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Chinese Investments in Latin America: Disputes along the Non-Conventional Belt and Road

Thu, 2018-12-13 17:00

Guilherme Rizzo Amaral

Introduction

In October 1865, Sir Robert Hart, a former British diplomat and by then an official in the Qing Chinese Government, wrote to Empress Dowager Cixi expressing his opinion that China should desperately seek progress through investments in mining, the telegraph, the telephone and especially in railways. The reaction of Empress Cixi’s closest advisors was harsh. The words of Earl Li well describe the mood of Chinese officials towards the measures Hart advocated: “they deface our landscape, invade our fields and villages, spoil our feng-shui, and ruin the livelihood of our people”.1)This episode is described in the biography “Empress Dowager Cixi: The Concubine Who Launched Modern China”, by Jung Chang. jQuery("#footnote_plugin_tooltip_3930_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3930_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Who could imagine that, 150 years later, China would be the world’s most passionate advocate of the same progress it once admonished. With the Belt and Road Initiative (BRI), China unleashes a bold plan to invest between US$ 1 and 8 trillion in infrastructure and other means to connect over 65 different countries which collectively represent more than 60% of the global population and 30% of global GDP.

Conventionally, the BRI refers primarily to the terrestrial belt linking China to Central and South Asia and onward to Europe, and the maritime road linking China to the nations of South East Asia, the Gulf Countries, North Africa and on to Europe. And yet recent statements by President Xi Jinping and a declaration signed during the Second China-CELAC Ministerial Forum in January 2018 indicate that Latin America is a “natural extension” of the Maritime Silk Road. In fact, over the past 10 years, Latin America has been second only to Asia as a destination of Chinese investments. This is why one can also think of a non-conventional BRI, one more associated to a mindset than to a strict geopolitical plan of investments.

The purpose of this article is not to offer a one-size-fits-all dispute resolution method for conflicts arising from the non-conventional BRI, but rather to raise some of the issues that might be addressed in the future on a case-by-case basis.

Judiciary or Arbitration?

The less likely dispute resolution mechanism to be sought in BRI disputes is the Judiciary. With the exception of Mexico, no Latin American country has ratified the Hague Choice of Court Convention. China, on the other hand, signed it in 2017, but has not yet ratified it. That means that starting proceedings in the court of choice will not prevent any of the parties from starting proceedings in the courts of their own state.

What is more, the choice of court is a “tough sell”, especially when it falls upon the national courts of one of the parties’ state. Lack of impartiality will often be raised, be it because of the weak civil justice system in some Latin American countries, be it, in the case of China, because of the direct submission of the Supreme People’s Court (SPC) to the Standing Committee of the National People’s Congress (article 67[6] of the Constitution of the People’s Republic of China).

With the recent creation of the China International Commercial Courts (CICC) in Shenzhen and Xi’an, China proposes a one-stop platform for BRI disputes. However, these courts hardly qualify as “international”: they have no foreign judges and only Chinese law-qualified lawyers are allowed to represent the parties. Besides, saving rare exceptions, even if the parties choose the CICC to solve their conflicts, there is a threshold of RMB 300 million (approximately USD 42 million) for a case to be heard.

Regardless, the CICC will still play an important role in BRI disputes, especially given their jurisdiction to hear cases “involving applications for preservation measures in arbitration, for setting aside or enforcement of international commercial arbitration awards” (article 2[4] of the CICC provisions).

That leaves the parties with arbitration. Though mediation and other amicable methods of dispute resolution should evidently be encouraged, a provision for arbitration in case those methods fail is highly desirable. Arbitration is perhaps the only stable and predictable framework for solving disputes involving so many different nationalities and geopolitical interests.

Investment and Commercial Arbitration

Despite the fact that most Latin American states offer great resistance to the ICSID state-investor dispute mechanism, many of them have signed Bilateral Investment Treaties with China that are still in force, such as Argentina, Barbados, Bolivia, Chile, Colombia, Cuba, Ecuador, Guyana, Mexico, Peru, Trinidad and Tobago and Uruguay. An important exception is Brazil, China’s largest partner in the region, having received a staggering 55% of all Chinese investment in Latin America over the past 10 years.

Therefore, BRI disputes may give rise to investment or commercial arbitration, depending on the existence of said treaties and on the nature of the dispute.

Seats

BRI disputes will likely have a foreign element, allowing for arbitration either in mainland China or abroad. In addition, the SPC tends to adopt a more liberal interpretation of the term “foreign-related relationship” when faced with BRI disputes (see Typical Case 12, Siemens v. Golden Landmark).

Choosing a seat in mainland China narrows the choice of institutions. Foreign institutions are not considered arbitral commissions according to article 10 of the People’s Republic of China’s (PRC) Arbitration Law. In general, they cannot administer arbitration proceedings on the Mainland, even though case law seems to be evolving towards a more liberal view (see Duferco SA. v. Ningbo Arts & Crafts. Imp. & Exp. Co. Ltd.). Choice of seat also attracts the PRC Arbitration Law to the procedure, which entails relevant differences in relation to the UNCITRAL Model Law (largely adopted in Latin American countries).

The main differences are: (i) no ad hoc arbitration is allowed, (ii) the Kompetenz-Kompetenz principle is a matter for the arbitral institution rather than for the arbitral tribunal (there can be delegation, though), (iii) the time limit to challenge arbitral jurisdiction is until before the first hearing rather than not later than the submission of the statement of defence (Model Law), (iv) applications for interim measures or preliminary orders are submitted by the Parties to the arbitral institution, which shall submit them to the competent court; neither the institution nor the tribunal can issue such orders, (v) the presiding arbitrator is either chosen jointly by the parties or by the chairman of the arbitral institution; not by the co-arbitrators, and (vi) the time period to apply for an award to be set aside is 6 months, instead of the 3 months provided by the Model Law.

Finally, the choice of seat entails the court’s jurisdiction to set aside the award. A Chinese court may not set aside a foreign award (to which enforcement can still be denied), yet it may set aside a domestic award or a foreign-related award issued in mainland China. In either case, for the award to be set aside or denied enforcement, the Prior Reporting System requires a decision from the SPC.

Provided that Latin American parties have the necessary leverage to negotiate arbitration agreements with their Chinese counterparts, traditional seats such as London, Paris, Hong Kong and Singapore will likely be sought (arbitration in a US seat is seldom accepted by Chinese parties). This is especially true given that China is a contracting party to the New York Convention, allowing for foreign awards to be enforced on the Mainland as long as they are issued in the territory of another contracting party.

Institutions

International arbitral institutions soon realised the importance of tending to BRI disputes.

With offices in the Shanghai Pilot Free Trade Zone (FTZ), in Hong Kong and in Singapore, the ICC has created a Belt and Road Commission2)An important disclaimer: the author of this article is an ambassador to said Commission. jQuery("#footnote_plugin_tooltip_3930_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3930_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); to raise awareness of the Court as “the go-to” institution for BRI disputes.

After opening a representative office in Shanghai FTZ in 2016, SIAC has recently signed a MOU with CIETAC to promote joint efforts to provide services to BRI players.

HKIAC has a Belt and Road Advisory Committee in place and extensive experience administering arbitrations involving Chinese and non-Chinese parties.

If the LCIA lags behind in terms of specific efforts to market itself as an option to BRI countries, it still draws particular strength from the fact that parties in all regions see London as a preferred seat, according to recent research.

On the other hand, when it comes to the non-conventional Belt and Road, especially when Latin American parties are involved, the ICC is by far the institution with the closest connection to the region.

In 2017, none of the top 10 foreign users of SIAC or of the LCIA were from Latin America. The same goes for the HKIAC in 2016 (last available report). At the ICC, however, parties from Latin America and the Caribbean held an impressive share of 15.8% in 2017, with Brazil ranking fourth with 115 parties and Mexico holding the twelfth place with 55 parties. Furthermore, it is the only institution with an office in Latin America (São Paulo), not to mention its national committees in 15 Latin American countries.

Conclusion

As Confucius teaches us, “[r]eal knowledge is to know the extent of one’s ignorance”. It is still early to assess the future of BRI disputes and thus it is quite important to keep an open mind at this point. The sage also said that wisdom may be learned by three methods: “first, by reflection, which is noblest; second, by imitation, which is easiest; and third, by experience, which is the most bitter”. This may be a good beacon to the (belt and) road that lies ahead.

References   [ + ]

1. ↑ This episode is described in the biography “Empress Dowager Cixi: The Concubine Who Launched Modern China”, by Jung Chang. 2. ↑ An important disclaimer: the author of this article is an ambassador to said Commission. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Lessons from Perú’s Legacy in Public Procurement: A Successful Approach to Follow and Mistakes to Avoid

Thu, 2018-12-13 16:05

Alonso Bedoya

The recent Petrobras – Lava Jato government fraud scandal that hit Brazil hard and swept through other Latin American countries has also greatly affected Perú. According to Marcelo Odebrecht (a Brazilian businessman and the former CEO of Latin America’s largest construction company), more than US$29m was paid in bribes between 2005 and 2014 in Perú (US$788m in the whole of the Latin American region). It is publicly known that Odebrecht, a large infrastructure company, acted as the agent to bribe high-level government authorities in order to win tenders. However, in Perú , the introduction of a mandatory private dispute resolution framework for public procurement using conciliation and arbitration has helped to contain corruption for the most part.

Perú has greatly evolved during the past two decades in the context of its arbitration laws and policymaking, to the extent that by the latter part of 2014, the Lima Chamber of Commerce alone had administered more than 3,000 cases with a total combined value of US$ 4,435,535,355.20.1)Roger Rubio, María Belén Saldaña, Arbitration World (international series), Perú Arbitration P. 739, Fifth Edition, Thomson Reuters UK. jQuery("#footnote_plugin_tooltip_3509_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3509_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. This reflects the vast array of circumstances in which arbitration has been used to solve conflicting issues.

Responsively, Perúvian legislators decided to implement arbitration as a means of bypassing national judicial courts in order to settle governmental and private entity disputes. The result was that in 1998, Perú enacted the now-repealed Public Procurement Act Nº 26850, which prescribed in Article 41 2)Law No. 26850. Article 41 °. – “When a discrepancy arises between the parties in the execution or interpretation of the contract, this will be defined through the extrajudicial conciliation or arbitration procedure, as agreed by the parties.” jQuery("#footnote_plugin_tooltip_3509_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3509_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); that any government-private party disputes under public procurement contracts be mandatorily resolved through conciliation or arbitration processes. Today, the original Act Nº 26850 (now Public Procurement Act Nº 30225, amended by Legislative Decree Nº 1444) still seeks to embody an effective conflict resolution procedure in order to encourage generous national and international investment.

Current Law

Public Procurement Act 30225 establishes the following key provisions: a) contracting parties are free to decide the means by which they will resolve their disputes regarding the execution of public procurement contracts, and may choose between conciliation or arbitration (this is non-negotiable between the parties) to solve matters such as the execution, interpretation, resolution, non-existence, ineffectiveness or invalidity of any given contract, with the provision that cases in which the nullity of the contract is discussed must be submitted to arbitration, b) public officials are liable to administrative sanctions if they do not use arbitration to resolve disputes, c) the government allows two types of arbitration: ad hoc and institutional; the latter being conducted by an institution accredited by the Supervisory Body of Public State Procurement (OSCE), d) for a lawyer to perform as ad-hoc arbitrator, the practitioner needs to be registered in the National Registry of Arbitrators (RNA) under OSCE administration, and meet all its requirements. The lawyer must also be specialized in arbitration and public procurement contracts as well as in administrative law.

Highlights of Mandatory Arbitration in Public Procurement Contracts

As arbitration is mandatory, the mechanism has spread to the extent that even the smallest municipality in Perú is required to use arbitration to resolve disputes. This condition and other pro-investment measures have greatly benefited the Perúvian government, as private domestic and foreign investment has greatly increased. Arbitration has also allowed for the resolution of public procurement disputes to be expedited. This is demonstrated by the research that has been carried out by the PUCP (Pontificia Universidad Católica del Perú), which shows that in 2014 the duration of public procurement arbitrations was less than a year in 70% of cases, and only 6% of cases continued beyond 24 months. The short time periods for resolving disputes and the fact that the Perúvian government was considered a private party within public procurement disputes (and thus equal to any other private entity), incentivised foreign investors to do business in Perú, by promoting a sense of stability and predictability. Foreign investors involved in complex contracts such as EPC or turnkey agreements for the engineering and construction of large-scale, infrastructure projects such as hydroelectric plants, reservoir dams and highway systems do not need to be members of a BIT-signatory state with Perú in order to use arbitration as a dispute resolution mechanism, thus avoiding the unpredictability of the Perúvian court system.

Errors to Avoid

As mentioned above, the Perúvian legislation in public procurement gives parties the opportunity to choose between ad hoc and institutional arbitration. Even though arbitral institutions provide many benefits to parties that cannot be found in ad hoc arbitration, the vast majority of parties prefer ad-hoc arbitration. More than 70% of public procurement arbitrations are resolved by ad hoc arbitration, with only 30% conducted by an institution.
This continuous growth of arbitration for public procurement disputes may be due to the fact that arbitration is regarded as a pro-private contractor system, as most cases are decided in favour of the company rather than the Perúvian government as per the studies conducted by the PUCP. However, arbitration is not immune from accusations of corruption.
The main issue facing Perúvian ad hoc arbitrations is the absence of rules on how arbitrators have to conduct procedures in line with the standards of fairness and impartiality. By failing to issue awards in a timely manner, failing to restrict ex parte communications, failing to limit document production and failing to clarify the number of hearings that will be required, they undermine the stability and predictability of procedures and outcomes. Other issues include a lack of transparency and exorbitant fees being charged by arbitrators which do not correlate either to the time invested or to the complexity of the dispute.

As a result of a lack of institutional oversight, the Lava Jato influence was able to taint some public procurement arbitrations involving Petrobras/Odebrecht by nominating inexperienced arbitrators who welcomed ex parte engagements to deal with affairs of public interest.

Final thoughts: Amendment

It has been 20 years since Perú first introduced a mandatory legal framework for public procurement disputes. In general terms, this measure has successfully brought a stable legal framework to the country by generating predictability and transparency in relation to the outcome of a dispute. In fact, given the special characteristics of arbitration and in particular its expeditiousness, there is no doubt that it has become the mechanism that currently provides greater advantages to individuals and even to the State itself. However, there is still room for improvement when it comes to Perúvian arbitration. Institutional Arbitration should be prioritized over ad hoc arbitrations, to prevent future Lava-Jato scenarios in arbitration proceedings. In addition, the Perúvian State role during the execution of public procurement contracts ought to be intensely monitored. More than 95% of public procurement disputes originate due to the lack of contractual management of the State (not for example, failing to make payments on time or not honouring other contractual terms), thus bringing claims against the State.

On reflection, it would be a solid step forward for Perú to ensure transparency by removing ad hoc arbitration as an option for resolving public procurement disputes, despite the fact that doing so will entail making drastic modifications to the current arbitration regulations and public procurement laws. Further, it is of utmost importance to promote training in public procurement and in arbitration, particularly in regions where large infrastructure projects are being procured. Hopefully, similar mandatory private dispute resolution frameworks for public procurement can be used throughout Latin America, Europe and Asia to promote arbitration and combat corruption, emulating the successes and avoiding the mistakes experienced in the Perúvian model.

References   [ + ]

1. ↑ Roger Rubio, María Belén Saldaña, Arbitration World (international series), Perú Arbitration P. 739, Fifth Edition, Thomson Reuters UK. 2. ↑ Law No. 26850. Article 41 °. – “When a discrepancy arises between the parties in the execution or interpretation of the contract, this will be defined through the extrajudicial conciliation or arbitration procedure, as agreed by the parties.” function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Intra-EU ECT Claims Post-Achmea: Vattenfall Decision Paves the Way

Thu, 2018-12-13 03:00

Kirstin Schwedt and Hannes Ingwersen

The Court of Justice of the European Union’s (CJEU) judgment in Slovak Republic v. Achmea B.V. (Achmea) on arbitration under intra-EU BITs has been broadly discussed (on this blog, see e.g. here, here, here, here, here, here and here). Nine months after the Court’s ruling, some tribunals have had the opportunity to react. Food for thought and a strikingly straightforward solution comes especially by way of a detailed 72-page procedural decision confirming jurisdiction in the ICSID arbitration between Swedish power company Vattenfall and Germany regarding claims under the multilateral Energy Charter Treaty (ECT) following the state’s phaseout of nuclear power in the wake of the Fukushima disaster (ICSID Case No. ARB/12/12).

The Vattenfall-tribunal’s rejection of Germany’s Achmea-based jurisdictional objection warrants closer analysis: First, Achmeas reach to ECT-based claims has been hotly debated, not least because of the practical significance and number of pending ECT-claims. The European Commission recently communicated in unequivocal terms that it sees intra-EU ECT-claims as barred by Achmea. Second, the tribunal delves deep into the complex and arguably uneasy relationship between EU law and investment treaties as part of public international law.

Tribunals Take Different Roads, Yet All Roads Lead to Rome

Various Achmea-based jurisdictional objections have found different treatment by tribunals. In Masdar Solar v Spain (ICSID Case No. ARB/14/1), the tribunal denied Spain’s request to reopen the arbitration following Achmea, briefly addressing the issue and concluding that the “Achmea Judgment is simply silent on the subject of the ECT.” An ICSID tribunal in Gavrilovic v Republic of Croatia (ICSID Case No. ARB/12/39) under the Austria-Croatia BIT dismissed Croatia’s intra-EU objection after Achmea for being late and refrained from an ex officio review of the issue.

In contrast, the Vattenfall-tribunal found Germany’s objection – not raised prior to Achmea – to be timely. The “very existence” of the CJEU’s judgment amounted to a new fact that was previously unknown to Germany in terms of ICSID Rule 41(1). The tribunal further highlights its ex officio authority to consider jurisdictional issues under the ICSID Rules, remarking that it would have seen fit to consider the intra-EU issue, even if Germany had not raised the objection.

Recently, a tribunal in UP and C.D Holding Internationale v. Hungary (ICSID Case No. ARB/13/35) under the France-Hungary BIT rejected Achmea-based objections on grounds similar, yet not identical, to those relied on by the Vattenfall-tribunal: Hungary could not, says that tribunal, rely on EU law and Achmea to escape its public international law obligations under the ICSID Convention (not the BIT).

In conclusion: Tribunals have unanimously remained unimpressed by Achmea, while the underlying reasons to uphold jurisdiction are manifold.

Vattenfall: No Primacy of EU Law

The Vattenfall tribunal identifies the dispute resolution provision of the ECT, Article 26, as the starting point for its jurisdictional analysis, and queries whether EU law has consequences for the meaning of that provision when interpreted in accordance with the principles of international law. While the tribunal acknowledges that the EU Treaties and the CJEU’s judgments interpreting them form part of international law, it does not accept EU law as means to interpret Article 26 ECT.

