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Finland Takes Important Steps to Increase its Attractiveness as a Venue for International Arbitration: Launch of the Revision Process of the Finnish Arbitration Act Announced

Fri, 2019-05-17 05:29

Heidi Merikalla-Teir

The Finnish Minister of Justice announced at the end of January this year that the revision process of the 1992 Finnish Arbitration Act would be launched during the current government term. Finnish business and arbitration communities greatly welcomed the statement, as it mirrors their long-time efforts towards this goal. The Ministry of Justice has begun an internal project and will appoint an external group to monitor the work of the Ministry.

It was December 2016 when the Finland Chamber of Commerce submitted a proposal to the Finnish Ministry of Justice for the reform of the Finnish Arbitration Act (“Act”). The Finland Chamber of Commerce requested an amendment of the Act’s obsolete provisions and deficiencies.  The goal of such revision is an arbitration act fully consistent with current internationally-recognized standards embedded in the UNCITRAL Model Law on International Commercial Arbitration (1985; with amendments adopted in 2006; “UNCITRAL Model Law”).

Enacted in 1992, the Act has been in force almost unchanged for over 25 years. Based on the 1985 version of the UNCITRAL Model Law, the Act, nevertheless, differs in some respects from it. The Finland Chamber of Commerce’s reform proposal, therefore, covers, amongst other things, the following divergences:

  • The Act’s strict written form requirement for a valid arbitration agreement: The Act specifies that an arbitration agreement is in writing if it is contained in a document signed by the parties or in an exchange of letters, telegrams or telexes or other such documents between the parties; further, it states that an arbitration agreement is in writing if an agreement made in an aforementioned manner refers to a document containing an arbitration clause. The requirement is not only outdated in the light of modern means of communication but also problematic in practice. It excludes the formation of a valid arbitration agreement, for example, where, during negotiations, one of the parties referred to the arbitration clause contained in the general terms and conditions and the other party has accepted it only orally. To overcome these problems, the Finland Chamber of Commerce proposed to derogate from the written form requirement and to make the provision correspond to Article 7 of the UNCITRAL Model Law.
  • The possibility to have a final award declared null and void: The current provisions of the Act allow the unsuccessful party in the arbitration to bring an action for annulment of the arbitration award at any time, without any time limits. The absence of a time limit for filing an action for annulment of the arbitral award is seen as undermining the finality of arbitral awards. Therefore, the Finland Chamber of Commerce suggested deleting the provisions on annulment of awards.
  • The setting aside procedure is inefficient: The time limit for instituting setting aside proceedings based on the grounds set forth in the Act—which are not completely in line with the UNCITRAL Model Law—is three (3) months of the date on which the party filing the action received a copy of the award. The action must be brought before the District Court in whose jurisdiction the arbitral award was made. Setting aside proceedings may take a long time if the decision is appealed and goes through all court instances. The Finland Chamber of Commerce suggested that the grounds for setting aside of awards be fully aligned with the UNCITRAL Model Law, that the time limit for instituting setting aside proceedings be reduced to two months, and that there be a one-instance appeal.
  • The lack of provisions on the granting of interim measures by the arbitral tribunal: In the absence of these provisions, it is unclear whether arbitrators have the right to issue any interim measures in arbitration in Finland. For the same reason, in Finland, arbitrators have no jurisdiction to issue interim measures that are enforceable, if necessary, on the party against whom the measures are sought. The fact that Finnish courts have jurisdiction to issue interim measures also in arbitration proceedings and without prejudice to an arbitration agreement cannot be regarded as sufficient for national and international parties who, naturally, expect to obtain effective interim measures from an arbitral tribunal. While the Act does not contain provisions on arbitrator-ordered interim measures, the Arbitration Rules and the Rules for Expedited Arbitration of the Arbitration Institute of the Finland Chamber of Commerce (FAI), in force as of 1 June 2013, provide specific regulations regarding interim measures that may be ordered by the arbitral tribunal at the request of a party.

Further to the above, the Act fails to explicitly address certain principles of due process, such as the power of arbitrators to decide on their own jurisdiction; the arbitrators’ duty to treat the parties equally; and the requirement that the arbitrators give reasons for the arbitration award, although all these principles are also applicable in Finnish arbitration. Enacting statutory provisions compliant with the UNCITRAL Model Law would eliminate any such inconsistencies.

Against this background and considering that, over the lifetime of the Act, commercial and business contractual relations and needs have indeed become significantly more diversified and international, there is a need to revise the Act and ascertain that today’s international practices are fully reflected in its provisions.

To support its proposal for the reform of the Act, in January 2018, the Finland Chamber of Commerce and the FAI held a seminar and discussion on the “Need for Revisions of the Finnish Arbitration Act”. The event focused on key problems arising from the Act and addressed topics, such as why Finland should adopt the UNCITRAL Model Law and why the Swedish example cannot be applied to Finland in order to make arbitration in Finland more attractive for international cases. The seminar report and the presentations of the distinguished speakers can be accessed here.

Following the proposal and the well-attended seminar, more than 200 lawyers and business representatives signed a petition for the reform of the Act, which was handed over by the Finland Chamber of Commerce to the Minister of Justice in spring 2018.

In September 2018, the Ministry of Justice held its own seminar on the need for reform of the Act, after which it called a public hearing on the matter. During the public hearing, nearly 40 written statements were submitted to the Ministry of Justice, showing overwhelming support for the revision of the Act.

Finally, after long-time efforts of the Finnish business and arbitration communities, the Ministry of Justice has found that there is a need for a reform of the Act. The long-awaited news came at the Annual Conference of the Finnish Bar Association at the end of January, where the Finnish Minister of Justice announced that the revision process would be launched during the current government term. In his speech, the Minister pronounced the need for modern legislation, stating that

“the functioning of the justice system is one of the most important pillars of Finland’s economic success. Trust in dispute resolution and in the enforcement of rights is becoming an increasingly important factor for business and investment. Arbitration provides businesses with a competitive way to resolve disputes. We have noticed room for improvement in the current Act; hence, we will launch a reform of the arbitration legislation.”

Currently, the Ministry of Justice is setting up a Monitoring Group for the law reform whose term will end on 31 December 2020. The Finland Chamber of Commerce has nominated three members to this committee. The Finnish Bar Association and other stakeholders have been given the right to nominate members to the Committee as well.

The Finland Chamber of Commerce is confident that the reform will have a significative positive impact for Finland and hopes that, as a result of it, Finland will have an arbitration act that meets international standards reflected in the UNCITRAL Model Law. In this way, Finland will meet all the conditions to build systematically towards international recognition in the field of international dispute resolution, increasingly emerging as an important seat for dispute resolution. Finland’s geographical location, low corruption, and reputation as an impartial country, together with a well-functioning regulatory and operational environment, are factors that set a good basis to build upon.

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Arbitrating in CEE & CIS: Transparency, Accountability and Choice of Arbitrators

Thu, 2019-05-16 03:00

Ioana Knoll-Tudor

The second edition of the Jeantet “Arbitrating in CEE and CIS” roundtable was held during the Paris Arbitration Week on Thursday 4 April 2019 at the Jeantet offices. The topic of this year’s edition was “Transparency, Accountability and Choice of Arbitrators”.

An increasing demand of international arbitration users for more transparency, predictability of decisions and diversity in the appointments of arbitrators is met by arbitral institutions with a number of initiatives aimed at meeting the expectations of the users, broadening the spectrum of available arbitrators and achieving more diversity, providing users with more available information when appointing arbitrators, offering more transparency and predictability by publishing decisions, etc. The second edition of the Jeantet “Arbitrating in CEE and CIS” roundtable thus aimed at providing the perspective of some of the most active arbitral institutions in the CEE and CIS region as well as the feedback of the Arbitrator Intelligence on its CEE Campaign. The speakers this year were: Ivana Blagojević (Deputy Counsel, ICC), Beka Injia (Secretary General, Georgian International Arbitration Centre [GIAC]), Anja Ipp (Legal Counsel, SCC), Catherine A. Rogers (Founder of Arbitrator Intelligence) and Rinaldo Sali (Vice-Director General, Milan Chamber of Arbitration [CAM]). The roundtable was once again moderated by Ioana Knoll-Tudor (Jeantet).

The issues discussed are summarized below.

  1. Appointment of arbitrators

 1.1   Arbitrators appointed by the arbitral institutions

In the absence of an agreement between the parties or when appointment by the institution is mandatory, arbitral institutions become the appointing authority. In 2018, the CAM appointed arbitrators in 42% of its cases and the GIAC in 62% of the cases. In 2017, 26% of the ICC arbitrators were appointed by the Court, whether directly or upon a proposal from National Committees.1)ICC Dispute Resolution Bulletin 2018, Issue 2, ICC Practice and Procedure, p. 56. jQuery("#footnote_plugin_tooltip_1519_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1519_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Arbitral institutions apply various formal and substantial criteria when appointing arbitrators. The criteria relate to the arbitrators themselves (such as their nationality, age and qualifications, availability and ability to conduct arbitration proceedings, previous experiences as co-arbitrators, chairman, sole arbitrator, counsel etc.)2)See Article 15(5) of the 2019 CAM Arbitration Rules, Article 17(7) of the 2017 GIAC Arbitration Rules, Article 13(1) of the 2017 ICC Arbitration Rules, and Article 17(7) of the 2017 SCC Arbitration Rules. jQuery("#footnote_plugin_tooltip_1519_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1519_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); but also to the case at hand (such as the applicable law, seat and language of the arbitration, subject matter of the dispute, nature and circumstances of the dispute, procedural issues to be covered by the arbitrators, the amount in dispute). Despite the efforts of arbitral institutions to find arbitrators specialized in the industries and subject matters involved in the respective case as well as to promote arbitrators from the relevant geographic zone, the GIAC noted that there is a lack of arbitrators from the CEE and CIS region.

The availability and time-efficiency of arbitrators constitute another important criterion. The SCC Arbitration Rules, for example, impose shorter time limits than other institutions to render an award. In this sense, the SCC Board sometimes prefers to appoint less-known arbitrators, who can proceed swiftly with the case, instead of arbitrators with overburdened schedules. The ICC also keeps records of the arbitrators’ time-management through regular reports addressed to the Court by the Secretariat, and which include notes on their handling of time (e.g., to convene a Case Management Conference, to establish the Terms of Reference, to render a final award, to notify the parties throughout the procedure, etc.). The CAM, for its part, emphasized the importance of having a member of the Secretariat participating at the hearings and reporting the efficiency of each arbitrator to the CAM Arbitral Council.

The procedure of disclosure ensures that each arbitrator considered for appointment is independent and impartial. As the pool of arbitrators from the CEE and CIS region is rather limited and in some cases arbitrators with very specific qualifications are necessary (i.e., need for an arbitrator speaking a particular language), this procedure may sometimes be more flexible than in other cases.  Nevertheless, the agreement of the parties is always required prior to any appointment.

Finally, the issue of administrative secretaries has been raised by the audience, since they can be appointed by an arbitrator to assist with the administration of a case but often, neither the arbitral institutions nor the parties, have a say in such appointment. The ICC has adopted a very proactive approach in this respect. While it acknowledges that administrative secretaries may be a real added-value in large cases, in small cases, the ICC contacts the arbitrator to enquire about the exact role and time-commitment of the administrative secretary, and ensure that the costs related to such appointment are borne neither by the ICC nor by the parties.

1.2   Party-appointed arbitrators

The available information on arbitrators is scarce and parties must rely on their own network and resources to find such information. This lack of information was the starting point of the Arbitrator Intelligence (AI) project, which was launched with the aim of promoting more transparency and offering international arbitration users more information about arbitrators, prior to appointing them.

AI aims also at contributing to the appointment of more diverse arbitrators, both by the parties and by the arbitral institutions. Although arbitral institutions are actively encouraging diversity in their appointments, almost no parties from the CEE and CIS region appoint local arbitrators. Therefore, there is a reduced pool of appointed arbitrators originating from the CEE and CIS countries: only 6% of ICC arbitrators in 2017. By comparison, 54% of the ICC arbitrators are from North & Western Europe.

  1. Tools used for more transparency by arbitral institutions

 2.1   Publication of the names of the arbitrators

The approach of arbitral institutions to the publication of the names of the arbitrators is not unanimous. While the CAM, GIAC and the ICC (to some extent) publish the names of their arbitrators, the SCC chose not to.

Although it does not provide an official list of arbitrators, the CAM publishes since 2016 the names of all its arbitrators, as well as the composition of the tribunals and their appointing authorities. Consent of the parties is not required for such publications however arbitrators can opt out from having their names disclosed.

The ICC website lists arbitrators seating in ICC cases registered after 1st of January 2016. Such publication is subject to the parties’ consent and practice shows that arbitrators are very favorable to it, even asking the parties for their consent to appear on this list when in presence of a confidentiality agreement.

The SCC chose not to publish the names of its arbitrators but nevertheless holds an informal database of every person who was appointed as arbitrator or appeared as counsel in SCC proceedings.

2.2   Publication of the decisions on challenges of arbitrators

The SCC was the first major arbitral institution to publish summaries of arbitrator challenges decided by the SCC Board, beginning in 2005. It recently went a step further and, since 1 January 2018, provides reasoned decisions for all arbitrators’ challenges decided by the Board, unless the parties agree otherwise.

Upon request of any party, the ICC Court may also communicate the reasons for a decision on the challenge of an arbitrator or for a decision to initiate replacement proceedings. This possibility has been specifically mentioned in the newest version of the ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration which entered into force on January 1st, 2019 (“2019 ICC Note”).  Between 2014 and 2018, the Court communicated reasons to parties in 14 cases, out of which 7 cases only in 2017.

The CAM also publishes every year on its website between 15 and 20 relevant summaries of decision for challenges, in an anonymized format.

2.3 Publication of awards

Although not provided in the ICC Arbitration Rules, the publication of awards was mentioned in the 2019 version of the 2019 ICC Note in a rather novel manner:  “[p]arties and arbitrators in ICC arbitrations accept that ICC awards made as from 1 January 2019 may be published […] no less than two years after [its notification to the parties and arbitrators by the Secretariat]”.3)ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (1 January 2019), paras. 41-42. jQuery("#footnote_plugin_tooltip_1519_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1519_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Parties are free (i) to object to the publication, (ii) to require that the award is in all or in part anonymised or pseudonymised and (iii) to agree to a longer or shorter time period for publication.4)ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (1 January 2019), paras. 42-43. jQuery("#footnote_plugin_tooltip_1519_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1519_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, this publication operates a major shift from an “opt-in” mechanism to an “opt out” one.

The systematic publication of awards is not on the agenda of the SCC in the near future. The SCC underlines confidentiality as one of the most important features sought by its users. The SCC however translates and publishes all Swedish courts’ decisions relating to arbitration (which often include the corresponding arbitral awards as appendices).

Finally, it shall be noted that the CAM drafted a series of Guidelines for the anonymous publication of arbitral awards.

Conclusion

The demand for more transparency, more predictability and more diversity in international arbitration is met by arbitral institutions with several initiatives such as publication of the names of arbitrators or of decisions and arbitral awards. It also gives rise to private initiatives such as AI.

While all these measures allow the users to have more information about arbitral proceedings and arbitrators and therefore to make more informed decisions, the respect of confidentiality must be the threshold shaping these initiatives. The different approaches of arbitral institutions towards confidentiality will certainly create various degrees of transparency depending on each institution. Parties willing to benefit from more confidentiality will have to include the appropriate clauses in their contracts or ensure that they raise the red flag at the end of their proceedings.

As the AI project is concerned, it will help users gather more information about potential candidates as arbitrators and therefore enlarge the arbitrators pool. It will also certainly enhance the performance and efficiency of the currently appointed arbitrators.

 

References   [ + ]

1. ↑ ICC Dispute Resolution Bulletin 2018, Issue 2, ICC Practice and Procedure, p. 56. 2. ↑ See Article 15(5) of the 2019 CAM Arbitration Rules, Article 17(7) of the 2017 GIAC Arbitration Rules, Article 13(1) of the 2017 ICC Arbitration Rules, and Article 17(7) of the 2017 SCC Arbitration Rules. 3. ↑ ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (1 January 2019), paras. 41-42. 4. ↑ ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (1 January 2019), paras. 42-43. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Choice of Law and Arbitration in International Contracts: A Roundtable with Stakeholders

Thu, 2019-05-16 00:41

Ana Coimbra Trigo

Whatever the nature of the transaction, in international business there is one prime question fundamental to the validity, interpretation, effectiveness and enforceability of the contract: what law governs?” – Professor Julian Lew QC, Preface, Rethinking Choice of Law in Cross-Border Sales, Gustavo Moser (Eleven International Publishing, 2018).

On 15 April 2019, a sunny Monday in Vienna, Austria, a roundtable composed of Luca Castellani, Louise Barrington, Prof. Ingeborg Schwenzer, Patricia Shaughnessy, Florian Mohs, Sabrina Strassburger, and Michael McIlwrath (by video), sat down to address the choice of governing law in international contracts. With the backdrop of Gustavo Moser’s book Rethinking Choice of Law in Cross-Border Sales, and with him acting as the moderator, the esteemed speakers addressed three issues: (i) choice of law and Brexit, (ii) the drafting of choice of law clauses, and (iii) CISG status and prospects.

Gustavo Moser started off by reminding everyone that emotions pervade our decisions and that perceptions influence our choices: human beings make around 2,000 – 10,000 decisions a day. We frequently take similar decisions from the past as a ‘proxy’ and arrive at the same decision to (what we believe to be) a similar ‘set of facts’. The trouble with this, Gustavo continued, is that there are ‘glitches’ in our thinking, of which individuals may not be fully aware of, let alone know how to quantify its effects (e.g. status quo bias). A good example of this arises in the choice of governing contract law.

 

Topic 1: Choice of Law and Brexit

Michael McIlwrath initiated the discussion. Having gone through ICC data prior to the Brexit years, Michael found that London had not been increasingly selected as a seat of arbitration between 2008 and 2015, whereas non-traditional seats were conversely growing, a trend compatible with the parties choosing to have disputes closer to home. Michael highlighted that London has benefited from the reliability and predictability of English courts, and the wide adoption of English law is because it is considered contract-friendly. In his perspective, the significance of English law is neither impacted by Brexit, nor from the enforceability in the EU of arbitral awards rendered in the UK, potentially perceived in the future as less advantageous. Michael concluded that Brexit might possibly affect the choice of English arbitrators, London’s convenience as a seat and the practice of international arbitration, depending on the future conditions imposed on free movement of professionals and whether certain industries go abroad. Michael proposed that parties should be asking whether any of the laws chosen is better for their contracts. Citing a recent survey that Gustavo shared (Practical Law Survey 2018 on the Impact of Brexit on dispute resolution clauses), Michael added that whereas previously approximately 25% of companies intended to conduct a review of their choice of law or jurisdiction clauses, the combined number in the revised survey was 78%.

Prof. Ingeborg Schwenzer expressed her concern that the uncertainty potentially surrounding enforcement in Europe of judgements rendered in the UK might drive parties away from London. Prof. Schwenzer and Patricia Shaughnessy discussed the impact of EU law incorporated into English law, be it consumer law or other areas of law, regulation of distribution contracts, franchise relationships, and even competition law, which would no longer be subject to any developments binding on the EU (including ECJ judgements). Louise Barrington shared her experience of a similar “frozen law” situation in Hong Kong, where English law continued in place after 1997, but not bound by subsequent developments of this jurisdiction, thus suffering a detrimental delay in legal updates and some commercial uncertainty. Louise agreed that choice of forum, more than choice of law, might be impacted by Brexit.

