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2019 In Review: A View From the United Arab Emirates

Fri, 2020-01-10 20:00

Dalal Al Houti (Assistant Editor for the MENA Region) and Kiran Nasir Gore (Associate Editor)

With 2019 concluded and a new decade on the horizon, it is worth reflecting on salient arbitration-related developments in the United Arab Emirates. As a jurisdiction, the UAE is not only a geographically-strategic venue for arbitration, but also a legally strategic one. As Dr. Gordon Blanke explained in his recent post, the UAE offers opportunities for “forum shopping” between both onshore arbitral seats (i.e., mainland UAE, typically Dubai or Abu Dhabi) and offshore arbitral seats (i.e., one of the UAE’s two judicial free zones: the Dubai International Financial Centre (“DIFC”) or the Abu Dhabi Global Market (“ADGM”). Drawing on this dichotomy, we review recent onshore and offshore arbitration developments in the UAE and offer insights into forthcoming opportunities for further development of arbitral practice.

 

The Onshore Landscape Following the Long-Awaited UAE Federal Arbitration Law

The long-awaited Federal Arbitration Law of the UAE, Federal Law No. 6 of 2018 on Arbitration (“Federal Arbitration Law”), came into effect in June 2018 and has since been put to the test.  This standalone Federal Arbitration Law repealed Articles 203-218 of the UAE Civil Procedure Code (Federal Law No.11 of 1992) applicable to arbitration, and any other provisions contrary to the Federal Arbitration Law.  During 2019, our authors focused on the developments that have arisen as a result.

  • Penal Code Article 257 Changed

The UAE  modified Article 257 of its Penal Code so as to exclude arbitrators from the scope of its application. Since a 2016 amendment, Article 257 imposed criminal liability on arbitrators, experts, and translators who issue decisions or opinions contrary to the duties of “integrity” and “neutrality”. That version of Article 257 allowed either side to claim that an arbitrator in question (or other enumerated participant in the arbitration) had not maintained the requirements of integrity and neutrality. By exempting arbitrators from its scope, the latest amendment provides comfort to arbitrators acting in UAE-seated arbitrations.

  • Joinder of Third Parties

Arbitrators often encounter requests to “extend” the arbitration clause or “join” third parties to an arbitration. Under the Federal Arbitration Law, arbitrators sitting in the UAE now have further guidance and are empowered to order the joinder of third parties provided they are: (1) satisfied that an arbitration agreement exists between the original parties and the third parties: and (2) have granted the concerned parties an opportunity to be heard on the application for joinder. Notably, Article 22 of the Federal Arbitration Law does not appear to require both parties’ express consent to joinder, it merely requires the parties to be given an opportunity to be heard. That said, arbitrators should keep in mind that the Federal Arbitration Law maintains the requirement that an arbitration agreement be made in writing (Article 7(1)) and be signed by a person having capacity to do so (Article 4(1)).

An example of this mechanism in action is provided by a recent arbitration of the Dubai International Arbitration Centre (“DIAC”) in which the claimant sought permission to apply for joinder of third parties. After considering the application, the arbitrator decided to allow service of the request for arbitration together with the application for joinder on the third parties. Accordingly, DIAC served the parties in question while granting a 30-day period for response. Despite having been duly served and given an opportunity to be heard, the concerned parties failed to respond. The arbitrator subsequently accepted the claimant’s application for joinder and agreed to join the third parties as respondents to the arbitration. Under the facts presented, the arbitrator found that the Article 22 requirements had been satisfied. However, it is yet to be seen whether the UAE onshore courts will endorse this interpretation of Article 22, should the case become the subject of an annulment proceeding.

  • Update to Civil Procedure Code

Whilst the Federal Arbitration Law introduced a streamlined process under Article 55 for the enforcement of domestic awards before the UAE onshore courts, it did not expressly repeal Articles 235 to 238 of the Civil Procedure Code (the “CPC”), which apply to the enforcement of foreign judgements and award. This caused confusion amongst the local arbitration community as to whether the streamlined provision provided under Article 55 of the Federal Arbitration Law applied to foreign arbitral awards, or whether Article 55 only applied to the enforcement of domestic arbitral awards. The confusion was clarified through a February 2019 Cabinet Resolution as it contains new provisions in Chapter IV at Articles 85 to 88 on the “Enforcement of foreign judgments, orders and instruments”, which are intended to replace Articles 235 to 238 of the CPC.

To summarize, Articles 85 to 88 of the Cabinet Resolution essentially provide that the relevant provisions of the Cabinet Resolution concerning the enforcement of foreign judgments and orders shall also apply to foreign arbitration awards provided that (1) the subject-matter of the award is arbitrable under UAE law and (2) the award is enforceable in the country of origin. Importantly, Article 85(2) provides that an application for enforcement of a foreign judgment or arbitration award in the UAE should be brought directly before the competent execution judge who is required to issue its order within three days from the date of filing. Even though the execution judge’s order remains subject to the usual channels of judicial appeal, the regime put in place by the Cabinet Resolution represents a welcome improvement to the enforcement process, and provides clarity as to the enforcement regime applicable to foreign awards.

***

2019 has seen a number of kinks ironed out in the UAE onshore arbitration law and it is expected that 2020 will continue to resolve teething issues which inevitably arise in the initial years following a significant change in legal framework.

 

Offshore Highlights: Advancements within the UAE Free Judicial Zones

As mentioned above, a unique highlight of arbitration in the UAE is the variety of arbitral fora it offers. While onshore UAE arbitration recently experienced significant developments through the Federal Arbitration Law, offshore arbitral fora remain attractive and are evolving to keep up with international best practices.

  • Statutory Revision at the Dubai International Arbitration Centre, DIFC

Within the DIFC, the DIAC saw revision of its founding statute. As explained in a June 2019 post, Decree No. 17 of 2019 approved a new statute for DIAC (the “New DIAC Statute”) which is more comprehensive than the prior statute. Among other features, our contributors speculated that the New DIAC Statute could impact the level of independence of DIAC vis-à-vis the Dubai Chamber of Commerce and Industry (the “Chamber”) because it allows the Chamber’s Board of Directors to appoint the DIAC’s Board of Trustees, which is the governing body carrying out the overall responsibility for the DIAC’s management. As explained by our contributors, in order for the DIAC to remain competitive and attractive in the UAE arbitration scene, it is important for the DIAC to ensure that its independence is both actually maintained and seen to be maintained.

The DIAC must also ensure that its Rules bolster its competitiveness. Indeed, since 2017, the UAE arbitration community has anticipated the release of new DIAC Rules, a revision process that many feel is overdue as the current DIAC Rules have been in place since 2007. It will be interesting to see if this revision of the DIAC’s founding statute is a step toward bringing such a revision into reality during 2020.

  • Debate Concerning the Jurisdiction of the ADGM

During 2019, our contributors continued to debate the true jurisdiction of the ADGM. One position is that the ADGM is an arbitral seat “open to all.”  This argument is premised on the understanding that Arbitration Regulations enacted in 2015 establish the ADGM as a seat of arbitration for (1) disputes with a nexus to the ADGM, or (2) for disputes unconnected to the ADGM, where the parties (a) choose the ADGM as the seat of arbitration, or (b) agree to the application of the ADGM Arbitration Regulations. This is consistent with the scope of jurisdiction of the ADGM Courts, where parties may opt into the jurisdiction of the ADGM Court of First Instance, even where the transaction or dispute in question has no connection with the ADGM.

The ADGM Court of First Instance is considered by many as a favorable venue: between 2017 and 2018 there was a 100% increase in its caseload (from 7 cases to 14 cases) and 2019 also saw several interesting decisions involving residential property disputes, recognition of an arbitral award under the New York Convention, and decisions on costs and other applications. Indeed, the ADGM is widely regarded by parties as a favorable seat, for its incorporation of the UNCITRAL Model Law, with certain enhancements, including with regard to confidentiality of proceedings, the joinder of third parties, and the waiver of the right to bring an action for setting aside.

However, as one of our contributors has pointed out, the jurisdiction of the ADGM Court of First Instance is distinct from the jurisdiction available for ADGM arbitration. This limitation is provided in Articles 13(6)-(7) of the ADGM Founding Law which can be read to require an ADGM-nexus for an arbitral dispute to be within its jurisdiction. This is a key issue for prospective users as a jurisdictional defect may lead to challenge of an arbitral award under the ADGM Arbitration Regulations (specifically, Article 53(2)(ii) (the invalidity of the arbitration agreement).  Given the debate among our contributors on this subject, it seems this is an area ripe for clarification by the Ruler of Abu Dhabi during 2020.

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The Contents of the ASA Bulletin, Volume 37, Issue 4 (December 2019)

Fri, 2020-01-10 01:00

Matthias Scherer and Catherine Anne Kunz

We are happy to report that the latest issue of the ASA Bulletin is now available and includes the following articles and cases:

 

ARTICLES

Elliott GEISINGER, De la musique avant toute chose, et pour cela préfère l’impair

In his last message as ASA President, Elliott GEISINGER exhorts us to prefer the “uneven” in arbitration, namely diversity.

 

Matthias SCHERER, Angela CASEY, Domestic Review of Investment Treaty Arbitrations: the Swiss Experience Revisited

This article offers an overview of the decisions of the Swiss Supreme Court rendered in the past decade involving treaty claims or claims under the Energy Charter Treaty: Russia v. Yukos – Hungary v. EDF – Recofi v. Vietnam – Poland v. Hortel – Serbia v. Mytilineos – Russia v. Ukrnafta & Stabil – India v. Deutsche Telekom.

 

David ROSENTHAL, Complying with the General Data Protection Regulation (GDPR) in International Arbitration – Practical Guidance

David ROSENTHAL provides practical guidance on how to comply with data protection requirements under the EU General DATA Protection Regulation (GDPR) in international arbitration. A template data protection agreement is included at the end of the article.

 

Gustavo SCHEFFER DA SILVEIRA, Brazilian Special Appeal No. 1.639.035-SP, 18 September 2018, Paranapanema S/A vs/ BTG Pactual S/A and Santander Brasil S/A

Gustavo SCHEFFER DA SILVEIRA comments on the recent decision rendered by Brazilian courts in the Paranapanema case, in which the courts found that the arbitration agreement in a contract extended to two connected contracts, despite the exclusive forum selection clause they contained, on the basis that all three contracts formed a single economic transaction.

 

Johannes LANDBRECHT, Commercial Arbitration in the Era of the Singapore Convention and the Hague Court Conventions

Johannes LANDBRECHT presents the Singapore Convention (2018) concerning mediated settlements, the Hague Choice of Court Convention (2005) and Hague Judgment Convention (2019) and considers their impact on the competitiveness of international commercial arbitration.

 

Simon GABRIEL, Congruence of the NYC and Swiss lex arbitri regarding extension of arbitral jurisdiction to non-signatories. BGE 145 III 199 (BGer Nr. 4A_646/2018)

Simon GABRIEL reports on a recent decision of the Swiss Supreme Court relating to the extension of arbitration agreements to non-signatories under the New York Convention (NYC). The central question is whether non-signatories may rely on Article II NYC to resist a state court’s jurisdiction.

 

Morten FRANK, Arbitration ‘if any’ or ‘to be settled’: A pathological yet curable agreement to arbitrate?

This article focuses on the interpretation and legal consequences of pathological arbitration clauses providing for arbitration “if any”, “if required” or “to be settled” in the light of the case law of English and U.S. courts.

 

Lorenz RAESS, Challenging Court Assistance in the Taking of Evidence in International Arbitration – the Swiss Perspective

This contribution sheds light on how to challenge decisions rendered by Swiss state courts at the seat of the arbitration when called upon by parties or an arbitral tribunal to assist in the taking of evidence under Article 184(2) of the Swiss Private International Law Act.

 

DECISIONS OF THE SWISS FEDERAL SUPREME COURT

  • 4A_646/2018 (145 III 199) of 17 April 2019 [Extension of arbitration agreement to non-signatory – Non-signatory entitled to rely on Article II NYC and to resist jurisdiction of state court]
  • 4A_98/2017 (143 III 462) of 20 July 2017 [Russia v. Yukos Capital: Request to set aside treaty award (ECT) – Jurisdiction of the arbitral tribunal – Request premature]
  • 4A_34/2015 (141 III 495) of 6 October 2015 [Hungary v. EDF: Request to set aside treaty award (ECT) – FET – Jurisdiction – Umbrella clause – Reservation]
  • 4A_616/2015 of 20 September 2016 [Recofi v Vietnam: Request to set aside award rendered under the BIT between France and Vietnam – Lack of eligible investment]
  • 4A_157/2017 of 14 December 2017 [Hungary v Hortel et al: Request to set aside award rendered under the BIT between the Netherlands and Poland – Public policy – Gambling laws – Fiscal prerogatives – FET]
  • 4A_396/2017 of 16. October 2018 [Russian Federation v. Ukrnafta: Request to set aside award rendered under the BIT between Russia and Ukraine – Crimea – Scope of application of BIT]
  • 4A_65/2018 of 11 December 2018 [India v. Deutsche Telekom: Request to set aside award rendered under the BIT between Germany and India – Jurisdiction – Investor – Investment – Pre-investment – Indirect investment]
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2019 in Review: Investment Arbitration in Europe

Thu, 2020-01-09 03:00

Deyan Dragiev (Assistant Editor for Europe)

After the quite tumultuous 2018, which saw the seminal Achmea judgment of the Court of Justice of the European Union and the subsequent awards on jurisdiction by a number of investment treaty arbitration tribunals, 2019 comes as a sequence and furtherance to developments that were in process in the course of the previous year. The tense relationship between EU law and investment treaties seems to have been triggering ripples in the arbitration world in the course of the year.

2019 began with the political reverberations of the Achmea saga. In January 2019, the EU Member States adopted declarations that envisaged the termination of the intra-EU investment treaties and the establishment of a single EU regulation, and investment court loomed large on the scene once again. Most of the Member States extended the effect of Achmea also to intra-EU disputes within the context of the Energy Charter Treaty (ECT), while a handful of Member States argued that it would be more appropriate to wait until the Court of Justice has explicitly ruled on the compatibility of the ECT arbitration clause with EU law, which has not been the case yet. In a separate Declaration, Hungary rejected the application of the Achmea judgment to the ECT altogether. Some countries, e.g., Hungary started terminating their BITs. Others, including those outside the EU, started reconsidering their investment treaty policy and treaty-making. Furthermore, on 24 October 2019, the European Commission announced that the EU Member States have reached agreement on a plurilateral treaty for the termination of all intra-EU bilateral investment treaties (BITs) (“Termination Agreement”).  According to the Termination Agreement, all intra-EU BITs, listed as an annex to it, shall be terminated by the operation of that Agreement. Moreover, the sunset clauses contained in intra-EU BITs are made devoid of legal effect. The Termination Agreement nullifies the legal effect of the arbitration clauses contained in intra-EU BITs with the date of commencement 1 January 2007. Concluded investment treaty arbitrations are not prejudiced by the Termination Agreement. Hence, the Termination Agreement shall not alter the results of disputes which were already completed. Pending disputes, however, shall be resolved via so-called “structured dialogue”. As envisioned under the Termination Agreement, this should be a procedure closed within the respective EU Member State. Therefore, the rationale of investment treaty arbitration – to internationalize the dispute with an investor and bring it before an impartial umpire – seems to be undermined. There is no clarity as to the consequences of the structured dialogue being not successful, which is why the Termination Agreement raises significant concerns on how it will operate in practice.

Regardless of various political moves, the arbitral stance of suspicion and disregard towards Achmea did not change radically. The tendency of arbitral tribunals constituted under the Energy Charter Treaty (ECT) to reject intra-EU jurisdictional objections, despite contrary views expressed by most EU member states, was recently continued in the case of Landesbank Baden-Württemberg (LBBW) and others v. Kingdom of Spain. Under that case, the tribunal once more analysed the relationship between the provisions of the ECT and EU law, as Spain raised a jurisdictional objection under a claim arising from the Spanish renewables sector amendments. First, Achmea was differentiated on grounds that a provisional interpretation of Article 26 of the ECT appears to constitute an offer of arbitration by each EU member state to investors from all other contracting parties without any limitations regarding intra-EU disputes. The tribunal found that even if EU law were to prohibit Spain from making an offer of arbitration under Article 26 of the ECT, the tribunal must still give priority to the ECT as it does not operate under EU law but under international law and the ECT. The case is one more example that the Achmea case will continue to reverberate and lead to a widening gap between investment treaty tribunals and EU-law based interpretation by EU authorities such as the EU Commission and the Court of Justice of the European Union. Therefore, 2019 did not produce a full stop to the Achmea saga. Given the latest developments recently, the story will certainly continue even beyond this year’s end.

One more saga produced its stages during 2019: the Micula dispute, which has touchpoints with the Achmea judgment and the EU-investment arbitration tensions. The EU General Court upheld the Micula application and annulled a 2015 decision of the EU Commission against Micula, considering that EU state aid law was inapplicable and that the Commission had exercised its powers retroactively. As a background to the saga, Romania gave certain rights and incentives to the business of Micula brothers. Since this happened prior to 2007, the year of the accession of Romania to the EU, it could be assumed that EU law should not extend to encompass this period. The CJEU reasoned that, contrary to the Commission’s contention,

“it cannot be considered that the effects of the award constitute the future effects of a situation arising prior to accession […]since that award retroactively produced definitively acquired effects which it merely ‘stated’ for the past, that is to say, effects which, in part, were already established before accession” (§84).

With respect to the intra-EU aspect of the applicable BIT (concluded between Sweden and Romania), the General Court further distinguished, very briefly, the Micula case from Achmea, ruling that “the arbitral tribunal was not bound to apply EU law to events occurring prior to the accession before it”, as opposed to the Achmea tribunal (§87). In addition, the General Court ruled that the contested decision was unlawful because it considered the award as illegal state aid within the meaning of Article 107 TFEU since, pursuant to the Court’s case-law, compensation for damage suffered cannot be regarded as aid unless it has the effect of compensating for the withdrawal of unlawful aid, which was not the case here as EU State aid law is not applicable to situations pre-dating Romania’s accession (§§103-104).

Later during 2019, the Micula saga reached the English Supreme Court, too: Micula et al. v Romania 2018/0177, where the enforcement of the widely discussed ICSID award against Romania was discussed. The UK enforcement proceedings started in the autumn of 2014. Romania filed a set-aside application against the ICSID award with the English High Court. In the alternative, the State also asked the court to vary or stay the registration of the ICSID award by the Micula brothers. There are two main issues which reached the UK Supreme Court to be decided: first, whether the High Court has the power to stay the enforcement of an ICSID award; and, second, where an ICSID award against an EU Member State has been stayed pending proceedings before the EU courts, whether the duty of sincere cooperation precludes an English court from ordering the State to provide security. The Supreme Court had not handed down its decision yet. First, because in similarity to the Achmea saga, this eventual decision will also be an authoritative interpretation of the relationship between EU law and investment treaty arbitration, which is a tense one, as the Achmea story demonstrates. In addition, it will most likely come up after Brexit, therefore the UK Supreme Court’s decision in the Micula case would be a harbinger of how the post-Brexit dialogue between UK and EU courts will be.

There were some reform and reconsideration moves in the course of this year.

Marking the latest step in its procedural rules overhaul, the International Centre for Settlement of Investment Disputes (“ICSID”) Secretariat released the third Working Paper on Proposals for the ICSID Arbitration Rules Amendments in late August 2019 (“WP3”). The Contracting States, stakeholders and the public have submitted reform proposals regarding arbitrator challenges to the UNCITRAL secretariat, in preparation of UNCITRAL Working Group III meetings. The overarching proposal within the Working Paper included increasing the perceived and actual independence and impartiality of the tribunal, clarifying the removal threshold under WP3 proposed Arbitration Rule (“AR”) 22 and second, introducing the option for disputing parties to submit challenges to an external decision-maker under proposed AR 23. Similarly, some contracting States proposed to subject the challenge decision to judicial review or validation by the Chair under proposed AR 23.

