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ICC Commission Report on Financial Institutions and International Arbitration: Workstream on Arbitration of Islamic Finance Disputes

Sun, 2017-01-15 21:36

Samaa Haridi and Mohamed Abdel Wahab

Hogan Lovells For Hogan Lovells

The Workstream on Arbitration of Islamic Finance Disputes was tasked with looking at whether the development of specific rules and the development of a comprehensive so-called lex Islamica and procedures for Islamic Finance would encourage the use of arbitration in resolving Islamic Finance Disputes. The Workstream’s Report proposes a list of recommendations that the ICC may consider while developing its rules and procedures. The Report emphasizes that the applicability of its recommendations should be assessed in light of the Sharia’s doctrinal diversity. Islamic Shari’a doctrinal diversity is composed of Primary and Secondary Sources; while the Primary Sources are undisputed, the Secondary Sources may pose a challenge in the development of unified rules and procedures because there is limited consensus on the scope of interpretation of the Secondary Sources.

The Primary Sources of Islamic Shari’a are the Quran and the Sunna. The Quran, the paramount authority, includes the principles that govern the relationships of individuals in society. The second most authoritative source for Shari’a is the Sunna, which is a collection of the actions and sayings of the Prophet compiled by the Prophet’s contemporaries and should be used as a reference for actions and decisions. The Secondary Sources comprise the Islamic Schools of Jurisprudence that was developed to address topics not covered within the Primary Sources. However, these Schools differ in the methodology they use to derive their rulings from Quran and Sunna.

There are six main Schools of Islamic Law: four within the Sunni branch of Islam and two within the Shi’a branch. The Schools agree on certain rules and principles and disagree on others. The Report highlights a certain number of principles of Shari’a law, such as the prohibition of the payment or acceptance of interest (Riba), which all Schools agree upon, and the prohibition of the use of conditions precedent in a contract, as an issue deemed permissible according to some Schools and prohibited for others. The Report also provides insights on the possibility of varying interpretations of various principles within Shari’a law. For example, all Schools prohibit speculative transactions, but they disagree as to the point at which a transaction becomes too speculative or uncertain to pass muster. This potential difference in interpretation might pose a challenge in the application of the Report’s recommendations to the development of a framework for Islamic Finance Arbitration.

The Report proposes that the ICC lead the development of a framework for the resolution of Islamic finance disputes through establishing fast track and cost effective rules on arbitrating Islamic finance disputes and conducting trainings in Islamic finance transactions and disputes, in cooperation with well-established institutions specializing in Islamic finance to help arbitrators and practitioners gain the needed expertise in the field of Islamic finance. It recommends the development of an arbitration guide for the Islamic finance market, the establishment of a task force dedicated to the development of a lex Islamica and the development of a set of uniform, harmonized legal norms for deciding Islamic finance disputes.

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ISDS, Moral Damages, Reputational Harm… To The State – A Comment In The Wake Of Lundin

Fri, 2017-01-13 07:30

Aleksei Drobyshev

YIAG

Lundin Tunisia B. V. v. Republic of Tunisia is a case that very little information was (and, in many ways, still is) available about until very recently. In November 2016, excerpts from the award (in French), itself dated December 22, 2015, became available on the ICSID website.

The published excerpts give very limited information on the factual background of the dispute. The following is known for certain: the Claimant, Lundin, had a contract with Tunisia, under which it received certain concessions with respect to an off-shore oil field. The contract included a clause that allowed Tunisia to buy back a portion of these concession rights, which Tunisia did. The state purchased these concession rights through a public entity, whose debt Tunisia guaranteed. Part of the claim by Lundin was with respect to this public entity not performing some of its obligations, while other parts addressed a related tax dispute between the parties.

In addition to the substantive issues and those procedural issues that are ordinary for investment disputes (such as whether the Claimant had an investment), the Lundin tribunal was faced with an issue that few investment tribunals face – the issue of moral damages. The moral damages claim, however, was raised not by the investor, but by Tunisia, the Respondent state.

Although the tribunal rejected the moral damages claim, it did so on the facts – the Claimant committed no international wrongdoing. With respect to the procedure, the tribunal found first, that the Respondent state can bring a moral damages claim in an investment dispute, and, second, that the tribunal does have the power to award such moral damages, should it find such a decision appropriate.

Although it is a somewhat rare occurrence, this is not the first time that an investment tribunal has had the task of deciding a moral damages claim. Even though BITs and other investment treaties, to the author’s knowledge, do not contain provisions on awarding moral damages to either party, investment tribunals have affirmed that they have the mandate to award moral damages to the investor (see e.g. Desert Line v. Yemen, Europe Cement v. Turkey). The underlying rationale goes all the way back to the fundamental principle that the reparation for an international wrongdoing shall, to the fullest extent possible, wipe out the consequences of said wrongdoing. This principle is reflected in the ILC Articles on State Responsibility (Articles 31, 34), and is applied in public international law including in the Opinion in the Lusitania Cases and the Chorzów case.

The Lundin tribunal began its reasoning with this statement: “Il ne fait pas de doute que des dommages-intérêts pour dommage moral peuvent être attribués par des tribunaux arbitraux internationaux[…]” (para. 374).

There is no doubt that, in principle, an investment tribunal can award moral damages. That is, to an aggrieved investor.

However, when a Respondent state makes a moral damages counterclaim in an investment dispute, that raises its own issues.

Since the ILC Articles on State Responsibility are often cited as the rationale for an investment tribunal to hear a moral damages claim, it seems only natural to examine them first. While they have a very specific subject, i.e. the responsibility of states, they touch upon, albeit indirectly, the question of what kind of damage states can suffer, too.

Article 31 of the ILC Articles uses the broad term “injury” with respect to damage that warrants reparation and provides that this includes both material and immaterial damage. The latter is referred to as “moral” damage, and involves, as put by the ILC Draft Articles Commentary, “such items as individual pain and suffering, loss of loved ones or personal affront associated with an intrusion on one’s home or private life”. One can notice that the given examples share one common characteristic: they cause stress to an individual. But how can one cause stress to a State? In the author’s view, it is not possible.

That is not to say that the state can only suffer material, financially assessable harm. Indeed, the ILC Articles in Article 37 take into account the possibility of a state (as claimant against another state) suffering damage that is not quantifiable. Such damage, however, generally warrants satisfaction, such as a declaration of wrongfulness or an apology, and even that is only the case when restitution and compensation are insufficient to undo the damage done by the international wrongdoing. This falls outside the scope of moral damages, i.e. the kind of loss that is quantifiable, and involves either physical or psychological stress to individuals, or reputational harm. More importantly, however, this damage must have been caused to a state by another state, since the ILC Articles do not apply to actions of individuals.

Despite that, and the Articles’ subject matter, the Lundin tribunal used a reference to Article 31(2) of the ILC Articles as a general basis for a finding that the tribunal had the power to hear Tunisia’s moral damages counterclaim against the investor.

In general, it is difficult to think of the moral damage that the state can suffer from an investor, when the very purpose of ISDS is to protect investors, and host states only accept obligations to protect investors under their investment treaties. The only kind of damage that the state can suffer is reputational harm: if the state is falsely accused of wrongful expropriation of an investment, it risks creating a reputation that that state is investor-unfriendly, and thus the state experiences harm. This is also a line of reasoning that one can see in the public excerpts of the Lundin award (para 379). An earlier tribunal, Meerapfel v Central African Republic, also admitted the possibility of reputational harm to the respondent state, but rejected the counterclaim on facts (para. 431).

There is a fault in this line of reasoning: if the basis for hearing and awarding any kind of moral damages claims by investment tribunals is the idea that damage for international wrongdoings should be undone as fully as possible, then the question is: what was the wrongdoing by the investor?

The first option is that the investor induces reputational harm to the state by the very act of bringing the claim before the investment tribunal, if the tribunal finds that the state did not violate its obligations under the relevant investment treaty. The second one is that the reputational harm is caused by the media exposure from the dispute. Either way, the conclusion that there is wrongdoing by the investor would be rather absurd, since the investor does not violate any rules of public international law by bringing an investment claim or if the state experiences negative media coverage.

It appears that the current reasoning that investment tribunals use to admit respondent states’ counterclaims with respect to moral damages is somewhat flawed. If the sole basis for awarding any kind of moral damages in investment disputes is the ILC Articles (particularly, the principle that all damage resulting from a violation of international law must be compensated), then the respondent states’ moral damages counterclaims should not be admitted. This is because investment tribunals decide cases based on investment treaties, which an investor cannot violate the way the host state can. Whatever immaterial (i.e. reputational) damage the investor can cause to the state, it does not happen because of a violation of public international law.

In the author’s view, the best way out of this dilemma is to not allow respondent states’ moral damages counterclaims in investment arbitration. Alternatively, if the tribunals are to find a rationale for admitting such counterclaims, it appears that it should be based on something other than the ILC Articles, which were the basis in Lundin. The ILC Articles are a proper basis to allow investors’ moral damages claims, since they concern international responsibility of states. This mechanism, however, does not work the other way around.

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Turkish Court of Appeals: The Arbitral Tribunal’s Failure to Obtain an Expert Report Does Not Constitute a Violation of Public Policy

Fri, 2017-01-13 04:46

Okan Demirkan and Begüm Yiğit

Kolcuoglu Demirkan Kocaklı Attorney Partnership

An arbitration-friendly decision was rendered by the 11th Civil Chamber of the Turkish Court of Appeals (“Court of Appeals”) on 22 June 2016 [File no. 2016/4931, Decision no. 2016/6886]. The decision deals with the question as to whether the arbitral tribunal’s failure to refer the calculation of damages to experts constitutes a violation of public policy. Success in an arbitration proceeding depends highly on the evidence that impacts the substance of an arbitral award. Historically, public policy has been and still is a delicate notion in Turkey. The Court of Appeals’ recent decision is particularly important, as the Court of Appeals examined the discretionary power of the arbitral tribunal to take evidence in respect of the public policy ground for setting aside the award.

Article 439 of the Turkish Code of Civil Procedure (“CCP”) stipulates the grounds for setting aside a national arbitral award, which are in line with the UNCITRAL Model Law. According to this article, the award may be set aside upon one of the parties’ request if,

(i) a party to the arbitration agreement was under some incapacity or the said agreement is not valid under the law to which the parties have subjected it or failing any indication regarding the law applicable, the arbitration agreement is invalid under Turkish law;
(ii) the composition of the arbitral tribunal is not in line with the parties’ agreement or with the procedure provided in the CCP;
(iii) the arbitral award was not rendered within the term of arbitration;
(iv) the arbitrator or arbitral tribunal unlawfully found itself competent or incompetent;
(v) the arbitrator or arbitral tribunal decided on a matter beyond the scope of the arbitration agreement or did not decide on all of the matters claimed or exceeded its competence;
(vi) the arbitral proceedings were not conducted in accordance with the parties’ agreement or failing such agreement, with the CCP, and such non-compliance affected the substance of the award; and
(viii) the parties were not treated with equality or were otherwise unable to present their case. The award may be set aside ex officio by the court examining the file if, (i) the subject matter of the dispute is not capable of resolution by arbitration under Turkish law, or (ii) the award is in conflict with public policy.

As the grounds listed in Article 439 of the CCP are exhaustive and awards are not subject to judicial review on their merits, violation of public policy is the most preferred ground in Turkey for making an application to set aside an arbitral award.

In the present case, although the arbitrators were not experts in the field of accounting and finance, they rendered an award without obtaining an expert report regarding the calculation of damages arising out of unjust termination of an agreement. The plaintiff, invoking Article 431 of the CCP, which provides an arbitral tribunal with the authority to decide to refer issues to experts when necessary, filed a claim to set aside the award before the competent first instance court, claiming that the award violated public policy and the CCP’s provisions. The first instance court decided to set aside the award based on violations of public policy and the CCP provisions. According to the first instance court, as per Article 431 of the CCP, the arbitral tribunal should have referred the calculation of damages to experts, and obtaining an expert report regarding the calculation of damages is a matter relating to public policy. However, the Court of Appeals reversed the first instance court’s decision by adopting an arbitration-friendly approach and emphasizing the fundamental principles of commercial arbitration.

Firstly, the Court of Appeals held that the application of applicable law is not listed as one of the grounds for setting aside an award under Article 431 of the CCP, and therefore this matter cannot be examined during an action for setting aside. This conclusion complies with the standards of arbitration-friendly jurisdictions, where it is well established that an arbitral tribunal does not exceed its authority merely because it reaches an incorrect substantive result as regards the application of law. Doing so is not an excess of mandate or authority, and is not contrary to public policy, but a substantive mistake on an issue within the tribunal’s jurisdiction. The English High Court held in a recent decision that the tribunal’s failure to reach the correct decision cannot constitute a ground for challenge under the English Arbitration Act [B v. A [2010] 2 Lloyd’s Rep 681, [2010] EWHC 1626 (QB) (Comm)]. A recent U.S. decision is to the same effect, holding that courts are limited to determining whether the arbitrator acted within the scope of his powers and not whether he did it well, correctly or reasonably [AmerixCorp v. Jones, 457 F. Appx. 287, 291 (US Ct of Apps (4th Cir), 2011)].

Secondly, the Court of Appeals held that the arbitral tribunal had discretionary power to obtain an expert report and the arbitral tribunal’s failure to refer the calculation of damages to experts does not constitute a violation of public policy. It seems plausible to suggest that this conclusion is consistent with the wording of Article 431 of the CCP, as it stipulates that the arbitral tribunal “may” decide to appoint experts to report on issues determined by the tribunal. In other words, pursuant to Article 431 of the CCP, arbitrators are competent but they have discretion to request or exclude expert evidence. This conclusion is also in line with the provisions of the IBA Rules on Taking of Evidence in International Arbitration. Under Article 9 of the IBA Rules on Taking of Evidence in International Arbitration, the arbitral tribunal may exclude any evidence due to lack of sufficient relevance to the case or materiality to its outcome.

Furthermore, the conclusion reached by the Court of Appeals, according to which arbitral tribunals possess broad authority over evidentiary matters, is reflected in national arbitration legislation and judicial decisions of arbitration-friendly jurisdictions. For instance, according to section 34(1) of the English Arbitration Act, an arbitral tribunal shall decide all procedural and evidentiary matters, subject to the right of the parties to agree any matter. Similarly, courts generally refuse to set aside particular awards based on allegedly incorrect refusals to admit or exclude evidence. In this respect, the French Court of Appeals upheld an award which refused to consider evidence provided by one party, reasoning that arbitral tribunals’ evidentiary decisions cannot ordinarily be reviewed [Judgment of Paris Court of Appeals, 2001 Rev. Arb. 731, 16 November 2000].

In conclusion, the Court of Appeals’ decision is pleasing, as it emphasizes essential principles that have already been accepted in arbitration-friendly jurisdictions. One issue worth noting is that this Court of Appeals decision concerns an award rendered in domestic arbitration, so arbitration lawyers have good reason to hope that the same approach will be adopted in relation to awards rendered in international arbitration proceedings. It is expected that the Court of Appeals’ arbitration-friendly interpretation will positively influence the public policy understanding of Turkish courts in national and international arbitration practice.

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Standard Chartered Bank (Hong Kong) v. TANESCO: The Tribunal’s Power to Reconsider Its Previous Decisions

Thu, 2017-01-12 04:00

Inna Uchkunova

International Moot Court Competition Association (IMCCA)

Co-authored with Ivaylo Dimitrov, George Washington University Law School

Foreword

A recent award rendered in the case of Standard Chartered Bank (Hong Kong) Limited v. Tanzania Electric Supply Company Limited (TANESCO) (ARB/10/20, Award, 12 September 2016) (hereinafter: “SCB HK v. TANESCO”) seems to put an end to a dispute which had sparked lately relating to an arbitral tribunal’s power to revise or reconsider its previous interim decisions in ICSID arbitration.

