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Brazil Warms To The Global Procurement Market Further With New Chile Treaty, But Still No Arbitration For Investors

Fri, 2018-10-19 01:22

Natalie Yarrow and Pedro Henrique Martins

Herbert Smith Freehills

Brazil has been notoriously reluctant to enter into treaties with other States that provide for the protection of investors and investments, viewing them as detrimental to the host State and its national investors. Brazil has no bilateral investment treaties in force, a limited number of its own treaties, named Cooperation and Facilitation Investment Agreements (CFIAs), and is not a signatory to the International Centre for Settlement of Investment Disputes Convention (ICSID Convention). To date, however, this approach has not limited Brazil’s attractiveness to foreign investment, with Brazil being a leading recipient of foreign direct investment.

Yet over the last few years, Brazil’s attitude towards agreements aimed at promoting investment has softened as its own national industries have eyed up opportunities in foreign markets. We have recently seen Brazil enter into a suite of public procurement agreements (PPAs). These PPAs aim to ensure open, fair and transparent conditions of competition in the government procurement markets. Chile is the latest State to enter into a PPA with Brazil, which provides rules for the mutual increase in the participation of Chilean and Brazilian companies in public procurement bids by establishing bilateral equal treatment and internationalisation of procedures.

Brazil’s PPAs represent an interesting approach to tapping into the global public procurement market, a move which has the potential of unlocking billions in revenue, while remaining outside the traditional model of investment agreements. While they include some investor-friendly provisions, they nevertheless limit the direct recourse of investors against the State. The Chilean PPA is silent on dispute resolution, and the Chilean CFIA, whose definition of investment would likely encompass public procurement contracts, reserves arbitration for States only. As such, investors with qualifying contracts under the Chilean PPA will be confined to pursuing any dispute through the national courts or by escalating the dispute to the State level.

Background

Earlier this year, Brazil executed the Acordo de Contratação Pública entre a República Federativa do Brasil e a República do Chile, the PPA with Chile, which aims to expand bilateral trade between the two countries with regard to public procurement processes. This follows the execution of the same type of agreement with the Mercosur (comprising Brazil, Uruguay, Argentina and Paraguay) in December 2017, and with Peru in April 2016, the latter being included within a broader agreement comprising provisions related to investments and services. All three PPAs will enter into force in January 2019. Additionally, the Brazilian government has reported that it is currently negotiating further agreements pertaining to public procurement provisions with Mexico, the European Union and the European Free Trade Association.

In addition to this, Brazil has been an observing member of the Government Procurement Agreement (GPA) since August 2017. The GPA is a plurilateral agreement within the framework of the World Trade Organization whose goal is to open public procurement markets mutually among its State parties.

These events form part of a move of the Brazilian government to enter into the global public procurement market, which is estimated to generate USD 3.4 trillion per year. In the past decades, Brazil has been reluctant to open its internal market for foreign providers of goods and services out of fears that granting the equivalent treatment to foreign companies as that given to Brazilian ones could prevent or hinder its discretion to foster its national industries. This perception seems to have shifted, however, due to the bilateral nature of PPAs allowing Brazilian companies to expand their portfolio abroad. According to the National Confederation of Industry of Brazil, Argentina alone offers a USD 81.5bn market to Brazilian investors, followed by Peru (USD 12bn) and Chile (USD 11bn). That, together with the other countries of the Mercosur, leaves a USB 109bn potential market waiting to be accessed. Furthermore, if the remaining agreements currently under negotiation are signed, this could pave the way for an estimated USD 2trn in public procurements.

Key protections and features of the PPAs

National treatment

As a means to achieving this greater participation in the global public procurement market, the PPAs provide a legal framework that aims to place international companies on a level playing field with Brazilian companies with regard to their competitiveness as well as to facilitate their participation in public bids. The PPAs therefore include specific provisions with regard to national treatment and non-discrimination (Article V(1)(2) of the Chilean PPA; Article 4.4(2) of the Peruvian PPA and Article 6 of the Mercosur PPA), stating that “immediate and unconditional” treatment shall be granted to goods/services providers of the parties in relation to any contracts covered by the relevant PPA.

Non-preferential rules of origin

In the past, many have viewed preference margins as the greatest obstacle to foreign investors seeking to do business with the Brazilian government. In an attempt to tackle this, a specific provision has been included in the PPAs to establish that the parties shall apply the non-preferential rules of origin provided for in Article 1.2 of the Agreement on Rules of Origin of the WTO to contracts covered by the PPAs (Article 12 of the Chilean PPA; Article 7 of the Peruvian PPA and Article 7 of the Mercosur PPA). The WTO Agreement on Rules of Origin determines the country of origin of a product for purposes of international trade. Non-preferential rules of origin are those which apply in the absence of any trade preference — that is, when trade is conducted on a most-favoured nation basis. In Brazil, the general law applicable to public procurement processes is Law n. 8,666/1993. Article 3 allows the Brazilian government to exercise discretion over how it wishes to develop its national industry, providing, for example, the possibility of establishing preference margins that allow national products and/or services to be up to 25% more expensive than foreign products and/or services. The PPAs seem to derogate from the application of the national rule and grant the possibility of discussing the matter under internationally agreed rules.

Dispute Resolution

In contrast to the Mercosur PPA, the Chilean PPA does not contain any mechanism for dispute resolution. As the Chilean PPA deals with a sub-set of investment, namely public contracts, it may be read in the wider context of the Chilean CFIA, signed in November 2015. The definition of “investment” in the Chilean CFIA is considerably broad, including “contractual rights, including turnkey, administration and other similar agreements” (Article 1.4(d)). Public contracts covered by the PPAs could therefore potentially fall within the Chilean CFIA’s scope.

The arbitration agreement provided for in the Chilean CFIA (and also the Peruvian CFIA) is ad hoc (Article 25 and Annex 1, Chilean CFIA). The arbitration agreement only applies to the State parties to the Chilean CFIA, i.e. Chile and Brazil, and not to either of their investors. In addition, the ad hoc provision can only be triggered after extensive attempts through various means of solving the dispute amicably (Article 24, Chilean CFIA). Such amicable mechanisms include an ombudsman for each Government to address the foreign investor’s complaints, and also a Joint Committee, which will issue a recommendation for the disputing parties. If none of these methods succeed, or if the parties dispute the Joint Committee’s recommendations, the dispute can then be submitted to arbitration.

What this means is that, if a dispute arises under the Chilean PPA, only the State can submit the claim to arbitration. In addition, the Chilean CFIA does not contain an umbrella clause, in contrast to some BITs, meaning that an investor does not have the possibility to elevate a potential breach of contract with a State to a breach of an international treaty. An investor therefore has no recourse to arbitration and must pursue its claim through the national courts, unless the investor’s home State wishes to bring the claim itself. Otherwise, arbitration only remains an option for foreign investors if the contract entered into with the Brazilian public authority includes an arbitration clause and the dispute concerns patrimonial rights, such as rights to assets of a commercial nature.

Comment

The approach to dispute resolution adopted in the Chilean PPA and Chilean CFIA is unsurprising given Brazil’s distrust of investor-state arbitration. In practice, the lack of recourse to investor-state arbitration does not seem to have dampened foreign investors’ interest in the country so far. Brazil has been a regular receiver of foreign direct investment in the past decade, including foreign companies becoming shareholders of SPVs for infrastructure projects. It can be inferred from the lack of such mechanisms in the Chilean PPA and Chilean CFIA that Brazil is not concerned that the lack of investor-state arbitration will have any negative consequences for future investment.

However, there is a softening in Brazil’s attitude and the execution of the PPAs may also suggest that Brazil is reviewing its past position with regard to protectionist measures. Brazil introduced the PPA/CFIA model to offer a greater balance between investor protection and the host State’s development agenda. Some might argue that, particularly with regard to concession agreements, whose long-term duration and high value usually require a greater level of certainty when it comes to dispute-solving mechanisms (compared to a single-time provision of goods), the PPAs could have provided a good opportunity for Brazil to adopt an approach more aligned with international practice with regard to investor-state disputes with a view to attracting investments to a sector that has high demand for qualified contractors.

It is unlikely that we will see a change in stance on investor-state arbitration any time soon. However, as Brazil’s domestic industries expand and the outflow of investment increases, it may be interesting to see if that stance softens further.

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A Data-Driven Exploration of Arbitration as a Settlement Tool: How Can We Express Confidence in Small Data Samples?

Thu, 2018-10-18 23:40

Brian Canada, Debi Slate and Bill Slate

Recently, CRC Press published Data-Driven Law: Data Analytics and the New Legal Services by Edward J. Walters. The volume’s contributed chapters cover a wide range of topics at various levels of mathematical rigor, but they all underscore the importance of how data science can greatly improve the quality and efficiency of the legal process from document discovery to predicting potential judgments. While Data-Driven Law does not specifically discuss arbitration or other alternative dispute resolution mechanisms in which Dispute Resolution Data (DRD) specializes, we nonetheless believe that the book’s publication is a strong leading indicator of the growing role that data analytics will play throughout the legal profession. Certainly, we recognize that many strategic decisions in this profession are informed by the invaluable wisdom that practitioners have accumulated over a career’s worth of experience. What we aim to provide is a means to help augment that wisdom with knowledge derived from the analysis of data that have been collected thoughtfully, thoroughly, and systematically. In this way, practitioners need not rely exclusively on hunches or educated guesses to guide their decision-making processes. With the power of data, they can now provide their clients with more definitive and fact-based assessments of how likely a case will result in a particular outcome, given a set of defined input parameters.

 

To that end, we presented the first in a series of blog posts discussing the results of data-driven analyses which support the notion that the most frequently observed outcome of international arbitration cases is settlement or withdrawal. In most cases, settlement/withdrawal is reached relatively quickly, often less than a year following the claim date, and also prior to any counter-claim, preliminary hearing, or hearing on the case’s merits. Our results were derived from an aggregate view of all available international commercial arbitration case data in the DRD repository, which presently consists of nearly 4,000 cases dating back to 2005.

 

In our September 2018 follow-up blog post, we demonstrated that because this data sample was relatively large, we can be quite confident that our statistical estimate of cases ending in settlement/withdrawal (currently 54%) has a low margin of error (hereafter abbreviated “MOE”). That is, our estimate (specifically, 54% ± 2%, with 95% confidence) is likely to be representative of the entire “population” of all international arbitration cases, when viewed as an aggregate across all case types and case regions. We invite the interested reader to review our September 2018 blog post, which includes a primer on how to compute the MOE while explaining, in accessible language, what the MOE actually means from a statistical standpoint.

 

However, just as having a large sample size yields a narrow MOE, a smaller sample size typically results in a wider MOE, given the same 95% level of confidence. And while the aggregate estimate of 54% (±2%) of cases ending in settlement/withdrawal speaks to the potential power of arbitration as a settlement tool in a broad sense, parties are likely to be more interested in estimates that pertain to a specific case type, or to a specific geographic region in which the arbitration took place, or perhaps to other, even narrower data segments extracted from the spectrum of international commercial arbitration. More specific criteria will, necessarily, reduce the size of the data sample to be analyzed. Here, we use selected results from analyzing the DRD database to demonstrate the effect of sample size on MOE, and we discuss how stakeholders may interpret such results with varying degrees of confidence.

 

For example, let us consider how the proportion of cases resulting in settlement/withdrawal varies by case type. In the DRD repository, the four largest sectors (by number of cases entered in the database) presently include commercial contracts (817 cases), hospitality & travel (456), construction (369), and wholesale & retail trade (314). From Figure 1, we can see that in all but one of these case types, settlement/withdrawal is the most frequent outcome, but in addition, the MOE varies inversely with the number of cases.

Figure 1: Percentages of international commercial arbitration cases (since 2005) resulting in settlement/withdrawal for each of four major case types (with a similar result for all case types shown for comparison). Margin of error (indicated by error bars) is computed at the 95% confidence level. To simplify the MOE computation, other case outcomes are grouped into a single “not settled/withdrawn” category.

 

For the four major case types shown in Figure 1, the MOE is about ±5%, which is arguably an acceptable degree of uncertainty for parties exploring arbitration as a dispute resolution mechanism. Such a relatively narrow MOE mainly results from each of these case types having a relatively large sample size (about 300 or more). In contrast, Figure 2 shows the arbitration case outcomes (and associated margins of error) for four selected case types that, at least presently, have smaller sample sizes. For example, there are currently 39 cases in the agriculture sector in the DRD database, approximately half of which resulted in settlement/withdrawal. The associated MOE of ±16% means that the actual percentage of all international commercial arbitration cases in the agriculture sector reaching settlement/withdrawal ranges between 33% and 65%, based on a 95% level of confidence.

 

Such a wide range may still guide the decision-making processes of the stakeholders exploring arbitration as a settlement tool. For example, in the mining & raw materials sector, the MOE is relatively high at ±11%, but the likely maximum proportion of cases reaching settlement/withdrawal is no higher than 50%. This suggests that, at least for this case type, one can be reasonably confident that the chances of reaching settlement prior to a hearing (or, for that matter, reaching settlement at any point in the arbitration process) is not insignificant, but it is still relatively low.

Figure 2: Percentages of international commercial arbitration cases (since 2005) resulting in settlement/withdrawal for four selected case types currently represented by fewer than 300 cases in the DRD database.

 

The fact that the degree of uncertainty of the case outcome is larger for reduced sample sizes does not imply the data are of poor quality; rather, the uncertainty is a function of the quantity of data. Consequently, in an effort to provide DRD’s customers with helpful guidance as to whether the sample size for a given scenario is large enough so that uncertainty is relatively minimal, DRD is introducing a “signal strength” metric intended to provide its users with a simple visual indicator of the confidence that a given DRD data sample is likely to be representative of the “population” of all cases associated with the category of data to which the sample corresponds, whether or not those cases are recorded in the DRD database.

 

Aesthetically, the signal strength indicator resembles the familiar “signal bars” that are a ubiquitous feature of the modern mobile phone’s user interface. Functionally speaking, the number of bars is based on a proprietary computation involving such inputs as sample size, the margin of error associated with the reported statistic, and the level of confidence on which the MOE is based. In short: the greater the number of bars, the greater the degree of confidence that the reported statistic lies within an acceptably low MOE (at most ±5%). Figure 3 illustrates several examples of the DRD “signal strength” as determined for statistical results selected from those presented in Figures 1 and 2.

 

Figure 3: Selected results annotated with DRD’s new “Signal Strength” metric: an “at-a-glance” indicator of the level of confidence that the associated statistic represents all cases meeting the same criteria.

 

We at DRD acknowledge the value of practitioner experience. We do not claim that our results should replace the wisdom of lawyers and other legal professionals who are keenly aware of the myriad possibilities of how cases play out in practice. Rather, we believe that our data-driven offerings can enhance “the human factor” with additional, largely quantitative knowledge that can inform the decision-making process, particularly within the alternative dispute resolution spectrum. In our next blog post, we will share further examples of results derived from a continually finer-grained analysis of DRD’s dataset. For example, we will present results demonstrating how the likely outcome of an international commercial arbitration case changes when settlement is not reached prior to a hearing on the merits. We will also report on how the magnitude of the claim amount can affect the case’s chances of yielding an award that meets or exceeds some threshold percentage of the original claim amount. These examples, combined with those presented in our prior blog posts, merely scratch the surface of what a comprehensive dataset like ours can offer, and we look forward to enabling the alternative dispute resolution community to learn the analytical tools needed to extract valuable insights that can potentially guide future strategic decisions.

 

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Blockchain and Cryptocurrencies: The New Frontier of Investment Arbitration?

Wed, 2018-10-17 23:39

Armand Terrien and Alexandra Kerjean

Blockchain and cryptocurrencies (including bitcoin) have garnered significant attention in legal scholarship over the last few years, mirroring and to some extent anticipating on the public debate over the impact of blockchain technology on the new world economic landscape and the adequate level of regulatory response to such impact – Is a cryptocurrency taxable income or property (the IRS thinks so)?  Is it an asset subject to lien or attachment (courts are starting to think so)?  Is it an investment contract (security) susceptible to make initial coin offerings (ICOs) subject to securities regulation (the SEC thinks so)?  Or perhaps a commodity (the CFTC thinks so)?

When it comes to arbitration, the literature (including on this blog, here, here, here, here, here, here and here) largely focuses on how the technology is going to change the way disputes are settled, i.e., how it will revolutionise the ADR game, either by boosting Online Dispute Resolution (ODR) or by altogether substituting smart contract dispute resolution mechanisms to arbitration as we know and practice it.  In other words, what blockchain can do for arbitration.

Of equal interest, but much less in the spotlight, is what arbitration can do for blockchain.  In particular, we submit that within the next few years, blockchain technology and cryptocurrency industries will become an increasingly active playing field for investment arbitration.  Blockchain technology and crypto industries are therefore arguably set to replace solar and renewable energy ventures as the new frontier of investment arbitration.

In this post, we anticipate some of the ways investment arbitration can serve blockchain and crypto actors in light of the uniqueness of this digital industry, as well its rapidly evolving regulatory framework.

  1. Crypto ventures and assets as the object of foreign investment legislation

Leaving aside jurisdictions unfriendly or downright hostile to blockchain and crypto (such as Brazil, which in early 2018 elected to prohibit investments in crypto by investment funds and ruled that cryptocurrencies are not financial assets), there are arguably two strands to the regulatory rush to address the development of the industry.  First, regulators and legislators can chose to tackle, on a piecemeal basis, discrete legal issues raised by the industry, notably as they relate to tax and securities regulation.  Second, countries that have identified the potential for development of the industry and which are eager to attract foreign capital, can decide to embrace liberal, far-reaching, legislation.

In December 2017, Belarus became the first country in the world to enact such broad legislation.  The Belarus “Digital Economy Development Ordinance” not only authorises ICOs at national level, it also recognises crypto mining (the act of creating bitcoin or other cryptocurrencies by solving complex algorithms), exchange services, and the use of smart contracts, as legitimate business activities.  Compared to more restrictive regulatory frameworks, such as the one in place in Russia, the new Belarus legislation is evidently designed to attract foreign investors willing to develop blockchain and crypto activities in the region.

Other countries, such as Switzerland, have already signalled their positive stance towards cryptocurrencies.  France is preparing legislation legalizing ICOs and generally establishing an attractive regulatory framework for companies using cryptocurrencies so as to attract financial start-up businesses.  Venezuela, a country no stranger to investment arbitration, has even gone further and launched its own cryptocurrency pegged to oil, called the “Petro”, so as to sidestep U.S. sanctions.

  1. Crypto ventures and assets as protected investments under international law

Having established that States may increasingly identify blockchain and crypto technology ventures as worthy objects of foreign investment legislation, we must first turn to the question of whether this investment can be a “protected investment” under international law.  To our knowledge, there is no publicly available award discussing the jurisdiction of an arbitral tribunal over a dispute concerning blockchain or crypto investments.  There are however a number of staple issues in investment arbitration which call for reasonably obvious comments as they apply to blockchain and crypto-related investments, with the risk, of course, of fuelling long-standing and lively debates.

