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Foreign Administered Arbitration in China: The Emergence of a Framework Plan for the Shanghai Pilot Free Trade Zone

Thu, 2019-09-05 18:00

Martin Rogers and Noble Mak

On 6 August 2019, the State Council of the People’s Republic of China (PRC) (the “State Council”) published the “Framework Plan for the New Lingang Area of the China (Shanghai) Pilot Free Trade Zone” (the “2019 Framework Plan”).

Under Article 4 of the 2019 Framework Plan, reputable foreign arbitration and dispute resolution institutions may register with the Shanghai Municipal Bureau of Justice and the judicial administrative authority of the State Council, and set up operations in the New Lingang Area of the Shanghai Pilot Free Trade Zone (“Shanghai FTZ”).

Registered institutions can conduct arbitrations involving civil and commercial disputes arising from areas including international commerce, maritime affairs and investment. This appears to allow foreign arbitration institutions to handle investor-state disputes seated in China, though in reality this will largely depend on whether the state involved will agree to such an arrangement.

Also, according to Article 4, registered arbitration institutions will be permitted to enact rules to allow interim measures in favour of both the PRC and foreign parties to support the conduct of dispute resolution processes, including through preservation of assets and evidence. (The relevant parts of Article 4 as summarised above shall be referred to as the “Statement” in this blogpost.)

The Statement is in line with the “Plan for Further Deepening the Reform and Opening-up of China (Shanghai) Pilot Free Trade Zone” issued by the State Council in 2015 (the “2015 Plan”). The Statement represents an important step towards developing Shanghai into an international arbitration hub with a leading role in the Asia-Pacific region. In contrast, equivalent framework plans in relation to other free trade zones in the PRC have not placed as strong an emphasis on arbitration.

 

Status of Arbitrations Seated in mainland China but Administered by Foreign Arbitration Institutions

Prior to the publication of the 2019 Framework Plan, there were no express provisions allowing foreign arbitration institutions to administer cases with a seat in mainland China.

In 2013, in a reply to a request for instructions from a lower court, the Supreme People’s Court (“SPC”) acknowledged the validity of an arbitration clause providing for an arbitration seated in mainland China but administered by a foreign arbitration institution. (See an earlier blogpost on this here.) However, as the SPC’s reply is not technically binding on Chinese courts, and the nationality of such an arbitration award is unclear (as discussed in the succeeding section), the prevailing view among legal practitioners remained that parties should avoid foreign-administered arbitrations seated in mainland China in light of the uncertainty.

Since 2015, foreign arbitration institutions have been allowed to set up representative offices in the Shanghai FTZ. Currently, representative offices have been set up by the Hong Kong International Arbitration Centre (“HKIAC”), the Court of Arbitration of the International Chamber of Commerce (“ICC”), the Singapore International Arbitration Centre (“SIAC”), and the Korean Commercial Arbitration Board (“KCAB”). Thus far, perhaps because of the uncertainty, these representative offices appear to have focused on promotional efforts and logistical support in arranging for arbitration hearings, rather than administering cases seated in mainland China.

The Statement is therefore a significant step towards certainty as it suggests that, subject to successful registration, foreign arbitration institutions are permitted to administer cases seated in mainland China.

 

Status of Awards

Whilst this is clearly a positive development, uncertainty remains as to the status of awards: domestic or non-domestic? As discussed in a previous blogpost, the SPC has been shifting its approach in determining the nationality of an arbitral award, which in turn affects whether an award is “domestic” or “non-domestic”. Under PRC law, there are procedural differences in relation to the annulment and enforcement of domestic as opposed to non-domestic awards. Hence, it would be very helpful if future guidance or regulations issued by Shanghai governmental bodies could clearly delineate whether awards made in foreign-administered arbitrations seated in mainland China would be considered domestic awards or non-domestic awards.

 

Alignment of Arbitration Rules

In the 2015 Plan, the State Council stated its goal to align with international dispute resolution rules, improve the arbitration rules of the Shanghai FTZ, and strengthen the internationalisation of commercial arbitration in mainland China.

With respect to various important aspects (such as the appointment of arbitrators, hearings, memorials, procedural orders, discovery, documentary evidence, witness evidence, expert evidence, confidentiality, joinder and consolidation, etc.), CIETAC arbitration rules and guidelines on evidence are, on paper, broadly in line with usual international practices. Nevertheless, the general perception is that the application of Chinese arbitration procedural laws involves, and results in, significant procedural uncertainty.

In our view, such perception is less about what is on paper (the law and rules) and more about what happens in practice. Notwithstanding the similarities in the rules (which are stated in general terms to allow for flexibility), there is quite often a significant difference in the way arbitrations, particularly domestic ones, are handled in mainland China, and the way international arbitrations are handled outside mainland China. For example, the use of witness testimony and cross-examination is not common in arbitrations in mainland China, and practitioners are generally unfamiliar with the relevant procedures and requirements. What remains to be seen is how these China-seated foreign-administered arbitrations will be conducted. There may well be no consistency in approach as it ultimately comes down to how individual arbitrators manage a specific arbitration.

In any event, as foreign arbitration institutions start to administer cases seated in China, there will be a “cultural exchange” at a deeper level as more PRC lawyers get involved in foreign-administered cases, and more foreign parties get involved in China-seated cases. This will certainly be a welcomed development towards the improvement of the PRC arbitration rules and practice, as well as towards the internationalisation of commercial arbitration in mainland China.

 

Impact on Hong Kong

When the Statement has been fully implemented, and foreign arbitration institutions begin to operate directly in mainland China, Shanghai will likely become a much more important arbitration hub than it is currently. Foreign commercial parties, who previously preferred arbitrations seated in Hong Kong, may be increasingly willing to have arbitrations seated in mainland China if they are administered by a reputable foreign arbitration institution. This is particularly the case with respect to the Belt and Road Initiative, where Chinese parties have strong bargaining power and would most likely prefer to have arbitrations seated in mainland China.

As Shanghai becomes a more important arbitration centre, there is some prospect of Hong Kong gradually losings its competitive advantage as the leading disputes resolution hub in Asia.

Nevertheless, an important factor in selecting an arbitration seat is court supervision. Hong Kong is still perceived to have a very strong rule of law. For example, the World Bank Group, as part of its World Governance Indicators project, ranked Hong Kong as second in Asia and fourteenth globally for the rule of law for the year of 2017. The World Economic Forum’s Global Competitiveness Report 2018 has ranked Hong Kong’s judiciary as the number one most independent in Asia and eighth globally. Mainland Chinese courts still do not reach the perceived standards of independence and reliability of the Hong Kong courts. The Hong Kong common law system is perceived as very stable and predictable, with its system of precedent and stare decisis.

Moreover, there are well established frameworks for Chinese courts to grant interim measures in connection with arbitrations seated in mainland China and Hong Kong. (See this previous blogpost with respect to the arrangement with Hong Kong.) To date, the PRC has not established any similar arrangements with other jurisdictions. In other words, Hong Kong will remain an attractive option for PRC-related international arbitration disputes: for court supervision by an independent and reliable judiciary system and procedural convenience in connection with interim measures in mainland China.

 

Concluding Remarks

It goes without saying that China’s economic development has been, and still is, at high speed, with six new free trade zones announced just days ago in six provinces (including border regions) across China. The Shanghai FTZ (whose size doubled recently following the inclusion of the New Lingang Area) takes the lead in all this. The Statement comes as a bold step to bolster international confidence in Shanghai’s disputes resolution system – a crucial element to establish Shanghai’s status as a “world city”— and a demonstration of China’s commitment to deepen its reform as laid out in the 2015 Plan. This is certainly a positive initiative, both for Shanghai and for foreign parties with commercial interests in China. As for Hong Kong – it retains its unique edge but tough competition is waiting ahead.

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Consequences of the Judicial Nature of Arbitration: An Egyptian Perspective

Wed, 2019-09-04 19:00

Moamen Elwan, Mohamed Samy and Khaled Abou El Wafa

Introduction

Although the nature of arbitration is still a matter of debate in the Egyptian legal system, the arbitration-friendly jurisprudence of Egyptian courts now supports the idea that the arbitration process is indeed of a judicial nature.

A clear example is provided by the Supreme Constitutional Court (“SCC”),1)Supreme Constitutional Court, Challenge No. 95 of 20 JY, session dated 11 May 2003. See also Supreme Administrative Court, Challenge No. 35839 of 57 JY, session dated 7 February 2018 holding that arbitration is of judicial nature. jQuery("#footnote_plugin_tooltip_9408_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9408_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); which previously deemed Article 66 of the Public Sector Agencies and Companies Law No. 97 of 1983 (“Public Sector Law”) unconstitutional. Article 66 stipulated that the decisions of arbitral tribunals constituted pursuant to Public Sector Law may not be subject to challenge by any means. In support of its stance, the SCC held that arbitral tribunals’ awards rendered under Public Sector Law should be treated the same as courts judgements and voluntary arbitration awards governed by the Egyptian Arbitration Law (“EAL”), and that each of these types of judgments and awards are of judicial nature. Therefore, if arbitration under Public Sector Law is equal to voluntary arbitrations,2)Voluntary Arbitration or Regular Arbitration is meant to be arbitration that is subject to Arbitration Law No. 27 of 1994. jQuery("#footnote_plugin_tooltip_9408_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9408_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); voluntary arbitrations are equally of judicial nature.

The same idea is reflected in the Court of Appeal’s3)Cairo Court of Appeal, Circuit (50), Challenge No. 17 of 135 JY, session dated 31 December 2018. jQuery("#footnote_plugin_tooltip_9408_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9408_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); prior holding that “arbitration is a technical mean with a judicial nature that aims to settle a dispute”.

Therefore, the authors are of the view that arbitration proceedings in Egypt are indeed of judicial nature and the consequences of such view is the subject of this blog.

 

Consequences of Considering Arbitration Proceedings as Having a Judicial Nature

There are various consequences of arbitral proceedings being considered of a judicial nature related to (i) referral of disputes to and from arbitral tribunals; (ii) contradictions between court judgements and arbitral awards; (iii) conflict of jurisdiction between arbitral tribunals and domestic courts; and (iv) pleas of unconstitutionality. Each is discussed in turn.

 

(i) Referral of Disputes to and from Arbitral Tribunals

Article 110 of the Civil & Commercial Procedural Law (“CCPL”) allows a domestic court to refer a case to another court, if the first court finds it lacks jurisdiction over the case in question. If we assume that arbitration proceedings are of a judicial nature, arbitral tribunals would be able to refer a certain case to a domestic court in the event that a tribunal decided it lacks jurisdiction over the dispute.

This is supported by the Supreme Administrative Court’s decision that an arbitral tribunal constituted under Public Sector Law may refer a dispute to the competent court, if it lacks competence.4)Supreme Administrative Court, Challenge No. 35839 of 57 JY, session dated 7 February 2018. jQuery("#footnote_plugin_tooltip_9408_4").tooltip({ tip: "#footnote_plugin_tooltip_text_9408_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Although this decision was rendered within the context of arbitration under Public Sector Law, the same principle could be understood to apply equally to regular arbitration constituted according to the EAL. Thus, voluntary arbitration proceedings should be equal to arbitration under Public Sector Law.

Similarly, the Court of Cassation held that if the case lies within the jurisdiction of a Public Sector Law tribunal, the court still has to refer the case to that tribunal.5)Court of Cassation, Challenge no. 634 JY 45, dated 27 March 1979. jQuery("#footnote_plugin_tooltip_9408_5").tooltip({ tip: "#footnote_plugin_tooltip_text_9408_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Court of Cassation explained that although the travaux preparatoires of Article 110 referred to the main judicial branches (the civil and administrative courts), Article 110 was drafted with general and absolute terms. Thus, it applies also when the case falls within the jurisdiction of an entity with judicial competence.6)Ibid. jQuery("#footnote_plugin_tooltip_9408_6").tooltip({ tip: "#footnote_plugin_tooltip_text_9408_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Arbitral tribunals (even those other than the Public Sector tribunals) thus were held to be entities with judicial competence as will be explained below.

This conclusion could be practically problematic though, due to the special nature of arbitration if compared to state courts. First, arbitral tribunals do not have the same standing as domestic courts. A tribunal is normally constituted after the initiation of the arbitral proceedings, and is often appointed by the parties. Thus, if a court finds it has no competence and decides to refer the dispute, which entity should the court refer the dispute to? Even if this problem can be avoided to some extent (for example, in case of institutional arbitration, by referring the dispute to the relevant institution), what if the agreed arbitration is ad hoc?

However, this does not undermine the judicial nature of arbitration, nor does it affect the validity of a court’s referral of cases to arbitration in theory. It only concerns a practical impediment that might affect the application of the rule in some exceptional cases (in cases of ad hoc arbitration), but does not affect the validity of that rule (exceptio probat regulam).

By way of example, before the current CCPL, referral did not previously occur between ordinary (civil) courts and State Council courts, for reasons related to both branches’ independence vis-a-vis each other, before expressly providing for such referral in the current law. This did not mean that any of those branches was not a judicial entity.

Second, it could be argued that such referral is inconsistent with the voluntary nature of arbitration, which is based on the consent of the parties. Suppose that the claimant raised court proceedings against the respondent, and the latter made a jurisdictional plea that the court supposedly accepted. In that case, the claimant might not be willing to go to arbitration. To that effect, we may find arbitration proceedings initiated against the will of one party.

A possible response is that referral does not equate forcing the claimant to arbitration against its will. In any case, the claimant can request termination of arbitration proceedings according to Article 48 of the EAL.

Third, in case the domestic court referred the dispute to the relevant institution, such referral decision may be challenged by the parties. Will the relevant institution proceed with the constitution of the arbitral tribunal to decide over the referred dispute or will the relevant institution decline to proceed with the arbitration and suspend the case while awaiting the outcome of the challenge against the referral decision?

An answer can be inferred by analogy from Article 13 of the EAL, which provides that if proceedings are initiated before a court in a matter that is subject to an arbitration agreement, such proceedings shall not hinder the initiation of the arbitration proceedings and the continuance thereof until an award is rendered. Thus, by the same means, if the referral judgment is challenged before the competent court, this should not prevent the arbitration proceedings from moving on until an award is rendered.

Fourth, what is the situation if the said relevant arbitration institution decided that it is incompetent to decide the referred dispute? Will the arbitration institution re-refer the dispute to the domestic court or refer the dispute to the other relevant arbitration institution? Or will it only decide its non-jurisdiction without any referral?

Yet, this is a case of passive conflict of jurisdiction that might also occur in cases of referral to domestic courts. In such case, the SCC shall be competent to decide on such conflict of jurisdiction, in accordance with Article 25 of the SCC Law.

It is to be noted that the Cairo Court of Appeal has recently stimulated some confusion concerning the nature of arbitration in Egypt. The judgement rendered by the Court of Appeal7)Cairo Court of Appeal, Circuit (62), Challenge No. 39 of 130 JY, session dated 6 August 2018. jQuery("#footnote_plugin_tooltip_9408_7").tooltip({ tip: "#footnote_plugin_tooltip_text_9408_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); was related to annulment proceedings of an arbitral award that was rendered on 22 March 2013 by an ad hoc tribunal at the Cairo Regional Center for International Commercial Arbitration.

The Court annulled the award based on the non-jurisdiction of the ad hoc tribunal, as the dispute was under the auspices of the Unified Agreement for the Investment of Arab Capital in the Arab States, which provides for the jurisdiction of the Arab Investment Court to decide on disputes under its provisions. The Court, however, refused to refer the dispute to the entity that has jurisdiction (the Arab Investment Court) according to Article 110 of the CCPL.

Nevertheless, this should not cast doubt on the judicial nature of arbitration, since the Court was clear in its reasoning that the Arab Investment Court is not an Egyptian court, and thus the dispute may not be referred to it in accordance with Article 110 of the CCPL.

It is worth noting that Article 110 only allows the court to refer a dispute to an Egyptian court, stating that “If the court decided that it lacks jurisdiction, it [the court] shall refer the dispute to the competent court…”. According to the Court’s interpretation of this article, the referral of a case may only be to a domestic Egyptian court. Thus, the Court’s reasoning may imply, a contrario, that if the tribunal had been Egyptian, the Court would have referred the dispute to it under Article 110. This is reinforced by the above-mentioned Supreme Administrative Court decision which held that arbitral tribunals constituted under Public Sector Law may refer a dispute to the competent court.8)Supra note 4. jQuery("#footnote_plugin_tooltip_9408_8").tooltip({ tip: "#footnote_plugin_tooltip_text_9408_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

(ii) Contradictions Between Court Judgements and Arbitral Awards

Article 25 of the SCC Law grants an exclusive jurisdiction to the SCC to resolve conflict pertaining to enforcement of two contradictory judgements, one issued from a judicial authority or an authority with a judicial competence and the other from another of said authorities. Therefore, if the arbitration proceedings are to be considered of judicial nature, any conflict between an award rendered by an arbitral tribunal and a court judgement shall be resolved by the SCC.

Nonetheless, the above conclusion might be in contradiction with Article 58 of the EAL, which requires that an arbitral award not contradict a previous court judgement.

However, the SCC previously decided that it had competence to decide on the enforcement of two contradictory arbitral awards and a domestic court judgement. In this case, the SCC held that the arbitral award would be enforceable, since the arbitral tribunal had the exclusive jurisdiction over the subject matter of the dispute.9)Supreme Constitutional Court, Challenge No. 8 of 22 JY, session dated 4 August 2001. jQuery("#footnote_plugin_tooltip_9408_9").tooltip({ tip: "#footnote_plugin_tooltip_text_9408_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

(iii) Conflict of Jurisdiction Between Arbitral Tribunals and Domestic Courts

The SCC is competent to decide on cases where there is a conflict of jurisdiction between a domestic court or an authority with judicial competence and another court or authority with judicial competence. If arbitration is to be considered of judicial nature, the SCC would have the final word in cases where the same dispute is filed before an arbitral tribunal and the other party rushes to file the same dispute before the domestic court. In this scenario, the SCC would have the final word on which proceedings would continue and which would be terminated.

 

(iv) Pleas of Unconstitutionality and Arbitration

The judicial nature of arbitral proceedings would mean that, pursuant to Article 29 of the SCC Law, an arbitral tribunal would be competent to refer constitutional pleas to the SCC in order to decide on the constitutionality of a law or regulation.

This could be achieved either by a party claiming the unconstitutionality of a certain provision of law or regulation, or the arbitral tribunal’s initiative to suspend the arbitral proceedings and refer the question of constitutionality of a certain provision of a law or regulation to the SCC for its decision.

 

Conclusion

Based on the above, Egyptian law recognizes that arbitration is indeed of judicial nature. Although some of the consequences of this conclusion might be problematic from the practical aspect, practice will indeed be able to overcome such issues while reserving the judicial nature of arbitration.

 

This Blog expresses the authors’ point of view only and not the firm’s view.

References   [ + ]

1. ↑ Supreme Constitutional Court, Challenge No. 95 of 20 JY, session dated 11 May 2003. See also Supreme Administrative Court, Challenge No. 35839 of 57 JY, session dated 7 February 2018 holding that arbitration is of judicial nature. 2. ↑ Voluntary Arbitration or Regular Arbitration is meant to be arbitration that is subject to Arbitration Law No. 27 of 1994. 3. ↑ Cairo Court of Appeal, Circuit (50), Challenge No. 17 of 135 JY, session dated 31 December 2018. 4. ↑ Supreme Administrative Court, Challenge No. 35839 of 57 JY, session dated 7 February 2018. 5. ↑ Court of Cassation, Challenge no. 634 JY 45, dated 27 March 1979. 6. ↑ Ibid. 7. ↑ Cairo Court of Appeal, Circuit (62), Challenge No. 39 of 130 JY, session dated 6 August 2018. 8. ↑ Supra note 4. 9. ↑ Supreme Constitutional Court, Challenge No. 8 of 22 JY, session dated 4 August 2001. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Chinese Court’s New Approach to Interpreting the Validity of a Pathological Foreign-Related Arbitration Clause

Tue, 2019-09-03 21:00

Xu Zhihe and Li Tingwei

Under China’s arbitration regime for foreign-related arbitration and international arbitration, the concept of a juridical seat is a statutory juncture where, in cases with no express agreement on the applicable law between the parties, Chinese courts must determine the applicable law (statutory text is available in Chinese here and unofficial English translation here).1) See Article 18 of the Law on the Application of Laws to Foreign-Related Civil Relations of the PRC. This Article reads: “The parties may by agreement choose the law applicable to their arbitration agreement. Absent any choice by the parties, the law of the place where the arbitration institution locates or the law of the seat of the arbitration shall be applied”. jQuery("#footnote_plugin_tooltip_3259_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3259_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Recently, in the case of China Light Tri-union Int’l Co., Ltd. (“Plaintiff”) v Tata International Metals (Asia) Limited (“Defendant”) (2017 Jing Min 04 Min Te No. 25), the Beijing No. 4 Intermediate People’s Court (“Beijing Court”) of the People’s Republic of China (“PRC”) rendered a judgment reviewing a foreign-related arbitration clause that re-affirmed the Chinese courts’ pro-arbitration attitude while it sought to determine which law, in the absence of an express agreement, should apply.

 

Background

In 2015, the Plaintiff entered into a sales contract with the Defendant which provides in the arbitration clause that

any dispute arising out of or in connection with this contract shall be settled through friendly negotiation. If the negotiation fails, the dispute shall be submitted to Singapore International Economic and Trade Arbitration Commission for arbitration in accordance with the American arbitration rules. The arbitral award shall be final and binding on both parties”.

Disputes arose between the two parties during the performance of the sales contract. In August 2016, relying on the above-quoted arbitration clause, the Defendant initiated arbitration proceedings in the Singapore International Arbitration Center (“SIAC”) against the Plaintiff, which was accepted by the SIAC in the next month. In May 2017, the Plaintiff applied to the Beijing Court for a judgment to confirm that the arbitration clause is invalid under Chinese law.