Moreover, there is the innovative idea of an Advisory Centre on Investment Law. The core competency of an Advisory Centre should be to represent, together with lawyers from the respondent States, under-resourced developing country respondents in international investment disputes and the immediate preparation of such disputes. There is currently no institution that provides assistance in the representation of respondents in international investment disputes —  developing countries are left entirely on their own in the course of investment disputes. Also, an Advisory Centre should be established with the purpose to help developing countries because of the increased costs of investment disputes.

We will be waiting to see how these developments will have further implications during 2020 and beyond.

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Appointment of Sole Arbitrator: Can a Modified Asymmetrical Arbitration Clause Avoid Court Appointment?

Wed, 2020-01-08 01:49

Ajar Rab

An asymmetrical arbitration clause is one where only one party can choose the method of resolving disputes between the parties. A slightly varied form of such a clause is usually contained in statutory arbitrations, which involve lop-sided arbitration clauses where only one party has the right to appoint the arbitrator. At first brush, these clauses appear to be patently unfair, but the same have been held to be enforceable in various jurisdictions. Considering their enforceability has been recognized, one may use the same to further efficiency and speed of the entire arbitral process, especially in the context where a mutually agreed sole arbitrator must be appointed. If one were to modify these clauses further to account for disagreement between the parties, one could limit, if not eliminate, the need to approach courts for such appointments.

Often times, an arbitration clause requiring the appointment of a mutually agreed sole arbitrator contains nothing more than the phrase “mutually appointed by both parties,” leaving several questions, including the appropriate time period for appointment, unanswered. Additionally, such language does not provide a contractual solution to a deadlock with respect to the choice of the sole arbitrator. The only remedy in ad-hoc arbitrations, in such cases, is seeking an appointment of arbitrator through the court at the seat of the arbitration under Article 11 (4) of the UNCITRAL Model Law, 1985 (“Model Law”).

In jurisdictions where court procedure is slow and tedious, an application to the court for appointment of an arbitrator can last years before being finally decided. Therefore, more elaborated language for the arbitration clause could be a possible contractual solution. The below sample clause provides such a solution:

The arbitral tribunal will comprise of a single arbitrator to be appointed by mutual consent of the Parties within 7 (seven) days of the request of the notice to start arbitration proceedings. If either party does not respond to the request for mutual appointment of arbitrator within the aforesaid 7 (seven) days, the party issuing such a request may nominate such an arbitrator, subject to such nomination not being in contravention of IBA Guidelines on Conflict of Interest.

The incorporation of such a clause may appear to be asymmetrical, granting one party the right to nominate the sole arbitrator, but in practice, the same adequately caters to the interest of both the parties for several reasons explained below.

 

1. Fair and Equal Treatment

The first and foremost objection ordinarily raised with respect to asymmetrical arbitration clauses is that they are violative of the fundamental principle of fair and equal treatment of parties in arbitration. This argument is often misplaced and misapplied. The principle of fair and equal treatment is enshrined in Article 18 of the Model Law, which refers to treatment with equality, and each party being given a full opportunity of presenting its case before the arbitral tribunal. Therefore, the said Article only comes into play once the arbitral tribunal has been formed and concerns only the manner in which the tribunal is expected to conduct the arbitral proceedings.

Asymmetrical arbitration clauses and the clause referred to above fall within a stage prior to the appointment of the sole arbitrator. While asymmetrical arbitration clauses grant one party the right to choose to go to court or have the dispute resolved through arbitration, the modified clause above ensures equal and fair treatment with respect to choice of the method of dispute resolution, i.e., through arbitration, and also grants an equal opportunity to either party to exercise their right to accept or reject the name of the sole arbitrator suggested by the party invoking arbitration.

The above sample clause also leaves enough flexibility for parties to reach an agreement with respect to the appointment of the sole arbitrator, should the party continue to communicate with each other and negotiate in good faith. At the same time, it creates a deterrent against delay tactics by forcing a party to seek a court appointment of the sole arbitrator at the cost of additional delay and expense.

Any concern over equality and fair treatment is adequately addressed by giving both parties the equal rights to participate in the appointment of the sole arbitrator, and should one party choose not to exercise that right, the same would amount to waiver under contract law principles. Alternatively, if one of the parties intends to play foul by deliberately mishandling the service of notice of arbitration, the same would bring the risk of challenge to the final award by the other party.

 

2. Independence and Impartiality

Another reason why the aforesaid sample clause is more suitable as it unequivocally accepts the international standards for independence and impartiality of the sole arbitrator and hence any concern over one-party appointing a non-neutral or biased arbitrator is suitably addressed. If the party appointing the sole arbitrator fails to ensure compliance with the standards, the opposite party will get more reasons to challenge the appointment of the sole arbitrator.

 

3. Neutrality

Tied to the standard of independence and impartiality, the above sample clause strengthens the neutrality of the sole arbitrator. Any arbitrator appointed under such a clause would be more conscious of the possibility of his or her appointment being challenged and hence would have a greater incentive to fully disclose even the remotest conflict of interest, which would further bolster the integrity and efficacy of the entire arbitral process. Furthermore, such an appointment would be in consonance with the intention of the parties to have speedy and effective dispute resolution with minimal court intervention and without sacrificing or compromising adjudication of their dispute by a neutral person.

 

4. Breach of the Arbitration Agreement

One potential objection with the above sample clause may be that it would unnecessarily place one of the parties in a position where they would be forced to breach the arbitration agreement (and hence may be liable for damages if granted by the tribunal later) when one party does not fulfill its obligation to respond within seven days of the receipt of the arbitration notice. However, even this objection may not hold water as the fundamental basis of arbitration is consent and when two commercial parties intend to have speedy dispute resolution along with the freedom to determine the arbitrators, procedure, etc. of the arbitral tribunal, there is little ground to argue that this flexibility cannot be extended to the formation of the arbitral tribunal.

 

Conclusion

Therefore, as per the foregoing, there are more reasons in favor of incorporating the more elaborated sample arbitration clause mentioned above as opposed to the potential objections against its incorporation. If more and more parties were to adopt such clauses, they could drastically reduce court intervention and deter guerrilla tactics of delay and abuse of the process by the parties. The only set of circumstances in which the parties would be forced to go to courts with respect to the nomination of the sole arbitrator by the mutual agreement would be the challenge the appointment of the arbitrator under Article 13 (3) or 14 (1) of the Model Law.

Thus, the acceptability of asymmetrical clauses may actually be a silver lining permitting a spin-off or variation which may ultimately create situation where court-appointed sole arbitrators would become an exception rather than the norm, especially in countries with slow court procedures, where delay tactics in appointment of sole arbitrator is often the first resort when one of the party is the government or a public sector undertaking. While there is little or no basis to reasonably predict how the courts in each country would react to such a clause, it cannot reasonably be denied that such a clause would only further arbitral efficacy and reduce court intervention to a bare minimum, ultimately strengthening the goal of speedy dispute resolution.

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Intra-EU Investment Reform: What Options for the Energy Charter Treaty?

Mon, 2020-01-06 23:49

Markus Beham and Désirée Prantl

The recently leaked treaty for the termination of intra-EU BITs can be seen as the culmination of an ongoing effort by the European Commission to discourage investment arbitration between Member States, reflecting, in the eyes of many, a tension between public international law and EU law. In spite of this, and even after the Court of Justice of the European Union’s (CJEU) Achmea decision, intra-EU proceedings are still being instituted, most recently in the cases of VM Solar Jerez v. Spain and Strabag v. Germany.

In the aftermath of Achmea, EU Member States expressed their intention to terminate all intra-EU BITs by 6 December 2019. While they seem to have reached consensus on the future of intra-EU BITs, Achmea‘s impact on intra-EU investor-state arbitration under the Energy Charter Treaty (ECT) remains disputed. Twenty-two Member States declared that intra-EU arbitration under the ECT was equally incompatible with primary EU law and sought to “discuss without undue delay whether any additional steps are necessary to draw all the consequences from the Achmea judgment in relation to the intra-EU application of the Energy Charter Treaty. Hungary rejected this view, finding that “the Achmea judgment concerns only the intra-EU bilateral investment treaties” and holding that “the future applicability of the ECT in intra-EU relations requires further discussion and individual agreement amongst the Member States”. Finland, Luxembourg, Malta, Slovenia, and Sweden refrained from taking any position.

The Commission is of the view that the investor-state arbitration clause of the ECT, “if interpreted correctly”, is not applicable between EU Member States. As a consequence, the ECT does not offer an invitation to arbitrate for investors in intra-EU constellations. In absence of a valid arbitration agreement, tribunals lack both competence and jurisdiction. The EU has argued its position in amicus curiae briefs to arbitral tribunals (one of them cited extensively here) and domestic courts (here and here).

 

Jurisdictional questions before tribunals

Arbitral tribunals have uniformly rejected the Commission’s view in the known proceedings so far. Jurisdictional objections asserting that the arbitration provisions of the ECT are not applicable for disputes between an EU Member State and an investor of another EU Member State have been dismissed under different theories.

In Masdar Solar v. Spain, the first decision to follow Achmea, the tribunal tersely pointed out that the CJEU has not touched upon the issue of applicability of the ECT. The reasoning was expanded on in Foresight Luxembourg Solar v. Spain and CEF Energia v. Italy. The tribunal in Vattenfall handed down an elaborate Decision on the Achmea Issue (already discussed here). In determining the ordinary meaning of Article 26 ECT, the Vattenfall tribunal found no indication in the wording, context, or object and purpose of this provision that intra-EU disputes should be excluded. It also stressed that the ECT does not contain a “disconnection clause” ensuring that provisions in mixed agreements apply only to third parties and not between EU Member States. The tribunal in Cube Infrastructure v. Spain added a historical reasoning as to the nature of the ECT to the interpretation. In LBBW v. Spain, the tribunal also accorded primacy to the treaty from which it derived its jurisdiction, the ECT, over primary EU law in case of conflict.

In Eskosol v. Italy, the tribunal dealt with the Declaration by the 22 Member States, dismissing its nature as a binding interpretative instrument. A similar ruling on jurisdiction came from the tribunals in Rockhopper v. Italy and SolEs Badajoz v. Spain. In I.C.W. Europe Investments v. Czech Republic, Photovoltaik Knopf Betriebs-GmbH v. Czech Republic and WA Investments-Europa Nova v. Czech Republic, the tribunals found that, since the seat of arbitration was Switzerland, EU law was simply international law between third countries. Yet another tribunal in 9REN Holding v. Spain simply found no incompatibility between the claims under the ECT and EU law. A future preliminary ruling might reshuffle the argumentative cards for both sides.

 

Amending the Energy Charter Treaty

The alternative to judicial clarity would be a straightforward political decision. The Energy Charter Conference, the governing and decision-making body for the Energy Charter process composed of all states or regional economic integration organisations which have signed or acceded to the ECT, has approved the modernisation of the ECT. On 15 July 2019, the Commission was authorised by the Council to enter into negotiations on behalf of the EU. In its negotiating directives, the Council seeks to “bring the ECT provisions on investment protection in line with the modern standards of recently concluded agreements by the EU and its Member States” and “in line with the EU approach in its investment protection agreements and the position taken by the EU in UNCITRAL WG III and ICSID, to ensure that this approach is reflected in the Modernized ECT”. It committed to “ensure that any rule or commitment agreed upon by the European Union should be in line with the EU legal framework”. The EU submitted this position to the policy options for modernisation of the ECT adopted on 6 October 2019 by the Energy Charter Conference.

Beyond the harmonious interpretation suggested by the EU, there is no explicit carve-out provision for intra-EU disputes in the ECT. Article 46 ECT prohibits any reservations to the Treaty, barring unilateral modifications by individual parties. While it seems unlikely – recalling the position taken by Hungary and insinuating the doubtful minds of Finland, Luxembourg, Malta, Slovenia, and Sweden – that a uniform position of EU member states will emerge in the near future, what are the legal options?

Amendments are possible under Article 42 ECT following a proposal by any contracting party. These are then communicated by the Secretariat at least three months before the proposed adoption by the Energy Charter Conference. Following adoption, the depositary submits the amendments to all contracting parties for ratification, acceptance, or approval. On the ninetieth day after submission to the depositary by at least three fourths of the contracting parties, the amendments enter into force for those parties.

The ECT has 56 members, including the EU and Euratom. This means that the Union and its member states are a small stretch away from reaching a three fourths majority on their own. One such amendment took place in 1998 to incorporate the new WTO system.

 

Inter se agreements

Article 41 of the Vienna Convention on the Law of Treaties provides that the modification of multilateral treaties between a select group among the parties to a multilateral treaty (referred to as an inter se agreement) must either be provided for by the treaty or at least not be prohibited. Nor may it affect the enjoyment by the other parties of their rights under the treaty or the performance of their obligations or relate to a provision, derogation from which is incompatible with the effective execution of the object and purpose of the treaty as a whole.

The Commission has already submitted the argument before arbitral tribunals (rejected here and here) that the Lisbon Treaty constitutes an inter se agreement. Since Article 46 ECT prohibits any reservations to the Treaty, however, one might reason that the effective execution of the object and purpose of the treaty as a whole would pose an obstacle to an inter se agreement. The “object and purpose” of a treaty may be deducted from its preamble and its core substantive provisions (such as Article 2 ECT), particularly those from which no reservation or derogation is permitted. In the case of the ECT, an inter se agreement could be understood to defeat the general prohibition of reservations.

In addition, Article 16 ECT specifically denies any derogation from the investment provisions of the ECT in the case of prior or subsequent agreements (see in this regard also the reasoning of the Vattenfall tribunal) unless more favourable. Even in the case of a valid inter se agreement, it is doubtful whether the investor state dispute settlement provisions would not still apply.

 

Withdrawal and association agreement

Finally, the EU could at any time withdraw in accordance with Article 47 ECT through written notification to the depositary. Taking effect one year after the date of the receipt by the depositary (or any specified later date), the Union and its member states could then conclude an association agreement with the remaining members of the ECT in accordance with Article 43 ECT. The downside of this construction would be the 20-year sunset clause in Article 47 ECT triggered by a unilateral by the EU and its members.

 

Article 26(3)(b)(ii) statements

There remains a possibility under the ECT itself. Article 26(3)(b)(ii) allows, “for the sake of transparency, each party listed in Annex ID (this includes the EU) to provide a written statement of its policies, practices and conditions to the Secretariat. In May, the EU submitted a new statement to ensure that the EU judicial system is recognised for purposes of the fork-in-the-road clause. However, it is clarified in a footnote that none of it concerned intra-EU investments, adding that the Union “may address this matter at a later stage”. In Vattenfall, the EU had taken recourse to its previous statement that “[t]he Communities and the Member States will, if necessary, determine among them who is the respondent party to arbitration proceedings initiated by an Investor of another Contracting Party” to restrict the offer to extra-EU investors. The tribunal did not share the view.

 

Outlook

In terms of the envisaged reform of intra-EU investment dispute settlement the creation of an institutionalised mechanism as envisioned in the CETA Agreement deserves mentioning. In this regard, in April 2019 the CJEU has already confirmed its compatibility with primary EU law. An alternative would be “a future Multilateral Investment Court” exercising jurisdiction over the ECT as set out in the negotiating directives.

Since it might be put into question, following the benchmark set by the CJEU in Opinion 1/17, whether the current system of investment protection under the ECT is even legitimate in extra-EU constellations from a Union law perspective, the EU will continue to seek reform. Depending on the momentum during the reform process, it will either aim at a holistic solution for all parties to the ECT or an explicit or implicit carve out for intra-EU disputes alongside reformed investment protection provisions for extra-EU investments disputes. Both options depend on a large-scale consensus by all parties to the ECT.

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Oded Besserglik v Mozambique: The BIT Was Not In Force, Who’s To Blame?

Sun, 2020-01-05 21:28

Juan Carlos Herrera Q.

In the recently rendered Oded Besserglik v Mozambique award (“Award”), after 5 years of proceedings and millions in costs and expenses, a tribunal accepted a Motion to Dismiss and declined jurisdiction over the dispute for the relevant treaty never entered into force.

Despite the fact that Mozambique prevailed on its motion, this case raises several questions as to the efficiency, ethics and professionalism of all participants (and the system). No participant of the case is in a position to discharge its responsibility, especially because this case should have never been brought before a tribunal (claimant’s counsel fault), approved and registered (ICSID’s fault), heard (tribunal’s fault), and untimely defended (respondent’s counsel fault).

 

Background of the Case

Mr Besserglik (“Claimant”), a South African national, had interests in a couple of entities in Mozambique and was allegedly unlawfully deprived of his shares and other assets for which he had claimed around US$ 100 million in compensation.

On 4 March 2014, the Claimant filed an Application for Approval of Access to the International Centre for Settlement of Investment Disputes (“ICSID”) Additional Facility on the basis of the Agreement Between South Africa and Mozambique for the Promotion and Reciprocal Protection of Investments (“BIT”), signed on 6 May 1997, and the Law No. 3/93 of Mozambique (“Investment Law”).

The application was approved by the Secretary-General of the ICSID on 17 April 2014 and confirmed on 3 July 2014, after it had made a request for additional information. Mr Besserglik requested to commence arbitration proceedings in June 2014 and the tribunal was constituted in January 2015. On 20 June 2017, within weeks to the Hearing on Jurisdiction and Liability, Mozambique filed a Motion to Dismiss alleging that the BIT never entered into force. At this point, the parties exchanged several submissions, produced several witness statements, and Mozambique and South Africa have even exchanged Diplomatic Notes (confirming that the BIT never entered into force, see Award ¶373).

 

Procedural Considerations for the Motion to Dismiss

The tribunal was posed three fundamental questions:

  • Were there any limitations to raise a new jurisdictional objection at a late stage of the proceedings, in accordance with the Article 45(2) of the Arbitration (Additional Facility) Rules (“Arbitration Rules”)?
  • Did Mozambique waive its right to raise such a jurisdictional objection, in accordance with the Articles 33 and 34 Arbitration Rules?
  • Despite such delay, is the tribunal -in its own words-, still bound to validate the jurisdictional objection and dismiss the case?

 

(i) Timing

Between the registration of the request to commence the proceedings and the Motion to Dismiss, 21 months had passed. This had been made in disregard of Article 45(2) of the Arbitration Rules, which provides that any objection shall be raised as soon as possible after the constitution of the tribunal until the filing of the counter-memorial. The latter being the ultimate limit to raise such objections unless they were unknown by the objecting party (the tribunal cited the approach taken in the Pac Rim v El Salvador Award, ¶265).

Mozambique had to bear the burden of demonstrating that the factual basis of the jurisdictional objection, i.e. that the BIT was not in force, was unknown until it was effectively raised in its Motion to Dismiss. The tribunal acknowledged that such a duty is difficult to discharge, stating that “[a] party who was aware or could have, by an examination of its records, made itself aware of the fact that the BIT was not in force, is not protected by the exception”; otherwise respondents will be entitled to raise jurisdictional objections at any stage of the proceedings (Award, ¶272).

Mozambique attempted to justify being under the exception by relying on the United Nations Conference on Trade and Development (“UNCTAD”) and ICSID websites where the BIT was registered as in force, and in the fact that, since December 2011, Claimant’s counsel was cognizant that the BIT was not in force. For the tribunal, such justifications did not discharge Mozambique’s duty under the Arbitration Rules, nor did its case fall under the exceptions. Mozambique should have raised this jurisdictional objection until the filing of the counter-memorial unless the factual basis of the objection was unknown (the exception). However, had Mozambique checked its records, it would have known that the BIT was not in force.

 

(ii) Waiver

The tribunal deemed that Article 34 of the Arbitration Rules did not apply to the question of whether a belated jurisdictional objection entails a waiver, especially because such a  failure of a timely objection would not cure the lack of jurisdiction.

