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YSIAC Conference Recap: This House Believes that Emotional Intelligence Will Always Trump Artificial Intelligence

18 hours 23 min ago

Esther Candice Lim

Introduction

Humans versus robots: the YSIAC debate held yesterday as part of YSIAC Conference 2019 sought to address the deep question of what it means for us to be human and the timely question of whether technology can and will, one day, surpass us.

The moderator for the debate was Professor Nadja Alexander (Director, SIDRA). Arguing for the motion were Professor Dr. Maxi Scherer (Special Counsel, Wilmer Cutler Pickering Hale and Dorr LLP) and Mr Adrian Tan (Partner, TSMP Law Corporation) – Human 1 and Human 2 respectively (“Humans”). Arguing against the motion were Mr Todd Wetmore (Partner, Three Crowns LLP) and Mr Rimsky Yuen, SC (Barrister, Arbitrator and Mediator, Temple Chambers) –  Robot 1 and Robot 2 respectively (“Robots”).

 

The starting vote? 85% in favour of the motion and 15% against.

 

First Round of Arguments

Human 1 opened confidently, proclaiming that the votes of the 130 strong audience members demonstrated the “absolute superiority of human intelligence”, which was met with congratulatory smiles all around. She argued that the motion does not mean that emotional intelligence (or human intelligence) will trump artificial intelligence in every instance, conceding that there are obvious situations, such as Google Translate being able to translate 150 languages, where artificial intelligence is superior to human intelligence. Human 1 stated that the ultimate question, therefore, is whether artificial intelligence is superior to human intelligence, to which she argued “no”.

Citing statistical studies, Human 1 argued that while artificial intelligence can assist in routine situations, it is deficient in unprecedented or emergency situations. Put simply, artificial intelligence is a calculation of the likelihood of an event based on existing input data. Human 1 then brought the issue closer to home, with an illustration of an arbitral tribunal making decisions based on probability predicted by a machine. She reasoned that parties would not accept such decisions as they will argue that every case is unique to its own facts. Artificial intelligence also cannot provide reasons as to why it reached a certain outcome, she said.

Human 1 concluded by reading, to the audience’s glee, a nonsensical chapter of a Harry Potter novel written by a program with artificial intelligence, which was met with raucous laughter. Spoiler alert: Ron eats Hermione’s family.

In response Robot 1 first declared that the Robots took the motion to mean whether emotional intelligence will always trump artificial intelligence in the course of decision-making in arbitration, before quickly firing back that “the motion is embarrassed by its own ambition”. Acknowledging Human 1’s concession that emotional intelligence will not always trump artificial intelligence, he argued that human intelligence is fundamentally limited. On the other hand, artificial intelligence, being in its infancy, can only develop and improve moving forward, with the ability to potentially incorporate elements of emotional intelligence as well. Citing an article, he argued that artificial intelligence is capable of self-learning.

Robot 1 canvassed how artificial intelligence can help humans avoid cognitive bias, focusing effect, and omission bias in arbitral decision-making, and how artificial intelligence can be deployed 24 hours every day (much like associates in law firms!). He closed his arguments by stating that emotions are not a substitute for collection and analysis of data and any motion positing the primacy of emotional intelligence over artificial intelligence is an attempt to place intuition over reason.

 

Second Round of Arguments

Human 2 stepped forward, eloquently rebutting Robots’ interpretation that the motion includes the words “decision-making in arbitration”. He said, “I don’t see it but that is the beauty of machine language”. Human 2 argued that if one were to look at the context of arbitration and court disputes, a dispute is, at its core, people disagreeing with other people, and that a key part of dispute resolution is getting people to understand and accept the dispute in question.

Human 2 moved to his argument that the value of humans lies in our imperfections. Illustrating his point with the examples of the Japanese robot priest, Mindar, the Chinese robot monk, Xian’er, the Indian robotic hand in a Hindu temple and the German robot priest, BlessU-2, he argued that when one is in trouble, one does not want someone who is perfect. He said one would want someone who is flawed, and who struggles with the human experience of life. As it is with priests, so it is with lawyers, judges and arbitrators.

Robot 2 countered that if one needs to find the right answer one first has to ask the right question. Citing relatable examples, he argued that the reason why people utilise machines with artificial intelligence is that machines can do a better job than humans.

Robot 2 questioned the yardstick by which we measure the superiority of emotional and artificial intelligence, arguing that it is untrue that artificial intelligence cannot do “good” things such as creating art and music – fields which were thought to be quintessentially in the realm of human intelligence. He addressed Human 1’s illustration on Harry Potter, questioning whether that example truly represents the failings of artificial intelligence or the failings of the human responsible for that particular program. If someone could write a better code and create a better program, perhaps it is only a matter of time before artificial intelligence is able to create the next Hollywood blockbuster. Robot 2 asked whether having reasons is necessarily “good”, for sometimes people do not require reasons but an outcome.

Lastly, Robot 2 invited the audience to question the premise of the motion. He said, “It puts people in the position that A is always against B. I ask why they should be exclusive rather than inclusive. Why should we think in the way the motion represents?”

 

Rebuttal arguments

In rebuttal, Human 1 argued that it is a fiction that artificial intelligence is not prone to human biases, citing an article which reported that an artificial intelligence program was found to have a gender bias vis-à-vis men. She rebutted Robot 1’s argument about limitless learning by stating machine learning means improvement, but one only based on past data at any given moment in time. Hence there is no way machine learning can go beyond what has been done in the past.

Robot 1 swiftly responded by stating that the motion must fail by virtue of Humans’ concession that emotional intelligence cannot, in perpetuity, trump artificial intelligence. “You know when things are getting desperate when someone says vote for me because we are flawed”, he said, closing by proposing that the audience let the machines work at night so that they would not have to.

Finally the Humans and Robots took questions from the audience, which they responded to with another round of clever sparring between Human 2 and Robots 1 and 2.

 

Conclusion

At the end of the spirited debate which traversed humans, robots, and my favourite quote from Human 2, “Do you love me?” the audience were invited to cast their votes once more.

 

The result? 68% for and 32% against.

 

The Robots moved the most minds that day, but it is heartening to know that many still have faith in the relevance of human (or emotional) intelligence. As Robot 2 says, why should artificial intelligence and emotional intelligence even be mutually exclusive in the first place? Artificial intelligence is improving by leaps and bounds. It will no doubt become an even more advanced and widely used tool for lawyers and arbitrators in the near future – not just in legal research, but also in document disclosure and with expert evidence. With the advancement of artificial intelligence programs, it is hoped that lawyers and arbitrators can then spend more time on the human (and some would say most important) aspects of each case: the client’s needs and the effective resolution of the dispute before them.

 

More coverage from YSIAC Conference is available here.

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YSIAC Conference Recap: How to Win an Arbitration

Wed, 2019-11-20 07:30

Yi-Jun Kang

The Young SIAC (“YSIAC“) Conference 2019 took place earlier today in Singapore, attracting young arbitration practitioners from all across the globe. The theme of the 2019 Conference was “Arbitration 2.0 – Navigating New Frontiers in International Dispute Resolution”, which explored the impact of various trends, technologies and innovations in international arbitration.

Nonetheless, while trends may come and go, the goal of an arbitration practitioner remains constant – that is to obtain an ultimate victory in every arbitration. Keeping this overarching goal in mind, the afternoon panel session (‘How to win an arbitration’) explored what means can be used to achieve this and the panellists also shared how to effectively use those means.

The panel was moderated by Ms Pauline Low (Associate Counsel, SIAC) and comprised Mr Lau Wai Ming (Senior Legal Counsel, Accenture), Mr Jern-Fei Ng QC (Barrister, Essex Court Chambers), Mr James Nicholson (Senior Managing Director, Head of Asia Economic & Financial Consulting, FTI Consulting), Mr Siraj Omar SC (Director, Drew & Napier LLC) and Mr Andrew Pullen (Barrister, Fountain Court Chambers).

 

Panel discussion

The panel discussion began with the quintessential question – what exactly is a “win” in arbitration? The panel was quick to disregard the traditional understanding of winning. Instead, there was immediately a consensus amongst the panellists that a “win” must necessarily be viewed from the lens of the client and is therefore an outcome which achieves a client’s objectives and is in the best interests of the client.

While there is of course no magic formula to achieve a “win” in arbitration, the panel shared many pearls of wisdom gleaned from their years of experience. Some of their tips and tricks include the following:

  • Eyes on the prize: Mr Ng QC shared that one should never lose sight of the end goal, i.e. a favourable and enforceable award. This focus therefore informs everything he does from the outset – the case theory advanced on behalf of one’s clients as well as the conduct of the arbitration process.
  • Getting a head-start from inception: Mr Omar SC highlighted that dispute resolution clauses are often overlooked during the drafting process. He emphasised that a well-framed arbitration clause is half the battle won. He noted that while clients may not be cognisant of this, it is the lawyers’ job to think about potential disputes which may arise, the potential reliefs the client may need, enforcement issues, and hence frame the dispute resolution clause accordingly.
  • Starting your case on the right foot: Mr Pullen highlighted that from the perspective of a claimant, thorough ground work should be done before the commencement of an arbitration. In particular, he said that even before filing a notice of arbitration, a party should fully consider whether its claims and causes of action will withstand scrutiny, test the veracity of the available evidence and potentially even have experts do a sense check on quantum issues. This approach was supported by Mr Nicholson, who stated that a win is getting most of the damages claim in an arbitration, if not all.
  • Appointing the right arbitrators: The constitution of the tribunal is (perhaps unsurprisingly) a critical element to ensuring ultimate victory. Mr Ng QC noted that the seat of arbitration, governing law and the nature of dispute are the typical factors which weigh on a party’s mind when nominating an arbitrator. However, a less common but equally critical consideration should be that of business practices and legal traditions involved in a particular dispute. By way of example, he added that if one’s client operates in a particular jurisdiction where business is usually conducted informally, having an arbitrator who is aware of and sensitive to such particular cultural nuances would go a long way in obtaining a favourable outcome for one’s client.
  • Selecting the right expert and utilising experts effectively: Many practitioners will be aware that the selection of expert witnesses is by no means a straightforward process. Mr Pullen highlighted that the most important considerations are usually subject area expertise and experience in acting as an expert witness in arbitrations. He mentioned that it would be ideal if a potential candidate possesses both but sometimes, especially in particularly esoteric fields, it may not be easy to identify such an individual. Mr Nicholson agreed, and noted that the most eminent expert in a particular field may not necessarily be the best expert witness. He further stated that the advantages of having a good expert witness are largely twofold: it brings the dual benefits of efficiency and credibility, especially if the expert is involved at the outset. This can assist with a coherent presentation of the case.
  • Having a clear case theory: According to Mr Ng QC, it is imperative for winning that a lawyer is able to tell the arbitrator, in one paragraph, what you want and why you should get it. Mr Omar SC concurred with this view. Besides, he emphasised the importance of having a clear case theory and a central argument, which should play right through from the pleadings and witness statements to cross-examination.
  • Using procedural tools to one’s advantage: Mr Pullen shared from his experience that applications for interim measures can be decisive in the context of an entire case. Interim measures can include interim measures ordered by a national court or tribunal, such as injunctions and document preservation orders. Mr Pullen stated that when deployed effectively, especially when the other side’s resources are under constraint, these can provide one with substantive “wins” early in the proceedings – putting the opposition on the back foot. On the flipside, Mr Lau cautioned that counsels in developing arbitration jurisdictions usually employ more “creative” guerrilla tactics, sometimes successfully, in an attempt to derail arbitrations.

 

Conclusion

Overall, the interactive session provided a unique opportunity for the delegates to tap on the vast experience of the eminent panel and to gain insight into how experienced practitioners, counsel and consultants manoeuvre their way through an arbitration to achieve the ultimate success for their clients. The war stories shared by the panel were helpful in driving home their points and putting things in perspective for the delegates. The panel’s comments were a timely reminder to junior lawyers to be cognisant of a client’s objectives at all times, and to always keep the end goal of a favourable and enforceable award in view. After all, the last thing a claimant wants is to obtain an award that is substantively in one’s favour but which turns out to be a pyrrhic victory. While there is certainly no silver bullet that would guarantee a “win” in an arbitration, the delegates definitely went away with many insights on how one can set themselves up for victory from early on in the arbitration process.

 

More coverage from YSIAC Conference is available here.

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Arbitration Tribunals’ Curtailed Jurisdiction in Armenia: Again “No” to the Contract Invalidity Issue

Tue, 2019-11-19 02:00

Mushegh Manukyan

More than four years have passed since the Armenian Cassation Court—the highest court in Armenia—held in its EKD/1910/02/13 (2014) decision (“Cassation Court Decision”) that only state courts may exercise jurisdiction over the issue of contract invalidity (see previous post). To recall, the Cassation Court reasoned that civil rights could be protected through judicial, administrative or public (arbitration) means but that “the most guaranteed option was the judicial option because in such case the protection was conducted in accordance with the judicial procedure strictly envisaged by the law…”  To that end, given the importance of civil rights concerning contract invalidity, the Cassation Court found that those rights shall be protected by state courts rather than by arbitral tribunals. The Cassation Court Decision had a limiting effect on the scope of arbitrable issues and thus paralyzed the Armenian arbitration system.

Following this decision, the Parliament amended the Civil Code in 2015 by specifically stipulating that “[t]he protection of civil rights is provided by a court or arbitral tribunal…” (the “2015 Amendment”). The policy justification that the government put forward to amend the Civil Code was by reference to the Cassation Court Decision, making clear that it limited “the possibility of resolving disputes arising from certain legal relationships through arbitration.” However, despite the 2015 Amendment, the court practice of rejecting the jurisdiction of arbitral tribunals over the contract invalidity issue appears to remain intact.

 

2019 Civil Appeals Court Decision

A recent decision of the Civil Appeals Court dated 16 April 2019 in the KD2/0548/02/18 case signalled that the Armenian courts would continue limiting the ability of arbitration tribunals to exercise jurisdiction over the contract invalidity issue. In this dispute between two major telecom companies, the claimant sought damages arising out of the invalidity of a 2009 contract in a state court despite the fact that the contract contained an arbitration clause. The court, however, agreed with the respondent that sought to stay the proceedings, relying on the arbitration clause. The claimant subsequently appealed the court decision before the Civil Appeals Court, relying, inter alia, on two main grounds:

First, it argued that the 2015 Amendment does not affect a contract concluded in 2009;

Second, the claimant also asserted that with the 2015 Amendment the legislature targeted only employment, consumer, and family disputes.

The Appeals Court held that the contract invalidity issue shall be exclusively decided by state courts. The decision was appealed to the Cassation Court, but the appeal was subsequently dropped. The Appeals Court’s decision appears to be premised on the proposition that the contract invalidity issue is so important that it cannot be entrusted to arbitral tribunals. The Appeals Court, citing the Cassation Court Decision, reiterated that the State has an obligation to create “necessary and effective mechanisms” to ensure that the right to effective means for legal protection can be fulfilled “fully and effectively.” In light of the Cassation Court’s statutory powers to ensure the interpretation and uniform application of laws, the Appeals Court deemed that the Cassation Court Decision had already specified instances of specific importance that shall be decided by state courts. To that end, the Appeals Court held that the dispute at hand “shall be subject to the first instance state courts’ jurisdiction given the importance and specificity of the requirements and legal norms underlying thereof.”

 

Comments

The Appeals Court appears to have agreed that the 2009 contract was not governed by the 2015 Amendment. This was by reference to Article 438 of the Civil Code, which stipulates:

  1. A contract must comply with rules that are mandatory for the parties by virtue of a statute or other legal acts (imperative norms) in effect at the time of its conclusion.
  2. If after the conclusion of a contract a statute is adopted establishing rules mandatory for the parties other than those that were in effect upon conclusion of the contract, the terms of the concluded contract shall remain in force except in cases when it was established in the statute that its effect extends to relations arising from previously concluded contracts.

Two observations should be made in this regard:

First, the parties’ arbitration agreement was broad and even contained the language “excluding jurisdiction of general courts,” which confirms the parties’ intention to avail the tribunal of unrestricted powers to decide all contractual disputes between the parties. This was consistent with the then-existing practice. Notably, in the period between 10 February 2007 (the effective date of the law on commercial arbitration) and 18 July 2014 (the date of the Cassation Court Decision), arbitration agreements were drafted without a single restrictive reference to the contract invalidity issue. The restrictive interpretation of the Civil Code emerged only as a result of the unusual Cassation Court Decision. The Appeals Court, however, concluded that in 2009, the Civil Code included mandatory rules limiting the power of arbitral tribunals to hear the contract invalidity issue. Thus, the Court found that the law prevails over the contract.

Second, by applying Article 438, the Court tacitly modified the arbitration agreement to exclude the contract invalidity issue from its scope but failed to determine the validity of the arbitration agreement as to other matters.

With regard to the claimant’s second point that the 2015 Amendment targeted a specific group of disputes, as someone who personally took part in the discussions of the 2015 Amendment, I should note that, although as part of the 2015 Amendment the Parliament authorized arbitration for certain types of post-dispute family, employment and consumer arbitrations, it is inaccurate to assert that the Civil Code was amended in the context of these disputes only. Rather, the government’s policy justification (as referred to above) makes clear that the reason for the 2015 Amendment was the Cassation Court Decision.

Also, it is difficult to speculate whether the Civil Appeals Court in fact gave weight to the independence issue in this case as the Cassation Court did, but the facts that raise concerns over the independence of the arbitral institution are overwhelming. Particularly, the parties’ arbitration agreement envisaged an arbitration with a panel of three arbitrators at the Arbitration Institution at the Chamber of Commerce and Industry of Armenia (“CCIA Arbitration Institution”) under its rules.

The CCIA Arbitration Institution is perhaps the most commonly used arbitration institution in Armenia. According to the CCIA Arbitration Institution rules, “[b]y agreeing to arbitration to be administered by” the CCIA Arbitration Institution, “the parties have accepted that [the arbitral tribunal] shall be formed exclusively from the list of arbitrators of the Arbitral Institution.” The lawyer for the party that sought to uphold the arbitration clause was a partner of a law firm whose managing partner is the President of CCIA Arbitration Institution, who has broad powers under the CCIA Arbitration Institution rules and its charter, ranging from arbitrator appointments to deciding on arbitrator challenges. The lawyer himself is listed as an arbitrator on the CCIA Arbitration Institution’s roster, along with five other members of the firm. The Secretary of the CCIA Arbitration Institution is also a partner of the same law firm. Further, the firm’s website makes plain that the party it represented in this case is a “major client.”

In such circumstances, it is unsurprising that the claimant chose to avoid the CCIA Arbitration Institution. Similarly, it is also apparent why in such cases Armenian courts have sought to ensure the integrity of the protection of civil rights through Armenia’s court system.

