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Colombia’s Constitutional Court Conditions Ratification of the Colombia-France BIT to the Interpretation of Several Provisions of the Treaty

Thu, 2019-07-04 01:33

Eduardo Zuleta and María Camila Rincón

In June 2019, Colombia’s Constitutional Court (the “Court”) issued a communication informing its decision on the constitutionality of the BIT between Colombia and France (the “BIT”) signed on July 10, 2014. In an unprecedented decision, the Court adjudged that the BIT is compliant with the Colombian Constitution (the “Constitution”) but conditioned its ratification to the state parties’ issuance of a joint interpretative note of several provisions, including those regarding fair and equitable treatment (“FET”), national treatment, most favored nation (“MFN”), and expropriation.

In the past, the Court subjected the approval of the FTA between Colombia and South Korea to the issuance of a unilateral interpretative declaration to interpret section A(2) of Annex 8C so as to preserve the powers of the Colombian Central Bank. However, this is the first time that the Court conditions the approval of several clauses of the BIT to the adoption of a joint interpretative declaration, or in absence thereof, to a renegotiation of the BIT.

Three out of nine justices of the Court issued dissenting opinions basically considering that the Court exceeded its constitutional powers.

 

The Court’s decision

The Court considered, generally, that the BIT is compliant with the Constitution. Nonetheless, it concluded that certain interpretations of the text of the BIT may be inconsistent with constitutional principles such as the obligation to provide equal treatment to foreign and national investors and their investments, and not to discriminate the former vis-à-vis the latter. In turn, the Court warned that to ratify the BIT, the state parties had to either adopt a joint interpretative declaration or renegotiate the treaty to comply with the decision of the Court.

 

Fair and Equitable Treatment

Article 4 of the BIT provides that:

“Each Contracting Party shall accord fair and equitable treatment in accordance with applicable international law to investors of the other Contracting Party and its investments in its territory. For greater certainty the obligation to accord fair and equitable treatment includes, inter alia:

a) the obligation not to deny justice in civil, criminal or administrative proceedings in accordance with due process;

b) the obligation to act in a transparent, non-arbitrary and discriminatory manner as regards investors from the other contracting Party and its investments”. This treatment is consistent with the principles of foreseeability and legitimate expectations (…)”.

The Court concluded that the language of this clause is vague and undetermined and therefore contradicts constitutional principles of legal certainty and good faith. Hence, this provision must be interpreted by the state parties to clarify whether “international law” refers to customary international law, treaty law, or both, and if it refers to customary international law, to which “instruments” does custom refer to. Moreover, the Court considered that the expression “inter alia” must be interpreted restrictively, in an analogical and not additive sense. Finally, it concluded that the concept of “legitimate expectations” is compliant with the Constitution only to the extent that (a) the expectations arise from specific and repeated acts carried out by the host state to induce an investor to make or maintain investments in its territory; and (b) the expectations are breached as a result of the investment being affected by abrupt and unexpected changes made by public authorities.

 

National treatment and MFN

Akin to other national treatment and MFN clauses included in multiple International Investment Agreements ratified by Colombia, Article 5 of the BIT provides that each contracting party shall grant to the investments of investors of the other contracting party made in its territory, a treatment not less favorable than that accorded, in like circumstances, to investments of its own investors or to investments of investors of another third state. According to Article 5(3) of the BIT, this obligation does not prevent the contracting parties from adopting justified, necessary and proportional measures to guarantee public order in the event of serious threats to fundamental interests of the states.

For the Court, the terms “similar circumstances” and “necessary and proportional” are vague and uncertain. According to the Court, the former must be interpreted in a way that encompasses all relevant circumstances –including differentiated treatment directed to pursue legitimate public policy objectives– and the latter should be interpreted in a way that respects the autonomy of national authorities to guarantee public order and protect legitimate public policy objectives.

Also, the Court concluded that the practice accepted by some international investment tribunals to import through the MFN clause provisions from other treaties ratified by the host state of the investment, threatens the powers of the President of Colombia to direct international relations and negotiate treaties, as embodied in Article 189.2 of the Political Constitution. Consequently, the Court declared the expression “treatment” to be compliant with the Constitution insofar as it is interpreted to preserve the competences of the President.

 

Expropriation

Article 6(2) of the BIT provides for the definition of indirect expropriation. Under this provision, a case-by-case analysis must be performed in order to determine whether a measure or series of measures adopted by one of the contracting parties constitute indirect expropriation, considering, among others, the consequences of the measure in the legitimate expectations of the investor. Furthermore, it provides that measures adopted to safeguard legitimate public policy objectives do not constitute an indirect expropriation insofar as such actions are necessary and proportional.

The Court found that the expressions “legitimate expectations” and “necessary and proportional” pose difficulties due to their vagueness and dissimilar application by international investment tribunals. Accordingly, it concluded that these terms must be interpreted under the same conditions required by the Court as regards Article 4 with respect to the concept of “legitimate expectations”, and Article 5 regarding the expression “necessary and proportional”.

 

Preliminary Comments

Although the full text of the judgment has not been released yet by the Court, the official communication reporting the decision raises several questions and comments. The following is a brief initial reaction to the official summary issued by the Court. But of course, it will be necessary to wait for the full text of the judgment to perform a full evaluation of the Court’s reasoning.

In its analysis of Article 4 of the BIT, the Court emphasized on the need to specify which are the “instruments” comprising customary international law in order to clarify the concept of “international law”. This request is far from clear. The Court seems to assume that customary international law is contained in a set of treaties or international instruments. If this is the case, the task entrusted to the contracting parties by the Court is almost impossible to comply with since there is no set of treaties or instruments that embodies customary international law.

Additionally, the Court does not explain how it comes to what appears to be its own definition of “legitimate expectations”. There is no reference in the Court’s communication to the interpretation of the BIT in the light of the Vienna Convention on the Law of Treaties (VCLT), to which both Colombia and France are parties.

As to the MFN clause contained in article 5 of the BIT, the clarifications requested by the Court seem more as requests for modifications or additions to the BIT than mere interpretative declarations. The Court demands the MFN clause to be interpreted so as to bar the possibility of importing of provisions incorporated in other international investment agreements (IIAs). While, Article 5(4) of the BIT already excludes the application of the MFN clause to import clauses of “definitions” (such as Article 1 of the BIT) or dispute settlement mechanisms incorporated in other IIAs, the BIT does not exclude substantive–or any other–provisions. Thus, the question is whether broadening the scope of limitations to the MFN clause as requested by the Court, would constitute an addition to the BIT rather than an interpretation.

This decision has dramatically changed the Court’s longstanding position regarding IIAs and may have several effects.

First, if the Parties wish to pursue the ratification of the BIT, the representatives of Colombia and France will have to negotiate again either a joint interpretative declaration or the language of the BIT. The question, of course, is whether France will follow the Court’s requests.

Second, the judgment of the Court may become evidence of state practice on how Colombia interprets provisions such as “similar circumstances” or “legitimate expectations”. For better or worse, this may have an impact on on-going and future investment arbitrations against Colombia.

Third, the Court drew a red line for Colombia in the negotiation and ratification of IIA. It is most likely that the Court will not approve similar clauses as the ones incorporated in the BIT without further interpretation. The bottom-line question is whether this judgment opens the door for the Court to impose on Colombia’s executive branch, and particularly on the President as head of the international relationships of Colombia, the Court’s views as to the contents of future IIAs.

 

Conclusion

The official communication suggests that the Court abrogated the competence to redefine the text of certain provisions of the BIT invading the competence granted to the President of Colombia by the Constitution. Furthermore, it seems that most of the interpretations requested by the Court cannot be addressed through a joint interpretative declaration but require an amendment to the treaty and therefore a new negotiation of its terms. The complete decision may, or may not, shed light on the position of the Court and on whether it exceeded its powers.

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Future Profits vs Cost: When do Tribunals Consider a Damages Claim Too Speculative?

Tue, 2019-07-02 21:30

Marion Lespiau

Recently published arbitral awards provide insight into Tribunals’ reasoning when the quantum of a claim is challenged for being too uncertain or speculative.

Typically, Claimants will not only claim costs incurred up to the date of the breach or expropriation, but they will also claim compensation for future profits in a but-for scenario. However, a recurring challenge raised by Respondents and/or their experts, in particular where a project or business has little or no track record of profits, is that future projections are too speculative, so that Claimants’ compensation should be limited to costs already incurred.

I provide below examples of recent arbitral awards where this point was raised, and I summarise the reasoning adopted by Tribunals in each case.

Generally, it appears that Tribunals use several criteria to assess future projections, including (i) the past track record of the project or business, (ii) the length of the projections, (iii) the ability to continue operating, and to operate profitably, over the projection horizon, (iv) the stability and predictability of future revenue and costs, and (v) the availability and reliability of evidence to support projections. Recent decisions show, however, that these different criteria are not weighted equally, and that Tribunals tend to focus more on future profitability than past performance.

 

Ability to generate future cash flows

Tribunals have refused to compensate investors for future profits when there was insufficient evidence that the projects could generate positive cash flows. In Bear Creek Mining Corporation v. Republic of Peru (ICSID ARB/14/21), Bear Creek, a Canadian mining company, claimed US$224.2 million in damages following the revocation in 2011 of its mining concessions for the Santa Ana silver mining project in Peru.

The concessions had been granted in 2007 and 2008. The Claimant had started exploration activities and had applied for a mining permit. The Claimant sought to prove that the project would have been able to move into the production phase but for the actions of the Respondent and claimed the fair market value of the project using the Discounted Cash Flow (DCF) method. According to the Respondent, the use of an income-based measure of value, such as DCF, would be highly speculative given that the asset was not a going concern and had no history of operations or profitability.

The Tribunal considered that the evidence presented by the Claimant was insufficient to support their claim that a hypothetical purchaser of the project would have been willing to pay a price based on DCF projections. Moreover, the Tribunal was unconvinced that there was evidence that the project had an ability to produce profits. The Tribunal awarded Bear Creek its sunk investment costs of US$18.2 million.

Similarly, in Clayton and Bilcon of Delaware Inc. vs. the Government of Canada (PCA Case No. 2009-04), the Claimants acquired in 2004 a quarry in Nova Scotia to develop alongside a marine terminal. In 2007, the project failed its governmental Environmental Assessment (EA) so could not proceed. The Claimants considered that they were unfairly treated by the Government of Canada during the EA process and filed a claim under NAFTA. The Claimants argued that their project would have passed the EA process had it been treated fairly and claimed US$443 million in compensation for future profits over the life of the project (50 years). The Respondent pointed out that the obtention of the EA was not certain and that the project may have failed anyway regardless of the NAFTA breaches.

The Tribunal found that the Claimant failed to prove there was sufficient certainty that the EA would have been granted or that the project would have been economically viable. The Tribunal awarded compensation for loss of opportunity which it estimated at US$7.0 million on the basis of costs incurred before it became clear the EA would not be obtained.

 

Stability and predictability of future cash flows

In five solar power cases against Spain, Tribunals awarded compensation for lost future profits even if the power plants did not have a long history of operations. In Eiser Infrastructure Limited and Energia Solar Luxembourg S.à.r.l vs. the Kingdom of Spain (ICSID ARB/13/36), the Claimants requested compensation for the loss in value of their investments in three Concentrated Solar Power (CSP) plants following a change in feed-in tariff incentives enacted by Spain in 2013. The plants had been operating since May 2012.

The Claimants based their calculation on the cash flows that would have been generated by the CSP plants over their useful life (40 years according to the Claimants) had the original incentive legislation been maintained. Respondent claimed that the DCF method was not appropriate due to the long time-period of the projections (25 years according to the Respondent) which made assumptions used in the DCF model highly uncertain. Instead, the Respondent relied on the Regulatory Asset Base (RAB) of the plants, i.e. the cost of building and maintaining the plants.

The Tribunal considered that power stations have a relatively simple business model, producing electricity whose demand and long-run value can be analysed and modelled in detail based on readily available data. They also noted that the plants were still in operation. The Tribunal concluded that the Claimants could be compensated for lost future profits over a 25-year period.

 

A focus on the future

Some Tribunals have put a clear emphasis on the future profitability of a project or business as opposed to their history. In the words of the Tribunal in East Mediterranean Gas S.A.E. v. Egyptian General Petroleum Corporation and Egyptian Natural Gas Holding Company and Israel Electric Corporation Ltd (ICC, 18215/GZ/MHM):

[Respondent] has, additionally, raised an objection as to the accuracy of a DCF model, given the lack of record of [Claimant]’s profitability. The Tribunal sees no reason for concern. The important fact is not whether [Claimant] can prove its profitability in the past, but rather whether it is reasonable to presume that, were it not for [Respondent]’s wrongdoing, it would have obtained a foreseeable stream of income in the future.

This approach is illustrated in Process and Industrial Developments Limited v. The Ministry of Petroleum Resources of the Federal Republic of Nigeria (January 2017). In that case, the parties entered into a 20-year Gas Supply and Processing Agreement (GSPA) in 2010, whereby Nigeria would supply Wet Gas to P&ID (the Claimant) which would process it in a newly-built facility and return it in the form of Lean Gas.

Nigeria did not make the necessary arrangements for the agreed supply of Wet Gas, including building the necessary pipelines. In March 2013, the Claimant treated this as a repudiation of the GSPA. By that date, the Claimant estimated that it had invested US$40 million in the project, although it had not yet acquired the land or built the facility.

The Claimant estimated that the project would produce a net profit of US$5 billion to US$6 billion over a 20-year period. The Respondent objected stating that the Claimant should only be entitled to nominal damages as it had not fully performed its obligations under the GSPA at the date of the repudiation. The Respondent also insisted that damages could only be awarded for a period of three years as the Claimant had a duty to mitigate its loss and it should have pursued other investment opportunities.

Despite the repudiation occurring at a very early stage of the contract, the Tribunal considered that there was no evidence that the Claimant would not have performed its obligations if it had been supplied with Wet Gas. In other words, in a but-for scenario, the evidence indicated that Claimant would have been able to operate a profitable business, and the lack of past operating history was not a decisive factor for the Tribunal in the circumstances. The Tribunal awarded full compensation over the full length of the contract, so US$6.6 billion before interest.

In conclusion, these cases illustrate the approach taken by Tribunals to decide whether the Claimants should be compensated for their future profits or only for the costs already incurred. As shown above, Tribunals tend to focus on the evidence supporting the ability of a project or business to produce future profits rather than on their past performance and rely heavily on the particular facts of each case.

 

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PRC Courts’ Stance on Requests to Stay Enforcement Proceedings Pending Challenges at the Seat of Arbitration

Mon, 2019-07-01 19:00

Tereza Gao and Edison Li

Introduction

In international arbitration, winning an award is not the end of the story.  Instead, a favorable business outcome depends on successful enforcement of the award in the jurisdiction(s) where the opponent’s assets are situated.  Unfortunately for the winning party, the losing party may delay or even avoid enforcement by raising challenges and instigating proceedings in various forums.  The winning party may be hauled up in national courts to fend off frivolous challenges, wasting valuable time and potentially allowing the losing party to dissipate its assets and evade successful enforcement.

To reduce uncertainties in the time between an award and its successful enforcement, many jurisdictions make efforts to provide clarity.  Hong Kong courts, for example, have repeatedly demonstrated reluctance in granting a temporary stay of enforcement and have conditioned any granted stay on the losing party paying security to minimize potential prejudice caused to the winning party’s interests.  Similarly, in the U.K., judicial precedents attempt to set out certain relevant factors in deciding whether to suspend enforcement proceedings.

In the People’s Republic of China (“PRC“), however, safeguards to the winning party’s enforcement interests in the face of post-award challenges are less clear.  As will be explained below, one recent case decided by the Shenzhen Intermediate People’s Court (“Shenzhen Court“) is an exemplar on this exact issue.  While this decision, like all PRC court decisions, is not binding on future cases, Hong Kong Water Solutions v. Shenzhen Tall & Stout (“Hong Kong Water Solutions“) sheds light on how PRC courts might deal with applications to suspend enforcement proceedings.

 

PRC Courts’ Discretion to Suspend Enforcement Proceedings

In the PRC, as with other New York Convention member states, the decision on whether to stay an enforcement proceeding and/or order security is a matter that lies within the court’s discretion.  Article VI of the New York Convention stipulates that:

“If an application for the setting aside or suspension of the award has been made … the authority before which the award is sought to be relied upon may … adjourn the decision on the enforcement of the award and may also … order the other party to give suitable security”.

Consistently, Article 83 of the Supreme People’s Court (“SPC“) Minutes of the Second National Working Conference on Trial of Foreign-related Commercial and Maritime Cases (2005) (“Article 83“) provides that:

“… People’s Courts may suspend recognition and enforcement proceedings of a foreign award if setting aside proceedings are pending overseas.  If [corresponding] foreign courts would not refuse to recognize and enforce the award under the same circumstances, People’s Courts shall treat the award reciprocally”. (emphasis added)

We are not aware of any case that has expressly referred to Article 83.  Neither can Article 83 form a legal basis to PRC court decisions.  Article 83 is nevertheless helpful in the sense that, by adopting the word “may,” it confirms the wide discretion of PRC courts under Article VI of the New York Convention to suspend enforcement proceedings pending setting aside proceedings overseas.

 

What Are the Factors That Are Likely to be Considered by PRC Courts Deciding Requests to Suspend Enforcement Proceedings? 

For the first time in the history of PRC court practice, in a 2018 judgment, Hong Kong Water Solutions, the Shenzhen Court refused the losing party’s application to suspend the enforcement proceeding, while the validity of the award was being challenged in the U.S.

As part of the relevant factual background, the parties submitted their dispute to an ICDR tribunal in Los Angeles.  In 2015, the tribunal entered an award favorable to Hong Kong Water Solutions (the “Award Creditor”).  Shenzhen Tall & Stout (the “Shenzhen Award Debtor”) and Taiwan Tall & Stout (the “Taiwan Award Debtor“) subsequently failed to pay the award.  In 2016, the Award Creditor applied to the Shenzhen Court for recognition and enforcement of the award against the Shenzhen Award Debtor (because it presumably had assets in the PRC).

Around the same time, the Award Creditor also applied to the Los Angeles County Superior Court (“L.A. Court“) to confirm the validity of the award, where the Taiwan Award Debtor raised objections.  Following the L.A. Court’s confirmation of the validity of the award, the Taiwan Award Debtor filed an appeal in early 2017.  During pendency of the U.S. appeal, the Shenzhen Award Debtor requested the Shenzhen Court to suspend the enforcement proceeding on the basis that the award could be annulled at the seat of arbitration.

In response, the Award Creditor applied for an order that suspension of the enforcement proceeding should only be granted on the condition that the Shenzhen Award Debtor provide security.  The Shenzhen Court, exercising its discretion under Article VI of the New York Convention, directed the Shenzhen Award Debtor to provide security in the equivalent amount of the awarded damages.  However, the Shenzhen Award Debtor failed to do so and no suspension order was made.

The Shenzhen Court subsequently recognized and enforced the award.  In refusing to suspend recognizing and enforcing the award, the Shenzhen Court considered and balanced the following factors:

  • Security: The Shenzhen Award Debtor failed to provide the security as requested.
  • Circumstances of the Annulment Proceeding: Despite the ongoing appeal, the L.A. Court had already confirmed the validity of the award. Further, while the Taiwan Award Debtor applied to annul the award, the Shenzhen Award Debtor did not make the same application in the U.S.  Evidence available was insufficient to show that the award would be set aside in any event.

This appears to be the only publicly available case in which a PRC court has been asked to suspend enforcement of an arbitral award on the basis of setting aside proceedings overseas. While it is difficult to generalize PRC court practice on suspension of enforcement proceedings based on this case alone, Hong Kong Water Solutions serves as a useful guide as to the factors that may be taken into account by PRC courts.

