Kluwer Arbitration Blog
Recent developments in the international investment scene have also impacted the Asian region. Notably, China and Southeast Asia have emerged not just as growing foreign direct investment (FDI) recipients but also as major sources of outbound FDI. In parallel, the Asian region experienced a proliferation in international investment agreements (IIAs). Asian countries were initially hesitant toward investor-state dispute settlement (ISDS) mechanisms. Later, however, as Asian countries began encouraging inbound and then outbound FDI, they started committing to treaties with ISDS mechanisms. Unlike some countries from other regions, which changed their course of action towards ISDS provisions after their first-ever ISDS cases, most of the ASEAN member states have continued incorporating ISDS provisions even after their initial encounters with ISDS claims.
On 16 February 2017, the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS) and the Sydney Centre for International Law (SCIL) co-hosted a symposium on the theme: “International Investment Arbitration Across Asia”. The symposium, sponsored also by the Sydney Southeast Asia Centre and Herbert Smith Freehills, brought together leading experts of international investment law from Southeast Asia, North Asia, India and Oceania. The symposium re-examined the historical development of international investment treaties in the Asian region, focusing on whether and how the countries may be shifting from rule takers to rule makers. A focus was on the ASEAN(+) treaties, including the (ASEAN+6) Regional Comprehensive Economic Partnership (RCEP) at an advanced stage of negotiations, and the Trans-Pacific Partnership (TPP) Agreement, which was discussed more broadly as an urgent topic in the wake of the change of direction by the US under the new administration. Participants at the symposium also elaborated on the experiences of Asian countries with ISDS mechanisms, and the attitude towards ISDS before and after first major investor-state arbitration (ISA) cases in the region. The many speakers and discussants for the event further explored possible future trajectories of international investment treaty policymaking of Asia-Pacific countries, especially China, Japan, Korea, India, Australia and New Zealand.
Dr Luke Nottage (University of Sydney) delivered an opening speech, surveying pan-Asian FDI, major treaties (including the TPP) and ISDS patterns. Dr Nottage provided an overview of the increased inbound and outbound investments in the Asian region with a special focus on Southeast Asia. He also talked about the rule of law indicators in the ASEAN member states, corruption perceptions and consistency in their investment treaty making, as well as the timing of the first ISDS claims against ASEAN member states on the signing on IIAs. Dr Nottage suggested that these ISDS cases may have had less impact on subsequent signing bilateral investment treaties (BITs) and Free Trade Agreements (FTAs) by Asian countries compared to other parts of the world.
Dr Julien Chaisse (Chinese University of Hong Kong) joined this speech to outline the current state and future development trajectories of TPP, RCEP and the G20 Guiding Principles for Global Investment Policymaking. Dr Chaisse emphasized the importance of the TPP with regard to ISDS provisions and further elaborated on current issues with respect to the US and the TPP. He contrasted the Malaysian and Vietnamese experience, stating that their participation in TPP was a result of intensive negotiations and a huge commitment. Vietnam also incorporated parts of the TPP draft into negotiations to conclude an FTA with the EU. “TPP is not dead”, Dr Chaisse concluded, expressing his belief in the TPP at least as a benchmark for ongoing and future IIAs. With regard to RCEP, Dr Chaisse stressed that it remained an ASEAN (not Chinese) initiative, and emphasised the treaty’s complexity and importance, the success of which greatly depends on cooperation among all ten ASEAN member states. Lastly, Dr Chaisse analyzed characteristics and future implications of the G20 Guiding Principles for Global Investment Policymaking.
Deeper factors responsible for the evolving treaty practices were scrutinized by Dr Lauge Poulsen (University College London). Including reference to the Asian region, Dr Poulsen addressed motives of the governments signing up to treaties that constrain their regulatory authority and expose them to potentially expensive arbitration claims. A commonly assumed expectation of developing countries was that BITs would attract more FDI. Dr Poulsen pointed out two new empirical aspects for this, as well as risks associated with concluding such investment agreements, and questioned whether governments considered them before being bound by such agreements. This argument further led to the conclusion that although ISDS claims did not necessarily stop the process of signing the international investment treaties, they considerably slowed down the process.
Dr Shiro Armstrong (Australian National University) presented the results of the econometric study, in collaboration with Dr Nottage, which examined the impact of investment treaties and ISDS provisions on FDI. The study found that on aggregate, while both weaker and stronger ISDS provisions have a positive impact on FDI, the effect of weaker ISDS provisions is more pronounced. Dr Nottage added that disentangling the factors at play and drafting policy implications remains a complex task, and both authors expressed concerns about the quality of the existing data on FDIs and other methodological issues. Making a virtual appearance via a Skype call from Bangkok, Dr Jason Yackee (University of Wisconsin) extended such methodological concerns, after presenting his preliminary research on the correlation of Thailand’s commitments to ISDS with an increase in FDI, where results differed greatly depending on whether OECD or Thai government data was used. Dr Yackee urged participants to think outside the box to come up with new research strategies for future analysis of this controversial policy question.
Insightful observations on the ASEAN(+) treaties, including RCEP, were added by Dr Diane Desierto (University of Hawaii, by Skype from Stanford). Dr Desierto discussed strategies, norms, institutions and politics of the regional investment treaties. Dr Desierto also discussed some common features and ISDS provisions of the ASEAN in Southeast Asia as well as the risks of parallel proceedings associated with the fragmented investment treaty instruments in the Asian region. Elaborating the topic, Jurgen Kurtz (University of Melbourne) presentation focussed on South East Asian investment treaty practice. Dr Kurtz critiqued the assumption of isomorphism underpinning that practice arguing instead that unique political economy considerations (especially drivers of internalization of costs) have shaped distinctive (and at times, innovative) treaty choices. ASEAN’s bold positioning of collective investment rules however have suffered from internal contradictions, not least the puzzling practice of reverse open regionalism. Dr August Reinisch (a discussant from the University of Vienna) sketched some parallels and contrasts between ASEAN and EU investment treaty developments, particularly with regard to the approaches now to ISDS provisions agreed within EU member states as well as with the rest of the world.
A succession of experts then deliberated on the investment treaty practices of other significant Asia-Pacific countries. Dr Julien Chaisse analysed the investment policy of China, stating that “there are many rules leading to Beijing”. Reflecting on the current events in relation to Prime Minister Abe’s meeting with the President Trump, Dr Tomoko Ishikawa (Nagoya University) reviewed Japan’s current investment treaty regime. In particular, she focused on treaty practices before and after 2010, identifying novelties added by the TPP, not previously common in Japan’s practice. The case of Korea was presented by Dr Joongi Kim (Yonsei Law School). Dr Kim addressed three important areas: the extensive investment treaty practice of Korea; the ISDS cases where Korea was respondent but also now the claimant investor’s home country; and the trade and FDI inflows versus outflows. In addition, trends in the international investment regime globally and within Asia cannot be fully understood now without touching on India’s new Model BIT. Dr Prabhash Ranjan (South Asian University) explained the highly controversial ISDS and related provisions in the December 2015 Model BIT. Dr Ranjan set out the background to India’s novel approach and addressed some of the key issues of the new Indian Model BIT, recently accepted by Cambodia.
Topics presented at the symposium were not limited to “Asia” in the narrow or formalistic sense. Amokura Kawharu and Dr Luke Nottage offered a comparative study of key areas of the existing treaties for Australia and New Zealand, closely integrated economically with the Asian region and even more so bilaterally. They ended up examining the potential to facilitate more EU-style treaty innovations in the Asia-Pacific region and the influence these two countries collectively might have on such processes. The final main speaker of the symposium, Adjunct Professor Donald Robertson (Herbert Smith Freehills) addressed the relation of investment treaties with governance, focusing on principles of best-practice regulation, which sparked considerable potential for further debate.
Justin Gleeson SC, former Solicitor-General and leader of the team that successfully defended the Philip Morris claims against Australia, offered concluding remarks to sum up the symposium. He noted that despite the diversity of the objectives of the speakers, the core aim of these studies remained the same: “it is all about human wellbeing across the planet”.
The symposium therefore offered an excellent platform to share new findings and discuss ideas related to challenges and opportunities related to the investment treaty regime and associated peculiarities in the wider Asia-Pacific region. This marked a thought-provoking continuation of intellectual debate from a related previous conference on “International Investment Arbitration and Dispute Resolution in Southeast Asia” hosted by Chulalongkorn University on 18 July 2016, focusing on the experience of individual ASEAN member states. The research presented at both conferences, also related to an Australian Research Council project over 2014-7 (for Trakman, Armstrong, Kurtz and Nottage), will be brought together in a book on “International Investment Treaties and Arbitration Across Asia” to be co-edited by Dr Chaisse and Dr Nottage.More from our authors:
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A year ago, on 25 February 2016, it was reported that Poland intends to terminate its Bilateral Investment Treaties (“BITs”; see initial comments here). Earlier this year, by a resolution of 5 January 2017, an interministerial Working Group on Polish investment policy was officially established to, among other things, review and analyse existing BITs (as recently commented on here).
As we learn from the reasoning to the draft of this resolution issued on 27 October 2016, the fate of Polish BITs hinges on whether these were concluded with other EU Member States (such “intra-EU BITs” are likely to be terminated, in order to carry out Poland’s position announced by its Committee of European Affairs on 3 June 2011), or with non-EU Member States (these “extra-EU BITs” are to be upheld, renegotiated, or terminated). Poland currently has over 60 BITs in force, including with all EU Member States save for Ireland and Malta (since no BIT was ever concluded with these States), and Italy (since Italy terminated its BIT with Poland in 2013).
Foreign investors in Poland covered by investment protection under those BITs that will survive the review by the Working Group and will be upheld, can sleep safe and sound. However, foreign investors currently protected under many Polish BITs, including all intra-EU BITs, may – sooner rather than later – wake up in a quite different legal landscape. This entry highlights the potential termination process of the treaties and the implications it may have for investors in Poland.
While the Vienna Convention on the Law of Treaties (“VCLT”) lists various scenarios that result in a treaty ceasing to be in force, this entry focuses on two modes of terminating treaties as set out in Article 54 VCLT that Poland is most likely to rely on.
First, under Article 54(b) VCLT a treaty may be mutually terminated at any time by consent of all the parties after consultation with the other contracting States. With respect to intra-EU BITs, it appears that Poland’s preferred option would be the simultaneous termination thereof by all EU Member States. Given that the political and economic interests of the 28 States do not seem to be sufficiently aligned with respect to the role and fate of these treaties (considering that the European Commission’s repeated calls to terminate BITs have not been successful to date), such a coordinated annihilation of intra-EU BIT regime seems unlikely. Even when a proposal for a comprehensive phasing out of intra-EU BITs was made in April 2016, it suggested replacing the system rather than extinguishing it, and did not appear to meet with a wider interest from other EU Member States.
On a more moderate scale, Poland is likely to approach its counter-parts to proceed with a “BIT-by-BIT” termination by consent. Since at least some States, including some EU Member States, can be expected to share Poland’s willingness to extinguish BITs, this strategy may result in the mutual termination of at least some of the BITs in question.
To date, the only Polish BITs that have been terminated were those with Italy, as noted above, and Finland (replaced by a subsequent BIT in 1998). However, in the course of 2016, Poland received notices from the Czech Republic and Romania regarding the mutual termination of their respective BITs with Poland (together with sunset clauses), while Denmark was reported to be considering a similar notice. It will certainly be interesting to see what Poland’s approach to the BIT concluded with the UK will be, as the UK’s investment protection climate may also change in the aftermath of Brexit.
Second, under Article 54(a) VCLT, a treaty may be terminated unilaterally if it so provides. Polish BITs typically provide for an option of unilateral termination by notice. Notice must be provided to the other Contracting Party, upon expiry of which the treaty ceases to be in force. Some treaties further specify that the notice may only be given after the expiry of the initial period (of 10 to 30 years) for which a treaty was concluded, or after specified subsequent periods (of 5 to 30 years), if any. For example, the Netherlands-Poland BIT may be terminated only upon notice of at least six months before the date of expiry of the initial period of 15 years (which lapsed in 2009) or of each subsequent 10-year-long period of validity (the current period will end in 2019).
Implications of Termination
One question arising in the case of Poland terminating its BITs is what implications this has on the rights of foreign investors.
In the case of a unilateral termination, during the notice period as stipulated in a BIT, any obligations Poland assumed thereunder would remain in force and Poland would remain responsible for any treaty violations that occur prior to or during the notice period.
In addition, even where a BIT is terminated, many Polish BITs include sunset clauses, which stipulate that a treaty will continue to be effective for a further period from the date of the termination in respect of investments made before that date. For example, the Netherlands-Poland BIT provides that investments are protected for a period of 15 years after termination.
Poland would therefore remain liable for any treaty violations throughout the sunset period, where so provided. This approach appears to be uncontroversial. For example, in Marco Gavazzi and Stefano Gavazzi v. Romania (ICSID Case No. ARB/12/25), the investors initiated arbitration under the Italy-Romania BIT in 2012 after the treaty had already been terminated in 2010, but while the sunset period was still running. Reportedly, the effectiveness of the sunset clause was not disputed.
Sunset clauses clearly apply in the case of a unilateral termination of a treaty. One issue is whether, in the event of termination by consent, the Contracting States may agree to terminate the treaty together with its sunset clause or modify the latter with the effect of shortening the relevant sunset period. There are precedents indicating that States may seek to avoid prolonging effects of sunset clauses. Recently, the Czech Republic, Indonesia, and Peru terminated at least some of their BITs together with the sunset clauses.
If Poland wanted to extinguish its BITs sooner rather than later (and some BITs provide for a survival period as long as 20 years), it is likely to invite its counter-part to terminate the sunset clause. It would not be surprising given that, back in 2008 when replying to Italy’s notice of (unilateral) termination of the Italy-Poland BIT, Poland suggested terminating the BIT by consent and agreeing on an early extinguishment thereof.
Whether or not such a termination or modification of a sunset clause would be effective towards investors protected under a BIT constitutes a point of contention. In a scenario where Poland agrees with the other Contracting State to terminate the BIT together with its sunset clause, and an investor initiates arbitration only thereafter, then it would ultimately be for the tribunal to decide whether the termination of the sunset clause extinguished the investor’s rights. It appears that this issue has not yet been tested by international arbitral practice.
Good arguments can be made for both sides. In principle, Poland could argue that States are “masters” of any such treaty between them, and they may freely alter or terminate any of its provisions, including sunset clauses, if they so agree. Potentially, Poland could strengthen its position by claiming that there will be a superseding treaty (e.g., one of the trade agreements, including an investment chapter, currently being negotiated by the EU) or a similar regime (e.g., EU law with regard to intra-EU BITs), ensuring that investors’ rights will be protected despite the termination of the treaty.
Investors, on the other hand, would claim that they have direct (rather than derivative) rights under the treaty, which cannot be terminated at whim. The nature of investors’ rights and the effect of any treaty modification or termination should be analysed under the terms of a particular treaty. For example, it could be considered in this context whether a rather uncommon wording of Article 12(3) Mongolia-Poland BIT (stipulating that any revision or termination thereof “shall be effected without prejudice to any right or obligation accruing or incurred under this Agreement prior to the effective date of such revision or termination”) would be supportive of investors’ position.
One consideration regarding the implications of the termination of sunset clauses on investors’ rights would be whether investors have already exercised their rights under a BIT by commencing arbitration. Although Article 70(1) VCLT indicates a presumption against any retroactive effect of termination, such a presumption can nevertheless be rebutted by the parties’ consent to the contrary. However, it may be difficult to convince a tribunal that has already been seized by an investor that a subsequent treaty termination, effectively pulling the rug out from under the investor, was effective. A stronger argument could be made where investors have not yet commenced arbitration at the time of termination.More from our authors:
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As of 1 February 2017 shareholders in a Russian company may refer their corporate law disputes to arbitration. Still, except for disputes from share purchase agreements or those involving securities registrars, having an arbitration clause in a company charter, a shareholders’ agreement (“SHA“), or elsewhere which submits corporate disputes to arbitration is not enough. A mandatory part of such an arbitration clause is a designation of valid corporate arbitration rules which are issued by a permanent arbitration institution and duly filed with the RF Ministry of Justice. Otherwise, an arbitration agreement will be deemed incomplete and pathological.
In line with this development, on 1 February 2017, the International Commercial Arbitration Court (“ICAC“, or abbreviated in Russian as “MKAS“) at the RF Chamber of Commerce and Industry enacted the Arbitration Rules for Corporate Law Disputes (“ICAC Corporate Rules“). Although the ICAC Corporate Rules are rather detailed, they are to be applied along with the standard rules of the Russian leading international arbitration provider – the revised 2017 ICAC International Commercial Arbitration Rules (discussed here), or the 2017 ICAC Domestic Arbitration Rules, respectively (see the Russian versions of all the ICAC Rules here).
The ICAC Corporate Rules fully implemented the new mandatory legislative provisions, (discussed here). They also developed this reform further by adopting some additional provisions required for fostering legal certainty as provided in civil procedure rules on corporate disputes (e.g., rules on the res judicata effect of an award for all shareholders), and provisions which are supposed to guarantee smooth handling of multi-party arbitration (e.g., rules on the appointment of a tribunal and consolidation).
The following key features of the ICAC Corporate Rules are reviewed herein: the types of corporate disputes which are arbitrable, the scope of bylaw arbitration clauses, disclosure duties, tribunal formation, and rules on joinder and consolidation.
Arbitrable Corporate Disputes
The application of the ICAC Corporate Rules is available in a broad range of corporate disputes over a legal entity established in Russia. A dispute may relate to:
- the formation, reorganization, and liquidation of an entity;
- shareholders’ claims for the recovery of damages incurred by the entity;
- shareholders’ claims in regards to void/voidable transactions involving the entity;
- civil (but not employment) law relations with directors, especially regarding their appointment, dismissal, and liability;
- agreements regarding corporate governance, including SHA;
- securities issues;
- decisions on the void resolutions of a corporate body;
- disclosure of information to shareholders;
- other arbitrable disputes (see the list of non-arbitrable corporate disputes here).
