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The Astana International Financial Centre: AIFC Court and International Arbitration Centre Legal Systems to be based on English Common Law

Sat, 2017-08-05 23:31

Philip Kim

Herbert Smith Freehills

The President of the Republic of Kazakhstan (President) signed the constitutional law “On the Astana International Financial Centre” (Law) on 7 December 2015, which provides a legal framework for the establishment and operation of the Astana International Financial Centre (AIFC). The launch of the AIFC is part of the President’s “100 Concrete Steps” Plan of the Nation (Plan) to bring Kazakhstan into the world’s 30 most developed countries by 2050.1)See “Kazakhstan: 100 Steps Toward a New Nation“, Erlan Idrissov, The Diplomat, 25 July 2015 jQuery("#footnote_plugin_tooltip_1276_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1276_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Plan will implement five institutional reforms aimed at creating a favourable and attractive environment for foreign investment and the provision of financial services in accordance with global best practice.

The AIFC is scheduled to begin operations on 1 January 2018, and will position itself as a major financial hub for Central Asia, the Caucasus Republics, Eurasian Economic Union, the Middle East and Europe. It aims to become one of the top 10 Asian financial centres by 2025.

This blog article seeks to provide some background on the functions of the AIFC, and to give an overview of the legal system governing the AIFC in particular the creation and development of the AIFC Court and the AIFC International Arbitration Centre (International Arbitration Centre).


The objectives of the AIFC include the creation of an attractive environment for investment in the financial services industry, the development of the securities market, the insurance market, banking services and Islamic financing market in Kazakhstan as well as the development of financial and professional services based on best international practices.

The AIFC will introduce a preferential tax regime, where members of the AIFC will be exempt from corporate income tax, property and land taxes until 1 January 2066.(Article 6 of the Law) Citizens of countries of the OECD, Singapore, Malaysia, the UAE and Monaco as well as other countries identified by the Kazakhstan government will also have visa-free entry to the country for a period of 30 days.(Article 7(5) of the Law)

The AIFC will comprise of the following five main bodies:
1) AIFC Management Council;
2) AIFC Authority;
3) Astana Financial Services Authority;
4) AIFC Courts; and
5) Arbitration Centre.

AIFC Management Council

The AIFC Management Council is the top executive body and will be headed by the President. Its key task will be to determine the development strategy of the AIFC.(Article 11(1) of the Law)

AIFC Authority

The AIFC Authority is the main governing and operational body and is created as a joint stock company.

Astana Financial Services Authority

This institution will develop and exercise regulation of the financial services and financial services-related activities at the AIFC.

On a related note, the Astana International Exchange (AIX) – AIFC’s international stock exchange and the main platform for the initial public offering of Kazakhstan’s major companies – is targeted to launch in the fourth quarter of 2017.2)See “AIFC to launch its international stock exchange in fall“, Zhazira Dyussembekova, The Astana Times, 14 April 2017´ jQuery("#footnote_plugin_tooltip_1276_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1276_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); NASDAQ has been selected to implement the AIX trading platform,3)“Astana International Financial Centre JSC and Nasdaq sign technology deal for new AIFC Exchange“, International Finance Magazine, 7 June 2017 jQuery("#footnote_plugin_tooltip_1276_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1276_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and the Shanghai Stock Exchange will be taking a 25% stake in AIX.4)“Shanghai Stock Exchange to Become Shareholder of New AIFC Stock Exchange”, Kazakhstan News Gazette, 22 June 2017 jQuery("#footnote_plugin_tooltip_1276_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1276_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The key functions and powers of each governing body are further set out in Articles 10 to 14 of the Law.


The governing law of the AIFC will be based on the Constitution of Kazakhstan and will have a special legal regime, consisting of the Law and its own independent judicial system and jurisdiction which will be based on English common law and standards of leading international financial centres. The current law of Kazakhstan will also apply to the extent it does not conflict with the Law or Acts of the AIFC.(Article 4(1) of the Law)

It is expected that the AIFC legal system will have similarities with the principles and standards of the Dubai International Financial Centre (DIFC) in Dubai.5)”The new Astana International Financial Centre“, The Law Society, 14 March 2016 jQuery("#footnote_plugin_tooltip_1276_5").tooltip({ tip: "#footnote_plugin_tooltip_text_1276_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, it should be noted that rules of ratified international treaties will prevail over those set out in the Law.( Article 4(4) of the Law)

The official language of the AIFC has been designated to be English (Article 15 of the Law), and all legislation of the AIFC will be drafted and adopted in the English language.

Acts of the AIFC for the purpose of implementing the Law should be developed and adopted by the AIFC bodies within two years from the entry into force of the Law i.e., no later than 19 December 2017.(Article 21 of the Law)


The AIFC Court and International Arbitration Centre are set up to deal with investment disputes within the AIFC.

Rt. Hon Lord Woolf, the former chief judge for England and Wales, is advising on the establishment of both institutions, with a planned launch date of 2018.6)“Kazakhstani Center to Use English Law for Arbitration”, Natalie Olivo, Law360, 28 June 2017 jQuery("#footnote_plugin_tooltip_1276_6").tooltip({ tip: "#footnote_plugin_tooltip_text_1276_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The DIFC Court in Dubai is also a key partner in advising and assisting with the establishment of the AIFC Court system.7)“DIFC Courts to advise planned Astana International Financial Centre”, DIFC Courts, 30 August 2015 jQuery("#footnote_plugin_tooltip_1276_7").tooltip({ tip: "#footnote_plugin_tooltip_text_1276_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

AIFC Court

The AIFC Court will be an independent court external to the judicial system of Kazakhstan.(Article 13(1) of the Law) This will be a two-tier court system consisting of the Court of First Instance and the Court of Appeal, and will be made up of international judges with previous experience in common law jurisdiction countries. The AIFC Court will have exclusive jurisdiction over disputes between AIFC participants, AIFC bodies and their employees, disputes relating to operations conducted in AIFC or subjected to AIFC laws, and disputes directed to AIFC Court by third parties.(Article 13(4) of the Law) It will not have jurisdiction over criminal and administrative proceedings (Article 13(4) of the Law), including criminal or administrative offences committed in the territory of the AIFC. The AIFC Court will also have exclusive jurisdiction to interpret the acts of the AIFC.(Article 13(10) of the Law)

Decisions of the AIFC Court will be final, with no right to appeal and binding on all individuals and legal entities.(Article 13(7) of the Law) Enforcement of the AIFC Court decisions will be in accordance with the normal court enforcement procedures in Kazakhstan.(Article 13(8) of the Law)

International Arbitration Centre

The International Arbitration Centre will be established within the AIFC, and this will offer an alternative dispute resolution option for AIFC participants and other investors.

The International Arbitration Centre will adjudicate disputes in cases where there is an arbitration agreement between the parties. Foreign arbitrators are expected to sit in these tribunals. The procedure for the recognition and enforcement of decisions of the International Arbitration Centre will follow that of the process set out for the recognition and enforcement of arbitral decisions made by arbitration courts in Kazakhstan.(Article 14(3) of the Law)

Court proceedings will be conducted in English (Article 19 of the Law), and legislations will also be built on English common law and enacted by the AIFC Court and International Arbitration Centre.


The commitment of the AIFC to operating under the principles of English common law has been met with support and interest from investors and legal representatives alike, and this will advance Kazakhstan as an attractive financial centre for business that upholds internationally recognised standards. The establishment of the AIFC Court and International Arbitration Centre based on English law with independent judicial system and jurisdiction, foreign qualified judges and arbitrators will further promote transparency and affirm the impartiality of the courts and tribunals as trusted institutions for the resolution of investment disputes.

References   [ + ]

1. ↑ See “Kazakhstan: 100 Steps Toward a New Nation“, Erlan Idrissov, The Diplomat, 25 July 2015 2. ↑ See “AIFC to launch its international stock exchange in fall“, Zhazira Dyussembekova, The Astana Times, 14 April 2017´ 3. ↑ “Astana International Financial Centre JSC and Nasdaq sign technology deal for new AIFC Exchange“, International Finance Magazine, 7 June 2017 4. ↑ “Shanghai Stock Exchange to Become Shareholder of New AIFC Stock Exchange”, Kazakhstan News Gazette, 22 June 2017 5. ↑ ”The new Astana International Financial Centre“, The Law Society, 14 March 2016 6. ↑ “Kazakhstani Center to Use English Law for Arbitration”, Natalie Olivo, Law360, 28 June 2017 7. ↑ “DIFC Courts to advise planned Astana International Financial Centre”, DIFC Courts, 30 August 2015 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: Arbitrators as Lawmakers
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Kluwer Mediation Blog – July Digest

Sat, 2017-08-05 03:37

Anna Howard

July saw a collection of thought-provoking and passionate posts from our writers, including the particular challenges of conducting research on mediation, insights from the Global Pound Conference in London and reflections on how little we know about our neighbours. A brief summary of all the posts in July can be found below.

In Research on Mediation – Why It’s Tricky And Why We Need To Do It, Sabine Walsh considers the unique challenges posed by research in conflict and mediation, and explores how these might be overcome.

In this passionate piece, The Road To Becoming A Mediator, Virginie Martins De Nobrega charts the enriching, unpredictable and often lengthy road to becoming a mediator.

In And A Little Child Shall Lead Them – Peacemakers Conference 2017, Joel Lee shares visual metaphors for mediation created by students at the Peacemakers Conference held in June in Singapore.

In What’s Wrong With Trust And Respect, Charlie Irvine probes the usefulness of the words “trust” and “respect” in mediation. Charlie concludes that “By showing the parties respect, and trusting their words and judgements, we provide a glimpse of reasonable human interaction. That’s an invitation that’s hard to reject.”

In The German Mediation Act Five Years On: The Perspective Of Two Judge Mediators, Greg Bond shares his discussion about the Act and its effects with two experienced mediator-judges working in German courts: Anne-Ruth Moltmann-Willisch and Pia Mahlstedt. Both are pioneers of mediation in Germany, who were involved in coordinating pilot court mediation programmes that preceded the German Mediation Act.

In The Global Pound Conference, London – The Grand Finale, Nicky Doble identifies her key insights from attending this conference and, in particular, highlights the key points made by users of mediation.

In Invidious Choices: Mediators As Homeric Navigators, Ian Macduff extensively explores the issue of the relationship and choice between rights and cultural values; the tension when legal rights point in one direction and cultural norms in the opposite.

In Knowing Our Neighbours – A Mediator’s Reflection, John Sturrock notes how little we know about each other, how much we are prepared to assume however and how easily we are led to judgements. John argues that these tendencies seem detrimental to building sustainable relationships which will enable us to survive and thrive, whoever and wherever we are, adding that the same applies to the commercial disputes in which many of us now participate as mediators.

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Lithuania takes Steps to Facilitate Post-Arbitral Court Proceedings and to Maintain Confidentiality during the Arbitral Process

Thu, 2017-08-03 23:45

Tadas Varapnickas

Young ICCA

Since 1996, commercial arbitration in Lithuania has been regulated by the Law on Commercial Arbitration which was based on the provisions of the 1985 UNCITRAL Model Law on International Commercial Arbitration. In 2012, the Lithuanian Parliament revised the Law in accordance with the 2006 amendments to the UNCITRAL Model law. Furthermore, in order to emphasize its international origin, Article 4(5) of the Law establishes that the provisions of the Law should be interpreted in light of the UNCITRAL Model law.

Hence, since more than twenty years Lithuania has a regulation based on the most modern arbitration provisions recognised worldwide. In addition, Lithuanian courts have proven that they are willing to protect arbitration agreements and arbitration itself.

Nevertheless, the application of the law in practice has shown that some lacunae remain. In particular, this regards the involvement of national courts in post-arbitral proceedings related to the annulment and/or enforcement of arbitral awards.

Consequently, a draft law amending the Law on Commercial Arbitration was proposed to Parliament by the Government on 21 August 2015. After considerations, the Lithuanian Parliament adopted the draft law on 8 November 2016 and it came into force on 1 July 2017.

Although the amendments do not entail essential changes to the arbitration proceedings, it is still worthy to analyse what changed in Lithuanian arbitration law as of July 2017.

Confidentiality vs. Publicity in Court Assistance to Arbitration

The Lithuanian Law on Commercial Arbitration emphasizes confidentiality as one of the main characteristics of arbitration. Indeed, Article 8(3) of the Law explicitly states that arbitration proceedings are confidential, meaning that nothing that happens during the arbitral process can be revealed to anyone. On the contrary, civil procedure in the Lithuanian national courts, as in most countries, is based on the opposite principle – court proceedings are public except where public or private interest requires differently (for example, cases concerning child adoption are strictly confidential).

This divergence between the Law on Commercial Arbitration and the Civil Procedure Code becomes relevant when there is a need for court assistance during arbitration proceedings. Although arbitration is confidential, and this may even have been the reason why the parties decided to choose it, when a particular issue comes before national courts, e.g. an application for the removal of an arbitrator, the arbitration in essence becomes public as the civil case concerning the arbitrator’s removal will be heard in public.

In order to resolve this divergence and to create legal certainty for the parties, the amendments to the Law on Commercial Arbitration foresee that cases concerning court assistance to arbitration, such as default arbitrator appointments, removal of arbitrators or applications for interim measures, are also confidential. However, it should be noted that the new confidentiality provisions do not cover court proceedings for the annulment or recognition of arbitral awards. These cases continue to be heard in public.

Enforceability Issues under Lithuanian Arbitration Law

One of the key amendments to the Law on Commercial Arbitration is related to the enforcement of national arbitral awards. Pursuant to the old Article 41(4) of the Law, an arbitral award is an enforceable document which can be enforced in accordance with the rules provided in the Civil Procedure Code. In practice this meant that in cases where the losing party refused to comply with an arbitral award, the other party could apply to the competent court and request a writ of execution. However, in practice it remained unclear which court was actually competent to issue such a writ.

In state court proceedings, a writ of execution is issued by the court which heard the respective case in the first instance. There are 54 courts of general jurisdiction that hear first instance civil cases, 49 district courts and five regional courts, and each of these courts issues writs of execution.

For national arbitral awards there was naturally no first instance court which had examined that case before. In lack of guidance in the laws, it therefore remained unclear which of the 54 first instance courts should be responsible for issuing the writ of execution.

This indeterminacy led to phantasmagorical situations: In one enforcement case, after the losing party refused to voluntarily comply with the arbitral award, the winning party applied to the Vilnius District Court for a writ of execution. However, the District Court refused to issue the writ, reasoning that the application should be made to the Vilnius Regional Court, as the case would have fallen within the first instance jurisdiction of the Regional Court but for the arbitration agreement. The winning party complied with the ruling of Vilnius District Court and applied to the Vilnius Regional Court. The Regional Court also refused to issue the writ of execution reasoning that this fell into the jurisdiction of the Vilnius District Court. Finally, after the winning party reapplied to the Vilnius District Court, the District Court issued the writ of execution. However, it was of no use, as the losing party had become insolvent in the meantime (A. ŠEKŠTELO. “Problems of the enforcement of an arbitral award – do we need a writ of execution”. [2014] Justitia, 2014(79), p. 104).

