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Disclosing the Elephant in the Case File? Costa Rican Court Sets Aside Award

Thu, 2020-05-21 03:00

The Costa Rican court in charge of deciding upon arbitral matters recently set aside an award on the ground of the arbitrator’s failure to disclose a circumstance that could be found in the case file.

In a five-page judgment dated June 27, 2019,1)Judgment from 27 June 2019, PH Chucás S.A. v. Instituto Costarricense de Electricidad, Case No. 989-F-21-2019 from the First Chamber of the Supreme Court of Justice of Costa Rica. jQuery("#footnote_plugin_tooltip_4980_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4980_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the First Chamber of the Supreme Court of Costa Rica annulled the award, which ruled against the Costa Rican Electricity Institute (ICE), a state-owned company that exclusively manages the electricity system in the Central American country.

 

The arbitration

The arbitration was conducted under the 2014 International Centre for Conciliation and Arbitration, US–Costa Rican Chamber of Commerce (CICA) Rules and governed by the domestic arbitration law of Costa Rica (Law 7727).

The arbitral tribunal ruled in favor of the Claimant, PH CHUCÁS, S.A. – a Costa Rican registered company in charge of the development of an electricity power plant under the public tender 200LI-000043-PROV – and ordered ICE to restore the financial equilibrium of the tender from US$ 107.5 million to $280 million, inter alia. The arbitration is high profile in Costa Rica due to the amount in dispute and the repercussions that such contingency could have on the finances of the state-owned entity.

The arbitral tribunal was composed by three arbitrators: Mario Pacheco Flores (President designated by the co-arbitrators and appointed by CICA), Fernando Montero Piña (appointed by PH CHUCÁS), and Adrián Alvarenga Odio (appointed by ICE).

 

The judgment

Once the award was rendered, ICE discovered that the arbitrator’s law firm provided several notarial services to the claimant. The First Chamber found in the Case No. 989-F-21-2019 that the president – Mr. Pacheco – had failed to disclose that he had acted himself as Notary Public in 2011 for the Claimant in one occasion. This public deed in which Mr. Pacheco acted as Notary Public could have been discovered in the arbitration’s case file as it formed part of the public tender (subject of the dispute).

Furthermore, Mr. Pacheco omitted to disclose work that was carried out by his law firm in favor of the Claimant and its related companies for the course of 10 years. One of Mr. Pacheco’s partners acted as Notary Public in the Claimant’s deed of incorporation and served as its agent. The judgment also considered as “critical evidence” the fact that Mr. Pacheco’s son used to be part of the Claimant’s Board of Directors.

Mr. Pacheco did not disclose these circumstances during the course of the arbitration. In fact, in his Statement of Impartiality and Independence he marked the option “Nothing to Declare”.

While all of the documents containing the above-mentioned information can be retrieved from the Public Registry of Costa Rica, ICE did not raise such issues during the arbitration, but only alleged them once the award was rendered.

 

The annulment of the award

The First Chamber relied on Article 11 of CICA´s Code of Ethics to annul the award. This provision states that the arbitrator’s failure to disclose any circumstance that could generate reasonable doubts as to his impartiality or independence shall be considered as an element of partiality and will entail the arbitrator’s removal, even if said circumstance does not justify the arbitrator’s removal.

The Court did not analyze the exception established in Article 11(a) of the Code of Ethics which clarifies that “the failure to disclose an indirect connection will not generate a ground for removal”. Instead, the Court made reference to the Herrera Ulloa v. Costa Rica Case of the Interamerican Court of Human Rights which states that the mere suspicion of partiality is sufficient to exclude a person from deciding a case.

The First Chamber therefore set aside the award due to Mr. Pacheco’s failure to disclose the above mentioned links that connected him and his law firm to the claimant and warned the arbitral community to perform “a higher level of assessment of its professional relationships, and the ones of its partners and family members.”