Meanwhile, the sole arbitrator of the SIAC proceedings decided that it had jurisdiction over the substantive disputes and issued a procedural order banning the Plaintiff from continuing its action in the Beijing Court.

The Plaintiff argued on two major issues before the Beijing Court: (a) as an import agent, whether the Plaintiff was bound by the underlying contract; and (b) whether the disputed arbitration clause was valid or not.

Specifically, in relation to the second issue, the Plaintiff disputed that the arbitration clause lacked both choice of applicable law and juridical seat of arbitration. The Plaintiff also contended that there was an error in the wording of the agreed arbitration institution, i.e., “Singapore International Economic and Trade Arbitration Commission”, which the Plaintiff argued did not point to any specific arbitration institution. Thus, the Plaintiff’s position was that none of the three statutory junctures for determining the applicable law, as stipulated in Article 18 of the Law on the Application of Laws to Foreign-Related Civil Relations of the People’s Republic of China (“Law on Foreign Related Civil Relations”), could be found in the disputed arbitration clause.

The Plaintiff then referred to Article 14 of Judicial Interpretation issued by China’s Supreme People’s Court (“SPC”) on the Law on Foreign Related Civil Relations2) Article 14 of the Judicial Interpretation reads: “Where the parties did not choose the law applicable to a foreign-related arbitration agreement, nor did they agree on the arbitration institution or the place of arbitration, or where their agreement to arbitrate cannot be ascertained, the people’s court may apply the law of the People’s Republic of China to determine the validity of the arbitration agreement”. jQuery("#footnote_plugin_tooltip_3259_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3259_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });(“Judicial Interpretation on Law of Application”), Article 18 of the Arbitration Law of the People’s Republic of China (“Arbitration Law”)3)Article 18 of the Arbitration Law reads: “Whereas an agreement for arbitration fails to specify or specify clearly matters concerning arbitration or the choice of arbitration commission, parties concerned may conclude a supplementary agreement. If a supplementary agreement cannot be reached, the agreement for arbitration is invalid”. jQuery("#footnote_plugin_tooltip_3259_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3259_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Article 3 of the Judicial Interpretation of the Arbitration Law4)Article 3 of the Judicial Interpretation of the Arbitration Law of the PRC reads: “If the name of the arbitration institution agreed upon in an arbitration agreement is not described in an accurate way, but the specific arbitration institution is determinable, it shall be deemed that the arbitration institution has been selected”. jQuery("#footnote_plugin_tooltip_3259_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3259_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); to argue that Chinese law should apply to determine the validity of the disputed arbitration clause, since pursuant to the law governing foreign-related arbitrations, the disputed arbitration clause would be invalid for its lack of designation of an arbitration institution.

The Defendant argued that Singaporean law, rather than Chinese law, should apply to determine the validity of the disputed arbitration clause. The Defendant gave three reasons in this regard:

Firstly, the Defendant argued that where an arbitration institution or the juridical seat of arbitration could not be ascertained from an arbitration clause, the Chinese court should adopt the principle of proximity and apply the most closely related law as the applicable law.

Secondly, the Defendant contended that the Plaintiff knew that both parties agreed on a Singaporean arbitration institution. Since the agreed arbitration institution was in Singapore and the place of an arbitration institution is a statutory juncture for determination of the applicable law, Singaporean law should apply as the applicable law to the disputed arbitration clause.

Thirdly, the Defendant further argued that since Singapore had been agreed to as the place of the arbitration institution and the disputed arbitration clause did not provide for arbitration in any other place, Singapore should be construed as the juridical seat of the arbitration.

 

Ruling of the Beijing Court

The Beijing Court firstly confirmed the foreign element of the disputed arbitration clause, as the Defendant was incorporated under the laws of HKSAR. As a result, it decided to apply the Law on Foreign Related Civil Relations and the Judicial Interpretation on Law of Application to determine the applicable law.

The Beijing Court also confirmed that the disputed arbitration clause did not include an express agreement on its applicable law. Therefore, pursuant to the afore-mentioned statutes and judicial interpretation, it reasoned that the law of the place of the arbitration institution or the juridical seat should be adopted, if any of those two statutory junctures could be found.

Looking at the text of the arbitration clause, although there was no arbitration institution bearing the name “Singapore International Economic and Trade Arbitration Commission” in Singapore, the Beijing Court found that the parties’ intention to resolve disputes through arbitration was undoubted. From the wording of the dispute arbitration clause, the Beijing Court construed that the parties wanted their arbitration to be conducted under the legal framework of Singapore, and accordingly decided that the seat of arbitration should be Singapore and that the applicable law to the arbitration clause should be Singaporean law.

In its judgment, the Beijing Court also re-emphasized the pro-arbitration position that has been expressed in the Judicial Interpretations issued by the SPC. In the case at hand, application of Chinese law and that of Singaporean law would lead to contradictory results on the finding of validity of the disputed arbitration clause. In deciding to apply Singaporean law, the Beijing Court thus showcased the pro-arbitration attitude of the Chinese courts.

Further, the Beijing Court considered the Plaintiff’s argument on Article 402 of the Chinese Contract Law5)Article 402 of the Chinese Contract Law reads: “Where the agent, acting within the scope of authority granted by the principal, entered into a contract in its own name with a third person who was aware of the agency relationship between the principal and agent, the contract is directly binding upon the principal and such third person, except where there is conclusive evidence establishing that the contract is only binding upon the agent and such third person.” jQuery("#footnote_plugin_tooltip_3259_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3259_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); (“Contract Law”) and found that none of the parties disputed having signed the sales contract. In this regard, since the dispute as to whether the Plaintiff or its principal should be bound by the sales contract was a question of law, the Beijing Court opined that the question of how the contractual rights and obligations should be borne between the parties could only be answered through subsequent hearing on merits. Thus, the Beijing Court concluded that such question did not fall within the ambit of its jurisdiction.

In the end, the Plaintiff’s application for a declaration of invalidity of the disputed arbitration clause was rejected.

 

Comments

The first comment should be made on the impact of a principal-agent relationship on the binding force of a contract under Chinese law, as the question of whether a principal should be bound by the arbitration clause in the underlying contract signed by its agent and the third party is still unsettled in the judicial practice of China.

A thought-provoking comparison could be made between the Convention on Agency in the International Sale of Goods (“Convention”) and the relevant provision in the Contract Law. Article 12 of the Convention provides that

“[w]here an agent acts on behalf of a principal within the scope of his authority and the third party knew or ought to have known that the agent was acting as an agent, the acts of the agent shall directly bind the principal and the third party to each other, unless it follows from the circumstances of the case, for example, by a reference to a contract of commission, that the agent undertakes to bind himself only”.

However, Article 402 of the Contract Law provides that a contract signed by the authorized agent on behalf of the principal shall directly bind the principal and the other signatory party to the contract.

In this regard, the Chinese courts have attempted to clarify their position. In a recent judgment (2019 Hu 01 Min Zhong No. 5542), the Shanghai No. 1 Intermediate People’s Court confirmed that a principal should be bound by the underlying arbitration clause concluded between its agent and a third party, where it was aware of the existence of principal-agency relationship.

Another example (2015 Si Zhong Min Shang Te Zi No. 166) is where a third party who has signed the underlying contract sought to vacate an arbitral award for reason that the winning party, i.e., the principal, was not a signatory party to the contract. After finding that the third party was completely informed of the fact that the actual buyer of the disputed contracts was the principal, the Court concluded that the rights and obligations arose from the disputed contracts signed by the third party and the agent, including but not limited to resolving their disputes by arbitration, directly bound the principal. On other occasions, it was decided that whether an underlying contract would bind the principal was a substantive question that should be left to the arbitration tribunal’s determination.6)See for example, Judgment No. (2015) Luo Min San Chu Zi 874. jQuery("#footnote_plugin_tooltip_3259_6").tooltip({ tip: "#footnote_plugin_tooltip_text_3259_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

However, the Chinese judicial practice up to today has mostly focused on the binding effect of the arbitration agreement on the unsigned principal, while the question in the case before the Beijing Court was whether an agent could rely on Article 402 of the Contract Law and deviate itself from the arbitration clause.

On such issue, one point of view is that since the underlying contract directly binds the principal and the third party as a matter of law, so does its arbitration clause.7)Chen Zhidong (2015), challenges from Article 402 of the Chinese Contract Law on our country’s foreign-related commercial arbitration, Fa Xue. jQuery("#footnote_plugin_tooltip_3259_7").tooltip({ tip: "#footnote_plugin_tooltip_text_3259_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Another point of view is that as a signed party, the agent should be bound by the arbitration clause. If a tribunal decides in its award that the underlying contract directly binds the principal and the third party, then the agent should be discharged from the arbitration clause by virtue of a final and binding arbitral award.8)Compilation of CIETAC Award between 1995-2002, (2002), Law Press, p. 548. jQuery("#footnote_plugin_tooltip_3259_8").tooltip({ tip: "#footnote_plugin_tooltip_text_3259_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The second point of view was adopted by the Beijing Court in the present case.

The second comment is on the determination of applicable law for the arbitration clause. It can be said that the arbitration clause before the Beijing Court was pathological in a way that it provided for an arbitration institution which does not exist in reality.

In this respect, the power to decide the juridical seat is not expressly vested in the Chinese courts under the relevant laws.9)As Article 18 of the Law on Foreign Related Civil Relations and Article 14 of the Judicial Interpretation on Law of Application both confer the relevant Chinese court with the power to decide the applicable law on the basis of a statutory juncture, but remain silent on whether and how the court should examine the existence of a statutory juncture. jQuery("#footnote_plugin_tooltip_3259_9").tooltip({ tip: "#footnote_plugin_tooltip_text_3259_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It is noted that as a result, court judgments swing in their approaches when interpreting whether a juridical seat has been agreed upon or not in vaguely worded clauses.

In past judicial practice, a Chinese court might directly use Chinese law as the applicable law if the arbitration clause does not include a designation of an arbitration institution or a juridical seat. If this approach is taken, such arbitration clause would be declared invalid under Chinese law. However, in this case, the Beijing Court confirmed the parties’ intention to arbitrate their disputes and to do so under the Singaporean legal framework and presumed Singapore as the seat of arbitration.

 

Conclusion

It is noted that when determining the validity of foreign-related arbitration agreements pursuant to the applicable law, the Chinese courts have referred to applicable conflict rules and selective conflict rules to make an arbitration agreement as effective as possible. The present case reflects the judicial philosophy of the Chinese courts to respect parties’ autonomy, and to promote and support commercial arbitration.

In this regard, the reasoning of the Beijing Court’s judgement specifically mentioned that,

where the laws of the place in which the arbitration institution is located and the laws of the place in which the arbitration is conducted are different, the applicable law that makes the arbitration agreement effective shall be chosen to determine the validity of the arbitration agreement, which reflects the court’s principle to support validity of an arbitration agreement in its judicial review of an arbitration.

From the New York Convention on the content as well as the developing trend of international commercial arbitration, to the regulations of judicial interpretation in China, the broadening of criteria of effectiveness of an arbitration agreement in order to allow such arbitration agreement to be as effective as possible, is not only beneficial to respecting the intent of the parties to choose arbitration as a means to settle their disputes, but also conducive to promoting and supporting the development of arbitration, and to create a good legal environment for international commercial arbitration”.

This supportive judicial approach to arbitration is undoubtedly very worthy of affirmation.

However, there are still unresolved issues pertaining to the interpretation of conflict of laws rules such as identification of private international law and definition of points of contact. In this case, the Beijing Court’s judgement lacked an explanation on why it considered “Singaporean legal framework”, rather than “Singaporean arbitration institution” or “American arbitration rules”, to be the point of contact in deciding to apply Singaporean law.

In order to construct Chinese modern rule of law with regard to international arbitration, it is necessary for the Chinese courts to apply reasonable and normative legal interpretation methods, which are regulated in the code of private international laws, i.e., the above-mentioned articles of the Law on Foreign Related Civil Relations and the Judicial Interpretation on Law of Application, and to use methods of contract interpretation to identify the parties’ true intentions through wordings of an arbitration agreement as a complete approach to interpretation, while considering the given facts and the rules of application of laws to justify the corresponding conclusion.

References   [ + ]

1. ↑ See Article 18 of the Law on the Application of Laws to Foreign-Related Civil Relations of the PRC. This Article reads: “The parties may by agreement choose the law applicable to their arbitration agreement. Absent any choice by the parties, the law of the place where the arbitration institution locates or the law of the seat of the arbitration shall be applied”. 2. ↑ Article 14 of the Judicial Interpretation reads: “Where the parties did not choose the law applicable to a foreign-related arbitration agreement, nor did they agree on the arbitration institution or the place of arbitration, or where their agreement to arbitrate cannot be ascertained, the people’s court may apply the law of the People’s Republic of China to determine the validity of the arbitration agreement”. 3. ↑ Article 18 of the Arbitration Law reads: “Whereas an agreement for arbitration fails to specify or specify clearly matters concerning arbitration or the choice of arbitration commission, parties concerned may conclude a supplementary agreement. If a supplementary agreement cannot be reached, the agreement for arbitration is invalid”. 4. ↑ Article 3 of the Judicial Interpretation of the Arbitration Law of the PRC reads: “If the name of the arbitration institution agreed upon in an arbitration agreement is not described in an accurate way, but the specific arbitration institution is determinable, it shall be deemed that the arbitration institution has been selected”. 5. ↑ Article 402 of the Chinese Contract Law reads: “Where the agent, acting within the scope of authority granted by the principal, entered into a contract in its own name with a third person who was aware of the agency relationship between the principal and agent, the contract is directly binding upon the principal and such third person, except where there is conclusive evidence establishing that the contract is only binding upon the agent and such third person.” 6. ↑ See for example, Judgment No. (2015) Luo Min San Chu Zi 874. 7. ↑ Chen Zhidong (2015), challenges from Article 402 of the Chinese Contract Law on our country’s foreign-related commercial arbitration, Fa Xue. 8. ↑ Compilation of CIETAC Award between 1995-2002, (2002), Law Press, p. 548. 9. ↑ As Article 18 of the Law on Foreign Related Civil Relations and Article 14 of the Judicial Interpretation on Law of Application both confer the relevant Chinese court with the power to decide the applicable law on the basis of a statutory juncture, but remain silent on whether and how the court should examine the existence of a statutory juncture. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Financial Services Arbitration under the LCIA Rules: An Outlook

Tue, 2019-09-03 00:57

Aaron McDonald and Jerome Temme

In 2018, financial services disputes accounted for the largest share of disputes referred to the London Court of International Arbitration (LCIA). With indications that the LCIA may adopt a form of summary dismissal procedure in its revised Arbitration Rules this autumn, the LCIA could become an even more important forum for banking and financial services disputes in the coming years.

 

The LCIA – attracting more financials services disputes than other institutions

29% of all cases commenced at the LCIA in 2018 arose in the financial services sector. This figure is up from 24% in 2017 and significantly higher than comparable figures for other major institutions (to the extent that they publish figures for the banking and finance sector separately). At the Hong Kong International Arbitration Centre (HKIAC), 12% of disputes in 2018 were allocated to the finance sector (up from 6% in 2017), whereas at the International Chamber of Commerce (ICC) the “Financing and Insurance” sector accounts for somewhere between 5% and 8% of all cases. At the Singapore International Arbitration Centre (SIAC) – based in another financial hub – “banking and financial services” is included in the catch-all category for “other” sectors, which covers 10% of new cases in 2018 (up from 4% in 2017) but which also includes energy, insurance, and intellectual property disputes.

Another significant figure from the LCIA’s 2018 statistics is that 21% of all new arbitrations were commenced under a “Loan or Other Facility Document” (24% in 2017) which indicates that the nature of the dispute is inherently financial rather than merely a commercial dispute involving a financial institution.

 

London – a financial (and arbitration) hub

London’s status as a global financial hub goes some way to explaining the importance of financial services disputes under the LCIA Arbitration Rules. Lower figures in Hong Kong and Singapore-based institutions show, however, that this cannot be the only explanation.

Many finance documents entered into by international parties are governed by English law – even if there is no direct connection with England – because English law is seen as a good choice for finance contracts, providing practical and commercial solutions to a number of issues. English-seated arbitration is also a popular choice, for example because under English law unilateral option clauses are permissible. These clause are frequently requested by financial institutions (for example in loan transactions and derivatives involving emerging markets), as they allow the institution to choose the dispute resolution mechanism (e.g. arbitration or litigation) after the dispute has arisen depending on the circumstances of the case. However, such unilateral option clauses have been challenged under the laws of some other seats (e.g. France).

Where a contract is governed by English law, parties may therefore be inclined also to choose London-seated arbitration. The choice of the LCIA then often follows naturally when selecting an arbitration institution.

 

Arbitration – a dispute resolution mechanism which has become increasingly attractive to financial institutions

Historically, the financial services sector had been less enthusiastic about arbitration than other sectors (e.g. construction and energy). This was in large part due to perceived downsides of arbitration such as difficulties in conducting proceedings with multiple parties and under multiple contracts, a lack of binding precedent and the lack of expedited or summary proceedings.

That arbitration is used more and more in financial disputes is, at least in part, thanks to modern institutional rules which facilitate the joinder of parties to existing arbitration proceedings and the consolidation of parallel proceedings. Most modern rules also offer expedited timetables for straightforward claims and interim or emergency measures for especially urgent cases.

The ease of enforcing arbitral awards in foreign jurisdictions under the New York Convention – when compared with the difficulties of enforcing court judgments abroad, at least outside the European Union – is another reason why banks increasingly opt for arbitration at a time where their business is increasingly conducted in emerging markets.

Many banking and finance disputes also involve financial products which are becoming ever more complex. In this context, financial institutions value the ability for the parties to choose their own arbitrators, in particular arbitrators with extensive experience in, for example, the type of financial products to which the dispute relates. A number of highly qualified arbitrators with finance expertise are available and arbitral bodies are also sharing their panel lists to make the process of selecting a suitably qualified arbitrator easier.

Another reason for using arbitration is the relative convenience with which parties can agree to keep their arbitration private and confidential. This can be particularly attractive in the securitisation context or where, during the course of the dispute resolution process, details of a party’s financial difficulties would emerge.

 

Summary or early dismissal – making arbitration even more attractive in future for the financial services sector?

The latest development in arbitration practice is the introduction of summary or early dismissal. Such a procedure – the equivalent of a summary judgment procedure in the English courts – allows parties to request that claims, issues or defences that clearly lack merit be dealt with quickly, without the need to go through all the steps of an arbitration, including a hearing.

The lack of a summary or early dismissal procedure in arbitration has, for a long time, been cited as one of the key reasons why clients in the banking and finance sectors preferred litigation in the English courts over arbitration.

In LCIA arbitrations, banking and finance parties appear more often as claimants (21% of claimants vs 12% of respondents in 2018, and 23% vs 9% in 2017). Some of these cases arise where a debtor is in contractual default and has no arguable defence. In the absence of summary dismissal procedures, however, the claimant financial institution will have to conduct a full arbitration, potentially including a full merits hearing, before receiving an award determining that the money is in fact due and the debtor has no defence. The early dismissal procedure allows the claimant to apply to the tribunal and receive an award without going through all the steps, thereby saving both time and expense.

While there are concerns that arbitration awards obtained through summary or early dismissal might not be enforceable in certain jurisdictions because a party has been deprived of its right to have its case heard, most institutions appear to consider that this concern is outweighed by the benefits of a summary dismissal. Whether an enforcement risk exists depends, in the end, on the jurisdictions and parties involved. The English courts have been open to the idea of summary processes in arbitration; for example, in Travis Coal v Essar Global Fund [2014] EWHC 2510 (Comm), the High Court found that the tribunal had complied with its duties to be fair and treat parties equally despite having issued an award using some summary processes.

Institutions such as the SIAC, HKIAC and the Stockholm Chamber of Commerce introduced summary dismissal procedures in their latest set of rules and the ICC clarified in a practice note that ICC tribunals have the power to summarily dismiss claims or issues. It is widely expected that the LCIA will introduce an early dismissal procedure in its 2019 revised rules to be published this autumn.

This could further strengthen the trend of parties to financial transactions choosing the LCIA Arbitration Rules as a go-to dispute resolution mechanism in their finance documents.

 

Future growth for financial services arbitration at the LCIA?

A growing number of financial services arbitrations are seated in London, and this trend is likely to continue, at least in the short to medium term. An increasing number of financial documents entered into in recent years contain LCIA arbitration clauses, and some of these contracts will give rise to disputes which will be submitted to arbitration at the LCIA.

The anticipated LCIA rule change providing for some form of summary dismissal procedure may also encourage financial institutions to include LCIA arbitration in their contracts, and thus lead to more financial services arbitrations in the medium term. This trend may be amplified by the uncertainty surrounding Brexit, which may encourage some parties to move away from English court litigation to London-seated arbitration.

In the longer term, whether financial services arbitration in London continues to grow will depend to some extent on whether the UK will leave the EU with or without a deal, and how banks react to the final outcome. If London maintains its status as a thriving financial centre and an attractive place to do business, the LCIA is likely to benefit from a continued influx of new financial services arbitrations in the long term as well.

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The New OAS Guide on International Contracts and International Arbitration

Sun, 2019-09-01 23:08

José Antonio Moreno Rodríguez

The Guide on the Law Applicable to International Commercial Contracts in the Americas (the “Guide”) was recently approved by Resolution 249 of 2019 of the Inter-American Juridical Committee (CJI) of the Organization of American States (OAS).

