Kluwer Arbitration Blog

Syndicate content
Updated: 25 min 34 sec ago

Puma v. Estudio 2000: Three Learned Lessons

Sun, 2017-05-28 21:00

José María de la Jara & Julio Olórtegui

Back in 2010, an arbitral tribunal composed by Luis Ramallo García (chairman), Miguel Temboury and Santiago Gastón ordered Puma to pay € 98 million to Estudio 2000 for the wrongful termination of their distribution contract.

Notably, Mr. Gastón – appointed by Puma – did not sign the award. It was later revealed that he was not given a chance to deliberate. Even though he had a discrepancy regarding the compensation to be awarded to Estudio 2000, surprisingly, his fellow arbitrators met without notifying him, changed the content of the previously agreed project and finished writing the award. The arbitrators even managed to sign it and notify the parties that same day.

On 15 February 2017, the Spanish Supreme Court declared the two arbitrators professionally liable for excluding Mr. Gastón from the deliberation procedure, and obliged them to pay Puma € 1’500,000.00 plus legal interests.

The decision of the Spanish Supreme Court constitutes an international landmark in relation to the deliberation process. In this post, we will open the arbitrator’s black box to dive into such process, explain its basic rules and suggest several tips to protect an award in difficult deliberations.

 

Lesson No. 1: consensus should not be the main goal

As Berger points out, deliberation is a joint effort to identify the relevant issues and exchange arguments, ideas and reflections that allow weighing the different options available to the arbitral tribunal.

Let’s be clear: deliberation is not tied to consensus.  As Sunstein and Hastie argue, deliberations should provide a group (e.g. arbitrators) as much information as possible.  Discussion should be encouraged. Better and more information allows the higher cost of arbitration to be translated into deeper analysis and a well sustained decision. A fair and accurate decision does not necessarily have to be unanimous.

High-level discussion, however, should not drive to anarchy. As Levy explains, the chairman is responsible for structuring, overseeing and coordinating the deliberation procedure.  Hence, he should act as a concertmaster to coordinate the exchange of ideas. Specifically, the chairman should:

  • Be an inquisitive and quiet leader. Social psychology shows that members of the group might remain silent not to contradict the opinion of those with a higher hierarchical position. Therefore, chairmen should promote the presentation of the ideas of their co- arbitrators, before issuing their opinion. This lowers the chances of an arbitrator failing to disclose relevant information only because it does not coincide with the chairman’s opinion.
  • Prime critical thinking. When the majority of the group has taken an argumentative line and the goal is to achieve consensus, the third arbitrator might be predisposed to withhold opposing information, in order to avoid reputational damage. Chairmen should try changing the rules of the game, by assigning priority to information sharing, allowing a deeper analysis even when the majority of the group has taken an initial position.
  • Assign roles. To incentive unbiased discussion, the chairman could assign arbitrators to prepare a specific position depending on their specialty. Then, the other members of the group could adopt the role of the devil’s advocate, assuming an opposing position. This technique allows the chairman to ensure that each arbitrator feels confident enough to shape her ideas and to disclose opposing opinions.

 

Lesson No. 2: treat deliberation with respect

The deliberative procedure is shaped by the principle of collegiality. Each of the steps of the deliberation should be interpreted in such a way as to guarantee the right of the arbitrators to have the opportunity to express their opinion on the construction of the award.

Collegiality was breached in the Puma Case. Two arbitrators held the final part of the deliberation while the third one was away in Madrid.

Such issue should have been fixed easily. As held in Sefri v. Komgrap, a phone call, an email or a videoconference would have been enough to give Mr. Gastón the opportunity to express his ideas in relation to the final draft of the award and protect the principle of collegiality.

The result was a lack of opportunity by one of the arbitrators to convey his opinion on the final draft of the award. As stated in Guangying Garment v. Eurasia, excluding an arbitrator from the deliberation process breaches the collegiality principle. Furthermore,  an arbitral award without deliberation breaches the defense and the right to be heard rights of the party that appointed the excluded arbitrator, (Société des télécommunications internationals du Cameroun v. SA France Télécom), and such decision does not qualify as an award (Goller v. Liberty Mutual Insurance).

Beyond the form, what really matters is that each arbitrator is given the opportunity to express his or her opinion. The formalities of the deliberative procedure shall be flexible, adapting themselves to the arbitrators and not the other way round.

In order for tribunals to respect such procedure, arbitrator practitioners might find the following tips useful:

  • Set time aside to meet your co-arbitrators. The amount of shared information when deliberating depends on the trust that exists between the arbitrators. Therefore, the chairman should arrange a meeting as soon as possible.
  • Begin deliberation as soon as possible. Deliberation should begin – gradually – upon the reception of the written submissions of both parties. In this regard, Rivkin recommends that the arbitrators could travel and meet for the procedural conference to conduct a preliminary discussion. However, preliminary discussions should be protected with disclaimers to avoid any impression of bias (“I would like to hear more about this at the hearing because maybe I could change my position”).
  • Reed Retreat. Arbitrators should meet one day before the hearings to discuss the case and how it should proceed. This allows the arbitrators to focus their attention and clear preliminary discussions out of the way.
  • Allow deliberation time during breaks and after the hearing. Approximately four breaks occur during each hearing day. Arbitrators should use these pauses to discuss the evidence they have just witnessed and to deepen their understanding of the case. Moreover, arbitrators should never set the return flight for the same day on which the hearings end. The best time to deliberate is immediately after the hearings are over. At that moment, the evidence presented will still be fresh in the memory of the arbitrators.
  • Start writing soon. Ideas should be shaped and put into paper as soon as the tribunal has allowed a discussion. This prevents opinions from getting forgotten and allows the award to be completed in advance. It is not advisable to delay issuing an award only for style editing.

 

Lesson No. 3: protect yourself against toxic arbitrators

Arguably, if two arbitrators knowingly exclude a third one from the deliberation process, they could qualify as “toxic arbitrators”.

As Bernandini points out, it is during the deliberations that these arbitrators show their true face. They reveal whether they are truly independent and impartial or whether they will block the participation of a member of the tribunal, disappear from the discussions, “plant” an annulment, or execute some other poisonous practice.

In such scenarios, arbitration practitioners might find these practices useful:

  • Register the deliberation. Leave a record of who attended, the content of the discussions, the agreements and pending points.

While this practice is critical, our research suggests that it is not the general rule. The result of a survey of more than 155 practitioners in Latin America showed that the arbitrators registered, on average, only 1.78 out of 10 deliberations. Moreover, 54.2% of the respondents replied that they had not recorded any of their last 10 deliberations.

  • Actively seek to participate in the deliberation. Send emails to your co-arbitrators. If they are not answered, consider sending formal communications, copying the arbitration center that administers the dispute. These could serve in an eventual annulment process to prove that you were excluded from the deliberations.
  • If you are being excluded, consider breaking the confidentiality of the deliberations. Depending on the specific case, one may choose to (i) send a formal communication to the co-arbitrators, (ii) notify the parties and the arbitration center that the principle of collegiality is being violated; or (iii) focus on generating evidence of such violation on the understanding that the toxic arbitrators will not change their position and that it may be more convenient for the parties to set the award aside. In any case, do not be afraid to express your opinion in a dissenting vote. Carefully consider attaching records of lack of deliberation and even evaluate your enrolment as a witness in the judicial process.

 

Final remarks

A tribunal is more than a mere sum of its parties. Through deliberation, they are capable to render an award with a deeper understanding of the dispute. Hence, excluding an arbitrator from the deliberation procedure betrays the will of the parties expressed in the arbitration agreement.

It is necessary to actively fight against this toxic practice. Write. Discuss. Attend conferences. Raise your voice and report toxic practices. After all, putting on a gas mask and pretending we are protected will only allow the virus to spread and generate more followers.

More from our authors:

The post Puma v. Estudio 2000: Three Learned Lessons appeared first on Kluwer Arbitration Blog.

The Dubai-DIFC Judicial Committee and DIFC Conduit Jurisdiction: A Sequel in Four Parts – The DIFC Courts under Siege (Part 2)

Sat, 2017-05-27 14:13

Gordon Blanke

In a blog earlier this year, I reported in some detail on the Dubai-DIFC Judicial Committee’s first decision in Daman v. Oger (see Cassation No. 1/2016 (JT) – Daman Real Capital Partners Company LLC v. Oger Dubai LLC, hearing of 19 December 2016, published by the JT in both English and Arabic). By way of reminder, the Dubai-DIFC Judicial Committee (or simply the “Judicial Tribunal” or “JT”) was established by the Ruler of Dubai by virtue of Decree No. (19) of 2016 in order to resolve conflicts of jurisdiction between the onshore Dubai and the offshore DIFC Courts (see http://kluwerarbitrationblog.com/2016/11/29/ruler-of-dubai-establishes-new-judicial-committee-to-resolve-conflicts-of-jurisdiction-between-the-on-and-offshore-dubai-courts-will-it-undermine-the-difc-courts-acquired-status-as-a-condui/). The regular reader of this Blog will remember that in particular the creeping jurisdiction of the DIFC Courts as a conduit jurisdiction for the enforcement of domestic arbitral awards rendered onshore for onward execution against assets of award debtors in mainland Dubai has given rise to concerns of jurisdictional conflict with the onshore Dubai Courts (see, e.g., ARB 003/2013 – Banyan Tree Corporate Pte Ltd v. Meydan Group LLC, ruling of the DIFC Court of First Instance of 2nd April 2015). Daman v. Oger concerned two parallel actions: (i) an application for annulment of a DIAC award rendered in mainland Dubai as the seat of the arbitration before the onshore Dubai Courts in their capacity as the curial courts and (ii) an application for the recognition and enforcement of that award before the DIFC Courts for onward execution in the offshore DIFC. The JT found in favour of the Dubai Courts’ proper jurisdiction and ordered the DIFC Courts to cease from entertaining the case. I concluded in my previous blog on the subject that the JT’s decision was likely based on a “first-seized” rule given that the application for annulment before the onshore Dubai Courts had been filed first and had hence preceded the application for recognition and enforcement before the offshore DIFC Courts. In that sense, apart from the absence of a desire to execute the subject DIAC award onshore, there was no risk that the findings of the JT in Daman v. Oger would pose a threat to the acquired status of the DIFC Courts to serve as a conduit jurisdiction for the recognition and enforcement of domestic non-DIFC awards for onward execution in mainland Dubai.

Since its decision in Daman v. Oger, the JT has dealt with two further arbitration-specific applications that are variations of the theme. In the first one (see Cassation No. 2/2016 (JT) – Dubai Water Front LLC v. Chenshan Liu, hearing of 19 December 2016, published by the JT in both English and Arabic), the JT adopted the same reasoning as it had done in Daman v. Oger, the only difference being that the subject award was intended for onward execution onshore. Like in Daman v. Oger, the DIFC Courts were invited to “cease from entertaining the case”. However, unlike in Daman v. Oger, an application for annulment was made to the Dubai Courts only after the award creditor had instigated proceedings for recognition and enforcement before the DIFC Courts. In other words, on this occasion, the JT appears to have ignored the “first-seized” rule, which gave rise to hope in Daman v. Oger that the DIFC Courts’ acquired status of a conduit jurisdiction remained unaffected by the decisions of the JT. Unsurprisingly, the three DIFC Court members of the JT (Chief Justice Michael Hwang, Omar Al Muhairi and Sir David Steel) did not hesitate to dissent. The DIFC Court members’ dissent is explained by Deputy Chief Justice Sir David Steel’s findings in the related enforcement proceedings before the DIFC Courts in the following terms:

“Nobody is challenging or could challenge that the Dubai Courts are the Court of the seat, but the suggestion that the Dubai International Financial Centre has no jurisdiction hits the buffers at the start namely that only the DIFC Courts have jurisdiction to consider the enforcement of the award in the DIFC. It has exclusive jurisdiction.  It is somewhat unfortunate that the proposition as regards the Arbitration Law is set out without reference to the decision in Banyan Tree […].” (Giacinta v. Gillam LLC [2016] DIFC ARB 004, para. 23)

In other words, Sir David relied on the acquired status of the DIFC Courts as a conduit jurisdiction in the terms defined in Banyan Tree and hence recognised the DIFC Courts’ competence to recognise and enforce a domestic non-DIFC award for onward execution onshore. Sir David further clarified that “[t]he Dubai Courts are the court of the seat and thus the Dubai Courts clearly have jurisdiction to determine an application to annul the award.” (Giacinta v. Gillam LLC [2016] DIFC ARB 004, para. 15) The DIFC Courts, in turn, “have exclusive jurisdiction in respect of the enforcement of awards within the DIFC: no question of their jurisdiction can arise.” (ibid.)

In the second case (see Cassation No. 3/2016 (JT) – Main Logistics Solutions LLC and other v. Wadi Woraya LLC and others, hearing of 19 December 2016, published by the JT in both English and Arabic), dealing with a DIFC enforcement action in relation to a foreign award rendered in London, the JT found that there was no conflict under Art. 4 of Decree No. (19) of 2016 as no application (for annulment of the subject award) had as yet been made to the onshore Dubai Courts. The JT therefore dismissed the case. In other words, the award debtor’s application before the JT was premature and could hence not be entertained. The JT found likewise in a later decision (see Cassation No. 5/2016 (JT) – Gulf Navigation Holding PJSC v. DNB Bank ASA, hearing of 19 December 2016, published by the JT in both English and Arabic) albeit in relation to the enforcement of a foreign judgment, clarifying that for the jurisdiction of the JT to be triggered, there had to be a positive (both courts seizing jurisdiction or issuing conflicting judgments) or a negative (both courts abandoning jurisdiction) conflict of jurisdiction.

The JT’s most recent decisions in the terms discussed above give reasoned concern that the DIFC Courts are under siege, evidently deprived of their own liberty to define their proper jurisdiction within the meaning of the Judicial Authority Law as amended (Dubai Law No. 12 of 2004 in respect of The Judicial Authority at Dubai International Financial Centre as amended (by Dubai Law No. 16 of 2011). More specifically, even though initially protected from hostile attacks on their acquired status as a conduit jurisdiction, the DIFC Courts are now under threat to lose that status, in particular in the light of the JT’s decision in Dubai Water Front. That said, the reasoning of the JT’s decisions is extremely sparse and there remains leeway for recent developments to fall back into line with what was believed to have been the status quo. It is to be hoped that future decisions on the subject will put onto a firm footing the JT’s approach to the division of jurisdiction between the onshore Dubai and the offshore DIFC Courts in the recognition and enforcement of non-DIFC awards. In this context, it is important to repeat that the formalisation of a first-seized rule by making it a firm part of the regime of mutual recognition under Art. 7 of the Judicial Authority Law as amended would assist the resolution of any pending and future jurisdictional conflicts between the two courts. As demonstrated on repeated occasion elsewhere (see my various previous blogs on the subject), the conduit jurisdiction status of the DIFC Courts complies with the UAE Constitution and is not contrary to UAE public policy; nor does it violate the jurisdictional gateways under Art. 5(A)(1) of the Judicial Authority Law as amended read together with Art.42(1) of the DIFC Arbitration Law.

In any event, given the inherent powers of the JT and the status of the JT’s decisions (JT decisions being non-appealable, see Art. 7, Decree No. (19) of 2016), little can presently be done other than … wait … for a cavalry to the rescue!

More from our authors:

The post The Dubai-DIFC Judicial Committee and DIFC Conduit Jurisdiction: A Sequel in Four Parts – The DIFC Courts under Siege (Part 2) appeared first on Kluwer Arbitration Blog.

Ecuadorian BITs’ Termination Revisited: Behind the Scenes

Thu, 2017-05-25 21:00

Javier Jaramillo, Pérez Bustamante & Ponce and Universidad San Francisco de Quito and Camilo Muriel-Bedoya

As in García-Marquez’s novel, the denunciation of the Ecuadorian bilateral investment treaties (“BITs”) represents a chronicle of a death foretold and the Ecuadorian National Assembly and Ecuador’s President have taken one of the final steps to terminate them. Along the way, the internal termination proceedings have been highly politicized, international investment arbitration has been demonized, and more questions than answers have arisen.

Notwithstanding the fact that states may sovereignly denunciate an international treaty and that BITs usually do regulate their termination, the reasons behind such a polemical decision need to be addressed and cautiously assessed. This post aims to review the steps and arguments that the Republic of Ecuador has embraced, their flaws, and the proposals of what is yet to come in the next years.

 

Termination proceedings

Since the 1960s, Ecuador has negotiated 30 BITs, 27 of which entered into force. Only one of them – executed with Egypt – terminated in 1995, and almost a decade ago, in 2008, Ecuador denunciated nine of these BITs: those executed with Uruguay, the Dominican Republic, Guatemala, El Salvador, Cuba, Nicaragua, Honduras, Paraguay and Romania (the last six will still be in force until 2018, due to their survival clauses).

Consequently, 17 BITs remained in force and a second denunciation round took place, which has its origins in 2008. The year 2008 is not a coincidence as Ecuador’s new Constitution was then enacted bringing with it a particular and controversial prohibition under its article 422, which provides:

Treaties or international instruments where the Ecuadorian State yields its sovereign jurisdiction to international arbitration, in contractual or commercial disputes, between the State and natural persons or legal entities cannot be entered into (…).

According to the Ecuadorian Constitution and local law, denunciation of certain international treaties requires the National Assembly’s approval and, additionally, a previous and binding opinion issued by the Constitutional Court. This process was followed and the Constitutional Court considered that all the BITs were incompatible with article 422, a flawed conclusion that would apparently legitimize the termination proceedings.

 

Fallacies and unconstitutionalities

The following fallacies have been constantly repeated during the denunciation proceedings, namely: (i) that the BITs are unconstitutional; (ii) that local law replaces the protections and guarantees of a BIT; and, (iii) that BITs imply more foreign investment.

The termination of the remaining 17 BITs has been mainly based on their so-called unconstitutionality. Unfortunately, the political arguments surpassed the constitutional ones and incompatibility was sought where there was none. The Ecuadorian Constitution forbids entering into treaties or international instruments that provide jurisdiction to international arbitration, though with an important specification: contractual or commercial disputes.

Thus, the Constitutional Court did not consider that international investment arbitration is a very different animal from international commercial or contractual arbitration. In general terms, the former addresses breaches of international law, particularly of international standards protected by a BIT (e.g. fair and equitable treatment, full protection and security, most-favored-nation treatment, etc.), while the latter focuses on contractual breaches of a commercial nature, which do not necessarily derive in breach of international law. Tribunals have historically pointed out these differences in several awards.