Among the factors to be considered, the provision of adequate security by the award debtor appears to be a prerequisite for enforcement proceedings to be suspended.  This is directly distilled from the Shenzhen Court’s reasoning, and is also consistent with the positions set out in a few provisions of law governing awards made in certain regions.  One example is Article 17 of the Provisions of the SPC on the Recognition and Enforcement of Arbitral Awards Made in Taiwan (2015), which provides that enforcement proceedings of arbitral awards made in Taiwan “shall” be suspended if the award debtor can provide both adequate security and evidence that an application for setting aside the award has been accepted by courts in Taiwan.  The same approach also applies to awards made in Macau pursuant to Article 9 of Arrangement between the Mainland and the Macau SAR on Reciprocal Recognition and Enforcement of Arbitration Awards (2007).  Thus, for awards made in Taiwan and Macau at least, and as also seen in Hong Kong Water Solutions, enforcement proceedings will unlikely be suspended if award debtors fail to meet the prerequisite by providing adequate security.

The circumstances of the setting aside proceeding at the seat of arbitration also appear to be relevant to PRC courts’ consideration in enforcement proceedings.  As shown in Hong Kong Water Solutions, in deciding whether to suspend enforcement proceedings, PRC courts may give weight to whether the award debtor raised its own challenges, whether the court at the seat has already made a ruling, and the prospect of the annulment proceedings.  Article 83 also appears to suggest similar considerations.  In addition to confirming the “discretion” to suspend enforcement proceedings as prescribed in Article VI of the New York Convention, Article 83 further requires PRC courts to “reciprocally” enforce an award if “foreign courts” (note the provision is not itself clear as to which foreign courts it refers to) would not suspend enforcement proceedings under the same circumstances.

 

Takeaway

In dealing with challenges to enforce arbitral awards, PRC courts have discretion to suspend the enforcement proceeding pursuant to Article VI of the New York Convention.  However, it remains challenging to discern, based on Hong Kong Water Solutions alone, how PRC courts will exercise their discretion and what factors are likely to be considered in suspending enforcement proceedings pending annulment proceedings overseas.  Moreover, the provisions which appear to be exactly on point either arguably do not have legislative effect or govern only awards made in specific regions.

It is yet to be seen whether any statute, SPC interpretations or guiding cases may come into effect to provide further guidance on this issue in the PRC.  It will also be interesting to see if future cases fall within the same line of reasoning as in Hong Kong Water Solutions.  The limited information available appears to suggest a trend in PRC court practice to request the provision of security as a prerequisite, among various factors, to stay enforcement proceedings pending setting aside proceedings in other jurisdictions.

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Against Indian Parties Choosing a Foreign Seat

Mon, 2019-07-01 03:20

Vishvesh Vikram and Shubham Jain

The question whether two Indian parties can choose a foreign seat of arbitration has become far too obfuscated with some recent judicial pronouncements. This article seeks to argue that the scheme of Indian Arbitration and Conciliation Act (“Act”) itself does not permit it.

In India, enforcement of arbitral awards is covered in two parts under the Act. Part I of the Act covers arbitrations with their seat in India, including international commercial arbitrations. Part II of the Act covers arbitrations which are seated outside India. Even though the Act mentions the word “place” instead of “seat”, the Supreme Court has clarified in Bharat Aluminium Company v. Kaiser Aluminium Technical Services [(2012) 9 SCC 552] that it refers to seat only, except for Section 20(3), where the word “place” refers to the venue.

International commercial arbitration is defined in terms of involvement of a party who is either a national, a resident, a body corporate, or government, of another country.

The uncertainty caused by various High Court and Supreme Court judgments on this issue has previously been discussed in detail elsewhere. The argument for allowing Indian parties to choose a foreign seat stems from two judgments – Sasan Power Limited v North American Coal Corpn India Pvt Ltd [(2016) 10 SCC 813, “Sasan Power”] and Reliance Industries Limited v Union of India[(2014) 7 SCC 603, Reliance Industries”]. In Sasan Power, the Madhya Pradesh High Court had allowed two Indian parties to choose a foreign seat. However, the Supreme Court, on appeal, clarified that the question did not expressly arise because of a foreign element in the case (NACCIPL was the subsidiary of an American company). Even in Reliance Industries, the Supreme Court did not venture into the discussion whether two Indian parties could choose a foreign seat – the judgment merely enforced an award where two Indian parties were seated outside India. On the basis of the ruling in Sasan Power, the Delhi High Court also allowed two Indian parties to choose a foreign seat in GMR Energy Limited v. Doosan Power Systems India [2017 SCC OnLine Del 11625].

For arbitrations seated in India, Section 28 requires that Indian law would be applicable as substantive law except for international commercial arbitrations. Further, Section 34 sub-clause (2A) provides that except for international commercial arbitrations, an award under Part I can be set aside if there is a patent illegality. Patent illegality has previously been defined by the Supreme Court in Associate Builders v Delhi Development Authority [(2015) 3 SCC 49] to mean a prima facie violation of Indian law, or a conclusion that no fair-minded person could reach through reasonable application of a legal provision. The proviso to sub-clause (2A) itself makes it clear that patent illegality cannot be claimed merely for erroneous application of a law or by reappreciation of evidence.

However, enforcement of foreign-seated arbitral awards under Section 48 in Part II does not require any such review. Thus, if two Indian parties are permitted to choose a foreign seat for arbitration, it would imply that they will be permitted to escape scrutiny from an allegation of patent illegality as Part II of the Act will be applicable. Compliance with the substantive law in force is not a precondition for enforcement of an award under Section 48, unless the law completely incapacitates a party or renders the arbitration agreement invalid.

Hence, the argument that two Indian parties choosing a foreign seat would still be subject to Indian law as applicable substantive law, and hence not evade it, cannot be accepted, since violation of substantive applicable law is not a ground for setting aside the award. Given that even parties with a foreign seat can opt for a venue for arbitration in India, permitting Indian parties to opt for a foreign seat may mean that two parties, without even venturing outside India’s borders, would be able to opt out of compliance with Indian law.

Such a view would result in Part I becoming a penalty for those Indian parties who fail to opt for a foreign seat, since only arbitral awards where both parties were Indian can be subjected to review of patent illegality under the present scheme of the Act.

In this case, if two Indian parties were to be permitted to opt for Part II, there would be no incentive for them to choose Part I as both the parties will be free from their obligation to comply with Indian law by simply choosing a foreign seat and thus opting for Part II. Such a view of the scheme would make Part I redundant. Furthermore, the distinction in enforceability between Part I and Part II, insofar as patent illegality is concerned, only exists to ensure that two Indian parties cannot derogate from Indian law. Hence, the scheme of the Act is clear in prohibiting Indian parties from choosing a foreign seat.

The Arbitration and Conciliation Act provides for parties undergoing international commercial arbitration to bypass domestic regulatory mechanisms. If such a scheme was to be envisioned as applicable to two Indian parties as well, then it would result in Part I becoming a penalty for Indian parties for choosing to comply with Indian law. Allowing national parties to opt out of the Indian legal system may have many adverse effects. The authors do not wish to argue for an approach which diminishes the scope for arbitration in India in general. The authors believe sufficient protection is provided to an arbitral award even under Section 34 where it cannot be set aside merely for erroneous application of law or a need for reappreciation of evidence. The authors believe that the Arbitration and Conciliation Act is pro-arbitration even though two Indian parties may not opt for a foreign seat under its scheme.

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The Contents of the Brazilian Arbitration Journal, Volume XVI, Issue 62 (June 2019)

Mon, 2019-07-01 02:00

João Bosco Lee

The present edition of the Revista Brasileira de Arbitragem [Brazilian Arbitration Journal] presents three articles in the National Doctrine section: Laura Carneiro de Mello Senra deals with the arbitrability of cases involving the remuneration of Brazilian federal public servants in which disputes against the Federal Union or a different public entity may arise; Leandro Rigueira Rennó Lima and Ana Luiz de Castro Viana comment on the importance of improving lawyers’ collaborative posture for the development of mediation in Brazil; and Thiago Marinho Nunes studies the use of arbitration as an adequate and efficient dispute resolution method in agribusiness.

In the International Doctrine section, Julia Guimarães Rossetto and Luís Alberto Salton Peretti briefly present their comments on the new international commercial arbitration acts promulgated in Argentina and in Uruguay, which have opted for a dualist system for the treatment of domestic and international arbitrations.

Turning to the National Judicial Case Law section, Guilherme Enrique Malosso Quintana analyses a ruling by the São Paulo Court of Appeal in regard to bankruptcy fraud and the use of protesto to avoid alienation of assets in the context of arbitration. In addition, Fabiane Verçosa comments on a decision by the Brazilian Superior Court of Labor addressing the delicate matter of the use of arbitration for individual labor disputes.

In the International Judicial Case Law section, Bruno Guandalini delves into a judgment of the Supreme Court of the United States on the competence for the definition of arbitrators’ jurisdiction, since Courts of Appeal from different Circuits had been adopting divergent understandings regarding the issue.

The General Matters section entails Resolution n. 4/2018 of Câmara de Conciliação, Mediação e Arbitragem Ciesp/Fiesp establishing the emergency arbitrator procedure. Furthermore, Ana Carolina Weber comments on the 1st edition of the summary of arbitral awards published by Câmara de Arbitragem do Mercado da B3 S.A. – Brasil, Bolsa, Balcão, and Rodrigo Moreira reports the highlights of the 8th ICC Brazilian Arbitration Day, held on 28 March 2019 in São Paulo.

Last but not least, the present edition presents Vitor Silveira Vieira’s review on O Dever de Revelação do Árbitro (in English, The Arbitrator’s Duty of Disclosure) by Ricardo Dalmaso Marques, and Arnaldo de Lima Borges Neto’s review of Tratado de Arbitragem (in English, Treatise on Arbitration), a commentary on the Portuguese voluntary arbitration law, by António Menezes Cordeiro.

Boa leitura arbitral!

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Interviews with Our Editors: Perspectives on Alternative Dispute Resolution from Karima Sauma, Executive Director of CICA – AmCham Costa Rica

Sat, 2019-06-29 19:02

Enrique Jaramillo (Assistant Editor for Latin America) and Kiran Nasir Gore (Associate Editor)

Welcome to the Kluwer Arbitration Blog, Ms. Sauma!  We are grateful for this opportunity to learn more about the International Center for Conciliation and Arbitration (“CICA” for its initials in Spanish), which is celebrating its twentieth anniversary this year (congratulations!), as well as about the dynamic alternative dispute resolution environment of Costa Rica. 

Thank you for this opportunity! I am delighted to be able to contribute to the Kluwer Arbitration Blog.

 

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

I am the Executive Director of CICA, based in San José, Costa Rica. I oversee all the Center’s activities, including our case-management services and academic and educational efforts. I am also an adjunct professor at ULACIT University in San José, and the academic director of the “Especialización en Arbitraje CICA-ULACIT”.

Previously, I worked as an Advisor with the Dispute Settlement Team of the Costa Rican Ministry of Foreign Trade, where I was part of Costa Rica’s defense team in claims filed under various treaties and free trade agreements. Prior to joining the Ministry of Foreign Trade, I worked with the international arbitration group at a large international firm in Washington, DC.

 

  1. We understand that CICA is affiliated to, but independent of the Costa Rican-American Chamber of Commerce (“AmCham Costa Rica”). How does this relationship enhance CICA’s ability to educate the arbitration community, and also to serve international and domestic users of your dispute resolution services?

CICA’s relationship with AmCham provides us with the institutional support of a solid, well-respected and long-standing organization, but at the same time, allows us to operate independently to preserve the core principles that guide arbitration. Being a part of AmCham enhances our ability to reach domestic and international users who are Chamber members and need our dispute resolution services (however, you do not need to be a Chamber member to be able to use our services).

It is also the ideal platform to educate a wider audience about alternative dispute resolution (ADR), liaise with the government and other institutions that share our mission, and look for more creative ways to provide our services. It also helps us understand better the needs of our users and allows us to deliver more tailored solutions. More importantly, it ties us to a wider network of AmChams, which has helped us in our regional appeal.

 

  1. Can you tell us more about your users and their disputes? What kinds of parties do you usually serve, and are there particular industries or types of disputes prevalent among them?   How does CICA rely upon this information to enhance its services and approach?   

The types of parties and disputes that are brought before CICA are very diverse, which is one of the great advantages of working in arbitration. Currently, the most popular issues involve construction disputes, real estate agreements, and bank loans, but the industries and topics are usually wide-ranging.

The case-load and topics are generally a reflection of the economic state of the country and the region, so it is important for us to be aware of what is going on in order to provide services that respond to our users’ needs at a particular juncture. In addition to our case-management services, we have focused on expanding our academic efforts, which include conferences and workshops that promote the use of alternative dispute resolution.

We have also seen an increase in international arbitrations that involve companies with a regional presence in Central America, so we are working to strengthen our capabilities in the region.

 

  1. In 2011, Costa Rica adopted its Law for International Arbitration (based on the 2006 UNCITRAL Model Law and available in English here). How has this development impacted CICA’s workload?

The adoption of this Law marked a turning point for arbitration in Costa Rica because it allowed us to finally manage international cases. Since then, Costa Rica has strived to become a hub for international arbitration. CICA has been at the forefront of this process, and leads the way in terms of international cases in Costa Rica. The adoption of this law also meant the need to modify certain aspects of the arbitration process that were rooted in domestic judicial proceedings. To this end, CICA, alongside leading local university ULACIT, created the first and only postgraduate degree in Costa Rica that includes courses on international arbitration. These education efforts are crucial, as they help train professionals to be better equipped at handling the increasing workload of international cases.

Additionally, CICA will unveil later this year our new Arbitration Rules, which represent a notable effort in making our processes more international.

 

  1. Aside from the leading international arbitral institutions, recent years have seen the emergence of many more regional ADR centers. From your perspective, what are the advantages to using a regionally-based ADR center for dispute resolution?  How does CICA stand out among its peers in Latin America?

There are many advantages to using a regionally-based ADR center for dispute resolution. On the one hand, CICA provides first-rate dispute resolution services at a fraction of the cost of the leading international arbitral institutions. This means that we offer high-quality work, with equally high standards, but because we are located in Costa Rica we can offer more competitive rates.

We are also more adept at dealing with the local and cultural aspects of the region, which translates into more efficient and effective processes.

Additionally, we offer a wider selection of arbitrators that have more experience in the region, and whose professional qualifications can make them better suited to hear the dispute at hand.

On the other hand, Costa Rica is a great seat for arbitrations:

  • It has a long tradition of upholding the rule of law, including solid laws that regulate domestic and international arbitrations.
  • Notably, it adopted the 2006 UNCITRAL Model Law to regulate its international arbitrations and is also a member of the New York Convention.
  • Local courts are very respectful of arbitration awards, and generally defer to the decisions of the arbitral tribunals.
  • It is a long-standing and peaceful democracy, known for its political, social and economic stability.
  • It has a very professional workforce, with plenty of experience in alternative dispute resolution.
  • It is geographically privileged, and easily accessible from all the major airports in the world.

 

  1. During the past decade we have seen a number of developments in Latin American arbitration – including an increasing aversion by some countries in the region to investment arbitration. How have these trends impacted Costa Rica generally, and CICA more specifically?

Costa Rica has a strong tradition of creating and upholding public policies that promote foreign investment. This includes the subscription of numerous international investment agreements that contain ISDS provisions. In fact, Costa Rica has faced 11 investor-State arbitrations – one of the highest numbers in Central America – which have, in turn, shed a spotlight on ISDS in the country. However, Costa Rica’s experience with these cases has generally been a positive one.

The fact that Costa Rica has had positive outcomes has assisted in limiting some of the backlash that other countries have faced regarding ISDS. However, investment arbitration cases are frequently reported on, albeit incorrectly, because they involve the government and public policies. This has resulted in the dissemination of a lot of misinformation relating to arbitration. CICA’s mission has been to counter this misinformation through publications, events and workshops that promote the use of alternative dispute resolution and educate with correct information. Additionally, CICA has sought to improve the media’s understanding of arbitration in order to have more accurate reporting.

 

  1. Earlier this year, CICA and Arbitrator Intelligence signed a historic agreement through which CICA became the first Latin American arbitral institution that will use the Arbitrator Intelligence Questionnaire (AIQ) to promote diversity, accountability, and transparency in international commercial arbitration. Can you tell us more about this initiative and how it will support CICA’s core goals?

This is a wonderful initiative that highlights some of the most important efforts that we are currently pursuing. The quality of the decision-makers is paramount to the successful resolution of any case, which is why one of our permanent concerns is to have the best arbitrators possible. The AIQs will assist us in the selection of arbitrators with verifiable data, but will also promote the inclusion of new, more diverse arbitrators, by shedding light on appointments that would otherwise go unnoticed.

At CICA we hope that using tools like the AIQ will help answer some of the users of dispute resolution services’ questions related to issues of accountability, transparency and diversity in international arbitration. We hope that this movement continues to spread to other institutions so that we can truly improve these aspects of international arbitration in a global way.

I am also currently involved with the Equal Representation in Arbitration Pledge and Young ITA (Institute for Transnational Arbitration), which are two organizations that are doing a lot for diversity and the inclusion of younger generations in arbitration. All these initiatives combined will hopefully lead us to real, lasting and positive change.

 

  1. How has CICA sought to celebrate its twentieth anniversary, and what is your vision for CICA during the next twenty years to come?

This year, we are celebrating twenty years of spearheading an ADR movement in Costa Rica and the region. We are proud of leading the way for a more peaceful and amicable way of solving conflicts and hope to continue doing so for many years to come.

Our vision for CICA for the next twenty years involves improving our services, expanding our reach, and liaising with the government and other institutions that share our mission. Specifically, regarding our case-management services, we will continue to incorporate the latest technology to improve the way that we carry out arbitration and mediation processes. Technology will continue to disrupt the way that we currently do things, and ADR is no exception. However, we look at this as an opportunity to become more creative, more efficient, and to develop new and more customizable ways of solving conflicts. Additionally, technology will enable us to expand further and reach more users from different backgrounds and geographical locations.

Additionally, we look to improve existing services by implementing new rules of arbitration (coming out later this year), diversifying our roster of arbitrators, and using more data-driven tools to create better services.

The future also requires that we develop different skillsets in response to changing times, and CICA is playing an important role in promoting and training a new generation of professionals in alternative ways of resolving conflicts and promoting peace. This includes a focus on negotiation and communication tools, as well as other creative ways of handling conflict. We are also working together with the government to develop different programs directed at public officials that will help with this mission. In the years to come, we seek to strengthen our position as an ally in the development of public policies that concern conflict resolution, justice and peace.

I can definitely say that from our point of view, the future looks busy and exciting!

 

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

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

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The Prague Rules: A Soft Law Solution to Due Process Paranoia?

Sat, 2019-06-29 00:17

Jordan Tan and Ian Choo

The publication of the Rules on the Efficient Conduct of Proceedings in Arbitration (“Prague Rules”) on 14 December 2018 heralded a challenge to the well-established incumbent (i.e. the International Bar Association (“IBA”) Rules on the Taking of Evidence (“Evidence Rules”)) and prompted much debate amongst the arbitral community, including at least six posts on this blog,1)The previous KAB posts are available here, here, here, here, here and here. jQuery("#footnote_plugin_tooltip_9684_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9684_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); but none have quite come out in full support of it. This post suggests that there is much to celebrate about the bold new rules.

