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Enforcement of Mediated Settlement Agreements in Vietnam: A Step Forward the International Trend?

Sat, 2017-07-01 23:06

Nguyen Manh Dzung and Dang Vu Minh Ha

Young ICCA

On 24 February 2017, the Government of Vietnam promulgated Decree No.22/2017/ND-CP on Commercial Mediation (the “Decree”). It is the first legislation specifically governing commercial mediation in Vietnam. The Decree is inspired by the UNCITRAL Model Law on International Commercial Conciliation (the “UNCITRAL Model Law”), but includes several local modifications. From the drafting process, the Decree has attracted the attention and comments of experts and practitioners not only from Vietnam but also from the international community.

Furthermore, Vietnam also recently introduced an effective regime for the enforcement of mediated settlement agreements, one of the most critical issues of mediation. It is secured by the regulations on recognition of results of out-of-court mediation (mediated settlement agreements) in Chapter 33 of the 2015 Vietnamese Civil Procedure Code (the “CPC”).

Beyond the national level, the EU-Vietnam Free Trade Agreement (the “EVFTA”), which is regarded as the most comprehensive and ambitious FTA that the EU has ever concluded with a developing country, also dedicates a considerable role to the mediation of both state-state and investor-state disputes.

Considered altogether, will these legal frameworks create firm ground for the rise of mediation in Vietnam?

Disputes allowed to be settled by commercial mediation

Mediation is a brand-new issue for the legislators in Vietnam. In lack of a pre-existing mediation law, the Decree is therefore instead significantly influenced by the 2010 Vietnamese Law on Commercial Arbitration (the “LCA”). In particular, similar to the scope of application of the LCA, the Decree stipulates that mediation shall only be applicable for disputes of a commercial nature, disputes in which at least one party is engaged in commercial activity or disputes specifically designated by other laws to be settled by commercial mediation. Under Vietnamese law, “commercial activities” means activities for the purpose of generating profits, including the sale and purchase of goods, provision of services, investment, and commercial promotion. Presently, only disputes falling within this scope can be settled by commercial mediation. Though the scope of application of the Decree is narrower than foreseen in the UNCITRAL Model Law, it can cover almost all current common commercial disputes. Additionally, it is expected that the sphere of application will be expanded in the near future with the amendment of the Vietnamese Law on Commerce as well as other substantive laws. These will most likely specifically designate further kinds of disputes for resolution through mediation.

Qualifications of mediators, practice of foreign mediators and presence of foreign mediation institutions in Vietnam

The Decree set out quite strict qualifications for mediators. Specifically, apart from general moral standards, mediators must have a university or higher qualification and at least two years of working experience in their educated discipline. Furthermore, mediators are required to have mediation skills as well as legal understanding, knowledge of business and commercial practice. These requirements are similar to those applicable to arbitrators under the LCA. Despite these strict requirements, the Decree lacks an accreditation system for meditators.

The Decree on Commercial Mediation promotes both institutional and ad-hoc mediation. Accordingly, mediators can choose to be listed on the panel of a mediation centre or practise independently as ad-hoc mediator or both.

Though there is no explicit restriction on the nationality of mediators, the Decree imposes a technical barrier requiring ad-hoc mediators to register with the Department of Justice where they reside. As a result, the opportunity for foreign mediators to personally practise in Vietnam may be restricted. Presently, it therefore appears that the selection of an adequate mediator may be a hard task for disputing parties as well as their counsel since the persons meeting the requirements of the law may not be as skilful and experienced as internationally accredited mediators. However, influenced by the LCA and in compliance with the commitment of Vietnam in accession to the WTO, the Decree also encourages foreign mediation institutions to open branch or representative offices in Vietnam. Furthermore, the branch offices of international mediation centres can establish their own panels of mediators provided that the mediators meet the general qualifications specified by the Decree. We expect that these regulations will facilitate international mediation centres to explore the Vietnamese mediation market.

Recognition of mediated settlement agreements

The enforceability of mediated settlement agreements is maybe the most important factor contributing to the success of mediation. Accordingly, in order to safeguard the enforceability of mediated settlements, Vietnamese law provides a mechanism for the recognition of mediated settlement agreements, which converts the agreements into court judgments.

The written mediated settlement agreement, on the one hand, will be valid and have binding effect on the disputing parties in accordance with the provisions of civil law. On the other hand, pursuant to the Decree and Chapter 33 of the CPC one or both parties to the mediated settlement agreement can apply to the courts for the recognition of their agreement. After being recognized, the mediated settlement agreement is enforceable as a full and final court judgment in compliance with the Vietnamese Law on the Enforcement of Civil Judgments. However, this recognition mechanism only applies for settlement agreements resulting from mediations conducted under the provisions of the Decree. Hence, the results of mediations conducted by foreign mediation centres such as the Singapore International Mediation Center (SIMC), the Center for Effective Dispute Resolution (CEDR), etc. are presently not be covered by these regulations.

The Vietnamese regulations mirror Directive 2008/52/EC of the European Parliament and Council of 21 May 2008 on Certain Aspects of Mediation in Civil and Commercial Matters, especially its Article 6 on the enforceability of agreements resulting from mediation.

With these regulations, Vietnam is at the forefront of a new international trend on the enforcement of mediated settlement agreements. In future, this trend may well lead to an instrument, most favourably in form of an international convention, on the enforcement of international commercial settlement agreements resulting from mediation, which could have a similar effect as the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The draft of such a Convention is currently the main topic of discussion in Working Group II of the UNCITRAL (Agenda of Working Group II of the UNCITRAL http://www.uncitral.org/uncitral/en/commission/working_groups/2Arbitration.html accessed on 15 May 2017).

Investment Mediation

Apart from building the framework for commercial mediation, with the EVFTA Vietnam also entered into one of the very first new generation free trade agreements promoting and detailing the settlement of investment dispute through mediation. Under the EVFTA, at any time during the settlement of an investor-state dispute, any disputing party can invite the other party to conduct mediation in accordance with the procedure stipulated therein.

The specific regulations on mediation included in the EVFTA demonstrate the special attention given by the legislators in Europe and Vietnam to dispute resolution through mediation, which is apparently gradually becoming a favourable new trend in the world. Consequently, we believe that this trend will also positively affect and further help the development of commercial mediation in Vietnam.


It is apparent from the above that both commercial mediation and investment mediation in Vietnam have received due attention from legislators and are now provided with a sound legal framework, which will be the cornerstone for its future development. Despite certain drawbacks, it can be expected that the new legislation will bring mediation in Vietnam closer to the standards of international practice and will help it to become an effective method of dispute resolution for the business community. In addition, we expect that the new legislation on mediation will actually support rather than pose competition to arbitration, as it will enhance the usage of multi-tiered dispute resolution and strengthen the pro-ADR policy of the Vietnamese government. Accordingly, we have the strong belief that mediation will flourish in Vietnam in the near future due to its facilitation by the new legal framework as well as the support from the Vietnamese courts and government.

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The Annulment of Interstate Arbitral Awards

Sat, 2017-07-01 05:30

Peter Tzeng

On Thursday, the arbitral tribunal in Croatia/Slovenia rendered a final award on the merits of the dispute despite what a previous post on this blog called “severe breaches of duty of confidentiality and impartiality” during the arbitral proceedings. In commercial and investment arbitration, where procedural irregularities arise, either party can seek annulment of the award before an annulment body, such as a national court or an ICSID ad hoc committee. In other words, commercial and investment arbitral awards are subject to a compulsory control mechanism. The case of Croatia/Slovenia, however, is an interstate arbitration. Two questions thus arise. First, as a matter of lex lata, are interstate arbitral awards subject to a compulsory control mechanism? Second, as a matter of lex ferenda, should interstate arbitral awards be subject to such a mechanism? This post addresses these two questions in turn.

Lex Lata

As a matter of lex lata, interstate arbitral awards are not subject to a compulsory control mechanism. This might seem obvious to many readers. After all, as a matter of practice, States very rarely seek the annulment of interstate awards. The only two modern cases where States have done so, Arbitral Award Made by the King of Spain (Honduras v. Nicaragua) and Arbitral Award of 31 July 1989 (Guinea-Bissau v. Senegal), are both cases where the parties consented to the jurisdiction of the International Court of Justice (ICJ) to settle the dispute. Absent such consent, States simply do not seek the annulment of interstate arbitral awards.

This practice is in line with the legal framework governing interstate arbitration. One might wonder why there is no compulsory control mechanism for interstate awards, but there is for commercial and non-ICSID investment awards (i.e., annulment at the national courts of the seat of arbitration). After all, commercial, non-ICSID investment, and interstate arbitration all have quite similar legal frameworks. In all three, the arbitral award is “final and binding”. In all three, State entities can be parties to the arbitrations. And in all three, the arbitral tribunal is often seated in a national jurisdiction where the national law expressly grants national courts the power to annul international arbitral awards. So why are national courts able to annul commercial and non-ICSID awards, but not interstate awards? To be more concrete, as Croatia/Slovenia is seated in Belgium, why can’t Croatia go to Belgian courts to annul the award rendered on Thursday?

One commonly cited reason is that interstate arbitral awards are completely “delocalized”: they are subject only to public international law, not to any national law, so it would be absurd for national courts to have the power to annul them. Nevertheless, there are two important counterarguments to consider. First, many scholars argue that commercial and non-ICSID arbitral awards are similarly “delocalized”, but they are undoubtedly subject to annulment (the effect of the annulment on enforcement is another question). And second, interstate arbitrations today, like commercial and non-ICSID arbitrations, generally have a seat of arbitration, so it would be inaccurate to argue that they are completely detached from national jurisdictions.

A more practical reason why national courts cannot annul interstate arbitral awards is State immunity. Indeed, in Chagos Marine Protected Area (Mauritius v. United Kingdom), the United Kingdom invoked State immunity to counter Mauritius’s claim that the award could be annulled by Dutch courts (Reasoned Decision on Challenge, para. 117). Article 5 of the United Nations Convention on Jurisdictional Immunities of States and Their Property (which has not yet entered into force, but largely reflects customary international law) provides that “a State enjoys immunity … from the jurisdiction of the courts of another State subject to the provisions of the present Convention”. The provision concerning arbitration, Article 17, provides that “a State cannot invoke immunity … in a proceeding which relates to … the setting aside of the award”, but the provision applies only to arbitrations where (1) the arbitration agreement is between the State and “a foreign natural or juridical person”; and (2) the dispute is one “relating to a commercial transaction”. As a result, Article 17 applies to commercial and investment arbitrations. Nevertheless, as the ILC Commentary makes clear (p. 55), Article 17 does not apply to interstate arbitrations because (1) the arbitration agreement is formed between States; and (2) interstate disputes often (though not always) concern sovereign rights rather than commercial transactions. Article 12 of the European Convention on State Immunity (which has entered into force, but is not widely ratified or acceded to) contains the same two requirements.

Whether one agrees more with the first reason, the second reason, or perhaps another reason not mentioned above, the conclusion is the same: as a matter of lex lata, interstate arbitral awards are not subject to a compulsory control mechanism.

Lex Ferenda

As a matter of lex ferenda, in the opinion of the present author, interstate arbitral awards should be subject to a compulsory control mechanism. The policy debate concerning the propriety of annulment centers around the reconciliation of two principles: finality and fairness. On the one hand, arbitral awards should be final, such that a dissatisfied party cannot relitigate the dispute simply because it disagrees with the outcome. On the other hand, arbitral awards should be fair, such that a dissatisfied party can relitigate the dispute if there are legitimate reasons for doing so.

In commercial and investment arbitration, this balance between finality and fairness has been struck in the mandates of annulment bodies. In order to promote fairness, the rules governing commercial and investment arbitration (e.g., the ICSID Convention, the UNCITRAL Model Law, and national laws) provide for annulment as a compulsory control mechanism. In order to promote finality, these rules set forth very limited grounds for annulling arbitral awards, which are generally procedural rather than substantive. Although one cannot conclude that this balance is perfect, it is widely accepted.

In interstate arbitration, the balance has been struck with greater emphasis on finality. This is because, although the annulment of interstate awards remains a possibility, there is no compulsory control mechanism. One can argue that finality is more important in interstate arbitration because the continued existence of interstate disputes can lead to serious consequences like the loss of life (e.g., in territorial boundary disputes featuring armed conflict). Nevertheless, Croatia/Slovenia and South China Sea (Philippines v. China) both show that concerns over fairness can also arise, and where these concerns are not addressed, even a “final” award will not be treated as final by all the parties, such that the aforementioned serious consequences can still arise.

Indeed, there are at least two reasons why a compulsory control mechanism for interstate awards would be desirable. First, there needs to be an impartial forum to determine whether procedural irregularities have occurred. In South China Sea, China expressed serious concerns not only over the jurisdiction of the tribunal, but also over its composition and constitution, yet no impartial forum could hear this claim on a compulsory basis. In the two most recently filed UNCLOS arbitrations Enrica Lexie (Italy v. India) and Ukraine v. Russia, similar concerns could arise regarding the propriety of the appointing authority’s self-appointment, yet again no compulsory impartial forum can hear the claim. Second, there needs to be an impartial forum to determine the consequences of procedural irregularities. In Croatia/Slovenia, there is no question that procedural irregularities occurred, but there is no compulsory impartial forum to determine their consequences.

Although the arbitral tribunal itself could be the one to decide on these matters (as the Croatia/Slovenia tribunal did in its Partial Award of 30 June 2016), under the principle of nemo judex in causa sua, the tribunal should not be the one, or at least not the only one, deciding on the consequences of its own procedural irregularities. Doing so not only undermines the legitimacy of the arbitral award, but also may lead the dissatisfied State to unilaterally declare that the award is “null and void”, as China did in South China Sea, or that the arbitration simply “does not exist”, as Croatia did in Croatia/Slovenia.


In conclusion, interstate arbitral awards are not subject to a compulsory control mechanism, but, in the opinion of the present author, they should be. On a practical level, how could this compulsory control mechanism be established? First, as a matter of customary law, one could envisage an evolution of the law of jurisdictional immunity so as to extend the exception contained in Article 17 of the United Nations Convention on Jurisdictional Immunities of States and Their Property to interstate arbitrations, such that at the very least State immunity could not be invoked in interstate annulment proceedings. Second, as a matter of conventional law, States could come together to conclude a multilateral convention that provides for a compulsory control mechanism for interstate arbitrations between State parties, as has been proposed at least once in the past. Third, as a matter of State practice, States could simply begin to offer to accept the jurisdiction of the ICJ on the basis of forum prorogatum for disputes over the validity of interstate arbitral awards.

The views expressed in this post are solely those of the author, and do not necessarily reflect the views of any institution with which the author is affiliated. The author (LinkedIn, SSRN) may be contacted at [email protected]

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Seven Trends and Seven Tips for Enforcing GAFTA and FOSFA Awards in Ukraine

Fri, 2017-06-30 03:14

Ivan Kasynyuk and Olga Kuchmiienko

The analysis of Ukrainian court practice enables us to share our thoughts on trends regarding the recognition and enforcement of GAFTA/FOSFA awards in Ukraine, and to provide tips that may help to enforce this type of awards in the future.

Seven Trends on the Recognition and Enforcement of GAFTA/FOSFA Awards in Ukraine

1. Ukrainian courts adhere to the New York Convention.

But it takes time…

Statistically, an award is passed through seven court hearings at different instances before being recognized in Ukraine, despite Ukrainian legislation, which allows to recognize an award at the first instance hearing.

E-mail communication is acceptable.

Courts recognized and enforced an arbitral award even when an arbitral agreement as well as a main contract were concluded via e-mail, or when an arbitration notice was sent by e-mail.

2. Ukrainian courts tend not to interfere in the merits of awards.

Our research showed that only once a lower court’s decision analyzed the merits in an award. The decision was subsequently cancelled by a higher court, finding it to be in contradiction to the New York Convention and Ukrainian legislation.

3. The cases on recognition and enforcement of GAFTA/FOSFA awards are frequently revised by higher courts.

Out of about 80 court decisions in 11 cases on the recognition and enforcement analyzed in the research, 63% of them were revised by higher courts. In most cases, a decision was changed or the case was remitted to the first instance for revision.

4. The standing of a party claiming enforcement is regularly assessed by courts.

Almost 20% of the claims for the recognition and enforcement of arbitral awards were rejected because they were filed by a claimant who did not have standing before an arbitral tribunal. For instance, recognition and enforcement was sought by a person that is not a party to an arbitration agreement (Budtechimport LLC vs Prodexim LLC) or to an assignment agreement (Euler Hermes Services Schweiz AG filed a claim against Odessa oil-fat combine PJSC).

