essential attribute of arbitration.
The UNCITRAL and Stockholm Chamber of Commerce (SCC) Rules have a limited role, merely providing for private hearings and confidentiality of awards. The ICC per se do not provide for the confidentiality of awards, materials and Tribunal’s deliberations, unless requested by the party. LCIA obligates parties to keep the (i) award, (ii) all materials and documents presented and, (iii) the Tribunal deliberations confidential. It allows for three exceptions to this rule namely, court order, parties’ consent, public interest and reasonable necessity. Since WIPO aims to protect IP and trade secrets, it has a strict confidentiality protection regime.
How can confidentiality be maintained in International commercial arbitration?
There is no universal approach to maintaining confidentiality in arbitrations. However, parties are free to decide the degree of confidentiality they desire. Special care must be observed while drafting the arbitration clause to ensure confidentiality of parties’ dealings and interests. Common and civil law courts have contradicting opinions on different confidentiality issues like:-
- Does the duty of confidentiality extend only to commercially sensitive information and awards or to all information relating to proceedings? ;
- Are witnesses obligated to maintain confidentiality? And;
- Whether confidentiality must be maintained during court proceedings arising out of arbitration?
Though the institutional rules favor confidentiality, the ICC Rules does not provide for the same per se, leaving it to the Tribunal’s discretion. Due to the inconsistencies in domestic laws and institutional rules, parties must protect their interests by having specific confidentiality provisions in arbitration agreement.
- Confidentiality requirements for documents– The arbitration clause should provide for confidentiality for all documents exchanged and steps to avoid disclosure. This ensures non-disclosure of business secrets. Where malafide disclosure happens, the defaulting party would be liable to compensate the ‘victim’.
- Confidentiality obligations of third-parties– Statements, tribunal’s deliberations and the final award should be maintained as confidential by the tribunal, parties, witnesses, experts and administrative personnel. All witnesses must sign a confidentiality undertaking.
- Choice of governing arbitral law- A legal regime having strong confidentiality protection is preferable.
These provisions apply where adopted arbitral rules fail to provide sufficient confidentiality protection. Though commercial parties consider an expansive arbitration clause detrimental to the deal, it must be comprehensively negotiated at the initial phase. Parties must state clearly the confidentiality protection required to ensure effective drafting of the arbitration clause.
Suggestion for a uniform rule
Different arbitral institutions fail to provide a uniform standard, due to the prevailing competition in arbitration business. Since parties often choose a generic arbitration clause to avoid focusing on contingent future disputes, uniform confidentiality protection mechanism is the need of the hour.
This author proposes that when arbitration commences the tribunal should get parties’ consent on the scope of confidentiality. Where parties fail to agree, the arbitrator(s) will pass a protective order deemed accepted by the parties. Where a party alleges violation of the confidentiality agreement or protective order, the tribunal can resolve the same. If such violation happens after conclusion of arbitration, it must be resolved by the same tribunal—given its familiarity with the confidentiality agreement/protective order.
A protective order should incorporate certain exceptions. Even if parties only incorporate a generic arbitration clause with no confidentiality protection, this order will still apply. Due to this, parties can avoid approaching courts if confidentiality provisions are breached. An arbitral tribunal however cannot pass a protective order without informing parties about the same on commencement of arbitration. ’
In a 2012 post, the author considered confidentiality as one of the biggest benefits of international commercial arbitration, for commercial aspects. It ensures that legal complications in one market do not affect the profitable projects in another. Domestic judicial pronouncements, however, have caused a split in the understanding of confidentiality. Hong Kong and New Zealand provide for statutory confidentiality protection and privacy in court hearings over the awards. England and Singapore provide for implied confidentiality in arbitral proceedings. Local courts further broaden the legal regime by providing exceptions to the general rule of non-disclosure. On the other hand, Sweden and US do not impose any legal duty of confidentiality. In this light, arbitral institutions should strive to remove uncertainties on confidentiality protection regime in international arbitrations.More from our authors:
The post Confidentiality in International Commercial Arbitration: Bedrock or Window-Dressing? appeared first on Kluwer Arbitration Blog.
Remy Gerbay and Badar Al Raisi
The first blog in this two-part series, published last year, discussed the growing concern of arbitration users over “due process paranoia”. In that first blog, due process paranoia was defined as the perceived reluctance by arbitral tribunals to act decisively (for example by rejecting applications for extensions of time, refusing amendments to submissions, rejecting new evidence or declining to reschedule a hearing) for fear of the award being challenged on the basis of a party not having had the chance to present its case fully. The issue of due process paranoia continues to take prominence within the international arbitration community. It was the topic of the 31st Freshfields Arbitration Lecture delivered by Professor Lucy Reed in October last year.
In our first blog, we argued that the concern with due process paranoia was that, when a tribunal opts for caution instead of procedural economy in circumstances where the tribunal could, in actual fact, afford to be robust (because the enforcement risk is lower than is believed to be by the arbitrators), the tribunal makes a ‘wasteful’, ‘sub-optimal’, decision. These wasteful, sub-optimal, decisions are particularly frustrating to parties when they are taken in response to what appears to be dilatory tactics employed by the other side. We argued that the solution to due process paranoia may therefore be found in a more precise assessment of the enforcement risk by arbitrators. This, in turn, is dependant on reliable data.
In that context, for our first blog, we conducted a systematic review of cases in our jurisdiction (England) reported since the enactment of the English arbitration Act (1996) in which an application had been made for setting aside an award. The purpose of this review was to assess whether, and if so in what circumstances, awards had been set aside in England because an arbitrator had taken an overly robust case management. This review showed that there was not a single judgment where an arbitration award had been set aside in England because the tribunal had taken an overly robust case management decision. Instead, most set aside decisions were due to arbitrators basing their award on arguments or evidence that had not been put forward to the parties during the proceedings.
Having focused on set aside proceedings in our previous blog, we now turn our attention to the other side of the equation, namely applications made to the English courts to resist enforcement of foreign awards. The relevant provision in this respect is s. 103 of the Act, which incorporates the grounds for the refusal of recognition or enforcement set out in Article V of the New York convention.
Adopting a similar approach to our previous blog, we systematically reviewed all English court judgments citing s.103 that have been reported since 1996. The search generated 57 judgments. If one excludes first instance judgments which were subsequently appealed, only 26 judgments actually dealt with s.103. The 31 other judgments included many instances in which either s.103 was simply cited in passing, or it was discussed as a related issue, not within the context of an application for refusing the enforcement of a New York Convention award.
Of the 26 English court judgments dealing with applications under s.103, the courts only refused to enforce a New York Convention award in 6 instances, and adjourned the enforcement of awards in 7 instances. This in itself shows that refusal to enforce New York arbitration awards is relatively uncommon in England, whatever the grounds.
More interestingly perhaps, our review of these judgments also showed that none of the instances in which an application under s.103 was granted arose out of a complaint that an arbitral tribunal had made an overly robust case management decision.
Under s.103 (as in under the New York Convention), a party can apply for the recognition or enforcement of an award to be refused on the following grounds:
- a party to the arbitration agreement was (under the law applicable to him) under some incapacity (s.103(2)(a));
- the arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made (s.103(2)(b));
- the applicant was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case (s.103(2)(c));
- the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration or contains decisions on matters beyond the scope of the submission to arbitration (s.103(2)(d));
- the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, with the law of the country in which the arbitration took place (s.103(2)(e));
- the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made (s.103(2)(f); and
- the award is in respect of a matter which is not capable of settlement by arbitration, or if it would be contrary to public policy to recognise or enforce the award (s.103(3)).
Additionally, the court may also grant an adjournment on its decision on the enforcement of an arbitration award to pursuant to s. 103(5) of the Act, which is a temporary measure pending proceedings before the supervisory court to set aside the award.
Of the total cases, the ground most frequently relied upon for issuing refusal of enforcement applications related to breach of public policy (s.103(3)), which was raised in 10 instances. Challenges under this subsection never succeeded.
The second ground most frequently relied upon was in relation to the parties complaint of their inability to present their case under s.103(2)(c). This ground is the one most closely associated with rules of natural justice. Therefore it is the one most likely to be used by parties seeking to challenge robust case management decisions.
Applications under s.103(2)(c) have succeeded in only three instances. Interestingly, of these three instances only one may arguably be said to relate (indirectly) to case management as discussed below.
All three decisions arose out of awards which relied upon information or arguments that had not been put to the parties:
- Malicorp Ltd v Egypt  EWHC 361 (Comm): In this case the award had granted the claimant remedies on a basis which had not been pleaded nor argued.
- Irvani v Irvani  1 Lloyd’s Rep. 412. In this highly unusual case, the arbitrator, who was the sister of the claimant and the respondent, had seemingly based her decision on information available to her, but not to the respondent.
- Kanoria & Ors V Guinness & Anor  EWCA Civ 222. In this last case, a party to an arbitration was unable to present his case because he had never been informed of the case that he was required to meet.
This last case is perhaps the only one where case management comes into consideration, albeit indirectly. In that case, the party resisting enforcement of the award was suffering from a life threatening decease at the time of the arbitration, so that it was impossible for him to participate in the proceedings in a meaningful way. He had decided not to attend a hearing in a foreign jurisdiction. At that hearing, however, a case of fraud was made against him, of which he had not been made aware prior to the hearing. In the circumstances, the court found that, in breach of natural justice, he had not been informed of the case he was required to meet. While this could have been averted through proper case management (eg. by ensuring, at the very least, that the party who could not attend the hearing was made aware of the fraud claims made against him), the case does not concern an arbitrator taking overtly robust case management decisions to the detriment of a wasteful party trying the engage in dilatory tactics.
The fact that robust case management as such has not really prevented the enforcement of New York Convention Awards in England may be explained by the approach taken by the English courts in dealing with the operation of s. 103(2)(c). The approach is set out by Coleman J in In Minmetals Germany Gmbh v Ferco Steel Ltd  1 All ER (Comm) 315:
“In my judgment, the inability to present a case to arbitrators within section 103(2)(c) contemplates at least that the enforcee has been prevented from presenting his case by matters outside his control. This will normally cover the case where the procedure adopted has been operated in a manner contrary to the rules of natural justice. Where, however, the enforcee has, due to matters within his control, not provided himself with the means of taking advantage of an opportunity given to him to present his case, he does not in my judgment, bring himself within that exception to enforcement under the Convention.” (emphasis added)
Furthermore, Lord Philips CJ in his judgment in Kanoria & Ors V Guinness & Anor  EWCA Civ 222 explained that s.103(2)(c) applies where a “a party to an arbitration is unable to present his case if he is never informed of the case that he is called upon to meet.” (paragraph 22 of the judgment). This was reaffirmed in Cukurova Holding AS v Sonera Holding BV  UKPC 15. This approach suggest that arbitral tribunal must act in a wholly unreasonable manner in order to have an award refused under this ground, and it is unlikely to apply to instances where they have decided to act decisively by taking robust but fair case management decisions.
These findings, just like those of our first blog on the topic, re-affirm that arbitrators with a tendency for occasional due process paranoia should feel free to proceed robustly, at least whenever the likely place of enforcement is England and Wales.
 NB in HJ Heinz Co Ltd v EFL Inc  EWHC 1203 (Comm), a summary application for a declaration that it would be contrary to public policy to recognise or enforce the award in England pursuant to the Arbitration Act 1996 s.103(3) was refused. Whilst the summary application was not successful, it cannot be immediately identified whether the s.103(3) argument succeeded in separate proceedings, and therefore this has not been included in the final countMore from our authors:
The New Ecuadorian PPP Act: A New Opportunity for Foreign Investment? Some Caveats Regarding Arbitration
Javier Jaramillo, Pérez Bustamante & Ponce and Universidad San Francisco de Quito and Ricardo Montalvo, Coordinating Ministry of Production, Employment and Competitiveness of Ecuador
Article 19 of the Incentives for Public-Private Partnerships and Foreign Investment Act (“PPP Act”) recognizes local and international arbitration as one of the dispute resolution methods that has arisen in Public-Private Partnership agreements (“PPP agreements”). Article 20 of this Act and articles 19, 20, 21, and 22 of its Regulations set forth certain rules for these arbitrations to be performed. However, these provisions leave us with certain doubts regarding the viability of the arbitral system and its application to the scope of PPP agreements.
In this article, we will refer, specifically, to two limitations created by the framework that is currently in force: i) exclusions as to subject matter jurisdiction, and, ii) the requirement to exhaust administrative proceedings. This article only refers to the arbitral mechanism derived from a PPP agreement and sets aside possible claims that may arise from international investment treaties.
Matters Subject to Arbitration
Article 20 of the PPP Act expressly determines subject matter jurisdiction limitations and excludes “tax matters, as well as any other act directly derived from the State of Ecuador’s legislative and regulatory power” (Emphasis added).
In principle, it appears that the provisions incur in an overly broad prohibition that could cause concern among investors. Apparently, any violation of the rights and benefits acquired by the private company or investor via a PPP agreement, that arises from the promulgation of a legal norm – even a mere resolution or regulation-, could not be subject to a claim brought before a local or an international arbitral tribunal.
Therefore, we must deconstruct each element of the prohibition in order to understand its scope. The prohibition covers acts directly derived from the state’s legislative and regulatory power and establishes tax matters as an example of these acts.
PPP agreements, validity of tax matters and validity of general rules are closely related once PPP Act benefits are examined. On one hand, it provides tax incentives that, pursuant to article 17, will continue to be valid while the contract is in force. In turn, article 15 recognizes legal stability for “regulatory affairs that have been declared as essential” in the respective agreements.
Does this perhaps mean that, if the state decides to eliminate tax incentives granted to a private party through the use of its legislative power or modify specific regulations declared to be essential in PPP agreements, the company would have no other option than to submit its claim to ordinary courts? Although we could intuitively answer this question affirmatively, a detailed and thorough analysis could lead us to think otherwise.
Acts derived directly from the state’s legislative and regulatory power in PPPs, namely tax matters and specific industry regulations, do not directly affect the PPP agreement. Therefore, discussions such as those regarding the validity of those acts or their legitimacy should be decided by the litigious-tax jurisdiction or the litigious-administrative jurisdiction, as applicable. Indeed, the disputes related to these matters are not part of the PPP agreement, but rather, directly attack the challenged act.
The PPP agreement and the rights and obligations derived therefrom are indirectly affected by these general acts. Thus, in a dispute arising from the PPP agreement, parties do not directly discuss the state’s legislative or regulatory power, but rather, the effects that this power has caused to the contractual rights of the private party, through concrete administrative events or acts. This way, the matter submitted to arbitration is not a direct expression of the state’s power, but instead, of the effects that the power has indirectly caused.