Briefly, the key differences relate to the default rules that apply when adducing evidence. While under the Evidence Rules the right to rely on documents, call fact witnesses and appoint experts generally lies with the party, under the Prague Rules parties are encouraged to avoid document production, and the tribunal (rather than the party) calls the fact witnesses and appoints the expert(s).2)For a more detailed discussion, see here and here. jQuery("#footnote_plugin_tooltip_9684_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9684_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Other “novel” features not present in the Evidence Rules include having the tribunal present its preliminary views at an early stage, the principle of iura novit curia, and conferring on the tribunal the power to assist in the amicable settlement of disputes.

 

Challenging a Well-Established Incumbent

There is, of course, inertia in changing what is a well-established way of doing things. One wonders whether the criticism would be quite so strong if the Prague Rules sought to “supplant” other soft law instruments instead. Not all IBA soft law has reached the levels of the tremendous success that the Evidence Rules have. The IBA Guidelines on Conflicts of Interest (“Conflicts Guidelines”) and the IBA Guidelines on Party Representation, for instance, have a more muted reception amongst the international arbitral community. Still, because the Prague Rules invade a space where the Evidence Rules are adopted sometimes almost pro forma, the resistance to change is keener.

 

Filling the “Gap”

The oft-cited goals of soft law include “gap”-filling and harmonisation of international best practices. It is clear that the Evidence Rules sought to do that when it was first promulgated.

Similarly, the Prague Rules seek to fill a perceived “gap” in international arbitration. Cost and the lack of effective sanctions during the arbitral process against dilatory tactics remain the worst characteristics of international arbitration.3)Queen Mary University of London and White & Case LLP, 2018 International Arbitration Survey: The Evolution of International Arbitration (9 May 2018), 7, 8. jQuery("#footnote_plugin_tooltip_9684_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9684_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This “gap” is filled by the Prague Rules insofar as it seeks to codify best practice in arbitral procedure on these issues.

It should be noted that the Prague Rules are far from the first soft law instrument attempting to regulate time and costs in arbitral proceedings. Institutions like the UNCITRAL (Notes on Organising Arbitral Proceedings), the ICC (Appendix IV of the ICC Arbitration Rules 2017) and the College of Commercial Arbitrators (Protocols for Expeditious, Cost-Effective Commercial Arbitration) have all issued guidelines and protocols to deal with issues of time and cost. Even law firms have pitched in – New York-based law firm Debevoise and Plimpton LLP has issued a Protocol to Promote Efficiency in International Arbitration. What is significant about the Prague Rules is that it seeks to codify a set of evidentiary rules, as opposed to being just mere techniques, to achieve this end.

Does the fact that the Prague Rules and Evidence Rules refer to themselves as “Rules” rather than “Protocols” or “Guidelines” suggest that they are of a more mandatory nature? Such a notion would be inaccurate. Rather, soft law instruments “draw their strength from their intrinsic merit and persuasive value rather than from their binding character“.4)Railroad Development Corporation v Republic of Guatemala, ICSID Case No. ARB/07/23, Decision on Provisional Measures, (Oct 15, 2008), ¶32. jQuery("#footnote_plugin_tooltip_9684_4").tooltip({ tip: "#footnote_plugin_tooltip_text_9684_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The arbitral community is a sophisticated one – time will be the ultimate arbiter of whether it gains any traction. But to deny it a chance to enter the fray at all would be unfortunate.

 

Are the Prague Rules a Panacea to Due Process Paranoia?

The specific goal of the Prague Rules, stated in both the Preamble and the Note from the Working Group, is to increase the efficiency of arbitral proceedings by encouraging a more active role for arbitral tribunals. To do so, the Prague Rules have the following notable provisions:

  1. The Arbitral Tribunal is to have wide powers of case management, including expressing its preliminary views on the case: Article 2.4.
  2. The Arbitral Tribunal and the parties are encouraged to avoid any form of document production, including e-discovery: Article 4.2.
  3. The Arbitral Tribunal may apply legal provisions not pleaded by the parties if it finds it necessary: Article 7.2.
  4. The Arbitral Tribunal and the parties should seek to resolve the dispute on a documents-only basis: Article 8.1.
  5. The Arbitral Tribunal may assist the parties in reaching an amicable settlement of the dispute at any stage of the arbitration unless one of the parties objects: Article 9.1.

At risk of over-simplification, critics have argued that the above provisions fall afoul of the principles of due process – the right to be heard and the right to an independent and impartial tribunal. Such criticism may not be appropriate for at least three reasons.

First, to the extent that the Prague Rules are adopted by the parties in its entirety, it has safeguards built in to ensure that arbitrators comply with procedural rules of natural justice.

  • The mandate of the tribunal generally under the rules already requires the tribunal to be cognizant of due process principles and ensure that they are observed and adhered to. Article 1.4 states: “[a]t all stages of the arbitration and in implementing the Prague Rules, the arbitral tribunal shall ensure fair and equal treatment of the parties and provide them with a reasonable opportunity to present their respective cases“.
  • Similarly, Article 7.2 providing for iura novit curia safeguards the parties’ due process rights by ensuring that “parties have been given an opportunity to express their views in relation to such legal authorities“.

Second, the rules are not completely radical departures from the established arbitral procedure. In fact, most of them find expression in either soft law or arbitral institutional rules.

  • Assistance in amicable settlement is a familiar concept in many arbitral jurisdictions. Article 26 of the 2018 DIS Arbitration Rules provides for the same (other examples are cited on this blog here). It is also found in international instruments like the aforementioned Appendix IV of the ICC Rules, and General Standard 4(d) of the Conflicts Guidelines clearly envisions the possibility of the arbitrator taking on such a role.
  • Iura novit curia is endorsed in Article 22.1(iii) of the LCIA Arbitration Rules (2014).
  • Avoidance of document production is envisioned under Article 25(6) of the ICC Rules, which provides that the tribunal “may decide the case solely on the documents submitted by the parties unless any of the parties request a hearing“.
  • An active role for the tribunal was also contemplated, somewhat ironically, in the Evidence Rules – Article 8.2 of the Evidence Rules provides that the tribunal “shall at all times have complete control over the Evidentiary Hearing“.

In any event, even if the criticism that so many new provisions enshrined in one combined document potentially go too far in establishing a new arbitral procedure, this can be overcome by applying the rules in a piecemeal fashion (such a view was alluded to previously here). Rules which are entirely foreign to the parties can always be opted out of, and the “standard procedure” under the Evidence Rules can apply as a fall-back.

Third, as a matter of principle, if the parties have actually agreed to the rules, it cannot be that adoption of the rules simpliciter amounts to a violation of due process. The New York Convention provides for the refusal of recognition and enforcement for both a failure to observe principles of due process (Article V(1)(b)) and a failure to respect the autonomy afforded to parties in determining arbitral procedure (Article V(1)(d)). If due process paranoia stems from a perceived reluctance by tribunals to act decisively for fear of awards being challenged, the clear mandate given to the tribunal to actively take such measures must surely militate against such fears.

This is classically illustrated by the Prague Rules themselves in situations where the power conferred to the arbitrator appears particularly contentious. For instance, the aforesaid Article 2.4(e) which allows the tribunal to express its preliminary views also states that such views cannot be taken as evidence of the tribunal’s lack of independence or impartiality and cannot constitute grounds for disqualification.

 

The Way Forward

The advent of the Prague Rules affords parties greater variety when choosing their arbitral procedure. More specifically, it articulates a framework for tribunals to play a more active role, which is likely to have the salutary benefits of discouraging dilatory and guerrilla tactics.

As both the Evidence Rules and the Prague Rules note in their preambles, they operate as “guidelines”, and are not meant to limit the inherent flexibility of arbitration. This must be correct – soft law should not be seen as “hard” law, no matter the regularity of use. In this vein, the “challenge” to the status quo also reduces the perception that arbitration has become increasingly judicialized. Arbitration has always prided itself on its inherent flexibility – the reception to the Prague Rules should be no exception.

 

The contributor Ian Choo is currently a practice trainee with Cavenagh Law LLP, which is registered as a Formal Law Alliance in Singapore with Clifford Chance Pte Ltd under the name Clifford Chance Asia. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Clifford Chance, nor those of its clients.

 

 

References   [ + ]

1. ↑ The previous KAB posts are available here, here, here, here, here and here. 2. ↑ For a more detailed discussion, see here and here. 3. ↑ Queen Mary University of London and White & Case LLP, 2018 International Arbitration Survey: The Evolution of International Arbitration (9 May 2018), 7, 8. 4. ↑ Railroad Development Corporation v Republic of Guatemala, ICSID Case No. ARB/07/23, Decision on Provisional Measures, (Oct 15, 2008), ¶32. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Jurisdiction of Emergency Arbitrator in Investment Treaty Arbitration

Thu, 2019-06-27 19:16

Qian Wu

The use of Emergency Arbitrator (“EA”) procedure is not frequently deployed in investment treaty arbitration, compared to its success in the commercial space. Despite calls for caution, three sets of major arbitration rules have promulgated EA procedure for investment disputes, i.e., Arbitration Rules of Stockholm Chamber of Commerce (“SCC Rules”), SIAC Investment Arbitration Rules (“SIAC IA Rules”), and China International Economic and Trade Arbitration Commission International Investment Arbitration Rules (“CIETAC IA Rules”).

To date, all reported EA investment arbitration cases were conducted under the SCC Rules. Four EA decisions have been published: TSIKInvest v. Moldova (Russia-Moldova BIT), Evrobalt v. Moldova (Russia-Moldova BIT), Kompozit LLC v. Moldova (Russia-Moldova BIT) and Munshi v. Mongolia (Energy Charter Treaty (“ECT”)). At least four EA decisions have been rendered which remain confidential: JKX Oil v. Ukraine (ECT and UK-Ukraine BIT), Griffin v. Poland (Luxembourg-Poland BIT) Puma v. Benin (Belgium/Luxembourg-Benin BIT), and Okuashvili v. Georgia (Belgium/Luxembourg-Georgia BIT, UK-Georgia BIT).

This post submits that the urgency of an EA application should not override the fundamental requirement that the EA must have jurisdiction. This requirement is far from a moot point given that the interpretation of state consent is at stake, and the impact of the EA decision might be significant.

 

The Jurisdiction of EA 

A. Compétence de la Compétence of EA

The EA’s jurisdiction, just like that of an arbitral tribunal, derives from the parties’ consent to arbitrate, namely, the underlying investment treaty (and the applicable arbitration rules). As explained in Evrobalt, the EA “steps in where a tribunal is yet to be constituted” (para. 17). Only if the EA is “satisfied ‘prima facie’ that an arbitral tribunal duly constituted under the arbitration agreement relied on by the applicant may have (or perhaps would have) jurisdiction to hear the merits” could the EA consider the relief requested1)Marc J. Goldstein, A Glance into History for the Emergency Arbitrator, Fordham International Law Journal, Vol. 40(3), p. 780. jQuery("#footnote_plugin_tooltip_1460_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1460_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

As a further step, an EA is treated as equivalent to an arbitral tribunal under the Singapore International Arbitration Act (Cap. 143A) (“IAA”). The IAA provides, “‘arbitral tribunal’…includes an emergency arbitrator appointed pursuant to the rules of arbitration …”. Corresponding to the IAA provision, paragraph 7 of Schedule 1 of the SIAC IA Rules stipulates that the EA shall have the powers vested in the arbitral tribunal, “including the authority to rule on its own jurisdiction, without prejudice to the Tribunal’s determination”.

By assuming such role, the EA should have compétence de la compétence to define the boundaries of its own jurisdiction and conduct independent review to safeguard the consensual nature of arbitration.2)Charles N. Brower et al., The Power and Effectiveness of Pre-Arbitral Provisional Relief: The SCC Emergency Arbitrator in Investor-State Disputes, in Kaj Hobér et al. (eds.), Between East and West: Essays in Honor of Ulf Franke, Juris, 2010, p. 68. jQuery("#footnote_plugin_tooltip_1460_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1460_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Yet the EA’s compétence de la compétence should be distinguished from that of an arbitral tribunal due to lack of exclusivity effect: Article 37(5) of the SCC Rules, Rule 27.2 of the SIAC IA Rules and Article 5(4) of Appendix II of the CIETAC IA Rules entitle a party to apply for interim relief from a judicial authority before the constitution of the arbitral tribunal.

 

B. Consent to EA Procedure

  1. Construed Consent

The Russia-Moldova BIT and ECT designate SCC as the arbitral institution. Both came into force before the introduction of EA procedure into the SCC Rules 2010. The issue is whether there is state consent to EA procedure.

The Evrobalt EA stated that, by virtue of the provision defining the temporal application in SCC Rules 1999 (effective at the time of ratification of Russia-Moldova BIT), the Contracting States should have contemplated that SCC Rules effective at the time an arbitration commences would be applicable. Alternatively, the standing offer to arbitrate (i.e., valid for 15 years as defined in the BIT) “should be construed as a dynamic reference to the version of the SCC Rules in effect at the time of the commencement of the arbitration” (para. 30).

That the Contracting States’ “contemplat[ed]” amendment of the SCC Rules was found by the Kompozit EA through (i) signature and ratification of the Russia-Moldova BIT (as the SCC Rules 1988 had been amended and the SCC Rules 1999 were in effect); yet (ii) no specific mention or agreement was made regarding the applicable version.

The CIETAC IA Rules, although worded differently from the SCC Rules, similarly afford room for interpretation of state consent. Article 1 of Appendix II provides that a party could apply for EA “based upon the applicable law or the agreement of the parties”. Article 46 defines “applicable law” as:

  • law or rules of law designated by the parties as applicable to the substance of the dispute; failing such designation, or such designation is in conflict with a mandatory provision of law; or
  • law or rules of law that the arbitral tribunal considers appropriate, including the domestic laws of any relevant State, any applicable rules of international law and trade custom.

Whether the designation of substantive law could manifest the consent to EA procedure could be debated.

The potential need for interpretation of state consent calls for clarification of the standard to be applied. In this regard, the Evrobalt EA emphasized the prima facie basis it adopted when upholding the applicability of SCC Rules 2010. The Kompozit EA “assume[d]” that the amendment of SCC Rules 2010 should be within the Contracting States’ expectation and sustained the deemed consent argument.

 

  1. Express Consent

The SIAC IA Rules require a distinctive agreement to EA procedure. Only if “the Parties have expressly agreed on the application of the emergency arbitrator provisions”, a party would be entitled to invoke the EA procedure under the SIAC IA Rules.

It appears that the “express agreement” does not tolerate any query to state consent. Consequently, if there is any doubt on the existence of the consent, it is likely that (i) an EA application would be rejected by the SIAC Court of Arbitration; or (ii) the EA appointed may decline its jurisdiction. The formulation tends to suggest that such consent should technically be from the disputing parties, i.e., the investor and the host state. Nevertheless, in the context of investment arbitration, it is accepted that any agreed mechanism provided in the treaty should be deemed to be chosen directly by the parties to the arbitration.

Another conceivable form of consent could be a special agreement between the investor and the host state. However, it was noted by the OECD that the government opt-in to allow investor access to EA procedure is possible but unlikely.

 

C. Ratione Materiae and Ratione Personae

These requirements have been frequently argued with various tests employed and significant time devoted. Unsurprisingly, EAs have established that the only the prima facie existence of ratione materiae and ratione personae is sufficient.

In reaching its finding, the EA “based on the submissions made by Claimant” (TSIKInvest, para. 61). Specifically, the Evrobalt EA, referring to Moldova’s response to notice of dispute, noted that “Moldova has not disputed the Claimant’s status as ‘investor’ or its qualifying ‘investment’ in Moldova” and swiftly concluded that Evrobalt had demonstrated, prima facie, that it meets the requirements.

It is worth mentioning that none of the host states in the four cases mentioned above participated in the EA proceedings. EAs accepted investor’s claimed basis for jurisdiction as true and did not conduct separate examination.

 

D. Cooling-off Period

The cooling-off period provision in the Russia-Moldova BIT was unanimously held inapplicable to the appointment of EA. As held by the TSIKInvest EA:

  • It would be procedurally unfair to TSIKInvest and contrary to the purpose of EA procedure; and
  • TSIKInvest seemed to be facing a serious risk of suffering irreparable harm before the expiry of the cooling-off period if interim measures are not granted.

The Kompozit EA highlighted the treaty language that the parties “will try, as far as possible, to resolve such dispute amicably”, noting Moldova’s refusal to engage in settlement discussions, and found that such language does not mandate the exhaustion of 6-month period.

However, such findings may not be conclusive on the issue as the applicability of the cooling-off period is essentially a question of treaty interpretation.3)Koh Swee Yen, The Use of Emergency Arbitrators in Investment Treaty Arbitration, in ICSID Review, Vol. 31(3), p. 542; see also, Joel Dahlquist, Case Comments: The First Known Investment Treaty Emergency Arbitration, Journal of World Investment & Trade, Vol. 17, Issue 2, p. 266. jQuery("#footnote_plugin_tooltip_1460_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1460_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

E. Impact of Institutional Appointment of EA on EA’s Jurisdiction

Under Article 4(2) of Appendix II to the SCC Rules, “[a]n Emergency Arbitrator shall not be appointed if the SCC manifestly lacks jurisdiction over the dispute”.

In Munshi, on the heels of its finding that ratione personae, ratione materiae and state consent to EA procedure had been met, the EA stated that “[t]he Board has therefore already decided that the Emergency Arbitrator does not manifestly lack jurisdiction”, and concluded that the “Claimant has prima facie established jurisdiction …” (para. 33). Some opine that since EA application requires an immediate decision, the EA cannot defer its decision until a final determination on jurisdiction is made – therefore the registration of the application by the institution serves to satisfy this prima facie jurisdiction.4)Kyongwha Chung, Emergency Arbitrator in Investment Treaty Disputes,  accessed on 6 April 2018, pp. 31-32. jQuery("#footnote_plugin_tooltip_1460_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1460_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Others however view the SCC Board’s screening function comparable to that of the ICSID Secretary General when deciding to register an ICSID case, and that it could not ground the EA’s jurisdiction.

In comparison, the SIAC IA Rules aim at avoiding possible confusion or inference as to the jurisdiction of SIAC or EA. They do not set out the threshold for appointing the EA or confer express power to the institution to decide jurisdiction through the vehicle of the EA. Paragraph 3 of Schedule 1 stipulates “[t]he Court shall, if it determines that SIAC should accept the application for emergency interim relief, seek to appoint an Emergency Arbitrator within one day…”.

 

F. Admissibility

Significantly, the Evrobalt EA noted that the EA relief request would be inadmissible if the measure sought is “with effect equivalent to (still less superior than) the definitive relief sought in the main proceedings” which “would amount to disposing of the claim on the merits” (Evrobalt, paras. 37-38). Yet, the relief in EA and that in the main arbitration proceeding must be closely related and the putative rights must “be actionable rights in the main arbitration proceedings” (Evrobalt, para. 43).

  

Jurisdictional Objection Pending EA Proceedings

There are obvious challenges for host states to mount a robust defence in EA proceedings due to factors such as the lack of developed institutional capacity to respond quickly and the potential complex analysis of state consent to EA procedure.

In the four decisions discussed, the host states did not participate in the EA proceedings. In one reported case, Griffin v. Poland, the Polish government challenged the jurisdiction of the EA on the basis that it had not consented to the application of SCC Rules 2010.

It is difficult to object to the EA jurisdiction on the grounds of ratione personae or ratione materiae as the threshold bar is low and largely fact-based. As indicated above, the EAs tend not to make an independent inquiry on the evidence proving such requirements and instead accept the Claimant’s factual assertions.

Accordingly, unless the underlying treaty has envisaged consent to EA, the host state’s first reference should be to the applicable arbitration rules. For instance, under the SIAC IA Rules, in order to apply for the EA relief, express consent is a must. Therefore, arguing the absence of express agreement is an option. The EA, if so appointed, shall examine the consent to EA procedure thoroughly while balancing the urgency of the matter and the imperative requirement to establish express state consent.