5. The court enforces an award if the debtor is registered or has a property within the territory of Ukraine.

In the case Nibulon S.A. vs BSC CmbH, the defendant was not a registered entity in Ukraine, but an Austrian company. It did not have any property in Ukraine, and hence the Ukrainian court refused to decide the case. Interestingly, Nibulon S.A. provided the court with an alleged address of the debtor that appeared to be the office of Nova Capital LLC, registered in Ukraine. It arose that debtor had never been registered there (and in Ukraine as well) and did not have any connections with Nova Capital LLC. Therefore, since the claimant did not prove that the property belongs to the debtor, awards were not recognized.

6. The claimant may seek an interim relief in the proceedings for recognition and enforcement of an arbitral award.

Securing a claim is allowed at any stage of proceedings (even before filing a claim), if the failure to secure such a claim may complicate or prevent the enforcement of the award. As mentioned above, the creditor may seek enforcement in Ukraine provided that the debtor is registered, has assets, or cargo in Ukraine. However, it should be noted that when a claim is considered by the third instance court, i.e. Higher Court/Supreme Court, the court is not empowered to grant an interim relief.

7. The practice on compound interest enforcement is not uniform.

There is no uniform practice on whether a compound interest prescribed by an award must be compensated, although for already some time, Ukrainian courts have been enforcing arbitral decisions awarding compound interest.

Examples of decisions enforcing such awards are as follows:

a) a court decision in the case № 4с-410/2563/12 stated that it “[a]llow[s] to enforce the arbitration award of GAFTA dated July 21, 2011 №14-329”, without any details provided as to a particular sum of interest;

b) a court decision in the case № 127/4348/13-ц enforcing the original award, followed by the claimant asking the court to define a particular amount of interest. The court defined the amount then in an additional decision, rendered as an integral part of the recognition and enforcement decision;

c) a court decision in the case № 2521/930/2012 citing the resolution of an award with the following words added: “that constitutes [money equivalent of the compound interest at the date of the decision]”. In particular, the court inserted into its decision the precise sum of compound interest, calculated on the date of making the decision by applying the formula of compensation prescribed by the award.

However, the approach may be changed.

Notably, the Kyiv Court of Appeal held in the Order dated 23.02.2017., based on the recent decision of the Supreme Court dated 26 October 2016, stated that:

“[…] when a foreign arbitral award containing an obligation of the debtor to compensate compound interest, the precise amount of which is not defined, then there are no legal grounds to enforce the decision. Given that claimant requests such interest and in the absence of the court`s or other authority’s power to change the claimant`s request, there is no possibility for a partial enforcement of a decision. Otherwise, it would contradict subpara. b of para 2, Art. V of the New York Convention and paragraph. 6 of Article 396 of Civil Procedure Code of Ukraine.”

At this point of time, the decision is waiting for another revision of the higher court. Therefore, the issue of enforcement of GAFTA/FOSFA awards containing compound interest is currently left open.

Seven Tips: In What Way May Claimants Enhance Their Chances of Enforcement of GAFTA/FOSFA Awards?

The above outlined trends underline seven tips regarding how to avoid obstacles and successfully enforce arbitral decisions:

  1. A claim must be filed by a company mentioned in the recital of an award, or a company that obtained this right under an assignment agreement. Preferably, an assignment agreement would be concluded after the date of the arbitral award. Otherwise, the court may refuse the claimant in recognition since “the assignment agreement precedes the award”.
  2. Special attention should be paid to the evidence that the arbitral award came into force, i.e. that it is valid and final. In terms of such evidence, the extract from GAFTA/FOSFA arbitration rules or a letter from an arbitration institution that this particular award came into force would assist.
  3. The debtor must be registered or have property within the jurisdiction of the court before which the enforcement claim is brought.
  4. If there is a strong indication that the claim will be successful and there is a risk of dissipating the assets on the debtor’s side, it makes sense to ask the court for interim measures. Ukrainian courts are not reluctant to grant such measures. However, it should be noted that shall the interim measure be found as exercised without sufficient legal grounds, the claimant must afterwards compensate for all damages to the other party caused by a granted measure. In such a case, the court decision on interim measures is to be cancelled by the higher court.
  5. A claimant should be prepared for long-lasting procedures since there is a risk that the case will pass through all instances. The whole process may last from one and a half up to two years depending on the number of hearings, appeals, and new trials.
  6. It is advisable to send an arbitral agreement and notices via the same e-mail.
  7. A claim for enforcement and an arbitral award are to be in compliance with the New York Convention.


Overall, the approach of Ukrainian courts may be characterized to be pro-arbitration and in accordance with the international practice.

At the same time, there are not so many cases for the recognition and enforcement of GAFTA/FOSFA awards in Ukrainian courts. The reasons for noted results may be different: GAFTA/FOSFA awards against Ukrainian companies are enforced voluntarily; debtors that have Ukrainian beneficiaries and staff are incorporated in other jurisdictions; creditors do not start the proceedings because they do not believe that they will be successful due to the dissipation of debtor`s assets, or corruption in Ukrainian courts.

Then again, statistics are speaking for themselves: 50% of arbitral awards were enforced by means of court procedures during the last seven years. One more case is still in progress (Nibulon vs Rise), which concerns the obligation to pay compound interest. At this point in time, it is hard to predict the outcome of the proceedings.


To sum up, if the trends in Ukrainian justice on recognition and enforcement were synonymous to the fashion ones, we would recommend claimants to: choose the classic style, but keep an eye on the new winds of changes.

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Urgency, Irreparable Harm and Proportionality: Seven Years of SCC Emergency Proceedings

Thu, 2017-06-29 03:29

Anja Havedal Ipp

SCC was one of the first institutions to provide for emergency arbitrator proceedings in its rules. In 2010, the new Appendix II was added to the SCC Arbitration Rules and the Rules for Expedited Arbitrations (“SCC Rules”), allowing a party in need of prompt interim relief to receive a decision from an emergency arbitrator where no tribunal had yet been constituted. In the seven years that have passed since the introduction of Appendix II, the SCC has seen almost 30 applications for the appointment of an emergency arbitrator, with 13 of those received in 2016 alone. A recently published SCC Practice Note summarizes the 2015-2016 emergency arbitrator proceedings, and draws some conclusions based on all decisions rendered to date.

In all emergency proceedings that took place in 2015 and 2016, the SCC appointed and referred the dispute to an emergency arbitrator within 24 hours of the claimant submitting its application. Under the SCC Rules, the emergency arbitrator should render a decision on interim measures within five days from the date when the application was referred to him or her. A brief extension may be necessary for both parties to have an opportunity to be heard. In 2015 and 2016, half of the emergency arbitrator decisions were rendered within the five-day deadline, and the remaining half were rendered within seven days.

The SCC Rules do not specify the grounds or conditions for interim relief, but rather give the emergency arbitrator broad discretion to “grant any interim measures it deems appropriate”. The decisions rendered in SCC emergency arbitrations now make up a significant body of jurisprudence with regard to that discretion. Most, but not all, emergency arbitrators refer to Article 17 of the UNCITRAL Model Law, as well as the lex arbitri and previously published decisions on interim relief. A set of factors have crystalized and are now commonly accepted as prerequisites for granting interim relief. These factors are: (1) jurisdiction, (2) chance of success on the merits, (3) urgency, (4) irreparable harm, and (5) proportionality.

  • The first factor, prima facie jurisdiction, has rarely been a contested issue in SCC emergency proceedings. That said, some respondents have argued that because the emergency arbitrator provisions were not part of the SCC Rules when the arbitration agreement was signed, they had not consented to submit to emergency proceedings. This argument does not succeed, however, as it is generally accepted that an arbitration clause is deemed to reference the version of the rules in force when the arbitration is initiated. Other respondents have argued that they are not bound by the arbitration agreement. In such cases, the arbitrator makes a preliminary jurisdictional finding based on the limited submissions available within the scope of the emergency proceedings; the definitive jurisdictional determination becomes an issue for the tribunal.
  • The second factor, chance of success on the merits, has been framed in different ways by emergency arbitrators. Some are satisfied if a claimant presents a prima facie case on the merits – a mere showing that the elements of a claim are present. Most arbitrators, however, set a somewhat higher threshold; they require claimant to demonstrate a reasonable possibility of success on the merits. This means that, based on the limited submissions before the emergency arbitrator, the claimant must appear more likely than respondent to succeed on the merits of the claim. For example, if the decision turns on an issue of contract interpretation, the claimant must show that its interpretation is somehow more plausible or more likely to prevail than the interpretation proposed by the respondent.
  • The urgency and irreparable harm requirements are frequently discussed together. Some arbitrators do not consider urgency to be a separate factor, but rather that it is inherent in the requirement that the interim measures are necessary to avoid irreparable harm. Another way of framing this is that irreparable harm is a measure of urgency; if the claimant is likely to suffer irreparable harm before a final award is issued, the request for interim measures is necessarily urgent. Most emergency arbitrators, in measuring urgency or risk of irreparable harm, analyze whether the harm may be compensable by way of damages. If the harm that claimant seeks to avoid can be adequately compensated by an award of damages, most arbitrators find that interim relief is not warranted.
  • Lastly, proportionality. Where all other factors are met, emergency arbitrators consider the proportionality of the interim relief by weighing the harm avoided against the potential harm inflicted upon the respondent. If granting the interim measure would cause significant harm to the respondent, the emergency arbitrator is unlikely to grant the applicant’s request.

All emergency arbitrators appointed in 2015-2016 applied some or all of these factors in their analysis of the claimant’s request. This resulted in four requests being granted in full, six being dismissed, and three granted in part.

Not all emergency proceedings lead to regular arbitral proceedings. In some cases, the parties appear to settle the dispute after the emergency decision is rendered; or perhaps the claimant chooses not to pursue the claims in light of the emergency arbitrator’s findings. Without speculating as to the intentions of the claimants that apply for emergency measures, it appears that the emergency arbitrator proceeding provides a procedural tool that can be used for a variety of purposes.

Finally, a few words about enforcement. The SCC occasionally receives information about the compliance with and enforcement of SCC emergency decisions. Based on this anecdotal evidence, it appears that the degree of voluntary compliance with emergency decisions is relatively high. This hypothesis is also supported by the fact that the number of applications for emergency relief has steadily increased in recent years, even though decisions on interim measures remain unenforceable in many jurisdictions.

More information about SCC emergency arbitrator proceedings, and summaries of 14 recent emergency decisions, is available in the recently published SCC Practice Note: Emergency Arbitrator Decisions Rendered 2015-2016.

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Wolters Kluwer Announces Collaboration with Arbitrator Intelligence

Tue, 2017-06-27 23:58

Crina Baltag (Associate Editor)

Wolters Kluwer Legal & Regulatory U.S. today announced its collaboration with Arbitrator Intelligence (AI) to improve resources available to the arbitration community and bring more transparency to the arbitration process.

Through this collaboration, Wolters Kluwer will provide AI’s Arbitrator Intelligence reports on Kluwer Arbitration, making highly valuable data widely available and providing users with important insights throughout arbitrator selection process.

“Wolters Kluwer is delighted to support this important initiative by AI,” said Gwen de Vries, Director of Publishing of the International Group at Wolters Kluwer Legal & Regulatory U.S. “The organization’s mission to make the arbitrator selection process more transparent will benefit the arbitration process, which will ultimately benefit the arbitration community.”

AI is a non-profit, university-affiliated entity that aims to promote fairness, transparency, accountability and diversity in arbitrator selection and appointments. Through its anonymous questionnaire (called the “Arbitrator Intelligence Questionnaire” or “AIQ”), AI collects objective information and professional assessments of arbitrators’ case management skills and decision making. When sufficient feedback is received, AI compiles the anonymized data into individual “Arbitrator Intelligence Reports.”

“As a non-profit start up, we are delighted to work with Wolters Kluwer to improve the arbitrator selection process,” said Catherine Rogers, Founder of Arbitrator Intelligence. “Through this collaboration we hope to make valuable information more accessible to legal professionals in arbitration.”

The Wolters Kluwer International unit recently launched the next generation of Kluwer Arbitration, the world’ leading research solution for international arbitration. With more than 500 arbitration laws, 10,000 court decisions with full analysis, and commentary from more than 300 authors, the site provides legal professionals with market-leading content and fast, accurate research functionality.

To learn more about Kluwer Arbitration, click here.

To learn more about Arbitrator Intelligence, click here.

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Hong Kong Court of First Instance Rejects Crown Immunity Claim by PRC State-Owned Enterprise

Mon, 2017-06-26 20:17

Damien McDonald and Matthew Townsend


In a judgment dated 8 June 2017, the Hong Kong Court of First Instance (the “Court”) rejected an assertion of Crown immunity by China National Coal Group Corporation (“China Coal”) (a PRC state-owned enterprise (“SOE”)) and granted a charging order against the shares it held in a Hong Kong company, China Coal Hong Kong Limited (TNB Fuel Services SDN BHD v. China National Coal Group Corporation [2017] HKCFI 1016).

The decision provides guidance on the approach by the Hong Kong courts to claims of Crown immunity in Hong Kong by Chinese SOEs.

Crown immunity in Hong Kong

The common law doctrine of Crown immunity arises from the principle that “the sovereign can do no wrong” and provides that a sovereign cannot be sued in the courts of his own country.

In the 2010 case of Hua Tian Long (No. 2) [2010] HKLRD 611 (the “HTL Case”) the Hong Kong Court of First Instance found that the common law doctrine of Crown immunity subsisted in Hong Kong, notwithstanding the handover of Hong Kong to China in 1997. The immunity of the British Crown in the Hong Kong courts was transferred to the PRC State.

Accordingly, the PRC Central People’s Government (“CPG”), the domestic sovereign government of the Hong Kong Special Administrative Region, is entitled to claim immunity from suit and execution in the courts of Hong Kong.

Importantly, Crown immunity does not apply to Hong Kong arbitration (as opposed to litigation). Under Hong Kong law, it is generally accepted to be the position that a State party is bound by its agreement to arbitrate before a Hong Kong arbitral tribunal. However, Crown immunity will still be relevant to Hong Kong-seated arbitrations involving State parties, as it may be necessary to apply to the local courts for interim relief, and/or enforcement of any award.

In the HTL Case, which concerned a claim to Crown immunity by the Guangzhou Salvage Bureau (“GSB”), the court found that the material consideration to determine whether a corporation should be treated as part of the Crown, was the control which the CPG exercised over that corporation. In particular, the key test was “whether the corporation in question was able to exercise independent powers of its own”.

Whilst the “control test” applied in the HTL Case arises from the application of Hong Kong common law, the question of whether the entity in question meets the test will principally be a question of the lex incorporationis, namely PRC law. In the HTL Case, the court found that under PRC law, the GSB was part of the PRC State. However, the court in that case also accepted the submission by counsel for the GSB that the GSB was different from Chinese SOEs which “enjoy powers of independent management and freedom from interference, with ownership of its assets and the capacity independently to assume civil liabilities”.

Factual Background

On 17 December 2014, the Applicant, a Malaysian private company (“TNB”), obtained an arbitral award for approximately US$5.3 million against the Respondent, China Coal (“Award”). The details of the arbitration, including its seat, institution, and rules were not disclosed.

On 10 June 2015, the Court granted TNB leave to enforce the Award. Subsequently, in August 2015, TNB applied for a charging order over shares held by China Coal in China Coal Hong Kong Limited (the “Shares”). In April 2016, TNB successfully obtained an order nisi with respect to the Shares.

China Coal, which is wholly owned by the Chinese government’s State Asset Supervision and Administration Commission (“SASAC”), asserted that, as an entity of the CPG, it was entitled to Crown immunity in Hong Kong.

China Coal invited the Hong Kong Secretary for Justice (“SJ”) to intervene in the proceedings, on the basis that the case raised issues of constitutional importance and public interest.


There were two issues to be determined by the Court. The first was whether there had been a valid assertion of Crown immunity by the CPG. The second was, given that an assertion of Crown immunity does not conclusively bind the court, whether the assertion was otherwise valid by reference to the lex incorporationis and the application of the “control test”.

With respect to the first issue, Justice Mimmie Chan decided that China Coal’s assertion of Crown immunity had not been validly made. Specifically, Justice Chan found that China Coal had “failed to show authority to assert Crown immunity on behalf of the CPG, and that no such claim has been validly made on behalf of the CPG”. The only evidential support for this claim came from the affirmation of China Coal’s general legal counsel. However, and significantly, pursuant to the SJ’s intervention, a letter had been obtained from the Hong Kong and Macao Affairs Office of the State Council of the CPG (“the Letter”), the contents of which “signally [defeats China Coal’s] assertion of Crown immunity”.