These criteria must be reviewed under further scrutiny having to do with tax issues. Article 22.2 of the PPP Regulations expanded the scope of the prohibition of the PPP Act, qualifying “the disputes related, either directly or indirectly, to matters with a tax nature” as matters not capable of being submitted to arbitration (emphasis added). As opposed to the matters established in article 20 of the PPP Act, this would cause the impossibility of arbitrating even the indirect effects of tax matters. This legal provision apparently leaves investors without the possibility of resorting to a neutral forum that decides, for example, on the impacts derived from their tax incentives.
Fortunately, article 22 exclusion only refers to international arbitration and its scope must be exclusively interpreted for the arbitral agreement in the PPP agreement. Thus, the investor can sign other instruments recognized under the Ecuadorian legal framework, such as investment contracts, with an independent arbitral clause that would protect it from legal modifications regarding tax incentives.
Exhaustion of Administrative Proceedings
As a condition precedent for submission of an arbitration claim, article 20.2 of the PPP Act requires that parties exhaust the phase of direct negotiations and mediations, in addition to administrative proceedings available.
Upon the publication of the PPP Act, this last requirement caused surprise among practitioners because it revived a legal problem that had been overcome after the publication of the State Modernization Act in 1993. The latter eliminated the requirement of exhausting the administrative proceedings as a prerequisite to submit judicial claims challenging an administrative act. This was surely due to the influence of the Production, Trade, and Investment Code, issued in 2011, which disregarded the Modernization Act. Article 27 of the Code establishes the exhaustion of administrative recourses as a requisite to submit disputes derived from investment contracts to international arbitration.
In any case, beyond this historical precision, the drafting of article 20 of the PPP Act did not permit an adequate interpretation regarding the scope of this requirement. Accordingly, it was not clear when arbitration should be brought nor what is understood by exhaustion of the administrative proceedings. Article 20.2 states that arbitration only applies provided that these proceedings are previously exhausted, while paragraph b) of that same section determines that ordinary courts have jurisdiction to resolve the disputes of PPP agreements in cases in which after “the term contemplated for notice of the resolution to the interested party that exhausts the administrative proceeding, the action before the arbitral jurisdiction has not been exercised.”
Exhaustion of these proceedings takes place through administrative acts, and parties must be served for these acts to enjoy efficacy. Therefore, administrative proceedings would be exhausted solely with the notice of these acts. On the other hand, the rule demands that the arbitral actions must be exercised prior to expiration of the term contemplated to notify the party of the resolution. Consequently, it is not clear whether this refers to a remission to the lapse of time contemplated in the term or to an arbitration request being submitted prior to the notice of the resolution. This last interpretation would lead to a contradiction of the rule and would cause evident insecurity to investors: On the one hand, Article 20.2requires the initiation of arbitration subsequent to exhaustion and; on the other hand, paragraph b)requires the arbitration request to be brought before the effective issuance of the resolution and its service —which constitutes the exhaustion of administrative proceedings itself—.
Further, it was also unclear as to what was understood by “exhaustion of administrative proceedings”, as article 179 of the Executive Power’s Administrative Regime Statute considers a series of hypotheses regarding a possible exhaustion. Article 20 of the PPP Regulations is more specific about the matter. It establishes that administrative proceedings would be understood to have concluded when the private company had exhausted all the ordinary administrative recourses, excluding the exhaustion of extraordinary recourses such as the extraordinary revision recourse. This provision also clarifies that once the recourses were exhausted, the private party would have a peremptory period of 30 days to file an arbitration claim.
Unfortunately, the referred provisions leave us without an answer as to a very important subject: What happens to the claims of a private company that do not arise out of an administrative act? Contractual breaches by the state regarding payment of agreed quantities are one example of this. It is not clear whether, in these cases, the private party should directly resort to arbitration or whether, instead, it should elicit an administrative act from the administration by filing claims to exhaust administrative proceedings. Both options appear to be plausible. Only administrative practice and interpretation performed by decisive bodies will provide certainty in this regard.
The PPP Act recognized arbitration as an alternative dispute resolution system derived from PPP agreements. However, its provisions relating to the limitations of matters that can be subject to arbitration and the requirement of exhaustion of administrative proceedings are replete with undefined legal concepts and unclear steps that must be followed to fulfill both requirements. In certain cases, the PPP Regulations have provided private parties the power to submit their disputes to arbitration; in others, however, it has precluded them, generating important and unnecessary settlement costs, which could influence the decision of foreign corporations on investing in Ecuador. Lastly, the cases that the PPP Regulations have not been able to develop will fall to the judgment of the Public Administration in terms of determining their application. Therefore, the Ecuadorean Public Administration will have the duty of acting predictably, transparently, and pursuant to law so that the PPP Act can fulfill one of its purposes: attracting foreign investment.More from our authors:
2016 was an important year for international arbitration. Lord Chief Justice of England and Wales challenged the legitimacy of international arbitration, while supporters such as former Chief Justice of the High Court of Australia (Robert French AC) came forward to defend its coexistence with commercial courts. Several institutions such as ACICA, SIAC and KCAB updated their arbitration rules for 2016, while SCC and ICAC introduced new rules for 2017. SIAC also released its draft Investment Arbitration (IA) Rules, followed by a public consultation process and finally enactment of its new rules. Several institutions published detailed practice notes and statistics: HKIAC, SIAC, LCIA, SCC and the ICC updated its note on the conduct of arbitration. The year concluded with Hong Kong and Singapore reforming their respective laws in order to allow for third party funding arrangements – arguably one of the most important developments in 2016.
This article discusses 10 key areas which will continue to play a significant role in further developing international arbitration beyond 2020.
In response to the 2015 Queen Mary International Arbitration Survey, several institutions were seen as leading the international arbitration arena by publishing detailed practice notes and statistics in 2016. It is highly likely that this will continue in 2017, as the purpose of these practice notes is to clarify certain provisions and respond to market changes – such as recent developments regarding third party funding in Singapore and Hong Kong. Both jurisdictions will need to supplement their existing rules with practice notes shortly. However, it is worth noting that several provisions in the 2017 SIAC IA Rules already address these developments. They are discussed in a previous article.
2. Arbitrator Selection Process
Although largely ignored over the years, this area will likely be explored in 2017, though developments are unlikely to surface until at least 2018. Institutions are hesitant to disclose, let alone discuss, the selection process as it leads to significant debate among arbitrators, law firms, and academics. What cannot be denied is that it is inherently difficult to assess whether parties are in a better position to appoint arbitrators, or whether the task should be left to the arbitral institution – as the answer will depend on the experience of the parties.
Developments in this area could vary from the release of practice notes with basic guidelines, to publishing an arbitrator selection framework – where institutions would implement their own guidelines in order to clarify the various factors that must (or should) be considered before an arbitrator is appointed. The other, more difficult, option is to wait for a multilateral framework. Though only soft law, it would be comparable to the IBA guidelines on conflicts of interest in international arbitration – which emphasise best practice.
3. Investment Arbitration Rules
On 1 January 2017 SIAC released the first edition of its IA Rules. This modern set of investment arbitration rules are quite different to the ICSID Rules, as they are a hybrid of commercial and investment arbitration rules. It will be interesting to observe whether a significant number of parties will now settle disputes with SIAC, as opposed to ICSID. In 2017, global arbitration conferences will undoubtedly discuss and evaluate these developments. Beyond 2017, some institutions may follow suit, though most will be proud to highlight that they will remain commercial dispute resolution centres.
4. Third Party Funding
Both Singapore and Hong Kong have reformed laws which previously prohibited third party funding arrangements. On 10 January 2017, the Singapore Parliament passed a bill allowing for third party funding for arbitrations in Singapore. On 11 January 2017, Hong Kong similarly introduced a bill to its Legislative Council (LegCo) with Mr Rimsky Yuen SC moving the second reading of the bill. Developments in both jurisdictions indicate that their respective governments are strong supporters of international arbitration. Litigation funders in both jurisdictions have been gearing up for work over the last year, and this area will continue to be discussed heavily at global arbitration conferences in 2017.
5. Rise in Financial Institution Arbitration
The ICC Commission on Arbitration and ADR published a comprehensive report in November 2016 titled ‘Financial Institutions and International Arbitration’. The Report concluded that many institutions have, in large part, failed to fully embrace international arbitration as a viable dispute resolution method. The report has been discussed in a previous article. The HKIAC was quick to invite the co-chair of the ICC task force on Financial Institutions and International Arbitration to present at an event in December 2016. These developments will lead to institutions targeting a broader set of clients from 2017 onwards. Once financial institutions recognise the commercial benefits associated with international arbitration, they will undoubtedly provide global arbitral institutions with lucrative dispute resolution work.
6. Potential Appeal Mechanism (by consent)
One of the benefits of arbitration over litigation is that it does not allow for appeals. Arbitration has always encouraged finality, to ensure that parties can resolve their disputes swiftly and with certainty. Critics, who tend to discourage resolving disputes via arbitration, may argue that justice cannot truly be achieved without an appeal process. In response to question 14 of the questionnaire that the ICC’s distributed before it published its ‘Financial Institutions and International Arbitration’ report, some institutions expressed an interest in an appeal process subject to two broad conditions: that the consent of all parties is obtained at an early stage, and that certainty is not undermined. While the first of these is achievable, it will be difficult (if not impossible) to achieve certainty if an appeal process is introduced.
7. Sanitising Arbitral Awards
Another perceived advantage of resolving disputes via arbitration is confidentiality, which inevitably comes at the expense of precedent. Precedent not only ensures consistent decisions, but also promotes certainty. The ICC report also found that several financial institutions viewed confidentiality as being less important than precedent, particularly where disputes related to syndicated lending and derivatives. The report also reminds readers that although an arbitration is private, it is not expressly confidential according to the ICC Rules. The UNCITRAL rules are also silent as to confidentiality, but publication is addressed in Art 34.5. Other institutions have strict provisions that deal with confidentiality and publication: Article 42 in the 2013 HKIAC Rules, Article 22 in the 2016 ACICA Rules, and Rule 24.4 of the 2016 SIAC Rules. Interestingly, SIAC has taken an extra step to confirm that the tribunal may issue an order or award for sanctions or costs if a party breaches their confidentiality obligations in Rule 39.4. Also worth noting is that the 2017 SIAC IA Rules have provided greater clarity with respect to publishing of awards in Rule 38. Confidentiality, and more specifically publication, provisions are likely to be reformed in all new international arbitration rules from 2017 onwards. More sanitised awards will also be published by institutions.
8. A Shift to the East
It is no secret that Hong Kong and Singapore have become some of the most frequently used jurisdictions for international arbitration within the last 5 years. This is due to a multitude of reasons, some of which include: both jurisdictions being competent in administering a high volume of cases as well as high-value disputes, strong panels of arbitrators, state-of-the-art facilities, geographic convenience, modern arbitral rules, and most importantly a supportive judiciary and government. In 2016, both experienced sharp growth, and this is likely to continue beyond 2017.
9. Diversity in International Arbitration
Another area which has received little attention is diversity, particularly among arbitrators and with respect to both gender and ethnicity. They key question that needs to be asked is: why is diversity still an issue when there has been a significant increase in the use of international arbitration globally? Other discussions need to focus on the impact this may have on the tribunal’s orders and awards, solutions such as quotas, as well as how current obstacles can be overcome. Arbitral Women is an organisation that was set up to address this gender imbalance, and has almost 1000 members in over 40 countries. The non-profit Arbitrator Intelligence also claims that it will ‘facilitate increased diversity in arbitrator appointments’. For greater discussion on this topic, refer to another post which discusses a recent survey on diversity which was published in January 2017.
10. Appropriate use of: Emergency Arbitration, Summary Dismissal, Expedited Procedure, Joinder and Consolidation
Most institutions are reforming their old rules in order to include these innovative procedures. As each serves a unique purpose, they are not automatically relevant to every dispute. In 2017, global arbitration conferences will likely discuss the most recent provisions such as SIAC’s Early Dismissal of Claims and Defences (Rule 29) and SCC’s Summary Procedure (Article 39). Joinder, consolidation and emergency arbitration have already received a fair amount of attention since around 2013.More from our authors:
The post 10 Hot Topics for International Arbitration in 2017 appeared first on Kluwer Arbitration Blog.
Ricardo Guimarães and Raquel Galvão Silva
New years are a great opportunity to take stock and to prepare for future developments, despite the obvious difficulties in predicting what the main trends will be. This is also the case for 2017.
Looking back to 2016 there are two topics that immediately stand out: gender diversity and transparency. Both topics were subject to substantial discussion last year and the developments in these areas are likely to continue (or even increase) in 2017.
For gender diversity in international arbitration, last years’ highlight was without question the Equal Representation in Arbitration Pledge, which was launched in May and has been described as a turning point for gender diversity in arbitration. The Pledge follows the recognition by members of the arbitration community of the under-representation of women on international arbitral tribunals and establishes concrete and actionable steps aimed at ensuring that women are appointed as arbitrators on an equal opportunity basis.
As of the 9 January 2017, the pledge had 1620 signatories, including well-known law firms and arbitral institutions. In fact, arbitral institutions have had a valuable role in promoting greater gender diversity in arbitration panels, adopting specific policies for that effect and publishing annual statistics, thus enhancing transparency in this regard.
The ICC, for example, published in May 2016 a Note to the ICC National Committees and Groups about the selection of arbitrators, encouraging them to favor diversity, including of gender, in proposing candidates to become arbitrators. In addition, it published for the first time in 2016 statistics on gender representation in arbitral tribunals, showing that women arbitrators represented just over 10% of all appointments and confirmations in 2015. According to the same statistics, women were more frequently appointed or confirmed as co-arbitrators (43%) than they were as sole arbitrators (32%) or tribunal presidents (25%). Finally, the statistics show that parties were less likely to select women arbitrators than the ICC Court. These figures are in line with the statistics released by other arbitration centers, in particular the LCIA
It will be interesting to see the statistics for 2016, but it seems clear that the discussion on gender diversity in arbitration is far from over and we expect it to continue to be a hot topic in 2017, probably with parties more directly involved in the debate which will also probably focus more intensively in other forms of diversity besides gender. The ICSID report for 2016, for example, has just been released and it evidences a greater diversity in terms of geographies from which arbitrators have been appointed. Amongst other interesting trends, the report shows that the Western European appointments for annulment committees have declined – representing 42% of all appointments compared with 50% in 2015.
As in previous years, the balance between confidentiality and transparency in international arbitration was widely discussed in 2016 and such discussion is likely to continue.
This trend for a higher degree of transparency has been mainly happening in investor-state arbitrations, led by critics who perceive ICSID as a “secret court” in which investors can challenge a country’s laws or regulations if adverse to their investments.