The instrument particularly takes into account the OAS Mexico Convention of 1994 “on the law applicable to international contracts” and the Hague Principles “on the choice of law for international contracts,” approved by the Hague Conference on Private International Law in 2015. UNCITRAL, the ICC, the IBA and other organizations related to the arbitral world intervened in the Working Group that drafted these Principles. When dealing with applicable law in arbitration, the Guide focuses in particular on the 1958 New York Convention, and the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law on Arbitration, among other arbitral instruments.

I acted as Rapporteur for the Guide, benefiting from significant input from several jurists and organizations. The document was submitted to the United Nations Commission on International Trade Law (“UNCITRAL”), the International Institute for the Unification of Private Law (“UNIDROIT”) and the Hague Conference on Private International Law, as well as to the ABA Section on International Law, the American Association of Private International Law and the Department of Justice Canada. It received comments from prominent experts of the arbitral world.

The Guide has several objectives. Among others, it seeks to support efforts by the OAS Member States to modernize their domestic laws on the subject. Furthermore, the Guide can provide assistance to contracting parties in the Americas and their counsel in drafting and interpreting international contracts. In addition, it can serve as guidance to judges and arbitrators, who may find the Guide useful both to interpret and supplement domestic laws.

The Guide is preceded by a summary of specific recommendations to legislators, adjudicators, and the parties and their advisors on international contracts.

The Guide itself contains an explanatory introduction (Part One), followed by its context and background (Part Two). Part Three describes the recent developments with uniform law, mostly based on the standardization efforts undertaken by UNIDROIT and UNCITRAL, in addition to efforts by the private sector and other developments in the arbitration arena. Part Four, in turn, describes the uniform method of interpreting international texts. Adjudicators are encouraged to consider its advantages and to take into account the development and dissemination of international jurisprudence in this regard.

Part Five pertains to the scope of the Guide, in terms of international commercial contracts with their corresponding classification and in terms of topics that are excluded, such as those related to capacity, family and inheritance relationships, insolvency, etc.

Part Six deals with the complex problem of non-State law and various related terminologies, such as uses, customs and practices, principles, and lex mercatoria. The Guide adopts the expression “rules of law”, as equivalent to non-State law and other terms referring to the matter. This, in order to take advantage of the extraordinary casuistic and doctrinal developments in the world of arbitration with regards to this expression.

The Guide follows the Hague Principles, according to which the rules of law must be “generally accepted on an international, supranational or regional level as a neutral and balanced set of rules”. In the current state of affairs, the applicability of the UNIDROIT Principles as non-State law if chosen by the parties clearly emerges from the Hague Principles and the Guide. The same applies to the UNCITRAL (Vienna) Convention on Contracts for the International Sales of Goods of 1980 that can be chosen even if not applicable to the case at hand under its own terms.

Part Seven of the Guide deals with the problem of party autonomy in international contracts. Disagreements still exist regarding modalities, parameters, and limitations of the principle. These include, for example, as regards the method of choice – which could be explicit or tacit – whether a connection is required between the chosen law and the domestic laws of the State of the parties to the contract; whether non-contractual issues can be included in the choice of law; which State, if any, can impose limitations on choice; and whether non-State rules can be chosen. Those issues are addressed in the Guide.

Part eight of the Guide refers to express or tacit choice of law, stressing that, one way or another, the choice should be evident or appear clearly from the provisions of the contract and its circumstances.

Part Nine, regarding formal validity of contracts, advocates against any requirements as to form, unless otherwise agreed by the parties or as may be required by applicable mandatory rules.

Part Ten refers to the law applicable to the choice of law clause. In principle, the Guide favors the applicability of the law chosen by the parties. However, it admits that the law of the State in which a party has its establishment may prevail under certain circumstances. The Guide also refers to the innovative provision of the Hague Principles addressing the issue of choice of law when the standard terms submitted respectively by the parties coincide or differ.

Part Eleven deals with separability, whereby the invalidity of an international contract does not necessarily affect the choice of law agreement. Moreover, the effectiveness or invalidity (regardless of whether substantive or formal) of the contract must be evaluated according to the law chosen in the agreement in which it was selected. This separability principle is aligned with the Hague Principles and with the UNCITRAL Model Law.

Part Twelve deals with other problems of law applicable to the field of international contracts. It advocates that a choice of law can be modified at any time and that any such modification does not prejudice its formal validity or the rights of third parties. It also provides that no connection is required between the law chosen and the parties or their transaction. This is still a requirement in some systems, such as the US in its Restatement (Second) of Conflict of Laws. However, a tendency exists towards its abandonment, as reflected in recent international instruments, among them the Mexico Convention and the Hague Principles.

The Guide also deals with renvoi, or the matter if the application of a specific domestic law also includes its private international law provisions. If so, those provisions may refer the matter back to another law. In this case, the Guide advocates for the exclusion of renvoi, to provide greater certainty as to the applicable law, consistent with the Mexico Convention and the Hague Principles.

Part Thirteen deals with the absence of an effective choice of law by the parties. In this case, the Guide advocates the solution of the closest connection contained in the Mexico Convention, and discards others such as the “place of performance” contained in the Montevideo Treaties. The Guide advocates that if adjudicators find that transnational rules are more appropriate and thus more closely connected to the case than national law, they will apply them directly. In this regard, the Guide clarifies an interpretative problem related to the Mexico Convention.1)13. During the process of drafting the inter-American instrument, the United States delegation proposed the formula of the closest connection, the intention being that it would lead to a transnational, non-State law, rather than to a domestic law. Around the same time, the UNIDROIT Principles, some two decades after their inception and drafting, were coming into the limelight. It was the opinion of Friedrich Juenger, member of the United States delegation, that the reference to “general principles” should clearly lead to the UNIDROIT Principles. After considerable discussions during CIDIP-V, a compromise was reached. Regarding the rule that was ultimately adopted, one interpretation is that the role of lex mercatoria or non-State law has been reduced to that of an auxiliary element that, together with the objective and subjective elements of the contract, help the adjudicator to identify the law of the State with the closest connection to the contract. Another interpretation, in line with Juenger´s advocacy, favors the application of non-State law in absence of choice. See the discussion in the OAS Guide, Numbers 353-354. jQuery("#footnote_plugin_tooltip_7052_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7052_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

With respect to arbitration, there are major differences regarding the approach that should be used to determine the applicable law in the absence of an effective choice by the parties. The Guide exposes the different approaches in comparative law and shows how the Mexico Convention can serve as an effective guide for international arbitrations seated in jurisdictions within the Americas.

Part Fourteen deals with dépeçage, or “splitting” of the law, so that different parts of the contract can be governed by different laws. According to the Guide, when granted interpretive discretion, adjudicators are encouraged to admit dépeçage.

Part Fifteen refers to the flexibility to interpret international contracts, to mitigate the harshness of a strict application of the law. In the Americas, a flexible formula has been accepted for many years through Article 9 of the 1979 OAS Inter-American Convention on General Rules of Private International Law, ratified by several countries in the region. The Mexico Convention also contains a flexible formula that can be applied in the determination of the applicable law. In the arbitral world, Article 28(4) of the UNCITRAL Model Law, copied in many arbitral regulations in the Americas, also includes a flexible formula, explained in the Guide.

Part Sixteen of the Guide refers to the scope of the applicable law, and the aspects that will be governed by that applicable law. Specification of these aspects reduces the likelihood of their being otherwise classified as non-contractual and the uniformity of outcomes is thereby encouraged.

Part Seventeen of the Guide deals with public policy. This highly contested notion lacks consensus in regard to the various terms used to refer to it and its relevance and applicability. Also, certainly, there is a lack of effective communication among academics and practitioners. Moreover, this obscure subject is rendered even more opaque by the imprecision, diversity and confusion of the vocabulary used.

In line with the Hague Principles and the Mexico Convention, the Guide attempts to clarify this mess and to simplify the terminology. It addresses the two facets of public policy in the international context. One comprises the overriding mandatory rules of the forum that must be applied irrespective of the law indicated by the conflict of laws rule. The other precludes application of the law indicated by the conflict of laws rule if the result would be manifestly incompatible with the public policy of the forum.

The Guide notes that the question of public policy in arbitration was one of the “most sensitive” issues addressed in the drafting of the Hague Principles. In line with them, the Guide does not advocate for “any additional powers on arbitral tribunals and does not purport to give those tribunals an unlimited and unfettered discretion to depart from the law” that is applicable in principle. On the contrary, tribunals might be required to take account of public policy and mandatory rules, and where appropriate ascertain the need for them to prevail in the specific case.

Part Eighteen of the Guide addresses other issues, such as those related to the existence of other conventions, or states with more than one legal system or territorial units.

By way of example, George Bermann’s recent lecture at the Hague Academy on “International Arbitration and Private International Law” appears in a more than 600 pages book. This publication is sufficient testimony of the complexities, obscurities and gaps existent in relation to international contracts and arbitration. The Guide represents an important step forward in addressing the matter in an effective way.

References   [ + ]

1. ↑ 13. During the process of drafting the inter-American instrument, the United States delegation proposed the formula of the closest connection, the intention being that it would lead to a transnational, non-State law, rather than to a domestic law. Around the same time, the UNIDROIT Principles, some two decades after their inception and drafting, were coming into the limelight. It was the opinion of Friedrich Juenger, member of the United States delegation, that the reference to “general principles” should clearly lead to the UNIDROIT Principles. After considerable discussions during CIDIP-V, a compromise was reached. Regarding the rule that was ultimately adopted, one interpretation is that the role of lex mercatoria or non-State law has been reduced to that of an auxiliary element that, together with the objective and subjective elements of the contract, help the adjudicator to identify the law of the State with the closest connection to the contract. Another interpretation, in line with Juenger´s advocacy, favors the application of non-State law in absence of choice. See the discussion in the OAS Guide, Numbers 353-354. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Mandatory Shareholder Arbitration: Moving the Debate to India

Sun, 2019-09-01 01:21

Avani Agarwal and Aditi Ramakrishnan

Class action suits were introduced in India by the 2013 Companies Act, with the hope that costs of litigation might reduce in comparison to individual cases. However, not a single class action case has been filed in the past five years. This suggests that litigation is currently not serving the interests of shareholders. Given arbitration’s various advantages as a dispute resolution mechanism, mandatory shareholder arbitration may be a good alternative for Indian investors.

While the Indian state has been actively encouraging arbitration over the past few years, domestic securities law has been growing stricter as a result of multiple large scale scandals. These conflicting trends raise questions about the legality of mandatory arbitration clauses in shareholder agreements. This post explores both the law of securities and of arbitration on the matter in order to ascertain the viability of mandatory shareholder arbitration in India.

India’s Arbitration Law – The Arbitration and Conciliation Act 1996, as amended in 2019, lays out India’s arbitration law, inspired largely by the UNCITRAL Model Law. Section 7 simply provides that an arbitration agreement is any agreement by “the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not”. The conditions provided for such an agreement, such that it has to be in writing, are unlikely to impose any restrictions. Section 8 provides that a judicial authority before which a dispute, that is the subject of an arbitration agreement, is brought, must refer the parties to an arbitration. Disputes related to corporate law in India are dealt with by a parallel structure of tribunals, established in 2013 by the Companies Act. While these National Company Law Tribunals are quasi-judicial authorities, they are entitled to refer parties to arbitration under this section (see – Richa Kar v. Actoserba Active Wholesale Pvt. Ltd).

When the word ‘mandatory’ is used, the first concern that may arise is that such a set up might violate the necessity of consent for arbitration. Indeed, the Indian Supreme Court has held that no reference can be made to arbitration unless all the parties explicitly consent (see – Afcons Infrastructure ltd v. Cherian Varkey Construction Company Pvt.). However, this requirement is not necessarily undermined by mandatory shareholder arbitration. Whenever the proposal is brought up, the existing shareholders will have to vote on it. Only those who accept the idea of arbitrating future disputes will vote positively. Shareholders who do not agree may let go of their shares or agree to be bound by the agreement nonetheless. Since the provision introduced by the agreement will be a part of the company’s public documents, all prospective shareholders are legally required to be aware of it. Based on this knowledge, they can make an informed decision about buying the company’s shares and will only agree if they consent to having any conflicts arbitrated. Consequently, Indian arbitration law does not serve as a hinderance to mandatory arbitration for shareholders.

With respect to Indian Corporate Law – There are two conceivable laws that may potentially come into conflict with and impact the viability of mandatory shareholder arbitration in India: the Companies Act 2013, and Securities and Exchange Board of India Act 1992 (“SEBI Act”).

Companies Act – An agreement for mandatory shareholder arbitration can be entered into either in the Articles of Association of a company, or a separate private agreement between the shareholders. Section 6 of the Companies Act states that the provisions of the Act would override any provisions of the articles of association that contradict it. The Companies Act also provides for a National Company Law Tribunal (“NCLT”) for the redressal of any grievances of shareholders. The question then is whether an arbitration proceeding can take place or whether the jurisdiction of the NCLT would override such a proceeding.

The Supreme Court of India has defined a standard rule as to whether or not a matter can be referred to an arbitral tribunal, in the Booz-Allen case. The test is essentially to see whether or not the actions relate to actions in rem or in personam. Actions in rem are to be adjudicated upon by courts, and those in personam may be referred to arbitration. The Bombay High Court has held that arbitration cannot be referred to even when the remedy asked for is in rem. However, the decision has been criticised and the Booz-Allen test continues to be the binding law on the matter. Therefore, it stands to reason that only cases such as winding up or certain cases of oppression and mismanagement cannot be referred to arbitration. In consonance with the broadening acceptability of arbitration, this position has been altered by some courts who say that even in cases of oppression and mismanagement, if the tribunal or court finds the petition to be mala fide, vexatious, or submitted with the intent of avoiding the arbitration clause, the dispute will be duly referred to arbitration.

Additionally, rights in personam that are derived from rights in rem are arbitrable. It must be noted at this point however, that under section 8 of the Arbitration Act, a cause of action cannot be split up to be adjudicated upon.

SEBI Act – A bare reading of the SEBI Act makes it clear that the SEBI performs public functions – it deals with matters of securities that have a larger impact on public and economic development. It ensures investor confidence, which is beneficial for economic progress. The SEBI Act creates and governs special rights. The Bombay High Court has held that if there is a legislation governing special rights and obligations, and the adjudication is reserved exclusively for a specific authority (SEBI in this case), it is contrary to public policy to allow for arbitration.

Given this, there seems to be a bar on arbitration in securities disputes. However, the SEBI itself has promulgated certain norms promoting arbitration in disputes of this nature. It has published a circular laying down procedures and guidelines for arbitration in redressing investor grievance. Further, SEBI bye-laws also provide for arbitration to resolve disputes arising out of trading between members. The bye-laws of the National Stock Exchange also contain similar provisions. It is to be noted that the disputes made explicitly arbitrable by the securities laws and rules in India are rights in personam. It seems clear, therefore, that both the company law in India and the securities law in India arrive at the same conclusion – that so long as the rights affected are in personem, they shall be referred to arbitration whenever an agreement requires this.

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The Singapore Mediation Convention: What Does it Mean for Arbitration and the Future of Dispute Resolution?

Sat, 2019-08-31 03:00

Iris Ng

International arbitration and mediation are often viewed as opponents in an antagonistic battle for the hearts, minds and wallets of disputants. The fear of arbitration losing its status as the most preferred form of alternative dispute resolution is palpable: Mediation’s key disadvantage has long been the difficulty of enforcing mediated settlement agreements. But the United Nations Convention on International Settlement Agreements Resulting from Mediation (“Singapore Convention”) would promote the widespread international enforceability of settlement agreements, which directly erodes the edge of arbitration, considering that the enforceability of arbitral awards is usually ranked as arbitration’s most important feature. In this post, I argue that mediation will not eclipse arbitration anytime soon, but at the same time that the Singapore Convention is a positive development for the dispute resolution system as a whole.

By way of introduction, at the time of writing, the Singapore Convention has been signed by 46 countries including the US, China, India and South Korea. It needs to be ratified by three countries before it comes into force.


Uncertainties in the operationalisation of the Singapore Convention

The first reason why there is room for some healthy scepticism over the Singapore Convention is that there is some uncertainty over how the Singapore Convention will be operationalised. This has several facets, which I will consider in turn.

First, as arbitration practitioners may think with a bit of schadenfreude, the take-up rate of the Singapore Convention is still up in the air. A treaty’s effectiveness hinges on its widespread adoption and acceptance, and the Singapore Convention is still in its infancy compared to the New York Convention. While the initial response to the Singapore Convention has been positive, the fate of the UNCITRAL Model Law on International Commercial Conciliation, 2002 (“Conciliation Model Law”) provides reason to be circumspect. Legislation based on or influenced by the Conciliation Model Law has been adopted in only 33 States in a total of 45 jurisdictions. The corresponding figures for the UNCITRAL Model Law on International Commercial Arbitration is 80 States in 111 jurisdictions. But this comparison is flawed. The Conciliation Model Law was designed to apply in cases where parties could not agree or had not included on a set of mediation rules into their contract.1)Peter Binder, International Commercial Arbitration and Mediation in UNCITRAL Model Law Jurisdictions (Kluwer Law International, 4th Ed, 2019) at p 552. jQuery("#footnote_plugin_tooltip_6279_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6279_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This was revised in 2018 by the UNCITRAL Model Law on International Commercial Mediation and International Settlement Agreements Resulting from Mediation, 2018 (amending the UNCITRAL Model Law on International Commercial Conciliation, 2002) (“Mediation Model Law”), which added, among others, the regime for enforcement that parallels the Singapore Convention. Thus, the slow uptake of the Conciliation Model Law does not necessarily bode ill for the Mediation Model Law or the Singapore Convention.

Second, it is an open question how Article 12(4) of the Singapore Convention will affect its implementation in member states of regional economic integration organisations. Article 12(4) provides that the Singapore Convention “shall not prevail over conflicting rules of a regional economic integration organization” if the settlement agreement is sought to be relied on in a member state, and the states involved that make the mediation “international” under Article 1 of the Singapore Convention are member states. The enforcement regime under the Singapore Convention would therefore be subject to any additional preconditions imposed by regional organisations, such as obtaining the counterparty’s consent, as required under the EU Directive on Mediation, before a settlement agreement may be relied on.

Third, Article 5(1)(d) of the Singapore Convention has the potential to greatly limit the applicability of this Convention. Article 5(1)(d) affords a defence if granting relief would be contrary to the terms of the settlement agreement. On this view, which is supported by the travaux préparatoires,2)See the discussion in T Schnabel, “The Singapore Convention on Mediation: A Framework for the Cross-Border Recognition and Enforcement of Mediated Settlements” (2019) 19 Pepp Disp Resol LJ 1 at 48–49. jQuery("#footnote_plugin_tooltip_6279_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6279_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); parties would be allowed to “contract out” of enforcement of their settlement agreement under the Singapore Convention by so providing in their settlement agreement. Although Article 5(1)(d) might still be limited in effect if courts adopt a strict approach towards interpreting clauses that purport to contract out of the Singapore Convention, legally advised commercial parties are unlikely to face difficulty drafting a sufficiently clear and enforceable clause.

 

Arbitration and mediation: Frenemies in mutualistic competition

The second reason why arbitration practitioners need not panic just yet is that arbitration and mediation are not true enemies, but “frenemies”.

Although arbitration and mediation compete in the same conceptual space of “alternative dispute resolution” to litigation, this dynamic should be viewed as a manifestation of mutualistic, rather than zero-sum competition. Zero-sum competition involves competing against others and according primacy to outcomes because one party’s loss is another’s gain. Mutualistic competition involves competing with others and focuses on the pursuit of an objective (e.g., winning the game) through trying to surpass the competition. To characterise the arb-med relationship as zero-sum competition would be to make two wrong assumptions: (a) that it is impossible to increase the attractiveness of a jurisdiction as a whole as a dispute resolution hub, such that arbitration and mediation advance in tandem (the “fixed pie” assumption); and (b) that disputant-consumers inevitably choose either arbitration or mediation, but not both (the “either/or” assumption).

First, the “fixed pie” assumption is contradicted by empirical evidence. The availability of mediation at several renowned arbitral institutions has not dampened demand for arbitration services. The ICC, SCC, and LCIA are amongst the institutions which have all recorded robust growth over the years despite offering mediation services. This phenomenon arises from the fundamental differences between arbitration and mediation, and how disputants choose one mode of dispute resolution over another for their different competitive advantages. Arbitration is regarded as a “litigation-substitute” pathway to a final and binding determination, which carries precedential value in fact if not in law (especially for test cases with multiple similar claims). By contrast, mediation is a less adversarial mode of dispute resolution that saves “face” and preserves relationships at lower financial cost. In view of the different cost-benefit analyses for disputes of different natures (such as complexity and dollar value), the “fixed pie” assumption is incorrect.

Second, the “either/or” assumption underlying a zero-sum mentality is that parties choose arbitration or mediation, but not both. That is disproved by the existence of various combinations of the two under arb-med, med-arb and arb-med-arb protocols (collectively referred to as “AMA protocols”), which are increasingly popular. According to the 2018 Global Pound Conference Series report, the combining of adjudicative and non-adjudicative processes features in the top three ways to improve the future of commercial dispute resolution. The question then is not whether AMA protocols should be adopted, but which of its forms has the most potential. In this connection, it is significant that the Singapore Convention carves out from its scope of application, under Article 1(3)(b), settlement agreements that have been recorded and are enforceable as an arbitral award.


The New York Convention, the Singapore Convention, and the future of dispute resolution

Speaking in 2016, the Chief Justice of Singapore called for a shift from viewing “ADR” as alternative dispute resolution, to appropriate dispute resolution. The underlying idea is that modern legal systems should provide a diversified range of dispute resolution options so parties can pick the mode of justice that is most suited to the subject matter, parties and desired outcomes. Taking that perspective, the Singapore Convention is but another piece in the jigsaw of global conventions that work towards this end. It joins the ranks, but does not seek to usurp the place, of the New York Convention for arbitration and the 2005 Hague Convention on Choice of Court Agreements for litigation. All things considered, the Singapore Convention is a development that the arbitration and mediation fraternity alike has cause to celebrate.