The Letter, confirmed in general terms that China Coal, as an SOE, is “an independent legal entity, which carries out activities of production and operation on its own, independently assumes legal liabilities and there is no special legal person status or legal interests superior to other enterprises”. The Letter further asserted that, save in certain “extremely extraordinary circumstances where the conduct was performed [by the SOE] on behalf of the state via appropriate authorisation, etc.”, the SOE would not be deemed as a body performing functions on behalf of the CPG.

The Court approached the second issue through addressing two related questions. The first was whether China Coal was part of the CPG and the second whether it was otherwise controlled by the CPG. With respect to the first question, Justice Chan found that “as a matter of fact under PRC law, the Respondent is not part of the CPG, nor SASAC” and was a distinct and independent corporate entity from the CPG.

This finding was made in light of an examination of the material provisions of the PRC Company Law, the PRC Constitution and Assets Law, among other legislation, insofar as they related to SOEs and extensive expert evidence on their meaning and application to China Coal under PRC law.

The Court also observed that the status of China Coal was readily distinguishable from that of the GSB in the HTL Case. In that instance the entity in question was a public institution, not, like China Coal, a separate legal entity. Furthermore, the GSB, unlike China Coal, had no shareholders, no paid-up capital, no right to independently acquire or dispose of assets, and no ability to assume independent civil liabilities.

With respect to the second question and the application of the common law “control test” by reference to the PRC law, Justice Chan determined that “[i]n all, bearing in mind the nature and degree of the control which can be exercised by SASAC on behalf of CPG over [China Coal], [China Coal’s] ability to exercise independent powers of its own, and that its business and operational autonomy are in fact enshrined in and guaranteed under the applicable PRC law, I consider that the Respondent is not entitled to invoke Crown immunity”.

In terms of both questions, the Court held as a matter of PRC law, China Coal “is entitled to independent autonomy in its business operations, and it has not been established that [China Coal] is part of or controlled by the CPG to be entitled to Crown immunity against execution of its assets”.

The Court dismissed China Coal’s assertion of Crown immunity and granted the charging order absolute against the Shares. China Coal was ordered to pay TNB’s and SJ’s costs of the application.


It has been seven years since the handing down of the HTL Case, and the application of the “control test” to determine the existence of Crown immunity under Hong Kong law. The TNB Fuel Services judgment now provides further guidance on the application of that test in Hong Kong, in particular when it comes to SOEs under PRC law. The rationale for the decision, including the detailed analysis of the nature and effect of the PRC statutory provisions governing Chinese SOEs, strongly suggests that such SOEs engaging in commercial activities will face a high bar in claiming Crown immunity in Hong Kong.

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Changes in the Arbitration Law: Greater Certainty for Consumers Comes with Greater Control over Arbitration in Bulgaria

Mon, 2017-06-26 02:20

Velislava Hristova


Since the end of January 2017, a new law amending and supplementing the Code of Civil Procedure became effective (the “Law”). It also provides for amendments to the International Commercial Arbitration Act (“ICAA”) and to the Consumers Protection Act (“CPA”). Below is a summary of some of the key changes introduced by the Law.

Consumer disputes out of the jurisdiction of the arbitral tribunals

The Law proposes that a dispute in which one of the parties is a consumer is non-arbitrable. The arbitration clause in a consumer contract is void, except for cases where such clause provides for settlement of dispute in accordance with the procedure for alternative dispute resolution under the CPA. If an arbitral tribunal renders an award in a non-arbitrable dispute, the award is ex lege deemed void and the arbitrators are sanctioned with a fine.

The changes aim to introduce guarantees for protection of consumers. They respond to frequent abuse by debt collection corporations, monopolistic companies, public service providers that, among others, take advantage of arbitration proceedings by including arbitration clauses not subject to negotiation in their standard contracts and general terms. For their part, consumers have no choice but to sign them. Thus, the dispute is usually resolved by an arbitral tribunal chosen by the company. Some companies even create their own arbitral institutions (so-called “pocket arbitrations”) which render awards predominantly in their favor. Often consumers are communicated arbitral awards against them without even having been informed in advance about the existence of the proceedings, without having concluded a valid arbitration clause, or for non-existing debts. Since the award is not subject to appeal, the last chance for consumers to protect themselves is to seek annulment of the award on limited grounds.

The amendments have ex nunc effect and apply to future disputes arising after the Law’s entry into force (and not to pending proceedings). Proceedings in relation to consumer disputes are to be terminated ex lege.

Control over the writ of execution based on arbitral award

Pursuant to the Law, the district court where the domicile or seat of the debtor is located has jurisdiction to issue writs of execution for enforcement of arbitral awards. Such competent district courts is entitled to examine whether the underlying dispute is arbitrable. If the court finds that the arbitral award is issued in a non-arbitrable dispute and thus it is void, it will refuse to issue a writ of execution. Until such finding is made, this additional form of control by state courts may nonetheless arguable leave the parties uncertain whether the award will be enforced or not.

Public order is no longer a ground for setting aside arbitral awards

The Law proposes a repeal of one of the most common grounds for setting aside of arbitral awards – infringement of public order of the Republic of Bulgaria. It is not clear what the aim of this change is, especially given the fact that arbitral awards are not subject to appeal and can only be annulled on grounds explicitly and exhaustively listed in the ICAA.

Considering that Bulgaria is a party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, enforcement of a foreign arbitral award may be refused if it is contrary to international public order.

Control by the Ministry of Justice

The Law also provides for control over the arbitrators and the arbitral institutions by the Ministry of Justice through a special Inspectorate. The Inspectorate examines the compliance with the ICAA by arbitrators and arbitral institutions ex officio or upon complaints. In case of established non-compliance, the Minister of Justice gives mandatory instructions. The arbitrators and the institutions that do not comply with such instructions are subject to monetary sanctions. It is still questionable to what extent the Inspectorate will exercise this form of control and whether it has the capacity to do so effectively.

Minimum requirements for the arbitrators – for the first time in Bulgarian law

Not everybody can be an arbitrator under the Law. In order to be an arbitrator, a person should (i) be a legally capable citizen, who has not been sentenced for a premeditated publicly indictable offence, (ii) have higher education, (iii) have at least eight years of professional experience, and (iv) possess high moral qualities. There conditions are exhaustive.

These amendments are driven by the fact that in some cases the persons who serve as arbitrators have questionable qualifications and reputation. However, the requirements for arbitrators’ qualifications to some extent limit and complicate the parties’ choice in appointing an appropriate arbitrator.

More transparency for the parties to arbitration proceedings

As provided for in the Law, in order for the parties to be aware of the development of the arbitration proceedings at any time, each party will have remote access to the case files and be able to check all the necessary information on the website of the arbitral institution.

Furthermore, each arbitral tribunal should keep all the documentation for completed cases for a period of ten years in its archives. After this period, only the awards and the settlements should be kept.

Concluding remarks

The amendments are designed to better protect the consumers and any intention in this direction is welcomed. Consumers are traditionally the weaker party in disputes and the introduced changes are without a doubt a positive legislative step. However, the amendments that provide for more control over the arbitration proceedings go beyond the intention to protect consumers. Only time will show whether such approach is beneficial or if the new provisions create more obstacles than solve any problems.

The views expressed in this article are those of the author alone and should not be regarded as representative of, or binding upon ArbitralWomen and/or of Dinova Rusev & Partners Law Office or its employees.

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Qatari Court of Cassation Thickens the Fog on the Heels of the New Qatari Arbitration Law

Thu, 2017-06-22 17:01

Thomas R. Snider, Roy Georgiades & Reem Khader

In a recent judgment, the Qatari Court of Cassation ruled that an arbitral tribunal may only hear a dispute arising from a contract that is valid and that the validity of a contract is to be determined solely and exclusively by the courts (Civil Appeal No. 65-2017). Notably, the judgment was issued on 18 April 2017 just days after Qatar’s new Arbitration Law, Law No. 2 of 2017 (“Qatari Arbitration Law”) came into effect on 12 April 2017, yet the judgment appears to stand in stark contrast with two internationally accepted principles enshrined in the Qatari Arbitration Law: competence-competence and separability of the arbitration clause.

Case Facts

The claimant, a contractor, had entered into four agreements with the defendant consultant, appointing the latter to represent and provide services on behalf of the claimant in relation to a large project for the execution of numerous works for which the defendant received approximately 111.5 million Qatari Riyals (approximately USD 30.6 million). The claimant filed a case before the Qatari Court of First Instance against the defendant for the invalidation of the four agreements on the basis that the defendant did not possess the required license for performing the contractual works, which constitutes a breach of mandatory provisions under Qatari law.

Court of First Instance

The defendant argued that the case should be dismissed by virtue of an arbitration clause contained in the signed agreements. The Court of First Instance accepted the defendant’s argument and dismissed the case on the basis of the existing arbitration clause.
Court of Appeal
The claimant appealed the judgment of the Court of First Instance to the Court of Appeal, which upheld the judgment.

Court of Cassation

The claimant appealed to the Court of Cassation. The appeal was based on the claimant’s submission that the action was wrongly dismissed by the Court of First Instance and the Court of Appeal since the relief sought was the invalidation of the four agreements for being contrary to public policy. In particular, the claimant argued that the agreements were entered into and performed by the defendant unlawfully in violation of public policy by virtue of the defendant not having the requisite license and that matters of public policy were for the courts, and not arbitral tribunals, to determine.

The Court of Cassation granted the appeal. According to the Court of Cassation, any claim involving the invalidity of a contract (and restoration of the parties to the position they were in prior to the contract) implicates a matter of public policy. In reaching this sweeping conclusion, the Court of Cassation stated (as translated) that:

“[i]t is unimaginable that the arbitral panel may consider the dispute arising from the agreement without there being certainty that the agreement itself is valid, and such determination on the validity of the agreement is solely and exclusively for the judicial courts to consider and rule upon. If the appeal judgment contains a decision that is contradictory to such, then such judgment is subject to appeal by Cassation.”
It thus appears that the Court of Cassation is of the view that the Qatari courts have exclusive jurisdiction over questions of contract validity and that such jurisdiction is exercisable in advance of an arbitral tribunal’s determination on (1) its own jurisdiction and (2) a contract’s substantive validity.

The Effect of the Judgment – A Striking Contradiction to the Qatari Arbitration Law?

The Court of Cassation’s judgment, which was unexpected in light of the recent introduction of the Qatari Arbitration Law, appears to be inconsistent with the familiar notions of competence-competence and separability of the arbitration clause, which are contained in the new law and well established internationally.

These principles are enshrined in Article 16 of the Qatari Arbitration Law, which is almost identical to its counterpart in Article 16 of the UNCITRAL Model Law on International Commercial Arbitration (“UNCITRAL Model Law”). Article 16 of the Qatari Arbitration Law provides that
“[t]he Arbitral Tribunal shall decide in respect of the plea raised questioning its jurisdiction to entertain the dispute, including those grounded on absence, invalidity, nullity, revocation or irrelevancy of the Arbitration Agreement to the subject matter of the dispute. The Arbitration clause shall be treated as an agreement independent from the other conditions provided for in the contract. The nullity, rescission or termination of the contract shall not affect the arbitration clause, provided that such clause is valid per se.”

Thus, Article 16 incorporates the doctrine of competence-competence by providing that an arbitral tribunal may rule on its own jurisdiction in the first instance. Indeed, this provision in the Qatari Arbitration Law, which provides that a tribunal “shall” determine its own jurisdiction, goes even farther than Article 16 of the UNCITRAL Model Law, which provides that a tribunal “may” make this determination.

Article 16 of the Qatari Arbitration Law likewise incorporates the doctrine of separability by making it clear that, even though an arbitration clause may be contained within a broader substantive contract between parties, it is nevertheless considered a separate agreement. As such, the arbitration clause may (and, most of the time, will) continue to be valid even though the substantive contract within which the arbitration clause is contained is found to be invalid. This enables an arbitral tribunal to decide a dispute even if the substantive contract is invalid (or terminated or non-existent).

These provisions in Article 16 are complemented by Article 8 of the Qatari Arbitration Law, which mirrors Article 8 of the UNCITRAL Model Law. Article 8 of the Qatari Arbitration Law requires a Qatari court that is seized of an action subject to an arbitration agreement to refrain from proceeding in the action unless the court concludes that the arbitration agreement is invalid.

When the doctrines of competence-competence and separability are read together, one would expect that an arbitral tribunal would properly determine whether it has jurisdiction over a dispute in the first instance even if the underlying substantive contract is invalid. For example, in the English case of Fiona Trust & Holding Corporation & Others v. Privalov & Others, [2007] EWCA Civ. 20, the court held that where the underlying substantive contract was obtained through bribery, the arbitration clause in that contract remained valid and the arbitral tribunal thus maintained jurisdiction to determine its own jurisdiction.

In light of the incorporation of these principles in the Qatari Arbitration Law, one would have expected the Court of Cassation to have upheld the judgments of the Court of First Instance and Court of Appeal. Pursuant to Articles 8 and 16 of the Qatari Arbitration Law, the expected course of action would have been for the Court of Cassation to have referred the parties to arbitration and left it to the arbitral tribunal to determine first whether it had jurisdiction to hear the case and second whether the underlying agreement was valid or void. Pursuant to Article 16(3) of the Qatari Arbitration Law, either party could then have requested the Qatari courts to review the jurisdictional determination by the tribunal, and the determination of the underlying agreement’s validity is subject to annulment by the courts pursuant to Article 33(3) of the Qatari Arbitration Law.

Instead, by not giving due regard to the principles of competence-competence and separability, the Court of Cassation gave itself jurisdiction to consider the validity of the underlying substantive contract in the first instance. In doing so, the Court of Cassation took an intrusive approach that is inconsistent with these two fundamental principles set forth in the new Qatari Arbitration Law.

One particular concern that this approach raises is that parties who wish to avoid arbitration in Qatar will seek to put forth arguments based on public policy (which would apparently include any case in which it is alleged that a contract is invalid based on the Court of Cassation’s extraordinarily broad interpretation of public policy) in order to go directly to the courts to have them rule on the substantive merits of a claim. Accordingly, the Court of Cassation’s linkage of the substantive validity of the contract to the validity of the arbitration clause (and thus the jurisdiction of the arbitral tribunal) is cause for concern.

It is still too soon to tell whether such an approach will be followed and maintained by the Court of Cassation and other Qatari courts. Since Qatar does not recognize the doctrine of binding precedent, this judgment may prove to be an outlier and future court cases may be more in tune with the principles of competence-competence and separability as set forth in the new Qatari Arbitration Law. What the judgment does tell us, however, is that the new Qatari Arbitration Law has not cleared up the fog blurring the balance between the powers of the arbitral tribunal and the courts in Qatar.

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BIT between Morocco and Nigeria – A Bold Step in the Right Direction?

Thu, 2017-06-22 03:08

Stanley Nweke-Eze


In December 2016, Morocco and Nigeria signed the Reciprocal Investment Promotion and Protection Agreement (“Bilateral Investment Treaty” or “BIT”) – an agreement between two countries for the provision of foreign investment to the nationals and companies from one country, in the other. This BIT contains some innovative provisions that attempt to strike a balance between the power of the host State to regulate its economy and the need to protect the rights of foreign investors in the host State. In particular, the BIT gives investors pre and post-investment obligations, unlike most BITs that simply represent obligations which host States must respect in guaranteeing the safe operations of foreign investment like provisions on fair and equitable treatment, full protection and security, expropriation, national treatment, and settlement of disputes. This note briefly analyzes some of the innovative provisions introduced in the BIT and considers their practical implications.

Public interest provisions:

The BIT started in its preamble by reaffirming the right of both States to regulate and introduce new measures relating to investments in their territories. Regarding environmental regulation, article 13 gives a host State the right to exercise discretion with respect to regulatory, compliance, investigatory, and prosecutorial matters. Article 13(4) expressly confirms that a host State can, in a non-discriminatory manner, adopt, maintain, and enforce measures which it considers appropriate to ensure that investment activities are undertaken in a manner that is sensitive to environmental and social concerns. In addition, foreign investors are required to comply with environmental assessment screening and assessment processes that are applicable to their investments prior to their establishment. On labor and human rights, both States agreed in article 15 not to weaken, reduce, relax, or waive their domestic labor laws as well as international labor and human rights instruments in relation to domestic labor, public health and safety, or human rights to encourage foreign investment. In particular, article 18 requires foreign investors to maintain environmental management systems, uphold human rights in the host State, act in accordance with core labor standards, and not to operate their investments in a manner that circumvents international environmental, labor and human rights obligations to which the host State and/or home State are parties.