Regrettably, the National Assembly seconded this argument and a special committee in charge of analyzing the denunciations issued several reports, recommending the termination of the remaining 17 BITs entered into with Argentina, Bolivia, Canada, Chile, China, Finland, France, Germany, Italy, the Netherlands, Peru, Spain, Sweden, Switzerland, the United Kingdom, the United States, and Venezuela. Finally, on May 3, 2017, the National Assembly’s Plenary approved the termination of all these BITs, though under the undermined fallacies mentioned above.

The National Assembly replicated the Constitutional Court’s unconstitutionality argument without distinguishing that the Constitution does not forbid international investment arbitration. Likewise, the National Assembly considered that the 2008 Constitution represents a fundamental change of circumstances and, misunderstanding article 62 of the Vienna Convention on the Law of Treaties, it also justified the termination of the BITs under that provision.

As mentioned above, the 2008 Constitution does not forbid international investment arbitration; therefore it follows that the BITs are not unconstitutional and that the enactment of the new Constitution does not represent a fundamental change of circumstances. Accordingly, this argument, which tried to legitimize the denunciations, is far from being flawless or, ironically, constitutional.

Interestingly, the reports considered that the BITs do not allow partial termination (i.e. the dispute resolution articles) and, under article 44 of the Vienna Convention, recommended the termination of the entire treaty in each case. The Ecuadorian law, nonetheless, expressly establishes that termination, renegotiation or a constitutional amendment could be sought, but the latter options were not considered.

 

Substitutes, correlation and causation

Furthermore, the vicarious interpretation that local law would give enough guarantees to foreign investments (i.e. specifically, as noted by the National Assembly, under the Ecuadorian Organic Code of Production, Commerce and Investments) is undermined. Local law does not entirely replace the international obligations that a treaty protects, even if similar standards are conceived. Also, a neutral dispute resolution mechanism is of utmost importance for foreign investors and, when it comes to Ecuadorian courts, unfortunately they are not particularly known for their celerity, and neither for not being politicized or interventionist. Finally, it would be naive to conclude that BITs are necessarily equivalent to more foreign investment.

Correlation does not imply causation, and the mere existence of a BIT does not automatically attract foreign investment. The attractiveness of a country is not just determined by the treaties it has executed, and more complex variables play an important role. Of course, local laws are significant, but if there is no legal certainty, independent courts and political stability (to say the least), foreign investors would naturally be more attracted to other jurisdictions that fulfill these requirements. Conversely, the drastic termination of BITs, instead of improving and amending them through negotiations, does raise concerns within the international community and could give a wrong message to foreign investors.

 

What is next?

Although Ecuador’s fate is uncertain and investors are raising many questions, some lights can be followed and the future debates are apparent from the Government’s conduct.

Back in 2013, President Correa created the Commission for Comprehensive Audit of the Reciprocal Investment Treaties and the Investment International Arbitration System (CAITISA, for its initials in Spanish). CAITISA finally made public its report and conclusions on May 8, 2017. Among the general recommendations, CAITISA proposes to eliminate or limit certain BIT provisions, namely: to exclude dispute resolution clauses, to include rights to be claimed by host states, to give standing to the indigenous communities, and to establish performance standards for investors such as technology transfer obligations, capital flow regulations, and others.

However, CAITISA’s main recommendation focuses on sponsoring an Alternative Model BIT (“AMB”), suggesting a reinforced focus on human and labor rights, together with protections for the indigenous communities and nature. Also, the AMB proposes giving host states standing to bring claims under the BIT, enforcing sustainable development standards, and supports the creation of an international investment court.

Moreover, the AMB suggests including a specific and strict definition of “investment”, requiring two-year minimum duration and limited to direct property owned by the investor. Also, the AMB recommends limiting the “investor” definition by requiring potential investors to have active operations in the host state for at least two years, revealing ownership information, and providing the possibility of losing investor standing if fraud or corruption in the management of the investment is proven.

The AMB recommends to expressly and strictly define the fair and equitable treatment standard, to exclude umbrella and most-favored-nation clauses, to limit survival clauses by establishing fixed-term provisions requiring the States’ express intent for renewal, and to exclude protection for indirect expropriation. Interestingly, the AMB suggests replacing full protection and security clauses with provisions enforcing the international minimum standard of treatment of foreign investors.

 

Finish them (?)

Aside from legal misunderstandings, Ecuador’s decision to terminate its BITs seems to be odd and inconsistent with its current foreign policy, which seeks to attract foreign direct investment to palliate the economic crisis. In December 2015, Ecuador enacted a Public-Private Partnerships law seeking to attract foreign investment by providing tax incentives to upcoming strategic allies. The law, although with some flaws, recognizes investors’ right to activate dispute resolution clauses under the different BITs in case controversies relating to their investment arise. Additionally, on November 11 2016, Ecuador executed the Accession Protocol to the Multiparty Trade Agreement with the European Union and, on 1 January 2017, Ecuador joined the Trade Agreement.

Finally, on May 16, 2017, President Correa issued the executive decrees that order the termination of the BITs and the notification to the treaties’ state parties. Now, the new negotiations will depend upon President Correa’s recently elected successor. The terminations, however, may complicate this process, especially considering that several countries expressed their willingness to renegotiate the current BITs instead of terminating them. Hopefully, Ecuador’s next steps will contribute to reinforce the foreign investment regime and not the country’s isolation.

More from our authors:

The post Ecuadorian BITs’ Termination Revisited: Behind the Scenes appeared first on Kluwer Arbitration Blog.

Judicial Economy in Investor-State Disputes

Wed, 2017-05-24 23:30

David M. Bigge

The recent mention of “judicial economy” in the award in Eli Lilly and Company v. Government of Canada provides an opportunity to consider judicial economy in investor-state arbitration more generally. In its award of March 16, 2017, the Eli Lilly tribunal determined that certain judicial interpretations of Canada’s patent law did not violate the substantive requirements of NAFTA Chapter Eleven. The claimant acknowledged during the proceedings that it had to prove a “dramatic change” in Canadian patent law to prevail on its claims. The tribunal found in its award that the claimant had not demonstrated such “a fundamental or dramatic change” in Canadian patent law, and therefore failed to establish a violation of NAFTA Article 1105 even under the Claimant’s broad interpretation of that provision (¶¶ 387, 389).

As a result of this finding, the Eli Lilly tribunal stated that it did not have to decide whether a decision by a state’s judiciary must rise to the level of a denial of justice in order to constitute a violation of Article 1105’s minimum standard of treatment provision, and that “judicial economy dictates that it should not do so.” (¶ 220, emphasis added). This reliance on judicial economy did not, however, restrain the Tribunal from opining on the matter for six further paragraphs, concluding (contrary to Canada’s argument) that “a claimed breach of the customary international law standard of treatment requirement of NAFTA Article 1105(1) may be properly a basis for a claim under NAFTA Article 1105 notwithstanding that it is not cast in denial of justice terms.” (¶ 223). The tribunal further adopted the Glamis Gold test for Article 1105, and noted that the application of Glamis Gold to a state’s judicial decisions could occur only “in very exceptional circumstances, in which there is clear evidence of egregious and shocking conduct. . . .” (¶¶ 222, 224). As the Eli Lilly tribunal did not base its decision in the case on this analysis, the discussion of judicial acts under Article 1105 must be considered obiter dictum.

Application of Judicial Economy in Investor-State Cases

Although “judicial economy” could refer to many efficiencies of arbitration, including preliminary awards, bifurcation, or consolidation, the Eli Lilly tribunal referred to “judicial economy” as the basis for refusing to decide certain legal issues presented by the parties – particularly difficult or novel issues – where there is another basis of decision. Judicial economy as applied in Eli Lilly is a prominent feature of WTO dispute resolution: the Appellate Body has long held that WTO panels “need only address those claims which must be addressed in order to resolve the matter in issue in the dispute.” Indeed, this rule is routinely applied in the WTO context, and is even discussed in the WTO’s online training program.

Judicial economy is not widely-addressed in investor-state awards, under ICSID or otherwise, and its application in practice is inconsistent. This inconsistency may at least in part be the result of the different sets of rules used for various disputes. The UNCITRAL Rules (1976) – the governing rules for the Eli Lilly dispute – require in Rule 32(3) only that the tribunal state the reasons upon which the award was based; they do not promote or prohibit judicial economy in awards. The tribunal in Spence v. Costa Rica, a CAFTA case using the UNCITRAL Rules (1976), was therefore able to state in a 2016 interim award that, “[t]o the extent that any point has not been expressly addressed in this Award it is for reason of judicial economy and an appreciation that an assessment of the point in question was not necessary for purposes of the Tribunal’s decision rendered herein.” The Chevron v. Ecuador tribunal, also operating under the UNCITRAL Rules (1976), likewise assured the parties that “[t]he Tribunal has . . . considered the Parties’ submissions and claimed relief at length; and the omission here of any reference to any part of such cases should not be taken as signifying otherwise.” It should be noted, of course, that the UNCITRAL Rules permit a party to request an additional award if the tribunal fails to address an issue raised in the proceedings, but the tribunal may decline to make the additional award if it considers the request to be unjustified.

Article 48(3) of the ICSID Convention, in contrast, expressly requires that an “award shall deal with every question submitted to the Tribunal,” a requirement reflected in Rule 47(1)(i) of the ICSID Rules. These provisions limit a tribunal’s ability to apply judicial economy in the same manner as the WTO. This does not mean, however, that ICSID tribunals can never invoke some aspects of judicial economy to streamline their awards. As the annulment committee in M.C.I. Power Group L.C. v. Ecuador explained,

[t]he obligation in Article 48(3) of the Washington Convention to deal with every question applies to every argument which is relevant and in particular to arguments which might affect the outcome of the case. On the other hand, it would be unreasonable to require a tribunal to answer each and every argument which was made in connection with the issues that the tribunal has to decide . . . . [T]he tribunal must address all the parties’ “questions” . . . but is not required to comment on all arguments when they are of no relevance to the award.

The M.C.I. explanation of judicial economy has been applied by a number of subsequent ICSID tribunals, including in Suez v. Argentina and Gremcitel S.A. v. Peru, both holding that “[c]onsiderations of judicial economy suggest . . . that the Tribunal can dispense with dealing with arguments . . . which have no impact” on the outcome. The line between a “question” and an “argument” may be difficult to draw, but this delineation is required by the ICSID Convention as explained by the annulment committee in M.C.I. In any event, while some exercise of judicial economy is permitted, an ICSID tribunal is not permitted to rule on the narrowest issue and leave the rest of the presented questions unanswered.

Rejection of Judicial Economy

Some arbitrators have expressly rejected the notion of judicial economy in investor-state disputes. In a separate opinion in S.D. Myers v. Canada, one arbitrator wrote:

This opinion will address those issues necessary to dispose of this first stage of this case, and in doing so will attempt to provide reasoning that is sufficiently well elaborated as to be a potential source of assistance in the future. With respect to some of these issues, it would be possible for me to reach a particular conclusion on one legal basis, and avoid considering other possible bases for reaching the same conclusion. I have not always, however, taken this path of maximum avoidance. The parties to this case have devoted a great deal of thought, energy and expense to arguing a variety of legal points and have expressly indicated their desire for some broad guidance for the future. I would think it might be rather diseconomic from their point of view for me to now refrain from expressing the opinion I have formed on some important points that have been fully debated in these proceedings and which will likely be of considerable ongoing interest.

“Completeness” and “the parties have invested time and effort in briefing these issues” are perhaps the most oft-cited bases for addressing legal matters unnecessary for the resolution of the dispute. For example, in Allard v. Barbados, a case administered by the PCA under the UNCITRAL Rules (1976), the claimant alleged that his property was subject to environmental degradation due to various acts and omissions by the Respondent. In a 2016 award, the tribunal ruled that the claimant failed to establish, as a factual matter, that his property was degraded, but nonetheless “for the sake of completeness” went on to assess the alleged acts and omissions of the respondent (¶¶ 139-140). The tribunal concluded after this unnecessary analysis that “even if it had found that there was a degradation of the environment . . . it would not have been persuaded that such degradation was caused by any actions or inactions of Barbados,” and therefore that the claimant had failed to establish causation (¶ 166). Despite the fact that the claimant had proven neither loss nor causation, the tribunal went on to conduct a detailed analysis of the alleged breaches of the BIT at issue, “having regard to the exhaustive compilation of the Parties’ pleadings and the joinder of issue.” (¶ 167).

Likewise, in KT Asia Investment Group v. Kazakhstan, an ICSID case, the tribunal dismissed for lack of jurisdiction on the ground that no contribution had been made by the investor that could comprise an “investment.” Nonetheless, the tribunal explained, “[f]or the sake of completeness and because the Parties have briefed these matters, the Tribunal will now briefly examine the other elements of an investment, i.e. duration and risk.” The Tribunal in Nova Scotia Power v. Venezuela followed a similar approach.

Perhaps the most interesting reference to judicial economy appears in the 2010 award in Merrill & Ring v. Canada. In Merrill & Ring, Canada had presented a jurisdictional time-bar argument that was credible and could have disposed of the entire case. Instead of addressing that issue, the Tribunal launched into a long discussion of fair and equitable treatment under NAFTA Article 1105’s minimum standard of treatment provision, which the tribunal admitted was “[t]he most complex and difficult question brought to the Tribunal in this case. . . .” (¶182). The Merrill & Ring tribunal defined Article 1105 more expansively than previous NAFTA tribunals, basing its interpretation on the concept of “reasonableness” and suggesting that regulatory transparency, legal stability, and legitimate expectations may be requirements of customary international law. This Article 1105 analysis, which has been heavily criticized by a number of scholars, comprises 26 pages and 64 paragraphs, before the award reveals that the tribunal was unable to reach a conclusion on Canada’s liability in that case (¶ 246).

The Merrill & Ring tribunal then turned to damages and found that even assuming Canada was found liable, the claimant had not established its damages to the satisfaction of the tribunal. It was only after the lengthy exegesis on Article 1105 and the conclusion on damages that the tribunal turned to the far simpler and less controversial topic, Canada’s time-bar objection. Having found that the claimant had failed to establish damages for its Article 1105 claim, the tribunal asserted that it was applying judicial economy to refrain from ruling on the time-bar objection.

Merrill & Ring’s supposed reliance on judicial economy was a perversion of the concept; in expansively and controversially interpreting NAFTA Article 1105, instead of resting only on the simpler damages issue or addressing the time bar objection at all, the tribunal made the process less – not more – economical.

Considerations in the Application of Judicial Economy

Several considerations come into account when determining whether to apply judicial economy in drafting an award. Above all, it is the economy of judicial economy that should drive its use. If it would be more efficient to resolve a dispute simply and quickly, without having to dedicate time to analyze complicated or difficult legal and factual issues, that should be the route chosen by the tribunal in order to minimize the financial burden on the parties.

Arbitrators must also consider their obligation to address the issues presented by the parties. If, as in the ICSID system, a tribunal is obligated to resolve every question submitted to it, such an obligation limits the tribunal’s discretion to invoke judicial economy. These concerns may be what drive some tribunals to address arguments, unnecessary for the disposition of the award, for the sake of “completeness.” Depending on the specific rule involved, however, such “completeness” concerns might be addressed by summarizing the parties’ arguments while refusing, on the basis of judicial economy, to rule on those issues. This was the approach taken, for example, in InterTrade Holding v. Czech Republic, a PCA case under the UNCITRAL Rules (1976), in which the tribunal ruled first that it did not have jurisdiction, and proceeded “for the sake of completeness” to detail the parties’ merits arguments without ruling on them (¶ 205).

Some arbitrators, like the concurring arbitrator in S.D. Myers, may also believe that they have a responsibility to develop an area of law perceived to be unclear. Such an impulse should be resisted. The arbitrators’ only obligation is to the parties to the arbitration, who are paying for an efficient and effective resolution of their dispute. Arbitrators in investor-state disputes can point to no authority for a broader responsibility to develop international law for future application. Furthermore, investment treaties reflect two (or more) sovereign parties’ agreement. Arbitrators should be mindful to minimize potential conflict between states on treaty interpretation issues. Extrapolation on the agreed terms of a treaty, where such extrapolation is unnecessary to render an award, is therefore unwarranted.

Finally, it should be noted that, as in all things in arbitration, the parties to the dispute have a role to play in this procedural issue. Parties can agree in the arbitration agreement, in terms of reference, or in draft procedural orders submitted to the tribunal, that the arbitrators should (or should not) utilize judicial economy. Indeed, tribunals who refrain from exercising judicial economy often cite the fact that the parties went through the effort of submitting various arguments, suggesting that the parties expect the tribunal to rule on each of those points. If parties wish the tribunal to be more economical, they can make that wish known prior to the drafting of the award. In particular, parties can agree that tribunals should determine whether there are dispositive preliminary issues that can resolve the case without a full analysis of the merits. Obviously such a request could also include bifurcation of proceedings, although judicial economy could be invoked without bifurcation where the tribunal determines that bifurcation is inappropriate.

David M. Bigge is an attorney at the U.S. Department of State, currently serving as the U.S. Agent to the Iran-U.S. Claims Tribunal and Deputy Legal Counselor in Embassy The Hague. Prior to this position, Mr. Bigge served as an attorney-adviser on the State Department team that represents the United States in investor-state disputes, and previously represented private clients in commercial arbitration. The views expressed herein are the author’s personal views, and do not necessarily reflect the views of the U.S. government.

More from our authors:

The post Judicial Economy in Investor-State Disputes appeared first on Kluwer Arbitration Blog.

International Arbitration In London From The Perspective Of A Civil Law Lawyer: Rome I Regulation And Contractual Penalties

Wed, 2017-05-24 14:37

Petr Bříza and Tomáš Hokr

YIAG

International arbitration takes a great pride in being flexible, adjustable and thus very responsive to the needs of the parties involved. Indeed, in terms of international arbitration imagination has virtually no limits – nothing really prevents parties to an arbitration agreement from agreeing on an arbitration pursuant to the UNCITRAL Arbitration Rules, in the Spanish language, administered by SIAC, seated in Dubai, with Australian governing law or to opt not to include some of the features into the “arbitration package”. Of course this example is largely exaggerated and often times what appears to be a little creative may be justified for good reasons. Nevertheless, the unusual content of such an arbitration package may not only be impractical but also unpredictable as to the legal consequences. Such an arbitration then requires extra attention and vigilance on the part of the legal counsels.

We have recently encountered an interesting arbitration in this respect. This London-seated LCIA arbitration (London seat was chosen by the parties in the arbitration clause) arose over a complex dispute involving a cross-border petroleum transaction. A petroleum trader, a Czech entity, had agreed to purchase a bulk of petroleum products from another, Russian entity, to be delivered over a certain period of time. The transaction fell into the time frame when economic sanctions were imposed upon Russia by the EU, as a result of which the transaction was not carried out. The main issue subject to the arbitration proceedings that followed was the extent of the alleged damages.

