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UNCITRAL Working Group III: An Introduction and Update

Mon, 2020-03-23 02:00

Next week was due to be the 39th session of the United Nations Commission on International Trade Law’s (UNCITRAL) Working Group III, and its sixth session considering the issue of reform to investor-State dispute settlement (‘ISDS’). The session has since been postponed indefinitely, in light of the current global COVID-19 pandemic. In lieu of Working Group III’s meeting in New York, we are running a series of posts this week to discuss some of the key reforms that the Working Group (‘WG’) has under consideration. These are all topics to which the WG will return when its meetings resume. This post provides an introduction to the series. It sets out some background related to the WG process to date, and then introduces the posts you will see throughout this week as part of our series.

 

Working Group III: The Process So Far

In July 2017, the Commission turned the issue of ISDS reform over to WG III. This WG comprises member States, observer States, and observer international and non-governmental organisations. As previously explained, the WG has divided its task into three phrases, as follows: (a) first, identify and consider concerns regarding investor-State dispute settlement; (b) second, consider whether reform was desirable in light of any identified concerns; and (c) third, if the WG were to conclude that reform was desirable, develop any relevant solutions to be recommended to the Commission. The first and second stages have now been completed, with the WG having determined that reform is desirable. Such reform is considered necessary to respond to a range of issues that have been identified and discussed during the WG’s meetings. These include issues associated with the duration and cost of investor-State arbitration proceedings, and related issues such as security for costs; issues of predictability and consistency between arbitral decisions; concerns related to processes for the appointment of arbitrators, including issues associated with their independence, diversity, and qualifications; and problems raised by third-party funding arrangements.

At its sessions in October 2019 and January 2020, the WG discussed a range of possible reform options, including the establishment of an advisory centre, creation of a code of conduct, development of an appellate and/or standing court mechanism, and reforms to address issues of third-party funding. It also agreed on a schedule for the discussion of these – and additional – reform options, agreeing to dedicate its 39th session in 2020 (now postponed) to considering the following areas of reform:

  • dispute prevention and mitigation as well as other means of alternative dispute resolution;
  • treaty interpretation by States parties;
  • security for costs;
  • means to address frivolous claims;
  • multiple proceedings including counterclaims; and
  • reflective loss and shareholder claims (together with the Organisation for Economic Cooperation and Development).

As noted above, this session was due to take place in New York from 30 March to 3 April 2020, but has been indefinitely postponed due to the unfolding COVID-19 situation.

 

A Preview into Our WG III Series

We have invited a group of contributors to explore different aspects of the WG III process over the course of this week. We hope that this series will provide a useful forum – particularly now that the WG’s session is not proceeding as scheduled – for our contributors and readers to engage with the WG reform process, and to debate its merits, scope, and limits.

Our first three posts consider institutional reforms, examining the WG’s development of reforms focussed on the establishment of standing and appellate review mechanisms.

On Tuesday, we will have a post by Andreea Nica that introduces the WG’s discussions concerning the possible establishment of a multilateral investment court. The post examines the background to this proposal, and analyses some of the key issues associated with its implementation including issues of enforcement, financing, and the selection and appointment of adjudicators.

This will be followed on Wednesday by a post by Associate Professor Fernando Dias Simões (The Chinese University of Hong Kong), which examines how institutional modifications interact with issues associated with adjudicator selection and appointment. That post examines the relationship between institutional reforms and concerns about the politicisation of ISDS, and identifies a number of mechanisms that could be incorporated as part of broader institutional reforms to ensure that adjudicators can be chosen due to their professional skills and merit, not their political leanings.

In Thursday’s post, Marike Paulsson (Albright StoneBridge Group) explores whether the creation of an appellate mechanism would respond to concerns about ISDS procedures, or rather create more difficulties. She highlights a number of issues potentially associated with the creation of an appellate mechanism, including issues of cost, duration, and uncertainty.

Our next two posts in the series examine key procedural reforms under development by WG III.

In Friday’s post, Johan Sidklev and Bruno Gustafsson (Roschier Attorneys Ltd) explore the WG’s discussions of security for costs and frivolous claims. The WG intended as part of its 39th session to consider security for costs as a mechanism for averting frivolous claims in ISDS. Friday’s post examines how any reform of the standards for ordering security for costs might address the conflict between the interest of adequate costs recovery for States, and policy considerations relating to, among other things, an investor’s access to justice.

This will be followed by a post on Saturday by Dr. Anna De Luca (Bocconi University) examining the WG’s proposals concerning counterclaims. Her post highlights the implications of this reform option, including for asymmetry in investment arbitration and the UNCITRAL WG III’s analysis of procedural versus substantive reform options.

Our contributors this week offer a diverse set of perspectives on a number of important and emerging issues under consideration by the WG. We hope you enjoy the series!

 

To see our full series of posts on the UNCITRAL WG III reform process, click here.

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The 2020 Vis Moot: Facing Emerging Challenges, While Continuing to Hone Best Practices in Procedure and Ethics

Sun, 2020-03-22 02:03

For decades, like clockwork, the Willem C. Vis International Commercial Arbitration Moot (‘Vis Moot’) and its sister competition, Vis East Moot, have brought together students, academics, practitioners, and arbitrators to consider emerging and important substantive topics in international arbitration and international sales law. Many of us honed our passion for these fields as student participants in the Vis Moot. We enthusiastically return to the Vis Moot each spring, as an opportunity to step back from the rigors of real-world practice and catch up with old friends and colleagues, while supporting students and considering emerging topics through the lens of the current problem.

 

Emerging Challenges

In the Fall, the Vis East Moot saw the decision by many student teams to withdraw in light of ongoing protests stemming from local concern over Hong Kong’s autonomy from mainland China. In addition, recent months of preparation for oral hearings have been overshadowed by the global public health crisis associated with COVID-19. This led to the reluctant, but appropriate and necessary, decision by Vis Moot organizers to first postpone in-person oral hearings in Hong Kong (to an unannounced date), followed by the recent decision to cancel oral hearings in Vienna.

The Vis Moot continues to execute its mission in unexpected ways. Student teams now have an opportunity to engage, in real-time, with the realities of arbitral practice. Most practitioners and arbitrators, after months of preparation, have seen hearings cancelled, either due to settlement or other circumstances requiring their delay. We also are now on the eve of the first Virtual Vis Moot: the organizers of each competition are separately providing students the opportunity to present their oral arguments from “home.” During the current public health crisis, nothing else could feel more modern. Globally, social distancing and remote working are emerging as a new reality. Practitioners face the pressurized challenge to rely on technology to transition their work and collaboration to a virtual setting, including the conduct of court and arbitration hearings. Consistent with the spirit of Lucy Greenwood’s Campaign for Greener Arbitration, there may be a silver lining to this momentary disruption. We have an opportunity to re-evaluate our individual carbon footprints and implement environmentally-friendly best practices. Indeed, each of these challenges and reactions highlights the true resilience and strength of both the Vis Moot community and the global arbitration community.

 

The 2020 Problem

Substantively, the Vis Moot problem always includes important questions – perhaps ones that have been percolating under the radar for some time – concerning arbitral procedure and contractual interpretation. It calls upon students, coaches, practitioners, and academics to consider these questions in detail and over a long period of time to glean collective insights and solutions. Already, in 2020, these goals have been achieved. While we may not all meet in person this year in Danubia (the Vis Moot’s fictional “seat”), the experience of coaching, researching, preparing memoranda, scoring memoranda, and preparing for oral hearings are each exercises that facilitate the Vis Moot’s goals.

With respect to arbitration, this year’s Problem involves two main questions.

First, the validity and enforceability of a unilateral option arbitration clause. This question was thoroughly considered on the Blog in a recent post by Kevin Cheung.

Second, the regulation of party representatives and the appropriate standards to guide whether their conduct is ethical and fair. Specifically, the Problem involves a scenario where one party has engaged an expert witness, one of the world’s few English-speaking experts on the subject. The other party contends that this expert’s selection is merely a tactic to create a conflict of interest with its party-appointed arbitrator and will lead to a (yet to be filed) improper arbitrator challenge and create delay in the resolution of the dispute. Under these circumstances, does the tribunal have the power to exclude the expert witness? The remainder of this post draws upon the Blog’s archives for insights to guide this analysis.

 

The Case for Tribunal Regulation of Counsel Conduct 

In recent years, the tribunal’s power to regulate the conduct of party representatives has attracted significant attention.

Prof. Margaret Moses has previously explained the arbitration community’s concern: arbitration is increasingly global and no longer controlled by an elite and exclusive “club” of parties, counsel, and arbitrators who implicitly understand the appropriate standard of conduct. Thus, with increasing use and diversity among its players, it is important to create explicit (rather than implicit) minimum and equalized standards for conduct. Indeed, Blog contributors have commented that national rules regulating counsel behavior rarely envisage the unique circumstances that counsel are confronted with in international arbitrations. Moreover, the reliance on national frameworks to regulate counsel conduct would probably lead to a fragmented response to transnational problems.

While there is agreement that a basic conceptual framework is needed and codes of conduct would be instructive, there is not agreement on what these codes of conduct should provide. This consensus stems from the understanding that self-regulation alone is not effective. The risk of guerilla tactics is pervasive. However, the existence of this risk does not automatically mean that the tribunal is the appropriate body to promulgate such standards (nor does it necessarily have the “power” to do so).  If the tribunal exercises powers it has not been granted, could its award be vacated on the ground that it exceeded the scope of its power? In this year’s Problem, this is precisely the risk. The International Law Association’s Committee on Commercial Arbitration has considered the issue and offered some useful recommendations by identifying two buckets of powers held by the tribunal: inherent and implied. Exercise of both types of powers can fall within their mandate to adjudicate a dispute.

As noted by Prof. Maxi Scherer, the goal should be to level the playing field among counsel and their clients. Because national rules cannot be relied upon to exclusively regulate counsel behavior in international arbitration, arbitral institutions are uniquely positioned to lead this debate by formulating common standards and rules regulating counsel conduct. Indeed, the London Court of Arbitration (‘LCIA’) was the first arbitral institution to offer guidelines on the conduct of counsel in international arbitrations (for the similar ICC initiative, see here). This year’s Problem specifically invokes the LCIA Rules (2014) as the lens for analysis.

The LCIA Rules (2014) include General Guidelines for the Parties’ Legal Representatives (‘LCIA Guidelines’) as part of its rules (for a general overview on the 2014 LCIA Rules, see here). Interestingly, the LCIA Guidelines are binding upon its users by virtue of Article 18.5, which provides that the participation of legal representatives before LCIA arbitral tribunals is conditioned to the compliance with the LCIA Guidelines. Accordingly, counsel give their consent to the LCIA Guidelines by agreeing to appear by name before the arbitral tribunal.

With respect to the Problem, the LCIA Guidelines provide that:

  • the LCIA Guidelines should not be interpreted so as to undermine a legal representative’s obligation to present the party’s case effectively to the tribunal (Paragraph 1); and
  • legal representatives should not engage in activities intended unfairly to obstruct the arbitration or to jeopardize the finality of any award (Paragraph 2).

As one Blog commentator mentioned, these recommendations are fairly general and high-level. As the application of these guidelines is not straightforward, tribunals should be particularly careful when interpreting Paragraph 2 of the LCIA Guidelines, which refers to obstruction strategies – the so-called guerrilla tactics. Indeed, certain procedural steps might be necessary to represent effectively a party in an arbitration, such as the appointment of a party expert whose linguistic capabilities and expertise make her unique to represent a party’s case in the arbitration – such as that of Respondent in the 2020 Problem. Accordingly, tribunals should strike a fine balance between discouraging and sanctioning those that engage in guerilla tactics, while at the same time not undermining a party’s right to present its case effectively.

In regard to the scope of the tribunal’s power to analyze claims connected to party representatives’ conduct, Article 18.6 grants tribunals significant discretion to decide, upon complaint of one of the parties or upon its own initiative, on whether legal representatives have violated the LCIA Guidelines. Moreover, the provision sets forth sanctions to be applied by tribunals, which include written reprimands or cautions in regard to future conduct in the proceedings, as well as the catch-all remedy of applying “any other measure necessary” for the tribunal to fulfil its general duties. One Blog contributor challenged whether a party-appointed arbitrator would be prepared to impose sanctions on the counsel that appointed her, knowing that such an approach would potentially undermine future appointments – indeed, given the economics, would party-appointed arbitrators be prepared to bite the hand that feeds them?

While analyzing the design of the LCIA Guidelines, a Blog commentator affirmed that the preference for broadly drafted recommendations is somewhat inherent to any attempt to formulate universally acceptable principles for the conduct of the parties’ legal representatives. The same can also be said about non-binding codes of ethical conduct that are relevant to the Problem, such as the 2013 IBA Guidelines on Party Representation in International Arbitration (for other examples of non-binding codes of ethics, see comments on the Prague Rules here and on the Spanish Arbitration Club’s Code of Best Practices in Arbitration here).

 

Discretionary Rules: The 2013 IBA Guidelines on Party Representation in International Arbitration

The 2013 IBA Guidelines on Party Representation in International Arbitration (‘2013 IBA Guidelines’) cover similar aspects to those covered by the LCIA Guidelines and reflect another institutional approach, although not binding upon parties unless expressly agreed by them either before or during the arbitration proceedings (for a general overview of the 2013 IBA Rules, see here).

According to its Preamble, the 2013 IBA Guidelines were not designed with the intention of replacing mandatory rules or agreed-upon arbitral rules, nor of vesting arbitral tribunals with powers reserved to regulatory professional bodies, as a contributor said. Rather, the 2013 IBA Rules consists of a valid initiative to consolidate best practices in international arbitration, which may level the playing the field between legal practitioners coming from different legal traditions, as well as between less and more experienced lawyers.

However, critics affirm that the 2013 IBA Guidelines will likely not offer optimal efficacy in shaping the conduct of party representatives, even if they are to become binding rules through the acceptance, in whole or in part, by the parties. This is so for a number of reasons.

First, the IBA 2013 Guidelines do not provide guidance on all aspects of party representative conduct, leaving out important aspects. Second, as raised by one contributor, the 2013 IBA Rules is concerned with counsel conduct, and not with conduct of the parties themselves, who are those that could consent to the application of the regulation.1)On this point, see Comments to Guidelines 1-3 (“A Party Representative, acting within the authority granted to it, acts on behalf of the Party whom he or she represents. It follows therefore that an obligation or duty bearing on a Party Representative is an obligation or duty of the represented Party, who may ultimately bear the consequences of the misconduct of its Representative.”). jQuery("#footnote_plugin_tooltip_2165_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2165_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In this sense, there is an inconsistency between those that are subject to the regulation and those who could agree to its application, which may deprive counsel from the incentives to act in accordance with the guidelines.Third, and as a consequence, the sanctions provided by the 2013 IBA Rules inherently penalize the end user of the arbitration, not their legal representative, as one contributor suggests. This is the case of adverse costs orders (for an analysis of this matter, see here).2)2013 IBA Rules, Guideline 26(b) and (c). jQuery("#footnote_plugin_tooltip_2165_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2165_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

***

All in all, this year’s Vis Moot participants will have a rich experience – both substantively and procedurally – and we are looking forward to seeing advancement of the debate, and the success of the participants, during the upcoming online pleadings!

References   [ + ]

1. ↑ On this point, see Comments to Guidelines 1-3 (“A Party Representative, acting within the authority granted to it, acts on behalf of the Party whom he or she represents. It follows therefore that an obligation or duty bearing on a Party Representative is an obligation or duty of the represented Party, who may ultimately bear the consequences of the misconduct of its Representative.”). 2. ↑ 2013 IBA Rules, Guideline 26(b) and (c). 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Young Female Practitioners Breaking into the World of International Arbitration

Fri, 2020-03-20 23:21

Late last year, Herbert Smith Freehills Seoul and Kim & Chang held a “Women in Arbitration” Networking-Dinner and panel discussion as part of the Seoul ADR Festival 2019. The dinner aimed to provide an opportunity for female professionals in the Korean arbitration community to network with their industry peers and work to advance their position in arbitration. This post provides the perspectives of the authors based on the panel discussions.

 

A young practitioner’s perspective

Latin America

Increasing legitimacy in international arbitration, as explained by Van Leeuwen in a KluwerBlog in 2019, requires that arbitral decisions are made by a diverse pool of arbitrators, composed not only by gender equality, but also from geographical diversity. The reality is, however, that the field is not yet fully diversified, thus being a young woman from Mexico may present challenges to breaking into the international arbitration community. ArbitralWomen’s data show that, compared to other developed countries such as the United Kingdom, Mexico has few registered female arbitrators. Thus, accessible mentoring programs are not a feasible option for my jurisdiction. As a young Latina woman, the path is still long and tough; both Mexico and South Korea are jurisdictions known for being patriarchal societies. For instance, in the platform ArbitralWomen, there are no South Korean female arbitrators registered. The lack of female role models working in international arbitration from diversified jurisdictions reduces the number of young women willing to work in international arbitration and inhibits the opportunities for women to engage in constructive, supportive networking. Thus, encouraging societal awareness of potential unequal gender treatment at work becomes critical to being able to move forward and progress. For instance, by promoting its highly credentialed female members, ArbitralWomen seeks to equip clients, counsel and other stakeholders in the international arbitration community with access to women for any role needed. Another method discussed by the panel to enhance diversity is to establish targets and quotas. Ms Paula Hodges (Herbert Smith Freehills) explained that Herbert Smith Freehills used to have 20% female partners thereafter aiming for a clear target to achieve 35% female partners by May 2023. A male from the audience asked why the target was 35% and not 50%. Ms Hodges answered that the aim is to set realistic targets in order to advance more effectively. According to the authors, the responsibility to set effective targets has a direct impact on young practitioners and gender perception for future generations. Mr Eun Young Park (Kim & Chang), the male voice on the panel, explained that targets have a more positive response by male colleagues whereas quotas spike criticism and more discussions about the results. Ultimately, it is important to recognize the problem of opportunity and recognition when compared with our male peers from relatively privileged jurisdictions. Thus, we need to reset the balance in the pursuit of legitimacy for international arbitration.

 

Europe

The disparities in the progress towards more gender-equal societies are clearly visible when comparing Sweden, my country of origin, and South Korea, where I currently live. As raised by Ms Sue Hyun Lim (KCAB INTERNATIONAL) during the panel discussion, South Korea has experienced a rapid economic and societal shift in the last few decades, which is reflected in the distinct generational gap. The authors note that in a society where respect for elders is essential, it is important to balance the need to impress the older generation and the desire to have a more progressive working culture and environment. In this regard, the Economist’s glass-ceiling index measures gender equality in the labour market and lists South Korea as the worst environment for women to work in within the OECD, having the largest gender pay gap amongst OECD countries. Given the increased number of highly educated women in law, it is important to secure equal opportunities for male and female practitioners alike. Moreover, the topic of networking was also addressed by the panel, where the general consensus is that women can be excluded from social groups, mainly because men have more time to network and socialize. The same Economist’s glass-ceiling index displays that in 2017 South Korea and Sweden were at opposite sides of the spectrum when it comes to gender equality in the labour market. This is not to say that there isn’t room for improvement in Sweden; parity has not been reached, but there is institutional support which is not yet present in other countries. In some places there is a more urgent need for support groups, where experience sharing, and mentoring can encourage the next generation of women to disrupt the status-quo and confidently reach for their goals. At the event in Seoul, panelist Ms Hodges urged law firms and institutions to encourage diversity, without leaving the burden of fighting unconscious and conscious bias entirely on women. Ms Kim Rooney (International arbitrator) agreed networking events hosted by arbitral institutions are important and people must recognize that gender equality has not been achieved yet. The authors agree that the situation is not improving fast enough, and it is up to the individuals to make a positive impact. In addition to the institutions promoting diversity, there are other initiatives available: for instance, the Equal Representation in Arbitration Pledge (ERA Pledge) launched in 2015, aims to improve the representation of women in arbitration. We cannot content ourselves with hiding behind the optimistic statement of having come a long way, when women are still not given the same opportunities for advancement, face gender discrimination from the seniors in their fields and are expected to fulfil rigid gender roles even after attaining the same education and/or professional experience as their male colleagues. As stated by Noor Kahdim on 26 September 2016 in a KluwerBlog, we should be striving towards a true meritocracy in international arbitration. While there is much work to be done, in the last ten years we have seen remarkable progress and an optimism that diversity can be achieved. Ideally, the same advice should be given to young men and young women entering the field of arbitration, but the reality is that young women still need further guidance to tackle the bias that plagues professional fields. The obstacles are more pronounced in certain cultures compared to others, but women in Europe, Latin America, East Asia and beyond should focus their training, intelligence, character, and values to assert themselves in their professional fields leading by example for the generations of professional men and women to come.