These provisions constitute a welcome development. They reflect the growing concern on the part of many States to bridge the gap between foreign investment and public interest issues. Indeed, the dilemma faced by arbitral tribunals (as reflected in the conflicting decisions between Santa Elena v. Costa Rica; Metaclad v. Mexico; Tecmed v. Mexico on one hand, and Methanex v. USA and Saluka v. Czech Republic on the other) on whether host States should strictly respect their international obligations towards foreign investors as evidenced in investment treaties or whether host States should strictly respect their international obligation of persevering public interest issues, particularly the environment, will be significantly minimized. Hence, the obligations will serve as a clear defense for a host State in the event of an investment dispute which is related to the exercise of its regulatory powers, subject to the relevant limitations. However, there is need not to misuse the right to regulate so as not to put off potential foreign investors with burdensome regulation.

Furthermore, both States agreed to prevent and combat corruption regarding foreign investment. By article 17, foreign investors have an obligation to desist from offering, promising or giving undue pecuniary or other advantage, or be complicit for gaining any favor regarding a proposed investment, license, and so on. Breach of these provisions will subject the foreign investor to prosecution in the host State, according to its applicable laws and regulations. This is a remarkable provision since there is little doubt that corruption impairs development in host States. As host States are increasingly relying on this defense to evade liabilities that befall them as seen in World Duty Free v. Republic of Kenya and Metal-Tech Ltd. v. the Republic of Uzbekistan amongst others, this provision affords foreign investors the necessary incentive to act in accordance with the law. However, it is not clear whether the anti-corruption provisions can be interpreted to mean that arbitral tribunals cannot handle the issues of corruption and a mere reaffirmation that issues of corruption are best dealt within the local courts of the host State since foreign investors are subject to prosecution in the host State.

In addition, article 6 contains the National Treatment and Most Favored Nation (“MFN”) provisions. These clauses prima facie may undermine the express provisions of the BIT relating to public interest issues. For example, it is not clear from the provisions whether MFN treatment covers only substantive rules or extends to procedural protections such as dispute resolution. These debates have been raised in several cases, including Maffezini v. SpainImpregilo SpA v. Argentina, and Salini v. Jordan. The beginning words of Article 6(5) are: “[t]he treatment granted under 1, 2, 3, 4 of this article shall not be construed as to preclude national security, public security or public order…”, and the article does not provide that MFN treatment apply to the dispute resolution processes as well as other public interest provisions in the BIT.

Administrative and dispute resolution provisions:

Article 4 established a Joint Committee for the administration of the BIT and this committee will be composed of representatives of both States. The committee will seek to resolve any disputes concerning foreign investment. It is not clear from the BIT how the representatives of the committee will be chosen, duration of their tenure, and so on. In addition, since only the States can designate who the members of the committee will be, there is concern that the interests of the foreign investors may not be adequately represented. Interestingly, article 5 provides that the States can exchange information concerning investments through the committee. This will probably assist the investors of each State with their due diligence exercises before going into the host State since some of the information that can be exchanged include regulatory conditions for investment, public policies and legal landmarks that may affect investments, trade procedures and tax regimes, amongst others.

On arbitration, before initiating proceedings, the BIT provides for specific steps. First, a party (i.e., host or home State) may submit a specific question of interest of an investor to the committee. By article 26, if the dispute cannot be resolved within six months from the date of the written request for consultations and negotiations, the investor will resort to the local remedies or the domestic courts of the host State, and may afterwards, resort to international arbitration. It appears that this proposed mechanism for resolving disputes may take more time. A more serious concern is that the power to refer disputes to the committee rests solely on the States and this power is discretionary. Hence, being able to refer a dispute to the committee may depend on the relationship between the investor and its home State. The opportunity to resort to arbitration after exhausting local remedies in the domestic courts of host State still leaves the concerns about judicial sovereignty of the host State unresolved. This is because the process arguably grants the arbitral tribunal tremendous powers in deciding issues that have important judicial and regulatory implications of a host State, and arguably gives foreign investors an unfair advantage over domestic investors.

Another significant question that arises in the context of the BIT is the method of enforcing breach of these obligations against foreign investors. According to article 20, if foreign investors fail to adhere to these obligations, they will be subject to civil actions for liability in the judicial process of their home State for the acts or decisions made in relation to the investment where such acts or decisions lead to significant damage, personal injuries or loss of life in the host state. However, this provision is ambiguous. It is not clear who can bring such an action against the investors in their host State and if (besides charges of corruption), other breaches of the obligations that rests on the shoulders of the investors can be initiated in the courts of the host State.

On the bright side, article 10 provides for a transparent dispute resolution process, which addresses the problem of publicity, especially in relation to proceedings that involve public interests. Both States agreed that their laws, regulations and administrative rulings regarding foreign investment will be published in the shortest possible time and be accessible, if possible, by electronic means. If the dispute gets to arbitration, the notice of arbitration, pleadings, briefs submitted to the tribunal, other written submissions, minutes of transcripts of hearings, orders, awards and decisions of the tribunal shall be available to the public. In addition, the arbitral tribunal shall conduct hearings publicly provided that any protected information that is submitted to the tribunal shall be protected in accordance with the applicable law. This mechanism is an impressive development since the arbitral tribunals may assess the regulatory policies and actions of a host State, and the assessment may have significant economic and political consequences to the citizens of the host State. It will also minimize the uncertainty and lack of uniformity in the resolution of investment disputes.

Conclusion and way forward:

The BIT, although still unratified by both States, is a bold step towards striking a balance between the need to protect foreign investment and the power of a host State to regulate its economy. Whether the step was in the right direction is uncertain, especially since some provisions are ambiguous. The right answer will be revealed when the provisions of the BIT are put in practice. Be it as it may, there is an opportunity to amend the BIT at any time at the request of either State giving the other party six months’ notice in writing, in accordance with article 30. Both States also agreed to meet every five years after the entry into force of the BIT to review its operation and effectiveness, and may adopt joint measures to improve the effectiveness of this Agreement, in accordance with article 33.

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Deposition in Japan for U.S.-based International Arbitration

Wed, 2017-06-21 03:48

Shigeki Obi

Young ICCA

I. Introduction

A deposition is a “witness’s sworn out-of-court testimony” (Legal Information Institute “Wex, Deposition”). In U.S.-based litigation, a deposition is available as part of the discovery procedure. In the United States, a deposition is also available in arbitration. Arbitral tribunals seated in the United States may order a deposition of a witness if s/he is under the control of a party (C. SALOMON and S. FRIEDRICH, Obtaining and Submitting Evidence in International Arbitration in the United States, The American Review of International Arbitration (2013), The American Review of International Arbitration, p. 574).

However, like most civil law countries, Japan does not have pre-trial discovery procedures which allow for depositions to be conducted. This presents an obstacle when conducting depositions in Japan for U.S.-based matters, whether in connection with litigation or arbitration proceedings.

II. Deposition in Japan for U.S.-based Litigation

A deposition in Japan is conducted by a U.S. consul when it is taken for use in a U.S.-based litigation. The Consular Convention between Japan and the Unites States of America authorizes a U.S. consular officer to conduct depositions in Japan for U.S.-based litigation (22 March 1963, 15 U.S.T. 768 (hereinafter “Consular Convention”), article 17 (1)(e)(ii)).

Other deposition methods by U.S.-licensed attorneys are considered to be unavailable (Embassy of Japan in the United States “To Attend Deposition Taking By U.S. Consul”, (hereinafter “Embassy of Japan Website”))

A. A Voluntary Deposition by a Consular Officer Is Available

Article 17 (1)(e)(ii) of the Consular Convention provides that “[a consular officer may] take depositions, on behalf of the courts or other judicial tribunals or authorities of the sending state, voluntarily given”.

The Government of Japan strictly interprets that such a deposition is available only if (1) it is conducted on U.S. consular premises; and (2) pursuant to a U.S. court order or commission. Since only a consular officer has the authority to take a deposition and U.S. attorneys are merely allowed to play a supplemental role, all direct or cross- examinations by U.S. attorneys must be presided over by a consular officer (Bureau of Consular Affairs of the U.S. Department of State “Legal Consideration, International Judicial Assistance, Japan, Taking Voluntary Depositions of Willing Witnesses”, last updated 15 November 2013, (hereinafter “DOS Website”).

Non-Japanese participants, including U.S.-licensed attorneys, are required to obtain a Japanese Special Deposition Visa, unless they are (1) an Attorney at Foreign Law in Japan, which is authorized to provide legal services based on the laws of its home jurisdiction (Act on Special Measures concerning the Handling of Legal Services by Foreign Lawyers, Law No. 69 of 2014 (Japan), article 3); (2) a permanent resident of Japan; or (3) a spouse of the one of the above (DOS Website).

B. Other Deposition Methods Are Unavailable in Japan

The Government of Japan takes a position that other deposition methods are unavailable for U.S.-based litigation (Embassy of Japan Website).

First, taking a deposition in Japan for the use of U.S. court proceedings constitutes an indirect exercise of foreign judicial authority in the territory of Japan, even if the deposition is conducted on a voluntary basis. Accordingly, such a deposition is considered as a violation of Japan’s sovereignty unless Japan grants special authorization through the Consular Convention (Y. FUJITA, Transnational Litigation—Conflicts of Laws, in Z. Kitagawa (ed.), Doing Business in Japan, part 5-14, section 14.07 (Matthew Bender, 2015), para. (5)(e)(i)).

Second, Japan is not a member of the Hague Convention on the Taking Evidence of Abroad in Civil or Commercial Matters, which provides procedures for taking evidence abroad upon the request of judicial authorities of state parties. The Hague Convention procedures are of no use to a party to a U.S.-based litigation seeking to take a deposition in Japan.

III. Deposition in Japan for U.S.-based International Arbitration

However, it is unclear whether this outcome applies to a deposition in Japan for a U.S.-based arbitration.

A. It Is Unclear Whether the Consular Convention Covers Depositions for Arbitration

It is uncertain whether the deposition procedure under the Consular Convention is available for the use of U.S.-based arbitration.

Article 17(1)(e)(ii) of the Consular Convention provides that a U.S. consular officer may “take depositions, on behalf of the courts or other judicial tribunals or authorities of the sending state, voluntarily given” (emphasis added).

It can be argued that an international arbitration tribunal does not meet the definition of any “courts or other judicial tribunals or authorities”, because its jurisdiction is based on an arbitration agreement between private parties, and the tribunal does not exercise “judicial” authority, even if it issues a final and binding decision. This potential interpretation, however, to the author’s knowledge, has never been tested or the subject of a Japanese court decision.

B. It Is Unclear Whether Taking a Deposition for U.S.-Based Arbitration Violates Japan’s Sovereignty

The same applies to the issue whether a deposition in aid of U.S.-based arbitration violates Japan’s sovereignty. International arbitration does not arise from an exercise of State power, but from private parties’ arbitration agreement.

In cases where tribunals of U.S.-based international arbitration seek judicial assistance of a U.S. court for taking depositions in Japan, the enforcement proceeding may be seen as an exercise of the U.S. courts’ power in the territory of Japan. However, such practice is uncommon.

IV. Conclusion

As stated above, it is understood that the Consular Convention provides the only deposition method available in Japan in aid of U.S.-based litigation. However, in the arbitration context, no clear answer has been given as to which method is available to conduct a deposition in Japan for the use of U.S.-based arbitration.

I hope this blog to provide a basis of further discussions as to this topic.

*The opinions in this blog post are irrelevant to those of the Permanent Court of Arbitration.

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Eiser Infrastructure v. Spain: Could the tide be turning in favor of photovoltaic foreign investors in Spain?

Tue, 2017-06-20 07:34

Raul Pereira de Souza Fleury

A previous post analyzed the application of the fair and equitable treatment (“FET”) and legitimate expectations in the recent award in Eiser Infrastructure Ltd. v. Spain (ICSID Case No. ARB/13/36), the first ICSID case to reach a final award related to the measures Spain applied to roll-back certain incentives and benefits offered to promote investment in the Concentrated Solar Power (“CSP”) sector. Following up on said post, this one provides some comments on what changed since the award in Charanne B.V. and Construction Investments S.A.R.L v. Kingdom of Spain, which was the first [reported] award relating to Spain’s measures described above. The Eiser award is certainly significant and it has great potential to impact future awards in the at least 29 Energy Charter Treaty (“ECT”) arbitrations left against Spain for the same measures in the CSP sector.

So, what changed since Charanne?

Many are probably wondering what changed since the claims filed by Charanne and Isolux seeking compensation for the measures that modified Spain’s CSP regime. In fact, the tribunal in Eiser did refer to the facts in Charanne to explain their way to the award (¶367 et seq.).

In particular, the Charanne case was based on two pieces of legislation passed by the Spanish government to attract foreign investment in the CSP sector: Royal Decrees (“RD”) 661/2007 and 1578/2008; and two pieces of legislation that affected the feed-in tariff regime and other aspects of the CSP framework: RD 1565/2010 and Royal Decree-Law (“RDL”) 14/2010. These regulations eliminated the feed-in tariffs for solar power plants starting from their 26th year of functioning, limited the working hours of said plants, and imposed fees for the use of transportation and distribution networks (¶367). However, the tribunal indicated that the measures at stake in Charanne “had far less dramatic effects than those at issue here” (¶368).

In Charanne, the majority found that the essential characteristics and guarantees provided by the RDs 661/2007 and 1578/2008 were not eliminated by the 2010 measures (¶518). Charanne’s argument was that the reduction of the benefits to only until the 26th year of operation of the plant would deprive them of all the benefits they had, because the lifetime of CSP plants were between 35 and 50 years (¶523), however, the majority found that Charanne did not submit sufficient evidence to support such allegation (¶522). Moreover, it noted that given the technology available at the time of the construction of the plants, their operation lifetime could not exceed 30 years; and despite this objective benchmark, the majority also noted that even Charanne provided in their lease contracts, terms of 25 years, with some contracts establishing 30 years, and only two contracts providing for more than 30 years (¶527).

Based on this reasoning, the tribunal found that the RDs 661/2007 and 1578/2008, as well as other documents (like promotion documents), could not constitute an essential element of their expectations, as investors, that they would be able to operate the CSP plants for periods of 35 to 50 years (¶529). Therefore, the majority concluded that the 2010 measures—although they implemented adjustments and adaptations—did not eliminate the main characteristics of the regulatory framework, because the investors retained their right to feed-in tariffs and their priority right to sell the totality of their production in the system; and so, as a matter of international law, Charanne’s legitimate expectations were not breached (¶533).

Going back to Eiser, this case was built on regulations affecting RDs 661/2007 and 1578/2008 that differ a great deal from RD 1565/2010 and RDL 14/2010 (the ones at stake in Charanne), to know: RDL 9/2013, RD 413/2014, and Ministerial Order IET/1045/2014. The tribunal in Eiser indicated that Charanne “addressed much less sweeping changes to the photovoltaic regulatory regime, changes that produced far less drastic economic consequences for the Charanne claimants” (¶369). The tribunal found a drastic and abrupt modification of the legal framework upon which Eiser’s investment depended. So, although Article 10(1) of the ECT did not grant Eiser the right to expect an immutable legal regime, they did have the legitimate expectation that the measures would not destroy the value of their investment, and that was the result of the 2013-2014 measures (¶387).

The tribunal found that RDL 9/2013 completely derogated the regime of RD 661/2007, significantly reducing the financial back-up of Eiser. It stated that the new system was based on totally different circumstances, employing a new and never tested normative approach with the purpose of significantly reducing the subsidies granted to the existing solar plants (¶¶390-391).

In particular, the new regime, besides derogating RD 661/2007, it uses a hypothetical standard plant to calculate the profit of pre-existing plants that were built and installed relying on RD 661/2007. Therefore, the tribunal found that the new standard plants do not take into account the real characteristics of the plants installed in the early times of RD 661/2007. The RDL 9/2013 retroactively established standards of design and investment that were supposed to be incorporated by Eiser and other operators, which were early investors under the regime of RD 661/2007 (¶¶413-414).

All this sufficed to establish that Spain breached the FET standard by implementing RDL 9/2013, RD 413/2014, and Ministerial Order IET/1045/2014, which eliminated RDs 661/2007 and 1578/2008, two pieces of legislation completely different and that where the core of Eiser’s (and many other investors) investment in the Spanish CSP sector.

What can we expect from now on?

The Spanish government is right in asserting that Eiser award cannot be deemed binding since that is not the rule in investment arbitration, and “[e]ach arbitration is different, both in the information considered and the arguments advanced.” Moreover, it is true that the tribunal in Eiser recognized that Spain did face a heavy tariff deficit that needed to be addressed. However, and even when the claims Spain is sustaining are related to the same CSP regime, one cannot bypass the fact that the claimants in Charanne framed their claims very narrowly, targeting only RD 1565/2010 and RDL 14/2010, two measures very different from RDL 9/2013, RD 413/2014, and Ministerial Order IET/1045/2014 (at issue in Eiser) in respect to their effects.