Also, when agreed by the parties, disputes arising from the formation and management of shareholding in an offshore company might be submitted for settlement under the ICAC Corporate Rules.
Corporate Bylaw Arbitration in Russia
According to a Russian statutory requirement (see more here), an arbitration clause for resolving corporate disputes can only unanimously be included by the shareholders into the company’s charter.
Moreover, under the ICAC Corporate Rules, a default scope of operation of an arbitration clause included into the company’s charter shall extend to:
i) the company;
ii) company’s members, including prospective members, who have acquired a share in the company by its purchase or inheritance after its inclusion into the charter, and former shareholders, which remain bound by the arbitration clause which was valid during their shareholding;
iii) directors, including prospective and retired directors, in relation to their corporate rights and obligations.
This provision may be relevant for a statement of claim, in which a claimant should generally identify any person who has an interest in the outcome of the dispute (interested person) known to it, i.e. a party to an arbitration agreement, whose rights or duties may be affected by an award.
Interestingly, executive directors usually do not sign any document reflecting their acceptance of the charter. Under the Russian Labor Code, a company and an executive director must sign an employment agreement, which, considering explicit non-arbitrability of all employment disputes, usually does not contain an enforceable arbitration clause. Thus, even where directors have constructive knowledge of the public charter’s arbitration clause, this might not be taken into account by a Russian court. Also, some aspects of directors’ mandate, such as their appointment or dismissal, and the recovery of harm caused by their activities to the company, are covered by both corporate and labor laws. Hence, parties should consider this when pursuing arbitration in Russia against executive directors who are not managing shareholders, or when they are commencing disputes against them which might simultaneously be qualified as labor law disputes.
Extensive Disclosure Duties
A proper service of notifications regarding arbitration proceedings is particularly important in corporate arbitration. An award has the res judicata effect for all shareholders, irrespective of their actual participation in proceedings.
For this reason, an ICAC corporate award should include information regarding all interested parties and it should be rendered in compliance with the following three statutory duties (described here):
(i) the ICAC needs to inform the company about the filed claim,
(ii) the ICAC needs to disclose this information online via its website, and
(iii) the company has to inform interested persons and the share registrar about the commenced proceedings.
In addition to the three disclosure duties, the company is obliged within 15 days upon receiving the claim to report to the ICAC Secretariat on notifications which they delivered to specific shareholders.
Moreover, in some cases, such as a challenge of the corporate decisions or the company’s transactions, or the recovery of harm from shareholders, the claimant is required to notify its fellow shareholders and the company before commencing arbitration. Failure to take the respective reasonable measures may result in the dismissal of the case.
Appointing a Tribunal
Unlike under the 2017 ICAC International Arbitration Rules (see here), according to which a decision of the ICAC Appointment Committee is used as a fallback mechanism in case the group of claimants and/or the group of respondents cannot agree on their arbitrator, in corporate multi-party arbitration the following restriction on who can serve on the tribunal is imposed: arbitrators should be elected from the ICAC list of arbitrators and specialized in corporate law.
To ensure their participation in the appointment of the tribunal, the parties are advised to include a mechanism for the selection of arbitrators into the arbitration clause. A joinder application must be filed within 60 days from the ICAC online publication of the claim if it wishes to participate in the nomination of an arbitrator.
Any shareholder or other interested person who is not initially involved as a claimant or a respondent may join arbitral proceeding at any stage. However, the joining party should accept the arbitral proceeding as it is and is not authorized to raise any objections as to the events before the joinder date. As a result of late joinder, the party might be deprived of a possibility to challenge an arbitrator, or to request the repetition of an arbitral hearing, or to file submissions within applicable deadlines.
Also, only after the joinder, an interested person is to be informed on the progress of the arbitral proceeding. Furthermore, upon the joinder, the joining party may file additional claims against the claimant or the respondent if such claims fall under the same arbitration agreement, and they are linked to the initial claim from the standpoint of substantive law. Finally, the joining party might reject a voluntary dismissal, confession of a claim, and settlement and, thus, block certain final dispositions of a matter. It is, therefore, highly advisable to join arbitral proceedings at the earliest possible moment in the proceedings.
In the end, the award will be binding for all interested persons, irrespective of whether they actually joined the arbitral proceeding and actively participated. Even when they do not join, interested persons may apply for a certified copy of the award.
Obligatory Consolidation for Parallel Proceedings
Pending ICAC corporate cases with similar subject-matter must be consolidated and settled within a single proceeding. This prevents a scenario in which a company is subjected to multiple disputes based on the same events. The proceeding that were initiated first takes priority, in the sense that subsequently submitted claims are automatically considered as applications for joinder to the first proceeding. The Rules provide some examples to illustrate cases with similar subject-matter, such as claims for the recovery of damages caused to the company by the same respondent or by the same void transaction.
As an innovative and promising device, the ICAC Corporate Rules are opening the door to the legal feasibility of arbitrating corporate claims in Russia. Shareholders may benefit from the use of tailored-made arbitration rules, arbitrators’ business expertise and language knowledge, the confidentiality of arbitration, and other efficient features of the ICAC Corporate Rules. Corporate arbitration in Russia, due to its limited use in the past, is not expected to be utilized to resolve shareholder claims on any widespread basis quite soon, but still it is clearly gaining new legitimacy as an alternative method for their handling through the enactment of the ICAC Corporate Rules.More from our authors:
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Patricia Backhausen and Conti von Hirsch
A conference titled ‘International Financial Services and Small States’ was held at Wilmer Cutler Pickering Hale and Dorr’s London office on 30-31 January 2017, jointly organised by the firm’s International Arbitration Practice Group and the Centre for Small States, Queen Mary University of London. The conference followed on from the ‘Integration and International Dispute Resolution in Small States’ conference in May 2016.
The conference took the form of a keynote address, three discussion panels and a reflection panel. One of the panels, chaired by Gary Born, focused on the use of international arbitration in financial matters and its relevance for Small State International Financial Centres (SS IFCs).
The two forms of tax dispute resolution
Carlos Ramos-Mrosovsky (Freshfields Bruckhaus Deringer) considered the two different forms of resolving tax disputes: negotiation between the states themselves pursuant to a tax treaty (the most widespread form), and arbitration pursuant to investment treaties. In view of the taxpayer’s lack of involvement in and control over the state-to-state negotiation procedure, Mr Ramos-Mrosovsky explained that, if possible, it was preferable for an individual to lodge a claim under a BIT. However, this was a big ‘if’, as there are a number of difficulties associated with bringing a tax claim under a BIT.
The first hurdle is establishing that a tax claim is arbitrable under the terms of the BIT: when compared to typical BIT clauses, tax disputes do not obviously fit within the scope of investment arbitrations – indeed many BITs explicitly exclude tax matters (e.g. the Hong Kong-New Zealand BIT), subject to certain exceptions, such as in the context of expropriation.
The second hurdle is proving that the measure really is a tax. The definition of what constitutes a tax matter will depend on whether domestic or international law is applied, and Mr Ramos-Mrosovsky highlighted how arbitral tribunals had reached differing conclusions on this point (in Occidental Petroleum v. Ecuador a domestic law definition was applied, whereas an international law definition was applied in Burlington Resources v. Ecuador).
The third hurdle is demonstrating that the tax dispute is admissible under the BIT. To qualify for the protection of the BIT, the individual must show that the tax in question is illegitimate. As a starting point, there is a basic presumption of validity in favour of legislative measures adopted by a state, which has a sovereign right to impose such tax measures as it deems appropriate (El Paso Energy v. Argentina, at 290, 295). However, a measure might trigger the protection of the BIT if it was not a bona fide tax, but was rather an action “taken only under the guise of taxation, but [that] in reality aims to achieve an entirely unrelated purpose” (Yukos award, at 1407). Similarly, a tax might trigger the protection of the BIT if it was discriminatory (Burlington Resources v. Ecuador), or “extraordinary, punitive in amount or arbitrary in its incidence”(En Cana v. Ecuador, at 177) such that issues of indirect expropriation arise.
Arbitration in the financial sector
Claudia T Salomon (Latham & Watkins LLP) then discussed the extent to which arbitration has been adopted by the financial sector, a topical issue in the light of the November 2016 ICC Report on ‘Financial Institutions and International Arbitration’.
Ms Salomon, who co-authored the ICC Report, emphasised that it was unhelpful to speak of the financial ‘sector’ as a distinct sector: the suitability and popularity of arbitration varied greatly across the various branches of finance (derivatives, securities, M&A, project finance etc.), which were therefore best considered independently of each other as standalone sub-sectors. It was wrong, then, to speak of a general aversion to arbitration in the financial sector.
For especially complex and highly technical disputes (e.g. M&A, project finance), the possibility of choosing a panel with the required level of expertise was highlighted as a very attractive feature of arbitration, and financial institutions were particularly open to using arbitration for such disputes. The ease of enforcement was another important consideration, especially as financial institutions increasingly look towards emerging markets for growth. Confidentiality was a factor for certain transactions, though in general the desire for precedent prevailed.
However, finality was seen as a double-edged sword: financial institutions often preferred litigation precisely because it afforded the possibility of an appeal. Ms Salomon saw this as a potential opportunity for SS IFCs to differentiate themselves from other jurisdictions by incorporating the possibility of appealing an award into their arbitration procedure. Another perceived advantage of litigation was that litigation allows for a more expeditious disposal of straightforward proceedings such as simple debt actions. Ms Salomon again saw no reason why similar procedures could not be incorporated into arbitration legislation.
Financial dispute resolution and SS IFCs
Francoise Hendy (FRANHENDY Attorneys), however, showed little enthusiasm for the idea of SS IFCs embracing tax arbitration. In her view, the current system of tax dispute resolution worked well and she saw little need for change.
Ms Hendy also warned of the importance for SS IFCs of fostering good relationships with larger states and considered that treaty-based negotiation was more conducive to this, as well as allowing for more creative and flexible solutions, and at considerably less expense. Negotiation also obviated the need for creating a whole infrastructure for financial arbitration from scratch, something that presented particular difficulties for SS IFCs given their constraints on human capital.
The last point led chair Gary Born to question whether financial arbitration ought rather to be considered as a form of financial service itself that formed part of the overall “palette of offerings” of financial services provided by SS IFCs. Mr Born pointed to the examples of Hong Kong, Switzerland and Singapore as evidence of the close link between dispute resolution services and financial services.
However, Ms Hendy maintained that there was little point in SS IFCs going to the trouble of creating the necessary infrastructure. Addressing Mr Born’s point that the availability of dispute resolution services might make an SS IFC’s overall financial services package more attractive, Ms Hendy acknowledged that it was important not to fall behind the competition in this regard, but argued that it was not important to do more than the competition. Only where an SS IFC wanted to differentiate itself by carving out a niche for itself as a jurisdiction renowned for financial arbitrations might it make sense to invest in an arbitration infrastructure.
The special status of SS IFCs
The discussion between Ms Hendy and Mr Born fed into one of the main themes of the conference, namely the special status of SS IFCs on the global stage.
Professor Christopher Bruner (Washington and Lee University), in his keynote address, outlined how certain small states had succeeded in establishing themselves as dominant centres for international finance. Their lack of natural resources and human capital had created a reliance on international financial services as a way of participating in the global economy.
The discussion of the impetus on small states to create and support IFCs led to a wider panel discussion of how the global economy, in turn, benefited from SS IFCs by virtue of the tax neutrality, flexibility, simplicity and creditor friendliness that they afforded. Geoff Cook (Jersey Finance) and Richard Hay (Stikeman Elliott LLP) outlined the important role played by SS IFCs in funding the investment-gap in Africa by acting as intermediaries between investors and emerging markets. Professor Richard Murphy (City University London), however, was far more critical of the role of SS IFCs in the global economy, in particular because of their status as what he termed “secrecy jurisdictions”: jurisdictions which enabled tax avoidance and money laundering without any accountability.
The criticised lack of transparency surrounding SS IFCs – in particular, the general unavailability of information regarding the beneficial ownership of companies – gave rise to problems of perception. SS IFCs were generally characterised in the media as being parasitic, entrenching poverty in developing countries and facilitating tax evasion and money laundering. The panel agreed in attributing this in large part to the role of NGOs and other “false prophets” in publishing damning information based on misleading data. The panelists agreed that commissioning research of their own would allow SS IFCs to challenge the established narrative with evidence-based arguments that highlighted the positive role that SS IFCs played,
Tax reform and closing remarks
The legal architecture of the international tax reform agenda, as set out in the work plans of the OECD Global Forum on Transparency and Exchange of Information, the OECD Base Erosion and Profit Shifting (BEPS) and the EU Good Tax Governance Initiative, was another focus for discussion.
Reflecting on the conference Susie Allegre (Doughty Street Chambers) emphasised the opportunity for SS IFCs to pioneer a business and human rights framework while Professor Petra Butler (Co-Director, Centre for Small States) reminded the participants of the lack of human capacity which limited what reforms small states could implement.
The conference programme containing a full list of all the speakers can be found here.More from our authors:
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As Hong Kong enters the year of the Rooster, its arbitration community can look back on a year of the Monkey in which the territory’s institutions and authorities implemented a number of initiatives aimed to promote arbitration, and its courts rendered several pro-arbitration decisions.
Third party funding for arbitration in Hong Kong
In November 2016, the Hong Kong Law Reform Commission (“LRC”) released a report in which it recommended that third party funding of arbitration (“TPF”) should be expressly permitted for arbitrations seated in Hong Kong.
The report, which also recommends TPF be permitted for services provided in Hong Kong in aid of arbitrations with a foreign seat, comes in the wake of an extensive public consultation (covered in last year’s update on the year of the Sheep).
Hong Kong law does not permit TPF for litigation, except in limited circumstances, but some Hong Kong practitioners consider it an open question as to whether TPF is permissible for arbitrations in Hong Kong. In its report, the LRC recommends amendment to the Arbitration Ordinance (Cap. 609) (the “Ordinance”) to resolve this issue.
The report also makes a number of other recommendations, including that clear standards be developed to apply to TPF funders operating in Hong Kong. These should in turn address issues such as capital adequacy, confidentiality, disclosure, privilege, conflicts of interest, control of the arbitration by the funder and the grounds for termination of TPF arrangements.
As for the implementation of these standards, and other regulations, the LRC recommends that for an initial period of three years a “light touch” approach should be adopted in line with international practice and in accordance with Hong Kong’s needs and regulatory culture. A body authorized under the Ordinance should issue a code for TPF Funders (“Code”), and upon the conclusion of the initial period should issue a report reviewing the Code’s operation and making further recommendations.
The LRC further recommends that a funded party be required to give written notice, to the other party and relevant institution, of its funding agreement, and the identity of the funder.
The report also considers the, much debated, question of whether a tribunal should be empowered to make orders for costs and security for costs orders against a TPF funder. It recommends that there is no need to give a tribunal the power to order security for costs against a TPF funder, as the powers of a tribunal under the Ordinance to order a party to give security for costs afford adequate protection. As for the question of whether tribunals should be entitled to make costs orders against a TPF funder, the report makes no immediate proposals but suggests that the issue be considered during the initial three-year period of the Code’s operation.
Hong Kong confirms arbitrability of IP rights
In recognition of the increasing volume of disputes relating to intellectual property rights (“IPR”), Hong Kong has introduced new amendments to the Ordinance, confirming that IPR disputes may be resolved by arbitration, and that it is not contrary to Hong Kong public policy to enforce arbitral awards involving IPR.
At present, there is no specific legislative provision addressing the arbitrability, or otherwise, of IPR in Hong Kong. The Arbitration (Amendment) Bill 2016 (the “Bill”), introduced into the Legislative Council on 14 December 2016, would insert such provisions by way of a new Part 11A containing new Sections 103A-J.
The new sections variously: define terms relating to IPR disputes (Sections 103A-C); confirm that such disputes may be arbitrated (Section 103D); clarify the status of licensees who are not party to the arbitration (Section 103E); and provide that an arbitral award may not be set aside, or refused enforcement, only because the award involves an IPR. (Section 103F-G). Sections 103I-J concern patents, and provide inter alia that the validity of a patent may be put at in issue in arbitral proceedings.
The Bill also coincides with a recent initiative of the Hong Kong International Arbitration Center (HKIAC) to create a panel of arbitrators for IPR disputes. HKIAC’s new panel comprises more than thirty experts with expertise related to IP.
The year of the Monkey saw the HKIAC implement a number of initiatives, including, on 15 December 2016, releasing data on the costs and duration of a HKIAC arbitration.
The statistics also coincide with similar recent releases by other leading arbitration institutions including the Singapore International Arbitration Centre (“SIAC”), the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”), and the London Court of International Arbitration (“LCIA”). They therefore offer a basis for comparison.
Although the standard caveats apply regarding differences in sampling and collation methodology, it would appear that:
• The median duration of an HKIAC arbitration of 11.6 months, is broadly comparable to that of the SIAC, but compares favourably to the figures of the LCIA and the SCC.
• Median tribunal fees for HKIAC arbitrations (US$19,587.63) are approximately US$7,300 lower than those for the SIAC, with median administration fees (US$ 9,281.49) approximately US$3,400 higher. Neither the LCIA nor SCC release exactly comparable data.
The results nonetheless would appear to vindicate HKIAC’s claim to be one of the world’s most time and cost-efficient arbitration institutions.
In October 2016, the HKIAC also announced that it shall offer its hearing and meeting rooms to parties free-of-charge in respect of HKIAC-administered dispute resolution proceedings to which one or more of the parties is a State listed on the “Organization for the Economic Cooperation and Development “DAC List of ODA assistance” (“OECD List”).
