Kluwer Arbitration Blog

Syndicate content
Updated: 16 hours 26 min ago

International Arbitration During COVID-19: A Case Counsel’s Perspective

Thu, 2020-06-04 03:00

Background

There is much public discourse on the impact of the ongoing pandemic on international arbitrations. Commentators and scholars have provided perspectives on how to navigate and find safe harbours in the uncharted waters of COVID-19. In the “new normal” of wide-ranging travel advisories and restrictions, there is an emerging consensus to better integrate the use of technology with dispute resolution. Indeed, major hearing centres located in Singapore, London, and Toronto have collaborated to share resources and offer virtual hearing solutions. Suggestions such as the increased use of electronic filings, virtual evidentiary hearings, and online case management have been widely discussed, and these mechanisms are now being applied at pace in international arbitrations.

In addition to the implementation of technology, stakeholders are assessing other tools to mitigate the impact of COVID-19. Recently, Mr. Gary Born, the President of the SIAC Court of Arbitration, in his Open Letter addressed some of these issues. Against the background of these unprecedented circumstances, I draw on my experience as a member of the SIAC Secretariat to shed light on some recent trends and how SIAC tribunals have responded in this crisis to fulfil their adjudicative mandate.

The first quarter of 2020 has been an active period for the SIAC Secretariat. It is common practice for SIAC tribunals to conduct the preliminary case management conference telephonically or virtually. However, given the dramatic change in the arbitration landscape in the past few months, SIAC tribunals have successfully conducted a variety of hearings remotely, including applications for emergency interim relief and evidentiary hearings. Two recent SIAC arbitrations are illustrative of this trend.

 

Case Study I – Conducting an EA Hearing for Urgent Interim Relief

With various national courts not fully operational, the use of EA proceedings in compelling circumstances has become more attractive to users of international arbitration. Due to travel and other constraints, SIAC EAs and parties have used different modes to conduct hearings. For instance, participants have used Maxwell Chambers ADR Hearing Solutions, Zoom, and Microsoft Teams platforms for EA-related virtual hearings. Further, in some other cases, EA proceedings have been conducted on a documents-only basis.

In one of SIAC’s most recent EA applications filed in April 2020, the EA, as is required under the SIAC Rules, was appointed within 24 hours of the receipt of the EA application. After the EA was appointed, the EA swiftly scheduled a video case management conference (hosted on the Microsoft Teams platform – which was suggested by the claimant and agreed by the parties) to establish a schedule for consideration of the application.

Both parties were represented by counsel based in a common time zone. Following the case management conference, the EA, among other things, directed the parties to make submissions electronically by way of email (the EA did not require any hard copies). Further, the EA requested the parties to arrange for virtual hearing facilities with a service provider (Maxwell Chambers ADR Hearing Solutions in this case) including services for real-time transcription.

A day before the hearing, the EA and the parties, along with the service provider’s IT personnel, participated in a “test call” to assess the virtual hearing software. The following day, and based on the established order for advancing oral submissions, a full day of hearing (from 9:30 am to 5:00 pm) was conducted virtually. This hearing was attended by the EA, 9 party representatives, the service provider’s “moderator”, and a transcriber. In the course of the hearing, counsels relied on various documentary evidence using e-bundles. Subsequently, the EA decision was submitted to SIAC for scrutiny, and the decision was transmitted within the 14-day period as mandated under the SIAC Rules.

 

Case Study IIConducting an Evidentiary Hearing

This international commercial arbitration, seated in Singapore, applied the Expedited Procedure of the SIAC Rules 2016 with a 6-month timeframe for its completion. A tranche of the oral hearing (concerning evidence taking by witness conferencing), was heard virtually with about 19 participants (comprising the arbitrator, lawyers, expert witnesses, client representatives, transcribers and an IT moderator) from different time zones (GMT +8; and GMT -5).

Given the developing situation of COVID-19, the tribunal requested the parties to liaise with each other and explore methods of conducting expert witness conferencing by way of a video facility. The parties identified and agreed on a service provider (Maxwell Chambers ADR Hearing Solutions). Subsequently, the tribunal conducted a case management hearing over the telephone to discuss logistical issues and other procedural matters.

A day before the hearing the participants took part in a “dry run” to test the screen sharing, audiovisual, and other aspects of the virtual hearing. The parties agreed to be “guided” by the Guidance Note of Remote Dispute Resolution Proceedings as published by CIArb (Guidance Note). Following Appendix I of the Guidance Note, the claimant noted the parties’ agreement to hold a video conference hearing, identified the party representatives, and the list of electronic documents proposed to be referred to in the hearing.

The “dry run” or the practice round enabled the tribunal to tighten loose ends and run a full day of evidentiary hearing between 8:00 am and 4:00 pm Singapore time.  During the hearing, the tribunal permitted the parties to use the “chat function” for communication and to raise objections during the evidentiary hearing. To impart flexibility, the tribunal also allowed parties to raise urgent objections by use of the ‘un-mute’ feature. To maintain the proper structure of the evidentiary hearing, the tribunal managed the participants’ order of speaking.

 

Other Trends

In addition to the shift to online platforms, the tribunals have, on a case-by-case basis and subject to the circumstances of any particular dispute, adjourned some hearings for a later date or have extended timelines for written submissions or witness statements. In some cases, parties have jointly requested for the suspension of the proceedings to hold without prejudice settlement talks. In less complex cases, parties have requested the tribunal to dispense with the oral hearing and decide the dispute based on documents alone.

In one EP case, the parties agreed to inform the tribunal whether they would be agreeable for the proceedings to proceed on a documents-only basis after filing of the first round of pleadings. This shows that there may be merit in an ongoing conversation about the possibility of deciding the dispute solely on the documents in circumstances where it may be difficult to properly evaluate the suitability of documents-only arbitration at an early stage. Tribunals are also working to minimise the impact of COVID-19 on arbitral timelines. For instance, a tribunal suggested (and the parties agreed) to facilitate the exchange of unsigned final witness statements as the witnesses found it difficult, due to governmental regulations, to affix physical signatures on their statements. In this case, the tribunal directed the parties to exchange the final signed version of the witness statement on a later date.

 

Three Key Considerations for Virtual Hearings

1. Developing best practices for a virtual hearing: If managed properly and applied in appropriate disputes, virtual hearings can save considerable time and costs. As a matter of prudence and proper planning, stakeholders may wish to consider the following factors whilst opting for virtual hearings:

a. feasibility to organise a virtual hearing – assessing the number of participants, the participants’ access to technology, time-zone differences, and the parties’ ability to present their case virtually;

b. whether any guidelines or protocols (including security measures) are to be adopted;

c. whether there are any data privacy concerns;

d. whether any specific communication protocol may be followed (e.g., a paperless arbitration);

e. the procedure for the selection of an online platform;

f. revisiting the appropriate length of the oral hearing (stakeholders may explore the possibility of minimising the duration of the hearing);

g. the order of presentation and time-allocation between the parties;

h. the speaking etiquette (for instance, identifying oneself before speaking and exploring means to ensure that participants do not talk over one another);

i. format for e-bundles (tribunals may have subjective preferences in this regard);

j. whether a third-party vendor is needed to host documents;

k. the mode for taking of evidence and how objections may be made;

l. planning for breaks (the duration and modalities for requesting short-breaks);

m. whether additional services such as transcription and translation are required;

n. whether the hearing would be recorded;

o. planning for alternative hearing and communication arrangements (such as teleconferencing) in case there are technical issues during the virtual hearing; and

p. applicability of any recent case law and other policies being generated in the context of virtual court hearings.

2. The practice round: Various service providers allow arbitral participants to organise “dry runs” before the hearing day so that the users can acquaint themselves with the relevant technology. A well-organised dry run will work to ensure that participants have an uninterrupted experience on the hearing day. Participants should take particular note of the following features:

a. audio-video quality and the tribunal’s clarity of line of sight (in particular for hearings with factual witnesses where arbitrators may require an unobstructed panoramic view of the witness’ location and any documents that they may be referring to);

b. functionality of the “break-out rooms”, common and private chat features, and understanding how and when these will be engaged (this may be particularly useful in case of a three-member tribunal);

c. how parties and the tribunal will view e-documents (participants may use actual or dummy e-bundles to check ease of access to the documents);

d. communication protocol with the moderators or third-party vendors. For instance, it is important to consider how the transcribers will notify the tribunal in case they are experiencing technical issues and are unable to transcribe any specific portion of the hearing;

e. parties and the tribunal should consider the adequacy of their IT infrastructure. For instance, and even though it is a matter of individual preference, an SIAC tribunal described having multiple screens for the hearing as “very important”. The tribunal used four screens for the evidentiary hearing – the first screen for the live video feed of the hearing room, the second screen for viewing and comparing documents, the third screen for witnesses, and the fourth screen for transcription and translation. Further, using a desktop or a laptop as one of the four screens was recommended as it would allow a tribunal to edit, search for specific keywords, and perform other editing tasks with relative ease;

f. ordering of communication to ensure that participants do not speak over each other; and

g. finally, the tribunal and the parties may consider situations where one or more participants (including witnesses) get disconnected or “dropped off” from the virtual platform. In these situations, the tribunal may consider solutions such as a short break until the participant re-connects.

3. Using reliable technology:  Most service providers offer a technical guide to plan a virtual hearing. The following checklist sets out factors that participants may consider in case they opt to hold a hearing without a service provider’s oversight: (a) selection of a quiet location with adequate lighting; (b) assessing internet connectivity; (c) use of earphones with microphones for audio clarity; (d) muting microphones when a participant is not speaking and minimising competing sounds such as typing as they may create issues with transcriptions; (e) testing all the devices; and (f) planning for troubleshooting processes.

 

Conclusion

COVID-19 has undoubtedly accelerated the use and acceptance of virtual hearings in international arbitration. In the coming months and after the travel restrictions are eased, it is expected that users of arbitration will continue to refine and enhance the use of technology for virtual hearings. These hearings may become a “new normal” for cross-border disputes, at least for less complex cases, which may be better suited for online platforms. The arbitration community will also need to consider the question of whether virtual hearings should directly replicate “in-person” hearings or whether further efficiencies may be achieved to streamline the arbitral process.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


A Tale of Two Cases: Public Policy Defence to Award Enforcement in Hong Kong

Wed, 2020-06-03 03:00

Public policy defences to the recognition and enforcement of arbitral awards continue to generate uncertainty. Under Article V(2)(b) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), an award may be refused recognition or enforcement if “[t]he recognition or enforcement of the award would be contrary to the public policy of that country”. The parameters of this defence have never been entirely straightforward as examined in a previous post, The Public Policy Exception – Is the Unruly Horse Being Tamed in the Most Unlikely of Places?”. A recent decision in the Hong Kong courts illustrates this prevailing uncertainty and the different approaches courts might take to public policy defences.

 

Public policy defences to enforcement

The public policy defence is available under Article 36(1)(b)(ii) of the UNCITRAL Model Law, but no definition as to the scope of this defence is included. The Report on the Public Policy Exception in the New York Convention published by the International Bar Association in October 2015 confirmed that although there is no uniform approach, the majority of jurisdictions adopt a narrow interpretation of what public policy is and “require a certain level of intensity for a given circumstance to be held contrary to public policy. What constitutes “a certain level of intensity” is highly fact-specific, and leaves courts with rather wide discretion to rely on public policy grounds to refuse enforcement.

The English courts have taken a restrictive interpretation to the public policy defence. The English Court of Appeal affirmed that there is a high standard to meet for refusing enforcement of an arbitral award on this basis (see RBRG Trading (UK) v Sinocore International [2018] EWCA Civ 838). This is also the approach followed in Singapore, where the Singapore Court of Appeal stated that an award should only be set aside if upholding it would “shock the conscience” or violate the “most basic notion of morality and justice” (see PT Asuransi Jasa Indonesia (Persero) v Dexia Bank [2006] SGCA 41).

The Australian position has the advantage of a statutory definition of public policy. Sections 8 and 19 of the Australian International Arbitration Act 1974 stipulate that it would be contrary to Australian public policy if “(a) the making of the interim measure or award was induced or affected by fraud or corruption; or (b) a breach of the rules of natural justice occurred in connection with the making of the interim measure or award”. The Australian courts have construed the definition of public policy “narrowly as referring to the most basic, fundamental principles of morality and justice in the jurisdiction” (see Gutnick v Indian Farmers Fertiliser Cooperative Ltd [2016] VSCA 5).

 

Hong Kong’s approach to public policy

In Hong Kong, the public policy defence has been adopted in Section 86(2)(b) of the Hong Kong Arbitration Ordinance (Cap 609) (“Arbitration Ordinance”).1)Note that Hong Kong is a signatory to the New York Convention by virtue of China’s accession, and an enforcement of arbitral awards is subject to Section 85 of the Arbitration Ordinance. jQuery("#footnote_plugin_tooltip_6605_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6605_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The position of public policy is similarly of a high threshold as set out by the Hong Kong Court of Final Appeal in Hebei Import & Export Corporation v. Polytek Engineering Company Limited.2)(1999) 2 HKCFAR 111. jQuery("#footnote_plugin_tooltip_6605_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6605_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Court in that case stated that that foreign arbitral awards should be given effect “unless to do so would violate the most basic notions of morality and justice [which] would take a very strong case before such conclusion can be properly reached”.

In considering potential public policy defences under Hong Kong law, Hong Kong courts look to identify any “substantial injustice arising out of the award which is so shocking to the Court’s conscience as to render enforcement repugnant” (see A v R [2009] 3 HKLRD 389, para 23, per Reyes J). The defence is construed narrowly, and in Paklito Investment Ltd v Klockner East Asia Ltd,3)[1993] 2 HKLR 39. jQuery("#footnote_plugin_tooltip_6605_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6605_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Kaplan J lamented “the attempt to wheel it out on all occasions”. The public policy defence has failed on several occasions, including where apparent bias on the part of the tribunal was alleged in Gao Haiyan v Keeneye Holdings Ltd [2012] 1 HKC 335, and where non-disclosure on the part of the award creditor was alleged in Medison Co Ltd v Victor (Far East) Ltd [2000] 2 HKC 502. One of the rare instances where the public policy defence succeeded was in the case of Sun Tian Gang v Hong Kong & China Gas (Jilin) Ltd [2016] 5 HKLRD 221 and it concerned a respondent who was in prison and was found to have been unable to present his case. The public policy defence is also likely to succeed if actual bias on the part of the tribunal can be demonstrated (see e.g. Granton Natural Resources Co Ltd v Armco Metals International Ltd [2012] HKCFI 1938).

Hong Kong courts actively avoid reviewing the merits of an arbitral award, but recognise their duty to look to the reasoning of an award to ensure that the significant issues, in particular illegality claims, have been adequately considered and addressed by the tribunal.

In Z v Y4)[2018] HKCFI 2342. jQuery("#footnote_plugin_tooltip_6605_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6605_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); (“Z v Y”), the Hong Kong Court of First Instance refused to enforce an award on public policy grounds, citing the tribunal’s failure to address the respondent’s claim that the relevant agreements were a sham and illegal under PRC law. Yet in the recent decision in X v Jemmy Chien5)[2020] HKCFI 286. jQuery("#footnote_plugin_tooltip_6605_5").tooltip({ tip: "#footnote_plugin_tooltip_text_6605_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); (“Jemmy Chien”), the Hong Kong Court of First Instance allowed leave to enforce an award notwithstanding that one party alleged that the underlying agreements were a sham and would necessitate the commission of a criminal offence in Taiwan.

Jemmy Chien may be distinguished on its facts.

  • In Jemmy Chien, the Plaintiff claimed the underlying agreement was a sham to conceal the true intentions that necessitated the performance of illegal acts. In other words, whilst the agreement was legal, the true intent behind the agreement was tainted by illegality. On this point, the Court noted that if it were to accept the agreements were a sham, this would also mean that the Plaintiff had acted in concert with the Defendant. Refusing enforcement in these circumstances would be to permit the Plaintiff to rely on its own wrongdoing to avoid its contractual obligations. With this is in mind, the Court could not identify any public policy interests that would justify the Plaintiff’s application to resist the enforcement of the award. In contrast, in Z v Y, the underlying loan agreements disguised as supply contracts were illegal and a sham because they contravened the law and constituted the criminal offence of “fraudulent contracts”.
  • Unlike the tribunal in Z v Y, the tribunal in Jemmy Chien was taken to have thoroughly reviewed and addressed the Plaintiff’s illegality claim by providing sufficient reasoning and analysis as to why it was rejected. The tribunal provided reasons as to why the Defendant was the true party to the agreement and applied factors under Hong Kong Law to determine whether or not a party contracted personally or as agents for third party. Whereas in Z v Y, on a careful review of the award, the court was unable to determine whether the tribunal had thoroughly considered the issues of illegality, here the converse was true.

That said, a party would not be denied the opportunity to raise what it considers to be a legitimate defence to enforcement within the ambit of the New York Convention. Hong Kong courts have displayed their willingness to assess and scrutinise these defences in the ordinary course. However, the use of terms such as “substantial injustice”, “shocking”, “repugnant”, and “violat[ing] the most basic notions of morality and justice”, serve as a reminder that a party falling back on the public policy defence to enforcement has a very high threshold to overcome, and should approach any such defence with an element of trepidation. Hong Kong courts have also historically taken a robust approach and awarded indemnity costs against the unsuccessful party applying to set aside an award. Parties should bear this in mind before commencing such set aside applications.

 

Conclusion

It is likely that uncertainty as to the prospects of successfully invoking public policy defence to enforcement will continue to prevail. The outcome may well be impacted by the attitude of the enforcement courts to the manner in which tribunals have dealt with public policy issues in the award. Whilst the circumstances may be the same, a party resisting enforcement of an award on public policy grounds may well face ‘a tale of two cases’.

References   [ + ]

1. ↑ Note that Hong Kong is a signatory to the New York Convention by virtue of China’s accession, and an enforcement of arbitral awards is subject to Section 85 of the Arbitration Ordinance. 2. ↑ (1999) 2 HKCFAR 111. 3. ↑ [1993] 2 HKLR 39. 4. ↑ [2018] HKCFI 2342. 5. ↑ [2020] HKCFI 286. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


ICCA and Wolters Kluwer pay tribute to the late V.V. Veeder QC (1948-2020)

Tue, 2020-06-02 03:00

It was with deep sadness and a profound sense of loss that we learned of the death of one of the world’s leading arbitrators, Van Vechten Veeder QC – more widely known as V.V. or Johnny Veeder – on 8 March 2020.

For nearly three decades, Johnny Veeder lent his unique voice to ICCA’s publications, authoring the ICCA Handbook National Report for England and Wales between 1997-2015, contributing to the ICCA Yearbook Commercial Arbitration, addressing multiple ICCA Congresses between 1990 and 2014, and chairing the Programme Committee for the 2012 Singapore Congress.

Elected to the ICCA Council (later the ICCA Governing Board) in 2006, Johnny Veeder played a key role in shaping ICCA’s post-2012 renewal and governance: through the ICCA Nominations and Membership Committee, Inclusiveness Committee and Initiatives Committee; through his contributions to ICCA’s New York Convention Roadshow Programme; and by acting as mentor in five cycles of the Young ICCA Mentoring Programme (2011-2020).

ICCA has sought to pay tribute to Johnny Veeder’s immense contribution to the work of ICCA, though the publication of a ‘V.V. Veeder QC Memorial Volume, ICCA Congress Series’, launched today.

The ‘V.V. Veeder QC Memorial Volume’ gathers together eleven papers that he presented at ICCA Congresses between 1990 and 2014, covering topics as diverse as the UNCITRAL Model Law; cross-border enforcement of interim measures; a comparison between commercial and treaty-based arbitration; strategic management in commencing arbitrations; the future of State courts and arbitration; an interrogation of who the arbitrators are; and a historical overview of ICCA and its history. All these papers are written with Johnny’s characteristic wit and style, and give some insight into the breadth of his interest and vision.

Current ICCA President Lucy Reed and immediate past ICCA President Gabrielle Kaufmann-Kohler together note that ‘As the ICCA Presidents join to say in the Foreword to this important volume, in honour of our beloved friend and colleague:  “Johnny’s modesty was legendary. And nothing we could say would be better than allowing his words to speak for themselves”.’

Kluwer joins with ICCA to honour Johnny Veeder, with Gwen de Vries noting that ‘Johnny was a pillar of the international arbitration community, a kind person and a gifted legal expert; the community has lost one of its brightest stars’.