In order to resolve this issue, the amendments to the Law on Commercial Arbitration determine that writs of execution shall be issued by the District Court at the place of arbitration (for example, if an arbitration is seated in Kaunas, the Kaunas District Court will be competent to issue writs of execution for an award resulting from the arbitral proceedings). A district court can only refuse to issue a writ of execution under limited grounds established in the Law. Those grounds are: 1) the documents submitted are insufficient to determine the contents of the writ of execution; 2) the arbitral award has been annulled; and 3) the prescription period for applying for a writ of execution has expired. If a district court refuses to issue a writ of execution, that ruling may be appealed to the competent regional court.

Thus, the amendments bring more certainty to Lithuanian arbitration law as they clarify both the courts which have the jurisdiction to issue writs of execution for national arbitral awards and the circumstances under which courts can refuse to issue such a writ. Finally, it should be mentioned that before the amendments were adopted, relevant voices within the Lithuanian arbitration community suggested that the Vilnius Regional Court should receive the sole jurisdiction for issuing writs of execution, because it already has the sole jurisdiction for actions assisting arbitrations during the proceedings (V. MIKELĖNAS, V. NEKROŠIUS, E. ZEMLYTĖ. Lietuvos Respublikos komercinio arbitražo įstatymo komentaras. Vilnius: Registrų centras, 2016, p. 141-142).

Acceleration of Annulment Proceedings

The last amendment to the Law on Commercial Arbitration is related to the pace of annulment proceedings before national courts.

The amendments foresee that cases concerning the recourse against arbitral awards before the Court of Appeal of Lithuania shall be examined within 90 days of the Court’s acceptance of the setting aside application.

According to the explanatory note of the draft law, this amendment aims to increase the effectiveness of arbitration and consequently will help to strengthen the position of arbitration as a method of dispute resolution.

The ruling of the Court of Appeal may be appealed to the Supreme Court of Lithuania, the sole court of cassation for reviewing judgements, decisions, rulings and orders of the courts of general jurisdiction in Lithuania. However, neither the Law on Commercial Arbitration nor the Civil Procedure Code provide for a time-limit for a case to be examined before the Supreme Court. The draft law also does not contain a provision regarding the length of proceedings before the Supreme Court. According to the statistics of the Supreme Court, it takes around 160 days to examine a case in this Court. Therefore, the amendment concerning the acceleration of annulment proceedings does only half the job, as it only accelerates the proceedings before the Court of Appeal and not the Supreme Court.


The current amendments are the first revision of the Law on Commercial Arbitration after its fundamental reform in 2012. Although the amendments are limited in scope and do not impact the arbitral process itself, it is clear that the Lithuanian legislators are making efforts to create better conditions for commercial arbitration in Lithuania. The increasing number of arbitration proceedings in Lithuania further proves that Lithuania is on the right track.

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Is America First the End of FET?

Wed, 2017-08-02 23:44

Eric van Eyken

Young ICCA

Despite apparent “America First” language in the US Summary of Objectives for the NAFTA renegotiation which appear contrary to the minimum standards of treatment and fair and equitable treatment, those protections are likely to remain in a new NAFTA.

On 17 July 2017, the US Trade Representative published the “Summary of Objectives for the NAFTA renegotiation” as required by US law (the “Summary”). This Summary outlines the negotiating position of the United States with regard to the re-negotiation of the NAFTA announced on 18 May 2017 and on which President Trump campaigned.

With regard to investor state dispute settlement (“ISDS”), the Summary is brief, providing in full:

– Establish rules that reduce or eliminate barriers to U.S. investment in all sectors in the NAFTA countries.
– Secure for U.S. investors in the NAFTA countries important rights consistent with U.S. legal principles and practice, while ensuring that NAFTA country investors in the United States are not accorded greater substantive rights than domestic investors.

The second bullet in the Summary appears to contain a bombshell with regard to fair and equitable treatment (i.e., FET). The statement that “investors in the United States are not accorded greater substantive rights than domestic investors” would appear to run contrary to the international law concept of a minimum standard of treatment as reflected in NAFTA Article 1105. NAFTA Article 1105 provides for the customary international law standard of minimum treatment, i.e., FET, with regard to foreign investment:

Article 1105: Minimum Standard of Treatment
1. Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.

The FET standard is based upon the customary international law rule that host states are required to provide foreign investors and their investments with a minimum standard of treatment, regardless of whether such substantive protections are offered to the domestic citizens of the host state.

The FET standard is not without controversy, going back to the modern origins of the debate on this customary international law standard. As explained by Professor Rob Howse of NYU in a blog posting of 18 July 2017 regarding ISDS in the Summary, the 2017 US position appears to reverse the long running American (and capital exporting world’s) stance against the 19th century Calvo Doctrine, as explained by Professor Howse:

Those familiar with the history of international investment law will recognize this principle as part of the Calvo Doctrine, which was, ironically, a position taken by states in the global South against the United States, and other developed-country exporters of capital; they should not have to provide rights to foreign investors beyond those provided to domestic investors in the same circumstances. Now with the Trump Administration, the United States is propounding the Calvo Doctrine (or at least that part that concerns substantive rights rather than dispute settlement) against its NAFTA partners, Canada and Mexico.

Such a stance, while consistent with Trump’s “America First” nationalistic views is even more remarkable given that the US does not appear to have ever lost a NAFTA or BIT ISDS arbitration. To the contrary, US investors in Canada, Mexico, and beyond win their fair share of investment arbitration cases.

Why would the US Trade Representative adopt a stance that appears completely against US commercial interests, America First rhetoric aside? The answer is that the US Trade Representative is required by the US Congress to adopt the position set forth in the 2017 Summary.

Identical wording is found in US law going back at least until the early 2000s.

This position is found in Section 2(b)(4) of the 2015 Trade Promotion Authority (TPA) for the Trans-Pacific Partnership (TPP) Act, which establishes this position as part of the US TPP trade negotiating objectives:

…ensuring that foreign investors in the United States are not accorded greater substantive rights with respect to investment protections than United States investors in the United States…

It is similarly found in the 10 May 2007 US Bipartisan Agreement on Trade Policy.

Going back further, the same wording is found in the US Trade Act of 2002:

…ensuring that foreign investors in the United States are not accorded greater substantive rights with respect to investment protections than United States investors in the United States…

And yet, despite this statutory requirement, FET protection is included in the text of the TPP (Article 9.6), the US-Peru Agreement (Article 10.5), the US-Chile Agreement (Article 10.4), and the US-Colombia Agreement (Article 10.5), all agreements post-dating the US Trade Act of 2002.

The answer to this apparent contradiction is in the elaboration provided in the US Trade Act of 2002 regarding FET. Section 2012(b)(E)(3) of the Trade Act provides that the US objectives in this regard are met by:

seeking to establish standards for fair and equitable treatment consistent with United States legal principles and practice, including the principle of due process

This identical requirement is maintained under Section 2(b)(4)(E) of the 2015 Trade Promotion Authority under which the TPP was negotiated and under which President Trump is acting in his renegotiation of the NAFTA, including the 17 July 2017 Summary position.

As such, while my own initial reaction to the US Summary of its position on the NAFTA renegotiations was similar to Professor Howse, that Trump’s nationalism has killed FET, it appears that like so much in the Trump era, the reality is far different than the rhetoric.

America First is not the end of the FET standard. Indeed, given that the United States, Canada, and Mexico already agreed on modern language regarding ISDS as part of the TPP, it would be unsurprising to see Article 9.6 of the TPP text on FET included in a re-negotiated NAFTA.

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Will Adverse Inferences Help Make Document Production in International Arbitration More Efficient?

Wed, 2017-08-02 00:21

Claire Morel de Westgaver and Ellina Zinatullina

Bryan Cave LLP

The process of document production in international arbitration is important. Documentary evidence is often the primary category of evidence; and legal costs associated with it tend to constitute a significant proportion of the overall costs of arbitral proceedings. Document production may also be one of the very reasons why arbitration has been preferred over litigation. Depending on the parties’ legal traditions and expectations, arbitration may offer the possibility of having more limited or broader disclosure than that available in a particular national court.

Yet disclosure rarely hits the evidentiary happy medium: parties are typically either overwhelmed by the number of documents made available to them or find themselves lacking even a bare minimum of information pertaining to a particular issue. If the latter happens due to a failure of one of the parties to comply with a reasonable document request and/or an order to produce, the other party may request that adverse inferences be drawn from such failure. Adverse inferences can be a useful tool in filling an evidentiary gap and assisting a party in presenting its case. On the other hand, adverse inferences may bring in the risk of the ensuing award being challenged on that basis.

Save for the arbitrators’ general discretion with respect to the conduct of the proceedings and evidentiary matters, most arbitration rules and laws are entirely silent on the tribunals’ power to draw adverse inferences (see however s. 41(7)(b) English Arbitration Act 1996). The IBA Rules on the Taking of Evidence in International Arbitration (the “IBA Rules”) do expressly mention such power in Article 9.5, which provides as follows: “[i]f a Party fails without satisfactory explanation to produce any Document requested in a Request to Produce to which it has not objected in due time or fails to produce any Document ordered to be produced by the Arbitral Tribunal, the Arbitral Tribunal may infer that such document would be adverse to the interests of that Party”.

Adverse inferences formed part of the reasoning of an ICC award that was recently upheld by the Paris Court of Appeal in a decision which paves the way to a more vigorous use of adverse inferences (CA Paris, 1, 1, 28-02-2017, No. 15/06036).

The Decision of the Paris Court of Appeal

The arbitral proceedings were initiated in 2012 by twelve Spanish companies in relation to a share price dispute and pursuant to a share purchase agreement by which the Spanish entities had agreed to sell shares in a Spanish company, Grupo Guascor SL, to a Delaware company, Dresser-Rand Inc. Dresser-Rand Inc. had in turn transferred the shares to a Spanish company, Dresser-Rand Holdings Spain. Dresser-Rand Inc. and Dresser-Rand Holdings Spain (the “Dresser-Rand Companies”) were both respondents in the arbitration. During document production, the respondents failed to produce the pre-sale reports prepared by UBS and KPMG which had been requested by the claimants. In February 2015, the tribunal composed of Jean Yves Garaud, Carmen Núñez-Lagos and Clifford Hendel (the “Tribunal”) rendered an award in favour of the claimants on the basis of inter alia an inference that the UBS and KPMG reports were adverse to the interests of the respondents pursuant to Article 9.5 of the IBA Rules.

The Dresser-Rand Companies applied for the annulment of the award on the basis that: first, the Tribunal had gone beyond its mandate by applying the mechanism contemplated in the IBA Rules without prior consultation with the parties; and second, that the inferences had been drawn in violation of due process. With respect to the latter, the respondents complained, in particular, that the Tribunal had concluded that the UBS and KPMG reports were prejudicial to the respondents’ position despite having failed to (a) order the production of the reports; and (b) seek the parties’ submissions on the matter. In addition, the respondents argued that the claimants had not specifically requested the drawing of such inferences from the Tribunal.

On 28 February 2017, the Paris Court of Appeal upheld the award rejecting all of the arguments brought forward by the Dresser-Rand Companies. In considering the applicability of the IBA Rules, the Court found that the parties through various exchanges had allowed the Tribunal to apply the IBA Rules which were referred to in its procedural order No. 1. The Court held that in being guided by the IBA Rules, the Tribunal had therefore fulfilled its mandate which did not require any further consultation with the parties.

The Court further ruled that the Tribunal had observed due process requirements. In particular, the Court indicated that since the mechanism of adverse inference was available to the Tribunal by virtue of the IBA Rules, there was no need to invite the parties to comment on the matter. Given that the request for production of the audit reports was “perfectly clear and precise” and that the respondents had an opportunity to comment on such request and made no objection, it was not necessary for the Tribunal to issue an order for production of said documents to properly exercise its discretion to draw adverse inferences.

Potential ramifications

Anecdotal evidence suggests that tribunals tend to avoid relying on adverse inferences in any express way in their awards. Arbitrators may be concerned about a challenge being brought on the ground that their decision is based on inferences rather than evidence in the arbitration record. As such, the recent decision of the Paris Court of Appeal sends an important message to arbitrators. With the endorsement from a national court, tribunals’ general power to draw adverse inferences becomes more tangible and the decision may encourage its more assertive use.

The decision also reinforces the deterrent function that the adverse inference mechanism is designed to have. Production of evidence can be a burdensome and costly task. Yet if parties fail to comply with their obligations to produce certain documents (generally those harmful to their case), document production can turn into a moot exercise. In this context, there seems to be a real benefit in encouraging tribunals to sanction parties who fail to comply with disclosure obligations. The decision of the Paris Court of Appeal appears to support this view; and parties faced with a document request and/or order to produce may want to consider the risks associated with withholding documents without any valid reason.

As for any procedural pre-requisite that an order to produce the missing documents must have been issued, in most cases adverse inferences will be founded on a party’s failure to produce documents which were subject to a disclosure order from the tribunal. By agreeing to arbitrate parties impliedly undertake to engage in the arbitral process (including document production) in good faith. This decision of the Paris Court of Appeal suggests that, provided that the parties have been given an opportunity to object to the requests, an arbitral tribunal is within its powers to draw an inference that documents known to exist and being withheld without a valid reason are prejudicial to a party’s case even if no production order has been made.

Due to their nature, whether adverse inferences may be drawn depends on the circumstances of each case, including any applicable rules. In this regard, parties may expressly agree to give the tribunal discretion with respect to the drawing of adverse inferences. However, even if such express discretion exists, the tribunal does not have carte blanche and must exercise it in light of the requirement that each party must be given a reasonable opportunity to present its case. Tribunals should also be minded of the principle of non ultra petita when drawing an inference that has not been sought for by any party (Art. V(1)(c) of the New York Convention).

In the Dresser-Rand case, the Paris Court of Appeal underlined that the Tribunal’s decision did not turn on adverse inferences, but was instead mostly based on the evidence filed in arbitration. One may wonder whether the outcome of the annulment proceedings would have been different had the inferences been central to the Tribunal’s decision on the merits. Further, whether courts in other jurisdictions would be prepared to adopt the approach of the Paris Court of Appeal remains to be seen. In this respect, the fact that this decision on the discretion to draw adverse inferences, a concept of common law origins, was rendered by a court in a civil law jurisdiction is certainly interesting.

