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Young ICCA Interview

3 hours 20 min ago

Young ICCA

Young ICCA

Gretta Walters is an Associate at Chaffetz Lindsey LLP in New York, where she represents individual and corporate clients in international and cross-border disputes in arbitration and in state and federal court. She has experience in arbitral proceedings under the arbitration rules of the International Court of Arbitration of the International Chamber of Commerce (ICC), the International Centre for Dispute Resolution (ICDR), and the Arbitration Institute of the Stockholm Chamber of Commerce (SCC). Prior to joining Chaffetz Lindsey, Gretta was an Associate at Mayer Brown, Legal Counsel at the SCC, and a Visiting Lecturer at Stockholm University.

Gretta is a Global Advisory Board member of ICDR Young & International (ICDR Y&I) and Secretary of the International Commercial Disputes Committee of the New York City Bar. She also co-coaches the Foreign Direct Investment and Vis International Commercial Arbitration moot court teams at New York University Law School. She received a J.D. degree from American University, Washington College of Law (Washington, DC) and an LL.M. in international commercial arbitration from Stockholm University (Sweden). She is admitted to the New York bar.

1. What drew you to the world of International Arbitration?

I first learned about International Arbitration through the Vis moot court competition, and—if I’m being totally honest—I really had no idea what it was. The moot offered the potential of traveling to Vienna for a week as a law student, which sounded great to me. As I immersed myself in the substance of the competition, however, I knew International Arbitration was a field that I was interested in pursuing. The Vis was unlike any of my other law school coursework— it forced me to approach legal problems more creatively and from different perspectives, while considering unique legal issues and cultural backgrounds— and I loved it.

2. When did you start laying the groundwork for a career in International Arbitration? (e.g., was it while in law school, during a moot court, during your career or placed on a case within your firm)

I unintentionally started laying the groundwork for my career when I joined the Vis moot court team in law school with an eye on a trip to Vienna. Interestingly, however, this initial involvement with the Vis has been a constant throughout my career—I went on from being a competitor, to a student coach, to a judge, and now to a co-coach of the NYU Vis team.

3. What kind of groundwork did you do to set yourself up? (e.g., what steps did you take to enter the field?)

Once I knew I was interested in pursuing a career in International Arbitration, I did what I could to get my foot in the door while I was still in law school. (I had seen the hundreds of students with ambitions similar to mine at the Vis in Vienna and recognized that International Arbitration is a competitive field to enter.) My approach was to learn as much as I could about International Arbitration and to begin to network with those already practicing in the field. I took all the classes my law school offered in arbitration, continued to participate in the Vis, and attended all the arbitration conferences and events (either as a participant or volunteer) that I could.

4. Describe a pivotal moment in your career in arbitration and how did that affect your career (e.g., an opportunity to work with a prominent arbitrator/on a pioneering case?)

The pivotal moment in my career was when I made the decision to move to Sweden to pursue an LL.M. in International Commercial Arbitration Law at Stockholm University. I anticipated that the experience would teach me a great deal more about International Arbitration, but I had planned to return to New York immediately after the program ended, where I primarily would be working in US litigation. My decision to move to Stockholm ultimately changed my plans and kicked off a chain of unexpected experiences and opportunities that shaped my career.
First, the Stockholm program gave me a network of classmates and alumnae from all over the world that are some of my closest friends and professional colleagues today. They have each been invaluable to me as I’ve grown throughout my career. Second, the experience gave me an incredible mentor, Patricia Shaughnessy, the head of the Stockholm program. Without the academic, professional, and personal advice from Patricia, who I like to call my arbitration mom, I know I would not be where I am in my career today. And third, the move to Stockholm led to positions at Stockholm University and at the SCC after I completed my studies. There, I experienced International Arbitration on new, practical levels, which have been formative in my development as an attorney. For example, at the SCC, I was exposed to seasoned practitioners and arbitrators from all over the world and got to observe different styles of advocacy and arbitrating. In addition, I learned firsthand how various aspects of the institutional process, like arbitrator appointments and challenges, function. My time in Stockholm also gave me the opportunity to meet practitioners in the field and develop my own network. One of those practitioners was James Hosking, whom, several years later, I am now working with at my current firm of Chaffetz Lindsey and am also lucky enough to rely on as another invaluable mentor.

5. If we look at arbitration as a battlefield, what are the three metaphorical weapons any lawyer needs, and why?

A level head, an open mind, and an eye for detail. When you are working under tight deadlines and passionately fighting for your client, it can be easy to get stressed and frustrated at the process, opposing counsel, your colleagues, and others involved in the case. But even in those moments (or maybe particularly in those moments), approaching problems or issues calmly and with an effort to understand other peoples’ perspectives will give you the most success.
These three weapons are also important when you approach a new case. Many of my recent cases at Chaffetz Lindsey have involved disputes over financial transactions or construction projects. Regardless of the subject matter, however, I’ve learned to approach a new case the same—there is no substitute for a careful review of the key details and documents to understand the issues. And keep an open mind about the issues—a dispute over the strength requirements of structural steel can be much more interesting than it may sound like at first!

6. Upon reflection, are there any decisions you made that you feel aspiring arbitration practitioners could learn from?

As I mentioned above, the decision to move to Stockholm changed my career, but making that decision was a risk for me. I was set to begin my career in New York, practicing in US litigation, and LL.M. degrees are uncommon for many US practitioners to pursue. But I was still interested in one day working in International Arbitration and thought that the Stockholm program could maybe lead to opportunities in the field. Once I decided to take the risk, I decided to give 100% to my time in Stockholm. I worked hard and jumped on every opportunity I could to pursue the career I wanted, even though it sometimes put me outside of my comfort zone. That combination of being willing to take a risk, working hard, and putting myself out there was what worked for me. I would encourage other aspiring arbitration lawyers to do the same!
Another decision I made early on in my career was to actively engage with the larger arbitration community. While I was a student, these efforts started with attending International Arbitration conferences and events. As a practitioner, I now try to take a more active role, such as by taking on leadership positions (like with the ICDR Y&I) and publishing and speaking on arbitration issues. These “extracurricular” activities keep forcing me to step outside of my comfort zone, but they are rewarding. I’ve developed a great network of colleagues, had the opportunity to travel to great locations (like Costa Rica in winter), and been involved in interesting projects (like a forthcoming book on enforcement issues in New York).

7. Is there any additional candid advice or insight that you can offer to assist those who are entering the field, deciding whether to enter the field, or already are in the field of International Arbitration?

Don’t neglect learning how to actually practice law in the courts of at least one jurisdiction. It’s easy to want to jump immediately into International Arbitration from day one of your career (I was guilty of this too), but, at least for me, learning how to be a lawyer in my home jurisdiction has been invaluable. After my time in Stockholm, I did end up starting my law firm career with a majority of my cases in US litigation, and I still balance my caseload between a mix of US litigations and International Arbitrations. Understanding how a domestic judicial and legal system operates in practice and learning how to navigate procedural and substantive issues in that system have made navigating the International Arbitration procedures and processes easier. In addition, litigation, in my experience, can put you before the court or opposing counsel more frequently than in arbitration and can give younger attorneys greater opportunities to develop written and oral advocacy skills, which can be transferred to arbitrations.

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Examining the Validity of Unilateral Option Clauses in India: A Brief Overview

Fri, 2017-10-20 00:09

Nishanth Vasanth and Rishabh Raheja

Young ICCA

The decision of the Singapore Court of Appeal in Wilson Taylor Asia Pacific Pte Ltd v. Dyna-Jet Pte Ltd ([2017] SGCA 32) added another chapter to the debate on the validity of unilateral option clauses (or ‘sole option clauses’) in contracts. The Singapore Court of Appeal reaffirmed the Singapore High Court’s decision to uphold the validity of a unilateral option clause, thus adding to the varying decisions on this question across jurisdictions since 2010. During this period, courts in the UK, Italy and Spain have upheld such clauses as valid, while those in France, Russia, Bulgaria, Dubai and Poland have struck down such clauses. In this context, the authors consider the challenges faced by unilateral option clauses in various Indian courts.


What are unilateral option clauses and why are they controversial?

A unilateral option clause is a dispute resolution clause which confers an exclusive right to elect a specific dispute resolution method, i.e., it provides the option of resorting to arbitration or litigation; however, this option is conferred upon only one party. Courts have had to consider whether they should uphold such clauses in the interest of party autonomy or intervene due to public policy considerations.

In the Clifford Chance Unilateral Option Clauses – 2017 Survey, it is noted that courts in the UK and several other Common Law jurisdictions have upheld unilateral option clauses as they represent the bargain of the parties, irrespective of the advantage the clause confers on one side. On the other hand, some jurisdictions such as Russia and Poland have found such clauses to violate the parties’ equality of arms and procedural rights, reading these as ‘bilateral’ and not ‘unilateral’ option clauses. There have been other jurisdictions such as Bulgaria, China, and some US State courts, where these clauses have been wholly invalidated on public policy grounds of ‘morality’, ‘good faith’, ‘fairness’ and ‘unconscionability’. Some other grounds include the absence of a potestative condition, legal uncertainty, and lack of consideration.


Position in India:

Decisions on the validity of unilateral option clauses have been few and far between in India, with the only notable decisions being rendered by the Delhi and Madras High Courts (HC):

1. In Bhartia Cutler Hammer v. AVN Tubes (1995 (33) DRJ 672), the Delhi HC held that a party could not have an exclusive right to initiate arbitration as the Indian Arbitration and Conciliation Act, 1996, presupposed that there must be a mutual arbitration agreement between the parties, and an opportunity for bilateral invocation. Notwithstanding parties’ express consent to such a clause, it would not be deemed a valid arbitration agreement.

2. In Emmsons International Ltd. v. Metal Distributors (2005 (80) DRJ 256), the Delhi HC arrived at the same conclusion as in Bhartia Cutler, based on different reasoning. The court observed that unilateral option clauses were void as they restrained one party’s recourse to legal proceedings, in contravention of Section 28 of the Indian Contract Act, 1872. The court noted additionally (without substantiation) that a unilateral clause would be void for being contrary to the public policy of India.

3. In Lucent Technology v. ICICI Bank (2009 SCC OnLine Del 3213), the Delhi HC again held a unilateral option clause to be invalid. The court relied on both Bhartia Cutler and Emmsons International and invoked Section 28 of the Indian Contract Act, 1872, implying that the party’s right to recourse through legal proceedings had been infringed.

4. The Madras HC decided to go against the tide in Castrol India Ltd. v. Apex Tooling Solutions ((2015) 1 LW 961 (DB)) and did not dispute the general principle that arbitration clauses need not necessarily have mutuality. However, on the facts, the court held that the party seeking to invoke arbitration through its sole option could not do so, having failed to object, and having even participated during the preliminary stages of litigation.

5. In a slight deviation from its previous decisions, the Delhi HC in Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. (MANU/DE/3204/2009), upheld the validity of a unilateral option clause. However, the impact of this decision on the position of the court is unclear, as the clause was upheld not under Indian law, but under applicable English law.

From the above decisions it would appear that the three grounds upon which unilateral clauses have been successfully challenged before the courts in India are – lack of mutuality, public policy, and restraint of a party’s right to legal proceedings. However, the Madras HC’s decision to uphold these clauses calls for closer scrutiny of these grounds. Should the Supreme Court of India examine the validity of unilateral option clauses under Indian law, some of the counter-grounds it could consider include:

1. The absence of an explicit requirement for mutuality in the Indian Arbitration and Conciliation Act, 1996. Section 7 of the Act lists out the requirements for a valid arbitration agreement and does not include the mutuality of invocation of the arbitration clause among these. At the most, the stipulation under Section 7 for there to be an ‘agreement by the parties’ requires mutuality of consent, and not mutuality of invocation or consideration. While the Madras HC relied on this lack of an explicit requirement for mutuality to uphold unilateral option clauses, the Delhi HC invalidated unilateral option clauses even when the presence of mutual consent was proven. The Delhi HC’s insistence on mutuality of consideration appears to stem from Section 25 of the Indian Contract Act, which invalidates agreements lacking consideration. This raises interesting questions of separability of the arbitration agreement— whether the consideration for the main agreement is sufficient for and coextensive with the arbitration agreement, or whether the arbitration agreement requires separate consideration through mutual rights of invocation? Adopting the latter approach could lead to an intriguing situation where the mutuality of consideration and invocation takes priority over the mutuality of consent to such a clause. The latter approach would also not account for a situation where the consideration for the unilateral option clause is present in the main agreement, through a substantive concession or benefit provided to the party without the unilateral option. These complex questions of Indian contract and arbitration law merit the careful consideration of the Supreme Court.

2. The 2015 Amendment to the Indian Arbitration and Conciliation Act, 1996, and its pro-arbitration tenor could also have an impact on the Supreme Court’s approach to unilateral option clauses. Specifically, the scope of ‘public policy’ as a ground for challenge of awards has been defined explicitly and enumerated exhaustively under the 2015 Amendment. The Delhi HC’s decisions invalidating unilateral option clauses on grounds of ‘public policy’ were pronounced prior to the Amendment. Thus, a re-evaluation of whether such clauses violate the recently revised ambit of public policy will be necessary. Moreover, the increasing commercial acceptance of unilateral clauses could also be a consideration under a public policy challenge in this new regime.

3. Section 28 of the Indian Contract Act, 1872, invalidates agreements in restraint of legal proceedings. The provision, however is attracted only when there is an absolute and not a partial restraint on legal proceedings. In this light, the mere provision of an option to one party does not necessarily and absolutely undermine the other party’s right to approach the default forum for dispute settlement. Thus, Indian courts may have to deal with this question on a case-by-case and clause-by-clause basis, preventing misuse, delay, and equivocation from the party with the unilateral option of forum.

4. In addition to determining whether the clause in question is an absolute restraint in the terms of Section 28, another question demanding scrutiny is the stated exception to Section 28. Exception 1 to Section 28 permits an agreement to refer to arbitration – it would not be considered invalid for restraint of a party’s right to pursue legal proceedings. None of the Delhi HC decisions cited above considered either the requirement for an absolute restraint, or this exception to Section 28, in invalidating unilateral option clauses. This thus calls for clarification by the Supreme Court.

Given the above considerations, the authors are optimistic that unilateral option clauses will be held valid under Indian law. The fact that the Delhi HC — which had consistently invalidated these clauses — has taken a step towards accepting these clauses in Fuerst Day Lawson is indicative of a positive shift of stance. Moreover, the Delhi HC’s recent reluctance to allow public policy challenges to awards in two of its decisions following the Amendment weakens the likelihood of a successful public policy challenge to unilateral option clauses. Despite these positive developments, it would be prudent for parties to avoid the incorporation of unilateral option clauses when there is a possibility that Indian courts may be involved. In the meantime, one can only hope that the Supreme Court thoroughly tests the above three grounds for challenge and arrives at a position best representative of Indian law, and most beneficial to parties.

The authors would like to thank Clifford Chance LLP and AZB & Partners for sharing detailed material with the authors on the validity of unilateral option clauses in several jurisdictions, including India.

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“Notwithstanding the Non-obstante clause” can the Courts refuse to refer Non-Arbitrable Disputes to Arbitration?