It is hoped that Armenian litigants will genuinely realize the independent and impartial nature of arbitration. That would likely lead to a relaxation of the courts’ protectionist approach and over-reaction toward arbitration, which, as evidenced in the above two cases, may often be justified. Ultimately, the largest burden to make arbitration more acceptable to the Armenian business community lies with the arbitration institutions, which should develop their rules and arbitration panels in accordance with the highest standards of independence and impartiality.

Finally, it is difficult to predict how the Armenian courts will apply the jurisprudence concerning contract invalidity to arbitrations between foreign parties and Armenian counterparts with a seat in Armenia. However, with regard to the enforcement of foreign arbitral awards that touch upon the contract invalidity issue, it should be noted that the Armenian Constitution stipulates that “[i]n case there is a contradiction between the norms of international treaties ratified by the Republic of Armenia and the norms of laws, the norms of the international treaties shall be applied.” To that end, it is hoped that the pro-enforcement bias of the New York Convention, which Armenia ratified in 1997, will prevail, and that the Armenian courts will honour foreign arbitral tribunals’ decisions concerning contract invalidity.

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CEPANI Celebrates Golden Anniversary with Three Days of Events and a New Set of Arbitration Rules

Tue, 2019-11-19 01:00

Maarten Draye and Emma Van Campenhoudt

Located in the heart of Brussels, Europe’s capital and home to international organisations such as NATO, CEPANI, the Belgian Centre for Arbitration and Mediation, was founded on 25 September 1969. At that time, Belgium had just acceded to the Geneva Convention and was exploring ways to update its obsolete legal arbitration framework.

Much has changed in these five decades. Not only has CEPANI developed into the largest arbitration institute in Belgium. Nowadays, it boasts a full range of dispute resolution services, offering rules on arbitration, mediation, mini-trials, expert appraisals, contract adaptations and domain name disputes.

Through its President, Secretariat and various Committees (e.g. on the appointment and challenges of arbitrators), CEPANI administers on average 80 cases each year in English, French and Dutch. While the majority of cases involves at least one Belgian party and is seated in Belgium, an increasing number of cases involves foreign parties and arbitral seats. CEPANI arbitration proceedings last on average 15 months from introduction, and 13 months from the appointment of the arbitral tribunal until the award. Disputes submitted to CEPANI arbitration relate to different fields, including in particular civil and commercial contracts, inter-company disputes, services agreements, and share purchase agreements.

In addition to its role as an institution, CEPANI actively promotes the knowledge and use of arbitration through study and research. To this end, CEPANI regularly organizes conferences and lunch meetings, publishes books on dedicated topics and casebooks in its scientific collection, and edits b-Arbitra, a bi-annual arbitration review (also available online through KluwerArbitration). Every three years, it organizes an academic prize to reward an outstanding paper in national or international arbitration.

CEPANI has further become one of the major players in Belgium in the development of dispute resolution. A CEPANI working group was instrumental in the adoption by the Belgian legislator of the UNCITRAL Model Law on Arbitration as Part VI of the Belgian Judiciary Code in 2013. Since a number of years, CEPANI further actively participates as an observer in UNCITRAL’s Working Group II on Arbitration and Dispute Settlement at its sessions in Vienna and New York. Together with ICC Belgium, CEPANI recently set up Brussels Arbitration Hub, a website aimed at assisting parties who have chosen Brussels as place of arbitration in finding accomodation, interpreters, court reporters and other service providers. CEPANI40 offers a platform for below 40 practitioners with an interest in arbitration, giving the next generation a chance to meet and exchange views.

The Centre’s golden milestone did not go by unnoticed. On 13, 14 and 15 November 2019, CEPANI hosted three days of celebrations in Brussels that brought together arbitration practitioners from Belgium and abroad for a gala dinner and various academic sessions. The Centre has further issued a special edition of b-Arbitra. Dedicated to supreme court decisions, this collector’s item contains contributions discussing arbitration-related case law of the highest courts in the world’s most prominent arbitration jurisdictions. Finally, CEPANI will release a Liber Arbitrandum in its scientific collection, a liber amicorum containing contributions from national and international experts on a variety of arbitration topics.

To keep its rules up to date with the most modern trends, CEPANI also launches a new set of arbitration rules. The new rules will enter into force on 1 January 2020 and modernize the current 2013 arbitration rules. The 2020 Rules will maintain a number of the current features, including the setting up of terms of reference at the outset of the arbitration proceedings and the possibility of parties to resort to an emergency arbitrator pending the constitution of the arbitral tribunal.

With the new rules, the Centre aims to make the use of CEPANI arbitration even more secure, while maintaining an approach driven by an efficient, rapid and legally sound solution to disputes governed by its rules.

Most of the changes to the 2020 rules aim at clarifying and completing a number of existing provisions. These changes either seek to address practical issues that have arisen in practice, or are innovations inspired by the most recent arbitration practice.

One of the most eye-catching novelties is that the CEPANI Arbitration Rules will no longer be divided in two separate sections. Where the 2013 rules contained a separate set of expedited rules for claims of limited value in Section II, such expedited rules will be integrated in the main rules. Under the 2020 rules, expedited rules shall apply if the amount of the dispute does not exceed a total of EUR 100,000, unless the parties opt out.

Furthermore, the 2020 Rules will introduce a mandatory formal review of all draft arbitral awards by the CEPANI Secretariat. This will ensure that every arbitral award issued by an arbitral tribunal under CEPANI Rules will meet all formal requirements, making such awards more robust against possible challenges.

Finally, to enhance efficiency and reduce costs, electronic communication will become the default rule under the 2020 rules for communications between the CEPANI Secretariat, the arbitral tribunal and the parties. In addition, CEPANI will continue to use BOX, a secure online platform where the entire file is accessible for the parties and the arbitral tribunal.

To guide users through the new rules and the Centre’s practice, the CEPANI Secretariat will issue the first edition of its Guide to CEPANI Arbitration. Being written in English, this will become an indispensable tool for users of CEPANI arbitration, including the growing number of international parties, counsel and arbitrators.

At 50 years, CEPANI thus underscores its leading role as a regional arbitration centre in the heart of Europe. With a set of cutting-edge rules and the support of a thriving multilingual arbitration community, the Centre’s future looks bright.

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Pakistan’s Woes with Foreign Investors – Ways to Prevent the Tethyan Saga

Mon, 2019-11-18 00:00

Ahmad Ghouri

Introduction

In July this year, an International Centre for Settlement of Investment Disputes (ICSID) based arbitration tribunal ordered the Government of Pakistan (GOP) to pay a massive $5.8 billion to Tethyan in compensation. The legal battle between Tethyan and GOP started in 2011 when GOP refused to grant a mining lease to Tethyan after it had allegedly invested more than $220 million to discover copper and gold reserves in Reko Diq town in Baluchistan, Pakistan. After the ICSID tribunal’s decision, the GOP first announced that it will try to settle with Tethyan. However, the GOP is now reportedly seeking to review the tribunal’s decision in accordance with ICSID’s investment arbitration procedures after Tethyan moved a US court for enforcement of the award. The legal battle for Pakistan continues although millions have already been spent on legal costs from the public purse.

In the past, the GOP has been involved in at least 13 other high-stake disputes with foreign investors, including recently with Agility and Progas, where many more millions must have been spent in legal costs or compensation. These costs are of course in addition to losing these existing investments by entering into disputes with investors, and the loss of country’s repute as an investor-friendly destination. Additionally, disputes taken by foreign investors to ICSID arbitration are difficult to manage by governments where tribunals, in accordance with their perceived mandate, are focused on resolution of the existing dispute, and payment of compensation should it be necessary, and not on maintaining working relationships between the disputing parties.

 

Preventing investment disputes

As the GOP wants to promote foreign direct investment (FDI) to boost the country’s economic development, it must devise a clear policy to avoid disputes with foreign investors. A radical option to stop foreign investors from taking their disputes to international arbitration is to terminate the existing (around) 50 bilateral investment treaties (BITs) that provide legal bases for international arbitration to foreign investors. However, such a radical measure without strengthening the domestic regime for protecting FDI can be counter-productive. Pakistani courts have in the past, without commenting on or disputing the merits of those cases, repeatedly interfered in the GOP’s dealings with foreign investors. Although in most of those cases Pakistani courts interfered due to allegations of wrong doing on part of government officials, foreign investors and their investments have been put at risk. In such circumstances, investment arbitration under the existing BITs is the only neutral and effective remedy left for foreign investors.

Instead of terminating the existing BITs, the GOP needs to make a clear and comprehensive policy to prevent disputes with foreign investors from arising at the first place, rather than trying to resolve them at a later stage through ICSID or other international arbitration. The GOP also needs to build capacities to resolve such disputes locally.

 

Ways forward

The following sections of this post present three recommendations for the development of a comprehensive investment dispute prevention policy. These recommendations are specifically aimed at the GOP. However, they are equally useful for other developing countries that are seeking to reform their domestic policies to attract, facilitate and retain sustainable FDI that contributes to local economic and non-economic development.

 

  1. Identify irritants from the start

First, the GOP should make transparent procedures for pre-entry vetting of foreign investors and investments to identify possible irritants for both the government and foreign investors that may cause future disputes. For GOP, such irritants include any possible security and public order apprehensions. Pakistan currently has an open-admission system that does not require pre-screening and approval for incoming foreign investors. This open-admission policy requires careful reconsideration. Before foreign investors and investments are allowed into Pakistan, the GOP must consider their possible effects on public interest, public policy and public institutions; fundamental rights of citizens; the environment; critical infrastructure, technology and security of critical data; and the freedom and plurality of media and political activities. Foreign investors must also be required to submit information on, for example, their ownership structures, origin of funding for investments, and existing and planned operations in other countries.

For foreign investors, such irritants include, for example, a lack of quality and transparency in governance and management of foreign investments, and unaccountability of public officials. Foreign investments in the government infrastructure sector are considered ‘public procurements’ and are governed by the public procurement regulatory authorities set up by the federal and provincial governments. These authorities have been created for improving the governance, management, transparency, accountability and quality of public procurements. However, no such public authorities exist to achieve these objectives in other areas such as investments made to exploit natural resources and the private sector investments made either solely by a foreign investor or as a joint venture with a government or a private entity. Instead, such investments are negotiated, authorised, managed or governed by the relevant government Ministries, Divisions or Departments. In line with the public procurement regulatory authorities, the GOP should consider setting up a regulatory body to scrutinise foreign investments in these areas to ensure transparency, accountability and quality before formal agreements are signed or legally binding commitments are made.

 

  1. Ensure facilitation throughout the life cycle of investments

Second, the GOP should ensure facilitation throughout the life cycle of FDI. This life cycle begins with the first key stage of strategy for attraction by invitation to invest in priority sectors and fostering linkages between foreign and domestic firms. However, effective governance of the stages subsequent to attraction is also equally important to appease foreign investors. These lifecycle stages include ease of entry, establishment and retention; during and post-completion repatriation of earnings; and, most importantly, active assistance to support positive impacts on local population and contributions to local development.

The GOP’s existing policies primarily focus on the attraction of FDI and no significant attention is being paid to the post-establishment care. For effective attraction of FDI, the government has created a central coordination mechanism at the Board of Investment (BOI) to ensure liaison among various federal and provincial public authorities that deal with foreign investors. This mechanism is intended to take up the issues relating to investment proposals with the concerned government departments for timely materialization of investment projects and to resolve any obstacles posed to the establishment of investments.

However, the government needs to create a more comprehensive investment facilitation policy that includes post-establishment care. Such policy should include mechanisms for observing the progress of FDI projects during their entire life-cycle. This could be achieved by further targeted support to ensure timely action by relevant government authorities to address any post-establishment problems faced by investors. This observation and targeted support will prevent issues from arising in the first place. It will also help identify actual issues faced by foreign investors and provide the possibility of their amicable resolution locally through negotiations before they escalate to international arbitration.

Additionally, it is important that such aftercare policy is not merely an emergency service delivered in sporadic ad hoc manner aimed at providing passive information or resolving instantaneous issues. Instead, it must be a strategically informed policy to promote longer term gains from FDI targeted at the development needs of Pakistan. A strategically informed aftercare policy can include, for example, training the local workers, helping with export promotion, obtaining larger premises for expansions, identifying local suppliers, helping in building a business case for new investments, and developing networks to improve productivity and competitiveness. In addition to preventing and early identification of disputes, these initiatives will help to attract new investments by boosting investor confidence and ease of doing business rating.

 

  1. Create neutral and effective investor complaints and dispute resolution mechanisms

Third, the GOP should create an effective and neutral investor complaints and dispute resolution mechanism. The BOI has announced the establishment of a dedicated cell to address grievances of investors and taking-up their issues with relevant government departments. The BOI is also considering the possibility of establishing an Alternate Dispute Resolution (ADR) Centre to provide a forum to settle investment related disputes domestically before approaching international dispute resolution agencies. As the policy with regards to these initiatives is not fully set out as yet, it is unclear how the BOI would ensure that foreign investors actively avail the services of BOI’s grievances cell and ADR Centre prior to taking their disputes to international arbitration. The BOI needs to carefully weigh its options before such mechanisms are created. For example, the BOI needs to be clear as to whether it wants to create an investor complaints cell and play a supervisory or commanding role to address complaints against government departments in an effective manner, or whether it wants to play the role of a mediator for the resolution of disputes between foreign investors and government departments.

This question ultimately goes back to the BOI’s mandate under the law, however, it will be more appealing to foreign investors if the BOI takes a commanding role in addressing investor complaints rather than becoming a mediator. A mediator is supposed to be a neutral intermediary having no vested interest in the dispute, and foreign investors are likely to be apprehensive of BOI’s neutrality since it is primarily a mainstream government institution. A complaints cell at the BOI, on the other hand, appears to be a more convincing option instead of a mediation centre. The BOI can take notice of the complaints made by foreign investors against government authorities and intervene in a timely and effective manner to address those complaints in the spirit of cooperation and compromise.

Instead of an ADR Centre at the BOI, the GOP should consider the creation of a government backed, but fully autonomous, investment and commercial arbitration institution having a panel of independent local and foreign arbitrators. Such arbitration institution will be more attractive to foreign investors as compared to an ADR Centre because it will be both neutral and autonomous. Resolving disputes at a local arbitration forum by a mix of foreign and local experts having an in-depth knowledge of local realities, procedures and laws will be both time and cost effective. This will also boost investor confidence and attract more FDI. Private arbitration centres, such as the Centre for International Investment and Commercial Arbitration, have evolved but such centres cannot flourish unless they are backed by the government and are included in private-public contracts as an arbitration forum. Otherwise, the best way forward is that the government creates an autonomous arbitration institution that is fully backed by the government but operates independently and in accordance with international best practices. These developments will, of course, need to come hand in hand with the modernisation of Pakistani arbitration law that is based on the colonial era Arbitration Act 1940. Useful inferences can be drawn in this regard from the recent legislative developments in India, which has – following the footsteps of arbitration institutions created by Singapore and Hong Kong – set up a high level Arbitration Council to institutionalise and supervise arbitration proceedings in India.

 

Conclusion

As any other developing country, Pakistan needs more FDI that contributes to its sustainable development objectives. Disputes with foreign investors incur both reputational and financial costs. The GOP needs to make a clear and comprehensive policy to prevent disputes with foreign investors from arising in the first place rather than trying to resolve them at a later stage through international arbitration. A comprehensive dispute prevention policy would ensure that possible irritants for both investors and the host government are identified from the start so that both parties make informed and measured choices. Such policy would also ensure facilitation and care throughout the life cycle of FDI and not just at the time of its admission and entry. A life cycle-oriented aftercare policy would be based on continuous observation and targeted support to deal with issues that can lead to disputes. The host government can also strategically embed the aftercare policies into its long-term sustainable development objectives. Additionally, the GOP should also create a neutral and effective complaints mechanism to provide investors an opportunity to resolve their issues with public authorities amicably. In this regard, it is also imperative to develop domestic arbitration regime and institutions having the capacity and expertise to resolve disputes with foreign investors. These policies and initiatives will prevent disputes from arising in the first place and also provide an opportunity to resolve them amicably and locally, thus avoiding enormous legal costs. They will also improve the overall business environment and Pakistan’s outlook as a desirable FDI destination.

The precise suggestions made to implement these dispute prevention policy proposals in Pakistan are based on the current Pakistani normative and regulatory environment. However, these proposals are equally useful for other developing countries that can benefit from them in the specific ways they are implementable in their own normative and regulatory space.

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The U.S. Law of Arbitration: From 1925 to 2019

Sun, 2019-11-17 01:16

Thomas E. Carbonneau

The progression of arbitration law in the American legal system has been steadfast. Despite a few uneasy rulings, the U.S. Supreme Court (“SCOTUS” or “the Court”) has provided resolute support for arbitration and proclaimed the legitimacy of its enhanced adjudicatory role. The few rulings that strayed from the contemporary judicial evaluation of arbitration1)Wilko v. Swan, 346 U.S. 427 (1953); Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968); Bernhardt v. Polygraphic Co. of Am., 350 U.S. 198 (1956); Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974); Volt Info. Scis., Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468 (1989); Stolt-Nielsen S.A. v. Animal Feeds, Int’l, 559 U.S. 662 (2010) jQuery("#footnote_plugin_tooltip_2840_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2840_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); eventually were reconsidered and their impact on the law significantly lessened or entirely redefined. For example, the Rodriguez Court reversed Wilko v. Swan; Bernhardt Polygraphic was replaced with the Federalism Trilogy; Volt Information Sciences was recast as a contract freedom case; and Sutter virtually reversed Stolt-Nielsen.3)Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477 (1989) and Oxford Health Plan, LLC v. Sutter, 133 S. Ct. 2064 (2013) jQuery("#footnote_plugin_tooltip_2840_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2840_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); U.S. law provides that arbitral adjudication can apply to all civil disputes and, once chosen by the contracting parties, will yield binding determinations at a lower cost and more quickly than its judicial counterpart.

The Steelworkers Trilogy2)United Steelworkers of Am. v. Am. Mfg. Co., 363 U.S. 564 (1960); United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574 (1960); United Steelworkers of Am. v. Enter. Wheel & Car, 363 U.S. 593 (1960) Corp) jQuery("#footnote_plugin_tooltip_2840_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2840_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); in 1960, along with the cases on international litigation and arbitration4)Scherk v. Alberto-Culver Co., 417 U.S. 506, reh’g denied, 419 U.S. 885 (1974); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985); The Bremen v. Zapata Offshore Co., 407 U.S. 1 (1972) jQuery("#footnote_plugin_tooltip_2840_4").tooltip({ tip: "#footnote_plugin_tooltip_text_2840_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); foreshadowed the Federalism Trilogy5)Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983); Southland Corp. v. Keating, 465 U.S. 1 (1984); Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985) jQuery("#footnote_plugin_tooltip_2840_5").tooltip({ tip: "#footnote_plugin_tooltip_text_2840_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

The federalism cases spread the Court’s new assessment of arbitration to all levels of the American legal system. A contractual reference to arbitration could achieve what had eluded the American dispute resolution system throughout its history: efficient and effective adjudication. The law, in effect, had failed society by demanding that the legal system provide absolute procedural rectitude in the trial, extensive adversarial discovery in building the record, and appeal on the merits. By contrast, the characteristics of arbitral adjudication constituted, in and of themselves, a functional form of due process. Domestic civil justice and functional global commerce could best be realized through the submission of disputes to arbitration.