Florian Mohs was of the same position, and stated that both Rome I and II Regulations would be restated in English law. Regarding choice of court, he shared that, in an attempt to overcome the mentioned voluntary exclusion from the freedom of movement of judgements, the UK had acceded to the Hague Convention on Choice of Court Agreements (2005), conditioned upon exiting the EU. Moreover, Florian interestingly added that a “reverse home bias” effect could also take place, whereby potential creditors based in the UK (such as financial institutions) could select the forum of the potential debtors to litigate/arbitrate when in the EU.

Gustavo then cited the LCIA Casework Report 2018, informing that c. 78% of the new cases arose from contracts concluded between 2007 and 2016, and that in c. 75% of these, English law was chosen. Sabrina Strassburger added that no instructions were conferred to her regarding changes in choices of law contained in the contracts she supervised as in-house counsel. In this respect, Gustavo mentioned that this could be due to the status quo bias, since at the end of the day, a review of the clauses does not necessarily equate to change. Gustavo’s recent Kluwer posts on this matter are available here, here and here.

Finally, Luca Castellani argued that, from a global perspective, enforcement of judgements was more challenging than enforcement of arbitral awards, and encouraged UK lawyers to consider uniform law as an alternative for the clients’ benefit.

 

Topic 2: Drafting of Choice of Law Clauses

The discussion started with a comment from Michael saying that typically parties focus on their own familiarity with a certain law as the determining factor to select it. Sabrina, in response to Gustavo’s enquiry as to how scientific the drafting process is, added that, in her experience, there was no scientific approach to choice of law clauses (like a checklist approach, mentioned by Gustavo), and was dependent on variables such as the dispute resolution mechanism selected or the industry specialization of courts in a given jurisdiction (say in IP law). Furthermore, these clauses were typically addressed last, after weeks of long and demanding negotiations, and often neglected.

Louise warned that using choice of law as a bargaining tool in contract negotiations should be avoided as it could have dangerous effects and could give rise to lawyers’ professional liability. Luca added that the CISG was meant to be used when parties were not in a position to choose the applicable law, such as when one is contractually weaker or lacks legal advice.

Prof. Schwenzer added that in her experience, parties may, at times, chose laws to apply to their contracts without having an understanding of the respective consequences. Prof. Schwenzer gave the example of parties choosing Swiss law, for its perceived neutrality, when, in her opinion, challenges could arise from its conception in an archaic context, giving rise to different scholarly interpretations, rendering it unreliable. She provided another example, where UK lawyers, drafting lengthy contracts, would choose Swiss law. Consequently, there would be a discrepancy in regulation (later echoed by Patricia in regards to the common law four corner rule and Scandinavian practice of relying on the applicable legal framework), as well as problems with contract interpretation, since English terms would have to be interpreted under Swiss law. Florian replied that Swiss law conversely had other advantages, such as giving great effect to freedom of contract, with little mandatory requirements, less influenced by EU law, and predictable in its application. Patricia gave an example of parties choosing a law to a long-term contract without knowing if this law provided the possibility of limiting liability and to what extent, or if under it moral damages were compensable, rather merely considering the alleged reputability of a legal system.

Gustavo mentioned the results of two interviews conducted with multinational companies’ counsel on this issue, from which he concluded that, in general, the choice of law and choice of court clauses took into account several strategic factors. Brexit had not impacted the internal policies of these multinational companies in this regard, and CISG and the Unidroit Principles, although considered a viable alternative, were not chosen because the counterparties had no experience with it.

 

Topic 3: CISG Status and Prospects

All speakers argued for increased awareness, capacity building and legal training regarding the CISG. Louise gave the example of Canada, a contracting state to the CISG, where lack of awareness of this convention led to entire proceedings being conducted under Canadian contract law without the due application of the convention. Prof. Schwenzer mentioned that education or bar training should include the CISG as a mandatory subject, and gave China as an example, where students study the CISG as well as Chinese contract law in their syllabus. Louise and Luca added that there are some recent developments concerning Hong Kong and its accession to the CISG, partially also because of the Vis East, and the generated familiarity with the convention.

Florian spoke of his experience with the CISG, considering it a great tool, and shared that most choice of law clauses he had worked with did not exclude its applicability. He added that a clear choice of law would save time and costs otherwise incurred in debating this issue. Sabrina then shared her experience with contracts in the tech industry and mentioned that her counterparties typically expressly excluded the CISG for the following reasons: to avoid conflicts with domestic law; to avoid the gaps in the CISG; and due to a perceived lack of publicly available CISG case law.

Prof. Schwenzer added that interpretation costs could be avoided, as the CISG was translated into multiple languages. Pushing for the re-evaluation of the convention was also Michael, in his video, highlighting that Article 39 of the CISG conferred great legal predictability to a seller (providing for a clear 2-year warranty period for latent defects in goods), that parties could always contract around.

The roundtable also discussed the most recent accession of a state to the CISG, North Korea. Patricia and Luca discussed the process incurred in the last years for this purpose, the relevant policy reasons and the historical bridge that the CISG represented between eastern and western countries.

Luca praised the CISG in its quantitative adoption. Demystifying perceptions with numbers, Luca mentioned that the CISG from 1980, with 90 contracting states, had a rate of adoption of 2,3 states per year, when, in comparison, the New York Convention, from 1958, with 159 contracting states, had a rate of adoption of 2,5 states per year. As pertains to its qualitative adoption, the CISG had seen 4 processes of domestic adoption reach an end but deposit of the instrument of ratification was still pending. (Shortly after the roundtable, one of the four States, Liechtenstein, deposited its instrument and became the 91st State party to the CISG).

As to CISG prospects, Luca added that, given the current situation regarding multilateral treaties, negotiating the CISG today would be a challenging endeavour. Thus, from a uniform law perspective, Luca informed that no new projects were under way, but addressed hypothetically interesting developments, such as a model law on sales of goods (unexpected) or greater influence of the CISG in domestic sales law (desirable).

All in all, it became clear that both emotion and perception can cloud parties’ decisions on choices of law and forum, and that these clauses should be discussed at the first available opportunity. The Vis Moot is a starting point for worldwide dissemination of knowledge both regarding international arbitration and international sales law, and this seminar was a great chance to further acknowledge how choices of law and forum operate in the field.

 

The post had contributions from Gustavo Moser.

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The State of Play in Costs and Damages in International Arbitration

Wed, 2019-05-15 02:29

Michael McIlwrath and Crina Baltag (Acting Editor)

“Developing arbitration into a matured system of adjudication that can fully compete with litigation may create tension with its promise of providing a quick, fair, and flexible way to resolve a dispute. … Some years ago, Johnny Veeder posed the question, “whose arbitration is this anyway?”  Perhaps the time has now come for the arbitration community, as the caretakers of arbitration, to ask “what do you want to be when you grow up?” (Patricia Shaughnessy, Pre-arbitral Urgent Relief: The New SCC Emergency Arbitrator Rules’, Journal of International Arbitration, (2010), Volume 27, Issue 4), 337 – 360, p. 358)

 

Patricia Shaughnessy’s influence over international arbitration looms large, having pioneered the LLM program at the University of Stockholm and mentored hundreds of practitioners now working around the world.  On the occasion of her 65th birthday, colleagues and former students of Shaughnessy contributed to a liber amicorum on costs and networking in international arbitration: Finance in International Arbitration (soon to be published by Wolters Kluwer). Adding to Shaughnessy’s surprise, the organizers of the Pre-Vis Moot Conference, Bucerius Law School, University of Vienna, NYU Law, and McGill University, invited the book’s contributors to present their perspectives in Vienna on 12 April 2019, and invited Patricia Shaughnessy to moderate one of the sessions.

After a welcome by Prof. Paul Oberhammer in his capacities as dean of the Vienna University Law School and as a co-organizer of the event and by Prof. Franco Ferrari, NYU Law, as co-organizer, the panelists provided their insights ranging from arbitrator practices, the state of soft law on cost awards and allocation, and relevant trends in third party funding and awards of damages for antitrust violation and expropriation.

 

The costs that arbitrators generate

Prof. Anthony Daimsis of the University of Ottawa and Robin Oldenstam of Mannheimer Swartling in Stockholm presented two areas for arbitrators to improve, in the legal reasoning applied in their awards and in keeping and reporting accurate time records.

Prof. Daimsis made a compelling case that arbitrators often engage in heuristics, or intellectual short-cuts in their legal reasoning, which can lead to increased costs. For example, Prof. Daimsis explained that separability is anything but a “presumption” (at least under the Model Law) and challenged those in the community who have suggested it is to re-read Article 16 of the Model Law. Arbitrators who begin with this false presumption layer on costs by forcing needless motions and submissions for and against this false argument.

Sharing the results of a global survey of seasoned arbitration practitioners, Robin Oldenstam reported that a majority stated they had participated in at least one case where they suspected that an arbitrator had not provided an accurate time record and appeared to be seeking compensation for more work than the arbitrator had actually performed. Noting that this is an area that to date has not been addressed, and emphasizing the issue concerned mere suspicions and only appeared to arise in a minority of cases, Oldenstam nevertheless questioned whether current methods to verify arbitrator compensation are sufficiently transparent. Since the services of an arbitrator are based on the utmost confidence, trust in all aspects of the arbitration process is important for the overall trust in the system. The introduction of more transparency and structure around arbitrator time reporting would offer an opportunity to further improve trust in the arbitration process.

 

Recoverability & allocation of costs

Steven Finizio of WilmerHale summarized and compared the different approaches to the allocation of costs in commercial and investment treaty arbitration. Finizio observed the lack of a universally-accepted approach. The predominant approach in commercial arbitration is “adjusted costs follow the event.” Finizio (and his co-author Ross Galvin) reviewed published awards in investment treaty cases since 2014 and reported that “bear your own costs” is no longer the most common approach in those cases, with a majority of tribunals in recent cases taking an “adjusted costs follow the event” approach, but a significant number continue to require parties to bear their own costs.

Dr. Crina Baltag of the University of Bedfordshire addressed the issue of recoverability of in-house counsel (and management and employees’) cost in international arbitration. Baltag explained that the issue must not be addressed in isolation, but by looking at the evolution of the role of in-house counsel in international arbitration. Baltag noted that the broad language of institutional rules has always given arbitrators ample discretion to allow for recovery of such costs, referring to reimbursement of “legal or other costs” or of “legal and other expenses. Surveying the available case law, including ICC cases and investment treaty arbitration cases, such as Oko Pankki v. Estonia, Baltag observed that arbitrators are often inclined to grant in-house costs nowadays in principle but that there appears to be no settled rule as to how these costs should be calculated. She noted that in-house counsel typically do not have time-management systems comparable to those of external counsel.

Providing the perspective of parties, Michael Mcilwrath of Baker Hughes GE in Florence, Italy, said the first thing business executives typically ask about an arbitration is not whether they will win or lose but how much it will cost. Unfortunately, in-house counsel struggle to provide a reliable answer because of cost issues under the control of tribunals, such as the rule of cost allocation they will adopt in their final award, or the standards they will apply in deciding an application for security for costs or an interim order of costs relating to discovery. Mcilwrath suggested corporate counsel would hold arbitration in higher regard if there were guidelines or standards that permitted them to estimate costs at the outset of a case.

 

Security for costs and third-party funding

Celeste E. Salinas Quero, legal counsel at ICSID, Washington, D.C., shared results from a review of the forty ICSID cases in which security for costs were requested. She pointed out that tribunals seek to balance a respondent’s risk of being unable to recover an award on costs against the risk of infringing on a claimant’s right to pursue a meritorious claim. Although there is no express provision in the ICSID Rules, tribunals have dealt with these requests as interim measures, moving from requiring a respondent to demonstrate a right in need of protection to a less restrictive hypothetical entitlement to recover costs. But tribunals still require a showing of exceptional circumstances, which respondents have tried to show by demonstrating the claimant has adopted a specific corporate structure to shield its assets, misrepresented its financial standing, abused the process, or has a history of defaulting. While some tribunals have held that certain circumstances, if cumulatively present, may warrant an order for security for costs, only two ICSID tribunals have granted such requests to date. ICSID tribunals have also consistently held that impecuniosity and third-party funding are not per se sufficient to grant security for costs.

John Fellas from Hughes Hubbard & Reed LLP in New York discussed whether a prevailing party who relied upon third party funding could recover the premium paid to a funder, and n whether the use of third-party funding is evidence of impecuniosity.  With respect to the first issue, Fellas discussed the English case of Essar Oilfield Services limited v. Norscot Rig Management Pvt Limited, where the English High Court declined to vacate a costs award in an ICC case that included the funder’s premium on the theory that both the English Arbitration Act and the ICC Rules permitted an arbitrator to award “other costs.”  Fellas noted that many other arbitration rules provide an arbitrator with that authority.  With respect to the second issue, Fellas suggested that arbitrators will often look to the use of funding as rebuttable evidence of impecuniosity on the part of funded party, and typically give that party the opportunity to prove its financial health.

Prof. Catherine Rogers of Penn State Law and Queen Mary, University of London, addressed third-party funding in international arbitration. Starting with a conference at which she and Patricia Shaughnessy spoke on the topic back in 2014, she traced developments in the field and identified the challenges ahead. In homage, she framed her remarks around Professor Shaughnessy’s hallmark ability—balancing integrity and pragmatism in establishing manageable responses to professional challenges.”

 

Developments in damages awards

Prof. Stefan Kröll, Bucerius Law School, discussed to what extent post-cartel damages claims are covered by arbitration clauses in contracts between members of the cartel and their customers. The decision of the CJEU in CDC-Akzo had held that such disputes are not covered by “normal” forum selection clauses under the Brussel-I Regulation, but refrained from addressing arbitration clauses. The case law is divided on the issue. While some courts have followed the approach of the CJEU also in relation to arbitration clauses others have adopted a broad interpretation according to which arbitration clauses also cover post-cartel damage claims irrespective of the fact that the customer did not foresee the participation of its supplier in the cartel. Kröll addressed the various objections raised against such a broad interpretation finding that the arguments in favor of such an interpretation may be weaker in the case of post-cartel damages than in other cases.

Prof. Petra Butler, Victoria University of Wellington, compared the damages regimes for unlawful expropriation under a human rights framework with that under an investment arbitration framework using the respective Yukos decisions as examples. Petra’s conclusion emphasized that neither damages regime was necessarily better than the other but different which meant that counsel might want to strategically bring a case in both fora.

Prof. Andrea Bjorklund of McGill University in Montreal concluded the rich day by commenting on the presentations and thoughtful papers in honour of Patricia Shaughnessy.  Despite the broad range of issues covered, the speakers illustrated recurrent themes: the role of ethics for arbitrators, for counsel, for experts, and for funders; pleas for more guidance in the form of standards or rules instead of ambiguous default presumptions in the award of costs; and a desire to preserve the discretion of arbitrators to adjust their responses in light of the facts and law.  Ethics, rules, and faith in arbitrators underscored why educators like Prof. Shaughnessy make an enormous contribution to the quality of arbitration by imparting their wisdom and their ethical sense to their students.

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Tribunal’s Reference to Annulled Awards: Beyond a Question of Persuasiveness?

Wed, 2019-05-15 00:51

Dimitris Kontogiannis

Introduction 

This post explores whether a Tribunal may refer to an annulled arbitral award in support of its factual findings or legal assessments. Although a simple reference to annulled awards lies outside the context of any obligation for the Tribunal in terms of res judicata and stare decisis, this quest is aligned with annulled awards’ effectiveness and persuasive value. In essence, it has to do with the perception of annulment’s effect; whether and to what extent the annulment impacts the award’s value – if any – as a source of reference. This reflects a perception of the role of the seat of arbitration and its legal significance as the sole link between arbitration and national legal orders which decisively inform the award’s fate.

 

The Annulment of Arbitral Awards

In the course of the examination of the different doctrines over annulment, it is important not only to distinguish the annulment of commercial and investment awards but also to examine annulment as perceived in the enforcement context (within and outside the New York Convention (“NYC”)). The NYC covers awards rendered in commercial and investment arbitrations (in general outside ICSID) subject to the requirements of Article I. The ‘commercial reservation’ of Article I (3) does not preclude the use of the NYC in order to enforce investment awards since a narrow interpretation of the term ‘commercial’ neither is consistent with the purpose of the NYC, nor has been adopted in practice. Outside the NYC a more favorable enforcement regime applies.

 

Annulment Within the Context of the NYC

The existence of annulment’s international effect in conjunction with the NYC presupposes a specific stance over the role of the seat and the autonomy of the arbitration – if applicable – from this forum. Three approaches have been established: the ‘territorial’, ‘delocalized’ and ‘middle’ approach.

According to the ‘territorial’ approach, the selection of the seat submits the arbitration to a specific legal framework within which the arbitration will be conducted. Arbitration has a forum; the award is legally rooted in the arbitration law of the seat and the seat’s courts enjoy supervisory jurisdiction and exclusive competence to set it aside. The curial law permeates arbitration’s validity and the proper functioning of its procedural aspects. The legal authority of the award, which is conditioned upon annulment, emanates from that forum. In essence, the annulment prevents the award from having legal force (binding and res judicata effect) since it has ceased to legally exist. Thus, its enforcement is impossible (V(1)(e), NYC). ‘[E]x nihilo nil fit’. The Court of the forum recognationis refuses recognition, in a quasi-automatic process, without being competent to examine the grounds of annulment and without any residual discretionary power. The seat is the primary jurisdiction having the first and last say on awards’ validity and (non)existence. Thus, annulment, a ‘repressive’ control in terms of national law enjoys an international effect.

The second, ‘delocalized’ or ‘French’ approach questions annulment’s international reach. The Court has discretionary power to refuse enforcement even if it could be justified. Non- enforcement is permitted but not required by NYC. This is aligned with the permissive nature of Articles VII (‘more favorable right’ provision) and VI (discretionary adjournment). In essence, arbitration operates in the international sphere and is not anchored to a specific legal forum. Its legitimacy and the arbitrators’ power derive from any legal forum that recognizes the arbitration agreement’s and the award’s validity. The ‘juridicity of arbitration is rooted in a distinct transnational legal order’. This approach does not attribute any legal significance to the seat and annulled awards continue to legally exist.

Pursuant to the third approach, which indirectly accepts the seat’s legal significance, annulment’s international reach is recognized only when it resulted from a non-local standard (based on grounds similar to Article V(1)(a) to (d), NYC). Arbitration is thus protected from any particularity of the seat. This approach is similar to the perception that annulled awards must be enforced only in extraordinary circumstances, namely when their annulment constitutes a fundamental procedural impropriety, such as fraud. It has also been argued that the annulled award’s enforcement is subject to the recognition of the foreign court’s annulment judgment by the forum recognationis based on a ‘judgment route analysis’ (for instance, see the Maximov case as previously discussed on the blog).

 

Annulment Outside the NYC

Pursuant to the ‘most favorable right’ provision (Article VII, NYC), the most favorable enforcement regime established either in a treaty or in national legislation takes precedence and applies in its entirety.

By virtue of this article, the ‘French’ approach applies. It embraces a ‘universalist’ perception attributing no legal impact to the seat. French courts have consistently recognized an award as an international decision of justice, which by definition is not integrated or anchored in the national legal order of the seat. Thus, the awards’ legal validity and existence are conditioned upon any possible forum recognationis and the annulled award continues to legally exist.

Furthermore, a more favorable treaty regime applies. This permeates both investment and commercial arbitration. The ICSID Convention applies as both more favorable lex specialis and lex posterior rule. It provides for a self-sufficient annulment system, autonomous from national laws and Court’s interference. It constitutes the only really delocalized form of arbitration. There is no seat, and the annulment is feasible only within the ICSID system for specific grounds and beyond national Court’s control. The annulled award ceases to legally exist, and the annulment has an erga omnes effect (de facto international reach) within the contracting parties. Lastly, in the context of commercial arbitration, the 1961 European Convention on Commercial Arbitration applies. It attributes international reach to annulment only when is based on specific grounds (those mirroring the grounds of Article V(1)(a) to (d), NYC).