 

Concluding Remarks

As young female practitioners entering the world of arbitration, we are still expected to be pioneers to pave the way for the international arbitration community of the future. The world is changing, and so is the world of arbitration: initiatives such as the event in Seoul and the work that other organizations are doing are crucial in creating a more diverse arbitration community that can attract promising practitioners, female and male alike. As young practitioners, we should enter the world of arbitration determined to make our mark, by supporting each other, seeking out role models and mentors and distinguishing ourselves through hard work and vision. The future of international arbitration lies in the new generation of practitioners: both men and women should look forward to creating a more diverse international arbitration environment.

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India, Brazil Ink Novel Investment Treaty: Is Dispute Prevention the Way Forward?

Fri, 2020-03-20 21:31

On 25 January 2020, India and Brazil signed an Investment Cooperation and Facilitation Treaty, in the presence of the Brazilian president Jair Messias Bolsonaro. Arguably the most prominent of the 3 BITs that India has signed since adopting the model BIT in December 2015. The new treaty articulates several provisions (briefly discussed below) in departure from the model version. The two nations also committed to step-up cooperation in the field of oil and natural gas, cybersecurity, science and technology, health and traditional medicine, etc. This comes in the backdrop of India opening up its market to allow 100% FDI in Coal and Lignite mining as well as in some digital media sectors. India also offered for a 100% acquisition its debt-ridden national carrier Air India at the World Economic Forum at Davos earlier this January.

The treaty incidentally also comes at a time when Venezuela – which holds the maximum oil reserves in the world (roughly 18%) – faces sanctions from the United States thereby hindering commercial dealings by other nations and businesses with the oil dependent Latin American country.

As a backgrounder, for Brazil, this is the 27th BIT it has signed, yet there is only one which has seen light of the day. Surprisingly though, both Brazil and India are not signatories to the ICSID Convention. While Brazil has remained firm in its views that investor-state arbitration limits a state’s rights to regulate benefits to foreign investors, it may perhaps have been on the same footing as India – which has revoked 58 of its BITs in the recent past. India currently has only 14 BITs in force, with 5 in the post-signing incubation phase, including the most recent with Brazil.

 

A departure from the Model BIT

The new Investment Treaty, in terms of disputes and resolution, has departed considerably from the Model BIT of 2015. Her largely protective Model BIT provides for a new Investor State Dispute Settlement mechanism that requires foreign investors to exhaust local remedies for 5 years before going for international arbitration. Perhaps learning its lessons from the White Industries crises where the investor may not have anticipated that enforcing the award would take substantially longer time than procuring one from a tribunal. For the largest democracy in the world – with the fastest growing population – which has its higher judiciary clogged with close to half a million pending cases; it would make sense to prevent being accused for breach of the Fair & Equitable Treatment Standard owing to delayed adjudication. However, the instant treaty between India and Brazil completely shifts the focus from dispute resolution to dispute prevention, with no provision for investor-state arbitration, lest through their country.

 

Here’s a brief look at some of the key provisions

Investment has been defined narrowly to include shares, stocks, licenses, authorizations, loans to enterprises, intellectual property, and movable and immovable property. There is a categorical exclusion of several items like debt securities, portfolio investments, claims to monies arising out of commercial transactions, goodwill.

 Article 4 – Treatment of Investments

The standards of protection are provided for in Article 4, depart from the traditional Fair & Equitable Standard, preclude either nation from taking measures that constitute denial of justice, breach of due process, discrimination and abusive treatment against investments. Though in consonance with the model BIT’s Article 3, there is no most-favored nation (MFN) clause in the treaty.

 Article 10 – Investment Measures and Combating Corruption and Illegality

The Article casts a duty upon both nations to adopt measures and make efforts to prevent and fight corruption, money laundering and terrorism financing with regard to covered matters. Moreover, the treaty takes a step further in precluding any protection to investments made with capital or assets from ‘illicit’ sources. This provision rather cements the debate, at least for the purpose of this treaty, on whether corrupt investments are entitled to protection. The investment, to be recognized as such, has to be in accordance with the provisions of the treaty and in compliance with the laws of the host state, with an onus on the investors to share any information that the host state may desire, including those of corporate history and practices of the investor.

Article 13 – Joint Committee for the Administration of the Treaty

A Joint Committee envisaged under this provision would administer the treaty. The functions and responsibilities include supervising the implementation and execution of the treaty, and also consulting with investors and stakeholders on issues related to the work of the committee. But going beyond, the largely autonomous committee would, inter alia, be empowered to mediate for amicable disputes concerning investments and also, supplement rules for arbitral dispute settlement between the parties.

Article 14 – Ombudsman

Both nations shall designate an ombudsman who shall be responsible to support investors from the other party in its territory, and amongst other responsibilities, shall be tasked to address differences in investment matters with a view to help in prevention of disputes.

Article 18 – Dispute Prevention Procedure

The most striking feature of the treaty translates not to dispute resolution but dispute prevention. Grievance regarding a specific measure adopted by either nation can only be raised by the other nation, not by investors, before the Joint Committee. An investor, though, may raise objections through its representative nation, unless already raised before another dispute settlement forum (not envisaged in the treaty).

Article 19 – Dispute resolution between Parties

The dispute resolution clause does not envisage resolving disputes between investors and parties, but only between parties, i.e., the nations. The choice between an ad hoc Arbitral Tribunal or a permanent arbitration institution rests with the parties, however, there are 2 important conditions:

i. The purpose of the arbitration is to decide on interpretation of this treaty or the observance by a Party of the terms of this Treaty. The Arbitral Tribunal, however, shall be precluded from awarding compensation.

ii. The Tribunal shall be empowered to examine matters related to the following:

a. the objective, definitions, scope and general provisions.

b. treatment of investments, expropriation, compensation for losses attributable to war or other armed conflict, revolution, state of emergency, civil strife, etc., and transfer of funds.

c. treatment of protected information.

d. parties’ right to take prudential measures in relation to protection of investors, maintenance of financial institutions and financial systems.

e. amendments to the treaty, relationship with other treaties, and issues relating to the duration of the instant treaty.

iii. The parties would bear their own costs, although the tribunal may in its discretion direct any party to bear all or a substantial portion of the costs.

The treaty further lays down the criteria for the appointment of arbitrators as well as a code of conduct to be followed by the arbitrators. As it appears, an aggrieved party may ultimately seek refuge under its government to raise issues of treaty violation in arbitration, and vicariously seek enforcement of any arbitral directions regarding observance of treaty provisions.

 

Dispute Prevention

The treaty envisages cooperation, in pursuit of which are incorporated binding general and security exceptions; while giving due regard to each other’s sovereign prerogatives and regulatory powers. The minimization of the potential areas of disputes certainly exhibits promise in avoidance of conflicts that may escalate to the level of formal disputes. The level of governmental intervention in crystallizing those disputes may effectively mean resolution through diplomatic discussions, rather than invoking the provisions of this treaty. The promise to offer ombuds services, to act as a focal point for the other party’s investors, appears ideal. In theory, dispute prevention provisions can promote transparency, better informed investments, cooperation between investors and states, reduce blindsiding measures, save costs, prevent hostilities and eventually promote the objectives of the treaty.

Reportedly, India has been taken to investment arbitration on 24 occasions, and suffice it to say, India is wizening-up with its approach towards investments. India is currently defending 11 investment disputes, unlike its Brazilian counterpart, which has no reported ones. Indian investors on the other hand have notably resorted to Investment Arbitration on only 7 instances, of which just 3 remain pending. Though one of the largest developing economies, and one of the fastest growing, too, India still ranks 63rd on the Ease of doing business index and a startling 163 in resolving contracts. India’s new-found approach, under which any of the 3 new treaties are yet to come in force, is yet to manifest results vis-à-vis dispute resolution. How the new dispute prevention mechanism fares is a question for tomorrow, but it surely would highlight the impact of not resorting to traditional investor-state dispute resolution in an age when investment arbitration is often being questioned.

 

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The Green Pledge: No Talk, More Action

Fri, 2020-03-20 03:00

In an industry which thrives on lofty ideals of amicable dispute resolution and open debate, it is startling to observe that the environmental impact involved in the conduct of international arbitrations has received little attention.  This is not to suggest that the international arbitration community has completely ignored the issue, but the focus has been on policy-based issues relating to climate change, for example, the International Bar Association’s Report on Climate Change Justice and Human Rights, or the ICC’s publication entitled Dispute Resolution and Climate Change:  The Paris Agreement and Beyond.  These are all positive developments and must be welcomed, however, the stark reality is that there has been an absence of discussions about efforts that must be made at a personal level to address the carbon footprint as we engage in international arbitration proceedings.

 

The Campaign for Greener Arbitrations

The Campaign for Greener Arbitrations (“Campaign”) is an initiative to address the carbon footprint of international arbitrations and mediations.  The Campaign began life as a “Green Pledge” initiated by International Arbitrator, Lucy Greenwood, last summer after she noted the significant carbon footprint of the arbitral community and the reality that we are all collectively far behind the curve.

The Green Pledge was premised on a personal commitment by clients, counsel, and arbitrators to ensure to minimise the impact on the environment of every arbitration and mediation an individual is involved in.  Nine micro-level changes have been identified in the Pledge:

i) to “consider and question the need to fly” at all times during the arbitration;

ii) to “correspond [only] through electronic means” unless the circumstances expressly require otherwise;

iii)  to “request that electronic rather than hard copies of documents” be provided;

iv) to “discourage the use of hard copy bundles in hearing rooms”;

v) to suggest that “witnesses give evidence through video-conference” rather than attending oral hearings in person, when appropriate (for arbitrators and mediators);

vi) to “be mindful that email has a carbon footprint”;

vii) to “avoid traveling unnecessarily to deliberate with [] co-arbitrators/mediators and use screen sharing/video technology instead” (for arbitrators and mediators);

viii)  to “avoid traveling unnecessarily to conduct fact finding or other interviews with witnesses and use screen sharing/video technology instead when appropriate” (for counsel); and

ix) finally, an obligation on everyone to “offset the carbon emissions of any flights” taken for an arbitration or mediation.

The Green Pledge, therefore, required all of the participants to thoughtfully engage with their commitments to dispute resolution against the potential carbon impact it may have.  The Green Pledge provided a series of factors that can be considered and even the application of some of these criteria will overall result in a better impact for the environment.  Indeed, the Green Pledge has been nominated for the GAR “Best Development” Award 2020 for drawing the international arbitration community’s attention to its own carbon footprint.  The Campaign is now expanding the Green Pledge to be global and more inclusive.  While the Green Pledge began life as one arbitrator’s attempt to encourage others to make small changes in their behaviour, now the Campaign for Greener Arbitrations is growing in momentum.  It will include more diverse stakeholders within its ambit, such as arbitral institutions, law firms, hearing centres, and e-providers of arbitration services.

 

World on Fire: The Campaign is the need of the hour

The significance of the Campaign cannot be overstated in light of recent environmental catastrophes.  For instance, when Australia was struck by devastating bushfires recently, scientists confirmed that human-caused climate change increased the risk of such bushfires by as much as 30%.  Similarly, the European Commission confirmed that “more countries than ever [were] hit by forest fires in 2018.”  In 2019, it was reported that forest fires in the EU were three times the average number of fires over the previous decade.  In February, Antarctica logged its hottest ever recorded temperature, raising concerns over the accelerated retreat of the continent’s glaciers and rising sea levels.  The international arbitration community can no longer ignore the severity of environmental damage caused by human actions, especially when the carbon footprint of international arbitrations is immense, as demonstrated below.

 

An Environmental Impact Assessment of International Arbitrations

An Environmental Impact Assessment is the first step to address questions of climate change at a personal level in international arbitration. It comprised a study into the key environmental effects of a proposed action and was undertaken by the Campaign’s Steering Committee (“Steering Committee”), supported by a team from Dechert LLP, for international arbitrations.

The Steering Committee conducted a case study of a medium-sized (valued at US$30-50 million) international arbitration to determine its individual carbon footprint.  Naturally, several assumptions had to be made, which were deliberately conservative and made in consultation with an NGO to ensure accuracy.  For example, in calculating the number of printed sheets generated in the case study, the Steering Committee only included an estimate of the printed pages submitted to the tribunal and disregarded all internal printing and the generation of drafts.

The total carbon impact in kg CO2e of the arbitration used as the case study was 418,531.02.  This would require planting more than 20,000 trees to offset its emissions!  Global Arbitration Review notes that this is a “number equivalent to four times the number of trees in Hyde Park or all the trees in Central Park.”

 

Towards ‘Green Arbitrations’

More than 93% of the identified emissions related to travel, particularly air travel by business class, which, depending on size and area of the seat, is usually two or three times as energy intensive as traveling in economy class.  Reducing one long distance flight for every arbitration would result in significant carbon savings, as would eliminating hard copy submissions.

The Committee looked at a “Green Arbitration.”  This involved changing the assumptions as follows: (i) eliminating paper bundles, (ii) reducing the amount of travel and (iii) eliminating motorbike couriers due to the alternative use of e-bundles and video conferencing.  These changes resulted in conserving 51,704 kg CO2e per arbitration, which is ten times as much as the carbon footprint of every individual in the UK.

There are two key actions arising from the environmental impact assessment: (i) fly less; and (ii) stop using hard copy bundles.

Simply reducing the number of flights by one at each stage of every arbitration would reduce costs by half and emissions by a quarter.  Travel objectives could be met by using video more frequently to interview and prepare witnesses and taking the self-evident step of flying the witness to the team rather than the team to the witnesses.  Arbitrators should also be more receptive to discussing whether it is appropriate to take the testimony of certain witnesses by video.  Similarly, shifting from hard copy bundles is desirable because paper production is very resource heavy – requiring not just trees, but also water and fossil fuels.  The Campaign plans to expand its research to consider email use and energy consumption, as well as other aspects of an international arbitration practice beyond those analysed in the initial impact assessment.

 

COVID-19: Proving that technology is the way forward

The COVID-19 pandemic has had a serious impact on virtually every aspect of our lives and the consequences of this pandemic are not fully known yet.  On one hand, quarantining people, closing businesses, and having employees work from home has led to reduced congestion, and therefore reduced emissions, on the streets.  In China, public transport in Wuhan was shutdown following the outbreak.  It is predicted that global CO2 emissions could fall because of the pandemic.  On the other hand, the COVID-19 pandemic has also exposed human wastefulness and its adverse effect on the environment.  Private airlines continue to operate ‘ghost flights’ with few or no passengers for fear of losing airport slots allotted to them. However, the COVID-19 pandemic is forcing all participants to use technology in a more thoughtful and considered manner.  Indeed, it has forced the international arbitration community to consider the Green Arbitration alternatives by reliance on technology in place of in-person hearings.  But it is not just arbitrations that are considering alternatives but even moot court competitions.  This is best illustrated by the Vis Moot, the hearings of which are being organised online because both the Hong Kong and Vienna editions are cancelled.  Some arbitral institutions are also considering paperless alternatives to hard copy submissions, for instance, ICSID recently announced that Electronic Filing would be its default procedure.

 

What can you do?

You can do your bit signing the Green Pledge and actively reducing the carbon footprint of international arbitrations.  Adopt the nine guidelines in both existing and future arbitrations/ mediations and strive to raise the bar in every subsequent proceeding.

The Campaign will launch formally on Earth Day (22 April 2020).  Please contact [email protected] if you are interested in getting involved.

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India-Brazil Bilateral Investment Treaty – A New Template for India?

Thu, 2020-03-19 02:00

During the recent visit of Brazilian President, Jair Bolsonaro, to India, Brazil and India inked the investment cooperation and facilitation treaty (hereinafter bilateral investment treaty – BIT).

From Brazil’s point of view, this BIT is an extension of a novel approach to foreign investment in international law based on investment facilitation and cooperation, not investment protection – something that a typical BIT entails. Brazil embraced this approach in 2015 when it launched its Model BIT. Since 2015, Brazil has signed more than 10 such treaties focusing on investment facilitation and cooperation – the one signed with India being the latest one.

From India’s point of view, this is the fourth BIT signed after adopting a new Model BIT in 2016. The previous three have been signed with Belarus, Taiwan and Kyrgyz Republic (the text is not in public domain). India’s BIT with Brazil is based on the Brazilian, not Indian model BIT, though a careful reading of the text shows that both sides have compromised to strike this deal.

The purpose of this piece is to demonstrate how the India-Brazil BIT deviates from the Indian Model BIT. I discuss deviations on the following issues: definition of investment, expropriation, and investor-State dispute settlement (ISDS).

 

Definition of Investment

The India-Brazil BIT, like the Indian Model BIT, adopts an enterprise-based definition of investment where an enterprise is taken together with its assets. The Indian Model BIT further requires that the enterprise must satisfy certain characteristics of investment such as commitment of capital and other resources, duration, the expectation of gain or profit, and the assumption of risk and significance for the development of the country where the investment is made. Article 2.4 of the India-Brazil BIT also provides for these characteristics of investment except for ‘significance for the development’ of the host State. The requirement that investment should be significant for the development of the host State is a subjective requirement and proving that this requirement has been met could be a challenge for foreign investors.

 

Expropriation

A very important feature of the India-Brazil BIT is that it only protects against direct expropriation. Article 6.3 of the BIT states: “For greater certainty, this treaty only covers direct expropriation, which occurs when an investment is nationalised or otherwise directly expropriated through a formal transfer of title or outright seizure”. Thus, indirect expropriation is outside the scope of the BIT. This provision is consistent with Brazil’s Model BIT. Brazilian lawmakers have been critical of provisions in BITs that allow foreign investors to challenge indirect expropriation claims. Brazil believes that rules on indirect expropriation open the gates for abusive claims by foreign investors that limit a State’s capacity to adopt regulatory measures to pursue public interests such as the protection of public health and environment.

The absence of rules on indirect expropriation in the India-Brazil BIT is a complete departure from Article 5 of the Indian Model BIT and also India’s BITs with Belarus and Taiwan that provide protection to foreign investment from both direct and indirect expropriation. In fact, the Indian Model BIT not only provides protection from indirect expropriation but also provides how to determine that an investment has been expropriated indirectly.

In today’s world, direct expropriations of foreign investment have become rare. Foreign investment faces challenges from regulatory conduct of a host State that may have an effect equivalent to direct expropriation without expropriating investment directly. While the possibility of foreign investors abusing the system can never be ruled out, the possibility for host States to abuse their public power to the detriment of foreign investors or impose disproportionate costs on foreign investors for pursuing public interests can also not be ruled out. Thus, leaving indirect expropriation outside the scope of the BIT creates a yawning gap in the protection of foreign investment.