  • “Protected investment” under traditional BIT definitions

Moving from the obvious (but not to be overlooked) to the more novel, there are a number of elements of any blockchain or crypto venture that would qualify as protected investments under traditional BIT definitions.

First, it is worth recalling that the production of bitcoin and other cryptocurrencies is costly and time consuming.  Mining farms require significant capital commitment (lease of land; purchase of servers) and generate massive operating costs (mostly electricity).  In this sense, a crypto-mining farm is just like any industrial plant, and easily identifiable as a protected investment.  By way of example, the majority of mining farms are located in Canada, Iceland, or China, where energy is less expensive, and investors are setting up farms in Siberia, the Ukraine, or Kazakhstan, in an effort to reduce production costs as they might in any other industry (see here and here).  Any change in legislation or political shift in one of these countries may potentially trigger investment claims similar to those we have become accustomed to in the past 20 years.

Second, the question arises whether the crypto asset itself, the bitcoin for instance, can be a protected investment for purposes of a BIT.  In this respect, the use of the word “currency” is somewhat deceiving, as a cryptocurrency is not a legal tender or fiat currency (with the notable exception of Japan, where bitcoin is indeed a “legal tender”).  However, much like money which is kept in bank accounts held at financial institutions, cryptocurrencies can be held in so-called “wallets” (more accurately, it is the private keys necessary to access one’s bitcoin and sign off on transactions which are held, or stored, in the wallet).  There are different types of wallets, including “custodial wallets”, which are held by third-parties to whom one entrusts storage of one’s private keys much like one would trust one’s bank to place valuables in a safe.  Investors and tribunals have been toying with the notion that money held in a bank account could constitute a form of protected investment under a BIT.  Reasoning by analogy, if a bitcoin or other cryptocurrency “held” (with all the ambiguity that attaches to this term, see infra) in a wallet became unavailable to its owner through any act of a State (such as new legislation forbidding the use of crypto, or nationalising the wallet’s custodian), an arbitral tribunal could likely find that the contents of the wallet are a form of protected investment.

Third, expending from the narrow definition of “currency” (as vague as it is) to other uses of the blockchain technology, one could easily envision “coins” as protected investments.  The reasoning would indeed be even more intuitive if the tribunal were to find that the crypto-asset was more akin to a financial instrument or intangible asset (a “coin” acquired through ICO for instance), than traditional currency.  In this situation, and depending on the definition of “protected investment” in BITs potentially applicable to the dispute, an investor could make a colourable case that their crypto asset is indeed a “protected investment”.

The move towards regulating crypto assets of various shapes and forms as securities, taxable income, or intangible property for tax and securities law purposes, would suggest that in the not so distant future, tribunals could be amenable to extend the protection of BITs not only to blockchain businesses and industries, but to the very assets they generate, or trade in, as well.  Of course, as soon as such a trend is identified in investment arbitration case law, there is a good chance that States will tailor the definitions of protected investments in their model BITs in an effort to rein in any such trend.  The extent to which States will adapt their model language, however, will largely depend on the impact blockchain technology will have had on international trade when the issue finally arises.

Finally, of course, the investment must be located in the territory or dominion of the host State to be deemed “protected” under a BIT.  This will not be an issue where the arbitration concerns a mining farm.  The situation is however much more complicated where the crypto assets (coins or tokens of various shapes and forms) exist only in the blockchain, i.e., in a distributed ledger system that by definition knows no geographical border.  However, a colourable claim that the investment is located in the territory of a host State can be made in cases where certain rights or obligations linked to the asset only arise in the territory of that State, or where sufficient connections can otherwise be established under more traditional tests.  For instance, a “coin” deemed a financial asset by the Japanese regulator, issued by an issuer registered with the Japanese regulator, and traded on a crypto exchange under the supervision of the Japanese regulator presents evident connections to Japan, such that Japan could be identified as the home State of an investment in such a “coin” for investment arbitration purposes.

  • “Protected investment” for purposes of Article 25 of the ICSID Convention

The ICSID Convention provides no definition of the notion of investment.  In determining whether a certain crypto asset or venture qualifies as such for purposes of Article 25 of the Convention, a tribunal may seek to ascertain whether the asset or venture meets the requirements of the so-called Salini test: (i) a contribution of money or assets; (ii) a certain duration; (iii) an element of risk; and (iv) a contribution to the economic development of the host State.

For purposes of this post, we will simply open two avenues for future discussion.

First, there is no apparent bar to a crypto asset constituting the means of acquisition or holding of an investment for purposes of the first prong of the Salini test.  Second, the nature of blockchain technology and decentralised ledgers will in some cases make it more difficult for an investor to meet the fourth prong of the test (contribution to the economic development of the host State).  This criterion has of course come under fire in recent years.  Even if the criterion is retained, however, there will likely be colourable arguments to be made on a case-by-case basis that a specific crypto-asset meets this requirement (see supra).

Investments in mining farms, made via traditional currencies or cryptocurrencies, would of course constitute a more traditional form of investment, falling less controversially under the Salini test.

  1. What about substantive protections and damages ?

Once a protected investment has been identified, the whole gamut of substantive protections should be available to the investor, along easily identifiable lines.  If legislation banning cryptocurrencies is enacted and a mining farm shuts down as a result, there is ample expropriation and legitimate expectations precedent that would readily translate to the situation.  If new tariffs or barriers are enacted, legitimate expectations and fair & equitable arguments likewise immediately come to mind.  The list could go on.

As for damages, under the scenarios outlined above, the much-discussed volatility of cryptocurrency should not be a dominating factor of any quantum analysis.  Specifically, it should not serve as a means for substantial diminution of any award on damages, should a tribunal recognise the liability of a State for violation of its international obligations towards a more traditional form of blockchain or crypto-related investment.  This issue may however be worth revisiting, for instance in situations where the investment was made by commitment of cryptocurrency, or where issues of assumption of risk are particularly salient – for instance were the form of investment is most akin to an investment in a financial instrument.

 

The authors are senior associates in the international arbitration practice of Quinn Emanuel Urquhart and Sullivan’s Paris office.  They would like to thank Mauricio Pizarro Ortega and Magdalena Bulit Goni for helpful research assistance in the preparation of this post.  The views expressed in this post are the authors’ personal views, and do not reflect the opinions of Quinn Emanuel.

More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Why Arbitration Needs Conflict of Laws Rules

Tue, 2018-10-16 23:39

Giuditta Cordero-Moss

ITA

It’s been decades since arbitration has started its emancipation from conflict of laws rules (private international law). Many were of the opinion, and still are, that conflict of laws rules are an undesirable straitjacket forcing the arbitral tribunal to determine the applicable law according to rigid and complicated rules and thus hindering it from considering whatever rules it deems appropriate. The private international law method for determining applicable law, so goes the criticism, is unnecessary, complicated and leads to results that may come as a surprise to the parties. Underlying is the known philosophy according to which arbitration is international and not rooted in any specific national legal system. According to this philosophy, arbitration owes no obedience to national laws. It is delocalized. It owes obedience only to the parties. The logical consequence is that there is no need to apply conflict rules to determine the applicable law. Under most sources of arbitration law, the arbitral tribunal is obliged to apply the law chosen by the parties. Failing a choice by the parties, this philosophy requires that the tribunal determine the applicable law directly, without having to apply any conflict rules (the voie directe). The ICC was first out in introducing the voie directe, and many arbitral institutions followed suit. Other instruments of arbitration law are less radical, for example the UNCITRAL Model Law makes still reference to conflict rules – albeit not necessarily belonging to the law of the place where the tribunal has its seat.

There is no question that party autonomy is crucial in arbitration.

However, this does not necessarily mean that conflict rules have no function in arbitration.

Firstly, where the parties have not chosen a law, the result will be much more predictable if the applicable law is determined on the basis of objective criteria known in advance (i.e., applying conflict rules), than if it is the result of the tribunal’s complete discretion.

Secondly, and perhaps more importantly, conflict rules may contribute to the efficiency of the specific proceedings and (thirdly) to the effectiveness of arbitration in general.

Let’s discuss first the efficiency of the specific proceedings.

It is quite evident that a proceeding will not be efficient, if it results in an award that eventually is set aside as invalid or is refused enforcement. How can conflict rules contribute to avoiding such an inefficient proceeding?

If the parties have chosen the applicable law, conflict rules will generally confirm their choice – party autonomy is the most important conflict rule for contract disputes. However, following the parties’ choice may lead to disregarding other laws, and, in some cases, this may result in an award that is invalid or unenforceable. Imagine a contract containing the choice of a law belonging to a non-EU state. If the contract violates EU competition law, the defaulting party may invoke EU competition law as a defence: that party has not fulfilled its obligations, because doing so would have infringed EU-competition law. The other party will point at the choice of law made in the contract and exclude that EU competition law is applicable. As known and as confirmed by the famous Eco-Swiss decision, an award infringing EU-competition law may violate public policy and may thus risk being set aside or refused enforcement. The tribunal, therefore, may wish to take into consideration EU-competition law, so as to avoid rendering an invalid or unenforceable award. But does the tribunal have the power to disregard the choice of law made in the contract? If the tribunal exceeds its power, the award will be invalid and unenforceable.

How does the tribunal solve this dilemma?

This is where conflict rules may be extremely useful: they give the tribunal a basis upon which it can take into consideration EU-competition law, without disregarding the parties’ choice of law and exceeding its power.

If the parties’ choice is considered as a conflict rule (rather than being considered as being based on an absolute principle of arbitration law, as is assumed by the delocalization theory), it will follow that it has a certain scope, usually confined to matters of contract law and possibly of tort law. The choice made in the contract, therefore, will not affect issues of competition law. If the tribunal considers EU competition law, it has not disregarded the parties’ choice, because the parties’ choice did not cover competition law. In addition to having given the tribunal a basis to avoid rendering an invalid and unenforceable award, conflict rules have given the tribunal a basis to do so without exceeding its power. Furthermore, conflict rules have contributed to the predictability of the result.

It is certainly more predictable to acknowledge that the parties’ choice is a conflict rule and that therefore it follows the criteria and has the scope regulated in the private international law, than promising that the parties’ choice is an absolute principle. This promise may not be kept if the award is to be valid and enforceable. Hence, the tribunal will have to restrict party autonomy. Without the benefit of conflict rules, it will come as a surprise that party autonomy is not absolute. Moreover, there will be no objective criteria for restricting party autonomy, and the tribunal will have to do so on the basis of discretionary considerations. Conflict rules, therefore, may contribute to the predictability and efficiency of the specific proceeding.

Thirdly, conflict rules may contribute to the effectiveness of arbitration in general. If arbitration only obeys by the will of the parties, there is a risk that it becomes the instrument for evasion of important regulatory provisions. Parties who desire to ignore competition law, for example, choose for their contract a governing law without competition rules, and insert an arbitration clause. If the tribunal only follows the will of the parties, it will disregard competition law of the state that is actually affected by the disputed transaction. It is deleterious to the effectiveness of regulatory law such as competition law, if such a wide spread mechanism for dispute resolution such as arbitration permits to avoid its application. This is why, decades ago, disputes that involved issues of regulatory law such as competition law were deemed not to be arbitrable. With the famous Mitsubishi decision, an era of arbitration-friendliness was introduced: US courts, and later courts in many other states, accepted that disputes involving regulatory issues be arbitrated, because courts maintained the possibility to give a “second look” to the award. Through set aside or enforcement proceedings, courts would have the possibility to annul or refuse enforcement of an award that violated public policy.

This arbitration-friendliness, however, shows signs of erosion. The second look approach is not always sufficient to ensure the effectiveness of regulatory law or other mandatory rules that are deemed particularly important. If the losing party does not challenge the validity of the award, there will be no set aside proceedings. If the winning party does not need enforcement, there will be no enforcement proceedings. Enforcement may be sought in other jurisdictions, so that the courts of the system whose law has been avoided will not be involved. In these situations, courts will have no possibility to give a second look at the award.

The pendulum seems to be swinging now, and numerous courts in member states of the EU have rendered decisions restricting arbitrability of disputes regarding agency agreements, because they could not be sure that the arbitral tribunal would apply mandatory EU rules on protection of the agent.

Courts might be more prone to trust arbitration, if they could count on the use of conflict rules for the selection of the applicable law in arbitration.

Far from being the useless, arbitration-hostile cage from which arbitration should seek to liberate itself, conflict of laws rules are a useful tool that contributes to predictable and efficient arbitral proceedings, as well as to the effectiveness of arbitration as a dispute resolution mechanism.

Conflict rules are, in other words, more arbitration-friendly than the delocalization theory.

This post is a short summary of part of my scholarship. Various of the mentioned issues are not uncontroversial and require more extensive analysis. More extensive analysis may be found in my publications, a list of which is available here.

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Open Position: Assistant Editor of Kluwer Arbitration Blog

Mon, 2018-10-15 20:40

Crina Baltag (Acting Editor)

The Editorial Board of Kluwer Arbitration Blog announces the opening of the following position with Kluwer Arbitration Blog: Assistant Editor for North America, covering Canada and USA.

The Assistant Editor reports directly to the coordinating Associate Editor and is expected to (1) collect, edit and review guest submissions from the designated region for posting on the Blog, while actively being involved in the coverage of the assigned region; and (2) write blog posts as contributor. You have the opportunity to work with a dynamic and dedicated team and liaise with the best arbitration counsel in the world.

The Assistant Editor will work remotely. Please note that this is a non-remunerated position. If you are interested, please submit a resume and cover letter by email to [email protected], with cc to Dr Crina Baltag, [email protected]. The deadline for receiving the applications is 4 November 2018.

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BCCI v. Kochi – (Un)tangled Issues?

Mon, 2018-10-15 18:05

Anu Shrivastava

The Supreme Court of India (“Court”) in an landmark decision titled “BCCI vs. Kochi Cricket Pvt. Ltd. (previously covered in a blog post) clarified the applicability of the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Act”) to pending arbitration and court proceedings commenced under the Arbitration and Conciliation Act, 1996 (“1996 Act”). The Court held the following:

  1. Subject to party autonomy, the amendments would not apply to “arbitral proceedings” that had commenced before the commencement of the 2015 Act.
  2. The amendments would apply to court proceedings which have commenced, “in relation to arbitration proceedings”, on or after the commencement of the 2015 Act.

Exception: The amendments under the 2015 Act would apply to enforcement of an award under Section 36, even if the court proceedings relating thereto have been filed before the commencement of the 2015 Act.

Section 36 of the 1996 Act provides for enforcement of an arbitral award in the same manner as if it were a decree of a court in India.  The Court carved an exception to  Section 36 of the 1996 Act on the ground that enforcement proceedings are entirely procedural in nature, and could be applied retrospectively since no rights are vested in the parties seeking such enforcement. This post seeks to analyse the Court’s decision in carving out the exception for Section 36 and also to highlight practical problems which may arise in the aftermath of the decision.

Section 36 of the 1996 Act to apply retrospectively and no automatic stay on enforcement of the award – exception to the general rule.

The Court held that the 2015 Act was prospective in nature and would apply in relation to arbitration proceedings commenced after the commencement of the 2015 Act, i.e., 23 October 2015.  In the pre-amendment scenario, Section 36 provided for an automatic stay on the enforcement of an award until the expiry of the time limit for challenging the award, or until the disposal of such a challenge. Under the 2015 Act, there was no longer a provision for automatic stay on enforcement of an award and such stay could only be granted upon a request being made to the court.

The Court held that the amended Section 36 would apply to those applications for setting aside an arbitral award under Section 34 which had been filed after the commencement of the 2015 Act. Further, the amended Section 36 would apply retrospectively to Section 34 applications that had been filed prior to the commencement of the 2015 Act.

In declaring that Section 36 applies retrospectively, the Court analysed Section 6 of the General Clauses Act, 1897 which provides that the repeal of any enactment does not affect any right or privilege accrued or incurred under the repealed enactment. According to the Court, an automatic stay of awards could not be claimed as a vested right under Section 6 because enforcement is purely procedural and not substantive. Therefore, the provisions of the amended Section 36, being purely procedural, could apply retrospectively.  The operative portion of the judgment which concludes that Section 36 is purely procedural reads as follows:

“Since it is clear that execution of a decree pertains to the realm of procedure, and that there is no substantive vested right in a judgment debtor to resist execution, Section 36, as substituted, would apply even to pending Section 34 applications on the date of commencement of the Amendment Act”

In concluding so, the Court seems to have only considered precedents on execution of a decree, and not on enforcement of an award under Section 36. The Court did not consider if the un-amended Section 36 was also purely procedural or if there was a change in its nature due to the 2015 Act vis-à-vis substance and procedure. In arriving at the conclusion that Section 36 of the 1996 Act is purely procedural, the Court only considered the post-amendment scenario which does away with automatic stay on awards.

The essential issue which escaped the Court’s consideration is whether Section 36 could have been considered as purely procedural even before the amendments were introduced. Enforcement of an award, as provided for under Article 36 of the Model Law, does not only relate to procedural aspects but also contains substantive grounds of challenging an award.  Similarly, the Article V of the New York contains substantive objections to resist the enforcement of an award.  While such objections and grounds for setting aside a domestic award are provided for under Section 34 of the 1996 Act, perhaps the Court should have considered if Section 36 of the 1996 Act could be read in isolation from Section 34 of the 1996 Act. An argument was raised before the Court that Section 36 proceedings could not be considered as a proceeding which was independent of a proceeding under Section 34 of the 1996 Act. However, the Court considered it unnecessary to go into the “by-lane of forensic argument” about Section 36 standing independent of Section 34 of the Act.  Once the Court had decided that the 2015 Act was to apply prospectively, there should have been compelling reasons to the carve an exception to this general rule.

Practical considerations

The Court’s decision that Section 36 of the Act applies retrospectively because it is purely procedural may lead to further litigation on retrospective application of other similarly placed provisions which concern only procedural issues. The Court did not undertake a detailed analysis as to why the proceedings under Section 36 were not proceedings “in relation to arbitration”. This leaves room for further attempts at seeking retrospective applicability of other similarly situated provisions on the basis that they are purely procedural. For instance, what would be the fate of an interim order rendered by a tribunal under Section 17 of the Act? Section 17 of the 1996 Act is modelled on Article 17 of the UNCITRAL Model Law and confers powers upon an arbitral tribunal to issue interim measures. Before the amendments, Section 17 of the Act did not provide for any court assisted measure for enforcing an interim award. The 2015 Act has led to the insertion of Section 17(2) to provide that an interim order shall be enforceable as if it were an order of the court. On the basis of the Court’s decision, it may be possible to argue that enforcement of an award being procedural and “in relation to arbitration”, Section 17(2) should also apply retrospectively for enforcement of an interim award made before the enactment of the 2015 Act.