The tribunal in SCB HK v. TANESCO decided unanimously that it can exercise a power to reconsider its earlier Decision on jurisdiction and liability, thus becoming the first ever ICSID tribunal to do so. It reasoned, inter alia, that:

“In exercising a power to reopen a decision, a tribunal should be guided by, although not bound by, the limitations on reopening that apply to awards. Whatever the power the tribunal has to reconsider a decision that power must at least extend to the grounds for reopening an award in Article 51…” (Award, para. 322)

Facts

The factual background of the case is very complex involving numerous court proceedings in various jurisdictions. For present purposes, it may be briefly stated that the case relates to the 2001-2003 loan restructuring of the Independent Power Tanzania Limited (“IPTL”), the latter being in charge of constructing and operating an electricity generating facility in Tanzania.

Initial Dispute and the 1st ICSID Proceedings

In 1995, IPTL and TANESCO, an entity wholly owned by the Republic of Tanzania and designated as an agency pursuant to Article 25(1) of the ICSID Convention, concluded a power purchase agreement (“PPA”).

In 1998 however, a dispute arose between the parties to the PPA which resulted in TANESCO initiating ICSID proceedings claiming that IPTL has failed to comply with the financial model (debt/equity ratio) for the project leading to a higher tariff and overcharges.

The 1st ICSID tribunal acknowledged that IPTL had imprudently incurred costs and the tariff was recalculated.

Debt Restructuring and SCB HK’s Involvement

In 2004, following a renewed invoice dispute, TANESCO refused to make capacity payments and instead began to deposit the sums due under the PPA into an escrow account. IPTL, for its part, took to restructure its debt. The refinancing was effectuated without the knowledge of TANESCO. The Respondent’s position is that the new loan exceeded the amounts authorized by the 1st ICSID tribunal.

In 2005, SCB HK acquired IPTL’s loan and in 2010, further to IPTL’s default, SCB HK exercised its step-in rights and initiated ICSID proceedings claiming that all contractual rights of IPTL under the PPA are vested in it as the lender-assignee. TANESCO countered that the claimant’s debt acquisition was invalid under local law since the security assignment was not registered with the Tanzanian trade register.

The 2nd ICSID Tribunal’s Decision

In its Decision on jurisdiction and liability dated 12 February 2014, the tribunal found that the assignment was valid. The tribunal however provided only declaratory relief refusing to order TANESCO to pay the claimed sums to SCB HK rather than to IPTL, essentially, for the following reasons: (1) in light of the winding up proceedings with regard to IPTL, which had in the meantime been initiated by VIP Engineering and Marketing Ltd, IPTL’s minority shareholder, the possibility for the appointment of a liquidator was still open, therefore, the tribunal did not wish to interfere with the jurisdiction of Tanzanian courts which were in a better position to determine the priority among IPTL’s creditors; (2) the existence of the escrow account and the funds held therein provided at least some protection to SCB HK’s rights.

Developments on the Ground

Following the Decision, it transpired that with the support of TANESCO and the Government of Tanzania (“GoT”) all shares in IPTL had been transferred to Pan Africa Power Solutions (T) Ltd (“PAP”), a Tanzanian company. It remains unknown when and how Mechmar, the majority shareholder in IPTL, had transferred its shares to PAP. What is known is that after all affairs of IPTL had passed to PAP, TANESCO has agreed to settle the dispute regarding the outstanding payments and GoT released the funds from the escrow account and paid them to PAP which used part of the money to pay for the purchase of IPTL’s shares.

Reconsideration

Given that at the time of the tribunal’s Decision it was not known to either the claimant or the tribunal that TANESCO and IPTL had reached a settlement and that the escrow account funds have been released, SCB HK sought reconsideration of the Decision on jurisdiction and liability in light of those developments which affected the claimant’s situation.

After discussing the question whether a tribunal has a power to revisit its previous decisions and agreeing that it does since in this case important information had been withheld or misrepresented by the Respondent, the tribunal decided that it should reconsider its previous Decision.

Indeed, the tribunal noted that in the Decision it had provided a mere declaratory relief so as not to interfere with the local courts’ authority and in order to leave open the possibility of a liquidator being appointed for IPTL since it is for the liquidator and the courts to determine the question of priority among IPTL’s creditors. But now that the dispute between TANESCO and IPTL has been settled there was no likelihood for the appointment of a liquidator and what is more the situation of SCB HK has been rendered worse since the funds from the escrow account have been released in favour of PAP.

The tribunal, therefore, decided that it must grant the relief originally sought by the claimant and that in addition to making a declaration of the amount owed by TANESCO to SCB HK, it will also order the payment of that amount. The tribunal also recalculated the tariff applicable to the PPA.

A Note on the Tribunal’s Power to Reconsider Its Pre-Award Decisions

Following Prof. Georges Abi-Saab’s landmark dissent in ConocoPhillips v. Venezuela (ARB/07/30, Decision on respondent’s request for reconsideration, 10 March 2014), the question of the tribunal’s power to reopen its previous decisions was brought to the forefront.

The main argument of those denying that such a possibility exists has been that interim decisions are intended to be res judicata and thus not subject to review separately from the final award.

This argument is unsubstantiated for two main reasons:

1) arbitral awards rendered under the ICSID Convention are also intended to be final and binding but nevertheless they are subject to post-award remedies such as interpretation, revision, or annulment;
2) it has been claimed that under the ICSID Convention only awards are subject to remedies such as interpretation, revision, or annulment to the exclusion of interim decisions, but as seen in Waste Management II, this contention does not hold true since the tribunal there recognized that:

“…it had the power, while still exercising its functions and prior to the closure of the proceedings, to give any necessary interpretation of any of its decisions, to make any necessary supplementary decision, and to correct any error in the translation of a decision.” (emphasis added) (Waste Management, Inc. v. United Mexican States, ARB(AF)/00/3, Award, 30 April 2004, para. 17)

Prof. Schreuer has similarly commented that:

“Art. 51 is designed specifically for situations in which the tribunal has terminated its activity. A tribunal that is still in session can always revise its preliminary decisions informally.” (Christoph Schreuer, The ICSID Convention: A Commentary (CUP: 2009) at p. 880)

Importantly, even in Perenco Ecuador Limited v. Ecuador the tribunal acknowledged that “only in exceptional circumstances would it be open for the Tribunal to reconsider its prior reasoned decisions.” (emphasis added) (ARB/08/6, Decision on Ecuador’s reconsideration motion, 10 April 2015, paras. 3, 6)

It is also worth mentioning that in reconsidering their decisions arbitral tribunals must be guided by the standard contained in Article 51 of the ICSID Convention and not that contained in Article 52 thereof concerning annulment since, as noted by Prof. Andreas Bucher, it was never intended for the same tribunal to determine, e.g., whether it has made an excess of powers in its own decisions. (ConocoPhillips v. Venezuela ARB/07/30, Dissenting Opinion in relation to the Application for Reconsideration of part of the Decision on the Merits, 9 February 2016)

In sum, tribunals may and in cases such as SCB HK v. TANESCO should use the power to reconsider their decisions guided by Article 51 of the ICSID Convention, namely where a fact has been discovered of such a nature as to decisively affect the decision of the tribunal and the concerned party’s ignorance of that fact is not due to negligence, probably excepting cases in which the fact relates to a belated jurisdictional objection. (See Award, para. 323) Such a fact must have existed at the time of the decision. (Cf. Schreuer, supra p. 884, marginal para. 19) It remains, however, still unclear whether a tribunal may reconsider its decisions on its own motion in case of error of law. (See Waste Management, Inc. v. United Mexican States, supra, para. 17; Prof. Georges Abi-Saab’s D.O., supra, para. 62)

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Winter is Coming: Investment Arbitrations Striking Bosnia and Herzegovina

Wed, 2017-01-11 04:01

Nevena Jevremović

Association ARBITRI

Bosnia and Herzegovina (“BiH”) is generally perceived as a good emerging market for investment. The country is rich with natural resources and has a long tradition of industry with favorable and attractive locations and resources. Potential areas of investment include banking and finance, energy and mining, construction and IT (ICT) sector. The relevant national framework is beneficial for foreign investors, with incentives important to foreign investors, such as low taxes and flat tax rates. On an international scale, BiH is a party to around 40 bilateral investment treaties, and is a signatory to the ICSID Convention.

This, however, does not mean that BiH does not have its fair share of obstacles to overcome to increase foreign investments. In 2015, the flow of direct foreign investment was BAM 244 million (approx. EUR 122 million), with the main investors coming from Austria, Serbia, and Croatia. There is an 81,64 % drop from 2007 when the amount of direct foreign investment was BAM 1,329 million (approx. EUR 664 million).

Businesses and proponents of a responsible governance have criticized this dramatic drop, and advocated for a systematic change (see, e.g., White Book published by the Foreign Investor’s council sets for measures that, if implemented, would attract more investment). A recent increase in the number of investment disputes brought against BiH attests that this framework needs to change.

To put things into perspective: the overall value of the three investment arbitrations brought against BiH is over EUR 700 million. For a country facing financial difficulties, participating in these proceedings, and potentially losing the disputes, will be a difficult hit to take. The nature, scope and the result of these proceedings are important; however, there is almost no substantive information on this. Although publicly available information Is scarce and superficial, some general information can be drawn.

First, these disputes revolve around large-scale infrastructure and energy projects. For example, in Elektrogospodarstvo Slovenije – razvoj in inzeniring d.o.o. v. Bosnia and Herzegovina (ICSID Case No. ARB/14/13), the Slovenian energy company filed an arbitration claim against BiH claiming damages in the amount of approximately EUR 700 million. The relationship between the two companies dates back to the 1970s. The parties then entered into a contract for the construction and operation of Thermal Power Plants Block I and II. Although the contract performance was interrupted due to the war in Bosnia from 1991 to 1995, Slovenian company sought to regulate mutual relationship during 2006. As no agreement was reached, Elektrogospodarstvo attempted to seek remedies before the local courts in 2009, but was ultimately unsuccessful. The court found that the parties had agreed to arbitrate any dispute arising under the agreement, and therefore the court did not have jurisdiction to hear the case. Elektrogospodarstvo subsequently in 2014 initiated arbitration proceedings before an ICSID tribunal. The details of the case are not made public, but the essence of the claim is a breach under the Energy Charter Treaty, and the Agreement on Reciprocal Protection of Investments signed between the two states.

Second, the claims are brought alleging the government’s failure to take steps necessary for the investment to start. In Strabag (AG) v Ministry of Telecommunications and Transport, Strabag claims damages in amount of EUR 640,000 for breach of their construction agreement. In 2012, Strabag was the most successful bidder for the construction of a bridge over the river, Sava, in the north of Bosnia. Necessary licenses, however, were not procured and Strabag was unable to start the construction work within the 180 days’ timeframe provided in the agreement. Consequently, Strabag initiated arbitration proceedings before the Permanent Court of Arbitration in the Hague claiming damages for breach of the agreement. The media speculated that BiH will most likely lose this case. There is some indication in the press that the BiH Prosecutors Office is waiting for the outcome of the case to begin its own investigation as to why the necessary licenses were not procured.

A similar situation led to the most recent ICSID arbitration – Viaduct d.o.o. Portorož, Vladimir Zevnik and Boris Goljevšček v. Bosnia and Herzegovina (ICSID Case No. ARB/16/36). Almost a decade ago, the Republic of Srpska granted concession to Slovenian nationals for the construction of a hydropower plant on the river Vrbas in the northern part of the country. The power plant was never built, and the concessionaires unilaterally terminated the contract in 2015. According to the information in the local press, and as reported in the IAR Reporter, the investors claim that the local authorities awarded the same rights to a local concessionaire, and therefore acted in a discriminatory and repudiatory way.

Third, the information on the final outcome of the case is ambiguous. The cases before ICSID are not fully transparent. It is only possible to follow the procedural steps, without having any insight into the claims or defenses raised. Similarly, there is no conclusive information on how some of these proceedings are being handled on the government’s side. For example, the Council of Ministers sent a note to the Ministry of Telecommunications and Transport, the defendant in the Strabag case, recommending a potential settlement. There is no information whether such a settlement was initiated and, if yes, what was offered in its course. Given the public interest in projects of this type, and especially the consequences it may have on the environment, employment, etc., this attitude is somewhat reckless, to say the least.

Despite the obstacles, investment projects will keep knocking on BiH’s doors, and with them (unless the current settings change) a possibility of new investment claims. One of the questions which could be a good start for a reform is: Who bears the risk of overly optimistic investment contracts which provide for unrealistic deadlines for the completion of a project?

Foreign investors are attracted by BiH’s rich natural resources. The country, on the other hand, strives to enable a favorable climate for those investors. This is especially done through the concession granting framework. Nonetheless, the granting of a concession for exploration and later exploitation of natural resources does not suffice. There is a long line of bureaucracy requirements that need to be met for the operations to start. The processes are typically long and often unnecessarily burdensome. Just recently, Strabag AG and Koncar signed an agreement for the construction of the Vranduk power plant. The dynamics of awarding similar concessions to foreign investors will continue, parallel to signing overly optimistic contracts since BiH wants to attract and keep its investors.

However, such governance and the unawareness of the obligations which BiH has under its BITs and international treaties will jeopardize the future of investments. This mandates raising awareness, and a serious analysis and strategic planning on how to approach future contracts and disputes with foreign investors. For example, a situation where a ministry does not act upon the instruction of the Council of Ministers to engage in negotiations and amicable settlement might not be the most responsive way to handle these situations. To ensure a more responsible approach towards this type of disputes in the future, the attitude towards the dispute resolution processes with foreign investors needs to be reshaped.

The government should also be equipped to face the pressure and often unbalanced position with a foreign investor. A failed investment is not always the host state’s fault; an investor bears part of the risk as well. Therefore, building the capacities of the states to negotiate and carry out these deals in ways that will be beneficial to both the public and foreign investors is a must.

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“Legitimate Expectations” in the Vattenfall Case: At the Heart of the Debate over ISDS

Tue, 2017-01-10 04:00

Laura Yvonne Zielinski

Criticism of the Investor State Dispute Settlement (“ISDS”) system is common these days. Protesters demonstrate against “secretive tribunals of highly paid corporate lawyers” as which the mainstream media increasingly portray arbitral tribunals. (“Investor-state dispute settlement – the arbitration game”, The Economist, 11 October 2014)

A Controversial Doctrine

Central to the general public’s opposition to ISDS is the concept of legitimate expectations. The German magazine Der Spiegel, for instance, criticizes arbitral tribunals’ broad interpretation of the concept to mean quasi-comprehensive insurance for investors. (“Schiedsgerichte – Die Kläger-Clique”, Spiegel Online, 16 April 2016)

Rooted in domestic administrative law, the standard of legitimate expectations has been introduced into international investment law through the prism of good faith, (Tecnicas Medioambientales Tecmed S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, para. 154) It “is now considered part of the [fair and equitable treatment (the “FET”)] standard” and is “firmly rooted in arbitral practice”. (Crystallex International Corporation v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award, 4 April 2016, para. 546)

“[T]he concept of “legitimate expectations” relates […] to a situation where a Contracting Party’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure by the [Contracting] Party to honour those expectations could cause the investor (or investment) to suffer damages.” (International Thunderbird Gaming Corporation v. The United Mexican States, Arbitral Award, 26 Janaury 2006, para. 147) Over time, the contours of the concept have been refined to take account, for example, of the socio-economic situation of the host State and of the investor’s conduct. (Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007)

Invoked in a Controversial Case

Opposition to ISDS is particularly vocal in Germany where it was sparked by popular outrage over Vattenfall AB and others v. Federal Republic of Germany (ICSID Case No. ARB/12/12), an investment arbitration proceeding brought under the Energy Charter Treaty. The Swedish company Vattenfall, together with others, is reportedly claiming €4.7 billion as compensation for losses allegedly suffered due to Germany’s decision to shut down all nuclear energy production.