The host state may also consider raising an objection, thanks to Rule 25.1 of the SIAC IA Rules, to the existence or validity of the arbitration clause, the applicability of the SIAC IA Rules, or the competence of SIAC to administer the arbitration, and request the objection be referred to the SIAC Court of Arbitration. However, the claimant may well contend that the deliberations of the SIAC Court of Arbitration has no bearing on the pending EA proceeding unless the objection is upheld by the SIAC Court of Arbitration, because Rule 25.1 prescribes only that “[t]he arbitration shall be terminated if the Court is not so satisfied [prima facie that the arbitration shall proceed]”.

 

Concluding Remarks

The emerging application of EA in investment treaty arbitration has afforded effective emergency relief to investors, but at the same time, pose challenges to host states. The published EA decisions discussed above will play leading role in enhancing the understanding of the EA proceedings against sovereign states and their rights and options thereunder.

As potential guidance for both investors and host states, the urgency of the matter will not necessarily expose host states to EA measures if they properly raise a jurisdictional objection at the appropriate time. In this regard, the timeline for the EA procedure under the SIAC IA Rules is 14 days from the appointment of the EA unless extended by the Registrar. The SCC, for its part, allows 5 days from the date of the EA application unless extended by the SCC Board. In this way, both the SCC Rules and the SIAC IA Rules leave room for jurisdictional objection during the EA proceedings, although with different paths and timelines to respond. It shall remain to be seen how these jurisdictional objections play out as the body of EA jurisprudence continues to develop.

References   [ + ]

1. ↑ Marc J. Goldstein, A Glance into History for the Emergency Arbitrator, Fordham International Law Journal, Vol. 40(3), p. 780. 2. ↑ Charles N. Brower et al., The Power and Effectiveness of Pre-Arbitral Provisional Relief: The SCC Emergency Arbitrator in Investor-State Disputes, in Kaj Hobér et al. (eds.), Between East and West: Essays in Honor of Ulf Franke, Juris, 2010, p. 68. 3. ↑ Koh Swee Yen, The Use of Emergency Arbitrators in Investment Treaty Arbitration, in ICSID Review, Vol. 31(3), p. 542; see also, Joel Dahlquist, Case Comments: The First Known Investment Treaty Emergency Arbitration, Journal of World Investment & Trade, Vol. 17, Issue 2, p. 266. 4. ↑ Kyongwha Chung, Emergency Arbitrator in Investment Treaty Disputes,  accessed on 6 April 2018, pp. 31-32. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Arbitrating Business and Human Rights Disputes: Public Consultation on the Draft Hague Rules on Business and Human Rights Arbitration

Wed, 2019-06-26 23:54

Martin Doe, Steven Ratner and Katerina Yiannibas

Since 2013, an independent group of international lawyers (the Working Group of the Business and Human Rights Arbitration project) has been considering the possibility of using international arbitration as a method of resolving disputes over obligations and commitments arising out of business-related human rights abuses.  The idea underlying the project is that international arbitration could overcome some of the legal and practical barriers faced when bringing human rights claims through the existing mechanisms of redress, particularly national courts. It could provide a meaningful non-judicial remedy for victims of business-related human rights impacts, as called for in Pillar III of the UN Guiding Principles on Business and Human Rights, as well as a strategy for business to manage human rights risks within its supply chain, as called for in Pillar II of the Guiding Principles.

In particular, arbitration in this context would offer: (i) a neutral forum for dispute resolution, independent of both the parties and their home states; (ii) a specialized dispute resolution process in which the parties are able to participate in the selection of competent and expert adjudicators for their dispute; (iii) the possibility to obtain binding awards subjected only to limited judicial review, and enforceable across borders; (iv) means of dispute resolution potentially cheaper and quicker than litigation, which are also able to (v) accord parties broad autonomy to agree upon the substantive laws and procedures applicable to their arbitrations. Arbitrations could involve victim claims against businesses or claims between different businesses within a supply chain, with consent provided ex ante in contracts or other agreements or ex post through a compromis.

After extensive consultation with both business and civil society stakeholders, the Working Group formed a Draft Team to elaborate a set of arbitral rules, the Hague Rules on Business and Human Rights Arbitration. The Drafting Team, led by Judge Bruno Simma, consists of 14 experts with diverse professional backgrounds (business, civil society, academic, arbitral institutions, practicing attorneys), and expertise in human rights, arbitration, litigation, operation of supply chains, and other topics relevant to the elaboration of draft rules.  The work of the Drafting Team and related activities of the project are funded by the City of The Hague, and endorsed by the Foreign Ministry of the Netherlands.

 

Transparency and public participation in the drafting of The Hague Rules

The Drafting Team began its work in January 2018, with a meeting at the Center for International Legal Cooperation (CILC) in The Hague. From the outset, the Drafting Team valued the importance of transparency and multi-stakeholder inclusion and discussed how best to involve the various stakeholders so as to promote an informed, inclusive, and balanced process. A Sounding Board was created, consisting of experts to provide input and feedback.

After its second meeting in 2018, the Drafting Team produced an Elements Paper to educate, inform, and garner input from the potential stakeholders of BHR arbitration. Readers unfamiliar with the project are encouraged to read the Elements Paper. The Elements Paper posed over 70 questions, and over a consultation period running from November 2018 through January 2019, garnered over 120 responses from the members of the Sounding Board as well as additional organizations representing different communities of practice. The summary of those responses is available here. All contributions were reviewed and reflected in preparatory papers by the Drafting Team members for discussion at its third meeting in April 2019 and greatly informed the preparation of the first draft text of The Hague Rules.

 

Invitation for public consultation on the first draft text of The Hague Rules

The first draft text of The Hague Rules is now available for public consultation between 21 June-25 August 2019. The Rules are based on the 2013 UNCITRAL Arbitration Rules and adapted to the unique features of business human rights disputes. Some key modifications from the UNCITRAL Rules include:

  • provisions on facilitating settlement and mediation, and emphasizing the complementarity of arbitration to such procedures as the OECD National Contact Points system (Articles 1(6), 17(3), 42, and 51);
  • provisions to address the inequality of arms which may arise in such disputes (inter alia, Articles 5(2), 20(4), 24, 27(2), and 27(4));
  • the establishment of the PCA as the default appointing authority, given its intergovernmental nature and experience in business and human rights disputes (Article 6);
  • procedures for multiparty claims and joinder by third parties (Article 17-bis);
  • a procedure for the early dismissal of claims manifestly without merit, developed on the basis of similar procedures in the ICSID, SIAC, SCC, and HKIAC Rules (as well as the proposed new ICSID Rules) (Article 23-bis);
  • provisions making the arbitral tribunal’s power over interim measures more robust, and at the same time more flexible (Article 26);
  • an emergency arbitrator mechanism elaborated on the basis of the ICC and SCC Rules (Article 26-bis);
  • specialized evidentiary procedures drawn up on the basis, inter alia, of the IBA Rules and Rules of the International Criminal Court, among others (Articles 27, 28, and 30(3));
  • measures to protect the identity of parties, counsel, and witnesses where such protections are warranted by the circumstances of the case, while ensuring due process is maintained for all parties (Articles 17(5), 28(3), and 37(5));
  • provisions on transparency and third-party participation (Articles 24-bis and 33-38);
  • tailored provisions on remedies in the business and human rights context (Article 40);
  • rules on applicable law that enhance flexibility and party autonomy (Article 41);
  • rules to protect the public interest in the case of confidential settlements (Article 42(1));
  • nuanced rules in respect of costs and deposits that encourage the tribunal to sensitive to the interests of access to justice (Articles 46-49);
  • an expedited arbitration procedure for small claims (Article 52); and
  • a Code of Conduct that reflects the highest standards for independence and impartiality in international dispute resolution (Annex).

In light of the expertise of the readers of the Kluwer Arbitration blog, the Drafting Team welcomes comments from all readers. In order to guide you through the reasoning underlying the formulation of certain articles of the Hague Rules, draft commentaries are provided for each article to highlight whether the Hague Rules amend the original text of the UNCITRAL Rules and, if so, why and to what extent, including the intent of various clauses. The commentary also formulates certain specific questions on certain points where input is particularly important.

To access the draft Hague Rules on Business and Human Rights and submit comments, click here. Comments should be sent directly to [email protected] by 25 August 2019.

 

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Young ICCA Workshop in Bishkek, Kyrgyzstan: A Northeast and Southeast Asia Perspective

Tue, 2019-06-25 21:10

Julia Jiyeon Yu

Although Central Asia has geostrategic importance in Asia, the Middle East, and Europe as the heart of the ‘Silk Road’, the Kyrgyz Republic in Central Asia1)Central Asia consists of 5 countries (Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, and Turkmenistan) and Kyrgyzstan is a landlocked nation bordered by China, Kazakhstan, Uzbekistan and Tajikistan. jQuery("#footnote_plugin_tooltip_1161_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); has remained relatively unknown, especially in international arbitration, as compared to other countries in this region.

On 27 May 2019, the first Young ICCA Skills Training Workshop was held at the American University of Central Asia in Bishkek, Kyrgyzstan. Faculty speakers from Moscow, Paris, Frankfurt, Malaysia, Hong Kong and Singapore, together with local experts, were invited to present on the topics: “How to draft arbitration clauses” and “How to start a career in international arbitration”. The workshop also covered issues of enforceability of arbitration clauses and arbitral awards in the domestic courts of the Kyrgyz Republic.

 

Background: Some Features of Kyrgyz Arbitration Law and Practice

The Kyrgyz legal system is a civil law system which has features of French civil law and Russian Federation laws. The Law of the Kyrgyz Republic “On Arbitration Courts in the Kyrgyz Republic” (the “Kyrgyz Arbitration Law”) was adopted in 2002. It is said that2)See Kyrgyzstan, Nurbek Sabirov, Kalikova & Associates Law Firm, International Arbitration (First Edition) Published by Global Legal Group. jQuery("#footnote_plugin_tooltip_1161_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the Kyrgyz Arbitration Law largely contains some elements of the UNCITRAL Model Law on International Commercial Arbitration (the “UNCITRAL Model Law”). However, the Kyrgyz Republic is not on the list of countries where the UNCITRAL Model Law is adopted. The Kyrgyz Republic has been a party to the New York Convention since 1997.

One of the features of the Kyrgyz Arbitration Law which drew my attention is that, in the Kyrgyz Republic, an arbitration award cannot be set aside by the court, though the competent court has the right to refuse enforcement of the arbitration award.3)See Kyrgyzstan, Nurbek Sabirov, Kalikova & Associates Law Firm, International Arbitration (First Edition) Published by Global Legal Group. jQuery("#footnote_plugin_tooltip_1161_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This means that in order to set aside an award, an award debtor is not entitled to raise issues to set aside the award at the court of the seat of arbitration, and there is nothing the award debtor can do but to wait until an award creditor initiates the enforcement action in a competent court. Therefore, parties who select the Kyrgyz Republic as the seat of international arbitration should be aware of the fact that they will not be able to apply to the Kyrgyz courts to set aside any eventual arbitration award.

Another feature of the Kyrgyz arbitration practice is that, the Supreme Court of the Kyrgyz Republic appears to put quite a conservative and narrow interpretation on the enforceability and validity of an arbitration agreement. For example, it is a mandatory requirement for an arbitration agreement to state the name of the arbitration institution and not enough to refer only to arbitration rules. The Supreme Court of the Kyrgyz Republic ruled that the arbitration clause did not comply with the mandatory requirements of the Kyrgyz Law, because it did not contain the name of the arbitration institution, which was agreed upon by the parties for the settlement of their disputes and referred only to arbitration rules.4)See Arbitration Year Book 2017, Kyrgyzstan, Alexander Korobeinikov, Baker McKenzie’s Almaty office. jQuery("#footnote_plugin_tooltip_1161_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Also, under the Kyrgyz Arbitration Law, in order for an arbitration agreement to be valid and enforceable, it must be in a written form and shall state that ‘any’ dispute between parties shall be settled in arbitration. Therefore, it would be advisable to give extra attention in drafting an arbitration clause when entering into a contract with a Kyrgyz party.

While the Kyrgyz Republic is a signatory state to the ICSID Convention since 1995, the Kyrgyz government has not ratified it. The Law of the Kyrgyz Republic on Investments (2003) stipulates national treatment for foreign investors and guarantees foreign investors the same protections and treatment as domestic nationals and companies. The Kyrgyz Republic is also a party to various international agreements, allowing foreign investors to protect their investments and to bring cases against the Kyrgyz Republic. The country has a number of bilateral and multilateral investment treaties including the Energy Charter Treaty.5)Roeline Knottnerus and Ryskeldi Satke, Kyrgyz Republic’s experience with investment treaties and arbitration cases, Published by Transnational Institute Amsterdam, July 2017. jQuery("#footnote_plugin_tooltip_1161_5").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The Kyrgyz economy largely relies on the export of gold and other minerals and tourism. Foreign direct investment in these sectors are supposed to boost its economic growth.6)Roeline Knottnerus and Ryskeldi Satke, Kyrgyz Republic’s experience with investment treaties and arbitration cases, Published by Transnational Institute Amsterdam, July 2017. jQuery("#footnote_plugin_tooltip_1161_6").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Under this circumstance, it would be easy to face investment disputes relating to environmental and social issues in the host country. The Kyrgyz Republic has received quite a number of investment arbitration cases in relation to banking and financial services disputes, mining and environmental disputes.7)Roeline Knottnerus and Ryskeldi Satke, Kyrgyz Republic’s experience with investment treaties and arbitration cases, Annex II, Published by Transnational Institute Amsterdam, July 2017. jQuery("#footnote_plugin_tooltip_1161_7").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Northeast and Southeast Asia’s Perspective

As a Korean qualified lawyer working in Singapore, I was wondering how both Korea and Singapore investors would approach Central Asia and what their strategies are. The Korean government is enthusiastically seeking a new economic growth engine through economic cooperation with Russia and the Eurasian countries. In particular, there is a growing need to expand the Eurasian trade network, based on a FTA with the Eurasian Economic Union (“EAEU”).8)Report on the Korea-EAEU Industrial Cooperation Enhancement Policy, KIEP(Korea Institute for International Economy Policy) 2017. jQuery("#footnote_plugin_tooltip_1161_8").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In this regard, it is widely accepted in Korea that “New Northern Policy”, which establishes a new framework for industrial cooperation between Korea and the EAEU, is strategically important.

Singapore has not yet signed an investment agreement with the Kyrgyz Republic while Malaysia has. Singapore is also negotiating a Free Trade Agreement with the EAEU, of which the Kyrgyz Republic is a member. ASEAN and the Eurasian Economic Commission have signed a Memorandum of Understanding on Economic Cooperation. While China is actively engaging the Kyrgyz Republic with the ‘One Belt One Road’ project,9)Roman Mogilevskii, Kyrgyzstan and the Belt and Road Initiative, University of Central Asia. jQuery("#footnote_plugin_tooltip_1161_9").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Japan has bilateral investment agreements with Kazakhstan and Uzbekistan only.

From a Korean perspective, there would be a lot of opportunities to cooperate in Central Asia, considering activities of ‘Koryo-saram’ in the region and some aspects of cultural similarity to each other. For Korean businessmen, Singapore’s interest in Central Asia would matter because a number of Korean companies have (and are considering to) set up regional headquarters in Singapore and are trying to cover Central Asia too.

 

Key Takeaway from the Event

At the last session of the event, Mr. Shamaral Maichiev from the International Court of Arbitration at the Chamber of Commerce and Industry of the Kyrgyz Republic emphasized to local practitioners that bringing positive changes in the Kyrgyz Republic is important in order to increase its investment attractiveness. Echoing his comments, I added some comments at the same session that lawyers who want to act globally should know their region first and then try to expand their activities worldwide.

In order for the Kyrgyz Republic to attract more foreign investment, it would be crucial for its arbitration law and practice to be more reliable, transparent and stable. Law and practice of international arbitration in the Kyrgyz Republic is in the process of development. In this regard, education of young practitioners who will be leading this country is essential.

The Young ICCA Skills Training Workshop in Bishkek has clearly demonstrated that international activities can be well-blended with local ones throughout the region. This event has also provided participants and speakers with the valuable chance to know more about the Kyrgyz Republic – not only about its breath taking natural environment, but also about the potential of the Kyrgyz legal profession in arbitration.

References   [ + ]

1. ↑ Central Asia consists of 5 countries (Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, and Turkmenistan) and Kyrgyzstan is a landlocked nation bordered by China, Kazakhstan, Uzbekistan and Tajikistan. 2, 3. ↑ See Kyrgyzstan, Nurbek Sabirov, Kalikova & Associates Law Firm, International Arbitration (First Edition) Published by Global Legal Group. 4. ↑ See Arbitration Year Book 2017, Kyrgyzstan, Alexander Korobeinikov, Baker McKenzie’s Almaty office. 5, 6. ↑ Roeline Knottnerus and Ryskeldi Satke, Kyrgyz Republic’s experience with investment treaties and arbitration cases, Published by Transnational Institute Amsterdam, July 2017. 7. ↑ Roeline Knottnerus and Ryskeldi Satke, Kyrgyz Republic’s experience with investment treaties and arbitration cases, Annex II, Published by Transnational Institute Amsterdam, July 2017. 8. ↑ Report on the Korea-EAEU Industrial Cooperation Enhancement Policy, KIEP(Korea Institute for International Economy Policy) 2017. 9. ↑ Roman Mogilevskii, Kyrgyzstan and the Belt and Road Initiative, University of Central Asia. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Round Table on Arbitration in Belgrade (May 2019): Hot Topics in Our Daily Arbitration Practice

Tue, 2019-06-25 03:00

Nataša Hadžimanović and Jelena Perović

Prof. Dr. Jelena Perović, from the University of Belgrade (Serbia) and Dr. Nataša Hadžimanović, from Gabriel Arbitration (Zurich, Switzerland), launched the Round Table on Arbitration in 2018 as a forum to discuss controversial issues, share experiences and highlight new trends in arbitration.

The 2nd Round Table on Arbitration took place in the magnificent rooms of the Aeroklub in Belgrade, Serbia, on 21 May 2019. With the umbrella topic “Hot Topics in Our Daily Arbitration Practice”, the Round Table attracted an audience from Bosnia and Hercegovina, Northern Macedonia, Serbia and Switzerland. Under the moderation of Prof. Dr. Jelena Perović and Dr. Simon Gabriel from Gabriel Arbitration, participants highlighted and discussed several topics relevant in their practice.

 

Third-Party Funding (“TPF”) in South East Europe (“SEE”)

Dr. Nataša Hadžimanović started the discussion concerning TPF in the region. Specifically, the audience was asked to discuss

  1. whether TPF was being used in SEE, and
  2. how the arbitration practitioners tackled the challenges which usually came with TPF.

These challenges were identified as the need for time, considerations whether to disclose TPF, and the possibility that a party who was unaware of TPF could omit to ask for a security for costs at an early stage of the proceedings and then, as a consequence, be unable to obtain reimbursement for its costs as the provider of TPF was no party to the arbitration.

The following was stated:

The rules of the relevant arbitration institutions in the region did not offer specific rules on TPF. Also, in investment arbitrations in SEE, security for costs was hardly ever awarded. Under the BAC Rules and the Rules of the Permanent Arbitration of the Serbian Chamber of Commerce, security for costs had, so far, never been awarded although such a measure could, in principle, be awarded on the basis of the rules on interim measures. This meant that costs could not be recovered even in case a party had been informed on TPF and asked for security for costs.