 

Tribunal’s Quasi- Unfettered Freedom to Make Any Reference When Determining Facts and Law: A Jura Novit Arbiter Question?

The Tribunal has been entrusted with the power to affect or confirm parties’ rights and obligations in a final and binding manner. In the course of fulfilling its mandate, it has the power to reach a decision based on its own legal and factual analysis, knowledge and research without being bound by parties’ input (‘Jura novit arbiter’). In essence, it is free to assess the legal relevance of factual findings and adjudicate on different legal grounds from those submitted by the parties. It can also take initiatives to obtain factual evidence as a counterpart of the application of law. An award is not subject to review on the merits, neither its legal and factual findings are subject to de novo assessment, at the annulment or enforcement phase. Thus, it cannot be annulled or non-enforced by virtue of wrong application of law and facts or references to any source when dealing with the merits.

However, this freedom is not unfettered. The Tribunal can exercise in full extent its decision-making power within the limits of its ambit as delimited by parties’ agreement and submissions (‘ne ultra petita’ principle). This power must be exercised in conformity with due process and procedural fairness (right to be heard; principle of contradiction), in order to have award’s enforceability ensured (V(1)(c), NYC). Thus, there is no rule prohibiting the Tribunal from having recourse to any source (such as dissenting opinions, annulled awards) in support of legal or factual findings as long as these are related to legal issues which lie within tribunal’s mandate. In cases where it raises proprio motu any factual or legal issue, it has to give to the parties a fair opportunity to comment, primarily when the issue was reasonably unforeseeable for them (procedural fairness).

 

The Impact of a Reference to a Nonexistent Source

We have associated the possibility of having annulled awards as a source of reference with annulment’s international reach as perceived in the enforcement context. This reference is not a reliance in terms of res judicata and stare decisis. First, annulled awards are deprived of res judicata effect under the ‘territorial’ approach and potentially under the ‘middle’ approach. However, even if we could assume that it had res judicata or at least it continued to exist, any precedential value would not be attributed to the award. In commercial and investment arbitration there is no stare decisis doctrine. Possibly, there is only a need for consistency. In that sense, since the Tribunal is not obliged to follow precedent (a legally nonexistent award does not form precedent) and since any unjust or unfounded legal or factual assessment is not sanctionable, this reference could raise only concerns of persuasiveness.

However, in ICSID arbitration, a reference to annulled awards could lead to annulment. It touches upon the award’s reasoning. In this context, the annulled award does not exist. Thus, the Tribunal bases its reasoning on a nonexistent source. As a result, this reference – either as the only or as the most decisive ground on which the decision is based – may lead to annulment by virtue of Article 52(1)(e), ICSID Convention. It could amount to lack of legal reasoning, if it is the only ground, or at least to insufficient and inadequate reasoning. However, the annulment of the award will not succeed if the reference is made to support a legal principle that already exists. Then, the reasoning could be deemed implicitly existent in the consideration of the award and thus, reasonably inferable. Additionally, the adequacy of a reasoning based on an annulled award could bring a question of correctness and thus the risk of having an appeal in disguise is raised. Although the reference’s persuasive value does not justify annulment, it remains debatable whether this reference is a reason with substance, a ‘sufficiently pertinent reason’ or a reason which ensures the award’s logic and coherence allowing the reader to understand its logical flow.

Lastly, an annulled ICSID award seems not to have any (persuasive) value (see also Procedural Order in the Fraport case). In commercial and non-ICSID investment arbitration the annulled award seems either not to have any value at all (legally nonexistent), not having been affected by the annulment (‘delocalized’ approach), or at least having its effect and persuasive value impaired depending on the ground on which it was annulled.  In that sense, such a reference could impact only on the arbitrator(s)’ reputation and credibility, and the award’s persuasive value. It could be seen as weak decision-making. However, it could be argued that in the ICSID context, a reference to an annulled award is associated with legal consequences beyond the award’s persuasiveness.

Overall, it seems that an annulled award could be a source of law or facts affecting arbitrators’ credibility but not (necessarily) the second awards’ fate.

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The Abu Dhabi Global Market: An Arbitral Seat Open to All

Mon, 2019-05-13 19:15

John P Gaffney

Introduction

The Abu Dhabi Global Market (“ADGM”) is a financial free zone in the United Arab Emirates. Foreign parties are attracted to the ADGM for a number of reasons, including its direct application of English common law, the ability to use English language to conduct proceedings in the ADGM Courts, and its enhanced adoption of the UNCITRAL Model Law on International Commercial Arbitration (“UNCITRAL Model Law”) (see previous discussion here).

Further, the ADGM has recently opened an arbitration centre, which is equipped with hearing facilities that are made available to parties resolving their disputes through mediation or arbitration. The launch of the ADGM arbitration centre further enhances the ADGM’s attractiveness as an arbitral seat to all parties, including those registered in the ADGM, as well as to those with no connection with the ADGM.

Notwithstanding that the ADGM arbitration law was enacted in 2015, regrettably there appears to be some misunderstanding on the scope of its arbitral jurisdiction.

This article is intended to address such misunderstanding.

 

The Proper Scope of the ADGM’s Arbitral Jurisdiction

It has been suggested in a number of articles, including in a previous Kluwer Arbitration Blog by Dr Gordon Blanke, that the ADGM’s arbitral jurisdiction is more narrowly drawn than the DIFC (i.e., the underlying dispute must have some nexus to the ADGM).

Most recently, it was posited that:

“Unlike the case in the DIFC, future arbitrants cannot contract into the resolution by arbitration of any disputes in the ADGM: arbitrating in the ADGM requires a subject-matter nexus to the ADGM. This essentially means that arbitration in the ADGM is limited to (i) the resolution of civil or commercial disputes involving the ADGM or any ADGM stakeholders (ie ADGM authorities or establishments) or to (ii) the resolution of disputes arising out of a contract or a transaction conducted in whole or in part in the ADGM or out of an incident that occurred in the ADGM. As a consequence, DIFC arbitration is an attractive option to all those that wish to arbitrate general commercial disputes in a common law environment in the Middle East.”1) Gordon Blanke, “Free zone arbitration in the DIFC and the ADGM”, Arbitration International, 2019, 0, 1–22, at 2. jQuery("#footnote_plugin_tooltip_4796_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4796_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

There appears to be a misunderstanding. The Arbitration Regulations enacted in 2015 (“Arbitration Regulations 2015”), which govern arbitrations seated in the ADGM, represent an enhanced adoption of the UNCITRAL Model Law. Part 3 of the Arbitration Regulations 2015, which governs arbitration proceedings, applies to arbitrations “where the seat of the arbitration is the Abu Dhabi Global Market, or where an arbitration agreement applies these Regulations” (Article 8 of the ADGM Regulations).

The “seat” is the juridical seat of the arbitration designated (a) by the parties to the arbitration agreement, or (b) by the arbitral tribunal or any institution or person vested by the parties with powers in that regard. Article 33 (Seat of arbitration) of the Arbitration Regulations 2015 provides:

“The parties are free to agree on the seat of arbitration. Failing such agreement, the seat of arbitration shall be determined by (a) any arbitral or other institution or person vested by the parties with powers in that regard, or (b) the arbitral tribunal, having regard to the circumstances of the case, including the convenience of the parties.”

Therefore, contrary to what has been suggested, the Arbitration Regulations 2015 establish the ADGM as a seat of arbitration for (a) disputes with a nexus to the ADGM, or (b) for disputes unconnected to the ADGM, where the parties (i) choose the ADGM as the seat of arbitration, or (ii) agree to the application of the ADGM Arbitration Regulations.

The foregoing, and rather self-evident, conclusion is underlined by Article 32 (Determination of rules of procedure) of the Arbitration Regulations 2015, which provides in sub-section (3):

“Unless otherwise agreed by the parties, the tribunal has the power to order a claimant to provide security for the costs of the arbitration. This power shall not be exercised on the ground that the claimant is (a) an individual ordinarily resident outside the Abu Dhabi Global Market, or (b) a corporation or association incorporated or formed other than in the Abu Dhabi Global Market, or whose central management and control is exercised outside the Abu Dhabi Global Market.” [Emphasis added]

As may be seen, the Arbitration Regulations 2015 thus contemplate that the parties to an arbitration seated in the ADGM or to which the Arbitration Regulations 2015 otherwise apply will not necessarily have a nexus to the ADGM. If the requirement of a nexus to the ADGM did exist, the highlighted passage in Article 32(3), above, would be unnecessary.

This is consistent with the scope of jurisdiction of the ADGM Courts, in respect of which it is possible for parties to opt into the jurisdiction of the ADGM Court of First Instance, even where the transaction or dispute in question has no connection with the ADGM.2) The ADGM Courts, Civil Evidence, Judgments, Enforcement and Judicial Appointments Regulations 2015 (“ADGM Court Regulations”), as amended, which also govern the jurisdiction and procedures of the ADGM Courts (in addition to Abu Dhabi Law No. 4 of 2013 (“Founding Law”) which defines in part the scope of the ADGM Court’s jurisdiction), provides in Article 16 that the ADGM Court of First Instance may exercise jurisdiction conferred on it by (a) Article 13(6) and 13(7) of the ADGM Founding Law; (b) Applicable Abu Dhabi Laws; (c) the ADGM Court Regulations; (d) any other ADGM enactment; or (e) any written request by the parties to have the ADGM Court of First Instance determine their dispute. jQuery("#footnote_plugin_tooltip_4796_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4796_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Conclusion

It is regrettable that there remains to be some misunderstanding in relation to the scope of ADGM’s arbitral jurisdiction. The Arbitration Regulations 2015 establish the ADGM as a seat of arbitration for (a) disputes with a nexus to the ADGM, or (b) for disputes unconnected to the ADGM, where the parties choose the ADGM as the seat of arbitration. Thus, contrary to what has been suggested, parties with no “subject matter nexus” to the ADGM may freely choose the ADGM as the seat of arbitration and the ADGM Arbitration Regulations as the procedural law of the arbitration.

 

John Gaffney is a Senior Counsel at Al Tamimi & Company in Abu Dhabi.

References   [ + ]

1. ↑ Gordon Blanke, “Free zone arbitration in the DIFC and the ADGM”, Arbitration International, 2019, 0, 1–22, at 2. 2. ↑ The ADGM Courts, Civil Evidence, Judgments, Enforcement and Judicial Appointments Regulations 2015 (“ADGM Court Regulations”), as amended, which also govern the jurisdiction and procedures of the ADGM Courts (in addition to Abu Dhabi Law No. 4 of 2013 (“Founding Law”) which defines in part the scope of the ADGM Court’s jurisdiction), provides in Article 16 that the ADGM Court of First Instance may exercise jurisdiction conferred on it by (a) Article 13(6) and 13(7) of the ADGM Founding Law; (b) Applicable Abu Dhabi Laws; (c) the ADGM Court Regulations; (d) any other ADGM enactment; or (e) any written request by the parties to have the ADGM Court of First Instance determine their dispute. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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What Compensates Tears? A Case Study in How To Determine Damages In Large Proportion Disasters in Brazil through Class Arbitration

Sun, 2019-05-12 18:52

Luiz Olavo Baptista

Brumadinho Dam’s Rupture1)The dam collapse happened on 25 January 2019.. On the first day, the fire department, responsible for the rescues, estimated that the number of victims was about 200. Ten days after the disaster, the death toll was confirmed to be 134, while 199 were still missing. Trigger Warning: At this link one can find material produced by the BBC, showing images after the break of the dam near the city of Brumadinho. Discretion advised. jQuery("#footnote_plugin_tooltip_1249_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1249_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and the First Gulf War

Writing about these events side by side might seem like a mistake at first as they hold no historical connection and emerged under completely distinct circumstances. However, amidst these personal tragedies, we cannot ignore this common denominator: the human and material losses suffered by the victims. In both cases, either federal prosecutors or attorneys acting on behalf of the victims will have to deal with the complex process of calculating a fair compensation (for the lack of a better expression) over the damaged properties, the lost business expectations, and the work and salary prospects of the perished victims. All these elements matter in the determination of a fair value for the indemnification.

 

The UNCC Model

But how can we ensure that fair compensation is paid and justice done, given the magnitude of the disaster? In 1991, in the aftermath of the first Gulf War, the UN Security Council created the United Nations Compensation Committee (“UNCC”), a subsidiary organ whose purpose was to determine the compensation owed to those directly affected by the conflict. Under those circumstances, it was established that a class action would be the most suitable course of action.

What makes the UNCC model special is the separation of claims into two phases. In the first phase, the claimant could present claims arising from their own rights and other substantive aspects of the dispute. Hence, the victims may be aided by lawyers or other professionals as they argue their case. In the second phase, the Panels examined the claims in terms of their admissibility for each claimant or victim, including consideration of the existence of a nexus of causality and the determination of the quantum – using as main criterion the real value, in market conditions, of the damaged goods and/or establishments.

 

Translating the UNCC Model to Class Arbitration in Brazil  

Taking a cue from UNCC experience, one could imagine that a possible solution in the event of mass disasters, such as Brumadinho’s and/or even in case of wars, is class arbitration2) In Brazil, arbitration is considered an accepted alternative to long-standing lawsuits, which may obstruct access to justice, see explanatory discussion here. jQuery("#footnote_plugin_tooltip_1249_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1249_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

In Brazilian law, both class actions and arbitration are well established practices for dispute resolution in several situations.3) In Brazilian law this means of dispute resolution is available to some associations acting on behalf of their members (e.g., pension fund associations) jQuery("#footnote_plugin_tooltip_1249_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1249_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. However, compared with the American counterpart, the practice of class arbitration in Brazil is still in its infancy.

To consider the merits of this approach, we must pose ourselves the following question: why is class arbitration only an afterthought in the minds of Brazilian jurists? An attempt to answer this question requires understanding the legal premises of class action in Brazil, and how those foundations may or may not allow for class arbitration, which then allows for a comparison to the American experience in this area of law.

Brazil adopts the civil law system, in which its legal system is based on codified and written law, as opposed to the role played by precedents in common law systems. Nowadays, legal grounds for typified class actions are found in two main legal sources: the Public Civil Action Law (Law 7,347 of 1985) and the Consumer Protection Code. If in the United States class actions are only valid after the Court verifies the conditions under which the class was certified, in contrast, in Brazil the law already grants them legitimacy beforehand. Another difference is that class action decisions in the U.S. are binding to all members except those who informed the Court before the procedure that they were not to be considered as members of the class. This process, known as “opting out”, does not occur in Brazil. Instead, given that class actions lawsuits protect plaintiffs’ collective rights, a decision in a class action is only binding if it is favorable to class members.  If the decision is unfavorable, plaintiffs are still free to file individual lawsuits before the Court.

In Brazil, class action and arbitration law were designed independently and the legal framework does not necessarily provide for a specific legal apparatus to allow combination of the two. Still, that does not mean that class arbitration is impossible, nor that the nature of class action or arbitration are incompatible with Brazilian law. Rather, it does seem more of a lack of forethought by the legislator than an outright prohibition. In fact, the Federal Constitution allows labor class arbitration in the Article 114, §1, and legislatures previously discussed Bill No. 5139/2009, which deals precisely with arbitration as an alternative dispute resolution method for class litigations. Discussions over this particular bill, however, have since been discontinued.

Yet, at the end of 2018 the Court of Justice of the State of São Paulo accepted a collective arbitration. Shareholders of Petrobras (one of Brazil’s main state-owned company) decided to sue the company as a class after Federal Police’s Operation Car Wash corruption scandals were revealed. As a defense, Petrobras argued, before the first instance court, that the shareholders signed contracts with arbitration clauses, thus removing the state courts’ jurisdiction over their claims. The shareholders replied that they signed the clause as individuals, not as a group. In the decision, the judge ruled that, since all members of the class signed the arbitration clause, the arbitral tribunal had jurisdiction to adjudicate the claim. Yet, it would not be necessary for each individual to file an independent action. Collective arbitration could happen through class representation, reducing costs for the claimants. The Court of Justice thus upheld the decision of the first instance judge.

 

Applying the UNCC Model to Large Proportion Disasters in Brazil

On November 5, 2015, a dam in Mariana, located in the state of Minas Gerais, collapsed, causing catastrophic damage. Samarco, a joint venture between Vale (another one of Brazil’s main state-owned companies and the one responsible for the Brumadinho incident) and the BHP group, was responsible for the dam. Four years have passed and the environmental damage from the disaster remains, with an aftermath of 19 deaths and lawsuits being filled at the State and Federal levels. Out of the several administrative penalties applied, Samarco only paid one. An astonishing amount of dozens of public civil actions and more than fifty thousand individual lawsuits remain pending before the judiciary awaiting trial.

State-owned company Vale submitted to the Public Prosecutor’s Office the following proposal: (i) compensation for moral damages, ranging from R$ 75,000 to R$ 300,000, depending on the relationship the person had with the victim; (ii) monthly payment corresponding to two-thirds of the wages of the deceased worker until the date on which he would turn 75 years old; (iii) guarantee of “employment or salary” for the surviving employees of Brumadinho until the end of 2019; and (iv) health plan for families of independent and outsourced workers.

The Atlantic Forest’s Non-Governmental Organizations Network filed a civil lawsuit against Vale claiming compensation for collective moral damages in the amount of R$ 30 billion and compensation of R$ 500,000 to R$ 1 million for relatives of the deceased and surviving victims of the dam’s rupture.

In an interview, Supreme Court Justice Dias Toffoli said that the best alternative to Samarco’s reputation and to alleviate the suffering of the victims was through conciliation. The Coordinator of the program “Development and Socioenvironmental Rights” at the NGO Conectas, Caio Borges,  commented that “unlike the way in which businesses and the authorities acted in the case of the Rio Doce, this time the whole remediation process must be carried out through legitimate means and this means the participation of the people affected.” [

Given the large number of victims and the extensive material and environmental damage, I dare not say there is a method that both satisfies and reduces the impact of this incident with the various possibilities to be explored along the third-party funding companies in the market. For this reason, the legal model and mentality used in the Panels of the UNCC could be transported and adapted to the reality of Brumadinho – perhaps with the new perspective of a class arbitration.

The combination of both methods – bifurcated proceedings to be assisted by a fully and strictly vetted group of accountants and collective action – in the UNCC was paramount in the long process of damage determination and quantification. By implementing this reasoning, we could more adequately compensate the victims of the incident, as well as their families, for their material and immaterial losses, thus also reducing the risk of spending years or decades in the State courts in the search for justice.

References   [ + ]

1. ↑ The dam collapse happened on 25 January 2019.. On the first day, the fire department, responsible for the rescues, estimated that the number of victims was about 200. Ten days after the disaster, the death toll was confirmed to be 134, while 199 were still missing. Trigger Warning: At this link one can find material produced by the BBC, showing images after the break of the dam near the city of Brumadinho. Discretion advised. 2. ↑ In Brazil, arbitration is considered an accepted alternative to long-standing lawsuits, which may obstruct access to justice, see explanatory discussion here. 3. ↑ In Brazilian law this means of dispute resolution is available to some associations acting on behalf of their members (e.g., pension fund associations) function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Brexit: Could Arbitration Be A Port In The Storm?

Sun, 2019-05-12 01:31

Bianca Berardicurti

The Brexit clock is ticking and, under the current circumstances, the no deal scenario is being increasingly regarded at least as a concrete option – although the situation is changing on a daily basis and the extension of the two-year term under Article 50 TFEU could provide some breathing room.

In the context of the uncertainties surrounding the ratification of the withdrawal agreement, the consequences of a hard Brexit in the field of civil justice and private international law represent a major concern: It is not difficult to see that an exit of the United Kingdom (UK) from European Union (EU) without a deal would have disruptive effects especially in terms of jurisdiction and enforcement of decisions.