The OECD List, identities a number of countries which, on the basis of World Bank gross national income statistics, and UN “Least Development Country” categorisation, are eligible to receive official development assistance (“ODA”). Such entities will now enjoy free-of-charge use of the HKIAC’s world class facilities for qualifying disputes.
The HKIAC’s initiative is also a timely one in view of growing attention given to investor state arbitration in Asia, and the fact that many of the countries listed are also part of China’s One Belt One Road outward bound investment initiative.
In a noteworthy development for CIETAC’s Hong Kong Arbitration Centre (“CIETAC HK”), a Chinese court has for the first time enforced a CIETAC HK arbitral award in Mainland China.
While CIETAC is China’s busiest arbitration institution, it only established its Hong Kong Arbitration Centre in September 2012. The CIETAC HK’s authority to accept and administer cases was only formalised upon the publication of the 2015 edition of CIETAC’s rules.
The Decision of Ennead Architects International LLP v. Fuli Nanjing Dichan Kaifa Youxian Gongsi (2016) Su 01 RenGang No.1 was rendered on 13 December 2016, by the Nanjing Intermediate People’s Court of Jiangsu Province. In this decision, the Nanjing Court allowed the enforcement of the interest portion of the arbitral award, with which the PRC respondent had already substantially complied. In doing so, the court relied upon a 1999 arrangement between Mainland China and Hong Kong for the mutual enforcement of arbitration awards.
This confirmation that the Chinese courts recognise the validity of, and are prepared to enforce, awards administered by CIETAC HK further cements CIETAC HK as a genuine alternative for arbitration users, seeking the “offshore” resolution of China-related disputes.
The year of the Monkey also saw a number of pro-arbitration decisions of the Hong Kong courts. These included but were not limited to the following cases:
• Astro Nusantara International B.V. and others v PT Ayunda Prima Mitra  HCCT 45/2010) by which the Hong Kong Court of Appeal refused to overturn a Hong Kong Court of First Instance decision refusing enforcement of awards rendered in Singaporean arbitration proceedings, in doing so clarifying certain issues, including the interrelationship between an award debtor’s right, on the one hand, to pursue “passive” remedies against an award, and its duty, on the other hand, to act in good faith in challenging enforcement.
• Sun Tian Gang v Hong Kong & China Gas (Jilin) Ltd  HKEC 2128 by which the Hong Kong court confirmed the circumstances in which it will set aside an arbitral award on the grounds that the arbitral process and enforcement violated notions of natural justice, fairness, due process and public policy.
• William Lim & anor v Hung Ka Hai Clement  HKCFI 1439; HCA 1282/2016 by which the Hong Kong Court of First Instance stayed litigation proceedings in favour of a reference to arbitration, in so doing rejecting the Plaintiffs’ contention that they were entitled to maintain the court proceedings by virtue of the operation of an “escalation clause”, providing for one or more methods for resolving disputes prior to the commencement of arbitration proceedings.
• American International Group and AIG Capital Corporation v X Company (HCCT 60/2015) in which the Hong Kong Court of First Instance refused to set aside an arbitral award despite the Plaintiff’s allegation that the Award had been wrongly decided on the basis of principles of fairness and equity, instead of under the strict law of the relevant agreements.
The HKIAC also published statistics covering the enforcement of arbitral awards in Hong Kong in 2016. The statistics provide a useful cross section of the position in Hong Kong when it comes to enforcement. They show that the Hong Kong courts granted a total of 32 applications for enforcement, Further, whereas five applications were brought to set aside an order granting leave to enforce, only one of those resulted in the court setting aside the order.
The Year of Monkey was perhaps a year of evolution rather than revolution for arbitration in Hong Kong, 2016 being characterised by the steps taken by various institutions and authorities to build upon the innovations of previous years. Nonetheless these steps confirm the continued commitment of Hong Kong’s arbitration community to maintain the territory’s status as a leading international arbitration seat aligned with, and often setting, international best practice.More from our authors:
The post Arbitration in Hong Kong: The Year of the Monkey in Hindsight appeared first on Kluwer Arbitration Blog.
Earlier this year, the Dubai-DIFC Judicial Committee established by the Ruler of Dubai by virtue of Decree No. (19) of 2016 (also know as the “Judicial Tribunal” or the “Joint Judicial Committee”) rendered its first decision (see Cassation No. 1/2016 (JT) – Daman Real Capital Partners Company LLC v. Oger Dubai LLC, hearing of 19 December 2016, published by the Judicial Tribunal in both English and Arabic). In a previous blog (see http://kluwerarbitrationblog.com/2016/11/29/ruler-of-dubai-establishes-new-judicial-committee-to-resolve-conflicts-of-jurisdiction-between-the-on-and-offshore-dubai-courts-will-it-undermine-the-difc-courts-acquired-status-as-a-condui/), I explored the background and rationale behind the establishment of the Joint Judicial Committee. Suffice it to recall for present purposes that the Committee has been established to resolve conflicts of jurisdiction between the onshore Dubai and the offshore DIFC Courts. In this context, it is important to note that in particular the creeping jurisdiction of the DIFC Courts as a host or conduit jurisdiction for the enforcement of domestic arbitral awards rendered onshore for onward execution against assets of award debtors in mainland Dubai has given rise to concerns of jurisdictional conflict with the onshore Dubai courts (see, e.g., ARB 003/2013 – Banyan Tree Corporate Pte Ltd v. Meydan Group LLC, ruling of the DIFC Court of First Instance of 2nd April 2015). Daman v. Oger is the very first case that has come before the Joint Judicial Committee and as such has prompted the Committee to test its competences under Decree No. (19) of 2016.
By way of background, on this occasion, the Joint Judicial Committee sat in a panel of six judges, three from the DIFC Courts (Dr. Michael Hwang, Chief Justice of the DIFC Courts; Omar Juma Al Muhairi, DIFC Court of Appeal; and Sir David Steel, DIFC Court of First Instance) and the remaining three from the onshore Dubai Courts (Dr. Ali Ibrahim Al Imam, Chief Justice of the Dubai Court of Cassation; Essa Mohammed Sharif, Dubai Court of Appeal; and Jassim Baqer, Chief Justice of the Dubai Court of First Instance), Dr. Al Iman serving as the Committee’s President and hence having the casting vote. The Tribunal was asked to decide which of the two courts, the DIFC Courts or the onshore Dubai Courts, had proper jurisdiction to hear the case. The case, in turn, concerned two parallel actions before the two courts, namely (i) an application for annulment of an underlying DIAC award rendered in mainland Dubai as the seat of the arbitration before the onshore Dubai Courts in their capacity as the curial courts and (ii) an application for the recognition and enforcement of that award before the DIFC Courts for onward execution in the DIFC. Importantly, the action for annulment before the onshore Dubai Courts was served first and as such preceded the action for recognition and enforcement before the DIFC Courts. This gave rise to a concern of conflicting outcomes from the process before the onshore Dubai Courts and that before the DIFC Courts, hence creating a potential conflict of jurisdiction between the onshore Dubai and the offshore DIFC Courts. Importantly, the instant case does not appear to concern the situation where the DIFC Courts serve in their role as a host or conduit jurisdiction in the archetypical sense of that term given that the award debtor and its assets are understood to have been present in the DIFC at all material times (in other words, the question of the DIFC Courts’ competence to order enforcement for onward execution before onshore Dubai Courts in mainland Dubai in an otherwise purely onshore context did not arise in the present circumstances). The natural consequence of this is – in the words of the Joint Judicial Committee that – bar the reference of the merits of the original dispute to arbitration – the DIFC Courts “would [have] be[en] alone the competent courts to entertain the case since the building concerning the dispute (Daman Tower) together with the appellant company [i.e. the award debtor] are located and licensed in the DIFC.” (see p. 3, ruling of the Joint Judicial Tribunal in Cassation No. 1/2016 (JT); read together with Art. 5, Judicial Authority Law).
It is worth mentioning that the DIFC Courts had progressed on a prolonged trajectory of procedural measures against the award debtor, including the imposition of a freezing order, a winding-up order and an order to cease trading in order to safeguard the execution of the DIFC Courts’ order for enforcement against an award debtor that had by and large ceased to be a going concern. In addition, pending a decision on cassation from the Dubai Court of Cassation, the DIFC Courts signaled their disposition to suspend the DIFC enforcement proceedings subject to the timely provision of security for costs by Daman, the award debtor. For the avoidance of doubt, the annulment proceedings before the onshore Dubai Courts are presently still pending cassation. Following the findings of the Dubai Court of First Instance, the Dubai Court of Appeal dismissed Daman’s application for annulment, rejecting concerns that (i) the DIAC Tribunal lacked jurisdiction, (ii) the underlying building contract had been signed without authority, (iii) a pre-arbitral condition precedent had not been satisfied, and that (iv) expert witnesses had wrongly been excluded from the hearing of fact witnesses.
Against this background, the Joint Judicial Committee held in pertinent part as follows:
“Doubtless the case before the Dubai Courts is still pending awaiting decision of the Court of Cassation. Thus the conflict with regards to jurisdiction between the two courts still exists. This conflict should not be resolved by permitting both courts to entertain the case. Pursuant to Article 4 of the Decree No. 19/2016 and for the sake of justice and to avoid contradictory judgements [sic] only one of the two courts should determine to annul or recognize the aforementioned arbitral award.
According to the general principles of law embodied in the procedural laws/Dubai Courts are the competent courts to entertain this case. There is no similarity between this case and the case when it’s [sic] sought to enforce or annul a foreign arbitral award in several jurisdictions pursuant to the New York [C]onvention 1958.
Therefore, the cassation should be allowed and judgement [sic] entered accordingly.”
(see pp. 3-4, ruling of the Joint Judicial Tribunal in Cassation No. 1/2016 (JT))
The Judicial Committee then decided that “1. [t]he case is to be remitted for trial by Dubai Courts” and that “2. DIFC courts should cease from entertaining the case” (see p. 4, ruling of the Joint Judicial Tribunal in Cassation No. 1/2016 (JT)), costs to be borne by Oger, the award creditor.
It is apparent from the Committee’s findings that in order to prevent a potential conflict of jurisdiction that may arise from contradictory outcomes of the prospective decision of the Dubai Court of Cassation and the DIFC Courts’ order to enforce, the Joint Judicial Committee relied on a first-seized rule, according preferential jurisdiction to the onshore Dubai Courts, which were seized in an action for annulment of the subject award before the application for ratification and enforcement being filed with the DIFC Courts. This is an easy way to manage two potentially competing courts of competent jurisdiction for related actions that may produce conflicting outcomes in the event of the courts being seized in parallel. The natural implication of this is that had the DIFC Courts been seized first, the Dubai Courts – as opposed to the offshore counterparts – would have had to desist from entertaining the action. This said, there is an argument for saying that in this latter instance, the award debtor would have been deprived of its statutory right to challenge the award pursuant to Art. 216 of the UAE Arbitration Chapter, onshore Dubai being the seat of the arbitration and hence the natural place for challenging the award. The obvious counterargument is that an award debtor will be able to mount a defense of nullification in response to an application for enforcement under Article 44 of the DIFC Arbitration Law (and hence be given a fair hearing on nullification). In this context, it is important to recall the controversy inherent in this counterargument, which in part has been dismissed in previous constitutional and public policy challenges of the DIFC Courts’ role as a conduit jurisdiction (see http://kluwerarbitrationblog.com/2015/07/22/difc-court-of-first-instance-dismisses-application-for-referral-to-usc-of-purported-constitutional-conflict-between-uae-civil-procedures-code-and-dubai-judicial-authority-law-and-difc-arbitration-law/ and http://kluwerarbitrationblog.com/2015/09/05/host-jurisdiction-status-of-difc-courts-not-contrary-to-uae-public-policy/). Nevertheless, it would be prudent to introduce amendments to the UAE Arbitration Chapter prescribing a time-limit of e.g. three months for challenging an arbitral award after issuance, failing which the award will be considered good for enforcement by the competent courts, including the DIFC Courts. This will allow an award debtor of a domestic award rendered in mainland Dubai sufficient time to apply for nullification before the onshore Dubai Courts in satisfaction of its rights of defense under Article 216. Further, in order to deal with the wider problem of conflicts of jurisdiction between the Dubai and the DIFC Courts, it may be advisable to amend Article 7 of the Judicial Authority Law, which establishes a regime of free movement of judgments, orders and ratified awards between the onshore Dubai and offshore DIFC Courts, to include a first-seized rule in the terms contemplated above. In any event, the Joint Judicial Committee leaves no doubt that at a domestic level, there cannot be a solution à la New York Convention, which allows contradictory outcomes of nullification and enforcement of the same award in different jurisdictions.
Further, the Judicial Committee’s decision inviting the DIFC Courts to “cease from entertaining the case” may not have as far-reaching implications as may appear at first sight. In the given context, the meaning of these words may not require more than a temporary suspension of the DIFC enforcement proceedings (including all ancillary actions) pending a final ruling on nullification by the Dubai Court of Cassation. This, in any event, would make perfect sense in that should the Dubai Court of Cassation affirm the Dubai Court of Appeal’s rejection of the award debtor’s challenge of the subject award, the DIFC Courts’ will be the natural forum for the enforcement and execution of that award and will as such resume enforcement jurisdiction. This reading would also accommodate the three DIFC Court judges’ dissent on the “second point of the judgment” (see p. 4, ruling of the Joint Judicial Tribunal in Cassation No. 1/2016 (JT)) requiring the DIFC Courts to cease to entertain the case. This reading further finds support in the binary wording of the Joint Judicial Committee when concluding that only one of the two courts, i.e. the onshore Dubai and the offshore DIFC Courts, should determine to annul “or” (as opposed to “and”) recognize the subject award, implying the involvement of two separate jurisdictions for annulment on the one hand and enforcement on the other. In this sense also, there is no reason to believe that the Judicial Committee’s decision jeopardises the DIFC’s acquired status as a conduit jurisdiction.
Finally, in his Order of 1st February 2017 (see Claim No. CFI 013/2016 – Oger Dubai LLC v. Daman Real Estate Capital Partners), Sir Richard Field of DIFC Court of First Instance, having reviewed the decision of the Joint Judicial Committee, ordered further written submissions from the Parties in order to determine whether in the light of that decision, the DIFC Courts had any jurisdiction to “retain or modify the orders it has previously made supplemental to [Oger’s] enforcement application” (ibid, para. 1), essentially sharing the above reading of the decision of the Joint Judicial Committee. Further reporting will follow once Sir Richard Field has rendered a decision on the subject.More from our authors:
The post Daman v. Oger: The First Decision of the Dubai-DIFC Judicial Committee (Part 1) appeared first on Kluwer Arbitration Blog.
The Australian Centre for International Commercial Arbitration’s Guideline on the Use of Arbitral Secretaries
Esme Shirlow (Assistant Editor for Australia & New Zealand)
On 1 January 2017, the Australian Centre for International Commercial Arbitration (‘ACICA’) released a new Guideline on the Use of Tribunal Secretaries. This new Guideline addresses a silence in the existing ACICA Arbitration Rules as to the scope for tribunals to appoint arbitral secretaries, and the basis upon which they might be appointed. This post provides an overview of the Guideline and assesses how it compares to guidelines on arbitral secretaries that have been developed by other arbitration institutions.
Overview of the Guideline
ACICA is an international dispute resolution institution operating in the Asia-Pacific region, and based in Sydney, Australia. ACICA facilitates the mediation and arbitration of international commercial disputes, including under its own institutional arbitration rules. The new Guideline will apply from 1 January 2017 to any arbitral secretary appointments made in arbitrations administered by ACICA. This includes arbitrations administered by ACICA under the ACICA Arbitration Rules, as well as those administered under the UNCITRAL Arbitration Rules. The Guideline is also expressly made available for use in non-ACICA administered proceedings, but only after consultation with ACICA.
The Guideline is designed to “encourage transparency with respect to the appointment, duties and remuneration of tribunal secretaries”. To this end, the Guideline covers a range of topics relevant to the use of arbitral secretaries, including their appointment and removal, their duties, and remuneration for their costs and expenses. Consistent with the goal of increasing transparency, the Guideline stipulates particular expectations as to the matters subject to consultation between the tribunal and disputing parties and further identifies a number of matters subject to disputing party agreement. This includes, for example, a requirement that the parties consent to any appointment or modification to the terms of appointment of arbitral secretaries.
The Guideline in Context
With the release of this Guideline, ACICA joins a number of other institutions seeking to better regulate the use of arbitral secretaries in international commercial arbitration. Institutional guidance on this matter has been released, inter alia, by the Stockholm Chamber of Commerce (2017), UNCITRAL (2016), the Hong Kong International Arbitration Centre (2014), and the International Chamber of Commerce (2012). These institutional guidelines respond to broader concerns about the processes by which secretaries are appointed and the duties performed by them in arbitration proceedings. In 2015, for example, 68% of the 763 respondents to the International Arbitration Survey considered that the use of tribunal secretaries was an area which required regulation. Concerns related to the existing state of regulation have been canvassed previously on this blog, including in 2013 and 2016.
The ACICA Guideline thus matches broader institutional attempts to regulate the use of arbitral secretaries. In fact, the structure and content of the ACICA Guideline closely follows, though modifies, the Guidelines on the Use of a Secretary to the Arbitral Tribunal released by the Hong Kong International Arbitration Centre (‘HKIAC’) in 2014. This indicates the propensity for institutions to develop their own approaches on such matters, even where those approaches clearly build upon existing institutional rules and guidelines. This highlights the particular unlikelihood of a uniform standard developing to guide practice in this area in the future. Whilst most arbitral institutions now provide guidance on the appointment and use of arbitral secretaries, important differences in the substance of such regulation remain.
