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Res Judicata: An Analysis for the Sake of Public Policy

Sun, 2019-02-24 00:44

Selin Ece Tekin

The principle of res judicata is a universal principle recognized by the legal systems of all civilized nations. The res judicata principle should be applied by arbitral tribunals as the arbitral tribunals are alternative to the courts and when an award is enforced it becomes a part of the legal order of the country where it is enforced.1) Silja Schaffstein, The Doctrine of Res Judicata before International Arbitral Tribunals, Geneva, 2012, pp. 193-194, ¶ 583-584. jQuery("#footnote_plugin_tooltip_8580_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8580_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The reflection of this doctrine in international arbitration is that where the matter in dispute has already been decided by a national court or by an earlier arbitrator, it should be barred by law as the existence of two enforceable awards on the same issue, between the same parties would be contrary to procedural public policy.

Although the res judicata doctrine is not codified in some countries’ laws, it is established and recognized by case law. For instance, under Article 190(2)(e) of the Swiss PIL, if the award is incompatible with public policy it is a reason for annulment.2)Geisinger E./Voser N., International Arbitration in Switzerland, 2nd Edition, 2013, p. 255. jQuery("#footnote_plugin_tooltip_8580_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8580_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Not every violation of the mandatory laws of a country constitutes a violation of public policy, but rather only a violation of the fundamental rules of a country’s legal system.  The only case where a violation of procedural public policy was affirmed until 2013 under Swiss Law concerned an award that disregarded the fundamental procedural principal of res judicata.3) Arroyo M., Chapter 2, Part II: Commentary on Chapter 12 Swiss PIL, Article 190, Finality, challenge: principle, in Manuel Arroyo (ed), Arbitration in Switzerland: The Practitioner’s Guide, Wolters Kluwer, 2013, p. 245. jQuery("#footnote_plugin_tooltip_8580_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8580_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Therefore, under this doctrine, a tribunal should be barred from deciding in the event there is a final, conclusive and binding judgment or arbitration award regarding the same cause of action, with the same claims and between the same parties.

This principle was recognized in a Swiss Federal Supreme Court Decision rendered in 2001 (4P.37/2001) where the Supreme Court held that two contradicting decisions on the same subject matter between the same parties both of them enforceable within a specific legal order would be contrary to public policy.

Similarly, on 13 April 2010, the Swiss Federal Supreme Court (Decision 4A_490/2009) explained the obligation of an arbitral tribunal in respect of res judicata and emphasized that an arbitral tribunal sitting in Switzerland violates procedural public policy if it renders an award without taking into account the res judicata effect of a prior award or judgment between the same parties.

Four years later, the Swiss Federal Supreme Court held, in a decision dated 27 May 2014 (4A_508/2013), that an award issued by an international arbitral tribunal seated in Switzerland that disregards the preclusive effect of an earlier state court judgment or arbitral award violates the principle of res judicata, and breaches procedural public policy within the meaning of Article 190(2)(e) of the Swiss PIL. The Federal Court also stated that if in such a case the arbitral tribunal must hold the request inadmissible.

There are divergent views as to what constitutes the “subject matter of a dispute”. Some of the scholars suggest that it is comprised of the legal rule relied upon by a party as the legal basis of the claim. Some scholars defined it as the relief sought in the parties’ submissions and others suggest that the subject matter of a dispute comprises both the parties’ claims and the set of facts relied upon in support of the claims.

The Swiss Federal Court defined it as facts relied upon in support of the claim without reference to legal grounds, where it emphasized that the identity must be understood from a substantive and not grammatical point of view and that the res judicata effect extends to all the facts existing at the time of the first judgment, whether or not they were known to the parties, stated by them, or considered as proof by the first court. The Court concluded that A new claim, no matter how it is formulated, will have the same object as the claim already adjudicated even if it appears to be its opposite or if it was already contained in the preceding action, such as a claim decided on the merits in the first litigation and presented as a preliminary issue in the second. ” 

Another condition for res judicata is “being capable of enforcement”. As correctly described by the scholars, the logic behind this is that if the award does not meet the conditions for the enforcement, there would not be any risk for two enforceable conflicting decisions. In other words, a foreign judgment can never have effects in a country’s law that would not equally be available to a country’s domestic judgment. Therefore, the arbitral tribunals should carefully analyze whether the foreign state court judgment or foreign arbitral award meet the conditions of recognition as per the place of arbitration’s law.4)Voser N. (Partner) and Raneda J., ‘Recent Developments on the Doctrine of Res Judicata in International Arbitration from a Swiss Perspective: A Call for a Harmonized Solution’ (2015) 33 ASA Bulletin, Issue 4, pp. 742–779. jQuery("#footnote_plugin_tooltip_8580_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8580_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

It is accepted by Swiss scholars and by the Federal Court decisions that an arbitral tribunal with its seat in Switzerland may decide itself on the recognition of the foreign judgment subject to Article 25 and 27 of Swiss PIL or award as a preliminary issue before determining the res judicata effect in accordance with Art. 29(3) of the Swiss PIL.5)Voser N.  and Girsberger D., ‘Chapter 5: Conditions of Admissibility’, International Arbitration: Comparative and Swiss Perspectives (3rd edition, Kluwer Law International. jQuery("#footnote_plugin_tooltip_8580_5").tooltip({ tip: "#footnote_plugin_tooltip_text_8580_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In particular, the final International Law Association Committee (ILA) Report on Res Judicata and Arbitration identified the requirements for the application of the res judicata doctrine between arbitral tribunals. One of the requirements is a prior award that is final and binding and capable of recognition in the country where the arbitral tribunal of the subsequent arbitration proceedings has its seat. Where a request for recognition or enforcement has already been brought at the arbitral seat, the arbitral tribunal may deem it appropriate to await the enforcement court’s decision. However, where no such request has been brought, the arbitral tribunal have to determine whether the prior judgment was issued by a court that had jurisdiction in the international sense in accordance with Article II (3) of the New York Convention on the Enforcement and Recognition of Foreign Arbitral Awards and is capable of recognition at the arbitral seat.6)Silja Schaffstein, “The Doctrine of Res Judicata before International Arbitral Tribunals”, Geneva, 2012, pp. 193-194, ¶ 583-584. jQuery("#footnote_plugin_tooltip_8580_6").tooltip({ tip: "#footnote_plugin_tooltip_text_8580_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In a recent decision of the German Federal Court of Justice (Bundesgerichtshof Beschloss) of October 2018, the Court decided that a violation of res judicata not only occurs when a tribunal disregards that it is bound by the res judicata effect of an award or judgment rendered in a separate proceeding, but also where a tribunal incorrectly assumes to be bound by a decision or award rendered in a separate proceeding. The Court held that the underlying idea of this decision is due process, as one may be prevented from bringing a claim which it is entitled to pursue in court or arbitration in violation of German public policy under the German Code of Civil Procedure Section 1059(2).

Notwithstanding the arbitral tribunals’ duty to carefully analyse whether they are bound by a previous award or court decision, the arbitrators’ decision as a result of this analysis may be taken to the court for its review during the annulment. In fact, this was the case in the Boxer Capital Corp. v. JEL Investments Ltd7)Boxer Capital Corp. v. JEL Investments Ltd., 2015 Carswell BC 96, 379 D.L.R. (4th) 712. jQuery("#footnote_plugin_tooltip_8580_7").tooltip({ tip: "#footnote_plugin_tooltip_text_8580_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); decision of the British Columbia Court of Appeal where the court was asked to examine arbitrator’s decision on not being bound by the earlier award of a previous arbitrator or the decision of the judge who heard an appeal from that earlier award. The Appeal Court decided that this is not purely a questions of res judicata but in fact it is a review of the arbitral tribunal’s decision. The Appeal Court held that the court could only interfere with the tribunals jurisdiction when there is a complete loss of jurisdiction or a clear breach of a law as a result of the arbitrator’s erroneous decision.

In other words, the court should respect the arbitrator’s decision on the applicability of the res judicata doctrine. However, the arbitrators should conduct their analysis diligently when assessing the conditions of res judicata and limiting their powers accordingly as their incorrect decision as to be bound by an earlier award or judgment would also violate public policy.

 

 

References   [ + ]

1. ↑ Silja Schaffstein, The Doctrine of Res Judicata before International Arbitral Tribunals, Geneva, 2012, pp. 193-194, ¶ 583-584. 2. ↑ Geisinger E./Voser N., International Arbitration in Switzerland, 2nd Edition, 2013, p. 255. 3. ↑ Arroyo M., Chapter 2, Part II: Commentary on Chapter 12 Swiss PIL, Article 190, Finality, challenge: principle, in Manuel Arroyo (ed), Arbitration in Switzerland: The Practitioner’s Guide, Wolters Kluwer, 2013, p. 245. 4. ↑ Voser N. (Partner) and Raneda J., ‘Recent Developments on the Doctrine of Res Judicata in International Arbitration from a Swiss Perspective: A Call for a Harmonized Solution’ (2015) 33 ASA Bulletin, Issue 4, pp. 742–779. 5. ↑ Voser N.  and Girsberger D., ‘Chapter 5: Conditions of Admissibility’, International Arbitration: Comparative and Swiss Perspectives (3rd edition, Kluwer Law International. 6. ↑ Silja Schaffstein, “The Doctrine of Res Judicata before International Arbitral Tribunals”, Geneva, 2012, pp. 193-194, ¶ 583-584. 7. ↑ Boxer Capital Corp. v. JEL Investments Ltd., 2015 Carswell BC 96, 379 D.L.R. (4th) 712. 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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A Model Clause for a New Kind of Final Offer Arbitration in International Commercial Arbitration: the “Final Draft Award” Arbitration

Fri, 2019-02-22 21:01

Guilherme Rizzo Amaral, Danilo Ruggero Di Bella and Bruno Guandalini

A recent post discussed the upsides and downsides of the so-called Final Offer Arbitration (“FOA”)  also known as Baseball Arbitration. In short, in an FOA, instead of crafting an award from scratch, the arbitral tribunal simply has to pick either party’s final offer on the claims and elevate it to the final award, usually without making any changes or additions. Some institutional rules, however, do allow tribunals to provide supplementary reasons to justify their choice.

This post will build on the advantageous features of the FOA, whilst mitigating the risks inherent to such a streamlined type of arbitration. The resulting proposal will be supported alongside a purpose-built framework, comprising a procedure and a prêt-à-porter arbitration clause.

 

Weighing up risks and rewards towards a viable solution

One of the risks commonly associated with the use of FOA is the lack of reasoning in the resulting award. This limits itself to a choice between one of the parties’ final offers regardless of its adherence to the law or the facts relevant to the case. An award lacking reasoning jeopardizes the whole arbitral proceeding and opens the resulting award to challenges on three different fronts:

(1) failure to rule on the dispute in its entirety;

(2) failure to show that the losing party was given the chance to present its case; and

(3) very simply, lack of reasoning itself.

Some FOA proceedings circumvent this risk by demanding that arbitrators provide reasons for having selected one party’s offer over another. A good example are the ICDR/AAA Final Offer Arbitration Supplementary Rules, which state that: “[t]he tribunal’s award shall be reasoned, stating the rationale for its selection of one party’s final offer over that of the other party or parties”.1)6. Award  “The arbitral tribunal shall be limited to choosing only one of the final offers submitted by the parties. The tribunal’s award shall be based solely thereon, plus any interest, costs, or fees to be awarded pursuant to the governing arbitration rules, applicable law, or the agreement of the parties. The tribunal’s award shall be reasoned, stating the rationale for its selection of one party’s final offer over that of the other party or parties. jQuery("#footnote_plugin_tooltip_5374_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5374_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

While this specific type of FOA protects the award from any challenges stemming from the lack of reasons, it also encourages parties to engage in virtuous conducts, given that their chances of winning the case are proportional to the reasonableness of their requests. And yet, this type of FOA does not make the most out of its potential, especially in terms of increased efficiency, promptness and party control over the final award.

An alternative to the FOA would conversely direct the parties not to make final offers, but rather to submit entire draft awards. Under this setting – which could be named “Final Draft Award Arbitration” (“FDAA) – the tribunal would be presented with each party’s full-blown award proposal. The full-blown award proposal means that while the tribunal would be authorized to amend the parties’ reasoning, it would still be bound by the actual conclusion (decision) advanced by the prevailing award on the claims. In other words, the chosen draft award’s reasons would be persuasive, yet its conclusion would be binding on the arbitral tribunal.

There are many aspects that would make the FDAA more appealing overall than the classic FOA. It would increase the parties’ control over the proceedings as the parties would draft the award’s conclusions as well as its reasons. Ultimately, it would be more time efficient in the issuance of the final award, which, under this mechanism of ‘reverse-scrutiny’ may require only a few adjustments by the tribunal.

 

Whole Package FDAA or Issue-by-Issue FDAA?

More often than not, arbitrations present a multitude of claims and/or disputed issues at stake. In a traditional FOA setting, the question that arises is: would it be possible for arbitrators to pick-and-choose between the parties’ offers and then combine them to issue a mixed award? This possibility exists and is known as an issue-by-issue FOA. It is different from the classic whole package FOA, in which the arbitral tribunal must choose a single offer made by one of the parties and encompassing all claims.

At first glance, a whole package FOA would force arbitrators to choose between extreme positions, which might seem inefficient. Thus, by the same token, the issue-by-issue FOA would allow arbitrators to build a more convenient global solution by choosing more reasonable offers for each claim or issue.

On the other hand, the issue-by-issue FOA comes with at least two downsides. Firstly, it allows arbitrators to form their own package, giving way to compromised awards and ‘split-the-baby’ decisions, not to mention the possibility of Frankenstein like awards. Secondly, and most importantly, parties may propose more extreme – and inefficient – solutions to issues to which they have stronger claims in order to “abandon” weaker ones. In other words, the wrong incentives might compromise the success of the FOA in the issue-by-issue setting.

In the proposed FDAA, however, as arbitrators are allowed to modify or add reasons to the chosen draft award – being bound solely to the draft award’s conclusion on the claims – the use of the whole-package feature is even more compelling; given that the right incentives are in play along with the possibility to adjust the reasoning of the award.

 

The FDAA in action

Our proposal would be for the FDAA procedure to mirror a regular arbitration procedure until the closing of the proceedings (parties’ submissions and production of evidence). Following the closing, instead of presenting final submissions on the merits of the arbitration, each party would submit a draft award to the arbitral tribunal. The tribunal would then have to choose between one of the submitted awards in its entirety (unless it is an issue-by-issue FDAA, in which case the tribunal could choose different chapters from each award).

In any case, the arbitral tribunal would be bound solely to the actual conclusion (i.e. decision on the claims) of the chosen draft award. The tribunal could change the draft award’s reasoning as it sees fit.

Before issuing its final award, the arbitral tribunal would also be authorised to notify the parties either to clarify any of the draft awards or to correct a clerical, computational or typographical error, or any errors of similar nature contained in the draft award.

Some national arbitration laws (such as the English Arbitration Act, Section 69) allow the parties to appeal to the court on a question of law arising from an award. The choice for an FDAA would necessarily be considered a waiver of such an appeal and an exclusion of such court’s jurisdiction because in an FDAA procedure the arbitral tribunal has no control of the correctness of the parties’ draft award conclusions or of their adherence to the law. Hence, one should be mindful of the possible need to address this issue when drafting institutional rules, terms of reference or arbitral agreements providing for FOA (in most cases, the choice for institutional rules that preclude the right to appeal suffices).

 

A Model FDAA Clause

Ideally, the FDAA procedure should be detailed in the institutional rules. This would not only simplify the arbitration agreement – which could plainly refer to the “FDAA rules” of a given institution – but also allow for a more thorough explanation of the procedure.

Another option would be for the parties to agree on adopting the FDAA in the outset of the arbitration (such as in the Terms of Reference in an ICC arbitration) or the first procedural order issued by the arbitral tribunal.

Both solutions depend upon future and uncertain circumstances. With the exception of the ICDR/AAA, no main arbitral institution has specific FDAA procedures detailed in its rules yet, and there is no way to guarantee that parties would spontaneously agree to that once an arbitration initiates.

For these reasons, we suggest the adoption of a model FDAA clause that could be used in contracts immediately. The clause follows the whole package feature and is inspired on the ICC model clause and it reads as follows:

A – Final Draft Award Arbitration (“FDAA”)

A.1. All disputes arising out of or in connection with the present contract will be submitted to the [name of institution] and will be finally settled by a Final Draft Award Arbitration (“FDAA”) under the Rules of Arbitration of the [institution] by an arbitral tribunal composed of 3 (three) arbitrators appointed in accordance with said Rules.

A.2. After the closing of the proceedings, the arbitral tribunal will notify the Parties to submit their respective draft awards. Once such awards have been received, the arbitral tribunal will choose one award and disregard the other. When issuing the final award, the arbitral tribunal is strictly bound by the conclusion of the chosen draft award regarding the parties’ claims, only being allowed to change or complement its reasoning. Before issuing its final award, the arbitral tribunal may ask any of the parties to clarify its draft award, as well as to correct a clerical, computational or typographical error, or any errors of similar nature contained in the draft award.

A.3. The FDAA proceeding will also be observed in the event of a partial award.

References   [ + ]

1. ↑ 6. Award  “The arbitral tribunal shall be limited to choosing only one of the final offers submitted by the parties. The tribunal’s award shall be based solely thereon, plus any interest, costs, or fees to be awarded pursuant to the governing arbitration rules, applicable law, or the agreement of the parties. The tribunal’s award shall be reasoned, stating the rationale for its selection of one party’s final offer over that of the other party or parties. 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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Topical Issues in ISDS: Review of Recent Developments in the European Union

Fri, 2019-02-22 17:05

Munia El Harti Alonso

The CERSA (CNRS- University Paris II Panthéon-Assas) organized its third event in a series of seminars on selected topics in international investment law and investor-state dispute settlement (ISDS) (for the report of the first seminar, see here). The seminar on Topical issues in ISDS: EU Investment Law was held in Paris on 7 February 2019 and moderated by Professor Catharine Titi (CERSA). Practitioners Paschalis Paschalidis (Shearman & Sterling, Paris), Amy Roebuck Frey (King & Spalding, Paris), Professor Marc Bungenberg (Saarland University, Germany) and investment treaty negotiator Andre von Walter (European Commission DG TRADE) gathered to discuss the latest reforms in investment dispute resolution in the European Union.

 

1. The Comparison of Investment Protection Standards under EU Law and International Investment Law

Paschalis Paschalidis recalled that the traditional view shared amongst many arbitral tribunals was that EU law covered admission of investment, and once investment was past that stage there was no form of protection. This is no longer true. A recent example is the CJEU judgment Joined Cases C-52/16 and C-113/16 (rendered on the same day as Achmea) concerning expropriation usufructuary rights over agricultural lands by the government of Hungary and grounded on free movement of capital. EU law also provides post-investment protections and certain comparable provisions such as FET, but it does not apply yet to every aspect of state activity, as there are still pockets of significant Member States sovereignty in areas of taxation, criminal law and sovereign debt (see the Greek PSI).

