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The House Always Wins Remarks on AG Wathelet’s Opinion in the C-284/16 Achmea Case

Wed, 2017-11-22 02:52

Elżbieta Buczkowska, Patrycja Treder and Wojciech Sadowski

The Opinion delivered on 19 September 2017 by Advocate General Wathelet in the case C-284/16 Achmea has already been widely commented on in the international arbitration community. The views are either critical or approving, but so far, they have mostly been focused on whether a particular legal point made by the Advocate General was right or wrong.

In this post we propose taking a different approach. We see the Opinion in the Achmea case as a game-changer and a turning point in the approach that the European Union may be taking towards investment treaty arbitration. As a consequence, we submit that focusing on individual detailed aspects of the Advocate General’s Opinion may be off the mark. The Opinion is a one-package deal and it should be considered as a whole.

The simple reality is that the EU institutions can in principle take one of the two contrasting approaches to intra-EU investment treaty arbitration. They can either delegalize it or approve it.
The first approach had so far been pursued by the European Commission. In this respect the Commission insisted that the Member States should terminate intra-EU bilateral investment treaties and also prosecuted some of them for failing to do so. The European Commission in addition purported to intervene before investment treaty tribunals in numerous intra-EU investment treaty arbitrations or oppose the enforcement of certain intra-EU awards.

These efforts cost time, resources and money. Moreover, as it was rightly pointed out by Advocate General Wathelet in the Achmea opinion, the legal position of the European Commission and certain Member States opposing the validity of the intra-EU treaties was seriously flawed and their approach lacked coherence. Another key factor for consideration is that none of the investment treaty tribunals confronted so far with the objections against the validity of the intra-EU BITs actually found for the European Commission. The European Commission, it transpires from between the lines of the Advocate General’s reasoning, was fighting a lost cause.

The sentiment across the European Union has also changed since 2015. In addition to Brexit, numerous other cracks have appeared in the European structures. Adherence to the rule of law principle by certain Member States has been doubted. The independence of national courts, which are the primary channel of enforcement of the EU rules and principles, has come under attack in some Member States. Even the Court of Justice of the EU recognized that in certain matters (if only exceptional), the principle of mutual trust between courts in different Member States can be suspended. In other words, it now seems that the intra-EU investment treaty arbitration may still have a vital role to play also in the intra-EU dimension as the private enforcement mechanism of fundamental economic freedoms.

So what the Advocate General Wathelet actually does in the Achmea Opinion is to propose a radical departure from the line previously defended by the European Commission. The proposed deal is to recognize the conformity of the intra-EU bilateral investment treaties with the EU law. As any deal, however, it comes at a price.

The price is to subject intra-EU investment treaty tribunals to the fundamental principles of the EU law, and ultimately, to the supreme jurisdiction of the Court of Justice of the European Union. The Advocate General purports to achieve this objective in three steps.

Firstly, he proposes to recognize that neither the intra-EU bilateral investment treaties, nor the investor-state dispute resolution clauses contained in these treaties, are against the EU law. This ‘legalization’ of intra-EU investment arbitration is a pragmatic necessity, and a logical requirement for the proposed deal. Legal purity of reasoning in the Opinion on this point, accordingly, should be neither expected nor required, although admittedly, most arguments given by the Advocate General are compelling.

Secondly, the Advocate General proposes to recognize investment treaty tribunals as the “courts or tribunals of the Member States” in the sense of Article 267 TFEU. This principally means that the intra-EU investment treaty tribunals should be entitled to refer questions on the validity or interpretation of the EU law to the Court of Justice of the European Union.

What the Advocate General’s Opinion does not spell out expressly, however, is that such investment treaty tribunals should also be regarded as the courts or tribunals against whose decisions there is no judicial remedy under national law in the sense of Article 267 third indent TFEU. This means that the investment treaty tribunals should actually be obliged to refer such questions to Luxembourg.

This implies that in the Advocate General’s proposal, investment treaty tribunals would have to recognize the supreme jurisdiction of the European Court of Justice and follow the answers they receive.

Thirdly, the Advocate General is clear that if investment treaty tribunals want to operate in the intra-EU context, they will have to recognize the supremacy of the EU law, including over the bilateral investment treaties, and the supremacy of the European Court of Justice. This plea was made openly in para. 134 of the Opinion:

“In that case, [i.e. if they are courts or tribunals of a Member State in the sense of Article 267 TFUE – annotation added] the arbitral tribunals are required — and if they failed to do so their awards would be null and void on the ground that they would be contrary to public policy — to respect the principles set out by the Court […], including, in particular, the primacy of EU law (99) over the laws of the Member States and over every international commitment given between Member States, the direct effect of a whole range of provisions applicable to their nationals and themselves, mutual trust between them in the recognition of common values on which the Union is based and the full application of and respect for EU law.”

If the Opinion of the Advocate General is accepted by the Court, the choice before the investment treaty tribunals in Europe will be a hard one. They will have to agree to the terms and conditions of this licence to practice investment treaty arbitration in the EU as proposed by the Advocate General, and thus accept the limitations of their own supremacy and independence. Otherwise, the courts of the Member States of the EU will have clear instructions to set aside, or refuse the enforcement of non-conforming awards.

Either way, under the Advocate General’s proposal, the House always wins.

***

This post is an abridged version of a forthcoming publication on the same topic which should be finalized in the next months.

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M&A Arbitration: Pre-Closing Disputes and Letter of Intent

Mon, 2017-11-20 18:54

Nahila Cortes

The complexity of M&A

In recent years there has been an increase in M&A disputes. These are often complex because the underlying dispute can involve complicated business transactions between big companies that merge, are acquired, or form a joint venture. And more importantly, they can have a significant impact on the market (for example, the recent deal of United Technologies to buy Rockwell Collins amounted to US$30 billion).

In the context of the Argentine path to recovery from years of economic crisis and recession -which led to countless claims from foreign investors against the state- it is expected that there will be an increase in M&A, and foreign investors are likely to participate in these proceedings. Since the Argentine market seems to be gaining strength again, it is worth taking a close look at disputes that might arise in the context of international M&A disputes and how international arbitration can play a role to resolve them, especially when they arise at an earlier stage of the transaction.

Pre-closing disputes

The entire process of an M&A transaction can last several months, starting from the early negotiations until the end of the survival period or the expiration of statute of limitations. The parties involved in the transaction may initiate disputes based on different causes of action that are generally related to representations and warranties, earn out clauses, price adjustment provisions, indemnity clauses, and put and sales options, which arise at a post-closing phase.

However, disputes can also arise during the pre-closing phase. Such disputes are generally related to the breach of confidentiality or exclusivity provisions agreed in pre-contractual documents, or to other provisions and obligations arising out of the letter of intent (hereinafter “LOI”).

Concerning the LOI, it could be the source of conflicts at the early stage of the M&A. The LOI is commonly understood to be non-binding document, used to express a tentative intention of the parties to enter into negotiations or to pursue negotiations for the conclusion of a contract. If signed, this document will govern throughout the negotiation stage until the final execution of the contract.

Yet, the binding effect of the LOI is controversial. Although the parties generally state therein that their sole intention is to outline their will by stating “this LOI has no binding effects” or “they are subject to a contract,” most LOIs might probably have legal implications that arise from (i) the intention of the parties, (ii) the laws that governs the LOI, or (iii) a court decision that could impose binding obligations although they were not foreseen by the parties.

In this context, the first question that arises is whether the LOI is really a non-binding document and whether the parties must comply with minimum duties during the pre-contractual stage. Since there is not a uniform way to approach this matter, the parties negotiating a LOI in cross border transactions should acknowledge the degree of enforceability of the LOI according to the applicable law to it.

In Argentina, the Civil and Commercial Code (“C&CC”) expressly states that the LOI is an instrument by which a party, or all the parties, express their consent to negotiate over issues related to a future contract. Under the C&CC the LOI is subject to a restrictive interpretation, and it will have the binding effects of an offer if it fulfills the necessary requirements to be considered as such. Moreover, under Argentine law the parties have the duty to negotiate in good faith (sections 9, 961, and 991 C&CC) as well as the duty to inform, to protect confidential information, and to cooperate between the parties.

On the other hand, in common law jurisdictions the issue of the binding effect of the LOI is complex, and in the case of the U.S., there is no uniformity among States. In principle, the LOI is an agreement to enter into negotiations with no binding obligations arising out of it, however, depending on the jurisdiction, the courts may determine that the parties are bound by their terms by looking to the language of the LOI or to the conduct of the parties.

Regarding additional duties imposed to the parties that were not expressly agreed, the Uniform Commercial Code (“UCC”) and the Restatement (Second) of the Law of Contracts state that the duty to negotiate in good faith only applies in the contractual stage and the parties could waive it. However, U.S. case law shows that the different States have yet to reach a uniform ground regarding the enforceability of the duty to negotiate in good faith. Some states recognize this duty, such as Pennsylvania (see Bennet and Chanel Home Centers Div.), Delaware (see SIGA Technologies), and New York (See Vacold LLC); others do not.

Having said this, the binding effects of the LOI will be determined on a case-by-case basis and it is likely that litigious matters related to it may appear. In this context, the second question that arises is whether an arbitration clause included in the LOI is enforceable. Fouchard, Gaillard, and Goldman explain that an international arbitration agreement is an agreement in which two or more parties agree that a dispute which has arisen, or which may arise between them, and which has an international character, shall be resolved by one or more arbitrators. Shortly, the parties contractually agree to submit the dispute or the future disputes to an arbitral tribunal excluding the state courts jurisdiction.

The enforceability of the arbitration clause will depend on its validity as analyzed under the applicable rules. According to the 1958 New York Convention, the validity of the agreement will be analyzed under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made (Article V.1.a).

In the event that the arbitration agreement is governed by Argentine law, the C&CC will govern its formalities and substance. Section 1650 of the C&CC states that the arbitration agreement should be in writing and consented by all the parties. It could be included in a contract, in an independent agreement, in a bylaw, or in a rule of procedure.

Hence, under Argentine law, an arbitration clause included in an LOI will be enforceable, provided that all the parties consent to it. In the event there is a unilateral LOI, the other party will have to unconditionally accept the terms of the LOI including the arbitration clause. In the U.S., the situation will be similar. Notwithstanding the non-binding nature, we must keep in mind that the arbitration clause inserted is severable from the underlying contract or document in which it is contained. Therefore, a dispute under the LOI containing an arbitration clause should be resolved by arbitration.

Drafting arbitration clauses in an LOI

It is important to bear in mind that if the parties decide to include an arbitration clause in their LOI, the drafting will play an important role. Poorly drafted clauses may be unenforceable or cause unnecessary delays. That is why parties may want to analyze the type of clause they will insert, and it will depend, among other things, on the type of binding provisions agreed to in the LOI, the amount of money involved, the structure of the transaction, and the stage of the pre-closing phase in which the clause will have effects.

There are many elements to consider when drafting the clause (see the IBA Guidelines for drafting arbitration clauses). For a clause to be inserted in an LOI, the following elements should at least be considered, since at this stage of the M&A the parties might not want to spend a lot of time and money in the dispute or might want to reconduct their relationship.

First, the expedited procedure provided in ICC rules, as well as in other institutions such as SIACHKIACSCC is a good option to expedite the resolution of the dispute and reduce costs. A fast resolution could help the parties to reconduct negotiations. Also, this procedure will be effective when the transaction involves a small amount of money, or if that is not case, when there are not many and fundamental binding provisions in the LOI.

Second, a multi-tiered clause is also another good element to include providing for mediation, negotiation or other form of alternative dispute resolution, before resorting to arbitration. This will give the parties an opportunity to settle their claims in a less “litigious” environment and reconduct their transaction.

Third, the scope of the arbitration clause should not be limited, unless there are very good reasons to do it. Since it is hard to foresee all the types of disputes that can arise at the negotiation phase of M&As, it is better to keep it simple and broad. As stated in the IBA Guidelines, less inclusive language invites arguments about whether a given dispute is subject to arbitration.

Conclusion

M&A transactions are complex. Although many disputes arise after the closing, they can also come up during the pre-closing phase. The LOI is commonly used by the parties to express their intention, and in principle is a non-binding document. Notwithstanding this, depending on the applicable law and the jurisdiction, it is likely that provisions will be considered as binding. In this sense, resorting to arbitration to solve the dispute is a possibility and a good option. However, the parties must be careful in the drafting in order to adequate the dispute provisions to the structure of the transaction and have an effective clause aligned with their intentions.

*The views expressed herein are the views and opinions of the author and do not reflect or represent the views of Allende & Brea or any other organization to which the author is affiliated.

 

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Revisiting the Chagos Decision: Search for a Rationale

Mon, 2017-11-20 06:00

Ritwik Bhattacharya

In 2012, the Permanent Court of Arbitration [“PCA”] in the  Chagos Decision entertained a challenge to an arbitrator’s impartiality in an inter-state arbitration between Mauritius and the United Kingdom (“UK”) (analyzed here) . The PCA had to decide the appropriate standard for impartiality of arbitrators, and in the process, deal with the novel question of whether inter-State arbitration should be considered more like private commercial arbitrations or State-to-State permanent tribunals (like the International Court of Justice (“ICJ”) or the International Tribunal for the Law of the Sea (“ITLOS”)). While it decided in favour of the standard applicable to the latter, this post will examine whether the Tribunal’s decision is supported by a clear rationale.

 

The Two Viewpoints and the Tribunal’s Decision

Mauritius argued that inter-State arbitration should be treated like any other arbitration. Thus, the higher standard of appearance of bias was “applicable to all arbitrations,” and there was “no justification in law or policy for a different or lower standard of arbitral ethics in inter-State arbitrations.” It further argued that inter-State arbitration could not be considered akin to State-to-State permanent tribunals like the ICJ or the ITLOS for three reasons: first, the views of a particular judge carry far lesser weight in the ICJ or the ITLOS as the number of judges is higher; second, judges of the ICJ or the ITLOS are elected as opposed to being appointed in inter-State arbitrations and third, the likelihood of a dispute involving the home state of the elected judge in the ICJ or the ITLOS is very small.

The UK considered any reliance on the law and practice applied in international commercial and investment protection arbitrations to be “misleading” and “wrong” since inter-State arbitration does not involve “repeat arbitral appointments, whether by the same party or by the same law firm; potential for influence where arbitrators may be perceived as worrying about where their next appointment will come; [and] cross-overs, where individuals repeatedly switch between the roles of counsel and arbitrator […]”. It argued that the standard derived from the rules and practice of the ICJ and the ITLOS, which envisages a lower threshold, should be applied.

The Tribunal supported the UK’s viewpoint. In doing so, the Tribunal did not consider that the principles “developed in the context of international commercial arbitration and arbitration regarding investment disputes” had any relevance to the present dispute. To buttress its conclusion, it relied on the UK’s argument regarding inter-State arbitration being an alternative to the ICJ and the ITLOS, stating that “it cannot have been the intention behind that framework that different conditions would apply to the independence and impartiality of adjudicators in the third forum (arbitration under Annex VII) in comparison with the ICJ or ITLOS.”

 

The Search for a Rationale

The Tribunal did not directly address the submissions made by Mauritius and the UK about why inter-State arbitration should be treated like international commercial arbitration/investor-State arbitration, and State-to-State permanent tribunals respectively.

The Tribunal’s only reason was that inter-State arbitration in the instant case was an alternative to the ICJ and the ITLOS, because of which different rules cannot apply to impartiality and independence of arbitrators. First, it is not always necessary that inter-State arbitration is presented as an alternative to the ICJ or the ITLOS. It is possible for inter-State arbitration to exist as a standalone option, say in a Friendship, Commerce and Navigation (“FCN”) Treaty, where this reasoning is not tenable. Second, in any event, it is not necessary that alternative options for dispute resolution must be subject to the same procedural constraints. This was explicitly pointed out by Mauritius when it said that the mere availability of three alternative judicial bodies “doesn’t meld them or merge them in their procedures. There is no common set of procedural rules for bodies exercising jurisdiction under Part XV. […] To take an example, there is no provision for intervention before Annex VII Tribunals. There are different provisions for intervention before the court and before ITLOS.”