In an effort to ensure greater transparency, several initiatives have been emerging such as (i) the United Nations Commission on International Trade Law (UNCITRAL) Rules on Transparency in investor-state arbitration, which became effective on 1 April 2014 and, unless the parties to the treaty have agreed otherwise, are applicable to all investor-state arbitrations initiated under the UNCITRAL Arbitration Rules; (ii) the UNCITRAL Transparency Registry, a repository for the publication of information and documents in treaty-based investor-State arbitration, and (iii) the Convention on Transparency in Treaty-based Investor-State Arbitration (the Mauritius Convention) which provides a mechanism by which states can express their consent to the application of the UNCITRAL Rules on Transparency, including in respect of treaties concluded before 1 April 2014.
In 2016 these initiatives were further developed. ICSID, for instance, began live-streaming hearings in investor-state cases and, in December 2016, Canada became the second country in the world to ratify the Mauritius Convention which now needs a third ratification before entering into force.
This movement for greater transparency is increasingly growing also in international commercial arbitration and arbitral institutions have been amending their rules and practice. The ICC, for example, started to publicize on its website the names of the arbitrators appointed to ICC cases, their nationality, as well as whether the appointment was made by the ICC Court or by the parties and which arbitrator is the tribunal chairperson. Although parties can, by mutual agreement, opt out of this limited disclosure, they may also request the Court to publish additional information about a particular case. In addition, in February 2016, the ICC Court adopted a guidance note for the disclosure of conflicts by arbitrators and the new ICC rules which will come into force on 1 March 2017 now state that any party can ask the ICC Court to provide reasons for its decisions (in particular on challenges of arbitrators).
Other institutions have been taking a similar path, with the LCIA for instance publishing a comprehensive analysis of cases to provide users with information on the average costs and duration of arbitrations and the SCC publishing a report detailing the size of disputes, their length and costs, and how tribunals allocate the costs of arbitration and the costs for legal representation.
The changes implemented in 2016 towards a higher degree of transparency were considerable but there seems to be room for improvement. The 2015 International Arbitration Survey organized by Queen Mary and White & Case suggested that the arbitration community would “welcome increased transparency in institutional decision-making”, especially in the appointment of, and challenges to, arbitrators”. At the same time, when asked about the three most valuable characteristics of international arbitration, 33% of the respondents said that one of the main reasons they choose arbitration is the confidentiality and privacy of the process. The challenge for 2017 will thus continue to be the need to strike the right balance between transparency, on the one hand, and confidentiality, on the other hand, avoiding to undermine the ability of parties choosing (for valid reasons) to keep the proceedings private.More from our authors:
Appellate arbitration clauses provide for an appellate mechanism against an award rendered between the concerned parties by subjecting the dispute through another arbitration to eliminate all potential errors and obtain correction of the same. Not all arbitration disputes are suitable for an appellate review. But in cases where parties place higher importance on the correctness of an award rather than on time and cost of arbitration, appellate arbitration clauses serve this purpose. The purpose served by such clauses can also be understood by appreciating how arbitral awards cannot be judicially reviewed on merits (Gary Born, International Arbitration: Law and Practice at 8, Kluwer Law Int’l 2012). Since the grounds on which an award may be challenged before a court remain limited, as can be seen from the UNCITRAL Model Law and the Indian Arbitration and Conciliation Act, 1996 (“1996 Act”), appellate arbitration clauses provide greater freedom of review of arbitral awards to parties resorting to them.
Recognizing the importance of such clauses, a three-judge bench of the Supreme Court of India (“Supreme Court”), delivered a judgment on December 15, 2016 upholding the legal validity of appellate arbitration clauses under the 1996 Act in the case of M/s Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd., Civil Appeal No. 2562 of 2006 (“Centrotrade”). In Centrotrade, the arbitration agreement contained a two-tiered arbitration procedure providing for a first instance institutional arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration (“ICA Rules”) to be held in India. In the event of disagreement between the parties in respect of the correctness of the first award, the arbitration agreement granted either party a right to appeal against the first award before an appellate tribunal to be constituted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce (“ICC Rules”), to be held in London. The law of the main contract was Indian law.
Centrotrade initiated arbitration against Hindustan Copper Ltd. The tribunal of the first instance delivered a “nil” award, which prompted Centrotrade to appeal, as permitted by the arbitration agreement. The appellate tribunal delivered an award in favour of Centrotrade, who thereafter commenced Indian enforcement proceedings against Hindustan Copper Ltd. The determination of the Supreme Court on the enforcement proceedings is still pending. Hindustan Copper Ltd. thereafter moved to challenge the legal validity of the appellate tribunal award before a division bench of the Supreme Court. The judgment of the Supreme Court is important for two reasons: first, the 1996 Act is modelled on the UNCITRAL Model Law and, hence, the present judgment could add to the developing jurisprudence on how national courts should assess appellate arbitration clauses. Second, since Part I of the 1996 Act is also applicable to international commercial arbitrations seated in India, the judgment could increase India’s prospects as an arbitration friendly destination.
The Supreme Court affirmed that the intention of the parties to reserve a right to an appellate review of the first award is unambiguously clear from the wording of the two tiered arbitration agreement. Notably, the apex court also observed that the 1996 Act, neither explicitly nor implicitly, bars parties to resort to appellate arbitration clauses. Second, the Supreme Court drew the distinction between legal and statutory right to appeal. In Centrotrade, the election of an arbitration appellate mechanism qualified as a legal right premised on an agreement between the parties. Thereafter, the Supreme Court held that UNCITRAL Model Law—and hence the 1996 Act—allows parties to an arbitration agreement to reserve their right to appeal against an award.
Although the said case is a strong reflection of a pro-arbitration approach, the following questions of importance remain unaddressed. First, whether Indian courts would entertain annulment or enforcement proceedings in respect of the first arbitral award pending its review by an appellate arbitral tribunal. In the interest of judicial economy and efficiency, this should not be allowed. A bar on initiation of annulment or enforcement proceedings as regards the first award would also ensure certainty regarding the fate of the appellate arbitral award, and the recourse available to parties thereafter. The said proposition finds approval under the JAMS Optional Arbitration Appeal Procedure, 2003 (“JAMS Appeal Procedure”); the Arbitration Appeal Procedure of International Institute of Conflict Prevention and Resolution, 2007 (“CPR Appeal Procedure”); and the Optional Appellate Rules of American Arbitral Association, 2013 (“AAA Optional Rules”). Rule (c) of the JAMS Appeal Procedure, Rule 2.3 of the CPR Appeal Procedure and Rule A-2(a) of the AAA Optional Rules provide for the same.
Second, it is important to determine the stage at which the limitation period for seeking an annulment or enforcement of an award would commence, i.e., whether the limitation period would commence from the date of the first award or from the date of the appellate award. Since it would be proper to allow annulment or enforcement proceedings to commence only against the appellate award, it follows that the limitation period should also commence from the date of the appellate award. While Rule (c) of the JAMS Appeal Procedure and Rule 2.3 of the CPR Appeal Procedure imply that the limitation period for initiating annulment/enforcement proceedings shall commence from the date of the appellate award, Rule A-2(a) of the AAA Optional Rules makes the said case expressly clear while reading – “…and the time period for commencement of judicial enforcement proceedings shall be tolled during the pendency of the appeal.”
Third, the Indian judiciary may need to address whether the 1996 Act permits remanding the dispute to the prior tribunal, owing to the principle of party autonomy. Strictly speaking, a tribunal rendering its final award is functus officio. The said aspect requires consideration as the JAMS Appeal Procedure, the CPR Appeal Procedure and the AAA Optional Rules forbid the appellate tribunal to remand the matter back to the prior tribunal. The issue has two sides to it, assuming the arbitration agreement is silent on the availability of remand. The probable benefit of remanding may entail the familiarity of the said tribunal with the dispute, thereby avoiding a scenario wherein an appellate tribunal would be required to consider the issues de novo. However, a potential drawback to parties arising from a remand would be that of losing out on an opportunity to have the dispute re-examined by a set of arbitrators with specified qualifications. Rule A-5(d) of the AAA Optional Rules provides for the latter.
Fourth, in cases where a two-tiered arbitration agreement resorts to an ad hoc arbitration, it would be interesting to explore the manner in which an appellate tribunal would be appointed where no express procedure for the same is provided in an agreement. Since the arbitration agreement in the Centrotrade case did not provide for any appointment procedure, the default procedures under the ICA and ICC Rules applied respectively. Two eventualities may arise out of such a situation. Either the Indian courts may require the parties to resort to the same procedure of appointment as agreed upon for the constitution of the first arbitral tribunal or they may require the party invoking the appellate procedure to proceed under Section 11 of the 1996 Act to seek a court assisted appointment of the appellate arbitral tribunal. Although a situation as contemplated above (appellate arbitration clauses providing for ad hoc arbitration without a procedure for appointment) would be peculiar, as parties resorting to such clauses can reasonably be expected to seek appellate arbitrators possessing expertise over the concerned subject matter of the dispute, it can never be entirely ruled out.
With the abovementioned issues remaining unsettled in the Indian legal sphere of arbitration, it would be apt to say that although the Indian judiciary has put its best foot forward while upholding the legal validity of appellate arbitration clauses, a testing journey of a thousand miles remains yet to be covered and successfully completed.More from our authors:
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Arbitration is an increasingly popular form of dispute resolution in the field of construction, particularly for international projects where parties are of different nationalities, and where at least one party is unlikely to be operating on home soil.
However, a commonly cited disadvantage of arbitration as opposed to court litigation is that there may not be sufficient time to constitute a tribunal where urgent relief is required, such as a without notice injunction to prevent the dissipation of assets. Traditionally, in such circumstances, the parties have had to turn to the national courts for assistance. The English Arbitration Act, for example, permits the courts to step in to grant emergency relief “if the case is one of urgency”.
To address this draw-back, in recent years, many of the leading arbitral institutions have amended their rules to provide for the appointment of an emergency arbitrator. Such provisions give parties the opportunity to seek urgent and interim relief from an arbitrator who is appointed by the institution in short order. Indeed, mirroring court proceedings, some institutional rules even permit the appointment of an emergency arbitrator before the notice of arbitration has been filed (such as the LCIA and ICC rules).
The perceived advantages of seeking relief from an arbitrator rather than a court are that (i) it is more consistent with the parties’ agreement to avoid approaching the national courts, especially if one party has concerns about the neutrality of a particular national court (ii) the key arbitral institutions are able to draw on a large pool of arbitrators and have the facilities to deal with applications on an urgent basis (iii) confining the dispute to arbitration maintains the confidentiality of the proceedings, which may not be the case once a reference has been made to court and (iv) as many jurisdictions prohibit foreign counsel from appearing before the courts, the appointment of an emergency arbitrator will not require the applicant party to instruct additional local counsel to deal with an ancillary court application.
Whilst the key benefit of appointing an emergency arbitrator over seeking relief from the main tribunal (once constituted) would of course be urgency, there is also the potential advantage that the emergency arbitrator is appointed on a one-off basis only, and will not form part of the main tribunal. Therefore, the perceived risk of any prejudgment of the merits that is often associated with seeking interim relief from the main tribunal is eliminated.
The types of relief that could be sought from an emergency arbitrator in a construction dispute are, for example, an award of security for claim, or the preservation of evidence or assets. There have also been cases where emergency arbitrator relief has been sought to prevent a party from calling on a performance bond or to suspend the application of liquidated damages (in circumstances where there is a corresponding contractual right to set-off amounts payable against those liquidated damages).
However, there are a number of limitations on the relief that an emergency arbitrator can grant. In particular, and in contrast to the relief available from court, typically it is not possible for an arbitrator to grant without notice relief – the other party must usually be notified. A party seeking a without notice freezing injunction to prevent the dissipation of assets would likely therefore still need to apply to the courts. Given the consensual nature of arbitration, it would also not be possible to seek from an emergency arbitrator any form of relief which would bind a third party, such as making premises available for inspection, or compelling the attendance of witnesses, as the arbitrator will only have jurisdiction as between the contracting parties.
A further – and overriding – consideration is the extent to which any order given by an emergency arbitrator would actually be enforceable and therefore effective. This is because only final, not interim, arbitral awards are enforceable under the New York Convention. As an award rendered by an emergency arbitrator can be varied or lifted by the main tribunal once constituted, there is an argument that it is not truly final and binding in accordance with Article V.1(e) of the Convention. As the New York Convention does not define an “arbitral award”, whether an award rendered by an emergency arbitrator could be recognised and enforced as if it were a court order is dependent on national legislation.
Notably, however, the position has been confirmed in Singapore by virtue of an amendment to the International Arbitration Act, which recognises and provides for the enforceability of orders and directions of emergency arbitrators – see the International Arbitration (Amendment) Act 2012. The Hong Kong Arbitration Ordinance has similarly been amended.
Although some institutions have included provisions which expressly confirm the binding nature of awards rendered by emergency arbitrators, this is unlikely to be sufficient in practice.
The question of whether interim relief granted by an arbitral tribunal would be effective was considered by the English court in the case of Starlight Shipping v Tai Ping Insurance against the background of Section 44(5) of the English Arbitration Act, which provides that a court shall only act “if or to the extent that the Arbitral Tribunal, and any arbitral or other institution or person vested by the parties with power in that regard, has no power or is unable for the time being to act effectively.” Although the decision in that case was not made in the context of awards granted by emergency arbitrators, the judge held that whilst an arbitral tribunal could act effectively by rendering a final award, this was not the case for an interim award, which would not be enforceable under the New York Convention.
In addition to the question of enforceability, unlike the court, an emergency arbitrator cannot hold a recalcitrant party in contempt for failing to comply with an order or undertaking. The threat of contempt, and the corresponding criminal proceedings, are powerful tools in securing compliance with an order. Therefore, even if an emergency arbitrator were to grant a mandatory injunction requiring remedial works to be carried out, a site to be vacated, or even a freezing injunction, any non-compliance could not ultimately be enforced by the arbitrator in the same way.
The uncertainty regarding enforcement or non-compliance is not to say, however, that the award itself would not be sufficient to cause the recalcitrant party’s compliance. Non-compliance with an emergency arbitrator’s decision would no doubt influence the main tribunal’s perception of that party once the proceedings commence in earnest and could have a corresponding impact on the final award.
Despite some limitations concerning emergency arbitrator relief, the recent English case of Gerald Metals v Timis also suggests that there are some circumstances where, if emergency arbitrator relief is available, a party could be precluded from obtaining that relief from court. In that case, it was held that the court’s powers should only be exercised either owing to urgent circumstances which could not wait for an emergency arbitrator to be appointed or where the powers of the emergency arbitrator were inadequate. Following this case, parties must give serious thought to whether appropriate relief can be granted by an emergency arbitrator before going directly to the courts.