The contract did not contain an agreement on a key provision, namely the law applicable to the contract. We all know very well, how important the inclusion of a choice of law clause in the contract is, at least it avoids a lot of uncertainty down the road. There are however, situations, when the choice of law is missing and one has to resort to conflict of laws rules, especially if the parties are unable to agree on the applicable law.

The LCIA Rules as well as the other arbitration rules are of little help, stating in Article 22.3 that the Arbitral Tribunal shall apply the law which it considers appropriate. In ordinary circumstances, if the prerequisites for the application of the CISG are met, the Tribunal should apply the CISG. The damages provisions of the CISG are not, however, very detailed. Art. 7(2) of the CISG suggests that any matters which are not expressly settled in the CISG are to be settled in conformity with the general principles on which the CISG is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.

Here comes the tricky part. Within the EU, the conflict of law rules that determine the law applicable to contracts are harmonized by the Rome I Regulation. At the same time, Rome I excludes arbitration agreements from its scope. There is thus an ongoing discussion on whether arbitrators are under an obligation to apply the Rome I Regulation. On the one hand, it has been argued that the exclusion of the arbitration agreement in Rome I (Art. 1 para 2 e)) should be extended to arbitration itself since the Regulation is designed to complement Brussels I, which excludes arbitration from its scope. As a matter of fact, the recitals of Rome I refer only to national courts and are otherwise silent with regard to arbitral tribunals. This posture, therefore, comes to a conclusion that arbitrators are not required to apply Rome I and Rome I is thus only one set of conflict of laws rules among others to determine the most suitable applicable law in the absence of party choice. On the other hand, others argue that the term “court” used by Rome I must be broadly interpreted and it refers to any forum applying substantive law in adversary proceedings, arbitration included.

Actually, whether Rome I applies to a contract in arbitration proceedings may be a very relevant question, especially when a contract is concluded between non-EU parties. It is because Rome I has universal character (cf. Art. 2 of Rome I and no personal/territorial scope limitation in the text of Rome I, unlike Brussels I) which implies that Rome I is applicable without any additional link to the EU, be it the parties or the place of execution of the contract. Hence, the Regulation would even apply in litigation within the EU to a contract concluded and executed in a third country between two non-EU parties which, for any conceivable reason, come to a member state to litigate. If Rome I is to apply in arbitration in the way it does in the courts of member states, any agreement of the parties on the seat of arbitration within the EU would also determine the set of conflict of law rules and inherently also the governing law of the contract. Non-EU parties, by leaving the choice of law clause out of their contract (and thus relying on the private international law rules of either party’s state) but choosing an arbitral seat within the EU, for example, for enforcement purposes, may not always realize that by virtue of their agreement on a seat they build a kind of governing law clause into their contract (which may provide for different applicable law than the law determined by the private international law rules of either party’s state).

In our case, the arbitral tribunal not only has not contradicted the claimant’s position which has been to apply Rome I, the tribunal has even indicated that the application of Rome I is mandatory. This case is thus an interesting contribution towards the debate. However, it was not the only interesting issue arising in this arbitration.

When concluding a lengthy international contract, it is nearly impossible to anticipate all the legal consequences that may arise out of the contractual provisions in the later arbitral proceedings. What one should pay special attention to, however, are the provisions on damages. Despite the confidence brought by having some civil law system apply to the contract, appropriate considerations should be taken with regard to the composition of a tribunal. It is not uncommon in Europe that the tribunal consists of one English arbitrator, although one may encounter that situation in London more often than anywhere else. A civil law lawyer should note that English law has a particular interest in non-enforcement of the contractual penalties and, as our case demonstrates, English arbitrators are willing to (at least) consider application of the English rule against penalty clauses in contracts not only as a consequence of a choice of English law but also as a matter of public policy in cases, where another law is chosen.

It shall be noted that a London seat by itself in arbitration agreement will often not be sufficient to render a contractual penalty unenforceable. In fact, English doctrine limits applicability of the public policy exception to a very limited pool of cases. It has been applied to refuse to enforce a contract only under two circumstances: (i) if it would infringe fundamental English ideas of justice and morality (only in exceptional cases such as slavery) and (ii) if it tends to injure the public interest in a way which an English invalidating rule is designed to prevent. The latter then requires that the contract has relevant connections with England (other than the connection by reason of the forum where the dispute is held). Therefore, if one handles a dispute with non-English parties, where the facts are not in any way linked to England, there is ground for concern.

It is also appropriate to mention that not all contractual penalty clauses are unenforceable under English law. What is often labeled as a contractual penalty clause in civil law systems may include both a penalty clause, which is unenforceable, and a liquidated damages clause, which is permitted subject to certain conditions. In addition, recent development such as the English High Court’s judgement in Pencil Hill Limited v US Citta di Palermo S.p.A. suggests that contractual penalty-based awards may in fact be enforceable in England if moderated by an arbitral tribunal. The significance of such an approach is highlighted by the fact that moderation tools are inherent in most civil law systems.

Our case fell within the category of cases with no link to England. When drafting the contract, the parties simply chose London as a forum to arbitrate their contractual disputes. The arbitrator acknowledged that fact by ignoring the public policy exception and through enforcement of the contractual penalty under the Russian law.

As is common in international arbitration cases, what may have seemed at first glance like a pretty straightforward breach-of-contract/change-in-circumstances case involving the law of one country, revealed further reaching questions relating to the governing law of the contract and the enforcement of the contractual penalty. In the end, four different sets of conflict of law rules and three different legal systems were considered as potentially applicable to the contract. In contrast, and quite surprisingly, the breach-of-contract/change-in-circumstances has not been subject of greater controversy.

More from our authors:

The post International Arbitration In London From The Perspective Of A Civil Law Lawyer: Rome I Regulation And Contractual Penalties appeared first on Kluwer Arbitration Blog.

New Rules of the Game for Arbitral Institutions in Russia: Two Recent Governmental Authorizations

Tue, 2017-05-23 03:10

Elena Burova

One of the most significant changes that the new Russian Arbitration Law introduced, which has been in force for past eight months, relates to the requirement of Governmental authorization for establishing an arbitral institution (more discussion on this can be found in some of previous KAB posts available here, here, here).

In particular, the Russian Arbitration Law now provides that only non-profit organizations can establish a permanent arbitral institution (PAI), i.e. a subdivision of a non-profit organization performing the functions of administering arbitration on a permanent basis, as opposed to ad hoc arbitration. Such non-profit organizations shall obtain authorization from the Russian Government that is granted based on the recommendation from the Council of Development of Arbitration by the Ministry of Justice (Council).

There are several requirements for an arbitral institution that need to be met, and which are thereby investigated and confirmed by the Council. These are, inter alia:

  • compliance of arbitration rules and recommended list of arbitrators with criteria set by the new Law,
  • reputation of a non-profit organization (this includes, in particular, the reputation of the organization’s founders, as well as ensuring that the activity is aimed at the promotion of arbitration and providing a high standard arbitration services).

It is also worth mentioning that the two oldest Russian arbitral institutions – the International Commercial Arbitration Court (ICAC or MKAS) and the Maritime Arbitration Commission (MAC) at the Russian Chamber of Commerce and Industry – are exempted from the requirement to apply for the governmental authorization.

Russian Government Recently Granted Its First Authorization

On May 3, 2017, the Government of the Russian Federation released its first decision, dated April 27, 2017, granting authorization to act as a permanent arbitral institution, which has significant implications for arbitration practice in the country. The Russian Government authorized two Moscow-based non-profit organizations to perform the functions of a PAI: the Russian Union of Industrialists and Entrepreneurs (RSPP) and the Institute of Modern Arbitration. The RSPP was established as a non-political organization shortly before the collapse of the USSR “to protect the interest of industry at the time of fast and large-scale transformations in the state’s politics and economy.

The Arbitration Center at the Institute of Modern Arbitration was established in August 2016, at the initiative of the Federal Bar of Attorneys of Russia and Saint-Petersburg International Legal Forum. One of the main goals of the Arbitration Center is to facilitate professional, efficient and impartial resolution of disputes of any complexity in strict compliance with the new Russian arbitration procedure. Its rules are available in English and Russian. The Arbitration Center is also actively involved in promoting arbitration in Russia via organizing and holding educational and practical conferences and seminars.

Practical Implications of Governmental Authorizations on Arbitral Proceedings

As the new Law presupposes that certain procedural features of arbitration are available exclusively in an arbitral proceeding administered by a PAI, obtaining governmental authorization implies considerable advantages of PAIs over ad hoc arbitration. Some of them are listed here:

Arbitration of Corporate Disputes

Only a PAI can administer corporate disputes that are now considered arbitrable, as a result of the arbitration reform. The new Law also requires that the PAI administers this type of arbitration according to special rules for corporate disputes. Some arbitral institutions have already developed and adopted arbitration rules for corporate disputes. For example, the ICAC has separate set of rules for corporate disputes, and the Arbitration Center at the Institute of Modern Arbitration has the rules for corporate disputes as a part of its 2017 Arbitration Rules (Chapter 8).

Waiver of the Right to Annul an Arbitral Award

Another change that the new Law implements is the parties’ option to exclude the possibility to annul an arbitral award before national courts. Before the reform, this was expressly allowed only in domestic arbitration. Now this option has become available in any arbitral proceedings (both domestic and international) administered by a PAI – the parties may conclude an express agreement regarding legal remedies available to the parties against an arbitral award.

Judicial Assistance of State Courts

Parties to arbitration can apply to state courts for judicial assistance in certain procedural issues, such as taking evidence. For example, courts may be asked to order the production of documents, as arbitrators often miss coercive power to do so. Only parties to arbitration administered by a PAI can make use of this mechanism, according to the new Law.

Concluding Remarks

Looking at this development from a general perspective, it is a huge step forward towards building a professional and efficient arbitration framework in Russia. Before the arbitration reform, the establishment of an arbitral institution in Russia was unrestricted, which led to abuses and fraudulent practices. For example, according to the statistics of the Moscow Commercial Court, only in Moscow there were almost 330 arbitral institutions registered. The new arbitration law imposed the authorization requirement to eliminate the opportunities for misuse of arbitration proceedings in so-called “pocket” arbitrations. These were institutional arbitrations involving corporations as parties, and these very same corporations were at the same time the founders of institutions administering the respective proceedings. Hence, the arbitral tribunals formed under those institutions often lacked independence and/or impartiality, and for that reason national courts raised the conflict of interests issues (e.g., LUKOIL-Energoseti case decided by the former Supreme Commercial Court).

While the authorization requirement is aimed at obviating those unfair business practices, there is still a certain risk that some parties may resort to ad hoc arbitration or nonreliable arbitration centers seated outside Russia to circumvent authorization. One of recent examples that illustrates this practice is the case of an arbitral tribunal deciding under the auspices of the Russian-Singapore Arbitration Court, whose award was not in the end recognized in Russia. The restrictions imposed on ad hoc arbitral proceedings, as compared with authorized institutional arbitration, intent to neutralize this.

Overall, the road is long and further effort is expected from arbitral institutions, but also from national courts and arbitration community in general. Hopefully, other Russian arbitral institutions will follow the lead of pioneer arbitration centers and continue to contribute to forming a comfortable and independent dispute resolution environment in the country.

More from our authors:

The post New Rules of the Game for Arbitral Institutions in Russia: Two Recent Governmental Authorizations appeared first on Kluwer Arbitration Blog.

Overriding an Explicit Agreement on the Number of Arbitrators – One Step Too Far under the New ICC Expedited Procedure Rules?

Mon, 2017-05-22 03:46

Fabian Bonke

Expedited arbitration procedure, which allows procedural streamlining of arbitration proceedings, became widely accepted by arbitration institutions. The ICC followed this global trend by incorporating Expedited Procedure Rules into the ICC Rules which came into force on 1 March 2017 (see here).

The incorporation of expedited procedures is a response to the need to control the costs and length of arbitration proceedings, which have become a growing concern for arbitral institutions. In regards to the application of the Expedited Procedure Rules, the ICC opted for an automatic application of these rules to disputes with amounts not exceeding USD 2 Mio (Art. 30 (2) (a) ICC Rules in conjunction with Article 1 (2) Appendix VI). With this solution, the ICC Rules joined other institutional rules providing for the application of expedited procedure contingent on financial thresholds, such as the SIAC Rules, with the threshold of S$ 6,000,000 (Rule 5.1 lit. a) or the HKIAC Rules, with the threshold of HKD 25.000.000 (Art. 41.1 lit. a.).

Whether the new Expedited Procedure Rules will foster parties’ choice of the ICC Rules will depend on how successful these rules will be in streamlining arbitral proceedings. There are features which might obstruct such success – one being the power of the ICC Court to appoint a sole arbitrator when the Expedited Procedure Rules are applied. The issue lies in the fact that such an appointment in every case overrides parties’ agreement to the contrary.

The idea behind this concept is comprehensible: a proceeding involving a sole arbitrator is cheaper and may lead to the results much faster. It is, therefore, not surprising that institutional rules give preference to a sole arbitrator in expedited proceedings (e.g., Art. 41.2 HKIAC Rules).
Still, institutional rules vary as to how this preference is realized, especially regarding how this solution is to be reconciled with a conflicting arbitration agreement. Some arbitration rules give preference to an arbitration agreement providing for more than one arbitrator (e.g., the DIS Rules in Art. 3.1 DIS-Supplementary Rules for Expedited Proceedings 08 (SREP)). Other rules, such as, for example, the HKIAC Rules (Article 41.2(b)), empower an arbitral institution to invite the parties to agree on a sole arbitrator. In those cases, when the parties fail to agree to reduce the number of arbitrators, the parties’ agreement prevails over these institutional rules. Whereas the abovementioned rules preserve party autonomy, so far, only the SIAC Rules have allowed the arbitral institution to override the agreed number of arbitrators:

“[…] the case shall be referred to a sole arbitrator, unless the President determines otherwise;[…]”. (Rule 5.2 lit. (b))

Now, the new ICC Expedited Procedure Rules adopted a similar rule to the SIAC’s solution:

“The Court may, notwithstanding any contrary provision of the arbitration agreement, appoint a sole arbitrator.” (Article 2 of the Appendix VI)

This post examines the reasoning behind this Rule, and it outlines the consequences of the enforceability of an arbitral award rendered in the expedited proceedings.

Convincing Reasoning: Implied Consent?

The rationale behind the rule on institutional power to nominate a sole arbitrator by overriding an agreement to the contrary is based on the theory of implied consent: by agreeing on the application of institutional rules, the parties accepted all rules therein, including this particular rule which empowers the institution as well. The new ICC Rules emphasise:

“By agreeing to arbitration under the Rules, the parties agree that this Article 30 and the Expedited Procedure Rules set forth in Appendix VI […] shall take precedence over any contrary terms of the arbitration agreement.” (Art. 30 (1))

This corresponds to the reasoning of the Singapore High Court in AQZ v. ARA, which held that overriding the parties’ agreement to arbitrate before three arbitrators was consistent with party autonomy given that the parties had previously agreed on the SIAC Rules.

Is There Misinterpretation of the Parties’ Intention?

When assessing the power of the institution to nominate a sole arbitrator overriding a contrary agreement, one has to consider that the reconciliation of the parties’ agreement on the number of arbitrators and the institutional rules is a question of interpretation of the arbitration agreement1) BGH NJW 1986, 1436 (1437). jQuery("#footnote_plugin_tooltip_6748_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6748_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. The interpretation of an arbitration agreement is a matter of national law. The applicable national law, thus, determines whether an institution is entitled to override parties’ agreement as foreseen by the ICC Expedited Procedure Rules.

In this light, it seems questionable whether the implied consent accurately represents the intention of the parties. When the parties refer to arbitration rules which provide for an expedited procedure while expressly agreeing on the number of arbitrators, there is at least some reasonable doubt as to whether the former should prevail.

Namely, by expressly agreeing on the number of arbitrators, the parties demonstrate their intention to deviate from the otherwise applicable institutional rules. The priority clause in the ICC Expedited Procedure Rules is unlikely to rebut this interpretation in favour of the express agreement in all cases. In fact, one could argue that the existence of the contrary agreement indicates the parties’ ignorance vis-à-vis the priority rule. Therefore, courts might conclude that the parties agreed on a three-arbitrator panel and deviated from the ICC Expedited Procedure Rules.

Fortunately: No Dynamic Reference

The solution provided by the ICC Expedited Procedure Rules seems to be more in line with the parties’ intention when compared to the SIAC Rules, as interpreted by the Singapore High Court.

In the aforementioned case of AQZ v. ARA, the referenced SIAC Rules did not empower the SIAC President at the time of the conclusion of the arbitration agreement to nominate a sole arbitrator. The Court presumed that references to institutional rules are to be construed as references to those rules that may be applicable at the date of the commencement of the arbitration, as long as those rules contain mainly procedural provisions. This presumption could be displaced by the parties’ specific reference to the rules in force at the date of the arbitration agreement. In AQZ v. ARA, such a reference, however, was not included in the agreement, and the court, therefore, applied the Rules applicable at the time of the commencement of the proceedings.

The presumptive nature of such a dynamic reference is widely accepted also in other jurisdictions, such as Germany. The German Federal Supreme Court convincingly justified its acceptance of the dynamic reference with the parties’ expectation that institutional rules were to be continuously adapted to commercial or legal developments2)BGH NJW-RR 1986, 1059, 1060. jQuery("#footnote_plugin_tooltip_6748_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6748_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. A rebuttal of the presumption is accepted if contrary intention by the parties can be identified. It seems, however, that the Singapore High Court should have assumed such a rebuttal in the abovementioned case. According to the arbitration agreement in this case “[…] the dispute shall be finally settled by arbitration […] in accordance with the rules of conciliation and arbitration of the Singapore International Arbitration Centre (SIAC) by three arbitrators […]”. One could argue that this agreement on the number of arbitrators illustrates the parties’ intention to rebut the presumption on dynamic reference, at least in the part relevant for expedited procedure, which was not even provided for at the time of the conclusion of the agreement. Hence, it seems too narrow to assume a rebuttal only if the parties specified a particular version of the SIAC Rules.

Under the new ICC Rules, such a conflict between the parties’ intention and the priority rule is fortunately avoided by excluding its applicability to arbitration agreements concluded before the new ICC Rules came into force (Art. 30 (3) (a) ICC-Rules 2017).