The companies claim that it is not so much the decision itself to stop the production of nuclear energy in Germany that caused their losses, but rather the unexpected political changes in this regard. In 2002, the governing Social Democrats and Green parties decided to phase-out all nuclear power plants but allocated limited nuclear energy production volumes to companies that these would still be allowed to produce. Subsequently, in 2010, Angela Merkel’s government amended the Atomic Energy Act (“AEA”) to postpone the shutdown and allocated additional energy volumes (“11th Amendment”). However, only a few months later, following the Fukushima disaster in March 2011, the same administration performed a political U-turn and enacted another amendment to the AEA (“13th Amendment”) aiming to accelerate the phasing-out by imposing fixed shutdown dates for all nuclear reactors, irrespective of the remaining energy production volumes that had been allocated previously. To justify its decision, the government invoked the protection of public health and the environment.

Also in 2012, Vattenfall, RWE and E.ON. (“Energy Companies”) challenged the same legislation before the German Federal Constitutional Court (“Court”).

In a decision of 6 December 2016, further analyzed in a post by Nikos Lavranos previously published and available here, the Court dismissed the Energy Companies’ expropriation claim, but held that Germany had violated their legitimate expectations.

Interpreted by the German Federal Constitutional Court

The Court held that the 13th Amendment to the AEA constituted a breach of Vertrauensschutz (Article 14(1) of the German Constitutional Law) – the domestic German equivalent of the protection of legitimate expectations – insofar as it did not provide for any transition periods or compensation for investments in nuclear power plants which declined in value following the 2011 reduction of the production volumes that had been allocated in 2010. (BVerfG, Urteil des Ersten Senats, 6 December 2016, para. 369)

Article 14(1), under specific circumstances, protects legitimate expectations of stability of the legal framework as the basis of investments. It does not guarantee the fulfillment of all investment expectations, and does not generally provide protection against changes in the economic legal framework and resulting changes in the market position of an investor. It does, however, provide for compensation in cases in which the State directly prevents or substantially limits the use of investments undertaken in justified reliance on a specific legal framework. Nevertheless, the State has broad powers in determining how to compensate and is not obliged to spare investors from suffering any burden at all related to the changes. (BVerfG, Urteil des Ersten Senats, 6 December 2016, paras. 371 and 372)

Following the postponement of the phasing-out of nuclear power plants in 2010, the Energy Companies had legitimately expected their investments in the production of additional energy production volumes to be protected. Investments seemed to have been encouraged and it had not been foreseeable that the government would change its position again within the same legislative period. (BVerfG, Urteil des Ersten Senats, 6 December 2016, para. 376)

However, the Court also stated that legitimate expectations could only have arisen during the period between the enactment of the 11th Amendment on 8 December 2010 and the letter of 16 March 2011 from the Federal Environmental Ministry announcing a nuclear moratorium. Legitimate expectations could have neither been created by the government’s declaration of intent of 26 October 2009 to postpone the nuclear shutdown, nor by the presentation of the corresponding draft law of 28 September 2010. While the introduction of a draft law can destroy legitimate confidence in the continuing existence of a specific legal framework, it cannot create legitimate expectations of future changes. Compensable expectations can only arise once the parliament has passed a law. Consequently, the Court held that no legitimate expectations could continue to exist after the publication of the letter from the Federal Environmental Ministry of 16 March 2011, as this letter had clearly cast doubts on the government’s continued willingness to support the nuclear energy industry. (BVerfG, Urteil des Ersten Senats, 6 December 2016, para. 377)

Additionally, the Court held that the creation of legitimate expectations was not put into question by the fact that the constitutionality of the 11th Amendment to the AEA in 2010 had been disputed for years. The Court recalled that general discussions around the constitutionality of a law, outside of the Constitutional Court that is competent to decide on such matters, are common and therefore do not erode a law’s function as the basis for legitimate expectations. (BVerfG, Urteil des Ersten Senats, 6 December 2016, para. 378)

While the Court stated that the public interest justifications that motivated the enactment of the 13th Amendment to the AEA are of particular importance, they could not free the State from the consequences of the violation of the legitimate expectations it had itself created by enacting the 11th Amendment to the AEA. (BVerfG, Urteil des Ersten Senats, 6 December 2016, para. 379)

Finally, the Court held that, while any detriment to the aim of the acceleration of the nuclear shutdown should have been avoided in compensating the Energy Companies’ losses, the government’s broad powers in determining the scope of compensatory measures would have been sufficient to provide a form of compensation that would not have endangered the aim behind the 13th Amendment to the AEA. (BVerfG, Urteil des Ersten Senats, 6 December 2016, para. 382)

Concluding Remarks

The Court’s analysis of Vertrauensschutz contains interesting indications of what should and what should not be considered to create legitimate expectations in the investment context. Balancing the State’s aim to protect the public interest and the investor’s justified reliance on legal stability, it draws the line between mere political statements and legal realities. Thus declarations of intent or draft laws cannot create legitimate expectations but laws passed by parliament can. Investors should not rely on simple controversies surrounding a law, but can legitimately base their investment decisions on a competent court’s decision on a law’s constitutionality. Vertrauensschutz cannot function as an insurance against all business risk, but the State should take investors’ interests into account in changing the legal framework and should use its broad powers to provide for compensatory measures that do not sacrifice a law’s public interest purpose.

As mentioned above and as recently held by the Crystallex tribunal, in international investment law, “protection of legitimate expectations under the FET standard [already] occurs under well-defined limits.” (Crystallex International Corporation v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award, 4 April 2016, para. 547) Nonetheless, the Court’s use of and definition of the concept could further inform its content by way of reference to principles of law embodied in domestic legal systems. Such further delimitation of the concept of legitimate expectations through a comparative approach might contribute to renewed legitimacy of the FET standard, and thus of ISDS itself.

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Corralling Defaulting Parties and their Unpaid Costs Deposits under the SIAC Rules 2016

Sun, 2017-01-08 17:33

Arthur Dong and Darren Mayberry

AnJie Law Firm

SIAC released new rules of procedure (“SIAC Rules”) for the management of its arbitration practice, effective 1 August, 2016. Some of the new provisions are ground-breaking. New provisions include a consolidation procedure, a joinder procedure, and even rules providing for early dismissal of baseless claims. The SIAC Rules have drawn great attention to its numerous novel provisions. Nonetheless, it also adopted some subtle but no less weighty amendments. One amendment aims at costs deposits recovery. It allows the Tribunal to issue an interim order, or an award, for reimbursement of unpaid deposits for costs.

Rule 24 of the 2013 SIAC Rules had empowered the Tribunal to “issue an award for the unpaid costs of the arbitration.” (Rule 24(i), 2013 Rules). The corresponding but much improved version from the 2016 SIAC Rules permits the Tribunal to “issue an order or Award for the reimbursement of unpaid deposits towards the costs of the arbitration.” (Rule 27(g), 2016 Rules). The most critical new clarification replaces ‘costs’ with the term ‘deposits.’

First, some background on costs. Each party, claimant and respondent, normally pays 50% each. (Rule 34.2, 2016 Rules). They often make payment in three tranches of deposits. The Registrar may demand further deposits. (Rule 34.4, 2016 Rules). Costs of the arbitration include the Tribunal’s fees and expenses, SIAC’s fees and expenses, and the expense or fees of Tribunal-appointed experts. (Rule 35.2 2016 Rules). Parties are responsible for their own legal and expert fees, but may recover these in a successful award. Unfortunately, respondents may fail to pay one or more tranches of deposits for costs. When confronted with such a default on deposits, SIAC’s Registrar will not infrequently charge claimant the balance of respondent’s default.

The revision’s central purpose may simply be to provide clarity. Previously, Tribunals may have proven hesitant to enforce SIAC’s cost demands, if the matter of unpaid costs (or deposits) had even crossed the Tribunal’s mind at all. Under the new Rules, the Tribunal manifestly may enter an order for costs without a full hearing on the matter and before the conclusion of the case. Tribunals may have been hesitant or reluctant to employ the 2013 provision before the final award on the merits because of the lack of clarity on this point. They may not have even regarded the provision seriously or in any detail. Tribunals can now issue an order or an award to collect deposits against an uncooperative party after resolving jurisdiction, or even before doing so.

Whatever SIAC’s purpose for the revision, practitioners may recognize its full tactical potential. Rule 27(g) allows claimants a potentially powerful recourse against recalcitrant respondents. An able practitioner should consider making a Rule 27(g) motion whenever an opposing party refuses to pay its deposits. Additionally, one of the following aggravating conditions might also be present: (1) the arbitration fees assessed for the case are significant in amount; or (2) the proceedings have become, or are in the process of becoming, protracted in complexity or duration of time. In any case, practitioners should only seek recourse with the Tribunal when the opposing party has obtained some real advantage, however minor, through the refusal to pay a costs deposit. When no aggravating conditions arise or persist, practitioners may consider briefly invoking Rule 27(g) during the merits hearing. This would serve as a gentle reminder to the Tribunal to address the opposing party’s failure to pay deposits in its award and assessment of costs.

Certainly, Rule 27(g) motions promise an escape from the prior practice under which claimants simply bore the respondent’s costs until the award on merits is issued, or sometimes even until the award enforcement phase. This distinct possibility should prompt the following dispositions from applicants and tribunals. Practitioners must not hesitate to resort to Rule 27(g). Meanwhile, tribunals should resolve such applications with both deference and expeditiousness towards its applicants. After all, if the respondent will not pay its deposits, claimant must do so instead. Otherwise SIAC’s administration of the case may be suspended, or the relevant claims or counterclaims may be considered withdrawn (Rule 34.6, 2016 Rules). And leaving respondent to remain delinquent will not rehabilitate a respondent exhibiting a distinct lack of cooperation or good faith.

A party prevailing under Rule 27(g) would ordinarily obtain an order from the tribunal demanding the opposing party pay its deposits. At such an early stage of the proceedings, a prevailing party has a few apparent ways to enforce such an order, at least beyond a simple demand to the losing party to issue payment within a reasonable time period. Two remedies are obvious. On one hand, a successful application would in many cases become self-enforcing, as the party facing such an order would want to avoid open defiance of the tribunal’s clear procedural directive. On the other hand, a particularly eager prevailing party could also enforce such an order in a court with jurisdiction over the assets of the other party. Notably, if the tribunal’s decision takes the form of an award, the New York Convention would mandate enforcement in most other jurisdictions.

Tribunals may decide to bolster their Rule 27(g) orders with specific enforcement measures, particularly if aggravating circumstances accompany a respondent’s non-payment. Tribunals will find the most appropriate manner of remedies reserved at the very end, following the award on the merits.

Indeed, the Tribunal’s remedies or enforcement derives from its expansive discretion to determine in the award the apportionment of the costs of the arbitration among the parties. (Rule 35.1, 2016 Rules). The award of costs, of course, includes that of the tribunal, the SIAC administration fees, and even the prevailing party’s expert and attorney fees. (Rules 35 and 37, 2016 Rules). Absent specific prohibition by the parties, SIAC’s 2016 Rules mandate (employing “shall”) that the tribunal is to specify the costs and determine their apportionment. SIAC’s Rules does not instruct tribunals with further presumptions or principles that might inform their mandate, unlike other institutional rules. In contrast, the 2014 LCIA Rules explicitly favors the general principle of apportionment by relative success (or failure) with regard to the merits,

“except . . . in the circumstances the application of such a general principle would be inappropriate under the Arbitration Agreement or otherwise. The Arbitral Tribunal may also take into account the parties’ conduct in the arbitration, including any co-operation in facilitating the proceedings as to time and cost and any non-co-operation resulting in undue delay and unnecessary expense.” (Rule 28.4, LCIA 2014 Rules).

As for SIAC, its silence as to the specific bases informing costs allocation should be understood as a purposeful and strategic position. Since the SIAC Rules mandate a decision on costs without signaling any obligatory first principles, SIAC appears to have reserved comparatively more latitude for tribunals in which to apportion costs with consideration to a party’s default on deposits. Arguably, an arbitration clause designating the SIAC 2016 Rules must specifically restrict costs allocation to “parties bear their costs” or alternately, “costs follow the event,” to foreclose Rule 27(g) cost shifting. Otherwise, any ambiguity may open the door for a tribunal to allocate costs at least partially against a party defaulting on deposits, as if punishment for non-co-operation were a secondary but available principle. After all, the parties will have agreed in their arbitration clause to submit to a tribunal’s expansive power to allocate costs pursuant to application of SIAC Rule 35.1.

Best practice counsels that tribunals clearly forecast the possibility of cost shifting. Any effective Rule 27(g) order will spell out the tribunal’s right at the end to withhold otherwise rightful costs from, or award substantial costs against, a defiant and delinquent party.

Ultimately, compliance or non-compliance regarding 27(g) orders will drive an assessment of costs, either explicitly or implicitly, overtly or subliminally. And normally, even if the threat remains inchoate, it will serve the proceedings adequately enough. After all, over the course of the arbitration, the pressure of an impending award and the heightened potential of an unfavorable costs allocation should motivate even the most spirited of non-cooperative parties to at least take minimal steps to expedite the proceedings. And perhaps in most cases, respondents will simply comply with the 27(g) order in a timely manner.

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The CAS List of Arbitrators: Lessons from the Pechstein case for Tokyo 2020

Thu, 2017-01-05 23:20

Bruno Guandalini and Caio de Faro Nunes

2016 was a great year for Brazil, especially because it hosted the Rio 2016 Olympic Games, which has brought many good things: thousands of sports enthusiasts came to Rio de Janeiro to see high profile athletes; others just came for a good caipirinha on the Copacabana Beach; and, of course, many athletes from different countries came chasing their life dream – an Olympic gold medal. Some of these athletes are famous and have a successful career, such as Michael Phelps, Usain Bolt, or Neymar Jr. Others, however, were not even professionals and came from very poor countries, seeking an opportunity to leave dictatorial regimes. For them, preparing for the Olympic Games and even traveling to Brazil was already a huge battle, a gold medal winning. They have really set a “life record”.

In order to help this last group, some Brazilian Arbitration specialists formed a steering committee, acting as pro bono attorneys in the CAS Ad Hoc Arbitrations related to Rio 2016 disputes. In fact, those athletes would be helpless without this initiative, simply because they could not afford good counsel representation in such a specialized form. This weakness brings to mind the frequent political, economic and technical imbalance between sports associations and athletes. Very often athletes cannot afford a great legal battle. At the same time, they frequently depend on a specific organization for living, and are subject to the entity’s political decisions. In those cases, CAS arbitral tribunals serve as the “last resort” authority. The problem is, however, that its legitimacy has been questioned in the never ending Pechstein saga.