 

*The article is written in the author’s personal capacity, and the opinions expressed in the article are entirely the author’s own views.

References   [ + ]

1. ↑ Peter Binder, International Commercial Arbitration and Mediation in UNCITRAL Model Law Jurisdictions (Kluwer Law International, 4th Ed, 2019) at p 552. 2. ↑ See the discussion in T Schnabel, “The Singapore Convention on Mediation: A Framework for the Cross-Border Recognition and Enforcement of Mediated Settlements” (2019) 19 Pepp Disp Resol LJ 1 at 48–49. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Is Singapore Convention to Mediation what New York Convention is to Arbitration?

Sat, 2019-08-31 01:00

Ashutosh Ray (Assistant Editor)

If the number of signatories at the launch of a convention is any measure of success, then the Singapore Convention on Mediation (Singapore Convention) had close to five times the signatories as the New York Convention (NYC) which had 10 signatories (by the time the NYC came into force there were 24 signatories). The NYC was signed in 1958, a different world than today. Therefore, drawing parlance between the two conventions based on the number of signatories on the signing date must not be considered an indication of the future success of the Singapore Convention.

The signing ceremony of the Singapore Convention warrants a preliminary dialogue on its ability to break the hegemony of the NYC. This piece is not a clause by clause semantical comparison between the two conventions. Rather, it largely discusses how the Singapore Convention may have to undergo a hiatus due to a combination of factors stemming out of the NYC.

The first factor is the all-encompassing nature of the NYC. Several dispute resolution tools can bask in the NYC’s framework. Any settlement by way of mediation, negotiation and expert determination can be confirmed by an arbitral tribunal as a settlement award enforceable under the NYC. Similarly, an arbitration award can be the result of other hybrid procedures such as med-arb and arb-med-arb. As an example, med-arb enables the parties to secure an arbitral award reflecting their settlement on a few issues and the tribunal’s decision on the remaining issues, all under the framework of the NYC. Similarly, arb-med-arb enables the parties to filter issues by way of arbitration and then mediate those issues while pausing the arbitration proceedings. If the mediation is successful the parties return to the tribunal to pass a settlement award. If the mediation is unsuccessful, they resume the arbitration from where they had paused.

The limited application of the Singapore Convention could be a reason for its delay to gather steam. Unlike the NYC, the Singapore Convention does not support hybrid dispute resolution methods involving arbitration and litigation. This may not find favor with large international businesses who usually enter into elaborate dispute resolution clauses combining more than one dispute resolution tool. Surely, parties may still draft clauses in a manner allowing the application of Singapore Convention and the NYC alike. This will need careful drafting of the dispute resolution clause where mediation proceedings are divorced from the arbitration or litigation proceedings. The settlement agreement will be then enforceable under the Singapore Convention. If the mediation fails, the parties may then initiate a fresh arbitration proceeding and enforce the emanating award under the NYC. The parties may consider stipulating a time-frame to complete the mediation exercise so that their claim is not barred by limitation in the event of a failed mediation. Once the arbitration proceedings are initiated and the parties enter into mediation as part of the arbitration proceeding, any resulting agreement would take the form of a settlement award passed by the arbitral tribunal for it to be enforceable. It will no longer be enforceable under the Singapore Convention as it would be enforceable as an arbitral award. Perhaps, the parties could still use the Singapore Convention to enforce a settlement agreement from a mediation initiated mid-way during arbitration by ensuring that the arbitral tribunal is dissolved by the parties without an award. However, this convoluted mechanism may not be commercially or logistically viable.

Thus, parties might still find it easier to mediate their dispute as part of an arbitration proceeding where the success or failure of mediation will not affect the enforceability of the final award rendered by the arbitral tribunal.

The second factor is the NYC’s coverage. The NYC has been instrumental in promoting international trade and business, and in drawing the international legal world closer. The NYC has 160 signatories to date and is one of the most successful conventions ever. Thus, from the enforcement perspective, parties may still prefer a settlement award under the NYC than a settlement agreement under the Singapore Convention. Until such time that the Singapore Convention has an equal number of signatories (if not more) as the NYC, the latter may remain an attractive option for the parties to enforce their mediated agreements as settlement awards. As for now, existing hubs for international dispute settlement such as the UK, France, and Switzerland have not signed the convention. None of the EU member states have signed the Singapore Convention either. On the brighter side, some of the largest and fast-growing economies such as India, USA, China, and South Korea have signed the Singapore Convention which will encourage several others to sign and ratify the Singapore Convention.

The third factor is the parties’ ability to enforce an arbitration agreement under the NYC.  Singapore Convention does not allow enforcement of agreements to mediate. Thus, a party will have no protection under the Singapore Convention if an opposing party breached the agreement to mediate. The party wishing to enforce an agreement to mediate will have to resort to other protracted avenues to enforce the mediation agreement, just like any other contractual agreement. Therefore, parties may prefer entering into a hybrid arbitration agreement enforceable under the NYC and mediating within its framework instead.

The fourth factor is the lack of national laws on mediation. Ratifying the Singapore Convention would mean that the signatories also enact domestic laws to support the Singapore Convention. It is for this reason, the UNCITRAL Model Law mediation was recently adopted. It aims to guide the signatories to draft laws suited to their needs to support the Singapore Convention. Depending on each signatory’s legislative and administrative process, an exercise such as this across all the signatories will need time. The NYC, on the other hand, is already supported by tried and tested arbitration laws of its signatories, many of which have been amended several times to suit the framework of the NYC.

The fifth factor relates to soft law, protocols and institutional rules. The users of international arbitration complain that international arbitration has become complex, overtly procedural, time-consuming and expensive. They lament that it has become what it sought to address. While these criticisms are valid, it is also true that over the years international arbitration has streamlined across most jurisdictions and has become predictable. International arbitrations in Brazil proceed the same way as they would in Japan. International arbitration, for practical purposes, is no longer an “ADR” tool. It has become mainstream and is the “primary” mechanism for resolving international commercial disputes. While on one hand mediation under the Singapore Convention does hold the promise to be an effective “ADR” tool for resolving international commercial disputes, it is without the safety nets that the NYC affords. As an example, there is yet to be convergence on issues such as what constitute conflicts of interest for a mediator. Compare that to IBA Guidelines on Conflicts of Interest in International Arbitration which has been extensively used by the international arbitration community. Similar aspects of divergence on the conduct of mediation will surface as more settlement agreements are challenged in different jurisdictions (although this is unlikely, given the nature of mediation). Thus, it may be a perceived lack of safety net in adapting to something new that might bother large businesses to mediate their disputes under the Singapore Convention. They may want to wait and watch Singapore Convention’s functioning before including international mediation clauses independent of arbitration clauses in their contracts.

The sixth factor is the liberty of a signatory to limit the application of the Singapore Convention to itself and any of its agencies. So far two States, Iran and Belarus have made such reservations. The NYC does not allow such reservations. Several NYC enforcements emanate from arbitrations involving state agencies. Possibility of such reservations by signatories may hinder the wide and uniform application of the Singapore Convention. The implications would stand out if more signatories made such reservations.

The seventh factor is the possibility for the parties to opt-out of the Singapore Convention. The Singapore Convention states that enforcement of a settlement agreement may be refused if it is contrary to the terms of the settlement agreement. Thus, individual parties may agree to opt-out of the application of the Singapore Convention in their settlement agreement. While this may appear counter-intuitive, the possibility appears to exist.

Singapore Convention’s future looks bright despite the comfort that the NYC affords to the users. While the Singapore Convention seeks to emulate the NYC in the mediation space, it stands on a different pedestal. It comes at a time when international trade is peaking to new heights every day. The Singapore Convention will enter into force after its ratification by at least three signatories. Hopefully, it will be as successful as the NYC and play an important role in aiding the amicable settlement of international commercial disputes.

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Proposals at the UNCITRAL Working Group III for the Establishment of an Advisory Centre: A Possible Path to ISDS Reform?

Fri, 2019-08-30 01:00

Pablo Pérez-Salido

Introduction

There are parallel initiatives currently considering a potential reform of the international Investor-State Dispute Settlement (“ISDS”) system. Particularly, the work presently taking place at the United Nations Commission on International Trade Law (“UNCITRAL”) by its Working Group III (WGIII) is one of the forums that continues to attract attention as we get closer to its 38th Session scheduled for October 14, 2019, in Vienna, Austria (a detailed list of the WGIII’s public documents is available here). The progress at the WGIII has been previously addressed in this blog here and here.

To date, conversations at the WGIII continue to be government-led. In particular, amongst the different governments’ proposals submitted so far, several support the establishment of an advisory centre for investment disputes. Although the idea of an advisory centre is not entirely new,1)See e.g. the Advisory Centre on WTO Law; the UNASUR advisory centre project; and the ASEAN Forum initiative. jQuery("#footnote_plugin_tooltip_7842_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7842_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); it is certainly innovative in the context of ISDS. These submissions argue that an advisory centre is a crucial mechanism to solve issues related to access to legal aid, or lack thereof, by developing countries within the context of international treaty disputes. In essence, this reasoning is mainly motivated by the growing concerns around the costs and duration of ISDS proceedings in the existing system. In fact, this ISDS reform option appears to be a natural response by some national governments to the growing number of recent ISDS cases they are facing and to increasing budgetary constraints resulting from the 2008 financial crisis.

For these reasons, the establishment of an advisory centre could represent a significant opportunity to facilitate access to legal services and expertise necessary to better articulate an efficient defense in investment treaty disputes. However, there are numerous challenges connected to the establishment of such an advisory mechanism. For instance, ISDS is currently a decentralized system, and logistically it could be very difficult to create and, most importantly, finance an international advisory entity with global reach. These concerns are further discussed below in more detail.

 

The Working Group III’s Mandate

Since the summer of 2017, when the WGIII received its mandate2)Official Records of the General Assembly, Seventy-second Session, Supplement No. 17 (A/72/17), paras. 263 and 264. jQuery("#footnote_plugin_tooltip_7842_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7842_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); to identify issues regarding the existing ISDS system and assess whether its reform would be desirable, a total of four sessions have taken place with remarkable results. First, during the 37th Session held in New York in April of this year, numerous issues were identified, and classified under three main groups: (i) the lack of certainty and predictability of ISDS decisions; (ii) the lack of impartiality and independence of the party-appointed arbitrators; and (iii) the costs and duration of the proceedings (A/CN.9/970, para. 16). Subsequently, and in light of these concerns, consensus was ultimately reached by member States that ISDS reform was desirable. Since then, the WGIII has focused its efforts to narrow down the different reform proposals received and to establish a workplan to accomplish such reform.

To date, only the following governments have filed submissions with the WGIII: Indonesia, the EU and its Member States, Morocco, Thailand, Costa Rica, Brazil, Colombia, Turkey, Ecuador, South Africa, China, South Korea, Chile, Israel, and Japan.3)The Governments of Chile, Israel, and Japan submitted a join proposal (A/CN.9/WG.III/WP.163). jQuery("#footnote_plugin_tooltip_7842_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7842_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, it is expected that other delegations will file their submissions before October 2019. While some of the received proposals call for a ‘gradual’ reform, focusing first on resolving the most urgent deficiencies of the ISDS system (namely, third-party funding, code of ethics, dispute prevention mechanisms, and issues related to multiple proceedings), other proposals advocate instead for a more comprehensive ‘structural’ reform. As such, while a final workplan for reform is still being designed, the proposal for the establishment of an advisory centre appears to be compatible with these two predominant approaches for reform.

 

Proposals for the Establishment of an Advisory Centre

In preparation of the upcoming 38th Session, the WGIII published its Annotated Provisional Agenda and preparatory papers on a number of topics, including on the establishment of an advisory centre. Amongst the above-mentioned governments’ submissions, only six include a specific proposal for the establishment of such an advisory centre. Although each proposal offers a different approach to the scope of its services and potential beneficiaries, the rationale behind all of them is the same: the costs and duration of the ISDS proceedings in the current system create a burden on States that typically lack the financial muscle and/or the experience to efficiently handle this type of disputes (mainly, developing countries, but also SMEs and individual investors) (A/CN.9/WG.III/WP.168, para. 4). Consequently, an advisory centre could help developing States, at a low-cost, to better understand, manage, and defend themselves when facing investment disputes. Additionally, it could aid in the exchange of information and create better practices and protection standards for foreign investors.

For instance, Thailand advocates, inter alia, for the establishment of an Advisory Centre for International Investment Law (ACIIL), following the example of the Advisory Centre on WTO Law established in 2001 (A/CN.9/WG.III/WP.162, paras. 26 and 27). This ACIIL, it is argued, would serve a double purpose. First, it would provide States with legal advice before any investment dispute arises; and second, in the event of an existing dispute, it would then act as legal counsel. Further, Thailand suggests that this ACIIL could also help States to build their own institutional capacity and to develop a “Guideline on Dispute Prevention” (A/CN.9/WG.III/WP.162, para 25).

South Korea supports Thailand’s proposal and recognizes its merits. In its submission, South Korea shares its experiences in defending a series of recent ISDS cases and emphasizes the value of accumulated expertise, knowledge, and institutional capacity in both dispute-prevention and post-dispute regulatory efforts (A/CN.9/WG.III/WP.179, page 5, section 2). These factors, South Korea asserts, usually play a crucial role in an effective defense, especially during the early stages of the proceedings. Therefore, South Korea suggests that an advisory centre could allow States to benefit from a system of shared information and experiences between countries. Furthermore, South Korea argues that an advisory centre could also be a platform in charge of the creation and dissemination of new policy guidelines and educational materials on investment law, ultimately contributing to the prevention of investment disputes.

Turkey advocates for reducing costs and the duration of ISDS proceedings through, inter alia, the creation of a non-profit mechanism that would provide low-cost advocacy services to developing countries, SMEs, and individual investors alike. Costa Rica also includes the establishment of such an advisory centre on its list of priorities for ISDS reform. Similarly, Morocco supports the establishment of an aid mechanism for developing countries facing ISDS cases, and emphasizes that a low-cost advisory centre is the only way to enable such countries to better navigate proceedings and efficiently prepare their defenses in this type of disputes (A/CN.9/WG.III/WP.161, paras. 18 to 20). The EU and its Member States agree with this last proposition of a low-cost advisory centre, but further clarify that such mechanism may also work as part of the process of establishing a standing investment court with an appeal mechanism (A/CN.9/WG.III/WP.159/Add.1, para. 38).

 

Challenges to the establishment of an advisory mechanism

Despite the existing support by the aforementioned States, it is uncertain as to whether the establishment of an advisory centre is likely to gain the necessary support from other States in order to be considered a viable reform option. In this regard, some preliminary questions need to be clarified before this proposal can possibly move forward. For instance, who would be the beneficiaries of this hypothetical advisory centre? Would it be limited to developing countries and countries with little experience in defending ISDS cases? Or would it be more expansive and include all respondent States, regardless of their economic status or prior experience defending investment treaty disputes? Finally, as some submissions suggest (i.e. Turkey), could SMEs and individual investors also become beneficiaries of this advisory centre? Determining the list of beneficiaries is crucial because it will have a significant impact on the financial needs, geographical reach, and organizational structure of the advisory centre.

Once determined, it is also imperative to identify the true needs of such potential beneficiaries. Thus, what would be the scope of services provided by this advisory mechanism? For instance, would it only provide services in connection with investment disputes prevention? Or would it also offer active legal services and advocacy support once an investment dispute has arisen? Additionally, would the centre provide support to its beneficiaries in their institutional capacity-building efforts as well as for the development of best practices in investment law?

The response to these and other questions is crucial to evaluate the viability of the proposal. A broader set of services for a larger group of beneficiaries would proportionally impact the magnitude of the organizational structure of the advisory centre and, more importantly, the resources necessary for its financing.

Session 38th at UNCITRAL WGIII appears to be the best platform to discuss these proposals and facilitate consensus around the viability of establishing an advisory centre.

References   [ + ]

1. ↑ See e.g. the Advisory Centre on WTO Law; the UNASUR advisory centre project; and the ASEAN Forum initiative. 2. ↑ Official Records of the General Assembly, Seventy-second Session, Supplement No. 17 (A/72/17), paras. 263 and 264. 3. ↑ The Governments of Chile, Israel, and Japan submitted a join proposal (A/CN.9/WG.III/WP.163). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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The Invisible Arm of GDPR in International Treaty Arbitration: Can’t We Make It Go Away?

Thu, 2019-08-29 03:00

Emily Hay

Tribunal Directions re GDPR in Tennant Energy vs. Canada

A NAFTA tribunal in the Tennant Energy vs. Canada case recently issued directions by email to the parties stating that “the Tribunal finds that an arbitration under NAFTA Chapter 11, a treaty to which neither the European Union nor its Member States are party, does not, presumptively, come within the material scope of the GDPR”.

The tribunal had received submissions from the parties in which the claimant argued that EU General Data Protection Regulation 2016/679 (“GDPR”) should be taken into account and procedures developed to comply with it, since one of the tribunal members is based in the UK. Canada, on the other hand, argued that the GDPR does not generally govern the arbitration proceedings because, among other things, the claim was made under a treaty to which neither the EU nor its Member States are a party, and the arbitration is therefore outside of the material scope of the GDPR.

The tribunal appears to have accepted Canada’s argument that the entire arbitration proceedings fell outside of the material scope of the GDPR. This decision is premised on the fact that Tennant is a treaty-based arbitration. The finding is therefore not relevant to the application of GDPR in commercial arbitration, which has not been questioned.

 

GDPR: Can’t We Make It Go Away?

The GDPR came into effect on 25 May 2018. The GDPR’s obligations are onerous and the sanctions for non-compliance are strenuous. With the aim of ensuring the effective protection of personal data in a world of rapid technological change, the GDPR is a regulation with broad material and territorial scope of application. In international arbitration proceedings, where parties, counsel and tribunal members may be based in different jurisdictions, which may or may not coincide with the place of arbitration and law governing the parties’ relationship, the envisioned broad reach of the GDPR presents a particular conundrum. This is particularly the case when only one or some of the participants in an arbitration have a link with the EU.

In this context, the Tennant tribunal’s directions raise several interesting points about the application of GDPR to international arbitration proceedings, some of which are addressed below.

 

Territorial Scope of the GDPR

The Tennant tribunal concluded that “an arbitration under NAFTA Chapter 11” does not fall within the scope of GDPR since “neither the European Union nor its Member States” are a party to the treaty from which the tribunal derives its mandate. This finding is difficult to reconcile with the provisions on the territorial scope of the GDPR.

Provided the activity comes within the material scope of the regulation, the GDPR does not purport to regulate activities, but rather the actors that undertake such activities. The GDPR’s obligations attach to processing by data controllers and data processors “in the context of the activities of an establishment of a controller or a processor” in the EU (Article 3(1)) or where those outside the EU have targeted sales of goods or services to data subjects in the EU or monitored their behaviour inside the EU (Article 3(2)).

The GDPR therefore does not regulate any arbitration proceedings in the abstract, but it does regulate the processing activities of data controllers and processors that fall within its territorial and material scope. This was highlighted by Canada before the Tennant tribunal in response to the tribunal’s question as to “the applicability of the GDPR to the proceedings in question”. Canada stated that the question as to whether the parties, the arbitrators or the Permanent Court of Arbitration (“PCA”) which administers the dispute are subject to the GDPR “is a separate issue that they each bear the responsibility to determine independently” (Canada’s submission of 11 June 2019, p. 3). This highlights the point that data protection obligations attach to arbitrators, counsel, parties, and institutions across all of their cases, rather than being a set of rules attaching to a particular arbitration.

The question is what are the consequences for the arbitration proceedings when only one or some of the participants in the arbitration are subject to the GDPR. It may be that only one member of the tribunal, or counsel for one party, is a data controller under the GDPR. In that case, the data controller may have obligations under the GDPR even though they are the sole EU “connection” in the proceedings. There is no general exemption for arbitration that would relieve the data controller of its obligations, although there may be specific exemptions under the GDPR or national legislation that are relevant to particular aspects of arbitration proceedings. In practice, the fact that even one tribunal member, party, or counsel is subject to GDPR may potentially have implications for the other participants in the arbitration and the arbitration proceedings as a whole. Whether specific data protection arrangements should be put in place, as well as the nature of such arrangements, must be considered on a case-by-case basis.

 

The Material Scope of the GDPR

The Tennant tribunal held that an arbitration under NAFTA does not “presumptively” come within the material scope of the GDPR. While the tribunal’s communication does not reveal the details of its analysis, it seems to refer to Article 2 of the GDPR, entitled “Material scope”.

The material scope of the GDPR broadly includes all processing of personal data “wholly or partly by automated means” (Art. 2(1) GDPR). However, there are certain exclusions from this material scope, including processing of personal data “in the course of an activity which falls outside the scope of Union law” (Article 2(2)(a)).

Canada argued, and the tribunal appears to have agreed, that arbitrations based on treaties to which the EU is not a party are governed by rules that do not constitute Union law (in this case, NAFTA Chapter Eleven), and therefore fall outside the material scope of the GDPR under Article 2(2)(a).

The excluded subject matter would therefore be “all treaties to which the EU is not a party”. This proposed carve-out is difficult to square with the fact that Article 2(2)(a) GDPR is geared at the internal competence of the EU under the EU treaties, and with the broad application of the GDPR generally.

Article 2(2)(a) was intended to define the internal competence of the EU and its Member States, in particular with respect to national security. Recital 16 of the GDPR sheds some light on this. It states that “[t]his Regulation does not apply to issues of protection of fundamental rights and freedoms or the free flow of personal data related to activities which fall outside the scope of Union law, such as activities concerning national security”.

