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The Contents of the Brazilian Arbitration Journal, Volume XVI, Issue 62 (June 2019)

Mon, 2019-07-01 02:00

João Bosco Lee

The present edition of the Revista Brasileira de Arbitragem [Brazilian Arbitration Journal] presents three articles in the National Doctrine section: Laura Carneiro de Mello Senra deals with the arbitrability of cases involving the remuneration of Brazilian federal public servants in which disputes against the Federal Union or a different public entity may arise; Leandro Rigueira Rennó Lima and Ana Luiz de Castro Viana comment on the importance of improving lawyers’ collaborative posture for the development of mediation in Brazil; and Thiago Marinho Nunes studies the use of arbitration as an adequate and efficient dispute resolution method in agribusiness.

In the International Doctrine section, Julia Guimarães Rossetto and Luís Alberto Salton Peretti briefly present their comments on the new international commercial arbitration acts promulgated in Argentina and in Uruguay, which have opted for a dualist system for the treatment of domestic and international arbitrations.

Turning to the National Judicial Case Law section, Guilherme Enrique Malosso Quintana analyses a ruling by the São Paulo Court of Appeal in regard to bankruptcy fraud and the use of protesto to avoid alienation of assets in the context of arbitration. In addition, Fabiane Verçosa comments on a decision by the Brazilian Superior Court of Labor addressing the delicate matter of the use of arbitration for individual labor disputes.

In the International Judicial Case Law section, Bruno Guandalini delves into a judgment of the Supreme Court of the United States on the competence for the definition of arbitrators’ jurisdiction, since Courts of Appeal from different Circuits had been adopting divergent understandings regarding the issue.

The General Matters section entails Resolution n. 4/2018 of Câmara de Conciliação, Mediação e Arbitragem Ciesp/Fiesp establishing the emergency arbitrator procedure. Furthermore, Ana Carolina Weber comments on the 1st edition of the summary of arbitral awards published by Câmara de Arbitragem do Mercado da B3 S.A. – Brasil, Bolsa, Balcão, and Rodrigo Moreira reports the highlights of the 8th ICC Brazilian Arbitration Day, held on 28 March 2019 in São Paulo.

Last but not least, the present edition presents Vitor Silveira Vieira’s review on O Dever de Revelação do Árbitro (in English, The Arbitrator’s Duty of Disclosure) by Ricardo Dalmaso Marques, and Arnaldo de Lima Borges Neto’s review of Tratado de Arbitragem (in English, Treatise on Arbitration), a commentary on the Portuguese voluntary arbitration law, by António Menezes Cordeiro.

Boa leitura arbitral!

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Interviews with Our Editors: Perspectives on Alternative Dispute Resolution from Karima Sauma, Executive Director of CICA – AmCham Costa Rica

Sat, 2019-06-29 19:02

Enrique Jaramillo (Assistant Editor for Latin America) and Kiran Nasir Gore (Associate Editor)

Welcome to the Kluwer Arbitration Blog, Ms. Sauma!  We are grateful for this opportunity to learn more about the International Center for Conciliation and Arbitration (“CICA” for its initials in Spanish), which is celebrating its twentieth anniversary this year (congratulations!), as well as about the dynamic alternative dispute resolution environment of Costa Rica. 

Thank you for this opportunity! I am delighted to be able to contribute to the Kluwer Arbitration Blog.

 

  1. To start, can you briefly introduce yourself and explain your role at CICA?

I am the Executive Director of CICA, based in San José, Costa Rica. I oversee all the Center’s activities, including our case-management services and academic and educational efforts. I am also an adjunct professor at ULACIT University in San José, and the academic director of the “Especialización en Arbitraje CICA-ULACIT”.

Previously, I worked as an Advisor with the Dispute Settlement Team of the Costa Rican Ministry of Foreign Trade, where I was part of Costa Rica’s defense team in claims filed under various treaties and free trade agreements. Prior to joining the Ministry of Foreign Trade, I worked with the international arbitration group at a large international firm in Washington, DC.

 

  1. We understand that CICA is affiliated to, but independent of the Costa Rican-American Chamber of Commerce (“AmCham Costa Rica”). How does this relationship enhance CICA’s ability to educate the arbitration community, and also to serve international and domestic users of your dispute resolution services?

CICA’s relationship with AmCham provides us with the institutional support of a solid, well-respected and long-standing organization, but at the same time, allows us to operate independently to preserve the core principles that guide arbitration. Being a part of AmCham enhances our ability to reach domestic and international users who are Chamber members and need our dispute resolution services (however, you do not need to be a Chamber member to be able to use our services).

It is also the ideal platform to educate a wider audience about alternative dispute resolution (ADR), liaise with the government and other institutions that share our mission, and look for more creative ways to provide our services. It also helps us understand better the needs of our users and allows us to deliver more tailored solutions. More importantly, it ties us to a wider network of AmChams, which has helped us in our regional appeal.

 

  1. Can you tell us more about your users and their disputes? What kinds of parties do you usually serve, and are there particular industries or types of disputes prevalent among them?   How does CICA rely upon this information to enhance its services and approach?   

The types of parties and disputes that are brought before CICA are very diverse, which is one of the great advantages of working in arbitration. Currently, the most popular issues involve construction disputes, real estate agreements, and bank loans, but the industries and topics are usually wide-ranging.

The case-load and topics are generally a reflection of the economic state of the country and the region, so it is important for us to be aware of what is going on in order to provide services that respond to our users’ needs at a particular juncture. In addition to our case-management services, we have focused on expanding our academic efforts, which include conferences and workshops that promote the use of alternative dispute resolution.

We have also seen an increase in international arbitrations that involve companies with a regional presence in Central America, so we are working to strengthen our capabilities in the region.

 

  1. In 2011, Costa Rica adopted its Law for International Arbitration (based on the 2006 UNCITRAL Model Law and available in English here). How has this development impacted CICA’s workload?

The adoption of this Law marked a turning point for arbitration in Costa Rica because it allowed us to finally manage international cases. Since then, Costa Rica has strived to become a hub for international arbitration. CICA has been at the forefront of this process, and leads the way in terms of international cases in Costa Rica. The adoption of this law also meant the need to modify certain aspects of the arbitration process that were rooted in domestic judicial proceedings. To this end, CICA, alongside leading local university ULACIT, created the first and only postgraduate degree in Costa Rica that includes courses on international arbitration. These education efforts are crucial, as they help train professionals to be better equipped at handling the increasing workload of international cases.

Additionally, CICA will unveil later this year our new Arbitration Rules, which represent a notable effort in making our processes more international.

 

  1. Aside from the leading international arbitral institutions, recent years have seen the emergence of many more regional ADR centers. From your perspective, what are the advantages to using a regionally-based ADR center for dispute resolution?  How does CICA stand out among its peers in Latin America?

There are many advantages to using a regionally-based ADR center for dispute resolution. On the one hand, CICA provides first-rate dispute resolution services at a fraction of the cost of the leading international arbitral institutions. This means that we offer high-quality work, with equally high standards, but because we are located in Costa Rica we can offer more competitive rates.

We are also more adept at dealing with the local and cultural aspects of the region, which translates into more efficient and effective processes.

Additionally, we offer a wider selection of arbitrators that have more experience in the region, and whose professional qualifications can make them better suited to hear the dispute at hand.

On the other hand, Costa Rica is a great seat for arbitrations:

  • It has a long tradition of upholding the rule of law, including solid laws that regulate domestic and international arbitrations.
  • Notably, it adopted the 2006 UNCITRAL Model Law to regulate its international arbitrations and is also a member of the New York Convention.
  • Local courts are very respectful of arbitration awards, and generally defer to the decisions of the arbitral tribunals.
  • It is a long-standing and peaceful democracy, known for its political, social and economic stability.
  • It has a very professional workforce, with plenty of experience in alternative dispute resolution.
  • It is geographically privileged, and easily accessible from all the major airports in the world.

 

  1. During the past decade we have seen a number of developments in Latin American arbitration – including an increasing aversion by some countries in the region to investment arbitration. How have these trends impacted Costa Rica generally, and CICA more specifically?

Costa Rica has a strong tradition of creating and upholding public policies that promote foreign investment. This includes the subscription of numerous international investment agreements that contain ISDS provisions. In fact, Costa Rica has faced 11 investor-State arbitrations – one of the highest numbers in Central America – which have, in turn, shed a spotlight on ISDS in the country. However, Costa Rica’s experience with these cases has generally been a positive one.

The fact that Costa Rica has had positive outcomes has assisted in limiting some of the backlash that other countries have faced regarding ISDS. However, investment arbitration cases are frequently reported on, albeit incorrectly, because they involve the government and public policies. This has resulted in the dissemination of a lot of misinformation relating to arbitration. CICA’s mission has been to counter this misinformation through publications, events and workshops that promote the use of alternative dispute resolution and educate with correct information. Additionally, CICA has sought to improve the media’s understanding of arbitration in order to have more accurate reporting.

 

  1. Earlier this year, CICA and Arbitrator Intelligence signed a historic agreement through which CICA became the first Latin American arbitral institution that will use the Arbitrator Intelligence Questionnaire (AIQ) to promote diversity, accountability, and transparency in international commercial arbitration. Can you tell us more about this initiative and how it will support CICA’s core goals?

This is a wonderful initiative that highlights some of the most important efforts that we are currently pursuing. The quality of the decision-makers is paramount to the successful resolution of any case, which is why one of our permanent concerns is to have the best arbitrators possible. The AIQs will assist us in the selection of arbitrators with verifiable data, but will also promote the inclusion of new, more diverse arbitrators, by shedding light on appointments that would otherwise go unnoticed.

At CICA we hope that using tools like the AIQ will help answer some of the users of dispute resolution services’ questions related to issues of accountability, transparency and diversity in international arbitration. We hope that this movement continues to spread to other institutions so that we can truly improve these aspects of international arbitration in a global way.

I am also currently involved with the Equal Representation in Arbitration Pledge and Young ITA (Institute for Transnational Arbitration), which are two organizations that are doing a lot for diversity and the inclusion of younger generations in arbitration. All these initiatives combined will hopefully lead us to real, lasting and positive change.

 

  1. How has CICA sought to celebrate its twentieth anniversary, and what is your vision for CICA during the next twenty years to come?

This year, we are celebrating twenty years of spearheading an ADR movement in Costa Rica and the region. We are proud of leading the way for a more peaceful and amicable way of solving conflicts and hope to continue doing so for many years to come.

Our vision for CICA for the next twenty years involves improving our services, expanding our reach, and liaising with the government and other institutions that share our mission. Specifically, regarding our case-management services, we will continue to incorporate the latest technology to improve the way that we carry out arbitration and mediation processes. Technology will continue to disrupt the way that we currently do things, and ADR is no exception. However, we look at this as an opportunity to become more creative, more efficient, and to develop new and more customizable ways of solving conflicts. Additionally, technology will enable us to expand further and reach more users from different backgrounds and geographical locations.

Additionally, we look to improve existing services by implementing new rules of arbitration (coming out later this year), diversifying our roster of arbitrators, and using more data-driven tools to create better services.

The future also requires that we develop different skillsets in response to changing times, and CICA is playing an important role in promoting and training a new generation of professionals in alternative ways of resolving conflicts and promoting peace. This includes a focus on negotiation and communication tools, as well as other creative ways of handling conflict. We are also working together with the government to develop different programs directed at public officials that will help with this mission. In the years to come, we seek to strengthen our position as an ally in the development of public policies that concern conflict resolution, justice and peace.

I can definitely say that from our point of view, the future looks busy and exciting!

 

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

This interview is part of Kluwer Arbitration Blog’s “Interviews with Our Editors” series – past interviews are available here.

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The Prague Rules: A Soft Law Solution to Due Process Paranoia?

Sat, 2019-06-29 00:17

Jordan Tan and Ian Choo

The publication of the Rules on the Efficient Conduct of Proceedings in Arbitration (“Prague Rules”) on 14 December 2018 heralded a challenge to the well-established incumbent (i.e. the International Bar Association (“IBA”) Rules on the Taking of Evidence (“Evidence Rules”)) and prompted much debate amongst the arbitral community, including at least six posts on this blog,1)The previous KAB posts are available here, here, here, here, here and here. jQuery("#footnote_plugin_tooltip_9684_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9684_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); but none have quite come out in full support of it. This post suggests that there is much to celebrate about the bold new rules.

Briefly, the key differences relate to the default rules that apply when adducing evidence. While under the Evidence Rules the right to rely on documents, call fact witnesses and appoint experts generally lies with the party, under the Prague Rules parties are encouraged to avoid document production, and the tribunal (rather than the party) calls the fact witnesses and appoints the expert(s).2)For a more detailed discussion, see here and here. jQuery("#footnote_plugin_tooltip_9684_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9684_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Other “novel” features not present in the Evidence Rules include having the tribunal present its preliminary views at an early stage, the principle of iura novit curia, and conferring on the tribunal the power to assist in the amicable settlement of disputes.

 

Challenging a Well-Established Incumbent

There is, of course, inertia in changing what is a well-established way of doing things. One wonders whether the criticism would be quite so strong if the Prague Rules sought to “supplant” other soft law instruments instead. Not all IBA soft law has reached the levels of the tremendous success that the Evidence Rules have. The IBA Guidelines on Conflicts of Interest (“Conflicts Guidelines”) and the IBA Guidelines on Party Representation, for instance, have a more muted reception amongst the international arbitral community. Still, because the Prague Rules invade a space where the Evidence Rules are adopted sometimes almost pro forma, the resistance to change is keener.

 

Filling the “Gap”

The oft-cited goals of soft law include “gap”-filling and harmonisation of international best practices. It is clear that the Evidence Rules sought to do that when it was first promulgated.

Similarly, the Prague Rules seek to fill a perceived “gap” in international arbitration. Cost and the lack of effective sanctions during the arbitral process against dilatory tactics remain the worst characteristics of international arbitration.3)Queen Mary University of London and White & Case LLP, 2018 International Arbitration Survey: The Evolution of International Arbitration (9 May 2018), 7, 8. jQuery("#footnote_plugin_tooltip_9684_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9684_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This “gap” is filled by the Prague Rules insofar as it seeks to codify best practice in arbitral procedure on these issues.

It should be noted that the Prague Rules are far from the first soft law instrument attempting to regulate time and costs in arbitral proceedings. Institutions like the UNCITRAL (Notes on Organising Arbitral Proceedings), the ICC (Appendix IV of the ICC Arbitration Rules 2017) and the College of Commercial Arbitrators (Protocols for Expeditious, Cost-Effective Commercial Arbitration) have all issued guidelines and protocols to deal with issues of time and cost. Even law firms have pitched in – New York-based law firm Debevoise and Plimpton LLP has issued a Protocol to Promote Efficiency in International Arbitration. What is significant about the Prague Rules is that it seeks to codify a set of evidentiary rules, as opposed to being just mere techniques, to achieve this end.

Does the fact that the Prague Rules and Evidence Rules refer to themselves as “Rules” rather than “Protocols” or “Guidelines” suggest that they are of a more mandatory nature? Such a notion would be inaccurate. Rather, soft law instruments “draw their strength from their intrinsic merit and persuasive value rather than from their binding character“.4)Railroad Development Corporation v Republic of Guatemala, ICSID Case No. ARB/07/23, Decision on Provisional Measures, (Oct 15, 2008), ¶32. jQuery("#footnote_plugin_tooltip_9684_4").tooltip({ tip: "#footnote_plugin_tooltip_text_9684_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The arbitral community is a sophisticated one – time will be the ultimate arbiter of whether it gains any traction. But to deny it a chance to enter the fray at all would be unfortunate.

 

Are the Prague Rules a Panacea to Due Process Paranoia?

The specific goal of the Prague Rules, stated in both the Preamble and the Note from the Working Group, is to increase the efficiency of arbitral proceedings by encouraging a more active role for arbitral tribunals. To do so, the Prague Rules have the following notable provisions:

  1. The Arbitral Tribunal is to have wide powers of case management, including expressing its preliminary views on the case: Article 2.4.
  2. The Arbitral Tribunal and the parties are encouraged to avoid any form of document production, including e-discovery: Article 4.2.
  3. The Arbitral Tribunal may apply legal provisions not pleaded by the parties if it finds it necessary: Article 7.2.
  4. The Arbitral Tribunal and the parties should seek to resolve the dispute on a documents-only basis: Article 8.1.
  5. The Arbitral Tribunal may assist the parties in reaching an amicable settlement of the dispute at any stage of the arbitration unless one of the parties objects: Article 9.1.

At risk of over-simplification, critics have argued that the above provisions fall afoul of the principles of due process – the right to be heard and the right to an independent and impartial tribunal. Such criticism may not be appropriate for at least three reasons.

First, to the extent that the Prague Rules are adopted by the parties in its entirety, it has safeguards built in to ensure that arbitrators comply with procedural rules of natural justice.

  • The mandate of the tribunal generally under the rules already requires the tribunal to be cognizant of due process principles and ensure that they are observed and adhered to. Article 1.4 states: “[a]t all stages of the arbitration and in implementing the Prague Rules, the arbitral tribunal shall ensure fair and equal treatment of the parties and provide them with a reasonable opportunity to present their respective cases“.
  • Similarly, Article 7.2 providing for iura novit curia safeguards the parties’ due process rights by ensuring that “parties have been given an opportunity to express their views in relation to such legal authorities“.

Second, the rules are not completely radical departures from the established arbitral procedure. In fact, most of them find expression in either soft law or arbitral institutional rules.

  • Assistance in amicable settlement is a familiar concept in many arbitral jurisdictions. Article 26 of the 2018 DIS Arbitration Rules provides for the same (other examples are cited on this blog here). It is also found in international instruments like the aforementioned Appendix IV of the ICC Rules, and General Standard 4(d) of the Conflicts Guidelines clearly envisions the possibility of the arbitrator taking on such a role.
  • Iura novit curia is endorsed in Article 22.1(iii) of the LCIA Arbitration Rules (2014).
  • Avoidance of document production is envisioned under Article 25(6) of the ICC Rules, which provides that the tribunal “may decide the case solely on the documents submitted by the parties unless any of the parties request a hearing“.
  • An active role for the tribunal was also contemplated, somewhat ironically, in the Evidence Rules – Article 8.2 of the Evidence Rules provides that the tribunal “shall at all times have complete control over the Evidentiary Hearing“.

In any event, even if the criticism that so many new provisions enshrined in one combined document potentially go too far in establishing a new arbitral procedure, this can be overcome by applying the rules in a piecemeal fashion (such a view was alluded to previously here). Rules which are entirely foreign to the parties can always be opted out of, and the “standard procedure” under the Evidence Rules can apply as a fall-back.

Third, as a matter of principle, if the parties have actually agreed to the rules, it cannot be that adoption of the rules simpliciter amounts to a violation of due process. The New York Convention provides for the refusal of recognition and enforcement for both a failure to observe principles of due process (Article V(1)(b)) and a failure to respect the autonomy afforded to parties in determining arbitral procedure (Article V(1)(d)). If due process paranoia stems from a perceived reluctance by tribunals to act decisively for fear of awards being challenged, the clear mandate given to the tribunal to actively take such measures must surely militate against such fears.

This is classically illustrated by the Prague Rules themselves in situations where the power conferred to the arbitrator appears particularly contentious. For instance, the aforesaid Article 2.4(e) which allows the tribunal to express its preliminary views also states that such views cannot be taken as evidence of the tribunal’s lack of independence or impartiality and cannot constitute grounds for disqualification.

 

The Way Forward

The advent of the Prague Rules affords parties greater variety when choosing their arbitral procedure. More specifically, it articulates a framework for tribunals to play a more active role, which is likely to have the salutary benefits of discouraging dilatory and guerrilla tactics.