A first key difference amongst the various institutional guidelines is their approach to the requirement for there to be party consent to the appointment of arbitral secretaries. A range of approaches are possible, ranging from there being no requirement that the tribunal even consult with the parties as to the appointment, to a requirement that the parties (or even arbitral institution) agree to such appointment. The ACICA Guideline requires that the tribunal consult with the parties before appointing a secretary, and “only proceed with the appointment of the proposed secretary upon the agreement of the parties”. The SCC Arbitrator’s Guidelines, and Article 24(1) of the 2017 SCC Arbitration Rules, similarly require that the tribunal notify the SCC Secretariat of its intention to appoint an arbitral secretary and conditions that appointment on the consent of the disputing parties. By contrast, other rules and guidelines require only consultation with the parties for appointment. The HKIAC Guidelines and Article 13.4 of the HKIAC Rules, for example, require merely that the tribunal receive and consider the parties’ comments on the proposed appointment before exercising its discretion to appoint a secretary.
A second key difference is how each set of guidelines defines the permissible scope of a secretary’s duties. Guidelines differ both as to substance and the amount of guidance they provide on this issue. The ACICA Guideline takes an approach roughly occupying the middle ground of existing approaches. It addresses the permissible duties of arbitral secretaries by limiting such duties to: “(a) provid[ing] administrative assistance; (b) summar[ing] and/or research[ing] factual and legal issues in the record; and (c) prepar[ing] drafts of procedural orders and non-substantive parts of awards”. The Guideline appears to contemplate the scope for the duties of the arbitral secretary to be extended on the basis of party agreement to that effect. The ACICA Guideline precludes, however, the secretary from exercising “any decision-making functions”. The SCC Arbitrator’s Guidelines, by contrast, appear to envisage a more limited role for the arbitral secretary, extending their duties only to the exercise of “organizational, clerical and administrative functions”. The ICC Note similarly limits the secretary’s functions to “organizational and administrative tasks”, but defines those tasks broadly, including to encompass “conducting legal or similar research” and “attending hearings, meetings and deliberations”. Unlike these three sets of guidelines, the HKIAC Guidelines attempt to regulate in greater detail the permissible scope of a secretary’s duties, providing an itemised 13-point list of the duties that may be performed by the secretary.
A final point of differentiation between the various institutional guidelines is the approach taken in each set to the calculation of the secretary’s remuneration. The ACICA Guideline provides for two options, depending upon whether the tribunal is paid by the hour or by reference to the amount in dispute. Where the tribunal is compensated on an hourly basis, the Guideline provides that the secretary’s fees will be billed separately on the basis of an hourly rate. Where, however, the tribunal’s compensation is based on the amount in dispute, the Guideline provides for the secretary’s compensation to form part of the tribunal’s fees, being shared equally amongst the members of the tribunal unless agreed otherwise. The ACICA Guideline closely follows the approach set out in the HKIAC Guidelines to secretary remuneration but reduces the detail there provided in relation to certain matters such as, for example reimbursement of costs incurred by the secretary and travel allowances. Unlike the ACICA Guideline, the HKIAC Guidelines supplement existing regulation of secretary fees in the HKIAC Arbitration Rules. Schedule 2 of those Rules, for example, stipulates a cap on the hourly rate that can be charged by secretaries to HKIAC proceedings. The adoption of only the structure and content of the HKIAC Guidelines, even if subject to modifications, means that the ACICA Guideline does not benefit from a similar context of regulation. The Guideline therefore leaves certain matters, including the permissible rates a secretary may charge, unaddressed. The ACICA Guideline, in opting for the HKIAC approach to costs, departs from other institutional practice which precludes the direct payment by the disputing parties of a secretary’s fees. The ICC Note, for instance, provides that the engagement of a secretary “should not pose any additional financial burden on the parties”, such that the secretary’s fees must come out of the fees of the arbitrators and “not increase the total costs of the arbitration”.
The Guideline’s Contribution to the Better Regulation of Arbitral Secretary Appointments
Along with the Guideline, ACICA has also launched a Tribunal Secretary Panel. The requirements for applicants to be considered for inclusion on the Panel further the goal of the Guideline to better regulate the appointment of arbitral secretaries to ACICA proceedings. Candidates may be appointed to the Panel for a term of three-years on the basis of an application meeting specified criteria. In particular, the applicant must demonstrate prior experience as a tribunal secretary and completion of a recognised training course. The Guideline and Panel provide a useful resource for disputing parties, arbitrators and secretaries in specific cases. In addition, however, these efforts by ACICA demonstrate serious efforts by the organisation to respond to broader concerns about the processes attaching to the appointment of tribunal secretaries and the functions they perform. The creation of a Panel also indicates a move to professionalise the role of arbitral secretaries. The Panel and Guideline both provide a useful point of information for stakeholders and the broader public. These developments contribute to ongoing discussions as to the proper role of party consent in secretary appointments, the appropriate qualities of arbitral secretaries and the scope of their duties. It will be interesting to see how other institutions weigh in on this debate in the future.More from our authors:
The Arbitrator Intelligence Questionnaire (AIQ) is a feedback questionnaire that will be used by Arbitrator Intelligence (AI) to collect information on case management and decision making practices of international arbitrators. After pilot testing and extensively vetting the AIQ, we are now asking for public comments to help us further refine it.
A demonstration version of the draft AIQ is now available for review on our website. There, you will also find an interactive annotation tool that will allow you to register your comments directly onto the text of the AIQ. Come give us your input!
Why Is the AIQ Needed?
The AIQ is a potential solution to some of international arbitration’s most salient challenges. For example, a recent survey by Berwin Leighton Paisner investigating the lack of diversity in international arbitration found that a staggering 92% of respondents wanted more information about new and less well-known arbitrators, and a whopping 81% of respondents wanted to give feedback about arbitrators at the end of cases.
Respondents to the 2015 Queen Mary Survey on Improvements and Innovations in International Arbitration identified the third worst characteristic of international arbitration as the “lack of insight into arbitrators’ efficiency.” Meanwhile, most responses to the Survey about how institutions could improve international arbitration involved providing more information about arbitrators, how they are appointed, and their decision making.
Finally, and most recently, three out of the 10 Hot Topics in International Arbitration for 2017 identified in a Kluwer blog post – transparency, the arbitrator selection process, and diversity – go to the heart of AI’s mission.
The AIQ is our means to accomplish these aspects of our mission. The idea behind the AIQ is relatively simple: to replicate through systematically gathered feedback the kinds of information that are currently obtainable only through ad hoc, person-to-person phone calls during the arbitrator selection process. More, and more accurate, information about how arbitrators decide cases will empower parties, counsel, and institutions to make better informed choices in selecting arbitrators. It will also reduce information asymmetries that undermine the fairness of arbitrator appointments and facilitate greater diversity by allowing newer arbitrators meaningful opportunities to establish reputations based on their actual performance.
Challenges in Creating the AIQ
To effectively replicate the essential characteristics of telephone research, we faced tremendous challenges in developing both the content of the AIQ and a strategy for implementing it. For starters, when you conduct telephone research about arbitrators, you can ask case-specific questions and follow up questions to fill in details. By contrast, the AIQ must cover all the topics that may be relevant in any particular case and anticipate potentially relevant follow up questions.
Meanwhile, when you make telephone inquiries, you know the identity of the person on the other side of the line and can assess the quality of responses in light of your confidence in that person’s experience and judgment. For the AIQ, we have to develop alternative means for determining relevance and ensuring confidence in the quality of responses, while still maintaining the confidentiality of the responder and of identifying details of the case.
Another challenge in developing the AIQ is preventing what we might call “The Disgruntled Losing Party Problem.” The concern is that, instead of providing fair and objective feedback, disappointed parties might misuse a survey to exact revenge against arbitrators who rendered an unfavorable award. To avoid this problem, our AIQ has to include control questions and other mechanisms to reduce the potential for unfair or inaccurate responses.
Ultimately, all these challenges must be met, but the questionnaire can’t be too long! Meeting these various challenges forced us to think and rethink details of the AIQ, and find innovative solutions to protect confidentiality while assuring quality.
To meet these challenges, we worked for months refining and redrafting questions in consultation with the Penn State Survey Research Center and other experts who are trained in empirical research methodologies. We then extensively pilot tested the AIQ with advisors and friends of AI, and we previewed the AIQ to select groups of in-house counsel, arbitrators, law firms, and representatives from arbitral institutions. The result is a draft version of the AIQ, which is now posted for public comment. Through this process, we hope to get additional feedback from around the globe so we can further refine and improve the AIQ.
Overview of the AIQ
The AIQ is divided into two phases. The first Phase focuses on general background about the case, and can be completed by anyone who has access to the arbitral award or case file. Key data from Phase I will then be prefilled into in the questions in Phase II. For example, the arbitrators’ names will be input in Phase I, along with key dates (like the date the request for arbitration was filed, the date the proceedings were closed, and the date the award was rendered). These data then will be incorporated into the questions in Phase II, which seek more evaluative and analytical feedback and are designed to be completed by an attorney or party involved with the case.
There are several reasons we divided the AIQ into 2 phases. First, it soon became clear that we could not ask all the essential questions we needed to ask and still have a questionnaire that would not be unduly burdensome. Now, each phase can be completed in 15 minutes or less.
Second, because Phase I seeks only objective information derived from awards, it can be used not only to gather information an ongoing basis, but also to extract data from past awards collected by AI. This data from past awards will provide a valuable starting point for analytics about arbitrator decision making.
Give Your Feedback on the AIQ
We need you! Come visit the AI website, where a static presentation version of the AIQ is posted along with annotation software that will enable you and others in the international arbitration community to provide us with interactive comments on the AIQ. Is there any question or response that is unclear? Are we missing a question you think should be included? Or are there questions you think are superfluous, unnecessary, or simply unhelpful?
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International arbitration is no longer a cozy little practice among an elite group of insiders who can exchange information by telephone. We now see over 10,000 international arbitration cases annually (just among the major institutions), and thousands of arbitrators who regularly sit in those cases. The telephone is simply not a good means for keeping up with the scope of information implicated by these numbers. The result, unsurprisingly, is that even the largest firms and parties report finding themselves forced to consider or appear before arbitrators with whom they are unfamiliar and about whom they have trouble finding information.
The time has come for a technological and informational upgrade to the entire international arbitration regime. Parties, counsel, arbitral institutions, and even arbitrators need a more reliable, neutral, data-driven resource for sharing information about arbitrators and their decisional history. As an academic-based enterprise, Arbitrator Intelligence is uniquely positioned to meet these challenges on behalf of all stakeholders in the international arbitration community.More from our authors:
The post We Need Your Input! on The Arbitrator Intelligence Questionnaire appeared first on Kluwer Arbitration Blog.
The terms ‘Privacy’ and ‘Confidentiality’ had been used in arbitration interchangeably until the latter half of 20th century. While ‘Privacy’ means that no third party can attend arbitral conferences and hearings, ‘Confidentiality’ refers to non-disclosure of specific information in public. Private hearings do not necessarily attach confidentiality obligations to the parties to arbitration. The general assumption that arbitration proceedings are both private and confidential stands corrected in the 21st century. Nevertheless, confidentiality is one of the primary reasons for arbitration being the preferred option for commercial dispute resolution.
The said assumption flows from the traditional understanding of arbitration agreement which is a private contractual arrangement. This changed in the 1990s with Australian and Swedish courts rejecting any implied duty of confidentiality in arbitration. The Swedish Supreme Court in AI Trade Finance held that no implied duty of confidentiality existed in private arbitrations under the UN-ECE rules or Swedish law. The Australian High Court in Plowman observed that private arbitration hearings do not clothe the disclosed information and documents with confidentiality since absolute confidentiality is absent in Australia.
These precedents extend confidentiality protection to only such cases where parties intended to keep particular information private. This led to non-uniform application of confidentiality principle to arbitrations globally. To clarify this, several jurisdictions came out with new arbitration laws and some arbitral institutions amended their rules.
The undesirable publicity of the dispute between US-based consulting firm AlixPartners and financial investor Kingsbridge Capital Advisors has led to a debate over confidentiality of arbitral proceedings (see, for example, Stephan Balthasar’s post on confidentiality in arbitration).
While some nations and arbitral bodies notified that implied confidentiality cannot be assumed in arbitration proceedings, others have followed the traditional approach to impose a duty on the arbitrators, parties or both. The nature of arbitration proceedings and extent of confidentiality is dependent upon:-
- The seat of the Arbitration and;
- The arbitral rules applicable to the Arbitration.
The confidentiality issue is complicated due to the involvement of multiple actors (witnesses, translators, officials of the arbitral institution, etc.) in arbitration who—unlike the arbitrator(s) and parties—are not governed by the arbitral rules or arbitration agreement even though they have access to confidential information.
Confidentiality protection regime- The full picture
There is no uniformity on the confidentiality principle’s scope of application amongst countries and international arbitral institutions. Though the English Arbitration Act 1996 is silent on confidentiality, there are three rules:-
- Arbitration proceedings must be held in private;
- Implied confidentiality in every arbitration;
- Such confidentiality is subject to certain exceptions, namely court order, parties’ consent, public interest and reasonable necessity. The Court of Appeal in Shipyard Trogir formulated these exceptions for the first time.
English courts seek to protect confidentiality as long as it is not conflicting with the delivery of justice. Emmott divided all confidential information into two –
- Information inherently confidential (trade secrets); and
- Information protected by implied duty of confidentiality such that the same finds application only in arbitration. It also followed Shipyard Trogir to recognize the exceptions to implied confidentiality.
South East-Asia is increasingly becoming the center for international commercial arbitration. Singapore is home to the Singapore International Arbitration Centre (SIAC) and the local arbitration laws explicitly provide for confidentiality in court proceedings emanating from arbitration on the parties’ request. The general obligation of confidentiality is implied in the arbitration agreement. In AAY v. AAZ, the Singapore High Court opined that non-disclosure of parties’ identity amounted to protection of confidentiality of arbitral proceedings. The High Court reiterated the respect for confidentiality in arbitration while considering the question of sealing arbitration documents (for more on court’s reasoning, refer to Darius Chan’s post).
The Hong Kong Arbitration Ordinance (HKAO) expressly imposed confidentiality in arbitration proceedings from 2011, mandating non-disclosure of any information pertaining to arbitral proceedings. Where parties do not agree on confidentiality measures, statutory restrictions will apply. Mandatory legal disclosures, disclosure necessary for enforcing a right and disclosure in course of challenging the arbitral award are the three exceptions.
The Philippines Alternative Resolution Act 2004 promotes party autonomy in dispute resolution and explicitly provides for confidentiality in arbitral proceedings. Courts can issue protective orders to prevent disclosure of documents which are proved as confidential (for more information on the protective order regime in Philippines, refer to Ileana Smeureanu’s post).
However, jurisdictions like US and Australia reject any implied confidentiality. Though the US Court of Appeals have affirmed that any question on applicability of confidentiality in arbitration is a question on the very nature of the process, it is erroneous to presume that all information tendered during arbitration will remain confidential. Parties have the autonomy to decide if they wish to disclose the details of arbitration and award. However, confidentiality is frequently violated by parties and witnesses in US. The Australian High Court in Plowman distinguished privacy from confidentiality, observing that the latter is not an essential attribute of arbitration.
The UNCITRAL and Stockholm Chamber of Commerce (SCC) Rules have a limited role, merely providing for private hearings and confidentiality of awards. The ICC per se do not provide for the confidentiality of awards, materials and Tribunal’s deliberations, unless requested by the party. LCIA obligates parties to keep the (i) award, (ii) all materials and documents presented and, (iii) the Tribunal deliberations confidential. It allows for three exceptions to this rule namely, court order, parties’ consent, public interest and reasonable necessity. Since WIPO aims to protect IP and trade secrets, it has a strict confidentiality protection regime.
How can confidentiality be maintained in International commercial arbitration?
There is no universal approach to maintaining confidentiality in arbitrations. However, parties are free to decide the degree of confidentiality they desire. Special care must be observed while drafting the arbitration clause to ensure confidentiality of parties’ dealings and interests. Common and civil law courts have contradicting opinions on different confidentiality issues like:-
- Does the duty of confidentiality extend only to commercially sensitive information and awards or to all information relating to proceedings? ;
- Are witnesses obligated to maintain confidentiality? And;
- Whether confidentiality must be maintained during court proceedings arising out of arbitration?
Though the institutional rules favor confidentiality, the ICC Rules does not provide for the same per se, leaving it to the Tribunal’s discretion. Due to the inconsistencies in domestic laws and institutional rules, parties must protect their interests by having specific confidentiality provisions in arbitration agreement.
- Confidentiality requirements for documents– The arbitration clause should provide for confidentiality for all documents exchanged and steps to avoid disclosure. This ensures non-disclosure of business secrets. Where malafide disclosure happens, the defaulting party would be liable to compensate the ‘victim’.
- Confidentiality obligations of third-parties– Statements, tribunal’s deliberations and the final award should be maintained as confidential by the tribunal, parties, witnesses, experts and administrative personnel. All witnesses must sign a confidentiality undertaking.
- Choice of governing arbitral law- A legal regime having strong confidentiality protection is preferable.
These provisions apply where adopted arbitral rules fail to provide sufficient confidentiality protection. Though commercial parties consider an expansive arbitration clause detrimental to the deal, it must be comprehensively negotiated at the initial phase. Parties must state clearly the confidentiality protection required to ensure effective drafting of the arbitration clause.
Suggestion for a uniform rule
Different arbitral institutions fail to provide a uniform standard, due to the prevailing competition in arbitration business. Since parties often choose a generic arbitration clause to avoid focusing on contingent future disputes, uniform confidentiality protection mechanism is the need of the hour.