To consider another instance, an arbitration commences under the 1996 Act and a challenge is made to the appointment of one of the arbitrators on the ground of independence or impartiality. The tribunal decides under the 1996 Act as it stood before amendments, rejects the challenge and delivers the final award. After the amendments are introduced, a party approaches the Court under Section 34(2)(a)(v) of the 2015 Act for setting aside the award on the ground that the composition of the tribunal was improper. The 2015 Act led to the insertion of the Fifth Schedule which lists down the grounds which give rise to justifiable doubts as to the independence or impartiality of arbitrators. The tribunal while deciding under the 1996 Act would not have considered the grounds listed in the Fifth Schedule since it was inserted subsequently. However, the court while considering the Section 34 application under the 2015 Act would scrutinize the award on the basis of the Fifth Schedule. This would lead to different grounds being considered by the tribunal and the court in deciding the same issue.

The Court’s decision goes a long way in granting relief to award-debtors who have been waiting to enforce their awards,but has also caused it has also led to certain an uncertainty in the law of arbitrationies relating to the arbitration regime in India.The decision also runs contrary to the recommendations made by the Srikrishna Committee that the 2015 Act should not apply retrospectively lest it would result in inconsistency and uncertainty, and would cause prejudice to the parties.

The Arbitration and Conciliation (Amendment) Bill, 2018 (“2018 Bill”) tries to resolve these uncertainties and clarifies that the 2015 Act would not apply to arbitral proceedings and court proceedings (arising out of such arbitral proceedings) that have commenced before the 2015 Act.  The 2018 Bill further provides that the 2015 Act would only apply to arbitral and court proceedings which commence after the 2015 Act. It may be important to note that the provisions of the 2018 Bill were brought to the Court’s attention during the hearing for BCCI v. Kochi but the Court was not inclined to consider it.  The Court had observed that the amendments in the 2018 Bill would put all the important amendments of the 2015 Act on a “back-burner”.  Yet, the 2018 Bill has been passed by the Lower House of the Parliament without making any substantive modificationsin the same form, without making any changes. Once enacted, it will be interesting to see how courts interpret the 2018 Bill on applicability of the 2015 Act.

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Could Blockchain Become The New Standard For Transparency in Investment Arbitration?

Sun, 2018-10-14 16:20

Mauricio Duarte

In a world hurtling through one technological breakthrough after another, we are entering into an exciting new era. In recent contributions to this Blog, blockchain and its potential applications in arbitration have been well-documented by practitioners and early-adopters. However, there is one exceptional feature in blockchain that might be useful in investment arbitration.

The notion of transparency was once unfamiliar in international arbitration. Nonetheless, recent regulations have popularized the concept and the debate about transparency in investment arbitration shows little sign of fading. Investment arbitration has moved from being a highly confidential mechanism to one where transparency is a key component to the legitimacy and credibility of the system.

Transparency is a procedural notion that corresponds to openness, clarity, and reliability. At the same time, transparency, accessibility, openness, and democratization are concepts that lie at the heart of the value of blockchain. Blockchain is more than just a platform that further enhances our ability to communicate. Blockchain is a technology that tackles the issue of trust between peers. So, could we use this enhanced form of technology in investment arbitration?

The Rise of Transparency

The debate about transparency lies around the notion of a greater democratic participation in a globalized world. To many, the turning point towards greater transparency was the decision in SD Myers Inc. v. Government of Canada arbitrated pursuant to the North American Free Trade Agreement. The tribunal went on to determine that confidentiality was not an inherent component of the investor-state arbitration. The trend acquired a new flavor in Methanex Corp. v. United States of America when the tribunal permitted a joint amicus curiae brief from several interested civil society groups.

The fundamental argument became whether increased transparency would enable the state to better explain their actions to the people. The argument relies on the concept that is the obligation of a state to seek the welfare of its citizens at all times and transparency is a key mechanism for democracy to keep the State accountable for its actions. This was a compelling argument to promote transparency on all parts of the arbitration procedure, including the hearings, to ensure democracy and allow access to policy decision-making.

It was under this context that the UNCITRAL Rules on Transparency in Treaty-based investor-State Arbitration (“UNCITRAL Transparency Rules”) sought to clarify the extent of confidentiality and transparency in investment arbitration. The rules are a compilation of previous pro-transparency trends such as the publication of arbitral documents, amicus curiae submissions by third parties and, perhaps most controversially, the accessibility to arbitral hearings. This trend was later cemented with the subsequent Mauritius Convention on Transparency .

Despite the advantages, transparency in investment arbitrations does have some disadvantages. Primary among them is the notion that transparency can result in delays and higher costs. Allowing the stream of information and involvement of non-parties would require more time and, consequently, higher costs.

The Transparency Registry

Under Article 2 of the UNCITRAL Transparency Rules, information is made public through the UNCITRAL Transparency Registry, which is the central source for the publication of information and documents in treaty-based investor-state arbitrations managed by the UN Secretary-General through the UNCITRAL secretariat.

Under the Rules, the Transparency Registry is freely accessible to the public; hence information and documents in the arbitration process are made public, subject to certain safeguards, including the protection of confidential information or the integrity of the arbitral process.

The Registry, as the central repository for the publication of information and documents in treaty-based investor-state arbitrations, requires that the arbitral tribunal appoints a person from the tribunal from whom the Registry will receive information and to whom the Registry can revert for questions. In all cases in which the Transparency Rules are applicable, the arbitral tribunal has to submit the documents by email, through upload to http:// or by courier, on USB stick, CD-ROM or DVD. Furthermore, the documents sent to the Registry are required to be in searchable PDF format, 300 dpi, and not exceed 5 MB. If a document exceeds this size, it should be divided into smaller documents. Finally, any costs for submission of documents shall be borne by the submitting party or the submitting tribunal.

In principle, the service of the Registry is at no cost to the parties, tribunals, and the public. However, it would be remiss, to neglect the issue of the transaction costs associated with transparency (e.g., courier of documents, information chain, and time elapsed).

Merging with Blockchain

Everywhere, people are demanding more transparency. Curious individuals want distributed access to information. Now, everyone wants to increase trust and transparency in information exchanges of all shapes and sizes, and blockchain technology has the answer.
Blockchain removes the need for a central authority (i.e., Transparency Registry) to manage information, making it highly secure and impenetrable to hackers. Blockchain systems include a fully auditable and valid ledger of information. Entries into the ledger can only be made if they are validated by the system, and in order to change it, every single other blockchain in the system would also need to be changed. Therefore, the “trust mechanism” does not reside solely in a central authority, but in the members of the chain itself.

In the not too distant future, arbitrators should have the power to share the information that the UNCITRAL Transparency Rules mandates directly to a blockchain system. With the use of this enhanced form of technology, a protocol could be introduced to protect highly sensible information under the limits of the Transparency Rules. Consequently, the system would be automated to minimize the discretion to be exercised by the arbitral tribunal and enhance the efficiency in the process.

With higher transparency comes the need for information to be passed in a faster way. Currently, transparency is achieved with a long chain of information and parties involved, starting from the contracting parties to the arbitral tribunal and subsequently ending with the Transparency Registry. However, higher transparency requires that the information be shared with all participants simultaneously in a fast-paced manner.

Using a blockchain system to share the information directly by the arbitrators could mean that third parties and non-disputant parties can learn about a given dispute faster. This could enhance the participation in the arbitration process earlier while it is ongoing; for example, as observers at oral hearings or as drafters of amici curiae. With blockchain, a person wholly unconnected to the dispute, a third person requesting participating rights, and a non-disputing Party to the relevant investment treaty, are all entitled to the same level of access, encouraging a pre-award transparency in a low-cost and efficient manner.

Conclusion

Blockchain and the Transparency Rules are compatible; both strive to achieve an effective balance between that necessary cost – imposed on behalf of the public interest in transparency– and ensuring the efficiency and fairness of the proceedings for the disputing parties.

UNCITRAL’s Rules on Transparency, with a complementary enhanced form of technology present an opportunity for States to improve investor-State arbitration. The primary cost of opting out of transparency is the loss of an opportunity to legitimize a State’s actions under investment treaties and the loss of an opportunity to legitimize investor-State arbitration itself. These critiques could translate to a legitimacy problem, which could have more consequences for the future of the institution.

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It’s All Chinese To Me: Preparing And Cross-Examining Mandarin-Speaking Witnesses

Sat, 2018-10-13 19:26

Dorothy Murray, Meg Utterback, Llewellyn Spink and Zhen Ye

King & Wood Mallesons

Witness evidence is an integral part of international arbitration, but challenges can arise from the interaction of different legal cultures, norms and languages.  Although issues can arise with any testimony given through an interpreter, Mandarin-speakers are more challenged, and challenging, because of 1) the stark differences between Mandarin and English (the lingua franca of IA); and 2) the differences between international arbitration and the PRC legal system and process.

This article outlines practical considerations for preparing Mandarin-speaking witness evidence and conducting cross-examination in international arbitration. Mandarin-speaking witnesses will also find it useful in understanding the process and challenges of cross-examination.

 

Tips for being a witness

The role of a fact witness in international arbitration is to explain facts that are within his or her knowledge to the Tribunal to assist them in making their decision. The witness should present as honest and reliable so that the Tribunal believes their explanation of events.

Cross-examination is used by the cross-examiner to put their case to the opponent’s witness, and in doing so, to educate the Tribunal. The cross-examiner seeks to establish and advance their case whilst undermining the other side’s case, usually achieved by undermining the credibility of their witnesses.

In common law legal systems, the process of witnesses giving evidence orally and being tested by cross-examination, is considered one of the most effective means of discovering the truth.  English arbitrators are increasingly unwilling to give much weight to written witness statements, prepared and polished by a party’s lawyers.  They therefore rely more heavily on cross-examination and hearing directly from the witness at the hearing.

While PRC law permits witnesses to appear in Court, this rarely happens in practice.  When witnesses do appear, the process is more akin to a deposition than oral testimony in a common law court.  The witness may give a brief oral statement, generally for no more than 30 minutes. The witness may then be questioned by the lawyers from both sides and the judge.  However, the PRC court system is more inquisitorial than adversarial with the judge having the discretion to end the questioning of witnesses or to forego witness testimony and cross-examination entirely.

Oral witness testimony is little used in practice because it is not held in the same regard as in common law systems. Judges consider written statements and documentary evidence to be more reliable than oral evidence. Witnesses are assumed to be biased in favour of the party for whom they testify, and their testimony given little weight.

A Chinese witness must therefore appreciate that, in contrast to domestic Chinese procedure, their oral testimony is an important part of an international arbitration and the Tribunal will consider what they say carefully. Honest and reliable witnesses, who persuade the Tribunal, can win the arbitration.

 

Tips for preparing a Mandarin-speaking witness

Witnesses familiar with Chinese court procedure are likely to be focused on demonstrating the authenticity of documents that evidence the facts. Reassure them that the Tribunal wants to hear their personal recollection of facts with which they were directly involved, even where there are no documents available on the point.

Witnesses may be privy to information that they are not able to reveal to you as foreign counsel or to the Tribunal, for example where there are ongoing criminal investigations in the PRC or where the matters are considered a Chinese state secret.  Ensure the boundaries are clear to you and the witness, that they are raised in advance with the other side and Tribunal, and that the client is willing to risk having adverse inferences drawn if the witness refuses to answer a question.  Should the witness still be called to testify or is the risk to the client too great?

A Mandarin-speaking witness will be inclined to only answer the exact question asked.  This poses two problems.  First, the witness will not tell his lawyer everything he knows unless the right questions are asked.  A lawyer should have a detailed interview with the witness when preparing the witness statement and should ask questions in different ways to insure all information is being elicited. Second, witnesses will find it difficult to provide robust answers on cross-examination. The witness may fear saying the wrong thing.

Respect for hierarchy is an important Chinese cultural norm so it is useful to understand a witness’s position within the company.  A junior witness may be uncomfortable in giving testimony, especially before his or her superiors, and may look toward their superiors or their lawyers when testifying to seek approval of their testimony.  Conversely, a senior executive may be offended by the process of cross-examination and may become defensive to deflect any challenge to his credibility.

When interviewing and preparing senior witnesses and experts, Chinese lawyers are usually more deferential than common law lawyers. It is important to strike a balance between adequate deference and thorough fact-finding.  Be deferential but persistent.

If your witness speaks English as well as Mandarin, consider whether it is be better to give evidence in their imperfect English and avoid the delay and confusion that can arise from interpretation.

If the witness can read English but is less able or confident with the spoken word, a real-time transcript will be extremely useful to help him or her (and likely the interpreter) to understand the questions more accurately.

 

Cross-examining a Mandarin-speaking witness

First and foremost, do not attempt any Mandarin terms unless you are very confident of your pronunciation.  Mandarin is a tonal language, and a misplaced inflexion can mean that you and your witness end up speaking about different things, both of which may make sense to the speaker in context.

There are several key differences between the Mandarin and English languages and their grammar. In Mandarin, much of the meaning is contextual. Cross-examiners must state the question clearly and accurately. Moreover, Mandarin does not use tenses. Be careful formulating questions that involve different tenses as these will all be lost in translation.

Mandarin can be ambiguous and flowery. Unlike legal English, Mandarin expressions evoke more than just the words spoken. This can make accurate interpretation difficult. Often witnesses can reply in a vague manner that is open to interpretation if not further clarified.  This may explain why Mandarin interpreters often have a lengthy dialogue with the witness before replying, “The witness said ‘Yes.’”  The process can be frustrating for the cross-examiner and the Tribunal, if they cannot understand the Mandarin discussion resulting in the simple answer.  Thus, having a fluent Mandarin speaker at counsel table is crucial to the integrity of the transcript.  Often counsel must correct or at least question the interpreter’s understanding of the answer and be prepared to explain any “lost in translation” moments to the Tribunal. Waiting until the end-of-day transcript, or a post-hearing review of the tapes, will be too late.

Legal concepts may differ as well.  The cross-examiner should ensure that the witness, especially an expert witness on PRC law, understands what is being asked. Concepts such as indemnification, liquidated damages, and indirect loss may have a slightly different meaning in Chinese.  The cross-examiner must word their questions carefully and understand its implications.

 

Tips for counsel on both sides

Given the importance of the interpreter, the parties may wish to meet with him or her and test their interpretation prior to the hearing, particularly any relevant legal or technical industry terms. Consider if the interpreter will need experience with accented Mandarin or specific dialects. Consider too that Mandarin expressions may differ between Mandarin-speaking countries or regions.

There may simply be no translation of a term into or from Mandarin.  It may be necessary to ask the interpreter to explain what synonym has been used and ensure all are content it is the best available.

People, ships, places, and companies may have both an English name and a completely different Mandarin name. Be aware that words may also have a Pinyin transliteration of the Chinese name. As such, a short bi-lingual glossary of key terms and names agreed between the parties can be a useful tool for the interpreter, counsel and the Tribunal.

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Are Unilateral Option Clauses Valid?

Sat, 2018-10-13 02:07

Youssef Nassar

A unilateral option clause (“UOC”) can take many forms. It may grant its beneficiary the exclusive right to choose between litigation and arbitration when a dispute arises, or to choose to litigate before a specific jurisdiction, while constraining the non-beneficiary to a specific forum or a specific mode of dispute settlement. Consequently, UOCs are undoubtedly exclusively advantageous to one of the parties and they are frequently used in specific industries, such as banking and construction.

Due to a lack of statutory guidance as well as judicial approaches that fall on opposite ends of the spectrum, the validity of UOCs remains susceptible to a great deal of uncertainty and debate. Courts that uphold their validity rely on party autonomy. Courts that reject such validity rely on a wide array of arguments. This essay briefly analyzes the arguments used by courts rejecting the validity of UOCs and concludes that none constitutes adequate basis for invalidation.

  1. The potestative nature of an option clause

The first argument for the invalidity of UOCs, and possibly the least convincing and most criticized, is that a UOC is potestative. The concept of “caractère potestatif” is used in French law to describe a situation where performance of a contract is subject to a condition precedent the fulfillment of which falls within the discretion of one of the contracting parties.

In 2012, the French Cour de Cassation in Rothschild held that a UOC is a potestative condition and invalidated it. The UOC in the case granted exclusive jurisdiction over any disputes to the courts of Luxembourg, while maintaining the bank’s right to bring an action before the courts of the client’s domicile or any other court of competent jurisdiction. The obligation of each party to submit to the jurisdiction of the contractually chosen court was not subject to any condition. Further, “the ability of one party to bring actions before any court which would otherwise have lawful jurisdiction over the other party does not impose any obligation on such other party.” 1)Martin Gdanski & Marc Robert, The validity of unilateral hybrid clauses has become less certain under French law, Norton Rose Fullbright (2012).  jQuery("#footnote_plugin_tooltip_6511_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6511_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Additionally, the UOC cannot be considered to impose a condition upon which the performance of the contract is dependent.

In relying on the concept of potestative, the Cour de Cassation also used domestic legal principles to interpret the applicable EU provision where it had no basis to do soIn fact, this goes against the purpose of the Brussels Regulation, which is to provide a uniform and predictable legal framework.

  1. Lack of mutuality (consideration)

Consideration requires a ‘bargained-for exchange.’ “It is a common law doctrine of ‘mutuality of obligation’ that ‘either both must be bound, or neither is bound.’”2)Cristopher Drahozel, Nonmutual Agreements to Arbitrate, 27 J. Corp. L. 537, 538 (2002). jQuery("#footnote_plugin_tooltip_6511_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6511_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); While both parties must manifest assent for a contract to be formed, that manifestation need not be symmetric in time, place, or form. Contract provisions need not give the parties the same positions, and it is rather illogical to require this. It is enough that value be given on both sides. If the law required the terms of contracts to be symmetrical such that the parties merely traded the same thing for the other, no exchanges would take place.

The only context in which this argument would work is if the UOC is severed from the rest of the agreement when assessing consideration. This proposition is as absurd as requiring specific consideration for any other clause in the agreement.