Long story short, Claudia Pechstein is a well-known German speed skater who has been suspended for two years by the International Skating Union (ISU) – the only international professional skating association – due to an alleged indication of doping. Since Ms. Pechstein has signed a CAS arbitration agreement in the organization’s registration form, she commenced arbitration proceedings to challenge ISU’s suspension. Following an unsuccessful arbitration, she challenged the award before the seat of the arbitration, but the Swiss courts finally upheld the arbitral award. Still upset with the outcome of the dispute – which was actually denied by some specialists on the merits – Ms. Pechstein then resorted to the German courts, requiring damages from ISU and from the German federation Deutsche Eislauf-Union e.V., for lost income during the time of her suspension. The first instance preliminarily rejected the case. In the second instance, the Higher Regional Court of Munich found that the fact that ISU required Ms. Pechstein to sign the CAS arbitration agreement as a condition to participate in an international competition does not make such agreement void per se. The court also held, however, that by the time Ms. Pechstein signed the agreement, the CAS rules “did not provide for a fair balance with regard to the influence of the sport bodies on the one hand and the athletes on the other in choosing the arbitrators”(since most of the arbitrators on the CAS list were appointed by the sports association, with almost no influence from athletes) (see here). A huge threat was established to the whole CAS Arbitration system. The case was then brought before the German Federal Tribunal (BGH), which dismissed it on 9 June 2016. Regarding the dominant position argument, the BGH “confirm(ed) the dominant market position of the sport organizations, i.e. the ISU in this specific case, but (saw) no misuse of this position taking into account the interests of both sides – sport organizations and athletes”. As a rationale for the list of arbitrators imbalance issue, “the BGH (did) not see a structural imbalance as the CAS is not integrated in another organization like disciplinary bodies within sport organizations are”. In the eyes of the BGH, CAS rules allow athletes to achieve this balance once the “list of arbitrators has been composed in a sufficiently independent way even if established by a body with a majority of representatives of sport organizations”. On the top of that, it found that “athletes have a fair choice by nominating an arbitrator out of a list of more than 200 people and they can reject an arbitrator for bias”. 2016 in gone and flame in Rio is over but not the Pechstein saga. The case is still pending before the European Court of Human Rights in Strasbourg. Also, Ms. Pechstein affirmed that she will appeal to the German Constitutional Court. Even if Ms. Pechstein overturn’s chances are low, her case invites to a critical analysis of the BGH decision firstly and then to a normative analysis of the list of arbitrators issue.

To begin with, the BGH did not consider the arbitration market incentives. CAS existence depends on sports organizations to impose arbitration agreements as a condition to athletes who, having no choice, would accept CAS arbitration as a forum of last resort. It is mainly an arbitration market imposition. There is no free consent to arbitration, because if Ms. Pechstein had not signed the form she would have not competed in the ISU’s events – the only professional and international skating organization – and would have probably had no money for making a living. In addition, the arbitrators listed would presumably defend the sports organizations that will keep using CAS arbitration agreements, since, in this way, CAS business (and the organizations political power) would be maintained. It consists in a systemic bias, generated by the arbitration market and political incentives.

Secondly, the fact that athletes can nominate an arbitrator out of a list of 200 people is irrelevant. Even if arbitral tribunals are usually composed by three arbitrators and athletes have the right to appoint one of them, there is no information disclosed regarding the arbitrator’s nomination (whether he or she has been listed by a sports organization, by an athlete, or even by CAS itself). How then, in the appointment of the arbitrator, could athletes identify the names that were listed by sports organizations? On the top of that, there is always CAS acting as an appointing authority when parties do not appoint an arbitrator’s name or when arbitrators do not agree upon the president’s name.

Finally, the BGH’s argument that there is a possibility of rejecting an arbitrator for bias is not valid. According to CAS rules (R34), an arbitrator may be challenged for bias if the circumstances give rise to legitimate doubts over her/his independence or over her/his impartiality. However, the problem is that the challenge would be decided by the International Counsel for Arbitration for Sport (ICAS) and the CAS itself. Therefore, how would ICAS and CAS decide a challenge of an arbitrator for alleged breach of due process in the composition of the tribunal if ICAS itself is biased by economic and political incentives?

It is clear that the German Court upheld the CAS award position in order to guarantee the harmony of many CAS awards and the legitimacy of the system. If the Higher Regional Court of Munich decision would have been held valid, CAS arbitration system would have certainly collapsed.

As seen, the main problem in the Pechstein case is the alleged violation of due process as a consequence of the imbalance in the arbitral tribunal formation, specifically regarding the CAS list of arbitrators. Therefore, the case invites us to ask the following question, applicable to every institutional arbitration: how to exclude a systemic bias when the list of arbitrators may be controlled by interests of one of the parties and the appointing authority could presumably have interests in favoring such party? If it is almost impossible to stop sport organizations from adopting and imposing to athletes CAS arbitration agreements, the first answer would be to immediately exclude the mandatory list of arbitrators. This could, in first hand, avoid any challenge like the one argued in the Pechstein case. In fact, at the end of the day the existence of the list of arbitrators is not supported. The main argument in favor could be legal certainty and better control of quality of arbitrators. However, the Pechstein case came to show the contrary – and CAS seemed to agree – since it has recently “consider(ed) taking additional steps to preserve its independence – for example, by giving athletes further opportunity to influence the list of arbitrators and becoming more transparent about how the chair of a panel is nominated” (see here).

Even though CAS wants to keep its list for market or political purposes, it shall not be mandatory and the nomination process and criteria shall be fully disclosed. All names should have the date in which the arbitrator became listed, the person or entity that indicated the arbitrator to the list, the number of CAS arbitrations in which the respective arbitrator has already sat and who the parties were. This process would ensure transparency and would help CAS to maintain its legitimacy as the leading sports arbitration institution.

Last but not least, given the alleged systemic bias presumably caused by market and political incentives, CAS should also guarantee impartiality in acting as an appointing authority. The President of the Division should always be a person independent from any sport organization whatsoever.

In conclusion, even though the Pechstein saga has not caused a collapse in the CAS system, its legitimacy was at least questioned. It is time – and up to CAS – to improve steps in abandoning the mandatory list of arbitrators or at least adopting a full disclosure approach in its list composition; it would certainly confirm CAS legitimacy as the main sports arbitration institution worldwide. Even if Ms. Pechstein has not yet seen any gold medal from this battle, her case certainly could call the world’s attention for a more legitimate arbitration system. This is what the arbitration community, athletes, sports organizations, and mainly the International Olympic Committee should seek for Tokyo 2020.

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An Assessment of Australia’s Parliamentary Report on ISDS in the TPP

Thu, 2017-01-05 10:07

Jarrod Hepburn and Mark Huber

On 30 November, Australia’s Joint Standing Committee on Treaties (JSCOT) released its Report 165 on its inquiry into the Trans-Pacific Partnership Agreement (TPP).

JSCOT is a 16-member parliamentary committee tasked with advising the Australian parliament on ratification of treaties.

This article presents an overview and discussion of the Report’s findings on ISDS, the most common issue cited by respondents to JSCOT’s public inquiry.

Although recent comments by US President-elect Trump indicate that the TPP is unlikely to come into force, the Report warrants attention as it provides an insight into the Australian parliament’s understanding of the ISDS regime,  particularly while the country continues negotiations on another plurilateral trade and investment agreement, the Regional Comprehensive Economic Partnership (RCEP).

This insight is important, as the attitudes of Australia’s major political parties towards ISDS are historically inconsistent. Appended to the Report are certain ‘Additional Comments’ opposing ISDS by Committee members from the opposition Labor Party; and a short ‘Dissenting Report’ by the minority Australian Greens Committee member.

The Report’s final view is that ‘[u]nder the TPP ISDS provisions, Australian investors have more to gain than the Australian Government and the Australian people have to lose’.

Australia’s investment landscape:

The Report notes that Australia’s outward investment is the most significant sector covered by the TPP, accounting for 45% (A$868bn) of investment made by Australians abroad. The TPP would create new ISDS commitments between Australia and some TPP parties; would replace existing commitments with some other parties; and would sit alongside existing commitments with other parties.

In their opposition to ISDS, the Labor Party Committee Members cite reporting by Australia’s Productivity Commission that ‘[a]vailable evidence does not suggest that ISDS provisions have a significant impact on investment flows.’ Economic evidence on this question has long been debated; Luke Nottage, amongst others, has recently supported the proposition that ISDS agreements can promote foreign investment. The presence of ISDS can also affect the availability, and potentially pricing, of political risk insurance. Separate to investment flows, ISDS might still be supported for its role in protecting existing investments.

The ISDS regime:

The Report commences with a basic summary of ISDS and how it operates. At times, the Report’s wording is quite terse, leading to an overly simplistic impression of ISDS. For example, the Committee notes that, for a foreign investor to bring a case, they “must believe that an arbitrary or capricious action of the host Government has caused them to lose their investment”. Of course, a claimant’s subjective beliefs will have minimal impact on a tribunal’s ruling. More importantly, the statement ignores the possible application of a ‘sole effects’ approach (although, admittedly, the TPP’s state-friendly language might make this less likely).

Australia’s ISDS experience:

The Report next considers the use of ISDS in Australia. The Committee appears to balance the one known case brought against Australia (by Philip Morris) against ten known cases of Australian investors using (both treaty-based and contract-based) ISDS provisions against other countries.

Australian company Planet Mining (then engaged in ISDS against Indonesia), gave written and oral input contending that the availability of ISDS can be pivotal when making foreign investment decisions. The Committee relies heavily on Planet Mining’s evidence, and on further submissions and oral testimony from Planet Mining’s counsel, Dr Sam Luttrell. Other experts also made submissions but many, including Nottage, are surprisingly not cited.

The Report ultimately finds that ‘the benefits for Australian investors from agreements that include ISDS have been largely ignored in the debate about ISDS. The debate about ISDS provisions is consequently unbalanced.’

However, these benefits often prove difficult to quantify. Since the Report’s release, Planet Mining’s ISDS dispute was dismissed as an abuse of process, and the investor was ordered to pay nearly US$10m in costs. One wonders if Planet Mining’s views on ISDS have now changed. In any case, Planet Mining’s views alone do not necessarily tell us much about whether Australian investors generally take ISDS into account when making investment decisions.

ISDS in the TPP:

The Report provides a basic description of ISDS agreements, reviewing the content of early-generation agreements, the regime’s bilateral nature, and the TPP’s development from the new-generation US model. The Report highlights the TPP’s plurilateral nature as a key advantage, noting that the states parties currently maintain 6 free trade agreements and 21 bilateral investment treaties amongst themselves (though Wolfgang Alschner and Dmitriy Skougarevskiy count an even higher number).

Replacing these treaties with the TPP would be a positive step towards reducing uncertainty and potential abuse. But, as noted earlier, the TPP would not automatically terminate most of these agreements.

Concerns with ISDS:

The Report’s final part discusses key concerns raised by participants. These appear to have centred on two issues: the question of ‘regulatory chill’, and the costs of ISDS disputes.

Sovereignty and public interest regulation:

The Report notes that the TPP expressly carves out regulatory actions designed to protect legitimate public welfare objectives, and thus considers that claims brought against Australia would most likely fail.

In the Committee’s view, Australia would only lose an ISDS case either because the challenged regulation was poor policy in the first place (and the investor therefore deserved its compensation), or because the ISDS provisions were not functioning as intended. In the latter case, the Report notes that ISDS rulings cannot overturn domestic laws and regulations, nor directly prevent new regulations. The Labor Party Committee members’ Additional Comments suggest that this point is ‘false or meaningless’. Citing Dr Luttrell, the Report considers that the existence of ‘regulatory chill’ simply remains ‘an open question’.

The Report also suggests that a state’s loss resulting from malfunctioning ISDS provisions might inspire TPP parties to amend the agreement. However, amending the TPP or issuing a joint interpretation would be a difficult diplomatic process (the latter also raising contested legal issues). Feldman notes that coordination challenges might arise. These would be compounded by the TPP states parties’ cultural, legal and economic dissimilarities.

The Report touches on a concern that an ISDS agreement with the US might increase inbound claims, because US investors are the most frequent ISDS users. The Report downplays this concern, noting that Australia’s developed-country status makes an increase in claims unlikely. A recent study by Nottage also contended that this statistic needs to be viewed in perspective.

Philip Morris’ ISDS claim against Australia was regularly cited by participants. That dispute was dismissed last year as an abuse of rights. On one hand, the case’s result demonstrates that the regime is already well-equipped to prevent abuses. On the other hand, however, it says little about whether Australia’s tobacco laws comply with investment treaty commitments.

Australia’s success in defending against its one known claim to date should not be a determinative factor in whether to support ISDS in a treaty such as the TPP. The United States similarly promotes its 100% ISDS success rate, but it has perhaps been lucky in previous cases (such as Loewen), and might lose a case in the future.

Costs:

Citing Dr Luttrell as counsel for Philip Morris, the Report claims that Australia’s legal bill in defending that dispute was US$37m (A$50m). The figure’s origin is not made clear, but it echoes an (unsourced) figure circulated in Australian media since 2015. (The tribunal’s final costs determination remains pending.)

Matthew Hodgson notes that average defence costs in investment disputes are around US$4.5m. As an extreme example, Russia’s defence bill in the decade-long Yukos dispute was US$27m. Bearing in mind that the four-year Philip Morris dispute did not pass the jurisdictional phase, the US$37m cited seems implausibly large.

Nevertheless, the Report appears unfazed by these actual and potential costs, advising the Australian Government to assume that ISDS claims will arise, and to set aside sufficient funds to defend them.

Conclusion

The JSCOT Report’s coverage of ISDS is helpful, but is at times simplistic and lacking in analytical depth.

For Australian investors, ISDS might be beneficial (at least, where the investors’ claims are not dismissed under abuse doctrines). For Australia, the TPP would replace some dated bilateral ISDS agreements, which might assist the state in managing illegitimate treaty-shopping (at least, where investors’ claims are not already dismissed under those same abuse doctrines). ISDS might also increase investment into Australia. The Report has determined that these potential benefits outweigh the risks associated with defending and losing ISDS claims in the future.

If – as seems likely – the TPP fails to come to fruition, momentum in Asia looks set to shift to the RCEP. China is not part of the TPP, and the United States is not part of the RCEP, creating a degree of foreign policy significance in the TPP failing and the RCEP succeeding. RCEP might also include ISDS provisions. Accordingly, this Report serves as a good indicator, for better or worse, of Australia’s likely views on ISDS in RCEP and other future agreements.

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Two Roads Diverged in a Clause – the Law of a Free-Standing Arbitration Agreement vs. The Law of an Arbitration Agreement That Sits Within a Main Contract

Wed, 2017-01-04 05:30

Kabir Singh, Kartikey Mahajan and Andrew Foo

Clifford Chance

Traditionally, arbitration agreements do not designate the law governing the arbitration agreement. In BCY v BCZ [2016] SGHC 249 (“BCY v. BCZ“), the Singapore High Court clarified the position in relation to the law applicable to the arbitration agreement where such choice is absent. In doing so, the High Court differentiated between the situations where the arbitration agreement sits within a main contract and where it is a freestanding agreement. The decision raises interesting implications which we analyse below.

Background to the dispute

The dispute concerned a sale and purchase agreement for shares in a company (“SPA”). The parties exchanged seven drafts of the SPA but ultimately a final version of the SPA was not signed. The SPA contained an arbitration clause providing for ICC arbitration seated in Singapore, governing law of the contract as New York law and no law was specified to govern the arbitration agreement.

When the plaintiff decided not to proceed with the proposed sale of shares, the defendant commenced ICC arbitration. The plaintiff challenged the arbitrator’s jurisdiction on the ground that no arbitration agreement had been concluded between the parties. The arbitral tribunal found that New York law applied to the arbitration agreement, under which a valid arbitration agreement had come into existence.

The plaintiff appealed the decision of the arbitrator to the High Court under section 10 of the International Arbitration Act (Cap 143A). The issue before the Court was whether an arbitration agreement had come into existence, in accordance with the law governing the arbitration agreement.

Decision of the High Court

 Relying on the English Court of Appeal judgment of Sulamérica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others [2013] 1 WLR 102 (“Sulamérica”), the High Court reiterated that the governing law of an arbitration agreement is to be determined via a three-step test: (a) the parties’ express choice; (b) the implied choice of the parties, as gleaned from their intentions at the time of contracting; or (c) the system of law with which the arbitration agreement has the closest and most real connection.

Since there was no express choice of law to govern the arbitration agreement, the High Court was concerned with part (b) of the above test, i.e., the implied choice of law.

The defendant asserted that New York law, being the law governing the SPA, should govern the arbitration agreement. The plaintiff contended, however, that Singapore law, being the law of the seat, should govern the arbitration agreement. In support, the plaintiff relied on FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others [2014] SGHCR 12 (“FirstLink”) where an Assistant Registrar (an “AR“) held that absent indications to the contrary, the law of the seat will govern the arbitration agreement when the parties have not expressly specified so.

