Kluwer Arbitration Blog

Multiparty Investment Arbitration and Derivative Claims: Initial Thoughts on the NAFTA Case of B-Mex and Others v Mexico

Mon, 2018-11-19 16:14

Ridhi Kabra

The last decade has seen multiparty arbitration emerge as a contentious issue in investment treaty arbitration. Beginning with Abaclat v Argentina, investment tribunals have grappled with whether similarly-situated, but otherwise unrelated investors with distinct investments, can bundle their claims in a single arbitration. While decisions on this issue continue to evolve, a new ground for challenging multiparty arbitrations has emerged in the context of derivative claims in the NAFTA case of B-Mex and others v Mexico. Under NAFTA Article 1117, a foreign investor enjoys the derivative right to bring a claim on behalf of a local enterprise, if the investor ‘owns or controls’ the enterprise ‘directly or indirectly’. In the currently-pending B-Mex case, a group of 37 US shareholders have asserted their right to pursue a derivative claim on behalf of Mexican companies on the grounds that they collectively own/control the companies through their ownership of a majority of the companies’ shares. In this post, I offer a brief account of jurisdictional issues concerning the multiparty nature of the proceedings and present brief (initial) observations on the viability of Mexico’s objections.

Relevant case facts

The case concerns Mexico’s allegedly arbitrary and discriminatory interference with the claimants’ investments in five casinos in the Mexican gaming industry. Three US nationals were responsible for identifying the investment opportunity and making the initial investment.

They channeled their investments through corporate entities established in the US and Mexico. Each casino was owned by a locally-incorporated company (the ‘Mexican Companies’). In all, the principal investors in the Mexican Companies comprised the three US nationals and five US-incorporated companies owned by the US nationals (the ‘Original Claimants’).

The notice of intent to submit to arbitration listed only the Original Claimants as the intended claimants. The remaining 29 shareholders in the Mexican companies (the ‘Additional Claimants’) were included subsequently as claimants in the request for arbitration. Mexico contends that this later addition of the Additional Claimants was made necessary because the Original Claimants, by themselves, lacked ownership/control over the Mexican Companies. This contention is better explained by describing the shareholding structure of the Mexican Companies.

Broadly speaking, shares in the Mexican Companies were designated into two classes – Class A and Class B. Class A shareholders enjoyed limited voting rights. Class B shareholders had broad voting rights and could control shareholder resolutions through a majority vote. The Original Claimants owned between 41% and 82% of all shares in the Mexican companies. However, in four out of the five Mexican Companies, the Original Claimants owned less than 50% of the Class B shares. By joining the Additional Claimants to the arbitration, the claimants’ combined shareholding increased to between 56% and 82%, and their cumulative ownership of Class B shares (and the associated voting rights) crossed the 50% threshold.

Mexico has challenged the claimants’ standing on two grounds. First, Mexico contends that ownership of a local company requires full (and not majority) ownership of shares. Secondly, Mexico asserts that a group of unrelated shareholders – in this case the Original Claimants and the Additional Claimants – cannot be said to collectively control a company simply because they own a majority of the company’s shares.

Proof of collective ownership – full or majority shareholding?

In its bid to defeat the claimants’ standing, Mexico argues that investors can collectively present a derivative claim under the ownership limb of Article 1117’s ‘own or control’ only if they enjoy ‘full ownership’ over the local enterprise. Absent full ownership, investors must prove control to pursue a derivative claim (Reply on Jurisdictional Objections).

NAFTA does not define the terms ‘own’ or ‘control’. NAFTA tribunals have presumably considered it unnecessary to enunciate a test of ownership, because proof of majority shareholding in a local enterprise carries with it the presumption of control (Caratube v Kazakhstan). The B-Mex tribunal might find it relevant to clarify whether majority ownership tantamounts to ownership under NAFTA. Judicial economy would dictate that if the tribunal found positively on this issue, it would not need to consider Mexico’s objections to claimants’ standing based on collective control.

The phrase ‘own(ed) or control(led)’ appears in investment treaties in various contexts – including in the definition of ‘investment’, denial of benefits clauses, and investor standing to bring an investment claim. Yet, it is notoriously undefined. Definitions have begun to emerge recently, particularly in treaties concluded by Japan (see example, Japan-Australia Economic Partnership Agreement, art 14.17.[/fn] These treaties define ownership of an enterprise as ownership of a majority of the enterprise’s shares. The definition seems to be borrowed from the General Agreement on Trade in Services (GATS). Under GATS Article XXVIII, a company is deemed to be owned by the person who owns more than 50% of the company’s equity interests. Control, on the other hand, covers situations in which a person has the power to appoint a majority of the company’s directors or otherwise direct the company’s actions.

Mexico hinges its contention on the claim that the ‘control’ limb would be rendered redundant if ownership were to include majority ownership. This contention is arguably unsustainable. Indeed, situations of ownership and control can overlap – as in the case of full or majority ownership. But, a steady line of jurisprudence clarifies that ‘control’ reaches beyond ownership and covers situations of de facto control, such as when minority shareholders have sufficient voting strength to assert control (Thunderbird v Mexico), or when foreign investors exert substantial influence over the management of the enterprise (Vacuum Salt v Ghana). This is unsurprising given that shareholding in modern corporations is widely dispersed, and different voting rights attach to different classes of shares. Decision-making power is thus not necessarily connected to majority share ownership. Control – as distinct from ownership – allows jurisdiction over a local enterprise’s claims when control rests in the hands of a foreign investor, even though ownership might not. The Aguas del Tunari v Bolivia tribunal similarly explained the difference between ownership and control as:

“the Tribunal views this provision as meaning “owned [established by majority ownership] or controlled [established by minority ownership plus voting rights].

Whether ownership is restricted to cases of full ownership is the less contentious of the two objections raised by Mexico. As the tribunal’s Procedural Order No. 5 indicates, the tribunal has sought detailed analysis of the legal standards for proving collective control from the parties in their post-hearing briefs.

Collective control by a group of majority shareholders

Having asserted that ‘control’ and not ‘ownership’ should determine claimants’ standing in the case, Mexico argues next that a group of shareholders that collectively own more than 50% of an enterprise’s voting rights cannot be said to ‘control’ the enterprise, unless they are bound by a legal instrument, such as a shareholders’ agreement, to vote collectively.

Exclusive control v control by a group of shareholders

In the early stages of the written proceedings, Mexico reserved its right to challenge multiparty arbitration under  NAFTA Article 1117 ‘by a group of claimants contending that they collectively control an enterprise’ (Memorial on Jurisdiction). Relegated to a footnote in Mexico’s memorial, it was unclear at that stage whether Mexico was arguing for an objective bar against multiparty arbitration. Such an objection would not be novel. It has arisen in the context of ‘control’ under the ICSID Convention Article 25(2)(b) (which allows jurisdiction over claims by a foreign-controlled local enterprise). The tribunal in Vacuum Salt v Ghanaacknowledged that ‘an issue may exist’ as to whether ‘control’ is limited to ‘exclusive control’ or covers collective control by a group of shareholders. That tribunal left the question unanswered, but some authors (see example Douglas) have asserted that the ICSID Convention’s use of a singular ‘national’ requires control to lie in the hands of one controlling foreign investor. 1)Douglas, Z. (2009). The International Law of Investment Claims. Cambridge: Cambridge University Press. doi:10.1017/CBO9780511581137. jQuery("#footnote_plugin_tooltip_1240_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1240_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Article 1117 does not expressly permit multiparty arbitration. NAFTA parties have previously opposed multiparty arbitration, but such a challenge has not been based on any objective bar in the text of Article 1117. In Loewen v USA, for instance, the US conceded that Article 1117 ‘does not expressly provide that only one investor may file such a claim’ (US Memorial on Jurisdiction). In that case, the US’s objection to multiparty arbitration was born out of the case facts and the structure of the claimants’ corporate relationship. The claimants in Loewen comprised the local enterprise’s direct shareholder (The Loewen Group) and its ultimate indirect shareholder (Raymond Loewen). The two claimants did not appear jointly in the arbitration; they retained separate counsels and presented separate submissions. Furthermore, the claimants were in a vertical corporate relationship with the local enterprise. As each claimant could independently sustain a claim on behalf of the enterprise, the US feared that allowing multiparty arbitration in such a situation would create the possibility of claimants offering divergent and conflicting theories on behalf of the same enterprise, which it would have to separately defend. Accordingly, the US suggested that limits to multiparty arbitration should be read into NAFTA Article 1117 so as to ‘prevent multiple claims on behalf of the same enterprise’, and only the direct shareholder should be allowed to present the derivative claim. 2)The tribunal did not pronounce on the US’s objections. jQuery("#footnote_plugin_tooltip_1240_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1240_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The US’s line of objection is of limited assistance in this case. As described, the US was opposed to the pursuit of multiple claims on behalf of the same company. That objection does not apply when a group of horizontal shareholders – as in B-Mex – pursue a derivative claim. No single investor enjoys independent standing to present the claim, as the collective might of all investors is necessary to demonstrate ownership/control over the enterprise.

NAFTA tribunals have not limited standing under Article 1117 to cases of exclusive control. Horizontal shareholder groups have successfully pursued derivative claims, but in the relatively few examples of such cases, the group has normally comprised shareholders who had collectively decided to invest in the host State (see example Azinian v Mexico).

As arguments have developed in the case, it has become clear that Mexico is not seeking to limit standing under Article 1117 to situations of exclusive control. Instead, Mexico seeks to distinguish between collective control by related and unrelated shareholders (Post-Hearing Brief). Mexico concedes that related shareholders can be said to exercise control if they are collectively the majority shareholders of a local enterprise. Unrelated majority shareholders, in Mexico’s view, need to additionally prove their obligation to vote as a bloc through the existence of a binding agreement.

Unrelated majority shareholders and proof of collective control

At the heart of Mexico’s argument lies the difference between proof of the ability to exercise collective control and proof of actual exercise of collective control. Majority shareholding indicates only the ability to exercise collective control. Whether a group of shareholders actually exercise collective control depends on the existence of a formal or informal agreement to act together.

This is an accepted distinction in domestic corporate laws. Under domestic definitions of ‘control’ or ‘controlling shareholder(s)’, a group of persons are treated as controlling shareholders only when they are ‘acting in concert’ (see example Companies Act, Listing Rules and Takeover Code). Proof of concert requires a case-specific analysis. Concert is presumed for related shareholders, such as family members or business associates. Otherwise, concert is proved through a formal shareholders’ arrangement or tacit evidence of concert, such as repeated pattern of bloc voting.

By contrast, proof of actual exercise of collective control is not required in the only known treaty description of collective control – the Iran-US Claims Tribunal’s Claims Settlement Declaration (art VII(2). At the Iran-US Claims Tribunal, a group of shareholders could bring an indirect claim on behalf of a company if their ownership interest was collectively sufficient to control the company. As the ability to exercise collective control, without more, was sufficient to prove control under the treaty, the Tribunal has consistently found it of no import that collective control is based on the aggregation of individual shares of different shareholders (see example Mcharg and others v Iran).

Investment treaties, whilst occasionally defining control, do not expressly address the issue of collective control. Control is commonly defined as the ability to exercise substantial or decisive influence over a company’s management, including by way of ownership of a majority of the company’s voting rights (see example Energy Charter Treaty, art 1(6), Australia-India BIT, art 1(h), Netherlands-Argentina BIT, Protocol).

Given that the NAFTA does not define ‘control’, the B-Mex tribunal could distinguish the example of the Iran-US Claims Tribunal, and import the test of ‘concert’ from domestic laws. Some support for this view can be found in the case-law on ‘collective control’ in the similarly-undefined test of control in ICSID Convention Article 25(2)(b). In Sempra v Argentina and Camuzzi v Argentina, the tribunal decided that a foreign investor could aggregate its shares with another foreign investor to establish control, if the evidence proved that the shareholders were acting in ‘alliance’ or operating ‘jointly’.

Other tribunals have found the ability to exercise collective control sufficient to prove control. In Transgabonais v Gabon, the tribunal held that ICSID Convention Article 25(2)(b)’s test of ‘control’ is met if foreign investors collectively own a majority of a local company’s voting rights; proof of actual control through a shareholders’ agreement is not required. Notwithstanding, the tribunal conceded that the existence of foreign control by a plurality of entities is a question of ‘pure fact’. Ultimately, the tribunal held that allegations of ‘dissonant conduct among the different foreign nationals’ could affect a finding of control.

What amounts to collective control requires further in-depth analysis, but preliminary research suggests that actual exercise of control by unrelated investors has a role to play in jurisdictional assessments. It is also clear that, contrary to Mexico’s assertion, collective control does not require proof of formal agreement. The question might ultimately be one of burden of proof. Under the Sempra/Camuzzi approach, the claimants would have the burden of demonstrating actual control. Under the Transgabonais approach, actual control by majority owners of voting rights is presumed unless the respondent establishes otherwise.

Conclusion

Mexico’s objections in the case have created the opportunity for an investment tribunal to address not only the issue of collective control, but also clarify comprehensively the legal standards for proving ownership and control. It has been shown that Mexico’s arguments regarding ‘ownership’ as being ‘full ownership’ are unlikely to hold water. Such a reading would depart from established jurisprudence. It has also been shown that the NAFTA does not limit control to situations of exclusive control. Where the tribunal is likely to break new ground is on the issue of proving collective control by unrelated shareholders. The tribunal should not be persuaded by Mexico’s argument that only a formal agreement can prove collective control. There is no authority for such a proposition in domestic or international law. However, it would not be erroneous for the tribunal to build into the test of control, proof of actual exercise of collective control. Whether the tribunal would require such proof from the claimants at the outset, or whether majority share ownership would create a presumption of collective control in the absence of evidence to the contrary, is yet to be seen.

References   [ + ]

1. ↑ Douglas, Z. (2009). The International Law of Investment Claims. Cambridge: Cambridge University Press. doi:10.1017/CBO9780511581137. 2. ↑ The tribunal did not pronounce on the US’s objections. 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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Blowing Hot and Cold: Assessing the Permissibility of Fresh Jurisdictional Challenges During Setting-Aside Proceedings

Mon, 2018-11-19 04:59

Anirudh Lekhi

The Supreme Court of India (“SC”) in its recent decision M/s Lion Engineering Consultants v. State of M.P. & Ors. (“Lion”) has held that a party that had failed to raise a jurisdictional challenge before the arbitral tribunal under Section 16 of the Arbitration and Conciliation Act, 1996 (“Act”), would yet be permitted to raise such a challenge during setting-aside proceedings under Section 34 of the Act. The sole reason for this inference is that setting-aside proceedings are independent of proceedings before an arbitral tribunal. However, Lion’s observations are ostensibly against the scheme of Section 16, which allows jurisdictional challenges to be raised only before the arbitral tribunal. Additionally, the decision is in conflict with existing judicial precedents addressing the same issue.

In order to resolve this ensuing confusion, it is imperative to appreciate the distinct nature of each jurisdictional challenge and the objects underlying Section 16. In this light, I explore whether new jurisdictional challenges can be urged during setting-aside proceedings.

 

Anatomy of Section 16

The relevant part of Section 16 reads as follows:

  1. Competence of arbitral tribunal to rule on its jurisdiction-

(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objection with respect to the existence or validity of the arbitration agreement…

(2) A plea that the tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence;

It is evident from the above that a tribunal may determine any objection to its jurisdiction on its own. The appearance of the word “including” in Section 16(1) denotes that jurisdictional challenges to the existence or validity of the arbitration agreement are merely illustrative and not exhaustive. Thus, various kinds of jurisdictional challenges are permissible under Section 16.  In order to appreciate the varying facets of jurisdictional challenges, it would be useful to refer to the International Arbitration Practice Guideline on Jurisdictional Challenges (“Practice Guideline”).

According to Article 2 of the Practice Guideline, most jurisdictional challenges arise in relation to whether—(i) the arbitration agreement exists; (ii) the parties to the dispute are the same as the parties to the arbitration agreement; (iii) the arbitration agreement is defective; (iv) the arbitration agreement was made in the required form; (v) the subject-matter falls within its scope; and (vi) the arbitrators have the necessary powers. Therefore, jurisdictional challenges akin to those envisaged in the Practice Guideline may also be raised before the arbitral tribunal under Section 16.

Further, as per Section 16(2), objections to the jurisdiction of the tribunal can only be raised prior to the submission of the statement of defense. The objectives of this provision are two-fold. First, it ensures that the tribunal determines its jurisdiction at the very threshold. This precludes belated adjudication on questions of jurisdiction and preserves time and expense of the parties. Second, the provision reduces the supervisory role of Courts if parties fail to raise jurisdictional challenges within the period prescribed under Section 16(2). Consequently, the inability of Courts to revisit certain questions of jurisdiction may encourage parties to raise jurisdictional challenges promptly. Any interpretation of Section 16 should not lose sight of these objects.

 

Conflict in judicial precedents

The SC’s observations in Lion are at odds with its previous decision in Narayan Prasad Lohia v. Nikunj Kumar Lohia & Ors. (“Lohia”). The jurisdictional challenge in Lohia pertained to the composition of the arbitral tribunal. It was not raised before the tribunal and urged for the first time during setting-aside proceedings. In this regard, the SC observed— “Such a challenge must be taken under Section 16(2), not later than the submission of the statement of defence…If a party chooses not to so object, there will be a deemed waiver under Section 4.” Therefore, Lohia opined that a party’s failure to raise a jurisdictional challenge before the arbitral tribunal would result in a waiver of its right to raise such challenge subsequently. Since Lohia and Lion have been decided by benches of equal strength (three judges), it is unclear which of the two decisions holds the ground.

The SC in Gas Authority of India Ltd. v. Keti Constructions (I) Ltd. (“GAIL”) also determined a similar issue. Negating a jurisdictional challenge during setting-aside proceedings, GAIL held that since the objective of the Act is to secure expeditious resolution of disputes, such challenges must be made before the arbitral tribunal itself. However, the SC qualified its conclusion by observing— “If a plea of jurisdiction is not taken before the arbitrator as provided under Section 16 of the Act, such a plea cannot be permitted to be raised in proceedings under Section 34 of the Act for setting aside the award, unless good reasons are shown.” Thus, GAIL permitted fresh jurisdictional challenges during setting-aside proceedings if good reasons were shown. However, GAIL was decided by a smaller bench of two judges and to that extent, its qualification appears to ignore Lohia.

Additionally, two decisions of the High Courts of Bombay and Allahabad have offered very compelling reasons for allowing parties to raise jurisdictional challenges for the first time during setting-aside proceedings. These decisions opine that an inherent lack of jurisdiction cannot be sanctified by the failure of a party to raise an objection promptly. Accordingly, since questions of jurisdictions go to the root of the matter, a party may raise a jurisdictional challenge at any stage.

 

Way Forward

It is true that the lack of a tribunal’s jurisdiction cannot be rectified by a party’s failure to raise a jurisdictional challenge. However, it is also essential to keep an unscrupulous party from delaying proceedings through frivolous challenges during setting-aside proceedings. Therefore, an intermediate view may be deduced by recalling the different kinds of jurisdictional challenges provided under the Practice Guideline.

These jurisdictional challenges can be classified into two categories—(i) challenges relating to a defect in the jurisdiction and (ii) challenges on account of a lack of jurisdiction. This classification is rooted in the decision of the Privy Council in Ledgard v. Bull, which postulates that though a consent or waiver may cure a defect in the jurisdiction, it cannot cure an inherent lack of it. Therefore, jurisdictional challenges raised due to a defect in the jurisdiction must be distinguished from those based on an inherent lack of it.

In this regard, a jurisdictional challenge that the subject matter is not arbitrable is an illustration of a ground based on an inherent lack of jurisdiction. For instance, an objection that the subject matter relates to penal laws should be permitted during setting aside proceedings under Section 34, even if it was not urged before the tribunal under Section 16. This is because a party’s failure to raise this challenge before the tribunal, cannot confer jurisdiction upon the tribunal when the claim itself is not arbitrable.

However, the same latitude may not be given to fresh jurisdictional challenges relating to defects in the jurisdiction. Since jurisdictional defects are capable of a cure, the Courts should permit fresh jurisdictional challenges relating to defects in jurisdiction only if “good reasons are shown”. For example, jurisdictional challenges questioning the constitution of an arbitral tribunal or the existence of an arbitration agreement are illustrations of challenges based on defects in the jurisdiction. In such cases, a party’s failure to raise a challenge before the tribunal under Section 16(2) may lead to a waiver of the right to object subsequently.

The SC in Prasun Roy v. Calcutta M.D.A considered a fresh challenge to the constitution of an arbitral tribunal during setting-aside proceedings and surmised—“The principle is that a party shall not be allowed to blow hot and cold simultaneously. Long participation and acquiescence in the (arbitral) proceedings precludes such a party from contending that the (arbitral) proceedings are without jurisdiction.” In this light, it appears that the conduct of a party and the time taken to raise a jurisdictional challenge may be considered by the Court to ascertain whether there was a waiver or not.

In view of the above, the Court’s inquiry into the existence of “good reasons” may also include a determination of whether there was a waiver of the right to object or not. This would be in keeping with the SC’s verdict in GAIL as well as the objectives of Section 16 as parties would now have to establish cogent reasons for raising new jurisdictional challenges during setting-aside proceedings.

 

Conclusion

The arbitral regime in India is clogged with decisions that do not appreciate the unique nature of each jurisdictional challenge. Evidently, decisions such as Lion and Lohia have painted every jurisdictional challenge with the same brush and yet reached plainly opposite conclusions. It is, therefore, crucial to distinguish jurisdictional challenges based on an inherent lack in the jurisdiction from those founded on defects in the jurisdiction. Their nature would determine whether a party would be precluded from raising such challenges or be allowed if “good reasons” so warrant. This intermediate approach may resolve the prevailing confusion and preclude parties from employing dilatory tactics.

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Ex Aequo et Bono: An Overlooked and Undervalued Opportunity for International Commercial Arbitration

Sun, 2018-11-18 01:43

Nobumichi Teramura

Ex aequo et bono1)The author is grateful to Professors Leon Trakman and Luke Nottage for their comment on early drafts of this blog article.This blog post is based on the author’s PhD thesis. jQuery("#footnote_plugin_tooltip_5009_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5009_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); is a legal concept that confers on arbitrators the power to decide a dispute in accordance with their sense of fairness and good conscience, instead of rigorously applying terms of a specific body of law. The principle has been unpopular in contemporary arbitration practice because there has been a tacit understanding among arbitration lawyers that to apply ex aequo et bono is to ruin arbitral procedure. This blog posting challenges this perception and urges the international arbitration community to de-mystify and revitalise ex aequo et bono, particularly to redress the ‘over-judicialisation’ (encroaching formalisation) of international commercial arbitration.