The specific subject matter of national security is one which “falls outside the scope of Union law”, in that it is not within the EU’s competence under the treaties between the EU and its Member States.

Indeed, in the draft text of GDPR proposed in 2012, the original wording of Article 2(2)(a) was an exclusion of processing “in the course of an activity which falls outside the scope of Union law, in particular concerning national security” (25.1.2012 COM(2012)11 final). This follows similar language in Article 2 of the previous Data Protection Directive 95/46/EC, which excluded a number of further subject matters as falling outside the scope of EU law.

The Explanatory Memorandum to the Irish Data Protection Act 2018 (Ireland’s national legislation implementing the GDPR) states that in light of the case-law of the Court of Justice of the European Union, the exclusion in Article 2.2(a) “appears to be limited in practice to data processing in the context of national security, defence and the international relations of the State” (p.4).

Recital 16 of the GDPR is non-exhaustive, in that it lists subject matters outside EU law “such as” national security. There is room for debate about which activities fall outside the scope of EU law. However, regardless of whether the subject matters excluded from the GDPR are limited to those identified in the Irish Explanatory Memorandum, the issue remains that Article 2(2)(a) is essentially a provision made for internal EU law.

 

International Organisations and Privileges and Immunities

A further issue that was the subject of the parties’ submissions in the Tennant case was whether the PCA is subject to the GDPR because of its status as an international organisation and whether the arbitrators benefited from privileges or immunities derived from the PCA’s Headquarters Agreement with the Netherlands. The Headquarters Agreement governs the PCA’s relationship with the Netherlands and grants certain immunities to “PCA Adjudicators” within the meaning of that Agreement. The issue of the status, and privileges and immunities, of international organisations and their consequences under data protection law (including for any obligations of arbitrators) is a complex one which is outside the scope of the present contribution. For present purposes, it suffices to say that the Tennant tribunal made no finding with respect to the privileges and immunities of the PCA.

 

Conclusion

As illustrated above, the reach of the GDPR can easily be both overestimated and underestimated. Because of the fact that it may appear to merely add complexity to arbitration proceedings, tribunals could be reluctant to recognise and accommodate the obligations arising from this regulation. However, with GDPR serving as a standard for updates to data protection regimes globally, and the growing centrality of data and its protection to doing business, data protection is here to stay. Along with issues of VAT compliance, sanctions, legal privilege, and the protection of sensitive commercial information, it is one more legal regime to factor into the constellation of international arbitration.

In recognition of the need to better understand the role of data protection in arbitration proceedings, ICCA and the IBA have established a Joint Task Force on Data Protection in International Arbitration Proceedings. The task force is developing much-needed guidance to assist arbitration professionals with their data protection obligations during arbitration proceedings, which is due to be issued for public comment later in the year.

 

Emily Hay is rapporteur to the ICCA-IBA Joint Task Force on Data Protection in International Arbitration Proceedings. The views expressed here are her own.

 

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The Amparo: Key Factor in the Arbitration Scene of Central America and Mexico

Tue, 2019-08-27 22:46

David Hoyos and Ana Catalina Mancilla

In July, San Jose, Costa Rica and Monterrey, Mexico hosted the latest Young ITA Talks forum, which was also carried via videoconference. Panelists from all over Central America and Mexico gathered to discuss and share current trends in their respective countries regarding the recognition, enforcement and annulment of arbitral awards.

The in-person panels were held at the headquarters of the Costa Rican – American Chamber of Commerce’s International Center for Conciliation and Arbitration (CICA-AmCham) in San Jose and the Hogan Lovells office in Monterrey; speakers from El Salvador, Guatemala, Nicaragua and Honduras also participated in the event through the webinar.

A common topic during both sessions was the relevance of the amparo action available in certain jurisdictions that may interfere with procedures related to the recognition, enforcement or annulment of arbitral awards. The speakers discussed how, according to their own experience, this constitutional remedy has become a relevant point to reflect upon when applying for the recognition and enforcement of an award, but most importantly when litigating an annulment request.

As a brief background, in Latin America, the commonly called amparo is a mean of protection against any violation of a person’s (natural or legal) constitutional rights, regardless of whether the entity causing such violation is a public authority or a private party. In essence, the amparo’s purpose is the direct protection of human rights.

This constitutional remedy was first established in Mexico at the end of the nineteenth century and since then, it has been adopted by several Latin American countries, including those located in Central America (as reviewed by Flores on a Kluwer blog post about the New Amparo Law in Mexico). The reason behind the adoption and similarity of the amparo in these countries is based on their constitutions; all of them having a federal instrument that provide an extensive and detailed declaration of human rights. The amparo is there to guarantee the protection of those rights.

In the majority of the participants’ countries, after obtaining an unfavorable arbitral award or to request the enforcement and recognition of it, the interested party has to go before the competent judicial authorities. After said processes, many Central American countries’ –and Mexico’s– legislations provide the amparo as a means to challenge the judicial resolutions rendered therein, by which the parties may allege a violation of a constitutional right. Some of those allegations may be based on a lack of legal grounds by the ruling court or any other violation to their judicial due process, as these rights are also protected by their countries’ constitutions.

These available constitutional remedies may cause certain consequences that obstacles the purpose of the arbitration proceeding; forcing it to go through two additional instances. That is, for the award to be reviewed or enforced, it must go through a judicial process and later be reviewed in a constitutional proceeding (through an amparo action brought against the judicial resolution). These two instances have a direct impact on the proceeding’s timeframe and imply a further review by judicial authorities that may not be experts on arbitration matters and therefore, may cause an undesirable modification to the substance of the award.

Notwithstanding these considerations, all speakers agreed that the arbitration scene is substantially improving in Central America and Mexico, noting that the scope of the amparo action is being limited or even declared inadmissible in many jurisdictions.

For example, Guatemalan Constitutional Courts’ recent criterions tend to narrow the amparo’s scope. According to this Kluwer post by Sosa, this tendencies need to continue in order for Guatemala to become a competitive regional arbitral seat.

Mexico’s and Honduras recent reforms are also an example, which will be thoroughly discussed below, basically making their constitutional remedies not much of a hazard. For Mexico, the viable remedy against the annulment´s resolution is now an amparo directo. As for Honduras, the annulment process may be solved before another Arbitral Tribunal, therefore, its resolution isn’t subject to this remedy.

Although the amparo may never be completely eliminated from these countries, recent efforts made by the courts and legislators regarding its proceeding, aim for a faster and more efficient mean of protection.

At the Young ITA Talks, among other matters, the speakers from Mexico, Honduras, Costa Rica and El Salvador had interesting insights regarding the amparo procedures in their countries, as explained below.

Changes on Mexico’s constitutional remedies: Mexican legislation regulates two different amparo proceedings. On one hand, the amparo directo –a single instance procedure initiated either before the Supreme Court or the Collegiate Circuit Courts– which is only admissible against the final resolutions that put an end to a trial. On the other hand, the bi-instance amparo indirecto, which is a slower proceeding, brought before a District Court Judge to challenge an unconstitutional or unlawful act generally committed by a non-judicial government official.

As part of the 2013 reform to Mexico’s Amparo Law, an amparo indirecto may be filed against private institutions or individuals when they execute acts equivalent to those from an authority. However, Carlos Leal-Isla shared that there have been several dissenting criteria determining that this constitutional remedy cannot be brought against an arbitral award itself. Nevertheless, an amparo can be filed against the resolution rendered by the judge in the annulment special procedure. A notable comment concerning this remedy is that the available proceeding against such resolution is now the amparo directo.

As mentioned above, this is an important change in the arbitration scene in Mexico, since the amparo indirecto is, by essence, a slower proceeding to that of the amparo directo because its decision can be appealed to a higher court. This modification was due to the 2011 reform of the Code of Commerce where the ancillary procedure of annulment was abolished in favor of a new annulment special procedure; making its resolution the end of the trial, thus, making the amparo directo the only remedy available.

No amparo against the annulment resolution in Honduras: Unlike Mexico, the amparo action in Honduras can only be filed against resolutions issued by public officials or state authorities. Such proceeding can be initiated before the Supreme Court, in the Appellate Circuit Courts or in the Specialized Courts depending on the alleged violations and their final resolutions do not admit any other remedy. Gómez Bueso explains more about it in this essay (in Spanish).

Regarding the arbitration scene in his country, especially the annulment process against arbitral awards, Roberto Williams commented that, in order to avoid further obstructions in such proceeding, this process may be brought before another Arbitral Tribunal installed within the same Center where the award was rendered, as long as previously agreed upon by the parties. The benefits of considering this option is that any resolution issued by the aforementioned Arbitral Tribunal –according to the applicable legislation and recent jurisprudence– is immune to the amparo’s action since it is not rendered by public officials or state authorities.

The particularity of the amparo in Costa Rica: The Costa Rican amparo is different from other constitutional remedies in the region, in the sense that there’s no need to previously exhaust the corresponding judicial channels. This characteristic grants the user the possibility to proceed directly before the Constitutional Court against any unconstitutional act held by an administrative authority or private party. However, this constitutional remedy is not admissible against judicial resolutions.  

In the arbitration scene (as explained here by Vallejo), the Constitutional Court has held that the amparo action is inadmissible against the arbitration proceedings and its awards, given that the special laws on the subject contain the necessary remedies against those proceedings or awards. This was also commented by Christian Díaz, stating that, making the amparo unavailable, the Court has made its stand to not intervene in the arbitration procedure.

The effectiveness of the amparo in El Salvador against arbitral awards: Under Salvadoran legislation, an amparo can be filed against acts or omissions of public or private entities that violate or restrict someone’s constitutional rights. According to article 81 of El Salvador´s Law of Constitutional Proceedings, the resolution rendered in the amparo proceeding is final and does not admit any kind of appeal, just like Mexico’s amparo directo.

In the arbitration scene, there’s still a dissenting criterion regarding the faculties of a Judicial Courts to dive in and analyze a constitutional transgression in an arbitral award; especially when it comes to awards issued abroad. Humberto Sáenz commented on the matter, describing the situation as a problem –or rather a challenge– that El Salvador must face. However, as explained here by Humberto Sáenz himself, his country is adapting in order to become a more arbitration friendly jurisdiction.

Regarding the effectiveness of the amparo against the recognition of an award, Humberto Sáenz noted that, even after being granted the alleged constitutional protection in El Salvador and prevented its recognition in this country, the opposing party may still go to a foreign jurisdiction and file a request for recognition and enforcement under their legislation. Where, as he explained, the judicial authority could ignore the amparo’s protection, since the New York Convention does not bind the authorities to recognize a foreign resolution issued due to such arbitral award.

The insights shared in this Young ITA Talks suggest that indeed, when applying in this region for the recognition, enforcement or annulment of arbitral awards, it is very important to take into account the amparo action available in each jurisdiction. However, as described throughout the present report, the recent changes in the region’s legislation regarding the amparo proceeding and the latest precedents issued by the judicial authorities on the matter reveal a pro-arbitration tendency, which is undoubtedly a promising sign for the arbitration scene in Central America and Mexico.

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Spain: The Interplay between the Formation of an Arbitration Agreement and the Formation of an Underlying International Sales Contract under the CISG

Tue, 2019-08-27 02:00

Danilo Ruggero Di Bella

This post analyzes the problem stemming from the different form requirements established by the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“NYC”) and the 1980 United Nations Convention on Contracts for the International Sale of Goods (“CISG”) with respect to the formation of the agreements the two Conventions regulate. Being a problem whose ultimate solution lies within the national courts, this analysis limits its scope to Spain’s jurisprudence. Although the findings are limited to Spain’s jurisdiction, they may have a comparative value to sway or inform courts in other countries.

 

The (Problematic) Interaction between the NYC and the CISG

International commercial arbitration goes hand in hand with international trade. Knowing beforehand the competent tribunal, the possibility of appointing experts as its members, fast procedures and the straightforward enforceability of an arbitral award almost everywhere in the world – thanks to the NYC – are among the advantages to opt for international arbitration as the dispute resolution framework in international trade.

Similarly, the CISG offers a practical, uniform and well-balanced substantive framework for sellers and buyers in international transactions around the globe, making the CISG a sensible regime not to derogate from or opt out. Consequently, it is fair to submit that the NYC and the CISG work harmoniously together towards the same goal of removing international trade barriers.

However, a few problems may originate from the interaction between the two Conventions due to their different form requirements. The NYC dictates indeed stricter formal requirements for an arbitration agreement than the CISG does for an international sales contract. Pursuant to Article II of the NYC, an arbitration agreement must be in writing, either in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams (or emails, according to the non-binding – yet authoritative – 2006 UNCITRAL Recommendation interpreting the means of communication in Article II(2) as non-exhaustive). Instead, Article 11 of the CISG professes the freedom of form for the formation of an international sales contract, which needs not be in writing. Under the CISG, parties may indeed enter into a contract orally or by virtue of their mutual conduct according to Article 18. This means that while it may be indisputable that a seller and a buyer have entered into an international sales contract, the same cannot be stated about their arbitration agreement, every time the parties have perfected the underlying sales contract through their conclusive conduct.1)For a thorough study on this issue please read the very intriguing article by Professor Morten Midtgaard Fogt, The Interaction and Distinction between the Sales and Arbitration Regimes, ARIA Columbia, Vol 26, No. 3 (2015), 365 ff. jQuery("#footnote_plugin_tooltip_3630_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3630_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Often in an international sale of goods, the seller may ship the goods upon receiving the counteroffer containing the terms of the buyer or the buyer may make provision for payment or take delivery of the goods after receiving the offer stating the standard terms of the seller without actually signing any contract. If the offer’s or counteroffer’s terms – or simply the seller’s proforma invoice – refer to arbitration as a dispute settlement mechanism, would that arbitration agreement be validly formed, despite not being subscribed or confirmed in writing by the other party? According to the NYC’s formal written requisite, this could be doubtful, whilst based on the CISG this could very well happen.

Additionally, under the CISG, sellers and buyers are bound by the existing practice they have established between themselves as per its Article 9(1). In this respect, another common scenario in international trade is that the seller and the buyer draft and sign a written contract for the first transaction (containing all relevant terms, including an arbitration agreement) and then they keep on performing the following transactions based on the original terms agreed upon in the first contract, but without formalizing them into other following contracts. Could the arbitration agreement contained in the first contract concerning the first transaction be applicable to a dispute arising out the fifth transaction? The answer to this question is in the affirmative according to the CISG because of its Article 9, though, based on the NYC it could well be in the negative due to the formal requirement to be in writing.

Ultimately, it is up to the domestic court – both of the country where the arbitration is held and the country where enforcement is sought – to provide a definitive answer to the questions just posed.

 

How Have the Spanish Courts Grappled with This Issue?

So far, Spain’s Supreme Court (“SC”) has addressed this matter three times (to the author’s knowledge), all in the same year (1998), yet not in a consistent manner.

All three cases concerned an application for the exequatur of a foreign award whose enforcement debtor opposed based on the lack of a written arbitration agreement by relying on Article V(1)(a) of the NY Convention and the consequent enforcement creditor’s failure to supply the written arbitration agreement as per Article IV(1)(b).

The first case (ATS 1332/1998 on February 17th) is about an award of the Court of Arbitration of the Hamburg Commodity Exchange (HCE). The enforcement creditor supplied the correspondence between the parties, an invoice of the underlying transaction and a sale confirmation letter containing an HCE arbitration agreement not signed by either party. The SC maintained that although such documentation was sufficient to accredit the existence of an international sale agreement pursuant to Articles 18 and 19 of the CISG, it was not sufficient to prove the existence of an arbitration agreement under the NYC, therefore it dismissed the exequatur application.

The second case (ATS 1451/1998, on the same day as the previous one) is about an award of the International Chamber of Commerce (ICC) of Paris. The enforcement creditor supplied the correspondence between the parties, a sale confirmation letter containing an ICC arbitration agreement and a telefax sent by the enforcement debtor complementing as well as agreeing in general with the terms of the confirmation letter. Surprisingly, in this instance, the SC took a different approach as it held that the communications between the parties were enough not only to ascertain the existence of an international sales contract, but also the existence of an arbitration agreement. Accordingly, the SC confirmed the exequatur application. Interestingly and (maybe) rightly so, the SC interpreted Article V(1)(a) of the NYC as a conflict of law provision (“the [arbitration] agreement is not valid under the law to which the parties have subjected it”) remitting not to the Spanish domestic arbitration law, but to the substantive law applicable to the contract (the CISG) in order to establish the valid formation of the arbitration agreement. Since the CISG – as international substantive law – envisages the freedom of form to enter into an international sales contract, then the same applies for an arbitration agreement that is part of such an informal contract.

The third case (ATS 370/1998 on May 26th) concerns an award of the International Arbitration Chamber for Fruits and Vegetables (“CAIFL”). The enforcement creditor supplied the correspondence between the parties, an invoice of the transaction underlying the dispute, a delivery note of a previous transaction (hinting at an existing practice between the seller and the buyer), and a sale confirmation letter containing a CAIFL arbitration agreement. Surprisingly, this time the SC changed its stance and reverted to the approach adopted in the first case. The SC concluded that the communications exchanged between the parties were sufficient to accredit the existence of an international sale agreement pursuant to Articles 18 and 19 of the CISG. Nevertheless, they were not sufficient to prove the existence of an arbitration agreement pursuant to the NYC. Consequently, the SC rejected the exequatur application.

 

NYC Safety Valve

It is noteworthy that Article VII(1) of the NYC may curb the strict formal requirement of Article II of the same instrument, as it allows a party seeking enforcement of an award to rely on more favorable law or treaties of the country where enforcement is sought. Accordingly, the CISG can be regarded as the more favorable domestic law or treaty which the enforcement creditor could rely upon, thus circumventing the written requirement of the arbitration agreement as per Article II. However, Article 90 of the CISG may hinder this interpretation as it places the CISG at the bottom of any hierarchy of sources regulating matters governed also by the CISG, so it remains a conundrum which Convention should take precedence over the other.

Importantly, the non-alignment of the form requirement should not be a problem where the applicable version of the CISG is the one of a Contracting State that made a “form” reservation under Article 96, thus making operative Article 12 which requires ad substantiam the written form for an international sales contract.

 

Conclusion

Arguably, the telefax sent by the enforcement debtor in reply to the sales confirmation letter could be presumed as the decisive piece of communication in determining the common intention of the parties to arbitrate (in the cases concerning the German awards no written communication was sent by the other party to accept the other party’s terms). However, this would be an ill-founded assumption that ignores the SC’s reasoning. In the French award case, the SC reaches the conclusion on the valid formation of an agreement on the ground that it expressly considered the less formalist CISG as the legal backdrop regulating not only the international sales contract, but also the arbitration agreement. It is therefore unclear why in the third case the SC did not keep the same line of reasoning to confirm also the CAIFL award.

As in the three cases, the SC follows two different approaches (a stricter one with the German awards and a more flexible with the French award), unfortunately, it is not possible to deduct clearly how and if the SC would reconcile Article II of the NYC with Article 11 of the CISG in the future. Of course, the preferable approach is the flexible one (adopted with the French award) according to which the CISG displaces the NYC and the domestic lex arbitri to favor the uniform worldwide interpretation and application of the CISG in relation with the formation of arbitration. Given the international nature of the transactions governed by the CISG, there should be a presumption for a neutral forum, hence, for a favor arbitralis.

Eventually, the factual circumstances of each case will determine its outcome, yet it is useful to know of such interplay between the two Conventions, the diverging paths national courts can take, and which precedent to invoke to take one path or the other.

References   [ + ]

1. ↑ For a thorough study on this issue please read the very intriguing article by Professor Morten Midtgaard Fogt, The Interaction and Distinction between the Sales and Arbitration Regimes, ARIA Columbia, Vol 26, No. 3 (2015), 365 ff. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Xiamen Maritime Court in China Looks at Disputes with No “Foreign-related Element”

Sun, 2019-08-25 21:00

Brad Wang

In the case of ZL Offshore [translation] (“ZL”) v PICC P&C Shipping Insurance Operation Centre [translation] (the “Operation Centre”) and PICC P&C Zhoushan City Branch [translation] (the “Zhoushan Branch”) pronounced on 20 March 2019 (2019 Min 72 Min Chu 149), the Xiamen Maritime Court (the “Court”) of People’s Republic of China dismissed the challenge against its jurisdiction by the Operation Centre. The case serves as another example on how Chinese courts deal with disputes identified as containing no “foreign-related element”.

 

Background

At the end of 2017, ZL brought both the Operation Centre and the Zhoushan Branch before the Court in an insurance claim dispute due to an accident in Fujian (the “Accident”). The Accident involved a tugboat named Zheng Li 18000 which was owned by ZL. ZL claimed against the 2 defendants for damages of 1 million CNY and legal costs of 0.66 million CNY among other things.

The Operation Centre raised a challenge to jurisdiction against the Court when filling its defence. The Operation Centre argued that the agreement entered into between ZL and itself (the “Agreement”) incorporated the 2017 Rules of Classes 1 & 2 of the West of England Ship Owners Mutual Insurance Association (Luxembourg) (the “Rules”) and section 57 of the Rules1)Section 57 of the 2017 Rules of Classes 1 & 2 of the West of England Ship Owners Mutual Insurance Association. jQuery("#footnote_plugin_tooltip_9597_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9597_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); provides for either litigation at the High Court of Justice of England and Wales or arbitration by a sole arbitrator in London.

The Court therefore was asked to consider whether it should stay the proceeding.