While the Court noted that the parties agreed there was no material difference between New York and Singapore law in respect of whether an arbitration agreement was in existence, the Court nevertheless proceeded to determine the governing law of the arbitration agreement given the divergence of authorities on this issue.

The Court ultimately concluded that there had been no reason for the AR in FirstLink to depart from Sulamérica in favour of a starting presumption for the law of the seat (¶54). The Court also held that the choice of law analysis for an arbitration agreement would differ depending on whether it sits within a main contract or is instead a freestanding arbitration agreement.

 

1) Arbitration agreement as part of the main contract

The Court held that for arbitration agreements forming part of the main contract the “governing law of the main contract is a strong indicator of the governing law of the arbitration agreement unless there are indications to the contrary” (¶65). The choice of a seat different from the law of the governing contract could justify moving away from the starting point of applying the governing law of the main contract. (¶55). However, it could not in itself suffice to displace the starting position (¶65).

The Court also explained that the default position should only be displaced if the consequences of it “would be to negate the validity of the arbitration agreement, even though the parties themselves had evinced a clear intention to be bound to arbitrate their disputes”. In such circumstances, the law of the seat would govern the arbitration agreement

Further, the Court held that “anything which suggests the parties may not have intended to have their arbitration agreement governed by the same law as the main contract would still be a factor to consider.”

 

2) Freestanding arbitration agreement

With respect to ‘freestanding’ arbitration agreements, the Court concluded that if there is no express choice of law of the arbitration agreement, the law of the seat would most likely govern the arbitration agreement. The Court acknowledged that freestanding arbitration agreements are rare, and gave two examples (1) in highly complex transactions, where parties enter into a single arbitration agreement covering disputes arising out of several contracts or an overall project; and (2) an arbitration agreement concluded after a dispute has arisen.

 

Implications – Default laws under the institutional rules

 

When parties have not expressly agreed the law of an arbitration agreement:

  • The Model SIAC clause and the SIAC Rules are silent on what the default law of the arbitration agreement should be;
  • Whereas the HKIAC Model clause specifies Hong Kong law as the default law applicable to arbitration agreements;
  • Similarly, the LCIA Rules provide that the default seat of the arbitration shall be London and that the default law applicable to the arbitration agreement shall be the law of the seat (English law if the default seat is London), subject to parties’ agreement otherwise.

Thus, taking into account BCY v. BCZ, the law applicable to the arbitration agreement can depend on which institution’s Model Clause and/or institutional rules are adopted:

 

Conclusion

It is common for international arbitration users to be embroiled in disputes concerning the law applicable to the arbitration agreement where no express choice had been made. This is especially true where parties treat arbitration clauses as “Midnight Clauses” and do not give appropriate attention to carefully drafting an arbitration clause.

In such situations, the BCY v. BCZ decision is certainly a welcome step. BCY v. BCZ attempts to align the Singapore position with the English position (the Sulamerica decision), such that the implied choice of law for the arbitration agreement is likely to be the same as the law of the substantive contract.

BCY v BCZ also represents development of the common law jurisprudence on the distinction it draws between freestanding arbitration agreements and arbitration agreements contained in a substantive contract. Barring any express choice by the parties, the law governing the arbitration agreement which is freestanding is the law of the seat and the law governing the arbitration agreement contained in a substantive contract is the law of the substantive contract.

It will be interesting to observe how courts and tribunals address this distinction in future cases.  This is because the distinction can be a difficult one to draw.  For example:

  • In BCY v BCZ, the alleged arbitration agreement was held to be one that was part of a substantive contract, i.e., an SPA, notwithstanding the fact that the draft SPAs were never signed. The High Court accepted that the arbitration agreement, if it existed, had existed “prior to the conclusion of the [substantive] contract” and was “independent of the SPA“.
  • In Viscous Global Investments Ltd v Palladium Navigation Corporation “Quest” [2014] EWHC 2654, cited by the Singapore High Court, there were four bills of lading which each contained / incorporated an arbitration clause. Additionally, there was a subsequent letter of undertaking containing an arbitration clause. The English High Court held that the arbitration clause in the letter of undertaking replaced the four prior arbitration clauses and, thus, regarded the subsequent arbitration clause as a freestanding arbitration agreement. One wonders if the court would have reached the same conclusion if it had regarded the subsequent arbitration clause as merely varying the prior arbitration clauses, as the losing party had contended.

To avoid potentially costly litigation on this issue, it remains advisable for parties to expressly state the law governing their arbitration agreement. As explained above, adopting institutional rules and / or a Model Clause does not always offer certainty.

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Milan and Santiago Arbitral Institutions adopt Dispute Boards

Mon, 2017-01-02 22:43

Yasemin Çetinel, Elina Mereminskaya and Roberta Regazzoni

Çetinel Law Firm For Dispute Resolution Board Foundation (DRBF)

On January 1, 2016 the Milan Chamber of Arbitration (“Milan CAM”), issued Rules for Dispute Boards (“Milan Rules”) exactly one year after the Arbitration and Mediation Center of the Santiago Chamber of Commerce (“CAM Santiago”) did so in Chile (“Santiago Rules”). Milan CAM has around 950 mediation filings per year and over 130 arbitration proceedings each year. According to the current statistics, CAM Santiago manages over 250 arbitral cases per year, 21 per cent of which are construction arbitrations. Both entities are therefore prominent institutions in alternative dispute resolution in their respective countries and any new procedures put forward by them are worth consideration.

Types of DBs

The Milan Rules’ aim is to focus on dispute prevention. The boards are called Dispute Resolution Boards. The Board issues what are described as recommendations- although they are binding if not challenged within 30 days.

The Santiago Rules on the other hand, following the ICC approach, allow for all three types of DB: Dispute Review Board (DRB) issuing non-binding recommendation, Dispute Adjudication Board (DAB) issuing binding decision or Combined Dispute Board (CDB) issuing decision or recommendation. A CDB can only issue a Decision, without both parties consent, a) for reasons of urgency or other relevant causes,(for example, a Decision can simplify a contract’s performance or prevent significant harm being caused to any of the parties); b) if a Decision would prevent interruption of the contract; or c) if a Decision is required to preserve evidence.

Appointment of DBs

Milan CAM states it will promote the use of DBs in long-term contracts in general and in those contracts which involve multiple interfaces.

Milan CAM took a leading position in identifying dispute board members and published a first short list of potential DRB members to start a debate in Italy among the stakeholders. This list is composed of both local and international practitioners, including lawyers and engineers.

By Legislative Decree n. 50/2016, Italy also recently introduced a “legal board” concept as an ADR tool in public tenders whereby such “legal board” members may issue “proposals for resolution” of disputes and should such proposals be accepted and signed by the parties, it becomes a binding document. This is in effect another form of dispute board in the early stages of a project.

CAM Santiago will appoint DB members from two lists: first, its arbitrators’ roster; and second, a list of approved technical experts. CAM Santiago keeps a roster for domestic arbitration only made up of local lawyers, while in international arbitration the appointments are made on an ad-hoc basis. However, Article 20 of the CAM Santiago Bylaws allows for temporary incorporation of external arbitrators. It is assumed that this provision can be used for DB appointments as well. The list of technical experts, has not been established yet. CAM Santiago is working on it in collaboration with the Chilean Construction Chamber. There is no limitation in the Santiago Rules regarding nationality or profession of the technical experts. According to the information shared by CAM Santiago, first references to Santiago Rules, have already been written into some construction contracts.

Other Features

Under Milan Rules, the DB does not have any authority to unilaterally extend its term, for example, to allow it to issue a pending recommendation. The term may only be extended by both parties’ agreement. Santiago Rules take the same approach. This feature is in contrast with ICC dispute board rules where boards have a discretion to extend their terms.

It will certainly be interesting to monitor the progress made by each of these institutions both in how often they are asked to appoint and to what extent they embrace a wider disciplinary and regional selection than traditional arbitration appointments.

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Kluwer Mediation Blog: December Digest

Mon, 2017-01-02 03:24

Anna Howard

Centre for Commercial Law Studies, Queen Mary University of London

The last month of 2016 offered a compelling collection of posts on the Kluwer Mediation Blog, from the third-party funding of dispute resolution to the value and difficulty of forgiveness. For those of you looking for a New Year’s resolution, you’ll find inspiration in the posts by Greg Bond and John Sturrock (links to which can be found at the end of this digest).

The December posts opened with the first of a two-part article by Geoff Sharp which considers the development of third-party funding of litigation, arbitration and mediation. In Part 2, Geoff Sharp and Bill Marsh will compare notes on how third-party funding impacts the mediation process.

Sabine Walsh and Margaret Bouchier explore recent research conducted by the Mediators’ Institute of Ireland on skills and behaviours in workplace mediation. Margaret Bouchier, one of the researchers, sets out the highlights of the research process, its findings and their implications for the field.

In “Peacing Things Together”, Joel Lee explores definitions and components of peace and considers the contribution which can be made by mediators in waging peace.

Rasim Gjoka, Merita Bala and Constantin-Adi Gavrila consider the use of voting in a multi-stakeholder mediation for example as a way of reaching settlement or to overcome deadlock.

Drawing on two recent research projects, Charlie Irvine identifies the commonality between mediators and qualitative researchers and examines how a background in mediation can offer excellent preparation for conducting empirical research.

In Greg Bond’s evocative Christmas Eve post, Greg draws on a number of examples, including mediating a conflict between students supporting different sides of the Syrian war, to capture the value, and difficulty, of forgiveness.

And, to close the year, John Sturrock inspires us to engage in deliberate acts of kindness and invites us to consider how, as mediators, we might be more thoughtful and kinder in our engagement with others.

In the earlier months of 2016 many more topics were considered on the Kluwer Mediation Blog; why not take a look… Wishing all of our readers a happy and healthy 2017.

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The Role of International Law and Arbitration in Enforcing the Paris Agreement

Fri, 2016-12-30 17:51

Monica Feria-Tinta

20 Essex Street

The Paris Agreement does not include an enforcement mechanism.   However, trends show that different actors have been innovative in using different legal mechanisms to address environmental and climate change issues. As noted by the Stockholm Chamber of Commerce in this respect, “[g]reen investors have resorted to international arbitration to resolve disputes related to, among others, incentives and government failures to enforce environmental laws.”   Meanwhile, we have been witnessing an increase in climate change litigation brought in domestic courts.

Questions of climate change come to the fore in Arbitration

On 21 November the arbitral community, policy-makers, representatives of governments, the private sector, NGOs and academics, met in Stockholm at a conference whose focus concerned fundamental questions posed by such trends, namely:  How can existing legal norms be used to address questions about climate change? What role do International Law and arbitration have in the climate change issue? Entitled  “Bridging the Climate Change Policy Gap: The Role of International Law and Arbitration”, the one-day conference was jointly organized by the Stockholm Chamber of Commerce, the Permanent Court of Arbitration, the International Chamber of Commerce, and the International Bar Association.

The Conference in Stockholm could not have been more timely.  Not only did the Paris Agreement enter into force on 4 November 2016, but a major follow-up conference (COP22), the main objective of which was to establish a regulatory framework to enable countries to reach goals agreed upon in Paris, had just taken place in Marrakech from 7-18 November with no tangible results in the wake of uncertainties arising from a change of administration in the US.

With the Paris Agreement becoming binding for 113 jurisdictions, the Stockholm Conference brought to the fore its impact on arbitration.

Addressing climate change targets using existing legal mechanisms?

A panel entitled “Addressing climate change targets using existing legal norms”, moderated by Martin Doe from the Permanent Court of Arbitration and comprised of Prof. Catherine Redgwell (University of Oxford), Freya Baetens (Leiden University), Justin Jacinto, Curtis, Mallet-Prevost, Colt & Mosle LLP and this author, addressed the role of international tribunals (including arbitral tribunals) in the enforcement of climate change goals.   We were joined by Dennis van Berkel, from the Urgenda Foundation, who spoke on the use of domestic legal mechanisms.  Urgenda is the organisation which together with 900 Dutch citizens, brought a case against the Dutch government ending with last year’s unprecedented ruling by The Hague District Court, ordering the Dutch government to cut greenhouse gas emissions by at least 25 per cent by 2020 (Rechtbank Dan Haag (2015) C/09/456689).  The case, referred to as the “world’s first climate liability suit”, was primarily based on tort law, human rights law and international environmental law.

Towards Climate Change Justice in Arbitration?

My presentation focused on the role of international arbitration, in particular investment arbitration, in enforcing the Paris Agreement State’s duties.  Can arbitration, a method of dispute resolution whose great advantage is its swiftness, be of use in enforcing the Paris Agreement?   Could international arbitration be used to safeguard the needed investment and enforce the global climate changes mitigation agenda? And in doing so, could international arbitration deal adequately with the human rights impact of it all?  -were some of the key questions my presentation addressed.  I proposed four main areas or gateways relevant to discuss enforceability of the Paris Agreement in relation to arbitration.   First, the relevance of the Paris Agreement standards in adjudicating investment arbitration in the energy sector –by looking into “right to regulate” trends in recent case-law.  Second, the convergence of forums such as arbitral tribunals and the European Court of Justice, in enforcing Paris Agreement goals.    Third, the role of third party intervention in investment arbitration (by inter-governmental organisations and NGOs), bringing public law arguments (both on environmental law and human rights) to the attention of arbitral tribunals.   Fourth, the possibility of moving towards the arbitrability of human rights claims not just against States, but also corporations (an initiative for an International Arbitration tribunal on Business and Human rights already existing).

A fundamental right to a stable climate

Demands to resolve disputes arising from the adverse effects of climate change in the environment, affecting human beings, are on the increase.    In that context I discussed the need for dispute settlement mechanisms (including arbitration) for climate change-related cases between private parties epitomized by a case currently being heard before a Regional Court in Germany:  for the first time a person affected by the hazards of climate change is suing a corporation in Europe to get redress.  A Peruvian farmer is suing the Energy Company RWE before the Regional Court of Essen. As reported, the man is claiming RWE’s –allegedly “one of Europe’s biggest historical emitters according to a 2013 report in the journal Climatic Change”-liability in glacial melting in Huaraz, in Peru’s Cordillera Blanca, which is affecting his home.  Whilst claims like this are an uphill battle as discussed here, the burning question underlying such attempts for justice was best encapsulated by the Peruvian farmer himself when he approached the German jurist behind the claim: ‘Do you think it is correct that polluters never own up to their responsibility?

Another important precedent –mentioned during our discussion- was a ground-breaking constitutional climate lawsuit against President Obama, numerous federal agencies and the fossil fuel industry. A recent US District Court of Oregon ruling rejected a motion to dismiss the case.  In the ruling, the District Court stated that “the right to a climate system capable of sustaining human life is fundamental to a free and ordered society” (US District Court of Oregon Case No 6:15-cv-01517-TC. Emphasis added).  In said decision the Court further stated: “This Court simply holds that where a complaint alleges governmental action is affirmatively and substantially damaging the climate system in a way that will cause human deaths, shorten human lifespans, result in widespread damage to property, threaten human food sources, and dramatically alter the planet’s ecosystem, it states a claim for a due process violation. To hold otherwise would be to say that the Constitution affords no protection against a government’s knowing decision to poison the air its citizens breathe or the water its citizens drink. Plaintiffs have adequately alleged infringement of a fundamental right.”

The need for dispute resolution forums (including in the international arena) in the area of climate justice has been also acknowledged in a recent report by the IBA entitled Achieving Justice and Human Rights in an Era of Climate Disruption”, one of its recommendations being, the setting up of an International Tribunal for the Environment.  In making such a proposal, the IBA notes that “[a]n International Tribunal for the Environment could ascertain  and clarify environmental legal obligations of governments  and businesses,  facilitate harmonisation of and complement existing legislative and judicial systems”.  In his closing address of the Stockholm conference, David W Rivkin, President of the IBA, referred to such proposals.