Thu, 2017-10-19 07:00

Sai Anukaran

Non-arbitrability of disputes is a ground for setting aside the arbitral awards under Sections 34(2)(b) and 48(2) of the Arbitration and Conciliation act 1996 (the “Act”), the award is against the public policy of India. Arbitrability, here, refers to the objective arbitrability of the disputes, i.e., whether the national law imposes any restriction on the resolution of the dispute by the arbitral tribunal.  However, in Indian law confusion has arisen as to whether the courts can at a pre-arbitration stage, i.e., at the time of referring parties to arbitration in pursuant to a valid arbitration agreement decide upon the arbitrability of the dispute. The Supreme Court of India in the Case of Booz Allen Hamilton v. SBI Home Finance ((2011) (5) SCC 532), held that:

 

Where the issue of `arbitrability’ arises in the context of an application under section 8 of the Act in a pending suit, all aspects of arbitrability have to be decided by the court seized of the suit, and cannot be left to the decision of the Arbitrator. Even if there is an arbitration agreement between the parties, and even if the dispute is covered by the arbitration agreement, the court where the civil suit is pending, will refuse an application under section 8 of the Act, to refer the parties to arbitration, if the subject matter of the suit is capable of adjudication only by a public forum or the relief claimed can only be granted by a special court or Tribunal. (Emphasis in italics added).

 

The Supreme Court further carved out a non-exhaustive list of six disputes that are incapable of being subject to private arbitration:

 

  • Disputes relating to rights and liabilities which give rise to or arise out of criminal offenses;
  • Matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;
  • Guardianship matters;
  • Insolvency and winding up matters;
  • Testamentary matters (grant of probate, letters of administration and succession certificate);
  • Eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction.

Further, the Supreme Court in Shri Vimal Kishor Shah v. Jayesh Dinesh Shah & Ors (Civil Appeal No. 8614 of 2016) further carved out a seventh category of dispute that is incapable of being subject to private arbitration: disputes arising out of trust deeds and under the Trust Act.

 

The 2015 amendment to Section 8 of the Act has, however, created uncertainty with respect to the court’s power to decide upon arbitrability of dispute at the pre-arbitration stage.

 

The amended Section 8 introduces a non-obstante clause, which reads as follows:

 

 . . . notwithstanding any judgment, decree or order of the supreme court or any other court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.

In contrast, Section 8 of the 2006 UNCITRAL Model Law and Section 45 of the Act provide that:

 

. . . unless it finds that the agreement is null and void, inoperative and incapable of being performed.

 

This phrase, however, does not find its place in Section 8 of the Act. Thus, a plain reading of amended Section 8 appears to have rendered nugatory the interpretation of courts regarding the arbitrability of disputes at the stage of Section 8. The amended Section 8 suggests that the courts can only inquire the prima facie existence of a valid arbitration agreement and leave the rest to be determined by the arbitral tribunal by virtue of the principal of Komptenz-Komptenz as enshrined under Section 16 of the Act. The courts only have the power to set aside the arbitral award under Sections 34(2)(b) or 48(2) of the Act on the ground that the subject matter of the dispute is not arbitrable as per the public policy of India

 

The Supreme Court in the case of Ayyasamy v. A. Paramasivam & ors (Civil Appeal Nos. 8245-8246 of 2016, decided on 04.10.2016), while dealing with a reference with respect to an agreement entered into prior to the 2015 amendment, have held in respect of Section 8 of the Act that

 

while mere allegation of fraud simplicitor will not confer jurisdiction on the courts to assume jurisdiction, however, in case of serious allegations of fraud the court can sidetrack the arbitration agreement.

 

Thus, the Supreme Court has imposed a restriction on arbitrability on account of fraud. However, the court in its judgment has not referred to the amended Section 8 and it is not clear whether the judgment was intended to be made applicable to the amended Section 8. If that were the scenario the judgment would be per incuriam in light of the amended Section 8 of the Act.

 

However, an alternate argument could be that serious fraud and non-arbitrability of the dispute would in itself affect the validity of the arbitration agreement. Even in such a case, it is doubtful if the court can undertake an in-depth analysis into the question of arbitrability (even on account of serious fraud) since the amended Section 8 of the Act restricts the power of the court to undertake only a prima facie view of the validity of the arbitration agreement. Thus, the decision in Ayyasamy is per incuriam, since the court would have to delve into the merits of the dispute to determine the degree of fraud.

 

The full bench of National Consumer Disputes Redressal Commission (NCDRC) in Aftab Singh v. Emaar MGF Land Limited & Anr. (Consumer Case No. 701 OF 2015, Order Dated 13.17.2017) while rejecting the plea of the respondent-builder to refer consumer dispute to arbitration, reiterated the view of Supreme Court in Booz Allen and Ayyasami that disputes governed by statutory enactments creating special tribunals (such as NCDRC) for a specific public purpose cannot be mandatorily referred to arbitration. The court further held that amendment to Section 8 of the Act does not intend to nullify erstwhile statutory interpretation of the Act by the courts and the sole purpose of the amendment is to curtail wide enquiry by the courts.

 

The effect of the non-obstante clause on pre-arbitral jurisprudence by the courts is yet to be determined by the Supreme Court. Once the parties to a dispute have agreed to resolve their disputes through binding arbitration, the purpose of arbitration would be defeated and precious time of the parties would be wasted in the determination of the validity of arbitration agreement before the national courts. This apprehension was also taken into account by Chandrachud, J. while delivering the judgment in the case of Ayyasamy v. A. Paramasivam & ors. Therefore, the correct view would be that while non-arbitrable disputes should not be referred to arbitration, the courts under Section 8 have only a limited scope of interference and cannot undertake an in-depth analysis into the merits and arbitrability of disputes at a pre-arbitration stage. Further, a dispute should be categorized as non-arbitrable only on limited grounds, in cases of compelling public interest.

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Ineligible Arbitrator Also Ineligible to Nominate Arbitrator: Indian Supreme Court – Does the Judgment Open Pandora’s Box?

Wed, 2017-10-18 07:00

Pranav Rai

This post critically examines the recent Supreme Court judgment in TRF Limited vs. Energo Engineering Private Limited where the court held that a person who is ineligible to be appointed as an arbitrator cannot even nominate an arbitrator. This judgment was in the context of a unilateral arbitration clause (“unilateral clause”) in which one party had control over the appointment of the arbitrator.

 

The arbitration clause here provided that, any dispute connected to the agreement is to be referred to sole arbitration of one party’s (Respondent’s) Managing Director (subsequently referred to as “official” for apposite appreciation) or his nominee. The official was ineligible to be appointed an arbitrator here in view of the Seventh Schedule (taken and adapted from the Red List of IBA Guidelines and inter alia prescribing ineligibility criteria for a party’s official being appointed arbitrator) of the arbitration statute (“Act”) and this ineligibility was not even contested between the parties.

 

The question before the court was whether such official was also ineligible to nominate an arbitrator. Relying on the maxim qui facit per alium facit per se (“the Principle”), i.e., what one does through another is done by oneself, or as elaborated by court, what cannot be done directly may not be done indirectly by engaging another outside the prohibited area, the court concluded in the affirmative.

 

Albeit the case settles the law on such unilateral clauses, I would argue that it raises issues with respect to unilateral clauses in general causing confusion and uncertainty.

 

General legal principle prevailed over legislative intent. The Act, which is based on UNCITRAL Model Law and also underwent extensive amendments in 2015 to address several issues that plagued the arbitration regime in India, nowhere suggests a legislative intent to make an arbitrator’s appointment/nomination dependent upon his appointer’s/nominator’s eligibility. Sufficient ineligibility criteria for arbitrator were already provided in the Act. For example, to protect against violation of natural justice (that an interested person cannot be an adjudicator), the Act inter alia provided for Fifth Schedule (taken and adapted from the Red and Orange List of IBA Guidelines) and Seventh Schedule. With a self-sufficient Act (at least with respect to arbitrator’s ineligibility) and absence of any legislative intent to add additional ineligibility criteria, the rationale for applying the Principle to arbitrator appointment/nomination is not entirely clear.

 

In support of the judgment, it can be contended that there was not much occasion for the court to consider the true legislative intent or the sufficiency of the arbitrator ineligibility grounds present in the Act. Since, a) the court applied a general legal principle, so the legislative intent for the Act and the arbitration principles are not relevant in this context; b) neutrality of arbitrator was not even an issue here and the court clarified that it was never its concern that the nominated arbitrator (a retired judge) would not be independent or impartial; and c) its only concern was the legal issue that it was inconceivable that a statutorily ineligible person can nominate a person, so adequacy of the ineligibility grounds in the Act are also not relevant.

 

The court should have considered the legislative intent regarding the objectives of alternate dispute resolution and principles of party autonomy, the sanctity of arbitration agreement and arbitrator neutrality, and then should have weighed them against any wrong likely to happen if the Principle is not applied here. It is also my argument that since arbitrator neutrality was not a concern here and the appellant was raising the ineligibility argument only as a legal point, the Principle should be applicable only if it can be applied consistently for all other arbitrator appointments (unilateral and mutual). But as has been discussed below, application of the Principle on all kind of arbitrator appointments would result in unintended consequences which makes it all the more important for the court to have considered the legislative intent here before selectively applying the Principle.

 

Why should the Principle not apply to mutual appointments? The judgment does not clarify why the Principle is not applicable to mutual appointments, where, a) each party appoints its own arbitrator; or b) parties mutually appoint a sole arbitrator, since even in these cases appointments will effectively be made by the (ineligible) official of each party (presuming that the parties are body corporate and thus can only act through its officials). The court distinguished the present unilateral clause from the situation in point a), stating that in such cases authority to nominate cannot be questioned, but it did not expressly distinguish it from point b). Notwithstanding this, it is apparent that the court did not intend to apply the Principle in case of mutual appointments for the obvious (but insufficient) reason that if the Principle is applied even to those cases, then the arbitration mechanism will not be able to function.

 

The reason for such selective application of the Principle to the present unilateral clause, but not to mutual appointment clauses, may have been the arbitrator’s neutrality aspect (as it would arguably be questionable in the case of unilateral clauses). But since arbitrator neutrality was not a concern for the court here, it is not entirely clear what this selective application of the Principle achieves in this case.

 

Uncertainty on how far the Principle can be stretched in other unilateral clauses. This was an “either/or” case in which the unilateral clause provided either the official will be the arbitrator, or he can nominate the arbitrator. So, the court had to first consider whether he was eligible to be an arbitrator. Only after this was determined (or in this case agreed by the parties) did the court conclude that ineligibility to be an arbitrator also means ineligibility to nominate one.

 

It is unclear what the fate is for unilateral clauses that give the official only a power to nominate/appoint (and not be a named arbitrator), as in such event the court will not get an opportunity to decide the official’s ineligibility. Will the courts still apply the Principle in such other unilateral clauses by using the Principle itself as a rationale for its application? In other words, can the courts say that it is immaterial whether or not the official was also a named arbitrator, and that the Principle should be applied even to such cases? Otherwise, it would be akin to allowing the official to do the same thing indirectly what he is not allowed to do directly. Logically, the answer should be “no,” because stretching the Principle so far would mean that all unilateral appointment clauses (or at least the unilateral appointment part therein) are invalid. Nevertheless, a question mark remains on the fate of such other unilateral clauses since there is no clear line drawn by the court on how far the Principle can be stretched vis-à-vis unilateral clauses.

No heed to Competence-Competence doctrine. While authorities were cited by Respondent to establish that authority of arbitration can be challenged only before the arbitrator, the court distinguished them on facts and relied upon another authority postulating that an appointment which is ex facie invalid cannot be raised before the arbitrator. On this basis, the court noted that it is incorrect to say that the arbitration proceedings once initiated cannot be interfered with by the courts while exercising its powers in relation to the appointment of an arbitrator and that a statutory disqualification (such as the one in present case) can be raised before the court.

 

Setting up of such precedence may result in undesirable consequences for the whole arbitration system. Encouraged by this ruling, several arbitration appointments under unilateral clauses may now be challenged in courts by the party that did not have a say in the appointment and matters that were intended to be arbitrated will now be litigated. Also, the High Courts may rely on this judgment and entertain such challenge applications and determine the eligibility of the appointed arbitrators themselves at the cost of Competence-Competence doctrine.

 

Conclusion. This judgment effectively adds one more ineligibility criterion to the already loaded Seventh Schedule, despite the fact that such criterion is not at all related to arbitrator’s neutrality. Uncertainty regarding enforceability of unilateral clauses (other than the one in the present case) will likely increase and the party challenging unilateral clauses will be armed with one more ground of challenge in the form of the Principle, until the court clarifies the limits to which the Principle can be stretched. A quicker and foolproof solution can be by way of a much-needed legislative intervention clarifying the position on unilateral arbitration clauses.

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Kluwer Mediation Blog: September Digest

Tue, 2017-10-17 03:41

Anna Howard

From cultural confusion to cognitive biases and recent apology legislation in Hong Kong, the recent posts on the Kluwer Mediation Blog continue to address a compelling assortment of topics.

In Cultural Confusion – A Good Thing for Mediation?, Nadja Alexander shares an encounter she had with a group of mediators to highlight the cultural confusion surrounding mediation. Nadja then considers the shift to a recognition of the real diversity of mediation practice.

In the Elephant in the Room – Part 1, Sabine Walsh explores what distinguishes mediators who get work from those who struggle to do so. In the second part of this series, Sabine will identify what successful mediators do differently and the lessons we can learn from them.

In Hong Kong Apology Ordinance, Ting-Kwok IU provides a comprehensive summary of Hong Kong’s Apology Bill which will become law on 1 December 2017. This is the first piece of apology legislation in Asia.

In ADR in Consumer Conciliation – The Example of the German Conciliation Body for Transport (Söp), Greg Bond shares his interview with Edgar Isermann, Söp director. Topics addressed include how the conciliation process works, how Söp measures its success, the value of conciliation and the future of conciliation and ADR.

In Your Truth, My Truth And The Truth, Charlie Woods draws on a recent CIArb Mediation Symposium in London at which Kenneth Cloke, John Sturrock and Charlie discussed some of the biases that can have most influence on conflict and its resolution. Charlie then identifies tools which mediators can use to address these biases.

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The Dubai-DIFC Judicial Committee and DIFC Conduit Jurisdiction: A Sequel in Four Parts – Game over? (Part 4)

Sun, 2017-10-15 17:40

Gordon Blanke

This is the final one in sequel of four parts on the status of the DIFC Courts as a conduit jurisdiction. It reports on a further number of recent decisions of the Dubai-DIFC Judicial Committee – also known as the Judicial Tribunal or in shorthand the JT – that question the DIFC Courts’ role as a conduit jurisdiction in the recognition and enforcement of arbitral awards for onward execution in mainland Dubai. Two of these decisions consolidate the position that it is the onshore Dubai courts – and not the DIFC courts – that retain proper jurisdiction for the recognition and enforcement of awards in onshore Dubai absent any geographic link to the DIFC. Both these decisions have met with strong criticism from the DIFC members of the JT, led by the Chief Justice of the DIFC Courts Michael Hwang. A third decision appears to confirm that despite the controversial developments of the JT’s case law, the concept of the DIFC conduit survives for now. Read in their proper context, there is even an argument for saying that these recent decisions preserve an opportunity for the JT to rely on a first-seized rule – in the terms that I have presented in previous blogs – as an ultimate solution to the jurisdictional dilemma between the Dubai and DIFC Courts.