As matters stand, the jurisdiction, recognition and enforcement of decision across the European Union are regulated by the Recast Brussel Regulation 1215/2015 which, broadly, provides for:

  1. Specific rules for determining the intra-EU jurisdiction, with a rather explicit favor towards parties’ choice of forum;
  2. A relatively fast and simple procedure for decisions issued in EU Member States to be recognized and enforced across the EU space.

In case of hard Brexit, the Recast Brussel Regulation would most likely be swept away, with no chance for the UK, as a Non Member State, to re-join it. As a result, the fear is that no reciprocal regime would be in place between the UK and the remaining Member States for determining the jurisdiction, recognizing and enforcing decisions in civil and commercial matters.

The harsh effects of a possible no deal scenario on the civil justice field have also been quite eloquently stressed by the European Commission in its “Notice to Stakeholders: Withdrawal of the United Kingdom and EU rules in the field of civil justice and private international law” issued on January 2019. Indeed, among other issues addressed by the document, as far as jurisdiction and enforcement of decisions are concerned, it has been clearly stated that:

  1. for proceedings involving a United Kingdom domiciled defendant initiated on or after the withdrawal date, international jurisdiction will be governed by the national rules of the Member State in which a Court has been seized;
  2. unless a judgment of a UK court has been exequatured before the withdrawal date, the EU rules on recognition and enforcement of such judgments of the UK will not apply to a judgment of a UK court that has not been enforced prior to the withdrawal date, even where the judgment has handed down, or the enforcement proceedings commenced, before the withdrawal date;
  3. for proceedings to enforce a judgment of a UK court commenced as of the withdrawal date in the EU-27, recognition and enforcement will be governed by the national rules of the Member State in which recognition or enforcement is sought.

Moreover, the European Commission invited all stakeholders to take all the above consequences “into consideration when assessing contractual choices of international jurisdiction”.

In this respect, not even the “Convention of 30 June 2005 on Choice of Court Agreements” entered into by the EU, Denmark, Montenegro, Mexico and Singapore (2005 Hague Convention) (also referred by the Commission in its Notice), which was ratified by the UK in its own right in December 2018, seems to be a satisfactory tool to keep jurisdiction and enforcement of decisions unaffected by a no deal Brexit for two reasons. Firstly, there is a question as to whether the UK actually enjoyed legal standing in respect of ratifying the Hague Convention in its own right, given that the judicial cooperation in civil matters falls under the EU’s jurisdiction according to Article 81 TFEU, and the UK was still a Member State of the EU at the time of ratification. Secondly, it has to be kept in mind that the Hague Convention is far more limited in its scope than the Recast Brussels Regulation, since

  1. it applies only to exclusive choice of court agreements concluded in civil or commercial matters (see Article 1, 2005 Hague Convention);
  2. a number of matters are excluded from the scope of the Convention (see Article 2, 2005 Hague Convention), and
  3. no detailed rules are provided for dealing the issue of parallel proceedings.

By the same token, the possibility for the UK to re-join the 2007 Lugano Convention on jurisdiction, recognition and enforcement of judgments in civil and commercial matters (the provisions of which are largely similar with the Recast Brussel Convention), in its own right is, at this stage, shrouded in uncertainty. Indeed, among other things, the agreement of all the current signatories (EU, Iceland, Norway, and Switzerland) would be needed for the UK to re-join.

In the face of all the above, not only arbitration does seem to be completely unaffected either by a withdrawal agreement being ultimately signed between the EU and the UK, or by a no deal scenario (since the validity of arbitration clauses, the arbitral tribunals’ jurisdiction and the enforcement of awards largely depend on non-EU legislation); but, also, there is some room to expect a slight increase in the use of arbitration clauses in this interim phase, as well as in case of hard Brexit, or even, if the deal eventually occurs, after the transition period provided in the current draft.

This is because irrespective of Brexit, the UK and the remaining Member States will continue to be a part of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which is enacted in the UK by the 1996 Arbitration Act. As a result, the arbitration clauses will be reciprocally respected, and arbitral awards will in any event continue to be readily enforceable. Also, so far as investment treaty arbitration is concerned, the UK will still be part, inter alia, to the ICSID Convention, also enacted in the International Investment Disputes Act of 1966. On this last point, it might be also interesting to consider whether, if the UK leaves the EU with no deal, an opportunity could emerge to narrow the effects of the Achmea decision on the non-compatibility of arbitration clauses contained in intra-EU Bilateral Investment Treaties with EU law (Court of Justice of the European Union (CJEU) Case C-284/16) for UK-based investors. Just by way of example, although CJEU case law adopted before the exit day will be retained, the UK will however not be bound by any further decision that might be handed down by the CJEU with respect to the non-compatibility of arbitrations based on the Energy Charter Treaty with European law (see here).

Finally, on a merits perspective, arbitration also appears to be the intelligent mid-way solution in all those circumstances where parties do not feel like deferring exclusive jurisdiction to English Courts, but English law is still deemed, for whatever reason, to be essential in the balance of the agreement – for example the purpose of narrowing certain typical (and sometimes unappealing) civil law good faith related effects on contracts.

Indeed, in such a case, the choice of an arbitration clause would not only serve to avoid the potentially awkward situation of a foreign court deciding on English law issues, but, also, would provide the parties with the opportunity of building a more “English law friendly” environment around the case. To this aim, parties would indeed have the chance to appoint arbitrators having a common law background. Also, parties could choose one of the highly reputable English arbitral institutions such as the LCIA (see here). It is worth noting that, practically speaking, costs and expenses in arbitration proceedings are at least comparable to the costs and expenses in the context of an English Court litigation. The consequence is that one of the main (if not the main) unappealing traits of arbitration in certain civil law jurisdictions is unlikely to represent an issue in the UK.

All the above being said, whilst the jurisdictional system seems to wobble under the Brexit gunfire, international arbitration stands instead. In other words, if the worst comes to the worst, arbitration can be considered as a safe port in the current Brexit storm.

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LIDW 2019: Competition Disputes, Arbitration and Egyptian Competition Law, 10 May 2019

Sat, 2019-05-11 03:00

Fatma Adel and Karim Amr

The last session of the London International Disputes Week discussed the resolution of competition disputes. Sir Peter Roth, The Honorable Mr Justice, President of the UK Competition Appeal Tribunal, gave the keynote speech. Sir Roth explained that, while most of these disputes are a follow up to EU Commission decisions and one must also take into consideration the provisions of the Recast Brussels Regulation, there are several reasons why the English courts tend to hear high profile competition disputes (e.g. Sainsbury’s Supermarkets Ltd v MasterCard Incorporated and Others ([2016] CAT 11; Massive Trucks Claim etc.). The first reason, explained Sir Roth, is the disclosure procedure, given that access to evidence is a key element for most of the competition disputes. Related to this, Sir Roth noted that the English courts, unlike the other EU Member States courts, know how to deal with confidentiality, another element of competition disputes, and, in particular, of the disclosure proceedings. Second, English judges are known for the intensive case management, essential in such complex disputes, and more importantly, English judges ensure that expert evidence is comprehensively tested in the court. Sir Roth also referred to the English language, the specialist competition courts, the procedure for class actions etc, as other reasons which explain why English courts are preferred for competition disputes. On this note, the post below takes a look at arbitration and competition disputes under the Egyptian Law and first addresses the arbitrability of such disputes in Egypt.

 

Introduction

In general, competition authorities are responsible for the public enforcement of competition laws by detecting the anticompetitive practices in order to protect the competitive structure of the market as a whole. By contrast, private enforcement refers to private parties initiating litigation in order to obtain compensation or reliefs for infringement of competition law. In addition to its initial role of protecting private interests, private enforcement is considered as complementary to public enforcement, as it strengthens the effectiveness of competition law by increasing the deterrence and the awareness among lawyers, businesses and the public. As arbitration is one of the main types of private enforcement, the question of its application to competition law disputes is always raised. Globally, arbitrators fully recognize this duty and for the most part routinely apply competition law, at least as competently as most national courts.1)Assimakis P. Komnios, Arbitration and EU competition law, p. 48. jQuery("#footnote_plugin_tooltip_9412_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9412_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The Egyptian competition law (“ECL”) is enforced by the Egyptian competition authority (“ECA”), who is playing a key role in promoting competition, believing that an efficient free market economy where economic freedoms are fully respected creates a robust and innovation-based economy for the country. As for private enforcement, whether through courts or arbitration, the rules governing it and its interaction with public enforcement of competition law are well embedded in the Egyptian legal system. This is due mainly because the competition law infringements are of criminal nature and, thus, the general rules governing the civil consequences of criminal offences are applicable. Despite that, private enforcement is still underdeveloped in Egypt, as only one judgment ordering compensation for competition law infringements was rendered since the adoption of the ECL. The private enforcement being rare, arbitration of competition law is not mainstream in Egypt. In addition, arbitration decisions are not published. However, given the huge importance of arbitration as a mean of settling disputes between undertakings, the discussion of this matter is crucial.

Where the Egyptian arbitration law and the ECL are applicable, three issues are raised on the interaction between arbitration and competition law, which are the arbitrability of competition law matters, the role of the arbitrators and the parties and the opposability of ECA’s decisions and the courts’ judgments before the arbitrator.

1) The arbitrability of competition law issues

This question is raised especially in Egypt, not just because competition law is related to public enforcement, but also because competition law infringements in Egypt are subject to criminal law. The first consequence is that the execution of an arbitral award rendered in a direct violation of competition law would be annulled by the Egyptian courts, as it’s considered contrary to the public order 2)Article 58 of the Egyptian arbitration law. jQuery("#footnote_plugin_tooltip_9412_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9412_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. Of course, it is acknowledged that court review cannot systematically menace the finality of awards, which is the backbone of arbitration. Thus, an arbitral award should be set aside only if there is a concrete and serious violation of competition law principles. This would ensure the effectiveness of competition law and allay any concerns of competition law enforcers and, at the same time, would affirm the respect of arbitration principles and the finality of the arbitration award.

The second consequence is that criminal offences themselves are not arbitrable, but all their civil consequences can be raised before the arbitrator.3) Article 551 of the Egyptian civil law and article 12 of the Egyptian arbitration law. jQuery("#footnote_plugin_tooltip_9412_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9412_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In addition, the fact that the economic courts in Egypt have exclusive jurisdiction over litigation on competition law matters does not preclude the arbitrator to decide on them.4)Laurence Idot, Arbitrage et droit de la concurrence, Concurrences Review, no 4-2010, 2010, p. 5. jQuery("#footnote_plugin_tooltip_9412_4").tooltip({ tip: "#footnote_plugin_tooltip_text_9412_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

2) The role of the arbitrator and the parties

The arbitrator is bound by the will of the parties and only discusses the questions that are raised by them.5)UNCTAD, Dispute settlement, 2005, p. 10. jQuery("#footnote_plugin_tooltip_9412_5").tooltip({ tip: "#footnote_plugin_tooltip_text_9412_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, the truth is that it is a misplaced idea that arbitrators are purely bound by the parties’ demands and can do nothing without their consent. On the international level, it is now admitted that arbitrators owe a broad duty also to the legal systems that recognize arbitration as a mechanism for the settlement of domestic and international commercial disputes on a par with the courts and that allow the arbitrability of competition matters that competition law will be respected and applied. In fact, respectable arbitrators are unlikely to accept to overlook a serious breach of competition law, even if it’s requested by the parties.6)OECD, Arbitration and competition, 26 October 2010. jQuery("#footnote_plugin_tooltip_9412_6").tooltip({ tip: "#footnote_plugin_tooltip_text_9412_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In the case where there are several defendants and not all of them have signed the arbitration clause, which is frequent in competition law as usually a large number of companies are guilty of competition law infringements, the most suitable solution would be to estimate every conduct distinctly from the other for the arbitration body to be able to continue its recourse against the parties subject of the arbitration agreement. In all cases, follow-on actions are the most suitable for cartels due to the difficulty of proof, while stand-alone actions are more frequent in other anticompetitive practices such as abuse of dominance.

3) The opposability of ECA’s and courts decisions before the arbitrator

If an infringement is found, the ECA can issue administrative decisions. In principle, these decisions cannot bound arbitrators. However, the arbitrator is bound by the injunction of the ECA ordering the nullity of a contract.7)Article 20 of the ECL jQuery("#footnote_plugin_tooltip_9412_7").tooltip({ tip: "#footnote_plugin_tooltip_text_9412_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Regarding court’s judgments, arbitrators are bound by such decisions and cannot render an arbitral award which contradicts a previous decision taken by the civil courts or the criminal courts in the same subject of the dispute, as this one of the conditions of the validity of the arbitration award in the Egyptian arbitration law.8)Article 58 of the Egyptian arbitration law. jQuery("#footnote_plugin_tooltip_9412_8").tooltip({ tip: "#footnote_plugin_tooltip_text_9412_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Conclusion

The question of arbitration and competition law is a question of equilibrium between both of them in a way to ensure public enforcers that arbitration is an acceptable and useful mechanism for private enforcement on the same level as the action of the courts. This balance is extracted from the fact that both policies can be properly taken into account in the complementary phases of the arbitration itself and of the review process by the courts.9)OECD, Arbitration and competition, 26 October 2010. jQuery("#footnote_plugin_tooltip_9412_9").tooltip({ tip: "#footnote_plugin_tooltip_text_9412_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Regarding ECA and its efforts to promote competition law, there are additional efforts to increase the intervention of private enforcement as a way to compensate the victims of different anticompetitive practices. Arbitration as a mean of private enforcement is also backed by ECA in a way that assures that it is an acceptable and useful mechanism to strengthen public enforcement.

This post only reflects the personal views of the authors and it does not necessarily represent the official position of the Egyptian Competition Authority.

References   [ + ]

1. ↑ Assimakis P. Komnios, Arbitration and EU competition law, p. 48. 2, 8. ↑ Article 58 of the Egyptian arbitration law. 3. ↑ Article 551 of the Egyptian civil law and article 12 of the Egyptian arbitration law. 4. ↑ Laurence Idot, Arbitrage et droit de la concurrence, Concurrences Review, no 4-2010, 2010, p. 5. 5. ↑ UNCTAD, Dispute settlement, 2005, p. 10. 6, 9. ↑ OECD, Arbitration and competition, 26 October 2010. 7. ↑ Article 20 of the ECL function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Arbitration and the Shipping Industry: A Discussion on Bills of Lading

Sat, 2019-05-11 02:00

Andria Alexandrou

Shipping disputes might range from minor issues to complex jurisdictional claims with several parties involved in the contracts. Due to the popularity and observed benefits of arbitration, such as the privacy of the arbitral process and perceived certainty in the binding nature of arbitral awards, arbitral agreements have grown in use with the increase in international trade. Despite the size or complexity of the matters involved, parties prefer to opt for alternative, cost effective, and efficacious forms of dispute resolution. It is, therefore, common for contracts – which govern marine adventures and those for the sale of goods – to contain an arbitration agreement, and a set of arbitral rules which will govern the dispute resolution between the parties. The overwhelming majority of such contracts worldwide provide for arbitration in London in accordance with the terms of the London Maritime Arbitrators Association (LMAA). The 2018 Statistics released by LMAA show a number of 508 awards issued in 2018 and a number of 21 mediation proceedings conducted in the same year.

Some cases involving maritime issues and arbitration became notorious also in the context of broader issues, such as the power of the courts of the Member States of the European Union to issue anti-suit injunctions under the Brussels Regulation. In Allianz Spa and another v West Tankers inc (THE “FRONT COMOR”) Case C-185/07 [2009], the CJEU indicated that it is for the court (first) seized to exclusively rule on the arbitration agreement objection and on its own jurisdiction and that resorting to anti-suit injunction to prevent the court from doing so “necessarily amounts to stripping that court of the power to rule on its own jurisdiction under Regulation no. 44/2001 [Brussels Regulation]” and “runs counter to the trust which the Member states accord to one another’s legal systems and judicial institutions”.

In Sea Master Shipping Inc v Arab Bank (Switzerland) Ltd (The “Sea Master”), QBD (Comm Ct) (Popplewell J) [2018] EWHC 1902 (Comm), the judgment establishes an example of reconciling the competence-competence principle with the rights and obligations of the parties. The judgment contains an interesting discussion on the auxiliary stance of arbitration clauses inserted in commercial contracts, with an interesting illustration on the effects on challenges to arbitral jurisdiction under the Carriage of Goods by Sea Act 1992 (“COGSA 1992”). Further, the discussion is contextualised with reference to the rights and obligations of Bill of Lading (BoL) holders. Bills of lading are important documents within shipping transactions. A BoL is a document issued by the carrier to the shipper of goods. It is a negotiable instrument, which serves several purposes, amongst those are the receipt for the goods shipped; it evidences the contract of carriage, and also serves as a document of title, viz. for ownership purposes. One important aspect which is attached to the BoL, is that it serves as a security for trade finance providers.

In the light of the judgment of Popplewell J, parties must now be aware that when holding a BoL as security that such a holder of a BoL may become subject to an arbitral tribunal’s jurisdiction which has been formed under an arbitration agreement, contained in or evidenced by the BoL,1) Watson Farley & Williams, Do arbitration agreements in bills of lading bind their holders?, August 2018. jQuery("#footnote_plugin_tooltip_6441_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6441_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); irrespective of the fact that they are not seeking to exercise rights under the BoL. Based on the Courts’ decision, one must note that an arbitration agreement is separate and independent from the contract, under the doctrine of separability, as confirmed by Popplewell’s J:

“[O]ne could not assume that a statute such as COGSA which addresses the substantive rights and obligations of the parties under a matrix contract intends to treat the rights and obligations under the ancillary arbitration agreement in precisely the same way.”

 The Sea Marine case further provided how rights and obligations operate in practice when a BoL incorporates an arbitration agreement. Section 2(1) of the COGSA 1992 provides that “the lawful holder of a bill of lading… shall (by virtue of becoming the holder of the bill…) have transferred to and vested in him all rights of suit under the contract of carriage as if he had been a party to that contract.” Essentially, it provides that contractual rights entailed in the BoL are automatically vested with the holder. Therefore, the rights obtained by and obligations imposed upon the holder of a BoL are governed under the statute. Contrary to section 2, section 3 of the COGSA 1992 sets out that obligations and liabilities entailed in a BoL only apply to the holder; amongst those are “taking or demanding delivery of the goods under the contract of carriage, making a claim under the contract of carriage against the carrier in respect of any of those goods, or is a person who, at a time before those rights were vested in him, took or demanded delivery from the carrier of any of those goods, that person shall become subject to the same liabilities under that contract as if he had been a party to that contract”. Bearing this in mind, it has been discussed that the holder of a BoL who is a party to the carriage of goods due to section 2 of the COGSA 1992, is bound by an arbitration clause, irrespective of the fact that the liability incurred has not been triggered by the factual events required by section 3 of the COGSA 1992. Therefore, the importance of this case in arbitration is that the Commercial Court ruled that “the holder of a BoL which includes or incorporates an arbitration agreement is subject to the jurisdiction of a tribunal formed under the arbitration agreement”2)Do arbitration agreements in bills of lading bind their holders? Watson Farley & Williams, August 2018, see here. jQuery("#footnote_plugin_tooltip_6441_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6441_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, regardless if the holder is not seeking to exercise any rights under the BoL. This formulates the legal stance, irrespective of whether parties are seeking to exercise their rights under the BoL or are no longer holders to the BoL.

 

 

References   [ + ]

1. ↑ Watson Farley & Williams, Do arbitration agreements in bills of lading bind their holders?, August 2018. 2. ↑ Do arbitration agreements in bills of lading bind their holders? Watson Farley & Williams, August 2018, see here. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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LIDW 2019: International Commercial Arbitration and Gala Dinner, 9 May 2019

Fri, 2019-05-10 06:34

Crina Baltag (Acting Editor)

London International Disputes Week continued yesterday with the session dedicated to international commercial arbitration, hosted by Herbert Smith Freehills LLP.

