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P v Q: A Principled Approach to Disclosure from Arbitrators?

Fri, 2017-06-09 03:28

Michael McErlaine

Herbert Smith Freehills

The English High Court has reinforced its pro-arbitration stance in two recent judgments in the case of P v Q [2017] EWHC 148 (Comm.) and [2017] EWHC 194 (Comm.). Much attention has been devoted to the failed application under section 24 of the English Arbitration Act 1996 (the “Act”) to remove the arbitral tribunal on the basis of alleged “over-delegation” of their duties to their secretary (see, for example, here). However, this article focuses on the application brought for disclosure of documents passing between the arbitral tribunal and the LCIA secretary. The Court had a relatively carte blanche given the competing approaches put forward by the parties and that, as the judge noted, “the researches of counsel have not identified any case in which an arbitrator has been ordered to give disclosure in connection with a removal application…”.

Background to the case

The case involved a challenge to the tribunal which arose after the Chairman of an arbitral tribunal inadvertently sending an email to P’s legal team intended for the Tribunal Secretary asking for the Tribunal Secretary’s reaction to the email. Full details of the background to the case can be found here.

The disclosure application

P’s challenge, brought under section 24 of the Act, was made with an ancillary application for disclosure of a range of communications between the Tribunal and the Secretary relating to the Secretary’s role and tasks delegated to him.

First, P submitted that the relevant principles governing the disclosure application were those found in the English Civil Procedure Rules (the “CPR”), CPR 31.12 i.e. an application for specific disclosure. In other words, as long as the documents sought were relevant (applying the test in CPR 31.6), the Court has discretion to order their disclosure. P’s lawyers accepted that the substance of the Tribunal’s deliberations would need to be redacted.

Secondly, the co-arbitrators’ counsel put forward a different test. The starting point was that a party cannot seek disclosure from a decision maker in the context of a challenge to such a person’s impartiality citing the case of Locabail (UK) Limited v Bayfield Properties Ltd [2000] QB 451. In addition, Article 30.2 of the 1998 version of the LCIA Rules, which governed the arbitration, also provided protection for the confidential nature of an arbitral tribunal’s deliberations. As such, the parties had contracted out of any jurisdiction the Court may have to order disclosure of the documents in issue.

Thirdly, Q submitted that disclosure should only be granted in rare and compelling cases and then only where: (i) there was a strong prima facie case on the merits of the connected section 24 application and (ii) disclosure was strictly necessary for the fair disposal of that application

The principles to be applied

Faced with these three competing views, the judge posed three questions:

1. Should the Court apply any merits threshold and, if so, what should the threshold be?
2. Should the Court apply a heightened test of relevant and, if so, what should the test be?
3. How should the Court approach the exercise of its discretion to order disclosure?

As to the first question, the Court noted that in an arbitration context it is not always realistic to expect a respondent to engage a summary procedure for strike-out or dismissal of an application – unlike in High Court litigation. However, the judge. saw no reason to depart from the default position that the Court does not address the merits of a substantive dispute when determining an interim application. The judge explicitly stated that, while he was not opening the door to the filing of evidence on the merits of the substantial disputes in applications such as the present one, the relevance and nature of the material sought could be taken into account by the Court when it exercises its discretion to order disclosure.

On the relevance question, the Court agreed with Q that the documents sought should be strictly necessary for the fair resolution of the section 24 application. The Court was satisfied that an application to remove an arbitrator under section 24 of the Act was an interlocutory application. The judge noted that interlocutory proceedings needed to be conducted in accordance with the overriding objective. If the Court started to award disclosure in support of interim applications then the risk of satellite litigation and increased delay and expense would only rise.

The judge held that the Court was required to resolve disputes arising in an arbitration context without unnecessary delay or expense and with minimal Court-intervention. This further justified a heightened standard of relevance.

Furthermore, the Court equated an application for disclosure from an arbitrator with an application against a non-party in Court proceedings, which also imported a test of necessity. Although a slightly odd comparison, the Court did acknowledge that an arbitrator is in a different position from a non-party on the receiving end of an application for disclosure of certain documents (in English procedure, referred to as a Norwich Pharmacal application and often made to enable a party to plead a claim). In particular, the arbitrators need to respond to the application in a way that maintains fairness and impartiality between the parties given the possibility they will maintain an on-going role in the substantive dispute.

Finally, the Court turned to the issue of how to exercise its discretion to order disclosure of the documents. In addition to the default considerations necessitated by the overriding objective – such as time, expense and proportionality – the judge identified a number of other relevant considerations arising from the disclosure application. These were:

1. The proceedings were brought under Part 8 of the CPR. Part 8 is an alternative procedure for bringing claims where there is usually no substantial dispute in fact. This was an indicator – though not determinative – that disclosure will normally be inappropriate. Furthermore, the notion of minimal intervention from the Court meant that disclosure in the context of arbitration claims should only be awarded in exceptional cases.
2. If an arbitral institution has been vested by the parties with the power to order the disclosure being sought and declines to do so then the Court should be reluctant to order disclosure.
3. An application in support of a strong claim – in this case the section 24 application – may potentially justify disclosure in support even though this could result in the parties incurring additional costs.
4. It can only be in the rarest of cases that arbitrators should be required to give disclosure. The Locabail case granting immunity to a judge from such disclosure applies equally to members of an arbitral tribunal to allow them the freedom to carry out their functions.

Commentary

The Court dismissed the disclosure application. The Court did not accept the argument put forward by the co-arbitrators that the LCIA Rules had excluded in its entirety the Court’s jurisdiction to award disclosure. Nonetheless, P had failed to meet the requisite elements of the test – the documents were not strictly necessary to determine the section 24 application, there were no compelling reasons to depart from the Locabail principle, and under the parties’ agreement in the form of the LCIA Rules that the arbitrator’s deliberations should be confidential from the parties. The Court recognised that ordering the disclosure could have wider repercussions for international arbitration. In particular, it could discourage potential arbitrators from serving on tribunals as well as potentially affecting their ability to carry out their adjudicative role properly. The fact that the application was defended by the co-arbitrators’ counsel may be seen as indicative of the general feeling of the arbitration market.

The Court was not persuaded by P’s arguments that there was a distinction between the substance of deliberations and more procedural communications relating to the role of the Tribunal Secretary or tasks to be delegated to the Tribunal Secretary. However, the judgment does not indicate significant analysis of the question of whether the documents sought actually fell within the meaning of “deliberations” in Article 30.2. It could be suggested that, if the LCIA Rules intended to cover procedural communications, such as those at issue in P v Q, the drafters could have used a phrase like “all communications” or “all documents”. The Court did not consider this when relying on the wide scope of the Locabail principle such that all communications for the purposes of the process of deliberation and all documents brought into existence for such purpose are immune from disclosure to the parties.

The Court’s approach has policy advantages in light of the potential problems that could arise if courts or tribunals had to consider process versus substance arguments each time an application for disclosure was made. However, the approach is not wholly satisfactory given that the protection in Article 30.2 derives from the parties’ agreement rather than public policy considerations.

Moreover, the Court proceeded on the basis that the Locabail principle applies as much to arbitral tribunals as it does to judges. Judges perform an important public function and their jurisdiction derives in a very different way to that of an arbitral tribunal. Arbitrators “contract in” to the role and, whilst their function is quasi-judicial, the genesis of their jurisdiction is the parties’ agreement. It cannot be said that there is a complete overlap in the functions of a judge and an arbitrator. Judges are largely compelled to follow rigid civil procedure rules whereas arbitrators are expected to manage the arbitral process. In this sense, arbitrators have both an adjudicatory function as well as a procedural or administrative function. This, and the private nature of the arbitrator’s role, may justify differences in treatment between judges and arbitrators. For example, whilst section 29 of the Act gives an arbitrator immunity for anything done in the discharge of his function as arbitrator unless he or she is acting in bad faith, in many civil law jurisdictions, legislation relating to judicial liability does not apply to arbitrators who enjoy only qualified immunity (and in some jurisdictions, no immunity), and can be held liable for breaches of contract in relation to the discharge of their duties. It therefore did not necessarily need to follow that Locabail would apply to arbitral tribunals or apply so widely. Disclosure of the arbitrator’s documents would likely have probative value in the context of any claim against the arbitrator.

The principles adopted by the Court are largely to be welcomed as respecting the principle of party autonomy. However, the Court’s reasoning begs the question as to whether parties engaging in ad hoc arbitrations are at a disadvantage when it comes to such applications on the basis that there may be no party agreement on the confidentiality of deliberations. Although it is just one factor to be taken account by the Court when exercising is discretion – and would unlikely on its own change the outcome – more guidance would be welcome.

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Special Issue of the Journal of International Arbitration: Dispute Resolution in Asia

Wed, 2017-06-07 17:30

Maxi Scherer

VIEWS FROM ASIA

Chief Justice Sundaresh Menon, Adjudicator, Advocate, or Something in Between? Coming to Terms with the Role of the Party-appointed Arbitrator
Abstract: This article analyses the role of party-appointed arbitrators in international arbitration, providing a comprehensive discussion of the challenges posed to this institution by the growth of arbitration accompanying the expansion of global trade, and the author’s views on the justifications for the retention of the institution and the proper role that the party-appointed arbitrator should occupy. The article then turns to providing practical rules of engagement and best practices that may be adopted to minimize the risks that are often associated with the system of party appointments.

Neil Kaplan CBE QC SBS, Winter of Discontent
Abstract: This article discusses some of the major criticisms of arbitration today and considers whether these criticisms are justified and whether there are ways in which they can be dealt with effectively by more efficient procedures.

ARTICLES SECTION

Chiann Bao, Third Party Funding in Singapore and Hong Kong: The Next Chapter
Abstract: 2017 marks an important juncture for the arbitral community in Hong Kong and Singapore as both jurisdictions are legislating to make third party funding available for international arbitration. The road to reform was by no means smooth, as the author describes through a review of the policy and prior case law in this area. The author goes on to describe the new legislation and anticipated legal framework for third party funding for arbitration in both jurisdictions. This article will compare the regulatory framework and substantive protections provided in Singapore and Hong Kong with their common law ancestor in England and Wales, across a number of areas where the availability of third party funding has generated concerns and controversy. Given the pace at which litigation funding is expanding, the author anticipates further development of the concept in Asia.

Dr. Nicolas Wiegand, Can Asia Cut the Costs?
Abstract: In recent years, Asian arbitration hubs such as Hong Kong and Singapore are more and more frequently preferred over established venues in Europe or the United States. Apart from the geographical advantage and many other attributes, they are uniquely positioned to provide more cost-effective options for arbitration, which may prove to be one of the major attractions to parties using arbitration. The overall costs for arbitration proceedings still impose a deterring factor that drives away potential users of arbitration, including in booming Asia. To target this issue, this article identifies the main cost drivers and analyzes diverging approaches against the backdrop of the legal environment in Asia to make a proposal as to whether and how Asia can cut the costs.

Mel Andrew Schwing, The KLRCA I-Arbitration Rules. A Shari’a-Compliant Solution to the Problems with Islamic Finance Dispute Resolution in Singapore and Malaysia?
Abstract: In 2012, the Kuala Lumpur Regional Centre for Arbitration launched its i-Arbitration Rules in an attempt to attract more disputes from the multitrillion-dollar Islamic finance industry. The i-Arbitration Rules attempt to provide a Shari’a-compliant protocol for international commercial arbitration of those disputes. This article analyses whether they meet that objective by first exploring why there is a need for an alternative method of dispute resolution in Asia for Islamic finance disputes, then looking at the issues that arise when Shari’a matters are subject to international commercial arbitration, and finally considering whether the i-Arbitration Rules resolve those issues.

João Ribeiro and Stephanie Teh, The Time for a New Arbitration Law in China. Comparing the Arbitration Law in China with the UNCITRAL Model Law
Abstract: As China consolidates its position as one of the most important trade players in the international market, arbitration has become an attractive alternative to litigation in commercial disputes between Chinese companies and their foreign trade partners. The UNCITRAL Model Law on International Commercial Arbitration 1985, with amendments as adopted in 2006, represents the accepted international legislative standard for a modern arbitration law. In order to make China an attractive seat for international commercial arbitration and enhance the efficiency of the arbitration system for the benefit of commercial parties, whether Chinese or foreign, it is important for China to consider adopting the UNCITRAL Model Law. This article provides an overview of the UNCITRAL Model Law and its positive impact on the development of arbitration in several jurisdictions worldwide. Next, the benefits of legal reform are highlighted through a contrast between China’s current Arbitration Law and the UNCITRAL Model Law. Finally, this article lays out a procedural roadmap through which China’s legal framework may be amended to incorporate the UNCITRAL Model Law.

Dr. Fan Yang, “How Long Have You Got?” Towards a More Streamlined System for Enforcing Foreign Arbitral Awards in China
Abstract: Arbitration of China-related commercial disputes has become important because of the growth in trade and investment between China and the rest of the world. Lessons derived from a particular case of recognition and enforcement of a foreign arbitral award in China are of interest to those who are interested in the Chinese reception of arbitral awards. This article will examine the process of enforcing commercial awards in China under the New York Convention (1958). The study will use the concrete experience of the two Australian awards in the Castel v. TCL case to illustrate some deficiencies in the so-called Report System under the current Mainland Chinese law and judicial practice. It will be argued that this Report System needs to be reformed and streamlined. In particular, first, the lower courts should be required to engage the system promptly and without undue delay; secondly, a clear time limit and the consequence of exceeding that time limit should be explicitly provided for each of the stages in the system; and thirdly, the operation of the system should be transparent so that parties can track the progress of their cases once the Report System is engaged. Suggestions will also be made concerning steps which foreign award-holders should take to improve their chances of gaining swift enforcement in Mainland China.

Harshad Pathak and Pratyush Panjwani, Parallel Proceedings in Indian Arbitration Law: Invoking Lis Pendens
Abstract: Prior to the 2015 amendments, the power to appoint arbitrators under section 11 of the Arbitration and Conciliation Act of 1996 in India was vested with the Chief Justice of India, or a High Court. In 2005, the Supreme Court of India re-characterized it as a judicial function, thereby, departing from the position under the UNCITRAL Model Law. While the recent amendments have drastically altered the machinery for appointment of arbitrators, their retrospective application is dubious. As such, the re-characterization of the appointment proceedings as a judicial function still continues to raise concerns, one of which pertains to the jurisdictional overlap between the proceedings for appointment of arbitrators, and those before a judicial authority while deciding an application for seeking a reference to arbitration. Both judicial proceedings are presently permitted by section 8(3) of the 1996 Act to run parallel, even if they involve deciding an identical question concerning the validity of an arbitration agreement. In this article, the authors critique the Indian courts’ failure to identify and address this jurisdictional overlap, and the risks it poses. As a possible solution, the authors rely on the principle of lis pendens, or its common law equivalent of res sub judice, to suggest that where an application seeking reference to arbitration, and involving a question as to existence of a valid arbitration agreement, is pending before a judicial authority, a parallel petition for appointment of arbitrators, raising identical concerns, must not be decided.

NOTES AND COUNTRY REVIEWS
Mariel Dimsey, Hong Kong’s Year in Review: a Résumé of 2016 Arbitration Developments
John Bang and David MacArthur, Korean Arbitration Act Amended to Adopt Key Features of 2006 Model Law Amendments

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Taking a Close Look at Today’s Arbitral Process and Who Pays for It: A Report from Helsinki International Arbitration Day 2017 (I)

Wed, 2017-06-07 02:05

Heidi Heidi Merikalla-Teir and Mika Savola

The Finland Arbitration Institute (FAI)

Helsinki International Arbitration Day (HIAD) is an annual arbitration conference organized by the Arbitration Institute of the Finland Chamber of Commerce (FAI). It was held for the sixth time in Helsinki on 18 May 2017. This year, the event was organized with the support of the ICC International Court of Arbitration and the ICC Finland, and it attracted some 250 legal practitioners from approximately 20 countries to hear presentations and exchange views under the general heading “Taking a Close Look at Today’s Arbitral Process and Who Pays for It”. The topic of the conference was chosen mainly for two reasons: first, to shed light on the different practices applied by different arbitral institutions in the administration of their cases; and second, to discuss the various methods used, and potential best practices to be found, in the allocation of the costs of arbitration by international arbitral tribunals.

Recent Developments at the FAI and the ICC

The conference was opened by the welcoming remarks of the FAI Secretary General, Ms Heidi Merikalla-Teir, and the Executive Director of the ICC Finland, Mr Timo Vuori. They noted the growing international case load of the FAI, which shows that also non-Finnish users of arbitration have come to trust FAI proceedings as a reliable and efficient means to resolve cross-border commercial disputes. It is also evidence of the increasing popularity of Finland as a trustworthy venue for international arbitration, a trend that will probably continue as Finland stands to benefit from its status as a modern society with an advanced legal system and highly educated lawyers, coupled with a top ranking in the global anti-corruption indexes.

The floor was then given to Mr Alexis Mourre, President of the ICC International Court of Arbitration (ICC). In his keynote, Mr Mourre provided an overview of the challenges that international commercial arbitration faces today, and elaborated on the new policies that the ICC has implemented in response to these issues over the past couple of years. They include, among other things, the launch of expedited rules for small-value claims; the increase of transparency through reasoning of the ICC Court’s decisions and publication of arbitrators’ names; the emphasis put on the ethics in arbitration through guidance note on disclosure and rules on the conduct in arbitration; the increase in efficiency by shortening time-limits for the establishment of Terms of Reference and by introducing specific sanctions for delays; and finally, certain additional services, such as the ICC Secretariat’s role in the administration of so-called “sealed offers”.