We trust that you will enjoy the eleven papers in this collection, and together with us remember and celebrate Johnny’s remarkable life and work.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Reimbursement of Advance on Costs Paid in Substitution for Defaulting Party: a Case Study Under the ICC Rules

Mon, 2020-06-01 04:00

It is not uncommon to encounter international arbitration cases in which one party, usually the respondent, refuses to pay the advance on costs set by the institution. This may occur when that party objects to the jurisdiction of the arbitral tribunal or there is a risk that the advance will not be recovered after the decision on costs due to, for instance, potential insolvency of the counterparty.

The rules of the leading institutions establish that, if there is a failure by one party to timely pay its share of the advance on costs, the institution itself or the arbitral tribunal may direct the other party to make a substitute payment, failing which the arbitration may be suspended or (counter)claims considered withdrawn.1)For instance, ICC Rules, Articles 37(5) and 37(6); LCIA Rules, Article 24(4); SIAC Rules, Article 34(6); ICDR Rules, Article 36(3); SCC Rules, Article 51(5); DIS Rules, Article 35(4). jQuery("#footnote_plugin_tooltip_2307_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2307_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This raises a question as to what remedies are available to the paying party to obtain reimbursement from the defaulting party.

The question is tackled by the rules of some institutions, which expressly authorise the arbitral tribunal to render an order or partial award for reimbursement of the advance on costs at the request of the paying party. For instance, Article 24(5) of LCIA Rules sets forth that “the party effecting the substitute payment may request the Arbitral Tribunal to make an order or award in order to recover that amount as a debt immediately due and payable to that party by the defaulting party, together with any interest.” This power is also expressly regulated in the rules of other institutions, such as SIAC Rules 2016 (Article 27(g)), VIAC Rules 2018 (Article 42(4)), SCC Rules 2017 (Article 51(5)) and HKIAC Rules 2018 (Article 41(5)). A similar provision has also been included in the recently published Rules of the Madrid International Arbitration Centre, which establish in Article 9(7) that [i]n the event that one of the parties pays the advance on costs that had been requested to its counterparty, the arbitrators, at the party’s request, may issue an award recognizing the credit that the former holds against the latter.”

The rules of other institutions, such as ICC or DIS, do not expressly grant that power. As explained in the case study below, the absence of an express provision in that regard arguably does not provide an excuse to the defaulting party nor does it necessarily imply that recovery by means of an order or partial award of the amounts paid in substitution is excluded.

 

Case study

The case in question involves proceedings initiated by the Claimant on the basis of an arbitration agreement that provided for arbitration administered by the ICC. The Respondent objected to the jurisdiction of the arbitral tribunal and refused to pay the advance on costs by alleging, in particular, a manifest lack of merit of the Claimant’s claims and a risk of non-recovery of the amounts paid in case of a favourable award.

Eventually, the Claimant paid the Respondent’s share of the advance on costs. Immediately after, the Claimant requested that the Arbitral Tribunal issue an order or partial award ordering the Respondent to reimburse the paid amounts. The Respondent argued that the arbitral tribunal did not have the power to issue such an order or partial award and opposed it on the merits.

The arbitral tribunal issued a partial award granting the request and ordering the Respondent to reimburse the amounts paid by the Claimant in substitution on the following grounds:

First, it concluded that the parties have a contractual obligation, as per the arbitration agreement, to pay their respective shares of the advance on costs. In the arbitral tribunal’s view, a reference to the ICC Rules in the arbitration agreement shall be deemed an undertaking to comply with the provision providing that the parties shall pay the advance on costs in equal shares.

Second, the arbitral tribunal noted that it is undisputed that tribunals have the power to decide on all issues within the scope of the arbitration agreement. It therefore found that a dispute between the parties regarding non-compliance with the contractual obligation to pay the advance on costs is covered by the arbitration agreement and is thus within the arbitral tribunal’s jurisdiction.

Third, it was pointed out that the authority of ICC tribunals to grant the reimbursement is even clearer when examining the evolution of the ICC Rules and comparing Article 31(2) of the 1998 version2)According to Article 31(2) of the 1998 ICC Rules: “[d]ecisions on costs other than those fixed by the Court may be taken by the Arbitral Tribunal at any time during the proceedings”. jQuery("#footnote_plugin_tooltip_2307_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2307_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); with Article 38(3) of the 2017 version.3)According to Article 38(3) of the 2017 ICC Rules: “At any time during the arbitral proceedings, the arbitral tribunal may make decisions on costs, other than those to be fixed by the Court, and order payment”. This wording was introduced in the 2012 version of the ICC Rules, Article 37(2). jQuery("#footnote_plugin_tooltip_2307_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2307_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); According to the arbitral tribunal, the inclusion of the wording “order payment” emphasises the power of tribunals not only to decide on costs at any time during the proceedings, but also to order their payment. The arbitral tribunal further understood that the wording “other than those to be fixed by the Court” is aimed at preserving the prerogative of the Court to fix the costs of the proceedings, but does not strip the arbitral tribunal of its power to order the payment of the advance on costs once fixed by the Court.

Fourth, the arbitral tribunal rejected that it lacked prima facie jurisdiction and found that there were no other grounds allowing the Respondent not to comply with its payment obligations. In particular, it found that the Claimant’s claims did not manifestly lack merit and that the risk of non-recovery alleged by the Respondent was neither proved nor attributable to the Claimant.

 

Conclusion

The positions on the topic are not unanimous. Some scholars and ICC tribunals do not consider that the non-payment of the share of the advance on costs constitutes a breach of contract. Rather, they consider it a “mere procedural issue” or an issue that is “administrative and provisional” in nature.4)Thomas Rohner and Michael Lazopoulos, Respondent’s Refusal to Pay its Share of the Advance on Costs, ASA Bulletin, Kluwer Law International 2011, Volume 29 Issue 3, p. 554; Yves Derains and Eric Schwartz, A Guide to the ICC Rules of Arbitration, p, 347. See also partial award rendered in ICC Case No. 12491. jQuery("#footnote_plugin_tooltip_2307_4").tooltip({ tip: "#footnote_plugin_tooltip_text_2307_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Arguably, however, the findings of the arbitral tribunal in the case study are based on a correct understanding of the obligations stemming from arbitration agreements and the ICC Rules. They are also in line with other awards rendered in recent years in ICC arbitrations, which have concluded that [t]he obligation of each party to pay its share of the advance on costs is a contractual obligation resulting from the arbitration agreement”, that the arbitration agreement “is a contract nevertheless, giving rise to a procedural obligation to provide the advance on costs” and that, as a result, arbitral tribunals are authorised to issue partial awards ordering the defaulting party to reimburse to the counterparty the advance on costs paid in substitution.5)Partial awards rendered in ICC Cases Nos. 10526 and 13139. See also partial awards rendered in ICC Cases Nos. 10671 and 11330. jQuery("#footnote_plugin_tooltip_2307_5").tooltip({ tip: "#footnote_plugin_tooltip_text_2307_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In any case, in the absence of express regulation in the rules, the decision on this issue may vary depending on the approach taken by the arbitral tribunal on the nature of the obligation to pay advance on costs and the interpretation of the applicable rules. Therefore, an express reference in the rules to the arbitral tribunal’s authority to render a partial award ordering reimbursement of advance on costs provides certainty in this regard and is also likely to discourage parties from non-compliance with their payment obligations.

References   [ + ]

1. ↑ For instance, ICC Rules, Articles 37(5) and 37(6); LCIA Rules, Article 24(4); SIAC Rules, Article 34(6); ICDR Rules, Article 36(3); SCC Rules, Article 51(5); DIS Rules, Article 35(4). 2. ↑ According to Article 31(2) of the 1998 ICC Rules: “[d]ecisions on costs other than those fixed by the Court may be taken by the Arbitral Tribunal at any time during the proceedings”. 3. ↑ According to Article 38(3) of the 2017 ICC Rules: “At any time during the arbitral proceedings, the arbitral tribunal may make decisions on costs, other than those to be fixed by the Court, and order payment”. This wording was introduced in the 2012 version of the ICC Rules, Article 37(2). 4. ↑ Thomas Rohner and Michael Lazopoulos, Respondent’s Refusal to Pay its Share of the Advance on Costs, ASA Bulletin, Kluwer Law International 2011, Volume 29 Issue 3, p. 554; Yves Derains and Eric Schwartz, A Guide to the ICC Rules of Arbitration, p, 347. See also partial award rendered in ICC Case No. 12491. 5. ↑ Partial awards rendered in ICC Cases Nos. 10526 and 13139. See also partial awards rendered in ICC Cases Nos. 10671 and 11330. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Transparency and Data Analytics: The Keys to the Transformation of the ISDS Adjudicator Appointment Process

Mon, 2020-06-01 03:00

The Changing Landscape of the ISDS System

The ongoing global discussions on the reform of the Investor-State Dispute Settlement (ISDS) system have been broad in scope and covered a wide range of concerns. As previously documented on this blog, the governments participating in the UNCITRAL Working Group III – ISDS Reform (WG III) have determined three main reform areas: consistency and coherence of the awards, costs and efficiency, and the adjudicators and decision-makers. The latter category has solicited the most attention as ISDS adjudicators (primarily arbitrators) have been a “lightening rod” for criticism (both on and off the record) at the sessions of the WG III.

Many concerns have been raised about ISDS adjudicators, regarding such issues as accountability, independence and impartiality, so-called “double-hatting” (appearing in ISDS proceedings in multiple roles), and the enormous size of some monetary awards. Although critiques of ISDS adjudicators in some circles may be exaggerated, there was a consensus in the WGIII that there is a need for a universal set of standards for the conduct of ISDS adjudicators. Among their top priorities are those areas that they deem to merit special regulation, such as repeat appointments, issue conflicts and double hatting.

These concerns prompted the Secretariats of UNCITRAL and ICSID to develop a Draft Code of Conduct (Draft Code) for ISDS adjudicators, which has recently been released and open for comment.

 

A Step Towards Transparency: The UNCITRAL and ICSID Draft Code of Conduct for Adjudicators

A brief review of the substance of the Draft Code reveals its sweeping nature with respect to disclosure obligations, coverage of subjects, and flexibility for policymakers in the future.

The definition of „adjudicators“ in the Draft Code encompasses arbitrators, ad hoc committee members, candidates to become adjudicators, appellate judges, and judges in permanent bodies. This broad definition is intended to ensure that the Draft Code can be adapted and applied to various ISDS mechanisms, including ad hoc arbitration or a standing ISDS adjudicative body.

Despite its sweeping nature, the Draft Code provides policy makers a flexible menu of options in acknowledgement that it cannot be one-size-fits all. The options allow regulators to shape some nuances of the most sensitive issues related to ISDS adjudicators, most notably, ensuring their independence and impartiality.

The focal point of the Draft Code is Article 5, which provides for a broad and sweeping disclosure obligations. If adopted, these provisions could dramatically broaden the scope of disclosure as they seem to encompass all past professional encounters (even single encounters of the counsel and adjudicator in proceedings several years ago). Drawing clear and bright lines for disclosure is an appealing way to avoid confusion and reduce conflicts. However, if implemented in their current form, the new rules could potentially establish the duty to disclose professional interactions which would otherwise not raise questions on the independence and impartiality of the adjudicators. Sweeping disclosure obligations can create tensions between the adjudicator’s dueling obligations of confidentiality in one case, and broad disclosure in another.

Nevertheless, several aspects of arbitrator independence and impartiality in ISDS proceedings raise ethical concerns that are unique to ISDS proceedings (which were detailed in a previous blog post), and have not been directly addressed in previous codes.

For instance, the disclosure obligation in the Draft Code includes the past publications and speeches of the adjudicator, in order to reveal any potential issue conflict. On the other hand, “previously expressed legal opinions” are placed on the Green List of the IBA Guidelines on Conflicts of Interest in International Arbitration, which means they cannot lead to disqualification, and thus they are not subject to mandatory disclosure.

Furthermore, Article 10 of the Draft Code limits pre-appointment interviews of the adjudicators to information about their availability. To ensure full transparency of the interview process, it also requires that the content of any interview should be disclosed if the adjudicator is appointed.

Limitations on pre-appointment interviews are not new, but the provisions of the Draft Code go well beyond prior standards. For example, the CIArb International Arbitration Practice Guidelines for the Interviewing of Prospective Arbitrators provide that the pre-appointment interviews may take place, but should not include any discussion about the merits of the case (instead of limiting the interview to questions of availability). Meanwhile, similar to the Draft Code, the Guidelines encourage keeping notes or recording the interview (where appropriate) and they provide that the content of an interview may be disclosed. The CIArb Guidelines stop short, however, of imposing an obligation to disclose the contents of the interview.

In another example, the IBA Guidelines on Party Representation in International Arbitration limit the pre-appointment interviews to communications aimed to determining their expertise, availability or the existence of potential conflicts of interest. Such interviews are  specifically identified in the Green List of the IBA Guidelines on Conflicts of Interest in International Arbitration, and thus, they do not have to be disclosed. Unlike the CIArb Guidelines, neither of the above-referenced IBA Guidelines addresses the recording or the disclosure of the content of the interview.

Therefore, in contrast to other existing sources, the Draft Code would significantly raise the standards for adjudicator disclosures and contacts with the parties.

 

The Enforcement of the Code of Conduct for ISDS Adjudicators: Who, What and How?

The enforcement of any set of ethical rules and codes of conduct in the realm of ISDS is challenging due to its decentralization and the ad hoc nature of the adjudicator appointment process. The successful application of the Draft Code will largely depend on voluntary compliance, as there are no more direct measures such as monetary or disciplinary sanctions that might exist with other established professions. It is noted in the Draft Code itself that there could be difficulties in the enforcement of monetary or reputational sanctions in the ISDS context. Some government submissions to the WG III recognized that that the strict enforcement of higher ethical standards for adjudicators could reduce the number of practitioners willing to accept appointments to ISDS tribunals. The limited number (and lack of diversity among) ISDS adjudicators is itself an area of concern, which is sometimes linked to concerns about repeat appointments and impartiality.

Enforcement is another area where the international arbitration community is working to develop solutions. Several arbitral institutions have developed internal and sometimes informal sanctions for arbitrators. For example the ICC adopted a policy in 2016, under which the fees of the arbitral tribunal (or sole arbitrator) can be reduced from 5-20% for delays in the submission of the draft award. Nothing would seem to prevent institutions overseeing ISDS cases (which the ICC itself does) from adopting a similar policy.

Institutions acting on an ad hoc basis, however, can only do so much. To fill the void, CIArb has developed a proposal for a two-tiered disciplinary process for arbitrator misconduct in which the complaints would first be heard by the arbitral institution, and then referred to CIArb, if justifiable cause is established. To date, there does not seem to have been public discussion about application of the CIArb proposal to ISDS.

The enforcement of the Draft code will hinge on the availability of the information on the track record of the adjudicators, including their compliance with their disclosure obligations. The UNCITRAL WG III has also indicated that an increased level of transparency of data on the compliance with the code of conduct for adjudicators may be beneficial for its overall enforcement. To date, one of the few efforts to be address this concern for more transparency about arbitrators’ track records is Arbitrator Intelligence.

 

Arbitrator Intelligence Reports: Filling the information gap with data analytics

The Draft Code creates a framework in which the parties and adjudicators in ISDS proceedings will have to minimize their contacts prior to the dispute (and disclose any communication, including pre-appointment interviews). Therefore, the parties will have to obtain information about adjudicators from a “safe distance”, with minimal contacts with the adjudicators. On the other hand, the adjudicators should rest assured that they will be able to attract a meaningful number of appointments, without establishing direct contacts with the parties. Given new proposals to restrict pre-appointment interviews, new sources of information are needed now more than ever.

Arbitrator Intelligence is creating tools that will enhance the effectiveness of the appointment process and therefore potentially aid in efforts to increase confidence in ethics and integrity in ISDS and international arbitration more generally. Through its anonymous online survey called the Arbitrator Intelligence Questionnaire or AIQ, Arbitrator Intelligence is gathering reliable factual and evaluative information about arbitrators’ case management and decision making. This information is contributed by arbitrator practitioners worldwide on a voluntary basis.

This data is analyzed and packaged into reports that provide legal practitioners with a comprehensive overview regarding arbitrators’ decisional trace records. Arbitrator Intelligence Reports provide practitioners with information that would otherwise have to be gathered through informal phone-calls and/or pre-appointment interviews with adjudicators. The reports could also place lesser-known arbitrators on the radar of arbitration practitioners, thus helping to reduce the number of repeat appointments, which were outlined above as a concern in ISDS.

As the face of ISDS is rapidly evolving, the adjudicator appointment process will inevitably continue to be a focus of intense scrutiny. It appears that new standards are inevitable and inevitably more exacting than other existing sources. The Draft Code is an admirable effort to address the many concerns in the changing world of ISDS. Public debate over these proposed standards are an excellent opportunity to expand the understanding of the ISDS-specific conduct which should be regulated, and the particular nuances of such regulation. Absent an established enforcement mechanism, greater insights into the track records of adjudicators can encourage self-regulation and voluntary compliance with the provisions of the Draft Code.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Denunciation of ICSID Convention: Re-Visiting Mr. Söderlund’s Separate Opinion

Sun, 2020-05-31 03:00

For some time now, the world has seen a rise in proto-nationalism, protectionism, and even nationalization of resources. This paradigm shift when coupled with criticism being leveled against the Investor-State Dispute Settlement (“ISDS”) system for its alleged bias in favor of capital exporting countries, make for a dangerous combination. With the ‘return of the state’ in ISDS (most recently evidenced by  India’s new BIT with Brazil) International Centre for Settlement of Investment Disputes (“ICSID”) arbitrations have never been more vulnerable to the threat of denunciation (particularly in those investment agreements which do not have a fallback to arbitration under the UNCITRAL or other rules).

It is in this context that the author wishes to briefly recall the law governing denunciation under the Convention – particularly Mr. Christer Söderlund’s separate opinion in Blue Bank International (“Opinion”). In the ocean of literature available on this topic the author believes the Opinion to be insufficiently explored. Although not law, it presents a very interesting thesis departing from the conventional wisdom.

Under the existing framework, denunciation is governed by Article 71 and Article 72 of the Convention. The proper interpretation of the articles has been the subject of widespread academic discussion and even some ICSID awards. For example, it has been discussed several times on this blog, e.g. here, here, here & here. Broadly speaking, pursuant to Article 71 a contracting state may denounce the Convention by furnishing a notice to the World Bank. The denunciation will take effect six months after the notice. Notwithstanding this, Article 72 provides that the aforesaid notice will not affect any rights or obligations ‘arising out of consent to the jurisdiction of the Centre given by one of them before such notice was received by the depositary’. This opens up a key question: what is the effective date of denunciation taking effect?

Three schools of thought have emerged. The first school advocates that denunciation takes effect forthwith, i.e. immediately after the notice is received by the World Bank. The most notable advocate for this school has been Professor Schreuer, whose views were heavily relied upon in the 2018 Fabrica award. The second school of thought advocates that denunciation takes effect six months after the notice. The result of this view would be that investors would have up to six months to commence ICSID arbitration if the denouncing state has offered such procedural redress in an applicable instrument. This view was adopted by the Tribunals in Blue Bank International and Venoklim. The third school postulates that investors can invoke the arbitration clause even after the six-month period. The result of this view is that investors would be able to invoke the right to arbitrate at any point up to the expiry of the sunset clauses (if any) in the consent instrument.

Söderlund’s Opinion appears to fall within the third school of thought. What is indeed remarkable is that an attempt has been made to challenge the working contractual model based on which other tribunals (including the majority in Blue Bank International) have rendered their decisions, rather than suggesting an alternative interpretation under the already popular framework.

 

The offer-acceptance model

Generally speaking, an arbitration clause provided for in a treaty is considered to be based on the offer-acceptance model. In other words, it is a “standing offer” by the host states which may be unilaterally accepted by Investors.

Advocates of the first school of thought argue that denunciation of the Convention in effect revokes this standing offer. This view is underpinned by an interpretation of Article 72 in light of Article 25 of the ICSID Convention. Article 25(1) provides that: ‘..when the parties have given their consent, no party may withdraw its consent unilaterally’. Therefore, any obligation which may subsist by the operation of Article 72 is qualified by the requirement of consent of both the parties (“Perfected Consent”). In other words, on a contextual interpretation of Article 72, both parties are required to honor their existing obligations unless mutually agreed otherwise by the parties. Since the Investor has not accepted the standing offer, all obligations of the host state stand extinguished. It is further argued that Article 71 has no place in this discussion. This is because Article 71 governs the rights/obligations of contracting states as party to the Convention, whereas Article 72 governs the rights/obligations of Contracting states as a party to arbitrations. Additionally, the cooling off period in Article 71 is applicable only to those right/obligations which do not require Perfected Consent. For example, the right to participate in the Administrative Council (Article 4-7 of the Convention), the duty to respect the immunities and privileges foreseen in the Convention (Articles 18–24) do not require Perfected Consent (a unilateral undertaking by the state is sufficient) and are therefore governed by Article 71. In other words, Article 71 encompasses a general rule whereas Article 72 is a specific rule with regard to rights/obligations arising out of consent. Since it is now a well-established principle of interpretation that a specific rule supersedes a general rule (lex specialis derogat legi generali), it is only proper that denunciation takes effect forthwith.