The revamped arbitration doctrine survived the periodic changes in the Court’s composition. A majority of the justices consistently agreed that arbitration was an effective solution to the problem of the inaccessibility of civil justice. As in other Western democracies, American society had evolved and changed significantly in terms of population, structural character, and its need for resources. The entanglements and leaden pace of the legal methodology was having a ruinous impact upon the social order. Adjudication, therefore, needed to be altered and made more accommodative of societal needs. The demanding burdens of civil litigation were neither tolerable nor workable. American society could not constitutionally abandon its obligation to provide fair and impartial civil justice by accepting or acquiescing to the operational dysfunctionality of the civil adjudicatory process. For the Court, arbitration could remedy the problems of civil litigation. The judicial commitment to arbitration would, over time, bring about a systemic revolution in American law.

SCOTUS’ faith in arbitral adjudication evidently influenced the substance of its rulings on arbitration. Prior to their ascension, no member of the Court ever professed an in-depth knowledge of or a strong interest in arbitration.  In fact, the opinion in some cases, e.g., First Options of Chicago v. Kaplan, 514 U.S. 938 (1995), demonstrated a spotty knowledge of arbitration. Justices were on the Court because of their legal skills, their familiarity with judicial litigation, and their political involvements. Prior to their period of service, few, if any, members of the Court ever touted non-judicial adjudication. The leadership of the Court, in particular Chief Justice Warren Burger, wanted all its members to become aware of the grave failings of the legal process and to join the effort to eradicate them. During their tenure, a number of justices bettered their understanding of arbitration and developed a much deeper appreciation of the remedy and its beneficial impact upon the legal process.

Political convictions, however, generated consternation about arbitration. The unilateralism of adhesion reduced the majority in favor of arbitration. The long-standing social justice contention between the ‘haves’ and ‘have-nots’ cooled the attention given to judicial reform through private contract. While a majority could still be constituted in favor of arbitration, opposing political persuasions created a sense of disunity among the justices. Despite the political differences, the Court continued to sustain party recourse to arbitration. Law and policy would need to be reconciled to maintain a majoritarian position on arbitration. Subsequent rulings established a more measured balance between law and arbitration, but also intensified the critique of law and the support for litigation through arbitration. Rulings depended upon the current and evolving needs of the legal system and society. Legal positions often varied by circumstance and group dynamics within the Court. Be that as it may, a majority of justices continued to favor arbitration strongly because it harbored a ‘real’ solution to the need for effective civil litigation.

Throughout his tenure on the Court, Justice Thomas objected to arbitration and the application of the FAA on a states’ rights basis. Like Justice Scalia and O’Connor, Justice Thomas believed that the federal statute was never intended to apply in state courts. In his view, state courts were free to apply state law in arbitration cases and reach results different from those likely in federal courts. Nevertheless, Justice Thomas voted with the majority in the class waiver cases. Since Justice Scalia’s death, Justice Thomas has resumed emphasizing that the FAA is federal law that is not binding on state courts. For the sake of accuracy, any assessment of Justice Thomas’ position on arbitration should take into account his dissent in Mastrobuono because it is a powerful statement of the standing of the prior decision in Keating. Justice Thomas convincingly argues that the two opinions cannot be reconciled.

Justice Alito is as reluctant as Justice Thomas on the topic of arbitration, if not more so. He appears to be the most likely justice to oppose the “emphatic [strong, liberal] policy favoring arbitration.” He came to the Court from the Third Circuit, a federal appellate court that frequently advocates for restrictions on arbitration and arbitrability—a position also espoused by the Ninth Circuit. Justice Alito’s opinion in Stolt-Nielsen v. AnimalFeeds was an unequivocal criticism of arbitration’s trespass on the legal system’s jurisdiction, mission, and authority. In Stolt-Nielsen, the Court held that a special jurisdictional award rendered by an AAA Panel was null and void because the arbitrators failed to provide a legal basis for their ruling—in effect, amounting to a form of merits review of the award prohibited by current law and strongly disfavored by judicial policy. In effect, the Court deemed that the arbitrators should rule as judges would have ruled. By disappointing that expectation, the arbitrators’ conclusions were deemed unenforceable. This view of arbitration is antiquated and should no longer be possible in the contemporary legal regulation of arbitration.

Nonetheless, the future of arbitration in the U.S. and like-minded legal systems seems to be strong. Judicial hostility is seen as an outdated and arthritic position. International commercial arbitration is more developed and well-established than its domestic counterpart. There is long-standing and significant legal and political support for arbitration in Western European democracies (e.g., France, England, Switzerland, The Netherlands, and Belgium). Court acceptance of and support for arbitration is critical. The courts enforce both arbitral agreements and awards. Law firms have developed departments in arbitration. International commercial litigation is basically conducted through arbitration. States even use arbitration to resolve foreign investment and related problems; it has proven successful, but sovereignty nonetheless remains an obdurate obstacle to adjudicatory civilization. Arbitration is the most energetic development in law in a very long time.

Arbitration is an area of legal practice that promises great professional opportunities. The allure of arbitration has become virtually impossible to resist. For these reasons, this author decided to write his Seventh Edition of the “Law and Practice of United States Arbitration”.

 

References   [ + ]

1. ↑ Wilko v. Swan, 346 U.S. 427 (1953); Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968); Bernhardt v. Polygraphic Co. of Am., 350 U.S. 198 (1956); Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974); Volt Info. Scis., Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468 (1989); Stolt-Nielsen S.A. v. Animal Feeds, Int’l, 559 U.S. 662 (2010) 2. ↑ United Steelworkers of Am. v. Am. Mfg. Co., 363 U.S. 564 (1960); United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574 (1960); United Steelworkers of Am. v. Enter. Wheel & Car, 363 U.S. 593 (1960) Corp) 3. ↑ Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477 (1989) and Oxford Health Plan, LLC v. Sutter, 133 S. Ct. 2064 (2013) 4. ↑ Scherk v. Alberto-Culver Co., 417 U.S. 506, reh’g denied, 419 U.S. 885 (1974); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985); The Bremen v. Zapata Offshore Co., 407 U.S. 1 (1972) 5. ↑ Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983); Southland Corp. v. Keating, 465 U.S. 1 (1984); Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985) function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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The Contents of the Asian International Arbitration Journal, Volume 14, Issue 2

Sun, 2019-11-17 00:00

Lawrence Boo and Gary Born

The contents of this issue of the journal is now available and includes the following contributions:

 

Rachel Chiu Li Hsien, ‘A World Without Borders; A New World Order: Navigating Cross-Border Insolvencies Through Arbitration’

To date, multi-jurisdictional efforts aimed at managing cross-border insolvencies are largely limited to broad speaks of cooperation between national Courts. Absent is pointed attention to the incongruence in national insolvency laws at play. Without a single cross-jurisdictional forum with policing-like powers to navigate these differences, detours from the certainty, speed, and predictability that insolvency law serves have become a recurrence. This article posits realigning the goals of insolvency law in the context of cross-border insolvencies, by employing arbitration and mediation as lubricants to the difficult ‘choice of law’ and ‘choice of forum’ issues that present. The author proposes the construct of a specialized interstate dispute resolution centre that runs on a quasi-arbitration-mediation model and a set of ‘choice of law’ principles. This framework offers a path to resolve certain cross-border insolvency related disputes that carry a substantial transnational element. Most critically, the author advocates the value of a transnational integrated framework aimed at building consensus around ‘choice of law’ and ‘choice of forum’ issues. She believes this is key to realizing the goals of certainty and expeditious management of multinational commercial enterprises in financial distress.

 

Michael Neumeier, ‘Class Arbitration in Australia: A Bright Future or a Pipe Dream?’

Class arbitration has been a hotly debated issue in academic circles since the turn of the century throughout the world. Much literature has recognized that class arbitration could be an effective means of resolving the ever-increasing number of mass claims with cross-border implication. However, the cross-border advantage of class arbitration is dependent on the legal community’s ability to craft a procedure that is acceptable across a diverse tapestry of legal systems around the world. In continental European legal systems there appears to be a jurisprudential battle underway with some supporting class arbitration, and many fundamentally objecting to it (some authors have even argued that class arbitration would be unconstitutional). These objections have not halted the development of alternative collective redress regimes in EU Member States, (albeit they are disparate and often incomplete) demonstrating an underlying appetite for collective redress. Australia has had a wealth of experience with judicial class actions, whilst there is little literature considering the possibility of class arbitration. This paper: (1) considers whether class arbitration would even be possible under Australian law, and (2) proposes a ‘less is more’ class arbitration regime that would be harmonious on an international level.

 

Sharad Bansal, ‘The Dampening Effect of ‘Foreign’ Mandatory Laws’

Party autonomy – a foundational facet of international arbitration – is often at loggerheads with public policy elements. A recurrent debate in international arbitration has been the extent of limits imposed by public policy on party autonomy. One aspect of this debate is when parties expressly opt for a law governing the merits of the dispute, can an arbitral tribunal derogate from such law and apply a mandatory rule which it finds to be relevant to the dispute? This issue has repercussions on the enforceability of arbitration agreements as well as arbitral awards where mandatory rules are involved. In this article, the author argues that arbitrators are bound to apply mandatory laws notwithstanding the fact that such a measure constitutes a departure from the lex contractus, since parties inherently lack the capacity to contract out of mandatory rules. To the extent that mandatory rules reflect public policy they now cast a limit to parties’ lex contractus.

 

Binsy Susan & Adarsh Ramakrishnan, ‘How to Trump a “No Claims Certificate” in Arbitration’

In construction contracts, employers generally insist on submission of ‘no due/certificate’ claims signed by the contractors, as pre-condition to release payments due under the final bill. To secure the full amount, contractors generally send an arbitration invocation notice setting out their claims (or in cases where there is no arbitration clause, a legal notice) to the employers, in defiance of any such settlement certificate/voucher. When the employers contend that the dispute is not ‘arbitrable’ on account of discharge of the contract in terms of the No Dues/Claims Certificate, the contractors refute it by stating that any such settlement certificate/voucher was obtained by fraud, coercion or undue influence and that there was absence of free consent. The article will analyse the Indian law on validity of such no dues certificates/settlement certificates/discharge vouchers in construction contracts and the possible course of action that contractors may adopt to contest claims, despite such certificates.

 

Saad Aljadean Badah, ‘Capacity of Parties and Arbitration Agreement, Part I’

The Gulf Cooperation Council (‘GCC’) is a political and economic alliance of six states namely Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman. They share similar political and cultural identities rooted in the creed of Islam (See: http://www.gcc-sg.org/en-us/AboutGCC/Pages/StartingPointsAndGoals.aspx). They are all parties to the New York Convention 1958. This article seeks to examine the concept of capacity under the laws of the GCC states and how it impacts the enforcement of the agreement to arbitrate under the New York Convention when interposed with the Civil Codes of the GCC states.

 

Chahat Chawla, ‘Legislation Update: India’

On 10 August 2018, the Lok Sabha (Lower House of the India’s bicameral Parliament) passed the Arbitration and Conciliation (Amendment Bill), 2018 (‘2018 Amendment Bill’), to further amend the Arbitration and Conciliation Act, 1996 (‘1996 Act’). In a short span of three years, the Indian Parliament has sought to overhaul India’s principal arbitration legislation for the second time, after the initial reforms introduced by the Arbitration and Conciliation (Amendment) Act, 2015 (‘2015 Amendment Act’). The 2018 Amendment Bill has been described as ‘a momentous and important legislation’ by the Indian Minister of Law and Justice, which is aimed at making India a ‘hub of domestic and international arbitration’. Other than the introduction of the 2018 Amendment Bill, the Indian Government, this year, also introduced the New Delhi International Arbitration Center Bill, 2018 (‘NDIAC Bill 2018’) in the Lok Sabha. The primary objective of the NDIAC Bill is to establish a ‘flagship arbitral institution’ to enable the growth of institutional arbitration in India. This Note undertakes a review of the key features of the 2018 Amendment Bill and the NDIAC Bill 2018 and how the proposed legislative measures impact the existing arbitral regime in India.

 

The issue also includes a book review by Qian Wu of ‘Arbitration in the Digital Age: The Brave New World of Arbitration’, edited by Maud Piers and Christian Aschauer (Cambridge University Press, 2018).

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Deliberations of the Arbitral Tribunal: Opening the “Black Box”

Fri, 2019-11-15 23:43

Alessandra Lobo, Gabriel Veras and Giulia Spalletta

“Deliberations of the Arbitral Tribunal” was the theme of the #YoungITATalks held in Sao Paulo on October 10, 2019, organized by L.O. Baptista Advogados and Young ITA.

Experienced arbitrators Adriana Braghetta (L.O. Baptista), Carlos Elias (CEARB) and Mariana Craveiro (ContiCraveiro) discussed with moderator Mariana Cattel (L.O. Baptista) the ‘behind the scenes’ of arbitral tribunals’ deliberations.

An efficient deliberation of the tribunal is essential to ensure due process, to grant a fair award and to avoid a surprising decision to the parties. However, deliberation is still a “black box”, a secret part of arbitration. There are no official guidelines on good practices related to it, especially because each arbitration can be influenced by many variables, such as the nuances of the specific dispute, the applicable law, the arbitrators’ culture and/or the seat of arbitration. So, are there any appropriate steps of general application that every tribunal should follow when deliberating? And is there a right time to hold deliberations?

Drawing from their experience as arbitrators, the panelists believe that even though each case has its own particularities, the answer is affirmative. They indicated that the deliberations should occur throughout the proceedings, not only in the moment of drafting the award. As a consequence, appropriate measures can be taken from the beginning of the arbitration. In their opinion, leaving the analysis of the case to the end of the proceeding may lead to an inaccurate decision, because the arbitral tribunal will not have enough familiarity with the facts and documents to fully understand and explore all the issues brought by the parties. This distancing from the case could lead to inefficient deliberations and to confusion as to what the main issues are that need to be clarified in the evidence production phase. If the tribunal is not engaged with the issues early on, it will not know whether the document production requested by the parties is indeed relevant to decide the dispute, which can unnecessarily extend the duration and costs of the proceeding.

So, what can be done to develop an efficient deliberation? The panelists considered that arbitrators’ commitment to the case and the dynamics between the tribunal members are crucial to the effectiveness of the deliberation process. The tribunal, as a committed team from the outset of the arbitration, has to be curious and sharp on all the details of the case, to listen to what the parties and other arbitrators have to say and not be afraid to take difficult decisions. This leads to the importance of establishing an efficient and effective communication channel between the arbitrators. When all the tribunal members know, trust and communicate with each other, there can be a smooth exchange of ideas, which should ultimately result in a solid award. In cases where the arbitrators are not yet acquainted, one measure that helps develop this relationship of trust among the members of the tribunal from the start is to hold early meetings in person rather than by tele/video-conference. In a face-to-face meeting, the arbitrators have the opportunity to fully focus on the details of the case and to actually listen to their fellow arbitrators’ opinions and interpretation of the facts. This opportunity to hear and to be heard creates a collaborative environment between the members of the tribunal and encourages arbitrators to be active and engaged throughout the proceeding.

Further, this proactive posture and engagement in every phase of the proceeding helps to ensure a more fluid deliberation process. To build this engagement, the panelists suggested that arbitrators should schedule meetings to (i) explore the case, studying the parties’ arguments, (ii) elaborate their own timeline/chronology with the most relevant facts, to understand when and how the dispute arose, (iii) define the issues they consider important for the ruling, and (iv) guarantee that they will address all the issues in the award, even to establish their irrelevance. Holding such meetings early in the case (and relatively frequently) should assist the arbitrators to understand the main issues of the case and to make appropriate decisions as to the procedure. For example, it will allow the tribunal to better evaluate whether expert examinations would be useful, preventing unnecessary production of evidence.

Moreover, the panelists shed some light on other measures that arbitrators can take during the deliberation process, including: (i) to begin the analysis of the submissions only after having received the statement of claim and the others party’s answer, so as to get an overall sense of the main issues and arguments on each side, as doing so helps the arbitrators to keep an open mind while exploring each party’s case, thus avoiding any prejudgments the arbitrators may make early on in the case; and (ii) to schedule a hearing for the parties to present their case after the first round of written statements to debate the relevant issues of the case (i.e. a so-called “Kaplan Opening”; see further: “Keep it Simple. Keep it Interesting” by Sapna Jhangiani).

But who is responsible for taking action and implementing these measures? Ordinarily, the chairman of the tribunal has the responsibility of organizing the arbitration and coordinating the dialogue and exchange of ideas (see further: “The Chairman’s Role in the Arbitral Tribunal’s Dynamics” by Laurent Lévy).

However, the deliberations should be shared among all members of the tribunal. In fact, co-arbitrators can step in and even take over the responsibility of drafting the award if the chairman is not diligent enough. After all, as pointed out by Jara and Olórtegui, deliberations are shaped by the principle of collegiality. If one arbitrator is excluded from the opportunity to deliberate and convey his opinion on the final draft of the award, the decision is at risk of annulment and the other members of the tribunal could be held professionally liable (see further: “Puma v. Estudio 2000: Three Learned Lessons” by José Maria de la Jara and Julio Olórtegui; the Supreme People’s Court of China’s decision in Guangying Garment v. Eurasia; and the Federal Supreme Court of Switzerland’s decision in Sefri v. Komgrap).

The parties’ counsel can also adopt measures to assist the arbitrators to deliberate efficiently. For example, on the written statements, lawyers should not leave questions unanswered or avoid dealing with the thorny parts of their case. It is fundamental to create a dialogue with the counterparty (through the written pleadings or otherwise) to clarify to the arbitrators what are the most important issues under discussion. One issue that, in the panelists’ view, parties should address early on in the proceeding are the particularities of the case regarding the economic rationale of the business in dispute, as understanding what drives economic decisions in that specific market might help the tribunal to better ascertain how the dispute arose and how each party behaved. Also, being aware of the tribunal’s background and profile before presenting the case contributes to a more objective presentation of the issues and helps to build rapport with the members of the tribunal and to capture the tribunal´s interest. In hearings, for example, counsel may build rapport by making eye contact with the arbitrators to check if they are following the presentation and how they are reacting to each argument, and to assess when to pause or what to further explain, as Sapna Jhangiani pointed out. It is important to have in mind that, in the counsel’s toolbox, the most powerful and relevant weapon is simplicity. The use of infographics and timelines can help communication to be clear and concise while providing the arbitral tribunal with all the information it needs to make a decision. (See further: “Keep it Simple. Keep it Interesting” by Sapna Jhangiani). In addition, the parties’ counsel should be careful not to be sarcastic or to insult, humiliate or annoy witnesses during hearings because these guerrilla tactics usually don’t work with experienced arbitrators.