The circumstances that one of the provisions in an integrated agreement grants certain rights to only one of the parties does not in other instances render that provision ineffective for lack of consideration or mutuality, as long as appropriate consideration can be found in other provisions of the agreement or elsewhere.There appears to be no good reason for deviating from this rule merely because an arbitration, rather than some other, clause is involved.3)Hans Smit, The Unilateral Arbitration Clause: A Comparative Analysis, 20 American Rev. Int. A. 391, 401 (2009). jQuery("#footnote_plugin_tooltip_6511_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6511_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

However, courts rejecting the validity of unilateral arbitration agreements based on lack of mutuality seemingly adopt this specific approach. The clause is severed from the agreement and assessed separately. Inevitably, it is found lacking in consideration and, consequently, invalidated. “Severability” was developed in a different context for a different purpose and it is inapplicable in this respect. It is a rule developed to effectuate the salvation, not the condemnation, of arbitration clauses.” 4) Id. jQuery("#footnote_plugin_tooltip_6511_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6511_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Ultimately,“it is sufficient to note that under general rules of contract law, consideration should be present, but need not be adequate … the unequal position[s] of the parties, including presumably the imbalanced consideration, should not be grounds for invalidity.”5)Deyan Draguiev, Unilateral Jurisdiction Clauses: The Case for Invalidity, Severability or Enforceability, 31 J. Int’l Arb. 19, 41 (2014). jQuery("#footnote_plugin_tooltip_6511_5").tooltip({ tip: "#footnote_plugin_tooltip_text_6511_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

  1. Violation of EU law

In addition to its reliance on the widely criticized potestativedoctrine, the court in Rothschild       held that UOCs were in violation of article 23 of the Brussels I Regulation concerning “prorogation of jurisdiction” (the equivalent of article 25 in the Recast Brussels Regulation). This interpretation was rejected by many and, although the issue has never been considered by the European Court of Justice (“ECJ”), some commentators are of the view that, had the matter been referred to the ECJ, it may well have concluded that the Cour de Cassation misinterpreted Article 23. The Cour de Cassation in Rothschildheld that the UOC was contrary to “the finality of the extension of jurisdiction provided for in Article 23” and its objectives.6)Supra note 1. jQuery("#footnote_plugin_tooltip_6511_6").tooltip({ tip: "#footnote_plugin_tooltip_text_6511_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The UOC exclusively enabled the bank to bring an action before the courts of the domicile of Mrs. X, the courts of Luxembourg or any other court of competent jurisdiction. Despite potentially being numerous, these options are both limited and foreseeable. Further, article 23 explicitly states that the parties may agree on conferring exclusive jurisdiction unto courts other than those of competent jurisdiction. In that sense, Article 23 is the “epitome of party autonomy, as declared in recital 14 to the Brussels I Regulation … [its] primary purpose … is to establish an avenue in favor of choosing a competent court other than the normally competent court under the rules of the Regulation.”7)Supra note 5, at 37. jQuery("#footnote_plugin_tooltip_6511_7").tooltip({ tip: "#footnote_plugin_tooltip_text_6511_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Therefore, the position of the Cour de Cassation that the clause in Rothschildwas not compatible with the object and purpose of the Brussels I Regulation is based on a misinterpretation of the Brussels I Regulation.

  1. Equality of treatment and unconscionability

Prima facie a UOC is imbalanced, as it serves the interests of only one party. “This designation potentially follows the natural lack of balance between the parties, especially regarding their bargaining power. In effect, one of the parties to the clause has to ‘adhere’ to the unfavorable terms of the clause.”8)Supra note 5, at 33. jQuery("#footnote_plugin_tooltip_6511_8").tooltip({ tip: "#footnote_plugin_tooltip_text_6511_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This gives way to two grounds for invalidity: imbalance between the parties and unconscionability.

With respect to the first ground for invalidity, it has been submitted that UOCs violate article 6 of the European Convention on Human Rights pertaining to the right to a fair trial. The Supreme  Arbitrazh Court of Russia in the Sony Ericsson case has also implied that the “right to equality of arms” is violated by a UOC. In essence, the argument here, whether articulated in the contours of article 6 of the European Convention on human Rights or otherwise, pertains to the right to a fair trial. More specifically, the right to have equal opportunity to present one’s case before a court. This argument is based on a misinterpretation or a misunderstanding of the concept in question. The principle of “a fair trial” means that the parties have equal procedural rights (due process) once the proceedings have begun. In other words, equal footing before a specific forum not with regards to the choice of forum.

The second ground for invalidity is that of unconscionability. It may be argued that it is unconscionable “for a party to exploit its economically powerful position or the ignorance of the party who agrees to a unilateral arbitration clause without understanding the unfair advantage it gives to its contract partner by insisting upon acceptance of a unilateral arbitration clause.” 9)Smit, supra note 3, at 404. jQuery("#footnote_plugin_tooltip_6511_9").tooltip({ tip: "#footnote_plugin_tooltip_text_6511_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This argument is not convincing for a number of reasons. First, an agreement may include a number of imbalanced clauses and lack of balance is rarely a per se ground for invalidity. Secondly, submitting to this argument would lead to the absurd result of invalidating a great number of agreements simply because they contain a clause that is favorable to one of the parties. Finally, a defense of unconscionability requires both procedural and substantive unconscionability. Procedural unconscionability is manifested by unfair surprise. It is difficult to argue that such a condition is satisfied in the context of UOCs where both parties negotiated the agreement and accepted the UOC.

  1. Conclusion

Despite the variety of arguments, none constitutes acceptable grounds to invalidate UOCs. On the other hand, the argument for upholding their validity is well established. Neither arbitral tribunals nor courts deciding on the validity of a UOC should curb or contain party autonomy absent adequate grounds to do so. Without explicit statutory guidance, however, it seems that the debate will continue on.

References   [ + ]

1. ↑ Martin Gdanski & Marc Robert, The validity of unilateral hybrid clauses has become less certain under French law, Norton Rose Fullbright (2012).  2. ↑ Cristopher Drahozel, Nonmutual Agreements to Arbitrate, 27 J. Corp. L. 537, 538 (2002). 3. ↑ Hans Smit, The Unilateral Arbitration Clause: A Comparative Analysis, 20 American Rev. Int. A. 391, 401 (2009). 4. ↑ Id. 5. ↑ Deyan Draguiev, Unilateral Jurisdiction Clauses: The Case for Invalidity, Severability or Enforceability, 31 J. Int’l Arb. 19, 41 (2014). 6. ↑ Supra note 1. 7. ↑ Supra note 5, at 37. 8. ↑ Supra note 5, at 33. 9. ↑ Smit, supra note 3, at 404. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Efficient Arbitration – Part 4: Document Production in International Arbitration

Fri, 2018-10-12 23:48

Pawel Halwa and Jakub Kaczmarek

Schoenherr

In Parts 1 – 3 of our Efficient Arbitration Series, we introduced various efficiency tools. In Part 4 we will discuss one of these tools which has considerable savings potential: “document production”.

Presenting the right evidence is key in arbitration. But, what if a party does not have the documents it needs to prove its case, because they are in the possession of its opponent?

This is where “document production” comes into play: the party will request these documents from its opponent, and the arbitral tribunal will decide whether and to what extent the opponent needs to comply with that request.

As with most aspects of arbitration, document production is also agreed by the parties. The requirements and procedure are best addressed already at the Case Management Conference. This, in particular, as parties do not always see eye to eye when it comes to document production: For one, parties and arbitrators with a common law background are familiar with ‘discovery’. They are likely to provide for more extensive document production than parties and arbitrators with a civil law background. For another, of course, the party seeking documents to prove its case will argue for more extensive document production than its opponent, who would prefer these documents to remain off record.

The commonly used procedure for document production, as set forth by the 2010 International Bar Association Rules on the Taking of Evidence in International Arbitration, includes the following steps:

• To avoid ‘fishing expeditions’, a party’s request under these IBA Rules should describe the requested documents (or a narrow and specific category of documents), and state that they are relevant and material to the outcome of the case, and not in the possession, custody or control of the requesting, but of another party.
• The other party may either produce the documents or object to the production. The IBA Rules specify the detailed reasons for refusing to produce documents.
• The tribunal will then decide which documents to order the party to produce. To help the tribunal determine the contentious issues and to assess whether a document may be relevant and material, Parties often used the so-called Redfern Schedule. Also, the parties may appoint an impartial and independent expert, the so-called Document Production Master.

Reaching a decision on producing the documents or maintaining objections is often difficult. If the opposition is based on formal grounds, e.g. insufficiently precise application for submitting a category of documents it may, in principle, be resolved without knowledge of the evidence sought. However, deciding on an opposition based on substantive grounds (such as privilege, commercial or technical confidentiality of the documents) may require the tribunal to read the contents of the documents. In such cases appointment of an impartial and independent expert may help the tribunal decide whether to order the party to produce documents.

The expert’s task is to opine if the objection is legitimate without disclosing the contents of the documents to the tribunal and other parties. However, even in such a case, the decision to uphold the objection is taken by the arbitral tribunal.

The expert appointed in this way may also be able to decide on the legitimacy of the objections and perform other functions, such as inspecting the parties’ headquarters to search for the relevant documents to be submitted in the proceedings.

Ultimately, the decision to appoint an expert, as well as the scope of its competence and powers, is with the parties.

For its complex procedure, document production can be time-consuming and expensive. However, when used properly, it is a powerful tool to strengthen (or weaken) a party’s case — in particular if, without document production, one of the parties will lack the evidence that will likely make or break their case.

This makes document production such a great example of an efficiency tool:
If mishandled, document production is an expensive, lengthy process without much of a result. But, if handled properly, it will indeed improve the chances to win the arbitration.

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¡Entra la cancha!: The Arbitrator Intelligence LatAm Campaign

Fri, 2018-10-12 02:41

Augusto Garcia Sanjur and Muhamed Tulic

Arbitrator Intelligence

We write in our capacity as Arbitrator Intelligence’s “Country Team Leaders” with an update about Arbitrator Intelligence’s Latin American Campaign.

As most Kluwer readers know, Arbitrator Intelligence (AI) aims to promote transparency, diversity and accountability in arbitrator appointments. The primary means to this end is the Arbitrator Intelligence Questionnaire (or AIQ). The AIQ is a confidential, online survey to be completed at the end of each arbitration by parties, in-house or outside counsel, and third-party funders. In the AIQ, responders provide feedback about the arbitral proceedings and the arbitrator’s case management.

The value of the AIQ is that this important information can be accessed while still protecting parties’ confidentiality (the AIQ does not ask for parties’ names or other confidential information) and the independence of responders (responders must register for security purposes, their submissions are anonymous). The AIQ collects key data that will facilitate assessment and analysis of arbitrator decision-making and case outcomes.

With a focus on its goal to promote diversity through more information, on October 1, Arbitrator Intelligence launched its six-week Latin American (LATAM) campaign. The main purpose of the campaign is to collect as many AIQs as possible about Latin American arbitrators and arbitrations in Latin America.

Information from the AIQs collected will allow Arbitrator Intelligence to highlight trends and arbitrators in the region by generating Arbitrator Intelligence Reports on Latin American Arbitrators, which parties can use in future arbitrator selection.

The LATAM campaign focuses on Brazil, Colombia, Mexico, Costa Rica, Guatemala, Panama, Ecuador, Peru, Argentina and Chile, but AIQs from all countries are welcome.

The Campaign is organized around a core group of Country Team Leaders—Giorgio Sassine, Catalina Bizic, Augusto Garcia Sanjur, Muhamed Tulic, Elizabeth Zorilla, and Jose Maria de la Jara—and designated AI Ambassadors in each of the identified countries. Ambassadors were chosen out of more than one hundred outstanding arbitration experts who responded to our call for applications (a list of our Ambassadors is available here).

Many of the Ambassadors volunteered out of interest and commitment to Arbitrators Intelligence’s goals to promote transparency, accountability, and diversity. But it also did not hurt that we have come up with some good prizes as incentives. After the six weeks long campaign, the Ambassador who generates the most AIQs will have an opportunity to co-author an article with Gary Born and, the second most another article with Catherine Rogers. Other prizes include professional opportunities, such as attendance at the ITA Dallas Workshop in June, and the ITA-ASIL Conference in April, signed copies of Gary Born’s treatise (generously donated by Kluwer) and designated access to books on Kluwer’s Digital Book Platform (again thanks to Kluwer).

The first week of the campaign started with the theme ¡Entra la cancha!, which was meant to encourage arbitration practitioners to join in creating their own future opportunities by generating information about arbitration in Latin America.

So far response has been overwhelming—thanks to our outstanding Ambassadors!

Arbitrator Intelligence has collected over 60 AIQs in just the first 10 days of the Campaign, and hence information about hundreds of arbitrators in those cases. We are also getting ready to launch in the coming weeks of the campaign both a Spanish version and a Portuguese version (thanks to Vitor Vieira!) of the AIQ so it is accessible to more parties in the region.

In the process of organizing the LATAM campaign, we also developed another important innovation, which we are calling the Moot Arbitrator Intelligence Questionnaire, or Moot-AIQ. For those of us who have competed in moot competitions, we know the challenges in finding information about moot arbitrators. For example, it would be helpful in your final preparations to know if your arbitrators tend to ask many questions or few, and questions more about facts or law, orand whether they are flexible in granting time extensions. But it is virtually impossible to know this information apart from the moot grapevine, which (just as in real life!) works better for some than for others.

To address this moot problem, we developed a specialized AIQ that mirrors the real AIQ for moot competitions. Apart from making valuable information more available, completing an end-of-hearing AIQ is a lot like feedback that is now so common in many industries. From Uber’s tradition of both passenger-to-driver and driver-to-passenger feedback, to McKinsey Consulting’s 360-degree-feedback program for executives, information about an experience can be a valuable resource when given in both directions.

Like the original AIQ, the Moot-AIQ seeks mostly factual information (like that described above) and maintains confidential the names of individual respondents.

In working on the LATAM Campaign, to test the Moot-AIQ we teamed up with the International Competition of Arbitration (XI Competencia Internacional de Arbitraje) for its eleventh edition which was organized by Universidad de Buenos Aires (Argentina) and the Universidad del Rosario (Colombia).

For those who do not know, the ICA Moot is the most important regional arbitration moots in Latin America. In the eleventh edition of the competition, there were 54 teams competing, 607 participants of which 447 were students and 160 were coaches and 260 arbitrators. The participants and arbitrators came from 16 different countries.

At the ICA, coaches and student competitors were provided with a link, which lead them to the ICA-AIQ (International Competition of Arbitration-Arbitrator Intelligence Questionnaire). (The ICA-AIQ is a special version of the Moot-AIQ tailored for the purposes of that competition.)

Arbitrator Intelligence will provide general information from the responses and, after the organizers have an opportunity to review the responses, they will determine if arbitrator-specific information would be useful for either their future planning or for use by competitors next year.

We are exceedingly grateful to the Universidad de Buenos Aires and the Universidad del Rosario, for being brave enough to welcome innovation and be the first moot to test the Moot-AIQ. We are hopeful that this experiment may be inspiration for future moot court programs and look forward to working with interested organizers.

In the meantime, back in the LATAM Campaign, we encourage everyone (whether in the region or not) to use this period to submit AIQs on recent arbitration cases. Like so many other aspects of international arbitration, Arbitrator Intelligence is a collaborative project. Its ends are part of its means—to succeed, it needs to collect input from many participants, while its success will make information more generally available to all participants.

Specifically in a region as dynamic as Latin America, the value of more information about newer arbitrators will be an essential resource both to make regional arbitrators more known globally and to give regional practitioners greater access to information about foreign arbitrators. ¡Vamos!

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Accreditation of Arbitrators in India: A New License Requirement?

Thu, 2018-10-11 06:05

Ajar Rab

The current government in India is undertaking sweeping policy changes to increase India’s rank on the global index of ease of doing business. In order to attract more investments, it is also focusing on revamping the ailing judicial system and attempting to bring India at par with global arbitration standards. In pursuance of the same, the Union Cabinet has approved the Arbitration and Conciliation (Amendment Bill 2018) (the “Bill”) and the  New Delhi International Arbitration Centre Bill, 2018 (the “NDIAC Bill”) which has already been tabled before the Lower House of the Parliament (covered previously in this post).

Highlighting the salient features of the Bill, the Press Information Bureau of India issued a press release stating that the Bill will, inter-alia, provide for the creation of an autonomous body called the Arbitration Council of India (“ACI”) aimed towards grading arbitral institutes and accrediting arbitrators. The press release also noted that the amendments were based on the recommendations of a High-Level Committee under the Chairmanship of Justice B. H. Srikrishna, Retired Judge, Supreme Court of India, which was to provide recommendations and suggestions with respect to “Institutionalisation of Arbitration Mechanism” in India (“Committee”).

The Bill, inter-alia, provides for the insertion of Section 43G in the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”) specifying the norms for accreditation of arbitrators as provided in the Eight Schedule (to be added to the Arbitration Act). Though there are many instances of an existing gap between cup and lip between the provisions of the Bill and the report of the Committee, Section 43G of the Bill is going to have a severe impact on international arbitration and arbitrators in India.

Section 43G of the Bill states the norms for accreditations shall be as specified in the Eighth Schedule. However, instead of providing an inclusive definition, the Eighth Schedule provides a list of who can be an arbitrator and anyone not falling within the below-mentioned list shall “not be qualified to be an arbitrator”:

  • is an advocate within the meaning of the Advocates Act, 1961 having ten years of practice experience as an advocate; or
  • is a chartered accountant within the meaning of the Chartered Accountant Act, 1949 having ten years’ of practice experience as a chartered accountant; or
  • an officer of the Indian Legal Service; or
  • an officer with a law degree having ten years’ experience in legal matters related to the Government, Autonomous Body, Public Sector Undertaking or at a senior level managerial position in private sector; or
  • an officer with an engineering degree having ten years’ of experience as an engineer in the Government, Autonomous Body, Public Sector Undertaking, or at a senior level managerial position in private sector or self-employed; or
  • an officer having senior level experience of administration in the Central or State Government or having experience of senior level management of a Public Sector Undertaking or a Government company or a private company of repute; or
  • in any other case, a person having educational qualification at degree level with ten years’ of experience in scientific or technical stream in the fields of telecom, information technology, Intellectual Property Rights or other specialised areas in the Government, Autonomous Body, Public Sector Undertaking or at a senior level managerial position in a private sector, as the case may be.

It is pertinent to mention that the Committee report categorically mandated that no new body is to be created for accreditation of arbitrators and instead recognition is to be given to professional institutes which have a robust and well-defined system of accreditation such as the Chartered Institute of Arbitrators (CIArb), the Singapore Institute of Arbitrators (SIArb), the Resolution Institute (RI), or the British Columbia Arbitration or Mediation Institute (BCAMI). Thus, the recommendation of the Committee was to recognize international bodies/professional institutes providing accreditation of arbitrators as their criteria is based on (a) professional education (b) attendance of arbitration hearing (c) qualifying examinations (d) peer interviews/assessment by a panel of approved arbitrators. This would lead to professional and well-qualified arbitrators. While this intent is duly reflected in Section 43D(2)(b) of the Bill which states that one of the functions of the ACI will be to recognize professional institutes providing for accreditation of arbitrators, based on the current wording of Section 43G, it is unclear whether the ACI will simply (i) recognize such institutes; or (ii) recognize such institutes only if the accreditation provided by them meets the criteria mentioned in the Eighth Schedule; or (iii) whether the ACI alone will accredit arbitrators as Section 43G does not provide for recognition of professional institutes for the purposes of accreditation.