Advocates of the second school also start their enquiry under the guise of the offer-acceptance framework, but nevertheless reach a somewhat different conclusion. Adopting a purposive interpretation, it is argued that there exists no dichotomy between Article 71 and 72 and any other view would be at the cost of “robbing” the cooling off period in Article 71 of its effect utile. This view is in consonance with International treaty practice (see e.g. Article 56(2) of The Vienna Convention on the Law of Treaties).

Some scholars have made arguments which can be classified under the third school (For example- Professor Gaillard seems to offer something on the lines of a firm offer model).. Briefly, he demarcates those arbitration clauses which purport a mere offer to arbitrate as against those clauses which incorporate an unconditional consent to arbitration. In other words, the nature of state consent and its possible revocation thereof varies according to the terminology used in the consent instrument.

 

Third party beneficiaries’ model

Mr. Söderlund’s separate opinion has challenged the offer-acceptance model when consent is expressed through an investment treaty such as a BIT. He does not dispute that Article 72 requires Perfected Consent; what he in fact argues is that this requirement has already been met. Instead, he challenges one major assumption in the previous model by presenting an alternative theoretical view-point, namely, that the investor is not the appropriate party who has the obligation to perfect consent because it is only a beneficiary to the contract/treaty. The real parties to the “contract” (i.e. the treaty) are the states and not investors.

When the Convention was formulated, state consent in relation to foreign investment typically featured in an arbitration clause entered into by the state itself – usually in a natural resource concession or an investment agreement (¶21). Given the historical account, the ensuing practice of including ISDS clauses in investment treaties was not clearly envisioned and thoroughly discussed by the drafters. The first Investment treaty to expressly incorporate an investor-state arbitration clause was the 1968 BIT between Indonesia & the Netherlands. Since then, over 2000 such BITs have entered into force. As Söderlund notes, this shift in practice means that  ‘the provisions of the Convention will nowadays have to be regularly applied in a contextual framework that did not exist at the time of the Convention’s creation’ (¶24).

Flowing from the above analysis, there may be two different but related reasons as to why the offer-acceptance model is logically inaccurate in a typical BIT context:

  1. In the case of an investment contract or an agreement to submit dispute to the International Court of Justice, the parties to the dispute are the same. However, in the case of an investment treaty the contracting parties are the host state and the home state of the investor, whereas the disputing parties are the host state and the investor.
  2. There are three relevant parties as opposed to only two parties. The offer-acceptance model ceases to make sense in a tripartite context as it is only applicable in a two-dimensional playing field.

The preferred model should, therefore, be the third-party beneficiaries’ model presented by Mr. Söderlund in his Separate Opinion. Put simply, the “contract” to arbitrate is between the two sovereign states, whereas the investor is a third-party beneficiary to the contract.

Consequently, the arbitration clause as contained in an investment treaty should not be considered as a “standing offer”, which has to be accepted by an investor, but rather it should be treated as a “procedural right” that is secured to the third-party beneficiary. Conclusively, this right is secured with the investor as long as the investment treaty is in effect (¶48,49). In the situation where the denouncing state terminates the relevant BIT also, the right will exist until the sunset period runs its course. Since it is a well-established principle of law that a right conferred upon a beneficiary cannot be altered without the consent of that beneficiary, denunciation will not have any effect because here the beneficiary i.e. the investor has not consented to the alteration of its rights.

 

Conclusion

Mr. Söderlund offers a very interesting perspective which has so far featured only in academic discussions. However, the Fábrica award which was passed a year after the Opinion discusses Article 72 in great detail and disagrees with Mr Söderlund’s view. On this note it is important to recollect that there is no strict doctrine of stare decisis in ISDS proceedings. The future is still open to tribunals to adopt a reasoning similar to that of Mr. Söderlund – off-setting the possible use of denunciation in such vulnerable times.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Everyone Should Do His Own or Everyone Should Have His Own? An Analysis on the Requirements of Conferral of the Arbitral Tribunal’s Jurisdiction

Sat, 2020-05-30 04:00

In a recent decision in XPL Engineering ltd. v. K & J Townmore Construction ltd. [2019] IEHC 665, the Irish High Court decided to refer a construction dispute to arbitration on an application by the defendant, K & J Townmore Construction Ltd, for an order under Article 8 (1) of the UNCITRAL Model Law referring the parties to arbitration. Mr. Justice David Barniville reasoned that the defendant had sufficiently demonstrated that the requirements of Article 8(1) of the UNCITRAL Model Law had been met with regard to the pertinent terms of the arbitration agreements concluded between the parties despite the contentions by the plaintiff that no dispute existed in the terms of the arbitration agreement.

 

Background of the Dispute

The defendant, a construction company, engaged the plaintiff, an engineering company, as a subcontractor to provide mechanical works on two subcontracts each containing an arbitration clause. Shortly after the commencement of both subcontracts, the plaintiff claimed that monies were owed to it by the defendant under both subcontracts. The plaintiff issued plenary proceedings1)This term refers to court proceedings with pleadings and hearing on oral evidence, which are initiated by a plenary summons, as opposed to summary proceedings that are held without pleadings and the hearing of which is based on affidavit with or without oral evidence. jQuery("#footnote_plugin_tooltip_4030_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4030_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); in 2014 against the defendant, which the latter asserted to have arisen out of disputes that the underlying subcontracts required to be referred to conciliation or arbitration.

The plaintiff contended that the requirements set forth in Article 8(1) of the UNCITRAL Model Law for the referral of the dispute to arbitration have not been complied with by the defendant and, therefore, the Court is not obliged to stay the proceedings and refer the parties to arbitration. Notably, it alleged, inter alia, that:

(a) there is no “dispute between the parties” for the purposes of the arbitration agreement contained in the subcontract and Article 8(1) of the UNCITRAL Model Law, and

(b) that the defendant requested the reference to arbitration later than its “first statement on the substance of the dispute”.

 

The Decision of the Court

The Court ruled that the defendant had demonstrated that the prerequisites of Article 8 (1) of the UNCITRAL Model Law were satisfied by making its request for the referral to arbitration not later than the relevant point in time and that a dispute indeed existed between the parties.

 

There was a Dispute Between the Parties

Pursuant to the High Court’s rationale, in determining whether a dispute exists, the court should not examine whether the position of the party is tenable or credible. The court does not apply the same test as in the process of determining whether summary judgment or leave to defend have to be granted. By virtue of the enactment of Section 9(4) of the English Arbitration Act 1996 the role of the court is not to assess the merits of the parties’ pleadings. That would be intrusive upon the role of the arbitrator and radically undermine the arbitral process, which the parties entrusted with their case.

On the other hand, as decided by the English Court of Appeal in Collins (Contractors) Limited v. Baltic Quay management (1994) Ltd [2004] 99 Con LR 1, the mere making of a claim by the plaintiff does not qualify as a dispute unless it can reasonably be inferred, if not explicit by the parties’ submissions, that the respondent rejects the plaintiff’s claim and therefore a dispute exists. In the case at hand, the Irish Court agreed with this reasoning, and held that the defendant denied the plaintiff’s entitlement to payment under the subcontracts and that it had suffered damages in that respect. Additionally, the correspondence exchanged between the parties further proved the existence of a dispute. The Court employed a liberal interpretation of the term “dispute” relying on the presumption that the parties intended a “one-stop” forum for determining their dispute. That assumption should readily be made upon the discharge of the burden of proof by the party requesting the referral  to arbitration. As the Court highlighted, in case the parties disagree as to the existence of a “dispute”, the court shall lean in favor of its existence. The above presumption is in accordance with a teleological interpretation of the term “dispute” that should praise the “commercial purpose of the arbitration agreement” meaning that the parties intended to have their dispute decided by the same tribunal. However, the interpretation of the said term should not overlook the instructive wording of Article II (1) of the New York Convention 1958 as to the meaning of the term “dispute”: “[…] differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not […]”. That suggests that there must be at least a dispute on a point of law or fact and the claim should concern a legal right or obligation, or the reparation for breach of a legal obligation.

 

There is no Time Limit to make an Application

The Court correctly opined that Article 8(1) of the UNCITRAL Model Law does not set out any particular time limit within which an application for reference to arbitration shall be made. What is required is that the request shall be made no later than the “first statement on the substance”. It may be the case that a court is not satisfied with this de minimis requirement and refuses to grant the referral to arbitration. Likewise, an unreasonable delay in making such application to the court, which may cause prejudice and abuse of process, could estop the party from relying on the arbitration agreement and obtaining an order under Article 8(1) of the UNCITRAL Model Law. Absent an express time limit in making the said application, it falls within the discretionary power of the court to rule on that issue and the procedural law of the jurisdiction of the court first seized.

 

Which Applicable Law and How far should the Judicial Review go?

Even if not discussed by the Court, there are two important questions that might arise in similar cases.

First, the applicable law: It generates some discomfort that it is not clear under Article 8(1) of the UNCITRAL Model Law which law governs the assessment of the above questions. To a great extent, such examination is carried out under the spectrum of the national law tradition of the court seised to determine such jurisdictional issues. Nonetheless, this effect should not be dispositive ipso facto since an approach that furthers the harmonisation and unification of the legal framework for the settlement of international disputes should prevail over national law idiosyncrasies.

The second is, how far should the judicial review go: Although it remains unsettled whether the courts’ review in order to determine jurisdictional issues under Article 8(1) of the UNCITRAL Model Law should be a prima facie review or an expansive and full review, it is well justified why courts should adopt the first solution. Courts have to consider that a high standard of review may well affect the role of the tribunal to rule on its own jurisdiction, pursuant to Article 16 of the Model Law, or even other courts’ role throughout the arbitral process (whether the court at the seat of arbitration or the courts of enforcement of the award).2)Lawrence Boo, “The Enforcement of Arbitration Agreements under Article 8 of the Model Law” in: UNCITRAL Model Law After Twenty-Five Years: Global Perspectives on International Commercial Arbitration, 2013. jQuery("#footnote_plugin_tooltip_4030_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4030_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

At any given time that the referral to arbitration becomes pertinent, courts and interested parties should scrutinise the requirements of the conferral of jurisdiction under the respective applicable body of law. More importantly, one has to pay close attention to the dynamics between court’s permissible review for purposes of determining jurisdiction and the arbitral tribunal’s kompetenz-kompetenz. Put simply, the fact that “everyone should do his own [case]” does not mean or result in that “everyone should have his own”.3)Those concepts emanate from Plato’s and Aristotle’s theory of justice as a sense of duty and system of rights, respectively. See: Afifeh Hamedi, “The Concept of Justice in Greek Philosophy (Plato and Aristotle)” 5, 27 Mediterranean Journal of Social Sciences MCSER Publishing, Rome-Italy, 2014. jQuery("#footnote_plugin_tooltip_4030_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4030_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It is imperative therefore to integrate the advantageous synergies developed between courts and arbitral tribunals yet thoughtfully consider how far each one should go.

 

Conclusions

The reasoning of the Court is enlightening. Examining whether the parties intended to have their dispute resolved through arbitration should be the principal objective of the review of the authority first seised. Although not explicitly dealt with by the Court at hand, it is instructive to employ the most suitable standard of judicial review bearing in mind that a prima facie review would leave the determination of arbitral jurisdiction to the competent tribunal, whereas a full review might affect the commencement or continuance of arbitral proceedings while the court’s  final determination on jurisdiction is pending.

References   [ + ]

1. ↑ This term refers to court proceedings with pleadings and hearing on oral evidence, which are initiated by a plenary summons, as opposed to summary proceedings that are held without pleadings and the hearing of which is based on affidavit with or without oral evidence. 2. ↑ Lawrence Boo, “The Enforcement of Arbitration Agreements under Article 8 of the Model Law” in: UNCITRAL Model Law After Twenty-Five Years: Global Perspectives on International Commercial Arbitration, 2013. 3. ↑ Those concepts emanate from Plato’s and Aristotle’s theory of justice as a sense of duty and system of rights, respectively. See: Afifeh Hamedi, “The Concept of Justice in Greek Philosophy (Plato and Aristotle)” 5, 27 Mediterranean Journal of Social Sciences MCSER Publishing, Rome-Italy, 2014. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Brazilian Federal Court of Appeals Prevents Federal Revenue’s Office from Accessing Data of Arbitration Proceedings

Fri, 2020-05-29 03:00

In a dispute involving the Centro Brasileiro de Mediação e Arbitragem – CBMA (“CBMA”) and the Brazilian Federal Revenue’s Office (“FRO”), the Brazilian Federal Court of Appeals prevented FRO from accessing data of arbitration proceedings administered by CBMA.

The CBMA, an arbitral institution with headquarters in the city of Rio de Janeiro, State of Rio de Janeiro, Brazil, has been summoned in several occasions by the FRO to exhibit documents concerning arbitrations proceedings administered by it.

CBMA presented to the FRO documents concerning its own accounting and other arbitration related information that would not amount to the violation of the confidentiality, but denied to disclose other documents, in particular the arbitral awards or settlement agreements involving the parties in dispute, as well as documents containing the fees paid by the litigants in the period embracing the years of 2008 to 2011.

CBMA argued that the FRO’s order violates the confidentiality clause of its Arbitration Rules (“CBMA Rules”) and the secrecy, found on article 13, paragraph 6, of the Brazilian Arbitration Act (“BAA” – Law no. 9.307/1996) and also on article 229, I, of the Brazilian Civil Code1)“Art. 229. No person may be compelled to testify about fact: I – that should be kept secret by virtue of a status or profession; (…)” Such article has been revoked by Law no. 13.105/2015. jQuery("#footnote_plugin_tooltip_6687_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6687_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); (“BCC” – Law no. 10.406/2002).

FRO alleged that the request for information addressed to the CBMA was grounded on the general legal duty of cooperation with the public administration, whereby the private entities have the legal obligation to provide information concerning assets, business and activities that can potentially echo in the tax sphere. It mentioned the Income Tax Regulation (“ITR” – Decree no. 3.000/1999) – since then revoked by Decree no. 9.580/2018 – and articles 195 and 197 of the National Tax Code (“NTC” – Law no. 5.172/1966) to support its contention. The latter articles read as follows:

Article 195. For the purposes of tax legislation, legal provisions excluding or limiting the right to examine goods, books, files, documents, papers and commercial or tax effects of industrial traders or producers, or their obligation to display them, have no effect.

Art. 197. Upon written notice, the following institutions are obliged to provide the administrative authority with all information available to them in relation to the assets, businesses or activities of third parties:

I – notaries, clerks and other official servants;

II – banks, banking houses, savings banks and other financial institutions;

III – asset management companies;

IV – brokers, auctioneers and official dispatchers;

V – the administrator of the estate/executor;

VI – trustees, commissioners and liquidators;

VII – any other entities or persons that the law designates, by reason of their position, occupation, function, ministry, activity or profession.

Single paragraph. The obligation provided for in this article does not embrace information regarding facts about which the informant is legally obliged to observe secrecy due to its position, occupation, function, ministry, activity or profession.

It further contented that the confidentiality of arbitration arises from a private agreement between the litigants which cannot be enforced upon third parties such as the FRO. From the point of the view of the authors of this post, the FRO relies on the privity of the contracts’ principle.

At this point, two clarifications are important to the readers of this blog.

First, article 15.1 of the CBMA Rules in force during the period in which the information was demanded by the FRO sets that “unless otherwise agreed between the parties, or if required by the applicable law to the parties, the members of the Tribunal and of the Center [CBMA] will maintain confidentiality about the matters related to the arbitration, except those already in the public domain or that have already been disclosed in some way”.

Second, article 13, paragraph 6, of the BAA establishes that “[i]n performing his duty, the arbitrator shall proceed with impartiality, independence, competence, diligence, and discretion”. In the lack of an express reference to confidentiality in the BAA, the term discretion has been interpreted by some Brazilian scholars as a duty to keep the confidentiality of the proceedings:

From our perspective, the Brazilian Arbitration Act, in art. 13, § 6, established and still does a duty of confidentiality upon the arbitrators, regardless of any contractual provision or institutional rules in this regard. (…) this duty of confidentiality also applies to the arbitral institution administering the proceedings, given the nature of its activity2)FITCHNER, José Antonio. MONTEIRO, André Luis. A confidencialidade na reforma da lei de arbitragem. In: ROCHA, Caio Vieira, SALOMÃO, Luis (coords.). Arbitragem e Mediação – A Reforma da Legislação Brasileira, 2. ed. São Paulo: Atlas, 2017. jQuery("#footnote_plugin_tooltip_6687_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6687_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Evidencing that this is not a straightforward issue, however, in 2019 the authors seem to have altered their previous position to conclude that there is no legal obligation of confidentiality under the BAA.3)FICHTNER, José Antonio, MANNHEIMER, Sergio Nelson, MONTEIRO, André Luís. Teoria Geral da Arbitragem. Rio de Janeiro: Forense, 2019, p. 595. jQuery("#footnote_plugin_tooltip_6687_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6687_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Other commentators state that discretion is not to be confused with confidentiality: “[o]ne thing is the temperance of the arbitrator, of whom is expected a discreet behavior; another very diverse thing is confidentiality.”4)CARMONA, Carlos Alberto. Arbitragem e processo: um comentário à Lei nº 9.307/96, 3. Ed. São Paulo: Atlas, 2009, p. 246. jQuery("#footnote_plugin_tooltip_6687_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6687_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In any case, there is consensus that confidentiality would stem from the applicable arbitration rules or from the arbitration agreement.5)“It is necessary, either way, to keep in mind that arbitration in Brazil is not necessarily confidential. It is the institutional arbitration rules that tend to establish that the procedure shall be confidential.” CARMONA, Carlos Alberto. Arbitragem e processo: um comentário à Lei nº 9.307/96, 3. Ed. São Paulo: Atlas, 2009, p. 246. jQuery("#footnote_plugin_tooltip_6687_5").tooltip({ tip: "#footnote_plugin_tooltip_text_6687_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

The Litigation Commenced by CBMA

Upon receival of the summon ordering CBMA to exhibit arbitration-related documents to FRO, CBMA filed a writ of mandamus filed under no. 0017682-42.2013.4.02.5101 before the 28th Federal Court of Rio de Janeiro (“Lower Court”), asking the court to enjoin the FRO from ordering the CBMA to share all the information requested by FRO concerning the arbitration proceedings administered by CBMA from 2008 to 2011 and to declare that CBMA would not be legally penalized by refusing to present such documents.

The mandamus was dismissed by the Lower Court decision without prejudice, on the ground that it would need further evidentiary production to make a decision, which would be incompatible with the strict procedural rules applicable to the writ of mandamus in general.

CBMA filed an appeal against the Lower Court’s dismissal of the case, which was judged on February 12, 2020 by the Regional Federal Court of the 2nd Region6)A second instance court competent to decide appeals of decisions issued by the Lower Courts of the States of Rio de Janeiro and Espírito Santo. jQuery("#footnote_plugin_tooltip_6687_6").tooltip({ tip: "#footnote_plugin_tooltip_text_6687_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); (“Federal Court of Appeals”) and that reversed, by majority, the Lower Court’s decision.

 

The prevailing opinion

The reporting judge Luiz Norton Baptista de Mattos’ decision recognized that the writ of mandamus would be admissible given that it only discusses legal issues and, therefore, would not require an evidentiary stage.

On the merits, he relied on the principle of strict legality, applicable to the public administration, to grant the mandamus and to prevent the FRO from requesting CBMA to exhibit the documents.

His decision states that private entities do not have the legal duty to provide information requested by the FRO without a prior law, strictu sensu, that imposes such obligation to them.7)Stricto sensu laws are rules issued by the legislative authorities in accordance with the procedure established by articles 49 to 59 of the Brazilian Constitution. Decrees are not embraced by such provisions. jQuery("#footnote_plugin_tooltip_6687_7").tooltip({ tip: "#footnote_plugin_tooltip_text_6687_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Other rules raised by the FRO such as the ITR could not support its demand since they cannot be considered law, strictly speaking.