Finally, an efficient deliberation process requires not only the arbitrators’ active engagement with the issues of the case, but also the tribunal’s commitment to act as a unit, and the counsels’ efforts to present their case objectively. The key to open the black box of deliberation lies on the increase of transparency as to the conduct of the proceeding, and on the use of case management techniques that further communication among the arbitrators, and between the parties and the tribunal. After all, besides being great legal experts, arbitrators must also be excellent case managers.

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ArbitralWomen: Career Paths in Arbitration

Fri, 2019-11-15 22:13

Malgorzata Mrozek

On September 25, 2019, a program on “Career Paths in Arbitration” took place in Boston, MA, at Harvard University.  The program was sponsored and organized by ArbitralWomen, Young ArbitralWomen Practitioners (“YAWP”) and the Boston International Arbitration Council (“BIAC”).  The event was supported by the United States Council for International Business (“USCIB”), the Harvard International Arbitration Law Students Association (“HIALSA”), and Harvard Law School Women’s Law Association (“WLA”).  All panelists and the moderator are members of ArbitralWomen.

Isabel Yang, Founder and CEO of ArbiLex, moderated the discussion. Topics ranged from the career paths of the panel speakers, hot topics and trends in the practitioners’ jurisdictions, career advice, and final a question and answer segment.

Ema Vidak Gojkovic, an associate at King & Spalding and former member of the Steering Committee of YAWP, opened the conversation by giving a general overview of international arbitration, as many in attendance at Harvard were law students new to the practice area. Betsy Hellmann, counsel at Skadden, Arps, Slate, Meagher & Flom, explained that from her time in law school she was interested in international disputes and as an associate was encouraged to gain experience in both international arbitration and general litigation.  Litigators’ experience in U.S. litigation, particularly in discovery, depositions, and cross examinations give American trained attorneys an advantage in arbitral proceedings. Moreover, American litigators are prepared to take arbitration from cradle to grave, all the way from the initiation of arbitral proceedings to enforcement actions in courts, if necessary. Conna Weiner, Arbitrator, Mediator and Special Master at JAMS and vice-chair ICC-USCIB Northeast Arbitration Committee, discussed the differences between being a mediator and an arbitrator.  The role of a mediator is to listen, be patient, and employ the power of persuasion to bring the parties to a resolution.  An arbitrator, in contrast, has the power to impose rules, procedures, and outcomes.  Ms. Weiner explained that her years of experience as an in-house counsel equipped her well for being both a mediator and arbitrator, as in-house counsels must understand the positions of all parties in disputes in order to best counsel their internal clients. Dana MacGrath, President of ArbitralWomen and Investment Manager and Legal Counsel at Bentham IMF, described how her experience practicing international arbitration as an advocate and arbitrator prepared her for her work at Bentham, a third-party litigation and arbitration finance company.  She can properly evaluate the strengths and weakness of claims that Bentham considers funding, and then advise the company about which cases to fund and on what terms.

 

The conversation then turned to developments in international arbitration across different regions of world.  Ms. Vidak Gojkovic shared that in London there is still a great deal of uncertainty as to how Brexit will play out, however the city is not concerned with losing its place as a center for international arbitration.  In Latin America, Ms. Hellmann noted arbitrators’ increasing sensitivity to potential issues of corruption so as not to issue unenforceable awards.  Ms. MacGrath stated that various geographic markets have recently embraced third-party funding for arbitration, with some governments, particularly in Asia, adopting specific legislation to allow third-party funding of arbitration.

Ms. Weiner detailed her efforts through her work with BIAC to promote Boston as an arbitral seat.  Boston is a booming city with highly internationalized life sciences and healthcare sectors, which would benefit from international arbitration as their dispute resolution mechanisms for cross-border ventures. One of the challenges in promoting international arbitration in Boston, Ms. Weiner noted, is a bias against arbitration by U.S. lawyers.  Ms. Weiner often hears that U.S. litigators feel as though arbitraion is a black box, without the check points in U.S. litigation that give parties to a dispute insight into how the judge views the case, such as during arguments on motions to dismiss or summary judgment.

Ms. MacGrath explained that companies, however, want to find good business resolutions for disputes.  She noted that they often opt for mediation before commencing arbitral proceedings in order to seek an efficient negotiated resolution.  Mediation and arbitration are frequently better avenues to preserve the business relationship between the parties than litigation.  Ms. Hellmann added that a major factor that allows for the preservation of business relationships through arbitration is the confidentiality of proceedings.  Enforceability, confidentiality, and neutrality are what set international arbitration apart from litigation and make it an appealing method of dispute resolution.

The conversation concluded with a discussion of diversity in the field of international arbitration.   Ms. MacGrath noted the progress made in the last five years in diversifying the field.  She explained briefly the work of ArbitralWomen, of which she is President.  ArbitralWomen works to promote women in international arbitration by mentoring female practitioners, connecting women with through networking events and promoting its members’ professional developments and achievements on ArbitralWomen’s website and social media.  Ms. Weiner highlighted the importance of such efforts by explaining that international arbitration is a highly referral-based field, so growing a broad network, having visibility, and establishing expertise is vital. The more diverse practitioners are seen, the more will be involved in proceedings, since diversity begets diversity.  Ms. Vidak Gojkovic described the work by ArbitralWomen’s group focused on young practitioners, called Young ArbitralWomen Practitioners group (YAWP). YAWP amplifies the accomplishments of young practitioners and promotes their development.  She also described YAWP Inspire!, an initiative that makes available to a broad audience inspiring interviews of leading female practitioners and arbitrators in international arbitration.

An additional important effort towards improving diversity is the formation of the International Council of Commercial Arbitration (ICCA) Task Force on Gender Diversity and Discrimination in International Arbitration.  Numerous arbitral institutions and international organizations have joined ICCA’s effort to study the need for and benefits of greater gender diversity among counsel, tribunals, and clients.  The task force will be proposing initiatives to promote diversity in international investment and commercial arbitration at the next ICCA Congress, in May 2020 in Edinburgh, Scotland.

While there has been progress in diversity, as the panelists noted during the “Career Paths in Arbitration” program, there is still much work to be done to remove the “pale, male, and stale” image of international arbitration and achieve greater diversity  Such diversity should aim at including gender, but should extend to all kinds of diversity, including promoting young practitioners to have on-your-feet roles at arbitration hearings, and thereby develop the new generation of international arbitration practioners.

 

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English Arbitration, Spanish Insolvency and David Guetta

Fri, 2019-11-15 00:16

Manuel Penades Fons

One of David Guetta’s most famous songs is “When Love Takes Over”. Recent weeks have shown him that insolvency can also “take over”. The Commercial Court in Santander (Spain) ruled recently that an arbitration agreement signed by the agents of David Guetta ceased to produce effects due to the insolvency of the counterparty, the Spanish company Delfuego Booking SL.

 

Facts of the Case

In April 2018, Delfuego Booking signed a contract with the agents of David Guetta for the performance of a concert by the renowned artist in Santander (Spain). The agreement included a choice of English law and submitted the disputes arising out of the contract to arbitration in London.

On the date of the concert, David Guetta did not travel to Spain and the show had to be cancelled. The organisers of the event suffered several losses. The agents of David Guetta refunded EUR 203,000 to Delfuego Booking, which allegedly covered part of the fees that had been paid to the artist prior to the concert. Delfuego Booking claimed that their losses were greater, including the additional advance fees not returned by the French DJ, the costs related to the technical and logistical preparation of the show and the reimbursement of thousands of tickets to disappointed fans. These amounted to around EUR 600,000. The agents of David Guetta refused to pay.

Due to the inability to pay its debts, the Commercial Court of Santander opened insolvency proceedings against Delfuego Booking in September 2018. The main asset in the insolvency was the claim of the company against David Guetta’s agents, which the administrator intended to pursue. Given the lack of resources to commence arbitration in London, the administrator requested the Commercial Court to suspend the effects of the arbitration agreement pursuant to article 52.1 of the Spanish Insolvency Act (“SIA”). According to this provision,

[t]he opening of insolvency proceedings shall not affect in and of itself the mediation clauses and arbitration agreements subscribed by the insolvent party. The court shall be allowed to suspend the effects of such clauses or agreements when it finds that they may harm the insolvency process, notwithstanding the provisions in international treaties.

 

The Court’s Decision

The request required a double analysis by the Court: firstly, a choice of law test to ascertain the law governing the effects of the opening of insolvency proceedings on the London arbitration agreement (on this question see also a previous post), and secondly, the application of the relevant applicable law. In both steps, the Court cited relevant literature in the field.

As to the choice of law point, the Court reasoned that neither the New York Convention nor the Geneva Convention was applicable to resolve the question at hand. The issue was not the validity or the effectiveness of the arbitration agreement in general, but the impact that the insolvency of one of the parties had on the agreement to arbitrate. Neither of those Conventions referred to this question. Rather, the choice of law rule had to be found in the European Insolvency Regulation Recast (“EIR Recast”) which provides in article 7 that “the law applicable to insolvency proceedings and their effects shall be that of the Member State within the territory of which such proceedings are opened”, including in article 7.2.f “the effects of the insolvency proceedings on proceedings brought by individual creditors, with the exception of pending lawsuits”. This covered arbitration agreements which had not been activated at the time of the opening of insolvency proceedings, as in the dispute between Delfuego Booking and David Guetta’s agents. Therefore, Spanish law was the relevant applicable law.

At the second stage of the analysis, the Court confirmed that article 52 SIA was the relevant provision, even if the arbitration was international. The assessment then moved into the requirements to exercise the power to suspend the effects of the arbitration agreement to avoid harm to the insolvency process. This is one of the most valuable parts of the judgment, given the dearth of previous case law on that point.

To start with, the Court emphasised that such power must be approached in the context of the general rule of article 52.1, which favours the effectiveness of arbitration agreements post-insolvency, and hence must be exercised with caution.

Second, the harm referred to in article 52.1 should not be equated to the abstract procedural threat produced by the existence of dormant arbitration agreements or to the mere possibility that individual arbitration proceedings may run in parallel to the insolvency. Rather, the relevant harm concerns the substantive collective interest protected by the insolvency process. That is, the need to maximise the value of the insolvent estate to increase the payment rate of outstanding debts to creditors. This interpretation is supported by similar factors empowering the court to terminate executory contracts “in the interest of the insolvency” under article 61.2 SIA. In that context, the Court found critical that, in addition to the inevitable costs linked to international arbitration in London, the arbitration agreement was very vaguely drafted as it failed to choose any arbitral institution or any rules applicable to the arbitration. This would have resulted in additional costs and procedural uncertainty.

Finally, the Court clarified that in international disputes, the suspension of arbitration agreements does not activate the jurisdiction of the insolvency court to hear the merits of the case (the vis attractiva concursus). Instead, it simply revives the general rules of international jurisdiction applicable to civil and commercial matters. Even if the Court did not state it expressly, the relevant rules in that case were those in the Brussels I Regulation Recast (“BIReg Recast”). One of the forums available to Delfuego Booking under the Regulation were the courts of Santander, as “the place in a Member State where, under the contract, the services were provided or should have been provided” (article 7.1.b, second indent BIReg Recast). It followed that the alternative to the deficient London arbitration agreement was not litigation abroad, but at the insolvent company’s domicile.

Based on these factors, the Court concluded that maintaining the effectiveness of the arbitration agreement would harm the relevant interests in the insolvency and ordered its suspension.

 

Comment

The judgment of the Commercial Court of Santander provides valuable guidance in a relevant area of practice that lacked judicial elaboration in Spain. One should be aware that the application of article 52 SIA has generated abundant uncertainty before international arbitral tribunals and it is hoped that this decision will shed some light in that sphere. The judgment, however, should not be perceived as arbitration hostile.

First, the Court only applied Spanish law to this case because the arbitration agreement had not been activated before the opening of insolvency proceedings. Had arbitration been pending, article 18 EIR Recast would have made English law applicable to define the effects of insolvency on the ongoing arbitration (although the outcome under English law might have been similar – see here and more generally here).

Second, if Spanish law had applied to a pending arbitration, article 52.2 SIA would have secured the continuation of the proceedings until the rendering of a final and binding award and the Court would not have had the power to suspend the arbitration agreement.

Third, the Court emphasised that the suspension in this case was fundamentally motivated by the vagueness of the arbitration agreement and the availability of the home court’s jurisdiction under the BIReg Recast. Had the arbitration agreement been better drafted or jurisdiction of the Spanish courts been unavailable after the suspension of the agreement, it is possible that the Court would have reached a different conclusion.

Overall, this is a balanced decision that demonstrates the commendable willingness of the judge Carlos Martínez de Marigorta Menéndez to engage with the complexities of the issue and, more generally, confirms the ability of Spanish courts to produce sophisticated legal analysis in the field of international arbitration – a much-needed message in light of certain other court decisions rendered in Spain in the recent past (see here and here).

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Perenco v Ecuador: An Example of a “Lengthy, Complex, Multi-faceted, Hard Fought and Very Expensive” Investment Arbitration?

Wed, 2019-11-13 20:56

Daniela Páez-Salgado (Assistant Editor for Latin America) and Natalia Zuleta

After 11 years and more than US$ 89 million in costs,1)Perenco claimed US$ 57,923,322 in legal costs and other expenses, while Ecuador claimed US$ 31,620,369.27 for legal costs and other expenses and an additional US$ 49,629.76 for Petroecuador’s legal costs (a total of US$ 31,701,618.76). jQuery("#footnote_plugin_tooltip_6849_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6849_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); an international tribunal rendered a final decision awarding damages in the Perenco v. Ecuador saga. We discuss below the background of the case, the main decisions rendered throughout the proceedings, with a special focus on the latest award on damages rendered in favor of Perenco and Ecuador.

 

Background

On April 30, 2008, Perenco Ecuador Limited (“Perenco”) brought a claim before the International Centre for Settlement of Investment Disputes (“ICSID”) against Ecuador under the France-Ecuador BIT (the “BIT”) and two Participation Contracts (which provided for ICSID arbitration) for the exploration and exploitation of hydrocarbons in two blocks of the Amazon region concluded between Perenco and Petroecuador, Ecuador’s national oil company. Although Perenco acted as the operator of the two blocks, the entity that entered into the Participation Contracts was actually a consortium comprised by Burlington Resources Oriente Limited (“Burlington”) and Perenco.

In 1993, Ecuador passed Law 44, recognizing “Participation Contracts” as the preferred contractual model for the exploration and exploitation of hydrocarbons. Under these production sharing contracts, the ownership of the hydrocarbons remained with the state, and the contractor received a fair share of the oil produced under a formula: as production increased in volume, or quality, the contractor’s participation percentage decreased. Shortly after Perenco acquired its interests in Blocks 7 and 21, international oil prices began to rise dramatically. As a result, in 2006, the Ecuadorian Congress passed “Law 42”, a law which amended the Hydrocarbons Law, granting the Government participation over 50% of the extraordinary income from the surge in oil prices. Ecuador then issued Decree 662 in 2007, which increased the windfall profit tax rate to 99%.

Perenco made payments pursuant to the new law from July 2006 through April 2008. In parallel, Perenco had been negotiating with Petroecuador (since January 2008) an agreement to transition to a new contractual model. However, on April 2008, President Correa announced that all existing production-sharing agreements were to be terminated within the year and new contracts would be implemented.

Hence, Perenco filed its Request for Arbitration with ICSID on April 30, 2008 and proposed to Ecuador the possibility of transferring the payments related to Law 42 to an escrow account, pending the resolution of the dispute. Ecuador did not accept such proposal. Despite Ecuador’s refusal, Perenco began to deposit the Law 42 amounts into an off-shore escrow account. As a result, the Government began local proceedings to collect the sums allegedly owed by Perenco, and its production and shipments were seized. Finally, in 2010, Petroecuador terminated one of the contracts (Block 21) under the legal figure of Caducidad, under which the Ecuadorian Ministry of Energy and Non-renewable Natural Resources has the legal power to terminate a Participation Contract concluded between a private party and Petroecuador.

 

Perenco’s Claims with the ICSID Tribunal

Perenco claimed that Ecuador breached the fair and equitable treatment standard (“FET”) under the BIT and that it had unlawfully expropriated its investment. Pursuant to Rule 40 of the ICSID Arbitration Rules, Ecuador brought counterclaims for environmental and infrastructure damages arising out of the operations in the oil blocks under the Participation Contracts, and not the BIT.

Burlington (one of the members of the consortium) also brought an independent investment arbitration claim against Ecuador under the US-Ecuador BIT for violation of FET and expropriation of its investment. In both the Burlington and the Perenco arbitrations, Ecuador brought counterclaims for environmental damages. The Burlington arbitration was resolved on February 7, 2017. The Tribunal found that Ecuador was liable for US$379.8 million on the grounds of expropriation and ruled that Ecuador was correct to expect that Burlington would remediate the blocks to natural background values and ordered US$ 39.2 million in compensation to Ecuador. This award caused a potential situation of double recovery for Ecuador, who was still seeking compensation for environmental damage from Perenco at the time of that award.

 

Decision on Jurisdiction and Merits

In 2011, the Tribunal upheld jurisdiction over Perenco’s contract claims, but deferred its decision on jurisdiction over the treaty claims to the merits phase. One of the main issues over the treaty claims was Perenco’s standing based on its nationality (Perenco is a Bahamian company indirectly owned by a French citizen who died intestate and therefore, by his beneficiaries). Finally, in its Decision on Remaining Issues of Jurisdiction and on Liability of September 12, 2014, the Tribunal concluded that it had jurisdiction over the treaty claims.

In that same decision, the Tribunal found that Ecuador (i) had breached both Participation Contracts, (ii) acted in violation of FET, and (ii) that Ecuador’s decision to terminate the contract by declaring Caducidad amounted to an expropriation. The FET violation was based on the issuance of Decree 662 in 2007, whereby the state would receive 99% of windfall profits, converting the Participation Contracts into de facto service contracts, leaving Perenco unprotected against lower oil prices. The Tribunal found that the measures implemented through Law 42 or Decree 662 did not rose to expropriation.

As the Burlington Tribunal, the Tribunal also found that Perenco was liable to Ecuador for environmental damage. In this regard, in a subsequent decision issued in 2015 (the Interim Decision on Ecuador’s Environmental Counterclaim), the Tribunal held that under the Participation Contracts, Perenco was obliged to comply with Ecuadorian law, which included the constitutional regime of strict-liability for environmental harm. Therefore, because Perenco’s activities amounted to a violation of Ecuador’s environmental laws, the Tribunal held that Perenco was liable for those damages, which would be awarded by the Tribunal in the corresponding phase.