Amy Roebuck Frey considered that EU law, from an investment treaty point of view, is sometimes viewed as a risk largely due to a lack of understanding. While it is overly simplistic to equate “legitimate expectations” under EU law with the substantive protections developed under investment treaty case law (the latter includes broader protections), she suggested there should be more studies to see if, on the whole, investors and investments are given equivalent protections in the two legal orders of EU law and international investment law.

Marc Bungenberg further remarked that the Micula case was already paradigmatic of a shock of cultures between EU law and international investment law. The material standards of protection and enforcement in EU law, even if the European Commission argues the EU upholds high standards, will depend on the Member States will and the functioning of their respective judicial systems.

 

2. The Achmea Judgement and its Consequences for Intra-EU Bilateral Investment Treaties, Energy Charter Treaty (ECT) and ICSID Arbitrations

Paschalis Paschalidis indicated that on 28 January 2019 in the ICSID Sodexo v. Hungary case, another arbitral tribunal ruled out on an objection based on Achmea. It reached the same conclusion as in UP and C.D  v. Hungary. Concerning the Dutch-Slovak BIT at issue in Achmea, EU law was applicable via two doors: domestic law of the host state and international law. arbitral tribunals, such as the ones in Blusun v. Italy and Electrabel v. Hungary, also accepted EU law’s quality as international law.

Amy Roebuck Frey argued that Article 26.6 of the ECT does not refer to domestic law but to “applicable rules and principles of international law”, which is why some tribunals have decided that EU law is not international law for the purposes of that provision. Article 16 of the ECT on Conflict of Treaties, providing that the most favorable treaty applies, may prove difficult for the CJEU to reconcile with its reasoning in Achmea, as Article 16 is binding on the CJEU, the EU being a member of the ECT.

Even in the context of intra-EU BITs, we cannot say with complete accuracy that all such treaties fall within Achmea. It is worth noting that, following Achmea and the declarations of certain EU Member States, a  Swedish court in Micula considering enforcement efforts did not dismiss the case on jurisdictional grounds.

2.1. The Implications of the Political Declarations Signed by the EU Member States in Brussels Regarding the Consequences of the Achmea Judgement

Amy Roebuck Frey was critical of the Member States’ Joint Declaration underlining rationale of attempting to end pending cases. From a legal perspective, only BITs containing similar wording to the BIT in Achmea should be terminated, since the CJEU only addressed those treaties. She posited that the declaration of the other 5 Member States referring to intra-EU BITs “such as those issued in Achmea” is consistent with that view. In any case, in principle, neither intra-EU BITs nor the ECT can be amended by issuing a declaration; the treaties themselves provide the means for amendment.

Paschalis Paschalidis understands that several, if not all, Member States do not treat these declarations as treaties. Regardless of their status as treaties or not, the interesting question is whether these declarations constitute “subsequent agreements” in the sense of Article 31.3.a of the Vienna Convention on the Law of Treaties (VCLT).

2.2. The Tension Between Member States’ Positions in the Recent Declarations and the Fundamental Right of Legal Certainty for EU Investors/Survival clauses

Amy Roebuck Frey commented that if the EU Member States amend the ECT, the VCLT provisions on modification may also apply. Interestingly, Italy one of the signatories of the political declaration has previously withdrawn from the ECT and yet has emitted a declaration on the survival clause. It is not clear that a contracting party can take any step to modify a treaty after its withdrawal from that treaty has taken effect.

3. The Experience with Opinions of the Advocate General of the EU and Opinion 1/17

Marc Bungenberg explained that in 70% of the cases the Court follows the opinion of the AG. Paradigmatically, the more important the case, the less likely is that the Court will follow the AG, such as in the emblematic case Van Gend en Loos, as well as in Achmea, Portugal/Council in regard to the direct applicability of WTO Law or the accession of the EU to the ECHR (Opinion 2/13).

Opinion 1/17 of AG Bot, which declares CETA’s ICS mechanism to be compatible with EU law, it comes in a politically charged context. The approach of AG Bot is interesting, but it does not indicate finally what is to come.

4. The EU Transition from ad hoc ISDS Arbitral Tribunals to a Permanent and Two Layered Investment Court System (ICS)

Andre von Walter explained the project for the creation of a multilateral investment court (MIC) – or a plurilateral court – that could lead to a multilateral court. Asked why the EU decided to move away from investment arbitration, he noted that the EU Member States’ governments, most EU citizens and policy makers do not feel comfortable when arbitration is applied to a vertical public law relationship as it is the case for treaty-based investment disputes; that the classic features of arbitration applied to public law disputes are perceived as problematic along with the limited review mechanisms of the current ISDS system. The creation of a MIC would bring more coherence and predictability. Commercial arbitration and State-to-State arbitration are in different situations, but for treaty disputes between individuals and states, the EU does no longer negotiate arbitration systems.

4.1 Method of Appointment of Adjudicators by States and Ensuring Independence under the ICS

Andre von Walter explained that many crucial questions arise with regard to the methods of selection and appointment of adjudicators. In the EU’s view, the mandate of the adjudicators of any future investment court should be non-renewable, forbid double-hatting and provide guarantees of full independence. The adjudicators should above all have a public international law experience and could come from Justice, Academia, legal professions or other areas.

4.2. Multilateral Investment Court and State of Play of the ISDS Reform Negotiations Within UNCITRAL

Andre von Walter observed that the EU’s reform ideas have been channeled in the discussions in UNCITRAL. There has been an appetite to work multilaterally on ISDS reform, so the two tracks were combined in Working Group III (WG III). The mandate of WG III is articulated in three steps: identifying concerns about the ISDS regime, considering whether reform is desirable in regard to those concerns, and what can be the options of reform in a third step. The Documents provided on the website of DG TRADE set out the EU’s proposals for the third stage of the mandate. Systemic reform is important. The current state of play at UNCITRAL appears to be a delicate balance between different types of reform.

Finally, Marc Bungenberg discussed in detail concrete options in relation to the institutional set-up of a multilateral investment court. He stressed the need to focus on the rule of law, reduced costs, transparency considerations, consistency in the case law and the enforcement of MIC decisions. In this respect, he drew on his recent monograph, co-authored with August Reinisch, “From Bilateral Arbitral Tribunals and Investment Courts to a Multilateral Investment Court”, which presents the first comprehensive study of the feasibility of establishing a MIC.

In conclusion, the discussion of these recent developments and open questions reveal that international investment law in the European Union is a vibrant field with still many pending issues. The near future will show how these questions and issues will be resolved.

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Arbitration in Kyrgyzstan: Evolution and Next Steps Ahead

Thu, 2019-02-21 21:00

Hannepes Taychayev and Natalia Alenkina

Arbitration in Kyrgyzstan

Historically, arbitration in the Kyrgyz Republic is one of the least studied in Central Asia. Not much attention has been paid to the study of the law and practice of arbitration in the country. One of the recent books on the Law and Practice of International Arbitration in the CIS Region wholly neglects the country while giving sufficient attention to other former Soviet republics such as Russia, Ukraine, Kazakhstan, and the other states in the Commonwealth of Independent States.

In the same way as its neighbors in Central Asia, the legal foundation of Kyrgyzstan has been inherited from the Soviet Union. In the USSR arbitration as a private dispute settlement mechanism based on consent of the parties, alternative to state judicial system was limited. However, Article 162 of the Constitution of the Kyrgyz Soviet Socialist Republic (1978) guaranteed the citizens of the Soviet Kyrgyz Republic to settle commercial disputes between enterprises, institutions and organizations through state run arbitration courts. Here it is important to distinguish between arbitration, as an independent institution of civil self-governance for dispute resolution, where parties by mutual agreement submit a dispute to an arbitral tribunal that renders a binding decision and a system of Arbitration Courts (Arbitrazh Courts) which are part of a judicial system of a state.

Arbitration as a semi-independent private dispute settlement institution found its way in to the Constitution of independent Kyrgyzstan. Article 85 of the 1993 Constitution of the Kyrgyz Republic gave fundamental significance to the institution of arbitration. The Article empowered local bodies of self-administration to establish arbitration tribunals who had the power to rule on disputes between two private parties where the parties agreed so. Their power to entertain cases were limited to issues pertaining to property and family matters. The decisions of the arbitration tribunals were binding unless they contradicted to the law of the Republic. Interestingly enough Article 79 the Constitution of 1993 identified arbitration tribunals along with Arbitrazh Courts and other courts of the country to be part of the judicial system. This in effect made it an institution of first instance within the judicial system, not an independent institution of civil self-governance for dispute resolution.

At present arbitration is recognized as independent from the judicial system. Article 58 in a chapter on Citizenship and the Rights and Duties of a Citizen of the Constitution states:

For extrajudicial settlement of disputes arising from civil legal relations, citizens of the Kyrgyz Republic are entitled to establish arbitration courts. The order of establishment and functioning of arbitration courts shall be determined by law.” (non-official translation)

Besides the legal norms laid down in the Constitution arbitration are regulated by the Law of the Kyrgyz Republic No. 135 of July 30, 2002 “On Arbitration Courts in the Kyrgyz Republic” and Civil Procedure Code No.14 of January 25, 2017.

Prospects for further development of arbitration

Despite the large body of law on the subject matter, the way the arbitration has been defined in the Constitution, coupled with further prospects of development of the institution of arbitration, gives one grounds to think that there is not a clear understanding of the role and function of arbitration as an institution. Any attempt to extend the functions and the role of arbitration beyond the fields it has originally been designed for could compromise the positive image of arbitration as an institution.

The government of Kyrgyzstan in its development plan “Strategy on Sustainable Development of the Kyrgyz Republic 2018 – 2040” proposes to institutionalize arbitration as a mechanism for improving the access to justice. The Plan reckons that corruption has virtually penetrated into all fields of activity of the State, hence becoming the major impediment for development. For this reason, inter alia, it aims at easing the load on the judicial system of the country by delivering all civil disputes to commercial arbitration tribunals and arbitration courts while the judicial system will focus on dealing with criminal cases only. The role of the commercial arbitration tribunals will be to examine the merits of civil disputes and render an award that will be reviewed by courts of general jurisdiction.

Further, for the purposes of improving the business environment in the country, the government is proposing to develop a system of dispute settlement between entrepreneurs and administrative state bodies in the International Arbitration Court of Kyrgyzstan. The proposition is based on the assumption that the existing mechanism of dispute settlement between state bodies and the business community cannot adequately address the issues arising between the two. The new dispute settlement mechanism is to be designed in a way to address the needs of both the domestic and the international business community in their disputes between the State bodies of Kyrgyzstan. According to the Ministry of Economy of Kyrgyzstan compared to the existing mechanism the new one is going to be quick since it will allow disputes to be settled with recourse to a single legal authority with no possibility of appealing the decision. It will be more efficient, confidential and will allow choice of applicable law, place and language of the proceedings. The new legislation is to expand arbitrable disputes arising from State’s exercise of its administrative functions such as taxation and customs.

However, we are of the opinion that further development of arbitration in Kyrgyzstan should not be in expanding competencies of arbitral tribunals beyond the inherent functions they were designed for and contrary to constitutional provisions. Next steps ahead should be focused on improving the cooperation between judicial and arbitral bodies. One way to achieve this would be to analyse judicial practice by courts in the supervision and supporting of arbitral bodies and thereafter provide training for judges based on the best international practices in the field.

Concluding remarks

From its establishment in 1993 to present day the institution of arbitration in Kyrgyzstan has gone through many changes. It has developed from being part of the judicial system into an institution of civil-self-governance. However, the proposed changes by the Kyrgyzstan government not only clashes the judicial system of the country with arbitration but also creates a high degree of uncertainty as for the institutional identity of the institute of arbitration in Kyrgyzstan.

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Investment Arbitration: A Case for Incremental, Iterative, Progressive, and Prioritized ISDS Reform

Thu, 2019-02-21 02:12

Mercy McBrayer

Chartered Institute of Arbitrators (CIArb)

At the heart of the debate surrounding Investor-State Dispute Settlement (ISDS) Reform is UNCITRAL Working Group (WG) III.  Until two years ago, WG III was dedicated to discussing issues surrounding online dispute resolution.  But in 2017, in response to several significant awards against states in investment arbitration and corresponding public outcry, the WG III was re-tasked to examine the ISDS system and determine if it was desirable for the states to embark on a regime of reform to the system.

In order to provide a centralized compendium on information on the areas of potential reforms being discussed by WG III, the Chartered Institute of Arbitrators (CIArb) has launched a collection of discussion papers providing detailed information of the issues put forward in the discussions in WG III.  As an official observer organization of WG III, CIArb is perfectly placed to provide perspective on the discussions to our 17,000-strong membership and to the wider arbitration practice.  The purpose of CIArb’s ISDS Discussion Papers is to inform readers of the various arguments put forward by the WG III-member states and observers regarding the topics that have arisen.  The intent is not to persuade, but rather to inform stakeholders in ISDS.  The views offered in the papers are not necessarily reflective of any position taken by the CIArb.  Rather, they are a report of the views that the CIArb delegation observes are present in the discussions.

The key criticisms of ISDS have crystalized in recent years into three distinct categories: Efficiency, Decisions, and Decision-Makers.  The CIArb ISDS Discussion Papers are broken into these three areas, which the WG III has accepted as overarching themes in the debate.  In the discussion of efficiency, the papers offer views of the member states’ criticisms of the increasing time and cost of ISDS disputes while also noting the necessity that the parties themselves create for lengthy, expensive proceedings.  Solutions to these issues such as third-party funding of disputes, proposed expedited rules, strengthened security for costs and interim measures procedures, requiring pre-dispute settlement, and creating rules for bifurcation of proceedings have all been put forward.  In the area of decisions, states have expressed a high level of concern over the consistency, predictability, and valid legal interpretation of instruments.  With these issues have come suggestions of review mechanisms for awards and the establishment of multi-lateral investment courts, along with concerns over transparency and the role of third parties in proceedings.  Finally, the discussion of decision-makers centres around ways to ensure the impartiality and independence of arbitrators in investment arbitration. This includes standards of disqualification, methods of appointment, challenge procedures, and conflicts of interest.  WG III has also discussed whether a code of conduct, training requirements, certifications, or rostering should be put in place for arbitrators.  The lack of diversity of arbitrators in ISDS on many levels is also an area of serious concern to many states.

A common thread running throughout the discussions in all areas is the idea that each proposal or possible solution put forward raises its own set of problems and counter arguments as a result.  Many reforms that have been put forward have the potential to affect other aspects of the system significantly, even if unintentionally.  Most often, the concept of party autonomy, historically a defining element of arbitration, is the first to be forfeited.  This is followed closely by the concept of confidentiality.  Many states see these sacrifices as acceptable.  In light of this, the sole position that CIArb has taken to this point is that a comprehensive analysis of the broad implications that any change will have on the system must be undertaken before any proposed reform is implemented. The ISDS system forms a critical component of the global trade and investment system and, therefore, changes to the system have far-reaching effects that should be evaluated systematically and any reform must be incremental, iterative, progressive, and prioritized. Hence, it is evolution, not revolution, that should be the reference point for any ISDS reforms undertaken by WG III. It is hoped that the Discussion Papers are a first step in just such an analysis.

CIArb’s event officially launching the Discussion Papers, “Evolution, Not Revolution: CIArb’s Work on Investor State Dispute Settlement (ISDS) Reform at UNCITRAL Working Group III”, hosted by Pinsent Masons LLP and structured as an engaging discussion, with the participation of Dr Paul Tichauer, Jean-François Le Gal, Dr Crina Baltag, V.V. Veeder, QC, Philp Bliss Aliker, Wolf von Kumberg, Mercy McBrayer, and Lewis Johnston, was an excellent opportunity to present the CIArb ISDS Discussion Papers and hear the opinion of the public. On efficiency, the panellists highlighted the fact that the new generation of international investment agreements, as well as the amended arbitration rules provide for effective solutions for addressing issues of costs and duration of ISDS proceedings. It was stated that a prudent and proper approach to the ISDS reform should not focus on speedy and cost-effective resolution as a goal in itself. Further, the panellists emphasized the increasing role of prevention policies, including the efficient implementation of ADR proceedings, along with educating the public on the advantages of such alternative mechanisms, especially in the context of the draft Singapore Convention on the International Settlement Agreements resulting from Mediation. With respect to decision-makers, the panellists confirmed the necessity of a code of ethics for arbitrators with meaningful sanctions, while emphasising certain consequences of the exclusion of party-appointed decision-makers. As to decisions, the panellists indicated that while there is a real concern, ultimately affecting the confidence in the system, certain mechanisms, such as interpretative statements of non-disputing treaty parties, can be employed in tackling this issue. It was also highlighted that while the current UNCITRAL WG III discussion is focused only on procedural aspects of the ISDS reform, a good number of issues are rooted in the lack of uniformity of the standards of treaty protection.

 

A similar event presenting developments in WG III work and updates to the Discussion Papers is planned for late summer 2019 and is expected to take place in Singapore.  CIArb invites feedback on the Discussion Papers from the broader arbitration community. The intention is for the Discussion Papers to continue to evolve as the WG III discussions progress.  Practitioners are invited to give feedback or to suggest inclusions to the CIArb directly.  The Discussion Papers can be found here and here.

 

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The Future of ISDS: Can’t See the Wood or the Trees

Wed, 2019-02-20 01:35

Maarten Draye and Emily Hay

On 22 November 2018, the Belgian Ministry of Foreign Affairs, Foreign Trade and Development Cooperation hosted a High Level Event on the Reform of Investment Protection. Distinguished panellists from arbitral institutions, international organisations, academia, civil society, arbitration users and legal practitioners presented diverse views on the need for reform of the system of investor-State dispute settlement (“ISDS”), the progress of current reform efforts, and the potential multilateral investment court (“MIC”). These insightful contributions surveyed the many and varied perspectives from which to view the current state of ISDS, and its future. At the end of the day, however, the distinct impression was that the various stakeholders in this debate are talking at cross-purposes, making it difficult to see either the wood or the trees.

Status of Current Reform Initiatives

A first wave of reforms is undertaken by ICSID. Meg Kinnear, Secretary-General of ICSID explained that the fourth comprehensive reform of the ICSID arbitration rules is well underway. The proposed amendments were published in August 2018, and are open for comment by States and the public until 28 December 2018. A vote on the amendments to the rules is expected in 2019 or 2020.

In order to keep ICSID’s procedural rules fit-for-purpose, there is a range of proposed reforms, including:

  • a new provision for consolidation or coordination of like cases;
  • an obligation to disclose the existence and source of third party funding;
  • strong provisions in favour of greater transparency of awards, decisions, and orders, including deemed consent and the publication of excerpts; and
  • the availability of expedited procedures, anticipated to be useful in particular for small and medium enterprises.

The reform proposals are based on ICSID’s day-to-day experience in the management of cases, which puts it in a unique position to know what works and what does not. See more details on the proposed reforms here.

In parallel, UNCITRAL has tasked its Working Group III to study ISDS reform. Anna Joubin-Bret, Director of the International Trade Law Division at UNCITRAL, reported that at its thirty-sixth session in November 2018, Working Group III completed the second phase of its mandate, reaching consensus that reform is desirable to address concerns about the current system of ISDS. These concerns fall into three broad categories:

  • lack of consistency, coherence, predictability and correctness of arbitral decisions by ISDS tribunals;
  • concerns about arbitrators and decision makers, including lack of independence and impartiality, limitations in challenge mechanisms, lack of diversity, and qualifications; and
  • concerns regarding the costs and duration of proceedings.