Conclusion

When the abovementioned concerns are taken into account, it seems that the recent ICC reform took a step too far when empowering the ICC Court to override a contrary agreement between the parties in expedited proceedings. Disregarding parties’ autonomy, which is a well-known and recognized core of arbitration, poses a risk to the enforceability of an award. A losing party might try to set aside or resist enforceability of an award arguing that the composition of the arbitral tribunal was not in accordance with the party agreement (Art. 34 (2) (a) (iv) of the UNCITRAL Model Law; Art. 35 and 36 (1) (a) (iv) UNCITRAL Model Law; Article V 1. (d) NY Convention). In the end, this uncertainty could prolong arbitration proceedings as much as enforcement proceedings, and paradoxically this could deteriorate efficiency, which is exactly a result contrary to the one for which expedited procedures are established for.

As many other issues raised in the practice, this one as well boils down to advising parties to draft carefully: For the parties who aim for fast-track proceedings, it is recommendable to avoid an agreement on more than one arbitrator (until the legal uncertainty pertaining to this issue is resolved by national courts), whereas the parties with a strong preference for a panel of more than one arbitrator should explicitly opt-out from the application of the ICC Expedited Procedure Rules in their agreement.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Hogan Lovells, its affiliates, or its employees.

References   [ + ]

1. ↑ BGH NJW 1986, 1436 (1437). 2. ↑ BGH NJW-RR 1986, 1059, 1060. 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:

The post Overriding an Explicit Agreement on the Number of Arbitrators – One Step Too Far under the New ICC Expedited Procedure Rules? appeared first on Kluwer Arbitration Blog.

Celebrating the Semicentennial: New Proposed Changes to the ICISD Arbitration Rules

Sat, 2017-05-20 23:46

Crina Baltag (Associate Editor)

In October 2016, the ICSID advised the Member States of the ICISD Convention that it was beginning the fourth amendment process since the enactment of the definitive ICSID Arbitration Rules in 1967. The first amendment to the Rules took place in 1984 and mainly referred to the possibility to resort to national courts for provisional measures, if so agreed by the parties in the instrument recording their consent, and to the publication of excerpts of ICSID arbitral awards (concerning the ‘legal rules applied by the Tribunal’). The amendments of 2003 reflected the practice of the Secretariat since the enactment of the 1984 Rules, such as the requirement for juridical person to state ‘that it has taken all necessary internal actions to authorize the request’. The 2006 Rules considered a broader amendment process by tackling the provisional measures, the preliminary objections, the transparency rules, the establishment of an appeals panel, the independence of arbitrators etc. While some of the suggested amendments did not make it into the final draft of the 2006 Rules, they nevertheless generated a constructive debate in the arbitration community (see, for example, the appeals mechanism). (See Crina Baltag, The ICSID Convention: A Successful Story – The Origins and History of the ICSID in Crina Baltag (ed.), ICSID Convention After 50 Years: Unsettled Issues, 2017, Wolters Kluwer)

The current amendment process is intended ‘to modernize the rules based on case experience’. The ultimate goal, as suggested by the ICSID Secretariat is to ‘make the process increasingly time and cost effective while maintaining due process and a balance between investors and States’. The Secretariat highlighted the areas where the amendments could be considered and background papers would be prepared for this purpose: appointment of arbitrators, including a code of conduct for them and the challenges to arbitrators; third party funding; consolidation; preliminary objections and first session; witnesses; experts and other evidence; discontinuance of a case; awards and dissenting opinions; security for costs and security for stay of enforcement of awards ordered by the ad hoc committee; allocation of costs; annulment; publication of decisions and orders (compared to the current provisions referring to awards); as well as the modernization of the means of communication (apparently with a view of making the procedure ‘less paper-intensive and more environmentally friendly’).

While the future of the ISDS is constantly challenged, it is perfectly legitimate and opportune for the ICSID to listen to its users and implement the developments of the ISDS practice after more than 600 arbitration cases. No doubt, the ICSID and the ICSID Convention shaped the international law and contributed to the establishment of an investment law. In the prophetic words of Aron Broches, the central figure behind the creation of the ICSID, ‘[t]he wide interest shown by actual and potential investors, as well as by official development authorities and other governmental agencies, testifies to the potential usefulness of the Convention and of the Centre. This gives reason for confidence that in the coming years this potential will be realized and the new institution will come to play a significant role in furthering the availability of private international investment for economic development.’ It is essential to remember that the provisions of the ICSID Convention are, fundamentally, the result of a compromise essential for the existence of the ICSID Convention itself. To this extent, as highlighted by the Secretariat, the amendment of the ICSID Convention is not contemplated at this stage (and, arguably, it would be quite difficult to achieve). But, when it comes to the ICSID Rules, there is more flexibility. Several topics addressed by the ICSID Rules and indicated by the Secretariat do need to be updated in accordance with the latest developments of international law and with the innovations of the means of communication (see third party funding, transparency, etc.). Other amendments reflect the practice of the Secretariat and are necessary in order to maintain the due process requirement and ensure the legitimacy of the arbitration process. For instance, the standard of challenges to arbitrators in an over-globalized world and which until recently was seen as notoriously high under the ICSID Rules or the procedure for appointment of arbitrators, which could see an arbitral tribunal being appointed in an average of seven months, despite several time limitations under the Rules. (See in general, Daniel Kalderimis, The Future of the ICSID Convention: Bigger, Better, Faster? in Crina Baltag (ed.), ICSID Convention After 50 Years: Unsettled Issues, 2017, Wolters Kluwer) Other areas discussed in previous amendment processes, such as the annulment system, would probably be reassessed based on the lessons learned (and probably not sufficient at the time when first addressed) and on the developments of international law.

The background papers reflecting the proposed changes to the ICSID Rules should be available by early 2018 and the ICSID Secretariat would probably make them available to the public for consultations and discussions. In the meantime, any additional preliminary suggestions concerning potential rule amendments can be sent to [email protected].

More from our authors:

The post Celebrating the Semicentennial: New Proposed Changes to the ICISD Arbitration Rules appeared first on Kluwer Arbitration Blog.

Nat’l Railroad Passenger Corp. v Fraternal Ord. of Police, Lodge 189: Has the D.C. Circuit Opened the Door for Challenges under the Public Policy Exception?

Fri, 2017-05-19 21:34

Daniela Páez-Salgado (Assistant Editor for South America)

On April 28, 2017, the Court of Appeals for the District of Columbia Circuit (in a majority decision) affirmed the district court’s decision to set aside an award issued by a sole arbitrator finding that the award violated public policy.  The award was rendered in the context of mandatory arbitration of statutory claims under the Railway Labor Act.  The award was later challenged with the District of Columbia district courts pursuant to the same statute.  The judicial review process was therefore not conducted under the Federal Arbitration Act (“FAA”).

The dispute concerned an action brought by the Fraternal Order of Police, a labor union, on behalf of an employee of the National Railroad Passenger Corporation (known as “Amtrak”) who was fired for misconduct on December 3, 2012.  The union sought arbitration pursuant to the grievance procedure contained in the collective bargaining agreement alleging that the employee had been fired without just cause.  The arbitrator did not reach the merits of the claim but ruled that the Amtrak Inspector General’s investigator had not fully complied with Rule 50 of the collective bargaining agreement procedures relating to the conduct and control of interrogations of employees.  Among others, Rule 50 of the agreement provided that an investigator must record the interview with the employee and if the employee is suspected of criminal activity, the investigator must give Miranda warnings.  During the investigation of the fired employee, the investigator failed to record the interrogatory as well as to give the employee his Miranda warnings.  Therefore, the arbitrator found that the investigation had not fully complied with the provision of the collective bargaining agreement and ruled that Amtrak must reinstate, with backpay and lost seniority, the employee fired for misconduct.  Subsequently, Amtrak sought the seating aside of the award with the District of Columbia district courts.

The district court vacated the award finding that Amtrak Inspector General could not legally be governed by Rule 50 of the collective bargaining agreement.  Section 153 First (q) of the Railway Labor Act establishes that a ground on which a court may set aside an award is that a particular contractual provision at issue is contrary to “law or public policy.”  The district court relied on the decision of U.S. Dep’t of Homeland Security v FLRA (DHS) to find that the award was contrary to public policy.  In DHS, the court held that under the Inspector General Act of 1978 public sector unions and agencies can neither add to nor subtract an Inspector General from its investigatory authority through collective bargaining. 751 F.3d 655, 671 (D.C. Cir. 2014).  The district court found that the arbitrator’s application of Rule 50 was contrary to the precedent in DHS and vacated the award.

The Court of Appeals affirmed the lower court’s ruling.  According to Senior Circuit Judge Randolph, who authored the decision, the provision of the collective bargaining agreement was contrary to the law because the arbitrator’s application of Rule 50 to the Inspector General’s investigation had the effect of subtracting him of his investigatory authority.  Hence, the district court was right in refusing to enforce the award based on that provision.

The decision was accompanied by a strong dissent of Judge Pillard who expressed that the limited scope of judicial review of awards did not grant the district court legal basis to vacate the arbitrator’s award.  While Judge Pillard agreed with the majority on that the reasoning of the arbitrator’s opinion failed to anticipate the court’s decision in DHS, she was of the opinion that it exceeded the court’s judicial review power to scrutinize whether an arbitrator’s reasoning conflicted with public policy since that power is limited to determining whether the award itself –rather than an arbitrator’s reasoning- creates an explicit conflict with the law.

Judge Pillard also stressed the U.S. Supreme Court and the Circuit’s historical narrow approach to the public policy exception as a ground to vacate awards in the U.S.  In this sense, she showed concern on a future use of the majority’s reasoning to actions seeking to set aside awards initiated under the FAA.  She supported this concern on the Circuit’s prior precedent which equated the judicial review standard of FAA actions with mandatory arbitration of statutory claims. Cole v. Burns Int’l Sec. Servs., 105 F.3d 1465, 1486 (D.C. Cir. 1997).

The Circuit has previously ruled on cases involving the judicial review of awards and the public policy exception.  For instance, in Teamsters Local Union No. 61 v United Parcel Serv., Inc., the Court of Appeals held that the public policy exception is extremely narrow and applies only when the public policy emanates from clear statutory or case law, not from general considerations of supposed public interests. 272 F.3d 600, 606-07 (D.C. Cir. 2001).  Notwithstanding, this decision might open the door for actions seeking to challenge an award where the losing party disagrees with the arbitrator’s reasoning.

While the appellant announced it will appeal the Circuit’s decision with the U.S. Supreme Court, public records reveal that such appeal has not been filed so far.  The parties have 90 days after entry of the judgment to file a petition for a writ of certiorari with the Clerk of the U.S. Supreme Court.

More from our authors:

The post Nat’l Railroad Passenger Corp. v Fraternal Ord. of Police, Lodge 189: Has the D.C. Circuit Opened the Door for Challenges under the Public Policy Exception? appeared first on Kluwer Arbitration Blog.

Again the “Incorporation” of the IBA Guidelines into a Code of Ethics: an “Investment in Virtue”?

Fri, 2017-05-19 00:24

Duarte Gorjão Henriques

In many ways, Portugal is a remarkable arbitration-friendly jurisdiction. Not only a new UNICTRAL Model based law has been enacted a few years back now, but also its courts have proved to be very supportive of arbitration. The deference that they have been showing to the validity of the arbitration clause inserted in derivatives master agreements and to the principle of “competenz-competenz” is but a single example of this support. On the other hand, the arbitration community has been developing extraordinary efforts to show that Portugal is placed in the best position to play the role of an international arbitration hub for the Portuguese-speaking countries.

Some thought leaders applauded a few initiatives undertaken by one of the major arbitration players in Portugal. Indeed, while Michael McIlwrath considered the phenomenon of the “incorporation” of the IBA Guidelines on Conflicts of Interests into the Code of Ethics of the Lisbon Commercial Arbitration Centre as a step in the right direction, Catherine A. Rogers underscored the enactment of new criteria for the appointment of arbitrators of the said Arbitration Centre as a “positive move towards increasing party participation and confidence in arbitrator appointments by the CAC”, indicating the “Portugal’s aim to evolve from a respected domestic institution to a global competitor”.

However, two recent cases decided by the Central Administrative Court South (equivalent to the Court of Appeals for administrative matters) raise some concerns as to the real acceptance of the international standards by the Portuguese jurisdiction. In those cases, the Administrative Court had the chance to look at the “IBA Guidelines on Conflicts of Interests in International Arbitration when deciding challenges made against arbitrators in disputes involving Portuguese public entities.1)In Portugal, arbitration is admitted as means to solve disputes involving administrative matters and involving the State and other legal entities governed by public law – Art. 1(5) of the Portuguese Arbitration Law, enacted by Law No. 63/2011 of 14 December 2011. jQuery("#footnote_plugin_tooltip_7823_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7823_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The first case related to a situation where the arbitrator appointed by the claimant (private company), holder of a public concession, was challenged by the respondent (a state instrumentality) in a dispute that arose in relation to the public concession contract.2)Case decided by the Central Administrative Court South on 30 August 2016, accessible at www.dgsi.pt, last accessed on 28 de Abril de 2017. jQuery("#footnote_plugin_tooltip_7823_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7823_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The challenge was drawn on the basis of the fact that the arbitrator had been vice-chairman of the general shareholders meetings’ board of the institution bankrolling the holder of the public concession. The Administrative Court denied the challenge request and considered that the “IBA Guidelines on Conflict of Interests” are relevant but are nothing more than … guidelines. The Court went on as to state that “the guidelines are not applicable by themselves”, and consideration should be given to the dimension of Portugal. Regulation such as the “Guidelines” were drafted for international arbitration “in a human and economic universe unparalleled in the peninsular West”, stressed the Court.

In the second case, the critics went deeper.3)Case decided by the Central Administrative Court South on 16 February 2017, accessible at www.dgsi.pt, last accessed on 28 de Abril de 2017. jQuery("#footnote_plugin_tooltip_7823_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7823_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); A private entity brought a claim in arbitration against the Lisbon Municipality. During the proceedings, it became apparent that the arbitrator appointed by the private entity had been appointed by the same company in three prior cases. That arbitrator had not made any disclosure prior to initiating his mandate. For those reasons (and other ancillary not relevant for this purpose), the Municipality challenged the arbitrator before the Administrative Central Court South.

The Court denied the challenge brought by the Lisbon Municipality, stating that the “IBA Guidelines” are not the Law of Portugal. In reaching this conclusion, the Court found the following:

– the court characterized “quasi-law” or “soft-law” practices as stemming from the Anglo-Saxon traditions that are alien to the European Continental laws, and suggested it is inappropriate to import them into Portuguese cases;
– the court specifically criticized the various IBA guidelines on international arbitration as being neither applicable in domestic arbitration nor a source of Portuguese law;
– the court found that three appointments by the same party was an arbitrary standard used an “American and transnational mathematical fashion” to assess the lack of impartiality or independence of “professional arbitration lawyers” who may make their lives out of arbitration.
– thus, the court asked: why not four or five prior cases? Or in the previous four or five years?

The Court then found that being appointed by the same party on “two or three” prior occasions did not call into question the arbitrator’s independence.

The reasoning presented by these two decisions are in a staggering contrast with four other cases brought before the Supreme Court of Justice, and the Lisbon and Oporto Courts of Appeal, where it was considered that “particular weight should be given to the IBA Guidelines”.4)See decision of the Portuguese Supreme Court of Justice of 12 July 2017, decisions of the Lisbon Court of Appeal of 24 March 2015 and 29 September of 2015, and decision of the Oporto Court of Appeal of 3 June 2014, all accessible here. jQuery("#footnote_plugin_tooltip_7823_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7823_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In those other cases, the courts relied on the IBA Guidelines as a particularly useful instrument in deciding conflicts of interests.

What is the source of this apparent schizophrenia in Portuguese arbitration case law? In part it may be due to a split within the domestic arbitration community in which some traditionalists believe arbitrators capable of self-regulating their independence, while others express concerns about the need to safeguard appearances and assure a degree of oversight by the courts.

It is beyond doubts that Portugal is evolving into a more modern arbitration jurisdiction, equipped with all “state of the art” legal and regulatory instruments, but it is also true that this evolution may not be accomplished without stumbles and occasional “parochialism” along the way.

As I suggested before, the mindset underlying the “traditionalist” demeanor will tend to look at a mere “reference” to the IBA Guidelines5)The provision at stake reads “bearing in mind the IBA Guidelines” (see my post). jQuery("#footnote_plugin_tooltip_7823_5").tooltip({ tip: "#footnote_plugin_tooltip_text_7823_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); as a true “incorporation”, therefore bearing the risk of bringing some binding meaning to those guidelines, which would tend to be “mathematically” applied.

That mindset was obviously echoed in those Administrative Court’s decisions. It is my hope that they are all but two isolated cases.

As Agostinho Pereira de Miranda once titled one article of his own”,6)“Investing in virtue: the duty of disclosure and the procedure to challenge the arbitrator”, originally: “Investir em virtude: dever de revelação e processo de recusa do árbitro”. See ”Revista Internacional de Arbitragem e Conciliação Vol. VI – 2013, Almedina. jQuery("#footnote_plugin_tooltip_7823_6").tooltip({ tip: "#footnote_plugin_tooltip_text_7823_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); I remain confident that these decisions do not signal a “disinvestment in virtue”.

References   [ + ]

1. ↑ In Portugal, arbitration is admitted as means to solve disputes involving administrative matters and involving the State and other legal entities governed by public law – Art. 1(5) of the Portuguese Arbitration Law, enacted by Law No. 63/2011 of 14 December 2011. 2. ↑ Case decided by the Central Administrative Court South on 30 August 2016, accessible at www.dgsi.pt, last accessed on 28 de Abril de 2017. 3. ↑ Case decided by the Central Administrative Court South on 16 February 2017, accessible at www.dgsi.pt, last accessed on 28 de Abril de 2017. 4. ↑ See decision of the Portuguese Supreme Court of Justice of 12 July 2017, decisions of the Lisbon Court of Appeal of 24 March 2015 and 29 September of 2015, and decision of the Oporto Court of Appeal of 3 June 2014, all accessible here. 5. ↑ The provision at stake reads “bearing in mind the IBA Guidelines” (see my post). 6. ↑ “Investing in virtue: the duty of disclosure and the procedure to challenge the arbitrator”, originally: “Investir em virtude: dever de revelação e processo de recusa do árbitro”. See ”Revista Internacional de Arbitragem e Conciliação Vol. VI – 2013, Almedina. 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:

The post Again the “Incorporation” of the IBA Guidelines into a Code of Ethics: an “Investment in Virtue”? appeared first on Kluwer Arbitration Blog.