 

Dispute Settlement    

The most important aspect of the India-Brazil BIT, inspired from Brazil’s Model BIT and other Brazilian BITs, is that it adopts a very different approach to the settlement of investment disputes. It is well known that Brazil has been a vocal opponent of the ISDS system. Thus, Brazil has developed a novel approach to settlement of investment disputes based on prevention. For this purpose, Article 13 of the India-Brazil BIT provides for the creation of a joint committee comprising officials of both the countries. This joint committee shall, inter alia, supervise the implementation and execution of the treaty and resolve disputes concerning investments of investors in an amicable manner.

Article 14 establishes the creation of national focal points or ombudsman in both the countries that would, inter alia, endeavour to follow the recommendations of the joint committee, and address differences in investment matters. Article 18 of the India-Brazil BIT provides for a dispute prevention procedure. As per this procedure, any measure of a country that the other country considers amounts to a breach of the BIT, shall be referred to the joint committee for dispute prevention. In case the joint committee is unable to prevent the dispute, then the dispute shall be referred to State to State arbitration pursuant to the procedure in Article 19.

Article 19 of the India-Brazil BIT provides for State-to-State dispute settlement (SSDS). Article 19.2 states that the purpose of SSDS arbitration is to decide on the interpretation of the treaty or observance by a country of the terms of the treaty. It further clarifies that the SSDS arbitration tribunal shall not award compensation. There is no mention of ISDS in the India-Brazil BIT. The absence of ISDS in the BIT is a clear reflection of the Brazilian stand on this issue. Brazil has been sceptical of ISDS for several reasons, including it being discriminatory against domestic investors.

The dispute settlement provisions in the India-Brazil BIT are not consistent with the dispute settlement provisions of the Indian Model BIT. The Indian Model BIT provides for both SSDS and ISDS. The investor’s access to international arbitration in the Indian Model BIT is subject to several restrictions such as exhausting local remedies for a period of five years and following a very strict time period requirements. However, not allowing ISDS means that foreign investors shall be completely dependent on the home State. If for any reason the home State does not wish to espouse the cause of the foreign investor, there will be no redress available for the foreign investor under international law. While Brazil’s concerns about ISDS are legitimate, the solution to addressing these concerns is not to do away with the system completely. Instead, it would be better to ensure that the systemic concerns that plague the ISDS model such as lack of transparency, bias in the appointment and functioning of arbitrators, etc., are addressed by undertaking the necessary reforms.

 

Similarities with the Indian Model BIT     

Some provisions in the India-Brazil BIT are common to the Indian Model BIT. For instance, like the Indian Model BIT, there is no most favoured nation (MFN) provision in the India-Brazil BIT, although the Brazilian Model BIT provides for a MFN provision.

Like the Indian Model BIT, Article 20.3 of the India-Brazil BIT puts taxation related regulatory measures outside the purview of the BIT. However, there is one subtle difference. Article 2.4(ii) of the Indian Model BIT states that the host state’s decision that the impugned regulatory measure is taxation-related shall be final and non-justiciable. The Article 20 language in the India-Brail BIT that gives immunity for taxation related measures does not use the language of non-justiciability. Articles 23 and 24 of the India-Brazil BIT provides for general and security exceptions respectively and resemble the general and security exceptions in the Indian Model BIT.

 

Conclusion

The India-Brazil BIT reflects a compromise between the Indian and Brazilian approaches to investment treaties. However, the BIT is certainly more titled towards the Brazilian approach. It does not contain ISDS and rules on indirect expropriation, which creates a gaping hole in the protection of foreign investment. The focus of the BIT is more on dispute prevention. While this is admirable, the fact that also needs to be appreciated is that host States may abuse their public power and thus BITs need to reflect a careful balance between a host State’s right to regulate and investment protection. As I have argued in my book, subsequent to being sued by several foreign investors, India adopted a Model BIT that gives precedence to the host State’s right to regulate over investment protection. The India-Brazil BIT tilts even more towards a host State’s right to regulate, thus marking a departure from India’s Model BIT. It will be interesting to see whether India, in its future BIT negotiations, would come back to its Model BIT template or be more comfortable with the Brazilian template.

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Enforceability of Emergency Arbitrator Orders in Turkey and Take-Aways from the 15th ICC Turkey Arbitration Day 2020

Wed, 2020-03-18 01:06

The 15th ICC Turkey Arbitration Day was held on 24 January 2020 in Istanbul. The aims of the conference were to contribute to the development of commercial and investment arbitration in Turkey, to promote Istanbul as a place for arbitration and alternative dispute resolution as well as the work of Turkish arbitration practitioners both on domestic and international levels.

 

Discussions at the Conference

The day started with introductory remarks from M. Rifat Hisarcıklıoğlu, President of the Union of Chambers and Commodity Exchanges of Turkey and Chair of the Board of the ICC Turkey National Committee, Alexander G. Fessas, Secretary General of the ICC International Court of Arbitration, Prof. Dr. Metin Feyzioğlu, President of the Union of Turkish Bar Associations and Zekeriya Birkan, Deputy Minister of the Turkish State Department of Justice. They highlighted the valuable contribution of arbitration to judicial systems and its crucial importance in meeting the needs of business life as well as Turkey’s desire and ambition to become one of the top arbitration centres in the world. Five sessions were held to discuss various hot topics of international arbitration. In four of these sessions, local and foreign practitioners and academics (i) provided a general overview on the 2019 Report of the ICC Commission on the Arbitration and ADR Task Force on emergency arbitrator proceedings, (ii) presented the Report of the ICC Commission on Arbitration and ADR on construction arbitrations and its particularities, (iii) discussed the local and European banks’ approach to arbitration as a means to settle finance industry disputes, and (iv) finally referred to the importance of securing an enforceable award.

One of the sessions focused particularly on arbitration practice in Turkey. During this session academics and judges addressed the enforceability of interim reliefs and emergency measures in international arbitrations seated in Turkey and the courts’ approach. This post aims to give a summary of the discussions held in this session.

 

Enforceability of interim reliefs and emergency measures under the applicable rules

Prof. Dr. Ali Yeşilırmak opened the session by presenting the regulatory framework of the available options and avenues to seek interim relief under Turkish arbitration law and the arbitral tribunals’ powers to grant interim measures. He highlighted the differences between the regulations of the Turkish International Arbitration Law No. 4686 (“TIAL”) and the Turkish Code of Civil Procedure No. 6100 (“CCP”). Under Article 414 of the CCP, which is more recent compared to the TIAL, the law explicitly prohibits the courts to decide on interim measures when the dispute is to be resolved by domestic arbitration unless the arbitrators allow the parties to seek for court assistance. This article also explicitly mentions the court’s duty to enforce interim reliefs granted by the arbitrators. To the contrary, under Article 6 of the TIAL the parties are always free to ask for court assistance before or during the arbitration, and the arbitral tribunal is not entitled to grant interim measures or interim attachments that are required to be enforced through execution offices or to be executed through other official authorities or that bind third parties. Prof. Yeşilırmak criticised the incompatibilities between these two legislations and recommended to amend the TIAL in order to reflect the arbitration friendly approach of the CCP.

Prof. Yeşilırmak also noted that even though the TIAL and CCP allow the arbitrators to grant interim relief, he is of the opinion that emergency arbitrators are not able to enjoy such prerogative since they should not be considered as arbitrators for the purposes of settling the main dispute in arbitration.

 

Courts’ approach

After these remarks, Judge Nevzat Boztaş, the Chair of the 14th Civil Chamber of Istanbul Regional Court of Appeal, and Judge Dr. Adem Aslan, Member of the 11th Civil Chamber of the Court of Cassation took the floor to discuss the courts’ approach to the enforceability of interim reliefs granted by the arbitrators and the scope of the judicial review of such reliefs when they are brought before the court.

Judge Boztaş discussed the scope of the court’s examination of the emergency arbitrator orders when the parties ask for court assistance to enforce these interim reliefs under Article 6 of the TIAL and Article 414 of the CCP. The discussion mainly evolved around the question of whether the court should respect the emergency arbitrator’s order as it is and solely decide on the validity of the arbitration agreement without getting into the merits or whether the court should conduct a separate and independent evaluation based on lex fori and general principles such as, inter alia, urgency of the relief sought, mandatory rules of law, public order and fundamental rights. Judge Boztaş stated that his approach leans towards the latter, meaning that the court should conduct its own test for granting interim relief even though the dispute is to be resolved by arbitration. According to his view, the emergency arbitrator’s order would only weight as evidence during this judicial process. Judge Boztaş defended his position by highlighting the principle of the courts’ independent decision-making. He suggested that the legislator had consciously chosen those words that explain how the courts ought to enforce the arbitrator’s interim reliefs under the CCP and highlighted the lack of explicit wording under the TIAL concerning international arbitrations.

We would like to note that, Article 6(1) and 6(4) of the TIAL reserves the parties’ right to apply to courts for emergency measures under the CCP before or during arbitration albeit the existence of an arbitration agreement. Article 6(3) also allows the parties to seek for court assistance in case the emergency measure was sought in arbitration, but one of the parties does not comply with the arbitrator’s interim relief. This leads us to the question of whether the legislator intended for the courts to conduct a different prima facie review when dealing with an interim order granted by an arbitrator as opposed to considering the arbitrator’s order as only an evidence in their judicial review. This question will probably be answered by future practice of the courts.

Judge Aslan closed the session by discussing another aspect of court assistance and focused on the debate as to whether an interim order is final under national laws and within the meaning of the New York Convention (“Convention”), and thus, whether the Convention may be applicable to the enforcement of emergency arbitrator orders. Judge Aslan informed the attendees about a recent Court of Cassation decision (11th Chamber, E. 2017/3469, K. 2019/4259, 11.6.2019) which reversed the Court of Appeal’s position on enforcing interim reliefs granted by arbitrators which remains to be a controversial issue. In the said decision, the Court of Appeal was reluctant to enforce interim orders on the grounds that: (i) interim orders are not final or binding neither under national laws nor under the Convention which renders them unenforceable, and (ii) the parties do not hold any legal interest in enforcing interim orders that deal with the arbitral tribunal’s competence due to the fact that such determinations are merely declaratory.

The Court of Cassation, however, concluded that the Court of Appeal erred in its above reasoning and held that interim orders are enforceable on the following grounds:

  • Since partial awards are set forth under Article 14/A(2) of the TIAL and may be subject to enforcement under Article 15/B, by the same token, so should the interim orders granted by the arbitrators.
  • The Convention does not mention the finality of an award as a prerequisite for enforcement but rather refers to awards that have a binding effect on the parties. Partial or interim awards in fact bind the parties on the date the order is granted and also final for the purposes of the subject of the relief sought.

This particular interpretation of the Court of Cassation is of great importance since it may also pave the way for enforceability of the emergency arbitrator orders which are final in terms of the subject of the interim relief sought and binding for the parties on the date the order is granted.

Judge Aslan concluded his presentation by discussing more decisions of the Court of Cassation relevant to understand the courts’ position on granting interim reliefs where the main dispute is to be or is already resolved by arbitration. These note-worthy holdings may be summarized as follows:

  • It is possible to seek interim reliefs from a national court even if the final arbitration award has not been enforced yet. The lack of such an enforcement decision alone does not constitute a legal barrier to make an application for an interim measure before national courts. (19th Chamber, E. 2004/9775, K. 2004/13391, 30.12.2004)
  • It is a material procedural violation and against public order when the arbitral tribunal decides on interim relief without having an explicit request raised by the party during the arbitration considering that there is no available avenues for judicial review of such reliefs falsely granted by arbitrators. (11th Chamber, E. 2019/781, K. 2019/2161, 25.03.2019)

The overall conclusion of this session was that the nature of interim reliefs granted by arbitrators, and the smooth enforcement of such orders by national courts remain a controversial issue. It seems like the courts still have a tendency to thoroughly review the interim orders granted by the arbitrators and conduct their own legal tests if they believe the arbitrator’s order does not respect certain national principles and laws.

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Combating Climate Change: The Role Of Investor-State Arbitration In Africa

Tue, 2020-03-17 01:07

UN Secretary-General António Guterres opened the COP25 climate change conference on 2 December 2019 saying that:

“…At current trends, we are looking at global heating of between 3.4 and 3.9 degrees Celsius by the end of the century. The impact on all life on the planet – including ours – will be catastrophic. The only solution is rapid, ambitious, transformative action by all – governments, regions, cities, businesses and civil society […] all the main emitters must do more”.

António Guterres was disappointed with the outcome of the COP25 climate change conference. According to the UNEP Emissions Gap Report 2019 a global emissions reduction of 7.6% per year over the next ten years is required to limit global warming to 1.5 degrees Celsius. Even the most ambitious national climate action plans fall short, however, and every fraction of additional warming will bring worse impacts, threatening “lives, livelihoods and economies.

In this blog post we will analyse the role of investor-state arbitration in the transition to a sustainable economy.

 

The risks of ISDS

Traditionally Investor-State Dispute Settlement (ISDS) was seen as a valuable tool in facilitating inward direct investment to developing countries in Africa and elsewhere. Bilateral Investment Treaties (BITs) incorporated ISDS to provide comfort to investors in cross-border transactions that disputes could be resolved outside of the uncertainties of local legal systems.

More recently ISDS has been the subject of criticism, including a perception that ISDS is skewed in favour of investors, at the expense of state parties’ ability to make legitimate policy decisions.1)UNCTAD’s Reform Package for the International Investment Regime discusses amendments in this regard, from page 38. jQuery("#footnote_plugin_tooltip_9330_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9330_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Many BITs include provisions to avoid inequitable (discriminatory) interference with foreign investors’ rights, but State action to combat climate change could give rise to such inequity (and therefore claims) regardless of the broader environmental legitimacy of state action.

Some commentators are concerned that fear of costly claims for breach of investment treaties may curb states’ appetite for pro-climate legislation and policies. There is a wide range of precedents for investors bringing action against states for losses suffered due to policy changes. Spain, for example, has faced a large number of claims under the Energy Charter Treaty after revising incentives under its (renewable) energy schemes. Whilst Spain might be well placed to absorb the costs of such ISDS cases, the risk of high-cost arbitration may slow the adoption of ambitious climate policies in emerging markets.

The impact of similar claims could be significant in nations dependent upon extractive industries and Foreign Direct Investment (FDI). High levels of FDI increase the range and scale of cross-border investments (and necessarily, the risk of investor-state disputes), and extractive industries are in danger of being “stranded” or devalued by environmental policy changes. Although the UNCTAD World Investment Report 2019 shows that FDI into Africa has diversified across sectors including finance and manufacturing, oil and gas still dominate and the threat of ISDS could have a significant impact upon legislators’ willingness and ability to enact climate change law and policy.

 

ISDS as a force for change

Although concerns about ISDS could potentially stall concerted action against climate change, ISDS could also be a force for change. ISDS is not inherently flawed: it provides parties with a neutral and private mechanism for dispute resolution which, under the New York Convention, leads to awards which are recognised in the majority of States. Without ISDS many investments would not proceed, and as a supra-national means of holding states to account, it is an important tool in promoting free, fair, and rules-based international trade and commerce.

Furthermore, present concerns regarding ISDS and climate law or policy seem to arise from perceived inadequacies in international agreements, rather than from ISDS itself. Many BITs are seen to lack reciprocity, imposing obligations on states and granting rights to investors. Some common treaty provisions are also broad in scope. The Fair and Equitable Treatment (FET) standard has a ‘legitimate expectation’ component which leaves it open to investors to claim losses arising not only from changes to regulatory regimes, but also the implementation and enforcement of existing laws.

Many BITs were drafted fifty years ago when the investment landscape and nuances of international law were very different. Could amendments allow states to utilise ISDS in transitioning to a sustainable economy?

 

Amendments to BITs

In June 2017, the Stockholm Treaty Lab launched a competition inviting entrants to draft a model treaty which encouraged and protected cross-border investments in climate change adaptation and mitigation. The entries raise interesting ideas which could be incorporated into current BITs to manage and foster the transition to sustainable economies. Suggestions from “The Creative Disrupters”2)Nathalie Bernasconi-Osterwalder, Martin Dietrich Brauch, et al (2019) Journal of International Arbitration, 36(1), pp. 7-36. jQuery("#footnote_plugin_tooltip_9330_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9330_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); include a two-tier categorisation of “sustainable” and “unsustainable” investments with different rights and obligations, and the ability to deny certain benefits and remedies to unsustainable investments. The team suggests a more restrictive alternative to the FET standard as well as an explicit right to regulate for legitimate social and economic policy objectives. They also require the conduct of environmental impact assessments prior to the establishment of investments, with a set of minimum national standards.

There are some similar provisions in existing international agreements. The Pan-African Investment Code (PAIC) is a template treaty of the African Union (AU), which seeks to balance the promotion and protection of investments with each state’s ability to advance sustainable development. Adopted in 2016, the PAIC obliges investors to comply with environmental law, omits the FET standard, and allows states to submit counterclaims in arbitration proceedings. Notably the PAIC retains the right to resolve disputes by ISDS, but requires an African dispute resolution centre. Although the PAIC is non-binding, it will be interesting to see whether AU member states adopt its provisions in future BITs. Its interaction with the African Continental Free Trade Agreement, which recently came into force, will also be of interest.

The Morocco-Nigeria BIT, although not yet in force, is notable in that it contains binding provisions which promote climate change action. Both states will impose duties upon investors to comply with local and/or home environmental legislation, and the performance of the treaty will be monitored by a joint committee, enabling states to scrutinise investors’ compliance with this legislation. Similar provisions could be adopted in other BITs to help further climate change goals.

Provisions promoting the transition to a sustainable economy are present in few existing BITs. However this has not always prevented tribunals from taking environmental considerations into account. In Cortec Mining Kenya Limited and others v Republic of Kenya (ICSID Case No. ARB/15/29), discussed here on the blog, the tribunal found that the claimants did not have a protected investment under the UK-Kenya BIT because they had not acquired an environmental impact assessment licence, and thereby failed to comply with local environmental legislation. The definition of “investment” in the UK-Kenya BIT did not require compliance with Kenyan law, but the tribunal held that explicit language to that effect was not necessary. Whether other tribunals would be willing to adopt a similar approach is uncertain, and the claimants are attempting to have the award, rendered in favour of Kenya, annulled.

With amendments to BITs and local legislation promoting environmental and climate-resilient factors, ISDS could have an important role in combating climate change. Tribunals could hold investors to account for breaches of environmental legislation, prevent them from claiming in respect of states’ legitimate policy changes, and enforce protective measures in favour of sustainable investments. To combat the global problem of climate change most effectively, however, it is not sufficient to enforce action at a national level alone.

 

Is there a role for state-state arbitration?

The main supra-national legislation in respect of climate change adaptation and mitigation is the Paris Agreement. Unlike the majority of BITs, the Paris Agreement does not contain compulsory provisions for arbitration, but instead adopts Article 14 of the 1992 United Nations Framework Convention on Climate Change (UNFCCC). This provides for settlement of disputes by “negotiation or any other peaceful means”, with the option to opt-in to compulsory arbitration by written declaration. The UN website only lists two declarations accepting compulsory arbitration under the UNFCCC, from the Netherlands and the Solomon Islands, and the “annex on arbitration” detailing the appropriate procedure has yet to be drafted.