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Mediation Digest – July

Tue, 2017-08-01 03:31

Anna Howard

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Federal Court Upholds P&I Club’s Coverage Determination as Valid, Binding ADR Decision

Sun, 2017-07-30 22:07

Jason P. Minkin, Jonathan A. Cipriani and Nicole Gallagher

The U.S. District Court for the Southern District of New York has enforced a P&I Club’s internal claims appeal process as a legally binding alternative dispute resolution (“ADR”) method, rejecting allegations brought by one the Club’s Members that the procedure was “fundamentally unfair.” TransAtlantic Lines LLC v. Am. Steamship Owners Mut. Prot. & Indemn. Ass’n, Inc., 2017 WL 2334995 (S.D.N.Y. May 30, 2017). The court’s holding is a reminder that a coverage decision, rendered in connection with an ADR procedure voluntarily entered into by the parties, is not lightly set aside.

American Steamship Owners Mutual Protection and Indemnity Association (“American Steamship”) is a non-profit, mutual protection and indemnity insurance association that provides marine insurance to its Members. American Steamship’s claims handling and coverage determinations are carried out by its manager, Shipowners Claims Bureau, Inc. (“SCB”). Members can appeal a denial of coverage to American Steamship’s Board of Directors, which is composed of the association’s Members’ officers and representatives. The appeal process does not permit oral argument. The Board is required to issue written decisions within six months, which are “intended to be final and binding.” Further review of the Board’s decision may take place in federal court under an “arbitrary and capricious standard.”

One of American Steamship’s Members, TransAtlantic Lines LLC (“TransAtlantic”), sought reimbursement from American Steamship for costs expended in litigation involving lost and damaged cargo. SCB allowed the claim in part, but denied it as to attorneys’ fees TransAtlantic paid to a third party. TransAtlantic filed an appeal with American Steamship’s Board. The appeal was fully briefed, and the Board issued a 22-page decision upholding the coverage determination.

TransAtlantic then sued American Steamship in the Southern District of New York. The threshold issue was the applicable standard of review. TransAtlantic sought de novo review of the Board’s decision, and brought various tort and contract claims against American Steamship, rather than a single challenge to the Board’s coverage determination. According to TransAtlantic, the ADR process was “fundamentally unfair” because: (i) the Board had a financial interest in the decision, rendering it impermissibly biased; (ii) the procedure permitting Board members (who are officers or representatives of other American Steamship Members) to act as an ADR panel violated American Steamship by-laws prohibiting directors from acting upon any claim in which they have an interest; (iii) it was “unlikely” that the Board provided meaningful consideration of the appeal because the claim was adjudicated at a regular Board meeting without oral argument; and (iv) the Board members may not have taken an oath of impartiality and failed to disclose their financial or personal interests. TransAtlantic also argued that de novo review was appropriate because the Board’s decision violated public policy.

The court rejected each of TransAtlantic’s arguments. The court declined to apply a de novo standard of review, first noting that at least two Southern District of New York decisions have treated American Steamship’s Board hearings as ADR proceedings that are subject to a deferential standard of review. See Progress Bulk Carriers v. Am. S.S. Owners Mut. Prot. & Indem. Ass’n, Inc., 939 F. Supp. 2d 422 (S.D.N.Y. 2013) (Magistrate’s Decision and Order), aff’d, 2 F. Supp. 3d 499 (S.D.N.Y. 2014). The court agreed with these prior rulings, reasoning that “American Steamship’s hearings bear all the hallmarks of a voluntary ADR proceeding.” The court explained that the agreed-to rules at issue: (i) refer to the Board’s hearings as “adjudications;” (ii) provide that the Board’s decisions are “intended to be final and binding;” and (iii) allow for review in federal court only under an “arbitrary and capricious” standard of review.
On the issue of whether the hearing itself was fundamentally unfair, the court rejected this argument, reasoning that: (i) any supposed bias was inherent in the ADR process agreed to by TransAtlantic when it joined American Steamship; (ii) the by-laws only disqualified Members from presiding over claims involving their own companies, which was not the situation here; (iii) there was no factual support for the allegation that the Board did not meaningfully consider the appeal, and the fact that the Board issued a 22-page decision one month after hearing the appeal “strongly suggest[ed] that the Board’s consideration was, if anything, conscientious and thorough;” and (iv) there was no requirement in the agreement (which TransAtlantic voluntarily entered into) for the Board to take an oath of impartiality or disclose financial or personal interests. The court also found that TransAtlantic was aware of the “unfair” aspects of the hearing process, but failed to raise any objections before the Board. This failure to object, according to the court, was another reason why the “fundamental fairness” argument failed.

As to TransAtlantic’s argument that the ADR decision should be reviewed de novo because it violated public policy, the court, again, disagreed. The court found that TransAtlantic had not satisfied either element of the two-prong test under New York law to determine whether the ADR decision violated public policy. Specifically, TransAtlantic had pointed to no statute prohibiting the use of ADR for disputes of this nature, and no evidence that the award violated a “well-defined constitutional, statutory, or common law” of New York state.

TransAtlantic also requested to defer ruling on the summary judgment motion to permit discovery into the alleged unfairness of the Board’s consideration of the appeal. This request was denied. Citing the discretionary standard to be applied, the court noted that, in post-ADR proceedings, discovery is available only in limited circumstances and that, in order to take discovery of the ADR panel itself, a litigant must present “clear evidence of impropriety,” such as bias or corruption. Here, discovery was not allowed because, as the court previously determined, there was no colorable argument of impermissible bias. The court stated: “Having agreed to the challenged features ahead of time, TransAtlantic cannot now take discovery into whether they were unfair.”

Finally, having concluded that the correct standard of review was the more deferential “arbitrary and capricious” standard set forth in American Steamship’s rules, the court reviewed the bases for the coverage determination and concluded that none of the Board’s reasons for denying coverage were arbitrary or capricious.

The TransAtlantic decision is a reminder that courts are loath to set aside the results of voluntary ADR proceedings. That is particularly so where, as was the case here, the participants do not raise any objections to the process until after the award has been issued.

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Risky business: political risk insurance in the OBOR jurisdictions – Report on the 4th CMS-HKIAC Investment Law Lecture

Fri, 2017-07-28 20:14

Olga Boltenko and Nanxi Ding

“And the day came when the risk to remain tight in a bud was more painful than the risk it took to blossom.” (Anaïs Nin)

Introduction and background

On 12 July 2017, CMS Hong Kong and the Hong Kong International Arbitration Centre (HKIAC) hosted the fourth joint lecture in their quarterly series focusing on the topics of investment and trade law in the Asia-Pacific region. Marking the first year of the series, the lecture was also the first of its kind to introduce the concept of political risk insurance to the Hong Kong investment community.

Mr Timothy Histed, head of the Multilateral Investment Guarantee Agency of the World Bank Group (MIGA), travelled from Singapore to unveil the World Bank’s political risk insurance policies in the context of China’s One Belt, One Road (OBOR) initiative.

Political risk insurance: concept and examples

Political risk insurance is by no means a new concept in the world of investment law, and for good reason. Investment in volatile jurisdictions and project financing in developing countries can involve a number of possible setbacks. These include allegations of bribery and corruption; volatility or even the total collapse of a local economy; the cancellation of concessions and contracts; political crises; and government changes. Despite the ever-present security concerns in volatile and conflict-affected States, investors value business opportunities that promise generous returns on their investments, so long as the anticipated returns are high enough to cover the potential increased risk premium.

The MIGA has developed five suites of insurance products that it has utilised successfully in Asia for at least a decade. Its policy statement is to encourage and facilitate foreign direct investment (FDI) in developing countries with a view to eradicating extreme poverty. The MIGA is not a commercial institution; as such, therefore, it does not harbour profit-driven ambitions. This contrasts with private insurers in the region, who have developed similar political risk insurance products but operate in accordance with a profit-driven model.

To benefit from MIGA insurance policies, a foreign investor must be a national of a MIGA member State and must seek insurance for an investment into a developing country. The MIGA also insures investments made by nationals of a host country if the funds originate from outside that country and the host government approves the investment. The MIGA insures investors against losses relating to currency inconvertibility and transfer restrictions, expropriation, war, terrorism and civil disturbance, breach of contract and failure to honour financial obligations.

None of the MIGA’s five suites of insurance policy, apart from its breach of contract insurance, requires the insured investor to produce an arbitral award in its favour in order to seek compensation.

The MIGA would pay compensation in the hard currency specified in the contract of guarantee with the investor if the host State blocks currency conversion and repatriation of returns. Compensation is payable for expropriation upon assignment of the investor’s interest in the expropriated asset to the MIGA. Under the umbrella of its policy for insuring risks against war, terrorism and civil disturbance, the MIGA protects insured investors against the destruction of tangible assets or total business interruption caused by politically motivated acts of war or civil disturbance in the host country. In cases of States or State-owned enterprises not honouring their financial obligations, it would compensate the insured investor on the basis of the insured outstanding principal and any accrued and unpaid interest.

MIGA insurance against breach of contract is the only insurance policy that requires the insured investor to engage a contractual dispute resolution mechanism as a precondition for compensation. If, after a specified period of time, the investor is unable to obtain an arbitral award as a result of interference by the respondent government with the dispute resolution mechanism, or it has obtained an award but has not received payment under it, the MIGA would pay compensation.

MIGA’s leverage

As Timothy Histed explained during the lecture, many investors choose the MIGA not only for the variety of its insurance policies but also for its ability to leverage the network of the World Bank Group. The network has direct access to the governments of host States, who often depend on that organisation for funding and subsidies.

The MIGA would see it as a failure if the insured investor were to be required to engage dispute resolution mechanisms in order to receive compensation for its losses. In the 29 years of the MIGA’s insurance operations, only nine investors have had to resort to dispute resolution mechanisms.

Political risk insurance and investment arbitration: the interplay

Many attendees of the lecture questioned the precise interplay between investment arbitration and political risk insurance. Traditionally, the investment community views recourse to investment arbitration itself as a form of insurance against political risks and argues that such recourse facilitates FDI and brings down the costs of investing in fragile jurisdictions. The ongoing public policy debate begs the question whether the availability of political risk insurance makes investment treaty arbitration unnecessary. The answer is ‘no’, albeit with caveats.

The interplay between the two concepts is inevitable, but it does not mean that political risk insurance removes the need for investment arbitration. Sophisticated investors often have access to both political risk insurance policies and investment treaty arbitration, and indeed engage both mechanisms to recover their lost investments.

By way of example, CalEnergy Company Inc (a foreign investor listed at the time on the New York Stock Exchange (NYSE), the Philippine Stock Exchange (PSE) and the London Stock Exchange (LSE)) acquired political risk insurance to cover two geothermal power projects in Indonesia. When the projects were suspended by the government, CalEnergy’s subsidiaries launched two investment treaty claims against Indonesia, alleging expropriation. CalEnergy’s insurance policies not only provided standard expropriation cover but also, expressly and separately, covered arbitral awards.

In Hochtief AG v Argentine Republic (ICSID Case No ARB/07/31, Decision on Jurisdiction, 24 October 2011), Argentina objected to the admissibility of Hochtief’s claims on the basis that the German government had agreed to pay Hochtief €11,359 million under a political risk insurance policy that covered the claimant’s losses so that, Germany was subrogated to Hochtief’s rights by virtue of article 6 of the Germany-Argentina BIT (the BIT) and Hochtief had therefore lost its standing to pursue a treaty claim. The arbitral tribunal dismissed Argentina’s objection on the basis of the wording of article 6 of the BIT, thus allowing Hochtief’s claims to proceed.

The Hochtief tribunal further found that a political insurance payment is a benefit which an investor arranges on its own behalf and for which it pays. Political risk insurance does not reduce the losses caused by a government’s actions in breach of the underlying BIT. In essence, political risk insurance is an arrangement made with a third party in order to provide a hedge against potential losses. The Hochtief tribunal did not consider that any principle of international law required that such an arrangement, to which the respondent government was not a party, should reduce that government’s liability.

Takeaways from the lecture

Political risk insurance is a sophisticated tool to hedge risks of undue government interference with investments in fragile economies and developing States. Whilst it is costly, it guarantees compensation in cases of expropriation, adverse regulation, political instability and the physical destruction of investments. A number of private insurers are currently adjusting their political risk insurance products to offer coverage against claims for denial of justice and breach of investors’ legitimate expectations as well.

Most political risk insurance products do not require the insured investor to go to the trouble of obtaining a treaty award in order to claim compensation. Public insurers, such as the MIGA, have the additional leverage of resolving the dispute with the relevant local governments before a full treaty dispute is crystallised.

Investment treaty arbitration remains the most efficient tool to recover the cost of lost investments where political risk insurance is not available and where all other options fail. Treaty tribunals will neither regard political risk insurance as an arrangement that affects the level of compensation, nor will they view political risk insurance as an obstacle to the admissibility of investors’ claims.


The two concepts – political risk insurance and investment arbitration – should therefore be viewed as complementary concepts that co-exist to reduce the cost of FDI and increase investors’ confidence in exporting capital to developing markets.

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Squaring the Circle: Reconciling Conflicting Awards in the Eiser and Isolux Spanish Renewable Cases (Part II)

Thu, 2017-07-27 21:30

Clifford Hendel

The below continues and concludes a two-part post about the Spanish renewable energy cases which have been concluded to date, in particular, the apparently contradictory Eiser and Isolux awards, the former of which was decided in May 2017 and the latter, which (although decided in July 2016) only became public in June 2017.  Part I of the post can be found here.

The Three Awards – Reprise and (Partial) Reconciliation?

The investors in Charanne acquired control of the owner of 34 photovoltaic (PV) plants in Spain in 2009. The regulatory changes enacted in 2010 eliminated regulated tariffs for such plants after 30 years of operation, introduced technical requirements for voltage dips, limited operating hours and hours entitled to retribution in the period 2011-2013and imposed charges for the use of the transportation and distribution network. The investors alleged that the changes reduced the profitability of their plants by some 10%.

The Tribunal concluded that although the economic and financial consequences of the reduction in profitability were significant, they did not justify a conclusion that the value of the investment had been destroyed (paragraph 466) so as to constitute an indirect expropriation. The Tribunal (by majority) further concluded that the commitments of regulatory stability contained in RD 661/2007 were not sufficiently targeted or specific so as to permit legitimate expectations on the part of claimants that its provisions would not be modified.

Isolux (in many respects, a companion case to Charanne, brought by related investors – parts of the group of companies controlled by the Spanish construction group of the same name, now the subject of insolvency proceedings – with the same counsel, and the same co-arbitrators named by each party) involved a challenge to the 2012-2014 changes by claimants who made their investment decision and indirect investment in 117 entities (thus stepping into the latters’ shoes), each owning a PV plant in Spain. According to the award, in prior litigation, the investor’s parent company had submitted an expert report to the Spanish Supreme Court indicating an expected rate of return of some 6% on its investment, less than the “reasonable” rate of some 7% provided by the new regulation.