The obligation to provide information concerning third parties can only bind the persons and entities expressly referred to in article 197 of the NTC. It differentiated the case at hand from the obligation of financial institutions to provide equivalent information from third parties, as in the latter case there are laws expressly authorizing it.

His decision further stated that “there are innumerous other appropriate means for the FRO to carry out tax inspection, including requesting banking data as above mentioned, not being allowed that the FRO acts outside of the boundaries of the legal and constitutional dictates”.

Regarding the contention of the CBMA that it is under the duty of secrecy and, thus, not obliged to provide the information requested, the Federal Court of Appeals denied the argument – although clarifying that it would be irrelevant for the final ruling since the assessment of article 197 of the NTC would suffice.

His ruling states that the duty to keep the secrecy would be only a private agreement between the litigants. As to the term discretion present in the BAA, it stated that “the duty of discretion (…) is not to be confused with secrecy, as the latter has bigger density as to the preservation of third parties information”.

On this subject, the oral concurring opinion, rendered by Federal Judge Marcus Abraham, has a different view. He stated that, although confidentiality is not expressly referred to in the BAA, “it somehow results from paragraph 3 of article 2, which sets that arbitration involving the Public Administration will respect the publicity principle (…). Therefore, in my opinion, the obligation to give publicity and disclose all the awards is only applicable in cases where the Public Administration is involved”.

 

The dissenting opinions

The dissenting Judge Luiz Antonio Soares rejected the writ of mandamus on the merits because, in his opinion, the FRO did not aim to obtain any information about third parties through the documents requested, but of the CBMA itself, as the debtor of tax obligations.

The opinion of Luis Antonio Soares was followed by Judge Cláudia Neiva, who addressed that the confidentiality of arbitral proceedings is of a private nature and could not be opposed to the FRO.

 

Conclusion

Although grounded on the absence of a stricto sensu law requiring private entities to exhibit third-party related documents and information, the decision of the Federal Court of Appeals preserves the secrecy of arbitral proceedings under administration of the CBMA, which is a practical result that seems to be aligned with the expectation of most of the domestic and international arbitral community.

At the same time, it preserves the public interest and the interest of the FRO, since the FRO has several other means to obtain information regarding taxpayers, and these parallel avenues do not jeopardize the confidentiality of arbitration proceedings.

The decision is still subject to appeal by the FRO. At the time of publication, time periods under Brazil’s procedural law are suspended due to the Covid-19 crisis. Once the suspension is lifted, the FRO will have approximately one month to challenge the court’s decision.

 

All texts in Portuguese that are mentioned or cited in this post have been freely translated into English by the authors.

References   [ + ]

1. ↑ “Art. 229. No person may be compelled to testify about fact: I – that should be kept secret by virtue of a status or profession; (…)” Such article has been revoked by Law no. 13.105/2015. 2. ↑ FITCHNER, José Antonio. MONTEIRO, André Luis. A confidencialidade na reforma da lei de arbitragem. In: ROCHA, Caio Vieira, SALOMÃO, Luis (coords.). Arbitragem e Mediação – A Reforma da Legislação Brasileira, 2. ed. São Paulo: Atlas, 2017. 3. ↑ FICHTNER, José Antonio, MANNHEIMER, Sergio Nelson, MONTEIRO, André Luís. Teoria Geral da Arbitragem. Rio de Janeiro: Forense, 2019, p. 595. 4. ↑ CARMONA, Carlos Alberto. Arbitragem e processo: um comentário à Lei nº 9.307/96, 3. Ed. São Paulo: Atlas, 2009, p. 246. 5. ↑ “It is necessary, either way, to keep in mind that arbitration in Brazil is not necessarily confidential. It is the institutional arbitration rules that tend to establish that the procedure shall be confidential.” CARMONA, Carlos Alberto. Arbitragem e processo: um comentário à Lei nº 9.307/96, 3. Ed. São Paulo: Atlas, 2009, p. 246. 6. ↑ A second instance court competent to decide appeals of decisions issued by the Lower Courts of the States of Rio de Janeiro and Espírito Santo. 7. ↑ Stricto sensu laws are rules issued by the legislative authorities in accordance with the procedure established by articles 49 to 59 of the Brazilian Constitution. Decrees are not embraced by such provisions. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


The Primacy of the Court’s Supervisory Powers Under Sections 67 and 68 of the Arbitration Act 1996 in Minister of Finance (Incorporated) & Or v International Petroleum Investment Company & Or

Thu, 2020-05-28 03:00

In Minister of Finance (Incorporated) & 1Malaysia Development Berhad v International Petroleum Investment Company & Aabar Investments PJS [2019] EWCA Civ 2080 (“IPIC”), Sir Geoffrey Vos, delivering the judgment of the England and Wales Court of Appeal, addressed the ambit of supervisory relief available before the English Courts under ss 67 and 68 of the Arbitration Act 1996 (“the Act”).

 

Facts

This appeal arose out of allegations that a multi-billion dollar fraud had been carried out against 1MDB (the second claimant-appellant), a Malaysian state-owned investment fund. 1MDB is a wholly-owned subsidiary of the first claimant-appellant (collectively, the “claimants”).

The claimants were engaged in a London-seated arbitration (the “first arbitration”) against the respondent-defendants (the “defendants”). Subsequently, the parties entered into a settlement deed which culminated in a Consent Award made in May 2017. In the present proceedings, the claimants applied to have the Consent Award set aside on the basis of, inter alia, fraud. In response to the claimants’ applications, the defendants commenced two fresh arbitrations (the “fresh arbitrations”) against the claimants seeking declaratory relief that the settlement deed was valid, and payment of over US$1 billion which was alleged to have fallen due under the settlement deeds because of the claimants’ application to set aside the Consent Award. In December 2018, the defendants applied to strike-out the claimants’ application, and/or alternatively, for a stay of the claimants’ application on case management grounds. The claimants then applied for an anti-arbitration injunction under s 37(1) of the Act.

 

The Judgment Below

At first instance, Mr Justice Knowles (“Knowles J”) refused the claimants’ application for an anti-arbitration injunction and the respondents’ application for striking-out, but granted the defendants’ application for a stay of court proceedings on case management grounds in order to allow the fresh arbitrations to proceed. The crux of Knowles J’s reasoning centred on [70] of the first instance judgment, that there was an “equality in foundation” between the fresh arbitrations and the court’s supervisory jurisdiction of the first arbitration under ss 67 and 68 of the Act because both those foundations centred on the litigants’ consent to enter into arbitration in the first place. In other words, since both the exercise of the court’s supervisory jurisdiction and the fresh arbitrations depended on the parties’ consent, granting the anti-arbitration injunction would unjustly prioritise the court’s supervision over the fresh arbitrations.

 

The Court of Appeal Judgment

The Court of Appeal disagreed with the fundamental premise of Knowles J’s decision. At [1], the “primacy of the powers of the court” under ss 67 and 68 was emphasised. The fresh arbitrations were held to threaten or infringe the legal rights which the claimants had to recourse under ss 67 and 68. These legal rights, being mandatory rights within the meaning of s 4 of the Act, could not be said to be on equal footing to the consent of parties to enter into the fresh arbitrations. The Court therefore removed the case management stay, and granted the anti-arbitration injunction.

In relation to the case management stay, the Court accepted Knowles J’s reliance on Lord Bingham’s holding in Reichhold Norway ASA v Goldman Sachs International [2000] 1 WLR 173 that “stays are only granted … in rare and compelling circumstances”. However, the Court disagreed with Knowles J in the application of the test, holding that a) the Court was performing a public function as a branch of the state in resolving disputes under ss 67 and 68, b) it would be illogical to give precedence to the fresh arbitrations given that the fresh arbitrations were, in substance, mere reactions to the claimants’ court application, c) a stay would not necessarily avoid duplication as this would depend on issue estoppels arising in the fresh arbitrations, d) a stay would only enable the arbitrators to reach at best a provisional decision as to their own jurisdiction under the kompetenz-kompetenz principle, in contrast to a final binding determination by the court, and e) it would be unduly burdensome for the claimants to have to first defend the significant financial claims in the fresh arbitrations.

In relation to the anti-arbitration injunction, the Court agreed with Knowles J that the correct test was that at [34] of Claxton Engineering Services Ltd v TXM Olaj-es Gazkutato Kft (No. 2) [2011] EWHC 345 (Comm) (“Claxton”) to ascertain i) whether the claimants’ rights had been infringed or threatened by the fresh arbitrations, ii) whether continuation of the fresh arbitrations would be vexatious, oppressive, or unconscionable, and iii) whether it would be just and convenient to grant an injunction. The Court held at [73] that the claims sought in the fresh arbitrations infringed and threatened the claimants’ “undoubted legal right” to recourse under ss 67 and 68, and went on to observe that, notwithstanding the agreement of parties to such clauses, “[i]t is not legitimate … to enforce the clauses of the settlement deeds that attempt to suppress the court’s review of the consent award”.

 

Comment

The Court’s decision is largely explicable on the mandatory statutory framework the Act provides for. Per s 4(1) of the Act, mandatory provisions “have effect notwithstanding any provision to the contrary”. The Departmental Advisory Committee on Arbitration Report on the Arbitration Bill 1996 specifically described mandatory provisions as ones which “cannot be overridden by the parties” at [28] of the report. These mandatory provisions are further described at s 1(b) of the Act as “safeguards as are necessary in the public interest”, and the cumulative effect of these extracts underscores two points:

First, mandatory provisions like ss 67 and 68 are specifically envisaged as going towards a public interest which Parliament clearly intended that parties cannot derogate from. This ensures that, in the contexts of serious irregularity and/or where the substantive jurisdiction of the tribunal is impugned, justice can be done. Because a public interest is invoked, it cannot be said that the applications of ss 67 and 68 are solely manifestations of the consent which undergirds the arbitration in the first place.

Second, the mandatory framework is rightly described at [39] as part of the balance provided for by the architecture of the Act. On one hand, court intervention in arbitral proceedings is carefully limited so that the parties’ wishes are given appropriate weight. For instance, s 1(c) of the Act provides that the court should not intervene except as provided for by the Act. On the other hand, the mandatory framework, and in particular ss 67 and 68, apply even if parties would rather avoid them. This is an appropriate balance to strike – ss 67 and 68 go towards the heart of the consent to arbitrate in the first place. After all, a party cannot be taken to consent to arbitration which is marred by serious irregularity or fraud.

Viewed in this context, it is unsurprising that there is extensive authority outlining the reasoning for how ss 67 and 68 come to apply. In C v D [2007] EWCA Civ 1282 at [17], Lord Justice Longmore observed that “the parties incorporated the framework of the 1996 Act” by virtue of their choice of seat for the arbitration. The IPIC judgment makes clear that the consent of the parties is not the sole jurisprudential basis for the application of ss 67 and 68. Rather, the public interest outlined above is another foundation for its application. To this, one might add that the very framework of the Act provides for ss 67 and 68 to apply in the manner the Court adopted. In practical terms, therefore, practitioners should note that agreeing to a London-seated arbitration brings as a corollary supervisory oversight by the English courts.

This decision, while providing welcome clarity on the ambit and application of ss 67 and 68, leaves open a number of issues. First, where the subject matter of the arbitration is one that is determined in part by the courts and otherwise by arbitration, such as in certain insolvency contexts, does the fact that the courts are exercising public functions in those contexts necessarily mean that the court process should “trump” the arbitration? Second, what provisions will be seen as attempts to contract out of the mandatory provisions under the Act? As regards the former, it is unclear how the nexus of court determinations and arbitral proceedings will operate in such contexts. The Court in IPIC hinted at the role issue estoppel can play, though it is unclear how that will operate if a court proceeding and an arbitration are found to not be “on equal footing”. As for the latter, the instant facts represented a clear instance of a party’s rights under ss 67 and 68 being fettered. However, it remains to be seen how protective the Court will be of attempts to impose contractual consequences for the challenge of consent awards. In other words, could a watered-down version of the consequences the defendants imposed be found to not fall foul of the Claxton test?

 

Conclusion

A jurisdiction’s arbitration-friendliness is often assessed by reference to how willing courts are to intervene in arbitration. IPIC is a timely reminder that non-intervention is not the be-all-and-end-all to determining that issue. The consent of parties is at the heart of arbitration, and a state’s arbitration-friendliness can also be evidenced by its willingness to ensure that the consent underpinning arbitration is not vitiated. If challenges on the basis of serious irregularities or substantive questions of jurisdiction are disallowed inter partes, the effective consent of the parties may be undermined. In IPIC, the English courts have shown that they will intervene in such contexts.

 

The author wishes to thank Ms Jenna Hare for her insightful comments on this article. This case note is written in the author’s personal capacity, and the opinions expressed in the case note are entirely the author’s own views. All errors herein are my own. 

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Eating Your Cake and Having It Too: The Equitable Doctrine of Approbation and Reprobation in MPB v LGK

Wed, 2020-05-27 04:00

The proverb “You can’t have your cake and eat it too” makes more sense to some people in the reverse, and it was in fact first formulated in that way in English in the 16th Century. Its point, as we are all aware, is that sometimes we have to make a choice between two options that cannot be reconciled. Legally, it is discussed in the context of the equitable doctrine of election, or approbation and reprobation.

On 23 January 2020 Veronique Buehrlen QC, sitting as Deputy High Court Judge, handed down judgment in MPB v LGK [2020] EWHC 90 (TCC), dismissing an application by MPB to set aside an arbitration award on jurisdiction pursuant to section 67 of the Arbitration Act 1996 (the Act). In doing so, she found that an arbitration agreement included in a lower ranking set of standard terms and conditions bound the parties in the absence of any dispute resolution clauses in contractual documents which ranked higher in the contractual hierarchy. Although the Judge made her decision based on the question of whether LGK’s terms and conditions had been incorporated into the contract between the parties, given the facts and submissions made by the parties, her judgment necessarily analysed the doctrine of approbation and reprobation and recent authorities pertinent to the dispute.

 

Facts of the Case

MPB is a building contractor, which had entered into an agreement with LGK, a steel supplier and installer, to supply and install structural steel to MPB’s project in North London. The agreement itself arose out of an exchange of a number of emails which attached various quotations, amendments to those quotations and each party’s standard terms and conditions. One of the emails contained a quotation (the Quotation), that was accompanied by LGK’s standard terms and conditions (LGK’s Terms). The final order, as agreed between the parties, incorporated MPB’s standard terms (MPB’s Terms) and included a table of works which was based on the Quotation.

Clause 11 of LGK’s Terms contained a two-tiered dispute resolution clause, which provided:

either party may refer a dispute to adjudication at any time…The Decision of the Adjudicator shall be binding on the parties until the dispute is finally resolved through agreement for by Arbitration [sic] under the CIMAR rules.

A dispute arose between the parties regarding the works performed by LGK, and MPB engaged other contractors to complete LGK’s works. A series of four adjudications followed, two initiated by each party. The third was commenced by MPB in reliance on LGK’s Terms, pursuant to which MPB was awarded £76,056.67 and successful enforcement proceedings followed. Subsequently, LGK commenced arbitration proceedings in relation to the adjudication decision, in accordance with Clause 11 of the LGK Terms. Mr Jonathan Cope was appointed as sole arbitrator and immediately faced a jurisdictional challenge from MPB. When he issued his award on jurisdiction, holding that he did have jurisdiction over the dispute by virtue of the arbitration agreement in LGK’s Terms, MPB filed an application to the High Court under section 67 seeking to set aside his award.

 

Decision of the High Court

MPB’s application to the High Court sought to set aside the arbitrator’s award on jurisdiction pursuant to section 67(1)(a) and section 67(3)(c) of the Act on the basis that there was no arbitration agreement between the parties and the Tribunal accordingly lacked substantive jurisdiction over the dispute. MPB argued that the agreement with LGK did not incorporate the LGK Terms, in particular, Clause 11. It did so notwithstanding its own reliance on Clause 11 in initiating the third adjudication. At the outset of her judgment, Veronique Buehrlen QC noted that it was common ground that a challenge under section 67 proceeds de novo, that is, that Mr Cope’s award on jurisdiction had no legal or evidential weight.

Veronique Buehrlen QC was asked to rule on two questions:

  • Did the agreement between MPB and LGK incorporate Clause 11 of LGK’s Terms?
  • In light of MPB’s conduct in the third adjudication, was it open to MPB to challenge the application of Clause 11?

 

Incorporation of LGK’s Terms

On the first issue, the Judge found that the agreement did indeed incorporate Clause 11 of LGK’s Terms, giving three reasons. Firstly, MPB had had clear notice of LGK’s Terms, as the Quotation had been provided to it with LGK’s Terms. Secondly, the scope of work and price contained in the Quotation were “clearly based on, and to be read in conjunction with” LGK’s Terms. Finally, despite MPB’s Terms being given priority, the arbitration agreement in LGK’s Terms was not inconsistent with MPB’s Terms, which did not contain a dispute resolution clause. She found that:

[w]hilst the obvious implication where a contract is silent on the matter of dispute resolution is that any dispute will be brought before the Courts …I do not see one set of terms incorporating an arbitration clause as inconsistent with another set of terms incorporated into the same contract where no such clause has been included.

 

Approbation and Reprobation

As noted above, the Judge made clear that in light of her finding on the first issue, she did not need to consider LGK’s alternative argument on approbation and reprobation. She nevertheless did so in the event that it provided an alternative route to establishing jurisdiction were she to be mistaken as regards her conclusions on incorporation of LGK’s Terms.

The Judge held that MPB had unequivocally elected to rely on Clause 11 and its assertion of a right to challenge the arbitration agreement was different to and inconsistent with that election. She found that the question was not whether MPB should be precluded from arguing their case in a particular way, but about their clear and unequivocal election to use a particular dispute resolution procedure.

The Judge summarised the principles arising from the case law as follows (¶58 of the judgment):

(i) The first is that the approbating party must have elected, that is made his choice, clearly and unequivocally;

(ii) The second is that it is usual but not necessary for the electing party to have taken a benefit from his election such as where he has taken a benefit under an instrument such as a will;

(iii) Thirdly, the electing party’s subsequent conduct must be inconsistent with his earlier election or approbation.

In essence, the doctrine is about preventing inconsistent conduct and ensuring a just outcome.

The Judge dismissed MPB’s application to set aside the award with costs.

 

Comment

The case provides a clear reminder to parties to ensure consistency or a clear hierarchy in dispute resolution provisions where multiple contracts and/or standard terms are in play and to ensure that dispute resolution provisions are included in all contracts. This is of course particularly pertinent in the construction industry. It also further emphasises the potential finality of jurisdictional decisions that may be taken early and if parties seek to rely on one tier of a dispute resolution clause, they are likely later to be precluded from challenging the validity of the second tier.

Perhaps of most interest however is the analysis applied by the Judge to the question of whether the electing party needs to have taken a benefit for the doctrine of approbation and reprobation to become engaged. MPB had argued that there was such a need for a benefit and no benefit had been conferred in this case, because MPB had the right to refer the dispute to adjudication by virtue of the Construction Act in any event. The potential need for a benefit to the party making the election was enunciated by Lord Evershed MR in Banque des Marchands de Moscau (Koupetschesky) v Kindersley [1951] 1 Ch 112, who described the doctrine as preventing a party from resiling from its election where the party has:

taken a benefit under or arising out of the course of conduct which he has first pursued and with which his present action is inconsistent.

Further, in Skymist Holdings Ltd v Grandlane Developments Ltd [2018] EWHC 3504, Waksman J set out principles applying to the doctrine and said that the party must gain a benefit, because: ‘if there was no benefit, it was not clear why it would be unjust to the other party to allow the first party later to “reprobate.””

Veronique Buehrlen QC however took the view that it was “usual but not necessary” for an electing party to have taken a benefit. She rejected the relevance of certain of the adjudication authorities on the doctrine (including Skymist) on the basis that they related to challenges to an adjudicator’s decision on enforcement. She noted at ¶68 that Lord Evershed MR had in fact left the position open, by requiring the conferment of a benefit “at least in a case such as the present.” Ramsey J in PT Building Services Ltd v ROK Build Limited [2008] EWHC 3434 (TCC) had however found that “the taking of a benefit, whilst sufficient for there to be an election, is not necessary” and that instead what had to be determined was whether there had been an election. A detriment suffered by the other party would also explain why it would be unjust to allow a party to reprobate. Here, the fact of LGK’s wasted time and costs would amount to such a detriment were MPB to be permitted to reprobate its previous position.

The approach taken by the Judge clearly achieved an outcome that is fair on the facts: MPB could not eat its cake and have it, too.

 

Postscript: Does the order matter? Not if “and” works to suggest that the two activities cannot occur simultaneously…otherwise and for the purposes of the doctrine of election, the only version that makes sense is the original.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Is Arbitration In Venezuela In Danger?