The Chamber also acknowledged that some of the documents in which the challenge was based were part of the case file and that all the information forms part of the public domain. Nevertheless, it reasoned that it was not reasonable for ICE to conduct an inquiry when the President was designated by the co-arbitrators and appointed by CICA, as it did not know about the professional connections between the arbitrator and the related entities.

The First Chamber derived the case file to the Costa Rican Bar Association for a thorough investigation of Mr. Pacheco’s conduct.

 

An international duty to disclose test

On March 27, 2018, the Paris Court of Appeal set aside an ICC arbitral award rendered in favor of Audi Volkswagen on similar grounds. In that case, the arbitrator appointed by Audi Volkswagen (Mr. Klaus-Albrecht Gerstenmaier) failed to disclose work carried out during the arbitration by his law firm (Haver & Mailänder in Stuttgart) for Porsche, which is part of Volkswagen’s Group.2)Ross, Alison. “Audi Volkswagen award set aside in Paris”. Global Arbitration Review (29 March 2018). jQuery("#footnote_plugin_tooltip_4980_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4980_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Unlike the Costa Rican case, the work performed by Mr. Gerstenmaier’s law firm became part of the public domain only after the arbitration was over. Furthermore, Mr. Gerstenmaier had not personally worked on the specific case and he alleged to have had no knowledge about it.  Nevertheless, the French Court still found that the arbitrator’s failure to disclose such circumstances created doubts as to his independence, and annulled the award.

The English Court of Appeal followed a different approach in 2018. In Halliburton v Chubb, the English Court found that even if good practice requires the arbitrator to disclose a circumstance and he fails to do so, a fair-minded and informed observer would not conclude that there is a possibility that he was biased solely because of such failure. The Court considered that “something more is required”.

The Court therefore concluded that the lack of disclosure alone did not constitute justifiable doubts as to the arbitrator’s impartiality under section 24(1)(a) of the English Arbitration Act 1996.

Halliburton appealed the decision to the Supreme Court of England and Wales and a hearing took place in November 2019. The final decision is still awaited.

 

Concluding Remarks

In line with the IBA Guidelines on Conflicts of Interest (2014) “nondisclosure cannot by itself make an arbitrator partial or lacking independence: only the facts or circumstances that he or she failed to disclose can do so.”

Thus, as the English Court of Appeal suitably inferred, nondisclosure of a circumstance that should have been disclosed does not make an arbitrator biased – “something more is required”. The First Chamber of Costa Rica set aside the award because of the arbitrator’s failure to disclose alone and did not analyze if the circumstances themselves gave raise to justifiable doubts. Such approach should be discouraged.

Arbitrators shall follow the “in case of doubt, disclose” approach in light of the complex commercial context and their duty to render an enforceable award. If an arbitrator fails to disclose a circumstance, courts shall consider whether the challenging party could have reasonably obtained the information in which the challenge is based during the arbitration. Otherwise, parties could become aware of a non-disclosed public connection between the arbitrator and the other party during the arbitration and hide it as a smoking gun for a later challenge in case they do not prevail. That situation seems to have arisen in this case, where the elephant in the room formed part of the case file all along.

References   [ + ]

1. ↑ Judgment from 27 June 2019, PH Chucás S.A. v. Instituto Costarricense de Electricidad, Case No. 989-F-21-2019 from the First Chamber of the Supreme Court of Justice of Costa Rica. 2. ↑ Ross, Alison. “Audi Volkswagen award set aside in Paris”. Global Arbitration Review (29 March 2018). 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Cote-d’Ivoire Investment Code Amendments: Regaining Control over Investment Dispute Settlement

Wed, 2020-05-20 03:00

In less than a decade, the Republic of Côte-d’Ivoire enacted two investment laws (2012 and 2018). The latter one recently amended, reflects the best practices the country has learned from its previous investor-states disputes. On December 18, 2019 the Council of Ministers introduced some amendments to the 2018 Investment Code related inter alia to VAT exemption, financial incentives subject to local content criterion among others, but most importantly to reaffirm Côte-d’Ivoire’s commitment to respect the different treaties (BITs) it entered into, while establishing the Court of Arbitration of Côte-d’Ivoire as the competent body for resolving Investor-State disputes. These latest developments can be read as Côte-d’Ivoire’s efforts to regain control over its international investment law policy, and the implementation of a Pan African objective consistent with the emergence and promotion of domestic or regional African-based dispute resolution centres.