As both the Evidence Rules and the Prague Rules note in their preambles, they operate as “guidelines”, and are not meant to limit the inherent flexibility of arbitration. This must be correct – soft law should not be seen as “hard” law, no matter the regularity of use. In this vein, the “challenge” to the status quo also reduces the perception that arbitration has become increasingly judicialized. Arbitration has always prided itself on its inherent flexibility – the reception to the Prague Rules should be no exception.

 

The contributor Ian Choo is currently a practice trainee with Cavenagh Law LLP, which is registered as a Formal Law Alliance in Singapore with Clifford Chance Pte Ltd under the name Clifford Chance Asia. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Clifford Chance, nor those of its clients.

 

 

References   [ + ]

1. ↑ The previous KAB posts are available here, here, here, here, here and here. 2. ↑ For a more detailed discussion, see here and here. 3. ↑ Queen Mary University of London and White & Case LLP, 2018 International Arbitration Survey: The Evolution of International Arbitration (9 May 2018), 7, 8. 4. ↑ Railroad Development Corporation v Republic of Guatemala, ICSID Case No. ARB/07/23, Decision on Provisional Measures, (Oct 15, 2008), ¶32. 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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Jurisdiction of Emergency Arbitrator in Investment Treaty Arbitration

Thu, 2019-06-27 19:16

Qian Wu

The use of Emergency Arbitrator (“EA”) procedure is not frequently deployed in investment treaty arbitration, compared to its success in the commercial space. Despite calls for caution, three sets of major arbitration rules have promulgated EA procedure for investment disputes, i.e., Arbitration Rules of Stockholm Chamber of Commerce (“SCC Rules”), SIAC Investment Arbitration Rules (“SIAC IA Rules”), and China International Economic and Trade Arbitration Commission International Investment Arbitration Rules (“CIETAC IA Rules”).

To date, all reported EA investment arbitration cases were conducted under the SCC Rules. Four EA decisions have been published: TSIKInvest v. Moldova (Russia-Moldova BIT), Evrobalt v. Moldova (Russia-Moldova BIT), Kompozit LLC v. Moldova (Russia-Moldova BIT) and Munshi v. Mongolia (Energy Charter Treaty (“ECT”)). At least four EA decisions have been rendered which remain confidential: JKX Oil v. Ukraine (ECT and UK-Ukraine BIT), Griffin v. Poland (Luxembourg-Poland BIT) Puma v. Benin (Belgium/Luxembourg-Benin BIT), and Okuashvili v. Georgia (Belgium/Luxembourg-Georgia BIT, UK-Georgia BIT).

This post submits that the urgency of an EA application should not override the fundamental requirement that the EA must have jurisdiction. This requirement is far from a moot point given that the interpretation of state consent is at stake, and the impact of the EA decision might be significant.

 

The Jurisdiction of EA 

A. Compétence de la Compétence of EA

The EA’s jurisdiction, just like that of an arbitral tribunal, derives from the parties’ consent to arbitrate, namely, the underlying investment treaty (and the applicable arbitration rules). As explained in Evrobalt, the EA “steps in where a tribunal is yet to be constituted” (para. 17). Only if the EA is “satisfied ‘prima facie’ that an arbitral tribunal duly constituted under the arbitration agreement relied on by the applicant may have (or perhaps would have) jurisdiction to hear the merits” could the EA consider the relief requested1)Marc J. Goldstein, A Glance into History for the Emergency Arbitrator, Fordham International Law Journal, Vol. 40(3), p. 780. jQuery("#footnote_plugin_tooltip_1460_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1460_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

As a further step, an EA is treated as equivalent to an arbitral tribunal under the Singapore International Arbitration Act (Cap. 143A) (“IAA”). The IAA provides, “‘arbitral tribunal’…includes an emergency arbitrator appointed pursuant to the rules of arbitration …”. Corresponding to the IAA provision, paragraph 7 of Schedule 1 of the SIAC IA Rules stipulates that the EA shall have the powers vested in the arbitral tribunal, “including the authority to rule on its own jurisdiction, without prejudice to the Tribunal’s determination”.

By assuming such role, the EA should have compétence de la compétence to define the boundaries of its own jurisdiction and conduct independent review to safeguard the consensual nature of arbitration.2)Charles N. Brower et al., The Power and Effectiveness of Pre-Arbitral Provisional Relief: The SCC Emergency Arbitrator in Investor-State Disputes, in Kaj Hobér et al. (eds.), Between East and West: Essays in Honor of Ulf Franke, Juris, 2010, p. 68. jQuery("#footnote_plugin_tooltip_1460_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1460_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Yet the EA’s compétence de la compétence should be distinguished from that of an arbitral tribunal due to lack of exclusivity effect: Article 37(5) of the SCC Rules, Rule 27.2 of the SIAC IA Rules and Article 5(4) of Appendix II of the CIETAC IA Rules entitle a party to apply for interim relief from a judicial authority before the constitution of the arbitral tribunal.

 

B. Consent to EA Procedure

  1. Construed Consent

The Russia-Moldova BIT and ECT designate SCC as the arbitral institution. Both came into force before the introduction of EA procedure into the SCC Rules 2010. The issue is whether there is state consent to EA procedure.

The Evrobalt EA stated that, by virtue of the provision defining the temporal application in SCC Rules 1999 (effective at the time of ratification of Russia-Moldova BIT), the Contracting States should have contemplated that SCC Rules effective at the time an arbitration commences would be applicable. Alternatively, the standing offer to arbitrate (i.e., valid for 15 years as defined in the BIT) “should be construed as a dynamic reference to the version of the SCC Rules in effect at the time of the commencement of the arbitration” (para. 30).

That the Contracting States’ “contemplat[ed]” amendment of the SCC Rules was found by the Kompozit EA through (i) signature and ratification of the Russia-Moldova BIT (as the SCC Rules 1988 had been amended and the SCC Rules 1999 were in effect); yet (ii) no specific mention or agreement was made regarding the applicable version.

The CIETAC IA Rules, although worded differently from the SCC Rules, similarly afford room for interpretation of state consent. Article 1 of Appendix II provides that a party could apply for EA “based upon the applicable law or the agreement of the parties”. Article 46 defines “applicable law” as:

  • law or rules of law designated by the parties as applicable to the substance of the dispute; failing such designation, or such designation is in conflict with a mandatory provision of law; or
  • law or rules of law that the arbitral tribunal considers appropriate, including the domestic laws of any relevant State, any applicable rules of international law and trade custom.

Whether the designation of substantive law could manifest the consent to EA procedure could be debated.

The potential need for interpretation of state consent calls for clarification of the standard to be applied. In this regard, the Evrobalt EA emphasized the prima facie basis it adopted when upholding the applicability of SCC Rules 2010. The Kompozit EA “assume[d]” that the amendment of SCC Rules 2010 should be within the Contracting States’ expectation and sustained the deemed consent argument.

 

  1. Express Consent

The SIAC IA Rules require a distinctive agreement to EA procedure. Only if “the Parties have expressly agreed on the application of the emergency arbitrator provisions”, a party would be entitled to invoke the EA procedure under the SIAC IA Rules.

It appears that the “express agreement” does not tolerate any query to state consent. Consequently, if there is any doubt on the existence of the consent, it is likely that (i) an EA application would be rejected by the SIAC Court of Arbitration; or (ii) the EA appointed may decline its jurisdiction. The formulation tends to suggest that such consent should technically be from the disputing parties, i.e., the investor and the host state. Nevertheless, in the context of investment arbitration, it is accepted that any agreed mechanism provided in the treaty should be deemed to be chosen directly by the parties to the arbitration.

Another conceivable form of consent could be a special agreement between the investor and the host state. However, it was noted by the OECD that the government opt-in to allow investor access to EA procedure is possible but unlikely.

 

C. Ratione Materiae and Ratione Personae

These requirements have been frequently argued with various tests employed and significant time devoted. Unsurprisingly, EAs have established that the only the prima facie existence of ratione materiae and ratione personae is sufficient.

In reaching its finding, the EA “based on the submissions made by Claimant” (TSIKInvest, para. 61). Specifically, the Evrobalt EA, referring to Moldova’s response to notice of dispute, noted that “Moldova has not disputed the Claimant’s status as ‘investor’ or its qualifying ‘investment’ in Moldova” and swiftly concluded that Evrobalt had demonstrated, prima facie, that it meets the requirements.

It is worth mentioning that none of the host states in the four cases mentioned above participated in the EA proceedings. EAs accepted investor’s claimed basis for jurisdiction as true and did not conduct separate examination.

 

D. Cooling-off Period

The cooling-off period provision in the Russia-Moldova BIT was unanimously held inapplicable to the appointment of EA. As held by the TSIKInvest EA:

  • It would be procedurally unfair to TSIKInvest and contrary to the purpose of EA procedure; and
  • TSIKInvest seemed to be facing a serious risk of suffering irreparable harm before the expiry of the cooling-off period if interim measures are not granted.

The Kompozit EA highlighted the treaty language that the parties “will try, as far as possible, to resolve such dispute amicably”, noting Moldova’s refusal to engage in settlement discussions, and found that such language does not mandate the exhaustion of 6-month period.

However, such findings may not be conclusive on the issue as the applicability of the cooling-off period is essentially a question of treaty interpretation.3)Koh Swee Yen, The Use of Emergency Arbitrators in Investment Treaty Arbitration, in ICSID Review, Vol. 31(3), p. 542; see also, Joel Dahlquist, Case Comments: The First Known Investment Treaty Emergency Arbitration, Journal of World Investment & Trade, Vol. 17, Issue 2, p. 266. jQuery("#footnote_plugin_tooltip_1460_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1460_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

E. Impact of Institutional Appointment of EA on EA’s Jurisdiction

Under Article 4(2) of Appendix II to the SCC Rules, “[a]n Emergency Arbitrator shall not be appointed if the SCC manifestly lacks jurisdiction over the dispute”.

In Munshi, on the heels of its finding that ratione personae, ratione materiae and state consent to EA procedure had been met, the EA stated that “[t]he Board has therefore already decided that the Emergency Arbitrator does not manifestly lack jurisdiction”, and concluded that the “Claimant has prima facie established jurisdiction …” (para. 33). Some opine that since EA application requires an immediate decision, the EA cannot defer its decision until a final determination on jurisdiction is made – therefore the registration of the application by the institution serves to satisfy this prima facie jurisdiction.4)Kyongwha Chung, Emergency Arbitrator in Investment Treaty Disputes,  accessed on 6 April 2018, pp. 31-32. jQuery("#footnote_plugin_tooltip_1460_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1460_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Others however view the SCC Board’s screening function comparable to that of the ICSID Secretary General when deciding to register an ICSID case, and that it could not ground the EA’s jurisdiction.

In comparison, the SIAC IA Rules aim at avoiding possible confusion or inference as to the jurisdiction of SIAC or EA. They do not set out the threshold for appointing the EA or confer express power to the institution to decide jurisdiction through the vehicle of the EA. Paragraph 3 of Schedule 1 stipulates “[t]he Court shall, if it determines that SIAC should accept the application for emergency interim relief, seek to appoint an Emergency Arbitrator within one day…”.

 

F. Admissibility

Significantly, the Evrobalt EA noted that the EA relief request would be inadmissible if the measure sought is “with effect equivalent to (still less superior than) the definitive relief sought in the main proceedings” which “would amount to disposing of the claim on the merits” (Evrobalt, paras. 37-38). Yet, the relief in EA and that in the main arbitration proceeding must be closely related and the putative rights must “be actionable rights in the main arbitration proceedings” (Evrobalt, para. 43).

  

Jurisdictional Objection Pending EA Proceedings

There are obvious challenges for host states to mount a robust defence in EA proceedings due to factors such as the lack of developed institutional capacity to respond quickly and the potential complex analysis of state consent to EA procedure.

In the four decisions discussed, the host states did not participate in the EA proceedings. In one reported case, Griffin v. Poland, the Polish government challenged the jurisdiction of the EA on the basis that it had not consented to the application of SCC Rules 2010.

It is difficult to object to the EA jurisdiction on the grounds of ratione personae or ratione materiae as the threshold bar is low and largely fact-based. As indicated above, the EAs tend not to make an independent inquiry on the evidence proving such requirements and instead accept the Claimant’s factual assertions.

Accordingly, unless the underlying treaty has envisaged consent to EA, the host state’s first reference should be to the applicable arbitration rules. For instance, under the SIAC IA Rules, in order to apply for the EA relief, express consent is a must. Therefore, arguing the absence of express agreement is an option. The EA, if so appointed, shall examine the consent to EA procedure thoroughly while balancing the urgency of the matter and the imperative requirement to establish express state consent.

The host state may also consider raising an objection, thanks to Rule 25.1 of the SIAC IA Rules, to the existence or validity of the arbitration clause, the applicability of the SIAC IA Rules, or the competence of SIAC to administer the arbitration, and request the objection be referred to the SIAC Court of Arbitration. However, the claimant may well contend that the deliberations of the SIAC Court of Arbitration has no bearing on the pending EA proceeding unless the objection is upheld by the SIAC Court of Arbitration, because Rule 25.1 prescribes only that “[t]he arbitration shall be terminated if the Court is not so satisfied [prima facie that the arbitration shall proceed]”.

 

Concluding Remarks

The emerging application of EA in investment treaty arbitration has afforded effective emergency relief to investors, but at the same time, pose challenges to host states. The published EA decisions discussed above will play leading role in enhancing the understanding of the EA proceedings against sovereign states and their rights and options thereunder.

As potential guidance for both investors and host states, the urgency of the matter will not necessarily expose host states to EA measures if they properly raise a jurisdictional objection at the appropriate time. In this regard, the timeline for the EA procedure under the SIAC IA Rules is 14 days from the appointment of the EA unless extended by the Registrar. The SCC, for its part, allows 5 days from the date of the EA application unless extended by the SCC Board. In this way, both the SCC Rules and the SIAC IA Rules leave room for jurisdictional objection during the EA proceedings, although with different paths and timelines to respond. It shall remain to be seen how these jurisdictional objections play out as the body of EA jurisprudence continues to develop.

References   [ + ]

1. ↑ Marc J. Goldstein, A Glance into History for the Emergency Arbitrator, Fordham International Law Journal, Vol. 40(3), p. 780. 2. ↑ Charles N. Brower et al., The Power and Effectiveness of Pre-Arbitral Provisional Relief: The SCC Emergency Arbitrator in Investor-State Disputes, in Kaj Hobér et al. (eds.), Between East and West: Essays in Honor of Ulf Franke, Juris, 2010, p. 68. 3. ↑ Koh Swee Yen, The Use of Emergency Arbitrators in Investment Treaty Arbitration, in ICSID Review, Vol. 31(3), p. 542; see also, Joel Dahlquist, Case Comments: The First Known Investment Treaty Emergency Arbitration, Journal of World Investment & Trade, Vol. 17, Issue 2, p. 266. 4. ↑ Kyongwha Chung, Emergency Arbitrator in Investment Treaty Disputes,  accessed on 6 April 2018, pp. 31-32. 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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Arbitrating Business and Human Rights Disputes: Public Consultation on the Draft Hague Rules on Business and Human Rights Arbitration

Wed, 2019-06-26 23:54

Martin Doe, Steven Ratner and Katerina Yiannibas

Since 2013, an independent group of international lawyers (the Working Group of the Business and Human Rights Arbitration project) has been considering the possibility of using international arbitration as a method of resolving disputes over obligations and commitments arising out of business-related human rights abuses.  The idea underlying the project is that international arbitration could overcome some of the legal and practical barriers faced when bringing human rights claims through the existing mechanisms of redress, particularly national courts. It could provide a meaningful non-judicial remedy for victims of business-related human rights impacts, as called for in Pillar III of the UN Guiding Principles on Business and Human Rights, as well as a strategy for business to manage human rights risks within its supply chain, as called for in Pillar II of the Guiding Principles.

In particular, arbitration in this context would offer: (i) a neutral forum for dispute resolution, independent of both the parties and their home states; (ii) a specialized dispute resolution process in which the parties are able to participate in the selection of competent and expert adjudicators for their dispute; (iii) the possibility to obtain binding awards subjected only to limited judicial review, and enforceable across borders; (iv) means of dispute resolution potentially cheaper and quicker than litigation, which are also able to (v) accord parties broad autonomy to agree upon the substantive laws and procedures applicable to their arbitrations. Arbitrations could involve victim claims against businesses or claims between different businesses within a supply chain, with consent provided ex ante in contracts or other agreements or ex post through a compromis.

After extensive consultation with both business and civil society stakeholders, the Working Group formed a Draft Team to elaborate a set of arbitral rules, the Hague Rules on Business and Human Rights Arbitration. The Drafting Team, led by Judge Bruno Simma, consists of 14 experts with diverse professional backgrounds (business, civil society, academic, arbitral institutions, practicing attorneys), and expertise in human rights, arbitration, litigation, operation of supply chains, and other topics relevant to the elaboration of draft rules.  The work of the Drafting Team and related activities of the project are funded by the City of The Hague, and endorsed by the Foreign Ministry of the Netherlands.

 

Transparency and public participation in the drafting of The Hague Rules

The Drafting Team began its work in January 2018, with a meeting at the Center for International Legal Cooperation (CILC) in The Hague. From the outset, the Drafting Team valued the importance of transparency and multi-stakeholder inclusion and discussed how best to involve the various stakeholders so as to promote an informed, inclusive, and balanced process. A Sounding Board was created, consisting of experts to provide input and feedback.

After its second meeting in 2018, the Drafting Team produced an Elements Paper to educate, inform, and garner input from the potential stakeholders of BHR arbitration. Readers unfamiliar with the project are encouraged to read the Elements Paper. The Elements Paper posed over 70 questions, and over a consultation period running from November 2018 through January 2019, garnered over 120 responses from the members of the Sounding Board as well as additional organizations representing different communities of practice. The summary of those responses is available here. All contributions were reviewed and reflected in preparatory papers by the Drafting Team members for discussion at its third meeting in April 2019 and greatly informed the preparation of the first draft text of The Hague Rules.

 

Invitation for public consultation on the first draft text of The Hague Rules

The first draft text of The Hague Rules is now available for public consultation between 21 June-25 August 2019. The Rules are based on the 2013 UNCITRAL Arbitration Rules and adapted to the unique features of business human rights disputes. Some key modifications from the UNCITRAL Rules include:

  • provisions on facilitating settlement and mediation, and emphasizing the complementarity of arbitration to such procedures as the OECD National Contact Points system (Articles 1(6), 17(3), 42, and 51);
  • provisions to address the inequality of arms which may arise in such disputes (inter alia, Articles 5(2), 20(4), 24, 27(2), and 27(4));
  • the establishment of the PCA as the default appointing authority, given its intergovernmental nature and experience in business and human rights disputes (Article 6);
  • procedures for multiparty claims and joinder by third parties (Article 17-bis);
  • a procedure for the early dismissal of claims manifestly without merit, developed on the basis of similar procedures in the ICSID, SIAC, SCC, and HKIAC Rules (as well as the proposed new ICSID Rules) (Article 23-bis);
  • provisions making the arbitral tribunal’s power over interim measures more robust, and at the same time more flexible (Article 26);
  • an emergency arbitrator mechanism elaborated on the basis of the ICC and SCC Rules (Article 26-bis);
  • specialized evidentiary procedures drawn up on the basis, inter alia, of the IBA Rules and Rules of the International Criminal Court, among others (Articles 27, 28, and 30(3));
  • measures to protect the identity of parties, counsel, and witnesses where such protections are warranted by the circumstances of the case, while ensuring due process is maintained for all parties (Articles 17(5), 28(3), and 37(5));
  • provisions on transparency and third-party participation (Articles 24-bis and 33-38);
  • tailored provisions on remedies in the business and human rights context (Article 40);
  • rules on applicable law that enhance flexibility and party autonomy (Article 41);
  • rules to protect the public interest in the case of confidential settlements (Article 42(1));
  • nuanced rules in respect of costs and deposits that encourage the tribunal to sensitive to the interests of access to justice (Articles 46-49);
  • an expedited arbitration procedure for small claims (Article 52); and
  • a Code of Conduct that reflects the highest standards for independence and impartiality in international dispute resolution (Annex).

