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Intra-EU Disputes under the Energy Charter Treaty: Quo Vadis?

Sun, 2019-08-18 03:00

Florian Stefan

The tendency of arbitral tribunals constituted under the Energy Charter Treaty (ECT) to reject intra-EU jurisdictional objections, despite contrary views expressed by most EU member states, was recently continued in the case of Landesbank Baden-Württemberg (LBBW) and others v. Kingdom of Spain (ICSID Case No. ARB/15/45).1)Decision on the Intra-EU Jurisdictional Objection, dated 25 February 2019, Landesbank Baden-Württemberg, and others v. Spain (ICSID Case No. ARB/15/45). jQuery("#footnote_plugin_tooltip_5742_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5742_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The decision made by an ICSID tribunal over a claim brought under the ECT was made in February 2019 but has only recently come to light. It joins the ranks of previous decisions under the ECT made in the wake of the Achmea judgment by the Court of Justice of the European Union (CJEU), as discussed in previous posts, and comes at a time when efforts by the European Commission to reform the ECT are garnering widespread strength.

 

The LBBW Case 

The LBBW case was brought by a group of German banks against Spain under the ECT and concerns reforms to Spain’s renewable energy sector. It is one of a total 43 investor-state arbitrations pending against Spain under the ECT regarding the state’s reforms to its renewable energy sector. In the 1990s, Spain established a special regime for renewable energy production with the intention to promote foreign investment in the sector. Spain provided a guarantee to investors that renewable energy plants would be able to sell their electricity to the Spanish electricity grid at a fixed price for the entire lifetime of the plants.

In the LBBW Case, the Claimants argue that, in reliance on Spain’s commitments, they financed 78 renewable energy plants with loans totaling a combined €1.76 billion, until Spain substantially changed the regime before eventually abolishing it in its entirety. According to the claimants, Spain’s actions violated its obligations under both Article 10(1) of the ECT, which guarantees fair and equitable treatment of investments, and Article 13 of the ECT, which protects investments against expropriation.

Spain’s principal argument was that Achmea constitutes a definitive ruling that investor-state arbitration provisions in intra-EU cases are incompatible with EU law. Therefore, such provisions cannot afford a basis for jurisdiction where an EU member state is taken to arbitration by an investor from another EU member state. According to Spain, this also applies to cases brought under the ECT, regardless of the fact that Achmea concerned an intra-EU BIT and not a multilateral treaty such as the ECT, to which both EU and non-EU states are signatories.

The tribunal found that, particularly in light of Achmea, the relationship between the provisions of the ECT and EU law gives rise to important questions which Spain was entitled to raise as a jurisdictional objection. However, the tribunal flatly refused Spain’s arguments that the tribunal lacks competence and that the proceedings are to be considered as a state-to-state arbitration as the Claimants are largely owned by German federal states. Likewise, it rejected both parties’ respective arguments that the issue was already “settled law”. According to Spain, Achmea conclusively decided the matter, and according to the banks, arbitral tribunals have consistently rejected the objection. The tribunal found that it must make its own analysis of the issue and arrive at its own conclusions, particularly since the case’s circumstances were different than in Achmea and the decisions cited in favour of the tribunal’s jurisdiction. It went on to rule that a provisional interpretation of Article 26 of the ECT appears to constitute an offer of arbitration by each EU member state to investors from all other contracting parties without any limitations regarding intra-EU disputes.

 

The Effect of Achmea

The interpretation was, however, provisional as the tribunal had yet to consider the effect of Achmea. With regards to Achmea, the tribunal noted that it had to ascertain whether the logic of the reasoning of the CJEU, although made in relation to a BIT, was also applicable to Article 26 of the ECT insofar as that provision was invoked in an intra-EU dispute. It found that the differences between the tribunal’s situation, as a tribunal established under Article 25 of the ICSID Convention and Article 26 of the ECT, and that of the tribunal in Achmea outweighed the similarities between them.

The tribunal particularly emphasised the nature of the ECT as a multilateral treaty. Since the ECT was concluded both by the EU and by its member states, there is no doubt of the possibility of a tribunal established under Article 26 of the ECT having been provided for without the knowledge of the EU. It further involves reciprocal obligations by all contracting parties and thus is more than just a network of bilateral relationships as is the case with a BIT. Furthermore, issues of EU law might also arise in proceedings between one EU member state and another contracting party, and nevertheless could not be referred to the CJEU for a preliminary ruling. Furthermore, the reasoning of the CJEU in Achmea regarding the role of a national court was inapplicable in the LBBW case, as it was to be decided by an ICSID tribunal, deriving its authority from Article 25 of the ICSID Convention, that has no national seat and is not subject to the jurisdiction of any national court. Lastly, it found that the CJEU had not ruled out the possibility of a court established by an international agreement and thus rooted in public international law, such as the European Court of Human Rights, to rule on a dispute involving an EU member state while taking EU law into account.

In sum, the tribunal in LBBW v Spain arrived at the same conclusion as the tribunals in Vattenfall, Masdar and Greentech,2)Masdar Solar & Wind Cooperatief U.A. v Spain (ICSID Case No. ARB/14); Vattenfall AB and others v Germany (ICSID Case No. ARB/12/12); Greentech Energy Systems A/S and others v Italy (SCC Arbitration V 2015/095). jQuery("#footnote_plugin_tooltip_5742_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5742_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); namely that EU law does not preclude arbitration of intra-EU investment disputes under the ECT. It also found that even if EU law were to prohibit Spain from making an offer of arbitration under Article 26 of the ECT, the tribunal must still accord priority to the ECT as it does not operate under EU law but under international law and the ECT.

 

Reforming the ECT

The decision in the LBBW case was made public just days before the Council of the EU announced that it has awarded a mandate to the European Commission to begin negotiations on the modernisation of the ECT. The “new” ECT should explicitly reaffirm the states’ “right to regulate“, i.e. the right of the contracting parties to take protective measures with regards to, inter alia, health, safety and environment objectives. However, the mandate also included bringing the ECT provisions on investment protection in line with recently concluded agreements by the EU and its member states and ensuring that a future multilateral investment court applies to the ECT.

This is in line with the political declaration issued by 22 EU member states in January 2019, in which they not only stated that investor-state arbitration clauses contained in BITs concluded between EU member states are contrary to EU law and thus inapplicable, but also noted that the investor-state arbitration clause in Article 26 of the ECT is incompatible with EU law.

 

Conclusion 

The tribunal in LBBW v Spain was unperturbed by the European Union’s efforts to put a halt to Intra-EU investment arbitration. While the tribunal acknowledged that the European Commission (and most EU member states) argue for the disapplication of Article 26 of the ECT in intra-EU cases, it rejected all arguments put forward in support thereto. However, the LBBW tribunal’s findings did not come much as a surprise, as the decision closely follows the observations made by the tribunal in Vattenfall, which appears to have set the new standard against applying the principles of Achmea to intra-EU disputes brought under the ECT. Although there is of course no doctrine of binding precedent in international law, respondent states will have a difficult time arguing against what has now become a series of consistent cases.

As of today, more than two-thirds of of all ECT investor-state arbitrations are intra-EU disputes. It remains to be seen how the non-EU signatory states of the ECT will react to the Commission’s proposals on a reform of the treaty and in particular its dispute settlement provisions. Further, it will not be long before the CJEU will have to concern itself with this issue. While the Swedish Court of Appeals recently rejected a request for a preliminary ruling by Spain in an ECT case, Spain has already brought another request for a preliminary ruling to the CJEU in the context of an ECT arbitration. In the meantime, it is to be expected that more ECT tribunals will reject the intra-EU objection, thereby adding further fuel to the fire.

References   [ + ]

1. ↑ Decision on the Intra-EU Jurisdictional Objection, dated 25 February 2019, Landesbank Baden-Württemberg, and others v. Spain (ICSID Case No. ARB/15/45). 2. ↑ Masdar Solar & Wind Cooperatief U.A. v Spain (ICSID Case No. ARB/14); Vattenfall AB and others v Germany (ICSID Case No. ARB/12/12); Greentech Energy Systems A/S and others v Italy (SCC Arbitration V 2015/095). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Bulgaria: Assignment of an Arbitration Clause – Is Debtor’s Consent Required?

Sat, 2019-08-17 02:00

Velislava Hristova

The assignment of contractual rights is a common business practice. An important question concerning the assignment of rights under a contract is the fate of the arbitration agreement related to those rights and whether it is transferred automatically to the assignee so that such arbitration agreement becomes effective and binding in the relationship between the assignee and the debtor.

In a recent judgment, the Bulgarian highest court had the occasion to decide whether and under what circumstances an assignment of contractual receivables transfers the rights under the arbitration clause incorporated in the same contract.1)M.S.D. v. Credo Consult 55 OOD, Supreme Court of Cassation, Judgment No. 261 from 1 August 2018 under commercial case No. 624/2017. jQuery("#footnote_plugin_tooltip_4180_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4180_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The court departed from the widely recognised principle of automatic transfer of the arbitration agreement and held that the assignment of contractual receivables does not transfer the rights under the arbitration clause contained in the same contract unless the debtor explicitly agrees to the assignment of the arbitration clause.

 

Facts of the Case

M.S.D., as a lessee, and B.M., as a landlord, concluded a Rental Agreement containing an arbitration clause referring all disputes to be settled by a sole arbitrator in an ad hoc arbitration. The landlord assigned his receivables against M.S.D. under the Rental Agreement to a third party, Credo Consult 55 OOD. The assignee raised the assigned claims for payment of the rental price against the lessee in arbitration they commenced on the basis of the arbitration clause incorporated in the Rental Agreement.

The sole arbitrator declared herself competent to hear the dispute with the argument that the assignment of the rights under the Rental Agreement included the transfer of the arbitration agreement to the assignee and granted the claims of Credo Consult 55 OOD.

M.S.D. initiated court proceedings under Article 47 of the International Commercial Arbitration Act (“ICAA”) before the Bulgarian Supreme Court of Cassation (“BSCC”) for setting aside of the arbitral award claiming, among other grounds, lack of a valid arbitration agreement between her and Credo Consult 55 OOD. According to M.S.D., the assignee Credo Consult 55 OOD was not a party to the arbitration clause because she has never explicitly consented the arbitration clause to be transferred and the transfer of the receivables under the Rental agreement did not result in the assignee stepping into the arbitration clause.

 

BSCC’s Findings

The BSCC set aside the arbitral award on the ground that there was no valid arbitration agreement between the assignee and the debtor. It held that the arbitration agreement is autonomous from the underlying contract in which it is incorporated, is subject to a separable legal regulation and is not an accessory to the legal relationship between the parties under the main contract. The BSCC reasoned that the substantive rights and obligations under the underlying contract differ from the rights and obligations under the arbitration agreement. According to the BSCC, the mere notification of the debtor as regards the assignment is irrelevant to the transfer of the arbitration agreement. It is relevant only for assessing whether the transfer of the receivables under the underlying contract between the assignee and the assignor has had an effect vis-à-vis the debtor. Therefore, the arbitration agreement cannot be transferred to the assignee together with the assignment of receivables under the underlying contract, unless the debtor explicitly consents in writing to its transfer.

 

Comment

The judgment under consideration has reaffirmed the practice of the BSCC first expressed in its Judgment No. 70 of 15 June 2012 under commercial case No.112/2012. The BSCC has since then rendered several judgments discussing whether the arbitration agreement is transferred automatically through the assignment of rights under the main contract.

In two judgments, the BSCC has adopted the so-called automatic transfer rule deciding that the arbitration agreement is an accessory to the underlying contract that should follow the latter.2)B. O. v. Company, Supreme Court of Cassation, Judgment No. 51 from 23 September 2013 under commercial case No. 610/2012; I. D. I. v. Company, Supreme Court of Cassation, Judgment No. 203 from 20 January 2015 under commercial case No. 1300/2014. jQuery("#footnote_plugin_tooltip_4180_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4180_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });This view is in line with the predominant practice of arbitral tribunals seated in Bulgaria.3)Arbitral award of 16 May 2005 of the Arbitration Court at the Bulgarian Industrial Association under arbitration case No. 4/2004; Arbitral award of 27 September 2007 under Internal Arbitration Case 2011/2006. jQuery("#footnote_plugin_tooltip_4180_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4180_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, according to the subsequent case law of the BSCC, such an approach should not be followed and should be treated as isolated practice.

The general position of the BSCC, expressed by different judges from the BSCC, who had to decide on the matter, is that the assignment of rights under a contract does not automatically entail the assignment of the arbitration clause contained therein due to the distinct nature of the latter and its autonomy from the rest of the contractual provisions.4)Company v. A. G. Corporate and S., Supreme Court of Cassation, Judgment No. 71 from 9 July 2015 under commercial case No. 3506/2014. jQuery("#footnote_plugin_tooltip_4180_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4180_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Another argument against the automatic transfer of the arbitration agreement raised by the BSCC in the available case law is related to the obligations attributed to it. An arbitration agreement gives rise not only to rights but also to obligations. While rights can freely be assigned, it is not possible to assign obligations. As a consequence, the explicit consent of the debtor of the receivables is required in order for the assignee to be constituted as a party to the arbitration agreement.5)E. S. S. v. Company, Supreme Court of Cassation, Judgment No. 44 from 29 June 2016 under commercial case No. 971/2015. jQuery("#footnote_plugin_tooltip_4180_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4180_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); With the judgement under consideration, this position has been acknowledged by the BSCC as the constant practice and as such is expected to be followed by the court in subsequent cases.

The BSCC has decided the issue in a manner similar to the resolution adopted by Russian courts long ago, deciding that the assignee is not bound by the arbitration agreement unless the debtor explicitly consents to the assignment of the arbitration agreement.6)Russian Federation No. 8, IMP Group (Cyprus) Ltd. v. Aeroimp, Moscow District Court (Civil Department), Not Indicated, 21 April 1997, in Albert Jan Van den Berg (ed), Yearbook Commercial Arbitration 1998 – Volume XXIII, Yearbook Commercial Arbitration, Volume 23 (Kluwer Law International; ICCA & Kluwer Law International 1998) p. 748. jQuery("#footnote_plugin_tooltip_4180_6").tooltip({ tip: "#footnote_plugin_tooltip_text_4180_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It seems that at present such an approach has lost most of its supporters.

The requirement for the debtor’s consent is understandable in exceptional cases, such as intuitu personae claims or where the assignor and the debtor have explicitly excluded the transfer of all or part of the rights and/or obligations under the main contract. However, in general, since the debtor already consented to the arbitration agreement at the time of its conclusion with the assignor, subsequent repetition of the debtor’s consent is not required for the transfer of the arbitration agreement.

The contemporary view that the arbitration agreement automatically travels together with the assigned contractual receivables has received significant support in the modern arbitral and court practice of various jurisdictions, such as France, the United Kingdom, Switzerland and Germany. Therefore, the recent approach of the BSCC seems to be in contrast with the prevailing present-day practice.

 

Conclusion

While the two decisions in which the BSCC has adopted the automatic transfer rule appeared to open the door to case law favouring the transfer of the arbitration agreement along with the rights under the main contract, the BSCC has now once again made it clear that it will not easily accept the automatic assignment of the arbitration agreement.

In light of the case law of the BSCC, the arbitration agreement contained in the contract is not transferred to the assignee, unless the debtor has explicitly agreed to its assignment. It would seem that this approach will be followed by the BSCC in future cases and should be taken into account by arbitrators and parties involved in arbitration proceedings in Bulgaria.

The key takeaway for a party wishing to seek the protection of assigned contractual rights in arbitration proceedings is to obtain explicit consent from the debtor for the transfer of the arbitration agreement contained in the contract. Otherwise, the assignee incurs the risk of not being able to invoke the arbitration agreement and to find itself before a state court rather than an arbitral tribunal. Even if the latter finds itself competent to hear the dispute, the arbitral award is likely to be set aside by the BSCC on the ground that there is no valid arbitration agreement between the assignee and the debtor, due to the lack of consent of the debtor.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Djingov, Gouginski, Kyutchukov & Velichkov or its employees.

***

NB: The links for the texts of the decisions of the Bulgarian Supreme Court of Cassation cited in this post lead to the case webpages. There, you can click on the icon located next to the phrase “Пълен текс”. In case you see more than one icon, please click on the one whose date corresponds to the date of the decision.

References   [ + ]

1. ↑ M.S.D. v. Credo Consult 55 OOD, Supreme Court of Cassation, Judgment No. 261 from 1 August 2018 under commercial case No. 624/2017. 2. ↑ B. O. v. Company, Supreme Court of Cassation, Judgment No. 51 from 23 September 2013 under commercial case No. 610/2012; I. D. I. v. Company, Supreme Court of Cassation, Judgment No. 203 from 20 January 2015 under commercial case No. 1300/2014. 3. ↑ Arbitral award of 16 May 2005 of the Arbitration Court at the Bulgarian Industrial Association under arbitration case No. 4/2004; Arbitral award of 27 September 2007 under Internal Arbitration Case 2011/2006. 4. ↑ Company v. A. G. Corporate and S., Supreme Court of Cassation, Judgment No. 71 from 9 July 2015 under commercial case No. 3506/2014. 5. ↑ E. S. S. v. Company, Supreme Court of Cassation, Judgment No. 44 from 29 June 2016 under commercial case No. 971/2015. 6. ↑ Russian Federation No. 8, IMP Group (Cyprus) Ltd. v. Aeroimp, Moscow District Court (Civil Department), Not Indicated, 21 April 1997, in Albert Jan Van den Berg (ed), Yearbook Commercial Arbitration 1998 – Volume XXIII, Yearbook Commercial Arbitration, Volume 23 (Kluwer Law International; ICCA & Kluwer Law International 1998) p. 748. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Interviews with Our Editors: Perspectives on Arbitration in Iran from Oveis Rezvanian, Director of the Tehran Regional Arbitration Centre

Fri, 2019-08-16 02:00

Mihaela Maravela (Assistant Editor to the Acting Editor)

Welcome to the Kluwer Arbitration Blog, Mr. Rezvanian! We are grateful for this opportunity to learn more about the Tehran Regional Arbitration Centre (“TRAC”) and your experience with international arbitration in the region.

 

  1. To start, can you briefly introduce yourself and explain your role at TRAC?

My educational background is quite diverse. I have bachelors in both law and industrial engineering, followed by an MBA degree. I have then obtained an LL.M. in International Commercial Arbitration Law from Stockholm University and a PhD in International Law from the Graduate Institute of International and Development Studies, Geneva. My doctoral thesis, titled “Relation of ADR and arbitration in resolution of construction disputes” was a combination of law and engineering, which I defended in December 2013.

Immediately after returning to Iran in 2014, I was appointed as the Director of TRAC. The appointment was made by the Government of Islamic Republic of Iran and after consultation with the Secretary-General of the Asian-African Legal Consultative Organization (“AALCO”). My activity as TRAC Director is aimed at implementing the Rules of Arbitration and the Internal Regulations with independence and impartiality and I consult with the Arbitration Boards of TRAC on matters concerning the implementation of the Rules of Arbitration.1)TRAC has one International Arbitration Board and one Domestic Arbitration Board. jQuery("#footnote_plugin_tooltip_3530_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3530_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In addition to my TRAC position, I am currently an Associate Professor of Arbitration Law at the Institute for Management and Planning Studies, lecturing on international arbitration, international trade law and legal texts (in English) to postgraduate students. Also, in the recent years, as an Iranian arbitration lawyer, I have been regularly involved in domestic and international arbitrations, either as counsel or as arbitrator.

 

  1. You mentioned AALCO, and we know that TRAC was established on the basis of an agreement by AALCO and Iran. Can you give us a brief background on the inception of TRAC and the reasons for its creation?

One of the major achievements of AALCO in its program in the economic field was the launching of its Integrated Scheme for Settlement of Disputes in the Economic and Commercial Transactions in 1978. Pursuant to that scheme, it was decided to establish regional arbitration centres under the auspices of AALCO, which would perform as international institutions with the objectives to promote international commercial arbitration in the Asian-African regions and provide for the possibility of conducting international arbitrations under these centres.

Five such Centres have been established so far, which are located at Cairo (Arab Republic of Egypt), Kuala Lumpur (Malaysia), Lagos (Nigeria), Tehran (Islamic Republic of Iran) and Nairobi (Republic of Kenya). The respective host governments recognize the Centres’ independence as an international organization and accord privileges and immunities to them.

TRAC has been established pursuant to the Agreement signed on 3 May 1997, between the Islamic Republic of Iran and AALCO. The Agreement came into force in July 2004, after receiving ratification from the Iranian legislative bodies. TRAC effectively commenced its activities a year later, in July 2005, by publishing its Rules of Arbitration.

 

  1. Since it commenced activities in 2005 how many arbitrations have been referred to TRAC?

Please allow me to not give numbers, because we are considering publishing that in a separate report. But instead, I should explain that in the last 4 years TRAC has received considerably more cases than in the previous 10 years. Therefore, I can confirm that a noticeable increase has started in the TRAC caseload as a well-known arbitration institution in the region. In addition, in the recent years, TRAC has been more known among the Iranian and regional lawyers and business users and we are aware that TRAC arbitration clause has been increasingly inserted in various types of international contracts such as oil and gas services, foreign trade, transport, distribution, banking, export credits, telecommunications, construction and engineering. Therefore, we expect that TRAC caseload would continue to increase in the future.

 

  1. You mention that TRAC operates as a regional arbitration centre. In your view, what are the advantages of using a regionally-based ADR centre for dispute resolution?