In the context of international construction projects governed by FIDIC contracts, there is also the question of the role of Dispute Adjudication Boards (“DAB’s”) in settling disputes and providing relief. As the DAB procedure pre-dates the more recent phenomenon of emergency arbitrators, its interaction with emergency arbitrator relief is uncertain. The role of the DAB is of course distinct from emergency arbitrator relief: the DAB is frequently on-hand throughout the life of the project, and, where this is the case, given its proximity to the issues, its opinion is usually trusted and respected by the parties. Any DAB decision will lead to finality unless a notice of dissatisfaction is served. In contrast, the emergency arbitrator process is always a precursor to arbitration: as above, its award can be varied or lifted by the main tribunal once constituted.
In circumstances where the parties have agreed to mandatory DAB procedure with an optional reference to arbitration, some interesting questions arise concerning the appropriate forum for interim relief. Where there has been a DAB decision followed by a notice of dissatisfaction, when can a party commence emergency arbitration? Would an emergency arbitrator have jurisdiction, or should that relief be directed back to the DAB? Can a party apply to an emergency arbitrator during the 56-day cooling-off period after notice of dissatisfaction for the purposes of amicable settlement contained in clause 20.5 of FIDIC? This may be relevant, for example, if there is a risk of deliberate asset dissipation following the DAB decision (as by that point, the losing party will know that a DAB is against them and might also be worried about its prospects of success before an arbitral tribunal).
For contracts which anticipate the appointment of a DAB but such appointment is not mandatory, can a party proceed directly to emergency arbitration without first approaching the DAB? Although there is no authority on the point, it is likely that an emergency arbitrator would decline to step in and grant relief unless the DAB were unable to act effectively. Where the DAB’s role to be on-hand during the life of the project, it would arguably be best-placed to determine interim disputes. Parties may wish to consider such issues when they are drafting their dispute resolution clauses in order to ensure certainty in circumstances where multiple fora could have concurrent jurisdiction over a dispute.
There is no doubt that the availability of relief from a number of different fora is a good thing for construction parties, as it enables them to seek adequate and appropriate protection of their arbitration claims, whether from a court, emergency arbitrator, main arbitral tribunal or in some cases an adjudicator/adjudication board. However, parties in need of relief must ensure that they are not literally “spoilt for choice”. Now more than ever, they must give careful thought to the type of relief they need and who is best-placed to grant it at that particular time, or else risk wasted applications which are either fruitless or inherently ineffective.
More from our authors:
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From mediation competitions in Panjim, India and Paris, a proposed mediation law in Lithuania and an exploration of how Game Theory might help us better analyse the role of mediator, the month of January saw the usual breadth of topics on the Kluwer Mediation Blog. Perhaps one of the following posts may take your fancy:
In Chunking Up and Down – advice for those preparing for the ICC Mediation Competition in Paris Geoff Sharp explains two approaches to thinking through a problem: chunking up (going to the bigger broader chunks of thought) and chunking down (going to smaller more detailed chunks of thought). This is useful advice for the participants of the ICC Mediation Competition and for us all.
In New Year’s Resolutions for Mediators, Sabine Walsh shares her mediation resolutions for the coming year including to practise reflective practice more and to continue acquiring new skills.
In Winners and Losers, Christopher Cox draws on his experience as a solicitor to identify the difference which a mediator can make to a seemingly unresolvable dispute.
In Of Superheroes, Mere Mortals and Saving the World, Joel Lee and Joshua Lau consider the superpowers of everyday heroes including many skills which are witnessed or encouraged in mediation.
In Mediation Reform in Lithuania – has it failed?, Tadas Varapnickas offers a summary of the proposed law on mediation in Lithuania and identifies the challenges which this law faces.
In Lex Infinitum – Talking Mediation in India, Greg Bond draws on his recent experience at Lex Infinitum 2017 International Dispute Resolution Competition and shares the views and voices of some of those whom he met at the competition.
In “To be truly radical is to make hope possible, rather than despair convincing,”
Ian Macduff explores how we might expand our view of the value that is on the table both at the ICC Mediation Competition 2017 and, more broadly, in the world of international commercial mediation.
Last but by no means least, in Game Theory and Mediation: Adding Real Value?, John and David Sturrock consider how Game Theory might help us better analyse aspects of the role of mediator, up until now perhaps understood tacitly and pursued on instinct and experience.More from our authors:
Arbitration has become a preferred method for the resolution of international commercial disputes in Russia, mostly thanks to the activities of the Moscow-based International Commercial Arbitration Court (“ICAC“, the Russian acronym “MKAS“) at the RF Chamber of Commerce and Industry. Established in 1932 as the Foreign Trade Arbitration Commission placed under the USSR National Chamber of Commerce, the ICAC handled 22 cases in 1939, including 7 disputes involving English companies.
In 2014-2015, the ICAC caseload reached 495 international arbitration case filings, including 40 disputes involving companies from Germany, 26 from China, 15 from the United States, and 13 from the United Kingdom (A.N. Zhiltsov, Review of ICAC Practice for 2014-2015 (in Russian), in: International Commercial Arbitration Review, 2016, Issue 2). These numbers established the position of the ICAC as the largest international arbitration service provider in Eastern Europe.
The revision of the 2005 ICAC Rules was inevitable to bring them in line with mandatory rules set out by the reformed Russian arbitration law. In competitive markets, arbitration rules should regularly be updated to accommodate demands of institutional arbitration users. For example, since 2005, other renowned arbitral institutions (e.g., in New York, London, and Paris) reviewed their rules, and some of these institutions reviewed them even more than once (in Hong Kong, Stockholm, Vienna, and Singapore). A healthy ambition to reflect the best of modern arbitration practices became a driving factor for the reconsideration of the ICAC Rules as well.
Under auspices of this ambition, the ICAC recently published the revised ICAC International Commercial Arbitration Rules (“2017 ICAC Rules”) (see the Russian version here), which came into force on 27 January 2017 (the date of their filing with the Russian Ministry of Justice).
This post offers an overview of the 2017 ICAC rules. Some of the key features of revised arbitration procedure are reflected in provisions on the commencement of arbitration, formation and challenge of a tribunal, legal representatives, organization of proceedings, expedited procedure, and complex arbitrations. As the 2017 ICAC Rules are a part of a broader regulatory reform at the ICAC, before presenting these key features, a brief overview of the overall changes in the ICAC regulations is provided:
A Brief Overview of the Changes in the ICAC Regulations
The ICAC legal status is governed by the statutory ICAC Regulations, attached to the Russian International Arbitration Act. The 2017 ICAC Organizational Principles Regulations complements these statutory regulations by governing the status of arbitrators, the organization of ICAC bodies, and other general issues.
Due to the ICAC merger with the Arbitration Court and the Sports Arbitration Court, two further specialized sets of rules were approved – the 2017 ICAC Domestic Arbitration Rules and the 2017 ICAC Sports Arbitration Rules.
When considering arbitration in Russia, it is also necessary to notice a particular approach to corporate arbitration, discussed already at the Kluwer Blog (see more here and here). As a consequence of this newly developed approach, the ICAC adopted the 2017 ICAC Corporate Law Disputes Arbitration Rules.
Furthermore, the ICAC introduced short rules governing the administration of ad hoc arbitrations, which might apply to those cases that fall under the 2010 or 1976 UNCITRAL Arbitration Rules. Apart from the appointment and removal of arbitrators, the ICAC’s organizational support in ad hoc arbitrations may include the circulation of submissions, tribunal secretary service, arrangement of oral hearings, arrangement of hearing and meeting rooms, administration of the payment of fees to arbitrators, certification of arbitrators’ signatures on awards, and similar.
Finally, the ICAC Schedule of Arbitration Costs was updated and the ICAC Regulations for the Payment of Arbitrator’s Fees and Arbitration Administration Fees were adopted.
Key Changes of the 2017 ICAC Rules
The Commencement of Arbitration
As under the previous regime, arbitration proceedings before the ICAC are commenced upon:
- the delivery of a full-framed statement of claim, and
- the payment of a non-refundable registration fee of $1,000.
Those actions shall suspend the running of a limitation statute period and the applicable version of the ICAC Rules will be determined accordingly. To be precise, the applicable version will be the version in effect at the time of the commencement of arbitration. Any defects of a statement of claim should be remedied upon the Executive Secretary’ request within a 15-day time limit.
The Appointment of a Tribunal
As a default rule, the 2017 ICAC Rules provide for a three-member tribunal, unless the aggregate claim amount in dispute falls below $50,000. In that case, the dispute will be decided by a sole arbitrator (cca. 30% of ICAC cases).
To follow-up on the Dutco case, it is envisaged that when there are more than two parties and the dispute is referred to three arbitrators, the group of claimants and the group of respondents shall each designate an arbitrator. In the event of any failure to designate an arbitrator by one of the groups, the arbitrator shall be appointed by the Appointment Committee, which, simultaneously, may at its sole discretion appoint an arbitrator for the counter-party as well.
The Challenge of Arbitrators
Either party may challenge an arbitrator if circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence, or if an arbitrator lacks qualifications set out by the parties’ agreement or applicable law.
A 15-day time limit for challenging an arbitrator may be prolonged by the Appointment Committee when there is a valid excuse for the omission of the time limit, or depending on the nature of a challenge ground. Namely, some challenge grounds, comparable to Non-Waivable Red List grounds, can be invoked at any stage. These grounds are included into Clause 5 of the Rules for Arbitrators’ Impartiality and Independence оf 27.08.2010 No. 39, and they are modeled according to the 2004 IBA Guidelines on Conflicts of Interest in International Arbitration.
Following the trend set by Article 18 of the 2014 London Court of International Arbitration Rules, each party shall ensure that its representative is acting in compliance with the ICAC Rules. When authorizing its representative, the party shall thereby confirm that the legal representative has agreed to such compliance. Non-compliance may result in a negative allocation of arbitration costs, an issuance of a written reprimand, or in an offer to the party to substitute its representative.
Any party should provide information on any intended change in regard to its legal representation, and such changes are prohibited after the tribunal’s formation if such a change could give rise to the grounds for the challenge of an arbitrator, or it could lead to the annulment of an award.
The Organization of Arbitration Proceedings
A tribunal’s chair may, upon consultation with co-arbitrators, establish a procedural timetable setting out procedure and time limits for filing of additional pleadings and evidences, and he/ she may arrange a case management conference.
Interestingly, keeping the records of hearings is not compulsory anymore. Only where the tribunal considers it expedient, the records will be prepared. In practice, this document may serve in annulment proceedings as evidence for an (im)properly held arbitral hearing. Thus, the parties are advised to early apply for completing the records and to consent to audio recording to ensure that the proper summary of the progress of a hearing is kept.
Expedited Arbitration Procedure
A time limit for issuing an award amounts to 180 days from the formation of tribunal. An expedited procedure should decrease this limit to 120 days. A fast-track procedure will automatically be employed where the aggregate claim amount does not exceed $50,000. Its key features are as follows:
- a dispute is decided by a sole arbitrator,
- only one round of pleadings is held, and
- an oral hearing is held only upon a party’s special request, or based on the arbitrator’s decision.
Multi-Contract and Multi-Party Arbitration
By designating the 2017 ICAC Rules, parties agree to apply its new provisions on single arbitration under multiple contracts, consolidation of arbitrations, joinder of additional parties (co-claimants and co-respondents), and intervention of non-parties (intervenors).
For example, claims arising out of multiple contracts or directed against several parties may be made in a single statement of claim even where the claims are covered by different arbitration agreements provided that the arbitration agreements “are compatible in content and are linked from the standpoint of substantive law”.
Upon the request of a party, the ICAC Presidium may consolidate pending arbitration where
(i) all parties agree;
(ii) all claims are made under the same arbitration agreement and there are no other obstacles for consolidation; or
(iii) the claims are covered by different arbitration agreements provided that the arbitration agreements “are compatible in content and are linked from standpoint of substantive law”.
Some other factors, such as at which stage are the proceedings at the moment of consolidation, a risk for approval of contradictory awards, and efficiency of the proceedings, should be given attention when deciding whether to consolidate cases or not. Consolidation shall be deemed impossible without the parties’ consent when different arbitrators have already been appointed for the pending arbitrations.
The adoption of the 2017 Rules shows the ICAC’s commitment to nurturing its status of the largest arbitration service provider in this part of Europe. These rules implement some of the best international practices and, consequently, it is expected that they will serve well the further promotion of arbitration in Russia.More from our authors:
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A Recent Latin -American Example of the Increasing Recurrence of Multiple Proceedings in International Arbitration
Julián Bordacahar, MIDS
In Scherk v. Alberto-Culver Co, the US Supreme Court stated that “[a] contractual provision specifying in advance the forum in which disputes shall be litigated and the law to be applied is an almost indispensable precondition to achievement of the orderliness and predictability essential to any international business transaction.” While this statement holds almost invariably true in the majority of cases, a recent example proves that this is not always the case. This post discusses one of the most exciting and complex international arbitration cases in Latin America.
The case involved the consolidation of three different related arbitrations, parallel judicial proceedings in different jurisdictions, the issuance of conflicting interim measures, anti-arbitration injunctions, the annulment of procedural orders, the setting aside of the arbitral award, recognition proceedings of said award, among others. The result, an arbitral tribunal confronted with the seemingly impossible task of having to comply with contradictory judicial orders and endless difficulties to fulfill its task of rendering an enforceable award. And yet, this epic litigation journey may not be over yet.
In the very interesting (and still unresolved) case of YPF v AESU, SULGAS and TGM, a dispute arose under a multilateral Gas Supply Agreement (the “GSA”) concluded between two major Latin-American Oil & Gas companies (YPF and Petrobras) and several other Brazilian and Argentine distribution and transport companies. The gas would be imported from Argentina to Brazil for the construction of a thermal power plant fueled by natural gas in the Brazilian city of Uruguaiana.
The GSA contained a somewhat unusual ICC arbitration clause. While it provided for the place of arbitration to be in Montevideo, Uruguay, and that any award rendered shall be final and binding, it also stated that the only recourses available against any award would be motions for clarification and/or annulment under Article 760 of the Civil and Commercial Procedure Code of Argentina, which shall be filed exclusively before the courts and in accordance with Argentinean laws (the “Choice of Forum Clause”).
A series of disputes eventually arose in 2008 and 2009 and three different arbitration proceedings were commenced, which were later consolidated into one. Hence, all the parties assumed the role of claimants and respondents simultaneously involving an aggregate amount at stake of approximately US$ 1.6 billion. They agreed to bifurcate the proceedings into liability and damages stages. In May 2013, the arbitral tribunal issued a final partial liability award against YPF.
As a result, parallel judicial proceedings were commenced (i) by YPF before Argentinean courts –the agreed forum– (set aside action and anti-arbitration injunction); and (ii) by the winning parties before Uruguayan courts –the courts of the seat– (declaratory relief as to the exclusive jurisdiction of the courts of the seat to the exclusion of the chosen ones and injunction for the arbitral proceedings to continue).