This author proposes that when arbitration commences the tribunal should get parties’ consent on the scope of confidentiality. Where parties fail to agree, the arbitrator(s) will pass a protective order deemed accepted by the parties. Where a party alleges violation of the confidentiality agreement or protective order, the tribunal can resolve the same. If such violation happens after conclusion of arbitration, it must be resolved by the same tribunal—given its familiarity with the confidentiality agreement/protective order.
A protective order should incorporate certain exceptions. Even if parties only incorporate a generic arbitration clause with no confidentiality protection, this order will still apply. Due to this, parties can avoid approaching courts if confidentiality provisions are breached. An arbitral tribunal however cannot pass a protective order without informing parties about the same on commencement of arbitration. ’
In a 2012 post, the author considered confidentiality as one of the biggest benefits of international commercial arbitration, for commercial aspects. It ensures that legal complications in one market do not affect the profitable projects in another. Domestic judicial pronouncements, however, have caused a split in the understanding of confidentiality. Hong Kong and New Zealand provide for statutory confidentiality protection and privacy in court hearings over the awards. England and Singapore provide for implied confidentiality in arbitral proceedings. Local courts further broaden the legal regime by providing exceptions to the general rule of non-disclosure. On the other hand, Sweden and US do not impose any legal duty of confidentiality. In this light, arbitral institutions should strive to remove uncertainties on confidentiality protection regime in international arbitrations.More from our authors:
The post Confidentiality in International Commercial Arbitration: Bedrock or Window-Dressing? appeared first on Kluwer Arbitration Blog.
Remy Gerbay and Badar Al Raisi
The first blog in this two-part series, published last year, discussed the growing concern of arbitration users over “due process paranoia”. In that first blog, due process paranoia was defined as the perceived reluctance by arbitral tribunals to act decisively (for example by rejecting applications for extensions of time, refusing amendments to submissions, rejecting new evidence or declining to reschedule a hearing) for fear of the award being challenged on the basis of a party not having had the chance to present its case fully. The issue of due process paranoia continues to take prominence within the international arbitration community. It was the topic of the 31st Freshfields Arbitration Lecture delivered by Professor Lucy Reed in October last year.
In our first blog, we argued that the concern with due process paranoia was that, when a tribunal opts for caution instead of procedural economy in circumstances where the tribunal could, in actual fact, afford to be robust (because the enforcement risk is lower than is believed to be by the arbitrators), the tribunal makes a ‘wasteful’, ‘sub-optimal’, decision. These wasteful, sub-optimal, decisions are particularly frustrating to parties when they are taken in response to what appears to be dilatory tactics employed by the other side. We argued that the solution to due process paranoia may therefore be found in a more precise assessment of the enforcement risk by arbitrators. This, in turn, is dependant on reliable data.
In that context, for our first blog, we conducted a systematic review of cases in our jurisdiction (England) reported since the enactment of the English arbitration Act (1996) in which an application had been made for setting aside an award. The purpose of this review was to assess whether, and if so in what circumstances, awards had been set aside in England because an arbitrator had taken an overly robust case management. This review showed that there was not a single judgment where an arbitration award had been set aside in England because the tribunal had taken an overly robust case management decision. Instead, most set aside decisions were due to arbitrators basing their award on arguments or evidence that had not been put forward to the parties during the proceedings.
Having focused on set aside proceedings in our previous blog, we now turn our attention to the other side of the equation, namely applications made to the English courts to resist enforcement of foreign awards. The relevant provision in this respect is s. 103 of the Act, which incorporates the grounds for the refusal of recognition or enforcement set out in Article V of the New York convention.
Adopting a similar approach to our previous blog, we systematically reviewed all English court judgments citing s.103 that have been reported since 1996. The search generated 57 judgments. If one excludes first instance judgments which were subsequently appealed, only 26 judgments actually dealt with s.103. The 31 other judgments included many instances in which either s.103 was simply cited in passing, or it was discussed as a related issue, not within the context of an application for refusing the enforcement of a New York Convention award.
Of the 26 English court judgments dealing with applications under s.103, the courts only refused to enforce a New York Convention award in 6 instances, and adjourned the enforcement of awards in 7 instances. This in itself shows that refusal to enforce New York arbitration awards is relatively uncommon in England, whatever the grounds.
More interestingly perhaps, our review of these judgments also showed that none of the instances in which an application under s.103 was granted arose out of a complaint that an arbitral tribunal had made an overly robust case management decision.
Under s.103 (as in under the New York Convention), a party can apply for the recognition or enforcement of an award to be refused on the following grounds:
- a party to the arbitration agreement was (under the law applicable to him) under some incapacity (s.103(2)(a));
- the arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made (s.103(2)(b));
- the applicant was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case (s.103(2)(c));
- the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration or contains decisions on matters beyond the scope of the submission to arbitration (s.103(2)(d));
- the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, with the law of the country in which the arbitration took place (s.103(2)(e));
- the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made (s.103(2)(f); and
- the award is in respect of a matter which is not capable of settlement by arbitration, or if it would be contrary to public policy to recognise or enforce the award (s.103(3)).
Additionally, the court may also grant an adjournment on its decision on the enforcement of an arbitration award to pursuant to s. 103(5) of the Act, which is a temporary measure pending proceedings before the supervisory court to set aside the award.
Of the total cases, the ground most frequently relied upon for issuing refusal of enforcement applications related to breach of public policy (s.103(3)), which was raised in 10 instances. Challenges under this subsection never succeeded.
The second ground most frequently relied upon was in relation to the parties complaint of their inability to present their case under s.103(2)(c). This ground is the one most closely associated with rules of natural justice. Therefore it is the one most likely to be used by parties seeking to challenge robust case management decisions.
Applications under s.103(2)(c) have succeeded in only three instances. Interestingly, of these three instances only one may arguably be said to relate (indirectly) to case management as discussed below.
All three decisions arose out of awards which relied upon information or arguments that had not been put to the parties:
- Malicorp Ltd v Egypt  EWHC 361 (Comm): In this case the award had granted the claimant remedies on a basis which had not been pleaded nor argued.
- Irvani v Irvani  1 Lloyd’s Rep. 412. In this highly unusual case, the arbitrator, who was the sister of the claimant and the respondent, had seemingly based her decision on information available to her, but not to the respondent.
- Kanoria & Ors V Guinness & Anor  EWCA Civ 222. In this last case, a party to an arbitration was unable to present his case because he had never been informed of the case that he was required to meet.
This last case is perhaps the only one where case management comes into consideration, albeit indirectly. In that case, the party resisting enforcement of the award was suffering from a life threatening decease at the time of the arbitration, so that it was impossible for him to participate in the proceedings in a meaningful way. He had decided not to attend a hearing in a foreign jurisdiction. At that hearing, however, a case of fraud was made against him, of which he had not been made aware prior to the hearing. In the circumstances, the court found that, in breach of natural justice, he had not been informed of the case he was required to meet. While this could have been averted through proper case management (eg. by ensuring, at the very least, that the party who could not attend the hearing was made aware of the fraud claims made against him), the case does not concern an arbitrator taking overtly robust case management decisions to the detriment of a wasteful party trying the engage in dilatory tactics.
The fact that robust case management as such has not really prevented the enforcement of New York Convention Awards in England may be explained by the approach taken by the English courts in dealing with the operation of s. 103(2)(c). The approach is set out by Coleman J in In Minmetals Germany Gmbh v Ferco Steel Ltd  1 All ER (Comm) 315:
“In my judgment, the inability to present a case to arbitrators within section 103(2)(c) contemplates at least that the enforcee has been prevented from presenting his case by matters outside his control. This will normally cover the case where the procedure adopted has been operated in a manner contrary to the rules of natural justice. Where, however, the enforcee has, due to matters within his control, not provided himself with the means of taking advantage of an opportunity given to him to present his case, he does not in my judgment, bring himself within that exception to enforcement under the Convention.” (emphasis added)
Furthermore, Lord Philips CJ in his judgment in Kanoria & Ors V Guinness & Anor  EWCA Civ 222 explained that s.103(2)(c) applies where a “a party to an arbitration is unable to present his case if he is never informed of the case that he is called upon to meet.” (paragraph 22 of the judgment). This was reaffirmed in Cukurova Holding AS v Sonera Holding BV  UKPC 15. This approach suggest that arbitral tribunal must act in a wholly unreasonable manner in order to have an award refused under this ground, and it is unlikely to apply to instances where they have decided to act decisively by taking robust but fair case management decisions.
These findings, just like those of our first blog on the topic, re-affirm that arbitrators with a tendency for occasional due process paranoia should feel free to proceed robustly, at least whenever the likely place of enforcement is England and Wales.
 NB in HJ Heinz Co Ltd v EFL Inc  EWHC 1203 (Comm), a summary application for a declaration that it would be contrary to public policy to recognise or enforce the award in England pursuant to the Arbitration Act 1996 s.103(3) was refused. Whilst the summary application was not successful, it cannot be immediately identified whether the s.103(3) argument succeeded in separate proceedings, and therefore this has not been included in the final countMore from our authors:
The New Ecuadorian PPP Act: A New Opportunity for Foreign Investment? Some Caveats Regarding Arbitration
Javier Jaramillo, Pérez Bustamante & Ponce and Universidad San Francisco de Quito and Ricardo Montalvo, Coordinating Ministry of Production, Employment and Competitiveness of Ecuador
Article 19 of the Incentives for Public-Private Partnerships and Foreign Investment Act (“PPP Act”) recognizes local and international arbitration as one of the dispute resolution methods that has arisen in Public-Private Partnership agreements (“PPP agreements”). Article 20 of this Act and articles 19, 20, 21, and 22 of its Regulations set forth certain rules for these arbitrations to be performed. However, these provisions leave us with certain doubts regarding the viability of the arbitral system and its application to the scope of PPP agreements.
In this article, we will refer, specifically, to two limitations created by the framework that is currently in force: i) exclusions as to subject matter jurisdiction, and, ii) the requirement to exhaust administrative proceedings. This article only refers to the arbitral mechanism derived from a PPP agreement and sets aside possible claims that may arise from international investment treaties.
Matters Subject to Arbitration
Article 20 of the PPP Act expressly determines subject matter jurisdiction limitations and excludes “tax matters, as well as any other act directly derived from the State of Ecuador’s legislative and regulatory power” (Emphasis added).
In principle, it appears that the provisions incur in an overly broad prohibition that could cause concern among investors. Apparently, any violation of the rights and benefits acquired by the private company or investor via a PPP agreement, that arises from the promulgation of a legal norm – even a mere resolution or regulation-, could not be subject to a claim brought before a local or an international arbitral tribunal.
Therefore, we must deconstruct each element of the prohibition in order to understand its scope. The prohibition covers acts directly derived from the state’s legislative and regulatory power and establishes tax matters as an example of these acts.
PPP agreements, validity of tax matters and validity of general rules are closely related once PPP Act benefits are examined. On one hand, it provides tax incentives that, pursuant to article 17, will continue to be valid while the contract is in force. In turn, article 15 recognizes legal stability for “regulatory affairs that have been declared as essential” in the respective agreements.
Does this perhaps mean that, if the state decides to eliminate tax incentives granted to a private party through the use of its legislative power or modify specific regulations declared to be essential in PPP agreements, the company would have no other option than to submit its claim to ordinary courts? Although we could intuitively answer this question affirmatively, a detailed and thorough analysis could lead us to think otherwise.
Acts derived directly from the state’s legislative and regulatory power in PPPs, namely tax matters and specific industry regulations, do not directly affect the PPP agreement. Therefore, discussions such as those regarding the validity of those acts or their legitimacy should be decided by the litigious-tax jurisdiction or the litigious-administrative jurisdiction, as applicable. Indeed, the disputes related to these matters are not part of the PPP agreement, but rather, directly attack the challenged act.
The PPP agreement and the rights and obligations derived therefrom are indirectly affected by these general acts. Thus, in a dispute arising from the PPP agreement, parties do not directly discuss the state’s legislative or regulatory power, but rather, the effects that this power has caused to the contractual rights of the private party, through concrete administrative events or acts. This way, the matter submitted to arbitration is not a direct expression of the state’s power, but instead, of the effects that the power has indirectly caused.
These criteria must be reviewed under further scrutiny having to do with tax issues. Article 22.2 of the PPP Regulations expanded the scope of the prohibition of the PPP Act, qualifying “the disputes related, either directly or indirectly, to matters with a tax nature” as matters not capable of being submitted to arbitration (emphasis added). As opposed to the matters established in article 20 of the PPP Act, this would cause the impossibility of arbitrating even the indirect effects of tax matters. This legal provision apparently leaves investors without the possibility of resorting to a neutral forum that decides, for example, on the impacts derived from their tax incentives.
Fortunately, article 22 exclusion only refers to international arbitration and its scope must be exclusively interpreted for the arbitral agreement in the PPP agreement. Thus, the investor can sign other instruments recognized under the Ecuadorian legal framework, such as investment contracts, with an independent arbitral clause that would protect it from legal modifications regarding tax incentives.
Exhaustion of Administrative Proceedings
As a condition precedent for submission of an arbitration claim, article 20.2 of the PPP Act requires that parties exhaust the phase of direct negotiations and mediations, in addition to administrative proceedings available.
Upon the publication of the PPP Act, this last requirement caused surprise among practitioners because it revived a legal problem that had been overcome after the publication of the State Modernization Act in 1993. The latter eliminated the requirement of exhausting the administrative proceedings as a prerequisite to submit judicial claims challenging an administrative act. This was surely due to the influence of the Production, Trade, and Investment Code, issued in 2011, which disregarded the Modernization Act. Article 27 of the Code establishes the exhaustion of administrative recourses as a requisite to submit disputes derived from investment contracts to international arbitration.
In any case, beyond this historical precision, the drafting of article 20 of the PPP Act did not permit an adequate interpretation regarding the scope of this requirement. Accordingly, it was not clear when arbitration should be brought nor what is understood by exhaustion of the administrative proceedings. Article 20.2 states that arbitration only applies provided that these proceedings are previously exhausted, while paragraph b) of that same section determines that ordinary courts have jurisdiction to resolve the disputes of PPP agreements in cases in which after “the term contemplated for notice of the resolution to the interested party that exhausts the administrative proceeding, the action before the arbitral jurisdiction has not been exercised.”
Exhaustion of these proceedings takes place through administrative acts, and parties must be served for these acts to enjoy efficacy. Therefore, administrative proceedings would be exhausted solely with the notice of these acts. On the other hand, the rule demands that the arbitral actions must be exercised prior to expiration of the term contemplated to notify the party of the resolution. Consequently, it is not clear whether this refers to a remission to the lapse of time contemplated in the term or to an arbitration request being submitted prior to the notice of the resolution. This last interpretation would lead to a contradiction of the rule and would cause evident insecurity to investors: On the one hand, Article 20.2requires the initiation of arbitration subsequent to exhaustion and; on the other hand, paragraph b)requires the arbitration request to be brought before the effective issuance of the resolution and its service —which constitutes the exhaustion of administrative proceedings itself—.
Further, it was also unclear as to what was understood by “exhaustion of administrative proceedings”, as article 179 of the Executive Power’s Administrative Regime Statute considers a series of hypotheses regarding a possible exhaustion. Article 20 of the PPP Regulations is more specific about the matter. It establishes that administrative proceedings would be understood to have concluded when the private company had exhausted all the ordinary administrative recourses, excluding the exhaustion of extraordinary recourses such as the extraordinary revision recourse. This provision also clarifies that once the recourses were exhausted, the private party would have a peremptory period of 30 days to file an arbitration claim.
Unfortunately, the referred provisions leave us without an answer as to a very important subject: What happens to the claims of a private company that do not arise out of an administrative act? Contractual breaches by the state regarding payment of agreed quantities are one example of this. It is not clear whether, in these cases, the private party should directly resort to arbitration or whether, instead, it should elicit an administrative act from the administration by filing claims to exhaust administrative proceedings. Both options appear to be plausible. Only administrative practice and interpretation performed by decisive bodies will provide certainty in this regard.
The PPP Act recognized arbitration as an alternative dispute resolution system derived from PPP agreements. However, its provisions relating to the limitations of matters that can be subject to arbitration and the requirement of exhaustion of administrative proceedings are replete with undefined legal concepts and unclear steps that must be followed to fulfill both requirements. In certain cases, the PPP Regulations have provided private parties the power to submit their disputes to arbitration; in others, however, it has precluded them, generating important and unnecessary settlement costs, which could influence the decision of foreign corporations on investing in Ecuador. Lastly, the cases that the PPP Regulations have not been able to develop will fall to the judgment of the Public Administration in terms of determining their application. Therefore, the Ecuadorean Public Administration will have the duty of acting predictably, transparently, and pursuant to law so that the PPP Act can fulfill one of its purposes: attracting foreign investment.More from our authors:
2016 was an important year for international arbitration. Lord Chief Justice of England and Wales challenged the legitimacy of international arbitration, while supporters such as former Chief Justice of the High Court of Australia (Robert French AC) came forward to defend its coexistence with commercial courts. Several institutions such as ACICA, SIAC and KCAB updated their arbitration rules for 2016, while SCC and ICAC introduced new rules for 2017. SIAC also released its draft Investment Arbitration (IA) Rules, followed by a public consultation process and finally enactment of its new rules. Several institutions published detailed practice notes and statistics: HKIAC, SIAC, LCIA, SCC and the ICC updated its note on the conduct of arbitration. The year concluded with Hong Kong and Singapore reforming their respective laws in order to allow for third party funding arrangements – arguably one of the most important developments in 2016.
This article discusses 10 key areas which will continue to play a significant role in further developing international arbitration beyond 2020.
In response to the 2015 Queen Mary International Arbitration Survey, several institutions were seen as leading the international arbitration arena by publishing detailed practice notes and statistics in 2016. It is highly likely that this will continue in 2017, as the purpose of these practice notes is to clarify certain provisions and respond to market changes – such as recent developments regarding third party funding in Singapore and Hong Kong. Both jurisdictions will need to supplement their existing rules with practice notes shortly. However, it is worth noting that several provisions in the 2017 SIAC IA Rules already address these developments. They are discussed in a previous article.