 

(iii) Tribunal’s Authority

Normally, a Respondent’s belated jurisdictional objection would not be upheld by the tribunal (Award, ¶307). Nonetheless, in light of the principle of Kompetenz-Kompetenz, the tribunal had a duty to write valid and enforceable awards and it must only proceed with matters under its competence. Consequently, tribunals are entitled to examine every jurisdictional objection as it is their prerogative (citing Zhinvali v. Georgia) and a duty (citing Pac Rim v El Salvador) (Award, ¶310 et seq).

Furthermore, the tribunal considered that despite Mozambique’s delay could have entailed a procedural advantage and would have been ruled out as such, these sort of objections are not at the disposal of the parties (Award, ¶316) and the fact that a BIT is not in force cannot be amended by the untimely jurisdictional objection of one of the parties (Award, ¶320).

 

The BIT is Not in Force: What Happened Next?

Mozambique made four submissions to support the fact that the BIT is not in force, but the tribunal mainly relied on the second one: as per article 12(1) of the BIT, the entry into force of the BIT is subject to a notification. The tribunal analysed the situation in light of Article 24(1) of the Vienna Convention on the Law of the Treaties (“VCLT”), which establishes the manner and date for a treaty to enter into force.

The BIT’s Article 12(1) adopted a very formalistic approach whereby it enters into force “on the day following” after an exchange of notifications between Mozambique and South Africa (indicating the fulfilment of constitutional requirements in each state). For the tribunal, even the publication of the BIT in the Official Gazette of Mozambique as “in force” does not discharge the requirement of the notification as per Article 12(1) (Award, ¶341).

The tribunal regarded the lack of evidence as to the exchange of notifications as sufficient to dismiss the case (Award, ¶371). Nonetheless, it went on to consider that the Diplomatic Notes between Mozambique and South Africa confirmed that the BIT never entered into force (Award, ¶383). The tribunal also deemed that the lack of registration of the BIT before the United Nations (“UN”) Secretariat is irrelevant because its sanction (that such treaty cannot be invoked before any organ of the UN) is not applicable to an investor (a non-member of the UN).

 

Additional Basis of Jurisdiction

The tribunal noted that the Claimant failed to construe a cogent argument towards the applicability of the Investment Law as an additional basis for jurisdiction (Award, ¶397) and thus accepted Mozambique’s submission that the consent to arbitration under the Investment Law was the BIT itself, and, since it never entered into force, claims based on such law should also fail (Award, ¶416).

Nonetheless, in an attempt to construe an argument of estoppel, the Claimant alleged that Mozambique made several representations as to the applicability of the BIT for South African investors and, hence, estoppel should apply to give effect to the BIT.

Mozambique argued that the VCLT, as the applicable law on the issue, does not enshrine the possibility of estoppel bringing the BIT into force. Furthermore, the alleged representation was done years after the investment was made thus barring any allegation that such representations were of relevance.

The tribunal, without referring to the applicability of estoppel in situation where non-state parties are involved (see Cambodia v Thailand, Dissenting Opinion of Judge Spender, pp. 143-4), held that, in light of the VCLT, the notification requirement cannot be discharged by invoking estoppel, due to a question of jurisdiction and that a treaty is in force is a matter of law (Award, ¶422).

As for the requirements of estoppel to be applicable in the case, the tribunal considered that Mozambique should have made a statement of fact that is unambiguous, voluntary, unconditional, authorized, and that caused an advantage for itself and detriment to the other party (see further on estoppel in Mauritius v UK award,  ¶438). In that sense, the Claimant was unable to show that he relied on a valid representation of Mozambique (a PowerPoint presentation) nor in other requirements of estoppel. Hence, the tribunal rejected the submission on estoppel (see estoppel as a source of jurisdiction in Chevron v Ecuador, Second Partial Award on Track II, ¶7.80 et seq).

 

A String of Errors

Mozambique is a country with great needs and the fact that it employed large sums of money in a dispute with no jurisdictional basis is at least polemic considering that several times States are brought before international tribunals for exercising – legitimately or not – its regulatory powers. The manner in which this case has been handled is a disfavour to a system that has received severe critics for its alleged lack of transparency and legitimacy, and that is currently under revision and reform.

There were four moments in which the BIT could have been checked, namely:

  • When claimant’s legal counsel prepared his case (after December 2011, when South Africa informed him that the BIT was not in force),
  • At the time of the application for approval and request to arbitration,
  • At the time the tribunal was appointed and initiated its procedural activities, and
  • When Mozambique’s legal counsel prepared its defence.

Legal counsels of the parties, the ICSID and the tribunal shared a joint duty to conduct the proceedings with the highest level of efficiency and diligence. Especially because in investor-state arbitration the exercise of sovereign powers of a state are under examination and, on several occasions, states are condemned to pay astronomical amounts of money with prejudice to their economies.

The members of the arbitral tribunal and especially legal counsels are not only subject to the applicable ethical standards in international arbitration, but also to their own domestic deontological standards which compel them to exercise their legal profession with the utmost care and attention. Surely, further development on this point needs to be conducted not only at the multilateral level but also within the arbitral institutions and organizations in order to avoid infamous cases like this.

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The Coming of Age of Institutional Arbitration Rules in Iran: An Analytic Overview of the ACIC Rules

Sat, 2020-01-04 22:31

Mohsen Mohebi and Naimeh Masumy

 Introduction

The Arbitration Center of Iran Chamber of Commerce (hereafter “ACIC”) was established in 2002, following approval by the parliament of Iran as an affiliate to the Iran Chamber of Commerce. However, it has a distinctive and independent legal character. The ACIC is the first institution to incorporate institutional arbitration into the legal system of Iran for the resolution of both domestic and international disputes

The last five years have been pivotal for the ACIC and included significant developments. In addition to Rules of Arbitration which were developed during the formation of the ACIC (the “ACIC Rules”), the ACIC launched its own arbitration rules designed for cost and regulations on organization. The ACIC Rules now consist of Rules of Arbitration, Rules of Arbitration Costs and Regulations on Organization. The ACIC has also published three volumes of selected arbitration awards issued under the auspice of ACIC, both in domestic and international arbitrations. More recently, the ACIC has published “Iranian Yearbook of Arbitration” designed to address the varying nuances of Iran’s arbitration practice.

Certain key features of the ACIC Rules and anticipated future developments of this institution are set out below.

 

Key Features of the New ACIC Rules: Points of Convergence with the UNCITRAL Model Law

To substantial extent, the ACIC Rules mirror the provision of LCIA Rules, which were modelled after UNCITRAL Model Law (“Model Law”). There are several points of convergence between the Arbitration Rules of the ACIC and the Model Law. Similar to the Model Law, the ACIC Rules distinguish between domestic and international arbitration. As iterated in Article I of the ACIC CharterAll domestic and international commercial disputes referred to the arbitration Center of Iran Chamber shall be conducted in accordance with the present Rules”. The ACIC is designed to serve both domestic and international arbitration proceedings in a manner that is both cost-effective and efficient.

Further, the ACIC Rules contain provisions that are instituted to guarantee a basic level of fairness to parties and the process. For instance, rules regarding the conduct of multi-party arbitrations (Article 15), the procedure for challenge of an arbitrator (Article 24) and competence of competence (Article 29) are particularly designed to reduce technical defects that can frustrate proceedings. More prominently, the establishment of a Court of Arbitration of the ACIC, consisting of senior and eminent members, to decide on prima facie jurisdiction is enshrined in Article 9 and Articles 22 through 26 of the Regulations on Organization and signifies the pro-enforcement stance of Iranian arbitration landscape. These articles aim to foster and promote enforcement without overzealous judicial scrutiny.

In the similar vein, Article 35 of the ACIC Rules empowers tribunal to issue all urgent and provisional measures with respect to the subject matter of the dispute. According to this rule, a party seeking an urgent measure is ought to approach arbitral tribunal directly. However, the respective article does not specify whether or not this power vested onto tribunal is curtailed by mandatory provisions applicable to the proceedings. It could be argued that this reservation should be incorporated as it is necessitated by both Civil Procedure Code of Iran and Iran International Arbitration Act. In practice, Article 17 of Iran International Arbitration Act will govern issues surrounding provisional measures with respect to international arbitration, however, the act has remained silent regarding the enforcement of such measures. Similarly, the Civil Procedure Code which governs the domestic arbitration fails to address issues in relation to provisional measures. The absence of hard guidance has given rise to a conundrum for ACIC. A cursory look at the practice of ACIC tribunals reveals that they tend to make distinctions between cases where the party asks for a provisional measures addressed to the respondent or a third party like banks. In the former, the tribunal directly compel the respondent himself to act or refrain from acting particular measures, however in the latter the question of enforcement of the order has remained unclear. Moreover, it appears that Article 35 grants a broad discretion to arbitrators to decide what procedures to adopt and what issues to take into account when considering application for security for costs. This could pose further complications in the absence of specific and precise criteria to apply and may result in arbitrary and partial decisions.

Another prominent feature of the ACIC Rules that is consistent with the best practices of international arbitration is the broad and extensive use of witness evidence and experts. Article 45 affords broad discretion to the arbitral tribunal to “conduct a witness hearing” if the arbitral tribunal deems the subject of testimony of relevance. Similarly, article 46 stipulates that arbitrator may refer to expert opinion at his own initiative when “he deems necessary”. In the absence of additional provisions, it appears that there is no limitation as to the examination of experts and the arbitral tribunal enjoys unfettered discretion to assess the viability of expert opinion. In addition, the ACIC Rules provide mechanism for parallel proceedings to be consolidated into a single arbitration. This concept is recalled in Article 6 of ACIC Rules subject to the timing of the request and other relevant circumstances. This procedural mechanism is a progressive step towards harmonization of arbitral awards. In this regard, the ACIC has recognized that a unified process avoids repetition or duplication of the same evidentiary materials in proceedings and related costs such as expert witness fees. However, it should be noted that timing of the consolidation, compensation of dismissed arbitrators and duplication of already submitted evidence for the benefits of parties are not explicitly addressed within the ACIC framework.

The above provisions demonstrate the intention of the ACIC Rules in presenting a legal framework that are aligned with international arbitration on a global scale. However, the current ACIC model requires comprehensive reforms to account for a more efficient and sophisticated framework that is consistent with archetype of legal framework across borders.

 

The ACIC Rules:  Future Prospect

What is visibly absent from the existing framework is the codification of the best practices of procedural rules that are the prototype of modern international standards. In this regard, the ACIC seeks to move away from an institution being a mere postbox and appointing authority, and strives to shape the arbitral process by embracing and promulgating innovation. To this end, after 20 years, the ACIC Board of Directors has issued a call for amendment of the ACIC Rules formulated in 2002.

Firstly, the current ACIC Rules do not include provisions for emergency arbitrators, nor do they embody expedited arbitration. In the absence of provisions regarding emergency arbitrators, when the lex arbitri is the Iranian law, both courts and arbitral tribunal will have the authority over the case but due to the absence of precise guidelines, a party seeking an urgent measure will instead resort to national courts when the issue is extraordinarily urgent. This will undermine the choice of arbitration as an optimal dispute resolution mechanism. To this end, the domestic law ought to adopt a coherent framework to account for the emerging practice of emergency arbitration, without such a provision, domestic law and practice in national courts will pose further complications with regard to enforcement against the noncompliant party. Therefore, the future amendments to the ACIC Rules must first consider the specifics of the Iranian legal framework.

Secondly, the current ACIC Rules do not embody a comprehensive framework to protect confidentiality in arbitration proceedings. Parties can nonetheless agree in writing that the arbitration session for the hearing and consideration of the case shall be in confidence. According to Article 43, the arbitrators may take necessary measures to protect trade secrets and confidential information, but the current legal framework of the ACIC Rules is silent regarding the ways in which documents and information shall be submitted to the tribunal. Thus, it is important that the rules be revised to reflect the changes and emerging standards within international arbitration practice. It is therefore imperative for the future developments to encompass best practices of the international arbitration community which will not only reinforce Iran’s pro-arbitration stance, but also will pave the way for new standards that have yet to be explored by other Iranian arbitral institutions.

Further, the procedures for appointing arbitrators are not designed to be sufficiently swift. In this regard, Article 13 does not outline the timing requirements for the constitution of arbitral tribunal. The designated deadlines for an arbitrator’s appointment have remained unclear. For instance, Article 10 provides one period of 15 days for the parties to present their objections to the appointment of the arbitrators. It can be argued that the long process of appointing the panel of arbitrators under the ACIC Rules can delay the constitution of the arbitral tribunals. There is a need to revise this rule to make it more consistent with modern archetype of institutional arbitration rules.

 

Conclusion

The ACIC has recognized the central role it serves in promoting institutional rules of arbitration in the Middle East region, thus revisiting its rules will solidify its quintessential role in promoting arbitration in both domestic and international sphere. Revisions would address the growing complexity of contemporary arbitration proceeding which afford parties greater autonomy and flexibility. It can be argued that the new developments will reflect the ACIC’s ambition to compete with other major international arbitration institutions, and will usher the ACIC in a new era for  arbitration in Iran, both international and domestic.

 

Dr. Mohsen Mohebi has served almost 13 years as Secretary General of the Arbitration Center of Iran Chamber of Commerce. He has been member of ICC Court of Arbitration since 2006-mid 2017. He is currently a member of the Permanent Court of Arbitration.

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Interviews with Our Editors: The Energy Charter Treaty: Discussing Modernisation and Challenges with Dr. Alejandro Carballo, General Counsel, Energy Charter Treaty Secretariat

Fri, 2020-01-03 23:14

Maria Fanou (Assistant Editor)

Alejandro, thank you for joining us on the Kluwer Arbitration Blog! We are delighted to have the opportunity to interview you at a time when the Energy Charter Treaty (ECT) and its modernisation are on the spotlight. Alejandro is the current General Counsel and Head of the Conflict Resolution Centre at the ECT Secretariat, which he joined in 2013.

 

  1. Looking at the ECT statistics, we note that there has been a noticeably increasing number of ECT arbitrations since 2013. How could you explain this and do you foresee any changes in the near future?

While there has been a structural increase in the number of cases during 2013-2016, mainly related to reforms in the renewable sector, this does not automatically mean an increase of breaches of the ECT. While many ECT cases are still pending, statistics point out that only around 40% of the final awards found a breach of the ECT and awarded damages (which only in eight cases amounted to 50% or more of the initial damages claimed).

Arbitral tribunals constituted under the ECT have confirmed that the host State is entitled to maintain a reasonable degree of regulatory flexibility to respond to changing circumstances in the public interest. However, those tribunals also considered that subsequent regulatory changes should be made fairly, non-retroactively, consistently and predictably, taking into account the circumstances of the investment. The Energy Charter Conference endorsed in 2017 the best practices in regulatory reform (CCDEC2017 04) and included in 2018 the right to regulate as one of the topics for modernisation.

The 2014 conclusions of the review under Article 34(7) ECT requested to emphasise amicable investment dispute settlement, including the assistance of the Secretariat with good offices, mediation and conciliation. The Conference also asked the Secretariat to provide neutral, independent legal advice and assistance in dispute resolution. As a result, the Secretariat has been actively promoting investment mediation and established the Conflict Resolution Centre to provide such support and good offices. We have experienced an increased interest in good offices, facilitation and supported negotiation; and yes, some of the potential cases brought to our attention did not end up in arbitration.

 

  1. In early November 2019, the Energy Charter Conference approved the modernisation of the ECT (mandate, procedural issues, timeline for negotiations). Furthermore, a list of approved topics has come to light as well as a set of suggested policy options. Can you share your insights on the drivers for this reform process?

As you point out, it is a process, which started quite earlier and had a significant step with the update of the 1991 political declaration in 2015 (which records in its preamble the desire to reflect the new realities of the energy sector and to give a new impulse to enhanced regional and global cooperation).

The conclusions of the 2014 review under Article 34(7) ECT requested the Secretariat to monitor the debates on investment protection and discuss with the relevant experts which provisions of investment protection and dispute settlement could be improved and required further consideration by the Conference. However, the potential tools to be considered were Protocols or Declarations, without changing the wording of the provisions of the ECT.

In January 2017, several stakeholders (including the industry, governments, academics, UNCITRAL and UNCTAD) discussed the investment protection standards under the ECT, concluding that some particular issues could benefit from additional clarification. Later in the year, Contracting Parties and Signatories of the ECT also analysed and considered current investment policy tendencies incorporated in recent international investment agreements.

However, since the provisions of the ECT were adopted as a comprehensive package, whose coverage is not limited to investment protection (but also includes transit, trade…), discussions expanded to take into consideration all the provisions of the ECT.

After consultation with observers and the industry in 2018, the Conference approved a list of topics, which in 2019 was enriched with several suggested proposals on policy options as well as the consideration of some provisions that could be considered obsolete. The process now considers that the output could take the form not only of protocols or declarations but also of potential amendments to the ECT (or keeping the status quo for some of the topics considered).

It has been so far a fast process, driven by the Members of the Conference. As mentioned in the 2018 Bucharest Energy Charter Declaration, members will undertake every effort to reach a conclusion, reflecting the new realities of the energy sector and investment policy.

 

  1. The EU has expressly referred (see e.g. the general comments of the EU as well as the Council Negotiating Directives for the Modernisation of the ECT) to the reform discussions under the auspices of UNCITRAL Working Group III (WG III). The view taken is that, if a Multilateral Investment Court (MIC) is established, this shall also apply to the ECT. Could you share your thoughts on this initiative for the establishment of a permanent court and its applicability to the ECT?

UNCITRAL WG III had already started discussions on Investor-State Dispute Settlement reform in 2017, so the approved list of topics for modernisation did not include Article 26 of the ECT. Nevertheless, according to Article 26.2 (b) of the ECT, the investor party to a dispute may choose to submit it for resolution under any applicable, previously agreed dispute settlement procedure. So, if a future MIC allows it, parties could agree to refer their dispute under the ECT to such MIC.

Still, the list of topics for modernisation includes some issues closely related to dispute resolution such as third-party funding, valuation of damages, transparency, frivolous claims and security for costs.

 

  1. In May 2015, at a High-Level Ministerial Conference held in The Hague, the International Energy Charter was adopted and signed by 65 countries and organizations (including the EU). Four years after this development, can you share any insights with our readers in relation to the contribution of this initiative? For instance, has it engaged new countries and motivated them to cooperate in the field of energy? And, furthermore, how does this initiative relate to the current amendment process?

Currently, 100 states and regional international organisations (several of them in Africa) have signed the political declaration, which was the first successful step of modernisation. The International Energy Charter (which similar to the ECT deals not only with investment but also with transit, trade, and environmental issues) has raised the interest in international energy cooperation and the potential usefulness of the ECT beyond Eurasia into Africa, Middle East and Latin America; and not only in relation to investment, but also for having a common international legal framework dealing with transit of energy. While international energy cooperation is quite active these days, many countries are looking for a comprehensive, multilateral legal framework to cover such cooperation (which many countries have identified in the ECT). Apart from the recent accessions of Jordan and Yemen to the ECT, there are several other countries (mainly in Africa) in the accession process. Negotiations on the International Energy Charter also showed the political interest and possibility of moving further into the modernisation of the ECT.

 

  1. The CJEU rendered the landmark judgement in the intra-EU BIT case, Achmea. The case has been extensively discussed in scholarship, numerous conferences as well as in the KAB (see here). In the aftermath of the judgement, EU MSs made three separate Political Declarations on the termination of intra-EU BITs (see for a discussion in our Blog here). The apple of discord (that led to the three different texts) was the applicability of the Achmea-judgement to ECT disputes. This issue has already been raised before a number of different arbitral tribunals (see e.g. here). They all have agreed that the ECT applies inter se and there is no bearing of the Achmea judgment to ECT cases. Against this background, how challenging does the task of negotiating the modernisation of the ECT become in your opinion?

One of the topics of modernisation is REIO (Regional Economic Integration Organization), for which some of the policy options suggested aim at clarifying the legal relationship under the ECT between the members of an REIO. Although negotiations may be challenging, we have the successful precedents of the 2015 International Energy Charter (even though it was a non-binding political declaration) and the 1998 trade-related amendments. Furthermore, the negotiation mandate was approved in November 2019 aiming to conclude negotiations expeditiously, showing a strong political will and commitment; evidence of which is the fact that the first meeting took place one month later, on 11 December 2019.