The next and third phase of the work of Working Group III will be to discuss and determine what reforms should be developed to address the specific concerns. Due attention will be given both to concerns based on facts, as well as concerns based on perception. See the draft report of the thirty-sixth session of Working Group III here.

Ms. Joubin-Bret emphasised that this Working Group is a government-led process. This reflects the fact that it was States who initiated the design of the current system, and in her view they should be the ones to reform it.

Which Reforms, Why and How?

According to some stakeholders in civil society who voiced their objections during the event, the question should not be what reforms to undertake, but whether we should rather abolish the system of investor protection altogether. The concerns of these groups are more existential and question why investors should receive favoured treatment. Their assertion that investors are offered protection which is not available in other areas such as human rights, climate, labour rights, etc., may very well be on point. It risks, however, throwing away the baby with the bath water.

While it is difficult to measure the immediate impact of bilateral investment treaties on the levels of foreign investment, Patrick Baeten, Deputy GC at Engie, pointed out that investors want certainty and will always look at the level of investment protection when investigating long-term commitments. He predicted that, failing adequate protection (regardless of its form), investment gaps would not be filled, or at least not at the same cost. Moreover, many speakers, including James Zhan, Senior Director of Investment and Enterprise at UNCTAD, pointed out that the current discussion on reform should not be limited to ISDS or other issues of procedure, but also include substance. Treaties can be revised to include obligations for investors which can be enforced by host States.

For those who accept that investment protection should continue to exist in one form or another, there remains a great variance in opinions on the level of reform to ISDS necessary. For some practitioners, the system is imperfect but with some self-regulating tweaks could be sufficiently improved. Others propose largely maintaining the current system, but adding an appeal mechanism to address issues of consistency, predictability and correctness. Those in favour of a more dramatic rethink may support an MIC, or some form of court with international jurisdiction in combination with recourse to domestic courts. Reference was made to the recent report by the IBA on “Consistency, efficiency and transparency in investment treaty arbitration”, which details some of the challenges facing ISDS and proposes solutions to foster the legitimacy of the system.

In her keynote speech, European Commissioner for Trade Cecilia Malmström expressed the EU’s view that the MIC is the only option on the table that can effectively address these concerns. According to the EU, only a permanent body to resolve investment disputes can create predictability and consistency, bring about the necessary expertise in the system, effectively address costs and duration, and assure equal representation. The EU plans to put forward this idea at the multilateral level during the next phase of UNCITRAL Working Group III’s discussions.

Does an MIC Address the Concerns Raised?

At the time of the conference, no detailed proposals for an MIC had been made public. It was therefore unclear what form the court would take, whether it would be an independent institution in its own right, or whether it would make use of the secretariat and facilities of other institutions which already exist. It was further unknown what kind of judges would sit on the court, how they would be appointed, and what rules would govern their service.1)Meanwhile, on 18 January 2019, the EU submitted two papers containing concrete reform proposals to UNCITRAL. jQuery("#footnote_plugin_tooltip_8922_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8922_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Even speaking in general terms, many speakers doubted whether an MIC could address the concerns with the current ISDS system that have been identified. The speakers therefore advocated that, at this stage, full consideration should be given to all potential reform options, and to measure those options against the objectives sought to be achieved. Professor Loukas Mistelis of Queen Mary University pointed out that, if an MIC is created, one option could be to maintain the current system of ISDS, with the MIC to function as an appellate body.

A further question lingers over the feasibility of bringing an MIC into existence in the current global climate, in which multilateralism already faces serious challenges, and a number of other multilateral efforts in the economic sphere have stalled or are dysfunctional.

Again recalling the importance of substantive standards, several contributions also highlighted that while proposed reforms to ISDS are mainly procedural, the importance of the nature and wording of standards of treaty protection should not be underestimated. Mr. Zhan of UNCTAD pointed out that the overwhelming majority of ISDS cases are brought under old generation treaties. In this connection, Professor Bernard Hanotiau of Hanotiau & van den Berg commented that divergent treaty wording, some of which is unclear or inconsistent with other treaties, is often the very reason why ISDS tribunals reach different interpretations of treaties in different cases.

Conclusion

This event illustrated once more how divided different participants in the debate are on the issue of ISDS, and more generally, on investor protection. At the same time, it demonstrated the need for a continued exchange of views in pursuit of solutions that cater to diverse stakeholders.

Civil society groups question the existence of an entitlement to investor protection itself. This approach does not seem to be shared by most lawmakers. However, the EU, one of the main political forces in the debate at UNCITRAL, has made it clear that it sees an MIC as the only way forward.

Meanwhile, practitioners acknowledge to varying degrees that change is necessary, but point out that an MIC will likely fail to address many of the concerns with ISDS. Indeed, it may create new ones. At this stage, it seems doubtful that such technical remarks will fall on fertile soil, since the idea of an MIC which has been planted by the EU appears cultivated in large part on political ideology.

While States are legitimately in the driver seat of ISDS reform, discussions between experts and lawmakers must continue, in order to benefit from the input of those with daily experience of legal practice and procedure. In this way, every potentially viable variety of tree will be given due consideration before a decision is made whether to replant the forest entirely, or whether to seek better results through forest management.

References   [ + ]

1. ↑ Meanwhile, on 18 January 2019, the EU submitted two papers containing concrete reform proposals to UNCITRAL. 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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Drrrrum-Roll Please….

Mon, 2019-02-18 23:52

Catherine A. Rogers

Arbitrator Intelligence

After years of research, development, data collection, analysis, and refinement, Arbitrator Intelligence (AI) is unveiling a Prototype of its forthcoming Arbitrator Intelligence Reports, or AI Reports.

The formal launch of the Prototype is scheduled March 1 at Vienna Arbitration Days, with a special London Launch of the Prototype on March 4 at 6:00pm at WilmerHale. This post previews the Prototype, and traces where we are going from here.

 

Launch of the Prototype

The Prototype, like the future AI Reports, is an interactive electronic document that presents sophisticated, multi-faceted data analytics regarding an individual arbitrator’s track record. The Prototype focuses on a fictional mid-career arbitrator named Diana Artemis and is based on mock data that we created for the Prototype.

After the formal launch of the Prototype, we will be organizing numerous other presentations both in physical venues around the world and through online webinars. The purpose of these events will be to obtain feedback on the Prototype to revise and refine our work as we begin production of AI Reports on actual arbitrators. If you are interested in organizing such a presentation, please contact [email protected].

 

The Data, Campaigns & Ambassadors

The mock data in the Prototype resembles actual data that we have collected on real arbitrators through our Arbitrator Intelligence Questionnaire or AIQ, which is completed by participants at the end of an arbitration. When we turn to AI Reports, the collected data will be analyzed to generate reports on actual arbitrators, as illustrated:

 

The AIQ collects information on a wide range of topics regarding arbitral proceedings (document production, jurisdictional rulings, interim relief), and the final award (substantive outcomes, timing, legal methodology, cost allocation, interest rates).

To date, Arbitrator Intelligence has collected over 600 AIQ responses that provide data on arbitrations that involved over 800 individual arbitrators.

Most of these AIQs are the product of two efforts:  Regional Campaigns and Cooperation Agreements with arbitral institutions.

 

Regional Campaigns

To raise awareness about Arbitrator Intelligence and to encourage parties, counsel, and third-party funders to complete AIQs, we have been organizing Regional Outreach Campaigns.

The first such campaign in Latin America was wildly successful, thanks to a truly amazing group of AI Ambassadors from the Region.  Throughout the Campaign and beyond, our Ambassadors have presented Arbitrator Intelligence in numerous venues, promoted its goals of transparency, accountability, and diversity, and inspired submission of approximately 150 AIQs.

We currently have another campaign under way in Central and Eastern Europe (CEE), with yet another group of outstanding Ambassadors. Based on preliminary results, this Campaign too promises to be highly successful.

Beyond Latin American and CEE, we receive almost daily new requests to bring campaigns to other regions.  Our next Women Arbitrator’s Campaign will be launched on March 8 on  International Women’s Day and in cooperation with ArbitralWomen. Another Campaign will also soon be launched in conjunction with the al-Tamimi law firm and directed collecting information about arbitrator in the Middle East/North Africa/Turkey.

 

Cooperation Agreements

In addition to Regional Outreach Campaigns, Arbitrator Intelligence also relies on relationships with arbitral institutions to encourage submission of AIQs.

Under Cooperation Agreements, arbitral institutions agree that, at the end of each arbitration, they will send emails requesting parties and counsel to complete an AIQ.  In exchange, Arbitrator Intelligence will provide institutions with free AI Reports, when they are ready.

The AIQ was launched in the summer of 2017 in conjunction with the Singapore International Arbitration Centre (SIAC), which was also the first arbitral institution to sign a Cooperation Agreement with Arbitrator Intelligence

Since that time, Arbitrator Intelligence has signed additional Cooperation Agreements with the Cámara de Commercio de Lima and the Arbitration and Mediation Center of the American Chamber of Commerce of Ecuador. We are currently in discussions with numerous other institutions around the world.

As we all know, one of the most important functions an institution provides is appointment of arbitrators. Free access to AI Reports will enable arbitral institutions, particularly smaller regional institutions, to consider a broader range of arbitrators based on more detailed data-based analysis.

 

*    *    *

We believe introduction of AI Reports will soon bring a multitude of benefits to international arbitration. But we need your help.

First, we hope to see you in Vienna, London, or elsewhere to benefit from your feedback on the Prototype.

Second, we need LOTS, LOTS, LOTS more AIQs! The more AIQs we have, the better and more quickly we will be able to produce AI Reports systematically and on a large number of arbitrators.  So please, contribute AIQs through upcoming Campaigns, in response to emails you may receive from arbitral institutions, or by visiting our website directly.

With your help, AI Reports on individual arbitrators will be available later in 2019 as an important new resource for appointment of international arbitrators.

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The Contents of Journal of International Arbitration, Volume 36, Issue 1, 2019

Mon, 2019-02-18 22:23

Maxi Scherer

We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:

Annette Magnusson, ‘Foreword: The Story of the Stockholm Treaty Lab’ (2019) 36 Journal of International Arbitration, Issue 1, pp. 1–6

In 2015, the world community adopted the Paris Agreement and the Sustainable Development Goals, setting an ambitious agenda for curbing global warming and ensuring a sustainable future. It is broadly recognized that attaining these goals will require investments amounting to trillions of dollars across the globe: renewable energy plants must replace carbon-heavy ones; energy-efficient transportation will be needed to carry an increasingly mobile world population; sustainable agriculture and forest restoration must substitute unsustainable land use and deforestation; and climate-resilient infrastructures must be built where global warming and rising sea levels already put communities at risk. Much of the technology necessary to reduce climate change and its effects already exists – affordable solar energy, for example, and energy-efficient vehicles, and carbon capture and storage. Investments are needed to bring these existing technologies to meaningful scale around the world, beyond the borders of the countries that can readily afford them. Investments are also necessary to support innovation in areas where the current state-of-the-art technology is still not sufficient to effect the necessary change. In today’s globalized economic system, many of these investments are likely to be cross-border in nature. In other words, if the global climate-change goals are to be attained, a significant increase in ‘green’ foreign direct investment (FDI) must materialize. For several decades, international investment agreements have been used to increase FDI flows by incentivizing and protecting investments. But no international legal instrument exists that specifically encourages much-needed green investments.

Martin Dietrich Brauch, Yanick Touchette, Aaron Cosbey, Ivetta Gerasimchuk, Lourdes Sanchez, Nathalie Bernasconi-Osterwalder, Maria Bisila Torao Garcia, Temur Potaskaevi, Erica Petrofsky, ‘Treaty on Sustainable Investment for Climate Change Mitigation and Adaptation: Aligning International Investment Law with the Urgent Need for Climate Change Action’ (2019) 36 Journal of International Arbitration, Issue 1, pp. 7–35

The climate change mitigation and adaptation objectives set by the Paris Agreement under the United Nations Framework Convention on Climate Change (UNFCCC) and the broader Sustainable Development Goals (SDGs) under the Agenda 2030 create a need for an unprecedented shift from carbon-intensive to low-carbon investment projects. Investment and the legal regimes that govern it—including international investment law—are critical to this shift. To accelerate it, the authors propose the Treaty on Sustainable Investment for Climate Change Mitigation and Adaptation. One of the winners of the Stockholm Treaty Lab competition, the treaty has three building blocks: (1) encouraging Sustainable Investments; (2) discouraging Unsustainable Investments and eliminating new Unsustainable Investments; and (3) ensuring a just transition to sustainable and low-carbon economies and societies. It allows states to indicate, in schedules to the annexes of the treaty, which sectors will be defined as Sustainable or Unsustainable Investments. It protects and signals policy support for Sustainable Investments, while denying treaty-based procedural rights to Unsustainable Investments and committing states to agree on modalities and timelines for phasing out incentives for Unsustainable Investments, such as fossil fuel subsidies. It includes investor obligations and provides access to justice to individuals and communities through an accountability mechanism.

Paula Henin, Jessica Howley, Amelia Keene, Nicola Peart, ‘Innovating International Investment Agreements: A Proposed Green Investment Protocol for Climate Change Mitigation and Adaptation’ (2019) 36 Journal of International Arbitration, Issue 1, pp. 37–70

This article describes a proposal for a new Green Investment Protocol for the Encouragement, Promotion, Facilitation, and Protection of Investments in Climate Change Mitigation and Adaptation (‘Green Investment Protocol’ or ‘Protocol’), which aims to incentivize foreign investment in climate change adaptation and mitigation so as to help achieve the targets set out in the Paris Agreement.

Silke Noa Elrifai, Simon R. Sinsel, Maya Hennerkes, Hans Rusinek, ‘A Model Multilateral Treaty for the Encouragement of Investment in Climate Change Mitigation and Adaptation’ (2019) 36 Journal of International Arbitration, Issue 1, pp. 71–94

The Paris Agreement sets out to limit global warming to below 2°C, yet the pathway to reach that goal is unclear. This specifically applies to the mobilization of investment for climate change mitigation and adaptation. One way to mobilize foreign investments is to create a favourable investment climate with the help of multilateral investment treaties. In this article, a model treaty is proposed to considerably increase climate-friendly investments while maintaining regulatory flexibility for signatory states. Building on Design Thinking principles, key challenges for the success of such a treaty are identified and provisions are crafted incorporating feedback from twenty-five experts from finance, policy, and legal domains. The proposal addresses four key challenges: (1) define climate change mitigation and adaptation investments; (2) decrease the barrier of limited access to capital due to perceived and actual risks; (3) combat insufficient investor trust in long-term contracts; and (4) retain states’ ability to regulate. The treaty proposal addresses these challenges by proposing, inter alia, a definition for mitigation and adaptation investments that establishes a link to the Nationally Determined Contributions under the Paris Agreement, an innovative financing mechanism, a conversion of host country subsidies to investment grants, and a performance verification using latest distributed ledger technology.

Daniel Magraw, Leila Chennoufi, Krycia Cowling, Charles Di Leva, Jonathan Drimmer, Chiara Giorgetti, Young Hee Lee, Jan Low, Kendra Magraw, Steve Mccaffrey, Grace Menck Figueroa, Sergio Puig, Anabella Rosemberg, ‘Model Green Investment Treaty: International Investment and Climate Change’ (2019) 36 Journal of International Arbitration, Issue 1, pp. 95–134

Mitigating and adapting to the extraordinary threats posed by climate change will require dynamic responses across all elements of human society. Governments face urgent, unprecedented challenges in this regard, including with respect to regulating foreign investment. The international investment regime was not designed to take account of this reality, however, either substantively or with respect to the settlement of disputes. This article proposes a new approach to foreign investment regulation designed to rectify this systemic failure, in the form of an innovative bilateral investment treaty drafted by a multidisciplinary team of internationally renowned experts. The approach proposes a balanced, reciprocal set of obligations for both investors and host states consistent with the Paris Agreement. To incentivize transformation, moreover, the article argues for investment treaties that demand good governance by investors, establish sufficient policy space for host states (via a sectoral approach that specifically addresses areas such as climate change, water, agriculture, human rights, indigenous peoples and public health), and adopt a flexible, fair, accountable and transparent approach to dispute settlement, including enhanced standards for arbitrators and a Code of Ethics—among other innovations.

Christopher Campbell , Coimbra Trigo Ana, ‘A Vision for Green Foreign Direct Investment: Proposals for an Investor-State Collaborative Effort’ (2019) 36 Journal of International Arbitration, Issue 1, pp. 135–160

Time is of the essence. With each passing day, the options and alternatives available to the peoples of the world to stem the tide of man-made destruction to the Earth are steadily disappearing. The Stockholm Treaty Lab challenged professionals from various disciplines to imagine and design strategies to mitigate and reduce the detrimental impact of human beings upon the planet. This article reflects the culmination of thought processes and ideas of one the participating teams.

The team drafted a legal instrument within the currently existing U.N. infrastructure, and included a number of aspects advocating for its widespread adoption, seeking to incentivize parties with the power to effect environmentally sound change to be more active. Economists, business consultants, lawyers, and scientist sought to find solutions to three man-made issues, namely (1) food waste, (2) deforestation, and (3) lack of renewable energies. Each of these three categories represent a major exacerbating force upon climate change, yet are areas that could be drastically affected with cooperation among states and investors. Within each category, both general policies and specific solutions/incentives are outlined. Further, dispute resolution mechanisms and the imagined economic impact for investors financing these initiatives are discussed. It is the belief of the team that the problems considered by the article have little chance of being effectively addressed unless there is widespread cooperation, thus it is hoped that articles like this one can be the catalyst for that change.

José Rafael Mata Dona, ‘Stockholm Convention on the Use of Blockchain to Boost Climate Action’ (2019) 36 Journal of International Arbitration, Issue 1, pp. 161–170

This article examines an innovative junction between international investment law and climate change law with the potential to increase foreign investment in climate change mitigation and adaptation. In particular, it explores the use of Blockchain (1) as a climate change investment vehicle, (2) in the collection of evidence of emission reduction compliance and (3) in the implementation of a Carbon Tax. Finally, it analyses the possibility to incorporate those three Blockchain applications to the network of already existing International Investment Agreements (IIAs) and describes a new role arbitration can play in the resolution of new type of claims.

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“May” Means “Shall” in Georgia – Supreme Court of Georgia Upholds a Permissive ICC Arbitration Clause

Sun, 2019-02-17 21:00

Sophie Tkemaladze

“May” means “Shall” in Georgia! – this was the telephone message I received on January 18, 2018 from a colleague who had just been informed in the courtroom that the ICC arbitration clause he was relying upon was upheld by the Supreme Court of Georgia. I had been following this case [Supreme Court of Georgia Case #as-148-140-2017] since 2016 and kept my fingers crossed for the survival of the arbitration clause. The progress that was made in this case – from the “unfriendly” decision of the Batumi City Court in 2016 on to the “turning point” decision of the Kutaisi Court of Appeals in 2017 and ending gloriously with the final “pro-arbitration” statement of the Supreme Court of Georgia – is telling of the progress arbitration has made in Georgia over the last several years.