 

The first decision (Cassation No. 1/2017 – Gulf Navigation Holding PJSC v. Jinhai Heavy Industry Co Ltd, hearing of 22nd May 2017) deals with a jurisdictional conflict between the Dubai Centre for Amicable Settlement of Disputes, which forms part of the Dubai Courts, (the “Settlement Centre”) and the offshore DIFC Courts in relation to the recognition and enforcement of a New York Convention award rendered in London under the London Maritime Arbitration Association (LMAA) Rules. The award found in favour of Jinhai Heavy Industry Co Ltd (JHIC), Chinese shipbuilding enterprise, ordering Gulf Navigation Holding PJSC (GNH), a UAE-incorporated company, to pay JHIC an outstanding installment of USD 14.55 million plus interest under a shipbuilding contract concluded with JHIC as builders in 2011. In October 2015, GNH failed in an application for setting aside before the English courts given the “unarguable” nature of the application. JHIC, as award creditor, secured an ex parte order for recognition and enforcement of the award from the DIFC Courts in December 2016, relying on Art. 42 of the DIFC Arbitration Law (see DIFC Law No. 1 of 2008), which, in turn, replicates the enforcement provisions of the 1958 New York Convention (on the recognition and enforcement of foreign arbitral awards). By way of reminder, pursuant to Art. 42(1) of the DIFC Arbitration Law, the DIFC Courts are bound by international enforcement instruments that bind the UAE, including for present purposes the New York Convention. Importantly, GNH did not challenge the DIFC Court order for recognition and enforcement and has hence to be taken as having accepted the supervisory jurisdiction of the DIFC courts. In early February 2015, i.e. around eight months before JHIC’s application for recognition and enforcement before the DIFC Courts, GNH filed a claim with the Settlement Centre seeking the appointment of an expert for examination of the issues that had already been decided in the earlier arbitration and that were therefore res judicata. Nevertheless, the majority of the JT found that “[a]ccording to the general principles of laws embodied in the procedural laws and since Dubai Courts have the general jurisdiction, […] they are the competent courts to entertain this case” (see Cassation No. 1/2017, p. 4). Further, the majority concluded that “[…] this case is not similar to cases in which the Courts apply the provisions of the New York Convention 1958 because the two courts are in one Emirate, viz, Dubai Emirate).” (ibid.)

 

In a dissenting opinion of 4 June 2017 (Cassation No. 1/2017, Dissenting Opinion), Chief Justice Michael Hwang, Deputy Chief Justice Sir David Steel and H.E. Justice Omar Al Muhairi – all three of the DIFC Courts – categorically disagreed with the JT’s findings: There was no principle of general jurisdiction according precedence to the onshore Dubai Courts in the event of a jurisdictional conflict between the onshore and offshore courts (see Dissenting Opinion, para. 16). To the contrary, a combined reading of Art. 5(A)(1) and Art. 5(A)(1)(e) of the Judicial Authority Law (see Dubai Law No. (12) of 2004 as amended), which defines areas of exclusive jurisdiction of the DIFC Courts, including in particular “[a]ny claim or action over which the Courts have jurisdiction in accordance with DIFC laws and DIFC Regulations”, such as Art. 42(1) of the DIFC Arbitration Law (see Dissenting Opinion, at paras 17-19), militate in favour of the DIFC Courts’ exclusive jurisdiction in the present circumstances. Further, the majority’s statement on the New York Convention was “an incorrect statement of international law” (Dissenting Opinion, at para. 21): “If the DIFC [Courts] were to be prevented from enforcing this foreign Award, this would place the UAE in breach of its obligations under Article III of the New York Convention, which requires all States which have acceded to the Convention to enforce foreign awards.” (ibid.) According to Hwang, Steel and Al Muhairi, Art. 4 of Decree 19 of 2016 (establishing the JT) require the JT to determine conflicts of jurisdiction “in accordance with the legislation in force and the rules of jurisdiction applicable in this regard”, including the DIFC Courts’ exclusive jurisdiction to interpret the DIFC’s laws and regulations, and not general principles of law in the terms wrongly stipulated by the majority (see Dissenting Opinion, at paras 22-23).

 

No doubt, the JT’s reliance on the general jurisdiction of the Dubai Courts taking precedence over the DIFC Courts challenges a natural reading of the distribution of competence between the onshore Dubai and offshore DIFC courts pursuant to the existing laws and regulations in the terms outlined by the JT’s dissenting members. The Dubai Courts are simply not hierarchically superior in jurisdiction to the DIFC Courts, both courts qualify, constitutionally speaking, as UAE courts with their respsective jurisdictional limits defined in the prevailing legislation. Pursuant to that legislation, the DIFC Courts are clearly competent to hear applications for ratification and enforcement of both domestic and foreign arbitral awards, even absent any assets of the award debtor in the DIFC. The onward execution of DIFC Court orders for the ratification and enforcement of those awards in onshore Dubai, in turn, is sanctioned by the regime of mutual recognition in place between the Dubai and DIFC Courts by virtue of Art. 7 of the Judicial Authority Law. In relation to foreign awards, the enforcement obligations under the New York Convention add further weight to this position, requiring the DIFC Courts to comply with the terms of the Convention in their capacity as a UAE court. The only way that the JT could reconcile its present position with the statutory status quo is by introducing a first-seized rule, the court first seized taking jurisdictional precedence on a case-by-case basis (on the present facts, the Settlement Centre was seized first by the award debtor, i.e. before the award creditor filed an application for recognition and enforcement with the DIFC Courts and could be attributed preferential jurisdiction on that basis). On a further note, though, it is not clear whether the JT had proper jurisdiction in the present circumstances in the first place given that (i) the recognition and enforcement proceedings before the DIFC Courts were already complete at the time of GNH’s application to the JT and (ii) the subject matter of that application (appointment of an expert) was different from the subject of the dealings before the DIFC Courts (recognition and enforcement), there being hence no competing proceedings between the onshore and offshore Dubai Courts nor a risk of contradictory outcomes.

 

In the second decision (Cassation No. 3/2017 – Ramadan Mousa Mishmish v. Sweet Homes Real Estate, hearing of 22nd May 2017), the JT relies upon the same rule (read: assumption) of general jurisdiction, finding in favour of the jurisdiction of the onshore Dubai Courts. That case dealt with the recognition and enforcement of a domestic award (rendered under the DIAC Rules in Dubai) before the DIFC Courts for onward execution in onshore Dubai, i.e. a classic conduit jurisdiction case. The award debtor, Mr. Ramadan Mousa Mishmish, filed for nullification before the onshore Dubai Courts sometime in 2016 whilst the award creditor, Sweet Homes Real Estate, secured a DIFC Court order for recognition and enforcement in March 2016. That order remained unchallenged. The dissenting members of the JT – again Hwang, Steel and Al Muhairi – confirmed that “while the Dubai courts have sole jurisdiction in regard to the validity of the award [Dubai being the seat of the arbitration and the onshore Dubai Courts having curial jurisdiction over an award rendered there], there is concurrent jurisdiction in regard to enforcement.” (see Cassation 3/2017, Dissenting Opinion of 5 June 2017, at para. 11). Further, the dissenting members found that there was no jurisdictional conflict given the concurrent jurisdiction for enforcement of the onshore and offshore Dubai Courts (ibid., at para. 13). One may add that there further is a pre-requisite of proceedings being pending before both courts at the time of the application to the JT, which is not the case here (this application only having been filed in January 2017). Whatever the formal points that could be raised against the proper competence of the JT, the JT’s findings in the present case would only be compatible with the existing statutory status quo if the JT were to introduce a first-seized rule (the nullification proceedings before the onshore Dubai Courts having been initiated before the award debtor’s application for recognition and enforcement before the DIFC Courts).

 

In the third decision (Cassation No. 5/2017 – Emirates Trading Agency LLC v. Bosimar International N.V., hearing of 22nd May 2017), the JT confirmed that there was no conflict of jurisdiction between the onshore and offshore courts (there being no proceedings pending before the onshore Dubai Courts), thus rejecting the application. The JT confirmed that the DIFC Courts had issued a final and binding order for recognition and enforcement of a foreign award rendered in London and that the JT was not competent to hear questions of the constitutionality of the DIFC Court’s conduit jurisdiction (such determinations being reserved for the Union Supreme Court under Art. 99 of the UAE Constitution).

 

Taking the above developments in the round, the game for the DIFC Courts as a conduit is not quite over yet. Importantly, given that the JT decisions are not binding on future JTs, there is a chance that going forward, the general jurisdiction assumption which presently forms the basis of the JT’s support for the attribution of preferential jurisdiction onshore, may be substituted with a first-seized rule that will accord jurisdictional precedence to the court first seized, whether onshore or offshore. Such an approach would be compatible with the existing regime of mutual recognition in place between the Dubai and DIFC Courts under Art. 7 of the Judicial Authority Law and mark a promising way forward in the co-operation between the onshore and offshore Dubai Courts.

 

 

 

 

 

 

 

 

 

 

 

 

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New Arbitration Act in Hungary

Sun, 2017-10-15 01:08

Zoltán Novák

Young ICCA

The Hungarian Parliament has recently adopted a new Act on Arbitration, which will enter into force on 1 January 2018 (the Act). The new Act (based on the UNCITRAL Model Law on International Commercial Arbitration as amended in 2006 (the Model Law)) implements changes that are likely to have a considerable impact on the Hungarian dispute resolution landscape. The previous Arbitration Act from 1994 was based on the 1985 UNCITRAL Model Law, but it was found to be outdated in several aspects. The new Act basically applies the same rules for domestic and international arbitration but provides that, in the case of international arbitration, the presiding arbitrator should have a nationality different from that of the parties.

The new Act adopts the Model Law’s broad concept of arbitrability. Previously, arbitration was restricted to cases in which the parties could “freely dispose of the subject matter”. In the new Act arbitration is defined simply as a dispute resolution method chosen by the parties in the event of a dispute arising from a commercial relationship. The term “commercial” covers all commercial or business matters, whether contractual or not. Only certain special procedures – like family or employment matters – and consumer cases shall be excluded from arbitration. The new approach may mean that the range of arbitrable matters shall widen in the future.

The new Act adopts the provisions on interim measures and preliminary orders included in the Model Law. Accordingly, the arbitral tribunal can – at any time prior to the award – order a party to maintain or restore the status quo, to take actions preventing harm or prejudice to the arbitral process or to preserve evidence relevant to the case. If the tribunal considers that prior disclosure of the request for interim measure would jeopardize its purpose, it may grant a preliminary injunction without hearing the affected party.

The new Act also contains new provisions that have not been taken from the Model Law but had been inspired from from ordinary litigation procedure. One of these innovations is the opportunity of intervention. Upon the request of any of the parties, the arbitrators can invite a third party to join that party in order to support its cause. The intervener may submit evidence and take part in hearings.

Another important litigation concept the new Act introduces into arbitration is retrial. In case any relevant new fact or evidence emerges within one year upon receipt of the award that was not known at the time of arbitration, a party may request retrial of the case by the arbitral tribunal. If the retrial is likely to succeed, the arbitrators may suspend the enforcement of the contested award. This procedure may go against the principle of finality of awards but its applicability is very limited and the parties can exclude its application in the arbitration agreement.

The law also tries to increase the accountability of arbitrators by providing that arbitration will become free of charge with regard to arbitrators’ fees in case the award is set aside. This means that the arbitrators shall reimburse their fees to the parties if the award rendered by them does not stand up to scrutiny by the courts. This rule might encourage arbitrators to conduct proceedings more carefully.

Another change in the landscape is that the leading Hungarian arbitration institution (the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry) will merge with two specialised arbitration courts (the Permanent Arbitration Court for Energy Matters and the Permanent Arbitration Court for Money and Capital Markets) to form the “Commercial Arbitration Court”. This new arbitration institution will have almost complete jurisdiction to act as the permanent arbitration court for the administration of arbitration cases in Hungary. Only sport and agricultural matters shall retain their specialized arbitral institutions. Apart from these courts, only ad hoc arbitration tribunals may be set up to hear individual cases.

A practical example of the possible impact of the new Act concerns avoidance actions in liquidation procedures. If the receiver of a company under liquidation files a court action for the avoidance of a contract containing an arbitration clause, the other contracting party as defendant often moves for the court to refer the dispute to arbitration. Under the previous law, courts usually declined such motions holding that such cases were not arbitrable. In reaching this conclusion, courts referred to two main reasons: First, the parties no longer disposed freely of the subject matter because, in the context of liquidation, the interests of creditors of the insolvent company also needed to be taken into account. Second, the unavailability of intervention made the assertion of these third party interests practically impossible in arbitration. In the new Act, both obstacles have been removed, which may cause courts to reconsider the issue of arbitrability of avoidance actions and honour arbitration clauses even in contracts challenged during liquidation. Of course this would be a most welcome change for foreign investors, who expect arbitration clauses to preclude state courts from any interference with their contract and particularly from declaring it void.

All in all, the above mentioned changes might help international investors to feel more comfortable in doing business in Hungary by having the safeguard of a modern dispute resolution system.

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Open Positions: Assistant Editors of Kluwer Arbitration Blog

Sat, 2017-10-14 01:04

Crina Baltag (Acting Editor)

The Editorial Board of Kluwer Arbitration Blog announces the opening of the following positions with Kluwer Arbitration Blog: Assistant Editor for Europe, Assistant Editor for Asia (Hong Kong and PR China) and Assistant Editor for Africa.

The Assistant Editors report directly to the Associate Editors and are expected to (1) collect, edit and review guest submissions from the designated region for posting on the Blog, while actively being involved in the coverage of the assigned region; and (2) write blog posts as a permanent contributor. You have the opportunity to work with a dynamic and dedicated team and liaise with some of the best arbitration counsel in the world.

The Assistant Editors will work remotely. Please note that this is a non-remunerated position. If you are interested, please submit a resume and cover letter by email to [email protected], with cc to [email protected] The deadline for receiving applications is 25 October 2017.

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Closing the umbrella: a dark future for umbrella clauses?

Thu, 2017-10-12 21:00

Raul Pereira de Souza Fleury

In December 2015, I published an article examining whether there was a trend towards the elimination of umbrella clauses from investment agreements, be they bilateral, multilateral, or model investment treaties. By that time, model bilateral investment treaties (BITs) from the United States, France, Canada, Colombia, and the Southern African Development Community (SADC) and many prominent multilateral investment agreements, including the NAFTA and the ASEAN-Australia-New Zealand FTA, did not contain umbrella clauses. The position against umbrella clauses was clear.

Furthermore, the much anticipated Trans-Pacific Partnership (TPP) and EU-Canada Comprehensive Economic and Trade Agreement (CETA) showed signs that they would not contain umbrella clauses, as well as other important jurisdictions in updating their model BITs, such as India and Norway.