Thus far, TPF had been used only in investment arbitrations. As TPF was expensive, the minimum threshold for investing per case was EUR 1 million. The present practice in the region, therefore, was that on average only claims over EUR 10 million were financed. Nonetheless, there were some providers of TPF who would finance smaller claims of EUR 2 or 5 million, and this approach was perceived as promising in SEE, as 95% of all claims were under EUR 10 million.

It was advised that parties who were not sure where to look for TPF could use the services of a TPF broker while the parties who were not sure whether to seek financing from a TPF could nonetheless opt for a free assessment at a preliminary stage.

The biggest challenges related to TPF were time (in one case the assessment of a good claim by a provider of TPF had taken so long that the claimant went bankrupt and no arbitration took place) and whether TPF would be provided throughout the whole arbitration proceedings.

It was pointed out that other forms of financing could be interesting for the region as well – such as the purchase of a claim or of an award. It became clear from the discussions that the arbitration community in SEE would continue to explore this topic and the full potential of the use of TPF in SEE (for example, in an upcoming event of the Belgrade Arbitration Association).

 

Impact of the Belt & Road Initiative (“BRI”) on Arbitration in SEE

Dr. Johannes Landbrecht from Gabriel Arbitration asked the audience whether the BRI had an impact on arbitration in SEE. In his experience, the investment interest in the context of BRI concerned infrastructure, green energy and construction disputes.

Furthermore, one of the topics discussed was that, as with the BRI big Chinese companies came into play, such big companies had the power to impose contractual terms. The key issue was, therefore, how to adequately deal with the imposition of the applicable law, the seat and the applicable rules – unless such clauses were so-called “midnight clauses”, where no discussion would take place anyway. It was concluded that an ideal scenario would be if parties with a joint legal background – be it the civil or common law tradition – would pick a law from their legal tradition. In case this was not possible, it was advised that a party should at least not give up the seat in order to choose its arbitrator accordingly, as such an arbitrator would perceive the applicable law from the perspective of his/her own legal system.

 

The Reform of the Swiss Legal Framework on International Arbitration

Prof. Dr. Milena Đorđević enquired about the ongoing reform of the Swiss lex arbitri, the aim of which is to be even more user-friendly. If everything goes according to the plan, the new provisions will be approved by the Swiss Parliament without major changes in 2019 and will enter into force in 2020.

Dr. Mladen Stojiljković and Dr. Simon Gabriel pointed out the following changes:

  • the possibility was provided to file submissions to set aside an arbitral award in the English language;
  • the revision was expressly included as an extraordinary legal remedy against an arbitral award for situations where relevant facts or evidence came to light after the arbitration proceedings had been completed, or where criminal investigations showed that the award had been tainted by illegality, or where circumstances came to light after the arbitration proceedings had been completed that called into question an arbitrator’s independence or impartiality;
  • an express rule was included that arbitration clauses in unilateral acts such as for example wills or trust deeds would have legal force;
  • a default provision on the determination of the seat was included to help parties who just had opted for arbitration in Switzerland (the first Swiss court called would designate the arbitral seat);
  • finally, the formal requirements were eased in case parties wished to waive their right to challenge the arbitral award, i.e. parties with a domicile/branch/place of residence outside Switzerland can waive their right to challenge an award if they so provide in writing, and it is no longer necessary to “expressly” waive this right.

 

Formal Defects and Formal Requirements of an Arbitration Agreement

Prof. Dr. Jelena Perović started a discussion on what should happen to arbitration clauses in case they did not meet a specific form requirement which the parties themselves had included in their main contract: Should such a defect affect only the main agreement or also the arbitration clause? It was concluded that it should be a matter of interpretation whether the parties had meant to apply the form requirement also to the arbitration agreement – considering that for the arbitration clause, in principle, a lower standard should apply because it exists to set up a conflict resolution mechanism.

Furthermore, Dr. Mladen Stojiljković commenced a discussion by asking the audience on the impact of stamps in SEE: Who would be the party in a case where one party had signed but not stamped an agreement containing an arbitration clause while its parent company had stamped but not signed it? It was pointed out by the audience that historically in SEE the stamp had been very important, and originally it had been more important than the signature. The requirement of the stamp, even though it had recently been abolished under Serbian law, was in practice only very slowly losing its importance. Today, however, the signature would prevail, if authentic. However, there were also opinions that in the described case (where one party had signed and another one stamped an arbitration agreement), both parties should be bound.

Following the discussion on stamps, Prof. Dr. Maja Stanivuković, President of the BAC, opened a conversation on whether electronic submissions filed with an arbitral institution should contain any form of signature. The audience expressed its view that this was unnecessary because submissions often contained no names, no signatures of counsel, just the name of the law firm.

 

Conclusion

The discussion highlights the impact of global trends in trade on the investment and arbitration practice in SEE. Parties from SEE, with the help of their legal representatives, meet the challenges which these trends bring. Notable examples include the use of TPF as well as the impact of the BRI on business in SEE.

Legislation in SEE is trying to foster the establishment of new business relationships: Strict formal requirements (and the relevance of the stamp in commercial practice) – elements deeply inherent in the SEE legal tradition – are being abolished. However, parties in SEE are aware of the fact that changes in enacted legal acts do not necessarily change the law in practice: Formal requirements (even though abolished by legal acts) are losing their importance only slowly.

The role of legal representatives in this process is of crucial importance, as is the importance of open fora like the Round Table on Arbitration where arbitration practitioners can share their experiences and ideas to better advise their clients.

 

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LIBOR Phase-Out: Questions of Interest to Arbitrators

Mon, 2019-06-24 01:39

Sabina Sacco and David Khachvani

Introduction

The London Interbank Offered Rate (“LIBOR”) is an estimate of the interest rate at which London-based major banks borrow unsecured funding from one another. It is administered by the Intercontinental Exchange (“ICE”) under the supervision of the Financial Conduct Authority (“FCA”). Based on the entries supplied by a panel of banks, ICE currently estimates and publishes LIBOR on a daily basis in five currencies, for seven maturity periods.1) US Dollar, Euro, Pound Sterling, Japanese Yen and Swiss Franc; overnight, one week, one month, two months, three months, six months, and one year. jQuery("#footnote_plugin_tooltip_9698_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

LIBOR has been a fixture of international commercial transactions for over 30 years.  Financial contracts (such as derivatives, syndicated loans, bonds, and retail mortgages) commonly use it as the benchmark interest rate. It is also used in a variety of commercial contracts to define the interest rate applicable in price adjustment mechanisms or for late payments.

Notwithstanding its importance, reliance on LIBOR must soon end. In the wake of what is generally referred to as the “LIBOR Scandal”, after it emerged that some banks had manipulated the system by submitting artificially high or low interest rates, on 27 July 2017, the FCA’s CEO announced that, as from 1 January 2022, the FCA would no longer require participating banks to file LIBOR estimates. Although the FCA did not directly call for the discontinuation of LIBOR, it is now widely understood that LIBOR is unlikely to be published as from 2022.

The end of LIBOR raises several questions for arbitral tribunals dealing with issues of interest. In this blog we attempt to address two such questions.

First, how should a tribunal apply a LIBOR-benchmarked contract once LIBOR has ceased to exist? Can the tribunal apply a replacement rate,2) The financial industry has been seeking to come up with viable replacements for LIBOR. However, given some unique characteristics and the global nature of LIBOR, finding sustainable alternatives has proven difficult. Among the alternatives proposed so far, there are overnight index rates for different currencies, such as the Sterling Overnight Index Average (“SONIA”) and the Swiss Average Rate Overnight (“SARON”), as well as various repurchase agreement rates and the secured overnight financing rate for the US dollar (“SOFR”); see here for more details. jQuery("#footnote_plugin_tooltip_9698_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); or has the relevant clause become frustrated or impossible to perform?

Second, what will happen to awards of interest by reference to LIBOR that have not been fully paid on the date of LIBOR’s discontinuance? Can they be corrected or revised, and if not, are they still enforceable?

 

A. LIBOR-Benchmarked Contracts

We first address the situation where an arbitral tribunal is faced with a contract that refers to LIBOR as a benchmark. Although parties are expected to replace or amend their contracts in the phase-out period or resort to contractual fallback mechanisms, it is likely that disputes will nevertheless arise in respect of outstanding LIBOR-benchmarked contracts after the phase-out.

Where the contract provides for a fallback mechanism or an alternative benchmark for calculating interest (as is the case with many financial contracts3) The International Swaps and Derivatives Association (“ISDA”), for instance, recommends that fallback mechanisms be included in transactions precisely to avoid difficulties when the default reference rate is not (or no longer) available.  See ISDA, “Development of Fallbacks for LIBOR and other Key IBORs”, 28 November 2017, see: https://www.isda.org/2017/11/28/development-fallbacks-libor-key-ibors-faqs/, last accessed on 18 May 2019. The US-based Alternative Reference Rates Committee (“ARRC”) has recently released recommended contractual fallback language for US dollar LIBOR denominated floating rate notes and syndicated loans. See https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC-Apr-25-2019-announcement.pdf last accessed on 21 May 2019. jQuery("#footnote_plugin_tooltip_9698_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, the tribunal should apply that mechanism. Any disputes are thus likely to relate to the interpretation or operation of that mechanism. While the tribunal’s task should be relatively straightforward, difficulties may arise in the interpretation of the “trigger provisions” which determine when the mechanism is activated.

Where the contract contains no fallback mechanism, the tribunal will need to resort to a more complex analysis under the applicable substantive law. Below we offer an overview of legal concepts that might guide the tribunal in common and civil law jurisdictions, using English and Swiss law as examples. Our analysis focuses on contracts concluded before the LIBOR phase-out became public knowledge.4) If parties concluded a LIBOR-benchmarked contract after that date, neglecting the consequences of the phase-out, different considerations may apply, possibly calling for the application of rules such as those on “initial impossibility” or “mistake”, among others, depending on the type of contract and parties involved. jQuery("#footnote_plugin_tooltip_9698_4").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

  1. English law

The following principles might be potentially relevant for LIBOR-benchmarked contracts governed by English law:5) For a more in-depth discussion, see in particular W. Bristow, R. Huntsman, “A post-LIBOR world: how will the English courts address legacy contracts after 31 December 2021”, International Banking and Financial Law Review 3, 1 January 2018. jQuery("#footnote_plugin_tooltip_9698_5").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Contextual interpretation – As recalled by the UK Supreme Court in Wood v. Capita Insurance Services Ltd, interpreting contractual provisions under English law involves ascertaining the objective meaning of the language chosen by the parties to express their mutual intention. For this purpose, besides the ordinary meaning of the contractual terms, English courts may also consider the context, including the contract as a whole, the circumstances known to the parties while entering into the contract, and commercial common sense. Applying these principles, a tribunal might consider it appropriate to ascertain if the parties intended for interest to apply per se, and were flexible as to its calculation.6) Notably, a court or tribunal might forego contractual interpretation altogether, since the analysis to be conducted in respect of the LIBOR phase-out is not necessarily interpretative. jQuery("#footnote_plugin_tooltip_9698_6").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); If this is so, and if a proposed alternative to LIBOR makes commercial sense (because it ensures a comparable result in terms of allocation of the floating interest rate risks between the parties for a given transaction), a court or tribunal could resort to that alternative as a reflection of the parties’ likely mutual intention. That being said, in Arnold v. Britton & Others, the Supreme Court has also emphasized that the analysis should be made from a standpoint contemporaneous to the conclusion of the contract. Thus, if the parties have not inserted a fallback mechanism in their contract, it might be difficult to prove – without specific contemporaneous evidence of intention – that the parties intended to calculate the applicable interest rate based on an alternative benchmark.

Implying Contractual Terms – A tribunal may imply a term to form part of the contract if the term is reasonable, equitable, not contradicted by other terms of the contract, and either necessary for preserving the business purpose of the contract or so obvious that “it goes without saying”. Marks & Spencer v. BNP Paribas Securities Services & another shows that the courts apply the test strictly and are not willing to imply a contractual term simply because the outcome may be otherwise harsh for one of the parties.7) Equally, English courts seek to avoid implying terms based on hindsight bias. jQuery("#footnote_plugin_tooltip_9698_7").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  If the LIBOR clause plays a peripheral role in the contract, it may be difficult to argue that implying an alternative mechanism is crucial for the preservation of the parties’ contractual deal. Conversely, where the LIBOR clause is a central term, a tribunal is more likely to imply a fallback mechanism to preserve the contract’s business efficacy.

Alternative Valuation Mechanism – In Sudbrook Trading Estate v. Eggleton, an English court substituted a contractual valuation mechanism in a lease when that mechanism became inoperable.8) Sudbrook Trading Estate v. Eggleton, [1983] 1 AC 444. jQuery("#footnote_plugin_tooltip_9698_8").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, this was only possible because the valuation mechanism was not itself an essential term of the contract. Tribunals applying English law might thus consider applying the rationale in Sudbrook by analogy when the reference to LIBOR is considered non-essential.  This will depend on the type of contract, the tribunal’s understanding of the parties’ intent and whether an existing alternative can fulfill a substantially equivalent function in terms of risk allocation and general reliability.

Frustration – If the above approaches fail, then, depending on the role of the LIBOR clause for the contract, either the entire contract or the LIBOR clause may be deemed frustrated, i.e. commercially impossible to perform. In that case, the parties may be able to recover sums paid before the frustration. Tribunals taking this route should bear in mind commercial realities and the wider detrimental effects that such an outcome may have on the relevant financial market.9) Albeit, given that arbitral awards are often confidential and without precedential value, the implications are not comparable with those of court judgments. jQuery("#footnote_plugin_tooltip_9698_9").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

  1. Swiss law

The following rules may become relevant when a tribunal is faced with a LIBOR-benchmarked contract governed by Swiss law:10) For this section, see, eg, B. Winiger, in L. Thévenoz/F. Werro (Eds), Commentaire romand – Code des obligations I, 2nd ed. 2012, Article 18 SCO, paras 14-53 and 193-215 ; W. Wiegand, in H. Honsell/N. Vogt/W. Wiegand (Eds), Basler Kommentar – Obligationenrecht I, 6th ed. 2015, Article 18 SCO, paras 18-40 and paras 95-125a, with further references. jQuery("#footnote_plugin_tooltip_9698_10").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Article 18(1) Swiss Code of Obligations – Pursuant to this provision, when interpreting a contract,11) As noted in footnote 6 above, it will be for the tribunal to determine whether the question is one of contract interpretation in the first place. jQuery("#footnote_plugin_tooltip_9698_11").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); a tribunal should seek to establish the parties’ “true and common intention” (“subjective” interpretation). Beyond the text of the contract, the parties’ “true and common intention” may be evinced by reference to other elements, including their negotiations and subsequent conduct. If the parties’ true and common intention cannot be established, the tribunal will interpret the agreement as it would have been understood by a reasonable person, acting in good faith, in light of the circumstances at the time of its conclusion (“objective” interpretation). Under both a subjective and an objective interpretation, in case of doubt, the tribunal should be guided, inter alia, by the principle in favorem negotii, and thus opt for a solution that best preserves the parties’ contractual bargain. The tribunal may also refer to relevant trade customs and industry practice. These rules might enable the tribunal to preserve the parties’ contractual deal by substituting a defunct reference to LIBOR with another benchmark that would best reflect the prevailing industry practice and the contractual risk allocation.

Clausula rebus sic stantibus (théorie de l’imprévision) – Under this principle, a tribunal may intervene to adapt a contract to changed circumstances. However, as the Supreme Court’s case law makes clear (eg, ATF 192 III 97), the threshold for obtaining relief under this theory is very high. In particular, the principle applies only where the change of circumstances was not reasonably foreseeable and its impact is such as to render the transaction grossly disproportionate (and therefore abusive). Arguably, if a debtor uses the extinguishment of LIBOR in order to free itself from the obligation to pay interest or fundamentally alter the contractual risk allocation, a tribunal might have a ground to intervene to reestablish the contractual equilibrium. This could be done by resorting to an alternative benchmark that makes commercial sense in the given circumstances.

Impossibility – Article 119(1) SCO provides that an obligation, LIBOR clause or entire contract as the case may be, “is deemed extinguished where its performance is made impossible by circumstances not attributable to the obligor.” The obligor might then be liable “for the consideration already received”. Given its detrimental economic effects, this solution would appear to be best considered as a last resort if other mechanisms do not allow the preservation of the contractual deal.

 

B. LIBOR-Based Interest Awards

Arbitral tribunals enjoy a degree of discretion in determining damages, including interest, subject to the usual requirements of due process and equality of arms.12) In specific cases, the contract or applicable investment treaty contains guidance as to the interest rate to be applied on the compensation amount. jQuery("#footnote_plugin_tooltip_9698_12").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Tribunals often use LIBOR as a benchmark for calculating pre- and post-award interest, even when LIBOR is not specifically mentioned in the relevant contract or investment treaty. A review of the publicly available awards issued after the announcement of the LIBOR phase-out shows that tribunals continue to use LIBOR, without apparently considering the risk that, if the award is not paid out until 2022, the winning party may be left with an unenforceable interest award.13) Gavrilovic and Gavrilovic d.o.o. v. Republic of Croatia, ICSID Case No. ARB/12/39, Award, 26 July 2018, para. 1324.d; Unión Fenosa Gas, S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/14/4, Award, 31 August 2018, para. 10.138; Greentech Energy Systems A/S (now Athena Investments A/S), NovEnergia II Energy & Environment (SCA) SICAR and NovEnergia II Italian Portfolio SA v. Italian Republic, SCC Case No. V (2015/095), Final Award, 23 December 2018, para. 594(e). jQuery("#footnote_plugin_tooltip_9698_13").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_13", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Tribunals should consider the following when dealing with matters of interest:

First, in currently pending proceedings, if a party requests an award of interest by reference to LIBOR and none of the parties raises the issue of the LIBOR phase-out, tribunals should arguably bring the issue to the parties’ attention. This derives from the tribunal’s duty to render an enforceable award, which is sometimes explicitly set out in applicable arbitration rules.14) E.g, Article 42 of the 2017 ICC Rules. jQuery("#footnote_plugin_tooltip_9698_14").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_14", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Second, if the tribunal has already rendered an award containing LIBOR as a benchmark, the available options are limited. Although arbitration rules often provide for a possibility for correction or interpretation of an award, this mechanism is reserved for typographical errors and genuine ambiguities in the language of the award, as opposed to substantive issues that the parties have neglected or that have arisen after the award has been rendered. An application for revision may be a more suitable mechanism. However, only some arbitration laws and rules provide for such a possibility, and even when they do, the applicable time limits are stringent. For instance, under Article 51 of the ICSID Convention, a party may make an application for revision of the award within 90 days from the discovery of a new material fact. Given that the LIBOR phase-out has been in the public domain since July 2017, it might be difficult to argue that this fact was unknown to a diligent party 90 days prior to lodging the revision application.

In these circumstances, an award creditor will likely need to argue before the enforcing courts that LIBOR should be substituted by another benchmark, with the uncertainty that that entails.15) Since this issue does not appear to fall under the 1958 New York Convention, the outcome will depend on the legislation of the jurisdiction in which enforcement is sought. In particular, domestic jurisprudence concerning the enforcement of ambiguous or disputed terms of arbitral awards is likely to be relevant. jQuery("#footnote_plugin_tooltip_9698_15").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_15", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Conclusion

The LIBOR phase-out from 2022 creates a considerable risk of contractual disputes. As things stand, the absence of a commonly agreed substitute for LIBOR makes the outcome of such disputes uncertain. While the solution will depend on the law applicable to the contract, tribunals are in principle equipped with sufficient tools to preserve the contractual deal by reference to the parties’ common intentions and commercial common sense. In some cases, however, a tribunal may be left with the unattractive solution of declaring LIBOR-benchmarked obligations frustrated or impossible to perform.