Court of First Instance

It all started with the claim lodged with the Batumi City Court in April 2015 on a matter, which under the contract between the parties, was subject to ICC arbitration. The clause read: “If within 30 (thirty) days since the beginning of […] negotiations the Purchaser and the Supplier have not managed to settle the dispute, either of the party is able to apply for the arbitration of law to the International Chamber of Commerce (ICC) to resolve the dispute. The arbitration will take place in Tbilisi, Georgia, the language will be English and will be subject to the ICC regulations.

Respondent, in its first statement of defense, brought up existence of the arbitration clause and requested the Court to terminate the proceedings and refer the parties to arbitration. In its surprising and scarce reasoning, Batumi City Court read the arbitration clause as referring to ICC Rules of arbitration, and found it insufficient to determine parties’ will to refer their disputes to a specific arbitration institution.

This reasoning is similar to the recent decision of the Supreme Court of the Russian Federation [No. A40-176466/17] affirming refusal to enforce an ICC Award on the basis that the arbitration clause only referred to the Rules of Arbitration of the ICC and not a specific arbitration institution. Unlike the Russian case, however, where the issue was raised at the enforcement stage and the reasoning was confirmed by the highest court, the issue in the Georgian case was raised in the context of article 8.1 of the Model Law (Article 9.1 of the Georgian Law on Arbitration) and, fortunately, it was only the Court of First Instance which erred in its finding. Batumi City Court found the arbitration clause invalid, proceeded with full review of the case and on July 15, 2016 rendered its decision on the merits.

Court of Appeals

Kutaisi Court of Appeals turned the approach towards arbitration clauses to a sensible angle. The Court analyzed provisions of the Law of Georgia on Arbitration (which is based on the UNCITRAL Model Law) vis-a-vis the language of the arbitration clause. It noted that the parties’ agreement was clear on their will to refer their disputes to arbitration under the ICC Rules and its administration. It held that choosing the place and language of arbitration was allowed under the legislation. Court of Appeals reversed the decision of the Batumi City Court, upheld the validity of arbitration clause and referred the parties to arbitration under the ICC Rules.

It is noteworthy that by this time Tbilisi Court of Appeals had considered a similar issue with respect to model GIAC (Georgian International Arbitration Center) arbitration clause, which likewise referred to the rules, rather than the institution itself. In its decision dated November 24, 2016 Tbilisi Court of Appeals explained why reference to the Rules of Arbitration was sufficient to find the will of the parties to refer their disputes to the administration of the respective institution. The Court even brought an example of the standard ICC clause in support of its argument and noted: “Model/standard clauses of some arbitration institutions make reference precisely to the Rules and not to the institution. For example, the model clause of the International Chamber of Commerce (ICC) […]”. Thus, both Courts of Appeals of Georgia have now ruled that reference to institutional Rules suffices to hold the respective arbitration clauses valid.

Supreme Court of Georgia

The saga continued as both parties appealed the decision of the Kutaisi Court of Appeals to the Supreme Court of Georgia. Claimant, among others, argued that the clause only granted parties the right to refer their disputes to arbitration. Such right, in Claimant’s view, gave the discretion, but could not oblige the unwilling party to go to arbitration and therefore, could not be the basis for the Court to decline its jurisdiction (this argument was never raised at earlier stages). Respondent appealed the decision on another ground: that the court did not grant them full costs of futile litigation (specifically, attorney’s fees) which Respondent had to incur at Batumi City Court.

In a long-awaited decision of the Supreme Court of Georgia, the Justices confirmed the finding of the Court of Appeals with respect to validity of the arbitration clause. In justifying the binding nature of the arbitration clause, the Supreme Court noted: “the agreement, pursuant to which either party is entitled to refer the dispute to arbitration, means that the arbitration agreement grants a right to either party to commence arbitration; however, if such right is exercised by either one of the parties, then both parties are obliged to submit to arbitration […].” The court further noted: “If the term of the contract gives more than one possibility of interpretation, it is generally reasonable to apply the interpretation which corresponds to the essence of the agreement; therefore, in the present case, the word ‘is able’ should be interpreted in such a way, that if such choice is exercised, the parties are obliged to refer the dispute to arbitration under the Rules of arbitration of the International Chamber of Commerce (ICC).

In addition, the Supreme Court reversed Court of Appeals’ decision with respect to the attorney’s fees. It emphasized that the Respondent from the outset tried to object to the jurisdiction of the Batumi City Court, however was forced to employ lawyers and defend its interests due to Claimant’s insistence on litigation. The Court stated that “[…] such costs should be reimbursed by the party whose actions have triggered these costs” and ordered the Claimant to reimburse full attorney’s fees incurred by Respondent in litigating the case in the court of first instance.

Conclusion

This decision of the Supreme Court reinforces the consensual nature of arbitration and the pro-arbitration spirit of the laws in Georgia. It also clarifies the standards of construction of the arbitration clauses. The reasoning of both Kutaisi Court of Appeals and the Supreme Court are particularly significant in this respect, as they send a clear message to lower courts (which are in charge of enforcing arbitration agreements under the New York Convention) that arbitration clauses must be construed with pro-enforcement spirit and upheld when parties’ intention to refer their disputes to arbitration is clear. Such intention is clear even when arbitration is stipulated as a right to be exercised by one of the parties. This is now the case law in Georgia as well (joining the approach of English, Singapore, Canadian courts).

It is not yet clear, how this decision will affect the practice of the Georgian courts with respect to unilateral option clauses (there is an established case law finding clauses calling for arbitration or litigation invalid). An approach in line with the reasoning of the Supreme Court would be to say that it equally applies to unilateral option clauses (provided it is a B2B context). Whether a clause refers solely to arbitration, as a right or an option, without noting litigation as another option, or whether it explicitly stipulates a choice between arbitration and litigation – in both cases the choice is between arbitration and litigation. In either case, providing for a possibility/an option of arbitration means that at the time of conclusion of the contract both parties acknowledged and agreed that either of them could opt for arbitration; as the Supreme Court stated, “[…] if such right is exercised by either one of the parties, then both parties are obliged to submit to arbitration […]”. The decision of the Supreme Court widens the door for such interpretation.

This decision sends yet another signal to the parties and their representatives: the party who “breaches” the arbitration agreement shall be responsible for the consequential costs of “futile” litigation.

The approach taken by the Supreme Court is particularly timely today when Georgia strives to prove itself as an “arbitration-friendly” jurisdiction and become an attractive seat for international arbitrations. If before we were talking about the progress we had made by adopting the UNCITRAL Model Law based legislation, organizing annual GIAC Arbitration Days in Tbilisi and declaring Government’s desire to promote ADR (the significance of all of which is not to be undermined!), the Supreme Court has acted and demonstrated that arbitration agreements shall be respected and enforced in Georgia.

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The Know How to Enforcing Foreign Arbitration Awards in South Africa

Sun, 2019-02-17 02:50

Danika Balusik

Hogan Lovells

Legislative Framework

 

After much anticipation, the South African International Arbitration Act 15 of 2017 (“new Act”) was welcomed by arbitration practitioners in December 2017. The intention of the new Act has been to incorporate the UNCITRAL Model Law as the cornerstone of the international arbitration regime in South Africa. The South African Arbitration Act 42 of 1965 remains applicable to domestic arbitrations.

 

One of the most significant changes in the new Act was the incorporation of the Recognition and Enforcement of Foreign Arbitral Awards Act 40 of 1977 (the “REFAA Act”) which was promulgated to give effect to the New York Convention, that was signed by South Africa in 1976. The REFAA Act recognised that a foreign arbitral award is binding between parties and is capable of being enforced by way of application to the court, to have the award made an order of the court. To avoid duplication of legislation, the REFAA Act has been repealed in its entirety and replaced by the new Act.

 

Procedure

 

The court application to have a foreign arbitral award made an order of a court is a fairly lengthy process. A Notice of Motion and Founding Affidavit is lodged by the Applicant (the party wanting to enforce the award) at a High Court in South Africa that has jurisdiction over the matter. Jurisdiction is usually determined with reference to the principal place of business or the location of the assets of the Respondent (the party against whom the award is being enforced). In terms of section 17 of the new Act, the application is required to be accompanied by the original foreign arbitral award and the original arbitration agreement in terms of which the award was made, both authenticated for use in the High Court, together with certified copies of the award and the agreement.

 

The application is issued by the Registrar of the High Court served on the Respondent by the Sheriff of the court. The Respondent can then elect to oppose the application or not. Should the Respondent elect to oppose the application, it is required to file a Notice of Intention to Oppose within the time period set out in the Notice of Motion (between 5 to 10 days). Thereafter, the Respondent is required to file an answering affidavit on the Applicant within 15 days of serving its Notice of Intention to Oppose. The Applicant will then be afforded an opportunity to file a Replying Affidavit, within 10 days of receipt of the Respondent’s Answering Affidavit.

 

In terms of the High Court Rules, an Applicant is entitled to make an application to the court on an urgent basis, in accordance with Rule 6(12) of the Uniform Rules of Court. In this instance, the time periods are reduced and general procedure applicable to applications is shortened. However, the Applicant would be required to motivate as to why the matter is urgent, for example, that the Respondent is in the process of disposing of all its assets in South Africa. Should the court find that grounds for urgency do not exist; the matter will be enrolled on the ordinary motion court roll.

 

Advantages and Pitfalls

 

When it comes to enforcing arbitration awards, time is of utmost importance. When a matter is placed on the ordinary court roll and the application is opposed, the hearing usually takes places approximately 4-6 months after the matter is enrolled – a pitfall with enforcement in South Africa. It is no secret that a successful party to arbitration wants to have the award enforced as soon as possible so as to receive what it is entitled to, and therefore a 4-6 month delay in enforcement can cause prejudice to the successful party. If the application is not opposed, the application can be heard approximately 1-2 months after the relevant time period has lapsed for the Respondent to serve its notice of intention to oppose.

 

When a party is considering opposing the enforcement of a foreign arbitral award, section 18 of the new Act is important and sets out the various grounds on which the enforcement of a foreign arbitral award will be refused. If a court finds that a reference to arbitration where the subject matter of the dispute is not permissible under the laws of South Africa or where the award is contrary to public policy, the court will refuse to recognise or enforce the foreign arbitral award.

 

Where a party against whom the award is sought to be invoked can prove (1) a party to the arbitration agreement had no capacity to contract, (2) the arbitration agreement is invalid under the law to which the parties are subjected to, (3) that he or she did not receive notice of the appointment of the arbitrator or the arbitration proceedings or was not able to present his or her case, (4) the award deals with disputes not contemplated by or falling within the terms of reference, (5) the arbitration procedure was not in accordance with the arbitration agreement or laws of the country in which the arbitration took place, or (6) the award is not yet binding on the parties or has been set aside or suspended by a competent authority, the court may refuse to recognise or enforce a foreign arbitral award.

 

There is currently no case law dealing with section 18 of the new Act, however, as the wording of section 18 mirrors that of section 4 of the REFAA Act, the below cases remain significant when dealing with refusal of recognition and enforcement of foreign arbitral awards. South African law recognises the principle of judicial precedent. It is very likely that case law decided upon with reference to the REFAA Act will still bear precedential value when deciding case law under the new Act.

 

In the case of Seton Co v Silveroak Industries Ltd (2000 (2) A 215 (T)), the Respondent opposed an application to have an award by a French arbitral tribunal for damages in favour of the Applicant recognised by the High Court, on the grounds that the award was tainted by a fraud committed on the tribunal by the Applicant. The Respondent contended that the South African High Court should refuse the enforcement of the award by virtue of the provisions of section 4(1)(a)(ii) of the REFAA Act in that it was contrary to public policy to recognise an award obtained through fraud. The Respondent conceded that it did not have evidence on the affidavit to substantiate the allegation of fraud, but that there was someone who, if subpoenaed to give viva voce evidence, would give the necessary evidence.

 

The court held that section 4(1)(a)(ii) of the REFAA Act provided that a court would only refuse to recognise a foreign arbitral award if on the face of the award and the arbitration agreement it was clear that the agreement was contrary to public policy. To successfully claim that the award was obtained under fraudulent means (and therefore against public policy), there ought to be no extraneous evidence to persuade the court that the agreement in question was an illegal agreement. The Respondent was required to approach the French court to have the award set aside on the grounds of alleged fraud and parallel to that, make an application for a stay of the Applicant’s application to have the arbitral award enforced, pending the outcome of the Respondent’s application to have the arbitral award set aside in France. The South African High Court found no reason not to recognise the award, and therefore the Applicant’s application for recognition and enforcement succeeded.

 

In Phoenix Shipping Corporation v DHL Global Forwarding SA (Pty) Ltd and Another (2012 (3) SA 381 (WCC)), Phoenix and DHL approached the Western Cape High Court for an order for the recognition and enforcement of a London arbitral award. Bateman Ltd resisted the application on the grounds that it was never a party to the agreement referred to in the request for arbitration, that the arbitrator had accordingly lacked jurisdiction over it, and that the enforcement of the award would, therefore, be contrary to public policy. DHL relied on the booking note, which provided that the parties submitted to London arbitration. DHL contended that the arbitrator had made an award against Bateman Ltd and that Bateman Ltd had failed to satisfy the arbitral award, which the court was then obliged to enforce.

 

The court held that the booking note issued by Phoenix did not, in South African law, constitute a binding contract of carriage for the transportation of Bateman Ltd.’s machinery in terms of which the parties submitted any dispute to arbitration. Arbitration is characterised by its consensual nature and there was nothing to suggest that there ever was a consensus (either between Bateman Ltd and DHL or between Bateman Ltd and Phoenix) to conclude a contract in terms of which the parties had agreed to submit to arbitration. Both the common law and the REFAA Act recognised the importance of an arbitration agreement as a prerequisite to the enforcement of the arbitral award. In this case, as a fact, there had not been a valid agreement concluded between DHL and Bateman Ltd, agreeing to arbitration in terms of either English law or South African law. DHL had accordingly failed to allege and prove a valid arbitration agreement. Absent an arbitration agreement, no arbitrator could claim jurisdiction to determine a dispute and an order for the recognition and enforcement of a foreign arbitral award, which on the face of it was invalid, would be contrary to the principles of public policy.

 

Whilst it may take some time to have a foreign arbitral award made an order of a court in South Africa, parties can be confident that the South African courts will continue to uphold the principles of public policy and remaining practical and impartial when deciding to recognise and enforce a foreign arbitral award.

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Libra v CODESP: Is Arbitration in the Brazilian Ports Sector Salvageable?

Fri, 2019-02-15 19:05

Gabriel Ferreira Labatut Simões

A long-term dispute between Libra Terminais S.A., Libra Terminais Santos S.A., two companies belonging to one of the major port operating groups in Brazil (“Libra”), and the Dock Companies for the State of São Paulo (“CODESP”) seems to have been concluded by a recent arbitral award. The dispute concerned a concession agreement of two terminals in the Port of Santos in São Paulo, Brazil. The historic award is the first decision based on controversial statutes regulating arbitration in the ports sector in Brazil. This decision can provide insights on the practical effects of these statutes and their contentious provisions.

Background

In 1995, Libra and CODESP signed a concession agreement for terminal T-37 (“T-37”) and adjacent areas in the Port of Santos (“T-37 Agreement”). In exchange for the concession, Libra would pay CODESP a monthly fee and would be obligated to expand and improve T-37’s infrastructure.

A few years later, in 1998, Libra and CODESP signed another concession agreement for terminal T-35 and adjacent areas (“T-35 Agreement”, together with the T-37 Agreement, “Concession Agreements”). Similar to the first agreement, Libra would have to pay a monthly fee to CODESP and make investments to expand and improve the terminal.

Soon after the conclusion of the T-35 Agreement, still in 1998, Libra requested CODESP to suspend the collection of the fee owed by Libra. According to Libra, CODESP had not fulfilled its obligations to renovate terminal infrastructure and ensure minimum depth of the waterway access to the Santos Port, which supposedly allowed Libra to stay the payments. Meanwhile, CODESP was attempting to collect the amounts owed by Libra for the concessions. These discussions lasted decades in Brazilian courts. From 1998 to 2015, the parties initiated more than 10 lawsuits, resulting in different outcomes. While Libra was successful in some of the claims, CODESP was successful in others. However, the dispute had no prospect of ending soon.

In 2015, new legislation regarding dispute resolution mechanisms in the ports sector enabled Libra and CODESP to opt for arbitration to resolve their dispute.

Ports sector dispute settlement legislation

The port concessions sector in Brazil is regulated by Statute No. 12.815 (“Ports’ Statute”). The Ports’ Statute was envisaged to modernise the port concessions sector in Brazil by amplifying private investment and improving competition and efficiency. In what was seen as a positive development at the time; the Ports’ Statute established that – public and private – parties in concession contracts could resort to arbitration to resolve disputes regarding their financial obligations. The caveat was that the Statute did not specify how the arbitration should be conducted.

Therefore, in 2015, soon after the enactment of the changes to the Brazilian Arbitration Act (previously discussed in this Blog), the Federal Government enacted Decree No. 8.465 (Port Arbitration Decree, or “PAD”). PAD regulated and expanded the provision of the Ports’ Statute that allowed use of arbitration to resolve contractual disputes in the sector.

In contrast with the Ports’ Statute, the PAD was not well received (see here, here and here). It seemed that the PAD was a well-intended project but poorly executed. It was seen as an attempt by the Federal Government to manage and engage in new practices of dispute resolution. For example, among the most criticised provisions, the PAD (i) established that all information regarding the arbitration should be publicised; (ii) added time consuming bureaucracy to the process of initiating an arbitration; and (iii) provided that arbitration could only be used to settle disputes regarding the reestablishment of the financial-economic equilibrium of a contract; only if the arbitration was based on a submission agreement and not on an arbitration clause.

Nonetheless, despite criticisms, in 2015, Libra and CODESP signed a submission to arbitration agreement relying on the mechanism provided for in the PAD.

Arbitration and Partial Award

Pursuant to the submission agreement, the Tribunal had the mandate to decide (i) whether CODESP breached its obligations under the Concession Agreements; (ii) which of the parties (CODESP or Libra)  was liable for the performance of the construction works on the public docks in front of T-37; (iii) whether the financial-economic equilibrium of the T-35 Agreement had been affected by CODESP’s actions; (iv) whether Libra was liable to pay the fee originally agreed between the parties in the Concession Agreements; and (v) parties’ liability regarding these issues.

The Terms of Reference were signed in September 2017 and, a year later, the Tribunal issued an Award. The Award dismissed all of Libra’s claims, accepted CODESP’s claims, and ordered Libra to pay the fee originally agreed by the parties, as well as penalties for breach of contract. The Tribunal decided the case through the strict application of the contractual terms and the relevant statutes. However, the true contribution of the Libra v CODESP arbitration award is that it provides valuable insight as to whether initial criticism regarding application of the PAD was justified.

Time consuming bureaucracy?

One of the main criticisms to the PAD is that, in theory, it increases bureaucracy for execution of submissions to arbitrate. PAD requests a case by case preliminary government assessment regarding the benefits of using arbitration in each particular dispute. The PAD also establishes that arbitrators and arbitral institutions should be contracted by direct negotiation, as opposed to public biddings. Although the former is swifter than the latter, it still entails a number of time-consuming administrative burdens.On the other hand, a positive aspect of the PAD is the time requirement to issue an arbitration award within 24 months, which seems to offset, at least partially, the additional bureaucracy.