It is worth mentioning the other case won by Spain last year, the Isolux case. While here the claimants did challenge 2013 measures, it is reported[1] that the claims related to the implementation of a 7% tax on power generators’ revenues and a reduction in subsidies for renewable energy producers. However, it is hard to know whether the Isolux award will ever play a role in the future cases against Spain, considering that in Eiser, the tribunal rejected Spain’s request to include said award as legal authority, due to its confidential nature (¶¶89-92).

Therefore, we must acknowledge two very important realities separating Charanne (and possibly Isolux) from Eiser: (i) Both cases dealt with different sets of regulatory measures; and more importantly (ii) the regulatory measures analyzed in Eiser had a far wider reach and more negative effect on the investor, since they completely eliminated the legal and regulatory framework relied upon by most investors to make their investments in the Spanish CSP sector. In addition, both tribunals in Charanne and Isolux rendered the award by majority, while the Eiser tribunal was unanimous. This last characteristic, while not a key issue for practical matters, it is worth mentioning.

As indicated at the beginning of this post, more awards are yet to come, and these forthcoming awards will continue to define the landscape of the Spanish investment arbitration saga, similar to the situation with Argentina in the 2000s.


[1] The award has not been published.

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Economic Crime and International Investment Law: Current Issues

Mon, 2017-06-19 11:27

Anna Lanshakova

The Twenty-eighth ITF Public Conference on Economic Crime and International Investment Law, hosted by the British Institute of International and Comparative Law (BIICL) on 22 May 2017, attracted 13 distinguished speakers and more than 100 participants for a day discussion on the issues of economic crime in investor-state arbitration. The conference provided a forum for legal scholars, practitioners, and students to reflect on the controversial issues arising out of allegations of economic crime in investor-state arbitration.

The conference commenced with a welcoming address by Professor Yarik Kryvoi, Director of Investment Treaty Forum, followed by keynote address by Lucinda Low, President of the American Society of International Law. In her opening address, Lucinda Low pointed out that the issues of corruption and bribery allegations are increasingly growing both in commercial and investment arbitration. Notable cases dealing with allegations of economic crimes included Fraport Airport v. The Republic of the Philippines, World Duty Free v. The Republic of Kenya, Metal Tech v. The Republic of Uzbekistan, and the most recent case, Vladislav Kim and others v. The Republic of Uzbekistan.

Though issues of economic crimes in investment arbitration are far from novel, there remains a lack of uniformity among arbitral tribunals on how tackle economic crimes. The core issues causing divergence include (i) breach of investors’ obligations as a bar to jurisdiction; (ii) attribution of a state officials’ wrongful acts to the state; (iii) interaction between State criminal proceedings and arbitration; (iv) provisional measures to stop State proceedings; (v) the burden and the standard of proof; (vi) sua sponte investigation and inquiry into corruption. All these controversial concerns were discussed during the conference.

Breach of Substantive National and International Law Obligations as a Bar to Jurisdiction

The first panel discussed the types of investors’ obligations, the breach of which leads to denial of jurisdiction.

Since investment treaties are concluded to encourage and protect foreign investors, they do not represent an adequate source of investors’ obligations vis-à-vis States. Nevertheless, several investment treaty cases have ruled that if a foreign national has acquired foreign investment in violation of the host State’s laws, then such investment should not be protected before investment arbitration tribunal. However, not every single infraction of the host State’s law should lead to denial of protection. To decide whether the tribunal shall upheld the jurisdiction, it should analyse the type of law that was violated, the importance of that law, and the seriousness of the breach. This statement is supported by several cases. In Metalpar v. Argentina, the tribunal upheld the jurisdiction pointing that Argentinian law already prescribed sanction for such violations, and therefore, denial of investment protection would be disproportionate. In Peter Allard v. Barbados, the tribunal upholding the jurisdiction stated that the investor acted in a good faith. Similarly, in Mamadoil v. Albania, the tribunal did not find sufficient seriousness of the breach to deny the jurisdiction.

One of the speakers argued that illegality, even if proven, does not necessarily deprive the tribunal of jurisdiction, unless it is expressly stated in the relevant treaty, or the illegality causes a nullification of property rights under relevant domestic law, such that there is no longer an “investment” for purposes of subject matter jurisdiction.

Discussion also arose over whether the illegality considerations are related to the issues of jurisdiction or admissibility. It was noted that the timing of the investor’s unlawful conduct is critical: it is only unlawful conduct pertaining to the acquisition of the investment that is relevant to the jurisdiction of the tribunal; unlawful conduct ex post the establishment of investment is instead a question for the admissibility. However, no uniformity with respect to the issue exists in the tribunals’ practice. While some tribunals deny jurisdiction after finding establishment illegality (Fraport I, II, Metal-Tech Ltd. v. Republic of Uzbekistan), other tribunals find such claims inadmissible (Plama v. Bulgaria, World Duty Free v. The Republic of Kenya, SGS v. Republic of the Philippines).

Economic Crimes and the Merits of Investor-State Disputes

Panel Two addressed the issues of provisional measures, state attribution, and relationship with national proceedings.

With respect to provisional measures in investor-state arbitration, the proposition was made that though provisional measures can be resorted to in investor-state arbitration according to Article 47 of ICSID Convention, such measures are relatively useless when dealing with criminal proceedings brought by a State against claimants. First, the provisional measures cannot be granted before the tribunal is constituted. Second, it takes a long time to acquire such measures after the tribunal is constituted. Generally, states are not willing to allow the interference of the tribunal in the criminal sphere, as opposed to civil and administrative spheres. When it comes to the exclusivity of arbitration proceedings under Article 26 of the ICSID Convention, the states usually make an argument that this provision only applies to domestic proceedings in civil or administrative matters, but never in criminal.

Regarding the attribution of economic crimes committed by the State’s official to the State, it was stated that we are currently at the situation of attribution asymmetry. International investment tribunals surprisingly resist to apply these principles in scenarios of corruption performed by state officials (i.e., World Duty Free v. The Republic of Kenya and EDF v. Romania). Metal Tech v. The Republic of Uzbekistan it is the only case where the “responsibility” of State is found in the award with respect to the allocation of costs between the parties

In order to rebalance this asymmetry, three fundamental interrelated objectives were suggested: (i) to level playing field between investors and states; (ii) to define and apply the principles and rules pursuant to which foreign investments are promoted and protected or not entitled to protection; (iii) to determine the list of principles and rules according to which State’s conduct is in accordance with international law.

No agreement between the panellists was achieved on whether investor-state tribunals may raise and investigate allegations of corruption sua sponte. On one hand, the arbitrators having a duty to render an enforceable award may overlook the possibility of corruption and face allegations based on public policy violations. On the other hand, conducting an investigation of corruption may invite challenges based upon ultra petita and/or ultra vires.

Evidentiary Challenges of Allegations of Economic Crimes in Investor-State Disputes

Panel Three discussed the evidentiary challenges of allegations of economic crimes in investor-state disputes.

Allegations of economic crimes, such as corruption or bribery are easy to make, but notoriously difficult to prove. In domestic criminal law, the burden of proof is not disputed – the prosecutor has to prove the guilt of the suspect. This issue in investment arbitration is unclear because both the investor and the state representative may be involved in an alleged economic crime such as bribery.

Since ultimately allegations of economic crimes are dealt in accordance with national criminal laws, the burden of proof is also determined with these laws. However, some tribunals addressed the issue of the standard of proof, suggesting that a “reasonable certainty” standard applies to situations of suspected corruption (Metal Tech v. The Republic of Uzbekistan); that “clear and convincing evidence” was needed (EDF v. Romania); or that both standards were equivalent (Getma International and others v. Republic of Guinea).

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Spanish Energy Arbitration Saga: Green Light for Investors Claiming Breach of FET?

Sat, 2017-06-17 07:33

Nahila Cortes

On May 4, 2017 the third final award on the Spanish energy arbitration saga was unveiled. After two wins against Charanne and Isolux Infrastructure (both SCC), this time the foreign investors scored a point, leaving the overall score table at 2-1. In Eiser, the first ICSID case to reach a final award related to the measures Spain applied to roll-back certain incentives and benefits offered to promote investment in the Concentrated Solar Power (CSP) sector, the tribunal awarded €128 million to the investors.

Eiser argued that the measures Spain applied in 2013 and 2014, specifically the Royal Decree-Law (“RDL”) 9/2013, Royal Decree (“RD”) 413/2014, and Ministerial Order IET/1045/2014, expropriated its investments, breached the FET, imposed exorbitant measures against the investment, and did not honor Spain’s commitments. The Tribunal composed of John Crook (Chairman), Stanimir Alexandrov, and Campbell McLachlan, narrowed the analysis of Eiser’s claim to the breach of the FET standard and found that Spain breached Article 10(1) of the Energy Charter Treaty (“ECT”).

Bearing in mind that there are many cases pending against Spain based on the regulatory changes that affected the CSP sector, this piece will focus on the Tribunal’s approach to the threshold of the FET standard under the ECT. Does this award represent a turning point in favor of photovoltaic foreign investors in Spain? Did this Tribunal take a different approach from the one in Charanne to analyze the investor’s legitimate expectations under the FET standard?

In their arguments, the parties discussed two main issues relating to a foreign investor’s legitimate expectations: whether FET protects the investor’s right to an immutable and stable framework; and which type of profits investors can claim for violation to their legitimate expectations. Eiser argued that RD 661/2017, the regulatory framework under which they made their investment, granted Eiser immutable economic rights that were protected by the ECT’s FET standard, guaranteeing stable and transparent conditions for the investment, and that Spain’s measures drastically changed the regulatory framework by eliminating and substituting RD 661/2017 with a completely different and arbitrary regime. On the other hand, the Respondent sustained that Eiser could not expect that RD 661/2007 would remain frozen, and that the investor only had a right to receive reasonable profits.

The Tribunal recognized that the FET standard does not grant foreign investors a “right to regulatory stability per se,” meaning that States always preserve their right to modify their regulatory regimes to adapt to circumstances and changing public needs (¶362). In the absence of specific commitments of the State directly extended to investors, the key issue for the Tribunal was to determine to which extent a foreign investor can trigger the FET protection provided in an investment treaty (in this case, the ECT) and be awarded with compensation as a response to the host State’s action.

The Tribunal concluded that Article 10(1) of the ECT protects investors from a fundamental regulatory change -total and unreasonable- in a manner that does not take into account the circumstances of existing investments made in reliance on the prior regime (¶363). Fundamentally the Tribunal recognized that an investor’s right to a legal stability is an important element of the FET that must be protected; however, this right is not unlimited.

Three factors enabled the Tribunal to reach to this conclusion. As a preliminary matter, citing to ADC v. Hungary, the Tribunal recognized that the regulatory power of the state has a limit that is established by the commitments assumed under investment treaties that cannot be ignored. The Tribunal reasoned that although Spain did experience a legitimate public policy problem with the tariff deficit, and that the decision to take measures in order to remedy said situation was necessary, the Spanish authorities had to take those measures considering the obligations Spain undertook under the ECT, including the obligation to treat foreign investors in a fair and equitable fashion (¶371).

Second, the interpretation of the FET under the ECT shall take into account the ECT objectives of legal stability and transparency (¶379). This Tribunal understood that the State’s obligation to provide FET to investors necessarily implies that the State shall provide fundamental stability in the essential features of the legal framework that investor relied on when making the investment. To arrive to this conclusion, the Tribunal interpreted Article 10(1) under Article 31 of the Vienna Convention on the Law of Treaties, that is, “in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” With this approach, the Tribunal recognized that the objective of the ECT is to provide a legal framework that will foster long term cooperation, and the treaty is just an instrument to increase the stability that is required to fulfill this purpose. Another element that reinforces this approach is that Article 10(1) expressly states that “the Parties shall create stable, equitable and transparent conditions.”

Thirdly, the obligation of the State to provide stability to the essential features of the regimen under which the investments was made has become a rule to most tribunals. Indeed, in this case the Tribunal referred to leading cases that supported this view (¶383), such as Total v. Argentina (ARB/04/01), where it was decided that “an investor has the right to expect that the legal framework will respect basic elements of the investments.” In El Paso v. Argentina (ARB/03/15), the tribunal concluded that the measures adopted by the State considered as a whole, altered the prior legal framework that the investor took in consideration when making the investment and dismantled the existing regulatory framework that was established to attract investors. Moreover, in CMS v. Argentina (ARB/01/08) it was decided that the measures transformed and completely modified the legal and business framework in relation to the framework under which the investment was decided to be performed.

Eiser’s Tribunal established a high threshold to find a breach of the ECT’s FET standard in the absence of State’s specific undertakings. As stated, the regulatory modification must be fundamental, total, and unreasonable, and must not consider the circumstances under which the existing investment was done. In this sense, the Tribunal concluded that Article 10(1) granted investors the right to expect that Spain would not modify the regimen under which the investment was done, in a drastic and unexpected way that would destroy the investment (¶387).

It is interesting to note that the Tribunal’s approach to the applicable standard of the FET does not contradict the Tribunal’s approach adopted in Charanne. Although the final outcomes differ greatly, Charanne’s tribunal applied the same approach to legal stability and dramatic changes to the rules of the game. Said Tribunal considered that an investor has the legitimate expectation that any modification to the legal framework in which the investor based its investment shall not be unreasonably, contrary to the public interest, or disproportional. In effect, the Tribunal considered that a modification is disproportional when it occurs suddenly and unexpectedly removing the essential features of the regulatory framework in place (¶370). Having said this, the differences between both cases were the regulatory measures under consideration, not the standard applied by the Tribunal.

In conclusion, this award might show a trend for future cases challenging RDL 9/2013, RD 413/2014, and Ministerial Order IET/1045/2014 under the ECT’s FET. For this Tribunal, Spain breached the FET standard under the ECT because the measures adopted by the State, fundamentally changed and did not consider the basic features under which Eiser’s investment was made, thus frustrating Eiser’s legitimate expectations. Interestingly, the difference with Charanne was the regulatory measures under analysis, not the approach the Tribunal used to analyze them.


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 organizations to which the author is affiliated.

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What is all the fuss? The Potential Impact of the Hague Convention on the Choice of Court Agreement on International Arbitration

Fri, 2017-06-16 00:50

Mathew Rea and Marcela Calife Marotti

Bryan Cave LLP

We make reference to the Kluwer Arbitration Blog post of 23 September 2016 by Sapna Jhangiani and Rosehana Amin, entitled ‘The Hague Convention on Choice of Court Agreements: A Rival to the New York Convention and a ‘Game-Changer’ for International Disputes?’. That blog concluded that the Hague Convention was potentially a game changer. We respectfully disagree.


The Hague Convention on Choice of Court Agreements, concluded in 2005, which came into force on 1 October 2015 (the “Hague Convention”), aims to improve enforcement of international judgments, as well as ensuring states uphold the choice of court in contractual agreements. It aims to create a system of recognition of court decisions with the same level of predictability and enforcement as the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), which entered into force on 7 June 1959 (the “New York Convention”). Here we explore whether in fact the Hague Convention will be such a game-changer, whether the Hague convention really is a threat to international arbitration and whether it will change the international dispute landscape so drastically.

Ratification and alternative regimes

The Hague Convention has been ratified by the European Union (the “EU”) (except for Denmark), and by Singapore and Mexico (29 countries in total). Another two countries, the United States and Ukraine, have signed the Hague Convention but have not ratified it to date. It must also be noted that with Brexit, the United Kingdom, upon exiting the EU (i.e. after 29 March 2019), will have to sign and ratify the Hague Convention independently if it wishes to be a part of it. The New York Convention by contrast, applies to 154 countries.

Comparative regimes to the Hague Convention include the Brussels Convention (Recast) of 12 December 2012 (the “Brussels Recast”), applicable only to EU member states. Under Chapter III of the Brussels Recast, judgements given in one EU member state shall be recognised in another member state without any special procedure required (Article 36); and such judgment is enforceable without the need to be declared enforceable (Article 39). The EU is also part of the Lugano Convention of 1988, which governs the enforcement of judgments as between Iceland, Switzerland, Norway and all pre-2004 EU states, plus Poland. So the same applies in these countries.

Other regimes include those under the Administration of Justice Act 1920 (for High Court judgements) and the Foreign Judgments (Reciprocal Enforcement) Act 1933 (for lower courts or tribunals), which are effective between the United Kingdom and Commonwealth countries, including Crown states such as the Isle of Man and Jersey to streamline the enforcement of England and Wales judgments.