In light of the expertise of the readers of the Kluwer Arbitration blog, the Drafting Team welcomes comments from all readers. In order to guide you through the reasoning underlying the formulation of certain articles of the Hague Rules, draft commentaries are provided for each article to highlight whether the Hague Rules amend the original text of the UNCITRAL Rules and, if so, why and to what extent, including the intent of various clauses. The commentary also formulates certain specific questions on certain points where input is particularly important.

To access the draft Hague Rules on Business and Human Rights and submit comments, click here. Comments should be sent directly to [email protected] by 25 August 2019.

 

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Young ICCA Workshop in Bishkek, Kyrgyzstan: A Northeast and Southeast Asia Perspective

Tue, 2019-06-25 21:10

Julia Jiyeon Yu

Although Central Asia has geostrategic importance in Asia, the Middle East, and Europe as the heart of the ‘Silk Road’, the Kyrgyz Republic in Central Asia1)Central Asia consists of 5 countries (Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, and Turkmenistan) and Kyrgyzstan is a landlocked nation bordered by China, Kazakhstan, Uzbekistan and Tajikistan. jQuery("#footnote_plugin_tooltip_1161_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); has remained relatively unknown, especially in international arbitration, as compared to other countries in this region.

On 27 May 2019, the first Young ICCA Skills Training Workshop was held at the American University of Central Asia in Bishkek, Kyrgyzstan. Faculty speakers from Moscow, Paris, Frankfurt, Malaysia, Hong Kong and Singapore, together with local experts, were invited to present on the topics: “How to draft arbitration clauses” and “How to start a career in international arbitration”. The workshop also covered issues of enforceability of arbitration clauses and arbitral awards in the domestic courts of the Kyrgyz Republic.

 

Background: Some Features of Kyrgyz Arbitration Law and Practice

The Kyrgyz legal system is a civil law system which has features of French civil law and Russian Federation laws. The Law of the Kyrgyz Republic “On Arbitration Courts in the Kyrgyz Republic” (the “Kyrgyz Arbitration Law”) was adopted in 2002. It is said that2)See Kyrgyzstan, Nurbek Sabirov, Kalikova & Associates Law Firm, International Arbitration (First Edition) Published by Global Legal Group. jQuery("#footnote_plugin_tooltip_1161_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the Kyrgyz Arbitration Law largely contains some elements of the UNCITRAL Model Law on International Commercial Arbitration (the “UNCITRAL Model Law”). However, the Kyrgyz Republic is not on the list of countries where the UNCITRAL Model Law is adopted. The Kyrgyz Republic has been a party to the New York Convention since 1997.

One of the features of the Kyrgyz Arbitration Law which drew my attention is that, in the Kyrgyz Republic, an arbitration award cannot be set aside by the court, though the competent court has the right to refuse enforcement of the arbitration award.3)See Kyrgyzstan, Nurbek Sabirov, Kalikova & Associates Law Firm, International Arbitration (First Edition) Published by Global Legal Group. jQuery("#footnote_plugin_tooltip_1161_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This means that in order to set aside an award, an award debtor is not entitled to raise issues to set aside the award at the court of the seat of arbitration, and there is nothing the award debtor can do but to wait until an award creditor initiates the enforcement action in a competent court. Therefore, parties who select the Kyrgyz Republic as the seat of international arbitration should be aware of the fact that they will not be able to apply to the Kyrgyz courts to set aside any eventual arbitration award.

Another feature of the Kyrgyz arbitration practice is that, the Supreme Court of the Kyrgyz Republic appears to put quite a conservative and narrow interpretation on the enforceability and validity of an arbitration agreement. For example, it is a mandatory requirement for an arbitration agreement to state the name of the arbitration institution and not enough to refer only to arbitration rules. The Supreme Court of the Kyrgyz Republic ruled that the arbitration clause did not comply with the mandatory requirements of the Kyrgyz Law, because it did not contain the name of the arbitration institution, which was agreed upon by the parties for the settlement of their disputes and referred only to arbitration rules.4)See Arbitration Year Book 2017, Kyrgyzstan, Alexander Korobeinikov, Baker McKenzie’s Almaty office. jQuery("#footnote_plugin_tooltip_1161_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Also, under the Kyrgyz Arbitration Law, in order for an arbitration agreement to be valid and enforceable, it must be in a written form and shall state that ‘any’ dispute between parties shall be settled in arbitration. Therefore, it would be advisable to give extra attention in drafting an arbitration clause when entering into a contract with a Kyrgyz party.

While the Kyrgyz Republic is a signatory state to the ICSID Convention since 1995, the Kyrgyz government has not ratified it. The Law of the Kyrgyz Republic on Investments (2003) stipulates national treatment for foreign investors and guarantees foreign investors the same protections and treatment as domestic nationals and companies. The Kyrgyz Republic is also a party to various international agreements, allowing foreign investors to protect their investments and to bring cases against the Kyrgyz Republic. The country has a number of bilateral and multilateral investment treaties including the Energy Charter Treaty.5)Roeline Knottnerus and Ryskeldi Satke, Kyrgyz Republic’s experience with investment treaties and arbitration cases, Published by Transnational Institute Amsterdam, July 2017. jQuery("#footnote_plugin_tooltip_1161_5").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The Kyrgyz economy largely relies on the export of gold and other minerals and tourism. Foreign direct investment in these sectors are supposed to boost its economic growth.6)Roeline Knottnerus and Ryskeldi Satke, Kyrgyz Republic’s experience with investment treaties and arbitration cases, Published by Transnational Institute Amsterdam, July 2017. jQuery("#footnote_plugin_tooltip_1161_6").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Under this circumstance, it would be easy to face investment disputes relating to environmental and social issues in the host country. The Kyrgyz Republic has received quite a number of investment arbitration cases in relation to banking and financial services disputes, mining and environmental disputes.7)Roeline Knottnerus and Ryskeldi Satke, Kyrgyz Republic’s experience with investment treaties and arbitration cases, Annex II, Published by Transnational Institute Amsterdam, July 2017. jQuery("#footnote_plugin_tooltip_1161_7").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Northeast and Southeast Asia’s Perspective

As a Korean qualified lawyer working in Singapore, I was wondering how both Korea and Singapore investors would approach Central Asia and what their strategies are. The Korean government is enthusiastically seeking a new economic growth engine through economic cooperation with Russia and the Eurasian countries. In particular, there is a growing need to expand the Eurasian trade network, based on a FTA with the Eurasian Economic Union (“EAEU”).8)Report on the Korea-EAEU Industrial Cooperation Enhancement Policy, KIEP(Korea Institute for International Economy Policy) 2017. jQuery("#footnote_plugin_tooltip_1161_8").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In this regard, it is widely accepted in Korea that “New Northern Policy”, which establishes a new framework for industrial cooperation between Korea and the EAEU, is strategically important.

Singapore has not yet signed an investment agreement with the Kyrgyz Republic while Malaysia has. Singapore is also negotiating a Free Trade Agreement with the EAEU, of which the Kyrgyz Republic is a member. ASEAN and the Eurasian Economic Commission have signed a Memorandum of Understanding on Economic Cooperation. While China is actively engaging the Kyrgyz Republic with the ‘One Belt One Road’ project,9)Roman Mogilevskii, Kyrgyzstan and the Belt and Road Initiative, University of Central Asia. jQuery("#footnote_plugin_tooltip_1161_9").tooltip({ tip: "#footnote_plugin_tooltip_text_1161_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Japan has bilateral investment agreements with Kazakhstan and Uzbekistan only.

From a Korean perspective, there would be a lot of opportunities to cooperate in Central Asia, considering activities of ‘Koryo-saram’ in the region and some aspects of cultural similarity to each other. For Korean businessmen, Singapore’s interest in Central Asia would matter because a number of Korean companies have (and are considering to) set up regional headquarters in Singapore and are trying to cover Central Asia too.

 

Key Takeaway from the Event

At the last session of the event, Mr. Shamaral Maichiev from the International Court of Arbitration at the Chamber of Commerce and Industry of the Kyrgyz Republic emphasized to local practitioners that bringing positive changes in the Kyrgyz Republic is important in order to increase its investment attractiveness. Echoing his comments, I added some comments at the same session that lawyers who want to act globally should know their region first and then try to expand their activities worldwide.

In order for the Kyrgyz Republic to attract more foreign investment, it would be crucial for its arbitration law and practice to be more reliable, transparent and stable. Law and practice of international arbitration in the Kyrgyz Republic is in the process of development. In this regard, education of young practitioners who will be leading this country is essential.

The Young ICCA Skills Training Workshop in Bishkek has clearly demonstrated that international activities can be well-blended with local ones throughout the region. This event has also provided participants and speakers with the valuable chance to know more about the Kyrgyz Republic – not only about its breath taking natural environment, but also about the potential of the Kyrgyz legal profession in arbitration.

References   [ + ]

1. ↑ Central Asia consists of 5 countries (Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, and Turkmenistan) and Kyrgyzstan is a landlocked nation bordered by China, Kazakhstan, Uzbekistan and Tajikistan. 2, 3. ↑ See Kyrgyzstan, Nurbek Sabirov, Kalikova & Associates Law Firm, International Arbitration (First Edition) Published by Global Legal Group. 4. ↑ See Arbitration Year Book 2017, Kyrgyzstan, Alexander Korobeinikov, Baker McKenzie’s Almaty office. 5, 6. ↑ Roeline Knottnerus and Ryskeldi Satke, Kyrgyz Republic’s experience with investment treaties and arbitration cases, Published by Transnational Institute Amsterdam, July 2017. 7. ↑ Roeline Knottnerus and Ryskeldi Satke, Kyrgyz Republic’s experience with investment treaties and arbitration cases, Annex II, Published by Transnational Institute Amsterdam, July 2017. 8. ↑ Report on the Korea-EAEU Industrial Cooperation Enhancement Policy, KIEP(Korea Institute for International Economy Policy) 2017. 9. ↑ Roman Mogilevskii, Kyrgyzstan and the Belt and Road Initiative, University of Central Asia. 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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Round Table on Arbitration in Belgrade (May 2019): Hot Topics in Our Daily Arbitration Practice

Tue, 2019-06-25 03:00

Nataša Hadžimanović and Jelena Perović

Prof. Dr. Jelena Perović, from the University of Belgrade (Serbia) and Dr. Nataša Hadžimanović, from Gabriel Arbitration (Zurich, Switzerland), launched the Round Table on Arbitration in 2018 as a forum to discuss controversial issues, share experiences and highlight new trends in arbitration.

The 2nd Round Table on Arbitration took place in the magnificent rooms of the Aeroklub in Belgrade, Serbia, on 21 May 2019. With the umbrella topic “Hot Topics in Our Daily Arbitration Practice”, the Round Table attracted an audience from Bosnia and Hercegovina, Northern Macedonia, Serbia and Switzerland. Under the moderation of Prof. Dr. Jelena Perović and Dr. Simon Gabriel from Gabriel Arbitration, participants highlighted and discussed several topics relevant in their practice.

 

Third-Party Funding (“TPF”) in South East Europe (“SEE”)

Dr. Nataša Hadžimanović started the discussion concerning TPF in the region. Specifically, the audience was asked to discuss

  1. whether TPF was being used in SEE, and
  2. how the arbitration practitioners tackled the challenges which usually came with TPF.

These challenges were identified as the need for time, considerations whether to disclose TPF, and the possibility that a party who was unaware of TPF could omit to ask for a security for costs at an early stage of the proceedings and then, as a consequence, be unable to obtain reimbursement for its costs as the provider of TPF was no party to the arbitration.

The following was stated:

The rules of the relevant arbitration institutions in the region did not offer specific rules on TPF. Also, in investment arbitrations in SEE, security for costs was hardly ever awarded. Under the BAC Rules and the Rules of the Permanent Arbitration of the Serbian Chamber of Commerce, security for costs had, so far, never been awarded although such a measure could, in principle, be awarded on the basis of the rules on interim measures. This meant that costs could not be recovered even in case a party had been informed on TPF and asked for security for costs.

Thus far, TPF had been used only in investment arbitrations. As TPF was expensive, the minimum threshold for investing per case was EUR 1 million. The present practice in the region, therefore, was that on average only claims over EUR 10 million were financed. Nonetheless, there were some providers of TPF who would finance smaller claims of EUR 2 or 5 million, and this approach was perceived as promising in SEE, as 95% of all claims were under EUR 10 million.

It was advised that parties who were not sure where to look for TPF could use the services of a TPF broker while the parties who were not sure whether to seek financing from a TPF could nonetheless opt for a free assessment at a preliminary stage.

The biggest challenges related to TPF were time (in one case the assessment of a good claim by a provider of TPF had taken so long that the claimant went bankrupt and no arbitration took place) and whether TPF would be provided throughout the whole arbitration proceedings.

It was pointed out that other forms of financing could be interesting for the region as well – such as the purchase of a claim or of an award. It became clear from the discussions that the arbitration community in SEE would continue to explore this topic and the full potential of the use of TPF in SEE (for example, in an upcoming event of the Belgrade Arbitration Association).

 

Impact of the Belt & Road Initiative (“BRI”) on Arbitration in SEE

Dr. Johannes Landbrecht from Gabriel Arbitration asked the audience whether the BRI had an impact on arbitration in SEE. In his experience, the investment interest in the context of BRI concerned infrastructure, green energy and construction disputes.

Furthermore, one of the topics discussed was that, as with the BRI big Chinese companies came into play, such big companies had the power to impose contractual terms. The key issue was, therefore, how to adequately deal with the imposition of the applicable law, the seat and the applicable rules – unless such clauses were so-called “midnight clauses”, where no discussion would take place anyway. It was concluded that an ideal scenario would be if parties with a joint legal background – be it the civil or common law tradition – would pick a law from their legal tradition. In case this was not possible, it was advised that a party should at least not give up the seat in order to choose its arbitrator accordingly, as such an arbitrator would perceive the applicable law from the perspective of his/her own legal system.

 

The Reform of the Swiss Legal Framework on International Arbitration

Prof. Dr. Milena Đorđević enquired about the ongoing reform of the Swiss lex arbitri, the aim of which is to be even more user-friendly. If everything goes according to the plan, the new provisions will be approved by the Swiss Parliament without major changes in 2019 and will enter into force in 2020.

Dr. Mladen Stojiljković and Dr. Simon Gabriel pointed out the following changes:

  • the possibility was provided to file submissions to set aside an arbitral award in the English language;
  • the revision was expressly included as an extraordinary legal remedy against an arbitral award for situations where relevant facts or evidence came to light after the arbitration proceedings had been completed, or where criminal investigations showed that the award had been tainted by illegality, or where circumstances came to light after the arbitration proceedings had been completed that called into question an arbitrator’s independence or impartiality;
  • an express rule was included that arbitration clauses in unilateral acts such as for example wills or trust deeds would have legal force;
  • a default provision on the determination of the seat was included to help parties who just had opted for arbitration in Switzerland (the first Swiss court called would designate the arbitral seat);
  • finally, the formal requirements were eased in case parties wished to waive their right to challenge the arbitral award, i.e. parties with a domicile/branch/place of residence outside Switzerland can waive their right to challenge an award if they so provide in writing, and it is no longer necessary to “expressly” waive this right.

 

Formal Defects and Formal Requirements of an Arbitration Agreement

Prof. Dr. Jelena Perović started a discussion on what should happen to arbitration clauses in case they did not meet a specific form requirement which the parties themselves had included in their main contract: Should such a defect affect only the main agreement or also the arbitration clause? It was concluded that it should be a matter of interpretation whether the parties had meant to apply the form requirement also to the arbitration agreement – considering that for the arbitration clause, in principle, a lower standard should apply because it exists to set up a conflict resolution mechanism.

Furthermore, Dr. Mladen Stojiljković commenced a discussion by asking the audience on the impact of stamps in SEE: Who would be the party in a case where one party had signed but not stamped an agreement containing an arbitration clause while its parent company had stamped but not signed it? It was pointed out by the audience that historically in SEE the stamp had been very important, and originally it had been more important than the signature. The requirement of the stamp, even though it had recently been abolished under Serbian law, was in practice only very slowly losing its importance. Today, however, the signature would prevail, if authentic. However, there were also opinions that in the described case (where one party had signed and another one stamped an arbitration agreement), both parties should be bound.

Following the discussion on stamps, Prof. Dr. Maja Stanivuković, President of the BAC, opened a conversation on whether electronic submissions filed with an arbitral institution should contain any form of signature. The audience expressed its view that this was unnecessary because submissions often contained no names, no signatures of counsel, just the name of the law firm.

 

Conclusion

The discussion highlights the impact of global trends in trade on the investment and arbitration practice in SEE. Parties from SEE, with the help of their legal representatives, meet the challenges which these trends bring. Notable examples include the use of TPF as well as the impact of the BRI on business in SEE.

Legislation in SEE is trying to foster the establishment of new business relationships: Strict formal requirements (and the relevance of the stamp in commercial practice) – elements deeply inherent in the SEE legal tradition – are being abolished. However, parties in SEE are aware of the fact that changes in enacted legal acts do not necessarily change the law in practice: Formal requirements (even though abolished by legal acts) are losing their importance only slowly.

The role of legal representatives in this process is of crucial importance, as is the importance of open fora like the Round Table on Arbitration where arbitration practitioners can share their experiences and ideas to better advise their clients.

 

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LIBOR Phase-Out: Questions of Interest to Arbitrators

Mon, 2019-06-24 01:39

Sabina Sacco and David Khachvani

Introduction

The London Interbank Offered Rate (“LIBOR”) is an estimate of the interest rate at which London-based major banks borrow unsecured funding from one another. It is administered by the Intercontinental Exchange (“ICE”) under the supervision of the Financial Conduct Authority (“FCA”). Based on the entries supplied by a panel of banks, ICE currently estimates and publishes LIBOR on a daily basis in five currencies, for seven maturity periods.1) US Dollar, Euro, Pound Sterling, Japanese Yen and Swiss Franc; overnight, one week, one month, two months, three months, six months, and one year. jQuery("#footnote_plugin_tooltip_9698_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

LIBOR has been a fixture of international commercial transactions for over 30 years.  Financial contracts (such as derivatives, syndicated loans, bonds, and retail mortgages) commonly use it as the benchmark interest rate. It is also used in a variety of commercial contracts to define the interest rate applicable in price adjustment mechanisms or for late payments.

Notwithstanding its importance, reliance on LIBOR must soon end. In the wake of what is generally referred to as the “LIBOR Scandal”, after it emerged that some banks had manipulated the system by submitting artificially high or low interest rates, on 27 July 2017, the FCA’s CEO announced that, as from 1 January 2022, the FCA would no longer require participating banks to file LIBOR estimates. Although the FCA did not directly call for the discontinuation of LIBOR, it is now widely understood that LIBOR is unlikely to be published as from 2022.

The end of LIBOR raises several questions for arbitral tribunals dealing with issues of interest. In this blog we attempt to address two such questions.

First, how should a tribunal apply a LIBOR-benchmarked contract once LIBOR has ceased to exist? Can the tribunal apply a replacement rate,2) The financial industry has been seeking to come up with viable replacements for LIBOR. However, given some unique characteristics and the global nature of LIBOR, finding sustainable alternatives has proven difficult. Among the alternatives proposed so far, there are overnight index rates for different currencies, such as the Sterling Overnight Index Average (“SONIA”) and the Swiss Average Rate Overnight (“SARON”), as well as various repurchase agreement rates and the secured overnight financing rate for the US dollar (“SOFR”); see here for more details. jQuery("#footnote_plugin_tooltip_9698_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); or has the relevant clause become frustrated or impossible to perform?