The tribunal concluded that the claimant could not have had a legitimate expectation at the time of its investment (determined by the majority to be October 2012, as Spain had argued, instead of June 2012, as claimant had argued) that the regulatory framework would not materially – or even fundamentally –change, since (i) in the years prior to the investment, the regulatory framework had already been modified on various occasions (paragraph 788), (ii) the Spanish Supreme Court had established clearly that – insofar as national law was concerned – there were no obstacles to the modification of the regulatory regime, with a reasonable investor presumed to have knowledge of this situation (paragraphs 793-794); and (iii) the claimant was perfectly aware of the referenced Spanish case law (paragraph 795).  This last element was of particular importance because the claimant’s ultimate parent company have unsuccessfully challenged one of the 2010 measures before the Spanish courts.  The challenge resulted in a decision of the Supreme Court of September 2012 (before the investment itself was made in October 2012) which concluded that the regulatory changes were permitted so long as they respected a reasonable rate of return, noting (paragraph 818, translation by the author) that “A party who decides to invest in a country which, according to it, lacks legal certainty, cannot later complain that it was not provided such certainty”.  The majority also echoed the Charanne finding that the legislative commitments were insufficiently targeted and specific to permit them to be the basis for legitimate expectations of essential stability.

The Isolux tribunal concluded (paragraph 804, translation by the author) as follows:

In October 2012, any investor could have foreseen not only a fundamental modification of the Special Regime but also its suppression, so long as the principle of reasonable profitability of the investment was guaranteed… With its special knowledge of the Supreme Court decision of September 23, 2012, Claimant should have considered the abolition of the Special Regime as a realistic possibility when it made its investment.”

Significantly, Isolux (like Charanne) was issued by majority, over a short but forceful dissenting opinion on the FET/legitimate expectations issue of Prof. Dr. Guido S. Tawil. The dissent’s principal discrepancy with the majority involved the “manner in which the factual circumstances of ‘foreseeability’ of the measures adopted by the Kingdom of Spain should be evaluated” (paragraph 6, translation by the author).

Noting that the claimant had effected its investment (obtaining the acquired rights of a prior investment) under a specific remunerative regime, the dissent observes that “elements permitting the conclusion that [, as of either June or October 2012,] the Kingdom of Spain would completely eliminate the FIT… without recognizing a right to compensation for eventual holders of rights affected by such measure were not presented” (paragraph 7, translation by the author). The dissent further observed that if the FIT established in 2007 could be eliminated without triggering a right to compensation, nothing would prevent Spain from eventually eliminating in the future the more recently-established guaranty of “reasonable profitability”.

Eiser involved a challenge, by UK and Luxembourg-based claimants who made their investment decision and investment in a series of concentrated solar power plants (CSP) in Spain in 2007. The claimants alleged that the regulatory changes from 2012-2014 constituted “a complete value destruction” of their investment because some Euro 125 million was reduced in value to a mere Euro 4 million, thereby (as indeed found by the Tribunal, paragraph 365) “stripping claimants of virtually all of the value of their investment.

The Eiser Tribunal noted (e.g., in paragraphs 365-369) that the changes to the PV regulatory regime at issue were far more “dramatic,” “sweeping” and “drastic” in terms of their impact on the economic value of the claimants’ assets and interests than those at issue in Charanne.

Eiser did not address Isolux. Indeed, it could not: while Isolux was decided many months before Eiser, the award remained confidential at the time (it was only leaked to the public after the Eiser award was issued, as noted above) and for this reason, the Eiser Tribunal rejected Spain’s attempt to introduce it into evidence.

None of the Charanne, Isolux or Eiser awards can be understood to deny the state’s right (and duty) to regulate (and re-regulate). Nor does any suggest that the right to regulate is limitless, i.e., that there can be no circumstances in which the state, in the exercise of its sovereign right and duty, defeats legitimate expectations of an investor and thus violates the obligation to accord FET, becoming obligated to provide compensation.

The question is where to draw the line.  In some cases (as in Isolux), where the violation is not clear to all members of the panel, the claim may founder. In others, as in Eiser (where the front-loaded nature of capital investment in CSP projects and their financing made the impact of the new regulatory regime particularly “devastating” (paragraph 409) on the claimants’ investments), a claim has clear prospects for success.  The following observation (paragraph 365) of the unanimous Eiser Tribunal is telling:

…[T]he evidence shows that Respondent eliminated a favorable regulatory regime previously extended to Claimants and other investors to encourage their investment in CSP. It was then replaced with an unprecedented and wholly different regulatory approach, based on wholly different premises. This new system was profoundly unfair and inequitable as applied to Claimant’s existing investment, stripping Claimants of virtually all of the value of their investment.

A Caution

The reconciliation attempted above is only partial, and not entirely novel: A June 29, 2017 IA Reporter post also indicates that “one partial explanation for the differing outcomes [in Isolux and Eiser] may be that the respective investors invested at different junctures, perhaps creating different expectations.

Just as it is undeniable that the Isolux majority can be said to have found a (perhaps, peculiar) way to let Spanish jurisprudence enter its considerations “by the back door”; it is undeniable as well that the Eiser award reflects, in substance and tone, a particularly (and perhaps, peculiarly) harsh evaluation of the new Spanish regulatory regime, referring to it as imposing a “one size fits all” standard on existing facilities (paragraph 400) and expressing “serious reservations about basing the new regulatory regime on the hypothetical costs of a hypothetical “efficient” plant… cast[ing] into question the fairness and equity of the change to the new regime” (paragraph 393).

To the extent that this harsh general view of the new regulatory regime is shared by future arbitral panels, they may establish relatively low hurdles as a predicate for legitimate expectations and/or relatively low thresholds for finding relevant economic or financial consequences to an investor or investment.

Surely, the approach taken by counsel and experts, the preparation and credibility of witnesses and experts, the identity and background of, and chemistry among, tribunal members, will (as always) matter. That being said, the factual specificities of the three cases have clearly played a fundamental role in their resolution.

To the extent that investors in the pending cases can establish that they had reasonable grounds at the time of making their investment to expect regulatory stability and/or that the changes that were enacted impacted them or their investments in a truly material (or even “devastating”) way, more awards like Eiser can be expected. On the other hand, as long as investors fail to so establish and Spain can show that the investors’ reasonable expectations must have been otherwise and/or the impact of the regulatory changes on the investor or investment was modest, then more awards like Isolux can be expected.

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Squaring the Circle: Reconciling the Conflicting Awards in the Eiser and Isolux Spanish Renewable Cases (Part I)

Wed, 2017-07-26 21:30

Clifford Hendel

In furtherance of European and national policy directives, Spain enacted in the early years of this century a series of decrees to regulate the production of electricity from renewable sources and provide incentives to producers. In particular, by Royal Decree 661/2007, a generous, production-based remuneration subsidy in the form of a feed-in-tariff (FIT) was put in place in order to assure attractive profitability for producers of energy derived from renewable sources.

However, the triple-whammy of great success of the program, Spain’s burgeoning “tariff deficit” and the impact of the global financial crisis triggered a series of measures starting in 2010 to 2014, which rolled-back key features of the existing regulation. These culminated in a series of 2012-2014 reforms eliminating the FIT-based “special regime” system and substituting it (including for plants constructed and financed under the prior regulatory regime) for a system that provided a pre-established “reasonable” rate of return based on the assets and costs of a hypothetical efficient plant.

The result: a deluge of arbitration claims filed by foreign investors against Spain. Analogous, although not identical, measures have been implemented in a number of other European jurisdictions, triggering investment arbitration claims against them as well. While the non-Spanish cases are beyond the scope of this post, it is noteworthy to observe the “cross fertilization” evidenced, for example, by the December 27, 2016 ICSID award in the case Bluson S.A. v Italy, in which a tribunal (which included one of Eiser’s co-arbitrators) rejected, citing Charanne, the investor’s claim of FET violation based on legitimate expectations.

Some three dozen claims against Spain have been filed to date under the Energy Charter Treaty (ECT) arising from the rollback of the renewables regulations. Final awards have been issued in only three cases: Charanne (Stockholm Chamber of Commerce, January 2016); Isolux (Stockholm Chamber of Commerce, July 2016); and Eiser (ICSID, May 2017).  Previous blog posts have discussed the Charanne and Eiser decisions.

In the three cases, and surely in those remaining to be decided, the key issue on the merits involves the application of the concept of “fair and equitable treatment” (FET), and its constituent element: “legitimate expectations.” Both Charanne and Isolux (each by majority decision) rejected the investors’ claims, the former arising from reforms implemented in 2010 and the latter from the more significant changes implemented between 2012 and 2014. Eiser, on the other hand, found forcefully (and unanimously) for the investors, who challenged the 2012-2014 reforms.

This article does not discuss the numerous jurisdictional objections addressed in the decisions, other than noting that they appear to put an end to the “intra-EU” objection that Spain had raised. Indeed, the tribunals confirmed Spain’s argument that the 2012 law which imposed a 7% tax on the value of electric energy production was not enacted in bad faith or in a discriminatory matter, and thus was not subject to review by an ECT panel.

The bulk of the still-pending cases involve challenges to the 2012-2014 regulatory changes. The different outcomes of Isolux and Eiser have, understandably, created a certain amount of perplexity and consternation. They have triggered observations that the outcomes are ultimately irreconcilable and only explainable (if at all) by subjective and ultimately uncontrollable issues (such as the identity of the participants, strategy or mere fortuity), thereby precluding any real ability to predict outcomes of future cases and adjust one’s conduct and expectations accordingly.

The intensity of the reaction in Spain is best exemplified by a curious and defensive press release published by the Spanish Ministry downplaying the finding and relevance of Eiser and by the heated and partisan debate taking place in the press on the topic.

In this regard, shortly after the Eiser award was issued, and noting its series of particularly strong critiques of Spain’s position and arguments, a number of articles appeared in the local press ascribing the negative result in the case to various errors attributed to Spain. See for example: an article by M. Jiménez entitled “Así perdió España el arbitraje de las renovables”, appearing in El País on May 18, 2017 (mentioning the “weak arguments” presented by Spain, the lack of credibility of its experts, a last-minute and entirely unconvincing jurisdictional challenge and the failure of the Government to respond to cooling-off letters sent by the investors, and concluding that Spain’s defense strategy “led it to a dead-end”); a blog entry by J. Fernández-Villaverde entitled “¿Tenemos los abogados del estado que necesitamos?” published on May 18, 2017 in the Spanish legal blog ¿Hay Derecho? (criticizing the Ministry’s decision to proceed without external counsel, and stating that Spain’s counsel was “outlawyered” and this could be attributed to Spain’s assertedly “deficient system of selection of our body of elite functionaries”); and a blog entry published in the same outlet on May 28, 2017 by S. Alvarez Royo-Villanova entitled “La regulación de las energías renovables: incompetencia y prepotencia (a nuestra costa)”.

In the author’s view, these matters – while surely contributing to the forcefulness of the Eiser award and the multitude of sharp criticisms it contained – were very unlikely to have determined the result itself. For a more fulsome and balanced view of Eiser in the context of Charanne, see I.Iruretagoiena Agirrezabalaga, “A propósito del primer laudo condenatorio para España en el marco de las disputas relativas a los ‘recortes’ en el ámbito de las energías renovables”, Diario La Ley, No. 9.013, Sección Tribuna, July 4, 2017.

Indisputably, each investor and each investment is different, and every case will be presented and defended differently, by different counsel, with different experts, for decision by different panels of arbitrators, presided by different chairs, under the auspices of one or another arbitral institution. Each of these essentially subjective factors will weigh, to some extent, on the ultimate decisions reached.

But a close review of the voluminous awards in Eiser (some 175 pages in all) and Isolux (some 225 pages in all) suggests that they may not be as irreconcilable as the press headlines would suggest; rather, they can be understood to apply a similar (or, at least, substantially similar) conceptual framework to very different investors and investments…..or at least, to investors and investments that were viewed quite differently by the respective tribunals.

Thus, what today might appear, on first impression, as fundamentally irreconcilable may –with the passage of time and the accumulation of further awards– be revealed as quite the opposite.

Common Ground….and Slippery Ground?

As a preliminary matter, it is useful to note two points of common ground among all three cases decided to date. Firstly, FET (under the ECT or other treaty) does not give an investor the right to regulatory stability. As indicated in Eiser (paragraph 362), citing Micula v Romania:

“[T]he fair and equitable treatment standard does not give a right to regulatory stability per se. The state has a right to regulate, and investors must expect that the legislation will change, absent a stabilization clause or other specific assurance giving rise to a legitimate expectation of stability. The question presented here is to what extent treaty protections, and in particular, the obligation to accord investors fair and equitable treatment under the ECT, may be engaged and give rise to a right to compensation as a result of the exercise of a State’s acknowledged right to regulate.

Secondly, the seal of approval as a matter of national law of the Spanish Supreme Court on the series of regulatory changes (including the repeal of RD 661/2007 and establishment of the new framework for existing renewable plants) is not dispositive of claims brought under the ECT or other investments protection treaties.

As held in Isolux (paragraph 793, translation by the author),“[T]he rulings of the Spanish Supreme Court do not bind this Arbitral Tribunal, which must decide the matter exclusively on the basis of the ECT and international law.” Along the same lines, Eiser states (paragraph 373) that “the question of conformity with Spain’s Constitution and with the requirements of the ECT are quite separate” and thus the Supreme Court’s upholding of the validity of the changes “is not a sufficient response to Claimants’ claims, which also must be tested against the obligations Respondent assumed by becoming a party to the ECT.

As will be seen in Part II of this article, the common, indisputable, black-and-white issue among the tribunals is the understanding that national law and jurisprudence cannot trump international law or bind panels interpreting or applying it.  A separate issue is whether, how and to what extent national law and jurisprudence might play a role (albeit indirect) in the FET/legitimate expectations analysis of international tribunals.

Having briefly set out the backdrop to this saga, the objective of this two-part post and some common (and perhaps not so common) grounds about the various Spanish awards to date, Part II will enter into a little more detail about the cases, the holdings and lessons which can be learned from them.

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Long-Term Contracts: New Regulation for International Commercial Arbitrations

Wed, 2017-07-26 00:24

María Pilar Perales Viscasillas


The last 40 years or so has experienced increased growth in the number of transactions concluded internationally, departing from classical one-shot contracts such as the simple sale of goods contract. These complex contracts involve in many instances a mix of private and public issues as is seen in regulatory sectors (telecommunications, oil and gas). The rise of complex international contracts gave birth in some cases to a new approach to their design.

Nowadays, international arbitral tribunals generally deal with disputes related to long-term contracts. Although these contracts often are heavily negotiated and carefully drafted, it has been difficult for arbitrators to assess the agreement of the parties against a national law due to the fact that long-term contracts are largely unregulated under domestic legal systems. Needless to say, no matter how well a contract is drafted, certain issues that were not previously contemplated will arise during its performance.