It is also not clear why the standard in international commercial arbitration/investor-State arbitration is irrelevant in the present case. In paragraph 151, the Tribunal recognized that the standard for impartiality in the PCA’s Optional Rules, while not adopted by the parties to the dispute, “has been adopted in a number of PCA administered arbitrations” and “can be considered to form part of the practice of inter-State arbitral tribunals.”  The explanatory notes to the text of the PCA’s Optional Rules clearly state that they “are based on the UNCITRAL Arbitration Rules,” with certain modifications. The articles to which such modifications have been made are enumerated in the notes to the text at page 64. None of the modifications concern the standard of impartiality under Rule 10, PCA’s Optional Rules. Therefore, it can be inferred that decisions applying UNCITRAL rules and supporting the appearance of bias standard, would arguably be relevant to the standard of impartiality, even in inter-state arbitrations.

Lacking a clear rationale by the Tribunal for its decision, some authors have speculated what the rationale behind this decision could be. Annalise Nelson has stated that a potential rationale could be the “diplomatic culture or sensitivity that pervades inter-State disputes and sets them apart from other forms of arbitration.” This, combined with the low frequency of inter-State arbitrations, means that “arbitrators are therefore less likely to focus their careers and income streams around securing future state-to-state arbitration appointments than other kinds of arbitration.” That, by itself, is not a very strong reason since it does not explain why the perception of the integrity of the dispute resolution process is any less important in an inter-state arbitration. Furthermore, it could be argued that an arbitrator could potentially be seen as favouring a State in inter-State arbitrations, so as to procure future appointments in other kinds of arbitrations.

 

A Question of Practicality

Some authors have focussed on more practical considerations that may have played on the mind of the Tribunal. Chiara Giorgetti posits that the decision to employ a low threshold for impartiality was taken deliberately to disincentivise challenges to arbitrators, which have become common and unnecessarily increase the cost and length of arbitration proceedings. Annalise Nelson argues that if a stringent threshold is applied, it will make it difficult to find arbitrators, as most arbitrators who are appointed in inter-state arbitrations tend to come from “a tiny pool of candidates.” These practical considerations need to be weighed against the strong principle of preserving the integrity of the judicial decision-making process where justice should not only be done but should manifestly and undoubtedly be seen to be done. Further, the practical implications of this decision must also be considered.

Broadly, there are three impacts that flow out of the Chagos Decision. First, while the Tribunal disregarded the appearance of bias standard, it did not provide an alternative standard beyond stating that there must be no prior involvement in the subject matter of the case and there must not be justifiable doubts about the impartiality of the arbitrator. Lack of prior involvement in a subject matter cannot be the only criterion for bias. The “justifiable doubts” standard is an unhelpful truism since it does not provide any guidance as to what conditions can lead to these “justifiable doubts.” Therefore, as one author has noted, “the contours of the applicable standard adopted remain unclear.” Second, challenges to arbitrators will undoubtedly reduce. While this will help in saving time and costs in arbitration, it also means that parties will deter from challenging arbitrators in legitimate cases. In the Chagos Decision, Mauritius was careful to repeatedly emphasise its “respect for the probity and standing of Judge Greenwood.” However, parties must now show that the concerned arbitrator is actually biased, which can prove detrimental from a strategic viewpoint if the challenge fails and arbitrator proceeds to adjudicate the case. Third, a practical consequence peculiar to inter-state arbitration would be the likelihood of state parties considering the arbitration as illegitimate and refusing to accept its consequences, as can be seen in the case of China in the South China Sea. This danger is more aggravated in the context of inter-state arbitral awards since no direct enforcement mechanism exists and this can potentially undermine the faith in inter-state arbitration as a viable means of dispute resolution. For the sake of clarity of the law and viability of inter-state arbitration as a dispute resolution mechanism, it is imperative that appearance of bias threshold be applied even to inter-state arbitrations or in the alternative, compelling reasons be provided for applying a lower threshold.

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A New, BLEU-based Objection to Intra-EU Energy Charter Treaty Claims

Sat, 2017-11-18 23:24

Danilo Ruggero Di Bella

Currently, several dozen arbitral claims have been lodged by investors from an EU Member-State against another EU Member-State based on the Energy Charter Treaty (ECT). These so-called intra-EU ECT-based arbitrations seem to be increasing, despite attempts by the European Commission to halt them. So far, neither the Respondent-States nor the Commission (as amicus curiae) have succeeded in convincing an arbitral tribunal of intra-EU jurisdictional problems with such claims.

This post argues a new potential objection to intra-EU ECT-based claims based on is the parallelism between the ECT and the Belgo-Luxembourg BITs, or in other words, between the superseded European Economic Community (EEC) and the Belgo-Luxembourg Economic Union, coupled with the principle of systematic integration. To understand this comparison, it is first necessary to recall the background of these treaties.

The 1957 Treaty of Rome set forth in article 210 the international legal personality of the EEC and granted the Commission competence to conclude treaties in name of the EEC. In 1991, the Commission signed, on behalf of the EEC (and also the ECSC and the EURATOM), the European Energy Charter – the treaty establishing the ECT’s political foundations – whose signature is a precondition for joining the Energy Charter Conference and acceding to the ECT. In 1993, following the entering into force of the Maastricht Treaty, the European Union (EU) was established and the European Economic Community became the European Community (EC) to reflect its new wider scope of action. Consequently, in 1994 the ECT was signed as a mixed agreement by the Commission on behalf of the back then European Communities – the ECSC, the EURATOM, and the EC – and by the Member States, falling the Energy Charter Conference related areas within the mixed competence. Once the Treaty on the Functioning of the EU (TFEU) entered into force in 2009, the EU replaced and succeeded the EC by amending the EEC Treaty and relabeling it as the TFEU. Nowadays, of the three Communities that signed the ECT in 1994, only EURATOM is still operating and is a Contracting Party to the ECT just as the EU is.1)BALTAG Crina, The Energy Charter Treaty: The Notion of Investor, Kluwer, 2012, p.57-63. jQuery("#footnote_plugin_tooltip_2715_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2715_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); All the way from the drafting of the European Energy Charter to the negotiation of the ECT, the role of the European Commission has been crucial to the ECT’s adoption and entrance into force in 1998. The three European Communities, on one hand, as well as, the EU and EURATOM, on the other, when signed and entered into the ECT, respectively, did so as a Regional Economic Integration Organisation (REIO) pursuant to article 38 of the ECT, which allows REIO to become a Contracting Party to that treaty. Simultaneously, the EU Member-States signed and ratified the ECT (the value of these signatures and ratifications will be put in perspective down below through the lens of the Belgo-Luxembourg BITs).

Let us turn now to the intriguing Belgo-Luxembourg Economic Union (BLEU). The BLEU was constituted in 1922 by the entrance into force of the 1921 Convention establishing an Economic Union between Belgium and Luxembourg. This Convention established a Regional Economic Integration Organisation primarily based on a common external trade-investment policy and customs-excises union – where the territories of the Member-States are to be considered as forming one single territory –, and on a monetary association, too. Overtime the 1921 Convention has been adapted to the new circumstances – such as the founding of the Benelux Economic Union, the EEC and, later, the EU – through Protocols up to the negotiation of a new Convention, which entered into force in 2005. The new Convention confirmed and strengthened the preferential relations between Belgium and Luxembourg within the legal framework of the BLEU2)SOMERS Eduard, Belgium-Luxembourg Economic Union, Max-Planck. jQuery("#footnote_plugin_tooltip_2715_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2715_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This preferential relation is acknowledged by the Benelux and the EU in Article 94 of the Benelux Treaty and Article 350 of the TFEU, respectively. The EU recognizes so much the special bound between Belgium and Luxembourg that at times it considers the Belgo-Luxembourg Economic Union as a single Member-State (e.g., the “whereas (2)” of the EC Regulation No. 2771/1999). As regards the institutions of this Economic Union, they closely recall the structure of the EU itself for their functions as well as their names. The BLEU is, indeed, administered by the Mixed Administrative Commission, that is entrusted with tasks similar to those of the European Commission, being the executive arm of the Economic Union and ensuring on a permanent basis the application of the Convention and a regular liaison between the Governments of the two Member-States. Whereas the Council of the European Union closely resembles the BLEU’s Committee of Ministers, which is regularly summoned to adopt legal instruments, and coordinate common policies, just as the Ministers do in the Council. And just like the EU Commission proposes the legislation to be adopted by the Council of the EU and the EU Parliament as well as supervises its application, the BLEU Commission prepares proposals to be submitted to the Committee of Ministers for decision making, and oversees the implementation of the Convention.

It is noteworthy that, long before the EU, the BLEU has guaranteed nationals of its Member-States – both natural and juridical persons – freedom of movement and establishment, equal treatment in respect of the exercise of professional occupations and salaried employments.

As the similarities highlighted above make clear, although it is well-known that the Benelux is presumably the forerunner of the European Economic Community, the true forerunner of the Benelux (and consequently of the EEC, the EC and the EU) is the Belgo-Luxembourg Economic Union itself.

Investment protection is one of the BLEU’s areas of action, conducted through a peculiar bilateral investment treaty model, that is usually offered to the prospective third High Contracting Party for its acceptance (a third Party with respect to the Union). On behalf of the Economic Union, the BLEU has entered into approximately 100 BITs. Now, these Belgo-Luxembourg BITs concluded by the BLEU share many of features with the ECT concluded by the EU, primarily for two reasons:

1) the EU and the BLEU are both Regional Economic Integration Organizations (undoubtedly, as illustrated above, with a lot in common, as one inspired the other);

2) the way these treaties have been negotiated, signed and ratified by the Parties (as explained below).

Due to the mixed nature of the competences necessary to authorize its entrance into force, the ECT was negotiated, signed and ratified by the EU Commission on behalf of the EU, by each EU Member-State and, of course, by third State Parties. Curiously enough, BLEU BITs are no exception to it, and not only vis-a-vis Luxembourg. Again, because of the very same reason (the mixed nature of the competences necessary to authorize their entrance into force), BLEU BITs are signed not only by the representative of the Economic Union, but also by representatives of Luxembourg, Belgium, and by representatives of each Belgian region. The fact that a region of Belgium signs a BIT does not give that region an independent legal standing under that treaty, of course. After the signature, Luxembourg and Belgium are each responsible to ratify the BIT to ensure its implementation. Hence, in our parallelism, the signature of the representative of the Economic Union is comparable to the EU Commission’s signature in the ECT, whereas the signature of the representative either of Walloon Region or Luxembourg is equivalent to the signature of Italy or Spain representatives on the ECT.

So, if it is clear that a Belgian investor cannot rely on a BLEU BIT to file an arbitration against Luxembourg, why is it not equally clear that a French investor may not resort to the ECT to launch an arbitration against Italy? It flows from the above mentioned analogy that this ought not to happen. After all the BLEU has significantly influenced the shape of the EU and its activities, so why should this influence have been absent during the drafting and signing of the ECT? That’s why it is sensible to suggest that the ECT should be read in the light of the older and consolidated BLEU BITs tradition to prevent intra-EU arbitrations just like intra-BLEU arbitrations.

Avoiding inconsistencies in international law – resulting from allowing intra-EU arbitrations while denying intra-BLEU arbitrations – calls for cross-applying the principle of systematic integration to Economic Integration Organizations in investment arbitrations. Tribunals have frequently construed the particular international investment agreement (IIA) at issue based on other IIAs in a manner that brings coherence to the system of investment law. The weight accorded to other treaties in understanding the applicable IIA may be seen as proportionate with the degree of similarity among equivalent texts. Accordingly, given the high affinity between the ECT and the BLEU-BITs, when interpreting the status of the EU or its Member-States under the ECT, BLEU BITs may offer interpretative guidance as to the legal standing of an Economic Integration and its Contracting Parties to an IIA by contextualizing and redefining their peculiar contours.

References   [ + ]

1. ↑ BALTAG Crina, The Energy Charter Treaty: The Notion of Investor, Kluwer, 2012, p.57-63. 2. ↑ SOMERS Eduard, Belgium-Luxembourg Economic Union, Max-Planck. 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: Compendium of International Commercial Arbitration Forms
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Access to Justice: Rebalancing the Third-Party Funding Equilibrium in Investment Treaty Arbitration

Fri, 2017-11-17 22:02

Ylli Dautaj and Bruno Gustafsson

Third-party funding remains a hot topic in arbitration, which is understandable considering its complexity and that its accompanying issues often have major implications for arbitral procedure. This fall, the ICCA-Queen Mary Task Force on third-party funding in international arbitration released its “draft,” touching upon a number of contemporary issues vis-á-vis third-party funding, all of which ought to be of high interest to practitioners, scholars, and students alike.

The third-party funding market exceeds billions of dollars and various actors are involved by way of funding, getting funded, and as brokers/intermediaries.1)Chapter 3: “Litigation Funding in International Arbitration”, in Jonas von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure, International Arbitration Law Library, Volume 35 (Kluwer Law International; 2016) p. 75-76. jQuery("#footnote_plugin_tooltip_9570_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9570_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); One of the primary reasons for seeking third-party funding is the lack of “access to justice.” In the context of third-party funding, “access to justice” refers to all tools and resources that implicate a party’s opportunity to defend or enforce a legal right. In other words, lack of “access to justice” can be roughly equated to a lack of resources to litigate properly. Notwithstanding, this reason alone is changing and third-party funding is more and more being used by claimants to allocate risks and costs while continuing its business operations with a steady cash flow. However, with competition being the hallmark of the western economy, businesses being able to compete while simultaneously litigating for justice is ipso facto the essence of real “access to justice.”

In “Gamblers, Loan Sharks & Third-Party Funders“, Catherine Rogers wrote that investment arbitration has attracted funders’ attention due to massive potential recoveries. However, she raised an important point in that critics are concerned that ”significant new funding in investment arbitration cases will aggravate an already exploding caseload that creates a disproportionate burden on States.” Although funders can, in theory, fund the respondent party, too, there is no real incentive to do so and ”[f]or this reason, the arrival of third-party funders may well alter the entire landscape by significantly increasing the number of claims, as investors whose claims were considered too costly to pursue are able to obtain financing.” Furthermore, she wrote that ”[t]he resulting concern is that third-party funding will further distort perceived disparities in investment arbitration that favor investors over States.” It can be said that Catherine was right in her analysis and most probably the near future will shed further light on the otherwise bullet-proof analysis.

This view makes it easy to overlook certain important features vis-á-vis access to justice, e.g. that some states might also lack sufficient expertise and resources to litigate properly, and thus “access justice.” Two important issues come to mind. First, that the overwhelming majority of funding goes – either directly or indirectly – to the claimant, and perhaps reasonably so. Second, the decision of whether to fund or not is primarily based on the merits of the case, the benefit-cost analysis, and the enforceability of the award. It is in light of this latter calculus that a third-party funder, privileged with the expertise of well-known arbitration scholars and practitioners, could potentially weigh in a less developed country’s lack of resources to prepare and litigate a case as a factor in its analysis. The calculus might culminate in, for example, that a less developed state would be more amenable to reach a quick settlement for an otherwise vexatious or frivolous claim.

On September 6, 2017, a new “investment support programme for the least developed countries” was released. The program is designed to provide a number of less developed countries (and there “under-resourced” law firms) with, among other things, advice and support in investment-related negotiations and to assist in dispute settlement, such as international arbitration.

It is true that third-party funding enhances the access to justice and that it is a good thing for the equality of arms and for the overreaching principles of procedural fairness and justice. However, less developed countries, too, have shortcomings vis-á-vis realizing real access to justice. If third-party funders do factor in the less developed states’ resources, experience, and knowledge in its calculus (which is likely), it is with anticipation that we wait to see whether the investment support programme (or similar projects) will be a factor of consideration in the third-party funding calculus. If it does become so, it is a welcome feature in rebalancing the contemporary one-sided regime of third-party funding in investment treaty arbitration.

References   [ + ]

1. ↑ Chapter 3: “Litigation Funding in International Arbitration”, in Jonas von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure, International Arbitration Law Library, Volume 35 (Kluwer Law International; 2016) p. 75-76. 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: Compendium of International Commercial Arbitration Forms
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A Possible Objection, Not Yet Raised, to Intra-EU ECT Claims before the ICSID: Terra Raf Trans Traiding Ltd. v. Kazakhstan Versus Eiser v. Spain

Thu, 2017-11-16 22:54

Danilo Ruggero Di Bella

In an interesting post published on Kluwer Arbitration Blog by Eric Leikin and Martina Magnarelli, it is described in a very comprehensive manner the state of play as regards the soundness of Respondents and European Commission’s arguments refusing the jurisdiction of arbitral tribunals in intra-EU ECT claims.