Wed, 2020-05-27 03:00

Recently, the Constitutional Chamber of the Venezuelan Supreme Court of Justice (the “Court”) issued an interlocutory judgment ordering the Business Center for Conciliation and Arbitration (CEDCA) to stay an arbitration and to forward the arbitration file in order to decide on a request for “avocamiento” filed by one of the parties before the Court.

This issue is so troubling that the Arbitration Committee of the IBA issued an open letter to the President of the Caracas Bar Association expressing concerns that this decision may result in a

disquieting precedent as regards the ability of parties to an agreement providing for arbitration seated in Venezuela to enjoy and enforce their rights under their agreement. If the avocamiento remedy can be applied to arbitrations seated in Venezuela such that the Venezuelan courts can deprive an arbitral tribunal of its exclusive jurisdiction to decide the merits of a dispute submitted to arbitration, it may in effect reduce agreements to submit disputes to arbitration seated in Venezuela to dead letter.”

The full letter can be read here.

 

What is “avocamiento

Under Venezuelan law, the Chambers of the Venezuelan Supreme Court of Justice, may take over a case from the lower judicial courts or reassign it to a different court when there are “serious procedural disorders or scandalous violations of the legal system that ostensibly harm the image of the Judicial Branch, public peace or democratic institutional framework” (Article 107 of the Organic Law of the Supreme Court of Justice). From the language of the law, it appears to be clear that this figure applies to proceedings before instance courts (Article 108 of the Organic Law of the Supreme Court of Justice), not to arbitration proceedings.

 

What we know so far

The case at hand involves a domestic arbitration under the rules of the CEDCA seated in Caracas. In the final phase of the arbitration procedure, the arbitral tribunal shared with the parties a draft award for them to submit observations to be considered by the arbitral tribunal before issuing the award. However, on 10 February 2020, the losing party applied to the Constitutional Chamber of the Supreme Court of Justice for an “avocamiento.” The Court’s interlocutory judgement has merely stayed the arbitration. It provides neither a discussion nor a decision on the applicability of avocamiento to arbitration, which, indeed, had never before been invoked with respect to an arbitration.

 

Why it matters

While the Constitutional Chamber is yet to issue its final decision on the “avocamiento,” the fact that it has agreed to stay the arbitration in the meantime gives cause for serious concern about the integrity of arbitrations seated in Venezuela. If the Court were to grant the request, this would entail seizing the decision on the merits from the arbitral tribunal, and this at a stage when the arbitral tribunal had already produced a draft award and shared it with the parties for them to comment.

As pointed out by the Venezuelan Arbitration Association, “Commercial arbitration laws around the world authorize the intervention of the courts only in very specific cases. Under no circumstances are ordinary courts or a Chamber of the Supreme Court of Justice authorized to interfere in the decision on the merits or to stay the proceedings. This is precisely the fundamental feature of arbitration, in which the parties, from the outset when they submit to arbitration, waive their right to assert their claims before the judges.”

While the Constitutional Chamber of the Venezuelan Court of Justice has proclaimed to take a “pro arbitration” stance in the past, we will have to wait and see if it will follow through when deciding on this odd request.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Enforcing Intra-EU Dispute Awards in the United States after Achmea

Tue, 2020-05-26 04:00

After the Court of Justice of the European Union (“CJEU”) rendered the Achmea decision, heated discussions on its impact ensued. Particularly, the concern raised on whether the ICSID proceeding provided for in intra-EU BITs and intra-EU disputes under the Energy Charter Treaty (“ECT”) would be valid. Several arbitral tribunals and national courts have dealt with this issue and it has been discussed on this blog multiple times (e.g., here).

On 5 May 2020, a majority of the EU Member States signed an agreement for the termination of intra-EU bilateral investment treaties (“termination agreement”). A stated aim of the termination agreement is to invalidate all intra-EU investor-State arbitral proceedings. However, it explicitly states that the ECT is not covered and will be dealt with at a later stage. This agreement would not affect arbitral proceedings concluded before the Achmea judgment, i.e. before 6 March 2018.

Keeping this background in mind, this post will analyze two recent U.S. cases addressing the enforceability of intra-EU dispute award.

 

Micula v. Gov’t of Romania, 2019 WL 4305533 (D.D.C.)

On 11 September 2019, the District Court of Columbia rendered its decision enforcing an ICSID award against Romania. On 19 May 2020, the US Court of Appeals for the District of Columbia affirmed the District Court’s decision (here). Micula had obtained an ICSID award against Romania in 2013, but subsequentely the European Commission ordered Romania not to pay and to recover any amounts already paid in implementation or execution of the arbitral award, that would otherwise constitute an impermissible “state aid” (EU Commission Decision 2015/1470 of 30 March 2015 on State aid). Micula went ahead with enforcement procedures already in 2014.

In the United States, to enforce an arbitration award against a state, the petitioner must show that any of the exceptions under the Foreign Sovereign Immunity Act (“FSIA”) applies. The courts have recognized arbitration exception under the FSIA.

Romania, relying on Achmea, contested the arbitration agreement under the Sweden-Romania BIT as invalid and unenforceable. This view was supported by the European Commission, in its amicus brief where the Commission argued that the Achmea “applies foursquare to the arbitration agreement in the Romania-Sweden BIT.” In response, Micula argued that Achmea does not apply because: (1) Romania acceded to EU after the ICSID proceeding commenced, whereas the Slovak Republic in Achmea was already part of the EU when the arbitral proceedings commenced; and (2) Achmea did not invoke the ICSID proceeding.

The court found that Achmea does not apply in this context for three reasons. First, the Achmea’s reasoning and purpose were to protect “the autonomy of EU law” and the same purpose and objective were not found in the present case. Unlike Achmea, the events leading to the current dispute occurred prior to Romania joining the EU in January 2007. The court noted that the Romania-Sweden BIT entered into force in July 2003. The revocation of the incentives took legal effect in February 2005. The ICSID proceeding commenced in July 2005. Therefore, the court found that Romania’s action leading to the parties’ dispute “remained outside the EU and subject, at least primarily, to its own domestic law.”

Second, the ICSID tribunal did not decide “a question of EU law in a way that implicates the core rationale of Achmea.” The court found that although the tribunal considered EU law as part of the “factual matrix” of the case, it expressly refused to decide on the question whether “any payment of compensation arising out of this Award would constitute illegal state aid under EU law and render the Award unenforceable within the EU.”

Finally, the court focused on the General Court of the European Court of Justice’s ruling rendered in June 2019. The General Court overruled the EU Commission Decision  2015/1470 of 30 March 2015 on State aid, where EU Commission found that the benefits provided under the Romania-Sweden BIT to Micula constitute unlawful state aid, thus violating EU law. The General Court found that Achmea is distinguishable stating “in the present case, the arbitral tribunal was not bound to apply EU law to events occurring prior to the accession before it, unlike the situation in the case which gave rise to the judgment of 6 March 2018, Achmea.”

Although the court had a chance to address whether Achmea makes the ICSID proceeding under intra-EU BIT invalid, the court did not address this specific issue. However, the court limited the practical impact of Achmea by conducting a detailed analysis on whether the court has the subject matter jurisdiction to enforce final award rendered under the ICSID proceeding by virtue of intra-EU BIT. The court demonstrated that the impact of Achmea should be based on a case-specific analysis.

Interestingly, but outside the scope of this post, the court rejected Romania’s argument on the “Act of State” and “Foreign Sovereign Compulsion” doctrines.

 

Novenergia II – Energy & Env’t (SCA) v. Kingdom of Spain, 2020 WL 417794 (D.D.C.)

On 27 January 2020, the District Court of Columbia rendered a decision granting Spain’s request to stay the enforcement proceeding until resolution of the set-aside proceedings in Sweden. The parties’ dispute was brought to the Stockholm Chamber of Commerce (“SCC”) proceeding by virtue of the ECT. The SCC tribunal unanimously rejected Spain’s jurisdictional challenge that the intra-EU disputes under the ECT is invalid under Achmea. The tribunal rendered a decision in favor of the investor. On 14 May 2018, Spain sought to set aside the award in the Swedish Svea Court of Appeal. Novenergia, in turn, sought an enforcement proceeding in the District Court of Columbia on 16 May 2018. On 16 May 2018, the Swedish Svea Court of Appeal ordered to suspend the enforcement of the final award until it decides on Spain’s application to set aside the award.

Spain sought to dismiss the enforcement action alleging that the District Court of Columbia lacks subject matter jurisdiction – as Romania had argued in Micula. Alternatively, Spain sought to stay the proceeding until the set aside proceeding in Sweden has been completed.

Conclusively, Spain argued that the District Court of Columbia lacks jurisdiction because intra-EU disputes under the ECT are invalid pursuant to the Achmea doctrine. The court facing this issue, avoided rendering a determinative decision, stating instead that: “the more prudent course of action is to allow courts within the EU to first decide the issues.” Thus, the court granted a stay without addressing whether intra-EU disputes under the ECT would be invalid. The court justified staying the proceeding under its inherent power and using Europcar Factors as guidance.

 

What Did the Courts Decide?

The Micula shows that the courts in the United States would likely find the necessary subject matter jurisdiction to go ahead with the enforcement procedure. However, two cases (Novenergia II, Masdar Solar) also show that the courts may order to stay the proceeding instead of addressing whether it has the subject matter jurisdiction when the set aside proceeding or ICSID appellate proceeding is pending.

Regarding a State’s opposition that the intra-EU arbitral clause is invalid under a BIT or the ECT, the courts did not answer this question. Rather the court conducted a “case-specific analysis” in Micula. Thus, after Micula, it remains an open question of whether the courts will enforce an arbitral award resulting from intra-EU disputes.

 

Implications on Other Proceedings?

A party seeking enforcement of an arbitral award resulted from intra-EU disputes should keep in mind the following potential arguments to support their claim. First, the U.S. courts should not simply follow a State’s argument that intra-EU disputes under the ECT are invalid under the infamous Achmea doctrine. This is because the Achmea decision itself did not explicitly deal with this issue, vis-á-vis the ECT. Additionally, in the termination agreement, Member States defer answering this issue at a later stage.

Second, the intra-EU disputes under the BIT providing ICSID proceeding initiated before the Achmea judgment should not be invalid. When the party initiated the arbitral proceeding, the intra-EU BIT was in effect. It would be unreasonable to retroactively make arbitral clause unenforceable.

On the other hand, the Member States would most likely rely on Achmea and the termination agreement. Additionally, EU Member States could elect to enter into separate termination agreement relating to the ECT, if they decide to do so (e.g., here).

Currently, there are seven cases in the District of Columbia seeking to enforce an arbitral award against Spain (e.g., here). The European Commission filed an amicus brief in these proceedings arguing that the intra-EU disputes by virtue of the ECT are “fundamentally incompatible with EU law.” (e.g., here).

It would be highly interesting to see how the courts rule on this matter, whether they will conclusively find the enforceability of intra-EU dispute awards after Achmea or conduct a case-specific analysis.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Remote Hearings in International Arbitration – and What Voltaire Has to Do with It ?

Tue, 2020-05-26 03:00

Remote hearings are nothing new, but the COVID-19 crisis has forced international arbitration out of its comfort zone. Parties, counsel, and arbitrators must adapt to the new reality of conducting proceedings in the face of travel restrictions and social distancing measures. One particularly thorny question is whether and to what extent planned physical hearings that cannot be held due to the above-mentioned restrictions should be postponed, or be held remotely, using modern communication technologies. In a recent article published here, I take a step back from the immediate crisis and propose an analytical framework for remote hearings in international arbitration. In the context of the current pandemic and beyond, the article provides parties, counsel, and arbitrators with the relevant guidance on assessing whether to hold a hearing remotely, and if so, how to best plan for and organize it. The article also tests the risk of potential challenges to awards based on remote hearings, looking in particular at alleged breaches of the parties’ right to be heard and treated equally.

Maybe unusually, the article begins with the opening lines of the poem “La Bégueule” from 1772 by the French philosopher Voltaire:

“Dans ses écrits un sage Italien

Dit que le mieux est l’ennemi du bien;

Non qu’on ne puisse augmenter en prudence,

En bonté d’âme, en talents, en science;

Cherchons le mieux sur ces chapitres-là;

Partout ailleurs évitons la chimère.

Dans son état heureux qui peut se plaire,

Vivre à sa place, et garder ce qu’il a !”

This poem is the reason why the proverb “the best is the enemy of the good” is often attributed to Voltaire, even though the origin seems to be the Italian “Il meglio è l’inimico del bene.”1)Susan Ratcliffe, Concise Oxford Dictionary of Quotations 389 (OUP 2011). jQuery("#footnote_plugin_tooltip_6078_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6078_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The proverb is often cited as meaning that “people are … unhelpfully discouraged from bringing positive change because what is proposed falls short of ideal” and “[i]f we want to make progress, we should … seek improvement rather than perfection.”2)Richard Susskind, Online Court and the Future of Justice, 89-90, 182 et seq. (OUP 2019). jQuery("#footnote_plugin_tooltip_6078_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6078_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, put in context, Voltaire’s poem suggests quite the opposite. In “La Bégueule” Voltaire tells the story of a woman who is perpetually unhappy. According to the opening lines, when it comes to prudence, goodness, talent, or science, one should strive for excellence. Yet, for other matters, one should avoid falling for the illusion of constant improvement. Instead, one should stay put and “remain at one’s place,” the value of which is not to be underestimated.

The tension between the two meanings – the one typically attributed to the proverb and the other originally intended by Voltaire – is interesting. It highlights two rather opposing human approaches to uncertainty: on the one hand, a proactive approach aiming for improvement and embracing unknown situations even if they are not perfect; on the other hand, a cautious approach avoiding progress for the mere sake of it and at the risk of making matters worse. In current times of uncertainty due to the COVID-19 pandemic, we are facing many novel issues and often have to choose between being proactive or cautious. International arbitration is no exception. Among other things, parties, counsel, and arbitrators must assess whether and to what extent physical hearings that cannot be held due to the above-mentioned restrictions should (cautiously) be postponed, or (proactively) be held remotely using modern communication technologies.

Most steps in an international arbitration are done remotely nowadays, including holding case management conferences at the outset and/or mid-stream (often organized as telephone or videoconferences rather than as physical meetings) and exchanging written submissions via document share platforms. Possibly the last “pieces of the puzzle” that typically remain as physical meetings are hearings, either on the merits or on major procedural issues. But the current COVID-19 pandemic forces international arbitration practitioners to reconsider this point and assess whether those hearings, too, can be held remotely. Depending on its length, the current crisis has the potential of being a real game-changer if international arbitral tribunals, as well as national courts around the globe, become used to holding hearings remotely. Such a paradigm shift might be something that many arbitration users have wanted for some time.

The above-mentioned article takes a step back from the immediate crisis and proposes an analytical framework for remote hearings in international arbitration. Among other things, it discusses the importance to distinguish between different types of remote hearings. For instance, fully remote hearings, in which every participant is in a different location, raise additional questions compared to semi-remote ones, in which a main venue is connected to one or several remote venues. Moreover, remote legal arguments might require a different analysis from remote evidence taking. In the post-COVID-19 world, hearings might combine these different forms, with some parts of a hearing being held semi-remotely or fully remotely and others with physical meetings.

For all possible forms of remote hearings, parties and tribunals must assess the relevant regulatory framework, including in particular the law of the seat of the arbitration and the arbitration rules, if any. Some national laws or arbitration rules contain specific provisions on remote hearings in permissive terms, expressly allowing the tribunal to hold hearings remotely.3)See e.g. Dutch Civil Procedure Code, art. 1072b(4); UNCITRAL Arbitration Rules 2010, art. 28(4); London Court of International Arbitration (LCIA) Rules, art. 19.2; International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (ICAC) Rules, s. 30.6. Compare Hong Kong International Arbitration Centre (HKIAC) Administered Arbitration Rules, art. 13.1; Court of International Arbitration at the International Chamber of Commerce (ICC) Rules, art. 24(4), App. V, art. 4(2), App. VI, art. 3(5); International Centre for Dispute Resolution (ICDR) International Arbitration Rules, art. 20.2; Singapore International Arbitration Centre (SIAC) Rules, art. 21.2; Arbitration Institute of the Stockholm Chamber of Commerce (SCC) Rules, art. 28(2). jQuery("#footnote_plugin_tooltip_6078_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6078_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Others do not contain specific provisions, and remote hearings will therefore be assessed against the backdrop of other provisions, such as the parties’ right to a hearing4)See e.g. German Civil Procedural Code (ZPO), s. 1047(1); Swedish Arbitration Act, s. 24(1); Arbitration Law of the People’s Republic of China, art. 47; SCC Rules, art. 32(1); UNCITRAL Rules, art. 17(3); ICC Rules, art. 25(6); SIAC Rules, art. 24.1. jQuery("#footnote_plugin_tooltip_6078_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6078_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and the tribunal’s broad power to determine procedural matters.5)UNCITRAL Model Law, art. 19(2); English Arbitration Act, s. 34(1); Swiss Private International Law Act, art. 182(2); HKIAC Rules, arts. 13.1, 22.5; ICC Rules, arts. 19, 22(2); ICDR Rules, art. 20.1; LCIA Rules, art. 14.5; SCC Rules, art. 23(1); SIAC Rules, art. 19.1, 25.3; UNCITRAL Rules, art. 17(1), 28(2). jQuery("#footnote_plugin_tooltip_6078_5").tooltip({ tip: "#footnote_plugin_tooltip_text_6078_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The article finds that arbitral tribunals typically have the power to decide on remote hearings – either as granted under a specific rule, or as part of the tribunals’ general broad power to conduct the arbitral proceedings as they deem appropriate.

However, the tribunal’s power to decide on remote hearings is not without limits. The article discusses one important limit: the parties’ agreement. If the parties agree on a certain conduct (i.e. to hold a remote hearing or not), absent specific circumstances, arbitral tribunals should follow the parties’ agreement. The article also deals with the opposite situation, i.e. where one party requests a remote hearing while the other insists on a physical hearing. This situation raises delicate questions and arbitral tribunals have to balance the parties’ right to be heard and treated equally6)See e.g. Dutch Civil Procedure Code, art. 1036; English Arbitration Act, s. 33(1)(1); French Civil Procedure Code, art. 1510; German Civil Procedure Code ZPO, art. 1042; Hong Kong Arbitration Ordinance, s. 46; Swiss Private International Law Act, art. 182(3); UAE Federal Law, art. 26; UNCITRAL Model Law, art. 18; HKIAC Rules, art. 13.1; SCC Rules, art. 23(2); UNCITRAL Rules, art. 17(1). jQuery("#footnote_plugin_tooltip_6078_6").tooltip({ tip: "#footnote_plugin_tooltip_text_6078_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); with its obligation to conduct the proceedings in an efficient and expeditious manner.7)See e.g. ICDR Rules, art. 20.2; HKIAC Rules, art. 13.5; ICC Rules, arts. 22.1, 25.1; LCIA Rules, art. 14.4(ii); SCC Rules, art. 23(2); SIAC Rules, art. 19.1; UNCITRAL Rules, art. 17.1; Vienna International Arbitration Centre (VIAC) Rules, art. 28(1). jQuery("#footnote_plugin_tooltip_6078_7").tooltip({ tip: "#footnote_plugin_tooltip_text_6078_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The finding of the article is that arbitral tribunals typically have the power of ordering remote hearings over the opposition of one party, but the exercise of that power requires careful consideration.

This balancing exercise must contain a multi-factorial approach, including, for instance, assessing the reason for, and content of, the remote hearing, as well its envisaged technical framework. The envisaged timing for the hearing and any potential delay if it is held physically, and a comparison between the costs for a remote hearing and a physical one might also be relevant. Among other things, the article addresses concerns often raised in the context of remote witness and expert testimony, namely, the alleged prejudice to the cross-examining party and the tribunal’s supposed inability to assess the credibility of a remote witness or expert. Analyzing case law from around the world, the article finds that these fears are often overblown and typically can be counterbalanced by appropriate technological solutions.

The previous points emphasize the importance of careful planning and organization of remote hearings. Existing soft law instruments on remote hearings mainly focus on the actual set-up of remote hearings, but the article shows that the planning thereof may start much earlier. This includes considering specific language regarding remote hearings in the parties’ arbitration agreements or the tribunal’s first procedural order (of which sample clauses are suggested in the article).