With a view to addressing the special needs of long-term contracts, UNIDROIT set up a working group aimed at drafting amendments and additions to the black-letter rules and comments of the UNIDROIT Principles of International Commercial Contracts 2010, successfully approving a new 2016 edition that was recently published in spring 2017.1)At its 95th session (Rome, 18-20 May 2016), the UNIDROIT Governing Council adopted amendments and additions to the 2010 UNIDROIT Principles and authorised the Secretariat to prepare and publish the 2016 edition. The Principles may be found here. For the time being, in English and French while other languages edition is being prepared. jQuery("#footnote_plugin_tooltip_2668_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2668_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); To clarify, the 2010 UNIDROIT Principles also covered long-term contracts, but a number of issues were not taken into account; this was the work that was developed in the 2016 edition.

Readers of the 2016 UNIDROIT Principles will not find a chapter dealing with long-term contracts as such, but they will find a novel definition and an increased number of provisions, examples, and comments within the Principles that are specially focused on the needs and particularities of long-term contracts. Significantly, the working group conducted their discussions from the viewpoint that international commercial arbitration is the normal way to resolve disputes in this area, while also taking into account other dispute resolution methods, such as dispute boards.

The 2016 edition defines a long-term contract as one which is to be performed over a period of time and which normally involves, in varying degrees, complexity of the transaction and an ongoing relationship between the parties (art.1.11). As explained in Comment 3 of that provision, three elements typically distinguish long-term contracts from ordinary exchange contracts: duration of the contract, an ongoing relationship between the parties, and complexity of the transaction. For the purpose of the Principles, the essential element is the duration of the contract, while the latter two elements are normally present in varying degrees, but are not required. Examples of long-term contracts may include those involving commercial agency, distributorship, outsourcing, franchising, leases (e.g. equipment leases), framework arrangements, investments or concessions, professional services, operation and maintenance, supply (e.g. raw materials), construction/civil works, industrial cooperation, or joint ventures.

International arbitrators will also find in the 2016 edition new additions and modifications to the Principles focusing on matters that are key to long-term contracts: open terms; agreements to negotiate in good faith; evolving terms; supervening events; co-operation between the parties; restitution after ending contracts entered into for an indefinite period; and post-contractual obligations.

The only departure from the text as originally proposed by the working group was the omission of provisions on termination for compelling reasons. After public exposure of the draft during a seminar held at the University of Oslo’s Faculty of Law, serious concerns were expressed with respect to the recommended provisions on termination for compelling reasons. Several other voices within the UNIDROIT Governing Council joined to oppose these provisions, and so a vast majority of Council members ultimately opposed them as well, based primarily on the argument that they would create too much uncertainty.

For decades, lawyers and arbitrators have been struggling with the challenges that long-term contracts present, particularly during their long performance. The new international regulation of these contracts by the 2016 UNIDROIT Principles will provide guidance as well as enhance certainty and security for contracting parties and international arbitral tribunals.

This work is part of the Research Project of the National Plan I+D of the Ministry of Economy and Competitiveness of Spain (DER2013-48401 –P) and (DER2016-78572-P).

References   [ + ]

1. ↑ At its 95th session (Rome, 18-20 May 2016), the UNIDROIT Governing Council adopted amendments and additions to the 2010 UNIDROIT Principles and authorised the Secretariat to prepare and publish the 2016 edition. The Principles may be found here. For the time being, in English and French while other languages edition is being prepared. 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: Arbitrators as Lawmakers
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California – The Next Major International Arbitration Seat?

Mon, 2017-07-24 17:45

Patrick T. Byrne

Whether inside or outside the practice of international commercial arbitration, it does not take long to look at the list of the most popular seats for such arbitrations and wonder – where on earth is California? As the sixth largest economy, complete with some of the most significant business centers in the world while operating under an influential and sophisticated legal regime, one could reasonably expect California to be a popular choice when it came to choosing a seat for an international commercial arbitration. However, as reports such as the Queen Mary Survey of 2015 illustrate, this is not at all the case. Instead, the seat preference within the U.S. is thoroughly dominated by New York, with California failing to even establish itself as a clear second choice (Florida outperformed California with respect to seats of ICC arbitrations in 2015). So why the snub?

The answer may lie in its restriction with respect to legal representation. As some are aware, as it stands, out-of-state attorneys (those licensed in a U.S. state other than California) and foreign attorneys are not permitted to represent parties in international commercial arbitrations situated in California. While not definitively the reason for the state’s difficulty in attracting arbitrations, it is hard to imagine that such efforts have not been significantly hampered by such a policy. Considering the numerous established and well-respected seats around the globe that have positioned themselves comfortably atop the preference lists of international companies, it would be unreasonable to expect these parties to relinquish the freedom of retaining the counsel of their choice when selecting a seat, especially considering how often the seat is completely unrelated to the dispute, making it unlikely that a CA-licensed attorney would provide any advantage.

And it is because of this unnecessary and unfortunate rule that, in February 2017, the California Supreme Court created a Supreme Court International Commercial Arbitration Working Group to study the possibility of allowing foreign and out-of-state attorneys to represent parties in international commercial arbitrations within California. That Working Group, consisting of international arbitration practitioners, released its report in late April 2017.
The Working Group ultimately provided three alternative proposals, in the form of actual proposed statutory text, indicating its clear preference for the most user-friendly of the three (“Proposal 1”). In essence, Proposal 1 was largely based on the American Bar Association’s recommended Model Rule for Temporary Practice by Foreign Lawyers, with certain changes to adapt the rule to California. Some specific requirements are worth noting.

Under this proposal, a foreign attorney providing legal services in an international commercial arbitration within California must be a member in good standing of a recognized legal profession in his/her home country and must be subject to effective regulation and discipline within that jurisdiction. Additionally, the foreign attorney must be in good standing in every jurisdiction where he/she is admitted to practice.

If eligible, such a foreign (or U.S. out-of-state) attorney would be permitted to provide legal services in connection with an international commercial arbitration under four circumstances: 1) the services are undertaken in association with an attorney who is admitted to practice in California and who actively participates in the matter; 2) the services are reasonably related to the attorney’s practice in a jurisdiction in which the attorney is admitted to practice; 3) the services i) are performed for a client who resides or has an office in a jurisdiction in which the attorney is admitted to practice, or ii) are reasonably related to a matter that has a substantial connection to a jurisdiction in which the attorney is admitted; or 4) the services arise out of a dispute governed primarily by international law or the law of a jurisdiction other than California.

Even if eligible, a foreign or out-of-state attorney would not be able to appear in any California courts related to the arbitration, unless permitted to do so pro hac vice pursuant to existing procedures.
Additionally, the Working Group’s proposal provides that any foreign or out-of-state attorneys providing legal services under this provision would be deemed to have agreed to be subject to the California Rules of Professional Conduct, the laws of California that govern the conduct of attorneys and to the disciplinary authority of California to the same extent as a CA-licensed attorney.

The Working Group’s proposed regulation should be enough to satisfy both those concerned with continuing to permit the state to monitor and regulate the practice of law within its jurisdiction, while also providing the necessary legal relaxation that could greatly increase California’s attractiveness for future international commercial arbitrations.

For those worried about foreign or out-of-state lawyers practicing within California, it must again be remembered that often international arbitrations seated in California will have absolutely nothing to do with California substantive law, and thus there is no reason to believe that such foreign representation would fail to meet the standards one would expect from a CA-licensed attorney. If anything, increasing the potential attorney pool would allow parties more freedom in finding and selecting attorneys specializing in the precise type of dispute at issue, substantive law at issue, or both. Such options actually provide parties the possibility of finding superior representation than they may find if restricted to the pool of a single jurisdiction.

With respect to the potential scenario of having a foreign attorney advising on California substantive law despite the lack of training or qualification within the state, the Working Group correctly made the observation that such a foreign attorney would already be permitted to freely advise on California law in international arbitrations seated in more user-friendly jurisdictions, such as New York, Florida or a number of non-U.S. options, and would likely continue to do so if California maintained its current restrictions. Therefore, the status quo fails to achieve the goal of closely regulating those advising on California law in international commercial arbitrations.
Of course it remains to be seen precisely what will come of the Working Group’s proposal. California Supreme Court Chief Justice Tani G. Cantil-Sakauye, a fairly popular jurist in the state, said that the Court “[saw] merit in [the Working Group’s] preferred recommendation . . .,” while the Chair of the Working Group, Daniel Kolkey of Gibson, Dunn & Crutcher, has indicated that the group will now work with the Legislature in implementing such recommended changes.

In providing the justification for its proposal, the Working Group accurately portrayed California’s current system as out-of-touch with top international arbitration hubs (including those within the U.S.), costing California the opportunity to enjoy significant opportunities that come with being one of the preferred seats in this growing industry. For those hoping that California would one day see the light and open its doors to the international arbitration community, this report was a major step in the right direction.

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Enforcing Foreign Diktat: Puncturing the Stereotype

Sun, 2017-07-23 19:57

Moazzam Khan and Shweta Sahu


India has long been regarded as an unappealing centre for arbitration – be it as the seat of arbitration or as the place of final enforcement of the arbitral award. Indian judiciary is often quoted to be over interfering in matters of arbitration and enforcement. If fact could replace fiction, in the last decade, Shylock would have a hard time enforcing his rights to his money with little hope of claiming a pound of Antonio’s flesh. The Indian courts wouldn’t shy from reopening and rehashing the proceedings already happened before the Duke of Venice, a twist in the tale that could make Shakespeare rewrite the famous climax and make Portia’s wit of little consequence indeed. While this reputation may have been well-deserved in the decade past, the ground reality since has seen a galactic shift. The legislature and judiciary have together taken upon themselves to ensure this course correction.

In this article we bust the myth that is an enforcement defiant India in context of foreign awards.

A. The ever-shrinking scope of resisting enforcement of foreign awards in India:

The legislature and judiciary have restricted resistance to enforcement of a foreign award only on established grounds under Section 48 of the Arbitration and Conciliation Act 1996 (“Act”) and, in keeping with the view of arbitrally-progressive jurisdictions, have held that executing courts cannot review the award on merits.

Some (the authors included) would even argue that under the present regime, it is easier to enforce a foreign award in India than a domestic one.

i. Foreign-Seated Awards – no longer open to challenge in India:

The myriad of challenges to enforcement of foreign awards in India had become a nightmare for parties seeking enforcement in India. The uncertainty associated with enforcement of foreign awards reached its zenith with Bhatia International v. Bulk Trading S.A. (2002) 4 SCC 105 which laid down that Indian courts would have jurisdiction in international commercial arbitrations, irrespective of the seat of the arbitration. The resulting jurisprudence saw Indian courts not only refusing enforcement but even setting aside foreign awards. The time was ripe for the proverbial hero to emerge and save foreign seated arbitrations from the un-welcome interventions by Indian Courts. In September 2012, a five judge bench of the Hon’ble Supreme Court of India delivered its much celebrated decision in BALCO v. Kaiser Aluminium (2012) 9 SCC 552 which ousted the jurisdiction of Indian courts in foreign-seated arbitration. Post BALCO, foreign awards cannot be challenged in India. (However, this judgment was applied prospectively, to arbitral agreements executed after 6 September 2012 i.e. the date of the judgment.)

ii. “Patent Illegality” no longer a ground of resisting enforcement of foreign awards:

The introduction of the test of “patent illegality” to the already infamous ground of “public policy”, as interpreted in ONGC v. Saw Pipes (2003) 5 SCC 705, meant that enforcement of a foreign award in India could be challenged on the basis that the foreign award was contrary to the substantive law of India or in contravention of contractual terms etc. – determinations which ought to be in the sole remit of the arbitrator.

After almost a decade, the scope of challenge was restricted in Shri Lal Mahal Ltd. v. Progetto Grano SPA (2014) 2 SCC 433 wherein “public policy” under Section 48(2)(b) of the Act was narrowly interpreted and the recourse to the ground of “patent illegality” for challenging enforcement of foreign awards was no longer available.

The pro-arbitration shift in the judicial mindset can also be gleaned from the fact that the in judgment Shri Lal Mahal Ltd., the Supreme Court (speaking through Hon’ble Mr. Justice R.M. Lodha) overruled its own ruling in Phulchand Exports Limited v. O.OO. Patriot (2011) 10 SCC 300 (an earlier judgment delivered by Justice Lodha himself – wherein the Supreme Court had ruled that a party could resist enforcement of a foreign award on grounds of “patent illegality”).

As the statute reads today, even domestic awards cannot be vitiated on grounds of being patently illegal in India-seated international commercial arbitrations. (Arbitration and Conciliation Act 1996, section 23(2A))

iii. A foreign award need not be stamped under the Indian Stamp Act:

A domestic award may be refused enforcement if it hasn’t been adequately stamped, in accordance with laws of India. However, resisting enforcement of a foreign award on the ground that it is not stamped as per the Indian law, has been shunned as a frivolous ground for delaying and obstructing enforcement of foreign awards. (See Naval Gent Maritime Ltd. v. Shivnath Rai Harnarain (I) Ltd. (2009) 163 DLT 391 (Del))

iv. Intention to arbitrate is paramount:

In a recent appeal, the Supreme Court upheld the finding of the Bombay High Court that in a foreign seated arbitration (and resultant award), an un-signed arbitration agreement would not defeat the award. (See Govind Rubber v Louids Dreyfus Commodities Asia P. Ltd. (2015) 13 SCC 477) The court preferred to give primacy to the intention and conduct of parties for construing arbitration agreements over the mandate of the parties’ signatures required in the agreement.

v. Burden of proof on the resisting party:

Similarly, in a recent ruling, the Bombay High Court placed a “higher burden on party resisting enforcement of giving necessary proof which stands on higher pedestal than evidence” than the burden on the party seeking enforcement of a foreign award, who is only expected to produce necessary evidence. (See Integrated Sales Services Ltd., Hong Kong v. Arun Dev s/o Govindvishnu Uppadhyaya & Ors. (2017) 1 AIR Bom R 715)

vi. No third party or the Government can object to enforcement of a foreign award:

With the Supreme Court taking the lead in a consistent pro-enforcement approach of foreign awards, the High Courts have also been keeping up with the pace, with the High Court of Delhi being the harbinger in this respect. In NTT Docomo Inc. v. TATA Sons Ltd (2017) SCC OnLine Del 8078, the Delhi High Court allowed enforcement of an LCIA award after rejecting the Reserve Bank of India’s objections that the underlying terms of settlement (wherein the Indian entity, Tata Sons, was required to pay $1.17 billion to NTT Docomo, a Japanese company) would be against the public policy of India. The Delhi High Court held that since RBI was not a party to the award, it could not maintain any challenge to its enforcement.

vii. Reciprocating countries for enforcement of foreign awards outnumber the ones for foreign judgments:

48 countries have been notified by the Central Government of India as “reciprocating countries” under the New York Convention, while only 12 nations have been recognized as reciprocating countries under Section 44A of the Code of Civil Procedure for execution of foreign judgments. In respect of judgments emanating from the remaining countries, the parties seeking execution would have to file a suit in India and place in evidence the underlying foreign judgment.