 

The landscape today

According to the United Nations Conference on Trade and Development (UNCTAD), 52 new investment agreements have been signed since December 2015. In addition, the model BITs from Norway and India were approved. Thus, we have 54 new instruments relating to investment protection. Of these 54 instruments, only two (3.7%) contain an umbrella clause, namely, the Austria-Kyrgyzstan BIT and the Japan-Iran BIT.

While it is not known whether there are more investment agreements that have not yet become public, the trend seems clear and it can be explained by the comments made in 2007 to the draft Norwegian model BIT: “[t]he point of departure for the work on a new model agreement has been that the Arbitration Tribunal shall only be able to consider alleged breaches of the standards in the interstate investment agreement.” This comment reflects the main concern with umbrella clauses:  the difficulty to determine whether or not they can work as a “bridge” to bring claims arising from contractual relations into the sphere of investment treaty protection.  This concern is shown in the variety of forms and scenarios in which the application of umbrella clauses is an issue:

  • The difference between contract claims and treaty claims;
  • The requirement of exercising sovereign authority (puissance publique) which has the effect of breaching a contract;
  • Whether the umbrella clause supersedes a forum selection clause contained in a public contract;
  • Whether shareholders and parent companies that did not sign the public contract can benefit from the umbrella clause;
  • Whether sub-state entities that signed the public contract are covered by an umbrella clause.

 

The issue of inconsistency

Each of these issues has been addressed by arbitral tribunals, which have provided different answers. Take for example the landmark SGS cases against Pakistan (ARB/01/13), the Philippines (ARB/02/6), and Paraguay (ARB/07/29). Each of these cases dealt with almost identically worded umbrella clauses; however each tribunal interpreted the umbrella clause in a different way. In SGS v. Pakistan, the tribunal held that “in the face of a valid forum selection clause,” there was no need to elevate claims grounded in a contract to treaty claims. Just a year later, the tribunal in SGS v. Philippines held that an umbrella clause “provide[s] assurances to foreign investors with regard to the performance of obligations assumed by the host State under its own law with regard to specific investments”; however, it decided to stay the arbitral proceedings in order to wait for the Philippine courts to decide the amount of money the government owed SGS. Finally, the tribunal in SGS v. Paraguay adopted a different and broader interpretation, holding that the ordinary meaning of the word commitment in the umbrella clause clearly encompassed contractual obligations, and that the clause “provide[d] no basis for excluding contracts from the scope of ‘commitments’ covered in the [umbrella clause].”

What is even more worrisome is that the set of facts in each of the SGS cases was basically the same: the breach of a service contract for pre-shipment inspection. And over the years different tribunals have followed not one of the interpretations given by the SGS cases, but all three of them, as some examples summarized in the following chart:

SGS v. Pakistan Interpretation SGS v. Philippines Interpretation SGS v. Paraguay Interpretation – Toto Construzioni v. Lebanon

– Salini v. Jordan

– El Paso v. Argentina

– Siemens v. Argentina

– Joy Mining v. Egypt – BIVAC v. Paraguay

– Bosh v. Ukraine – Eureko v. Poland

– Noble Ventures v. Romania

– Burlington v. Ecuador

– Duke Energy v. Ecuador

The other issues cited above also had different interpretations, adding more fuel to the debate of whether an umbrella clause encompasses contractual claims and, if so, under what circumstances. Unfortunately, a consensus has not been reached, and this is showing in treaty practice. While tribunals do struggle in finding the correct interpretation of other treaty standards like fair and equitable treatment, full protection and security, and expropriation, these standards establish clear obligations for states.  In contrast, the main purpose of an umbrella clause is more ambiguous:  to bring under the “umbrella” of the treaty obligations of the state that arose out of a different instrument, i.e., a contract.

The generic language of umbrella clauses has contributed to intense debates since the first SGS case and continues to do so. Yet, treaty practice shows a trend towards the elimination of the umbrella clause from investment agreements. Notwithstanding this perceived new trend, umbrella clauses are still present in new treaties. In this sense, it is worth mentioning the wording of the one contained in the Austria-Kyrgyzstan BIT, which clarifies that “the breach of a contract between the investor and the host State will amount to a violation of this treaty.” That wording would provide more certainty in adjudicating future cases under this particular BIT; however, it might be too late for others.

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Ecuador’s Ordeal: Is International Jurisdiction a Journey with No Return? (Part I)

Wed, 2017-10-11 21:05

Enrique Jaramillo

“BITs and arbitration centers, such as ICSID, are an expression of an unjust moral order”, said Ecuador’s former President, Rafael Correa, back in 2014. Such animadversion led the country to denounce all its bilateral investment treaties (BITs) earlier this year. The Latin American nation’s feud with BITs and the International Centre for Settlement of Investment Disputes (ICSID), however, can be traced back far before that.

It is the purpose of this two-part post to assess the situation of investors in Ecuador vis-á-vis the country’s efforts to elude the substantive and procedural protections afforded by investor-state dispute settlement (ISDS).

This first part begins with a review of the law governing entering and denouncing the ICSID Convention (the “Convention”), as well as of an important debate on the effects of withdrawing from it. Then, it goes on to revise Ecuador’s concrete steps to distance itself from ISDS; from the first BITs terminated back in 2008 to the last note verbale denouncing Ecuador’s final BIT in 2017.

The second part, to be posted in a subsequent publication, will refer to investors’ alternatives after the termination of the BITs, what might be Ecuador’s last standing BIT, and the urgent need to provide investment protections in the face of the current situation of the country’s petroleum sector.

 

ICSID Convention: You Can Check Out Anytime You Like, But Can You Ever Leave?

This section refers to the legal steps that a nation has to take in order to, first, subject itself to international tribunals and, second, to withdraw from such jurisdiction.

It is no secret that consent is the sine qua non requirement of arbitration. Namely, both parties must consent to submit their disputes to an arbitration tribunal. A state can provide such consent in several ways: by treaty, by law, or by contract. Investors, on the other hand, can also give their consent in a number of fashions, e.g., by initiating arbitration. This is what Jan Paulsson calls “arbitration without privity”, and it consists of investors bringing claims against states that have previously consented to arbitration by means of, for example, a BIT.

As to ICSID arbitration, there are additional requirements that must be met before a dispute can be decided by a tribunal. Only one relevant to this discussion: the dispute must involve a member of the Convention.

Whereas the requirements to submit to ICSID jurisdiction are clear, the law on how to withdraw from it is far from settled. Under Article 71 of the Convention, any contracting state can denounce the Convention by submitting a written notice. This denunciation takes effect 6 months from the receipt of the notice. Article 72 states, however, that the notice of denunciation does not affect the rights and obligations of contracting states arising from consent to ICSID jurisdiction given before such notice.

The meaning of Article 72 has divided scholars in two groups: the “bilateralists”, and the “unilateralists”. The former believe that ICSID jurisdiction requires consent by both parties, whereas the latter argue that Article 72 refers only to consent given by contracting states.

This debate matters because states consent to such jurisdiction, predominantly, through BITs. Therefore, from a unilateralist point of view, if such BIT predates a state’s denunciation, that state is subject to ICSID jurisdiction for as long as that BIT is in force. This effect is exacerbated by the fact that BITs usually contain survival clauses-applicable in cases of unilateral termination-that lengthen the life of a treaty’s provisions for several years in order to protect existing investments. Consequently, under this interpretation, a state can be subject to the Convention for many years after its denunciation. From a bilateral point of view, on the other hand, a denouncing state is subject to ICSID jurisdiction only if investors consent to it by starting arbitration before the state’s denunciation.

The bilateralist view predominates among academics. This, however, is far from meaning that ICSID tribunals favor the scholars’ view. On the contrary, the only tribunal that has directly ruled on the matter, in Venoklim Holding B.V. v. Bolivarian Republic of Venezuela, stated that Article 72 of the Convention refers only to consent given by the state, not by investors.

Nonetheless, it is worth to mention that the Venoklim claim was brought within six months from Venezuela’s notice of denunciation, i.e., before the denunciation became effective under Article 71 of the Convention. This is relevant because some bilateralist scholars-as well as some ICSID cases, e.g., Blue Bank International & Trust (Barbados) Ltd. v. Bolivarian Republic of Venezuela-support the position that a denouncing state, which previously consented to arbitration, is still subject to ICSID jurisdiction as long as the claimant initiates the proceeding within such six months. Although no tribunal has decided on the validity of claims brought after this period, there are a number of pending cases that will help to settle the debate. This author is aware of at least one case decided earlier this year, i.e. Valores Mundiales, S.L. and Consorcio Andino S.L. v. Bolivarian Republic of Venezuela, where the tribunal might have ruled on the issue. Much to my disappointment, however, the award is not publicly available yet.

 

Has Ecuador Been Tilting at Windmills?

Ecuador’s effort to withdraw from ISDS is comprised of four different steps. All such steps, however, have been either ineffective, at worst, or uncertain, at best.

The first two steps took place in 2008. In January of that year, Ecuador denounced over a third of its BITs. This round of denunciation, however, was less than meaningful because, on one hand, such BITs had no real impact on the economy and, on the other hand, the nation was still a contracting state of the ICSID Convention. Thus, investors from countries whose BITs Ecuador had not yet denounced, were still able to have their claims decided by ICSID tribunals.

The second step took place in October 2008, when a new Constitution came into force. A provision of this new Magna Carta prohibits the Government from submitting disputes to the jurisdiction of international arbitration tribunals, unless such disputes are submitted to Latin American tribunals, whose jurisdiction stems from instruments among Latin American parties. However, because under the Vienna Convention on the Law of Treaties (“VCLT”) a state cannot use local law to justify breaching an international treaty, the 2008 Constitution had no effect. From an international perspective, it affected neither existing nor future proceedings against Ecuador. At national level, conversely, such provision afforded the arguments to denounce a second set of BITs a few years later.

The third step took place in 2009. Back then, Ecuador already faced claims for almost 13 billion dollars, and it decided to denounce the ICSID Convention altogether. Although this was the first meaningful step toward escaping from the grip of international tribunals, it was also insufficient. Granted, being a member state is an essential requirement to ICSID jurisdiction, but international arbitration is not only possible under ICSID. Most BITs also provide for arbitration in other centers and under different rules, such as UNCITRAL, or the Additional Facility (AF) rules. This alternative has, actually, enabled several post-denunciation claims against the other ICSID-denouncing countries, i.e., Venezuela and Bolivia.

The last, most decisive step against ISDS took place earlier this year. On 16 May, then-President Correa issued a number of Executive Decrees ordering the termination of all of Ecuador’s BITs. A few days later, the notes verbales formally denouncing such treaties were submitted to the corresponding embassies. However, the BITs contain several provisions extending their life after their termination, i.e., survival clauses, termination windows, and notice periods similar to that established in Article 71 of the ICSID Convention.

For illustrative purposes, the following chart provides the reader information on Ecuador’s most relevant BITs, and the effect of the abovementioned provisions, extending the validity of the treaties into the future.

Notice Period Survival Clause Termination Window Note Verbale notified on BIT valid until USA 1 year 10 years N/A 18 May 2017 18 May 2028 Canada 1 year 15 years N/A 19 May 2017 19 May 2033 The Netherlands N/A 15 years Notification must be submitted before 1 January 2021. 5 June 2017 1 July 2036 France 1 year 15 years N/A 22 May 2017 22 May 2033 U.K. 1 year 15 years N/A 18 May 2017 18 May 2033 China 1 year 10 years N/A 19 May 2017 19 May 2028

 

To the extent these BITs provide for arbitration under rules other than ICSID, Ecuador is bound to it until the expiration of the relevant treaty. As far as ICSID is concerned, on the other hand, the nation’s position is less clear. From a bilateralist perspective, Ecuador is not bound to ICSID jurisdiction as to any claim submitted after its withdrawal from the Convention in 2009. Under a unilateralist perspective, on the contrary, the country is subject to it until the last treaty expires in the year 2036.

Please continue to Part II of this post.

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Keep Calm and Arbitrate? The Impact of Political Events on International Arbitration

Tue, 2017-10-10 19:34

Joe Liu

HK45

Recent political developments have resulted in considerable geopolitical uncertainty and presented challenges to the international order. With the UK’s vote to exit the European Union, the election of Donald Trump as US president, the Western sanctions against Russia, and the rising North Korea nuclear tensions, 2017 ushers in a turbulent time where commercial parties’ usual approach to dispute resolution is under challenge. This article examines the likely impact of recent political changes on international arbitration.

Brexit is imminent. With the approval of the UK Parliament, Theresa May has triggered the Article 50 exit clause of the Treaty of Lisbon that gives the UK and the EU until the end of March 2019 to reach a withdrawal agreement. While exit negotiations are ongoing, there are doubts over London’s future as an international arbitration centre. The concerns arise primarily from the socio-economic consequences of Brexit, which might include the possible departure of financial institutions, increased immigration barriers for foreign talent, and the city’s potential loss of its preeminence as a global financial centre. Despite these concerns, London’s arbitration framework will not be affected by Brexit. The UK remains a party to the New York Convention and the ICSID Convention. The 1996 English Arbitration Act will remain in force and the body of English case law that enunciates the English courts’ strong support for arbitration will continue to apply. Some commentators have even argued that London could benefit from Brexit, because the city might be perceived as a more neutral seat and the English courts would no longer be restrained by the European Court of Justice’s ruling in West Tankers from issuing anti-suit injunctions to prevent parties from commencing court proceedings within the EU in breach of arbitration agreements.

The rise in nationalism not only pushed the UK out of the EU but also pushed Donald Trump into the White House. The Trump administration has revived the protectionist rhetoric that has caused the US’s withdrawal from the TTP, a suspension of the TTIP negotiations, and a renegotiation of NAFTA which Trump described as “the worst trade deal ever”. While these actions may call into question the US’s legal framework for trade and investment, they have a limited impact on the arbitration system in the country. The US Supreme Court’s stance on arbitration is also unlikely to be affected by Trump’s appointment of Justice Neil Gorsuch to replace the late Antonin Scalia. In fact, the Court’s 5-4 conservative majority has been the backbone for most of its pro-arbitration rulings in the past years. However, in June, the Court temporarily lifted part of the suspensions that lower courts had put on Trump’s travel ban targeting visa applicants from six Muslim-majority countries. The Court granted an exception for people from the affected countries with “a credible claim of a bona fide relationship with a person or entity in the United States” to enter the country, without clearly defining “bona fide relationship”. Until the Court reviews the matter in October, arbitrators, counsel, witnesses and experts from the affected countries may face difficulty or protracted procedures of obtaining visas to attend arbitration hearings in the US.

Trump’s Muslim travel ban is not the only measure that risks straining the US’s relationships with foreign powers. The sanctions imposed on Russia over its military actions in Crimea in 2014 and its alleged interference in the 2016 US presidential election pushed US-Russia relations towards a new post-Cold War low. The sanctions over Crimea were subsequently followed and repeatedly extended by the EU and a number of other Western states. One consequence of the sanctions is that Russian businesses are now revisiting their options to arbitrate disputes and some are looking to arbitrate in Asian jurisdictions with no sanctions against Russia. A survey published by the Russian Arbitration Association in 2016 indicates that, while the traditional European arbitral seats remain the most preferred venues for Russia-related disputes, Russian users increasingly view Asian arbitration centres, such as Hong Kong and Singapore, as viable alternatives.