2. Arbitrator Selection Process
Although largely ignored over the years, this area will likely be explored in 2017, though developments are unlikely to surface until at least 2018. Institutions are hesitant to disclose, let alone discuss, the selection process as it leads to significant debate among arbitrators, law firms, and academics. What cannot be denied is that it is inherently difficult to assess whether parties are in a better position to appoint arbitrators, or whether the task should be left to the arbitral institution – as the answer will depend on the experience of the parties.
Developments in this area could vary from the release of practice notes with basic guidelines, to publishing an arbitrator selection framework – where institutions would implement their own guidelines in order to clarify the various factors that must (or should) be considered before an arbitrator is appointed. The other, more difficult, option is to wait for a multilateral framework. Though only soft law, it would be comparable to the IBA guidelines on conflicts of interest in international arbitration – which emphasise best practice.
3. Investment Arbitration Rules
On 1 January 2017 SIAC released the first edition of its IA Rules. This modern set of investment arbitration rules are quite different to the ICSID Rules, as they are a hybrid of commercial and investment arbitration rules. It will be interesting to observe whether a significant number of parties will now settle disputes with SIAC, as opposed to ICSID. In 2017, global arbitration conferences will undoubtedly discuss and evaluate these developments. Beyond 2017, some institutions may follow suit, though most will be proud to highlight that they will remain commercial dispute resolution centres.
4. Third Party Funding
Both Singapore and Hong Kong have reformed laws which previously prohibited third party funding arrangements. On 10 January 2017, the Singapore Parliament passed a bill allowing for third party funding for arbitrations in Singapore. On 11 January 2017, Hong Kong similarly introduced a bill to its Legislative Council (LegCo) with Mr Rimsky Yuen SC moving the second reading of the bill. Developments in both jurisdictions indicate that their respective governments are strong supporters of international arbitration. Litigation funders in both jurisdictions have been gearing up for work over the last year, and this area will continue to be discussed heavily at global arbitration conferences in 2017.
5. Rise in Financial Institution Arbitration
The ICC Commission on Arbitration and ADR published a comprehensive report in November 2016 titled ‘Financial Institutions and International Arbitration’. The Report concluded that many institutions have, in large part, failed to fully embrace international arbitration as a viable dispute resolution method. The report has been discussed in a previous article. The HKIAC was quick to invite the co-chair of the ICC task force on Financial Institutions and International Arbitration to present at an event in December 2016. These developments will lead to institutions targeting a broader set of clients from 2017 onwards. Once financial institutions recognise the commercial benefits associated with international arbitration, they will undoubtedly provide global arbitral institutions with lucrative dispute resolution work.
6. Potential Appeal Mechanism (by consent)
One of the benefits of arbitration over litigation is that it does not allow for appeals. Arbitration has always encouraged finality, to ensure that parties can resolve their disputes swiftly and with certainty. Critics, who tend to discourage resolving disputes via arbitration, may argue that justice cannot truly be achieved without an appeal process. In response to question 14 of the questionnaire that the ICC’s distributed before it published its ‘Financial Institutions and International Arbitration’ report, some institutions expressed an interest in an appeal process subject to two broad conditions: that the consent of all parties is obtained at an early stage, and that certainty is not undermined. While the first of these is achievable, it will be difficult (if not impossible) to achieve certainty if an appeal process is introduced.
7. Sanitising Arbitral Awards
Another perceived advantage of resolving disputes via arbitration is confidentiality, which inevitably comes at the expense of precedent. Precedent not only ensures consistent decisions, but also promotes certainty. The ICC report also found that several financial institutions viewed confidentiality as being less important than precedent, particularly where disputes related to syndicated lending and derivatives. The report also reminds readers that although an arbitration is private, it is not expressly confidential according to the ICC Rules. The UNCITRAL rules are also silent as to confidentiality, but publication is addressed in Art 34.5. Other institutions have strict provisions that deal with confidentiality and publication: Article 42 in the 2013 HKIAC Rules, Article 22 in the 2016 ACICA Rules, and Rule 24.4 of the 2016 SIAC Rules. Interestingly, SIAC has taken an extra step to confirm that the tribunal may issue an order or award for sanctions or costs if a party breaches their confidentiality obligations in Rule 39.4. Also worth noting is that the 2017 SIAC IA Rules have provided greater clarity with respect to publishing of awards in Rule 38. Confidentiality, and more specifically publication, provisions are likely to be reformed in all new international arbitration rules from 2017 onwards. More sanitised awards will also be published by institutions.
8. A Shift to the East
It is no secret that Hong Kong and Singapore have become some of the most frequently used jurisdictions for international arbitration within the last 5 years. This is due to a multitude of reasons, some of which include: both jurisdictions being competent in administering a high volume of cases as well as high-value disputes, strong panels of arbitrators, state-of-the-art facilities, geographic convenience, modern arbitral rules, and most importantly a supportive judiciary and government. In 2016, both experienced sharp growth, and this is likely to continue beyond 2017.
9. Diversity in International Arbitration
Another area which has received little attention is diversity, particularly among arbitrators and with respect to both gender and ethnicity. They key question that needs to be asked is: why is diversity still an issue when there has been a significant increase in the use of international arbitration globally? Other discussions need to focus on the impact this may have on the tribunal’s orders and awards, solutions such as quotas, as well as how current obstacles can be overcome. Arbitral Women is an organisation that was set up to address this gender imbalance, and has almost 1000 members in over 40 countries. The non-profit Arbitrator Intelligence also claims that it will ‘facilitate increased diversity in arbitrator appointments’. For greater discussion on this topic, refer to another post which discusses a recent survey on diversity which was published in January 2017.
10. Appropriate use of: Emergency Arbitration, Summary Dismissal, Expedited Procedure, Joinder and Consolidation
Most institutions are reforming their old rules in order to include these innovative procedures. As each serves a unique purpose, they are not automatically relevant to every dispute. In 2017, global arbitration conferences will likely discuss the most recent provisions such as SIAC’s Early Dismissal of Claims and Defences (Rule 29) and SCC’s Summary Procedure (Article 39). Joinder, consolidation and emergency arbitration have already received a fair amount of attention since around 2013.More from our authors:
The post 10 Hot Topics for International Arbitration in 2017 appeared first on Kluwer Arbitration Blog.
Ricardo Guimarães and Raquel Galvão Silva
New years are a great opportunity to take stock and to prepare for future developments, despite the obvious difficulties in predicting what the main trends will be. This is also the case for 2017.
Looking back to 2016 there are two topics that immediately stand out: gender diversity and transparency. Both topics were subject to substantial discussion last year and the developments in these areas are likely to continue (or even increase) in 2017.
For gender diversity in international arbitration, last years’ highlight was without question the Equal Representation in Arbitration Pledge, which was launched in May and has been described as a turning point for gender diversity in arbitration. The Pledge follows the recognition by members of the arbitration community of the under-representation of women on international arbitral tribunals and establishes concrete and actionable steps aimed at ensuring that women are appointed as arbitrators on an equal opportunity basis.
As of the 9 January 2017, the pledge had 1620 signatories, including well-known law firms and arbitral institutions. In fact, arbitral institutions have had a valuable role in promoting greater gender diversity in arbitration panels, adopting specific policies for that effect and publishing annual statistics, thus enhancing transparency in this regard.
The ICC, for example, published in May 2016 a Note to the ICC National Committees and Groups about the selection of arbitrators, encouraging them to favor diversity, including of gender, in proposing candidates to become arbitrators. In addition, it published for the first time in 2016 statistics on gender representation in arbitral tribunals, showing that women arbitrators represented just over 10% of all appointments and confirmations in 2015. According to the same statistics, women were more frequently appointed or confirmed as co-arbitrators (43%) than they were as sole arbitrators (32%) or tribunal presidents (25%). Finally, the statistics show that parties were less likely to select women arbitrators than the ICC Court. These figures are in line with the statistics released by other arbitration centers, in particular the LCIA
It will be interesting to see the statistics for 2016, but it seems clear that the discussion on gender diversity in arbitration is far from over and we expect it to continue to be a hot topic in 2017, probably with parties more directly involved in the debate which will also probably focus more intensively in other forms of diversity besides gender. The ICSID report for 2016, for example, has just been released and it evidences a greater diversity in terms of geographies from which arbitrators have been appointed. Amongst other interesting trends, the report shows that the Western European appointments for annulment committees have declined – representing 42% of all appointments compared with 50% in 2015.
As in previous years, the balance between confidentiality and transparency in international arbitration was widely discussed in 2016 and such discussion is likely to continue.
This trend for a higher degree of transparency has been mainly happening in investor-state arbitrations, led by critics who perceive ICSID as a “secret court” in which investors can challenge a country’s laws or regulations if adverse to their investments.
In an effort to ensure greater transparency, several initiatives have been emerging such as (i) the United Nations Commission on International Trade Law (UNCITRAL) Rules on Transparency in investor-state arbitration, which became effective on 1 April 2014 and, unless the parties to the treaty have agreed otherwise, are applicable to all investor-state arbitrations initiated under the UNCITRAL Arbitration Rules; (ii) the UNCITRAL Transparency Registry, a repository for the publication of information and documents in treaty-based investor-State arbitration, and (iii) the Convention on Transparency in Treaty-based Investor-State Arbitration (the Mauritius Convention) which provides a mechanism by which states can express their consent to the application of the UNCITRAL Rules on Transparency, including in respect of treaties concluded before 1 April 2014.
In 2016 these initiatives were further developed. ICSID, for instance, began live-streaming hearings in investor-state cases and, in December 2016, Canada became the second country in the world to ratify the Mauritius Convention which now needs a third ratification before entering into force.
This movement for greater transparency is increasingly growing also in international commercial arbitration and arbitral institutions have been amending their rules and practice. The ICC, for example, started to publicize on its website the names of the arbitrators appointed to ICC cases, their nationality, as well as whether the appointment was made by the ICC Court or by the parties and which arbitrator is the tribunal chairperson. Although parties can, by mutual agreement, opt out of this limited disclosure, they may also request the Court to publish additional information about a particular case. In addition, in February 2016, the ICC Court adopted a guidance note for the disclosure of conflicts by arbitrators and the new ICC rules which will come into force on 1 March 2017 now state that any party can ask the ICC Court to provide reasons for its decisions (in particular on challenges of arbitrators).
Other institutions have been taking a similar path, with the LCIA for instance publishing a comprehensive analysis of cases to provide users with information on the average costs and duration of arbitrations and the SCC publishing a report detailing the size of disputes, their length and costs, and how tribunals allocate the costs of arbitration and the costs for legal representation.
The changes implemented in 2016 towards a higher degree of transparency were considerable but there seems to be room for improvement. The 2015 International Arbitration Survey organized by Queen Mary and White & Case suggested that the arbitration community would “welcome increased transparency in institutional decision-making”, especially in the appointment of, and challenges to, arbitrators”. At the same time, when asked about the three most valuable characteristics of international arbitration, 33% of the respondents said that one of the main reasons they choose arbitration is the confidentiality and privacy of the process. The challenge for 2017 will thus continue to be the need to strike the right balance between transparency, on the one hand, and confidentiality, on the other hand, avoiding to undermine the ability of parties choosing (for valid reasons) to keep the proceedings private.More from our authors:
Appellate arbitration clauses provide for an appellate mechanism against an award rendered between the concerned parties by subjecting the dispute through another arbitration to eliminate all potential errors and obtain correction of the same. Not all arbitration disputes are suitable for an appellate review. But in cases where parties place higher importance on the correctness of an award rather than on time and cost of arbitration, appellate arbitration clauses serve this purpose. The purpose served by such clauses can also be understood by appreciating how arbitral awards cannot be judicially reviewed on merits (Gary Born, International Arbitration: Law and Practice at 8, Kluwer Law Int’l 2012). Since the grounds on which an award may be challenged before a court remain limited, as can be seen from the UNCITRAL Model Law and the Indian Arbitration and Conciliation Act, 1996 (“1996 Act”), appellate arbitration clauses provide greater freedom of review of arbitral awards to parties resorting to them.
Recognizing the importance of such clauses, a three-judge bench of the Supreme Court of India (“Supreme Court”), delivered a judgment on December 15, 2016 upholding the legal validity of appellate arbitration clauses under the 1996 Act in the case of M/s Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd., Civil Appeal No. 2562 of 2006 (“Centrotrade”). In Centrotrade, the arbitration agreement contained a two-tiered arbitration procedure providing for a first instance institutional arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration (“ICA Rules”) to be held in India. In the event of disagreement between the parties in respect of the correctness of the first award, the arbitration agreement granted either party a right to appeal against the first award before an appellate tribunal to be constituted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce (“ICC Rules”), to be held in London. The law of the main contract was Indian law.
Centrotrade initiated arbitration against Hindustan Copper Ltd. The tribunal of the first instance delivered a “nil” award, which prompted Centrotrade to appeal, as permitted by the arbitration agreement. The appellate tribunal delivered an award in favour of Centrotrade, who thereafter commenced Indian enforcement proceedings against Hindustan Copper Ltd. The determination of the Supreme Court on the enforcement proceedings is still pending. Hindustan Copper Ltd. thereafter moved to challenge the legal validity of the appellate tribunal award before a division bench of the Supreme Court. The judgment of the Supreme Court is important for two reasons: first, the 1996 Act is modelled on the UNCITRAL Model Law and, hence, the present judgment could add to the developing jurisprudence on how national courts should assess appellate arbitration clauses. Second, since Part I of the 1996 Act is also applicable to international commercial arbitrations seated in India, the judgment could increase India’s prospects as an arbitration friendly destination.
The Supreme Court affirmed that the intention of the parties to reserve a right to an appellate review of the first award is unambiguously clear from the wording of the two tiered arbitration agreement. Notably, the apex court also observed that the 1996 Act, neither explicitly nor implicitly, bars parties to resort to appellate arbitration clauses. Second, the Supreme Court drew the distinction between legal and statutory right to appeal. In Centrotrade, the election of an arbitration appellate mechanism qualified as a legal right premised on an agreement between the parties. Thereafter, the Supreme Court held that UNCITRAL Model Law—and hence the 1996 Act—allows parties to an arbitration agreement to reserve their right to appeal against an award.
Although the said case is a strong reflection of a pro-arbitration approach, the following questions of importance remain unaddressed. First, whether Indian courts would entertain annulment or enforcement proceedings in respect of the first arbitral award pending its review by an appellate arbitral tribunal. In the interest of judicial economy and efficiency, this should not be allowed. A bar on initiation of annulment or enforcement proceedings as regards the first award would also ensure certainty regarding the fate of the appellate arbitral award, and the recourse available to parties thereafter. The said proposition finds approval under the JAMS Optional Arbitration Appeal Procedure, 2003 (“JAMS Appeal Procedure”); the Arbitration Appeal Procedure of International Institute of Conflict Prevention and Resolution, 2007 (“CPR Appeal Procedure”); and the Optional Appellate Rules of American Arbitral Association, 2013 (“AAA Optional Rules”). Rule (c) of the JAMS Appeal Procedure, Rule 2.3 of the CPR Appeal Procedure and Rule A-2(a) of the AAA Optional Rules provide for the same.
Second, it is important to determine the stage at which the limitation period for seeking an annulment or enforcement of an award would commence, i.e., whether the limitation period would commence from the date of the first award or from the date of the appellate award. Since it would be proper to allow annulment or enforcement proceedings to commence only against the appellate award, it follows that the limitation period should also commence from the date of the appellate award. While Rule (c) of the JAMS Appeal Procedure and Rule 2.3 of the CPR Appeal Procedure imply that the limitation period for initiating annulment/enforcement proceedings shall commence from the date of the appellate award, Rule A-2(a) of the AAA Optional Rules makes the said case expressly clear while reading – “…and the time period for commencement of judicial enforcement proceedings shall be tolled during the pendency of the appeal.”
Third, the Indian judiciary may need to address whether the 1996 Act permits remanding the dispute to the prior tribunal, owing to the principle of party autonomy. Strictly speaking, a tribunal rendering its final award is functus officio. The said aspect requires consideration as the JAMS Appeal Procedure, the CPR Appeal Procedure and the AAA Optional Rules forbid the appellate tribunal to remand the matter back to the prior tribunal. The issue has two sides to it, assuming the arbitration agreement is silent on the availability of remand. The probable benefit of remanding may entail the familiarity of the said tribunal with the dispute, thereby avoiding a scenario wherein an appellate tribunal would be required to consider the issues de novo. However, a potential drawback to parties arising from a remand would be that of losing out on an opportunity to have the dispute re-examined by a set of arbitrators with specified qualifications. Rule A-5(d) of the AAA Optional Rules provides for the latter.
Fourth, in cases where a two-tiered arbitration agreement resorts to an ad hoc arbitration, it would be interesting to explore the manner in which an appellate tribunal would be appointed where no express procedure for the same is provided in an agreement. Since the arbitration agreement in the Centrotrade case did not provide for any appointment procedure, the default procedures under the ICA and ICC Rules applied respectively. Two eventualities may arise out of such a situation. Either the Indian courts may require the parties to resort to the same procedure of appointment as agreed upon for the constitution of the first arbitral tribunal or they may require the party invoking the appellate procedure to proceed under Section 11 of the 1996 Act to seek a court assisted appointment of the appellate arbitral tribunal. Although a situation as contemplated above (appellate arbitration clauses providing for ad hoc arbitration without a procedure for appointment) would be peculiar, as parties resorting to such clauses can reasonably be expected to seek appellate arbitrators possessing expertise over the concerned subject matter of the dispute, it can never be entirely ruled out.