There are a number of reasons that explain the advantage of regional arbitration centres. First, regional arbitration centres have regional knowledge, particularly when disputes arise between parties from the same region. In addition, regional arbitration centres are able to provide more efficient arbitrations (in terms of time and costs) for the users. If you just take a look at TRAC’s table of fees, for example, it is clear that the costs for users are remarkably lower than those of many other arbitration institutions, while the fees might still be attractive for the arbitrators. Also, if the parties decide that the seat of arbitration is in the same place where the institution is located (i.e. Tehran) the logistic costs (i.e. travel costs, accommodation, acquiring visa, etc.) would be lower than many other places. Also, considering the limited market that the regional arbitration centres are targeting, they are able to conduct the arbitration proceedings in a very timely manner. I should also add that there is a very good chance of amicable resolution of disputes in arbitrations administered in regional arbitration centres, due to some cultural similarities.

 

  1. Can you tell us more about your users and their disputes? What kinds of parties do you usually serve, and are there particular industries or types of disputes prevalent among them?

In general, there is no limitation in types of disputes that TRAC would accept to act as the arbitration centre. However, by reviewing TRAC cases, it is apparent that the number of disputes related to sales/purchase, construction, oil and gas industry (including petrochemical) is higher than those in other areas. It is also our understanding that disputes related to technology contracts are rarely referred to TRAC. Therefore, TRAC is now considering establishing a special section for startups in this industry in order to provide very cost-effective and quick resolution of disputes. We, therefore, expect to have an increase in this sector soon.

 

  1. Typically, what is the demographic of the arbitrators appointed? How are challenges to appointments dealt with by the TRAC that we understand has a committee set up to this end?

When the dispute is between Iranian nationals, in most of the cases the arbitrator(s) would be also Iranian. But when one of the parties is from another country, the Centre shall take into account the appointment of an arbitrator of a nationality other than the nationalities of the parties. Therefore, in addition to Iranian arbitrators, thus far, TRAC has appointed arbitrators from Turkey, France, Germany and UK.

According to the new TRAC Rules of 2018 (“TRAC Rules 2018”), in case of a challenge of an arbitrator by a party, all parties may agree to the challenge, or the challenged arbitrator may withdraw, and in both such cases the challenged arbitrator would be replaced. In case all parties are not in agreement with respect to the challenge, or the arbitrator does not withdraw, the party making the challenge may seek a decision on the challenge by the Centre. In that case, the decision on the challenge shall be made by the Centre, respectively by a committee comprised of three members of the Arbitration Boards. The members of the committee shall be appointed by the TRAC Director and shall be independent from the parties and the concerned arbitrator(s).

We have just finished a challenge case, in which the Respondent appointed arbitrator was challenged by the other party at the very final stage of the proceedings, that is right before rendering the award. After such challenge was received by the Centre, the Arbitral Tribunal suspended the proceedings, pending receipt of the result of challenge. The challenge committee eventually rejected the challenge and, therefore, the case proceeded.

 

  1. In March 2018 TRAC has launched its new set of arbitration rules you have mentioned above. We understand that the main features of the new rules are the possibility to appoint an emergency arbitrator for obtaining urgent measures and the mechanism for expedite procedure. Was the new set of rules introduced to respond to users’ needs in the region? What is the experience so far with expedite arbitration under the new arbitration rules at TRAC?

TRAC Rules 2018 are based on the 2010 UNCITRAL Arbitration Rules , with some modifications to make them suitable for institutional arbitration. Also, some innovative features are added to the Rules in order to meet the business users’ needs and to be synchronized with the recent developments of international commercial arbitration. In particular, the 2018 TRAC Rules provide for the expedited procedure under Article 5, as well as for the emergency arbitration procedure under Article 27.2 and its Appendix I, encompassing 14 articles. These two procedures are unprecedented under the Iranian law and are introduced by the 2018 TRAC Rules into the Iranian legal system.

TRAC has not yet received any request for emergency measure, but three cases were filed with TRAC that were eligible for expedited procedure, for which a threshold of under Eur 1,000,000 is established by the Rules. However, in one of these cases, although it met the requirements for the expedited procedure, the parties did not request for such procedure, as each side wished to exercise its right to appoint a co-arbitrator in a panel of three arbitrators. In the other two cases, arbitrations under expedited procedure started and they are currently under progress. We expect that in both cases, the Tribunal would render awards within the six-month period as required by the 2018 TRAC Rules.

 

  1. We understand that one of the aims of TRAC is for disputes to be solved in a timely manner compared to national courts. How long have the arbitrations thus far initiated lasted?

Arbitrations in TRAC are generally being conducted in a very timely manner. The duration of arbitrations, however, depends on many factors, i.e. the nature of the dispute as well as the relief sought, the number of arbitrators (sole of three members), the cooperation between the parties, etc.

In the history of TRAC, there are a number of cases (mostly with sole arbitrators) in which the award was rendered in less than a year from the date the request for arbitration was filed with the Centre. In case of three member tribunals, however, it is expected that more time is needed, as the coordination and deliberations between the members of the tribunal might take time. But in any case, I can confirm that the average length of arbitration proceedings under TRAC Rules is remarkably shorter than proceedings in front of national courts.

 

  1. We see that TRAC has concluded in 2017 a cooperation agreement with the Permanent Court of Arbitration (“PCA”) and that TRAC constantly organizes conferences to raise awareness of arbitration in the region. What more needs to be done, in your view, to improve the visibility of TRAC and promote arbitration?

Since its establishment in 2004, TRAC has been continuously active in promoting international arbitration in Iran and in the region, as well as encouraging scholar activities.

As you mentioned, in 2017 a cooperation agreement was signed between PCA and TRAC to establish a framework for joint cooperation in promoting arbitration as means of solving international disputes. We have also conducted many joint promotional activities with some well-known arbitration centres, i.e. The Arbitration Institute of the Stockholm Chamber of Commerce (SCC) and centres in the region, i.e. Istanbul Arbitration Centre (ISTA). All these attempts proved to be very helpful in raising awareness about developments in the field of arbitration in Iran and in the region.

Also, TRAC is regularly involved in organizing workshops, seminars and training forums in the field of international arbitration in order to spread the understanding on arbitration among practitioners and to raise educated lawyers and arbitrators. TRAC seminars are either in the form of general courses on arbitration, or specific courses on sectors that are fertile for dispute resolution, i.e. construction, oil and gas.

In addition, TRAC is very active in encouraging and supporting scholar activities. Since 2016, by organizing arbitration moots (in both Farsi and English), TRAC attempted to foster the study of international commercial law and arbitration as means of solving international business disputes among Iranian students.

Since 2018 and with the aim of encouraging Iranian students to research on arbitration related issues, TRAC started an annual prize for the best LL.M. dissertation in the field of commercial and investment arbitration.

 

  1. We know that TRAC started hosting a VIS Pre-Moot in 2018. What is the role TRAC has played in supporting development of young students/lawyers interested in arbitration?

In 2009, as master student at Stockholm University, I participated in the Willem C. Vis International Commercial Arbitration Moot. Since then, my dream was to establish a Vis Pre-Moot in Iran and this dream came true in 2018, when we launched the first Iranian Vis Pre-Moot. In the last competition, TRAC hosted four Iranian teams which shows an increasing interest among the Iranian students. We hope to develop the competition to regional level in the next years and to attract more teams from the region in this competition.

 

Thank you for this opportunity.  We wish continued success to both you and the TRAC!

This interview is part of Kluwer Arbitration Blog’s “Interviews with Our Editors” series – past interviews are available here.

References   [ + ]

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Arbitrability of IPR Disputes in India: 34(2)(B) or Not to Be

Wed, 2019-08-14 23:26

Vishakha Choudhary

Introduction

The juxtaposition of laws that seemingly operate in different domains has posed a continual challenge to arbitration – conventionally, in the form of concerns over arbitrability of disputes. Here, arbitrability connotes the notion that a dispute, by its nature, is capable of being adjudicated beyond public fora, through a private tribunal chosen by parties. This ‘objective’ arbitrability differs from ‘subjective’ arbitrability, which is the scope of arbitrable disputes as defined in an arbitration agreement. This post deals with objective arbitrability. In the context of intellectual property rights (‘IPR’) disputes, concerns of objective arbitrability stem from the impact arbitral awards may have on non-consenting parties. Owing to insufficient legislative engagement with this issue, judicial position on arbitrability of IPR disputes in India remains unsettled.

 

The notion of objective arbitrability in India

The significance of objective arbitrability is set forth in Section 34(2)(b)(i) of the Indian Arbitration and Conciliation Act, 1996, identical to Article 34(2)(b)(i) of the UNCITRAL Model Law. It stipulates that awards contemplating a non-arbitrable subject matter may be set aside.

The Supreme Court first shed light on the implications of Section 34(2)(b) in Booz Allen and Hamilton v. SBI Finance (‘Booz Allen’). The Court emphasised that the scope of arbitrable disputes must be limited to those concerning ‘rights in personam’ or personal rights enforceable against certain individuals. A contrario, rights in rem’ exercisable against the world at large were excluded from the scope of arbitrable disputes. Based on this rationale, the Court identified an illustrative list of non-arbitrable disputes: criminal offences, disputes concerning family laws, insolvency and winding up, testamentary matters and tenancy disputes. Pertinently, the Court in Booz Allen cautioned against a strict application of the rem – personam distinction by famously clarifying:

This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.

Further, it also excluded from the scope of arbitration in India, disputes arising from statutes that vest exclusive jurisdiction in specified courts.

 

The curious case of intellectual property rights

A case-by-case approach by the Bombay High Court

The Bombay High Court in Eros International v. Telemax Links India Pvt. Ltd. (‘Telemax’) directly addressed arbitrability of IPR (Copyright) disputes. The legal provision at issue was Section 62(1) of the Indian Copyright Act, 1957, which states:

Every suit or other civil proceeding arising under this Chapter in respect of the infringement of copyright in any work or the infringement of any other right conferred by this Act shall be instituted in the district court having jurisdiction.

According to the Court, this provision only precludes infringement claims from being brought before a court hierarchically lower than the competent district court. Section 62(1) was not, however, intended to oust the jurisdiction of an arbitration tribunal. Based on this preliminary finding, the Court proceeded to analyse the nature of infringement claims. It noted that while an infringement action arising from a contractual relationship may succeed against a certain defendant, this decision would not necessitate the success of such action against a different defendant. Thus, while the overlying copyright is a ‘right in rem’ enforceable against the world at large, the specific contractual dispute over its infringement is a ‘right in personam’ action against a particular individual. Accordingly, the dispute was held to be arbitrable. Without explicitly referencing the Booz Allen obiter, the Court followed the Supreme Court’s reasoning – that is, it refrained from summarily dismissing questions of arbitrability without assessing the nature of rights at issue. The Court’s finding has been positively received in select subsequent decisions.  (See e.g., Deepak Thorat S/o Dinkar Thorat v. Vidli Restaurant Ltd., 2017 SCC OnLine Bom 7704.) Its decision also aligns with the literal approach to the interpretation of statutes followed by Indian courts. (See e.g., Swedish Match AB & Anr. v. Securities and Exchange Board of India & Anr., (2004) 11 SCC 641.)

The Bombay High Court continued to heed the Supreme Court’s warning in subsequent decisions such as Indian Performing Rights Society v. Entertainment Networks, 2016 SCC OnLine Bom 5893 (‘IPRS’). Unlike the Telemax case, the Court in IPRS was tasked with deciding whether averments of the Claimant’s right to claim royalties in relation to broadcasting of a sound recording were arbitrable. The arbitrator decided against the need to obtain a license from the Claimant, differentiating between rights held in original music works and in sound recordings. However, the Court on review found that by virtue of this decision:

[IPRS’s] …rights as a licensor were destructed in the impugned award not only against the claimant, but also against the world at large.

By distinguishing the case at hand from Telemax based on the implications of the relief granted for third parties, the Court clarified that arbitrating the case would have implications for IPRS’s rights to collect royalties on their works from third parties as well. Moreover, it would also affect several other copyright owners in the underlying musical works who were not parties to the arbitration in question. Therefore, the award was rightly set aside.

 

Disregarding the Booz Allen caveat

Unfortunately, similar analyses were absent from other decisions on arbitrability of IPR disputes. In Impact Metals v. MSR India (‘Impact Metals’), the Hyderabad High Court failed to consider the nature of the remedies or rights at issue to assess such arbitrability. Instead, it summarily based its decision on the illustrative list in Booz Allen, which did not expressly exclude IPR from arbitable subject-matters. This decision sets a dangerous precedent for arbitration of ‘rights in rem’ by failing to account for the implications this might have on rights of third parties. Further, the confidentiality of arbitral awards may prejudice interested third parties against whom such erga omnes legal decisions are rendered.

The Ayyaswamy v. A Paramsivam (‘Ayyaswamy’) decision paved way for further confusion. This Supreme Court decision declared patents, trademarks, and copyright disputes to be non-arbitrable in an obiter. The case is often viewed in academic discourse as a complete limitation on the arbitration of IPR disputes in India. Notably, this obiter is a ‘general’ remark by the Court, not rendered in relation to any particular set of facts. To rely on this generic statement in ignorance of the clarification made in the Booz Allen decision would be imprudent.

The Lifestyle Equities CV v. QD Seatoman Designs Pvt. Ltd. decision provides some clarification. The Court reasoned that the list of ‘non-arbitrable disputes’ in the Ayyaswamy judgment merely reiterates scholarly opinion and does not constitute the Apex Court’s ratio. Further, it went on to apply the Booz Allen caveat to reiterate that disputes relating to patent use and infringement (here, a right of ‘better usage’ vis-à-vis the other party) concern ‘rights in personam’, and therefore, are arbitrable.

 

Conclusion

IPR form a crucial constituent of commercial transactions and are comprised in the bundle of rights therein. To ipso facto declare them non-arbitrable would upset the purpose of the Arbitration Act, impair the efficacy of commercial arbitration and disregard party autonomy. Thus, the inflexible stance adopted in the Impact Metals and Ayyaswamy decisions is misconceived.

Admittedly, it is important to keep ‘rights in rem’ beyond the reach of arbitration. In light of the progressive reforms of the 1996 Act in recent years, this could be achieved through legislative clarifications. For example, both the United States of America and Switzerland permit the arbitration of patent infringement claims, provided that the consequent award is registered with the relevant patent authority or board. (See 35 United States Code (U.S.C) § 294(d); Article 193.2, Swiss Federal Act on Private International Law, 1989.)  This simultaneously safeguards the complementary interests of effective arbitration of IPR disputes and public interest in ‘rights in rem’. A similar legislative provision could be emulated in India. Further, the ‘arbitrable’ aspects of intellectual property could be clarified via legislation, as is the case in Hong Kong. (See Part 11A, Hong Kong Arbitration (Amendment) Ordinance, 2017 [Ord. No. 5 of 2017].)  Clarifications concerning the scope of counterclaims permissible in IPR arbitrations (such as express exclusion of counterclaims challenging the validity or registration of IPR) are also crucial. Swift action here is essential to set ghosts of the past to rest.

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It’s a Beautiful Day in the Neighborhood? An Overview of Arbitration Law in the U.S. and Canada

Tue, 2019-08-13 21:00

Eric Morgan and Charles ('Chip') B. Rosenberg

Introduction

The United States and its neighbor to the north, Canada, share the world’s longest border, a common language, and similar values, resulting in one of the most stable and mutually beneficial international business relationships in the world. Indeed the United States is Canada’s largest trading partner, and Canada is the United States’ second largest trading partner. As Mr. Rogers eloquently put it, “it’s a beautiful day in the neighborhood”. However, even with the most stable business relationships, disputes inevitably arise.

The United States and Canada have incorporated arbitration into their legal regimes in similar manners, but a number of critical differences exist of which U.S. companies doing business in Canada and vice-versa should be aware. This article addresses several important issues that parties doing business between the United States and Canada should consider when drafting an arbitration clause to ensure that the clause meets their expectations.

 

Sources of Law

United States: The Federal Arbitration Act (“FAA”) regulates domestic and international arbitrations in which the underlying transaction involves “interstate commerce”, such as transactions between the U.S. and Canada. The federal government has not adopted the UNCITRAL Model Law, but federal courts have interpreted the FAA consistently with the UNCITRAL Model Law. But where underlying transactions take place completely within one state, that state’s arbitration acts govern. Most states have adopted some version of the Uniform Arbitration Act, and some have adopted variations of the UNCITRAL Model Law.

Canada: In contrast to the United States, the key legislation governing arbitration in Canada is found primarily at the provincial or territorial – rather than the federal – level. While a federal arbitration statute does exist, it applies only in limited circumstances where at least one of the parties to the arbitration is the Crown, a federal departmental corporation, or a Crown corporation. The legislation governing Canadian arbitrations is largely the realm of the provinces, which have enacted discrete statutes pertaining to both international and domestic arbitrations. With the exception of Quebec, each province and territory has adopted the UNCITRAL Model Law either wholesale or in modified form. In addition to international arbitration statutes, all provinces and territories have adopted separate legislation governing domestic arbitration.

 

Arbitration Rules

United States: The FAA provides some foundational rules for arbitration proceedings such as requiring that arbitration agreements be in writing, but leaves much of the details to the parties. Regardless of the parties’ agreement, the FAA allows parties to “summon . . . any person to attend before them . . . as a witness”. In terms of review, the FAA allows courts to vacate an arbitral award only on limited grounds, including “corruption, fraud, or undue means”. Parties have the option of conducting an ad hoc arbitration or administering an arbitration through any number of arbitration institutions, such as JAMS, CPR, or AAA, among others.

Canada: Legislation governing international arbitrations which incorporate the UNCITRAL Model Law typically require that a binding arbitration agreement be in writing and signed by the parties. The formal requirements for domestic arbitration agreements are found in provincial legislation, which differ between the provinces. As in the United States, parties to Canadian arbitrations have significant flexibility to choose their own arbitral procedure and may adopt a specific set of arbitration rules from an arbitral institution or create their own ad hoc procedural rules. Canada has a strong tradition of ad hoc domestic arbitration while institutes are becoming more established. The ADR Institute of Canada, based in Toronto, has adopted the National Arbitration Rules relating to domestic disputes, while the British Columbia International Commercial Arbitration Centre is often used for arbitrations centered in Vancouver.

 

Class Actions

United States: The U.S. Supreme Court has explained that, due to the flexibility and contractual nature of arbitration agreements, parties can “specify with whom they choose to arbitrate their disputes” and courts and arbitrators must “give effect to the contractual rights and expectations of the parties”. In cases where an arbitration agreement is silent on class actions, the U.S. Supreme Court has held that an arbitrator cannot institute a class action because it would “change the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator”. For the same reason, an ambiguous arbitration agreement cannot provide “the necessary ‘contractual basis’ for compelling class arbitration”. Agreements that waive class action rights are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract”.

Canada: Arbitration clauses are typically enforceable in the context of commercial contracts but may be unenforceable in the context of consumer contracts. Several Canadian provinces have amended their consumer protection statutes to limit the circumstances in which consumer disputes (including class actions) may be submitted to arbitration. Canadian courts have interpreted such legislation as permitting consumer class proceedings despite the existence of mandatory arbitration clauses in the underlying consumer contracts. While the use and permissible scope of arbitration clauses in employment contracts is the subject of ongoing litigation before the Supreme Court of Canada, parties should be mindful that such clauses may not be fully enforceable in the Canadian employment context by virtue of the governing employment legislation.

 

Conclusion

As it’s not always a “beautiful day in the neighborhood”, U.S. companies doing business in Canada and vice-versa should be aware of the similarities and notable differences between the U.S. and Canadian arbitration regimes. By properly understanding these similarities and differences, contract drafters can ensure that an arbitration clause fully meets the expectations of the parties.

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Does Judicial Intervention Aid or Undermine Arbitration in Nigeria?

Tue, 2019-08-13 00:00

Okechukwu Umemuo

Introduction

Party autonomy is the underlining principle of arbitration. The courts ought to have it in mind whenever they are called upon to intervene in matters related to arbitration. The right of parties to resolve their dispute by arbitration must be upheld and given effect to. When the judiciary acts to give effect to this right, such intervention helps the arbitral process but where it does not, then judicial intervention undermines arbitration. There were legitimate concerns that judicial intervention could be the Achilles heel of arbitration in Nigeria, but that was before the landmark judgment delivered by the Supreme Court of Nigeria (“Supreme Court”) on the 7 June 2019 in Suit No. SC/851/2014: Dr. Charles Mekwunye V Christian Imoukhuede.

In that case, the Supreme Court, in a unanimous decision, upheld an arbitral award (“Award“) on the reasoning that parties were bound by the arbitration agreement they entered into, including mistakes contained in it which they condoned or waived. By so holding, the Supreme Court set aside the much-criticized judgment of the Court of Appeal that gave rise to this judgment (reported as Imoukhuede V Mekwunye & 2 ORS. (2015) 1CLRN 30) which was delivered on 14 November 2014. The Supreme Court, therefore, charted the path of what should be the judicial attitude when called upon to interpret and give effect to arbitration agreements, which is, to jettison technicalities and respect the medium chosen by parties to settle their disputes.