In Libra v CODESP, the time requirements for issuance of the award seemed to balance out the additional bureaucracy imposed by the PAD. While CODESP had to go through the preliminary government assessment; submission to arbitration was signed by the parties in less than three months from the day that the PAD entered into force. In fact, the dispute was adjudicated in record time, as the Tribunal decided on the liability issues in no more than 16 months from the signing of the Terms of Reference, which is less than the average period of time for an arbitration to be decided in Brazil, and substantially faster than obtaining a final decision in court.

Publicity issues?

Another point of contention regarding the PAD is the protection of sensitive information (e.g. price formation, production methods, formulas) vis à vis the requirement that all information regarding the arbitration must be publicized.

Again, this did not seem to be an issue in Libra v. CODESP. Even though the Federal Government divulged most of the proceedings through a specific website, no sensitive information was published. This is especially important considering that the Tribunal granted Libra’s request to keep confidential certain documents containing information on its commercial practices. Therefore, it seems that the publicity requirement of the PAD is not incompatible with, and can accommodate, existing judicial protection to sensitive information.

Abuse of privileged condition?

The most glaring issue with the PAD is that it grants to the Public Administration the power to decide whether disputes regarding the financial-economic equilibrium of contracts can be submitted to arbitration. According to the PAD, these disputes can only be submitted to arbitration via submission agreements.  This means that public parties can decide, after the dispute has arisen, whether the dispute should be submitted to arbitration or referred to a national court, which clearly puts the Administration in a privileged position as a disputing party and can hinder the “parity of arms” principle.

Nonetheless, there is some reason for optimism; Libra v CODESP has pinned down better arbitration practices for public authorities as disputing parties. For example, it is all very common for state parties in Brazil to challenge the legitimacy of arbitration. However, in Libra v CODESP, the Administration refrained from these unnecessary (and generally unsuccessful) challenges, demonstrating willingness to submit to arbitration even when there was no contractual obligation to do so.

In fact, the Federal Government Attorney’s Office, for the first time in history, has created a department to deal exclusively with arbitration. The department will represent the Federal Government in arbitration proceedings and will be responsible for gathering and managing expertise in the area, which indicates that the government intends to continue to use arbitration to resolve disputes with private parties in the future.

Conclusion

Prior authors in this blog (see here and here) have correctly described Brazil as an arbitration-friendly jurisdiction. Indeed, it does not appear that the PAD, despite accurate and relevant criticism, can challenge that description.

Libra v CODESP has provided strong indications that the Public Administration in Brazil, despite resistance and poorly drafted legislation. Brazil is walking steadily towards fully embracing arbitration as an efficient (and legitimate) dispute resolution mechanism.

Nonetheless, one should not let excessive optimism be a blindfold, as Libra v CODESP does not answer all the problems with the PAD. One question that remains unanswered is whether the prerogatives granted to the Public Administration by the PAD will be abused, especially in cases where future prospects of prevailing on the merits of the dispute might not be so positive.

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Cybersecurity in International Arbitration: Don’t be the Weakest Link

Fri, 2019-02-15 01:37

Claire Morel de Westgaver

Bryan Cave Leighton Paisner LLP

In recent years there has been a dramatic increase in cyber-attacks on corporates, governments and international organisations. Arbitration proceedings are not immune from the threat of attack as previous incidents demonstrate.

The publication last year of a draft Cybersecurity Protocol for International Arbitration by the International Council for Commercial Arbitration, the International Institute for Conflict Prevention and Resolution (CPR) and the New York City Bar was an important step in raising awareness of cybersecurity risks and initiating a discussion within the arbitration community. The discussion has focussed on the sorts of measures that may be appropriate to protect documents and data against unauthorised access. However, there appears to remain a critical issue upon which consensus has not yet been found: the manner in which cybersecurity measures should be designed, implemented and enforced.

As a firm, BCLP wanted to contribute to the discussion and formulation of cybersecurity strategies by using our Annual Arbitration Survey to find out what arbitrators, corporate counsel, external lawyers, users of arbitration and those working at arbitral institutions thought about these and other related issues.

The full BCLP Arbitration Survey 2019 can be downloaded here and some of the key findings are summarised below.

 

Cybersecurity is an important (and real) issue

The results of this year’s survey confirm that the importance of cybersecurity is widely recognised. 90% of respondents said that it was an important issue in international arbitration, with 11% of respondents indicating that they had had experience of arbitral proceedings being subject to a cybersecurity breach. That more than 1 respondent out of 10 was involved in an arbitration where someone was able to obtain unauthorised access to electronic documents or other information in itself demonstrates the pressing need for cybersecurity measures to be put in place.

 

What measures

The two factors regarded by the largest number of respondents as being relevant to a cybersecurity strategy were the level of sensitivity/commercial value of the documents to be used in an arbitration (94%) and the consequences for the parties if someone were to gain unauthorised access to the documents/information (78%). Other factors included the costs of implementing the proposed measures (70%) and the extent to which the proposed security measures may hinder the ability of a party to present its case (61%).

In nearly all cases the percentage of respondents who regarded a particular measure as desirable was significantly higher than the percentage of respondents who had seen the same measure in practice. 83% of respondents thought it desirable for electronic documents to be transferred by means of a secure shared portal, as opposed to 53% who had seen the measure adopted in practice. 50% of respondents thought participants in an arbitration should have in place appropriate firewalls and antispyware and/or antivirus software, as opposed to 12% who had seen the measure implemented in practice.

 

Who and when

The majority of respondents agreed that active engagement by all participants to an arbitration would be necessary in order for a cybersecurity strategy to be effective.  96% of respondents thought that the parties would need to actively engage with the process and 94% thought that the arbitrators would need to actively engage with the process. There was, however, a recognition that obtaining agreement from all participants to observe cyber security measures would not be straightforward. Only 56% of respondents thought that obtaining the agreement of the parties or the arbitrators to observe security measures would be very or relatively easy.

There was a large measure of consensus about the desirability of considering cybersecurity measures at an early stage of the proceedings but opinion was divided over who should take the lead on initiating discussions on cybersecurity issues. 48% thought the parties should take the lead, 31% thought the supervising arbitral institution (if any) should take the lead, and 21% thought it should be the tribunal. Among respondents who act as arbitrators, nearly half (48%) thought that the parties should take the lead in initiating discussion. This suggests that a significant proportion of arbitrators are reluctant to actively engage in the assessment of cybersecurity risks and the development of appropriate measures. Whilst arbitrators may have legitimate reasons for such a position, as reflected in the numbers referred to above, there may well be circumstances where parties may not be able to take a view or agree on appropriate cybersecurity measures.

 

How to implement

One question that has been the subject of discussion is whether cybersecurity measures is a procedural matter, best handled by the tribunal after hearing submissions from the parties, or an administrative matter, best handled by the supervising arbitral institution, assuming there is one. Just over half of respondents (52%) thought it was a procedural matter for the tribunal, 41% thought it was an administrative matter for the institution and 7% were undecided.

This is an interesting finding as there are pros and cons with both approaches and the procedural or administrative nature of measures is likely to dictate whether such measures should be implemented in procedural orders, arbitration rules or arbitrators’ terms of appointment.

Giving arbitrators the power to impose cybersecurity measures may not sit well with the background and training of all arbitrators, and the nature of their main function. Further, depending on their level of interest and the information technology environment in which they operate, individual arbitrators may take very different approaches to cybersecurity. Whilst the nature and potential consequences of cybersecurity risks may vary from one case to another, there are certain cybersecurity risks that will arise in virtually every international arbitration. In that context, the adoption of mandatory measures addressing baseline risks would raise the level of cybersecurity in international arbitration on a more systemic basis. In addition, given that to be effective any measures adopted will have to be adhered to by the arbitral tribunal, arbitrators may find themselves in a situation where their personal preferences or practices may conflict with the objectives sought to be achieved by a robust cybersecurity strategy.

52% of respondents felt that a tribunal should have the power to impose measures in cases where the parties were unable to agree them. 71% of respondents thought that a tribunal should have the power to impose sanctions on a party that breaches data security measures that have been agreed or ordered by the tribunal. What remains unclear is how, in a system where cybersecurity measures are ordered by a tribunal (rather than stemming from arbitration rules for example), a breach of a measure on the part of the tribunal itself should be handled. It is difficult to contemplate that a tribunal would be competent to sanction itself.

It was clear that respondents felt that arbitral institutions could have an important role to play in dealing with issues of cybersecurity. 68% of respondents said that they would be more likely to use the arbitration rules of an institution that was able to provide advice or assistance on appropriate data security measures. 70% of respondents felt that support from within an institution’s secretariat would be useful to improve cybersecurity.

47% of respondents indicated that, where appropriate, their clients would be willing to pay a higher fee/incur an additional cost with an arbitration institution that provided advice and assistance on appropriate security measures and/or provided a secure platform (or similar) on which all communications and data sharing storage in the arbitration could take place. This particular finding may provide comfort to institutions. It suggests that users recognise that there is a cost aspect to cybersecurity and that the pressing need for structural solutions to be put in place may in some circumstances justify the associated increase in cost. As suggested in a previous blog post published on 6 October 2017, Cybersecurity in International Arbitration – A Necessity and an Opportunity for Arbitral Institutions, arbitral institutions are particularly well positioned to implement systemic solutions to cybersecurity risks; something that a risks-based approach by which risks are assessed and dealt with by parties and tribunals on a case-by-case basis is less likely to achieve.

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Joinder of Third Parties: A Welcome Novelty Under the UAE Federal Arbitration Law

Fri, 2019-02-15 00:30

Soraya Corm-Bakhos

In June 2018, the long awaited UAE Federal Arbitration Law (Law No. 6 of 2018) entered into force, repealing the arbitration specific provisions (“UAE Arbitration Chapter”) contained in the UAE Civil Procedure Code (Law No. 11 of 1992). Whilst it is fair to say that the new UAE Federal Arbitration Law failed overall to meet the local arbitration community’s expectations by not resolving some of the salient issues of arbitration in the UAE, such as the issue of capacity to enter into an arbitration agreement or the recoverability of parties’ costs, it contains a number of new provisions, which notably enhance arbitration proceedings seated in the UAE. The provisions on joinder of third parties are one good example of improvements introduced by the UAE Federal Arbitration Law.

Arbitrators often may have to consider requests to “extend” the arbitration clause or “join” third parties. Many commercial contracts involve various stakeholders, which are not always signatories to the contract but either have an interest in the dispute or mutual claims arising out of the same fact pattern. In such circumstances, efficiency considerations play in favour of joining these third parties to the arbitration. This said, joinder of third parties raises challenging issues around consent to arbitrate. As all arbitration practitioners know, consent is the cornerstone of arbitration. How to reconcile the consensual nature of arbitration while maximising efficiency by binding related parties? While the precise answer and related legal arguments may differ from one legal system to another, joinder of third parties will commonly be based on either implied consent or disregard of the corporate personality.

What legal principles should an arbitrator sitting in the UAE apply when considering joinder of third parties? Arbitrators should bear in mind that the UAE Federal Arbitration Law maintains the requirement that an arbitration agreement be made in writing (Article 7.1) and signed by a person having capacity to do so (Article 4.1). Ultimately, the answer will largely depend on the pleadings and arguments put forward by the concerned parties before the arbitrator.

When considering whether or not joinder is procedurally possible in the first place, the arbitrator must take into account and respect the law of the seat or legal place of the arbitration and, if any, the procedural rules. In this context, one will note that the current version of the rules of the Dubai International Arbitration Centre (DIAC), one of the most prominent arbitral institutions in the UAE, do not address joinder of third parties. Prior to the adoption of the UAE Federal Arbitration Law, the UAE Arbitration Chapter did also not contain any provisions on joinder. Article 22 of the UAE Federal Arbitration Law now provides as follows:

“The Arbitral Tribunal may authorise the joinder or intervention of a third party into the arbitration dispute whether upon request of a party or upon request of the joining party, provided that he is a party to the Arbitration Agreement after giving all Parties including the third party the opportunity to hear their statements.”

Based on the foregoing provisions, an arbitrator sitting in the UAE in a DIAC arbitration is now empowered to order the joinder of third parties provided he or she is (i) satisfied that an arbitration agreement exists between the original parties and the third parties and (ii) provided he or she has granted the concerned parties an opportunity to be heard on the application for joinder. Importantly, Article 22 does not appear to require all concerned parties’ express consent to joinder, simply requiring that each concerned party be given an opportunity to be heard.

In a recent local DIAC arbitration case, in which I was personally involved, the claimant sought permission to apply for joinder of third parties. After considering the application for joinder, the arbitrator decided to allow service of the request for arbitration together with the application for joinder on the third parties by the DIAC. DIAC served the concerned entities while granting them 30 days to provide their answers. Despite having been duly served and given an opportunity to be heard, the concerned entities failed to respond. By a reasoned decision, the arbitrator granted the relief sought by the claimant in the application for joinder and agreed to formally join the third parties as respondents to the arbitration. The arbitrator noted that pursuant to the provisions of Article 22 of the UAE Federal Arbitration Law, third parties may be joined provided that the arbitrator was satisfied that an arbitration agreement exists between the claimant and the third parties. Based on the evidence on record, the arbitrator considered that the fact pattern of this particular case lent itself to disregard of the corporate form and to finding of apparent authority. More specifically, the arbitrator found that it was established on the record that:

  • the agreement was signed by the HR manager of “X Group”, identified as “X Group”, a company organised and duly registered in Dubai, UAE, with a specific registered office in Dubai;
  • although “X Group” advertised on its website the existence of a corporate entity named “X Group LLC”, the original respondent in the arbitration, it was established that such limited liability company did not exist; there rather appeared to be separate legal entities operating under the name “X Group”;
  • on the website of the “X Group”, the concerned third parties were described as part of the “X Group”; the third parties advertised themselves as being part of the “X Group”;
  • the claimant’s claim in the arbitration was for payment by the “X Group” of services rendered by the claimant for the benefit of the “X Group”;
  • the HR manager corresponded with the claimant in his capacity as HR manager of the “X Group”; and
  • the joining third parties shared the same address as set out for the “X Group” in the agreement.

Based on the foregoing, the arbitrator found it reasonable – in the absence of any evidence to the contrary – that the HR manager acted as the agent of the joining third party entities, having acted well within the usual range of authorities and/or powers when signing the agreement with the claimant in respect of the particular services and it stood to reason that as such the HR manager did have authority to give full effect to the agreement, including the arbitration agreement through his signature. In the prevailing circumstances, the arbitrator found that the HR manager signed the agreement in his apparent authority as HR manager of the third parties, which entities were therefore bound under the agreement, including the arbitration agreement.

It remains to be seen whether the unconventional approach adopted by the arbitrator, who – despite the absence of all concerned parties’ express consent – decided to grant the joinder in the particular circumstances of this case, will be sanctioned by the UAE courts in the event of a potential action for annulment of the award.

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Arbitral Tribunal Not Properly Constituted: What is the Role of an ICSID Committee?

Thu, 2019-02-14 00:51

Ba Duong (Donny) Trinh

Introduction

On 14 December 2018, an ICSID committee issued a decision on annulment of the award of Suez, Sociedad General de Aguas de Barcelona S.A., and InterAguas Servicios Integrales del Agua S.A. v. The Argentine Republic, ICSID Case No. ARB/03/17 (“Suez 03/17”) in which it declined to uphold the application for annulment from Argentina. This decision marked the fourth time Argentina has failed in its attempt to have the award set aside since 2016 with the same reason that the original tribunals failed to disqualify Prof. Gabrielle Kaufmann-Kohler due to the conflict of interest. Three of these four cases were ICSID arbitrations (the two other ICSID cases are: EDF International S.A., SAUR International S.A. and León Participaciones Argentinas S.A. v. Argentine Republic, ICSID Case No. ARB/03/23 (“EDF”) and Suez, Sociedad General de Aguas de Barcelona, S.A.and Vivendi Universal, S.A. v. Argentine Republic, ICSID Case No. ARB/03/19 (“Suez 03/19”)). The fourth case was an ad hoc UNCITRAL arbitration under Argentina-UK BIT (AWG Group Ltd. v. The Argentine Republic (“AWG”)). This post will focus on the three ICSID committees’ annulment decisions and the debate therein regarding the limitation of review powers of an ICSID committee under the ICSID Convention.

Factual Background

Prof. Kaufmann-Kohler started to act as a member of the Board of Directors of UBS in April 2006 and remained in this position until 2009. In each of the three ICSID arbitration proceedings that took place within this period of time, UBS was undeniably connected with the claimants in some different forms. Argentina hinged its arguments on these connections in order to question Prof. Kaufmann-Kohler’s qualifications before other unchallenged members in accordance with Article 58 of the ICSID Convention. In EDF, Argentina requested the rest of the tribunal to disqualify Prof. Kaufmann-Kohler on the basis of five connections between UBS and EDF and EDFI, a subsidiary of EDF, most importantly the common interests of these three companies in an Italian company and a Swiss Company. In Suez 03/17 and Suez 03/19, Argentina challenged Prof. Kaufmann-Kohler on the ground that UBS held shares and other interests in the claimant companies, i.e. Suez and Vivendi (only in Suez 03/19). Argentina further claimed that Prof. Kaufmann-Kohler had failed to disclose these connections.

The tribunals in each of the three cases followed the requirement under Article 14(1) of the ICSID Convention, thus applying the test of whether Prof. Kaufmann-Kohler could “be relied upon to exercise independent judgment”. The tribunals reached similar conclusions, namely that the connections between Prof. Kaufmann-Kohler and the claimants were so far-flung that they could not have affected her independence. In EDF, the unchallenged members opined that Prof. Kaufmann-Kohler’s non-executive directorship at UBS gave her no financial interest in any of the Claimant companies and that she would not benefit in any way from an award in their favour.1) Decision of 25 June 2008 on the challenge to Prof. Kaufmann-Kohler in EDF International SA and Others v. Argentine Republic (ICSID ARB/03/23), para. 71 jQuery("#footnote_plugin_tooltip_2352_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2352_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Meanwhile, in Suez 03/17 and Suez 03/19, the tribunals evaluated the extent of arbitrator-party relationship based on four qualitative criteria: proximity, intensity, dependence, and materiality. Taking into account the facts regarding the significance of shares that UBS held in Suez and Vivendi, as well as the role of Prof. Kaufmann-Kohler at UBS, both tribunals concluded that the connections between Prof. Kaufmann-Kohler and the claimants ‘did not create a manifest lack of independence and impartiality of judgment’ because UBS was merely a portfolio investor in the claimant companies and the economic links were fairly insignificant. Therefore, these proceedings still remained ongoing with Prof. Kaufmann-Kohler as part of the tribunal.

The Consistency in Three ICSID Committees’ Decisions

After losing in each of the original proceedings, Argentina decided to request the ad hoc committees to annul the award on two grounds. The first ground was the improper composition of the tribunal under Article 52(1)(a) with the participation of Prof. Kaufmann-Kohler who was supposed to be disqualified based on an alleged of conflict of interest. On the second ground, Argentina claimed that Prof. Kaufmann-Kohler committed ‘a serious departure from a fundamental rule of procedure’ under Article 52(1)(d) with her failure to disclose the connections between UBS and the claimants. Argentina further argued that the ad hoc committee would have to examine the issues de novo and decide as though there was no challenge that had been previously made.