In the tribunal’s view, there is no room within Article 31 of the Vienna Convention on the Law of Treaties (VCLT) to draw from EU Treaties (and thus indirectly from Achmea) to interpret another treaty, the ECT. It concludes that EU law does not constitute “principles of international law which may be used to derive meaning from Article 26 ECT, since [EU law] is not general law applicable as such to the interpretation and application of the arbitration clause in another treaty such as the ECT”.

The Vattenfall tribunal is concerned about potentially different interpretations of the same ECT provision if EU law was used for interpreting the multilateral treaty. This would result in an “incoherent and anomalous result” that would be inconsistent with the object and purpose of the ECT. Instead, “pacta sunt servanda and good faith require that the terms of that treaty have a single consistent meaning”. Article 31(3)(c) VCLT, which states that any relevant rules of international law applicable in the relations between the parties should be taken into account when interpreting a treaty, could not be relied upon to “rewrite the treaty being interpreted, or to substitute a plain reading of a treaty provision with other rules of international law, external to the treaty being interpreted, which would contradict the ordinary meaning of its terms”.

Vattenfall: Article 16 ECT as a Simple Route to Jurisdiction

The arbitrators notably accentuate Article 16 ECT, which states that no provisions concerning the subject matter of Part III or V of the ECT in prior or subsequent international agreements between two or more parties to the ECT shall be construed to derogate from i.a. Article 26 ECT, where the provision in the ECT is more favourable to the investor or investment. If EU law were to prohibit arbitration, says the tribunal, it would concern the same subject matter as Article 26 ECT, the latter allowing for arbitration and thus being “more favourable to the Investor” in terms of Article 16 ECT. Article 16 ECT would thus require Article 26 ECT to prevail. Article 16 ECT is identified by the arbitrators as “a simpler and clearer route to the answer to the jurisdictional challenge” than other reasons provided. Similarly, but slightly less prominently, the tribunal in Masdar Solar v Spain also relied on Article 16 ECT (cf. para. 332 of the Masdar award).

The arbitrators do not see a conflict between Article 26 ECT and Articles 267, 344 TFEU, but remark obiter dictum that even if such a conflict existed, EU law would not prevail over the ECT, applying a variety of conflict rules – lex posterior pursuant to Article 30(4)(a) VCLT, modification of the ECT in light of Article 41(1) VCLT, or lex specialis with a view to Articles 16 ECT and 351 TFEU. Returning to Article 16 ECT, the tribunal considers the provision to be lex specialis, once more concluding that “Article 16 poses an insurmountable obstacle to Respondent’s argument that EU law prevails over the ECT”. This view is not effectively countered by arguing that Article 16 ECT is not a suitable conflict rule because it is itself part of one of the conflicting regimes. The (general) public international law rule enshrined in Article 41 VCLT, limiting the cases in which multilateral agreements can be bilaterally modified, leads to the same result and reinforces the effectiveness of Article 16 ECT.1) Andrej Lang, Regime Collision between EU Law and Investment Law: New Developments in the Vattenfall Case, www.verfassungsblog.de, last accessed 8 October 2018. jQuery("#footnote_plugin_tooltip_8724_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8724_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Additionally, the tribunal emphasises that it sees a critical role with drafters to define the scope of the obligations established by the investment treaty. In case of the ECT, there was ample opportunity to carve out intra-EU claims, since it would have been a simple matter to draft the ECT so that Article 26 does not apply to disputes between an Investor of one EU Member State and another EU Member State as respondents. That was not done”.

Commentary

Tribunals still grappling with the intra-EU question, especially those in ECT cases, are certain to pay great attention to the carefully crafted Vattenfall decision. Its reasoning may well serve as a blueprint for further decisions and awards in similar cases.

Reading the CJEU’s judgment side-by-side with the Vattenfall decision puts the spotlight on the starkly different perspectives from which the EU institutions and international arbitral tribunals look at the issue. The CJEU’s principal task is to interpret and ensure the primacy of EU law, whereas arbitral tribunals are obliged to put into effect the mutual obligations of states under their respective investment treaties. These distinct viewpoints necessarily shape reasoning and methodology of the different actors: The CJEU relies on principles of EU law, whereas arbitral tribunals base their decisions on public international law. For intra-EU ISDS, this has resulted in norm conflicts that are now paid for by states and investors alike.

The issue remains in flux: In the context of an action to annul an ECT award at the Svea Court of Appeal (SCC Case No. 063/2016, Novenergia v Spain), Spain has asked the Swedish court to seek a preliminary ruling on the ECT’s compatibility with EU law from the CJEU. Such decision would bring clarity with respect to the CJEU’s position on the multilateral treaty. In parallel, on the other side of the Atlantic, the US District Court of the District of Columbia is called to decide on Spain’s motion resisting enforcement of the Novenergia award based on Achmea. Beyond a “thumbs up” or “thumbs down” for the ECT, one may curiously expect a ruling on the public international law implications of the overlap between EU law and (other) public international law when it comes to intra-EU investment protection.

The views expressed in this blog post are those of the authors alone and do not reflect the opinion of Linklaters LLP.

References   [ + ]

1. ↑ Andrej Lang, Regime Collision between EU Law and Investment Law: New Developments in the Vattenfall Case, www.verfassungsblog.de, last accessed 8 October 2018. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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The Prague Rules: The Real Cultural War Isn’t Over Civil vs Common Law

Wed, 2018-12-12 00:59

Michael McIlwrath

The Prague Rules on the Efficient Conduct of Proceedings in International Arbitration will be officially launched this week (December 14). This set of rules of evidence and procedure formulated from civil law practices has already generated a substantial and healthy debate within the international arbitration community, including here on the Kluwer blog, on whether they are needed to overcome a perceived common law orientation of the IBA Rules of Evidence.1) See, e.g, whether the Prague Rules are a viable alternative to the IBA Rules of Evidence, whether civil law lawyers genuinely desire a set of rules that embody civil law concepts for international arbitration, and whether that the Prague Rules’ prohibition on any form of e-discovery is unrealistic as a means to restrain excessive discovery in international arbitration. jQuery("#footnote_plugin_tooltip_3447_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3447_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Leaving aside whether the Prague Rules are truly representative of the civil law world or just certain legal systems within it (that would be a separate debate of its own), the biggest cultural divide in international arbitration is not civil versus common law approaches.

 

Where cultures really clash:  predictability versus flexibility

There is no doubt that, as the Prague Rules state, parties to international arbitration usually desire an efficient and speedy process. Just as much – and perhaps even more – they want predictability. They will want to know how the arbitrators will conduct the proceedings, how they will weigh the evidence, what legal issues they will focus on, and how long it will take to obtain a final award.

By contrast, the hallmark of international arbitration is the tribunal’s ability to formulate procedures that are suited to the particular parties and their disputes.  This flexibility is largely what distinguishes international from domestic arbitration, with tribunals in the latter case generally applying a “one size fits all” approach copied from local litigation practices.

In terms of setting up the procedure for an international arbitration, the concepts of predictability and flexibility are polar opposites. And in resolving this tension, it is predictability that typically loses out.  This is natural.  Arbitrators, once appointed, are not bound to follow the parties’ expectations. In fact, they may not even know what the parties’ expectations are.

 

The most common source of party dissatisfaction is not the rules

Unlike the standard procedures applied in domestic arbitration or court litigation, parties to an international arbitration will usually need to wait for Procedural Order n. 1 before they can advise their business clients on how the proceedings will unfold.

And when it arrives, parties often find the arbitration will not be what they expected when the tribunal was appointed.  The range of procedural approaches that different arbitrators will bring to the same set of rules can be a source of either criticism or praise, depending on one’s point of view. In 20 years of representing my company in disputes around the world, I have experienced international arbitrations firmly rooted in the extremes of civil and common law procedural approaches, all with tribunals purportedly referring to the IBA Rules. This is usually over the protests of at least one unhappy side.

Fancy that:  a service profession where a paying customer could not predict what service they would receive until it was too late to change course.

Not surprisingly, parties often sour on the arbitration before the proceedings are fully underway.

 

A set of rules based on national practices is not a realistic solution for international cases

As with the IBA Rules of Evidence, the Prague Rules cannot be more effective than the arbitrators called to interpret and apply them.

In cases where both sides agree to apply the Prague Rules because they share common procedural values, there will be no pressing need for them. If the arbitrators apply expansive procedures that clearly neither side wants, the parties have a problem that no set of rules will fix.

Where, by contrast, the parties are from different legal cultures and have divergent views of procedure, the Prague Rules will be put to the same test as the IBA Rules the moment either party accuses the tribunal of failing to provide a fair opportunity to present their case.  Some arbitrators will default to more expansive procedures, going a considerable distance to avoid any semblance of denial of due process and to maximize international enforceability of the award.

There will be no speedy proceedings with these arbitrators, especially since the Prague Rules give them reasons to be concerned about enforcement. In contrast to the balanced approach of the IBA Rules, some parts of the Prague Rules may strike foreign courts as per se violations of due process. These include the tribunal’s ability to pronounce its preliminary views on the disputed issues at the initial case management conference (article 2.3(e));2) The Prague Rules anticipate that this is likely to pose a problem and seek to address it through a disclaimer in article 2.3(e) that, “such preliminary views shall not by itself be considered as evidence of the arbitral tribunal’s lack of independence or impartiality, and cannot constitute grounds for disqualification.” It is open to question whether any enforcing jurisdictions would treat the right to assert lack of an arbitrator’s impartiality as being waivable by a party. Further, as a recent Kluwer post noted, however, the language of article 2.3 is likely unworkable given that almost all documents today are in electronic form and, notably, the rules do not define what they mean by “e-discovery.” jQuery("#footnote_plugin_tooltip_3447_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3447_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); avoiding “any form of discovery, including e-discovery” (article 4.2); the ability of a tribunal “to give as much evidential value as it deems appropriate” to the statement of a witness who is not called to testify (article 5.8); or the tribunal’s raising legal issues not pleaded by the parties (article 7.2).

Other arbitrators, of course, will be more restrictive, and will not feel they must accommodate the demands of the party that cries the loudest.  These proceedings will indeed be more efficient. This occurs today under the IBA Rules.

The main difference is not driven by the rules adopted for the proceedings, but how the arbitrators choose to apply them (or not) and how they otherwise conduct the proceedings.

 

But the concept of the Prague Rules points in the right direction

While parties will use the civil/common law distinction as a way to reduce the guessing-game when appointing arbitrators, this dichotomy is simply a proxy for assessing whether the arbitrator will likely adopt restrictive or expansive approaches to procedure, ie, to create predictability.  It is not always an accurate proxy, however. There are many civil law arbitrators who will easily indulge a party’s excessive and expensive document requests.  And there are many common law arbitrators who would never tolerate this.

If the Prague Rules were to adopt the terminology of “restrictive/expansive” or an equivalent, instead of relying on outmoded characterizations of regional procedures, they would stand a greater chance of influencing international practice by helping to overcome the tension between the desires for predictability and flexibility.

Here are four ways a future iteration of the Prague Rules could have a broad impact without ever being adopted as the rules of evidence or procedure in a single international arbitration.

1. A “menu” approach to the IBA Rules of Evidence. Instead of keeping parties in the dark about the likely procedure to be followed, why not offer explicitly the broad range of procedural approaches available under the IBA Rules? The Prague Rules could be revised to complement the IBA Rules this way, or the IBA Rules could be revised to offer a “Prague Option”, among others, for parties and tribunals to expressly consider at the earliest opportunity.

2. An ala carte approach to procedural devices. A serious shortcoming of the Prague Rules for international cases is that they are a full set of procedures to be accepted or rejected in their entirety. This is a pity, since it means they will often be rejected in cases where parties are from different backgrounds, but might be amenable to some portions but not others.  For example, my business would not be well served if all of our disputes were to be entirely under civil or common law procedures, and I hope we will never be forced to make this choice. For most cases, we will prefer a mix that we believe is best for a given dispute, such as the front-loading of pleadings (civil law), a willingness to dispose of key issues early (common law), more evidentiary weight given to documents than witnesses (civil law), limited or at least tightly focused discovery (hybrid of civil and common law), and party-appointed experts (common law). If proposed as discrete tools instead of a full set of procedures, the Prague Rules would likely find greater acceptance and use.

3. As a means for arbitrators to publicly declare their preferences. There is no reason to make parties guess about the procedures a proposed arbitrator prefers for most cases. If an arbitrator appears at a conference and declares that they are willing to apply the Prague Rules, this may provide parties with a considerably greater sense of predictability when appointing them (or not).3) Even better, the arbitrators may issue written declarations of their support for the Prague Rules or any of the procedural devices they include. Encouraging arbitrators to be more forthcoming with their procedural preferences was proposed in the article, Puppies or Kittens: How to Better Match Arbitrators to Party Expectations. jQuery("#footnote_plugin_tooltip_3447_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3447_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

4. Prompting better conversations between parties and tribunals on procedure. Rather than relying on unstated and inaccurate presumptions of what the parties want, arbitral tribunals may consider using the Prague Rules as a source of conversation for shaping the procedure to fit their real expectations. They may do this even while applying the IBA Rules of Evidence.  The desire for better “conversations” over the means of resolving disputes was a key finding of the Global Pound Conference, which surveyed dispute stakeholders in 28 cities between 2016 and 2017.4) See the GPC Report on Data Trends and Regional Differences. A full report of all Global Pound Conference survey results and findings will be published in early 2019. jQuery("#footnote_plugin_tooltip_3447_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3447_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Exploring the parties’ procedural expectations is simply good practice that arbitrators should engage in more frequently.5) The value of more discussion with parties about their procedural expectations is forcefully set out in Carita Lindholm Wallgren’s Predictability of Proceedings in International Commercial Arbitration – And is there a Nordic Way?, Festschrift to Gustaf Möller, Tidskrift utgiven av Juridiska Föreningen i Finland (JFT) 2011. jQuery("#footnote_plugin_tooltip_3447_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3447_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

The Prague Rules should occupy a bigger tent

 The initial draft of the Preamble to the Prague Rules stated that they were drafted as a response to the IBA Rules of Evidence, accused of being “closer to common law traditions, as they follow a more adversarial approach regarding document production, fact witnesses and Party-appointed experts. In addition, the parties’ entitlement to cross-examine witnesses is almost being taken for granted.”

The preamble was recently revised to remove this criticism, and any mention, of the IBA Rules of Evidence. It now states more broadly that, although “initially intended to be used in disputes between companies from civil law countries, [the Prague Rules] could in fact be used in any arbitration proceedings where the nature of the dispute or its amount justifies a more streamlined procedure actively driven by the tribunal.”

This change is a step in the right direction, away from a small tent inhabited by those from a shared legal culture, and towards the bigger tent of international arbitration.

References   [ + ]

1. ↑ See, e.g, whether the Prague Rules are a viable alternative to the IBA Rules of Evidence, whether civil law lawyers genuinely desire a set of rules that embody civil law concepts for international arbitration, and whether that the Prague Rules’ prohibition on any form of e-discovery is unrealistic as a means to restrain excessive discovery in international arbitration. 2. ↑ The Prague Rules anticipate that this is likely to pose a problem and seek to address it through a disclaimer in article 2.3(e) that, “such preliminary views shall not by itself be considered as evidence of the arbitral tribunal’s lack of independence or impartiality, and cannot constitute grounds for disqualification.” It is open to question whether any enforcing jurisdictions would treat the right to assert lack of an arbitrator’s impartiality as being waivable by a party. Further, as a recent Kluwer post noted, however, the language of article 2.3 is likely unworkable given that almost all documents today are in electronic form and, notably, the rules do not define what they mean by “e-discovery.” 3. ↑ Even better, the arbitrators may issue written declarations of their support for the Prague Rules or any of the procedural devices they include. Encouraging arbitrators to be more forthcoming with their procedural preferences was proposed in the article, Puppies or Kittens: How to Better Match Arbitrators to Party Expectations. 4. ↑ See the GPC Report on Data Trends and Regional Differences. A full report of all Global Pound Conference survey results and findings will be published in early 2019. 5. ↑ The value of more discussion with parties about their procedural expectations is forcefully set out in Carita Lindholm Wallgren’s Predictability of Proceedings in International Commercial Arbitration – And is there a Nordic Way?, Festschrift to Gustaf Möller, Tidskrift utgiven av Juridiska Föreningen i Finland (JFT) 2011. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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David Aven v. Costa Rica: An Aftershock of Urbaser v. Argentina?

Wed, 2018-12-12 00:21

Andreea Nica

Introduction

The assessment of human rights within an investment arbitration framework, typical for the investor-state dispute resolution (ISDS) mechanism, is one of the topics which has gained significant momentum in the past years, and has led even to the establishment of a Working Group on International Arbitration of Business and Human Rights. Arbitral tribunals often find it difficult to hold an investor accountable for breach of human rights during the operation of an investment because traditionally only States are considered to have the responsibility for their observance and enforcement. Although the idea of individuals and corporations acting as holders of rights on the international plane has been long accepted, no multilateral convention has yet recognized private entities’ general obligation to respect human rights.

 

Investors’ obligation to respect human rights – quo vadis?

The increased role and impact transnational investments play support the creation of a system of investor due diligence obligations at the international level, subject, of course, to the practical obstacles and the political will. A first step in this direction could be found in the 2014 initiative of the Human Rights Council entrusted to the Open-ended Intergovernmental Working Group on transnational corporations and other business enterprises with respect to human rights. Paragraph 4 of the concept note proposed by the Ecuadorian chair of the group expressly acknowledged that “the international legal system reflects an asymmetry between rights and obligations of transnational corporations (TNCs); while TNCs are granted rights through hard law instruments, such as bilateral investment treaties and investment rules in free trade agreements, and have access to a system of investor-state dispute settlement, there are no hard law instruments that address the obligations of corporations to respect human rights”. Although far from imposing direct international obligations upon investors in its current form, this initiative has the potential of being developed into a powerful instrument, with echoes into the ISDS arena as well.