The first panel, moderated by Chantal-Aimée Doerries QC, Atkin Chambers, discussed the future of international arbitration in London, and in particular what London offers and where it must improve in order to maintain its place as leading seat of arbitration.

Ania Farren, Vannin Capital, highlighted that from the perspective of arbitration costs, parties appreciate that the English law embodies the rule that costs follow the event (or loser pays). Further, Ania Farren referred to the role of third-party funding in international arbitration and the fact that London is a sophisticated place, not only accepting, but also encouraging funding in arbitration proceedings. Ania emphasised the support given by the English courts in the development of the funding practice, as well as the fact that third-party funders in London have managed a way to self-regulate and to ensure that high standards are followed.

Jacomijn van Haersolte-van Hof, LCIA, noted, also related to the costs of arbitration, that LCIA sees the need of more transparency when it comes to the time spent by arbitrators in a case, given that some institutions, including LCIA, work with hourly based fees for arbitrators.

Noradèle Radjai, Lalive, commented on one of the key themes of the arbitration panels of previous days, namely the “English way” of conducting arbitration. Noradèle explained that one should consider whether we are in fact in the presence of a protracted procedure, with long hearings and even longer document production phase. In this sense, the reaction should be “why doing it this way?” and proceed to considering other procedures. Ania Farren replied to this and suggested that the real question stakeholders should focus on is how to make arbitration going forward in an efficient manner.

Moving to the issue of Brexit, Mark Ferguson, Mylan, showed concerns as to whether Brexit would adversely impact the cultural awareness in London, while Jacomijn van Haersolte-van Hof suggested that one should also consider the short term problems generated by Brexit, such as tax issues or visa requirements for those attending an arbitration hearing, rather than only focusing on the long term consequences. On this line, Noradèle explained that Brexit would probably generate more competition between arbitration institutions, while Mark made the point that London should find a way to remain a dynamic seat of arbitration.

The second panel focused on whether technology will make international arbitration better and was moderated by David Brynmor Thomas QC, 39 Essex Chambers. Duncan Morely, Relativity, gave a short presentation about the technologies available at this point and which facilitate a more efficient arbitration procedure, in particular when it comes to document production. Nevertheless, Duncan emphasized that even with the varieties of technologies available, there is still a need for lawyers to be present in the process.

Professor Julian Lew, Queen Mary University of London, noted that arbitration files nowadays are electronic, with few documents submitted by parties in hard copy. Professor Lew suggested that now is indeed the time for arbitrators and counsel, when commencing an arbitration, to pragmatically sit down and agree on how the case will be presented, and this should include a decision on the use of technology.

Lucy Greenwood, Greenwood Arbitration, made the point that arbitrators and parties trust and use technology in arbitration proceedings, but that we now have to enhance the ways in which arbitration also adapts to the different tools enabled and developed by the use of technology. Suber Akther, Siemens, also confirmed that in-house counsel are fond of technology and they employ it to a great extent not only in arbitration proceedings, but in dispute resolution, in general. In this context, Suber made reference to the use of Online Dispute Resolution and Artificial Intelligence in the decision-making process, picking up on certain points raised at the Flagship Conference of Wednesday.

The third panel was moderated by Barry Fletcher, LexisNexis, and discussed the balance between the finality of arbitral awards and the safeguards before the English courts, with focus on sections 67, 68 and 69 of the 1996 English Arbitration Act. Matthew Weiniger QC, Linklaters, focused on whether one should consider challenging an arbitral award or not. Matthew explained that even when there is no prospect of a successful outcome of such challenge, there are collateral advantages that motivate a party to proceed with such challenge, such as delaying the payment under the award. Peter Hirst, Clyde & Co, emphasized that parties, when they sign up for arbitration, they are sophisticated enough to understand that finality of arbitral awards is one of the advantages offered by the process. Aloke Ray QC, White & Case, also suggested that there are, indeed strategic reasons for challenging an arbitral award and one of these could be that the losing party might be pushing for a settlement agreement. Ruth Byrne, King & Spalding, also suggested that one should consider the costs with challenging the arbitral awards, which could be significant.

The final panel of the session dedicated to international commercial arbitration was moderated by Chris Parker, Herbert Smith Freehills LLP, and debated whether there is diversity in international arbitration. The discussion kicked off with a short presentation by Stephen Jagusch QC, Quinn Emmanuel, of the Jay Z case and its effects on diversity in international arbitration. Stephen underlined that while the impact of the case was immediate, so far this was only with respect to the arbitration institution concerned and that one should take this as an opportunity for enhancing diversity more globally.

Vyapak Desai, Nishith Desai, explained that the real question about diversity is how to link it, as an objective, with the scope of arbitration, which is the adjudication of a dispute. Vyapak gave the example of India, as a diverse jurisdiction and culture, but that faces significant challenges in terms of ensuring that this diversity is represented, including in arbitration.

Mimi Lee, Chevron, highlighted the importance of promoting diversity, including by businesses. Mimi pointed out, however, that when it comes to selecting arbitrators, parties are more focused on finding a competent person, with the risk of not promoting diversity, and therefore, a solution for ensuring diversity must necessarily refer to increasing the pool of talented, diverse and competent arbitrators.

Source: Crina Baltag

The day ended with the Gala Dinner hosted by Global Arbitration Review in the superb setting of the Mansion House, the official residence of the Lord Mayor of London. GAR editor David Samuels introduced the keynote speaker, Michael Mcilwrath, Global Litigation Counsel at Baker Hughes GE in Florence, Italy, as a long-time “voice of the user.”

By a raise of hands questions at the start of Mcilwrath’s presentation, nearly half the diners indicated they had been born outside the UK, and a visible majority of all those present had worked in the past year on a dispute seated outside the UK. Touching on what he termed the “elephant in the room,” the impact Brexit may have on London as a seat, Mcilwrath argued that those present at the dinner had provided evidence that more important than the popularity of the seat as a measure of London’s success as a center for international dispute resolution is the breadth and reputation of the diverse people working there.

Offering a personal illustration, Mcilwrath said he had just spent his own “Arbitration Week” not in conferences but working on three arbitrations in London. He said that in none of the cases had the parties chosen London as the seat, nor English law, nor had they even appointed English-qualified counsel. The substantial work being carried out in London was instead by world-class experts in two cases, and the third was foreign counsel based in London handling an arbitration in another country (and not in the English language).

Mcilwrath concluded by suggesting that to maintain its leadership position, London should think of its community as an “organization,” in the sense of different people all sharing a common purpose. To thrive, it will need to preserve its robust, global pipeline of talented people. For example, while Brexit may bring about a more restrictive approach to boarders, London’s dispute community will need to be even more expansive, in order to keep London as the place where the world’s brightest practitioners want to come with their families to study, work, and live.

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LIDW 2019: London International Disputes – Present and Future, 8 May 2019

Thu, 2019-05-09 01:51

Crina Baltag (Acting Editor)

The 2019 London International Disputes Week continued yesterday with the Flagship Conference on the Present and Future of London International Disputes, in the unique setting of the National Gallery, in Trafalgar Square.

Professor Richard Susskind OBE, IT Advisor to the Lord Chief Justice, discussed the role of Technology and the Future of Dispute Resolution. Richard Susskind suggested that rather than stressing the same paradigm of quicker and cheaper resolution of disputes, one should consider the value lawyers bring to those they advise. As such, in the past fifteen years, one can note that the discussion has been centered on “more for less”, with services being decomposed in parts and outsourced. In this context, technology can replace some of the work lawyers do, such as document review, electronic disclosure, etc. In addition to this, Richard Susskind looked specifically at the role of technology in the context of the future of legal services and noted that there has been an exponential growth of technology in this field, with emphasis on the capability of technology to respond to most varied situations. For example, the increasing role of Online Dispute Resolution (ODR), which, in the definition of Richard Susskind, is an electronic form of Alternative Dispute Resolution and which includes e-negotiation, e-mediation and other forms of ODR, such as e-neutral evaluation. With this, the question raised by Richard Susskind was whether in dispute resolution there is, indeed, a need to physically congregate and, by way of consequence, whether a court is a service or a place. With this, Susskind envisages two generations of online courts, lato sensu: the first generation, dealing with low-value disputes and judges rendering their judgments online, and a second generation of online courts where judges are replaced by artificial intelligence. Finalizing, Richard Susskind urged the public to consider two points. First, that focus should be on dispute prevention, rather than on dispute resolution, and second, that clients do not necessarily need lawyers, but they need the outcomes the lawyers bring, and, particularly on this latter point, technology can be of utmost importance.

 

Source: Crina Baltag

Continuing the afternoon of the Flagship Conference at the London International Disputes Week, the panel on the Future of International Arbitration in London was moderated by Judith Gill QC, President of the LCIA Court, and had as panellists The Honourable Mr Justice Andrew Popplewell, Paul Friedland, White & Case, Domitille Baizeau, LALIVE, Susanne Gropp-Stadler, Siemens AG and Professor Dr Nayla Comair-Obeid, Obeid Law Firm. The focus of the discussion was on London as a seat of arbitration and the challenges it is likely to face in the context of Brexit. Nayla Comair-Obeid responded to the question addressed by Judith Gill as to what makes London a preferred seat for arbitration by pointing out that the latest Queen Mary/White & Case Survey on the Evolution of International Arbitration places London first, before Paris, Singapore, Hong Kong and Geneva, as the preferred seat, with more than half of the respondents believing that Brexit will likely have no impact on the use of London as seat. Some of the advantages of London as a seat of arbitration highlighted by Nayla Comair-Obeid were the efficiency of the English courts and the 1996 English Arbitration Act, as well as the quality of the legal education and of the legal services provided by lawyers and law firms. Paul Friedland turned to the threats to London as a preferred seat of arbitration and indicated regionalization – the increased recognition of regional arbitration hubs, in particular in East Asia and the Middle East – as the major challenge. Paul Friedland also emphasized that such regionalization is accompanied by globalization of legal practices, with major law firms being now able to advise clients in different parts of the world. Domitille Baizeau focused on the “English way” of conducting international arbitration, and, in this context the role of the Prague Rules on the Efficient Conduct of Proceedings in International Arbitration. Related to this, Andrew Popplewell mentioned that irrespective of the way arbitration is conducted, it has to be swifter and cheaper and, as such, the question is one of pro-activeness of arbitrators in the light of the due process principle. Going back to London as a preferred seat of arbitration, Susanne Gropp-Stadler underscored the fact that London offers different alternatives for different types of disputes, and indicated the important role not only of LCIA, but also of other institutions, such as the London Maritime Arbitrators Association or the Grain and Feed Trade Association Arbitration. Looking at the impact of Brexit on London as a preferred seat of arbitration, Susanne Gropp-Stadler indicated that we will probably become aware of the impact of Brexit only in few years, when long-term contracts concluded in the past two years would yield their disputes. Nevertheless, Susanne Gropp-Stadler emphasized that the issue is one of perception, in the sense that while Brexit might not have any impact on arbitration, parties might be pushed away by the way Brexit is handled by the British government.

The Flagship Conference concluded with the keynote speech by The Right Honourable David Gauke MP, Lord Chancellor and Secretary of State for Justice, who highlighted that one of the reasons parties choose London as a seat of arbitration is the trust they have in the English legal system.

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LIDW 2019: International Investment Disputes, 7 May 2019

Wed, 2019-05-08 03:00

Mercy McBrayer

The session on International Investment Disputes of the LIDW 2019 was divided in three panels discussing the hot topics in investment law and the Investor-State Dispute Settlement (ISDS) system: investment protection post-Achmea, interim measures, security for costs, emergency arbitration procedures, and transparency in investment arbitration, as well as the wider issue of ISDS reform.

The first panel of the session was moderated by Professor Loukas Mistelis, Queen Mary University of London, and addressed the landscape of investment law and ISDS post-Achmea. The discussion was timely, especially in the light of the recent Decision of the Arbitral Tribunal in Eskosol v. Italy on the applicability of the January 2019 Declarations of the Member States of the European Union (EU) to the Energy Charter Treaty (ECT) and to the case. To begin, Professor Mistelis highlighted that most of the EU developments in investment law are the result of a trade law approach of the European Commission, rather than an investment law approach. He noted the probable lack of a logical basis for this approach. Thomas Sprange QC, King & Spalding, reviewed the Declaration on the Legal Consequences of the Judgment of the Court of Justice (of the European Union) in Achmea (Slovak Republic v Achmea Case C-284/16) and on Investment Protection in the European Union of 15 January 2019, as well as the separate Declarations submitted by Hungary on the one hand, and Finland, Sweden, Luxembourg, Malta, and Slovenia, on the other, on 16 January 2019. Thomas highlighted that the language of the Declaration of 15 January 2019 is aspirational, rather than legally binding. As such, the Declaration sets out a plan for the steps EU Member States should take in the future of intra-EU investment law and ISDS. He also stressed that the Declaration is not retroactive, irrespective of if one considers that such instrument produces have any legal consequences. Siddharth Dhar, Essex Court Chambers, discussed the position on English courts before and after Achmea. He identified two situations where the CJEU judgment is likely to become relevant:

  1. set aside for a BIT arbitration seated in London is sought under Section 67 of the 1996 English Arbitration Act, and
  2. an investor seeks to fight enforcement of a foreign award with the argument that the arbitral tribunal lacked jurisdiction to hear the matter.

Based on existing case law, it appears the English courts may find that international law applies in these situations, rather than EU law, where there is an intra-EU BIT. Siddharth also looked at the enforcement proceedings in England of the arbitral award rendered in Micula v. Romania. On this final point, Siddharth stressed that the consequences of Brexit will likely depend on what the withdrawal agreement negotiated between the EU and UK ultimately says. Matthew Weniger QC, Linklaters, looked at the CJEU Opinion 1/17, where Belgium asked for a ruling on the EU law compatibility of the Investment Court System provided for by the CETA. Matthew pointed out that the Opinion seems to rest on three points of analysis:

  1. whether the ISDS provisions under CETA are compatible with EU legal order;
  2. whether the ISDS provisions under CETA are compatible with the principle of equal treatment; and
  3. whether the court system provisions under CETA are compatible with the right of access to an independent tribunal.

The CJEU appears to have answered all three points in the affirmative.

The second panel was moderated by David Goldberg, White & Case, and focused on four hot topics of investment arbitration, namely: interim measures, emergency arbitration, security for costs, and transparency. Sylvia Tonova, Jones Day, kicked off the discussion of interim measures in the context of the sovereign right of States to prosecute criminal offences. She highlighted that the current view of ISDS in the popular press on this matter is that investment arbitration is nothing but a “get out of jail free card”. Sylvia refuted this by noting that such requests are rarely granted and then focusing on a few key investment arbitration cases dealing with these interim measures, with special focus on Quiborax v. Bolivia, Hydro v. Albania, Munshi v. Mongolia, Boyko v. Ukraine, and Nova Group v. Romania. The conclusion is that the bar is high for a party to be awarded interim measures that avoid criminal proceedings and that they are only given if the party can show that the motive for the criminal proceedings was to interfere with the proceedings of the dispute. David Goldberg focused on the use of emergency arbitration in investment arbitration and discussed the highlights of the procedure available under the SCC Arbitration Rules, first introduced in 2010. David emphasized emergency arbitration decisions in JKX Oil v. Ukraine, TSIKinvest v. Moldova (see the inapplicability of the cooling-off period requirement in emergency arbitration proceedings), and Puma Energy v. Benin. David also raised the question as to whether fairness can be maintained in the ISDS context with the speed of the procedure, given that States barely have time to respond or appoint a counsel and thus sometimes do not even participate in the emergency proceedings. Yasmin Mohammad, Vannin Capital, addressed the issue of security for costs in investment arbitration proceedings and began with the short overview of the evolution of investment treaty protection, noting a growing reversal of roles within the traditional notion of investment importing and exporting states. She noted in this context the significant policy shift from the security for costs measure which was meant to protect respondent States against frivolous claims. Yasmin highlighted that a series of arbitral awards have said that exceptional circumstances must exist in order for a tribunal to order such measure. The discussion also considered the relevance of third-party funding in the context of security for costs, with a focus on the decision in Armas v. Venezuela. Yasmin noted that while funders generally support disclosure of the existence of a third-party funder, the disclosure of the very terms of the funding agreement is usually strongly opposed by clients. Finally, Charles Claypool, Latham & Watkins, discussed the issue of transparency and bullying campaigns in investment arbitration. Charles emphasized that on one hand there is an acknowledged need for transparency in investment arbitration, given that a State is a party to the dispute, while on the other hand there is a need to protect parties and their rights in the dispute. Looking at Biwater Gauff v. Tanzania, Charles noted that, in the light of the active press campaigns by both parties to undermine each other in the dispute, the arbitral tribunal held that aggravating the dispute was the limit of transparency. Charles emphasized that transparency is seen positively, but that when a party engages with the media, transparency is then likely being used as a rationale for undermining the proceedings. At the same time, Charles stressed that while it is notable that States generally seem to agree that transparency in ISDS proceedings is an important public interest, to date only five States have ratified the Mauritius Convention on transparency.

The third panel of the session, moderated by Sylvia Nouri, Freshfields, focused on the ongoing conversation around ISDS reforms. Andrea Bjorklund, McGill University, looked at the development of such reform in the UNCITRAL Working Group III, in the light of the EU proposal of a court system (already present in CETA, for example). Andreas stressed that there appears to be no consensus among the States participating in the Working Group III as to whether there is a clear solution responding to the concerns raised in relation to the ISDS system. While it might be argued that there are two camps, one supporting systemic reform by way of this court system, and the other supporting incremental reform by adjusting the current investment arbitration procedure, Andrea noted that the discussion is still evolving. Andrew Cannon, Herbert Smith Freehills, focused on the steps taken by States in addressing the concerns with ISDS through the provisions in the new generation of international investment agreements. Andrew gave the examples of attempts to make the definition of ‘investor’ more definite in the new Belgium-Luxembourg Model BIT and clarifications added to the fair and equitable treatment standard in the new Dutch Model BIT, as well as the increased emphasis on investor’s responsibility, especially in the context of environmental protection. Toby Landau QC, Essex Court Chambers, looked at the current amendment process of the ICSID Arbitration Rules. In this context, Toby took the position that we are witnessing a collective failure of imagination when it comes to procedural improvements of ISDS. This is explained, Toby said, by the fact that investment arbitration proceedings are modelled on the rules applicable in international commercial arbitration.  He advocated that the time has come to address the real issue in question: whether the current procedure works at all for investment arbitration. As to the ICSID amendment process, Toby emphasized that the current improvements are not radical. To the contrary, the current version of the draft Arbitration Rules released in March 2019 drops several bold amendments suggested in the first draft of August 2018. Toby finalized his presentation by urging stakeholders to think outside the box when it comes to any ISDS reforms. Lola Fadina, UK Department for International Trade, concluded the panel and the session with an overview of ISDS reforms from a State perspective. Lola emphasized that States must provide for the right investment environment, as well as for access to justice while responding to any concerns raised in relation to the current system. She described the balancing act states must perform when protecting the interests of a state’s investors, foreign investors, and public interests. Lola stressed the importance of the new generation of international investment agreements in the context of the current discussion.

 

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LIDW 2019: The Rise of Arbitration in Financial Services Disputes, 7 May 2019

Wed, 2019-05-08 00:00

Matteo Zambelli

The nature and up-coming trends in the financial services dispute sector were one of the topics dealt with during the first day of the London International Dispute Week (LIDW). The audience had the opportunity to formulate an understanding of how financial disputes are treated by courts and tribunals.