In his comments on the keynote, the Chair of the FAI Board, Mr Mika Savola, discussed what some of the new ICC policies might mean from the viewpoint of the FAI. As an introductory remark, Mr Savola reminded that when drafting the current FAI Arbitration Rules which came into force in 2013, the ICC Arbitration Rules of 2012 served as a source of inspiration in many respects, especially in relation to the provisions governing multi-contract and multi-party arbitration. Further, Mr Savola praised two of the ICC’s recent policy changes as particularly innovative. First, the fact that the ICC Court is now willing to provide reasons for its decisions on challenge and replacement of arbitrators, prima facie jurisdiction and consolidation of arbitrations upon any party’s request is a groundbreaking move that resonates well with the users of international arbitration and should therefore be carefully considered also by other arbitral institutions. Second, Mr Savola gave credit to the ICC Secretariat for starting to administer “sealed offers” (as explained in para. 193 to 195 of the “Note to parties and arbitral tribunals on the conduct of the arbitration under the ICC Rules of Arbitration” dated 1 March 2017). In his view, this new practice will not only promote amicable settlements of disputes but also serve to reduce the overall costs of arbitration and give the parties and arbitral tribunals a valuable tool to increase the quality of cost decisions in ICC arbitrations. Consequently, other arbitration institutions too would be well-advised to consider adopting similar practices in proceedings governed by their respective rules.

Role of Arbitral Institutions in the Arbitral Process

Mr Savola’s remarks were followed by an interview and discussion on the topic of “How Does the ICC Arbitral Process Work in Practice” by and between Ms Inka Hanefeld, partner at Hanefeld Rechtsanwälte and Vice-President of the ICC Court, and Ms Maria Hauser-Morel, Counsel at the ICC Secretariat. The lively dialogue demonstrated the particularities of case administration during the lifespan of an ICC arbitration, as well as the level of monitoring and scrutiny exercised by the Secretariat and the Court at various stages of the ICC proceedings.

In the next session, the focus shifted to the comparison of case management at five well-known arbitration institutes. The topic was addressed by a prominent and geographically dispersed panel moderated by Ms Carita Wallgren-Lindholm, founding partner at Lindholm Wallgren Attorneys and member for Finland at the ICC Court, under the heading “How Active Is and Should the Role of an Arbitral Institution and its Secretariat be in the Arbitral Process Vis-à-Vis the Arbitral Tribunal and the Parties?”. The speakers included Ms Heidi Merikalla-Teir, Secretary General of the FAI (Finland); Mr Alexander Fessas, Managing Counsel and Secretary General elect of the ICC (France); Ms Annette Magnusson, Secretary General of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) (Sweden); Mr Philipp Habegger, partner at HABEGGER Arbitration and former President of the Arbitration Court of the Swiss Chambers’ Arbitration Institution (SCAI) (Switzerland); and Ms Ulrike Gantenberg, partner at Heuking Kühn Lüer Wojtek and member of the Board of Directors of German Institution of Arbitration (DIS) (Germany).

First, the panel discussed the varying intensity at which different arbitral institutions monitor the arbitral process under their rules, e.g., in areas such as the fixing of advances on costs, deciding on challenges to arbitrators, and scrutiny of arbitral awards. It was noted that the ICC appears to be most closely involved in all the practical aspects of arbitral proceedings (with the exception of issues related to value-added tax, see below), and it is the only institute that exercises full-fledged scrutiny of awards rendered under its auspices. By comparison, the panelists positioned the FAI and the SCC “in the middle of the scale” in terms of the intensity of monitoring, since both of them only request the arbitral tribunal to submit certain types of documents to the institute and do not require the tribunal to share with the Secretariat everything about the proceedings; however, in contrast to the SCC, the FAI Board also reviews each FAI award once it has been issued with a view to collecting information on the arbitrator performance that is crucial for potential future appointments. The DIS and the SCAI, in turn, were placed at the lower end of the scale with respect to their level of engagement in the arbitral process. The DIS, in particular, vests the arbitral tribunal with exceptionally broad powers e.g. in deciding on challenges raised against the arbitrator(s) and in fixing the arbitral tribunal’s own fees, although these features may be subject to change as a result of the DIS Rules revision process that is currently underway.

As to the “geographical coverage” of different arbitral institutions, the panelists noted that while a mere 20% of the cases administered by the SCAI included a Swiss party, there was at least one German party involved in more than 75% of the cases administered by the DIS. Also the FAI and the SCC were viewed mostly as regional players, though with an increasing number of international cases administered under their rules. The ICC was unanimously considered as the only truly global actor among the various arbitration institutes.

The panel also addressed the extent to which different institutes provide services in questions related to value-added tax (VAT) in connection with the fixing of the advances on costs and determining the final costs of the arbitration. It was noted that while the ICC does not strictly speaking administer VAT issues, it does provide a VAT fund account service, thereby offering parties the assurance of having a neutral depository keep the monies until they become payable to the arbitrator(s), and arbitrators the convenience of having an institution administer this financial aspect of the proceedings on their behalf. In contrast, both the FAI and the SCC go further in the administration of VAT issues. This is done already at the outset of the arbitration so that, when calculating advances on costs, the FAI and the SCC take into consideration any potential VAT that may ultimately have to be added to any arbitrator’s fee, and the likely amount of VAT will then be included in the advances on costs to be fixed by the institute. (to be continued)

The next Helsinki International Arbitration Day will be held on 24 May 2018 (more information will be available here). If you wish to look back at HIAD 2017, you can watch videos from the event here and photos here.

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The Parties’ Discretion to Terminate the Proceedings for the Annulment of an Arbitral Award: Recent Developments in Court Rulings

Tue, 2017-06-06 03:13

Emma Morales

Linklaters

On 4 April 2017, the Madrid High Court of Justice (“TSJM”), the court in Spain that handles appeals for the annulment of awards, issued two decisions – Case numbers 43/2016 and 63/2016 – in which it confirms the doctrine already advanced by means of a previous judgment rendered by the same court (see Judgment of the TSJM dated 28 February 2017 [JUR 2017/ 89938]). In brief, according to these three decisions, once the parties file an appeal for the annulment of an arbitral award for any of the reasons described in article 41.2 of the Spanish Arbitration Act (the “Arbitration Act”, Law 60/2003 dated 23 December 2003), they cannot waive or withdraw the appeal filed.

Art. 41:
1. The award may be annulled only if the party requesting the annulment claims and proves:
B) That he has not been duly notified of the appointment of an arbitrator or of arbitration proceedings or has not been able, for any other reason, to assert his rights.
E) That the arbitrators have resolved on matters not subject to arbitration.
F) That the award is contrary to public order.
2. The motives contained in paragraphs b), e) and f) of the previous section may be appraised by the court hearing the action for annulment ex officio or at the request of the public prosecutor in relation to the interests legally defended.

In both annulment proceedings (Case numbers 43/2016 and 63/2016), the parties requested termination because an out-of-court settlement had been reached during the pendency. In the first case, the request was based on article 19.2 of the Spanish Civil Procedural Law, Law 1/2000 dated 7 January 2000 (“LEC”) (transaction), while in the second it was based on Article 22.1 LEC (extra-procedural satisfaction).

The arguments given by the Court to reject the parties’ request to termite the proceeding for the annulment of an arbitral award could be summarized as follows: it concluded that the transaction, waiver or withdrawal (as putting into practice the principle that the parties set the scope of the case and the judge is limited by the relief sought) in proceedings for the annulment of an arbitral award that deals with a matter not subject to parties decision making (“indisponible”), cannot be accepted by the Court when the appeal is based on any of the reasons that the court could assess ex officio (i.e. those established in Article 41.2 Arbitration Act, and sections b), e) and f) of Article 41.1 referred to above).

Therefore, for the TSJM, only appeals for the annulment of an arbitral award based on the other grounds of Article 41.1 could be subject to the parties’ discretion (i.e. transaction, waiver, withdrawal, etc).

Art. 41:
1. The award may be annulled only if the party requesting the annulment claims and proves:
A) That the arbitration agreement does not exist or is not valid.
C) That the arbitrators have resolved on matters not subject to their decision.
D) That the designation of the arbitrators or the arbitration procedure has not respected the agreement between the parties, unless such agreement is contrary to an imperative regulation of this Law, or, in the absence of such agreement, that have not been adjusted to this law.

To support its decisions, the TSJM considered that, once an appeal for the annulment of an arbitral award has been filed based on the grounds referred to (Article 41.2 Arbitration Act, sections b), e) and f) of Article 41.1) the parties cannot decide on it, thus depriving the court of undeniable jurisdiction. The reason is that there are general interests that deserve protection, such as the preservation of public order and, in particular, the need for the arbitration procedure to be carried out in accordance with the most basic requirements of hearing and contradiction. General interests that, according to the TSJM, the court has a legally imposed duty to safeguard ex officio.1)To support its grounds, TSJM refers to previous judgements dated 17 September 2015 [PROV 2015, 242025]. 23 October 2015 [JUR 2015, 301853] and 2 November 2016 [AC 2016, 1939]. jQuery("#footnote_plugin_tooltip_6839_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6839_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The TSJM itself recognizes that this assessment clearly emphasizes judicial control over arbitration, although in this case the justification would lie in the fact that the ex officio examination proceeds on those grounds that go beyond the simple will of the parties and their decision-making powers. Thus, the TSJM recalls that the annulment of an arbitral award can only be agreed by the competent Court, and not by means of a transaction by the parties.

The rulings were subject to a dissenting vote by one of the judges, who considers that the principle that the parties limit the scope of the case and that the judge is limited by the relief sought, cannot be restricted except by legislation.

According to this dissenting opinion, the protection of general interests is guaranteed in any case through the mechanisms for rejection of the transaction established in section 2 of article 19 LEC, since the Court must analyse whether the transaction reached by the parties is illegal. This judge understands that to deny the parties the possibility to waive, withdraw or compromise in proceedings for the annulment of an award infringes the legal provisions of article 19 LEC, and could cause damage to any of the parties if a judgment was finally rendered contrary to what was agreed in good faith in the transaction. Finally, the dissenting opinion concludes by listing other negative consequences which, in this judge’s view, this ruling entails for: the parties, which do not obtain satisfaction for their interests; the Administration of Justice, which is forced to artificially enlarge the procedure without any effect; and for arbitration, by introducing a further obstacle in exercising action for the annulment of the award.

There are many other negative effects that could be raised. Nevertheless, we could not agree more with this dissenting opinion.

References   [ + ]

1. ↑ To support its grounds, TSJM refers to previous judgements dated 17 September 2015 [PROV 2015, 242025]. 23 October 2015 [JUR 2015, 301853] and 2 November 2016 [AC 2016, 1939]. 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:

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Use of Economics in International Arbitrations

Mon, 2017-06-05 05:30

Carlos Pabon-Agudelo

When one talks with practitioners about the use of economics in the context of International Arbitrations, the conversation basically focuses on damages determination and what methodologies to use to determine amount of harm. Very often the discussion becomes dry and both sides end up being frustrated.  No doubt discussions around discount rates or valuation methodologies, for instance, could become a dry topic between two different professionals if the discussion is not kept within the context of the issue at hand – the claim.  However, experts and counsels have forgotten that there is always an economic rationale behind any claim and methodological calculation. This rationale can be used to make a claim or counterclaim more robust. The use of economics in international arbitrations is not limited to damages. Economics is key to formulate a strong case before a tribunal either in commercial or investment state settings.

 

To grasp this idea in the context of international arbitrations either at the commercial or the investment-state level, one needs to go back to the basic instrument behind any commercial relationship – the contract.

 

Business and investment contracts are legal documents and at their core they represent a codification of a commercial relationship between parties.  Since a contract is a legal memorialization of a financial/economic arrangement, economic principles underpin those relationships.   So contracts are economic documents and are a key factor that allow market economies to work and do so efficiently. This means that contracts:

i) allow parties to rely on each other to abide by the terms and conditions as agreed in the contract;

ii) are paramount instruments that facilitate large and long-lived infrastructure projects because once an investment is committed, the investor is at risk for a substantial, long term and immobile investment and the other party for the reliability of the investors;

iii) are an economically efficient way to allocate a given set of risks, rewards and obligations when negotiated freely since the terms and conditions have been captured in a voluntary and mutually beneficial agreement. If that balance is upset, either because one of the parties sees an opportunity to maximize its gain or there is an event that disrupts the anticipated gain for one or both parties, then economic efficiency is lost.

 

Since economic principles underlie the contracting structure in either the basic agreement or any further amendments, the use of economics to interpret contracts is indispensable. Such economic interpretation must reflect the commercial and economic objectives and expectations of the parties when the contract was signed. In the context of international disputes, this means to analyze whether a claim, for instance, of contract breach or infeasibility is inconsistent with the initial commercial and economic principles explicitly or effectively agreed to by the parties.  In addition, it means checking whether the balance of risks and rewards inherent in the contract has been maintained or has been altered, and the economic repercussions of any possible modification by the arbitrators.

 

So, economics is a fundamental input for counsel because it helps not only to determine damages, but also to understand and assess the principles surrounding a commercial relationship. By using economics as a tool, practitioners can formulate a well-structured case from the beginning; not limiting themselves to the breach of legal clauses but more importantly assessing the state of a commercial relationship and how it has been affected by an event or how it might be altered by an award.

 

The following war stories illustrate how the use of economics in the context of international arbitrations complements and supports the legal analysis and informs tribunals. I was a consulting expert in those cases.

 

The first story refers to a request for contract modification. Claimant’s integrated gas/electricity project consisted of the monetization of fuel reserves by generating and transmitting the commodity to a market. Claimant argued that due to changes in market conditions of its commodity, contract royalties should be reduced. It also claimed that it was not treated fairly and that one of its integrated activates had been harmed due to paying high royalties.

 

The economic and commercial analysis undertaken brought to light several key facts:

i) the failure to link a contract modification request with the plain language terms in the contract;

ii) the development of unsupported market arguments to justify the renegotiation of the contract that were not in line with the reference markets agreed initially by the parties;

iii) the likely unbalancing of the risks and rewards established in the contract since the counterparty was not receiving any benefits from the proposed contract changes;

iv) the development of unfairness arguments that were not a precondition for contract reform; and

v) the flawed argument of contract infeasibility. Essentially, economic analysis showed that the claim had no valid basis and that any contract modification should only be based on the terms of the contract as agreed by both parties since there was no economic support for contract infeasibility.

 

The second story refers to a power distribution concessionaire in the South Asian market. Claimant argued that a “comfort letter” committed the international investor to fund power costs owed to an energy supplier. The economic analysis undertaken in this case showed several facts:

i) the misunderstanding and misapplication by government authorities of the fundamentals of a power sector reform, e.g. economic efficiency, competition, attraction of private investment and the opportunity to earn an adequate return, etc.;

ii) the failure of the government and regulatory agency to comply with its obligations, e.g. collection enforcement, payment of due bills, power theft reduction, etc.; and

iii) the misrepresentation that funding operating losses through equity contributions was a common business practice when the holding company had been structured to shield itself from those practices.  Effectively, by using economic principles of utility regulation and market restructuring, it was noted to the tribunal that the claim was baseless and that failure to comply with economic fundamentals and basic utility regulation principles had financially encumbered the investor.

 

Finally, the third story is a commercial arbitration case that involved the purchase of a power and desalinization plant. The claim referred to a breach of warranties when the plant became nonoperational after the asset was acquired. Economic analysis was used in the case to:

i) assess historical and projected future financial information;

ii) determine damages based on lost profits and direct cost approaches;

iii) assess damages based on reading of the case facts; and

iv) assess the indirect effects of lost revenue and long plant shutdowns such as the ability to make further investment, and the negative impact on commercial relationships with 3rd parties and off-takers. Again, by using economic principles the tribunal was informed about the economic and commercial implications that a breach of warranties had brought upon the investors and the need for compensation for the harm caused.

 

As the war stories above illustrate, economic analysis is a very important and valuable tool in the context of international disputes. It helps in understanding the underlying principles of a commercial relationship and assesses whether the allocation of responsibilities and rewards that originally was agreed by the parties has been affected.  It also helps to determine alternatives to rebalance a contract if such a balance has been altered.

 

The use of economic principles in the context of commercial or investment-state arbitrations is not different as one can infer from the examples above. The principles are the same. The difference basically just relies on the applicable legal framework and the specific heads of claim.  The expert and counsel need to work together to develop robust arguments within the applicable law to make stronger cases.

 

Finally, as the case stories show, economic analysis is a tool that not only informs tribunals, but also allows them to become aware of the tradeoffs between the economic benefits of providing relief via contact modification with the economic harm from disturbing the allocation of rights and obligations agreed by the parties in a contract.

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Women in Arbitration Are on the Rise

Sat, 2017-06-03 23:10

Victoria Pernt

Schoenherr

The numbers are in, and they are encouraging.

In the past decade, female arbitrator appointments have more than tripled.

Last year alone, arbitral institutions appointed a third more female arbitrators than the year before. Driving this trend is the Equal Representation in Arbitration Pledge (the “Pledge”), a global initiative addressing the gender imbalance in arbitration. Launched in May 2016, the Pledge quickly garnered support. Over 1,800 signatories committed to promoting the fair representation of women in international arbitration.