Court Proceedings and Award on Damages
As a consequence, national courts from Argentina and Uruguay issued conflicting judgments. They each declared that they had exclusive jurisdiction and issued contradictory interim measures. While the Argentinean court ordered the tribunal to stay the arbitration, the Uruguayan court order it to resume it. Furthermore, even though no annulment action ever took place at the seat, the Argentinean court eventually vacated the award in November 2014. Irrespective of this, in April 2016, the arbitral tribunal issued its final award ordering YPF to pay approximately US$ 185 million to AESU and SULGAS and US$ 319 million to TGM. Nonetheless, YPF also challenged this award in Argentina.
While the Uruguayan judgment on exclusive jurisdiction is final, the Argentinean judgment has been challenged before Argentina’s Supreme Court, who has not ruled yet on whether it will hear the challenge or not. Finally, on May 2016, AESU and SULGAS initiated recognition proceedings of the liability award in the courts of New York. However, no decision was ever rendered because it was recently made public that YPF, AESU and SULGAS had settled.
General Comments on the Choice of Forum Clause
This case raises a very interesting question: are parties allowed to agree that courts, other than those of the seat of arbitration, will have exclusive jurisdiction over the challenge of an award?
Despite acknowledging that parties have ample autonomy, the Uruguayan court held that parties are not allowed to confer jurisdiction to courts other than those of the seat. The mere choosing of a seat has the unavoidable consequence of applying the seat’s lex arbitri because arbitrations are “localized” and, hence, establish jurisdiction at the seat. This is true even in the rare cases where parties may decide to choose other procedural law, which despite arguably indicating that the award should carry said law’s nationality, does not suffice to deprive the award from carrying the seat’s nationality.
Moreover, no accumulation of jurisdiction can be permitted neither under the Panama Convention on International Commercial Arbitration (“Panama Convention”) nor the New York Convention (“NY Convention”). In addition, Article 22(1) of the Mercosur Convention on International Commercial Arbitration enshrines the “unity of jurisdiction” principle providing exclusive jurisdiction to the courts of the seat. As a result, the Choice of Forum Clause of Argentinean courts had no effect at all.
In contrast, the Argentinean court ruled that international arbitrations are not prima facie subject to any national legal system. It further noted that it was undisputed that (a) it was agreed that Argentinean courts would have exclusive jurisdiction; and (b) party autonomy is the cornerstone of arbitration. Since no violation of international public policy had occurred, the court held, such autonomy must be respected.
Furthermore, because the Mercosur Convention entered into force after the GSA was concluded, it did not apply to the validity of the Choice of Forum Clause or, in any event, the parties were allowed to deviate from the provision which attributes jurisdiction to the courts of the seat. Finally, neither the Panama Convention nor the NY Convention prohibit –directly or indirectly– the choice of a forum other than the seat.
Because of the particularities of this case, it would have certainly been interesting to see the outcome of the recognition proceedings in New York. On the one hand, the parties clearly chose Argentinean courts to have the exclusive final say on the award’s validity, and said courts annulled it. To the extent that such choice is not considered invalid (which is certainly controversial), it could be argued that it should only be fair for the parties to respect the decision of the mutually agreed forum.
On the other hand, however, even if arguendo, such agreement was valid, said award may arguably still be recognized under the NY Convention (or the Panama Convention) because it could also be argued that the Argentinean court is simply not the “competent authority of the State in which, or according to the law of which, the decision has been made”. Nonetheless, because one of the wining parties, TGM, could still commence recognition and enforcement proceedings, the outcome of this issue remains open.
This case is also another clear example of divergent (and conflicting) interpretations by state courts of the NY Convention, as well as of the lack of dialogue and cooperation between different national courts hearing the same dispute. The case involved complex factual and legal issues, including intricate private as well as public international law questions. All this in the context of a multimillion high-stake dispute arising out of a sensitive natural resources’ area as the gas industry, and involving both multinational corporations as well as state-owned entities. Yet, both courts showed indifference to the ongoing proceedings taking place in the other State.
In this vein, neither court decided to consider the fact that the other was also hearing the same case, or the possibility to stay its proceedings pending the outcome of the other, and no considerations of comity or mutual respect were even mentioned. Moreover, given that the interpretation of Mercosur Law was at the heart of the validity of the Choice of Forum Clause, both courts could have made use of the possibility to request a non-binding advisory opinion from the Mercosur Permanent Review Tribunal as suggested by the dissenting judge of the Argentinean Court of Appeals. However, neither of them did.
Because of the increasing complexities involved in modern cross-border dispute settlement, every adjudication body should make use of any available tool which facilities the coordination of parallel proceedings, even though these may still fall short of being able to provide efficient and predictable outcomes. Among other issues, multiple proceedings increase litigation costs, may lead to delays, create the risk of contradictory decisions, double recovery, among others. It is clear that one of the critical challenges of our time is to find better ways for national and international courts and tribunals to be better equipped to deal with these issues.
All in all, while it is fair to concede that the case discussed in this post is somewhat unique because of the unusual drafting of the arbitration clause, it also constitutes another example showing the growing recurrence of parallel proceedings taking place in modern international dispute settlement and the various legal and practical complexities which they raise.More from our authors:
Daniela Páez-Salgado (Assistant Editor for South America) and Zach Li, FTI Consulting
On December 21, 2016, the Tribunal in Hochtief v Argentina issued an award on damages against Argentina in an arbitration brought under the Argentina-Germany BIT. The Claimant had alleged multiple treaty breaches by Argentina, arising out of the 2000 economic crisis, and originally sought US$ 54 million in damages. Although the Tribunal found that Argentina had violated the fair and equitable treatment clause, the damages award was only US$ 13.41 million.
A consortium of five companies, including Hochtief, a German construction company, participated in a bidding process for the construction of a toll highway and a bridge in Argentina. The consortium was granted the concession in 1998. The Concession Contract required the consortium to incorporate a local company for the purpose of performing the contract. Consequently, the consortium created Puentes del Litoral S.A. (“PdL”), with the consortium members as PdL’s shareholders.
Under the Concession Contract, PdL was entitled to a basic toll rate and an adjustment mechanism to absorb the effects of inflation in Argentina. In 2002, in the midst of the Argentinean economic crisis, the Government passed the Emergency Law (the “Law”). Hochtief alleged that the Law eliminated the rights guaranteed in the Concession Contract and destroyed the project’s viability. PdL was unable to fulfill its obligations to third parties, and in 2007 it initiated bankruptcy proceedings. Hochtief then brought the treaty claim for the diminution in the value of its investment in PdL.
Around the same time, the Government started a renegotiation process with PdL. In 2012, PdL and the majority of its shareholders entered into a Transitory Agreement with the Government to settle its claims. Despite that agreement, the Tribunal found, in 2014, that the Government’s conduct violated the BIT’s fair and equitable treatment provision, due to the Respondent’s failure to redress the commercial balance of the contract after the pesificación.
To calculate the compensation owed to Hochtief, the Tribunal calculated the loss of value of its shareholding (26 percent) in PdL. The loss of value of the subsidiary, according to the Tribunal, included “the sums that [the subsidiary] should have received if pesification had not occurred and if the toll rates had been revised annually.” (Decision on Liability, ¶316).
The Decision on Liability also directed the parties to attempt to agree among themselves on the proper amount of damages. When the parties failed to reach agreement, they went back to the Tribunal for a final decision. The Claimant took this opportunity to apply for reconsideration of the Tribunal’s prior pre-judgment interest determination. However, the Tribunal denied the application.
International arbitral tribunals commonly direct the parties’ quantum experts to engage in a joint meeting, where they can determine their points of agreement and disagreement without intervention by counsel. These joint meetings usually take place after the submission of the experts’ first or reply reports, but in advance of the hearing on quantum, so that the experts can file a joint report in which it is hoped that they can narrow some fo their differences. Indeed, it is not uncommon for the experts to make certain concessions, which aid the arbitrators in their determination of damages. Notably, however, in Hochtief v Argentina, the Tribunal directed the Parties, not the experts, to agree on a sum.
As to the pre-judgment interest issue, the Claimant argued that the rates of short-term US Treasury Bills (total damages of US$ 54 million) specified in the Decision on Liability did not allow for full reparation of its losses. The Claimant provided two alternatives:(i) pre-judgment interest rate calculated based on the Claimant’s weighted average cost of capital (total damages of US$ 103 million); or (ii) commercial interest rate, as referred to in Article 4(2) of the BIT (total damages of US$ 72.8 million).
While many bilateral investment treaties have a clause that specifies the applicable pre-judgment interest rate under a lawful expropriation, the treaties often do not prescribe such a rate in cases of unlawful expropriation. In addition, the determination of the proper pre-judgment interest rate is often perceived as a pure legal matter. The combination of these factors has led to a multiplicity of approaches in investment arbitration case law. Two of the most significant approaches to date are the return on alternative investments approach and the corporate borrowing rate approach.
The return on alternative investments approach is probably the most frequently selected. It embraces the rationale that claimants should be compensated based on an interest rate that reflects the return they could have otherwise achieved if they were given the opportunity to invest in an alternative investment. Common benchmarks selected by tribunals under this approach are short-term US treasury bills or US government bond yields, rates in the financial markets, or other indicators that they deem as a fair proxy.
The corporate borrowing rate approach, on the other hand, bases the pre-judgment interest rate on the interest rate that the claimant must pay based on its credit rating, ability to access capital markets and other market considerations. In addition, tribunals have also awarded pre-judgment interest based on the host state’s legislation. On a few occasions, tribunals have adopted a pre-judgment interest rate based on exercise of judgment that they deemed to be reasonable, fair, and appropriate.
With respect to the two alternatives that the Claimant advanced, the Tribunal found no reason to modify its previous decision. Further, the Tribunal specified that one-year US Treasury Bills provided the applicable pre-judgment interest rate.
Regarding the Tribunal’s assessment of the parties’ calculation on damages with respect to Claimant’s entitlement of 26% of the damages caused to PdL by the State, the Tribunal noted that the Claimant interpreted the Decision on Liability to mean that it was entitled to 26% of PdL’s direct cash flow. The Tribunal found that this interpretation was in fact contrary to the approach that it had adopted in the Decision on Liability, which was for the calculation to include the impact of PdL’s financial obligations on its performance.
The Tribunal generally agreed with the main points made by State’s experts. Specifically, the Tribunal found that the Claimant’s expert calculated the value of the Claimant’s investment in PdL instead of the Claimant’s share of the value of PdL. This finding appears to be consistent with the State’s argument regarding Claimant’s change in valuation methodology from “Free Cash Flow to Equity” to “Free Cash Flow to Firm”. Further, the Tribunal found that the Claimant’s expert excluded the repayment of PdL’s debt from the “but-for” cash flows to the shareholders. This finding appears to accept the State’s position that the Claimant’s valuation included compensation for the Claimant’s credit’s claims.
Thus, the Tribunal concluded that the Claimant was only entitled to an award of US$ 13.41 million for the diminution in the value of the Claimant’s shareholding in PdL caused by State’s breach of the BIT.
With respect to the parties’ calculation regarding the compensation that the Claimant would have received if pesification had not occurred and if the toll rates had been revised annually, the Tribunal determined that the cost incurred by the Claimant would not have been pesified during the relevant period. Therefore, the Tribunal rejected the Claimant’s claim for US$ 4 million.
Finally, and of considerable interest to arbitration practitioners, the Tribunal sanctioned the Claimant on costs on the grounds that its expert had disobeyed the Tribunal’s instructions as set out in the Decision on Liability. It is highly unusual for a tribunal to punish a prevailing party by reducing its costs due to the misbehavior of its expert. A tribunal might do so in cases where, for example, counsel instructed an expert not to address an issue that counsel knew to be material or relevant to the dispute. Additionally, the IBA Guidelines on Party Representation in International Arbitration, Guidelines 26 and 27, explain that a costs sanction may be appropriate when a party has extended the proceedings through frivolous applications. Specifically, Guideline 26(c) states that the arbitrators may “consider the party’s representative misconduct in apportioning the costs of the arbitration.” (See a further analysis of counsel misconduct in a prior post here). Hochtief v Argentina takes this guidance one step further: the arbitrators may also consider the parties’ quantum experts’ misconduct in apportioning the costs of the arbitration.More from our authors:
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Anja Havedal Ipp
Nearly one hundred climate scientists, economists, policy specialists, investors, and lawyers recently convened in Stockholm for the conference “Bridging the Climate Change Policy Gap: The Role of International Law and Arbitration” organized jointly by the Arbitration Institute of the Stockholm Chamber of Commerce (“the SCC”), the International Bar Association, the International Chamber of Commerce and the Permanent Court of Arbitration. The conference explored whether international law could bridge the gap between the objectives and the outcomes of international climate change agreements – and whether arbitration could serve as an enforcement mechanism in the climate change context. A report from the conference is available on the SCC website.
Building on the momentum created at the conference, the SCC will now continue working toward a sustainable future through the Stockholm Treaty Lab. The aim of this new initiative is set high: The drafting of a new model international treaty that will encourage investment in climate change mitigation and adaptation. A treaty that, if implemented, would create transparent, stable and enforceable investment policy regimes and encourage investors to fund low-carbon projects, support technological innovation, and otherwise invest in a sustainable future.
The agendas for curbing global warming that were laid out in the 2015 Paris Agreement and Sustainable Development Goals will require investments amounting to trillions of dollars across the globe. Renewable energy must become even more affordable and available; energy-efficient transportation will be needed to carry an increasingly mobile world population; sustainable agriculture and forest restoration must substitute unsustainable land use and deforestation; and climate-resilient infrastructures must be built where global warming and rising sea levels already put communities at risk. To some extent, the technologies necessary already exist – solar and wind power, energy-efficient vehicles, and carbon capture and storage – but enormous investments are needed to deploy these on a meaningful scale. In other areas, investments are needed to support the innovation of new technologies where existing ones fall short.
A recurring theme among the speakers and participants at the conference in Stockholm was that although the money for these “green” investments exists, investors are hesitant to deploy their funds in the absence of stable and transparent legal frameworks, including neutral and reliable enforcement mechanisms. Nonetheless, no international legal instrument exists that specifically incentivizes and protects cross-border investments aimed at climate change mitigation and adaptation.
It is against this background that the SCC is launching the Stockholm Treaty Lab – an innovation contest where the grand prize will be awarded to the contestant team that drafts the model treaty with the greatest potential to increase investments in climate change adaptation and mitigation. The SCC envisions that contestants will draw inspiration from the existing regime of international investment agreements, which encourages foreign investments by ensuring market liberalization, fair treatment of investors, and neutral enforcement through arbitration.
Kluwer Arbitration has produced a short video introducing the Stockholm Treaty Lab (viewable also below), featuring SCC Secretary General Annette Magnusson and SCC Chairman Kaj Hobér. More information on the initiative is also available on the SCC website.