As for arbitral awards that use LIBOR as a benchmark for interest, tribunals should be vigilant of the risk that the interest portion of the award may become unenforceable if it remains unpaid beyond 2022. As the available remedies after the award has been rendered are scarce, tribunals are encouraged to uphold their duty to render an enforceable award, including by raising the consequences of the LIBOR phase-out with the parties whenever they have neglected to address these issues.

References   [ + ]

1. ↑ US Dollar, Euro, Pound Sterling, Japanese Yen and Swiss Franc; overnight, one week, one month, two months, three months, six months, and one year. 2. ↑ The financial industry has been seeking to come up with viable replacements for LIBOR. However, given some unique characteristics and the global nature of LIBOR, finding sustainable alternatives has proven difficult. Among the alternatives proposed so far, there are overnight index rates for different currencies, such as the Sterling Overnight Index Average (“SONIA”) and the Swiss Average Rate Overnight (“SARON”), as well as various repurchase agreement rates and the secured overnight financing rate for the US dollar (“SOFR”); see here for more details. 3. ↑ The International Swaps and Derivatives Association (“ISDA”), for instance, recommends that fallback mechanisms be included in transactions precisely to avoid difficulties when the default reference rate is not (or no longer) available.  See ISDA, “Development of Fallbacks for LIBOR and other Key IBORs”, 28 November 2017, see: https://www.isda.org/2017/11/28/development-fallbacks-libor-key-ibors-faqs/, last accessed on 18 May 2019. The US-based Alternative Reference Rates Committee (“ARRC”) has recently released recommended contractual fallback language for US dollar LIBOR denominated floating rate notes and syndicated loans. See https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC-Apr-25-2019-announcement.pdf last accessed on 21 May 2019. 4. ↑ If parties concluded a LIBOR-benchmarked contract after that date, neglecting the consequences of the phase-out, different considerations may apply, possibly calling for the application of rules such as those on “initial impossibility” or “mistake”, among others, depending on the type of contract and parties involved. 5. ↑ For a more in-depth discussion, see in particular W. Bristow, R. Huntsman, “A post-LIBOR world: how will the English courts address legacy contracts after 31 December 2021”, International Banking and Financial Law Review 3, 1 January 2018. 6. ↑ Notably, a court or tribunal might forego contractual interpretation altogether, since the analysis to be conducted in respect of the LIBOR phase-out is not necessarily interpretative. 7. ↑ Equally, English courts seek to avoid implying terms based on hindsight bias. 8. ↑ Sudbrook Trading Estate v. Eggleton, [1983] 1 AC 444. 9. ↑ Albeit, given that arbitral awards are often confidential and without precedential value, the implications are not comparable with those of court judgments. 10. ↑ For this section, see, eg, B. Winiger, in L. Thévenoz/F. Werro (Eds), Commentaire romand – Code des obligations I, 2nd ed. 2012, Article 18 SCO, paras 14-53 and 193-215 ; W. Wiegand, in H. Honsell/N. Vogt/W. Wiegand (Eds), Basler Kommentar – Obligationenrecht I, 6th ed. 2015, Article 18 SCO, paras 18-40 and paras 95-125a, with further references. 11. ↑ As noted in footnote 6 above, it will be for the tribunal to determine whether the question is one of contract interpretation in the first place. 12. ↑ In specific cases, the contract or applicable investment treaty contains guidance as to the interest rate to be applied on the compensation amount. 13. ↑ Gavrilovic and Gavrilovic d.o.o. v. Republic of Croatia, ICSID Case No. ARB/12/39, Award, 26 July 2018, para. 1324.d; Unión Fenosa Gas, S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/14/4, Award, 31 August 2018, para. 10.138; Greentech Energy Systems A/S (now Athena Investments A/S), NovEnergia II Energy & Environment (SCA) SICAR and NovEnergia II Italian Portfolio SA v. Italian Republic, SCC Case No. V (2015/095), Final Award, 23 December 2018, para. 594(e). 14. ↑ E.g, Article 42 of the 2017 ICC Rules. 15. ↑ Since this issue does not appear to fall under the 1958 New York Convention, the outcome will depend on the legislation of the jurisdiction in which enforcement is sought. In particular, domestic jurisprudence concerning the enforcement of ambiguous or disputed terms of arbitral awards is likely to be relevant. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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To Enforce or Not to Enforce Annulled Arbitral Awards?

Sun, 2019-06-23 01:20

Kirsten Teo

The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) prescribes mandatory, uniform international rules for the recognition and enforcement of international arbitration agreements and awards in the Contracting States. Pursuant to Article V(1)(e) of the New York Convention, an award may be denied recognition and enforcement by the enforcement court if a competent court in the arbitral seat or primary jurisdiction annuls the award.1)Gary B. Born, The New York Convention: A Self-Executing Treaty, 40 Michigan Journal of International Law 115 (2018) jQuery("#footnote_plugin_tooltip_7718_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7718_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In view of the permissive language in Article V(1)(e) of the New York Convention, enforcement courts have the discretion to: (a) treat the annulled award as an invalid underlying judgment that ceases to exist, hence there is nothing to enforce; (b) accord some deference to the annulment judgment but reserve the right to enforce the award if deemed justified according to the domestic laws of the enforcement jurisdiction; or (c) disregard the annulment judgment and make an independent decision on whether or not to enforce the annulled award. As the Honourable the Chief Justice of Singapore Sundaresh Menon noted in his keynote address at the CIArb London Centenary Conference on 2 July 2015,

[There is] growing uncertainty over the international framework governing the recognition and enforcement of awards. There is, for instance, a lack of international consensus on the effect of an order by the seat court setting aside an award in subsequent enforcement proceedings. And we have also seen the re-litigation of identical issues in different enforcement proceedings in different courts. This is bound to increase costs and further erode the value of finality.

 

The Territorial, Westphalian and Transnational Theories

Whether or not enforcement courts decide to enforce an annulled award is influenced by how the enforcement courts characterise the nature and role of the arbitral seat. On a broad spectrum, there are three theories namely: (a) the seat or territorial theory i.e. where an award has been set aside by the competent authority in the country where it was rendered, it ceases to exist and is not enforced; (b) the Westphalian or multi-local theory pursuant to which annulment decisions do not conclusively determine enforcement unless the annulment is based on internationally recognised grounds; and (c) the transnational legal autonomy or delocalisation theory according to which the annulment decision has no bearing on enforcement, and an annulled award may be enforced unless it falls within the grounds to refuse enforcement under the domestic law of the enforcement court.2) See Albert Jan van den Berg, Enforcement of Annulled Awards, 9 (2) ICC International Court of Arbitration Bulletin 15, 15 (1998), Julian Lew, Achieving the Dream: Autonomous Arbitration, 22 (2) Arbitration International (2006), and Emmanuel Gaillard, Legal Theory of International Arbitration (Martinus Nijhoff Publishers, 2010) jQuery("#footnote_plugin_tooltip_7718_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7718_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

As an example of the prevailing seat theory, the Singapore Court of Appeal observed in 2013 that it was doubtful whether an enforcement court might recognise and enforce a foreign award which had been set aside by courts in the arbitral seat. This is because the contemplated erga omnes effect of a successful application to set aside an award would generally lead to the conclusion that there was simply no award to enforce: see [76] and [77] in PT First Media TBK v Astro Nusantara International BV and others [2013] SGCA 57. This observation accords with Professor Peter Sanders’ opinion that if an award is annulled, the courts will refuse enforcement as “there does not longer exist an arbitral award and enforcing a non-existing arbitral award would be an impossibility or even go against the public policy of the country of enforcement.3)Peter Sanders, New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1955(6) Netherlands Int’l Law Review 43 at p. 109-110 jQuery("#footnote_plugin_tooltip_7718_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7718_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

The strict public policy exception in the US

In TermoRio S.A. E.S.P. v. Electranta S.P., 487 F.3d 928, 939 (D.C. Cir. 2007), the D.C. Circuit affirmed the District Court’s decision to refuse enforcement of an award on the grounds that Colombia’s highest administrative court – at the arbitral seat – had annulled the award, accepting that there is a “narrow public policy gloss” on Article V(1)(e) of the New York Convention and that a foreign judgment is unenforceable as against public policy to the extent it is repugnant to fundamental notions of what is decent and just in the United States. The appellants had not alleged or provided any evidence to suggest that the proceedings before the Colombian court or the annulment judgment violated any basic notions of justice.

In Getma International v Republic of Guinea 862 F. 3d 45 (D.C. Cir, 2017), Getma sought to enforce in the United States an award annulled by the Common Court of Justice and Arbitration of the Organization for the Harmonization of Business Law in Africa (“CCJA”), a court of supranational jurisdiction for Western and Central African States. The D.C. Circuit on 7 July 2017 affirmed the District Court’s decision that Getma had failed to satisfy the standard i.e. that the CCJA’s annulment of the award was repugnant to the fundamental notions of morality and justice.

As was discussed on this blog, in Thai-Lao Lignite (Thailand) Co, Ltd v. Gov’t of the Lao People’s Democratic Republic 864 F. 3d 172 (2d Cir, 2017), the Second Circuit on 20 July 2017 affirmed inter alia the District Court’s order refusing enforcement of an award annulled by the Malaysian courts. The 2009 award issued by a Malaysian tribunal in favour of the claimants was initially confirmed by the Southern District in 2011 before it was set aside by the Malaysian courts in 2012. The Southern District subsequently vacated its enforcement judgment, finding that the New York Convention required it to give effect to the later Malaysian decision, which did not “rise to the level of violating basic notions of justice such that the Court here should ignore comity considerations.” The Second Circuit decided that the Federal Rule of Civil Procedure 60(b)(5) which permits District Courts to “relieve a party…from a final judgment” when the judgment “is based on an earlier judgment that has been reversed or vacated,” applies to a District Court’s consideration of a motion to vacate a judgment enforcing an arbitral award that has since been annulled by courts at the seat. The enforcement courts analyse the Rule 60(b) considerations, including timeliness and the equities, and assign significant weight to international comity in the absence of a need to vindicate “fundamental notions of what is decent and just” in the United States.

The public policy exception in the United States – i.e. that the annulment of the award has to run counter to the United States public policy and be repugnant to the fundamental notions of what is decent and just in the United States – is a stringent one. As was discussed on this blog, this exception was met in Corporación Mexicana De Mantenimiento Integral, S. De R.L. De C.V. v. PemexExploración Y Producción, No. 13-4022 (2d Cir, 2016) which is the first federal appellate decision to confirm an annulled award. The Second Circuit held that the Southern District did not abuse its discretion in confirming the award annulled by the Mexican courts. The high hurdle of the public policy exception was surmounted in this case “by four powerful considerations: (1) the vindication of contractual undertakings and the waiver of sovereign immunity; (2) the repugnancy of retroactive legislation that disrupts contractual expectations; (3) the need to ensure legal claims find a forum; and (4) the prohibition against government expropriation without compensation.”. Normative policing was discussed on this blog.

Does the possibility that the award could be annulled at the arbitral seat result in a stay or suspension of the enforcement of the award? This appears to be unlikely. In the judgment on 24 April 2019 of Science Applications International Corporation v The Hellenic Republic (S.D. N.Y. 2019), the District Court decided inter alia not to disturb the 2013 D.C. court decision declining to adjourn enforcement of the award until after the resolution of the annulment action in the Greek courts. An award was rendered against the Hellenic Republic in 2013. The prevailing party successfully obtained a judgment in D.C. confirming the award in 2017 and sought to attach the state’s assets to satisfy the judgment, so it moved the District Court in New York for an order finding that a reasonable period of time has elapsed since judgment was entered pursuant to 28 U.S.C. § 1610(c). According to the Foreign Sovereign Immunities Act, the property of an agency or instrumentality of a foreign state within the United States may not be attached “until the court has ordered such attachment and execution after having determined that a reasonable period of time has elapsed following the entry of judgment and the giving of any [required] notice.” Meanwhile, proceedings were ongoing in the Greek courts to invalidate the award. The District Court in New York held that these circumstances did not prevent it from finding that a reasonable period of time, which was 11 months since the D.C Court entered judgment on 29 May 2018, had elapsed.

According to the international comity test, an annulment decision should be recognised on grounds of comity (i.e. the award is not enforced) unless the annulment decision is “procedurally unfair or contrary to fundamental notions of justice” 4) William W. Park, Duty and Discretion in International Arbitration, Arbitration of Int’l Bus. Disputes, Oxford (2006, 2nd ed 2012 jQuery("#footnote_plugin_tooltip_7718_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7718_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The line of cases above-cited indicate that it is incumbent on the parties, seeking to enforce in the United States an annulled award, to prove exceptional facts sufficient to meet the stringent public policy test in order for the annulment decision to be disregarded. Further, the courts may vacate its enforcement judgment if the award is subsequently annulled. Finally, the possibility that an award may be annulled at the seat does not impede enforcement of the award.

 

The author’s views expressed herein are personal and do not reflect the views of Eversheds Harry Elias or Eversheds Sutherland and their clients. The author reserves the right to change the positions stated herein.

References   [ + ]

1. ↑ Gary B. Born, The New York Convention: A Self-Executing Treaty, 40 Michigan Journal of International Law 115 (2018) 2. ↑ See Albert Jan van den Berg, Enforcement of Annulled Awards, 9 (2) ICC International Court of Arbitration Bulletin 15, 15 (1998), Julian Lew, Achieving the Dream: Autonomous Arbitration, 22 (2) Arbitration International (2006), and Emmanuel Gaillard, Legal Theory of International Arbitration (Martinus Nijhoff Publishers, 2010) 3. ↑ Peter Sanders, New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1955(6) Netherlands Int’l Law Review 43 at p. 109-110 4. ↑ William W. Park, Duty and Discretion in International Arbitration, Arbitration of Int’l Bus. Disputes, Oxford (2006, 2nd ed 2012 function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Singapore Court of Appeal Decision: Does Art. 16(3) Model Law Preclude Setting Aside Proceedings?

Fri, 2019-06-21 21:56

Eunice Chan Swee En

Art 16(3) of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”) provides that if a tribunal issues a preliminary ruling that it has jurisdiction, a respondent may appeal the tribunal’s ruling to the relevant court within 30 days.

Can a party who loses a jurisdictional challenge still set aside the final award for lack of jurisdiction, if that party did not seek curial review of its unsuccessful jurisdictional challenge under Art 16(3) of the Model Law?

In a recent decision by the Singapore Court of Appeal in Rakna Arakshaka Lanka Ltd v Avant Garde Maritime Services (Pte) Ltd [2019] SGCA 33 (“Rakna”), the key issue was whether the party had participated in the arbitration proceedings. A party who chooses not to participate in the proceedings does not contribute to the wastage of costs, and therefore retains its entitlement to apply to the seat Courts to set aside the award for lack of jurisdiction.

 

Facts

The Appellant, Rakna Arakshaka Lanka Ltd (“RALL”), was a Sri Lankan company specialising in providing security and risk management services. The Respondent, Avant Garde Maritime Services (Pte) Ltd (“AGMS”), another Sri Lankan company, was in the business of providing maritime security services.

Prior to March 2011, acting under the auspices of the Ministry of Defence and Urban Development of the Republic of Sri Lanka (“MOD”), the parties agreed to form a private-public partnership to carry out certain projects. The parties entered into a Master Agreement that incorporated 6 separate agreements, pursuant to which they undertook various projects including one called the Galle Floating Armoury Project. The Master Agreement provided for disputes to be settled by arbitration in Singapore in accordance with the rules of the Singapore International Arbitration Centre (“SIAC”).

Following the election of a new president of Sri Lanka in 2015, the new government commenced investigations into the dealings between RALL and AGMS.  AGMS took the position that there was no illegality in the operation of the Galle Floating Armoury Project.  AGMS asked RALL to obtain, inter alia, a letter from the MOD and/or the government to confirm that AGMS’s business under its public-private partnership with RALL was legitimate and carried out under the authority of the government through MOD.  RALL did not do so.

AGMS commenced arbitration proceedings against RALL, claiming that RALL had breached the Master Agreement by failing to provide utmost assistance to AGMS. The Notice of Arbitration was sent to RALL, but RALL did not file any response. SIAC nominated an arbitrator on behalf of RALL after the latter failed to do so.

Subsequently, RALL wrote to SIAC stating that AGMS had agreed to withdraw the matter on the basis of a memorandum of understanding (“MOU”) between parties. RALL requested the Tribunal to “lay by the proceedings of the Arbitration”. However, AGMS informed the Tribunal that it was not in a position to withdraw the arbitration and requested an award granting an interim injunction preventing RALL from terminating the Master Agreement. The Tribunal issued an Interim Order in which it held that RALL’s failure to ensure the continuity of the Master Agreement went to the root of the MOU, and that the dispute in the arbitration was therefore still alive. The Tribunal proceeded with the arbitration and issued an award in favour of AGMS.  RALL did not participate in the arbitration.

RALL commenced proceedings to set aside the award. The Singapore High Court dismissed RALL’s application to set aside the award. RALL appealed.

 

The Court of Appeal’s Decision

The Singapore Court of Appeal held that it is not necessary for parties to file a formal objection, or a plea in the legal sense of the term, in order to engage Art 16(3) of the Model Law.  On the facts, Art 16(3) of the Model Law was engaged as:

  • RALL had challenged the Tribunal’s jurisdiction. While there was no formal pleading by RALL which asserted a lack of jurisdiction, RALL had furnished the Tribunal with its objection to jurisdiction by way of its letter to the SIAC.  RALL’s letter had stated that the parties had “reach[ed] a settlement”, and “it is no longer required to proceed with the above matter”. This letter was equivalent to objecting to the Tribunal’s continued jurisdiction over the matter on the basis that there was no longer any dispute which the Tribunal could deal with.
  • The Tribunal had clearly made a preliminary ruling on its jurisdiction to deal with the matter within Art 16 of the Model Law, when it held that the MOU had not been implemented and the dispute referred to in the Statement of Claim was “still alive” and should be proceeded with.

The preclusive effect of Art 16(3) of the Model Law does not extend to a respondent who fails in its jurisdictional objection, but does not participate in the arbitration proceedings. Such a respondent has not contributed to any wastage of costs, or the incurring of any additional costs that could have been prevented by a timely application under Art 16(3) of the Model Law.

The position is different if a respondent fails in its jurisdictional objection but then participates in the arbitration. By doing that, the respondent would have contributed to wasted costs. It is just to bar such a respondent from bringing a setting aside application based on the ground of lack of jurisdiction, as such an application is outside the time limit prescribed in Art 16(3) of the Model Law.

In Rakna, the Court of Appeal set aside the Tribunal’s award as it contained decisions on matters that were beyond the scope of the submission to the arbitration. In the Court’s view, the MOU had effected a settlement and resolved the dispute between the parties. Once the dispute was resolved, ipso facto there was no longer a dispute which could be arbitrated on. The Tribunal thus had no jurisdiction to conduct the arbitration proceedings.

The Court of Appeal rejected RALL’s other challenges against the Award.

 

Discussion

At first blush, a respondent may think that the path is clear for him to choose not to participate in the arbitration proceedings, if he takes the view that the tribunal lacks jurisdiction over the dispute.

However, such a strategy is a gamble. Should the respondent ultimately fail in challenging the tribunal’s jurisdiction, he will have lost the opportunity to present any substantive defences to the claim.

A strategy of non-participation preserves a respondent’s ability to set aside the final award based on jurisdictional objections and saves the costs of participating in the arbitration, but comes at the cost of sacrificing the substantive defences which the respondent could have raised if he had participated in the arbitration. Such a strategy may only be attractive to a respondent who has a meritorious case on jurisdiction, but a weak defence on the merits.

A respondent who has reasonable defences may not want to give up his chances of defeating the claim on its merits. Where such a respondent loses his preliminary jurisdictional challenge but intends to participate in the merits hearing, his options are as follows.