Finally, the article also tests whether awards based on remote hearings withstand potential challenges in recognition/enforcement or set aside proceedings. Detailed analysis of existing case law from jurisdictions around the world shows no reported cases in which such challenges were successful. The article discusses the most likely grounds for challenges, namely, the parties’ right to be heard and treated equally. It concludes that, absent specific circumstances, remote hearings in and of themselves do not violate any of these principles.

The assessment of remote hearings is a delicate issue and the analytical framework proposed in the article seeks to help parties, counsel, and tribunals in making this assessment. In the current COVID-10 pandemic and beyond, the choice between holding a remote hearing, possibly over the opposition of one party, or postponing it, illustrates the two opposing approaches, exemplified by the diverging interpretations of Voltaire’s poem. Are we proactively striving for novelty, without fear of possible imperfections, or do we take a cautious approach, stressing both the benefits of the status quo and the risks of too radical a change?

In Voltaire’s poem, the discontent woman eventually returns to her husband and lives a happy life, but not without taking a secret lover. Leaving aside questions of morality, and pushing the interpretation of the poem to its limits, it shows that solutions cannot be found by imposing a principled approach, but are better if they are specific to each individual case, taking into account all relevant circumstances. In any event, the fact that many arbitral tribunals, as well as national courts, are growing their experiences with remote hearings is an opportunity that should not be underestimated. It allows users of international arbitrations – parties, counsel, and arbitrators alike – to increase their toolbox and find the best-suited solution for any given case.

References   [ + ]

1. ↑ Susan Ratcliffe, Concise Oxford Dictionary of Quotations 389 (OUP 2011). 2. ↑ Richard Susskind, Online Court and the Future of Justice, 89-90, 182 et seq. (OUP 2019). 3. ↑ See e.g. Dutch Civil Procedure Code, art. 1072b(4); UNCITRAL Arbitration Rules 2010, art. 28(4); London Court of International Arbitration (LCIA) Rules, art. 19.2; International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (ICAC) Rules, s. 30.6. Compare Hong Kong International Arbitration Centre (HKIAC) Administered Arbitration Rules, art. 13.1; Court of International Arbitration at the International Chamber of Commerce (ICC) Rules, art. 24(4), App. V, art. 4(2), App. VI, art. 3(5); International Centre for Dispute Resolution (ICDR) International Arbitration Rules, art. 20.2; Singapore International Arbitration Centre (SIAC) Rules, art. 21.2; Arbitration Institute of the Stockholm Chamber of Commerce (SCC) Rules, art. 28(2). 4. ↑ See e.g. German Civil Procedural Code (ZPO), s. 1047(1); Swedish Arbitration Act, s. 24(1); Arbitration Law of the People’s Republic of China, art. 47; SCC Rules, art. 32(1); UNCITRAL Rules, art. 17(3); ICC Rules, art. 25(6); SIAC Rules, art. 24.1. 5. ↑ UNCITRAL Model Law, art. 19(2); English Arbitration Act, s. 34(1); Swiss Private International Law Act, art. 182(2); HKIAC Rules, arts. 13.1, 22.5; ICC Rules, arts. 19, 22(2); ICDR Rules, art. 20.1; LCIA Rules, art. 14.5; SCC Rules, art. 23(1); SIAC Rules, art. 19.1, 25.3; UNCITRAL Rules, art. 17(1), 28(2). 6. ↑ See e.g. Dutch Civil Procedure Code, art. 1036; English Arbitration Act, s. 33(1)(1); French Civil Procedure Code, art. 1510; German Civil Procedure Code ZPO, art. 1042; Hong Kong Arbitration Ordinance, s. 46; Swiss Private International Law Act, art. 182(3); UAE Federal Law, art. 26; UNCITRAL Model Law, art. 18; HKIAC Rules, art. 13.1; SCC Rules, art. 23(2); UNCITRAL Rules, art. 17(1). 7. ↑ See e.g. ICDR Rules, art. 20.2; HKIAC Rules, art. 13.5; ICC Rules, arts. 22.1, 25.1; LCIA Rules, art. 14.4(ii); SCC Rules, art. 23(2); SIAC Rules, art. 19.1; UNCITRAL Rules, art. 17.1; Vienna International Arbitration Centre (VIAC) Rules, art. 28(1). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Securing Witness Evidence: English Courts to the Rescue of Foreign Arbitrations

Mon, 2020-05-25 03:00

In A and B v C, D and E [2020] EWCA Civ 409, the English Court of Appeal issued on 19 March 2020 an order compelling a non-party to arbitration proceedings seated in New York to give evidence in support of the arbitration.

 

The Arbitration

The dispute arose under two settlement agreements between A and B on the one hand (the “Claimants”), and C and D on the other (the “Respondents”), in relation to the exploration and development of an offshore oil field in a central Asian state (the “State”). The settlement agreements entitled the Claimants to a percentage of the proceeds from the sale of the Respondents’ respective interests in the oil field to the State in 2002.

The Claimants commenced arbitration seated in New York under the settlement agreements. One of the main issues in dispute was the nature of certain payments, described as “signature bonuses”, made by the Respondents to the State. The Respondents argued that these payments were deductible from the sale proceeds as costs. The Claimants alleged that these payments were bribes, and therefore not properly deductible.

The Claimants relied upon the fact that G, an individual who negotiated the sale on behalf of the State, had historically been indicted by a US court for corruption charges. In this respect, they were seeking the evidence of E, an individual who negotiated the questioned payments directly with G on behalf of the Respondents. E was resident in England, outside the jurisdiction of the courts of the arbitral seat, and was not prepared to give evidence in New York, where the hearing was due to take place. The only means to adduce E’s evidence in the arbitration was therefore an order by the English courts compelling him to give evidence either at the evidentiary hearing or prior to the hearing through means which would then allow the evidence to be adduced at the hearing (for instance, a video recording).1)Failure to comply with such an order made by an English court may trigger contempt of court proceedings. jQuery("#footnote_plugin_tooltip_7305_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7305_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

On 13 November 2019, the tribunal granted the Claimants permission to apply to the English courts in order to compel E’s testimony.

 

Legal Basis of the Application to the English Courts

The Claimants applied to the English courts under section 44 of the English Arbitration Act 1996, seeking an order permitting them to take E’s evidence by deposition under English Civil Procedure Rule 34.8.2)Civil Procedure Rule 34.8 allows a party to apply for an order for a person to be examined before a hearing takes place. This evidence is referred to as a deposition. jQuery("#footnote_plugin_tooltip_7305_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7305_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Section 44(1) of the Arbitration Act provides that the court has the same powers to make orders for the purposes of and in relation to arbitral proceedings as it has in “legal proceedings”. Section 44(2) lists a number of matters in respect of which the court has such powers, which include the “taking of the evidence of witnesses”.

 

The Position in Earlier Case Law

The English High Court concluded that the English courts did not have jurisdiction to grant the order sought against E, who was not a party to the arbitration. Although Mr Justice Foxton noted that the plain wording of section 44 of the Arbitration Act suggested the contrary, he felt compelled to reach the conclusion he did due to existing case law. He did however note that, in the absence of this case law, he saw “considerable force” in the argument that (at least certain provisions of) section 44 could be used to make orders against non-parties.

In particular, two earlier decisions of the High Court concluded (although one of them obiter) that section 44 of the Arbitration Act did not empower English courts to make orders against non-parties to the arbitration.3)Cruz City Mauritius Holdings v Unitech Limited [2014] EWHC 3704 (Comm); DTEK Trading SA v Morozov [2017] EWHC 94 (Comm). jQuery("#footnote_plugin_tooltip_7305_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7305_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); These judgments concerned orders in respect of different matters listed in section 44(2), and not the taking of witness evidence. On the contrary, in the only case that had dealt with an order for the taking of witness evidence under section 44(2)(a), the High Court judge found that he had jurisdiction to make the order, but declined to use his discretion to do so. Notably, in this latter judgment, whether section 44 covered orders against non-parties was not argued.

 

The Court of Appeal Judgment

In the Court of Appeal, Lords Justices Flaux, Newey and Males overturned the decision of the High Court. They found that section 44(2)(a) grants an English court the power to make an order for the taking of witness evidence in support of an arbitration seated outside of England and Wales by way of deposition from a witness who is not a party to that arbitration. The reasoning of the court was as follows:

  1. Section 44(1) read together with the definition of “legal proceedings” in section 82(1)4)Legal proceedings “means civil proceedings in England and Wales in the High Court…”. jQuery("#footnote_plugin_tooltip_7305_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7305_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); grants an English court the same powers to make orders in relation to arbitration proceedings as it has in relation to domestic civil proceedings.
  2. Section 44(1) must also be read together with section 2(3). Section 2(3) provides that the power conferred by section 44 is exercisable even if the seat of the arbitration is outside England and Wales, thereby explicitly permitting English courts to make orders in support of foreign arbitrations.
  3. The wording of section 44(2)(a) is wide enough to cover all witnesses, irrespective of whether they are a party to the arbitration. There was no basis to limit “witnesses” exclusively to parties to the arbitration, and it would be fair to say that this provision was principally directed against witnesses who are not under the control of the parties to the arbitration. Witnesses are often not parties to the dispute. The reference to witnesses ought not to connote only party witnesses.
  4. The English court has the power to order evidence to be given by deposition in domestic civil proceedings under Civil Procedure Rule 34.8. Therefore, section 44(2)(a) confers upon the court the power to order the same in relation to foreign arbitration proceedings. Although there are situations in which an English court may only issue a letter of request, as opposed to an order for deposition, in support of foreign court proceedings, this was irrelevant. Section 44(1) looks solely to the powers English courts have in respect of domestic court proceedings, and not to the powers they have in respect of foreign court proceedings.
  5. Subject to the “gateways” of section 44(1) and 44(4) which set out when the court may exercise its power,5)These “gateways” are: (i) whether the English court has the same power to grant orders in domestic civil proceedings, and (ii) if the case is not one of urgency, whether the application to the English court is made with the tribunal’s leave or written agreement of the other parties to the arbitration. jQuery("#footnote_plugin_tooltip_7305_5").tooltip({ tip: "#footnote_plugin_tooltip_text_7305_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the courts enjoy a discretion as to whether to issue an order or not. In particular, section 2(3) allows courts to decline to issue an order in aid of a foreign arbitration, when it considers the foreign seat makes it inappropriate to do so.

 

An Important but Limited Confirmation

The judgment of the Court of Appeal empowers English courts to assist with the taking of witness evidence in foreign arbitrations. Parties arbitrating across the globe are therefore able to apply to the English courts for assistance with the taking of witness evidence, even if the witness is not a party to the arbitration. England’s position as a jurisdiction that can step up to support arbitrations, no matter where they are seated, will allow this practice to develop and grow in the future.

The English courts enjoy discretion in making orders for the taking of witness evidence in foreign arbitrations. They may decline to do so if they find that, in the circumstances of the particular case, the fact that the seat is located outside the jurisdiction makes the granting of the order inappropriate.

However, the judgment of the Court of Appeal is limited in scope. While it resolved the question whether section 44(2) of the Arbitration Act may be used to obtain orders for the taking of witness evidence against non-parties, it explicitly left open the question whether other powers granted by section 44(2) are exercisable against non-parties. Parties seeking such orders against non-parties to the arbitration (including, for instance, interim injunctions and orders for the preservation of evidence) will still need to overcome the hurdle of earlier case law suggesting this is not possible. However, the reasoning of the Court of Appeal in A and B v C, D and E will likely guide these future developments as English courts consider and analyse the scope of section 44(2) of the Arbitration Act.

 

The authors would like to thank Dilpreet Dhanoa for her support.

References   [ + ]

1. ↑ Failure to comply with such an order made by an English court may trigger contempt of court proceedings. 2. ↑ Civil Procedure Rule 34.8 allows a party to apply for an order for a person to be examined before a hearing takes place. This evidence is referred to as a deposition. 3. ↑ Cruz City Mauritius Holdings v Unitech Limited [2014] EWHC 3704 (Comm); DTEK Trading SA v Morozov [2017] EWHC 94 (Comm). 4. ↑ Legal proceedings “means civil proceedings in England and Wales in the High Court…”. 5. ↑ These “gateways” are: (i) whether the English court has the same power to grant orders in domestic civil proceedings, and (ii) if the case is not one of urgency, whether the application to the English court is made with the tribunal’s leave or written agreement of the other parties to the arbitration. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Arbitration Clauses, Insolvency Proceedings, and a Lack of Consistency Across the Common Law

Sun, 2020-05-24 04:00

In the recent decision of AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33 (“AnAn“), the Singapore Court of Appeal found that when a debtor challenges a winding-up application on the basis of a disputed debt or cross-claim that is subject to an arbitration agreement, the court should apply the prima facie standard of review in its determination, such that the winding-up proceedings will be stayed or dismissed if (a) there is a valid arbitration agreement between the parties; and (b) the dispute falls within the scope of the arbitration agreement, as long as that the dispute is not being raised by the debtor as an abuse of process.1)The views expressed in this blog are those of the authors and do not represent the views of their firm. jQuery("#footnote_plugin_tooltip_5611_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5611_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

For cases where the debt or cross-claim is not subject to an arbitration agreement, the standard of review remains whether there is a “triable issue”. The debtor has to show that there exists a substantial and bona fide dispute, whether in relation to a cross-claim or a disputed debt.2)AnAn at [25]. jQuery("#footnote_plugin_tooltip_5611_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5611_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The Court of Appeal’s reasoning in its decision was that the reduced standard of review would “promote coherence in the law concerning stay applications, so that parties to an arbitration agreement are not encouraged to present a winding-up application as a tactic to pressure an alleged debtor to make payment on a debt that is disputed or which may be extinguished by a legitimate cross-claim“.3)AnAn at [60]. jQuery("#footnote_plugin_tooltip_5611_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5611_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Court further found:4)AnAn at [63]. jQuery("#footnote_plugin_tooltip_5611_4").tooltip({ tip: "#footnote_plugin_tooltip_text_5611_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

“[u]nder the present dichotomy of standards, the applicable standard of review would depend solely on the creditor’s arbitrary or tactical choice – if the creditor pursues an ordinary debt, the prima facie standard would apply; if the creditor applies, on the basis of the same disputed debt, for the debtor to be wound up, the higher triable issue would apply. This would in turn encourage the abuse of the winding-up jurisdiction of the court, which is not the appropriate forum to adjudicate on disputed claims that are subject to arbitration“.

The Singapore Court of Appeal adopted the same approach as the English Court of Appeal in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589 (“Salford”) which found that when faced with a disputed debt that is subject to an arbitration agreement, the English courts ought to dismiss or stay the winding-up application save in “wholly exceptional circumstances”, or this would otherwise “inevitably encourage parties to an arbitration agreement – as a standard tactic – to bypass the arbitration and the [Arbitration Act 1996] by presenting a winding up petition“.5)AnAn at [30], citing Salford at [40]. jQuery("#footnote_plugin_tooltip_5611_5").tooltip({ tip: "#footnote_plugin_tooltip_text_5611_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The authors respectfully submit that the approach espoused by the Singapore and English Courts of Appeal does not take into account the practical realities of the insolvency regime in either jurisdiction for the following reasons:

  • There is a significant difference between an application for a stay in favour of arbitration, and an application for stay or dismissal of a winding-up application. In the former, whether there exists a dispute between the parties is not in issue: the issue for the court to determine is the correct forum for the dispute to be determined. The basis of a winding-up application, in contrast, is that the debtor has failed to pay a debt for which there is no substantial or credible dispute. The winding-up court is not a forum for dispute resolution: it is an enforcement court, which will only determine the threshold question of whether there exists a genuine dispute over a debt, so that such dispute may be resolved by another forum before enforcement.
  • The test of “substantial or bona fide dispute” is the test that would be applied for any debt other than one which arises from a contract subject to arbitration. Following AnAn and Salford, a creditor now must prove that any dispute raised by a debtor is an abuse of process if the debt arises from a contract subject to an arbitration agreement, which is a higher threshold.
  • In the circumstances where that higher threshold cannot be met, a creditor would now have to endure the time and expense of arbitration proceedings before being able to present a winding-up petition against the debtor company (or execute against its assets), without any certainty as to whether the costs of such arbitration proceedings will ultimately be recoverable against the company.
  • The key principle espoused by both Courts is the importance of upholding the parties’ bargain to arbitrate any disputes between them, and the legislative policy in favour of arbitration. These worthy ideals ignore the fact that the principle underlying the insolvency regime in both jurisdictions is the public interest in creditors being able to apply to wind up companies unable to pay their debts where no bona fide dispute exists. That principle has now been displaced such that it only applies where the debt does not arise from a contract subject to an arbitration agreement, thus creating a two-tier system where debts subject to litigation and arbitration are treated differently. Coherence in one area of the law has therefore been sacrificed in favour of coherence with the law concerning stay applications where, as respectfully submitted at point (1) above, no coherence is necessary.
  • A key factor for the decision in Salford was that a court, when presented with a winding-up application, should not be able to conduct a summary judgment type of analysis on liability where the parties have agreed to submit all disputes to arbitration.6)Salford at [40]. jQuery("#footnote_plugin_tooltip_5611_6").tooltip({ tip: "#footnote_plugin_tooltip_text_5611_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, a summary judgment is a final and conclusive decision on the merits, and this should not be conflated with the circumstances in which the triable standard of review would be applied as a threshold test to determine whether any bona fide dispute exists.
  • The authors submit that there is in reality little risk of creditors abusing the winding-up regime by an “arbitrary or tactical choice” as to whether to pursue a claim for a debt, or make a winding up application. The triable issue standard of review is designed to distinguish cases where there is a bona fide and substantial dispute from those where there is not – that is what the test embodies, and any creditor who makes a winding-up application in the face of a credible dispute as to whether the debt is owed should fail – with liability to pay costs – without it being necessary to introduce the lower prima facie standard of review for debts subject to an arbitration agreement.
  • In any event, whilst the decision in AnAn was at pains to emphasise that the court, when presented with a winding-up application founded on a debt subject to arbitration, should not descend into any investigation of the merits of the dispute, even the prima facie standard of review, with the abuse of process safeguard, is likely, in practice, to involve some consideration of whether the debtor’s dispute is bona fide. This begs the question as to how differently the tests will actually be applied in practice, and also whether the two-tier system put forward by the court will achieve its stated purpose.

 

Lack of Consistency Across the Common Law

The lack of consistency across the common law on this point illustrates that the approach adopted by the Courts in AnAn and Salford is by no means obvious.

The Eastern Caribbean Court of Appeal in Jinpeng Group Ltd v Peak Hotels and Resorts Ltd (BVIHCMAP2014/0025 and BVIHCMAP2015/0003) (“Jinpeng“) departed from the Salford approach because the triable issue standard of review was “too firmly a part of BVI law“,7)Jinpeng at [47]. jQuery("#footnote_plugin_tooltip_5611_7").tooltip({ tip: "#footnote_plugin_tooltip_text_5611_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and also because it felt that the Salford approach came too close to being an automatic stay position.

The Malaysian High Court took a different route in Awangsa Bina Sdn Bhd v Mayland Avenue Sdn Bhd (WA-28NCC-1146-12/2018) (“Awangsa“), adopting the prima facie standard of review after reviewing the authorities in England, Singapore and Hong Kong. The approach in Malaysia in fact operates like an automatic stay, because where there is an arbitration agreement, the court only has to “ascertain whether there is a prima facie dispute of the debt claimed by the [applicant]”,8)Awangsa at [25]. jQuery("#footnote_plugin_tooltip_5611_8").tooltip({ tip: "#footnote_plugin_tooltip_text_5611_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); which the debtor may do simply by denying its indebtedness.

In The City Hotel (Londonderry) Limited v Stephenson [2003] NICA 47, the Northern Irish Court of Appeal rejected a submission that the debtor-company should satisfy a less onerous test than proving a bona fide dispute on substantial grounds to the debt which was subject to an arbitration clause.

In Hong Kong, Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (“Lasmos”) broadly adopted the position in Salford. This position was then cast with some uncertainty by the Hong Kong Court of Appeal in But Ka Chon v Interactive Brokers LLC [2019] HKCA 873 where it expressed obiter reservations about the decision in Lasmos, considering it to be a substantial curtailment of a creditor’s right under the existing insolvency legislation to present a winding-up application.

The recent Hong Kong High Court decision of Dayang (HK) Marine Shipping Co, Ltd v Asia Master Logistics Ltd [2020] HKCU 494 applied the triable issue standard of review. Part of the Court’s reasoning was that the presentation of a winding-up petition does not entail the submission of a dispute for the determination and/or resolution by the Court – disputes over the debt are only finally resolved upon determination by the liquidator, who acts in a quasi-judicial capacity. In the authors’ view, this analysis misses the point – genuinely disputed debts should not reach a liquidator, and should be resolved by whatever forum the parties agreed to in their contract. As highlighted at point (6) above, this is what is entailed by the application of the threshold triable issue standard of review by the Court presented with a creditor’s winding-up application.