The SCC plans to launch the contest in March 2017.More from our authors:
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Diversity in International Arbitration: Where Do We Stand? – An Overview of a Berwin Leighton Paisner Survey
Patricia Živković (Associate Editor)
Diversity in arbitral tribunals has already received a considerable amount of attention at this blog, especially in regards to gender diversity (post are available here, here, and here). The discussion is, of course, still ongoing and far from reaching the desired goals. On 10 January 2017, Berwin Leighton Paisner released an annual arbitration survey titled Diversity in International Arbitration: Are We Getting There? (“Survey”). The results of the Survey confirm that further discussion on the topic of diversity in arbitration is necessary. This post highlights some of the more interesting (and also thought provoking) results of the Survey, whereas the full version of the Survey can be downloaded here.
The Survey adopted a unique approach in tackling some very important issues by focusing on obtaining statistics in regards to the situation, as well as taking a proactive stance on how to move forward from this point. This was done, in particular, by addressing the issue of attribution of responsibility for promoting and achieving diversity in arbitral tribunals.
The Survey received responses from 122 respondents from all over the globe including: Asia, Australasia, the Middle East and North Africa, North America, Latin America and the Caribbean, Western and Eastern Europe, East and West Africa, the BVI/Cayman and Bermuda (page 5 of the Survey).
The results of the Survey, unfortunately but not surprisingly, revealed that the diversity in arbitral tribunals is far from being achieved and respondents flagged some diversity issues which deserve due consideration. For example:
- 84% of respondents thought that there were too many male arbitrators (page 7 of the Survey);
- 80% of respondents thought that tribunals contained too many white arbitrators (page 7 of the Survey);
- 64% of respondents felt that there were too many arbitrators from Western Europe or North America (page 7 of the Survey);
- 28% of respondents believed that they had lost appointments because they were considered too young (page 6 of the Survey).
The catchphrase “pale, male, and stale” has not lost its stand in the field of arbitration thus far. This does not come as surprise as, according to the Survey,
“Established practice in international arbitration is acknowledged to block change and keep new entrants – the same arbitrators are chosen again and again.”
The Most Important Attributes of Arbitrators
The Survey investigated and reported on the attributes that are taken into account by parties when nominating an arbitrator and the importance given by parties to each of these factors.
On a positive note, the expertise of an arbitrator is placed the highest on the list of attributes ranked by importance. The Survey reports that “93% of respondents felt that a potential candidate’s expertise was either ‘very important’ or ‘important’” (page 9 of the Survey). The expertise of potential arbitrators is followed by efficiency, for which 91% of respondents opined as a “very important” or “important” consideration in the nomination process (page 9 of the Survey).
Gender and ethnicity, on the other hand, have received lower percentage on a stand-alone basis. Only 12% considered gender as “very important” or “important” factor, while 24% of the respondents found that ethnicity/national identity was worth consideration when nominating an arbitrator (page 8 of the Survey). However, when respondents were asked to view all the potential candidates as if they were all equal in regards to their level of expertise and experience, the results told a different story. In this context, the results were the following:
- “On gender, only 6% of respondents said “No”, it was not desirable to have gender balance. Other responses were fairly evenly divided. 50% of respondents thought that it was desirable to have gender balance on arbitral tribunals but 41% thought that “It makes no difference”.” (page 8 of the Survey),
- “Responses on ethnicity and national background followed a similar pattern with 54% saying “Yes”, 31% saying that “It makes no difference” and 10% saying “No”.” (page 9 of the Survey).
The Attribution of the Responsibility for the Initiation of Change
The Survey asked respondents who is responsible for initiating a change (page 12 of the Survey). It was perceived that all the main actors in arbitration share this responsibility, though in somewhat different portions.
Seventy-eight percent of respondents felt that arbitral institutions should play a role in achieving greater diversity on arbitral tribunals. Sixty-five percent of respondents thought that counsel for parties are also important players. Sixty percent of respondents included arbitrators and 24% of respondents considered that academics and teachers have a role in this as well. Only 12% said that none of the abovenamed had a role in initiating a change and that they were happy with the status quo.
It was also noted that the initiation of change has already been commenced, especially related to gender diversity. This is, however, done scarcely, and not all the diversity attributions have received their share of attention thus far. In particular, it was stated that:
“There is increased transparency about the number of women appointed as arbitrators and there are various initiatives underway to encourage the appointment of more women. There are fewer initiatives in relation to other under-represented groups.” (page 3 of the Survey)
A factor that is gaining more and more attention to this point is the age of arbitrators. A lack of new entrants to the pool of arbitrators is linked to a lack of information about new and less well-known arbitrators from all backgrounds (page 12 of the Survey). Ninety-two percent of respondents stated that they would welcome more information about new and less well-known arbitrators and only 5% of respondents said that they would not (page 12 of the Survey).
Advocating for Diversity
The Survey also reported on the question: “Should diversity matter?” Several responses were collected and put forward to purport the opinion that diversity does matter:
- the inclusion of individuals of varied racial, ethnic, gender and social backgrounds has a value in itself;
- a system serving the needs of a particular constituency – in this case, participants in international commerce – should reflect the make-up of that community;
- a lack of diversity may also affect the quality of arbitral awards;
- the deliberative process before the arbitral tribunal is likely to be crucial and, therefore, the diversity of views may be fundamental for a fair process and outcome;
- widening the pool of arbitrators will give greater choice and fewer conflicts, remove the imbalance in information available to different parties and encourage greater efficiency, as well as facilitating new perspectives on the dynamics of a dispute; and
- a diverse tribunal may be better prepared, more task-orientated, and more attentive to the parties’ arguments than a non-diverse tribunal (page 3 of the Survey).
This post introduces only a small portion of many interesting statistics presented in the Survey. This type of inquiry is welcomed at these times because it serves as a reminder that the road to reach our goals is a long one. It also offers a welcomed point that advocating for diversity should always be put in the context. We welcome your thoughts on these and other statistics as well as your opinion on how to approach these issues in practice.More from our authors:
Bulgarian arbitration law has been an area of rare developments. It is incorporated in the International Commercial Arbitration Act (“ICAA”), adopted in 1988 as almost a direct translation of the UNCITRAL Model Law on International Commercial Arbitration in its 1985 version. The only major reform of ICAA was its extension to arbitrations between entirely domestic parties by amendment from 1993. Hence, despite its name, the ICAA regulates both domestic and international arbitrations. Apart from this, the ICAA used to provide for a fairly liberal procedure with very little state interference.
Non-arbitrability of consumer disputes
However, there has been a recent backlash to arbitration mainly because arbitration, due to its flexibility, has become to be seen as a tool for conduct of unfair practices. Some newly established institutions have started handling predominantly consumer disputes where the claimant was a major services provider (heating, electricity, water, etc.). This spawned various debatable practices such as dubious service of documents to respondents and questionable qualification of arbitrators, as such institutions listed largely unknown persons.
The recent amendments adopted by the Bulgarian Parliament purport to avert such suspicious practices by a wide legislative brush: all consumer disputes are excluded from the scope of arbitrability under Article 19 of the Civil Procedure Code. All pending disputes between commercial entities and consumers should be discontinued.
Amended grounds for state court scrutiny of awards
The ICAA used to designate the Sofia City Court as the single state court having jurisdiction to issue writs of execution for the purpose of commencement of enforcement of arbitral awards. The amended law introduces a new jurisdictional criterion: the competent state district court is the court at the domicile or at the seat of the award-debtor. More importantly, now the ICAA empowers the district court to investigate whether the arbitral award is null and void or not. If the award has been rendered under a non-arbitrable dispute, the state court should not issue a writ of execution on its basis. In practice, this has significant consequences. First, the law puts forward a new instrument for state scrutiny over arbitral awards and, indirectly, on the work of arbitrators. Issuance of writs of execution would not only be a formalistic exercise, but it may lead to the result that the long-chased arbitral award is futile just because the relevant state court considers that the arbitral tribunal erred on its own jurisdiction. Although this does not, formally, impair the kompetenz-kompetenz principle, the amended ICAA builds up a second tier test for arbitral awards on the gateway to enforcement, which, if not passed, may make efforts of award-creditors bitter and lost.
Furthermore, the grounds for setting aside under the ICAA were amended, too. As the ICAA used to reflect the 1985 UNCITRAL Model Law, it featured public policy as on of the grounds for setting aside of arbitral awards. It has been an often argued, but seldom granted, basis for setting aside of awards. However, the wide and undefined scope of the concept of public policy has rendered it as a final resort for the aggrieved parties. This has also spawned uncertainty as to what precisely provides for the content of public policy in case of awards rendered by domestic tribunals. The recent amendment of the ICAA removes public policy as ground for setting aside of awards. It is worth noting that, following this legislative change, international (foreign) awards could be resisted enforcement for reasons of violation of public policy only on the basis of the New York Convention, as the ICAA will no longer feature this specific ground. More importantly, if a tribunal is seated in Bulgaria and renders an award which would not be subject to enforcement via the New York Convention due to being a domestic award, the parties would not be able to resort to public policy arguments. Therefore, it seems that the legislative amendment has been quite focused on protecting domestic arbitrations but has lost sight on those with international dimensions.
Governmental control over arbitrators
The ICAA used to feature almost no specific requirements regarding arbitrators. This liberal regime is now changed as the amended law requires: university education, lack of criminal convictions, at least 8 years of professional experience as well as high moral qualities. The law certainly purports to prevent low qualified arbitrators from being appointed, but also clearly restricts freedom of choice, which has always been the backbone of arbitration. Moreover, the Ministry of Justice is now empowered to exercise a form of control over arbitration institutions. The inspectors at the Ministry of Justice are entitled to scrutinize the work of arbitration institutions and provide compulsory instructions to achieve compliance with the law. Arbitrators handling consumer disputes in breach of the prohibition on these cases will be subject to pecuniary sanctions.
The indicated powers of control and scrutiny introduced in Bulgaria are in vague terms and it is not clear whether these will be exercised to full extent. However, the amendment of the ICAA seems to be a clear example of a sway from the liberal regime of almost no state involvement towards a more intrusive one, where both the judiciary and the executive have some, direct or indirect, means to influence arbitration proceedings in Bulgaria.More from our authors:
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Tiago Duarte-Silva and Aaron Dolgoff
The selection of an interest rate to apply to an arbitral damages award can be an important determinant of the total award. For example, prejudgment interest added 26% to damages across 63 ICSID awards since 2000. Consistent with this notion, many international investment treaties specify claimants be compensated at a reasonable or normal “commercial rate.” However, the lack of specificity in the definition of this rate leaves significant scope for arbitral discretion, and therefore the parties to a dispute may rely on expert opinions to support their particular positions. This imprecise definition requires an interpretation of what constitutes a normal “commercial rate,” either as the rate at which the claimant could have or did invest funds, or the rate at which the claimant could have or did borrow funds.
The importance of clearly defining a “commercial rate” is evident in data on corporate borrowing rates. Such rates show wide variation both over time and across the borrowers’ debt maturity, seniority, and credit risk. Past arbitral decisions have relied on various definitions of “commercial rate,” leaving significant scope for disagreements between the parties as to what constitutes an appropriate rate. We suggest a more empirical approach to help tribunals select a prejudgment interest rate that best comports with their interpretation of “commercial rate.”
In this post, we first describe the concept of “normal commercial rate,” and then examine how corporate debt interest rates vary through time as well as across debt and company characteristics.
Typical clauses for interest compensation in Bilateral Investment Treaties (BITs) define prejudgment interest as a “normal commercial rate.” This is the exact phrase used in BITs with Canada and the UK. Other variations of this phrase are a “commercially reasonable rate” (US or Japan), “appropriate market rate” (France), or “usual bank interest” (Germany). See the most recent model BIT treaties (where available) or recent bilateral treaties, from the UNCTAD BIT database here. Such definition leaves room for opinion on its precise meaning and measurement. For example, the following two cases illustrate two common interpretations:
- BG Group v. Argentina: “This Tribunal agrees with BG that interest at a reasonable commercial rate is appropriate… The rate of interest is a function of the instrument in which BG could have reasonably invested funds available to it… investment in a highly secure, dollar denominated, liquid and short-term instrument would have enabled BG to rapidly redeploy its funds.” (awarded interest at six month US Treasury rates).
- Tidewater v. Venezuela: “as the Treaty’s reference to ‘normal commercial rate’ underlines, it represents the cost of borrowing the sum that the claimant ought to have received over the same period of time. Thus, the appropriate reference point is the cost of borrowing available to Claimants.” (awarded interest at 4.5%).
The above examples of arbitral awards show a key issue in determining a “normal commercial rate:” whether that term refers to an investment or a borrowing rate. An investment rate interpretation is consistent with compensation for the opportunity cost of not being able to invest the award amount between the date of harm and the date of the award. Companies are able to invest at rates that run the full gamut of risk, from risk-free debt (e.g., purchase of US Treasury bills) to speculative debt (e.g., purchase of debts in default), to equity investments in specific projects or properties. This interpretation often leads to the selection of a risk-free or nearly risk-free rate (e.g., BG Group v. Argentina’s award of a “highly secure… liquid and short-term instrument”).
The borrowing rate interpretation is consistent with compensation for the claimant’s cost of capital, and, in some circumstances, compensation for being forced to borrow as a result of the alleged harm. A borrowing rate, however, depends on the characteristics of both the borrower and the terms of the loan. Tribunals are often hesitant to use a borrowing rate that is specific to the claimant’s cost of debt, often opting for borrowing rates of low credit risk, non-bank borrowers. For example, the tribunal in Joseph Charles Lemire v. Ukraine (March 28, 2011) eschewed LIBOR as an interbank rate, opting instead for LIBOR+2% as indicative of the higher rate banks would charge to their clients.
Several arbitral awards have referenced a benchmark such as LIBOR+2%, though such awards may be based more on precedent than any empirical assessment of typical commercial borrowing rates. (PSEG Global Inc., et al, v. Republic of Turkey; Sempra Energy International v. Argentine Republic; and Enron Corporation and Ponderosa Assets, LP v. Argentine Republic.) To the extent tribunals intend to award interest at a rate that reflects market conditions during the prejudgment interest time period, reliance on precedent presents a risk that the award would not, in fact, reflect such market conditions. We turn to some empirical data to illustrate this issue.
Figure 1 shows the spread of one-year A-rated corporate bonds over one-year LIBOR. This spread is the difference between the yield on one-year A-rated corporate bonds and the yield on one-year LIBOR. To the extent that an A-rated borrower is typical, A-rated borrowers typically pay rates that are much lower than LIBOR+2% and are frequently lower than LIBOR+0.5% if we put aside conditions observed at the height of the most recent financial crisis. The spread varies over time, even for a constant credit rating. This reflects changing market conditions, i.e., changes in the market’s willingness to accept lower returns for a given credit risk. Note that LIBOR is meant to represent the rate at which a group of banks could borrow funds in the interbank market. It is not necessarily the lowest possible commercial borrowing rate as, for example, a borrower may post collateral that makes the loan less risky than an interbank loan.