The Pledge has led to a considerable rise in female arbitrator appointments in a single year. According to research published by Lucy Greenwood to mark the one-year anniversary of the Pledge (featured by GAR), institutional appointments of female arbitrators increased by over a third, from about 12 % in 2015 to about 17 % in 2016.

The success of the Pledge has so far rested on the shoulders of the arbitral institutions.

Four institutions revealed how they put their commitments to the Pledge into practice. At the “Not in the Rules” seminar this May in Vienna, Stefano Azzali (Milan Chamber of Arbitration), Annette Magnusson (Arbitration Institute of the Stockholm Chamber of Commerce), Manfred Heider (Vienna International Arbitral Centre) and Francesca Mazza (Deutsche Institution für Schiedsgerichtsbarkeit, the “DIS”) gave participants a glimpse behind the curtains of institutional arbitrator appointments. The DIS, for example, has introduced an extra step in the appointment process in order to increase its female arbitrator appointments to 30 %: whenever a shortlist of four to five candidates does not include at least one woman, a separate shortlist is compiled only including female candidates. This extra step ensures that the DIS proactively searches for equally suitable female arbitrators.

But let’s not pat ourselves on the back just yet. It is still a long way to parity.

While arbitral institutions may proactively appoint female arbitrators, they are often not involved in the appointments. The ICC, for example, makes direct appointments in only 25 % of its cases. Notably, the ICC Rules provide for the appointment of presiding arbitrators by the institution. Under the DIS Rules, on the other hand, chairmen are appointed by the party-appointed arbitrators. This leaves little room for the DIS to appoint arbitrators itself, and it does so in only 10 % of the cases.

Most arbitrator appointments are therefore made by the parties – and those lag far behind the institutions in appointing women.

The reason may be that female arbitrators often lack visibility: Mirèze Philippe and Noor Dahim observed that “[t]alented female practitioners in dispute resolution are numerous”, yet women do not promote themselves in the same way men do. Ms Philippe notes that it is “everyone’s responsibility to promote each other”, and recommends search services for female arbitrators such as those offered by ArbitralWomen and the Pledge.

Law firms should provide more opportunities for women internally. This solution to the lack of visibility is put forward by White & Case partner Andrew de Lotbinière McDougall and attorney Fiona Candy, who believe in the snowball effect of good female counsel being appointed as arbitrators.

The Pledge also plays an important role in increasing the visibility of talented female lawyers: it reminds them to promote themselves, and it calls upon organisations, law firms, and arbitral institutions to actually offer them opportunities to do so. After all, even the most suitable female arbitrator candidate is unlikely to be appointed if unknown to the appointing party.

To truly achieve fair representation of women in arbitration, increasing their visibility is key. Only then may the Pledge achieve its “ultimate goal of full parity”.

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Antitrust Arbitration in Europe (Part II): The Scope and Effect of Arbitration Clauses (Microsoft Case)

Sat, 2017-06-03 08:20

Patricia Živković (Associate Editor)

My previous blog post on this topic dealt with two issues stemming from the juxtaposition between the current arbitration legal framework and necessary due process requirements which are specifically developed for antitrust damages proceedings: (1) the necessary regulation of complex arbitration specifically designed for antitrust damages matters, and (2) the need to address information asymmetry in antitrust arbitration proceedings (through the introduction of discovery). This post is, on the other hand, focused on the scope and effect of arbitration clauses in antitrust damages matters. The recent English High Court decision of 28 February 2017, (Microsoft Mobile OY (Ltd) v Sony Europe Limited et al., [2017] EWHC 374 (Ch)) (“Microsoft case”), depicts a development of a new transnational phenomenon – antitrust arbitration. In the Microsoft case, the High Court made the decision to stay the present court proceedings on antitrust damages claims commenced by Microsoft Mobile Oy (Ltd) (“Microsoft”), to give effect to an arbitration clause agreed upon between the parties.

Microsoft, a company established under the laws of Finland, is a manufacturer and distributor of mobile telephone handsets, which contain lithium ion batteries (“Li-ion Batteries”). Microsoft brought the proceedings in its own right and as assignee of the rights of Nokia and its relevant subsidiaries, and claimed damages for losses caused by allegedly anti-competitive conduct in relation to the sale to Nokia and/or to Microsoft Mobile of Li-ion Batteries (“Cartel”). The Cartel, according to Microsoft, was allegedly formed by four companies established in three different jurisdictions: Sony Europe Limited (England and Wales), Sony Corporation (Japan), and LG Chem Limited and Samsung SDI Co Limited (South Korea) (“Defendants”). Microsoft held Defendants or any of them jointly and severally liable for the loss and damage which manifested itself in higher prices paid by Nokia and/or Microsoft Mobile for Li-ion Batteries and additional costs, incurred by financing the overcharge suffered by them.

Microsoft contended the jurisdiction of the English High Court based on Article 4 of the Brussels I Regulation (Recast), as Sony Europe, the first defendant, had domicile in England and Wales. The other Defendants are companies domiciled in Japan and the Republic of Korea; hence, Microsoft needed permission to serve the claim out of the jurisdiction pursuant to Part 6.36 of the Civil Procedure Rules. This post is further focused on a jurisdictional objection made by Sony Europe, which sought a stay of the proceedings against it pursuant to section 9 of the Arbitration Act 1996 on the grounds that the dispute between Microsoft and Sony Europe is subject to a valid arbitration clause.

Sony Europe contended that an arbitration clause concluded between it and Nokia was unaffected by the assignment to Microsoft Mobile and continued to bind Microsoft Mobile. Interestingly, this was a common ground between the parties. However, they departed on whether the claims brought in these proceedings against Sony Europe fall within the scope of that arbitration clause.

This matter was already discussed to a certain extent in international practice. For example, Dutch and Finnish courts found, that broadly worded arbitration agreements do not encompass antitrust disputes.1)Case No. C/13/500953/HAZA 11-2560, CDC Project 13 SA v Akzo Nobel NV et al., District Court of Amsterdam (June 4, 2014) (upheld by the Amsterdam Court of Appeals); East West Trading BV v. United Technologies Corp. and Others, District Court of Central Netherlands (November 27, 2013); CDC Hydrogen Peroxide SA v Kemira Oyj, District Court in Helsinki, Finland (July 4, 2013). jQuery("#footnote_plugin_tooltip_6951_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6951_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In 2015, the CJEU decided on a similar matter upon the reference for a preliminary ruling from the Landgericht Dortmund (Germany) in the case Cartel Damages Claims Hydrogen Peroxide SA v Akzo Nobel NV et al., which involved the defendants from the same cartel. According to the CJEU,

“A jurisdiction clause can concern only disputes which have arisen or which may arise in connection with a particular legal relationship, which limits the scope of an agreement conferring jurisdiction solely to disputes which arise from the legal relationship in connection with which the agreement was entered into. […] In the light of that purpose, the referring court must, in particular, regard a clause which abstractly refers to all disputes arising from contractual relationships as not extending to a dispute relating to the tortious liability that one party allegedly incurred as a result of the other’s participation in an unlawful cartel.” (Paras 68 and 69 of the CJEU Judgement)

The CJEU limited its opinion solely to jurisdiction clauses, i.e. choice of law clauses, leaving “the effectiveness of broadly worded agreements to arbitrate in relation to follow-on damages claims […] subject to uncertainty in Europe“.

The English High Court’s decision in the Microsoft case proves this standpoint by stating the following:

“In conclusion, whilst I accept that it is possible for the provisions of EU law to permit a court to sideline or declare ineffective an arbitration clause, there is nothing in the decision of the Court in CDC to mandate such a course. […] I appreciate that the Court did not consider arbitration clauses specifically. However, that fact cannot disguise the basic truth that the Court’s approach to the risk of “fragmentation of claims” was fundamentally different to that of the Advocate General, and involved a wholesale rejection of his approach. I can see nothing in the decision of the Court to require me to displace the effect of the arbitration clause as something inimical to EU law. Accordingly, I reject Microsoft Mobile’s contention that the arbitration clause should be set aside or disregarded on the grounds of EU law.” (Para. 81 of the English High Court’s decision)

As mentioned in my previous post, collective redress plays an important role in private antitrust damages actions, as antitrust damages proceedings involve multiple claimants on one side and (possibly) multiple respondents (competition law infringers) on the other side. It is visible from the above citation that the High Court was aware that referring Microsoft to arbitration would lead to the fragmentation of claims as the claims against Sony Europe would need to be submitted in arbitration, without the joinder of other parties, and Microsoft would lose its anchor defendant in England and Wales. However, the question before the Court was, therefore, whether the lack of collective redress within arbitration render the arbitration clause ineffective or inoperable. According to the English High Court, the answer was clearly “no”.

As to the relation between contractual and tort claims, which were explicitly distinguished by the CJEU in regards to jurisdiction clauses, the English High Court held that:

“[…] the mere fact that a claim in contract has not been pleaded is, to my mind, irrelevant. Were the manner in which a case was actually pleaded to matter, instead of how a case could have been pleaded, it would be easy for a claimant to circumvent the scope of an arbitration or jurisdiction clause by selectively pleading or not pleading certain causes of action. It would be an extraordinary outcome were a claimant successfully to be able to contend that, because a contractual claim had not been pleaded, a “parallel” claim in tort arising out of exactly the same facts and with a scope defined by that contract fell outside the scope of such a provision. The proposition only has to be stated to be rejected.” (Para. 72(ii) of the English High Court’s decision)

Besides posing this argument, which aimed at the prevention of abuse through the construction of claims, the High Court also found the connection between contractual and tort claims in this case to be considerable because since, for example and among other reasons, the extent to which the negotiated price was above the “good faith” price will inevitably involve an examination of the dealings between the defendant and the various other cartelists. Consequently, the English Court found the antitrust damages claims against Sony Europe to fall under the arbitration clause and stayed the court proceedings against Sony Europe.

The High Court’s decision is a detailed and interesting read which brings a new stance within the EU on the matters discussed within. As such, it cannot be covered in its entirety in this post. However, from what was mentioned here, a several conclusions for the arbitration community can be made. Firstly, the position of EU national courts as to the enforcement of arbitration clauses in cases of antitrust damages claims is not yet uniform. Clear opposite stances on these issues in different jurisdictions can influence the choice of an anchor defendant, depending on a desired jurisdictional result. More importantly, the arbitration community should figure out as soon as possible how to deal with those claims that will be referred to arbitration, just as they were in the Microsoft case. Whereas an arbitration clause may perfectly well stand at the beginning of arbitration, this does not answer the question whether due process rights of a claimant seeking antitrust damages will be adequately protected within arbitration proceedings. In other words, the enforcement of arbitration agreements does not guarantee an enforceable arbitral award, and this may eventually result with a non-suitability of arbitration for such claims.

References   [ + ]

1. ↑ Case No. C/13/500953/HAZA 11-2560, CDC Project 13 SA v Akzo Nobel NV et al., District Court of Amsterdam (June 4, 2014) (upheld by the Amsterdam Court of Appeals); East West Trading BV v. United Technologies Corp. and Others, District Court of Central Netherlands (November 27, 2013); CDC Hydrogen Peroxide SA v Kemira Oyj, District Court in Helsinki, Finland (July 4, 2013). 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:

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Hong Kong Court of Appeal Affirms that the Choice of Remedies Doctrine Does Not Offend Principle of Good Faith under the New York Convention

Thu, 2017-06-01 19:19

Nicholas Poon

YSIAC

Introduction

The dispute over the enforcement of an arbitration award (“Award”) between the Astro and Lippo groups of companies has been fought out in numerous jurisdictions, notably Singapore and Hong Kong. When Astro sought to enforce the Award it had obtained against Lippo in Singapore, Lippo resisted on the ground that the tribunal (“Tribunal”) lacked jurisdiction as it had improperly joined some of the parties to the arbitration (“Arbitration”). Astro contended that Lippo may not raise this objection at the enforcement stage as Lippo had elected not to avail itself of its right under Article 16(3) of the Model Law to challenge the Tribunal’s preliminary ruling that it had jurisdiction.

Decisions in Singapore and Hong Kong

The Singapore Court of Appeal (“SGCA”) disagreed with Astro, holding that Lippo was not so precluded because the Model Law gave parties the choice to elect between active and passive remedies against an award. Accordingly, Lippo may still enforce its passive remedy to resist enforcement, despite not having availed itself of the active remedies in Article 16(3) or Article 34. On the merits of the jurisdictional objection, the SGCA agreed with Lippo that the Tribunal had improperly joined several of the parties to the Arbitration. But that was not the end.

Astro had taken out parallel proceedings in Hong Kong to enforce the Award which Lippo did not resist initially. It was only after enforcement orders were granted and judgment entered against Lippo that Lippo sought an extension of time to set aside the same.

The Hong Kong High Court (“HKHC”), which heard the matter after the SGCA had rendered its judgment, (a) declined to extend time for setting aside the enforcement orders and judgment, and further (b) held that Lippo was precluded from resisting enforcement as its conduct constitutes a breach of the good faith principle under the New York Convention (“Convention”).

The Hong Kong Court of Appeal (“HKCA”) agreed with the HKHC on the first issue, but not the second, which is the focus of this commentary.

HKCA’s decision

The HKCA affirmed the position under Hong Kong law that even if one of the grounds for resisting enforcement under the Convention is established, the court has a discretion to enforce the award “in circumstances where there has been [a] breach of the ‘good faith’ principle by the award debtor”. However, in its view, Lippo had not breached the good faith principle because:

(a) the Tribunal’s wrongful joinder of some of the parties was a “fundamental defect”. In this regard, it is “particularly relevant” to take into account the law of the seat of arbitration and ruling of the supervisory court (i.e. the SGCA’s decision);

(b) Lippo had not concealed its objection to the Tribunal’s jurisdiction, nor did Lippo fail to raise the same to the Tribunal and carried on with the Arbitration on the footing that it would raise the objection only at the enforcement stage;

(c) as Lippo had expressly reserved its position as regards jurisdiction throughout, Astro did not proceed with the Arbitration in reliance on Lippo’s conduct;

(d) there is no general obligation on the part of an award debtor to “exhaust his remedies in the supervisory court before he could rely on a [Convention] ground to resist enforcement”; and

(e) the requirement of “good faith” under the Convention and the “choice of remedies” doctrine under the Model Law are not mutually exclusive but complementary.

Commentary

The HKCA’s decision represents another significant endorsement of the choice of remedies doctrine.

Practically, with the HKCA’s decision, the positions in Singapore and Hong Kong in relation to the raising of jurisdictional objections before the courts are now aligned. It should be noted, however, that the global treatment of choice of remedies is far from homogenous. There are other jurisdictions which have adopted a contrary approach. One such example is England, where section 73(2) of the Arbitration Act 1996 provides that a party which could have but did not challenge the tribunal’s ruling on jurisdiction by any available process of review or appeal or by challenging the award on jurisdiction, may not later object to that tribunal’s substantive jurisdiction on a ground which was the subject of that ruling.

On that note, it is understandable that some are disappointed that the HKCA did not disapprove of the choice of remedies doctrine as anti-arbitration. Such disappointment should not be overstated.

First, even if an award debtor succeeds in resisting enforcement in one jurisdiction (as opposed to setting aside the award in the supervisory court), the award remains valid. It may still be enforced elsewhere, subject of course to the application of any estoppel.

Second, while there is a default expectation that awards should be enforceable, it bears emphasising that the grounds for refusing enforcement under the Convention exist to protect an award debtor from an unjustified award. Thus, the discretion to enforce an award notwithstanding that a ground for refusing enforcement is established should be exercised judiciously and hence sparingly. The idea that liberal enforcement of awards is somehow pro-arbitration is deeply flawed. Where an award is successfully challenged, it could be as much pro-arbitration as when a challenge is dismissed. The integrity of arbitration as a system cannot be tied to the outcome in particular cases. It is promoted only when the outcome is driven by the principled application of the rules which comprise and regulate the system.

Third, the risk that much time and resources spent in obtaining an award may be wasted should an award debtor succeed in resisting enforcement on the grounds of a jurisdictional objection which could have been decided earlier by the courts can be ameliorated in at least one of two ways.

The first way is for the putative award creditor to obtain curial blessing of the tribunal’s jurisdictional ruling under Article 16(3). Contrary to initial presumptions, Article 16(3) is party-blind. This is evidenced by the Model Law’s careful and deliberate choice of words of “any party may request” in Article 16(3), which may be contrasted with the use of the words “the challenging party” under Article 13(3) which deals with curial review of a challenge against an arbitrator.1)See also Simon Greenberg, “Direct Review of Arbitral Jurisdiction under the UNCITRAL Model Law on International Commercial Arbitration” in The UNCITRAL Model Law after Twenty-Five Years: Global Perspectives on International Commercial Arbitration (Frédéric Bachand and Fabien Gélinas eds) (Juris, 2013) at pp. 64–65. jQuery("#footnote_plugin_tooltip_7141_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7141_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The use of the words “decide the matter” further adverts to the Model Law’s intention not to restrict Article 16(3) to a specific type of application. By choosing not to avail itself of Article 16(3) to determine the tribunal’s jurisdictional ruling, the putative award creditor absorbs the risk that an enforcement court may subsequently disagree with the tribunal’s ruling. The proposition that it is the award debtor who is responsible for any wastage of time and resources should the final award be refused enforcement is therefore not entirely fair.