There is little incentive for state signatories, particularly those responsible for the most greenhouse gas emissions, to opt-in to arbitration. They risk exposure to large claims for the loss and damage some states are experiencing because of climate change, resulting from sea level rise, desertification, and the exacerbation of extreme weather events, for example. Whilst many African (and other) states suffering such loss and damage might wish to hold other countries to account for their contributions to climate change, they are, for the moment, unlikely to be able to do so.

The immensity of the challenge ahead requires co-ordinated action at a global scale. A recent United Nations Development Programme report suggests:

“[i]t’s clear that business as usual simply isn’t good enough anymore. We must do more – much more – in areas related to mitigation, adaptation, and the finance to support all of this work. And we must do it quickly.”

In light of the difficulties of enforcement between nations, it would seem prudent for states to consider the role of ISDS (and existing and future BITs) in meeting their international obligations in respect of climate change. Investors too should seek to understand how their existing and future investments and ISDS may be shaped by the growing raft of environmental regulation and climate policies.

References   [ + ]

1. ↑ UNCTAD’s Reform Package for the International Investment Regime discusses amendments in this regard, from page 38. 2. ↑ Nathalie Bernasconi-Osterwalder, Martin Dietrich Brauch, et al (2019) Journal of International Arbitration, 36(1), pp. 7-36. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Quo Vadis Supreme Court of Ukraine?

Mon, 2020-03-16 01:30

On 9 October 2019 the Supreme Court of Ukraine 1)This article refers to the Supreme Court created in the course of the judicial reform of 2016 in Ukraine. jQuery("#footnote_plugin_tooltip_8030_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8030_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); (Supreme Court) rendered a decision in a case on setting aside an arbitral award that goes completely against Article 3 of the UNCITRAL Model Law on International Commercial Arbitration.

 

Background

All began when a US company, Altum Air Inc. (Altum Air), initiated proceedings against a Ukrainian company, Windrose Aviation Company (WINDROSE), with the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry (ICAC) in accordance with the arbitration agreement contained in the contract between the two companies. The ICAC ruled in favor of Altum Air. WINDROSE did not appear in the arbitration proceedings, though they were notified according to the ICAC Rules and the Law of Ukraine on International Commercial Arbitration (Law on ICA) that in its totality reiterates the respective provisions of the UNCITRAL Model Law on International Commercial Arbitration (UNCITRAL Model Law), although it’s worth to remark that Ukraine did not adopt the 2006 revised version.

 

Expect the Unexpected: Local Court Sets Aside the Award

WINDROSE applied to a local court for setting aside of the ICAC award, claiming they did not receive any single ICAC notification of the arbitration proceedings and that the company found out about arbitration proceedings only after receipt of the ICAC award (case No 761/17236/17).

WINDROSE alleged that all the ICAC communications, except the very last one, the ICAC’s award, were not delivered in a due manner. WINDROSE claimed the ICAC communications were received by an employee who was unauthorised to collect mail. As a result, WINDROSE was not duly notified.

The WINDROSE employee authorised to receive the mail claimed he never saw any ICAC written communications. Meanwhile, WINDROSE denied that a first ICAC notification containing the statement of claim, the ICAC Rules and the recommendatory list of arbitrators had been serviced to their CEO’s secretary by a DHL courier.

In turn, Altum Air referred to Article 3 of the Law on ICA stating that “any written communication is deemed to have been received if it is delivered to the addressee personally or if it is delivered at his place of business, habitual residence or mailing address”, and it is completely irrelevant what employee of the addressee physically accepts the communications.

The local court took into consideration the handwriting examination of the authorised employee of WINDROSE, subpoenas (although the secretary of WINDROSE’s CEO did not appear before the court), cross-examination, etc. A year and a half after the process was initiated, the local court finally decided in favour of WINDROSE and set aside the ICAC award on the basis of Article 34(2)(1)(ii) of the Law on ICA.

 

Turn of Events: Court of Appeal Upholds the Award

Altum Air appealed whereas WINDROSE submitted its secretary’s affidavit stating the secretary had never received any ICAC notices.

The appellate court upheld the ICAC award because “WINDROSE’s local acts regarding persons authorised to receive communications cannot be decisive in resolving the issue of whether a party has been duly notified of the arbitration proceedings”. Furthermore, the appellate court found that,

[a]s a proper notification the ICAC Rules and the Law on ICA do not provide for international commercial arbitration or any of the parties to submit any evidence that a written notice has been served on a party in accordance with its internal procedures, as any attempt to follow such procedures would inevitably result in impossibility of giving any written notice of the arbitration proceedings to a party that does not actually wish to participate in the arbitration proceedings. Thus, no matter which exact WINDROSE employee received a communication, the fact of delivery of a written communication to the company’s place of business is a proper notification of the party, and that party shall be deemed to be duly notified of the arbitration proceedings.

 

Nobody Saw It Coming: The Supreme Court Sets Aside the Award

WINDROSE appealed to the Supreme Court which, in turn, decided in favour of WINDROSE for no good reason.

The Supreme Court reached two conclusions. Firstly, a delivery to an address other than the address where a company’s CEO is seated, even if that address is not the official (registered) place of the company’s business, does not constitute a due notification of that company. Secondly, a company shall be deemed to be duly notified if a communication is received by a person who is duly authorised by that company to receive the mail.

The Supreme Court completely ignored Article 3 of the Law on ICA that makes no reference to any authorised employee of a company or verification of seat of that company.

Moreover, the Supreme Court heeded some evidence that WINDROSE presented. This included, namely, a printout from the DHL website with a tracking code dated January 2019 matching a tracking code of the first written communication to WINDROSE sent by the ICAC, dated October 2016. It is generally known that DHL updates its database every 90 days, so one should assume that tracking codes once used are reused in course of time. But it is really striking that the Supreme Court based its ruling on the printout showing a communication with a matching tracking code that was purely national, i.e. it circulated only within the borders of Mexico, from Los Mochis to Uruapan, so that communication was not even sent from the territory of Ukraine. Despite these manifest discrepancies, the Supreme Court agreed with WINDROSE’s assertion that the ICAC had sent its first written communication to Mexico.

 

In Search of Lost Reason

It is hardly understandable why the Supreme Court decided to examine some facts of the case. According to Article 400(1) of the Civil Procedure Code of Ukraine, the Supreme Court cannot establish facts or consider facts as proven if such facts were not examined by lower courts. If necessary, the case must be referred to lower courts for reconsideration.

The Court of Appeal took an approach recommended in UNCITRAL Secretariat Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and, literally, for the first time ever in Ukrainian judicial practice explained clearly why a requirement of an authorised employee cannot be applied in consideration of issue of service of notice. In contrast, the Supreme Court reiterated a relatively new and bogus concept of due notification of a party in arbitration proceedings reflected in some judicial decisions. And in the present case, the Supreme Court not only imposed the formal requirements for service of notice, but established even more rigorous requirements than those for service of process in civil procedure in state courts.

Previous similar cases decided by the Supreme Court do not offer a satisfactory explanation for why the Ukraine’s apex court took a rather inadequate approach. In case No 761/20762/15-ц on recognition and enforcement of arbitral award, the circumstances of the case were quite similar. State Enterprise Scientific Research Institute Orion against whom the award was invoked claimed that security personnel authorised to receive the mail had never received any of the arbitration communications. Although the Supreme Court confirmed in its decision of 21 August 2019 that the issues of service of notice shall be governed by the rules of arbitration chosen by the parties and finally rejected to refuse recognition and enforcement of the arbitral award, the Court, nevertheless, based its decision mainly on affidavit of some employees of Orion asserting the issue of arbitration proceedings against Orion was repeatedly discussed during staff meetings, and CEO of Orion was aware of the arbitration proceedings.

In its decision of 19 June 2019 in case No 761/31470/17, the Supreme Court upheld the
lower courts’ position that a debtor was duly informed of the arbitration proceedings as
all notifications were received by the debtor’s authorised employee (the exact name of
the employee figured in the case) and refused to set aside the arbitral award.

Generally speaking, judicial practice indicates that courts pay no attention to the personality of a company’s employee receiving notifications from arbitrations and usually consider that the delivery to a company’s place of business is in itself a due notification of that company (cases No 761/5894/17, No 796/109/2018). Unlike the viewpoint taken by the Supreme Court, the general approach of the judiciary is to refuse to carry out handwriting examination or interrogation of witnesses as not necessary for such type of cases that imply a summary procedure.

Another reason for the dramatic decision of the Supreme Court could be a peculiarity that the Supreme Court’s position sometimes differs depending on the judges comprising the panel. And it happens occasionally that the Supreme Court changes its approach and renders a different decision in a similar case, this being not only a peculiarity for cases on international commercial arbitration.

 

Conclusion

In sum, the Supreme Court, contrary to Ukrainian and as well as international law, potentially created a legal environment for unwanted situations to occur where any debtor who does not wish to participate in arbitration proceedings simply will not receive notifications delivered to its place of business. Such debtor will always be able to say that the notification was received by an unauthorised employee. And as a result, the arbitral award should be set aside, or, if it is a foreign arbitral award, recognition and enforcement of that arbitral award should be refused due to a failure to give proper notice of the appointment of an arbitrator or of the arbitral proceedings to such debtor.

References   [ + ]

1. ↑ This article refers to the Supreme Court created in the course of the judicial reform of 2016 in Ukraine. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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After 48 Years at ICSID (1972-2020): An Overview of the Status of Egypt in ICSID Arbitrations

Sat, 2020-03-14 19:00

The motive for writing this blog post was conceived during my work as a member of the Technical Secretariat for the Ministerial Committee for Settlement of Investment Contracts Disputes, when I realized the need of both academics and practitioners for access to a reliable database of empirical analyses to support their work. This post is a contribution to that vast database of empirical research, which I hope can help statesmen and stateswomen, law firms, institutions, arbitrators and mediators involved in the field of investment dispute settlement achieve insightful views and determinations.

In what follows, I have tried to gather all relevant information from publicly accessible and available sources regarding most of the issues that can be analyzed empirically in relevance to all the ICSID cases involving Egypt. The results of this empirical analysis show interesting trends and I provide my personal insights on this empirical information.

This empirical analysis comes at a critical time for Egypt. In the last ten years, Egypt has encountered a steep increase in the number of disputes submitted to the ICSID. Since the 2011 Egyptian revolution, 22 ICSID arbitrations were filed against Egypt, amounting to 65% of the total cases filed against Egypt since joining the ICSID Convention.

 

1. Basis of Consent for ICSID Jurisdiction and Its Impact

Egypt has concluded 98 Bilateral Investment Treaties (BITs), 63 of which (i.e. 65 %) refer to the ICSID Convention. As stated by UNCTAD, Egypt is considered among the top 10 signatories of BITs. According to the ICSID cases database, BITs concluded by Egypt are the most relied on basis for consent to establish ICSID jurisdiction. Interestingly, the Egyptian Investment Law was invoked in two ICSID cases based on Egyptian Investment Law which previously offered unilateral consent to ICSID jurisdiction (i.e. Manufacturers Hanover Trust Company v. Arab Republic of Egypt & General Authority for Investment and Free zones; and Southern Pacific Properties “Middle East” Limited v. Arab Republic of Egypt).

The number of the BITs referring to the ICSID Convention might justify why Egypt is, to date, ranked the fourth-most-frequent respondent state following Argentina (56 cases), Venezuela (49 cases) and Spain (39 cases). According to the ICSID cases database, up to March 2020, 34 cases were filed against Egypt (i.e. 4.6% of the total registered cases at ICSID), out of which, 26 cases were concluded by ICSID tribunals, with 15 awards rendered by ICSID tribunals.

However, the analysis identified that 32% of the cases filed were only invoking first-generation BITs, particularly, the Egypt/UK (1975) and Egypt/US (1982) BITs. The statistical analysis findings in the case of Egypt do not support the common perception that there is a correlation between the number of BITs concluded by a state and the number of investment claims it receives.

Since Egypt joined the ICSID Convention, the most frequent BIT invoked was Egypt/US BIT with 6 cases, followed by the Egypt/UK BIT with 5 cases. The majority of investment disputes filed against Egypt, 17 cases (i.e. 50%), involved Western European countries. Meanwhile, 9 cases (i.e. 27%) involved parties from the Middle East, and 7 cases (i.e. 21%) involved parties from North America, including one case invoking the Egyptian Investment Law by an American investor.

Interestingly, Egypt was successfully granted 10 requests for bifurcation of jurisdictional issues by ICSID tribunals; however, it only prevailed in 3 claims for lack of jurisdiction and 2 claims were dismissed partially for lack of jurisdiction. Compared to Algeria, the most analogous example to the case of Egypt at the ICSID in the MENA region, we find that Algeria prevailed in all the awards rendered in its ICSID disputes for lack of jurisdiction (i.e. 3 cases were dismissed for lack of jurisdiction, 2 cases were settled and 3 cases are pending).

The impact of invoking BITs against Egypt 22 times in the aftermath of the Egyptian revolution could have tempted Egyptian policymakers to follow the example of Bolivia, Ecuador and Venezuela in disengaging from the whole ISDS system by withdrawing from the ICSID Convention or the BITs. Despite the high probability of paying large-sums to claimant investors after the flotation of the Egyptian pound in 2011, however, Egypt was committed to respect its treaty obligations. It is noteworthy to consider the IMF loan agreement concluded by Egypt in 2016 as an important factor for compelling Egypt to continue in the ISDS system, as Egypt was avoiding any potential implications jeopardizing the loan agreement such as a large investment arbitration award or an indication that Egypt is denouncing its treaty obligations.

It is evident now that BITs were negotiated without any knowledge for its future consequences and implications. At the time of concluding this large number of BITs, Egypt’s motive was to attract more investments and it was unlikely to assume that these terms and measures would be interpreted in such a way allowing investors to bring this high number of claims before the ICSID. As a consequence, Egyptian policymakers became more cautious when negotiating new BITs to avoid potential arbitrations. This was evident in the latest BIT concluded by Egypt in 2014 (Egypt/Mauritius BIT), which required referring disputes to domestic administrative procedures before resorting to investment arbitration.

It is important to emphasize that only 13, out of 22 cases filed after 2011, were directly or indirectly involved with the ramifications of the Egyptian revolution. The remaining 9 cases were related to disputes accumulated from a decade. As noted in an earlier Kluwer Arbitration Blog post, the timing of the so called Arab Spring was tempting for some investors to the exploitation of such events by bringing meritless claims as a tactical mechanism for obtaining amicable settlements.

As of March 2020, there are 9 pending cases filed against Egypt. It is difficult to foresee whether there will be an increase in ICSID cases in the future.

 

2. The Breadth of Claims, Outcome of Cases and Their Impact

A. Breadth of Claims

i. Measures Challenged

In most of the disputes decided by arbitral tribunals, investors have most frequently brought claims challenging the following measures allegedly taken by Egypt:

Direct/indirect expropriation 78%,
Fair and equitable treatment 71%,
Full protection and security 64%,
Denial of justice 50%,
Most favored nation treatment 28%,
Discriminatory measures 21%,
Minimum standard of treatment 14%,
Breach of contracts 7%,
National treatment 7%, and
Umbrella clauses 7%.

The statistical analysis identified that direct and indirect expropriation was the most frequent treaty standard mentioned in Egypt’s BITs (i.e. in 94 BITs) which correlates with the number of expropriation claims brought against Egypt. Additionally, the other treaty standards related to expropriation such as FET and full protection and security correlate with the number of expropriation claims brought against Egypt.

 

ii. Economic Sectors

Egypt was a respondent in various economic sectors, with the most frequent cases (i.e. 7 cases, 20%) filed in the oil, gas and mining sector, among which is the largest sum awarded against Egypt to date. The tourism sector closely follows, with 6 cases (i.e. 17%).

Noteworthy is that cases in the oil, gas and mining sector steeply increased over the past ten years with 6 cases (i.e. 86% of cases in this sector) filed since 2011. Notwithstanding that the oil, gas and mining sector was the most affected by investment and commercial arbitrations following the 2011 revolution. Egypt in a quite short period showed clear signs of turning into a new direction by settling some of the major energy disputes and introducing major reforms in the energy sector, thus gaining confidence of foreign investors. These steps were indispensable following the major natural gas discovery of Zohr field in the Mediterranean in 2015, paving the way for promoting Egypt as an energy hub in the Mediterranean area.

 

iii. Claims Amounts

The total amount of claims registered against Egypt amounted to approximately $ 22.760 billion. Interestingly, the total amount of claims registered against Egypt after 2011 amounted to $ 21.638 Billion. This total is high because one of the registered disputes amounts to $ 15 billion.

 

B. Outcome of Cases and Their Impact

The awards in the majority of cases have been rendered in favor of Egypt, with 7 cases dismissed on merits, 3 claims dismissed for lack of jurisdiction and 5 cases upheld in favor of the investors. The total amount of awards upheld in favor of the investors amounts to approximately $ 2.125 billions (i.e. 9.3% of the total amount of claims). It is noteworthy that Egypt has only lost cases from Western European countries.

To avoid significant potential financial awards, Egypt successfully concluded 14 settlements during the period 1992–2020 (i.e. 56% of the total concluded cases). It is worth noting that Egypt concluded 11 of the settlements (i.e. 78%) during the period 2014–2020, following the establishment of the Committee for the Settlement of Investment Contracts Disputes as an alternative out-of-court forum to amicably settle investment disputes. Interestingly, 9 of the cases (i.e. 69%) were discontinued according to article 43(1) ICSID Arbitration Rules, based on the request of both parties.

These findings might differ from pro-state critiques that argue that arbitral tribunals are deferential to respondent states, resulting in bias against developing states and the ISDS system. On the other hand, this outcome demonstrates that there is no relationship between a respondent state’s development status and the outcome in investment arbitration. However, if we count the number of cases upheld and the settlements concluded as a win in favor of foreign investors, we will conclude that claimant-investors are the frequent winners in investment arbitrations.

 

3. Tribunals

A. Appointment of Presidents

There is no clear relationship between the diversity of nationalities among the members of tribunals and the quality of their decision making. After analyzing the appointments made by Egypt and its counterparties, we can establish a certain pattern of appointing Western European arbitrators.

The parties and co-arbitrators appointed 17 presiding arbitrators, while the rest of the 14 appointments were made by the ICSID Administrative Council. There is a tendency within parties and co-arbitrators to appoint Western European arbitrators for the most part (19 president appointments). On the contrary, appointments made by the ICSID Administrative Council tend to be more diverse, as it is best placed to ensure greater diversity in nationalities across tribunals.

Interestingly, the analysis identified that in the 7 cases awarded in favor of Egypt on the merits the presiding arbitrator and the arbitrator appointed by Egypt were from the same jurisdictional system. This shows the importance of jurisprudential homogeneity as a key element when considering the choice of arbitrators by the parties and co-arbitrators.

 

B. Appointment of Arbitrators

Arbitrator selection is undoubtedly one of the most important stages in an arbitration. It is hard to define a certain pattern for choosing arbitrators. However, the most frequent factors might be the ideology of the arbitrator, the legal convictions and stances, his/her previous decisions and experience in given economic sectors. Unsurprisingly, when focusing on the appointments made by claimants, I found a modest statistical correlation with pro-investor arbitrators.

 

C. Appointment by Region

Most appointments came from Western Europe (16 appointments), North America (6 appointments), South America (2 appointments), South-East Asia (2 appointments) and Middle East (2 appointments). Surprisingly, there were no appointments from Africa or Eastern Europe. These findings assert the lack of diversity in the appointments made by parties and co-arbitrators, and proves the existence of a pattern in appointing Western European and North American arbitrators.