Second, what will happen to awards of interest by reference to LIBOR that have not been fully paid on the date of LIBOR’s discontinuance? Can they be corrected or revised, and if not, are they still enforceable?

 

A. LIBOR-Benchmarked Contracts

We first address the situation where an arbitral tribunal is faced with a contract that refers to LIBOR as a benchmark. Although parties are expected to replace or amend their contracts in the phase-out period or resort to contractual fallback mechanisms, it is likely that disputes will nevertheless arise in respect of outstanding LIBOR-benchmarked contracts after the phase-out.

Where the contract provides for a fallback mechanism or an alternative benchmark for calculating interest (as is the case with many financial contracts3) The International Swaps and Derivatives Association (“ISDA”), for instance, recommends that fallback mechanisms be included in transactions precisely to avoid difficulties when the default reference rate is not (or no longer) available.  See ISDA, “Development of Fallbacks for LIBOR and other Key IBORs”, 28 November 2017, see: https://www.isda.org/2017/11/28/development-fallbacks-libor-key-ibors-faqs/, last accessed on 18 May 2019. The US-based Alternative Reference Rates Committee (“ARRC”) has recently released recommended contractual fallback language for US dollar LIBOR denominated floating rate notes and syndicated loans. See https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC-Apr-25-2019-announcement.pdf last accessed on 21 May 2019. jQuery("#footnote_plugin_tooltip_9698_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, the tribunal should apply that mechanism. Any disputes are thus likely to relate to the interpretation or operation of that mechanism. While the tribunal’s task should be relatively straightforward, difficulties may arise in the interpretation of the “trigger provisions” which determine when the mechanism is activated.

Where the contract contains no fallback mechanism, the tribunal will need to resort to a more complex analysis under the applicable substantive law. Below we offer an overview of legal concepts that might guide the tribunal in common and civil law jurisdictions, using English and Swiss law as examples. Our analysis focuses on contracts concluded before the LIBOR phase-out became public knowledge.4) If parties concluded a LIBOR-benchmarked contract after that date, neglecting the consequences of the phase-out, different considerations may apply, possibly calling for the application of rules such as those on “initial impossibility” or “mistake”, among others, depending on the type of contract and parties involved. jQuery("#footnote_plugin_tooltip_9698_4").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

  1. English law

The following principles might be potentially relevant for LIBOR-benchmarked contracts governed by English law:5) For a more in-depth discussion, see in particular W. Bristow, R. Huntsman, “A post-LIBOR world: how will the English courts address legacy contracts after 31 December 2021”, International Banking and Financial Law Review 3, 1 January 2018. jQuery("#footnote_plugin_tooltip_9698_5").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Contextual interpretation – As recalled by the UK Supreme Court in Wood v. Capita Insurance Services Ltd, interpreting contractual provisions under English law involves ascertaining the objective meaning of the language chosen by the parties to express their mutual intention. For this purpose, besides the ordinary meaning of the contractual terms, English courts may also consider the context, including the contract as a whole, the circumstances known to the parties while entering into the contract, and commercial common sense. Applying these principles, a tribunal might consider it appropriate to ascertain if the parties intended for interest to apply per se, and were flexible as to its calculation.6) Notably, a court or tribunal might forego contractual interpretation altogether, since the analysis to be conducted in respect of the LIBOR phase-out is not necessarily interpretative. jQuery("#footnote_plugin_tooltip_9698_6").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); If this is so, and if a proposed alternative to LIBOR makes commercial sense (because it ensures a comparable result in terms of allocation of the floating interest rate risks between the parties for a given transaction), a court or tribunal could resort to that alternative as a reflection of the parties’ likely mutual intention. That being said, in Arnold v. Britton & Others, the Supreme Court has also emphasized that the analysis should be made from a standpoint contemporaneous to the conclusion of the contract. Thus, if the parties have not inserted a fallback mechanism in their contract, it might be difficult to prove – without specific contemporaneous evidence of intention – that the parties intended to calculate the applicable interest rate based on an alternative benchmark.

Implying Contractual Terms – A tribunal may imply a term to form part of the contract if the term is reasonable, equitable, not contradicted by other terms of the contract, and either necessary for preserving the business purpose of the contract or so obvious that “it goes without saying”. Marks & Spencer v. BNP Paribas Securities Services & another shows that the courts apply the test strictly and are not willing to imply a contractual term simply because the outcome may be otherwise harsh for one of the parties.7) Equally, English courts seek to avoid implying terms based on hindsight bias. jQuery("#footnote_plugin_tooltip_9698_7").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  If the LIBOR clause plays a peripheral role in the contract, it may be difficult to argue that implying an alternative mechanism is crucial for the preservation of the parties’ contractual deal. Conversely, where the LIBOR clause is a central term, a tribunal is more likely to imply a fallback mechanism to preserve the contract’s business efficacy.

Alternative Valuation Mechanism – In Sudbrook Trading Estate v. Eggleton, an English court substituted a contractual valuation mechanism in a lease when that mechanism became inoperable.8) Sudbrook Trading Estate v. Eggleton, [1983] 1 AC 444. jQuery("#footnote_plugin_tooltip_9698_8").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, this was only possible because the valuation mechanism was not itself an essential term of the contract. Tribunals applying English law might thus consider applying the rationale in Sudbrook by analogy when the reference to LIBOR is considered non-essential.  This will depend on the type of contract, the tribunal’s understanding of the parties’ intent and whether an existing alternative can fulfill a substantially equivalent function in terms of risk allocation and general reliability.

Frustration – If the above approaches fail, then, depending on the role of the LIBOR clause for the contract, either the entire contract or the LIBOR clause may be deemed frustrated, i.e. commercially impossible to perform. In that case, the parties may be able to recover sums paid before the frustration. Tribunals taking this route should bear in mind commercial realities and the wider detrimental effects that such an outcome may have on the relevant financial market.9) Albeit, given that arbitral awards are often confidential and without precedential value, the implications are not comparable with those of court judgments. jQuery("#footnote_plugin_tooltip_9698_9").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

  1. Swiss law

The following rules may become relevant when a tribunal is faced with a LIBOR-benchmarked contract governed by Swiss law:10) For this section, see, eg, B. Winiger, in L. Thévenoz/F. Werro (Eds), Commentaire romand – Code des obligations I, 2nd ed. 2012, Article 18 SCO, paras 14-53 and 193-215 ; W. Wiegand, in H. Honsell/N. Vogt/W. Wiegand (Eds), Basler Kommentar – Obligationenrecht I, 6th ed. 2015, Article 18 SCO, paras 18-40 and paras 95-125a, with further references. jQuery("#footnote_plugin_tooltip_9698_10").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Article 18(1) Swiss Code of Obligations – Pursuant to this provision, when interpreting a contract,11) As noted in footnote 6 above, it will be for the tribunal to determine whether the question is one of contract interpretation in the first place. jQuery("#footnote_plugin_tooltip_9698_11").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); a tribunal should seek to establish the parties’ “true and common intention” (“subjective” interpretation). Beyond the text of the contract, the parties’ “true and common intention” may be evinced by reference to other elements, including their negotiations and subsequent conduct. If the parties’ true and common intention cannot be established, the tribunal will interpret the agreement as it would have been understood by a reasonable person, acting in good faith, in light of the circumstances at the time of its conclusion (“objective” interpretation). Under both a subjective and an objective interpretation, in case of doubt, the tribunal should be guided, inter alia, by the principle in favorem negotii, and thus opt for a solution that best preserves the parties’ contractual bargain. The tribunal may also refer to relevant trade customs and industry practice. These rules might enable the tribunal to preserve the parties’ contractual deal by substituting a defunct reference to LIBOR with another benchmark that would best reflect the prevailing industry practice and the contractual risk allocation.

Clausula rebus sic stantibus (théorie de l’imprévision) – Under this principle, a tribunal may intervene to adapt a contract to changed circumstances. However, as the Supreme Court’s case law makes clear (eg, ATF 192 III 97), the threshold for obtaining relief under this theory is very high. In particular, the principle applies only where the change of circumstances was not reasonably foreseeable and its impact is such as to render the transaction grossly disproportionate (and therefore abusive). Arguably, if a debtor uses the extinguishment of LIBOR in order to free itself from the obligation to pay interest or fundamentally alter the contractual risk allocation, a tribunal might have a ground to intervene to reestablish the contractual equilibrium. This could be done by resorting to an alternative benchmark that makes commercial sense in the given circumstances.

Impossibility – Article 119(1) SCO provides that an obligation, LIBOR clause or entire contract as the case may be, “is deemed extinguished where its performance is made impossible by circumstances not attributable to the obligor.” The obligor might then be liable “for the consideration already received”. Given its detrimental economic effects, this solution would appear to be best considered as a last resort if other mechanisms do not allow the preservation of the contractual deal.

 

B. LIBOR-Based Interest Awards

Arbitral tribunals enjoy a degree of discretion in determining damages, including interest, subject to the usual requirements of due process and equality of arms.12) In specific cases, the contract or applicable investment treaty contains guidance as to the interest rate to be applied on the compensation amount. jQuery("#footnote_plugin_tooltip_9698_12").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Tribunals often use LIBOR as a benchmark for calculating pre- and post-award interest, even when LIBOR is not specifically mentioned in the relevant contract or investment treaty. A review of the publicly available awards issued after the announcement of the LIBOR phase-out shows that tribunals continue to use LIBOR, without apparently considering the risk that, if the award is not paid out until 2022, the winning party may be left with an unenforceable interest award.13) Gavrilovic and Gavrilovic d.o.o. v. Republic of Croatia, ICSID Case No. ARB/12/39, Award, 26 July 2018, para. 1324.d; Unión Fenosa Gas, S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/14/4, Award, 31 August 2018, para. 10.138; Greentech Energy Systems A/S (now Athena Investments A/S), NovEnergia II Energy & Environment (SCA) SICAR and NovEnergia II Italian Portfolio SA v. Italian Republic, SCC Case No. V (2015/095), Final Award, 23 December 2018, para. 594(e). jQuery("#footnote_plugin_tooltip_9698_13").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_13", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Tribunals should consider the following when dealing with matters of interest:

First, in currently pending proceedings, if a party requests an award of interest by reference to LIBOR and none of the parties raises the issue of the LIBOR phase-out, tribunals should arguably bring the issue to the parties’ attention. This derives from the tribunal’s duty to render an enforceable award, which is sometimes explicitly set out in applicable arbitration rules.14) E.g, Article 42 of the 2017 ICC Rules. jQuery("#footnote_plugin_tooltip_9698_14").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_14", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Second, if the tribunal has already rendered an award containing LIBOR as a benchmark, the available options are limited. Although arbitration rules often provide for a possibility for correction or interpretation of an award, this mechanism is reserved for typographical errors and genuine ambiguities in the language of the award, as opposed to substantive issues that the parties have neglected or that have arisen after the award has been rendered. An application for revision may be a more suitable mechanism. However, only some arbitration laws and rules provide for such a possibility, and even when they do, the applicable time limits are stringent. For instance, under Article 51 of the ICSID Convention, a party may make an application for revision of the award within 90 days from the discovery of a new material fact. Given that the LIBOR phase-out has been in the public domain since July 2017, it might be difficult to argue that this fact was unknown to a diligent party 90 days prior to lodging the revision application.

In these circumstances, an award creditor will likely need to argue before the enforcing courts that LIBOR should be substituted by another benchmark, with the uncertainty that that entails.15) Since this issue does not appear to fall under the 1958 New York Convention, the outcome will depend on the legislation of the jurisdiction in which enforcement is sought. In particular, domestic jurisprudence concerning the enforcement of ambiguous or disputed terms of arbitral awards is likely to be relevant. jQuery("#footnote_plugin_tooltip_9698_15").tooltip({ tip: "#footnote_plugin_tooltip_text_9698_15", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Conclusion

The LIBOR phase-out from 2022 creates a considerable risk of contractual disputes. As things stand, the absence of a commonly agreed substitute for LIBOR makes the outcome of such disputes uncertain. While the solution will depend on the law applicable to the contract, tribunals are in principle equipped with sufficient tools to preserve the contractual deal by reference to the parties’ common intentions and commercial common sense. In some cases, however, a tribunal may be left with the unattractive solution of declaring LIBOR-benchmarked obligations frustrated or impossible to perform.

As for arbitral awards that use LIBOR as a benchmark for interest, tribunals should be vigilant of the risk that the interest portion of the award may become unenforceable if it remains unpaid beyond 2022. As the available remedies after the award has been rendered are scarce, tribunals are encouraged to uphold their duty to render an enforceable award, including by raising the consequences of the LIBOR phase-out with the parties whenever they have neglected to address these issues.

References   [ + ]

1. ↑ US Dollar, Euro, Pound Sterling, Japanese Yen and Swiss Franc; overnight, one week, one month, two months, three months, six months, and one year. 2. ↑ The financial industry has been seeking to come up with viable replacements for LIBOR. However, given some unique characteristics and the global nature of LIBOR, finding sustainable alternatives has proven difficult. Among the alternatives proposed so far, there are overnight index rates for different currencies, such as the Sterling Overnight Index Average (“SONIA”) and the Swiss Average Rate Overnight (“SARON”), as well as various repurchase agreement rates and the secured overnight financing rate for the US dollar (“SOFR”); see here for more details. 3. ↑ The International Swaps and Derivatives Association (“ISDA”), for instance, recommends that fallback mechanisms be included in transactions precisely to avoid difficulties when the default reference rate is not (or no longer) available.  See ISDA, “Development of Fallbacks for LIBOR and other Key IBORs”, 28 November 2017, see: https://www.isda.org/2017/11/28/development-fallbacks-libor-key-ibors-faqs/, last accessed on 18 May 2019. The US-based Alternative Reference Rates Committee (“ARRC”) has recently released recommended contractual fallback language for US dollar LIBOR denominated floating rate notes and syndicated loans. See https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC-Apr-25-2019-announcement.pdf last accessed on 21 May 2019. 4. ↑ If parties concluded a LIBOR-benchmarked contract after that date, neglecting the consequences of the phase-out, different considerations may apply, possibly calling for the application of rules such as those on “initial impossibility” or “mistake”, among others, depending on the type of contract and parties involved. 5. ↑ For a more in-depth discussion, see in particular W. Bristow, R. Huntsman, “A post-LIBOR world: how will the English courts address legacy contracts after 31 December 2021”, International Banking and Financial Law Review 3, 1 January 2018. 6. ↑ Notably, a court or tribunal might forego contractual interpretation altogether, since the analysis to be conducted in respect of the LIBOR phase-out is not necessarily interpretative. 7. ↑ Equally, English courts seek to avoid implying terms based on hindsight bias. 8. ↑ Sudbrook Trading Estate v. Eggleton, [1983] 1 AC 444. 9. ↑ Albeit, given that arbitral awards are often confidential and without precedential value, the implications are not comparable with those of court judgments. 10. ↑ For this section, see, eg, B. Winiger, in L. Thévenoz/F. Werro (Eds), Commentaire romand – Code des obligations I, 2nd ed. 2012, Article 18 SCO, paras 14-53 and 193-215 ; W. Wiegand, in H. Honsell/N. Vogt/W. Wiegand (Eds), Basler Kommentar – Obligationenrecht I, 6th ed. 2015, Article 18 SCO, paras 18-40 and paras 95-125a, with further references. 11. ↑ As noted in footnote 6 above, it will be for the tribunal to determine whether the question is one of contract interpretation in the first place. 12. ↑ In specific cases, the contract or applicable investment treaty contains guidance as to the interest rate to be applied on the compensation amount. 13. ↑ Gavrilovic and Gavrilovic d.o.o. v. Republic of Croatia, ICSID Case No. ARB/12/39, Award, 26 July 2018, para. 1324.d; Unión Fenosa Gas, S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/14/4, Award, 31 August 2018, para. 10.138; Greentech Energy Systems A/S (now Athena Investments A/S), NovEnergia II Energy & Environment (SCA) SICAR and NovEnergia II Italian Portfolio SA v. Italian Republic, SCC Case No. V (2015/095), Final Award, 23 December 2018, para. 594(e). 14. ↑ E.g, Article 42 of the 2017 ICC Rules. 15. ↑ Since this issue does not appear to fall under the 1958 New York Convention, the outcome will depend on the legislation of the jurisdiction in which enforcement is sought. In particular, domestic jurisprudence concerning the enforcement of ambiguous or disputed terms of arbitral awards is likely to be relevant. 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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To Enforce or Not to Enforce Annulled Arbitral Awards?

Sun, 2019-06-23 01:20

Kirsten Teo

The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) prescribes mandatory, uniform international rules for the recognition and enforcement of international arbitration agreements and awards in the Contracting States. Pursuant to Article V(1)(e) of the New York Convention, an award may be denied recognition and enforcement by the enforcement court if a competent court in the arbitral seat or primary jurisdiction annuls the award.1)Gary B. Born, The New York Convention: A Self-Executing Treaty, 40 Michigan Journal of International Law 115 (2018) jQuery("#footnote_plugin_tooltip_7718_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7718_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In view of the permissive language in Article V(1)(e) of the New York Convention, enforcement courts have the discretion to: (a) treat the annulled award as an invalid underlying judgment that ceases to exist, hence there is nothing to enforce; (b) accord some deference to the annulment judgment but reserve the right to enforce the award if deemed justified according to the domestic laws of the enforcement jurisdiction; or (c) disregard the annulment judgment and make an independent decision on whether or not to enforce the annulled award. As the Honourable the Chief Justice of Singapore Sundaresh Menon noted in his keynote address at the CIArb London Centenary Conference on 2 July 2015,

[There is] growing uncertainty over the international framework governing the recognition and enforcement of awards. There is, for instance, a lack of international consensus on the effect of an order by the seat court setting aside an award in subsequent enforcement proceedings. And we have also seen the re-litigation of identical issues in different enforcement proceedings in different courts. This is bound to increase costs and further erode the value of finality.

 

The Territorial, Westphalian and Transnational Theories

Whether or not enforcement courts decide to enforce an annulled award is influenced by how the enforcement courts characterise the nature and role of the arbitral seat. On a broad spectrum, there are three theories namely: (a) the seat or territorial theory i.e. where an award has been set aside by the competent authority in the country where it was rendered, it ceases to exist and is not enforced; (b) the Westphalian or multi-local theory pursuant to which annulment decisions do not conclusively determine enforcement unless the annulment is based on internationally recognised grounds; and (c) the transnational legal autonomy or delocalisation theory according to which the annulment decision has no bearing on enforcement, and an annulled award may be enforced unless it falls within the grounds to refuse enforcement under the domestic law of the enforcement court.2) See Albert Jan van den Berg, Enforcement of Annulled Awards, 9 (2) ICC International Court of Arbitration Bulletin 15, 15 (1998), Julian Lew, Achieving the Dream: Autonomous Arbitration, 22 (2) Arbitration International (2006), and Emmanuel Gaillard, Legal Theory of International Arbitration (Martinus Nijhoff Publishers, 2010) jQuery("#footnote_plugin_tooltip_7718_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7718_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

As an example of the prevailing seat theory, the Singapore Court of Appeal observed in 2013 that it was doubtful whether an enforcement court might recognise and enforce a foreign award which had been set aside by courts in the arbitral seat. This is because the contemplated erga omnes effect of a successful application to set aside an award would generally lead to the conclusion that there was simply no award to enforce: see [76] and [77] in PT First Media TBK v Astro Nusantara International BV and others [2013] SGCA 57. This observation accords with Professor Peter Sanders’ opinion that if an award is annulled, the courts will refuse enforcement as “there does not longer exist an arbitral award and enforcing a non-existing arbitral award would be an impossibility or even go against the public policy of the country of enforcement.3)Peter Sanders, New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1955(6) Netherlands Int’l Law Review 43 at p. 109-110 jQuery("#footnote_plugin_tooltip_7718_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7718_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

The strict public policy exception in the US

In TermoRio S.A. E.S.P. v. Electranta S.P., 487 F.3d 928, 939 (D.C. Cir. 2007), the D.C. Circuit affirmed the District Court’s decision to refuse enforcement of an award on the grounds that Colombia’s highest administrative court – at the arbitral seat – had annulled the award, accepting that there is a “narrow public policy gloss” on Article V(1)(e) of the New York Convention and that a foreign judgment is unenforceable as against public policy to the extent it is repugnant to fundamental notions of what is decent and just in the United States. The appellants had not alleged or provided any evidence to suggest that the proceedings before the Colombian court or the annulment judgment violated any basic notions of justice.