The diverging caselaw within Singapore itself prior to AnAn illustrates some of the challenges with AnAn’s approach. At [23] of BDG v BDH [2016] SGHC 211, the learned first instance judge found that if issues were not raised by a debtor bona fide, that would be a reason to find there is no prima facie dispute – this appears to conflate the triable issue and prima facie standards of review, which is a risk of the two-tier system introduced by AnAn. The key objection to AnAn’s approach was well summarised by the learned first instance judge in VTB Bank (Public Joint Stock Co) v Anan Group (Singapore) Pte Ltd [2018] SGHC 250 at [67] as follows:

On the whole, the Salford approach appears to “place a very heavy obstacle in the way of a party who presents a petition claiming sums due under an agreement that contains an arbitration clause” (see Eco Measure at [10]). This may be seen to deal a blow to the insolvency regime since creditors legitimately seeking to wind up insolvent companies may be delayed in or entirely derailed from the recovery of their debts by debtor-companies, which would be able to stave off winding up proceedings simply by raising disputes which they say should be resolved by arbitration, even if these allegations may be entirely unmeritorious.

 

Last Word

It is possible that the position expressed in AnAn will not be the last word of the Singapore Court of Appeal on this issue. It remains to be seen how matters will evolve from what the Singapore Court of Appeal describes in the case as “the perceived state of flux in the Commonwealth on this issue“9)AnAn at [88]. jQuery("#footnote_plugin_tooltip_5611_9").tooltip({ tip: "#footnote_plugin_tooltip_text_5611_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and, in particular, whether this issue will be reconsidered by the English courts, whose judgments continue to provide guidance and inspiration across the common law. In the authors’ humble submission, the approach adopted by both the Singapore and English courts merits revisiting.

References   [ + ]

1. ↑ The views expressed in this blog are those of the authors and do not represent the views of their firm. 2. ↑ AnAn at [25]. 3. ↑ AnAn at [60]. 4. ↑ AnAn at [63]. 5. ↑ AnAn at [30], citing Salford at [40]. 6. ↑ Salford at [40]. 7. ↑ Jinpeng at [47]. 8. ↑ Awangsa at [25]. 9. ↑ AnAn at [88]. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


The Arbitrability of Secondary Sanctions: A System with a Coherent Standard of Review

Sun, 2020-05-24 03:00

In January 2020, following the Executive Order of President Trump, the United States imposed additional sanctions targeting predominately Iran’s metals sector including copper, iron and steel manufactures (the “Order”). These sanctions were designed to expand secondary sanctions to cover new industry sectors such as mining, textiles and construction. The secondary sanctions aim to deter and penalize non-U.S. individuals and entities who knowingly engaged in a “significant transaction” for the sale or transfer of Iranian goods in connection with those sectors. In effect, the Order also imposes criminal sanctions against third-country actors for engaging in activities, like financial and technological support of Iranian parties that may not have a U.S. nexus. For instance, U.S. secondary sanctions threaten to bar non-U.S. entities, such as European businesses, from foreign exchange transactions subject to U.S. jurisdiction, or to deny certain loans from U.S. financial institutions. Such extra-territorial reach of jurisdiction may cause many contracts between Iranian entities and non-U.S. entities to become inoperative. To this effect, the recent imposition of sanctions on Iran brings into focus the suitability of international arbitration as a mechanism to resolve disputes arising out of secondary sanctions.

Traditionally, sanction-related disputes have been regarded as non-arbitrable, because sanction provisions (both primary and secondary) are a function of foreign policy and would usually fall within the ambit of the international public policy concept. However, the existing paradigm reveals an opportunity for arbitration to resolve disputes concerning secondary sanctions.

This blog post discusses the aptitude of international arbitration as a transnational system of justice by examining the validity and application of secondary sanctions. In doing so, it addresses the interplay between the arbitrability of disputes and the public policy exception. It then discusses how international arbitration endorses international law to assess the validity of sanctions. Finally, it concludes with why international arbitration can adequately adjudicate disputes involving secondary sanctions.

 

The Legal Nature of Secondary Sanctions

Secondary sanctions are increasingly a substantive topic for consideration in international arbitration, where arbitrators must decide whether sanction policies are relevant to the merits of a party’s performance of a contract. Yet, the first question an arbitrator must address is whether a dispute is capable of being arbitrated in the first place. The answer to this question very much depends on whether sanction regimes are characterized as involving “overriding mandatory provisions” of the lex arbitri or whether they fall under the category of “public policy” of the country that imposed sanctions. This distinction is important because, although the contours of overriding mandatory provisions and public policy are not well-defined, not all the rules of public policy necessarily override mandatory provisions. In this respect, overriding mandatory rules cannot be derogated, and their application is compulsory irrespective of the law otherwise applicable. Accordingly, Article 9(3) of the Rome 1 Regulation of the Rome Convention (“Rome Regulation”) provides a possible source of guidance. Based on this provision, overriding mandatory rules are related to social and economic policies of the relevant country, serving its crucial public interest, without regard to private law norms. However, it must be recognized that the definition of an overriding mandatory rule has its roots in private international law, which is predicated on the notion of forum verses foreign law. To this end, provisions enshrined in the Rome Regulation, which is a private international law instrument, are intended to mitigate jurisdictional conflict. Thus, this negates its relevance in international arbitration as a delocalized system that owes no obedience to the lex fori.

In the absence of a readily identifiable formula, the international arbitration community avails itself of the New York Convention to determine if sanction-related disputes are arbitrable. However, the New York Convention blurs the line of distinction between the notion of arbitrability and public policy. Article V(2)(a) of the New York Convention provides a cursory reference to the notion of arbitrability without further conceptual clarification. As a result, different international authorities and national arbitration laws delineate inarbitrability on the basis of public policy considerations.

Despite the overlapping features of these two concepts, they produce diverging results as they remain separate spheres. For example, the case of  Fincantier-Cantieri Navali provides a prime example where the tribunal clarified the distinction between arbitrability and public policy. The tribunal emphasized that: “The fact that the said claim affects public policy would not suffice, in itself, to rule out the arbitrability of the dispute […] arbitrability cannot be denied for the only reason that mandatory provisions of law or given material public policy make the claim null and void.”

In addition, some national courts have taken the position that arbitrators have the power to examine and apply provisions of public policy. For instance, in Ganz v. SNCFT, the court held that “in international arbitration […] an arbitrator is entitled to apply the principle of public policy”. Interestingly, with respect to the concepts of inarbitrability versus public policy exceptions, the U.S. has often narrowly construed the latter. For example, in the Pemex decision the Second Circuit Court of Appeals noted the “high hurdle of the public policy exception” finding that “retroactive legislation that cancels existing contract rights is repugnant to United States law.” In effect, the implementation of additional or secondary sanctions may qualify as a “retroactive” legislative foreign policy practice that would ultimately be found to be repugnant to U.S. law. Thus, as is observed by the referenced case law, despite the lack of conceptual clarity regarding arbitrability, this concept embodies a wide conceptual dimension and is most amenable to the evolutionary development as the underpinning of arbitration is evolving and becoming more equivalent to a transnational system of justice. That is why distinguished scholars like Emmanuel Gaillard have strongly advocated that international arbitration is to be guided by the rules of the so-called transnational (truly international) public policy, not by national overriding mandatory provisions of individual countries. This sentiment is also in line with the existing paradigm in international arbitration where there is a more international and even transnational approach towards the application of public policy. This is particularly important in the context of secondary sanctions regime as a foreign policy tools which have international character and requires international law scrutiny.

 

The Aptness of International Arbitration in Addressing Sanction Related Disputes

Arbitrators are sometimes thought of as foxes guarding the chicken coop, with a bias in favor of business, and as such are allegedly not suited for settling disputes concerning issues of public and international legal importance. It has been contended that as private adjudicators, that arbitrators only serve parties’ interests. The argument continues that arbitration therefore cannot account for global interests or internationally well-recognized principles. Furthermore, as a consent-driven mechanism that derives its power from the authority mandated by the parties, the arbitrator’s task is to effectuate the intent of the parties, rather than to enforce the statute or comply with internationally recognized norms. It has been argued that international arbitration cannot address issues like secondary sanctions that have international weight and may warrant international public law scrutiny.

However, these arguments are unwarranted. Whilst arbitrators are privately appointed, that does not make them unable to assess issues with public law elements. In fact, in the context of mandatory rules, Professor Berman observed that despite arbitrators being privately appointed, an arbitral tribunal has a public role and function to perform and cannot remain categorically deaf to the values enshrined in principles such as the rule of law. Arbitrators cannot be deprived of the authority to take international rules and principles into account. For instance, in Philips Petroleum Co v. Iran, the tribunal resorted to well-established principles and remedies under public international law to ascertain whether intangible property rights like contract rights are capable of protection per se. The tribunal noted that: “expropriation by or attributable to a State of the property of an alien gives rise under international law to liability for compensation [..] such as the contract rights involved in the present case.”

Therefore, arbitrators, in examining the scope of a sanction’s application, have been entrusted with a considerable degree of freedom to assess their legality. They are entitled to assess the validity of secondary sanctions through the prism of public international law. In this respect, if the conduct of the sanctioned state, or party does not amount to a breach of international norms or international public policy, then the issue remains ripe for international arbitration. Similarly, if a secondary sanction is evidently based on discriminatory motives by a domestic or international adjudicator, then international arbitration has the discretion to assert that there has been an exercise of indirect extraterritorial jurisdiction that is incompatible with the traditionally recognized basis of jurisdiction in public international law.

Furthermore, Dr. Cortese observes that “the appreciation of a situation in which international economic sanctions are adopted involves a complex assessment of the state of international law.” Similarly, Dr. Azeredo de Silveria also recognizes that economic sanctions are subject to the limits that international law imposes with regard to its applicability and legitimacy. Thus, this blog post proposes that arbitration is a well-suited mechanism to adjudicate sanction-related disputes. This is because it examines the public international character of sanctions by scrutinizing the effect and legal nature of secondary sanctions through an international law lens.

The argument that the private nature of arbitration renders it amenable to decide in favor of private interests has not been borne out in practice. Many scholars have affirmed that the principal obligation of an arbitrator to render an accurate award that is loyal to the context of the relevant disputes. Furthermore, the tribunal in Ministry of Defense of Iran v. Cubic Defense System, decided that rendering an award in favor of a sanctioned party does not violate the fundamental public policy behind the sanction. In this case, the arbitrators declared the sanction unlawful by using their discretion and inquiring in its effect and purposes.

Ultimately, arbitration may be better-suited to examine sanction related disputes than domestic courts. This is mainly due to the fact that a conflict of law analysis predominately employs the concept of comity to ascertain the scope and applicability of unilateral sanctions. Comity is a non-legal binding norm predicated on notions like reciprocity, expectation of courtesy and morality, which may render a court’s decision more arbitrary. International commercial arbitration and its reciprocity in employing international law principles, may render the final outcome more predictable and consistent.

 

Concluding Remarks

The modern incarnation of arbitration as a system of transnational justice enables today’s legal system to resolve secondary sanctions. International arbitration is well-equipped to strike a balance between a desire of efficiency in international commerce and the need for the enforcement of public policy issues and sanction-related disputes. As the current paradigm reveals, this adjudicative system embodies a detailed and heightened standard of review. Entrusting arbitrators to handle sanction-related disputes will usher arbitration into a new era, as a viable, potent system of international dispute resolution.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Recognition of Annulled Awards in France: Where Does the Limit Lie?

Sat, 2020-05-23 03:00

The Paris Court of Appeal considers that the arbitral awards annulled at the place of the arbitration do not amount to a valid cause for refusal of enforcement in France. Recently, the Court specified that whether the interests at stake are international or national does not change this position.

 

Background of the Dispute 

On 6 January 1999, National Gas Company (“NATGAS”) entered into a contract for the supply of gas with Egyptian General Petroleum Company (“EGPC”) to deliver natural gas to two Eastern regions in Egypt, (“Contract”). The Contract contained an arbitration agreement and the place of arbitration was to be Cairo (Egypt).

In January 2008, a change in the Egyptian monetary policy led to a variation of the exchange values of the Egyptian Pound. In accordance with Article 7 of the Contract, NATGAS requested EGPC to readjust the price in accordance with the new value of the Egyptian Pound. Failing an agreement between the parties, NATGAS instituted arbitration proceedings before the Cairo Regional Centre for International Commercial Arbitration (CRCICA).

On 12 September 2009, the Arbitral Tribunal ordered EGPC to pay 253,424,668.31 Egyptian Pounds (equivalent to approximately 30 million Euros). EGPC, as a result, introduced proceedings before the Egyptian courts to have the arbitral award set aside.

On 27 May 2010, the Cairo Court of Appeal annulled the arbitral award on the grounds of public policy due to the fact that the Ministry had not provided the necessary authorizations.

In the meantime, NATGAS sought the enforcement of the award before the French courts in order to obtain enforcement in France. On 19 May 2010, the Tribunal de grande instance of Paris granted the enforcement order. Complex and lengthy proceedings before the French Courts followed this decision and ended only in 2019 with a confirmation of the enforcement order. Essentially, the French Courts considered that there was no violation of the French international public policy.

The recognition and enforcement of foreign arbitration awards, previously annulled by the courts of the seat, has always given rise to an extremely divisive debate since the famous Putrabali case (Civ. 1st, 29 June 2007, n°05-18.053) and even prior to this (see in this respect Civ. 1st, 23 mars 1994, n°92-15.137, Hilmarton case).

However, the decision taken by the Paris Court of Appeal on 21 May 2019 deals with a slightly different situation, as the arbitration award of 12 September 2009 specifically relates to business involving national Egyptian interests. In fact, both parties in this case were Egyptian entities, the contract was to be performed in Egypt, Egyptian law was applicable to the merits and the place of the arbitration was in Egypt.

 

Parties’ Arguments and Court Reasoning

The decision provides a particularly interesting summary of the parties’ arguments on the nature of the arbitration and on what grounds the Paris Court of Appeal legitimates the intervention of French Law namely the international character of the award.

EGPC argued that both the Contract and the arbitration must be regarded as strictly related to Egyptian national interests. Moreover, according to EGPC, the arbitral award was annulled by the Cairo Court of Appeal on the ground of public policy, which, inter alia, prevents its enforcement abroad.

NATGAS argued that the arbitral award is to be regarded as an international award. It was annulled, according to NATGAS, on grounds resulting from Egyptian internal law of public policy, which does not correspond with the definition of international public policy. Therefore, the annulment decision of the Cairo Court of Appeal has no bearing on French international public policy.

The reasoning of the Paris Court of Appeal is twofold.

First, as a general principle, the Paris Court of Appeal considered that the rules applicable to the recognition and the enforcement of international awards are also applicable to foreign awards, irrespective of international or purely domestic nature.

Then, confirming the Putrabali case law, the Paris Court of Appeal referred to the Convention of 15 March 1982 between France and Egypt in deciding that the annulment of the arbitral award at the seat was not a valid cause of refusal of enforcement in France. The Paris Court of Appeal thus clarified that it is irrelevant whether or not the interests taken into consideration are international or national. This would have been sufficient to recognize the award in France under the established jurisprudence.

But, interestingly, the Court went further, and, even if it was not required to do so, the Court examined whether (and why) the award should be regarded as international. In the opinion of the Court, the fact that the banks financing the project, (which were neither a party to the arbitration nor to the dispute) were Italian, the arbitration and the award should be considered as international in nature.

 

Assessment

With this decision, the Paris Court of Appeal continues to draw its own roadmap on the recognition of an arbitral award rendered, and thereafter annulled, abroad.

This has the effect that an arbitral award rendered abroad on purely domestic reasons can be recognized in France, if French courts consider that – for whatever reason – the award is international. In other words, French courts are ready to recognize in France any arbitral award, whether it is an international or a foreign award (if the foreign award can be considered an international award).

It can be argued that there is a gap in the French system. In the French Code of Civil Procedure, there are two categories of arbitration proceedings: domestic arbitrations, i.e. arbitrations which involve interests related to one jurisdiction, and international arbitrations, i.e. arbitrations which involve international trade interests. Probably, a further distinction should be made taking into account the precedent in the Putrabali case. Such a third category could be the “foreign arbitration” with respect to the issue of recognition of annulled award.

Most of the authors and commentators agree on the fact that arbitral awards should be regarded as a “fait juridique” (and not an “acte juridique”) before the French courts and that consequently the nature (domestic or international) should not be relevant for the recognition of awards in France. However, it should be noted that the original spirit of the rule applicable to the recognition of annulled awards was grounded on the international nature of the award.

This is likely to be the reason why the Paris Court of Appeal in the present case, even if it is was not required under established jurisprudence, verified the international character of the award.

The question is whether the newly created International Chamber of the Paris Court of Appeal – which is, since 2019, the court deciding on the recognition and enforcement of international arbitral awards – will maintain the same position.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Arbitration Unplugged Series – Virtual hearing: Present or Future?

Sat, 2020-05-23 01:30

During a vivid “virtual” presentation delivered by the well-known arbitrator, professor and practitioner, Gary Born, the topic of virtual hearings was addressed. Another well-known international arbitrator, Elena Gutierrez García and the President of the AMCHAM-Peru Arbitration Center, José Daniel Amado, moderated the discussion.

At the outset, Mr. Born clarified that virtual hearings are not a novel technological device used in arbitral proceedings. In his famous treatise on international arbitration (3rd. edition coming soon), important changes in arbitral proceedings, as a result of the development of technology during the last decade, are analyzed. During his presentation, he addressed some of the more notorious changes in telephonic and videoconferencing technologies as tools impacting the organization of arbitral proceedings, even though in a more limited way than the use of virtual hearings the international arbitral community has witnessed during these pandemic times. He noticed that there are parties that insist on in-person procedural hearings, but more and more it has become standard for the first procedural hearings to be performed by conference calls as opposed to in-person hearings. He also clarified that videoconferencing technology has been used for witness testimony for quite some time now as a result of visa restrictions or health issues, making it necessary for a witness to testify remotely. He acknowledged that, sometimes, issues arise during such practice, e.g., coaching of a witness during testimony or the side in charge of cross examining a witness requesting for someone present in the same room with the witness during his testimony.

Mr. Born shared with the audience his recent experience in a hearing room in Sao Paulo, the week before the lockdown went down, with more than 50 people participating in that hearing. This scenario, for the time being, is out of the question. He noted that the pandemic has changed the practice of international arbitration rather dramatically.

As a result of his own experience and, in general, that of the international arbitral community, remote testimony is something we are all familiar with. Nowadays, opening and closing arguments, witness and expert examination and cross-examination, in a virtual format, is becoming the rule. As a result of this new virtual reality, he addressed what he labeled as (i) the legal issues; and, (ii) the practical issues that arise as a result of such new reality.

 

First, the legal issues:

If both parties are content to move forward with virtual hearings, then no legal issues arise. Under this scenario, if the arbitral tribunal is willing to proceed (as it should), practical issues -but not legal ones- will arise. Of course, this reality is not always the case: for example, when the claimant requests a virtual hearing, but the respondent does not want to move as fast as the claimant and raises its concerns and its preference for in-person hearings. The opposite scenario may also be the case: the claimant wants to exercise his right to establish its case with examination of evidence in life format (e.g., cross examination of witnesses and experts). And, finally, both parties may object to the tribunal’s invitation for a virtual hearing (Mr. Born emphasized that the tribunal should not order a virtual hearing under this scenario) raising issues related to recognition or setting aside proceedings against the award.

Mr. Born addressed what he labeled as the first legal issue: the law of the arbitral seat and the institutional procedural rules applicable to arbitration. Most modern institutional arbitration rules contemplate that if one of the parties to the arbitral proceedings requests a hearing, the tribunal shall provide that party a hearing. Article 24 of the UNCITRAL International Commercial Arbitration Model Law (the Model Law) (“[T]he arbitral tribunal shall hold such hearings at an appropriate stage of the proceedings, if so requested by a party”) and many national legislations provide the same. If a party requests a hearing, the tribunal shall provide a hearing. The question arises if a hearing is the kind of oral in-person hearing that existed at the time the Model Law was drafted in 1985, but now we are dealing with virtual hearings, when not only a witness but counsel are not in the physical presence of the tribunal, so the question raised is whether this is really a hearing. Is it true under this scenario that counsel was provided with the opportunity to be heard? He mentioned German legal authorities concluding that a hearing is performed as long as physical presence is provided, but he concluded that most authorities today have a different view. It is generally accepted that a hearing includes any mechanism (e.g. audio and visual) to hear counsel in real time, provides the opportunity for a witness to deliver testimony directly to the tribunal in real time. In these pandemic days, he concluded, “an entire virtual hearing is a hearing”.