 

D. Nationality of Arbitrators

Twenty-nine different nationalities have been represented in cases involving Egypt. Arbitrators appointed by Egypt have most frequently come from France (11 times), the United States (4 times) and Great Britain (4 times). In contrast, most of the appointments made by the claimants came from the United States (9 appointments). From the statistical data, we can infer that Egypt tends to choose French arbitrators due to their civil law background. Interestingly, claimants did the opposite by choosing most of the arbitrators from a common law background. Surprisingly, in the case of Egypt, British arbitrators didn’t prevail. Interestingly, Egypt once appointed an Egyptian arbitrator.

The analysis of the appointments made by claimants also shows interesting insights into the common players in the pool of international arbitrators, which is still dominated by pro-investor arbitrators. On closer inspection, it is evident that a certain list of arbitrators are frequently chosen to arbitrate in most of the cases involving Egypt.

 

Conclusion

This post focused on the status of Egypt in ICSID based on an analysis of the available data in an attempt to encourage national practitioners to do the same regarding their countries and to make this information publicly available. It is highly recommended that the ICSID website and other relevant websites publish more detailed information based on statistical data for each country.

 

The views expressed herein are those of the author alone and should not be regarded as representative of, or binding upon the author’s department at the Ministry of Justice or any other institution to which the author is affiliated. The statistical data in this article were provided from the publicly available sources such as the ICSID and UNCTAD websites.

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The ICSID Reforms and Working Paper 4: Push or Pull?

Sat, 2020-03-14 02:00

Last month, ICSID published a further Working Paper (WP4) linked to its ongoing reform process, by which it is considering a series of amendments to the ICSID and ICSID Additional Facility Rules. The Working Paper is the fourth in a series of working papers, preceded by Working Papers 1 (August 2018), 2 (March 2019), and 3 (August 2019). The reform process has also encompassed a series of consultations conducted by ICSID with States and other stakeholders about proposed and possible amendments. Naturally, the consultation process has yielded numerous proposals and even more debate. ICSID has released a helpful backgrounder setting out key reforms proposed in the process, and IAReporter has synthesised some of the main modifications made in WP4. This post will therefore not provide an exhaustive account of WP4, but will instead highlight three particularly interesting developments incorporated into WP4. The post offers an overview of these key developments in order to raise the question for readers as to whether this (potentially final) working paper pushes reforms forward in a progressive direction, or instead pulls back the proposals towards more moderate amendments.

 

Mandatory Disclosure of Third-Party Funding Arrangements

The ICSID amendment process is likely to result in significant changes concerning when parties to ICSID arbitrations must disclose third-party funding arrangements. This was a reform option canvassed very early in the reform process, and framed as a response to the increasing conflict of interest issues that third-party funding arrangements have raised for arbitrators. ICSID noted in WP3 that stakeholder consultations had given rise to ‘two categories of comment’ on third-party funding arrangements, with one group of stakeholders proposing the prohibition of third-party funding entirely, and another proposing greater disclosure of information about third-party funding in individual cases. The ICSID reform process has opted for the latter type of reform. Rather than prohibiting third-party funding arrangements outright, ICSID has instead proposed rules to provide for the mandatory disclosure of third-party funding arrangements.

Such amendments follow rising concern – raised by stakeholders as well as parties in ICSID cases – about the impact of third-party funding arrangements on arbitral proceedings. This includes concerns about the risk that any non-disclosure of such arrangements might mask potential conflicts of interest for arbitrators or others involved in an arbitral proceeding, as well as more practical issues related to the potential inability of a funded claimant to satisfy costs awards should it prove unsuccessful in the proceedings. The amendments appear to balance such concerns against the potentially desirable role of third-party funding in investment arbitration. The non-prohibition of third-party funding might, for example, open greater space for ICSID arbitration claims to be filed by small investors, or for claimants to make claims concerning human rights, environmental, or other public interest issues, which may otherwise not be feasible without third-party funding.

WP4 retains the definition of third-party funding developed in previous iterations of the proposed rules. For the purposes of the rules, third-party funding is defined as situations in which a party ‘has received funds for the pursuit or defense of the proceeding through a donation or grant, or in return for remuneration dependent on the outcome of the proceeding’. WP4 modifies the matters that must be disclosed and clarifies the circumstances in which disclosures must be made, by changing Proposed Arbitration Rule 14 to oblige parties to disclose:

  • the address (not just the name) of any third-party funder;
  • funding received by a party either directly or indirectly (rather than in circumstances where funding is received by the ‘party, its affiliate or its representative’); and
  • third-party funding received for the ‘proceedings’ rather than for ‘the dispute’.

The first and second changes broaden the disclosure obligation, by requiring parties in receipt of third-party funding to disclose more details about their funder and to make such disclosures in a broader range of circumstances. The third change narrows the obligation, by separating funding received to pursue ICSID proceedings from that received to pursue non-ICSID proceedings related to the parties’ dispute.

The proposed amendments also address the importance of third-party funding arrangements to decisions on security for costs. Originally, the revised rules on security for costs recognised the capacity for ICSID tribunals to make such orders, directing them to consider the relevant party’s capacity to comply with an adverse decision on costs, alongside ‘any other relevant circumstances’. Proposed Arbitration Rule 53 has been amended in WP4 to encourage tribunals to consider, as part of these circumstances, any third-party funding arrangement. The revised rule notes, nonetheless, that such third-party funding ‘is not by itself sufficient to justify an order for security for costs’. Whilst the language of the rule on security for costs has been changed in WP4, its overall function remains the same. The slight change in emphasis indicates that the tribunal now ‘shall’ consider all evidence as opposed to having some discretion to do so (‘may consider’, in WP3). In practice, this may mean that a tribunal cannot exclude evidence of third-party funding as irrelevant to its decision on security for costs, but the wording of the provision nonetheless retains arbitral discretion to weigh exactly what influence such arrangements will have to these decisions.

 

Disclosures of Corporate Structures

The ICSID reform process also introduces amendments to the process, and requirements, governing the submission by claimants of their request for arbitration. In WP3, the ICSID Secretariat noted that some States had requested that the rules governing requests for arbitration be amended to require ‘disclosure of the financial status of a requesting party and the corporate structure of a requesting party that is a legal entity’. The ICSID Secretariat adopted the view that such information – to the extent it was relevant – could be provided as part of the claimant’s provision of information under Institution Rule 2 (requiring the request for arbitration to provide ‘a description of the investment, a summary of the relevant facts and claims, the request for relief, including an estimate of the amount of any damages sought, and an indication that there is a legal dispute between the parties arising directly out of the investment’). States appear to have pursued their requests for such disclosures to be specifically required under Institution Rule 2, with the ICSID Secretariat noting in WP4 that ‘IR 2 is not revised to require these disclosures, because they have no bearing on the registration decision’. Nevertheless, Institution Rule 3 has been amended in WP4 to provide a recommendation that the request for arbitration ‘include the names of the persons and entities that own or control a requesting party which is a juridical person’. Juridical claimants initiating ICSID proceedings are thus now encouraged to make disclosures regarding their corporate structure. The ICSID Secretariat notes that this amendment is designed to ‘assist the parties and any appointing authorities in, inter alia, identifying Tribunal or Commission candidates who are free from conflicts of interest’.

 

Transparency of Arbitral Documents, Hearings, and Deliberations

Working Paper 4 also incorporates additional proposed reforms to ICSID’s transparency regime. Reforms to enhance transparency were canvassed by the ICSID Secretariat at the start of the reform process. The capacity for the amendments to introduce broad changes to the transparency regime applicable in ICSID arbitrations is somewhat constrained, given that the ICSID Convention (which is not being amended) requires both disputing parties to consent to the publication of awards. ICSID has attempted to introduce a work-around this limitation by using a “deemed consent” clause to provide that awards will be published if neither party objects to such publication within 60 days of the award having been rendered. Should a party object to such publication, the amendments will retain the present status quo, according to which excerpts of the award will be published by the ICSID Secretariat. These proposed amendments are retained in WP4 (as Proposed Arbitration Rule 63).

WP4 also amends the proposed rule regulating the publication of documents filed in the proceeding. In WP3, this rule had provided that ‘[u]pon request of either party, the Centre shall publish any document filed in the proceeding’, save that, where a party disagreed with such request, it could ‘refer any dispute regarding the publication or redaction of [such] a document…to the Tribunal for determination’. WP4 amends the rule governing such publication to clarify the process for making – and granting – requests for publication of such documents. This revised rule now requires both parties to consent to publication or, absent such consent, allows the tribunal to determine whether publication is permitted. WP4 also specifies that this process will not apply to permit publication of ‘supporting documents’.

WP4 also considerably alters the transparency framework applicable to hearings. Proposed rules in WP3 provided the tribunal with power to ‘determine whether to allow persons in addition to the parties, their representatives, witnesses and experts during their testimony, and persons assisting the Tribunal, to observe hearings, after consulting with the parties’. WP4 extends the scope for open hearings in ICSID arbitrations, creating an opt-out regime by providing that: ‘The Tribunal shall allow persons in addition to the parties, their representatives, witnesses and experts during their testimony, and persons assisting the Tribunal, to observe hearings, unless either party objects.’

WP4 also clarifies who may attend the tribunal’s deliberations. WP4 opens scope for the Tribunal to admit non-members into its deliberations, providing that it may be assisted ‘by the Secretary of the Tribunal at its deliberations’. The attendance of other persons is also contemplated in WP4, but made subject to notification of the parties (‘[n]o other person shall assist the Tribunal at its deliberations, unless the Tribunal decides otherwise and notifies the parties’).

 

Concluding Remarks

Working Paper 4 is potentially the last in the series of working papers produced by the ICSID Secretariat to guide the rules amendment process. The ICSID Secretariat has now asked Member States for their views as to whether a further consultation on the proposed amendments is required, or whether the rules are ready to be put to a vote. Either way, the ICSID Secretariat has noted that its goal is to put the amended rules to vote in the second half of 2020, for implementation in early 2021. The ICSID working papers span a variety of issues, including about transparency and conflicts of interest in investor-State arbitration, which are often subject to political concerns and diverging policy objectives. In navigating this push and pull, the ICSID Secretariat’s WP4 attempts to strike a balance and to propose amendments to enhance the fundamental elements of arbitration without undercutting the overall legitimacy and workability of this form of dispute settlement. The ICSID Secretariat has managed a potentially contentious process transparently and efficiently, placing it in a position to now propose a vote by Member States on the proposed amendments. It is likely that in the coming months the proposed amendments will continue to firm up and form a focal point for ongoing debate in both the ICSID and broader ISDS reform contexts.

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How Will the Coronavirus Impact International Arbitration?

Thu, 2020-03-12 19:00

Background – The Pandemic is Confirmed

As cases of COVID-19, the pathogen associated with the coronavirus outbreak, are reported in rising numbers in countries around the world, the likelihood of a worsening global impact looms. This past Wednesday, the World Health Organization officially declared the outbreak a global pandemic.

In the course of just a couple weeks, the virus has evolved from a challenge largely affecting Central China to a crisis that has the world’s full attention. In the past three weeks, the number of affected countries has jumped from approximately 25 to 114, with the number of confirmed cases rising sharply. COVID-19 has infected over 125,000 people, resulting in thousands of deaths, and many more cases and deaths may be unreported.

The virus has already destabilized global commerce, hit company earnings worldwide and prompted significant drops in global stock markets. Cities, regions and, now, countries are being locked down. Daily work and travel plans are being altered for nearly all of us.

The virus has spread substantially in and beyond China, and there are significant outbreaks most notably in Italy, Iran, and South Korea, with a growing number of reported outbreaks in many other countries in Europe, Asia and the US.

The issue now is time. Health officials say there are no proven therapies for the virus and most say it will take at least a year to develop a safe vaccine. Accordingly, we can expect the virus to be with us for an extended period.

It is easy to panic, but is doing so warranted? To date, most cases are mild, medical resources are largely available for more severe cases and outbreaks are being contained. There is good cause for hope that public health strategies will be successful. At this point, the goal is to slow the spread of the virus so that healthcare systems can be properly prepared and not overwhelmed.

 

Impact to Date

Anticipating how the virus will impact international arbitration is a difficult and somewhat dystopian task. The future is uncertain. Still there is no question that the virus has already impacted the field and will have greater impacts if it is not readily contained.

It is certain that the virus is already affecting the way business is done. International supply chains have been severely affected. Many law firms are advising their clients regarding suspending contractual performance and force majeure provisions. Contract drafters are rethinking contractual terms including provisions as to arbitral seats, choice of law, institutions and procedures.

The virus has caused disruption to international arbitration practice in China, South Korea, Japan, Singapore, elsewhere in Asia and, now, increasingly in Europe, the US and the rest of the world. Apart from quarantines, travel to and from parts of Asia and Italy has been banned or curtailed by governments. This past Wednesday, the US imposed major restrictions on travel from continental Europe.

The virus is increasingly affecting international arbitration in regions that had limited exposure to the contagion before. In a period of two weeks, a small outbreak in Italy has escalated to a growing concern throughout Europe. In the past months, tribunals in the US and Canada have been struggling to manage hearings without witnesses from China. Now the US is dealing with its own outbreaks, particularly in Washington State, California, and New York.

Arbitration hearings have been delayed or relocated and most practitioners are giving thought to whether it is safe to conduct hearings in certain locales. A growing number of companies and law firms are requiring employees to work from home or are imposing their own travel bans. There is a risk seemingly healthy travelers may be unknowing carriers. Those who disregard public health advisories discouraging unnecessary travel put themselves at risk and may cause drastic harm to others, particularly seniors and others who are at a high risk.

Even without travel bans, many arbitration practitioners are leery of travel and hosting delegations from affected areas. Likewise, practitioners from affected regions are hesitant to impose on others. There is also the risk that healthy travelers will be confronted with an unexpected travel ban or quarantine upon arrival or departure. As a result, international arbitration will be curtailed not only where the virus is present but where it may be spread. Essentially, everywhere.

Nearly all major arbitration institutions have adopted precautionary measures, including encouraging protective healthcare measures in their offices, suggesting postponement of hearings and advising parties to refrain from attending hearings in person. Some parties, counsel and tribunals will respect these advisories; others will not. There is also concern some parties will take advantage of developments to needlessly delay arbitrations.

The virus is likely to lead not just to the delay or relocation of hearings but to the cancellation of meetings and conferences in various parts of the world. Legal conferences in Hong Kong, Singapore, elsewhere in Asia, and more recently, in Europe and in the US, have already been cancelled. Planners and potential attendees of major upcoming international arbitration conferences in largely unaffected locales are watching the developing situation closely.

 

Changes to the Way We Do Arbitration

Expect fewer handshakes and more elbow bumps and bows. As the stock markets teeter, the market for videoconferencing technology is booming. Undoubtedly, more evidentiary hearings will be conducted online or at least with some of the participants participating remotely. This sea change in the way international arbitrations are conducted may be the turning point in finally bringing online dispute resolution (ODR) to the world of international arbitration.

The virus will also affect the way evidence is created, gathered and transmitted. Reliance on paper contracts and documents sent through the mail or by courier is likely to be curtailed as the world relies more heavily on digital signatures and document transmissions to avoid spreading contagions. In turn, parties are more likely to conduct document searches, reviews and production digitally. As well, tribunals will prefer digital memorials and document submissions. The hard-copy evidentiary bundle is likely to go by the wayside as arbitrators who insist on paper submissions give way to those willing and able to operate digitally. Adoption of digital solutions may lead to increased implementation of artificial intelligence and other new technologies.

Sadly, we must expect there will be illness, if not deaths, among those participating in arbitrations. A serious pandemic could be devastating for many. The threat requires all of us to proceed in a cautious, thoughtful and civil manner. For now the best guidance is to follow the health and travel advisories of public health authorities including the World Health Organization, national health protection agencies, such as the Centers for Disease Control and Prevention (CDC) in the US, and local public health officials.

Without mitigation efforts, even localized outbreaks of the virus may have lasting impacts, causing loss of lives and weakening economies. Major, rapid outbreaks may mark the end of certain arbitral seats or the rise of others as states struggle to recover from economic, political or even military turmoil.

 

Potential Beyond the Virus

As long as some measure of global commerce continues, we can expect there will be a demand for international arbitration in the world. We may see more arbitrations as parties seek to avoid public forums.

If (let’s be positive, when) we move beyond the virus, we may see much more international arbitration. Undoubtedly the virus will shake supply and pricing expectations in nearly every global market from commodities to industrial products. Many major energy and construction projects have come to a halt.

Many new claims will be initiated involving commercial delays or cancellations due to disruptions in construction, manufacturing of goods and provision of services. Likewise, there will be claims relating to international transit, from shipping to rail to air and sea, including claims involving delays or cancellation of shipment of components for a wide array of consumer and industrial products. There will be claims relating to biotech, pharma and healthcare efforts to fight the outbreaks. Data privacy claims will be on the rise. Undoubtedly, we will see a significance increase in insurance claims in all sectors.

 

Conclusions

The coronavirus is a threat that can only be contained through the leadership of the global health sector and support from each of us as global citizens. We all have the obligation to be proactive about public safety. That requires taking recommended precautions with respect to healthcare and travel. As to arbitration, that includes organizing arbitral proceedings as efficiently as possible and relying on videoconferencing and other technologies to limit transmission risks.

With proper precautions, and a bit of luck, the coronavirus will be a short-lived problem. No matter what the outcome, it will change the world of international arbitration as we know it.

 

Gary Benton is the Chairman of the Silicon Valley Arbitration and Mediation Center (SVAMC) in Palo Alto, California. This article represents the views of the author and not necessarily those of SVAMC.

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Austrian Supreme Court on the Lack of Impartiality and Independence of Arbitrators Discovered Ex Post

Thu, 2020-03-12 00:32

Like virtually all arbitration laws, the Austrian Arbitration Act is silent on whether the lack of impartiality and independence of an arbitrator may be invoked for the first time in setting aside proceedings in cases where a party becomes aware of the relevant circumstances only after the award was rendered. The Austrian Supreme Court has, however, permitted such challenges provided that a party can prove that it was prevented from challenging an arbitrator during the arbitration (because it was unaware of the arbitrator’s alleged lack of impartiality or independence).

In a decision rendered on 1 October 2019 (No 18 OCg 5/19p), the Austrian Supreme Court abandoned its long-standing position that, in such cases, only “blatant”, i.e., gross partiality of an arbitrator, warranted the setting aside of an arbitral award. It has now been established that any lack of impartiality and independence of an arbitrator constitutes a ground for setting aside if a party was unaware of such lack of impartiality or independence during the proceedings.

 

Background

The underlying arbitration was initiated against an Austrian cooperative by a former member who sought annulment of the management’s resolution to exclude him from membership. The five-member arbitral tribunal, which was appointed in accordance with the cooperative’s articles of association, dismissed the claim.

The claimant moved to set aside the award, inter alia, on the basis of the improper composition of the arbitral tribunal under section 611 para. 2, line 4 of the Austrian Arbitration Act. He argued that that the arbitral tribunal was improperly composed because one arbitrator (that he himself had appointed) was a state court judge, despite the fact that Austrian state court judges are prohibited from acting as arbitrators. The claimant asserted that he had not been aware of this prohibition and had therefore been unable to challenge the arbitrator during the arbitration. In addition, he argued that two arbitrators were not impartial due to their close relationship with the management of the respondent (i.e. the cooperative).

 

Decision

The Supreme Court dismissed the challenge and upheld the arbitral award holding, in respect of the alleged improper composition of the tribunal, that:

  • the violation of the official duty of judges (such as accepting to act as arbitrators) does not lead to a deficiency in the arbitral process and therefore does not constitute a ground for setting aside the award;
  • the claimant did not argue that he had been prevented from challenging the two arbitrators whom he considered biased and “apart from that, there [wa]s in any case no doubt that the claimant as a long-standing official knew of the close relationship between both arbitrators characterized as partial and the respondent”.