‘Negative’ Reputation Undeserved

While ex aequo et bono can be found in various legal instruments2)Article 28(3) of the Model Law. jQuery("#footnote_plugin_tooltip_5009_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5009_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and institutional rules3)For example Article 31 of CAAI Arbitration Rules; Article 21 (3) of ICC Rules of Arbitration; Article 29.2 of ACICA Arbitration Rules; Article 22.4 of LCIA Arbitration Rules; Article 33.2 of Swiss Rules of International Arbitration; Article 27(3) of SCC Rules; Article 35.2 of HKIAC Administered Arbitration Rules; Article 31.2 of SIAC Rules; and Rule 60.3 of JCAA Rules. jQuery("#footnote_plugin_tooltip_5009_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5009_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, it has long been perceived by some arbitration lawyers as arguably causing negative impacts on arbitral procedure: unpredictability of results and the potential for abuse of discretion (if any) by arbitrators. As to the former, it is suggested that the uncertain nature and scope of ex aequo et bono may undermine certainty in arbitration4)Karyn S. Weinberg, Equity In International Arbitration: How Fair is Fair? A Study of Lex Mercatoria and Amiable Composition, 12 Boston University International Law Journal 227, 246-7 (1994); Edouard Bertrand, Amiable Composition: Report of the ICC France Working Group, International Business Law Journal 753, 763 (2005); Regis Bonnan, Different Conceptions of Amiable Composition in International Commercial Arbitration: A Comparison in Space and Time, 6 Journal of International Dispute Settlement 522, 538 (2015). jQuery("#footnote_plugin_tooltip_5009_4").tooltip({ tip: "#footnote_plugin_tooltip_text_5009_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. As to the latter, it is argued that to adopt ex aequo et bono is to permit arbitrators to ‘ignore’ the actual intentions of the parties5)Emmanuel Vuillard & Alexandre Vagenheim, Why Resort to Amiable Composition, International Business Law Journal 643, 650 (2008). jQuery("#footnote_plugin_tooltip_5009_5").tooltip({ tip: "#footnote_plugin_tooltip_text_5009_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. These concerns seem to have been a major cause of the limited application of the principle in arbitration practice. According to Born, tribunals in only 2-3% of arbitration cases annually apply ex aequo et bono6)Gary Born, International Commercial Arbitration 2770 (Kluwer Law International 2nd ed. 2014). jQuery("#footnote_plugin_tooltip_5009_6").tooltip({ tip: "#footnote_plugin_tooltip_text_5009_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

However, these criticisms of ex aequo et bono may be misplaced.

Commentators pointing out the unpredictability of results seem to assume that international commercial arbitration, through the strict application of legal rules, is more predictable than that of under ex aequo et bono. But is this assumption true?7)See, e.g., Edouard Bertrand, Under What Circumstances is It Suitable to Refer Disputes to Amiable Composition, International Business Law Journal 609, 610-11 (2008). jQuery("#footnote_plugin_tooltip_5009_7").tooltip({ tip: "#footnote_plugin_tooltip_text_5009_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Concepts such as good faith or reasonableness inherently contain a degree of discretion and vagueness. If legal norms containing such concepts are enforced, there is already no absolute certainty in the arbitrators’ decision-making. Therefore, the old saying ‘the only certainty is that nothing is certain’ may apply to arbitration in general.

Moreover, are arbitrators allowed to overturn party intentions through applying ex aequo et bono, if they must respect the principle of party autonomy? Arbitrators decide a dispute by exercising powers granted by the parties, even in arbitration adopting ex aequo et bono.8)Article 28(2) of the Model Law. jQuery("#footnote_plugin_tooltip_5009_8").tooltip({ tip: "#footnote_plugin_tooltip_text_5009_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); If they confer authority to decide ex aequo et bono on themselves and ignore the actual intentions of the parties, this would certainly constitute an undue exercise of discretion.

Such a situation would rarely happen because the parties must expressly agree to adopt ex aequo et bono for the principle to be applied under the UNCITRAL Model Law. Article 28(2) states that ‘[t]he arbitral tribunal shall decide ex aequo et bono … only if the parties have expressly authorized it to do so’; arbitrators are not able to rely on their idea of fairness without clear authorisation by parties. Article 28(4) also provides that ‘the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction’.

In addition to these explicit limitations imposed by the Model Law, arbitrators with the power of deciding ex aequo et bono must observe applicable mandatory rules of law. For example, the award should not violate mandatory rules of the seat of arbitration. This is because an important duty for arbitrators is to issue an enforceable arbitral award. According to the 2018 QMUL Survey and many other empirical studies, enforceability of arbitral awards is one of the most valuable characteristics of arbitration. Parties expect arbitrators to issue an enforceable decision.

What these limitations clarify is that ex aequo et bono under the Model Law mandates arbitrators to implement the principle of party autonomy thoroughly but flexibly. The arbitrators are not allowed to abuse their discretion and ignore the express intentions of the parties.

Potential in Ex Aequo et Bono to Respond to ‘Over-Judicialisation’

In fact, there can be benefit in using ex aequo et bono more often in international arbitration.

The flexibility inherent in ex aequo et bono has potential to improve the practice of international commercial arbitration, by redressing excessive formalisation in arbitral procedures.

Although international commercial arbitration was originally developed as a cost-effective and flexible dispute resolution system,9)Nigel Blackaby, Redfern and Hunter on International Arbitration 1,2 (Constantine Partasides, et al. eds., Oxford University Press 6th ed. 2015). jQuery("#footnote_plugin_tooltip_5009_9").tooltip({ tip: "#footnote_plugin_tooltip_text_5009_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); it can be seen as expensive and inefficient in some cases. In particular, the increasing number of procedural guidelines and the importation of litigation-style techniques have possibly made arbitration more cumbersome. In fact, international arbitration institutions revise their rules every few years, almost always adding new provisions. Professional associations, in turn, draft new guidelines, sometimes introducing new procedural steps. Due to the development of information technology, the amount of evidence submitted during an arbitral procedure is sharply increasing. While the aim of these initiatives is not to make arbitration burdensome but to decrease procedural ambiguities10)Luke R Nottage, The Procedural Lex Mercatoria: The Past, Present and Future of International Commercial Arbitration, Sydney Law School Research Paper No. 06/51; CDAMS Discussion Paper No. 03/1E, at 5. jQuery("#footnote_plugin_tooltip_5009_10").tooltip({ tip: "#footnote_plugin_tooltip_text_5009_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, the efforts can often (unfortunately) exacerbate procedural complexities.

However, this may not be the direct cause of delay in arbitral proceedings. Unless otherwise agreed by parties, arbitrators have no legal duty to observe procedural guidelines, which are default rules, and litigation-style techniques, which are alien to arbitration. Arbitrators nevertheless appear to be forced to follow these default rules by their so-called ‘due process paranoia’: the ‘reluctance by tribunals to act decisively in certain situations for fear of the arbitral award being challenged on the basis of a party not having had the chance to present its case fully’ (see for example, here, here, and here). In short, arbitrators’ psychological state seems to be a significant underlying cause of inflexibility and delay.

Ex aequo et bono may improve this mentality of arbitrators. The primary aim in applying the principle is to give them the authority to make decisions flexibly to deliver effectively on the arbitrators’ mandate to decide the dispute as granted by the parties. By agreeing to ex aequo et bono proceedings, at least for some types of disputes, the parties permit arbitrators to act robustly to provide efficient dispute resolution. The arbitrators, therefore, do not have to become overly sensitive to every single procedural issue. They only have to observe norms arising from the principle of party autonomy: contract terms, trade usages, and mandatory rules of law at the seat of arbitration.

This real feature of ex aequo et bono needs to be disseminated more broadly in the arbitration community; otherwise, it would be impossible, through ex aequo et bono, to cure arbitrators’ due process paranoia and thereby to counter-balance the over-judicialisation of international commercial arbitration. Since the application of ex aequo et bono requires express agreement by the parties to resort to the principle, it is crucial to make those parties – as users of arbitration – to realise that ex aequo et bono has a potential to make arbitration more efficient. Ex aequo et bono alone is not effective enough to combat against the encroaching over-judicialisation; the parties’ agreement for the tribunal to use it is essential.

Conclusion

Unlike their counterparts in the European Middle Agents, modern merchants are not inclined to resort to ex aequo et bono. This blog posting suggests that the contemporary business world’s disinclination to use ex aequo et bono derives from an inadequately informed perception of the principle. Their arguably erroneous understanding is that ex aequo et bono hampers arbitral procedures by giving rise to irreconcilable uncertain outcomes and by encouraging arbitrators to abuse their discretion. However, uncertainties persist in arbitration under the strict application of legal terms, while ex aequo et bono arbitration is in fact bound by significant elements of party autonomy. Accordingly, it is unclear if we should keep emphasising the allegedly negative features of ex aequo et bono. This blog has instead proposed to use (or at least plan to use) the flexibility inherent in the principle in order to boost the efficiency of international commercial arbitration.

References   [ + ]

1. ↑ The author is grateful to Professors Leon Trakman and Luke Nottage for their comment on early drafts of this blog article.This blog post is based on the author’s PhD thesis. 2. ↑ Article 28(3) of the Model Law. 3. ↑ For example Article 31 of CAAI Arbitration Rules; Article 21 (3) of ICC Rules of Arbitration; Article 29.2 of ACICA Arbitration Rules; Article 22.4 of LCIA Arbitration Rules; Article 33.2 of Swiss Rules of International Arbitration; Article 27(3) of SCC Rules; Article 35.2 of HKIAC Administered Arbitration Rules; Article 31.2 of SIAC Rules; and Rule 60.3 of JCAA Rules. 4. ↑ Karyn S. Weinberg, Equity In International Arbitration: How Fair is Fair? A Study of Lex Mercatoria and Amiable Composition, 12 Boston University International Law Journal 227, 246-7 (1994); Edouard Bertrand, Amiable Composition: Report of the ICC France Working Group, International Business Law Journal 753, 763 (2005); Regis Bonnan, Different Conceptions of Amiable Composition in International Commercial Arbitration: A Comparison in Space and Time, 6 Journal of International Dispute Settlement 522, 538 (2015). 5. ↑ Emmanuel Vuillard & Alexandre Vagenheim, Why Resort to Amiable Composition, International Business Law Journal 643, 650 (2008). 6. ↑ Gary Born, International Commercial Arbitration 2770 (Kluwer Law International 2nd ed. 2014). 7. ↑ See, e.g., Edouard Bertrand, Under What Circumstances is It Suitable to Refer Disputes to Amiable Composition, International Business Law Journal 609, 610-11 (2008). 8. ↑ Article 28(2) of the Model Law. 9. ↑ Nigel Blackaby, Redfern and Hunter on International Arbitration 1,2 (Constantine Partasides, et al. eds., Oxford University Press 6th ed. 2015). 10. ↑ Luke R Nottage, The Procedural Lex Mercatoria: The Past, Present and Future of International Commercial Arbitration, Sydney Law School Research Paper No. 06/51; CDAMS Discussion Paper No. 03/1E, at 5. 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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Japan’s (In)Capacity in International Commercial Arbitration

Fri, 2018-11-16 20:00

Nobumichi Teramura and Luke Nottage

Not long after the ICCA Congress held in Sydney, the Japan International Dispute Resolution Center (JIDRC) was established in Osaka on 1 May 2018, with some fanfare from the Japanese government and local legal circles. ‘JIDRC-Osaka’ does not provide arbitration services but offers specialist facilities for international arbitration hearings and other forms of Alternative Dispute Resolution (ADR). Facilities are reasonably priced as they are housed quite centrally in a modern Ministry of Justice building.

Further, on 1 September, the International Arbitration Center in Tokyo (IACT) started operation as the first Asian international arbitration body specialised in intellectual property disputes. Unusually for international arbitration institutions, the top page of the IACT’s website displays prominently an extensive list of former judges agreeable to serving as presiding arbitrators, including Dr Annabelle Bennett SC from Australia.

These new initiatives are based on the ‘Basic Policy on Economic and Fiscal Management and Reform 2017’ approved by the Cabinet of Japan. The Justice, Sports, Trade and Transportation ministries in Japan are reportedly discussing how they should promote Japan as a seat for international commercial arbitration (“ICA”) to the world in English.
We examine the challenges in developing Japan as a regional arbitration hub, keeping in mind our separate article regarding Australia’s capacity in ICA.

Japan’s ICA Capacity

While not as comprehensive as the Austrade brochure, the Japan Commercial Arbitration Association (JCAA) earlier published a pamphlet entitled ‘Responding to the needs of international business: A guide to international commercial arbitration in Japan’ (“JCAA Pamphlet”). It argues for Japan as a compelling arbitration forum mainly because of a revised Japanese Arbitration Law and a modern Japan that is ‘energetic yet refined, fully wired but also enticing: … where fast-paced international business mixes seamlessly with a cultural yearning to seek consensus amid traditional notions of fair play’.1)JCAA Pamphlet at page 1. jQuery("#footnote_plugin_tooltip_1343_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1343_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Regarding arbitration law, the pamphlet mentions:

  • a global standard (the Japanese Arbitration Law was introduced in 2004 based on the 1985 UNCITRAL Model Law)
  • party autonomy
  • court assistance and minimal interference (‘Court intervention in arbitral proceedings is prohibited under the … Arbitration Law except in specifically defined circumstances. Instead, courts play a supporting role, rendering valuable assistance by appointing arbitrators, serving notice or taking evidence’)2)JCAA Pamphlet at page 2. jQuery("#footnote_plugin_tooltip_1343_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1343_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • representation by foreign legal counsel (registration is unnecessary to represent clients in ICA cases seated in Japan)
  • the New York Convention (Japan is a signatory and the Arbitration Law is in line with it).

The first point might surprise some readers as a selling point because Japan was quite late in Asia to adopt the 1985 Model Law, and the Japanese Arbitration Law has still not officially adopted any of the 2006 amendments to the Model Law.3)http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration_status.html jQuery("#footnote_plugin_tooltip_1343_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1343_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, most Model Law jurisdictions have not adhered to the amendments either, so it could be argued that they do not yet constitute a ‘global standard’. Moreover, the Japanese Arbitration Law is partly based on UNCITRAL’s deliberations resulting in the 2006 amendments.

As for the attraction of a ‘modern’ Japan, the pamphlet claims:

  • an advanced nation (‘Japan possesses all the facets necessary for reliable and effective resolution of commercial disputes by arbitration’)4)JCAA Pamphlet at page 8. jQuery("#footnote_plugin_tooltip_1343_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1343_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • good communications and transport connections
  • a business and financial hub (especially Tokyo)
  • cultural benefits (‘Equality before the law and fair play are highly valued norms of Japan’s democratic society’)5)JCAA Pamphlet at page 9. jQuery("#footnote_plugin_tooltip_1343_5").tooltip({ tip: "#footnote_plugin_tooltip_text_1343_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The pamphlet’s authors may have been too modest, an enduring trait of Japanese culture, as there are further advantages for choosing Japan as the seat for ICA. Parties can now find Japanese and non-Japanese expert arbitrators based in Tokyo (and even Osaka or Seoul, both not far away), as well as some ICA specialisation among law firms and lawyers (Bengoshi and Gaikokuho-Jimu-Bengoshi).6)See for example: Who’s Who Legal jQuery("#footnote_plugin_tooltip_1343_6").tooltip({ tip: "#footnote_plugin_tooltip_text_1343_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Japanese arbitration institutions also have strong connections with internationally well-known arbitrators from various jurisdictions.7)List of Arbitrators and Mediators (Non-Japanese) who have conducted JCAA Arbitration and/or Mediation cases filed since 1 January 1998 jQuery("#footnote_plugin_tooltip_1343_7").tooltip({ tip: "#footnote_plugin_tooltip_text_1343_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In addition, as introduced at the outset of this blog posting, the country has new arbitration centres and support facilities established under the Japanese government’s recent pro-arbitration policy. Finally, Japan lies in Asia, although Japan is no longer ‘the largest economy in the world’s most dynamic region’.8)JCAA Pamphlet at page 1. jQuery("#footnote_plugin_tooltip_1343_8").tooltip({ tip: "#footnote_plugin_tooltip_text_1343_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Japan’s political and economic environment has also been stable particularly in recent years, although it is necessary to monitor the Trump government’s unpredictable trade and diplomatic strategies (see, for example, comments here).

Japan’s ICA Incapacity

Nonetheless, as in our other posting’s assessment of the recent Austrade brochure promoting Australia for ICA, such advantages need to be weighed against some downsides. The most serious immediate challenge for promoting Japanese ICA is probably still a relative paucity of arbitrators based in Japan who are able to confidently handle arbitration cases in English.9)According to ICC Statistical Report (Language of awards): “Awards approved in 2017 were drafted in a total of 13 languages. English remains the predominant language (for 77% of the awards).” jQuery("#footnote_plugin_tooltip_1343_9").tooltip({ tip: "#footnote_plugin_tooltip_text_1343_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Although the Japanese arbitration community has maintained a pool of good-quality arbitrators and attorneys who are fluent in the language, their total numbers remain low.

Although the Japanese government and legal profession are aware of this situation and have tried to improve it, their commitment has sometimes come into question. A recent example is the ‘Opening Ceremony’ for JIDRC-Osaka, entitled ‘The Future of International Arbitration in Japan’ but conducted in Japanese instead of English. To really establish Japan as a new international ADR hub, it seems important to create opportunities to expose local practitioners to legal English and to engage in the lingua franca of modern ICA.

Another challenge for seating ICA in Japan is the country’s geographical inconvenience. Although certainly not as remote as Australia, Japan is on the outskirts of Asia. Tokyo is one of the world’s leading megalopolises, but the city itself is distant from other major Asian economic centres: seven hours from Singapore; four hours from Hong Kong; three hours from Taipei, Shanghai and Beijing. Tokyo might be an appealing arbitration venue for companies doing business in the city itself or around Japan. But other parties, especially Asian corporations with no strong business interests there, will probably continue to favour the very popular regional arbitration venues like Singapore and Hong Kong.

One way to overcome the geographical disadvantage is to develop a niche marketing approach, as we urged recently for Australia. The establishment of the IACT is a promising experiment, although there is a risk of impeding a critical mass in ICA caseload and the development of a consistent ‘Japan’ brand. (The caseload is already split between the JCAA and TOMAC, and a ‘JIDRC-Tokyo’ facility is also now envisaged ‘in the very near future’.) There is also still scope to focus on disputes between parties in the Americas or along the ‘Belt and Road’ where Chinese investors are involved in multi-national consortiums. Moreover, e-arbitrations would be helpful to combat geographical inconvenience, but few Japanese arbitration institutions (even IACT) seem to be interested in developing online arbitration platforms yet.

A final difficulty relates to the putative ‘cultural yearning to seek consensus’.10)JCAA Pamphlet at page 1. jQuery("#footnote_plugin_tooltip_1343_10").tooltip({ tip: "#footnote_plugin_tooltip_text_1343_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Given world-wide concerns about the costs, delays and over-formalisation of ICA, can this be niche-marketed as a positive, for example by emphasising the Arbitration Law’s nod to Arb-Med and its practice notably in JCAA arbitrations? Or do the persistence of such concerns show that it is implausible to compete on price, given the information asymmetries in the ICA ‘market’ (on the demand side) and the growth of large law firms even in Asia (on the supply side)? Is the attraction of consensus even cultural (as opposed to economic), or changing (alongside at least some aspects of Japan’s wider legal order), or something best addressed in separate international mediation proceedings and institutions (like another new ADR facility, the Japan International Mediation Centre – Kyoto)?

Conclusion

Given such difficult questions, and Japan’s advantages and disadvantages particularly in the context of established and emerging regional hubs (including now Kuala Lumpur and Seoul), the Japanese government probably and quite understandably cannot be expected to invest much taxpayers’ funding into any ambitious project to promote Japanese ICA. The features identified as demonstrating Japan’s ICA capacity are nothing really new or distinctive; they can be found in the existing hubs – often even more so – and even in jurisdictions like Australia that are now trying again to join the inner circle. Japan also faces capacity constraints, including some lack of human resources and geographical inconvenience, and difficult issues around how to explain and promote its broader approach towards dispute resolution in a complex society.

More than one year has passed since the Japanese government announced its then new initiative, but government ministries still mostly appear to be engaged in drafting some detailed plan for promoting Japanese ICA. Benjamin Franklin famously said, ‘time is money’. If this American saying seems incongruous, what about: ‘Odawara-hyō-jō (小田原評定)’? But this seems depressing because it evokes how the Go-Hōjō samurai clan (one of the strongest in 16th century) were defeated due to their long-running but unproductive debate over tactics. The lesson now is that the world of ICA changes fast: make your next move, Japan!

References   [ + ]

1, 8, 10. ↑ JCAA Pamphlet at page 1. 2. ↑ JCAA Pamphlet at page 2. 3. ↑ http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration_status.html 4. ↑ JCAA Pamphlet at page 8. 5. ↑ JCAA Pamphlet at page 9. 6. ↑ See for example: Who’s Who Legal 7. ↑ List of Arbitrators and Mediators (Non-Japanese) who have conducted JCAA Arbitration and/or Mediation cases filed since 1 January 1998 9. ↑ According to ICC Statistical Report (Language of awards): “Awards approved in 2017 were drafted in a total of 13 languages. English remains the predominant language (for 77% of the awards).” 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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Investment Arbitrations Against Spain in a Post-Achmea Scenario: A New Hope for Mediation?

Fri, 2018-11-16 02:30

Josep Gálvez

Introduction

Unquestionably, Spain captures the highest percentage of arbitration procedures for cuts applied to renewable energies, accumulating almost thirty ongoing lawsuits from foreign investors, with claims pending in the ICSID, in the SCC and in the ICC arbitrations. Spain as the respondent was successful in the first two arbitrations, but these were unique cases and not extendable to the other claims. The amount currently set by arbitrators to compensate the four successful claimants is far from the aspirations of Spain which has defended its right to change the premiums for renewables, but also far from the claimants demands whereby they have been awarded less than the amount claimed.

In a nutshell, arbitrators appear to be accepting the cuts the Spanish government introduced in 2011 (among others, limitation of hours, plant life to 25 years, etc.) and endorse the 7% tax on electricity generation. However, other premium cuts, such as those that were subsequently adopted in 2014, are not accepted as these cuts were in breach of ‘legitimate investor confidence‘ under the Energy Charter Treaty.