 

Background

Prior to this epoch-making decision, the Court of Appeal’s decision in Imoukhuede V Mekwunye & 2 ORS. (2015) 1CLRN 30 had cast a very dark cloud over judicial intervention in arbitration in Nigeria and many commentators reached the conclusion that a Pandora’s box of anti-arbitration judicial decisions had been opened. The Court of Appeal had in that case set aside the Award on the basis of a minor error made by parties wherein the arbitration institution was wrongly referred to as “Chartered Institute of Arbitrators, London, Nigeria Branch”, instead of “Chartered Institute of Arbitrators, UK, Nigeria Branch”. The Court of Appeal was emphatic that since there was no body in existence known as “Chattered Institute of Arbitrators, London, Nigeria Branch”, the Award must be set aside. The Court of Appeal further upheld and affirmed all the other technical challenges brought against the Award to wit:

  1. that the arbitrator misconducted herself when she wrote a letter of adjournment on a letter-head of a law firm, instead of writing it in her personal name. This, the Court of Appeal held to be a delegation of her duty and thus found that the arbitrator misconducted herself; and
  2. that there was no valid appointment of an arbitrator because the appointing authority had in the letter of appointment used the word “recommended” instead of “appointed”.

It was of no moment to the Court of Appeal that the Respondent participated in the arbitration conducted by an arbitrator appointed by the Chartered Institute of Arbitrators, UK, Nigeria Branch and did not raise any objection to the jurisdiction of the arbitrator until after the Award was made. It was this travesty that was remedied by the Supreme Court in Suit No. SC/851/2014: Dr. Charles Mekwunye V Christian Imoukhuede.

However, as reassuring as the Supreme Court’s intervention in this case is, it must be noted that it took a period of twelve years between 14 May 2007, when the Award was made, and 7 June 2019 for the Supreme Court to uphold the Award and order the Respondent to pay the sum awarded. This is a great disservice to commercial arbitration in Nigeria. It defeats the very purpose of arbitration if any sort of judicial intervention could drag on for over a decade after the Award was made.

Generally in Nigeria, resolving disputes through the courts can be a protracted business. A litigated dispute from the High Court to the Supreme Court may take several years. This kind of delay is caused by several factors, including the busy dockets of the courts, the various technical objections which a clever defendant can conjure and generally, the lack of reforms and innovation in the administration of justice. It is in a bid to obviate this cumbersome and ineffective system that more parties are resorting to arbitration to resolve commercial disputes. Indeed, Nigeria now has a robust arbitration practice.

However, under the guise of challenging an award, protracted litigation may sometimes ensue after an award has been made in arbitration. The case under review is a clear example of how judicial intervention can deprive a successful claimant of the benefits of his award for several years. Indeed, a situation where a party can delay complying with an award and the courts can legitimately prevent enforcement for several years during the pendency of a challenge of the award in court, clearly undermines arbitration.

 

On the Need to Eschew Technicalities in Judicial Intervention in Arbitration

Generally, Nigerian Law is tailored after English Law and has not undergone as many reforms as the latter. The effect is that courts in Nigeria when construing the law sometimes lean towards form rather than substance. Thus, where an award comes before a court for enforcement or where a respondent applies to set aside an award and a Nigerian Judge wears a technical cap, it may be easier to find technical reasons to strike down the award. This attitude, if unchecked, may result in Nigeria not being an attractive destination for dispute resolution and high profile commercial transactions where time is of the essence, as it is often the case.

It is for this very reason that the Supreme Court’s decision in Suit No. SC/851/2014: Dr. Charles Mekwunye V Christian Imoukhuede is indeed heartwarming. By its unanimous decision, the Supreme Court has set the tone on what the attitude of Nigerian Courts should be in judicial intervention in arbitration, going forward. Thus, courts that are lower in the judicial hierarchy are bound under the principle of stare decisis to follow this precedent. The earlier judgment of the Court of Appeal in the same case now represents the old thinking which must be jettisoned.

Instructively, the technical objections raised against the Award in Suit No. SC/851/2014: Dr. Charles Mekwunye V Christian Imoukhuede are the sort that the Supreme Court might have upheld in a different scenario. They are summarized as follows:

  1. by some drafting error, the appointing institution was not properly described;
  2. the appointing institution also failed to categorically state that it was making an appointment but rather “recommended” a sole arbitrator; and
  3. in the course of the reference, the sole arbitrator communicated with the parties using the letter-head of her law firm.

However, in this instance, the Supreme Court deftly defused all these objections and upheld the Award. It held that the intention of parties must be given effect to and that by section 33 of the Arbitration and Conciliation Act, LFN, 2004, any irregularity which the Respondent became aware of and failed to object to, was deemed to have been waived by him. Therefore, the Respondent, having participated in the reference up to Award could not be heard to complain about any non-compliance.

 

Recommendations

It is strongly recommended that a special regime be created for cases that arise from the enforcement or challenge of an arbitral award. Judicial intervention, even commendable ones like that of the Supreme Court in Suit No. SC/851/2014: Dr. Charles Mekwunye V Christian Imoukhuede, will nonetheless undermine arbitration unless a special regime that ensures the speedy dispensation of all such arbitration-related cases is created. It is also recommended that refresher courses be instituted for Judges and Justices of the High Court and the Appellate Courts on the fundamentals of arbitration and the need to understand that in arbitration the parties choose their judge and must therefore swim or sink with him/her.

 

Conclusion

In summation, we commend Suit No. SC/851/2014: Dr. Charles Mekwunye V Christian Imoukhuede for further reading on what the attitude of Nigerian Courts should be, going forward, when it comes to judicial intervention in the arbitration process. The era of technicalities in the interpretation of arbitration agreements is gone. Nigeria may yet attain its full potentials as the economic hub of West Africa and the most attractive business destination in Africa if judicial intervention aids the arbitral process.

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Digital Case Management in International Arbitration

Mon, 2019-08-12 23:25

Sven Lange and Irina Samodelkina

The modern business world strives to increase efficiency – and the use of modern IT systems is a key tool in that regard. One would thus expect that arbitration, which aims to resolve disputes efficiently, would jump at the many opportunities offered by modern IT technology to truly digitalise dispute resolution. But progress has been slow. While arbitration practitioners widely recognise the benefits of using modern technologies, the approach in practice is still largely based on conventional methods.

Indeed, there is sometimes a striking mismatch between the visionary topics that are being discussed (such as the question of when artificial intelligence will eventually replace arbitrators) and the reality of contemporary arbitration (in which it is still common for trainees and assistants to prepare hard copies of hearing bundles containing thousands of pages). In this blog post, we will therefore focus on one particular use of modern IT technology that could have a huge impact on arbitration and that is already being pursued by some in the arbitration community: digital case management systems.

 

What could a digital case management system look like?

The ideal digital case management system would address a number of aspects, including – most importantly – the management of documents. All documents submitted in a particular case would be run exclusively through a single platform. In particular, the parties would file their submissions through the platform and would upload all exhibits there as well. Furthermore, the tribunal and the institution would communicate with the parties exclusively through this platform. Thus, many of the problems associated with email communication could be avoided: Gone would be the days of struggling with size constraints! In addition, the risk of accidentally excluding a recipient from the list of addressees would also disappear. A simple upload of the communications would be sufficient for avoiding these issues altogether.

But not only would the sending of communications be simplified, the storage and retrieval of communications would also be made much simpler. All communications and exhibits would automatically be filed in the appropriate place and could thus easily be found when needed. Everything, i.e. the complete record of the case, would be stored in one place, accessible instantly and regardless of a user’s location and whether a PC, tablet or smart phone is being used. Hard copy files could thus be completely avoided, as could the need for hearing bundles as well as the costly and tedious exercise of transporting them to and from the hearing venue.

A further benefit of such a document management system would be that it automatically ensures that the record of the arbitration is clear and in order. More often than one would hope, parties to an arbitration file documents without exhibit numbers or file updated versions of previously filed exhibits. In such situations, references to documents can become unnecessarily complicated and, worse still, it can even be difficult to distinguish which documents are supposed to be “officially” on the record of the arbitration. However, if the document management system does not allow such action, these situations could be avoided.

All that said, document management would not be the only benefit; the platform could also manage the chronology of the case. First, it could do so with a view to past procedure, listing when and by whom each submission was filed. And, even more importantly, it could do so with a view to the future. Thus, the tribunal would not need to put future deadlines into a word document to be distributed to the parties as an annex to Procedural Order No. 1. Instead, the tribunal could simply enter future deadlines into the platform (and, if necessary, update the deadlines through the platform). Ultimately, the whole chronology of the case going backwards and forwards could be presented in a user-friendly interface, not dissimilar to a Facebook feed. At the end of the arbitration, this system could perhaps even automatically create an initial outline of the procedural history for use in the award.

Finally, through artificial intelligence (of limited sophistication), the system could be taken even further. For example, it could be programmed to recognise references to exhibits within a submission and, as a result, automatically offer a hyperlink to allow easier access to the referenced exhibit. Likewise, hyperlinks could be offered for references to specific sections contained in a previous submission. In this way, arbitrators would be able to follow the development of the parties’ arguments on a particular issue very easily, without the need to have several hard copies spread out across their desks. In addition, the platform could simplify and facilitate case scheduling. After the tribunal suggests a timeframe for a hearing, the arbitrators and the parties would indicate when during this timeframe they are available – thereafter, the platform would automatically compute a list of potential hearing dates.

 

What are the challenges?

There are several challenges to the use of digital case management systems. First of all, the development of such systems is not cheap, in particular because they must meet the highest standards of cyber security. Moreover, data protection concerns need to be addressed as well. In addition, the use of such systems is only possible if the parties to a dispute are in agreement in this regard. Indeed, for some aspects of such systems (including the strict limitation of the record of the arbitration to communications and documents filed through the system), a clear set of rather technical rules will be required.

Apart from that, key players in the arbitration community will need to promote the proliferation of digital case management systems. However, parties will rarely think about the use of case management systems when agreeing on an arbitration clause for their contract. Moreover, once a dispute has arisen, they may no longer be able to find respective agreement. At the same time, some tribunals may be reluctant to suggest the use of digital case management systems, as they prefer the tried and tested (paper-based) approach.

Against this background, arbitral institutions appear to be best placed to push for digital case management systems. They know what would really help users and can thus steer the development in the right direction. But more importantly, they can introduce the necessary changes to make digital case management systems a feature of arbitration under their respective rules. Indeed, using the institution’s own digital case management system should be the standard (with an opt-out option for those users who prefer a traditional method of case management).

 

Are these ideas new?

Of course, we are not the first ones to come up with the idea of digital case management systems. Several private providers like CASE ANYWHERE or eJust Arbitration Platform are offering systems with some of the features we have described above. Moreover, as early as 2005, the ICC presented NetCase – a document management platform which allowed parties to electronically follow the course of the arbitration. However, the system does not seem to have been widely used and is no longer being offered.

Other institutions offering case management systems are the AAA (WebFile) and WIPO (ECAF). Moreover, the Russian Arbitration Center at the Russian Institute of Modern Arbitration (RIMA) has been offering a digital case management system since 2017, with an English version having been launched in October 2018. The system is expressly referenced in Article 6 of the RIMA Rules, with the parties having the option, but not the obligation, to use it for electronic filings.

Recently, the SCC unveiled the SCC Platform which will enter into service on 1 September 2019. From thereafter, “all SCC arbitrations will be administered through the SCC Platform”. In particular, the SCC Platform will allow communication and file-sharing between the SCC, the parties and the tribunal, downloading and uploading of documents on the go, to the exclusion of email or other channels. It will also contain a calendar of events showing how far the case has progressed.

 

Conclusion

There is a great potential to increase the efficiency of arbitration by using digital case management systems. Arbitral institutions are best placed to promote the use of such systems and there are already several products on offer or planned for the near future. Against this background, we are convinced that, in a few years’ time, using digital case management systems will be the standard in international arbitration.

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Resolving Disputes Amidst Japan-Korea Trade and Investment Tensions: Part I

Sun, 2019-08-11 17:38

James Claxton, Luke Nottage and Brett G. Williams

1. Complex Multi-faceted Tensions between Japan and Korea

A media and geopolitical storm recently erupted after Japan introduced measures affecting exports to the Republic of Korea (Korea). Thunder sounded with Japan’s imposition of certification requirements on three chemicals needed by South Korean companies to make semiconductors, memory chips and displays for consumer electronics (the 4 July Measure). This was followed by lightning and rain when Japan removed Korea from its “white list” of trusted trading partners (the 2 August Measure), then threats by Seoul to retaliate by reducing military-intelligence cooperation and imposing countermeasures on trade. The growing tempest has brought about the worst breakdown in cross-border bilateral relations in five decades, generating both regional and global ramifications.

Differing rationales for the geopolitical storm have been given. The Japanese government and media tend to emphasise security concerns, namely on-shipments of such chemicals with potential military applications to North Korea, violating multilateral sanctions. The South Korean government and media, as well as some international news outlets, have often placed more emphasis on the possibility of Japan “retaliating” for an October 2018 judgment of the Supreme Court of Korea. That decision upheld lower court judgments from 2014 finding major Japanese companies, such as Nippon Steel, liable to compensate claimants alleging that they were forced labourers for the Japanese companies during World War 2. The companies, and the Japanese government, have argued that such claims were precluded by a bilateral treaty signed in 1965 to restore diplomatic relations. (Similar claims and defences but under different bilateral instruments have been raised before Japanese courts by Chinese war-time labourers, generating a settlement with Nishimatsu group companies.) A few media reports also speculate that Japan introduced export restrictions affecting Korea to bolster the appeal of the Abe Administration in upper House of Councillor elections, but it secured another solid victory anyway. Some media sources suggest that populist Korean President Moon Jae-in may be “playing to the base” too in domestic politics.

Introducing trade-restrictive measures, however, raises the potential for Korea to complain before the World Trade Organization (WTO). It brings to mind the claim successfully brought by the Obama Administration against China over 2012-14, resulting in China removing export duties and quotas imposed on rare earths, for which it similarly controlled almost all world trade. However, the general exceptions China failed to establish in that case, under Article XX of the General Agreement on Tariffs and Trade (GATT), dealt with health and conservation of natural resources. By contrast, Japan here could be expected to raise national security exceptions under Article XXI. There are even greater differences from a procedural perspective, which we focus on below. If indeed Korea files a formal complaint and an ad hoc panel rules against Japan, this would only come by next year at the earliest. By then the Appellate Body will likely lack sufficient members (full-time “judges”), due to the Trump Administration blocking new appointments until its concerns about dispute resolution and other aspects of the WTO system are adequately addressed. Accordingly, Japan could appeal any panel decision allowing retaliation for any GATT violations found, and then never come under pressure to remove or adjust its measures against Korea.

The situation becomes even messier when we consider below other potential inter-state dispute resolution processes. Japan could seek arbitration under the 1965 treaty, but that effectively requires the counterparty to provide further consent, which Korea does not seem to want to do. Japan might also consider litigating the treaty before the International Court of Justice (ICJ). Another option is to invoke inter-state arbitration under the Japan-Korea bilateral investment treaty (BIT) in force since 2003, and/or a trilateral investment treaty including China in force from 2014, underpinning cross-border relations among Asia’s three largest FDI providers. However, it may be difficult to prove that the Korean court judgments involved a procedural defect or discrimination towards the Japanese companies creating a denial of justice, contrary to the relevant treaty.

Part II in a separate posting will analyse a further possibility: the Japanese companies might directly initiate investor-state dispute settlement (ISDS) claims, as provided by both investment treaties in lieu of inter-state arbitration. This could theoretically include an application to the ad hoc arbitration tribunal to issue interim measures preventing enforcement of the Korean Supreme Court ruling, until the tribunal had finally determined claims such as denial of justice. However, this dispute resolution option generates legal and practical problems for the Japanese companies themselves, and the Japanese government due to some renewed sensitivity recently over ISDS in general. Because of these multi-faceted potential disputes, involving various treaties and parties, we will end by urging formal mediation to assist achieving a global settlement.

 

2. Japan vs Korea Under the 1965 Treaty or Investment Agreements

Procedural as well as substantive law complications arise under the 1965 Japan and Korea Treaty on Basic Relations. It purports to settle and foreclose claims related to the treatment of Korean nationals during the period of Japanese colonial rule before World War 2 in exchange for a payment by Japan to Korea of USD 2.5 billion (in today’s terms) and an offer of favourable loans to Korea. Japan and Korea disagree about whether the treaty was meant to settle only state-level claims or to also extend to private claims by Korean labourers against Japanese businesses.

Article III provides that disputes over treaty interpretation can be settled in inter-state arbitration should diplomatic consultations fail. Although Japan invoked this provision on 20 May 2019, after consultations following Korean court execution orders against Japanese companies, Korea has not consented to arbitrate or selected an arbitrator under the terms of the treaty. This effectively closes the door on the possibility as there is no authority named in the treaty for default appointments of party arbitrators. While Korea’s non-compliance with the arbitration provision may raise the issue of good faith under general international law in principle, the practical consequence for now is that arbitration is stalled, although Japan still seems to hold out hope that the Korean government will change its course.

Japan has also said it is considering bringing the 1965 treaty dispute to the ICJ. Like arbitration, this option would require Korea’s consent because, unlike Japan, Korea has not made a declaration that the jurisdiction of the ICJ is compulsory or elsewhere consented to give the Court authority over the dispute. While proceedings before the ICJ raise a different set of procedural considerations – including relative efficiency, confidentiality, and access to provisional measures – it is unclear why Korea would be more open to this alternative than arbitration if Japan were to move to institute proceedings.

Japan could therefore instead make collateral claims under the 2002 Japan-Korea BIT or the 2012 trilateral investment agreement between China, Japan and Korea, although the Japanese government does not seem to have raised this possibility publicly. Both instruments were in force when the dispute arose and each provides for mandatory inter-state arbitration supported by appointing authorities to act for non-participating parties.

Article 14 of the BIT would allow Japan to commence UNCITRAL Rules (ad hoc) arbitration against Korea. It usefully adds an expedited procedure for submissions, hearings, and drafting of the arbitral award, but envisages first “consultations” without specifying any time limit beyond which arbitration can be commenced. Japan may also be disconcerted that there is no express elaboration of a “loser pays” principle, as has become more common (although far from uniform) in international commercial and even investor-state arbitration. The starting point under the BIT is instead that each state bears costs equally, whatever the outcome, subject to tribunal discretion.

Under the trilateral agreement, Article 17 provides that Japan can commence arbitration under the UNCITRAL Arbitration Rules after a mandatory consultation period of six months beginning with a written request for consultations. The scope of the written request, concerning “any dispute relating to the interpretation or application of [the trilateral agreement],” may not be broad enough to include Japan’s request for consultations under the 1965 treaty on 9 January 2019. Assuming notice is not a hurdle, the arbitration procedure mostly mirrors the expedited process and division of costs terms found in the BIT. The most significant difference is that China would be permitted to make submissions and attend hearings as a right.

Apart from these procedural issues, arbitration under an investment treaty may not be attractive to Japan as it could narrow the scope of possible claims. Rather than deal directly with the questions of interpretation of the 1965 treaty, the arbitration would concern whether the Korean judiciary breached standards of treatment in the investment treaty by holding Japanese companies liable for forced labour. The standards for resolving this question are expressed differently in the instruments. The BIT promises state treatment that is fair and equitable without qualification while the trilateral agreement links fair and equitable treatment of investors to “generally accepted rules of international law” and goes on to stipulate that “a determination that there has been a breach of… a separate international agreement, does not ipso facto establish that there has been a breach [of the investment treaty].” Based on the broader treatment standard and indefinite consultation period, the BIT may offer a better option for Japan.

To prevail under either investment treaty, Japan would likely have to demonstrate serious procedural irregularities or prove that the Korean Supreme Court’s ruling was discriminatory and not merely that the court misinterpreted the terms of the 1965 treaty in reaching its judgment. There are a few public examples of investors challenging court judgments successfully on the basis of protections in investment treaties. Chevron notably convinced an investment tribunal to stay a 9.5 billion USD Ecuadorian court judgement against the company and ultimately recovered damages for denial of justice under the Ecuador-U.S. BIT and violations of customary international law. Yet the fit with the dispute between Japan and Korea is far from perfect. While the Chevron tribunal found that the court judgment was written by a third party in exchange for payment to the judge, there have been no such allegations of corruption against the Korean courts.

Even if Japan were to convince a tribunal that its nationals were denied justice by the Korean courts, the tribunal would not necessarily have to interpret the 1965 treaty to resolve the claims. Absent a ruling on the meaning of the treaty, the root cause of the dispute would remain unsettled.

 

3. Korea vs Japan in the WTO

So far, Korea has not filed any formal complaint under the WTO’s Dispute Settlement Understanding (DSU). In force from 1995, that allows an affected member state first to seek bilateral consultations, then request formation of panel of three ad hoc decision-makers, and then appeal any adverse ruling to the Appellate Body for review by a minimum of three “judges”. However, Korea instead has so far raised its concerns in this case to the WTO General Council, the WTO’s highest decision-making body comprising representatives of all member states. Korea may be seeking to raise wider awareness among them about the bilateral tension and thereby prompt an informal diplomatic solution, but raising matters in this forum could entrench positions. If Korea does file a formal complaint through the DSU, issues anyway are complicated in terms of substantive WTO law and especially under the current WTO dispute settlement regime.