Paris Agreement enabling legislation: “Reasonable and foreseeable”

A key conclusion from my own contribution to the panel on which I sat, aptly picked by Lena Johansson Secretary General of International Chamber of Commerce Sweden at the close of the conference, is that the Paris Agreement will give rise to regulatory changes which are “reasonable and foreseeable” -in the language of the Charanne Tribunal– and which ought to fall within the “legitimate expectations” of investors in the energy sector.

After all, investment arbitration is not to reflect a dystopian international law world where investor protection trumps relevant binding obligations by States under international law.  Harmonization is possible under the rules of the Vienna Convention on the Law of Treaties.   And as the Charanne, and more recently the RREEF tribunal (jurisdiction) have emphasized, “an arbitral tribunal not only has the power, but the duty” to apply relevant international law to a dispute, not existing “disharmony or conflict” (in the words of the RREEF tribunal) between different international law regimes (§ 82).

It all comes together in Stockholm on climate change

A visit to the Moderna Museets or Museum of Modern Art in Stockholm could have not been most fitting as an end to my trip.  There I saw Acclimatize, climatic conversations by artists: Art as a strong emotional conveyor of climate debate.  A geoengineering performance such as Rescue Blanket for Kebnekaise (the placing of a giant reflecting blanket at the top of Sweden’s tallest mountain, Mount Kebnekaise -an attempt to raise awareness about the rapid melting of the South peak of the Kebnekaise) echoed the commonality of issues I had just been engaged with, concerning glacier melting in the Cordillera Blanca in Peru.    

Olafur Eliasson, an artist who made an installation in a public space in Paris during COP21 (Ice Watch) questioned himself: Where does climate action come from? –raising doubts that it could come from intellectual knowledge alone, but of physical experience. Maybe the legal battles on climate justice that have started to take place, are making, in their own way, the effects of climate change around the world tangible, visible, forcing us to face up to them.  To take Eliasson’s view, after all, all the human progress behind industrialization that led to the climate crisis, has the power to invent, create, and come up with the solutions, including legal solutions, to it.

 

 

 

 

 

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Are State Creditors Defeated by State Immunity from Enforcement in France?

Thu, 2016-12-29 17:26

Saria María Moreno Sanchez

MIDS Geneva LL.M. in International Dispute Settlement

The fact that foreign States are normally entitled to immunity from enforcement before national jurisdictions pursuant to customary international law, has always been the stumbling block in the enforcement of arbitral awards against them.

In France to the date State immunity from enforcement has been regulated by case law, but a new Bill on transparency, anti-corruption and modernisation (Sapin II) has been adopted to insert provisions aimed at implementing customary international law on sovereign immunity from enforcement into the French Civil Enforcement Procedure Code.

The National Assembly has recently decided to intervene by codifying these provisions after the Cour de Cassation Decision of 13 May 2015, relied on the U.N. Convention on Jurisdictional Immunities of States and their Property (U.N. Convention), which is not yet in force, to determine when State property may be subject to post-judgement measures. The Court reached its decision on the basis that the U.N. Convention reflects the current criteria for State immunity.

The draft article reads as follows:

Article 59

Following article L. 111-1 of the Civil Enforcement Procedure Code the subsequent articles are added:

Article L. 111-1-1. Provisional and enforcement measures shall only seize Foreign States property if a preliminary judicial authorization has been issued.

 Article L. 111-1-2. Provisional or enforcement measures against property of a foreign State cannot be authorized by a judge unless one of these conditions is satisfied:

 1° The State has expressly consented to the taking of such measures;

 2° The State has allocated or earmarked property for the satisfaction of the claim which is the object of that proceeding;

3° A decision or an arbitral award has been rendered against a State and it has been established that the property is specifically in use or intended for use by the State for other than government non-commercial purposes and has a connection with the entity against which the proceeding was directed…

On 15 November 2016, the Senate objected to the adoption of Sapin II before the Constitutional Council, stating that article 59 was incompatible with the rights guaranteed by the French Constitution as it impairs creditors’ rights in a manifestly excessive manner.

The requirement for preliminary judicial authorisation for the enforcement of awards, provided in Sapin II, was one of the significant points considered by the Senate to be irreconcilable with urgent enforcement measures. The Senate argued that under the Sapin II provisions, State creditors aiming to enforce an award in France would be obliged to obtain a judicial authorization from local courts, thereby hampering the enforcement of any measure targeting the property of foreign States in France.

In the Senate’s view, this would inevitably lead to the relocation of movable assets by foreign States and will put the burden of proof on States’ creditors as they will be bound to demonstrate before a local court that the property at stake is solely for commercial purposes.

Although Sapin II was intended to implement the U.N. Convention, the Senate highlighted that integrating a preliminary judicial authorisation for enforcement measures was not envisaged by the U.N. Convention and is therefore contrary to the right to enforce judicial decisions guaranteed by the Constitution and by the European Court of Human Rights.

On 8 December 2016, the Constitutional Council decided that article 59 is consistent with French Constitution provisions and therefore rejected the Senate’s objection. The Constitutional Council stated that the judicial authorization ensures compliance of the legal conditions required for the enforcement measures and thereby protects public interest.

After the Bill is enacted, the perception of Paris as one of the top arbitration jurisdictions in the world may be affected due to provisions hindering the enforcement of awards against property covered by State immunity protection. It has already been acknowledged that France may try to follow the path of the ‘Yukos Law’ passed in Belgium, which also requires foreign States’ creditors to obtain a judicial authorization for the attachment of foreign States’ assets.

To require States’ creditors to preliminarily prove that foreign States’ property is not sovereign could imply imposing a high threshold for foreign States’ creditors. It will likely be difficult for creditors to discharge that burden of proving that the property they seek to attach is undeniably used for commercial purposes. This may mean that the pendulum is swinging back slightly towards absolute immunity from enforcement.

Overall, the amendment to the French Civil Enforcement Procedure Code reflects France’s intention to embrace the undertakings provided by the UN Convention, in situations where grating attachment against foreign States’ assets will be inappropriate. Likewise, it will enable national courts to ensure enforcement measures against State property in appropriate cases. Nevertheless, if the Senate is correct, Sapin II may be going too far in requiring a preliminary judicial authorization for enforcement of measures against property subject to State immunity.

 

 

 

 

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The German Constitutional Court Judgment in the Vattenfall case: Lessons for the ECT Vattenfall Arbitral Tribunal

Wed, 2016-12-28 17:49

Nikos Lavranos

NL-Investmentconsulting

On 6 December 2016 the German Constitutional Court (GCC) delivered its judgment in the case of Vattenfall and other nuclear power energy companies against Germany.

This dispute and final judgment – which have attracted far less attention and criticism from anti-ISDS groups than the Vattenfall dispute currently under the Energy Charter Treaty (ECT) – provide some valuable lessons for the arbitral tribunal in the ECT Vattenfall dispute.

As is well known, the ECT Vattenfall dispute (as well as the dispute before the GCC) relate to the rather sudden decision of the German Government following the Fukushima disaster to close down all nuclear power stations without any compensation. This decision was taken only months after the same Government had decided to significantly extend the periods of the existing permits for the nuclear power plants.

The main issue of the dispute before the GCC concerns the question whether or not Vattenfall and the other energy companies must be compensated. This in turn requires that the property of the companies has been expropriated in a manner that must be compensated according to German constitutional law by the German State.

Interestingly, the main question at issue in the ECT proceedings is very similar: must Germany compensate Vattenfall according to the ECT because the investments (property) of Vattenfall were unjustifiably expropriated?

It therefore does not come as a surprise that the main elements of the legal analysis and conclusions of the GCC can to a large extent be applied in analogy to the ECT proceedings. In other words, the Vattenfall judgment of the GCC offers useful lessons for the ECT arbitral tribunal – in fact, for any arbitral tribunal that has to balance the protection of investments against the protection of public goods and regulatory policy space.

1st lesson: States enjoy broad regulatory powers

The GCC was very clear that the State enjoys broad regulatory powers when it comes to the protection of public goods such as health and environment. Although the events in Fukushima did not alter the security of the nuclear power stations in Germany and despite the fact that such an earthquake followed by a tsunami can be practically excluded for Germany, the German State is free to decide to shut the nuclear power stations down. In other words, the German Government and ultimately the German Parliament are free to make the ultimate determination as to whether or not the remaining risks of nuclear power stations are still acceptable or not. Thus, the GCC unambiguously confirmed the broad regulatory powers of the State. Indeed, it did so in a very similar manner as the arbitral tribunal in the Philip Morris v. Uruguay tobacco plain packaging case.

Accordingly, the GCC Vattenfall judgment defies yet again the unfounded critique of anti-ISDS groups that judicial proceedings – be they national or international – would somehow limit the regulatory powers of the State

2nd lesson: legitimate expectations must be protected

Despite the broad regulatory freedom of the State, the State must act within certain boundaries. One important element in this regard is the protection of legitimate expectations.

More specifically, after the German State had extended the permissions for the nuclear power plants, Vattenfall and the other power plant operators were entitled to feel encouraged to undertake investments in their plants and did not have to expect that within the same legislative period, the German legislature would again distance itself from its fundamental decision in energy policy matters. The GCC stated in this context that:

“even the paramount public interest grounds for an accelerated nuclear phase-out cannot absolve the legislature of the consequences of those investments undertaken in the short period of validity of the 11th AtG Amendment [which extended the permissions] and in the legitimate expectation that the legislature itself had brought about with view of the prolongation of the operational lifetimes”.

Again, the similarities with the legitimate expectation principle in investment arbitration law is striking. Many arbitral tribunals have essentially approached this matter in the same way: when States create legitimate expectations, which in turn have resulted into investments, the investor can expect that the State acts in a reasonable and foreseeable manner. Conversely, if the State suddenly and unexpectedly completely reverses in a very short time frame its policy, the legitimate expectations of the investors must be protected.

3rd lesson: unjustifiable expropriation of property must be compensated

Finally, the GCC turned to the issue of the protection of property, expropriation and compensation. Based on its extensive jurisprudence, the GCC first of all made it clear that the protection of property can be limited for public purposes. Accordingly, the power plant owners had to accept a certain level of interferences with their property rights.

However, based on the principle of proportionality the GCC found that the lack of any compensation for the complete reversal of its policy on nuclear power constitutes violation of the property rights of Vattenfall et al.

Accordingly, the main take away from this judgment is that while the State retains broad regulatory powers to protect public goods, which may even lead to the expropriation of the property, disproportionate expropriation must be compensated.

In other words, expropriation for public purposes is acceptable as long as it is accompanied by adequate compensation. Again, this is strikingly similar to the system provided for in practically all bilateral investment treaties (BITs). This shows that the provisions contained in BITs and the jurisprudence developed by arbitral tribunals is very much in tune with generally accepted constitutional law principles. Hence, BITs are nothing extraordinary or give investors special rights, but rather fit nicely into the Rule of Law system of the most advance democratic legal systems.

Foreshadowing the outcome in the Vattenfall ECT dispute

While it is obviously impossible to try to forecast the outcome of the Vattenfall ECT dispute, the similarities described above would seem to indicate that the arbitral tribunal would come to comparable conclusions as the GCC.

More specifically, it seems rather undisputed that the arbitral tribunal would also conclude that Germany has broad regulatory powers to determine whether or not, and if so, to what extent it considers the use of nuclear power as acceptable.

Moreover, following the general approach of other arbitral tribunals concerning the protection of legitimate expectations, it would seem likely that the Vattenfall arbitral tribunal would also conclude that Germany created legitimate expectations vis-à-vis Vattenfall that deserve to be protected.

As a consequence thereof, it would not be surprising if the Vattenfall arbitral tribunal would come to the same conclusion as to the GCC, namely, that the absence of any compensatory measures is a disproportionate interference with the property of Vattenfall, which has led to the destruction of investments made by Vattenfall, that must be compensated.

Whether or not the Vattenfall arbitral tribunal will decide as predicted remains to be seen.

However, at the very least it can be expected that the arbitral tribunal will perform a very comprehensive balancing between the regulatory powers of the State and the protection of the legitimate expectations and property rights of the investor. Just like the GCC, the arbitral tribunal will most likely analyse all arguments in-depth and come to a well-reasoned decision. In other words, we can expect to see a detailed award, which meets the highest legal standards – very much comparable to the GCC or any other international court or tribunal.

Accordingly, the Vattenfall arbitral tribunal will – hopefully – defy the anti-ISDS groups who have created such an unfounded hysteria against ISDS in the public debate by claiming that the Vattenfall case is an example of so-called “regulatory chill” or even worse undermining democracy.

 

 

 

 

 

 

 

 

 

 

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The Year 2016 for India – Of New Beginnings and Not-So-Happy Endings?

Tue, 2016-12-27 22:21

Tejas Shiroor

Lazareff Le Bars For ArbitralWomen

Much Ado About India’s Protectionist Model BIT

The last week of November 2016 was an eventful and rather paradoxical week for India. While India and Brazil successfully concluded negotiations for a new Bilateral Investment Treaty (“BIT”), the India-Netherlands BIT expired.

India has spent the past year refurbishing its investment agreements. According to UNCTAD, India is one of the most frequent respondent states in investor-state disputes, with approximately 20 disputes filed against it since 2003, three of which were initiated in 2016. In an attempt to armour itself against fresh attacks by investors, the Indian government notified 57 countries with which its BITs have expired, or are soon to expire, that it intends to negotiate new treaties upon their expiry. These negotiations will be based on India’s Model BIT (the “Model BIT”), which India circulated in December 2015.

The Model BIT has raised more than just a few eyebrows, as it does away with significant protections that investors conventionally rely on. For example, it does not contain a most favoured nation (“MFN”) clause; it does away with the fair and equitable treatment (“FET”) standard; it insists on the exhaustion of local remedies (both judicial and administrative) during a period of at least five years (unless the investor can demonstrate that there are no available domestic legal remedies capable of providing any relief), and provides for a further cooling-off period of six months, before initiating arbitration proceedings.

Nevertheless, the Sun Rises on the India-Brazil BIT…

While sceptics have wondered just how much success India will have in negotiations based on this rather protectionist Model BIT, India seems to have found a friend in its main trading partner in Latin America, and BRICS counterpart – Brazil.

As reported by IAReporter, India and Brazil have recently successfully agreed on a BIT. While the text of the India-Brazil BIT will be published only later this year, according to IAReporter:

• Investors will not have the option of initiating arbitration proceedings against India or Brazil. The BIT replaces investor-state arbitration with other alternative dispute resolution mechanisms, such as an ombudsman, state-to-state arbitration and “dispute prevention procedures”.
• The BIT does not provide for the blanket protection of the FET standard. Instead, it contains specific protections derived from customary international law, such as protection against denial of justice.
• The MFN clause has been omitted entirely from the BIT.
• The BIT also contains investor obligations and a number of exceptions relating to taxation, labour, health, security, human, animal and plant life, and “national archaeological treasures”.

The unconventional nature of the India-Brazil BIT, and the exclusion of investor-state arbitration in particular, does not come as a surprise. Brazil, which is the fifth largest beneficiary of foreign direct investment (“FDI”) in the world, and the largest in Latin America, has called into question the belief that more BIT protection entails more FDI. Unlike other countries, Brazil has refused to entangle itself in a web of BITs, by signing but not ratifying 14 BITs in the 1990s. Since 2015, however, Brazil has signed new BITs with Angola, Chile, Colombia, Malawi, Mexico, and Mozambique. It is worth noting that none of these new BITs are presently in force, and that its BITs with Angola and Mozambique exclude investor-state arbitration as a means of dispute resolution.