To begin with the earliest decision in EDF, the committee responded to Argentina’s argument that the issues should be determined de novo by assessing the relationship between the findings and rulings of the tribunal in respect to Article 58 and the role of the committee at the annulment stage. The EDF committee considered that the function of an ICSID ad hoc committee did not include the determination of the independence and impartiality of an arbitrator, because Articles 57 and 58 entrusted this function to the unchallenged members of the tribunal. According to this committee, the role of an ad hoc committee was not to determine whether or not the original tribunal has rendered a correct decision because it is not an appellate body. It would not find a ground of annulment existing under Articles 52(1)(a) and 52(1)(d) unless the tribunal’s decision was “so plainly unreasonable that no reasonable decision-maker could come to such a decision”. The tribunal continued to point out that the same conclusion had actually been reached by another ‘reasonable decision-maker’, which was the Suez 03/19 tribunal, and therefore rejected Argentina’s annulment request with regards to Prof. Kaufmann-Kohler’s disqualifications.

The two Suez committees followed the lead of the EDF committee. They held that, with direct reference to EDF committee’s decision, they would only review whether the decisions made by the tribunals were “so plainly unreasonable that no reasonable decision-maker could come to such a decision” since they would not operate as an appeal mechanism. In the end, the outcomes in both subsequent decisions on ‘Kaufmann-Kohler controversy’ were not different from the first one with the loss for Argentina.

Commentary

Another way to understand the approach of these ICSID committees is that if the decision of an arbitral tribunal is not clearly unreasonable, though it could be somewhat controversial, still there will be no point going through it all over again. From the author’s view, such approach would probably raise two questions:

(1) What should be the actual role of an ICSID committee when dealing with a request to annul an award on the ground of improper composition of the tribunal?

(2) What is the role of Article 52(1)(a) in this context?

Firstly, it is clear that the function of review of an ICSID ad hoc committee should be akin to that of a national court before which a challenge of a non-ICSID arbitration award is brought. Besides the three ICSID proceedings, as mentioned above, Argentina also sought vacatur of an UNCITRAL award in AWG before the District Court for the District of Columbia with the same ground that Prof. Kaufmann-Kohler’s participation constituted improper composition of the tribunal.2) Decision of the US District Court for the District of Columbia on Argentina’s Petition to Vacate the Arbitral Award, 30 September 2016; Judgment of the United States Court of Appeals for the District of Columbia, 3 July 2018 jQuery("#footnote_plugin_tooltip_2352_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2352_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Unlike the ICSID committees, both the DC district court and then the Court of Appeals adjudicated this particular issue by analyzing the factual background and came to decision on their own, not depending on whether or not the arbitral award was ‘plainly unreasonable’. The question is why an ad hoc committee and a national court performed in two different ways. From author’s view, there would be no reason for them to perform differently, given that they had the same function to decide on an annulment request raised by the same party, with very similar set of facts, based on substantively same grounds under Article 52(1)(2) ICSID Convention and § 10(a)(2) Federal Arbitration Act, which is challenge of an award due to improper constitution of tribunal. The question now is which way is more appropriate.

Secondly, if the approach of three ICSID committees is more appropriate, how should Article 52(1)(a) be interpreted? Article 52(1)(a) enunciates:

“Either party may request annulment of the award […] on one or more of the following grounds:

(a) that the Tribunal was not properly constituted”.

Words matter. There is clearly no implication of a limited scope of review under this provision. When a party raises request, the committee shall decide de novo on its own whether or not to set aside the award based on the party’s request, not on whether there is another tribunal that comes with the same conclusion. If the committee’s decision depends on other decisions that much, then what is the role of Article 52 in such circumstances?

Finally, all three ad hoc Committees never answered the question raised by Argentina: how did the members of the Committee come to the conclusion not consider the annulment of award relating to disqualification of an arbitrator unless the tribunal’s decision was “so plainly unreasonable that no reasonable decision-maker could come to such a decision”, since this requirement is not expressly spelled out in Article 52(1)(a) nor anywhere else in the ICSID Convention? The Committees reasoned that they performed the function of an annulment committee, not of an appellate body. If the scope of review was so wide as to re-consider the merits of a decision, an ad hoc committee would be turned into an appellate body and thus it would be inconsistent with the limited scope of annulment under the ICSID Convention.3) Decision on Annulment (5 February 2016) in EDF International SA and Others v. Argentine Republic (ICSID ARB/03/23), para. 145 jQuery("#footnote_plugin_tooltip_2352_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2352_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, the distinction between annulment and appeal consists of two elements: the result of the process and the aspects of the decision under review.4) Christoph H. Schreuer, ‘The ICSID Convention: A Commentary’ (Cambridge University Press, 2009), p. 901. jQuery("#footnote_plugin_tooltip_2352_4").tooltip({ tip: "#footnote_plugin_tooltip_text_2352_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); First, the result of annulment is the invalidation of the original decision while the result of a successful appeal is its modifications. In this case, Argentina clearly did not request the committees to modify the decisions but to invalidate them. Secondly, annulment is not concerned with substantive correctness of the decision while appeal is, and annulment does not provide the challenging party an opportunity to raise new arguments on the merits or introduce new evidence. However, Argentina asked for none of these. Argentina asked the committees to set aside the decisions based on one of fundamental standards listed exhaustively in Article 52(1) and, therefore, the distinction made by the tribunals between annulment and appeal was not relevant in this context.

References   [ + ]

1. ↑ Decision of 25 June 2008 on the challenge to Prof. Kaufmann-Kohler in EDF International SA and Others v. Argentine Republic (ICSID ARB/03/23), para. 71 2. ↑ Decision of the US District Court for the District of Columbia on Argentina’s Petition to Vacate the Arbitral Award, 30 September 2016; Judgment of the United States Court of Appeals for the District of Columbia, 3 July 2018 3. ↑ Decision on Annulment (5 February 2016) in EDF International SA and Others v. Argentine Republic (ICSID ARB/03/23), para. 145 4. ↑ Christoph H. Schreuer, ‘The ICSID Convention: A Commentary’ (Cambridge University Press, 2009), p. 901. 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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When is Commencement of Court Proceedings a Repudiatory Breach of an Arbitration Agreement?

Tue, 2019-02-12 21:00

Andrew Pullen

In Marty Ltd v Hualon Corporation (Malaysia) Sdn Bhd [2018] SGCA 63, the Singapore Court of Appeal held that an arbitral tribunal had no jurisdiction because the claimant in the arbitration (“Hualon”) had repudiated the arbitration agreement1)See here another discussion of this case from the Singapore law perspective jQuery("#footnote_plugin_tooltip_5456_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5456_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. Of most interest, the decision appears to create a presumption in Singapore law that commencing litigation in breach of an arbitration agreement is repudiatory, diverging from English law.

 

Background

In 2014, Hualon, through a receiver appointed by its creditors (the “Receiver”), commenced proceedings in the BVI courts (the “BVI Action”) against its former directors and Marty Ltd (“Marty”), a company owned by the former directors. Hualon claimed that the former directors, in breach of duty, had unlawfully diluted Hualon’s shareholding in its Vietnamese subsidiary in favour of Marty. Hualon brought claims for dishonest assistance and unjust enrichment against Marty. The BVI Action was eventually dismissed.

In 2015, following various steps in the BVI Action, but before it was dismissed, Hualon (through the Receiver) commenced an arbitration against Marty, pursuant to an arbitration agreement set out in the Vietnamese subsidiary’s company charter (the “Charter”). The claims against Marty were essentially the same as in the BVI Action. Marty unsuccessfully challenged the tribunal’s jurisdiction before the tribunal and in the High Court. Those decisions were overturned by the Court of Appeal.

 

The decision

Repudiation

The Court of Appeal held (at [68] and [80]) that Hualon had repudiated the arbitration by a combination of commencing the BVI Action and contending in its statement of claim that, upon appointment of the Receiver, the former directors lost all authority to bind Hualon. This amounted to a “disavowal” of all documents signed by the former directors after the Receiver’s appointment, including, crucially, the Charter containing the arbitration agreement. The Court observed (at [43]) that an allegation that the entire contract was entered into without authority is a challenge to each and every clause, including the arbitration clause. Hualon did not qualify its position and this, therefore, was sufficient to evince “repudiatory intent”.

Acceptance of the repudiation

It is only if a repudiation is accepted by the innocent party that the contract is terminated. The Court of Appeal held (at [89]) that Marty had accepted the repudiation. Where the breach of the arbitration agreement was commencement of litigation, acceptance “must lie in accepting the court’s jurisdiction and engaging it on the merits” (see [85]). Marty did so when it applied for summary judgment in the BVI Action. In contrast, Marty’s challenge to the jurisdiction of the BVI court on forum non conveniens grounds, stating that Malaysia or Vietnam were possible alternative fora but without committing to submit to those courts, was not sufficiently clear and unequivocal.

 

A presumption of repudiation?

The Court of Appeal rested its decision that Hualon repudiated the arbitration agreement on a combination of commencement of the BVI Action and disavowal of the Charter because Marty’s counsel accepted that commencement of proceedings did not per se amount to a repudiatory breach. However, the Court stated, obiter, (at [66]) that it is:

“strongly arguable that the commencement of court proceedings per se by a party who is subject to an arbitration agreement is prima facie repudiatory of such party’s obligations under that agreement” (emphasis in original).

According to the Court, commencement of litigation is prima facie repudiatory, but it would be open to the breaching party to furnish an explanation or qualification for having commenced the proceedings which showed objectively that it had no repudiatory intent in doing so. It appears that the explanation would have to be furnished to the other party contemporaneously with the breach. The effect of this is to create something akin to a rebuttable presumption.

 

Analysis

There are three types of repudiation in Singapore and English law: (i) renunciation of the contract; (ii) self-induced impossibility of performance; and (iii) a sufficiently serious failure to perform in accordance with the terms of the contract.

We are not concerned with impossibility. Nor was the case analysed as a serious failure to perform. That would have required the Court to assess:

(i) whether the obligation not to litigate a dispute had the status of a condition (a term, any breach of which, no matter how trivial, amounts to a repudiation); or

(ii) if not, whether the breach had the effect of depriving the innocent party of substantially the whole benefit which it was intended it should obtain from the arbitration agreement (the Hong Kong Fir test).

There was no such assessment.

The discussion of whether Hualon had manifested “repudiatory intent” by its actions makes clear that the Court analysed the case in terms of renunciation, i.e. where a party “expressly or implicitly refuses to perform in accordance with the terms of the contract”. However, a refusal to perform will amount to a renunciation only if it is a refusal to perform (i) all obligations under the contract, (ii) a condition, or (iii) where the consequent breach would satisfy the Hong Kong Fir test2)The Law of Contract in Singapore, Andrew Phang Boon Leong, Gen Ed, para 17.003, 17.031 and 17.048; Chitty on Contracts, 33rd edition, para 24-018 jQuery("#footnote_plugin_tooltip_5456_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5456_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

The obligation not to litigate cannot have the status of a condition, because that would mean that commencement of litigation would always be repudiatory, no matter what explanation was provided.

The Court of Appeal did not mention the Hong Kong Fir test.

The Court therefore appears to regard commencement of court proceedings as a refusal to perform all obligations under the arbitration agreement. One can see why the BVI Action evinced such a refusal: it was combined with a disavowal of the arbitration agreement.

But that will not be the same in every case. By commencing litigation in respect of a claim, a party may evince a refusal to arbitrate that claim. But even without a specific qualification of the sort which the Court of Appeal suggested would be necessary to rebut the presumption, there are circumstances in which it would not be clear that it was refusing to arbitrate every claim falling under the arbitration agreement. Such circumstances might include the following:

  • the litigation concerns one claim, but the parties are already arbitrating a different claim under the same contract and the party commencing the litigation gives no indication that it wishes to abandon the arbitration;
  • the claim in the litigation is limited in scope, in the context of much broader contract which could give rise to multiple disputes e.g. a small debt claim arising under a 30-year licensing agreement covering a suite of products;
  • there is (objectively) legitimate doubt as to whether the claim in the litigation falls within the scope of the arbitration agreement (even if it is later held to do so) e.g. a non-contractual claim relating to a transaction involving multiple contracts, some containing arbitration clauses, others containing jurisdiction clauses.

Beyond the above examples, it is not unknown for parties simply to make mistakes and overlook an arbitration agreement. However, such a mistake will not negate repudiatory intent because the test is objective. Hualon claimed it was unaware of the arbitration agreement when it commenced the BVI Action, but Hualon was not entitled to rely on its own alleged ignorance because it was not communicated to Marty. That was a purely subjective reason for its conduct and could not negate the repudiatory intent which a reasonable person would infer (see [52] and [74]). The Court of Appeal’s view would therefore create something of a hair trigger, since commencement of the litigation is said to be prima facie repudiatory, not continuation of proceedings after the breach of the arbitration agreement has been pointed out.

The Court of Appeal’s presumption, albeit obiter, appears to put Singapore arbitration law onto a different footing from English arbitration law. The Court departed from earlier Singapore and English authorities (describing the reasoning in the leading English case, Rederi Kommanditselskaabet Merc-Scandia IV v Couniniotis SA (The “Mercanaut”) [1980] 2 Lloyds Rep 183, as “thin”), and from the views expressed in the leading (English) textbooks Chitty on Contracts, which states that “resort to legal proceedings of itself [does not] constitute a repudiation of the arbitration agreement” (33rd edition, para 32-051) and Russell on Arbitration, which states (24th edition, para 2-137) that:

“A party may repudiate the arbitration agreement by commencement of proceedings in court in breach of its terms, but such breach will only be repudiatory if done in circumstances that show the party in question no longer intends to be bound by the agreement to arbitrate”.

The view in Chitty may be too lenient on the breaching party, but for the reasons explained above it is suggested that the Court of Appeal’s presumption goes too far and requires qualification. The position described in Russell allows an appreciation of the facts of the particular case and may be preferable. In any event, the Court of Appeal’s presumption requires further consideration when next before the Court.

References   [ + ]

1. ↑ See here another discussion of this case from the Singapore law perspective 2. ↑ The Law of Contract in Singapore, Andrew Phang Boon Leong, Gen Ed, para 17.003, 17.031 and 17.048; Chitty on Contracts, 33rd edition, para 24-018 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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Relooking at Consent in Arbitration

Mon, 2019-02-11 21:00

Benson Lim (Assistant Editor for PR China, Hong Kong and Central Asia) and Adriana Uson

Consent has long been accepted as the cornerstone of arbitration, until recently. The evolution and expansion of arbitration brought about diverging opinions on the consensual character of arbitration. For example, Stavros Brekoulakis suggested that “[w]hile … a functional concept of consent may enhance the effectiveness of arbitration clauses in complex transactions, it is very difficult to reconcile with fundamental principles of consent.” 1) Brekoulakis S, “Parties in International Arbitration: Consent v Commercial Reality” (2015) Presentation at the 30th Anniversary School of International Arbitration jQuery("#footnote_plugin_tooltip_3458_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3458_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In the context of binding non-signatories in an arbitration, Brekoulakis also suggested that “what matters is not whether a non-signatory can demonstrate consent for arbitration, but whether it is inextricably implicated in a dispute which is the subject matter of an arbitration.”2) See discussion in Brekoulakis S, “Rethinking Consent in International Commercial Arbitration: A General Theory for Non-signatories” (2017) 0,1-34 Journal of International Dispute Settlement jQuery("#footnote_plugin_tooltip_3458_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3458_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

We discuss whether consent in arbitration is now merely a legal fiction.

International treaties and national laws have consistently required consent as a precondition to arbitration. Thus, a party can only bring its dispute to arbitration – and bar either party from invoking the jurisdiction of otherwise competent courts – where there is an agreement to arbitrate. The New York Convention requires a written arbitration agreement or clause within an agreement, i.e. record of consent, for an arbitral award to be enforceable.3) New York Convention, Art. II (1, 2), Art V. jQuery("#footnote_plugin_tooltip_3458_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3458_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The UNCITRAL Model Law on International Commercial Arbitration, which has been adopted by numerous states around the world, likewise provides that an arbitral award may be refused recognition and enforcement if the parties to the arbitration agreement were under some incapacity, or if the agreement was not valid under its own governing law.4) UNCITRAL Model Law on International Commercial Arbitration, Art. 35. jQuery("#footnote_plugin_tooltip_3458_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3458_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The English Arbitration Act 1996 provides that ‘parties should be free to agree how their disputes are resolved.’ 5) s. 1(b) of the Arbitration Act 1996. jQuery("#footnote_plugin_tooltip_3458_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3458_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In the case of PT First Media TBK (formerly known as PT Broadband Multimedia TBK) v Astro Nusantara International BV and others and another appeal [2013] 226 SGCA 57, the Singapore Court of Appeal stated that: ‘[a]n arbitral award binds the parties to the arbitration because the parties have consented to be bound by the consequences of agreeing to arbitrate their dispute. Their consent is evinced in the arbitration agreement.’ The US Supreme Court in Volt Information Sciences v Leland Stanford, Jr. University [1989] 489 U.S. 468 recognized that ‘[a]rbitration under the [Federal Arbitration Act] is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit…’

However arbitration, which has long been seen as a consensual exercise, has increasingly been viewed as a mechanism borne out of compelled consent. This is especially so when parties have unequal bargaining positions. In sports arbitration, for instance – the Swiss Federal Supreme Court in Guillermo Cañas v ATP Tour6) ATF 133 III 235, 243 para. 4.3.2.2 [Guillermo Cañas v. ATP Tour], 25 ASA BULL. 592, 602 (2007), as translated in 1 SWISS INT’L ARS. L. REP. 65, 84-85 (2007). jQuery("#footnote_plugin_tooltip_3458_6").tooltip({ tip: "#footnote_plugin_tooltip_text_3458_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); recognized that ‘any athlete wishing to participate in organised competition under the control of a sports federation whose rules provide for recourse to arbitration will not have any choice but to accept the arbitral clause.’ Germany’s Federal Court of Justice (the Budesgerichtshof) took a similar stance in Az. KZR 6/15, Pechstein v. International Skating Union, 7 June 2016, finding that agreements referring disputes between athletes and sports federations to the Court of Arbitration for Sport in Lausanne was consensual and lawful, despite the fact that any professional sportsperson who wished to compete was required to agree to arbitration. In the US, mandatory (non-negotiable) arbitration agreements are found in employment contracts, which the US Courts uphold such as in the case of Gilmer v Interstate Johnson / Lane. Corp , Rent-A-Center v Jackson, and AT&T Mobility v Concepcion.7)See discussion in Giles T and Bagley A “Mandatory Arbitration of Employment Disputes: What’s New and What’s Next?” (2013) 22(3) at p.39 Employee Relations Journal jQuery("#footnote_plugin_tooltip_3458_7").tooltip({ tip: "#footnote_plugin_tooltip_text_3458_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Another source of increasing doubt in the consensual nature of arbitration comes from the expansion of arbitration from resolving disputes between two parties to complex multi-party arbitrations and third-party joinders, where arbitrators hear claims by or against someone who never signed the relevant contract, therefore, not giving consent to arbitration.