We elaborate elsewhere the substantive issues. In short, Korea will claim that Japan’s 4 July Measure violates the Most-Favoured-Nation rule in GATT Article I because exports to other WTO Members of the three chemicals receive an advantage in the form of the expedited export facilitated by the bulk licences and that advantage is not extended to exports to Korea. It could similarly complain about the 2 August Measure, removing Korea from the white list of countries receiving less onerous treatment from Japan in relation to controls over exports of a broad range of goods.

Japan might then claim justification for both measures under GATT Article XXI, allowing a state to take “any action which it considers necessary for the protection of its essential security interests”. A recent WTO panel decision in one of several disputes between Russia and Ukraine, found that this exception is not completely “self-judging” (as asserted by Russia, as well as generally the USA,) so it had jurisdiction to examine the measures that Russia claimed were to protect its security. But the panel nonetheless found them justifiable, applying a two-step test.

If Korea does bring a WTO claim and Japan raises this particular security exception, a new ad hoc panel formed may not follow such legal reasoning and factual determinations may be difficult. There is further uncertainty because although the Russia-Ukraine panel decision was appealed, the Appellate Body is understaffed and cannot deal with it this year.

That understaffing points to an ever bigger, procedural problem for Korea. Even if it prevails on the merits before a WTO panel, this is unlikely to occur before next year. By then, however, another of the three remaining Appellate Body judges will have reached mandatory retirement. If the USA keeps objecting to any new appointments because of various objections to the DSU procedures and the wider WTO system, the Body will lack a quorum to decide any appeals, including for example by Japan if unhappy with the earlier ad hoc Panel. In other words, Korea will have achieved only a pyrrhic victory.

Various WTO members are trying to resolve the DSU breakdown. For example, the EU proposed amendments to the DSU in late 2018 that attracted support from Australia and Korea, but the USA was not persuaded. The EU and China apparently criticised April 2019 proposals by Australia and Japan as being too soft on the USA. China’s views towards the WTO dispute settlement system are unclear, after recently withdrawing from panel proceedings against the EU’s anti-dumping duties.

There are ongoing discussions for back-up plans whereby member states agree not to appeal or to substitute the usual two-tier DSU process with inter-state arbitration under DSU Article 25, rarely used since 1995 (as discussed on this blog here). But these plans are complicated and involve states opting in to a new dispute settlement regime. Such deep uncertainties over inter-state dispute resolution procedures further cloud the picture regarding a potential WTO claim by Korea against Japan.

To conclude so far, Japan can probably fend off WTO claims by Korea. However, on substantive and/or procedural grounds, Korea probably has a good chance of fending off claims brought by Japan under the two applicable investment agreements and the 1965 treaty. This leaves questions over potential investment agreement claims by affected Japanese companies, creating further complications and enhancing the need to try formal mediation, as we explain in our forthcoming related posting.

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Resolving Disputes Amidst Japan-Korea Trade and Investment Tensions: Part II

Sun, 2019-08-11 17:10

James Claxton, Luke Nottage and Brett G. Williams

Our previous posting set out the background to the current trade tension between Korea and Japan. It outlined the possibility of Japan bringing claims under a 1965 Treaty that purported to settle claims resulting from Japan’s colonisation of Korea, or under two investment treaties, regarding Korean courts recently ordering Japanese companies to pay compensation to war-time Korean labourers. Yet such claims also face procedural and/or substantive law difficulties. Then it showed how Korea might bring a formal claim before the World Trade Organization (WTO), but face difficulties with substantive law and especially procedure, given the general breakdown in the WTO’s usual two-tier inter-state dispute resolution process.

We now elaborate the possibility of affected Japanese companies instead or in parallel bringing investor-state dispute settlement (ISDS) claims against Korea, similarly alleging denial of justice in Korean court proceedings, under the two treaties. We conclude that these extra complications bolster the attraction of a formal mediation to bring both countries and the affected companies together in order to achieve an overall negotiated settlement.

 

4. Japanese Companies vs Korea Through ISDS

Apart from the difficulties outlined in our previous posting over proving a denial of justice, a major problem for the Japanese companies if they initiate ISDS arbitration is that they would have to fork out tribunal, lawyer and expert witness fees. Empirical evidence confirms those are often hefty, even if the claim ultimately succeeds, which is one major reason why investors try to mobilise and involve their home states even if relevant treaties allow them to “go it alone” by providing the option of ISDS as well as inter-state arbitration.

A major problem for the Japanese government, in turn, is that any ISDS claims brought by the companies would likely further incense not only the current Korean government, but also some groups within Korean society (including an association of judges). They and the then opposition party first became critical of ISDS especially as it was negotiated into the Korea-US Free Trade Agreement (KORUS) and their presidential candidate ran on a platform that was critical of ISDS. However, that candidate lost resoundingly, which practically ended the debate, and KORUS was brought into effect from March 2012. Nonetheless, ISDS also remained on the radar as the first-ever treaty-based claim was brought against Korea from late 2012 by a Belgian subsidiary of US-based Lone Star. The claim is still pending, despite some expectations it would be resolved by March 2019.

One Australian NGO now even interprets a recent Korean newspaper report of current Prime Minister Lee Nak-Yeon as suggesting that Korea may “abolish” ISDS. More likely he was expressing his personal views because Korea’s investment treaty policy and practice largely remain unchanged. This is evident from the recent Korea-Armenia BIT and Korea-Central America FTA, which both contain ISDS, although wider policy and practice have been evolving somewhat (e.g., regarding transparency in ISDS). Nonetheless, an ISDS claim by Japanese companies and/or an award favouring Lone Star would further inflame simmering political tensions. This potential is heightened as this year another US investor (Gale) has filed a notice to initiate ISDS regarding a development in Incheon, while Chinese and now Malaysian investors have filed notices regarding projects on Jeju Island.

Despite such practical difficulties, as early as 2014 (in the wake of the first-instance Korean court judgments against Japanese companies like Nippon Steel) Investment Arbitration Reporter commentators had reported that Japanese companies could be preparing ISDS claims against Korea. Apart from questions over the substantive grounds under the relevant treaties, outlined in our previous posting, another threshold issue to consider is: how likely are Japanese investors generally to bring ISDS claims anyway?

Japanese investors were initially very “reluctant claimants”, with an analogy potentially with Japan’s “reluctant litigants” as measured by comparatively few per capita civil suits filed in Japanese courts. In contrast to home countries with much higher ISDS claiming per capita (such as Canada, more so say than the US), there had been only a few indirect treaty-based claims from companies linked to Japan, notably Nomura via its Saluka Investments subsidiary against the Czech Republic (settled in 2007), and Bridgestone via a US subsidiary against Panama (with public hearings over the internet, 29 July – 2 August 2019, illustrating incidentally the growing transparency of ISDS proceedings). At least one other threatened ISDS claim was seemingly based on consent to arbitration administered by the International Centre for the Settlement of Investment Disputes (ICSID) contained not in a treaty but an investment contract, namely between an aluminium smelter consortium and Indonesia. However, this also settled (in 2013) so no arbitration was commenced by the Japanese investors.

Nonetheless, Japanese firms have filed three Energy Charter Treaty claims arbitrations against Spain since 2015. This follows the lead of investors from many other states, also impacted by Spain’s abrupt changes in renewable energy policy. Their precedents allow Japanese companies and their legal advisors to reduce costs and other “institutional barriers” to pursuing formal dispute resolution procedures. Nissan’s UNCITRAL Arbitration Rules claim in 2017 under the India-Japan FTA is even bolder, as few of the many ISDS claims brought against India (since a 2011 award for Australia’s White Industries) have involved investments in manufacturing. This claim may indicate a changing mindset among the leaders of at least larger Japanese companies, towards more active engagement in international arbitration. However, Nissan is quite unusual given its alliance with French shareholder Renault (although that relationship is itself now impacted by securities law prosecutions against CEO Carlos Ghosn).

Tracing the emergence of claims by Japanese investors generally, the possibility of ISDS claims against Korea now by Nippon Steel and other affected companies cannot be excluded simply on the basis say of some general “cultural” aversion to formal dispute resolution processes. As for those who still favour instead the “elite management” theory put forward for such aversion to explain low levels of civil litigation within Japan, whereby government and business elites divert cases away from formal dispute resolution, it is noticeable that peak business associations (especially the Keidanren) have long pressed for ISDS-backed investment treaty protections. And the Abe Administration since 2012 has signed 16 standalone BITs (all with ISDS), albeit still far fewer than Korea, as well several FTAs. This sends the message that investment treaties are important and to be used, paralleling more active engagement with ISDS in other parts of Asia especially as various “institutional barriers” slowly start to come down. However, in highly politicised cases such as this they are probably best used as part of a multi-level negotiation and an overall dispute resolution as elaborated in the concluding section below.

Article 15 of the 2002 BIT envisages the investor seeking “consultations or negotiation” with the host state for up to 3 months, then a notice of intent triggering a cooling-off period of at least another 3 months, before being able to commence arbitration under the ICSID Convention (as both Japan and Korea are parties), with its more favourable enforcement regime, or any other separately agreed Arbitration Rules. (Articles 17-18 exclude ISDS for disputes over prudential measures concerning financial services and temporary safeguards for cross-border capital transactions, which are inapplicable here.)

Article 15 of the trilateral agreement requires more details in the investor’s request for consultations so the dispute can be “solved amicably”, but if no settlement is reached after four months the investor can seek arbitration under the ICSID Convention, UNCITRAL Rules or any other separately agreed Arbitration Rules. The host state can require the investor to first seek administrative review under any local requirements, but only for up to four months before arbitration is commenced. (ISDS exclusions regarding certain intellectual property rights or temporary safeguards are again inapplicable here.)

Nonetheless, filings would mean investors incurring significant arbitration expenses up-front, with empirical studies on ISDS costs showing claimants are often unable to recover all lawyer and expert witness expenses even if successful. More importantly, filings by Nippon Steel and others would likely inflame the underlying tension, resulting in boycotts, protests or even strikes around their affiliated companies in Korea. Perhaps for such practical reasons, this point has not been raised by general media, relevant companies or the Keidanren, although the Investment Arbitration Reporter has reiterated the possibility of ISDS claims since the Korean Supreme Court judgment late last year.

 

5. Mediation to Assist a Negotiated Settlement

In light of this complex and delicate situation, how could a global settlement be reached? One possibility is for one or more affected Japanese companies to seek direct consultations with Korea, but include a request for mediation to help reach a negotiated outcome. Neither the BIT or the trilateral agreement mention mediation or conciliation, unlikely some investment treaties that refer to it as an option, but mediation can be agreed separately as neither treaty’s “fork in the road” provision preclude this possibility.

Recent empirical research highlights the pervasiveness of settlements even after arbitration is filed, contrary to some commentators’ scepticism. This therefore demonstrates the potential for even more settlements through greater use of investor-state mediation.

An advantage of such ad hoc mediation is that skilled mediators could also bring in the host states, and come up with a resolution of the disputes under the 1965 treaty and the WTO as well. Mediation has not been so popular in inter-state dispute resolution, but a recent successful settlement of a maritime boundary dispute between Australia and Timor-Leste has highlighted its wider potential for large-scale international disputes nowadays.

There are otherwise few signs that Japan and Korea will be able to work out the dispute on their own at the moment. President Moon has warned of a “prolonged” conflict and has committed that Korea “won’t be defeated again”, while Japan initially resisted engaging in negotiations after Korea refused to arbitrate under the 1965 treaty and is now ratcheting up pressure on Korea in the trade dispute. This suggests that the states’ positions have hardened as public sentiment on both sides has soured amidst protests, product bans, disruptions to business and tourism, and even self-immolation by Korean nationals in protest against Japan.

High-level officials from the US have tried to extricate the parties from their entrenched positions. An early offer by Donald Trump to mediate did not get traction, but the US has continued to try to play a role in resolving the dispute including calls for a “standstill agreement” to prevent further escalation of tensions. Yet the US suffers from a credibility problem, as the Trump Administration has itself been using trade policy in a more confrontational way, evidenced by the WTO Appellate Body problem and bilateral trade war with China. Some see that approach as having spread now to Japan’s dealings with Korea. Others urge the US to keep exploring ways to “quietly nudge” both nations to resolve their disputes, but acknowledge the limited scope for informal interventions even for a superpower.

Australian (former) officials or politicians from Australia may have a role to play, or from another influential state (such as Singapore) in current negotiations around the WTO DSU as well as a Regional Comprehensive Economic Partnership (RCEP, or ASEAN+6 FTA). Furthermore, Singapore is actively positioning itself as a proponent of international mediation, not least by hosting last week the diplomatic conference for a new UN Convention on cross-border enforcement of mediated settlement agreements – signing up along with 45 others (including Korea, China and the USA, but not Australia or Japan), attracting widespread commentary. Although the new treaty is designed to promote commercial and potentially investor-state mediation, it could heighten interest also in inter-state mediation.

It would further delay RCEP negotiations if there were a collapse in trust and values shared between Korea and Japan, including generally regarding ISDS and investment commitments. Already, some have suggested that this bilateral tension is behind Korea getting cold feet about seeking to join the regional CPTPP now partly in force, which Japan (with Australia and Singapore) pushed to bring into force after the Trump Administration withdrew US signature of the earlier Trans-Pacific Partnership FTA.

However, even Australia or Singapore could be seen as having their own interests in the bilateral spat. Better candidates as neutral mediators – especially for a more structured and sustained mediation process – could be senior figures (formerly) within the United Nations, such as UNCTAD, or another international organisation such as:

  • the OECD, although it is more policy – than practice – oriented;
  • the International Bar Association, which produced investor-state mediation rules in 2012, although those are hardly used so far and the Association’s leaders tend now to be full-time practitioners especially from larger law firms; and
  • the International Law Association, instead comprising mostly professors specialising in international law.

Both ICSID  and the Centre for Effective Dispute Resolution (CEDR) have started to promote investor-state mediation recently, including running courses with the International Energy Charter and International Mediation Institute to train up mediators for investment disputes. They too could be consulted for possible mediators, with experience also preferably in WTO law and broader international relations, especially in Asia.

Overall, successful mediation and negotiated settlements tend to arise in two ways. One is where the litigation behind the mediation, including likely costs and delays, has a predictable outcome. (This is one reason sometimes given for low levels of civil litigation in Japan, epitomised by traffic accident data.) But another is where the dispute becomes very complicated, allowing skilled mediators to help parties find novel ways to perceive and develop shared interests. This would not be possible before an adjudicatory forum, like the ICJ or an arbitral tribunal, with a limited mandate to decide claims. An imposed solution, with a perceived winner and loser, might also fail to calm the tide of nationalism, public unrest, and deteriorating relations between the countries. These circumstances offer both a unique opportunity for mediation as well as a challenge for international dispute resolution.

 

This analysis derives from a project on Asia-Pacific international business dispute resolution funded jointly over 2019 by the University of Hong Kong and the University of Sydney. It will be tabled at a second symposium on 15 November.

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Are the Prague Rules Suitable for Investment Arbitration?

Sun, 2019-08-11 02:00

Trinidad Alonso and Georg Scherpf

Introduction 

The Prague Rules have been widely discussed over the past few months, among others, on this blog.1)Posts on the topic of the Prague Rules can be found here, here, here, here, here, here, here, here and here. jQuery("#footnote_plugin_tooltip_8675_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8675_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Yet, to the knowledge of the authors, none of those discussions has specifically addressed the application of the Prague Rules to investment arbitration.

Although the Prague Rules may have been drafted with a view to making commercial arbitration more efficient, there is in principle nothing that would prevent the Prague Rules from being applied in investment arbitrations. Given the civil law approach of the Prague Rules, one might even think that in a dispute between a civil law state and an investor from a civil law state they would be capable of meeting the expectations of the parties. Moreover, the work of the UNCITRAL Working Group III and the amendment process of the ICSID Rules also seek to make investment arbitration more streamlined. In particular, ICSID – the arbitration  “dinosaur” – has recently even proposed expedited rules for investment disputes. Against this background, could the Prague Rules also assist in achieving greater efficiency in investment arbitration proceedings?

This blog post looks at the practice in investment arbitration regarding the taking of evidence and contrasts its approach to that of the Prague Rules. The post reflects on current practice as opposed to expressing a view as to the state of such practice.

 

Taking of Evidence in Investment Arbitration 

An almost autonomous practice has emerged within investment arbitration that seems to be generally accepted regardless of the parties’ legal traditions. Is that practice compatible or at least open to the Prague Rules?

Investment arbitrations typically involve complex issues that require equally complex evidence. When it comes to evidence, it is frequently the case that document production will occur, a hearing will take place, and witnesses/experts will be cross-examined. The IBA Rules on the Taking of Evidence (“IBA Rules”) are often used as guidance.2)Further articles on the IBA Rules can be found here. jQuery("#footnote_plugin_tooltip_8675_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8675_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

ICSID’s rules amendment project has provided valuable insights into current practice. Although not all investment disputes are conducted under the ICSID Rules, ICSID cases can serve as an indication for what may constitute accepted practice in investment arbitration and extrapolations from ICSID practice to general practice will be made throughout this post.

 

  • Party-led

In investment arbitration, the initiative to provide and request evidence resides primarily with the parties who enjoy wide discretion. The tribunal’s powers concerning evidence are understood to be “supplementary”.3) ICSID Arbitration Rule 34; See also Schreuer, Commentary to the ICSID Convention, para 10 p. 643 and para 44, p. 651. jQuery("#footnote_plugin_tooltip_8675_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8675_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The currently proposed amendments to the ICSID Arbitration Rules uphold this approach, far more common law- or at least IBA Rules-oriented, even when two civil law parties are involved.4)See ICSID Arbitration Rule 20(2) and proposed ICSID Rule 26(4). jQuery("#footnote_plugin_tooltip_8675_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8675_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

  • Document Production, Witnesses and Experts

Tribunals rarely encroach on the parties’ choice or presentation of evidence. Although ICSID Rule 34 provides that the tribunal may “call upon the parties to produce documents, witnesses and experts”, it rarely takes the initiative.

ICSID has noted that document production occurs in two-thirds of cases.5)In particular, in its Schedule 9 (Working Paper #1) concerning time and costs, ICSID has identified document production taking place in 41 out of 63 (65%) cases over a given timeframe. jQuery("#footnote_plugin_tooltip_8675_5").tooltip({ tip: "#footnote_plugin_tooltip_text_8675_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It is the authors’ experience that a full document production takes place whenever requested by a party. It is often assumed at the outset of the proceeding that there will be a full document production and the tribunal and the parties merely discuss how it best fits into the procedural calendar.6)Proposals for Amendment of the ICSID Rules – Working Paper #2 (2019) vol I, para 237. ICSID explains that document production takes place in many cases. jQuery("#footnote_plugin_tooltip_8675_6").tooltip({ tip: "#footnote_plugin_tooltip_text_8675_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Regarding witnesses/experts and the conduct of the hearing, tribunals give deference to the parties’ decision on which witnesses or experts to hear and how to allocate time at the hearing. In particular regarding experts, parties will appoint their own experts while tribunal-appointed experts are rarely engaged.7)Choudhury, Tribunal-appointed damages experts: Procedural improvements can serve as a better alternative in arbitration, pp. 3-4. Nevertheless, see new proposed Rule 38 on tribunal-appointed experts. jQuery("#footnote_plugin_tooltip_8675_7").tooltip({ tip: "#footnote_plugin_tooltip_text_8675_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In the authors’ experience, tribunals are also lenient when a party seeks to submit evidence after the last written submissions, again showing deference to the party adducing “new” evidence.

 

Taking of Evidence under the Prague Rules 

The Prague Rules’ aim to improve procedural efficiency is certainly commendable. However, its emphasis on the tribunal’s active role in the taking of evidence appears to be in direct contrast with the approach to evidence in investment arbitration.

In particular, the provision of the Prague Rules on documentary evidence (Article 4) is in stark contrast to established practice in investment arbitration.8)For an overview, see Schreuer, Commentary to the ICSID Convention, pp. 643-645. jQuery("#footnote_plugin_tooltip_8675_8").tooltip({ tip: "#footnote_plugin_tooltip_text_8675_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Article 4 encourages the avoidance of any document production and constraints the parties to request specific documents.

The situation is similar in relation to the examination of witnesses and experts and to the holding of a hearing. Experts and witnesses are rarely excluded by the tribunal; witnesses will generally appear for examination if requested by the parties or the tribunal – and not just by the tribunal as the Prague Rules mandate (Article 5). Again deference is shown to the decision of the parties on the presentation of evidence. The tribunal-appointed expert as the default under the Prague Rules is also in contrast to the practice in investment arbitration as explained above: while party-appointed experts are the rule in investment disputes (and tribunal-appointed experts rarely used), the Prague Rules show their preference for tribunal-appointed experts. Finally, Article 8 of the Prague Rules favoring documents-only proceedings runs directly counter to the common practice in investment proceedings where typically at least one hearing will be held.

Clearly, the Prague Rules seem to stand diametrically opposed to the practice in investment arbitration.

 

What about Expedited Proceedings?

ICSID recently proposed to introduce expedited arbitration (“EA”) rules for investment disputes. According to the Center, these rules may be appropriate, for example, for SMEs with investment disputes based on a contract.