The main problem for previous investors who have subsequently become claimants is to project with a high degree of confidence how the awards can be enforced, with Spain trying to use the recent Achmea ruling by the European Court of Justice (ECJ). In this sense, the European Commission has informed Spain that Spain cannot pay out any awards in respect of its renewable incentive scheme because that action would constitute illegal state aid. Furthermore, any attempt to enforce an ICSID award against Spain before any EU Member State courts will probably be met by the response that the Achmea judgment renders intra-EU investor-state arbitration illegal under EU law.

Clearly Spain is shielding its position by using the Achmea ruling to avoid enforcement of awards before any EU national court, with Sweden having already suspended the enforcement of Novaenergía’s award. However, the arbitral Courts of the ICSID and the Stockholm Chamber of Commerce maintain their competence to rule. Hence, it appears that the arbitrations brought by investment funds against Spain are becoming the foundations for a major conflict between the EU and the international arbitration system, especially the World Bank’s ICSID, with a subsequent impact for the claimants who obtain a favourable award.

Whilst the Spanish government continues to avoid the payment of awards by using the Achmea judgement, claimants are also entitled to enforce their award outside of the EU. Some plaintiffs are filing precautionary measures requests before various US Courts to obtain injunction orders over Spanish sovereign assets. However, there is no current confirmation of any Spanish sovereign asset freeze.

Mediation: A New Hope in a Post-Achmea Judgement Era?

Certainly, tension between Spain and international funds and companies that suffered cuts due to their investments in renewables continues to rise. According to the Spanish Government the global figure of 7.5 billion euros has been updated to over 8.2 billion euros, representing nearly a 10% increase in the financial damages sought, and a potential threat to the financial balance of the Spanish electricity system.

The score is dramatic: after four arbitration awards against the country and only two in favour of Spain, the total sums claimed continue to rise day by day. In addition, the awards are also generating a spiralling costs and accruing interest that already exceeds 20 million euros. The Spanish Government appears to view these increases in the amounts claimed because plaintiffs have detected that the awards granted in favour of plaintiffs have been between 30% and 50% of what was initially demanded. The claimants, therefore, increased the amounts being sought.

In this scenario, which is complicated for both Spain and claimants, it is worth considering if the recent change of government in Spain might lead to a change in attitudes towards this subject. Following a vote of no confidence in the Spanish Parliament on 1 June, Spain has a new Prime Minister and a new Socialist government. Although the new government is currently and understandably silent on this matter within the public domain, we are of the view that the government would welcome a solution to significant financial issues that also affects the image and reputation of Spain in the international investment community.

In fact, the fourth ICSID award against Spain was awarded at a time when the new socialist government had replaced the previous conservative government, the award being in favour of the investment fund Antin, which had bought two solar plants in Spain and claimed 238 million euros for the premium cuts approved by the previous cabinet. Spain’s new government is facing a problem that is increasing in scale. It is well known that several law firms and litigation fund managers are considering the possibility of raising new arbitrations given the latest court rulings, the consequences of which could be severe for Spain. But can a Sovereign state allow itself to be put in a position where the time spent trying to defend itself does nothing but increase with more and more arbitration claims being considered?

With the current uncertain scenarios, mediation between investors and the current Spanish government appears to be a viable solution. Exploring the possibilities of an agreement could be well received within the international markets and perceived as a significant success for the new cabinet, improving the reputation of Spain whilst removing the current mentality on all sides of “them vs. us”.

If settlements could be reached that were acceptable to both sides, Pedro Sánchez’s government could achieve a goal of seeing arbitration proceedings against Spain withdrawn whilst simultaneously solving some of the perceived problems mainly created by the previous cabinet. Although the ruling by the Court of Justice of the European Union has invalidated this type of intra-EU arbitration, this not only supposes a new economic setback for Spain, but also could open a mediation opportunity for all parties involved in this matter. If mediation results in investors receiving return of capital sooner rather than later, and the Spanish government improves its image in the international investment community whilst reducing the time that has to be spent fighting its legal position and also reducing the financial amounts to be paid, then why would mediation not be a possible solution for all sides, rather than each side running the risk of “winner takes all” arbitration? “Casino bankers” was a term used frequently in the aftermath of the 2008 financial crisis, but “Casino speculators” could almost apply to those seeking an “all or nothing” approach rather than exploring the possibility of alternative dispute resolution.

We endorse the idea of mediation, especially when considering the context in which the new Spanish Minister of State for Energy, Mrs. Teresa Ribera has publicly acknowledged the issues for regaining investor confidence in Spain. The new cabinet’s strategy indicates that among the measures that will be included, the inclusion of investment guidelines should be facilitated to help build future stable, predictable and competitive scenarios, with special emphasis on green technologies with respect to what will be the needs of the future. In this sense, an energy transition in Spain should probably include open dialogue with affected investors.

Conclusions

Following the ECJ’s Achmea judgment, the situation for claimant investors against Spain has become significantly more complex than prior to the Achmea judgement, as even with a favourable award, the chances of obtaining a rapid payment without additional costs are severely hampered.

For investors, enforcement actions outside the EU is also an option, but at the same time costly and involves a prior search for sovereign assets property of the Kingdom of Spain, as was the case in Argentina in 2012, for example. For many investor funds the Internal Rate of Return is used as the relevant benchmark, favouring a quicker solution for return of capital.

A conflict outside of the EU does not present better options for Spain either, as it has been repeatedly losing before international arbitration courts. Accordingly, the Spanish government can no longer continue to accumulate awards against the country, nor procedures that seriously endanger the country’s image internationally, with potential consequences for the economy and for the new cabinet.

Therefore, we are of the view that all parties should be encouraged to initiate dialogue through mediation by a third party outside of the arbitration process, as a way that may finally settle the dispute. In this way, for the Spanish government it will mean a clear victory over its predecessor in office, allowing the current government to move forward and carry out the legal reforms of energy transition. For claimants, they will be able to obtain a quicker payment and probably under better conditions than by trying to enforce the award outside the EU or by selling any award to third parties.

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‘The Grandfathers I Never Had’: Should We Choose Arbitral Rules with Grandfathering Provisions?

Thu, 2018-11-15 06:00

Andrew Foo and Promit Chatterjee

Many arbitration centres trumpet innovativeness as their selling point. One commonly cited proof of innovativeness is ‘software upgrades’, i.e., centres revising rules to introduce new arbitral procedures. These are intended to make arbitration cheaper, faster, and fairer.

Introducing New Arbitral Procedures – First Movers

New procedures introduced over the past decade include emergency arbitration (“EA“), expedited procedure (“EP“), consolidation, joinder, and early dismissal.

However, how do we tell if one institution is more innovative than another? One simple way would be to judge them by the speed at which they introduce new rules.

Some institutions are typically ‘first movers’. For example, the SIAC and SCC introduced EA provisions in 2010. The ICC, HKIAC, and LCIA then followed suit between 2012 and 2014. Further, among these institutions, the SCC was the first to expressly provide for consolidation, and with the SIAC were, up to 31 October 2018, the only commercial institutions expressly providing for early dismissal/summary determination.

However, the ‘first mover’ advantage can be eroded by homogenisation: other institutions introducing similar features. For example, between 2010 and 2014, the world’s top 5 most preferred institutions (based on the Queen Mary 2018 International Arbitration Survey) all introduced EA. Further, all 5 institutions have now introduced consolidation and joinder provisions.

Therefore, to properly distinguish between these institutions, a deeper understanding of their attitudinal differences is required.

One litmus test of an institution’s approach towards innovation is whether it complements new procedures with grandfathering provisions. A grandfathering provision states that an old rule continues to apply to existing situations, while the new rule will apply to future cases. It is an express departure from the default position, that the applicable version of a set of arbitral rules are “those in force when the time for invoking…[those rules] arises” (Bunge SA v Kruse [1979] 1 Lloyd’s Rep 279).

Grandfathering – Divergent Approaches

Among the leading institutions, there is a discernible difference in grandfathering approaches.

For example, the current rules of the HKIAC1) HKIAC Administered Arbitration Rules 2018, Art. 1.5. jQuery("#footnote_plugin_tooltip_2023_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2023_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, ICC2) ICC Rules of Arbitration 2017, Art, 29(6)(a) jQuery("#footnote_plugin_tooltip_2023_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2023_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and LCIA3) LCIA Arbitration Rules 2014, Art. 9.14. jQuery("#footnote_plugin_tooltip_2023_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2023_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); expressly state that their EA provisions do not apply to arbitration agreements entered into before these provisions came into force (unless parties agree otherwise). On the other hand, the SIAC and SCC are more aggressive – their rules do not contain grandfathering provisions for EA.

This difference in approach can significantly affect how disputes are resolved. While the more aggressive approach enables parties to avail themselves of the latest features of the rules and can therefore theoretically provide shorter routes to relief, it can sometimes result in protracted enforcement battles.

Case Studies – JKX v Ukraine, AQZ v ARA, and Noble Resources v Shanghai Good Credit

JKX v Ukraine4)SCC EA 2015/002; discussed in Ipp, “SCC Practice Note:  Emergency Arbitrator Decisions Rendered 2015-2016“, Section 3.1 (accessed on 7 November 2018) jQuery("#footnote_plugin_tooltip_2023_4").tooltip({ tip: "#footnote_plugin_tooltip_text_2023_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, AQZ v ARA5)[2015] SGHC 49 jQuery("#footnote_plugin_tooltip_2023_5").tooltip({ tip: "#footnote_plugin_tooltip_text_2023_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Noble Resources v Shanghai Good Credit6)[2016] Shanghai No. 1 Intermediate People’s Court jQuery("#footnote_plugin_tooltip_2023_6").tooltip({ tip: "#footnote_plugin_tooltip_text_2023_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); are instructive examples. These cases have been discussed in previous posts on this blog (JKX, AQZ, Noble Resources).

JKX v Ukraine – In 1998, Ukraine ratified the Energy Charter Treaty (the “ECT“). The ECT provides for SCC arbitration. At that time, EA was not part of SCC arbitration.

Fast forward to 2014 – Ukraine received notice of a claim by a UK-headquartered MNC, JKX, under the ECT. Within 2 months, Ukraine was ordered by an SCC emergency arbitrator to stop applying a particular domestic law on gas production royalties to JKX. Six months later, the arbitral tribunal issued an interim award, effectively mirroring the terms of the emergency arbitrator’s decision.

It is unclear whether the emergency arbitrator’s decision was ultimately enforced. However, at least at first instance the Ukrainian courts found that the SCC EA procedure was in accordance with the parties’ agreement.7)Hamama and Sendetska, “Interim measures in support of arbitration in Ukraine: lessons from JKX Oil & Gas et al v Ukraine and the recent reform of Ukrainian legislation” https://academic.oup.com/arbitration/article/34/2/307/5033005 (accessed on 7 November 2018) jQuery("#footnote_plugin_tooltip_2023_7").tooltip({ tip: "#footnote_plugin_tooltip_text_2023_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

On the other hand, both AQZ and Noble Resources involved EP under the SIAC Rules.

In AQZ, parties concluded a coal shipment contract in 2009. The SIAC arbitration clause therein provided for disputes to be settled by three arbitrators. At that time, the SIAC Rules did not contain an EP.

Fast forward to 2013 – the claimant successfully applied for arbitration conducted under the EP. The SIAC Rules then in force (2010 version) stipulated that under the EP a sole arbitrator would be appointed, unless the SIAC decided otherwise. The SIAC-appointed sole arbitrator then issued an award, which the respondent applied to set aside.

However, the Singapore High Court said it was “commercially sensible” to interpret the arbitration agreement as conferring the SIAC with discretion to appoint a sole arbitrator, provided the SIAC took into account the fact that the arbitration agreement pre‑dated the EP coming into force. The Court also observed that unlike the ICC’s EA provisions, the SIAC Rules do not contain grandfathering provisions. The Court said this “fortified” the conclusion that the EP provisions “override parties’ agreement for arbitration before three arbitrators.

Noble Resources involved similar facts, save that the arbitration agreement post-dated the coming into force of the SIAC EP provisions.

However, the Shanghai First Intermediate Court refused enforcement, on the grounds that appointment of a sole arbitrator under application of the EP was not in accordance with the parties’ agreement for three arbitrators.

These cases amply demonstrate how, in the absence of grandfathering, claimants can attempt a faster route to relief, under relatively new arbitral procedures such as EA and EP. This is so even if the parties’ chosen arbitral rules did not contain such procedures at the time of contracting / time of the respondent’s consent to arbitration.

Subsequent enforcement battles can raise question marks over the efficacy of the relief obtained (discussed here). However, claimants may nonetheless regard the threat of enforcement, adverse publicity, potential impact on respondents’ credit lines, etc. as useful pressure points.

Familiarity with New Procedures – Differing Levels of Experience

As ‘first movers’ and ‘non-grandfathers’, the SIAC and SCC have gained significantly more experience than other institutions in administering new procedures.

For example, as of 2016, the SIAC and SCC have administered 76 EA applications in total, against 2,626 new cases – 2.9%. This compares favourably to the 60 EA applications administered in total by the ICC, HKIAC and LCIA, against 5,145 new cases – 1.2%.8)We have used statistics from their respective annual reports to compute the number of EA applications and arbitrations administered by the SIAC, SCC, ICC, LCIA and HKIAC during 2010-2016, 2011-2016, 2012–2016, and 2014-2016 (the LCIA and HKIAC) respectively. jQuery("#footnote_plugin_tooltip_2023_8").tooltip({ tip: "#footnote_plugin_tooltip_text_2023_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Grandfathering – Suited to Taste

Given the differences in grandfathering approaches, businesses should carefully choose their arbitral institutions. This is particularly so for long-term contracts, since the chosen arbitral rules are more likely to be updated during the lifetime of the contract. For example, between 2007 and 2016 the SIAC revised its rules 4 times.

There is no ‘one size fits all’ approach, whereby the most aggressive or most conservative institution must be the best fit for all businesses in all situations.

For example, in infrastructure projects, a contractor as payee is more likely to make than face claims. It may therefore prefer an institution that takes a more aggressive approach towards innovation. This is because institutions typically introduce procedures that short-cut a claimant’s route to relief, and the absence of grandfathering provisions would allow the contractor to utilise such procedures.9)In choosing a ‘non-grandfathering institution’, a party would have to accept some uncertainty, and perhaps trust that, in Michael McIlwrath’s words, “we are far from a day when an arbitration institution might go too far in developing a [procedure] that is more efficient and proportionate to the value of the dispute.“ jQuery("#footnote_plugin_tooltip_2023_9").tooltip({ tip: "#footnote_plugin_tooltip_text_2023_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Risk appetite matters too. For example, listed/governmental entities may prefer arbitral centres that take a more measured approach towards rule revision. This can provide shareholders/public with greater certainty about the arbitral procedures eventually applicable when a dispute does arise. Alternatively, parties could specify in their contracts that the applicable arbitral rules shall be a specific version, e.g., the 2014 LCIA Rules, to avoid being subject to unpredictable future rule revisions.

Parties should also consider the potential jurisdictions where any award/order is likely to be enforced (particularly the enforcement of relief rendered under less conventional or truncated procedures), before opting for a ‘non-grandfathering institution’.

Conclusion

In summary, when choosing an arbitral institution, parties should go beyond evaluating the institution’s track record or its current set of rules. Instead, parties should also factor in something more fundamental: “What bargain does this institution strike with its users?” Does it lean towards respectful assistance, or proactive legislation? The answer to that question may well hold the key to how satisfactorily a party’s disputes are resolved.

Note: Clifford Chance Asia is a Formal Law Alliance in Singapore between Clifford Chance Pte Ltd and Cavenagh Law LLP.

References   [ + ]

1. ↑ HKIAC Administered Arbitration Rules 2018, Art. 1.5. 2. ↑ ICC Rules of Arbitration 2017, Art, 29(6)(a) 3. ↑ LCIA Arbitration Rules 2014, Art. 9.14. 4. ↑ SCC EA 2015/002; discussed in Ipp, “SCC Practice Note:  Emergency Arbitrator Decisions Rendered 2015-2016“, Section 3.1 (accessed on 7 November 2018) 5. ↑ [2015] SGHC 49 6. ↑ [2016] Shanghai No. 1 Intermediate People’s Court 7. ↑ Hamama and Sendetska, “Interim measures in support of arbitration in Ukraine: lessons from JKX Oil & Gas et al v Ukraine and the recent reform of Ukrainian legislation” https://academic.oup.com/arbitration/article/34/2/307/5033005 (accessed on 7 November 2018) 8. ↑ We have used statistics from their respective annual reports to compute the number of EA applications and arbitrations administered by the SIAC, SCC, ICC, LCIA and HKIAC during 2010-2016, 2011-2016, 2012–2016, and 2014-2016 (the LCIA and HKIAC) respectively. 9. ↑ In choosing a ‘non-grandfathering institution’, a party would have to accept some uncertainty, and perhaps trust that, in Michael McIlwrath’s words, “we are far from a day when an arbitration institution might go too far in developing a [procedure] that is more efficient and proportionate to the value of the dispute.“ 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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Choice of Law, Brexit and the ‘Ice Cream Flavour’ Dilemma

Wed, 2018-11-14 00:33

Gustavo Moser

The title of this post may, at a first sight, seem rather odd, but this author submits that choice of a governing contract law can actually be explained using ice cream as an analogy.

 

Assuming an individual generally likes ice cream, a question that arises is whether any thought has ever gone into why someone chooses a particular ice-cream flavour over another? It could be the consistency, the colour, the calories, the nutrients, the preparation or cultivation of the ingredients, ethical, environmental or religious considerations, or it may even be part of a certain diet. Alternatively, an individual may choose a flavour because they have (or have not) chosen that particular flavour before, or they were taught to choose one over the others; or a third party (someone we like or not) once recommended a particular flavour, or because the individual simply enjoyed that particular flavour on a previous occasion. Perhaps one has absolutely no idea what the thought processes behind ice-cream flavour choices are at all. And here lies the main point of the post: choices and (un)certainties.

 

The analogy is not as equivocal as one would have thought at the outset: like with governing contract laws, we also decide on the ice cream’s choice based on some level of rationality as listed above. However, the rational and non-rational elements are not easily balanced during the decision-making process. We therefore turn to Daniel Kanheman’s works to aid our understanding and reflect on how Brexit impacts on the topic.

 

  1. Kanheman’s Systems 1 and 2

Daniel Kahneman, a psychologist and 2002 Nobel prize winner in Economic Sciences, distinguishes between two systems in the mind for decision-making: System 1– the subconscious, which operates quickly and efficiently; and System 2– conscious and directed thought, which nevertheless operates in a rather slow and inefficient fashion.

 

1.1 System 1

System 1 has learned associations between ideas (e.g., an individual associating law of country X with a good choice in governing contract law because a colleague had a recent successful experience in a case where X law was applied, or associating Y law in a governing contract law as being efficient because of numerous published reports about the efficiency of Y courts); it has also learned skills such as reading and understanding nuances of social situations. This knowledge is stored in memory and accessed without intention or effort. In our example above, the association of X law with success equals not the idea of success.

 

Mental actions that are governed by System 1 are completely involuntary; e.g., the same individual thus concluding without further thought in a governing contract law decision that Y courts are efficient. System 1 is fast and efficient, but Kahneman postulates that it is unable to estimate the values and probabilities associated with each available option. Therefore, to run System 1 and execute decisions in a timely fashion we rely on intuition (discussed under item 2 below).

 

1.2 System 2

Under Kahneman’s System 2, in choosing a governing contract law, parties would process all available information, make choices, and execute behavior(s) in a way that is calculated to maximise their expected utility, i.e., the differential between expected benefits and expected costs. In other words, on this basis contracting parties make decisions utilising a cost-benefit analysis to achieve Pareto-efficient results. A scenario is considered Pareto-efficient if it is impossible to change it so as to make at least one person better off (in their own estimation) without making another worse off (again, in their own estimation).

 

However, assessment and comparison of all available options would only be possible with an extraordinary amount of energy and time. This may be unattainable in certain decision-making settings, in addition to a human being’s limited computational skills. Accordingly, in these scenarios it would seemingly be inappropriate for decisions to be made under Kahneman’s System 2, where the mind is slower, rule-based, analytic and controlled and where reason dominates. Hence, in situations where there are time, financial and energy constraints, such as in decisions involving a governing contract law, a decision may have to be taken under System 1, although it may not be a conscious decision by the contracting party.

 

  1. The use of mental shortcuts

Perhaps not surprisingly, in a business context, people work under pressure, tight timeframes and busy schedules, the result of which being that choice of governing contract law is typically deferred to the last phase of negotiation. This choice is not infrequently – yet equivocally – treated as the “last minute” clause, being the final “detail” in the design of the contract.  It is also regrettable that the governing law clause is typically positioned at the very end of the agreement, rather than at the outset when attention would arguably be at a higher level.

 

Parties may or may not choose a particular law or rules in order to: (i) prevent the application of less ‘credible’ laws or rules and parties’ benefitting from a more acceptable legal framework; (ii) avoid a particular law or rules so as to escape the application of other laws (for various reasons, including the lack of trust of some of players in that law’s or rules’ application by state court judges); or (iii) ensure that a given legal framework concerning which the parties have bargained would apply fully. Players may also contextualise their negotiation deals as to whether one or the other choice was made in accordance with the other side’s jurisdiction or whether they had included an arbitration agreement.

 

Choices of governing contract laws are therefore rather often grounded on a parties’ success or failure in a real-world environment and not according to logical and/or arithmetical rules. There is, arguably, a good reason to do so: if you spent time and resources on a litigation/arbitration matter, regardless of whether you succeeded or not, it is likely that you have acquired knowledge in, or a better grasp of, that particular law or rules and will or will not use it again (at least you are more inclined to come to this realisation due to the so-called sunk costs!). Therefore, using mental shortcuts to make these decisions (e.g., opt into law Z given the score obtained previously) may save time and could thus be particularly appealing in time-pressure situations. However, no two cases are the same and players may fall into the trap of making insufficient adjustments to distinguish case A from B. To add a further complication to this mix, especially in the context of the choice of law being England and Wales, are the complexities brought about by Brexit.

 

  1. Brexit

In current times, it is sensible for parties to discuss as to whether or not to revise their standard contracts, boilerplate clauses, and choice of law strategies, in light of the Brexit uncertainties. It is necessary to realise that cognitive biases may however drive this decision, in particular given the presence of ‘status quo’ bias in our decision-making processes.