The second way is to request the tribunal to codify its jurisdictional ruling in an award, and thereafter enforce the same. There is a legitimate body of jurisprudence that a tribunal’s jurisdiction ruling can constitute an award and ought to be enforceable as such under the applicable national arbitration laws and the Convention.2)See, for e.g., Yves Derain and Eric A. Schwartz, A Guide fo the ICC Rules of Arbitration (Kluwer, 2nd Ed, 2005) at p. 108; Jean-François Poudret, Sébastien Besson, Comparative Law of International Arbitration (Thomson Sweet & Maxwell, 2nd Ed, 2007) at p. 402. See also Emirates Trading Agency LLC v Sociedade de Fomento Industrial Private Limited [2015] EWHC 1452 at [25]; Christian Mutual Insurance Co., v. Ace Bermuda Insurance Limited [2002] Bda L. R. 1. jQuery("#footnote_plugin_tooltip_7141_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7141_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Under this approach, the claimant can take the tribunal’s jurisdictional award and enforce it in the seat of arbitration, or any other jurisdiction in which it is likely to seek enforcement of a final award. Indeed, this possibility was directly referenced in the Commission Report on the Model Law.3)Report of the United Nations Commission on International Trade Law on the work of its eighteenth session (3-21 June 1985) A/40/17, at para. 159. jQuery("#footnote_plugin_tooltip_7141_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7141_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); If the respondent elects not to resist enforcement or is unsuccessful, and the jurisdictional award is enforced as a judgment, any subsequent attempt to challenge the final award on the same jurisdictional objections determined in the jurisdictional award is most likely to fail on res judicata grounds. This approach however remains to be tested fully in Singapore.4)Cf. International Research Corp PLC v Lufthansa Systems Asia Pacfici Pte Ltd [2014] 1 SLR 130 at [65] and its treatment of PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597. jQuery("#footnote_plugin_tooltip_7141_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7141_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In conclusion, the HKCA’s decision represents another victory for the choice of remedies doctrine. But the contours of the doctrine are only starting to take shape. It will likely take many more court and arbitration decisions to work out its optimum operative parameters.

References   [ + ]

1. ↑ See also Simon Greenberg, “Direct Review of Arbitral Jurisdiction under the UNCITRAL Model Law on International Commercial Arbitration” in The UNCITRAL Model Law after Twenty-Five Years: Global Perspectives on International Commercial Arbitration (Frédéric Bachand and Fabien Gélinas eds) (Juris, 2013) at pp. 64–65. 2. ↑ See, for e.g., Yves Derain and Eric A. Schwartz, A Guide fo the ICC Rules of Arbitration (Kluwer, 2nd Ed, 2005) at p. 108; Jean-François Poudret, Sébastien Besson, Comparative Law of International Arbitration (Thomson Sweet & Maxwell, 2nd Ed, 2007) at p. 402. See also Emirates Trading Agency LLC v Sociedade de Fomento Industrial Private Limited [2015] EWHC 1452 at [25]; Christian Mutual Insurance Co., v. Ace Bermuda Insurance Limited [2002] Bda L. R. 1. 3. ↑ Report of the United Nations Commission on International Trade Law on the work of its eighteenth session (3-21 June 1985) A/40/17, at para. 159. 4. ↑ Cf. International Research Corp PLC v Lufthansa Systems Asia Pacfici Pte Ltd [2014] 1 SLR 130 at [65] and its treatment of PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597. 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:

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May Digest – Kluwer Mediation Blog

Thu, 2017-06-01 03:30

Anna Howard

From making the case for understanding the mediator as co-creator, with the parties, of outcomes to exploring the argument that mediators need to be qualified lawyers, there has been much lively discussion on the blog this month. You will also find a post on the key findings of recent empirical research in New Zealand on users of commercial mediation. Scroll down for a brief summary of all the posts on the Mediation Blog in May.

In Brexit, Trump and the Nash Trap. A loss of trust, Greg Rooney applies the Nash Trap to the recent events of Brexit and the election of Donald Trump. Greg then considers the relevance of the Nash Trap to mediation.

In From Regulation to Resolution: Mediating Disputes in Regulated Sectors, Suzanne Rab explores the reasons why disputes in regulated sectors are suited to mediation. Suzanne then identifies which types of dispute in regulated sectors would be amenable to mediation and explains the relevance of sector insights for the effective conduct of mediations in these sectors.

In That Daunting First Mediation, Alex Azarov reflects on his first mediation and identifies lessons he learnt from that experience. Alex’s thoughtful guidance will be helpful to both those new to mediation and those with more experience.

In The Mediator’s Prayer 2, Joel Lee offers a sequel to A Mediator’s Prayer as he succinctly captures how a mediator will assist disputants during the mediation process.

In Confusions Between Good Mediation Skills and Legal Knowledge, Constantin Adi-Gavrila draws on a recent conversation with a lawyer to examine the view that mediators should be lawyers.

In Who Are We Helping? The Mediator As Co-Creator, Charlie Irvine considers worries about mediation’s approach to manifest injustice before making the case for understanding the mediator as co-creator, with the parties, of outcomes. Charlie argues that co-creation enhances the prospects for justice.

In Mediation Cultures Are Relative: The Example Of Mediator-Lawyers, Caucus and Joint Session, Greg Bond responds to Constantin Adi-Gavrila’s earlier post in which Constantin writes about a conversation with a friend who was convinced that all mediators need to be lawyers. Greg examines the argument that to mediate you need to be a qualified lawyer, have legal knowledge of the disputed matter, and be able to evaluate it from a legal perspective.

In Users Of Commercial Mediation In New Zealand: The First Empirical Study, Grant Morris outlines the key findings of his recent empirical research on the users of commercial mediation in New Zealand. Grant presented the findings of this research at the Auckland Global Pound Conference on 31 May 2017.

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Free Riders or Collective Actors?

Wed, 2017-05-31 00:48

Catherine A. Rogers

Arbitrator Intelligence

After several years in the planning, one year in the making, and many months in the testing, Arbitrator Intelligence (AI) will on 1 June 2017 launch its AI Questionnaire or “AIQ.” The formal unveiling will occur in Singapore at an event hosted by the Drew & Napier law firm, supported by the Singapore International Arbitration Center, and officiated by none other than AI Advisor Gary Born.

The idea behind the AIQ is relatively simple: to replicate the types of information parties currently obtain through ad hoc, person-to-person telephone inquiries. At the end of each case, AI will invite parties, with the help of arbitral institutions like SIAC, to provide objective information and professional assessments of arbitrators’ case management and decision making. When sufficient information is collected, it will be made available to the international arbitration community through “AI Reports.”

AI Reports will provide information about everything from arbitrator rulings on document production, to arbitrator questions during hearings, to their reasoning in arbitral awards, to their calculation of interest rates.

AI has already been identified as an important innovation that will benefit the arbitration community. James Hope called it a “welcome attempt to prevent such complacency on the part of some arbitrators” and the American Lawyer Magazine identified AI’s plans as an “immediate and market-friendly way to promote the diversity of decision-makers in all global arbitration.”

But there is one big question. And by “big,” I mean the entire success of the project hinges on this question: Will the international arbitration community pitch in to complete AIQs at the end of arbitrations? Despite the obvious and acknowledged benefits of data that will be collected through the AIQ, economists predict that projects like this, which require Collective Action, face an almost insurmountable Free Rider Problem.

Put simply, Collective Action requires that a large number of people work together (in our case, the by providing systematic responses to the AIQ at the end of arbitrations) to achieve some common objective (in our case, the production of sufficient collective data that AI Reports can be produced). But while each individual in the international arbitration community may share a common interest in accessing AI Reports, each also has a conflicting interest in hoarding their time or their insights.

Meanwhile, if individuals believe that the collective act will occur without their individual contributions, then we have what economists refer to as a Free Rider Problem. Economists predict that individuals will take advantage of being able to use a common resource or collective good (in our case, the AI Reports) without paying for it (in our case, by not contributing any AIQ responses necessary to create those reports).

Contrary to economists’ dire predictions, we believe that AI can inspire Collective Action and avoid the Free Rider Problem. What makes us so confident? We have at least five reasons.

1. People Crave Information about Arbitrators more than Chocolate

In a recent survey by the law firm Berwin Leighton Paisner on diversity in international arbitration found that 81% of respondents wanted to give feedback about arbitrators at the end of cases—that sounds like a pretty resounding expression of self-interest in acting in a way that also contributes to the collective good! In that same survey, 92% of respondents wanted more information about new and lesser-known arbitrators. Since when do 92% of people surveyed agree on anything?!?

By comparison, only 90% of people surveyed globally like chocolate. While taking the AIQ may not be as tasty as sinking your teeth into a rich chocolate treat, we do believe the overwhelming desire both to provide feedback and to have information about arbitrators will make completing AIQs a rewarding experience in itself.

2. International Arbitrationists Already Defy the Economists

The international arbitration community has a long and distinguished history of engaging in collective action for the benefit the community and despite conflicting individual self-interests. One of the most poignant, and relevant, examples is the adoption and widespread use of the IBA Guidelines on Conflicts of Interest in International Arbitration.

Arguably, individual arbitrators have a compelling self-interest in narrow, ill-defined grounds for disclosure and disqualification. Nevertheless, in 2004 a collection of some of the brightest and most prominent arbitration specialists developed the Guidelines. They have since become an essential point of reference for parties, lawyers, arbitrators, and institutions.

In 2014, individual vs. collective good was reexamined when the IBA considered “advance waivers,” which make it easier for arbitrators to avoid cumbersome disclosure obligations and sometimes frivolous potential challenges. But again in the 2014 revisions, the drafters of the IBA Guidelines chose the collective good and legitimacy of the system over the individual convenience of arbitrators, even if most of the drafters also serve as arbitrators.

Particularly in light of what has been some exacting critiques of international arbitrators’ lack of diversity and accountability, we believe the community will again rise to act collectively in supporting the AIQ.

3. AI Is Engineering Collective Action

AI is not leaving the potential for a Collective Action Problem to chance—we are actively engineering our way around it.

Virtually every survey faces the question of how to encourage responses. Several solutions from research into survey design and implementation are already incorporated into the AIQ.

For example, we kept response time for each Phase (there are 2 phases) to 15 minutes or less. We have also worked to make the AIQ easy to take—in Phase II, key data is prefilled and you can take either Phase of the AIQ on your mobile phone!

Meanwhile, research in the field indicates that people are more likely to respond to surveys when they understand the larger goals their responses will help support. AIQ will promote AI’s general mission of increasing fairness, transparency, accountability, and diversity in the arbitrator selection process. See Reason 2, above.

Research also indicates that people are more likely to respond to surveys when they commit in advance to taking the survey. Borrowing from the remarkable success of The Pledge in respect to gender diversity, AI is inviting individuals, law firms, and parties to support and commit to responding to the AIQ by signing the “AI Pact.” We will be inviting individuals, parties, and law firms, to sign on to Pact when it comes online in the coming days.

Finally, as it develops its AI Reports (anticipated to be available about 1 year from now), AI is also hoping to use proverbial carrots and sticks to encourage participation in the AIQ. AI is contemplating some means of rewarding responders to the AIQ with individual benefits (a free AI Report anyone?), or limiting access/charging more to those who use AI Reports in cases, but do not contribute AIQ responses at the end of those cases (Free Riders beware!).

4. Supporting the AIQ Is Good for Client Relations!

Parties and their in-house counsel have the most to gain from the AIQ and AI Reports. Parties always want greater confidence and predictability in arbitrator appointments. Systematically collected information and related data analytics will promote these goals, and potentially save money in the process.

Moreover, in-house and outside lawyers’ interests are not always perfectly aligned in selecting arbitrators. AI Reports will facilitate more meaningful collaboration and objective analysis in the arbitrator selection process.

At our recent previews of the AIQ (hosted by law firms like WilmerHale, King & Spalding, and the North American Branch of the Chartered Institute of Arbitrators), it was clear that parties and in-house counsel are acutely aware of the potential benefits, and want to see the international arbitration community pitch in to generate this collective resource. So, make your client(s) happy by filling out an AIQ!

5. AI Already Has Collective Support

If you remain unconvinced about AI’s ability to overcome the Collective Action Problem, take a look at our extraordinary Board of Advisors. These individuals represent a spectrum of interests and perspectives. Collectively, however, what they have in common is that they are all leading voices with rich professional experience. They all, also, are committed to improving international arbitration and support AI.

AI has also received a tremendous outpouring of support from other sectors in the international arbitration community. Perhaps most notably, young and diverse practitioners regularly contact us to express support and volunteer to help because they see AI as opening up a future for them. Information and technology are great forces for democratization and development of a robust meritocracy. New arbitrators see that these forces will help create greater opportunities for career development and they want to participate in those efforts.

* * *

After our June 1 launch in Singapore, AI will be continuing rollout of its AIQ in various other venues, from Hong Kong and Kuala Lumpur to Peru and Mexico. Watch for us! Sign up for The Pact! And let’s get those AIQ responses coming in!

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The CJEU’s Opinion on EU-SING FTA: More Confusion than Clarity

Tue, 2017-05-30 05:01

Nikos Lavranos

On his last day in office, former EU Trade Commissioner De Gucht sent the request for an opinion from the Court of Justice of the EU (CJEU) aiming to get a seal of approval from the CJEU that the EU-SING FTA and all future EU trade and investment treaties fall completely within the EU’s exclusive trade and FDI competence (Art. 207 TFEU). This move was born out of frustration with the Council and the Member States, which from the very beginning rejected that view and claimed that ISDS, investment protection and expropriation would fall within the shared/mixed competence or even in their exclusive competence.

In order to clarify this highly disputed issue once and for all, the CJEU was called upon to provide an answer and thereby fundamentally determine the future EU trade and investment policy, in particular with regard to CETA, EU-Japan FTA and all other ongoing and future trade and investment negotiations.

Since a full and detailed analysis is beyond the scope of this blog, I want to highlight the following points.

Non-direct foreign investments are mixed competence

One of the most notorious issues, which has been splitting from the very beginning the European Commission and European Parliament on the one hand, and the Council (i.e. the Member States) on the other hand has been the exact scope of ‘foreign direct investment’ as contained in Art. 207 TFEU.

The European Commission and European Parliament have always adopted a maximalist view by claiming that foreign direct investment covers all types of investments, including non-direct foreign investments, such as portfolio investments. In contrast, the Member States have always furiously defended the restrictive literal interpretation of the treaties, which would mean that all types of non-direct foreign investments fall outside the exclusive trade competence under Art. 207 TFEU.

The CJEU sided with the Council and Member States, which is a big blow to the European Commission.

However, the European Commission advanced further arguments, which for claiming exclusive competence over all types of foreign investments. For example, the European Commission was claiming that non-direct foreign investments may be considered as capital movement, which fall within the scope of Art. 63 TFEU, which is a mixed competence unless the EU has adopted secondary legislation that has significantly regulated this area. Since the EU has not adopted any secondary legislation regarding non-direct foreign investments, the CJEU found that this legal basis cannot be used for claiming EU exclusive competence.

The Court also rejected the final argument of the European Commission that the conclusion of international agreement may prove “necessary in order to achieve objectives of the EU Treaties” (Art. 216 TFEU).

As a result, non-direct foreign investments remain within the mixed competence.
This conclusion, however, does not solve the problem of where exactly the difference lays between direct and non-direct investments. This lack of clarity will certainly be the source for more court cases.

Dispute settlement provisions are also mixed competence

The other most contested competence issue concerns the dispute settlement provisions contained in the EU-SING FTA. The European Commission has always argued that ISDS is directly connected with foreign direct investments and therefore falls squarely within its exclusive competence, whereas the Council argued that ISDS is a mixed competence.

This is the first time that the Court is called upon to give its views on ISDS. The Court remained careful not to reveal its view on investment treaty arbitration and its (non)compatibility with EU law, instead it focused on the position of the national courts of the Member States. The Court argued that arbitration “removes disputes from the jurisdiction of the courts of the Member States, [which] cannot be of a purely ancillary nature and therefore cannot be established without the Member States’ consent”. Accordingly, ISDS provisions remain within the mixed competence.

Apart from the fact that this is a massive simplification of the arbitration process since domestic courts remain involved in the recognition, enforcement and annulment of arbitral awards, this argument echoes the main reason for rejecting international tribunals in its previous opinions, namely, the fact that such international courts operate outside the preliminary ruling mechanism between the CJEU and national courts. This could already be a hint of how the Court would judge the ICS provisions in CETA.

In addition to ISDS, the EU-SING FTA also contains state-state dispute settlement (SSDS) provisions.

The Court recalled that the EU has the power to submit itself to SSDS provisions when concluding an international agreement, as was the case with the WTO, but it avoids expressing a view whether SSDS is (in)compatible with EU law. It simply refers to its arguments made with regard to ISDS in order to conclude that SSDS is also of mixed nature.

Transparency is also mixed competence

Another issue which the Court considered were the various transparency obligations, which are scattered around the treaty. The Court opined that to the extent that substantive provisions fall within the mixed competence, the related transparency provisions, which must be considered to be of an “ancillary” nature, also fall within the mixed competence. This means that the transparency rules regarding ISDS, in particular the UNCITRAL Transparency Rules 2014, which are referred to in EUSFTA, must be considered to be mixed. Accordingly, the so-called ‘Mauritius Convention’ must be signed and ratified as a mixed agreement. That is something the European Commission certainly would have wanted to avoid.