B. The legislative intent: Arbitration and Conciliation (Amendment) Act 2015

Consistent with the pro-enforcement approach adopted by Indian courts, the recent legislative changes to the Act vide the Arbitration and Conciliation (Amendment) Act 2015 clarify the extent to which a foreign award can be said to be in conflict with the public policy of India. Subsequent to these amendments, only the following cases amount to violation of “public policy” under Section 48 of the Act:

i. the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81 of the Act; or
ii. it is in contravention with the fundamental policy of Indian law; or
iii. it is in conflict with the most basic notions of morality or justice.

The tests for these grounds have been summed by the Supreme Court in Associate Builders v. Delhi Development Authority (2014) (4) ARBLR 307 (SC). It has been further clarified that “the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.” Such amendments are to be seen as strong measures in response to the infamous perception of India being liberal to the challenges to enforcement of arbitral awards on grounds of “public policy”.

Furthermore, subsequent to these amendments, even after making of the arbitral Award, a successful party which is entitled to seek the enforcement of the award can apply to the court under section 9 of the Act, for protection by grant of interim measures, pending enforcement of the foreign award. (See, Arbitration and Conciliation Act 1996, section 2(2) proviso)

C. Protectors of the Realm: Commercial Courts in India

The Indian legal system continues to face criticism on account of the time taken in disposal of cases. Thus, with the objective to accelerate disposal of high value commercial disputes, Commercial Courts, Commercial Division and Commercial Appellate Division of High Court Act, 2015 (“Commercial Courts Act”) was enacted.

Under this regime, specialized commercial courts were set up for speedy and effective dispute resolution of all commercial disputes.

The Commercial Courts Act also provided that proceedings emanating from arbitrations (both foreign and domestic), where the subject matter is a commercial dispute, would also be heard and disposed of by the Commercial Courts (Commercial Courts Act, section 10). The statute amended the application of the extant Code of Civil Procedure 1908 to commercial disputes, provided for a mechanism for speedy resolution, and a much needed requirement of appointment of only those judges which have experience in dealing with commercial disputes. (Commercial Courts Act, sections 4, 5)

“Change is the end result of all true learning”

Liberalization of policies and clarified norms of doing business in India have made investments more lucrative and attractive. However, to truly sustain its growing global credibility, India needed to deal with the elephant in the room.

His Lordship Justice D. Desai in 1982, of the Supreme Court of India had, in relation to the then extant arbitral laws, observed that “the way in which the proceedings under the Act are conducted and without exception challenged in Courts, has made Lawyers laugh and legal philosophers weep” (Guru Nanak Foundation v Rattan Singh (1982) SCR (1) 842). India has since come a long way. In face of the legislative and judicial changes brought in and the evident shift in the judicial mindset, India’s current reputation of being enforcement unfriendly is largely undeserving and a remnant of the decade past – the Bhatia Raj. India is no longer emerging as a pro-arbitration and pro-enforcement jurisdiction. It has already arrived. Sit-up and take notice!

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Escalation Clauses – Where Do They Leave the Counterclaimant?

Thu, 2017-07-20 23:47

Natasha Peter

In a judgment of 24 May 2017 (Biogaran v International Drug Development, case n° 15-25.457), the commercial chamber of the French Cour de Cassation (Supreme Court) considered the question of whether a counterclaimant is bound by the requirements of a “multi-tier” dispute resolution clause. The clause in question required the parties to mediate as a precondition to court proceedings, but the court ruled that the defendant could nevertheless pursue a counterclaim that had not been submitted to mediation.

Since at least 2003 (with the landmark judgment of a mixed chamber of the Supreme Court in case n° 0019.42), the French courts have been clear that escalation clauses are in principle capable of imposing negotiation, conciliation or mediation as a condition precedent to litigation or arbitration. However, they have been equally clear that these clauses will only have this effect if they are drafted in terms that are mandatory, unambiguous and sufficiently specific. The decision in Biogaran v International Drug Development is a novel application of this line of reasoning.

The case originated in a claim brought by Biogaran in the Paris commercial court for alleged non-payment of sums due under a pharmaceuticals contract. According to the contract terms, the parties were required to conduct amicable negotiations of any dispute for a period of 60 days. If this did not succeed, the dispute was to be submitted to a mediator who would have a further 60 days to attempt to resolve it, “failing which the parties would submit to the jurisdiction of the Paris court” (free translation).

Biogaran complied with the amicable dispute resolution and mediation requirements before filing its court claim. The defendant, International Drug Development, responded with a counterclaim for termination of the contract – an issue which had not been considered in the mediation. The Paris court of appeal held that the counterclaim was barred for failure to comply with a condition precedent.

In overturning this decision, the Supreme Court reasoned that at the time when counterclaim was made, the proceedings had already been “commenced” (as that term is defined in Article 53 of the French Code of Civil Procedure). It was therefore irrelevant whether the contract required a mediation as a condition precedent to the commencement of proceedings. The question was rather whether it specifically imposed a precondition to the filing of a counterclaim – and without express wording to this effect, the court was not prepared to find that it did.

A careful consideration of the wording of a multi-tier dispute clause is already a recurrent feature of French jurisprudence on the subject. In a number of cases, the Supreme Court has refused to let vaguely worded clauses stand in the way of a party’s right of access to the courts, requiring, for example, that a contractual condition precedent must specify how the negotiation was to be conducted (see the decision of 29 April 2014, n° 12-27.004), and that it must be expressed in mandatory terms (see, for example, its decision of 29 January 2014, n°13-10833).

More recently, however, there have been a number of occasions on which the Supreme Court has found that the hurdle for imposing such a condition precedent has been met. A frequently cited decision is that of the mixed chamber of the Supreme Court on 12 December 2014 (Proximmo v Arnal-Lafon-Cayrou, n° 13-19.684, which has been followed, for example, in case n° 15-17.989 of 6 October 2016 and case n° 16-16.585 of 29 March 2017). The court held that a claim made by a firm of architects was barred because the claimant had not respected a contractual requirement to submit any dispute to conciliation by the order of architects before taking it to court. Notably, the court also held that this failure could not be remedied by the claimant submitting the dispute to the professional body while the litigation was on-going. The contractual requirement had to be complied with before the court action was started. Unlike in some other jurisdictions (such as England & Wales and Switzerland, to name only two examples), the French courts will thus not simply stay the proceedings in order to allow an escalation clause to be complied with – although if a claim is struck out, the claimant is usually free to start a fresh action once it has complied with the necessary preliminary requirements.

In Biogaran the court broke new ground in applying these principles to a counterclaim, but its reasoning is coherent with the previous jurisprudence. In Proximmo v Arnal-Lafon-Cayrou, the court’s refusal to grant a stay to allow the claimant to remedy its default was motivated by the fact that (at least on the facts of that case) the mediation had to be conducted before the court was seized of the case, so a stay would not overcome the problem. In Biogaran, given that the court was already seized, the requirement no longer applied.

Biogaran is particularly interesting given the sparsity of decisions on this subject in other jurisdictions. Certain jurisdictions seem to have adopted a similar line to the French court – for example, the Kansas Court of Appeals in Vanum Construction Co. Inc. v Magnum Block LLC (case no 103,385 of 10 December 2010) decided that a contractual clause which required mediation “as a condition precedent to arbitration or the institution [of] legal or equitable proceedings by either party” did not oblige the defendant to mediate before filing a counterclaim, because the mention in the clause of the “institution” of proceedings referred only to the commencement of a lawsuit and not to the filing of a counterclaim. Conversely, in the context of a FIDIC Red Book dispute resolution clause, the Bulgarian courts (in decision No. 1966 of 13 October 2015, commercial case No. 4069/2014) upheld an arbitral award refusing to consider the contractor’s counterclaims when the contractor had not first referred them to adjudication.

The English courts have adopted a more nuanced view, finding that as a matter of discretion they can exceptionally allow parties to bring additional claims (which presumably must include counterclaims) in the context of on-going litigation proceedings, without first complying with contractual dispute resolution provisions. The issue was considered by the English High Court, also in the context of a construction dispute, in the case of Connect Plus (M25) Limited v Highways England Company Limited [2016] EWHC 2614 (TCC). The claimant in that case argued that some of the issues before the court had not been considered by an expert, in breach of a contractual requirement. On the facts, the court disagreed, but it went on to say that if it were wrong, it would “unusually” exercise its discretion against staying the proceedings to allow these issues to go to expert determination, because the allegedly “new” claims were too closely interwoven with the pre-existing claims to allow any sort of sensible division between them. It is clear from the judgment, though, that the more usual approach would be for the English courts to stay any new claims until the relevant contractual preconditions had been complied with.

The issue is also expressly dealt with in some arbitral procedural rules. For example, both the Institution of Civil Engineers Arbitration Procedure (rule 5.2) and the Construction Industry Model Arbitration Rules (rule 3.5) expressly grant the arbitral tribunal jurisdiction over issues that are connected with and necessary for the determination of the dispute, irrespective of whether there has been compliance with any condition precedent to arbitration.

Nevertheless, absent any guidance in the rules of arbitration or applicable case law, counterclaimants are still left with a large degree of uncertainty as to their obligations, particularly where (as is often the case) the wording of the contract is not crystal clear. And of course the question of the continuing relevance of an escalation clause after a court or tribunal has been seized is not confined to situations where there is a counterclaim. Parties who have complied with a contractual precondition in respect of one aspect of their dispute are often faced with the question of whether their compliance was extensive enough. Are they required to submit exactly the same claim to the court or arbitration tribunal as was considered in the negotiation, mediation or adjudication? Or do they have some latitude to amend their arguments or even add new claims at a later date? These questions are of quite some practical importance given that parties often only engage lawyers when they file for litigation or arbitration, so the nature of the dispute will frequently evolve at that stage.

Although one should not attempt to read too much into a single decision, particularly one that does not have the force of binding precedent, the reasoning of the French Supreme Court in the Biogaran case proposes an interesting approach to this question. It suggests that there is distinction to be drawn between preconditions to commencing proceedings and preconditions to joining additional claims to proceedings that have already commenced. At least when the escalation clause is worded in general terms, one might infer that once proceedings have been commenced, the clause is no longer applicable to additional claims between the same parties (counterclaims or otherwise). This has the advantage of ensuring that once proceedings have been started, the court or tribunal has more scope to determine all the issues between the parties in a single set of proceedings. Very often, this will give effect to the underlying aim of the parties when they agreed to the escalation clause – that their dispute be resolved efficiently and with a minimum of cost.

Nevertheless, as we have seen, the French courts will pay close attention to the wording of the escalation clause itself (as of course will tribunals and courts in other jurisdictions), so each case must be considered on its own terms.

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When Is It Too Late To Object: The Seoul Central District Court’s Judgment Regarding The Waiver Of The Right To Object

Wed, 2017-07-19 22:26

Hongjoong Kim and Umaer Khalil

A recent decision of the Seoul Central District Court provided guidance as to when a party should be considered to have waived its right to object to instances of non-compliance in arbitration proceedings. This post provides a summary of the Court’s judgment case and considers the possible ramifications of the Court’s reasoning for parties involved in arbitration proceedings in Korea.

The Arbitration Proceedings

The decision arose out of a challenge to an arbitration award issued under the Korean Commercial Arbitration Board’s (“KCAB”) Domestic Arbitration Rules 2011. Two Korean companies (the “Claimants”) had initiated arbitration proceedings against a Russian national (the “Respondent”) pursuant to a Joint Guarantee Agreement between the parties. The Joint Guarantee Agreement referred any disputes arising thereunder to arbitration by the KCAB, but did not specify which set of the KCAB’s rules would apply.

The KCAB has two sets of arbitration rules: domestic and international. One of the ways in which the domestic and international rules differ is the method of appointing the arbitral tribunal. Under the KCAB Domestic Arbitration Rules 2011, the KCAB provides each of the parties with a list of candidate arbitrators that the parties are required to rank in order of preference. The tribunal is then appointed by the KCAB based on the parties’ cumulative ranking of the candidate arbitrators. On the other hand, under the KCAB International Arbitration Rules 2011, the tribunal is appointed in a much more familiar fashion, with each side appointing a co-arbitrator, followed by the two co-arbitrators agreeing upon the chair-arbitrator. If the co-arbitrators are unable to agree, the chair is appointed by the KCAB.

Normally, an arbitration involving at least one party with its principal place of business outside Korea will be considered an “international arbitration,” and will therefore be subject to the KCAB International Arbitration Rules 2011. (Since the arbitration in this case was filed before the KCAB International Arbitration Rules 2016 came into effect, those rules are not considered in this post.)

However, in the present case, the Respondent, a Russian national, was a second generation Korean Russian with a Korean name. In addition, the Claimants’ Request for Arbitration had indicated that the Respondent was domiciled in Korea (the address had been provided to the Claimants by the Respondent for the purpose of the parties’ transaction). Based on the information available to it immediately after the Request for Arbitration was filed on 9 December 2014, the KCAB designated the dispute as one governed by the KCAB Domestic Arbitration Rules 2011.

In accordance with the Domestic Arbitration Rules 2011, on 11 December 2014, the KCAB wrote to the Respondent informing him of the arbitration and presenting him with a list of arbitrator candidates that he was asked to rank. The Respondent appointed its legal counsel on 24 December 2014 and returned the ranked list of arbitrators to the KCAB on 26 December 2014, without making any mention of the applicable rules or reserving his rights in this regard. The arbitral tribunal was constituted on 2 January 2015, pursuant to list-and-rank method under the KCAB Domestic Arbitration Rules 2011. On the same day, the KCAB informed the parties of the formation of the tribunal and that the first hearing date had been fixed for 26 January 2015. Upon a request by the Respondent, the date of the first hearing was changed to 9 February 2015. On 5 February 2015, the Respondent submitted its Answer to the Request for Arbitration.

In its Answer, the Respondent stated that since his principal place of business was located in Russia, the formation of the arbitral tribunal in accordance with the Domestic Arbitration Rules 2011 was against the parties’ arbitration agreement and the arbitral rules that should properly apply to the proceedings, i.e., the KCAB International Arbitration Rules 2011. The Respondent’s Answer requested an interim award in connection with this issue.

On 14 July 2015, the tribunal issued its final award in favor of the Claimants, together with its decision on the pre-merits issue of the constitution of the tribunal. Regarding the issue of the constitution of the tribunal, the tribunal found that the arbitration was properly subject to the KCAB International Arbitration Rules 2011, therefore the tribunal should have been constituted in accordance with those rules. However, the tribunal held that pursuant to Article 50 of the International Arbitration Rules 2011, if a party was aware of any non-compliance with the rules but still proceeded with the arbitration without promptly raising an objection, the party would be deemed to have waived its right to object. Since the Respondent had taken until the filing of its Answer on 5 February 2015 to make its objection, the tribunal found that the Respondent had waived its right to object to the constitution of the tribunal.