 

The ‘status quo’ bias refers to an individual’s tendency to prefer an option which is consistent with the current state of affairs, i.e., the player would be more acquiescent to a risk-averse approach to, or less appetite for, changes. ‘Status quo’ bias would apply to standard contracts, boilerplate clauses and choice of law strategies more generally. This could explain why contracting parties will likely keep a certain practice such as opting-in or out of certain laws, e.g., England and Wales or using standard contracts where governing contract laws are already defined without further consideration. Long story short: we are generally risk-averse to changes but changes can also be positive!

 

In view of the above, parties need to be conscious not to fall into the trap of relying on the ‘status quo’, especially given the uncertainties surrounding Brexit. This includes whether Rome I and Rome II Regulations will be incorporated into national legislation. Parties will need to be mindful that in the event Rome I and Rome II Regulations are not immediately incorporated into national legislation, then the UK will revert to pre-existing common law framework. If so, if an issue arose relating to governing law before the English courts, at least in respect of contractual obligations, it is unlikely that the existing position will change significantly because the common law principles are similar to those in Rome I.  However, the position is less clear with regard to the governing law in respect of non-contractual obligations as Rome II does not reflect the English common law so closely. Uncertainty in this area is likely to be burdensome on parties from a time and cost point of view as parties dispute the interpretation of non-contractual obligations.

 

On the other side of the spectrum, parties should also be conscious not to fall into the trap of the ‘halo’ effect, i.e., once a good or bad impression is formed, that impression can often be extended and exaggerated. Hence, in the context of Brexit, parties should not be complacent about the effects of their choice of law decisions, but equally, should not panic over the choice of law being England and Wales in existing and future agreements, and the potential consequences of this choice. There are, and there will continue to be, vast benefits of choosing English law. It is also useful to bear in mind that the rules on governing law may not extend to arbitration, and Brexit is likely to have minimal immediate impact on this area of dispute resolution.

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The Tension Between Principle and Policy: Calibrating the Right of Non-Participating Respondents to Challenge Awards

Tue, 2018-11-13 06:00

Nicholas Poon

Introduction

On 23 July 2018, this blog posted a commentary entitled “Choice of Remedies Doctrine – A Jack-In-The-Box?”

The commentary explored the Singapore High Court’s decision in Rakna Arakshaka Lanka Ltd v Avant Garde Maritime Services (Private) Limited [2018] SGHC 78 (“Rakna”), and its implications.  The commentary also revisited the Singapore Court of Appeal’s decision in PT First Media TBK (formerly known as PT Broadband Multimedia TBK) v Astro Nusantara International BV and others and another appeal [2014] 1 SLR 372 (“Astro”) which upheld the “choice of remedies doctrine”.

Revisiting the choice of remedies doctrine in Rakna

Simply put, the doctrine recognises that an award debtor has the right to elect between an active remedy in the form of attacking an award by applying to have it set aside, and a passive remedy in the form of resisting enforcement only when the award creditor brings enforcement proceedings.  An award debtor’s decision not to avail itself of an active remedy does not preclude it from resorting to the passive remedy later on.  Suffice to say, Astro has generated controversy, with the legal position differing across jurisdictions.1)See for e.g. Jonathan Hill, “Enforcement of Awards under the New York Convention: Choice of Remedies and the Significance of Time Limits” (25 June 2018) (link). jQuery("#footnote_plugin_tooltip_9692_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9692_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Referring to an earlier piece which I had written and in which I had argued that the choice of remedies doctrine should not be viewed as “anti-arbitration”, the commentary suggests that the conduct of a “” respondent who refuses to participate in the arbitration proceedings and/or take steps earlier to challenge the tribunal’s jurisdiction, but subsequently objects to the tribunal’s jurisdiction at the setting aside or enforcement stage may be “anti-arbitration”.  The commentary raises a number of insightful, credible arguments in support of the notion that such anti-arbitration conduct should be sanctioned, for instance, by precluding the recalcitrant respondent from raising its jurisdictional objections at the setting aside and even the enforcement stage.

There is no need to repeat here the salient facts and holding of Rakna which are amply set out in the commentary.  As the commentary rightly points out, from the claimant’s perspective, the conduct of the recalcitrant respondent leaves much to be desired.  It is also true that there would be a substantial wastage of resources if the recalcitrant respondent is allowed to raise jurisdictional objection after the final award is rendered, and succeeds in doing so, at least from the claimant’s and perhaps a neutral observer’s perspective.

Going beyond the distracting labels of pro- and anti-arbitration

But important as it is to focus on the unfortunate ramifications of any successful challenge against an award, the ideal of justice is – and must be seen to be – party-blind.  It would be wrong, even in an arbitration-friendly jurisdiction such as Singapore, for justice, manifested in the arbitral jurisprudence and policies, to be seen to be predisposed to claimants in an arbitration.

Accordingly, any analysis of the fairness of a policy cannot begin and end from only the perspective of only one party to the dispute.  Indeed, intentionally favouring the claimant is not “pro-arbitration”; it is simply “pro-claimant”.  In the same vein, strong-arming the respondent to submit to arbitration by undermining its ability to mount legitimate challenges against an arbitral award is not “anti-arbitration”; it is “anti-respondent”.

There is no merit in an efficient dispute resolution mechanism if it does not further the interest of justice.  A respondent cannot fairly be described as being recalcitrant, when it has a legitimate jurisdictional objection.  The jurisprudence in Singapore, conventionally seen as a “pro-arbitration” jurisdiction, is dotted with examples of awards being set aside or refused enforcement on jurisdictional grounds.  Astro is but one example.

As persuasive as the argument is that jurisdictional objections should be resolved as early as practicable, there is equal force in the argument that a claimant who pursues arbitration in spite of an evident jurisdictional defect undertakes the risk that the resources invested into the process may come to naught.  That is neither the fault of the system nor the respondent.  Hence, instead of characterising a particular conduct, approach or policy as “anti-arbitration” or “pro-arbitration”, which is merely a label that detracts from the underlying merits, in the words of Chief Justice Sundaresh Menon, it is “much more useful” to look at the reasoning of the Courts in enforcing, adopting and/or reject the conduct, approach or policy.2)See Sundaresh Menon, “The Somewhat Uncommon Law of Commerce” (2014) 26 SAcLJ 23 at [59]. jQuery("#footnote_plugin_tooltip_9692_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9692_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In Rakna, the respondent “stayed away from the arbitration, did not file a response, did not nominate an arbitrator, refused to pay any fees, did not file a statement of defence and then raised a jurisdictional challenge by way of a terse letter and absented itself from the preliminary meeting, refused to file any submissions in support of its stand and allowed the arbitration to proceed without participation” (see Rakna at [72]).  In the High Court’s judgment, the respondent’s conduct was in blatant disregard of the policy behind Article 16(3) of the Model Law and amounted to an “abuse of process”.

But, as the commentary correctly points out, on the authority of Astro, the very same “abusive conduct” would not have prevented the respondent from resisting enforcement of the award in reliance on the same jurisdictional objections.

The challenge of reconciling policy with principle

The abuse of process is understandable, from a policy perspective, if it is rationalised as arising from pursuing a similar (but not identical) active remedy in the form of setting aside proceedings despite failing to take advantage of an active remedy available at an earlier stage to challenge the tribunal’s ruling on jurisdiction, i.e. Article 16(3) of the Model Law.  However, the application of the abuse of process doctrine as a policy response meets stern resistance in the form of legal principle.

The travaux, in particular the Analytical Commentary (see Rakna at [68]), puts it beyond argument that both active (setting aside) and passive (resisting enforcement) remedies remain available to a party who did not participate in the arbitration.  It is worth noting in this regard that the part of the travaux referred to by the High Court in Rakna in support of its conclusion predates the Analytical Commentary.  Applying the travaux strictly, therefore, the respondent in Rakna was fully entitled to wait until the final award is issued and only thereafter apply to set aside the final award on the basis of its jurisdictional objections.

Whether the Court of Appeal will land on the same side as the High Court is anyone’s guess.  But this is unlikely to be one of those cases where the Court of Appeal has plainly no reason to disagree from the High Court.  Quite apart from whether the intention in the travaux should be given effect to in construing Article 16(3) of the Model Law and/or section 10 of the International Arbitration Act (“IAA”), there is also the deeper, fundamental question whether it is right to burden a respondent who has a meritorious jurisdictional objection with taking positive steps to challenge a preliminary ruling on jurisdiction that has been issued within the time limited under the Model Law and section 10 of the IAA.

This question admits of no easy answer, but any answer must account for and recognise that placing this burden on the respondent has the potential effect of restricting the respondent’s access and right to present its jurisdictional arguments to the Court of Appeal.  This is because the High Court’s decision in a challenge of a preliminary ruling on jurisdiction under section 10 of the IAA is not appealable to the Court of Appeal unless leave is granted by the High Court, unlike a decision in setting aside and resisting of enforcement proceedings which is appealable to the Court of Appeal as of right.

Restricting a party’s right of appeal is not inherently wrong.  But where the restriction hinges on the tribunal exercising its unfettered discretion in favour of deciding its jurisdiction in a preliminary ruling and not together with the merits in a final award, which invariably leaves the respondent’s right of appeal at the mercy of the tribunal, the justification for endorsing the restriction will have to be exceptionally strong.

References   [ + ]

1. ↑ See for e.g. Jonathan Hill, “Enforcement of Awards under the New York Convention: Choice of Remedies and the Significance of Time Limits” (25 June 2018) (link). 2. ↑ See Sundaresh Menon, “The Somewhat Uncommon Law of Commerce” (2014) 26 SAcLJ 23 at [59]. 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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Public Policy: National, International and Transnational

Mon, 2018-11-12 03:01

Margaret Moses

Institute for Transnational Arbitration (ITA)

On the 60th anniversary of the New York Convention, we can generally conclude that the public policy basis for refusing to enforce an arbitration award has for the most part worked as the drafters intended. The drafters knew that by permitting courts to refuse to enforce foreign arbitral awards based on public policy, they were opening the possibility that courts might use idiosyncratic local rules to undermine the broad enforcement goals of the Convention. Nonetheless, they believed this exception to enforcement was a necessary safety valve that would prevent intrusion on state sovereignty if a foreign award was irreconcilable with the enforcing country’s legal structure. Today, although there are some idiosyncratic decisions where foreign arbitral awards are not enforced because of local rules, the trend is toward a more international and even transnational understanding of the proper application of the public policy exception.

 

The language of Article V(2)(b) of the Convention, redrafted several times by the Working Group, ultimately provided that the enforcing court could refuse enforcement if it found that

(b) The recognition or enforcement of the award would be contrary to the public policy of that country.1) The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), 330 United NationsTreaty Series 38, no. 4739, Art. V(2)(b)  (emphasis added). jQuery("#footnote_plugin_tooltip_7361_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7361_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

“That country” refers unequivocally to the country where recognition and enforcement is sought. The plain language of the clause and the drafters’ intent indicate that public policy means national public policy, the public policy or ordre public of the state of the enforcing court. This interpretation is warranted because the purpose behind the exception was to permit a country to refuse to enforce an award that was contrary to its own system.

 

However, in practice, courts have varyingly used national, international and even transnational interpretations of the public policy exception. The Convention itself does not define public policy. So the public policy of one country will not be exactly same as that of another country. Different countries have different standards undergirding their national public policy, and these can result in quite different interpretations of the term.  In addition, public policy is not necessarily static, and over time may continue to evolve.

 

But there are some similar understandings and common principles that have, for the most part, prevented the public policy exception from creating a large loophole undermining Convention enforcement, and have encouraged courts not to refuse enforcement based on local, parochial standards.

 

There are two main reasons why, for the most part, courts do not often refuse enforcement of a foreign arbitral award. First, domestic public policy has traditionally been interpreted narrowly. Second, a number of countries have both a domestic public policy and an international public policy, and they have tended to apply their own states’ international public policy with respect to foreign awards.

 

In a case in Colombia, Tampico Beverages Inc. v. Productos Naturales,2) Tampico Beverages Inc. v. Productos Naturales de la Sabans S.Z. Alqueria, SC9909-2017, Case N° 11001-02-03-000-2014-01927-00. jQuery("#footnote_plugin_tooltip_7361_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7361_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); for example, the Supreme Court of Colombia was asked to enforce an ICC award that had been challenged as a violation of public policy because of an arbitrator’s conflicts of interest. Although the court acknowledged that enforcement under these particular circumstances might violate Colombia’s domestic public policy, it concluded that the country’s international public policy was different, and that the court should look to international authorities to determine if there was a violation. It then turned to the 2014 IBA Guidelines on Conflicts of Interest as representative of international practices. Thus, the court looked outwardly, toward international practices, relying on an international soft law instrument to help it determine that its country’s international public policy was not violated.

 

A state’s international public policy tends to be interpreted more narrowly than its domestic public policy, such that a foreign arbitral award is less likely than a domestic one to be refused enforcement. But a state’s international public policy is not what commentators call a “truly international public policy,” or a transnational public policy. Rather, it is a policy viewed through the lens of the state’s own laws or standards for dealing with a foreign arbitral award. Thus, even though it is an international public policy, it is defined at the state level. It is still the public policy of that country, that is, the country of the enforcing court.  But it is the international public policy of that country.

 

“Truly international” is how commentators view transnational as opposed to international public policy. Transnational public policy is not the public policy of any one state, but rather involves public policy that transcends state boundaries. Such public policy is defined as arising out of an international consensus regarding universal standards as to norms of conduct that are generally recognized and agreed upon as unacceptable in most civilized countries, such as slavery, bribery, piracy, murder, terrorism, and corruption. It is generally agreed that transnational public policy has an even more restrictive scope than international public policy.

 

Commentators note that support has been steadily growing for the development of a body of transnational public policy. Most nations these days find that an award fundamentally tainted by fraud or corruption should not be enforced. To the extent that there is a general, widely held perception among nations that this is the case, there are likely to be fewer outliers among courts who may proceed to enforce an award tainted by fraud or bribery.

 

Thus, it may be that transnational public policy, with its carefully defined terms representing “fundamental moral or legal principles recognized in all civilized countries,” may have some influence on a court’s perspective in enforcing arbitral awards. But probably more influential than transnational public policy is simply a transnational perspective that could influence a court’s conception of what the scope of its state’s international public policy should be.

 

A transnational perspective can substantially broaden a court’s approach to its state’s international public policy. Rather than simply viewing the policy through the lens of the state’s own laws or standards for dealing with a foreign arbitral award, a transnational focus can encourage courts to adopt broader perspectives which, although not recognized in all civilized countries, tend to be accepted as best practices in the international arbitration community. By incorporating into their conception of international public policy this more transnational, best practices perspective, courts can help to unify the international framework for deciding on enforcement of foreign arbitral awards.

 

Incorporating a transnational perspective into this framework could encourage courts to become less parochial. For example, India has recently moved away from a position of refusing to enforce a foreign award that violated Indian law. At least part of India’s reason for changing its approach was likely that its decisions were out of step with what other countries were doing. Thus, an incentive to incorporate a more transnational perspective may come from a pragmatic perception that when a country is an outlier with respect to what other countries are doing, there are economic costs. The Indian government has expressed a desire to make India a hub for international arbitration. It understands that to do this, it must change its reputation as a country unfriendly to arbitration.

 

Countries interested in change should understand that a transnational perspective is one that embraces the practices of the international community of nations.  For the arbitration community, when courts treat enforcement of foreign arbitral awards with some consistency across borders, international awards can become more predictable and more likely to be enforced.

 

At this time of the 60th Anniversary of the New York Convention, the public policy exception appears to have worked well. However, it could be better. Although it is not realistic to expect uniform cross-border application of the public policy exception, nonetheless, today better communication and technology make it possible to know both how courts in different countries are dealing with the public policy exception, and also what the international arbitration community views as best practices with respect to enforcement of foreign arbitral awards. Thus, courts in different jurisdictions are more able to understand and meet expectations in the arbitration community with respect to enforcement of foreign arbitral awards.

 

A transnational public policy, defined as “norms agreed upon by all civilized nations,” was not envisioned by those who drafted the language of Article V(2)(b) of the Convention.  Such a policy, however, can inform court decisions dealing with issues of bribery and corruption.  A transnational perspective, on the other hand, is different. It is a perspective that encourages the application of public policy in a way that is reasonably congruent with the international public policy of a broad community of nations. A transnational perspective can thus strengthen both the pro-enforcement bias of the Convention, and the safety valve for ensuring that only meritorious awards are enforced.3) An expanded version of this topic can be found in Fach Gómez K, Lopez Rodriguez AM (eds), 60 Years of the New York Convention: Key Issues and Future Challenges, Wolters Kluwer, forthcoming, 2019. jQuery("#footnote_plugin_tooltip_7361_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7361_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

References   [ + ]

1. ↑ The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), 330 United NationsTreaty Series 38, no. 4739, Art. V(2)(b)  (emphasis added). 2. ↑ Tampico Beverages Inc. v. Productos Naturales de la Sabans S.Z. Alqueria, SC9909-2017, Case N° 11001-02-03-000-2014-01927-00. 3. ↑ An expanded version of this topic can be found in Fach Gómez K, Lopez Rodriguez AM (eds), 60 Years of the New York Convention: Key Issues and Future Challenges, Wolters Kluwer, forthcoming, 2019. 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 Marriage of Artificial Intelligence & Blockchain in International Arbitration: A Peak into the Near Future!!!

Mon, 2018-11-12 00:26

Ibrahim Mohamed Nour Shehata

Introduction:

Two of the most frequent buzz words in our world right now are without doubt: Blockchain & Artificial Intelligence (“AI”). Both technologies have definitely grabbed the attention of the international arbitration community, however, most of the current literature contemplates far-fetched scenarios and how these technologies can revolutionize the world of international arbitration. These articles definitely provide a snapshot of what the future of international arbitration might look like in 10 or 20 years. I would like to take a step back and see how these technologies can benefit the international arbitration community in the next 5 years. Further, no one has yet envisaged the potential impact of a marriage between both blockchain and AI in international arbitration. I would like to look also into the possibility of such a marriage and whether it can be considered as a match made in heaven.

 

(A) AI & International Arbitration:

Three Potential Imminent Benefits of AI in International Arbitration:

AI has undergone some recent outbreaks especially with respect to human language processing inspiring a whole array of legal tech solutions in the areas of legal research, access to justice, and predicting cases’ outcomes. In fact, some US courts already use AI-powered algorithms to assist the judges with setting bail-outs and sentencing decisions. As for international arbitration, most of the discussion has been centered around the possibility of having robotic arbitrators. Unfortunately, this discussion is more of an unknown unknown. The international arbitration community would be better off focusing its efforts upon the known knowns. AI has several use cases that are perfectly positioned to enhance international arbitration both in terms of efficiency as well as quality.

First, AI can review extremely long and detailed contracts and be able to recommend the most compatible arbitration agreement, and especially the most well-suited seat of arbitration and arbitral institution. This could be extremely helpful especially in transactions with tight deadlines as usually the arbitration clause is left till the end and hence dubbed as the “Midnight Clause.” For example, if the parties want to use a unilateral arbitration agreement, AI could direct them to choose London as the arbitral seat instead of Paris as the latter considers such an agreement as invalid.

Second, as the saying goes, arbitration is as good as the arbitrators. In this regard, AI can help the parties with choosing the best well-matched arbitrator for their disputes in terms of quality and availability. Further, in light of the ongoing discussion regarding party-appointed arbitrators and their inherent bias as was evidenced by a recent study, AI can help with the brand new methodology of appointment advocated by the CPR: the so-called screened appointment of arbitrators. In this regard, AI can help with the success of this new methodology through following these three steps:

Accordingly, AI will help achieving 4 main goals:

  1. Eliminate the Unconscious Bias of Party-Appointed Arbitrators;
  2. Diversify the Pool of Arbitrators in line with the Equal Representation in Arbitration Pledge;
  3. Reduce the Challenges to Arbitrators;
  4. Find the most Suitable & Available Arbitrator for the prospective dispute.

Third & Finally, AI can scrutinize arbitral award in a timely manner to maximize its chances of recognition and enforcement. For example, AI can ensure that the arbitral tribunal has complied with the procedural format required for the award. AI can also ascertain that the arbitral tribunal has answered every issue raised by the parties in their submissions. Additionally, AI can help the arbitrators with assessing the compliance of the award with mandatory rules and public policy of the seat of arbitration or potential places of enforcement of the award to comply with their duty to render an enforceable award. This can be done especially with respect to international public policy (i.e., Anti-Corruption International Regulations) as advocated recently by Sophie Nappert who asked an intriguing question: “What about drawing assistance from an algorithm programmed to recognise red flags in a given set of factual circumstances, and to determine the percentage chance of corruption being, or not being, present?”

 

(B) Blockchain & International Arbitration:

Private Permissioned Blockchain v. Public Permissionless Blockchain:

A blockchain can be defined as: “A database that stores digital information in a highly secure manner through (1) using cryptographic functions to encrypt such information and (2) distributing the database across a number of networks.” This definition tries to highlight the most important feature about blockchain; its extraordinary level of cybersecurity. Blockchain can be categorized in 4 types as follows:

Therefore, a private permissioned blockchain would be the optimal type of blockchains to be used in international arbitration for the following reasons:

  1. Private: To ensure the confidentiality that is usually highly regarded by participants in the arbitral process.
  2. Permissioned: To ensure that only pre-designated participants have control over the arbitral process (i.e., the arbitral institution before the constitution of the arbitral tribunal, and then the arbitral institution itself.)

 Is there even a need for Blockchain in International Arbitration?

An arbitration practitioner has claimed in a recent Kluwer Arbitration Blog that: “there are cogent technological reasons which will make it difficult for the management of an arbitration reference to be conducted in a blockchain platform in the foreseeable future.” He relied upon an unsubstantiated claim that it is “quite slow and expensive to store massive volumes of data on a blockchain ledger.” The arbitration practitioner was relying in his assessment upon the low scalability of public permissionless blockchains such as bitcoin and did not take into consideration the very high scalable private permissioned blockchain that can allow for thousands of transactions per second at a very low cost. This article goes on – and rightly so – to advocate that cloud computing might not have “adequate security protocols which can prevent major cyberattacks in the future.” Then, the article advocates for the use of decentralized cloud storage systems and suggests that companies such as Storj, Sia and Filecoin are currently commercializing the use of such systems. This is quite ironic because if you are in the blockchain space, you would know that all three companies are in fact blockchain companies. In a way or another, a blockchain-sophisticated reader would see such an article as rather advocating for the use of blockchain in international arbitration. Therefore, blockchain (a private permissioned type) would be beneficial for international arbitration for the following reasons:1) For a full detailed account of the potential imminent benefits of blockchain for international arbitration, please see my forthcoming article “Three Potential Imminent Benefits of Blockchain for International Arbitration: Cybersecurity, Confidentiality and Efficiency” to be published in the next edition of Young Arbitration Review (YAR). jQuery("#footnote_plugin_tooltip_9167_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9167_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

  1. Cybersecurity: Blockchain could potentially improve cybersecurity as it can impede fraudulent activities, and detect data tampering based on its underlying characteristics of immutability, data encryption and operational resilience.
  2. Confidentiality: Private permissioned blockchains could be compared to “organizations intranet pages, where information is only shared and exchanged internally with those who have been authorized to access the site.” Therefore, a private permissioned blockchain would provide international arbitration with an extremely confidential platform minimizing the risk of the leakage of sensitive data to any participant in the arbitral process.
  3. Efficiency: IBM signifies that smart contracts build on the blockchain might have the ability to reduce the time consumed in dispute resolution by 75%. Therefore, blockchain-based smart contracts might speed up the arbitral process to a great extent.