 

Decision on Damages

Once the Tribunal rendered a decision on liability and held a hearing on quantum, it rendered a final award on September 27, 2019. This award addressed the damages claimed by both parties; specifically, US$ 1.5 billion for the principal claim, and US$ 2.5 billion for the counterclaim. In the end, the Tribunal awarded Perenco US$ 449 million as compensation for Ecuador’s violation of the Participations Contracts and the BIT, and awarded Ecuador US$ 54 million for its environmental counterclaim.

 

Application of a “Layering Approach” to Determine the Valuation Date

The Tribunal faced a challenge on the determination of the valuation date for the damages to be awarded to Perenco, given that Ecuador’s two breaches took place nearly three years apart (Decree 662 in 2007; and Caducidad in 2010).  Perenco alleged that because both breaches were inter-related, a single valuation date (the date Caducidad was declared) should be considered (¶72). On its side, Ecuador proposed a “layering approach” whereby the losses caused were to be assessed at the date of the breach that caused them. Under this methodology, two calculations ought to be made: (i) lost profits caused by Decree 662 since its issuance up to the declaration of Caducidad; and (ii) value of the blocks on the date of expropriation at July 2010 (¶73).

The Tribunal agreed with Ecuador’s approach. Under this more orthodox approach and pursuant to the Draft Articles on Responsibility of States for Internationally Wrongful Acts, the claimant has the burden of proving the damages proximately caused by each breach at the time of its occurrence. In this case, the Tribunal found that Perenco did not prove that the breaches resulting from the issuance of Decree 662 of 2007 and of the declaration of Caducidad were inter-related. For the Tribunal, the expropriation was not an expected consequence of the issuance of Decree 662 (¶111). Therefore, because the breaches caused by Decree 662 (violation of FET) and the declaration of Caducidad (expropriation) were separated by a period of time of over two years, they could not be lumped together as one date to calculate the damages (¶77).

Finally, because the Tribunal was concerned with the degree of randomness associated with employing the date of the award as the valuation date (as a single event can have dramatic effects in the valuation given the volatility of the oil market), it chose to calculate Perenco’s loss of rights according to the prevailing market conditions and industry expectations at the time when the state declared Caducidad (¶116).

 

The Appointment of an Independent Expert and Apportionment of Liability to Perenco

To award the damages for the environmental counterclaim, the Tribunal appointed an independent expert given that there were certain issues of fact extremely difficult for it to make proper determinations based on the expert evidence presented by the parties (¶424). The independent expert’s role was to “supplement the work performed by the Parties’ experts” to establish a more reliable technical platform to support the Tribunal’s decision (¶519).

Tribunal-appointed experts are not a novelty in international arbitration.2)Hodgson and Stewart, “Experts in Investment State Arbitration”, Journal of International Dispute Settlement, 9, 453-463 (2018). jQuery("#footnote_plugin_tooltip_6849_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6849_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The rules of important arbitral institutions (e.g., Article 29 of the UNCITRAL Arbitration Rules, Rule 34(a) of the ICSID Arbitration Rules), as well as the IBA Rules on the Taking of Evidence provide for this alternative and have guidelines for tribunal-appointed experts (see, Article 6). However, it has not been very common for investor-state tribunals to appoint independent experts. In fact, tribunal-appointed damages experts were engaged in only eight publicly available cases since 2005 where damages were awarded.3)Choudhury, Nathan, “Tribunal –appointed damages experts: Procedural improvements can serve as a better alternative in arbitration”, Thompson Reuters, p. 3-4 (2018). jQuery("#footnote_plugin_tooltip_6849_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6849_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In all of these cases, the tribunal expert appointment was made in addition to the party expert appointments.4)Ibid. jQuery("#footnote_plugin_tooltip_6849_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6849_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In the case at hand, and from the procedural standpoint, the Tribunal allowed the Parties to submit two rounds of written submissions, make oral submissions and pose questions to the independent expert at a hearing. In addition, a witness conferencing session took place at the hearing, where the independent expert was paired with each party’s expert and counsel was permitted to put questions to the two experts (¶¶627-630).

The independent expert was instructed to estimate the cost of remediating the “total measured contamination” in Blocks 7 and 21, so that the Tribunal could then decide how much of such contamination was Perenco’s responsibility (¶750). For this last exercise the Tribunal had to consider two temporal issues that affected causation: (i) contamination caused by operators which operated the blocks prior to Perenco; (ii) contamination caused by Petroecuador after Caducidad, when it took over the operation of the blocks. The independent expert concluded that the full remediation costs amounted to US$ 160 million. The Tribunal then found that the total amount of damages attributable to Perenco was of US$ 93 million based on the expert evidence.

 

Implications of the Burlington Decision on Counterclaims

The Burlington Tribunal’s Decision on Counterclaims (awarding US$ 39 million to Ecuador), left it to the Perenco Tribunal to deal with any issues of double recovery by Ecuador given that the Perenco Tribunal would have to decide on Ecuador’s counterclaim after its decision. In March 2017, the Parties were invited to comment on the Burlington Tribunal’s decision. Perenco alleged that Ecuador had already been compensated for any damages related to the counterclaims and it should not be ordered to pay any damages; or that at least, the amount paid by Burlington to Ecuador should be set off from any remediation costs the Tribunal awards to Ecuador (¶894). Ecuador did not dispute that there was substantial overlap between the contamination estimated by the independent expert and the Burlington Tribunal given that the former had identified larger areas and additional volumes of soil contamination, additional mud pits and additional sites with groundwater contamination (¶891). Therefore, Ecuador proposed a framework based on a site-by-site comparison of areas, depths, volumes and costs between both cases.

The Tribunal rejected both Parties’ approaches, and admitted that it “thought long and hard about how to protect against double recovery”, and decided to treat the US$ 39 million as a down payment towards the total amount of damages payable by Perenco.  Perenco was then ordered to pay US$ 54 million to Ecuador (¶¶896-899).

 

Conclusion

Despite the formal conclusion of the arbitral proceedings, the end of this dispute is yet to come. Perenco filed a petition in the U.S. District Court for the District of Columbia on October 1, 2019 to confirm the award, while ICSID registered the application for annulment on October 4, 2019 and granted the customary stay of enforcement of the award.

Overall, and apart from the Tribunal’s own characterization of a “lengthy, complex, multi-faceted, hard fought and very expensive” proceeding (¶967), seems that this case also endorses ‘Tribunals’ activism’ given that the Tribunal: issued provisional measures ordering a sovereign state to refrain from pursuing local judicial actions against the claimant; appointed an independent expert to assess the value of a state’s counterclaim; and carefully considered the monetary award in another case to avoid double recovery concerns.

References   [ + ]

1. ↑ Perenco claimed US$ 57,923,322 in legal costs and other expenses, while Ecuador claimed US$ 31,620,369.27 for legal costs and other expenses and an additional US$ 49,629.76 for Petroecuador’s legal costs (a total of US$ 31,701,618.76). 2. ↑ Hodgson and Stewart, “Experts in Investment State Arbitration”, Journal of International Dispute Settlement, 9, 453-463 (2018). 3. ↑ Choudhury, Nathan, “Tribunal –appointed damages experts: Procedural improvements can serve as a better alternative in arbitration”, Thompson Reuters, p. 3-4 (2018). 4. ↑ Ibid. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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Environmental Injustice: How Treaties Undermine the Right to a Healthy Environment

Wed, 2019-11-13 01:00

Lisa Sachs, Ella Merrill and Lise Johnson

Our planet faces unprecedented threats, including irreversible global warming, loss in biodiversity, and water pollution and water scarcity. The impacts of these environmental crises also threaten human rights and exacerbate inequality. Slowing these worsening environmental trends – and addressing the impacts of environmental change on populations – will require cumulative policy responses at the national and international level.

Alarmingly, alongside global efforts to protect the environment from mounting risks, including those caused by large-scale investments, investor-state dispute settlement (ISDS) claims and awards are quietly undermining environmental conservation, governance, rights and justice. This blog highlights several areas of environmental protection and environmental justice that have been impacted by ISDS cases, including in particular measures related to climate action, protection of water resources, environmental impact assessments, and communities’ rights to representation and access to justice.

 

Implications for Climate Action

The international scientific community’s assessment that the world needs to strand 80% of proven fossil fuel reserves and transition to zero-carbon energy systems in order to avoid the most disastrous consequences of global warming has enormous implications for global investments. While trillions of dollars of new investments are required to meet growing demands for clean energy, significant existing investments in fossil fuel extraction, transmission and processing have to be urgently phased out. In line with their commitments, individual countries are increasingly adopting a range of policy tools to shift energy generation and transmission and to phase out fossil fuel resources.

Many such measures will impact the profitability (and in some cases, viability) of investments related to carbon-intensive energy, the types of economic impacts that have triggered ISDS claims. Indeed, we’ve already started seeing the first cases. In 2015, following years of delay, the United States government rejected TransCanada’s construction permit to build the Keystone XL Pipeline; President Obama announced that the pipeline would undercut governmental efforts to make the United States a leader in climate action. In response, TransCanada filed a $15billion claim, seeking compensation for future lost profits it allegedly expected to earn from development and operation of new fossil fuel infrastructure. Ultimately, TransCanada suspended the case after President Trump was elected and approved the resubmitted permit application.

In 2015, the new provincial government of Alberta, Canada announced its Climate Leadership Plan, including compensation for the early closure and eventual phase out of coal-fired power plants by 2030. In response, Westmoreland, whose mine supplied coal to the majority of phased-out operations, alleged that Alberta’s compensation for the coal-fired power plants but not for the coal mines breached Canada’s obligations under NAFTA, claiming $357 million in damages.

Lama Energy Group brought another claim under the Canada-Czech Republic BIT, alleging that the Government of Alberta was unduly delaying approvals for their oil sands project, in light of the Government’s environmental concerns. The policies that triggered these actions, however, were subsequently reversed; after the election of conservative Premier Jason Kenney in June 2019, Lama received regulatory approval for its project despite pushback from First Nations groups who claim the activities will put sacred lands and drinking water at risk.

Most recently, in response to the Dutch government’s announcement in 2018 that it would shut down all coal-fired power plants by 2030, Uniper, the owner and operator of one of the country’s largest power plants, threatened arbitration under the Energy Charter Treaty if the legislation is passed into law. Uniper’s calculated bet is that the threat of arbitration will again reverse the necessary policy.

As cities, states and countries continue to adopt policies to address the mounting climate crisis, the threat of additional ISDS cases that will delay or deter – or cause governments to reverse – such measures mounts. For many governments and government officials, the threat of litigation from investors may be too politically or financially costly to fight.

 

Implications for Clean Water

Treaty protections, as they have been interpreted by investment tribunals, have also allowed investors to challenge governments’ ability to protect water resources from contamination. Romania, pressured also by environmental groups, did not issue necessary environmental permits for Gabriel Resources’ Rosia Montana gold and silver mine, in part for fear of cyanide pollution, particularly given recent memory of the cyanide spill and subsequent environmental disaster in 2000, for which the European Court of Human Rights found Romania liable for failing to conduct an adequate EIA. Gabriel Resources filed a claim for $4.4 billion in damages, contending that non-issuance of the environmental permit breached treaty protections.

On the other side of the Atlantic Ocean, Lone Pine, which holds permits for petroleum and natural gas exploration in the Utica basin in Canada, claimed $100 million from Canada for a Quebec moratorium on fracking below the St. Lawrence River, in response to concerns about the impacts of fracking and other development activities on the water source. In Colombia, a series of cases amounting to almost $1billion were brought against the country after the Colombia Constitutional Court ordered the prohibition of mining activities in the Páramos (wetland) regions in 2016, in order to preserve an important source of the country’s water supply.

 

Implications for Environmental Decision-making

Environmental impact assessments are a widely accepted and relied upon feature of licensing processes, to inform governments and other stakeholders of anticipated environmental impacts from projects seeking approval; EIAs are intended to guide decision making, including the gateway decision of whether or not to approve a proposed project and then whether and how to influence its design. While domestic institutions have pathways for challenging determinations made on the basis of an EIA, investors have used ISDS to bypass, or challenge the outcomes of, those domestic processes.

Bilcon, an American mining company, sought to develop a mining and marine terminal project in Canada, and was required to obtain various approvals from provincial and federal authorities. An expert panel assembled as part of the EIA to provide a non-binding opinion on whether or not the project should proceed recommended that the project be rejected in light of its anticipated impacts, including that the project was inconsistent with “core community values.” Nova Scotia and the federal government then rejected the project, stating that the mining project was likely to cause negative environmental impacts contrary to the Canadian Environmental Assessment Act. Bilcon filed a treaty claim, and the tribunal ruled in Bilcon’s favor, finding that the “advisory panel’s consideration of ‘core community values’ went beyond the panel’s duty to consider impacts on the ‘human environment,’” in violation of the NAFTA.

When Canada challenged the award in Canadian Federal Court, the presiding judge acknowledged that the decision raises “significant policy concerns,” including “its effects on the ability of NAFTA Parties to regulate environmental matters within their jurisdiction, the ability of NAFTA tribunals to properly assess whether foreign investors have been treated fairly under domestic environmental assessment process, and the potential ‘chill’ in the environmental assessment process that could result from the majority’s decision,” but stated that the Federal Court had a very limited scope to review the tribunal’s determination.

 

Implications for Representation

The extraordinary rights that ISDS confers on investors comes at an even greater cost to the rights of other stakeholders, including domestic citizens that are impacted by the investments. In Ecuador, Copper Mesa’s exploration concession faced great opposition from the community, partly due to concerns of environmental impacts, and a lack of awareness regarding those impacts. Copper Mesa’s response violated basic standards of decent corporate conduct, including hiring a private security force, which fired pepper spray and live rounds into crowds of protesters. In response to the escalating conflict at the mine site, Ecuador eventually revoked Copper Mesa’s concession, citing Copper Mesa’s failure to consult the community.

In light of Copper Mesa’s egregiously irresponsible and aggressive response to the community, a group of citizens sued Copper Mesa and the Toronto Stock Exchange in Canadian courts, but the case was dismissed for lack of jurisdiction (notably, the case was also challenged domestically and through the National Contact Point [NCP] process). Copper Mesa, however, successfully sued Ecuador before an arbitration tribunal, which found in Copper Mesa’s favor. The tribunal indicated that Ecuador’s failure had been in siding with its own citizens and responding to the escalating domestic crisis, and ordered Ecuador to pay $19 million to the company.

More recently, in Armenia, local communities protested the Amulsar Gold Project owned by Lydian International, because of concerns over the mine’s environmental impacts on nearby lakes, mineral springs and agricultural land. Lydian threatened arbitration against Armenia after the project was temporarily shut-down due to protests. As in so many cases, the threat of arbitration seemed sufficient to change the government’s mind; in August 2019, Prime Minister Pashinyan announced that mining could proceed, saying that the project posed no environmental threat.

 

Conclusion

In large part because of the growing number of cases that have successfully challenged public interest measures and awarded substantial damages to investors, governments and especially their citizens are starting to question the legitimacy of ISDS and its suitability for today’s governance challenges. Research also suggests that in addition to undermining or discouraging important regulatory measures, the procedural and substantive aspects of ISDS can also exacerbate inequality and undermine the rule of law.

While not all investor claims are successful, it is clear that investors are bringing cases, often with the encouragement of law firms, in order to alter regulatory outcomes or to increase the cost of regulation. Even the claim itself, before any damages are awarded, has resulted in regulatory chill.

Investment governance has a critical role to play in shaping investment flows, and their contributions to and impacts on sustainable development. Enough ISDS cases have illustrated the tremendous risks of putting enforceable investor protections at the heart of investment governance. Global investment governance needs to be redesigned for the 21st century, with people and the planet at the core.

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The Judgments Convention: A Game Changer in the Field of International Commercial Disputes?

Tue, 2019-11-12 22:28

Chintan Nirala and Kathleen Mpofu

The Hague Conference on Private International Law (HCCH) started the Judgements Project in 1992 which focused on two facets of cross-border litigation: international jurisdiction of courts and recognition and enforcement of their judgements abroad. The project has produced two conventions: The 2005 Choice of Courts Convention and the 2019 Convention on the Recognition and Enforcement of Foreign Judgements in Civil or Commercial Matters (the “Convention”).

This post will provide an analysis of the Convention, looking at practical issues such as its goals, entry into force, key provisions and what its conclusion could possibly mean for the future of international commercial dispute resolution.

 

Goals and Entry into Force

The aim of the Convention is to achieve a uniform set of core rules on recognition and enforcement of foreign judgements in civil or commercial matters. It will provide greater predictability and certainty in relation to the ‘global circulation’ of foreign judgements.

However, the Convention has not yet entered into force. At present, Uruguay is the only signatory to the Convention. In order to enter into force, at least one more state would have to deposit its instrument of ratification, acceptance, approval or accession to the Convention.

 

Key Provisions

The Convention has four chapters.

Chapter I (Articles 1-3) deals with the substantive scope and definitions. The Convention only applies to the recognition and enforcement of judgements relating to civil or commercial matters and will not extend to revenue, customs or administrative matters. Article 2 provides a list of excluded subject matters including matters related to intellectual property, privileges and immunities, privacy, law enforcement activities and arbitration and related proceedings.  For the Convention to be excluded on these bases, the subject matter should be the object of the proceedings and not arise simply by way of defence or as a preliminary question.

Article 3 provides the definition of ‘judgement’. The definition has two main elements – (i) Court and (ii) Decision on Merits. However, the Convention remains silent on the definition of both these terms.

Chapter 2 (Articles 4-15) focuses on establishing the bases for recognition and enforcement, grounds for refusal and other procedural issues associated with recognition and enforcement.

Article 5 provides the requirements for determining the eligibility of a judgement for recognition and enforcement. The requirements are based on various ways of establishing jurisdiction namely the connection between the state of origin and the defendant; jurisdiction based on express consent; and a connection between the claim and the state of origin. Article 6 sets out the exclusive bases for eligibility for matters dealing with rights in rem in immovable property i.e. in order to be an eligible judgement for enforcement, the property in question must be situated in the state where the judgement was given.

Article 7 sets out the grounds for refusal of enforcement. It is a closed list of grounds that brings about certainty to the procedure around recognition and enforcement. Recognition and enforcement “may” be denied on grounds dealing with procedural fairness such as proper service of documents, fraud, public policy, the existence of inconsistent or conflicting judgements in the state where recognition is sought and where the same dispute between the same parties is still pending before the courts of the state where recognition is sought.

Other provisions to note include provisions on refusal of a judgement on the basis that the judgement awards punitive damages (Article 10); recognition and enforcement of judicial settlements (Article 11); documents that need to be produced (Article 12);and that the Convention does not take precedence over national law, i.e. it does not prevent enforcement under national laws (Article 15).

Chapter 3 (Articles 16-23) contains provisions that allow states to make declarations as to the operation of the Convention. A declaration can be made that the Convention will not apply to matters where the state or government agency is a party or to specific matters of special interest, such as environmental damage, labour contracts or consumer contracts.