Switzerland to Become More Attractive for International Arbitration

Thu, 2017-05-18 00:29

Léonard Stoyanov

On 11 January 2017, the Swiss Federal Council proposed a revised version of the Swiss International Private Law Act (“SPILA”) relating to international arbitration (art. 176 et seq.) with a view to increasing the attractiveness of Switzerland as a place of arbitration while preserving the concise, liberal and flexible traits of the SPILA. More precisely, the Federal Council aims at (i) updating the provisions of the SPILA by implementing elements of the Federal Tribunal’s jurisprudence and clarifying ambiguities, (ii) reinforcing parties’ autonomy and (iii) improving the law for a simplified application. This initiative follows on from the modernisation process initiated by other countries.

While the proposed amendments mainly relate to the SPILA, the Federal Tribunal Act (“FTA”) and the Civil Procedure Code (“CPC”) will also be affected if the proposed amendments are adopted by the parliament.

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

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

In its current wording, article 176 I SPILA provides that the provisions of chapter 12 apply to any arbitration if the seat of the arbitral tribunal is in Switzerland and if, at the time when the arbitration agreement was entered into, at least one of the parties had neither his/her/its domicile nor his/her/its habitual residence in Switzerland.

In a decision of 2002 disputed among scholars, the Federal Tribunal held that one ought to take into account the parties’ situation at the time when the arbitral proceedings are initiated rather than at the time when the arbitration agreement was entered into. This created legal uncertainty as one cannot determine from the outset, but only at the time when the parties start arbitration proceedings, which law will apply (chapter 12 SPILA or the internal arbitration rules contained in the CPC). The proposed revised article 176 I SPILA specifies that the parties are those “to the arbitration agreement” so as to make the time of the entry into the arbitration agreement relevant. This would however probably not affect the current federal jurisprudence for parties to arbitral proceedings who/which will not have signed the arbitration agreement.

B. Ancillary procedures

As at today, the CPC is silent with regard to the type of proceedings applicable when the judge is seized in his capacity as “juge d’appui” (e.g. with regard to the appointment, challenge, replacement of arbitrators; see infra, IV with regard to the opportunity of creating a unique Swiss local judge). Hence a new article 251a is proposed which provides that ancillary proceedings relating to international arbitration be conducted in the form of summary proceedings (another provision would be amended to the same extent with regard to internal arbitration).

C. Means of recourse available against an award

While the Federal Tribunal reckons that an award may be rectified, interpreted, completed or revised, the SPILA does not as at today mention the possibility to challenge an award by way of correction, interpretation, addition or revision.

To fill this gap, draft articles 189a and 190a SPILA will, if adopted, exhaustively govern the recourses available against an arbitral award thereby incorporating the federal jurisprudence (these means of recourse are also available in the context of national arbitration in the CPC).

According to draft article 189a SPILA, unless provided otherwise, any party may require from the arbitral tribunal to correct obvious mistakes or interpret or complete certain passages of the award within a thirty day deadline following communication of the award. In the meantime, the arbitral tribunal may on its motion correct, interpret or complete its award. The request does not suspend the deadline to challenge the award before the Federal Tribunal but a new deadline starts for the sole part of the award which was corrected, interpreted or completed.

Draft article 190a SPILA expressly allows for the revision of an award, what both scholars and the Federal Tribunal already opine is possible. Thus, according to this draft provision, a party may request that an award be revised (i) if said party discovers relevant facts or means of proof after the arbitration (provided however that they are not subsequent to the award) and (ii) if criminal proceedings establish that the award was influenced to the detriment of the party challenging the award even in the absence of a conviction (if criminal proceedings are not possible, evidence may be adduced otherwise). The request may be filed within ninety days following the discovery of the revision motive (within a ten year time limitation period). The parties’ autonomy will however prevail insofar as they may agree in their arbitration agreement or at a later stage to exclude the right to a revision.

D. Addressing the impossibility to request the appointment of an arbitrator by the local judge

Pursuant to article 176 III SPILA, if the parties have not specified the seat of the arbitral tribunal, the arbitrators themselves may choose it if both the parties and the arbitration institution designated by them failed to do so. If neither determined the seat, several provisions become inapplicable starting by article 176 I SPILA which governs the applicability of the SPILA itself and extending to all the provisions governing the ancillary jurisdiction of Swiss tribunals and notably article 179 III SPILA which provides that where a tribunal is called upon to appoint an arbitrator, it shall make the appointment.

Accordingly, the draft bill contains an additional sentence to article 179 II SPILA providing for the jurisdiction of the Swiss tribunal first seized.

II. Reinforcing the parties’ autonomy

While the current wording of article 178 I SPILA provides that 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, the proposed revision (inspired by the corresponding provision governing internal arbitration) provides that such an agreement is valid if made in writing “or by any other means which permits it to be evidenced by a text”. More importantly, the revised text provides that said condition is deemed to be met even though it is satisfied by only one party to the arbitration agreement, in which case the validity of the agreement as regards its substance will still be examined in light of article 178 II SPILA (which is not due to change).
Thus, to take the example cited by the Federal Council, if party A sends party B a written proposal to enter into a contract which contains an arbitration clause and party B starts performing the contract without signing it, the arbitration clause would be considered as accepted by party B provided that performance of the agreement would be formally reckoned (art. 178 I SPILA) as the acceptance of the offer made by party A as a matter of substantive law (art. 178 II SPILA).

Article 178 SPILA is further due to be completed by a new paragraph extending to unilateral arbitration clauses (and not solely arbitration agreements) contained for example in a will or a trust deed.

The requirements for the parties to renounce the application of chapter 12 SPILA in favour of the internal rules of arbitration (part 3 of the CPC) will continue to be stringent for the sake of legal certainty: a written agreement will be necessary.

III. Increasing of the appeal of the laws governing international arbitration

Rather than amending the SPILA with references to articles of the CPC governing internal arbitration which would apply by analogy, a consolidated version of the SPILA has (rightly) been preferred in view of easing the understanding of the Swiss rules governing international arbitration for foreigners. Accordingly, existing references in the SPILA to provisions in the CPC will be replaced.

Today, briefs filed before the Federal Tribunal must be filed in an official language and may thus not be filed in English. The door is however not completely closed to English as the Federal Tribunal often renounces the requirement of a translation of exhibits in English filed by a party before it unless the other party or parties object thereto.

It is proposed that submissions may be drafted in English in the future. The aim is to avoid translation expenses for the parties. Bearing in mind that the proposed revision does not impact existing restrictions applicable to foreign lawyers to represent parties before the Federal Tribunal, the parties who/which were represented in arbitral proceedings by a lawyer not admitted to represent such party before the Federal Tribunal may be tempted to have such lawyer draft the submission(s) and have it (them) filed by a local lawyer in his/her own name as this would avoid the need to inform the local lawyer of the specifics of the dispute (in some cases perhaps the need for translation) and the related costs. This may however be a miscalculation, aside from political considerations of protectionism, professional ethics or civil liability issues. Indeed, neither the limited grounds for challenging an arbitral award nor the very stringent formal requirements relating to the drafting of the submissions (particularly the recourse), which both explain the very low success rate of challenges of arbitral awards in Switzerland, will be altered in the revised law. The purpose sought with this proposal is solely to avoid translation costs with the Federal Tribunal not to facilitate challenges of awards. No amendment of the FTA with regard to the language of the decision is foreseen such that the decision will still be rendered in an official language (but which one?). Lastly, this proposal may be regarded with some reluctance not only by Swiss lawyers but by the federal judges themselves.

IV. What the Federal Council has decided not to amend

Tomorrow like today, jurisdictional objections will be examined differently depending on whether the seat of the arbitral tribunal is in Switzerland (in which case art. 7 SPILA will apply) or abroad (in which case art. II/3 of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards will apply).

The scope of the examination by the judge seized of an action in a matter in respect of which the parties have entered into an arbitration agreement will continue to be limited to a summary examination when the seat of the arbitral tribunal is in Switzerland whereas the scope of the judge’s examination will be full whenever the seat of the arbitral tribunal is abroad.

To justify the status quo, the Federal Council refers to the Federal Tribunal, which expressed the view that when it is seized of a recourse against an award, it has full power to review whether the arbitral tribunal rightly or wrongfully declared itself competent whenever the seat of the arbitral tribunal is abroad. One may however argue that instead of ruling on this point from the outset with full examination, the narrow scope of examination of the judge entails the risk of being counterproductive in the event the Federal Tribunal later denies the arbitral tribunal’s competence, in which case the parties will have lost time and money (subject to article 186 I bis in fine SPILA).

The idea of a sole “juge d’appui” was also rejected for reasons relating to the federal structure of the State had a cantonal tribunal acted as the national local judge (why such cantonal tribunal rather than another?) and because this task would have interfered with the Federal Tribunal’s duty had it been chosen to act in such capacity for its task must remain that of the uniform application of federal law in the country. Besides, it would have required the judges composing the tribunal in its contemplated capacity as local judge to recuse themselves in the event of a later recourse against the arbitral award. The creation of a separate federal judicial instance was regarded as disproportionate.

V. Conclusion

The proposed amendments do not dramatically reshape the existing chapter 12 of the SPILA but tend to update it and make it easier to use and thus more appealing. The draft bill will be available for consultation until 31 May 2017.

More from our authors:

The post Switzerland to Become More Attractive for International Arbitration appeared first on Kluwer Arbitration Blog.

The Protection of Investments in Disputed Territories: A Panel Hosted by BIICL’s Investment Treaty Forum

Tue, 2017-05-16 23:15

Asaf Niemoj

On March 14th the Investment Treaty Forum at The British Institute of International and Comparative Law hosted a panel of experts to discuss practical and legal aspects of investments protection in the context of territorial disputes.

Territorial disputes sometimes lead to the annexation of the territory of one state by another, of which the annexation of Crimea by the Russian Federation is a good example. International Law provides for the means intended to apply in cases of territorial transfer. However, these concern cases of lawful changes of sovereignty, and not the circumstances described above where no lawful transfer of territory occurred. The result is that investors that were normally protected by treaties signed by the predecessor state may find themselves with no legal recourse. Different legal questions regarding what is, apparently, a legal vacuum emerge; in particular, the possibility that treaties signed by the annexing state would apply in the annexed territory.

Professor Yarik Kryvoi, head of the Investment Treaty Forum, who chaired the panel, introduced the reasons behind the decision to hold such seminar. He spoke about the importance of the issue in light of the many ongoing territorial disputes around the world. Examples of such disputes are the West Sahara-Morocco dispute, The Occupied Palestinians Territories-Israeli dispute, disputes in the South China Sea, Cyprus-Turkey dispute and, more recently, the dispute between the Ukraine and The Russian Federation regarding the Crimea Peninsula.

He further mentioned that large countries are currently involved in territorial disputes – Russia, France, China and India. He pointed out that, surprisingly, the control over territories is the subject of disputes which are currently pending even in Western Europe.

This background makes it clear that protection of investments in disputed territories is a hot and still relevant topic. Professor Kryvoi introduced a panel of experts among them Dr. Daniel Costelloe of WilmerHale and Dr. Tom Grant, of Cambridge University.

The Territorial Application of Treaties and Succession to Investment Treaties in Annexed Territory

Dr. Daniel Costelloe began his presentation by giving a general description of the territorial application of treaties under general international law and, more specifically, the application of the moving treaty-frontiers rule. He discussed these rules with a focus on the question whether an investment treaty applies territorially in annexed territory. Specifically, he analyzed the rule reflected in Article 29 of the Vienna Convention on the Law of Treaties and in Article 15 of the Vienna Convention on Succession of States in Respect of Treaties in the context of annexed territories.

Dr. Costelloe emphasized that the term ”territory” in Art 29 and Art 15, respectively, refers to territories over which the treaty party has sovereignty in accordance with international law. In light of this reading, he concluded that, in the event of an annexation of territory, Art 29 and Art 15 respectively do not apply, because no legal transfer of territory occurred. He noted, at the same time, that in the event of an annexation of territory the application of the moving treaty-frontiers rule becomes difficult.

The second issue Dr. Costelloe addressed concerned the interpretation of references to the term “territory” in treaty provisions, again in the context of annexed territory. The provisions of investment treaties and other types of treaties typically refer to the treaty parties’ territory. Dr. Costelloe cautioned that in interpreting and applying a treaty provision referring to a party’s “territory” a tribunal might be required to take at least some position with respect to the territorial dispute.

Dr. Costelloe pointed out two potential objections to a tribunal’s jurisdiction in these circumstances. First, a respondent, annexing state could – theoretically – object to the tribunal’s jurisdiction on the basis that the treaty does not apply in the annexed territory. This objection is extremely unlikely, however, because it is inconsistent with the annexing state’s claim for the territory. The more likely strategy would simply be non-appearance.

A second potential jurisdictional objection is that a tribunal cannot hear a claim if deciding the claim would require the tribunal to make a legal determination in relation to the underlying territorial dispute. Dr. Costelloe noted that this objection is a plausible one, in light of an investment treaty’s functions – to decide investment disputes rather than territorial disputes – and the jurisdictional limitations it operates under in doing so.

Dr. Costelloe’s conclusions were –

• Where an annexation of territory leads to a de facto, if not a legal, transfer of territory, a strict application of the rule reflected in Articles 29 and 15 mentioned above has the potential to lead to injustice.
• In certain circumstances, there may be room to acknowledge a limited exception to the moving treaty-frontiers rule, even in relation to treaties, such as investment treaties, that, unlike human rights treaties for example, prima facie do not call for extraterritorial application.
• It seems possible to acknowledge such a limited exception without prejudice to the merits of the underlying territorial dispute.

The Ukraine – Russia BIT: The Crimea Case

Dr. Tom Grant spoke about the annexation of the Crimea Peninsula by the Russian Federation and arbitrations which emerged from it.

He mentioned the proceedings instituted by Ukraine against Russia in the International Court of Justice. Ukraine argues, inter alia, that, Russia being a party to the Committee on the Elimination of Racial Discrimination (CERD) and Russia in fact controlling Crimea, the legal obligations under CERD follow Russia to Crimea. Similar argumentation would seem to underpin the claims of investors against Russia under the Russia-Ukraine BIT.

In the arbitrations now pending it seems that Russia will not appear. Nevertheless, each tribunal must ordinarily decide whether it has jurisdiction to hear the case or not and give reasons for its decision. Dr. Grant suggested potential jurisdictional problems, including:

Firstly, the Russia-Ukraine BIT specifically provides that “territory” means territory held in “conformity with… international law”. This proviso might lead to the conclusion that the BIT does not apply in Crimea. To deal with this problem Dr. Grant suspects that, like Ukraine at the International Court, the claimants in the BIT cases will say that the substantive protections of the relevant treaty apply to the occupied territory. The difficulty for the BIT claimants is that the BIT might be interpreted to cover a narrower range of situations than CERD Art. 3 or ECHR Art. 1. Critical will be how much a tribunal is willing to interpret these jurisdictional terms as analogous. BITs might be assimilated into a general category of human rights protections—at a level of principle; but as a matter of practical application each treaty must be interpreted and applied on its own terms.

Secondly, a further potential obstacle which might prevent the application of the BIT is that Ukrainian national law now seems to prohibit investments in the occupied territories. Because the BIT requires investments to be in conformity with national law — including, expressly here, of the sending State — this might prevent a tribunal from applying the BIT. A possible rebuttal is that national law does not alter rights and obligations under international law, certainly not ex post adoption of a national law. Practice, though rich in claims about host State laws, is sparse in regard to laws of the State of origin.

On a final note, Dr. Grant suggested that, if one or more of the investment tribunals indeed finds that jurisdiction is lacking, then a future possibility is that Ukraine invokes Art 10 of the BIT to institute proceedings against Russia in regard to a dispute over the interpretation of the BIT.

More from our authors:

The post The Protection of Investments in Disputed Territories: A Panel Hosted by BIICL’s Investment Treaty Forum appeared first on Kluwer Arbitration Blog.

The Ansung Tribunal Gives Its Views On Allocation of Costs Under ICSID Arbitration Rule 41(5)

Tue, 2017-05-16 05:10

Shiyu Wang

On March 9, 2017, a three-person ICSID Tribunal rendered an Award in Ansung Housing Co., Ltd. v. People’s Republic of China.  The case marks the second time where China appears as a Respondent before an ICSID tribunal.  The first case was brought by a Malaysian company in May 2011, but that case was discontinued on May 16, 2013.  The Ansung Tribunal accepted China’s Rule 41(5) objection and dismissed a claim filed by a Seoul-based property developer, Ansung Housing Co. Ltd. (“Ansung Co.”), finding that the Korean company failed to sue within the three-year statute of limitations prescribed under the applicable investment treaty.  The case raises interesting issues concerning costs.

 

Summary

In December 2006, Ansung Co. entered into an investment agreement with the local government of Sheyang County in China’s Jiangsu Province.  The agreement provided Ansung Co. with the exclusive right to build a golf course.  The local government promised to provide the company 200 hectares of land in two phases to build a 27-hole golf course.  In 2009, Sheyang Island Park, a Chinese-local company, started operating an 18-hole golf course in the same area and the local government took no measures to enjoin this alleged illegal operation.  In November 2010, the local government refused to provide Ansung Co. the second phase of 100 hectares of land.  In 2011, without the planned full course, and facing competition from Sheyang Island Park, Ansung Co. was unable to profit and had to pull back its entire investment and sell the golf course, resulting in a total loss of more than CNY100 million (USD14.5 million).

 

According to Article 9(7) of the China-Republic of Korea BIT, “an investor may not make a[n international arbitration] claim . . . if more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, knowledge that the investor had incurred loss or damage.”  Ansung Co. filed its claim on October 7, 2014.  It argued that it first acquired knowledge of its loss or damage on December 17, 2011, after the deal to sell its entire investment in Sheyang-County was closed, so it was still within the three-year period.  China argued, however, that Ansung Co. first acquired knowledge of its loss or damage as early as 2007, when Ansung observed the development of a competing golf course at Sheyang Island Park.  The competing golf course went into operation in 2009, which is well before October 2011.  Pursuant to Rule 41(5), China requested the Tribunal to dismiss Ansung Co.’s claim because the claim was time-barred and, thus, manifestly lacked legal merit.  The Tribunal agreed.

 

Ansung Co. also sought to invoke the MFN clause in Article 3(3) of the China-Republic of Korea BIT to import a provision from a BIT entered into by China with Third States that did not prescribe a temporal limitation for an investor brining a claim against the host.  The Tribunal disagreed, stating that Article 3(3) does not extend to MFN treatment for a State’s consent to arbitrate with investors—specifically not to the temporal limitation period in Article 9(7).