It is pertinent to highlight that as per the criteria laid down under the Eighth Schedule, there is no room for any method by which the quality, experience and professional qualification of an arbitrator can be gauged. The Eighth Schedule reflects the conservative and outdated thinking of the government as the criteria relies solely on seniority and a basic professional degree or employment in a government service. None of these are sufficient or even remotely reflective of a person’s knowledge of arbitration law or his/her capability to effectively discharge the duties and role of an arbitrator.

The current list provided in the Eighth Schedule assumes that by merely practicing as an advocate or chartered accountant for 10 years, a person is deemed to have gained knowledge in the field of arbitration and can discharge the role of an arbitrator which is judicial in nature. The list gives preference to seniority in managerial positions, matters related to government functions and government enterprises without defining what is the scope and extent of such seniority. Again, fallaciously, the list assumes knowledge of arbitration and basic tenets of justice only on account of age and association with the government or managerial positions in the private sector.

As many internationally renowned arbitrators would testify, mere age or seniority or association with government work does not in any manner equip a person to become an arbitrator. Even as an advocate with 10 years of practice in India, there is no guarantee that an advocate would actually be well versed in arbitration or that he or she would have handled arbitration matters in those 10 years. Therefore, the result of the Eighth Schedule being passed as a law would be that all those persons mentioned in the Schedule can become accredited arbitrators since there are no other criteria to evaluate their knowledge and understanding of arbitration. The catastrophic result would be accredited arbitrators without any knowledge, education, experience in arbitration law or the practice of arbitration.

The Committee report had specifically stated that the ACI should not be a body which provides accreditation but one that merely recognizes the accreditation provided by international bodies/professional institutes. The establishment of another body for accreditation would only result in duplication of efforts and would involve substantial financial commitment from the government. Despite such a clear recommendation that the ACI is not to become a regulator or a license granting body, the Bill has managed to achieve just that. If the proposed amendment is passed in its current form, it remains unclear if all internationally accredited arbitrators would again require accreditation in India by the ACI or will their existing accreditation be given due recognition, and if so, under what circumstances.

The other problems with Section 43G and the Eighth Schedule are that they fail to account for persons who even though internationally accredited and recognized as arbitrators, may not fall in the list of persons provided in the Eighth Schedule. Furthermore, while most bodies/professional institutes such as the CIArb, SIArb etc. encourage students to enrol and get accreditation as arbitrators, the Eighth Schedule in effect provides an age/seniority threshold which runs counter to the idea of promotion of arbitration.

Unless suitably addressed, creating another body for accreditation would neither benefit nor bolster arbitration in India. In fact, it would just become another certification for arbitrators without any serious reputation in the international market. Moreover, if professional institutes are not recognized, international arbitrators would have to re-apply for accreditation in India before arbitrating disputes in India.

Arbitration was already moving at a snail pace in India and suffered on account of judicial interference at every stage of the arbitration proceedings, the last thing it needed was government interference as well. In effect, the current text of Section 43G and Eight Schedule of the Bill will create more problems for arbitrators and the arbitration landscape in India. Instead of reducing the scope of judicial intervention, the Bill manages to create a new licensing requirement for arbitrators under the garb of providing accreditation.

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A Debate About the Not So Straightforward Applicability of the Articles on State Responsibility to Investor-State Arbitrations

Wed, 2018-10-10 00:34

Danilo Ruggero Di Bella

At a time when Spain is targeted by investment arbitrations (with almost thirty ICSID cases pending against it), the second ICSID-CIAMEN Forum held in Madrid could not be more auspicious.  The event – organized by Marta Lya Martini Briceño and José María Beneyto from the CIAMEN (Centro Internacional de Arbitraje, Mediación y Negociación) with the collaboration of Gonzalo Flores (ICSID Deputy Secretary-General) – was hosted at CEU-San Pablo University and gathered arbitration practitioners from a variety of jurisdictions. The hot topics of the Forum were the most recent ICSID jurisprudence, the future amendments to the ICSID Arbitration Rules and Spain’s renewable energy cases.

During the conference, a debate about the applicability of the International Law Commission’s Articles on State Responsibility (ILC Articles) to investor-state arbitrations struck my attention. This post attempts to report on that debate and add a few observations.

 

A different view on the ILC Articles

During his presentation, while highlighting diverging interpretations of the FET standard in the recent awards rendered against Spain, Derek Smith (Foley Hoag) expressed the singular view that it is a widespread mistake to apply the full reparation principle – enshrined in Art. 31 of the ILC Articles – when assessing damages in investor-state arbitral proceedings. Although this has been a common practice by many arbitral tribunals, Smith considered it to be an error and argues his position based on the Chorzów Factory case, the Commentaries of the ILC to the provisions of the ILC Articles dealing with the legal consequences of an internationally wrongful act of a State, and the stance maintained by Professor James Crawford.

Smith argued that the Chorzów Factory case – regarded as the starting point by any investment arbitration tribunal called upon to quantify damages – has been repeatedly misinterpreted to the extent that its application has been overstretched to disputes where an individual is arbitrating against a State. Smith submitted that the Chorzów Factory case and the principle of full reparation stemming from it (according to which reparation should wipe out all the consequences of an illegal act and re‐establish the status quo ante) is applicable exclusively to State-to-State disputes, as in that case the PCIJ intended to rule solely on the reparation due by one State to another. Smith backed up his argument by referring directly to the 1928 Judgement on the Merits of the Chorzów Factory case, where, indeed, the German-Polish Mixed Arbitral Tribunal emphasized that “Rights or interests of an individual the violation of which rights causes damage are always in a different plane to rights belonging to a State, which rights may also be infringed by the same act. The damage suffered by an individual is never therefore identical in kind with that which will be suffered by a State[…]”. This may find confirmation in another excerpt from that case, where the Mixed Arbitral Tribunal stressed that “The present dispute is…a dispute between governments and nothing but a dispute between governments. It is very clearly differentiated from an ordinary action for damages, brought by private persons[…]”.

Smith further supported his view by referring to the Commentaries of the ILC which clarify that Part Two of the ILC Articles – including Art. 31 – “does not apply to obligations of reparation to the extent that these arise towards or are invoked by a person or entity other than a State.”1)ILC Commentaries, pages 87-88 jQuery("#footnote_plugin_tooltip_5941_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5941_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, and again, that “[t]he articles do not deal with the possibility of the invocation of responsibility by persons or entities other than States, and paragraph 2 [of Art. 33] makes this clear. It will be a matter for the particular primary rule to determine whether and to what extent persons or entities other than States are entitled to invoke responsibility on their own account.”2)ILC Commentaries, page 95 jQuery("#footnote_plugin_tooltip_5941_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5941_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Finally, Smith quoted Professor Crawford who confirms that “the ILC Articles make no attempt to regulate questions of breach between a state and a private party such as a foreign investor. Those rules must be found elsewhere in the corpus of international law, to the extent that they exist at all.”3)Crawford, “Investment arbitration and the ILC Articles on State Responsibility,” (2010), ICSID Review—Foreign Investment Law Journal, Volume 25, Issue 1, page 130 jQuery("#footnote_plugin_tooltip_5941_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5941_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

From all the above it follows – according to Derek Smith – that to award full reparation to an investor constitutes an excessive and legally unjustified compensation.

 

The majority view by the other Panelists   

At this point, during the conference, other members of the panel replied by affirming that applying the full reparation principle to estimate damages in investment arbitrations cannot be regarded as a mistake.

Pedro Claros (DAC Beachcroft) contended that, as the full reparation principle has been applied in diplomatic protection cases (where a State indeed takes up an individual’s claim against another State), it is not bizarre its use by way of analogy – and, therefore, the use of Art. 31 of the ILC Articles – in awarding damages to individuals in non-State-to-State disputes.

At that point Derek Smith rebutted that analogy cannot be used as a basis to justify the application of the full reparation principle to individual vs. State disputes, because arbitral tribunals’ jurisprudence is not a source of international law (only the jurisprudence of the ICJ is), according to Article 38 of the Statute of the ICJ. Smith submitted that the application of such a principle (and Part Two of the ILC Articles) to investor-State arbitration require a legal ground other than analogy.

Subsequently, Gabriel Bottini (Uría Menéndez) replied that the Commentaries to the ILC Articles make many references to human rights treaty-based cases, where individuals confront States. By consequence, the application of these Articles to individual vs. State disputes, such as investor-state arbitration, is in line with their scope.

 

Observations

Although the Chorzów Factory Tribunal underlines that it is mandated to adjudicate a dispute between States, as opposed to an ordinary action for damages brought by an individual, still it considers that the calculation of the reparation due to the State could be liquidated on the basis of the actual damages suffered by the individual, whose case was espoused by the Claimant State. 4)Factory at Chorzów (Merits), Judgment of 13 Sept.1928, page 28 jQuery("#footnote_plugin_tooltip_5941_4").tooltip({ tip: "#footnote_plugin_tooltip_text_5941_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Accordingly, it was that tribunal to draw a first parallelism between the damages suffered by the individual and the damages suffered by the individual’s home-State, thus pointing out a straightforward correlation between the losses incurred by the individual and the claimable amount due from the State as form of full reparation. Consequently, the analogy drawn by Pedro Claros appears well-founded.

Even though, unlike the ICJ, arbitral tribunals supporting the application of the full reparation principle may not be a source of international law, they do contribute to the development of international law, especially by building a jurisprudence constante, whose authority resides in its persuasiveness. Apart from their influence, we should not be oblivious to the fact that the members constituting those tribunals are often incumbent or former judges of the ICJ itself5)Listen to the interview of Bruno Gelinas-Faucher by Joel Dahlquist on The Arbitration Station jQuery("#footnote_plugin_tooltip_5941_5").tooltip({ tip: "#footnote_plugin_tooltip_text_5941_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

As correctly pointed out by Gabriel Bottini, the ILC Commentaries to the ILC Articles draw several examples from human rights cases, i.e. individual vs. State cases. Additionally, the Commentaries make direct reference to the practice of ICSID tribunals (again, individual vs. State cases).  They do so particularly with respect to the power of ICSID tribunals to award full reparation as compensation, by covering ongoing and also expected lost profits (as long as non-speculative)6)ILC Commentaries at pages 100 (footnote 522), 104 (footnote 566) jQuery("#footnote_plugin_tooltip_5941_6").tooltip({ tip: "#footnote_plugin_tooltip_text_5941_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); More importantly, the Commentaries draw such a reference with respect to Part Two of the ILC Articles, which purportedly is not meant to be applied to individual vs. State disputes. Could this be an inconsistency in the ILC Commentaries?

Lastly, the missing legal ground (other than simply analogy), required by Smith’s view in order to apply Art. 31 of the ILC Articles to investor-state arbitrations (and more in general to individual vs. State disputes), could be found in the residual character of the ILC Articles. Quoting Professor Crawford himself: “The ILC Articles are residual articles and an adjudicator must first look at the treaty under review and see what it says on the subject. If the treaty (such as a BIT) covers the field of the issue at stake, the ILC Articles have no role to play.”7)Crawford, “Investment arbitration and the ILC Articles on State Responsibility,” page 131 jQuery("#footnote_plugin_tooltip_5941_7").tooltip({ tip: "#footnote_plugin_tooltip_text_5941_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The corollary of this, of course, is that if the BIT is silent about the standard of compensation, then Part Two of the ILC Articles should apply (full reparation principle included).

 

Conclusion  

Derek Smith’s opinion is intriguing, since it questions something – the applicability to investor-State disputes of Art. 31 of the ILC Articles, together with the principle of full reparation – that is taken for granted and part of well-established tribunals’ practice. Such a position may come particularly handy if one’s goal is getting a quantum reduction as state-appointed counsel. However, confining the full reparation principle only to State-to-State disputes stands at odds with the majority view.

 

References   [ + ]

1. ↑ ILC Commentaries, pages 87-88 2. ↑ ILC Commentaries, page 95 3. ↑ Crawford, “Investment arbitration and the ILC Articles on State Responsibility,” (2010), ICSID Review—Foreign Investment Law Journal, Volume 25, Issue 1, page 130 4. ↑ Factory at Chorzów (Merits), Judgment of 13 Sept.1928, page 28 5. ↑ Listen to the interview of Bruno Gelinas-Faucher by Joel Dahlquist on The Arbitration Station 6. ↑ ILC Commentaries at pages 100 (footnote 522), 104 (footnote 566) 7. ↑ Crawford, “Investment arbitration and the ILC Articles on State Responsibility,” page 131 function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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The Blockchain ADR: Bringing International Arbitration to the New Age

Tue, 2018-10-09 02:03

Marike R. P. Paulsson

Sometimes, the establishment needs to step aside to let the next promising generation create a new way forward: So it commences with entrepreneurial students at the University of Miami, combining talents of engineering, technology, and international law and arbitration. It is by thinking out of the box that disruptive changes happen and they must in order to break through an outdated status quo. The founder of “Blockchain ADR”, Alexander Fischetti, launched the idea of using blockchain for international arbitration in Sao Paolo, in March 2018. The University of Sao Paolo and the Global Legal Institute for Peace collaborated with the World Economic Forum to understand blockchain from the engineering, the economic, and the legal perspective.

The idea of blockchain is that it is a platform, a technological carrier of data, if one wishes to understand it that way. When an engineer from the University of Sao Paolo, not versed in international arbitration, asks: “Are international arbitrations mostly conducted with written submission and in person hearings?” One could still answer defiantly that in the modern era of electronic communication, institutions handle arbitrations by accepting electronic submissions and facilitating virtual hearings. However, then the engineer asks: “Are those documents submitted through email platforms and similar carriers?” The answer is: “Yes, probably.” Email carriers are far less secure than a blockchain carrier. They are too easy to hack. Blockchain is not. The step from paper submissions to email seemed acceptable when the step to blockchain was not. The resistance to blockchain by the establishment is the resistance to disruptive change but not a rational one, and it is certainly not an informed resistance.

What are the advantages of blockchain? The secure transportation of data, the possibility of storing original data and the almost 100 % guarantee that data will not get lost. What then could the outcome be under the New York Convention? Are there advantages and new challenges? Yes.

Article II of the New York Convention and the Blockchain

Article II of the New York Convention provides that arbitration agreements must be, in principle, recognized as binding. If the requirements listed under Article II are met, a court shall refer the parties to arbitration. This provision was perhaps construed in a timely fashion during the three week conference in 1958 but the consensus to add Article II to the New York Convention was one of the 11th hour and with that came some inevitable drafting errors.

Article II dictates that the arbitration agreement must be valid and its subject matter must be arbitrable. Recognition cannot take place if the agreement would be null and void or incapable of enforcement. Yet, the real hurdle to modern day recognition of the arbitration agreement is the ‘in writing’ requirement of Article II(2) of the New York Convention. The agreement meets the ‘in writing’ requirement if the agreement or the clause has been signed by the parties or has been concluded through an exchange of telegrams or telefaxes. The 2006 UNCITRAL Recommendations addressed the outdated idea of telegrams. UNCITRAL recommends that this requirement must be read to ‘include’ the electronic means of communication, and this would open the door to using blockchain as a means to conclude arbitration agreements.

So what is the advantage of blockchain for arbitration agreements? The arbitration agreement once concluded cannot be altered on this platform. The original is preserved on the blockchain. As far as securing those agreements and not losing the data, it is better placed on the blockchain. Now that UNCITRAL has endorsed the use of electronic communications, parties ought to use a blockchain format rather than other electronic carriers. The blockchain provides the users with unique keys with which only they can access the data. This means that the parties to the arbitration have a unique way to access the original arbitration agreement without being able to alter it (or lose it for that matter). Subsequently, the parties can allow the arbitral institution to have a key as well to the data and they can provide that data to any enforcement court that is called upon to refer the parties to arbitration. Article II with its ‘in writing’ requirement is not simply a matter of evidence as it is under most national arbitration laws. At the time, an ample discussion took place among delegates to feature the idea of tacitly accepting an agreement to arbitrate. At the time, that idea was rejected because the delegates recognized the reality that modern customs in international trade dictated the use of agreements in writing. The takeaway is that the New York Convention including Article II should over time be adapted to modern customs in international trade, and soon that should include arbitration agreements on the blockchain.

Article IV of the New York Convention

If Article II has often led to the premature death of arbitration because most agreements did not meet the now rather stringent ‘in writing’ requirement, one has yet to explore the challenges under Article IV of the New York Convention, which I tend to refer to as the Pandora’s Box. Article III is perhaps the core instruction to courts under the New York Convention: courts of the country where enforcement is sought must recognize awards as binding. There is a presumption of validity. Pieter Sanders, the founding father of the New York Convention, created the allocation of the burden of proof in Articles IV and V (referred to in Article III). Refusal can only take place on the basis of the grounds listed in Article V. A court can grant the enforcement if the applicant has complied with the requirements listed in Article IV. A court will assess the submission of documents under Article IV on a prima facie basis only. Article IV of the New York Convention provides that the successful party in arbitration must supply the original arbitration agreement or a copy thereof, the original award or a copy thereof, and finally, the applicant must provide a sworn translation in the official language of the country where enforcement is sought.

With that, the request for enforcement ought to be simple which supports the idea that enforcement of an award by the successful party in the arbitration should be relatively simple which is in line with the purpose of the New York Convention, which contributes to the effectiveness of international arbitration. Yet, in practice, Article IV became a volatile article and the subject of unscrupulous use by counsel and judges alike. This is because Article IV also requires that copies must be certified and signatures authenticated. However, not a single guideline was provided as to who should do this, where this should be done and what should be authenticated: the daunting ‘Ws’.

If the parties were to use the Blockchain ADR as a platform for international arbitration and enforcement under the New York Convention, many of these obstacles under the New York Convention could be disposed of.

The Blockchain ADR, as discussed above, would be the platform holding all documents and data related to an international arbitration procedure from beginning to end, meaning that the arbitration agreement and the arbitral award(s) would be stored here. This means that the party requesting the enforcement of the award under Article IV of the New York Convention, can simply access the blockchain server with its unique key to find not a copy but the original arbitration agreement and the original arbitral award. Because the data on the blockchain is authentic, no certification of copies or authentication of signatures is required. Blockchain holds originals that are secured, that cannot be altered or lost. It provides an answer to the many questions raised under Article IV of the New York Convention. It would, therefore, be wise for users in arbitration and stakeholders to implement the idea of blockchain in order to preserve some of the core provisions of the New York Convention and transplant those sixty year old texts to the next era.

Moving Forward

In order for users to rely on this, it will again be necessary for institutions and legislators to adapt rules and laws. First, the New York Convention – Article IV – does not include the possibility of using the Blockchain for international arbitration, surprisingly in 1958. UNCITRAL would have to issue recommendations as they did in 2006, to endorse the use of blockchain in addition to the other forms of electronic communication that provides a legitimate basis for including blockchain-based ADR – with its secured storage of data that are originals and authentic – in Article IV. It would have to issue a recommendation that provides that originals are not only paper originals but ‘blockchain originals’ that do not require authentication or certification given the nature of blockchain. No more daunting ‘Ws’. Admittedly, the status of those recommendations under Article 31 of the Vienna Convention on the Law of Treaties is one of soft law only. But realism compels us to resort to this, as one could not imagine a replacement of the treaty itself or even an amendment or supplement to the treaty. Yet, we must allow our disruptive game changers to bring this pivotal form of dispute resolution to the New Age of international trade.