The EU de jure replaced the Member States in their BITs with Singapore

One of the most surprising outcomes of this opinion relates to a rather technical but nonetheless very important point, namely, the question of what happens with the dozen or so existing BITs which the Member States have concluded with Singapore, many dating back 20 years or more.

The EU-SING FTA simply states in Article 9.10 that “upon the entry into force of the EU-SING FTA, all BITs between the Member States and Singapore, including the rights and obligations derived therefrom, shall cease to have effect and shall be replaced and superseded by this agreement.”

The Court argued that with the entry into force of the Lisbon Treaty in December 2009, which conferred to the EU the exclusive competence regarding foreign direct investments means that once the EU-SING FTA enters into force it replaces all Member States’ BITs – at least as far as foreign direct investment is concerned.

Neither the so-called grandfathering Regulation 1219/2012 nor Art. 351 TFEU, which protects the existence and performance of pre-EU accession agreements of the Member States, prevents the EU from replacing the Member States as regards their BITs – as far as foreign direct investments are concerned.

Accordingly, by virtue of obtaining exclusive competence, the EU can replace and subsequently in effect terminate all Member States’ BITs with Singapore to which the EU itself is not even a contracting party.

This is a very far-reaching and surprising conclusion, which seems difficult to reconcile with public international law and the law of treaties. In fact, this line of argument was explicitly – and for the right reasons – rejected by the Advocate General in her opinion.

As a justification for its argument, the Court referred to the single case of the old GATT 1947 in which the EEC, later EC, de facto replaced the Member States while never having been contracting party to the GATT 1947. However, de jure the Member States always remained contracting party to the GATT 1947 and remained legally bound by it. That was exactly also the position of the Advocate General. The GATT 1947 comparison is therefore clearly misleading.

In short, the Court seems to have equated the obtainment of exclusive competence by the EU, i.e., the power to act externally by exclusion of the Member States with the power to replace Member States in their international treaties, which seems to me to be of an entirely different order.

In any event, the Court’s approach creates legal uncertainty for all third states which have concluded BITs with EU Member States. They can never be sure anymore whether or not the EU may have ‘replaced’ the Member State as a contracting party simply by virtue of an internal shift of competence within the EU.

Also, from the perspective of international law, it seems impossible that an outside party (i.e. the EU) can simply intrude in international treaties which it is not even a party.

This solution further creates problems of delineation. Does this mean that the BITs with Singapore as far as they concern non-direct foreign investments are not replaced by the EU or that Member States retain the competence to modify or terminate them? Are we talking about a mixed competence to modify or terminate Member States’ BITs? What happens if a Member State, for example the UK, refuses to terminate its BIT with Singapore?

Finally, the Court did not discuss the issue of what happens with the so-called sunset clauses, contained in the Member States’ BITs with Singapore. These sunset clauses provide for continued protection and access to ISDS for all investments made before the termination of the BITs. Typically, sunset clauses have a duration of between 10-20 years. But what does this “partial replacement” by the EU of the Member States’ BITs mean for the application of those sunset clauses? Will they continue to be applicable to non-direct foreign investments?

It is unclear how this could work in practice.

In conclusion, the Court created more confusion than clarity.

One thing is clear: the European Commission did not obtain the full exclusive competence which it was hoping. At the same time the Council and the Member States maintain significant control over the future shape and form of EU trade and investment agreements. The question of course is whether mixity will be beneficial for the quick conclusion of such agreements, if they have to be ratified by all Member States. The Wallonian’s effort to hijack CETA suggests otherwise.

One alternative for the European Commission could be to avoid including mixed elements in FTAs in order to get them approved only by the Council and the European Parliament. However, it seems very unlikely that the Council, which is mandating the European Commission to negotiate FTA, would be ready to give up its control.

As far as ISDS and ICS and their (in)compatibility with EU law is concerned, that is still an open question, which the Court may provide an answer, if and when CETA is referred to it for an opinion – as was promised by the federal Belgian government to Wallonia. Until such time, the EU investment policy remains in limbo.

Disclaimer: This blogpost is partly based on my much more detailed and extensive analysis, which has been published by Borderlex.

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Puma v. Estudio 2000: Three Learned Lessons

Sun, 2017-05-28 21:00

José María de la Jara & Julio Olórtegui

Back in 2010, an arbitral tribunal composed by Luis Ramallo García (chairman), Miguel Temboury and Santiago Gastón ordered Puma to pay € 98 million to Estudio 2000 for the wrongful termination of their distribution contract.

Notably, Mr. Gastón – appointed by Puma – did not sign the award. It was later revealed that he was not given a chance to deliberate. Even though he had a discrepancy regarding the compensation to be awarded to Estudio 2000, surprisingly, his fellow arbitrators met without notifying him, changed the content of the previously agreed project and finished writing the award. The arbitrators even managed to sign it and notify the parties that same day.

On 15 February 2017, the Spanish Supreme Court declared the two arbitrators professionally liable for excluding Mr. Gastón from the deliberation procedure, and obliged them to pay Puma € 1’500,000.00 plus legal interests.

The decision of the Spanish Supreme Court constitutes an international landmark in relation to the deliberation process. In this post, we will open the arbitrator’s black box to dive into such process, explain its basic rules and suggest several tips to protect an award in difficult deliberations.

 

Lesson No. 1: consensus should not be the main goal

As Berger points out, deliberation is a joint effort to identify the relevant issues and exchange arguments, ideas and reflections that allow weighing the different options available to the arbitral tribunal.

Let’s be clear: deliberation is not tied to consensus.  As Sunstein and Hastie argue, deliberations should provide a group (e.g. arbitrators) as much information as possible.  Discussion should be encouraged. Better and more information allows the higher cost of arbitration to be translated into deeper analysis and a well sustained decision. A fair and accurate decision does not necessarily have to be unanimous.

High-level discussion, however, should not drive to anarchy. As Levy explains, the chairman is responsible for structuring, overseeing and coordinating the deliberation procedure.  Hence, he should act as a concertmaster to coordinate the exchange of ideas. Specifically, the chairman should:

  • Be an inquisitive and quiet leader. Social psychology shows that members of the group might remain silent not to contradict the opinion of those with a higher hierarchical position. Therefore, chairmen should promote the presentation of the ideas of their co- arbitrators, before issuing their opinion. This lowers the chances of an arbitrator failing to disclose relevant information only because it does not coincide with the chairman’s opinion.
  • Prime critical thinking. When the majority of the group has taken an argumentative line and the goal is to achieve consensus, the third arbitrator might be predisposed to withhold opposing information, in order to avoid reputational damage. Chairmen should try changing the rules of the game, by assigning priority to information sharing, allowing a deeper analysis even when the majority of the group has taken an initial position.
  • Assign roles. To incentive unbiased discussion, the chairman could assign arbitrators to prepare a specific position depending on their specialty. Then, the other members of the group could adopt the role of the devil’s advocate, assuming an opposing position. This technique allows the chairman to ensure that each arbitrator feels confident enough to shape her ideas and to disclose opposing opinions.

 

Lesson No. 2: treat deliberation with respect

The deliberative procedure is shaped by the principle of collegiality. Each of the steps of the deliberation should be interpreted in such a way as to guarantee the right of the arbitrators to have the opportunity to express their opinion on the construction of the award.

Collegiality was breached in the Puma Case. Two arbitrators held the final part of the deliberation while the third one was away in Madrid.

Such issue should have been fixed easily. As held in Sefri v. Komgrap, a phone call, an email or a videoconference would have been enough to give Mr. Gastón the opportunity to express his ideas in relation to the final draft of the award and protect the principle of collegiality.

The result was a lack of opportunity by one of the arbitrators to convey his opinion on the final draft of the award. As stated in Guangying Garment v. Eurasia, excluding an arbitrator from the deliberation process breaches the collegiality principle. Furthermore,  an arbitral award without deliberation breaches the defense and the right to be heard rights of the party that appointed the excluded arbitrator, (Société des télécommunications internationals du Cameroun v. SA France Télécom), and such decision does not qualify as an award (Goller v. Liberty Mutual Insurance).

Beyond the form, what really matters is that each arbitrator is given the opportunity to express his or her opinion. The formalities of the deliberative procedure shall be flexible, adapting themselves to the arbitrators and not the other way round.

In order for tribunals to respect such procedure, arbitrator practitioners might find the following tips useful:

  • Set time aside to meet your co-arbitrators. The amount of shared information when deliberating depends on the trust that exists between the arbitrators. Therefore, the chairman should arrange a meeting as soon as possible.
  • Begin deliberation as soon as possible. Deliberation should begin – gradually – upon the reception of the written submissions of both parties. In this regard, Rivkin recommends that the arbitrators could travel and meet for the procedural conference to conduct a preliminary discussion. However, preliminary discussions should be protected with disclaimers to avoid any impression of bias (“I would like to hear more about this at the hearing because maybe I could change my position”).
  • Reed Retreat. Arbitrators should meet one day before the hearings to discuss the case and how it should proceed. This allows the arbitrators to focus their attention and clear preliminary discussions out of the way.
  • Allow deliberation time during breaks and after the hearing. Approximately four breaks occur during each hearing day. Arbitrators should use these pauses to discuss the evidence they have just witnessed and to deepen their understanding of the case. Moreover, arbitrators should never set the return flight for the same day on which the hearings end. The best time to deliberate is immediately after the hearings are over. At that moment, the evidence presented will still be fresh in the memory of the arbitrators.
  • Start writing soon. Ideas should be shaped and put into paper as soon as the tribunal has allowed a discussion. This prevents opinions from getting forgotten and allows the award to be completed in advance. It is not advisable to delay issuing an award only for style editing.

 

Lesson No. 3: protect yourself against toxic arbitrators

Arguably, if two arbitrators knowingly exclude a third one from the deliberation process, they could qualify as “toxic arbitrators”.

As Bernandini points out, it is during the deliberations that these arbitrators show their true face. They reveal whether they are truly independent and impartial or whether they will block the participation of a member of the tribunal, disappear from the discussions, “plant” an annulment, or execute some other poisonous practice.

In such scenarios, arbitration practitioners might find these practices useful:

  • Register the deliberation. Leave a record of who attended, the content of the discussions, the agreements and pending points.

While this practice is critical, our research suggests that it is not the general rule. The result of a survey of more than 155 practitioners in Latin America showed that the arbitrators registered, on average, only 1.78 out of 10 deliberations. Moreover, 54.2% of the respondents replied that they had not recorded any of their last 10 deliberations.

  • Actively seek to participate in the deliberation. Send emails to your co-arbitrators. If they are not answered, consider sending formal communications, copying the arbitration center that administers the dispute. These could serve in an eventual annulment process to prove that you were excluded from the deliberations.
  • If you are being excluded, consider breaking the confidentiality of the deliberations. Depending on the specific case, one may choose to (i) send a formal communication to the co-arbitrators, (ii) notify the parties and the arbitration center that the principle of collegiality is being violated; or (iii) focus on generating evidence of such violation on the understanding that the toxic arbitrators will not change their position and that it may be more convenient for the parties to set the award aside. In any case, do not be afraid to express your opinion in a dissenting vote. Carefully consider attaching records of lack of deliberation and even evaluate your enrolment as a witness in the judicial process.

 

Final remarks

A tribunal is more than a mere sum of its parties. Through deliberation, they are capable to render an award with a deeper understanding of the dispute. Hence, excluding an arbitrator from the deliberation procedure betrays the will of the parties expressed in the arbitration agreement.

It is necessary to actively fight against this toxic practice. Write. Discuss. Attend conferences. Raise your voice and report toxic practices. After all, putting on a gas mask and pretending we are protected will only allow the virus to spread and generate more followers.

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The Dubai-DIFC Judicial Committee and DIFC Conduit Jurisdiction: A Sequel in Four Parts – The DIFC Courts under Siege (Part 2)

Sat, 2017-05-27 14:13

Gordon Blanke

In a blog earlier this year, I reported in some detail on the Dubai-DIFC Judicial Committee’s first decision in Daman v. Oger (see Cassation No. 1/2016 (JT) – Daman Real Capital Partners Company LLC v. Oger Dubai LLC, hearing of 19 December 2016, published by the JT in both English and Arabic). By way of reminder, the Dubai-DIFC Judicial Committee (or simply the “Judicial Tribunal” or “JT”) was established by the Ruler of Dubai by virtue of Decree No. (19) of 2016 in order to resolve conflicts of jurisdiction between the onshore Dubai and the offshore DIFC Courts (see http://kluwerarbitrationblog.com/2016/11/29/ruler-of-dubai-establishes-new-judicial-committee-to-resolve-conflicts-of-jurisdiction-between-the-on-and-offshore-dubai-courts-will-it-undermine-the-difc-courts-acquired-status-as-a-condui/). The regular reader of this Blog will remember that in particular the creeping jurisdiction of the DIFC Courts as a conduit jurisdiction for the enforcement of domestic arbitral awards rendered onshore for onward execution against assets of award debtors in mainland Dubai has given rise to concerns of jurisdictional conflict with the onshore Dubai Courts (see, e.g., ARB 003/2013 – Banyan Tree Corporate Pte Ltd v. Meydan Group LLC, ruling of the DIFC Court of First Instance of 2nd April 2015). Daman v. Oger concerned two parallel actions: (i) an application for annulment of a DIAC award rendered in mainland Dubai as the seat of the arbitration before the onshore Dubai Courts in their capacity as the curial courts and (ii) an application for the recognition and enforcement of that award before the DIFC Courts for onward execution in the offshore DIFC. The JT found in favour of the Dubai Courts’ proper jurisdiction and ordered the DIFC Courts to cease from entertaining the case. I concluded in my previous blog on the subject that the JT’s decision was likely based on a “first-seized” rule given that the application for annulment before the onshore Dubai Courts had been filed first and had hence preceded the application for recognition and enforcement before the offshore DIFC Courts. In that sense, apart from the absence of a desire to execute the subject DIAC award onshore, there was no risk that the findings of the JT in Daman v. Oger would pose a threat to the acquired status of the DIFC Courts to serve as a conduit jurisdiction for the recognition and enforcement of domestic non-DIFC awards for onward execution in mainland Dubai.

Since its decision in Daman v. Oger, the JT has dealt with two further arbitration-specific applications that are variations of the theme. In the first one (see Cassation No. 2/2016 (JT) – Dubai Water Front LLC v. Chenshan Liu, hearing of 19 December 2016, published by the JT in both English and Arabic), the JT adopted the same reasoning as it had done in Daman v. Oger, the only difference being that the subject award was intended for onward execution onshore. Like in Daman v. Oger, the DIFC Courts were invited to “cease from entertaining the case”. However, unlike in Daman v. Oger, an application for annulment was made to the Dubai Courts only after the award creditor had instigated proceedings for recognition and enforcement before the DIFC Courts. In other words, on this occasion, the JT appears to have ignored the “first-seized” rule, which gave rise to hope in Daman v. Oger that the DIFC Courts’ acquired status of a conduit jurisdiction remained unaffected by the decisions of the JT. Unsurprisingly, the three DIFC Court members of the JT (Chief Justice Michael Hwang, Omar Al Muhairi and Sir David Steel) did not hesitate to dissent. The DIFC Court members’ dissent is explained by Deputy Chief Justice Sir David Steel’s findings in the related enforcement proceedings before the DIFC Courts in the following terms:

“Nobody is challenging or could challenge that the Dubai Courts are the Court of the seat, but the suggestion that the Dubai International Financial Centre has no jurisdiction hits the buffers at the start namely that only the DIFC Courts have jurisdiction to consider the enforcement of the award in the DIFC. It has exclusive jurisdiction.  It is somewhat unfortunate that the proposition as regards the Arbitration Law is set out without reference to the decision in Banyan Tree […].” (Giacinta v. Gillam LLC [2016] DIFC ARB 004, para. 23)

In other words, Sir David relied on the acquired status of the DIFC Courts as a conduit jurisdiction in the terms defined in Banyan Tree and hence recognised the DIFC Courts’ competence to recognise and enforce a domestic non-DIFC award for onward execution onshore. Sir David further clarified that “[t]he Dubai Courts are the court of the seat and thus the Dubai Courts clearly have jurisdiction to determine an application to annul the award.” (Giacinta v. Gillam LLC [2016] DIFC ARB 004, para. 15) The DIFC Courts, in turn, “have exclusive jurisdiction in respect of the enforcement of awards within the DIFC: no question of their jurisdiction can arise.” (ibid.)

In the second case (see Cassation No. 3/2016 (JT) – Main Logistics Solutions LLC and other v. Wadi Woraya LLC and others, hearing of 19 December 2016, published by the JT in both English and Arabic), dealing with a DIFC enforcement action in relation to a foreign award rendered in London, the JT found that there was no conflict under Art. 4 of Decree No. (19) of 2016 as no application (for annulment of the subject award) had as yet been made to the onshore Dubai Courts. The JT therefore dismissed the case. In other words, the award debtor’s application before the JT was premature and could hence not be entertained. The JT found likewise in a later decision (see Cassation No. 5/2016 (JT) – Gulf Navigation Holding PJSC v. DNB Bank ASA, hearing of 19 December 2016, published by the JT in both English and Arabic) albeit in relation to the enforcement of a foreign judgment, clarifying that for the jurisdiction of the JT to be triggered, there had to be a positive (both courts seizing jurisdiction or issuing conflicting judgments) or a negative (both courts abandoning jurisdiction) conflict of jurisdiction.