 

Ansung Tribunal Provides Guidance on Allocation of Costs in Rule 41(5) cases

Rule 41(5) allows a Respondent-State to raise an objection that a claim is manifestly without legal merit at the preliminary stage.  If the objection is sustained, the claim will be dismissed. Before Ansung, there were only five ICSID cases on Rule 41(5): Trans-Global Petroleum, Inc. v. Jordan, Brandes Investment Partners, LP v. Venezuela, Global Trading v. Ukraine, RSM Prod. Corp. v. Grenada and MOL Hungarian Oil & Gas Co. Plc v. Croatia.

 

By way of background, Article 61(2) of the ICSID Convention gives the tribunal discretion to allocate costs of the arbitration as it deems appropriate.  Prior to the Ansung Award, two of the Rule 41(5) cases discussed above were dismissed.  Neither case, however, provided a complete picture of the tribunals’ consideration on allocation of costs.  In Global Trading, the tribunal devoted one paragraph at the end of the decision on the matter.  It briefly mentioned two factors relevant to the allocation of costs: the newness of the Rule 41(5) procedure and the reasonableness of both parties’ arguments.  Since the rule was introduced only four years before Global Trading was brought, and since the parties’ arguments were both reasonable, the tribunal adopted the “pay-your-own-way” approach and ordered both parties to cover their own costs.   In RSM, the same year when Global Trading was decided, the tribunal did not consider Rule 41(5)’s novelty at all and applied the “cost follow the event” principle, finding that claimant was liable for 100% of respondent’s legal costs, the fees and expenses of the tribunal, and the administrative fees and expenses of the ICSID.

 

Unlike Global Trading and RSM, the Ansung Tribunal provided a detailed analysis on allocations of costs in Rule 41(5) cases.

 

First, novelty is not within a Tribunal’s consideration for costs anymore.  Global Trading, was decided in 2010 and now in 2017, according to the Ansung Tribunal, the Rule 41(5) procedure can no longer be considered new.  Even if accepting that “MFN applies to temporal limitation” as a novel legal question, such novelty would not be considered by the Tribunal in its allocation of costs.

 

Second, neither Claimant’s unfortunate position nor its efficiency in the Rule 41(5) procedure provide a good reason to allocate costs in its favor.  Ansung Co. submitted that it is a small investor that had already suffered substantial loss because of China’s action. Ansung Co. also asserted that it had pursued its claim in good faith, on sound substantive grounds, and “in the most procedurally efficient and economical manner.”  The Tribunal, however, found that none of these points were relevant to the allocation of costs following a successful Rule 41(5) objection.

 

Third, the Tribunal focused it analysis on the reasonableness of the Respondent’s costs claim.  Ansung Co. cited to a non-Rule 41(5) case—Romak v. Uzbekistan—and submitted that there is a general practice in investment arbitration disfavoring the shifting of arbitration costs against the losing party.  China disputed this and cited RSM where the tribunal applied the “costs follow the event” principle.  The Tribunal made clear that it did not need to venture into a discussion on either the “costs follow the event” or “pay-your-own-way” approaches.   Instead, the only question left was the reasonableness of Respondent’s costs claim.

 

The Tribunal ultimately found Respondent’s costs claim to be disproportionate to its Rule 41(5) objection submission and excessive given the one-day hearing.  As a result, the Tribunal decided to award China its share of the direct costs of the arbitration proceedings plus 75% of its legal fees and expenses.

 

Implications

According to its timeline, Ansung was registered by the ICSID on November 4, 2014, and the Award was rendered on March 9, 2017 – about two years and four months later.  Considering the usual lifespan of ICSID cases, Ansung is likely to encourage future respondent-States to utilize Rule 41(5) objections effectively.  Under English common law, a similar preliminary procedural mechanism is generally known as “motion to dismiss”.  In the United States, under Rule 11 of the Federal Rules of Civil Procedure, if a motion to dismiss is granted due to lack of support for pleadings, a court may impose sanctions against the violating attorneys and litigants.  In March 2017, the U.S. House of Representatives passed H.R. 720 to make Rule 11 sanctions mandatory.

 

While there are only six Rule 41(5) tested cases, based on the analysis in Ansung, after finding meritless claims, it is likely that tribunals would focus mainly on the “reasonableness” of the costs claimed, and no longer consider the “novelty” of the rule in allocating the costs.  But should future parties also worry about the risk of being sanctioned for bringing manifestly unmeritorious claims before tribunals?

 

On one hand, although sanctions are uncommon in arbitration, there are institutional rules such as  Article 18.6 of LCIA Arbitration Rules (2014) which allow the tribunals to order sanctions against counsels who has violated the general guidelines of the rules.  Also, in ICSID arbitration proceedings, the discretion to allocate costs does give tribunals some form of a weapon to use to sanction parties.  For example, in Kim v. Uzbekistan, the tribunal held the respondent responsible for claimants’ entire expert cost (£259,519.76) because respondent’s counsel, in violation of “attorney’s eyes only” procedural order, copied a high-ranking government official on an email that contained confidential information.

 

On the other hand, given the preliminary nature of Rule 41(5), the dismissal of claims and the obligation to pay most, if not all, of the arbitration costs already function as “sanctions” against losing parties.  Rule 41(5) should be utilized to strike a balance between the need to save time and costs and the guarantee of due process in arbitration proceedings.  An actual sanction in addition to a dismissal would probably tip the balance by deterring claimants from bringing their claims.

More from our authors:

The post The Ansung Tribunal Gives Its Views On Allocation of Costs Under ICSID Arbitration Rule 41(5) appeared first on Kluwer Arbitration Blog.

Bolivia’s Step Back in State Arbitration

Sun, 2017-05-14 22:40

José Carlos Bernal Rivera

As reported in the excellent piece by Alejandro López Ortiz and Gustavo Fernandes in “A Year of Legal Developments for International Arbitration in Latin America”, Bolivia may have taken a step back in State arbitration with the passing of its new act on arbitration in 2015. The article remarks the limitations to arbitrability introduced by the new act, and the investment arbitration chapter of the act, which intends to provide a domestic arbitration framework for both national and foreign investors in Bolivia. The goals of these and other provisions of the new act are to keep arbitration proceedings (even investment arbitrations involving foreign investors) inside the country and subject to Bolivian law and its authorities.

So, how far does the new Bolivian arbitration act go in its intent to keep State arbitration inside the country? Aside from whether this mechanism will attract foreign investments, it is interesting to analyze the Bolivian proposal. Why is the government so disenchanted with international arbitration? How is the act’s investment arbitration chapter supposed to work? Are these limits to international arbitration a brand new feature of this act, or just a reflex of the policies implemented by the government since 2006? This brief article will try to dig deeper in the current situation of Bolivia, and the great lengths it is willing to go in order to avoid any more international arbitration cases involving the State or State entities in the future.

 

International arbitration boom in the last decade in Bolivia

In the last decade, a large amount of arbitration claims were filed against Bolivia as a result of investment disputes between foreign nationals and the State. The nationalizations carried out by the government of Mr. Evo Morales since he was elected to the Bolivian presidency in 2006, have, predictably, brought a large array of foreign investors to the negotiation table for reaching settlements with the government, and in several cases to arbitration instances. Bolivia promptly proceeded to withdraw from ICSID in 2007, becoming the first country in history to take this step.

Euro Telecom International reached a settlement agreement with Bolivia for approximately US$ 100 million for the nationalization of the telecom company ENTEL. Ashmore Energy International and Shell reached another settlement agreement with Bolivia in 2009 for US$ 241 million for the nationalization of pipeline infrastructure, and Pan American Energy settled with Bolivia for US$ 498 million in 2014 for the nationalization of the oil company “Chaco.”

Other companies were not able to reach settlements and opted for arbitration. Chilean company Quiborax was awarded US$ 48.6 million by an ICSID tribunal. Red Eléctrica of Spain was awarded US$ 65 million for the nationalization of its shares in the Bolivian company “TDE”. The Canadian company South American Silver is seeking US$ 385 million for the nationalization of the “Mallku Khota” mine in Bolivia, and Glencore has recently filed, in August 2016, a new arbitration claim against Bolivia for the nationalization of “Vinto” and “Colquiri” mines, for which the parties were initially negotiating a settlement agreement, which was unsuccessful. There are several other cases, but these are enough to illustrate the point.

It is not possible to say that Bolivia´s disenchantment with investment arbitration in international fora is based solely on the results of these cases. Bolivia’s policy rather fits well with the general discourse of the government regarding the recovery of natural resources from transnational companies. In 2009, the Bolivian Constitution was completely modified in order to implement the new policies of the government.  One of the most remarkable changes was that of article 366, which states that all foreign companies operating within the oil and gas industry in Bolivia are bound to Bolivian sovereignty and authorities, and that “[n]o foreign jurisdiction or international arbitration will be accepted in any case […].”  This is the first and only mention of the word “arbitration” in the Bolivian Constitution.

Against this background, the policies of the 2015 arbitration act are definitely not new. The ICSID withdrawal, the 2009 Constitution and, the repeal of key pieces of legislation (such as the repeal of the investment law which was in place since the nineties) were revealing factors regarding the shift in the investment policies of the government, and they all took place several years before the enactment of the new arbitration law of 2015. It is likely that the high amounts paid by the Bolivian government for the nationalizations were a contributing factor for the step back of Bolivia in State arbitration, although some people claim that the amounts paid actually reflect good results, if they compare to the amounts sought by the investors in the first place.

 

The “investment arbitration” chapter of the Bolivian act

This second part of the article analyzes the content of the new act in regards to investment arbitration in Bolivia and subject to Bolivian law. How would an investment arbitration case involving a foreign company be conducted in Bolivia?

One of the most important realizations about this chapter of the Bolivian act is that it might not be applicable to many of the foreign companies doing business in the country. Here is why. There are several restrictions to the participation of foreigners in some industries of the Bolivian economy (all in accordance to the general discourse of the current government, as explained in the first part of this article). The “strategic” sectors of the economy, which include some of the largest industries in Bolivia, such as oil, gas, mining and electricity, are reserved only for State-owned entities. Any participation of foreign companies in these industries can only be made in close connection with State-owned companies. This means that State-owned companies would either need to hire foreign companies to provide services (in which case the foreign companies would probably not be doing investments per se), or they would need to associate with the foreign companies in a sort of joint venture enterprise or “PPP.” The second scenario is less common in practice than the first.

It seems like the investment chapter of the Bolivian law has in mind the rather uncommon scenario of mixed enterprises in which both State and the foreign company associate. This chapter of the law envisages two scenarios: one dedicated to Bolivian investment and, one dedicated to mixed investment and foreign investment. The terms “Bolivian investment”, “mixed investment” and “foreign investment” are not defined in the arbitration act, but their exact definition can be gathered from the Investment Promotion Act of April, 2014.

If a foreign company and a Bolivian State-owned company associate to work in a strategic sector of the Bolivian economy, this would probably be considered a mixed investment (it cannot be a “foreign investment”, because of the restrictions applicable to strategic sectors of the economy). In such a case, internal disputes between the two partners might be considered investment disputes, which the parties could potentially submit to the investment arbitration procedure established under the new act. What would such an investment arbitration case look like?

The investment arbitration chapter of the new Bolivian act establishes several mandatory provisions that will be applied to investment cases, thus limiting the right of the parties to freely determine the characteristics of the procedure in their arbitration agreement. The law mandates that, before submitting to arbitration, the parties must first engage into a conciliation process. The lex arbitri will be Bolivia’s, and the arbitration would be deemed local, not international (though the audiences can take place abroad). The arbitral tribunal must necessarily be composed of three arbitrators, and the arbitration cannot be ex aequo et bono, it must be decided under Bolivian law.

By far, the most relevant restriction in the investment arbitration chapter is that of the lex arbitri. The act mandates that the procedural laws applicable to investment arbitration cases be Bolivian law, which means that any annulment claim sought against an arbitral award issued in an investment case against Bolivia, would be reviewed by Bolivian courts. This is, as you can imagine, far from ideal for a foreign company. If the seat of the arbitration is that of the country against which the company has filed the claim, then many of the most attractive features of the institution of arbitration as an ADR mechanism are diminished.

 

Conclusion

There seems to be several reasons that have pushed Bolivia to withdraw from ICSID and try to establish a local alternative structure for investment arbitration cases. It is also clear, however, that the “local option” in the new arbitration law does not really offer a completely neutral forum for investors, and this might be a potent deterrent for investment. Bolivia must consider the possibility that, by trying to keep investment arbitration cases inside the country, it might be keeping foreign investment outside of it altogether.

More from our authors:

The post Bolivia’s Step Back in State Arbitration appeared first on Kluwer Arbitration Blog.

Enterprises in China’s Free Trade Zones Enter 2017 with New Options for Arbitration

Sat, 2017-05-13 20:03

Arthur Dong and Darren Mayberry

On December 30, 2016, the Supreme People’s Court (“SPC”) issued a set of new Opinions. It covers an array of matters relating to legal measures to expedite the development of Free Trade Zones. (Opinions on Providing Judicial Protection for the Construction of Pilot Free Trade Zones, December 30, 2016). Among other matters, the SPC sought to open the Free Trade Zones to further options regarding alternative dispute resolution. Remarks made in Article 9 have effectively designated as Foreign Per Se any Wholly Foreign-Owned Enterprises which are registered in one of 11 current Free-Trade Zones. In three brief paragraphs, the SPC seems to have shifted the landscape for China-based arbitrations. The immediate practical significance of the Opinions may remain humble and limited. In time, the SPC’s Opinions may permit increased deference and jurisdictional purview to foreign tribunals. It also may serve as the beginning of ad hoc arbitration in China.

This note will review the necessity for arbitral institutions under Chinese arbitration agreements. It will also examine the foreign-element requirement necessary to escape the Chinese arbitral institution requirement, while reminding that all China-registered enterprises are Chinese. After summarizing the landscape ahead of the Opinions, the note will then look at the substance of the Opinions. This note then analyzes the expansion of foreign arbitral jurisdiction. It will subsequently consider practical implications. Before the note concludes, it will survey how the Opinions will affect arbitration practitioners and organizations related to the Free Trade Zones.

The Necessity for the Selection of an Arbitration Institution under Chinese Law

Chinese law mandates institutional arbitration of domestic disputes. Article 16 of China’s Arbitration Act requires each arbitration agreement to designate an arbitration commission. Under Article 18 of the Act, lack of clarity on this point may defeat even the validity of the arbitration agreement.

Foreign Arbitration Institutions and the Foreign Elements Requirement

Chinese courts uniformly recognize and enforce foreign awards, including the awards of foreign arbitration institutions and ad hoc tribunals, provided that genuine foreign elements arise throughout the transaction. The foreign elements test will often be satisfied when one of the parties is a foreign-registered company. When both parties are domestic entities, and no other element can connect the dispute to another jurisdiction, selecting offshore arbitration can lead to unnecessary risk and uncertainty.

WFOEs and FIEs as Domestic Entities

Wholly Foreign-Owned Enterprises (“WFOE”) are foreign-owned Chinese entities. Similarly, Foreign Investment Enterprises (FIEs) are Chinese companies, even though they may be entirely foreign-owned (i.e., WFOEs) or only partially foreign owned (joint-ventures).

Enter the Opinions

FIEs may benefit from favorable treatment with regard to arbitration, but they must be registered in one of China’s 11 Free-Trade Zones (FTZs). WFOEs within FTZs will receive particularly favorable arbitration treatment. FTZ-based enterprises may engage in ad hoc arbitration, subject to rather stringent requirements.

First, the SPC has determined that two FTZ-registered WFOEs satisfy the foreign-element test such that they may submit to arbitration agreements seated in foreign jurisdictions. For now, at least, both parties must be WFOEs to qualify. As for FIEs more generally, the SPC has permitted courts to validate such agreements (or not). Accordingly, people’s courts are also to dismiss challenges to recognize or enforce resulting awards when the moving party has either (1) initiated arbitration or (2) failed to object during the arbitration procedure. Objections must challenge the violation of public policy relating to the foreign-element test.

Second, the SPC states that FTZ-registered enterprises may not need to engage supervision of an arbitration commission for China-based arbitration procedures. This applies even FTZ enterprises without foreign investors. Importantly, the enforceability of any ad hoc arbitration will hinge on the satisfaction of three specific requirements. The arbitration clause must designate a specific particular place on the Mainland, a specific (set of) arbitrator(s), and a specific arbitration rule.

Domestic FTZ parties commencing arbitration under an ad hoc arbitration agreement, or even under an agreement designating a foreign institution, could face a challenge to the validity of that agreement. Such a challenge would most likely bring the matter before a People’s Court. Before People’s Courts can declare such clauses invalid, they must report these cases to the higher courts. Likewise, higher courts that agree with the lower court concerning the invalidity of the clause must also report to the SPC for final review.

Two WFOEs qualify as Foreign

The SPC’s Opinions newly opens a classification for WFOEs, one once reserved exclusively to strictly non-domestic companies. WFOEs registered in FTZs are now foreign enterprises. As for FTZ-based non-WFOE FIEs, the Opinions offers a path to enforcement of foreign awards, while also leaving a last opportunity for an opposing party to mount a jurisdictional challenge. This Foreign designation only encompasses those Wholly Foreign-Owned Enterprises registered in one of 11 Free-Trade Zones. Two WFOEs, each registered in a Chinese FTZ, may securely arbitrate their disputes abroad. Unlike a completely foreign-registered company, a single WFOE contracting with a domestic company outside an FTZ may be able or unable to satisfy the foreign elements test, depending on the specific circumstances, the overall nature of the transaction, and other factors.

The Opinions may be the beginning step, therefore, and not the final word, towards the modernization of China’s arbitration regime. And it follows a track not entirely unfamiliar; that of the pursuit of progress through a gradual opening to the outside.

The WFOE FTZ-registration synthesizes existing notable Chinese cases. Two recent cases confronted matters concerning the recognition and enforcement of foreign arbitrations. In the 2015 Golden Landmark v. Siemens ITL case,1)Siemens International Trading (Shanghai) Co., Ltd vs. Shanghai Golden Landmark Co., Ltd (2013) Hu Yi Zhong Min Ren (Wai Zhong) Zi No. 2 (2015) (Shanghai No. 1 Intermediate People’s Court). jQuery("#footnote_plugin_tooltip_8334_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8334_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Shanghai’s First Intermediate Court found a foreign-relation arose simply because both companies were registered in the Shanghai Free Trade Zone. Additionally, it was critical to the decision to enforce the SIAC award that the sources of capital, allocation of income, and governance of the companies were all closely related to foreign investors. Notably, the objecting party had already performed some of the award and had acquiesced to the SIAC tribunal’s authority in other ways. As for the 2013 Chaolaixinsheng case,2)Beijing Chaolaixinsheng Sports and Leisure Co., Ltd. v Beijing Suowangzhixin Investment Consulting Co., Ltd., (2013) Er Zhong Min Te Zi No. 10670 (2014) (Beijing No. 2 Intermediate People’s Court). jQuery("#footnote_plugin_tooltip_8334_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8334_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the SPC came to a different conclusion and refused to recognize or enforce a KCAB award. The Beijing-based companies had little reason to resolve their dispute abroad. The only foreign relation was tenuous; the owner of one of the companies was a Korean citizen. The recent Opinions clarifies that the divergent results were indeed a meaningful product of the differing factual circumstances.