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The Contents of Journal of International Arbitration, Volume 35, Issue 5

Mon, 2018-10-08 02:45

Maxi Scherer

We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:

Klaus Peter Berger, The Direct Involvement of the Arbitrator in the Amicable Settlement of the Dispute: Offering Preliminary Views, Discussing Settlement Options, Suggesting Solutions, Caucusing

This article explores the question whether and to what extent international arbitrators should become directly involved in the parties’ efforts towards an amicable settlement of their dispute. It demonstrates that the controversy over the international arbitrator’s role in the facilitation of settlements is just one example of a wider and long-standing debate on the proper role of a tribunal in international arbitral proceedings. The article favours a pragmatic approach based on party autonomy as the foundation of arbitration. The parties may very well agree to expand the tribunal’s mandate so that the arbitrators may also act as conflict resolvers by facilitating a settlement of the parties’ dispute. However, arbitrators may never impose their preliminary views on the parties or employ any other means to promote an amicable settlement against their will.

Michael W. Bühler, Out of Africa: The 2018 OHADA Arbitration and Mediation Law Reform

Almost twenty years after it adopted the Uniform Act on Arbitration (UAA), the Organization for the Harmonization of Business Law in Africa (OHADA) revised its UAA and adopted a new Uniform Act on Mediation (UAM), along with a fresh set of arbitration rules of the Common Court of Justice and Arbitration in Abidjan (the ‘CCJA Rules’). These three texts were revised with the assistance of an external consultant, the author of this article. Among other changes, the 2018 UAA has provided arbitral tribunals with an express power to determine whether compulsory pre-arbitral steps (such as mandatory mediation) have been complied with, and to suspend the arbitration until such requirements have been met. It has also fixed strict time limits for local judges asked to act in support of arbitration. This article further questions whether the few limited improvements to the CCJA Rules will positively impact the future of the CCJA’s arbitration centre, given its very low caseload. With the 2018 UAM, a solid legal platform for the use of mediation in the region is now in place. The training of mediators and arbitrators, and their ability to carry out both the acts and rules in an efficient manner and effectively coexist with the judiciary, remain major challenges for the region.

Gordon Blanke, Free Zone Arbitration in the United Arab Emirates: DIFC v. ADGM: (Part I)

This article is published in two parts and discusses the concept and practice of free zone arbitration in the United Arab Emirates (UAE). More specifically, the article seeks to highlight the status quo of arbitration in the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), both of which may serve as an offshore seat of arbitration in their own right. Both the DIFC and the ADGM offer a common law alternative to arbitration in onshore UAE. Part I of the article focuses on arbitration in the DIFC. It provides an introduction to the judicial and legislative framework of the DIFC, including in particular the main provisions and the operation of the DIFC Arbitration Law, the institutional framework of arbitration in the DIFC, the curial function of the DIFC Courts in DIFC-seated arbitrations, and the recognition and enforcement of domestic DIFC and foreign arbitral awards in the DIFC. Part I also discusses the DIFC Courts’ status as a conduit jurisdiction facilitating the recognition and enforcement of non-DIFC awards for onward execution in onshore Dubai and beyond.

Edgardo Muñoz, Mexican Punitive Damages in Commercial Arbitration: Forecasting the Future

In February 2014, the Supreme Court of Mexico, citing US scholarship and case law, held that punitive damages had to be awarded to a tort plaintiff as part of the indemnity afforded by Mexican law under the heading of moral damages (daños morales). Before this landmark decision, nothing similar to punitive damages existed in the Mexican legal system. In the context of arbitral proceedings, this new interpretation of moral damages gives rise to two questions at the core of the international discussion on punitive damages and arbitration. The first has regard to the power of arbitral tribunals with seat in Mexico to award punitive relief when the applicable substantive law, including Mexican law, contemplates it. The second is the possibility of enforcing foreign-based law punitive damages awards in Mexico. Despite the early stage and still incipient discussion regarding the true nature and application of punitive damages in Mexico, the author forecasts that, while they may be an available relief in arbitration proceedings in Mexico, this decision is a rare exception and their quantum limited. In addition, Anglo-American law based punitive damages awards may still find a public policy obstacle for their enforcement or grounds for their nullity in Mexico.

Mauro Megliani, Thou Shalt Not Arbitrate: Sovereign Debt and Investment Arbitration

This article addresses the issue of the interaction between sovereign debt and investment arbitration. The point has been recently highlighted by the Report of the UN Independent Expert on Sovereign Debt. In this context, investment arbitration has been regarded as capable of disrupting an orderly debt restructuring, since creditors may prefer operating outside a restructuring process and submitting their claims to arbitration. Arbitration becomes an escape route for creditors who do not want to accept take-it-or-leave-it conditions and are faced with domestic courts who decline to hear the case on the basis of the immunity doctrine. Arbitration may well be the ideal venue to balance the interests at stake. Under a human rights approach, creditors are called not to lend or have to cease lending when doing so would affect the socio-economic rights of the population. Under a necessity approach, the obligation of paying interest and reimbursing capital would be suspended to the extent that it would affect the duty of a state to provide essential services to the population. Under a transnational public policy approach, a claim is not enforceable when doing so would infringe the socio-economic rights of the population. Under an expropriation approach, the compensation for a default should consider the speculative intent in purchasing bonds after the default and award not the nominal value but the purchase price.

BOOK REVIEW

Philip Wimalasena, Die Veröffentlichung von Schiedssprüchen als Beitrag zur Normbildung [The Publication of Arbitral Awards as a Contribution to Legal Development] Tübingen: Mohr Siebeck. 2016.

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Beyond USMCA: ISDS à la carte

Mon, 2018-10-08 00:17

Nikos Lavranos

Zooming out from the excellent analysis of Robert Landicho and Andrea Cohen on the specific changes that the USMCA as the intended successor of NAFTA will bring for investment protection and ISDS, this contribution will place the USMCA in a global perspective, in particular regarding the efforts of the EU to replace ISDS system with the ICS/MIC.

The à la carte approach of Canada and Mexico

Canada is an interesting example of the very flexible à la carte approach regarding ISDS provisions. When CETA was first finalized, Canada agreed to an old school ISDS approach with a few minor tweaks. However, after the backlash against ISDS in Europe, which was mainly focused on TTIP, Canada accepted – after a two year long ‘legal scrubbing’ process – the EU’s proposal for the so-called investment court system (ICS). In parallel though, Canada accepted the old school ISDS system in the CTTP, whereas in the context of the USMCA, Canada was ready to give up ISDS with the US, while maintaining it in a restricted version regarding Mexico.

Also, Mexico has been applying the à la carte approach, depending on the demands of the other Contracting Parties. Like Canada, Mexico also signed up to the old school ISDS system in the CTTP and accepted to maintain it for the USMCA, whereas it recently signed up to the ICS proposal in the updated EU-Mexico FTA.

Thus, on the one hand, both Canada and Mexico have accepted the ICS as the purported successor of ISDS in their bilateral FTAs with the EU, while on the other hand, they are keeping ISDS in the CTTP – and as far as Mexico is concerned in the USMCA.

In contrast, US President Trump has been more consistent in withdrawing completely from the CTTP (formerly known as TTP) on his first day in office and successfully removed ISDS in USMCA regarding Canada. These steps reflect his apparent aversion against ISDS, despite the fact that the US never lost a NAFTA case and US investors have been heavy (and often successful) users of the ISDS system under NAFTA and other US FTAs and BITs.

The à la carte approach of the EU

Whereas the EU has successfully imposed its ICS proposal on Canada, Singapore, Vietnam and Mexico in its FTAs, thereby effectively making the ICS the blueprint for all its future FTAs, it failed to convince Japan to accept it in the recently concluded EU-Japan FTA. Moreover, the EU did not even bother to put it on the table for the currently on-going FTA negotiations with Australia and New Zealand.

The reason for that is not so much that the EU does not want to include some sort of ISDS/ICS provisions in its FTAs, but rather due to the competence debacle after the CJEU determined in its Opinion 2/15 on the EU-Singapore FTA that the EU does not have exclusive competence over ISDS and the “Wallonia-drama” when Wallonia threatened to block the finalization of the CETA negotiations. In other words, the EU now prefers to conclude purely old school trade FTAs, leaving investment protection and ISDS chapters out of the FTAs unless all Member States sign up to them.

Nonetheless, the EU continues its efforts to create traction for a multilateral investment court (MIC), which is currently negotiated within UNCITRAL. In this context, it is interesting to note that Canada is a strong supporter of the EU in the UNCITRAL negotiations and coincidentally managed (together with the EU) to get a Canadian investment treaty negotiator to become chair of the UNCITRAL working group. In stark contrast to that, the US and Japan have been and continue to be the strongest critics of the MIC proposal. The next UNCITRAL negotiation round will take place at the end of October/early November in Vienna. After that, it will be clear to what extent the MIC is supported.

Thus, the bottom line is that far from creating uniformity and consistency with regard to ISDS provisions at a global level, States are in fact introducing different ISDS/ICS configurations and thus create more fragmentation and potential inconsistency. Indeed, the US, Canada and the EU are even dropping ISDS completely from their FTAs, which is exactly what many NGOs, academics, national parliaments and the European Parliament, are calling for.

Accordingly, the future ISDS menu, depending on the States involved, could look as follows (with various combinations possible):

• no ISDS
• ISDS light and restricted
• old school ISDS
• ICS
• MIC

Less Rule of Law and less access to justice

So what are the consequences of restricting or even completely eliminating ISDS?

Firstly, access to justice is limited and made more expensive because it will require – as rightly noted by Robert Landicho and Andrea Cohen – more sophisticated nationality planning and treaty shopping, which in turn means additional expenses to set-up and finance subsidiaries with actual or substantial business activities in countries like Switzerland or post-Brexit UK, which still maintain numerous BITs with old school ISDS provisions. Obviously, many SMEs, who hardly can afford the current ISDS system, will be completely shut out of the system, unless they bring Third Party Funders (TPFs) on board. In other words, increasingly only large multinationals will be able to go through the whole ISDS procedure, including the recognition and enforcement phase.

Secondly, States will increasingly be able to get away with behavior against foreign investors, which otherwise would fall foul of their legal obligations under their BITs and FTAs. Prudent investors are aware of that and will put a risk premium on their products and services, which eventually will have to paid by the end consumers, including those in developing and transitional countries.

So, the main conclusion to be drawn from the above is that States, such as the US, Canada, the EU and its Member States, which used to be the champions of promoting ISDS and thus improving the Rule and access to justice worldwide are now the ones who actively undermine exactly those virtues.

Thus, in future the menu carte will be increasingly accompanied by a note of the Chef stating that “unfortunately, ISDS is not served anymore” or that “unfortunately, as of today, certain ISDS ingredients have been replaced by ICS/MIC ingredients”.

In any event, one thing is certain: the food will not taste as good as it used to be and the bill will be much higher.

Bon appétit!

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Swiss Federal Supreme Court Confirms the Principles for the Admissibility of a Success Fee

Sat, 2018-10-06 23:41

Georg von Segesser and Petra Rihar

In a decision dated 26 July 2018 and published on 29 August 2018, the Swiss Federal Supreme Court (the “Supreme Court”) dismissed an appeal to set aside an arbitral award as it found that Swiss public policy was not violated by a sole arbitrator’s confirmation of a success fee owed to a Swiss law firm by its client. With reference to its previous case law, the Supreme Court held that the disputed success fee did not raise any issues despite the disproportion between its fixed and variable parts and the lack of alignment it created between the client’s and counsel’s interests (4A_125/2018).

Background

B. AG, a Zurich based law firm (“B”), and A. SA, a Portuguese company seated in Oliveira de Frades (“A”), entered into two Engagement Letters agreeing that B would represent A, as claimant and counter-respondent, in two ICC arbitration proceedings: the first against C GmbH and the second against D GmbH. With respect to B’s remuneration, B and A agreed on a combination of a reduced hourly fee and a success fee. The Engagement Letters were subject to Swiss law and contained an arbitration clause in favour of Swiss Rules arbitration in Zurich.

The Engagement Letter concerning the ICC arbitration against D GmbH provided for different remuneration scenarios in case that the amount sought by A would be determined by a decision or a settlement:

“A success fee consisting of 15% on (i) any amount claimed by and awarded to A. SA (ignoring any successful set-off defence) applies.
The success fee becomes payable in addition to the reduced blended hourly rate. The amounts in question do not include any compensation for attorney’s fees or other costs of arbitration and apply irrespective of whether the amount is determined by a decision of [sic] settlement.
In the event of a full settlement disposing of all claims in the arbitration, the success fee is reduced to 4% calculated based on the difference between the aggregate amount in dispute (total of claim, counter-claim and sett-off defence).
Should B. AG consider a settlement offer made by D. GmbH to be appropriate, it may request A. SA to consent to such offer. Should A. SA not wish to agree to the settlement offer, B. AG in its own discretion may opt to be compensated in line with this success fee arrangement as if the settlement offer had been accepted.
In no event may (i) the success fee be negative or (ii) exceed CHF 1’500’000 or its equivalent in other currencies (success fee cap).”

The amounts in dispute for the two proceedings were EUR 10.2M for A.’s claim and EUR 147.2M for the counterclaim in the dispute with C., respectively EUR 3.1M for A’s claim and EUR 1.8M for the counterclaim in the dispute with D.

After A had reached a settlement with respect to both ICC arbitrations for a total amount of EUR 11.5M to be paid by A, B invoiced A for unpaid hourly fees in the amount of CHF 168,633.60 and the payment of a success fee in the amount of CHF 2M, reduced at B’s discretion from CHF 2.5M (i.e. the sum of the fee caps for the two disputes). A contested the invoice.

B initiated arbitration proceedings against A in Zurich seeking the payment of CHF 2.5M plus interest and expenses. The sole arbitrator ordered A to pay B fees in the amount of CHF 1,666,722, plus interest. When analyzing the admissibility of the disputed success fee, the sole arbitrator considered the principles set out by the Swiss Federal Supreme Court in its decision 4A_240/2016 dated 13 June 2017 (BGE 143 III 600). Regarding the permissible amount of the success fee however, the sole arbitrator expressly deviated from said Supreme Court decision.

A appealed before the Supreme Court arguing that the decision of the sole arbitrator violated Swiss public policy (article 190(2)(e) of the Private International Law Act, “PILA”) because his interpretation of the Engagement Letters disregarded the principle of a lawyer’s duty of independence due to both the amount of the contingency fee and the fee arrangement’s different outcomes for resolving the dispute by decision or settlement.

Decision

The Supreme Court begins its considerations with an analysis of the contested fee agreement. It notes in particular that the agreed upon difference in the calculation of the success fee in case of settlement rather than an arbitral award, resulted in an incentive for counsel to get A to settle the dispute. Indeed, the success fee cap amount of CHF 1.5M could only be reached if 97% of the appellant’s claims were granted by an award. By contrast, in case of a settlement, the reduction of the counterclaims by a mere quarter would suffice to reach the cap. The Supreme Court also refers to the sole arbitrator’s determination that the success fee cap amount would be owed in most cases where the parties reached a settlement. Moreover, the Supreme Court notes that the option granted in the third paragraph of the success fee clause effectively guarantees counsel the settlement-based success fee even if the client were to reject the settlement offer.

Noting that a success fee arrangement can only lead to a better representation of a client if it keeps the interests of client and counsel aligned, the Supreme Court finds that the necessary incentive for counsel was absent from the present fee arrangement. Under these circumstances, the acceptance of a settlement may have been an appropriate solution for the client, but not necessarily also the most economically beneficial.

The Supreme Court goes on to state that an arrangement such as the one under review, where the success-based fee amount outweighs the fixed (hourly) amount by a factor of five, is especially problematic with regard to the independence of counsel as well as certain other provisions of the domestic Swiss law governing the legal profession (“BGFA”). However, in light of its restricted scope of review in appeals against arbitral awards pursuant to art. 190 (2) PILA, the Supreme Court deems these issues not decisive for the present appeal.

Delving into its examination of the alleged violation of Swiss public policy (“ordre public”), the Supreme Court restates its longstanding practice in the matter as follows: the substantive determination of a disputed claim only violates public policy if it fails to recognise fundamental legal principles and, as a result, becomes wholly incompatible with the essential, largely recognised system of values, which, according to the prevailing view in Switzerland, should form the basis of every legal system. These principles include pacta sunt servanda, the prohibition of abuse of rights, the principle of good faith, the prohibition of expropriation without compensation, the prohibition of discrimination, the protection of vulnerable persons and the prohibition of excessive commitment (cf. Art. 27 para. 2 CC) if this constitutes an obvious and serious violation of personality.

The Supreme Court then classifies the present dispute as an issue of the conflict between counsel’s pecuniary interests and those of the client, rather than an issue of the lawyer’s independence from the client’s counterparty. It is in this context, that the Supreme Court goes on to review the following precedents regarding the question whether lawyers’ success fees are compatible with the Swiss public policy.

In an enforcement decision, an award granting a success fee of USD 1,837,500 (corresponding to approximately 2% of the total settlement amount) was classified as compatible with Swiss public policy (5A_409/2014). In another decision, the Swiss Federal Supreme Court held that a foreign arbitral award granting a success fee amounting to 30% of the procedural profit did not violate Swiss public policy (5P.201/1994). Even with a success fee of more than CHF 6,500,000, corresponding to approximately 6.5% of the financial interest, a violation of Swiss public policy was denied, even though the fee agreement in question was a pactum de quota litis, which would be inadmissible under domestic Swiss law (5P.128/2005).

Against this background, the Swiss Federal Supreme Court finds that the success fee under the first engagement letter does not raise any issues. With regard to the second engagement letter, it notes that the total amount of fees confirmed by the sole arbitrator amounts to less than 2% of the amount in dispute, which cannot be considered a violation of Swiss public policy. As for the disproportion between the fixed (“Fixhonorar”) and variable parts (“Erfolgshonorar”) of the fee and the lack of aligned interests resulting from the increased fee in case of a settlement, the Supreme Court finds that these elements also fail to amount to a violation of public policy. Consequently, the Supreme Court dismissed A’s appeal.