Even though the challenge was dismissed, two aspects of the Court’s reasoning merit special attention.

First, the Court seized the opportunity to correct what it considered to be a wrong standard set by its previous case law. According to two decisions from 2013, the setting aside of an award for an arbitrator’s lack of impartiality was justified only “in blatant cases”, i.e., if the degree of partiality discovered ex post was extreme (decisions No 2 Ob 112/12b dated 17 June 2013 and No 2 Ob 155/13b dated 27 November 2013). The Court held (at the time) that, in a situation when the award had already been rendered, the limitation to “blatant cases” was justified by the principles of legal peace and legal certainty.

In the decision at hand, the Court expressly joined the opinions of the authors who criticised its previous stance and found that any lack of impartiality of arbitrators – whether “blatant” or not – renders the composition of the tribunal improper.

Second, the Court highlighted that doing away with the limitation to “blatant cases” would not impair legal certainty because a challenge is only admissible if brought within the prescribed three-month time limit (save in cases of criminal offences, which, however, need to be proven by way of a final court decision).

 

Comment

The Supreme Court’s decision marks an important and most welcomed turnaround in relation to setting aside an award on the grounds of an arbitrator’s lack of impartiality discovered ex post.

At the same time, the Court seems to suggest that it would not allow exceptions even if a party was able to show that it discovered an arbitrator’s lack of impartiality only after the time limit for a set-aside action. It is, however, quite conceivable that circumstances giving rise to doubts as to an arbitrator’s impartiality are revealed many months after the award was rendered. Let us consider, for instance, the scandal in the arbitration between Slovenia and Croatia that shook the arbitration community in 2015 and imagine that the transcripts of the ex parte conversations were revealed much later, after the time limit for annulment expired. It would certainly be frustrating and far from legal certainty if there could be no remedy against such an award.

In addition, no time limit exists under the New York Convention (NYC) for invoking the grounds for refusal to enforce awards. The Austrian Supreme Court has still not had the chance to address a case where a party opposed enforcement based on an arbitrator’s partiality discovered ex post, but it did rule in 2005 that a party is not precluded from invoking a ground for refusing recognition and enforcement even if it did not challenge the award in the place of arbitration or if any such challenge was not successful (decision No 3 Ob 221/04 b dated 26 January 2005).

There seems to be no justification or logic, in the author’s view, that the reliance on a lack of impartiality discovered ex post is subject to a preclusive time limit for challenging an award, when no such time limit exists for invoking the same ground in enforcement proceedings under the NYC.

A possibility to extend the (relatively short) time limit for challenge would seem appropriate and necessary, at least in exceptional cases, when a party shows that it was not and could not have become aware of an arbitrator’s lack of impartiality before the expiry of the time limit. The revision of arbitral awards that has been admitted in exceptional cases as an extraordinary remedy by the Swiss Federal Court is a good solution. The current draft amendment to the Swiss Private International Law Act even explicitly provides that a revision can be sought within 90 days of the discovery of new circumstances giving rise to doubts as to an arbitrator’s independence or impartiality.

Arbitrators’ impartiality and independence is a matter of public policy and is at the heart of the integrity of the arbitral process. If this integrity is compromised by an arbitrator’s bias that was not disclosed by the respective arbitrator (and most likely also by one party), would legal certainty not mandate that the resulting award could be challenged even after the expiry of the time limit for (ordinary) challenge? In the author’s view, the answer is a clear “yes”.

It remains to be seen whether this concern will also motivate the Austrian legislator to intervene by providing for an appropriate legal remedy in the future.

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Yukos: Enforcement or Adjournment of Arbitral Awards During Set Aside Proceedings

Wed, 2020-03-11 00:31

I discussed in a previous post on the blog the decision of 18 February 2020 of the Court of Appeal in The Hague that revived the awards rendered in July 2014 against the Russian Federation in Veteran Petroleum Ltd.Yukos Universal Ltd. and Hulley Enterprises Ltd. cases. Those awards had been annulled in April 2016 on the basis that there was no valid arbitration agreement.

The decision in 2016 did not stop the efforts to enforce the awards, that Yukos continued globally, in addition to filing an appeal with the Court of Appeal to overturn the annulment decision (which was successful earlier this year).

In principle, on the basis of Article V(1)(e) of the New York Convention, a court may refuse the enforcement of an award if the award had been set aside. Courts developed theories to enforce annulled awards: they are what I call the Russian Doll theories. Now that the Yukos awards have been revived, Article V(1)(e) of the New York Convention no longer applies. What about Art. VI? Could the Russian Federation argue that the enforcement proceedings should be stayed pending the annulment procedure and its imminent appeal with the Supreme Court?

 

Article V(1)(e) and Article VI

The judicial application of Article V(1)(e) has taken a life of its own. Not only in the Yukos proceedings but in others, the courts have allowed for the enforcement of annulled awards, often for reasons of public policy.

Article V was drafted for the party resisting the enforcement; the party that has lost the arbitration. The New York Convention is built on two pillars: sovereignty and party autonomy. The latter protects both the claimant and the respondent. If due process rights have not been complied with, if there is no valid arbitration agreement or if some other irregularity has occurred; Article V allows for the respondent to be heard. Article VI was also created for the losing party. If the party resisting enforcement had serious grounds to request for the award to be set aside, it could initiate those setting aside proceedings and request for a stay of the enforcement proceedings:

If an application for the setting aside or suspension of the award has been made to a competent authority referred to in article V(1)(e), the authority before which the award is sought to be relied upon may, if it considers it proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security (Article VI of the New York Convention).

The rationale was procedural efficiency. At the core of the request, the enforcement court must establish a bona fide intention to set aside the award, rather than the use of setting aside procedures as a mere delaying tactic.1)M.Paulsson, ‘The 1958 New York Convention in Action’, (Kluwer 2016), p. 213. jQuery("#footnote_plugin_tooltip_4437_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4437_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The delegates in 1958 allocated more time to understanding and drafting Article VI than Article V. The debate focused on the role of the court of origin that has to review the setting aside request and the courts of enforcement that would have to decide to what extent the setting aside proceedings would be successful. Article VI was a compromise between the need to give the losing party in the arbitration adequate time to await the final decision in the setting aside proceedings and be ensured that assets would not be executed pending the annulment procedure and the successful party in the arbitration who has the right to enforce a valid and binding award as soon as possible. The use of the word ‘may’ in Article VI was to allow the enforcement court discretion to either dismiss an Article VI defense and grant enforcement immediately or, if based on submitted evidence, the court considers an annulment procedure to be meritorious, adjourn the outcome so that there is time to await the setting aside proceedings. The delegates did not draft Article VI to enable the losing party to rely on setting aside proceedings to delay enforcement. One indicator for delaying tactics was if the losing party would wait with the filing of a setting aside request until the successful party had commenced enforcement proceedings. In the Yukos case the Russian Federation filed the request for setting aside in a timely manner by complying with the statute of limitations under Dutch law.

 

Standards developed by enforcement courts

Mostly lower courts in the US developed further standards for the application of Article VI of the New York Convention. Admittedly, the judicial application of courts in Contracting States – to date 160 -is not a source under Article 31 of the Vienna Convention on the Law of Treaties (some opine that judicial application can be a source if there is a dominant application. The New York Convention has proven over the last sixty years that uniform or even a dominant application is not always feasible). Furthermore, in the US, the decisions of district courts do not always carry the same weight and it is a court of first instance with single judges, often overruled. Yet, their decision might offer useful guidance in understanding the rationale of Article VI.

In Spier v Tecnica the District for the Southern District of New York developed a test for adjourning the enforcement proceedings: it placed the burden of proof on the party requesting enforcement to submit enough evidence proving that it is manifestly clear that the request for setting aside was ‘transparently frivolous’. The text of Article VI states nothing about the burden of proof unlike Article V. The delegates did not discuss the allocation of the burden of proof either. A good faith interpretation of Article VI would not necessarily justify such a heavy onus on the prevailing party in the arbitration: the purpose of the New York Convention is to contribute to the effectiveness of international arbitration. Another US District Court analyzed the court’s discretion under Article VI and held that enforcement courts have an ‘unfettered discretion’. Another important reason for courts to adjourn the enforcement decision is international comity towards the courts of origin. Again another US District Court balanced the New York Convention’s pro-arbitration attitude against the principle of international comity which was ‘equally embraced by the New York Convention’.

The US Court of Appeals, District of Columbia held that if the award was manifestly invalid, the enforcement would be adjourned without the court requiring security. If the award was manifestly valid, the court would deny a request under Article VI and grant the enforcement or it would stay the enforcement but require the respondent to post security. The second point is that the court must consider the ease or difficulty of enforcement of the award, and whether it will be rendered more difficult, for example, by movement of assets or improvident trading, if enforcement is delayed. If that is likely to occur, the case for security is stronger.

The English Commercial Court developed a sliding scale for security in Soleh Boneh:

If the challenge to the validity of the award is manifestly well-founded, it would in my opinion be quite wrong to order security until that is demonstrated in a foreign court… If the award is manifestly invalid there should be an adjournment and no order for security; if it is manifestly valid there should either be an order for immediate enforcement, or else an order for substantial security.2)Dowans Holding S.A. et al. v. Tanzania Electric Supply Co. Ltd (High Court of Justice, Queen’s Bench Division, Commercial Court 2011), in Yearbook Commercial Arbitration XXXVI (2011) (United Kingdom no. 93), at 363-365 and Soleh Boneh International Ltd. V. Government of Government of the Republic of Uganda [1993] 2 Lloyd’s Law Rep 208 CA at 212 and IPCO Nigeria Limited (Nigeria) v. Nigeria National Petroleum Corporation (Nigeria), (Commercial Court 2005), in Yearbook Commercial Arbitration XXXI (2006) (United Kingdom no. 70), at 853-866. jQuery("#footnote_plugin_tooltip_4437_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4437_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

If setting aside might be successful and tip the balance of the sliding scale in favor of defendant, the court might still order security if the risk of assets being moved remains high.3)M.Paulsson, ‘The 1958 New York Convention in Action’, (Kluwer 2016), p. 216. jQuery("#footnote_plugin_tooltip_4437_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4437_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Final Remarks

We have to see how the Russian Doll unfolds in the Yukos case: does the cassation procedure trump the enforcements efforts around the world or not? Will an enforcement court use Article VI to grant adjournment? With or without security? Will there be a discrepancy between the various decisions on that point in the enforcement fora relied upon by Yukos? We will have to wait for a year or two before the Dutch Supreme Court will decide on the appeal.

What any court of enforcement would have to assess, at minimum, and through a good faith-lens, is:

  • whether the setting aside attempt was bona fides; or
  • whether the setting aside attempt was for dilatory tactics;
  • whether the assets would be executed and lost during the setting aside procedure;
  • whether the losing party in the arbitration submitted enough evidence that warrants a stay of the enforcement because the setting aside will ultimately be successful; or
  • whether the successful party in the arbitration submitted enough evidence proving that is was manifestly clear that the setting aside was transparently frivolous;
  • whether the losing party can provide security pending the remainder of the annulment proceedings.

All of this is against the background of an enforcement effort against a sovereign which begs the question as to what kind of assets can be enforced: are those assets in a given forum, protected by immunity? If so, none of the above doesn’t even matter. Either way, how this saga will unfold will continue to be complex and take a while.

References   [ + ]

1. ↑ M.Paulsson, ‘The 1958 New York Convention in Action’, (Kluwer 2016), p. 213. 2. ↑ Dowans Holding S.A. et al. v. Tanzania Electric Supply Co. Ltd (High Court of Justice, Queen’s Bench Division, Commercial Court 2011), in Yearbook Commercial Arbitration XXXVI (2011) (United Kingdom no. 93), at 363-365 and Soleh Boneh International Ltd. V. Government of Government of the Republic of Uganda [1993] 2 Lloyd’s Law Rep 208 CA at 212 and IPCO Nigeria Limited (Nigeria) v. Nigeria National Petroleum Corporation (Nigeria), (Commercial Court 2005), in Yearbook Commercial Arbitration XXXI (2006) (United Kingdom no. 70), at 853-866. 3. ↑ M.Paulsson, ‘The 1958 New York Convention in Action’, (Kluwer 2016), p. 216. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Avoiding Potential Bias in the Handling of Interim Measures Applications in Georgia

Tue, 2020-03-10 00:01

Recent legislative developments have shown that Georgia strives to become a hub for dispute resolution in the Caucasus region. The legislative framework on commercial arbitration is now fully tailored to the needs of international commercial arbitration: the law of Georgia on arbitration (the “Law on Arbitration”) is based on the UNCITRAL Model Law on International Commercial Arbitration as amended in 2006. Georgia is also a contracting party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). Georgian case law on commercial arbitration generally reflects Georgia’s pro-arbitration stance.

Yet despite all the efforts made at the legislative level, arbitration has not been very popular and has not been able to gain the trust of businesses in Georgia thus far. A 2018 report on the Legal and Practical Aspects of Arbitration in Georgia produced with the help of the European Union and the United Nations Development Programme (the “Report”) identified the limited liability form of Georgia’s arbitral institutions as one of the main factors hindering the development of arbitration in Georgia.1)See Report, at pp. 27-28. jQuery("#footnote_plugin_tooltip_4878_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Report explains that arbitral institutions in Georgia are usually incorporated as limited liability companies and, hence, are “profit-oriented.” Due to the potential “client relationship” between the arbitral institutions and their users, the impartiality of these arbitral institutions is somewhat in doubt.2)Ibid. jQuery("#footnote_plugin_tooltip_4878_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Generally, arbitral institutions in other jurisdictions operate on a non-profit basis (e.g., LCIA, HKIAC, and SIAC) because adopting a profit-oriented form may imperil such institutions’ ability to offer an impartial and independent arbitration service to its users.3)Remy Gerbay, The Functions of Arbitral Institutions (Wolters Kluwer, 2006), at pp 23-24. jQuery("#footnote_plugin_tooltip_4878_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); By way of example, an institution formerly known as the National Arbitration Forum (the “NAF”) in the USA, which was operating on a for-profit basis, was accused of favoring debt collection companies and eventually, in 2009 NAF stopped accepting the debt collection related claims.4)Ibid. jQuery("#footnote_plugin_tooltip_4878_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

This article argues that this potential for “profit-oriented” behavior could prove damaging to users’ faith in arbitration and one such example relates to how Georgia’s domestic arbitral institutions handle interim measure applications before the formation of a tribunal.

 

Issuance of Interim Measures in Georgia  

As in most other jurisdictions, in Georgia, interim measures can be granted either before or after the arbitral tribunal has been constituted. Before the tribunal is constituted, claimants have two possible strategies: either applying for an interim measure to a court or requesting the arbitral institution that administers the dispute to issue an interim measure.

The author’s review of the rules of arbitral institutions in Georgia that are incorporated as limited liability companies shows that if a claimant applies for an interim measure before a tribunal is constituted, an employee of the arbitral institution (who is most likely the president of the arbitral institution) will decide whether the request should be granted. None of the rules require that an independent person not affiliated with or employed by the institution be appointed as an emergency or temporary arbitrator. However, the rules call upon a “special or an emergency arbitrator,” who is an employee of the arbitral institution, to decide before the formation of the tribunal whether to grant a request for interim measures. By way of example, Article 32 of the Rules of the Dispute Resolution Center states that the president of the institution will act as an emergency arbitrator to review an application of an interim measure before a tribunal is constituted. The rules of other arbitral institutions in Georgia that are incorporated as limited liability companies have a similar provision. Only the Georgian International Arbitration Center (the “GIAC”), which is the first non-profit arbitration institution in Georgia and is not incorporated as a limited liability company, specifies that parties may apply to a court for an interim measure before the commencement of arbitration proceedings.

Thus, for the institutions in Georgia that are incorporated as limited liability companies, before the tribunal is constituted, interim measures are technically issued by the arbitral institutions themselves through one of their employees or a closely affiliated person. Similar procedures in other jurisdictions are quite rare but not unheard of.5)Garbey, at pp. 71-72. jQuery("#footnote_plugin_tooltip_4878_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); By way of example, section 13.1 of the Rules of The Arbitration Court Attached to The Czech Chamber of Commerce and Agricultural Chamber of The Czech Republic states that the president of the arbitration court may issue measures for the preservation of evidence before a tribunal is constituted. However, this provision only mentions measures relating to the preservation of evidence. For other types of measures, section 13.2 of the same rules states that a party may apply to a court for an interlocutory measure if the enforcement of an award could be at risk.

The above-mentioned practice of issuing interim measures via a decision of an employee or affiliate of an arbitral institution before a tribunal is constituted can be problematic in Georgia and it is arguably inconsistent with the spirit of the Law on Arbitration. Article 17 of the Law on Arbitration provides that any party, before the commencement of arbitration proceedings or at any time during such proceedings but before an arbitral award is rendered, may request “arbitration” to grant interim measures. By using the word “arbitration,” Article 17 likely refers to an arbitral tribunal rendering decisions on the substantive issues in a dispute, not an arbitral institution that merely administers the dispute. In the author’s view, Article 17 and any other similar provisions employing the word “arbitration” should be construed as referring to the tribunal that hears the merits of the case or, if available under the applicable rules, an emergency arbitrator.

One of the general observations made by the Report is that courts in Georgia find it hard to distinguish between the arbitral tribunal and the institution that administers the dispute.6) Report, p. 13. jQuery("#footnote_plugin_tooltip_4878_6").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This is especially true in cases involving the issuance of interim measures before the formation of the tribunal. Does it make a difference that sometimes the institutions’ arbitration rules call a person employed by the institution who decides on the request for interim measures “a special arbitrator”?  It arguably does not, since the “special arbitrator” is still an employee of the institution, and such interim measures should be considered as if they are issued by the institution itself.

 

Can this be a Problem?

As mentioned previously, businesses in Georgia do not generally trust local arbitration. This problem can be compounded by the fact that there is sometimes a real or perceived identity of interests between the institution and one of the parties to an arbitration. One of the notable cases in this regard is a 2011 ruling rendered by the Tbilisi Appellate Court.7)Ruling #2b/2130-11 of the Tbilisi Appellate Court, dated 20 July 2011. jQuery("#footnote_plugin_tooltip_4878_7").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In that case, the Tbilisi Appellate Court refused to enforce the arbitral award on the grounds that the applicant and the arbitral institution that administered the dispute had a common shareholder. The court deemed that enforcement of the award was against public policy. In another 2014 ruling rendered by the Tbilisi District Court, the court found a conflict of interests between the arbitral institution that administered the dispute and a representative of a party on the grounds that the same people appeared to be employed by the arbitral institution and by the law firm representing the party.8)Ruling #2/16444-14 of the Tbilisi District Court, dated 6 October 2014. jQuery("#footnote_plugin_tooltip_4878_8").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

As such, it might further damage the reputation of arbitration in Georgia to continue leaving the power of issuing interim measures before the formation of the tribunal to arbitral institutions. This post does not in any way suggest or imply that such interim measures issued before the formation of the tribunal are or have ever been issued in a partial way. However, considering that the arbitral institutions in Georgia have incentives to issue interim measures to keep their clients – that is, users – happy, the potential for abuse by the institution is surely present and something for users to be concerned about.