 

(C) Marriage of AI and Blockchain in International Arbitration: A Match made in Heaven between Confidentiality & Transparency?

Confidentiality and Transparency are usually seen as two opposites. However, with the marriage of AI and Blockchain, we can finally achieve both goals equally. As we already know, parties appreciate the fact that arbitration can provide a confidential platform for resolving their disputes.

In fact, 87% of respondents believe that confidentiality in international commercial arbitration is important. However, in international commercial arbitration, the lack of a transparent body of arbitral awards lessens the degree of legal certainty and predictability for both parties and makes life difficult for all participants in the arbitral process to have a reference point to which they can anchor their expectations. Further, the lack of transparency has left a dent to the legitimacy of international commercial arbitration which prompted many scholars to advocate for the publication of arbitral awards. As we have already pointed out, private permissioned blockchain promises a better platform for ensuring confidentiality of arbitral disputes. Accordingly, if we manage to train an AI software on spotting the identifying facts of arbitral awards (lets’ say investment arbitration awards as most of them are already publicly available), then we can have such AI software have an exclusive access to the body of arbitral awards on the private permissioned blockchain and then redact the identifying facts of such arbitral awards. Such a marriage will help us as an arbitration community achieve both virtues: Confidentiality and Transparency, which will reinforce the legitimacy of arbitration as a better platform for adjudicating disputes in the business community.

 

References   [ + ]

1. ↑ For a full detailed account of the potential imminent benefits of blockchain for international arbitration, please see my forthcoming article “Three Potential Imminent Benefits of Blockchain for International Arbitration: Cybersecurity, Confidentiality and Efficiency” to be published in the next edition of Young Arbitration Review (YAR). 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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ICSID Arbitration Reform: Mapping Concerns of Users and How to Address Them

Sun, 2018-11-11 02:16

Yarik Kryvoi

On 13 November 2018, ICSID will present its new proposed amendments at a major conference in London. This round of amendments aims, among other things, to modernize the ICSID procedure based on case experience, simplify the rules, and make the process increasingly time and cost effective while maintaining due process and a balance between investors and States.

On the basis of surveying members of the Investment Treaty Forum and the broader community of investment lawyers, this blog post makes suggestions for further improvement. A comparison of the ICSID Arbitration Rules with UNCITRAL Arbitration Rules and the Arbitration Institute of the Stockholm Chamber of Commerce Arbitration Rules (SCC Rules) shows that the amended rules will allow ICSID to catch up with those institutions in some areas and lead on introducing progressive developments in other areas.

How changes of ICSID procedure can be achieved?

The ICSID Convention itself contains several procedural rules which regulate the conduct of arbitral proceedings. Amendment of these rules is, however, difficult as a matter of public international law. However, ICSID Rules of Procedure for Arbitration Proceedings, which are incorporated by parties into their arbitration clauses by reference, can be amended more easily, upon the approval of a majority of two-thirds of the Member States. This seems to be the approach preferred by the ICSID Secretariat.

Other options, which ICSID may consider include adopting agreed the State Parties interpretation of certain provisions of the ICSID Convention, publishing guidance or best practice notes on various procedural aspects of proceedings. Any of the State Parties to the ICSID Convention can make a unilateral interpretative statement. Such statement would then be binding on the State making the declaration, as well as on the States that have clearly accepted such a declaration.

Key concerns, raised in a survey of the members of the investment community relate to timely appointment of arbitrators and its challenges, over-committed arbitrators and their conflicts of interest.  Also, some hope to see access to emergency arbitrators and fast-track arbitration procedure, as well as a procedure for summary rejection of claims. The current rules and practice of the ICSID Secretariat can do more to facilitate amicable settlement of disputes, consolidation of proceedings, allocation of costs and security for costs, timely rendering of awards and consistency of ICSID annulment decisions. The proposed amendments help to address most of these issues, but there is still room for further improvement as discussed in more detail below.

Timely appointment of arbitrators and challenges

The timeframe currently laid out in ICSID rules is longer than what envisaged in arbitration rules of other leading arbitral institutions. Moreover, currently the ICSID Arbitration Rules and Institution Rules do not require the nomination of arbitrators in the absence of an agreement or the proposition of a method for nomination. This lacuna causes additional delays and costs to the detriment of the parties.

ICSID Rules can be amended so as to require the claimant to nominate an arbitrator in the Request for Arbitration and to propose a method for constituting the Tribunal in the absence of a previous agreement.  In addition, the Rules can be amended to include specific timelines for the nomination of arbitrators by the parties. This could be a process whereby nomination by the requesting party must be within 10 days of the notice of registration; the other party must then make their nomination proposal within 20 days of receipt of the requesting party’s proposal; and the requesting party must then make any counter-proposal within 20 days of receipt of the other party’s proposal.

Tribunals should also be encouraged to reflect the costs of the delay incurred by a challenge in the costs awards, so that the costs of delay can be borne by the party making an unsuccessful challenge. The standards of challenges should be aligned with those adopted by other leading arbitration institutions. Moreover, ICSID can publish its own guidelines or best practices in this area.

Over-committed arbitrators

Highly qualified arbitrators may find it difficult to deal with their responsibilities in a timely fashion because they may have committed themselves to too many proceedings within a limited timeframe. The ICSID can require arbitrators to confirm under the Arbitrator Declaration the days or weeks that the arbitrator has already committed to his/her other undertakings over the next two years. The ICSID can also require tribunals to provide the parties and the ICSID with regular reports on progress towards an award, for instance, in every three months after the end of the hearing or, if any, following the submission of post-hearing briefs.

Arbitrators’ conflicts of interest

Neither the ICSID Convention nor the Arbitration Rules in their current form help in addressing potential conflicts of interest among arbitrators. This might cause an issue particularly in cases where arbitrators act as counsel in other cases which touch upon related issues that they may decide or take a position on. This also leads to a higher number of challenges which slow down arbitration proceedings and increase the costs.

Arbitrators can also be required to routinely disclose in the Arbitrator Declaration all other cases in which they are sitting. In addition, ICSID Arbitration Rules should include an explicit provision that would allow the parties to modify by agreement the test under Article 57 of the ICSID Convention which deals with disqualification of arbitrators. For example, the parties can agree that challenges will be decided in accordance with the International Bar Association’s Guidelines. ICSID can also provide further guidance on the interpretation of Article 57 by publishing a summary of decisions or best practices to achieve the development of a uniform and consistent application of principles.

Amicable settlement of disputes

A significant number of investor-State disputes result in settlement. This helps the parties reduce unnecessary costs and delays as well as preserve their relations. Yet, the ICSID Convention Conciliation Rules are not used very often. This may be because parties fail to see the benefits of the procedure specifically tailored to their needs in seeking an amicable settlement.

ICSID tribunals and the ICSID Secretariat should actively promote the use of ICSID Conciliation Rules. Although the current Arbitration Rules provide for the consideration of issues in dispute with a view to reaching an amicable settlement at the pre-hearing conference, it would make sense to urge tribunals to encourage parties to resolve their disputes amicably. The parties should be asked to express their views on the possibility of an amicable settlement.

Allocation of costs

Current ICSID Arbitration Rules do not provide guidance on allocation of costs, thereby incentivizing parties to file challenges based on weak merits. ICSID proceedings remain notoriously expensive. This is partly due to the lack of effective mechanisms that would discourage parties from adopting procedural tactics to delay proceedings and from putting financial pressure on the opposing party.

The Tribunals could be encouraged by an express provision to include a breakdown of costs for various procedural steps. This would not only help in raising the parties’ cost awareness, but also enhance the transparency and quality of the reasoning of decisions on costs.

In order to maximise effectiveness and minimise the costs of proceedings, tribunals can be encouraged explicitly to consider bifurcation between the phases of merits and quantum, which would save the parties from making detailed pleadings on the quantum before liability is established.

Moreover, the proposed amendments could introduce a rule that would require the parties to prepare short summaries of the main submissions to be included in the award. This would reduce the time and cost of rendering awards.

Consistency of ICSID annulment decisions

The ICSID Secretariat has complete responsibility for the appointment of annulment committees, constituted for each case. As a result, the approach of annulment committees is not always consistent. ICSID ad hoc Committees deciding on annulment applications find it difficult at times to distinguish between the appeal of awards and the application of the ICSID Convention’s provisions on annulment. Inconsistent decisions and confusion with respect to the role of ICSID ad hoc Committees create incentives for unsuccessful parties to launch annulment proceedings as a delaying tactic.

To address the concerns about the current annulment mechanism, one solution to consider would be the introduction of a standing annulment committee. The Chairman of the Administrative Council would seek to appoint three persons from a selected pool of arbitrators from the Panel of Arbitrators (e.g. the same twelve individuals) to form ad hoc committees to decide on annulment applications. This would not require making changes in the ICSID Convention and would help ensure the coherency and predictability of the decision-making process at the annulment stage.

The ICSID may consider convening informal meetings with members of the Panel of Arbitrators to discuss select controversial issues, and to see if there is a consensus in favour of a particular solution, or to better understand the different views on these issues. That could be followed by publication of guidance or best practice notes.

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Claims for Losses Caused by Criminal Offences not to be Arbitrated, Say Lithuanian Courts

Sat, 2018-11-10 03:23

Stasys Zelenekas

Young ICCA

The Court of Appeal of Lithuania (“Court of Appeal”) in Prosecutor v. Public Entity “Pramogų sala”,1) Ruling of the Court of Appeal of Lithuania in case No. 1S-183-307/2018 dated 9 August 2018. jQuery("#footnote_plugin_tooltip_6372_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6372_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); has ruled on 9 August 2018 that claims for damages are not arbitrable in cases where the (disputable) loss is caused by a criminal act. It must be noted, though, that the Law on Commercial Arbitration of the Republic of Lithuania (2012) does not contain this prohibition. However, it establishes that disputes arising from family legal relations and disputes concerning registration of patents, trademarks and design may not be submitted to arbitration. Moreover, disputes arising from employment and consumer contracts may not be referred to arbitration only where an arbitration agreement is concluded after the dispute has arisen.

The list of non-arbitrable subject matter does not include claims when loss is caused by a criminal act. Therefore, the position of the Court of Appeal clarifies the limits of arbitrability of certain types of disputes under Lithuanian law. What remains in doubt, however, is whether the ruling of the Court of Appeal fully complies with the parties’ freedom to arbitrate any disputes (including tort disputes).

Facts of the case

The dispute in question concerned a concession contract concluded between the municipality of Šiauliai (“Municipality”) and a public enterprise (incorporated by the Municipality). The contract included a standard arbitration clause stating that any disputes arising about the performance of the contract shall be decided by an arbitral tribunal. Eventually, the manager of the public enterprise was accused of abuse of powers resulting in failure to perform the contract and an associated loss suffered by the Municipality. The Lithuanian court (which heard the criminal case) has recognised the Municipality’s right to damages arising from the manager’s criminal act and determined damages to be recoverable from both the enterprise and the manager.

At the onset of the civil proceedings, the manager and the enterprise challenged the court’s jurisdiction claiming that the dispute is subject to arbitration in accordance with the contract’s arbitration clause, which provided that any disputes shall be settled by an arbitral tribunal. The Lithuanian court of first instance supported this position. The Court of Appeal, however, reversed the decision.

Court of Appeal’s ruling

The Court of Appeal has ruled that “the private nature [emphasis added] of arbitration determines that only disputes arising from private (commercial) legal relationships might be arbitrable. Meanwhile, disputes arising in relationships regulated by public law (e. g., criminal law) cannot be arbitrable”. On the basis of this, the Court of Appeal found that claims for losses arising from criminal offences should be heard by courts and not by an arbitral tribunal.

The Court of Appeal also noted that if the claims for damages were filed against one of the joint debtors, all associated claims must be dealt with jointly by the court and not by an arbitral tribunal, despite an arbitration agreement in the contract between the creditor and one of the debtors. The reason – the connection between the private contractual relationship and the criminal conduct that caused the loss.

Comment

Lithuanian arbitration law does not explicitly state that disputes for damages caused by criminal activities are non-arbitrable. Neither is such a restriction established by other Lithuanian legislation. Therefore, the recent ruling of the Court of Appeal is of great importance as it limits the parties’ right to refer these disputes to arbitration.

It must be noted that in this case, the Court of Appeal also pointed out that such disputes may be dealt with by two different bodies (the court or an arbitral tribunal) if the claims can be separated on the basis of both fact and law. The Court of Appeal emphasised the necessity of the claims being inextricably linked to be heard by the same adjudicatory authority (i.e., by the court). However, the Court of Appeal did not provide any specific guidelines that enable parties to identify when the claims might be seen as inextricably linked. To that extent, the reasoning of the Court of Appeal might be considered to have some shortcomings.

In this case, the claimant had sought joint and several liability of both defendants (i.e., the manager and the enterprise). Moreover, the claims were based on the same factual circumstances. Therefore, in opinion of the Court of Appeal, both criteria (factual and legal) were satisfied: the Court of Appeal held that the claims being “inextricably linked” meant that they could not be resolved by arbitration.

There is no doubt that portions of the claim (to some extent) might have been based on provisions of public (i.e., criminal) law. Nevertheless, there do not appear to be any obvious reasons under Lithuanian law for the Court of Appeal to have held that the claim could not be heard by an arbitral tribunal, as the arbitration clause stipulated in the contract covered any disputes, including contractual claims and tort claims. Therefore, despite the fact that both claims were “inextricably linked”, the Court of Appeal could still have held the dispute with the enterprise to be arbitrable. This position might also have been supported by the fact that the court (which found the manager guilty) recognised, inter alia, the Municipality’s right to reimbursement of damages.

Moreover, the manager of the enterprise had already been convicted. Therefore, no element of public law remained in the civil case that was to be heard. The only question to be resolved was whether (and to what extent) the loss caused by the manager and the enterprise (incurred because of criminal activity) should be recovered from them (i.e., a question only of civil law). The Court of Appeal, however, gave no justification for how this situation differed from a regular civil claim (i.e., where the enterprise is held liable for the loss, but no criminal activity is involved) subject to hearing by an arbitral tribunal. Indeed, the presence of this difference was uncertain and, therefore, the Court of Appeal had no reasonable grounds to give preference to the jurisdiction of courts.

Courts of certain other countries maintain a similar position. For instance, the courts of England & Wales have noted that even when a criminal act gives rise to a claim for damages, the case might be arbitrable.2) For example, the decision of the High Court of England in The London Steam-Ship Owners’ Mutual Insurance Association Ltd v The Kingdom of Spain and the French State [2013] EWHC 3188. jQuery("#footnote_plugin_tooltip_6372_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6372_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The courts have also admitted that in some cases an arbitral tribunal itself might “find facts that constitute a criminal offence and even find that a criminal offence has been committed”. Thus, an arbitral tribunal could have jurisdiction over claims for damages arising from criminal activities.

The ruling of the Court of Appeal, however, reveals that Lithuanian courts tend to limit opportunities to arbitrate disputes involving elements of public (in this case – criminal) law. Unfortunately, this position may adversely affect the development of Lithuanian arbitration law.

References   [ + ]

1. ↑ Ruling of the Court of Appeal of Lithuania in case No. 1S-183-307/2018 dated 9 August 2018. 2. ↑ For example, the decision of the High Court of England in The London Steam-Ship Owners’ Mutual Insurance Association Ltd v The Kingdom of Spain and the French State [2013] EWHC 3188. 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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Should Political Risk Insurance Payment Be Deducted From Investment Treaty Award Compensation?

Sat, 2018-11-10 02:59

Yashasvi Tripathi

Introduction

Political Risk Insurance (PRI) was discussed as a concept here. In fact, an earlier post discussed PRI as an alternative to investment treaty arbitration (ITA) for investors. The interaction between PRI and ITA is a germane field of study as both are risk mitigation strategies for investors and in some instances an investor can initiate claims under ITA and under PRI, such as, in cases of expropriation, government changes, political violence etc.

This post seeks to answer the topical conundrum: whether the insurance payment received by an investor (insured) under a PRI policy should be deducted from the compensation to be awarded to the investor (claimant) in an ITA if the grounds of claim under PRI and ITA are the same.

Conundrum

The two recent awards of ICSID tribunals, viz., Hochtief AG v. Argentine Republic (ICSID Case No. ARB/07/31, Award dated 19 December 2016) and Ickale Insaat Ltd Sirketi v. Turkmenistan (ICSID Case No. ARB/10/24, Award dated 8 March 2016) have answered the conundrum differently. The conundrum is again in front of an ITA Tribunal in Glencore Finance (Bermuda) Ltd v. The Plurinational State of Bolivia.1) PCA Case No. 2016-39/AA641, Bolivia’s Preliminary Objections, Statement of Defence, and Reply on Bifurcation (18 December 2017). jQuery("#footnote_plugin_tooltip_2920_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2920_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });      

In the Hochtief AG award, the tribunal held the respondent state, Argentina, liable for breach of FET obligation and awarded compensation to the claimant. The claimant had received PRI payment prior to the ITA award. Notably, the grounds for initiating both were the same. An issue of contention between the parties was the deduction of claimant’s PRI receipts from the ITA compensation.

The tribunal held the claimant’s PRI receipts would not be deducted from the compensation. The tribunal reasoned that the claimant arranged for the insurance payment on its own by paying for it. It is separate from the ICSID claim. The tribunal espoused that the respondent’s liability shouldn’t be reduced by an arrangement to which the latter was not a party. It agreed that due to such insurance policies the claimant might be obliged to pay some part of the compensation to the insurer.

Some practitioners agree with the principle of non-deduction.

Remarks on the case: Article 6 of the applicable Argentina – Germany BIT 2) Treaty between the Federal Republic of Germany and the Argentine Republic on the Encouragement and Reciprocal Protection of investments, 1991. jQuery("#footnote_plugin_tooltip_2920_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2920_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); mentions that if either contracting party makes a payment to its nationals because of a guarantee it has assumed regarding  investments, then the other contracting party shall recognize the assignment, of any right or claim from such national to the paying contracting party. Notably, the article mentions assignment, which means complete transfer of ownership.

Further, the tribunal had a problem with reduced liability of the respondent. However, unequivocally the respondent’s liability is not reduced, as it will have to pay Germany, the paying contracting party as per the agreement. Rather, the respondent will have to pay twice for the same cause of action.

In the case of Ickale Insaat, the tribunal had dismissed the claims of the claimant. The claimant (investor/insured) had a PRI policy for the leased equipment and machinery. However, the tribunal decided to deduct the claimant’s PRI receipts in calculating the compensation, if to be awarded, given the evidence and non-rebuttal by the claimant.

The tribunal reasoned that the compensation should be equivalent to the real value of the expropriated investment. It was on the assumption that the claimant might have been paid and would have recovered the value of the insured investment.

Notably, the dissenting arbitrator, and even the claimant, agreed on deduction principally, which is evident from the claimant’s request for rectification of the award. The parties only differed with respect to the sufficiency of evidence if the claimants actually got the PRI payment.

Way out and why

The following points indicate that PRI and ITA should be alternative, and not simultaneous means of redress for the investors:

i) The wording of treaties and insurance policies and the principles of insurance law: The language in the treaties for incentivizing agreements, like the article 6 above; and in the contracts of insurance, like the one concluded by the U.S. PRI provider, Overseas Private Investment Corporation (OPIC), mention the assignment of the relevant rights of the investor to the paying contracting party or to OPIC, so that the latter then proceeds against the host governments.

The request for arbitration by OPIC also uses assignment: that on making the payment to the insured, the insurer (OPIC) received in return, assignment of certain rights and interests to pursue recovery against the host government under the applicable agreement.

Assignment has specific legal connotations. Black’s Law Dictionary defines assignment as an act by which one-person transfers to another, the whole of the right or interest. It is complete transfer of rights, enabling the insurer to claim on its own without the name of the insured. 3) E.J. Macgillivray, MacGillivray & Parkington on Insurance Law, 8th ed jQuery("#footnote_plugin_tooltip_2920_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2920_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

When the whole of the right is transferred from the insured to the insurer, then the same right ought not be exercised by the insured at an ITA.

The request for arbitration by OPIC also states: by subrogation the host government is liable to reimburse the OPIC for payments it made to the investors and to compensate the OPIC to the fullest extent of rights and interests transferred to OPIC from the investors.

Subrogation is a product of equity, which prevents unjust enrichment. Generally, an insurer has the right of subrogation and not the insured. Further, insurer gets rights of subrogation as soon as the payment is made.4) Id. jQuery("#footnote_plugin_tooltip_2920_4").tooltip({ tip: "#footnote_plugin_tooltip_text_2920_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

As a common law principle, an insurer does not have rights of subrogation against its own insured for the claims arising from the same risk for which the insured was covered. Hence, if an investor is being compensated by a host government, after being paid by the insurer, then too the insurer doesn’t get the right of subrogation against the insured (the investor), as was claimed by a few practitioners agreeing with the non-deduction principle.

ii) Behavior of PRI providers: Some PRI providers, like Multilateral Investment Guarantee Agency, mandate for the insured to engage in arbitration as a precondition for the grant of PRI compensation. They grant PRI payment if the arbitration process has failed. Meaning thereby, the PRI providers deem compensations from PRI and ITA as an alternative to each other and definitely not something to be awarded simultaneously.

Further, after making the payments, the PRI providers initiate arbitration against host governments for the same cause of action. The authority with which PRI providers proceed against the host governments speaks about their understanding of the transferred rights, which is of ownership and complete.

iii) Phenomenon of moral hazards: Morally hazardous behavior of the investors in presence of PRI coverage (as detailed in a study) signifies that investors at times solely rely on PRI payments for their losses and do not care about the outcomes in ITAs. The investors deem their damages to be sufficiently covered by the PRI itself. Investors view PRI as an easy way out of a country in which they do not want to continue. The CalEnergy case in Indonesia is illustrative of this phenomenon.