Comment

In the present decision, the Supreme Court confirms that a success fee (“pactum de palmario”) is in principle admissible under Swiss law. However, due to the international nature of the arbitral award under appeal and its correspondingly restricted scope of review with regard to alleged violations of Swiss public policy pursuant to art. 190 (2) of the PILA, it does not examine the admissibility parameters under domestic Swiss law as set out in BGE 143 III 600. Instead, it validates the sole arbitrator’s explicit departure from those domestic requirements and refers to its established jurisprudence on the compatibility of success fees with Swiss public policy to validate the award. In doing so, it indicates that only the nominal amount of fees or the ratio between the total fees and the amount in dispute are relevant with regard to an alleged violation of public policy; not however any detrimental effect on lawyerly independence or conflicts of interest created by such a fee arrangement.

For reference, under Swiss law, a lawyer’s success fee is admissible only under the following conditions:

(1) Regardless of the outcome of the proceedings, the lawyer must earn an hourly fee which not only covers his own costs, but also enables him to make a reasonable profit.

(2) There must be a reasonable ratio between the performance-related component and the hourly fee which is owed regardless of the outcome of the case to ensure that lawyer’s independence is not impaired and there is no risk of unfair advantage.

(3) The Supreme Court further sets a time limit: The remuneration agreement containing a success fee, may be concluded at the beginning of the mandate or after the end of the legal dispute, but not during the ongoing representation in a dispute.

(4) The Supreme Court also states that success fees must be scrutinized against the background of Art. 12 lit. e and lit. i of the BGFA warranting the lawyer’s independence as well as the maintaining of clear conditions with regard to the invoicing.

One question that the Supreme Court’s decision does not address is whether a fee agreement such as the present one could lead to the sanctioning of counsel by the supervisory body for violation of professional conduct rules.

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CIETAC Arbitration Award Enforced in the U.S. Despite Alleged Forgery in the Underlying Agreement

Fri, 2018-10-05 20:00

Katharine Menéndez de la Cuesta and Arantxa Cuadrado Pérez-Broseta

Allegations of fraud and forgery of a sales agreement are for an arbitral tribunal to decide and a party should not ignore a notice of arbitration. This is according to a federal judge who enforced an award against a party that claimed the agreement was forged and did not participate in the arbitral proceedings. On May 30, 2018, U.S. District Court Judge Joanna Seybert of the Eastern District of New York granted a petition to enforce an arbitral award rendered in Tianjin, China, by the China International Economic and Trade Arbitration Commission (“CIETAC”) and denied a motion to dismiss the petition to enforce. The Court found that none of the grounds to deny enforcement of an arbitral award alleged by the Respondent under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “NYC”) were satisfied. The case is Tianjin Port Free Trade Zone Int’l Trade Serv. Co., Ltd. v. Tiancheng Chempharm Inc.USA, No. 17-CV-4130 (JS)(AYS), 2018 LEXIS 90106 (E.D.N.Y., May 30, 2018).

The dispute arose out of an agreement for the sale and purchase of dietary supplements entered into between Tianjin Port Free Trade Zone International Trade Service Co., Ltd., (the “Seller”) and Tiancheng Chempharm, Inc. USA (the “Buyer”) (the “Sales Agreement”). According to the Seller, the goods were delivered, but the Buyer failed to pay the agreed purchase price. The arbitrator found in favor of the Seller and ordered the Buyer to pay the purchase price, including interest, and the costs of the arbitration.

The Buyer asserted three grounds to oppose the enforcement of the award, namely, that (i) it did not receive “notice of the arbitration proceedings;” (ii) the Sales Agreement “in question was in fact fabricated, and the Buyer’s representative signature was forged;” and (iii) the Seller failed to make “a good faith effort to amicably settle [the] dispute” before starting the arbitration as required by the Sales Agreement. 1) Resp’t Mem. Of P. & A. In Supp. Of Its Mot. To Dismiss Pet. To Confirm Arbitration Award, ECF No. 23, Jan. 4, 2018. jQuery("#footnote_plugin_tooltip_2156_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2156_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Judge Seybert rejected all three arguments.

The Notice of Arbitration

Article V(1)(b) of the NYC provides that the party against whom an award is sought to be enforced must have been given “proper notice of the appointment of the arbitrator or of the arbitration proceedings” and must have been “able to present his case.” Here, the Buyer claimed it “never received any notice of the arbitration proceeding in China” being “unable to appoint an arbitrator” and “deprived of its right to have the opportunity” to serve a petition to vacate the award. 2) Resp’t Mot., p. 7. jQuery("#footnote_plugin_tooltip_2156_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2156_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In the EDNY, the party opposing enforcement under Article V(1)(b) must show that it was not given “ ‘notice reasonably calculated’ to inform [it] of the proceedings and ‘an opportunity to be heard’ ” Jiangsu Changlong Chem., Co., Inc. v. Burlington Bio-Medical & Sci. Corp., 399 F. Supp. 2d 165, 168 (E.D.N.Y. 2005). Consistent with this standard, the Court in Tianjin Port Free found that “CIETAC provided Tiancheng with the opportunity to participate in the arbitration in a meaningful manner.” CIETAC verified that the notice of arbitration and the other documents were properly delivered to the Buyer who, according to the Court, “simply chose not to participate in the arbitration proceedings.” Tianjin Port Free, at 4.

The Alleged Forgery of the Sales Agreement

The second argument alleged by the Buyer was that the Sales Agreement was forged. The Buyer alleged that the Sales Agreement was “fraudulent and void” because the Buyer’s representatives never signed the document, never had a direct business relationship with the Seller and never traveled to Tianjin, China, the city where the Sales Agreement was allegedly signed.

The Buyer’s attack was to the contract as a whole. Judge Seybert rejected the Buyer’s argument because “the issue of whether the underlying contract that is the subject of the arbitrated dispute was forged or fraudulently induced [is] a matter to be determined exclusively by the arbitrators.” Tianjin Port Free, at 5 (citing the Second Circuit’s landmark decision on this issue, Europcar Italia, S.p.A. v. Maiellano Tours, Inc., 156 F.3d 310, 315 (2d Cir. 1998)). The decision is consistent with Second Circuit precedent.

In Europcar, the party resisting enforcement alleged that enforcement of an award based on a forged contract would be contrary to United States public policy, invoking Article V(2)(b) of the NYC. The Second Circuit found that the enforcement would not violate public policy and distinguished two separate issues, “the issue of a fraudulently obtained arbitration agreement or award, which might violate public policy and therefore preclude enforcement,” and “the issue of whether the underlying contract that is the subject of the arbitrated dispute was forged or fraudulently induced—a matter to be determined exclusively by the arbitrators.” Europcar, at 315. The Second Circuit relied on Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967) to frame the discussion within the old distinction between attacks to arbitration agreements in particular—for the court to decide—or attacks to the contract in which they are contained as a whole—for the arbitrators to resolve. But Prima Paint dealt with the issue of the validity of the entire contract tainted with fraud in its inducement. It did not involve allegations of forgery, which would arguably go to the existence of the contract instead of its validity.

Other U.S. circuits have approached the issue of forged contracts containing arbitration agreements differently. In China Minmetals Materials Imp. & Exp. Co v Chi Mei Corp., 334 F.3d at 290 (3d Cir. 2003), the Third Circuit vacated a district court decision confirming a CIETAC arbitration award holding that under First Options, a party opposing enforcement of a foreign arbitration award under the NYC on the grounds that the contract which contains the arbitration agreement “was void ab initio is entitled to present evidence of such invalidity to the district court, which must make an independent determination of the agreement’s validity…” China Minmetals, at 289. The China Minmetals court distinguished the case from Europcar reasoning that in Europcar “the party resisting enforcement did not argue that the agreement containing the arbitration clause (…) was forged or fraudulent; rather, it argued that one of the agreements on which the arbitrators based their substantive decision (…) [which did not include the arbitration clause] was forged.” China Minmetals, n. 12.

In Will-Drill Resources, Inc. v. Samson Resources Co., 352 F.3d 211 (5th Cir. 2003), another case dealing with allegedly forged contracts, the Fifth Circuit concluded that “where a party attacks the very existence of an agreement, as opposed to its continued validity or enforcement, the courts must first resolve that dispute.” Will-Drill Resources, at 219.

Accordingly, for the Third and Fifth Circuits, attacks to the validity of the contract as a whole are distinct from attacks to its existence. The U.S. Supreme Court has not yet decided the question of whether challenges to the existence of an agreement to arbitrate are for the court or for the arbitrator to decide. In Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), the Supreme Court held that a challenge to the validity of a contract as a whole must go to the arbitrator. Buckeye, at 1210. However, in a frequently cited footnote, the Supreme Court clarified that, “[t]he issue of the contract’s validity is different from the issue [of] whether any agreement between the alleged obligor and obligee was ever concluded,” and that the Court was only deciding the former. Buckeye, at 441 n.1.

The Pre-Arbitration Negotiations

The third argument raised by the Buyer was also dismissed because the Court found that the Seller did attempt to amicably settle the dispute before commencing the arbitration. The Buyer claimed the arbitration clause provided that “entering into ‘friendly negotiations’ for the settlement of a dispute is a condition precedent to instituting arbitration” but the Seller failed to do so. 3) Resp’t Mot., p. 9. jQuery("#footnote_plugin_tooltip_2156_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2156_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Court determined that the Seller tried to resolve the dispute with the Buyer before starting the arbitration but that, “as the arbitration panel found,” the Seller did not cooperate (Tianjin Port Free, at 5). In other words, the Court did not decide the issue de novo but gave deference to the arbitrator’s finding that the condition precedent to the obligation to arbitrate had been satisfied.

The Court’s conclusion is consistent with BG Group Plc. v. The Republic of Argentina, 134 U.S. 1198 (2014), where the U.S. Supreme Court held that the issue of whether the parties complied with a prerequisite to an obligation to arbitrate set forth in an arbitration agreement is a procedural arbitrability issue that is for the arbitrator to decide.

New York is an international transactions hub and, accordingly, a leading jurisdiction for recognition and enforcement proceedings of foreign arbitral awards. The E.D.N.Y. decision is consistent with the liberal federal policy in the U.S. favoring arbitration of commercial disputes.

References   [ + ]

1. ↑ Resp’t Mem. Of P. & A. In Supp. Of Its Mot. To Dismiss Pet. To Confirm Arbitration Award, ECF No. 23, Jan. 4, 2018. 2. ↑ Resp’t Mot., p. 7. 3. ↑ Resp’t Mot., p. 9. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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What’s in a Name Change? For Investment Claims Under the New USMCA Instead of NAFTA, (Nearly) Everything.

Fri, 2018-10-05 00:10

Robert Landicho and Andrea Cohen

Young ITA

President Trump’s October 1, 2018 announcement that the United States, Canada, and Mexico have reached an agreement to replace the 1994 North American Free Trade Agreement (NAFTA) marks a veritable sea change in investor-state dispute settlement in the region. Previous and prospective users of NAFTA’s dispute resolution procedures will immediately note that this new free-trade agreement departs substantively and significantly from the NAFTA’s investment chapter—which has been on the books since 1994. More than just a change in name, the new United States-Mexico-Canada Agreement (USMCA), is an identity change.

This brief note discusses preliminary impressions from the released text of the USMCA and addresses only the investor-state arbitration provisions in USMCA, Chapter 14, that purport to replace Chapter 11 of the NAFTA. It begins with a discussion of the implications for those with cases already before NAFTA tribunals, then moves to the relevant considerations for investors in Canada and Mexico, and then presents some key definitional changes in the new text. The note concludes with some initial takeaways and a watchlist for readers while the USMCA Parties await U.S. Congressional approval. This note is far from comprehensive – no doubt, the applicability, interpretation, and application of the USMCA’s provisions will be the subject of increased discussion and scrutiny in the coming months.

Part I

For now, the USMCA is not yet the law of the land in the United States – as with any U.S. treaty, it must first be approved by Congress. Nonetheless, there are (at least) three key takeaways at this initial stage:

1. Under this proposed USMCA text, current NAFTA litigants need not fear that the USMCA will disrupt ongoing NAFTA arbitrations (i.e., the shift to the USMCA will have no effect on the fourteen cases that have already been filed under Chapter 11 of the NAFTA).

2. Although the NAFTA has not yet been terminated, the USMCA provides that, once terminated, investors may nevertheless file NAFTA claims within three years, provided the investments were validly made in accordance with Chapter 11 of the NAFTA already (or are made during the short remaining interval while NAFTA is still in force).

3. The USMCA would completely eliminate future investor-state arbitration between U.S. and Canadian parties under the USMCA. Moreover, the USMCA would limit the type of disputes that may be brought by investors of investments made between the United States and Mexico, and would force investors to file claims in national courts first, and then wait 30 months before initiating arbitration (unless the investor has a contract with the government relating to an “covered sector” expressly specified in the USMCA).

Thus, investors with existing investments covered by the NAFTA who wish to bring arbitration against Canada pursuant to Chapter 11 of NAFTA would need to do so within three years of the NAFTA’s termination if the USMCA is approved by Congress and the NAFTA is terminated, or otherwise risk losing their ability to file investor-state arbitration under the new USMCA altogether. Investors with qualified investments in Mexico may still have the option to bring an investor-state arbitration under the USMCA after filing a claim in national courts and waiting the requisite 30 months after initiating that lawsuit, but would do well to confirm whether their potential investment claims are part of a covered sector under the USMCA (thereby enabling them to take advantage of the full remedies available under the USMCA), or if they will be limited in the types of claims they can file.

No change for current litigants of NAFTA claims, but claims for investments established or acquired while NAFTA is in force must be brought within three years of NAFTA’s termination.

For those parties with arbitrations that have already been filed under Chapter 11 of the NAFTA, the current text of the USMCA would allow these NAFTA arbitrations to proceed uninhibited. Moreover, Annex 14-C of the USMCA, pertaining to “Legacy Investment Claims and Pending Claims,” directly addresses whether (and in which circumstances) prospective claims might be “grandfathered” into the NAFTA’s existing investment protection regime.

A “legacy investment” is defined in Article 6(a) of Annex 14-C as “an investment of an investor of another Party in the territory of the Party established or acquired between January 1, 1994, and the date of termination of NAFTA 1994, and in existence on the date of entry of force of this agreement.” Accordingly, an investment must have been “established or acquired” when the NAFTA is still in force, and remain “in existence” on the date of the USMCA’s entry into force.

As users of investment arbitration are no doubt familiar, a State must express its consent to arbitrate investment claims against an investor from another State. In the context of the “legacy investments” discussed above, the new USMCA makes clear that an investor cannot wait to file its NAFTA claims ad infinitum. Rather, each State Party’s consent to arbitrate in accordance with Section B of Chapter 11 of the NAFTA expires “three years after the termination of NAFTA 1994,” under Article 3 of Annex 14-C.1) Notably, under Article 2 of Annex 14-C, the consent and submission to arbitration must “satisfy the requirements” of Chapter II of the ICSID Convention. jQuery("#footnote_plugin_tooltip_6314_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Chapter 14 also provides that “an arbitration initiated pursuant to the submission of a claim under Section B of NAFTA 1994 while NAFTA 1994 is in force may proceed to its conclusion […] the tribunal’s jurisdiction with respect to such a claim is not affected by the termination of NAFTA 1994.” Thus, Annex 14-C clarifies that the USMCA creates no jurisdictional impediment to the completion of already-filed NAFTA claims.

No investment claims for future U.S. investors in Canada (or vice-versa) after the NAFTA’s Termination.

The USMCA’s current text eliminates the possibility of future investor-state arbitration between U.S. and Canadian parties under the USMCA for investments made after the termination of the NAFTA.2) Although investor-state arbitration is dead between the U.S. and Canada, state-to-state arbitration between the two very much survives. Canada won its fight over NAFTA Chapter 19, paying for it in dairy concessions, and there will be no change to those provisions. This means that Canada may continue to bring suit before a special panel over alleged unfair trade practices by the U.S. and Mexico, including anti-dumping and countervailing duties. jQuery("#footnote_plugin_tooltip_6314_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This is unequivocal in the text of Article 14.2 of the USMCA, which limits the scope of investor-state arbitration to Legacy Investment Claims and Pending Claims, Mexico-U.S. Investment Disputes, and Mexico-U.S. Investment Disputes Related to Government Contracts only:

For greater certainty, an investor may only submit a claim to arbitration under this Chapter as provided under Annex 14-C (Legacy Investment Claims and Pending Claims), Annex 14-D (Mexico-United States Investment Disputes), or Annex 14-E (Mexico-United States Investment Disputes Related to Covered Government Contracts).

Investors wishing to arbitrate claims will be forced to arbitrate in a forum other than a NAFTA investment tribunal (likely pursuant to a contract or other applicable instrument containing a valid arbitration clause), or be forced to bring claims in local courts if a domestic remedy is available.

The USMCA imposes limits on investment arbitration for U.S. investors in Mexico (or vice-versa).

Although not as clear-cut as the prohibition on claims of U.S. investors against Canada (or vice-versa), the new USMCA provisions would substantially limit the availability of investor-state dispute settlement for claims pertaining to investments made by U.S. investors in Mexico (and vice-versa).

Investor-state arbitration for U.S.-Mexico investment claims survives under Annex 14-D, but only as to claims of direct expropriation,3) Direct expropriation under Annex 14-B, Clause 2 occurs when “an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure.” jQuery("#footnote_plugin_tooltip_6314_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); claims for violations of national treatment,4) USMCA Article 14.4.1 defines national treatment as “treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.” jQuery("#footnote_plugin_tooltip_6314_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); or for violations of the most-favored-nation (MFN) provision of the USMCA5) Under the USMCA Article 14.5.1, most-favored-nation claims arise when a state’s treatment of an investor is “less favorable than the treatment it accords, in like circumstances, to investors of any other Party or of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.” Readers of the new USMCA will be particularly careful to read footnote 22 in Chapter 14, which provides that “the ‘treatment’ referred to in Article 14.5 (Most-Favored-Nation Treatment) excludes provisions in other international trade or investment agreements that establish international dispute resolution procedures or impose substantive obligations; rather, ‘treatment’ only includes measures adopted or maintained by the other Annex Party, which may include measures adopted or maintained pursuant to or consistent with substantive obligations in other international trade or investment agreements.” (emphases added) Like other provisions in Chapter 14 of the USMCA, the language of this provision may depart substantially from the definitions used in other investment agreements. jQuery("#footnote_plugin_tooltip_6314_5").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); (except for any MFN or national treatment claims “with respect to the establishment or acquisition of an investment,” which are expressly excluded).