The Right Honourable Lord Justice Hamblen gave the key-note speech emphasising on the joint work between the Chancery Division and the Commercial Court of the Queen’s Bench division as an initiative to meet the needs of court users in financial cases. The prepared report set out recommendations which constituted the basis of the “Financial List”. An interesting feature of this List was the need for a more formalised training for judges in relation to financial markets. The response to such a concern is the training of court judges through seminars arranged by the Financial Markets Law Committee (FMLC). The question that arises at this point is whether such expertise can be found (without rather than with training) in arbitral tribunals as an alternative to courtroom litigation.

Dr Jacomijn Van Haersolte-Van Hof focused on the arbitration of financial services disputes from the perspective of the LCIA. In terms of numbers, the significance of arbitration is not at all neglectable for this sector. Namely, 29% of the LCIA cases per industry sector concern banking and finance disputes. An important selection factor determining the parties’ choice to arbitrate such disputes is the high quality of decision-making by experienced arbitrators within the industry sector. With this background in mind, the issue discussed in this post is: Is arbitration rising in the financial services disputes?

 

It is often maintained that innovation in finance is a reaction to an economically inefficient framework. No such reaction has yet occurred to the way in which financial services disputes are resolved in England. Unlike other sectors that rely heavily on arbitration, disputes in the world of finance (with the exception of project finance) have been settled through recourse to national courts of major financial centres (with London by a pre-eminent forum in this respect). According to the 2013 Queen Mary’s International Arbitration survey, litigation ranked as the first choice (82%) for the financial service industry in terms of dispute resolution mechanisms. English courts have further cemented their leadership with the creation of the specialist Financial List that handles claims relating to the financial markets. Hence, as evidenced by the 2016 report from the ICC Taskforce on Financial Institutions and Arbitration, financial institutions have fairly limited exposure to arbitration.

The preference for court-based dispute resolution is chiefly dictated by the requirement for legal certainty in a fast-evolving market (although the considerable case law that has developed since the 2008 financial crisis has provided helpful guidance in the financial sector), which, in England, is provided by a body of binding precedents. Additionally, in respect of certain highly regulated financial markets, public policy dictates a court involvement in the adjudication of disputes. Finally, the lack of binding precedents in arbitration generate significant concerns for banks and institutional investors that could be faced with arbitrating the same issue multiple times against different counterparties without the point at issue ever being resolved.

Thus, according to the 2018 Queen Mary’s International Arbitration survey, when responding to the question “how likely is it that the use of international arbitration for resolving cross-border disputes will increase in relation to the following industries and sectors?”, 56% of the respondents from the Banking and Finance Sector believed that this was likely. While this is an increase from the previous iteration of the survey, it appears a rather conservative view when contrasted with the over 80% expressed by respondents from the other sectors.

However, albeit with less enthusiasm than in other markets, this trend has started to shift in recent years and recourse to arbitration is on the rise. The increasing complexity in the nature of claims involving financial products, such as priority-of-payment disputes between noteholders in connection with structured investment vehicles (SIVs) and collateralized debt obligations, the availability of a pool of highly specialised arbitrators to adjudicate financial disputes (i.e. The Panel of Recognised International Market Experts in Finance, “PRIME” established in 2012), and the involvement of counterparties from emerging markets are some of the key drivers behind the use of arbitration in financial transactions.

In a sector that relies heavily on market standard provisions, the publication by the International Swaps and Derivatives Association (ISDA) of its “2013 Arbitration Guide” can be considered as an important step in providing market participants with an alternative dispute resolution option beyond litigation. Thereafter, the European Federation of Energy Traders (EFET) has followed the ISDA example by providing for dispute resolution through the London Court of International Arbitration (LCIA) or the German Institute of Arbitration in their master agreements for the delivery and acceptance of gas and electricity.

In December 2018, ISDA built on its success with the revision of its arbitration guide, which was expanded to include arbitration clauses (governed in all cases, bar one where the agreement is subject to Irish law, by either English or New York law) for use with 16 different arbitration centres. This diversification could also be considered as an attempt to address the gap between the number of proceedings and the availability of arbitration by widening the availability of different arbitral fora. It is often remarked that in areas such as derivatives there is a real need for arbitrators with a higher level of background in the instruments and practices of the market. While this may well be the case, often the recurrent themes in derivative matters being subjected to litigation are the same: mis-selling claims, disputes as to close-out procedure, suspension of payments, or validity of termination. These are issues that many commercial arbitrators are very familiar with and they may soon become less challenging with an industry-wide implementation of smart contracts.

Should one wish to address the immediate need for specialised arbitrators the establishment of a derivative industry-specific arbitration institution such as the London Maritime Arbitrators Association (LMAA) could be the way forward by introducing a standardised approach, reducing costs, and increasing efficiency. Such an institution could be highly beneficial for ISDA members in concentrating a deep pool of experts under one industry specific umbrella. This concentrated level of expertise could help to create an interpretative consensus through the publication of anonymised abstracts of awards (this is PRIME’s approach) and convince institutional investors based in key financial centres to solve their disputes through arbitration.

While as a result of ISDA’s approach there has been a growing number of derivatives related disputes being referred to arbitration, such disputes predominantly involve parties from emerging markets. This trend is shared amongst most financial services disputes in general. This was the reason why the China International Economic and Trade Arbitration Commission (CIETAC) has produced the Financial Disputes Arbitration Rules at an early stage (2003), while another decade was needed for ISDA and PRIME to produce theirs.

However, counterparties in emerging markets are increasingly pushing banks and financial institutions to have dispute resolution take place in neutral fora. This trend can be tracked in the marked increase in the number of disputes under the LCIA rules in the banking sector as evidenced in the LCIA 2018 Annual Case Work.

With the availability of the expedited procedure from The Arbitration Club, i.e. the Financial Sector Branch’s “Financial Services Expedited Arbitration Procedure”, and of some summary procedures provided under the rules such as the ones of the Singapore International Arbitration Centre (SIAC), it is believed that the remit of arbitration in finance can be expanded beyond plain vanilla banking, asset management or ISDA derivatives.

One of the areas that could benefit from the use of arbitration is an area of finance that relies exclusively on the courts’ support – securitisation. In the context of securitisation transactions or other transactions involving insolvency remote special purpose vehicles (SPVs), by adopting this mode of dispute resolution for the Trustee (for the benefit of the SPV’ securities holders) and for the other parties involved in the securitisation transaction (bearing in mind that the consensual nature of the arbitration process only binds the parties that agree to it), the SPV will ensure that the risk of court interference with the contractual structure selected by the parties is minimised. The advantage of using such procedure (a benefit that would extend to most non listed financial transactions) is, of course, that any proceeding will, to a large extent, be kept confidential.

Additionally, by forcing the holders of securities to be represented by the Trustee in the arbitration proceedings, multiple (and perhaps conflicting) proceedings by different classes of investors in the securities will be avoided. Further, since it has it has become apparent during the financial crisis that courts may be consulted for matters that are not strictly “disputes” (such as a request for direction from a Trustee under the trust instrument in a securitisation transaction), arbitration clauses will have to be drafted rather widely to capture these additional requests to be put to an arbitral tribunal. Moreover, arbitral tribunals with expert arbitrators appear to be rather suited to address such “additional request”.

Finally, if arbitration were to be used as the default dispute resolution provisions in securitisation transactions, the structure’s bankruptcy remoteness could be enhanced by limiting, through arbitration, the intervention of the courts in the area that poses the highest degree of risk to investors in a securitisation transaction – insolvency. This could be achieved, as mentioned above, by clarifying in the arbitration clause that any dispute or claim shall be adjudicated subject to the subordination, non-petition, and limited recourse stipulations; thus ensuring that such provisions are not derogated from or disapplied. However, it would not be possible to oust the jurisdiction of the courts completely. This is because even when it could be possible to restrict through arbitration courts having jurisdiction over the SPV, it would not be possible, as proven by the Lehman Brothers’ insolvency, to oust the jurisdiction of the courts in respect of the insolvency of other parties (i.e. Trustee, Swap Counterparty, etc.) to a securitisation transaction.

While the growth in the use of arbitration in the finance sector continues, there are instances in which arbitration is not a viable tool. This may be determined by the nature of the subject matter (which is not arbitrable) of the dispute, by the existence of insolvency proceedings, by the characteristics of one of the parties (i.e. a public entity that should be submitted only to the transparency of a public hearing), or by their numbers (multiparty arbitration may not be a viable option or some of the parties may not have signed the relevant arbitration clause). Alternatively, the speed of litigation tools such as default or summary judgment may be warranted for although they are not awarded by courts too readily. Finally, there may be instances where the jurisdiction of the courts cannot be ousted. That being said, it would still appear that arbitration is suitable to solve most financial disputes and it will continue to gain popularity in the financial sector.

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Interviews with Our Editors: Insights from Dr Jacomijn van Haersolte-van Hof, Director General of the LCIA, During London International Disputes Week

Tue, 2019-05-07 07:01

Kiran Nasir Gore (Associate Editor)

Thank you for joining us on the Kluwer Arbitration Blog, Dr van Haersolte-van Hof!  We appreciate that the LCIA is quite busy this week as a Supporting Institution of the inaugural London International Disputes Week (LIDW19). We are honored to have this opportunity to gain insight from your perspective and highlight for our readers the LCIA’s role as a leader among global arbitral institutions. 

 

  1. You’ve had a particularly unique path toward becoming Director General of the LCIA, with a career spanning two decades and experience acting as counsel and sitting as arbitrator in global disputes in affiliation with multiple law firms, big and small. How do these experiences shape your vision for the LCIA?

It is a great pleasure to contribute to the Kluwer Arbitration Blog, in particular during this inaugural London International Disputes Week.

I was fortunate to sit first as tribunal secretary and then as arbitrator almost from the outset of my career as a practitioner. This is one of the attractions of arbitration from my perspective; practitioners often combine the roles of counsel and arbitrator, which contributes to the quality of the process and enhances one’s skills both as counsel and as arbitrator. I was able to apply these skills as a teacher of arbitration later in my career, as well.

I was active within the LCIA for many years, acting as counsel and arbitrator, serving as one of the original YIAG Co-Chairs and a frequent attendee of the Tylney Hall symposia. My involvement with the institution as well as my experience working for various firms, both large and small, has positioned me well to understand the legal side of the role, the casework component and the types of thought leadership that the institution can produce.

When the opportunity arose to join the LCIA as Director General, I realised that this would be a unique opportunity to add a further perspective to my arbitration practice, and to help continue the momentum of the LCIA from a venerable, but small institution to a key key player in international arbitration.

 

  1. One of your first activities as the Director General of LCIA was to oversee the release of the LCIA’s 2014 Arbitration Rules. Do you see a further update of the Rules in the LCIA’s near future?  If so, what are the top three areas you would focus on?

My joining the LCIA coincided with the launch of the 2014 LCIA Arbitration Rules. While it was a steep learning curve, the arrival of the new Rules formed a unique opportunity to connect and meet with many users and discuss the substantive issues triggered by the new Rules.

Indeed, I expect some further changes to the Rules to be introduced. We are not anticipating a complete overhaul, but we are looking forward to more of an update to be released later in the spring. Areas where updates could be made would be to confirm the existing powers to expedite the arbitration process. It may also be an opportunity potentially to introduce GDPR and other regulatory language.

As a coincidence, I look forward to mid-June when the LCIA will welcome its first Deputy Director General, Jamie Harrison, who will help steward these updates, as well.

 

  1. Despite continuing increase in the number and types of arbitral institutions established globally, your Annual Reports confirm that the LCIA – and London by association – continues to maintain a steady market share. What kinds of parties and disputes does LCIA appeal to, and what qualities help you to maintain your leadership status? 

London is and will undoubtedly remain the preeminent forum to meet commercial, business and legal needs. This is especially true in certain sectors, which is reflected in the LCIA’s caseload. 2018 saw a significant rise in the number of disputes in the banking and finance sector, reaffirming the LCIA’s position as the world’s premier arbitral institution for complex financial disputes. Energy and resources and transport and commodities also remain important industry sectors of the LCIA.

It is interesting to note that in the banking and finance sector, parties act significantly more frequently as claimant than as respondent.

Looking at the types of agreements we frequently see at the LCIA, loan agreements and shareholders’ agreements are the number one and two.

It is also important to note that parties frequently choose English law and London as the seat even though 80% of the parties are from outside of the UK. This is a reflection of the importance of London as a commercial, business and legal centre where users are either based themselves, or where they are comfortable making use of the infrastructure.

 

  1. LCIA has launched an online database containing anonymised decisions of the LCIA Court on challenges made to arbitrators, beginning in 2010. How does this initiative reflect best practices in light of debates on transparency, conflicts, and arbitral integrity?

One of the unique features of LCIA arbitration is the confidential nature of the arbitration proceedings. In investment arbitration in particular there is a noticeable trend towards transparency. For now, LCIA users continue to value confidentiality as one of the key advantages. It is therefore not for the LCIA to publicise awards issued by LCIA arbitrators.

Transparency is of course a broader concept than publishing awards and transparency of other aspects of the procedure may contribute to the well-being of the system. Arbitrator appointments and in particular challenges are vital to the integrity of the arbitral process.

Several years ago, the LCIA therefore decided not only to provide reasoned challenge decisions, but also to publish anonymised digests of the LCIA Court’s challenge decisions. Interestingly, the number of challenges, let alone the number of successful challenges is very limited (approximately six per year over the last few years, with a caseload of approximately 300 cases per year). I like to think that this is attributable to the robust procedure, which dissuades frivolous challenges but provides a solid platform for potentially meritorious procedures.

 

  1. The role of tribunal secretaries (sometimes known as the Fourth Arbitrator) has been a hot topic in the field for some years now. In response to these debates, in 2017, the LCIA analysed the issue and revised its Notes to Arbitrators, having recently concluded a Roadshow on the topic.  Do you anticipate seeing increased use of tribunal secretaries in the future?  Are there ideal qualities that a tribunal secretary should possess?

Tribunal secretaries are a feature of arbitration, albeit that they do not figure in every case. Given this reality it is better to accommodate and facilitate such usage, rather than turn a blind eye to it, especially for an institution which should be capable of meeting the needs of users and arbitrators in a wide range of cases and procedures. The LCIA guidelines are prescriptive when it comes to procedure, safeguarding standards of independence and impartiality, scoping the secretary’s mandate and remuneration, but not prescriptive when it comes to identifying the tasks which the tribunal secretary may perform. The guidelines are designed to facilitate a rational discussion of the tribunal secretary’s tasks to prevent surprises and potentially disappointment and disgruntled parties at a later stage of the proceedings.

The launch of the Tribunal Secretary Roadshow has been and continues to be one of the most satisfying series of events in which I have been involved. Discussing the role of tribunal secretaries inevitably leads to a discussion of more general and sometimes quite profound issues such as how a tribunal anticipates dealing with evidence, how the internal decision-making process amongst tribunal members works and what they expect from the parties.

People often feel strongly about the use of tribunal secretaries, which is not only a reflection of personal preferences, but also often driven by cultural perspectives. There is not a “one size fits all” solution, but hopefully the guidelines on tribunal secretaries will lead to a greater understanding of the versatility of the instrument, of the benefits it can bring and the restrictions that may apply.

 

  1. Over the past few years, many (including authors on our Blog) have speculated on the impact of Brexit on London as an international arbitration hub. What are your thoughts?  

Brexit will ultimately not affect London as an international arbitration hub. The key legal instrument, the New York Convention, is a truly global instrument and the Arbitration Act is solid and robust. Arguably, compared with court litigation arbitration may become a more attractive option as litigation is likely to be affected more profoundly when the Brussels Regulation ceases to apply to the UK. Then again, the real challenges of Brexit are perhaps not the strictly legal developments, but psychological or emotional factors, not in the least caused by the lengthy and uncertain process. Competing hubs and practitioners will not hesitate to try to bank on these sentiments, unjustified as that may be.

What is certain, and this is not something to be celebrated, but still a factor to be reckoned with in our industry, is that Brexit is undoubtedly going to lead to an increase in disputes, at least for some time.

London was a centre for international disputes and international arbitration long before the European Union and I am convinced it will remain so in time to come.

 

  1. Congratulations on the LCIA’s role as a Supporting Institution for the inaugural London International Disputes Week – it must be quite the effort! Can you tell us about the impetus for this initiative and how it intersects with the current global focus on the UK?

The prospect of Brexit, albeit that the precise timing and format uncertain at this stage, was one of the drivers for the LIDW. It was also a good opportunity to bundle a number of new as well as existing successful and important events, including the biannual LCIA Tylney Hall symposium on 9 May.

With a focus on both arbitration and litigation, LIDW will undoubtedly celebrate London as a key centre for a variety of disputes. The city’s key position in this regard is due to a combination of English law, a wide pool of lawyers and its facilities and services (court reporters, hearing venues, etc.).

With such a robust agenda, it is going to be a busy week and I am looking forward to it! I expect many users from London and from overseas will attend events as well as set up meetings on the side. I look forward to seeing many readers of the blog in person over the next couple of days.

 

Thank you for this opportunity.  We wish continued success to both you and the LCIA!

This interview is part of Kluwer Arbitration Blog’s coverage of the inaugural London International Disputes Week (LIDW19), further posts available here.  It is also a part of our “Interviews with Our Editors” series – past interviews are available here.  

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Unilateral Option Clauses: Russian Supreme Court Puts an End to the Long-Lasting Discussion

Mon, 2019-05-06 22:12

Alexander Gridasov and Maria Dolotova

Introduction

Unilateral option clauses (also known as “asymmetric” or “one-sided” clauses) are clauses which give both parties the right to refer disputes to a particular dispute resolution forum, but which simultaneously give one party an exclusive right to elect to refer a particular dispute to another forum. The classic example of a one-sided clause is a standard arbitration clause for both parties supplemented with an extra option for one of these parties to start the dispute with the state courts of the competent jurisdiction (the “prorogation” part of the clause).

Inclusion of such clauses into the agreement can be highly beneficial to the party enjoying the extra option. When a dispute arises, such party would be able to choose the forum which is most favourable in the circumstances.

As usual, there is more in this than meets the eye. The courts in some jurisdictions have shown a negative attitude to such clauses and even rendered them invalid in some cases.

Until the end of 2018, the position in Russia was not clear cut. It was evident that one-sided clauses would likely cause problems (although there were a few courts which took a different view). However, due to ambiguity in court practice, it was hard to foresee what “type” of problems one-sided clauses would cause in a particular case. As discussed below, the main risks were such clauses being rendered invalid (i) in full; (ii) only in respect of the prorogation part; or (iii) only to the extent that such clauses provided inequality in forum choice options (in the latter case the parties are put on an equal footing in terms of forum choice).

On 26 December 2018, the Presidium of the Russian Supreme Court put an end to this long-lasting discussion and issued a Digest of Court Practice Relating to Judicial Assistance and Control over Domestic and International Arbitration (the “Digest“).

Below we will consider the attitude of the Russian courts to one-sided clauses in different periods of time and then the effect of the Digest.

 

Position of the Russian courts before 2012

Arguably, one-sided arbitration clauses were not an issue until 2012. The courts were guided by the decisions of the Federal Arbitrazh Court of the Moscow Circuit rendered in a series of disputes initiated by financial institutions under relevant facility agreements (FC Eurocommerz ZAO cases and the Financial Leasing Company case).

The agreements contained an arbitration clause and also provided for the right of the creditor to initiate proceedings in the courts of England or any other appropriate jurisdiction. In each particular case, the creditors initiated actions before the Arbitrazh Court of Moscow. The defendants requested that the proceedings be withdrawn by reference to the valid arbitration clauses. Although the courts of first instance in some of the cases upheld the defendants’ approach and terminated the proceedings, the higher courts considered the claims on the merits and confirmed the validity of the unilateral option clauses in the agreements. Moreover, it was emphasised that a party bearing financial risks (a creditor) is lawfully vested with the right to choose the jurisdictional options contained in the agreement.