Among these arguments (all rejected by the tribunal on duty), the Respondent in Eiser v. Spain put forward the following line of reasoning: any Investor coming from an EU Member State is divested of its national character and becomes predominantly an Investor of the EU, because its home country is also an EU Member State and subject to EU law, consequently, the EU Investor and the Respondent, an EU State, are found in the same “Area” – the area of the EU – so that the diversity required by Article 26(1) and (2) does not occur.1)Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, para. 195. jQuery("#footnote_plugin_tooltip_3117_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The tribunal in response to this argument replied that there can be no “EU Investors” under Article 1(7)(a)(ii) of the ECT, because there is no trans-national body of European law regulating the organization of business units, which remain subject to member countries’ domestic law.2)Eiser v. Spain, para. 196. jQuery("#footnote_plugin_tooltip_3117_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Now, a counter-argument to the finding of this tribunal may come – funnily enough – not from an intra-EU ECT-based precedent, but from a non-intra-EU ECT-based one, namely an ECT-based arbitration where a Gibraltarian company faced (together with Romanian and Moldavian investors) the Republic of Kazakhstan.

In that case the exception raised by the Respondent was that the ECT did not apply to Gibraltar, because even if the UK – when it signed the treaty on 17 December 1994 – made a declaration to the effect that provisional application under Article 45(1) of the ECT shall extend to Gibraltar, the UK did not reiterate the inclusion of Gibraltar as to the territorial scope of the ECT, when it ratified the ECT on 13 December 1996. Consequently, according to Kazakhstan, the entry into force of the ECT put an end to its provisional application in respect of the UK and its territories, therefore, Gibraltar was to be found cut out of its application (provisional and definitive), and, accordingly, the Gibraltar-based company could not have relied on the ECT as an UK investor could have.3)Ascom Group S.A., Anatolie Stati, Gabriel Stati and Terra Raf Trans Traiding Ltd. v. Republic of Kazakhstan (SCC Case No. 116/2010), para. 734. jQuery("#footnote_plugin_tooltip_3117_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

However, in that arbitration the tribunal came to the conclusion that it did not have to rule on whether (as the Respondent argued) the provisional application of the ECT were ceased or not in respect of Gibraltar, because the tribunal found that “the ECT applies to Gibraltar on the basis that Gibraltar is a part of the European Community, which is itself party to the ECT.” Indeed, pursuant to Art. 52 of the Treaty on the European Union, Art. 355 of the Treaty on the Functioning of the European Union, and declaration number 55 to the Treaty of Lisbon made jointly by the United Kingdom and the Kingdom of Spain, Gibraltar is included in the EU territory. Therefore, the Tribunal concluded that the Gibraltar-based company qualifies as an [EU] investor under the ECT.4) Stati v. Kazakhstan, SCC Case No. V (116/2010), paras 746-747. jQuery("#footnote_plugin_tooltip_3117_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

So, if in Terra Raf Trans Traiding Ltd v. Kazakhstan the tribunal applied the ECT to Gibraltar, not because it is a UK-dependent territory, but because it is a part of the European Union’s territory, then a contrario sensu the ECT shall not apply to an EU investor coming from a EU territory (like for example, Germany or Luxemburg) and investing in the same EU territory (like Spain or Italy), as this investment cannot be qualified as foreigner. This is particularly true in the context of the ICSID Convention because of its Article 25(2)(a). But before delving into the exception to the ICSID jurisdiction ratione personae drawn from Terra Raf Trans Traiding Ltd v. Kazakhstan and based on Article 25 of the ICSID Convention, few premises are necessary:

1) according to Article 20 of the Treaty on the Functioning of the EU (TFEU), every person holding the nationality of a Member State shall be a citizen of the Union. Such citizenship of the Union is additional to and does not replace national citizenship,5)For a deeper understanding of the EU related implications, please see Crina Baltag, The Energy Charter Treaty: The Notion of Investor, Kluwer Law International, 2012, p.57-67 jQuery("#footnote_plugin_tooltip_3117_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and there is no procedure in place to renounce only the EU citizenship without also relinquishing the national citizenship of a Member State (which means no “Pey Casado-like trick” is allowed to the extent that you cannot renounce your national citizenship just to file an investment arbitration against your former country). For the purpose of international law, Article 20 of the TFEU may well be regarded as the municipal law pursuant to which a natural person’s nationality is to be determined by the arbitral tribunal seized of the matter (according to its discretion, of course).6)Hussein Nuaman Soufraki v. The United Arab Emirates, ICSID Case No. ARB/02/7, Award 2004, § 55 and 84. jQuery("#footnote_plugin_tooltip_3117_6").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });;

2) in a declaration regarding article 25 of the ECT dealing with the Economic Integration Agreements, the European Communities and their Member States recalled that companies or firms formed in accordance with the law of a Member State shall be treated in the same way as natural persons who are nationals of Member States. Therefore, also companies are to be deemed holding the citizenship of the European Union, being treated as natural persons for the purposes of the ECT, as they enjoy the right of establishment pursuant to Part Three, Title III, Chapter 2 of the Treaty establishing the European Community;

3) under Article 25(2)(a) of the ICSID any natural person with double nationality is excluded from bringing a claim under the Convention if that person had also the nationality of the Contracting State party to the dispute.

From the above it follows that every EU claimant has a double nationality (its Member State’s and European’s nationality), every EU claimant is equated – under the ECT – with a natural person (regardless of being a juridical person), namely, a natural person with dual nationality, who therefore cannot bring a claim before the ICSID – because of Article 25(2)(a) – against either its country of origin or the UE and/or any territorial constituent part thereof (like Italy or Germany).

Whenever the Claimant is not a foreign investor to the Area where it invested, being the investor a EU national and belonging that Area to the EU territories, arguably, an ICSID Tribunal lacks jurisdiction ratione personae. Consequently, each and every arbitration pending before the ICSID against the Kingdom of Spain and the Italian Republic, launched by an EU investor relying on the ECT, might be dismissed on this jurisdictional dual-national-exclusion exception, which is, as explained above, based on a salient ECT-based precedent (Terra Raf Trans Traiding Ltd.et alius v. Kazakhstan), the ICSID Convention (Article 25.2.a), and the ECT itself (to be precise, the declaration with respect to Article 25 and Article 26 of the ECT).

Despite there is no obligation of stare decisis incumbent on arbitral tribunals, the Terra Raf Trans Traiding case is relevant in the current (as well as future) ICSID arbitrations because investment arbitration tribunals have repetitively relied upon previous decisions and awards in their findings, thus establishing a de facto case-law and creating a coherent corpus of investment law.7)See e.g. Reinisch August, The Role of Precedent in ICSID Arbitration, Austrian Arbitration Yearbook 495-510 (2008). jQuery("#footnote_plugin_tooltip_3117_7").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Although the Terra Raf Trans Traiding case is not an ICSID case (since it was administered under the auspices of the SCC), its persuasive impact on the current arbitrations pending before the ICSID is not weakened at all. Indeed, what tribunals tend to look at to gauge the relevance of a precedent is the basis of jurisdiction (rather than the procedural rules) of the previous tribunal that rendered it, since each BIT or MIT is to be interpreted autonomously8)AES Corporation v. The Argentine Republic, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, para. 28. jQuery("#footnote_plugin_tooltip_3117_8").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. And in the Terra Raf Trans Traiding case as well as the current ICSID cases pending against Spain and Italy, the basis of jurisdiction is the same MIT, the Energy Charter Treaty. That is why, if the Respondents in those proceedings rely on this SCC ECT-based precedent to object to the jurisdiction of those ICSID tribunals, those tribunals will have two soft-obligations:

– Firstly, to take into consideration that precedent;
– Secondly, in case those arbitrators were of a different opinion, they should expressly motivate the reasons of their departure from that precedent.

The views expressed in this article are those of the author and DO represent those of the law firm Bottega DI BELLA.

References   [ + ]

1. ↑ Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, para. 195. 2. ↑ Eiser v. Spain, para. 196. 3. ↑ Ascom Group S.A., Anatolie Stati, Gabriel Stati and Terra Raf Trans Traiding Ltd. v. Republic of Kazakhstan (SCC Case No. 116/2010), para. 734. 4. ↑ Stati v. Kazakhstan, SCC Case No. V (116/2010), paras 746-747. 5. ↑ For a deeper understanding of the EU related implications, please see Crina Baltag, The Energy Charter Treaty: The Notion of Investor, Kluwer Law International, 2012, p.57-67 6. ↑ Hussein Nuaman Soufraki v. The United Arab Emirates, ICSID Case No. ARB/02/7, Award 2004, § 55 and 84. 7. ↑ See e.g. Reinisch August, The Role of Precedent in ICSID Arbitration, Austrian Arbitration Yearbook 495-510 (2008). 8. ↑ AES Corporation v. The Argentine Republic, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, para. 28. 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: Compendium of International Commercial Arbitration Forms
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International Arbitration of Business and Human Rights: A Step Forward

Thu, 2017-11-16 02:25

Claes Cronstedt, Jan Eijsbouts, Adrienne Margolis, Steven Ratner, Martijn Scheltema and Robert C. Thompson

International arbitration is taking a giant step forward as part of the global movement to protect human rights. A drafting team, with expertise in international investment, arbitration, human rights, supply chains and other issues, is being assembled to prepare a set of rules. The project is the culmination of several years of work exploring the use of arbitration to resolve business and human rights disputes. It is being funded by the City of The Hague and supported by the Netherlands Foreign Ministry. Bruno Simma, former judge of the International Court of Justice and a respected international arbitrator, will chair the drafting team. A wide range of stakeholders will provide input through a network of “sounding boards”. Once drafted, the rules will be offered to the Permanent Court of Arbitration and other international arbitration institutions. The new rules could also be used in arbitration proceedings that the parties manage themselves on an ad hoc basis.

Arbitration – Filling a Gap in Victim Protection

Current remedies for business-related human rights abuses such as trafficking in persons, child labor, violence against labor protestors, unsafe and unhealthy working conditions, land seizures, and multiple others are patchy, unpredictable, often ineffective and fragile. This fails both victims, who have little access to justice, and businesses, which often operate in environments of legal uncertainty and where participants are not competing on a level playing field.

The Working Group on International Arbitration of Business and Human Rights has undertaken more than three years of consultations with stakeholders. It has concluded that international arbitration has the potential to handle human rights abuses in many regions where courts and other mechanisms have failed. Arbitration may also be an attractive alternative to court litigation even where competent courts are available, offering speedier procedure and awards that are potentially enforceable throughout the world under the New York Convention.

Multinational businesses face growing pressure to ensure that they and their business partners are not involved in human rights abuse. A number of highly publicized cases have fueled public indignation, prompting concern among businesses that being tainted with human rights abuse can harm their reputation and weaken their social license to operate. International initiatives such as the United Nations Guiding Principles on Business and Human Rights are influencing business policy. The Guiding Principles’ third pillar stresses the necessity of a remedy for victims of corporate human rights abuses, and human rights arbitration represents one form of remedy. In addition, the World Bank’s Performance Standards and the Equator Principles are providing human rights guidelines for lenders and investors. National legislation is contributing, for example the recent UK Modern Slavery Act and the new French due diligence law.

Advantages of Human Rights Arbitration for Business and Victims

The Working Group has frequently been asked why businesses would agree to arbitrate human rights disputes. There are many reasons. Arbitration provides a forum in which businesses and those who accuse them of human rights abuses can impartially resolve their disputes no matter where the abuses might occur. When a corporation’s reputation is questioned by NGO campaigns, management might prefer speedy resolution of a dispute, rather than lengthy litigation in court. Instead of submitting cases to judges chosen by “the luck of the draw,” parties would choose neutral arbitrators who have business and human rights expertise. An expeditious and fair hearing would limit reputational damage. Proceedings can be less adversarial than in court litigation, preserving working relationships.

A business could also choose arbitration to prevent future human rights abuse in its supply chains by inserting human rights commitments and arbitration clauses into its contracts. These contracts could contain perpetual clauses that require each member of a supply chain, in turn, to insert such clauses in contracts with its own suppliers. An entire supply chain could be covered by an arbitration arrangement that allows the originating business to instigate arbitration against any supplier in the chain that breaches the commitment to observe human rights. This would not be expanding its own liability, only exposing any breaching supplier to relatively prompt enforcement.

Businesses that develop projects such as airports, highways, plantations, and mines could place arbitration clauses, human rights commitment clauses and perpetual clauses in their development contracts. This would commit those working on the project to avoid human rights abuses and would be directly enforceable by the multinational, since the actors violating human rights would be subject to arbitration.

Multinationals could increase the deterrent effects of their supply chain and development contracts by enabling victims of abuse to invoke the arbitration clauses, thus becoming third party beneficiaries. Giving rights to victims can be a highly effective compliance tool, as shown in environmental programs where statutes provide for so-called “citizen suits.” Victims have historically shown great interest in vindicating their own rights, as numerous cases brought under domestic tort law in various jurisdictions indicate. A supplier or subcontractor is likely to think twice before committing human rights abuse when it faces binding arbitration instigated by the multinational company, the victims, or both.

The victims’ side has much to gain by choosing to arbitrate. The lack of available courts in many regions of the world and jurisdictional bars in multinationals’ home states mean that arbitration could be the sole source of justice for most victims. Hence, any development that offers arbitration, such as business contracts containing third party rights, would be welcomed.

The Need for New Arbitration Rules and Model Arbitration Clauses

If international arbitration would be acceptable to both the business side and the victims’ side, why are revised arbitration rules needed? The UNCITRAL and other commercial arbitration rules are not flexible enough to accommodate human rights disputes. Human rights arbitration is fundamentally different from, for example, investor-state arbitration and has special requirements that the drafting team will need to examine.

The first requirement is that the arbitrators who handle human rights disputes will need to have expertise that is currently lacking. Human rights NGOs have made clear to the Working Group that, in their view, commercial arbitrators have neither the expertise nor the sensitivity to human rights matters to enable victims to feel comfortable coming before an arbitral tribunal. Hence, the Working Group is recommending that arbitration institutions adopting the new rules should create special rosters of human rights arbitrators, as the Permanent Court of Arbitration has established a special roster of arbitrators for environmental matters. The new rules should also allow the parties, especially the victims’ side, to appoint qualified arbitrators who are not on the official rosters.

The second requirement is that the arbitration proceedings are transparent. Hearings should not be held in secret, and awards should not be unpublicised. Human rights NGOs and many others believe that human rights issues are of public concern. Transparency will also allow the public to hold arbitrators accountable for making fair and impartial rulings.

The third requirement relates to the participation of victims and their representatives in human rights proceedings. In many cases of abuse, multiple victims will be presented. Special provisions are needed to qualify such victims as legitimate claimants and allow for joinder of their claims. Additionally, particularly in countries with repressive governments, witness protection arrangements will be required. The arbitrators may need special powers to allocate costs and legal fees to winning victims, in order to overcome the “inequality of arms” that victims face when litigating with well-funded businesses. Finally, human rights awards may require long term monitoring and supervision, along the lines of the environmental rules adopted by the Permanent Court of Arbitration.

In addition to new rules, standardized or model contract language is needed so that businesses can implement the program with suppliers and subcontractors. The Working Group is inviting national and international bar associations to collaborate to draft human rights commitment clauses, escalation clauses and perpetual clauses.

Next steps

This arbitration proposal is in the early stages of development. The Working Group envisions that once the new rules are in place, business leaders will begin to support them. Others will follow. Lenders, investors, and government agencies could also play a role in encouraging the use of international arbitration to resolve business and human rights disputes.

For additional information, including the composition and background of the Working Group, see here.

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Arbitration in the CIS Region: from Soviet Roots to Modern Arbitration Laws

Tue, 2017-11-14 16:09

Yarik Kryvoi & Kaj Hober

Over the last years, European arbitration institutions show the increasing number of arbitration cases involving Russian and other former Soviet Union countries, most of which are members of the Commonwealth of Independent States (CIS).