The main gist of the proposed ICSID EA rules is the tightening of deadlines. The Center has warned the parties that compromises will have to be made in relation to procedural applications, including document production.9)Proposals for Amendment of the ICSID Rules – Working Paper #1’ (2018) vol III, para 663. Proposed Rule 36 applies with modifications. jQuery("#footnote_plugin_tooltip_8675_9").tooltip({ tip: "#footnote_plugin_tooltip_text_8675_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Additionally, the proposed rules on tribunal-appointed experts that are applicable to regular proceedings do not apply in EA. Although the Center has again placed an emphasis on parties and counsel in order to showcase the efficiency of the EA rules, one can see how parties to a less complex investment case, concerned about costs, may wish for the tribunal to adopt a more active role. The tribunal, whose availability is especially relevant in these proceedings, may also want to ensure that deadlines mandated by the EA rules are diligently met. The Prague Rules may be well-suited in this scenario as they bring back the necessary focus on the arbitral tribunal.

 

Conclusion 

The Prague Rules require the tribunal to become seriously involved in the taking of evidence whereas practice in investment arbitration gives deference to the parties’ choice and presentation of evidence with the tribunal taking a more supplementary role. To some degree, the greater deference to the parties’ choice may also ensure the legitimacy and acceptance of ISDS proceedings considering that states are involved. More often the stakes are simply too high to curtail a parties’ choice and presentation of evidence for the benefit of speedy proceedings. Although the nature of many investment arbitrations often justifies more rigid management of deadlines and a firm exclusion of late evidence, the approach of the Prague Rules is unlikely to be suited for regular investment arbitrations for the reasons outlined above. The Rules may nevertheless contribute to the debate on procedural efficiency in investment arbitration and such a debate may open the door for their application to cases that justify a more streamlined procedure, such as those to which expedited arbitration rules may apply.

 

The views expressed in this article are those of the authors and do not necessarily reflect those of Luther Rechtsanwaltsgesellschaft and/or those of its clients.

References   [ + ]

1. ↑ Posts on the topic of the Prague Rules can be found here, here, here, here, here, here, here, here and here. 2. ↑ Further articles on the IBA Rules can be found here. 3. ↑  ICSID Arbitration Rule 34; See also Schreuer, Commentary to the ICSID Convention, para 10 p. 643 and para 44, p. 651. 4. ↑ See ICSID Arbitration Rule 20(2) and proposed ICSID Rule 26(4). 5. ↑ In particular, in its Schedule 9 (Working Paper #1) concerning time and costs, ICSID has identified document production taking place in 41 out of 63 (65%) cases over a given timeframe. 6. ↑ Proposals for Amendment of the ICSID Rules – Working Paper #2 (2019) vol I, para 237. ICSID explains that document production takes place in many cases. 7. ↑ Choudhury, Tribunal-appointed damages experts: Procedural improvements can serve as a better alternative in arbitration, pp. 3-4. Nevertheless, see new proposed Rule 38 on tribunal-appointed experts. 8. ↑ For an overview, see Schreuer, Commentary to the ICSID Convention, pp. 643-645. 9. ↑ Proposals for Amendment of the ICSID Rules – Working Paper #1’ (2018) vol III, para 663. Proposed Rule 36 applies with modifications. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Can Regulatory Freedom Justify Indirect Expropriation in Investment Arbitration?

Sat, 2019-08-10 01:00

Yarik Kryvoi and Lizaveta Trakhalina

States can regulate as part of their sovereignty and can give away a part of their regulatory freedom by making commitments to foreign investors, such as the obligation to compensate investors for expropriation. Unless a treaty removes or modifies a particular norm of international law, international law on expropriation, including customary law, should apply. The real challenge is to define what exactly customary international law norms require and how to interpret treaty provisions on expropriation.

To deal with this challenge, the Investment Treaty Forum of the British Institute of International and Comparative Law co-organised on 20 June 2019 with Withers World Wide a debate on regulatory freedom and indirect expropriation. The debate also featured a discussion on the new book of Dr. Aniruddha Rajput’s “Regulatory Freedom and Indirect Expropriation in Investment Arbitration”.

Professor Attila Massimiliano Tanzi chaired the debate while Andrea Carlevaris was asked to argue in favour of the motion that regulatory freedom cannot justify indirect expropriation. Andrea Menaker argued against the motion. Although the panellists found common ground on most points, they had somewhat different views on the interpretation of the importance of the State’s purpose in assessing regulatory measures.

This post summarises the most important arguments made at the event and adds additional observations related to expropriation under international law.

 

Treaty Provisions, Customary International Law and Cases on Expropriation

According to a 2019 report of the United Nations Commission on Trade and Development, States increasingly omit or include more detailed clauses on indirect expropriation in their international investment agreements. Many States argue that the concept of indirect expropriation interferes with their rights to regulate, and amend international treaties accordingly. On the other hand, investors are concerned that the regulatory freedom of states may damage their legitimate expectations and stifle their activities.

Most investor-State disputes today arise out of the old generation of treaties which give tribunals great freedom to interpret customary international law to define unlawful expropriation. However, even if treaties are amended, it is unlikely that new provisions will resolve all controversial issues related to expropriation, leaving arbitrators and academics the task of interpreting them.

Decisions of other tribunals can serve a helpful role. In practice, tribunals often cite decisions in inter-State disputes, the reports of the World Trade Organisation Dispute Settlement Body, the European Court of Human Rights decisions, and other cases beyond the investor-State framework. On the one hand, such practice supports the idea that international investment law is a part of public international law. On the other hand, it is important to be cautious with importing jurisprudence of other tribunals (such as the Iran-US Claims Tribunal) or domestic law because of different jurisdictional requirements, different nature of regulatory measures and context. Even decisions of other investor-State tribunals are not binding and result from different legal and factual circumstances.

In some treaties, expropriation remains the only standard the violation of which falls within the scope of the tribunal’s jurisdiction. This is why distinguishing between breaches of treaty provisions related to expropriation from other treaty standards such as FET, discrimination or full protection and security has important practical consequences.

 

Deprivation of the Investor and the Sole Effects Doctrine

One approach to determining whether expropriation was in breach of international law focuses on the effects of regulatory measures. The so-called sole effects doctrine requires the consideration of the detrimental effect of the measure on the investor as a major or even the only factor to decide on the legality of expropriation. Two oft-cited cases, Biloune v. Ghana and Metaclad v. Mexico, employed this approach and explicitly rejected all other conceivable criteria before concluding that the damage to an investor alone was relevant.

For this approach, the State’s purpose in applying the measure (e.g., good faith or malice) becomes almost irrelevant. In adopting this approach, the tribunal in Metaclad v. Mexico noted that “the Tribunal need not decide or consider the motivation or intent of the adoption of the Ecological Decree…”. To assess whether the damage suffered by the investor amounted to making the investor’s property rights useless, tribunals assess a number of factors that have been elaborated in the well-known Pope & Talbot v. Canada case:

The Investor remains in control of the Investment, it directs the day-to-day operations of the Investment, and no officers or employees of the Investment have been detained by virtue of the Regime. Canada does not supervise the work of the officers or employees of the Investment, does not take any of the proceeds of company sales (apart from taxation), does not interfere with management or shareholders’ activities, does not prevent the Investment from paying dividends to its shareholders, does not interfere with the appointment of directors or management and does not take any other actions ousting the Investor from full ownership and control of the Investment. (Interim Award, Pope & Talbot v Canada, 26 June 2000, para. 100)

The tribunal in Techmed focused on the same factors in assessing direct deprivation and held that regulations which completely defeat the profit-making ability of investment constitute compensable indirect expropriation.

The participants argued that the sole effects doctrine was excessively broad essentially covering any regulatory measure of the state, even a lawful one, because any such measure would naturally lead to a degree of damage. The sole effects doctrine may also lead to inequitable results, for example, if the measure affects a less diversified business, the impact would be more serious compared to a more diversified business.

 

The Purpose of Measures and Proportionality

The consensus at the Investment Treaty Forum meeting was that the effect of measures should not be the only element, and that the purpose of the measure should play an important role, too. While the good faith intent of the State alone does not make expropriation lawful, the key question is when the exercise of regulatory power becomes illegal under international law.

The conceptual difference between a regulatory and expropriatory measure is whether the state adopted the measure with the purpose to deprive the investor of its property. For example, when states started to regulate the production and the use of asbestos, they did so to protect public health rather than to deprive investors of their property. In some cases, such as SD Meyer, States may claim that their purpose was bona fide (e.g., protection of environment), while in reality, the purpose could be to protect a national business, discriminating against foreign investors.

Declaring that a regulation was made for a public purpose is not sufficient to justify expropriation; in other words, it is not a self-judging principle. The panellists agreed that in such cases the sole effects test should not find a strict application. However, they disagreed as to whether some tribunals ignored regulatory freedom or engaged in the judicial economy. In other words, if no substantial deprivation took place – there was no need to look any further, for instance, to examine the nature of the measure and its extent.

One of the most influential decisions on expropriation, Methanex v. United States of America, established the following criteria to determine the legality of expropriation:

  • lack of genuine (i.e. bona fide) public purpose;
  • that the measure in question is not designed to achieve the alleged public purpose;
  • that the measure in question is discriminatory;
  • lack of due process;
  • lack of proportionality between the effect of the measure and the public purpose sought to be realized;
  • a breach of the investor’s legitimate expectation that a particular action would not be taken by the host State;
  • a breach of the fair and equitable treatment standard; and/or
  • a direct benefit to the host State from the measure.

Tribunals often use a proportionality approach to determine the legality of expropriation under international law because it considers the contradictory interests of states and investors. The question is whether proportionality can be imported into investor-State dispute settlement. Some argue that there is no solid basis for this principle in public international law.

A common approach used by tribunals is to see whether the measure was taken in good faith and for what purpose, in the light of other alternatives. In other words, the purpose and the effect of measures determine whether expropriation was unlawful. This approach does not mean second-guessing State’s policies but rather assessing whether they breach any existing international law obligations of the State.

A podcast form the event is published on BIICL Soundcloud.

 

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Can One Arbitrate with a Turkish Party Based on a Contract in a Language other than Turkish?

Fri, 2019-08-09 03:00

Pelin Baysal and Bilge Kağan Çevik

Although parties to international transactions frequently agree to arbitrate, they sometimes reconsider that commitment when a dispute arises, and look to challenge the validity of the arbitration agreement. Thanks to the separability presumption, the courts and the tribunals insulate the arbitration agreements from attacks on the underlying contract and uphold arbitration. However, the separability presumption sometimes backfires; particularly if one is attempting to arbitrate with a Turkish party based on a contract in a language other than Turkish.

 

Law No. 805 on Compulsory Use of Turkish in Economic Enterprises (“Law No. 805”)

Old-fashioned mandatory legislation under Turkish law opens a door for those who want to renounce their earlier decision to arbitrate, provided however that one of the parties is Turkish and that the contract was made in Turkey, but not drafted in Turkish.

The Law No. 805 is short and to the point. Accordingly, every contract has to be made in the Turkish language if one of the parties is Turkish and the contract itself was concluded in Turkey. Although there are some opinions suggesting that the Law No. 805 does not require foreign companies to comply with the Turkish language requirement when dealing with Turkish parties, the latest decisions of the Turkish Court of Cassation assert that the Turkish language has to be used in any type of contracts, documents, and accounting books where at least one party is Turkish and the contract was concluded in Turkey.1)Decision of 11th Chamber of Court of Cassation Case No. 2012/4088, Decision No. 2013/3972, dated 04.03.2013. jQuery("#footnote_plugin_tooltip_3045_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3045_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The sanction of non-compliance with this law is as excessive as the obligation it imposes: Any agreement executed in violation of the Turkish language requirement cannot be taken into account for the benefit of the party invoking that agreement.

 

Turkish Courts Circumvention of the Law No. 805

The rationale behind the Law No. 805 is said to be the protection and the promotional use of the Turkish language. Going back as far as 1936, when the Law No. 805 was enacted, the law may have held more relevance since Turkey was actively promoting the use of the Turkish language as state policy back then. Coming back to the present day, however, it is hard to reconcile the mandatory use of the Turkish language with the needs of globalised business.

It seems like Turkish courts also embrace the opinion that the application of the Law No. 805 is somewhat backward minded. When taking a look back at the decisions in which the Law No. 805 has been applied, it seems that Turkish courts are making an effort to circumvent the application of the mandatory provisions of this law as far as possible. Despite the fact that the provisions of the Law No. 805 are mandatory, Turkish courts abstain from their ex officio application. It is only when a party raises the Turkish language requirement do the Turkish courts examine the question of whether or not the contract violates Law No. 805.

Moreover, even if a party were to raise an objection based on the Turkish language requirement, Turkish courts do not directly jump to the conclusion that the contract itself is void. In those cases, Turkish courts examine whether raising the Turkish language requirement in turn constitutes an abuse of rights.2)Decision of 11th Chamber of Court of Cassation Case No. 2012/3122, Decision No. 2012/4073, dated 16.03.2012. jQuery("#footnote_plugin_tooltip_3045_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3045_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In many instances, Turkish courts concluded that a party, who had previously relied on any part of the contract, cannot later argue that the contract is void for violating the provisions of the Law No. 805.

 

The Price to be Paid for the Separability Presumption under Turkish law

Nevertheless, the Turkish courts’ hands are tied when it comes to arbitration agreements. Although the Turkish courts appear to do all that they can to eliminate the negative impacts of the Law No. 805, these efforts generally have no avail when it comes to the arbitration agreements.

In some instances, Turkish courts enforce those contracts, prepared in violation of the Law No. 805, except for the arbitration clauses therein. Whilst Turkish courts did not provide any reasoning as to why they treat the arbitration agreement and the contract differently, such a conclusion appears to be based on the separability presumption.3)Decision of 11th Chamber of Court of Cassation Case No. 2014/1385, Decision No. 2014/3815, dated 28.02.2014. jQuery("#footnote_plugin_tooltip_3045_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3045_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This is indicated by the fact that Turkish courts enforce the contracts, prepared in violation of Law No. 805, by relying on the abuse of rights; however, such abuse of rights conclusions are not expanded to cover arbitration agreements, which are included in the same contracts. The core meaning of the separability presumption is that arbitration clauses do not necessarily live or die with the contracts in which they are found. In other words, arbitration agreements are separate agreements, and their validity must be analysed independently from the rest of the contract.

Although the separability presumption generally assists in promoting arbitration by concluding that the arbitration agreement itself is valid while the rest of the contract is not, this presumption sometimes backfires. In some cases, the separability of the valid contract does not serve to insulate the defective clause but rather leaves it to perish alone. Accordingly, even though the Turkish courts are able to circumvent the application of the Law No. 805 based on the abuse of rights, this argument generally does not work when upholding the arbitration agreements. Indeed, since arbitration agreements are considered to be stand-alone agreements, independent from the main contract, the parties’ previous reliance on the main contract does not help to conclude that the challenge of the arbitration agreement results in an abuse of rights. The abuse of rights argument is possible in arbitration agreements only when the party previously relied on or remained silent to the application of the arbitration agreement itself but later started to challenge it.

There might be an argument that if the parties act on the contract, in violation of the Law No. 805, without any qualification, a later reproach of the arbitration agreement by a party should not enable that party to wash its hands of the arbitration clause. However, it seems like this is the price to be paid for the separability presumption under Turkish law.

Ultimately, the efficacy of an international arbitration agreement depends on the parties’ ability to enforce that agreement. Therefore, it is essential to consider the Law No. 805 not only when the arbitration agreement is subject to Turkish law but also when the place of enforcement is Turkey. Indeed, in both cases, the Turkish courts might refuse recognition and enforcement based on the public policy exception under Article V(2)(b) of the New York Convention.

 

A Way Forward

Against this backdrop, it is always advisable to have the Turkish translation of the contracts that are to be executed with Turkish parties. Nonetheless, sometimes the contracts contain hundreds of pages, and the parties may not wish to translate it due to costs or other related concerns. Alternatively, the Turkish language requirement might come to mind at the last moment, and the parties might not have sufficient time for translation. In those cases, it is highly recommended to have, at the very least, the Turkish translation of the arbitration clause annexed to the contract in order to ensure that the separability presumption does not backfire.

References   [ + ]

1. ↑ Decision of 11th Chamber of Court of Cassation Case No. 2012/4088, Decision No. 2013/3972, dated 04.03.2013. 2. ↑ Decision of 11th Chamber of Court of Cassation Case No. 2012/3122, Decision No. 2012/4073, dated 16.03.2012. 3. ↑ Decision of 11th Chamber of Court of Cassation Case No. 2014/1385, Decision No. 2014/3815, dated 28.02.2014. 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: Arbitration in Belgium: A Practitioner’s Guide
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Is There Finally a (Partial) Solution to the 2017 Hungarian Arbitration Act’s Controversial Requirement that Arbitrators Reimburse Fees If the Award is Set Aside?

Thu, 2019-08-08 04:50

Veronika Korom

As reported in earlier blog posts on the Kluwer Arbitration Blog, 1) See, e.g., Zoltán Novák, New Arbitration Act in Hungary, Kluwer Arbitration Blog, 15 October 2017; Alexandra Bognár, Hungary: Are Interim Measures Hard to Enforce?, Kluwer Arbitration Blog, 18 July 2017; Ioana Knoll-Tudor, The 2018 Hungarian Arbitration Act: Implications of the New Setting Aside Provisions, Kluwer Arbitration Blog, 15 July 2018. jQuery("#footnote_plugin_tooltip_6038_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6038_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Hungary’s newly adopted Arbitration Act (Act No. LX of 2017, hereafter the “2017 Arbitration Act”) is based on the UNCITRAL Model Law as amended in 2006 and governs both domestic and international arbitrations within Hungary commencing on or after 1 January 2018. The declared aim of the 2017 Arbitration Act is to reaffirm arbitration as a modern, efficient and effective alternative to state courts and to increase Hungary’s competitiveness as a venue for domestic and international commercial arbitration. 3) Explanatory Note, T/15361 Draft Act on Arbitration, 26 April 2017. jQuery("#footnote_plugin_tooltip_6038_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6038_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Since its adoption, the 2017 Arbitration Act has been amended in important aspects in an effort to further clarify and better align its provisions with international best practice. Most recently, effective as of 10 July 2019, the 2017 Arbitration Act was amended for the third time to revise the rather unusual and highly controversial requirement that arbitrators conducting proceedings in Hungary reimburse all fees if their award is subsequently set aside by the Hungarian courts. This requirement, the result of the somewhat unfortunate codification of existing Hungarian arbitral practice in the 2017 Arbitration Act, has been criticized as a “populist measure” 2) Philippe Cavalieros, Le nouveau droit hongrois de l’arbitrage sous le prisme de la responsabilité de l’arbitre, Revue de l’arbitrage 2018, No. 3, p. 555. jQuery("#footnote_plugin_tooltip_6038_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6038_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and has led some commentators to warn arbitrators against accepting appointments on tribunals seated in Hungary.

This blog post briefly presents the initial wording and origin of the contested provision (1) and revisits some of the main criticisms levied against it (2). It then presents the revised wording of the 2017 Arbitration Act (3) and concludes with considerations for the future (4).

 

  1. The Initial Wording and Origin of the Requirement that Arbitrators Reimburse Fees If the Award is Set Aside

In its initial form, Section 57(2) of the 2017 Arbitration Act provided that

“if the arbitral award is annulled, no arbitrator fee shall be due in respect of the arbitral proceeding that resulted in the annulled award and the members of the arbitral tribunal that rendered the annulled award shall not be entitled to arbitrator fees”.

Based on the premise that arbitrators have a duty to the parties to render an enforceable award, and taking the view that the grounds for setting aside awards are largely aimed at sanctioning egregious irregularities in the conduct of the proceedings and in the rendering of the award by the arbitral tribunal, by introducing Section 57(2) in the 2017 Arbitration Act, the Hungarian legislator meant to increase the accountability of arbitrators and thereby to enhance the attractiveness of arbitration in the eyes of the users.4)Explanatory Note, T/15361 Draft Act on Arbitration, 26 April 2017. jQuery("#footnote_plugin_tooltip_6038_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6038_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The idea that the parties should not be required to bear the costs of the second proceeding if the award is set aside and the arbitration is resumed has long been part of Hungarian arbitration practice. Although the previously applicable 1994 Arbitration Act did not contain rules on the proceedings to be conducted following the setting aside of an award, the 2011 Rules of Arbitration of the Permanent Arbitration Court attached to the Hungarian Chamber of Commerce and Industry (“HCCI Arbitration Court” and “2011 HCCI Rules of Arbitration”) provided that, following the setting aside of an award, the dispute must be resubmitted to the same arbitral tribunal that rendered the annulled award. It further provided that this tribunal would not be entitled to fees in respect of the second proceeding (Article 20(7) of the 2011 HCCI Rules of Arbitration). Thus, pursuant to the 2011 HCCI Rules of Arbitration, while the arbitrators did not have to reimburse the fees for the proceeding that resulted in the annulled award, they had to conduct the second arbitration and render a second award without additional remuneration.

In 2017, the Hungarian legislator decided to codify the rules on the resumption of arbitration proceedings following the setting aside of awards directly in the 2017 Arbitration Act by adopting a slightly amended version of Article 20(7) of the 2011 HCCI Rules of Arbitration. Contrary to Article 20(7), which had required the resubmission of the dispute following annulment to the same tribunal that had rendered the annulled award, Section 47(5) of the 2017 Arbitration Act allows the parties to choose between resubmitting their dispute to the original arbitral tribunal and submitting to a different tribunal. Rather than requiring the original tribunal to conduct a second arbitration without remuneration (as Article 20(7) of the 2011 HCCI Rules of Arbitration had done), Section 57(2) of the 2017 Arbitration Act provided that the arbitrators who sat on the first tribunal must reimburse the fees for the proceeding that had led to the annulled award. These fees could then be used to fund the second arbitration. By introducing this requirement into the 2017 Arbitration Act, the Hungarian legislator made it applicable not only to proceedings administered by the HCCI Arbitration Court but to all arbitration proceedings seated in Hungary.