The current state of affairs seems to suggest that, in lack of specific language inserted in international investment agreements (IIAs), a tribunal has its hands tied when it comes to asserting an investor’s liability for breach of human rights. Even when such language exists, the range thereof might differ, as a mere preamble statement1) The preamble of the Norwegian Model BIT (2015) encourages Sates to “reaffir[m] their commitment to democracy, the rule of law, human rights and fundamental freedoms in accordance with their obligations under international law, including the principles set out in the United Nations Charter and the Universal Declaration of Human Rights”. jQuery("#footnote_plugin_tooltip_8543_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); or a corporate social responsibility clause2) Article 810 [Corporate Social Responsibility] of the Canada-Peru Free Trade Agreement states: [e]ach Party should encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate internationally recognized standards of corporate social responsibility in their internal policies, such as statements of principle that have been endorsed or are supported by the Parties. These principles address issues such as labor, the environment, human rights, community relations and anti-corruption. The Parties therefore remind those enterprises of the importance of incorporating such corporate social responsibility standards in their internal policies”. jQuery("#footnote_plugin_tooltip_8543_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); might not be as effective as the incorporation of specific human-rights-related obligations.3) Article 15(1) [Minimum Standards for Human Rights, Environment and Labour] of the SADC Model BIT states: “Investors and their investments have a duty to respect human rights in the workplace and in the community and State in which they are located. Investors and their investments shall not undertake or cause to be undertaken acts that breach such human rights. Investors and their investments shall not assist in, or be complicit in, the violation of the human rights by others in the Host State, including by public authorities or during civil strife”. jQuery("#footnote_plugin_tooltip_8543_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); New generation IIAs seem to follow the latter approach but, as explained in another post, a number of issues relating to the enforcement of such obligations remain open.

 

Urbaser v. Argentina – the first earthquake

As elaborated here, investment arbitration tribunals have dealt with issues relating to human rights in different ways. The most controversial and impactful one is represented by the formulation of a counterclaim by the host State for breach of human rights by the investor. Notwithstanding that this issue might entail several procedural hurdles – particularly in terms of asserting jurisdiction –  tribunals seem to have become quite innovative in overcoming them considering the salience of human rights in sensitive matters, such as environmental protection. As discussed in a previous post, there are numerous perspectives from which jurisdiction over a counterclaim can be assessed, but this post focuses on probably the most problematic one: the scenario in which consent must be derived from the general wording of the IIA.

The landmark decision rendered in Urbaser v. Argentina4) Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, Award dated 8 December 2016 (Urbaser v. Argentina) jQuery("#footnote_plugin_tooltip_8543_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); was the first one to shake the investment arbitration community on this topic. The investor unsuccessfully claimed that its concession for the supply water and sewerage services in Buenos Aires was adversely impacted by Argentina’s emergency measures adopted in the aftermath of the 2001 financial crisis. Argentina filed a counterclaim alleging that the concessionaire’s failure to provide the necessary level of investment in the concession led to violations of the human right to water, which consequently affected the population’s health and the environment in that region. Quite unsurprisingly, the tribunal dismissed the counterclaim, noting that the investor’s obligation to perform contractual water services had its source in domestic law, and not in general international law, and there was no legal ground under the latter to circumstantiate a claim or the corresponding compensation from a group of individuals for performance of services formulated against a private entity. However, the situation would be different if an obligation to abstain – such as a prohibition to commit acts violating human rights – would be at stake, as this would be of immediate application, not only upon States, but equally on individuals and other private parties (§§1210, 1220). Thus, by numerous obiter dicta, the tribunal proclaimed a revolutionary approach towards the role of human rights in investment arbitration. After being the first tribunal to assert jurisdiction over a human rights counterclaim, it also became the first to declare that non-State actors are under a negative obligation “not to engage in activity aimed at destroying” (§1199) human rights. Stressing upon the integrated nature of the two regimes, the decision signalled that investment tribunals are ready to account for and enforce human rights obligations.

 

David Aven v. Costa Rica – A new shock?

The recent decision in David Aven v. Costa Rica5) David R. Aven and others v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Award dated 18 September 2018 (David Aven v. Costa Rica) jQuery("#footnote_plugin_tooltip_8543_5").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); suggests that an earthquake is almost never an isolated occurrence.6) In Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims dated 7 February 2017, the Tribunal granted almost EUR 40 million for environmental damage concerning pit and non-pit soil remediation, groundwater remediation, and well abandonment causing mud pits following Ecuador’s counterclaim. However, jurisdiction was not disputed, as the parties had concluded an agreement by which Burlington accepted jurisdiction over the counterclaims. Also, in Perenco Ecuador Ltd. v. The Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador), ICSID Case No. ARB/08/6, where a similar counterclaim was brought but the cases were not joined because of Ecuador’s opposition, the jurisdiction was never challenged by the investor. jQuery("#footnote_plugin_tooltip_8543_6").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The tribunal empanelled to hear the dispute had to decide if it had jurisdiction over a counterclaim in relation to the environmental damage caused to undisclosed wetlands during the operation of a real estate project. This was looked at from three stances: (1) the language of the relevant IIA, (2) the investment arbitration case law and (3) procedural economy and efficiency.

First, the relevant treaty environmental language,7) E.g., Article 10.9.3.c and Article 10.11 of DR-CAFTA. jQuery("#footnote_plugin_tooltip_8543_7").tooltip({ tip: "#footnote_plugin_tooltip_text_8543_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); rather general in nature, was interpreted as representing a source for the investors’ obligation to comply with the environmental domestic laws and regulations, and any corresponding measures adopted by the host State for the implementation of such norms; any breach thereof would amount to a violation of domestic and international law and would trigger liability for the damages caused (§734). The tribunal courageously held that, although the enforcement of environmental law is primarily on the States, it cannot be accepted that a foreign investor could not be subjected to international law obligations in this field (§737).

Second, citing the approach adopted in Urbaser v. Argentina, the tribunal proclaimed that “it can no longer be admitted that investors operating internationally are immune from becoming subjects of international law (…) particularly when it comes to rights and obligations that are the concern of all States, as it happens in the protection of the environment” (§737). Consequently, it found no substantive reasons to exempt an investor from the scope of claims, and interpreted “an investment dispute” as covering disputes giving rise to counterclaims, asserting prima facie jurisdiction for additional reasons of procedural economy and efficiency (§§740-742).

Costa Rica’s environmental counterclaim was ultimately dismissed for non-observance of the procedural requirements set forth under Article 20 and 21 of the UNCITRAL Arbitration Rules governing the proceeding(§§744-747). Also, the tribunal noted in passing and, somewhat contradictory to previous reasoning, that the treaty language did not actually “impose any affirmative obligations upon investors” nor supported a counterclaim for violation of state-enacted environmental regulation (§743). Still, the window opened by Urbaser v. Argentina seems to have been widened with this case. If one decision might be viewed as unique reasoning, two can at least signal the incipience of a trend. Indeed, the assertion of a more tenable link between human rights, on one side, and business and IIAs, on the other side, is just one step forward in the overall movement towards a more balanced approach in the ISDS system, which may also ensure its survival in these times characterized by a legitimacy crisis

References   [ + ]

1. ↑ The preamble of the Norwegian Model BIT (2015) encourages Sates to “reaffir[m] their commitment to democracy, the rule of law, human rights and fundamental freedoms in accordance with their obligations under international law, including the principles set out in the United Nations Charter and the Universal Declaration of Human Rights”. 2. ↑ Article 810 [Corporate Social Responsibility] of the Canada-Peru Free Trade Agreement states: [e]ach Party should encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate internationally recognized standards of corporate social responsibility in their internal policies, such as statements of principle that have been endorsed or are supported by the Parties. These principles address issues such as labor, the environment, human rights, community relations and anti-corruption. The Parties therefore remind those enterprises of the importance of incorporating such corporate social responsibility standards in their internal policies”. 3. ↑ Article 15(1) [Minimum Standards for Human Rights, Environment and Labour] of the SADC Model BIT states: “Investors and their investments have a duty to respect human rights in the workplace and in the community and State in which they are located. Investors and their investments shall not undertake or cause to be undertaken acts that breach such human rights. Investors and their investments shall not assist in, or be complicit in, the violation of the human rights by others in the Host State, including by public authorities or during civil strife”. 4. ↑ Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, Award dated 8 December 2016 (Urbaser v. Argentina) 5. ↑ David R. Aven and others v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Award dated 18 September 2018 (David Aven v. Costa Rica) 6. ↑ In Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Counterclaims dated 7 February 2017, the Tribunal granted almost EUR 40 million for environmental damage concerning pit and non-pit soil remediation, groundwater remediation, and well abandonment causing mud pits following Ecuador’s counterclaim. However, jurisdiction was not disputed, as the parties had concluded an agreement by which Burlington accepted jurisdiction over the counterclaims. Also, in Perenco Ecuador Ltd. v. The Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador), ICSID Case No. ARB/08/6, where a similar counterclaim was brought but the cases were not joined because of Ecuador’s opposition, the jurisdiction was never challenged by the investor. 7. ↑ E.g., Article 10.9.3.c and Article 10.11 of DR-CAFTA. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Swissbourgh v Lesotho: Can a Right to Arbitrate be an Investment?

Mon, 2018-12-10 16:08

Jack Wass

In a conventional investment dispute, the claimant seeks compensation for the impairment of its substantive investment in the territory of the host state. Swissbourgh Diamond Mines (Pty) Ltd v Lesotho arose out of mining investments made by the claimants in Lesotho in the 1990s. However, this arbitral proceeding was not concerned directly with the impairment of the claimants’ underlying investment. Rather, they alleged that Lesotho was liable for frustrating the claimants’ ability to bring their underlying investment claim in a particular forum.

The claimants alleged that Lesotho had participated in the unlawful dissolution of a tribunal established pursuant to the Treaty of the Southern African Development Community (SADC Tribunal) after the claimants had submitted their expropriation claim to that tribunal, but before the claim was resolved. This prevented them seeking recourse for the underlying expropriation. The claimants brought a separate arbitration, administered by the Permanent Court of Arbitration and seated in Singapore, under Annex 1 to the Protocol on Finance and Investment of the SADC (the Investment Protocol).

The PCA Tribunal granted an order that a new tribunal be established to hear the underlying claim,1) Swissbourgh Diamond Mines (Pty) Ltd v Kingdom of Lesotho (Sir David A R Williams QC, R Doak Bishop and Justice Petrus Millar Nienabar (dissenting in part)). jQuery("#footnote_plugin_tooltip_4723_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Lesotho applied to set aside the award. The Singapore Court of Appeal, in a unanimous judgment delivered by Sundaresh Menon CJ, upheld the High Court’s decision that the PCA Tribunal did not have jurisdiction and that the award had to be set aside.2) Swissbourgh Diamond Mines (Pty) Ltd & ors v Kingdom of Lesotho [2018] SGCA 81. jQuery("#footnote_plugin_tooltip_4723_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The Court of Appeal dealt with four issues:

  • First, it held that where a dispute fell outside the scope of an arbitration clause, then Article 34(2)(a)(iii) of the UNCITRAL Model Law allowed the award to be set aside;
  • Second, it held that Lesotho was not ‘bound to accept’ the jurisdiction of the PCA Tribunal;
  • Third, it held that the PCA Tribunal did not have jurisdiction over the claim; and
  • Fourth, it found that the claimants may not have exhausted local remedies before bringing the arbitral claim.

In this post I will focus on the second issue, and conclude with some brief thoughts on the third.

The claimants alleged that by making various public and private statements, Lesotho committed to accepting the jurisdiction of the PCA Tribunal, and that the respondent should not be permitted to approbate and reprobate on that question. Either Lesotho’s statements constituted binding unilateral declarations to accept the jurisdiction of the Tribunal, or Lesotho was estopped from denying that it had done so. The statements in question fell into three categories: (i) political statements to SADC organs that the claimants would be permitted to pursue their claims in other fora; (ii) submissions in the course of the Tribunal’s hearing phase that the claimants should have the opportunity to pursue their claims if the Tribunal found that it had jurisdiction; and (iii) a freestanding offer to have the claim arbitrated in another SADC state, which was rejected.

In principle, the second and third questions ought to have been addressed in the reverse order: only if the Court found that the Tribunal lacked jurisdiction did any question of relying on Lesotho’s statements arise. The claimants’ case was that if the Tribunal lacked jurisdiction, then Lesotho was precluded from relying on that absence because of the statements it had made.3) Chagos Marine Protected Area (Mauritius v United Kingdom), 18 March 2015, para 437, citing Case Concerning the Temple of Preah Vihear (Cambodia v Thailand) [1962] ICJ Rep 6, Judge Fitzmaurice Sep Op, 63. jQuery("#footnote_plugin_tooltip_4723_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The question of whether a claimant can invoke estoppel (or its related doctrines, acquiescence and binding unilateral declarations) to establish the jurisdiction of a tribunal is unsettled. The International Court of Justice controversially held that the United States was precluded from denying the Court’s jurisdiction in the Nicaragua Case,4) Military and Paramilitary Activities in and Against Nicaragua (Nicaragua v United States of America) (Jurisdiction) [1984] ICJ Rep 392, 410–1 jQuery("#footnote_plugin_tooltip_4723_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and more recently a minority of the International Tribunal on the Law of the Sea argued that Ghana was estopped from denying the Tribunal’s jurisdiction over Argentina’s claim in respect of the ARA Libertad.5) The ‘ARA Libertad’ Case (Argentina v Ghana) (Provisional Measures) [2012] ITLOS Rep 332, Judges Wolfrum and Cot Sep Op, paras 68–9 jQuery("#footnote_plugin_tooltip_4723_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Critics argue that since the jurisdiction of an international tribunal is founded on consent, a respondent by definition cannot be precluded from contesting jurisdiction: either they consented or they did not. In Swissbourgh, the Court did not see anything objectionable in principle to the idea that a respondent state may be precluded from contesting the jurisdiction of an arbitral tribunal. As I have argued elsewhere,6) Jack Wass ‘Jurisdiction by Estoppel and Acquiescence in International Courts and Tribunals’ (2016) 86(1) British Yearbook of International Law 155. jQuery("#footnote_plugin_tooltip_4723_6").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the application of estoppel reinforces rather than undermines the consensual nature of international jurisdiction: where a state has made an unequivocal representation that it will not dispute the jurisdiction of a tribunal, and the claimant has relied upon that representation to its detriment, it would be contrary to the underlying principle of good faith for the respondent to resile from it. Reliance on unilateral declarations can be justified on the same basis.

But the significant consequences of such a finding demand strict adherence to the elements of estoppel: an unambiguous representation, reliance, and detriment.7)It is sometimes said that benefit to the representor is sufficient, and detriment to the representee is not required; this theory is rejected in Wass at 165. jQuery("#footnote_plugin_tooltip_4723_7").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Court of Appeal rightly found that these elements were not satisfied: most importantly, Lesotho’s statements were not directed at the jurisdiction of the PCA Tribunal, but were directed at the merits question of whether the claimants should have an alternative forum available, and in some cases were expressly conditional on the PCA Tribunal having jurisdiction in the first place. There is an understandable temptation to restrain a state from adopting inconsistent positions generally, but the fundamentality of consent means that a tribunal cannot equate the state’s position on the merits with acceptance of jurisdiction to determine the substance, unless the state has made an unequivocal statement to that effect.8)It was for this reason that I argue the Separate Opinion in the ARA Libertad case was wrong: see Wass at 171. jQuery("#footnote_plugin_tooltip_4723_8").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Since Lesotho was free to deny that the PCA Tribunal had jurisdiction, the Court was then required to determine whether it did so under Annex 1 to the Investment Protocol. It emphasized the need for a territorial nexus between the investment and the host state. Although the Court did accept that an investment consists of a bundle of rights which includes the secondary right to seek remedies and vindicate the primary right, the right to refer the underlying claim to the SADC Tribunal did not have the necessary territorial nexus since it existed only on the international plane and beyond Lesotho’s enforcement jurisdiction; the only investment left was the original mining leases, which did not carry an obligation to guarantee that the SADC claim would be heard. It followed that the PCA Tribunal had no jurisdiction over the claim in relation to the dissolution of the SADC Tribunal, and the award had to be set aside. Although the Court relied on the ‘generally accepted principle in international investment law’ of territoriality, that limitation is usually invoked to ensure that the underlying activity constituting the investment has the necessary economic link with the host state to justify the protection of the treaty.9)See, for example, the decision of the majority in Abaclat v Argentina (Decision on Jurisdiction and Admissibility) ICSID Case No ARB/07/5 (2011, Tercier P, van den Berg & Abi-Saab (dissenting)), para 374. jQuery("#footnote_plugin_tooltip_4723_9").tooltip({ tip: "#footnote_plugin_tooltip_text_4723_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In the Court of Appeal’s conception, that criterion also serves to distinguish between matters within and beyond the enforcement jurisdiction of the host state.

The result in Swissbourgh may seem harsh. The claimants had a genuine underlying investment. They claimed that the investment had been expropriated and that they had possessed the right to refer that dispute to the SADC Tribunal. Lesotho participated in a process that foreclosed that avenue, leaving the claimants without recourse. In those circumstances it would have been tempting to find a remedy. However, adherence to fundamental principles of international jurisdiction did not allow the Court to do so.

References   [ + ]

1. ↑ Swissbourgh Diamond Mines (Pty) Ltd v Kingdom of Lesotho (Sir David A R Williams QC, R Doak Bishop and Justice Petrus Millar Nienabar (dissenting in part)). 2. ↑ Swissbourgh Diamond Mines (Pty) Ltd & ors v Kingdom of Lesotho [2018] SGCA 81. 3. ↑ Chagos Marine Protected Area (Mauritius v United Kingdom), 18 March 2015, para 437, citing Case Concerning the Temple of Preah Vihear (Cambodia v Thailand) [1962] ICJ Rep 6, Judge Fitzmaurice Sep Op, 63. 4. ↑  Military and Paramilitary Activities in and Against Nicaragua (Nicaragua v United States of America) (Jurisdiction) [1984] ICJ Rep 392, 410–1 5. ↑ The ‘ARA Libertad’ Case (Argentina v Ghana) (Provisional Measures) [2012] ITLOS Rep 332, Judges Wolfrum and Cot Sep Op, paras 68–9 6. ↑ Jack Wass ‘Jurisdiction by Estoppel and Acquiescence in International Courts and Tribunals’ (2016) 86(1) British Yearbook of International Law 155. 7. ↑ It is sometimes said that benefit to the representor is sufficient, and detriment to the representee is not required; this theory is rejected in Wass at 165. 8. ↑ It was for this reason that I argue the Separate Opinion in the ARA Libertad case was wrong: see Wass at 171. 9. ↑ See, for example, the decision of the majority in Abaclat v Argentina (Decision on Jurisdiction and Admissibility) ICSID Case No ARB/07/5 (2011, Tercier P, van den Berg & Abi-Saab (dissenting)), para 374. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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The Contents of Journal of International Arbitration, Volume 35, Issue 6, 2018

Sun, 2018-12-09 16:47

Maxi Scherer

We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:

Gordon Blanke, Free Zone Arbitration in the United Arab Emirates: DIFC v. ADGM (Part II)

This is Part II of a two-part article that deals with the phenomenon of free zone arbitration in the United Arab Emirates.  Part I, which was published in the last issue of this journal, discussed in some detail the concept and practice of free zone arbitration in the Dubai International Financial Centre (DIFC).  This Part II discusses free zone arbitration in the more recently established Abu Dhabi Global Market (ADGM) and highlights the main differences between the two.  In doing so, Part II will take a closer look at the judicial and legislative framework of the ADGM, including in particular the main provisions and the operation of the 2015 ADGM Arbitration Regulations, the institutional framework of arbitration in the ADGM, the curial function of the ADGM Courts in ADGM-seated arbitrations and the recognition and enforcement of domestic (non-)ADGM and foreign arbitral awards in the ADGM.  Part II also explores to what extent the ADGM Courts are envisaged to serve as a host or conduit jurisdiction in the terms proposed and practiced by their DIFC counterparts.