Russian parties were second only to local Swedish companies appearing before the Arbitration Institute of the Stockholm Chamber of Commerce (SCC). In addition, the majority of investor-state disputes at the SCC concerned CIS countries.


 
Figure 1. Cases Involving CIS Related Parties on Major Arbitration Institutions

Approximately a third of the London Court of International Arbitration (LCIA) cases involve either a Russian/CIS party or a party ultimately controlled by Russian/CIS entity. Most these cases are governed not by Russian law, but by English law with the choice of London as the seat of arbitration and appointment of English arbitrators. Moreover, CIS businesses often operate via foreign registered companies, which make the real number of Russia-related disputes even higher.

Although the countries of the former Soviet Union are not perceived as arbitration-friendly because of the weak rule of law, many countries in the region have recently modernised their legislation to become more supportive of international arbitration. Arbitration institutions based in the CIS region consider significantly more cases compared to institutions based abroad.

 

Unusual aspects of international arbitration in the CIS region

Legal systems of the countries of the CIS region share the same roots in the Soviet legal system and several peculiarities, compared to arbitration practices in the West. Unusual aspects of international arbitration in the region include the cautious approach of courts to optional arbitration clauses (which give more procedural options to one party compared to the other).

Another unusual aspect is the possibility under Russian civil law, for a shareholder or a public prosecutor in some cases to apply to a court to invalidate the entire contract containing an arbitration clause, even though they are not parties to the contract. Law of several other CIS countries contain similar provisions.

A distinct characteristic of the CIS arbitration market is that international law firms, rather than domestic firms, often represent parties in international arbitration, usually in close cooperation with local firms.  However, this is not usually the case for disputes considered in institutions located in the CIS region. Several domestic CIS firms also successfully represent parties in large cases in the region and elsewhere.

Other common procedural features of the CIS arbitration include such measures as reducing the number of the parties’ submissions, full payment of arbitration costs by the claimant, squeezing proceedings into one hearing limited by time, and resolving disputes mainly based on documentary evidence.

CIS-related disputes are also known for the use of the so-called guerrilla tactics, meaning that the parities ‘will try to exploit the procedural rules for their own advantage, seeing to delay the hearing and (if they get any opportunity) ultimately to derail the arbitration so that it becomes abortive or ineffective’.

The legislation of the CIS countries does not give a clear definition of public policy, in most cases referring just to foundations of law and order of the state, or the basis of the rule of law. This uncertainty gives the courts discretional powers to interpret this concept, and sometimes public policy is interpreted in a very broad manner in order not to enforce awards rendered against state-controlled entities.

Although foreign arbitration users might expect that public policy can be broadly interpreted in the region, in practice most CIS countries rarely set aside or refuse to enforce awards on the basis of expansive interpretation of public policy.

 

Investor-State disputes involving CIS States

After the Soviet Union disintegrated in 1991, its successor republics urgently sought to attract foreign investors to support the recovery of their economies. Former Soviet states started to conclude bilateral treaties to facilitate cooperation on legal matters within the post-Soviet space. The peak of concluding international treaties concluded by CIS states was in early 1990s.

The largest number was concluded by Russia, followed by Ukraine and Belarus. Kazakhstan, Uzbekistan and Moldova each concluded over forty BITs. Tajikistan and Turkmenistan tended to conclude less treaties. In addition, most CIS States are contracting parties to the Energy Charter Treaty (ECT).

 

Figure 2. Total Number of BITs signed by CIS States

Overall, the countries in the region have concluded more than 550 investment treaties, including BITs, free trade agreements, and other treaties containing investment-related provisions. Typically these treaties provide more than one option for arbitration, including resort not only to ICSID itself, but also to ICSID Additional Facility Rules when the dispute falls outside the scope of the ICSID Convention, the SCC Rules, as well as ad hoc proceedings under the UNCITRAL Rules.

In 2014, Russia, Belarus and Kazakhstan signed and ratified the Treaty on the he Eurasian Economic Union (EAEU). Armenia has acceded to the Treaty, and the relevant accession agreement was ratified by the Parliaments of Armenia and Russia. In 2015, Kyrgyzstan also joined the treaty. The Treaty confirms the creation of an economic union that provides for free movement of goods, services, capital and labour. The Treaty, which entered in force in 2015 also provides a full suite of investment protections, along with a binding investor-state arbitration mechanism.

 

Figure 3. Total number of investor-States disputes against CIS States

An important novelty of the EAEU Treaty is that it extends common dispute resolution provisions (including ICSID and UNCITRAL options) to investors coming from the Member States of the EAEU.

 

Understanding international arbitration in the CIS region

The legal framework of many CIS states has significantly improved in recent years because of reform of several CIS states’ legislation on arbitration. Apart from certain controversial proposals regarding the increased regulation of arbitration, the new legislation is a significant step forward in the development of a more arbitration-friendly climate in the region.

With each State has its own peculiarities, investors and lawyers advising them need to understand the law and practice of arbitration in the CIS countries to minimise their risks.

The recently published Law and Practice of International Arbitration in the CIS Region (Kaj Hober & Yarik Kryvoi eds) offers the first comprehensive overview of commercial and investor-state arbitration of the CIS States, including bigger States such as Russia, Ukraine and Kazakhstan and less known jurisdictions such as Moldova, Turkmenistan and Tajikistan.

 

 

 

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Independence and Impartiality of Arbitrators: Are We There Yet?

Mon, 2017-11-13 16:08

Shivani Khandekar and Divyansh Singh

It is a fundamental principle in international arbitration that every arbitrator must be and remain independent and impartial of the parties and the dispute

The issue of arbitrator independence, impartiality and neutrality has been a frequent source of contention in India. It is particularly rampant in disputes arising out of contracts executed before the amendment of the Arbitration and Conciliation Act, 1996 (‘the Act’). Pre-amendment, there was no bar on any category of person from being appointed as arbitrator and parties could (and often would) sign arbitration agreements that provided for one of their employees to be appointed as arbitrator. Contracts with government agencies, in particular, were rife with arbitration agreements specifying one of their own as arbitrator. The 2015 amendments to the Act, which came into effect on 23.10.2015, have been pro neutrality, independence and impartiality with the addition of Section 12(5) that renders any person who falls within any of the categories in Schedule 7 of the Act ineligible to act as arbitrator and Schedule 5 that lists grounds which shall guide in determining whether there exist justifiable doubts as to the independence or impartiality of an arbitrator. However, given that these amendments are only applicable prospectively, many disputes currently in the courts are governed by the pre-amendment Act.

One such recent dispute viz. Aravali Power Company Pvt. Ltd. v. M/s. Era Infra Engineering Ltd.1)Civil Appeal Nos. 12627-12628 of 2017 jQuery("#footnote_plugin_tooltip_7458_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7458_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); was decided by the Supreme Court recently wherein the Apex Court has, relying on its previous decisions in Indian Oil Corporation Ltd. and Others v. Raja Transport Private Ltd.2)(2009) 8 SCC 520 jQuery("#footnote_plugin_tooltip_7458_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7458_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Northern Railway Administration, Ministry of Railway, New Delhi v. Patel Engineering Company Ltd.3)(2008) 10 SCC 240 jQuery("#footnote_plugin_tooltip_7458_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7458_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, upheld the eligibility of the CEO of the appellant company to arbitrate the dispute. With the current trend of pro arbitration judgments by the Indian Courts, this prima facie appears to be a set-back and contrary to the principle of arbitrator neutrality. However, in order to understand and critique the judgment in Aravali (supra) properly, it is important to take a look the factual matrix.

Aravali Power Company Pvt. Ltd. (‘the Appellant’) awarded a contract for the construction of a permanent township package for the Indira Gandhi Super Thermal Power Plant to M/s Era Infra Engineering(‘the Respondent’). A contract consisting of General Conditions of Contract (GCC) and Special Conditions of Contract (SCC)was signed between the parties. Clause 56 of the GCC stipulated arbitration between the parties and specified that any dispute would be referred to the sole arbitration of the project in-charge.

The scheduled date of completion of work was 19.05.2011. However, the progress of the work was quite slow and the Appellant cancelled remaining work. Aggrieved by such cancellation, arbitration was invoked by the Respondent on 29.07.2015 with the notice being received by the Appellant shortly thereafter, thus making the pre-amendment Act applicable to the proceedings. It is pertinent to note that in the letter invoking arbitration, the Respondent, on the basis of nemo judex in causa sua, suggested that a retired judge of the High Court be appointed as Sole Arbitrator or a panel of independent arbitrators be made available to choose from.

The Appellant, however, placing reliance on Clause 56 of the GCC, declined the Respondent’s request and proceeded to appoint its own Chief Executive Officer as the Sole Arbitrator on 19.08.2015. The first arbitration hearing was fixed on 07.10.2015 and was attended by both parties. As per the record of the proceedings, no objection was raised by the Respondent regarding the constitution of the Arbitral Tribunal.

In fact, it was only after the amendment of the Act that the Respondent sought to challenge the appointment of the Arbitrator on 12.01.2016. This challenge was rejected by the Arbitral Tribunal on the ground that the Respondent had already participated in the arbitration proceedings without contesting the constitution of the Arbitral Tribunal. Aggrieved by the order of the Arbitral Tribunal, the Respondent approached the High Court of Delhi under Section 14 of the Arbitration Act seeking termination of mandate of the Arbitrator and under Section 11(6) for the appointment of an independent Arbitral Tribunal. The Appellant contended that the petition under Section 14 of the 1996 Act was not maintainable as the Arbitrator was appointed as per the terms of the Arbitration Agreement and the Respondent took no steps to contest such appointment in the manner prescribed under the pre-amendment Act.

The High Court allowed the applications under Sections 14 and 11(6) and set aside the appointment of the Arbitrator and further directed the Appellant to provide a panel of three independent arbitrators for the Respondent to choose from. This was done keeping in mind the objective of the 2015 amendment and the underlying principle of impartiality, independence and neutrality. Aggrieved by this order of the High Court, the Appellant approached the Supreme Court of India.

The Supreme Court set aside the High Court’s decision on the following grounds:

  • The appointment of the arbitrator was not invalid or unenforceable as a result of his being an employee of one of the parties as per the provisions of the pre-amendment Act, which was admittedly applicable to this case. Reliance was placed on the observations of the Supreme Court in the case of Indian Oil Corporation Ltd. and Ors. v. Raja Transport Pvt. Ltd.4)(2009)8 SCC 520 jQuery("#footnote_plugin_tooltip_7458_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7458_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); in this regard.
  • As per the law laid down in Northern Railway Administration, Ministry of Railway, New Delhi V. Patel Engineering Co. Ltd.5)(2008) 10 SCC 240 jQuery("#footnote_plugin_tooltip_7458_5").tooltip({ tip: "#footnote_plugin_tooltip_text_7458_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and the provisions of the pre-amendment act, the terms of the arbitration agreement ought to be adhered to/given effect as closely as possible and jurisdiction of the court under Section 11(6) would arise only if the conditions specified in clauses (a),(b) and (c) of Section 11(6) are satisfied.
  • The Respondent did not contend that the provisions of Section 12 in its unamended form stood violated nor did it challenge the constitution of the Arbitral Tribunal within the prescribed time frame as per the provisions under Section 13 of the Act. Further, the Respondent participated in the arbitration proceedings.

This judgment is technically sound to the extent that under the old Arbitration Act of 1996, the Respondent only had recourse to Sections 12 and 13 after constitution of the Arbitral Tribunal and failed to take advantage of the same within the prescribed time limit.

Section 12 provided that an arbitrator may only be challenged on the following two grounds:

  • the existence of circumstances that give rise to justifiable doubts as to his independence or impartiality, or
  • he does not possess qualifications agreed to by the parties.

Section 12 further provided that a party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.

Section 13 provided the challenge procedure and stated that any challenge to an arbitrator must be brought within 15 days of becoming aware of the constitution of the arbitral tribunal or 15 days after becoming aware of any circumstance referred to in Section 12. However, failure to make such challenge within the specified time period may be tantamount to deemed waiver under Section 4 of the Arbitration Act.

Further, the Court can be approached by way of a Section 14 petition to terminate the mandate of an arbitrator only in the following circumstances:

  • if he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay; and
  • he withdraws from his office or the parties agree to the termination of his mandate.

In the present case, the Arbitrator was neither de jure nor de facto unable to perform his functions since, under the pre-amendment act there was no bar to an employee being appointed as arbitrator. In fact, in the Case of Indian Oil Corporation (supra), the Indian Supreme Court had held that being an employee of a party to an arbitration did not ipso facto raise a presumption that the arbitrator was biased, partial or lacked independence.

However, there are certain issues that remain unaddressed by this decision. To begin with, there is no clarity on the issue of maintainability of the petitions filed by the Respondent under Section 11(6) and 14 of the Act. The Supreme Court has held that no petition under Section 11(6) would lie unless the conditions specified in Clauses (a), (b) and (c) of the Section are satisfied. There is, however, no clear discussion on the Section 11(6) application not being maintainable after the arbitral tribunal enters upon reference.

The case of Northern Railway Administration (supra) was limited to the scope and ambit of Section 11(6) with respect to the appointment procedure in the arbitration agreement. There was no discussion on the stage of filing the Section 11 application and whether such an application could be filed after a tribunal has entered upon reference. Given the recent judgments of the Supreme Court in TRF v. Energo Engineering Projects6)2017 SCC OnLine SC 692 jQuery("#footnote_plugin_tooltip_7458_6").tooltip({ tip: "#footnote_plugin_tooltip_text_7458_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and in HRD Corporation (Marcus Oil and Chemical Division) v. GAIL(India) Ltd.7)Civil Appeal No. 11126 of 2017 jQuery("#footnote_plugin_tooltip_7458_7").tooltip({ tip: "#footnote_plugin_tooltip_text_7458_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, there needs to be greater clarity on the maintainability of a Section 11 application after constitution of an arbitral tribunal. This is especially in light of the fact that kompetenz-kompetenz and minimal interference of the courts are fundamental principles of international commercial arbitration.

In addition, greater clarity might have been required on the issue of the Section 14 application not being maintainable as the Arbitrator was neither de jure nor de facto unable to perform his functions under the pre-amendment Act. It is only after the amendment, as stated in the case of HRD (supra), that an employee-arbitrator is de jure unable to perform his functions as a result of his ineligibility under Section 12(5) and thus, lacks the jurisdiction to adjudicate his own competence.

Finally, coming to the issue of neutrality, it can be contended that after the amendment of the Act, the approach of the Courts must change to keep disputes in consonance with the basic object of the amendments and the fundamental principles of international arbitration despite the procedures prescribed in the old Act.

The choice of the persons who compose the arbitral tribunal is vital and often the most decisive step in an arbitration. It has rightly been said that arbitration is only as good as the arbitrators8)Lalive, ‘Mélanges en l’honneur de Nicolas Valticos’ in Droit et Justice (1989), 289 jQuery("#footnote_plugin_tooltip_7458_8").tooltip({ tip: "#footnote_plugin_tooltip_text_7458_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. The Supreme Court may have to reconsider its stand in the case of Indian Oil Corporation (supra) and Aravali (supra). It is only then that India will truly be recognized as a pro-arbitration jurisdiction.

References   [ + ]

1. ↑ Civil Appeal Nos. 12627-12628 of 2017 2. ↑ (2009) 8 SCC 520 3, 5. ↑ (2008) 10 SCC 240 4. ↑ (2009)8 SCC 520 6. ↑ 2017 SCC OnLine SC 692 7. ↑ Civil Appeal No. 11126 of 2017 8. ↑ Lalive, ‘Mélanges en l’honneur de Nicolas Valticos’ in Droit et Justice (1989), 289 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: Compendium of International Commercial Arbitration Forms
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Kluwer Mediation Blog – October Digest

Mon, 2017-11-13 02:00

Anna Howard

With reviews of new mediation laws in Ireland and Vietnam, an assessment of how well Barnier and Davis are performing as negotiators in the crucial and complex Brexit negotiations, and highlights from Collaborative Scotland’s bus tour which took the message of mediation across Scotland, October has offered an engaging variety of posts on the Kluwer Mediation Blog. A brief summary of each post is provided below. Very many thanks to all our writers and readers.