 

  1. A French court recently sent a request for a preliminary reference ruling to the CJEU (the judgment was made available by GAR here) concerning the interpretation of the term “investment” under the ECT. How is the ECT Secretariat monitoring these developments?

We are aware of such request, which relates to the annulment proceedings instituted by Moldova against the arbitral award rendered under the ECT in Paris in October 2013. We will follow any publicly available information; same as we do with other domestic proceedings challenging the validity or enforcement of an award rendered under the ECT (in particular, because sometimes domestic courts in such proceedings provide their interpretation of some articles of the ECT). We aim to provide a clear and comprehensive picture to the industry and Contracting Parties to the ECT of how its provisions are applied in practice.

 

  1. In the past few years, we have witnessed an intensification of the regime clash between EU law and investor-State arbitration. In July 2019, the first case ever that the EU will be the respondent arose (here). This is the first time a REIO is found on the respondent’s side. Do you foreshadow any specific challenges in relation to this development?

Any potential challenge affects more the arbitral institutions and the REIOs themselves since we are not directly involved in arbitration cases. From our side, it may have implications only concerning our facilitation efforts and good offices.

 

  1. Does the Secretariat follow the awards and their enforcement? In light of the various developments we discussed, how concerned should one be about the enforceability of ECT awards?

As part of our responsibility, we try to monitor all cases under the ECT, from the early stages until the implementation of a decision or agreement (see chart and information on cases at energychartertreaty.org). However, there is no obligation to inform the Secretariat, so we have to rely mainly on public information and confirmation from the parties involved.

While several awards are still facing annulment proceedings (and a temporary stay of their enforcement has been granted), according to our information most final awards under the ECT have been implemented. Furthermore, we have not been approached by investors complaining of lack of compliance.

 

  1. One last question. In June 2016, the Energy Charter Conference adopted a Guide on Investment Mediation. How often is mediation used as a means of dispute settlement under the ECT? Has the 2016-Guide contributed sufficiently to the promotion of mediation? Are there any future initiatives that the Secretariat is considering to enhance the use of mediation?

Although mediation is not new, it is increasingly considered both by the industry and states as a useful additional tool to solve investment disputes. Through our consultations, we are aware of some concerns (mainly the lack of awareness and domestic legal frameworks supporting the use of investment mediation by government officials), which we addressed with the guide on investment mediation, the training of investment mediators (after Washington DC, Paris and Hong Kong, we expect the next editions in 2020 to take place in Kazakhstan and South Africa), several seminars on investment mediation providing capacity building for government officials, and the model instrument. The latter already attracted the interest of several members and observers who sent secondees to the Secretariat to prepare its implementation.

Our approach is always practical and innovative (the Model Instrument was a runner up -highly commended- for the Financial Times Innovative Lawyers in 2019), trying to address actual problems while having in mind the need to adapt to different geographical/cultural approaches. Therefore, we had broad consultation with government officials, the IMI Task Force on Investor-State mediation, CEDR, ICSID, World Bank, UNCITRAL, UNCTAD, AALCO…

On 1 April 2019, we organised as a side event to UNCITRAL WG III (with the participation of ICSID, World Bank, UNCTAD and MIGA) a workshop on the prevention of investment disputes, which confirmed that the existing Model Instrument already contains the most relevant tools for prevention of investment disputes.

Conflict prevention, together with effective dispute management and an early, independent assessment to ascertain the best (most effective) course of action (including the possibility of solving the dispute by negotiation or mediation) are fundamental.

Thank you for your time and perspectives.

 

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

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Extension of Arbitration Agreements to Non-Signatories in Switzerland: The Supreme Court Sticks to Her Guns

Thu, 2020-01-02 23:23

Simon Bianchi

In 2019, the Swiss Supreme Court (“Supreme Court”) seized two opportunities to confirm and develop its existing case law in relation to the personal scope of arbitration agreements and their possible extension to non-signatories.

 

Extension to Non-Signatories under the New York Convention

In a first decision, ATF 145 III 199, dated 17 April 2019, the Supreme Court had to decide whether its case law on the extension of arbitration agreements to non-signatories developed under Article 178 of the Swiss Private International Law Act (“PILA”) (see previous posts here and here) could also apply in relation to Article II of the New York Convention (“NYC”).

In this case, the underlying dispute concerned a distribution agreement between a Slovenian company, as principal, and a Swiss company (“BAG”), as distributor. The distribution agreement was signed by a member of BAG’s board vested with individual signing authority, but this person was also a board member, having individual signing authority, of B. Suisse SA (“BSSA”), a sister company of BAG. This agreement was to expire on 31 December 2014, but the parties continued their business relationship and complied with their obligations until the end of 2015. In 2016, the Slovenian company initiated court proceedings against BSSA in Switzerland in order to recover outstanding amounts. BSSA requested the Swiss lower court (“Court”) to declare the claims inadmissible since an arbitral tribunal seated in Ljubljana should have had exclusive jurisdiction over the dispute according to the arbitration clause contained in the distribution agreement.

In its decision, the Court found that BSSA had performed the distribution agreement for several years instead of BAG, thereby manifesting its intent to be bound by this agreement including its arbitration clause. As to the argument raised by the Slovenian company that BSSA could not be bound by the written arbitration clause as it did not sign it, thus failing to meet one of the formal requirements under Article II NYC, the Court considered that such argument infringed the principle of good faith (venire contra factum proprium). Indeed, the Slovenian company had actively cooperated without any reservation to the performance of the agreement by BSSA. Finally, the Court affirmed that the parties’ conduct amounted to a tacit prolongation of the agreement and the arbitration clause until the end of 2015. In conclusion, the Court found that it lacked jurisdiction and referred the parties to arbitration pursuant to Article II(3) NYC.

The Slovenian company appealed to the Supreme Court in order to vacate the Court’s judgment on two grounds: (i) BSSA was not bound by the arbitration clause due to the fact that the formal requirements of Article II(2) NYC were not met and (ii) the tacit prolongation of the distribution agreement did not extend to the arbitration clause in line with the principle of separability.

The Supreme Court noted that the Court’s finding that the originally written arbitration clause only bound the Slovenian company and BAG, but not BSSA, was untenable. It recalled that (i) the determination of the parties to an arbitration agreement requires an interpretation of the underlying agreement and the arbitration clause and (ii) it is not admissible to simply rely on incorrect or incomplete party names. However, despite this erroneous finding, the Supreme Court did not remand the case to the Court as it considered that, in any case, there was a binding arbitration agreement between the Slovenian company and BSSA.

With regard to the first argument raised by the Slovenian company, the Supreme Court found that (i) the formal requirements of Article II(2) NYC correspond to those of Article 178(1) PILA and (ii) the well-established case law relating to the extension of arbitration agreements to non-signatories under Article 178 PILA was thus fully applicable. With that in mind, the Supreme Court concluded that BSSA had intervened in the performance of the agreement for several years and, by such conduct, manifested its intent to be bound by the arbitration clause. The Supreme Court further confirmed that the formal requirements set out in Article 178(1) PILA and Article II(2) NYC were solely applicable to the initial parties to the arbitration agreement, but did not prevent the extension of the latter to non-signatories.

As to the tacit prolongation of the distribution agreement and the arbitration clause, the Supreme Court endorsed the Court’s finding that no formal prerequisite was required for the prolongation of an arbitration clause under Article II(2) NYC.

 

Extension to a State as Non-Signatory

In a second decision, 4A_636/2018, dated 24 September 2019, the Supreme Court had to decide whether a State could be bound by an arbitration clause signed by a State-owned entity under Article 178 PILA.

The underlying dispute arose out of an agreement between two Turkish companies, their joint venture company (“Appellants”), and a Libyan state-owned entity in relation to a pipeline construction project. Following the riots that took place in Libya in 2011, the joint venture company suspended its works and no agreement could subsequently be reached to restart these works. As a result, the Appellants initiated arbitration against the Libyan state-owned entity and the State of Libya. In an interim award on jurisdiction, the tribunal denied jurisdiction in respect to Libya as the latter had not signed the agreement. The Appellants challenged this award in front of the Supreme Court. They invoked that the tribunal wrongly denied jurisdiction in respect to Libya on the grounds that (i) the Libyan state-owned entity and Libya were to be treated as a single entity under Libyan law due to the supervisory role of the State of Libya and (ii) the arbitration clause should be extended to Libya under Swiss law because of its involvement in the performance of the agreement. The Appellants alleged that the landmark “Westland” case (P 1675/1987 dated 19 July 1988), which denied the extension of an arbitration clause to a non-signatory State, was outdated.

The Supreme Court recalled that it was bound by the tribunal’s factual findings, in particular:

  1. The Libyan state-owned entity was not entirely financed by the State but also through the sale of water;
  2. The involvement of the Libyan Minister of Water became necessary only because Libya was supposed to compensate the Appellants for the machinery and equipment destroyed during the riots in 2011;
  3. The Libyan Administrative Contract Regulations were not applicable to the agreement and it was not proven that the State’s Audit Bureau participated in the negotiations; and
  4. The agreement had neither been reviewed nor authorised by the State’s General People Committee or the Prime Minister.

With regard to the incorrect application of Libyan law, the Supreme Court confirmed the tribunal’s finding that a substantive law principle according to which Libya or one of its administrative entities can be held liable for the wrongful conduct of a supervised company does not imply that the State submits to the arbitration clause contained in the underlying contractual agreement. Indeed, the Supreme Court considered that a finding of extension of substantive liability had no consequence on the tribunal’s jurisdiction and was insufficient to derogate from the jurisdiction of State courts.

As regards the extension of the arbitration clause to non-signatories under Swiss law, the Supreme Court recalled that such extension is admissible only in exceptional circumstances as it derogates from the principle of privity of contracts. Such exceptional circumstances might arise when the non-signatory repeatedly participates in the performance of the agreement and thus expresses by such conduct its willingness to be bound by the arbitration agreement. Based on the tribunal’s findings, the Supreme Court found that (i) there was no evidence of Libya’s repeated interference in the agreement and (ii) thus Libya never expressed, by conduct, its willingness to become a party to the arbitration clause. Finally, the mere fact that Libya was an authoritarian regime and that the construction project was particularly important to the government at the time of contract conclusion did not create any legitimate expectation that Libya would be a party to the agreement.

 

Conclusion

These decisions can be considered important in many aspects. First, the Supreme Court confirmed that the mere fact that one party to the arbitration clause is a State-owned entity does not justify the extension of such clause to the controlling State, unless the latter interferes in the negotiations and/or performance of the underlying agreement in such a way that it expresses by such conduct its willingness to be bound by the arbitration clause. Second, the Supreme Court affirmed for the first time that its well-established case law with respect to the extension of an arbitration agreement to non-signatories also applies in relation to Article II NYC.

In conclusion, from a Swiss perspective, the extension of arbitration agreements to non-signatories is admissible if the non-signatory was involved in the negotiations and/or performance of the underlying agreement in such a way that it expressed by such conduct its willingness to be bound by the arbitration clause. This standard is applicable irrespective of the non-signatory involved (i.e. State or private entity) and the law applicable (i.e. PILA or NYC).

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2019 in Review: Australia, New Zealand and the Pacific

Wed, 2020-01-01 18:00

Esme Shirlow (Assistant Editor for Australia, New Zealand and Pacific Islands)

2019 has seen a series of important arbitration-related developments for Australia, New Zealand and the Pacific. This post highlights selected key arbitration developments in these States from the past 12 months. It focuses on several domestic arbitration law reform efforts and on important developments in respect of investor-State arbitration.

 

Domestic Arbitration: Legal Developments and Reforms

2019 saw some important developments in the region related to domestic arbitration laws. In New Zealand, for example, a law reform process culminated in a series of reforms to update New Zealand’s Arbitration Act. As commentators on the Blog have noted, this reform process was more modest than initially anticipated. For example, reforms related to the arbitration of trust disputes had been canvassed for inclusion as part of this process, but were ultimately removed from the amendments to the Arbitration Bill as adopted. Nevertheless, key issues associated with the arbitration of trust disputes have now been addressed through a separate Trusts Act, which received Royal assent in July (but is yet to take effect).

Meanwhile in Australia, 2019 has seen reform of sports arbitration laws, in response to the recommendations of the Wood Review into Australia’s “sports integrity arrangements”. The Review noted that most sports integrity issues in Australia are referred variously to in-house dispute resolution tribunals, the Court of Arbitration for Sport, or ad hoc tribunals. It observed that this “fragmented approach risks inconsistency and unpredictability in outcomes for the large range of issues that might need resolution”. As such, one of the core recommendations of the Review was the establishment of a National Sports Tribunal. Accepting this recommendation from the Review, the Australian Government resolved to establish a National Sports Tribunal to hear alleged anti-doping rule violations and other sporting disputes. Legislation to this effect was introduced into Parliament in February 2019, but lapsed when the Australian federal election was called. The legislation was subsequently reintroduced and received Royal assent in September. The Act creates a central arbitration body to which private parties (and sporting bodies) may refer sporting disputes. The Tribunal has an Anti-Doping Division, a General Division, and an Appeals Division.

A further important domestic development occurred in Australia in May, when the Australian High Court issued a ruling relevant to the interpretation of arbitration clauses, holding that ordinary principles of contractual interpretation would apply to commercial contracts containing arbitration clauses. Organisations in Australia have also continued efforts throughout the year to boost the appeal of commercial arbitration in Australia.

States in the Pacific have also engaged in domestic arbitration reforms this year. In particular, in July Papua New Guinea (“PNG”) acceded to the New York Convention, with the Convention taking effect for PNG from October 2019. That State has also announced its intention to develop and release a draft Arbitration Bill to modernise its existing domestic arbitration law. These developments have followed efforts by the Asian Development Bank to promote arbitration reform in the region, and to improve arbitration capacity in the South-Pacific. Separately, in December 2019, Fiji’s Acting Prime Minister and Attorney-General announced plans to establish a Pacific International Mediation and Arbitration Centre in Fiji. In conjunction with this proposal, Fiji has also noted its intention to ratify the Singapore Convention on International Settlement Agreements Resulting from Mediation in 2020.

Finally, international and domestic disputes involving stakeholders from Australia, New Zealand and the Pacific are likely to keep arbitration in the news and on the political agenda for these States into 2020. In November 2019, for example, Pakistan filed a request for annulment of the $US 5.84 billion award in favour of Tethyan Copper Company under the Australia-Pakistan bilateral investment treaty. This dispute sparked broader interest earlier this year in light of the quantum of the award, which as some commentators noted was equivalent to a loan package agreed between the IMF and Pakistan to respond to Pakistan’s economic difficulties and support its economic reform program. Domestically, sugar cane farmers in Australia have this year been preparing for arbitration under the Mandatory Sugar Code of Conduct, in respect of an ongoing dispute with a Chinese-owned mill. Australia’s airline industry is also pushing for regulations to provide for the arbitration of pricing and service disputes, calls which the Australian Government has thus far resisted. Disputes over striking air traffic controllers in Fiji have also involved referrals to arbitration this year.

 

Investor-State Arbitration

In my post wrapping up regional developments in 2018, I noted that both Australia and New Zealand were grappling with questions associated with the future of investor-State dispute settlement in their treaty practice. This year saw the continuation of these debates in both States, and particularly in Australia given Australia’s conclusion of three new treaties providing investment protections: Hong Kong (signed March 2019), Indonesia (signed March 2019), and Uruguay (signed April 2019). The conclusion of these treaties has foreshadowed the termination of some (but not all) of Australia’s existing agreements with these States. Each of these treaties was referred to Australia’s parliamentary Joint Standing Committee on Treaties (“JSCOT”) for review prior to ratification. The Committee delivered its report on the Hong Kong and Indonesia treaties in October 2019, and on the Uruguay treaty in December 2019. Each of these reports acknowledged the Government’s efforts to reform Australia’s investment treaties to provide “explicit procedural and substantive safeguards for investor-state dispute settlement”. The Committee recommended that binding treaty action be taken in respect of each treaty. Hong Kong has since announced that the Australia-Hong Kong treaty will enter into force in January 2020. Australia also appears to have ratified the treaty with Indonesia. Australia’s free trade agreement with Peru, also providing investor-State dispute settlement, is due to enter into force in February 2020.

Australia has also this year been exploring ratification of the UN Convention on Transparency in Treaty-based Investor-State Arbitration (which it signed in July 2017). This Convention is linked to the Transparency Rules developed by UNCITRAL’s Working Group II, with both being designed to enhance the scope for procedural transparency and participation in investor-State arbitration proceedings. Australia’s envisaged ratification of the Convention was the subject of a favourable JSCOT report in December 2019, with the Committee recommending the ratification of the Convention in light of its capacity to “provide an efficient mechanism to modernise and update the transparency provisions in Australia’s network of older-style bilateral investment treaties and FTAs”.

The rest of the region has been less prolific in the conclusion of treaties providing for investor-State arbitration this year. However, both New Zealand and Australia remain involved in negotiations for free trade agreements with the European Union, and both States are also still engaged in the negotiations of the Regional Comprehensive Economic Partnership (which Australia has indicated will be signed in 2020). Both Australia and New Zealand have also signalled their intention to negotiate free trade agreements post-Brexit with the United Kingdom. These negotiations, and others, have helped to keep issues related to the future of investor-State arbitration on the agenda.

New Zealand has this year been less active in pursuing reforms to investor-State arbitration than might have been expected. New Zealand is, for example, yet to release its draft “ISDS Protocol”, which as I explained last year has been proposed as a means of addressing the impact of investor-State dispute settlement on the rights and interests of the Māori. New Zealand has completed an initial consultation on what the Protocol might contain, and is now drawing on that feedback to prepare the draft Protocol. In November 2019, New Zealand’s Trade for All Advisory Board released a report concerning the direction of New Zealand’s future trade policy. That report noted the lack of progress in respect of the Protocol (and New Zealand’s broader ISDS-reform agenda), observing as follows:

As part of its trade and investment policy, the Government has decided to oppose the inclusion of Investor-State Dispute Settlement (ISDS) in FTAs … It is, therefore, surprising that New Zealand has not engaged more in international processes to reform arbitration provisions in investment treaties. The same lack of engagement in the United Nations Commission on International Trade Law (UNCITRAL) is also surprising, given our country’s broader interests in arbitration.

This therefore remains an area to watch into the coming year. The release of a Protocol would, in particular, be of significance – not just for New Zealand, but also to other States with indigenous populations given the likelihood of increasing intersections and tensions between indigenous interests and investment arbitration.

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Applications for Extension of Time for Passing the Award in India: Which Court to Entertain?

Tue, 2019-12-31 23:51

Gaurav Juneja and Aayush Jain

Section 29A was inserted, by way of amendments to the Indian Arbitration and Conciliation Act (the Act), in the year 2015. With the introduction of this provision, the time-period for passing the award has been fixed at twelve months from the date the arbitral tribunal enters upon reference and is extendable by another six months with the consent of the parties. Any further extensions can only be granted by the concerned court, either prior to or after the expiry of the time period, failing which the mandate of the arbitral tribunal shall terminate.

Recently, however, the time-period of twelve months has been relaxed by way of certain important amendments to Section 29A which were notified on 30 August 2019. While this post does not intend to review the said amendments in detail, it must be mentioned that ‘international commercial arbitrations’ have now been excluded from the ambit of Section 29A.

The focus of this post will be on an interesting issue concerning the jurisdiction of courts to entertain an application for extension of time under Section 29A, which has also been the subject of a few conflicting decisions by courts in India.

 

Scheme of Section 29A

Section 29A inter alia provides that in case the award is not made within twelve months (or within the extended period as the case maybe), the mandate of the tribunal shall terminate unless it is extended by the ‘Court’. The expression ‘Court’ has, in turn, been defined under Section 2(1)(e) of the Act to mean:

(a) In the case of international commercial arbitrations, the High Court in exercise of its ordinary original civil jurisdiction.