In 2012, this tolerant approach dramatically changed following the Ruling of the Presidium of the Supreme Arbitrazh Court of the Russian Federation in the widely known Sony Ericsson case.

 

Sony Ericsson case

The case concerned an action initiated by a Russian entity, Russkaya Telefonnaya Kompaniya (RTK), against a Russian subsidiary of Sony Ericsson over the quality of mobile phones supplied to RTK. The dispute resolution clause provided for all disputes to be resolved by ICC arbitration in London with an option vested in Sony Ericsson to apply to a court of competent jurisdiction.

In violation of the dispute resolution clause, RTK filed a claim with the Arbitrazh Court of Moscow which dismissed the claim without hearing. The court referred to the arbitration clause in the contract concluding that it had no jurisdiction to hear the case. The conclusion of the court of the first instance was upheld by the higher instance courts.

However the Presidium of the Supreme Arbitrazh Court of the Russian Federation set the rulings of the lower courts aside and remitted the case to the court of first instance.

It held that a one-sided option clause violated the principle of procedural equality of the parties. It further clarified that a unilateral option clause vesting the right to refer a dispute to a state court with one party to the agreement and depriving another party of this right is invalid. This meant the depriving party should have the right to apply to a competent court enjoying equal jurisdictional rights with its counterparty.

However the wording and consequently the effect of the ruling in the Sony Ericsson case was not entirely clear and resulted in ambiguity and inconsistent decisions as discussed below.

 

Age of ambiguity

Neither courts nor scholars could come to a unanimous opinion as to the consequences of the conclusions made by the Supreme Arbitrazh Court in the Sony Ericsson case.

According to the prevailing view a clause under which only one party has a right to refer a dispute to the state court and the second party is deprived of this right shall become bilateral or “symmetric” so that both parties (when acting as a claimant) have similar rights to choose between arbitration and state courts.

For example, in the 2015 case of Piramida LLC v BOT LLC, the court considered a one-sided option clause issue while enforcing an arbitral award. It agreed with the Sony Ericsson case’s motif that a dispute resolution option clause should not vest the right to refer a dispute to a state court with only one of the parties. The court further stated that the impaired party should have an equal right to choose a competent court or tribunal between those determined under the unilateral provision in the contract.

An alternative approach found in the case law provides for invalidation of the “prorogation” part of the clause. Primarily this position is caused by the divergent approach to unilateral option clauses in different legal jurisdictions. For example, in the UK where one-sided clauses are deemed to be valid and enforceable, a claimant with a right to go to a state court will turn out to be in a better position in comparison with its counterparty that can only refer a dispute to arbitration. Meanwhile in Russia, the same dispute resolution agreement will be construed as violating the equality of the parties’ rights. Such violation can be restored by granting parties the right to file a claim with a competent Russian state court in accordance with general jurisdictional rules resulting from the invalidation of the “prorogation” part of the dispute resolution provisions of the contract.

Finally, our analysis has revealed a few cases where the Russian court concluded that a unilateral option clause should be rendered invalid in full: both its arbitration and “prorogation” parts. In the 2016 case Emerging Markets Structured Products B.V. v Zhilindustriya LLC and others, the court considered a claim filed by a foreign creditor against Zhilindustriya LLC and other guarantors under a guarantee governed by English law. The claim was filed with the Arbitrazh Court of Moscow at the place of residence of one of the respondents. The claim was granted in full albeit the respondents tried to argue that it was to be dismissed without consideration on the merits due to the arbitration clause. The courts declared the dispute resolution clause (both the arbitration and “prorogation” parts) invalid referring to the Sony Ericsson case. They concluded that a one-sided option clause violates the principle of balance of rights vested in the parties which is deemed to be a directly applicable rule according to the courts considering this case. Having said this, the courts arrived at the decision that general jurisdictional rules provided by the Arbitrazh Procedure Code of the Russian Federation should apply to determine jurisdiction instead of the unilateral option clause agreed by the parties.

In another 2014 case, Novokuznetsky cold-store combine OJSC v UMO LLC, the court dismissed the application of Novokuznetsky cold-store combine OJSC to enforce an arbitral award rendered under a unilateral option clause.1)For the sake of clarity the court also found that the counterparty – UMO LLC was not properly notified about the arbitration hearing. jQuery("#footnote_plugin_tooltip_5905_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5905_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Referring to the Sony Ericsson case, the court concluded that the unilateral option clause was invalid as violating the equality of the parties’ rights and the general principle of equality of the parties. The court failed to further substantiate the particular legal grounds under which it found the award unenforceable. However one can presume that a reference to violation of public policy as a ground to refuse enforcement was likely borne in mind by the court.

These two cases show there was a clear risk that the Russian courts might refuse to enforce an arbitral award rendered under a unilateral option clause.

Following the above practice a unilateral option clause also leaves open the possibility of a respondent in arbitration proceedings commenced under such clause, commencing proceedings before the Russian courts as a claimant (provided the courts admit the existence of personal or territorial jurisdiction). Apart from additional expenses, such proceedings may jeopardize the  possibility of enforcing the arbitration award in Russia at a later stage (if it is inconsistent with the Russian judgment).

 

End of discussions

At the end of 2018 the Supreme Court put an end to the above contradictory practice. In its Digest the court determined that a unilateral option clause violated the principles of competitiveness and equality of the parties, breached the equality of the parties’ rights and was therefore invalid to the extent that such clause provided for inequality in forum choice options. As a consequence each party to the contract is deemed as having equal rights to choose a forum agreed in the option dispute resolution clause.

In spite of the fact that the Digest does not formally have a precedential value, it provides valuable guidance to the approach which the Russian courts will likely pursue in relation to unilateral option clauses.

Having said the above and taking into consideration the clarifications provided in the Digest, the application of unilateral option clauses in contracts with Russian counterparties, particularly when enforcement is expected to be sought in Russia, does not likely entail nullity of the dispute resolution option clause in full or refusal to enforce an arbitral award rendered under such clause, albeit it will not prevent the Russian party from filing a parallel claim with the Russian courts.

In this regard the parties should carefully assess whether the risks associated with one-sided option clauses in contracts with Russian counterparties override the potential benefits of flexibility which the claimant may have.

 

References   [ + ]

1. ↑ For the sake of clarity the court also found that the counterparty – UMO LLC was not properly notified about the arbitration hearing. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Damages Considerations in Central Asian Investment Arbitrations

Sun, 2019-05-05 17:32

Tigran Ter-Martirosyan

Despite the variety of investment treaty disputes involving assets in the Post-Soviet jurisdictions in Central Asia, assessment of damages in each particular case is often heavily debated by the parties, experts and tribunals. In many instances, selecting an appropriate valuation method is the cornerstone of the tribunal’s decision-making on damages. This article provides an overview of some publicly available investment treaty awards in relation to assets in Kazakhstan, Uzbekistan, Kyrgyzstan and Tajikistan, and analyses the key considerations of tribunals in relation to damages.

 

An Analysis of Tribunals’ Considerations in Damages Assessment

 

  1. The Discounted Cash Flows (DCF) Method

DCF valuation is based on the concept that value can be assessed by reference to expected future cash flows.

In performing a DCF valuation, it is necessary to consider the expected financial performance of the subject asset. In doing so, valuers may have regard to projections prepared by management or other stakeholders (such as banks, investors, equity analysts) as at the valuation date, and also consider the historical performance of the asset (although the latter is not necessarily relevant in estimating the future performance).

A survey of publicly available awards rendered for investment disputes in Central Asia demonstrates that the majority of tribunals treat this method with caution, principally because of the uncertainties they face in its application:

  • In AIG Capital Partners et al. v Kazakhstan (2003) [¶¶ 12.1.9-12.1.10], the tribunal referred to the speculative nature of DCF analysis due to the asset not being a going concern and the absence of a track record or advance customer orders to assess future cash flows reliably;
  • In Al-Bahloul v Tajikistan (2010) [¶¶ 71-73] and Caratube International Oil Company et al. v Kazakhstan et al. (2017) [¶¶ 1087, 1098, 1101, 1106-1107, 1119, 1131, 1151], the tribunals raised the issues of going concern, proven track record and “sufficient certainty” of profitability in commenting on the DCF method; and
  • Also in Al-Bahloul v Tajikistan (2010) [¶ 96], the tribunal questioned the applicability of the DCF method if the financing of the asset was uncertain.

Notwithstanding the above, some tribunals have determined that the DCF method is an appropriate approach to valuation, even when the subject business has no track record or limited data is available as to its historical and/or expected financial performance:

  • The tribunal in Al-Bahloul v Tajikistan (2010) [¶ 75] acknowledged that determination of future cash flows from hydrocarbon exploration projects “need not depend on a past record of profitability…and sufficient data allowing future cash flow projections should be available” and a minority arbitrator in Caratube International Oil Company et al. v Kazakhstan et al. (2017) [¶ 1089] stated “that the valuation of a concession or a contract for the exploration of an oil field is calculated by reference to the reserves (and not to the actual profit)”;
  • In Sistem Muhendislik v Kyrgyzstan (2009) [¶ 164], the tribunal stated that DCF may be applied even if available data is scarce, if both parties considered it to be sufficient for the DCF approach;
  • In Rumeli Telekom et al. v Kazakhstan (2008) [¶ 810], the tribunal found that “DCF valuation would likely have formed one of the measures which would have informed a discussion between a willing seller and a willing buyer”, but nevertheless the DCF method “must be understood as an approximation which is dependent on the validity of the assumptions, and not as a mechanical calculation which yields a value whose validity is not open to question”.

 

  1. The Market Approach / Comparable Multiples Method

Whilst tribunals acknowledge the applicability of the market approach (sometimes referred to as the comparable multiples method), and in some instances even prefer this method over the DCF method (e.g., Stati et al. v Kazakhstan (2013) [¶ 1625]), the market approach has its limitations. It provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available, in particular by considering the latter’s prices as a multiple of their financial and/or operating metrics. Commonly used multiples include enterprise value to EBITDA and price to earnings.

The key shortcoming of the market approach, as identified by tribunals in the past, is that it is limited by the degree of comparability between the subject asset and the benchmark / comparable assets (or between the economic characteristics of the subject asset over time).

Nonetheless, tribunals have concluded that despite (sometimes) limited comparability, circumstances might exist where there are no alternative ways to value the subject asset:

  • In Belokon v Kyrgyzstan (2014) [¶ 312], the tribunal noted that the comparable multiples method to valuing a Kyrgyz bank was “in some respects mechanistic, and unlikely to be wholly consonant” and “the circumstances are not free from difficulty or doubt”, but the “final numbers reflect what the arbitrators believe to be prudent approximations derived from the best available information to them”. Due to the absence of comparable quoted banks in Kyrgyzstan or Central Asia generally, the multiple ultimately applied to value the bank in question was based on the prices of similar banks in Central and Eastern Europe, which had different economic characteristics (not least due to the different country risk levels);
  • In Caratube International Oil Company et al. v Kazakhstan et al. (2017) [¶¶ 1133-1135], the tribunal rejected multiples derived from comparable asset sales and purchase offers for a variety of reasons, including differences in asset location, stage of development, size and arm’s length nature of the bids and actual transactions;
  • In Sistem Muhendislik v Kyrgyzstan (2009) [¶ 162], the tribunal found no adequate basis for application of the comparable multiples approach as the majority of comparables were in more developed markets than Kyrgyzstan (e.g., UK, US, Sweden). The tribunal considered that proposed application of a 30% discount to those multiples to adjust for the conditions of the Kyrgyz market “involve[d] a large measure of speculation”.

 

  1. Role of Past Transactions in the Subject Asset

The awards analysed suggest that tribunals place significant weight on transactions in the subject asset itself (and even in non-binding or indicative bids that do not result in transactions), and any value indications derived from these. In some instances, tribunals relied on transactions despite them having taken place when the asset’s performance and/or general economic conditions were materially different to those at the damages assessment date. I note that using past transactions to value the subject asset is a variation of the comparable multiples method discussed above.

For example:

  • In Rumeli Telekom et al. v Kazakhstan (2008) [¶¶ 813-817], the tribunal awarded just above 50% of the claimed DCF value without any detailed calculation of the awarded amount, but with reference to transactions in and offers for the subject telecom business that: (a) occurred after the valuation date (i.e., the benefit of hindsight was used); (b) were rejected (in particular, the tribunal states it “does not regard them as relevant to the market value of the shares” at the valuation date); (c) were non-binding; and (d) were made at the “time the very rapid market growth in the market…had not become established”;
  • In Stati et al. v Kazakhstan (2013) [¶¶ 1746-1748], instead of relying upon valuation methods adopted by the parties’ experts, including DCF, comparable multiples and wasted costs, the tribunal considered “the relatively best source for the valuation…accepted by the Tribunal are the contemporaneous bids that were made for the LPG Plant [i.e., one of the subject assets] by third parties after Claimants’ efforts to sell the LPG Plant both before and after” the valuation date. The tribunal considered actual bids for the asset and ultimately awarded the amount offered by a state-owned entity. In other words, the tribunal relied purely on factual inputs (despite those appearing to be non-binding) as opposed to valuation expert opinions.

 

  1. Third-party Valuations of the Subject Asset

Another reference point that tribunals appear to consider are contemporaneous third-party valuations performed outside of the dispute context.  For example, in Stati et al. v Kazakhstan (2013) [¶ 1643], the tribunal refers in its award to a third-party valuation performed by a bank for a state-owned entity independently of the dispute and which corroborates the claimant’s valuation.

 

  1. Sunk or Wasted Costs

Notwithstanding the pros and cons of the valuation methods discussed above, the so called “sunk or wasted costs” method appears to have a material impact on tribunals’ awards in investment arbitrations. This method follows the replacement cost approach, which follows the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction, unless undue time, inconvenience, risk or other factors are involved. In practice, tribunals appear to treat wasted costs as a reference point for replacement cost. This consideration is particularly prominent where tribunals are concerned with the speculative nature of other valuation methods, inputs or modelling assumptions.

For example:

  • In AIG Capital Partners et al. v Kazakhstan (2003) [¶¶ 12.1.9, 15], the tribunal criticised the DCF method as applied by the claimant because the fair market value of the investment on the DCF basis was more than 4 times the amount invested at the relevant date. On that basis, the amount invested up to the valuation date was awarded;
  • In Caratube International Oil Company et al. v Kazakhstan et al. (2017) [¶¶ 1087, 1151, 1161, 1164, 1166], the tribunal found that the value of lost future profits did not provide a basis for damages that was sufficiently certain and, therefore, “sunk investment costs best express in monetary terms the damages incurred…as a result of the unlawful expropriation”;
  • In Stati et al. v Kazakhstan (2013) [¶¶ 1687-1688], the tribunal accepted the amount invested in an oil field exploration project as damages, but stated that damages claimed for lost profit / opportunity “provide a much higher threshold for Claimants’ burden of proof…both legally and factually”, referring to a requirement for “track record of profitability rooted in a perennial history of operations, or…binding contractual revenue obligations in place that establish the expectation of profit at a certain level over a given number of years”.

Nonetheless, some awards recognise that cost is not necessarily representative of value, even if easier to establish. For example, the tribunal in Sistem Muhendislik v Kyrgyzstan (2009) [¶ 161] found that, in the context of expropriation, “replacement cost is less helpful than a valuation based upon expected profits…in contrast, because buyers of businesses can be expected to value them according to the profit that they will generate, rather than the cost of creating them, the “multiple deals”…and the DCF method, appears more appropriate”.

 

Comments and Concluding Remarks

Based on the above analysis, it appears that tribunals in Central Asian investment arbitrations have concerns with the DCF and market approaches due to questions of reliability of the assumptions underpinning the former and comparability of benchmarks in the latter. Tribunals viewed transactions in or bids for the subject asset and wasted costs as valuation reference points or, at least, as helpful cross-checks.

In relying upon historical transactions or bids, it is necessary to consider (a) the similarity in the economic characteristics of the asset at the relevant times (e.g., an asset in the development stage may not be comparable to the asset when it is more mature); (b) changes in external market conditions over time (e.g., interest rates, regulatory regime); and (c) whether the transactions were conducted at arm’s length and, in the case of bids, whether or not they were binding.

As to wasted costs, despite the above raised criticisms of the DCF and market approaches, they are generally accepted business valuation approaches and, as noted in Rumeli Telekom et al. v Kazakhstan (2008) [¶ 810], one would expect these approaches to be considered by a willing buyer and a willing seller in reaching an arm’s length transaction price. This is particularly relevant given that the cost (a historic measure) to build an asset may be substantially different to the asset’s fair market value, which in many instances reflects investor’s expectations as to future benefits that could be derived from that asset.

 

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

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A Data-Driven Exploration of Arbitration as a Settlement Tool: Are Case Outcomes Affected by the Size of the Claim?

Sun, 2019-05-05 00:12

Brian Canada, Debi Slate and Bill Slate

The growing repository of international commercial arbitration case data maintained by Dispute Resolution Data (DRD) is designed to enable practitioners to use analytical tools, ranging from simple to complex, for gleaning valuable insights into the effectiveness of arbitration as an alternative dispute resolution mechanism. For example, we showed in our first blog post that among the 3,500+ active international arbitration cases in DRD’s database, a sizeable majority result in settlement/withdrawal—and in many cases, this outcome is reached relatively quickly, often within one year following the claim date and before any counter-claims or hearings. Since then, we have published follow-up results that dive continually deeper into the dataset to show how the patterns of arbitration case outcomes can vary depending on case type and other parameters.

Here, we examine the potential effect of the size of the claim, both alone and in conjunction with case type, on the outcomes of international commercial arbitration cases, with a specific focus on whether the case resulted in settlement/withdrawal (as opposed to other outcomes, such as the rendering of an award judgment, dismissal of the case, or administrative closure). For the sake of keeping the analysis relatively simple, we will group the cases into three different ranges of claim amounts corresponding to successively larger orders of magnitude. The first range consists of smaller claims, totaling $1M or less (where M = “million”). The second range includes cases with claim amounts between $1M and $10M, and the third range includes cases with the largest claim amounts (totaling $10M or more).

When looking at an aggregate view across all case types in the DRD database, there appears to be an inverse relationship between the claim amount and the likelihood of reaching settlement or withdrawal. As depicted in Figure 1, the average settlement frequency for cases with the smallest claim amounts ($1M or less) is 60%, with a margin of error of ±2% (computed at a 95% level of confidence). Cases with claim amounts in the range of $1M to $10M had a settlement frequency of 54% ± 3%, and the largest cases ($10M or higher) settled at a frequency of 43% ± 4%.

Figure 1. Estimated frequencies at which settlement/withdrawal is reached for international commercial arbitration cases (since 2005), as computed across all case types from the DRD database, and for successively larger ranges of claim amount ranges. Each measurement is annotated with the DRD Signal Strength, which is closely tied to the size of the sample used in the analysis (thereby reflecting data quantity, not quality.) Claim amounts for international cases have been converted to U.S. Dollars for the purpose of this analysis.

 

The DRD Signal Strength, introduced in our October 2018 blog post, is our proprietary indicator of the degree of confidence that the data samples used in our analysis are reflective of the corresponding populations of all such international commercial arbitration cases that meet the same criteria. Similar to examples we have shown previously, larger sample sizes yield a higher “signal strength,” and with the relatively large samples analyzed here (1911 cases with claim amounts of $1M or less, 974 cases with claim amounts between $1M and $10M, and 574 cases with claim amounts of $10M or more), the high signal strength — 5 out of 5 for all three claim amount ranges — is not surprising. Consequently, we can be reasonably confident that the true proportion of international commercial arbitration cases reaching settlement appears to decrease with increasing claim size.