With the abovementioned issues remaining unsettled in the Indian legal sphere of arbitration, it would be apt to say that although the Indian judiciary has put its best foot forward while upholding the legal validity of appellate arbitration clauses, a testing journey of a thousand miles remains yet to be covered and successfully completed.More from our authors:
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Arbitration is an increasingly popular form of dispute resolution in the field of construction, particularly for international projects where parties are of different nationalities, and where at least one party is unlikely to be operating on home soil.
However, a commonly cited disadvantage of arbitration as opposed to court litigation is that there may not be sufficient time to constitute a tribunal where urgent relief is required, such as a without notice injunction to prevent the dissipation of assets. Traditionally, in such circumstances, the parties have had to turn to the national courts for assistance. The English Arbitration Act, for example, permits the courts to step in to grant emergency relief “if the case is one of urgency”.
To address this draw-back, in recent years, many of the leading arbitral institutions have amended their rules to provide for the appointment of an emergency arbitrator. Such provisions give parties the opportunity to seek urgent and interim relief from an arbitrator who is appointed by the institution in short order. Indeed, mirroring court proceedings, some institutional rules even permit the appointment of an emergency arbitrator before the notice of arbitration has been filed (such as the LCIA and ICC rules).
The perceived advantages of seeking relief from an arbitrator rather than a court are that (i) it is more consistent with the parties’ agreement to avoid approaching the national courts, especially if one party has concerns about the neutrality of a particular national court (ii) the key arbitral institutions are able to draw on a large pool of arbitrators and have the facilities to deal with applications on an urgent basis (iii) confining the dispute to arbitration maintains the confidentiality of the proceedings, which may not be the case once a reference has been made to court and (iv) as many jurisdictions prohibit foreign counsel from appearing before the courts, the appointment of an emergency arbitrator will not require the applicant party to instruct additional local counsel to deal with an ancillary court application.
Whilst the key benefit of appointing an emergency arbitrator over seeking relief from the main tribunal (once constituted) would of course be urgency, there is also the potential advantage that the emergency arbitrator is appointed on a one-off basis only, and will not form part of the main tribunal. Therefore, the perceived risk of any prejudgment of the merits that is often associated with seeking interim relief from the main tribunal is eliminated.
The types of relief that could be sought from an emergency arbitrator in a construction dispute are, for example, an award of security for claim, or the preservation of evidence or assets. There have also been cases where emergency arbitrator relief has been sought to prevent a party from calling on a performance bond or to suspend the application of liquidated damages (in circumstances where there is a corresponding contractual right to set-off amounts payable against those liquidated damages).
However, there are a number of limitations on the relief that an emergency arbitrator can grant. In particular, and in contrast to the relief available from court, typically it is not possible for an arbitrator to grant without notice relief – the other party must usually be notified. A party seeking a without notice freezing injunction to prevent the dissipation of assets would likely therefore still need to apply to the courts. Given the consensual nature of arbitration, it would also not be possible to seek from an emergency arbitrator any form of relief which would bind a third party, such as making premises available for inspection, or compelling the attendance of witnesses, as the arbitrator will only have jurisdiction as between the contracting parties.
A further – and overriding – consideration is the extent to which any order given by an emergency arbitrator would actually be enforceable and therefore effective. This is because only final, not interim, arbitral awards are enforceable under the New York Convention. As an award rendered by an emergency arbitrator can be varied or lifted by the main tribunal once constituted, there is an argument that it is not truly final and binding in accordance with Article V.1(e) of the Convention. As the New York Convention does not define an “arbitral award”, whether an award rendered by an emergency arbitrator could be recognised and enforced as if it were a court order is dependent on national legislation.
Notably, however, the position has been confirmed in Singapore by virtue of an amendment to the International Arbitration Act, which recognises and provides for the enforceability of orders and directions of emergency arbitrators – see the International Arbitration (Amendment) Act 2012. The Hong Kong Arbitration Ordinance has similarly been amended.
Although some institutions have included provisions which expressly confirm the binding nature of awards rendered by emergency arbitrators, this is unlikely to be sufficient in practice.
The question of whether interim relief granted by an arbitral tribunal would be effective was considered by the English court in the case of Starlight Shipping v Tai Ping Insurance against the background of Section 44(5) of the English Arbitration Act, which provides that a court shall only act “if or to the extent that the Arbitral Tribunal, and any arbitral or other institution or person vested by the parties with power in that regard, has no power or is unable for the time being to act effectively.” Although the decision in that case was not made in the context of awards granted by emergency arbitrators, the judge held that whilst an arbitral tribunal could act effectively by rendering a final award, this was not the case for an interim award, which would not be enforceable under the New York Convention.
In addition to the question of enforceability, unlike the court, an emergency arbitrator cannot hold a recalcitrant party in contempt for failing to comply with an order or undertaking. The threat of contempt, and the corresponding criminal proceedings, are powerful tools in securing compliance with an order. Therefore, even if an emergency arbitrator were to grant a mandatory injunction requiring remedial works to be carried out, a site to be vacated, or even a freezing injunction, any non-compliance could not ultimately be enforced by the arbitrator in the same way.
The uncertainty regarding enforcement or non-compliance is not to say, however, that the award itself would not be sufficient to cause the recalcitrant party’s compliance. Non-compliance with an emergency arbitrator’s decision would no doubt influence the main tribunal’s perception of that party once the proceedings commence in earnest and could have a corresponding impact on the final award.
Despite some limitations concerning emergency arbitrator relief, the recent English case of Gerald Metals v Timis also suggests that there are some circumstances where, if emergency arbitrator relief is available, a party could be precluded from obtaining that relief from court. In that case, it was held that the court’s powers should only be exercised either owing to urgent circumstances which could not wait for an emergency arbitrator to be appointed or where the powers of the emergency arbitrator were inadequate. Following this case, parties must give serious thought to whether appropriate relief can be granted by an emergency arbitrator before going directly to the courts.
In the context of international construction projects governed by FIDIC contracts, there is also the question of the role of Dispute Adjudication Boards (“DAB’s”) in settling disputes and providing relief. As the DAB procedure pre-dates the more recent phenomenon of emergency arbitrators, its interaction with emergency arbitrator relief is uncertain. The role of the DAB is of course distinct from emergency arbitrator relief: the DAB is frequently on-hand throughout the life of the project, and, where this is the case, given its proximity to the issues, its opinion is usually trusted and respected by the parties. Any DAB decision will lead to finality unless a notice of dissatisfaction is served. In contrast, the emergency arbitrator process is always a precursor to arbitration: as above, its award can be varied or lifted by the main tribunal once constituted.
In circumstances where the parties have agreed to mandatory DAB procedure with an optional reference to arbitration, some interesting questions arise concerning the appropriate forum for interim relief. Where there has been a DAB decision followed by a notice of dissatisfaction, when can a party commence emergency arbitration? Would an emergency arbitrator have jurisdiction, or should that relief be directed back to the DAB? Can a party apply to an emergency arbitrator during the 56-day cooling-off period after notice of dissatisfaction for the purposes of amicable settlement contained in clause 20.5 of FIDIC? This may be relevant, for example, if there is a risk of deliberate asset dissipation following the DAB decision (as by that point, the losing party will know that a DAB is against them and might also be worried about its prospects of success before an arbitral tribunal).
For contracts which anticipate the appointment of a DAB but such appointment is not mandatory, can a party proceed directly to emergency arbitration without first approaching the DAB? Although there is no authority on the point, it is likely that an emergency arbitrator would decline to step in and grant relief unless the DAB were unable to act effectively. Where the DAB’s role to be on-hand during the life of the project, it would arguably be best-placed to determine interim disputes. Parties may wish to consider such issues when they are drafting their dispute resolution clauses in order to ensure certainty in circumstances where multiple fora could have concurrent jurisdiction over a dispute.
There is no doubt that the availability of relief from a number of different fora is a good thing for construction parties, as it enables them to seek adequate and appropriate protection of their arbitration claims, whether from a court, emergency arbitrator, main arbitral tribunal or in some cases an adjudicator/adjudication board. However, parties in need of relief must ensure that they are not literally “spoilt for choice”. Now more than ever, they must give careful thought to the type of relief they need and who is best-placed to grant it at that particular time, or else risk wasted applications which are either fruitless or inherently ineffective.
More from our authors:
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From mediation competitions in Panjim, India and Paris, a proposed mediation law in Lithuania and an exploration of how Game Theory might help us better analyse the role of mediator, the month of January saw the usual breadth of topics on the Kluwer Mediation Blog. Perhaps one of the following posts may take your fancy:
In Chunking Up and Down – advice for those preparing for the ICC Mediation Competition in Paris Geoff Sharp explains two approaches to thinking through a problem: chunking up (going to the bigger broader chunks of thought) and chunking down (going to smaller more detailed chunks of thought). This is useful advice for the participants of the ICC Mediation Competition and for us all.
In New Year’s Resolutions for Mediators, Sabine Walsh shares her mediation resolutions for the coming year including to practise reflective practice more and to continue acquiring new skills.
In Winners and Losers, Christopher Cox draws on his experience as a solicitor to identify the difference which a mediator can make to a seemingly unresolvable dispute.
In Of Superheroes, Mere Mortals and Saving the World, Joel Lee and Joshua Lau consider the superpowers of everyday heroes including many skills which are witnessed or encouraged in mediation.
In Mediation Reform in Lithuania – has it failed?, Tadas Varapnickas offers a summary of the proposed law on mediation in Lithuania and identifies the challenges which this law faces.
In Lex Infinitum – Talking Mediation in India, Greg Bond draws on his recent experience at Lex Infinitum 2017 International Dispute Resolution Competition and shares the views and voices of some of those whom he met at the competition.
In “To be truly radical is to make hope possible, rather than despair convincing,”
Ian Macduff explores how we might expand our view of the value that is on the table both at the ICC Mediation Competition 2017 and, more broadly, in the world of international commercial mediation.
Last but by no means least, in Game Theory and Mediation: Adding Real Value?, John and David Sturrock consider how Game Theory might help us better analyse aspects of the role of mediator, up until now perhaps understood tacitly and pursued on instinct and experience.More from our authors:
Arbitration has become a preferred method for the resolution of international commercial disputes in Russia, mostly thanks to the activities of the Moscow-based International Commercial Arbitration Court (“ICAC“, the Russian acronym “MKAS“) at the RF Chamber of Commerce and Industry. Established in 1932 as the Foreign Trade Arbitration Commission placed under the USSR National Chamber of Commerce, the ICAC handled 22 cases in 1939, including 7 disputes involving English companies.
In 2014-2015, the ICAC caseload reached 495 international arbitration case filings, including 40 disputes involving companies from Germany, 26 from China, 15 from the United States, and 13 from the United Kingdom (A.N. Zhiltsov, Review of ICAC Practice for 2014-2015 (in Russian), in: International Commercial Arbitration Review, 2016, Issue 2). These numbers established the position of the ICAC as the largest international arbitration service provider in Eastern Europe.
The revision of the 2005 ICAC Rules was inevitable to bring them in line with mandatory rules set out by the reformed Russian arbitration law. In competitive markets, arbitration rules should regularly be updated to accommodate demands of institutional arbitration users. For example, since 2005, other renowned arbitral institutions (e.g., in New York, London, and Paris) reviewed their rules, and some of these institutions reviewed them even more than once (in Hong Kong, Stockholm, Vienna, and Singapore). A healthy ambition to reflect the best of modern arbitration practices became a driving factor for the reconsideration of the ICAC Rules as well.
Under auspices of this ambition, the ICAC recently published the revised ICAC International Commercial Arbitration Rules (“2017 ICAC Rules”) (see the Russian version here), which came into force on 27 January 2017 (the date of their filing with the Russian Ministry of Justice).
This post offers an overview of the 2017 ICAC rules. Some of the key features of revised arbitration procedure are reflected in provisions on the commencement of arbitration, formation and challenge of a tribunal, legal representatives, organization of proceedings, expedited procedure, and complex arbitrations. As the 2017 ICAC Rules are a part of a broader regulatory reform at the ICAC, before presenting these key features, a brief overview of the overall changes in the ICAC regulations is provided:
A Brief Overview of the Changes in the ICAC Regulations
The ICAC legal status is governed by the statutory ICAC Regulations, attached to the Russian International Arbitration Act. The 2017 ICAC Organizational Principles Regulations complements these statutory regulations by governing the status of arbitrators, the organization of ICAC bodies, and other general issues.
Due to the ICAC merger with the Arbitration Court and the Sports Arbitration Court, two further specialized sets of rules were approved – the 2017 ICAC Domestic Arbitration Rules and the 2017 ICAC Sports Arbitration Rules.
When considering arbitration in Russia, it is also necessary to notice a particular approach to corporate arbitration, discussed already at the Kluwer Blog (see more here and here). As a consequence of this newly developed approach, the ICAC adopted the 2017 ICAC Corporate Law Disputes Arbitration Rules.
Furthermore, the ICAC introduced short rules governing the administration of ad hoc arbitrations, which might apply to those cases that fall under the 2010 or 1976 UNCITRAL Arbitration Rules. Apart from the appointment and removal of arbitrators, the ICAC’s organizational support in ad hoc arbitrations may include the circulation of submissions, tribunal secretary service, arrangement of oral hearings, arrangement of hearing and meeting rooms, administration of the payment of fees to arbitrators, certification of arbitrators’ signatures on awards, and similar.
Finally, the ICAC Schedule of Arbitration Costs was updated and the ICAC Regulations for the Payment of Arbitrator’s Fees and Arbitration Administration Fees were adopted.
Key Changes of the 2017 ICAC Rules
The Commencement of Arbitration
As under the previous regime, arbitration proceedings before the ICAC are commenced upon:
- the delivery of a full-framed statement of claim, and
- the payment of a non-refundable registration fee of $1,000.
Those actions shall suspend the running of a limitation statute period and the applicable version of the ICAC Rules will be determined accordingly. To be precise, the applicable version will be the version in effect at the time of the commencement of arbitration. Any defects of a statement of claim should be remedied upon the Executive Secretary’ request within a 15-day time limit.
The Appointment of a Tribunal
As a default rule, the 2017 ICAC Rules provide for a three-member tribunal, unless the aggregate claim amount in dispute falls below $50,000. In that case, the dispute will be decided by a sole arbitrator (cca. 30% of ICAC cases).
To follow-up on the Dutco case, it is envisaged that when there are more than two parties and the dispute is referred to three arbitrators, the group of claimants and the group of respondents shall each designate an arbitrator. In the event of any failure to designate an arbitrator by one of the groups, the arbitrator shall be appointed by the Appointment Committee, which, simultaneously, may at its sole discretion appoint an arbitrator for the counter-party as well.
The Challenge of Arbitrators
Either party may challenge an arbitrator if circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence, or if an arbitrator lacks qualifications set out by the parties’ agreement or applicable law.
A 15-day time limit for challenging an arbitrator may be prolonged by the Appointment Committee when there is a valid excuse for the omission of the time limit, or depending on the nature of a challenge ground. Namely, some challenge grounds, comparable to Non-Waivable Red List grounds, can be invoked at any stage. These grounds are included into Clause 5 of the Rules for Arbitrators’ Impartiality and Independence оf 27.08.2010 No. 39, and they are modeled according to the 2004 IBA Guidelines on Conflicts of Interest in International Arbitration.
Following the trend set by Article 18 of the 2014 London Court of International Arbitration Rules, each party shall ensure that its representative is acting in compliance with the ICAC Rules. When authorizing its representative, the party shall thereby confirm that the legal representative has agreed to such compliance. Non-compliance may result in a negative allocation of arbitration costs, an issuance of a written reprimand, or in an offer to the party to substitute its representative.
Any party should provide information on any intended change in regard to its legal representation, and such changes are prohibited after the tribunal’s formation if such a change could give rise to the grounds for the challenge of an arbitrator, or it could lead to the annulment of an award.
The Organization of Arbitration Proceedings
A tribunal’s chair may, upon consultation with co-arbitrators, establish a procedural timetable setting out procedure and time limits for filing of additional pleadings and evidences, and he/ she may arrange a case management conference.
Interestingly, keeping the records of hearings is not compulsory anymore. Only where the tribunal considers it expedient, the records will be prepared. In practice, this document may serve in annulment proceedings as evidence for an (im)properly held arbitral hearing. Thus, the parties are advised to early apply for completing the records and to consent to audio recording to ensure that the proper summary of the progress of a hearing is kept.
Expedited Arbitration Procedure
A time limit for issuing an award amounts to 180 days from the formation of tribunal. An expedited procedure should decrease this limit to 120 days. A fast-track procedure will automatically be employed where the aggregate claim amount does not exceed $50,000. Its key features are as follows:
- a dispute is decided by a sole arbitrator,
- only one round of pleadings is held, and
- an oral hearing is held only upon a party’s special request, or based on the arbitrator’s decision.
Multi-Contract and Multi-Party Arbitration
By designating the 2017 ICAC Rules, parties agree to apply its new provisions on single arbitration under multiple contracts, consolidation of arbitrations, joinder of additional parties (co-claimants and co-respondents), and intervention of non-parties (intervenors).
For example, claims arising out of multiple contracts or directed against several parties may be made in a single statement of claim even where the claims are covered by different arbitration agreements provided that the arbitration agreements “are compatible in content and are linked from the standpoint of substantive law”.
Upon the request of a party, the ICAC Presidium may consolidate pending arbitration where
(i) all parties agree;
(ii) all claims are made under the same arbitration agreement and there are no other obstacles for consolidation; or
(iii) the claims are covered by different arbitration agreements provided that the arbitration agreements “are compatible in content and are linked from standpoint of substantive law”.
Some other factors, such as at which stage are the proceedings at the moment of consolidation, a risk for approval of contradictory awards, and efficiency of the proceedings, should be given attention when deciding whether to consolidate cases or not. Consolidation shall be deemed impossible without the parties’ consent when different arbitrators have already been appointed for the pending arbitrations.