Heiko A. Haller & Annette Keilmann, In Claimant’s Hands? Admissibility and Consequences of a Withdrawal of Claim in International Arbitration

The withdrawal of claim is not explicitly dealt with in most arbitral rules.  As a consequence, it can be unclear whether a withdrawal is without prejudice or with prejudice (i.e., a ‘waiver’ of the claims).  Also, it is questionable whether, in case of a withdrawal with prejudice, the respondent is entitled to object to a withdrawal.  Finally, there may be doubt whether a cost decision has to be taken and who decides on the allocation of the costs when a claim is withdrawn.  This article concludes that – unless the claimant clarifies that its withdrawal is one with prejudice – the withdrawal is only without prejudice.  The respondent may object to such withdrawal.  From the moment when the respondent has received the detailed request for arbitration or the statement of claim, even the respondent’s consent is required.  Regarding a withdrawal with prejudice, no consent of the respondent is needed.  Finally, although any effective withdrawal of a claim terminates the arbitration proceedings with immediate effect, the arbitral tribunal remains competent to decide on the allocation of the costs of the proceedings.

Joachim Drude, Fiat Iustitia, Ne Pereat Mundus: A Novel Approach to Corruption and Investment Arbitration

Corruption has existed forever.  Notwithstanding a seemingly universal condemnation as reflected in a number of international conventions, levels of corruption continue to be quite high across the globe.  The public sector is most troubled with it.  There are countries where grand corruption deeply rooted at highest government levels constitutes the very essence of state policy.  This article analyses whether it is appropriate in the investment arbitration context to deny contracts or investments procured by corruption any form of protection as the tribunals in World Duty Free, Metal-Tech and Spentex have done, relying on considerations of international (transnational) public policy.  Based on a comparative analysis of how several jurisdictions deal with the issue, the article concludes that, subject to certain limitations, it is not against international (transnational) public policy to accord protection to contracts and investments tainted by corruption.

NOTES SECTION 

Shaun Pereira, Deferred Challenges to Jurisdiction Under the Model Law

This note discusses a recent decision of the Singapore High Court, which decided that a party’s failure to bring a challenge against an arbitral tribunal’s preliminary ruling on jurisdiction under Article 16 of the UNCITRAL Model Law precluded that party from applying to set aside the merits award on the jurisdictional grounds which could have been challenged earlier.  This note argues that a better interpretation of the Model Law is that parties are entitled to choose between the two alternatives of a challenge under Article 16 or a subsequent setting-aside application on those jurisdictional grounds.  That interpretation is more consistent with the drafting history of the Model Law and makes good practical sense, and any undesirable conduct can be adequately regulated through the cognate doctrines of waiver and estoppel.

BOOK REVIEWS

Patrick Dumberry, A Guide to State Succession in International Investment Law, 1st edition, Edward Elgar Publishing 2018, ISBN: 978-1788116602 (reviewed by Dr Hanno Wehland)

Jose Daniel Amado, Jackson Shaw Kern & Martin Doe Rodrigues, Arbitrating the Conduct of International Investors, 1st edition, Cambridge University Press 2018, ISBN: 9781108415729 (reviewed by Dr Crina Baltag)

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No More Penal Sanctioning of Arbitrators and Party-Appointed Experts in the UAE

Sun, 2018-12-09 16:01

Gordon Blanke

With 2018 drawing to a close, the UAE legislature has ushered in a long-awaited amendment to Art. 257 of the UAE Penal Code (see Decree issuing Federal Law No. (24) of 2018 amending certain provisions of the Federal Law no. (3) of 1987 issuing the Penal Code). Readers of Kluwer Blog will remember that that Article was last amended in 2016 to make arbitrators and party-appointed experts criminally liable for an expression of bias over the course of an arbitration process in violation of the prevailing principles of impartiality and fairness (see my previous reporting at Kluwer Blog).

My openly-held view at the time was that the potential effects of this Article should not be overstated and would, in any event, remain limited given in particular that criminal liability under UAE law requires mens rea and would therefore only be engaged provided that it could be shown that an arbitrator knowingly expressed bias. This means that an arbitrator’s criminal liability could only come into play if it was established that he or she had favoured one of the parties to the arbitration with the intention of providing an unfair advantage, so the bias had to be proven to have been intentional. As I explained at the time, a qualifying advantage could be procedural, such as not having accorded a party a fair hearing, or substantive, such as a finding in favour of a party in violation of the prevailing law on the merits. Any such violations, whether procedural or substantive, would require proof to have been committed by the arbitrator intentionally, i.e. a genuine error in applying the law or the unintentional conferral of a procedural advantage would not have been sufficient. Corresponding requirements apply to the application of Art. 257 to party-appointed experts although party-appointed experts could have arguably got into the crossfire of Art. 257 more readily given their role in providing one-sided expertise in support of one of the arbitrating parties only.

Even though it would have been difficult in practice to disqualify an arbitrator or a party-appointed expert in reliance on Art. 257, the Article risked being invoked abusively by unmeritorious parties that are known to make use of guerrilla practices in a local arbitration context. The newly amended Art. 257 provides verbatim as follows:

“Any person who, while acting in the capacity of an expert, translator or investigator appointed by a judicial authority in a civil or criminal case, or appointed by an administrative authority, confirms a matter contrary to what is true and misrepresents that matter while knowing the truth about it, shall be sentenced to imprisonment for a minimum term of a year and a maximum term of five years.

The punishment shall be temporary imprisonment if the mentioned individuals were assigned to mandate in relation to a felony.

The mentioned individuals shall be prohibited from undertaking the assignments commissioned to them another time, […].”

As is evident from the wording above, the most recent amendment to Art. 257 excises the reference to arbitrators and party-appointed experts and ensures that going forward, it will no longer apply to these two categories of professionals. This is not only a relief for the locally-active arbitration profession that frequently doubles as arbitrator in UAE-seated arbitrations and experts appointed by parties in arbitral UAE-seated proceedings, but also sends a strong signal to the international arbitration community that the UAE remains a preferential seat of arbitration in the region. The most recent amendment of Art. 257 arrives timely on the heels of the new UAE Federal Arbitration Law (see UAE Federal Law No. 6 of 2018 and my previous reporting at http://arbitrationblog.kluwerarbitration.com/2018/06/06/uae-federal-arbitration-law-adopted-long-last-well-ends-well/), which entered into force with effect from June this year, but missed an opportunity to rectify the anomaly introduced by the 2016 amendment of Art. 257.

It is encouraging to see that the UAE legislature has taken to heart the criticism that was levelled at the 2016 amendment since its publication and took note of the anomaly that the amendment created and the risks it placed on the perception of the UAE as a mature and safe seat of arbitration in the Middle East. The prompt reaction of the UAE legislature to undo the 2016 amendment to reflect best international standards and practice will no doubt be welcomed by both the local and international arbitration profession as an indicator of the UAE’s commitment to serving users of arbitration as an investor-friendly and arbitration-experienced seat.

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Document Production in International Arbitration: The Good or the Evil?

Sun, 2018-12-09 02:00

Pelin Baysal and Bilge Kağan Çevik

Document production is one of the most important and controversial topics in international arbitration. Some practitioners consider the document production as “an essential element of justice”, whereas some others consider it as “a waste of time and money”. So, where does the truth lie?

Does Common Law Provide Better Justice than Civil Law or Vice Versa?

In common law countries, the rationale for discovery suggests that justice can only be established if both sides have access, as far as possible, to the same materials. Thus, a party must not only produce documents that it intends to rely upon but also those which might have an adverse effect on its case. In common law countries, the discovery of documents is regarded as an indispensable tool in the fact-finding process.

In civil law countries, however, judges enquire into the facts with the assistance of the parties. The parties only present the documents that they wish to rely upon, but certainly do not present anything that would damage their own case. Furthermore, large document production proceedings can be a costly and time-consuming process. Accordingly, most civil lawyers suggest that the discovery adds significant delay and costs to the proceedings, yet rarely contributes much to the outcome.

Is common law justice better than civil law, or vice versa? Is American justice better than, French or German, or is it the other way around? It cannot be said that either common law or civil law countries produce a better quality of justice. Also, these legal systems do not call for a change to serve better justice. Further, the users of both systems seem content with the process in their country. Thus, neither system can be said to be inherently problematic, but still the divergent approaches to document production make life difficult for a litigant who is trying to pursue a claim before the national court of a different legal system.

Against this background, the concept of international arbitration emerged as an alternative to litigation before domestic courts and is perceived as the best forum of choice for international disputes. Thus, international arbitration has to accommodate the expectations of the parties from different legal systems. How then should document production be conducted in international arbitration?

As Malcolm Wilkey pointed out: “an emphatic tribunal should do its best to make both litigants feel at home.”1)Malcolm Wilkey, The Practicalities of Cross-Cultural Arbitration, in Conflicting Legal Cultures in Commercial Arbitration: Old Issues and New Trends 79. jQuery("#footnote_plugin_tooltip_4635_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4635_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The challenge in international arbitration is to satisfy both expectations: Obtaining the disclosure of documents that are material to the outcome of the case, but at moderate costs.

There is no standard “one size fits all” application of document production in international arbitration. What document production is required in a complex construction case might be quite different from a case seeking to determine the meaning of a word in a commercial agreement. This is the inherent advantage of the arbitration: being able to craft a procedure in relation to the needs of each case.

The IBA Rules or the Prague Rules?

Today parties often agree to be governed or at least guided by the International Bar Association Rules on the Taking of Evidence (“IBA Rules”). The IBA Rules main goal was to bridge the gap between different legal systems, which is “particularly useful when the parties come from different legal cultures”. To this purpose, the IBA Rules offer the tools for a limited search of evidence that is relevant and material to the outcome of the arbitration. This formulation is generally accepted as compromising the conflicting approaches as it allows the separation of the “wheat from the chaff “among the document production requests.

Nevertheless, nowadays some arbitration practitioners challenge the IBA Rules by arguing that the application of the IBA Rules is leading to the Americanisation of international arbitration. This criticism gave rise to the proposal of a different set of rules, Inquisitorial Rules on the Taking of Evidence in International Arbitration (“Prague Rules”), which is to be launched in December 2018 2)Draft of 1 September 2018 jQuery("#footnote_plugin_tooltip_4635_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4635_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); (for related posts on the Prague Rules on Kluwer Arbitration Blog click here, here and here). The defenders of the Prague Rules suggest that the features of the IBA Rules are unknown to the civil law systems and, therefore, causing dominance of common law in international arbitration. They further argue that the application of inquisitorial procedure would contribute to international arbitration particularly by reducing time and costs.

Assuming that the application of the IBA Rules establishes the dominance of the common law approach to international arbitration, should the Prague Rules not receive the same criticism from common law practitioners given that they provide for the inquisitorial approach which is uncommon for common law? In other words, would the application of the Prague Rules not cause international arbitration being played in a more civil law style?

If the parties wanted to resolve their dispute by the rules of the certain legal system, the need for international arbitration would not arise, as the national courts would suffice. The effective resolution of the international disputes could not be sustained by building an illusory divide between common law and civil law, but could only be sustained by bridging those cultural gaps.

Leaving aside the above discussion that is based on the purposes of the IBA Rules and the Prague Rules, there are numerous similarities between them. Both rules leave the ultimate control of the document production to the tribunal. It is the tribunal who will eventually satisfy both parties’ expectations by ensuring the production of those documents that are material to the outcome of the case and at a moderate cost.

Nonetheless, the difference arises where the Prague Rules suggest that “Generally, the Arbitral Tribunal shall avoid extensive production of documents, including any form of e-discovery” (cf. Article 4.2). Considering that transactions are conducted predominantly via electronic means nowadays, it seems that prohibiting the production of e-documents is excessive to reconcile the needs of the businesses in this century.

Final Awards May Be Successfully Challenged Based on Document Production Orders

When a losing party is analysing why it was unsuccessful in a case, it generally refers to the document production orders and might say that “if the tribunal had not rejected my document production request, I could have proven the other party’s meritless claims”.

Different legal systems’ different approaches to document production also show itself in actions for setting aside and the recognition and enforcement of arbitral awards. In many civil law countries, the prohibition of a “fishing expedition” constitutes a fundamental principle of procedural law. On the other hand, in many common law countries, a relatively extensive document production is considered as an essential requirement for a fair proceeding. Therefore, the issue arises as to whether a tribunal’s excessively limited document production or allowance of the fishing expedition, would result in the challenge of the final award due to the violation of public policy.

The issue got even more complicated after the Higher Regional Court of Frankfurt’s decision. The dispute arose out of a failed M&A transaction. The American purchaser accused the German vendor of having manipulated the internal debts and initiated arbitration proceedings to claim damages. In the procedural order, the parties agreed to submit all documents that the party-appointed experts had taken into consideration. Afterwards, the claimant submitted two financial expert reports but only submitted 110 out of 1,200 documents that were taken into consideration by those experts. Although the respondent requested the remaining documents to be produced, the tribunal rejected the request by arguing that it was in the tribunal’s discretion to order document production. At the end, the tribunal decided in favour of the claimants on the merits, and the respondent challenged the award before the Higher Regional Court of Frankfurt in June 2010.3)Oberlandesgericht Frankfurt, 17.02.2011, 26 Sch 13/10 jQuery("#footnote_plugin_tooltip_4635_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4635_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The applicant argued that the tribunal violated the parties’ agreement in the procedural order by refusing to order the production of the documents that the claimant made available to its party-appointed experts. The court set aside the award by stating that it is only in the discretion of the arbitral tribunal to order document production only when the parties’ agreements do not restrict the arbitral tribunal’s discretion. In the present case, however, the arbitral tribunal was bound by the parties’ agreement. Although the losing party appealed the decision before the German Federal Court of Justice, the court considered the appeal inadmissible and rejected it.4)BGH, 2 Oct. 2012, III ZB 8/11 jQuery("#footnote_plugin_tooltip_4635_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4635_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

It is crucial for every arbitral tribunal to conclude arbitration proceedings with an enforceable award. If questions of a breach of public policy or parties’ agreement stem from document production orders, then concerns as to the ability to enforce the final award under the New York Convention arise. To avoid raising concerns, the tribunals should be cautious when it comes to determining whether they have the discretion to order document production or not; and if yes, to avoid the refusal of sufficient document production or excessively onerous document production.

References   [ + ]

1. ↑ Malcolm Wilkey, The Practicalities of Cross-Cultural Arbitration, in Conflicting Legal Cultures in Commercial Arbitration: Old Issues and New Trends 79. 2. ↑ Draft of 1 September 2018 3. ↑ Oberlandesgericht Frankfurt, 17.02.2011, 26 Sch 13/10 4. ↑ BGH, 2 Oct. 2012, III ZB 8/11 function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Recent Developments on Arbitration in Franchising Contracts: a Brazilian Perspective

Fri, 2018-12-07 16:05

Ricardo Aprigliano

I. Introduction

Despite the fact that commercial arbitration has experienced a huge development in Brazil in the last years and a general favorable approach by Brazilian courts, there are fields in which arbitration is still incipient, with complex discussions about its enforceability and to what extent consumer, labor or adhesion contracts can be discussed via arbitration.

Brazilian Courts have already decided some cases regarding adhesion contracts, with a restricted interpretation of the validity of arbitration agreements when related to asymmetrical relations, such as consumer contracts. Recently, the Appellate Court of São Paulo has ruled a case about a franchising contract, in which it dismisses the formal requirements of arbitration clauses inserted in adhesion contracts (Appellation no. 1047574-03.2017.8.26.0100), even though franchising agreements are generally classified as adhesion contracts.

It seems an important decision about the formal requirements of arbitration clauses in franchising contracts, with a new and more liberal approach in favor of the arbitration clauses.

II. Formal Requirements in International Arbitration Law

The New York Convention (1958) prescribes, under its Article II(2), that the “agreement in writing” must exist in written form to effectively bind the parties and must be either signed by all the parties or contained in an exchange of letters or telegrams (it is widely accepted that other means of exchange are also admissible). The enforceability of the agreement depends on the alternative fulfillment of one of the two requisites, in combination with the written form.

The UNCITRAL Model Law on International Arbitration, in which the Brazilian Arbitration Act was inspired, does not impose a specific way when it comes to the required form of the arbitration agreement in its Article 7, as it allows two possible options to the Contracting States: Option I, which requires that the arbitration agreement be made in a corporeal, non-ephemeral form (such as through writing or recording), or Option II, which institutes no formal requirements whatsoever.

III. Formal requirements in Brazilian arbitration law

The Brazilian Arbitration Act (Lei 9.307/1996, “BAA”) has adopted the expression “arbitration convention” (“convenção de arbitragem”) as a general term to refer to its two different species: arbitration clause (“cláusula compromissória”) and arbitration agreement (“compromisso arbitral”). These two species do not coincide with those of international law. The second and less common option is to agree to arbitrate after the beginning of the conflict. Our law has provisions about its formal requirements, demanding that the arbitration agreement must exist in written form, signed by the Parties before two witnesses, among other requirements (Article 9 of the BAA).

The most common way to agree to arbitrate is through the arbitration clause, which is signed before the beginning of the conflict. It can be included in the contract or signed in a separate document. In fact, Article 4(1) of the BAA explicitly admits the possibility of an arbitration clause which exists independently of the contract itself, as long as it mentions unequivocally the contract affected by it. Based on those provisions, Brazilian courts have decided some cases regarding the formal requirements of the arbitration clauses.

It should also be noted that our Arbitration Act has a provision which states that the arbitration clause must not only be written, but also (i) inserted in boldface type, and (ii) signed in particular by the adherent. According to Article 4(2) of the BAA, that is the case when the contract in question is classified as an adhesion contract:

Article 4(2): In adhesion contracts, the arbitration clause will be effective only if the adherent takes the initiative of instituting the arbitration or expressly agrees with its institution, as long as it is written in a separate document or in boldface type, with a signature or special approval for that clause.

The Brazilian concept of adhesion contract mostly overlaps that of international law. An adhesion contract is the one in which one party has substantially more power to determine the essential aspects of the contract, in a “take it or leave it” fashion. When a contract is classified as an adhesion contract, any arbitration clause in it included automatically incurs in the two additional form requirements mentioned above.