It is true that after the establishment of the tribunal, the tribunal can always amend or cancel interim measures. In addition, pursuant to Article 21 of the Law on Arbitration, a court is in charge of enforcing interim measures. However, institutions still have the incentive to grant various interim measures, including freezing orders. Appointing an employee or an affiliate of an arbitral institution as someone who issues interim measures before the formation of the tribunal does not guarantee the impartiality of the process. As the majority of arbitration cases handled by arbitral institutions in Georgia are related to consumer loans between financial institutions and individuals,9) Report, at p. 11. jQuery("#footnote_plugin_tooltip_4878_9").tooltip({ tip: "#footnote_plugin_tooltip_text_4878_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the party against whom the interim measure is granted is highly unlikely to even challenge the interim measure, either in court or before the tribunal. To be clear, the only institution that administers international disputes in Georgia is GIAC and, as discussed above, it does not have these problematic issues, but it is the author’s view that these issues are nonetheless important to address for the overall growth of arbitration in Georgia.

 

What is the Solution?

Erasing the difference between the institution that administers disputes and the tribunal that hears the case is not legally sound. Importantly, the problem is not in the legislation, which generally states that interim measures can be granted by “arbitration” before or after the commencement of arbitration proceedings. The problem is in the understanding of the word “arbitration,” which should be construed as the tribunal that hears the case and not as the institution that deals with the administration of the case. Although the problem associated with the issuance of interim measures is not the sole problem hindering the development of arbitration in Georgia, as the Report suggest that there are multiple contributing factors, it is important that before the formation of the tribunal interim measures are granted either by a court or by an independent arbitrator who is not affiliated or employed by the institution that administers the dispute. Hence, in Georgia, as in most arbitration-friendly jurisdictions, interim measures before the formation of the tribunal should be granted either by a court or by an emergency arbitrator who is not an employee of the institution. This would guarantee impartiality in the process of issuing interim measures and would be another step forward for Georgia to establish itself as a regional dispute resolution hub.

References   [ + ]

1. ↑ See Report, at pp. 27-28. 2, 4. ↑ Ibid. 3. ↑ Remy Gerbay, The Functions of Arbitral Institutions (Wolters Kluwer, 2006), at pp 23-24. 5. ↑ Garbey, at pp. 71-72. 6. ↑ Report, p. 13. 7. ↑ Ruling #2b/2130-11 of the Tbilisi Appellate Court, dated 20 July 2011. 8. ↑ Ruling #2/16444-14 of the Tbilisi District Court, dated 6 October 2014. 9. ↑ Report, at p. 11. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Climate Change, the Environment and Commercial Arbitration

Sun, 2020-03-08 22:13

The legal considerations arising out of climate change and environmental matters more generally have been considered extensively in the context of worldwide litigation, and, to some extent, in investment treaty arbitration. However, such issues have not been subject to the same level of public debate in the commercial arbitration sphere. This post analyses how environmental considerations arise, and are treated, in commercial arbitration, and explores some developments and initiatives in this space.

 

Background

The concepts of environmental protection and climate change are broad and disputes arise in these contexts in a myriad of forms. Such disputes range from claims against governments and major carbon emitters to investigations launched by governments themselves. Some types of environment and climate change-related disputes may of course not lend themselves to arbitration. Nonetheless, disputes with an environmental component may also arise in the context of contractual and commercial disputes that are typically resolved through commercial arbitration.

Before discussing such disputes in more depth, recent developments in investor-state dispute settlement (“ISDS“) should be noted, as environmental considerations have gained increasing momentum in recent years in this realm. In particular, recent bilateral investment treaties (“BITs“) such as the 2016 Morocco – Nigeria BIT or the 2018 model Dutch BIT expressly mention the environment, or sustainable development and social responsibility. On the jurisprudence side, various recent investment arbitration awards demonstrate that tribunals’ attitudes are changing, as environmental considerations are becoming increasingly present and important in their reasoning. For instance, in the David Aven v. Costa Rica and Cortec v. Kenya cases, the tribunal grounded its reasoning at least in part on environmental considerations, which, in the Cortec tribunal’s words, were of “fundamental importance”. While there is clearly movement on the ISDS front, it is interesting to query whether the same can be said regarding the commercial arbitration sphere.

 

Climate change in commercial arbitration

The inherent flexibility and internationalism of the arbitral process makes commercial arbitration an ideal dispute resolution method for climate change and environment-related disputes, which almost invariably have an international dimension. In a recent related International Chamber of Commerce (“ICC“) report, the ICC highlights the unique advantages of arbitration in this context. For instance, the parties’ flexibility in choosing arbitrators enables them to select tribunals with adequate knowledge of the regulatory and technical issues involved in such disputes. In addition, commercial arbitration provides the option of choosing a neutral forum for resolving sensitive disputes, as well as seamless award enforcement possibilities worldwide given that the overwhelming majority of States have signed and ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Decisional trends are difficult to predict in commercial arbitration given the prevalence of confidentiality arrangements between the parties. However, issues relating to climate change action and environment-related regulatory compliance may become increasingly common in commercial arbitration given the industry sectors which have a strong preference for arbitration, such as the energy and construction sectors.

In addition, according to the Grantham Research Institute on Climate Change and the Environment, as at 2018, there were already over 1,500 climate change-related laws and policies worldwide. Following the entry into force of the Paris Agreement, climate change-related action and regulations have increased dramatically. The natural consequence of these legislative developments may be an increase in environment-related commercial arbitrations in the future.

To refer to just one example, in their efforts to achieve the goals of the Paris Agreement, a number of states have introduced additional or enhanced environmental footprint-related reporting obligations. For instance, the UK Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 require certain companies to make disclosures regarding their annual quantity of emissions in tonnes of carbon dioxide resulting from activities for which they are responsible, and from the purchase of electricity for their own use.

Non-compliance with such reporting requirements could result in breaches of common commercial contractual provisions, such as conditions precedent or warranties which require compliance with applicable laws and regulations, and to ensure that other companies involved in the performance of the contract do so as well. In theory, non-compliance with such reporting requirements could also support allegations of breaches of provisions requiring compliance with HSSE policies, depending on their content. Such breaches can give rise to arbitrations where the parties have chosen this dispute resolution method. As such, it is entirely conceivable that arbitral tribunals might be in a position where they would have to assess whether parties’ disclosures (and potentially their underlying climate change prevention strategies) satisfy applicable reporting requirements and standards and company HSSE policies.

Further environment-related arbitrations could arise in situations where the parties to a contract breach or seek to avoid commercial obligations by raising force majeure arguments on the basis of climate change effects, or where commercial parties pursue claims against other companies on the basis of their climate change-related contributions causing harm to the claimants’ operations.

 

Institutional support for the arbitration of environmental disputes

While most arbitral institutions with a focus on commercial arbitration have largely remained silent on the issue of arbitrating environmental disputes, some have shown a varying degree of adaptability and support vis-à-vis environment-related arbitration. For instance, the American Arbitration Association has expressly listed environmental disputes, which include “pollution control, environmental clean-up, and chemical regulation for chemical plants, landfills, and other types of industrial projects”, as one of its areas of expertise.

In addition, the ICC has engaged with the questions posed by environment-related arbitrations by creating a task force on “Arbitration of Climate Change Related Disputes” to explore, among other things, how ICC arbitration can be used to tackle climate change-related disputes. The ICC indicated great willingness to accommodate and administer such disputes, and concluded that it is uniquely positioned to do so.

 

SCC Arbitrator Guidelines

An interesting development in relation to the process, rather than subject matter of arbitrations, from an environment perspective, occurred in October 2019, when the SCC issued its revised arbitrator guidelines (the “Guidelines“) which cover questions frequently raised by arbitrators including on costs and expenses. A notable feature in these Guidelines is the SCC’s new approach to expenses. In particular, the Guidelines provide additional detail on the reimbursable travel-related expenses, which now include the “standard costs of climate compensating for the [arbitrators’] flights”, i.e. the arbitrators’ costs of carbon offsetting their flights to and from case-related proceedings.

Although only the SCC specifies the recoverability of carbon offsetting costs, this does not necessarily mean such expenses are not recoverable under other arbitral institutional frameworks.

Although phrased differently, the permissible expense guidelines adopted by many other arbitral institutions are worded so as to suggest that carbon offsetting costs could be recoverable. By way of example, the London Court of International Arbitration, the Korean Commercial Arbitration Board and the China International Economic and Trade Arbitration Commission all provide for the reimbursement of reasonable costs or expenses reasonably incurred, which could include carbon offsetting costs. Other institutions use slightly more restrictive wording, which could be interpreted to exclude the reimbursement of carbon offsetting costs, in particular where the relevant institutional guidelines refer to the “actual” or “necessary” costs of the arbitrators’ travels.

Given how recent the SCC Guidelines are and, in light of the pressing international focus on climate change action, it is easy to understand why the SCC opted for this explicit approach to carbon offsetting costs. It will be interesting to see whether and how, if at all, other arbitral institutions will adapt their permissible expense policies in the future. In any case, nothing would prevent the parties to a dispute from agreeing (for example, at an early procedural conference) that such costs may be claimed by the tribunal in question, irrespective of the applicable institutional rules or guidance.

 

An overall appraisal

Given that the vast majority of commercial arbitrations are confidential, it is difficult to identify trends with respect to tribunals’ treatment of environment-related considerations. However, such considerations are becoming increasingly prevalent and relevant in the commercial arbitration sphere, as they pervade the substance of some arbitrations, as well as the arbitral process.

The global push for increased transparency in commercial arbitration may result in increased publication of awards, which might allow interested parties to follow the treatment of environment-related considerations in commercial arbitration more easily and closely in the future.

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The Ongoing Lebanese Financial Crisis: Is There Potential For Investor-State Arbitration?

Sun, 2020-03-08 01:51

Over the past few months anti-corruption protesters in Lebanon have taken to the streets calling for widespread reforms to the Lebanese economic and political system. This has caused considerable strain on the country’s already frail economy. The first two weeks of the unrest saw a complete closure of banks with no possibility of making transfers or withdrawals. As the situation stabilised and the banks re-opened, restrictions were imposed on the withdrawal and transfer of funds for fear that a bank run would occur which could lead to a collapse of the Lebanese financial system. These restrictions have been described as de facto capital controls.

As a result, it has become nearly impossible to transfer money abroad or convert Lebanese Pounds into other currencies at the official rate, which has in turn affected the ability of businesses to import goods, something upon which the Lebanese economy heavily relies.

In light of these difficulties, investors may be keen to explore potential avenues of relief which would allow them to access their funds and be compensated for any ensuing damage to their business. The aim of this post is to explore whether investor-state arbitration would be an appropriate solution for these investors.

 

The Investment Protection Landscape in Lebanon

Lebanon is party to fifty Bilateral Investment Treaties (BIT), of which forty-two are in force, These are supplemented by two multilateral treaties: the OIC Agreement and the Arab Investment Agreement. Every one of these treaties provides various protections and guarantees for foreign investments and grants foreign investors access to some form of investor-state dispute resolution mechanism.

 

Free Transfer of Funds

All of Lebanon’s investment treaties contain a “free transfer” provision which guarantees investors’ rights to freely transfer funds relating to their investment in and out of Lebanon. Such funds may include the initial capital, the returns as well as the proceeds from the sale of an investment. Typically, such provisions will also guarantee access to the foreign exchange market which allows the conversion of Lebanese Pounds into a freely convertible currency such as the US Dollar.

Free transfer provisions have rarely been relied upon in investment treaty arbitrations; however, there are at least two known occurrences of investors successfully invoking them: (i) the Valores Mundiales v. Venezuela case in which the tribunal condemned Venezuela for its failure to guarantee the investor unrestricted transfer of payments relating to their investment; and (ii) the Pezold v. Zimbabwe case in which Zimbabwe had restricted the investors from freely converting funds to US dollars.

A foreign investor in Lebanon may therefore have a valid claim under a free transfer provision which would allow them to have their funds unblocked. However, a claim under a free transfer provision would not address the losses that the investor may have suffered as a result of their funds being frozen for a period of time.

 

Fair and Equitable Treatment

Investors may be able to receive a more comprehensive recovery if they rely on the Fair and Equitable Treatment provision of the applicable treaty. In the case of the OIC Agreement which lacks an FET provision, investors may rely on the Most Favoured Nation clause to import FET protections from another treaty. The FET standard offers a wider scope of protection than the free transfer provision: in fact, the Tribunal in Achmea v. Slovakia found that the investor’s free transfer claim was effectively subsumed by its FET claim.

A successful FET claim may allow an investor not only to recover the funds which are being blocked from transfer, but also to be awarded damages for incidental harms that have befallen their investment as a result of the restrictions. For instance, if an investor is no longer able to import certain goods that are essential to the operation of their business because of their inability to make payments to their suppliers, then it is notionally conceivable that Lebanon may be held liable for breach of the FET standard.

 

Full Protection and Security

All of Lebanon’s investment treaties guarantee investments full protection and security. As the Tribunal in CME v. Czechia explained, a state’s obligation to afford full protection and security arises not only out of the actions it takes but also out of its inaction.

Investors may therefore choose to rely on this standard to argue that the harm done to their investments was caused by the Lebanese state’s idleness in (i) addressing the problems that caused the crisis in the first place, (ii) containing the protests once they erupted and/or (iii) controlling the actions subsequently taken by the private banks. This argument may be particularly apposite when it comes to the Lebanese government’s failure to crack down on currency exchange offices which have been exacerbating the situation by illegally selling dollars at 30 to 60% above the official rate.

 

Bank Accounts as Investments: The Ratione Materiae Hurdle

Since the early 1990s Lebanese banks have been offering high interest rates, sometimes reaching 15% per annum, on savings accounts both in US Dollars and Lebanese Pounds. This has led many to deposit significant funds with Lebanese banks, enjoying steady returns over the years. In this context, it would be interesting to examine whether these bank accounts can themselves be considered investments protected under BIT provisions.

There is a good argument that an interest-bearing savings account would satisfy the Salini test as it would constitute (i) a contribution of assets (ii) over a period of time with (iii) an element of risk (given the longstanding political instability in Lebanon) and which arguably (iv) contributes to the host state’s economy.

In Czescik v. Cyprus, the tribunal found that funds in a bank account could not be characterised as an investment, although importance was also given to the fact that the funds had only been transiting through a Cypriot bank account before reaching their final intended destination outside of Cyprus. In Anderson v. Costa Rica, however, the Tribunal embraced the wide definition of investment under the applicable treaty which included “any type of asset” in order to determine that interest-bearing deposits of funds constituted investments (although strictly speaking, these deposits were not bank account deposits).

Whether or not bank accounts would qualify as investments will therefore depend on the wording of the applicable treaty, the nature of the bank account and the intended purpose of the funds.

 

Dual Nationals as Investors: The Ratione Personae Hurdle

Lebanon has a significantly large expatriate and emigrant community, and it is likely that many of the people who possess bank accounts and other investments in the country will be dual nationals. Whether dual nationals may bring claims against Lebanon will therefore likely be a recurring issue.

Dual nationals are expressly barred from bringing such claims under the Canada-Lebanon BIT and the Iran-Lebanon BIT. And while no other treaties make similar prohibitions, dual nationals will be blocked from resorting to ICSID arbitration given that the ICSID Convention itself restricts dual nationals from bringing claims against either of their home states. However, all of Lebanon’s treaties offer at least one alternative to ICSID arbitration, usually in the form of arbitration under the rules of UNCITRAL, the International Chamber of Commerce, the Stockholm Chamber of Commerce, or the Cairo Regional Centre for International Commercial Arbitration. In the treaty with Morocco, the Arab Investment Court is the proposed alternative and in the case of Syria it is the only non-domestic dispute resolution option.

That being said, even in a non-ICSID arbitration, dual national investors should still expect to face a jurisdictional challenge and should carefully consider the implications of recent case law on effective nationality.

 

The Unofficial Nature of the Restrictions: The Attribution Hurdle

For Lebanon to be found liable under an investment treaty, the breach of the treaty must be attributable to the Lebanese state. However, the restrictions that have been imposed were taken at the initiative of the banks themselves without any formal endorsement or measure by the government, parliament or central bank. The Lebanese state has been viewed as complicit in bringing about this situation, and there have been allegations that the measures were taken at the informal direction of the governor of the central bank who has been seeking to legitimise them. At present, however, the path to attribution is not straightforward.

The attributability of a private bank’s actions to the state has been explored on a number of previous occasions. The tribunal in MNSS v. Montenegro noted that although a private bank was under the supervision of the central bank, it was not under its control and therefore the actions of the private bank could not be attributable to Montenegro under Article 8 of the ILC Articles on State Responsibility. In Marfin v. Cyprus, the tribunal did not attribute the actions of a private bank to the respondent state despite the central bank having overall control over the bank, because the tribunal could not find any evidence that the controversial actions were taken at the instruction or direction of the respondent.

Conversely, in Al Warraq v. Indonesia, the tribunal found that Indonesia could be held liable for its inaction in the face of the banking crisis which had led to the collapse of a private bank. In the circumstances, however, the claimant was a shareholder in the collapsed bank, and the tribunal underlined that the central bank’s duty of care was owed not to the bank’s shareholders but to its depositors. There may, therefore, be scope to argue that despite not adopting any overt capital control measures, Lebanon would be liable for frustrating investors’ legitimate expectations. Alternatively, the Lebanese government’s failure to police the illegal measures taken by the banks may be construed as a breach of the full protection and security guarantee.

 

A Situation to Watch Out For

There have been talks of stronger measures to come such as haircuts, forced currency conversions and voluntary currency devaluation. If these materialise, they may lead to a flurry of expropriation claims.

Despite the obstacles that lie along the way and the fact that the situation has not fully crystallised, it appears that there is already room for investors to commence treaty arbitration and it will likely not be long before Lebanon starts receiving notices of dispute.

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Arbitration Trending in the Derivatives Context: Perspectives

Sat, 2020-03-07 02:00

In my previous post in September 2018, I discussed certain trends in the negotiation of arbitration provisions in derivatives documentation. I mentioned at the outset that the International Swaps and Derivatives Association (“ISDA”) had by then already provided detailed guidance on the use of arbitration clauses in the 2013 ISDA Arbitration Guide.

A year on, the ISDA published the 2018 ISDA Arbitration Guide, which builds on the earlier edition by providing an expanded range of “ISDA-fied” model arbitration clauses for a larger number of arbitration institutions and seats around the globe.

The 2018 ISDA Arbitration Guide reflects a trend I had noted in my previous post, that there is growing momentum for the use of arbitration in the financial services context generally, and in the derivatives context in particular. I would argue that this trend shows no signs of slowing down, particularly in the Asia Pacific (“AP”) region. On the contrary, the advantages of arbitration clauses over court proceedings are becoming more widely understood and appreciated.

There are both commercial/business and regional factors underlying this trend. Among the former, one underestimated factor is an important concept underpinning the ISDA Master Agreement itself (and other master agreements). This concept is that of the “self-help” remedy. Briefly, this refers to the credit enhancement techniques that parties build into the documentation, which are designed to work without having resort to court proceedings. There are two main and inter-related mechanisms: close-out netting and collateralisation through title transfer.

Close-out netting is a feature of the ISDA Master Agreement (and other master netting documentation). Upon a default, all outstanding transactions are terminated, the amounts owing between the parties are calculated, and these amounts are netted off such that a single net sum payable from one party to the other is arrived at. It is crucial that insolvency does not interfere with this mechanism by, for example, allowing the liquidator to “cherry pick” and argue that only amounts owing to the insolvent company should be admitted. Parties would therefore seek jurisdiction-specific legal opinions to confirm that the onset of insolvency will not affect the operation of close-out netting.