The Court’s Judgment in Set-Aside Proceedings

The Respondent sought to set aside the award in the Seoul Central District Court (the “Court”) pursuant to Article 36(2)(1)(d) of the Korean Arbitration Act (i.e., on the basis that the composition of the arbitral tribunal was not in accordance with the agreement of the parties).

The Court based its decision on Article 5 of the Korean Arbitration Act, which states that if a party knows that a non-mandatory provision of the Arbitration Act or an arbitration agreement has been breached, and still proceeds with the arbitration without raising an objection without delay, it “shall be deemed to have forfeited its right to object.”

The Court held that, based on the facts before it, it appeared that the Respondent had not been aware that the application of the KCAB Domestic Arbitration Rules 2011 was in violation of the parties’ agreement when he returned the ranked list of candidate arbitrators to the KCAB on 26 December 2014. The Court considered that the purpose of Article 5 of the Arbitration Act – to ensure the stability and economy of arbitral proceedings – had to be carefully balanced with need to ensure that the parties were afforded their right to select a tribunal in accordance with their agreed procedure. Since depriving a party of its rights in connection with the constitution of the tribunal formed grounds to annul an award, the waiver of such a right had to be considered very carefully.

Based on the foregoing findings, the Court held that raising an objection by the time of the Answer did not risk harming the stability and the economy of the proceedings, because of which the Respondent should not be considered to have waived its right to object to the constitution of the tribunal. Under the circumstances, the Court set aside the arbitral award on the ground that the composition of the tribunal was not in accordance with the parties’ agreed procedure.

Possible Ramifications

Given the novel situation that was before the Court, it is probable that the Court’s decision will serve as an important reference to parties involved in international arbitration proceedings in Korea.

In this regard, the Court’s decision raises several interesting issues, two of which are briefly discussed below:

(i) At first sight, the Court’s reasoning seems to suggest that a high standard should be applied to determining whether a party has waived its right to object by reason of a delay in raising the objection. It is possible that the Court’s reasoning will be referred to in future cases to suggest that a mere failure to raise an objection promptly is not enough to waive the right to object, but that the delay should be such as to indicate an intention by the delaying party that it waives its right to object to the non-compliance in question. In this regard, it would be important to note that while the Court did state that one had to be careful in applying Article 5, it does not seem to have expressly stated that such caution would necessarily mean applying a higher standard to whether there was delay in raising an objection or not. The Court’s decision in this regard seems to be based on the factual finding regarding the Respondent’s knowledge of the non-compliance, and not on a particular interpretation regarding the permissible duration of delay.

(ii) In considering the purpose of Article 5 of the Arbitration Act, the Court considered that Article 5 of the Arbitration Act was intended to ensure the stability and economy of arbitration proceedings. In addition to the purpose enunciated by the Court, it is also possible that Article 5 serves the purpose of preventing parties from taking a wait-and-see approach with respect to important stages in the proceedings. For example, there may be cases where a party would be required to object to the procedure for the constitution of the tribunal before the names of the arbitrators have actually been disclosed to the parties, to ensure that a party does not withhold its objection with the intent of raising it only if it does not like the tribunal resulting from the relevant procedure. While the present case was one in which the Respondent had very limited time to respond to the KCAB’s notice after engaging its counsel, it is possible that the reasoning in the present case can be referred to in other cases where this is not the case. In such cases, it may be necessary for the Court to consider whether Article 5 of the Arbitration Act should serve to prevent such wait-and-see tactics.

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A Note to in House Lawyers: When Do You Appoint a Law Firm for an Arbitration?

Wed, 2017-07-19 01:21

Sadaff Habib


Firms will often write that for effective representation it is best to engage law firms at an early stage in the dispute process. Whilst there may be some merit in this, it may not necessarily be entirely true. It is evident that in-house roles are not what they were initially thought to be. In house lawyers today are expected to do more than just ‘manage’ the dispute. The result: it is possible for some cases to be managed entirely in house and/ or for law firms to be involved at a later stage. So how does the in house lawyer decide when the time is ripe to get external counsel. Below are four (4) points that the in house lawyer should consider when deciding to get an external law firm on board.

1. Complexity and value of the dispute

It is true some disputes are more complex than others. In complex disputes, for example high profile shareholder disputes or construction disputes involving public works or infrastructure projects, it is preferred for a law firm to be on board at an early stage. This is because if your company is filing an arbitration for recovery of outstanding sums and the matter is relatively complex it may be fitting to have a firm on board before you file the case to determine if there is a case and the position of the company. Such a strategy would assist the company in saving costs.

If the case involves a subject matter outside the realm of the in house lawyer’s experience, then the in house lawyer is better suited to refer the dispute to the law firm from the outset.

The claim amount also plays a key role. Complexity is often associated with the value, and shareholders and board members with their commercial sense often associate the two together. In house lawyers are often persuaded to appoint law firms for high value disputes irrespective of complexity to play safe and ensure senior management is comfortable with the dispute management.

2. Cost

Some cases simply do not justify the cost of external counsel. As an in house lawyer, remember you yourself are a cost to the company. Therefore, you would best be served to come up with ways of reducing the company’s costs by internal dispute management, subject to your team’s capacity as opposed to outsourcing the matter. This is especially true if the dispute is relatively less complex and the value of the case is low. For such cases, in house lawyers should asses the strengths and weaknesses of their company’s position and suitably advise top management on the next steps. It may be that such cases are better off being settled particularly if the case has been filed against the company.

3. Time

Depending on your capacity, it might not be possible to handle the entire arbitration process especially if it is anticipated that lengthy pleadings will be involved. In such cases, in house counsel can work on the case at the initial stage that is can draft and submit the Request for Arbitration or Reply to the RFA as the case may be, and appoint arbitrators. At times, particularly if you are the respondent, the company may best be served for the in house lawyer to draft and respond to the submissions, because he is likely to be most familiar with the facts and the commercial goings-on of the company.

4. It’s your job to prepare your law firm

At the end of the day, some disputes by their very nature will require a firm to be pulled on board at the onset or after the initial submissions. For effective case management, it is the in house lawyer’s job to ensure the firm has all the documents and information it needs to prepare the case. It cannot be stressed enough that communication channels be open. In house lawyers will be benefited from preparing full factual and evidentiary briefs for their firms. This is because in house lawyers are best placed to gather all the information and relevant documents and collate them for the firm. This in turn reduces costs such as law firm billing hours and prevents wasting of time in the firm sending requests for information and the in house lawyer responding to their queries.

At the end of the day, it all depends on whether the ends justify the means. It’s a matter of cost, time and efficiently running the dispute to obtain a favourable outcome. Regardless, of when the law firm is involved, the in house lawyer is responsible for feeding the law firm with information in as much a collated a manner to achieve the desired results – cost efficiency and possible triumph.

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

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Hungary: Are Interim Measures Hard to Enforce?

Mon, 2017-07-17 23:19

Alexandra Bognár


The Hungarian Parliament recently passed new legislation on arbitration (Act LX of 2017 on Arbitration, the “2017 Act”) that will reform Hungarian arbitration law as of 1 January 2018.

The 2017 Act, considering both the shortcomings of the current Hungarian legislation (Act LXXI of 1994 on Arbitration, the “1994 Act”) and the amendment of the UNCITRAL Model Law on International Commercial Arbitration adopted in 2006 (the “Model Law”), repositions arbitration by reforming the choice of arbitrators, the institutional system of Hungarian arbitration panels, and the power of the panels ordering interim measures and preliminary orders.

Interim measures in arbitration today

Though interim measures are recognised in the 1994 Act, their effectiveness is somewhat questionable and worrisome for parties seeking quick and effective legal protection. As such, it has long been a shortcoming of arbitration in Hungary.

Under the 1994 Act, the arbitration tribunal may order either party to implement interim measures to the extent the tribunal deems necessary. The 1994 Act adds that the interim measure shall remain in force until a new decision of the arbitration tribunal is adopted to replace it or until it makes an award in the same matter. In line with international practice, the arbitration tribunal has the power to impose interim measures even prior to the commencement of the arbitration proceedings.

On the other hand, such an order would only be effective between the parties, but not towards third parties (eg it does not have absolute effect restricting parties not participating in the procedure). In other words, the decision of the arbitration panel is not enforceable under Hungarian law. Therefore the success of an interim measure imposed by arbitral tribunals greatly depends on the voluntary compliance of the party against whom it is imposed. The consequences of non-compliance, however, would ultimately be drawn up in the final award, although the arbitration panel is powerless to “penalise” the non-performing party in due time.

The above regulation is not in conformity with international arbitration practice and makes arbitration less effective in Hungary compared to regular court proceedings, where such an order would be enforceable.

Interim measures by means of regular court assistance

The ineffectiveness of arbitration panels is currently addressed by court assistance provided for under the 1994 Act, namely that the parties are entitled to turn to the regular court either before or during the arbitration proceedings for assistance in imposing interim measures.

Regular court assistance in light of an arbitration procedure is already very exceptional, not to mention interim or protective measures, which would automatically lead to the fragmentation of the case with (sub)proceedings before multiple courts or panels. Despite its rarity, court assistance has the benefit that regular court decisions are enforceable, unlike decisions by an arbitration panel.

By forcing the parties to turn to the courts for effective legal protection, this scenario, while a safer solution for the party requesting the interim measure, clearly has not made arbitration more favourable.

Interim measures and preliminary orders in the future

The 2017 Act departs from the differentiation between interim measures ordered by an arbitration panel and a regular court, elevating the decisions of the arbitration panel to the same level as those of the regular court. The 2017 Act will thus broaden the authority of arbitration panels.

The provisions on interim measures are adopted almost verbatim from the Model Law, clarifying both the means of interim measures and the circumstances the panel should analyse. Thus, the arbitral tribunal may grant interim measures upon the request of the party if (a) harm not adequately reparable by an award of damages is likely to result if the measure is not ordered, and such harm substantially outweighs the harm that is likely to result to the party against whom the measure is directed if the measure is granted; and (b) there is a reasonable chance that the requesting party will succeed on the merits of the claim.

By explicitly stipulating that the above orders of the arbitration panel should be enforced in accordance with the rules of judicial enforcement (ie the same way as regular court orders), the 2017 Act makes up for the legislative deficiencies of the 1994 Act.

The 2017 Act will introduce preliminary orders, too. A party may submit a request for an interim measure together with an application for a preliminary order directing the other party not to frustrate the purpose of the interim measure requested, ie without the prior notification of the opposing party.

In addition, the arbitral tribunal will have the power to order security in connection with the above orders of the parties. The tribunal may require the party requesting an interim measure to provide appropriate security in connection with the measure while it must require the party applying for a preliminary order to provide security unless the tribunal considers it inappropriate or unnecessary to do so.

The above innovations will to a certain extent eliminate uncertainties about interim measures, hopefully making arbitration more attractive for contractual parties in dispute and convincing them to agree in arbitration more frequently.

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Stockholm Treaty Lab: Combating Climate Change through Legal Crowdsourcing

Mon, 2017-07-17 03:21

Anja Havedal Ipp

On the very same day that U.S President Donald Trump announced that the United States would withdraw from the Paris Agreement on Climate Change, the Stockholm Treaty Lab Prize opened for registration. An initiative of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), this global innovation contest aims to crowdsource a model treaty that puts the Paris Agreement into practice. Several teams have already signed up.

The idea of the Stockholm Treaty Lab formed when the SCC, a major player in investor-state arbitration, decided to explore whether it would be possible to harness the power of international arbitration and investment law to serve the aims of the Paris Agreement and the Sustainable Development Goals. Climate agreements and international environmental law are often criticized for lacking teeth and being unenforcable. Yet those of us active in the field of investor-state arbitration see international law being enforced every day. The Stockholm Treaty Lab seeks to bridge this gap.

Fulfilling the promises in the Paris Agreement will require investments amounting to trillions of dollars across the globe. Enormous investments are needed for innovation in areas such as green aviation and carbon capture and storage, and to ramp up the use of existing technologies like wind and solar energy. Such “green” investments present exciting and lucrative opportunities for investors, but they are unlikely to materialize on a meaningful scale as long as no reliable and enforceable international law exists to encourage and protect them. What if there was a framework of policy-oriented treaties specifically aimed at encouraging green investments – treaties that could be enforced using international arbitration? This is the ultimate goal of the Stockholm Treaty Lab innovation contest.

The Stockholm Treaty Lab Prize will be awarded to the contestant team that drafts the model treaty with the highest potential to encourage foreign investment in climate change mitigation and adaptation. Several multi-disciplinary teams from across the globe have already registered. Submissions will be assessed based on how well they meet the following criteria:

  • Compatibility. The Model Treaty is compatible with the Paris Agreement and the Sustainable Development Goals. It aims to facilitate states’ achievement of the climate-change objectives set out in those instruments.
  • Efficacy. If adopted by states, the Model Treaty will lead to a significant increase in green investments related to climate change mitigation and adaptation. To this effect, the Model Treaty proposes incentives and protections that serve foreign investors’ needs and interests. The claimed efficacy of the proposed incentives and protections is supported by research and data.
  • Viability. The Model Treaty is likely to be adopted by states around the world because it serves the states’ needs and interests, facilitates the achievement of climate-change goals, and does not unduly restrict the states’ ability to legislate and regulate.
  • Universality. The Model Treaty appeals to the potentially diverging interests of states and investors in different parts of the world. Where necessary, the Model Treaty includes alternative provisions from which contracting states may select the most appropriate based on context and circumstances.
  • Enforceability. The Model Treaty is binding and enforceable. It contains an effective dispute resolution mechanism, through which both investors and states can bring claims related to the Treaty.

The submissions will be judged by a jury consisting of experts in international law, economics and climate science. David Rivkin is a chair of Debevoise & Plimpton’s International Dispute Resolution Group and the past president of the International Bar Association (IBA). Per Klevnäs is partner of Material Economics in Stockholm and has extensive international consulting experience relating to energy, environment and climate. Annette Magnusson is the SCC Secretary General and a frequent speaker on international arbitration and the development of legal services on a global level. Michael Lazarus is the Director of the U.S Center of the Stockholm Environment Institute and has more than 20 years of experience in energy and environmental analysis. M Sornarajah is Professor of Law at the National University of Singapore and has extensive experience in international law.

The winning model treaty will be presented to high-level stakeholders in global forum in 2018.
The Stockholm Treaty Lab is an initiative of the SCC. Supporters and partners include the IBA, the Haga Initiative and Stockholm Environment Institute (SEI). The competition is run by HeroX, a crowdsourcing platform where thousands of innovators compete to solve a wide range of challenges.