Practical Implications

This note will make an early attempt to assess some immediate and several eventual practical implications of the SPC’s Opinions. Initially it considers the perspective of foreign jurisdictions, tribunals, and practitioners. Then it looks at the effect on Chinese enterprises in the FTZs, and thereafter WFOEs in the FTZs.

For Foreign Jurisdictions, Tribunals, Practitioners

The SPC appears to have left room for foreign tribunals to assume kompetenz-kompetenz over proceedings involving two Chinese parties. In other words, if an FTZ-based (non-WFOE) FIE bears an agreement which has seated the arbitration outside of China, a party challenging jurisdiction may raise the question to the tribunal of whether the foreign elements in the transaction are sufficient to grant it jurisdiction. After all, the Opinions now instructs Chinese courts to recognize and enforce the final awards of foreign tribunals with regards to FTZ-centered FIEs. At the same time, it leaves open whether the commercial arrangements of such FIEs would contain foreign factors sufficient to allow for the validity of foreign arbitration.

This may lead to an interesting phenomenon. Non-Chinese jurisdictions, perhaps particularly Hong Kong and Singapore, may eventually develop ‘foreign’ case law resolving what particular circumstances may satisfy the various factors in the foreign elements test. After all, respondents would be well within their rights to raise objections to jurisdiction against non-WFOE FIEs under China’s public policy prohibition against foreign institutions adjudicating domestic disputes.

Therefore, the SPC’s clarification of Chinese law on the jurisdiction of foreign tribunal and foreign-related elements may do more than simply provide a foundation for foreign tribunals to handle disputes from China-based parties. It could open a small aspect of Chinese law to the world. Small perhaps, but potentially very influential.

Foreign tribunals and district courts abroad should strive to apply the foreign-related tests faithfully, factually, and with special care. Otherwise, the SPC may exercise its power to issue corrective guidance to restrain too liberal findings of foreign-related elements.

On the other hand, no foreign case law may ultimately result regarding foreign-elements under Chinese law and public policy. Foreign arbitration institutions and foreign tribunals may reject all challenges to jurisdiction relating to non-WFOE FIE-involved arbitrations. For a number of reasons, Hong Kong and Singapore courts may define the approach that foreign courts follow when facing such controversies.

For Chinese Enterprises in the FTZs

Many questions and uncertainties remain regarding the opening of ad hoc arbitration. Therefore, the initial practical ramifications of the Opinions on ad hoc arbitration may prove limited. Commercial enterprises are unlikely to crowd towards ad hoc arrangements. Each such ad hoc arbitration agreement would entail a certain challenge to validity soon after commencement of arbitration. Nonetheless, the SPC has signaled that enterprises registered within Free Trade Zones may be able to operate arbitrations entirely differently than enterprises in regular areas. Careful drafters may avoid the controversy and eschew ad hoc arbitration altogether. Likewise, the Opinions demands too many special requirements to save the handful of ‘mistakenly’ drafted arbitration clauses that are already out there.

Chinese enterprises will find the Opinions has cracked the door for ad hoc arbitration, but only just so. FTZ-based enterprises might reasonably fear what lies just on the other side. Not many Chinese enterprises will be too eager to experiment. And yet, the SPC may have nudged ad hoc arbitration forward just enough to gather some momentum.

For Wholly Foreign-Owned Enterprises in the FTZs

The SPC and its Opinions have just handed WFOEs registered in FTZs an unambiguous windfall. They can arbitrate abroad without fear of challenge to the validity of their agreements. Few WFOEs would have dared to arbitrate abroad before due to fears of enforcement complications. Now they can confidently opt to do so.

Concluding Remarks

Published on December 30, 2016, Article 9 of the SPC’s Opinions relating to Free Trade Zones will influence Chinese arbitration well into the coming decade. The Opinions certainly provides for favorable arbitration treatment for enterprises within the Free Trade Zones. That treatment will favor WFOEs in particular, and FIEs generally. Foreign enterprises and foreign arbitral institutions will find much to welcome within the brief three paragraphs of the Opinions. Both international and Chinese arbitration professionals must look now to the National People’s Congress for further and more expansive reform. Presumably, everyone in the international arbitration community looks forward to the SPC resolving the open questions and subsequent controversies in a reasonable and pro-enforcement manner.

References   [ + ]

1. ↑ Siemens International Trading (Shanghai) Co., Ltd vs. Shanghai Golden Landmark Co., Ltd (2013) Hu Yi Zhong Min Ren (Wai Zhong) Zi No. 2 (2015) (Shanghai No. 1 Intermediate People’s Court). 2. ↑ Beijing Chaolaixinsheng Sports and Leisure Co., Ltd. v Beijing Suowangzhixin Investment Consulting Co., Ltd., (2013) Er Zhong Min Te Zi No. 10670 (2014) (Beijing No. 2 Intermediate People’s Court). 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:

The post Enterprises in China’s Free Trade Zones Enter 2017 with New Options for Arbitration appeared first on Kluwer Arbitration Blog.

Australia’s International Arbitration Act Amendments: Rejuvenation by a Thousand Cuts?

Sat, 2017-05-13 04:33

Luke Nottage

On 22 March 2017, with minimal fanfare, the Civil Law and Justice Amendment Legislation Bill 2017 (“2017 Bill”) was introduced into the upper house of the federal Parliament. Buried within this omnibus Bill were four proposed reforms to the International Arbitration Act (IAA), renamed as such in 1989 when Australia was one of the first jurisdictions to adopt the UNCITRAL Model Law (after having incorporated the New York Convention in 1974). This follows other amendments to the IAA enacted in 2015 through two other omnibus Bills.

The series of recent amendments raises the question of whether law reform in this field is better achieved through such a piecemeal process, or instead in a more comprehensive fashion involving greater public consultation.

The 2015 Amendments

The Civil Law and Justice Legislation Amendment Act 2015 had basically filled a “legislative black hole” for certain pre-existing international arbitration agreements. This complexity arose from the interaction of the 2010 IAA amendments with new uniform Commercial Arbitration Acts (CAAs) made applicable only to domestic arbitrations.

The Civil Law and Justice (Omnibus Amendments) Act 2015 addressed another problem with the 2010 IAA amendments highlighted soon after the new CAAs were enacted over 2010-17. The former had added provisions providing for confidentiality in international arbitrations, but on an opt-in basis, unlike almost all other provisions added to the Model Law framework. By contrast, the CAAs had provided a similar confidential regime for domestic arbitrations, but on an opt-out basis.

Commentators soon queried this inconsistency, against the backdrop of significant survey and more anecdotal evidence that confidentiality was perceived as one (mid-level) attraction of international arbitration over litigation of commercial disputes. It also seemed ironic that the new CAAs in effect had reversed the decision of the High Court of Australia in Esso v Plowman [1995] HCA 19 (arising from a domestic arbitration) that there was no presumption of confidentiality, yet the IAA in 2010 did not equally create a presumption of confidentiality for international arbitrations seated in Australia. The Civil Law and Justice (Omnibus Amendments) Act 2015 belatedly aligned the IAA with the CAA position, by making confidentiality similarly available on an opt-out basis. This set of legislative reforms in 2015 also made two other less practically significant amendments, which simply aligned the IAA more closely with the New York Convention regime for enforcing foreign arbitral awards.

The 2017 Bill

Practitioners and commentators on international arbitration in Australia were mostly caught by surprise by the 2015 amendments. Nor was there much forewarning of the third and latest tranche of legislative amendments. The federal Attorney-General’s Explanatory Memorandum for the 2017 Bill explains (at para 10) that these: (i) specify the ‘competent court’ for Model Law purposes, (ii) “clarify procedural requirements” for foreign award enforcement, (iii) modernise arbitrators’ powers to award costs, and (iv) deal with confidentiality related to arbitrations subject to the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration.

The first amendment corrects another drafting error dating back to when Part III of the IAA gave force of law to the Model Law from 1989. Namely, Section 18 still does not specify that the Federal Court (in addition to the State and Territory Courts) is a “competent court” for the Model Law award enforcement regime under Articles 35 and 36 (or to assist tribunals in taking evidence under Article 27). Nor is the Federal Court specified for the recognition and enforcement of interim measures under Article 17H, added in the 2010 amendments.

The Explanatory Memorandum (at para 307) notes that this omission “has led to costly and confusing litigation as to which courts have jurisdiction”. This presumably refers to the protracted TCL v Castel saga, where the Federal Court had to invoke instead the Judiciary Act to deal with a challenge to enforcement of an Australia-seated international arbitration award (see more here). Such awards remain relatively rare, but now that Australia is belatedly attracting some international arbitrations, it is high time to fix this drafting problem.

The second proposed amendment also responds to calls to align the IAA regime with the New York Convention, by amending s8(1) to clarify that a foreign award is binding between the “parties to the award” rather than between the “parties to the arbitration agreement” pursuant to which it is made. The Explanatory Memorandum notes (paras 293-5) that:

“In Altain Khuder  [(2011) 282 ALR 717] the Victorian Court of Appeal held that [s8(1)] may require the award creditor seeking to enforce an award against a non-signatory to the arbitration agreement to do more than simply produce the award and the putative arbitration agreement in an application to enforce a foreign award, for the onus to shift onto the award debtor to demonstrate why the award should not be enforced. … In Dampskibsselskabet [(2012) 292 ALR 161] Foster J declined to follow the Victorian Court of Appeal in Altain Khuder, holding that the simple evidential onus cast upon the award creditor by sections 8 and 9 of the Act is to produce the award and the putative arbitration agreement without more, even if the award debtor is not named in the arbitration agreement relied on. This decision is in line with international practice and represents the approach which should be adopted in all Australian jurisdictions.”

This is again a welcome reform, as commentators have criticised the approach adopted by the Victorian Court of Appeal.

Regarding the third proposed amendment, the Memorandum notes (at para 318) that IAA s27 currently

“refers to an arbitral tribunal’s power to make an award as to costs and to tax or settle the amount of costs to be paid and to award costs as between party and party or solicitor and client. The references to taxing costs on a party and party or solicitor and client basis are outmoded and inflexible in contrast to current practice in international arbitration.”

Lastly, the Memorandum explains (from para 311) that s22 will be amended to exclude the opt-out confidentiality provisions where parties to an Australia-seated arbitration have agreed to apply the UNCITRAL Transparency Rules. The Memorandum explains at paras 312-3 that:

“Australia is not presently a party to the Transparency Convention. However, should the parties to an investment arbitration, which is to be conducted subject to the Transparency Convention, agree that the seat of the arbitration should be in Australia, this amendment would prevent any conflict between the IAA and the Transparency Convention. This broadens the scope of arbitration work which can be conducted in Australia under the IAA.”

The Attorney-General does not indicate that his Department from at least 2 March 2017 was undertaking informal consultations as to whether Australia should ratify the Convention (which will enter in force six months after Switzerland’s ratification on 18 April 2017). Ratification is important to give the revised s22 more “bite”, since Australia has many earlier BITs allowing arbitration under UNCITRAL Rules but lacking transparency provisions, including the failed challenge by Philip Morris Asia.

Nonetheless, even Australia’s recent treaties allowing investor-state arbitration have not adopted the Transparency Rules – preferring instead to build in specific transparency provisions. Some commentators on the Bill have referred to the Korea-Australia FTA, signed on 8 April 2014. However, Side Letters exchanged on that date confirm that both countries will consult as to the future application of the Transparency Rules, but until any separate agreement they will not apply. There are similar Side Letters for the China-Australia FTA, signed on 17 June 2015.

Concluding Remarks

Overall, the latest set of IAA amendments usefully completes rectification of various legislative drafting errors and uncertainties associated with Australia’s incorporation of international arbitration instruments. The 2010 amendments had already added s8(3A) to clarify that the listed grounds for refusing enforcement of foreign awards were exhaustive, as envisaged by the New York Convention.

Yet at least some of these problems seem to have arisen because of insufficient public consultation. Only the 2010 amendments involved the Attorney-General releasing an Issues Paper and eventually uploading an initial round of public submissions. Even then, the government made further changes to its own Bill, without it being referred to a select committee. That step could have allowed another round of submissions, as well as oral hearings, to permit deeper analysis (including how best to deal with confidentiality, including associated court proceedings). Nor have the three subsequent sets of amendments been referred to a select committee, or even subject to a prior departmental issues paper or exposure draft. The respective Attorneys-General also have not taken the opportunity to task the Australian Law Reform Commission (ALRC) to examine such issues, in contrast for example to New Zealand in 2013.

Australia is now left with calls to deal with several more difficult IAA reform questions, reiterated by Albert Monichino SC in 2015. The government should therefore heed a recent call from the NSW Law Society to engage the ALRC for a more comprehensive review of “laws that hamper Australian courts and arbitrators being able to efficiently and effectively deal with cross-border disputes”.

More from our authors:

The post Australia’s International Arbitration Act Amendments: Rejuvenation by a Thousand Cuts? appeared first on Kluwer Arbitration Blog.

P&I Insurer’s Consent to U.S. Jurisdiction in Service of Suit Clause Does Not Override Contractual Right to Arbitrate

Fri, 2017-05-12 00:41

Jason P. Minkin and Nicole Gallagher

The question of whether the jurisdictional grant in a “service of suit” clause overrides an otherwise valid and enforceable arbitration clause in the same agreement has been addressed by several courts in the United States. See McDermott Int’l, Inc. v. Lloyds Underwriters of London, 944 F.2d 1199 (5th Cir. 1991); Neca Ins., Ltd. v. Nat’l Union Fire Ins. of Pittsburgh, PA, 595 F. Supp. 955 (S.D.N.Y. 1984); West Shore Pipe Line Co. v. Associated Elec. and Gas Ins. Services, Ltd., 791 F. Supp. 200 (N.D. Ill. 1992); New Hampshire Ins. Co. v. Canali Reinsurance Co. Ltd., 2004 WL 769775 (S.D.N.Y. April 12, 2004); Lloyds Underwriters v. Netterstrom, 17 So. 3d 732 (Fla. Dist. Ct. App. 2009).

These courts have recognized the distinct purposes of the two clauses, which allow them to co-exist in harmony in the same agreement. The arbitration clause provides a choice of forum for resolving disputes under the contract, whereas the service of suit clause requires a party to consent to the jurisdiction to enforce the arbitration award. See West Shore Pipe Line Co., 791 F. Supp. at 203-04 (arbitration awards are not self-enforceable and therefore, service of suit clauses can dictate the location of any action that might be necessary following arbitration in order to enforce the award).

On April 13, 2017, the United States District Court for the Southern of Texas reinforced this general proposition, that a service of suit clause is not intended to override the English arbitration clause in the same protection and indemnity (“P&I”) insurance policy, holding that the two clauses, by their plain language, are to be read in harmony with each other, with the arbitration clause requiring the parties to arbitrate the substance of their dispute in England under English law, and the service of suit clause requiring the insurer to submit to the jurisdiction of an appropriate United States court for enforcement proceedings. Gemini Ins. Co. v. Certain Underwriters at Lloyd’s London, Civ. No. 4:17-cv-01044 (S.D. Tex., April 13, 2017).

Gemini involved an insurance coverage dispute arising from a maritime personal injury accident. Paul Blasingame, a Jones Act seaman, was crushed between a wellhead and his assigned vessel, the M/V Rhea, while climbing onboard during operations for his employer, Galveston Bay Energy, LLC (“Galveston”). The seaman sued his employer and the owner of the vessel under the Jones Act in Texas state court. Among other insurance coverage, Galveston maintained primary P&I insurance through a Lloyd’s syndicate, issued through the Osprey Underwriting Agency, Ltd. (“Osprey”), and commercial umbrella liability insurance through Gemini Insurance Company (“Gemini”). Gemini and other insurers whose policies were also implicated agreed to fund their share of settlement of the maritime personal injury accident, whereas Osprey, on behalf of Lloyd’s, did not agree to settle. Gemini disputed the position taken by Osprey, ultimately agreeing to pay more than its share of the settlement and obtaining from Galveston an assignment of rights to pursue Osprey and Lloyd’s under the Osprey P&I policy.

The Osprey P&I policy contained a “Law and Practice Clause” which provided, in relevant part that, “[n]otwithstanding anything else to the contrary, this insurance is subject to English law and practice and any dispute under or in connection with this insurance is to be referred to Arbitration in London, ….” Pursuant to the Law and Practice Clause, Osprey, on behalf of Lloyd’s, commenced arbitration proceedings in England seeking a determination that it did not owe any money toward the underlying maritime personal injury settlement.

Gemini, in turn, sued Lloyd’s in Texas state court, alleging that it was subrogated to Galveston’s rights under the Osprey P&I policy and asserting various contract and quasi-contract theories of recovery. Gemini also sought injunctive relief preventing Lloyd’s from going forward with the English arbitration. The Texas state court granted Gemini a temporary restraining order. Lloyd’s then removed the action to the federal district court in Texas pursuant to 9 U.S.C. § 205 (which provides for removal where, as was the case here, the subject matter of an action or proceeding pending in a State court relates to an arbitration agreement or award falling under the Convention on the Recognition and Enforcement of Arbitral Awards) (the “New York Convention”). After the case was removed to federal district court, a hearing took place to decide whether a preliminary injunction should be entered against Lloyd’s preventing them from pursuing the arbitration in England. The court denied the preliminary injunction request, favoring arbitration in England instead, as discussed below.

First, the Gemini court determined the “Law and Practice Clause” in the Osprey P&I policy was governed by the New York Convention and because it required arbitration under English law, it contained an implicit delegation clause for the arbitrator, not the court, to decide what claims are arbitrable. See Gemini, Op. at 9-10 (“By agreeing to arbitrate under English law, the parties clearly and unmistakably consented to delegate to the arbitrator the power to make threshold determinations about what claims are arbitrable.”)