That said, we believe that this seeming paradigm shift from consensual to compulsory or the so-called ‘compelled consent’ does not mean that the principle of consent has been extinguished. For arbitrations borne out of compelled consent, the problem is essentially one of abuse of unequal bargaining powers, which should be reconsidered by legislatures. For example, a legislature may decree that disputes of a small quantum and arising from an average consumer transaction shall be non-arbitrable. For multi-party arbitrations and third-party joinders, a “non-signatory” might still be bound by an arbitration agreement because consent to arbitrate was given through some other means other than the formality of a signature. .8) Park W, “Non-Signatories and International Contracts: An Arbitrator’s Dilemma”, in “Multiple Party Actions in International Arbitration” 3 (Permanent Court of Arbitration, 2009), adapted from Non-Signatories and International Arbitration, in Leading Arbitrators’ Guide to International Arbitration 707 (L. Newman & R. Hill, 3d ed. 2014); 2 Dispute Res. Int’l 84 (2008) jQuery("#footnote_plugin_tooltip_3458_8").tooltip({ tip: "#footnote_plugin_tooltip_text_3458_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Therefore we do not agree that “arbitration without consent exists”.9) Kaufmann-Kohler G and Peter H, “Formula 1 Racing and Arbitration: The FIA Tailor-Made System for Fast Track Dispute Resolution” (2001) 17(2) Arbitration International at p. 186 jQuery("#footnote_plugin_tooltip_3458_9").tooltip({ tip: "#footnote_plugin_tooltip_text_3458_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); We think it is more accurate to refer to a modern approach to consent that is more focussed on facts and more aligned with commercial practice, economic reality and trade usages.

In fact, marginalising consent10) See e.g. Youssef K, ed. by Mistelis L, Brekoulakis S, “The Death of Arbitrability” in Arbitrability: International and Comparative Perspectives (2009), Kluwer Law International at pp. 47-68. jQuery("#footnote_plugin_tooltip_3458_10").tooltip({ tip: "#footnote_plugin_tooltip_text_3458_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); or any other fundamental principle of arbitration to address these changing needs is inimical to the development of arbitration because it detracts from the fundamentals which made arbitration popular to commercial parties in the first place. Instead, a more nuanced adaptation of the concept of consent is required to accommodate the consideration of a multitude of circumstances in law, fact, or equity, which may evince the parties’ consent to arbitration or lack thereof.

The needs of arbitration users have changed since the drafting of the New York Convention in 1958 and these needs are not best addressed by a rigid and dogmatic adherence to arbitration principles and practices. For example, in respect of multi-party arbitrations, it remains to be seen whether an award can be enforced against a losing party joined to an arbitration against its will when that party cannot select the tribunal.11) See e.g. Van den Berg AJ, “Consolidated arbitrations and the 1958 New York Arbitration Convention” (1986) 2(4) Arbitration International, at pp 367-369 jQuery("#footnote_plugin_tooltip_3458_11").tooltip({ tip: "#footnote_plugin_tooltip_text_3458_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); As the raison d’être of international arbitration is the greater predictability of global enforcement of an award, parties’ concerns about such issues of award enforcement in multi-party arbitrations are real and can only be resolved by relooking at traditional arbitration principles.

Consent in arbitration must also address the new economic reality of more complex commercial practices. The close interactions of today’s global economies and the greater economic convergence in today’s markets have led to a greater prevalence of international trade and complicated projects around the world involving multi-party transactions and contracts. Groups of companies are not the exception but the present norm in major international projects as commercial parties seek to manage their risks and resources better. These multi-party transactions and contracts have in turn given rise to more multi-faceted and multi-party international trade disputes. The concept of consent must accurately reflect the economic functions of global entities and the complex structures of modern-day projects.

Such a nuanced approach towards the concept of consent will ensure the relevance of arbitration as the preferred international dispute resolution mechanism for modern-day parties.

References   [ + ]

1. ↑ Brekoulakis S, “Parties in International Arbitration: Consent v Commercial Reality” (2015) Presentation at the 30th Anniversary School of International Arbitration 2. ↑ See discussion in Brekoulakis S, “Rethinking Consent in International Commercial Arbitration: A General Theory for Non-signatories” (2017) 0,1-34 Journal of International Dispute Settlement 3. ↑ New York Convention, Art. II (1, 2), Art V. 4. ↑ UNCITRAL Model Law on International Commercial Arbitration, Art. 35. 5. ↑ s. 1(b) of the Arbitration Act 1996. 6. ↑ ATF 133 III 235, 243 para. 4.3.2.2 [Guillermo Cañas v. ATP Tour], 25 ASA BULL. 592, 602 (2007), as translated in 1 SWISS INT’L ARS. L. REP. 65, 84-85 (2007). 7. ↑ See discussion in Giles T and Bagley A “Mandatory Arbitration of Employment Disputes: What’s New and What’s Next?” (2013) 22(3) at p.39 Employee Relations Journal 8. ↑ Park W, “Non-Signatories and International Contracts: An Arbitrator’s Dilemma”, in “Multiple Party Actions in International Arbitration” 3 (Permanent Court of Arbitration, 2009), adapted from Non-Signatories and International Arbitration, in Leading Arbitrators’ Guide to International Arbitration 707 (L. Newman & R. Hill, 3d ed. 2014); 2 Dispute Res. Int’l 84 (2008) 9. ↑ Kaufmann-Kohler G and Peter H, “Formula 1 Racing and Arbitration: The FIA Tailor-Made System for Fast Track Dispute Resolution” (2001) 17(2) Arbitration International at p. 186 10. ↑ See e.g. Youssef K, ed. by Mistelis L, Brekoulakis S, “The Death of Arbitrability” in Arbitrability: International and Comparative Perspectives (2009), Kluwer Law International at pp. 47-68. 11. ↑ See e.g. Van den Berg AJ, “Consolidated arbitrations and the 1958 New York Arbitration Convention” (1986) 2(4) Arbitration International, at pp 367-369 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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Challenges in Front of the Successful Evolution of the FDI Protection Regime: EFILA Annual Conference

Mon, 2019-02-11 01:07

Ivaylo Dimitrov

The 4th EFILA Annual Conference, held in London on 31 January 2019, offered a lively discussion about the future of the European investment policy among the EFILA’s distinguished guests. As expected, the focal topics were the ISDS reform, the EU proposal for Multilateral Investment Court (“MIC”), and the way forward. The MIC proposal was the subject-matter of the Keynote Speech delivered by Colin Brown (Directorate General for Trade, European Commission (“EC”)), and the subsequent panel debate moderated by Arif H. Ali (Dechert), which included John Gaffney (Al Tamimi & Co), Mélida Hodgson (Foley Hoag), Veronika Korom (ESSEC Business School Paris), and Saadia Bhatty (Gide Loyrette Nouel) as speakers. Nonetheless, the clash between the world of investment arbitration and the EU investment policy naturally came across as the leitmotif of the other panels as well. The following post examines certain aspects of the EU proposal and its possible loopholes in light of other recent developments, such as (i) the unsuccessful enforcement of the ICSID award in Micula v. Romania in Sweden, (ii) the EU Member States’ Declaration on the legal consequences of Achmea, and (iii) the AG Bot Opinion in Opinion 1/17 on the compatibility of CETA’s Investment Court System (“ICS”) with EU law.

 

EU MIC Proposal

Much has been said about the ongoing ISDS reform and, in particular, the EU MIC proposal (see Kluwer Arbitration Blog posts, for instance, here, here, and here). At the dawn of 2019, Nikos Lavranos noted that 2019 might prove to be the year of the EU’s “Big Harvest” with respect to its ISDS aspirations and that its first assessment will take place at the EFILA Annual Conference. While it is too early to comment on the first prediction, the second one was accurate. Whereas the EU MIC proposal has many strands, almost all of which were vigorously debated by the panellists, I will here concentrate on a couple of them, which come to show that the EU might not be aiming at completely dissolving the current system. These are: (i) the dichotomy between substantive rules of protection and dispute resolution mechanism, and (ii) the enforcement of investment awards/decisions.

First, it seems that the EU does not currently take issue with the substantive rules of investors’ protection in the BIT network. Indeed, there can hardly be raised an objection against rules prohibiting discrimination and expropriation, as well as rules ensuring fair and equitable treatment of investors. This was recently underscored by the Submission from the EU and its Member States to the UNCITRAL Working Group III on ISDS reform of 18 January 2019:

…[T]he precise scope of jurisdiction of the standing mechanism and the substantive rules that it would apply are determined by the underlying treaties. This implies that the substantive rules that the standing mechanism would apply may evolve with the underlying treaty rules. (emphasis added)

The EU’s sympathy for the standards of investor protection is further evidenced by its recent investment treaty practice — i.e. CETA, EU-Vietnam IPA, EU-Singapore IPA — which endorses the well-established standards of investment protection subject to modifications providing more regulatory space for the sovereigns.

Second, as clarified during the conference, the EU considers the effective enforcement of awards/decisions vital. Thus, in the EU’s view, the domestic review at the enforcement stage does not make sense. Rather, the EU will endorse an ICSID-like enforcement regime at an international level which would be provided for in the future convention establishing the MIC mechanism. As pointed out in the recent EU Paper, this is in line with the idea of having a two-tier system with a first-instance court and appellate tribunal with the latter exercising the function of annulment or set-aside currently vested with the ICSID annulment committees and, respectively, national courts. With respect to enforcement in States which are not parties to the conventional regime, the EU would opt for the application of the 1958 New York Convention.

Apparently, the crux of the EU’s reformist idea concerns predominantly the institutionalization of the system and the introduction of a permanent body which can address the perceived flaws of the investment arbitration, namely the lack of (i) predictability and certainty, (ii) deliberative process, (iii) independence and impartiality safeguards, and (iv) costs and duration cap.

 

Micula Enforcement in Sweden

Against this backdrop, on 23 January 2019, the Nacka District Court in Sweden refused to enforce the ICSID Award in the Micula v. Romania. This is one of the most interesting episodes in the long-running saga involving the Micula brothers, Romania, the EC, and various enforcement courts. As pointed out by another commentator, the Micula case foreshadowed the clash between the investment arbitration world and EU law long before Achmea. But unlike Achmea, which concerned a battle for dispute settlement supremacy, Micula presented a frontal collision between substantive rules, namely the FET provision of Sweden-Romania BIT, and EU rules on State Aid. The first one prevailed in the ICSID arbitration where the majority of the tribunal decided that Romania breached the BIT by revoking certain tax and customs incentives notwithstanding the obligations towards EU arising out of the State’s accession. Nonetheless, the conflict recurred at the post-award stage as in March 2015 the EC decided that any payment of the compensation awarded by the ICSID tribunal would be incompatible with the EU law and would constitute illegal State aid thus effectively foreclosing Romania from respecting the award.

The Swedish court sided entirely with the EU law and declared that enforcing the award would run counter the principle of sincere cooperation established in the CJEU case law which obliges Member State courts to respect 2015 EC decision and decline enforcement.  This is a particularly powerful message by the Swedish court if one takes into account the fact that enforcement proceedings concerned an ICSID award. Unlike enforcement under the New York Convention, the ICSID Convention, to which Sweden is a Contracting State since 1967, provides for a self-contained enforcement regime which allows no review by domestic courts. Pursuant to Art. 54 ICSID Convention, each Contracting State shall recognise and enforce an ICSID award as if it were a final judgment of a court of that State.

 

Challenges Ahead

The brief remarks set out above demonstrate that States, regional organisations, and think tanks will face significant challenges in shaping the new regime of FDI protection and dispute settlement.

A. Substantive Conflicts

First, achieving predictability and certainty of the outcome is not premised solely on an effective dispute settlement mechanism. Even the most objective and knowledgeable pool of adjudicators can produce inconsistent results if there is no clarity with respect to the applicable law. As evidenced by Micula, the confrontation between EU law and investment treaty arbitration is not limited to issues of procedural character, but finds its roots in the conceptually different nature of the two systems. Thus, establishing a clear and uniform legal framework which is able to reconcile both systems is crucial for successful reform. In the intra-EU context, the obstacles seem to be the lack of uniform substantive rules on the protection of foreign investors. This lacuna is all the more problematic in light of the recent Declaration of 15 Member States on the legal consequences of the CJEU Judgment in Achmea which evidences, inter alia, Member States’ firm intention to terminate their intra-EU BITs. As suggested by Nikos Lavranos, one possible measure to remedy this situation could be the adoption of an EU regulation on investment protection. Alternatively, to the extent that substantive rules on investor protection remain in force as between the Member States, the relevant stakeholders should come up with an effective mechanism to resolve conflicts between substantive rules preventing thereby Micula-like scenarios. In this respect, seeds of reasonableness could be found in AG Bot Opinion with respect to the compatibility of CETA’s ICS with EU law, who pointed out that “the autonomy of the EU legal order is not a synonym of autarchy” (para. 59). This is equally valid with respect to the EU’s external investment policy and possible conflicts between treaty provisions and EU law. As set out by one panellist during the EFILA Conference, the coherence between MIC and EU law should be based on a set of key principles, among which: (i) respect for the autonomy of EU law, (ii) exclusive application of investment treaty law as interpreted by the rules of international law, rather than EU law, (iii) sufficient safeguards for the exclusive jurisdiction of CJEU, (iv) the binding power of CJEU’s interpretation of EU law, and (v) the preservation of the role of national courts in the dialogue under Art. 267 TFEU.

B. Enforcement

Leaving the question of enforcement of the MIC decisions under the New York Convention aside, the Micula enforcement saga proves that the establishment of an effective self-contained and supranational enforcement system is dependent on having uniform and coherent legal framework of substantive protection, as well as means for resolution of conflicts between various set of rules operating on the international level. Hopefully, negotiators, policymakers, and all relevant stakeholders will quickly grasp the problems and will successfully address the challenges in shaping a new just and fair regime of foreign investment protection.

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Could a Reduction in a State’s Income Violate Public Policy – A View on Turkey?

Sat, 2019-02-09 22:04

Pelin Baysal and Bilge Kağan Çevik

The Public Policy Exception as an Unruly Horse

There is an ongoing quest for a uniform application of the New York Convention. However, the interpretation of the exceptions to enforcement still varies. Albeit applying the same provisions, national courts continue to adopt different approaches to the enforcement of foreign arbitral awards. This is particularly true where the public policy exception is raised under Art. V(2)(b).

Considerable debate exists as to what the public policy is. To the extent it is capable of definition, the public policy is found to embrace nebulous concepts such as a state’s most basic notions of morality and justice. Due to its vague and unpredictable application; the public policy described by an English judge as “a very unruly horse, and when once you get astride it you never know where it will carry you.”1)Richardson v Mellish [1824]2Bing229, 252. jQuery("#footnote_plugin_tooltip_5643_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5643_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Driven by the motivation of taking advantage of the ambiguous nature of the public policy, the parties often raise the public policy exception where all other arguments for setting aside or refusing of the enforcement of the foreign arbitral awards have failed. As described by one national court: “the public policy ground is often invoked by a losing party raised to frustrate or delay the winning party from enjoying the fruits of a victory.”2)A v R [2009]HKCFI 342. jQuery("#footnote_plugin_tooltip_5643_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5643_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Partially in reaction to this, in many developed jurisdictions, courts have taken very restrictive and demanding views of public policy. Indeed, some national courts acknowledged that even when their domestic rules were inconsistently applied in arbitration, this was not in itself enough to refuse enforcement provided, i.e., that international public policy was not violated.

On the other hand, the unruly horse has not been fully tamed in some jurisdictions. In those countries, the inconsistent or broad application of the public policy exception may cause a severe infringement of the legal expectations of the parties to the arbitration and significantly decrease those countries’ reliability on legal predictability.

 

Unruly Horse is not Fully Bridled in Turkey, Especially when the 13th Civil Division of the Turkish Court of Cassation is in the Saddle

In Turkey, the Turkish Court of Cassation’s interpretation of the public order has changed throughout the years and embraces a trend towards a pro-arbitration approach. Nevertheless, it is still not possible to conclude that the task is complete and that the unruly horse of public policy is fully controlled in Turkey.

Previously, the Turkish Court of Cassation was using the public policy exception as a gateway to examine whether the tribunals correctly applied Turkish law or not. Although this appeal-like role ceased after the entry into force of the International Arbitration Act in 2001, the Turkish Court of Cassation continued to use the public policy exception as a tool to get “desired results”. Indeed, in its previous decisions, the Turkish Court of Cassation found that the ICC arbitrations’ scrutiny process violated Turkish public policy, and as a result refused to enforce arbitral awards with the ICC cache. Similarly, despite the parties having agreed that the seat of arbitration would be Switzerland and that Turkish law would be applicable, the Turkish Court of Cassation refused to enforce the final award stating that the “Turkish law” term also covers the Turkish procedural law, and the tribunal should have applied the Turkish procedural law as opposed to the Swiss procedural law.3)Court of Cassation 15th Civil Chamber, File No:1617, Decision No:1052 dated 10.3.1976. jQuery("#footnote_plugin_tooltip_5643_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5643_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

This perception has been changing, and Turkey has been transforming into an arbitration-friendly country thanks to the new pieces of legislation and change in the national courts’ perception of arbitration. This is especially evident after the Turkish Court of Cassation’s General Assembly on Case-Law Unification decision of 2012, in which it concluded that the lack of reasoning in a court decision or an arbitral award does not constitute a violation of Turkish public policy.4)Court of Cassation, General Assembly on Case-Law Unification, File No:2010/1, Decision No:2012/1 dated 10.2.2012. jQuery("#footnote_plugin_tooltip_5643_4").tooltip({ tip: "#footnote_plugin_tooltip_text_5643_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Current predominant practice of the Turkish Court of Cassation suggests that there is a violation of the foundations of Turkish public policy on enforcement of the arbitral awards only in cases where the award is contrary to the principles that underpin the public or commercial life of Turkey, as well as in cases where it is contrary to the fundamental notions of justice. In this context not every violation of the mandatory legal rules can be classified as a violation of the public policy.

However, this arbitration-friendly approach is apparently not endorsed by the 13th civil chamber of the Court of Cassation. The 13th civil chamber of the Court of Cassation is still continuing to abuse the public policy exception to not to enforce decisions against Turkey. In fact, the 13th civil chamber of Court of Cassation consistently sets aside, or refuses the enforcement of foreign arbitral awards, by arguing that “the reduction in an income of the State would clearly violate the economic balance and public policy.”5)Court of Cassation, 13th Civil Chamber, File No:2015/16140, Decision No:2017/3322 dated 16.3.2017. jQuery("#footnote_plugin_tooltip_5643_5").tooltip({ tip: "#footnote_plugin_tooltip_text_5643_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

One of the most popular decisions of the 13th civil chamber of Court of Cassation was dated back to 2012. The dispute was related to a concession agreement concluded between a GSM operator and the Turkish Information Technologies and Communication Authority (“TITCA”). The tribunal concluded that the discounts provided to distributors on wholesales were required to be excluded from the base of the shares. Accordingly, TITCA approached the Turkish courts to set aside this award due to a public policy infringement. The Turkish Court of Cassation held that even though the shares stipulated in the concession agreement did not constitute a tax per se, but that they were an important and continuous source of income for the State. Therefore, the reduction in such an income of the State would clearly violate both economic balance and public policy.6)Court of Cassation, 13th Civil Chamber, File No:2015/16140, Decision No:2017/3322 dated 16.3.2017. jQuery("#footnote_plugin_tooltip_5643_6").tooltip({ tip: "#footnote_plugin_tooltip_text_5643_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Although this decision was believed to be an example of an unfortunate and singular decision, the 13th civil division of the Turkish Court of Cassation endorsed the same approach also in 2014, 2015, 2016, and 2017. In those decisions, the 13th civil division of Turkish Court of Cassation either set aside the arbitral awards by arguing that “the reduction in an income of the State would clearly violate the economic balance and public policy”, or overturned the decision of the first instance court by suggesting the first instance court to undertake an evaluation whether such an award results in the decrease of the income of the State and decide accordingly.