However, there are countries that have no reciprocal arrangements with other countries such as the United States (or at least until it ratifies the Hague Convention). Therefore, to enforce a decision one has to start new legal proceedings in the court of the country or state in which enforcement is sought, so as to obtain a judgement in that jurisdiction. In the United States one must commence proceedings in the competent state court. The state court, in turn, will determine, based on the local laws, whether to give effect to the foreign judgment.

So the Hague Convention is not such a game changer. There are already conventions in existence, which assist enforcement.

Hague Convention vs. New York Convention

Even if the Hague Convention becomes ratified by more states the ease of enforcement of judgements seems unlikely by itself to impact on the popularity of arbitration.

First the scope of the Hague Convention is more limited than the New York Convention. The Hague Convention excludes consumer contract; employment contracts; carriage of goods; intellectual property matters as well as some fourteen other matters (Article 2). In contrast, the New York Convention does not have a set list similar to Article 2 of the Hague Convention. Instead it defers to national law to make such exclusions (see Article V(2)(a) and (b) of the New York Convention).

The list of matters excluded under Article 2 of the Hague Convention means that even if some parties might otherwise have been inclined to use the Hague Convention they may not be able to. Such parties who will not have the same enforcement protections are, therefore, unlikely to turn away from arbitration and choose court litigation instead.

In terms of recognition and enforceability, under the Hague Convention, Article 8 provides for enforcement and recognition of foreign judgments. Under Article 8, judgments are directly enforceable and the courts of contracting states are not allowed to review the judgment on the merits and “shall be bound by the findings of fact”. Similarly, under the New York Convention, Article III provides that the courts of contracting states must enforce awards rendered in another contracting state in the same way, using national procedural rules, as if it were enforcing a domestic award. However, the New York Convention goes a step further and expressly precludes the imposition of onerous conditions or higher fees than would be imposed on domestic arbitral awards, whilst the Hague Convention does not impose this restriction on national courts.

The Hague Convention and the New York Convention appear to have a very similar list of exceptions as to when the relevant state may refuse to recognise or enforce judgements, including: nullity; impropriety; incapacity; unenforceability and procedural unfairness. However, unlike the New York Convention, the Hague Convention allows a national court to refuse to enforce a judgment or recognise a decision if the judgement or the decision are contrary to a domestic judgement involving the same parties (regardless of the subject matter or cause of action).


The Queen Mary Survey of 2015 outlines the reasons why parties opt for arbitration rather than litigation. These include (in order): (i) enforceability of award and arbitration agreements; (ii) avoiding specific legal systems/national courts; (iii) flexibility; (iv) selection of arbitrators; (v) confidentiality and privacy; (vi) neutrality; (vii) finality; and (viii) speed and costs. If the first reason for users to opt for arbitration (rather than litigation) is enforceability of the award, one might see the Hague Convention as a possible threat to arbitration. However, since the second most popular reason for using arbitration (by a mere 1%) is to avoid specific legal systems/national courts, that may not be the case.

Arbitration and litigation have their own advantages and disadvantages beyond any greater ease of enforcement. But even if ease of enforcement alone were a factor, it seems unlikely the Hague Convention offers much in the way of advantages, which might tip the balance away from arbitration.

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The Trump Executive Order Faces FET-Like Review

Wed, 2017-06-14 23:23

Luke Sobota

Three Crowns LLP

The U.S. Court of Appeals for the Fourth Circuit recently issued an en banc decision, in International Refugee Assistance Project IRAP v Trump, affirming the district court’s injunction against President Trump’s Executive Order temporarily suspending entry into the United States by individuals from six Muslim-majority countries. Although the case concerns the application of specialized U.S. constitutional law, it provides an interesting case study of how domestic courts analyze issues of pretext and proportionality similar to those raised in investment arbitrations under the fair and equitable treatment (FET) standard.

At issue in IRAP and parallel legal proceedings is Section 2(c) of the second Executive Order (the first Executive Order on this topic had been enjoined by the Ninth Circuit Court of Appeals), which imposes a 90-day suspension of entry for nationals of Iran, Libya, Somalia, Sudan, Syria, and Yemen. The Executive Order was issued under the broad grant of authority to the President under the Immigration and Nationality Act (INA), which authorizes the suspension of entry of “all aliens or any class of aliens as immigrants or non-immigrants” whenever the President finds that their entry “would be detrimental to the interests of the United States.” The Executive Order states that these six countries present “heightened threats” because they support terrorism; have been compromised by terrorist organizations; have porous borders that facilitate the illicit flow of weapons and terrorists; or contain active conflict zones. Until existing screening and vetting procedures have been reviewed, the Executive Order continues, the risk of admitting a national from one of these countries intent on committing terrorist acts or otherwise harming the national security of the United States is “unacceptably high.” The Executive Order allows consular officers to issue discretionary waivers on a case-by-case base.

The plaintiffs in IRAP argued, among other things, that the Executive Order violates the Establishment Clause of the First Amendment to the U.S. Constitution, which provides that “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof.” In assessing that claim, the en banc court considered prior Supreme Court precedents in this area. In 1972, the U.S. Supreme Court held in Kleindienst v Mandel that where the Executive exercises power granted to it by Congress over the admission of aliens “on the basis of a facially legitimate and bona fide reason,” the Judiciary will “neither look behind the exercise of that discretion, nor test it by balancing its justification against the [plaintiffs’] First Amendment interests.” (Emphasis added.) Subsequently, in 2001, the Supreme Court held in Zadvydas v Davis that the power of the political branches over immigration is “subject to important constitutional limitations” that must be enforced by the Judiciary. Reconciling these authorities, the majority on the Fourth Circuit determined that it would assess whether the Executive Order was facially legitimate and bona fide under Mandel; only if the Executive Order failed this threshold test would the court engage in the constitutional inquiry noted in Zadvydas.

The court found the Executive Order to be facially legitimate because its stated purpose is to “protect the Nation from terrorist activities by foreign nationals admitted to the United States.”

It then turned to the bona fides of the stated rationale. The majority pointed out that Justice Kennedy, joined by Justice Alito, had elaborated on this requirement in his controlling concurrence in Kerry v Din : where a plaintiff makes an “affirmative showing of bad faith” that is “plausibly alleged with sufficient particularity,” the Judiciary may “look behind” the challenged action to assess its “facially legitimate justification.” The court noted that it is “difficult” for a plaintiff to make an affirmative showing of bad faith with plausibility and particularity, and where it does not do so, courts must defer to the facially legitimate reason. But, the court continued, where a plaintiff has “seriously called into question whether the stated reason for the challenged action was provided in good faith,” the Judiciary “must step away from [its] deferential posture and look behind the stated reason for the challenged action.”

The plaintiffs in IRAP argued that the Executive Order invokes national security in bad faith “as a pretext for what really is an anti-Muslim religious purpose.” The court found “ample” evidence to support this assertion, including:

* Then-candidate Trump’s numerous campaign statements expressing animus towards the Islamic faith;
* His proposal to ban Muslims from entering the United States;
* Is subsequent explanation that he would effectuate this proposal by targeting “territories” instead of Muslims directly;
* The first Executive Order, which targeted certain majority-Muslim nations and included a preference for religious minorities;
* Rudolph Giuliani’s statement that the President had asked him to find a way to ban Muslims in a legal way; and
* Statements by President Trump and his advisors that the second Executive Order had the same policy goals as the first.

The court also found “comparably weak evidence” that the Executive Order is meant to serve national security interests, including:

> The exclusion of national security agencies from the decision-making process;
> The post hoc nature of the national security rationale; and
> A report from the Department of Homeland Security that the Executive Order would not diminish the threat of terrorist activity.

Having found that the plaintiffs had made an affirmative showing of bad faith, the Fourth Circuit determined that Mandel’s deferential standard did not obtain and proceeded to address the merits of the Establishment Clause issue. This entailed, as set forth in the Supreme Court’s decision in Lemon v Kurtzman , and other relevant precedents, consideration of whether the Executive Order had a “secular legislative purpose” – a purpose that is “genuine, not a sham,” and that is not “secondary to a religious objective.” The court explained that, in performing this inquiry, courts should attempt to discern the official objective from “readily discoverable fact, without any judicial psychoanalysis of a drafter’s heart of hearts.” This standard calls for an “objective,” “reasonable,” and “common sense” assessment of the text, legislative history, and implementation of the enactment, including attention to the “historical context” and the “specific sequence of events leading to [its] passage.”

Applying this standard, and citing the same evidence that led it to reject application of Mandel’s deferential standard, the Fourth Circuit majority determined that the Executive Order’s “primary purpose is religious.” The court wrote that the Executive Order “cannot be read in isolation from the statements of planning and purpose that accompanied it, particularly in light of the sheer number of statements, their singular source, and the close connection they draw between the proposed Muslim ban and [the Executive Order] itself.” The court further noted that the national security rationale is “belied” by evidence that President Trump issued the first Executive Order without consulting the relevant national security agencies. Although it did not “discount that there may be a national security concern motivating” the Executive Order, the Fourth Circuit held that such purpose was “secondary” to the Executive Order’s religious purpose. The fact that the Executive Order was both “underinclusive” in targeting only a small percentage of the world’s majority-Muslim nations and “overinclusive” in targeting all citizens in the designated countries (including non-Muslims) was, according to the court, “not responsive to the purpose inquiry.” The court thus held that there was a likelihood that the plaintiffs would succeed on their constitutional challenge to the Executive Order.

In a concurring opinion, Judge Keenan, joined by Judge Thacker, further opined that the Executive Order did not comply with the INA because there is no “finding” by the President that the entry of the aliens in question “would be detrimental to the interests of the United States.” (This was the same rationale adopted by the Ninth Circuit in a subsequent decision enjoining the Executive Order.) Judge Keenen wrote that the stated reasoning in the Executive Order is a “non sequitur” because it does not, among other things, “articulate a relationship between the unstable conditions in these countries and any supposed propensity of the nationals of those countries to commit terrorist acts or otherwise endanger the national security of the United States.” In his concurring opinion, Judge Wynn found the apparent rationale for the Executive Order – viz., that “as a matter of statistical fact, Muslims, and therefore nationals of the six predominantly Muslim countries covered by the Executive Order, disproportionately engage in acts of terrorism, giving rise to a factual inference that admitting such individuals would be detrimental to the interests of the United States” – to be “highly debatable.” (Emphasis in original.) Judge Wynn did not find it necessary to resolve that “factual” question, however, because in his view the Constitution forbids “classifying individuals based solely on their race, nationality, or religion … and then relying on those classifications to discriminate against certain races, nationalities, or religions[.]”

Three of the 13 Fourth Circuit judges hearing IRAP dissented. They took the view that, under Din and other Supreme Court precedents, the absence of a bona fide reason must appear on the face of the enactment, and they therefore eschewed any consideration of the broader context in which the Executive Order was issued. Judge Niemeyer wrote that “[i]n looking behind the face of the government’s action for facts to show the alleged bad faith, rather than looking for bad faith on the face of the executive action itself, the majority grants itself the power to conduct an extratextual search for evidence suggesting bad faith, which is exactly what three Supreme Court opinions have prohibited.” Finding that the Executive Order’s “supposed ills are nowhere present on its face,” the dissenting judges concluded that the Executive Order survives the limited review prescribed in Mandel. The dissenters were also critical of the majority’s consideration of statements made during the presidential campaign, a view shared by Judge Thacker, who, in his own concurring opinion, wrote that because the Establishment Clause only concerns governmental action, conduct occurring before the President “takes office” cannot be considered. The majority, however, refused to impose a “bright-line rule against considering campaign statements” and found that they were probative in this case because “they are closely related in time, attributable to the primary decisionmaker, and specific and easily connected to the challenged action.”

As this précis show, the Fourth Circuit’s en banc decision grapples with issues similar to those that investment tribunals often face in applying the FET standard to sovereign actions affecting foreign investors. Although applying U.S. law pertaining to the Establishment Clause, the Fourth Circuit’s assessment of the Executive Order included a detailed assessment of its bona fides, its primary purpose, and its underlying rationale. The dissenting judges believed that the constitutional analysis should begin and end with the text of the Executive Order, but the majority went on to consider the context and history of its issuance. In doing so, the majority applied the following standard of review: an objective, reasonable, and common sense assessment of readily discoverable facts. Notwithstanding the substantial deference afforded the political branches in areas of immigration and national security – which was the specific focus of Judge Shedd’s dissenting opinion – the majority found that the plaintiffs had plausibly demonstrated that the Executive Order’s “stated” national security interest “was provided in bad faith, as a pretext for its religious purpose.” Compare Gold Reserve Inc. v Venezuela, Award, ¶¶ 600, 607 (22 September 2014) (inferring, on the basis of public statements by government officials, that the claimant’s mistreatment “was in breach of the FET standard as it was driven by political reasons”) and Tecnicas Medioambientales Tecmed S.A. v United Mexican States, Award, ¶ 165 (29 May 2003) (viewing agency’s stated reason for refusing to renew a permit in “the wider framework of the general conduct taken by [the agency]”).

Three concurring judges further looked to the rationale of the Executive Order, either rejecting or questioning the notion that nationals from the designated countries are more likely to engage in terrorism because of conditions found there. Their analysis – balancing the harm alleged by the plaintiffs against the stated security benefits of the Executive Order – is not dissimilar to considerations of proportionality that are often considered in FET analysis. See, e.g., Occidental Petroleum Corp. v Republic of Ecuador, Award, ¶¶ 442-452 (5 October 2012) (considering the claimant’s harm “out of proportion to the . . . ‘deterrence message’ which the Respondent might have wished to send”); Saluka Investments BV v Czech Republic, Partial Award, ¶¶ 304-308 (17 March 2006) (stating that “any differential treatment of a foreign investor must not be based on unreasonable distinctions and demands, and must be justified by showing that it bears a reasonable relationship to rational policies”).

The review of sovereign decisions in areas of core competence is a sensitive and complex undertaking, whatever the applicable law. The decision in IRAP was not unanimous, and the final word on the constitutionality of the Executive Order remains with the Supreme Court, which is currently taking briefing on these issues. Come what may, the majority, concurring, and dissenting opinions in the Fourth Circuit’s en banc decision may shed some comparative light for those addressing similar issues under the FET standard in investment arbitration.

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Judicial Activism and Spanish Arbitration

Tue, 2017-06-13 17:52

David J.A. Cairns

There has been much recent judicial activism in Spain in arbitration matters. Although the grounds for annulment of an arbitral award are limited in Spanish Arbitration Law (Article 41) and reflect the UNCITRAL Model Law standards, the volume of recent annulment decisions and the array of issues considered have been noteworthy.

The most active court has been the Superior Court of Madrid (Tribunal Superior de Justicia de Madrid) which decided no less than 124 annulment applications during 2015 and 2016, resulting in 33 annulments or partial annulments (a 26.6% success rate for applicants, with the qualification that this figure includes all cases, and may be much lower for international cases).

The financial crisis has been a fertile source of annulment applications, and particularly of disputes relating to the sale by banks of complex financial products, compounded in some instances by the practice of multiple appointments of the same arbitrators by major banks.

There has also been a strand of decisions relating to the independence and liability or arbitrators and arbitral institutions. These cases have largely arisen in the annulment context, but the most significant is the recent decision of the Spanish Supreme Court on the professional liability of arbitrators.

Some judgments of the Superior Court of Madrid have subordinated the jurisdiction of arbitral tribunals over the merits of the disputes to the imperatives of fundamental law in the form of the Spanish Constitution and, more controversially, European law. There have been complaints that the Superior Court of Madrid has been reviewing the merits of arbitral awards under the guise of annulment, and some vigorous dissenting opinions confirm the impression of doctrinal friction.

The Spanish concept of public policy has long been identified with the fundamental rights recognized by the Spanish Constitution and in the arbitration context particularly with the procedural and material minimum standards of due process and the right of defence. Spanish public policy also includes imperative norms relating to the freedoms guaranteed by European Community law. However, it is also well established that public policy does not authorize the revision of the justice of the award or the correctness of the decision.

The Superior Court of Justice of Madrid in several annulment decisions has built on the significance of European law to Spanish public policy to develop the concept of “economic public policy” identified with the general principle of contractual good faith in situations of inequality, disproportion or asymmetry between the parties by reason of the complexity of the product or disparate knowledge of the contracting parties. To date nine awards dealing with the sale of financial products have been annulled on the grounds of this new and controversial manifestation of economic public policy. However, the concept of economic public policy has not yet been applied to annul an international arbitral award.