 

The Court’s Reasoning and Decision

The Court noted the incorporation of the Rules in the Agreement and also reviewed the parties’ right to choose a forum under Article 531 of the Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China (the “Interpretation”), which says:2)Section 57 of the 2017 Rules of Classes 1 & 2 of the West of England Ship Owners Mutual Insurance Association. jQuery("#footnote_plugin_tooltip_9597_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9597_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Parties to a dispute over a foreign-related contract, or whose rights and interests in property involve foreigners or foreign affairs, can select a foreign court that has an actual connection with the dispute such as the domicile of the defendant, the place where the contract is performed or signed, the domicile of the plaintiff, the place of the subject matter, and the place where an infringement occurs. [translation]

The Court then looked at Article 5223)Article 522 of the Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China. jQuery("#footnote_plugin_tooltip_9597_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9597_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); of the Interpretation, which serves as the test on whether the dispute is over a foreign-related contract or the rights and interests in property which involve foreigners or foreign affairs (i.e. whether it contains “foreign-related element”), and therefore serves also as a condition on whether Article 531 applies. It says:4)Ibid. iii. jQuery("#footnote_plugin_tooltip_9597_4").tooltip({ tip: "#footnote_plugin_tooltip_text_9597_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The People’s Court can determine a civil case as one involving foreigners or foreign affairs in any of the following situations: (1) One or both parties concerned are foreigners, stateless persons, foreign enterprises or organisations; (2) The habitual residence of one or both parties concerned is outside the territory of the People’s Republic of China; (3) The subject matter is outside the territory of the People’s Republic of China; (4) The underlying facts which create, modify or extinguish the civil legal relationship between parties arise outside the territory of the People’s Republic of China; or (5) Any other circumstances that might deem the legal relationship as involving foreigners or foreign affairs [the catch-all provision].[translation]

In the case before it, the Court observed that the dispute was between Chinese parties only; the domiciles of the parties and the subject matter were all within the Chinese mainland territory; and the Agreement was entered into and the accident took place in the Chinese mainland territory. Also, there was no evidence of any foreign-related element in the dispute i.e., the “catch-all provision” does not apply. Therefore, the parties were not entitled to rely on Article 531 to agree to submit their disputes to a foreign court or foreign-seated arbitration. The incorporation of litigation/arbitration in London was therefore invalid.

After concluding that the arbitration agreement was invalid, the Court then looked at the Provisions of the Supreme People’s Court on the Scope of Cases Accepted by Maritime Courts5)the Supreme People’s Court on the Scope of Cases Accepted by Maritime Courts. jQuery("#footnote_plugin_tooltip_9597_5").tooltip({ tip: "#footnote_plugin_tooltip_text_9597_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); to select an appropriate court for this case. By relying on those provisions the Court held that the case shall be exclusively administered by a maritime court since it is a dispute out of an agreement which was, in nature, a marine insurance contract. Further, as the Accident took place in Fujian adjacent sea area, the Court then applied Article 6(2)(iv) of the Law of the People’s Republic of China on Maritime Procedures6)Article 6(2)(iv) of the Law of the People’s Republic of China on Maritime Procedures. jQuery("#footnote_plugin_tooltip_9597_6").tooltip({ tip: "#footnote_plugin_tooltip_text_9597_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); which provided that the Court, which is adjacent to place of accident, among others, shall have jurisdiction over the case.

 

Observations

Similar to this case, multiple cases through recent years have been heard in Chinese courts and the courts found foreign institutional and ad-hoc arbitration agreement to be invalid if the contract, which incorporates the arbitration agreement, contains no foreign-related element.

In its (2014) Hu 2 Min Zhong Ren (Zhong Xie) No.13 Ruling, Shanghai No. 2 Intermediate People’s Court confirmed that an arbitration agreement for arbitration at HKIAC was invalid given the contract in dispute had no Hong Kong-related element. Similar conclusions were reached in the following cases: Jiangsu Aerospace Wanyuan Wind Power Equipment Manufacturing Co., Ltd. v LM Wind Energy Blade Products (Tianjin) Co., Ltd. (ICC) [arbitration agreement invalid due to absence of foreign-related element]7)Jiangsu Aerospace Wanyuan Wind Power Equipment Manufacturing Co., Ltd. v LM Wind Energy Blade Products (Tianjin) Co., Ltd. (ICC). jQuery("#footnote_plugin_tooltip_9597_7").tooltip({ tip: "#footnote_plugin_tooltip_text_9597_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });; Alcoa v Huo Mei Hong Jun Aluminium Slab Ji Li Min Zhong Zi No.7 (ICC) [Alcoa subsidiary incorporated in the PRC not treated as foreign-related; dispute within jurisdiction of the Intermediate People’s Court under the Civil Procedure Law of the PRC]8)Alcoa v Huo Mei Hong Jun Aluminium Slab Ji Li Min Zhong Zi No.7 (ICC). jQuery("#footnote_plugin_tooltip_9597_8").tooltip({ tip: "#footnote_plugin_tooltip_text_9597_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });; Beijing Chaolai Xinsheng Sports Co., Ltd v Beijing Zhizhixin Investment Consulting Co., Ltd. (KCAB) [arbitral award not recognized due to absence of foreign-related element, and Article V(1)(a) of the New York Convention applied]9)Beijing Chaolai Xinsheng Sports Co., Ltd v Beijing Zhizhixin Investment Consulting Co., Ltd. (KCAB). jQuery("#footnote_plugin_tooltip_9597_9").tooltip({ tip: "#footnote_plugin_tooltip_text_9597_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

It is worth noting, however, the Chinese courts’ judicial thinking on this in two particular cases.

The first is the famous Golden Landmark case, in which the Shanghai No.1 Intermediate People’s Court considered whether there were any “other circumstances that might cause the legal relationship to be regarded as ‘foreign-related’”. The court held that there were, as the parties were both wholly foreign owned enterprises, and they had both been incorporated in the Shanghai Waigaoqiao Bonded Zone, which formed part of the China (Shanghai) Pilot Free Trade Zone. By recognising the case of foreign-related nature, the court recognised and enforced an SIAC award. Following that, on 30 December 2016, Chinese Supreme People’s Court issued a Notice entitled “Supreme People’s Court Opinion on the Provision of Judicial Safeguards for the Construction of Pilot Free Trade Zones”, aiming at strengthening judicial support for the development of pilot free trade zones in China (the “Notice”). The Notice allows, among other things, companies incorporated in the Shanghai Free Trade Zone, in certain circumstances, to agree to arbitrate disputes among themselves outside Chinese mainland.

Similar to the Golden Landmark case, Shanghai Maritime Court in its recent (2017) Hu 72 Min Te 181 Civil Ruling, recognised that the matter involved “other circumstances that might lead to the legal relationship being regarded as ‘foreign-related’”. Shanghai Maritime Court took into consideration that the vessel under the disputed ship-building contract was being built under the relevant standards/rules of American Bureau of Shipping (“ABS”) and was intended to join ABS after completion. The ship-building contract also stated the vessel shall be in compliance with laws and regulations of Marshall Islands and carry the flag of the same. In addition, in a related MOU between the disputant parties, it was agreed that the purchaser was to assign its rights and obligations of the ship-building contract to a subsidiary offshore before delivery of the vessel. Therefore, the LMAA arbitration clause contained in the ship-building contract was considered valid.

 

Conclusion

The decision of ZL case affirms the invalidity of any arbitration agreement or arbitral award concerning disputes which lack any foreign-related element. Parties who choose to proceed with arbitration in a foreign jurisdiction, should make sure that at least one of the following conditions is met if they expect to enforce the arbitral award in China:10)Article 304 of the Opinions on Issues Relating to Application of the PRC Civil Procedure Law. jQuery("#footnote_plugin_tooltip_9597_10").tooltip({ tip: "#footnote_plugin_tooltip_text_9597_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

  1. either or both parties are foreigners, stateless persons, foreign enterprises or organisations, or persons who habitually reside outside China;
  2. the establishment, alteration or termination of the legal relationship between the two parties occurs outside China; and/or
  3. the subject-matter of the dispute is outside China.

If none of the conditions exist, the parties should consider domestic arbitration or court litigation in the Chinese mainland. There remains a risk the “catch-all provision” would apply if they proceed to arbitrate in a foreign forum.

References   [ + ]

1, 2. ↑ Section 57 of the 2017 Rules of Classes 1 & 2 of the West of England Ship Owners Mutual Insurance Association. 3. ↑ Article 522 of the Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China. 4. ↑ Ibid. iii. 5. ↑ the Supreme People’s Court on the Scope of Cases Accepted by Maritime Courts. 6. ↑ Article 6(2)(iv) of the Law of the People’s Republic of China on Maritime Procedures. 7. ↑ Jiangsu Aerospace Wanyuan Wind Power Equipment Manufacturing Co., Ltd. v LM Wind Energy Blade Products (Tianjin) Co., Ltd. (ICC). 8. ↑ Alcoa v Huo Mei Hong Jun Aluminium Slab Ji Li Min Zhong Zi No.7 (ICC). 9. ↑ Beijing Chaolai Xinsheng Sports Co., Ltd v Beijing Zhizhixin Investment Consulting Co., Ltd. (KCAB). 10. ↑ Article 304 of the Opinions on Issues Relating to Application of the PRC Civil Procedure Law. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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The 2019 amendment to the Indian Arbitration Act: A classic case of one step forward two steps backward?

Sat, 2019-08-24 21:00

Subhiksh Vasudev

The Arbitration & Conciliation (Amendment) Act, 2019 (“the 2019 Amendment”), which amends the Indian Arbitration & Conciliation Act, 1996 (“the Act”), came into force with effect from 9 August 2019. The Law Minister of India was recently quoted as saying in one of the press releases (after the Bill in support of the 2019 Amendment was introduced in the lower House of Parliament), that the government intended to make India a hub of domestic and international arbitration by bringing in changes in law for faster resolution of commercial disputes.

Now that the 2019 Amendment is here, this post critically analyzes some of its provisions to understand if it is indeed a step in the right direction for India to become a hub for international arbitration. The analysis and comments in this post are solely and exclusively from the standpoint of international arbitration.

 

Critical analysis of some key provisions of the 2019 Amendment

 

  • The designation and grading of arbitral institutions

The 2019 Amendment introduces Section 11(3A) to the Act whereby the Supreme Court of India and the High Courts shall have the power to designate arbitral institutions, which have been graded by the Arbitration Council of India (“ACI”) under Section 43-I (also introduced by the 2019 Amendment). The underlying idea is that instead of the court stepping in to appoint arbitrator(s) in cases where parties cannot reach an agreement, the courts will designate graded arbitral institutions to perform that task (per Sections 11(4)–(6) of the Act, as amended by the 2019 Amendment). The designation aspect has already been discussed and criticized on this blog. However, it is the grading aspect which I intend to deal with some detail.

The 2019 Amendment introduces Part 1A to the Act, which is titled as ‘Arbitration Council of India’ (Sections 43A to 43M) and which empowers the Central Government to establish the ACI by an official gazette notification (Section 43B). The ACI shall be composed of (i) a retired Supreme Court or High Court judge, appointed by the Central Government in consultation with the Chief Justice of India, as its Chairperson, (ii) an eminent arbitration practitioner nominated as the Central Government Member, (iii) an eminent academician having research and teaching experience in the field of arbitration, appointed by the Central Government in consultation with the Chairperson, as the Chairperson-Member, (iv) Secretary to the Central Government in the Department of Legal Affairs, Ministry of Law and Justice and (v) Secretary to the Central Government in the Department of Expenditure, Ministry of Finance – both as ex officio members, (vi) one representative of a recognised body of commerce and industry, chosen on rotational basis by the Central Government, as a part-time member, and (vii) Chief Executive Officer-Member-Secretary, ex officio (Section 43C(1)(a)–(f)). The ACI is inter alia entrusted with grading of arbitral institutions on the basis of criteria relating to infrastructure, quality and calibre of arbitrators, performance and compliance of time limits for disposal of domestic or international commercial arbitrations (Section 43I).

The main drawback of this scheme is that it limits party autonomy in international arbitration through governmental and court interference. The ACI is a government body which shall regulate the institutionalization of arbitration in India and frame the policy for grading of arbitral institutions. The fact remains that the court’s choice in designating an arbitral institution will be limited by the options presented to it by the ACI. Consequently, the choice of a foreign party appearing before the Supreme Court and seeking appointment of an arbitrator will be limited to institutions which have ACI accreditation and to such arbitrators who may be on the panel of such arbitral institutions. The court will be equally handicapped in designating an ungraded institution – which has a global reputation for its facilities and quality of services and which wants to simply establish its local office in India, without going through the administrative hurdles of being graded by the ACI.

The 2019 Amendment, albeit aimed at institutionalizing the arbitration scene in India, leaves the discretion in the hands of courts and executive to decide who gets to be a part of this reform.  Another problem associated with this governmental control over the institutionalization process is the (possible) nepotism, red-tapism, lack of objectivity and lack of transparency in the grading process. In my experience, a foreign party often prefers to stay away from an arbitration regime with significant degree of court or governmental interference. However, it is nonetheless a welcome move by the government to acknowledge that institutional arbitration is the only way ahead to attract foreign parties to include India as the seat in their arbitration agreements.

 

  • Timely conduct of proceedings

As per the newly introduced Section 23(4), the statement of claim and defence shall be completed within a period of six months from the date of appointment of the arbitrator(s) and as per Proviso to the amended Section 29(1), the award in the matter of international commercial arbitration may be made as expeditiously as possible with an endeavour to deliver it within 12 months from the date of completion of pleadings under Section 23(4).

Whilst it is a welcome step – certainly with the right intent – it may lead to conflicts with the rules of an arbitral institution as it overlooks the procedural aspects inherent to a complex international arbitration. In international arbitration, the arbitrators routinely hold a case management hearing, and after consultation with the parties, issue an order on the procedural timetable for completion of pleadings, conduct of hearings etc. (e.g., see Rule 24 of the 2017 ICC Arbitration Rules). However, if Section 23(4) restricts a tribunal from being in control of its proceedings, then it may be impossible to effectively conduct complex multi-party arbitrations involving massive documents, where it may be practically impossible to complete pleadings in six months. Similarly, the autonomy of parties to decide on a more flexible procedural schedule will be severely limited. Most importantly, the parties will always be wary of the fate of an award where the time requirements of Section 23(4) are not strictly abided.

 

  • Confidentiality

As per the newly introduced Section 42A, the arbitrator, the arbitral institution and the parties to the arbitration agreement shall maintain confidentiality of all arbitral proceedings except award, where its disclosure is necessary for implementation and enforcement of award.

The ICC recently released updates to its Note to Parties and Arbitral Tribunals on the Conduct of Arbitration under the ICC Rules of Arbitration, effective 1 January 2019 in which it stated that all awards made as from 1 January 2019 may be published, no less than two years after their notification, based on an opt-out procedure (paras. 40-46). Per the opt-out procedure, any party may at any time object to publication of an award, or request that the award be sanitized or redacted. In such a case, the award will either not be published or be sanitized or redacted in accordance with the parties’ agreement.

This shows at the outset that India’s practice in publishing the award is in line with globally established arbitral institutions. However, by not incorporating an opt-out scheme in Section 42A, the legislature missed the opportunity to bring clarity to the fate of an award in terms of its publication. Who will decide that the disclosure of an award is necessary for its implementation? Will it mean full disclosure or will parties be allowed to agree on a redacted award? These uncertainties, in my view, only add to the suspense.

 

  • Qualification of arbitrators

The ACI is also entrusted with the function of reviewing the grading of arbitrators (Section 43D(2)(c)). The qualifications, experience and norms for accreditation of arbitrators shall be such as specified in the Eighth Schedule, as introduced by the 2019 Amendment (Section 43J). The Eighth Schedule stipulates nine categories of persons (such as an Indian advocate or cost accountant or company secretary with certain level of experience or a government officer in certain cases inter alia) and only those are qualified to be an arbitrator.

Thus, a foreign scholar or foreign-registered lawyer or a retired foreign officer is outrightly disqualified to be an arbitrator under the 2019 Amendment. For obvious reasons, foreign parties will be discouraged to opt for Indian institutional arbitration where the choice of candidates as their potential arbitrators is limited by nationality, likelihood of lack of experience and specialization – both academic and professional – in handling international arbitrations.

 

Conclusion

In my previous blog post, I mentioned how India is often criticised as a “non-friendly” arbitration jurisdiction by the international community. The 2019 Amendment attempts to take this criticism head-on, however in my view, it makes more misses than hits in the process. Although a step in the right direction yet, India is far away from becoming a global arbitration hub.

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Opting Out of the Domestic Arbitration Regime and Into the International Arbitration Regime, and Vice Versa: The Case of Switzerland

Sat, 2019-08-24 03:00

Andrea Roth

Introduction

The lex arbitri of Switzerland is well-known for affording parties maximum autonomy and procedural flexibility. In line with these principles, parties to international arbitration proceedings have the possibility to opt out of the otherwise applicable Chapter 12 of the Swiss Private International Law Act (“PILA”) and to opt into the statutory rules governing Swiss-seated domestic arbitration proceedings as set out in Section 3 of the Swiss Civil Procedure Code (“CPC”). The reversed option is available to parties to domestic arbitration proceedings as well, i.e. to opt out of the application of the CPC and to opt into the application of the PILA. This post will outline the practical aspects of this matter, with emphasis being put on the applicable case law from the Swiss Federal Supreme Court.

 

PILA v. CPC: Why Would Parties Prefer One Over the Other?

One of the main differences between the statutory rules of the PILA and the rules of the CPC is the more limited grounds to annul an arbitral award rendered in international arbitration proceedings. In domestic arbitration, an award can be annulled if the result of the award is arbitrary because the award is based on findings that are manifestly contrary to the facts on record, or because the award is based on a manifest violation of the applicable law or the principles of equity (Article 393(e) CPC). In international arbitration, however, a party may not challenge an award on the ground that the award is arbitrary. The only available ground allowing a substantive review of an arbitral award is the ground of incompatibility of the award with public policy (Article 190(2)(e) PILA), which is to be assessed more restrictedly than the ground of arbitrariness (see, e.g., the decision of the Federal Supreme Court, ATF 138 III 322, consid. 4.3.2). Furthermore, under the CPC, an award can also be annulled on the ground of manifestly excessive fees and expenses fixed by the arbitral tribunal (Article 393(f) CPC). No such ground exists under the PILA.

In certain instances, parties to international arbitration proceedings may thus have an interest to opt into the statutory rules available in domestic arbitration proceedings. In other instances, parties to domestic arbitration proceedings may prefer to have more limited grounds available to set aside an arbitral award and have thus an interest to apply the arbitration rules as set out in Chapter 12 of the PILA. For example, an international sports federation seated in Switzerland may want to apply the same lex arbitri to its procedures against athletes before the Court of Arbitration for Sport (“CAS”) in Lausanne, irrespective of whether the athlete is domiciled in Switzerland or abroad1)Berger/Kellerhals, International and Domestic Arbitration in Switzerland, 3rd. ed., Berne 2015, para. 114. jQuery("#footnote_plugin_tooltip_3674_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3674_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

 

Legal Bases

Article 176(2) PILA and Article 353(2) CPC both provide that the parties may exclude the lex arbitri applicable to their proceedings and agree on the other lex arbitri as set out in the CPC or the PILA (which otherwise would not apply) by an express declaration in the arbitration agreement or in a subsequent agreement. Such agreement must be in writing (Article 353(2) in connection with Article 358 CPC; see the decision of the Federal Supreme Court, ATF 115 II 390, consid. 2b/bb, with regard to the PILA).

According to the long-standing practice of the Federal Supreme Court established in international arbitration, a mere agreement of the parties to apply either Chapter 12 of the PILA or Section 3 of the CPC to their arbitration proceedings (without excluding the lex arbitri otherwise applicable) is not enough (see e.g. the decision of the Federal Supreme Court, dated 19 November 2013, Case no. 4A_254/2013, consid. 1.2.3, with further references). Rather the agreement must:

  1. contain an express agreement to opt out of the lex arbitri otherwise applicable,
  2. contain an express agreement to opt into either Chapter 12 of the PILA or Section 3 of the CPC, and
  3. be in writing.

Most of the agreements to be assessed by the Federal Supreme Court up until now merely contained opting-in clauses but no opting-out clauses. For example, an agreement read “These proceedings shall be governed by the Swiss Concordat on Arbitration [which was the lex arbitri that applied to domestic arbitration before the CPC came into force]” (see the decision of the Federal Supreme Court, dated 19 November 2013, Case no. 4A_254/2013). As requirement (i) was not met, the Federal Supreme Court considered this agreement to be invalid without being required to assess the sufficiency of an opting-out agreement.

 

New Leading Case Provides Clarity for Opting-Out Clauses

In a recent decision rendered on 7 May 2019 in French, the Federal Supreme Court was presented with the opportunity to assess whether the parties have agreed on a valid opting-out clause (Case no. 4A_540/2018, unofficial English translation available here; as the decision is intended for publication in the official collection it is to be regarded a leading case2)The Federal Supreme Court publishes all its leading cases in the official collection arrêts du Tribunal federal (“ATF”), namely decisions containing changes in case law, clarifications of earlier case law and confirmation of earlier case law that was established some time ago. Before 2000, only the decisions published in the official collection were publicly accessible. jQuery("#footnote_plugin_tooltip_3674_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3674_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });).

The background of this decision was a domestic arbitration proceeding before the CAS. In the proceedings before the CAS, the parties signed a procedural order (l‘ordre de procédure) transmitted by the CAS that provided among others for the following:

In accordance with the terms of the present Order of Procedure, the parties agree to refer the present dispute to the Court of Arbitration for Sport (CAS) subject to the Code of Sports-related Arbitration (2017 edition) (the “Code”). Furthermore, the provisions of Chapter 12 of the Swiss Private International Law Statute (PILS) shall apply, to the exclusion of any other procedural law.”

Before the Federal Supreme Court, the plaintiff argued that the parties had not validly opted out of Section 3 of the CPC as the agreement did not explicitly mention Section 3 of the CPC but only excluded “any other procedural law”.