Chapter 4 (Articles 24-32) makes provision for the application of the Convention in states having non-unified legal systems and in Regional Economic Organisations. It further clarifies that a state may notify that the Convention shall not have the effect of establishing relations with another contracting state.

 

Limitations of the Convention

Firstly, compared to the relatively simple and short procedure in the New York Convention (NYC), the proceedings under the Judgements Convention are lengthy. The obligation for enforcement involves the fulfilment of three positive conditions:

  • The judgement falls within the scope of application
  • It is eligible for recognition and enforcement
  • There are no grounds for refusal of recognition or enforcement.

In addition to this, the provisions made for instances when judgements are under appeal or review, though necessary, have the effect of lengthening the enforcement procedure.

Secondly, when the matter is on appeal or review or where the time limit for seeking ordinary review has not expired, the court addressed has three options. It may (i) grant recognition or enforcement; (ii) postpone its decision; or (iii) refuse recognition or enforcement. When making such a determination the court might conduct a prima facie assessment of the chances of success of the review procedure, if it is in a position to form a view on the issue. Although the assessment is subjected to a caveat – ‘if it is in a position to form a view’, such assessment may be controversial due to its outbound reach in assessing another country’s sovereign courts’ functioning.

Thirdly, the requested state’s court is not bound by the decision of the court of the state of origin regarding excluded subject matters and in determining, for the purposes of Article 5, 6 or 7, the judgements eligible for enforcement. As such, the requested state’s court may end up reviewing the decisions of the court of the state of origin as they relate to these issues (not on merits but application of law).

Fourthly, the provisions on lis pendens only apply in parallel proceedings in the requested state therefore proceedings between the same parties on the same subject matter, may still take place in other contracting states causing the risk of conflicting judgements.

 

Can the Judgements Convention potentially perform the same function for court judgements as is done by the NYC for arbitral awards?

In theory, yes. The Judgements Convention creates a framework through which foreign judgements can be enforced. Like the NYC, it sets out the procedure for enforcement and provides a closed list of instances in which recognition and enforcement may be refused.

The Secretary General of the HCCH described the Convention as a “game changer for cross-border dispute settlement and an apex stone for global efforts to improve real and effective access to justice.” The ability of the Convention to achieve game changer status is reliant on two factors, mainly:

  • Whether it will be widely accepted and ratified by a significant number of states; and
  • Whether parties will increasingly use litigation to settle international commercial disputes.

Regarding the first factor, what needs to be seen in practice is whether or not states ratify the Convention. The fewer the states to ratify it, the less likely it is that it will be able to achieve the same level of success as the NYC. One of the main reasons the NYC has been so successful is because a majority of states have ratified it and so it applies in numerous jurisdictions. In the absence of similar support by states for the Convention, it will not have the same effect as the NYC.

Regarding the second factor, at present the preferred method of settling international commercial disputes is through arbitration. The Convention addresses enforcement, which is only one of the numerous reasons people choose arbitration over litigation. There are other reasons why arbitration could still be the preferred method of dispute resolution including confidentiality, finality, party autonomy and flexibility with regard to the rules, procedure and seat of arbitration.

Despite this, the Convention has come at a time where there is increased activity in the way of improving national court systems to attract more international commercial litigation. This has resulted in the proliferation of international commercial courts. These are national judicial bodies established in several jurisdictions (e.g. the China International Commercial Court and the Netherlands Commercial Court) which are designed to specifically meet the needs of international commercial disputes. They address some of the drawbacks of arbitration including lack of transparency, inconsistencies in awards and lack of precedence. However, one of the main disadvantages of these international commercial courts is the difficulty in enforcing foreign judgements. As the Convention aims to remove that very disadvantage, it will be interesting to see whether this results in a growing number of commercial disputes before these international commercial courts.

 

Conclusion

While possessing some limitations, it will be interesting to see whether the Convention will support a shift from arbitration to litigation in resolving international commercial disputes or whether it will remain a failed attempt.

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Is Manifest Disregard Alive and Well in the Second Circuit?: A Remand to Find Out

Mon, 2019-11-11 21:26

J.P. Duffy IV and Philip Danziger

Introduction

In domestic award enforcement proceedings, the U.S. federal Court of Appeals for the Second Circuit (“Second Circuit”) in New York recently reversed a lower federal trial court’s decision to vacate that award on grounds that the arbitrator manifestly disregarded the law.  See Weiss v. Sallie Mae, Inc., Dkt. No. 18-2362, Slip Op. (2d Cir. Sept. 12, 2019).  While Weiss appears at first blush to be a pro-arbitration decision, closer examination reveals it is less so for two reasons.

First, while the Second Circuit refused to vacate the award on manifest disregard grounds, the Second Circuit nevertheless reaffirmed the controversial doctrine’s continued viability.

Second, after refusing to vacate the award, the Second Circuit remanded it back to the arbitrator with instructions to revisit his merits conclusions.  While the Second Circuit ostensibly did so to encourage the arbitrator to reach the legally correct outcome, the court’s actions undermined the functus officio doctrine and the doctrine of finality.

Weiss is therefore problematic on several levels.

 

Background

Weiss was a domestic arbitration that concerned consumer rights in a debt-collection matter.

Weiss was an individual who had defaulted on student loans.  After Weiss defaulted on her loans, the lender began calling her mobile telephone several times a day to collect her outstanding debt.  After receiving several hundred automated phone calls over an extended period, Weiss sued the lender in federal court.  The dispute was subsequently referred to arbitration.

By the time Weiss’ arbitration started, a class action lawsuit against the same lender for the same conduct settled on terms that precluded class members from recovering any damages from the lender.  Weiss was generally bound by that settlement under U.S. law if she was given notice of it, which would have precluded her arbitration claims.

Despite that fact, the arbitrator awarded Weiss $108,500 in damages against the lender, even though the arbitrator also concluded that Weiss was a member of the class that had previously settled its claims.

After receiving that seemingly inconsistent award, Sallie Mae moved in a federal trial court under domestic chapter of the U.S. Federal Arbitration Act (“FAA”) to vacate it.  Weiss responded by cross-moving to confirm the award.

The federal trial court accepted the lender’s arguments and vacated the award on grounds that the arbitrator had manifestly disregarded the law by acknowledging that Weiss was a member of a class that was barred from recovering damages from Sallie Mae, but nevertheless awarding Weiss such damages.  Weiss subsequently appealed that ruling to the Second Circuit.

 

Manifest Disregard After Hall Street

Manifest disregard of the law is a controversial doctrine, because it is not an expressly stated ground for vacating arbitral awards under the FAA.  The FAA and case law construing it also preclude courts from reviewing the underlying merits of a dispute in enforcement proceedings, and manifest disregard challenges inherently require courts to revisit merits determinations and to replace their judgment for that of the arbitrator’s.

In 2008, the U.S. Supreme Court called the manifest disregard doctrine into question in Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 576 (2008).  In Hall Street, the Supreme Court ruled that the only bases for vacating an arbitral award are the ones expressly stated in the FAA, which does not include manifest disregard, but declined to rule that manifest disregard was dead.  Moreover, subsequent Supreme Court decisions refused to decide whether manifest disregard survived Hall Street. See Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 670 (2010).

U.S. federal appeals courts have reached conflicting conclusions as to whether manifest disregard continues to be a viable basis for challenging arbitral awards after Hall Street.  The Fifth, Eighth, and Eleventh Circuits have held that manifest disregard did not survive Hall Street.  Conversely, the Second, Fourth, Seventh, Ninth and Tenth Circuits have all upheld manifest disregard challenges.  The First and Third Circuits have not yet ruled on the issue, but trial courts in those circuits have continued to allow manifest disregard challenges.

 

The Second Circuit Reiterates Manifest Disregard’s Viability in Weiss

In Weiss, the Second Circuit began its analysis by accepting that manifest disregard continues to provide a valid basis for challenging awards.  The court reiterated, however, that “[a] litigant seeking to vacate an arbitration award based on alleged manifest disregard of the law bears a heavy burden.”  Slip Op. at 9.  Accordingly, the Second Circuit reiterated the high bar that manifest disregard challenges face to succeed.

While it is positive that the Second Circuit reinforced such high standards for manifest disregard challenges, the court continues to ignore the fact that the mere act of raising manifest disregard challenges can force the party that prevailed in the arbitration to relitigate in the enforcement court issues that it already won in the arbitration.  Consequently, if the Second Circuit wishes to truly signal to parties the limited circumstances in which manifest disregard challenges are warranted, it should consider reinforcing that sanctions can be awarded for frivolous enforcement challenges, which the Eleventh Circuit and trial courts in the Second Circuit have done.  See, e.g., Inversiones y Procesadora Tropical Inprotsa SA v. Del Monte International GmbH, No. 18-14807, 2019 WL 4200011 (11th Cir. Sept. 5, 2019); New York Hotel & Motel Trades Council v. CF 43 Hotel, LLC, No. 16 CIV. 5997 (RMB), 2017 WL 2984168, at *6 (S.D.N.Y. June 14, 2017); DigiTelCom, Ltd. v. Tele2 Sverige AB, No. 12 CIV. 3082 RJS, 2012 WL 3065345, at *1, *7 (S.D.N.Y. July 25, 2012).

 

The Second Circuit Remands the Award Back to the Arbitrator to Revisit the Merits of His Conclusions

After refusing to vacate the award, the Second Circuit remanded it back to the arbitrator to revisit his prior merits determinations “to clarify whether the [settlement] notice was sufficient, to construe the general release in the [s]ettlement [agreement] in the first instance and, if necessary, to vacate or modify the arbitral award.”  Weiss, Slip Op. at 15.  While the Second Circuit’s decision to remand the award to the arbitrator was undoubtedly driven by the laudable desire to have the arbitrator reach the right conclusion, the Second Circuit’s actions called the functus officio doctrine into question.

Under the functus officio doctrine, arbitrators generally lose their mandates once a final award is issued.  Limited exceptions to the doctrine exist under both the FAA and the arbitral rules of most institutions for correcting non-substantive errors, and the Second Circuit has joined several other U.S. federal circuits in recognizing that arbitrators may revisit awards to clarify ambiguities that do not substantively modify the award.  See General Re Life Corp. v. Lincoln Nat’l Life Ins Co., 909 F.3d 544 (2d Cir. 2018).

The Second Circuit’s remand instructions in Weiss, however, went well beyond those limited exceptions and expressly directed the arbitrator to revisit the merits and reach a different outcome after doing so.  That directive would seem to call the functus officio doctrine into serious question and to severely undermine finality as well.

 

Conclusion

The Weiss decision contains pro-arbitration outcome-driven rulings, but also contains conclusions that are arguably hostile to fundamental arbitration doctrines.  Ultimately, Weiss may therefore represent a decision that was motivated by good intentions, but that may produce unintended consequences.  Particularly, the decision may (1) discourage courts from vacating awards in the rare instances where manifest disregard grounds do in fact exist; (2) while simultaneously signaling to parties that manifest disregard challenges can continue in all cases without consequence; and (3) encourage courts to remand awards back to arbitrators with instructions to “correct” the merits instead of just upholding or vacating them, which undermines finality and the functus officio doctrine.

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Enforcement of Arbitral Awards in Uzbekistan: Challenges and Uncertainties

Mon, 2019-11-11 00:12

Yakub Sharipov

The national courts in Uzbekistan have not commonly been noted by arbitration lawyers and foreign investors for having a pro-arbitration judicial attitude. However, since President Mirziyoyev took office in 2016, Uzbekistan has been trying to build a reputation as an investment-friendly country. It was hoped that the reforms in various sectors would extend as far as changing courts’ attitude towards enforcement of foreign arbitral awards. However, recent case law demonstrates that the enforcement of foreign arbitral awards in Uzbekistan is still unpredictable because Uzbek courts seem to interpret and apply the New York Convention (‘NYC’) using a ‘pick and choose’ approach.

 

Application of Article III of the New York Convention

In the unreported A v B case, claimant ‘A’, a UK-based company, filed an application for the recognition and enforcement of an LCIA award against respondent ‘B’, a Russia-registered entity, at the place where the respondent’s assets were located, i.e. in Uzbekistan. The Court of First Instance, Appeal Court and ultimately the Supreme Court all refused even to accept the claim1)Subject to Article 253 of the Economic Procedural Code of the Republic of Uzbekistan, the court returns the claim to the claimant if the court finds that such a claim is served in breach of Articles 249-252 of the Code. jQuery("#footnote_plugin_tooltip_3108_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3108_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); based on jurisdictional grounds, under Article 249 of Economic Procedural Code (‘EPC’), and returned it to the claimant without conducting the hearing, let alone recognizing and enforcing the award. The courts held that, notwithstanding Uzbekistan’s accession to the NYС, the mere fact that the respondent is a foreign-registered entity precluded the claimant from applying to Uzbek national courts for recognition and enforcement as, according to the courts, they lack jurisdiction. To support this dubious position, the courts referred to Article III of the NYC, quoting that ‘each contracting state shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles’.

More specifically, the courts found that, under Article 249 of the EPC, the application for the recognition and enforcement of foreign court decisions or arbitral awards shall be filed either (i) in the courts at the place of a debtor’s actual location, (ii) in the courts at the place of a debtor’s residence, or, alternatively, (iii) in the courts at the place of the debtor’s registered office if the debtor’s location or residence place is unknown. Since the respondent, as a foreign-registered entity, did not have an actual location, place of residence or registered office in Uzbekistan, the courts refused to accept the claim and hear it because of their alleged lack of jurisdiction. The claimant’s submission that all of the respondent’s tangible assets were located in Uzbekistan did not convince the courts otherwise.

 

Inconsistency of Domestic Rules

Notably, while Article 249 of the EPC does not provide for the enforcement of foreign arbitral awards where the respondent has its assets, it seems other domestic legislation permits enforcement of domestic awards (Article 37 of the Economic Procedural Code) and foreign arbitral awards (Article 365 of the Civil Procedural Code). In such a situation, one may argue that Article 249 contravenes the NYC in the first place. Another interesting question is why the courts did not refer to academic sources,2)See, e.g., ICCA’s Guide to the Interpretation of the 1958 New York Convention: A Handbook for Judges. jQuery("#footnote_plugin_tooltip_3108_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3108_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); practical guidelines and well-established case law on enforcement of foreign arbitral awards which are widely available free of charge in the public domain.

 

Cherry-picking Approach

As can be seen in A v B, the Uzbek courts appear to have interpreted the NYC out of context. In the courts’ logic the wording ‘in accordance with the rules of procedure of the territory where the award is relied upon’ is separate from and prevails over the rest of the article, i.e. ‘shall recognize arbitral awards as binding and enforce them’ and ‘under the conditions laid down in the following articles’. It appears that the courts focused on one clause of the article and disregarded Article III as a whole, hence not giving effect to the aims and principles of the NYC and its whole spirit.

Although they referred to the EPC, the courts failed to refer to its relevant provisions pertaining to the supremacy of international law over domestic law in its entirety. Specifically, none of the courts referred to the very first article of the Code, which unequivocally states that the provisions of international treaties prevail over national law in case of discrepancy between them. Effectively, this means that the NYC supersedes the provisions of the EPC to the extent any provisions of the EPC are inconsistent with it. The courts, however, seem to be of a different opinion as no analysis of the interplay between international and domestic law was provided.

In the same vein, it appears that the court should have considered that Uzbekistan is also a party to the Vienna Convention on the Law of Treaties. Pursuant to Article 27 of the Convention, ‘A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty’. Notwithstanding the provisions of the Vienna Convention, the courts refused to accept the claim and to hear the case, with reference to domestic law restrictions. In this vein, the fact that the courts refused to accept the claim de jure may amount to a refusal to recognize and enforce the foreign arbitral award on grounds not stipulated under the NYC. This may be seen as a violation of Uzbekistan’s obligations under the NYC.

 

Same Jurisdiction, Different Approach

In a similar case, Case No. 4-11-1912/222, a Danish party, ‟Alliance Capital К/S”, applied to the Tashkent regional Economic Court for recognition and enforcement of an ICC award against a Spanish party, “Corsan Corviam Construccion S.A.”. The regional court transferred the case to the Tashkent city Economic Court as the court having jurisdiction to decide the case. That court accepted jurisdiction and heard the case. Surprisingly, unlike in A v B, the court cited Article III of the NYC in full. The court also cited Article VII of the NYC, emphasizing that an interested party cannot be deprived of the rights to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon. In doing so, the court acknowledged the role of the NYC in the legal system of the country and refused to apply domestic law to the extent it was inconsistent with the NYC.

Interestingly, despite quite similar factual circumstance with A v B, the court in Case No. 4-11-1912/222 did not confirm whether it had jurisdiction under Article 249 of the EPC and did not discuss the respondent’s actual location or place of residence at all. Unlike in A v B, the court also did not mention the fact that the respondent’s registered office was in Spain as a potential ground for refusing to accept jurisdiction as had been done in the A v B case. Quite to the contrary, neither the respondent’s nationality nor the claimant’s failure to identify the respondent’s assets in Uzbekistan was found to be of any importance to the court in deciding that it had jurisdiction over the claim. Even though the court ultimately refused recognition and enforcement on different grounds, the claimant at least was able to present its position on recognition and enforcement in the courtroom.

 

Lack of Capacity or Lack of Established Practice 

It is quite surprising that, despite being a court of first instance, Tashkent city Economic Court seems to be more competent and familiar with the interplay of the NYC and domestic laws than the Supreme Court, but it is too early to make snap judgments on this phenomenon at this point. Quite worrying, however, is that the Supreme Court decision comes at a time when Uzbekistan is trying to become more arbitration-friendly and is trying to become a regional arbitration hub. Moreover, the Supreme Court’s decision may send a negative message to the lower courts that in Uzbekistan arbitral awards against non-resident entities are generally not enforceable.

The Supreme Court’s position might seem even more surprising bearing in mind that both the A v B and Alliance enforcement claims were filed just one month apart but ended with drastically different rulings. The positive mood in Uzbekistan from the numerous arbitration seminars, training sessions for judges with the participation of some of the world’s preeminent arbitration lawyers, as well as arbitration conferences held in Uzbekistan with speakers and participants from pro-arbitration jurisdictions, may be dampened by this decision of the Uzbek Supreme Court.

References   [ + ]

1. ↑ Subject to Article 253 of the Economic Procedural Code of the Republic of Uzbekistan, the court returns the claim to the claimant if the court finds that such a claim is served in breach of Articles 249-252 of the Code. 2. ↑ See, e.g., ICCA’s Guide to the Interpretation of the 1958 New York Convention: A Handbook for Judges. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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The Contents of b-Arbitra, Issue 2019-1

Sun, 2019-11-10 01:00

Annet van Hooft and Jean-François Tossens

We are pleased to present you with this new issue of b-Arbitra which not only includes four articles but also reports a significant number of cases from the Belgian courts.