This moral hazard is also observed in host governments. In the presence of PRI coverage, they have lesser incentive to reform their markets and economy for foreign investments (noted in an OECD policy paper). This illustrates that host governments don’t deem themselves primarily liable to compensate the investor in presence of PRI.

Thus, behavioral understanding of investors and host governments contradicts the non-deduction principle whereby PRI and ITA compensation are paid in addition to each other.

iv) PRI itself as a Dispute Resolution Mechanism: It is possible to equate PRI as one of the dispute resolution mechanisms, like an ITA. The dominance of public PRI providers, eventually changing the dispute to an inter-state dispute, supports this interpretation. For example, the dispute over the Dabhol power plant between an American Company and GOI turned into a state-state dispute between the US and India. It too signifies that PRI is an alternative to ITAs.

v) PRI v. ITA: At times, they have non-intersecting operating spheres. For example, PRI is essential for investors in host countries which haven’t entered into BITs or which are pulling out of the ITA regime. For instance, Venezuela and Ecuador denounced the ICSID Convention. PRI and ITA, as remedies, provide comparable but distinct advantages and remedies. Hence, one can be chosen over another depending on the preference of investors for certainty, speed, amount of compensation, cost etc.

vi) Equity: Making the host governments pay to the investor (the insured) for the same cause of action, as has been paid by the PRI provider (the insurer) is not equitable as the insured is getting compensated twice. If not leading to double compensation of the insured, it will lead to unjust enrichment of the insured, or at least liquidity benefits to the insured for a certain period.

Further, it amounts to the host government compensating twice for the same cause of action. This is equivalent to double jeopardy for the host governments, which is inequitable.

vii) Miscellaneous reasons: The prevailing conditions give rise to confusion as to who should proceed against the host governments regarding the insured investments, the insured or the PRI provider.

The non-deduction practice increases the transaction cost, as then the insured, who has been compensated by the insurer, will have to pay the insurer, as espoused by few practitioners agreeing with the principle. It leads to the same result of compensating the insurer circuitously.

Further, non-deduction leads to seeing the two fields of law: investment arbitration and insurance as mutually exclusive fields and non-integral. This doesn’t bode well for the future of the ITA regime, which already has few disgruntled opinions.

Conclusion 

PRI and ITA should co-exist as alternative ways and not as simultaneous sources of compensation for the same cause. Both provide distinct and comparable remedies in their distinct ways. If the PRI provider has paid an investor, then the PRI payment should be deducted from the compensation out of ITA awards. This will lead to a coherent and equitable system.

References   [ + ]

1. ↑ PCA Case No. 2016-39/AA641, Bolivia’s Preliminary Objections, Statement of Defence, and Reply on Bifurcation (18 December 2017). 2. ↑ Treaty between the Federal Republic of Germany and the Argentine Republic on the Encouragement and Reciprocal Protection of investments, 1991. 3. ↑ E.J. Macgillivray, MacGillivray & Parkington on Insurance Law, 8th ed 4. ↑ Id. 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 Return of “Forwarding” in the Costa Rican Arbitral World

Thu, 2018-11-08 16:05

Herman Duarte

The Return of the Jedi is a 1983 science fiction movie set in 4 ABY, a year after the Imperial occupation of Cloud City, when Luke Skywalker and his friends travel to Tatooine to rescue Han Solo from the clutches of Jabba the Hutt. The Empire prepares to destroy the Rebel Alliance with a more powerful Death Star, while the rebel fleet attacks it. Luke Skywalker faces his father, Darth Vader, in a final duel under the gaze of Emperor Palpatine. So, the Jedi Luke Skywalker returns triumphantly to overcome the dark forces, which allows the progress of the galaxy. 1) This contribution has been previously posted in Spanish in here. jQuery("#footnote_plugin_tooltip_9402_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9402_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Image: John Williams – Star Wars Episode VI: Return Of The Jedi (Original Motion Picture Soundtrack)2)Source:https://www.amazon.com/ jQuery("#footnote_plugin_tooltip_9402_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9402_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

Something similar happened on July 13, 2018 with the return of the figure of “Forwarding/Re-Sending” (there is no real translation for the “Reenvío” which is the term used in Spanish) to arbitration practice in Costa Rica. By “Forwarding” I refer to the figure created by the First Chamber of the Supreme Court of Costa Rica (see Decision 0941-F-07), that allows arbitrators to recover their competence after the award is rendered, in order to correct defects of nullity affecting such award. Despite of the criticisms against the figure of “Forwarding”, it is a mechanism that keeps parties from wasting time and resources in an arbitration process. Despite the benefits of this figure created by case law of the First Chamber, jurisprudence made a turn, and stopped its application in national arbitration. As a result of that decision, a considerable number of awards were annulled for defects that could have been corrected by the Arbitral Tribunal through this jurisprudential figure.

Faced with this reality, the First Chamber of the Supreme Court has returned to the year 2007 (returning to the past is not necessarily a bad thing) in which “Forwarding” in national arbitration was possible, in order to save the sunk costs and time of an award that gets vacated for an absurd – yet legal – reason.

In Decision 666-S1-18, the First Chamber of the Supreme Court of Costa Rica vacated an award and instead of closing the case, it sent it back to the Arbitral Tribunal because it considered that the reason that lead to the annulment of the award, was something that the tribunal could revise. In this context, the First Chamber ordered the tribunal not to change its decision per se, but to repeat a critical part of the evidence hearings stage, that lead to a due process violation by not allowing each party to present their case.

The problem surged due to the impediment of the respondent to obtain and offer a key witness statement. The Arbitral Tribunal rejected receiving such testimony because the claimant decided not to present the witness. Now, here it becomes tricky and it’s perfectly fine if you are not following the lines, because the witness system in Costa Rica is a bit strange. Let me explain. In some arbitration cases in Costa Rica (not all, but in some) the civil procedural rules are strictly followed, including the traditional rule that “no one can serve as evidence of their own case”. Hence, general managers, CEOs, presidents and other corporate officials cannot be called to testify by the party they represent, they can only be called by the opposing party. The rule, however, allows them to partake in some sort of cross-examination, i.e., they can be questioned by their own attorney, as long as they were initially called to testify by the other party.

In Decision 666-S1-18, the claimant requested the confession of the respondent´s legal representative, a key character of the commercial dispute. After the tribunal granted claimant’s petition, the respondent also requested to examine the same witness, which was his legal representative after all. The problem surged when, after the tribunal granted Claimant´s petition, Claimant withdrew its confession request, and consequently the tribunal decided to deny respondents’ request. This was considered by the First Chamber a violation of due process, and ordered the Tribunal to allow the testimony.

The First Chamber considered that: “it is not explainable or justified how the arbitration body denied the evidence,,, The interest that both parties considered at the time in the information and data that Mr. V.L. could offer for the resolution of the litigation and the current importance that the defendant’s highlights in that statement are evident. Consequently, the Chamber considers the practice of this proving relevant.” (Decision No. 666-S1-2018, First Chamber, Supreme Court of Justice of Costa Rica). To translate it into practical terms: arbitrators must ensure that key evidence to an arbitral proceeding to take place. The other element is that anyone can withdraw its intention to practice an evidence once it has been admitted by the Tribunal, but such withdrawal must be done with the consent of all parties involved. This is a clear manifestation of good faith in arbitral practice and more importantly, the decision traces a route to modernity for the Costa Rican arbitral practice.

Consequently, the First Chamber ordered the Arbitral Tribunal to practice said proof within the following six months. As opposed to the Costa Rican International Arbitration Act that does not provide a fixed term, the country’s Domestic Arbitration Act (Law 7727) states that the tribunal has to render a decision within 6 months from the submission of the statement of claim. The First Chamber’s ruling preserved the right of the Arbitral Tribunal to assess the evidence as appropriate for the purpose of solving the violation of due process affecting the respondent.3)Thanks to Marcela Filoy for sharing the First Chamber ruling. jQuery("#footnote_plugin_tooltip_9402_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9402_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

From the judgment of First Chamber, we can conclude that:

1. ”Forwarding” has returned, which undoubtedly will be a benefit for the arbitration community, in particular for its users that require an expeditious and definitive resolution of the conflicts that arise in a commercial relationship. The component of finality is maintained, even when the arbitrators have a “second chance” (as a result of resubmission) to analyze the errors and correct them. However, the question remains as to whether the “Forwarding” will only operate when the term to issue the award has not expired yet or whether it will be used regardless of the expiration of such term.

2. Respect for the criterion of the arbitrators in regard to the assessment of the evidence, because the interest of the First Chamber is really that there is no breach of due process, and ultimately that the arbitration process is legitimised through the satisfaction of its users, who must be afforded the opportunity to present their case.

3. A fracture – but no rupture – with the system of the Civil Procedure Code that is about to lose validity due to the entry into force of the New Code of Civil Procedure, that moves away from the principle of “Nobody can be a witness of his own cause”. This is, in addition, a positive factor as it goes hand in hand with the dominant arbitration currents in the most developed jurisdictions, in which the restriction on legal representatives to be called as witnesses by their own attorney has been removed.

The emphasis of Decision 666-S1-18 is not on formalism, but on potentiating due process by allowing an intense debate in the evidentiary stage of the process, providing for the possibility to reach the “real truth” as the First Chamber itself points out (Latin American judges love to create classifications of the truth, having a “real truth” to refer to what actually happened; and a “docket true” which refers to what the facts of the case file show). This is covered by two fundamental pillars of arbitration: the principle of defense, and parties’ opportunity to present their cases, which are manifestations of the principle of due process.

In short, the “Forwarding” may have its criticisms, but the perfect is the enemy of the good, and we need good mechanisms to resolve trade conflicts to alleviate social pressure. First Chamber: well done.

References   [ + ]

1. ↑ This contribution has been previously posted in Spanish in here. 2. ↑ Source:https://www.amazon.com/ 3. ↑ Thanks to Marcela Filoy for sharing the First Chamber ruling. 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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Switzerland to Become More Attractive for International Arbitration: Act 2

Thu, 2018-11-08 00:56

Léonard Stoyanov

On 11 January 2017, the Swiss Federal Council issued a draft bill to revise chapter 12 of the Swiss International Private Law Act (“SPILA”) on international arbitration (as well as, to a lesser extent, the Federal Tribunal Act and the Civil Procedure Code (“CPC”)), which was the subject of a previous publication on this blog.

 

On 24 October 2018, the Federal Council issued a revised bill, taking into account some of the comments made and concerns raised by interested parties with regard to the draft bill during the consultation phase, alongside a message for the attention of the Federal Parliament.

 

The goal of the proposed revision remains unchanged, i.e. (i) to update the provisions of the SPILA by implementing elements of the Federal Tribunal’s jurisprudence and clarifying ambiguities, (ii) to reinforce the parties’ autonomy and (iii) to ease the use of the SPILA.

 

I. Implementing the Federal Tribunal’s jurisprudence and clarifying ambiguities

A. Clarification of the scope of application of chapter 12 SPILA

To offset a heavily criticised decision of the Federal Tribunal, it was proposed in the draft bill that article 176 SPILA specify that the parties are those “to the arbitration agreement” so as to make the time when the arbitration agreement was entered into (as opposed to when arbitral proceedings were started) relevant when ascertaining whether chapter 12 SPILA applies. This proposal was maintained in the revised bill.

 

B. Request of the appointment of an arbitrator by the judge when the arbitration clause does not provide for a seat or when the parties merely agreed that the arbitration would take place in Switzerland

Pursuant to article 176 III SPILA, if neither the parties nor the arbitration institution has determined the seat of the arbitral tribunal, the arbitrators will do so. What if the arbitral tribunal is not constituted yet? According to article 179 II SPILA, the judge at the seat of the arbitral tribunal can be seized. To break this vicious circle and avoid the inapplicability of provisions of chapter 12 SPILA (starting with article 176 I according to which chapter 12 applies to any arbitration if the seat of the arbitral tribunal is in Switzerland), article 179 II in fine of the revised bill provides for the competence of the Swiss tribunal seized first.

 

Also, the judge may appoint all arbitrators in case of a multipartite arbitration.

 

C. Duty to disclose

The duty (which is to remain until the arbitral proceedings have come to an end) for any person who is offered to act as an arbitrator to disclose immediately the existence of facts which could raise doubts as to his/her independence or impartiality raised no criticism during consultation and was maintained in the revised bill.

 

D. Duty to object immediately to breaches of procedural rules

By contrast with the draft bill which was silent on this point, the revised bill provides for the duty to immediately raise any violation of procedural rules, failing which the party suffering such violation will be barred from raising it at a later stage. This is typically true for a breach of the right to be heard as per a longstanding jurisprudence of the Federal Tribunal.

 

E. Means of recourse available against an award

The proposal to expressly address the rectification, interpretation, completion and revision of awards remains in the revised bill.

 

Whereas the draft bill provided two revision grounds, i.e. (i) the late discovery of relevant facts or means of proof which existed before the issuance of the award (“although [the] party [challenging the award] showed the required diligence” in the latest version), (ii) the demonstration (preferably by a criminal investigation) that the arbitral proceedings were influenced by the perpetration of a criminal offence to the detriment of the party challenging the award, the revised bill contains a third ground: the discovery after the end of the arbitral proceedings of a ground for recusal provided that no other means of challenge is available.

 

While parties, none of whom/which has his/her domicile, habitual residence, respectively its seat in Switzerland, may renounce the right to seek revision of an award based on the late discovery of relevant facts or means of proof, (even) they may not waive such right if the arbitration was tarnished by the perpetration of a criminal offence. When applicable, the renunciation must be made in writing (with reference to art. 178 I of the revised bill, as for the opting out; infra, II. A.).

 

Besides, the revised bill provides that an award may be challenged before the Federal Tribunal irrespective of the amount in dispute.

  

II. Reinforcing the parties’ autonomy

A. Opting out of the SPILA

The revised bill, as did the draft bill, provides that the parties to an arbitration may waive the application of the SPILA in favour or the CPC (“opting out”) in the arbitration clause or later on, this time however only provided they do so in writing (by reference to art. 178 I SPILA).

 

B. Arbitration clauses in unilateral legal acts

Also unchanged is the proposed amendment whereby chapter 12 is to apply by analogy to unilateral arbitration clauses contained in wills, foundation bylaws, or trust deeds.

 

III. Improving the laws governing arbitration in the users’ interest

A. The SPILA and nothing but the SPILA

As initially contemplated, current references in the SPILA to provisions in the CPC will be replaced with a set of new provisions with a view to making the SPILA a standalone set of rules for international arbitration.

 

B. Submissions in English before the Federal Tribunal

The proposal that submissions before the Federal Tribunal may be drafted in English remains despite some criticisms, notably from the Federal Tribunal itself.

 

C. Summary proceedings to apply to ancillary procedures

The proposal that the proceedings applied in case the judge acts as a “juge d’appui”
(e.g. with regard to the appointment, challenge, replacement of arbitrators) be conducted in the form of summary proceedings remains.

 

D. Assistance by the judge to enforce interim measures

Today, article 183 II SPILA provides that the arbitral tribunal with a seat in Switzerland may seek assistance from the judge to enforce interim relief or conservatory measures it rendered. The revised bill extends this right to the parties to the arbitration, as supported by most scholars.

 

E. Assistance by the judge to foreign arbitral tribunals

An arbitral tribunal, the seat of which is abroad, or a party to a foreign arbitration may seek assistance from the judge at the place where interim relief or a conservatory measure is executed. Equally, such arbitral tribunal or a party to an arbitration abroad with such arbitral tribunal’s agreement, may seek assistance from the judge at the place where evidence must be administered.

 

The aim is to spare the trouble of going down the often lengthy and burdensome road of international assistance in civil matters.

 

F. Laws applied by the judge when his assistance is sought to administer evidence

Today, whenever the judge’s assistance is sought to administer evidence, he applies his own law. The revised bill enables the judge, if so requested, to take into account “other forms of procedures” and thereby mirrors article 11a II and III SPILA, which deals with the law applicable to judicial assistance carried out in Switzerland.

 

IV. What main substantial additions does the revised bill contain as compared to the draft bill of 2017?

Both the duty to object immediately to breaches of procedural rules (supra I. D.) and the assistance by the judge to foreign arbitral tribunals (supra III. E.) are novelties.

 

V. What has been left behind as compared to the draft bill?

A. No lesser standard for the arbitration agreement to be formally valid

Today, article 178 I SPILA reads “[a]s regards its form, an arbitration agreement is valid if made in writing, by telegram, telex, telecopier or any other means of communication which permits it to be evidenced by a text”.

 

With its draft bill, the Federal Council, thereby taking example on other national legislations, had proposed that an arbitration agreement be valid as to its form also if only one of the parties had met the form requirement with the addition of the sentence “[t]his condition is deemed met even though it is met by only one of the parties to the arbitral agreement”.

This proposed amendment was mostly rejected in the consultation phase and is therefore not included in the revised bill. It was essentially feared that it would affect legal certainty, notably in the context of the recognition and enforcement of awards under the New York Convention.

 

B. The arbitrators do not get to determine the amount and dividing up of the fees and expenses

According to article 189 III of the draft bill, the arbitral tribunal was competent to set the arbitration fees and expenses and divide them among the parties. This initial proposal was strongly rejected during consultation and was accordingly abandoned.

 

VI. Conclusion

The tuned proposed revision of the SPILA offers slightly more balance between the will to modernise it and the need for legal certainty and will likely achieve its triple purpose if accepted by the Parliament and not challenged by way of a referendum, in which case the updated SPILA and the related amendments in other laws will enter into force at the very earliest in
January 2020.

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The 2018 Revision of the Rules of the Court of Arbitration Attached to the Chamber of Commerce and Industry of Romania – An Important Upgrade

Wed, 2018-11-07 01:31

Catalina Bizic

A heated debate has been ignited by the results of the 2018 Queen Mary Survey, which highlighted time and cost as the most fervid complaints respondents had regarding arbitration. In order to address these issues, a series of measures have been implemented by major international arbitral institutions in recent years in order to counteract significant delays as well as excessive expenses.

Aligning themselves to the necessities and evolution of arbitration, the Rules of the Court of International Commercial Arbitration attached to the Chamber of Commerce and Industry of Romania (hereinafter “the Rules” and “CICA-CCIR”) have been revised in 2018 to enable parties to dispose of their dispute in a more efficient manner.

The much needed upgrade follows a series of efforts to revive flexibility and efficiency of arbitration in Romania after previous versions of the Rules severely damaged the principle of party autonomy. In a 2014 study conducted by the Directorate-General for Internal Policies of the European Parliament on arbitration in Romania, parties expressed discomfort concerning “the traditional freedom of arbitration from governmental and institutional control”. However, the conclusion of the study described the problems Romania faced at the time as “far from insoluble” as well as its capacity to “increase substantially as an arbitral State”. This was due to the 2011 and 2012 versions of the Rules providing for the “exclusive prerogative of the appointing authority” to appoint the presiding arbitrator of a dispute and, later on, all the members of the arbitral tribunal, annihilating the parties’ involvement in such a crucial matter, defects which have since been cured.

In this context, the endeavors of the institution become even more laudable, with considerable improvements generated by the 2014 and the now 2018 revisions respectively. These have also synchronized with the 2014 revision of the Romanian Code of Civil Procedure regulating domestic and international arbitration, an inspiration from the UNCITRAL Model Law. Although traditional litigation is still the preferred method of resolving disputes nationwide, despite an overly burdensome caseload beset upon courts, it has been held that “[c]ommercial disputes in Romania are increasingly being submitted to arbitration, particularly in sectors such as construction, concessions, public-private arrangements and corporate joint-venture type investment schemes” 1) Florian Nitu, Raluca Petrescu, Catinca Turenci, Arbitration Procedures and Practice in Romania: Overview, Practical Law, 1 August 2016 jQuery("#footnote_plugin_tooltip_1663_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1663_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. This demonstrates that the discomforts expressed in 2014 are slowly dissolving, with the new provisions amounting to yet another stepping stone, particularly in terms of combating concerns over time and costs.

Emergency Arbitrator

The emergency arbitrator is provided for under Annex II of the 2018 Rules. The President of CICA-CCIR decides upon the jurisdiction of CICA-CCIR and proceeds to appoint an emergency arbitrator within 48 hours of receipt of the application. In two days’ time after his or her appointment, the emergency arbitrator establishes a procedural timetable to be followed by the parties, with a decision being rendered within 10 days as of his or her designation. One particularity pertains to the impossibility of ex parte proceedings, the request for an emergency arbitrator being communicated to all the parties in dispute.

Contrasting the expedited proceedings that apply under art. 6 of Annex V to disputes arising out of arbitration agreements concluded after the entry into force of the 2018 Rules, there is no mirroring text for the emergency arbitrator provisions. This significant intermission has already been contemplated in what has been the first dispute submitted to CICA-CCIR this year under the emergency arbitrator provisions. The respondents filed an action for annulment of an order rendered by an emergency arbitrator arguing that, procedurally, the emergency arbitrator was not competent because the arbitration agreement had been concluded prior to the entry into force of these provisions and had provided for a number of three arbitrators and that, substantially, the requirements for granting the interim measure were not met.

The Bucharest Court of Appeal granted the request submitted by the respondents and annulled the order. Although the reasoning of the Court of Appeal has not yet been rendered in order to determine the procedural or substantive grounds for the decision, parties should mind the gap left open in the 2018 Rules as well as keep an eye on the publication of the reasoning (it can take courts up to one year to have the reasoning published) as it might create an important precedent for future cases.

Expedited Proceedings

The expedited proceedings provisions regulated under Annex V of the 2018 Rules apply automatically if the value of the dispute is below 50,000 lei (approximately 10,700 EUR or 12,500 USD) or as an opt-in alternative. The advantages of this procedure is that it consists of a sole arbitrator, a tighter procedural timetable, administering only necessary evidence, undergoing communications solely via e-mail and a time limit of 3 months for rendering the award.

Case management conference

A number of techniques have been put in place under art. 31 of the 2018 Rules relating to the case management conference and under Annex IV of the Rules relating to case management techniques. The former takes place at the first hearing date, addressing the necessity of filing an additional memorandum to the statement and answer to the statement of claim respectively, the general course of proceedings, the choice of having the arbitral tribunal decide ex aequo et bono, jurisdictional objections, requests for multi-party proceedings and the manner of appointing experts. The latter addresses, among others, the bifurcation the proceedings, the issuance of partial awards, the identification of issues that need to be addressed only in writing, the limitation of the parties’ submissions to only some key aspects of the dispute and the usage of audio and video means of communication instead of in-person hearings.