Figure 1: A-rated, one-year corporate bond spread to LIBOR
Figure 2 illustrates the A-rated corporate borrowing spread to LIBOR for annual maturities ranging from one to five years. Longer-term borrowing typically entails a higher spread. This maturity premium varies over time: the one-year and five-year spread are sometimes about 25 basis points apart, and sometimes over 100 basis points apart.
Figure 2: A-rated corporate bond spread to LIBOR, across maturities (1 to 5 years)
In other words, corporate debt rates are different for different debt maturities, and that difference in rates varies over time. Again, the spread to LIBOR is typically not 2%. To obtain spreads closer to 2%, one would need to consider a borrower of higher risk than A-rated borrowers. We examine this question next.
Figure 3 shows corporate bond spreads by credit rating (AA, A, and BBB). In addition to the time variation in borrowing costs, there are significant differences in borrowing rates as a function of issuer credit rating. The difference relative to LIBOR becomes quite large for riskier debts. Note also that the incremental borrowing cost of moving from AA-rated to A-rated debt is often smaller than the incremental borrowing cost of moving from A-rated to BBB-rated. These differences would become larger still when moving to credit ratings below investment grade. High yield or junk bonds have ratings below BBB.
Figure 3: One-year corporate bond spread to LIBOR, across ratings (AA to BBB)
The evidence above illustrates that borrowing rates vary over time with market conditions, as well as with debt maturity and credit rating. However, these are only a few of the factors that influence borrowing costs. Other factors include characteristics of the borrower and of the specific debt. Examples of borrower-specific factors affecting credit risks include: size of the company, profitability, consistency or volatility of the business, cash flows, and liquidity of assets. These factors may vary over time, across industries, and across firms within an industry. Debt-specific factors affecting borrowing rates include seniority in bankruptcy, security (collateral or other guarantees), and lender protection rights (e.g., debt covenants).
In conclusion, the selection of an interest rate for arbitral award damages can be an important determinant of the total award. In certain proceedings, tribunals are bound by treaty to award interest at a normal commercial rate. However, neither investment treaties nor award precedents provide clear guidance on how to define and measure a “commercial rate.” In addition to the fundamental question of whether such rates should reflect investment opportunity costs or claimant borrowing rates, there is also the important question as to how to benchmark the appropriate rate (particularly under the borrowing rate definition).
The benchmarks for corporate borrowing rates differ significantly over time, as well as with different borrower and debt-specific characteristics. To assist tribunals in selection of appropriate interest rates in arbitral disputes, claimants and respondents can provide more detailed empirical data. Such data might show corporate borrowing rates for the relevant period of time as well as display information or expert opinions substantiating why any particular rate should be preferred as typical or reasonable given the case’s specific circumstances.
The views expressed herein are the views and opinions of the authors and do not reflect or represent the views of Charles River Associates or any of the organizations with which the authors are affiliated.More from our authors:
The post Prejudgment Interest: What Is a “Normal Commercial Rate?” appeared first on Kluwer Arbitration Blog.
The first weeks of 2017 have again seen an exchange between Croatia and Slovenia about the continued work of the Arbitral Tribunal expected to decide this year on the course of the boundary between the two states. The Tribunal – formed under the 2009 Arbitration Agreement – will do so despite Croatia’s decision to terminate the treaty and withdraw from the process because of Slovenia’s serious violation of the Agreement in mid-2015. Kluwer Arbitration Blog has previously published a story about this scandal.
During the annual conference of Slovenia’s ambassadors, for example, the country’s officials called for a strategy to implement the prospective decision despite Croatia’s repeated statements that it will not consider itself bound by it, no matter the contents. Only a few days later, the Slovenian Foreign Minister said that Croatia-bound tourists would encounter difficulties when travelling through Slovenia if Croatia did not respect the Tribunal’s award. Croatian officials perceived this as a threat to the tourism industry which makes up 20% of the country’s GDP, prompting swift reactions from the Foreign Minister, as well as MEPs who stated that such moves would be contrary to “the four freedoms” of the EU.
The continued work of the Arbitral Tribunal is evidently a source of great tension between the two countries, which is why – at this point – it is worth looking more closely at the Tribunal’s Partial Award which allowed for the arbitration to continue. It did so despite “[a] severe breach[…] of duty of confidentiality and impartiality” thus only deepening the differences between Croatia and Slovenia instead of providing them with an opportunity to move forward with their bilateral dispute. What the Tribunal did in its Partial Award is establish that Slovenia did in fact violate the Arbitration Agreement, but that nevertheless, “[it] remains in force” (at para. 225) and that the Tribunal, as recomposed in late 2015, following a series of resignations, including that by Judge Abraham, President of the International Court of Justice, has the capacity and, moreover, the duty to continue the proceedings. Leaving several other considerations aside for reasons of brevity, what merits special attention in this decision is the distorted presentation of the most crucial facts of the case that then led the Tribunal to erroneous legal conclusions, all well to the prejudice of Croatia.
The most striking error is the Tribunal’s claim – repeated three times – that after Dr. Sekolec resigned and the Tribunal was recomposed “[n]o doubt has been expressed on the impartiality or independence of the three remaining arbitrators or of the two new ones” (at paras. 186, 195 and 224), whereas Croatia could not have been more vocal about it. In its letters to the Tribunal of 24 July and 31 July 2015, it said, e.g., that it “ha[d] difficulty understanding how it would be possible […] for the other members of the Tribunal […] to distinguish between the arguments and ‘facts’ presented by Slovenia through Arbitrator Sekolec, and those developed solely by Arbitrator Sekolec on his own”. Croatia also said that “no reasonable person would conclude that the actions that have occurred may not have influenced other actors in the arbitration process”. This was repeated in Croatia’s note verbale of 16 March 2016, which was also at the disposal of the Tribunal, as were all other documents that Croatia made available on its Foreign Ministry’s website. The Tribunal chose not only to ignore Croatia’s arguments, but explicitly stated the opposite, i.e. that no objections were made about anyone else on the Tribunal but Dr. Sekolec. By doing so, the Tribunal sought to exonerate itself from the duty to examine the shattering impact that Slovenia’s actions had on the Tribunal as a collective body and on its members as individuals. This duty would have been inherent to its existence even if Croatia had not complained, which it obviously did. Instead, the Tribunal simply opted for the easy, but ultimately wrong way out and examined the issue of independence and impartiality very narrowly and solely from the perspective of two documents that Dr. Sekolec circulated to his co-arbitrators and oral interventions he made in the plenary meetings (at para. 123). The Tribunal ignored recorded conversations which reveal that Slovenian officials prepared these documents and that Dr. Sekolec only edited them to look like his own (at pp. 7-8 of Excerpts from Recordings). The Tribunal did not refer at all to the fact that Dr. Sekolec provided Slovenia with the draft of the “[final] award” (at p. 11 of Excerpts from Recordings) for comments and edits, which he then intended to give to the Tribunal’s Registrar for further distribution.
The Tribunal also asserted that no new arguments or facts were presented to the Tribunal (at para. 195) whereas Dr. Sekolec was caught on tape as discussing the list of disputed areas in order of importance (at pp. 3-4 of Excerpts from Recordings) and textual descriptions of the boundary (at p. 9 of Excerpts from Recordings) as evidence which Slovenia – by explicit admission of Dr. Sekolec and the Slovenian official – had not presented to the Tribunal hitherto, and that he commits to discuss privately with President Guillaume and Judge Simma as his co-arbitrators.
It is logically and legally untenable not to appreciate the full extent of what Slovenia did through Dr. Sekolec, extending well beyond the contents and destiny of the two documents that the Tribunal mentions. It is equally unsustainable not to acknowledge the devastating impact of these actions on the arbitrators’ states of mind at a time when their views were being formed. Notwithstanding their professional integrity and admirable record, in this specific case they were caught in a spider web of Slovenia’s unscrupulous misconduct and manipulation making them manifestly incapacitated to continue to arbitrate independently and impartially.
In addition to affirming its capacity to arbitrate, the Tribunal also finds that it has the duty to do so because of an alleged unbreakable link between the conduct of arbitration and Croatia’s EU accession. However, in fact – no such link exists. The Arbitration Agreement does not provide for Croatia’s immediate and unconditional accession to the EU. It merely takes note of Slovenia’s lifting of reservations to Croatia’s accession negotiations, which in reality happened two months before the Agreement was even signed as the two states openly and actively sought to de-link the border issue from EU accession. That is witnessed by – for example – the explanation of the three principles that the two states’ leaders agreed to on 31 July 2009 (see the Slovenian Government’s website), as well as the Swedish Prime Minister’s letter confirming the EU’s understanding that accession talks would continue and that it is up to Croatia and Slovenia to decide how to resolve the border issue (see the Croatian Government’s website). In that sense, the Tribunal’s statement that “[f]ollowing [the Agreement’s] entry into force […] Slovenia lifted its reservations to Croatia’s accession to the [EU]” (at para. 15) and conclusions derived from that statement are as wrong as they are disappointing. They show the Tribunal’s inability to comprehend the facts of the situation or even merely copy and paste the facts that the two states themselves do not dispute.
The Tribunal’s conclusion that it has the capacity (because its independence and impartiality were not challenged) and duty (because of the alleged unbreakable link between the arbitration and EU accession) to continue its work led it to two erroneous legal conclusions:
First, the Tribunal accepted to be a judge in its own right and proprio motu assess the merits of Croatia’s claim that the independence and impartiality of that very same Tribunal were destroyed beyond repair. An appropriate appreciation of the extent of damage inflicted on this arbitration would have led the Tribunal to exclude itself from assessing the validity of Croatia’s treaty termination. As Croatia requested and as it should happen in all similar cases when procedural provisions of the treaty in question suffered violation, it should have directed the two parties to follow the procedure envisaged in the Vienna Convention, including the conciliation mechanism at the UN (see, for example, Villiger’s Commentary on the 1969 Vienna Convention on the Law of Treaties, at p. 746).
Second, the Tribunal establishes that Slovenia’s violation of the Agreement did not amount to “material breach”, which the Vienna Convention describes as a “violation of a provision essential to the accomplishment of the object and purpose of the treaty”. Thus, Croatia was not entitled to treaty termination. The Tribunal failed to acknowledge as essential – and as violated – the manner in which arbitration is conducted, i.e. by an independent and impartial body. It also remained silent on the fact – nevertheless recognized by one of its members, Judge Simma – that what is essential to a treaty, and what brings about material breach, is primarily what the parties themselves consider a key to effective treaty implementation (see, for example, Simma and Tams’s Article 60: Termination or suspension of the operation of a treaty as a consequence of its breach in the commentary of the Vienna Convention, edited by Corten and Klein). It follows that, had the Tribunal appropriately assessed the extent of harm that Slovenia’s actions inflicted on its independence and impartiality as key components of any arbitration, and had it taken the views of the parties into account, it would have found that Slovenia’s behavior destroyed an essential element of the treaty relation, which in the ICJ’s jurisprudence (paras. 216 et infra) amounts to material breach, giving rise to the right to terminate.
The fact that the Tribunal’s legal conclusions are based on evidently false premises is alarming. It shows a panel either disinterested in facts or unwilling to establish them and apply law. Whatever the true background, the end result is a troubling reality of a tribunal determined to continue to arbitrate even if it means conflating facts, ignoring procedural standards and propelling the parties to an interminable dispute. By deciding to continue its work, the Tribunal missed an opportunity to leave this arbitration process aside and bring Croatia and Slovenia closer to resolving their bilateral dispute through other means. Even more importantly, as an international judicial body, it failed to lead by example by reaffirming the fundamental legal and ethical standards in international arbitration, crucial to all states contemplating third-party dispute settlement mechanisms.
The views expressed herein are those of the authors and do not necessarily represent the views of the Ministry of Foreign and European Affairs of the Republic of Croatia.More from our authors:
Having disposed of yet another forest worth of pristine hearing bundles, I wonder: when will arbitration finally go paperless?
Gillian Lemaire asked the same question in a 2014 piece called “Where Do We Stand?” She looked at the legal and factual obstacles that paperless arbitrations face. Finding that, in reality, there were few, she proposed that much rests on individual case assessment, and joint efforts of tribunals and counsel.
One cannot but agree. At the same time, one cannot but wonder why, three years later, so little progress has been made. True, in a few exceptional cases, tribunals concede to paperless filings, and even hearings. But that is not the rule.
I think that it should be. Absent some elusive principle that justice can only be done on paper, there is nothing short of an award that must be printed, bound, packed, and shipped halfway around the world, usually only to suffer the fate of marketing collaterals. And, with portable screens now resolving better than the eye itself, hearings, too, can be paperless, obviating tedious flipping through pages and quests for missing printouts.
So why are they not? Commentators put it to apathy and aversion to new technologies. I would not agree. I witnessed the most seasoned of arbitrators wielding smartphones and tablets, often following the record not in the provided bundles, but on their devices. Yet, those same arbitrators (with commendable exceptions) also asked to be mailed hard copies of each and every brief, exhibit, and testimony; and instructed that hard copies of the entire record be made available in the hearing room.
Of course, arbitrators should have the right to ask for that. We all like to scribble, and paper does at times beat silicon. But this should be the exception, not the rule. Arbitral institutions should not just allow, but insist on paperless submissions, and discourage hearings with the carbon footprint of a small cruise ship. Counsel should take heed of the term core bundle: the largest of cases aside, those should never measure in truckloads.
But what is the last hurdle, at which general paperless arbitration still fails? I submit – and hope for an inspired discussion in the comments – that this hurdle is standardisation. In arbitration, we have technical standards for communication (email); submission (Word); documentation (pdf); remote collaboration (telco); document production (Redfern); and even exhibits are stamped identically in most cases. But no standard exists for interactive briefs, with formats and usability varying greatly; and much less so for hearing management software, despite the fairly limited number of actually needed features (display, highlight, possibly search).
The international arbitration community – institutions, arbitrators, counsel – should agree on such standards, and abide by them. Responsibility falls on all; but it should probably be the institutions who take the lead. After all, their reach is wider, their resources less strained, and their stance impartial. Together with the tribunals, they can ensure the equal treatment of parties, with no prejudice to those technologically disadvantaged.
Once we all turn and highlight electronic pages in the same way, we can bid adieu to the current lowest denominator of our profession—paper. Those few who cannot do without it may choose to opt in, but with local printing facilities replacing international shipping.