In Better Conversations and Respectful Dialogue, John shares the latest news from Collaborative Scotland. John also identifies some of the highlights from Collaborative Scotland’s Better Conversations Bus Tour, which took the message of mediation and respectful dialogue to the more peripheral areas of Scotland.

In On Negotiating in Interesting Times, Ian Macduff identifies the “natural experiment” afforded by New Zealand’s new coalition government which, as Ian notes, will govern only though constant negotiation and collaboration. Ian also considers some of the imminent pressing negotiations which the new government faces.

In Peer Coaching: On the loneliness of the mediator and what to do about it, Greg Bond discusses the lonely business of being a mediator and, in particular, the lack of feedback and shared reflection. Greg suggests ways in which to gain an outside perspective on our work as mediators.

In All Mediators are liars – Part 1, Martin Svatos draws on the liar’s paradox to show that common beliefs about truth and falsity might lead to contradictions and complications. As Martin adds, nothing is black or white, which is of particular relevance in mediation. Martin then explores what might constitute a desirable lie and an undesirable truth.

In Qualifications of a Commercial Mediator Under Vietnamese Law, Nguyen Gia Thien Le provides an overview of Vietnam’s recent law on commercial mediation. In particular, Thien considers the qualifications and training required to be a commercial mediator in Vietnam.

In Personality Preferences and Conflict, Joel Lee explores how personality preferences can contribute to conflict. Joel provides a comprehensive overview of the various personality preferences and considers how these can lead to conflict.

In Brexit Irritators – Davis and Barnier on negotiation, Charlie Irvine draws on research on the behaviour of successful negotiators to examine how Barnier and Davis are measuring up in their negotiations on Brexit.

In The Elephant in the Room – Part 2, Sabine Walsh explores how the new Mediation Act in Ireland can help mediators to market their services. Sabine also shares her own successful marketing strategies.

In Your Truth, My Truth And The Truth, Charlie Woods draws on a recent CIArb Mediation Symposium in London at which Kenneth Cloke, John Sturrock and Charlie discussed some of the biases that can influence conflict and its resolution. Charlie then identifies tools which mediators can use to address these biases.

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The EU Sets the Standard for International Tax Dispute Resolution

Sat, 2017-11-11 02:52

Jonathan Schwarz

Adoption of the EU Council Directive on Tax Dispute Resolution Mechanisms in the European Union on 10 October 2017 is a milestone in international tax dispute resolution. The Directive offers a uniform mechanism to address tax treaty disputes among EU member states that meets the BEPS Action 14 minimum standard, and largely renders the arbitration option in the OECD BEPS MLI redundant as between EU member states. It will apply to intra-EU disputes relating to income earned in a tax year commencing from 1 January 2018 for cases submitted from 1 July 2019. Competent authorities of Member States may agree to apply the Directive to cases submitted earlier or to earlier tax years.

The directive supplements the EU Arbitration Convention which only covers transfer pricing and attribution of profits to permanent establishments.  The new directive covers disputes between Member States over the interpretation and application of treaties that eliminate double taxation of income and capital. Its self-contained mutual agreement procedure (MAP), backed up by binding mandatory arbitration or alternative dispute resolution mechanisms, will likely provide the most effective, rule based system for resolving treaty disputes.

The directive expressly contemplates multi-state disputes with the result that complex transfer pricing or multiple residence disputes are capable of resolution in a single procedure.

Presenting  “complaint”

OECD Model Article 25 mutual agreement procedure concepts underpin the directive with a number of refinements. Large undertakings and large corporate groups must submit a “complaint” to each member state involved in the dispute, while individuals and other business undertakings must submit their complaint only to their state of residence.  In the case of individuals and smaller undertakings, it is the responsibility of competent authority the member state in receipt of a complaint to notify the competent authorities of all other Member States concerned within two months of receipt of the complaint. The OECD time limit for bringing a complaint applies – three years from the receipt of the first notification of the action resulting in, or that will result in, the treaty dispute.

Unlike existing treaty-based MAP, a complaint must be accompanied by detailed information and supporting documentation relating to the dispute as specified in the directive. The information must be in the language of each receiving state or any other language they may accept. Competent authorities have three months to request further information which must be supplied within three months of request.  Competent authorities then have a further six months to decide whether to accept the complaint. Limited grounds for rejecting the request are specified in the directive. The absence of a decision on this is deemed acceptance.

Mutual agreement

Competent authorities have six months to decide whether to resolve the dispute unilaterally. In the absence of such resolution the competent authorities must endeavour to resolve the issue by mutual agreement within two years from the last notification of acceptance of the complaint. This may be extended by up to one year at the request of a competent authority if justified in writing.

Arbitration or other alternative dispute resolution

In the absence of resolution by mutual agreement, taxpayers are entitled to request arbitration by an Advisory Commission. In addition, a request may be made where some, but not all, competent authorities have refused the MAP request if taxpayers have no right of appeals to national courts on the refusal.

An Alternative Dispute Resolution Commission may be established instead of an Advisory Commission. This may differ in composition and form from the Advisory Commission and may include last best offer arbitration. Although not explicit, it is apparent that the Advisory Commission will proceed by way of reasoned opinion. The directive also contemplates a permanent Alternative Dispute Resolution Commission.

Procedure

The arbitration process is also subject to a strict timetable, with a normal overall time limit of 18 months from the time of request until the Advisory Commission is required to give its opinion. National courts are given specific authority to intervene where there are failures in the appointment of the Advisory Commission and detailed requirements must be met in the case of independent members. Although the procedural rules (Rules of Functioning) are to be agreed by the competent authorities, the EU Commission is required to prepare standard rules which will apply in the absence of agreement or notification to the taxpayer. Taxpayers are entitled to appear before the Advisory Commission with the consent of the competent authorities. An Advisory Commission or Alternative Dispute Resolution Commission may require the taxpayer to appear before it and also has power to require attendance by the taxpayer and the production of documents and information from both the taxpayer and the competent authorities.

Decisions are by majority decision, with a casting vote to the chair in cases of deadlock.  The competent authorities are bound by the decision unless they agree a different resolution within six months of notification of the decision.  The taxpayer must agree the decision in order to be bound by it, thereby preserving appeal rights to national courts.

Transparency

The competent authorities may agree to publish the final decisions in full, subject to taxpayer consent. Information concerning any trade, business, industrial or professional secret or trade process, or that is contrary to public policy may be excluded. If there is no such agreement or consent the competent authorities must publish an abstract of the decision including a description of the arbitration method used. The abstract must contain a description of the issue and subject matter, the date, the tax periods involved, the legal basis, the industry sector, and a short description of the final outcome. Although the decisions do not constitute binding precedent, they will undoubtedly form a useful body of persuasive opinion.

The Commission estimates that there are about 900 double taxation disputes in the EU today, involving about €10.5 billion. More tax treaty disputes are in any event anticipated in the Post-BEPS era. By far the most user friendly treaty dispute resolution mechanism, enforceable on Member States, it may become the venue of choice in Europe. One strength of the directive is its status in EU law subject to the general jurisdiction of the Court of Justice of the EU and national courts. That is also a limitation in that it only applies to intra-EU disputes. A mechanism to extend the directive to third country tax treaty disputes would truely revolutionise the area.

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Arbitration and Money Laundering: What Are The Obligations Placed On Counsel And Arbitrators And What Risks Do They Face?

Thu, 2017-11-09 22:27

Patricia Nacimiento, Tilmann Hertel and Catrice Gayer

Herbert Smith Freehills

In June 2017, the Fourth European Anti-Money Laundering Directive (the “Fourth EU Directive” (EU) 2015/849) was transposed into German law. The regime was further tightened, its scope was extended and new features, such as the transparency register, were introduced. With the fifth European Anti-Money Laundering Directive already on the horizon, more changes are to come. These recent developments serve as a reminder that arbitration is often perceived as being vulnerable to white collar crime such as corruption, fraud and money-laundering. Why is that so?

At first glance, arbitration and money laundering seem to be worlds apart. It lies in the nature of money laundering that its magnitude is difficult to grasp. Due to the high number of unreported cases official statistics cannot provide an exact picture, yet the United Nations Office on Drugs and Crime (UNODC) estimate that every year two to five percent of the global GDP is laundered. This amounts to approximately US$ 840 billion to US$ 2.2 trillion a year. Given these numbers, it would be naïve to suggest that arbitration is unaffected.

The confidentiality of arbitration, which finds is basis in the parties’ agreement, can provide an ideal environment to conceal and disguise the origin of money. An arbitral award – issued in terms that enshrine a settlement between the parties – might be seen as the perfect means to legitimize money flows.

There are three main scenarios in which a potential money laundering concern may emerge in an arbitration. In the first instance, a party to the arbitration may raise questions regarding money laundering itself, potentially as a defence in the proceedings. Second, the arbitral tribunal may become suspicious regarding the legitimacy of the dispute or the purported transaction underlying that dispute. This may in turn raise questions about whether the whole purpose of the arbitration proceedings is to launder money. Third, and this could coincide with the second scenario where the entire arbitration is fabricated, the arbitration may be financed by illegal activities, e.g. the security for costs is paid by laundered money. In all three scenarios the arbitral tribunal could itself become – at least to some extent – an unwilling participant in the money laundering process.

So how should counsel and arbitrators respond to issues of money laundering? What are their obligations and what are the risks, if any, of failing to comply with them?

From the counsel’s perspective

As counsel, the Fourth EU Directive might have direct influence on the decisions taken. The Directive demands “notaries and other independent legal professionals” to file a report “where the obliged entity knows, suspects or has reasonable grounds to suspect that funds, regardless of the amount involved, are the proceeds of criminal activity”. The extent of this obligation and whether it will affect counsel will depend on how the Directive has been implemented in the respective Member State. For example, the German Anti-Money Laundering Act, which transposes the Directive into German law, specifically mentions lawyers as “independent legal professionals”. Depending on the assignment and work counsel is tasked with, at least under German law, counsel may potentially even be under a duty to report cases of suspected money laundering to the authorities. Arbitration proceedings as such do fall within the remit of application of the German anti-money laundering regime. If, however, the arbitration relates to a transaction that falls within the scope of the German AML laws, this should be examined more closely. Counsel, nonetheless, should always be alive to issue of money laundering and should be careful to comply with their firms’ internal AML measures which will transpose the obligations imposed under the Fourth EU Directive into their jurisdiction.

The Fourth EU Directive on Money Laundering from an arbitrator’s perspective

The position is more complicated when an arbitrator, rather than counsel, has suspicions of money laundering or money laundering concerns are raised before him or her. There was a debate as to whether any of the four EU Anti-Money Laundering Directives is applicable to arbitrators. It appears that at least from a German perspective this has now been settled. Under German law, Arbitrators are not subject to the EU Anti-Money Laundering Directive. While one might potentially take the position that lawyers acting as arbitrators (and if one where to stretch this even further) every arbitrator (including those who are no lawyers) as such have to be regarded as “other independent legal professionals”, arbitrator are not “assisting in the planning or carrying out of transactions”. Moreover, applying the Directive to arbitrators, but only to lawyers acting as arbitrators, cannot be the intention. If it was the case that lawyers acting as arbitrators were subject to the Directive, it would mean they had special duties to fulfill, which their fellow arbitrators would not be subject to. However, one has to be cautious: the interpretation in Germany may not be replicated across the EU and the situation may therefore vary in between EU Member States. Given the importance of anti-money laundering legislation globally, it is critical that arbitrators are aware of applicable AML-laws that may bite on them.

Where AML legislation does bite, failure to act in accordance with that legislation may expose the tribunal to fines or criminal investigation. Even where, as in Germany, an arbitrator is not obliged to report its suspicions under national law, the question how to deal with money laundering in arbitration remains.

In any scenario described before, the tribunal will not find a clear cut answer in the pertinent conventions, laws and arbitral rules. Rather, the arbitral tribunal will have to manoeuvre on unstable ground through the principles of party autonomy and non ultra petita on the one hand and the tribunal’s duty to render an enforceable award which may not be challenged and/or not be recognised based on a violation of public policy on the other.

If an arbitral tribunal becomes suspicious about money laundering on its own, the tribunal has to deal with this issue. Turning a blind eye on the suspicion may potentially not only endanger the enforceability of the arbitral award but it may – in the extreme – expose the tribunal to a criminal investigation. In many jurisdictions, including Germany, the tribunal will not be obliged to notify the authorities of its suspicion; and still there remains the risk to become an accomplice to the money laundering offence. The tribunal must therefore decide whether it investigates into the issue. One approach would be to inform the parties of its concerns and hear them on the issue. Given the tribunal’s limited powers to compel the parties to submit evidence and that is has only limited investigatory powers, this may be a futile exercise. This will particularly be so if the tribunal’s suspicions are justified. If the parties indeed agreed to stage the arbitration proceedings they are unlikely to provide the necessary evidence to substantiate the tribunal’s allegations.

In the second scenario, in which a party raises the “money-laundering defence”, a tribunal does not have to worry about the non ultra petita. The most critical questions in this respect relate to the standard of proof which the arbitral tribunal should apply as well as to the allocation of the burden of proof. As regards the standard of proof, there is precedent available concerning allegations of bribery and corruption. In three of the most prominent cases, arbitral tribunals in general applied a high standard of proof requiring “clear and convincing evidence” (EDF Ltd vs Romania – ICSID ARB/05/13), “clear and convincing evidence amounting to more than a mere preponderance” (Westinghouse vs the Republic of the Philippines, ICC Case No 6401) or proof “beyond doubt” (Hilmarton vs OTV, ICC Case No 5622). As regards the burden of proof, it remains to be settled whether this burden should entirely rest upon the party invoking the money laundering defence or whether this standard should be alleviated, e.g. by requiring the counterparty to bring counterevidence in case the allegation prima facie appears to be grounded. At present, this will still be decided on a case-by-case basis.

At the enforcement stage, the question arises whether an arbitral award that is tainted by money-laundering allegations can be denied recognition and enforceability based on public policy grounds, Art. V (2) (b) New York Convention. Generally, the concept of public policy is construed narrowly. A public policy violation presupposes a clear violation of fundamental legal principles. Against the background of the precedent concerning arbitral proceedings involving corruption, there is a strong basis to argue that money laundering falls under the international ordre public. Money laundering is declared illegal by a number of international legal instruments, such as the Fourth EU Directive, and efforts to combat money laundering have intensified on a global level. After all, the money that is laundered regularly stems from a foregoing illegal activity, such as corruption. However, the views amongst courts in different states will differ on this view, as will be the standard of review that national courts will apply when being faced with ordre public defences.

Where does this leave practitioners? There are no clear guidelines but the issue remains relevant – not least because the legislator is further knitting the net. Therefore, arbitration practitioners should be aware of the basic principles and the discussion should continue.

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New Risks for Investors? Israel’s Supreme Court Refuses to Set Aside a Multi–Million Class Action Against Foreign Investors

Wed, 2017-11-08 23:39

Asaf Niemoj

A. Introduction

Investments in a foreign country entail risks for the investors. These include the possibility that their investments will be nationalized or expropriated if, for example, a political change occurs. There is also a risk of loss as a result of war, armed conflict, revolution, a state of national emergency, etc. However, on 29 September 2017 the Israeli Supreme Court delivered a judgment which illustrates that investors may need to cope with new substantial risks, to which investment treaties may not have a remedy and which the investors may not have taken into consideration prior to entering into a business venture in a foreign country.

9771/16 Nobel Energy and others v Nasry and the Attorney General
, was an appeal submitted to the Supreme Court following a District Court’s refusal to set aside a multi-million class action filed against Nobel Energy and several other foreign investors. In their appeal to the Supreme Court, the investors argued that the District Court’s judgment should be overturned, and that the class action should be set aside. In its judgment, however, the Supreme Court refused to do so and dismissed the appeal. This means that a green light was given by the Supreme Court to proceed with the certification stage of this multi-million class action. This stage, though only the preliminary part of a class action, is a crucial part thereof and can have substantial implications on the final outcome of the case.

B. The Israeli Energy Market, the New Gas Fields and the Class Action

The following is a very brief background needed in order to understand the sequence of events which led to the filing of the class action and the above-mentioned Appeal to the Supreme Court.