Although the 2018 version of the CICA-CCIR Rules is still perfectible in certain aspects, the modifications will enhance both the expeditiousness and the quality of arbitration proceedings. However, these advantages can only prove fruitful if parties themselves or, more precisely, legal counsel meet the commitment threshold the institutions adhere to when maintaining and improving the attractive but “deceptive simplicity” of having “no flags, maces, orbs or scepters” 2) Alan Redfern, Martin J. Hunter, Nigel Blackaby, Constantine Partasides, Redfern and Hunter on International Arbitration, 6th edition, Ed. Oxford University Press, Oxford, 2015, par. 1.06. jQuery("#footnote_plugin_tooltip_1663_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1663_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); of arbitration as opposed to litigation.

 

This article has been adapted from the author’s dissertation presented in June 2018 for the LL.M. in International Arbitration at the University of Bucharest with updates that have intervened since. The author would like to thank Cristiana Irinel Stoica, Phd., for her coordination of the dissertation.

References   [ + ]

1. ↑ Florian Nitu, Raluca Petrescu, Catinca Turenci, Arbitration Procedures and Practice in Romania: Overview, Practical Law, 1 August 2016 2. ↑ Alan Redfern, Martin J. Hunter, Nigel Blackaby, Constantine Partasides, Redfern and Hunter on International Arbitration, 6th edition, Ed. Oxford University Press, Oxford, 2015, par. 1.06. 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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Singapore High Court Upholds Multi-Million Dollar ICC Award Relating To A Power Plant Project In Guatemala

Mon, 2018-11-05 18:05

Maximilian Clasmeier

On 26 April 2018, the Singapore High Court (“Court”), in China Machine New Energy Corp v Jaguar Energy Guatemala LLC and another [2018] – SGHC 101, has upheld an ICC award of a truly international nature. The case raised intriguing procedural questions in international arbitration: The impact of an “attorney-eyes-only order” (“AEO Order”), handling allegations of corruption and the possible use of “guerilla tactics”.

Two Guatemala-based companies invited bids for the erection of a coal-fired power plant near Puerto Quetzal, Guatemala in October 2007. One bid – and ultimately the successful one – was submitted by AEI Services LLC, based in Houston, Texas. It manages and controls its subsidiaries, Jaguar Energy Guatemala LLC and AEI Guatemala Jaguar Ltd (collectively referred to as “AEI”). AEI entered into a contract for the engineering, procurement and construction of the power plant (“EPC Contract”) with Chinese construction company CMNC for an approximate amount of USD 450 million to be paid progressively in milestone payments. The EPC Contract provided for expedited ICC arbitration seated in Singapore applying New York substantive law.

The financial structure of the project envisaged external funding by a syndicated loan facility. However, AEI and CMNC later agreed to a deferred payment security agreement (“DSPA”), pursuant to which AEI was to issue debit notes secured by security interests over assets to CMNC instead of making milestone payments. On 29 March 2010, AEI authorized CMNC to commence works under the EPC Contract.

In 2013, AEI complained about delays while CNMC alleged that security interests were neither evidenced nor perfected pursuant to the DSPA. Tensions between the parties increased and on 29 November 2013, AEI notified CMNC that it considered terminating the EPC Contract. Two e-mails by CMNC followed, containing threats to AEI affiliates that would later be subject to review by an arbitral tribunal and the Court. On 11 December 2013, AEI erected a fence around the work site. It further stationed armed guards at the premises and prevented CMNC’s employees from entering. Only four days later, on 15 December 2013, the dispute between the parties escalated. In a violent confrontation between CMNC’s employees and the stationed guards, the latter fired plastic pellets, used pepper spray and wooden sticks.

Between 19 and 24 January 2014, CMNC claimed, AEI harassed and intimidated certain individuals that would later serve as witnesses in the arbitration (the “Arbitration”). AEI claimed that it had validly terminated the EPC Contract and was entitled to liquidated damages. CMNC filed a counter-claim, alleging that it had exercised so-called “step-in rights” under the DSPA, leaving AEI with no right to termination and seeking payment of around USD 900 million. The arbitral tribunal conducted hearings in London, Singapore, Toronto and Hong Kong. During the Arbitration, the arbitral tribunal issued an AEO Order, restricting review of certain documents to the parties’ counsel. The arbitral award found AEI to have validly terminated the EPC Contract. It granted USD 129.4 million in liquidated damages plus interest and costs to AEI.

CMNC sought to have the arbitral award set aside in Singapore as the seat of the Arbitration on various grounds: (i) a breach of rules of natural justice, (ii) a breach of the arbitration agreement, particularly by unequal treatment, a lack of opportunity to present its case and failure to arbitrate in good faith, (iii) a breach of rules of Singaporean public policy in view of employed guerilla tactics and (iv) the arbitral tribunal’s failure to investigate allegations of corruption. The Court simplified its reasoning by distinguishing between what it termed the “Due Process Ground”, the “Defective Arbitral Procedure Ground” and the “Public Policy and Corruption Ground”.

As regards the Due Process Ground, CMNC argued that the use of the AEO Order denied it the opportunity to know the evidence against it and to meet that evidence, breaching its right to natural justice. The Court rejected CMNC’s argument. It found that determining the scope of natural justice in each case would depend largely on the arbitration agreement. In view of the expedited nature of the Arbitration, the Court ruled that the arbitral tribunal was to give effect to such arbitration agreement despite the scale and intricacy of the dispute. Thereby, the Court predominantly highlights the importance of far-sighted drafting of arbitration agreements,  strengthening party autonomy: the explicit parameters of such arbitration agreements may implicitly impact the threshold for a breach of natural justice.

As regards the Defective Arbitral Procedure Ground, the Court dwelled on a possible duty to arbitrate in good faith. The Court highlighted that no Singaporean court has yet decided the matter. However, neither did the Court, ruling that, in any case, AEI did not breach such duty and a decision was thus not necessary. Nevertheless, the Court deemed it “clear that an arbitration agreement includes a duty to cooperate in the arbitral process” and opined that “it may be that most or all arbitration agreements include a duty of good faith”.

At the same time, the Court touched upon the use of “guerilla tactics” in international arbitration, a  novel issue in Singaporean jurisprudence. CMNC argued that AEI’s conduct between 19 and 24 January 2014, which predated the arbitration, constituted such “guerilla tactics”. These, it argued, (i) reflect bad faith, (ii) amounting to a breach of the duty to arbitrate in good faith and thus finally (iii) constituting a breach of the agreed arbitral procedure. The latter link is crucial and the Court described it as possessing “forensic attraction”. However, the Court did not follow CMNC’s argument. In relying upon commentaries, the Court stressed that “guerilla tactics” refer to the “use of illegal or unethical means with the aim of obstructing, delaying, derailing or sabotaging an arbitration”. It ruled that such conduct was not at hand. It noted, however, that conduct predating an arbitration may amount to a breach of the duty to arbitrate in good faith. It follows that certain conduct may affect the enforcement stage of an arbitration, even if it occurred prior to the commencement of such. The Court appears to view the arbitration agreement as providing an underlying protective notion towards the parties’ choice for arbitration and the subsequent arbitral process. Such “pre-arbitration safeguard” is a powerful derivative of party autonomy, capable of balancing certain misconduct by a party aimed at sabotaging the other party’s recourse to legal relief.

As regards the Public Policy and Corruption Ground, the Court held that the threshold for a public policy violation “would only be crossed if upholding the award would ‘shock the conscience’, or would be ‘clearly injurious to the public good…wholly offensive to the ordinary reasonable and fully informed member of the public’, or would violate ‘the forum’s most basic notion of morality and justice’ ”.

As regards corruption, the Court provided a broader analysis. It held that “in appropriate cases, an arbitral tribunal would be required to investigate allegations of corruption”. However, certain requirements must be fulfilled for an omitted investigation of corruption to be contrary to public policy: First, there must be a nexus between the allegations of corruption and the issues under consideration in the arbitration. The allegations must be relevant to the claims in dispute. An arbitral tribunal does not investigate corruption as an end in itself. Second, the breach of the duty to investigate must carry “the risk that upholding the award that is subsequently issued may legitimize the corrupt activities”. On this basis, the Court rejected the argument of a public policy violation. It relied on the arbitral tribunal’s (factual) finding that no nexus between the allegations of corruption and the claim in the arbitration existed, stating that such factual finding was not subject to appeal. The approach is in line with the Court’s (limited) mandate at the enforcement stage and contributes to the efficiency of the proceedings.

The ruling by the Singapore High Court touches on myriad contentious issues in international arbitration: An AEO Order, handling allegations of corruption and the possible use of “guerilla tactics”. First, the reasoning is clear evidence of the parties’ responsibility in concluding an arbitration agreement. It gives effect to their autonomy and that of arbitral tribunals empowered by the will of the parties, adopting an approach of minimal intervention and ensuring utmost efficiency. Second, the ruling confirms the power of an arbitral tribunal to make AEO Orders in arbitrations seated in Singapore. Such AEO Orders are still a rare occurrence in international arbitration. Third, there exists a duty to arbitrate in good faith. Conduct contrary to such duty may even – albeit on a very narrow basis – lead to an arbitral award being set aside. Fourth, public policy remains a concept that may only cause the setting aside of an arbitral award in highly exceptional circumstances. Tribunals should be alert to allegations of corruption and apply a two-prong test. Only such test may then, if the requirements are fulfilled, lead a tribunal to investigate further.

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Ongoing Territorial Challenges in Crimea Cases: Putting Everest v. Russia in Context

Sun, 2018-11-04 22:00

Mykhaylo Soldatenko

After the 2014 Russian annexation of Crimea, the new local “authorities” have taken a number of privately and state-owned assets in the peninsula.  Ukrainian companies have commenced at least eight investment arbitrations against the Russian Federation under the Russia-Ukraine BIT (the “BIT”), seeking compensation for the lost property in Crimea.1) NJSC Naftogaz of Ukraine et al. (its 6 subsidiaries) v. Russia, UNCITRAL, PCA Case No. 2017-16 (commenced in 2016); Oschadbank v. Russia, UNCITRAL (commenced in 2016); Aeroport Belbek LLC and Mr. Igor Valerievich Kolomoisky v. Russia, UNCITRAL, PCA Case No. 2015-07 (commenced in 2015); Stabil et al. v. Russia, UNCITRAL, PCA Case No. 2015-35 (commenced in 2015); Everest Estate LLC et al. v. Russia, PCA Case No. 2015-36, Award, 2 May 2018; Privatbank and Finilon v. Russia, PCA Case No. 2015-21 (commenced in 2015); PJSC Ukrnafta v. Russia, PCA Case No. 2015-34 (commenced in 2015); Lugzor and others v. Russia, PCA Case No. 2015-29, (commenced in 2015). Two other companies – DTEK and Ukrenergo – notified Russia about the future arbitrations, see here and here. jQuery("#footnote_plugin_tooltip_3874_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  A number of tribunals have already found jurisdiction in Crimea cases.  Only some of the reasoning behind these decisions is publicly available.  Even where available, the relevant information is unfortunately second-hand, see here and here.

 

On 2 May 2018, the first final award was issued in one of the “Crimea cases.”  The investors in Everest Estate LLC etl. v. The Russian Federation, were awarded 150 million USD for the expropriation of several hotels and real estate properties.3) Everest Estate LLC et al. v. The Russian Federation, PCA Case No. 2015-36, Award, 2 May 2018, see ’RUSSIA HELD LIABLE IN CONFIDENTIAL AWARD FOR EXPROPRIATION…’, Investment Arbitration Reporter. jQuery("#footnote_plugin_tooltip_3874_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });   A number of other decisions are expected in the near future.

 

The Russian Federation has recently filed a challenge to the Everest awards at the seat of arbitration in The Hague, Netherlands. At the same time, the Swiss Federal Tribunal dismissed Russia`s challenge of jurisdiction in two other Crimea cases Stabil and Ukrnafta seated in Geneva.2) ‘Crimea awards upheld in Switzerland’, Global Arbitration Review, 16 October 2018. jQuery("#footnote_plugin_tooltip_3874_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

In this post, we will address some difficult jurisdictional hurdles of the post-annexation investment protection, which Russia may be bringing up in The Hague after the failure in Switzerland.  Namely, whether Crimea is Russian territory within the meaning of the BIT and whether the BIT covers investments made in Ukraine before the annexation.

 

Russia – Ukraine BIT’s application to a de facto state territory

 

The Crimea cases involve a unique jurisdictional issue of the BIT’s territorial scope.  Namely, whether occupied Crimea is now a Russian territory within the meaning of the BIT.  De jure Russian sovereignty over the peninsula has been widely rebutted,4) For example, Territorial Integrity of Ukraine, UNG Res 68/262, 27 March 2014. jQuery("#footnote_plugin_tooltip_3874_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); however, even Ukraine agrees that Crimea is under de facto Russian control.5) Ukraine in its third-party submission confirmed the relevant fact before the tribunal. See ‘FULL JURISDICTIONAL REASONING COMES TO LIGHT IN CRIMEA-RELATED BIT ARBITRATION VS. RUSSIA’, Investment Arbitration Reporter, 9 November 2017. jQuery("#footnote_plugin_tooltip_3874_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  So what is the status of de facto controlled territory under the BIT?  The answer will very much affect whether the Ukrainian investors or the Russian Federation prevail on the Dutch set-aside proceedings.

 

The BIT’s substantive protections are expressly limited to the Contracting State’s territories.6) BIT, Article 1 (1): “Investments” shall denote all kinds of property and intellectual values, which are being invested by the investor of one Contracting Party on the territory of the other Contracting Party in conformity with the latter’s legislation”. jQuery("#footnote_plugin_tooltip_3874_6").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  Article 1(4) of the BIT defines territory as “the territory of [the Contracting State], and also their respective exclusive economic zone and the continental shelf, as defined in conformity with international law”.  The question for the set-aside court will therefore be whether the definition includes a territory under state de facto control and whether the phrase “in accordance with international law” only relates to the Contracting State’s EEZ and continental shelf or whether it also defines the territory.

 

A number of the arbitral tribunals have already decided that Crimea is Russian territory within the meaning of the BIT, regardless of whether the Russian control is legal or not.  Relying on the VCLT,7) VCLT, Article 31 (1) (“A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”). jQuery("#footnote_plugin_tooltip_3874_7").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); each of the Tribunals in the known Crimea cases to date have construed the ordinary meaning of “territory” as covering de jure and de facto territory under state effective control.  The Ukrnafta and Stabil tribunals, referred to English, Ukrainian and Russian legal dictionaries, which defined the term “territory” without the sovereignty criteria.8) ‘FURTHER RUSSIA INVESTMENT TREATY DECISIONS UNCOVERED, OFFERING BROADER WINDOW INTO ARBITRATORS’ APPROACHES TO CRIMEA CONTROVERSY’, Investment Arbitration Reporter, 17 November 2017. jQuery("#footnote_plugin_tooltip_3874_8").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  Also, the Tribunals reportedly cited the default rule under Article 29 of the VCLT, which provides that treaties apply to state’s “entire territory” without any qualifications.9)Id. jQuery("#footnote_plugin_tooltip_3874_9").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  Moreover, the Tribunals noted that over the text of the BIT the term “territory” is closely connected to the states’ ability to legislate, and only the Russian Federation now legislates in Crimea.10) See Russian Federal Constitutional Law On Admitting to the Russian Federation the Republic of Crimea and Establishing within the Russian Federation the New Constituent Entities of the Republic of Crimea and the City of Federal Importance Sevastopol dated March 21, 2014. jQuery("#footnote_plugin_tooltip_3874_10").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  The Tribunals further noted that it would be contrary to the BIT’s object and purpose to leave investments in Crimea without any legal protection under the BIT.  Finally, the Tribunals invoked the good faith principle to assert that Russia cannot “blow hot and cold” by claiming territorial control over Crimea and at the same time deny the applicability of the BIT.

 

In Everest v. Russia, the Tribunal reportedly avoided detailed interpretation of the term “territory” and did not explain the meaning of the qualifier “in accordance with international law” at all.11) ‘FULL JURISDICTIONAL REASONING COMES TO LIGHT IN CRIMEA-RELATED BIT ARBITRATION VS. RUSSIA’, Investment Arbitration Reporter, 9 November 2017. jQuery("#footnote_plugin_tooltip_3874_11").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  The Tribunal found it persuasive that the BIT was applicable to Crimea upon its entry into force, irrespective of whether the investors would have qualified at the time, and it should remain applicable after Russia got control over Crimea. It remains to be seen whether this difference in reasoning from the Ukrnafta and Stabil awards will play a role in The Hague.

 

The Russian Federation, which did not participate in the arbitrations, may choose to push the set-aside court on the territorial question.  Without denying its allegedly “sovereign rights” over Crimea, Russia may argue that the Tribunal was required to address the legality issue mindful that without a positive answer to this question the jurisdiction cannot be established.  In this context, it may challenge the tribunals’ mandate under the BIT to touch territorial disputes between states.

 

It is likely that the set-aside court will have to deal with the qualifier “in accordance with international law” in light of the Russia’s potential argument that it defines the territory as well.  At least the Ukrainian version of the BIT allows the phrase to be susceptible to a double meaning.  Namely, the phrase may relate only to the EEZ and the continental shelf or to the territory as well.12) A reputable Ukrainian linguist, Olexander Avramenko, confirmed to us that at least in the Ukrainian language the phrase is susceptible to the double meaning (last contacted, 29 July 2018). jQuery("#footnote_plugin_tooltip_3874_12").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

In light of this textual ambiguity, other factors for interpretation may take a greater relevance including the object and purpose and context of the BIT.  For example, the BIT`s object and purpose likely suggests that the investments shall not be left without the BIT`s protection.  At the same time, the proposition that at the time of the treaty conclusion the parties potentially did not mean to encompass a de facto control scenario may have some relevance.  Also, Russia might argue that legality is a default criterion for a state territory under international law, which prohibits illegal acquisition of a state territory.13) For example, the Charter of the United Nations, Article 1(4): “All Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state”. jQuery("#footnote_plugin_tooltip_3874_13").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_13", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  At a minimum, it remains to be seen whether reliance on de facto control is enough for review of the jurisdictional award by set-aside court in the Netherlands.

 

Timing of the investments under the BIT

 

The Ukrainian investments in the Crimean cases were made before the Russian Federation’s de facto control of Crimea.  Articles 1(1) and 12 of the BIT requires that investments shall be made by a national of the Contracting Party on the territory of another Contracting Party. Consequently, the question is whether the Ukrainian investments shall be initially made into the Russian “territory” to be covered by the BIT.

 

In Ukrnafta and Stabil cases, the Tribunals noted that the only temporal requirement is contained in Article 12 of the BIT, namely that the investments shall be made after January 1, 1992.14) BIT, article 12: “This Agreement shall apply to all investments carried out by the investors of one Contracting Party on the territory of the other Contracting Party, as of January 1, 1992.”. jQuery("#footnote_plugin_tooltip_3874_14").tooltip({ tip: "#footnote_plugin_tooltip_text_3874_14", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Both Tribunals noted that the text does not require that the investments shall be made to the Contracting State from the beginning and reasoned that the wording of Article 1(1) evinces geographical rather than temporal criteria for investments.

 

In Everest v. Russia, the Tribunal similarly concluded that the text of the BIT does not suggest that the Contracting Parties intended to limit its application to investments made within the host state territory ab initio. The arbitrators opined that finding otherwise would unreasonably exclude from the treaty protection a number of investments and would contradict the BIT’s object and purpose.  In support of this proposition, the Tribunal cited, inter alia, PacRim v. El Salvador, where the Tribunal found that the investor was not required to have proper nationality ab initio as long as it possessed it prior to the state breach. (Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on Jurisdiction, 1 June 2012)

 

Nevertheless, the set-aside court will need to grapple with the text of the BIT itself.  Both the Ukrainian and the Russian versions of Article 1 (1) of the BIT contains a phrase “are being invested” in the present tense, while defining the term “investments”.  At the same time, Article 12 on the temporal scope uses the phrase “carried out” in the past tense.  Thus, the Russian Federation will likely argue that the past tense of Article 12 (Application of the Agreement) indicates a requirement that investments shall be initially made into the Russian territory.  Russia might also say that a change of control over the territory cannot be understood as an act of investment making into Russia under the BIT.  Consequently, it might add that the active investors’ conduct is required in this regard, for example, reregistration of the companies under the Russian law.

 

Conclusion

 

The Ukrainian investors face thorny jurisdictional challenges before the set-aside courts.  They were able to protect the jurisdictional awards in Switzerland. However, the majority of the Crimea cases are seated in The Hague, and consequently the Dutch setting aside proceedings are essential. Success at the seat is often an important prerequisite for effective enforcement of the awards against a resisting state.  The fate of the Crimea awards primarily depends on the local courts’ attitudes and approaches to interpretation of the Russia – Ukraine BITs’ provisions under the VCLT.

 

The submission is made in my personal capacity. The views contained in this article are not necessarily the views of Asters or its clients. Many thanks to Patrick W. Pearsall, Chair of Public International Law at Jenner & Block LLP for his valuable comments and suggestions.