The JT’s most recent decisions in the terms discussed above give reasoned concern that the DIFC Courts are under siege, evidently deprived of their own liberty to define their proper jurisdiction within the meaning of the Judicial Authority Law as amended (Dubai Law No. 12 of 2004 in respect of The Judicial Authority at Dubai International Financial Centre as amended (by Dubai Law No. 16 of 2011). More specifically, even though initially protected from hostile attacks on their acquired status as a conduit jurisdiction, the DIFC Courts are now under threat to lose that status, in particular in the light of the JT’s decision in Dubai Water Front. That said, the reasoning of the JT’s decisions is extremely sparse and there remains leeway for recent developments to fall back into line with what was believed to have been the status quo. It is to be hoped that future decisions on the subject will put onto a firm footing the JT’s approach to the division of jurisdiction between the onshore Dubai and the offshore DIFC Courts in the recognition and enforcement of non-DIFC awards. In this context, it is important to repeat that the formalisation of a first-seized rule by making it a firm part of the regime of mutual recognition under Art. 7 of the Judicial Authority Law as amended would assist the resolution of any pending and future jurisdictional conflicts between the two courts. As demonstrated on repeated occasion elsewhere (see my various previous blogs on the subject), the conduit jurisdiction status of the DIFC Courts complies with the UAE Constitution and is not contrary to UAE public policy; nor does it violate the jurisdictional gateways under Art. 5(A)(1) of the Judicial Authority Law as amended read together with Art.42(1) of the DIFC Arbitration Law.

In any event, given the inherent powers of the JT and the status of the JT’s decisions (JT decisions being non-appealable, see Art. 7, Decree No. (19) of 2016), little can presently be done other than … wait … for a cavalry to the rescue!

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Ecuadorian BITs’ Termination Revisited: Behind the Scenes

Thu, 2017-05-25 21:00

Javier Jaramillo, Pérez Bustamante & Ponce and Universidad San Francisco de Quito and Camilo Muriel-Bedoya

As in García-Marquez’s novel, the denunciation of the Ecuadorian bilateral investment treaties (“BITs”) represents a chronicle of a death foretold and the Ecuadorian National Assembly and Ecuador’s President have taken one of the final steps to terminate them. Along the way, the internal termination proceedings have been highly politicized, international investment arbitration has been demonized, and more questions than answers have arisen.

Notwithstanding the fact that states may sovereignly denunciate an international treaty and that BITs usually do regulate their termination, the reasons behind such a polemical decision need to be addressed and cautiously assessed. This post aims to review the steps and arguments that the Republic of Ecuador has embraced, their flaws, and the proposals of what is yet to come in the next years.

 

Termination proceedings

Since the 1960s, Ecuador has negotiated 30 BITs, 27 of which entered into force. Only one of them – executed with Egypt – terminated in 1995, and almost a decade ago, in 2008, Ecuador denunciated nine of these BITs: those executed with Uruguay, the Dominican Republic, Guatemala, El Salvador, Cuba, Nicaragua, Honduras, Paraguay and Romania (the last six will still be in force until 2018, due to their survival clauses).

Consequently, 17 BITs remained in force and a second denunciation round took place, which has its origins in 2008. The year 2008 is not a coincidence as Ecuador’s new Constitution was then enacted bringing with it a particular and controversial prohibition under its article 422, which provides:

Treaties or international instruments where the Ecuadorian State yields its sovereign jurisdiction to international arbitration, in contractual or commercial disputes, between the State and natural persons or legal entities cannot be entered into (…).

According to the Ecuadorian Constitution and local law, denunciation of certain international treaties requires the National Assembly’s approval and, additionally, a previous and binding opinion issued by the Constitutional Court. This process was followed and the Constitutional Court considered that all the BITs were incompatible with article 422, a flawed conclusion that would apparently legitimize the termination proceedings.

 

Fallacies and unconstitutionalities

The following fallacies have been constantly repeated during the denunciation proceedings, namely: (i) that the BITs are unconstitutional; (ii) that local law replaces the protections and guarantees of a BIT; and, (iii) that BITs imply more foreign investment.

The termination of the remaining 17 BITs has been mainly based on their so-called unconstitutionality. Unfortunately, the political arguments surpassed the constitutional ones and incompatibility was sought where there was none. The Ecuadorian Constitution forbids entering into treaties or international instruments that provide jurisdiction to international arbitration, though with an important specification: contractual or commercial disputes.

Thus, the Constitutional Court did not consider that international investment arbitration is a very different animal from international commercial or contractual arbitration. In general terms, the former addresses breaches of international law, particularly of international standards protected by a BIT (e.g. fair and equitable treatment, full protection and security, most-favored-nation treatment, etc.), while the latter focuses on contractual breaches of a commercial nature, which do not necessarily derive in breach of international law. Tribunals have historically pointed out these differences in several awards.

Regrettably, the National Assembly seconded this argument and a special committee in charge of analyzing the denunciations issued several reports, recommending the termination of the remaining 17 BITs entered into with Argentina, Bolivia, Canada, Chile, China, Finland, France, Germany, Italy, the Netherlands, Peru, Spain, Sweden, Switzerland, the United Kingdom, the United States, and Venezuela. Finally, on May 3, 2017, the National Assembly’s Plenary approved the termination of all these BITs, though under the undermined fallacies mentioned above.

The National Assembly replicated the Constitutional Court’s unconstitutionality argument without distinguishing that the Constitution does not forbid international investment arbitration. Likewise, the National Assembly considered that the 2008 Constitution represents a fundamental change of circumstances and, misunderstanding article 62 of the Vienna Convention on the Law of Treaties, it also justified the termination of the BITs under that provision.

As mentioned above, the 2008 Constitution does not forbid international investment arbitration; therefore it follows that the BITs are not unconstitutional and that the enactment of the new Constitution does not represent a fundamental change of circumstances. Accordingly, this argument, which tried to legitimize the denunciations, is far from being flawless or, ironically, constitutional.

Interestingly, the reports considered that the BITs do not allow partial termination (i.e. the dispute resolution articles) and, under article 44 of the Vienna Convention, recommended the termination of the entire treaty in each case. The Ecuadorian law, nonetheless, expressly establishes that termination, renegotiation or a constitutional amendment could be sought, but the latter options were not considered.

 

Substitutes, correlation and causation

Furthermore, the vicarious interpretation that local law would give enough guarantees to foreign investments (i.e. specifically, as noted by the National Assembly, under the Ecuadorian Organic Code of Production, Commerce and Investments) is undermined. Local law does not entirely replace the international obligations that a treaty protects, even if similar standards are conceived. Also, a neutral dispute resolution mechanism is of utmost importance for foreign investors and, when it comes to Ecuadorian courts, unfortunately they are not particularly known for their celerity, and neither for not being politicized or interventionist. Finally, it would be naive to conclude that BITs are necessarily equivalent to more foreign investment.

Correlation does not imply causation, and the mere existence of a BIT does not automatically attract foreign investment. The attractiveness of a country is not just determined by the treaties it has executed, and more complex variables play an important role. Of course, local laws are significant, but if there is no legal certainty, independent courts and political stability (to say the least), foreign investors would naturally be more attracted to other jurisdictions that fulfill these requirements. Conversely, the drastic termination of BITs, instead of improving and amending them through negotiations, does raise concerns within the international community and could give a wrong message to foreign investors.

 

What is next?

Although Ecuador’s fate is uncertain and investors are raising many questions, some lights can be followed and the future debates are apparent from the Government’s conduct.

Back in 2013, President Correa created the Commission for Comprehensive Audit of the Reciprocal Investment Treaties and the Investment International Arbitration System (CAITISA, for its initials in Spanish). CAITISA finally made public its report and conclusions on May 8, 2017. Among the general recommendations, CAITISA proposes to eliminate or limit certain BIT provisions, namely: to exclude dispute resolution clauses, to include rights to be claimed by host states, to give standing to the indigenous communities, and to establish performance standards for investors such as technology transfer obligations, capital flow regulations, and others.

However, CAITISA’s main recommendation focuses on sponsoring an Alternative Model BIT (“AMB”), suggesting a reinforced focus on human and labor rights, together with protections for the indigenous communities and nature. Also, the AMB proposes giving host states standing to bring claims under the BIT, enforcing sustainable development standards, and supports the creation of an international investment court.

Moreover, the AMB suggests including a specific and strict definition of “investment”, requiring two-year minimum duration and limited to direct property owned by the investor. Also, the AMB recommends limiting the “investor” definition by requiring potential investors to have active operations in the host state for at least two years, revealing ownership information, and providing the possibility of losing investor standing if fraud or corruption in the management of the investment is proven.

The AMB recommends to expressly and strictly define the fair and equitable treatment standard, to exclude umbrella and most-favored-nation clauses, to limit survival clauses by establishing fixed-term provisions requiring the States’ express intent for renewal, and to exclude protection for indirect expropriation. Interestingly, the AMB suggests replacing full protection and security clauses with provisions enforcing the international minimum standard of treatment of foreign investors.

 

Finish them (?)

Aside from legal misunderstandings, Ecuador’s decision to terminate its BITs seems to be odd and inconsistent with its current foreign policy, which seeks to attract foreign direct investment to palliate the economic crisis. In December 2015, Ecuador enacted a Public-Private Partnerships law seeking to attract foreign investment by providing tax incentives to upcoming strategic allies. The law, although with some flaws, recognizes investors’ right to activate dispute resolution clauses under the different BITs in case controversies relating to their investment arise. Additionally, on November 11 2016, Ecuador executed the Accession Protocol to the Multiparty Trade Agreement with the European Union and, on 1 January 2017, Ecuador joined the Trade Agreement.

Finally, on May 16, 2017, President Correa issued the executive decrees that order the termination of the BITs and the notification to the treaties’ state parties. Now, the new negotiations will depend upon President Correa’s recently elected successor. The terminations, however, may complicate this process, especially considering that several countries expressed their willingness to renegotiate the current BITs instead of terminating them. Hopefully, Ecuador’s next steps will contribute to reinforce the foreign investment regime and not the country’s isolation.

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Judicial Economy in Investor-State Disputes

Wed, 2017-05-24 23:30

David M. Bigge

The recent mention of “judicial economy” in the award in Eli Lilly and Company v. Government of Canada provides an opportunity to consider judicial economy in investor-state arbitration more generally. In its award of March 16, 2017, the Eli Lilly tribunal determined that certain judicial interpretations of Canada’s patent law did not violate the substantive requirements of NAFTA Chapter Eleven. The claimant acknowledged during the proceedings that it had to prove a “dramatic change” in Canadian patent law to prevail on its claims. The tribunal found in its award that the claimant had not demonstrated such “a fundamental or dramatic change” in Canadian patent law, and therefore failed to establish a violation of NAFTA Article 1105 even under the Claimant’s broad interpretation of that provision (¶¶ 387, 389).

As a result of this finding, the Eli Lilly tribunal stated that it did not have to decide whether a decision by a state’s judiciary must rise to the level of a denial of justice in order to constitute a violation of Article 1105’s minimum standard of treatment provision, and that “judicial economy dictates that it should not do so.” (¶ 220, emphasis added). This reliance on judicial economy did not, however, restrain the Tribunal from opining on the matter for six further paragraphs, concluding (contrary to Canada’s argument) that “a claimed breach of the customary international law standard of treatment requirement of NAFTA Article 1105(1) may be properly a basis for a claim under NAFTA Article 1105 notwithstanding that it is not cast in denial of justice terms.” (¶ 223). The tribunal further adopted the Glamis Gold test for Article 1105, and noted that the application of Glamis Gold to a state’s judicial decisions could occur only “in very exceptional circumstances, in which there is clear evidence of egregious and shocking conduct. . . .” (¶¶ 222, 224). As the Eli Lilly tribunal did not base its decision in the case on this analysis, the discussion of judicial acts under Article 1105 must be considered obiter dictum.

Application of Judicial Economy in Investor-State Cases

Although “judicial economy” could refer to many efficiencies of arbitration, including preliminary awards, bifurcation, or consolidation, the Eli Lilly tribunal referred to “judicial economy” as the basis for refusing to decide certain legal issues presented by the parties – particularly difficult or novel issues – where there is another basis of decision. Judicial economy as applied in Eli Lilly is a prominent feature of WTO dispute resolution: the Appellate Body has long held that WTO panels “need only address those claims which must be addressed in order to resolve the matter in issue in the dispute.” Indeed, this rule is routinely applied in the WTO context, and is even discussed in the WTO’s online training program.

Judicial economy is not widely-addressed in investor-state awards, under ICSID or otherwise, and its application in practice is inconsistent. This inconsistency may at least in part be the result of the different sets of rules used for various disputes. The UNCITRAL Rules (1976) – the governing rules for the Eli Lilly dispute – require in Rule 32(3) only that the tribunal state the reasons upon which the award was based; they do not promote or prohibit judicial economy in awards. The tribunal in Spence v. Costa Rica, a CAFTA case using the UNCITRAL Rules (1976), was therefore able to state in a 2016 interim award that, “[t]o the extent that any point has not been expressly addressed in this Award it is for reason of judicial economy and an appreciation that an assessment of the point in question was not necessary for purposes of the Tribunal’s decision rendered herein.” The Chevron v. Ecuador tribunal, also operating under the UNCITRAL Rules (1976), likewise assured the parties that “[t]he Tribunal has . . . considered the Parties’ submissions and claimed relief at length; and the omission here of any reference to any part of such cases should not be taken as signifying otherwise.” It should be noted, of course, that the UNCITRAL Rules permit a party to request an additional award if the tribunal fails to address an issue raised in the proceedings, but the tribunal may decline to make the additional award if it considers the request to be unjustified.

Article 48(3) of the ICSID Convention, in contrast, expressly requires that an “award shall deal with every question submitted to the Tribunal,” a requirement reflected in Rule 47(1)(i) of the ICSID Rules. These provisions limit a tribunal’s ability to apply judicial economy in the same manner as the WTO. This does not mean, however, that ICSID tribunals can never invoke some aspects of judicial economy to streamline their awards. As the annulment committee in M.C.I. Power Group L.C. v. Ecuador explained,

[t]he obligation in Article 48(3) of the Washington Convention to deal with every question applies to every argument which is relevant and in particular to arguments which might affect the outcome of the case. On the other hand, it would be unreasonable to require a tribunal to answer each and every argument which was made in connection with the issues that the tribunal has to decide . . . . [T]he tribunal must address all the parties’ “questions” . . . but is not required to comment on all arguments when they are of no relevance to the award.

The M.C.I. explanation of judicial economy has been applied by a number of subsequent ICSID tribunals, including in Suez v. Argentina and Gremcitel S.A. v. Peru, both holding that “[c]onsiderations of judicial economy suggest . . . that the Tribunal can dispense with dealing with arguments . . . which have no impact” on the outcome. The line between a “question” and an “argument” may be difficult to draw, but this delineation is required by the ICSID Convention as explained by the annulment committee in M.C.I. In any event, while some exercise of judicial economy is permitted, an ICSID tribunal is not permitted to rule on the narrowest issue and leave the rest of the presented questions unanswered.

Rejection of Judicial Economy

Some arbitrators have expressly rejected the notion of judicial economy in investor-state disputes. In a separate opinion in S.D. Myers v. Canada, one arbitrator wrote:

This opinion will address those issues necessary to dispose of this first stage of this case, and in doing so will attempt to provide reasoning that is sufficiently well elaborated as to be a potential source of assistance in the future. With respect to some of these issues, it would be possible for me to reach a particular conclusion on one legal basis, and avoid considering other possible bases for reaching the same conclusion. I have not always, however, taken this path of maximum avoidance. The parties to this case have devoted a great deal of thought, energy and expense to arguing a variety of legal points and have expressly indicated their desire for some broad guidance for the future. I would think it might be rather diseconomic from their point of view for me to now refrain from expressing the opinion I have formed on some important points that have been fully debated in these proceedings and which will likely be of considerable ongoing interest.

“Completeness” and “the parties have invested time and effort in briefing these issues” are perhaps the most oft-cited bases for addressing legal matters unnecessary for the resolution of the dispute. For example, in Allard v. Barbados, a case administered by the PCA under the UNCITRAL Rules (1976), the claimant alleged that his property was subject to environmental degradation due to various acts and omissions by the Respondent. In a 2016 award, the tribunal ruled that the claimant failed to establish, as a factual matter, that his property was degraded, but nonetheless “for the sake of completeness” went on to assess the alleged acts and omissions of the respondent (¶¶ 139-140). The tribunal concluded after this unnecessary analysis that “even if it had found that there was a degradation of the environment . . . it would not have been persuaded that such degradation was caused by any actions or inactions of Barbados,” and therefore that the claimant had failed to establish causation (¶ 166). Despite the fact that the claimant had proven neither loss nor causation, the tribunal went on to conduct a detailed analysis of the alleged breaches of the BIT at issue, “having regard to the exhaustive compilation of the Parties’ pleadings and the joinder of issue.” (¶ 167).