Thus, in this decision, the Federal Supreme Court had to assess whether the procedural order at hand contained an express agreement to opt out of Section 3 of the CPC as the lex arbitri otherwise applicable (requirement (i) as set out above).

The Federal Supreme Court considered this requirement to be met. According to the Court, a valid opting-out agreement did not need to explicitly mention Section 3 of the CPC or Chapter 12 of the PILA as long as the parties’ intention to exclude the otherwise applicable lex arbitri was clear (Case no. 4A_540/2018, consid. 1.6.1.3). Here, the Court considered the wording “to the exclusion of any other procedural law” [emphasis added] to be sufficiently clear to demonstrate the parties’ intention to exclude Section 3 of the CPC. The Court held that in view of Switzerland’s dualist arbitration regime, an agreement providing for the application of Chapter 12 of the PILA to the exclusion of any other procedural law was to be understood as an exclusion of the alternative statutory rules set out in the CPC, which was particularly clear for two parties seated or domiciled in Switzerland and being assisted by lawyers when signing the procedural order (Case no. 4A_540/2018, consid. 1.6.1.4).

The Federal Supreme Court further clarified that an opting-out agreement can be concluded any time during the arbitration proceedings until the rendering of the award. Finally, in an obiter dictum, the Court indicated that the arbitral tribunal‘s consent would be required if the opting-out was agreed after the constitution of the arbitral tribunal (Case no. 4A_540/2018, consid. 1.6.2).

 

Concluding Remarks

This recent decision of the Federal Supreme Court is to be welcomed as the parties are not burdened with unnecessary formalistic requirements they must meet in order to validly opt out of domestic arbitration into international arbitration or vice versa. Although a valid agreement must contain an express agreement to opt out of the lex arbitri otherwise applicable and an express agreement to opt into either Chapter 12 of the PILA or Section 3 of the CPC, the Federal Supreme Court has clarified that the opting-out agreement need not explicitly mention the lex arbitri otherwise applicable as long as the parties’ intention to opt out is clear.

Even though the decision concerned a domestic arbitration proceeding, it is to be expected that the Federal Supreme Court will apply the same requirements with regard to international arbitration proceedings. Nonetheless, in international arbitration proceedings not all parties may be familiar with Swiss law and its dual arbitration regime with Chapter 12 of the PILA and Section 3 of the CPC that either apply to international or domestic arbitration. Contrary to the parties in Case no. 4A_540/2018, some parties to international arbitration proceedings (in particular if not being assisted by lawyers) may thus not necessarily understand the wording “to the exclusion of any other procedural law” to constitute an opting-out of the lex arbitri otherwise applicable to their dispute. In order to avoid any misunderstandings and any potential disputes, parties to international arbitration proceedings who wish to apply Section 3 of the CPC to their proceedings should consider to include an explicit reference to the statutory rules in their opting-out agreement, for example by using the following wording: “The provisions of Section 3 of the CPC shall apply to the arbitration proceedings, to the exclusion of Chapter 12 of the PILA”.

References   [ + ]

1. ↑ Berger/Kellerhals, International and Domestic Arbitration in Switzerland, 3rd. ed., Berne 2015, para. 114. 2. ↑ The Federal Supreme Court publishes all its leading cases in the official collection arrêts du Tribunal federal (“ATF”), namely decisions containing changes in case law, clarifications of earlier case law and confirmation of earlier case law that was established some time ago. Before 2000, only the decisions published in the official collection were publicly accessible. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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The Arbitral Jurisdiction of The ADGM: How Far Does It Reach … Really?

Thu, 2019-08-22 23:00

Gordon Blanke

Introduction

There have, more recently, been a number of views on the proper scope of the jurisdiction of the Abu Dhabi Global Market (“ADGM”) as an arbitral seat. According to one view, there are no limitations to the scope of arbitration in the ADGM, according to another, more cautious view, arbitration in the ADGM requires an ADGM nexus. Ultimately, it will be for the legislature and/or the competent courts to determine the question of the true scope of the ADGM’s arbitral jurisdiction. At the time of writing, there is no ADGM-specific case law precedent that would answer that question one way or the other, that would confirm a wide or a narrow reading of the scope of the ADGM’s arbitral jurisdiction. To the contrary, existing legislation would suggest a narrower reading. That, of course, does not mean that a wider reading may not be ordained in further course, but for now, there are certain limitations to a wider reading that cannot be overcome by simple disregard.

 

The ADGM and the ADGM Arbitration Regulations

ADGM designates the financial free zone established by the Ruler of Abu Dhabi in 2013. The ADGM takes, to a considerable extent, after the earlier Dubai International Financial Centre (the “DIFC”), which is the financial free zone established by Ruler of Dubai in the Emirate of the Dubai in 2004. Like the DIFC, the ADGM is a judicial free zone, with its own, autonomous common law courts and a body of substantive laws that is adopted wholesale from English statute (albeit that the DIFC takes a more customized approach, having drafted its own body of substantive laws and relying on English law and the laws of other common law jurisdictions as a fallback only).

Importantly, both the ADGM and the DIFC have their own arbitration laws and as such each qualifies as a seat of arbitration in its own right. The ADGM more specifically has adopted the 2015 ADGM Arbitration Regulations (the “ADGM Arbitration Regulations”), which govern arbitrations seated in the ADGM. The ADGM Courts, in turn, serve as the curial courts in ADGM-seated arbitrations.

 

The ADGM Founding Law

The ADGM Arbitration Regulations operate within the legal framework of the ADGM, which, in turn, is subject to its founding law, Law No. (4) of 2013 concerning Abu Dhabi Global Market (the “ADGM Founding Law”). Powers that are not enabled by the ADGM Founding Law cannot come to bear further down in the legislative hierarchy. Similarly, limitations on such powers carry through to the body of secondary legislation, of which the ADGM Arbitration Regulations form a part.

The ADGM Arbitration Regulations, based as they are on the UNCITRAL Model Law, might, on their face, support a wide reading of the scope of the ADGM’s arbitral jurisdiction. However, this does not mean that there might not be inherent limitations in the ADGM’s Founding Law that prevent the ADGM Arbitration Regulations from developing their full potential in establishing the ADGM as an unencumbered seat.

 

Articles 13(6)-(7) of the ADGM Founding Law

Such inherent limitations reside in Articles 13(6)-(7) of the ADGM Founding Law, which provide in pertinent part as follows:

“6. The [ADGM or Global Market] Court of First Instance shall solely consider and decide on matters relating to the activities of the Global Market according to the following:

Civil or commercial cases and disputes involving the Global Market or any of the Global Market’s Authorities or any of the Global Market’s Establishments;
• Lawsuits and civil or commercial disputes arising out of or relating to a contract or a transaction conducted in whole or in part in the Global Market or to an incident that occurred in the Global Market
;

• […]

• Any request which the Global Market Courts has the jurisdiction to consider under the Global Market Regulations.

7. Notwithstanding the provisions of paragraph (6) of this Article, the parties in relation to the issues specified in the first and second paragraphs may agree in their commercial contracts and transactions to the jurisdiction of any court other than the Global Market Court of First Instance or agree to refer their disputes to arbitration.” (my emphasis)

A plain reading of the preceding Articles suggests that under the ADGM Founding Law, arbitration in the ADGM is limited to disputes with an ADGM nexus. Article 13(7) makes strict reference to the first and second paragraphs of Article 13(6) as the limits within which parties may agree to resort to arbitration in the ADGM. More specifically, only the disputes that are listed at those paragraphs, each of which has a nexus with the ADGM, may be referred to arbitration. In other words, referrals to arbitration of disputes that fall outside this scope, i.e., those without any ADGM nexus, will be unenforceable. Importantly, the fourth paragraph, which might have allowed for a wider reading, is excluded from the reference to arbitration under Article 13(7).

 

The Limited Scope of ADGM Arbitration Agreements

It is against this background that I have repeatedly – and entirely correctly to my mind (subject to an unfortunate footnote correction in the terms set out below) – commented on the scope of arbitration in the ADGM in the following terms, distinguishing it from the wider scope of arbitration in the DIFC:

Importantly, the scope of arbitration in the ADGM is much more limited than arbitration in the DIFC. Unlike the case in the DIFC, future arbitrants cannot contract into the resolution by arbitration of any disputes in the ADGM: arbitrating in the ADGM requires a subject-matter nexus to the ADGM. This essentially means that arbitration in the ADGM is limited to (i) the resolution of civil or commercial disputes involving the ADGM or any ADGM stakeholders (i.e. ADGM authorities or establishments) or to (ii) the resolution of disputes arising out of a contract or a transaction conducted in whole or in part in the ADGM or out of an incident that occurred in the ADGM [fn: See Arts 6-7, Law No. (4) of 2013. [This footnote hereby stands corrected to make reference to Art. 13(6) – 13(7).]] As a consequence, DIFC arbitration remains an attractive option for all those that wish to arbitrate in a common law environment in the Middle East. That said, the scope of arbitration in the ADGM is likely to expand as the ADGM is settling in and establishing itself as a new jurisdiction within the UAE.

The footnoted reference to Articles 13(6) and 13(7) is, of course, key and imports the limitation of arbitration agreements in the terms set out at Article 13(7) read together with Article 13(6) of the ADGM Founding Law. It must not be forgotten that the ADGM Founding Law was adopted by the Ruler of Abu Dhabi and as such its provisions trump those of the ADGM Arbitration Regulations, which have been adopted by the ADGM Board of Directors. The ADGM Board of Directors derives its legislative powers from the ADGM Founding Law, Article 6(1) of which authorizes the Board of Directors to “issue the Global Market Regulations relating to the organization of its work and the achievement of its objectives”. The exercise of that power must be subject to any limitations imposed by the ADGM Founding Law, such as the limitation of arbitration agreements contained in Article 13(7).

That limitation is not lifted by the wide definition of “seat” in the terms of Article 33 of the AGDM Arbitration Regulations. This is because, as stated above, the ADGM Arbitration Regulations are, in terms of the legislative hierarchy, inferior to the ADGM Founding Law and as such subject to the limitations contained at Article 13(7). For the same reason, Article 32(3) of the ADGM Arbitration Regulations on the tribunal’s power to award security for costs cannot displace the limitation contained at Article 13(7). In any event, Article 32(3) can perfectly well find application in a situation where the respondent party does have an ADGM nexus (for the avoidance of doubt, the limitation under Article 13(7) does not require both parties to have an ADGM nexus: In actual fact, Article 13(7) would even be satisfied where the underlying transaction has an ADGM nexus albeit that both parties are from outside the ADGM). Finally, the widening of the jurisdiction of the ADGM Courts on the basis of the ADGM Courts, Civil Evidence, Judgments, Enforcement and Judicial Appointments Regulations 2015 as amended by Regulation No 1 of 2018 (the “ADGM Court Regulations”) is clearly limited to the ADGM Courts: Not only do the ADGM Court Regulations not refer to arbitration, but the Board of Directors is simply not empowered to go beyond the limits of Article 13(7) of the ADGM Founding Law. Hence, arbitration agreements are required to have an ADGM nexus in the terms of the first and second paragraphs of Article 13(6) of the ADGM Founding Law. For the avoidance of doubt, the fourth paragraph of Article 13(6) does open up the Board of Directors’ legislative power to widen the jurisdiction of the ADGM Court of First Instance through the adoption of Global Market Regulations, such as it did through the ADGM Court Regulations. No such power, however, is provided by in the ADGM Founding Law with respect to arbitration.

In addition, not to pay heed to the wording contained in Article 13(6) would simply deprive Article 13(7) of all meaning: Why would it otherwise make express reference to arbitration in the first place?

 

Conclusion

How far then does the arbitral jurisdiction of the ADGM really reach? Well, maybe not far enough, but it is what it is. To say the least, awards of tribunals that disregard the limitation to disputes with an ADGM-nexus might face challenges under the ADGM Arbitration Regulations, e.g. under Article 53(2)(ii) (the invalidity of the arbitration agreement).

In any event and for the avoidance of doubt, arbitration in the ADGM would certainly be off to a more promising start if it were not inherently limited by Article 13(7) the way it presently is. To remove this limitation, it will be necessary to call on the ADGM legislator, i.e., the Ruler of Abu Dhabi, which will not necessary be a quick fix, but hopefully a fix after all.

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Nigeria’s Rules on Party Representation in Arbitration Proceedings: A Clog in the Wheel to Attraction?

Wed, 2019-08-21 23:38

Fikayo Taiwo

The interplay between the principle of party autonomy and procedural flexibility in arbitration greatly accounts for the growth of international arbitration as the preferred method of dispute resolution for cross-border commercial disputes. The growing trend of this preference is reflected in the most recent International Arbitration Survey conducted by the School of International Arbitration at Queen Mary University of London. The ability of parties to design many aspects of their proceedings including the seat of arbitration, the procedural rules that may be applicable (ad hoc or institutional) and the law applicable to the merits of the dispute partly account for the most valued reasons why parties would choose arbitration over other dispute resolution mechanisms. Tangential to the determination of a person’s civil rights and liabilities in any form of dispute resolution mechanism, including arbitration, is the need to guarantee parties’ fundamental right to a fair hearing. Embedded in this right to a fair hearing is the right of parties to select competent and experienced professionals to represent their interests, especially in light of the increasing value and complexity of international commercial disputes. Given the significance of this need, most jurisdictions and institutional rules recognise that arbitrating parties are free to appoint representatives of their choice, irrespective of nationality and professional qualification. Section 36 of the English Arbitration Act and Section 594(3) of the Austrian Arbitration Law are some examples of this position. Similarly, Article 4 of the UNCITRAL Arbitration Rules and Article 26(4) of the International Chamber of Commerce Arbitration Rules (‘ICC Rules’) recognise this freedom by providing that parties may appear in person or may be “represented or assisted by persons of their choice” or “through duly authorised representatives”.

However, some jurisdictions deviate from the norm by either proscribing representation by persons other than legal practitioners called to the local bar or specifically require that local counsel advise parties in arbitration either as to local law issues or otherwise. This is the position of Thailand, for instance, where, in certain circumstances, the law restricts representation by foreign lawyers in arbitrations involving Thai law or where the award will be enforced in Thailand.1)Polkinghorne, ‘More Changes in Singapore: Appearance Rights of Foreign Counsel’ (2005) 22 Journal of International Arbitration 75, 78. jQuery("#footnote_plugin_tooltip_5192_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5192_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In Chile, local regulations continue to forbid foreign counsel from representing parties in arbitration proceedings seated within its territory. Furthermore, Article 19 of the Angolan Arbitration Act provides that “parties have the right to appoint a lawyer” and “lawyers” are defined as only those legal practitioners qualified to practise in Angola for the purposes of this Act. Consequently, foreign legal practitioners are prevented from participating in arbitration proceedings as the Angolan bar only accepts Angolan lawyers.

The position is the same in Nigeria, where Article 4 of the Arbitration Rules provides that “parties may be represented or assisted by legal practitioners of their choice”. In determining who a “legal practitioner” is, the Nigerian Supreme Court has held in several cases, including Okafor v Nweke,2)(2007) 10 NWLR (Pt. 1043) 521, 531. jQuery("#footnote_plugin_tooltip_5192_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5192_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); that based on the Legal Practitioners Act, such person must have had his name on the roll “otherwise he cannot engage in any form of legal practice in Nigeria”. While this pronouncement was made with respect to litigation proceedings, it is not difficult to predict that a court faced with the same question in arbitration proceedings will adopt the literal rule of statutory interpretation in holding that the term “legal practitioner” as used in Article 4 is restricted to persons qualified to practice law in Nigeria. This will be particularly so if the court is informed of the previous position, where the High Court of Singapore construed the Singapore Legal Profession Act to have taken away the “common law right to retain whomsoever [parties] … desire or prefer for their legal services in arbitration proceedings in Singapore”.3)Turner (East Asia) Pte Ltd v Builders Federal (HK) Ltd, Josef Gartner & Co. [1988] 5(3) Journal of International Arbitration 139, 147. jQuery("#footnote_plugin_tooltip_5192_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5192_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

While Nigerian law provides for exceptions in the following instances:

  1. Section 2(2) of the Legal Practitioners Act to the effect that any person licensed to practice law in a jurisdiction similar to Nigeria’s may apply to the Chief Justice of Nigeria for authorisation to practice as a barrister for the purposes of any particular proceedings in Nigeria in which case, lawyers from common law jurisdictions may apply; and
  2. with respect to international proceedings seated in Nigeria where the Arbitration and Conciliation Act (ACA) is adopted as the lex arbitri, parties may exclude the application of Article 4 and the Nigerian Arbitration Rules in general through Section 53 of the ACA by agreeing that their proceedings will be governed by any other international arbitration rules;

it appears these provisions, among others, are insufficient in plugging the hole through which Africa-related disputes continue to seep through to Europe for resolution. For example, in a 2005 study, Drahozal and Naimark found that between 1996 and 2003, commercial parties selected Nigerian law and seat in only two international commercial arbitration agreements in contrast with western seats including London, Paris and New York.4)Christopher R Drahozal and Richard W Naimark, Towards a Science of International Arbitration: Collected Empirical Research (Kluwer Law International 2005) 344. jQuery("#footnote_plugin_tooltip_5192_4").tooltip({ tip: "#footnote_plugin_tooltip_text_5192_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In addition, while there has been a general increase in the number of African-related disputes resolved through arbitration as a result of increased investments in Africa, very few of these proceedings are seated in African jurisdictions. For example, the 2018 LCIA Annual Casework Report recorded that out of 317 cases referred to under the LCIA Rules, only 8% of parties were African with a 2.8% Nigerian representation. More significantly, none of the parties chose Nigeria as a seat although Nigerian law was chosen three times.

One could argue that the protectionist approach taken by Nigerian rules to restrict parties in selecting their preferred representatives in arbitration proceedings, among other reasons, partly accounts for its poor “formal legal structure” and “national arbitration law.” These are major factors business persons continue to consider before choosing a seat of arbitration and the continued persistence on this protectionist approach is unlikely to attract international arbitration to the region. This is especially so in light of jurisdictions like Singapore and California, who recognised the adverse effects of restrictive rules and have taken active steps to reverse their previous positions. Similarly, in a bid to enhance Ghana’s chances of being chosen by parties as a seat of arbitration, the Alternative Dispute Resolution Act of 2010 is based on internationally recognised principles and includes many modern and forward-looking provisions including the right of parties to be represented by counsel or any other person of their choice.5)Ghana’s Alternative Dispute Resolution Act of 2010, Section 42. jQuery("#footnote_plugin_tooltip_5192_5").tooltip({ tip: "#footnote_plugin_tooltip_text_5192_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In light of the foregoing, and given the globalization of legal services, it is expedient that foreign respondents are able to have (foreign or non-legal) counsel of their choice, who may be well versed with the intricacies of their transaction and dispute. Given the growing interest of states to provide more favourable conditions to arbitration, considering its importance to domestic and foreign investors, it is more likely than not that protectionist approaches such as the position in Article 4 of Nigeria’s Arbitration Rules will become a thing of the past. This is especially so in light of the Doing Business 2019 findings that Nigeria ranks 92nd out of 190 economies surveyed on the ease of enforcing contracts within the region. In conclusion, where parties are denied the choice of selecting persons who are familiar with their transaction solely on the basis of nationality and/or qualification, there is no gainsaying that this ranking will probably not improve. The determination to maintain this parochial position will inhibit Nigeria’s potential of being an attractive seat of arbitration on the African continent and the world at large.

References   [ + ]

1. ↑ Polkinghorne, ‘More Changes in Singapore: Appearance Rights of Foreign Counsel’ (2005) 22 Journal of International Arbitration 75, 78. 2. ↑ (2007) 10 NWLR (Pt. 1043) 521, 531. 3. ↑ Turner (East Asia) Pte Ltd v Builders Federal (HK) Ltd, Josef Gartner & Co. [1988] 5(3) Journal of International Arbitration 139, 147. 4. ↑ Christopher R Drahozal and Richard W Naimark, Towards a Science of International Arbitration: Collected Empirical Research (Kluwer Law International 2005) 344. 5. ↑ Ghana’s Alternative Dispute Resolution Act of 2010, Section 42. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Enforceability of Awards from Blockchain Arbitrations in India

Tue, 2019-08-20 21:00

Ritika Bansal

With the rise of e-contracts and smart contracts in commercial transactions globally, it becomes important to analyse developments in ADR such as blockchain arbitration. The concept of blockchain arbitration is very recent and it seeks to use the advantages of the technology in dispute resolution (how blockchain arbitration works can be read here). However, one important facet of understanding the feasibility of using blockchain technology in arbitrations in India is understanding whether awards rendered through such a process can be enforceable in the first place. While the 2015 Amendments to the Arbitration and Conciliation Act introduced some changes to bring the Act on par with contemporary technology, there is still lack of clarity in determining whether the peculiar form of blockchain arbitration can be facilitated through the Indian Act.

 

Validity of the Arbitration Agreement in Domestic Awards

One problem identified with the enforceability of blockchain arbitration awards is the lack of enforceability of the agreement itself under the New York Convention which requires such agreements to be in writing or through exchange of telegrams/telefaxes. Similarly, Section 7 of the Arbitration and Conciliation Award also requires that a valid arbitration agreement should be in “writing”. However, unlike Article II of the New York Convention, Section 7 further clarifies that an agreement would be considered as having been in writing if it has been communicated through “electronic means”. The allowance for “electronic means” was introduced through Section 3 of the Arbitration and Conciliation (Amendment) Act, 2015. Electronic means has not been defined under the Act or the Amendment Act despite the recommendation of the 246th Law Commission Report.

However, Section 10A of the Information Technology Act, 2000 gives validity to contracts which are formed through electronic means. Electronic means is defined in the section as means used for creation of an “electronic record”. Electronic Record is further defined under Section 2(1)(t) of the Act as “data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated micro fiche”. Smart contracts are made up of a series of electronic records which are transmitted and stored by the parties, thereby covering the same within the definition of an “electronic means”. Therefore it can be concluded that blockchain arbitration agreements would be valid under the amended Section 7 of the Arbitration and Conciliation Act. The question of whether the Amendment Act would apply or not to particular proceedings would depend on the date of the commencement of such proceedings.