To complete this legal framework, we shall also mention the Brazilian Consumer Defense Code, a Federal Act from 1990 that contains, in this particular regard, a provision that invalidates arbitration clauses inserted in consumer contracts (Lei 8.078/1990, article 51, VII).

IV. Adhesion Contracts: a Restricted Approach from Brazilian Courts

The highest Brazilian court in charge of interpretation of federal law is the Superior Tribunal of Justice (STJ). In recent years, STJ has issued decisions stating that consumers are not bound by arbitration agreements inserted in consumer contracts, whether they are classified as adhesion contracts or not, and are authorized to argue that invalidity of the clause directly before a state court. Not even the competence-competence rule applies in those cases.

In 2016, the Court has decided that franchising contracts are to be presumed adhesion contracts (as already discussed in this blog), which means that their arbitration agreements are only valid if the signature is followed by the two additional formal requirements: boldface typing and specific signature. More recently, another decision has asserted that a consumer is not bound by an arbitration agreement inserted in a contract regarding the buying of real estate from a construction company (REsp no. 1.753.041).

V. A New Decision From a Lower Court Proposes a More Flexible View on Franchise Agreements

Despite those decisions, the São Paulo Court of Appeal, which is one degree below the STJ in hierarchy, has ruled a decision on opposite terms: an arbitration clause inserted in a franchising contract is in principle valid, even if the formal requirements are not fulfilled.

The appellant (“Brumaria Comércio de Bolos”) was the franchisee of a franchising contract between itself and the appellee (“Vó, Quero Bolo! Franchising.”), which contained an arbitration clause. Despite of it, the appellant decided to initiate state court procedures in order to terminate the contract.

Initially, the single judge dismissed its request on the basis of the sole Paragraph of Article 8 of the BAA, which essentially incorporates the competence-competence doctrine, according to which only the arbitrator has the competence to decide whether the arbitration clause is enforceable.

At the Appellate Court of São Paulo, the decision was maintained, with the following additional arguments:

  1. The function of the formal requirements of Article 4(2) of the BAA is to warn the “vulnerable part” in an asymmetric relation, which means that the existence of asymmetry between the parties must be verified, in conjunction with the adhesion nature of the contract, in order to justify the formal requirements of Article 4(2);
  2. Entrepreneurial contracts are to be presumed symmetrical, which means that the burden of proof of asymmetry in the relation falls upon the “vulnerable part”. A franchise contract is of entrepreneurial nature, so it falls upon the appellant (who allegedly was in a vulnerable situation) to prove the existence of asymmetry between the parties;
  3. The appellant did not prove the asymmetry in the relation between the parties, and the fact that the contract had pre-defined clauses by the franchiser is not sufficient to prove otherwise. Therefore, the formal requirements of Article 4(2) are unnecessary for the validity of the arbitration clause in question.

The sentence also reaffirms the applicability of the competence-competence principle expressed in the Article 8 of the BAA, denying its competence to decide about the enforceability of an arbitration clause. The apparent contradiction of this statement with the aforementioned argument of the decision has not been subject of further scrutiny.

VI. Is There a New Standard on the Validity of Arbitration Agreements Related to Franchise Contracts in Brazil?

The recent decision of an important Court of Appeal in Brazil might lead us to the conclusion that the rules regarding adhesion contracts will, from now on, be interpreted by an initial distinction between commercial or entrepreneurial relations and non-entrepreneurial ones, and their influence on the enforceability of the arbitration agreement.

The São Paulo State Court of Appeal has established an important distinction. In contracts of entrepreneurial nature, the parties must be presumed on equal footing, even in adhesion contracts, leading to an interpretation that the formal requirements of Article 4(2) of the BAA are, in principle, unnecessary. It is up to the franchisee to argue and prove the asymmetry between the parties and the consequent need of the additional formal requirements.

The question is whether the Superior Court of Justice will follow that distinction and evolve its interpretation of the Brazilian Arbitration Act, not only regarding franchising contracts, but also other types of contracts where, despite the adhesion nature, the relation between parties might be considered equal and fair.

The end of the story is yet to be told, since the losing Party has appealed. The question will be, in the future months, once again decided by the Superior Tribunal of Justice.

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So You Think You Can… Enforce an Arbitral Award in the Kingdom of Saudi Arabia?

Thu, 2018-12-06 23:28

Sergejs Dilevka

Introduction

On 8 October 2018, the Ministry of Justice (the “MoJ”) of the Kingdom of Saudi Arabia (“Saudi Arabia”) announced that in the last 12 months its enforcement courts received a record-breaking 257 applications for enforcement of judgments and arbitral awards rendered outside Saudi Arabia, which were appraised at SAR 3.6 billion or “nearly one billion dollars.”  Relevant issues of award enforcement in Saudi Arabia have been previously discussed in the Blog. The aim of this post is to provide a brief comparative summary of the applicable legal framework and an overview of the recent figures and developments pertaining to the foreign enforcement applications in Saudi Arabia.

Legal Framework

Saudi Arabia has acceded to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “NY Convention”) in 1994.  Unfortunately, the accession did not provide any relief to the level of uncertainty surrounding the recognition and enforcement of arbitral awards.  In short, arbitral awards and all relevant documents still had to be translated into Arabic and submitted to the Saudi Board of Grievances (the “Board”). The Board would then perform a comprehensive review of the merits of the case to ensure that the award is in compliance with Shari’ah.

The infamous case of Jadawel International (Saudi Arabia) v Emaar Property PJSC (UAE) is a good, or perhaps slightly extreme, example of the interventionist approach adopted by the Board when conducting its review of the award.  In its 2008 ICC award, the Tribunal dismissed Jadawel’s USD 1.2 billion claims and ordered Jadawel to pay Emaar’s legal costs.  Upon review, however, the Board reversed the award and order Emaar to pay more than USD 250 million to Jadawel in damages.

In 2012, Saudi Arabia replaced its 1983 Arbitration Law (Old Law) that did not conform with modern arbitration practice with a New Arbitration Law, based on the UNCITRAL Model Law, by Royal Decree No. M/34 of 16 April 2012 concerning the approval of the Law of Arbitration (the “Arbitration Law”), which came into force on 9 July 2012.  In the same year, Saudi Arabia enacted a New Enforcement Law by Royal Decree No. M/53 of 30 August 2012 concerning the Execution Law (the “Enforcement Law”), which came into force on 27 February 2013.  The Enforcement Law was also complemented by Executive Regulations issued pursuant to the Minister of Justice Circular No. 13/T/4892 on 28 February 2013.

It is worth noting the following provisions of the New Enforcement Law:

  • Article 1 defines an Enforcement Judge as the chief of the execution department and judges, execution department judge and the judge of the court who undertakes the duties of the execution judge, as the case may be.
  • Article 2 provides the execution judge with the authority of forcible execution and supervision assisted by the sufficient number of execution officers pursuant to the provisions of the Law of Procedure before Shari’ah Courts.
  • Article 6 states that all decisions taken by the execution judge shall be final. As a result, there is no appeal from the decision of the Enforcement Judge.
  • Article 11 sets out the requirements for enforcing foreign judgments and arbitral awards. It provides that the Enforcement Judge may not enforce any court judgment and order passed in any foreign country except on the basis of reciprocity and after verifying the following:

1) the Saudi courts are not competent to hear the case in respect of which the court judgment/order/arbitral award was passed and that the foreign court/arbitration tribunal which passed it is competent in accordance with the international rules of jurisdiction set down in the laws thereof;

2) the litigants to the case in respect of which the judgment/award was issued were duly summoned, properly represented and were able to legally represent themselves;

3) the court judgment/arbitral award has become final in accordance with the law of the court/arbitration tribunal that passed it;

4) the court judgment/arbitral award is in no way inconsistent with any judgment or order previously passed by the Saudi courts; and

5) the court judgment/award does not provide for anything which constitutes a violation of Saudi public order or ethics.

The New Enforcement Law provides Enforcement Judges with enough teeth via Articles 46 and 47 to enforce the decisions. If the award debtor fails to pay the sum owed or fails to disclose property sufficient to satisfy the award within five days of notification of the execution order, the Enforcement Judge may impose a variety of sanctions some of which include travel bans, freezing debtor’s bank accounts, ordering the disclosure and seizure of assets, and event imprisonment.

One of the areas, where exercising extreme caution is advisable, is with respect to Article 11(5) of the New Enforcement Law requiring the Enforcement Judge to ensure an award does not contradict Saudi public order and Shari’ah.  Apart from the obvious issue of the myriad of way in which Shari’ah may be interpreted, the author would also like to highlight the remaining difficulties in enforcement of an arbitral award that, inter alia, grants interest.  It remains to be seen in what way an Enforcement Judge would treat such awards.

Arguably, the most important feature of the exceptionally fast processing of the foreign enforcement applications.  Subject to any hearings and under normal circumstances, the Enforcement Judge should issue the execution order within one month of the application and, if necessary, order seizure of assets, freezing bank accounts and so on within another one-two months depending on the circumstances of the case.

Statistics

As a result of the data available on the MoJ’s website on the previous numbers and values of the applications for enforcement of foreign judgments and awards, the increase in the number of Foreign Enforcement Applications becomes apparent:

Time Period Number of Foreign Enforcement Applications Total Value of Foreign Enforcement Applications (USD, approximate) 25/10/2014 – 13/10/2015 69 639,408,000 14/10/2015 – 01/10/2016 129 1,145,606,000 02/10/2016 – 20/09/2017 163 666,050,000 21/09/2017 – 10/09/2018 257 959,112,000 Total: 618 3,410,176,000

In this regard, the author would like to offer three key takeaways with respect to the Foreign Enforcement Applications.  First, the growth in applications year-on-year averages at 35%.  Second, the total number of applications has now exceeded 600 with a total value passing the USD 3.4 billion mark.  Third, more than 40% of the total number of application were made in the last 12 months.

Cases

Considering the absence of any statistics on the success rate of foreign enforcement applications in Saudi Arabia’s enforcement court, the author provides below some anecdotal enforcement examples identified mainly on the MoJ’s official website.

ICC Award (UAE subsidiary)

The first reported example of a successful enforcement of an arbitral award, pursuant to the Enforcement Law, came from an international law firm, on 31 May 2016.  The development was also covered by a post on the Blog.

The Riyadh Enforcement Court (the “REC”) decided to grant the Foreign Enforcement Application made by a UAE subsidiary of a Greek telecommunications company against a Saudi data communications service provider.  The ICC award in favour of the UAE subsidiary was rendered in London.  The subsidiary managed to defend approximately USD 350 million-worth of counterclaims and was awarded approximately USD 18.5 million in its favour.

The arbitral award was obtained in late 2011 and, therefore, enforcement proceedings commenced with the Board.  When it became possible, the subsidiary transferred the proceedings to the REC and, three months later, the award was recognised in Saudi Arabia.

US Court Judgment 

On 16 May 2018, the MoJ informed of successful enforcement of a judgment rendered by a court in the US state of Virginia in favour of a US company against a Saudi tourism company in the REC.  The judgment value was USD 3,758,000.  It is not clear how long it took the REC to consider the US company’s Foreign Enforcement Application, but the Saudi company was ordered to pay the applicant within five days of the decision’s notification date.

Chinese Award

On 24 May 2018, the MoJ statement produced an example of award enforcement through an order a court in Jeddah.  The court ordered a Saudi gold mining company to pay in excess of USD 10.1 million to a Chinese company thus enforcing an award issued by a “Chinese international arbitration tribunal.”  Reportedly, the Jeddah court ordered the Saudi company to pay the award within five days of the decision’s notification date or “face the penalties in the country’s Enforcement Law.”

ICC Award (Malaysian company)

On 29 May 2018, the MoJ reported a new successful enforcement of the Foreign Enforcement Application at the REC.  The REC enforced an ICC award in favour of a Malaysian company against a private Saudi university, which was ordered to pay the applicant USD 24,684,266, the award value, within five days of the decision’s notification date.

Other Examples

The MoJ has also cited enforcement of a foreign award ordering repayment of debts, which was issued in favour of Japanese companies against a Saudi company.  Another shared example of enforcement proceedings relating to a Foreign Enforcement Application included “incarcerating the owner of a Saudi establishment for refusing to pay [approximately USD 636,000] to a Chinese company.”

Conclusion

Establishment of the Saudi Center for Commercial Arbitration in 2016 is a prime example of Saudi Arabia’s reignited interest in resolving disputes through arbitration, which is a vital element for attracting investments and ensuring that international commerce continues thriving in  Saudi Arabia.

On the other hand, it is no less important for companies and individuals entering into business relationships with the residents and businesses in Saudi Arabia to be confident that a judgment or an arbitral award rendered by a court or a tribunal outside Saudi Arabia will be enforced effectively and expeditiously.  Judging by the provisions of the New Enforcement Law, the substantial growth in the number of the foreign enforcement applications, and the (limited) positive anecdotal evidence, the author is optimistic that such confidence continues to grow and cases like Jadawel will remain a thing of the past.

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Can I Get A … Diverse Tribunal?

Thu, 2018-12-06 16:21

Joshua Karton

Institute for Transnational Arbitration (ITA)

Jay-Z changed the rap game. Can he change the arbitration game? In a new lawsuit, the rap star (legal name: Shawn C. Carter) seems to be trying. Carter has recently won a temporary order staying arbitration for a dispute in New York. The memorandum of law in support of the petition for a stay (filed by a team from Quinn Emanuel’s New York office led by Alex Spiro) makes for memorable reading. It is in some ways a local particularity, a case with an Empire State of mind, but the arguments raised have potentially global ramifications.

Hip-hop fans will remember Jay-Z’s famous line, “I’m not a businessman; I’m a business, man!”. The dispute relates to one of Mr. Carter many commercial enterprises outside of his music career. In 2007, Mr. Carter sold a clothing brand that he had developed (“Rocawear”) along with a set of associated trademarks to Iconix, a brand-management company that owns and licenses a portfolio of consumer brands. After disputes arose over the use of certain trademarks by a different entity founded by Mr. Carter after the 2007 transactions (“Roc Nation”), several of the associated entities entered into a Master Settlement Agreement in July 2015, which contained an arbitration clause submitting any disputes to arbitration in New York, administered by the American Arbitration Association (AAA) under the AAA’s Commercial Arbitration Rules and governed by New York law. Iconix commenced arbitration according to this provision.

The arbitration clause called for three arbitrators “unless the parties are able to agree on a single arbitrator”. If the parties could not agree, the AAA would appoint all three arbitrators. During an administrative conference call between the parties and the AAA, the parties agreed that if they could not decide on a sole arbitrator, they would each submit four names from the AAA’s roster of arbitrators for “Large and Complex Cases”, a subset of the AAA’s National Roster of Arbitrators. The AAA would then add four more names and return that longer list to the parties, who could strike the names of individuals they found to be unsuitable.

The trouble came when the lawyers representing Mr. Carter and his businesses tried to identify four arbitrators from the AAA’s Large and Complex Cases roster that they felt comfortable nominating. They reviewed more than 200 potential arbitrators on that roster who are based in the New York area but found—allegedly to their surprise—that not a single one who possessed the necessary expertise was African-American. Noting that Mr. Carter is black, they asked the AAA to provide the names of some “neutrals of color” whom they could vet, and the AAA responded by providing the names of six additional potential arbitrators. Of these, three appeared to be African-American—two men and one woman—and one of the men was a partner in the law firm representing Iconix. Mr. Carter’s counsel profess themselves unable to determine whether the other two proposed arbitrators have similarly disqualifying conflicts of interest, nor could they confirm whether the individuals suggested by the AAA are actually listed on the AAA’s Large and Complex Cases roster. (The AAA does not publish its arbitrator lists, partly in order to maintain its ability to provide tailored lists of potential arbitrators for a fee.)

At this point, the AAA suggested that Mr. Carter could make selections from the arbitrators already identified, or else the AAA would select four candidates on his behalf. The AAA then proceeded to choose those four candidates, which included the two not-obviously-conflicted African-Americans on the list of “neutrals of color” it had previously provided to Mr. Carter. It combined that list with four candidates proposed by Iconix and four that it itself proposed, and sent the list of twelve candidates to the parties, inviting each to strike up to four names. The AAA set a deadline of November 30, 2018 for the parties to make their strikes, after which the AAA would appoint the tribunal itself. Mr. Carter and his associated entities turned to New York Supreme Court (a first-instance court of general jurisdiction), seeking a temporary restraining order enjoining arbitration.

Mr. Carter alleges that the arbitration agreement is void for violating New York’s public policy against racial discrimination, a policy is enshrined in the state constitution and statutory law. The legal argument is both simple and complex. It is simple because, if anything amounts to public policy, constitutional rights would seem to fit the bill. It is complex because it is not at all clear that a lack of potential arbitrators who share characteristics of an arbitrant constitutes racial discrimination (as a lack of diversity would clearly do in other contexts, such as in the composition of juries in criminal trials). It is even less obvious that arbitral institutions like the AAA have an obligation to provide diverse panels of potential arbitrators—the petition invokes “the AAA’s failure to associate with African-American arbitrators with the expertise to decide complex commercial disputes”. Nevertheless, the petition was successful; on November 28, the court issued a temporary restraining order staying arbitration until a full hearing on December 11.

Some may dismiss this petition as a clever tactical gambit made on behalf of a wealthy litigant—an American Gangster no less. But it raises important and potentially painful questions for arbitration around the world. For all the attention that the issue of arbitrator diversity has garnered, an aspect that is often overlooked is fairness to arbitrants (aside from the allegation of pro-investor or anti-developing-state bias in investment arbitrators). We have seen extensively discussed, especially with respect to gender, the unfairness to potential arbitrators who may be shut out of the profession, the danger that “group think” will compromises the quality of tribunal decisions, and the threat to popular legitimacy of international arbitration (especially investor-state arbitration) presented by the continuing dominance of “pale, stale, and male” arbitrators.

What often goes unaddressed is the reason for that risk to perceived legitimacy: that homogeneous panels of arbitrators may be unable to appreciate the concerns of arbitrants from minority or disadvantaged backgrounds, even when they are open-minded and willing to try. Mr. Carter’s argues that lack of access to African-American arbitrators with sufficient expertise to resolve complex commercial disputes “deprives litigants of color of a meaningful opportunity to have their claims heard by a panel of arbitrators reflecting their backgrounds and life experience, and all but excludes the voices of diverse decision makers in the arbitration process.” The petition goes on to note that homogeneous panels risk “unconscious bias in decision-making because ‘negative images of “the others” is pervasive … [and] arbitrators are not exempted from its negative influences’” (quoting Larry J. Pittman, “Mandatory Arbitration: Due Process and Other Constitutional Concerns”, 39 Cap. U. L. Rev. 853, 862 (2011)). Parties on the losing end of an arbitral process tainted by unconscious bias may well conclude that the industry is shady, it needs to be taken over.