In this issue you will find Dilyara Nigmatullina’s article on how arbitration and mediation can be adapted so as to meet the global demands for change that the users of these dispute resolution mechanisms are calling for. We then have Herman Verbist’s contribution on the so-called “UN Mediation Convention.” In his article, he discusses the drafting process of the Convention, its contents as well as the position of the European Union.

Tilman Niedermaier contributes on the new DIS Rules in his article called “Hello, DIS Rules 2018,” in which he explains, among other things, the enhanced role that the DIS, as an arbitral institution, assumes under the new rules. He also addresses the features that have been introduced to increase the efficiency and quality of DIS-administered proceedings, without altering their distinct character.

Maarten Draye, in his article called “Three Card Trick,” discusses the Court of First Instance judgment of 16 February 2017, the first time a Belgian court dealt with a third party opposition to an arbitral award.

We have several annotations in this issue. Our first annotation is from Adriaan Wijckmans and concerns the well-known decision of the Brussels Court of Appeal (of 29 August 2018) concerning the validity of arbitration clauses in the FIFA Articles of Association. Maxime Berlingin treats a case from the Brussels Court of Appeal (of 25 October 2018) in which the Court not only confirmed that jurisdictional objections must be raised before all other defenses but also that it is possible for non-signatories to be bound by an arbitration clause.

Luc Demeyere has annotated two decisions of the Brussels Court of Appeal (of 28 November 2017 and 11 September 2018) concerning the liability of arbitrators. The decision of the Brussels Court of First Instance of 2014 was already published in b-Arbitra 2016, 215. Finally, we have a note prepared by Professor Johan Erauw and Herman Verbist concerning two decisions of the Courts of First Instance of Tournai and Hasselt (of 21 December 2016, respectively 13 July 2017) relating to the use of arbitration clauses in distribution contracts.

We conclude with one book review by Sigvard Jarvin on “Post-M&A-Schiedsverfahren – Recht und Rechtsfindung jenseits gesetzlichen Rechts” edited by Rüdiger Wilhelmi and Michael Stürner.

We hope you enjoy this issue and always welcome further views, exchanges and suggestions from our readers.

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Improving the Participation of Minorities in International Arbitration

Sun, 2019-11-10 00:24

Fakhruddin Ali Valika

This blog is a summary of the discussion which took place at a workshop organized by Young ICCA in collaboration with Blacks of the American Society of International Law (BASIL) titled “Improving the Participation of Minorities in International Arbitration.”

The event was held in the New York office of Debevoise & Plimpton LLP on 26 September 2019 and was attended by law students and professionals. It addressed some pertinent issues which this blog will cover.

 

The Problem

There appears to be a global consensus regarding promoting diversity. While the obligation arises out of moral and ethical considerations, it often has legal prescription attached. The extent of diversity in the legal profession is disappointing both nationally and internationally. In the United States, for example, the profession appears to be dominated mostly by white males. Unfortunately, the problem further worsens when it comes to the area of international arbitration. International arbitration which is often considered the elite club in the legal profession performs extremely poorly in terms of diversity and minority representation. This issue of diversity was what the workshop addressed.

The event began with welcome and introductory remarks from Nawi Ukabiala (Debevoise), Prince-Alex Iwu (Diaz, Reus & Targ) and Matthew Morantz (Curtis). This was followed by a keynote address from Professor Benjamin G. Davis, who provided us with a historical background regarding the United States’ struggle with diversity and minority representation beginning from the transatlantic slave trade. He also touched upon the differing experiences depending upon one’s privilege and background.

 

A Diverse Tribunal

This keynote address set the stage for a panel discussion titled “Can I get a …. Diverse Tribunal?” The panelists included Naana A. Frimpong (King & Spalding), Randa Adra (Cromwell and Moring) and Mohannad A. El-Murtadi Suleiman (Curtis). The discussion was moderated by Ucheora O. Onwuamaegbu (Arent Fox).

The moderator discussed the issue of diversity in the US context giving the example of the recent case of popular celebrity Jay-Z in which he struggled finding a person of color as a qualified arbitrator for his matter. All of the panelists unanimously emphasized the dire need of making gender inclusion a priority in international arbitration. It was mentioned on how ethnicity and country of origin should also be focused on when striving for diversity and inclusion. Mohannad Suleiman discussed how diversity is needed regarding various aspects such as education (common law or civil law training), bar admissions and languages to ensure that the disputing parties feel their views are being adequately heard and understood by the tribunal. It is often the case that parties feel alienated due to the lack of diversity in a tribunal in all these respects.

The moderator then put forward the question, which was also raised in the Jay-Z case, as to why is a diverse tribunal even necessary to rightly decide the case? Mohannad discussed how people from different backgrounds view things differently which often leads them to different conclusions. However, he said that the underlying problem which demands diversity is different, as it has to do with perception and legitimacy. The perception of legitimacy is crucial to the resolution of disputes. He shared the example of his home country, Libya, whose experience with arbitration involved awards being passed against the country as a consequence of its wave of nationalization in the 1970s, which led the entire country and the region to view arbitration negatively. This negativity could have been avoided or mitigated if there was more trust in the neutrality of a properly appointed arbitral tribunal and this mechanism of alternative dispute resolution, a trust which can be developed through a diverse composition of the tribunal itself. He further explained how enforcement of an award passed by a non-diverse tribunal may also be difficult due to questions of legitimacy and interpretation of law.

Naana Frimpong explained how diversity should not be done for diversity’s sake but for the benefit it brings. She said empirical studies prove how diversity is beneficial especially in a body dealing with multi-jurisdictional issues. She also spoke about the legitimacy crisis in investment arbitration due to the private nature of arbitral tribunals as opposed to being public state courts, which often results in states and their citizens having distrust in the fairness of these proceedings. This crisis could also be addressed by diversity, she suggested. She drew similarities with the International Criminal Court which faced similar legitimacy issues in Africa due to its non-diverse composition and focus on criminals in Africa while not pursuing action against actors in other parts of the world. Randa Adra spoke about how the demand for highly experienced arbitrators has become a major issue in the fight for diversity. She discussed how young arbitrators are heavily disadvantaged hence any minority inclusion solution should incorporate this aspect.

The panel concluded that diversity is the responsibility of all parties and stakeholders. Institutions need to play a greater role and highlight disputes which have been dealt by diverse tribunals to reduce the information vacuum which exists. There was a call for affirmative action.

 

Minority Pledge

The second panel discussion was titled “Is a ‘Minority Pledge’ Needed in International Arbitration?” The panelists included Apoorva J. Patel (WilmerHale), Charline O. Yim (Gibson Dunn) and Jordan C. Wall (Willkie Farr & Gallagher). The discussion was moderated by Natalie L. Reid (Debevoise).

The moderator had the panel comment on the previous panel’s remarks on what a minority was and what diversity constituted. They recognized how diversity differs for everyone, hence a broad view must be adopted towards it rather than a narrow and restricted definition. The panel agreed how merely increasing white female representation does not amount to diversity. Acknowledging the importance of party autonomy in international arbitration, the panel further agreed that any solution towards promoting diversity must bear in mind the crucial role the parties play.

Apoorva Patel discussed his journey in arbitration and how not being able to find anyone in the field who looks like him was often disconcerting and demotivating. Charline Yim explained how she would often be confused for other Asian origin attorneys and told the audience about one such instance. Jordan Wall discussed his personal struggle and difficulties he encountered with being gay. Jordan Wall spoke about the Mansfield rule which Apoorva elaborated on by mentioning the Rooney rule. The Rooney rule is a National Football League policy which requires league teams to interview ethnic minorities for head coach and other senior positions. Inspired by the Rooney rule, the Mansfield rule aims at advancing women and minorities at law firms and place them in positions of power. The panel agreed as to how both rules have been effective and there is a need for a similar rule and pledge in the field of international arbitration. By formulating a minority pledge, the arbitration community gives teeth to the aim of striving for minority representation in international arbitration.

 

Conclusion

The panel discussion was followed by a speed networking and cocktail reception which provided students and young professionals the opportunity to receive valuable mentoring. There was a unanimous consensus to strive for minority representation in international arbitration individually and collectively. Recent developments such as suspensions of bilateral investment treaties by countries and the European proposal of replacing the investor-state dispute resolution mechanism through a Multilateral Investment Court, are all examples of the challenges posed to international arbitration which can be effectively addressed by restoring legitimacy. Increasing diversity will therefore directly translate into increased legitimacy of the system. The onus lies on the institutions, parties and each one of us who are interested in the field.

 

Any views expressed are solely those of the author and do not represent the views of the faculty members.

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Local v. International Standards for Granting Emergency Interim Relief: A Page from SIAC’s New Delhi Summit 2019

Fri, 2019-11-08 18:00

Chahat Chawla

This post covers an interesting discourse during the Singapore International Arbitration Centre’s Summit in New Delhi on 30 and 31 August 2019. In particular, the post focuses on the discussions during Panel Session 1: ‘Masterclass on the use of Institutional Procedures in Arbitration’ held on the second day of the summit. This session was moderated by Ms Sheila Ahuja (Allen & Overy LLP), and the panelists were Mr Gary Born (Wilmer Cutler Pickering Hale and Dorr LLP), Mr Bobby Chandhoke (L&L Partners), Prof Bernard Hanotiau (Hanotiau & van den Berg), Dr Michael Hwang, SC (Michael Hwang Chambers LLC), Mr Toby Landau QC (Essex Court Chambers) and Mr Andre Maniam, SC (WongPartnership LLP).

 

Summary of the discussion

Mr Andre Maniam, SC pointed out how institutions innovate and introduce different procedural tools to promote efficiency in the arbitration process. One such procedure discussed at length during the panel discussion was the Emergency Arbitrator (EA) provision under the SIAC Rules, 2016. Briefly, EA procedures allow parties to apply for urgent interim relief prior to the constitution of the tribunal. Accordingly, in cases where a party requires an immediate interim measure, SIAC will appoint an arbitrator (sometimes in a matter of few hours) to hear and decide an application in a time-bound manner.

Parties have frequently invoked the EA provisions under the SIAC Rules. Indeed, as of the date of this post, SIAC has received 93 applications for the appointment of EAs. Out of these 93 applications, 31 have been granted in favour of the applicant, 6 have been granted by consent, 17 have been granted in part, and 27 applications have been rejected. Further, in 8 instances the EA application was withdrawn and 4 EA applications are currently pending consideration.

It appears that there is no clear consensus in the international arbitration community regarding the applicable criteria to be used in cases of interim or emergency interim relief. It is therefore not surprising that the question of the applicable standard for provisional relief often becomes a point of contention between the disputing parties. This panel was no different.

During the panel discussion, Dr Michael Hwang, SC stated he was only dealing with interim injunctions in Singapore-seated arbitrations, but what he had to say might be applicable to:

  1. Other common law countries (including India) depending on their arbitration law on interim injunctions; and
  2. Other interim measures (which might, however, require other considerations than for injunctions).

In Dr Hwang’s view, for a Singapore-seated tribunal, the natural interpretation of Section 12(1)(i) (read with Section 12(5)) of the Singapore International Arbitration Act (Cap. 143A) taking into account its legislative history) was that, if an interim injunction were claimed, then it would be appropriate to apply the domestic (and practiced in various common law jurisdictions) standard applied by the Singapore Courts in granting interim injunctions based on the American Cyanamid test. Dr Hwang suggested that given that the Indian legislation had a similar legislative history as Singapore’s, it could also be argued that India-seated tribunals could apply the standards applied by the Indian Courts.

Mr Toby Landau, QC took a different view. He suggested that unless a tribunal is operating under “mandatory standards” as may be prescribed under the applicable lex arbitri, the tribunal ought to adopt an international approach. He argued that applying national court standards may pose a “danger” and prove to be a slippery slope if arbitrations were conducted in the same manner as court-based proceedings. Prof Bernard Hanotiau agreed with Mr Landau’s proposition and said that tribunals should be guided by international standards.

Mr Gary Born summarised the state of play in his treatise that the “better view” is for a tribunal to look at international sources for appropriate standards. He argued that the absence of relevant standards from most national arbitration statutes suggests that the seat of arbitration may not be a conclusive factor for the determination of the governing standards. To support this view, Mr Born argued that applying an international approach is in furtherance of the parties’ reasonable expectations for the following reasons. First, this approach will ensure the application of a uniform standard in international arbitrations. Second, this uniform standard will be applicable to all similar requests (regardless of the arbitral seat). Third and finally, this uniform standard would contribute towards achieving uniformity in the arbitral process.1)See Chapter 17; page 2465: Provisional Relief in International Arbitration’, in Gary B. Born , International Commercial Arbitration (Second Edition), (Kluwer Law International; Kluwer Law International 2014. jQuery("#footnote_plugin_tooltip_1076_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1076_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Comment

The SIAC Rules confer powers on tribunals or emergency arbitrators (as the case may be) to grant interim relief. However, the rules do not set out a standard to be applied by the arbitrators for the grant of such relief. In view of the same, it is for the tribunal to determine on a case-by-case basis the criteria which are to be applied in a particular set of facts and circumstances. Subject to the parties’ agreement and in the absence of a mandatory standard, a tribunal would broadly choose between a local and an international standard.

Even in cases where some (or majority) of the standards prescribed under a local test and an international test overlap, an applicant in any international arbitration would be compelled to argue that a less burdensome standard ought to apply. For instance, a Claimant is likely to argue that international standards should apply in cases where a national court applies a more onerous standard. Ultimately, and as mentioned above, it will be within a tribunal’s discretion to identify the applicable standards in a given case.

Whilst the contents of the local standards may be determined by a review of the prescribed standards (if any) or by the tests adopted by a seat-court, there seems to be a debate on the breakdown of “international standards”. One view is to apply the standards as set forth under the UNCITRAL Model Law (with amendments as adopted in 2006). In this regard, it may be noted that the 2006 amendments, and, in particular the amendments with regard to standard of interim relief, were subject to extensive deliberations and consultations with various governments and stakeholders. Viewed through this lens, an argument in favour of the codification of the “international standard” under the UNCITRAL Model Law (as revised in 2006) gains some traction.

Alternatively, parties and tribunals may look at previous awards and/or scholarly work to seek guidance on the contents of “international standards”. For example, Mr Born in his treatise summarises these international standards as follows: “stated generally…most international arbitral tribunals require showings of (a) risk of serious or irreparable harm to the claimant; (b) urgency; and (c) no prejudgment on the merits, while some tribunals require the claimant to establish a prima facie case on the merits, a prima facie case on jurisdiction, and to establish that the balance of hardships weighs in its favour”.2)See Chapter 17; page 2468: Provisional Relief in International Arbitration’, in Gary B. Born , International Commercial Arbitration (Second Edition), (Kluwer Law International; Kluwer Law International 2014. jQuery("#footnote_plugin_tooltip_1076_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1076_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Therefore, in a given case and depending on the nature of interim relief being sought, the following alternative tests may be adopted by a tribunal:

  1. Local/National Standards (tests adopted by the seat courts or under the governing law which applies to the substance of the dispute).
  2. International Standards (as envisaged under the UNCITRAL Model Law 2006).
  3. International standards as put forth by scholars and/or previous decisions.
  4. Combination/hybrid version of these tests as may be deemed appropriate by a tribunal.

The SIAC India Summit 2019 did well to highlight these issues, especially given that the Indian Arbitration and Conciliation Act (Indian Act) and its 2019 amendments do not prescribe any standards for granting provisional measures. Like most national arbitration legislation, the Indian Act recognises broad powers of India-seated tribunals to grant interim relief. The Indian Act further clarifies that under section 19, tribunals shall not be bound by the Indian Code of Civil Procedure (or the Rules of Court), thereby allowing arbitrators and parties to determine the rules of procedure for the conduct of arbitration.

It will be interesting to see how India-seated tribunals approach the question of standards of emergency relief. Anecdotal evidence and recent decisions of the Bombay and the Delhi High Court seem to suggest that tribunals are likely to apply national or local standards (for instance see VIL Rohtak Jind Highway).  However, India’s efforts to develop as an international hub for arbitration may have a bearing on how tribunals approach the question of applicable standards in the coming years. (See discussions on India’s recent arbitral reforms here, here, and here).

With a rise of institutional arbitration in India, and the EA mechanisms available under most sets of institutional rules, it bears watching how the Indian Courts will view EA decisions. As suggested by Mr Bobby Chandhoke at the panel discussion, Indian Courts may continue to take the approach adopted in Raffles Design and enforce EA decisions through section 9 of the Indian Act after a re-hearing.

Taken all together, given the emphasis and focus to bring the Indian Act in conformity with global trends, one could look at the 2019 amendments (as was opined by the moderator, Ms Sheila Ahuja) as a missed opportunity to introduce legislative provisions to support EA decisions. The next round of Indian amendments may well look to the Lion City and provide for the enforceability of EA orders and awards.

 

The views expressed herein are personal and do not reflect the views or the position of the Singapore International Arbitration Centre. The author reserves the right to amend his position if appropriate.

References   [ + ]

1. ↑ See Chapter 17; page 2465: Provisional Relief in International Arbitration’, in Gary B. Born , International Commercial Arbitration (Second Edition), (Kluwer Law International; Kluwer Law International 2014. 2. ↑ See Chapter 17; page 2468: Provisional Relief in International Arbitration’, in Gary B. Born , International Commercial Arbitration (Second Edition), (Kluwer Law International; Kluwer Law International 2014. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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To Insure or Not to Insure: Should Arbitrators Be Obliged to Insure Their Civil Liability?

Fri, 2019-11-08 00:31

Tadas Varapnickas

Arbitrators’ civil liability is not a topic that everyone within the arbitration community enjoys discussing. Therefore, it is not surprising that the approach to the concept of liability differs within the arbitration community. In cases where someone may face civil liability, the possibility to insure such risk arises. This blog post, therefore, will deal with the question of whether arbitrators should mandatorily insure their civil liability and whether it should be regulated by law.1)This blog post is based on the author’s PhD thesis and is intended to provide some guidelines concerning the issue – Varapnickas, Tadas. Arbitrator‘s civil liability and its boundaries. Vilnius: Vilniaus universiteto leidykla, 2018. This PhD thesis was defended at Vilnius University on December 3, 2018. A summary of the thesis is available in English here. jQuery("#footnote_plugin_tooltip_4277_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Different Concepts Concerning Arbitrator’s Liability

There are three concepts concerning arbitrator’s liability: absolute immunity, absolute liability, and limited or qualified liability. Under the first approach, which found its place in common law countries, firstly, arbitrators should not be found liable for their acts or omissions as arbitrators because the duties they perform are closely related and similar to the ones performed by judges who enjoy absolute immunity. The absolute liability doctrine is cardinally different. Supporters of this approach claim that arbitrators should be held liable as any other service providers and their liability could only be limited by the contract, not by the arbitrator’s status.