The latest set of sanctions passed by the US Congress target not only Russia but also North Korea. Amid Pyongyang’s continued missile tests and the US and South Korea’s latest joint military exercises, tensions on the Korean Peninsula have been escalating at an unprecedented pace. While the present situation has no direct impact on the legal and arbitration system of the affected jurisdictions, the ongoing threat of insecurity and instability posed by these developments may undermine the incentives of international parties and arbitrators to travel to the region for arbitration.

Political events generally have little impact on how international arbitration operates. Parties remain entitled to appoint arbitrators of their choice who will decide on disputes in a neutral venue and whose awards are enforceable worldwide. However, political instability may sometimes create a perception of legal uncertainty, which may impair businesses’ confidence in arbitrating in the affected jurisdiction. Such perception can be alleviated by a clear demonstration of the rule of law and judicial independence. Hong Kong is a good example.

The rule of law is well entrenched in the Hong Kong society and the independence of the Hong Kong courts is constitutionally guaranteed by the Basic Law. Despite recent political events in the territory, Hong Kong’s arbitration regime remains strong and stable and the courts continue to exercise judicial powers independently, free from interference. The Hong Kong courts have no hesitation in ruling against state-owned enterprises incorporated in or outside Hong Kong. In a recent case, the city’s specialist arbitration judge decided to enforce a US$5 million award against China Coal, rejecting the Chinese state-owned enterprise’s plea of crown immunity.

Judges in Hong Kong have also spoken out. Following the “Occupy Central” protest and the Chinese government’s release of a white paper on the “one country, two systems” policy in 2014, Lord Neuberger, former president of the UK Supreme Court and a judge of Hong Kong’s Court of Final Appeal, said that he detected “no undermining of judicial independence” in Hong Kong.

Some commentators have voiced concerns over possible changes to the “one country, two systems” principle after 2047, which may impact parties’ choice of Hong Kong as an arbitral seat for long-term contracts. In fact, top leaders of the Chinese government have repeatedly confirmed that the “one country, two systems” principle is “firm” and “unswerving” and it “would not sway or change”. During a 2016 visit to Hong Kong, Zhang Dejiang, chair of the Standing Committee of the Chinese National People’s Congress made the following comment:

“The remarks that the mainland government intends to ‘mainlandise’ Hong Kong and even turn ‘one country, two systems’ into ‘one country, one system’ are completely groundless. The majority of Hong Kong compatriots hope that ‘one country, two systems’ can continue as it is, and this is in the best interest of the nation. The central government will continue to steadfastly implement the system, and the Hong Kong community can rest assured of that.”

Commercial parties will continue to trade, invest and do business regardless of any political developments. International arbitration is a dispute resolution mechanism that is not subject to political interferences and remains the preferred mechanism to resolve cross-border commercial disputes. For these reasons, even though we are living at a highly politicized time, the impact of political events on international arbitration should not be overstated. Parties to international commercial disputes should keep calm and arbitrate.

The opinions expressed are those of the author and do not necessarily reflect the views of the HKIAC.

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Review of new Rules of the Maritime Arbitration Commission at the Russian Chamber of Commerce and Industry

Tue, 2017-10-10 01:34

Daria Zhdan-Pushkina

In January 2017, the new Rules of the Maritime Arbitration Commission at the Russian Chamber of Commerce and Industry were adopted (“MAC Rules”). The Rules implement new regulations which comply with the latest tendencies in arbitration.

MAC was established in 1930 in Soviet Russia and since then it administered about 4,500 disputes. In 2016 – 2017, the participants to the disputes came not only from Russia, but also from various other countries, including Poland, Malta, the United Arab Emirates, Turkmenistan, the Seychelles, the Marshall Islands. The majority of the claims arise from marine insurance. Nevertheless, claims in the fields of transportation, chartering, repair of ships, towing, salvage of ships and cargo are considered regularly.

This article touches upon the most significant changes in the procedure for considering disputes under the MAC Rules.

The requirements for the statements of claim and defense and for the amount of claim

The statement of claim should now include more information, in particular, contacts details of the parties for urgent communication (phone, email addresses). The time allowed for rectifying any defects in the statement of claim was reduced from 30 to 15 days from the receipt of the invitation from the Executive Secretary of MAC to rectify the defects. If these are not eliminated, the arbitral proceedings may continue until an arbitral award or a ruling to terminate the arbitral proceeding is delivered. The rules previously stated that a claim was considered not filed or remained without motion if a party failed to rectify the defects.

The requirements for the content and structure of the statement of defense were also amended. In addition, the Rules now provide a new detailed procedure for submitting counterclaims and set-offs. In particular they establish time limits for submission of the counterclaim and set-off, and the consequences of an unjustified delay in submitting them.

The MAC Rules now provide a procedure for determining the amount of claim. This innovation simplifies the calculation of fees, set at 3% of the claimed amount.

Multiple claims and parties and engagement of third parties

The MAC Rules set out the procedure for multiple parties and multiple claims. It is now possible to consolidate proceedings if they are covered by the same arbitration agreement or by several compatible arbitration agreements referring the claims to MAC, and are connected from the view point of substantive law, that is by their merits. This can be done, as a rule, if all parties agree to such consolidation. In certain cases, the decision on consolidation may be made by the MAC Presidium.

The Rules now establish more comprehensive regulation on the involvement of third parties in arbitral proceedings. A third party making no claims against the parties to the arbitral proceedings may be involved or joined in the arbitral proceedings provided that there is an arbitration agreement covering parties to the proceedings and the third party, or all parties to the proceedings and the third party agree to such effect.

Composition of the arbitral tribunal

According to the MAC historical tradition, the arbitral tribunal shall, as a rule, consist of two arbitrators. One innovation is that if the amount of claim does not exceed USD 15,000, such a claim is normally considered by a single arbitrator.

One new body within the MAC structure is the Appointing Committee, which has a significant role in forming and altering the composition of the arbitral tribunal. In particular, the Appointing Committee appoints the arbitrator where a party failed to select one. Also, the Appointing Committee may decide on challenges of arbitrators. If the challenge was filed after the set deadline, the Committee may still grant it provided that there is a reasonable explanation for the late filing and having regard to the nature of reasons for challenge. Also, the Appointing Committee has the right, on its own initiative, to decide on the termination of the arbitrator’s powers, for example, if the arbitrator is in fact unable to participate in the consideration of a dispute and in other cases.

It should be noted that, as previously regulated, the parties are free to choose an arbitrator also outside the list of recommended MAC arbitrators.

Language of the arbitral proceedings and representation of the parties

In the MAC Rules, provisions on the language of arbitration are now collected into a separate article. The parties may agree on a language or languages of the arbitral proceedings. Arbitral proceedings in a case shall be conducted in the Russian language, unless the parties agree otherwise. Written documents shall be submitted in the original language. MAC may request the parties to provide the translation of the documents.

Provisions on representation of the parties are now more detailed. A party should ensure compliance by its representative with the Rules. Authorizing a representative to act on its behalf, the party thereby confirms the agreement of its representative to comply with the Rules and other MAC regulations. The responsibility of representatives for improper conduct and non-compliance with the MAC Regulations is now stipulated.

Preparation of the case, supplementing claims and other submissions, hearings

The new MAC Rules have more details on the measures which may be taken by arbitrators to prepare for a case. These may include setting a schedule of proceedings, establishing a range of issues to be considered, and holding organizational meetings, including video-conferencing.

The new MAC Rules govern the procedure for supplementing claims and other submissions, aimed at accelerating the arbitration proceedings. Thus, the arbitral tribunal has now the right to set a deadline for submission of written statements and evidence by the parties, and not to allow amendments or supplements to the claims or explanations thereof having regard to any delay they may cause.

It is now possible to hear the parties, witnesses and experts via video-conferencing.

Proceedings in the case on the basis of written materials and expedited arbitration

The arbitral tribunal now has the right to conduct proceedings based on written materials, without the agreement of the parties, if neither of the parties requests an oral hearing.

In response to current trends in the development of the arbitral procedure, the MAC Rules also establish an expedited arbitration procedure. According to this procedure, unless otherwise provided, claims of up to USD 15,000 are considered by a single arbitrator. Such cases are heard based on written materials only and without an oral hearing, within a period not exceeding 120 days.

Confidentiality

In accordance with the new MAC Rules, the confidentiality requirements are extended not only to MAC and its staff, and arbitrators, but also to the parties, their representatives and other persons involved in arbitration.

Other comments

As a rule, the new version of the MAC Rules applies to arbitration proceedings commenced after the Rules have entered into force.

Thus, the MAC Rules have become more detailed, and some provisions are completely new. In our opinion, according to the new Rules, the procedure for considering a dispute is now more predictable and clearer.

The recommended arbitration clause for contractual disputes reads as follows:

“Any dispute which may arise out of or in connection with the present contract shall be settled at the Maritime Arbitration Commission at the Chamber of Commerce and Industry of the Russian Federation in accordance with its rules”.

Also, the Regulations on organizational principles of activity of MAC at the CCI of Russia and the Rules for the provision of certain functions for administering ad hoc arbitration came into force this year.

In accordance with the Rules for the provision of certain functions for administering ad hoc arbitration, MAC may provide assistance to the arbitral tribunal related to the case, such as sending notifications to the parties on the date of hearing and providing premises for hearings at the request of the parties or arbitrators.

I wish to thank Dmitry Davydenko, the Executive Secretary of Maritime Arbitration Commission at the Russian CCI, for his helpful comments with regard to the review of the MAC Rules.

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English Court Denies Application to Enforce Russian Arbitral Award Set Aside by Russian Courts

Mon, 2017-10-09 03:03

Jonathan Kelly, Adam Grant and Marina Zarubin

A recent decision by the English Court shows once again the very high bar that a claimant must reach to enforce an award that had been set aside by the court at the seat of jurisdiction. The judgment handed down in Maximov v OJSC Novolipetsky Metallurgichesky Kombinat [2017] EWHC 1911 (Comm) on 27 July 2017 denied an application to enforce an award issued by the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation (“ICAC”).

The arbitration award had been set aside by a decision of the Moscow Arbitrazh Court, which was then upheld by the Federal Arbitrazh Court of Moscow District and the Supreme Arbitrazh Court of the Russian Federation.

Despite some trenchant criticism of the Russian courts’ reasoning, the judge found that the set aside decision was not so “extreme and perverse” that it could only have been reached as a result of actual bias.

The Maximov Case

The application arose from an arbitration between claimant Nikolay Maximov, a Russian businessman, and the defendant company, majority owned and controlled by Russian businessman Vladimir Lisin. The dispute centered around the calculation of the purchase price under a share purchase agreement by which the defendant agreed to acquire the claimant’s 50% plus one share stake in OJSC Maxi-Group, a Russian metallurgical business. The ICAC arbitrators rendered an award of 8.9 billion rubles in favour of the claimant.

The defendant successfully applied to the Moscow Arbitrazh Court to have the award set aside. Following the set aside decision by the Moscow Arbitrazh Court, the claimant failed to overturn the decision on appeal to the higher Russian courts. The claimant then sought to enforce the arbitral award in multiple other jurisdictions in Europe, including France, the Netherlands, and England.

In the English court, Burton J held that the applicable test was whether the Russian courts’ decisions were so extreme and incorrect that the Russian courts could not have been acting in good faith. Burton J determined that apparent bias would not be sufficient and actual bias must be shown, although if direct evidence of bias or corruption were lacking, actual bias could be inferred from the surrounding circumstances. The judge’s reasoning therefore centered around an analysis of the Russian court decisions setting aside the arbitral award.

The Moscow Arbitrazh Court based its set aside decision on three grounds:

  1. that two arbitrators failed to disclose their links to expert witnesses put forward by the claimant in the arbitration (the “Non-Disclosure Ground”);
  2. that the award was in conflict with Russian public policy (the “Public Policy Ground”); and
  3. that the dispute was a corporate dispute and was therefore not arbitrable (the “Non-Arbitrability Ground”).

Burton J severely criticised all three grounds for the set aside decision, referring to the decision on the Non-Disclosure Ground as an “unsupportable conclusion”, the decision on the Public Policy Ground as “hopeless” and the decision on the Non-Arbitrability Ground as “adventurous” but “arguable”. The judge also expressed concern that the Public Policy Ground and the Non-Arbitrability Ground were “unfairly” not raised or argued before the first instance Russian court and were only referenced in the Russian judge’s subsequent written reasons.

Burton J appeared to agree with the claimant’s case, but ultimately said that he was more persuaded by counsel for the defendant who argued that the Russian Court’s reasoning can be explained other than by bias against the claimant. In a finding that appeared to be at odds with his assessment of the defendant’s case, Burton J concluded that the decisions were not “so extreme and perverse that they [could] only be ascribed to bias against the claimant”.

The judge found it significant that the Russian first instance judgment was public, and was not regarded as an outlier, since it was regularly followed by later judges. Burton J held that the Russian courts’ criticism of the arbitrators appeared to be rooted in the general negative treatment of arbitration by Russian courts in general and did not constitute cogent evidence of bias. The judge also noted that the Moscow Arbitrazh Court rejected allegations of fraud as a basis for setting aside the award, which it might have accepted if the court was determined to find against the claimant.

English Court Treatment of Arbitral Awards Set Aside at the Seat

The English High Court’s decision in Maximov followed the English law approach that decisions setting aside arbitral awards should be treated according to the ordinary principles for recognition of foreign judgments (see, e.g., Dallah Estate and Tourism Holding Co v Ministry of Religious Affairs of Government of Pakistan [2011] 1 AC 763, 798). A party will, therefore, generally be able to rely on a foreign decision setting aside an award unless that decision is found to be contrary to basic principles of honesty, natural justice and domestic concepts of public policy.

Burton J also stressed that the English court should not simply accept that a foreign court had set aside an arbitral award where there was at least an arguable case that the award had been set aside in breach of natural justice.

This echoed the court’s reasoning in Yukos Capital SARL v OJSC Rosneft Oil Company [2014] EWHC 2188 (Comm). In that case, the English High Court considered whether an arbitral award could in principle be enforced despite the set aside decision of the Moscow Arbitrazh Court, which was upheld on appeal. The defendant in that case pleaded the principle of ex nihilo nil fit (or ‘nothing comes of nothing’), the legal theory that if an arbitral award is set aside in the seat of the arbitration, it ceases to exist in a legal sense. The High Court held that there is no principle of ex nihilo nil fit in English law precluding the enforcement of arbitral awards set aside at the seat. Instead, the court must consider whether an award can be given effect notwithstanding a set aside decision, and that it is not bound to recognise a decision contrary to the principles of honesty, natural justice, and public policy.

Сounsel for the defendant in Maximov also pleaded the principle of ex nihilo nil fit. Burton J said he did not have to decide “this interesting point” but made obiter remarks echoing Yukos Capital SARL v OJSC Rosneft Oil Company. The ex nihilo nil fit principle has yet to be considered on appeal by higher courts.