The apparent inverse relationship between claim amount and settlement/withdrawal frequency motivates many possible questions, but one must recognize that we are looking at an overall, “aggregate” view of the data. Could a similar relationship be observed for specific case types—or, at the very least, are there any differences in settlement frequency with respect to the claim amount’s order of magnitude?

Figures 2A through 2D illustrates the settlement/withdrawal frequencies, for each of the three claim amount ranges, across four of the most well-represented case types in the DRD database, respectively: commercial contracts, construction, wholesale & retail trade, and hospitality & travel. For at least one of these case types, there appears to be a pattern of decreasing settlement frequency with increasing claim amount, although the “steadily decreasing” behavior observed in the aggregate view (depicted in Figure 1 above) is not as apparent.

For example, smaller cases ($1M or less) in the commercial contracts category (Fig. 2A), appear to settle at a very high rate (71% ± 3%), with the settlement rate dropping off considerably for cases between $1M and $10M (34% ± 12%) and above $10M (39% ± 17%). In addition, we see what appears to be a drop-off in settlement frequency for cases in the hospitality & travel category (Fig. 2D), but this appears to occur only for cases with claim amounts above $10M, and there is a significant margin of error due to the very small number of cases that fall into this claim amount range. For cases in the commercial contracts category, there is no overlap in the margin of error between the groups of cases with the smallest ($1M or less) and largest ($10M or more) claim amounts, suggesting the possibility of a relationship between claim size and case outcome—at least for this particular case type. However, for the other three case types shown (Figs. 2B-2D), the possibility of a relationship between claim amount and settlement frequency is much less clear, owing largely to the significant margin-of-error overlap across all three claim amount ranges.

Figures 2A through 2D. Differences in the estimated proportions of international commercial arbitration cases (since 2005) that result in settlement/withdrawal, for each of four highly represented case types in the DRD database, grouped by claim size range.

 

The results shown in Figures 2A through 2D suggest that the combination of case type and claim amount could have a potential effect on settlement frequency, but such an effect may only be limited to certain case types. A more complex analysis (at a minimum, a test for statistical significance) would be required to determine the probability that a case’s outcome is potentially dependent on the range in which the case’s claim amount falls. As an example, it can be shown from the results of performing a chi-square (????2) test of independence that for these three ranges of claim amounts (i.e., $1M or less, $1M to $10M, and $10M or higher) and the two outcomes studied herein (i.e., settled/withdrawn vs. not settled/withdrawn), there is a very low, almost negligible probability that reaching an outcome of settlement or withdrawal is independent of the claim amount range—at least for those cases in the commercial contracts category. This appears to be in line with the evidence presented in Figure 2A above, which suggests that—for this case type—there appears to be some relationship between claim amount and settlement frequency.

In contrast, performing a chi-square test of independence for each of the other three case types (construction, wholesale/retail trade, and hospitality & travel) results in a much higher probability of the data observed under the hypothesis that a case’s outcome and the size of its associated claim amount are independent. In other words, we cannot reject the possibility that the size of the claim has little or nothing to do with the outcome of the case, given the data that we currently have available for these three case types. When you look at Figures 2B through 2D above, this should make sense—the proportions of cases reaching settlement/withdrawal for each range of claim amounts appear not to be that different, especially considering the significant overlap in the margins of error across the three claim size ranges.

For space considerations, a detailed walkthrough of the computations involved in this and other tests for significance will be reserved for a future blog post, but of note: a chi-square test based on the data aggregated across all case types (i.e., the data depicted in Figure 1) yields a very low probability that the outcome of a case is independent of its claim amount range. This suggests that performing similar significance tests for other case types (beyond the four case types analyzed herein) could potentially produce results similar to those computed for the commercial contracts category.

DRD continues to grow and strengthen the quantity and quality of international commercial arbitration case data in its repository. In future blog posts, and as noted above, we plan to present at least one tutorial to illustrate the basics of statistical hypothesis tests, such as the chi-square test of independence that was summarized above, and possibly others. We also plan to explore the costs associated with various input variables (including but not limited to claim amount and case type), which can potentially help practitioners to set realistic budgets for international commercial arbitration cases in which they may be involved.

 

 

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Enforcement of Awards Against Sovereign States in Russia: Recent Developments

Sat, 2019-05-04 00:11

Nikita Kondrashov

Several authors have already discussed the enforcement of arbitral awards in Russia (see for example the recent posts on the issue estoppel and public policy in recognition and enforcement proceedings, on the confusion relating to the material scope of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and on the enforceability of awards rendered on the basis of model arbitration clauses).

Notwithstanding the above, the issues related to recognition and enforcement of awards issued against sovereign states in Russian courts have not yet been discussed on this blog. While this issue was also recently addressed in recognition and enforcement proceedings in Entes Industrial Plants (see case A40-230382/2018), the analysis made by Russian courts during recognition of OJSC Tatneft v. Ukraine  award remains the most thorough one.

The outcome of the recognition and enforcement proceedings in both cases can have considerable practical implications. A few former Soviet states may still have assets in Russia that claimants can use to enforce arbitral awards. For instance, as only Belarus, Kazakhstan and Uzbekistan are now involved in at least ten ICSID cases altogether, it is likely that investors may eventually seek recognition and enforcement in Russia should they succeed with their claims. Therefore, the outcome of both the above-mentioned proceedings becomes relevant, given their likely impact on the approach of Russian courts to enforcement against other states’ assets in Russian territory.

The Tatneft Award

The Tatneft award dealt with a number of claims of the Russian oil company Tatneft under the Russia-Ukraine BIT (“BIT”). On 29 June 2014, the tribunal, seated in Paris (France), unanimously found that Ukraine had breached the BIT and was liable to pay compensation amounting to 112 Million USD to Tatneft.

Tatneft sought to recognize and enforce the award in several jurisdictions, including Russia. The approach of the Russian courts to Tatneft’s application was rather peculiar. The Russian courts initially refused to recognize and enforce the award on the ground that Russian courts could only assume jurisdiction over such proceeding if Ukraine had assets that could be used to enforce the award within their territorial jurisdiction. It took Tatneft almost two years to convince the courts to reconsider this position.

Enforcement in Moscow Courts – The Requirement of “Effective Jurisdiction

The legal framework governing sovereign immunities in Russia is set by the Federal law “On jurisdictional immunities of foreign states and their property in Russian Federation” (“FIL”). This law draws a distinction between immunity from jurisdiction, i.e. immunity of a state from being sued in the courts of another state, and immunity from enforcement, i.e. immunity of the property of a state from measures aimed at enforcement of court decisions by another state. According to the FIL, a number of sovereign properties, e.g. properties used for diplomatic purposes, enjoy immunity from enforcement.

The rules for enforcement of arbitral awards in Russia are governed by the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the NY Convention”), the Code of Arbitrazh Procedure of the Russian Federation (“CAP”), and the arbitration law largely based on the UNCITRAL Model Law on International Commercial Arbitration. Within that framework, the recognition and enforcement of foreign arbitral awards and actual enforcement of recognized awards are two distinct stages of proceedings. The courts handle the recognition and enforcement proceedings of foreign arbitral awards in accordance with the NY Convention and other applicable domestic laws. After the competent court recognizes a foreign award in Russia, the court bailiff carries out the actual enforcement against debtor’s assets.

Article 242 of the CAP provides that the application for enforcement of an award can be filed either at the place where the debtor of the award is located (“seat criterion”) or at the place where the debtor’s property is located (“property criterion”). Unless either of these criteria is met, Russian courts will not accept jurisdiction (see e.g. the Ruling of the Russian Supreme Court in the case A40-183971/2016 dated 11 September 2017).

As Ukraine owned several buildings in Moscow, Tatneft apparently chose to rely on the property criterion and filed its application for recognition and enforcement with the Arbitrazh Court of Moscow (the court of first instance). In its Ruling, the Arbitrazh Court or Moscow held that Tatneft had failed to demonstrate that Ukraine had waived its immunity from jurisdiction in enforcement proceedings, even if it agreed to arbitration under the BIT. Adopting an interesting interpretation of Article 242 CAP, the court also found that it lacked territorial “effective jurisdiction” in the case under the property criterion, as Ukraine’s buildings in Moscow were used for diplomatic purposes and enjoyed immunity from enforcement. Tatneft subsequently challenged this ruling before the cassation court, the Arbitrazh Court of Moscow District.

In its Decree of 29 August 2017, the cassation court disagreed with the reasoning of the court of first instance. Firstly, it found that Ukraine had waived its immunity from jurisdiction both in respect of arbitration proceedings and any subsequent recognition and enforcement proceedings by agreeing to arbitration under the BIT. Secondly, the cassation court concluded that the NY Convention does not allow a refusal of recognition and enforcement of an award on the grounds of immunity of the debtor’s property from enforcement. Therefore, the court implicitly concluded that immunity of debtor’s property from enforcement was irrelevant at the stage of the recognition and enforcement proceedings. The cassation court also reasoned that the court of first instance misapplied Article 242 the CAP because the seat criteria of Article 242 of the CAP was still met, as Ukraine’s official diplomatic representative was located in Moscow.

On those considerations, the cassation court returned the case back to the court of first instance, i.e. Arbitrazh Court of Moscow, for reconsideration. Ukraine unsuccessfully tried to challenge this ruling in the Supreme Court of the Russian Federation (the respective ruling can be found here).

Upon receiving the case back, the court of first instance, the Arbitrazh Court of Moscow, chose to refer the case to another court. In its Ruling of 22 June 2018, the Arbitrazh Court of Moscow reiterated its position on “effective jurisdiction”. As, in the view of the court, Tatneft did not demonstrate that Ukraine held property that could have been used for actual enforcement of the award in Moscow, the court referred the case to the Arbitrazh Court of the Stavropol Region, because Ukraine had other assets in the territorial jurisdiction of that court. In its reasoning, the Arbitrazh Court of Moscow did not draw any distinction between the relevance of immunity from jurisdiction and the relevance of immunity from enforcement in recognition and enforcement proceedings. It also declined to apply the seat criterion of Article 242 CAP ultra petita, as was suggested by the cassation court. Tatneft tried to challenge this ruling before the cassation court but failed (the respective decree can be found here).

Recently, the Arbitrazh Court of Moscow once again endorsed the “effective jurisdiction” approach in recognition and enforcement proceedings concerning the Entes Industrial Plants award (see case A40-230382/18), an arbitral award issued against the Ministry of Transportation of the Kyrgyz Republic. The enforcement proceeding, in that case, was complex and the interplay between immunity from jurisdiction and immunity from enforcement was only a part of the court’s inquiry. Nonetheless, the Arbitrazh Court of Moscow obiter dictum reiterated its position on the role of “effective jurisdiction” in recognition and enforcement proceedings in its Ruling.

Enforcement in the Stavropol Court – The Requirement of “Effective Jurisdiction” Is Rejected

In its Ruling of 11 March 2019, the Arbitrazh Court of the Stavropol Region did not agree with the logic of the Arbitrazh Court of Moscow. The court found that there is a clear difference between the roles of immunity from jurisdiction and immunity from enforcement at the stage of recognition and enforcement of arbitral awards. The court agreed with the proposition that Ukraine had waived its immunity from jurisdiction in respect of arbitral proceedings and any subsequent recognition and enforcement proceedings by consenting to arbitration under the BIT. The court also concluded that Russian law applicable to recognition and enforcement proceedings does not suggest that applicants must show that a state holds property free from the enforcement immunity on the territory of the recognizing state for the application for recognition of an award to be granted.

Even though Tatneft eventually succeeded with its application almost two years after it had been filed for recognition and enforcement, the battle over the enforcement of the Tatneft award is not over. The decision of the Arbitrazh Court of the Stavropol Region can still be challenged by Ukraine.

Conclusions

In light of the above, one can draw two conclusions in respect of enforcement of arbitral awards rendered against sovereign states in Russia. Firstly, for now Russian courts have not developed a uniform position with regards to the role of sovereign immunity from enforcement at the stage of recognition and enforcement of arbitral awards. It is not unlikely that this issue will eventually have to be addressed by the Russian Supreme Court. Secondly, Russian courts have acknowledged that states waive their immunity from jurisdiction in respect of recognition and enforcement proceedings once they give their consent to arbitration.

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Uruguay Holds Firm in Two New Awards

Fri, 2019-05-03 05:05

Santiago Gatica and María Paz Lestido

Within the same week last March, two awards were rendered in cases against the Oriental Republic of Uruguay (Uruguay). One concerned an investment dispute with Italba Corporation (Italba), a company incorporated in Florida, over wireless spectrum services and the allocation of radio frequencies, and was Uruguay’s second case before an ICSID tribunal (the first being against Philip Morris). With this victory, the Southern nation remains undefeated in ICSID proceedings. The other involved a commercial dispute with Conecta S.A. (Conecta), a local gas distribution subsidiary of Brazil’s Petrobras.

 

ICSID Tribunal denies jurisdiction, finding that investor failed to prove ownership or control over local company

In 2016, Italba filed a request for arbitration against Uruguay under the United States-Uruguay BIT (the Treaty). The Tribunal was composed of President Rodrigo Oreamuno (appointed by agreement of the parties) and arbitrators John Beechey and Professor Zachary Douglas, respectively appointed by Italba and Uruguay.

The dispute arose in relation to the revocation of an authorization for the provision of dedicated wireless digital lines for the transmission of data services and the release of certain frequencies, which had been granted to Gustavo Alberelli and transferred to a local company, Trigosul S.A. (Trigosul). Alberelli is an Italian citizen and US resident who is a shareholder of Italba, as well as its president and chief executive financial officer. In the arbitration, Italba claimed to be the shareholder of Trigosul.

Italba claimed that Uruguay had breached its obligations under the Treaty not to expropriate US investments, and to accord US investors and their investments fair and equitable treatment, full protection and security and no less favorable treatment than that accorded to other investors and investments in like circumstances. Italba claimed compensation in the amount of US$ 61.1 million, plus interest.

During the arbitration, Italba filed an application for provisional measures and temporary relief, requesting the Tribunal to enjoin a criminal investigation that Uruguay had initiated against Italba’s witnesses, Gustavo Alberelli and Luis Herbón (Trigosul’s legal representative and former director), for alleged forgery in falsifying the signature of certain documents submitted in the arbitration. The arbitrators rejected the application holding that they lacked the power to order the cessation of the investigation and that Italba had failed to prove that its witnesses’ participation in the arbitration had been affected by the criminal investigation.

Italba also questioned the independence of Uruguay’s expert, Professor Xavier de Mello, for being a partner in a law firm representing Uruguay in another arbitration (coincidentally, the one commenced by Conecta) and accordingly requested that the Tribunal disregard his report and testimony. In rejecting the request, the Tribunal reasoned that the expert’s firm was based on a model known as “economic interest group” that operated similarly to English barristers chambers, which could not be “equated as a law firm in which the members are in partnership and share profits”. The arbitrators found that Italba had not proven that Professor de Mello had obtained an economic benefit from Uruguay, either directly or otherwise, that would affect his independence. Additionally, they noted that Art 5(2)(a) and (c) of the IBA Rules is “very specific” and “refers to the expert’s present or past relationship with any of the Parties and other actors in the proceeding” (i.e, does not require disclosure of the “present or past relationship with the Parties of all members of his/her law firm”).

The Tribunal noted that the Treaty afforded protection to investors who owned or controlled an investment in Uruguay. However, it found that none of the documents produced by Italba evidenced that it was either a shareholder of, or held the control over, Trigosul.

The record only included one share certificate endorsed in favor of Italba. However, the Tribunal held that to transfer a share certificate under local law, “it is imperative to endorse it, hand it over to the acquirer, notify the company in writing and record the endorsement in the company’s stock ledger”. Since the tribunal found there was no such record in Trigosul’s books, it concluded that the endorsement was not perfected and therefore Italba could not claim to be its “lawful holder”. The Tribunal also rejected Italba’s proposition that Trigosul’s officers failed to keep formalities in order because they were not attorneys.

Additionally, and despite considering that the endorsement should be resolved in accordance with Uruguayan law, the Tribunal analyzed Italba’s proposition that it should instead be assessed under the laws of Florida, where Alberelli had purportedly made the endorsement. However, the Tribunal concluded that Italba had failed to prove that it was the shareholder of Trigosul under Florida law.

The Tribunal also rejected Italba’s argument that ownership could be established by a theory of economic reality. The Tribunal noted that this theory is used for situations different than the transfer of shares (i.e, fraud or violation of public order), and concluded that applying it here would be futile as there was no evidence that Italba participated in shareholders meetings, shared profits or losses with the company, or oversaw its management. Italba also argued that ownership could be proven by showing capital contributions to the company, but the arbitrators found no evidence of such contributions from Italba.

Ultimately, the Tribunal concluded that Italba had not proven its ownership of Trigosul, and that it appeared from the evidence submitted that Alberelli and his family were the only shareholders.

The arbitrators then analyzed whether Italba had control of Trigosul, noting that the exercise of control is case-specific. Italba argued that it exercised control by making business decisions, capital contributions, funding operations and representing to third parties that it was the owner of Trigosul. Nevertheless, the Tribunal found no evidence to support these assertions and therefore held that Italba did not have control over Trigosul.

Since Uruguay’s first jurisdictional objection was upheld, the Tribunal considered it unnecessary to rule on the remaining objections. It found that the parties agree that the “loser pays” principle should guide the allocation of costs, and ordered Italba to pay Uruguay all costs.

In accordance with the Treaty’s transparency provisions and following the parties’ agreement, documents for the case can be found online. Those include a submission from the US government on questions of interpretation of the Treaty.

 

ICC tribunal holds that Uruguay has an obligation to renegotiate the terms of a gas distribution agreement, but finds that the State had not breached such obligation

In 2017, Conecta commenced a commercial arbitration seated in Buenos Aires against Uruguay under the Rules of the International Chamber of Commerce (ICC), on the basis of the arbitration clause included in the public works’ concession agreement executed by the parties in 1999 for the project, construction and exploitation of gas distribution systems outside of Montevideo (the Concession).

The Tribunal was composed of arbitrators Antonio Hierro and Dr. Diego P. Fernández Arroyo, appointed by Conecta and Uruguay, respectively, and President Yves Derains (appointed by agreement of the party-appointed arbitrators). The award was rendered on 18 March 2019, and made public as agreed by the parties.

The parties did not contest that in 2004, Argentina, Uruguay’s supplier of natural gas, adopted measures that limited and restricted the export of natural gas and the use of Argentina’s transportation system. Conecta claimed that the Argentine measures triggered its right to restore the initial financial-economic balance of the Concession, but as such balance had not been restored, the State breached its obligations and Conecta had the right to terminate the Concession and receive compensation in the amount of US$ 57.07 million.

The Tribunal recognized that the measures severely affected the financial-economic balance of the Concession, which had been executed on the basis of an abundant and competitive gas supply from Argentina. The Tribunal also recognized that the Concession included an obligation to renegotiate in good faith with the purpose of restoring its financial-economic balance due to severe and unforeseen circumstances, and that Conecta has the right to request a renegotiation of the terms of the Concession.

However, the Tribunal decided that the obligation to renegotiate does not imply an obligation to reach an agreement and concluded that Uruguay had not breached such obligation, as it had agreed to prior amendments to the Concession and had been involved in the project of a regasification plant aimed at solving the supply problem (despite the fact that such project was aborted in the end).

Other subsidiary claims made by Conecta and counter-claims made by Uruguay regarding to alleged contractual breaches incurred by Conecta were rejected by the Tribunal, which ordered each party to pay its own costs.

 

More to come

While Uruguay withstood these closely timed claims, the country’s track record will soon be tested; Uruguay is facing (i) another commercial dispute brought by Montevideo Gas, also a subsidiary of Petrobras, over a similar contract as the one agreed with Conecta and (ii) an investment arbitration for more than US$ 3.5 billion commenced by three UK investors over an iron ore project (PCA Case No 2018-04).

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