It is often noted that parties appear to be the worst offenders when it comes to arbitrator diversity, frequently opting for the “usual suspects” over diverse appointees. But even if that phenomenon is real, some parties may rationally prioritize factors such as race—as Mr. Carter seems to have done in this case—for the same reasons that other parties appoint arbitrators with particular professional or national backgrounds: to ensure that at least one member of the tribunal will understand (and presumably be sympathetic to) their perspective. In a party-driven system like international arbitration, arbitrants are entitled to that.

Applications for temporary restraining orders are made ex parte, so the allegations in Mr. Carter’s petition will not be contested until the hearing on December 11. It is therefore not clear how far this line of argument will proceed, although in granting the order, the court will have found that Mr. Carter was likely to succeed on the merits of his claim that the arbitration agreement violates New York public policy. Regardless of the final disposition of the case, arbitration lawyers and especially arbitration institutions should consider themselves put on notice: arbitration agreements may be subject to attack based not on drafting defects in the agreements, but on the complexion of the pool of potential arbitrators from which the tribunal will be appointed. Institutions that operate “closed” lists of arbitrators (where only arbitrators on the list may be appointed), such as the Court of Arbitration for Sport, should immediately consider the composition of those lists and vet them for diversity. In particular, sufficient numbers of arbitrators from a wide range of communities should be represented in the lists, so that even if some are conflicted or unavailable, diverse tribunals may still be formed. (The issue is particularly acute where, as with the AAA, the institution does not publish its lists, but could potentially be raised even where the lists are publicly available.) Institutions that fail to adapt may find themselves guilty until proven innocent.

The whole arbitration world should also be aware that incremental improvements on arbitrator diversity are no longer sufficient (if they ever were). Lack of diversity is not something we can brush off our shoulders. If the arbitration community cannot make real progress on arbitrator diversity (not just, for example, increasing the numbers of white, European women on tribunals), parties will increasingly force the point. This lawsuit provides a blueprint for minority arbitrants—whether genuinely concerned about lack of diversity or cynically employing defensive tactics—to derail arbitrations on the basis of lack of representativeness in the available pool of arbitrators.

Stay tuned….

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Should Arbitrators Come from Utopia Island?

Wed, 2018-12-05 16:05

Carlos A. Matheus López

The arbitrator’s duty of disclosure is often subject to misunderstandings, particularly in regards to its content and scope, as well as its relationship with the independence and impartiality of the arbitrator. That is why for almost a decade I have been raising in my publications, both on international commercial arbitration and investment arbitration, various criteria to clear doubts about such concepts.

Recently, this academic work has paid off, as the Peruvian Supreme Court issued a landmark decision on November 27, 2017 (Cassation No. 2267-2017, Lima). 1)The Peruvian Supreme Court has honored me by citing me and supporting its resolution on my relative criteria on the arbitrator’s duty of disclosure and on the independence and impartiality of the latter. jQuery("#footnote_plugin_tooltip_2971_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2971_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The case concerned an arbitral award that had been annulled on the grounds that an arbitrator had violated the duty of disclosure by failing to declare that he knew two of the plaintiff’s lawyers, even though they did not participate in the arbitral proceedings. Furthermore, the arbitrator and one of such lawyers had once been part of the same arbitral tribunal; albeit one hearing and deciding an unrelated dispute. Therefore, the Superior Court (Judgment of March 1, 2017) considered that the mere omission of the disclosure of such facts, generated the existence of bias on the part of the arbitrator, with the consequent violation of their independence and impartiality.

For its part, the Supreme Court, in disagreement with the Superior Court, dismissed the decision of the latter, establishing in its decision various criteria that, due to their eventual usefulness for international arbitration, are detailed below.

First, as to the independence and impartiality of the arbitrator, it points out to us that -as I have argued ad litteram in one of my books“Independence refers to the position or situation of the arbitrator, while impartiality refers to an attitude of intellectual or psychological nature (…) independence, basically consists of a situation of non-dependence on a party, while in impartiality, it is important not to be partial, that is, not to demonstrate prevention, allowing itself to be invaded or dominated by preconceived opinions and external factors to the merits of the case”.

Second, regarding the duty of disclosure, the Supreme Court points out -citing again another one of my books – that “The duty of disclosure is a preventive means that helps to limit the risk of challenges to the arbitrator and/or annulment of the arbitral award, based on a supposed failure to fulfill the independence and impartiality requirements. In order to help the parties determine the independence and impartiality of the arbitrator, there needs to be complete transparency regarding all relationships that the arbitrator may have with the parties or the dispute”. Only those circumstances that generate justifiable doubts about the independence and impartiality of the arbitrator should be revealed, since “(…) the doubt that is admissible in the arbitration process is that, objective, justified in circumstances that causes the distrust or suspicion of an arbitrator, since its existence affects the independence and impartiality of the latter (…) we can indicate as characteristics of the “justifiable doubts” the following: 1) Motivation: The doubt must be “justified”, not being arbitrary; and, 2) Objective character: The justification is objective because they are “the circumstances” that create doubt about the impartiality and/or independence of the arbitrator”.

Third, regarding the scope of the duty of disclosure, it states that “it is necessary to conclude that although the arbitrator is obliged to reveal all justified doubts that could cast serious doubts on or question his impartiality and independence in his arbitration practice, nevertheless, he must not fall in any way in that absurd or nonsense of revealing everything that comes to his mind, therefore it being logical to reason that the arbitrator was only obliged to reveal what is important or relevant to the proper conduct of the arbitration, but not that which is unimportant or irrelevant to the achievement of the same, given that there would be a serious risk that arbitration will unnecessarily be delayed and therefore not be fulfilled with the purposes for which it was created”. In this sense, it must reveal “only that which must be substantial and relevant to the proper functioning of the arbitration procedure and omitting everything that means unnecessary delay when it understands that there is nothing useful in pretending to inform even the most insignificant and irrelevant things, since if so, the arbitration procedure will be irrevocably condemned to oblivion as a useful alternative for the solution of disputes”.

The Supreme Court’s analysis on the scope of the duty of disclosure makes sense, because as we have argued in a book chapter, nobody is absolutely independent and impartial. Also, if that was the objective, arbitrators would have to come from Utopia Island, as imagined by Thomas More. Obviously, the arbitrators are not humans isolated in some strange island disconnected from the world, who are called to our world to arbitrate a case, and then when the case is done they return to their island to await, unpolluted, the call to arbitrate another case. Arbitrators are human beings who by nature establish relationships of different levels with people, places, things, ideas, and because of this, biases are inevitable. In such a way, the problem is one of intensity, so when deciding what to reveal, it is convenient for the arbitrator to report all the possible circumstances that may generate justified doubts about his independence and impartiality. In addition, we must be aware that excessive disclosure can generate as many problems as insufficient disclosure. Well, if an excessively scrupulous arbitrator reveals links that usually would not generate doubts, this could cause the parties to wonder if there is anything beyond what is apparent. Although, if you have any doubt about making a disclosure or not, it is preferable that you choose to reveal this conflicting circumstance to the parties.

Fourth, regarding the failure to fulfill the duty of disclosure, the Supreme Court states that “the mere omission of the duty of disclosure does not immediately suggest the existence of any bias on the part of the challenged arbitrator nor the violation of the principles of independence or impartiality that the arbitrator is subject to, for in order to establish a breach of duty of information, it is required that such omission in the declaration is relevant or transcendental and that it therefore affects the proper conduct of the arbitration process, which is not evident in the present case since the challenged arbitrator was not obliged to disclose the aforementioned circumstances insofar as they were without interest for the proper conduct of the arbitration procedure. (…) Indeed, although the duty of declaration is a fundamental element in the development of the arbitration procedure, it should not be forgotten that not every omission in the information must necessarily lead to an infringement of the principles of independence and impartiality, given that (…) the omission in the duty of information must be of such an entity and significance that they affect the proper development of the arbitration process”. And indeed, what is indicated makes sense, since the mere omission of the duty of disclosure does not per se suggest the existence of partiality and/or dependence on the arbitrator, which will only happen when the undisclosed circumstance constitutes a justified doubt about the independence and / or impartiality of the arbitrator.

Finally, we consider that the criteria established by the Peruvian Supreme Court decision could not only be useful for the improvement of the Peruvian arbitration practice in the matter of the disclosure obligation, but also for the global arbitration community.

References   [ + ]

1. ↑ The Peruvian Supreme Court has honored me by citing me and supporting its resolution on my relative criteria on the arbitrator’s duty of disclosure and on the independence and impartiality of the latter. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Would Introducing Active Costs Management to Arbitration be Beneficial?

Tue, 2018-12-04 18:29

Andy Ellis

Two initiatives concerning arbitration costs have filled a few column inches over the past several months. The first of these is a fairly straightforward cost-cutting initiative with immediate tangible benefits, while the second is likely to be something of a slow burner.

Starting with the first, more simple example, the American Arbitration Association (‘AAA’) has introduced a scheme for capped fees relating to its panel arbitrators. The AAA Alternative Fee Arrangements (‘AFA’) initiative is confined to the capping or fixing of the arbitrator’s compensation.  The objective is increased predictability rather than express costs reduction, although one would expect to see AAA panel members pitch more competitively and parties will welcome the transparency.  There are caveats in that the arrangement applies only to two-party arbitrations with a single arbitrator. But in general, what’s not to like?

The second initiative concerns active costs management in arbitration where legal costs are, in principle, payable under ‘loser pays’ or ‘costs-shifting’ provisions when applicable. Whilst not yet fully formed, the idea lends itself to wider discussion. This blog post will focus on the merits of this nascent concept. The source of the story is Sir Rupert Jackson, who suggested that when the applicable arbitration regime provides for costs-shifting between the parties, the extent of each party’s exposure to adverse costs could be determined at an earlier stage by costs management, in a similar fashion to the developments in English civil litigation since 2013.

One of the major changes implemented in English civil litigation, under what are known generically as the Jackson reforms, has been the introduction of costs management to case management. When the amounts at stake are under £10m (and in any case regardless of value when the court decides to exercise its power to manage costs), the parties are required to submit costs budgets which, once agreed to or approved, will be binding upon the eventual costs award absent good reason to depart.

In May of this year, Sir Rupert travelled to Mauritius and delivered the keynote speech at the 11th International Conference on Construction Law and ADR.

Although only two months into his new practise as an arbitrator, his observations about the advantages of arbitration over litigation were typically forthright. Perhaps jaundiced by the glacial passage of the litigation reforms that bear his name, Sir Rupert declared that arbitration is ‘head and shoulders’ above litigation when it comes to procedural reform because it is broadly responsive to the needs of users and not so much affected or delayed by political issues.

The closing section of his speech brought him back to home ground and noted that 67% of respondents to the Queen Mary 2018 International Arbitration Survey identified the high level of costs as the worst feature of international arbitration.

There is no doubt that Sir Rupert regards costs management as one of the more successful strands of his reforms. In 2013, he forecast that within a couple of years practitioners would be wondering what all the fuss was about, and many will now admit that, give or take a year, he was proven right. There are a growing number of examples of judges exercising discretion to apply costs management in cases with a value in excess of £10m and the direction of travel is likely to be wider adoption rather than the mothball that early sceptics expected.

My own experience in practice bears out the notion that active costs management has become absorbed into normal litigation life. The mechanics of the process are more familiar, and the advantages of increased predictability have become more evident. In Harrison v University Hospitals Coventry and Warwickshire NHS Trust [2017] EWCA Civ 792, the Court of Appeal beefed up the status of budgets when it clarified that a party was required at the end of the case to show good reason to depart not only upwards from an agreed or approved budget but also downwards. A degree of wiggle room was, therefore, removed, limiting the scope for arguments about the amount of costs on assessment – and reducing the need for assessment in most cases. This judgment has made sure litigators take the whole thing more seriously.

It is noted that these days most people tend to agree that costs management is here to stay and likely to be extended into higher value cases, especially group litigation.

So, what’s to be gained by encouraging the introduction of pre-emptive budgeting to arbitral proceedings? The answer should be obvious.

The wide discretion available in not only the amount of costs but what falls under the ambit of costs, can produce extreme results. In Essar Oilfields Services Ltd v Norscot Rig Management Services PVT Ltd [2016] EWHC 2361 (Comm), the receiving party was even able to recover the third-party funder’s bounty as a recoverable cost in the arbitration. This decision sent a few shockwaves through the arbitration world as it ran contrary to the normal principle to exclude any funding costs from recovery between the parties. It follows that having some notice at an early stage as to what the arbitrator may award in costs is likely to help manage clients’ expectations and focus more sharply the parties’ submissions about the incidence and amount of costs in the short window usually provided by the arbitrator when the award is circulated.

For Sir Rupert’s idea to gain traction, it is observed that there would need to be a less granular form of budget submission than the litigation model, perhaps with three simple phases: pre-hearing, the hearing and post-hearing. There would also need to be no reservation preventing approved budgets applying to incurred costs as well as to future costs. However, despite the attractions, I would not expect Sir Rupert’s idea to find favour immediately. One wonders why it is that active costs control has not been exercised widely within arbitration with arbitral seats in England, even though costs capping powers were conferred by s65 of the Arbitration Act back in 1996. Senior lawyers have also reported a reluctance by some to entertain security for costs applications, even though the powers have been written into LCIA Arbitration Rules since 1998.

Perhaps the explanation is simply that one of the attractions of arbitration remains its procedural light touch relative to litigation. There is no White Book in arbitration and to inject examination of any level of detail on costs will make it feel too much like litigation and potentially side-track the process. And if this negative view reflects the prevailing attitude, I can’t see Sir Rupert’s initiative gaining traction any time soon.

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How Far Do Tribunals Have a Duty to Investigate Corruption? The Kenyan High Court Has Its Word

Tue, 2018-12-04 02:07

Thomas Kendra and Matt Coleman

For AfricArb

It is twelve years since an ICSID tribunal dismissed World Duty Free’s claim against the Republic of Kenya for breach of a lease agreement signed in 1989. As is well known, the claimant obtained the contract with a $2 million bribe to former President Moi, and the tribunal held, inter alia, that it could not uphold a claim based on a contract obtained through corruption, deeming it contrary to international public policy (World Duty Free Company Limited v Republic of Kenya (ICSID Case No. ARB/00/7), para. 188).

Despite this 2006 award, World Duty Free commenced arbitration again in 2008 (against the Kenya Airports Authority (”KAA”)) for alleged breaches of contracts entered into pursuant to the same 1989 lease agreement. This time, World Duty Free’s prospects looked good: an ad hoc tribunal awarded it around $50 million in damages in December 2012. But the Kenyan High Court has now put an end to its short-lived success. Following an application from the KAA, it set aside the award on 5 October 2018, finding it “inimical to public policy” on the basis that damages had been awarded in relation to contracts founded in the 1989 agreement – which in turn had been obtained through corruption (Kenya Airports Authority v World Duty Free Company Limited t/a Kenya Duty Free Complex (High Court of Kenya, Nairobi, misc. application no. 67 of 2013)).

Interestingly, the bribe to former President Moi was not raised by either party in the arbitration. The High Court’s judgment, therefore, provides a useful reminder that addressing corruption often requires arbitrators to undertake a delicate balancing act, with significant consequences if the right balance is not struck. While a tribunal must not exceed the contractual limits of its power by considering matters falling outside the terms of reference, it must also ensure that its award is enforceable and therefore consistent with relevant public policy demands.

A Tribunal’s Duty to Investigate Corruption at Its Own Motion

There is no universally accepted approach to addressing corruption when it surfaces in international arbitration. While there does seem to be a general and gradual shift toward taking a more active stance than previously, arbitrators continue to grapple with issues such as finding suitable methods of applying international conventions on corruption and the possibility of establishing the existence of corruption with the concept of red flags.

However, as allegations of corruption were not raised by the KAA in its defence in the present case, Justice Torgbor (acting as sole arbitrator) considered the matter outside his jurisdiction:

There is therefore no basis… in pleading, evidence or agreement for this Arbitral Tribunal to take cognizance of an ‘ICSID judgement’ or an unlisted ICSID issue. Subject to the cautionary caveat occasioned by the Respondent’s withdrawal from the arbitral proceedings an Arbitral Tribunal does not normally roam around to find and determine issues the parties have not for themselves raised for determination“.

As Torgbor noted, a tribunal must take great care to restrict itself to considering the issues put before it. A failure to decide a case as pleaded may lead to annulment or problems with enforcement. In this case, the sole arbitrator’s reluctance to consider the bribe at his own motion is perhaps understandable given the conspicuousness of its absence from the parties’ submissions.

Nonetheless, the High Court, when considering the KAA’s application to set aside the award, judged that Justice Torgbor had erred in his decision and noted that:

Whilst arguing that the ICSID Award was not placed as formal evidence before the Torgbor Tribunal, Counsel for Kenya Duty Free nevertheless concedes that it was to be found in at least three bundles of Documents placed before the Tribunal. The language used by the Arbitral Tribunal does not suggest that it did not see and read the Award or at any rate was unaware of it“.

It went on to observe that once an allegation of corruption is brought to the attention of a tribunal, even if not pleaded, “the Tribunal ought to pause and interrogate [it]”. This direction is interesting for its breadth and clarity. It suggests that when confronted with corruption, tribunals should have the confidence to undertake at least a cursory exploration of the relevant allegations (whether raised by the parties or not).

Such logic may find traction elsewhere given the current debate on corruption in international arbitration. Indeed, the High Court’s decision fits within a wider trend of national courts indicating that arbitrators should adopt a more active stance in this regard. In a recent case before the Singapore High Court, for example, Kannan Ramesh J reiterated that, “in appropriate cases, an arbitral tribunal would be required to investigate allegations of corruption“, provided the allegations affect the issues under consideration in the arbitration (China Machine New Energy Corp v Jaguar Energy Guatemala LLC and another [2018] SGHC 101, paras. 224 and 226). This followed a similar ruling by the Paris Court of Appeal, which suggested early last year that Tribunals seated in France have a duty to “meticulously examine” evidence of corruption when it arises (Cour d’appel de Paris, arrêt du 21 février 2017, Belokon c. Kirghizistan (15/01650)).

Meanwhile, investment tribunals have also shown a greater willingness to adopt a proactive stance since the landmark 2006 decision in Word Duty Free v Kenya. In the 2016 case of Spentex v Uzbekistan, for example, the tribunal went as far as using the cost allocation as a means of addressing corruption. It strongly urged Uzbekistan to make a donation to the UNDP anti-corruption initiative, failing which it would have been subject to an adverse costs order.

Importance of Rendering an Enforceable Award

This gradual shift toward a more active stance on corruption requires arbitrators to pay particular attention to need to render an enforceable award, which may be jeopardised if they stray outside the contractual limits of their power by deciding on unpleaded issues. Indeed, section 35(2)(a)(iv) of the Kenyan Arbitration Act provides that an award may be set aside in Kenya if it “deals with a dispute contemplated by or not falling within the terms of reference to arbitration or contains decisions on matters beyond the scope of the reference to arbitration“.