Conclusion

The Maximov judgment shows that a claimant must surmount a very high bar to enforce an arbitral award that has been set aside by a court at the seat of the arbitration. Absent cogent evidence that the set aside decision offends basic principles of honesty and domestic public policy, the arbitral award may be doomed at the enforcement stage before English courts.

Parties should be aware of the English courts’ reluctance to enforce arbitral awards in these cases. When drafting arbitration agreements, parties should think carefully whether or not the enforcement of any future award will be required against assets in England and, if so, consider choosing this jurisdiction as a seat. After an award has already been set aside by a court at the seat, a claimant should carefully consider what evidence is available to him to claim that the decision to set aside the award is contrary to basic principles of justice. If cogent evidence is not available, a claimant may wish to abandon attempts to enforce it in England.

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Could Some European Countries Initiate A State-To-State Investment Arbitration Against Switzerland For Abruptly De-Pegging The Swiss Franc From The Euro?

Sun, 2017-10-08 01:18

Danilo Ruggero Di Bella

In the 2000s, mortgages in Swiss Franc (CHF) were very popular among consumers in Central, Eastern and Southeastern Europe for the acquisition of both private and commercial properties, as the CHF was a stable and reliable currency and offered lower interest rates than loans in Euro or in local currencies. When on 15 January 2015 the Swiss National Bank (SNB) suddenly decided to de-peg the CHF from the Euro, the move took by surprise the world central banking system, a market where slow and predictable decisions are of the essence. As a result of the de-pegging, the CHF drastically surged and considerably appreciated against the Euro and all the region’s currencies, making the CHF mortgages far more expensive to repay for hundreds of thousands of Central, Eastern and Southeastern European borrowers with incomes in local currency (in some cases, the principal sum as well as the monthly repayments owed doubled or even tripled up), thus throwing countries like Romania, Poland, Croatia, Montenegro, Serbia, and Bosnia-Herzegovina into a financial turmoil. Borrowers in these countries – struggling to repay the CHF mortgages – began pressuring their respective governments to artificially fix those loans at a lower exchange-rate.

Consequently, many of these countries implemented or consider implementing a forced conversion of the CHF loans into loans denominated either into national currency or in Euro, at historical exchange rates (meaning prior to 15 January 2015), to allow population to repay the installments of those loans. Namely, Croatia and Montenegro passed a law to this effect. Whereas Poland and Romania – that at first wanted to adopt a forced conversion bill from CHF to zlotys and lei at the expense of the banks – got cold feet fearing the reaction of German, Austrian and Italian banks.

Indeed, should any of these States enact a law forcing the conversion of housing loans made in CHF into the local currency or Euro at the currency fluctuation on the day these loans were disbursed, banks will suffer capital losses amounting to billions of Euros. That is why the drafting of these loan conversion acts is shaking the financial sector and investment arbitrations are looming against these States either to repeal or to compensate for these regulatory measures, being the first of these arbitrations already launched against Croatia and Montenegro. Arguably, foreign banks invoking bilateral investment treaties may well claim the breach of the FET standard, because of the retroactive effect of these measures converting the CHF loans at the exchange-rate they were originated at the expenses of the lenders, thus threatening the principle of legal certainty and, accordingly, impairing investors’ legitimate expectations.

Luckily enough, these counties might turn the tables on Switzerland by resorting to the same instrument wherefrom the problems seem to come, in other words, by commencing one or multiple State-to-State investment arbitrations. Before exploring this exciting avenue, it is necessary first to understand what a currency peg is and the implications of its snap termination.

A currency peg takes place when a government fixes its currency’s value to that of another country. By pegging the exchange-rate between countries, such monetary policy serves the purpose of creating a stable trading environment, which allows for accurate long-term predictability for business planning, especially in the import-export sector (whose operators will be able to know beforehand exactly what exchange-rate to expect, accordingly reducing uncertainties inherent to international transactions). A government achieves a currency peg by committing its central bank to either buy or sell its own currency on the open market to maintain the fixed exchange-rate, which has been previously set. The SNB introduced the exchange-rate peg in 2011 holding the CHF at 1.20 to the Euro, by promising to buy unlimited quantities of foreign currencies, thus forcing down its value to foster exports.

To any investment arbitration practitioner, the elements surrounding the pegging of a currency to another – i.e. the creation of stable trading conditions built upon the commitments of a state’s organ to ensure a predictable climate favorable to the operation of enterprises and to the flow of capitals and goods – should already ring a bell as they depict the recurring backdrop of a FET violation, where such elements stop being upheld by the State in question. Elements and evidence in support of a FET violation in this case are:

the breach of specific representations made on 18 December 2014 by the president of the SNB, Thomas Jordan, who reaffirmed SNB’s commitment to the minimum exchange-rate of CHF 1.20 per Euro by continuing to enforce it with the utmost determination (just for breaking his promise the month after, on 15 January 2015);

the breach of another (more specific) rule of international law that comes into play through Art. 31.2.c of the VCLT, videlicet Art. IV of the Articles of Agreement of the International Monetary Fund that imposes upon the Contracting Parties (like Switzerland) the obligations to promote economic stability through a monetary system that does not produce erratic disruptions (like the one at end), and to notify the Fund promptly of any changes in its exchange-rate policy.1)In this regard, see also the Decision No. 5712-(78/41) of the IMF of 23 March 1978 concerning art. IV of the IMF Agreement and emphasizing the importance of a prior notification to the Fund of all changes in the peg. Please see Erik Denters and Annamaria Viterbo (2015), International Monetary Fund (IMF), Second Edition, Wolters Kluwer jQuery("#footnote_plugin_tooltip_4047_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4047_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });;

an interview of the Managing-Director of the IMF – that may well serve as a witness/expert deposition as to the breach of the IMF Articles – where Ms. Lagarde states that she had not been notified about the CHF/Euro de-pegging ahead of time, which she found “a bit surprising” (by using a euphemism).

a study of 2009 conducted under the auspices of the SNB on the CHF lending across Europe, proving that the SNB was aware of the widespread use of the CHF loans all over Europe, so it could not be unaware of the dire spill-over effects of an offhand revaluation.

As to the attribution of the wrongful conduct, attribution under art. 4 of the Articles on State Responsibility of the SNB’s action to the Swiss State should be no problem as the Swiss Constitution devotes article 99 to the SNB itself, making it arguably a full-fledged State organ.

Romania, Poland, Croatia, Montenegro, Serbia, and Bosnia-Herzegovina have all concluded a BIT with Switzerland providing for an FET provision and a dispute settlement provision between the Contracting Parties to the treaty regarding its interpretation and (more importantly for our purposes) its application. Such a State-to-State dispute settlement provision, whose scope covers the application of the BIT itself, means that it will encompass divergences concerning the compliance of the actions or measures taken by the Contracting Parties with the terms and purposes of the BIT.2)UNCTAD, 2003, Dispute settlement: State–state, 14. jQuery("#footnote_plugin_tooltip_4047_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4047_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Hence, each one of these States may effectively invoke the international responsibility of Switzerland by giving notice to the Swiss government of its arbitration claim, wherein it alleges that Switzerland violated, under the applicable BIT, the obligation to afford FET with respect to the Claimant-State and its actual and potential investors by abruptly de-pegging the CHF from the Euro and, accordingly, thwarting friendly-investments constant conditions. To be clear, what constitutes a FET violation is not having de-pegged the CHF, but how such action was taken, videlicet without any prior notice to the Fund and, if this wasn’t enough, by issuing a misleading statement – just few weeks before the de-pegging occurred – where the SNB assured that it would have kept the CHF pegged to the Euro at 1.20. The failure to notify in time the Fund about the de-pegging, prevented other central banks’ governors from taking the necessary steps to avoid or mitigate the damages. Each Claimant-State may also be free to enact a forced conversion law whereby it converts the CHF-denominated loans into local currency and labels such act as a countermeasure against the internationally wrongful act committed by Switzerland to shield itself from international liabilities and the threat of foreign banks.

In the arbitration claim, every Claimant-State should pursue a declaratory relief3)See Nathalie Bernasconi-Osterwalder, State–State Dispute Settlement in Investment Treaties, October-2014, The International Institute for Sustainable Development,7-8. jQuery("#footnote_plugin_tooltip_4047_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4047_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, asking for satisfaction as form of reparation, modeled after Mexico’s claim in the 2000 NAFTA case Mexico v. United States of America, because in that way the Claimant-State would not have to prove that a particular national investor or investment had been affected by the sudden CHF/Euro de-pegging. Instead, it should simply tackle the measure or action adopted by the Respondent-State that it deems in violation of the BIT, i.e. the abrupt CHF/Euro de-pegging itself4)See Mexico v. United States, Final Report of the Panel, February 6, 2001, para. 292 jQuery("#footnote_plugin_tooltip_4047_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4047_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. By doing so, every problem concerning the territoriality requirements of a specific impaired investment would be avoided. Further, the Claimant-State could always reason its position by maintaining that such an abrupt revaluation of the CHF against the Euro, as well as, its currency is harmful for a stable economic environment per se.

Finally, it would be a unique opportunity for the whole system of investment arbitrations because it would be probably the first time that an investment arbitration be deployed to justify a regulatory measure adopted by several States (the forced loans conversion act), rather than undermining States’ regulatory powers. In this way, some of the harsh criticisms regarding the legitimacy of investment arbitrations could be softened.

The views expressed in this article are those of the author and DO represent those of the law firm Bottega DI BELLA.

References   [ + ]

1. ↑ In this regard, see also the Decision No. 5712-(78/41) of the IMF of 23 March 1978 concerning art. IV of the IMF Agreement and emphasizing the importance of a prior notification to the Fund of all changes in the peg. Please see Erik Denters and Annamaria Viterbo (2015), International Monetary Fund (IMF), Second Edition, Wolters Kluwer 2. ↑ UNCTAD, 2003, Dispute settlement: State–state, 14. 3. ↑ See Nathalie Bernasconi-Osterwalder, State–State Dispute Settlement in Investment Treaties, October-2014, The International Institute for Sustainable Development,7-8. 4. ↑ See Mexico v. United States, Final Report of the Panel, February 6, 2001, para. 292 function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitrators as Lawmakers
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Digesting the AG Wathelet Opinion in Case C-284/16 Slowakische Republik v Achmea BV. Is it A Trap?

Sat, 2017-10-07 06:24

Ivaylo Dimitrov

I. Introduction

On 19 September 2017 the Advocate General (AG) to the Court of Justice to the European Union (CJEU) Melchior Wathelet delivered his long-awaited Opinion in Case C-284/16 Slowakische Republik v Achmea BV. As already explained in another post, Bundesgerichtshof (“German Federal Court of Justice”) requested a preliminary ruling from the CJEU on the compatibility of certain provisions of the 1991 BIT between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic (“BIT”) with EU law. The case before the German Federal Court of Justice arose out of the efforts of Slovak Republic to set aside the Frankfurt-seated UNCITRAL Award in Achmea B.V. v. The Slovak Republic, UNCITRAL, PCA Case No. 2008-13 (formerly Eureko B.V. v. The Slovak Republic). In his shockingly firm Opinion, the AG concluded that the BIT, and specifically its dispute resolution mechanism, are not incompatible with the EU law and do not run afoul of Articles 344, 267, and 18 Treaty of Functioning of the European Union (“TFEU”). As acknowledged in the Opinion, the outcome of the case is of “fundamental” importance” and outreaches the particularities of the dispute at hand given the (i) uncertain future of the numerous intra-EU BITs, (ii) volume and importance of the current intra-EU investor-state disputes, and (iii) complicated political implications of the ongoing clash over the future of investment disputes in general and the European participation therein. Indeed, the position of the AG appears to be in a stark contrast to the view of the European Commission (EC) and its notorious efforts to dissolve the intra-EU ISDS. What is more, the Opinion was issued shortly after:

II. Positives of the Opinion

The AG Opinion is extremely interesting and gives the international community of lawyers and practitioners food for thought. Further, many of the conclusions of the AG deserve support:

1. No discrimination

The AG concludes that the BIT (Art. 8) is sound with the prohibition on the discrimination under Art. 18(1) TFEU by way of comparison with bilateral double taxation conventions. According to the CJEU case law (C-376/03), the latter are not discriminatory whereas the benefits which they grant are “an integral part thereof and contribute to the overall balance”. On the basis of this, the AG concluded that Art. 18(1) TFEU does not contain an MFN clause and does not prevent Member States from affording treatment to nationals of another Member State which is not afforded to national of a third Member State. Art. 18(1) TFEU provides equal treatment compared to nationals of the respective Member State (national treatment) (AG Opinion, para. 67-75). Apart from clarifying the scope and the meaning of Art. 18 TFEU, these arguments of the AG recognise the lex specialis character of reciprocal rights and obligations established by bilateral intra-EU treaties whereas those rights and obligations lay at the core of the treaty regime.

2. No violation of Art. 344 TFEU

The AG’s primary argument with regard to the question whether disputes referred to in Art. 8 of the BIT do not violate Art. 344 TFEU (monopoly of dispute settlement) as such disputes do not even come under Art. 344 TFEU since they do not represent disputes between Member States or between Member-States and the Union. Referring to Opinion 2/13 CJEU (Accession of the Union to the ECHR), the AG determined that disputes involving individuals are outside of the scope of the provision (AG Opinion, paras. 146-153).

Alternatively, even if Art. 344 TFEU applies, the investor-State disputes do not concern the interpretation or application of the EU Treaties. First, the jurisdiction of the arbitral tribunal is confined to rulings on breaches of BIT, and, second, the BIT legal rules are not the same as those of the EU Treaties. The AG makes the important finding that the scope of the BIT is wider than the EU treaties the BIT contains rules which have no equivalent in EU law and are not incompatible with it.

III. Is it A Trap? The international nature of the arbitral tribunals

Notwithstanding the positive sides of the Opinion, it should be accepted with some caution. Its careful reading reveals some arguments which are troublesome and inconsistent. In answering the second question of the preliminary request, namely whether Art. 267 TFEU (the preliminary reference procedure) precludes the application of the ISDS provision of the BIT, the AG makes the conclusion that the arbitral tribunal is common to the Member States parties to the BIT and is permitted to request preliminary rulings. Applying the CJEU case law test, the tribunals are considered courts under Art. 267 TFEU. The AG goes even further by determining that they are “…required — and if they failed to do so their awards would be null and void on the ground that they would be contrary to public policy — to respect the principles set out by the Court … including, in particular, the primacy of EU law over the laws of the Member States and over every international commitment given between Member States…” (Emphasis added). (AG Opinion, para. 134).

1. Possible political goals

If adopted, such opinion would possibly lead, as observed by Nikos Lavranos, to an “Europeanisation” of investment-State arbitration and would be integrated by the EU, which would be a diplomatic way to achieve the EC goals. This goal might be reaffirmed if one considers other passages from the Opinion. In arguing that the BIT does not undermine the allocation of powers within the EU and the autonomy of the EU legal system, the AG concludes that the awards made by the arbitral tribunals cannot avoid review by national courts and, if required, requesting preliminary rulings from the CJEU. Realizing that this principle applies only to UNCITRAL arbitrations conducted on the territory of a Member State, the AG merely points out that in the Achmea case Art. 8 of the BIT does not refer to ICSID.