The ISDA English Credit Support Annex (a very widely used document in cross-border transactions, particularly since the rolling out of regulatory uncleared margin requirements following the global financial crisis) uses the related technique of title transfer. Typically, exposures resulting from outstanding transactions between the parties are calculated and netted off on a daily basis. An amount equivalent to the outstanding net sum is then transferred as collateral to the party that is in the money. This reduces the overall exposure to zero on a daily basis and should therefore, in theory, limit the amount owing from a default to that resulting from intra-day market movements on the day of the default itself. Again, this requires non-interference from insolvency proceedings and parties would seek legal opinions to confirm this.

In much the same spirit, arbitration is a consensus-based, private and (by and large) bilateral arrangement seeking to resolve disputes that arise without recourse to court proceedings. The contractual basis that underpins the ISDA self-help remedies and arbitration allows parties to retain maximum control over their agreement and the resolution of disputes or issues that arise therefrom. Parties are thus better able to ensure a commercially-minded and flexible dispute resolution approach when they adopt these methods. In contrast, reliance on court procedures may be inherently unpredictable.

This goes a long way in explaining the attractiveness of arbitration in the ISDA context and its growing use in the market.

The trend towards arbitration has been particularly strong in the AP region for several reasons. Here, cross-border transactions are particularly common, and the consequent complexities are exacerbated by the fact that there is no overarching commonality of law and regulation, as in the European Union or the United States. In the AP region, there is instead a bewildering array of legal systems and regulatory regimes. Moreover, it is commonly thought that the raft of new regulations implemented after the global financial crisis (e.g. mandatory central clearing, non-cleared margin, transactional reporting etc.) has made the landscape even harder to navigate. For example, compliance is a clear impossibility where central clearing for the same transaction is mandated in two different jurisdictions.

Moreover, the interplay between law and regulation in many jurisdictions can give rise to surprising results. For example:

  • There is a risk that certain contractual obligations may be declared void on the grounds that they violate currency exchange control regulations; and
  • The recent tendency for regulators in many jurisdictions to be more “activist” on behalf of customers of financial institutions can result in arguments, based on the regulations, that a legal duty of care has arisen in favour of the customer.

Adding on to those issues are the problems that may be encountered in onshore court proceedings in many jurisdictions. I listed many of these in my previous post. They include a lack of experience in the local legal profession and judiciary, time delays, a tendency to bias, political complications and corruption.

So, how does arbitration assist in addressing these challenges?

Foremost, the choice of arbitration centres in the AP region is relatively straightforward. The pattern we see in negotiations seems to be in favour of Singapore. At the risk of over-generalisation, parties based in South Asia and Southeast Asia usually prefer the Singapore International Arbitration Centre (“SIAC”) while those based in Greater China and North Asia prefer the Hong Kong International Arbitration Centre (“HKIAC”). The International Chamber of Commerce (“ICC”) is also a popular option.

The strength of these arbitration centres is growing not just regionally but also globally, and their inclusion as standard options in both the 2013 and 2018 ISDA Arbitration Guides is encouraging. On every measure, these centres are establishing themselves as global centres for arbitrating financial disputes.

It is not difficult to see why, when we consider that these centres are situated in jurisdictions that boast impressive legal professionals and judiciary, who possess a deep well of experience in dealing with highly complex, cross-border and highly regulated transactions and products. This is a natural consequence of being international financial centres, but it is equally a result of conscious policy. In Singapore in particular, there have been strong efforts to create a legislative and judicial backdrop to arbitration that would allow it to operate with a minimum level of oversight and interference from the courts. Frequent updates to legislation have also kept Singapore on the cutting edge of global developments, and its reputation as a go-to centre globally has been growing rapidly as a result.

When looked at in comparison to the self-help remedies pioneered by the ISDA, these features are hugely important in maintaining the attractiveness of arbitration in the financial context. The parties are after all aiming for a dispute resolution mechanism that will be equally up to the task – flexible, sophisticated, unbiased and, by the way, also reasonably fast and inexpensive!

Examples of such flexibility in arbitration include how parties may choose a governing law for the arbitration clause which may differ from that of the contract, the arbitrators (with a preference for those with expertise in the relevant product/transaction and regulations) and sophisticated procedural features such as expedited proceedings and joinders. From an enforcement point of view, the high level of party control over the proceedings may well also reduce uncertainty of outcome.

Of course, there are several other features which may give arbitration an edge in a cross-border enforcement scenario. Prominent among these is the New York Convention that currently has over one hundred and sixty signatories and so enables recognition of arbitral awards in a large number of jurisdictions. This has benefits on two levels in the cross-border context (and particular resonance in the AP region given its number and variety of jurisdictions):

  • First, the chances are much greater that one is dealing with a signatory country rather than with a country with whom one has a reciprocal enforcement treaty or that provides other means for recognitions of foreign judgments (for example, section 426 of the United Kingdom’s Insolvency Act); and
  • Second, enforcement of an arbitral award may be concurrently sought in multiple jurisdictions if the counterparty has assets in several jurisdictions, and such enforcement may remain available regardless of the outcome of onshore court proceedings.

Lastly, I have an (admittedly minor) observation on the 2013 and 2018 ISDA Arbitration Guides. The guides require multiple consequential amendments to be made to the documentation, following the replacement of the standard jurisdiction clause with an arbitration clause (for example, consequential changes will be required to references to “judgment” in other parts of the documentation). This makes the transition to arbitration in the ISDA context less user-friendly. As a general rule in negotiations, the more there is to argue about the longer the negotiations take.

Therefore, given all the factors highlighted above, it may be time for the ISDA to consider designating arbitration as the standard enforcement mechanism in its template documentation (with the provision of suitable alternatives), rather than as a bolt-on alternative to the English or New York courts.

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Is A Delegation Clause the Answer to Pre-Arbitral Judicial Interference in India?

Fri, 2020-03-06 02:00

Most of the contemporary discourses on pre-arbitral judicial interference in India entail the scope of the judicial enquiry required before the constitution of an arbitral tribunal. As it currently stands, Section 8 (for arbitrations seated in India) and Section 45 (for foreign-seated arbitrations) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) have the potential of affecting the functioning of the arbitral proceedings. Both the sections provide that courts should refer the parties to arbitration upon a ‘prima facie’ satisfaction that a valid arbitration agreement exists. The scope of the pre-arbitral judicial intervention was also examined by the Law Commission in its 246th Report wherein, it recommended that ‘the same test regarding scope and nature of judicial intervention, as applicable in the context of section 11, should also apply to sections 8 and 45 of the Act.’ While only Sections 8 and 45 are the subject of this post, it bears noting that the position of the judiciary (as discussed here) has been vastly inconsistent under each of the three provisions.

In the current schema of things, arbitration agreements governed by the 1996 Act are still susceptible to lengthy judicial interference as Indian courts tend to perform a de jure analysis of the existence and validity of an arbitration agreement before a tribunal is constituted.1)See Garware Wallropes v. Costal Marine Constructions & Engineering, AIR 2019 SC 2053; United India Insurance v. Hyundai Engineering, AIR 2018 SC 3932. jQuery("#footnote_plugin_tooltip_6594_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6594_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Thus, two parties who intend to resolve all their contractual disputes, including questions pertaining to the existence and validity of the arbitration agreement itself, through arbitration, do not have a means to avoid the interference of Indian courts.

In the United States, parties willing to avoid this uninvited interference have included specific clause to this effect in their arbitration agreements. This clause acts as an unambiguous reinstatement of their will to delegate all jurisdictional questions, such as existence, scope, validity of the arbitration agreement (and even arbitrability of the dispute) to the arbitrator instead of the courts. Christened by the US courts as a ‘delegation clause’, these clauses can play a significant role in saving time and cost of the parties. In this blog post, the authors make a case for the implementation of delegation clauses in Indian contracts.

 

The Evolution and Practice of Delegation Clause under the US Federal Arbitration Act

The idea that parties can delegate the question of existence and validity of a domestic arbitration agreement to an arbitral tribunal instead of to courts is not expressly supported by the Federal Arbitration Act (“FAA”). Section 4 of the FAA mentions that courts should refer the parties to arbitration upon being satisfied that a valid arbitration agreement existed. However, as is the case with the doctrine of separability and competence-competence, the Supreme Court of the United States (“SCOTUS”) read this idea into the FAA (in this case, Section 2) through a series of progressive decisions.

Firstly, the SCOTUS in AT&T Technologies, Inc. v. Communications Workers of America (1986) ruled that unless the parties had agreed otherwise, pre-arbitral challenges to the existence and validity of an arbitration agreement should be carried out by the courts. The SCOTUS expanded this opinion in First Options, Inc. v. Kaplan (1995) when it ruled that the presumption that challenges under Section 4 of the FAA are decided by the courts could be overcome if there was ‘clear and unmistakable’ evidence of the intention of the parties to proceed otherwise.

While these decisions laid the groundwork for recognition of delegation clauses, it was only in Rent-A-Center, West, Inc. v. Jackson (2010), that the SCOTUS truly empowered such clauses. In Rent-A-Center, the SCOTUS held that the provision under Section 4 was a ‘default rule’ instead of a mandatory one and thus, parties could overcome its application through agreement. Following the separability presumption, it was held that the delegation clause was severable from the rest of the agreement and thus, just as a challenge to the contract did not invalidate the arbitration agreement; a challenge to the arbitration agreement would not invalidate the delegation clause. The SCOTUS characterized the delegation clause as ‘a distinct mini-arbitration agreement divisible from the contract in which it resides—which just so happens also to be an arbitration agreement.

In order to challenge the delegation of jurisdictional issues to the tribunal, the non-existence of a delegation clause should be expressly alleged, and the party should not generally challenge the arbitration agreement. Recently, arbitration clauses that refer to institutional rules acknowledging ‘competence-competence’ have also been treated as delegation clauses by the Missouri Supreme Court.

Delegation clauses, in general, have gained immense popularity in the current decade and are becoming a regular fixture in B2B contracts. The authors are of the view that the incorporation of an unambiguous delegation clause in an arbitration agreement may save the parties from the wavering operation of various sections of the 1996 Act. The parties may reflect their ‘clear and unmistakable’ intention to give the arbitrator carte blanche to finally determine issues of invalidity and non-existence of the arbitration agreement.

 

Importing the U.S. Approach to Delegation Clauses in Scheme of the 1996 Act of India

As far as the compatibility of the said clauses with the scheme of the 1996 Act of India is concerned, the authors note that the judicial, as well as the legislative trend, is towards minimal judicial intervention in the ‘conduct’ of arbitrations.2)See Mayavti Trading Pvt. Ltd. vs. Pradyuat Deb Burman, AIR 2019 SC 4284; Duro Felguera S.A. vs. Gangavaram Port Limited, AIR 2017 SC 5070. jQuery("#footnote_plugin_tooltip_6594_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6594_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This is also evident from the recent 2019 Amendment Act which has divested the courts of their power to decide the question of ‘existence’ of an arbitration agreement while appointing an arbitrator by repealing Section 11(6A) of the 1996 Act. Undoubtedly, the practice of determining the existence of a valid arbitration agreement still continues to exist under Section 8 and Section 45 of the 1996 Act. However, the same can be brought to terms with delegation clauses in the following three ways:

Firstly, the scope of enquiry under both these sections have been incarcerated to only ‘prima facie’ satisfaction of the judicial authority. It means that any conclusion made by the judicial authority under Section 8 as to the ‘existence’ of an arbitration agreement will only remain a factual or de facto determination of existence, ‘nothing more, nothing less’. The legal analysis of ‘existence’ can unmistakably be delegated by the parties to the tribunal alone. This was also reflected in the 246th Law Commission’s report where it noted that ‘if the judicial authority is of the opinion that prima facie the arbitration agreement exists, then it shall refer the dispute to arbitration, and leave the existence of the arbitration agreement to be finally determined by the arbitral tribunal.

Secondly, and as already explained above, the SCOTUS has interpreted Section 4 of the FAA, as far as it relates to reference to arbitration, to reflect a ‘default rule’. Similarly, in context of Section 8 of the 1996 Act, it must be remembered that it was never the intention of the 1996 Act to mandate the courts to perform a de jure analysis of the arbitration agreement before making a reference to arbitration. If that were the case, the original Act would have contained provisions to that effect under the erstwhile Section 8 (or Section 11). The current language in Section 8 exists because courts while dealing with the pre-arbitral challenges, derogated from the objectives of the Act. Thus, the 2015 as well as the 2019 amendments were brought firstly, to ensure that judicial interference, when done, was extremely limited and secondly, to harmonize the standard of review under Sections 8, 11 and 45. This leads us to conclude that the provisions under Section 8 do not speak of a mandatory requirement by the courts to decide on the existence and validity of the arbitration agreement.

Lastly, by affirming concepts such as ‘specific question doctrine’, the Supreme Court has earlier indicated that courts may give due credence to the terms of the arbitration agreement over the non-mandatory requirements of the Act.3)Seth Thawardas Pherumal v. Union of India, AIR 1955 SC 468. jQuery("#footnote_plugin_tooltip_6594_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6594_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Such a determination further re-affirms the possibility of having ‘delegation clauses’ under the Indian arbitration regime.

In sum, delegation clauses can be a vital tool in avoiding unwanted judicial interference before the tribunal takes the baton. Given the scheme of the 1996 Act and its similarity with the FAA provisions that deal with pre-arbitral challenges, the authors believe that the U.S. approach may provide guidance for implementing delegation clauses in India.

References   [ + ]

1. ↑ See Garware Wallropes v. Costal Marine Constructions & Engineering, AIR 2019 SC 2053; United India Insurance v. Hyundai Engineering, AIR 2018 SC 3932. 2. ↑ See Mayavti Trading Pvt. Ltd. vs. Pradyuat Deb Burman, AIR 2019 SC 4284; Duro Felguera S.A. vs. Gangavaram Port Limited, AIR 2017 SC 5070. 3. ↑ Seth Thawardas Pherumal v. Union of India, AIR 1955 SC 468. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Keeping Intra-EU ISDS Alive: The Supreme Court of Sweden Requests Preliminary Ruling from the CJEU on Validity of Arbitration Agreement in Light of Achmea Decision

Thu, 2020-03-05 02:00

Readers of the Kluwer Arbitration Blog will be very familiar with the drama surrounding the European Union’s (EU) pushback against intra-EU investor-state dispute settlement (ISDS) as contained in intra-EU bilateral investment treaties (BITs) and in particular the “clap of thunderAchmea (C-284/16) judgment (on this blog see, e.g. here). According to the Court of Justice of the European Union (CJEU), ISDS under intra-EU BITs such as the Netherlands-Slovakia BIT in Achmea is contrary to EU law because it creates a parallel jurisdiction to the EU’s domestic courts, which may impair the consistency, full effect and autonomy of EU Law (Achmea, ss 35-60). Following Achmea, the European Commission’s Communication COM(2018)547/2 of 19 July 2018 and the Declarations of the Representatives of the Governments of the Member States of 15 and 16 January 2019 on the legal consequences of the Judgment of the Court of Justice in Achmea and on Investment Protection in the European Union suggest that, with the exception of the multilateral Energy Charter Treaty, intra-EU ISDS is dead and buried (on this blog see, e.g., here). However, in February 2020 on appeal from the Svea Court of Appeal, the Supreme Court of Sweden (HD) kept intra-EU ISDS on life support, requesting a preliminary ruling from the CJEU on the validity of an arbitration agreement in light of the Achmea decision in the matter of Republic of Poland v. PL Holdings S.à.r.l. (Case No. T 1569-19).

 

Background and Procedural History

The Belgium-Luxembourg Economic Union (BLEU)-Poland BIT (1987) entered into force in 1991 with the purpose of promoting foreign direct investment between the signatories. According to Art 9(2) of the BIT, disputes between an investor and one of the contracting states would be submitted to arbitration at the choice of the investor. The investor, PL Holdings, is a company registered in Luxembourg that had acquired shares in two Polish banks. In 2013, the banks merged and following the merger, the investor owned 99% of the shares in the new bank. In July 2013, the Polish Financial Supervision Authority (KNF) decided to cancel PL Holding’s voting rights for its shares in the bank and to forcibly sell them. PL Holdings submitted a request for arbitration against Poland in 2014, arguing that its investment had been expropriated in violation of the BIT.

In 2017, the Arbitral Tribunal in PL Holdings S.à.r.l. v. Republic of Poland (SCC Case No V 2014/163) (Case Report available here) awarded the investor approximately EUR 150 million in damages plus interest and costs after determining that Poland violated the BLEU-Poland BIT (1987). Poland challenged the award on the basis that the arbitration clause contained in the BLEU-Poland BIT was contrary to EU law, following the Achmea (C-284/16) position that arbitration under intra-EU BITs is invalid because it does not comply with EU law. Specifically, Art. 267 and 344 Treaty on the Functioning of the European Union (TFEU) and the principle of autonomy of EU law. The investor rejected this argument. It argued that the subject matter was capable of settlement by arbitration and not incompatible with the legal order of the EU. Additionally, it argued that Poland’s objection as to the validity of the arbitration agreement should be time barred in accordance with the Swedish Arbitration Act and the SCC Rules 2010.

In 2019, the Svea Court of Appeal dismissed Poland’s challenge to the award (Case No. T 8538-17; T 12033-17). According to the Svea Court of Appeal, the decision in Achmea precludes EU member states from concluding agreements that obligate an EU member state to accept subsequent arbitral proceeding with an investor under a system that excludes disputing parties from “the possibility of requesting a preliminary ruling, even though the disputes may involve interpretation and application of EU law”. However, this obligation does not mean that the TFEU precludes arbitration agreements between an EU member state and an investor in a particular case based on party autonomy. Even though the EU member state is not bound by a standing offer contained in an intra-EU BIT, it is “free” to enter into an arbitration agreement with an investor regarding the same dispute at a later stage.

 

The Supreme Court asks for a preliminary ruling

Poland appealed the decision to the HD which in turn decided to stay the proceedings and request a preliminary ruling from the CJEU on the validity of the arbitration under Art. 267 and 344 TFEU (Request).

The HD considered it clear that the dispute settlement clause contained in the BIT was invalid under EU law. It then referred to the possible conclusion that the standing offer contained in the BIT for an investor to commence arbitration was then also invalid. However, it also considered the position advanced by the Svea Court of Appeal, that PL Holding’s request for arbitration could constitute an offer to the host state to accept jurisdiction in accordance with the principles set out by the CJEU in respect to party autonomy commercial arbitration.

Ultimately, the HD considered it unclear how EU law should be interpreted in the instant case. To avoid the risk of misinterpretation of EU law, the HD decided to request a preliminary ruling from the CJEU for clarification as to whether an arbitration agreement between an EU member state and an investor is invalid under EU law due to an invalid arbitration clause contained in an intra-EU BIT if the member state freely accepts the investor’s request for arbitration and refrains from objecting to the jurisdiction.

 

Comment

If the CJEU finds that the principles of commercial arbitration – including party autonomy – apply in cases where EU member states party to intra-EU BITs freely accept an EU investor’s offer to arbitrate and do not object to jurisdiction in a timely manner, it could in part revive intra-EU ISDS. A limited intra-EU ISDS based on party autonomy would no doubt help to reduce uncertainty for investors facing fresh objections as to the validity of their arbitration, while also offer greater flexibility for states in resolving investment disputes.

For the Svea Court of Appeal, the fact that Poland did not object to the validity of the arbitration in a timely manner was critical. Yet the long shadow of Achmea was sufficient to muddy the waters for the HD. Given the current standing of ISDS among the general public in Europe alongside the perceived risk to the autonomy of EU law, it may prove difficult to persuade the CJEU that this is the legally correct outcome. Against the politically-charged backdrop of the intra-EU ISDS debate, many investment arbitration practitioners (and activists) will be keenly awaiting the CJEU’s preliminary ruling.

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