 

  1. The Main Criticisms Levied Against the Requirement that Arbitrators Reimburse Fees if the Award is Set Aside

The Hungarian arbitration community largely welcomed the new requirement in Section 57(2), at least in principle, although some criticized its unintended consequences and questioned the practical feasibility of the measure.5) Zoltán Novák, New Arbitration Act in Hungary, Kluwer Arbitration Blog, 15 October 2017; Ádám Boóc, Remarks on the New Hungarian Act on Arbitration (Act LX of 2017), Romanian Arbitration Journal, 2019/2, pp. 93-105; Tamás Sárközy, A választottbíráskodás státuszkérdéseiről az új választottbírósági törvény alapján, in: A kereskedelmi választottbíróság évkönyve 2018 (ed.: János Burai-Kovács), HVGOrac Budapest 2019, p. 92; Róbert Szakál, Gondolatok a választottbíráskodás felelősségi kérdéseiről, in: A kereskedelmi választottbíróság évkönyve 2018 (ed.: János Burai-Kovács), HVGOrac Budapest 2019, p. 154. jQuery("#footnote_plugin_tooltip_6038_5").tooltip({ tip: "#footnote_plugin_tooltip_text_6038_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Stronger criticism was formulated by foreign commentators.6)Philippe Cavalieros, Le nouveau droit hongrois de l’arbitrage sous le prisme de la responsabilité de l’arbitre, Revue de l’arbitrage 2018, No. 3, p. 539-559; Ioana Knoll-Tudor, The 2018 Hungarian Arbitration Act: Implications of the New Setting Aside Provisions, Kluwer Arbitration Blog, 15 July 2018. jQuery("#footnote_plugin_tooltip_6038_6").tooltip({ tip: "#footnote_plugin_tooltip_text_6038_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The main criticisms levied against the Section 57(2) requirement were that it sanctioned all three members of the tribunal equally and irrespective of who was at fault for the setting aside of the award and that the sanction applied even if an arbitrator alerted in a dissenting opinion to certain irregularities which later led to the annulment of the award. The fact that Section 57(2) applied irrespective of the annulment ground retained by the state court was also criticized. Requiring arbitrators to reimburse fees received previously was seen as a practical impossibility, especially for arbitrators based outside of Hungary. The partial annulment of awards and the treatment of arbitrators’ expenses were cause for further concern. In addition, it was pointed out that the Section 57(2) rule could disrupt the collegiality and proper functioning of arbitral tribunals. Some argued that as a consequence of Section 57(2), foreign arbitrators would be particularly reluctant to accept appointments on tribunals seated in Hungary. It was feared that instead of rendering arbitration more attractive by improving the quality of awards and increasing Hungary’s reputation as a seat of arbitration, the obligation to reimburse arbitrator fees would hurt the image of arbitration, decrease the quality of awards and discourage tribunals from choosing Hungary as their seat.

 

  1. The Revised Wording of the 2017 Arbitration Act

Even before Section 57(2) could be tested in practice, in response to the above criticism, the Hungarian legislator decided to amend this controversial provision of the 2017 Arbitration Act. With effect of 10 July 2019, Act No. LXVI of 2019 revised Section 57(2) to read: “if the arbitral award is set aside, in case the proceedings are resumed following the setting aside, the parties shall not be required to pay the fees of the arbitral tribunal…”. The revised wording of Section 57(2) thus no longer requires arbitrators who rendered the annulled award to reimburse their fees. At the same time, the Hungarian legislator did not depart from its earlier position according to which parties cannot be required to pay arbitrator fees twice to obtain a single enforceable award. Thus, a new solution had to be found to fund the costs and arbitrator fees of the second arbitration. The solution eventually adopted by the Hungarian legislator only deals with arbitration proceedings conducted under the auspices of the HCCI Arbitration Court. Section 62 of the 2017 Arbitration Act was amended to task the Presidium of the HCCI Court of Arbitration with establishing a separate reserve fund from which the arbitrator fees of the second proceeding are to be drawn when the arbitration is resumed following the setting aside of the award. The revised Section 62 also provides that where the funds available in the separate reserve fund are insufficient to cover the arbitrator fees of the second tribunal, such fees shall be provided by the Hungarian Chamber of Commerce and Industry. At the same time, in respect of ad hoc and foreign institutional proceedings seated in Hungary, the revised 2017 Arbitration Act remains silent. It is thus not entirely clear what would happen if, for example, an ICC award rendered by a tribunal seated in Budapest were subsequently annulled by the courts and if the parties were to choose to resubmit their dispute to arbitration. Could the parties claim, by reference to Section 57(2) of the 2017 Arbitration Act, that they are not liable to pay the fees of the second tribunal? If so, who would be required to pay the fees for hearing the resubmitted dispute, and with what funds? The revised 2017 Arbitration Act does not answer these questions – it is thus a partial solution at best.

 

  1. Concluding Remarks and Considerations for the Future

As a result of this third amendment to the 2017 Arbitration Act, arbitrators sitting on tribunals in Hungary are no longer at risk of receiving a reimbursement claim for fees from many years previous if their award is set aside, which should come as a relief to many. Although the establishment, funding and functioning of the new separate reserve fund for resumed proceedings administered by the HCCI Court of Arbitration will no doubt face a number of difficulties in practice, the solution adopted by the Hungarian legislator is likely to contribute to improving the HCCI Court of Arbitration’s attractiveness to experienced Hungarian and foreign arbitrators. At the same time, the Hungarian legislator’s partial solution, which leaves ad hoc and foreign institutional proceedings seated in Hungary in a vacuum, is likely to continue to attract criticism from the international arbitration community. If Hungary wishes to secure a place in the ranks of recommended seats of arbitration, a further amendment to the 2017 Arbitration Act may be necessary – one restricting the application of the revised Section 57(2) to arbitrations administered by the HCCI Court of Arbitration.

References   [ + ]

1. ↑ See, e.g., Zoltán Novák, New Arbitration Act in Hungary, Kluwer Arbitration Blog, 15 October 2017; Alexandra Bognár, Hungary: Are Interim Measures Hard to Enforce?, Kluwer Arbitration Blog, 18 July 2017; Ioana Knoll-Tudor, The 2018 Hungarian Arbitration Act: Implications of the New Setting Aside Provisions, Kluwer Arbitration Blog, 15 July 2018. 2. ↑ Philippe Cavalieros, Le nouveau droit hongrois de l’arbitrage sous le prisme de la responsabilité de l’arbitre, Revue de l’arbitrage 2018, No. 3, p. 555. 3. ↑ Explanatory Note, T/15361 Draft Act on Arbitration, 26 April 2017. 4. ↑ Explanatory Note, T/15361 Draft Act on Arbitration, 26 April 2017. 5. ↑ Zoltán Novák, New Arbitration Act in Hungary, Kluwer Arbitration Blog, 15 October 2017; Ádám Boóc, Remarks on the New Hungarian Act on Arbitration (Act LX of 2017), Romanian Arbitration Journal, 2019/2, pp. 93-105; Tamás Sárközy, A választottbíráskodás státuszkérdéseiről az új választottbírósági törvény alapján, in: A kereskedelmi választottbíróság évkönyve 2018 (ed.: János Burai-Kovács), HVGOrac Budapest 2019, p. 92; Róbert Szakál, Gondolatok a választottbíráskodás felelősségi kérdéseiről, in: A kereskedelmi választottbíróság évkönyve 2018 (ed.: János Burai-Kovács), HVGOrac Budapest 2019, p. 154. 6. ↑ Philippe Cavalieros, Le nouveau droit hongrois de l’arbitrage sous le prisme de la responsabilité de l’arbitre, Revue de l’arbitrage 2018, No. 3, p. 539-559; Ioana Knoll-Tudor, The 2018 Hungarian Arbitration Act: Implications of the New Setting Aside Provisions, Kluwer Arbitration Blog, 15 July 2018. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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An Attachable Mess: Stemcor USA Incorporated v. Cia Siderurica do Para Cosipar

Tue, 2019-08-06 23:02

Jared Hubbard and Malgorzata Mrozek

Arbitration is often used to avoid the messy processes of national litigation, sometimes involving years of appeals and hearings. But when you want to attach property to support your arbitral award, that itself can result in years-long litigation, as in the case of Stemcor USA, Inc. v. Cia Siderurgica Do Para. The delays in the Stemcor saga were largely due to state law that was not drafted with arbitration in mind.

The multiple and lengthy proceedings involved in this dispute are telling. In 2010 and 2011, Thyssenkrupp Mannex GMBH (“TKM”) entered into contracts to purchase pig iron from America Metals Trading LLP (“AMT”). In 2012, Daewoo International Corp. (“Daewoo”) entered into unrelated contracts with AMT to purchase pig iron, which included international arbitration provisions. AMT failed to deliver pig iron to both Daewoo and TKM.

In December 2012, Daewoo filed an action in the United States District Court for the Eastern District of Louisiana (the “District Court”) to compel arbitration against AMT and sought writs of attachment on AMT’s pig iron pursuant to maritime law and the Louisiana non-resident attachment statute. (See Louisiana Code of Civil Procedure article 3541(5)). The District Court issued the writs of attachment, which were served on December 22, 2012. Six days later, on December 28, 2012, TKM sought writs of attachment over AMT’s pig iron in Louisiana state court. The Louisiana state court issued the writs which were served on the same pig iron on December 29, 2012.

In January 2013, the pig iron was sold and the proceeds were deposited into the registry of the District Court pending the resolution of the various arbitrations and litigations pending against AMT, as AMT had breached contracts with numerous other commercial partners as well.

In April 2013, TKM unsuccessfully sought to vacate Daewoo’s writ of attachment on AMT’s pig iron proceeds. Over two years later, in May 2015, TKM again attempted unsuccessfully to vacate Daewoo’s writ of attachment. In early 2016, the case was reassigned to a different section of the District Court, coming onto the docket of a new judge. TKM sought, for the third time, in May 2016, to vacate Daewoo’s attachment of AMT’s pig iron proceeds.

The third time proved to be the charm. Almost three and half years after Daewoo attached AMT’s pig iron, TKM finally succeeded in vacating Daewoo’s attachment. On August 6, 2016, the District Court held it did not have proper jurisdiction to issue Daewoo’s writs of attachment. The Court rejected attachment pursuant to maritime jurisdiction because the contract between Daewoo and AMT was for the sale of pig iron, and not maritime in nature. The Court then discussed Daewoo’s attachment under Louisiana’s non-resident attachment statute. The Court determined that Daewoo’s action to compel international arbitration was not “an action for money judgment” under the Louisiana statute, and so vacated Daewoo’s attachment. The District Court then ordered AMT’s pig iron proceeds transferred to Louisiana state court.

Daewoo appealed the District Court’s order, and a year later, in September 2017, the United States Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) vacated the District Court’s order dissolving Daweoo’s attachment. The Fifth Circuit held that while Daewoo’s action seeking to compel arbitration was not an action for money judgment for the Louisiana non-resident attachment statute to apply, a different article of the Louisiana Code of Civil Procedure, Section 3502, allowed for attachments in actions like Daewoo’s where the plaintiff seeks attachment prior to a complaint being filed.  Since Section 3502 allowed for pre-complaint attachments if the plaintiff obtained leave of court and furnished necessary affidavits and securities, and Daewoo had complied with these requirements, the Fifth Circuit found the District Court erred dissolving Daewoo’s attachment. After the Fifth Circuit’s decision, however, TKM requested a rehearing of the case.

Based on this request for a rehearing, ten months later, the Fifth Circuit withdrew its earlier opinion and reversed itself, finding that upon further review of the record Daewoo had not satisfied the necessary first step for attachment pursuant to Section 3502. Therefore, the Court held that as Daewoo had not complied with the requirements of Section 3502, the District Court had properly dissolved Daewoo’s attachment, and now affirmed the decision of the District Court.  Now it was Daewoo’s turn to petition for a rehearing of its case.

Finally, in October 2018, noting that “we regret the time that has passed”, the Fifth Circuit acknowledged that it was divided on the issue and concluded that it did not know how exactly to interpret the phrase “action for a money judgment” under Louisiana law, and determined that the Louisiana Supreme Court should be consulted on the proper interpretation of the statute.  Accordingly, it certified the question to the Louisiana Supreme Court.

On May 8, 2019, the Louisiana Supreme Court held that the Louisiana non-resident attachment statute allows for attachment in aid of arbitration if the origin of the underlying arbitration claim is one pursuing money damages and the arbitral party has satisfied the statutory requirements necessary to obtain a writ of attachment.

After this clarifying decision, the Fifth Circuit then withdrew its earlier opinions, vacated the judgment of the District Court, and remanded. Finally, more than six years after getting the attachment, and with three District Court decisions, three Fifth Circuit decisions, and a Louisiana Supreme Court decision, Daewoo got to hold onto its pig iron proceeds.

The moral of this long story, with its many contradictory court decisions, is that laws written to support litigation are often ill-suited to support the needs of parties in arbitration. When Daewoo signed up for arbitration, it needed to know that if it prevailed, it would be able to be paid, and so it properly attached its counter-party’s property. The local laws and courts should support this, without the necessity for years of litigation solely to see if those laws even apply to arbitration.

Parties may be able to avoid the quagmire faced by Daewoo by choosing an arbitral seat with laws that have already been repeatedly used and interpreted to support arbitration, or that are specifically drafted with arbitration in mind. Another possibility is to use emergency arbitration proceedings available under certain arbitral rulesets in order to provide for security for a pending claim. Such proceedings can result in an interim order issued within a short timeframe.  Unfortunately, obtaining national court enforcement of such an emergency order is still very much up in the air, as such interim orders are arguably not directly covered as final awards would be under the New York Convention. Ultimately, in a situation where multiple creditors are seeking to attach the same property, with some proceeding via litigation and others via arbitration, states and nations must provide a level playing field so that parties proceeding via arbitration have similar access to pre-judgment remedies as do parties proceeding via litigation—either through emergency arbitration or appropriate interim orders provided by national courts.

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Take-aways from the National Conference on Commercial and Arbitration Law in Cluj-Napoca, Romania

Tue, 2019-08-06 02:00

Radu N. Catană, Nataša Hadžimanović and Johannes Landbrecht

On 7-8 June 2019, the ninth (Romanian) National Conference on Commercial Law in Cluj-Napoca was organized by the Department for Company Law and Corporate Governance of the Law Faculty of the University Babeş-Bolyai in Cluj-Napoca (Romania), together with the Center for Commercial Law of the West University of Timişoara (Romania), supported by the Romanian National Institute of Magistrates and the Romanian National Institute of Insolvency Practitioners. This year, Prof. Dr. Radu Catană of the University Babeş-Bolyai and Dr. Nataša Hadžimanović of GABRIEL Arbitration (Zurich, Switzerland) added an international element to the conference with two panels on current issues in international arbitration dealing with “Arbitration and Insolvency” as well as “Costs and Efficiency in Arbitration”.

 

Arbitration and Insolvency

National Conference on Commercial and Arbitration law, Cluj-Napoca, Romania

The first panel, moderated by Dr. Johannes Landbrecht of GABRIEL Arbitration, addressed the complex issue of how to coordinate arbitration with insolvency proceedings. Prof. Ioan Schiau, partner with Schiau, Prescure, Teodorescu, Crişan (Braşov, Romania) and full professor at the Transylvanian University of Braşov (Romania), served as Special Guest and contributed, in particular, the Romanian perspective.

The panelists used the famous Vivendi saga, which had given rise to arbitration and state court proceedings across multiple jurisdictions (including England & Wales1)Syska v Vivendi Universal SA & Ors, 2 October 2008, [2008] EWHC 2155 (Comm); Syska & Anor v Vivendi Universal S.A. & Ors, 9 July 2009, [2009] EWCA Civ 677. jQuery("#footnote_plugin_tooltip_3261_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3261_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, Switzerland 2)Swiss Federal Tribunal, Decision of March 31, 2009, 4A_428/2008. jQuery("#footnote_plugin_tooltip_3261_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3261_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, Poland3)Decision of the District Court in Warsaw, 20 August 2009, case file No. VIII Co 388/08; decision of the Appellate Court in Warsaw, 16/26 November 2009, case file No. I ACz 1883/09.Cz 1883/09. jQuery("#footnote_plugin_tooltip_3261_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3261_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, as a factual background to the discussion. It was introduced by Simon Walsh of Woodford Litigation Funding (London, UK), who had acted as counsel in Vivendi-related cases. The dispute involved multiple parties across several jurisdictions and was, as a result, complicated enough. However, the complexity significantly increased when one of the Poland-based parties, Elektrim SA, became insolvent.

Dr. Marcin Asłanowicz of Schoenherr (Warsaw, Poland) explained that the insolvency of a Polish party, under Polish law as applicable at the time, caused tremendous difficulties in arbitration proceedings because such insolvency proceedings were meant to render arbitration proceedings, in essence, impossible. The result of these difficulties was, amongst other things, conflicting arbitral tribunal and state court decisions, as some applied the position of domestic Polish law and others did not.

For instance, one arbitral tribunal declined jurisdiction vis-à-vis Elektrim SA, while another arbitral tribunal accepted jurisdiction. Interestingly, both decisions were upheld by the respective state courts under their own law – which meant that these court decisions respectively in England & Wales and Switzerland were also contradictory. Yet, in Switzerland, the so-called Vivendi Case was not the final word, as further discussed by Dr. Johannes Landbrecht. In the subsequent so-called “Portugal Case“, the Swiss Federal Court in essence (tacitly) turned its earlier decision on its head – or at least some commentators would later argue so. Foreign insolvency law and its restrictions concerning arbitration proceedings would no longer impact Swiss arbitration proceedings as long as the foreign entity remained in existence.

The Portugal Case then provided André Pereira da Fonseca of Abreu Advogados (Lisbon, Portugal) with an opportunity to explain how Portuguese law coordinates arbitration and insolvency proceedings. André Pereira da Fonseca furthermore assessed whether the Swiss Federal Court had correctly applied Portuguese law.

Kicked off by Prof. Ioan Schiau, these presentations provoked a lively debate with the audience. The focus of this debate was the corresponding situation and practice in Romania. Romanian law monopolizes all decisions on the existence, as well as the recognition (in the insolvency), of disputed claims with the insolvency authorities, rendering arbitration agreements ineffective. In domestic cases, this does not create insurmountable problems. In the case of international proceedings, however, this approach can potentially lead to conflicting decisions. It emerged from the discussion that other legal orders such as England & Wales, Germany, Switzerland, or Bosnia-Herzegovina, circumvent these problems by employing a two-step approach. Arbitral tribunals remain competent to decide on the existence of a claim. The insolvency authorities decide such a claim’s fate in the context of the insolvency.

 

Costs and Efficiency in Arbitration

National Conference on Commercial and Arbitration law, Cluj-Napoca, Romania

The second panel was moderated by Dr. Nataša Hadžimanović. The speakers discussed from different perspectives and shared insights on how to increase the efficiency of arbitration proceedings and on how to decrease costs.

Dr. Alina Oprea of the University Babeş-Bolyai analysed the validity and practicality of unilateral hybrid arbitration clauses under various rules and laws. Such clauses are meant to provide one party with the option to unilaterally decide, at the time the dispute arises, whether to arbitrate or to litigate. That way an informed choice at the latest given moment is possible, namely when the dispute has already arisen. This allows taking several factors into account, namely the complexity of the dispute, the amount in dispute, the whereabouts of the assets of the counterparty, a possible counterparty’s insolvency, and others.

Hybrid arbitration clauses are mainly drafted by parties from the banking sector, and such parties are not only risk-averse but are usually also in a strong position to negotiate a dispute resolution clause that is favorable to their interests. Hybrid arbitration clauses are generally upheld in many jurisdictions such as England & Wales, USA, and Switzerland. Under Russian law, on the other hand, such clauses are accepted in principle but the option, if only unilateral as per the parties’ agreement, is extended to both parties – based on the principle of equal access to justice. In France, hybrid jurisdiction clauses have even been held invalid for being a potestative conditional obligation (see Article 1304-2 Code civil). Dr. Alina Oprea criticized the restrictive approach, inter alia, because the justice within the forum chosen by one of the parties was equally available for both the parties. Furthermore, such clauses contain no potestative conditional obligations, but rather potestative rights which are also under the Romanian Civil Code (which is still very close to French law) valid.

Ilma Kasumagić of Wolf Theiss (Sarajevo, Bosnia and Herzegovina) and Marija Šćekić of Wilmer Hale (London, UK) then continued the discussion on how to render arbitration proceedings more efficient, from a counsel’s and a client’s perspective respectively. Marija Šćekić explained, from the client’s perspective, that clients had to know that efficiency in arbitration was a question of the relationship between time, cost and quality: “Fast. Good. Cheap. Pick two”. There were, however, ways to reduce time and cost without reducing quality. She recommended clients to consider an early case assessment to avoid arbitrating matters with low chances of success. She also recommended attempting to negotiate settlements. Close cooperation of in-house lawyers and external counsel was essential, and clients should consider tailor-made proceedings.