2. Legal incorrectness

Some of the proposed views does not stand legal scrutiny from the perspective of public international law.

First and foremost, it is legally incoherent to regard investment arbitral tribunals as courts or tribunals of the Member States. It might be beneficial to consider them as such only for the purposes of Art. 267 TFEU. However, this may not be supported given the independent international status of the investor-State arbitral tribunals. The powers conferred to the arbitral tribunals stem exclusively from the treaty regime established by the parties (See Electrabel S.A. v. The Republic of Hungary, (ICSID Case No. ARB/07/19) Decision on Jurisdiction, Applicable Law and Liability, para. 4.112).

Secondly, if ICSID tribunals are required to make references for preliminary rulings each time they need to apply a question of EU law (See Art. 267 TFEU), they would effectively be placed under the supremacy of the CJEU. Admittedly, abitral tribunals have long accepted unique nature of EU law and that it should be applied both as national law and also as international treaty law. (See Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic (ICSID Case No. ARB/14/3), Award, para. 278). However, conflicts between international legal rules which have the same hierarchical power and regulate the same subject-matter is a complex question and cannot be ab initio resolved in favour of EU law based on the internal supremacy alleged by AG.

3. Inconsistency

Apart from the foregoing, the AG Opinion demonstrates some inherent inconsistencies. Giving a negative answer to the second question, the AG determined that the arbitral tribunals participate in the dialogue between courts and, where necessary, are required to request preliminary ruling. However, in his analysis of the third question, the AG argues that disputes resolved by the arbitral tribunals constituted under the BIT do not concern questions of interpretation or application of EU Treaties and are thus are not incompatible with Art. 344 TFEU. While the AG puts those arguments in further alternative, whether an investor-State dispute concerns interpretation or application of EU law is a matter of fact and cannot be automatically changed dependent on the alternatives construed.

IV. Conclusion

The AG Opinion in Achmea is certainly a breakthrough in the intra-EU ISDS saga. The analysis of the AG has many positive traits and views which should, in the author’s opinion, be adopted by the CJEU in its decision. Still, one should be careful and consider the overall effect of the proposed solutions which promises to be far-reaching.

The author holds a position of Research Assistant at the LCIA. Opinions expressed in this article are the author’s own and do not, in any way, reflect the view of the LCIA.

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Cybersecurity In International Arbitration – A Necessity And An Opportunity For Arbitral Institutions

Fri, 2017-10-06 01:17

Claire Morel de Westgaver

Bryan Cave LLP

Cybersecurity bears particular significance to the realm of international arbitration. In addition to the ambient cybersecurity risks faced by each participant in international arbitral proceedings, the need to share information between the parties, the tribunal and the institution for the resolution of a dispute increases the likelihood that data will be lost or breached. Arbitral institutions may be uniquely positioned to address cybersecurity risks in a consistent and sustainable way. Doing so provides an opportunity for arbitral institutions to advocate for institutional arbitration (as opposed to ad hoc arbitration) and to differentiate themselves from the competition by attracting cybersecurity conscious users through innovation.

Why is international arbitration a target for hackers?

First, as a neutral forum for the resolution of commercial and investment disputes, international arbitration often involves parties that are themselves prominent targets of cybersecurity attacks, e.g. multi-national groups, governments or state entities, public figures and NGOs. Second, although the level and scope of confidentiality is variable, arbitration offers the possibility to resolve disputes behind closed doors. Disputes submitted to international arbitration generally require evidence of facts which are not in the public domain and which may have the potential to influence politics and financial markets. Third, international arbitration involves actors from different jurisdictions that operate from a variety of settings. Parties are typically represented by large and often cross-border teams. In-house lawyers, counsel and arbitrators tend to travel extensively and work from multiple places including hotels, airport lounges or private home offices. These factors enhance the risk of being hacked by electronic means as well as social engineering and theft of physical data.

Analysis of the structure of international arbitration provides insight as to how cybersecurity risks may arise and which of its stakeholders may be best equipped to adequately address these risks.

Law firms

Law firms (including barristers’ chambers) are depositories of their clients’ data and documents. Communications that a law firm has with its clients are generally covered by privilege and/or a duty of confidentiality. With arbitrators often being associated with a law firm, such firms may also be privy to communications between members of a tribunal. The content of deliberations, including draft awards, is particularly prone to cyberattacks because they may contain confidential facts and also information which may give rise to insider trading.

Law firms are a prominent target for hackers. A 200 law firm study released by LogicForce (a cybersecurity consulting firm) found that all of them had been subjected to hacking attempts. In the context of arbitral proceedings in particular, in Libananco v Republic of Turkey (ICSID ARB/06/8), Turkey admitted to have intercepted Libananco’s correspondence with its counsel and third parties, albeit as part of a separate criminal investigation. In spite of their exposure and their resources, law firms are nonetheless not (yet) adequately prepared to cope with these risks. The LogicForce survey revealed that 40% of firms were actually unaware of the hacking attempts until the study was conducted and corresponding investigations made. Further, 95% of firms were not fully compliant with their own data governance and cybersecurity policies and only 23% had an adequate cyber-attack insurance policy in place.

While law firms have control over their communications with clients as well as witnesses and experts, their channels of discourse are relatively limited compared to arbitral institutions. Law firms do not have any control over participants other than by agreeing protocols with the opposition (not always possible or appropriate) or seeking directions from the tribunal.

Arbitrators

Unlike judges, arbitrators are private practitioners. Arbitrators may operate in contexts with varying degrees of cybersecurity (e.g., law firms and universities); or they may be independent from any firm or organisation. In the former case, arbitrators are typically subject to data security processes and policies over which they may not have any control and which may not be adapted to their role of arbitrator. In the latter case, arbitrators have a higher level of freedom and flexibility but they may not have any sophisticated IT support.

Under most rules and legal systems, arbitrators and tribunals have the power to make necessary orders for the protection of confidential information and documents. Arguably arbitrators’ wide procedural powers include the ability to make orders for the storage, use and transfer of data generated and produced in a given arbitration. In this regard, recommendations and protocols as to how cybersecurity risks may be tackled by parties and tribunals are a positive development and should be welcomed by the international arbitration community. However, if adopted by a tribunal, such measures would be limited in scope and enforceability. Further, whilst some arbitrators may have a strong grasp of cybersecurity issues, one needs to recognise that as a group arbitrators are not IT experts. As such, relying on them to improve cybersecurity may not be sustainable or in any event sufficient.

Arbitral institutions

As the depository of sensitive data, institutions are highly exposed to cybersecurity risks, including in terms of reputation management and compliance with the rapidly evolving regulations. In July 2015, the website of the Permanent Court of Arbitration in The Hague was hacked during a hearing of a sensitive maritime border dispute between China and the Philippines. The website was implanted with a malicious code that posed a data breach risk to anyone who visited a specific page devoted to the dispute. Despite this modern threat and the risks involved, many arbitration institutions continue to rely upon relatively insecure storage and communication systems. Notably institutional rules tend to be silent on cybersecurity and allow communications and transfer of data between the parties and the tribunal by any electronic means. In addition, many arbitral institutions use unencrypted email and commercially available cloud data repositories.

Yet, the permanent nature of arbitral institutions allows them to regulate by way of revisiting their arbitration rules and policies. Institutions could introduce mandatory filing and communication systems under which data would be transmitted exclusively through an internet-based secured platform, moving away from sharing external drives, hard copies and emails with sensitive attachments. Such platform could include separate areas only accessible to tribunal members for the storage and sharing of draft awards for example, and could be equipped with multi-factor authentication, as well as functions preventing users from editing, printing, downloading or emailing certain classes of documents. Such tools are already available on the market and often used by parties and tribunals, albeit on an ad hoc basis.

Institutions may take the view that gaining more control over the flow of data generated and produced as part of arbitral proceedings may result in further risks and liabilities. Yet, given their role in the arbitration process and the liabilities to which they are already exposed, devoting resources to cybersecurity may be seen by institutions as a long term investment, not only in terms of hedging existing risks but also business development. Arbitration users will become increasingly cybersecurity conscious and advanced security may help arbitration institutions to stand out from the increasingly fierce competition.


*The author is grateful to David Zetoony (Bryan Cave partner) for his advice and to Yeon-Ho Son (Bryan Cave trainee-solicitor) for his assistance.

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Let’s talk about arbitration

Thu, 2017-10-05 03:00

Joel Dahlquist Cullborg and Brian Kotick

Information dissemination is the flavor of the decade. Processing information with our busy lives has become harder than ever and companies are hard at work to ensure knowledge reaches as many people around the globe as possible. These efforts are not without their threats. The rise of what might be called the “fake news” movement has placed established news outlets in an existential crisis in which even the basic facts are questioned.

Arbitration, too, has been sucked into the “fake news” whirlpool resulting in critics questioning the value of the field that has existed for centuries. The arbitration community must adapt the means it disseminates its message by breaking down loaded concepts and utilizing technology so as to reach a wider audience.

One means of information dissemination that has not penetrated the field of arbitration is podcasts. We have seen the use of online audio and video recordings of adjacent fields, such as international law. In this regard, the United Nations Audiovisual Library of International Law has been a reputable source of information on cutting-edge issues. But outside of our field, the podcast format has exploded over the last handful of years and has become a major platform for politics, arts, literature, drama, and comedy. Arbitration-specific content has been limited, however.

“The Arbitration Station” is a new, weekly podcast that covers new developments in both commercial and investment treaty arbitration. It is run by young arbitration enthusiasts who believe the best way to understand arbitration is to talk about it in a more informal setting. We hope to provide an alternate outlet for those interested in staying connected and to generate dialogue with the wider audience.

Each episode is about an hour long and usually covers three distinct issues: two substantive issues in arbitration and a third, more light-hearted discussion intended to engage members of the arbitration community.

So far, six episodes have been released:

  1. “The Inaugural” – administrative secretaries, tribunal deliberations and PhD programs;
  2. “The Bourne Arbitration” – third party funding, diversity in arbitration and espionage tactics in arbitration;
  3. “The Machine Arbitrators” – appointing authorities, the EU’s role in investment arbitration and the automation of arbitration;
  4. “The Languages” – res judicata, emergency arbitration and important languages in arbitration;
  5. “The Costs” – costs in international arbitration and proper etiquette at an arbitration conference; and
  6. “The Redfern Schedule” – Place of arbitration, document production and arbitration in pop culture.

The podcast can be accessed via the website, iTunes or Soundcloud.

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Legitimacy and International Arbitration: An Alternate View

Wed, 2017-10-04 01:06

S.I. Strong

Over the last few years, legitimacy has become a hot topic in international arbitration. Although the investment regime has borne the brunt of the attack, commercial proceedings have also suffered from criticism. The range of voices questioning the propriety of arbitration has been at times quite diverse and has included journalists, judges, governments and human rights advocates as well as parties themselves.

To its credit, the arbitral community has not ignored these concerns but has instead responded with a series of public and private reforms. For example, demands for increased transparency have been answered in the investment realm by the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration and the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration and by the Case Law on UNCITRAL Texts (CLOUT) project and ArbitratorIntelligence in the commercial realm.

Practitioners and policymakers are not the only ones interested in the integrity of the arbitral process. Academics have also sought to address concerns about the legitimacy of international arbitration, primarily in the form of an ever-increasing number of empirical studies relating to the nature and quality of arbitral procedures. Although these studies strongly suggest that international arbitration can indeed be considered a legitimate form of dispute resolution, critics of arbitration tend to ignore or downplay this data.

Recent years have seen a rise in the number of people who refuse to recognize the veracity of scientific data, leading to concerns about how policy debates can realistically proceed. The problem in the arbitral realm is to some extent exacerbated by the fact that lawyers are trained to believe that the best form of persuasion is through content-based arguments. This preference for “hard evidence” has led the arbitral community to respond primarily to external criticism by addressing the merits of the dispute. This approach often reflects the underlying belief that erroneous policy positions are generated by an incorrect or incomplete understanding of the relevant facts. However, as discussed in my forthcoming article, empirical research by political scientists Brendan Nyhan and Jason Reifler has shown that pervasive misconceptions about objectively identifiable facts often do not arise as a result of information deficits. Instead, mistaken beliefs are often caused or perpetuated by a variety of other factors.

One of the most important elements of Nyhan and Reifler’s research is the discovery that political misperceptions are significantly affected by people’s preexisting worldviews. In fact, Nyhan and Reifler found that “[d]irectionally motivated reasoning – biases in information processing that occur when one wants to reach a specific conclusion – appears to be the default way in which people process (political) information.”

This conclusion is supported by research conducted by social scientists in other fields. For example, psychologists interested in the decision-making process have found that “cognitive distortions” often arise as a result of implicit or unconscious biases. One of the most well-established phenomena involves the status quo bias, which reflects an emotional preference for the established legal or social norm, regardless of the rationality of that preference. Not only has the status quo bias been empirically proven, it also appears to provide a potential explanation for why critics of international arbitration refuse to recognize the validity of empirical research suggesting that international arbitration is at least as good as (if not better than) international litigation in resolving cross-border commercial and investment disputes.

Adherents of the law and economics movement will recognize that the effect of the status quo bias is in many ways analogous to the effect of legal defaults. Indeed, economists have shown that defaults tend to assert a psychological pull in the direction of the established norm, regardless of the rationality of that particular position. Because litigation operates as the default in dispute resolution, judicial procedures can be considered to reflect the status quo. This suggests that international arbitration will always suffer, at least to some extent, from an unconscious bias in favor of litigation, particularly among those who are unfamiliar with international arbitration.

What does this mean for the arbitral community? First, it suggests the need to educate the legal and policymaking communities about the effect that unconscious biases can have on discussions about the legitimacy of international arbitration. This is not to say that some criticisms of the procedure are not valid, it is simply to recognize that comparisons between litigation and arbitration are affected by certain factors that do not reflect optimum or rational decision-making.

Second, this analysis suggests that it may be necessary or at least useful to “reset” cultural expectations about the status quo by adopting new defaults regarding international dispute resolution. This initiative could be implemented through treaties or legislation that establish arbitration as the legal default in international commercial matters or through judicial rules (such as those establishing a strong version of negative competence-competence) that would create a presumption in favor of arbitration. Various commentators, including Gary Born, Gilles Cuniberti and Jack Graves, have proposed these types of measures, and it may be time to give those proposals some serious thought.

Third, the issues identified in this post suggest a possible need to rethink how the arbitral community communicates with other segments of society. Traditionally, law and policymakers have relied on a point-counterpoint approach to legal debate, but scholars like Nyhan and Reifler have shown that that style of argument can actually exacerbate pervasive political misconceptions. These findings raise significant questions as to what types of communication will actually prove persuasive to those who hold different viewpoints. To answer that question, it may be necessary to consult with experts in communications theory to identify alternative means of discussing the legitimacy of international arbitration, as I argue in my recent article.

This is obviously a very complex subject, and this post has only touched very briefly on a few of the relevant points. However, it is hoped that this discussion has demonstrated how interdisciplinary research can help the arbitral community overcome certain recursive problems in the field.