Likewise, in KT Asia Investment Group v. Kazakhstan, an ICSID case, the tribunal dismissed for lack of jurisdiction on the ground that no contribution had been made by the investor that could comprise an “investment.” Nonetheless, the tribunal explained, “[f]or the sake of completeness and because the Parties have briefed these matters, the Tribunal will now briefly examine the other elements of an investment, i.e. duration and risk.” The Tribunal in Nova Scotia Power v. Venezuela followed a similar approach.

Perhaps the most interesting reference to judicial economy appears in the 2010 award in Merrill & Ring v. Canada. In Merrill & Ring, Canada had presented a jurisdictional time-bar argument that was credible and could have disposed of the entire case. Instead of addressing that issue, the Tribunal launched into a long discussion of fair and equitable treatment under NAFTA Article 1105’s minimum standard of treatment provision, which the tribunal admitted was “[t]he most complex and difficult question brought to the Tribunal in this case. . . .” (¶182). The Merrill & Ring tribunal defined Article 1105 more expansively than previous NAFTA tribunals, basing its interpretation on the concept of “reasonableness” and suggesting that regulatory transparency, legal stability, and legitimate expectations may be requirements of customary international law. This Article 1105 analysis, which has been heavily criticized by a number of scholars, comprises 26 pages and 64 paragraphs, before the award reveals that the tribunal was unable to reach a conclusion on Canada’s liability in that case (¶ 246).

The Merrill & Ring tribunal then turned to damages and found that even assuming Canada was found liable, the claimant had not established its damages to the satisfaction of the tribunal. It was only after the lengthy exegesis on Article 1105 and the conclusion on damages that the tribunal turned to the far simpler and less controversial topic, Canada’s time-bar objection. Having found that the claimant had failed to establish damages for its Article 1105 claim, the tribunal asserted that it was applying judicial economy to refrain from ruling on the time-bar objection.

Merrill & Ring’s supposed reliance on judicial economy was a perversion of the concept; in expansively and controversially interpreting NAFTA Article 1105, instead of resting only on the simpler damages issue or addressing the time bar objection at all, the tribunal made the process less – not more – economical.

Considerations in the Application of Judicial Economy

Several considerations come into account when determining whether to apply judicial economy in drafting an award. Above all, it is the economy of judicial economy that should drive its use. If it would be more efficient to resolve a dispute simply and quickly, without having to dedicate time to analyze complicated or difficult legal and factual issues, that should be the route chosen by the tribunal in order to minimize the financial burden on the parties.

Arbitrators must also consider their obligation to address the issues presented by the parties. If, as in the ICSID system, a tribunal is obligated to resolve every question submitted to it, such an obligation limits the tribunal’s discretion to invoke judicial economy. These concerns may be what drive some tribunals to address arguments, unnecessary for the disposition of the award, for the sake of “completeness.” Depending on the specific rule involved, however, such “completeness” concerns might be addressed by summarizing the parties’ arguments while refusing, on the basis of judicial economy, to rule on those issues. This was the approach taken, for example, in InterTrade Holding v. Czech Republic, a PCA case under the UNCITRAL Rules (1976), in which the tribunal ruled first that it did not have jurisdiction, and proceeded “for the sake of completeness” to detail the parties’ merits arguments without ruling on them (¶ 205).

Some arbitrators, like the concurring arbitrator in S.D. Myers, may also believe that they have a responsibility to develop an area of law perceived to be unclear. Such an impulse should be resisted. The arbitrators’ only obligation is to the parties to the arbitration, who are paying for an efficient and effective resolution of their dispute. Arbitrators in investor-state disputes can point to no authority for a broader responsibility to develop international law for future application. Furthermore, investment treaties reflect two (or more) sovereign parties’ agreement. Arbitrators should be mindful to minimize potential conflict between states on treaty interpretation issues. Extrapolation on the agreed terms of a treaty, where such extrapolation is unnecessary to render an award, is therefore unwarranted.

Finally, it should be noted that, as in all things in arbitration, the parties to the dispute have a role to play in this procedural issue. Parties can agree in the arbitration agreement, in terms of reference, or in draft procedural orders submitted to the tribunal, that the arbitrators should (or should not) utilize judicial economy. Indeed, tribunals who refrain from exercising judicial economy often cite the fact that the parties went through the effort of submitting various arguments, suggesting that the parties expect the tribunal to rule on each of those points. If parties wish the tribunal to be more economical, they can make that wish known prior to the drafting of the award. In particular, parties can agree that tribunals should determine whether there are dispositive preliminary issues that can resolve the case without a full analysis of the merits. Obviously such a request could also include bifurcation of proceedings, although judicial economy could be invoked without bifurcation where the tribunal determines that bifurcation is inappropriate.

David M. Bigge is an attorney at the U.S. Department of State, currently serving as the U.S. Agent to the Iran-U.S. Claims Tribunal and Deputy Legal Counselor in Embassy The Hague. Prior to this position, Mr. Bigge served as an attorney-adviser on the State Department team that represents the United States in investor-state disputes, and previously represented private clients in commercial arbitration. The views expressed herein are the author’s personal views, and do not necessarily reflect the views of the U.S. government.

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International Arbitration In London From The Perspective Of A Civil Law Lawyer: Rome I Regulation And Contractual Penalties

Wed, 2017-05-24 14:37

Petr Bříza and Tomáš Hokr

YIAG

International arbitration takes a great pride in being flexible, adjustable and thus very responsive to the needs of the parties involved. Indeed, in terms of international arbitration imagination has virtually no limits – nothing really prevents parties to an arbitration agreement from agreeing on an arbitration pursuant to the UNCITRAL Arbitration Rules, in the Spanish language, administered by SIAC, seated in Dubai, with Australian governing law or to opt not to include some of the features into the “arbitration package”. Of course this example is largely exaggerated and often times what appears to be a little creative may be justified for good reasons. Nevertheless, the unusual content of such an arbitration package may not only be impractical but also unpredictable as to the legal consequences. Such an arbitration then requires extra attention and vigilance on the part of the legal counsels.

We have recently encountered an interesting arbitration in this respect. This London-seated LCIA arbitration (London seat was chosen by the parties in the arbitration clause) arose over a complex dispute involving a cross-border petroleum transaction. A petroleum trader, a Czech entity, had agreed to purchase a bulk of petroleum products from another, Russian entity, to be delivered over a certain period of time. The transaction fell into the time frame when economic sanctions were imposed upon Russia by the EU, as a result of which the transaction was not carried out. The main issue subject to the arbitration proceedings that followed was the extent of the alleged damages.

The contract did not contain an agreement on a key provision, namely the law applicable to the contract. We all know very well, how important the inclusion of a choice of law clause in the contract is, at least it avoids a lot of uncertainty down the road. There are however, situations, when the choice of law is missing and one has to resort to conflict of laws rules, especially if the parties are unable to agree on the applicable law.

The LCIA Rules as well as the other arbitration rules are of little help, stating in Article 22.3 that the Arbitral Tribunal shall apply the law which it considers appropriate. In ordinary circumstances, if the prerequisites for the application of the CISG are met, the Tribunal should apply the CISG. The damages provisions of the CISG are not, however, very detailed. Art. 7(2) of the CISG suggests that any matters which are not expressly settled in the CISG are to be settled in conformity with the general principles on which the CISG is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.

Here comes the tricky part. Within the EU, the conflict of law rules that determine the law applicable to contracts are harmonized by the Rome I Regulation. At the same time, Rome I excludes arbitration agreements from its scope. There is thus an ongoing discussion on whether arbitrators are under an obligation to apply the Rome I Regulation. On the one hand, it has been argued that the exclusion of the arbitration agreement in Rome I (Art. 1 para 2 e)) should be extended to arbitration itself since the Regulation is designed to complement Brussels I, which excludes arbitration from its scope. As a matter of fact, the recitals of Rome I refer only to national courts and are otherwise silent with regard to arbitral tribunals. This posture, therefore, comes to a conclusion that arbitrators are not required to apply Rome I and Rome I is thus only one set of conflict of laws rules among others to determine the most suitable applicable law in the absence of party choice. On the other hand, others argue that the term “court” used by Rome I must be broadly interpreted and it refers to any forum applying substantive law in adversary proceedings, arbitration included.

Actually, whether Rome I applies to a contract in arbitration proceedings may be a very relevant question, especially when a contract is concluded between non-EU parties. It is because Rome I has universal character (cf. Art. 2 of Rome I and no personal/territorial scope limitation in the text of Rome I, unlike Brussels I) which implies that Rome I is applicable without any additional link to the EU, be it the parties or the place of execution of the contract. Hence, the Regulation would even apply in litigation within the EU to a contract concluded and executed in a third country between two non-EU parties which, for any conceivable reason, come to a member state to litigate. If Rome I is to apply in arbitration in the way it does in the courts of member states, any agreement of the parties on the seat of arbitration within the EU would also determine the set of conflict of law rules and inherently also the governing law of the contract. Non-EU parties, by leaving the choice of law clause out of their contract (and thus relying on the private international law rules of either party’s state) but choosing an arbitral seat within the EU, for example, for enforcement purposes, may not always realize that by virtue of their agreement on a seat they build a kind of governing law clause into their contract (which may provide for different applicable law than the law determined by the private international law rules of either party’s state).

In our case, the arbitral tribunal not only has not contradicted the claimant’s position which has been to apply Rome I, the tribunal has even indicated that the application of Rome I is mandatory. This case is thus an interesting contribution towards the debate. However, it was not the only interesting issue arising in this arbitration.

When concluding a lengthy international contract, it is nearly impossible to anticipate all the legal consequences that may arise out of the contractual provisions in the later arbitral proceedings. What one should pay special attention to, however, are the provisions on damages. Despite the confidence brought by having some civil law system apply to the contract, appropriate considerations should be taken with regard to the composition of a tribunal. It is not uncommon in Europe that the tribunal consists of one English arbitrator, although one may encounter that situation in London more often than anywhere else. A civil law lawyer should note that English law has a particular interest in non-enforcement of the contractual penalties and, as our case demonstrates, English arbitrators are willing to (at least) consider application of the English rule against penalty clauses in contracts not only as a consequence of a choice of English law but also as a matter of public policy in cases, where another law is chosen.

It shall be noted that a London seat by itself in arbitration agreement will often not be sufficient to render a contractual penalty unenforceable. In fact, English doctrine limits applicability of the public policy exception to a very limited pool of cases. It has been applied to refuse to enforce a contract only under two circumstances: (i) if it would infringe fundamental English ideas of justice and morality (only in exceptional cases such as slavery) and (ii) if it tends to injure the public interest in a way which an English invalidating rule is designed to prevent. The latter then requires that the contract has relevant connections with England (other than the connection by reason of the forum where the dispute is held). Therefore, if one handles a dispute with non-English parties, where the facts are not in any way linked to England, there is ground for concern.

It is also appropriate to mention that not all contractual penalty clauses are unenforceable under English law. What is often labeled as a contractual penalty clause in civil law systems may include both a penalty clause, which is unenforceable, and a liquidated damages clause, which is permitted subject to certain conditions. In addition, recent development such as the English High Court’s judgement in Pencil Hill Limited v US Citta di Palermo S.p.A. suggests that contractual penalty-based awards may in fact be enforceable in England if moderated by an arbitral tribunal. The significance of such an approach is highlighted by the fact that moderation tools are inherent in most civil law systems.

Our case fell within the category of cases with no link to England. When drafting the contract, the parties simply chose London as a forum to arbitrate their contractual disputes. The arbitrator acknowledged that fact by ignoring the public policy exception and through enforcement of the contractual penalty under the Russian law.

As is common in international arbitration cases, what may have seemed at first glance like a pretty straightforward breach-of-contract/change-in-circumstances case involving the law of one country, revealed further reaching questions relating to the governing law of the contract and the enforcement of the contractual penalty. In the end, four different sets of conflict of law rules and three different legal systems were considered as potentially applicable to the contract. In contrast, and quite surprisingly, the breach-of-contract/change-in-circumstances has not been subject of greater controversy.

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New Rules of the Game for Arbitral Institutions in Russia: Two Recent Governmental Authorizations

Tue, 2017-05-23 03:10

Elena Burova

One of the most significant changes that the new Russian Arbitration Law introduced, which has been in force for past eight months, relates to the requirement of Governmental authorization for establishing an arbitral institution (more discussion on this can be found in some of previous KAB posts available here, here, here).

In particular, the Russian Arbitration Law now provides that only non-profit organizations can establish a permanent arbitral institution (PAI), i.e. a subdivision of a non-profit organization performing the functions of administering arbitration on a permanent basis, as opposed to ad hoc arbitration. Such non-profit organizations shall obtain authorization from the Russian Government that is granted based on the recommendation from the Council of Development of Arbitration by the Ministry of Justice (Council).

There are several requirements for an arbitral institution that need to be met, and which are thereby investigated and confirmed by the Council. These are, inter alia:

  • compliance of arbitration rules and recommended list of arbitrators with criteria set by the new Law,
  • reputation of a non-profit organization (this includes, in particular, the reputation of the organization’s founders, as well as ensuring that the activity is aimed at the promotion of arbitration and providing a high standard arbitration services).

It is also worth mentioning that the two oldest Russian arbitral institutions – the International Commercial Arbitration Court (ICAC or MKAS) and the Maritime Arbitration Commission (MAC) at the Russian Chamber of Commerce and Industry – are exempted from the requirement to apply for the governmental authorization.

Russian Government Recently Granted Its First Authorization

On May 3, 2017, the Government of the Russian Federation released its first decision, dated April 27, 2017, granting authorization to act as a permanent arbitral institution, which has significant implications for arbitration practice in the country. The Russian Government authorized two Moscow-based non-profit organizations to perform the functions of a PAI: the Russian Union of Industrialists and Entrepreneurs (RSPP) and the Institute of Modern Arbitration. The RSPP was established as a non-political organization shortly before the collapse of the USSR “to protect the interest of industry at the time of fast and large-scale transformations in the state’s politics and economy.

The Arbitration Center at the Institute of Modern Arbitration was established in August 2016, at the initiative of the Federal Bar of Attorneys of Russia and Saint-Petersburg International Legal Forum. One of the main goals of the Arbitration Center is to facilitate professional, efficient and impartial resolution of disputes of any complexity in strict compliance with the new Russian arbitration procedure. Its rules are available in English and Russian. The Arbitration Center is also actively involved in promoting arbitration in Russia via organizing and holding educational and practical conferences and seminars.

Practical Implications of Governmental Authorizations on Arbitral Proceedings

As the new Law presupposes that certain procedural features of arbitration are available exclusively in an arbitral proceeding administered by a PAI, obtaining governmental authorization implies considerable advantages of PAIs over ad hoc arbitration. Some of them are listed here:

Arbitration of Corporate Disputes

Only a PAI can administer corporate disputes that are now considered arbitrable, as a result of the arbitration reform. The new Law also requires that the PAI administers this type of arbitration according to special rules for corporate disputes. Some arbitral institutions have already developed and adopted arbitration rules for corporate disputes. For example, the ICAC has separate set of rules for corporate disputes, and the Arbitration Center at the Institute of Modern Arbitration has the rules for corporate disputes as a part of its 2017 Arbitration Rules (Chapter 8).

Waiver of the Right to Annul an Arbitral Award

Another change that the new Law implements is the parties’ option to exclude the possibility to annul an arbitral award before national courts. Before the reform, this was expressly allowed only in domestic arbitration. Now this option has become available in any arbitral proceedings (both domestic and international) administered by a PAI – the parties may conclude an express agreement regarding legal remedies available to the parties against an arbitral award.

Judicial Assistance of State Courts

Parties to arbitration can apply to state courts for judicial assistance in certain procedural issues, such as taking evidence. For example, courts may be asked to order the production of documents, as arbitrators often miss coercive power to do so. Only parties to arbitration administered by a PAI can make use of this mechanism, according to the new Law.

Concluding Remarks

Looking at this development from a general perspective, it is a huge step forward towards building a professional and efficient arbitration framework in Russia. Before the arbitration reform, the establishment of an arbitral institution in Russia was unrestricted, which led to abuses and fraudulent practices. For example, according to the statistics of the Moscow Commercial Court, only in Moscow there were almost 330 arbitral institutions registered. The new arbitration law imposed the authorization requirement to eliminate the opportunities for misuse of arbitration proceedings in so-called “pocket” arbitrations. These were institutional arbitrations involving corporations as parties, and these very same corporations were at the same time the founders of institutions administering the respective proceedings. Hence, the arbitral tribunals formed under those institutions often lacked independence and/or impartiality, and for that reason national courts raised the conflict of interests issues (e.g., LUKOIL-Energoseti case decided by the former Supreme Commercial Court).

While the authorization requirement is aimed at obviating those unfair business practices, there is still a certain risk that some parties may resort to ad hoc arbitration or nonreliable arbitration centers seated outside Russia to circumvent authorization. One of recent examples that illustrates this practice is the case of an arbitral tribunal deciding under the auspices of the Russian-Singapore Arbitration Court, whose award was not in the end recognized in Russia. The restrictions imposed on ad hoc arbitral proceedings, as compared with authorized institutional arbitration, intent to neutralize this.

Overall, the road is long and further effort is expected from arbitral institutions, but also from national courts and arbitration community in general. Hopefully, other Russian arbitral institutions will follow the lead of pioneer arbitration centers and continue to contribute to forming a comfortable and independent dispute resolution environment in the country.