1. The Israeli energy market has gone through substantial changes in the last 8 years. This is due to the discovery of substantial amounts of gas in fields located in the exclusive economic zone near the Israeli coast. In 2012, following the discovery of the gas, the investors signed a contract with the Israeli Energy Company according to which the latter undertook to purchase gas produced by the investors from the said gas fields. According to the contract, the agreed price per unit was set at 5.042 USD. Indeed, following the conclusion of the deal, the Israeli Energy Company started purchasing more and more gas produced by the investors, to the extent that in 2012 the Israeli Anti-Trust and Competition Authority declared that the investors hold a monopoly in the area of natural gas supply. This declaration imposed further obligations on the investors, pursuant to the Israeli Anti-Trust Law.

2. Pursuant to Israeli law, a legal action based on an alleged breach of the Anti-Trust Law can, generally speaking, be certified as a class action. Based on these legal grounds, in 2014 an action against the investors, and a request to certify it as a class action, were filed with the District Court in Tel-Aviv. In his action the Claimant argues, inter alia, that the investors are using their position as monopoly holders to abuse the market, by setting an unfair price per gas unit (and that he argues is a breach of Anti-Trust Law). He argues that the fair price per gas unit is only 2.34 USD – less than half of the contractual price which was set at 5.042 USD. The Claimant therefore argues that the investors should be ordered to pay the members of the group (the Israeli energy consumers) the difference between the contractual price and a fair price. In essence, this means paying hundreds of millions of dollars back to the Israeli consumers.

3. In 2015, while the class action was still pending, the Israeli government adopted a national plan whose goal is to regulate the Israeli gas market. This Plan (also called the Gas Plan) was the work product of a professional committee appointed by the Government in order to examine the Israeli gas market and suggest ways to regulate it. The Plan consists of several chapters which aim to regulate different aspects of the gas market, among them pricing. However the Pricing chapter excludes contracts concluded prior to the adoption of the Plan by the Government, therefore the contract to which class action refers is excluded from the Plan and is not regulated by it.

4. Following the adoption of the Gas Plan by the Israeli government, a petition was filed with the Supreme Court asking it to declare that the Plan is illegal. Following the petition and in order to make sure that the Plan would be upheld, certain amendments were made to it.

5. In their motion to set aside the class action, the investors argued that the Supreme Court had already discussed and ruled on the issues raised by the Claimant in his class action. They argued that the Claimant is stopped from raising those issues again, given that they were already discussed and decided upon by the Supreme Court in its judgment on the petition to declare the Plan as illegal.

C. The Decision to Dismiss the Appeal

In its judgment the Supreme Court decided to dismiss the appeal, and allow the District Court to proceed with the hearings of the certification stage.1)In some common law jurisdictions where class-action are permitted, class-action proceedings are divided into two stages. During the first one, the certification stage, the court hears evidence in order to decide whether the action before it can and should be tried as a class-actions. In many cases this stage, although only a preliminary one, is crucial and in fact determines the outcome of the action. jQuery("#footnote_plugin_tooltip_5116_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5116_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Supreme Court stated that this is an exceptional class action in light of the extremely wide scope of the remedies sought, the deep involvement of the Israeli regulator, and the substantial implications it entails on the parties involved. In fact, the Supreme Court stated that it is very rare (if ever) that class actions with such characteristics and potential impact on the market are tried before the courts.

The Court further mentioned that the Plan does not cover contracts, if they were concluded before the Plan came into force, therefore the investors cannot rely on it. The Court further found that both the petition to declare the Plan as illegal and the class action do indeed share many common aspects. However, it found that the main question which arises from the class action is whether the gas price is excessive and amounts to an abuse of the market or not. It found that this was not the question discussed in the Petition, which was an administrative procedure aimed at examining the legality of the Plan. The Court mentioned that issues related to pricing were not discussed in the Supreme Court’s decision on the Petition, and indicated that in the petition the Supreme Court specifically stated that issues related to pricing are essentially economic in nature, and as such the professional governmental and regulatory bodies – and not the court – are better placed to examine and decide on them. It noted that the court will refrain from intervening in such matters and will do so only in rare cases where a decision made by a professional body is clearly unreasonable (or illegal).

D. The Potential Implications on Investors

The first thing that comes to mind is that though investors tend to believe that the main risks for their investments derive from governmental actions, this may not be true anymore.

Secondly, and following the first conclusion, it can be argued that investment treaties may not be able to protect such investments.

The third point is related to the second one. However, one point should be noted before discussing it. Part 6 of the Plan deals with the regulatory environment in Israel. It is entitled “maintaining a stable regulatory environment”. In short, in this section the Government of Israel states that it is aware that the development of gas fields is a unique investment due to the fact that it requires the investor to invest huge amounts of money which are far greater than those needed in other types of investments. It further states that the Government is aware that a stable regulatory environment is required in order to encourage foreign investments. The chapter then goes on to say, inter alia, that for a duration of 10 years the Government will not initiate any regulatory changes related to the public’s share in profits derived from the gas fields. Further, the Plan states that the Government will oppose any such initiative, if brought to the Israeli Parliament by one of its members.

This section was one of the most controversial parts of the Plan. It caused a major public debate and outrage because, in fact, this sections mean that the government is chained and cannot use its prerogative and duty to manage the country. Part 6 was discussed by the Supreme Court during the Petition hearings and was indeed amended following it.

Many important facts which are relevant to our discussion are not publicly available (and the Supreme Court noted that even the contracts were not presented in full). However, the relevant BIT seems to be the Israel-Cyprus BIT. Article 8 provides that disputes which arise between an investor of one Contracting Party and the other Contracting Party can be submitted by the investor, inter alia, to the Center for the Settlement of Investment Disputes.

As stated above, the Attorney General was a party to the appeal. His opinion, as submitted to the Supreme Court, was that the class action should indeed be set aside. In other words, the Attorney General took the side of the investors, rather than of the public (which was represented by the Claimant in the class action). In this regard it would be worth considering what would have been the position (from an investment treaty perspective) if the Attorney General were to take a different approach, namely one which sided with the Claimant rather than with the investors.

Would that be grounds for the investors to initiate arbitration proceedings? Would it be reasonable to argue that by taking such an approach the Israeli Government had breached its obligations under the Plan? Would it be reasonable to argue that by doing so the Israeli government had breached its obligation under Article 2 to “encourage and create favorable conditions for investments”? For now this is only a hypothetical question. However, the Nobel Energy case clearly demonstrates that new substantial risks can emerge and that this is something that should be considered by investors.

References   [ + ]

1. ↑ In some common law jurisdictions where class-action are permitted, class-action proceedings are divided into two stages. During the first one, the certification stage, the court hears evidence in order to decide whether the action before it can and should be tried as a class-actions. In many cases this stage, although only a preliminary one, is crucial and in fact determines the outcome of the action. 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: Compendium of International Commercial Arbitration Forms
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Collective Redress in Austria and the European Union: What’s in it for arbitration?

Tue, 2017-11-07 22:09

Michael Stimakovits

Schoenherr

The development of effective instruments for collective redress is a widely discussed topic among European politicians, consumer protectors, legal scholars and dispute resolution lawyers. The professional discourse was recently fuelled by the Volkswagen emission scandal (also referred to as “emissiongate” or “dieselgate”), which, at least in the US, was already subject to collective actions. Another more recent incident, which only emerged in summer 2017, is the German automotive industry cartel concerning allegations on decades of collusion between large German car manufacturers.

At EU level, collective redress mechanisms were most recently picked up by the European Commission in its (non-binding) Recommendation 2013/369/EU of 11 June 2013 (the “Recommendation”). It states that all EU Member States shall take the necessary measures to implement a general system of collective redress, and suggests concrete principles for collective redress mechanisms to, among others, avoid the development of an abusive litigation culture. Moreover, the European Commission called on the Member States to communicate information on the Member States’ experience with collective redress mechanisms, and to assess the implementation of the Recommendation by 26 July 2016. The information gathered in this process will be summarised in a report to be published in the near future.

The increased importance of introducing effective collective redress instruments in Europe is also evidenced by a detailed Report published in March 2017 by the U.S. Chamber of Commerce Institute for Legal Reform, against the backdrop of the European Commission’s upcoming assessment of its Recommendation. This publication takes a close look at developments in 10 EU-Member States concerning collective actions and provides several proposals on how to avoid abuses of collective redress.

Despite these recent developments, Vera Jourova, European Commissioner for Justice, Consumers and Gender Equality, is reported saying that the “soft approach” pursued by the European Commission did not have the desired effect (NB: interview in German; last downloaded 18 October 2017). Accordingly, she argues for an EU-wide framework for collective redress instruments to be binding upon all Member States, where especially European consumers may effectively concentrate their efforts against large companies.

Commissioner Jourova definitely has a point when it comes to the development of collective redress instruments in the EU Member States: Even though the collective redress systems currently in place at national level seem to contain some pertinent instruments. Upon closer examination, it turns out, however, that many of these instruments lack the desired efficiency (e.g. opt-out features), required safeguards (e.g. no regulation for third party funders), or adequate admissibility procedures.

An overview of the instruments of collective redress currently available in Austria confirms, at least to some extent, the need for further development. These instruments are mainly vested in Austrian consumer protection law:

Austrian law on consumer protection offers the possibility of “representative actions” (Verbandsklage) brought by certain associations mentioned in the Austrian Consumer Protection Act or the Unfair Competition Act. That would be for example, the association for consumer information or the Austrian Chamber of Labour. These associations are entitled to bring such representative actions if the interests of a large number of consumers are concerned. It is not a requirement for a representative action that a consumer had already suffered damages.

However, the application of representative actions is rather limited, since they merely aim to obtain a cease-and-desist order to control future behaviour of major market participants. What representative actions cannot do, is obtaining a performance judgment for the benefit of consumers.

Further, also based on the Austrian Consumer Protection Act, an association may lodge a test claim (Verbands-Musterklage), after having been assigned a claim by a consumer. With this measure it is possible to obtain a performance judgement; and the association may bring the test claim before the Austrian Supreme Court, independent of the amount in dispute. In short, the purpose of a test case is to resolve all claims arising out of the same cause in one go. Yet, this procedure still has its deficiencies: One major disadvantage is that it has no time-barring effect on the claims which are not part of the test claim. Moreover, if other injured parties pursue their individual claims, once the test claim has become final and binding, the defendant could easily torpedo or considerably delay these subsequent proceedings, by simply contesting each claim.

Finally, the third instrument of collective redress available in Austria is the Austrian-type class action (Sammelklage). This collective redress tool has been largely developed by case law of the Austrian Supreme Court, due to the lack of a “real” instrument providing legal protection to a large number of claimants. In order to participate in an Austrian-type class action, injured persons, first, need to assign their claim to an association (or person). This means they need to opt in to the class to be part of the suit — unlike in the US, where you have an opt-out system. The association then lodges a single claim which covers all of the individual claims assigned to it. In order to be admissible in court, the assigned claims need to be based on a similar set of legal and factual issues.

The assignment of claims to a single claimant has at least some advantages: the amount in dispute is regularly high enough to cooperate with a litigation funder and all the claims assigned to the leading claimant are prevented from being time-barred. However, a drawback for the effectiveness of Austrian instruments is that they only provide for an opt-in mechanism; an opt-out feature has not been introduced so far. Accordingly, also settlements in Austrian class-actions are only binding on the persons who have assigned their claims; there is no general binding effect for all similar claims as with the Dutch act on class settlements.

It will not only be interesting to see how the Austrian system will develop, but also what approach the European Commission will take in its report and following Commissioner Jourova’s statements.

However, even more exciting is the question of what part arbitration will play in the forthcoming development of collective redress instruments in Europe. An attentive reader will have noticed that arbitration has not been discussed much in this blog post. The reason being that the discussion of collective redress instruments almost exclusively relates to litigation (as for Austria, consumer protection law makes arbitration rather impractical, due to the known barriers with concluding arbitration agreements with consumers).

This observation corresponds to Gary Born’s statement in his blog post from 2015, namely that group arbitration proceedings are “relatively rare“.

At least in my experience, this is still the case and, unfortunately, I have not had the chance to work on a group arbitration so far. I wonder how common group arbitrations are in practice. Therefore, I invite the avid readers of the Kluwer Arbitration Blog to share their experiences with group arbitration proceedings in the comment section below.

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Thoughts On Making Arbitration Great Again

Mon, 2017-11-06 23:31

Richard Levin

After the US election, it was a certainty that in my inbox every morning there was at least one, if not more, email with a discussion on the future of arbitration in our changing society today. And this debate has continued in halls of university law schools to GAR events to law firm seminars. I am reluctant to write more, but the events strike me a little differently, at least as I try to consider present day events in an historical context or some larger big picture.

Recent government pronouncements on trade and immigration can ultimately, if not sooner, have an impact on the “right to arbitration,” a right some may see, as do I, embedded in the freedoms of contract and association. The Trump Administration seems to have some inherent distrust of anyone deciding disputes other than its own handpicked people as the US has walked away from multilateral agreements such as the Trans Pacific Partnership and the Paris Accord, and stating that in renegotiating NAFTA, foreign NAFTA country investors in the United States “are not accorded greater substantive rights than domestic investors,” a shout-out to the Calvo Doctrine. This may eventually not bode well for NAFTA ISDS.

Extraordinarily, in the past few days we have seen the likes of Nobel-laureate Joseph Stiglitz and Trump critic Robert Reich leading a swell of 200 academe to protest the use of ISDS in NAFTA as undermining the rule of law, outsourcing the judiciary, and giving short shrift to “checks and balances.” As well, protectionism and the current America First climate has certainly placed what we have known as globalization in the back seat. The soundings from such arbitration leaders as Gary Born and John Beechey have been well publicized, that economic nationalism or retrenchment and the negative concerns of free trade and globalization on both sides of the Atlantic, could very possibly signal further distrust for the general concept of investor state arbitration. ISDS is under the microscope and under some criticism, possibly with some merit in part, but overall the criticism is unfounded at least in my judgment.

One has to consider not only the benefits and importance of investment treaties as encouraging trade flows, but also that when disputes arise, these might not be particularly suitable to be in local courts. Nimble thinking is required. The pragmatic flexibility, evidently overlooked by Stiglitz’s group and required in any system with a robust rule of law has been described as “[t]he range of interventions…in the rule of law encompasses not only institutional reform within the branches of government, but also experiments that entail partnerships with a variety of stakeholders and the public outside government.” [Lisa Blomgren Bingham, Reflections on Designing Governance to Produce the Rule of Law, 2011 Journal of Dispute Resolution 67 at 73.] Furthermore “initiatives also include private justice systems, such as commercial arbitration and independent arbitrators in response to concerns over a lack of independence in the judiciary, as in the case of bilateral investment treaty arbitration intended to protect private property from expropriation.” (p 87).

The scarier proposition, to me at least, is that the very underpinnings and floor on which arbitration sits may themselves begin to shake with the onset of the above retrenchment thinking leading the charge or setting the stage. It is the arrogation of power in the Executive that has historically led to a failure in the rule of law and the elimination of checks and balances, not private arbitration. History has clearly shown when governments move to centralize power away from democratic individual autonomy, people’s rights are of necessity going to be adversely affected; and it follows that their individual rights to decide how they want their disputes resolved are taken away. This is what happened in the time of Napoleon, and famously in Germany in the 1930s. Moving down to the Mideast, I read recently where the Qatari Court of Cassation has recently decided the national courts are now in charge of arbitration matters, to the degree that it has stripped the arbitrators of the right to decide their own jurisdiction via competence-competence. I have not even addressed Poland, Latin America or other parts of the world.

Furthermore, arbitration, somewhat paradoxically is getting a populist’s black eye, especially in consumer circles, with the latest defeat of the CFPB proposal to curb the banks’ preference for mandatory arbitration in disputes. (This in spite of some evidence the consumer actually does better in its claims in arbitration than in a class action in court). And should US and international lawyers be able to rely on the US federal judiciary, and its own Supreme Court, for continuing pro arbitration pronouncements such as the BG Group decision, when it is very possible a great percentage of the federal bench will change in this Administration? Not likely. (I refer you to the sage remarks of VV Veeder QC on the BG case, long before Trump, in April of 2014, wherein he essentially said “not so fast” on arbitration catching on as the people’s cudgel).