First, he can seek curial review on the jurisdiction decision within the time limit in Art 16(3) of the Model Law.

Secondly, if he does not seek curial review, the preclusive effect of Art 16(3) will prevent him from making a subsequent setting aside application on jurisdictional grounds. However, it is important to bear in mind that Art 16(3) is not a “one-shot” remedy: see Pt First Media TBK v Astro Nusantara International BV and others and another appeal [2014] 1 SLR 372. The preclusive effect of Article 16(3) does not extend to the respondent’s rights to resist recognition and enforcement of any award. For some respondents, resisting enforcement may be enough.

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Tanzania Faces a New ICSID Claim under the Terminated Netherlands BIT

Fri, 2019-06-21 01:45

Sadaff Habib (Assistant Editor for Africa)

In September 2018, Tanzania took the international arbitration community by surprise when it issued its notice of its intent to terminate the Agreement on Encouragement and Reciprocal Protection of Investments between Tanzania and the Netherlands which was set to expire on 1 April 2019 (Netherlands BIT). Article 14 (2) of the Netherlands BIT provides that if either party did not terminate the treaty within six months of the expiration date, the bilateral investment treaty would automatically renew for an additional ten years, that is, to 2029.

 

The Case for Termination and the New ICSID Case

The rationale behind the termination is that the provisions of the Netherlands BIT were seen as limiting the government’s ability to regulate investments in the public’s interest. The treaty was viewed as incoherent with the legal reforms that Tanzania had recently adopted. The provisions of the Netherlands BIT prevented Tanzania from entering into agreements with a third party that would be more favourable as doing so may attract claims at the ICSID. Ultimately, Tanzania wished to ensure all investment related policies favour both its development and its people.

This is not an uncommon view of investment treaties particularly in weighing the benefit they bring to lesser developed countries. The effectiveness of bilateral investment treaties inducing foreign direct investment (FDI) has often been debated. Studies have shown that there is little to no correlation between a country’s BITs and FDI flow. For example, a 2014 analysis undertaken by the United Nations Conference on Trade and Development (UNCTAD) covering 146 economies over 27 years found no evidence that BITs foster increased bilateral FDI. It is not all too surprising that Tanzania opted to terminate the Dutch bilateral investment treaty.

Generally, bilateral investment treaties, being treaties under public international law, are subject to the Vienna Convention on the Law of Treaties (VCLT). Article 54 of the VCLT provides that a party can terminate a bilateral investment treaty either unilaterally under the provisions of the treaty or mutually at any time during the period of the treaty. Tanzania opted to unilaterally terminate the Netherlands BIT under the provisions of the treaty and by sending a notice shortly before the time period to terminate would expire under the treaty.

Six months following the termination of the BIT with Netherlands,  Ayoub-Farid Michel Saab, Chairman of FBME Bank and a Dutch national has filed an ICSID claim against Tanzania under the Netherlands BIT. The dispute apparently relates to FBME Bank. This bank was previously the subject of an ICC dispute which Saab and his brother filed against Cyprus. Earlier this year an arbitration award was issued in favour of Cyprus with a dissenting arbitrator.

The FBME Bank has been surrounded by controversy. In 2014, the US Treasury’s Financial Crimes Enforcement Network (FinCEN) accused FBME of facilitating money laundering and financing terrorism and organised crime. In 2017, Tanzania’s central bank shut down and liquidated FBME’s operations in the country.

The ICSID case against Tanzania was filed on 16 April 2019. It remains to be seen if Mr Saab will triumph in his claim.

 

The Status of the Netherlands BIT Post Termination

Although Tanzania terminated the bilateral investment treaty with the Netherlands, pursuant to Article 3 of the treaty, investors can file disputes against Tanzania in relation to investments made prior to the date of termination for a period of fifteen years. Article 3 of the Netherlands BIT states,

In respect of investments made before the date of the termination of the present Agreement, the foregoing Articles shall continue to be effective for a further period of fifteen years from that date.

It is not uncommon for BITs to contain sunset clauses such as the above. In 2012, South Africa sought to terminate its bilateral investment treaty with Belgium for a similar reason to Tanzania’s – the risk that the BITs outweighed their benefit to the country. The provisions of the South Africa- Belgium BIT also provided for the treaty to apply to existing investments for 10 years. Such sunset clauses particularly apply in cases of unilateral termination of the BIT such as in Tanzania’s case as opposed to mutual termination of the BIT where the parties may agree for the sunset clause not to apply or to limit its exposure.

 

What of Tanzania’s other BITs?

At the time of this ground breaking development, the African arbitration community queried what this would mean for investment arbitration in Tanzania, whether it would follow in the footsteps of South Africa and if this was the tip of the iceberg to follow. That is, would Tanzania seek to terminate other BITs in place. This was particularly of concern in the wake of certain controversial legislative reforms– international arbitration was no longer permitted in disputes in relation to Tanzania’s natural resources and international arbitration was prohibited in public private partnerships. As of this date, Tanzania has 12 BITs in force and 8 signed but not yet in force. It has ongoing disputes under two of its BITs, as recorded by the investment policy hub, where Tanzania is the respondent. These include:

  1. Sunlodges Ltd (BVI), 2. Sunlodges (T) Limited (Tanzania) v the United Republic of Tanzania (2018). Filed under the Italy and Tanzania BIT of 2001, the dispute involves claims arising out of the Government’s alleged seizure of the Claimants’ cattle farming land in order to build a cement works and a power station. The investment arbitration is filed under the UNCITRAL Rules with the Permanent Court of Arbitration administering the dispute. The claim amount is circa USD 30 million. The seat of arbitration is Sweden. The case is still ongoing.
  1. Agro EcoEnergy Tanzania Limited, Bagamoyo EcoEnergy Limited, EcoDevelopment in Europe AB, EcoEnergy Africa AB v. United Republic of Tanzania (2017). Filed under the Sweden and Tanzania BIT of 1999, the dispute involves claims arising out of the cancellation by the Government, in 2016, of the claimants’ sugar cane and ethanol project on the grounds that it would have adverse impact on local wildlife. The dispute is filed under the ICSID Rules and is administered by ICSID. The case is still ongoing.

The relationship between bilateral investment treaties and foreign direct investment (FDI) is questionable to say the least. In 2010,when South Africa decided to terminate 20 BITs its FDI stock increased 10 percent since that time, from 1.8 trillion rand to 2.0 trillion rand. It remains to be seen the route Tanzania will take with its remaining BITs. A word of caution would be that Tanzania renegotiate its sunset clauses under its treaties when seeking to terminate to reduce the impact of the treaties on existing investments. Meanwhile, it remains to be seen if Mr Saab will be successful in his most recent claim against Tanzania.

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Imposing Conditions on Investor Protection: A Role of Investor’s Due Diligence

Wed, 2019-06-19 21:00

Yulia Levashova

The notion of Corporate Social Responsibility (CSR) is gaining momentum in international investment law. States continue to include the CSR provisions in their newest international investment agreements (IIAs). In addition to typical CSR clauses directed at states to encourage investors to incorporate the internationally recognized standards on CSR (e.g. Argentina –Japan BIT (2018); the Australia-Hong Kong FTA (2019)), more IIAs incorporate provisions directly addressing investors.

In 2018, Brazil has signed three new cooperation and investment facilitation agreements with Guyana, Ethiopia and Suriname. All of them contain elaborated CSR provisions, focusing on investors’ obligations. For example, the Brazil – Ethiopia BIT (2018) provides in Article 14 that investors “shall endeavor (…) a) Contribute to the economical, social and environmental progress, aiming at achieving sustainable development; b) Respect the internationally recognized human rights of those involved in the investors’ activities”.1)Article 14, Brazil – Ethiopia BIT (2018). jQuery("#footnote_plugin_tooltip_8972_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Moreover, the Brazilian agreements subject foreign investor to compliance with national laws.2)Article 14, Brazil – Ethiopia BIT (2018); Article 15, Brazil – Guyana BIT (2018); Article 15, Brazil – Suriname BIT (2018). jQuery("#footnote_plugin_tooltip_8972_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The latter provision also exists in the Belarus-India BIT (2018), where in the provision on ‘investor obligations’ it is stated that “investors and their investments shall comply with all laws of a Party concerning the establishment, acquisition, management, operation and disposition of investments”.3)Article 11, Belarus-India BIT (2018). jQuery("#footnote_plugin_tooltip_8972_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

With an increasing number of CSR provisions providing a diverse range of investors’ obligations, the central question is whether these types of provisions are binding and if so, how they can be enforced? Depending on the type of CSR clause, some IIAs provide a potential solution for enforcing investor’s obligations. For example, a few IIAs include clauses establishing the liability of investors in the home State of investors (e.g. the Dutch Model BIT, the Morocco-Nigeria BIT).4)Article 7(4), Dutch Model BIT (2018); Art. 20, Morocco-Nigeria BIT (2016); Article 17(2), SADC Model BIT (2012). jQuery("#footnote_plugin_tooltip_8972_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Several other treaties contain clauses allowing a host state to file a counterclaim against an investor that potentially offer an opportunity for a host state to challenge the human rights and environmental violations involving a foreign investor.

This contribution, however, discusses another option for effectuating the CSR provisions namely through compliance of investors with CSR provisions, as a condition for investor’s protection under an IIA. The investor’s failure to comply with the CSR obligations can be considered at different stages of investment proceedings: at the (i) jurisdictional stage, or at the (ii) merits stage while deciding on the violation of substantive IIAs provisions, and/or at the moment of (iii) determining the amount of compensation.

Regarding the first option, the investor’s conduct can be subject to the jurisdictional limitations, or limitations of an access to investment-state dispute settlement (ISDS) through incorporation of legality requirement of an investment. Usually, this implies that an investment has to be in accordance with domestic law. The Iran-Slovak Republic BIT (2016) includes such limitations, specifying in the ISDS provision that “an investor may not submit a claim under this Agreement where the investor or the investment has violated the Host State law”.5)Article 14, Iran-Slovak Republic BIT (2016). jQuery("#footnote_plugin_tooltip_8972_5").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The BIT clarifies that a tribunal shall dismiss the investor’s claim upon his involvement in serious violations of the host state law, e.g. fraud, tax evasion, corruption etc.6)Article 14, Iran-Slovak Republic BIT (2016). jQuery("#footnote_plugin_tooltip_8972_6").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The draft Colombia Model BIT (2017) also includes a CSR clause that stipulates that for the purpose of accessing the ISDS, an investor has to accept the binding obligations established under the human rights and environmental treaties, to which Colombia or its counterparty are or become a party, throughout the making of its investment and its operation in the host party’s territory. In Cortec Mining v. Kenya, the tribunal declined jurisdiction over an investor’s claim for an unlawful revocation of the mining license under the Kenya-United Kingdom BIT, even without an explicit provision requiring compliance with domestic law. The tribunal agreed with the respondent state that the investor had failed to comply with the environmental impact assessment requirements imposed for the mining projects under Kenyan law.7)Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v. Republic of Kenya, ICSID Case No. ARB/15/29, Award 22 October 2018. jQuery("#footnote_plugin_tooltip_8972_7").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Explaining that such investment as licence constitutes “the creature of the laws of the Host State”8)Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v. Republic of Kenya, ICSID Case No. ARB/15/29, Award 22 October 2018, para. 319. jQuery("#footnote_plugin_tooltip_8972_8").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and therefore in order to rise for protection, it has to be made in accordance with the domestic law.

The second option is to condition the protection of investors under IIA’s substantive investment standards by taking into account the due diligence obligations of an investor. An example is the protection of the legitimate expectations of an investor under the fair and equitable treatment (FET) standard. One of the factors taken into account by tribunals in assessing whether the investor qualifies for the protection of the legitimate expectations is whether the investor has exercised the proper due diligence before investing into a host state. The requirement of due diligence concerns not only the economic aspects of an investment, but also includes a broader appraisal of the legal and socio-political circumstances in a host state. In a renewable energy case, Charanne v. Spain, the tribunal stated that in order for an investor to “exercise the right of legitimate expectations”, it should perform a “diligent analysis of the legal framework for the investment”.9)SCC Case No. 062/2012, Charanne Construction v. Spain, Award 21 January 2016, para. 505. jQuery("#footnote_plugin_tooltip_8972_9").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The examples of the recent FET cases indicate the growing importance of cautiousness and proper preparation by the investor.10)For comprehensive analysis of the role of due diligence in the context of the FET standard, see: Y. Levashova, The Right of States to Regulate in International Investment Law: The Search for Balance between Public Interest and Fair and Equitable Treatment, International Arbitration Law Library, Wolters Kluwer, 2019 (forthcoming). jQuery("#footnote_plugin_tooltip_8972_10").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Furthermore, the notion of investor’s due diligence does not have to be limited to the legitimate expectations. For example, 2018 Dutch Model BIT included the general provision emphasising the importance of the investor’s duty to conduct a due diligence process in order to identify, prevent, mitigate and account for the environmental and social risks and impacts of its investment.11)Article 7(3), Dutch Model BIT (2018). jQuery("#footnote_plugin_tooltip_8972_11").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The third possibility is to take the investor’s conduct into account at the stage of calculating the compensation. The 2018 Dutch Model BIT has incorporated the provision stipulating that the tribunal may take into account in determining the amount of compensation the investor’s incompliance with its commitments under the UN Guiding Principles on Business and Human Rights (UNGPB), and the OECD Guidelines for Multinational Enterprises (OECD Guidelines).12)Article 23, Dutch Model BIT (2018). jQuery("#footnote_plugin_tooltip_8972_12").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Such provision does not mandate tribunals to consider the compliance of an investor’s conduct with the UNGPB and the OECD Guidelines, however it exemplifies of how CSR obligations could potentially be taken into account in the calculation of damages. Such provision does not represent a novelty. Tribunals, in numerous cases, have been taking into account the misconduct of an investor in calculating the damages, e.g. by reducing the amount of compensation.13)E.g. Biwater Gauff v. Tanzania, ICSID Case No. ARB/05/22, Award 24 July 2008. jQuery("#footnote_plugin_tooltip_8972_13").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_13", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Conclusion

Imposing conditions on investment’s protection under IIAs either at the jurisdictional or merits stage, or/and in calculating compensation, has a number of advantages. Firstly, it does not require significant legislative changes in domestic law in order for example to facilitate the possibility for the third parties to bring claims against multinationals in courts of home state. Secondly, it creates a better balance between the rights and obligations of states and investors, and contributes to promotion of sustainable and responsible investment.

A problematic notion regarding this approach is however the ultimate reliance on interpretation by tribunals on whether an investor has complied with social obligations laid down in an IIA, due diligence requirements, or with domestic law. For example, in determining whether an investor has committed “serious violations of the host state law” under the Iran-Slovak Republic BIT (2016), would require the tribunal’s assessment of the seriousness of such violation under national law. That might result into an intrusive review of the application of domestic laws and policies. In the same vein, the appraisal of investor’s conduct in calculating the damages, without clear guidance on this matter in the treaty itself, will hardly change anything in enforcement of CSR clauses.

The exercise of proper due diligence by an investor in order to receive protection under IIA’s substantive investment standards, despite some drawbacks, has the potential to be further developed in treaty drafting. Of course, a weakness of this approach is the lack of objective and specific criteria on due diligence in investment law, which makes this requirement a rather a flexible notion with illusive contours rather than an identifiable legal standard. For example, tribunals in assessing the FET often employ different definitions of due diligence obligation. In Masdar v. Spain, the tribunal specified that in order to demonstrate the appropriate due diligence the investor has to “familiarize itself with the existing laws”.14)Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1, Award 16 May 2018, para. 494. jQuery("#footnote_plugin_tooltip_8972_14").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_14", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In Isolux v Spain, the tribunal states that an investor’s legitimate expectations can only be considered to have been violated if the new regulatory changes were not foreseeable by “a prudent investor”.15)Isolux Netherlands, BV v. Kingdom of Spain, SCC Case V2013/153, Award 17 July 2016, para. 781. jQuery("#footnote_plugin_tooltip_8972_15").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_15", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The different thresholds for a due diligence may yield different outcomes in determining whether this requirement has been sufficiently and properly performed by an investor for the purpose of an investor’s protection. This requires a more refined definition of due diligence that can be included in IIAs or the interpretative treaty documents.

The benefits of the inclusion of a requirement of due diligence processes in a treaty, in contrast to voluntary CSR codes, is that a due diligence is an operational risk assessment tool, which is widely used in other legal contexts such as commercial law or competition law. The mandatory human rights due diligence of companies has been also gaining prominence in the last decade.16)Global Business Initiative & Clifford Chance, Business and Human Rights: Navigating a Challenging Legal Landscape, 22 March 2019. jQuery("#footnote_plugin_tooltip_8972_16").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_16", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Initially, it has conceptualized through the work of the UN Special Representative on Business and Human Rights, John Ruggie, and currently finding its way in national and regional laws manding companies to perform due diligence processes in different sectors (e.g. the ‘UK Modern Slavery Act 2015’; France’s ‘duty of vigilance law’ of 2017; and Dutch ‘Child Labour Due Diligence Bill’, 2019 and EU regulations (on timber, conflict minerals and chemicals). By drawing from examples from other legal sectors, jurisdictions and fields of law, a careful drafting of the required investor’s due diligence processes, including specific steps in conducting such risk assessment procedures may benefit states and investors in early mitigation and the prevention of investment disputes.

References   [ + ]

1. ↑ Article 14, Brazil – Ethiopia BIT (2018). 2. ↑ Article 14, Brazil – Ethiopia BIT (2018); Article 15, Brazil – Guyana BIT (2018); Article 15, Brazil – Suriname BIT (2018). 3. ↑ Article 11, Belarus-India BIT (2018). 4. ↑ Article 7(4), Dutch Model BIT (2018); Art. 20, Morocco-Nigeria BIT (2016); Article 17(2), SADC Model BIT (2012). 5, 6. ↑ Article 14, Iran-Slovak Republic BIT (2016). 7. ↑ Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v. Republic of Kenya, ICSID Case No. ARB/15/29, Award 22 October 2018. 8. ↑ Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v. Republic of Kenya, ICSID Case No. ARB/15/29, Award 22 October 2018, para. 319. 9. ↑ SCC Case No. 062/2012, Charanne Construction v. Spain, Award 21 January 2016, para. 505. 10. ↑ For comprehensive analysis of the role of due diligence in the context of the FET standard, see: Y. Levashova, The Right of States to Regulate in International Investment Law: The Search for Balance between Public Interest and Fair and Equitable Treatment, International Arbitration Law Library, Wolters Kluwer, 2019 (forthcoming). 11. ↑ Article 7(3), Dutch Model BIT (2018). 12. ↑ Article 23, Dutch Model BIT (2018). 13. ↑ E.g. Biwater Gauff v. Tanzania, ICSID Case No. ARB/05/22, Award 24 July 2008. 14. ↑ Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1, Award 16 May 2018, para. 494. 15. ↑ Isolux Netherlands, BV v. Kingdom of Spain, SCC Case V2013/153, Award 17 July 2016, para. 781. 16. ↑ Global Business Initiative & Clifford Chance, Business and Human Rights: Navigating a Challenging Legal Landscape, 22 March 2019. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Micula Case: The General Court Quashes the Commission’s Decision and Rules that the Award is Not State Aid

Wed, 2019-06-19 03:49

Guillaume Croisant

In a striking new episode of the long-running Micula saga, the General Court of the CJEU has quashed the European Commission’s 2015 decision that Romania’s payment of the €178 million award rendered by an ICSID tribunal back in 2013 would constitute illegal State aid in the meaning of Article 107 of the TFEU. In its judgment rendered yesterday, the General Court considered that the award recognised a right to compensation for the investors existing before Romania’s accession to the EU. As a result, the Commission was precluded to apply EU State aid rules to this situation, at least with respect to the pre-accession period. The General Court’s decision can be appealed before the Court of Justice.