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Investor-State Resolution: A Snapshot of Cambodia

Tue, 2017-10-03 00:30

Sokyana Chan

The year 1993 saw a significant political transition in Cambodia through the adoption of democratic principles and free market economy. Since then, many legal reforms have been made in order to attract foreign direct investment, and one of which is providing a legal framework for protecting the investment. To date, the Kingdom has signed a total of 24 bilateral investment treaties (“BITs”) amongst which half have entered into force (see, here). These enforceable BITs are exclusively concluded with countries in East and Southeast Asia, the European Union, Switzerland and Russia.

The investor-State dispute resolution clause under the BITs that are currently in force generally covers a broad range of disputes that can be submitted to international arbitration. The Cambodia-China BIT is the exception that provides limited recourse to investment arbitration.

All of the BITs stipulate a two-tier dispute settlement. The first tier is an obligation to settle the dispute amicably through negotiations or consultations. Most of the BITs require a 6-month waiting period with the exception of the BITs concluded with Thailand, the Netherlands and Japan in which the cooling-off period is reduced to 3 months. The majority of the BITs employ the term “shall” for amicable settlement while others (i.e. BITs concluded with France, the Netherlands, Switzerland and Thailand) use a softer tone. It is important to note that investment arbitration case law does not have a consensus as to whether amicable settlement has to be satisfied before a dispute can be brought to an international arbitration. Nevertheless, it has been upheld that this obligation is exempted if it is futile to engage in such negotiations or consultations (see e.g., Ambiente v. Argentina, ICSID Case No. ARB/08/9, Decision on Jurisdiction and Admissibility, 8 February 2013; Ethyl Corporation v. Canada, UNCITRAL, Award on Jurisdiction, 24 June 1998).

Upon the satisfaction of the first-tier obligation, an investor may submit the dispute for adjudication. Two approaches are used in these BITs. Half of the BITs prefer a folk-in-the-road-provision approach in which an investor has to choose either the court of the Host State or an international arbitration for submitting the dispute. The other half provide exclusive recourse to investment arbitration. The majority of the BITs offer options, at the investor’s choice, between arbitration under ICSID Arbitration Rules and ad hoc UNCITRAL Arbitration Rules. The Cambodia-Croatia and the Cambodia-Netherlands BITs further include the ICC in these options. None of the BITs require the exhaustion of local remedies as a precondition for arbitration.

There is no limit as to the category of disputes that can be submitted for judicial or arbitral adjudication as long as these disputes have arisen out of a protected investment under a BIT. On the contrary, the Cambodia-China BIT provides a limited scope for recourse to international arbitration. The BIT favours the adjudication of investment disputes by the court of the Host State. Under Article 9(3) of the BIT, an investor may resort to an ad hoc arbitration for only “a dispute involving the amount of compensation for expropriation” and if it has not been litigated before a competent national court. The use of such language can be problematic in term of interpretation. The exact language is found in Article 8(3) of the China-Laos BIT, and the Tribunal in Sanum v. Laos (UNCITRAL, PCA Case No. 2013-13, Award on Jurisdiction, 13 December 2013) interpreted this clause to encompass all claims relating to expropriation. Such broad interpretation was rejected by the decision of the High Court of Singapore in 2015. The Court took a restrictive approach by limiting the Tribunal’s jurisdiction to only claims for “compensation for expropriation”. It should be noted that the Court’s decision was later struck down by the Court of Appeal of Singapore the following year. Another important aspect of the Cambodia-China BIT is that Article 9(8) further imposes each of the parties to bear its own costs with respect to the legal fees of its counsel and the appointed arbitrator, and all other costs to be shared equally. This provision is an attempt to discourage an investor from submitting a frivolous claim to arbitration.

No BIT provides a statute of limitation for bringing a claim before a competent court or arbitration. The Cambodia-Japan BIT is the only exception in which a claim cannot be submitted after three years from the date an investor has suffered the loss or damages from the breach of any rights under the BIT.

There has been no investment claim so far against Cambodia that is brought under the existing BITs. However, Cambodia Power Company (CPC) v. Kingdom of Cambodia and Électricité du Cambodge (EDC) (ICSID Case No. ARB/09/18, Decision on Jurisdiction, 22 March 2011) is the first and only investment case against the Kingdom that was brought pursuant exclusively to a contractual dispute settlement clause. The ICSID Secretary General registered this case in September 2009, and the jurisdictional ruling was made in March 2011.

The case concerns a dispute over the construction and operation of a power plant in Cambodia brought by CPC, a Cambodian-registered company wholly owned by a Delaware corporation, against Cambodia and EDC for the alleged breach of contractual obligations. Since there was no Cambodia-US BIT, the case was brought to the ICSID arbitration on the basis of:

– three series of agreements and the amendments concluded between Cambodia, EDC and CPC from 1996 to 1998 providing recourse to ICSID arbitration for disputes arising out of the agreements when Cambodia became a party to the ICSID Convention;
– Cambodia ratified the ICSID Convention in December 2004; and
– the case was initiated after the entry into force of the ICSID Convention in Cambodia.

The Tribunal found that it had no jurisdiction rationae personae over EDC because EDC was not an agency of Cambodia within the meaning of Article 25(1) of the ICSID Convention for two reasons. Firstly, Cambodia had not communicated the designation of EDC as its agency to the ICSID as required by Article 25(1) of the ICSID Convention. Secondly, Cambodia was not estopped from denying EDC as its agency. The Tribunal did not consider that the clause promising to designate EDC as an agency of Cambodia for the purpose of the ICSID Convention was an unequivocal and clear statement because such promise was conditional upon the future conduct of Cambodia’s ratification of the ICSID Convention, which did not happen at the time of concluding the agreements. The Tribunal further stated that CPC did not rely on such statement or suffer any detriment because CPC could initiate ICC arbitration against EDC as provided for in the agreements.

Nevertheless, the claims against Cambodia were within the jurisdiction of the Tribunal. In the absence of a BIT, the claims were allowed to be made under customary international law that provided minimum protection to an investment despite the parties’ agreement on English law as the governing law. The Tribunal did not find any indication from the agreements excluding the application of customary international law.

The award was rendered in April 2013. Though the decision has not been published, it has been reported that the Tribunal ruled in favour of the State. This case provides an important consideration for the approach used by Cambodia for arbitrating an investor-State dispute that operates outside a BIT regime. It also serves as a model for designing a dispute settlement clause in an investment contract with Cambodia that is not covered by a BIT.

In 2016, China and Japan represented a total of 50% of all investment in Cambodia (see, here). Since BITs concluded with these countries have entered into force, the investors are guaranteed recourse to investor-State arbitration. Other countries such as the United States, Vietnam, and India are also amongst the top investing countries in Cambodia. Yet, no BIT concluded with these countries has been ratified. The possibility for investors from these countries to settle a dispute with Cambodia through arbitration depends on whether an investment contract provides a possibility for investor-State arbitration as in the case that has been discussed earlier. In the absence of such provision, an investment dispute may be settled under the exclusive jurisdiction of the Cambodian court.

It can be concluded that Cambodia’s BITs that are currently in force generally provide a favourable condition for an investor to initiate investment arbitration for disputes arising out of a protected investment. With the exception of the Cambodia-China BIT, there is no complicated procedure, such as the exhaustion of local remedies, for submitting a dispute to an arbitral tribunal, or any limitation on the type of disputes that can be arbitrated. To date, twenty additional BITs have been either signed or are being negotiated with countries from Asia to North America, (see, here). It is interesting to see if Cambodia will use a different approach for investor-State dispute settlement in its future BITs.

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Switching Arbitral Seats: Musical Chairs in the Asia-Pacific

Sun, 2017-10-01 21:51

Elizabeth Macknay, Stewart McWilliam, Matthew Di Marco and Georgina Stevens

Herbert Smith Freehills

Singapore and Hong Kong are now considered to be amongst the top arbitration seats in the world, rivalling the long-established seats of London, Paris and Geneva. Perpetuating their dominance in the region, parties to contracts in the Asia-Pacific often choose either of these seats by default with no consideration of alternatives. This is underpinned, to an extent, by the perception that only Hong Kong and Singapore are able to provide certain benefits to parties to an arbitration. However this is not always the case. Australia, Korea and Malaysia are examples of alternative seats in the region which, in the following key aspects, are competitive with Hong Kong and Singapore.

1. Ample choice of legal counsel

Parties do not need to choose Hong Kong or Singapore as the seat to have ample choice of legal counsel. Australia, like Hong Kong and Singapore, has seen a proliferation of international law firms in the last decade, leaving parties with an abundance of options to engage counsel.

In our experience, parties engaging in transactions with Malaysian government-linked entities are likely to see such entities pushing to use the Kuala Lumpur Regional Centre for Arbitration (KLRCA) and to adopt Malaysian law. This may have assisted the development of the expertise of the local legal market. For example, a large local firm acted for MISC Berhad in its successful USD$254.45m claim against Shell in a KLRCA arbitration this year. In addition, in recent times, the Malaysian government has looked to develop the strength of Kuala Lumpur as an arbitral seat, with a number of foreign law firms recently being allowed to open offices, including Trowers & Hamlins opening in 2015 and Herbert Smith Freehills in 2017. In addition, Malaysia’s Legal Profession Act 1976, has been amended so that from June 2014, non-Malaysian qualified lawyers and foreign arbitrators have been able to appear in Malaysia-seated arbitral proceedings.

Local firms are also well experienced in Korea, benefitting from the increased case load of the Korean Commercial Arbitration Board (KCAB) in recent times. Whilst the “Big Five” Korean law firms dominate the legal market, there has been an increase in boutiques and new firms being established. Further, similar to Malaysia, Korea’s legal market has been liberalised to foreign entrants, with Herbert Smith Freehills being one of the first foreign law firms to receive approval from the Korean Ministry of Justice to open an office in Seoul and now having one of the largest arbitration practices of any of the international law firms on the ground in Korea.

Even if a party appointed counsel from outside of any of these locations, this should not be a weighty consideration, as the cost of flying counsel to the seat for a substantive hearing is likely to be a fraction of the overall cost of an arbitration. Indeed, both Korea and Malaysia are transport hubs in Asia, with world class international airports, flight networks covering most major cities in the world and relatively few visa restrictions on temporary visitors, meaning that bringing lawyers, arbitrators, witnesses and experts into the country from all over the world is now relatively straightforward.


2. Contemporary arbitration framework – legislation and rules

Each of Australia, Korea and Malaysia has contemporary frameworks governing international arbitrations, whether rules or governing legislation.

The main institution in Australia, the Australian Centre for International Arbitration (ACICA) amended its procedural rules last year to include new provisions to keep in step with developments in Hong Kong and Singapore, and ensure that ACICA’s rules continue to reflect contemporary best practice. Similarly, the federal government has introduced a bill to parliament that would amend the International Arbitration Act 1974 (Cth), which governs all international arbitration proceedings in Australia. The amendments aim to both address uncertainties in Australia’s arbitration landscape and keep Australia in line with leading arbitral jurisdictions (for more information on the bill see here).

The KCAB recently revised its procedural rules, like ACICA, to ensure KCAB keeps pace with innovations being implemented around the world. In addition, the Korean government also updated the legislation that governs international arbitrations in Korea.

Malaysia introduced new arbitration legislation in 2005, which it further amended in 2011, to align many aspects of its legislative framework with the UNCITRAL Model Law. The result, coupled with the removal of restrictions on foreign arbitrators and lawyers participating in arbitral proceedings seated in Malaysia in 2014, has been a noticeable increase in KLRCA’s annual case load. This went from 10-20 cases annually for the years prior to 2010, to 62 cases registered with KLRCA in 2016 (see Thompson Reuters Practical Law, “Arbitration procedures and practice in Malaysia: overview” by Rabindra S Nathan, and KLRCA 2016 Annual Report, page 16). This ensures a more experienced secretariat, and the choice to appoint any arbitrator the parties choose, but with institution fees around 20% cheaper than HKIAC or SIAC. KLRCA also released revised rules in May 2017.

3. Ability to handle complex disputes

The ability of an institution to handle multi-party and multi-contract disputes is important. Each of ACICA, KCAB and KLRCA has mechanisms to deal with consolidation and joinder.

Alternative seats preferable in appropriate circumstances

The above considerations demonstrate that, at least in some key aspects, Australia, Korea and Malaysia are competitive with Hong Kong and Singapore. Further to this, in the appropriate circumstances, those seats may even be a preferable choice. In our view, there are at least three scenarios in which this may arise.

Location of client, witnesses and documents

First, a significant portion of the work in an arbitration is not carried out at the seat but usually where the client, its witnesses and documents are located. The efficiencies, both in terms of costs and timing, of choosing a seat where these are located, are significant.

A recent example is the ongoing AUD$1.9b dispute between Chevron, CPB Contractors and Saipem over the construction of a jetty for a liquefied natural gas project in Western Australia. As reported by GAR, Chevron commenced the arbitration against CPB Contractors and Saipem SA under a clause that provides for ad hoc arbitration under UNCITRAL rules seated in Perth, Australia. Given that the client, most of the witnesses, documents and, assuming local law governs the contract, Australian counsel are likely to be located in Australia, there were obvious practical advantages, cost savings and efficiencies to the parties in selecting Perth rather than Hong Kong or Singapore.

Neutral seat

Secondly, if either party is from Hong Kong or Singapore, it may be a negotiation sticking point as to whether the choice of seat should be in Hong Kong or Singapore. Rather than maintaining its position on the choice of seat at the risk of losing leverage on other issues, Australia, Korea or Malaysia may be a neutral solution for the contracting party. For example, a service provider from Singapore and a principal from Hong Kong may resist an arbitration seated in Singapore or Hong Kong, but may consider Australia, Korea or Malaysia a neutral seat.

Expertise in particular disputes

Thirdly, certain institutions and practitioners in a seat may offer expertise relevant to the disputes that may arise under a contract. For example, the KLRCA has particular expertise in administering sharia law disputes, which is part of a broader goal to establish Malaysia as an Islamic finance hub. As part of its repertoire of procedural rules, it has rules that are sharia law compliant and suitable for the arbitration of disputes arising from agreements based on sharia law – being the ‘i-Arbitration Rules’.

Similarly, Australia has a specialist arbitration centre in Perth – the Perth Centre for Energy & Resources Arbitration (PCERA). PCERA was launched in November 2014 and aims to capitalise on Western Australian’s expertise in the energy and resources sectors.

In Korea, there is considerable knowledge in the arbitration community that has developed as a result of Korean clients being involved in international projects for many years. There are many lawyers in Korea, for example, specialised in EPC construction contracts, the renewable energy sector, computer gaming and consumer projects – all sectors that are booming in Asia and that, in time, no doubt will lead to disputes which will most likely be resolved by arbitration.

Conclusion

For good reason, Hong Kong and Singapore have cemented themselves as premier regional and global arbitral seats. The Asia-Pacific is, however, a large region with a booming arbitral market. For the reasons discussed above, Australia, Korea and Malaysia have demonstrated that they are viable arbitral seats, which should be given serious consideration by parties who may arbitrate in the region. In the right circumstances, and for the right parties, those seats might be preferred over their more established neighbours.

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