What is at bottom causing this concern and ill feeling? It is likely to be the convergence of the rise of national determinism in the US and abroad as well as the growing distrust of the institution of the arbitral process (an example being the Tapie case in France, where the process was tainted by otherwise respected figures). Chief Justice Roberts eloquently wrote in dissent that it is no small matter when a “state permits private adjudicators to review its public policies and effectively annul the authoritative acts of its legislature, executive, and judiciary.” [BG Group plc v. Republic of Argentina, 134 S. Ct. 1198, 1220 (2014).] And it is a tough sell when a sovereign’s efforts to achieve a clean environment or provide essential services for healthy communities are alleged as violating an investor’s rights in contract, and huge taxpayer moneys are awarded by tribunals not even indirectly accountable to any electorate. This fits right into what we heard from the Stiglitz-Reich group (outsourcing the domestic legal system, losing the checks and balances, no accountability, weakening the judicial branch). Furthermore across the pond in England, much has been written and said about arbitrators not having the same robust effect to law development as do the national courts. Even, the Chief Justice of England and Wales, Lord Thomas, has weighed in with some notoriety, and recently spoken of the need and suitability for courts, not arbitrators, to develop the rule of law.

This criticism, in my judgment, fails to strike the correct balance of interests and account for the bigger picture where “pragmatic flexibility” on our rule of law should prevail to allow such values as individual freedom of contract and allow for free investment flows across borders as well as the allowance of disputes to be heard in arbitration when they are not suitable in local courts. US Laws such as the FAA and treaties such as the New York Convention seem to have understood this balance as well as the real checks and balances as have academics such as Prof Blomgren Bingham. Moreover simply put, in the international transaction, when a border is crossed, the advantages of a neutral forum seem to be compelling, and this greatly outweighs any negative to my thinking. Stephen Breyer has an excellent discussion on this latter point in his recent book, The Court and The World, pp 179 et seq.

In closing, consider the hopefully extreme case. One of the countries’ leading thinkers on modern history and totalitarianism, Prof Timothy Snyder at Yale, has recently written that “(h)istory can familiarize, and it can warn.” Expansion of global trade in modern times, as it did in the 19th and 20th centuries, leads to heightened expectations of the people and also “perceived inequalities.” Leaders then emerge and put a “face on globalization” as resulting from a “conspiracy against the nation.” Professor Snyder’s short book, On Tyranny, offers twenty lessons from the 20th century to keep our liberty and freedom and combat tyranny. Institutions do not “protect themselves” Snyder notes. They fall “one after the other unless each is defended from the beginning.” So it is and, as stewards of the institution of the arbitral process, a process which embraces freedom, we should be ever so mindful.

Richard C Levin is partner at Akin Gump Strauss Hauer & Feld, and a principal at Richard Levin Arbitration LLC.

Further references: S. Breyer, The Court and the World, (2016). T. Snyder, On Tyranny, (2017). Lisa Blomgren Bingham, Reflections on Designing Governance to Produce the Rule of Law, 2011 Journal of Dispute Resolution 67 (2011). Remarks of VV Veeder, QC at Wilmer Hale Seminar, at 37:30.

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Proposed Reform of Italy’s Arbitration Act: One Step Forward, Two Steps Back?

Sun, 2017-11-05 22:35

Anna Biasiolo, Vanda Kopic and Teodora Marconi

The long-yearned for reform of the Arbitration Act has finally gotten off the starting block. An ad hoc commission has submitted its reform proposal (Proposal), to the scrutiny of the Ministry of Justice (for the full text of the Proposal see here; see also Guido Alpa et al., Un progetto di riforma delle ADR, Jovene, 2017). When and if it passes the scrutiny, the Proposal will be submitted to parliament for approval. It will no doubt be a long time coming ― and the process might suffer some delays given the impending elections ― but it is not too early to start questioning whether the Proposal heads in the right direction. This article focuses on two key aspects of the Proposal that raise such question:

> Arbitral tribunals being able to issue interim measures

>
Challenges of awards being able to go directly before the Italian Supreme Court.

In some respects, the Proposal heads in the right direction, especially by addressing the much debated issue of interim measures, but its timidity is self-evident and, if approved, the reform could end up being a missed opportunity.

For Italy to be a more attractive venue, it would be wiser to bring the Arbitration Act even more into line with international standards, for example, by aligning it to a greater extent to the UNCITRAL Model Law on International Commercial Arbitration.

For more details, read the rest of the article below!

Power to grant interim measures

The Italian Arbitration Act is notorious for being particularly conservative when it comes to interim measures. Parties have to look to the courts if they want interim measures, as arbitral tribunals “may not grant attachments or other interim measures, unless the law provides otherwise” (Art. 818 of the Civil Procedure Code, “CPC”). Currently, the only narrow exception to this prohibition is the power of arbitrators to suspend the effectiveness of shareholders’ resolutions in corporate arbitrations.

The commission’s attempt to improve things falls short by some way. It empowers arbitral tribunals to issue interim measures only – and by way of exception – when the applicable “arbitration rules” (regolamento arbitrale) so allow. This would be the case, for example, with ICC arbitrations (Art. 28 of the ICC rules allows so).

The Proposal aims to encourage administered arbitrations by discouraging ad hoc ones. However, the Proposal would not necessarily succeed in this aim. Indeed, an uncertainty exists as to what is exactly meant by “arbitration rules” as no definition is provided. This term could encompass rules of minor, inactive or extinct institutions or even rules that the parties decide to classify as such. Furthermore, the adoption of “arbitration rules” does not automatically imply that the arbitration is administered by an arbitral institution, as the parties are free to adopt arbitration institutional rules without involving the arbitral institution. This would be the case of the UNCITRAL Rules of Arbitration which can be used both in an ad hoc arbitration as well as in administered arbitration.

Moreover, the concise formulation of the Proposal leaves space for doubts about the regime of interim measures. First, based on the wording of the Proposal, it is unclear whether a party has the possibility to choose between requesting the interim measure to the arbitral tribunal or to the competent judge. Second, the Proposal fails to specify whether a form of assistance by state court is envisaged, for example in case of non-compliance by the party with the interim measure. Third, the Proposal is silent about the possibility to request again an interim measure that was once denied. The new regime could be drafted more in detail and provide for this possibility, should circumstances change or should new factual or legal grounds be deduced – as provided for interim measures issued by state courts (Art. 669-septies CPC).

In addition, the Proposal expressly states that interim measures cannot be challenged. Therefore, different rules would apply to interim measures granted by the state courts (which may be challenged under the provisions of Article 669-terdecies CPC) and to those granted by arbitral tribunals (which cannot be challenged).

In a nutshell, the Proposal seems to partially miss an opportunity to bring Italy into line with international standards. Indeed, arbitral tribunals in almost all other countries may freely grant interim measures – in both ad hoc and administered arbitrations.

Challenging awards

Challenges of awards must first go before the Court of Appeal. Subsequently, assuming there are grounds to do so, the Court of Appeal’s decision can be also challenged before the Supreme Court.

The commission has attempted to shorten and simplify the process by introducing a shortcut: in particular circumstances challenges for the annulment of awards could be brought directly before the Supreme Court. The Parties might agree in writing (either before or after the award has been rendered) on the possibility to directly challenge for the annulment of the award before the Supreme Court.1)This possibility is offered only if the parties did not agree, at the time of the arbitration agreement, on the possibility to challenge the award based on the violation of provisions of law concerning the merits (a possibility that has to be expressly agreed by the parties). jQuery("#footnote_plugin_tooltip_6423_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6423_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In principle, the commission’s intention is commendable, as awards would become final and binding more quickly. On the other hand, the usefulness of the Proposal is questionable: it is hard to imagine that the Parties would be willing to renounce to an additional step for challenge, especially if the dispute has already arisen. Moreover, the amendment would result in an increase in the Supreme Court’s already heavy caseload – and thus run counter to efforts made in the last decades by the Italian legislatures to reduce its caseload.

An additional concern regards the interplay between the new shortcut and the related provisions under the CPC. Indeed, where ‘gaps’ in the Proposal exist, the provisions on challenges before the Supreme Court – when compatible – are to be referred to. Besides the many holes that remain with this ‘gap-filling’, defining the regime applicable to the direct challenges could prove to be rather problematic. This is because, for example, during the proceedings for the challenge of the award, even if courts do not analyse the merits of the case, they nonetheless may have to carry out activities such as the collection of evidence, the finding of facts and/or the evaluation of factual evidence (e.g. to prove that a party was not given a proper notice of the arbitral proceedings or was unable to present its case). However, in Italy, the Supreme Court is prevented from carrying these out whereas the Court of Appeal can engage in similar activities. And albeit true that the practical concerns might find resolution in case law, it is unfortunate that the commission failed to make the wording clearer and ‘gap-less’ so as to prevent such issues.

For the reasons above, it seems that the proposed amendment may not be an appropriate way to improve the current rules for setting aside awards and that the parties could be potentially less prone to agree on the direct challenge than expected.

Finally, in Italy the grounds for challenging the awards are considerably more than in the other countries: no fewer than 12 grounds are listed under Art. 829 of the CPC. Despite the number, the grounds are in fact, taken as a whole, very similar, if not almost identical, to the ones provided by Art. 34 of the UNCITRAL Model Law. Nonetheless, it would be better to streamline the current grounds in order to bring them into line with the UNCITRAL Model Law, thus increasing the appearance of Italy as an “arbitration friendly” legislation. It is a fact that Italian judges have proved to be favourable to arbitration as rarely any challenge of the award is successful,2)According to a recent survey, following proceedings for the setting aside of arbitral awards before the Italian Courts of Appeal of Brescia, Genoa, Turin and Milan, only four out of 99 awards were set aside. This survey took into consideration 27 per cent of the overall number of decisions on challenge of awards – both national and international – issued from 1 January 2007 to 30 June 2014. jQuery("#footnote_plugin_tooltip_6423_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6423_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); thus Italy is currently a substantially “arbitration-friendly” seat as far as the challenge of awards is concerned.

Conclusion

Though the commission’s Proposal is a partially missed opportunity, it is a valuable first approach to the much needed reform of Italy’s Arbitration Act. It puts in light the areas where reform is compelling and it will serve as a starting point to reach the final version of the reform. However, many improvements are necessary, including above all bringing the national regime closer to the UNCITRAL Model Law.

References   [ + ]

1. ↑ This possibility is offered only if the parties did not agree, at the time of the arbitration agreement, on the possibility to challenge the award based on the violation of provisions of law concerning the merits (a possibility that has to be expressly agreed by the parties). 2. ↑ According to a recent survey, following proceedings for the setting aside of arbitral awards before the Italian Courts of Appeal of Brescia, Genoa, Turin and Milan, only four out of 99 awards were set aside. This survey took into consideration 27 per cent of the overall number of decisions on challenge of awards – both national and international – issued from 1 January 2007 to 30 June 2014. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitrators as Lawmakers
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Latest Chairman Designations to the ICSID Panels Substantially Increase Diversity

Sat, 2017-11-04 21:20

Chiara Giorgetti

ITA

On 15 September 2017, the Chairman of the Administrative Council of the International Centre for Settlement of Investment Disputes (ICSID) designated new members to the Panel of Arbitrators and the Panel of Conciliators.

This is momentous. For the first time, the lists contain an equal number of female and male members, and a geographical diversity has also been enhanced. Indeed, it is surprising that it has not been more widely reported.

—-

As is well-known, ICSID maintains a Panel of Arbitrators as well as a Panel of Conciliators. Under Article 13 of the ICSID Convention, each of its Contracting States may designate up to four persons to each Panel. In addition, the Chairman of the Administrative Council (the Chairman) may designate up to ten persons to each panel, to serve for a renewable term of six years.

Being on the Panel of Arbitrators is important because, under the ICSID Convention (Arts. 38 and 40), when asked to make an appointment, for example when the parties are unable to appoint members of the Tribunal 90 days after the registration of the request for arbitration, the Chairman must make the appointment from the Panel of Arbitrators. Thus, the Chairman appoints about 25% of all tribunal members and 100% of annulment Committees members. In addition to being prestigious, therefore, being on the Panel of Arbitrators enhances the chances and opportunities to be nominated as arbitrator and sit in ICSID arbitral tribunals and annulment committees.

The latest appointment occurred on 15 September 2017 (effect on 16 September 2017) when Dr. Jim Yong Kim, President of the World Bank Group and as such Chairman of the Administrative Council, designated 10 persons to the Panel of Arbitrators and 10 persons to the Panel of Conciliators. The full list of appointees is available here.

Half of the new appointees are women. The new appointees are all highly qualified, solid and respected lawyers. The new appointees to the Panel of Arbitrators are Funke Adekoya, partner at ǼLEX Legal Practitioners in Nigeria, Yas Banifatemi, partner at Sherman & Sterling LLP in Paris, Lucinda A. Low, partner at Steptoe Johnson LLP in Washington D.C. and presently President of the American Society of International Law (ASIL), Loretta Malintoppi, barrister at 39 Essex Chambers in Singapore and Professor Yuejiao Zhang of Tsinghua University Law School and former member of the WTO appellate body.

Under-representation of women in international arbitration is a recognized problem and many scholars, the present author included, have called for action to enhance equal representation in arbitration. For example, since 2015, several members of the arbitration community, including institutions and law-firms, have taken “the pledge” to take action “to increase, on an equal opportunity basis, the number of women appointed as arbitrators in order to achieve a fair representation as soon as practically possible, with the ultimate goal of full parity.” ICSID’s new nominations are the pledge in action.

As I argued in my article “Who Decides Who Decides”, institutions can play a pivotal role in making international arbitration more inclusive and enhance diversity by expanding the pool of arbitrators when making appointments. The new nominations by ICSID demonstrate the potential and significance of this role, and should be recognized. Let’s hope now that parties follow this lead and also include the many qualified women candidates when making appointments.

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The Duty to Give Reasons – A Robust Affirmation

Fri, 2017-11-03 20:11

Stephen Hunter

Last year I posted on the New Zealand High Court’s decision in Ngāti Hurungaterangi & Ors v Ngāti Wahiao [2016] NZHC 1486. The High Court rejected the plaintiffs’ claim that an arbitral award was inadequately reasoned and should be set aside. The Court described the panel’s reasoning as “undeniably sparse” but held by a “fine margin” that the requirements of natural justice had been met. That decision has now been reversed by the Court of Appeal. The Court has delivered a robust affirmation of the requirement for reasons and a stinging critique of the panel’s failure to discharge this obligation.

As I explained in my earlier post, the case arose from an agreement to return specified ancestral lands to Māori after 115 years in Crown ownership. Two Māori groups (hapū) had competing claims to exclusive beneficial ownership. The legislation giving effect to the agreement with the Crown provided for the dispute between hapū to be resolved by arbitration. The arbitral panel sat over 13 days and heard very extensive historical evidence. The panel delivered a relatively brief award determining that the land should be apportioned equally. The plaintiffs were given special leave to appeal to the High Court and subsequently to the Court of Appeal.

The Court of Appeal noted the legislative requirement for reasons in New Zealand’s Arbitration Act (reflecting the UNCITRAL Model Law) and explained the purpose and nature of that requirement. In doing so, the Court drew on the English Court of Appeal’s decision in Flannery v Halifax Estate Agencies Ltd [2000] 1 WLR 377 (CA). That decision related to the requirement for reasons in the judicial context, holding that reasons are a function of due process and therefore of justice. The New Zealand Court commented that this underlying purpose is common to both arbitral and judicial processes.

Expanding on the purpose of the requirement, the Court emphasised that reasons bring discipline and robustness to the decision-making process. A requirement to give reasons “concentrates the mind” and exposes the parties “to the disciplined thought pattern of the specialist adjudicator”.

The nature and extent of the duty varies with context. The most basic requirement is that reasons “must be coherent and comply with an elementary level of logic of adequate substance to enable the parties to understand how and why [the panel reached its decision]”. The reasons “must engage with the parties’ competing cases and the evidence sufficiently to justify the result.” Beyond this, the extent of the reasons required will be dictated by context and “must reflect the importance of the arbitral reference and the panel’s conclusion”.