Taking the arbitration counsel’s perspective, Ilma Kasumagić confirmed that an early case assessment was important also to make sure that the request for arbitration reflected all the strong points of the case. She highlighted the importance of tailor-made proceedings and recommended counsel to make sure that the arbitrators could determine the issues of the case early to enable counsel to concentrate on fewer points. She also recommended to write short, well-structured submissions containing few, but strong points, to select the documents used as evidence very carefully, to reduce the rounds of submissions, if possible, to consider to skip a document production phase and, possibly, also a hearing.

Dr. Fatih Serbest of the İstanbul Zaim University (Turkey) continued the discussion by explaining the advantages and challenges connected to fast-track arbitration rules. He stated that fast-track arbitration provided no “magic potion”. It was only suitable for certain disputes such as for instance disputes over issues in sport, M&A, and disputes over price/quality determination in commodities sales. He pointed out that a fast-track arbitration procedure only worked well when no one was sabotaging it. He also warned that a quick arbitration procedure could be followed by a long dispute in the enforcement phase as fast-track arbitration had to strike the difficult balance between due process and speed. Prof. Dr. Ioan Schiau commented that in Romania parties did not like fast-track arbitration as they insisted on choosing a party-appointed arbitrator.

The last part of this panel addressed the impact of third-party funding on the way costs are awarded in arbitration. Simon Walsh was asked to explain what third-party funding was: It transferred the risk of the dispute to the funder who, in exchange, would obtain a portion of the potential value of the claim in case the funded party would win (funding costs).

Eleonora Ebau of the University of Torino (Italy) then explained the impact of third-party funding on the way that costs are awarded in arbitration. She discussed (i) whether a funded party should, due to its duty to reimburse the funder for the costs advanced, be able to recover costs irrespective of the fact that the third-party funder had provided the funds (ii) whether, and if so under which (exceptional) circumstances, the funded party having prevailed in the arbitration should be able to recover the funding costs, and (iii) whether the arbitral tribunal could render a costs order directly against the third-party funder to address the “hit and run” risk if the funded party, who had lost the case, did not make payment to the other side. Eleonora Ebau pointed in this respect also to new regulations such as Art. 35 of the SIAC 2017 Investment Arbitration Rules which address this issue.

 

Three Takeaways

In addition to what has been illustrated above, we provide three further takeaways for the readers of this post below:

1) When drafting agreements, in order to make an accurate risk assessment and to provide for corrective countermeasures, one should assess whether potentially applicable insolvency law provisions could negatively affect the conflict resolution mechanism(s) being discussed by the parties.

2) Costs in arbitration can be reduced and efficiency improved by a variety of measures: in the drafting phase, for instance, by insisting on a unilateral hybrid arbitration clause or by choosing arbitration rules which allow for fast-track arbitration to be opted-in; in the phase of an emerging conflict, for instance, by negotiating a settlement; in the pre-arbitration phase, for example, by obtaining a thorough case assessment, and/or by obtaining third-party funding; and in the arbitration phase, by insisting on a tailor-made procedure focusing on the essential issues of a case, and/or by avoiding or insisting on fast-track arbitration.

3) Discussion fora like the Romanian National Conference on Commercial and Arbitration Law are of crucial importance because they allow arbitration and insolvency practitioners coming from different countries to share their experiences and ideas to better advise their clients and also to think about how to reshape the existing law in a future law reform.

References   [ + ]

1. ↑ Syska v Vivendi Universal SA & Ors, 2 October 2008, [2008] EWHC 2155 (Comm); Syska & Anor v Vivendi Universal S.A. & Ors, 9 July 2009, [2009] EWCA Civ 677. 2. ↑ Swiss Federal Tribunal, Decision of March 31, 2009, 4A_428/2008. 3. ↑ Decision of the District Court in Warsaw, 20 August 2009, case file No. VIII Co 388/08; decision of the Appellate Court in Warsaw, 16/26 November 2009, case file No. I ACz 1883/09.Cz 1883/09. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Rule of the Game v. Rule of Law: Had Ukraine Finally Resorted to CAS?

Mon, 2019-08-05 04:00

Dmytro Koval

It is no secret that each sport has its rules of the game with appropriate sanctions for violating them. However, it may be new for someone that sports also have its own dispute resolution system. Almost every sports organization has its own internal dispute settlement bodies, whose decisions may be appealed to Court of Arbitration for Sport seating in Lausanne, Switzerland (hereinafter – CAS) as the last instance.1)CAS decisions may then be challenged to Swiss Federal Tribunal, although based on a limited number of, mainly procedural, grounds. jQuery("#footnote_plugin_tooltip_4306_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4306_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

What is so important to know is that sports organizations prohibit their participants to bring their cases before state courts, by including respective provisions in their statutes.2)Art. 59 of FIFA Statutes. jQuery("#footnote_plugin_tooltip_4306_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4306_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Recourse to state court may lead to serious sanctions, up to exclusion from competition, which is comparable to a “professional death” of such participant. Nevertheless, Ukrainian athletes, although being subject to limitation, regularly submit their claims to state courts, thereby creating contradictory court practice as state courts have different approaches towards jurisdictional issues.

Recently, the Supreme Court has adopted a vital decision supposed to draw the line to all the previous practice and at the same time be guidance to courts in considering future claims. Since that landmark decision, new claims from athletes have already been submitted to Ukrainian courts, but are courts ready to recognize the exclusive jurisdiction of sports dispute resolution system?

 

What Supreme Court Ruled

In 2015, a referee was banned for life by the Federation of Basketball of Ukraine (hereinafter: “FBU”) from any competition under the auspices of the FBU due to violation of the rules of “fair play” (attempts to influence some players of the national team) during the competition among national teams (U16) at the European Championship, which took place in August 2015 in Sofia (Bulgaria). Disagreeing with that decision, the referee appealed to the state administrative court.

Administrative courts of first and appeal instances dismissed the claim since they considered it a civil law case rather than public law case, thus sending the claimant to civil courts. The referee did not agree and appealed to a higher court.

In March 2019, the case had gone as far as the Supreme Court where it was finally dismissed. The Court decided that none of national courts has jurisdiction to deal with this dispute. The Court clarified that the referee, being the member of the FBU, should follow its internal rules, which refer disputes between FBU and its members over “rules of the game” and “fair play” to exclusive jurisdiction of arbitration at CAS.

In essence, the Court finally recognized the exclusive jurisdiction of internal dispute settlement bodies and the CAS as appeal instance to consider internal disputes over rules of sports between sports organizations and athletes.

 

Bounds of Internal Dispute

At the same time, in another recent case, a civil court accepted its jurisdiction to consider the employment dispute between an athlete and a football club, despite the fact that employment contract contained clear arbitration clause referring all disputes to internal dispute settlement body and the CAS.

In the court’s view, the arbitration clause did not deprive the athlete of his constitutional right to a fair trial. The court found that this employment dispute went well beyond the scope of internal dispute and should be resolved in accordance with Ukrainian law.

Such a court’s decision is actually in line with another Ukrainian law, which directly prohibits recourse of employment disputes to arbitration.3)Art. 6 of Law of Ukraine on Arbitration Courts. jQuery("#footnote_plugin_tooltip_4306_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4306_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, because the court in its findings did not rely on this more appropriate ground for refusal, it becomes clear that courts acknowledge sports dispute resolution system as a place for solving “internal disputes” only, even if the parties agreed otherwise.

From these two decisions, it seemed that Ukrainian courts have finally referred internal disputes over rules of the game to sports organizations and CAS, and limited their jurisdiction to disputes which go beyond the scope of internal disputes, such as employment disputes between athletes and clubs.

 

Do the Courts Adhere to Such a Test?

In June 2019, a football club had been refused in accreditation by Ukrainian Association of Football (“UAF”) to participate in the competition of Professional Football League (“PFL”). The club’s appeal to dispute settlement body of UAF was also dismissed, thus they submitted a claim to state court.

In July 2019, the state court opened proceedings under the club’s claim by applying to European Court of Human Rights case Melnyk v. Ukraine4)Case of Melnyk v. Ukraine (Application no. 23436/03), judgment dated 28/03/2006, par. 22, 23. jQuery("#footnote_plugin_tooltip_4306_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4306_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); that the right of access to court cannot be limited in such a way or to such an extent that its very essence is impaired.

What is more interesting, the state court satisfied the club’s requests for interim measures securing their claim, including, inter alia, discovery of accreditation documents submitted by other football clubs, and even prohibition to UAF and PFL to carry out drawing and agreeing on a calendar of league championship for the season 2019/20 and the Ukrainian Cup. Currently, interim measures are pending on appeal by UAF and PFL; however, significant damage to the whole championship continues to inflict.

Put plainly, the state court not only ignored the Supreme Court’s decision and accepted its jurisdiction over internal sport-related dispute. The state court has also blocked part of Ukrainian football championship until it ensures the right of a club to a fair trial and decides on the merits of the dispute.

 

Consequences for Sports

Although Supreme Court’s ruling seemed to limit courts’ jurisdiction to disputes which go beyond the scope of internal dispute, it is nevertheless clear from the recent cases that courts are not ready to adhere to this test. Lower courts are still eager to accept jurisdiction in internal sports-related disputes on the pretext of enhancing protection of the right of access to court and right to a fair trial.

The crucial question is: Would sports organizations decide on the same subject of the dispute in its own dispute resolution system and apply sanctions to its members who used state courts instead of CAS?

Such ambiguous courts’ approach could not only lead to a situation of parallel proceedings with two different decisions but may result in serious sanctions from sports dispute settlement bodies against parties who obtained decisions from state courts.

 

Reasons Why Sports Disputes Go to State Courts

Perhaps the main reason why Ukrainian athletes and clubs initially go to state courts instead of appealing to CAS is a simple lack of financial opportunities. Appeal to CAS requires a minimum administrative fee of 1,000 Swiss francs, not to mention arbitrators’ fees5)CAS does not charge arbitrators’ fees in disciplinary disputes, however, the administrative fee still applies and professional legal support is required. jQuery("#footnote_plugin_tooltip_4306_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4306_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and legal fees, among other expenses.

Therefore, in most cases, athletes or clubs, having received a decision of internal dispute settlement body of their organization find themselves in the blind corner. Only a few of them go for justice to state courts, even at risk of unavoidable conflict with their organization and imposing sanctions against them. Most of them do not wish to bite the hand that feeds them and give up their claims.

 

International Practice

One of the possible solutions of this issue may be the creation of a sports arbitration court in Ukraine as an alternative independent appeal institution to the CAS. Such an organization could combine all the benefits of the CAS, as impartiality, qualified arbitrators with in-depth knowledge of sports and time efficiency. At the same time, such an arbitral institution in Ukraine would be more cost-efficient.

Such sports arbitration courts successfully operate in other countries such as the United Kingdom, Ireland, Italy, Portugal, France, Canada, Russia and others. Ukraine may follow good practice of other countries and create its own sports arbitration institution.

By making the sports’ justice more accessible to Ukrainian sports, creation of such an institution would probably deprive Ukrainian sports-related persons of the need to appeal to state courts, leading to the end of conflicts over jurisdiction.

References   [ + ]

1. ↑ CAS decisions may then be challenged to Swiss Federal Tribunal, although based on a limited number of, mainly procedural, grounds. 2. ↑ Art. 59 of FIFA Statutes. 3. ↑ Art. 6 of Law of Ukraine on Arbitration Courts. 4. ↑ Case of Melnyk v. Ukraine (Application no. 23436/03), judgment dated 28/03/2006, par. 22, 23. 5. ↑ CAS does not charge arbitrators’ fees in disciplinary disputes, however, the administrative fee still applies and professional legal support is required. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Kluwer Mediation Blog – June and July 2019 Digest

Sat, 2019-08-03 23:09

Anna Howard

Listening conveys respect to the speaker, which in turn engenders respect for the listener. People who are respected because they listen will have more influence when they speak.” Bill Marsh in Don’t Sit On Your Ass[ets] – Part 2: The Arguments.

Over the last couple of months, the Kluwer Mediation Blog has offered posts on key legislative developments, initiatives and issues in mediation. These include posts on the Singapore Mediation Convention, on proposed mediation legislation in Scotland, on whether judges should mediate, on mediation and the public interest in openness and accountability, and on a remarkable conflict resolution exercise in Australia led by Aboriginal Tasmanians.

You’ll find below a brief summary of, and link to, each post on the Kluwer Mediation Blog in June and July. We hope you find these useful.

In Mediation and Leadership, Sophie Tkemaladze draws on Ronald Heifetz’s model on exercising leadership to identify the similarities between leadership and mediation. Sophie applies several of Heifetz’s concepts to skills used in mediation, including his guidance on how leaders manage differences, how leaders ask questions rather than give answers, and how listening – both to others and to oneself – is essential for leadership.

In A Negotiation Emergency, John Sturrock identifies the poignancy of words from Genesis’ song “Duke’s Travels” to the context of Brexit in the UK. John notes that the need for a “Conflict Revolution” is clear and suggests that mediators need their own Extinction Rebellion.

In Across The Great Divide: Unpacking Complex (But Simplified) Conversations, Ian Macduff reflects on a recent and challenging conversation which, when it was later unpacked, opened up a wealth of important historical, cultural and political points that had been missed. Ian identifies two key mediator resources which would be useful in such conversations: hitting the “pause” button and asking questions.

In Simple Questions You Might Ask Yourself More Often, Greg Bond draws on his recent experience of doing mediation training in Tbilisi, Georgia, at New Vision University. The focus of the training was on listening, appreciation, fair and useful feedback, clarity, emotions – and on compassionate leadership. Greg identifies three valuable questions developed in the workshop in Tbilisi.

In All You Need Is Love – More Lessons From The Beatles And Indigenous Australians, Rosemary Howell introduces Emma Lee’s remarkable story involving the conflict resolution exercise which Emma labels “love bombing”. Emma explains and elaborates on how love and mutual respect have been used to reset the relationship between Aboriginal Tasmanians, government and the broader public away from the violent governance of the past 200 years and towards healthy and functional communities of proud cultural peoples. Emma identifies the numerous and significant gains made through such a methodology which, above all, has come from Indigenous leadership that is deeply rooted in cultural practices that are tens of thousands of years old.

In Singapore Convention Series – Why China Should Sign The Singapore Mediation Convention: Response To Concerns (Part I) and (Part II), Wei Sun identifies and responds to concerns regarding whether China should sign up to the Singapore Mediation Convention. The first post in this two-part series identifies and addresses concerns relating to China’s legal and judicial system, and the second post responds to concerns relating to the interests of various bodies of China.

In So, You Need A Mentor?, Dominique Panko draws on her own experience as both a mentee and mentor to provide guidance to young mediators on how to find a mediation mentor. Dominique also explains how mentors can benefit from mentoring young mediators.

In The Roles Of The Mediator, Constantin-Adi Gavrila acknowledges that there continues to be a genuine lack of understanding about the role of the mediator, particularly in jurisdictions where mediation is not, or is rarely, used. Constantin-Adi explains some of the mediator’s roles in order to enhance understanding of what the mediator can do and how what he/she does might be useful to parties in dispute.

In And A Little Child Shall Lead Them – Peacemakers 2019, Joel Lee shares some of the metaphors created by students at the Peacemakers Conference 2019 (these include “mediation is a microscope”, “mediation is a lighthouse” and “mediation in like braces”). The purpose of the Peacemakers Conference in Singapore is to teach 13-16 year olds how to resolve conflicts amicably.

In Scotland And Its Mediation Acts, Charlie Irvine examines two distinct proposals for mediation legislation in Scotland: the Proposed Mediation (Scotland) Bill and the proposal contained in the recent “Bringing Mediation into the Mainstream in Civil Justice in Scotland” report. Charlie then explores whether the ambitious goal of the proposals– of changing the culture of a justice system – can be done via legislation.

In A Trip To The World Of Tourism, Andrea Maia and Constanca Madureira consider the use of online dispute resolution and alternative dispute resolution in the context of the tourism industry in Brazil. In particular, Andrea and Constanca argue that ADR, including mediation, can be used to prevent or mitigate conflicts inherent in sustainable tourism development in protected area tourism.

In Mediation And The Public’s Right to Know: Has That Ship Sailed? Rick Weiler summarises a developing story in Canada which has raised concerns about whether the public should have the right to know the terms of a high profile, mediated settlement agreement involving the government of Canada. Rick explains that he did not find much guidance on the possible conflict between the public interest in the effective settlement of disputes (as in mediation) and the public interest in openness and accountability, and then shares relevant words from a Canadian mediator regarding the types of cases which are not appropriate for mediation.

In Bringing Mediation Into The Mainstream, John Sturrock describes his approach to his review of allegations of bullying and harassment in Scotland’s NHS Highland. John explains how his subsequent report includes chapters which wrestle with underlying human nature, cognitive biases and neuroscience while placing mediation and facilitation at the centre of a new approach to addressing difficult issues within the organisation. John also refers to the publication of a recent report on how to bring mediation into the mainstream in civil justice in Scotland.

In Don’t Sit On Your Ass[ets] – Part 2: The Arguments, Bill Marsh identifies how the use of legal arguments in mediation can be done well. Bill emphasises and elaborates on the importance of simplicity (of saying less, but saying it well), of tone and, to borrow Bill’s phrase, of the “reciprocity of listening”. Bill then considers the importance of moving on from the legal arguments – which he explains are about clarity and influence – to a different discussion about judgment calls, risk and resolution.

In Complexity, Newton And New Directions In Mediation Research, following earlier posts discussing the call for more field-based research into mediation,  Rick Weiler shares a series of questions to be addressed at the Pepperdine Past- and-Future Conference (18-19 June 2019) that seeks guidance for further research into dispute resolution, including mediation.  Rick ends with the challenging and important question: “What can be done to re-energize, revitalize the mediation process in the public interest?”

In Mirror Mirror, Charlie Woods draws on the significance of the mirror in the ceremony to mark the ascension of the new Japanese Emperor Naruhito to the Chrysanthemum Throne. Charlie explains how the mirror represents wisdom and truth, and served as a reminder for him of the importance of taking time for reflection when learning, checking understanding, and deciding on a course of action. Charlie adds that the mirror also reminded him of William Ury’s observation that “the most difficult person we have to deal with is the person we look at in the mirror in the morning.”

In Singapore Convention Series: A Call For A Broad Interpretation Of The Singapore Mediation Convention In The Context Of Investor-State Disputes, Mushegh Manukyan considers the applicability of the Singapore Mediation Convention to Investor-State disputes. Mushegh explains that the scope of the Singapore Convention includes gray areas, particularly, whether it would cover all or a limited scope of investment disputes. Mushegh notes that pro-mediation States have the opportunity to adopt implementing legislation that would clearly define the scope of the Singapore Convention in their territories and encompass, among others, a broad range of investor-state disputes.

In Should Judges Mediate?, Alan Limbury identifies and comments on the reasons why the Judge in the Australian case of Wardman & Ors v Macquarie Bank Limited [2019] FCCA 939 rejected the parties’ request that their dispute be referred to mediation to be conducted by a judge. The Judge instead ordered that the mediation be conducted by a Court Registrar. In comparing the roles of mediator and judge, the Judge noted, amongst other points, that “eminence and ability in the judicial role do not necessarily translate into the assumption by a former Judge of the role of a private mediator.”

In We Can Work It Out/You Can’t Always Get What You Want, Greg Bond identifies the title of The Beatle’s song ‘We Can Work It Out” as a great title for mediation, with its heartfelt appeal to common sense, trust and understanding. Greg then draws on the lyrics of The Rolling Stone’s “You Can’t Always Get What You Want” which offer a mediator’s mantra.

In Small Steps Towards Empathy: Some Reflections On Student Learning Journals, Ian Macduff draws on a handful of insights from his students’ learning journals that reinforce both the core value of negotiation and mediation programmes, and the benefits of personal journals. These include the central themes of trust and process in negotiation and mediation, the interest in cross-cultural communication and the emerging world of online negotiation, and the appeal of the narrative and transformative modes of mediation.

In DanShaRi – A Modern Decluttering Philosophy That Some Mediators Might Find Useful, Ting-Kwok IU applies the decluttering philosophy of the Japanese author, Hideko Yamashita, to the context of mediation. Ting-Kwok explains the concept of DanShaRi and identifies questions and techniques stemming from this concept which are relevant to mediators.

 

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Ambivalent Russian Arbitration Developments Regarding Hybrid Dispute Resolution Clauses

Sat, 2019-08-03 23:04

Daniil Vlasenko

Overview

At the end of 2018, the Presidium of the Russian Supreme Court published its “Review of Cases Related to the Functions of Assistance and Control in Relation to Arbitration and International Commercial Arbitration” (“Review”). The 51-page Review was dedicated to issues that the Russian courts have faced while hearing cases arising from domestic and international arbitration and which require consideration by the Supreme Court. Numerous issues were covered, including those connected to the arbitrability of certain types of disputes, the enforceability of arbitral awards and the validity of arbitration agreements.

This post focuses on Sections 6 and 7 of the Review, which considered the legality of certain types of hybrid dispute resolution agreements. On this issue, the Review described cases anonymously, two of which are discussed below. However, in order to appreciate completely the issues discussed, the legal background has been set out as well.

So far, the reaction of the Russian legal community has been divisive; some specialists believe that Russian courts have taken another step towards development of a stable and predictable judicial system. Others allege that in terms of asymmetrical clauses, outdated findings were reaffirmed, and the judicial system is not making any progress.