Prospective investors and practitioners will naturally wonder whether the exclusion of investor-state arbitration could render the India-Brazil BIT toothless. That said, as discussed below, could it also toll the death knell for intra BRICS arbitration?

The finalisation of the India-Brazil BIT comes on the heels of the Conference on International Arbitration in BRICS organised by the Indian government on 27 August 2016, ahead of the 8th BRICS Summit hosted by India on 15-16 October 2016. The aim of the conference was to debate the need to develop an effective international arbitration system for the resolution of intra BRICS commercial and investment disputes. Mr Arun Jaitley, the Indian Finance Minister, recommended that a task force comprising representatives from the BRICS member states be set up to suggest institutional reforms in international arbitration and develop arbitration as an alternative dispute resolution mechanism for intra BRICS investment and commercial disputes.

Three months down the line, now that two major BRICS countries, India and Brazil, have chosen to opt out of investor-state arbitration, India’s enthusiasm for arbitration of intra BRICS investment disputes is dubious. Moreover, their fellow BRICS, South Africa’s dislike for international arbitration is no secret. South Africa was the first African country to terminate its BITs and replace them with domestic law, the Protection of Investment Act 22 of 2015, which denies investors direct access to investor-state arbitration. This law requires investors to resort to local remedies to resolve investment related disputes, and provides for state-to-state arbitration, subject to the consent of the government and the exhaustion of local remedies.

Against this background, although India can talk the talk about arbitration to resolve BRICS-centric investor-state disputes, it seems rather unlikely from the India-Brazil BIT that India (or its BRICS counter-parts) will be ready to walk the walk.

… But Sets on the India-Netherlands BIT

The Model BIT has had little success so far with the capital exporting states of the European Union (“EU”).

India and the EU have been negotiating an India-EU Broad-based Trade and Investment Agreement (“BTIA”), to replace the India-Netherlands BIT which expired on 30 November 2016, as well as India’s BITs with 23 other EU states which will expire by the end of 2017.

India and the EU are nowhere close to reaching an agreement with respect to the BTIA. This is largely due to India’s inward-looking Model BIT, notably its provision which requires investors to exhaust local remedies during a period of five years before initiating arbitration proceedings.

India and the EU’s inability to reach an agreement with respect to the BTIA has been particularly worrisome, as the expiry of the India-Netherlands BIT has created a gaping legal hole in the two countries’ bilateral investment environment. While the India-Netherlands BIT contains a “sunset clause” which will protect existing investments for a period of fifteen years following termination, it will not protect new investments made after its termination on 30 November 2016.

Jyrki Katainen, Vice-President of the European Commission, cautions that in the absence of protection, European investors might not be eager to bring fresh investment into India, and the cost of capital will rise significantly. India must not take Mr Katainen’s concerns lightly. When Dutch Prime Minister Mark Rutte visited Prime Minister Modi in June 2015, he affirmed that the Netherlands has a lot to offer India, particularly in the areas of water management, health care, mobility, agriculture and horticulture, and urban planning. As reported on the Indian Ministry of External Affairs website, the Netherlands is India’s fourth largest trading partner in the EU, and the value of mutual trade has risen to more than six billion Euros in recent years. The Netherlands is also one of India’s top five investors, with the presence of 115 Dutch companies in India. In addition to possibly scaring away Dutch investors, the absence of a BIT/BTIA could worry potential Indian investors as well, as most of the out-bound FDI from India is directed to the Netherlands. If India does not play its cards right, the Netherlands may no longer have a lot to offer India, contrary to its Prime Minister’s promises.

Will India Woo Investors Despite Sending Them Mixed Signals?

Prime Minister Modi has been very vocal about facilitating “a vibrant ecosystem for alternate dispute resolution, including arbitration” to “provide additional comfort to investors and businesses”. Yet the Model BIT betrays his reluctance for arbitration.

He has acknowledged that “if a dispute arises, corporates want to resolve them quickly through arbitration, without going to courts.” However, in addition to India’s Model BIT, which compels disputing parties to first go to Indian courts, Section 29A of India’s new Arbitration and Conciliation Amendment Act, 2015, also forces parties to go to court to extend the period for completion of the arbitration beyond 18 months from the constitution of the tribunal (see here for a detailed discussion).

He has recognised that “Businesses seek assurance of the prevalence of rule of law in the Indian market. They need to be assured that the rules of the game will not change overnight, in an arbitrary fashion.” Nevertheless, his sudden (and controversial) decision to “demonetize” Indian Rupee (“INR”) 500 and INR 1000 banknotes overnight has raised alarm bells for investors as regards the stability and predictability of India’s legal environment.

So while India has been actively reshaping its arbitration laws and investment climate, the jury is still out on whether these measures will actually help create a more secure legal environment for investors, or if these mixed signals from India will drive investors away.

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Financial Institutions and International Arbitration – Asset Management

Mon, 2016-12-26 21:30

Henri-Paul Lemaitre and Duarte Gorjão Henriques

Lazareff Le Bars

General Considerations

In the context of the series of posts dedicated to the Final Report of the ICC Task Force on Financial Institutions and International Arbitration, this post aims at providing a broad picture of the scope, survey and conclusions related to the use of arbitration in disputes involving asset management matters.

As a matter of consideration of the general background, in the banking and finance industry the asset management represents a non-negligible sector. For illustrative purposes only, the website of one single asset manager advertises the existence of assets under its supervision (this includes assets under management and other client assets for which that institution does not have full discretion) worth 999 billion USD, with investment solutions including fixed income, money markets, public equity, commodities, hedge funds, private equity and real estate. Hence, the dimension and complexity of issues potentially arising therefrom are of considerable importance for the banking and finance activities at large.

In the first article dedicated to arbitration in asset management that has come to our attention, Laurent Levy defined asset management as consisting of “… custody, administration and management of assets which the client entrusts to the bank [or the other financial institution] which shall receive a compensation” 1)Laurent Levy, Arbitration of Asset Management Disputes, in ARBITRATION IN BANKING AND FINANCIAL MATTERS, 89 (G. Kaufmann-Kohler and V. Frossard, eds., 2003). jQuery("#footnote_plugin_tooltip_9487_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9487_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, involving several components and being conducted in the following areas: a) custody; b) administration; c) acquisition and disposal of assets; and d) management.2)See also Francisco G. Prol, “El Arbitraje Financiero: Una Aproximación desde España,” in “Revista de Arbitraje Comercial y de Inversiones,” edition of “Centro Internacional de Arbitraje, Mediación y Conciliación” (CIAMEN) de Madrid, Vol. VI, 2013 (3). jQuery("#footnote_plugin_tooltip_9487_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9487_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Notwithstanding this description, one might resort also to the standards of the ISO (the International Organization for Standardization), as revised in its “ISO 55000” for asset management.

Although seemingly focused on “physical” assets, a closer reading of the first definitions may lead us to consider that an asset is an item, thing or entity that has potential or actual value to an organization. Therefore, the definition encompasses all kinds of assets, including financial assets. Thus, the “ISO 55000” definition of “asset management” may be applicable in this context: asset management is the “coordinated activity of an organization to realize value from assets.” Furthermore, it may be said that “asset management” is a systematically performed process of the long-term maintenance of assets, with the objective of using the assets to produce the best results.

In the finance and banking industry, “asset management” is a process which aims to substantially expand the client’s financial portfolio. In order to do so, this process combines research, interviews, and statistical analyses of companies, markets, and trends, including evaluating asset financing options, asset accounting methods, productions operation management, and maintenance discipline in order to maximize a client’s financial portfolio value.

The survey on the use of arbitration in asset management

As a result of the research and enquiries done over the course of the works of the Task Force, it was not possible to conclude for a single approach that the players in asset management have towards the use of arbitration. We provide below a summary of the results of the survey conducted under the auspices of the Task Force.
Indeed, when the interviewees were asked whether the special character and nature of Asset Management and Private Banking have a significant bearing on the determination to use a certain type of dispute resolution system (i.e., state court litigation or arbitration), the answers ranged from “not necessarily,” or a simple “no,” to a clear positive recommendation of “arbitration as an adequate dispute resolution system in disputes between investment firms” although one interviewee was “more reluctant in relation to disputes between an investment firm and a retail client” to recommend arbitration.

When asked whether advisory and discretionary services in asset management raise any special concerns, and whether they play a role when making the determination to use arbitration to resolve disputes as opposed to traditional litigation, the answers ranged from a simple “unsure” or “no”, to a statement on the opposite end of the spectrum which suggested that instead of resorting to an institutionalized system of dispute resolution, the “nature of the services would be better protected in an arbitration procedure”. For some interviewees, the regulatory framework which applies to advisory and discretionary services in asset management may present an advantage, and may further support the use of arbitration.

Considering the question whether it would be advisable to use arbitration as a means of dispute solution in the context of asset management, generally speaking, the interviewees did not recommend the use of arbitration unless it is absolutely necessary due to the complexities inherent in the dispute. Concerns were raised because “one might anticipate problems in selecting an arbitral mechanism that is perceived as fair and impartial by the client, besides doubts about the arbitrability of such disputes (retail client as a consumer?).

As the question whether it would be advisable to use arbitration as a means of resolving asset management disputes between investment firms, with a professional client or an eligible counterparty, some interviewees expressed the view that disputes virtually never escalate, particularly up to the point of court proceedings. It is the modus operandi / “market practice” that even parties who are competitors in this field do not litigate against each other. Therefore, arbitration was not seen as having a major role in this field. On the other hand, this view was not shared by others, who recommend the use of arbitration among investment firms, and with eligible counter-parties. This lack of unanimity was also shown in cases where a dispute might arise between an investment firm and a retail client.

Finally, one interesting feature available in the international arbitration setting is the unilateral or asymmetrical arbitration clause, the use of which the interviewees were not much inclined to resort to, mostly because it may be considered invalid and unenforceable in some jurisdictions, or otherwise viewed as being biased in favor of the financial institution drafting the clause, or even bringing more complexity to the matter and possibly require additional advice.

Typical disputes in asset management

In order to properly ascertaining the use of arbitration in asset management matters, one must look at the issues that commonly arise in this context. The typical disputes are of course of a primarily contractual nature, giving rise to contractual liability.3)Laurent Levy, Arbitration of Asset Management Disputes, in ARBITRATION IN BANKING AND FINANCIAL MATTERS, 106 (G. Kaufmann-Kohler and V. Frossard, eds., 2003). jQuery("#footnote_plugin_tooltip_9487_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9487_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

However, when analyzing the cases where a dispute typically arises in the context of asset management, one should keep in mind the common features of this activity, which involve the setting of goals, the allocation of funds, the setting of a strategy and the monitoring of that strategy. Typically, asset management involves investments or specific advice regarding whether to invest, which are consequently subject to processes of decision-making. These processes are, in turn, subject to several factors associated with the prediction of the financial portfolio’s performance. This performance may suffer due to changes in those factors but may also be impacted by wrong assessments and decisions (or advice provided in this context) along the way. Consequently, it is fair to assume that typical disputes in asset management involve issues related to misrepresentation, lack of consideration, and mistake. In addition, misappropriation, possible force majeure/fait du prince, an unexpected change in circumstances, and a change in regulation(s) may also appear as the subject matter of an asset management dispute.

Issues of the scope of the management agreement contract between the bank and the client may be at stake. According to the plain meaning of the agreement, considered together with trade usage and the special instructions of the client, one may ask whether the bank’s actions were within the scope of the agreement. Going even further, what if the mandate is restricted to “common bank investment instruments”? And furthermore, what are “common bank investment instruments”? Are they comprised of security lending? Over-the-counter instruments? Financial futures? One may also ask: was the bank authorized to enter into any of these transactions?

Key benefits of arbitration in asset management

The issues mentioned above reinforce the idea that resolving disputes in asset management requires a decision-maker with a sufficient level of skill(s) and expertise, which may not be available in courts in many jurisdictions around the globe.

Arbitration has the potential to provide a decision-maker who has the expertise the parties determine is desirable for a particular transaction or dispute. Arbitration also seeks to ensure that the decision-maker is neutral, which is particularly important for asset management disputes connected to two or more jurisdictions.

Arbitration is ideally suited to safeguarding the confidentiality of the proceedings and of the
dispute itself, which is particularly important for asset management providers who do not wish to have their identities revealed, especially in the case of a breach or fault, and for clients
who do not want to have their financial positions exposed.

As discussed in the introductory post, confidentiality can be protected and preserved through a careful analysis of the legal and institutional regulatory framework applicable to the arbitration proceedings, as well as through the drafting of arbitration clauses and other agreements to ensure that all stages of the proceedings and all participants comply with confidentiality duties and requirements.

References   [ + ]

1. ↑ Laurent Levy, Arbitration of Asset Management Disputes, in ARBITRATION IN BANKING AND FINANCIAL MATTERS, 89 (G. Kaufmann-Kohler and V. Frossard, eds., 2003). 2. ↑ See also Francisco G. Prol, “El Arbitraje Financiero: Una Aproximación desde España,” in “Revista de Arbitraje Comercial y de Inversiones,” edition of “Centro Internacional de Arbitraje, Mediación y Conciliación” (CIAMEN) de Madrid, Vol. VI, 2013 (3). 3. ↑ Laurent Levy, Arbitration of Asset Management Disputes, in ARBITRATION IN BANKING AND FINANCIAL MATTERS, 106 (G. Kaufmann-Kohler and V. Frossard, eds., 2003). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors:

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The Need for Confidentiality in Arbitration Proceedings Relating to Advisory Matters

Sun, 2016-12-25 22:24

Arnaud de La Cotardière and Claudia Cavicchioli

Linklaters For Linklaters

Advisory works generally include advisory services rendered by investment banks to their clients in two main areas: M&A (mergers and acquisitions) and equity capital markets. In this context, a financial institution will enter into a various number of agreements, either with its clients (mandate, etc.) or with its counterparty to a transaction where the deal is conducted for its own account (share purchase agreement, etc.).

From a theoretical perspective, international arbitration appears particularly suited as a dispute resolution method for M&A and advisory works, notably given the generally complex issues they raise and the frequent need for confidentiality, due to the generally sensitive nature in terms of reputation.

The interviews conducted when drafting the ICC Commission Report on Financial Institutions and International Arbitration (the “Report”) have shown that this theoretical approach is largely adopted by financial institutions, which, nevertheless, still have concerns in submitting disputes to international arbitration. While showing a strong interest in arbitration, many representatives of financial institutions indicated that they rarely have recourse to this kind of dispute resolution mechanism, because of the cost involved (at least in some jurisdictions), the general unfamiliarity with the process and, in particular, a lack of trust in the process, as they perceive arbitration to be a “small club” with only few players.

On the other hand, the interviews supported the idea that one of the key perceived benefits of international arbitration in advisory matters relates to the existence of private hearings and the possibility of confidentiality. The possibility of opting confidentiality is therefore frequently a determining factor in a financial institution’s choice to submit a dispute to arbitration, insofar as it is upheld in the lex arbitri, or imposed under the rules of the arbitration institution, or provided for in the parties’ dispute resolution clause.

A large majority of the interviewees have notably underlined the risk of reputational damage for an advisor, should a negligence or a similar claim be heard publicly. One financial institution also responded that it will be more inclined to submit a dispute to arbitration when the parties believe that the possibility of confidential proceedings may encourage a settlement of the dispute between the parties before the award is rendered. A dispute arising out of the acquisition by a hedge fund of a stake in a company subject to a squeeze-out was cited as an example.

In this respect, the interviewees were well aware that, unless otherwise provided for under the applicable law, arbitration under ICC Rules is private but not expressly confidential. Therefore, when confidentiality is sought, the parties have to agree that the arbitration proceedings must remain confidential, either in their dispute resolution clause, or during the arbitration proceedings themselves, in the terms of reference.

In light of the possibility of opting for confidential proceedings, international arbitration is increasingly a part of the strategic options considered for cross-border banking and financial disputes in advisory matters and an important alternative to domestic litigation.