References   [ + ]

1. ↑ NJSC Naftogaz of Ukraine et al. (its 6 subsidiaries) v. Russia, UNCITRAL, PCA Case No. 2017-16 (commenced in 2016); Oschadbank v. Russia, UNCITRAL (commenced in 2016); Aeroport Belbek LLC and Mr. Igor Valerievich Kolomoisky v. Russia, UNCITRAL, PCA Case No. 2015-07 (commenced in 2015); Stabil et al. v. Russia, UNCITRAL, PCA Case No. 2015-35 (commenced in 2015); Everest Estate LLC et al. v. Russia, PCA Case No. 2015-36, Award, 2 May 2018; Privatbank and Finilon v. Russia, PCA Case No. 2015-21 (commenced in 2015); PJSC Ukrnafta v. Russia, PCA Case No. 2015-34 (commenced in 2015); Lugzor and others v. Russia, PCA Case No. 2015-29, (commenced in 2015). Two other companies – DTEK and Ukrenergo – notified Russia about the future arbitrations, see here and here. 2. ↑ ‘Crimea awards upheld in Switzerland’, Global Arbitration Review, 16 October 2018. 3. ↑ Everest Estate LLC et al. v. The Russian Federation, PCA Case No. 2015-36, Award, 2 May 2018, see ’RUSSIA HELD LIABLE IN CONFIDENTIAL AWARD FOR EXPROPRIATION…’, Investment Arbitration Reporter. 4. ↑ For example, Territorial Integrity of Ukraine, UNG Res 68/262, 27 March 2014. 5. ↑ Ukraine in its third-party submission confirmed the relevant fact before the tribunal. See ‘FULL JURISDICTIONAL REASONING COMES TO LIGHT IN CRIMEA-RELATED BIT ARBITRATION VS. RUSSIA’, Investment Arbitration Reporter, 9 November 2017. 6. ↑ BIT, Article 1 (1): “Investments” shall denote all kinds of property and intellectual values, which are being invested by the investor of one Contracting Party on the territory of the other Contracting Party in conformity with the latter’s legislation”. 7. ↑ VCLT, Article 31 (1) (“A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”). 8. ↑ ‘FURTHER RUSSIA INVESTMENT TREATY DECISIONS UNCOVERED, OFFERING BROADER WINDOW INTO ARBITRATORS’ APPROACHES TO CRIMEA CONTROVERSY’, Investment Arbitration Reporter, 17 November 2017. 9. ↑ Id. 10. ↑ See Russian Federal Constitutional Law On Admitting to the Russian Federation the Republic of Crimea and Establishing within the Russian Federation the New Constituent Entities of the Republic of Crimea and the City of Federal Importance Sevastopol dated March 21, 2014. 11. ↑ ‘FULL JURISDICTIONAL REASONING COMES TO LIGHT IN CRIMEA-RELATED BIT ARBITRATION VS. RUSSIA’, Investment Arbitration Reporter, 9 November 2017. 12. ↑ A reputable Ukrainian linguist, Olexander Avramenko, confirmed to us that at least in the Ukrainian language the phrase is susceptible to the double meaning (last contacted, 29 July 2018). 13. ↑ For example, the Charter of the United Nations, Article 1(4): “All Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state”. 14. ↑ BIT, article 12: “This Agreement shall apply to all investments carried out by the investors of one Contracting Party on the territory of the other Contracting Party, as of January 1, 1992.”. 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 Ethical Paradox Put to Play by Guerilla Tacticians

Sun, 2018-11-04 01:59

Alban Dautaj

Some rules, although made to protect the integrity of an arbitration procedure, open up opportunities for bad faith actors to utilize “legislative” shortcomings. Too often these actors engage in guerilla tactics. Soft law has developed to remedy these grievances. For example, the IBA Guidelines on Conflicts of Interest in International Arbitration (IBA Guidelines) seek to remedy situations where a relationship potentially can lead to bad faith conduct in the course of the arbitration procedure, e.g. where a third-party funder has a pre-existing relationship with an arbitrator. This post will demonstrate how new, untested rules risk paving the way for another set of unethical behaviors. This post’s central thesis is that the IBA Guidelines have used analogies (or legal fictions) to rein in third-party funders in circumstances where an alleged bias and independence can occur in their relationship with an arbitrator. This is good, but can also have unintended consequences—I highlight only one. However, guerilla tacticians will stand ready to further exploit any regulatory opening.

Regulating conduct is hard and often invites unintended and unwelcome consequences. The world of modern international arbitration is relatively transparent, rules-based, and judicialized. With this move towards a judicialized arbitration system comes advocates for further ethical standards, including but not limited to, “disclosure requirements.” While building an institution that can sustain criticism and foster legitimacy, best practices must be drawn from other sectors. The contemporary uncertainty—and unfortunate craving for detailed rules—can leave the door half-open to a great regulatory fallacy—i.e. that reactive, detailed ethical rules solve issues. Without delving too far into speculations, I want to highlight the paradoxical nature of regulating ethics by rules, rather than custom, practice, and markets. Reactive regulation often solves backwards, but the unknown can never be anticipated in detail. 1) For a good discussion of “governance techniques” in the financial sector, see Julia Black, Paradoxes and Failures: New Governance Techniques and the Financial Crisis. jQuery("#footnote_plugin_tooltip_1376_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1376_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); We ought to operate with caution before developing too detailed soft laws or we might be caught unprepared when rogue actors prove very capable and creative in using detailed rules to their advantage.

One example on regulating reactively

The IBA Guidelines treat third-party funders as a party in order to decide whether a conflict of interest exists.2) IBA Guidelines on Conflicts of Interest General Standards 6(b). jQuery("#footnote_plugin_tooltip_1376_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1376_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); I will outline how this, albeit well-intended, legal fiction can create unfortunate opportunities for unethical parties to use the rules to disqualify an arbitrator. Arbitrators have a duty to be and remain unbiased throughout the proceeding. An arbitrator can be determined to be unbiased at any point.

Existing rules on independence often concern relations between arbitrators and parties to the underlying agreement, and these parties are known and can be identified when an agreement is entered into. Arbitrator bias that stems from these known relations is almost always existent since before the appointment of the arbitrator. The parties and the arbitrator can anticipate these and choose an arbitrator accordingly. Third-party funders, on the other hand, are not parties to the underlying agreement and therefore they cannot be identified when the agreement is entered into because they are not involved with the parties until after a dispute has occurred.

Having rules where a third-party funder bears the identity of a party creates a situation where a party could bring in a funder at any point to create an appearance of bias. This could be used as a guerilla tactic. With the freedom to bring in a third-party funder at any stage of an arbitration, a party has the power to create an appearance of bias at any time and potentially disqualify an arbitrator. Traditional parties cannot be brought in to create a conflict and even if they would, a tribunal can use its discretion to minimize their influence.

Creating a tool for removing arbitrators was not the desire of IBA. The immutability of an arbitral tribunal is essential to secure the integrity and efficiency of the procedure as well as to protect the independence of the tribunal. This principle could be undermined if a challenge to an arbitrator would successfully lead to a removal of him or her due to one party’s inclusion of a funder. Also, efficiency favors a non-disruption of the arbitration procedure. Furthermore, a challenge to one of the arbitrators in a functioning tribunal can cause delay and expenses.

Guerrilla tactics

As described in the scenario above, while certainly unethical, guerrilla tactics may not always violate written rules. However, these “tricks” interfere with a fair arbitral proceeding. All unethical behavior are not illegal. According to a survey made on this topic, “fifty-five out of eighty-one international arbitration practitioners had witnessed the use of guerrilla tactics in cases in which they were involved.”3)Günther J., and Stephan Wilske. Guerrilla tactics in international arbitration. Kluwer Law International, 2013. jQuery("#footnote_plugin_tooltip_1376_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1376_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Sometimes “guerrilleros” utilize the unintended consequences of a rule. Paradoxically, rules that are intended to “protect the integrity of the process are abused.”

How to solve the third-party funding problem?  

Third party funders and their involvement in conflict of interest situations is and has been a talking point for a while. Still, we have no clear view on how to treat these funders when a situation appears where an arbitrator’s independence is questioned because of his/her relationship to the funder.4) Rogers, Catherine A. Ethics in International Arbitration. Oxford University Press, 2014, pg 183. jQuery("#footnote_plugin_tooltip_1376_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1376_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Rogers writes “As with any new phenomenon, the inclination is to search for similar activities as points of reference. Several possible analogies have been suggested.”

Some argue that a third-party funder is no different from an equity funder, others that the funder is a counselor – a “super-counselor.” Because of differing opinions on this, discussions are held on whether and how it should be regulated. The IBA Guidelines have solved this by creating a legal fiction where a third-party funder “may be considered to bear the identity of [a] party” to decide on whether a conflict exists.

Treating a third-party funder as an equity funder or a counselor is not the solution for reasons discussed below.

Legal fiction (Third-party funder = Equity funder)

The involvement of an equity funder only needs to be disclosed if the funder reaches a sufficient threshold of ownership in a party. Therefore, it is attractive to some third-party funders to identify as something analogous to an equity funder. 5)Id, pg 204. jQuery("#footnote_plugin_tooltip_1376_5").tooltip({ tip: "#footnote_plugin_tooltip_text_1376_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The proponents of this view argue that “private equity investors may (and sometimes do) control aspects of case management in ways that are similar to third-party funders.” As discussed on this blog previously, in some cases, equity funders even exercise more influence in the case than a third-party funder could or would.

In clear and convincing language, using “the concentration effect,” Rogers argues that a third-party funder, investing the same amount, will have a more significant interest in a case than an equity funder. Rogers illustrates this by a hypothetical scenario where a party with an overall value of 100 US dollars, 10 US dollars being the value of a claim owned by the party. In the hypothetical scenario, an equity funder investing 1 US dollar would have a 1% ownership of the company and therefore also a 1% interest in the claim. In this scenario, the 1% ownership need not be disclosed. If, on the other hand, a funder invests 1 US dollar directly in the claim, this funder would have a 10% interest in the claim. Two investments with the same dollar value will lead to two different situations with differing amounts of interest in the claim.

Legal fiction (Third-party funder = counselor)

An arbitral tribunal has broad discretion over procedural matters.6) Redfern, Alan, and Martin Hunter, Law and practice of international commercial arbitration, Sweet & Maxwell, 2004, Page 309; This has been expressed in Art.44 ICSID Convention, Art.IV4(d) European Convention, §1, 34(1) English Arbitration Act, Art.1494 & 1460 French New Code of Civil Procedure, Art.15(a) Revised Uniform Arbitration Act, Art.15(1) UNCITRAL Arbitration Rules, Art.15(1) ICC Rules, and in Art.14(1) LCIA Rules. jQuery("#footnote_plugin_tooltip_1376_6").tooltip({ tip: "#footnote_plugin_tooltip_text_1376_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This discretion stems from the principle of party autonomy and the procedural autonomy of arbitrators. It provides for efficiency and flexibility and prevents parties from abusing the process in arbitration. A tribunal can, therefore, disqualify a counselor from participating in an arbitration. This was the case in Hrvatska Elektroprivreda v. Republic of Slovenia, where a conflict of interest based on a relationship between a counselor and an arbitrator led to the disqualification of the counselor. However, disqualifying a third-party funder is not as effective as disqualifying a counsel.

Creating a legal fiction where a third-party funder is identified as a counselor or as a part of the counsel’s team would not be adequate to solve a conflict of interest. A tribunal has discretionary powers to prevent a counselor from participating in hearings, receiving briefs/information and more. A counselor cannot function in a practical way when restricted by a tribunal. A funder can function effectively despite the above-mentioned restrictions.

Conclusion

The question that lingers here is the very one asked in the book “Guerrilla Tactics in International Arbitration”: How can a protective rule itself be protected from abusive employment as a guerilla tactic?

Treating a third-party funder as a party, as provided by the IBA Guidelines, creates opportunities for unethical behavior. Other legal fictions and their shortcomings have been discussed. Maybe we need a complementary rule to the one in the IBA Guidelines, and then a complementary rule to that rule.

References   [ + ]

1. ↑ For a good discussion of “governance techniques” in the financial sector, see Julia Black, Paradoxes and Failures: New Governance Techniques and the Financial Crisis. 2. ↑ IBA Guidelines on Conflicts of Interest General Standards 6(b). 3. ↑ Günther J., and Stephan Wilske. Guerrilla tactics in international arbitration. Kluwer Law International, 2013. 4. ↑ Rogers, Catherine A. Ethics in International Arbitration. Oxford University Press, 2014, pg 183. 5. ↑ Id, pg 204. 6. ↑ Redfern, Alan, and Martin Hunter, Law and practice of international commercial arbitration, Sweet & Maxwell, 2004, Page 309; This has been expressed in Art.44 ICSID Convention, Art.IV4(d) European Convention, §1, 34(1) English Arbitration Act, Art.1494 & 1460 French New Code of Civil Procedure, Art.15(a) Revised Uniform Arbitration Act, Art.15(1) UNCITRAL Arbitration Rules, Art.15(1) ICC Rules, and in Art.14(1) LCIA Rules. 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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Legitimacy of Arbitral Appointments in India

Fri, 2018-11-02 21:56

Shweta Sahu, Payel Chatterjee and Moazzam Khan

YSIAC

Independence and impartiality of arbitrators are the hallmarks of arbitration. The amendments to the Arbitration and Conciliation Act 1996 (“Act”) in 2015, which adopted the international best practices from the International Bar Association Guidelines on Conflict of Interest (“IBA Guidelines”), aimed to bolster not only the neutrality of arbitrators, but also the perception of neutrality.

This article attempts to explore and analyze these changes along with the Indian Supreme Court ruling in HRD Corporation v GAIL (Civil Appeal No. 11126 of 2017), a landmark case dealing with issues of arbitral conflicts.

Legislative Framework

Pre-amendment

Prior to the amendment, Section 12(3) of the Arbitration and Conciliation Act 1996 provided that:

“(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances likely to give rise to justifiable doubts as to his independence or impartiality.

(3) An arbitrator may be challenged only if-

(a) Circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or

(b) He does not possess the qualifications agreed to by the parties.”

Post-amendment

The Arbitration and Conciliation (Amendment) Act 2015 (“Amendment Act”) further explained the circumstances under which such arbitral appointments may be challenged. Section 12(1) of the Arbitration and Conciliation Act 1996 was replaced with the following section:

“(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances, —

(a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and

(b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular their ability to complete the entire arbitration within a period of twelve months.”

The Amendment Act also inserted a new Fifth Schedule, which lists the grounds and circumstances that would give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Additionally, Section 12(5) of the Arbitration and Conciliation Act was inserted:

“(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator.”

Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.”

Analysis of the Post-Amendment Framework

Distinguishing “ineligibility” from “justifiable doubts as to independence and impartiality” of an arbitrator

While the Fifth Schedule (read with Section 12(1)(a)) lists the various instances giving rise to “justifiable doubts as to the independence and impartiality” of an arbitrator, the Seventh Schedule (read with Section 12(5)) of the Arbitration and Conciliation Act relates to instances which directly result in the “ineligibility” of a person from being appointed as an arbitrator unless the parties had expressly waived the applicability of the provision in writing after the agreement was entered into.

Appointment of employees of an arbitrating party as arbitrators

Courts in India have distinguished between serving and past officials of an organization, relying on Entry 1 of the Seventh Schedule for the former and Entries 2, 5, 9 and 12 of the Fifth Schedule for the latter. While the former would be de jure ineligible1) West Haryana Highways Projects Pvt. Ltd. v National Highways Authority of India (2017) 242 DLT 44; Orissa Concrete and Allied Industries Limited 2017 SCC OnLine Chh 904 jQuery("#footnote_plugin_tooltip_6236_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, the latter would not.2) M/s. Voestalpine Schienen GMBH v Delhi Metro Rail Corporation Limited (2017) 4 SCC 665 jQuery("#footnote_plugin_tooltip_6236_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The distinction is done considering former employees are seen as neither related to a party as employees, consultants or advisors, nor do they have any other past or present business relationship with the party, as required under Entry 1 of the Seventh Schedule.3) Reliance Infrastructure Ltd. v Haryana Power Generation Corporation Ltd Arbitration Case No. 166 of 2016 (O&M), decided on 27 October 2016 (“Reliance Infrastructure v HPGCL”) jQuery("#footnote_plugin_tooltip_6236_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

This pertains to cases where technical expertise of such retired officials is sought, involving niche disputes. An appointment of a former employee may be subsequently challenged if certain situations arise, such as revelation of the involvement of the appointee with the project under dispute.4) Afcons Infrastructure Ltd. v Rail Vikas Nigam Limited 2017 SCC OnLine Del 8675 jQuery("#footnote_plugin_tooltip_6236_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The Indian Supreme Court recently reiterated the law by stating that, although prior to the Amendment Act the arbitrator being a current employee of any of the parties was ipso facto not a ground for disqualification, pursuant to the Amendment Act, such appointments would be illegal.5) Aravalli Power Company Ltd. v Era Infra Engineering Ltd Civil Appeal No. 16727-16728 of 2017 jQuery("#footnote_plugin_tooltip_6236_5").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Appointment of practising counsels (including those briefed by lawyers of either party) as arbitrators

In a recent judgment of the Bombay High Court,6) Sheetal Maruti Kurundwade v Metal Power Analytical Pvt Ltd & Ors (2017) 3 AIR Bom R 68 jQuery("#footnote_plugin_tooltip_6236_6").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); it was affirmed that a counsel’s acceptance of a brief from an attorney or law firm for a different client or for an unrelated matter does not amount to automatic disqualification or ineligibility to being an arbitrator in an arbitration in which the same attorney or law firm is acting. Under the Fifth and Seventh Schedules of the Act, for a connection to cause disqualification, there must be a sufficiently proximate relationship between the arbitrator-counsel and the litigant specifically.7) Sheetal Maruti Kurundwade v Metal Power Analytical Pvt Ltd & Ors (2017) 3 AIR Bom R 68 jQuery("#footnote_plugin_tooltip_6236_7").tooltip({ tip: "#footnote_plugin_tooltip_text_6236_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Following the statutory amendments described above, the disputes before the Indian courts have primarily revolved around the appointment of former or serving employees as arbitrators, and whether there were “justifiable doubts as to independence and impartiality” and “ineligibility” of arbitrators. The Act does not lay down any conditions to identify the “circumstances” which may give rise to “justifiable doubts”. Thus, the threshold for disqualification of arbitrators continues to be highly subjective, even though the Schedules of the Act intended otherwise. In a recent judgment of HRD Corporation v GAIL, the Indian Supreme Court dealt with the appointment of former judges as arbitrators, who may be associated in previous disputes involving one or more parties to the arbitration.

HRD Corporation v. GAIL (Civil Appeal No. 11126 of 2017)

Overview of facts

The parties entered an agreement on April 1, 1999 for the supply of wax. Subsequently, disputes arose between the parties on the pricing and withholding of products. HRD Corporation (“Appellant”) invoked the arbitration clause, initiating a total of four arbitrations on the above issues.

Arbitration No. Relevant period Arbitrators 1. 2004-2007 Justice A.B. Rohatgi (presiding arbitrator), Justice J.K. Mehra and Justice N.N. Goswamy 2. 2007-2010 Same as above 3. 2010-2013 Justice T.S. Doabia, Justice A.B. Rohatgi replaced by Justice S.S. Chadha and Justice J.K. Mehra 4. 2016-2019 Justice K. Ramamoorthy replaced by Justice Mukul Mudgal (nominated by Appellant)

Justice T.S. Doabia (nominated by Respondent)

Justice T.S. Doabia and Justice K. Ramamoorthy appointed Justice K.K. Lahoti

The present dispute arises from the fourth arbitration. Two applications were filed by the Appellant under Sections 12(3), 12(5), 13 and 14 of the Act read with the International Centre for Alternative Dispute Resolution Rules 1999, seeking termination of Justice T.S. Doabia and Justice K.K. Lahoti due to an alleged prior association. The challenge was on the grounds that Justice Lahoti had previously given an opinion on a legal issue between GAIL and another public-sector undertaking in the year 2014; whereas Justice Doabia had previously rendered an award between the same parties in an earlier arbitration concerning the same disputes, but for an earlier period. These allegations were rejected by the arbitral tribunal.

While deciding the case, the Indian Supreme Court scrutinized the Schedules of the Act through an itemized comparison between the Fifth Schedule of the Act and the IBA Guidelines.

On the existence of justifiable doubts as to independence and impartiality, the Indian Supreme Court held that a broad common-sensical approach was to be adopted.

Regarding the Seventh Schedule of the Act, the Supreme Court held as follows:

Entries 1 and 2 of Seventh Schedule

Entries 1 and 2 refer to circumstances where the arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party; and where the arbitrator represents or advises one of the parties or an affiliate of one of the parties.

Justice Lahoti was neither a serving employee nor a consultant nor an advisor to the party. He had only given a professional opinion (not emanating from any business relationship) to the Respondent which was unrelated to the present dispute. Therefore, disqualification under Entry 1 did not arise.

Furthermore, Entry 2 was inapplicable since it concerns “current” representation or advice rendered to the Respondent, which was inapplicable in this case.

With respect to Justice Doabia’s appointment, it was held that the appointment of a person as an arbitrator is not equivalent to a “business relationship.”

Entries 8, 15 and 16 of Seventh Schedule

Entries 8, 15 and 16 refer to circumstances where the arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm derives a significant financial income therefrom, where the arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties, and where the arbitrator has previous involvement in the case.

These entries were held to be inapplicable in the present case as no advice was rendered by Justice Lahoti to the Respondent on a regular basis.

Entry 15 was similarly inapplicable, because the Indian Supreme Court found that no legal advice or expert opinion was provided on the dispute in hand. Justice Lahoti’s legal opinion which was given way back in 2014 was in relation to another issue. Similarly, in Justice Doabia’s case, it was held that an award rendered by an arbitrator in a previous arbitration cannot be read as a grant of a legal opinion under this Entry.

Lastly, “previous involvement in the case” under Entry 16 was read as referring to previous involvement in the “present dispute”, rather than merely the same agreement. Consequently, despite Justice Doabia having previously been an arbitrator between the same parties, he would not be rendered ineligible under Entry 16.

Identical entries in the Fifth and Seventh Schedules

With respect to the presence of the same Entries 1 to 19 in both Schedules, the Indian Supreme Court explained that arbitrators would have to make disclosures of their independence and impartiality as per the entries in the Fifth Schedule, which would otherwise be unknown to the parties. Based on such disclosures, eligibility would be determined under the Seventh Schedule read with Section 12(5) of the Act.

Conclusion

With the avid usage of extrinsic aids to interpretation e.g. the IBA Guidelines, 246th Indian Law Commission Report etc. and intrinsic aids like the headings in the Schedules, the Indian Supreme Court sought to decipher the exact meaning and intention of the relevant entries in the Schedules and adopt a purposive interpretation of the provisions. However, this exercise was limited to the extent of the contentions raised and referred to by the parties. It is yet to be seen whether the Indian courts would continue to upkeep the spirit of these amendments, especially that of the Schedules, in the years to come.

References   [ + ]

1. ↑ West Haryana Highways Projects Pvt. Ltd. v National Highways Authority of India (2017) 242 DLT 44; Orissa Concrete and Allied Industries Limited 2017 SCC OnLine Chh 904 2. ↑ M/s. Voestalpine Schienen GMBH v Delhi Metro Rail Corporation Limited (2017) 4 SCC 665 3. ↑ Reliance Infrastructure Ltd. v Haryana Power Generation Corporation Ltd Arbitration Case No. 166 of 2016 (O&M), decided on 27 October 2016 (“Reliance Infrastructure v HPGCL”) 4. ↑ Afcons Infrastructure Ltd. v Rail Vikas Nigam Limited 2017 SCC OnLine Del 8675 5. ↑ Aravalli Power Company Ltd. v Era Infra Engineering Ltd Civil Appeal No. 16727-16728 of 2017 6, 7. ↑ Sheetal Maruti Kurundwade v Metal Power Analytical Pvt Ltd & Ors (2017) 3 AIR Bom R 68 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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