In Getma International v Republic of Guinea 862 F. 3d 45 (D.C. Cir, 2017), Getma sought to enforce in the United States an award annulled by the Common Court of Justice and Arbitration of the Organization for the Harmonization of Business Law in Africa (“CCJA”), a court of supranational jurisdiction for Western and Central African States. The D.C. Circuit on 7 July 2017 affirmed the District Court’s decision that Getma had failed to satisfy the standard i.e. that the CCJA’s annulment of the award was repugnant to the fundamental notions of morality and justice.

As was discussed on this blog, in Thai-Lao Lignite (Thailand) Co, Ltd v. Gov’t of the Lao People’s Democratic Republic 864 F. 3d 172 (2d Cir, 2017), the Second Circuit on 20 July 2017 affirmed inter alia the District Court’s order refusing enforcement of an award annulled by the Malaysian courts. The 2009 award issued by a Malaysian tribunal in favour of the claimants was initially confirmed by the Southern District in 2011 before it was set aside by the Malaysian courts in 2012. The Southern District subsequently vacated its enforcement judgment, finding that the New York Convention required it to give effect to the later Malaysian decision, which did not “rise to the level of violating basic notions of justice such that the Court here should ignore comity considerations.” The Second Circuit decided that the Federal Rule of Civil Procedure 60(b)(5) which permits District Courts to “relieve a party…from a final judgment” when the judgment “is based on an earlier judgment that has been reversed or vacated,” applies to a District Court’s consideration of a motion to vacate a judgment enforcing an arbitral award that has since been annulled by courts at the seat. The enforcement courts analyse the Rule 60(b) considerations, including timeliness and the equities, and assign significant weight to international comity in the absence of a need to vindicate “fundamental notions of what is decent and just” in the United States.

The public policy exception in the United States – i.e. that the annulment of the award has to run counter to the United States public policy and be repugnant to the fundamental notions of what is decent and just in the United States – is a stringent one. As was discussed on this blog, this exception was met in Corporación Mexicana De Mantenimiento Integral, S. De R.L. De C.V. v. PemexExploración Y Producción, No. 13-4022 (2d Cir, 2016) which is the first federal appellate decision to confirm an annulled award. The Second Circuit held that the Southern District did not abuse its discretion in confirming the award annulled by the Mexican courts. The high hurdle of the public policy exception was surmounted in this case “by four powerful considerations: (1) the vindication of contractual undertakings and the waiver of sovereign immunity; (2) the repugnancy of retroactive legislation that disrupts contractual expectations; (3) the need to ensure legal claims find a forum; and (4) the prohibition against government expropriation without compensation.”. Normative policing was discussed on this blog.

Does the possibility that the award could be annulled at the arbitral seat result in a stay or suspension of the enforcement of the award? This appears to be unlikely. In the judgment on 24 April 2019 of Science Applications International Corporation v The Hellenic Republic (S.D. N.Y. 2019), the District Court decided inter alia not to disturb the 2013 D.C. court decision declining to adjourn enforcement of the award until after the resolution of the annulment action in the Greek courts. An award was rendered against the Hellenic Republic in 2013. The prevailing party successfully obtained a judgment in D.C. confirming the award in 2017 and sought to attach the state’s assets to satisfy the judgment, so it moved the District Court in New York for an order finding that a reasonable period of time has elapsed since judgment was entered pursuant to 28 U.S.C. § 1610(c). According to the Foreign Sovereign Immunities Act, the property of an agency or instrumentality of a foreign state within the United States may not be attached “until the court has ordered such attachment and execution after having determined that a reasonable period of time has elapsed following the entry of judgment and the giving of any [required] notice.” Meanwhile, proceedings were ongoing in the Greek courts to invalidate the award. The District Court in New York held that these circumstances did not prevent it from finding that a reasonable period of time, which was 11 months since the D.C Court entered judgment on 29 May 2018, had elapsed.

According to the international comity test, an annulment decision should be recognised on grounds of comity (i.e. the award is not enforced) unless the annulment decision is “procedurally unfair or contrary to fundamental notions of justice” 4) William W. Park, Duty and Discretion in International Arbitration, Arbitration of Int’l Bus. Disputes, Oxford (2006, 2nd ed 2012 jQuery("#footnote_plugin_tooltip_7718_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7718_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The line of cases above-cited indicate that it is incumbent on the parties, seeking to enforce in the United States an annulled award, to prove exceptional facts sufficient to meet the stringent public policy test in order for the annulment decision to be disregarded. Further, the courts may vacate its enforcement judgment if the award is subsequently annulled. Finally, the possibility that an award may be annulled at the seat does not impede enforcement of the award.

 

The author’s views expressed herein are personal and do not reflect the views of Eversheds Harry Elias or Eversheds Sutherland and their clients. The author reserves the right to change the positions stated herein.

References   [ + ]

1. ↑ Gary B. Born, The New York Convention: A Self-Executing Treaty, 40 Michigan Journal of International Law 115 (2018) 2. ↑ See Albert Jan van den Berg, Enforcement of Annulled Awards, 9 (2) ICC International Court of Arbitration Bulletin 15, 15 (1998), Julian Lew, Achieving the Dream: Autonomous Arbitration, 22 (2) Arbitration International (2006), and Emmanuel Gaillard, Legal Theory of International Arbitration (Martinus Nijhoff Publishers, 2010) 3. ↑ Peter Sanders, New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1955(6) Netherlands Int’l Law Review 43 at p. 109-110 4. ↑ William W. Park, Duty and Discretion in International Arbitration, Arbitration of Int’l Bus. Disputes, Oxford (2006, 2nd ed 2012 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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Singapore Court of Appeal Decision: Does Art. 16(3) Model Law Preclude Setting Aside Proceedings?

Fri, 2019-06-21 21:56

Eunice Chan Swee En

Art 16(3) of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”) provides that if a tribunal issues a preliminary ruling that it has jurisdiction, a respondent may appeal the tribunal’s ruling to the relevant court within 30 days.

Can a party who loses a jurisdictional challenge still set aside the final award for lack of jurisdiction, if that party did not seek curial review of its unsuccessful jurisdictional challenge under Art 16(3) of the Model Law?

In a recent decision by the Singapore Court of Appeal in Rakna Arakshaka Lanka Ltd v Avant Garde Maritime Services (Pte) Ltd [2019] SGCA 33 (“Rakna”), the key issue was whether the party had participated in the arbitration proceedings. A party who chooses not to participate in the proceedings does not contribute to the wastage of costs, and therefore retains its entitlement to apply to the seat Courts to set aside the award for lack of jurisdiction.

 

Facts

The Appellant, Rakna Arakshaka Lanka Ltd (“RALL”), was a Sri Lankan company specialising in providing security and risk management services. The Respondent, Avant Garde Maritime Services (Pte) Ltd (“AGMS”), another Sri Lankan company, was in the business of providing maritime security services.

Prior to March 2011, acting under the auspices of the Ministry of Defence and Urban Development of the Republic of Sri Lanka (“MOD”), the parties agreed to form a private-public partnership to carry out certain projects. The parties entered into a Master Agreement that incorporated 6 separate agreements, pursuant to which they undertook various projects including one called the Galle Floating Armoury Project. The Master Agreement provided for disputes to be settled by arbitration in Singapore in accordance with the rules of the Singapore International Arbitration Centre (“SIAC”).

Following the election of a new president of Sri Lanka in 2015, the new government commenced investigations into the dealings between RALL and AGMS.  AGMS took the position that there was no illegality in the operation of the Galle Floating Armoury Project.  AGMS asked RALL to obtain, inter alia, a letter from the MOD and/or the government to confirm that AGMS’s business under its public-private partnership with RALL was legitimate and carried out under the authority of the government through MOD.  RALL did not do so.

AGMS commenced arbitration proceedings against RALL, claiming that RALL had breached the Master Agreement by failing to provide utmost assistance to AGMS. The Notice of Arbitration was sent to RALL, but RALL did not file any response. SIAC nominated an arbitrator on behalf of RALL after the latter failed to do so.

Subsequently, RALL wrote to SIAC stating that AGMS had agreed to withdraw the matter on the basis of a memorandum of understanding (“MOU”) between parties. RALL requested the Tribunal to “lay by the proceedings of the Arbitration”. However, AGMS informed the Tribunal that it was not in a position to withdraw the arbitration and requested an award granting an interim injunction preventing RALL from terminating the Master Agreement. The Tribunal issued an Interim Order in which it held that RALL’s failure to ensure the continuity of the Master Agreement went to the root of the MOU, and that the dispute in the arbitration was therefore still alive. The Tribunal proceeded with the arbitration and issued an award in favour of AGMS.  RALL did not participate in the arbitration.

RALL commenced proceedings to set aside the award. The Singapore High Court dismissed RALL’s application to set aside the award. RALL appealed.

 

The Court of Appeal’s Decision

The Singapore Court of Appeal held that it is not necessary for parties to file a formal objection, or a plea in the legal sense of the term, in order to engage Art 16(3) of the Model Law.  On the facts, Art 16(3) of the Model Law was engaged as:

  • RALL had challenged the Tribunal’s jurisdiction. While there was no formal pleading by RALL which asserted a lack of jurisdiction, RALL had furnished the Tribunal with its objection to jurisdiction by way of its letter to the SIAC.  RALL’s letter had stated that the parties had “reach[ed] a settlement”, and “it is no longer required to proceed with the above matter”. This letter was equivalent to objecting to the Tribunal’s continued jurisdiction over the matter on the basis that there was no longer any dispute which the Tribunal could deal with.
  • The Tribunal had clearly made a preliminary ruling on its jurisdiction to deal with the matter within Art 16 of the Model Law, when it held that the MOU had not been implemented and the dispute referred to in the Statement of Claim was “still alive” and should be proceeded with.

The preclusive effect of Art 16(3) of the Model Law does not extend to a respondent who fails in its jurisdictional objection, but does not participate in the arbitration proceedings. Such a respondent has not contributed to any wastage of costs, or the incurring of any additional costs that could have been prevented by a timely application under Art 16(3) of the Model Law.

The position is different if a respondent fails in its jurisdictional objection but then participates in the arbitration. By doing that, the respondent would have contributed to wasted costs. It is just to bar such a respondent from bringing a setting aside application based on the ground of lack of jurisdiction, as such an application is outside the time limit prescribed in Art 16(3) of the Model Law.

In Rakna, the Court of Appeal set aside the Tribunal’s award as it contained decisions on matters that were beyond the scope of the submission to the arbitration. In the Court’s view, the MOU had effected a settlement and resolved the dispute between the parties. Once the dispute was resolved, ipso facto there was no longer a dispute which could be arbitrated on. The Tribunal thus had no jurisdiction to conduct the arbitration proceedings.

The Court of Appeal rejected RALL’s other challenges against the Award.

 

Discussion

At first blush, a respondent may think that the path is clear for him to choose not to participate in the arbitration proceedings, if he takes the view that the tribunal lacks jurisdiction over the dispute.

However, such a strategy is a gamble. Should the respondent ultimately fail in challenging the tribunal’s jurisdiction, he will have lost the opportunity to present any substantive defences to the claim.

A strategy of non-participation preserves a respondent’s ability to set aside the final award based on jurisdictional objections and saves the costs of participating in the arbitration, but comes at the cost of sacrificing the substantive defences which the respondent could have raised if he had participated in the arbitration. Such a strategy may only be attractive to a respondent who has a meritorious case on jurisdiction, but a weak defence on the merits.

A respondent who has reasonable defences may not want to give up his chances of defeating the claim on its merits. Where such a respondent loses his preliminary jurisdictional challenge but intends to participate in the merits hearing, his options are as follows.

First, he can seek curial review on the jurisdiction decision within the time limit in Art 16(3) of the Model Law.

Secondly, if he does not seek curial review, the preclusive effect of Art 16(3) will prevent him from making a subsequent setting aside application on jurisdictional grounds. However, it is important to bear in mind that Art 16(3) is not a “one-shot” remedy: see Pt First Media TBK v Astro Nusantara International BV and others and another appeal [2014] 1 SLR 372. The preclusive effect of Article 16(3) does not extend to the respondent’s rights to resist recognition and enforcement of any award. For some respondents, resisting enforcement may be enough.

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Tanzania Faces a New ICSID Claim under the Terminated Netherlands BIT

Fri, 2019-06-21 01:45

Sadaff Habib (Assistant Editor for Africa)

In September 2018, Tanzania took the international arbitration community by surprise when it issued its notice of its intent to terminate the Agreement on Encouragement and Reciprocal Protection of Investments between Tanzania and the Netherlands which was set to expire on 1 April 2019 (Netherlands BIT). Article 14 (2) of the Netherlands BIT provides that if either party did not terminate the treaty within six months of the expiration date, the bilateral investment treaty would automatically renew for an additional ten years, that is, to 2029.

 

The Case for Termination and the New ICSID Case

The rationale behind the termination is that the provisions of the Netherlands BIT were seen as limiting the government’s ability to regulate investments in the public’s interest. The treaty was viewed as incoherent with the legal reforms that Tanzania had recently adopted. The provisions of the Netherlands BIT prevented Tanzania from entering into agreements with a third party that would be more favourable as doing so may attract claims at the ICSID. Ultimately, Tanzania wished to ensure all investment related policies favour both its development and its people.

This is not an uncommon view of investment treaties particularly in weighing the benefit they bring to lesser developed countries. The effectiveness of bilateral investment treaties inducing foreign direct investment (FDI) has often been debated. Studies have shown that there is little to no correlation between a country’s BITs and FDI flow. For example, a 2014 analysis undertaken by the United Nations Conference on Trade and Development (UNCTAD) covering 146 economies over 27 years found no evidence that BITs foster increased bilateral FDI. It is not all too surprising that Tanzania opted to terminate the Dutch bilateral investment treaty.

Generally, bilateral investment treaties, being treaties under public international law, are subject to the Vienna Convention on the Law of Treaties (VCLT). Article 54 of the VCLT provides that a party can terminate a bilateral investment treaty either unilaterally under the provisions of the treaty or mutually at any time during the period of the treaty. Tanzania opted to unilaterally terminate the Netherlands BIT under the provisions of the treaty and by sending a notice shortly before the time period to terminate would expire under the treaty.

Six months following the termination of the BIT with Netherlands,  Ayoub-Farid Michel Saab, Chairman of FBME Bank and a Dutch national has filed an ICSID claim against Tanzania under the Netherlands BIT. The dispute apparently relates to FBME Bank. This bank was previously the subject of an ICC dispute which Saab and his brother filed against Cyprus. Earlier this year an arbitration award was issued in favour of Cyprus with a dissenting arbitrator.

The FBME Bank has been surrounded by controversy. In 2014, the US Treasury’s Financial Crimes Enforcement Network (FinCEN) accused FBME of facilitating money laundering and financing terrorism and organised crime. In 2017, Tanzania’s central bank shut down and liquidated FBME’s operations in the country.

The ICSID case against Tanzania was filed on 16 April 2019. It remains to be seen if Mr Saab will triumph in his claim.

 

The Status of the Netherlands BIT Post Termination

Although Tanzania terminated the bilateral investment treaty with the Netherlands, pursuant to Article 3 of the treaty, investors can file disputes against Tanzania in relation to investments made prior to the date of termination for a period of fifteen years. Article 3 of the Netherlands BIT states,

In respect of investments made before the date of the termination of the present Agreement, the foregoing Articles shall continue to be effective for a further period of fifteen years from that date.

It is not uncommon for BITs to contain sunset clauses such as the above. In 2012, South Africa sought to terminate its bilateral investment treaty with Belgium for a similar reason to Tanzania’s – the risk that the BITs outweighed their benefit to the country. The provisions of the South Africa- Belgium BIT also provided for the treaty to apply to existing investments for 10 years. Such sunset clauses particularly apply in cases of unilateral termination of the BIT such as in Tanzania’s case as opposed to mutual termination of the BIT where the parties may agree for the sunset clause not to apply or to limit its exposure.

 

What of Tanzania’s other BITs?

At the time of this ground breaking development, the African arbitration community queried what this would mean for investment arbitration in Tanzania, whether it would follow in the footsteps of South Africa and if this was the tip of the iceberg to follow. That is, would Tanzania seek to terminate other BITs in place. This was particularly of concern in the wake of certain controversial legislative reforms– international arbitration was no longer permitted in disputes in relation to Tanzania’s natural resources and international arbitration was prohibited in public private partnerships. As of this date, Tanzania has 12 BITs in force and 8 signed but not yet in force. It has ongoing disputes under two of its BITs, as recorded by the investment policy hub, where Tanzania is the respondent. These include:

  1. Sunlodges Ltd (BVI), 2. Sunlodges (T) Limited (Tanzania) v the United Republic of Tanzania (2018). Filed under the Italy and Tanzania BIT of 2001, the dispute involves claims arising out of the Government’s alleged seizure of the Claimants’ cattle farming land in order to build a cement works and a power station. The investment arbitration is filed under the UNCITRAL Rules with the Permanent Court of Arbitration administering the dispute. The claim amount is circa USD 30 million. The seat of arbitration is Sweden. The case is still ongoing.
  1. Agro EcoEnergy Tanzania Limited, Bagamoyo EcoEnergy Limited, EcoDevelopment in Europe AB, EcoEnergy Africa AB v. United Republic of Tanzania (2017). Filed under the Sweden and Tanzania BIT of 1999, the dispute involves claims arising out of the cancellation by the Government, in 2016, of the claimants’ sugar cane and ethanol project on the grounds that it would have adverse impact on local wildlife. The dispute is filed under the ICSID Rules and is administered by ICSID. The case is still ongoing.

The relationship between bilateral investment treaties and foreign direct investment (FDI) is questionable to say the least. In 2010,when South Africa decided to terminate 20 BITs its FDI stock increased 10 percent since that time, from 1.8 trillion rand to 2.0 trillion rand. It remains to be seen the route Tanzania will take with its remaining BITs. A word of caution would be that Tanzania renegotiate its sunset clauses under its treaties when seeking to terminate to reduce the impact of the treaties on existing investments. Meanwhile, it remains to be seen if Mr Saab will be successful in his most recent claim against Tanzania.

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Imposing Conditions on Investor Protection: A Role of Investor’s Due Diligence

Wed, 2019-06-19 21:00

Yulia Levashova

The notion of Corporate Social Responsibility (CSR) is gaining momentum in international investment law. States continue to include the CSR provisions in their newest international investment agreements (IIAs). In addition to typical CSR clauses directed at states to encourage investors to incorporate the internationally recognized standards on CSR (e.g. Argentina –Japan BIT (2018); the Australia-Hong Kong FTA (2019)), more IIAs incorporate provisions directly addressing investors.