The multiple arbitrations involving financial products have also given rise to annulment applications based on conflicts of interest. In another significant judgment, the Superior Court of Madrid annulled an award where the arbitral institution had failed to disclose its relationship with a multiple user of its services. The applicant alleged that the Tribunal Arbitral de Barcelona (TAB) derived a substantial part of its income from arbitrations over financial products, and the respondent (Caixabank, a major Spanish bank based in Barcelona) was a party to many of these cases. Evidence presented to the court demonstrated that Caixabank had participated in 79 TAB arbitrations between 2011 and 2015 and that these cases amounted to 11.62% of TAB’s revenue during this period. The Superior Court of Madrid held that arbitral institutions also have an obligation of independence and impartiality ‘with the consequent reasons for abstention, and the duties of disclosure and of information that apply to the arbitrators, mutatis mutandis, are required from the institutions called to administer arbitrations.’ The Court noted that an institution needed to ‘exercise extreme care in managing the arbitration where a habitual client is involved’ (appeal 79/2015; November 4, 2016).

This is not the only recent case where an award has been annulled on the basis of the conflict of interest of the arbitral institution. Many arbitral institutions in Spain operate under the aegis of local Chambers of Commerce. The Superior Court of Justice of Madrid in a judgment issued in November 2014 annulled an award on the basis that the institution administering the arbitration formed part of the Madrid Chamber of Commerce, which also owned 31% of the respondent in the arbitration. The court found that the indirect interest of the arbitral institution in the outcome of the arbitration violated the principle of the equality of the parties which as a matter of public policy could not be waived. The award was annulled on the ground that there was no valid arbitral agreement as the violation of the principle of equality occurred at the very moment of the agreement. The reasoning of the court in this judgment meant that disclosure of the conflict of interest by the arbitral institution would not have saved the award from annulment (judgment 63/2014, November 13, 2014).

Such a level of annulment activity inevitably raises questions of the professional liability of arbitrators and arbitral institutions. In a recent case, the professional liability of arbitrators arose after a successful annulment application in a case where the majority of the arbitral tribunal had deliberated, voted and issued the award without the participation of the third arbitrator. This breach of collegiality was found to constitute an infringement of the right of defence (and therefore public policy) of the party that had appointed the third arbitrator. In subsequent proceedings brought by one of the parties, the arbitrators constituting the majority were found professionally liable for the amount of their fees paid by that party pursuant to Article 21 of the Arbitration Law (which imposes liability on arbitrators, inter alia, for the damage and losses they cause by reason of recklessness). This liability was recently confirmed by the Spanish Supreme Court in a judgment of February 15, 2017 (Judgment 102/2017).

There are multiple possible interpretations for this judicial activism in arbitration in Spain. Some attribute much to personalities, and a strong division between the current judges in the Superior Court of Madrid. However, the judges are not responsible for the sheer volume of annulment applications that have come before them. There is no doubt that there is a lot of arbitration in Spain. Is there also an arbitral ‘bubble’? Is judicial activism a response to problems generated by the volume of new entrants at all levels of a profitable legal market?

Behind the development and use of the concept of ‘economic public policy’ is an intriguing question of why some arbitral tribunals have adopted an interpretation of the Spanish implementation of the European Directive 2004/39/EC on markets in financial instruments (MiFID) that seems to conflict with the jurisprudence developed in the Spanish courts. Does party autonomy and freedom of contract weigh more heavily with arbitral tribunals, while the courts place more weight on the investor protection objectives of the MiFID Directive? At a time when the legitimacy of international arbitration is already in question in other contexts, some more disquieting questions might be raised. Does international arbitration offer a level playing field for all participants where there are economically powerful repeat players? Are arbitral institutions supervising sufficiently the appointment of arbitrators and the resolution of potential conflicts of interests? Is more transparency and disclosure required from arbitral institutions regarding their own economic interests, their appointment processes, the resolution of challenges to arbitrators, and the identity of arbitrators appointed? Spanish arbitral institutions, of which there are too many, have been slow to adopt the recent initiatives of the LCIA and ICC to address such concerns.
In any event, a high rate of annulment In Spain raises questions that require a response. At its most basic, high annulment rates suggest a desynchronization between the courts and the arbitral community, and arguably qualitative concerns regarding arbitration practice in domestic cases.

The success of arbitration in Spain since the passage of the current UNCITRAL-based Arbitration Law has been truly impressive. There is a vibrant and active arbitration community in Spain. There is no doubt that it will rise to meet this latest challenge, which is indeed a symptom of the success of arbitration.

David JA Cairns is the author of the ICCA Handbook National Report on Spain, recently completely revised and updated and now available.

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A First Look at Eskosol S.p.A. in liquidazione v. Italian Republic: Has Either Party Gained the Upper Hand?

Tue, 2017-06-13 05:28

Gabriele Gagliani

The ICSID Tribunal in the case Eskosol S.p.A. in Liquidazione v. Italian Republic (ICSID Case No.ARB/15/50) has recently issued a Decision on Respondent’s Application under Rule 41(5) of the ICSID Rules of Procedure for Arbitration Proceedings (Arbitration Rules). In 2015, Eskosol filed a Request for Arbitration based on Italy’s claimed violation of the Energy Charter Treaty (ECT). Italy petitioned the Tribunal to dismiss the entirety of Eskosol’s claims based on their manifest lack of legal merit pursuant to Arbitration Rule 41(5).

The Decision of the Tribunal addressed only such preliminary matters as Italy’s objections. However, a closer look at it might already show what lies ahead, in the merits stage, and that Italy might have gained, to some extent, an upper hand in the proceedings.


Eskosol (or the company) was established in Italy in 2009 by a Belgian company, Blusun, and four Italian nationals. Following some changes in the company structure and legal nature, Blusun remained the owner of 80% of Eskosol’s shares. The company had been constituted in Italy to carry out the planning, development and building of solar photovoltaic power plants and to connect them to the national grid. In Italy, at the time of the launch of Eskosol’s project, a system of feed-in tariffs (guaranteed fixed payment) for a duration of 20 years for qualifying photovoltaic power plants projects was in place. Eskosol claims that the Italian Government subsequently adopted two measures (the “Romani Decree” and the “Conto Energia IV”) that have reduced the feed-in tariffs to a point where, Eskosol alleges, the project became economically unviable. Eskosol claimed that it was unable to pay its debt and, as a consequence, it was placed under bankruptcy receivership. Pursuant to Italian law, the Italian bankruptcy receiver is the one who has the power to institute proceedings on behalf of Eskosol.

However, the decision in hand tells in itself only part of the story. Indeed, in 2014, Blusun and its two owners had already started an arbitral proceedings (ICSID case No.ARB/14/3) against Italy for the alleged prejudice suffered by the investment it had made through Eskosol. In that case, Blusun had challenged a number of measures at issue in the Eskosol case, including the Romani Decree and the Conto Energia IV. The Blusun case Award, Tribunal’s orders, parties’ pleadings and related documents have been covered until now by a confidentiality agreement, with the exception of some excerpts produced by Italy in the Eskosol arbitration. Based precisely on those excerpts, it appears that the Tribunal in the Blusun case denied the foreign investor’s claims on the merits. Indeed, the Blusun Tribunal found that the measures at issue did not violate the ECT and were not the cause of the failure of the Eskosol project in Italy. Blusun and its two shareholders have recently filed an Application for Annulment of the Award.

The Arbitration Rule 41(5) Standard and the Assessment of the Respondent’s Objections

After Eskosol’s Request for Arbitration, pursuant to Arbitration Rule 41(5), Italy filed an application to dismiss the entirety of Eskosol’s claims based on their manifest lack of legal merit. At first glance, the Tribunal tried to strike a balance between the parties’ opposed positions. It stressed that a Rule 41(5) procedure does not have the purpose to address difficult issues of law. Nonetheless, it accepted Italy’s position that briefing legal objections at some length was appropriate for any assessment under the Rule 41(5) standard. As such, the Tribunal applied the standard proposed by Italy and its analysis addressed almost all the difficult and unsettled issues of law raised by the Respondent.

Italy presented four different objections under Rule 41(5). Namely, on whether Eskosol could qualify as a national of another Contracting State under Article 25(2) (b) of the ICSID Convention, whether Eskosol was an instrumentality of Blusun and its two owners, on the identity of parties (i.e. that Blusun and Eskosol were the same parties), and on the identity of object and cause of action between the Blusun and Eskosol cases. Although the Tribunal rejected Italy’s objections, in the Decision, the Tribunal might have somehow tipped the scale in favor of Italy.

Concluding Remarks: A Look to the Merits

The Eskosol Decision provides a number of clues that may bear decisively on the merits stage. While remaining neutral, the Tribunal has indicated a number of arguments that Italy could have raised in the proceedings such as the doctrines of abuse of rights or that no party should be permitted to benefit from its own wrong.

Most importantly, the Tribunal refers repeatedly to the obvious relevance that the Blusun Award has for the Eskosol case. Indeed, the Tribunal points out that Italy is free to argue, later in the case, that the conclusions reached by the Blusun Tribunal are persuasive and should be followed in the Eskosol case. To this end, and should Italy decide to take this course, the Eskosol Tribunal ordered the production of the Blusun Award in full. On this point, two considerations are called for. First, as noted, since the Blusun case concerned various measures, including (but not limited to) those complained of in the Eskosol case, the findings of the Blusun Tribunal are certainly relevant to orient the Eskosol Tribunal. Second, Italy succeeded in raising the important question of legal consistency and certainty in international investment arbitration. And the Tribunal seems to have fully taken up the problem. Clearly, the specter of two arbitral tribunals issuing contradicting decisions as in the Lauder arbitrations saga looms on the horizon. In the next phase of this arbitration, the Eskosol Tribunal will be confronted with issues of systemic importance on the consistency of international investment arbitration.

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Possible Sources Of Disagreement Between Quantum Experts In Discount Rate Estimation: A Review Of ICSID Awards

Mon, 2017-06-12 00:37

Juliette Fortin and Philippe Sales


Quantum experts often rely on the Discounted Cash Flow (DCF) approach to assess losses. The DCF approach is one of the most widely-used and accepted valuation methods, thanks in large part to its flexibility and the fact that it can be tailored to accommodate a wide array of assumptions.

The DCF approach is a method to estimate the current value of a stream of future cash flows. It is predominantly used in cases where the claimant can demonstrate some sort of track record, suggesting that projections of cash flows are not purely speculative. Arbitration tribunals have indeed tended to require a track record of at least two years to provide a basis for the projections required for DCF calculations.

Even when the DCF approach is not the primary valuation method used by a quantum expert, it is often used as a method to provide some confirmation for results obtained with alternative valuation methods.

Making reasonable estimates of future cash flows requires the expert to support his/her projections of the revenues and costs for the period for which projections are made. Counsel also has to choose and support the date for which the assessment of loss is to be made.  And, usually most disputed, the expert must determine the rate at which future cash flows are to be discounted to determine the net present value of the future cash flows.

In practice, the discount rate often turns out to be one of the most disputed and most significant elements of a DCF valuation. It reflects both (i) the time value of money (a dollar today is worth more than a dollar tomorrow, if only due to the passage of time) and (ii) the risk attached to future cash flows. It can have a significant impact on any loss assessment: while 100 EUR to be received in five years has a value of 78 EUR today at a 5% discount rate, it would be valued only at 40 EUR at a 20% discount rate.

The quantum expert needs to support the selection of a number of inputs when estimating a discount rate through the use of the Weighted-Average Cost of Capital (WACC), a blend of the cost of equity and cost of debt. In order to calculate this WACC, the expert first calculates a risk-adjusted cost of equity, based on: risk-free rate, market risk premium, applicable beta, country risk premium, other risk premiums (control, small size, etc.), as well as debt/equity ratio. The expert then needs to choose a relevant cost of debt.

Claimant’s experts and respondent’s experts almost always disagree on the appropriate discount rate. On the basis of available ICSID awards, we provide below a selection of examples of such disagreements with respect to: (1) country risk, which is usually the most disputed parameter, (2) risk-free rate, (3) applicable beta, (4) debt-to-equity ratio, (5) equity market risk premium and (6) company size premium. Note that the impact on the assessment of loss of each parameter described below may vary, we have aimed at focusing on the type of disagreements rather than the magnitude of them in those examples.

First, debates arise over the choice of the country risk premium, which aims at reflecting the additional risk (political instability, volatile exchange rate, etc.) associated with investing in a developing country rather than in the United States or another developed country. In El Paso Energy International Company v. Argentine Republic (ARB/03/15) for example, the parties’ respective experts proposed widely divergent discount rates, reflecting their respective views on country risk. The claimant’s expert computed a discount rate in the range of 12-13%, while the respondent’s expert argued that a 35% discount rate was warranted because of the severity of the Argentine economic crisis.

Neither approach convinced the tribunal. It considered that, while the discount rate calculated by the claimant’s expert was consistent with a risk assessment made under normal economic circumstances, it did not reflect the increased risks caused by Argentina’s sovereign default, which were bound to affect private investors as well. The tribunal further rejected the discount rate calculated by the respondent’s expert on the basis that the use of this rate did not lead to the assessment of fair market value since it attributed all the change in value to the sole economic crisis. The tribunal eventually settled on a 15.4% discount rate, by adjusting the claimant’s expert’s discount rate estimate upwards.

A frequent question is whether expropriation risk should be taken out of the usual country risk premium when an investment is covered by a BIT. Although not addressed here, this question could be the subject of another blog article.

Second, debates also exist over the choice of the risk-free rate, which corresponds to the rate of return of an investment that bears no default risk, such as government bonds from developed countries. In EDF International S.A., SAUR International S.A. and León Participaciones Argentinas S.A. v. Argentine Republic (ARB/03/23) for example, quantum experts disagreed on the relevant measure of the risk-free rate. The claimant’s expert argued that a 10-year US Treasury Bond rate (5.09% at the time) was warranted because it most closely matched the duration of the cash flows under consideration. The respondent’s expert, however, considered the rate of 30-year Treasury Bonds to be more appropriate.

The tribunal sided with the claimant’s expert on this issue, although on more technical grounds than the ones put forth by the claimant’s expert. The tribunal indeed argued that the risk-free rate should be the return on a zero beta portfolio, and that the beta value from the 10-year rate was closer to zero than that of the thirty-year bonds.

Third, the company beta, which measures how much the company’s share price moves against the market as a whole, is frequently discussed among quantum experts. In OI European Group B.V. v. Bolivarian Republic of Venezuela (ARB/11/25) for example, quantum experts disagreed on the proper way to estimate the company beta.

Both quantum experts retained the same sample of seven comparable companies when estimating the company beta, but disagreed on whether the average should be weighted or simple. The claimant’s expert argued that it was necessary to assign greater weight to the companies that appeared to be more comparable to the company being valued. This reasoning convinced the tribunal, which stated that a weighted-average was reasonable to account for these differences in similarity.

Further, although this is not the case in this arbitration, debates about beta also occur over the selection of the relevant industry. Betas are usually taken from published calculations for industries, but the projects being analysed often do not match perfectly the industry calculations.

Fourth, the debt-to-equity ratio, which determines the capital structure, is needed to calculate the WACC. We present below two examples where this ratio was disputed among the quantum experts. In Alpha Projektholding GmbH v. Ukraine (ARB/07/16), the claimant’s expert argued that the relevant ratio was the average 40% debt and 60% equity ratio of a set of comparable companies in the hotels & motels category for emerging markets, as it represented a better measure of the target capital structure of the company being valued. The claimant’s expert estimated a discount rate of 12.1%.

The respondent’s expert, however, considered that the relevant capital structure was the one which had been envisioned for the project under consideration, i.e. 100% equity and 0% debt. The respondent’s expert estimated a discount rate of 14.4%.

The tribunal agreed with the need to rely on the target capital structure and decided to adopt the 12.1% discount rate.

In OI European Group B.V. v. Bolivarian Republic of Venezuela (ARB/11/25), the claimant’s expert chose to use a larger sample of 16 comparable companies, when assessing the debt-to-equity ratio, than the one he used to estimate the company beta. The respondent’s expert argued that the same sample should be used, as a matter of consistency.

The tribunal recognised that both approaches were acceptable, and stated that using the same sample for estimating the company beta and debt-to-equity ratio would be methodologically more consistent. Yet, it sided with the claimant’s expert because the latter’s estimate of the debt-to-equity ratio appeared to be in line with reputable benchmarks, while the estimate of the respondent’s expert was brushed aside for being unreasonable.