An exception to the above limitation is found in Annex 14-E of Chapter 14, entitled “Mexico-United States Investment Disputes Related to Covered Government Contracts.” As the title of the annex suggests, Annex 14-E does not apply unless the claimant is “a party to a covered government contract”6) Article 6 of Annex 14-E defines “covered government contract” as “a written agreement between a national authority of an Annex Party and a covered investment or investor of the other Annex Party, on which the covered investment or investor relies in establishing or acquiring a covered investment other than the written agreement itself, that grants rights to the covered investment or investor in a covered sector.” jQuery("#footnote_plugin_tooltip_6314_6").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); that grants rights in a “covered sector” expressly named in Article 6 of Annex 14-E, in which case a claimant may rely on other benefits in the treaty, including the possibility of bringing claims for violations of the minimum standard of treatment afforded under customary international law,7) The USMCA defines the minimum standards of treatment due to investors “in accordance with customary international law, including fair and equitable treatment and full protection and security.” (Article 14.6.1). It adds that “(a) “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and (b) “full protection and security” requires each Party to provide the level of police protection required under customary international law.” (Article 14.6.2(a),(b)) jQuery("#footnote_plugin_tooltip_6314_7").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); claims of indirect expropriation,8) Indirect expropriation refers to a situation “in which an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.” (Annex 14-B, Clause 3) jQuery("#footnote_plugin_tooltip_6314_8").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); or claims with respect to the establishment of acquisition of an investment. The five “covered sectors” are:

(i) activities with respect to oil and natural gas that a national authority of an Annex Party controls, such as exploration, extraction, refining, transportation, distribution, or sale;
(ii) the supply of power generation services to the public on behalf of an Annex Party;
(iii) the supply of telecommunications services to the public on behalf of an Annex Party;
(iv) the supply of transportation services to the public on behalf of an Annex Party; or
(v) the ownership or management of infrastructure, such as roads, railways, bridges, canals, or dams, that are not for the exclusive or predominant use and benefit of the government of an Annex Party.9) See Article 6 of Annex 14-E (emphases added). It should be noted that the preservation of investor-state arbitration in these key sectors is likely due to successful lobbying by American industry groups during negotiations.

jQuery("#footnote_plugin_tooltip_6314_9").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The USMCA also adopts fundamental procedural changes for all remaining US/Mexico claims submitted to arbitration, even those in the covered sectors. Prospective claimants and their counsel will need to carefully plan a litigation strategy to comply with preconditions to arbitration under Annex 14-D.

1.
Prior to initiating investor-state arbitration under the USMCA, under Article 5 of Annex 14-D, U.S. and Mexican claimants must file suit in national courts. The dispute may proceed to arbitration only after “30 months have elapsed from the date the proceeding [in national courts] was initiated,” or after a final decision has been rendered in the national court of last resort (e.g., in the case of the United States, the U.S. Supreme Court). Recourse to national courts is not required where it would be “obviously futile or manifestly ineffective” – but it remains to be seen how national courts (or USMCA tribunals) will interpret this provision.

2. Appendix 3 of the USMCA also provides that U.S. investors “may not submit to arbitration a claim that Mexico has breached an obligation under this Chapter[…] if the investor or the enterprise, respectively, has alleged that breach of an obligation under this Chapter in proceedings before a court or administrative tribunal of Mexico.” Investors will likely question how Appendix 3 will be interpreted in light of Article 5 of Annex 14-D.

3. Moreover, arbitration under the USMCA must be filed within four years (i.e. 48 months) of the alleged breach by the claimant under Article 5 of Annex 14-D. As a practical matter therefore, assuming that a final decision in the national court of last resort has not been rendered prior to the 30 month waiting period, and assuming that the investor had filed suit in national court immediately after “the claimant first acquired, or should have first acquired, knowledge of the breach alleged … and knowledge that the claimant … or enterprise … has incurred loss or damage,” parties will have only 18 months (at most) to file their claims – roughly half of the time previously permitted under Chapter 11 of the NAFTA.

4. Importantly, where the claimant is party to a “covered government contract” under Annex 14-E, i.e., investors contracting with a government to provide services in one of the five “covered sectors,” the national courts requirement is waived10) See Footnote 31 to USMCA Chapter 14: “For greater certainty, Article 5.1(a)-(c) of Annex 14-D do not apply to claims under paragraph 2 [of Annex 14-E].” jQuery("#footnote_plugin_tooltip_6314_10").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and claimant may file anytime within a 3-year window. This means that – under the current USMCA text – those contracting with the government with respect to oil and gas activities, power generation, telecommunications, transportation, and infrastructure may not need to file in national courts first.

Regarding arbitrators, the USMCA explicitly adopts the IBA Guidelines on Conflicts of Interest in International Arbitration, including the guidelines on direct and indirect conflicts of interest, and any supplemental guidelines, in Article 6.5 of Annex 14-D. It also imposes a so-called “two-hats” bar, prohibiting arbitrators from “acting as counsel or as party appointed expert or witness in any pending arbitration under the annexes to this Chapter.”

Canada-Mexico investment arbitration might survive elsewhere, but not under the USMCA

Because no consent for investment arbitration has been included in the USMCA for investments between Canada and Mexico, investors seeking to bring investment claims are likely to rely on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) rather than the USMCA. The CPTPP, to which both Canada and Mexico are signatories, offers many of the same protections accorded to investors under both the NAFTA and the USMCA.11) Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Article 9: Investment jQuery("#footnote_plugin_tooltip_6314_11").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Mexico has already ratified the CPTPP and Canada has pledged to do so.12) “Canada Move Closer to CPTPP Ratification, Malaysia Calls for Trade Deal Review”, International Centre for Trade and Sustainable Development (Jun. 28, 2018) jQuery("#footnote_plugin_tooltip_6314_12").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The CPTPP will enter into force after 6 of the 11 signatory countries complete their ratification processes.

Part II

The USMCA uses lessons learned from NAFTA to clarify legal terms and amend arbitral procedure

Incorporating lessons from past NAFTA arbitrations, the USMCA Parties took steps to clarify certain key terms (including the standards of investment protection) throughout the agreement, often in footnotes, which may prove relevant in the USMCA’s interpretation. Some important changes are noted below:

1. Under the national treatment and most-favored-nation provisions of the USMCA, tribunals would be required to determine whether treatment is accorded in “like circumstances” based on a totality-of-the-circumstances test: “For greater certainty, whether treatment is accorded in “like circumstances” under this Article depends on the totality of the circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives.”

2. The USMCA offers more guidance on the definition of an “investment,” stating that “investment means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.”

3. In determining whether an “indirect expropriation” occurred within the meaning of Article 14.8.1 (as defined in Annex 14-B), the USMCA expressly states that this “requires a case-by-case, fact-based inquiry.” (It should be recalled that, under the current USMCA text, only claimants with a “covered government contract” in one of five “covered sectors” may file a claim for breach of the USMCA, Article 14.8.1, for an indirect expropriation).

a. Annex 14-B instructs tribunals to consider “the economic impact of the government action” (though economic impact alone is not determinative), “the character of the government action, including its object, context, and intent,” and “the extent to which the government action interferes with distinct, reasonable investment-backed expectations.”

b. Regarding “reasonable, investment-backed expectations,” it offers the following factors as guidance: “whether the government provided the investor with binding written assurances and the nature and extent of governmental regulation or the potential for government regulation in the relevant sector.”

4.
In contrast to the USMCA’s above definition of “indirect expropriation,” the USMCA specifically rejects that the “minimum standard of treatment under customary international law” should be defined by reference to an investor’s legitimate, investment-backed expectations. Specifically, Article 14.6(4) provides that “[f]or greater certainty, the mere fact that a Party takes or fails to take an action that may be inconsistent with an investor’s expectations does not constitute a breach of this Article, even if there is loss or damage to the covered investment as a result.” This departs from investment tribunals’ interpretation of the fair and equitable treatment standard under other investment treaties, or (some argue) the minimum standard of treatment under customary international law.

Codifying the interpretation from the NAFTA’s Free Trade Commission’s trilateral “Notes of Interpretation of Certain Chapter 11 Provisions” from 2001,13) NAFTA Free Trade Commission, “Notes of Interpretation of Certain Chapter 11 Provisions” (2001) (1. “Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party. 2. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.”) jQuery("#footnote_plugin_tooltip_6314_13").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_13", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Article 14.6(2) of the USMCA specifies that the term “minimum standard of treatment” is the customary international law standard, stating “[f]or greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the standard of treatment to be afforded to covered investments. The concepts of “fair and equitable treatment”14) Article 14.6(2)(a) defines “fair and equitable treatment” as “includ[ing] the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world.” jQuery("#footnote_plugin_tooltip_6314_14").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_14", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and “full protection and security”15) Article 14.6(2)(b) defines “full protection and security” as “requi[ring] each Party to provide the level of police protection required under customary international law.” jQuery("#footnote_plugin_tooltip_6314_15").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_15", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights.”

Things to watch

As current and prospective investors await congressional approval for the USMCA and the termination of the NAFTA, it might be asked: what happens next? The USMCA has created uncertainty for North American investors, which is likely to affect future foreign investment flows and raise new legal issues. Prudent investors and practitioners will watch for the following developments in the coming months:

Will NAFTA officially be terminated, and if so, when? What date will the USMCA come into force?

What are the likely issues that will emerge during the congressional approval process? How will industries respond to these changes, and what effect will their voices have on the USMCA’s approval? Will there be any proposed changes to the text of Chapter 14 of the USMCA?

Will the CPTPP be ratified before the NAFTA’s termination, and will it really offer Canadian and Mexican investors an effective avenue for future investor-state arbitration?

Finally, in light of well-known developments in Europe pertaining to investor-state arbitration,16) See, e.g., Laurens Ankersmit, “Achmea: the Beginning of the End for INVESTOR-STATE ARBITRATION in and with Europe?”, Investment Treaty News, International Institute for Sustainable Development (Apr. 24, 2018). jQuery("#footnote_plugin_tooltip_6314_16").tooltip({ tip: "#footnote_plugin_tooltip_text_6314_16", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); is the USMCA part of a global trend away from investor-state arbitration?

Given this uncertainty, current and prospective investors may consider whether certain investments may be structured (or restructured) through effective nationality planning. Investors should consult qualified counsel to discuss investment-protection alternatives to the new USMCA, including analysis of investment treaties between USMCA Parties and other States. These other investment treaties may contain more favorable standards of investment protection (or more advantageous procedural provisions) than those in the proposed USMCA text.

References   [ + ]

1. ↑ Notably, under Article 2 of Annex 14-C, the consent and submission to arbitration must “satisfy the requirements” of Chapter II of the ICSID Convention. 2. ↑ Although investor-state arbitration is dead between the U.S. and Canada, state-to-state arbitration between the two very much survives. Canada won its fight over NAFTA Chapter 19, paying for it in dairy concessions, and there will be no change to those provisions. This means that Canada may continue to bring suit before a special panel over alleged unfair trade practices by the U.S. and Mexico, including anti-dumping and countervailing duties. 3. ↑ Direct expropriation under Annex 14-B, Clause 2 occurs when “an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure.” 4. ↑ USMCA Article 14.4.1 defines national treatment as “treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.” 5. ↑ Under the USMCA Article 14.5.1, most-favored-nation claims arise when a state’s treatment of an investor is “less favorable than the treatment it accords, in like circumstances, to investors of any other Party or of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.” Readers of the new USMCA will be particularly careful to read footnote 22 in Chapter 14, which provides that “the ‘treatment’ referred to in Article 14.5 (Most-Favored-Nation Treatment) excludes provisions in other international trade or investment agreements that establish international dispute resolution procedures or impose substantive obligations; rather, ‘treatment’ only includes measures adopted or maintained by the other Annex Party, which may include measures adopted or maintained pursuant to or consistent with substantive obligations in other international trade or investment agreements.” (emphases added) Like other provisions in Chapter 14 of the USMCA, the language of this provision may depart substantially from the definitions used in other investment agreements. 6. ↑ Article 6 of Annex 14-E defines “covered government contract” as “a written agreement between a national authority of an Annex Party and a covered investment or investor of the other Annex Party, on which the covered investment or investor relies in establishing or acquiring a covered investment other than the written agreement itself, that grants rights to the covered investment or investor in a covered sector.” 7. ↑ The USMCA defines the minimum standards of treatment due to investors “in accordance with customary international law, including fair and equitable treatment and full protection and security.” (Article 14.6.1). It adds that “(a) “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and (b) “full protection and security” requires each Party to provide the level of police protection required under customary international law.” (Article 14.6.2(a),(b)) 8. ↑ Indirect expropriation refers to a situation “in which an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.” (Annex 14-B, Clause 3) 9. ↑ See Article 6 of Annex 14-E (emphases added). It should be noted that the preservation of investor-state arbitration in these key sectors is likely due to successful lobbying by American industry groups during negotiations.

10. ↑ See Footnote 31 to USMCA Chapter 14: “For greater certainty, Article 5.1(a)-(c) of Annex 14-D do not apply to claims under paragraph 2 [of Annex 14-E].” 11. ↑ Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Article 9: Investment 12. ↑ “Canada Move Closer to CPTPP Ratification, Malaysia Calls for Trade Deal Review”, International Centre for Trade and Sustainable Development (Jun. 28, 2018) 13. ↑ NAFTA Free Trade Commission, “Notes of Interpretation of Certain Chapter 11 Provisions” (2001) (1. “Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party. 2. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.”) 14. ↑ Article 14.6(2)(a) defines “fair and equitable treatment” as “includ[ing] the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world.” 15. ↑ Article 14.6(2)(b) defines “full protection and security” as “requi[ring] each Party to provide the level of police protection required under customary international law.” 16. ↑ See, e.g., Laurens Ankersmit, “Achmea: the Beginning of the End for INVESTOR-STATE ARBITRATION in and with Europe?”, Investment Treaty News, International Institute for Sustainable Development (Apr. 24, 2018). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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The Contents of Asian International Arbitration Journal, Volume 14, Issue 1, 2018

Thu, 2018-10-04 02:32

Lawrence Boo and Gary Born

Kluwer Law International and the Singapore International Arbitration Centre (SIAC) are pleased to announce their new partnership in publishing the latest edition of the Asian International Arbitration Journal (AIAJ). In this 2018 publication, Mr Gary Born, President of the SIAC Court of Arbitration, joins Professor Lawrence Boo as a General Co-Editor of the AIAJ.

The AIAJ seeks to be a thought leader on issues in international commercial arbitration in the Asia-Pacific region. Published twice yearly since 2005, this cutting edge, practical publication will provide insights into latest institutional developments and regulatory changes, as well as updates on recent case law, legislative enactments and arbitral awards in Asia.

The contents of the latest issue of the journal is now available and includes the following contributions:

 

V. K. Rajah, The Case For Singapore To Take The Lead In International Arbitration Ethics

There has in recent times been much hand wringing within the international arbitral community about the difficulties of reaching a consensus on ethical standards. This paper presents a simple thesis: it is in Singapore’s enlightened self-interest to set the highest pragmatic standards for its professionals regardless of where they operate and to ensure that all matters seated here are ethically policed by common standards. While Singapore should continue to steadfastly contribute to international thought leadership in this area, it cannot afford to adopt ‘wait-andsee’ approach for the rules to be imposed internationally. First, being ethics agnostic is not the Singapore way. Second, instead of harming its competitive edge, stricter ethical standards will pay dividends both professionally and commercially. To this end, greater weight should be given to the business and financial community in assessing both the desirability and urgency for reform. Third, Singapore should not be ethically disingenuous by upholding one standard of ethics before the courts and another lower standard before arbitral tribunals. Axiomatically, it is in Singapore’s self-interest to take the lead. The jurisdictions that best address the very patent desire by users for enforceable ethical standards will over time benefit enormously as first movers.

 

Gracious Timothy Dunna, Supreme Court In Centrotrade 2016: Too Quick To Nod At The Validity Of The Two-Tier Arbitration Clause?

In a decade’s time since the Supreme Court’s ruling in Centrotrade in 2006, a plethora of questions opened relating to two-tier arbitrations: What is the nature of the awards in the first and second instances; where is the appellate tribunal seated; what may be the grounds of appeal; and what authority is exercised by appellate tribunals? In 2016, nevertheless, the Supreme Court reflected upon several of these questions, and answered them using certain fundamental principles of arbitration. This piece tries to holistically understand appellate arbitrations and its entailments, and provides an alternative view as to why the Supreme Court erred in enforcing the appellate arbitration clause in Centrotrade.

 

Sai Anukaran, ‘Scope Of Arbitrability Of Disputes’ From The Indian Perspective

Arbitration essentially involves ouster of jurisdiction of civil courts by mutual consent of the parties in lieu of jurisdiction conferred upon a specific set of persons known as arbitrators to adjudicate the dispute. International Arbitral Standards require the states to keep their National Arbitral Legislation open-ended without limiting the scope of arbitrability of disputes, providing grounds only for setting aside of arbitral awards in violation of the Public Policy of the country. Thus, the interpretation of ‘Scope of arbitrability’ is left to the determination of the courts. The instant article explores the meaning of term ‘arbitrability of disputes’ and discusses the ‘Scope of arbitrability of disputes’ in Indian Perspective. The article critically analyses the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., wherein the Supreme court for the first time evolved test of arbitrability of disputes and further enumerated an illustrative list of disputes, which are incapable of being decided by arbitration. The article then maps the evolution of tests of arbitrability by various courts based on the Judgement of the Supreme Court and critically analyses them.

 

Mohamed H. Negm and Huthaifa Bustanji, Particularity Of Arbitration In International Intellectual Property disputes: Fitting Square Peg Into Round Hole

With the world more and more dependent upon technology of all types, the continued and growing importance of intellectual property cannot be understated. There has been, and will continue to be, an accompanying explosion in the number and complexity of transactions in which intellectual property is a critical, if not the critical, element. Many of these transactions cross national boundaries; as do the disputes which inevitably arise from them. This article will serve as a handy reference and guide for navigating through the complex maze of intellectual property and arbitration. The main characteristics of intellectual property disputes and the results offered by domestic litigation and arbitration are scrutinized in this article. It starts by exploring how and why arbitration can provide a better way to resolve these disputes. It then deals with the issue of arbitrability of intellectual property disputes with special emphasis placed on public policy rationales. Finally, the questions of the applicable law and limitations to party autonomy are adequately addressed.

 

Elizabeth Wu and Lawrence Boo, Of Moving Frontiers And Notes Verbales: Ascertaining The Intentions Of State Parties In Bits

The 1969 Vienna Convention on the Law of Treaties (the VCLT) provides an interpretive framework to ascertain State parties’ respective treaty obligations. In bilateral investment treaties (BITs), State parties mutually undertake to protect investments made by the nationals of the other contracting State. In its decision in Sanum Investments Ltd v. Government of the Lao People’s Democratic Republic [2016] SGCA 57, the Singapore Court of Appeal held that a Macanese investor was a protected national under a BIT between the Lao People’s Democratic Republic (Laos) and the People’s Republic of China (China). This ruling was made against the views of Laos and China, expressed through an exchange of Notes Verbales after the dispute arose, that the BIT did not cover Macau. This article examines the Court’s use of an evidentiary ‘critical date rule’ to exclude the consideration of these Notes Verbales. It questions whether the Court’s approach coheres with the principles of treaty interpretation encapsulated in the VCLT.

 

Contributions to the AIAJ should be submitted by softcopy, in a word document, to [email protected]. The editorial guidelines for the AIAJ may be found at the following link.

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