 

Background

In 2005, in the framework of the accession process of Romania to the EU, the country repealed incentives offered to certain investors in disfavoured regions in order to eliminate domestic measures that could constitute State aid incompatible with the acquis communautaire. Romania subsequently acceded to the EU on 1 January 2007.

Two of these investors, the Micula brothers (and their investment vehicles), launched ICSID arbitration proceedings on the basis of the 2002 Sweden-Romania BIT. In a majority award dated 11 December 2013, the arbitral tribunal ruled that Romania impaired the Micula brothers’ investments in breach of the fair and equitable treatment or the prohibition of expropriation clauses of the BIT. The investors were awarded c. €178 million, despite the claim of the European Commission, intervening as amicus curiae during the arbitration proceedings, that any ruling of the arbitral tribunal reinstating the privileges abolished by Romania, or compensating the investors for the loss of these privileges, would lead to the granting of new aid incompatible with EU State aid rules. Romania requested the annulment of the award before an ad hoc ICSID Committee, but its application was rejected on 26 February 2016.

Following partial payment of the award by Romania, the European Commission ruled on 30 March 2015 that such payment constituted illegal State aid. It precluded any further payment by Romania and ordered it to recover the partial payment that had been made. The Micula brothers filed an annulment application of this decision with the General Court of the CJEU.

In parallel, the Micula brothers lodged applications for recognition and execution of the arbitral award before national courts, including in Romania, Belgium, France, Luxembourg, Sweden, the UK and the US. Most of these courts stayed the proceedings, pending the General Court’s decision (by contrast, the Swedish Nacka District Court ruled that it was compelled to implement the Commission’s decision and to decline enforcement). Interestingly, in March of this year, the Brussels Court of Appeal made a preliminary ruling reference to the CJEU, requesting guidance on the interplay between the Member States’ contradictory obligations under EU State aid rules and the ICSID convention.

 

The General Court’s decision

In its ruling of yesterday, a five-judge bench of the General Court upheld the investors’ application and annulled the Commission’s 2015 decision, considering that EU State aid law was inapplicable and that the Commission had exercised its powers retroactively.

Indeed, all the events at stake (namely Romania’s adoption of the incentive measures, the investors’ acquisition of the licences enabling them to benefit from these incentives, the entry into force of the BIT, the revocation of the incentives and the initiation of the arbitration proceedings) took place before Romania’s accession to the European Union on 1 January 2007.

In this respect, after having recalled that “new rules apply, as a matter of principle, immediately to the future effects of a situation which arose under the old rule” (§83), the Court highlighted that, contrary to the Commission’s contention, “it cannot be considered that the effects of the award constitute the future effects of a situation arising prior to accession […], since that award retroactively produced definitively acquired effects which it merely ‘stated’ for the past, that is to say, effects which, in part, were already established before accession” (§84). It was merely the enforcement of a right that had arose in 2005, when Romania repealed the relevant incentives.

With respect to the intra-EU aspect of the applicable BIT (concluded between Sweden and Romania), the General Court further distinguished, very briefly, the Micula case from Achmea, ruling that “the arbitral tribunal was not bound to apply EU law to events occurring prior to the accession before it”, as opposed to the Achmea tribunal (§87).

The Commission also exceeded its powers with respect to the amounts granted as compensation by the arbitral tribunal for the period subsequent to Romania’s accession since, in its decision, it did not draw a distinction between the periods of compensation for the damage suffered by the applicants before or after accession (§91).

In addition, the General Court ruled that the contested decision was unlawful in so far as it classified the award as an aid within the meaning of Article 107 TFEU since, pursuant to the Court’s case law, compensation for damage suffered cannot be regarded as aid unless it has the effect of compensating for the withdrawal of unlawful aid, which was not the case here as EU State aid law is not applicable to situations pre-dating Romania’s accession (§§103-104).

The General Court’s decision remains subject to appeal to the Court of Justice.

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Open Positions: Assistant Editors of Kluwer Arbitration Blog

Tue, 2019-06-18 07:21

Crina Baltag (Acting Editor)

The Editorial Board of Kluwer Arbitration Blog announces the opening of the following positions with Kluwer Arbitration Blog: General Assistant Editor and Assistant Editor for Central Asia and East Asia.

 

The Assistant Editors report directly to the coordinating Associate Editor and are expected to (1) collect, edit and review guest submissions from the designated regions for posting on the Blog, while actively being involved in the coverage of the assigned regions; and (2) write blog posts as contributor. You have the opportunity to work with a dynamic and dedicated team and liaise with the arbitration community and various stakeholders. In the case of the General Assistant Editor, the focus will be global and involve coverage of several regions.

 

The Assistant Editors will work remotely. Please note that these are non-remunerated positions. If you are interested, please submit a resume and cover letter by email to [email protected], with cc to Dr Crina Baltag, [email protected]. The deadline for receiving the applications is 1 July 2019.

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Is Investor-State Arbitration Warming up to Security for Costs?

Mon, 2019-06-17 23:17

Chiara Cilento and Benjamin Guthrie

On April 29, 2019, an ICSID annulment committee broke new ground by upholding a tribunal’s order that a party post security for costs. This decision, in the case RSM Production Corp v. Saint Lucia, is the first time that an ad hoc committee has addressed whether the ICSID Convention and Rules grant tribunals such a power.  Although the decision is unpublished, it has been reported on by various outlets.  The committee is reported to have held that although the ICSID Convention does not expressly mention security for costs as a provisional measure that may be ordered, a tribunal’s power under the Convention in respect of provisional measures is broad enough to permit security for costs.  The committee further reportedly held that even if that were not the case, the tribunal’s action did not “manifestly” exceed its power given that other tribunals had also concluded they had authority to order security for costs.

In this post, we look at the significance of the ad hoc committee’s decision, and explore whether it heralds a new trend of ordering security for costs.  Following the RSM tribunal’s 2014 order (the first time an investment tribunal had ordered security for costs), another tribunal ordered security for costs in García Armas v. Bolivarian Republic of Venezuela; the ad hoc committee’s decision is a further step in the same direction.  However, while security for costs is plainly an issue that parties need to be aware of, it may be too early to say that it is the “new normal” in investment arbitration.

 

What is security for costs?

Security for costs is a type of interim measure which enables a party to post security to cover the legal costs associated with the arbitration (these may include, but are not limited to, attorney’s fees, tribunal fees, as well as administrative costs). Security for costs should not be confused with security for claims, which refers to the security posted for the substantive claims in the arbitration.

Security for costs is a form of interim measure typical in England and Wales and other Commonwealth jurisdictions, and is a commonly sought relief in arbitrations seated in such jurisdictions.  While security for costs has historically been less common in arbitrations in civil law settings, it appears to have become more common in the recent years.  In investor-state arbitration, security for costs was not historically granted until RSM.

 

The context of the ad hoc committee’s decision

The order of security for costs affirmed by the RSM ad hoc committee was hailed as groundbreaking when it was published in 2014.  No investment tribunal had previously issued such an order.  Moreover, neither the ICSID Convention nor the ICSID Arbitration Rules expressly grant a tribunal the authority to order security for costs—they empower the tribunal to impose provisional measures generally, but security for costs is not specifically listed as a provisional measure that may be imposed (see ICSID Convention Art. 47; ICSID Arbitration Rule 39).  The same is true of the ICSID Additional Facility Rules and UNCITRAL Arbitration Rules (see ICSID Additional Facility Arbitration Rule 46; UNCITRAL Arbitration Rules (2013) Article 26).

However, as the RSM tribunal itself observed, a number of ICSID tribunals opined as early as 1999 that they had the authority to order security for costs.  None actually exercised such a power, holding that it would only be warranted in exceptional circumstances that were not present in each case (¶¶ 52–53).

 

The RSM and García Armas cases

The RSM tribunal was the first to find that the exceptional circumstances warranting an order of security for costs were present.  It did so based on fairly atypical facts.  Prior to commencing arbitration against Saint Lucia, RSM had initiated two ICSID arbitrations against Grenada (RSM Production Corporation v. Grenada, ICSID Case No. ARB/05/14; Rachel S. Grynberg and others v. Grenada, ICSID Case No. ARB/10/6).  In both proceedings, RSM failed to pay required advances on costs and reimburse Grenada for costs advanced on its behalf, leading to discontinuance of annulment proceedings in one of the cases.

These past failures were front and center in the tribunal’s decision to order security for costs in RSM v. Saint Lucia.  The tribunal took them as evidence that RSM was unwilling or unable to pay the advances and that, as further evidenced by statements by counsel regarding RSM’s difficult financial position, RSM would likewise be unable or unwilling to pay an award of costs against it (¶¶ 77–81).  The tribunal also found it relevant that RSM’s claim was supported by a third-party funder, as the tribunal considered it doubtful that the funder would comply with an award of costs (¶ 83).

On June 20, 2018, four years after the order in RSM, the García Armas tribunal also ordered security for costs by ordering the claimants to provide security in the amount of US$ 1,500,000.  As mentioned above, this was only the second known time in which security for costs were ordered in an investor-state arbitration setting, and was also based on fairly atypical facts.  The claimants were ordered to produce their funding agreement with the third-party funding their case (¶ 2), which disclosed the fact that the funder would not cover an award for costs (¶ 25).  As a result, the tribunal ordered the claimants to produce evidence of their assets, to show that the respondent would have been able to successfully attach their assets in the event of an award for costs in favor of the respondent (¶ 7).  The tribunal finally found that the solvency of the claimants had not been sufficiently proved (¶ 250), and further opined that, taking into account all of the circumstances, the damage inflicted on the respondent by not awarding the security for costs would be greater than the damage caused to the claimants by ordering them to post the security (¶ 231).

 

Is security for costs still exceptional?

In short, the decisions to order security for costs in both the RSM and García Armas cases were based on facts that won’t be present in all investment arbitrations.  So while one might wonder whether the RSM annulment committee’s decision confirms a trend of increased willingness to order security for costs, the unique facts of these cases suggest that the decision may signify another step toward increased acceptance of security for costs, but perhaps not, by itself, an opening of the floodgates.  It is certainly a notable decision, however, particularly with respect to its ruling that ICSID tribunals have authority to order security for costs.

There has been substantial discussion about the relationship between third-party funding and security for costs.  Both the RSM and García Armas tribunals found third-party funding relevant to their decisions, as described above.  In RSM, moreover, Gavan Griffith authored an assenting opinion proposing that when a claim is funded by a third party, the burden should shift to the claimant to show why security for costs should not be ordered (¶¶ 11–18).  This position has not been universally adopted, but even it envisions that there are situations in which ordering a third-party-funded claimant to post security for costs is not appropriate, including when the claimant shows an ability to satisfy an adverse award of costs (¶ 16).

Eskosol S.p.A. v. Italian Republic is a further example.  In a 2017 order, the tribunal declined to order a third-party-funded claimant to post security for costs.  The tribunal held that it need not decide whether it had the power to make such an order because, even if it did, the exceptional circumstances that would warrant exercising that power were absent.  The key factor in the tribunal’s decision was that, although the claimant was bankrupt and there was no evidence its agreement with its third-party funder would require the funder to pay an award of costs, the claimant had taken out an insurance policy to cover the risk of an adverse award of costs (¶ 37).  This contrasts with the RSM case, in which there was no evidence that the funder would comply with an award of costs against the claimant, and García Armas, in which there was evidence it would not.  Eskosol shows that there are ways for third-party-funded parties to assuage concerns about whether an eventual award of costs will be honored – parties may wish give thought to these when commencing arbitration.

An additional development in this area are the proposed amendments to the ICSID Rules. In addition to the obligation provided by proposed Arbitration Rule 13 that the name of any third-party funder is disclosed to the Secretariat, proposed Arbitration Rule 51 provides that “[u]pon request of a party, the Tribunal may order any party asserting a claim or counterclaim to provide security for costs”.  If adopted, this latter rule would confirm tribunals’ authority to order security for costs.  But it would not mean that such orders are always appropriate.  In that regard, the proposed rule sets out a number of factors that a tribunal must consider, including the party’s willingness and ability to comply with an adverse decision on costs and the parties’ conduct.  While it does not expressly state that security for costs should only be ordered in exceptional circumstances, these factors are substantially the same those on which some tribunals are already relying, as illustrated by the cases discussed above.

 

Conclusion

In sum, recent years have seen steps toward a greater role for security for costs in the investment arbitration regime.  The rise of third-party funding is playing a role in that.  But it is perhaps too early to say that orders of security for costs are the norm – the decisions of tribunals both granting and denying security for costs suggest that particular circumstances are required.

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State Parties in Contract-Based Arbitration: A Report from the 16th Annual ITA-ASIL Conference

Sun, 2019-06-16 20:47

Isabella Bellera Landa

On March 27, 2019, Washington, D.C. hosted the 16th annual ITA-ASIL Conference discussing the impact of State parties in contract-based arbitrations.  Also known as private-public and “investomercial” arbitration, this genre of arbitration has recently grown due to, among other things, privatization processes, concession agreements, as well as conditions imposed by lenders and insurance companies.

Providing insight on the differences and similarities between treaty-based investment arbitrations and contract-based arbitrations involving State parties, speakers highlighted seminal cases that illustrate the particularities of a State’s involvement in commercial disputes and provided recommendations vis-à-vis investment protections.  Conference co-chairs Mélida N. Hodgson (Jenner & Block) and Prof. Dr. Stephan W. Schill (University of Amsterdam) led the event, which featured as speakers the Honorable Charles N. Brower (Judge ad hoc, International Court of Justice), Abby Cohen Smutny (White & Case), Catherine M. Amirfar (Debevoise & Plimpton), Professor Julian Arato (Brooklyn Law School), D. Brian King (arbitrator), Nathalie Bernasconi-Osterwalder (IISD), Professor Laurence Boisson de Chazournes (University of Geneva), Bart Legum (Dentons), Hugo Perezcano (CIGI), and Martina Polasek (ICSID).

The ICC reports that in 2017 the number of States and State entities that were parties to ICC arbitral proceedings rose to over 15 percent (from 11 percent in 2016).1) 2017 ICC Dispute Resolution Statistics, ICC Dispute Resolution Bulletin 2008 – Issue 4, at 9. jQuery("#footnote_plugin_tooltip_5888_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5888_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  Martina Polasek of ICSID noted that, while the number of contract-based arbitrations before ICSID has remained steady over the years, at 16 percent of its cases, ICSID has witnessed an increase in the number of arbitrations commenced under multiple sources of jurisdiction.  An increase in contract-based arbitrations may be on the horizon for ICSID, particularly if the new rules providing for expedited procedures are adopted.

While these statistics show the growth of private-public arbitration, they do not shed much light on the procedural and substantive implications resulting from the presence of States and State entities in contract-based arbitrations.  As Judge Brower argued, contract-based disputes involving States or State-owned entities are closer in kind to investment treaty arbitrations than those only involving private parties.  Judge Brower suggested we should refer to these proceedings as “investomercial arbitration” because “commercial arbitration” is not an adequate term to define them.  At the crux of this distinction, in Judge Brower’s opinion, are the political sensitivities involved in these proceedings, as well as the State’s exercise of public authority.

Many of the speakers addressed these substantive and procedural implications caused by a State’s involvement in a commercial arbitration.  Abby Cohen Smutny, for instance, explained that Judge Brower’s position is a reminder that foreign investors are not only looking for a neutral forum, but also may want to incorporate international law to resolve potential disputes against sovereigns.  Relatedly, Professor Laurence Boisson de Chazournes emphasized that there is a “blurring of the lines” with respect to the applicable law in private-public arbitration.  In this regard, Professor Boisson de Chazournes referred to how certain domestic legal systems, such as France, directly incorporate international law obligations within the limits of their national constitutions.

From a practical perspective, the panel discussions evidenced the need for the arbitration community to reach a consensus, or at least to provide additional insight into the scope of the application of international law to private-public arbitration.  Professor Julian Arato, for example, inquired whether “applying international law” merely leads to the application of general principles of international law such as pacta sunt servanda, or whether it would entail that “the entire iceberg” of international law would be brought into the dispute.  In Professor Arato’s view, since reasonable minds can disagree on this question, decisions on this issue are likely to diverge and create uncertainties to contracting parties.

Counsel and arbitrators might also encounter complexities in this genre of arbitration even when they apply the domestic law of a contract to resolve a dispute.  Indeed, as stated by Bart Legum, private-public arbitrations might raise complex public law issues in situations where the law of the underlying contract is that of a civil law jurisdiction.  Specifically, he questioned whether in that scenario, parties may be entitled to argue sophisticated jurisprudence developed by other civil law jurisdictions, i.e., France, to support their position under the law of the contract, even when the courts of such State do not regularly follow such jurisprudence.

Of course, parties may resort to the principle of party autonomy to resolve uncertainties.  In this regard, D. Brian King called for “smart contractual drafting” to protect contracting parties.  Specifically, he recommended including stabilization clauses, as well as indemnification and force majeure provisions to investment contracts to minimize risks.  With regard to stabilization clauses, Nathalie Bernasconi-Osterwalder referred to John Ruggie’s commentary to argue that stabilization clauses are typically broader in contracts signed by non-OECD countries.  She also left open questions with regard to an arbitrator’s role vis-à-vis long-duration stabilization clauses and the need for environmental protection, as well as the dismantlement of laws enacted by non-democratic governments.

The particularities of private-public arbitration may also have procedural implications.  In this regard, Catherine M. Amirfar explained that the presence of a sovereign affects the proceedings from start to finish.  Among other things, she observed that a sovereign’s presence in a proceeding might make settlements more cumbersome because of the commitment of public funds and conflicting internal political interests.  Moreover, she noted that it could create difficulties vis-à-vis the recognition and enforcement of an award, including due to divergent interpretation of the public policy exception under the New York Convention.

One speaker took a contrary view regarding the complexities of public-private arbitration and argued that this debate is not necessary and there is no such thing as “investomercial arbitration”.  Hugo Perezcano voiced his disagreement with most of the points raised during the day, including on any similarities between treaty-based arbitrations and private-public arbitrations.  In his view, these types of arbitrations arise from different causes of actions and applicable law.  He further recommended any parties concerned with certain domestic laws to choose a different applicable law for their contracts.

In the author’s view, some investors – particularly sophisticated ones with large bargaining power – may increasingly seek to enter into contractual agreements with States to protect their investments.  This will be particularly true if: (i) the investor’s alternative is a dispute settlement mechanism where claimants will be afforded less autonomy i.e., as with a permanent investment court; and/or (ii) States are more amenable to negotiate investor protections on a case-by-case basis, as opposed to relying on blanket protections provided under investment treaties.  Such facts will likely cause an increase in the number of private-public arbitrations before the ICC, ICSID, and other arbitral institutions.

We might, therefore, be witnessing only the beginning stages of this debate.  It is the author’s view that this debate must be careful not to generalize all disputes involving sovereigns or their state entities as being identical.  Moreover, it is necessary to acknowledge that States face specific social, political, and economic circumstances when they decide to attract and protect investments and are free to decide, for example, that certain state-owned entities should be independent and enter into purely commercial transactions.  In addition, the author considers that this debate should further provide greater innovations to protect smaller foreign and national investments where the investors may lack the bargaining power to do so.  This is critical since the availability of greater protections for these kinds of investors might facilitate additional capital flows into developing countries.  “Investomercial” or not, these disputes are likely to increase and create new challenges for both counsel and arbitrators.

References   [ + ]

1. ↑ 2017 ICC Dispute Resolution Statistics, ICC Dispute Resolution Bulletin 2008 – Issue 4, at 9. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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