Fifth, the equity market risk premium, which reflects the additional risk and expected return of investing in the market, in comparison to risk-free investment. In Tidewater Investment SRL and Tidewater Caribe, C.A. v. The Bolivarian Republic of Venezuela (ARB/10/5) for example, quantum experts disagreed on the correct size of the equity market risk premium. The claimants’ expert argued that a 5% premium was appropriate, based on an approximate average of the range of estimates recommended in empirical studies. The respondent’s expert, on the other hand, argued that a 6.5% premium represented the most accurate long-term equity risk premium and was supported by published data sources.

The tribunal reviewed the information exhibited in the quantum experts’ reports. It accepted the respondent’s expert’s view based on three primary sources of long-term equity risk premium, which gave a long-term market risk premium of between 6.0% and 6.7% at the date of assessment of loss.

Finally, there are cases where quantum experts add a size premium to calculate the relevant discount rate. In Tenaris S.A. and Talta – Trading e Marketing Sociedade Unipessoal Lda. v. Bolivarian Republic of Venezuela (ARB/12/23), quantum experts disagreed on the need to add such a premium.

The claimant’s expert did not use a size premium on the basis that the company being valued was very large compared to other domestic companies in the same industry. The respondent’s expert, on the contrary, argued that a size premium of 2.73% was warranted since the company being valued was much smaller than the comparable companies which constituted the sample used to estimate the beta.

The tribunal agreed with the respondent’s expert, explaining that adding a size premium was reasonable when the size of the company being valued was smaller than the average of comparable companies used to estimate the beta.

In conclusion, estimating the discount rate is a difficult and highly sensitive task. It is the source of frequent disagreement between quantum experts in international arbitration cases. The role of quantum experts is to prepare reasonable and well-supported analyses in order to help the tribunal’s decision-making process.

The views expressed in this article are those of the authors alone and should not be regarded as representative of, or binding upon ArbitralWomen and/or the authors’ firm.

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The Dubai-DIFC Judicial Committee and DIFC Conduit Jurisdiction: A Sequel in Four Parts – The Dubai Court of First Instance on the Attack (Part 3)

Sat, 2017-06-10 17:07

Gordon Blanke

In a recent ruling (see Commercial Case No. 1619/2016, ruling of the Dubai Court of First Instance of 15 February 2017), the Dubai Court of First Instance annulled the DIFC Courts’ rulings in the Banyan Tree line of cases (see Case No. ARB/003/2013, rulings of the DIFC Court of First Instance of 2nd April 2015 and 8 April 2015 (recognising and enforcing a DIAC award and confirming the DIFC Courts’ competence to serve as a conduit jurisdiction); and Appeal No. CA/005/2014, ruling of the DIFC Court of Appeal of 26 February 2015 (in relation to costs); for relevant background, see my previous blog, that recognised and ordered the enforcement of a Dubai International Arbitration Centre (DIAC) arbitration award for onward execution against Meydan Group LLC, the award debtor, in onshore Dubai. It was these cases that originally established the status of the DIFC Courts as a conduit jurisdiction for onshore domestic (non-DIFC) awards for onward execution outside the DIFC. The nullification of these awards at first instance essentially calls into question the DIFC’s acquired conduit jurisdiction status, at least within the context of domestic non-DIFC awards.

The basis of the Dubai Court of First Instance’s decision is a finding that the DIFC Courts did not have proper jurisdiction over the recognition and enforcement of the subject DIAC award:

“It is clear from the documents on record that the case brought in the DIFC Courts to recognize, confirm and enforce the arbitral award does not meet any of the DIFC Courts’ jurisdiction criteria set out in the law. There is nothing in the record to prove that any of the parties are licensed Centre establishments or are duly established or carrying on activity in the Centre or that the agreement in question was executed or performed in the Centre or that the case involves an incident that has occurred in the Centre. The parties have not agreed to give jurisdiction to the Centre nor has the Defendant claimed that any of the jurisdiction criteria are met. It certainly does not appear from reading the two decisions issued by the DIFC Courts in Claim No: ARB/003/2013, dated 2nd April 2015 and 8 April 2015, which are to be invalidated, that any of the DIFC Courts’ jurisdiction criteria set out in the law are met. The decision dated 2nd April 2015 held that the DIFC Courts have jurisdiction under Article 5(A)(d) of Law No. (12) of 2004 on the Judicial Authority at DIFC when there is no evidence in that decision or in the record to support the DIFC Courts’ jurisdiction. Nevertheless, the DIFC Courts confirmed their own jurisdiction to hear the claim then ruled, in their decision of 8 April 2015, that the arbitral award would be recognized and enforced.


Having established from the record that the DIFC Courts have no jurisdiction to confirm or set aside the arbitral award in question, it follows that the said two decisions are devoid of one of the basic elements of validity (being issued by a court that has no jurisdiction to issue such orders and decisions). The decisions are fatally flawed and void ab initio. The decision in Appeal No. 005/2014, dated 26 February 2015 (concerning the costs of the application contesting jurisdiction), which was issued consequent to the invalid decision of 2nd April 2015 issued in respect of that challenge, is also invalid.” (my translation)

The Dubai Court of First Instance’s conclusion denying the DIFC Court’s proper jurisdiction evidently ignores the true ambit of the jurisdictional gateway under Art. 5(A) of the Judicial Authority Law as amended (see DIFC Law No. 12 of 2004 as amended by DIFC Law No. 16 of 2011), upon which H.E. Justice Al Muhairi himself – correctly – relied in Banyan Tree when confirming the power of the DIFC Courts to serve as a conduit jurisdiction for domestic non-DIFC awards. Art. 5(A)(1) clearly confers upon the DIFC Courts “exclusive jurisdiction over […] (d) any application over which the [DIFC] Courts have jurisdiction in accordance with the Centre [i.e. the DIFC]’s Laws and Regulations”, including – no doubt – the DIFC Arbitration Law. Art. 42(1), the DIFC Arbitration Law, in turn, empowers the DIFC Courts to hear actions for enforcement of both domestic and foreign awards (“[a]n arbitral award, irrespective of the State or jurisdiction in which it was made, shall be recognised as binding within the DIFC and, upon application in writing to the DIFC Court”), including – no doubt – any non-DIFC awards (irrespective of whether these are of onshore UAE or properly foreign origin).

The Dubai Court of First Instance further claims to have general jurisdiction – inter alia by virtue of Art. 4 of Decree No. (19) of 2016 (establishing the Dubai-DIFC Judicial Tribunal or simply the “JT”) – over the validity of the DIFC Courts’ decisions and more specifically over the question as to whether the DIFC Courts’ decisions have been issued within the limits and scope of their proper jurisdiction. For the avoidance of doubt, this proposition entirely disregards the role given to Art. 7 of the Judicial Authority Law as amended, which establishes a regime of mutual recognition between the onshore Dubai and offshore DIFC Courts and hence creates an area of free movement of all judgments, orders and ratified arbitral awards between onshore Dubai and offshore DIFC and vice versa. The fact of the matter is that for the purposes of the operation of Art. 7, the Dubai and the DIFC Courts both qualify as UAE Courts of equal status (there being no vertical hierarchy between them). This is a fundamental pre-condition for the regime of mutual recognition that exists between the two courts and which is based on a presumption of mutual trust, each court deferring to the other on the proper determination of its competence within its own jurisdiction. Neither of the two courts has the power to review the orders, judgments or ratified awards that the respectively other Court has found and declared fit for execution under Art. 7 (by affixing an execution formula). In addition and in any event, to the extent that there were to have been a conflict of jurisdiction or a risk of contradictory outcomes between the Dubai and DIFC Courts in Banyan Tree, reference should have been made to the JT, which has been created precisely for that purpose (see Decree No. (19) of 2016, Art. 2(2)). By way of reminder, the JT has been established as a catalyst for the resolution of any jurisdictional conflicts that may arise between the onshore Dubai and the offshore DIFC courts (see my previous blog).

The above criticism aside, the Dubai Court of First Instance’s ruling also arguably runs counter to the position taken by the UAE Federal Supreme Court when seized by Meydan of the purported jurisdictional conflict between the onshore Dubai and the offshore DIFC courts in the same matter (see Petition No. 2 of 2015, ruling of the UAE Federal Supreme Court of 23rd December 2015 (Jurisdictional Challenge)) prior to the establishment of the JT. By virtue of its powers under Arts 33(9) and (10) and 60 of UAE Federal Law No. (10) of 1973 concerning the Federal Supreme Court, vesting the Federal Supreme Court with exclusive jurisdiction to determine, inter alia, positive and negative conflicts of jurisdiction between local judicial bodies within the same Emirate, the Federal Supreme Court denied that there was a positive conflict of jurisdiction between the offshore DIFC and the onshore Dubai courts in the matter before it. The Federal Supreme Court’s conclusion was based on the fact that the proceedings before the DIFC Courts had already completed and the DIFC Courts had issued an order for recognition and enforcement before the commencement of the challenge proceedings in the onshore Dubai courts (see Commercial Action No. 2127-2014, application for setting aside the subject DIAC award). In a sense, the Federal Supreme Court’s approach confirms the first-seized rule, which I have proposed in previous blogs as a conceptual basis for a principled solution to the present jurisdictional stand-off between the onshore Dubai and offshore DIFC Courts.

That said, the Dubai Court of First Instance (short of its recent ruling being understood as a declaration of war on the jurisdiction of the DIFC Courts) is clearly on the attack. It is to be hoped that on appeal, the Court of Appeal and the Dubai Court of Cassation will fend off the Dubai Court of First Instance, overturn its recent ruling and put the relationship between the onshore Dubai and the offshore DIFC Courts back into balance.

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Taking a Close Look at Today’s Arbitral Process and Who Pays for It: A Report from Helsinki International Arbitration Day 2017 (II)

Sat, 2017-06-10 00:37

Heidi Heidi Merikalla-Teir and Mika Savola

The Finland Arbitration Institute (FAI)

Helsinki International Arbitration Day (HIAD) is an annual arbitration conference organized by the Arbitration Institute of the Finland Chamber of Commerce (FAI). It was held for the sixth time in Helsinki on 18 May 2017.

Is There a Simple Solution to Arbitration Costs Allocation?

The afternoon of the conference was dedicated to the topic of cost allocation in international arbitration. Mr James H. Carter, Senior Counsel at WilmerHale in New York and former Chair of the Board of Directors of the American Arbitration Association, gave a highly interesting and somewhat controversial introduction to this subject with his presentation entitled “Is There a Simple Solution to Arbitration Costs Allocation?”. Mr Carter started by acknowledging that there is a lack of transparency in how the arbitral tribunals allocate the costs of arbitration between the parties, and a lack of consensus on the principles that should govern the apportionment of costs. He went on to identify two prevailing schools of thought as to arbitration costs allocation. According to the “American rule”, the parties split procedural costs (i.e., the arbitrators’ fees and expenses and any applicable administrative charges) and bear their own attorneys’ fees. Under the “costs follow the event” rule (also known as the “loser pays” principle), in turn, costs are apportioned based on the parties’ success on the merits of the case. Mr Carter disputed the oft-stated argument that the “costs follow the event” rule is well-suited and regularly applied in international commercial arbitration: in his experience, at least in the United States, arbitrators in international commercial disputes tend to start from the presumption of “no shifting” of either procedural costs or attorneys’ fees regardless of the outcome of the arbitration. However, when a non-prevailing party has complicated the case by improper procedural manoeuvres, arbitrators may and sometimes do shift some or all of the procedural costs against it. In Carter’s view, this should normally suffice to encourage appropriate and efficient party conduct. But shifting attorneys’ fees – which may run into the millions of dollars on each side – merely on the grounds that one party has prevailed on the merits of the dispute is probably too harsh a sanction to be adopted as a standard practice, not least because it may unduly affect the parties’ right to have their cases heard. Arbitral tribunals should therefore consider it only in the rare cases of manifestly unreasonable party conduct.

The following panel discussion built on the ideas put forth by Mr Carter under the heading “Costs of Arbitration is Always a Hot Topic – How Are the Costs of Arbitration Allocated Between the Parties in the International Commercial Arbitration Practice and Is the Current Practice on the Right Track?”. The session was moderated by Ms Gabrielle Nater-Bass, partner at Homburger, member of the FAI Board and President of the SCAI (Switzerland). The speakers included Ms Anja Håvedal Ipp, Legal Counsel of the SCC (Sweden); Mr Massimo Benedettelli, Professor of International Law at the University ”Aldo Moro”, Bari and partner at ArbLit (Italy); Mr Philippe Cavalieros, partner at Winston & Strawn and a member of the ICC Commission on Arbitration & ADR’s Task Force on Decisions as to Costs (France); and Mr Piotr Nowaczyk, Independent Arbitrator & Mediator and former member of the ICC Court (Poland).

The panelists took issue with Mr Carter’s notion of the limited applicability of the “costs follow the event” principle in international arbitration practice. In fact, many arbitration rules contain an express yet rebuttable presumption that the successful party will be entitled to recover its reasonable costs (e.g., the UNCITRAL, CIETAC, FAI, DIS, Swiss and LCIA Rules). Further, absent mandatory provisions of lex arbitri to the contrary, many arbitral tribunals seem to follow the “costs follow the event” principle as a starting point even in proceedings conducted under such arbitration rules which merely confirm the tribunal’s authority to apportion the costs of the arbitration between the parties without prescribing any guidelines as to the manner in which the costs should be allocated (e.g., the ICC, ICDR, SCC and SIAC Rules). However, not infrequently, when apportioning the costs of arbitration in a given case, arbitrators tend to exercise the wide discretion that most national laws and arbitration rules grant them in this regard by factoring in also considerations other than the parties’ success on the substantive issues in dispute, such as the effect of the parties’ procedural behaviour on the overall efficiency of the arbitral proceedings.

Ms Håvedal Ipp demonstrated the allocation of costs in SCC arbitration by presenting results of a recent study examining 80 arbitral awards rendered in SCC proceedings. According to the study, in 45% of the cases, the losing party was ordered to pay all of the costs of arbitration in full, reflecting a strict application of the “costs follow the event” principle. In 20% of the cases, the costs were split equally between the parties. Finally, in 35% of the cases, the arbitral tribunal applied a more sophisticated cost allocation analysis and apportioned the costs between the parties accordingly. To sum up, Ms Håvedal Ipp concluded that SCC arbitral tribunals seem to invoke the “costs follow the event” rule quite often in disputes which involve a clear losing party, whereas other methods of cost allocation become applicable when the outcome of the substantive dispute is less clear-cut.

The panel then proceeded to consider whether there should be more guidance available in the determination of the allocation of costs so as to increase the predictability and acceptability of final costs in international arbitral proceedings. In this context, a question was also raised as to whether the arbitral tribunal should proactively initiate a dialogue with the parties, at the earliest feasible time, with the aim of obtaining agreement on various issues related to cost recovery. Consistent with the recommendations set forth in the recent ICC Report on Decisions on Costs in International Arbitration, some of the panelists (as well as conference participants) suggested that it might be beneficial for an arbitral tribunal to discuss with the parties already in connection with the first preparatory conference a list of issues pertaining to the apportionment of costs, including (but not necessarily limited to) the following: the recoverability of different cost items, in particular the parties’ internal legal and other management costs; the method of cost allocation to be applied by the arbitral tribunal, including the assessment of the parties’ relative success on the merits and the effect of their procedural conduct on the determination and apportionment of costs; what records the parties are expected to submit to the arbitral tribunal at the end of the proceedings in order to substantiate their cost claims; and the format and timing of the parties’ cost submissions. – While addressing such issues at the outset of the proceedings is arguably not a common practice yet, it does have the benefit of removing uncertainty and improving predictability in relation to the arbitral tribunal’s approach to any cost issues, which in turn serves to contribute to the continuing legitimacy of arbitration as the primary method of resolving international commercial disputes.

Final remarks

The official conference programme ended with the closing remarks of Ms Petra Kiurunen, Vice-Chair of the FAI Board. After that, the participants enjoyed a dinner with an inspiring speech about the “bright future of international arbitration” by Mr Eric A. Schwartz, one of the world’s pre-eminent experts in the law and practice of international arbitration (former Secretary General, member and Vice-President of the ICC Court; former senior partner at King & Spalding; and currently an Arbitrator member/door tenant at Fountain Court Chambers). During the dinner, the Chair of the FAI Board, Mr Mika Savola, was awarded The Chamber of Commerce Cross for his meritorious work for the FAI and contribution to the Finnish business and industry. The Finland Chamber of Commerce also awarded Ms Carita Wallgren-Lindholm the Finland 100 – Special Medal of Merit for her contribution to the Finnish business and industry through her work as an ambassador of Finnish arbitration abroad (read more from Press Release).

The next Helsinki International Arbitration Day will be held on 24 May 2018 (more information will be available here). If you wish to look back at HIAD 2017, you can watch videos from the event here and photos here.

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