For more information on the Prize and how to participate, go to www.stockholmtreatylab.org.

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Hong Kong Approves Third Party Funding for Arbitration

Sat, 2017-07-15 21:40

Abdulali Jiwaji


The Hong Kong Legislative Council (LegCo) recently adopted a new law permitting the third party funding of arbitration. This comes as a welcome development, bringing Hong Kong into line with other common law jurisdictions and ensuring that it keeps pace with its international rivals. It also strengthens the position of the Hong Kong International Arbitration Centre (HKIAC).

This is something of a boost for Hong Kong as an international arbitration hub as the legislation should enable parties involved in arbitrations seated in the jurisdiction to access a much wider spectrum of funding arrangements. An appropriate Third Party Funding for Arbitration Code of Practice in Hong Kong is to be drawn up and will take effect later this year.

According to a 2015 survey, conducted by Queen Mary University of London, Hong Kong and Singapore are respectively the third and fourth preferred venues for international arbitration, behind London and Paris. While third party funding has traditionally been regarded with suspicion throughout much of Asia, the move to recognise third party funding to support arbitration in Hong Kong matches Singapore, which passed a similar law earlier this year – the competition continues between the two centres for the position of leading Asian arbitration venue.

The Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016, which allows third party funding for arbitrations seated in Hong Kong, will apply equally to domestic and international arbitrations. This follows their unification into a single regime in 2011. The term ‘third party funder’ has a distinctly broad meaning under the new Hong Kong guidelines. In addition to professional funders, it can also include any party without personal interest in the proceedings. The funded party will be obliged to disclose the existence of the funding agreement, together with the identity of the funder, to the other party and the tribunal or court hearing the case.

LegCo’s adoption of the bill follows the Final Report of Hong Kong’s Law Reform Commission (LRC) Sub-Committee, which was published last October. This showed that express authorisation of third party funding in arbitration had overwhelming support in the territory. Some 97% of those who took part in the consultation process – arbitrators, barristers, solicitors, government bodies and arbitral institutions – favoured the legislative amendments as recommended by the Commission, namely that the archaic common law torts of champerty and maintenance should no longer apply to arbitration, mediation or proceedings before the court connected to the arbitration.

In its response to the consultation, The Hong Kong Bar Association (HKBA) commented: ‘Hong Kong can be better placed to compete with other international commercial arbitration centres, like London where legal practitioners (save in class actions) are now allowed to practise on a contingency basis. The same is allowable in the US and Mainland China.’ It further noted that ‘the HKSAR government with the objective of maintaining and consolidating its premier position as an international dispute resolution centre, proposed the reform of the current arbitration legislation regime by expressly allowing third party funding.’

Arguably, the territory has not invested as much in self-promotion as some other regional arbitration centres, notably Singapore. This means that there is some catching up to do if it is to maintain a competitive position.

Looking ahead, some parties may be interested in the possibility of proceedings being funded when making choices about the jurisdiction when negotiating their contractual arrangements. This might draw parties involved in a Hong Kong connected contract to choose arbitration rather than litigation for dispute resolution, should they consider that the potential for obtaining funding is a decisive factor. And in general terms, this development will at least maintain Hong Kong’s relative attractiveness as a centre of arbitration for disputes about transactions involving China. We can look forward to an increase in the volume and scope of arbitrations which will be heard, taking into account also arbitrations which might not otherwise have moved forward without third party funding.

The LegCo report specifies that the bill will not apply to litigation in Hong Kong courts, where funding by third parties will generally remain prohibited, except for any court proceedings which specifically relate to arbitration – such as enforcement and challenges. Longer term, this development will be monitored as part of the process of considering the potential extension of third-party funding of court proceedings – assuming that LegCo deems such further reform to be desirable.

Third party funding has the potential to have a significant impact on the local dispute resolution market in Hong Kong. Third party funding is becoming the norm in other common law jurisdictions, and has really taken root in the London market by way of example, for litigation as well as arbitration. Judging by the recent experience of London, we have seen claims being advanced, using the help of funders, which would not previously have been possible. This applies especially to group litigation against large institutions, with a combination of claimants coming together to advance proceedings. It is hard to imagine these sorts of cases being maintained without funding. Even parties which are experienced in handling, and in a position to fund, their own litigation are increasingly considering third party funding as an attractive option.

Over time, it will be interesting to see what progress can be made in Hong Kong towards the wider admission of litigation funders to fund domestic commercial litigation – particularly in the context of securities litigation. Given the very active local securities markets in Hong Kong, there would be some interesting angles for litigation funders to assemble group actions of the type which are becoming more prevalent in Europe. If that path were to open up, it would require some adjustment by the Hong Kong legal profession, since the involvement of litigation funders fundamentally changes the approach to case management.

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Whose Line of Credit is it Anyway? Third Party Funding Issues in Arbitration

Sat, 2017-07-15 05:00

Noor Kadhim (Assistant Editor for the Middle East)

SHYLOCK “Is that the law?”
PORTIA “Thyself shalt see the act.
For, as thou urgest justice, be assured
Thou shalt have justice more than thou desir’st.

(The Merchant of Venice. Act 4.)

In the middle of uncertainty over the economic implications of a European Union without Britain and against a continuing rise in the popularity of arbitration as an avenue for redress by corporate investors, a barristers’ chambers’ round-table discussion on third-party funding of disputes on Tuesday 12 July 2017 could not have come at a more important time. The discussion involved less than a dozen legal practitioners, was organised by Frederico Singarajah, and was chaired by Peter Goldsmith QC. Aptly, it focused on third party funding in the arbitration sector.

Third-party funding in some shape or form of impecunious parties’ arbitrations is almost as old as the modern process of arbitration itself. One cannot deny that arbitration is, in general, a luxury that few can afford. And arbitration clauses that were historically negotiated sometimes blithely without forward-looking costs assessments have become steadily more expensive to employ over the years. This has contributed to the perceived lacuna in the attainment of justice for many otherwise meritorious and frustrated claimants. The unfortunate situation led Lord Neuberger in 2013 to conclude, in support of third-party funding, that “access to the courts is a right and the state should not stand in the way of individuals availing themselves of that right.”1) jQuery("#footnote_plugin_tooltip_9753_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9753_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The origins of modern third-party funders have been said to be traceable back to the late 19th century in the establishment of mutual before-the-event insurance associations (Freight, Demurrage and Defence (FD&D) Clubs) which were formed to fund the costs of shipping claims. FD&D Clubs have been funding international arbitration claims for well over a century and they continue to do so with success. Indeed, Nordisk Skibsrederforening, a FD&D club set up in 1889, registered over 2,300 cases in just one year (2015) in its two offices in Oslo and Singapore. These are staffed by lawyers dedicated to working exclusively on funded arbitrations. Over time, the economic benefits associated with taking a stake in the financial gains started to appeal to a greater cross-section than the insurance market. The so-called disparity of approach between the legal treatment of insurance against a party’s losses (which did not offend historic champerty and maintenance laws) and third-party funders’ contributions to a party’s costs in the expectation of profit from gain (which had previously been forbidden in England and other arbitration-friendly jurisdictions) was seen by many as a distinction without a real difference. One commentator pointed out in 2014 that the core similarity between liability insurance and third-party litigation funding is the transfer of litigation risk: “[b]y purchasing insurance, a potential defendant trades a fixed loss in the present for a carrier’s willingness to bear an uncertain loss in the future. Third-party litigation funding is the mirror image of this arrangement”1) jQuery("#footnote_plugin_tooltip_9753_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9753_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

Certainly, the upward trend in third party funding in England has been prompted by the relaxation of the rules of champerty and maintenance. Equivalent rules forbidding unconnected third-party interests in claims in other states (such as Australia, Switzerland, and the United States, to name three prominent arbitration-friendly jurisdictions) have also been relaxed, paving the way forward for more funds to enter the financing scene. More recently, other jurisdictions have started to follow suit. Singapore changed its laws only three months ago to allow third party-funding in international commercial arbitration. Just over a week ago, Burford Capital announced that it was funding a claimant in a Singapore-seated arbitration.

Against this background, Lord Goldsmith invited us to explore three topics.

First, which reasons underlie the increase in third party funding in arbitration, and will this trend continue? In particular, why the increased focus on arbitration as a ripe field for funding? In large part, the thinking was that this appetite was mostly associated with the high value of arbitration claims, the perceived finality of awards, and the relative ease of enforcement of awards. The question whether enforceability may be hampered by arbitrators’ limited ability to grant interim relief to claimants in arbitration compared to litigation was not investigated at the roundtable, however. It is a question to consider seriously, especially in jurisdictions where the courts are not as supportive of the arbitral function as the UK.

Second, which issues – particularly ethical and conflict issues – does third-party funding give rise to, and how can these be addressed? Lord Goldsmith noted that the UK Litigation Funder’s Code of Conduct issued in 2014 identified the following areas of concern: (i) confidentiality of funding arrangements (a thing that lawyers take for granted but should not necessarily be the norm for third-party funding), (ii) protection of claimants being funded, (iii) the permissibility or otherwise of control of the litigation proceedings by a third-party funder (this is apparently condoned by Australian law but is at risk of breaching English law), (iv) responsibility of funders for costs, and (v) the obligation that funds must in fact be readily available by a funder. A very recent procedural decision with respect to a respondent state’s (Venezuela’s) application for security for costs against a third party-funded litigant in an ICSID case reveals that at least that particular tribunal did not take for granted the fact that a claimant investor in a treaty arbitration had adequate funds to bring the case. It has, I believe, placed renewed emphasis on this last aspect (v) of the Code of Conduct.

As to control of litigation proceedings, one participant emphasised that this varies from funder to funder, with some being more interventionist than others. Against the prospect of an adverse costs order against a funder – which has not yet, to participants’ knowledge, been imposed – I would suggest that it is difficult not to be interventionist and to step in to ensure that an arbitration is being run effectively. In my view, the temptation, however, is to take on a matter without adequate due diligence (for example, failing to conduct adequate checks as to whether the law firm/ lawyer chosen by the client to represent it is capable of handling the case being funded). This may cause irresolvable problems later in the process. On this, Lord Goldsmith’s opinion was that if funders should indeed be allowed to control the arbitration, it would stand to reason that their liability in the proceedings (i.e. whether they could face an adverse costs order) would become unlimited.

Linked to the issue of interference are ethical concerns and conflicts of interest. Third-party funders may have pre-existing relationships with arbitrators who may hold advisory positions within the fund. This rings obvious alarm bells. It recently prompted the decision of a prominent arbitrator to decline an appointment. Without the obligation of disclosure of the funding arrangement, it is uncertain how many similar relationships continue to pass under the radar. Another ethics related issue arises, I think, with regard to the identity of the funder itself. With the emergence of more and more players on the market, including foreign funders, the source of funds becomes an issue in itself. To what extent does an arbitrator or a court need to investigate whether the funds themselves are clean and untainted by fraud, corruption or links with potentially criminal or terrorist organisations? Should funders be subject to the “know-your-client” checks and to what extent would the stricter imposition of these checks in some jurisdictions cause discrimination compared to funding clients in less stringent states? Accordingly, although disclosure of funding arrangements is not required in some jurisdictions, it should be expected across the board and is an inevitable condition for the legitimacy of the system.

Unconnected with disclosure but intertwined with conflict issues is the problematic scenario of settlement discussions. Specifically, how does one resolve a conflict of interest between a funder whose interests in settlement conflict with those of a client who may wish to fight the case all the way to a final hearing, given that he/she is not responsible for the legal costs? There is, as yet, no satisfactory answer to this issue.

This last topic led to the final discussion area: costs. The ICC arbitration of Norscot Rig Management Pvt Limited (Norscot) v Essar Oilfields Services Limited (Essar) was discussed in detail. In this case, the arbitrator, Sir Philip Otton, issued a ground-breaking fifth partial award in the case to allow the claimant to recover the costs of funding based on a permissive interpretation of section 59(1)(c) of the English Arbitration Act 1996 (EAA) embracing litigation funding as part of a party’s “other costs”. Essar’s later application to set aside the award in the English High Court due to “serious irregularity” was rejected. The latest award had followed earlier awards in which Essar had been found liable to pay damages for the repudiatory breach of an operations management agreement. If this case is to be taken as a precursor of the future, the door is open for the recovery of third party funding costs, which in Norscot’s case amounted to 300% of uplift on the funding provided (35% of the recovery). Indeed, arbitrators in England, by virtue of section 63 of the EAA, have wide latitude in determining the costs of arbitration assuming that an alternative procedure for costs has not been set out in the arbitration clause.

However, as a Deputy Counsel at the ICC who was involved in the administration of this matter, I would agree that the Norscot case turned on its facts and I believe it should not be used as a template. The arbitrator found this respondent’s behaviour to be oppressive towards Norscot. He held that Essar crippled Norscot’s finances by withholding payments due under the agreement such that Norscot did not have sufficient resources to fund its case. The benchmark of “reasonableness” under the EAA was met regarding the costs decision. This does not mean that future claimants will generally be successful in recovering their funding costs. But it is almost certain that most claimants will try, albeit that it is questionable whether they should be allowed to have their cake and eat it. When entering into the funding agreement, the claimant makes a choice: in return for the funding, he foregoes a part of the damages. In essence, a discounted product is accepted and the losing party should not have to pay extra for that decision.

In my opinion, the above discussion boils down at its core to a question of ethics. What are the moral contours applicable to each aspect of an arrangement in which an unconnected party may indirectly profit from the claim of an actual owner? Naturally, the conversation about arbitration funding these days has moved on from simply asking whether an arrangement is morally acceptable. For parties who are unable to fight their claim, third-party funding is often the only way. There is nothing inherently distasteful in this. The funder’s return should be commensurate with the risk it undertakes.

But this debate gave me some food for thought in a different respect. If we pass beyond arbitration funding and into the next frontier, that of arbitration award trading (selling of awards to third parties at a fraction of their potential enforcement value), the ethical line really does become obfuscated. Of course, access to justice can be impeded at more than one stage. This is because the process of enforcement of an award is where the real obstacles can arise. The struggle can become even more of an uphill battle for high value and politically sensitive claims (for this, one only has to take the Yukos saga as an example). However, lawmakers – and arbitrators – need to be careful in this relatively uncharted territory. The soil is fertile, not just for winning parties in need of ready cash, but also for corruption, and complex strategizing by unscrupulous opportunists.

1-Lord Neuberger, “From barretry, maintenance and champerty to litigation funding”, Gray’s Inn speech, May 8, 2013
2-Charles Silver, Litigation Funding versus Liability Insurance: What’s the Difference?, DePaul Law Review, Volume 63 Issue 2 Winter 2014: Symposium – A Brave New World: The Changing Face of Litigation and Law Firm Finance, Article 15

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