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Overriding an Explicit Agreement on the Number of Arbitrators – One Step Too Far under the New ICC Expedited Procedure Rules?

Mon, 2017-05-22 03:46

Fabian Bonke

Expedited arbitration procedure, which allows procedural streamlining of arbitration proceedings, became widely accepted by arbitration institutions. The ICC followed this global trend by incorporating Expedited Procedure Rules into the ICC Rules which came into force on 1 March 2017 (see here).

The incorporation of expedited procedures is a response to the need to control the costs and length of arbitration proceedings, which have become a growing concern for arbitral institutions. In regards to the application of the Expedited Procedure Rules, the ICC opted for an automatic application of these rules to disputes with amounts not exceeding USD 2 Mio (Art. 30 (2) (a) ICC Rules in conjunction with Article 1 (2) Appendix VI). With this solution, the ICC Rules joined other institutional rules providing for the application of expedited procedure contingent on financial thresholds, such as the SIAC Rules, with the threshold of S$ 6,000,000 (Rule 5.1 lit. a) or the HKIAC Rules, with the threshold of HKD 25.000.000 (Art. 41.1 lit. a.).

Whether the new Expedited Procedure Rules will foster parties’ choice of the ICC Rules will depend on how successful these rules will be in streamlining arbitral proceedings. There are features which might obstruct such success – one being the power of the ICC Court to appoint a sole arbitrator when the Expedited Procedure Rules are applied. The issue lies in the fact that such an appointment in every case overrides parties’ agreement to the contrary.

The idea behind this concept is comprehensible: a proceeding involving a sole arbitrator is cheaper and may lead to the results much faster. It is, therefore, not surprising that institutional rules give preference to a sole arbitrator in expedited proceedings (e.g., Art. 41.2 HKIAC Rules).
Still, institutional rules vary as to how this preference is realized, especially regarding how this solution is to be reconciled with a conflicting arbitration agreement. Some arbitration rules give preference to an arbitration agreement providing for more than one arbitrator (e.g., the DIS Rules in Art. 3.1 DIS-Supplementary Rules for Expedited Proceedings 08 (SREP)). Other rules, such as, for example, the HKIAC Rules (Article 41.2(b)), empower an arbitral institution to invite the parties to agree on a sole arbitrator. In those cases, when the parties fail to agree to reduce the number of arbitrators, the parties’ agreement prevails over these institutional rules. Whereas the abovementioned rules preserve party autonomy, so far, only the SIAC Rules have allowed the arbitral institution to override the agreed number of arbitrators:

“[…] the case shall be referred to a sole arbitrator, unless the President determines otherwise;[…]”. (Rule 5.2 lit. (b))

Now, the new ICC Expedited Procedure Rules adopted a similar rule to the SIAC’s solution:

“The Court may, notwithstanding any contrary provision of the arbitration agreement, appoint a sole arbitrator.” (Article 2 of the Appendix VI)

This post examines the reasoning behind this Rule, and it outlines the consequences of the enforceability of an arbitral award rendered in the expedited proceedings.

Convincing Reasoning: Implied Consent?

The rationale behind the rule on institutional power to nominate a sole arbitrator by overriding an agreement to the contrary is based on the theory of implied consent: by agreeing on the application of institutional rules, the parties accepted all rules therein, including this particular rule which empowers the institution as well. The new ICC Rules emphasise:

“By agreeing to arbitration under the Rules, the parties agree that this Article 30 and the Expedited Procedure Rules set forth in Appendix VI […] shall take precedence over any contrary terms of the arbitration agreement.” (Art. 30 (1))

This corresponds to the reasoning of the Singapore High Court in AQZ v. ARA, which held that overriding the parties’ agreement to arbitrate before three arbitrators was consistent with party autonomy given that the parties had previously agreed on the SIAC Rules.

Is There Misinterpretation of the Parties’ Intention?

When assessing the power of the institution to nominate a sole arbitrator overriding a contrary agreement, one has to consider that the reconciliation of the parties’ agreement on the number of arbitrators and the institutional rules is a question of interpretation of the arbitration agreement1) BGH NJW 1986, 1436 (1437). jQuery("#footnote_plugin_tooltip_5478_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5478_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. The interpretation of an arbitration agreement is a matter of national law. The applicable national law, thus, determines whether an institution is entitled to override parties’ agreement as foreseen by the ICC Expedited Procedure Rules.

In this light, it seems questionable whether the implied consent accurately represents the intention of the parties. When the parties refer to arbitration rules which provide for an expedited procedure while expressly agreeing on the number of arbitrators, there is at least some reasonable doubt as to whether the former should prevail.

Namely, by expressly agreeing on the number of arbitrators, the parties demonstrate their intention to deviate from the otherwise applicable institutional rules. The priority clause in the ICC Expedited Procedure Rules is unlikely to rebut this interpretation in favour of the express agreement in all cases. In fact, one could argue that the existence of the contrary agreement indicates the parties’ ignorance vis-à-vis the priority rule. Therefore, courts might conclude that the parties agreed on a three-arbitrator panel and deviated from the ICC Expedited Procedure Rules.

Fortunately: No Dynamic Reference

The solution provided by the ICC Expedited Procedure Rules seems to be more in line with the parties’ intention when compared to the SIAC Rules, as interpreted by the Singapore High Court.

In the aforementioned case of AQZ v. ARA, the referenced SIAC Rules did not empower the SIAC President at the time of the conclusion of the arbitration agreement to nominate a sole arbitrator. The Court presumed that references to institutional rules are to be construed as references to those rules that may be applicable at the date of the commencement of the arbitration, as long as those rules contain mainly procedural provisions. This presumption could be displaced by the parties’ specific reference to the rules in force at the date of the arbitration agreement. In AQZ v. ARA, such a reference, however, was not included in the agreement, and the court, therefore, applied the Rules applicable at the time of the commencement of the proceedings.

The presumptive nature of such a dynamic reference is widely accepted also in other jurisdictions, such as Germany. The German Federal Supreme Court convincingly justified its acceptance of the dynamic reference with the parties’ expectation that institutional rules were to be continuously adapted to commercial or legal developments2)BGH NJW-RR 1986, 1059, 1060. jQuery("#footnote_plugin_tooltip_5478_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5478_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. A rebuttal of the presumption is accepted if contrary intention by the parties can be identified. It seems, however, that the Singapore High Court should have assumed such a rebuttal in the abovementioned case. According to the arbitration agreement in this case “[…] the dispute shall be finally settled by arbitration […] in accordance with the rules of conciliation and arbitration of the Singapore International Arbitration Centre (SIAC) by three arbitrators […]”. One could argue that this agreement on the number of arbitrators illustrates the parties’ intention to rebut the presumption on dynamic reference, at least in the part relevant for expedited procedure, which was not even provided for at the time of the conclusion of the agreement. Hence, it seems too narrow to assume a rebuttal only if the parties specified a particular version of the SIAC Rules.

Under the new ICC Rules, such a conflict between the parties’ intention and the priority rule is fortunately avoided by excluding its applicability to arbitration agreements concluded before the new ICC Rules came into force (Art. 30 (3) (a) ICC-Rules 2017).

Conclusion

When the abovementioned concerns are taken into account, it seems that the recent ICC reform took a step too far when empowering the ICC Court to override a contrary agreement between the parties in expedited proceedings. Disregarding parties’ autonomy, which is a well-known and recognized core of arbitration, poses a risk to the enforceability of an award. A losing party might try to set aside or resist enforceability of an award arguing that the composition of the arbitral tribunal was not in accordance with the party agreement (Art. 34 (2) (a) (iv) of the UNCITRAL Model Law; Art. 35 and 36 (1) (a) (iv) UNCITRAL Model Law; Article V 1. (d) NY Convention). In the end, this uncertainty could prolong arbitration proceedings as much as enforcement proceedings, and paradoxically this could deteriorate efficiency, which is exactly a result contrary to the one for which expedited procedures are established for.

As many other issues raised in the practice, this one as well boils down to advising parties to draft carefully: For the parties who aim for fast-track proceedings, it is recommendable to avoid an agreement on more than one arbitrator (until the legal uncertainty pertaining to this issue is resolved by national courts), whereas the parties with a strong preference for a panel of more than one arbitrator should explicitly opt-out from the application of the ICC Expedited Procedure Rules in their agreement.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Hogan Lovells, its affiliates, or its employees.

References   [ + ]

1. ↑ BGH NJW 1986, 1436 (1437). 2. ↑ BGH NJW-RR 1986, 1059, 1060. 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:

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Celebrating the Semicentennial: New Proposed Changes to the ICISD Arbitration Rules

Sat, 2017-05-20 23:46

Crina Baltag (Associate Editor)

In October 2016, the ICSID advised the Member States of the ICISD Convention that it was beginning the fourth amendment process since the enactment of the definitive ICSID Arbitration Rules in 1967. The first amendment to the Rules took place in 1984 and mainly referred to the possibility to resort to national courts for provisional measures, if so agreed by the parties in the instrument recording their consent, and to the publication of excerpts of ICSID arbitral awards (concerning the ‘legal rules applied by the Tribunal’). The amendments of 2003 reflected the practice of the Secretariat since the enactment of the 1984 Rules, such as the requirement for juridical person to state ‘that it has taken all necessary internal actions to authorize the request’. The 2006 Rules considered a broader amendment process by tackling the provisional measures, the preliminary objections, the transparency rules, the establishment of an appeals panel, the independence of arbitrators etc. While some of the suggested amendments did not make it into the final draft of the 2006 Rules, they nevertheless generated a constructive debate in the arbitration community (see, for example, the appeals mechanism). (See Crina Baltag, The ICSID Convention: A Successful Story – The Origins and History of the ICSID in Crina Baltag (ed.), ICSID Convention After 50 Years: Unsettled Issues, 2017, Wolters Kluwer)

The current amendment process is intended ‘to modernize the rules based on case experience’. The ultimate goal, as suggested by the ICSID Secretariat is to ‘make the process increasingly time and cost effective while maintaining due process and a balance between investors and States’. The Secretariat highlighted the areas where the amendments could be considered and background papers would be prepared for this purpose: appointment of arbitrators, including a code of conduct for them and the challenges to arbitrators; third party funding; consolidation; preliminary objections and first session; witnesses; experts and other evidence; discontinuance of a case; awards and dissenting opinions; security for costs and security for stay of enforcement of awards ordered by the ad hoc committee; allocation of costs; annulment; publication of decisions and orders (compared to the current provisions referring to awards); as well as the modernization of the means of communication (apparently with a view of making the procedure ‘less paper-intensive and more environmentally friendly’).

While the future of the ISDS is constantly challenged, it is perfectly legitimate and opportune for the ICSID to listen to its users and implement the developments of the ISDS practice after more than 600 arbitration cases. No doubt, the ICSID and the ICSID Convention shaped the international law and contributed to the establishment of an investment law. In the prophetic words of Aron Broches, the central figure behind the creation of the ICSID, ‘[t]he wide interest shown by actual and potential investors, as well as by official development authorities and other governmental agencies, testifies to the potential usefulness of the Convention and of the Centre. This gives reason for confidence that in the coming years this potential will be realized and the new institution will come to play a significant role in furthering the availability of private international investment for economic development.’ It is essential to remember that the provisions of the ICSID Convention are, fundamentally, the result of a compromise essential for the existence of the ICSID Convention itself. To this extent, as highlighted by the Secretariat, the amendment of the ICSID Convention is not contemplated at this stage (and, arguably, it would be quite difficult to achieve). But, when it comes to the ICSID Rules, there is more flexibility. Several topics addressed by the ICSID Rules and indicated by the Secretariat do need to be updated in accordance with the latest developments of international law and with the innovations of the means of communication (see third party funding, transparency, etc.). Other amendments reflect the practice of the Secretariat and are necessary in order to maintain the due process requirement and ensure the legitimacy of the arbitration process. For instance, the standard of challenges to arbitrators in an over-globalized world and which until recently was seen as notoriously high under the ICSID Rules or the procedure for appointment of arbitrators, which could see an arbitral tribunal being appointed in an average of seven months, despite several time limitations under the Rules. (See in general, Daniel Kalderimis, The Future of the ICSID Convention: Bigger, Better, Faster? in Crina Baltag (ed.), ICSID Convention After 50 Years: Unsettled Issues, 2017, Wolters Kluwer) Other areas discussed in previous amendment processes, such as the annulment system, would probably be reassessed based on the lessons learned (and probably not sufficient at the time when first addressed) and on the developments of international law.

The background papers reflecting the proposed changes to the ICSID Rules should be available by early 2018 and the ICSID Secretariat would probably make them available to the public for consultations and discussions. In the meantime, any additional preliminary suggestions concerning potential rule amendments can be sent to [email protected].

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Nat’l Railroad Passenger Corp. v Fraternal Ord. of Police, Lodge 189: Has the D.C. Circuit Opened the Door for Challenges under the Public Policy Exception?

Fri, 2017-05-19 21:34

Daniela Páez-Salgado (Assistant Editor for South America)

On April 28, 2017, the Court of Appeals for the District of Columbia Circuit (in a majority decision) affirmed the district court’s decision to set aside an award issued by a sole arbitrator finding that the award violated public policy.  The award was rendered in the context of mandatory arbitration of statutory claims under the Railway Labor Act.  The award was later challenged with the District of Columbia district courts pursuant to the same statute.  The judicial review process was therefore not conducted under the Federal Arbitration Act (“FAA”).

The dispute concerned an action brought by the Fraternal Order of Police, a labor union, on behalf of an employee of the National Railroad Passenger Corporation (known as “Amtrak”) who was fired for misconduct on December 3, 2012.  The union sought arbitration pursuant to the grievance procedure contained in the collective bargaining agreement alleging that the employee had been fired without just cause.  The arbitrator did not reach the merits of the claim but ruled that the Amtrak Inspector General’s investigator had not fully complied with Rule 50 of the collective bargaining agreement procedures relating to the conduct and control of interrogations of employees.  Among others, Rule 50 of the agreement provided that an investigator must record the interview with the employee and if the employee is suspected of criminal activity, the investigator must give Miranda warnings.  During the investigation of the fired employee, the investigator failed to record the interrogatory as well as to give the employee his Miranda warnings.  Therefore, the arbitrator found that the investigation had not fully complied with the provision of the collective bargaining agreement and ruled that Amtrak must reinstate, with backpay and lost seniority, the employee fired for misconduct.  Subsequently, Amtrak sought the seating aside of the award with the District of Columbia district courts.

The district court vacated the award finding that Amtrak Inspector General could not legally be governed by Rule 50 of the collective bargaining agreement.  Section 153 First (q) of the Railway Labor Act establishes that a ground on which a court may set aside an award is that a particular contractual provision at issue is contrary to “law or public policy.”  The district court relied on the decision of U.S. Dep’t of Homeland Security v FLRA (DHS) to find that the award was contrary to public policy.  In DHS, the court held that under the Inspector General Act of 1978 public sector unions and agencies can neither add to nor subtract an Inspector General from its investigatory authority through collective bargaining. 751 F.3d 655, 671 (D.C. Cir. 2014).  The district court found that the arbitrator’s application of Rule 50 was contrary to the precedent in DHS and vacated the award.

The Court of Appeals affirmed the lower court’s ruling.  According to Senior Circuit Judge Randolph, who authored the decision, the provision of the collective bargaining agreement was contrary to the law because the arbitrator’s application of Rule 50 to the Inspector General’s investigation had the effect of subtracting him of his investigatory authority.  Hence, the district court was right in refusing to enforce the award based on that provision.

The decision was accompanied by a strong dissent of Judge Pillard who expressed that the limited scope of judicial review of awards did not grant the district court legal basis to vacate the arbitrator’s award.  While Judge Pillard agreed with the majority on that the reasoning of the arbitrator’s opinion failed to anticipate the court’s decision in DHS, she was of the opinion that it exceeded the court’s judicial review power to scrutinize whether an arbitrator’s reasoning conflicted with public policy since that power is limited to determining whether the award itself –rather than an arbitrator’s reasoning- creates an explicit conflict with the law.

Judge Pillard also stressed the U.S. Supreme Court and the Circuit’s historical narrow approach to the public policy exception as a ground to vacate awards in the U.S.  In this sense, she showed concern on a future use of the majority’s reasoning to actions seeking to set aside awards initiated under the FAA.  She supported this concern on the Circuit’s prior precedent which equated the judicial review standard of FAA actions with mandatory arbitration of statutory claims. Cole v. Burns Int’l Sec. Servs., 105 F.3d 1465, 1486 (D.C. Cir. 1997).

The Circuit has previously ruled on cases involving the judicial review of awards and the public policy exception.  For instance, in Teamsters Local Union No. 61 v United Parcel Serv., Inc., the Court of Appeals held that the public policy exception is extremely narrow and applies only when the public policy emanates from clear statutory or case law, not from general considerations of supposed public interests. 272 F.3d 600, 606-07 (D.C. Cir. 2001).  Notwithstanding, this decision might open the door for actions seeking to challenge an award where the losing party disagrees with the arbitrator’s reasoning.

While the appellant announced it will appeal the Circuit’s decision with the U.S. Supreme Court, public records reveal that such appeal has not been filed so far.  The parties have 90 days after entry of the judgment to file a petition for a writ of certiorari with the Clerk of the U.S. Supreme Court.

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