A virtual hearing is a hearing, but this does not necessarily mean that it satisfies other requirements, for example, under article 18 of the Model Law (“The parties shall be treated with equality and each party shall be given a full opportunity of presenting his case”) and articles 5.1 (b) and (d) of the New York Convention (i.e., the right to be heard). The assumption that because the parties to an arbitral proceeding willingly participate in a virtual hearing are exercising their right to be heard could be a wrong assumption (e.g., if unequal access to use of technology and accessibility is an issue, the right to be heard could later become an issue). This is important because it is connected with the practical implications of a virtual hearing (this point was addressed further during the presentation).

Mr. Born addressed two additional points related to the legal issues: first, in many national courts (e.g., U.S., U.K., Singapore) virtual hearings before the local courts are taking place, so it would be rather a peculiar reasoning for a court or tribunal to conclude that this is not acceptable in the world of arbitration; and, second, with no virtual hearings, when are in-person hearings going to be possible? This scenario seems more detrimental to the rights of the parties, he concluded.

 

Second, the practical issues:

Mr. Born invited the audience to address the so-called “practical” or “logistics” issues: If ordered by the tribunal, how should these virtual hearings be done? Again, if both parties object, then the tribunal should not move forward.

First, Mr. Born described his own experience during ICSID and SIAC administered arbitral proceedings. A great amount of time for preparation was required, working alongside with the arbitral institution and counsel for the other side. He recommended to parties involved in the organization of virtual hearings to agree on one single IT support provider (for dealing with issues of connectivity, and so forth) and test sessions performed before the hearing takes place (e.g., for technical compatibility, IT support and teaching / coaching all participants on how to connect during the hearings, activate and deactivate video and sound, among other technical issues).

Second, a number of issues should be considered and done: at the outset, and for preparation purposes, it is important to clarify among counsel for both parties and the tribunal whether all those involved in the virtual hearings will participate on their own. If this is the case, the tribunal should have access to private deliberations during the hearing; this also applies to counsel since you want the opportunity to rely on members of your team providing support and advice during questioning from the tribunal or during the cross examination of witnesses. It also should be an option to have access to more than one screen during the hearing (besides the main screen, it would be useful to have different screens for a virtual private room and one additional screen for documents). Finding the technological means to do this may be challenging but is doable.

Mr. Born raised his concern to people’s attention span during virtual hearings. This attention is shorter than during in-person hearings. Mr. Born relied on academic studies to support his point. To minimize this risk, he suggested tribunals and counsel agreeing for more breaks and shorter days of 4 to 5 hours as a more realistic estimate. He also addressed issues raised with time zones differences. If you have a virtual hearing with Singapore and U.S. counsel and tribunal members located in different time zones, difficulties may arise. It means, “someone has to wake up too early and someone has to stay up way too late”. He reminded the audience of the legal issues already addressed and the relevance of giving equality of treatment to counsel from both parties. The personal inconvenience should be distributed equally among the parties. This, he said, is “the beauty of the flexibility of arbitration!”

His takeaway from these logistical aspects: careful consideration to preparation will make virtual hearings more effective and could provide an adequate way for examining witnesses, experts and certainly create an adequate environment for oral opening and closing arguments by counsel. As a practical consideration, he mentioned that one thing is to exercise control over a witness with the physical presence of the tribunal, with counsel looking at how the tribunal is reacting to the witness testimony and a very different reality when counsel try to exercise such control during a virtual hearing. For this, it becomes rather relevant how to navigate through witness examination during a virtual hearing with the tribunal, the witness and the other side participating from different places and from different time zones around the world.

Before closing, Mr. Born addressed several questions posted by members of the audience (e.g., cybersecurity issues; set aside and annulment proceedings against the award under the New York Convention; technological steps to protect the integrity of witness testimony, among many more interesting questions).

As a final remark, he invited all those involved in international arbitration to view this pandemic world we are all living in today as an opportunity to try to use technology to make the arbitral process work better. We (arbitrators, counsel and institutions) need to make arbitration work better for the users; as a result, virtual hearings will help us all build a better arbitral process.

 

This report was the result of the kind invitation made by the AMCHAM-Peru Arbitration Center in my capacity as member of its international arbitration list of arbitrators.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Immunities: A Forgotten Variable in intra-EU Investment Claims?

Fri, 2020-05-22 03:00

Whenever litigating against states or sovereign entities – or international organisations for that matter – outside of their home jurisdiction there is a roadblock to consider: immunities. On closer inspection, immunities turn out as two roadblocks: immunity from jurisdiction and immunity from enforcement. Whereas the general assumption is that an agreement to arbitrate waives immunity from jurisdiction, immunity from enforcement is a common obstacle to cashing in on an award (as demonstrated by the struggles many investors faced trying to enforce awards in the Argentinian cases or the lengthy collection battle in Walter Bau v. Thailand).

The issue is rarely if ever mentioned in the recent discussions on investor-state dispute settlement reform, let alone in the intra-EU BIT debate. In a nutshell, the European Commission’s position on intra-EU BITs assumes that its Member States consist of advanced legal systems, free from bias towards foreign litigants from other member states. This does not take into account the difficulties associated with challenging exercises of governmental authority such as legislation within the host state, particularly for foreigners. But what if that state suddenly decides to change its legislation on remedies all together (a concern already voiced by the IBA in its 2015 fact-correcting statement on ISDS)? In an integrated European legal system, could the disappointed investor take the case to court in the safety of her own home state?

 

Immunity from Jurisdiction

The rationale behind immunities is the sovereign equality of states: no sovereign shall come before the courts of another (exemplified by the Latin phrase par in parem non habet imperium that equals cannot exercise power over one another). Following the doctrine of absolute immunity – as some states, e.g. China, still seem to do – immunity means exactly that. However, the majority view has shifted towards relative immunity when it comes to immunity from jurisdiction, meaning that commercial acts (acta iure gestionis) are, as a general rule, not covered, as opposed to acts through which states exercise governmental authority (acta iure imperii). But this only transposes the issue to the determination of what constitutes commercial activity. With exceptions (for a compilation of practice see here), domestic courts tend to make this call based on the nature of an act, as opposed to its purpose (contrary to immunity from enforcement, see below).

The 2004 United Nations Convention on Jurisdictional Immunities of States and their Property could provide greater clarity at the international level, including a tort exception, but is not in force. The 1972 European Convention on State Immunity is only in force in eight states: Austria, Belgium, Cyprus, Germany, Luxembourg, The Netherlands, Switzerland, and the United Kingdom. This includes six EU Member States to which the potpourri of exceptions to immunity from jurisdiction applies in claims relating to each other. In all other instances, customary international law applies.

 

Additional Hurdles: Service of Process

Irrespective of these larger questions, the issue of litigating a foreign state starts with the service of process upon it. This usually involves diplomatic channels, including both the home and the host state’s foreign ministry. This can prove time-consuming and formalistic, often requiring a strict order of hierarchical steps and translations of multiple documents. The gut instinct to attempt service on a foreign state’s embassy might easily backfire (as exemplified by the US Supreme Court case Republic of Sudan v. Harrison et al). For 76 states, the 1965 Hague Service Convention may provide guidance for the service of process from one contracting state to another. It requires the designation of Central Authorities for that purpose. However, under Article 13 a state “may refuse to comply […] if it deems that compliance would infringe its sovereignty or security”.

 

Additional Hurdles: Recognition

Once a decision is to be enforced in a foreign state, it must, as a general rule, be recognized and declared enforceable by the domestic courts of that state prior to actual enforcement measures such as attachment of assets. If no specific framework allowing for privileged recognition and enforcement exists, asset gathering might already fail simply because the relevant decision is not recognised or is not declared enforceable in the target state.

The issue of recognition and enforceability is, of course, less problematic with respect to court decisions subject to the Brussels 1a Regulation (or similar international treaties), as it would be for arbitral awards rendered under the ICSID framework or commercial awards subject to the New York Convention (or the European Convention): Pursuant to Article 53 of the ICSID Convention an ICSID award is binding on the parties and its monetary obligations are enforceable from the moment the award is rendered. Furthermore, pursuant to Article 54(1) of the ICSID Convention, each contracting state must recognize and enforce an ICSID award as if it were a final judgment of its own courts. Article 54(2) then provides that the party seeking recognition and enforcement furnish a certified copy of the award to the court or other authority designated by the relevant contracting state. For states which have acceded to the New York Convention the procedure of recognition and enforcement is governed by said convention.

 

Immunity from Enforcement

Yet even if the decision is recognized and accepted as an enforcement title, assets owned by foreign states (and sometimes also state-owned enterprises) can be exempt by the second roadblock that is immunity from enforcement: Whether this is the case will typically depend on the purpose for which the asset is used. Generally, those serving “governmental” activities are excluded (e.g., real estate used for diplomatic or consular purposes, including private residences, or such vehicles). Assets which are used for purely commercial activities are not immune from enforcement. Some jurisdictions require a sufficiently close connection between the claim and the forum state and immunity can also extend to “mixed use assets”. The Austrian Supreme Court held, for example, that the account of a foreign embassy with an Austrian bank that is also used for payments in relation to the performance of governmental activities is immune from enforcement measures in Austria. Article 19 of the 2004 United Nations Convention on Jurisdictional Immunities of States and their Property requires that the assets be within the forum state. Article 23 of the 1972 European Convention on State Immunity only allows enforcement in case of an express waiver in writing. Irrespective of applicability of this treaty, some jurisdictions require that such a waiver also be specific (as discussed on this blog and as Argentina had prominently argued in the ARA Libertad case, para 41).

If the investor is not able to conduct enforcement proceedings against the host state in another state due to immunities, the only path left is diplomatic protection, which is not a subjective right (although domestic legal systems may include provisions to that extent) and puts the proceedings out of the hand of the investor entirely (with payments awarded to the state, even if they should eventually end up in the pockets of the injured person, as the ICJ suggested in its 2012 Diallo decision, para 57). Investors would be subject to the good will of their home states. It is not clear how this result should be beneficial to an international rules-based order.

 

Towards an Honest ISDS Reform Debate

Immunities in the broader sense have been considered by the Secretariat of UNCITRAL Working Group III with regard to the status of a possible standing mechanism and its members (here, para 55, here, para 65, and here, para 83) or of an advisory centre on international investment law (here, para 65). The Report of the Working Group of its 38th session resumed in January 2020 flags the issue of immunity from enforcement, holding that ‘attention should be given to the assets of a State that would be subject to enforcement as well as issues relating to State immunity’ and that ‘reference was made to the 2004 United Nations Convention on Jurisdictional Immunities of States and Their Property (which applied to the immunity of a State and its property from the jurisdiction of the courts of another State) and article 55 of the ICSID Convention’ (see here, para 66). At the beginning of the session, the Chair pointed to the view that enforceability was ‘one of the most significant benefits’ of the current ISDS system (see the audio recording of the meeting on 20 January 2020 at 23.51) and a number of delegations addressed the issue of immunities in this regard (see the audio recording of the meeting on 22 January 2020). Morocco proceeded to reiterate in a written submission that enforcement should follow the 2004 United Nations Convention.

Apart from these considerations, the issue of immunity in its entire scope has not been prioritised in the discussion, nor have any of the additional hurdles. An honest ISDS reform debate must also consider the issue of immunities, an issue that equally persists within the Union. By excluding a separate legal remedy for intra-EU investments, the investor will most probably end up before the courts of the host or home state. A layer of international dispute settlement would be shed to reveal more sovereignty. While immunities are an unlikely danger for the autonomy of the EU legal order, as was the concern of the Court of Justice of the European Union in its Achmea decision, they will not promote an “ever closer Union”. If intra-EU BITs are unnecessary in a single market, why are immunities?

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


The CJEU – German Constitutional Court Debate and Impact on Achmea and the Termination Agreement

Thu, 2020-05-21 04:00

On 5 May 2020, which tellingly was the day before the last day in office of the President of the German Federal Constitutional Court (Bundesverfassungsgericht, BVerfG) Voßkuhle, the Bundesverfassungsgericht rendered its judgment on the constitutionality of the participation of the German Central Bank (Bundesbank) and the German Government in the European Central Bank (ECB)’s programme for the purchase of government bonds.

The judgment follows upon preliminary ruling questions in which the BVerfG essentially asked the Court of Justice of the EU (CJEU) whether the ECB violated the EU Treaties by exceeding its mandate and powers through the buying up of government bonds at the magnitude of more than € 2 trillion.

In Weiss and Others the CJEU simply concluded that there were no indications that the ECB went beyond its mandate. Indeed, the CJEU emphasized several times that the ECB enjoys a broad discretion when it implements its monetary policy.

In contrast, the BVerfG ruled – in summary – that the CJEU acted ultra vires because it failed to actually review the ECB’s decisions, thereby giving the ECB a complete card blanche, which the BVerfG considered to be in violation of the principle of conferral and democratic control.

This is not the first time that the BVerfG asserted its power to review acts of EU institutions, as I will explain below. However, this judgment is particularly interesting because it involves the ECB, the CJEU and the German Bundesbank – all institutions, which consider themselves to be completely independent from any (political and/or judicial) interference and whose decisions cannot – in principle – be reviewed and overturned by the BVerfG.

 

The Solange approach of the BVerfG vis-à-vis the CJEU

To cut a long story short, the Solange (German for “as long as”) approach of the BVerfG dates back to 1974 when it first was confronted with the question what domestic courts should do if they are confronted with perceived conflict between EU legislation and German fundamental rights.

The BVerfG held in the so-called Solange I decision that it did not deem the level of fundamental rights protection at the EU level to be sufficient, in particular, because no EU catalogue of fundamental rights comparable to those in the German Constitution existed at the EU level at that time. Consequently, since fundamental rights had not been explicitly recognized in the jurisprudence of the CJEU at that time, the BVerfG considered itself unable to relinquish its jurisdiction regarding fundamental rights protection in lieu of exclusive CJEU jurisdiction.

The CJEU subsequently picked up on the BVerfG’s signal and began to develop jurisprudence on fundamental rights protection. In recognition of that development, the BVerfG conceded parts of its jurisdiction under certain conditions when it issued its second Solange II judgment in 1986.

In its Solange II judgment, the BVerfG held that as long as the case law of the CJEU offered effective protection of fundamental rights against the acts of public organs (i.e., EU organs), which is comparable to the minimum level of guarantees by the German Constitution, the BVerfG will not exercise its jurisdiction in reviewing EU law measures. In other words, the BVerfG determined that the CJEU’s interpretation of EU law was authoritative and final, thereby binding all German courts –including the BVerfG itself.

But in 1992, the Maastricht Treaty came onto the European stage and introduced new tensions on the CJEU – BVerfG relationship. Among other things, the Maastricht Treaty contained many novel and far-reaching components such as the creation of the European Monetary Union (EMU) and the Euro, which affected the competences of the Member States.

In its Solange III judgment, the BVerfG made clear that the future development of the EU remains under conditional approval of the BVerfG while allowing the ratification of the Maastricht Treaty by Germany. More specifically, the BVerfG reasserted its “reserve jurisdiction” by stating that in case of an ultra vires EU act (“ausbrechender Gemeinschaftsakt”) the BVerfG would exercise its jurisdiction to review EU acts, thereby setting aside the supremacy of EU law and consequently, the final authority of the CJEU.

In short, the Solange approach enables the BVerfG to limit its jurisdiction in favor of the jurisdiction of the CJEU on a flexible basis – depending on whether EU institutions and their acts comply with the principle of conferral of powers and the core values of the German Constitution. This was also confirmed again in its judgment regarding the constitutionality of the Lisbon Treaty in 2009.

Seen in this perspective, the most recent judgment of the BVerfG regarding the ECB and the CJEU is not surprising or novel but rather logical since it follows the Solange approach it had developed in the past.

 

The EU Derives its Powers From the Member States

The origin of the tension between the BVerfG and the CJEU is the difference in opinion as to the basis on which the EU and its organs derive their powers.

Whereas in its seminal Van Gend & Loos and Costa ENEL judgments, the CJEU established that the EU Treaties are sui generis treaties that entail – quasi naturally – the supremacy of EU law over all domestic law – including constitutional law – of the Member States, the BVerfG has always been of the view that the powers of the EU and all its organs derive their powers from the constitutions of the Member States. More precisely, their powers are limited to the extent that these constitutions allow for the specific transfer of powers to the EU (principle of conferral of powers).

According to the BVerfG, the German Constitution provides only for a limited transfer of specific powers, which respects the core constitutional principles such as the principle of democracy and adequate judicial review over decisions of EU organs. As far as the German Constitution is concerned, the BVerfG considers itself to be – naturally – the final authority. In that sense and as explained above, the BVerfG never accepted the principle of supremacy of EU law in its totality but rather only a relative one, that is, as long as.

 

Achmea Judgment and Termination Agreement Before the BVerfG

Could the above be relevant in the context of the Achmea judgment of the CJEU and the termination agreement regarding the intra-EU BITs, which was signed by 23 Member States on 5 May this year?

As is well-known, in Achmea the CJEU ruled that the investor-State dispute settlement provision in the Netherlands-Slovakia BIT is incompatible with EU law. Subsequently, the large majority of Member States adopted political Declarations in which they announced their intention to terminate all their ca. 190 intra-EU BITs by 6 December 2019, which was followed by the recent signature of the termination agreement, discussed previously on the blog.

According to that agreement, not only will most intra-EU BITs be terminated but also the effect of the sunset clauses is retroactively removed. This means that no ISDS claims could be initiated any longer by investors who have invested before the termination of the respective BITs and thus assumed that they could rely on both the respective BIT’s and the sunset clauses therein in order to protect their investments.

In this context, it should be noted that Achmea, following the German Federal Civil Court’s confirmation of the CJEU’s Achmea decision, has filed a constitutional complaint before the BVerfG.

In addition, Achmea had applied to the BVerfG for an injunction decision that would prevent the German Government from signing the termination agreement in order to preserve its rights resulting from the arbitration award, which awarded Achmea more than €22 million plus interest rates in compensation. However, the BVerfG rejected that request because it concluded that it was premature when it was filed. Nonetheless, this decision does not prejudge the outcome of the main proceedings.

In any event, the BVerfG is now in a position to review the CJEU’s Achmea judgment and the German Federal Civil Court’s confirmation thereof along the same lines as it did regarding the CJEU’s judgment concerning the ECB.

Thus, the BVerfG could conclude that CJEU went beyond its powers and thus acted ultra vires when it ruled that the investor-State dispute settlement provision of the Netherlands-Slovakia BIT is incompatible with EU law, which effectively annulled the Achmea award of the arbitral tribunal that was established on the basis of the BIT that was – and still is – fully valid under public international (treaty) law. Consequently, the BVerfG could conclude that the CJEU violated the rights of Achmea stemming from the BIT and the German Constitution, in particular since the seat of the arbitration was Frankfurt a.M., Germany.

In addition, the BVerfG could also come to the conclusion that – as a consequence of an ultra vires act that formed the basis of the termination agreement – the consent of the German Government to sign the termination agreement constituted a violation of the German Constitution.

Hence, the BVerfG could decide that the CJEU’s Achmea judgment cannot have a legal effect in Germany and thus could reinstate the arbitration award.

 

The Push Back by the EU Institutions

On a more general level, the judgment of the BVerfG should be considered as a reminder to the EU institutions that their powers derive from the Member States and thus need to be based on their consent and support. The EU is not a federal state yet – something that is often forgotten in the bubbles in Brussels and Luxembourg.

However, the reactions of the EU institutions show that they are deaf to this warning. In an unusual move and in reaction to the judgment of the BVerfG, the CJEU issued a press release, essentially stating that its judgements are binding on all courts of the Member States and that EU law is the only ‘supreme law of the land’.

In addition, the European Commission has stated that it considers the option of initiating infringement proceedings against Germany because of the judgement of the BVerfG.

In other words, the EU institutions continue ignoring the fact that a significant minority of the EU population is critical towards the EU and that in the past the Maastricht Treaty and the European Constitution were rejected in several Member States.

Indeed, many EU citizens are increasingly becoming aware of the negative impact which the ECB’s low interest policy and massive bonds purchasing programmes have on their savings and pensions, which will be further amplified by the new corona bonds programme.

Seen in this perspective, it would seem more appropriate for the EU institutions to change their attitude in order to avoid a further backlash against the EU in the long term.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167