(b) In the case of an arbitration other than an international commercial arbitration, the principal Civil Court of original jurisdiction in a district and includes the High Court in exercise of its ordinary original civil jurisdiction.

(In India, five High Courts (Bombay, Delhi, Madras, Calcutta and Himachal Pradesh) have ordinary original civil jurisdiction – i.e., the power to hear a fresh case. All other High Courts have appellate jurisdiction)

The question then is whether, in view of the above, the applications for extension of time for passing the award under Section 29A will lie only with the High Court in the case of international commercial arbitrations and with the principal Civil Court in the case of other arbitrations.

It must be noted that under the provisions of Section 11 of the Act (appointment of arbitrators), the competent court to entertain applications for appointment of an arbitrator is the Supreme Court of India (Supreme Court) in the case of international commercial arbitrations; and the jurisdictional High Court in the case of any other arbitrations.

It also needs to be considered that in addition to extension of time, Section 29A also provides the power to substitute one or all the arbitrators, if required. This is of importance as, in the case of an international commercial arbitration, an arbitral tribunal appointed under Section 11 of the Act by the Supreme Court can be substituted by the High Court. Similarly, an arbitral tribunal appointed by the High Court in the case of any other arbitrations may be substituted by a principal Civil Court. In the latter case, the situation is even more extraordinary since a principal Civil Court does not, in the first place, have the power to appoint an arbitrator in any circumstances.

 

View Taken By Courts

In the case of Nilesh Ramanbhai Patel v Bhanubhai Ramanbhai Patel (Misc. Civil Application (OJ) No. 1 of 2018 in R/Petn. under Arbitration Act No. 56 of 2016), the High Court of Gujarat (Gujarat High Court) considered whether the expression ‘Court’ in the context of Section 29A can be understood as referred in Section 2(1)(e) of the Act.

The arbitrator was appointed by the Gujarat High Court. However, the proceedings could not be concluded in the prescribed time limit. An application for extension, accordingly, was filed before the Gujarat High Court. However, it was argued that the Gujarat High Court, having appointed the arbitrator, had become ‘functus officio’ and the application for extension of time would only lie before the Civil Court.

After examining the scheme of Section 29A, the Gujarat High Court questioned whether it was the intention of the legislature to vest the Civil Court with the power to make appointment of arbitrators by substituting the arbitrators appointed by the High Court under Section 11 of the Act. The Gujarat High Court also observed that the same situation would arise in the case of international commercial arbitrations, where the power to appoint the arbitrator rests exclusively with the Supreme Court. The High Court, thus, concluded that this conflict can be avoided only by understanding the expression “Court” for the purpose of Section 29A as the Court which appointed the arbitrator.

A similar view was taken by the High Court of Bombay in Cabra Instalaciones Y Servicios, S.A. v Maharashtra State Electricity Distribution Company Limited (Commercial Arbitration Petition (L) Nos. 814-818 of 2019). The petitioner approached the High Court under Section 29A of the Act and sought an extension of six months for conclusion of the arbitral proceedings and passing the award. The arbitration was an international commercial arbitration and the arbitrator had been appointed by the Supreme Court under Section 11 of the Act.

It appears that this was the second time an extension had been sought from the High Court in this case and the mandate of the arbitral tribunal was already extended by the High Court on a previous occasion.

Notwithstanding the earlier extension, the High Court considered whether it would have the jurisdiction, under Section 29A, to entertain the application for extension of time when the arbitrator had been appointed under Section 11 of the Act by the Supreme Court.

The High Court concluded that in the case of international commercial arbitrations, it did not have the jurisdiction to pass any orders under Section 29A and such power would lie only with the Supreme Court. Noticing that Section 29A also provided for the substitution of the arbitral tribunal by the concerned Court while considering an application for extension of time, the High Court opined that this would be the exclusive power and jurisdiction of the Supreme Court.

The High Court of Kerala has, however, taken a completely different view. In M/s. URC Construction (Private) Ltd. v M/s. BEML Ltd. (2017) 4 KLT 1140, the High Court of Kerala held that in view of Section 2(1)(e) of the Act, in the case of domestic arbitrations, the application for extension of time under Section 29A would lie to the principal Civil Court since the High Court of Kerala did not possess original civil jurisdiction.

Recently, in Tecnimont SpA & Anr. v National Fertilizers Limited (MA No. 2743/2018 in Arbitration Case (C) No. 24/2016)1)Khaitan & Co represented Tecnimont SpA and Tecnimont Private Limited, the Petitioners in this case. jQuery("#footnote_plugin_tooltip_4757_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4757_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, this issue also came up for consideration before the Supreme Court. As the arbitral proceedings could not be completed within 18 months (1 year plus the extended 6 months), the petitioners filed an application for extension of time before the Delhi High Court. However, as the matter was an international commercial arbitration and the arbitrator had been appointed by the Supreme Court, on seeking fresh advice in the matter, the petitioners approached the Supreme Court for extension of time. The Delhi High Court was duly apprised of these developments and the proceedings before the High Court were, accordingly, disposed of.

When the matter came up before the Supreme Court, it was argued by the petitioners that, since Section 29A also carried with it the power to substitute the arbitral tribunal, it was imperative that the application for extension of time also be heard by the Supreme Court. This request was opposed by the respondents and it was argued that under the Act, the time limit for passing the award in the case of international commercial arbitrations can only be extended by the High Court.

Eventually, however, the occasion for the Supreme Court to conclusively decide the question of law did not arise as the application for extension of time was withdrawn by the petitioners with the request that liberty may be granted to the petitioners to approach the Delhi High Court once again. The request was accepted by the Supreme Court and the matter was restored to the file of the Delhi High Court. Finally, the time limit for passing the arbitral award was extended by the Delhi High Court in view of the order passed by the Supreme Court.

 

Comment

It is worth considering whether it is proper for the High Court to have the power to substitute an arbitrator appointed by the Supreme Court, particularly when the power to appoint arbitrators is exclusive to the Supreme Court. In the context of international commercial arbitrations, this issue is not likely to arise anymore since, as such arbitrations stand excluded from the ambit of Section 29A pursuant to the recent amendments. It will, however, be interesting to see if this issue continues to remain relevant in so far as ongoing arbitrations are concerned.

Interestingly, in State of West Bengal v Associated Contractors (2015) 1 SCC 32, the Supreme Court held that it can, in no circumstances, be the ‘Court’ for the purpose of Section 2(1)(e) of the Act since the definition of ‘Court’ under Section 2(1)(e) was exhaustive. It must, however, be noted that this decision was in the context of Section 42 of the Act (Jurisdiction) and the question was whether the jurisdiction of all other Courts stood excluded once the parties had submitted to the jurisdiction of one Court under Section 9 of the Act. Moreover, this decision was delivered prior to the amendments to the Act in 2015, when Section 29A had not even been enacted.

Finally, while the text of Section 29A read with the definition of ‘Court’ under Section 2(1)(e) appears to be clear, it is difficult to envisage that the legislature intended to vest the power to play a role in the appointment in the principal Civil Court. In these circumstances, there is certainly merit in the argument that the definition of ‘Court’ in the context of Section 29A cannot be understood as referred to in Section 2(1)(e) of the Act. This is, thus, an aspect which certainly needs to be considered in the context of future amendments to the Act.

References   [ + ]

1. ↑ Khaitan & Co represented Tecnimont SpA and Tecnimont Private Limited, the Petitioners in this case. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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The New Year Arbitration Quiz: 2020

Tue, 2019-12-31 00:00

Michael McIlwrath

Should odd domestic arbitration practices be forgot, and never brought to mind!

 

Planning to be more international in the coming decade? Just in time for your New Years resolutions, we have the 2020 Kluwer Arbitration New Years Quiz.  This year, the blog’s editors have helped assemble questions about domestic arbitration practices from around the world.  They range from useful developments and interesting quirks to odd practices that will raise the eyebrows of anyone not from that jurisdiction.

Try your hand at placing these idiosyncrasies of domestic arbitration!

Send your answers to [email protected], by 7 January 2020. The first person to submit the correct answers, or the one with the most correct answers, will receive an invitation to a double-secret event on the occasion of the Kluwer Arbitration Blog anniversary, to be held in 2020!

 

 

1. Arbitrators

Match the arbitrator and the country whose courts decided the issues below in 2019:

a. Arbitrators imprisoned for accepting compensation based on ICC fee scales in ad hoc arbitration proceedings

b. Arbitrator’s failure to disclose an ownership stake in the institution that administered the arbitration held to be grounds for annulment of award

c. Arbitrator allowed to remain on tribunal despite being a former employee of one of the parties to the dispute

d. Court granted a professional body access to the arbitration hearing transcript and witness statements so it could determine whether an arbitrator should be disciplined for failure to disclose circumstances of possible bias

 

  1. USA
  2. England
  3. India
  4. Peru

 

 

2. Skeletons in the domestic closet

Match the following domestic practices with the jurisdictions where they are most likely to be found in arbitration:

a. Pre-hearing written skeletons

b. Pre-hearing oral examination of opposing witnesses with a written transcript that can be used later during the oral examination of the same witnesses at the arbitration hearing

c. Iura novit curia

d. “Sittings” as term for calculating arbitrator fees for hearing time (usually a half day)

 

  1. India
  2. USA
  3. UK
  4. Prague Rules

 

 

3. Swearing!

Match the oath with the place or rules.

a. Witnesses must swear an oath to tell the truth

b. Arbitrators must swear an oath to decide based on the truth

c. Arbitrators are expressly authorized to administer an oath to witnesses but are not required to do so

 

  1. LCIA Rules
  2. UAE
  3. New York, USA

 

 

4. Champerty

Third-party funding of arbitration is prohibited under the common law doctrine of champerty in which of the following Asian countries?

a. Hong Kong

b. Singapore

c. Australia

d. New Zealand

e. None of the above

 

 

5. Foreign lawyers

Match the rule with the jurisdiction

a. Foreign lawyers are expressly authorized to appear in international arbitration and mediation proceedings

b. Foreign lawyers may appear in international arbitrations but only as co-counsel with an attorney qualified to practice at this seat

c. Foreign lawyers may reside and work at this seat, subject to regulation by a statutory body

 

  1. Singapore
  2. England and Wales
  3. California, USA

 

 

6. Enforcement

Match the requirement with the jurisdiction (hint: one jurisdiction matches two propositions)

a. A party must pay a tax of 3% of the amount awarded in order to enforce an arbitration award

b. The arbitrators must read the entire text of their award out loud to the parties in order for it to become officially enforceable

c. Arbitrators do not have authority to issue provisional/interim measures

 

  1. Italy
  2. Ecuador

 

 

7. Employment disputes may be resolved by arbitration in all but which of the following countries?

a. USA

b. China

c. Saudi Arabia

d. The Vatican

e. Brazil

 

 

8. Grounds for challenging an award

Which of the following statements is true about Singapore?

a. The country’s arbitration act allows a party to challenge a domestic arbitration award on questions of law

b. The arbitration act does not allow a party to challenge an international arbitration award on questions of law

c. Both are true

 

 

9. Procedure

Which jurisdiction has enacted legislation to empower arbitrators to impose exemplary costs on parties seeking adjournments? 

 

a. Myanmar

b. Vietnam

c. India

d. South Africa

 

 

10. Which arbitration institution was established first?

a. The Finnish Arbitration Institute (FAA)

b. The Singapore International Arbitration Centre (SIAC)

c. The Vienna International Arbitration Centre (VIAC)

d. The Court of Arbitration of the International Chamber of Commerce (ICC)

e. The American Arbitration Association (AAA)

 

 

11. Bonus!

For extra points, send us the most interesting, idiosyncratic, or just plain crazy domestic arbitration practice that you have encountered.

 

The author would like to thank KAB editors: Zahra Rose Khawaja, Kiran Gore, Benson Lim, Daniela Paez and Piyush Prasad

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Royal Decree-Law 17/2019: An Opportunity for Spain to Leave Behind the Renewable Energy Arbitrations?

Sun, 2019-12-29 23:22

Pablo Pérez-Salido

On November 22, 2019, the acting government of Spain passed a long-anticipated legislation in response to more than four dozen of international arbitrations that, since late 2013, have been filed continuously against the country.1)See Clifford J. Hendel & María Antonia Pérez, ‘The Past, Present and Possible Future of the Spanish Renewable Energy Arbitration Saga,’ New York State Bar Association, International Section, Vol. 31, No. 1 (2018). jQuery("#footnote_plugin_tooltip_5447_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5447_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Royal Decree-Law 17/2019 (‘RDL 17/2019’) is, therefore, an attempt to provide new incentives and more certainty to the renewable energy sector, which has faced significant reforms in the last decade. The Government expects that this legislative measure will translate into a high number of withdrawals of such claims filed by foreign investors against Spain.

The RDL 17/2019 is a modification of the legislation that currently regulates installations that produce energy derived from renewable sources. It provides for urgent measures for the adoption of a remuneration framework that will guarantee, under certain conditions, the remuneration for such installations throughout the next two regulatory periods (2020-2025 and 2026-2031). Previously, the remuneration (via a rate of return) for these renewable installations during the period 2014-2019, was calculated by adding 300 basis points to the price of the Spanish bond payable at ten years. However, the RDL 17/2019 does not use this formula anymore. Instead, it offers, in relation to these installations, the possibility of withdrawal of pending arbitral or judicial proceedings against Spain in exchange for a 7.398% rate of return until 2031. Without such urgent measure, the rate of return for the next period would have dropped from 7.398% to approximately 4.7%.

It has been previously argued on Kluwer Arbitration Blog that only an amicable resolution could finally put an end to these disputes (see here and here). However, this post suggests that, perhaps, in the case of Spain, the RDL 17/2019 could be a turning point to the negative cycle that the country has experienced in this regard recently. Besides this, the blog post also aims to analyze in detail the implications of the RDL 17/2019 for the renewable energy ‘arbitration saga.’

 

Background

In the early 2000s, Spain adopted a set of incentives to attract foreign investors in what was then a flourishing renewable energy sector. Primarily, Spain offered generous incentives guaranteeing a high level of profitability for producers of energy derived from renewable sources. The call for investors was, indeed, a success, and Spain received considerable investments. This was, however, not without substantial aid or subsidies paid by Spain for such installations. However, due to the 2008 financial crisis and Spain’s increased public deficit, this promising regime of incentives became practically unsustainable. Consequently, starting in 2011, several legislative measures were put in place to substantially reduce the aid which led to its final elimination in 2013.

Following these legislative measures, a cascade of cases were brought against Spain by investors under the Energy Charter Treaty. To date, and to the best knowledge of the author, there are approximately 45 pending international arbitrations against Spain, seeking damages in excess of EUR 10,000 million. Additionally, as of the date of this post, Spain has lost 10 arbitration proceedings to foreign investors in which approximately a total of EUR 1,700 million in damages were sought, but ‘only’ EUR 821 million have been granted. In particular, since the first adverse arbitral decision against Spain in Eiser, the country has been enduring what now seems to be a constant ‘jurisprudence’ of arbitral awards rendered in favor of investors. In fact, these losses appear to have provoked a ‘domino effect’ upon other investors with similar claims that were perhaps waiting to see the result of other ongoing arbitrations. Therefore, it is not surprising that Spain finally decided to undertake an alternative approach, other than defending these numerous and constant arbitrations, in order to stop the ‘bleeding’ and to try to recover the trust of foreign investors toward its renewable energy sector.

At issue remains, however, whether the legislative reform contained in the RDL 17/2019 would be capable of changing the current tendency. Despite certain challenges examined herein, this legislative measure could be a game-changer for both the foreign investors and Spain. Particularly, those investors that have obtained a favorable arbitral award against Spain, but that are still undergoing timely and costly enforcement proceedings and searching for Spanish assets outside of the European Union, could find the provisions found in the RDL 17/2019 rather advantageous to them (mainly due to implications of Achmea).2)To the author’s best knowledge, none of the awards against Spain have been enforced as of yet. jQuery("#footnote_plugin_tooltip_5447_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5447_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This situation, however, has not prevented the filing of new claims against Spain (the latest, on October 4, 2019),3)VM Solar Jerez GmbH and others v. Kingdom of Spain (ICSID Case No. ARB/19/30). jQuery("#footnote_plugin_tooltip_5447_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5447_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and the interest stemming from the unfavorable awards against Spain continues growing each day that passes without payment. Consequently, in light of the above-mentioned, both the affected investors and the Spanish government could benefit from the legislative reform as an alternative approach capable of reaching a satisfactory and cost-effective solution to the numerous disputes that have ensued.

 

About the RDL 17/2019

The Royal Decree-Law 661/2007 regulates the remuneration framework for renewable energy installations. For the present regulatory period (2014-2019), such installations have enjoyed a 7.398% rate of return in relation to the initial investments. However, on December 31, 2019, the regulatory period will come to an end and the new rate would have dropped significantly as mentioned before (approximately to 4.7%) but for the measure adopted in the RDL 17/2019. This circumstance could have provoked a situation of great financial stress for the investors and would have likely resulted in the filing of additional claims against Spain.

In December 2018, there was an attempt by the  Government to pass a law which included similar measures. However, the national elections and the consequent dissolution of Congress prevented it from moving forward. Seeking to act swiftly, and arguing a situation of emergency, the acting Government passed the RDL 17/2019 without having to go first through Congress (which at the time was still dissolved until the formation of the new Government).4)Under Article 86 of the Spanish Constitution, the Government can pass royal decree-laws in the case of extraordinary and urgent necessity as long as it does not affect the institutions of the State, and the rights, obligations, and freedoms of the citizens under Title I of the Constitution. The situation or urgency, nevertheless, needs to be proven by the Government and the adopted measure must be a reasonable and adjusted response to such an emergency. jQuery("#footnote_plugin_tooltip_5447_4").tooltip({ tip: "#footnote_plugin_tooltip_text_5447_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The RDL 17/2019, First General Disposition, provides that (translation by the author): “it is necessary to update certain remuneration parameters for renewable installations under a special regime before the beginning of the next regulatory period [January 1, 2020]”. Specifically, it stipulates that “it is necessary to update the value of the rate of return applicable for the upcoming regulatory periods [2020-2025, and 2026-2031]… in order to provide certainty to the regime”. The Second General Disposition further provides that this update is ‘urgent’ since “the absence of the [update] will cause great uncertainty around the future profitability of these installations,” which could ultimately impair the financing of new projects and stop the materialization of new investments that are otherwise necessary to accomplish Spain’s ambitious agenda for an ecologically-friendly transition, for a lack of a better term, by 2030 (see here, in Spanish).

In essence, the RDL 17/2019 introduces an amendment to the Law of the Electricity Sector 24/2013 – which governs the renewable installations and their remuneration regime set forth in the Royal Decree-Law 9/2013 (‘RDL 9/2013’) – by providing that the value used to measure the rate of return of such renewable installations will not be reviewed until 2031. In other words, Spain guarantees for these renewable installations a rate of return of 7.398% during the next two regulatory periods. This rate is superior to the rate that would have been applicable during the period 2020-2025, while also avoiding any potential uncertainty for the 2026-2031 period. However, this incentive of a twelve-year guarantee shall only apply to those investors that agree to abandon their claims against Spain by September 30, 2020. Additionally, those investors in the process of enforcing their arbitral awards can also benefit from this incentive as long as they renounce all the enforcement actions.

 

Challenges

There are, however, two main challenges with regard to this legislative measure. First, perhaps these incentives might fall too short and fail to persuade foreign investors to withdraw their claims. When making their assessment of the situation, it is possible that some investors affected by the 2013 cuts, and with pending arbitrations or enforcement actions, may conclude that it is of greater benefit to receive a lower rate during the period 2020-2025 and the amount in an arbitral award (whether to be granted or already granted), rather than to accept a fixed 7.389% rate for the next twelve years.

Second, the deadline of September 30, 2020, as mandated in the RDL 17/2019 for investors to withdraw either their pending arbitrations or their enforcement proceedings, could be seen as too short and not realistic from a practical perspective. Can, in fact, this deadline, if perceived as an ultimatum, jeopardize a potential amicable resolution of some of these disputes? Only time will tell.