It is legitimate to ask whether international arbitration will eventually be seen as a viable alternative dispute resolution mechanism for resolving advisory disputes. The elements of response to this question are to be found in the complexity of the issues at stake, which relates to two main factors. First of all, advisory disputes often arise between commercial partners (notably, between financial institutions and their major clients), who will set as one of their main goals the need for maintaining the business relationship. Secondly, the disputes in this field are of a particular nature, as they seldom arise out of a matter of bad faith or wilful misconduct. Most commonly, the dispute will relate to a problem of interpretation of a complex contractual arrangement, whose issue is genuinely uncertain.

In light of these factors of complexity, disputes in advisory matters require a dispute resolution mechanism which helps, as much as possible, to create a smooth procedure. One could claim that arbitration could serve as the perfect alternative forum. Arbitration is indeed flexible by nature. Will it be flexible enough to convince Financial institutions? That will depend on many things, but mainly on the arbitrators and lawyers attitudes!

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What Law Governs the Separability of an Arbitration Agreement?

Sat, 2016-12-24 22:07

Francis Hornyold-Strickland

Wilmer Cutler Pickering Hale and Dorr LLP

Introduction

It is a key principle in many jurisdictions across the world that arbitration clauses should be separable from the underlying contract in which they are contained. This prevents arbitration clauses from being denuded of their effect, particularly where the contract is void for fraud.

However, not all jurisdictions uphold the separability principle. Therefore, in circumstances where the validity of an arbitration clause is challenged, it becomes necessary to identify the law (or laws) that should govern the question of separability.1)As discussed in this article, in some jurisdictions the question of separability can be governed by any one of a number of relevant laws. jQuery("#footnote_plugin_tooltip_3887_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3887_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This article explores the absence of an international consensus on this issue, with reference to the recent English case NIOC v Crescent Petroleum [2016] EWHC 510 (Comm) – an application under sections 67 and 68 of the Arbitration Act 1996 (“the Act”) to set aside an arbitral tribunal’s decision, including its finding that it had jurisdiction.

NIOC v Crescent Petroleum

In NIOC v Crescent Petroleum the contract was governed by Iranian law and provided for ad hoc arbitration. The parties had not stipulated the seat of arbitration, but when Crescent commenced proceedings against the National Iranian Oil Company (“NIOC”) for breach of contract, both parties agreed to seat the arbitration in London.

In the arbitration proceedings, NIOC challenged the jurisdiction of the arbitrators, arguing that: (1) the contract had been procured by corruption and was therefore void; (2) in the absence of an express choice of law governing the arbitration agreement, the arbitration agreement was governed by Iranian law; (3) the separability presumption is not recognized under Iranian law and therefore the arbitration agreement was necessarily void along with the contract; and (4) as a consequence, the arbitrators had no jurisdiction.

The tribunal rejected NIOC’s challenge to jurisdiction and found against NIOC on the merits. NIOC applied to the courts of the seat – to the commercial division of the English High Court – to set the award aside.

In the application to set aside the award, NIOC relied on Sections 2(5) and 4(5) of the English Arbitration Act to argue as follows: (1) applying Section 2(5) where an arbitration is seated outside England & Wales but the law of the arbitration agreement is English, that law governs separability, therefore, separability is implicitly a matter of the substantive law of the arbitration agreement, not of the lex fori2)Section 2(5) of the Act provides that where English law governs the arbitration agreement and where an arbitration is seated outside England & Wales, the separability presumption under Section 7 of the Act applies. Although, by contrast, the arbitration in this instance was seated in England, NIOC submitted that this provision meant that, as a matter of English law, the law of the arbitration agreement governs the question of separability. jQuery("#footnote_plugin_tooltip_3887_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3887_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });; (2) applying Section 4(5) of the Act the substantive law of the arbitration agreement was the same as that under the contract, namely Iranian law; the law of the seat was not applicable because the seat was only chosen after the arbitration agreement was entered (and the law governing the arbitration agreement should not change); (3) Iranian law does not recognize the separability principle and therefore both the contract and the arbitration agreement were void.

The judge in the case, Justice Burton, rejected these arguments and instead held that Section 2(5) was not applicable since the arbitration was seated in England. Rather, applying Sections 2(1) and 7 of the Act, he held that the arbitration agreement was valid.

Section 2(1) provides that where an arbitration is seated in England, Section 7 of the Act applies. Section 7 articulates the English law position on separability and reads:

“Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement.”

This judgment supports the presumption of separability and is consistent with the pro-arbitration position adopted by English courts, as well as that of numerous other jurisdictions.

The judgment does, however, leave unanswered the issue of the legal basis of the separability presumption, which NIOC sought to exploit. Its arguments raise interesting conflict of laws and/or comity questions regarding the governing law of separability: specifically, it remains unclear whether the law of the main contract, the law of the arbitration agreement, the lex fori, or (where different) the relevant procedural law applies. This is a question for which there is no international consensus.

In certain jurisdictions it may not matter: arbitrators can employ the “validation principle” to give effect to the separability of an arbitration agreement. This principle encourages arbitrators to apply a law connected to the dispute that will give effect to separability and the parties’ agreement to arbitrate.3)Born, Gary. International Commercial Arbitration: Commentary and Materials. Second Edition. Kluwer Law International. 2001, at p.112. See also: Born, Gary. International Arbitration: Law and Practice. Kluwer Law International. 2012, at p. 56; Article 178(2) of the Swiss Law on Private International Law; Santiago de Compostela Resolution of the Institut de Droit International, Article 4, in 4 ICSID Rev. 139, 141 (1989); Award in ICC Case No. 7920 of 1993, XXIII Y.B. Comm. Arb. 80 (1998). jQuery("#footnote_plugin_tooltip_3887_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3887_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); A number of legal systems adopt the principle, including Switzerland, Spain and Algeria, as well as the Institut de Droit International.4)Born, Gary. International Commercial Arbitration. Second Edition. Kluwer Law International, at §4.04[A][3] and §19.04[A][d]; See also for instance, Hamlyn & Co v Talisker Distillery [1894] AC 202, 215 (House of Lords): “[i]t is more reasonable to hold that the parties contracted with the common intention of giving entire effect to every clause, rather than of mutilating or destroying one of the most important provisions [-] the arbitration clause becomes mere waste paper if it is held that the parties were contracting on the basis of the application of the law of Scotland.”; see also Judgment of 26 August 2008, XXXIV Y.B. Comm. Arb. 404, 405 (Austrian Oberster Gerichtshof) (2009); Award in ICC Case No. 11869, XXXVI Y.B. Comm. Arb. 47, 57 (2011); and Collection of ICC Arbitral Awards 1991-1995 75, 84 (1997). jQuery("#footnote_plugin_tooltip_3887_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3887_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The English Arbitration Act implicitly adopts a similar, although slightly different, approach: the Act has no provision that permits arbitrators to choose whichever law would give effect to separability. Instead, the Act provides for English law as the governing law for separability in scenarios where: (1) the arbitration is seated in England & Wales irrespective of the law of the contract and/or arbitration agreement5)If the arbitration is seated in England & Wales, the separability presumption applies, unless the parties have expressly stipulated that separability is to be governed by a different law (see Section 7 of the Act). jQuery("#footnote_plugin_tooltip_3887_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3887_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });; and (2) where the arbitration is seated outside England and Wales but the law governing the arbitration agreement is English. In this regard the Act is more prescriptive than the validation principle but similarly expansive in its reach.

From a pure conflict of laws perspective, there is a clear tension between holding that: (1) the lex fori governs separability for arbitrations seated in England & Wales, but that (2) for arbitrations seated outside England & Wales, the law of the arbitration agreement (if English), governs separability, rather than the lex fori. Nonetheless, both achieve the effect of engaging Section 7 of the Act, which upholds the separability presumption. In this regard, the Act upholds the separability presumption whenever there is a connection to England & Wales or English law.

This might be seen as an implicit adoption of something similar to the validation principle. Both the validation principle and the English Arbitration Act prioritize expanding the reach of the separability presumption, over legislating for a single law that should govern the question. This is despite the fact that the latter would be more consistent with normal conflict of laws principles. However, arguably, when weighing up these competing concerns, given the centrality of party choice to the arbitration process, the absence of clarity over conflict of laws is a sacrifice worth making to maintain the validity of arbitration agreements: without Section 2(5) of the Act, it is quite possible that NIOC’s application would have succeeded and the tribunal’s jurisdiction may have been successfully challenged. That result would have undermined the parties’ express choice to resolve their dispute by arbitration and forced them to litigate, which, in turn, would have damaged the perception of arbitration as an effective, binding mechanism.

Taken in this light, the Act maintains the progressive approach to arbitration that has been a central tenet of English law since the early 2000s. At a time when arbitration is coming under increasing scrutiny, the Act remains a welcome legislative framework to uphold party autonomy and keep the parties to their agreement to arbitrate. In doing so it helps to ensure arbitration’s continued effectiveness as a dispute resolution tool.

References   [ + ]

1. ↑ As discussed in this article, in some jurisdictions the question of separability can be governed by any one of a number of relevant laws. 2. ↑ Section 2(5) of the Act provides that where English law governs the arbitration agreement and where an arbitration is seated outside England & Wales, the separability presumption under Section 7 of the Act applies. Although, by contrast, the arbitration in this instance was seated in England, NIOC submitted that this provision meant that, as a matter of English law, the law of the arbitration agreement governs the question of separability. 3. ↑ Born, Gary. International Commercial Arbitration: Commentary and Materials. Second Edition. Kluwer Law International. 2001, at p.112. See also: Born, Gary. International Arbitration: Law and Practice. Kluwer Law International. 2012, at p. 56; Article 178(2) of the Swiss Law on Private International Law; Santiago de Compostela Resolution of the Institut de Droit International, Article 4, in 4 ICSID Rev. 139, 141 (1989); Award in ICC Case No. 7920 of 1993, XXIII Y.B. Comm. Arb. 80 (1998). 4. ↑ Born, Gary. International Commercial Arbitration. Second Edition. Kluwer Law International, at §4.04[A][3] and §19.04[A][d]; See also for instance, Hamlyn & Co v Talisker Distillery [1894] AC 202, 215 (House of Lords): “[i]t is more reasonable to hold that the parties contracted with the common intention of giving entire effect to every clause, rather than of mutilating or destroying one of the most important provisions [-] the arbitration clause becomes mere waste paper if it is held that the parties were contracting on the basis of the application of the law of Scotland.”; see also Judgment of 26 August 2008, XXXIV Y.B. Comm. Arb. 404, 405 (Austrian Oberster Gerichtshof) (2009); Award in ICC Case No. 11869, XXXVI Y.B. Comm. Arb. 47, 57 (2011); and Collection of ICC Arbitral Awards 1991-1995 75, 84 (1997). 5. ↑ If the arbitration is seated in England & Wales, the separability presumption applies, unless the parties have expressly stipulated that separability is to be governed by a different law (see Section 7 of the Act). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors:

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Austrian Supreme Court Establishes New Standards as Regards the Decisive Underlying Reasoning of Arbitral Awards

Fri, 2016-12-23 22:49

Anne-Karin Grill and Sebastian Lukic

Schoenherr For Schoenherr

The decisive underlying reasoning (motifs, Begründung) is, without doubt, an essential part of any arbitral award and as such bears the potential of frustrating parties and arbitrators alike. On the one hand, elaborate reasoning in arbitral awards more often than not comes at the price of long waiting periods for the issuance of the awards, and periods of meticulous drafting on the part of the arbitrator(s). On the other hand, a lack of elaborate reasoning may likewise be a headache, since it exposes the arbitral award to setting aside.

From a practitioner’s point of view, how do you reconcile the extremes? When can the decisive underlying reasoning of an arbitral award be considered sufficient against the background of possible setting aside proceedings? Clearly, these are questions that must be determined on a case-by-case basis. Further, any assessment will necessarily be informed by the relevant lex arbitri.

As for arbitral awards issued by tribunals seated in Austria, a key provision in this respect is Section 611(2) para 5 of the Austrian Code of Civil Procedure (“ACCP”). This provision states that arbitral awards shall be set aside if the arbitral proceedings were conducted in a manner that is in conflict with the fundamental values of the Austrian legal system (procedural ordre public). Prevailing scholarly opinion argues that procedural ordre public may only be invoked where severe breaches of procedural law have materialised.

Up until recently, scholarly opinion in Austria also supported the finding of the Austrian Supreme Court that the failure to include any decisive reasoning in the arbitral award whatsoever or to include only insufficient reasoning, did not constitute a violation of Austrian procedural ordre public. The most recent judgment on the subject matter issued by the Austrian Supreme Court stems from September 2016 and marks an important turnaround regarding the relevance of the decisive reasoning underlying arbitral awards (OGH 28.09.2016, 18 OCg 3/16 i). In the case at hand, the Austrian Supreme Court was called upon in connection with setting aside proceedings relating to an interim award (Zwischenschiedsspruch). One of the questions before it was whether the decisive reasoning underlying the interim award was “insufficient” to a degree rising to the level of a violation of Austria procedural ordre public. By reference to the amendments introduced to the Austrian Arbitration Act (Schiedsrechtsänderungsgesetz 2006), the Austrian Supreme Court overturned its longstanding jurisprudence on the setting aside of arbitral awards on the basis of violations of Austrian procedural ordre public, finding that non-adherence to certain standards applicable to the underlying decisive reasoning in arbitral awards can be a ground for setting aside under Section 611(2) para 5 ACCP. According to the Austrian Supreme Court this is necessarily so in light of the fact that the standards applicable to arbitral awards are not the same as those applicable to judgements of civil courts. In this context, the Austrian Supreme Court called upon arbitral tribunals to strictly implement formal quality (formale Qualität) in their awards, especially in the absence of an appellate mechanism in the context of arbitration by which legal flaws in the decision – be them formal or material in nature – could be addressed. In particular, the Austrian Supreme Court held that

– arbitral awards are subject to setting aside pursuant to Section 611(2) para 5 of the ACCP if the decisive underlying reasoning consists merely of “meaningless phrases” (inhaltsleere Floskeln);

– if arbitral awards, in the decisive underlying reasoning section, make reference to the submissions of one party only, such reference does not imply “insufficiency” in the given context; and that

– an arbitral award is sufficiently reasoned (ausreichend begründet) if the arbitral tribunal discusses its own position in the course of the proceeding and, in the subsequent award, makes reference to this position.

The recent judgement of the Austrian Supreme Court is certainly to be welcomed. From both arbitrators’ as well as counsels’ perspective, it provides essential guidance: in the process of drafting their awards, arbitrators will forthwith have to bear in mind the minimum standards expressly determined by the Austrian Supreme Court. Counsels, on the other hand, in assessing the chances of success of potential setting aside proceedings in Austria, will be mindful that while the recent judgment may have opened a new door for setting aside in Austria, even awards that contain only insufficient reasoning will not be set aside by the Austrian state courts. This will be so in cases where (i) the parties expressly waived their right to receive a reasoned award (Verzicht auf die Begründung des Schiedsspruchs, Section 606(2) ACCP) or, more importantly, where (ii) the parties did not request an explanation of the award (Erläuterungsantrag, Section 610(1) para 2 ACCP). The latter, in particular, is a remedy that will have to have been exhausted before an application for the setting aside of the award may be lodged.

In conclusion, a word of reassurance may be in order. While the Austrian arbitration landscape is now richer in terms of grounds for setting aside, it is unlikely that we will see a surge in complaints as regards the quality of the decisive underlying reasoning in awards issued by arbitral tribunals seated in Austria. If anything, the change of direction regarding the jurisprudence of the Austrian Supreme Court will serve to improve the quality of Austrian arbitral awards even further.

*Anne-Karin Grill was recently named “Future Leader in Arbitration 2017” by Who’s Who Legal.

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