In 2018, Brazil has signed three new cooperation and investment facilitation agreements with Guyana, Ethiopia and Suriname. All of them contain elaborated CSR provisions, focusing on investors’ obligations. For example, the Brazil – Ethiopia BIT (2018) provides in Article 14 that investors “shall endeavor (…) a) Contribute to the economical, social and environmental progress, aiming at achieving sustainable development; b) Respect the internationally recognized human rights of those involved in the investors’ activities”.1)Article 14, Brazil – Ethiopia BIT (2018). jQuery("#footnote_plugin_tooltip_8972_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Moreover, the Brazilian agreements subject foreign investor to compliance with national laws.2)Article 14, Brazil – Ethiopia BIT (2018); Article 15, Brazil – Guyana BIT (2018); Article 15, Brazil – Suriname BIT (2018). jQuery("#footnote_plugin_tooltip_8972_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The latter provision also exists in the Belarus-India BIT (2018), where in the provision on ‘investor obligations’ it is stated that “investors and their investments shall comply with all laws of a Party concerning the establishment, acquisition, management, operation and disposition of investments”.3)Article 11, Belarus-India BIT (2018). jQuery("#footnote_plugin_tooltip_8972_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

With an increasing number of CSR provisions providing a diverse range of investors’ obligations, the central question is whether these types of provisions are binding and if so, how they can be enforced? Depending on the type of CSR clause, some IIAs provide a potential solution for enforcing investor’s obligations. For example, a few IIAs include clauses establishing the liability of investors in the home State of investors (e.g. the Dutch Model BIT, the Morocco-Nigeria BIT).4)Article 7(4), Dutch Model BIT (2018); Art. 20, Morocco-Nigeria BIT (2016); Article 17(2), SADC Model BIT (2012). jQuery("#footnote_plugin_tooltip_8972_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Several other treaties contain clauses allowing a host state to file a counterclaim against an investor that potentially offer an opportunity for a host state to challenge the human rights and environmental violations involving a foreign investor.

This contribution, however, discusses another option for effectuating the CSR provisions namely through compliance of investors with CSR provisions, as a condition for investor’s protection under an IIA. The investor’s failure to comply with the CSR obligations can be considered at different stages of investment proceedings: at the (i) jurisdictional stage, or at the (ii) merits stage while deciding on the violation of substantive IIAs provisions, and/or at the moment of (iii) determining the amount of compensation.

Regarding the first option, the investor’s conduct can be subject to the jurisdictional limitations, or limitations of an access to investment-state dispute settlement (ISDS) through incorporation of legality requirement of an investment. Usually, this implies that an investment has to be in accordance with domestic law. The Iran-Slovak Republic BIT (2016) includes such limitations, specifying in the ISDS provision that “an investor may not submit a claim under this Agreement where the investor or the investment has violated the Host State law”.5)Article 14, Iran-Slovak Republic BIT (2016). jQuery("#footnote_plugin_tooltip_8972_5").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The BIT clarifies that a tribunal shall dismiss the investor’s claim upon his involvement in serious violations of the host state law, e.g. fraud, tax evasion, corruption etc.6)Article 14, Iran-Slovak Republic BIT (2016). jQuery("#footnote_plugin_tooltip_8972_6").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The draft Colombia Model BIT (2017) also includes a CSR clause that stipulates that for the purpose of accessing the ISDS, an investor has to accept the binding obligations established under the human rights and environmental treaties, to which Colombia or its counterparty are or become a party, throughout the making of its investment and its operation in the host party’s territory. In Cortec Mining v. Kenya, the tribunal declined jurisdiction over an investor’s claim for an unlawful revocation of the mining license under the Kenya-United Kingdom BIT, even without an explicit provision requiring compliance with domestic law. The tribunal agreed with the respondent state that the investor had failed to comply with the environmental impact assessment requirements imposed for the mining projects under Kenyan law.7)Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v. Republic of Kenya, ICSID Case No. ARB/15/29, Award 22 October 2018. jQuery("#footnote_plugin_tooltip_8972_7").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Explaining that such investment as licence constitutes “the creature of the laws of the Host State”8)Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v. Republic of Kenya, ICSID Case No. ARB/15/29, Award 22 October 2018, para. 319. jQuery("#footnote_plugin_tooltip_8972_8").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and therefore in order to rise for protection, it has to be made in accordance with the domestic law.

The second option is to condition the protection of investors under IIA’s substantive investment standards by taking into account the due diligence obligations of an investor. An example is the protection of the legitimate expectations of an investor under the fair and equitable treatment (FET) standard. One of the factors taken into account by tribunals in assessing whether the investor qualifies for the protection of the legitimate expectations is whether the investor has exercised the proper due diligence before investing into a host state. The requirement of due diligence concerns not only the economic aspects of an investment, but also includes a broader appraisal of the legal and socio-political circumstances in a host state. In a renewable energy case, Charanne v. Spain, the tribunal stated that in order for an investor to “exercise the right of legitimate expectations”, it should perform a “diligent analysis of the legal framework for the investment”.9)SCC Case No. 062/2012, Charanne Construction v. Spain, Award 21 January 2016, para. 505. jQuery("#footnote_plugin_tooltip_8972_9").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The examples of the recent FET cases indicate the growing importance of cautiousness and proper preparation by the investor.10)For comprehensive analysis of the role of due diligence in the context of the FET standard, see: Y. Levashova, The Right of States to Regulate in International Investment Law: The Search for Balance between Public Interest and Fair and Equitable Treatment, International Arbitration Law Library, Wolters Kluwer, 2019 (forthcoming). jQuery("#footnote_plugin_tooltip_8972_10").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Furthermore, the notion of investor’s due diligence does not have to be limited to the legitimate expectations. For example, 2018 Dutch Model BIT included the general provision emphasising the importance of the investor’s duty to conduct a due diligence process in order to identify, prevent, mitigate and account for the environmental and social risks and impacts of its investment.11)Article 7(3), Dutch Model BIT (2018). jQuery("#footnote_plugin_tooltip_8972_11").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The third possibility is to take the investor’s conduct into account at the stage of calculating the compensation. The 2018 Dutch Model BIT has incorporated the provision stipulating that the tribunal may take into account in determining the amount of compensation the investor’s incompliance with its commitments under the UN Guiding Principles on Business and Human Rights (UNGPB), and the OECD Guidelines for Multinational Enterprises (OECD Guidelines).12)Article 23, Dutch Model BIT (2018). jQuery("#footnote_plugin_tooltip_8972_12").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Such provision does not mandate tribunals to consider the compliance of an investor’s conduct with the UNGPB and the OECD Guidelines, however it exemplifies of how CSR obligations could potentially be taken into account in the calculation of damages. Such provision does not represent a novelty. Tribunals, in numerous cases, have been taking into account the misconduct of an investor in calculating the damages, e.g. by reducing the amount of compensation.13)E.g. Biwater Gauff v. Tanzania, ICSID Case No. ARB/05/22, Award 24 July 2008. jQuery("#footnote_plugin_tooltip_8972_13").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_13", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Conclusion

Imposing conditions on investment’s protection under IIAs either at the jurisdictional or merits stage, or/and in calculating compensation, has a number of advantages. Firstly, it does not require significant legislative changes in domestic law in order for example to facilitate the possibility for the third parties to bring claims against multinationals in courts of home state. Secondly, it creates a better balance between the rights and obligations of states and investors, and contributes to promotion of sustainable and responsible investment.

A problematic notion regarding this approach is however the ultimate reliance on interpretation by tribunals on whether an investor has complied with social obligations laid down in an IIA, due diligence requirements, or with domestic law. For example, in determining whether an investor has committed “serious violations of the host state law” under the Iran-Slovak Republic BIT (2016), would require the tribunal’s assessment of the seriousness of such violation under national law. That might result into an intrusive review of the application of domestic laws and policies. In the same vein, the appraisal of investor’s conduct in calculating the damages, without clear guidance on this matter in the treaty itself, will hardly change anything in enforcement of CSR clauses.

The exercise of proper due diligence by an investor in order to receive protection under IIA’s substantive investment standards, despite some drawbacks, has the potential to be further developed in treaty drafting. Of course, a weakness of this approach is the lack of objective and specific criteria on due diligence in investment law, which makes this requirement a rather a flexible notion with illusive contours rather than an identifiable legal standard. For example, tribunals in assessing the FET often employ different definitions of due diligence obligation. In Masdar v. Spain, the tribunal specified that in order to demonstrate the appropriate due diligence the investor has to “familiarize itself with the existing laws”.14)Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1, Award 16 May 2018, para. 494. jQuery("#footnote_plugin_tooltip_8972_14").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_14", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In Isolux v Spain, the tribunal states that an investor’s legitimate expectations can only be considered to have been violated if the new regulatory changes were not foreseeable by “a prudent investor”.15)Isolux Netherlands, BV v. Kingdom of Spain, SCC Case V2013/153, Award 17 July 2016, para. 781. jQuery("#footnote_plugin_tooltip_8972_15").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_15", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The different thresholds for a due diligence may yield different outcomes in determining whether this requirement has been sufficiently and properly performed by an investor for the purpose of an investor’s protection. This requires a more refined definition of due diligence that can be included in IIAs or the interpretative treaty documents.

The benefits of the inclusion of a requirement of due diligence processes in a treaty, in contrast to voluntary CSR codes, is that a due diligence is an operational risk assessment tool, which is widely used in other legal contexts such as commercial law or competition law. The mandatory human rights due diligence of companies has been also gaining prominence in the last decade.16)Global Business Initiative & Clifford Chance, Business and Human Rights: Navigating a Challenging Legal Landscape, 22 March 2019. jQuery("#footnote_plugin_tooltip_8972_16").tooltip({ tip: "#footnote_plugin_tooltip_text_8972_16", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Initially, it has conceptualized through the work of the UN Special Representative on Business and Human Rights, John Ruggie, and currently finding its way in national and regional laws manding companies to perform due diligence processes in different sectors (e.g. the ‘UK Modern Slavery Act 2015’; France’s ‘duty of vigilance law’ of 2017; and Dutch ‘Child Labour Due Diligence Bill’, 2019 and EU regulations (on timber, conflict minerals and chemicals). By drawing from examples from other legal sectors, jurisdictions and fields of law, a careful drafting of the required investor’s due diligence processes, including specific steps in conducting such risk assessment procedures may benefit states and investors in early mitigation and the prevention of investment disputes.

References   [ + ]

1. ↑ Article 14, Brazil – Ethiopia BIT (2018). 2. ↑ Article 14, Brazil – Ethiopia BIT (2018); Article 15, Brazil – Guyana BIT (2018); Article 15, Brazil – Suriname BIT (2018). 3. ↑ Article 11, Belarus-India BIT (2018). 4. ↑ Article 7(4), Dutch Model BIT (2018); Art. 20, Morocco-Nigeria BIT (2016); Article 17(2), SADC Model BIT (2012). 5, 6. ↑ Article 14, Iran-Slovak Republic BIT (2016). 7. ↑ Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v. Republic of Kenya, ICSID Case No. ARB/15/29, Award 22 October 2018. 8. ↑ Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v. Republic of Kenya, ICSID Case No. ARB/15/29, Award 22 October 2018, para. 319. 9. ↑ SCC Case No. 062/2012, Charanne Construction v. Spain, Award 21 January 2016, para. 505. 10. ↑ For comprehensive analysis of the role of due diligence in the context of the FET standard, see: Y. Levashova, The Right of States to Regulate in International Investment Law: The Search for Balance between Public Interest and Fair and Equitable Treatment, International Arbitration Law Library, Wolters Kluwer, 2019 (forthcoming). 11. ↑ Article 7(3), Dutch Model BIT (2018). 12. ↑ Article 23, Dutch Model BIT (2018). 13. ↑ E.g. Biwater Gauff v. Tanzania, ICSID Case No. ARB/05/22, Award 24 July 2008. 14. ↑ Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1, Award 16 May 2018, para. 494. 15. ↑ Isolux Netherlands, BV v. Kingdom of Spain, SCC Case V2013/153, Award 17 July 2016, para. 781. 16. ↑ Global Business Initiative & Clifford Chance, Business and Human Rights: Navigating a Challenging Legal Landscape, 22 March 2019. 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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Micula Case: The General Court Quashes the Commission’s Decision and Rules that the Award is Not State Aid

Wed, 2019-06-19 03:49

Guillaume Croisant

In a striking new episode of the long-running Micula saga, the General Court of the CJEU has quashed the European Commission’s 2015 decision that Romania’s payment of the €178 million award rendered by an ICSID tribunal back in 2013 would constitute illegal State aid in the meaning of Article 107 of the TFEU. In its judgment rendered yesterday, the General Court considered that the award recognised a right to compensation for the investors existing before Romania’s accession to the EU. As a result, the Commission was precluded to apply EU State aid rules to this situation, at least with respect to the pre-accession period. The General Court’s decision can be appealed before the Court of Justice.

 

Background

In 2005, in the framework of the accession process of Romania to the EU, the country repealed incentives offered to certain investors in disfavoured regions in order to eliminate domestic measures that could constitute State aid incompatible with the acquis communautaire. Romania subsequently acceded to the EU on 1 January 2007.

Two of these investors, the Micula brothers (and their investment vehicles), launched ICSID arbitration proceedings on the basis of the 2002 Sweden-Romania BIT. In a majority award dated 11 December 2013, the arbitral tribunal ruled that Romania impaired the Micula brothers’ investments in breach of the fair and equitable treatment or the prohibition of expropriation clauses of the BIT. The investors were awarded c. €178 million, despite the claim of the European Commission, intervening as amicus curiae during the arbitration proceedings, that any ruling of the arbitral tribunal reinstating the privileges abolished by Romania, or compensating the investors for the loss of these privileges, would lead to the granting of new aid incompatible with EU State aid rules. Romania requested the annulment of the award before an ad hoc ICSID Committee, but its application was rejected on 26 February 2016.

Following partial payment of the award by Romania, the European Commission ruled on 30 March 2015 that such payment constituted illegal State aid. It precluded any further payment by Romania and ordered it to recover the partial payment that had been made. The Micula brothers filed an annulment application of this decision with the General Court of the CJEU.

In parallel, the Micula brothers lodged applications for recognition and execution of the arbitral award before national courts, including in Romania, Belgium, France, Luxembourg, Sweden, the UK and the US. Most of these courts stayed the proceedings, pending the General Court’s decision (by contrast, the Swedish Nacka District Court ruled that it was compelled to implement the Commission’s decision and to decline enforcement). Interestingly, in March of this year, the Brussels Court of Appeal made a preliminary ruling reference to the CJEU, requesting guidance on the interplay between the Member States’ contradictory obligations under EU State aid rules and the ICSID convention.

 

The General Court’s decision

In its ruling of yesterday, a five-judge bench of the General Court upheld the investors’ application and annulled the Commission’s 2015 decision, considering that EU State aid law was inapplicable and that the Commission had exercised its powers retroactively.

Indeed, all the events at stake (namely Romania’s adoption of the incentive measures, the investors’ acquisition of the licences enabling them to benefit from these incentives, the entry into force of the BIT, the revocation of the incentives and the initiation of the arbitration proceedings) took place before Romania’s accession to the European Union on 1 January 2007.

In this respect, after having recalled that “new rules apply, as a matter of principle, immediately to the future effects of a situation which arose under the old rule” (§83), the Court highlighted that, contrary to the Commission’s contention, “it cannot be considered that the effects of the award constitute the future effects of a situation arising prior to accession […], since that award retroactively produced definitively acquired effects which it merely ‘stated’ for the past, that is to say, effects which, in part, were already established before accession” (§84). It was merely the enforcement of a right that had arose in 2005, when Romania repealed the relevant incentives.

With respect to the intra-EU aspect of the applicable BIT (concluded between Sweden and Romania), the General Court further distinguished, very briefly, the Micula case from Achmea, ruling that “the arbitral tribunal was not bound to apply EU law to events occurring prior to the accession before it”, as opposed to the Achmea tribunal (§87).

The Commission also exceeded its powers with respect to the amounts granted as compensation by the arbitral tribunal for the period subsequent to Romania’s accession since, in its decision, it did not draw a distinction between the periods of compensation for the damage suffered by the applicants before or after accession (§91).

In addition, the General Court ruled that the contested decision was unlawful in so far as it classified the award as an aid within the meaning of Article 107 TFEU since, pursuant to the Court’s case law, compensation for damage suffered cannot be regarded as aid unless it has the effect of compensating for the withdrawal of unlawful aid, which was not the case here as EU State aid law is not applicable to situations pre-dating Romania’s accession (§§103-104).

The General Court’s decision remains subject to appeal to the Court of Justice.

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Open Positions: Assistant Editors of Kluwer Arbitration Blog

Tue, 2019-06-18 07:21

Crina Baltag (Acting Editor)

The Editorial Board of Kluwer Arbitration Blog announces the opening of the following positions with Kluwer Arbitration Blog: General Assistant Editor and Assistant Editor for Central Asia and East Asia.

 

The Assistant Editors report directly to the coordinating Associate Editor and are expected to (1) collect, edit and review guest submissions from the designated regions for posting on the Blog, while actively being involved in the coverage of the assigned regions; and (2) write blog posts as contributor. You have the opportunity to work with a dynamic and dedicated team and liaise with the arbitration community and various stakeholders. In the case of the General Assistant Editor, the focus will be global and involve coverage of several regions.

 

The Assistant Editors will work remotely. Please note that these are non-remunerated positions. If you are interested, please submit a resume and cover letter by email to [email protected], with cc to Dr Crina Baltag, [email protected]. The deadline for receiving the applications is 1 July 2019.

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Is Investor-State Arbitration Warming up to Security for Costs?

Mon, 2019-06-17 23:17

Chiara Cilento and Benjamin Guthrie

On April 29, 2019, an ICSID annulment committee broke new ground by upholding a tribunal’s order that a party post security for costs. This decision, in the case RSM Production Corp v. Saint Lucia, is the first time that an ad hoc committee has addressed whether the ICSID Convention and Rules grant tribunals such a power.  Although the decision is unpublished, it has been reported on by various outlets.  The committee is reported to have held that although the ICSID Convention does not expressly mention security for costs as a provisional measure that may be ordered, a tribunal’s power under the Convention in respect of provisional measures is broad enough to permit security for costs.  The committee further reportedly held that even if that were not the case, the tribunal’s action did not “manifestly” exceed its power given that other tribunals had also concluded they had authority to order security for costs.

In this post, we look at the significance of the ad hoc committee’s decision, and explore whether it heralds a new trend of ordering security for costs.  Following the RSM tribunal’s 2014 order (the first time an investment tribunal had ordered security for costs), another tribunal ordered security for costs in García Armas v. Bolivarian Republic of Venezuela; the ad hoc committee’s decision is a further step in the same direction.  However, while security for costs is plainly an issue that parties need to be aware of, it may be too early to say that it is the “new normal” in investment arbitration.

 

What is security for costs?

Security for costs is a type of interim measure which enables a party to post security to cover the legal costs associated with the arbitration (these may include, but are not limited to, attorney’s fees, tribunal fees, as well as administrative costs). Security for costs should not be confused with security for claims, which refers to the security posted for the substantive claims in the arbitration.

Security for costs is a form of interim measure typical in England and Wales and other Commonwealth jurisdictions, and is a commonly sought relief in arbitrations seated in such jurisdictions.  While security for costs has historically been less common in arbitrations in civil law settings, it appears to have become more common in the recent years.  In investor-state arbitration, security for costs was not historically granted until RSM.

 

The context of the ad hoc committee’s decision

The order of security for costs affirmed by the RSM ad hoc committee was hailed as groundbreaking when it was published in 2014.  No investment tribunal had previously issued such an order.  Moreover, neither the ICSID Convention nor the ICSID Arbitration Rules expressly grant a tribunal the authority to order security for costs—they empower the tribunal to impose provisional measures generally, but security for costs is not specifically listed as a provisional measure that may be imposed (see ICSID Convention Art. 47; ICSID Arbitration Rule 39).  The same is true of the ICSID Additional Facility Rules and UNCITRAL Arbitration Rules (see ICSID Additional Facility Arbitration Rule 46; UNCITRAL Arbitration Rules (2013) Article 26).