 

Background

Until June 2012, Russian commercial courts had treated both asymmetrical and hybrid clauses as valid and legal. Despite this, the Supreme Commercial Court of the Russian Federation (“Supreme Commercial Court”) reversed established case law in Russia and found in RTK v. Sony Ericsson (No. 1831/12 dated June 19, 2012) that a dispute resolution clause, consisting of both the right to resolve a dispute through arbitration or litigation before the domestic court is valid when both parties have access to both dispute resolution mechanisms. However, if the dispute resolution clause deprived one of the parties from referring the dispute to the court, that asymmetry would result in the invalidity of the whole dispute resolution clause. In its reasoning, the Supreme Commercial Court predominantly followed an “equality of arms” concept, which originated in European human rights law in the context of the right to a fair trial. The “equality of arms” concept mainly focuses on the fair balance of procedural rights granted to both parties of a dispute.

In December 2015, the Russian Arbitration Association (RAA) and the International Chamber of Commerce (ICC) had organized a joint conference, titled “Russia as a Place for Dispute Resolution”. Professor Georges Affaki, Chairman of the Banking Commission of ICC France, pointed out that the milestone decision of the Supreme Commercial Court in RTK v. Sony Ericsson, “shook the business [community]” and introduced “a serious element of legal uncertainty”. According to Professor Affaki, the Russian decision created a precedent affecting court practice in both Belarus and Kazakhstan.

Since then, Federal Law No. 382-FZ “On Arbitration (Arbitral Proceedings) in the Russian Federation” dated December 29, 2015 (“Arbitration Law”) was adopted with an expectation to gradually transform Russia into a more favorable jurisdiction for arbitration. So far, though, neither Russian legislators, nor Russian courts have made any feasible attempts to change their objectively “anti-arbitration” approach to asymmetrical clauses. Let’s examine whether the Review provided a different approach to the explored question.

 

Discussion on Section 6 of the Review

Section 6 of the Review describes a case where the arbitration agreement provided the undesignated claimant with a right to refer the dispute to either arbitration or a court.

Two companies had concluded a contract for the supply and delivery of goods, according to which all disputes arising out of that contract could be referred to either arbitration or court at the “claimant’s choice”. Eventually there was a dispute and the claimant elected to commence arbitration proceedings, in which it was successful on the merits.

At the stage of enforcement before the Russian courts, the court of first instance found that the unilateral right of the undesignated claimant to refer the dispute to either arbitration or court put the interests of that claimant over the interests of the respondent, which would be in conflict with the ‘balance of interest’ principle.

The Supreme Court reversed previous decision and sent the case back to the court of first instance, with the following justification: the provision of an arbitration agreement granting the claimant the right to choose between arbitration or court is not disproportionate as an arbitration agreement does not designate a specific party (particular person) to the contract. A mere indication that the claimant holds this right will not breach the balance of interest principle or equal treatment because both the seller and the buyer could potentially be a claimant in a dispute.

However, it remains unanswered how to interpret the contract, which by its nature carries a higher likelihood that one party will act as a claimant. In a typical loan agreement between a sophisticated commercial party (for example, a bank) and an individual, the borrower usually has more contractual obligations than the lender. Therefore, the borrower is likely to be a respondent and can raise the argument that even though the bank was not literally designated as a party bearing the right to choose the forum, in accordance with common commercial practice, it is likely that the lender will be the claimant and enjoy its superior position.

Specialists from common law jurisdictions might be critical of that position because the concept of equality of treatment was placed over the principle of freedom of contract. Moreover, in common law jurisdictions, asymmetrical clauses often proved to be an effective risk management technique. Using the previous hypothetical, it is natural for a bank to be interested in having several dispute resolution options if the borrower has assets in different jurisdictions. However, it may not come as a surprise if the scenario outlined above were to raise substantial difficulties before the Russian courts.

 

Discussion on Section 7 of the Review

Section 7 of the Review describes a case where the arbitration agreement provided the designated party with a right to refer the dispute to either arbitration or the court.

The court of first instance did not examine the dispute resolution agreement properly, leaving the case without consideration because it missed the fact that the contract consisted not just of an arbitration agreement, but also an asymmetrical right in favor of one of the parties, the right to choose between arbitration and domestic court proceedings.

Later, the court of cassation noticed that mistake and sent the case back to the court of first instance. It found that an arbitration agreement is void in part because a right to choose between court and arbitration is available to one designated party and that deprives the other party from referring the dispute to court. In this case, the court of cassation submitted that both parties to the contract should have the right to bring the dispute to either a court or arbitration.

The deprivation described put the interest of one party in the dominant position over the other that eventually breached the principle of balance of interest. The court of cassation also underlined that in the adversarial system, in order to defend rights and legitimate interests, the principle of equal treatment of parties requires equality of procedural rights as well. The mentioned standard is definitely fair but not flexible, because dispute resolution is not a mathematical equation. In certain cases, the party that bears the burden of proof requires significantly more time to present its case. Should time to present a case in hearings also be equal?

Moreover, in order to provide equal treatment, the court is adapting or curing the contract in a way to give the supposedly deprived party the same amount of rights. To this extent, the positive outcome is that the asymmetrical dispute resolution clause will no longer be per se invalid. Unfortunately, at the same time, the court appears likely to override the commercial relations of the parties and will definitely influence their initial will at the time of the conclusion of the contract. Furthermore, by adapting the dispute resolution clause the court may raise the risk of parallel proceedings, which will slow down not just dispute resolution of the particular controversy, but also bring extra uncertainty to the court system.

 

Conclusion

In conclusion, the Review has left the Russian arbitration community divided. On the one hand, it provided courts with pro-arbitration guidance regarding the validity of certain types of dispute resolution clauses. On the other hand, the Review did not uphold a more favorable treatment regime of the asymmetrical dispute resolution clause. Instead of solving the problem, the Review described a situation in which an asymmetrical clause may be found void in part, but the court’s right of adaptation could cure the irregularity. However, after that adaptation, the clause would cease to be asymmetrical and the whole aim of a carefully balanced dispute resolution mechanism would likely be undermined.

 

See also on the same issue, the Post authored by Alexander Gridasov, Maria Dolotova

The views expressed in this post are the author’s personal views and do not necessarily reflect those of Baker & McKenzie LLP.

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Colombia’s Constitutional Court Approves FTA with Israel but Conditions its Ratification

Fri, 2019-08-02 22:21

Eduardo Zuleta and María Camila Rincón

In June 2019, the Constitutional Court of Colombia (the “Court”) issued a communication summarizing its decision on the Free Trade Agreement between the Republic of Colombia and the State of Israel (the “FTA”) signed on September 30, 2013.  The Court adjudged that the FTA is compliant with the Colombian Constitution but warned that if the President decided to ratify the FTA, the State Parties to the FTA must first either issue a joint interpretative declaration or, if necessary, renegotiate the expropriation and most–favored-nation (“MFN”) clauses of the FTA.

In the process of approval, the Court held a public hearing and invited the ambassadors of Israel and Palestine, the Ministers of Trade and Foreign Affairs of Colombia, former negotiators of the treaty, and professors Adriana Zapata and Eduardo Zuleta, among others, to present positions on the matter.

This communication on the Court’s ruling comes at the same time as the communication summarizing the decision regarding the BIT between Colombia and France, in which the Court arrived at similar conclusions (discussed here).

 

The Court’s Decision

A key question resolved by the Court was whether the definition of “territory” in Article 1.5 of the FTA implied Colombia’s recognition of Israel’s sovereignty over the denominated “Palestinian occupied territories”. The Court also evaluated whether the fair and equitable treatment and MFN clauses, among others, were compliant with the Constitution.

The FTA contains two definitions of “territory”, one for trade purposes and a different one for investment purposes. Article 1.5 of the FTA contains the general definition of territory for each State Party as regards trade. With respect to Israel, “territory means [,] for the purposes of trade in goods, the territory where its custom laws are applied”.  For purposes of the investment chapter of the FTA the “territory” of Israel “includes the territorial sea, as well as the continental platform and the exclusive economic zone over which the State of Israel exercises sovereign rights or jurisdiction in accordance with international law and in accordance with the laws of the State of Israel”.

Considering that Israel exerts customs control over some of the Israeli-occupied settlements in the West Bank, the Gaza Strip, East Jerusalem or the Golan Heights, different voices held that by incorporating these definitions in the FTA, Colombia was recognizing Israel’s territorial sovereignty over such territories. According to said voices, the aforementioned recognition breached Colombia’s international duties and obligations as regards to human rights and international humanitarian law, as provided for in the Fourth Geneva Convention of 1949 and addressed by the UN Security Council and General Assembly Resolutions.

On this matter, the Court concluded that, in accordance with Article 31 of the Vienna Convention on the Law of Treaties (the “VCLT”), the definitions of territory incorporated in the FTA must be interpreted in light of the FTA’s object and purpose, which is to facilitate trade and investment between Colombia and Israel. Therefore, “territory” must be interpreted so as to have effects within the realm of trade and investment law and not as a provision reflecting an agreement on territorial boundaries.

Furthermore, the Court concurred with the decision of the European Court of Justice (“ECJ”) in the case Brita GmbH v. Hauptzollamt Hamburg-Hafen regarding the EU-Israel Association Agreement. For the ECJ, to interpret the EC-Israel Association Agreement as meaning that the Israeli customs authorities enjoy competence in respect of products originating in the West Bank would be tantamount to imposing on the Palestinian customs authorities an obligation to refrain from exercising their competence. Such an interpretation would run contrary to the pacta tertiis nec nocent nec prosunt principle, according to which “a treaty does not create either obligations or rights for a third State without its consent” (Article 34 VCLT). Thus, the EC-Israel Association Agreement must be interpreted to mean that products originating in the West Bank do not fall within the territorial scope of that agreement. The Court coincided with this ruling and concluded that the FTA is only capable of having effects between Israel and Colombia. None of its provisions can be interpreted in the sense of defining the sovereign territory of Israel or Colombia or creating obligations for Palestine.

As regards the Investment Chapter, the Court declared that certain provisions of the FTA required further interpretation to avoid inconsistencies with constitutional principles such as the obligation to provide equal treatment to foreign and national investors and their investments. In this sense, the Court held that in order for the President to ratify the FTA, the State Parties must first adopt a joint interpretative declaration to clarify the expropriation (Article 10.7) and MFN (Article 10.5) clauses.

Article 10.7 of the FTA defines “expropriation” and adds that the determination of “whether a measure or series of measures of a Party constitutes an effect equivalent to nationalization or expropriation requires a case-by- case, fact-based inquiry, considering, inter alia: … b) the level of interference on the reasonable expectations concerning the investment”. For the Court, (a) the expression “reasonable expectations” must be understood to arise from specific and repeated acts carried out by a host state to induce an investor to make or maintain investments in its territory; and (b) these expectations are breached as a result of the investment being affected by abrupt and unexpected changes made by public authorities.

In regard to the MFN clause incorporated in Article 10.5, the Court concluded that the term “treatment” must be interpreted in the context of the FTA, preserving the constitutional competences of the President of Colombia to direct international relations and to conclude treaties. This interpretation purports to prevent the practice of importing provisions from other International Investment Agreements ratified by the host state of the investment.

 

Preliminary Comments

First, the Court reached a reasonable conclusion regarding the interpretation of the definition of territory provided for in the FTA.  In international law there are different meanings of the term “territory”. Within the framework of international trade law, the concept of “territory” is related to the customs area on which a particular trade regime applies. On the other hand, in the field of public international law, “territory” corresponds to one of the constituent elements of a state, understood as the geographical space where a state exercises its sovereignty.

As a general rule, boundaries are defined by means of border treaties concluded between the respective states or by a competent international court. There is no precedent in international law, and even less in customary international law, supporting the thesis that border delimitation may result from the signing of a free trade agreement or an investment treaty. Likewise, there is no precedent of commercial bilateral treaties –such as FTAs– imposing obligations on third-party states involved in border disputes. Therefore, the Court could not have reached a different conclusion without transgressing basic principles of international law.

Second, the Court does not explain how it arrives to propose, what appears to be its own definition of “reasonable expectations”. There is no reference in the Court’s communication to the interpretation of the FTA in the light of the VCLT –to which both Israel and Colombia are parties– or customary international law. Furthermore, in comparison to its previous decision regarding the BIT between Colombia and France, the Court seems to equate the concepts of “legitimate expectations” and “reasonable expectations” without any clear analysis, reaching the same conclusion in respect of both concepts.

This decision may have similar effects to the ones regarding the Colombia-France BIT:

First, if the Parties wish to pursue the ratification of the BIT, the representatives of Colombia and Israel will have to issue a joint interpretative declaration or renegotiate the FTA.

Second, the judgment of the Court may become evidence of state practice on how Colombia interprets MFN and expropriation clauses. For better or worse, this may have an impact on on-going and future investment arbitrations against Colombia.

Third, the Court drew a red line for Colombia in the negotiation and ratification of IIA. It is most likely that Colombia will not ratify treaties incorporating provisions similar to the ones addressed by the Court in its judgment.

 

Conclusion

The Court’s official communication presents different outcomes. On the one hand, the interpretation regarding the definition of territory is supported on a clear application of the VCLT and general principles of international law. On the other hand, in the same line of its previous decision regarding the Colombia-France BIT, it suggests that the Court is abrogating the competence to define the text of certain provisions of the FTA invading the competence granted to the President of Colombia by the Constitution.

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Flexibility at the Expense of Certainty? Six Years of the ICC Emergency Arbitrator Procedures

Fri, 2019-08-02 02:00

Katie Marquet-Horwood

Background

The ICC Commission on Arbitration has recently published a report on Emergency Arbitrator (“EA”) Proceedings (“Report”) that promises to “offer guidance to users, counsel and EAs to facilitate the use of EA proceedings through increased transparency and predictability”.

The Report analyses the 80 cases in which the ICC EA procedures have been used in the six years from their inception in 2012 through to 2018. It responds to a perceived nervousness among parties and their counsels regarding the use of EA proceedings as opposed to seeking urgent interim/conservatory measures in national courts. This unease itself is perceived to arise from the lack of available information that parties can use to gauge the likely outcome of EA proceedings. Namely, there exists no established body of the judicial authority or other clear guidance to assist parties in understanding what relevant threshold tests should be applied by EAs (as would be available to parties seeking urgent interim relief in national courts, for example). As a result, it has in some cases been difficult for parties and their counsel to know how best to formulate an application, and to assess its likely prospects of success.

However, as this post will go on to consider, the Report’s analysis of the outcomes of EA proceedings suggests that EAs themselves may have struggled with the lack of available precedent on which to base their decisions. More precisely, there is little consistency in how these decisions have been arrived at (including, for example, as to fundamentals such as what laws have been applied, which has varied between the lex contractus, the lex arbitri, general but unspecified “standards established in international arbitration”, and combinations of the three). The result is that there appears to be no real consensus on what thresholds an application is required to meet in order for a relief to be granted, such that the Report is perhaps unlikely immediately to remove the difficulty parties experience in deciding whether to seek EA relief in ICC arbitrations.

 

Why Use EA Procedures?

The ICC EA Procedures were introduced in 2012 by Article 29 of the Rules of Arbitration of the ICC (“ICC Rules”), with detailed procedures contained in Appendix V (together, “EA Procedures”). The EA Procedures are designed to provide parties to a prospective ICC arbitration with a mechanism to seek urgent relief prior to the constitution of a tribunal to hear the substantive claim.

Whilst court systems supportive of arbitration, such as the courts of England and Wales, are generally well disposed to granting injunctive relief in these circumstances, there are a number of reasons why parties might prefer to seek relief from an EA. For instance, they may prefer to resort to the EA Procedures for confidentiality purposes, because interim relief is not available in national courts (whether because they have contracted out of their rights to approach national courts in the arbitration agreement or otherwise), or because they are seeking a flexible solution to an urgent issue which a national court might otherwise be unable or unwilling to order.

 

The Key Findings of the ICC Report

One of the Report’s key findings is that ICC EA proceedings can be concluded very quickly indeed, with the ICC Secretariat deciding within 24 hours of an application being made whether it is permitted to proceed in all 80 cases (only two of which were rejected at this stage). In the 70 cases in which an order was made, 47% had the order rendered within the 15 days foreseen in the EA Procedures, 46% within 16 to 19 days, and  7% between 20 to 30 days. In the remaining 10 cases no order was made, and this was because either the application was withdrawn or it was deemed that the EA Procedures did not apply.

The relief was granted only in the minority of applications (29%). Whilst the Report concludes that this may not be surprising, with the nature of interim relief meaning that it will be available in only exceptional cases, the success rate undoubtedly compares unfavourably with that of many national court systems. For example, in the English Commercial Court, relief is granted in anti-suit, freezing injunction and security for costs applications in 45.2% of cases, according to data compiled by Solomonic.

 

What Types of Relief Have Been Applied for? 

51 cases referred to in the Report sought an order preserving the status quo pending the constitution of the arbitral tribunal, in the majority of cases justified by the need to guarantee the availability of any final award. Other orders sought (with some EA applications requesting multiple forms of relief) included the reinstatement of individuals in a company, the removal of individuals from board positions or appointments, the organisation of shareholder meetings, the passing of board resolutions, and participation in board meetings. In one case the application requested an order from the EA for a preliminary injunction to preserve the status quo by maintaining the distribution agreement in effect. A further 23 cases sought an order for specific performance under the contract in dispute. 10 applications sought some form of declaratory relief, 8 an interim payment, 7 the transfer of money into an escrow account, and 6 an anti-suit injunction (for example, preventing a party from bringing any legal actions in state courts until a dispute had been decided).

 

Flexibility at the Expense of Certainty?

The EA Procedures provide that an EA’s jurisdiction is confined to granting “urgent, interim or conservatory measures that cannot await the constitution of an arbitral tribunal” (Article 29(1) of the ICC Rules). Thus, the main criteria contemplated by the ICC Rules for an EA order to be granted would appear to be that the relief is “urgent” and “cannot await the constitution of a tribunal”. A guidance note issued for EAs, the ICC Emergency Arbitrator Order Checklist, further provides that in determining these criteria, an EA should consider the admissibility/jurisdiction of the EA application. Beyond this, no substantive guidance as to how the issues of urgency, admissibility and jurisdiction have been or should be applied is available to EAs. The result, as the Report expressly acknowledges, is that there has been a “far from uniform” application of these tests.

The result of the ICC’s approach appears to be a great deal of confusion among EAs as to what criteria an application needs to meet in order to be successful. Of the 80 applications heard, 40% considered the likelihood of success on the merits, 50% considered the likelihood of irreparable harm (with 50% of those case following a literal interpretation of “irreparable” and the other 50% instead considering that the harm should be “serious and substantial”). A further 15% of the cases determined that it was necessary for there to be a risk of aggravation of the dispute were the relief not to be granted, and 20% considered a requirement for the application to entail no prejudgment of the merits of the substantive dispute. The balance of equities was a determinative factor in 20% of cases. In determining these issues, EAs variously made reference to general “international arbitration practice”, the lex arbitri and international guidance such as the UNCITRAL Model Law of 2006.

From the above it can be inferred that in bringing an application under the ICC EA Procedures, a party cannot have any certainty as to how threshold criteria for granting interim measures will be applied: the factors that will be taken into account by an EA in making its decisions vary enormously from case to case, and it is difficult to detect a pattern in their reasoning from the Report.

 

Enforcement

Of the national laws surveyed by the Report, only Hong Kong, Singapore and New Zealand expressly provide for the enforceability of EA decisions. There is currently very limited case law as to whether national courts are empowered to enforce any decisions rendered by an EA, with some considering that EA decisions lack the finality required by the New York Convention. In particular, the decisions are afforded the status of Orders only, to be revisited by the Tribunal once constituted. Accordingly, the present situation on enforcement will render EA proceedings unsuitable for disputes which are particularly acrimonious or where there are reasons to doubt that a respondent will comply with an EA order voluntarily.

 

What Is Next for the EA Procedures?

In the circumstances, it is perhaps unsurprising that only a very small proportion (1.3%) of ICC cases filed since 2012 have included applications for relief from an EA.

The Report itself is very instructive for parties considering the use of EA Procedures. However, the experience of EA Procedures illustrated is unlikely to provide much encouragement to parties or their counsel to pursue EA proceedings in present circumstances. The Report suggests that such applications will enjoy low prospects of success, with significant uncertainty as to how they will ultimately be decided, and question marks over the enforceability of any order in the absence of party consent. The vagaries of how EAs approach the applications before them also places undue emphasis on the identity of the particular EA, which is wholly outside the control of the parties.

Despite all of the practical difficulties that arise, with ICC cases typically concerning diverse topics involving disparate jurisdictions around the world, which trigger diverse challenges requiring diverging procedural solutions, there is certainly a genuine need for EA Procedures which can provide a flexible and viable alternative to the courts.

However, in order to make EA Procedures more attractive to parties, it is likely that the ICC will need to take steps to provide EAs and arbitration practitioners with clear guidance as to how the threshold tests of urgency, admissibility and jurisdiction should be considered, perhaps by reference to anonymised decisions of previous EAs. It would also no doubt make ICC EA proceedings more attractive if the ICC Rules were to make provision for genuine ex parte applications in limited circumstances, as well as perhaps providing for specific sanctions for parties who breach the terms of EA orders. In the meantime, the international arbitration community should continue to work with national courts to provide for the recognition of the enforceability of such orders. Absent such steps being taken, it would appear unlikely that the use of EA Procedures will increase significantly in the near future.

The ICC Report can be downloaded here.

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