Next, the court addressed, and ultimately rejected, Gemini’s argument that the jurisdictional grant in the Osprey P&I policy’s “Service of Suit” clause requiring the insurers to submit to the jurisdiction of a United States court in the event they fail to pay any amount due under the Osprey P&I policy, overrode the Law and Practice Clause requiring arbitration in England. The Osprey P&I policy’s Service of Suit clause provided, in relevant part, that “It is agreed that in the event of the failure of the Underwriters severally subscribing to this insurance (the Underwriters) to pay any amount claimed to be due hereunder, the Underwriters, at the request of the Assured, will submit to the jurisdiction of a court of competent jurisdiction within the United States of America … Subject, in all respects, to the Osprey Law and Practice Clause as contained in the clauses dated 1.04.96.” This clause, Gemini argued, was more specific than the Law and Practice Clause, and therefore governed under the ordinary rule that specific provisions trump general provisions. According to Gemini, the Service of Suit clause applied to a narrower universe of claims – actions for “failure … to pay any amount claimed to be due” – which was more specific than the broader dispute resolution provision in the Law and Practice Clause.

In rejecting Gemini’s arguments, the Gemini court noted that the Osprey P&I policy contemplated arbitration of disputes, that the summary section of the P&I policy specified that choice of law and jurisdiction are governed by the “Law and Practice Clause,” and that the “Law and Practice Clause” itself stated that arbitration in England is required “[n]otwithstanding anything else to the contrary ….” The “Law and Practice Clause,” the court stated, “then adds suspenders to that belt, emphasizing that ‘[i]n the event of a conflict between this clause and any other provision of this insurance, this clause shall prevail and the right of either party to commence proceedings before any other Court or Tribunal in any other jurisdiction shall be limited to the process of enforcement of any award hereunder.’” The Service of Suit clause, the court explained, was “explicitly subordinated” to the Law and Practice Clause because it also stated that it was “[s]ubject, in all respects, to the Osprey Law and Practice Clause….” Gemini, Op. at 11-12.

The Gemini court also found persuasive the “harmonizing” approach of the Fifth Circuit Court of Appeals in McDermott Int’l, Inc. v. Lloyds Underwriters of London, 944 F.2d 1199, 1200 (5th Cir. 1991) (harmonizing the two clauses by limiting the service of suit clause to actions to enforce arbitration awards issued under the arbitration clause is a reasonable and permissible interpretation of the contract) and the Florida appellate court in Lloyds Underwriters v. Netterstrom, 17 So. 3d 732, 736 (Fla. Dist. Ct. App. 2009) (same, and even if the two clauses conflicted, the arbitration clause controls). According to the Gemini court, “[t]he best way to harmonize these two provisions is not, as Gemini suggests, to treat the ‘Service of Suit’ provision as a carve-out from the ‘Law and Practice’ provision’s broad sweep.” The court explained that “[w]hile Gemini is correct that, all else equal, specific provisions control over general provisions,” that principle of construction, according to the court, cannot override clear contract language of the two clauses at issue. Gemini, Op. at 12. To find otherwise would “rewrite the parties’ contract,” which the Gemini court would not do.

Gemini reinforces the proposition that courts will apply arbitration clauses and service of suit clauses in harmony with each other. Insurers and practitioners should be aware of the Gemini decision and that such contract provisions, as demonstrated in Gemini, are not intended to conflict with each other. Rather, as the Gemini court noted, the two provisions work together to prevent costly fights over the appropriate forum for litigating issues arising out of the parties’ international insurance contract.

More from our authors:

The post P&I Insurer’s Consent to U.S. Jurisdiction in Service of Suit Clause Does Not Override Contractual Right to Arbitrate appeared first on Kluwer Arbitration Blog.

Can Foreign Investors Sue the UK for Brexit?

Wed, 2017-05-10 22:27

Roger Alford (Editor)

Here in London, it seems there is no end to the number of Brexit conferences one may attend. But as far as I know, there has yet to be one addressing the question of whether Brexit may give rise to viable investment arbitration claims against the United Kingdom. So on May 30, 2017 the University of Notre Dame and Volterra Fietta will host a debate on this question.

The panel will include:

Roger Alford, Notre Dame Law School
Markus Burgstaller, Hogan Lovells
Luis González García, Matrix Chambers
Dan Sarooshi, Oxford University and Essex Court Chambers
Jeremy Sharpe, Shearman & Sterling
Suzanne Spears, Notre Dame Law School and Volterra Fietta

The location is the University of Notre Dame, 1-4 Suffolk Street, London, SW1Y 4HG. The event begins at 6:00 pm with a reception afterward.

If you are interested in registering, please RSVP to [email protected]

More from our authors:

The post Can Foreign Investors Sue the UK for Brexit? appeared first on Kluwer Arbitration Blog.

Choice Between Interim Relief from Indian Courts and Emergency Arbitrator

Tue, 2017-05-09 21:29

Rishab Gupta and Aonkan Ghosh

YSIAC

The ability of a party to obtain urgent interim relief is central to the efficacy of any method of dispute resolution. In case of disputes that are subject to an arbitration agreement, until recently parties had only two options: either approach national courts for interim relief in support of the arbitration, or wait for the formation of the arbitral tribunal and then make an application for interim relief. The former would essentially require parties to initiate local proceedings before national courts (the avoidance of which may in fact have been the principal reason for choosing arbitration in the first place). The latter would expose a party to the risk of dissipation of assets while the arbitral tribunal is being constituted.

Emergency arbitration is often cited as one of the solutions to the parties’ conundrum. But is emergency arbitration genuinely a substitute to urgent interim relief from courts? In this article, we compare the pros and cons of obtaining urgent interim relief from national courts and emergency arbitrator. In doing so, we focus on India’s experience and provide statistics from the practice of Indian courts.

Relevant Parameters

By way of background, under Section 9 of India’s Arbitration and Conciliation Act, 1996 (the Act), Indian courts can grant interim relief in support of arbitration. Parties can approach courts for interim relief at any point before the constitution of the arbitral tribunal. However, after the tribunal has been constituted, parties are generally expected to seek interim relief from the tribunal directly. Further, interim relief from Indian courts is available even in cases where the seat of arbitration is outside India, unless the parties have agreed otherwise.

As for emergency arbitration, while the Act makes no reference to it, rules of Indian arbitration institutions – such as the Mumbai Center for International Arbitration and the Indian Council of Arbitration – allow parties to seek orders from emergency arbitrators. Moreover, Indian parties are often involved in emergency arbitration proceedings conducted by foreign institutions, particularly SIAC.

The table below contains a comparison of interim relief available under Section 9 of the Act with emergency arbitration.

How long it takes to obtain interim relief?

For the purposes of this study, we randomly selected 300 Section 9 applications filed before the Delhi High Court in the year 2016. Next, we excluded those applications that were either withdrawn or granted with the consent of the parties. For the applications that remained in our dataset, we analysed the time it takes to obtain the first ad-interim order. Ad-interim orders are orders of Indian courts that are operative either till the final disposal of an interim application or till the next hearing. For example, in urgent matters, a court might grant an ad-interim injunction restraining the respondent from calling upon a performance bank guarantee, pending the final adjudication of the Section 9 application. Accordingly, in evaluating the efficacy of Section 9 proceedings, the relevant time period is between filing of Section 9 application and grant of the first ad-interim order, as opposed to the date on which the Section 9 application is finally disposed of.

The study revealed that the median time it took the Delhi High Court to grant ad-interim relief from the date of filing is 3 days.

In the context of emergency arbitration, it is not possible to carry out a similar empirical study because arbitration institutions do not disclose data about individual cases. Also, time periods set out in the rules of the various institutions vary. For example, SIAC Rules provide that the emergency arbitrator must issue an award/order within 14 days of his appointment, while the ICC Rules provide 15 days. Experience shows that SIAC and ICC emergency arbitrators often issue their orders more quickly than that; nevertheless, it is likely to remain the case that parties can receive even quicker relief by filing a Section 9 application in Indian courts.

Success rate

Out of the 300 Section 9 applications filed before the Delhi High Court, 72 applications were either granted, withdrawn by consent or remain pending with no interim relief ordered to date. Of the remaining 228 applications, interim relief of some sort was granted in 167 cases. This represents a success rate of 73 per cent for the applicant. The most common forms of interim relief granted by the Delhi High Court were freezing injunction prohibiting dealing with or disposing of certain assets, orders for deposits of sums in court, creation of bank guarantee in favour of the applicant, and disclosure of assets.

In case of emergency arbitration, again very limited data is publicly available to evaluate the success rate in a methodical manner. In case of SIAC for example, between July 2010 and 31 March 2017, 57 emergency arbitration applications were filed, of which 29 applications were granted while 2 remain pending, 6 were withdrawn and 4 were granted by consent. That represents a success rate of 64.4 per cent. Other institutions have not however published similar statistics.

Orders against third parties

Emergency arbitrators cannot grant relief against third parties. That is an important limitation, which derives from the fact that the jurisdiction of emergency arbitrators and the (eventual) arbitral tribunal is limited to those parties who have consented to submit their dispute to arbitration. For example, article 29(5) of the ICC Rules expressly provides that the ICC’s Emergency Arbitrator Provisions apply only to signatories to the arbitration agreement or their successors.

On the other hand, Indian courts, like courts of other jurisdictions, can grant interim relief against third parties in certain circumstances (for example, where such orders are necessary to protect the subject matter of the arbitration). The classic situation is when a freezing order is granted against a bank that holds funds on behalf of one of the respondents. An emergency arbitrator would not be able to make the bank a party to the freezing order.

Ex-parte orders

The ability of a party to obtain ex parte interim orders can be crucial in circumstances where an element of surprise is necessary (for example, where prior notice to the respondent would lead him to remove his assets from the jurisdiction of the court). Like in other jurisdictions, Indian courts can grant ex parte orders in exceptional circumstances. Emergency arbitrators, on the other hand, cannot grant relief on an ex parte basis. That is because one of the central tenets of arbitration is that all parties be given equal opportunity to present their case.

Enforceability

Even if a party is successful in obtaining relief from an emergency arbitrator, it must still deal with the question of enforcement. With the exception of Singapore and Hong Kong, in no other country orders of emergency arbitrators have received statutory recognition. In India, the Law Commission considered this issue at the time of suggesting amendments to the Act; however, ultimately no such amendment was made. Therefore, orders of emergency arbitrators are not enforceable in India. The fact that certain rules permit emergency relief to be granted as “awards”, and not just “orders”, will make no difference to their enforcement in India (compare Schedule 1(6) of the SIAC Rules with Article 29(2) of the new ICC Rules).

Despite concerns regarding their enforceability in India, emergency relief can be crucial in Indian related arbitrations. To start with, orders of emergency arbitrators may be extremely helpful if the respondent has assets in jurisdictions where such orders are enforceable (e.g. Singapore and Hong Kong). Further, experience shows that parties often voluntarily comply with emergency orders. That may be because losing parties fear that arbitral tribunals would not look too kindly on their failure to comply with the orders of emergency arbitrators. Moreover, to further incentivize compliance, arbitration rules allow arbitral tribunals to reflect non-compliance with the orders of emergency arbitrators in their final award (see, e.g., Article 29(4) of the ICC Rules). Finally, and rather counter-intuitively, orders of emergency arbitrators may assist a party in obtaining relief from an Indian court under Section 9 of the Act (see, e.g., HSBC v. Avitel 2014 SCC OnLine Bom 102, where the Bombay High Court granted interim relief in the same terms as that of a SIAC appointed emergency arbitrator; but see Raffles Design (2016) 234 DLT 349, where the Delhi High Court in the context of a Section 9 application effectively ignored the orders of a SIAC appointed emergency arbitrator).

More from our authors:

The post Choice Between Interim Relief from Indian Courts and Emergency Arbitrator appeared first on Kluwer Arbitration Blog.

PCA Award Trapped in the Confines of the Singapore State Immunity Act

Mon, 2017-05-08 20:17

Olga Boltenko, Lakshanthi Fernando and Nanxi Ding

In early March 2017, the Singapore High Court released a judgment in which it considered an important question of enforcement of investor-state awards.

In Josias Van Zyl v Kingdom of Lesotho [2017] SGHCR 2, AR Pereira was asked to decide whether an order to enforce a final award in a treaty dispute administered by the Permanent Court of Arbitration is to be served through diplomatic channels, or whether it could be served by way of simple service on the defendant’s solicitors in Singapore.

While admittedly technical, the issue of service of process is fundamentally important for the enforcement of treaty awards. Having an enforcement order or a writ that cannot be served is equivalent to having a cheque that cannot be cashed. Singapore praises itself on being one of the most forward-thinking jurisdictions in Asia for treaty disputes. That praise, inevitably, should come with a convenient and speedy service mechanism. The convenience of service on a foreign State is inherently dependent upon the procedural privileges and immunities that a State enjoys in the enforcement jurisdiction. Having to resort to diplomatic channels is a universally accepted but arguably cumbersome and potentially lengthy procedure. In contrast, serving enforcement orders on solicitors next door is a convenient, predictable, and speedy process.

In essence, in Josias Van Zyl v Kingdom of Lesotho, AR Pereira decided Singapore’s fate when it comes to enforcement of treaty awards. He sent a strong message to the legal community that Singapore, at least in the interim, is not prepared to deviate from the traditional service mechanism through diplomatic channels, even where the enforcement circumstances might justify a more flexible and speedy procedure.

A blog post on Singapore would be incomplete without a reference to Hong Kong. In Hong Kong, service on a foreign State is governed by Order 11 Rule 7 of the Rules of the High Court. The Rules’ provisions are far from controversial and as such have not generated much debate or case law, apart from an important caveat of the Congo judgment. As a general rule, in Hong Kong, a person to whom leave has been granted to serve on a State must lodge a request in the High Court Registry for service to be arranged by the Chief Secretary for Administration, who will then effectuate the service. The Chief Secretary would forward the service request to the Ministry of Foreign Affairs, where the request would be served through consular or diplomatic channels. Helpfully, in addition to a rather non-controversial set of service rules, there is no requirement in Hong Kong for the plaintiff seeking to serve a State to demonstrate in the service application that the State does not enjoy immunity from suit or immunity from execution (NML Capital Ltd v Republic of Argentina).

This is where the similarities between the two jurisdictions end. Hong Kong’s Rules of the High Court allow flexibility of service on a foreign State where the State has agreed to a procedure different from that specified in the rules. In addition to that, the Hong Kong judiciary is known to exercise an important degree of flexibility by allowing service on Hong Kong solicitors rather than through diplomatic channels where the circumstances so warrant. In FG Hemisphere Associates LLC v Democratic Republic of Congo [2009] 1 H.K.L.R.D., Reyes J noted that the enforcing party sent the originating summons to various government officers of the defendant State, which in turn had caused the State to acknowledge service. Against this background, Reyes J granted the plaintiff an ex parte order for substituted service by posting the originating summons to Congo’s solicitors in Hong Kong.

The Singapore judiciary takes a completely opposite approach to service on a foreign State. Having been seized of the matter, AR Pereira, in a succinct judgment of 9 pages, determined that the Enforcement Order falls within the confines of s14 of the Act and dismissed the plaintiff’s application to serve the Enforcement Order on Lesotho’s solicitors in Singapore, thus precluding the plaintiffs from pursuing the easiest way of service.

Procedural Background

The underlying arbitration was conducted under the auspices of the PCA and the UNCITRAL Rules (PCA Case No. 2013-29: Swissbourgh Diamond Mines (Pty) Limited, Josias Van Zyl, The Josias Van Zyl Family Trust and others v. The Kingdom of Lesotho). The claim was brought by a group of South African investors, including the plaintiffs, against Lesotho, under the Treaty of the Southern African Development Community, for expropriation of their mining leases by the government. On 18 April 2016, a PCA tribunal seated in Singapore released its final award on costs. It is this final PCA award that the plaintiffs are seeking to enforce against Lesotho in Singapore.

The plaintiffs first tried to serve the Enforcement Order on Rajah & Tann, Lesotho’s solicitors in Singapore. Rajah & Tann declined to accept service on the basis that they had no instructions from Lesotho to do so. The plaintiffs then sought to serve the Enforcement Order on Webber Newdigate who represented Lesotho in the PCA arbitration, but to no avail. Persisting, the plaintiffs attempted service on Lesotho’s Attorney-General. That attempt was brushed off by Webber Newdigate on the basis that service was not compliant with s 14(1) of the Singapore State Immunity Act. That is why the plaintiffs motioned for substituted service of the Enforcement Order on Rajah & Tann in Singapore.

Reasoning and Judgment

AR Pereira, having looked into the plaintiff’s numerous attempts to navigate their Enforcement Order through the – almost Machiavellian – ping pong game by Lesotho’s counsel, took the view that the Enforcement Order must be served through diplomatic channels, for the following reasons.

Firstly, the Enforcement Order, when served, has the effect of instituting proceedings against a State within the meaning of s 14 of the State Immunity Act and of O69A r6(2) of the Singapore Rules of Court. AR Pereira found no reason to exclude enforcement proceedings from the procedural requirements of service on foreign States.

Secondly, AR Pereira rejected the plaintiffs’ arguments that the High Court should apply the Singapore Rules of Court, in particular Order 69A Rule 6, to allow the plaintiffs to serve the Enforcement Order on Lesotho’s Singapore solicitors. He noted that Order 69A Rule 6 of the Rules of Court is silent on the mode of effecting service on foreign States, but that must be because when the Rules were drafted, investor-state enforcement proceedings were not in contemplation, thus the omission should not remove the mandatory requirements of s 14 of the State Immunity Act. The plaintiff’s counsel argued that in any event, Lesotho is well aware of the enforcement proceedings given that it is involved in the set aside proceedings in Singapore and has retained counsel to pursue its set aside application. That argument did not convince AR Pereira who found that “if the State Immunity Act requires service in accordance with a specified procedure”, then it should not matter how the related set aside proceedings have developed.

Finally, AR Pereira found that the setting aside proceedings and the enforcement proceedings are fundamentally different. It is impossible to equate the initiation of the setting aside proceedings to the “appearance” in the enforcement proceedings. For that reason, Lesotho’s initiation of the setting aside proceedings in Singapore cannot be construed as a waiver of its procedural privileges under the State Immunity Act.

Conclusion

In effect, the Singapore courts have affirmed that they will not treat a State’s participation in related proceedings as a waiver of the State’s procedural privileges under the State Immunity Act. Arguably, this determination makes service of enforcement orders in treaty matters more cumbersome, but it gives respondent States certainty that they will keep their procedural privileges irrespective of whether they have initiated setting aside proceedings before the Singapore courts or not. Many other jurisdictions would loathe waiving the States’ procedural privileges, so AR Pereira’s determinations are not at all surprising. However, one cannot help but wonder whether Singapore would have risen to an entirely different level of accommodating treaty disputes from inception to enforcement, had AR Pereira allowed (as Reyes J did in Hong Kong) the Enforcement Order to be served on Lesotho’s local solicitors in Singapore.

More from our authors:

The post PCA Award Trapped in the Confines of the Singapore State Immunity Act appeared first on Kluwer Arbitration Blog.