Yet arbitrators must also be alive to the risk of their awards falling foul of public policy requirements. This was underlined by the Kenyan High Court in its judgment, which noted that, “however much [Arbitral Tribunals’] awards should enjoy autonomy, they should not be tolerated as long as they are inimical to public policy” (para. 38). This principle is of course also reflected in the New York Convention.

The present case illustrates that it can be difficult for tribunals to strike the right balance between these at times competing demands. However, as the ICSID tribunal in the first round of the World Duty Free saga observed, corruption is almost universally considered to be contrary to public policy:

“in light of domestic laws and international conventions relating to corruption, and in light of the decisions taken in this matter by courts and arbitral tribunals, this Tribunal is convinced that bribery is contrary to the international public policy of most, if not all, States or, to use another formula, to transnational public policy“.

With this in mind, the precedence afforded by the Kenyan High Court to the need for arbitrators to consider the issue of corruption is understandable.

Conclusion

It remains uncommon for a court to condemn a tribunal’s failure to investigate corruption at its own volition; however, the tribunal, in this case, was in the unusual position of possessing damming evidence of corruption in the well-publicised ICSID award. The wider impact of this decision may, therefore, be limited due to the factual circumstances.

Nonetheless, the High Court’s decision highlights the on-going tension between arbitrators’ nervousness at exceeding the contractual limits of their power, the arbitrator’s duty to investigate corruption at its own motion, and the need to render an enforceable award consistent with public policy. While in this case, the arbitrator was likely fully aware of Word Duty Free’s corruption, and therefore may have been overly cautious in the eyes of the Kenyan High Court, it illustrates the difficulties faced by arbitrators dealing with unpleaded allegations of corruption in the absence of explicit guidance.

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Kluwer Mediation Blog – October and November Digest

Mon, 2018-12-03 02:00

Anna Howard

Mediating is, in the end, service. Humility is its fertile soil.” Bill Marsh in “David Richbell – Lessons in Life and Mediation

The last couple of months have offered a collection of compelling posts on the Kluwer Mediation Blog. From the analysis of court decisions in Canada and Singapore on the enforcement of mediated settlement agreements, to insights into key developments on online dispute resolution, and onto a number of pieces on the increasing number of mandatory mediation initiatives across the globe –  there is something for everyone. You will find below a brief summary of, and a link to, each of the posts on the Kluwer Mediation Blog in November and October.

In “The Politics Of Being Polyanna”, Geoff Sharp considers the essential role played by mediator’s optimism. Geoff explores how mediators can be authentic and transparent yet be optimistic when they are not. Drawing on the words of Bernie Mayer, Geoff explains that the mediator’s job is to “effectively hold the tension between being both optimistic and realistic.

David Richbell – Lessons In Life And Mediation” – in this moving piece, Bill Marsh reflects on what made his close friend and colleague, the late David Richbell, such a good mediator. The many qualities identified include David’s ability to understand what too few mediators do – that enabling people to understand each other will usually bring about resolution, whereas simply pursing resolution will often not bring about understanding.

In “Ontario Court Enforces Settlement Agreement”, Rick Weiler examines the recent decision of the Ontario Superior Court of 455 Gordon Baker Holdings Limited et al. v. Toronto Transit Commission, 2018, which demonstrates the approach a judge will take when a party calls into question the enforceability of a settlement agreement. Rick notes that, generally, the courts will have little patience with the phenomenon known as “settlers remorse.”

In “Communication For Online Negotiation”, Andrea Maia explores the barriers to, and the opportunities for, communication in online negotiation. Andrea considers techniques which can be used to improve communication and identifies innovations which may enhance online communication.

In “Public Policies In The Field Of Mediation: Between Appearance, Necessity and Opportunity”, Constantin-Adi Gavrila and Marin Padeanu describe the project “Mediation – Effective Public Policy in the Civil Dialogue” in Romania which aims to explore options for a public policy in Romania in the field of mediation. Constantin-Adi and Marin explain that the policy paper resulting from this project aims to transform mediation into an instrument which will contribute to the development of a culture of dialogue in Romania. They also identify the challenges and opportunities associated with this project.

In “Singapore Case Note Part 2: What Happens When A Party To A Mediated Settlement Agreement Has A Change of Heart?”, in the second of a series of posts on the Singapore High Court case of Chan Gek Yong v Violet Netto, Nadja Alexander and Shou Yu Chong focus on two of the plaintiff’s claims in her attempt to set aside the mediated settlement agreement and pursue her case through litigation. Nadja and Shou Yu draw on the comments of the High Court of Singapore to identify a number of takeaways for mediators.

In “To Compel Or Not To Compel: Is Mandatory Mediation Becoming Popular?”, Rafal Morek identifies the increasing number of countries where mandatory mediation has been implemented, or is being explored, including Greece, Romania, India and Turkey, and provides a very useful summary of such initiatives.

In “Ethics in Mediation II: Of The Poor Man And The Lizard”, Martin Svatos explores the importance and challenges for mediators in remaining impartial and independent. Martin also shares guidance on how parties may identify and address potential conflicts of interest, including Warren Buffet’s front-of-the-paper test.

In “Triggering The Narrative – The Power Of Narrative Hooks”, Rosemary Howell demonstrates the power of narrative triggers and explains their relevance for mediators as they seek constantly to assess the dynamics unfolding during mediations, considering whether and how to intervene. Rosemary draws on a recent, challenging mediation to describe how she innovatively introduced a new narrative into the mediation which then enabled the parties to resolve their dispute.

In “Listen – Please Listen”, Greg Bond identifies the recurrent theme in all of the mediations in which he has been involved: each party wishes that the other would listen more.  Greg explores why there is so little listening and considers how we might become better listeners.

In “Reading the Virtual Landscapes of Disputes: The Expanding World Of Digital Justice”, Ian Macduff identifies the key themes which emerged in the recent 2018 Forum on Online Dispute Resolution at the Centre for ICT Law and School of Law in Auckland. In particular, regarding the topic of innovation, Ian identifies the themes of the growing significance of digital technology in the courts, and the potential for automation in access to legal information and resources. As regards the topic of impact, Ian notes that the discussion centred on the challenges of ethics and digital technologies and, more fundamentally, on the question of trust.

In “A View from Frankfurt”, John Sturrock considers how our engagement as mediators can make a difference. Drawing on the variety of work in which John is involved, John identifies a recurring theme which can be summed up in the following words which he heard yet again very recently: “I wish we had talked about this two years ago.” John emphasises that mediators are called to help people to talk – and to listen to each other, and in so doing they help them in turn to listen to – and hear – each other.

In “Against Mediation Regulation”, in the third of a series of blogs on the “Mediation Moves” Conference recently held at Viadrina University in Frankfurt, Tatiana Kyselova draws on her involvement in one of the conference’s workshops to explore a number of reasons against mediation regulation. In so doing, Tatiana draws on a refreshingly wide range of contexts and countries.

In “Mediator Engagement And Politics – And Other Things We Care About”, John Sturrock shares insights from another workshop from the Viadrina conference which explored the extent to which mediators can or should disclose or express their views when engaged in politically-related mediation work – or more generally. Drawing on the work of Ken Cloke and Bernie Mayer, and exploring difficult and important questions, John’s post provides much food for thought.

In “Enabling Access, Enhancing Capabilities”, Ian Macduff explores how the notable advances in digital technology offer significant new options for disputants and dispute resolution providers, thereby widening the scope of access to justice. Importantly, Ian notes that “access” needs to be expanded to “accessibility” in order to capture the further steps that need to be taken to meet the promise of the access to justice movement for those whose disabilities are not catered for by digital pathways.

In “Mediation Moves – A Conference, A Workshop, A Movement”, in the first of a series of posts on the “Mediation Moves” conference recently held at Viadrina University, Greg Bond  shares the original way in which the preparatory workshop opened. In his thoughtful reflections on that experience, Greg identifies that being able to talk about our own vulnerability and to listen to the vulnerability of others makes a difference, and not only to our mediation practice.

In “Compulsory Mediation – the Australian Experience”, Alan Limbury provides a detailed summary of the mandatory mediation provisions in Australia and draws on research to demonstrate their positive impact.  Alan also shares the courts’ reasoning, in a number of key Australian cases, for ordering mediation which captures and conveys the inherent value of mediation.

In “Singapore Case Note: What Happens When A Party To An MSA Has A Change Of Heart?”, Nadja Alexander and Shou Yu Chong, provide a detailed summary of the recent case of Chan Gek Yong v Voilet Netto. In particular, Nadja and Shou Yu focus on the Singapore High Court’s treatment of allegations made by one party that the mediators pressured that party to sign off on the MSA. Nadja and Shou Yu also identify the lessons which those interested in mediation can take away from this case.

In “Greece: Mediation Going Compulsory. The Sequel”, Haris Meidanis explores the latest developments regarding mandatory mediation in Greece. Following the postponement of the mandatory mediation provisions in the recent mediation law until September 2019, Haris considers and responds to the reasons for the resistance to these provisions on mandatory mediation.

In “Mediation Navigation Beacons”, Rick Weiler draws on his nearly 30 years of experience in mediating to identify certain core principles which he comes back to in every case he mediates. These are, as Rick describes them, his mediator’s navigation beacons to which he turns and which he teaches to his law students. They include the principle of high expectations which Rick describes as: “My experience in the mediation process (and, frankly, life beyond) has been that people and events rise or fall to meet your expectations. We must model that sense of high expectations in every interaction during the mediation.”

In “How Many Shades Of Grey?”, against the backdrop of Colin Woodward’s work on the relationship between the objectives of individual freedom and the common good in American politics, Charlie Woods considers how the entrenchment of positions in the political context reflects some of the ideas behind the concept of a zone of probable agreement (ZOPA) in a negotiation. Charlie then identifies factors which influence the chances of falling within the ZOPA.

In “The Cultural Factor And Universal Business Practice”, Antonietta Marsaglia draws on her recent experience as a co-mediator in a cross-border dispute to consider the value of co-mediation for such disputes while also exploring the universal business language and values which transcend cultures.

 

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Join in the Campaign on Women Arbitrators: Co-sponsored by Arbitrator Intelligence and ArbitralWomen!

Mon, 2018-12-03 01:14

Catherine A. Rogers, Louise Barrington and Mirèze Philippe

This year ArbitralWomen (AW) celebrates its 25th Anniversary. Founded in 1993, AW is a network of women from diverse backgrounds and legal cultures active in international dispute resolution in any role, including, arbitrator, mediator, expert, adjudicator, surveyor, facilitator, lawyer, neutral, ombudswoman or forensic consultant. With close to a thousand members from over 40 countries, AW has been instrumental in fostering a dynamic global discussion about the gender imbalance in arbitrator appointments and arbitration practice.  Through these efforts, AW and its members have helped identify the myriad causes for the gender imbalance, from pipeline leakage, to unconscious bias, to the need to better support work-life balance issues.

 

AW has also introduced important innovations to remedy the gender imbalance, including a mentorship program, formal and informal events at which causes and solutions are discussed. AW is a strong supporter of the Equal Representation in Arbitration Pledge (ERA Pledge or the Pledge).  The Pledge, is “a call for the international arbitration community to commit to increase, on an equal opportunity basis, the number of women appointed as arbitrators.” In addition, The Pledge promotes “pledges and charters launched by other organisations and groups, aiming to promote women practitioners namely in dispute resolution but also more broadly in the legal and business fields.”

 

By now, we know that all these efforts have been having important effects. Today, arbitral institutions are publishing both general statistics about gender and other diversity criteria and, in some instances, the names of arbitrators appointed to the cases they administer.  Meanwhile, the percentage of women appointed as arbitrators by institutions in 2016 was, on average, around 17%, up considerably in just a year from the 2015, when the average was 12% and up dramatically from 2012, when the percentages was a mere 6%.  Statistical correlation does not always equal causation, but Lucy Greenwood’s scholarship provides anecdotal input that seems to suggest that much of this progress is in fact tied to implementation of The Pledge.

However, institutional appointments account for only a fraction of all arbitrator appointments.  Concerns about lack of diversity are less evident in the estimated 75% of cases in which parties appoint arbitrators. As Lucy Greenwood cautions, there is a “stark disconnect between the rate at which institutions appoint women and the willingness of the parties to do so.”

 

Parties have many reasons to appoint diverse tribunals. A robust and growing body of literature demonstrates that group decision-making can be markedly improved when decisional bodies have a diverse composition. Other studies have long confirmed, not surprisingly, that representativeness of judges improves perceived legitimacy of adjudicatory apparatus. These studies suggest we would all benefit from greater diversity among arbitrators.

 

These studies have limited impact on actual behavior, however, because they measure the benefits of diversity in the abstract. Arbitrator selection, by contrast, is hyper-individualized and highly personal—both in the process and substance of assessing potential arbitrators. So, to affect parties’ actual practices and priorities when they are selecting individual arbitrators, it is necessary to address their more specific incentives.  When parties are asked they often provide an explanation to the effect: “when asked by a client to select an arbitrator, the desirability of promoting diversity is the last feature on anyone’s mind. ‘We are not being asked to make a statement’ he said, ‘we are asked to pick the best person for the job.’”

 

According to a survey conducted by 2017 survey by Bryan Cave Leighton Paisner, 93% of respondents identified “expertise” and 91% identified “efficiency” as the most important features in appointing arbitrators. In the words of our anonymous commentator cited above, they are looking for “the best person for the job.”

 

The problem is that this information is generally not available on arbitrators’ CVs. Given the confidential nature of arbitration, the traditional (and still only) way to collect this information is through personal phone calls with individuals who have appeared before a potential arbitrator or, better yet, sat as a co-arbitrator with that person.

 

There are two main problems with this approach.

 

The first problem with arbitrator research based only on person-to-person inquiries is that it creates an information bottleneck. The limited number of individuals who can provide such information stifles the ability of newer and more diverse arbitrators to develop international reputations that the BLP statistics tell us are key to getting appointments.

 

To illustrate, let’s take a hypothetical.

 

Imagine a young Brazilian woman has been appointed by arbitral institutions in three sizable and complex arbitrations. And she was simply AWESOME. The parties were wowed. Her co-arbitrators were impressed. And the institutions were delighted. How many attorneys worldwide now know about her exceptional abilities? Maybe 20? 30? 40 tops? And what are the chances that one of those 40 people will receive a phone call about her future appointment? To borrow from the philosophical question about a tree silently falling in the woods: What happens if an arbitrator has a fantastic reputation, but no one knows about it?

 

The second problem with ad hoc person-to-person research is that such research largely confines assessment of potential arbitrators to subjective evaluation by a limited number of individuals. This research technique functions more as a telephonic lottery than systematic evaluation. Workplace research in the United States suggests that cognitive biases—those implicit biases we all have but are often unaware of—most easily translate into employment discrimination when hiring is premised on subjective evaluations and processes that do not involve systematic evaluation.

 

Arbitrator Intelligence seeks to promote diversity both by breaking the information bottleneck, and by providing an alternative to the highly subjective, ad hoc nature of arbitrator assessments.

 

The means to these ends is the Arbitrator Intelligence Questionnaire, or AIQ. If parties and counsel complete an AIQ at the end of each arbitration, Arbitrator intelligence will compile the collected about arbitrators, analyze it, and compile it into Arbitrator Intelligence Reports on individual arbitrators. These reports will then be made available (for a fee) through our partner, Wolters Kluwer.

 

The content of the AIQ was developed to replicate the same kinds of information currently sought, and available only, through personal phone calls. Unlike phone calls, however, the AIQ seeks to disaggregate the abstract qualities of “expertise” and “efficiency” into objective, measurable data points. For example, to paraphrase a few questions from the AIQ: Did the arbitrators grant document production? Did they ask questions that demonstrated familiarity with the record? Based on data collected through the AIQ, Arbitrator Intelligence will also be able to determine the overall duration of arbitrations and time to issue the award, and numerous other valuable objective data.

 

Arbitrator Intelligence has been collecting data about arbitrators through the AIQ since the summer of 2017, and already has approximately 500 responses that cover more than 1200 examples of arbitrator case management and decision-making. Arbitrator Intelligence is now analyzing this data to develop Arbitrator Intelligence Reports.

 

After a highly successful Campaign in Latin America, we have sufficient data to create a sample reports on a Latin American arbitrator. However, Arbitrator Intelligence still needs more data to be able to generate sample reports on women arbitrators.

 

To generate this data, Arbitrator Intelligence and ArbitralWomen are calling on parties, counsel, and third-party funders to complete AIQs on recently completed arbitrations. The AIQ has two phases, which together take about 15 minutes to complete. Anyone with access to the file can complete Phase I, and anyone who participated in the actual proceedings can complete Phase II.

 

Do your part! Take a few minutes any day from now until December 14 to help generate information about women arbitrators. And stay tuned for when, in early January when Arbitrator Intelligence will be hosting a series of webinars and focus group sessions to obtain input on sample AI Reports.

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The 2018 ICC Arbitration Clause for Trust Disputes: Cutting the Gordian Knot of Trust Arbitration at Last?

Sun, 2018-12-02 05:00

Lucas Clover Alcolea

Over the last century, arbitration has established itself as one of the most popular means for resolving commercial disputes1) Gary B. Born, ‘Chapter 1: Overview of International Commercial Arbitration’, International Commercial Arbitration (2nd edition, Kluwer Law International 2014), 6–224, at 93-97; Queen Mary University London, 2015 International Arbitration Survey: Improvements and Innovations in Arbitration. jQuery("#footnote_plugin_tooltip_3546_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3546_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and has even penetrated fields of law traditionally reserved for the courts such as antitrust/competition law, company law and even tax law.5) Loukas A. Mistelis & Stavros L. Brekoulakis, Arbitrability: International and Comparative Perspectives (2009, Kluwer Law International), Part II. jQuery("#footnote_plugin_tooltip_3546_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3546_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); One new area of law to which arbitration can advance is the arbitration of internal disputes regarding trusts and the prospect for growth in this area has resulted in a flurry of articles by both trust and arbitration practitioners2) See for example Georg Von Segesser & Katherine Bell, ‘Arbitration of Trust Disputes’ (2017) 35:1 ASA Bulletin, at 10; Lawrence Lawrence Cohen & Joanna Poole, ‘Trust arbitration – is it desirable and does it work?’ (2012) 18: 4 Trusts and Trustees 324; Nicholas Le Poidevin QC, ‘Arbitration and trusts: can it be done?’ (2012) 18:4 Trusts and Trustees 307. jQuery("#footnote_plugin_tooltip_3546_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3546_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); as well as the release of rules and model clauses for such disputes.3) American Arbitration Association, Wills and Trusts; Liechtenstein Chamber of Commerce and Industry, Rules of Arbitration of Liechtenstein, ‘Model arbitration clause for trusts’ at 28. jQuery("#footnote_plugin_tooltip_3546_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3546_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The latest development in this field occurred on the first of November in Zurich when the ICC launched a new arbitration clause for trust disputes exactly ten years after its first clause on the subject was released in 2008.4)ICC Arbitration Clause for Trust Disputes, ICC International Court of Arbitration Bulletin Vol. 19 No. 2 at 9. jQuery("#footnote_plugin_tooltip_3546_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3546_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The aim of this post is to analyse some of the innovations and briefly consider whether it finally resolves some of the intractable problems posed by trust arbitration or whether it could have gone further.