In line with the work distribution of the civil chambers of the Turkish Court of Cassation, if the dispute is related to

  1. water, electricity, natural gas, phone and internet subscription agreements,
  2. waste water prices,
  3. joint ventures,
  4. invalid contracts, or
  5. strict liability provisions,

set aside and/or recognition and enforcement actions are to be brought before the 13th civil division of the Turkish Court of Cassation. Accordingly, if one of the disputing parties is a state and the award requires a reduction in the income of that state, the recognition and enforcement of the award will likely be rejected, or the award could be set aside.

 

Suggestions and Future Perspective

The decisions of the 13th civil division of the Turkish Court of Cassation are a reminder that dealing with the public policy exception continues to be a struggle for the Turkish courts. There is no doubt that the decisions of the 13th civil division of the Turkish Court of Cassation are contrary to the nature of the arbitration. These decisions suggest that if an arbitral award touches in the economic gains of a state, it violates its public policy and it is either to necessary to set it aside or deny the enforcement of it.

To circumvent the vexing decisions of 13th civil chambers of the Turkish Court of Cassation, the parties might refer their disputes to ICSID arbitration rather than other arbitration institutions and/or to ad hoc arbitration. As widely known, the ICSID awards are directly enforceable in contracting states and there is no recourse available to national courts in ICSID arbitrations.

Otherwise, there is a risk that the final award would not be enforced or it would be set aside by the 13th civil division of the Turkish Court of Cassation. Investors and the arbitration practitioners are eagerly waiting with fingers crossed for one of the first instance courts which will insist on its decision and try to convey the issue to the General Assembly of the Turkish Court of Cassation to finally resolve the issue.

Nevertheless, the re-organisation of the structure of the Turkish Court of Cassation to establish a separate civil division specialised on international arbitration law is under consideration. If this happens, it would avoid any incompatibility among different chambers of the Turkish Court of Cassation, and would make Turkey an even more arbitration-friendly jurisdiction. As an English judge said in response to his distinguished predecessor’s observations: “With a good man in the saddle, the unruly horse can be kept in control.”7)Enderby Town Fc ltd v. Football Association [1971] Ch 591, 606-7 CA. jQuery("#footnote_plugin_tooltip_5643_7").tooltip({ tip: "#footnote_plugin_tooltip_text_5643_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

References   [ + ]

1. ↑ Richardson v Mellish [1824]2Bing229, 252. 2. ↑ A v R [2009]HKCFI 342. 3. ↑ Court of Cassation 15th Civil Chamber, File No:1617, Decision No:1052 dated 10.3.1976. 4. ↑ Court of Cassation, General Assembly on Case-Law Unification, File No:2010/1, Decision No:2012/1 dated 10.2.2012. 5, 6. ↑ Court of Cassation, 13th Civil Chamber, File No:2015/16140, Decision No:2017/3322 dated 16.3.2017. 7. ↑ Enderby Town Fc ltd v. Football Association [1971] Ch 591, 606-7 CA. 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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Decisions of the Swiss Federal Supreme Court in 2018: Part I

Sat, 2019-02-09 04:00

Petra Rihar

This is the 1st part of the report highlighting the most significant arbitration-related decisions of the Swiss Federal Supreme Court (the “Supreme Court”) published in 2018.

Consent to Arbitrate

In two decisions, the Supreme Court dealt with the validity of an arbitration agreement under Swiss law. It set aside both awards – two of rather rare cases in which an appeal was granted.

In the decision 4A_150/2017 of 4 October 2017, published on 19 January 2018, the Supreme Court set aside a partial award, holding that the parties did not consent to submit to arbitration. The dispute arose between two insurance companies which, in the context of a reinsurance arrangement, entered into several agreements. Whilst the other agreements contained an arbitration clause, the retrocession agreement, on which the claim was based, provided for jurisdiction of state courts. Confirming the principle of consent in arbitration, the Supreme Court held that the interpretation of an arbitration agreement follows the general principles of contract interpretation, the decisive factor being the concurrent actual will of the parties. Where no such concurrent actual will exists, the agreement must be interpreted according to the principle of trust. When interpreting an arbitration agreement, it must also be borne in mind that the renunciation of a state court severely restricts the possibilities to appeal. Consequently, the will to depart from the state court jurisdiction cannot be easily assumed and must be clearly expressed by the parties.

Following the same principles, in the decision 4A_432/2017 of 22 January 2018, published on 26 February 2018, the Supreme Court set aside a CAS award. The dispute arose from an exclusive brokerage agreement between a footballer and his agent, who sued the footballer for payment of brokerage compensation. Whilst the dispute resolution clause in the brokerage agreement contained a reference to AFA and FIFA as “national and international bodies”, it contained no mention of an arbitral tribunal, but rather submitted the parties to the jurisdiction of the state courts in the “Comercial de Capital Federal, Republica Argentina”. Applying the principle of trust, the Supreme Court found that the tribunal had wrongly declared itself competent to decide the dispute as the dispute resolution clause did not contain a clear expression of the parties’ will to derogate from the state court jurisdiction.

The Scope of an Arbitration Agreement

In the decision 4A_583/2017 of 1 May 2018, published on 6 June 2018, the Supreme Court dealt with the objective scope of an arbitration agreement contained in a mandate agreement dated 2 July 1997 (“Mandate”), in a dispute between a foundation and an attorney. Whilst the foundation requested the return of a share certificate, the attorney claimed retention right on the certificate to secure outstanding payments under the Mandate and under other agreements. In an interim award, the tribunal affirmed its jurisdiction to hear all claims for outstanding payments as well as the request for the return of the share certificate. The attorney appealed against this award arguing that the tribunal was competent to assess his claim for outstanding payments under the Mandate, but not his claims not having their basis in the Mandate. The Supreme Court found that the parties did not actually agree on the objective scope of the arbitration agreement. It, therefore, interpreted the agreement in accordance with the principle of trust, thereby assuming that the parties did not want a division of legal process, but rather a comprehensive jurisdiction of the arbitral tribunal. The Supreme Court held that the jurisdiction of a tribunal competent for disputes arising out of a contract also included the assessment of the opposing party’s retention claims, provided that these claims had a sufficiently close connection with the object of retention, i.e. the share certificate. It was thus not necessary that the retention claims had their basis in the Mandate.

When deciding on the validity of an arbitration clause, the Supreme Court requires a clear expression of the parties’ will to derogate from the state court jurisdiction. Once the validity of the arbitration agreement is established, the Supreme Court’s approach is more liberal. When deciding on the objective scope of an arbitration agreement, it tends to assume a comprehensive jurisdiction of the tribunal.

Substance over Form

In the decision 4A_136/2018 of 30 April 2018, published on 6 June 2018, the Supreme Court dealt with the question of whether an interim decision titled as “Verfügung” (corr. to procedural order) should be challenged in the same way as an interim award. The issue arose from a dispute brought before a tribunal under the DIS Arbitration Rules. During the proceedings, the claimant challenged both the chairman and the arbitrator nominated by him for lack of impartiality. After the tribunal rejected the challenge in a “Verfügung”, the proceedings continued and ended with an award that was detrimental to the claimant. Subsequently, the claimant appealed before the Supreme Court requesting that the award be set aside, and the case be referred back to a newly appointed arbitral tribunal. Confirming the “substance over form” approach, the Supreme Court held that interim decisions of a tribunal on its jurisdiction or its composition – including an alleged bias of the arbitrators – are not only subject to an independent appeal but must also be directly challenged within 30 days upon notification, as the objections raised will otherwise forfeit and cannot be brought before the Supreme Court in an appeal against the final award.

The parties are well advised to promptly study the content of an arbitral decision – regardless of its title – and examine whether it can or must be challenged in order not to forfeit the grounds of appeal.

Anticipatory Assessment of Evidence

In the decision 4A_550/2017 of 1 October 2018, published on 18 December 2018, the Supreme Court dealt with the anticipatory assessment of evidence. The issue arose in a dispute brought before a tribunal under the Swiss Rules. In the award, the respondent was ordered to pay to claimant USD 1.5 Mio. on the basis of a contract which was – according to the respondent – invalid because it did not express the true will of the parties. The respondent challenged the award before the Supreme Court arguing that he was denied his right to be heard as the tribunal had ignored a number of arguments and evidence presented by the respondent. The Supreme Court dismissed the appeal, confirming the tribunal’s right to an anticipatory assessment of evidence. It held that a tribunal is allowed to refrain from assessing all evidence presented by the parties if (i) the presented evidence is unfit to support the alleged facts, or (ii) the fact to be proved is already sufficiently established by other evidence and the tribunal, by making an early assessment, reaches the conclusion that the additional evidence would not lead to different results with respect to the disputed facts.

This principle was again confirmed in the decision 4A_65/2018 of 11 December 2018, published on 27 December 2018, concerning an investor-state dispute brought before a tribunal under the UNCITRAL Arbitration Rules. Before the Supreme Court, the appellant Republic of India alleged, i.a., a violation of its right to be heard as it did not obtain permission to present a preparatory work for a bilateral investment treaty, which allegedly supported its position that the BIT relevant in the case at hand did not to protect indirect investments. As the preparatory work not only related to a treaty different from the relevant BIT, but was also presented late, the Supreme Court found that, due to the delay in invoking evidence that was not decisive in the case at hand, the appellant’s right to be heard had not been violated. It pointed out that not only did tribunals have a right to an anticipatory assessment of evidence, but also that a party’s right to have the presented evidence assessed must be exercised in a timely manner and in the agreed form.

Tribunal Appointed Expert

In the decision 4A_505/2017 of 4 July 2018, published on 6 September 2018, the Supreme Court dealt with the question whether a tribunal may, based on the results of its anticipatory assessment of the previously presented evidence, subsequently unilaterally reduce the scope of the tribunal appointed expert’s mandate concerning technical issues. The reduction of the mandate’s scope by the tribunal resulted in the exclusion of the counterclaims from the expert’s analysis. The Supreme Court held that the tribunal was entitled to reduce the scope of the expert’s mandate since (i) in the relevant agreement signed by all parties, the tribunal had expressly reserved the right to adapt the scope of the expert’s mandate, and (ii) the tribunal’s anticipatory assessment of evidence previously presented (including a witness hearing) showed that the counterclaims would be dismissed based on legal considerations, irrespective of the expert’s findings.

The 4A_505/2017 decision also confirms the established requirements regarding the parties’ right to a tribunal appointed expert. Such right exists, if: (i) the party expressly requested the appointment of an expert, (ii) in the agreed form and in a timely manner, (iii) she advanced the costs of the expertise, (iv) the expert evidence relates to relevant facts, and (v) it is necessary and capable of proving such facts. The requirements (iv) and (v) are met, e.g., where the facts are of a technical nature or otherwise require special knowledge and the arbitrators themselves do not have such knowledge (see also Kluwer Arbitration Blog of 9 August 2011).

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Decisions of the Swiss Federal Supreme Court in 2018: Part II

Sat, 2019-02-09 03:55

Petra Rihar

This is the 2nd part of the report highlighting the most significant arbitration-related decisions of the Swiss Federal Supreme Court (the “Supreme Court”) published in 2018.

 

Jura Novit Arbiter

In the decision 4A_525/2017 of 9 August 2018, published on 26 September 2018, the Supreme Court dealt with the principle of jura novit arbiter, controversial in a dispute resulting from a construction contract governed by Algerian law, between an Algerian public company and a constructor Canadian company. Applying the principle of equity and a contractual clause that was, according to the tribunal, not strictly applicable, the tribunal ruled that the constructor had to pay damages for the unjustified presence at the construction site. The constructor appealed to the Supreme Court arguing that its right to be heard was violated since the tribunal applied the rules of equity as an autonomous source of law under Algerian law, although no arguments based on equity had been advanced by either party, and the applied contractual clause did not concern the type of delay referred to in the counterclaim.

Referring to the principle of jura novit arbiter, the Supreme Court held that the right to be heard relates mainly to the establishment of facts and not of law. As the arbitral tribunals freely determine legal provisions applicable to the dispute, they may also decide on the basis of rules of law other than those invoked by the parties. The parties’ right to be heard becomes relevant and the parties must receive an opportunity to comment only in exceptional cases, namely if (i) the arbitral tribunal intends to base its decision on a legal norm that was not raised during the proceedings, (ii) the relevance of which could not be assumed by the parties, and the application of the norm thus comes as a surprise. The Supreme Court found that the notion of equity was used in different provisions of Algerian law and had been mentioned repeatedly during the arbitration. The appellant could thus not reasonably argue that it could not expect the tribunal to use considerations of equity to decide the dispute. The same was true for the contractual clause referred to by the tribunal by analogy, which was not only known to the parties, but had also been invoked by one of them in support of another claim.

The principle of jura novit arbiter was also applied in the decision 4A_338/2018 of 28 November 2018, published on 21 December 2018. In a domestic arbitration, a Swiss company alleged that FIFA had infringed the company’s contractual rights to purchase World Cup tickets. The tribunal rendered a decision in favor of the company. FIFA appealed to the Supreme Court arguing, i.a., that its right to be heard was violated since the tribunal applied one specific provision of Swiss law although neither party claimed that this provision was relevant. The Supreme Court held that the argument was inadmissible, noting that FIFA failed to explain why it could not have assumed the relevance of said provision and why its application by the tribunal came as a surprise.

Jura novit curia/arbiter, an established principle of Swiss procedural law, has two aspects, (i) the determination of the applicable law and (ii) the ex officio application of the determined law to the case.

 

Res Judicata

In the decision 4A_247/2017 of 18 April 2018, published on 6 June 2018, the Supreme Court dealt with the principle of res judicata. The dispute arose out of two loan agreements providing for the application of Swiss law and each including an arbitration clause. The dispute was first brought before and decided by state courts of Russia and the BVI. It was subsequently brought before a tribunal seated in Zurich. The tribunal’s award was appealed against before the Supreme Court.

Confirming its prior case law, the Supreme Court held that the principle of res judicata governs, i.a., the relationship between a Swiss arbitral tribunal and a foreign state court. If a party files a claim before a tribunal seated in Switzerland, identical to the one already subject of a judgment rendered between the same parties in another territory, the arbitral tribunal – in order not to expose itself to a claim of violation of procedural public policy – must declare the claim brought before it inadmissible insofar as the foreign judgment is capable of being enforced in Switzerland. The Russian state court had rendered its judgment disregarding the objection of lack of jurisdiction raised before it, without, at the same time, finding that the arbitration agreement was null and void, inoperative or incapable of being performed. As a consequence, the decision of the Russian state court was not enforceable in Switzerland and did not have the res judicata effect in the Swiss arbitration. The tribunal did therefore not violate the procedural public policy when rendering the award.

Under Swiss law, res judicata applies where (i) the parties and (ii) the subject matter are identical. It affects the operative part of the decision, but not the reasons on which it is based. It applies, without restriction, if a Swiss state court or tribunal is called upon, but a Swiss court decision or award exists. It applies, under the precondition of enforceability, where a Swiss court or tribunal is called upon, but a foreign court decision or award already exists.

 

Costs

In two decisions, one of them being the decision 4A_338/2018 (cited above), the Supreme Court dealt with the appeals against arbitral cost decisions. It held – in both cases – that the allocation of costs is a question of procedural law and not of substantive law.

In the decision 4A_450/2017 of 12 March 2018, published on 1 May 2018, a cost decision of a sole arbitrator was appealed against, based on the alleged violation of the principle of equal treatment. The dispute concerned the interpretation of a termination clause in a contract. The arbitrator issued a final award and agreed with the respondent on the disputed point. Claimant appealed before the Supreme Court arguing, i.a., that the arbitrator, by awarding costs exclusively to the respondent, although, by his own statement, no party was fully successful with its claims, violated the principle of equal treatment of the parties. The Supreme Court held that the principle of equal treatment can be invoked during the evidentiary phase, however not in later stages of the arbitral proceedings, and is not affected by the assessment of evidence or the application of law during the deliberations or when deciding on costs.

As a rule, in international arbitrations, the cost decisions may be challenged on the grounds listed in article 190(2) PILA, in particular if the tribunal lacked jurisdiction to decide on costs (article 190(2) lit. b) or if its decision went beyond the claims submitted (article 190(2) lit. c). Unlike in Swiss domestic arbitrations, in international arbitrations, the arbitrators’ fees and expenses cannot be challenged with the argument that they are manifestly excessive.

 

Success Fee

In the decision 4A_125/2018 of 26 July 2018, published on 29 August 2018, the Supreme Court dealt with the question of admissibility of a success fee in arbitration. The question arose in a dispute between a Portuguese client company and a Zurich law firm (representing the company in two ICC arbitrations) regarding the amount invoiced by the law firm for its work. With respect to the law firm’s remuneration, the parties agreed on a combination of a reduced hourly fee and a success fee. The dispute was brought before a sole arbitrator who found that the success fee arrangement was valid. The company challenged the award.

The Supreme Court confirmed that a success fee (“pactum de palmario”) was admissible under Swiss law. However, due to its restricted scope of review under article 190(2) PILA, it did not examine the admissibility parameters under domestic Swiss law. Instead, it validated the sole arbitrator’s explicit departure from the domestic requirements holding that Swiss public policy was not violated by the sole arbitrator’s confirmation of a success fee owed to the law firm by its client (see also Kluwer Arbitration Blog of 7 October 2018).

 

Enforcement

In the decision 5A_942/2017 / 144 III 411 of 7 September 2018, published on 27 September 2018, the Supreme Court dealt with the admissibility of an attachment over real estate property of a sovereign state in Switzerland. The attachment order proceedings were commenced by a UK company against the Republic of Uzbekistan, based on an award in favor of the UK company, rendered under the UNCITRAL Arbitration Rules by a tribunal seated in Paris.

With reference to article III of the New York Convention, the Supreme Court held that, for attachment of assets of a foreign state located in Switzerland in cases where the foreign state has acted “iure gestionis“, the requirement of a sufficient connection applies. It presupposes that the legal relationship on which the arbitral award is based and from which the attachment claim arises has a sufficient connection to Swiss territory. This requirement is fulfilled if (i) the legal relationship was established or is to be fulfilled in Switzerland, or (ii) the foreign state has undertaken acts thereby establishing a place of performance in Switzerland. By contrast, for an attachment to be granted it is not sufficient that assets are located in Switzerland or the claim has been awarded by a tribunal seated in Switzerland.

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