The limited liability doctrine tries to reconcile the two other approaches. According to this doctrine, since an arbitrator is not analogous to the state judge but neither a pure service provider due to the functions performed, arbitrator’s status is somewhere in between or sui generis. Therefore, arbitrators should not be liable for ordinary negligence but could not avoid liability in case of bad faith, i.e. when they act intentionally or are grossly negligent, for example, when arbitrator intentionally fails to disclose the conflict of interest and, therefore, the award is later annulled.

It is most widely accepted that an arbitrator’s civil liability should be limited. By way of example, Section 29 of the English Arbitration Act states that an arbitrator should be found liable only in cases of bad faith. Similar provisions exist in arbitration laws in Spain (Article 21 of Arbitration Act of Spain), Portugal (Article 9(4) of Portuguese Voluntary Arbitration Law), Italy (Article 813ter of Code of Civil Procedure of Italy), New Zealand (Article 13 of New Zealand Arbitration Act 1996), Australia (Article 28 of Australia’s International Arbitration Act 1974), Hong (Article 104 of Hong Kong Arbitration Ordinance), Sri Lanka (Article 45 of Sri Lanka Arbitration Act), and others. Although regulation in these countries differs, the goal remains the same – to ensure that arbitrators would only be liable in case of their bad faith, understanding the latter as arbitrator’s intent or gross negligence. Most arbitration rules, for example, LCIA (Article 31 of LCIA Arbitration Rules), ICC (Article 41 of ICC Arbitration Rules), SCC (Article 52 of SCC Arbitration Rules), DIS (Article 4 of DIS Arbitration Rules), SCAI (Article 32 of Swiss Rules of International Arbitration), HKIAC (Article 46 of HKIAC Arbitration Rules), Vilnius Court of Commercial Arbitration (Article 47 of Arbitration Rules of Vilnius Court of Commercial Arbitration), contain the same or very similar provision, under which arbitrators are not held liable in case of ordinary negligence.

 

Status quo on Professional Liability Insurance for Arbitrators

Although not widely discussed, liability insurance is an important topic for arbitrators’ community. When the Swiss arbitration association rendered a survey in 2013, 50% of arbitration institutions claimed to have liability insurance for claims against the institution itself. As regards arbitrator’s insurance, arbitration institutions replied that they insure arbitrators rarely and mostly when they require themselves.2)HABEGGER, Philipp et al. Arbitral Institutions Under Scrutiny: ASA Special Series No. 40. New York: Juris Publishing, 2013, p. 32. jQuery("#footnote_plugin_tooltip_4277_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This seems somewhat odd knowing that earlier an ICC working group on arbitrator’s status concluded that arbitrators should enter into a contract on liability insurance.3)ICC Working Group. ICC Final Report on the Status of the Arbitrator. ICC International Court of Arbitration Bulletin, 1996, vol. 7(1). jQuery("#footnote_plugin_tooltip_4277_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Hence, although the ICC Working Group concluded in 1996 that arbitrators should insure themselves, the survey rendered by Swiss arbitration association in 2013 revealed that arbitrators rarely request insurance. In other words, most arbitrators arbitrate without any liability insurance, meaning that if an arbitrator is faced with a civil liability claim, he/she alone would need to cover the damages. The amount of damages theoretically might be so large that an arbitrator would eventually risk facing bankruptcy. So, it is the parties to arbitration that should be interested in arbitrator’s liability insurance in the first place as it is designed to protect arbitrators from potential creditors. Secondly, the states should also be interested in the issue because it may lead to distrust of arbitration in general.

However, if one were to look at different arbitration laws, one would notice that there is nothing on arbitrators` liability insurance. Indeed, to the author’s knowledge, only Spain explicitly regulates arbitrator’s insurance questions. Article 21(1) of the Spanish Arbitration Act provides that arbitrators shall be required to take out insurance to cover civil liability or to make an equivalent guarantee, for the amount established by regulation. This obligation was included in the law together with the 2011 amendments of the Spanish Arbitration Act. As it was noted in another article on the Kluwer Arbitration Blog, the Spanish insurance sector reacted quickly, and Spanish insurers attempted to design a special insurance policy for arbitrators.

Although amendments in Spain were adopted eight years ago, other countries either in Europe or elsewhere in the world did not follow Spain’s example and there are no indications that any country is preparing to do that. As a result, in a situation where only Spain adopted a relevant regulation, the question arises if there is a need to discuss compulsory liability insurance at all?

It may be asked whether the professional liability insurance for lawyers would apply to arbitrators. Although it might depend on different national rules, generally the answer would be answered to the negative. Lawyers work in the field of representing clients before courts, state institutions, i.e., the main activity of lawyers is acting on behalf of someone else and this is the activity that is insured by professional liability insurance. Professional civil liability insurance of lawyers, therefore, is directed to protect lawyers for their main activities and not any activity performed by a lawyer. Arbitrating, on the other hand, is not an activity that would ipso facto be considered every lawyer’s activity. At the same time, auditors, architects, economists, lecturers and others may also be appointed as arbitrators. Therefore, even if professional insurance for lawyers applied to arbitrators, it would not be provided to all professions and the problem would not be resolved.

It might seem surprising that the issue of the insurance of arbitrator’s liability is not regulated by laws, particularly, when the ICC Working Group concluded that arbitrators should insure themselves. However, more careful analysis shows that it should not be too surprising. In fact, most of arbitration laws do not regulate arbitrator’s liability at all. For example, even the UNCITRAL Model Law does not provide any guidance on arbitrator’s liability. So, it should not be surprising that national arbitration laws do not regulate the issue of insurance if the issue of liability itself is not regulated.

 

Should Arbitrators Be Obliged to Have a Professional Liability Insurance?

There are opinions in academia suggesting that professional liability insurance for arbitrators would be useful.4)WESTON, Maureen A. Reexamining Arbitral Immunity in an Age of Mandatory and Professional Arbitration. Minnesota Law Review, 2006, vol. 88:449, p. 497. jQuery("#footnote_plugin_tooltip_4277_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Furthermore, insurance is required in other professions.5)YU, Hong-Lin. Who is an arbitrator? A study into the issue of immunity. International Arbitration Law Review, 2009, vol. 12(2). jQuery("#footnote_plugin_tooltip_4277_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

However, as mentioned above, it is most widely accepted that arbitrator’s civil liability should be limited, i.e. even without the insurance, arbitrator’s liability should be applied only when arbitrator acts conducted in bad faith (acts conducted intentionally or grossly negligently). Therefore, an obligation to insure civil liability when the liability is ipso facto limited may be treated as a redundant requirement. Indeed, arbitrators would then need to insure their liability only for acts committed in bad faith, while normally insurers only insure risks of ordinary negligence. Therefore, the issue arises as to whether liability insurance is at all possible in arbitration.

Insurance would also mean additional expenses which ultimately should be covered by the parties to arbitration paying higher arbitrators’ fees. Scholars support this conclusion.6)BROWN, Jenny. The Expansion of Arbitral Immunity: Is Absolute Immunity a Foregone Conclusion. Journal of Dispute Resolution, 2009, vol. 2009(1), p. 236. jQuery("#footnote_plugin_tooltip_4277_6").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Also, a rather small amount of insured parties may lead to higher insurance payments for arbitrators and again, ultimately, the parties.

On the other hand, in Brown’s opinion, insurance would ensure fair process with a competent arbitrator.7)BROWN, Jenny. The Expansion of Arbitral Immunity: Is Absolute Immunity a Foregone Conclusion. Journal of Dispute Resolution, 2009, vol. 2009(1), p. 236. jQuery("#footnote_plugin_tooltip_4277_7").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Yet, it is not explained what the correlation between insurance and competence is. On the contrary, knowing that any failure will be covered by insurance, arbitrators may start acting less prudently as they would not do without the insurance.

 

Conclusion

Therefore, the conclusion of the ICC working group that arbitrators should insure their civil liability,8)ICC Working Group. ICC Final Report on the Status of the Arbitrator. ICC International Court of Arbitration Bulletin, 1996, vol. 7(1). jQuery("#footnote_plugin_tooltip_4277_8").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); cannot be supported. Of course, if the arbitrator would feel more comfortable with insurance, the voluntary insurance can be suggested if applicable law allows for same. Yet, compulsory liability insurance would not achieve the purposes it would seek. Even if an arbitrator may be faced with the civil liability claim, those situations should be rare and most attempts to get arbitrators liable should fail because the standard of liability is high enough. Therefore, it should not be recommended for national law-makers to follow Spain’s example and to implement compulsory arbitrator’s liability insurance in national legislation.

References   [ + ]

1. ↑ This blog post is based on the author’s PhD thesis and is intended to provide some guidelines concerning the issue – Varapnickas, Tadas. Arbitrator‘s civil liability and its boundaries. Vilnius: Vilniaus universiteto leidykla, 2018. This PhD thesis was defended at Vilnius University on December 3, 2018. A summary of the thesis is available in English here. 2. ↑ HABEGGER, Philipp et al. Arbitral Institutions Under Scrutiny: ASA Special Series No. 40. New York: Juris Publishing, 2013, p. 32. 3, 8. ↑ ICC Working Group. ICC Final Report on the Status of the Arbitrator. ICC International Court of Arbitration Bulletin, 1996, vol. 7(1). 4. ↑ WESTON, Maureen A. Reexamining Arbitral Immunity in an Age of Mandatory and Professional Arbitration. Minnesota Law Review, 2006, vol. 88:449, p. 497. 5. ↑ YU, Hong-Lin. Who is an arbitrator? A study into the issue of immunity. International Arbitration Law Review, 2009, vol. 12(2). 6, 7. ↑ BROWN, Jenny. The Expansion of Arbitral Immunity: Is Absolute Immunity a Foregone Conclusion. Journal of Dispute Resolution, 2009, vol. 2009(1), p. 236. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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Sanctions vis-à-vis Blocking Measures and the Dilemma Faced by Arbitral Tribunals: Lessons Drawn From EU Blocking Regulation and U.S Extraterritorial Sanctions

Wed, 2019-11-06 21:30

Naimeh Masumy and Niyati Ahuja

Introduction

The United States announced the reinstatement of sanctions on Iran in May 2018. Following that, the EU responded by revising their Blocking Regulation (Regulation 2271/96) in August 2018. The Blocking Regulation was designed to safeguard European entities from the extraterritorial reach of the U.S. sanctions. The uncertainty surrounding the scope of application and the nature of blocking regulations, in general, has left their role in arbitration open to increasing speculation.

In Section I below, we discuss secondary sanctions, with a focus on the recent extraterritorial sanctions imposed by the U.S. In Section II, we analyze the varying nuances of blocking regulations and their implications on arbitration, considering EU Blocking Regulations as our focal point. In Section III, we address issues arising when a dispute falls both within the ambit of extraterritorial sanctions and the purview of blocking regulations. Finally, in Section IV, we provide an overview of the comprehensive analysis to be undertaken by arbitrators when confronted by a dispute that involves blocking regulations and extraterritorial sanctions.

 

I. Secondary Sanctions

Sanctions often have a wide and horizontal application prohibiting commercial activity with regards to an entire country. There are two categories of sanctions which may be imposed by a country: primary sanctions and secondary sanctions. Primary sanctions are those sanctions which are imposed on actions having a jurisdictional nexus with the country imposing them. Secondary sanctions apply to international parties without any relevant jurisdictional nexus between those parties and the country imposing such sanctions.

For the purpose of this post, we will focus on secondary sanctions which are extraterritorial in nature. In essence, these sanctions assert jurisdiction over a foreign party often without substantial nexus between the entity or the act committed and the territory of the regulating states. The extraterritoriality of sanctions is not generally accepted across all jurisdictions and hence states may develop blocking regulations to combat these sanctions. For instance, the U.S. imposed secondary sanctions and the EU developed Blocking Regulations to combat the same. This has been precisely echoed in the preamble of the EU Blocking Regulation which recalls that “by their extra-territorial application, such laws, regulations, and other legislative instrument violate international law and impede smooth international trade”.

 

II. Blocking Regulations

A. What are Blocking Regulations?

A blocking regulation is the legislation adopted to impede the sanctions imposed by a foreign jurisdiction.Blocking regulations are not a new phenomenon; Canada and Mexico implemented blocking regulations to counter the effect of U.S. sanctions in 1992 and 1996 respectively. A blocking regulation shields companies and individuals within its jurisdiction by prohibiting them from complying with sanctions, and not abiding foreign court rulings, orders and awards. These regulations can serve an important role as part of the legal measures employed by governments whose citizens will be subject to the sanction and can protect their commercial activities from the consequences of snapback.

B. Implications of EU Blocking Regulation (Regulation 2271/96)

The EU Blocking Regulation is not a standalone measure and each EU Member State ought to determine the amount of the penalty it deems appropriate to impose through their domestic legislation. For example, under German law, breach of the EU Blocking Regulation may constitute an administrative offence and can result in a fine of up to 500 Euros.

It is widely understood that the EU Blocking Regulation has neither been heavily enforced nor tested so far. At the EU level, no jurisprudence exists currently, except the one enforcement action has been heavily reported – against BAWAG PSK.

There are two major intended impacts of the EU Blocking Regulation: first, to enable foregoing compliance with any requirement of prohibition stipulated in extraterritorial sanction and, second, the nullification of foreign decisions. They both bear an important implication as they are changing the way arbitrators resolve disputes as the arbitrators are confronted with another applicable law.

 

III. The Impact of Secondary Sanctions and Blocking Regulations on International Arbitration  

A. Impact of Secondary Sanctions

The impact of sanctions with extraterritorial reach can be summarized in four distinctive categories:

  1. as a part of the governing law to the merits of the case: Parties may use sanctions as an excuse for failure to comply with contractual obligations. It may be either treated as ‘force majeure’ or ‘frustration of purpose’ depending on the jurisdiction.
  2. as a part of the domestic law of the lex arbitri or seat of the arbitration: Sanctions may form a part of the applicable law to the dispute if the seat of arbitration is situated in a sanctioning country. For example, if the parties have chosen New York as their seat of arbitration, U.S. sanctions will be applicable to the dispute.
  3. at the enforcement stage: The impact of sanctions continues even after an arbitration is concluded and an award issued, that is in the context of enforcement. Where enforcement is sought in a sanctioned state, an award may be subject to a challenge in the enforcing court if the objections raised concern a violation of sanctions regulations.
  4. external effect: Secondary sanctions usually result in impossibility of performance of a contract thereby releasing the obligation to perform. However, from a dispute resolution perspective, when a sanction regime proclaims itself applicable extraterritorially, it does not necessarily imply that arbitral tribunals, or domestic courts will give extraterritorial effect to these sanctions.

In this regard, characterization of sanctions by arbitrators has an important impact on an arbitration proceeding. There is no consensus yet as to whether sanctions should be given effect as fact or law. A factual impediment occurs whenever a sanction has the power to compel an individual or an entity to withhold performance, usually via threats of enforcement measures or penalties. The factual approach is increasingly regarded as an unsatisfactory shortcut to the extent that it compels arbitrators to give effect to sanctions almost mechanically which in reality contradicts the purpose of party autonomy. The legal approach suggests that a sanction would be given effect either only because it forms part of the applicable law or because it is applicable as a foreign overriding mandatory rule. It is important to note that the legal approach guarantees a higher degree of flexibility and allows the arbitrators to take into consideration blocking measures.

B. Impact of Blocking Regulations

A blocking regulation, in general, does not automatically apply to an arbitration proceeding, unless it aims to counter a sanction, and its application on the arbitration proceeding cannot be scrutinized in isolation.

The gradual promulgation of blocking measures into domestic law of the parties could result in a concrete body of law enabling courts to openly enforce blocking measures. By such adoption, these measures would fall within the ambit of article 9 of the Rome Regulation and constitute a part of the public policy of the seat of arbitration and be of significance at different phases of the arbitral procedure.

A major impact of the EU Blocking Regulations on international arbitration is the nullification of the effect of any foreign decision including court rulings or arbitration awards, based on the listed extraterritorial legislation or the acts and provisions adopted pursuant to them. This simply means that a European court ought to refuse to enforce an award for the reason that it contravenes EU Blocking Regulations.

 

IV. The Irreconcilable Dilemma Faced by Arbitral Tribunals

The dearth of jurisprudence with regards to blocking regulations has left many pertinent issues unanswered regarding how disputes involving sanctions and sanctioned parties vis-à-vis blocking regulation should be resolved. As previously mentioned, firstly, blocking regulations have a direct bearing on the enforcement of an arbitral award; secondly, arbitrators may engage in an excessive conflict of law analysis to determine and rationalize the applicable law; and, finally, in some particular situations, arbitrators may face certain liabilities due to breaching sanctions regime or blocking regulations.

One of the key operative provisions of EU Blocking Regulations seeks to nullify the effect of any arbitration award based on the sanction regime. Similarly, if the adoption of the blocking regulation is regarded a public policy pronouncement embedded in substantive law of a country, parties may seek to resist enforcement of such awards by arguing that the arbitration award is inconsistent with the country’s public policy. The recognition or enforcement of an arbitral award that involves sanctions may sometimes be seen as contrary to public policy in a sanctioned country. The generally restrictive view of public policy expressed in the famous case Westacre vs. Jugoimport-SDRP demonstrates that the courts, not taking into account unilateral sanctions that do not amount to public policy, will not be breaching ‘international public policy’. The judgment confirms that the prevailing trends with respect to the notion of public policy is in favor of international public policy.

The interplay of blocking regulations and sanctions calls for an extensive conflict of laws analysis while simultaneously broadening the discretion of arbitrators to apply the most appropriate law. When a disputed transaction falls within the ambit of both an extraterritorial sanction and blocking statutes, it is crucial for arbitrators to weigh the interests that are served by the sanctions against those served by the blocking statutes to determine which one should be applied to the dispute. The question that arbitrators need to consider is whether to look at a blocking regulation that has already declared the sanction unlawful or use their discretion to analyze the merits of the case. Furthermore, arbitrators must examine whether sanctions serve interests that are deemed legitimate by the international community. Thus, if a sanction is evidently based on discriminatory motives, arbitrators have the authority and a duty to disregard it.

While blocking regulations have put arbitrators in a precarious position, this post puts forward that endorsing conflict of laws analysis by arbitrators in order to rationalize applicable law could be perceived as an ideal way to maintain the predictability of the arbitration proceeding. The conflict of laws analysis may grant tribunals an objective criterion to take into consideration blocking regulation without disregarding the parties’ choice of law and exceeding its designated power. Moreover, applying conflict of law rules will play an important role in the absence of applicable law or where the parties have not chosen a law, and the result will be much more predictable.

An arbitrator may unknowingly breach sanctions and be held liable in certain cases when they are unsure of whether they can rely on blocking regulations or whether taking sanctions into account may expose them to violation liability. As the legal character of blocking regulations eventually gains uniformity, the aforementioned concerns need to be addressed by the arbitration community. If the landscape remains ambiguous, only the future will tell if arbitration remains to be the chosen form of cross-border dispute resolution.

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