Despite these challenges, the incentives set forth in the RDL 17/2019 could be a game-changer and effectively persuade a large number of foreign investors to withdraw their pending actions against Spain. By doing so, investors would be the primary beneficiaries of a significant remuneration regime until 2031.

References   [ + ]

1. ↑ See Clifford J. Hendel & María Antonia Pérez, ‘The Past, Present and Possible Future of the Spanish Renewable Energy Arbitration Saga,’ New York State Bar Association, International Section, Vol. 31, No. 1 (2018). 2. ↑ To the author’s best knowledge, none of the awards against Spain have been enforced as of yet. 3. ↑ VM Solar Jerez GmbH and others v. Kingdom of Spain (ICSID Case No. ARB/19/30). 4. ↑ Under Article 86 of the Spanish Constitution, the Government can pass royal decree-laws in the case of extraordinary and urgent necessity as long as it does not affect the institutions of the State, and the rights, obligations, and freedoms of the citizens under Title I of the Constitution. The situation or urgency, nevertheless, needs to be proven by the Government and the adopted measure must be a reasonable and adjusted response to such an emergency. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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2019 in Review: Legislative and Case Law Developments in Europe

Sun, 2019-12-29 22:00

Boris Praštalo (Assistant Editor for Europe)

The year 2019 has seen some important legislative and case law developments in the European jurisdictions and Kluwer Arbitration Blog, as always, has been closely monitoring the developments on the ground.

 

I. Summary of Important Legislative Developments

 

a) Sweden: Aligning Arbitration Law with International Developments and Eliminating Duplicate Proceedings

In March 2019, a revision of the Swedish arbitral law that is significantly reliant on the UNCITRAL model came into force. Amongst other changes, the revised law adopts a mechanism to resolve impasses in arbitrator appointments in multi-party arbitration, allows oral evidence to be given in English, and eliminates the previously existing risk of duplicate proceedings by way of disallowing parallel litigation once the arbitration has begun.

 

b) Poland: Making an Attempt to Improve the Legal Environment for Arbitration

The amendments to the Polish Code of Civil Procedure (‘CCP’) have come into effect in the second half of 2019. Some of these amendments have been directed at the Polish arbitration law (which is contained in the CCP). The changes made to this end have been done with the aim to clarify several uncertainties that have arisen over the course of time. For instance, the arbitrability of matters such as patrimonial rights and validity of shareholder resolutions in limited liability and joint-stock companies has long loomed in the air, with diametrically opposing views being espoused both in the scholarly arena and among the practitioners.

Other amendments to the CCP have made significant changes to the procedural rules before the Polish courts, with these alterations providing a very good illustration of why sometimes the road to hell is paved with good intentions. Namely, while, at least in theory, seeking to make the civil procedure in Poland more effective, in practice, the said changes possess the potential to greatly backfire. Among other things, the Polish legislature has introduced a shorter time limit for the submission of counter-claims and has made the regime for the introduction of evidence much stricter. Thus, in the future “[a newly improved] framework for arbitration, against the backdrop of increased difficulty in safely navigating through procedural pitfalls in court litigation, […][could potentially] provide arbitration with more traction in Poland”.

 

II. Case Law Highlights

 

a) Germany: Maintaining a Pro-Enforcement Stance while Safeguarding the Integrity of the Arbitral Proceeding

The very beginning of the year saw Bundesgerichtshof (‘BGH’) finally put an end to a six-year-long saga before the German courts. Namely, after a few ‘ping-pong’ exchanges between the BGH and its lower counterpart – Oberlandesgericht Karlsruhe – the BGH finally delineated which circumstances would lead to the annulment of the award if the tribunal-appointed expert (or an arbitrator) were to fail to disclose circumstances having the potential to bring into question their independence and impartiality. While the duration of the proceedings before the German courts can hardly be characterised as pro-arbitration – it did, after all, take six gruelling years to bring the whole affair to an end – the decision itself has overall been warmly received by the members of the arbitration community.

The BGH declared the award in question to be enforceable, and in the process, it clarified that the mere failure on the part of the tribunal-appointed expert (or an arbitrator) to disclose a pertinent fact will only lead to the annulment of the award if the said non-disclosure in and of itself showcases the expert’s or the arbitrator’s bias. However, as noted by the BGH, it is only in cases of intentional non-disclosure that this high threshold would be satisfied. In other cases, it would be upon the appropriate state court to carry out the analysis with the aim of determining whether the non-disclosure by a tribunal-appointed expert or an arbitrator would have given rise to justifiable doubts regarding their independence and impartiality had the disclosure occurred in a timely manner.

The approach espoused by the BGH in this case ensures that, on the one hand, the threshold for challenging the award as a result of non-disclosure of pertinent circumstances by an arbitrator or a tribunal-appointed expert is high enough to discourage frivolous attempts at setting-aside. On the other hand, the decision of the BGH leaves open the possibility to set aside the award in serious cases of non-disclosure. The final outcome is the reiteration of the pro-enforcement stance while at the same time maintaining in place a mechanism that safeguards the integrity of arbitrations seated in Germany.

 

b) Greece: A Door Opens for a More Permissive Enforcement of Punitive Damages

The general approach by courts in Greece has been to refuse the recognition and enforcement of foreign arbitral awards that provide for punitive damages. However, the Judgment no. 722 of 2019 of the Single Member Civil Court of Piraeus (‘Piraeus Court’) could very well prove itself to be a game-changer in this regard. While the judgement in question dealt with the recognition and enforcement of a US court decision, its approach and conclusions would equally be applicable to an arbitral award providing for punitive damages.

The Piraeus Court departed from the analysis and the approach followed by its counterparts. Namely, the enforcement of foreign judgements and arbitral awards awarding punitive damages, as per the test developed by the Greek Supreme Court, is only allowed in Greece when such damages do not contradict Greek public policy per se, and when they, as established by in concreto analysis, are not seen as disproportionate or excessive. In practice, Greek courts would refuse enforcement when punitive damages would not be considerably lower as compared to the actual loss suffered by the aggrieved party. In contrast, the Piraeus Court in the case at hand allowed the enforcement of punitive damages in the amount of USD 10 million although they were higher than the actual loss incurred by the aggrieved party (USD 7.8 million). In arriving at this outcome, the Piraeus Court opined that the correct manner in assessing the punitive damages is not to presume that they ought to be substantially lower, but that they should not be considerably higher than the actual loss. In essence, if the analysis of the Piraeus Court were to be adopted by other Greek courts as well, that would mean that the pool of enforceable arbitral awards in Greece would be somewhat expanded.

 

c) Switzerland: Opting Out of the International Arbitration Regime and into a Domestic One Made Somewhat Less Formalistic

While Switzerland has two separate arbitration regimes with two separate legal instruments governing international and domestic arbitrations, it allows the parties, through the exercise of party autonomy, to opt out of the international arbitration regime and into the domestic one, and vice versa. In other words, parties to an international arbitration seated in Switzerland can opt out of Chapter 12 of the Swiss Private International Law Act (‘PILA’), which is the default lex arbitri for international arbitrations, and opt into Section 3 of the Swiss Civil Procedure Code (‘CPA’), the latter being the arbitration law for domestic arbitrations. To do so, the Federal Supreme Court of Switzerland clarified this year that the wording of the arbitration clause to this end need not specifically state that the parties are opting out of either PILA or CPA, but that a general ‘opting-out’ language such as the following one will suffice: “[…] to the exclusion of any other procedural law.”

 

d) United Kingdom: Hearing Takes Place before the Supreme Court in the Case of Halliburton v Chubb

The hearing in the case of Halliburton v Chubb before the UK Supreme Court was held on 12 and 13 November this year. The decision, once rendered, will certainly have important implications regarding repeat appointments of arbitrators. At issue in this particular case is whether, and to what extent, an arbitrator is allowed to accept appointments in multiple references (with only one common party) that concern either exactly the same or merely overlapping subject matter without, as a result of it, giving rise to an appearance of bias. Furthermore, a question arises whether an arbitrator may accept such appointments without disclosure. The answers by the UK Supreme Court to these pressing issues can be expected sometime next year.

 

Concluding Remarks

This year there has only been a limited number of legislative efforts in Europe regarding arbitration, with Sweden and Poland leading the way. As for the judicial realm, in 2019 Europe has seen a number of impactful court decisions dealing with arbitration matters, including those rendered by courts in Germany, Greece and Switzerland. The UK Supreme Court has also not been idle when it comes to arbitration this year, but its final decision in the case of Halliburton v Chubb is expected to see the light of day sometime in 2020. On the whole, it is safe to conclude that 2019, while not being overly exciting, has been characterised by several developments on the old continent that the arbitration community will certainly continue to discuss in the coming year as well.

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Investment Dispute Settlement Body of the Organisation of Islamic Cooperation: A Dead End for Claims under the OIC Investment Agreement?

Sun, 2019-12-29 01:00

Yusuf Kumtepe and Riccardo Loschi

As part of International Investment Law and Policy Speaker Series, on November 14, 2019, the Columbia Center on Sustainable Investment  hosted Dr. Mouhamadou Kane, Project Lead and Manager for the Organisation of Islamic Cooperation (“OIC”) Investment Dispute Settlement Organ. During the program, Dr. Kane explained the text of a draft investment protocol for the OIC Investment Dispute Settlement Organ, which is not yet available publicly. He anticipates that the protocol will be adopted by foreign ministers of OIC Member States in March 2020. Once adopted, the protocol will provide an institutional mechanism for investor-State dispute settlement (“ISDS”) among the OIC Member States. OIC’s efforts to reform the ad hoc arbitration mechanism under the OIC Investment Agreement aim, among other things, to limit investors’ access to arbitration and address concerns for transparency of proceedings and accountability of arbitrators. This blog post provides background information on the OIC Investment Agreement, explains the structure of the proposed Investment Dispute Settlement Organ and conveys the authors’ views on the future of ISDS within the OIC.

 

Background of the OIC Investment Agreement

Adopted in 1981 and effective since 1988, the OIC Investment Agreement is a so-called old-generation international investment agreement. Signed by 36 OIC Member States and ratified by 29, the treaty provides for several classic investment protections, such as prohibition of unlawful expropriation, protection and security and most favored nation treatment. It also includes an ad hoc investor-state arbitration provision (Article 17), which will operate “[u]ntil an Organ for the settlement of disputes arising under the Agreement is established.”

Due to the general unawareness as to the very existence of the agreement (notably, OIC made the text available on its website only in 2009),1)Walid Ben Hamida, ‘A Fabulous Discovery: The Arbitration Offer under the Organization of Islamic Cooperation Agreement Related to Investment’ (2013) 30 Journal of International Arbitration 637, 639. jQuery("#footnote_plugin_tooltip_2480_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2480_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the first known OIC investment arbitration was initiated only in 2011 by the Saudi businessman Hesham Al-Warraq against Indonesia (“Al-Warraq”). Amusingly enough, Dr. Kane disclosed that, unaware of the existence of the OIC Investment Agreement, in 2011, he himself made a proposal for the adoption of a multilateral investment agreement among OIC Member States.

Since Al-Warraq, approximately ten investors have initiated arbitrations under the OIC Investment Agreement. In some of these cases, respondent States refused to appoint arbitrators and the OIC Secretary-General, the appointing authority under the OIC Investment Agreement, refrained from assisting the constitution of tribunal, reportedly because of the lack of time limits for appointment and supposed political pressure from some OIC Member States, which claimed that they had not consented to arbitration under the treaty. As a result, the Permanent Court of Arbitration intervened in several proceedings as appointing authority upon claimant’s request, as discussed in a prior blog post.

A major development came in April 2019, when Investment Arbitration Reporter reported that OIC Member States had made progress toward establishing a permanent dispute settlement organ, in part because of their concerns arising out of increasing numbers of OIC arbitrations.

 

The Proposed Structure of ISDS through the OIC Investment Dispute Settlement Organ

The new ISDS mechanism set out by the draft protocol requires an aggrieved investor to go through several intermediary steps before it may commence investment arbitration proceedings. As Dr Kane explained, this structure is consistent with the rationale of the draft protocol, namely to reduce the number of cases brought against the OIC Member States. Investors who wish to bring claims under the OIC Investment Agreement will first be required to exhaust local remedies in the domestic courts of the host State until a final decision is reached. After having done so, the investor would be entitled to file a denial of justice claim against the State. This would begin a State-to-State amicable settlement process. Only if this process fails the investor will be entitled to commence an investor-state proceeding before the First Instance Panel. After those proceedings have concluded and an award is rendered, the First Instance Panel’s award could be challenged before the Appellate Committee. Members of the First Instance Panel and the Appellate Committee would be appointed by the OIC States, and the appointees may include citizens of non-OIC states. Only after the two-tier dispute settlement process is concluded will the decision become final and enforceable. A secretariat for the Dispute Settlement Organ will be established to support the parties and the tribunal throughout the entire process.

It is anticipated that, at the ministerial level, a separate policy forum will have the mandate to issue binding interpretations of the substantive provisions of the treaty. The draft protocol also envisages the establishment of an independent advisory center that will offer legal assistance to respondent Member States and will potentially provide capacity building advice in dispute prevention and management. Lastly, Dr. Kane reported that the issues of third-party funding and frivolous claims will be regulated by the rules of the Dispute Settlement Organ and not by the draft protocol.

 

The Path Towards a Comprehensive OIC Dispute Resolution Mechanism 

In the upcoming months, the 57 OIC Member States will negotiate the draft protocol which will be adopted – with or without modifications – at the March 2020 meeting of the Council of Foreign Ministers. While the country that will host the Dispute Settlement Organ’s seat has not yet been decided, Dr. Kane explained that one option that the OIC is currently contemplating is to affiliate the organ to the Islamic Development Bank based in Jeddah, Saudi Arabia, an arrangement that could be considered akin to the relationship between the World Bank and the International Centre for Settlement of Investment Disputes (ICSID).

The proposed Dispute Settlement Organ is not the only example of the OIC’s recent efforts to reform international dispute resolution mechanisms among OIC Member States. The OIC is also in the process of establishing the OIC Arbitration Center in Istanbul, which will handle commercial arbitration disputes between the business entities of OIC Member States. The OIC Arbitration Center is also expected to administer investment arbitration claims that do not arise out of the OIC Investment Agreement, such as those under bilateral investment treaties between OIC Member States that may refer to the center as a possible forum.

 

The Future of OIC Investment Agreement Disputes

As emphasized by Dr. Kane, the reform proposal addresses sovereignty, legitimacy and capacity concerns affecting ISDS. While these concerns are also currently under the scrutiny of the UNCITRAL Working Group III, Dr. Kane highlighted that the reform proposal for the OIC Investment Dispute Settlement Organ constitutes a “South-South” contribution to ISDS, and  promised an early implementation of these reforms.

The proposed OIC ISDS mechanism represents an important step in modern ISDS reform and echoes certain recent developments in this field (see, e.g., the investment agreements concluded by the European Union that provide for two-tier mechanism composed by members appointed by contracting parties). However, the mechanism significantly restricts access to OIC investment arbitration and will likely dissuade investors from invoking the OIC Investment Agreement in the first place. On the one hand, exhausting local remedies and going through the State-to-State amicable settlement process may constitute an overlong exercise for most investors. On the other, the requirement for an investor to present a denial of justice claim might result into an unsurmountable gateway for most claims.

Further, it may be argued that these restrictions exceed the mandate to establish a permanent organ under Article 17 of the OIC Investment Agreement and would de facto amend the treaty without the required approval of four-fifths of the Member States to the treaty.

It will be interesting to observe if and to what extent Member States will confirm the current draft protocol and whether the final version will clarify the regime to which pending arbitrations will be subject following the establishment of the Dispute Settlement Organ. As things stand, however, future OIC investment claims will hardly pass the hurdles of the proposed dispute settlement mechanism.

References   [ + ]

1. ↑ Walid Ben Hamida, ‘A Fabulous Discovery: The Arbitration Offer under the Organization of Islamic Cooperation Agreement Related to Investment’ (2013) 30 Journal of International Arbitration 637, 639. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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Workshop on the Investor State Dispute Settlement Reform

Fri, 2019-12-27 23:41

Philipp Reinhold

On the 1 October 2019, the Europa-Institut of Saarland University and the International Investment Centre Cologne (IILCC) co-organized a workshop on the Investor State Dispute Settlement (ISDS) Reform and the creation of a Multilateral Investment Court (MIC). At the event, the IILCC Study Group presented its preliminary conclusions regarding a comparative report on the Multilateral Investment Court, which comprises a study by Prof. Dr. Marc Bungenberg, together with Prof. Dr. August Reinisch,1)Marc Bungenberg and August Reinisch, From Bilateral Arbitral Tribunals and Investment Courts to a Multilateral Investment Court – Options Regarding the Institutionalization of Investor-State Dispute Settlement, 2nd Edition (Open Access) Springer 2019 https://www.springer.com/gp/book/9783662597316). jQuery("#footnote_plugin_tooltip_5692_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5692_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); as well as studies prepared by Prof. Dr. Gabrielle Kaufmann-Kohler together with Dr. Michele Potestà.2)Gabriele Kaufmann-Kohler and Michele Potestà, CIDS research paper on whether the Mauritius Convention can serve as a model for further reforms, CIDS 2016 as well as CIDS Supplemental Report on the Composition of a Multilateral Investment Court and of an Appeal Mechanism for Investment Awards, CIDS 2017. jQuery("#footnote_plugin_tooltip_5692_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5692_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Introduction

In his introductory remarks, Jun.-Prof. Dr. Julian Scheu set the stage by recalling various developments which led to the current reform discussions on ISDS. The trade and investment negotiations conducted by the European Commission around 2013 with the United States and Canada were an important starting point. At the same time, high stakes investment claims such as Philip Morris v. Australia and Vattenfall v. Germany caught the attention of the general public and triggered a heated debate on the overall legitimacy of ISDS.3)Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12; Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12. jQuery("#footnote_plugin_tooltip_5692_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5692_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); These discussions culminated in the remarkable adoption of (a) the UN Convention on Transparency in Treaty-based Investor-State Arbitration in 2014, and (b) the inclusion of a permanent Investment Court System in the first generation of EU trade and investment agreements. Along with the ongoing reform discussions at UNCITRAL, these developments clearly illustrate that international investment law is going through a period of fundamental change. In conclusion, he argued that there could be no better moment in time for critical analysis and innovative thinking in this field of law.

Taking-up these remarks, Prof. Bungenberg provided insights on the circumstances leading to the preparation of the study together with Prof. Reinisch. Following from the public and heavy criticism towards investment arbitration, that came up in Germany and other countries during the negotiations of the Comprehensive Economic Free Trade Agreement (CETA) and especially as a result of Vattenfall vs. Germany, reforming ISDS became an issue of political debate. Whereas some voices demanded the abolishment of the whole system and others called for procedural reforms, it was the German Ministry of Economic Affairs that came up with the idea of a permanent institution replacing the current ad hoc procedure. This was opposed by a great number of practitioners and academicians whom argued instead for a moderate reform of the existing arbitration system. In the following, several proposals where presented that focused exclusively on reforming aspects of the current ISDS system. The German Ministry of Economic Affairs, however, was looking for concrete and comprehensive reform ideas with regard to the implementation of a permanent court system. Therefore, Prof. Reinisch and Prof. Bungenberg were asked to prepare a study that deals with the institutionalization of ISDS, whereby they were given full academic freedom to elaborate on a concrete solution.

Overall, Prof. Bungenberg sees varying and sometimes much different reform proposals by various studies that have been published to this today. Therefore, he underscores the importance of comparisons, such as the one carried out by the IILCC Study Group for the ongoing reform discussions.