In respect of this last point, the Court noted the significance of this particular arbitration to the parties and the fact that the arbitration was the culmination of a long and complex process. The Court drew on the decision of the Permanent Court of Arbitration on appeal from the Abyei Borders Commission. In that case, the Permanent Court had noted the significance of the issues at stake and that the degree of reasoning should be commensurate with the importance of the conclusions. Reasons “dispel any hint of arbitrariness and ensure the presence of fairness”. The New Zealand Court adopted the Permanent Court’s statements and held that they applied equally to the case at hand.

Having set out the requirements for a “disciplined thought pattern” and “an elementary level of logic”, the Court turned to the panel’s five paragraphs of reasons. The Court makes clear that these very basic requirements had not been met.

First, the award failed to set out a list of issues which would have provided an “organised framework” for the reasoning process. Instead the panel had identified “three largely uncontentious and formalistic issues”. In this regard, the Court commented that recitation of the parties’ cases is no substitute for identifying the true issues.

Second, the panel had failed to address very significant parts of the evidence. Whilst an arbitral panel is “master of the facts”, this evidentiary discretion “does not absolve the panel from stating why it preferred certain evidence”.

Third, the purported findings on significant issues were “conclusory, not reasoned”. The Court held that the “inescapable” inference was that the panel “having concluded the issue was difficult and complex, simply elected to adopt a convenient compromise, one that was not the result of any reasoned or logical process.” The Court quoted Lord Bingham in describing the award as “an irrational splitting of the difference” that could not be sustained on any grounds.

What is ultimately most significant about the Court’s judgment is not its recitation of the requirement for reasons. That has all been said before. Rather, it is the Court’s clinical analysis of the award. Mere words on the page, consisting of repetition of the parties’ arguments and conclusory findings, are not enough. The parties are entitled to see evidence of the disciplined thinking – the hard work – that should form the basis for any difficult decision. Arbitrators who avoid this and take easy shortcuts risk having their awards set aside.

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II Oxford Symposium on Comparative International Commercial Arbitration

Fri, 2017-11-03 02:08

André Monteiro, Felipe V. Sperandio e João Ilhão Moreira

On 20th November 2017, the II Oxford Symposium on Comparative International Commercial Arbitration will take place at Wolfson College – University of Oxford.

This conference brings together specialists from the Americas and Europe to discuss key issues in international commercial arbitration from a comparative perspective. This year we again have a particularly strong set of speakers.

After the welcome address delivered by Professor Louise Gullifer (Commercial Law Centre) and André Luís Monteiro (Andrade & Fichtner), the conference will start with the keynote speech from the Right Honourable Lord Saville of Newdigate PC QC, who was responsible for drafting the English Arbitration Act 1996 (Act), and sat as Justice of the UK Supreme Court. Lord Saville will discuss the relevance and appropriateness of the Act today, more than 20 years after its inception.

The conference will then discuss pathological arbitration clauses. Michael Tselentis QC (20 Essex Street), Ana Serra e Moura (ICC), Charlotta Falkman (SCC) and Carlos Forbes (CCBC) will explain how the institutions and courts interpret these clauses, under the guidance of panel chair Felipe V. Sperandio (Clyde & Co).

Omissions and drafting errors in arbitral clauses can be a cardinal sin in arbitration. In these cases, how should arbitrators deal with these problems? Do arbitral tribunals have the power to delete, replace or modify wrong words written by the parties, following previous judicial decisions (Lucky-Goldstar v. Ng Moo; Travelport v. Bellview; Deko v. Dingler) and arbitral decisions (ICC 6709; ICC 10097; ICC 7920; ICC 6000; ICC 9473)? Do arbitral institutions have the same power? How far can arbitrators and arbitral institutions go in giving effect to pathological arbitration clauses? Consider, for example, an arbitration agreement that uses the ambiguous expression “London Court of the International Chamber of Commerce”. How should LCIA and ICC handle this arbitration clause? What happens if both institutions understand they have power over the dispute? These are some of the issues that will be addressed by the panellists.

The second panel will debate the contrasting views on the degree of disclosure to be undertaken by arbitrators. It will focus on the impact of this issue on the setting-aside and recognition proceedings. The panel is comprised of Professor Catherine A. Rogers (UPenn and Arbitrator Intelligence), Professor Carlos Alberto Carmona (USP), Pedro Metello de Nápoles (PLMJ), José Antonio Fichtner (Andrade & Fichtner); and directed by Gloria Alvarez (University of Aberdeen).

The duty of disclosure is recognized as a fundamental principle of international commercial arbitration. Nevertheless, to which extent does this principle applies is required is a complex issue. Is there an international standard for disclosing? Should arbitrators reveal all the facts that link themselves to the parties and the case (full disclosure)? By adopting this standard, is there a risk of over disclosure and, consequently, of frivolous challenges to arbitrators? In other words, is there the risk that some irrelevant facts that were not  disclosed, end up being used by the losing party to set aside the arbitral award? Is the arbitrator’s failure to disclose per se grounds for annulling the award? Do parties’ counsel have a duty to supplement the disclosures with research into publicly available materials? If they do not fulfil this obligation, does this failure impact on their right to challenge the arbitral award? The speakers will support a variety of points of view.

In the afternoon, the conference will discuss whether arbitral tribunals are bound by court precedents in international commercial arbitration, and whether the “arbitral precedents order” is on the rise. A panel composed of Teresa Arruda Alvim (PUC/SP), Peter Hirst (Clyde & Co), Paula Costa e Silva (Universidade de Lisboa) and Christopher Harris (3VB) will be led by Victoria Narancio (WilmerHale).

Except where parties have agreed to arbitration ex aequo et bono, arbitral tribunals must decide cases by applying the law chosen by the parties. In doing so, arbitrators should give the same weight and legal effect to previous judicial decisions. Taking a philosophical approach, arbitral awards should apply judicial precedent because they also constitute law. In addition, applying judicial precedents, arbitration may provide predictable results to the parties. If arbitrators do not apply judicial precedents, can arbitration turn into an “outlaw land”? From another perspective, however, the question is: should an arbitral award be set aside because it did not follow a judicial precedent? Regarding the role of arbitral decisions, rather than judicial decisions, can an arbitral award be a precedent? Is the answer the same when we are thinking of sports arbitrations, domain arbitrations and investment treaty arbitrations instead of commercial arbitrations? Shall such “arbitral precedents” be followed in future arbitrations? Are they also binding for judicial courts? Or is it just a one-way street (judicial-arbitral, but not arbitral-judicial)? These complex issues will be discussed by the speakers.

Following this, João Ilhão Moreira (University of Oxford) will chair a panel composed of Horst Eidenmüller (University of Oxford), Giovanni Ettore Nanni (CBAr), Chris Parker (Herbert Smith Freehills) and Andreas von Goldbeck (University of Oxford) on whether and how arbitrators should sanction parties and counsel who breach accepted rules of behaviour during arbitral proceedings.

All parties in arbitration must observe the highest standards of good-faith and fairness in relation of the arbitrators and the counterparty. This obligation derives from the implied promise not to frustrate mutual expectations. Sometimes, however, arbitrators are faced with guerrilla tactics and need to take measures to keep the proceedings under their control. In these situations, it is worth understanding if arbitrators have the power to sanction parties for misconduct. Is it an “inherent power” that permits an arbitral tribunal to sanction a party even in the absence of a provision in the arbitration agreement or arbitration rules? What role does the law of the seat of arbitration play in this matter? When the applicable law applicable law admits this power in general terms (v.g..: Hong Kong, England, France, and Brazil), which measures can be adopted by the arbitral tribunal to sanction party misconduct – adverse inferences, exclusion of evidence, monetary sanctions, costs allocation? Can the arbitrators impose sanctions on the parties’ counsel as well? Were the decisions reached in the cases of ReliaStar v. EMC; Hrvatska v Republic of Slovenia; Superadio v. Winstar; Metropolitan v. Connecticut; Re Interchem v. Oceana correct? This panel will explore these questions in detail.

The last panel of the day will take the conference to one of the hottest topics in arbitration today. In September 2017, the ICCA-QMUL Task Force on Third-Party Funding released its draft report for comments. Since then, a few of the players in the market have their disagreement with the report’s findings. Steven Friel (Woodsford Litigation Funding), Leonardo Viveiros (Leste Litigation Finance), Diego Saco (Lex Finance Arbitration Financing) and Duarte Henriques (ICCA-QMUL Task Force on Third-Party Funding and BCH) will discuss the draft report, in a panel led by Napoleão Casado Filho (Clasen, Caribé & Casado Filho).

Third-party funding is a reality in both the judicial and arbitration fields. However, there are a few countries in which maintenance and champerty are prohibited by law (Ireland, for example). In these cases, is third-party funding allowed? If not, is there a risk of the enforcement of the arbitral award be denied if the winning party had the support of a third-party funder? Regarding the conflicts of interest, should a party disclose the existence of a third-party funder? Is this a mandatory and general rule, applicable for all cases? In doing so, should the party also reveal the terms of the funding arrangement to the arbitrators, or just the identity of the funder? In the absence of this disclosure, do the arbitrators have the power to expressly request that the parties disclose whether they are receiving third-party support? Can this order be issued directly against the funder? If these facts have not been revealed during the arbitral process, can unknown conflicts of interest be a basis for an effective challenge to an arbitrator or an arbitral award? Should all kinds of third-party funding (single-case funding v. pool of cases involving the same party and funder) be given the same treatment? These are just some of the issues that will be addressed by the panellists.

Justice Luiz Fux from the Brazilian Supreme Court will be the keynote speaker closing the conference. Justice Fux will deliver a speech on the continuing necessity to improve the relationships between courts and arbitrators towards the development of a secure and stable business environment.

This conference is co-hosted by the Commercial Law Centre at Harris Manchester College (University of Oxford) and the Oxford University Brazilian Society. The event is sponsored by Center for Arbitration and Mediation of the Chamber of Commerce Brazil Canada, Andrade & Fichtner Advogados, White & Case LLP, Leste Litigation Finance, Lex Finance Arbitration Financing, L.O. Baptista Advogados, Fux Advogados and Lex Anglo-Brasil. A post will follow on this blog with a summary of the discussions.

Registration for the event can be done at: https://billetto.co.uk/e/ii-oxford-symposium-on-comparative-international-commercial-arbitration-tickets-221136

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Decrypting Cryptocurrencies: Why Borderless Currencies May Benefit from Borderless Dispute Resolution

Thu, 2017-11-02 00:19

Simon Maynard and Elizabeth Chan

Three Crowns LLP

Cryptocurrency is a term that is becoming increasingly familiar. But how many of us have considered its implications for the world we live in—let alone for the practice of international arbitration?

Cryptocurrencies—essentially digital cash—and the blockchain technology on which they are built, have the potential to revolutionise the way funds are raised, traded and stored. Cryptocurrency transfers are not only faster, simpler, and less expensive than those offered by many financial services companies, but processing cryptocurrency transactions is also far cheaper than the cost of many traditional payment systems.

In June 2017, the total market capitalisation for all cryptocurrencies surpassed US$100 billion, while trading between cryptocurrencies has grown to in excess of US$2 billion a day. So mainstream have cryptocurrencies become that a number of international law firms have confirmed that, in principle, they would accept payment of their fees in cryptocurrency.

With the proliferation in the use—and potential abuse—of cryptocurrencies, the possibility for disputes can only increase—and with it, the need for an effective and efficient means of “off-blockchain” dispute resolution.

Decrypting cryptocurrencies

Cryptocurrencies are digital currencies. But unlike a fiat currency, the value of which is backed by a third-party institution (such as a central bank), cryptocurrencies are a decentralised digital asset represented by line items on a distributed public ledger called blockchain. Instead of relying on a financial institution to record transactions, blockchain leverages the resources of large peer-to-peer networks to verify and confirm each cryptocurrency transaction.

Blockchain ledgers are described as “distributed” because financial information is stored across multiple sites (which can be anywhere in the world), without the need for a central administrator. Every time a cryptocurrency transaction is made, that transaction is verified, confirmed and stored on a cryptographically secure public ledger—or “block”—that is linked to the preceding block, thus creating the blockchain. The blockchain is replicated across the entire network of peers, thus allowing parties to transact securely without a third-party intermediary.

The largest—and most widely known—cryptocurrency remains bitcoin, which was invented in 2009 by the still unidentified Santoshi Nakamoto. However, there are now over 900 different digital currencies, with bitcoin now representing less than half the world’s total cryptocurrency value.

Initial Coin Offerings and other potential cryptocurrency disputes

One of the most innovative and growing uses of cryptocurrencies is as a means to crowdfund investment capital via an Initial Coin Offering (ICO).

In an ICO, a company sells digital coins or tokens in exchange for payment in cash or an established cryptocurrency. The coin or token may function like a share, giving its owner an equity stake in the issuing company, with voting rights and a right to dividends. Alternatively, coins may operate more like points earned in a retailer loyalty programme, enabling their owner to access particular features (for example, goods or services) offered by that company.

In either case, like a share, the value of the coin or token can increase if the business is successful. In theory, it can then be traded globally on exchanges that handle cryptocurrencies. And as with any venture where funds are put at risk by investors, uncertainties as to the allocation of that risk, or the basis on which the risk was assumed, can give rise to disputes.

For instance, in order to attract investment, a company launching an ICO will provide certain information about its business, which may include an offering memorandum or prospectus, in some respects comparable to an offering circular issued by a company engaging in a rights or bond issue. Arbitration clauses could be the logical dispute resolution mechanism to include in such documents.

It is not just a possible breach of the terms and the conditions of these memoranda that could give rise to a claim. The manner in which an ICO is conducted also has the potential to form the basis of a dispute.

To take a recent example, in an ICO conducted earlier this year, network congestion resulting from high subscriber demand prompted the issuing company to keep the offering open for longer that it had initially planned. This resulted in complaints from early investors who argued that, in consequence, the funds raised had been allowed to succeed the issuer’s capped target, with the effect of decreasing the value of the coins purchased prior to reaching that target. Again, given the international profile of ICO investors, arbitration could provide the most effective means of resolving such disputes.

The potential for cryptocurrency disputes does not stop at ICOs. Despite the security provided by end-to-end encryption, there remains the possibility for disputes arising out of failures in the underlying blockchain system itself. Last year, in a high-profile hacking incident involving the popular Ethereum cryptocurrency platform, a hacker siphoned off millions of dollars worth of cryptocurrency contributed by investors. Investors who suffer harm arising from similar failures in the blockchain underlying their cryptocurrency investments may naturally wish to seek damages from the platform provider.

Finally, while uncertainty remains as to whether cryptocurrency-based economic activities can be classified as “investments” for the purposes of the existing investment arbitration regime, the rush of certain States to regulate—and even ban—cryptocurrency investment means that investment arbitration may well yet be deployed as a means to resolve regulatory disputes.

Arbitration as a means of resolving cryptocurrency disputes

Although the cryptocurrency industry is still relatively nascent, it has the potential for significant growth. As some cryptocurrency providers have already recognised, disputes arising from borderless currencies may be best served by a commensurately borderless form of international dispute resolution.

Not only does international arbitration offer a neutral alternative to domestic courts and result in an award that is enforceable in 157 countries under the New York Convention, it also allows cryptocurrency issuers and investors to choose expert decision-makers equipped to deal with technically complex disputes, as well as protect the confidentiality of sensitive proprietary information. Indeed, arbitral rules could be specifically tailored to suit the peculiarities of cryptocurrency disputes, just as they have been for, amongst other things, intellectual property disputes and disputes arising from the space industry.

However, a recent survey by the Silicon Valley Arbitration and Mediation Center suggests that while lawyers in the tech sector are increasingly likely to use international arbitration over litigation—with key benefits identified as specialist expertise, time to resolution, and increased privacy—only 35% had actually used arbitration in their last claim, compared to 44% for litigation and 37% for mediation.

There is, therefore, a pressing need for arbitration practitioners to promote the benefits of arbitration to the tech community, including those involved in developing and investing in cryptocurrencies. As a starting point, there would appear to be scope to develop model arbitration clauses tailored to cryptocurrency disputes, and to ICOs in particular, and to examine what (if any) modifications to institutional rules may be required to accommodate such disputes better. This could include, for example, providing for a list of specialist arbitrators able to handle the unique questions generated by cryptocurrency-related disputes. These might include complex conflict of laws issues, arising from the tension between international law, domestic regulatory regimes and the governing law of any relevant contractual agreement(s).

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