Those fearing costs: bear in mind that portable devices and software can be reused, but printing costs are always sunk. Staff costs stay the same. And those who consider making interactive briefs and electronic hearing bundles to be a formidable exercise: keep calm—it will almost certainly not be yourself doing it.More from our authors:
On 30 December 2016, The Singapore International Arbitration Centre (SIAC) finally released the first edition of its Investment Arbitration Rules (IA Rules). The IA Rules were first published as draft rules on 1 February 2016, and were discussed in a previous article. The IA Rules, which came into effect on 1 January 2017, now reflect more realistic timelines – undoubtedly in response to comments made during the public consultation process.
The IA Rules come at an important time, where a significant number of arbitral institutions continue to search for new ways of maximising business opportunities. Over the last few years, these institutions have sought to differentiate themselves in order to compete for high profile disputes. Leading regional institutions such as the Hong Kong International Arbitration Centre (HKIAC) and SIAC have seen a significant boost in the number of disputes that they handle annually. According to the 2015 Queen Mary International Arbitration Survey, both the HKIAC and SIAC are ranked within the top five most preferred arbitral institutions. This, in part, can be attributed to their proactive approach. Both institutions promote engagement via international roadshows, and other initiatives such as the tribunal secretary accreditation programme.
Over the last few years, Singapore and Hong Kong have been regarded less as competitors due to their unique geographical position; Singapore targets Southeast Asia, while Hong Kong caters for businesses situated in Northern Asia. However, international arbitration disrupts this model, as it is a form of dispute resolution that transcends international borders. Parties are increasingly willing to travel the extra mile, if they can benefit from flexible rules and the promise of the prompt resolution of their disputes.
Institutions such as SIAC have realised that, along with other forms of marketing strategies, one of the most effective means of enticing new parties to opt for arbitration is by revising former arbitration rules and introducing new ones. The IA Rules include several unique provisions which the 2016 SIAC International Arbitration Rules (SIAC Rules) do not feature. The SIAC Rules, which came into effect on 1 August 2016, are also a welcome update to the international arbitration landscape in Asia-Pacific.
The 2017 SIAC IA Rules are a specialised set of rules which aim to address issues relevant to investment arbitration. As they are essentially a hybrid of specialised investment arbitration rules and commercial arbitration rules, they are not a bespoke set of rules per se. Nonetheless, they are a welcome addition and parties need to familiarise themselves with their application.
Some key points to note are:
• The parties must agree to adopt the IA Rules in their agreements;
• The rules are applicable to disputes involving States, State-controlled entities, statutes, or other relevant instruments;
• The rules apply to any type of arbitration, and no objective criteria shall be considered (i.e issues regarding the existence of an ‘investment’ or ‘investor’). However, any requirements or restrictions in the underlying instrument shall prevail;
• If parties have previously agreed to adopt the 2016 SIAC Rules, they may subsequently consent to use the 2017 IA Rules instead.
Undoubtedly, the key selling point is that parties do not need to define an ‘investment’ as per Article 25(1) of the ICSID Convention. This not only broadens the scope of disputes that may be heard, but also promotes efficiency. Parties which seek to resolve disputes promptly, and are comfortable with strict deadlines, will also be attracted to these rules.
Features of the 2017 SIAC Investment Arbitration Rules
SIAC has introduced a number of innovative provisions in its IA Rules, which provide parties with greater latitude in conducting the arbitration process. They include:
1. Default list procedure – Rule 8: the SIAC Court is now able to adopt a default list procedure where parties fail to appoint their respective arbitrators. In the Draft IA Rules, the time limit for the appointment of either a sole arbitrator or multiple arbitrators was 28 days. The current IA rules now reflect a more lenient timeline, where Rules 6.2 and 7.2 provide for 42 days for a sole arbitrator and 35 days for multiple arbitrators. With respect to the appointment of the presiding arbitrator, Rule 7.3 has not been changed so the period is agreed by the parties or set by the Registrar.
2. Third Party Submissions – Rule 29: broadly, two situations exist. Firstly, Rule 29.1 allows a Non-disputing Contracting Party to make written submissions to the tribunal, provided that it gives notice to the Registrar and the parties. The tribunal may also, on its own initiative, invite a Non-disputing Contracting Party to provide written submissions. However, this is only on a question of treaty interpretation directly relevant to the dispute. Secondly, Rule 29.2 allows this to be extended to submissions regarding a matter within the scope of the dispute, provided that the Tribunal considers the non-exhaustive list in Rule 29.3 alongside the views of the parties.
3. Publication – Rule 38: unlike Rule 32.12 of the SIAC Rules which addresses the publishing of an award in a relatively limited manner, this provision provides complete transparency. It states that once parties have agreed to use the IA Rules, the parties shall be deemed to have allowed SIAC to publish information on proceedings. This information is limited to several key details such as the nationality of the parties and the tribunal, as well as the date of commencement, and whether proceedings are ongoing or terminated. Redacted excerpts may be published with respect to the reasoning of the tribunal, as well as decisions by the Court on challenges to arbitrators. Other, more identifying, information may only be published with the express consent of the parties to the arbitration.
The following provisions are also worth noting:
1. Third-party funding – Rule 24(l), Rule 33.1: the IA Rules tackle the issue of third-party funding directly. The tribunal has the power to order parties to disclose third-party funding arrangements, the identity of the funder, and any other details which the tribunal deems necessary. The tribunal may also take into account any third-party funding arrangements when apportioning the costs of the arbitration. Although other institutional rules have not addressed this, the HKIAC will likely be one of the first to revise its rules in order to reflect recent legislative developments in Hong Kong.
2. Opt-in Mechanism for an Emergency Arbitrator – Rule 27.4: parties may apply for emergency interim relief only if they expressly agree on the Emergency Arbitrator provisions.
3. Early Dismissal of Claims and Defences – Rule 26: as in Rule 29 of the SIAC Rules, the IA Rules allows parties to apply to the tribunal for the early dismissal of a claim or defence, provided that it is manifestly without legal merit or outside the jurisdiction of the tribunal. The IA Rules include an additional basis: that the claim or defence is manifestly inadmissible.
4. Challenges – Rules 12.1, 13.1: as in the SIAC Rules, the Draft IA Rules provided that the party who intends to challenge the arbitrator has a 14 day deadline. The current IA Rules now allow for a 28 day deadline. ICSID Rule 9(1) does not list a deadline, instead encouraging the party to act ‘promptly’. Similarly, the provision in the current IA Rules dealing with the decision on challenge now provides for 21 days as opposed to the 14 days in the Draft IA Rules. The SIAC Rules have a 7-day deadline. Rule 13.3 of the IA Rules also provides the arbitrator with the discretion to continue with proceedings during the challenge, whereas ICSID Rule 9(6) suspends proceedings.
5. Other Pertinent Deadlines – Rules 30.1, 30.3: the Draft IA Rules provided that the tribunal must declare the proceedings closed no later than 30 days after the last hearing or the filing of the last submissions. The current IA Rules amended this and are now aligned with ICSID’s approach, where no deadline exists. The deadline for the draft award has also been modified and is now 90 days from the date on which the tribunal declares the proceedings closed. This is in contrast to the 45-day deadline in the Draft IA Rules. Similarly, ICSID Rule 47 does not provide a deadline for the submission of the draft award.
It will be interesting to observe whether the revised rules will have a significant impact on the quantity and quality of disputes SIAC will administer over the next few years. With SIAC being the first arbitral institution to provide parties with two sets of rules, the question remains: will other institutions follow suit?
The 2017 SIAC IA Rules can be viewed here.More from our authors:
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Is an Arbitration Agreement in a Draft Contract Binding? Perspectives from the courts in Singapore and Switzerland
In BCY v BCZ  SGHC 249, the High Court of Singapore found that parties could not be bound by an arbitration agreement that was part of an unexecuted underlying contract. This post examines the analysis taken by the Singapore High Court vis-à-vis the Swiss Supreme Court, in a similar fact pattern.
The background to BCY v BCZ
BCY v BCZ concerned a proposed sale of shares in a company by the plaintiff to the defendant, subject to the execution of a mutually acceptable Sale and Purchase Agreement (SPA). After seven drafts of the SPA were exchanged, the plaintiff decided not to proceed with its execution. The defendant commenced arbitration proceedings pursuant to the International Chamber of Commerce (ICC) Rules of Arbitration, as provided for in the arbitration agreement of the SPA. The plaintiff objected to the arbitrator’s jurisdiction on the basis that there was no valid arbitration agreement (at ). The defendant’s position was that the arbitration agreement was concluded before the SPA (at –).
The choice-of-law analysis to determine the validity of the arbitration agreement in BCY v BCZ
In determining the validity of the arbitration agreement, the arbitrator relied on the seminal English Court of Appeal decision in Sulamèrica Cia Nacional de Seguros SA v Enesa Engenharia SA  EWCA Civ 638 (Sulamèrica) and found New York law (the governing law of the SPA) to govern the arbitration agreement (at ). Applying New York law, the arbitrator found the parties had “mutual assent” to be bound by the arbitration agreement, evident from the exchange of subsequent drafts of the SPA containing the same arbitration agreement and from the plaintiff’s readiness to sign the sixth draft of the SPA (at ).
In its review of the arbitrator’s decision, the High Court approved the Sulamèrica approach and similarly found New York law to govern the arbitration agreement. In adopting Sulamèrica, the High Court rejected the contrary approach taken by the Assistant Registrar in the earlier case of FirstLink Investments Corp Ltd v GT Payment Pte Ltd  SGHCR 12 (FirstLink). In that case, the Assistant Registrar found that, in the absence of contrary indication, in situations of “direct competition” between the law of the main contract and the law of the arbitral seat, it would be presumed that the latter would govern the arbitration agreement (at ). In this regard, Chong J was of the view in BCY v BCZ that there was no such competition in FirstLink because the only explicit reference to the laws of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) did not refer either to the seat of the arbitration (which, according to the SCC Rules, was to be determined by the Board of the SCC) or to the governing law of the main contract (at ). Nonetheless, in addressing the competing approaches in Sulamèrica and FirstLink, the High Court’s general findings are worth highlighting.
- ‘Free-standing’ arbitration agreements are stand-alone arbitration agreements not intended to be a term of any underlying contract. If these agreements do not contain an express choice-of-law, the significance of the arbitral seat indicated in the contract would be considered “overwhelming” and the law of the arbitral seat would most likely govern the arbitration agreement (at [44(a)]).
- Where an arbitration agreement forms part of an underlying contract, the express choice-of-law governing the underlying contract would be a strong indication that the parties intended the same law to govern the arbitration agreement (at [44(b)]). This presumption can be displaced either explicitly or implicitly. In the latter, the presumption will only be displaced if upholding it would negate the arbitration agreement in its entirety. In this regard, choosing an arbitral seat that is different from the law of the underlying contract or a minor inconsistency between the governing law and the main contract would not suffice to displace this presumption (at –).
- The substantive law of the seat of the arbitration is not necessarily more neutral than the governing law of the main contract (at ).
- Reference to the law of the seat of the arbitration in articles 34(2)(a)(i) and 36(1)(a)(i) of the UNCITRAL Model Law only arises for consideration in the absence of an express or implied choice-of-law. This brings the discussion back to whether the implied choice-of-law ought to be the law of the main contract vis-à-vis the law of the arbitral seat. This reference does not support a presumption in favour of the law of the arbitral seat (at ).
Notably, both parties in BCY v BCZ acknowledged that there was no material difference between New York and Singapore law on the validity of the arbitration agreement. The analysis of the position under one governing law would therefore be applicable to the other. Interestingly, while both the arbitrator and the High Court of Singapore found the governing law of the arbitration agreement to be New York law, their analysis led to contrary findings. The High Court found there was no objective evidence of the parties’ mutual intention to be bound by the arbitration agreement in the absence of the unexecuted underlying SPA; Chong J’s view was based on the premise that a party is well within its rights to make any amendments to the contract, including the arbitration agreement, before it is signed.
Can an arbitration agreement in a draft contract ever be binding?
While, within the factual matrix of this case, the Singapore High Court did not find that the circumstances in which the SPA was negotiated resulted in the formation of a legally binding arbitration agreement, there may well be circumstances in future cases that would reflect parties’ intention to be bound by the arbitration agreement independently and/or prior to the underlying contract. In a decision concerning the validity of an arbitration agreement in a draft contract, the Swiss Supreme Court found that the parties had agreed on the arbitration agreement during negotiation of the main contract, despite their not having signed the underlying contract. The parties, in this case, had initially exchanged comments about amending the specified arbitral seat contained in the arbitration agreement of the draft framework contract. However, the original proposed arbitration agreement remained in the draft and was never negotiated nor modified in further changes between parties. The Supreme Court opined that although the exchange of draft contracts containing arbitration agreements would not per se bind parties to it, there may well be “additional qualified circumstances” that could confer jurisdiction on the arbitral tribunal. Such circumstances include instances of prior contracts containing the same arbitration agreement, the parties’ objective intention to arbitrate their dispute and the exchange of draft contracts establishing their common intention to enter into an arbitration agreement, irrespective of the outcome of the main contract.
The relevant question for future tribunals and courts in similar cases will be to determine whether the circumstances leading to the execution of draft contracts manifests the parties’ intention to be bound by the arbitration agreement contained in it, independent and/or prior to the underlying contract. In this regard, if the arbitration agreement is found to be governed by either Singapore or New York law, BCY v BCZ would serve to offer guidance on the relevant circumstances where such intention is manifested. To establish this intent, parties would have to show more than mere agreement to the wording of the arbitration agreement, a proposal to include the arbitration agreement or an expression of readiness to sign the draft contract. Further, caution must be taken to ensure there is no ‘subject to contract’ qualification in the negotiations leading to and beyond the draft contract.
Doctrine of separability analysis in determining the validity of arbitration agreements in draft underlying contracts
In delivering its judgment, the High Court in BCY v BCZ was also of the view that there was no need to invoke the doctrine of separability in submitting that an arbitration agreement was concluded before the execution of the underlying contract (at ,  and ). This would be the correct approach in cases where parties do not submit that the governing law of the main contract is applicable to the arbitration agreement. As noted by the High Court, however, the difficulty arises in making both of the above arguments simultaneously (at ). In such scenarios, the doctrine of separability offers a tangible way to connect the arbitration agreement to the main contract, despite its seeming autonomy in having been concluded before the underlying contract.
As a final point, it bears nothing that the Singapore courts undertake a de novo review of the issue of whether an arbitral tribunal has jurisdiction (Sanum Investments Ltd v Government of the Lao People’s Democratic Republic  SGCA 57 at -). In comparison, the Swiss Supreme Court can only conduct a restrictive examination of an arbitrator’s decision and was, consequently, precluded from reviewing the parties’ intent to be bound by the arbitration agreement, in the above mentioned case, once the arbitrator had ruled (positively) on the same.