Updating the Classic Trust Scenario

The first improvement of the 2018 clause over the 2008 clause is the provision for protectors and other power-holders to also be bound by the arbitration clause as opposed to just the settlor, trustee and beneficiaries mentioned in the 2008 clause. This reflects the changing practice of offshore, and even onshore, trusts where complicated structures involving protectors and other power holders have become the norm driven by the settlors desire to retain greater control over the trustees and ensure that the trust fund is managed according to their will.

Deemed Acquiescence as Opposed to Conditional Grant of Benefit

The second difference, albeit perhaps not an improvement, is the changed language with regards to the binding effect of the clause on beneficiaries. In the 2018 clause the drafters appear to have opted for a theory of deemed acquiescence so that any beneficiary who claims or accepts ‘any benefit, interest or right under the Trust…’ will be deemed to be bound by it. The 2008 clause on the other hand included not only the idea of deemed acquiescence but also that of a conditional grant, i.e. as a condition for receiving benefit under the trust a beneficiary had to accept the clause. It is not entirely clear why this means of binding beneficiaries was eliminated from the 2018 clause and it might be thought that it represents a step backwards.

Explicit Confidentiality Obligations

The third difference, and a certain improvement, one finds in the 2018 clause is the explicit inclusion of confidentiality obligations regarding any arbitral proceedings rendered due to the clause and any awards or decisions rendered by the arbitral tribunal or a settlement agreement between the parties. Since one of the most important reasons for parties to consider arbitration over litigation to resolve trust disputes is the possibility of keeping matters confidential, their inclusion in the clause itself is certainly to be applauded.

No Duplication of the Rules on Joinder

As the 1998 ICC Rules did not include provisions for joinder and multi-party scenarios, the 2008 clause explicitly included such provisions but given that the new 2017 arbitration rules do so the 2018 clause removes such provisions and relies instead on those provisions in the rules themselves.

No Provision for Representing Unborn, Unascertained, Minor or Otherwise Incapable Beneficiaries

Neither the 2008 nor the 2018 clauses provide any provisions for the representation of unborn, unascertained, minor or otherwise incapable beneficiaries. As trusts may often involve children, classes whose individual members may not be known or mentally incapable individuals, and courts will be reluctant to approve of such clauses, this represents a major lacuna. In countries which are signatories to the European Convention on Human Rights it is highly likely that clauses which do not provide for the appointment of representatives for such beneficiaries are likely to breach those beneficiaries’ Article 6(1) right to a fair trial. Arbitral awards rendered on the basis of such clauses are, therefore, likely to face serious enforcement challenges or be annulled on public policy grounds.

It is true that the explanatory note to the clause underlines the importance of the inclusion of a means for representing such beneficiaries in order to avoid these problems but it could have been clearer about the real risk of an unenforceable or annulled award in such cases. Moreover, it would have perhaps been advisable to provide for sample means of representation. Although it might be objected that this is not desirable in a standard arbitration clause, Lawrence Cohen & Joanna Poole do so in their suggested clause6) Lawrence Cohen & Joanna Poole, ‘Trust arbitration–is it desirable and does it work?’ (2012) 18:4 Trusts Trustee 324 at 330. jQuery("#footnote_plugin_tooltip_3546_6").tooltip({ tip: "#footnote_plugin_tooltip_text_3546_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and it is therefore certainly possible.

Conclusion

The 2018 ICC Arbitration Clause is a welcome update of the 2008 clause and adds several important elements including confidentiality and provisions binding protectors and other power holders. However, it does not completely sever the Gordian knot of arbitrating trust disputes and could be improved in several respects, for example, by providing default provisions for the representation of unborn, unascertained, minor or otherwise incapable beneficiaries.

References   [ + ]

1. ↑ Gary B. Born, ‘Chapter 1: Overview of International Commercial Arbitration’, International Commercial Arbitration (2nd edition, Kluwer Law International 2014), 6–224, at 93-97; Queen Mary University London, 2015 International Arbitration Survey: Improvements and Innovations in Arbitration. 2. ↑ See for example Georg Von Segesser & Katherine Bell, ‘Arbitration of Trust Disputes’ (2017) 35:1 ASA Bulletin, at 10; Lawrence Lawrence Cohen & Joanna Poole, ‘Trust arbitration – is it desirable and does it work?’ (2012) 18: 4 Trusts and Trustees 324; Nicholas Le Poidevin QC, ‘Arbitration and trusts: can it be done?’ (2012) 18:4 Trusts and Trustees 307. 3. ↑ American Arbitration Association, Wills and Trusts; Liechtenstein Chamber of Commerce and Industry, Rules of Arbitration of Liechtenstein, ‘Model arbitration clause for trusts’ at 28. 4. ↑ ICC Arbitration Clause for Trust Disputes, ICC International Court of Arbitration Bulletin Vol. 19 No. 2 at 9. 5. ↑ Loukas A. Mistelis & Stavros L. Brekoulakis, Arbitrability: International and Comparative Perspectives (2009, Kluwer Law International), Part II. 6. ↑ Lawrence Cohen & Joanna Poole, ‘Trust arbitration–is it desirable and does it work?’ (2012) 18:4 Trusts Trustee 324 at 330. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Avoiding the MFN Clause: One Step Forward, Two Steps Back?

Sat, 2018-12-01 01:00

Amrit Singh

International investment agreements (IIAs) are divided into two types: (1) bilateral investment treaties and (2) treaties with investment provisions. I would primarily focus on the first category i.e. bilateral investment treaties. A bilateral investment treaty (BIT) is an agreement between two countries regarding the promotion and protection of investments made by investors from one country to other country’s territory, and vice versa.

India is not particularly new to the concept of BIT as India had signed the first BIT with the United Kingdom (UK) in 1994 and since 1994, India has signed BITs with 84 countries. Now, the reason why India had entered into BITs with other countries was because India wanted to attract foreign investment. The early 90s was the beginning of the era of liberalisation, as the then Prime Minister Mr. Narasimha Rao, along with the financial minister Mr. Manmohan Singh initiated the economic liberalisation of 1991.

India had been entering into sundry BITs but the major problem with the provisions of those agreements was identified by India in 2011, when an arbitral tribunal found India liable of violating the India-Australia Bilateral Investment Treaty. It was only in 2011 that India faced its first adverse arbitral award arising out of a BIT in the White Industries case.

White Industries was an Australian mining company and it entered into a contract with Coal India Limited for the supply of certain equipment and development of a coal mine. The dispute relating to bonus, quality and penalty payments arose in 1999 between Coal India and White Industries. The latter commenced arbitration under the ICC Arbitration Rules and secured an award in its favour as the tribunal awarded to White Industries a compensation of USD 4.08 million.

Coal India applied to the Calcutta High Court to set aside the ICC award as per the Arbitration and Conciliation Act of 1996. Subsequently, White Industries approached the Delhi High Court to enforce the same award in India. However, to the dismay of both the parties, the proceedings were not completed in due time. Moreover, to White Industries’ surprise, the enforcement proceedings were stayed and therefore it filed an appeal to the Supreme Court of India. The matter couldn’t be decided until 2010 and thus finally, White Industries resorted to arbitration as it invoked the arbitration clause under the India-Australia BIT.

The contention of White Industries was that it had been denied “effective means” of enforcing its rights in relation to its investment, a protection incorporated into the India-Australia BIT by virtue of an MFN clause it contained. Thus, due to an ineffectual judicial (justice) system, India paid a huge price.

This proceeding signalled the start of a new decade for India, as this case was followed by a spate of proceedings against India. The major problem with India was that the whole BIT regime was more of an investor-friendly regime rather than a balanced one. Thus, India started working on a new model and hence, India signed just one BIT between 2011 and 2015 and that with the UAE. The draft on the new model BIT was subsequently approved by the Cabinet in December 2015.

The new model BIT has significantly departed from the earlier model as this time it follows a protectionist policy and does not favour the investors much. It is very evident that the new model BIT is a result of the backlash that India has faced in the past 7 years. It is to be noted that according to the World Investment Report 2016, India was one of the top 15 most frequent respondent states in 2015, which can certainly daunt the potential investors planning to set up a business enterprise in India. Therefore, it seems pretty clear that now India, instead of adopting a balanced approach towards the investors, has chosen to be on the defensive side.

The model BIT adopted in 2015 indicates that from now on, India would give precedence to the host state’s right to regulate over investment protection. This can be inferred from the various changes that have been introduced, amongst which some of them are: (1) narrowing down the definition of investment adopting an ‘enterprise-based’ definition of investment instead of an ‘asset-based’ definition; (2) providing for a number of actions which could not be decided by the arbitral tribunal; and (3) deleting the MFN clause, etc.

The MFN clause in a BIT aims to create a level-playing field for all foreign investors by prohibiting the host state from discriminating against investors from different countries. Majorly, foreign investors have preferred borrowing beneficial clauses and provisions from another BIT signed by the host state with other country. Now, it is to be noted that based on the previous model, India used to have a MFN provision in the BIT. But the MFN clause has been completely excluded in the new model BIT.

Moreover, it is not surprising that India has excluded the MFN provision due to the problems it faced in the White Industries case where Australia invoked the ‘effective means’ provision contained in the India-Kuwait BIT. Now it is very easy to conclude to the fact that India obviously did not want to grant the same remedy of effective means to Australia and that is why India formulated a balanced BIT.

However, it is also pertinent to note that the tribunals often import clauses of BITs entered into by a state with other countries even when that state had purposely not kept the same clause or provision. The reason why the tribunals resort to this approach is because the MFN clause aims to provide the benefit to a country and therefore in this particular case, India suffered a lot and hence finally removed the MFN provision from its new BIT.

It is highly debatable as to whether this move in the current context is favourable or not but the reason for doing that is clear to the arbitration community. India should have been cautious in adopting such a stand, as this would definitely restrict the number of investors in India as they longer could enjoy the right of having the same rights as of those investors of other nations. Moreover, the MFN clause is also important in order to ensure that every state/or investor is treated equally, without any kind of discrimination. Hence, India has definitely come forward with some new and impressive developments but with that there are also some major shortcomings which can act as an impediment to attracting foreign investments in India.

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Sweden Adopts Revisions to Modernize its Arbitration Act

Sat, 2018-12-01 00:32

Patricia Shaughnessy

 

Introduction

On November 21, 2018, the Swedish Parliament adopted revisions to the Swedish Arbitration Act with the aim of modernizing it to further facilitate effective and attractive international and domestic arbitration in Sweden. The welcomed revisions will become effective for arbitrations commenced from March 1, 2019,1) The exceptions for application to arbitrations commenced after March 1, 2019 are:  Sections 41 (simplified court procedure for contesting arbitrator compensation) applies to proceedings brought to court after March 1, 2019; Section 43, para. 2, (oral evidence-taking in English in challenge proceedings) applies to challenges commenced after March 1, 2019; and Section 45 (a) (permission for appeal in challenge proceedings to the Supreme Court), apples to challenge judgments made after March 1, 2019. jQuery("#footnote_plugin_tooltip_6480_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6480_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); following a nearly five-year long legislative process to update the twenty-year old Arbitration Act of 1999, generating two earlier Kluwer blog posts by Brian Kotick and Anja Havedal Ipp. The revisions continue to reflect the influence that the UNCITRAL Model Law also had on the 1999 Act, while the Swedish Act retains its current approach and unique features. This short post highlights the key features of the revisions.

 

Jurisdictional Objections

One of the most notable revisions provides for a new procedure for judicial review of jurisdiction.  Under the current Act, parties have had the option of bringing a declaratory action to the District Court to determine jurisdiction prior to or during an arbitration, with the arbitrators entitled to continue the proceedings concurrent with the court proceedings.  Parties also have had the option of challenging an Award on jurisdictional grounds in set-aside proceedings at the Court of Appeal.  The revisions to Sections 2 and 4 (a) of the Act, allow parties to bring declaratory actions to determine jurisdiction only prior to the commencement of arbitration, unless the other party does not object to such concurrent proceedings after commencement of arbitration.  The revisions include a new provision allowing arbitrators to decide jurisdiction in an order that a party may appeal to the Court of Appeal within 30 days, resulting in a final jurisdiction decision.  During the judicial review, the arbitration may continue.  This approach reflects Article 16 of the Model Law and brings with it some issues that will be likely be addressed in future Swedish practice.  Parties should be careful to observe the shortened time for an appeal for such an order as compared to challenging an Award on jurisdictional grounds.

 

Appointment of the Tribunal

Under the current Act, when an arbitrator appointed by a party can no longer act or has been removed for reasons that existed when the arbitrator was appointed, and when the Parties have not agreed to a procedure for appointment and replacement, (such as under arbitral institutional rules of the SCC or ICC), the District Court will appoint the replacement arbitrator upon the request of a party.  The revisions allow for the party who appointed the original arbitrator to appoint the replacement arbitrator unless the court finds reasons not to allow such an appointment, for example delay or obstruction. (Section 16). If the original arbitrator must be replaced due to circumstances arising after the appointment, the party appointing the original arbitrator may appoint the replacement arbitrator, unless the parties have agreed otherwise. (Section 16, para 2.).

 

As complex arbitrations increasingly involve multi-parties, the revisions address the appointment of the arbitral tribunal in such cases when the parties have not agreed otherwise, which they typically would by agreeing to arbitral institute rules such as the SCC or ICC.  When the parties have not agreed to a procedure for appointment, the Act provides that the district court will appoint.  The revisions provide that upon the request of a party, the court shall appoint the entire tribunal in multi-party situations, including releasing any arbitrator previously appointed by the Claimant, unless the parties agree otherwise. (Section 14, para 2).

 

Consolidation of arbitrations

While modern rules of arbitration, such as the SCC 2017 Rules, provide for consolidation and joinder, the current Act has not addressed these issues.  The revisions have added a provision allowing a party to request the District Court to consolidate an arbitration with another when three conditions are met:  the parties agree to consolidate, it is advantageous to consolidate, and the same arbitrators are appointed.  (Section 23 (a)).  The court may also separate the arbitrations if justified. (Id.).  This provision would not be applicable when parties have agreed to arbitral rules providing for consolidation procedures; and, consequently, the Act’s consolidation provision would be used in ad hoc proceedings.

 

Determination of the Applicable Substantive Law 

The current Act does not provide for the determination of the substantive law applicable to the dispute.  The revisions provide that the arbitrators shall apply the law or set of legal rules the parties have agreed to, which unless otherwise indicated will be the substantive law and not a reference to such law’s choice of law rules.  (Section 27, para. 1).  If the parties have not agreed to the applicable law, the arbitrators may directly decide this issue. (Section 27, para. 2).  Arbitrators may only decide ex aequo et bono or as amiable compositeur if the parties have so agreed. (Section 27, para.3).

 

Terminology

Two revisions refer to terminology without having any significant impact on existing Swedish practice.  The term “seat” of an arbitration replaces the term “place” of arbitration to ensure the legal distinction between the legal seat and the place where hearings or other matters may take place (Section 22 of the Act).   The current Act refers to the impartiality of arbitrators but not to the independence , however, in practice both impartiality and independence have been required of arbitrators.  The revisions add the term “independence” to ensure clarity. (Section 8).

 

Termination of Arbitration

Pursuant to the current Act, once an arbitration is commenced it must be terminated with an Award.  This unique requirement may cause difficulties when the parties settle, withdraw a case, or fail to pay the advance on costs, and when rules, such as the ICC, require scrutiny of an Award.  The revisions allow the arbitrators to dismiss the case with an order, (Section 27), subject to certain provisions relating to the termination of the proceedings through an Award, (such as Section 36).

 

Excess of Mandate

Excess of mandate is a ground for setting aside an Award under the current Act.  Readers familiar with the Swedish arbitration will recognize that the current Act requires that a procedural error “must probably have affected the outcome of the case” to justify setting aside a challenged Award, (unlike the Model Law), while this has not been a requirement under the Act for excess of mandate.  The revisions will now impose this causality requirement also for setting aside an Award for excess of mandate.  (Section 34.3).

 

Challenge Procedure

To increase the efficiency of challenge procedures, the revisions have decreased the time-limit for bringing a challenge from three months to two months from receipt of the Award.  Parties should be aware that all of the grounds for challenge must be brought within this two-month period, (Section 34), which can be difficult when reviewing the records, consulting with clients, translating materials, and preparing filing submissions.    Section 33 of the Act has not been revised and provides no time limit for attacking “invalid awards”, namely when an Award violates public policy, the dispute is not arbitrable, or the Award is not in writing nor signed.  (Section 33).  The revisions have decreased the time period for contesting termination decisions (Section 36) and arbitrators’ compensation (Section 41) to two months.

 

The revisions provide a court may, upon the request of a party, allow the parties in challenge proceedings to take oral evidence in English, without translation to Swedish. This applies to both the Courts of Appeal and the Supreme Court (Section 45).

 

The current Act provides for an appeal of a challenge judgment from the Court of Appeal to the Supreme Court when the Court of Appeal provides permission for such an appeal, which is made with regard to the importance of the issues and establishing precedents.  Currently, such an appeal is not limited to particular issues in the case.  The revisions provide that upon such permission from the Court of Appeal, the Supreme Court may grant or deny leave for appeal and may determine which issues it will hear and decide.  (Section 43).

 

Conclusion

The revisions to the Swedish Arbitration Act enhance and increase the effectiveness of the already pro-arbitration legal environment for international and domestic arbitration in Sweden.  The new provisions may raise some new issues when put into practice, but will not dramatically change the landscape of Swedish arbitration.  The revisions are designed to support party autonomy and to interface with the modern rules and practice of international arbitration.

 

 

The author was a government- appointed expert in the committee mandated to investigate and propose revisions to the Swedish Arbitration Act.  Her views are entirely her own.

References   [ + ]

1. ↑ The exceptions for application to arbitrations commenced after March 1, 2019 are:  Sections 41 (simplified court procedure for contesting arbitrator compensation) applies to proceedings brought to court after March 1, 2019; Section 43, para. 2, (oral evidence-taking in English in challenge proceedings) applies to challenges commenced after March 1, 2019; and Section 45 (a) (permission for appeal in challenge proceedings to the Supreme Court), apples to challenge judgments made after March 1, 2019. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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