 

Institutional Structure

Philipp Reinhold started the series of presentations by focusing on the institutional elements included in the different reform proposals. At the beginning he emphasized that although both studies deal with options for a more permanent dispute settlement system, their methodical approach differs to a great extent leading to a very different level of detail. Whereas the study by Bungenberg/Reinisch offers specific institutional elements and explains their functions, the proposal by Kaufmann-Kohler/Potestà does not provide for a definitive structure but rather introduces two possible options for a more permanent investment dispute settlement. Reinhold described the institutional framework proposed by Bungenberg/Reinisch comprising a Plenary Body, a Secretariat, an Advisory Centre and Judges of a first and/or second instance. Against this background, he explained the institutional idea connected to the so called “Roster“ (discussed below), as well the “Permanent-Model” offered by Kaufmann-Kohler/Potestà. In concluding his presentation, Reinhold argued that every reform approach needs to balance the objective of a greater legitimacy with an overall efficiency of the system. Ignoring one of the two aspects entirely will prevent a reform and ultimately put the system itself at risk. In this regard, he expressed his support for the creation of an Advisory Centre as a component of higher legitimacy and inclusiveness.

The subsequent discussions focused on problems arising from a fundamental shift to a permanent court system, such as the enforcement of awards. Prof. Bungenberg argued that a real shift from an ad hoc arbitration to a permanent court system requires a clear and comprehensive institutional design. At this occasion he underlined the fact, that an Advisory Centre is not only proposed to support developing countries but also for small and medium enterprises. This means that, overall, the proposal seeks for a greater participation of different stakeholders in the system.

 

Implementation

Following on from the institutional considerations of the first section, Leonard Funk pointed out that questions regarding the implementation concern the instrument establishing the permanent body itself as well as its relationship to already existing IIAsOn this basis, he sees some essential differences between the two proposals. For example, Bungenberg/Reinisch propose that a minimum number of members should accede to the MIC Treaty before entering into force, whereas Kaufmann-Kohler/Potesta envisage to start the initiative as a purely plurilateral one with the possibility for States to join at any later stage. Another difference concerns the possibility of acceding to the permanent body on the basis of an ad hoc consent, which is not seen critically by Kaufmann-Kohler/Potestà, but by Bungenberg/Reinisch. Overall, Funk concludes, that both proposals envisage to implement a permanent body into the current ISDS system without the need to amend existing IIAs. However, the Kaufmann-Kohler/Potestà proposal may be characterized by slightly less interference with the network of existing IIAs and a rather gradual transition from the existing to the new dispute resolution network.

Commenting on the presentation, Prof. Bungenberg explained that, in his opinion, the ECJ had ruled out any form of ad hoc consent in his CETA opinion. Furthermore, a high degree of legal certainty could only be achieved through strict jurisdictional requirements. In view of the different reform proposals, Dr. Scheu stressed that constitutional hurdles of the EU will have to be taken into account in future reform negotiations.

 

Status and Selection of the Judges

In his presentation, Samuel Meyer-Oldenburg stressed the absolute necessity to create a legitimate dispute resolution mechanism by ensuring the competence and the independence of the adjudicators. In principle, this applies regardless of whether they form part of the permanent system or part of a roster. Starting with an appointment system, which should be dual levelled, the proposition of an independent screening committee, he concluded, that both proposals do in general agree about the necessity to set up an appointment procedure which prevents any doubts about the adjudicators. Once appointed, the terms of appointment become highly relevant. Both proposals prefer a system of full-time judges, to prevent “double hatting” and ensure an effective case management by limiting the admissibility of parallel engagements as far as possible. A code of conduct should ensure certain rules of behavior. On the other hand, the basic guarantees for judges must be met, as for example immunity and rules to exclude any kind of influence by the parties or the appointing entity.

The following discussion touched upon the compatibility of national diversity and expertise. In addition, the concern was raised that the system might become too costly. Prof. Bungenberg made clear that he sees no tensions between the requirements of diversity and expertise. With regard to costs, he argued that it should be kept in mind that the money would be spend to enforce the rule of law. Dr. Scheu, emphasized that the perceived legitimacy of the permanent court and the level of acceptance of its decisions are directly linked to the status of the judges. From his point of view, this makes the question one of the most important ones within the discussion.

 

Appeal Mechanism

Finally, Alexander Dünkelsbühler focused on different models of a potential appeal mechanism included in both proposals. First of all, he emphasized the authors principally agree that a uniform appeal mechanism will be beneficial to the uniformity of decisions in the sense of a “soft” precedent system as well as a higher legal certainty for both investors and states. Both proposals consider two options: the first possibility would be a uniform court with two instances, whereas the second option would consist of a single court of appeal separated from the first ad hoc instance. As an alternative, a system of preliminary decisions or plenary decisions is discussed, which would be suitable to preserve the simplicity and speed for the parties characterizing the current form of arbitration proceedings. According to Dünkelsbühler, the essential questions raised by the models are to what extent the “softening” of the finality of an arbitral award is desirable and whether an appeal or a mere cassation will bring greater advantages. Furthermore, the grounds for appeal or setting aside still have to be determined. Finally, Dünkelsbühler concluded that it will be decisive whether the appeal mechanism is structurally linked to the first instance or whether it will function independently.

In the following discussions, Prof. Bungenberg pointed to the Chinese proposal submitted within the UNCITRAL Working Group III, which supports the idea of an appeal stage. The subsequent discussion focused on whether a preliminary ruling would be a good way to achieve a uniformity of decisions. In this context, Prof. Bungenberg argued that a system that involves some sort of preliminary ruling would be very unique and maybe difficult to accept for representatives outside the EU region. In addition, annulment questions would stay as a problem. Furthermore, a possible refusal to submit a question to preliminary rule was identified as a major problem.

 

Conclusion

In their final remarks, Prof. Bungenberg and Dr. Scheu emphasized that the discussions show the variety of reform options on the table for creating and implementing an MIC. Thereby it becomes clear that the subjects-matters are interrelated and choices in one field may directly or indirectly impact another one, making debates particularly complex. It is highly important for the stakeholders to get involved in a lively discussion which offers the whole spectrum of perspective to the community of States because, overall, it seems likely that the ongoing reform discussions at UNCITRAL will shape the future of ISDS. Very likely, future discussions will also involve a reform of substantive laws.

 

* * *

 

Follow-up event

On 21 January 2020, zeiler.partners and the IILCC organize a follow-up debate on the reform of ISDS and the creation of a Multilateral Investment Court (“Do We Need a Multilateral Investment Court? Debating ISDS Reform between Enthusiasm and Scepticism”) taking place in Vienna.

References   [ + ]

1. ↑ Marc Bungenberg and August Reinisch, From Bilateral Arbitral Tribunals and Investment Courts to a Multilateral Investment Court – Options Regarding the Institutionalization of Investor-State Dispute Settlement, 2nd Edition (Open Access) Springer 2019 https://www.springer.com/gp/book/9783662597316). 2. ↑ Gabriele Kaufmann-Kohler and Michele Potestà, CIDS research paper on whether the Mauritius Convention can serve as a model for further reforms, CIDS 2016 as well as CIDS Supplemental Report on the Composition of a Multilateral Investment Court and of an Appeal Mechanism for Investment Awards, CIDS 2017. 3. ↑ Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12; Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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The Problem with Emergency Arbitration: Al Raha Group v. PKL Services

Fri, 2019-12-27 01:04

Jared Hubbard and Malgorzata Mrozek

Recently, the U.S. District Court for the Northern District of Georgia (the “District Court”) put the problem with emergency arbitration front and center: it refused to confirm and enforce an emergency interim arbitration award (the “Emergency Award”) awarded by an emergency arbitrator (the “Emergency Arbitrator”) under Article 6 of the American Arbitration Association’s International Center for Dispute Resolution International Arbitration Rules (“ICDR Rules”).  Instead, the District Court held that because the Emergency Award was not a final award, the District Court lacked subject matter jurisdiction and dismissed the case.  Al Raha Grp. For Tech. Servs. v. PKL Servs. Inc., No. 1:18-cv-04194 (N.D. Ga. Sept. 6, 2019).  To add insult to injury, the merits arbitration was stayed for almost a year while the District Court considered whether to enforce the Emergency Award.  In this case, emergency arbitration failed to protect the parties and resulted in a year-long delay in the arbitral proceedings.  With results like these, it raises the question of whether emergency arbitration is worthwhile for both parties to include in their contracts and for arbitral institutions to include in their rules.

 

The Al Raha Case: Emergency Awards Cannot be Enforced

Al Raha Group for Technical Services (“Al Raha”), a Saudi corporation, entered into a subcontract with PKL Services, Inc., (“PKL”), a U.S. corporation.  A dispute arose between the parties when PKL attempted to terminate the subcontract between PKL and Al Raha.  Al Raha filed a demand for arbitration and statement of claim.  Simultaneously, Al Raha also filed an application for emergency injunctive relief under the ICDR Rules seeking to prevent PKL from terminating the subcontract.  The Emergency Arbitrator was appointed; and after a telephonic hearing and written submissions by the parties, the Emergency Arbitrator issued the Emergency Award on August 27, 2018 prohibiting PKL from terminating the subcontract until the three-member arbitral panel was appointed.

PKL, nonetheless, moved forward with a replacement subcontractor while filing a motion under the ICDR Rules to vacate or modify the Emergency Award.  In response, Al Raha filed a Motion for Preliminary Injunction with the District Court seeking to confirm the Emergency Award and prohibiting PKL from terminating the subcontract.

In support of its motion for preliminary injunction, Al Raha asserted that the District Court had jurisdiction pursuant to the Federal Arbitration Act (“FAA”) and the New York Convention.  9 U.S.C. § 201 et seq.  Al Raha acknowledged that the Eleventh Circuit had not definitely addressed whether federal district courts have jurisdiction over interim arbitration awards, but that other circuits and district courts have concluded that district courts have jurisdiction in such cases.

PKL countered, arguing that the District Court lacked subject matter jurisdiction over the petition because the Emergency Award was not final – no determination had been made on the merits of any of the issues presented.  Further, PKL pointed to the ICDR Rules, which—similarly to most institutional rules on emergency arbitration—state that once a tribunal is constituted, it may reconsider, modify, or vacate an emergency award.

Al Raha filed its Motion for Preliminary Injunction on September 10, 2018.  PKL, in turn, filed its Opposition to the Preliminary Injunction on September 14, 2018, with a Reply by Al Raha filed a few days later. The three-member arbitral panel was appointed on October 8, 2018, but stayed all arbitral proceedings pending the resolution of the motions before the District Court.  The District Court, however, did not rule until September 6, 2019.  The parties thus waited in limbo for almost a year after the motion was filed for the District Court’s ruling; all the while PKL refused to comply with the Emergency Award.

Ultimately, the District Court sided with PKL, finding that it lacked subject matter jurisdiction because the Emergency Award was “a placeholder that did not purport to resolve finally any of the issues submitted to arbitration.”  Al Raha, No. 1:18-cv-04194 at *3.  The Emergency Arbitrator herself made clear, the District Court said, that the Emergency Award was not a final award by stating that she was preventing the termination of the contract “pending constitution of the full arbitral tribunal that will be appointed to hear the case on the merits.”  Id.  The District Court emphasized that “although district courts have original jurisdiction over any action or proceeding falling under the [New York] Convention, they lack authority to confirm arbitral awards that are not final.”  Id. at * 2 (internal citations omitted).  “An interim ruling from an arbitrator is not a final award if it does not purport to resolve finally the issues submitted to the arbitrators. . . . An interim ruling may be considered sufficiently final if it finally and definitely disposes of a separate and independent claim even if it does not dispose of all the claims that were submitted to arbitration.”  Id. (internal citations omitted).  Ultimately, the District Court found that the Emergency Award did not resolve any of the issues submitted to arbitration, but merely sought to preserve the status quo pending arbitral proceedings, and therefore was not a final award which could confer subject matter jurisdiction on the District Court.

 

The Broader Perspective on Enforcement of Interim Awards in USA

While Al Raha is the first case to deny enforcement of an emergency award, it is not the first case to address emergency arbitration or interim awards in the USA.

In Yahoo! Inc. v. Microsoft Corp., the U.S. District Court for the Southern District of New York addressed an emergency arbitrator’s order in a slightly different context—there the losing party was seeking to vacate the award by arguing that the emergency arbitrator exceeded his authority by issuing an award that was “irreversible” and thus “final.”  983 F.Supp.2d 310 (S.D.N.Y. 2013).  In this case, however, the court determined that the emergency arbitrator had the authority under the specific contract provisions in the case to enter a “final” award.  In the contract, the parties had specified that the emergency arbitrator could compel and award specific performance and provide for “non-monetary relief necessary to restore the status quo” between the parties.  The court determined that under the specific agreement, “the Arbitrator acted within his authority in granting an injunction . . . even though the equitable relief that was granted is, in essence, final.”  Id. at 317.

Similar to the Yahoo! case, in Chinmax Medical Systems Inc. v. Alere San Diego, Inc., the U.S. District Court for the Southern District of California refused to vacate an emergency arbitration award, although the basis for the court’s refusal to vacate in Chinmax was that the emergency award was not final because it could be reviewed by the full arbitral panel under the ICDR Rules.  2011 WL 2135350 (S.D. Cal. 2011).

Circuit Courts reviewing interim awards issued by the arbitral tribunal, however, have frequently viewed such interim awards as final and enforceable by courts.  The Ninth Circuit has stated that “temporary equitable orders calculated to preserve assets or performance needed to make a potential final award meaningful . . . are final orders that can be reviewed for confirmation and enforcement by district courts under the FAA.”  Pacific Reinsurance Management Corp. v. Ohio Reinsurance Corp., 935 F.2d 1019, 1023 (9th Cir. 1991).  The Sixth Circuit has also upheld an interim order where one of the parties was “required to perform the contract during the pendency of the arbitration proceedings,” finding that this “issue is a separate, discrete, independent, severable issue” from consideration of the merits of the claim.  Island Creek Coal Sales Co. v. City of Gainesville, Fla., 729 F.2d 1046, 1049 (6th Cir. 1984), abrogated on other grounds by Cortez Byrd Chips, Inc. v. Bill Harbert Const. Co., 529 U.S. 193 (2000).

In sum, courts considering emergency awards have refused to vacate them (on the merits in Yahoo! and on jurisdictional grounds in Chinmax).  And courts have generally enforced interim awards rendered by the full arbitral tribunal where they may be viewed as preserving assets or performance and may be seen as severable from the award on the merits of the case.  But as the Al Raha case (and to a lesser extent the Chinmax case) shows, enforcing an emergency award may not be possible under rules—such as the ICDR, ICC, SIAC, or HKIAC Rules—that  allow for the full arbitral tribunal to revisit any decision made by the emergency arbitrator.

 

The Impact of Non-Enforcement of Emergency Arbitral Awards

Despite these enforcement issues, it is likely that most parties will continue to voluntarily comply with emergency arbitral awards.  That is because the full arbitral tribunal is unlikely to look kindly upon a party’s refusal to comply with emergency arbitrator orders.  So, a party refusing to comply may strongly prejudice its case on the merits.

But there are some cases—particularly involving intellectual property disputes—where the preliminary injunction is the central issue.  If there is a non-disclosure agreement that the other party is threatening to breach, damages awarded months or years later by a final arbitral award may be wholly insufficient to compensate for the public release of confidential documents or trade secrets.  Ultimately, in cases where there is a need to depend on enforcement of a preliminary injunction, parties should continue to include the ability to seek injunctive relief before national courts—and cannot for the time being rely upon institutional rules to achieve similar objectives.

Ultimately, part of this problem may be solved by carefully drafting emergency arbitration provisions to allow for an emergency arbitrator to issue a “final” award on certain issues, even if such relief is only temporary.  Under Article 6 of the ICDR Rules, the emergency arbitrator “may modify or vacate the interim award or order” at any time, and once the arbitral tribunal is constituted, “the tribunal may reconsider, modify, or vacate the interim award or order of emergency relief issued by the emergency arbitrator.”  By definition, then, the ICDR Rules contemplate that the emergency relief is not final and may be modified or changed at any time.  If, however, the emergency arbitrator’s award were described in the rules as a “final award effective until 2 business days following the first conference of the constituted arbitral tribunal,” then that would provide a specific time period for which the emergency arbitrator’s award would be effective for, and allow the arbitral tribunal to continue the emergency award as an interim award—either for a specific time or for the duration of the arbitration—following its first procedural conference with the parties.

For now, however, given the court decisions coming out refusing to enforce emergency awards, parties should be very careful about relying on emergency arbitral proceedings to protect their rights.  One way to solve the issue is to adopt specific contractual language—as in the Yahoo! case—allowing emergency arbitrators to issue “final” awards maintaining the status quo between the parties pending the resolution of the disputes by the full arbitral tribunal.

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Roll Out the Red Carpet: The Hague Rules on Business and Human Rights Arbitration are Finally Here!

Thu, 2019-12-26 01:16

Ylli Dautaj (Assistant Editor)

Introducing the Rules

Playing its part in the twenty-first century movement to protect human rights, the international legal community has taken a significant step forward by providing for a framework to resolve business and human rights disputes by arbitration. Lead by the former ICJ justice, Judge Bruno Simma, The Hague Rules on Business and Human Rights Arbitration (“the Rules”) were launched by “the Drafting Team” on 12 December 2019.

The Rules have been in the making for over five years. The Drafting Team was finally established to prepare the Rules in 2017, which was followed by the “Report on the first Drafting Team meeting”, the “Elements Paper on Business and Human rights Arbitration”, the “Summary Paper on Sounding Board Consultation Round”, and the “Draft version of The Hague Rules on Business Human Rights Arbitration”. Following the draft version, a public consultation was open until 4 September 2019.

 

“Who” … worked on the Rules

These rules where prepared by a team of experts (practicing lawyers and academics) in international investment, arbitration, human rights, and equivalent. The project commenced with a “Working Group” which consisted of six members (Claes Cronstedt; Martijn Scheltema; Jan Eijsbouts; Robert Thompson; Steven Ratner; and Katerina Yiannibas) and was then materialized and finalized by the Drafting Team, consisting of 14 members (Chair, Bruno Simma and Members Anne Van Aaken; Diane Desierto; Marin Doe Rodriguiz; Jan Eijsbouts; Abiola Makinwa; Ursula Kriebaum; Pablo Lumerman; Sergio Puig; Steven Ratner; Katerina Yiannibas; Giorgia Sangiuolo; Martijn Scheltema; and Richard Meeran). The project was funded by the City of The Hague and supported by the Ministry of Foreign Affairs of the Netherlands.

 

“Why” … working on the Rules

Members of the Working Group opined that, apart from the traditional benefits of arbitration, “international arbitration has the potential to handle human rights abuses in many regions where courts and other mechanisms have failed”. More specifically, the project description states that:

“International arbitration holds great promise as a method to be used to resolve human rights disputes involving business. These disputes often occur in regions where national courts are dysfunctional, corrupt, politically influenced and/or simply unqualified. Parties to such disputes, generally multinational business enterprises (MNEs) and the victims of human rights abuse linked to MNEs, are in need of a private system that can function in these regions. Arbitration also has certain unique attributes that could serve the parties well even where fair and competent courts are available. In addition, arbitration can serve a useful tool to assist MNEs to prevent abuse from occurring in their supply chains and development projects.”

 

“What” … about the rules

The Rules are based on the UNCITRAL Arbitration Rules. The Rules are also accompanied by elaborate commentary. This further manifests the standing that The Rules may come to have. Corollary, this means that the Rules – in contrast to investment treaty arbitration – are not:

“[L]imited by the type of claimant(s) or respondent(s) or the subject-matter of the dispute and extends to any disputes that the parties to an arbitration agreement have agreed to resolve by arbitration under the Hague Rules. Parties could thus include business entities, individuals, labor unions and organizations, States, State entities, international organizations and civil society organizations, as well as any other parties of any kind.”1)The Rules, Introductory Notes, p. 3. jQuery("#footnote_plugin_tooltip_7132_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7132_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In a post from 2017, members of the Working Group highlighted three “special requirements that the drafting team will need to examine”, namely, (a) expertise of the arbitrators; (b) transparency; and (c) witness protection. I consider these requirements to be “threshold issues” and will therefore address each in turn below.