However, as the RSM tribunal itself observed, a number of ICSID tribunals opined as early as 1999 that they had the authority to order security for costs.  None actually exercised such a power, holding that it would only be warranted in exceptional circumstances that were not present in each case (¶¶ 52–53).

 

The RSM and García Armas cases

The RSM tribunal was the first to find that the exceptional circumstances warranting an order of security for costs were present.  It did so based on fairly atypical facts.  Prior to commencing arbitration against Saint Lucia, RSM had initiated two ICSID arbitrations against Grenada (RSM Production Corporation v. Grenada, ICSID Case No. ARB/05/14; Rachel S. Grynberg and others v. Grenada, ICSID Case No. ARB/10/6).  In both proceedings, RSM failed to pay required advances on costs and reimburse Grenada for costs advanced on its behalf, leading to discontinuance of annulment proceedings in one of the cases.

These past failures were front and center in the tribunal’s decision to order security for costs in RSM v. Saint Lucia.  The tribunal took them as evidence that RSM was unwilling or unable to pay the advances and that, as further evidenced by statements by counsel regarding RSM’s difficult financial position, RSM would likewise be unable or unwilling to pay an award of costs against it (¶¶ 77–81).  The tribunal also found it relevant that RSM’s claim was supported by a third-party funder, as the tribunal considered it doubtful that the funder would comply with an award of costs (¶ 83).

On June 20, 2018, four years after the order in RSM, the García Armas tribunal also ordered security for costs by ordering the claimants to provide security in the amount of US$ 1,500,000.  As mentioned above, this was only the second known time in which security for costs were ordered in an investor-state arbitration setting, and was also based on fairly atypical facts.  The claimants were ordered to produce their funding agreement with the third-party funding their case (¶ 2), which disclosed the fact that the funder would not cover an award for costs (¶ 25).  As a result, the tribunal ordered the claimants to produce evidence of their assets, to show that the respondent would have been able to successfully attach their assets in the event of an award for costs in favor of the respondent (¶ 7).  The tribunal finally found that the solvency of the claimants had not been sufficiently proved (¶ 250), and further opined that, taking into account all of the circumstances, the damage inflicted on the respondent by not awarding the security for costs would be greater than the damage caused to the claimants by ordering them to post the security (¶ 231).

 

Is security for costs still exceptional?

In short, the decisions to order security for costs in both the RSM and García Armas cases were based on facts that won’t be present in all investment arbitrations.  So while one might wonder whether the RSM annulment committee’s decision confirms a trend of increased willingness to order security for costs, the unique facts of these cases suggest that the decision may signify another step toward increased acceptance of security for costs, but perhaps not, by itself, an opening of the floodgates.  It is certainly a notable decision, however, particularly with respect to its ruling that ICSID tribunals have authority to order security for costs.

There has been substantial discussion about the relationship between third-party funding and security for costs.  Both the RSM and García Armas tribunals found third-party funding relevant to their decisions, as described above.  In RSM, moreover, Gavan Griffith authored an assenting opinion proposing that when a claim is funded by a third party, the burden should shift to the claimant to show why security for costs should not be ordered (¶¶ 11–18).  This position has not been universally adopted, but even it envisions that there are situations in which ordering a third-party-funded claimant to post security for costs is not appropriate, including when the claimant shows an ability to satisfy an adverse award of costs (¶ 16).

Eskosol S.p.A. v. Italian Republic is a further example.  In a 2017 order, the tribunal declined to order a third-party-funded claimant to post security for costs.  The tribunal held that it need not decide whether it had the power to make such an order because, even if it did, the exceptional circumstances that would warrant exercising that power were absent.  The key factor in the tribunal’s decision was that, although the claimant was bankrupt and there was no evidence its agreement with its third-party funder would require the funder to pay an award of costs, the claimant had taken out an insurance policy to cover the risk of an adverse award of costs (¶ 37).  This contrasts with the RSM case, in which there was no evidence that the funder would comply with an award of costs against the claimant, and García Armas, in which there was evidence it would not.  Eskosol shows that there are ways for third-party-funded parties to assuage concerns about whether an eventual award of costs will be honored – parties may wish give thought to these when commencing arbitration.

An additional development in this area are the proposed amendments to the ICSID Rules. In addition to the obligation provided by proposed Arbitration Rule 13 that the name of any third-party funder is disclosed to the Secretariat, proposed Arbitration Rule 51 provides that “[u]pon request of a party, the Tribunal may order any party asserting a claim or counterclaim to provide security for costs”.  If adopted, this latter rule would confirm tribunals’ authority to order security for costs.  But it would not mean that such orders are always appropriate.  In that regard, the proposed rule sets out a number of factors that a tribunal must consider, including the party’s willingness and ability to comply with an adverse decision on costs and the parties’ conduct.  While it does not expressly state that security for costs should only be ordered in exceptional circumstances, these factors are substantially the same those on which some tribunals are already relying, as illustrated by the cases discussed above.

 

Conclusion

In sum, recent years have seen steps toward a greater role for security for costs in the investment arbitration regime.  The rise of third-party funding is playing a role in that.  But it is perhaps too early to say that orders of security for costs are the norm – the decisions of tribunals both granting and denying security for costs suggest that particular circumstances are required.

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State Parties in Contract-Based Arbitration: A Report from the 16th Annual ITA-ASIL Conference

Sun, 2019-06-16 20:47

Isabella Bellera Landa

On March 27, 2019, Washington, D.C. hosted the 16th annual ITA-ASIL Conference discussing the impact of State parties in contract-based arbitrations.  Also known as private-public and “investomercial” arbitration, this genre of arbitration has recently grown due to, among other things, privatization processes, concession agreements, as well as conditions imposed by lenders and insurance companies.

Providing insight on the differences and similarities between treaty-based investment arbitrations and contract-based arbitrations involving State parties, speakers highlighted seminal cases that illustrate the particularities of a State’s involvement in commercial disputes and provided recommendations vis-à-vis investment protections.  Conference co-chairs Mélida N. Hodgson (Jenner & Block) and Prof. Dr. Stephan W. Schill (University of Amsterdam) led the event, which featured as speakers the Honorable Charles N. Brower (Judge ad hoc, International Court of Justice), Abby Cohen Smutny (White & Case), Catherine M. Amirfar (Debevoise & Plimpton), Professor Julian Arato (Brooklyn Law School), D. Brian King (arbitrator), Nathalie Bernasconi-Osterwalder (IISD), Professor Laurence Boisson de Chazournes (University of Geneva), Bart Legum (Dentons), Hugo Perezcano (CIGI), and Martina Polasek (ICSID).

The ICC reports that in 2017 the number of States and State entities that were parties to ICC arbitral proceedings rose to over 15 percent (from 11 percent in 2016).1) 2017 ICC Dispute Resolution Statistics, ICC Dispute Resolution Bulletin 2008 – Issue 4, at 9. jQuery("#footnote_plugin_tooltip_5888_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5888_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  Martina Polasek of ICSID noted that, while the number of contract-based arbitrations before ICSID has remained steady over the years, at 16 percent of its cases, ICSID has witnessed an increase in the number of arbitrations commenced under multiple sources of jurisdiction.  An increase in contract-based arbitrations may be on the horizon for ICSID, particularly if the new rules providing for expedited procedures are adopted.

While these statistics show the growth of private-public arbitration, they do not shed much light on the procedural and substantive implications resulting from the presence of States and State entities in contract-based arbitrations.  As Judge Brower argued, contract-based disputes involving States or State-owned entities are closer in kind to investment treaty arbitrations than those only involving private parties.  Judge Brower suggested we should refer to these proceedings as “investomercial arbitration” because “commercial arbitration” is not an adequate term to define them.  At the crux of this distinction, in Judge Brower’s opinion, are the political sensitivities involved in these proceedings, as well as the State’s exercise of public authority.

Many of the speakers addressed these substantive and procedural implications caused by a State’s involvement in a commercial arbitration.  Abby Cohen Smutny, for instance, explained that Judge Brower’s position is a reminder that foreign investors are not only looking for a neutral forum, but also may want to incorporate international law to resolve potential disputes against sovereigns.  Relatedly, Professor Laurence Boisson de Chazournes emphasized that there is a “blurring of the lines” with respect to the applicable law in private-public arbitration.  In this regard, Professor Boisson de Chazournes referred to how certain domestic legal systems, such as France, directly incorporate international law obligations within the limits of their national constitutions.

From a practical perspective, the panel discussions evidenced the need for the arbitration community to reach a consensus, or at least to provide additional insight into the scope of the application of international law to private-public arbitration.  Professor Julian Arato, for example, inquired whether “applying international law” merely leads to the application of general principles of international law such as pacta sunt servanda, or whether it would entail that “the entire iceberg” of international law would be brought into the dispute.  In Professor Arato’s view, since reasonable minds can disagree on this question, decisions on this issue are likely to diverge and create uncertainties to contracting parties.

Counsel and arbitrators might also encounter complexities in this genre of arbitration even when they apply the domestic law of a contract to resolve a dispute.  Indeed, as stated by Bart Legum, private-public arbitrations might raise complex public law issues in situations where the law of the underlying contract is that of a civil law jurisdiction.  Specifically, he questioned whether in that scenario, parties may be entitled to argue sophisticated jurisprudence developed by other civil law jurisdictions, i.e., France, to support their position under the law of the contract, even when the courts of such State do not regularly follow such jurisprudence.

Of course, parties may resort to the principle of party autonomy to resolve uncertainties.  In this regard, D. Brian King called for “smart contractual drafting” to protect contracting parties.  Specifically, he recommended including stabilization clauses, as well as indemnification and force majeure provisions to investment contracts to minimize risks.  With regard to stabilization clauses, Nathalie Bernasconi-Osterwalder referred to John Ruggie’s commentary to argue that stabilization clauses are typically broader in contracts signed by non-OECD countries.  She also left open questions with regard to an arbitrator’s role vis-à-vis long-duration stabilization clauses and the need for environmental protection, as well as the dismantlement of laws enacted by non-democratic governments.

The particularities of private-public arbitration may also have procedural implications.  In this regard, Catherine M. Amirfar explained that the presence of a sovereign affects the proceedings from start to finish.  Among other things, she observed that a sovereign’s presence in a proceeding might make settlements more cumbersome because of the commitment of public funds and conflicting internal political interests.  Moreover, she noted that it could create difficulties vis-à-vis the recognition and enforcement of an award, including due to divergent interpretation of the public policy exception under the New York Convention.

One speaker took a contrary view regarding the complexities of public-private arbitration and argued that this debate is not necessary and there is no such thing as “investomercial arbitration”.  Hugo Perezcano voiced his disagreement with most of the points raised during the day, including on any similarities between treaty-based arbitrations and private-public arbitrations.  In his view, these types of arbitrations arise from different causes of actions and applicable law.  He further recommended any parties concerned with certain domestic laws to choose a different applicable law for their contracts.

In the author’s view, some investors – particularly sophisticated ones with large bargaining power – may increasingly seek to enter into contractual agreements with States to protect their investments.  This will be particularly true if: (i) the investor’s alternative is a dispute settlement mechanism where claimants will be afforded less autonomy i.e., as with a permanent investment court; and/or (ii) States are more amenable to negotiate investor protections on a case-by-case basis, as opposed to relying on blanket protections provided under investment treaties.  Such facts will likely cause an increase in the number of private-public arbitrations before the ICC, ICSID, and other arbitral institutions.

We might, therefore, be witnessing only the beginning stages of this debate.  It is the author’s view that this debate must be careful not to generalize all disputes involving sovereigns or their state entities as being identical.  Moreover, it is necessary to acknowledge that States face specific social, political, and economic circumstances when they decide to attract and protect investments and are free to decide, for example, that certain state-owned entities should be independent and enter into purely commercial transactions.  In addition, the author considers that this debate should further provide greater innovations to protect smaller foreign and national investments where the investors may lack the bargaining power to do so.  This is critical since the availability of greater protections for these kinds of investors might facilitate additional capital flows into developing countries.  “Investomercial” or not, these disputes are likely to increase and create new challenges for both counsel and arbitrators.

References   [ + ]

1. ↑ 2017 ICC Dispute Resolution Statistics, ICC Dispute Resolution Bulletin 2008 – Issue 4, at 9. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Pearl River Delta Blues: Extradition and Hong Kong’s Position as Arbitral Seat

Sun, 2019-06-16 08:00

Alyssa King

After facing one of the largest protests in the city’s history on June 9, and then repeated protest and clashes with police last Wednesday, the Hong Kong government suspended efforts to pass its extradition bill. The bill would have required the city’s judges to extradite criminal suspects to Mainland China with minimal safeguards and facilitated asset seizure within the territory. Debate has been suspended, but the government promised to introduce a revised version. Today saw another massive march. The episode demonstrates the paradox at the heart of Hong Kong’s status as a legal center. This status depends on Hong Kong’s separation from the PRC legal system, even as its importance to the PRC may make such separation less tolerable to Beijing.

 

Greater Bay Area

Hong Kong is a particularly desirable seat for China-related arbitration. The city has a common law court system strongly influenced by English approaches to contract law. Its laws favor enforcement of agreements to arbitrate and of arbitral awards, and allow the courts to intervene in support of arbitration. Hong Kong has an agreement on award enforcement with the Mainland that resembles the New York Convention and has recently concluded a new agreement that will allow judges on both sides of the border to assist the arbitral process. Its lawyers are typically fluent in English, Cantonese (which means they can read documents in Chinese characters), and, increasingly, Mandarin. Beijing’s influence on the city’s politics, problematic from the perspective of many Hong Kongers, probably increases the comfort-level of Chinese state-owned enterprises. In short, Hong Kong is a convenient location that can cater to Chinese parties, including SOEs, with enough English law influences not to put foreigners off.

Mainland Chinese arbitration providers, such as the China International Economic and Trade Arbitration Center (CIETAC) and Shenzhen Court of International Arbitration (SCIA), have sought to capitalize on Hong Kong’s status. CIETAC, originally China’s only international arbitration provider, remains a leading organization. The SCIA is more of an upstart, having once been a CIETAC office that declared its independence in 2012. The SCIA’s investment rules make Hong Kong the default seat and its arbitrator list includes Hong Kong practitioners, who are conveniently close to Shenzhen. Not to be outdone, CIETAC opened a Hong Kong office in Fall 2012. The smaller China Maritime Arbitration Commission did so in 2014.

Both the local and central governments have promoted the city as a center for arbitration as part of a Greater Bay Area in the Pearl River Delta. Such a status may drive a perceived need for legal integration—and measures like the extradition bill.

 

Neutrality in Question

The extradition bill, however, undercut an important part of Hong Kong’s desirability. Hong Kong maintains its own immigration system and criminal courts. Within the PRC, parties have been known to try to get the local police to file criminal charges in business disputes, and the local police have been known to oblige. A contract interpretation matter that should be arbitrated suddenly also becomes criminal fraud—the suspect’s passport seized until the charges are dropped. The standard advice to parties outside of the PRC is don’t go to Mainland China for the duration of the dispute and don’t send your employees there. By contrast, Hong Kong has been neutral ground. Parties and witnesses can travel to an arbitration in Hong Kong without fear. Bankers and accountants know there will be limits to any criminal liability.

It is perhaps for this reason that the Hong Kong chapter of the International Chamber of Commerce came out against the extradition bill, adding its voice to the American Chamber of Commerce, governments, a large array of NGOs, the Hong Kong Bar Association, and even private businesses.1)Thank you to Susan Finder for alerting me to this letter. jQuery("#footnote_plugin_tooltip_6455_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6455_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The ICC has a Hong Kong office in part to court Mainland Chinese customers—so its intervention was unusual to say the least. The ICC’s letter to the Hong Kong Legislative Council covered the same ground as many others—pointing out that investors choose Hong Kong for their business and related dispute resolution, in part, because it meets “international standards in terms of protecting personal safety and ownership of property” and that “people” might “reconsider” this choice if “there is risk of their being removed to another jurisdiction which does not provide the protection they enjoy in Hong Kong”. [para 4] It also pointed out the PRC Central Government’s reliance on Hong Kong as part of the Belt and Road Initiative and its plans for a greater Pearl River Delta development area. It noted that “the government has worked to promote Hong Kong to be the seat of legal and dispute resolution services on the basis of Hong Kong’s rule of law widely known internationally”. [para 7]

If Hong Kong becomes a less desirable seat, more dispute resolution business may move to Singapore. Only a few hours by plane from Hong Kong, Singapore also boasts a common law legal system, favorable legislation, and lawyers who speak English and Mandarin. Parties may also choose Seoul, which is actively making a bid for regional business and could offer less political risk. Even if businesses constructively seat the arbitrations in Hong Kong but hold the arbitrations elsewhere, the city stands to lose out on the money that having people physically in the jurisdiction brings.

 

Trouble on the Belt and Road?

The PRC stands to lose as well. Through initiatives like the Greater Bay Area dispute resolution hub and China International Commercial Court (ably chronicled by Susan Finder), PRC policy-makers are seeking to influence the development of global civil procedure norms. When arbitration business moves out of Chinese territory and away from Chinese arbitration providers, the PRC loses an important avenue to do so.

The extradition bill now hangs over the city like a suspended sentence. Should hardliners feel they are losing too much control—they can revive it again. Next time, other measures may have eroded the citizenry’s ability to protest. A letter from the ICC is not going to be enough.

References   [ + ]

1. ↑ Thank you to Susan Finder for alerting me to this letter. 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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Latin American States, International Arbitration and Trade in Investment Agreements: Quo Vadis?

Sat, 2019-06-15 19:05

Belén Olmos Giupponi

International trade and investment arbitration in Latin America has come a long way over the last two decades as discussed in the book Trade Agreements, Investment Protection and Dispute Settlement in Latin America.  More recently, new generation trade and investment agreements entered into by Latin American states have progressively included innovative dispute resolution mechanisms, shaping a new era for international arbitration.

Latin American states have been gradually deploying international arbitration to settle trade and investment disputes. However, this evolution has not been linear as international arbitration has also stirred controversy in the region. In particular, international investment law has proved to be of significant concern for some countries in the region, which have faced (and still face) claims before international arbitration tribunals. In the trade arena, Latin American states are increasing their participation in the World Trade Organization (WTO) dispute settlement system, with some states becoming figureheads in trade dispute resolution, such as Brazil, Argentina and Mexico. The rest of the states have followed their footsteps, albeit with fewer cases. This has led to a further intertwining relationship between the trade and investment realms in treaty provisions (particularly TRIMs and trade in services chapters), which can also be seen in cases such as soft drinks/corn syrup.

Clearly, there has not been one single approach to international arbitration in the investment and trade agreements concluded with both regional and extra-regional partners. Hence, more than one stance on international arbitration can be observed. In the 1990s, Mexico led the way for change when it signed NAFTA, one of the first treaties comprising both trade and investment arbitration provisions. Central American countries have turned out to be a laboratory for new treaty models, as the agreement with the European Union and,  CAFTA-DR with the US and Canada, were negotiated in parallel. In South America, however, there seems to be a split in regard to the various trade and investment agreements. Whereas the FTAs signed with the US favoured the settlement of disputes through traditional mechanisms, those concluded with EU parties incorporate other alternative means. Three South American states have denounced the ICSID Convention. In turn, MERCOSUR has developed its own model of arbitration for intra and extra regional agreement disputes, while it is negotiating a new treaty with the EU.

 

Seeking to Speak With a Single Voice?