 

Difficulty in Determining Territory of the Awarding Country

India has made the reciprocity reservation under Article I of the New York Convention which means that foreign awards made in only certain Contracting States of the Convention (gazetted by the Central Government) can be enforced in India. As of now, India has gazetted less than 1/3rd of all of the Contracting States to the Convention.

An exception was carved out in the case of Transocean Shipping Agency v. Black Sea Shipping1)(1998) 2 SCC 281. jQuery("#footnote_plugin_tooltip_4227_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4227_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); where an award of Ukraine was enforced in India despite “Ukraine” not being gazetted officially by the Central Government. However, the reason for the same was that the USSR (which Ukraine was a part of originally) was gazetted by India.

In blockchain arbitration, arbitrators are selected by the dispute resolution service provider once a request for arbitration is made from a smart contract. These arbitrators are usually individuals who have applied to the service providers with their expertise. The arbitral award is then given on the blockchain ledger with the copies of such a decision being made available to the parties on their respective computers (in different countries). The arbitral award in itself, however, cannot be said to have been given in any one country. This then results in the question of whether such an award can be enforced in India in light of the reciprocity clause. A strict interpretation of the Arbitration and Conciliation Act would mean that such an award cannot be enforced in India since the physical space of the internet has not been gazetted by the Central Government. Such an interpretation would, however, be antithetical to the arbitration-friendly approach being increasingly adopted by India. Conversely, allowing all awards given through blockchain arbitration could result in the intention misuse of such proceedings to prevent the application of the reciprocity reservation of India.

This question is better answered in cases where the service provider approaches an established arbitral institution to render an award. In such a case, the country, where the arbitral institution is established in, can be considered to decide whether the same would pass the test of reciprocity and enforceability in India.

 

Evidence of Arbitral Award

The provisions for enforceability of a domestic and a foreign arbitral award have been laid down under Sections 36 and 48 of the Arbitration and Conciliation Act respectively. An application made for enforceability of either of such awards should include an “original copy” of the award. This becomes difficult in blockchain arbitration since there is no one “original copy” of the award in these arbitrations and the award is put on the network accessible to everyone.

It can, however, be argued that the Act also allows for “duly certified” copies of the original award to be presented to the Court. The mechanism of blockchain theoretically makes it impossible for anyone to merely alter their copy of the arbitration award, which means that a copy of the award taken from the blockchain would be duly certified in itself. To make it more secure, Courts can be allowed access to the blockchain to procure a direct copy of the award.

However, unlike a foreign award2)EPC Limited v. Rioglass Solar SA, (2018) SCC Online 1471. jQuery("#footnote_plugin_tooltip_4227_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4227_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, a domestic award is further required to be stamped in order to be enforced under Section 36 of the Arbitration Act. Section 3 of the Stamp Act read with Schedule I, Article 12 of the Act suggests an arbitral award made in “writing” should be stamped. The question of a “written” arbitral award is similar to the question of a written arbitration agreement discussed above. The Stamp Act currently does not include “electronic means” in the definition of a written arbitral award. Pending a legislative amendment to this effect, the Stamp Act could be read to allow for “electronic” arbitral awards in keeping with the trend demonstrated in the Arbitration and Conciliation Act and the Information Technology Act towards facilitating technological advancements in commercial transactions.

Further, section 17 of the Registration Act requires domestic awards to be registered when it affects rights related to an immovable property. Only such an award which is then duly stamped and/or registered can be presented to the Court for enforcement3)M. Anasuya Devi v. M. Manik Reddy, (2003) 8 SCC 565 jQuery("#footnote_plugin_tooltip_4227_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4227_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. This means that giving direct access of the blockchain to the enforcing Court would not be sufficient since such an award also needs to be duly stamped and/or registered first. Direct access, in domestic awards, can be given for the purposes of proving the original award while stamping and registering the document. The copy of the award which is then duly stamped and/or registered can be considered as “original” for the purpose of making an application under Section 36 of the Arbitration and Conciliation Act. For foreign awards, direct access can simply be given to the Court in which an application for enforcement of the foreign award is made.

 

References   [ + ]

1. ↑ (1998) 2 SCC 281. 2. ↑ EPC Limited v. Rioglass Solar SA, (2018) SCC Online 1471. 3. ↑ M. Anasuya Devi v. M. Manik Reddy, (2003) 8 SCC 565 function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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One Giant Leap for Chinese Arbitration: An Introduction to the New BAC/BIAC Fee Schedule

Mon, 2019-08-19 21:00

Hu Ke, Jiang Xinyan and Ren Xiaolu

On 19 July 2019, Beijing Arbitration Commission a.k.a. Beijing International Arbitration Center (the “BAC/BIAC”) released its amended Arbitration Rules (the “Rules”) and Fee Schedule (the “Fee Schedule”), both of which will take effect on 1 September 2019.

 

An Overview of BAC/BIAC’s New Fee Schedule

The amendments introduced many reforms to reduce the time and cost of arbitration, addressing a range of issues raised by arbitration users, practitioners, arbitrators and other stakeholders, such as transparency of arbitration costs, single arbitration under multiple contracts, and emergency arbitrator.

The amendment to the Fee Schedule is however the highlight of the changes.

First, the new Fee Schedule separates arbitrator’s fees from administrative expenses for both domestic and international cases, with the arbitrator’s fees consistently higher than the administrative costs. The new Fee Schedule replaces the previous one, which divided the arbitration fees into arbitration acceptance fee and arbitration handling fee without clarifying their respective components, including how much will be used to remunerate arbitrators.

Second, the Fee Schedule provides a new approach to calculate the administrative expenses and the arbitrator’s fees: the amounts calculated for each successive tranche of the amount in dispute must be added together, except where the amount in dispute is over RMB 5 billion (about USD 726 million as of 1 August 2019), the administrative fee charged by the BAC/BIAC will be capped at RMB 8.761 million (about USD 1.27 million); and where the amount in dispute is over RMB 8.682 billion (about USD 1.26 billion), the arbitrators’ fees will be capped at RMB 18 million (about USD 2.6 million), so as to avoid higher costs for high-value cases.

Third, cases with an amount in dispute of no more than RMB 5 million (about USD 0.73 million) will be conducted in an expedited manner, replacing the RMB 1 million (about USD 0.15 million) threshold in the previous fee schedule. There is a modest increase of costs for cases with an amount in dispute above RMB 5 million (about USD 0.73 million), for which the default setting will be a three-arbitrator panel. However, if parties may agree to submit their disputes to a sole arbitrator, the arbitrator’s costs can be reduced by 40% under the Fee Schedule.

Last, the Fee Schedule introduces an optional approach to arbitrator’s fees, that arbitrators may be compensated on an hourly basis upon parties’ agreement, in both domestic and international cases. The fee schedule also sets the ceiling for hourly rates at RMB 5,000/hour (about USD 720/hour), which is believed to be sufficiently attractive for leading arbitrators.

 

Groundbreaking improvements

The division of arbitrator’s fees and the administrative costs, and the consequential set-up of a transparent standard for the arbitrator’s charges are regarded by the Chinese arbitration community as the most groundbreaking improvements.

Its impact is threefold:

First, it delivers long overdue respect to the role of arbitrators in the process by providing fairer compensation for the services they render. It provides a strong incentive for high-quality arbitrator services, thus encouraging and enhancing professionalism among arbitrators’ community.

Traditionally, with institutions at the center of procedural management, arbitrators in China are often not engaged with the case before the hearing. Usually arbitrations in China do not have case management conferences, procedural timetables, comprehensive Procedural Orders No.1. or reasoned procedural orders. Higher compensation leads to more responsibilities. Arbitrators are now expected to do more in procedural management before hearings, and to deliver decisions more efficiently.

Second, by paying arbitrators more competitively and providing transparency on arbitration costs to users, it consolidates the legitimacy of arbitration as a trustworthy private mechanism for resolving commercial disputes by independent, impartial and highly respected umpires, with no or only modest increase in costs.

Last, this reform further reflects, and reinforces, the non-profit nature of arbitration institutions in China, and sets a model for other arbitration institutions to follow.

 

Why the New BAC/BIAC Fee Schedule Is Revolutionary in Chinese Arbitration

A practitioner commented that the new BAC/BIAC Fee Schedule is “one small step for BAC/BIAC, but one giant leap for Chinese arbitration”. This is not an overstatement.

All 260+ arbitration institutions in China are founded and financed by the government. For most of them, the arbitration costs the institutions charge would be regarded as part of the state revenue, while their operating costs are sponsored by the government financial budget separately. As such, when the institutions and the state treasury are making considerable revenue for the administration of justice, the arbitrators are often not well paid. To make things worse, parties are prevented from access to the fee arrangement between institutions and arbitrators, and have no idea how much goes to arbitrators.

Therefore, arbitrators – many being established practitioners, leading academics or senior in-house counsels – are often distracted from their arbitration work by their more profitable, productive, or demanding engagements, and are naturally less committed to their roles as private adjudicators of disputes. While many arbitrators are adhering to high standards in their practice and institutions are managing arbitrators as best as they can, users may find themselves stuck in poorly managed procedures, ill-prepared hearings, a long wait of 12 months or more for the award, or a final decision which is not well written and reasoned. This has become a fundamental challenge to the sustainable development of Chinese arbitration.

In short, users do not get what they pay for. Good arbitrators make good arbitrations, and economic logic tells us we cannot get better arbitrators with less fees. Without competitive remuneration to arbitrators, it would be very difficult for arbitration institutions to develop and retain a large pool of arbitrators committed to quality services. This move by BAC/BIAC is making a significant difference, and we are hopeful other institutions in China will follow.

 

What Further Steps BAC/BIAC May Take

There remain outstanding issues on arbitrator’s fees, such as the division of the arbitrator’s fees among a three-arbitrator tribunal, the method for the determination of arbitrator’s hourly rates (if applicable), and the remuneration of tribunal secretaries and assistants (if any).

The application of hourly charges would be at the center of further discussion. Although the Fee Schedule provides for the option of compensating arbitrators at hourly rates, it does not specify the method for determining the rates and how timesheet should be managed.

To avoid disputes on the application of hourly rates, we suggest BAC/BIAC issue a set of billing principles. BAC/BIAC may take the Arbitrator Billing Guidelines of AAA/ICDR and the Terms of Appointment including Remuneration of CIArb as references. Several principles therein are worth considering when drafting BAC/BIAC’s own set of billing principles, such as the relevant Code of Ethics for Arbitrators, disclosure of pre-set rates, calculation methods for arbitrators’ fees, cancellation fees, and reimbursement of expenses reasonably incurred. Such a set of billing principles would guide arbitrators in formulating their hourly rates as reasonably as possible and provide more transparency to users.

 

Conclusion

With the amendment of the Chinese arbitration laws already on the calendar of the Standing Committee of the National People’s Congress, we look forward to China further modernizing the arbitration legislation, rules and practice in the near future.

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Kazakhstan Internationalises Arbitration Law

Mon, 2019-08-19 01:32

Cameron Ford

Kazakhstan has been making concerted efforts to increase foreign investment and to reduce its dependency on extractive industries which have long dominated production. In 2015, when it was ranked 77th out of 190 countries for doing business, the then President introduced a “100 Concrete Steps” Plan to make the country one of the top 30 developed countries by 2050. In 2019 it had risen to 28th place, no doubt in large part due to the Plan which focused on five critical areas – New Modern State Apparatus; Rule of Law; Industrialization and Economic Growth; Nation with a Shared Future; Transparent and Accountable Government. A report by the Boston Consulting Group in December 2018 Investing in Central Asia was optimistic about the potential for future investment in Kazakhstan, identifying further improvement of the investment environment as one of the five keys to unlocking full potential.

Straddling a number of those areas is the Astana International Financial Centre (AIFC), incorporating the AIFC Court and the International Arbitration Centre (IAC) (past coverage of that development available here). The AIFC came into being in 2018 and is intended to be a major financial hub for Central Asia, the Caucasus Republics, Eurasian Economic Union, the Middle East and Europe. The AIFC Court hears disputes arising out of the AIFC with judges from common law countries and Lord Woolf as its first Chief Justice.

Being an arbitral institution, the IAC is not limited to administering disputes arising out of transactions within the AIFC but is available for disputes in transactions generally. Any contract may refer disputes to be resolved under IAC arbitration. To deal with these, the IAC was endowed with a set of state-of-the-art rules, a panel of outstanding international arbitrators and mediators, and an internationally regarded Chairman in the person of Barbara Dohmann QC.

 

2019 Amendments to the Law on Arbitration

Complementing the Plan and the IAC in particular, in January 2019 Kazakhstan amended its 2016 Law on Arbitration (the Law) (see rough translation in English of the Law) to align it with international conventions and practice by the Law of the Republic of Kazakhstan No. 217-VI “On Amendments to Certain Legislative Acts of the Republic of Kazakhstan Concerning Strengthening the Protection of Property Rights, Arbitration, Optimizing the Judicial Caseload, and Further Humanizing the Criminal Law”. This approach to internationalising arbitration could be expected to increase the attractiveness of the IAC as an administering institution and arbitration for Kazakhstan generally. This in turn can lead to significant increases in foreign direct investment,1)A Myburgh and J Paniagua, Does International Commercial Arbitration promote Foreign Direct Investment?, The Journal of Law and Economics 59(3):597-627 August 2016. jQuery("#footnote_plugin_tooltip_7977_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7977_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); can have a measurable impact on the country’s trading patterns particularly in the increased export of complex goods, and can trigger a process of institutionalization.2)Daniel Berkowitz, Johannes Moenius & Katharina Pistor, Legal Institutions and International Trade Flows, 26 Mich. J. Int’l L. 163 (2004), 177. jQuery("#footnote_plugin_tooltip_7977_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7977_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The more important 2019 amendments relax the requirements for the arbitration agreement, enable foreign law to be chosen to govern the dispute, allow the tribunal to use foreign law to determine the governing law, reduce the grounds for annulment of an award, internationalise the grounds for refusing to recognise an award, and restrict a state party’s revocation of consent to arbitration. This post discusses each of these changes in turn.

 

  1. Relaxing Arbitration Agreement Requirements

Before the changes, in order to be enforceable, arbitration agreements were required to state the intention of the parties to refer disputes to arbitration, indicate the subject matter to be determined by arbitration, state a specific arbitral institution or rules, and have the consent of the relevant authorised body where a state entity was party to the agreement.

Article 9.4 of the Law has been amended to remove those strictures, making more arbitration agreements enforceable and enabling parties to choose ad hoc arbitration.

This change gives foreign parties greater confidence that their arbitration agreement with a Kazakh counterparty will be upheld and this makes it more attractive for to agree to arbitration. This in turn encourages foreigners to do business with Kazakh state entities and nationals, increasing investment in the country. One of the reasons arbitration is chosen by foreign parties is their unfamiliarity with domestic courts and laws. If foreigners fear their arbitration agreement will not be upheld domestically and the local party will be allowed to commence domestic court proceedings, they may simply not enter into the transaction or require something to allay their fears such as some form of security, better terms and so on. This has the effect of either chilling investment in the country or increasing transaction costs.

 

  1. Foreign Law as Governing Law

Under Article 44.1 foreign law may now be chosen as the governing law of the contract and the dispute where one party is foreign to Kazakhstan. Formerly, that article required the governing law to be that of Kazakhstan where one party was a state entity – i.e., state bodies, and entities held 50% or more by the state. Now only contracts and disputes purely between Kazakh parties must be governed by Kazakh law.

This is a significant advancement, making transactions with Kazakh parties more attractive to foreigners and making arbitration in Kazakhstan more international. As well as being concerned at unfamiliarity with domestic courts, foreign parties worry about being committed to an unknown domestic law in a system they may not understand. Transacting under such a law increases risk and uncertainty, sometimes to levels a foreign party is unable to accept. Having the ability to choose a known and neutral governing law enables those risks to be managed and the transaction to be approved.

 

  1. Foreign Law May Determine Choice of Law

Article 44.1 now says that, if the parties do not agree, the applicable law will be determined in accordance with appropriate conflict of laws rules determined by the tribunal. This replaces the former position that the applicable law was determined by reference to Kazakh law and now conforms to Article 7 of the European Convention on International Commercial Arbitration.

Although under-appreciated by lay parties, the possibility of foreign choice of law rules determining the governing law makes contracting with Kazakh parties more appealing. Lawyers for foreign parties would have more confidence that an appropriate law with which they are familiar would be chosen in this way.

 

  1. Grounds of Annulment Reduced

Awards may no longer be annulled simply because they do not comply with the Law’s requirements on written form and signature. Under Article 52, Kazakh courts now may not examine the substance or merits of an award in annulment or recognition proceedings, in line with the New York Convention. Where the ground relied on for annulment is the tribunal’s non-compliance with the parties’ agreement that agreement cannot be contrary to the mandatory provisions of the Law. If there is no agreement, an award may be annulled if the tribunal did not comply with the Law generally, not only its mandatory provisions. This matches the approach of the UNCITRAL Model Law on International Commercial Arbitration.

Reducing the grounds of annulment, particularly quarantining the merits from review, makes parties feel safer in doing business with Kazakh counterparties and in selecting arbitration. Enforcement and recovery are very real questions for all parties to contracts without the added uncertainty of the potential for annulment through a merits review, particularly when the international standard restricts annulment to much narrower grounds.

 

  1. Internationalising Recognition and Enforcement

Article 57 on recognition of awards has been amended to align more closely to the New York Convention with three changes:

  • Under the former Law, a Kazakh court could refuse to recognise or enforce an award if it had been made possible by the commission of a criminal offence. This has been removed by the 2019 amendments.
  • Formerly an award could be invalidated and refused to be enforced if the arbitration agreement did not state its governing law. This has been removed, with invalidity of the arbitration agreement now being determined by the law where the award was made.
  • Before the amendments, the Law stated that an award was unenforceable if the tribunal did not comply with “the law”, without stating which law. Arguments could be made that “the law” referred to Kazakh law, the governing law of the contract, the lex arbitri or the law where the award was made (if different from the lex arbitri). The changes clarify that the law to be complied with is the law of the place where the arbitration was held.

While it would be rare for awards to be invalidated because they had been made possible by a criminal offence, it would be much more common for arbitration agreements not to state their governing law. Many arbitration agreements would fall into this category, with most seeming to assume they are governed by the law applicable to the contract. Removal of this ground of refusal to recognise is a significant step in giving parties confidence their awards will be enforced, in turn encouraging foreign parties to transact with Kazakh parties and agree to arbitration. The same could be said of clarification of “the law” with which the award must comply.

 

  1. Revocation of State Party’s Consent

Unlike the position before the amendments, under Article 8.10 a state party cannot now revoke its consent to arbitration. A state party is a state body or an entity in which the state has 50% ownership or more. Under Article 8.10, state parties must obtain the consent of the “authorised body” of their relevant industry to enter into an arbitration agreement. Formerly there was no preclusion on the authorised body revoking its consent at any time; however the 2019 amendments now state in article 8.10 that the consent is irrevocable.

Foreign parties must have been cautious in dealing with state parties before the amendments, not knowing whether the state party would adhere to the arbitration agreement or the foreigner be forced into domestic court proceedings. Again, this change heightens confidence in dealing with state parties and agreeing to arbitration.

 

Comments

Viewed overall, the amendments make transactions with Kazakh parties more attractive to foreigners knowing that they can choose a foreign governing law, their arbitration agreements are more likely to be upheld, they do not have to know and comply with obscure technical requirements, and that awards have a greater chance of being recognised and enforced.

On his appointment as Chief Justice of the AIFC Court, Lord Woolf said:

“[The President] wants the world to see English common law being applied in this country and not just in the capital, but to radiate throughout society in years to come as an example of how business should be done and justice done.”

The IAC and the amendments to the Law can be seen as part of that vision, not just promoting arbitration but also the common law, both with the ultimate aim of increasing business in the country and diversifying the economy.

Central Asia generally is seeing a move towards institutionalising and modernising arbitration as part of efforts to improve access to justice and the general investment environment. Kazakhstan is the largest country in Central Asia with vast oil, uranium and other mineral resources. Its efforts to attract trade through developing its laws and arbitration are likely to be mimicked by other countries in the region. Not only might the common law radiate through Kazakh society, but modern arbitration laws and rules might radiate through the region.

In November 2018 Uzbekistan resolved to establish the Tashkent International Arbitration Centre under the Chamber of Commerce and Industry of Uzbekistan to promote arbitration and investment (past coverage of that development available here).

Kyrgyzstan proposes to institutionalize arbitration as a mechanism for improving the access to justice as reported in this blog in Arbitration in Kyrgyzstan: Evolution and Next Steps Ahead.

In 2016 Turkmenistan adopted the International Commercial Arbitration Law based on the UNCITRAL Model Law but is not a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards – see in this blog Law of Foreign Arbitration in Turkmenistan: An Introduction.

Tajikistan has also ratified the New York Convention with a reservation that it would not be applied to differences related to immovable property, a restriction which may impose significant limitations on the utility of arbitration in infrastructure disputes.

Further modernisation of arbitration law, institutions and rules can be expected across the region as countries vie for foreign investment and seek to diversify their economies.

References   [ + ]

1. ↑ A Myburgh and J Paniagua, Does International Commercial Arbitration promote Foreign Direct Investment?, The Journal of Law and Economics 59(3):597-627 August 2016. 2. ↑ Daniel Berkowitz, Johannes Moenius & Katharina Pistor, Legal Institutions and International Trade Flows, 26 Mich. J. Int’l L. 163 (2004), 177. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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