Expertise: The preamble stresses the “importance of having arbitrators with expertise appropriate for such disputes”. This objective is detailed in Article 11(c) (on appointment of arbitrators), which emphasizes the requirement of expertise in “business and human rights law and practice” if need be. The commentary to the Article makes it emphatically clear that the Rules have been developed to address the expertise requirement in the selection process. While preserving party autonomy, “the presiding arbitrator is required to have demonstrated expertise in international dispute resolution and in areas relevant to the dispute (e.g., business and human rights law and practice […]).”

Transparency: In the preamble it is made abundantly clear that the UNCITRAL Arbitration Rules are changed partly to reflect “a high degree of transparency of the proceedings and an opportunity for participation by interested third persons and States.” Section IV is attributed to transparency. However, references to transparency are also made throughout the commentary. Section IV covers areas such as its application per se, publication of information and documents, and public hearings. The key take-away is that the articles on transparency mimic those in the UNCITRAL Transparency Rules.

Witness Protection: This part should have benefited from additional discussion. Probably because this is inherently within the sovereign prerogative and any comment would remain tentative and speculative at best. That said, an arbitral tribunal may, however, render an interim order (?) to enjoin witness intimidation. The debate on arbitral tribunals enjoining/suspending criminal investigations/procedures may shed some light on this debate. Article 30 of the Rules seem to strengthen the role of the arbitrator in this respect. Accordingly, the tribunal may “take any interim measures it deems necessary, including any measure to prevent serious harm to the enjoyment of human rights falling within the subject-matter of the dispute.” This could be interpreted broadly and as all-encompassing to include also ancillary issues of protecting a fair hearing and the procedural integrity. Compare this to the language and practice in the ICSID context (see here). The commentary also makes it clear that the selection of location for hearings and other meetings should consider safety of witnesses. Finally, and most importantly perhaps, the commentary to Article 33(3) states that the tribunal may adopt specific measures for witness protection, which includes non-disclosure of names, giving testimony in image- or voice altering devises, assignment of pseudonym, closed hearings, complete anonymity, etc. A cautionary note merits some attention: this protection may prove to be a major obstacle to the increased transparency. This type of protection for witnesses will be highly sought-after – it will definitely be used and misused to avoid public scrutiny.2)See e.g. Gabriel Resources Ltd. and Gabriel Resources (Jersey) v. Romania, ICSID Case No. ARB/15/31 (underscoring inter alia the hurdles of balancing transparency and maintaining certain information confidential.). jQuery("#footnote_plugin_tooltip_7132_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7132_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

“Reality” … of the Rules and challenges ahead

Only time will tell how well the Rules will be received by arbitral institutions and by practitioners equally. Will the Rules be an opt-in or an opt-out addition? Either way, the crux of the matter will be to inform the users of its benefits, both in theory and in practice. The Rules are flexible, though, and provide parties with both “discretion to modify or opt-out of certain provisions that do not respond to their needs in the dispute at hand” and sample model clauses, which are annexed to the Rules.3)Supra note 1. jQuery("#footnote_plugin_tooltip_7132_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7132_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Additionally, litigation costs remain an outstanding and significant issue. In practice, access to procedural justice may be trite without sufficient resources at the disposal of the aggrieved party. There need to be a sophisticated “legal aid” system planned and carefully executed. Otherwise, the Rules may prove to lack teeth where really needed. Conversely, the author fears that adversaries to arbitration, in general, and to investor state dispute settlement (ISDS), in particular, will selectively fund instances of human rights abuse to level an organized, streamlined, and systematic attack on the procedure. Therefore, it is crucial that there is sufficient expertise, transparency, and witness protection.

On the other hand, an over-emphasis on features traditionally inherent in court litigation – and with the help of strategically skilled and tactically sound litigation lawyers – may slowly turn arbitration into a too judicialized procedure. Some of the hallmarks of arbitration would go lost (e.g. flexibility and party autonomy) and therefore naturally lend itself to a re-emerging debate on transforming ISDS into an investment court system (ICS). This time, the proponents of the ICS would cloak the debate in actually demonstrated human rights breaches as opposed to a deficit of public interest considerations. Therefore, instead of improving international arbitration, it may expose one of its fundamental flaws, but most likely in an exaggerated, unproportioned, and hyperventilated manner. One should be careful in embracing radical change; a good idea can easily trigger the dismantling of a functional one.

 

“Ethos”… of the Rules

The Rules are guided by a move away from international arbitration being state-centric or investor-oriented and instead towards the reception of a more human-rights oriented approach. There is an emphasis on public interest considerations and access to justice. In a word, the Rules seek to contribute in “filling the judicial remedy gap in the UN Guiding Principles on Business and Human Rights”.

Additionally and incidentally, the Rules may help address the “investor obligation deficit” in current international investment agreements (IIAs). And if not used as an addition to ISDS procedures per se, the ethos of the Rules may indirectly pave the way towards a “new generation of IIAs” by having elaborated on the standing of human rights considerations in this context, and corollary steered the practice of negotiating IIAs to include such obligations in the future.

 

Concluding Remark

One should not easily reject viable and feasible solutions to the public interest equation, which is in fact intrinsic for the algorithm of a truly transnational arbitral framework. But one should, on this logic, not too readily embrace a good idea as a substitute for a functional or workable one.

References   [ + ]

1. ↑ The Rules, Introductory Notes, p. 3. 2. ↑ See e.g. Gabriel Resources Ltd. and Gabriel Resources (Jersey) v. Romania, ICSID Case No. ARB/15/31 (underscoring inter alia the hurdles of balancing transparency and maintaining certain information confidential.). 3. ↑ Supra note 1. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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From the Editors of Kluwer Arbitration Blog: 2019

Tue, 2019-12-24 22:03

Roger Alford (General Editor) and Crina Baltag (Editor)

It has now become a tradition that in December of each year, Kluwer Arbitration Blog offers you several posts with a retrospective of the year in specific regions and fields. We also take this opportunity to present ourselves and thank you for your immense support, as readers and contributors. Entering a New Year has also a special meaning to us, at Kluwer Arbitration Blog, as we will soon celebrate the 11th year since the publication of the first post in January 2009. As mentioned in the previous years, we look forward to another year of posts reflecting the “unique” and “fascinating” international arbitration community.

The year 2019 was a generous year for international arbitration. Achmea has continued to generate most of the developments in ISDS, including the Declarations submitted by the EU Member States, the comprehensive Decision in Eskosol v. Italy, and a proposed Treaty for the termination of the intra-EU BITs. The Energy Charter Treaty was also one of the highlights of the year, not only through the growing number of arbitrations concerning renewable energy, but also with the kick-off of its modernization process. In commercial arbitration, notable developments took place around the world, with the enactment of new arbitration laws and interesting court-related cases currently pending, such as Halliburton v. Chubb Bermuda Insurance, which is now under review by the UK Supreme Court. For next year, we still expect significant developments in ISDS, with the UNCITRAL Working Group III now in the third phase of its mandate and meeting in January 2020 for an additional session to discuss the proposed solutions of an appellate mechanism and a multilateral investment court. One should also keep an eye on the UNCITRAL Working Group II on expedited arbitration and whether the outcome of the discussions will trigger the amendment of the UNCITRAL Arbitration Rules. Less positive developments came from Latin America, with the incarceration of renowned arbitrators due to corruption allegations. However, this situation demonstrated the immense cooperation and collegiality of the international arbitration community, with support coming from the International Bar Association, the International Chamber of Commerce, the Institute for Transnational Arbitration and others. Also ending the year on a positive note, the ICC Taskforce on “Arbitration of Climate Change Related Disputes” has issued its Report in November 2019. Further, on 12 December 2019, Judge Bruno Simma and the Drafting Team of The Hague Rules on Business and Human Rights officially launched The Hague Rules at the PCA in The Hague.

 

This is also the time to acknowledge and thank our Editors:

Prof. Roger Alford, General Editor, Notre Dame Law School

Dr Crina Baltag, Editor, Stockholm University

Kiran Nasir Gore, Associate Editor, The George Washington University Law School

Benson Lim, Associate Editor, Hogan Lovells

Dr Patricia Živković, Associate Editor, University of Aberdeen

Mihaela Maravela, Assistant Editor to the Editor, Leaua Damcali Deaconu Paunescu

Ylli Dautaj, University of Edinburgh; Nicholas J. Diamond, Georgetown Law; Maria Fanou, European University Institute; Janice Lee; Mary Mitsi, University of West London; and Ashutosh Ray, Assistant Editors

Arie C. Eernisse, Shin & Kim, and Theresa Tseung, Assistant Editors for East and Central Asia

Sadaff Habib, Beale & Company LLP; Ana Carolina Dall’Agnol, University of Oxford; and Edward Hamilton, Clyde & Co, Assistant Editors for Africa

Esme Shirlow, Australian National University, Assistant Editor for Australia, New Zealand and Pacific Islands

Deborah Loh; Irene Mira, Asian International Arbitration Centre; and Christine Sim, Herbert Smith Freehills LLP, Assistant Editors for South-East Asia

Piyush Prasad, Singapore International Arbitration Centre, Assistant Editor for South Asia

Fabian Bonke, Hogan Lovells; Deyan Dragiev, CMS Cameron McKenna Nabarro Olswang LLP; and Boris Praštalo, Central European University, Assistant Editors for Europe

Dalal Al Houti; Zahra Rose Khawaja, Dentons; and Mohamed H. Negm, Egyptian State Lawsuits Authority, Assistant Editors for MENA

Ulyana Bardyn, Dentons; and Giorgio Sassine, Severson & Werson, Assistant Editors for North America

Daniela Paez-Salgado, Herbert Smith Freehills; and Enrique Jaramillo, IHS Markit, Assistant Editors for Latin America

 

The Blog is also the result of the fruitful collaboration with its publisher, Wolters Kluwer, and the Editorial Board is grateful to Eleanor Taylor and Vincent Verschoor, editors and content managers with Wolters Kluwer, for ensuring that we deliver the best final product to our readers. Furthermore, the Editorial Board is particularly grateful to the permanent contributors and to the affiliates of the Blog, some being with us from the first days of Kluwer Arbitration Blog.

At Kluwer Arbitration Blog, our mission is not only to bring you the latest developments in arbitration and to encourage discussions about unsettled topics in the field. We also strive to ensure that the diverse voices of the arbitration community are equally represented on the Blog, while being aware of the responsibility we have in shaping the arbitration practice.

With these thoughts, we would like to thank you for reading the posts and for actively contributing to Kluwer Arbitration Blog. Our readership continues to grow significantly, and this year was no exception, with the highest number of visits in our history and a year-over-year growth rate above 25%. The editors of Kluwer Arbitration Blog are always available at [email protected].

 

Wishing you the best for the Festive Season and a prosperous 2020!

 

Professor Roger Alford and Dr Crina Baltag, on behalf of the Editorial Board

More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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How to Fund Construction Disputes – Relying on Third-Party Funding?

Tue, 2019-12-24 01:00

Fabian Bonke (Assistant Editor for Europe) and Tara Theiss

It is well known that disputes arising from the realisation of major energy and infrastructure projects are often exceptionally complex, long, and expensive. They are of high factual and technical complexity with a great volume of evidence, witnesses and experts and involve multiple parties with the fragmentation of responsibilities. As such, one of the main concerns of parties involved is how disputes can be resolved in the most beneficial and cost-saving manner (more KAB posts on efficient arbitration can be found here). Now, with the rise of third-party funding (“TPF”) of disputes, or so-called litigation finance, the burden on parties to a potential dispute may be alleviated (more KAB posts on third-party funding can be found here). TPF generally involves a separate entity becoming involved in a legal dispute by providing financing of all or a part of the legal costs to one of the parties, in return for an agreed percentage of the winning award, or a lump-sum fee paid on success of the dispute.

 

Using TPF in Construction Cases

The use of TPF arrangements is reportedly still “in its early stages”, according to the International Arbitration Survey on Driving Efficiency in International Construction Disputes.1)QMUL International Arbitration Survey November 2019, p. 37. jQuery("#footnote_plugin_tooltip_7924_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7924_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This seems to be in contrast to the fact that TPF has long been a hotly debated topic within the arbitration community for years now and that the market for funding disputes has grown to over US$ 10 billion globally.2)ICCA-QMUL Report April 2018, p. 25. jQuery("#footnote_plugin_tooltip_7924_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7924_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); As stated in the ICCA-QMUL Report of 2018, TPF can hence be described as an “an integral part of the future of the global arbitration and litigation markets”.3)ICCA-QMUL Report April 2018, p. 17. jQuery("#footnote_plugin_tooltip_7924_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7924_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

According to a non-representative survey conducted by the authors of this post among leading funders in preparation of this blog post, the construction and engineering sector seems to be an attractive sector for TPF.4)We would like to thank the funders Augusta Ventures, FORIS, Vannin Capital, and Burford Capital for their valuable input given to us in this informal survey. jQuery("#footnote_plugin_tooltip_7924_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7924_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); As such, some funders currently expect at least 20% of their funding portfolio to consist of construction and energy cases in this financial year. Other funders state that they make up for a “notable portion” of the funded cases. Again, others report that such disputes only make up for a comparably small percentage of their overall portfolio but expect to see a growing number of cases from this industry in the future.

Funders see benefits in the fact that claims in this sector not only have the potential to be very large and so may yield high returns, but construction contractors also often have multiple claims that require funding enabling a cost-effective funding portfolio for the funders. Such a portfolio approach to litigation financing allows for a diversification of risks, which then also allows for the price to clients to be made more attractive. On the downside, the funders note that the high complexity and technicalities of the cases are challenging and require extensive due diligence leading to significant costs sometimes outweighing the benefits of funding.

 

Getting a Clear View on the Validity of Claims

Due to the high funding application rejection rates of 90% of applications for funding,5)ICCA-QMUL Report April 2018, p. 25. jQuery("#footnote_plugin_tooltip_7924_5").tooltip({ tip: "#footnote_plugin_tooltip_text_7924_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the process of applying is demonstrably stringent. As a result, an applicant party must be diligent in its preparation of the facts, documents, and details of the case. Furthermore, it will be elucidated in the course of the application whether the dispute could be awarded enough money for an adequate profit share. Seeing as how construction projects are often exceptionally complex and detailed, a party can greatly benefit from such a process, as it has the inherent capacity to crystallise a case and help to develop a realistic view of the claim.

While the process of preparing a funding application has its benefits, it must also be noted that pursuing it involves high effort, considerable time, and resources. Although usually no application fee itself is expected, the process of applying itself requires considerable investment on behalf of the applying party. Taking into consideration the high rejection rate, it is not unlikely that the preparation of the many intricate and vast amounts of fact-based documentation of a construction claim is in vain for the attempt to receive TPF. Even if that is the case, the applicant party would, however, benefit from the preparation and analysis of amounts of fact-based documentation which is key for the further pursuance of its claims.

 

Pursuing Claims despite Tight Project Budgets

It may be possible that a party has no money to start a claim, or, even if you are dealing with a large energy or construction corporation, it is often the case that individual project managers have their separate budgets that may not allow for arbitration or litigation proceedings to be initiated. As such, TPF embodies an opportunity to strategically pursue claims. The most obvious benefit of TPF is that it can enable parties to make claims and initiate disputes that they would otherwise not have funding or time for.6)International Chamber of Commerce Report 2013, p. 5. jQuery("#footnote_plugin_tooltip_7924_6").tooltip({ tip: "#footnote_plugin_tooltip_text_7924_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In essence, TPF stems from the necessity of a potential claimant to acquire funding to be able to initiate arbitration or litigation. In the context of energy and construction disputes, this is as relevant as in any other sector. In fact, considering the especially high technical and legal complexity of construction cases, and the need to consider a large number of documents and expert evidence, some funders have suggested that funding in the early stages may be especially helpful. Early-stage funding can enable a claimant to obtain the necessary evidence and help in the development of the claim.

 

Gaining Leverage in Settlement Negotiations

Most construction disputes are eventually settled between the parties. Even in these settlement scenarios, TPF may be beneficial as having a third-party funder implicitly demonstrates the worth of the claim to the other party because the counterparty will be aware of the extensive scrutiny conducted by the funder during the application process. The fact that funders are on board does not only mean that the claims “survived” the high rejection rate, but also that the funder assessed the claim with a high return benchmark. This assessment is an especially prominent benefit in energy and construction disputes because of their inherent intricacy and the high cost of arbitration. The approval by a third-party funder of the funding application, therefore, becomes a pressure point for settlement discussions.

 

Fighting for Margins

Not only is there the risk that the effort, time and money put into an application will become a sunk cost, but even if funding is granted, the return for the claiming party may not be financially rewarding after the lender’s payment is deducted from the successful arbitral award. As margins are characteristically slim in construction projects, it may prove short-sighted to seek funding. While it may seem convenient to seek TPF at the beginning of the dispute, where the costs still lie ahead, it may be a losing decision when 7.5-40% of a winning award must be paid back to the funder.

This might only be alleviated if third party funding costs are recoverable from the counterparty. This will depend on the definition of recoverable costs in the applicable national legislation/procedural rules. For instance, both the Civil Procedure rules in the UK and the German Code of Civil procedure do not allow recovery of third-party funding costs.7)UK Civil Procedure Rule 44.1(2)(a) and Section 91 of the German Code of Civil Procedure. jQuery("#footnote_plugin_tooltip_7924_7").tooltip({ tip: "#footnote_plugin_tooltip_text_7924_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In arbitration, on the other hand, it seems that the door has been opened to full recovery of costs that include third-party funding costs. As previous posts have discussed, in the 2016 Essar v. Norscot case, the UK High Court upheld an English seated ICC arbitral award that included almost £2 million in funding costs.8)The Essar v. Norscot Case: A Final Argument for the ‘Full-Disclosure-Wingers’ of TPF in International Arbitration. jQuery("#footnote_plugin_tooltip_7924_8").tooltip({ tip: "#footnote_plugin_tooltip_text_7924_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This approach is further supported by the ICCA-QMUL Task Force’s Report that found that the allocation of costs should not be affected by the existence of third-party funding.9)ICCA-QMUL Task Force Draft Report on Security for Costs and Costs 2015, p. 10. jQuery("#footnote_plugin_tooltip_7924_9").tooltip({ tip: "#footnote_plugin_tooltip_text_7924_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

 Conclusion

A number of unresolved issues continue to revolve around the topic of TPF beyond the advantages and disadvantages mentioned. For instance, the question remains whether policy problems will prevent TPF in future as there are no comprehensive rules under any arbitral frameworks or in national law that require the declaration of TPF and conduct remains unregulated. Therefore, it remains to be seen whether the advantages will prove to outweigh the disadvantages of TPF or vice versa. However, with specific regard to the construction sector, funders have identified construction cases to lend themselves well to the funding process and expect to see growth in the number of such cases that rely on third-party funding. Although construction cases are universally seen as higher in cost, this can constitute a business opportunity for funders that can alleviate the financial burden for claimants and expect equally higher rewards in doing so. While TPF also provides for some advantages for the construction company taking it out, it remains to be seen if they outweigh potential disadvantages.

References   [ + ]

1. ↑ QMUL International Arbitration Survey November 2019, p. 37. 2, 5. ↑ ICCA-QMUL Report April 2018, p. 25. 3. ↑ ICCA-QMUL Report April 2018, p. 17. 4. ↑ We would like to thank the funders Augusta Ventures, FORIS, Vannin Capital, and Burford Capital for their valuable input given to us in this informal survey. 6. ↑ International Chamber of Commerce Report 2013, p. 5. 7. ↑ UK Civil Procedure Rule 44.1(2)(a) and Section 91 of the German Code of Civil Procedure. 8. ↑ The Essar v. Norscot Case: A Final Argument for the ‘Full-Disclosure-Wingers’ of TPF in International Arbitration. 9. ↑ ICCA-QMUL Task Force Draft Report on Security for Costs and Costs 2015, p. 10. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: The Decision-Making Process of Investor-State Arbitration Tribunals
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