The adoption of the 2017 Rules shows the ICAC’s commitment to nurturing its status of the largest arbitration service provider in this part of Europe. These rules implement some of the best international practices and, consequently, it is expected that they will serve well the further promotion of arbitration in Russia.More from our authors:
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A Recent Latin -American Example of the Increasing Recurrence of Multiple Proceedings in International Arbitration
Julián Bordacahar, MIDS
In Scherk v. Alberto-Culver Co, the US Supreme Court stated that “[a] contractual provision specifying in advance the forum in which disputes shall be litigated and the law to be applied is an almost indispensable precondition to achievement of the orderliness and predictability essential to any international business transaction.” While this statement holds almost invariably true in the majority of cases, a recent example proves that this is not always the case. This post discusses one of the most exciting and complex international arbitration cases in Latin America.
The case involved the consolidation of three different related arbitrations, parallel judicial proceedings in different jurisdictions, the issuance of conflicting interim measures, anti-arbitration injunctions, the annulment of procedural orders, the setting aside of the arbitral award, recognition proceedings of said award, among others. The result, an arbitral tribunal confronted with the seemingly impossible task of having to comply with contradictory judicial orders and endless difficulties to fulfill its task of rendering an enforceable award. And yet, this epic litigation journey may not be over yet.
In the very interesting (and still unresolved) case of YPF v AESU, SULGAS and TGM, a dispute arose under a multilateral Gas Supply Agreement (the “GSA”) concluded between two major Latin-American Oil & Gas companies (YPF and Petrobras) and several other Brazilian and Argentine distribution and transport companies. The gas would be imported from Argentina to Brazil for the construction of a thermal power plant fueled by natural gas in the Brazilian city of Uruguaiana.
The GSA contained a somewhat unusual ICC arbitration clause. While it provided for the place of arbitration to be in Montevideo, Uruguay, and that any award rendered shall be final and binding, it also stated that the only recourses available against any award would be motions for clarification and/or annulment under Article 760 of the Civil and Commercial Procedure Code of Argentina, which shall be filed exclusively before the courts and in accordance with Argentinean laws (the “Choice of Forum Clause”).
A series of disputes eventually arose in 2008 and 2009 and three different arbitration proceedings were commenced, which were later consolidated into one. Hence, all the parties assumed the role of claimants and respondents simultaneously involving an aggregate amount at stake of approximately US$ 1.6 billion. They agreed to bifurcate the proceedings into liability and damages stages. In May 2013, the arbitral tribunal issued a final partial liability award against YPF.
As a result, parallel judicial proceedings were commenced (i) by YPF before Argentinean courts –the agreed forum– (set aside action and anti-arbitration injunction); and (ii) by the winning parties before Uruguayan courts –the courts of the seat– (declaratory relief as to the exclusive jurisdiction of the courts of the seat to the exclusion of the chosen ones and injunction for the arbitral proceedings to continue).
Court Proceedings and Award on Damages
As a consequence, national courts from Argentina and Uruguay issued conflicting judgments. They each declared that they had exclusive jurisdiction and issued contradictory interim measures. While the Argentinean court ordered the tribunal to stay the arbitration, the Uruguayan court order it to resume it. Furthermore, even though no annulment action ever took place at the seat, the Argentinean court eventually vacated the award in November 2014. Irrespective of this, in April 2016, the arbitral tribunal issued its final award ordering YPF to pay approximately US$ 185 million to AESU and SULGAS and US$ 319 million to TGM. Nonetheless, YPF also challenged this award in Argentina.
While the Uruguayan judgment on exclusive jurisdiction is final, the Argentinean judgment has been challenged before Argentina’s Supreme Court, who has not ruled yet on whether it will hear the challenge or not. Finally, on May 2016, AESU and SULGAS initiated recognition proceedings of the liability award in the courts of New York. However, no decision was ever rendered because it was recently made public that YPF, AESU and SULGAS had settled.
General Comments on the Choice of Forum Clause
This case raises a very interesting question: are parties allowed to agree that courts, other than those of the seat of arbitration, will have exclusive jurisdiction over the challenge of an award?
Despite acknowledging that parties have ample autonomy, the Uruguayan court held that parties are not allowed to confer jurisdiction to courts other than those of the seat. The mere choosing of a seat has the unavoidable consequence of applying the seat’s lex arbitri because arbitrations are “localized” and, hence, establish jurisdiction at the seat. This is true even in the rare cases where parties may decide to choose other procedural law, which despite arguably indicating that the award should carry said law’s nationality, does not suffice to deprive the award from carrying the seat’s nationality.
Moreover, no accumulation of jurisdiction can be permitted neither under the Panama Convention on International Commercial Arbitration (“Panama Convention”) nor the New York Convention (“NY Convention”). In addition, Article 22(1) of the Mercosur Convention on International Commercial Arbitration enshrines the “unity of jurisdiction” principle providing exclusive jurisdiction to the courts of the seat. As a result, the Choice of Forum Clause of Argentinean courts had no effect at all.
In contrast, the Argentinean court ruled that international arbitrations are not prima facie subject to any national legal system. It further noted that it was undisputed that (a) it was agreed that Argentinean courts would have exclusive jurisdiction; and (b) party autonomy is the cornerstone of arbitration. Since no violation of international public policy had occurred, the court held, such autonomy must be respected.
Furthermore, because the Mercosur Convention entered into force after the GSA was concluded, it did not apply to the validity of the Choice of Forum Clause or, in any event, the parties were allowed to deviate from the provision which attributes jurisdiction to the courts of the seat. Finally, neither the Panama Convention nor the NY Convention prohibit –directly or indirectly– the choice of a forum other than the seat.
Because of the particularities of this case, it would have certainly been interesting to see the outcome of the recognition proceedings in New York. On the one hand, the parties clearly chose Argentinean courts to have the exclusive final say on the award’s validity, and said courts annulled it. To the extent that such choice is not considered invalid (which is certainly controversial), it could be argued that it should only be fair for the parties to respect the decision of the mutually agreed forum.
On the other hand, however, even if arguendo, such agreement was valid, said award may arguably still be recognized under the NY Convention (or the Panama Convention) because it could also be argued that the Argentinean court is simply not the “competent authority of the State in which, or according to the law of which, the decision has been made”. Nonetheless, because one of the wining parties, TGM, could still commence recognition and enforcement proceedings, the outcome of this issue remains open.
This case is also another clear example of divergent (and conflicting) interpretations by state courts of the NY Convention, as well as of the lack of dialogue and cooperation between different national courts hearing the same dispute. The case involved complex factual and legal issues, including intricate private as well as public international law questions. All this in the context of a multimillion high-stake dispute arising out of a sensitive natural resources’ area as the gas industry, and involving both multinational corporations as well as state-owned entities. Yet, both courts showed indifference to the ongoing proceedings taking place in the other State.
In this vein, neither court decided to consider the fact that the other was also hearing the same case, or the possibility to stay its proceedings pending the outcome of the other, and no considerations of comity or mutual respect were even mentioned. Moreover, given that the interpretation of Mercosur Law was at the heart of the validity of the Choice of Forum Clause, both courts could have made use of the possibility to request a non-binding advisory opinion from the Mercosur Permanent Review Tribunal as suggested by the dissenting judge of the Argentinean Court of Appeals. However, neither of them did.
Because of the increasing complexities involved in modern cross-border dispute settlement, every adjudication body should make use of any available tool which facilities the coordination of parallel proceedings, even though these may still fall short of being able to provide efficient and predictable outcomes. Among other issues, multiple proceedings increase litigation costs, may lead to delays, create the risk of contradictory decisions, double recovery, among others. It is clear that one of the critical challenges of our time is to find better ways for national and international courts and tribunals to be better equipped to deal with these issues.
All in all, while it is fair to concede that the case discussed in this post is somewhat unique because of the unusual drafting of the arbitration clause, it also constitutes another example showing the growing recurrence of parallel proceedings taking place in modern international dispute settlement and the various legal and practical complexities which they raise.More from our authors:
Daniela Páez-Salgado (Assistant Editor for South America) and Zach Li, FTI Consulting
On December 21, 2016, the Tribunal in Hochtief v Argentina issued an award on damages against Argentina in an arbitration brought under the Argentina-Germany BIT. The Claimant had alleged multiple treaty breaches by Argentina, arising out of the 2000 economic crisis, and originally sought US$ 54 million in damages. Although the Tribunal found that Argentina had violated the fair and equitable treatment clause, the damages award was only US$ 13.41 million.
A consortium of five companies, including Hochtief, a German construction company, participated in a bidding process for the construction of a toll highway and a bridge in Argentina. The consortium was granted the concession in 1998. The Concession Contract required the consortium to incorporate a local company for the purpose of performing the contract. Consequently, the consortium created Puentes del Litoral S.A. (“PdL”), with the consortium members as PdL’s shareholders.
Under the Concession Contract, PdL was entitled to a basic toll rate and an adjustment mechanism to absorb the effects of inflation in Argentina. In 2002, in the midst of the Argentinean economic crisis, the Government passed the Emergency Law (the “Law”). Hochtief alleged that the Law eliminated the rights guaranteed in the Concession Contract and destroyed the project’s viability. PdL was unable to fulfill its obligations to third parties, and in 2007 it initiated bankruptcy proceedings. Hochtief then brought the treaty claim for the diminution in the value of its investment in PdL.
Around the same time, the Government started a renegotiation process with PdL. In 2012, PdL and the majority of its shareholders entered into a Transitory Agreement with the Government to settle its claims. Despite that agreement, the Tribunal found, in 2014, that the Government’s conduct violated the BIT’s fair and equitable treatment provision, due to the Respondent’s failure to redress the commercial balance of the contract after the pesificación.
To calculate the compensation owed to Hochtief, the Tribunal calculated the loss of value of its shareholding (26 percent) in PdL. The loss of value of the subsidiary, according to the Tribunal, included “the sums that [the subsidiary] should have received if pesification had not occurred and if the toll rates had been revised annually.” (Decision on Liability, ¶316).
The Decision on Liability also directed the parties to attempt to agree among themselves on the proper amount of damages. When the parties failed to reach agreement, they went back to the Tribunal for a final decision. The Claimant took this opportunity to apply for reconsideration of the Tribunal’s prior pre-judgment interest determination. However, the Tribunal denied the application.
International arbitral tribunals commonly direct the parties’ quantum experts to engage in a joint meeting, where they can determine their points of agreement and disagreement without intervention by counsel. These joint meetings usually take place after the submission of the experts’ first or reply reports, but in advance of the hearing on quantum, so that the experts can file a joint report in which it is hoped that they can narrow some fo their differences. Indeed, it is not uncommon for the experts to make certain concessions, which aid the arbitrators in their determination of damages. Notably, however, in Hochtief v Argentina, the Tribunal directed the Parties, not the experts, to agree on a sum.
As to the pre-judgment interest issue, the Claimant argued that the rates of short-term US Treasury Bills (total damages of US$ 54 million) specified in the Decision on Liability did not allow for full reparation of its losses. The Claimant provided two alternatives:(i) pre-judgment interest rate calculated based on the Claimant’s weighted average cost of capital (total damages of US$ 103 million); or (ii) commercial interest rate, as referred to in Article 4(2) of the BIT (total damages of US$ 72.8 million).
While many bilateral investment treaties have a clause that specifies the applicable pre-judgment interest rate under a lawful expropriation, the treaties often do not prescribe such a rate in cases of unlawful expropriation. In addition, the determination of the proper pre-judgment interest rate is often perceived as a pure legal matter. The combination of these factors has led to a multiplicity of approaches in investment arbitration case law. Two of the most significant approaches to date are the return on alternative investments approach and the corporate borrowing rate approach.
The return on alternative investments approach is probably the most frequently selected. It embraces the rationale that claimants should be compensated based on an interest rate that reflects the return they could have otherwise achieved if they were given the opportunity to invest in an alternative investment. Common benchmarks selected by tribunals under this approach are short-term US treasury bills or US government bond yields, rates in the financial markets, or other indicators that they deem as a fair proxy.
The corporate borrowing rate approach, on the other hand, bases the pre-judgment interest rate on the interest rate that the claimant must pay based on its credit rating, ability to access capital markets and other market considerations. In addition, tribunals have also awarded pre-judgment interest based on the host state’s legislation. On a few occasions, tribunals have adopted a pre-judgment interest rate based on exercise of judgment that they deemed to be reasonable, fair, and appropriate.
With respect to the two alternatives that the Claimant advanced, the Tribunal found no reason to modify its previous decision. Further, the Tribunal specified that one-year US Treasury Bills provided the applicable pre-judgment interest rate.
Regarding the Tribunal’s assessment of the parties’ calculation on damages with respect to Claimant’s entitlement of 26% of the damages caused to PdL by the State, the Tribunal noted that the Claimant interpreted the Decision on Liability to mean that it was entitled to 26% of PdL’s direct cash flow. The Tribunal found that this interpretation was in fact contrary to the approach that it had adopted in the Decision on Liability, which was for the calculation to include the impact of PdL’s financial obligations on its performance.
The Tribunal generally agreed with the main points made by State’s experts. Specifically, the Tribunal found that the Claimant’s expert calculated the value of the Claimant’s investment in PdL instead of the Claimant’s share of the value of PdL. This finding appears to be consistent with the State’s argument regarding Claimant’s change in valuation methodology from “Free Cash Flow to Equity” to “Free Cash Flow to Firm”. Further, the Tribunal found that the Claimant’s expert excluded the repayment of PdL’s debt from the “but-for” cash flows to the shareholders. This finding appears to accept the State’s position that the Claimant’s valuation included compensation for the Claimant’s credit’s claims.
Thus, the Tribunal concluded that the Claimant was only entitled to an award of US$ 13.41 million for the diminution in the value of the Claimant’s shareholding in PdL caused by State’s breach of the BIT.
With respect to the parties’ calculation regarding the compensation that the Claimant would have received if pesification had not occurred and if the toll rates had been revised annually, the Tribunal determined that the cost incurred by the Claimant would not have been pesified during the relevant period. Therefore, the Tribunal rejected the Claimant’s claim for US$ 4 million.
Finally, and of considerable interest to arbitration practitioners, the Tribunal sanctioned the Claimant on costs on the grounds that its expert had disobeyed the Tribunal’s instructions as set out in the Decision on Liability. It is highly unusual for a tribunal to punish a prevailing party by reducing its costs due to the misbehavior of its expert. A tribunal might do so in cases where, for example, counsel instructed an expert not to address an issue that counsel knew to be material or relevant to the dispute. Additionally, the IBA Guidelines on Party Representation in International Arbitration, Guidelines 26 and 27, explain that a costs sanction may be appropriate when a party has extended the proceedings through frivolous applications. Specifically, Guideline 26(c) states that the arbitrators may “consider the party’s representative misconduct in apportioning the costs of the arbitration.” (See a further analysis of counsel misconduct in a prior post here). Hochtief v Argentina takes this guidance one step further: the arbitrators may also consider the parties’ quantum experts’ misconduct in apportioning the costs of the arbitration.More from our authors:
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Anja Havedal Ipp
Nearly one hundred climate scientists, economists, policy specialists, investors, and lawyers recently convened in Stockholm for the conference “Bridging the Climate Change Policy Gap: The Role of International Law and Arbitration” organized jointly by the Arbitration Institute of the Stockholm Chamber of Commerce (“the SCC”), the International Bar Association, the International Chamber of Commerce and the Permanent Court of Arbitration. The conference explored whether international law could bridge the gap between the objectives and the outcomes of international climate change agreements – and whether arbitration could serve as an enforcement mechanism in the climate change context. A report from the conference is available on the SCC website.
Building on the momentum created at the conference, the SCC will now continue working toward a sustainable future through the Stockholm Treaty Lab. The aim of this new initiative is set high: The drafting of a new model international treaty that will encourage investment in climate change mitigation and adaptation. A treaty that, if implemented, would create transparent, stable and enforceable investment policy regimes and encourage investors to fund low-carbon projects, support technological innovation, and otherwise invest in a sustainable future.
The agendas for curbing global warming that were laid out in the 2015 Paris Agreement and Sustainable Development Goals will require investments amounting to trillions of dollars across the globe. Renewable energy must become even more affordable and available; energy-efficient transportation will be needed to carry an increasingly mobile world population; sustainable agriculture and forest restoration must substitute unsustainable land use and deforestation; and climate-resilient infrastructures must be built where global warming and rising sea levels already put communities at risk. To some extent, the technologies necessary already exist – solar and wind power, energy-efficient vehicles, and carbon capture and storage – but enormous investments are needed to deploy these on a meaningful scale. In other areas, investments are needed to support the innovation of new technologies where existing ones fall short.
A recurring theme among the speakers and participants at the conference in Stockholm was that although the money for these “green” investments exists, investors are hesitant to deploy their funds in the absence of stable and transparent legal frameworks, including neutral and reliable enforcement mechanisms. Nonetheless, no international legal instrument exists that specifically incentivizes and protects cross-border investments aimed at climate change mitigation and adaptation.
It is against this background that the SCC is launching the Stockholm Treaty Lab – an innovation contest where the grand prize will be awarded to the contestant team that drafts the model treaty with the greatest potential to increase investments in climate change adaptation and mitigation. The SCC envisions that contestants will draw inspiration from the existing regime of international investment agreements, which encourages foreign investments by ensuring market liberalization, fair treatment of investors, and neutral enforcement through arbitration.
Kluwer Arbitration has produced a short video introducing the Stockholm Treaty Lab (viewable also below), featuring SCC Secretary General Annette Magnusson and SCC Chairman Kaj Hobér. More information on the initiative is also available on the SCC website.
The SCC plans to launch the contest in March 2017.More from our authors:
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