It is not just a stereotype to assert that “Latin America is not a country.” There are almost as many approaches to international dispute resolution as countries in the region, which has led to various dispute resolution mechanisms designed in international treaties regulating foreign investment.

Certainly, there is no single model of international investment treaty, but rather clusters of different agreements ranging from the classic BIT, to new-generation international trade and investment agreements, to International Investment Agreements (IIAs) concluded in various stages since the 1990s. An overview of these different investment agreements may be helpful to better grasp the complexity of the current landscape. Some regional integration agreements regulate intra and extra regional investments, such as the Intra-Mercosur Investment Facilitation Protocol (MERCOSUR Protocol) or the Central American Agreement on Investments and Trade in Services. Extra-regional trade and investment treaties, such as those signed between Latin American states and the EU and the US, have incorporated the traditional investor-state dispute resolution clause in favour of ICSID arbitration, or ad-hoc arbitration under the UNCITRAL Rules, along with chapters on arbitration of trade disputes and international commercial arbitration favouring out-of-court dispute settlement between businesses.

In terms of the impact of foreign investment policies on IIAs in Latin America, from the NAFTA model to the United States, Mexico and Canada Agreement (USMCA), considerable modifications have been introduced to dispute settlement mechanisms regulated therein. In addition to the US, the EU has been actively promoting its model and the reform of the global ISDS system. In contrast, while China’s investments have grown in the region, the same 1990 BIT model is still in force in most Latin American countries, with some exceptions (like Costa Rica and Mexico).

 

Re-shuffling and Re-defining the Roles

Over the first two decades of this century, Latin American countries have performed in a considerable variety of ways in the field of international arbitration. So far, Latin America states have appeared most of the time as respondents in the ISDS system. Deviation from the global ISDS occurred when Bolivia (2007) and, subsequently, Ecuador (2009) and Venezuela (2012) denounced the ICSID Convention. Argentina, for a long time in the spotlight of international investment arbitration, came to terms with ISDS by settling some of the high-profile investment arbitrations arising out of the 2001 economic crisis.  Mexico joined the ICSID Convention last year, on July 27, 2018, marking a new turn in the region. Colombia has recently appeared as a respondent before ICSID: see, for instance, Eco Oro Minerals Corp. v. Republic of Colombia, ICSID Case No. ARB/16/41.

In turn, Brazil has led a new path in understanding international investment arbitration. Still consistent with its traditional slant on IIAs (signature but no-ratification of treaties), Brazil has moved on to take up an active role in the redefinition of international investment arbitration. The Brazilian BIT, created through the adoption of the Cooperation and Facilitation Investment Agreements (CFIA), has been incorporated into the Intra-Mercosur Investment Facilitation Protocol, highlighting some peculiarities concerning the regulation of foreign investment.

While ICSID continues to be predominantly the forum for the settlement of investor-state disputes, the PCA has emerged as another setting for international investment arbitration under UNCITRAL Arbitration Rules (2013).

Other recent developments consist of the increasing participation of Latin American states in mega-regionals such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); and the launch of new initiatives, like the Pacific Alliance, also incorporating dispute settlement mechanisms.

 

Keeping Up With New Trends in International Arbitration

Overall, Latin American states have contributed to new waves or paradigms in international arbitration which can be observed in a wide range of areas. Emphasis on conflict prevention and the reliance on other ADR methods are addressed in more recent agreements (e.g. some treaties provide for international conciliation and mediation). For instance, institutional dialogue and cooperation mechanisms are set forth in the MERCOSUR Protocol focusing on conflict prevention. The Protocol foresees the creation of a National Focal Point or Ombudsman in each Member State tasked with the responsibility of providing support to foreign investors. Additionally, there is a procedure for dispute resolution between states to be implemented by the Administrative Commission of the Protocol in intra-regional investment.

Despite the struggles and heated debates over international investment arbitration, state practice shows that Latin American states are becoming more active in the proceedings, by challenging the awards and even suing the foreign investor.

In terms of its contribution to International Arbitration 2.0 (a more flexible and efficient system), the enforcement of arbitral awards still remains controversial in some countries. International conflict prevention and resolution mechanisms bring legal certainty; however, this is thwarted if no effective enforcement is granted in domestic jurisdiction.

Other aspects that deserve mention are those related to due diligence and obligations on the part of the foreign investor. The Brazilian CFIA model embodies obligations for foreign investors. Recent cases like Álvarez y Marín Corporación S.A. and others v. Republic of Panama, ICSID Case No. ARB/15/14, have unveiled the relevance of the due diligence that must be exercised by foreign investor and state behaviour when an illegal investment is made.

Some Latin American states are engaging with the proposals for the establishment of an international investment court, having a say in the reform of the world investment system.

The enforcement of norms and the operation of the institutional settings remain key to articulating an efficient system. New initiatives which have been launched, such as the proposed UNASUR Centre for the Settlement of Investment Disputes, did not offer a thick institutional framework. Despite never being implemented, it revealed states’ approaches to international arbitration with the introduction of specific procedural norms. Other initiatives, like Prosur (Forum for the Progress and Development of South America), are rather more a political statement of purpose concerning regional integration and development.

 

Conclusion: What Lies Ahead for Latin America in International Arbitration?

Latin American states are contributing in various ways to the development of international arbitration by bringing new approaches to international dispute settlement and taking their own stance on crucial legal aspects. Although there is a distinctive regional approach, as discussed before, it is segmented.

Whether a new distinctive take on trade and investment dispute settlement develops further will depend on the evolution of the international agreements. The consolidation of positions in a particularly dynamic scenario for trade and investment remains key to Latin American countries.

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With Rights Come Responsibilities: Sustainable Development and Gender Empowerment under the 2019 Netherlands Model BIT

Fri, 2019-06-14 23:21

Kabir A.N. Duggal and Laurens H. van de Ven

On 22 March 2019, the Netherlands published its new model BIT (“2019 Dutch Model BIT”). The new model text may well set the scene for a new generation of investment treaties, paving the way with progressive rules on sustainable development and gender empowerment.

The 2019 Dutch Model BIT is a refined version of the initial draft that the Dutch Ministry of Foreign Affairs published on 16 May 2018. This initial draft was subject to public consultation. Based on this input, the Ministry amended the draft. The amended draft was discussed in parliament, pursuant to which further changes, including on women empowerment, were included in the 2019 Dutch Model BIT.

Traditionally, Dutch policy toward investment treaty protection has concentrated on protecting investors’ interests.1)Nico Schrijver, Vid Prislan ‘The Netherlands’ in Chester Brown (ed) Commentaries on Selected Model Investment Treaties (OUP 2013), p. 540; Minister’s Policy Note “Wat de wereld verdient: een nieuwe agenda voor hulp, handel en investeringen” (5 April 2013), p. 36. jQuery("#footnote_plugin_tooltip_9299_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9299_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, since the last Model BIT, which dates from 2004, the public opinion on investor-state arbitration has changed considerably, also in the Netherlands. There have been heated debates on ISDS, regulatory space and mailbox companies that have affected the general stance towards investment treaties.

The 2019 Dutch Model BIT thus incorporates a growing accord that investment is no longer a mere binary relationship between the foreign investor and the host state, but that it is also concerned with many other stakeholders. Both foreign investors and states must account for the wider impact of any projected investments, and take account of negative externalities which investments may bring before, during and after investing. Article 7(3) 2019 Dutch Model BIT outlines this by imposing a duty on the investor to consider the wider impact of the projected investment:

The Contracting parties reaffirm the importance of investors conducting a due diligence process to identify, prevent, mitigate and account for environmental and social risks and impacts of its investment”.

Article 6 of the 2019 Dutch Model BIT (entitled “Sustainable Development”) contains the parties’ obligation to promote and sustain investments that contribute to sustainable development and “encourage high levels of environmental and labor protection and shall strive to continue to improve those laws and policies”.

The 2019 Dutch Model BIT also refers to or incorporates various other international treaties. For example, the 2019 Dutch Model BIT refers to and affirms the G20 Guiding Principles for Global Investment Policymaking (Article 3(3)), the Paris Agreement, the fundamental ILO Conventions, and the Universal Declaration of Human Rights (Article 6(6)), as well as international standards on corporate social responsibility, including the OECD Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights and Recommendation CM/REC(206) (Articles 7(2), (5)). Further, the 2019 Dutch Model BIT attempts to put some teeth into this obligation to adhere to standards of corporate social responsibility. Under Article 23, a tribunal is “expected to” take into account non-compliance by the investor of its commitments under the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.2)The UN Working Group on Business and Human Rights has launched a thematic project to “unpack the gender dimension of the [UN Guiding Principles on Business and Human Rights].” See here. If concrete gender-related postulations are identified and connected to the UN Guiding Principles on Business and Human Rights in the future, a failure to meet such gender-related standards by investors could possibly be considered under Article 23 of the 2019 Dutch Model BIT. jQuery("#footnote_plugin_tooltip_9299_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9299_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Next to sustainable development, gender diversity is given more and more attention. Gender diversity was held to be one of ten hot topics in 2018 at the Kluwer Arbitration Blog. This debate, however, often focusses on gender equality in arbitral dispute resolution, specifically the gender division among arbitrators and counsel. The effect of investment treaties on gender equality, and the possibilities investment treaties can bring to empower women’s economic participation, are notions that thus far have gained little concrete foothold in investment treaties. This aspect of the gender discussion is better developed in international forums. According to Goal 5.a of the UN Sustainable Development Goals, UN States shall “undertake reforms to give women equal rights to economic resources, as well as access to ownership and control over land and other forms of property, financial services, inheritance and natural resources, in accordance with national laws”. Further, 118 WTO Members signed the Buenos Aires Joint Declaration on Trade and Women’s Economic Empowerment in 2017, which is poised to catalyse gender focussed multilateral trade policy.

The gender-related provisions in the 2019 Dutch Model BIT are therefore all the more interesting. Article 6(3) 2019 Dutch Model BIT provides:

The Contracting Parties emphasize the important contribution by women to economic growth through their participation in economic activity, including in international investment. They acknowledge the importance of incorporating a gender perspective into the promotion of inclusive economic growth. This includes removing barriers to women’s participation in the economy and the key role that gender-responsive policies play in achieving sustainable development. The Contracting Parties commit to promote equal opportunities and participation for women and men in the economy. Where beneficial, the Contracting Parties shall carry out cooperation activities to improve the participation of women in the economy, including in international investment”.

These provisions make clear that under the 2019 Dutch Model BIT, it no longer suffices for states to merely sit back and steer away from measures that impact foreign investments, but that they have an active duty to empower women to partake in the opportunities of foreign investment. States can no longer ignore women as important stakeholders in international investments.

Further, gender-based discrimination is expressly qualified as a “wrongful ground” that constitutes a breach of fair and equitable treatment under Article 9(2) 2019 Dutch Model BIT. Such discrimination could regard both natural as legal persons, and should prevent unequal treatment based on gender. However, challenging adherence to and enforcement of these gender-related obligations may prove in practice, the incorporation of gender-equalizing standards is a welcome development.

Gender-related considerations in investment treaties are a rare breed, especially as treaty provisions and not merely as preambular language. They can, however, be found in some trade agreements with investment chapters. The 2019 amendment to the Canada-Chile Free Trade Agreement (CCFTA) includes a stand-alone chapter on trade and gender, which lays down numerous commitments on Canada and Chile to promote gender equality and the inclusion of women on economic growth. It provides for cooperation activities between the two countries on this subject, and set up a Trade and Gender Committee to further that process. Nonetheless, none of these commitments are enforceable under the dispute resolution mechanism of the CCFTA pursuant to Article N bis-06.

Similarly, a gender-related provision was introduced by the 2018 amendment to the Canada-Israel Free Trade Agreement. Section 4 lists that one of the treaty’s objectives is to

promote gender equality and encourage women’s economic empowerment and the use of voluntary corporate social responsibility standards and principles, as well as promote access for small and medium-sized enterprises to the opportunities created by the Agreement”.

 A third example is the Chile-Uruguay Free Trade Agreement, which in Article 14 contains elaborate gender-related rules on gender empowerment, gender equality and cooperation activities between the two countries in this area.

The 2019 Dutch Model BIT may, therefore, be seen as taking a concrete step to further to introduce tools improving women’s empowerment in treaty-governed international investment. Together with its provisions on sustainable development, the 2019 Dutch Model BIT thus fosters a more equitable and inclusive investment regime that looks beyond the narrow, binary relationship between that of foreign investor and state. This is undoubtedly a positive development and the authors hope that subsequent treaties incorporate and build upon such obligations.

 

The views expressed herein are personal and do not reflect the views of Arnold & Porter or De Brauw Blackstone Westbroek and their clients. The authors reserve the right to change the positions stated herein.

References   [ + ]

1. ↑ Nico Schrijver, Vid Prislan ‘The Netherlands’ in Chester Brown (ed) Commentaries on Selected Model Investment Treaties (OUP 2013), p. 540; Minister’s Policy Note “Wat de wereld verdient: een nieuwe agenda voor hulp, handel en investeringen” (5 April 2013), p. 36. 2. ↑ The UN Working Group on Business and Human Rights has launched a thematic project to “unpack the gender dimension of the [UN Guiding Principles on Business and Human Rights].” See here. If concrete gender-related postulations are identified and connected to the UN Guiding Principles on Business and Human Rights in the future, a failure to meet such gender-related standards by investors could possibly be considered under Article 23 of the 2019 Dutch Model BIT. 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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Pre-deposit Clauses in an Arbitration Agreement: Are Arbitration Agreements Justiciable?  

Thu, 2019-06-13 19:04

Lakshya Gupta

The Indian Supreme Court recently in M/s Icomm Tele Ltd. vs. Punjab State Water Supply & Sewerage Board,  (“Icomm”), struck down a clause in an arbitration agreement as unconstitutional. The clause mandated a pre-deposit of 10% of the amount claimed in the arbitration proceeding. The Court found this clause to be arbitrary and resulting in a discouragement to arbitrate. While giving the judgment, the Court relied on the importance of alternative dispute mechanisms and the need to de-clog the court machinery. However, the judgment seems to raise more issues than it answers by extending the power of judicial review of courts to private agreements. It also brings to light the dichotomy of the Court to put a higher standard whenever the State is impleaded as a party. While, this may be necessary for social justice, it is interesting when similar principles are not extended to private parties.

 

The judgment in Icomm

The decision in Icomm was the result of an appeal to a writ petition filed in the Punjab and Haryana (P&H) High Court. The petitioner company had been awarded a tender for various civil/electrical works in the country by the respondent. Clause 25 of the notice inviting tender contained an arbitration clause which required a 10% of the amount claimed as pre-deposit to avoid “frivolous” claims. The clause also stated that in the event of a favourable award, the deposit will be refunded to him in an amount proportionate to the amount awarded, and the balance, if any, will be forfeited and paid to the other party. The petitioner claimed that this was arbitrary and opposed to public policy. However, the High Court refused to go into the merits of this contention and dismissed the writ. It stated that this was in nature of a private contract which was an open agreement and freely consented to by both the parties.

The Supreme Court on appeal overruled this judgement and accepted the contention of the petitioner. It stated that contracts of tender are justiciable since there is an element of public policy involved. What is interesting to note is that the precedents cited by the Court to support this power of judicial review all tested the procedure of awarding. The scope of judicial review is limited to the check of any bias inherent in the performance of administrative functions as understood in Tata Cellular vs. UOI , (“Tata”), which is cited by both the courts. The Supreme Court relied on this case but unlike the High Court, did not divulge into the application of the principles of Tata in later cases.

The High Court discussed this case in detail and distinguished the application of the principle given from the facts of the case at hand. For instance, in Raunaq International vs. IVR Construction Ltd., (Raunaq)the presence of any direct or indirect harm to the public (in the form of say undue delay in the construction of public utilities) was recognized as the core concern. The Wednesbury principle of unreasonableness was also considered to test arbitrariness wherever such harm was present. Jagdish Mandal vs. State of Orissa, applied and further explained the principles given in Raunaq. The Court here stated that the scope of judicial review in commercial transactions is very limited and the principles of equity and natural justice stay at arm’s length. But even these cases only questioned the fairness of procedure of grant of tenders and not any arbitration clause in their agreement.

The Supreme Court did accept that the review of private contracts is limited when it denied the petitioner’s contention that the notice was a contract of adhesion. In saying this, it held that imbalance of power cannot be claimed in commercial transactions. But, the specific nature of this clause, especially the part which allowed forfeiture of deposit by the party against whom an award had been passed, compelled the Court to hold clause 25 to be violative of Article 14 of the constitution. The Supreme Court distinguished the present case from S.K. Jain vs. State of Haryana (P&H HC), (“SK Jain”), in which a similar pre-deposit clause was challenged but was  held to be valid.

The clause in SK Jain was valid and distinguishable on two grounds – the amount deposit in terms of percentage chargeable increased with the increase in the quantum involved and there was no forfeiture. The pre-deposit was thus considered logical in light of being the balancing factor to prevent frivolous and inflated claims. In the present case the Court did not find any such nexus with frivolousness. This was because the clause required a 10% pre-deposit of the amount claimed in every instance of arbitration, no matter if the claim was genuine. The Court also opined that the courts, and by implication the arbitrator, can always dismiss frivolous claims with exemplary costs. There was no need for a party to have such pre-deposit clauses in their contract.

According to the Court, “Deterring a party to an arbitration from invoking this alternative dispute resolution process by a pre-deposit of 10% would discourage arbitration, contrary to the object of de-clogging the Court system and would render the arbitral process ineffective and expensive”.

 

The doctrine of freedom of contract vis-à-vis government contracts

This is not the first time that the Court has made special concessions to impose a higher degree of public interest in arbitration proceedings where the State is involved. In Datar Switchgears Ltd. vs. Tata Finance Ltd. (2000), (“Datar”), the Supreme Court held a clause which allowed one party to single-handedly choose the arbitrator is the event of a dispute to be valid. This was because of the doctrine of freedom of contract which gave complete discretion to the parties to choose their own terms. This has been upheld in several other cases involving two private parties.

The situation is slightly different when the State is involved. In Voestalpine Schienen GmbH vs. DMRC Ltd., the Court questioned a clause which allowed DMRC to choose a pool of arbitrators from which the other party could proceed to appoint one. It opined on the necessity of independent and impartial arbitrators in an arbitration process and discussed the importance of neutrality of arbitrators as set out in Section 12(3) of the Arbitration and Conciliation Act, 1996 (A&C Act). It also discussed the application of the provision in relation to contracts with State entities and how the balance between procedural fairness and the binding nature of contracts has been titled in favour of the former.

But the court did not invalidate the clause, nor did it extend the interpretation of section 12. It merely stated that there was a need to have a healthier and fairer environment for arbitration and send positive signals to the international business community. It categorically stated that the duty to do so is higher when one of the parties is the government. The case also stated that the theory of forfeiture in Datar is still binding precedent but failed to discuss the implications of freedom of contract where an instrumentality of the State is involved.

 

Conclusion

It is difficult to state that the judgment lays down a clear ratio with respect to the justiciability of arbitration agreements. It is simply restricted to the special facts of the case. Since SK Jain was distinguished and not overruled, thus, pre-deposit clauses are by themselves not banned. What the judgement reflects is the anxiety of the Judiciary to encourage ADR mechanisms in the country and try to keep up in pace with the international pressure to make the country more arbitration-friendly. However, it is not uncommon to see such arbitrary clauses as seen in Icomm, in private contracts. Unlike what the Court might want to believe, there is often a power imbalance which is exploited by the party making the contract. What will be interesting to see is how such an approach could help pierce the domain of arbitrary clauses between two private entities. Perhaps, the Court could test such an agreement via section 23 of the Indian Contract Act which declares contracts against public policy as void. But even this section is attracted when the object of the agreement is against public policy. If it can be used when only one clause in the agreement is questioned only time will tell.

 

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