 

The 2012 Investment Code ‘not a wonder of clarity’

The case Societé Resort Invest Company Abidjan, Stanislas Citerici, Gerard Bot v. The Republic of Côte-d’Ivoire, while pending, is the one which set in motion the changes to the investment law this post addresses. Indeed in this case, there was a discussion among the members of the tribunal as to how the State consent (Article 20, 2012 Investment Code) to ICSID arbitration should be interpreted. For the majority in its Decision on Jurisdiction, the consent to ICSID arbitration contained in Article 20 of the 2012 Investment Code could not be interpreted as requiring investors to elect in advance in the “dossier d’agrement” (translated as investment approval file) their preferred forum for dispute resolution (either local court or ICSID arbitration). Such interpretation according to the tribunal would be an “injustice” to investors, as the “dossier d’agrement” itself did not mention any disputes resolution mechanism (See para.139-140, Decision on Jurisdiction). Recognizing that investors are to be shielded from legal uncertainty notably a misinterpretation of Article 20, the tribunal made the following recommendation (See para.157, Decision on Jurisdiction):

As this is reported to be the first ICSID arbitration arising on the basis of the 2012 Code, it may be that the Côte d’Ivoire has not yet had the occasion to revisit the text of Article 20 since its promulgation. If the Côte d’Ivoire, upon receipt of the Tribunal’s decision, maintains its disagreement with the majority of the Tribunal’s analysis, then its remedy can be swift and straightforward: it can introduce amendments to Article 20 of the 2012 Code and to its model “demande d’agrément” with the effect that prospective investors will be in no doubt as to manner in which they are to convey their consent to ICSID arbitration.

The recommendation prompted the enactment of the 2018 Investment Code which in terms of dispute resolution seemingly closed the way to international arbitration and went beyond the tribunal suggestions. It is worth reminding that Article 20 of the 2012 Investment Code provided for arbitration under ICSID Convention. The 2018 Investment Code removed the offer to arbitrate pursuant to ICSID Convention, and provided for amicable settlement of the dispute to be conducted under the UNCITRAL Conciliation Rules within a year (article 50). In case of failure to reach an agreement, the parties may bring their dispute before the Common Court of Justice and Arbitration (CCJA) of OHADA Members States. After the infamous Getma v Guinea, OHADA launched significant initiatives to be a viable alternative for the resolution of international investment disputes. The latest OHADA Arbitration Rules (2017) is proof of this ambition.

 

The Amended 2018 Investment Code: A Nationalist Approach

Of importance among the changes brought to the 2018 Investment Code is the dispute resolution provision which is narrower than the previous one. Through these amendments, Cote-d’Ivoire seems to adopt a nationalist approach towards dispute resolution mechanism.

The new Article 50 of the 2018 Investment Code still provides for the amicable settlement of any disputes between an investor and the State within a period which should be no longer than twelve months (Paragraph 2 and 4). Contrary to the old version, it does not mention any rules of procedures (e.g. UNCITRAL Conciliation Rules) under which the amicable settlement should be conducted.

The reading of Paragraphs 4 and 5 suggest that parties may choose to submit their dispute either to the competent Ivorian domestic jurisdiction or to an arbitration procedure administered by the Court of Arbitration of Côte-d’Ivoire. This nationalist approach is also evidenced by the fact that the OHADA Common Court of Justice and Arbitration does not appear among the choice of forum. A fork in the road provision in the same paragraph prevents investors from pursuing parallel proceedings.

Following the suggestion made by the tribunal in Societé Resort Invest Company Abidjan, Stanislas Citerici, Gerard Bot v. The Republic of Côte-d’Ivoire, paragraph 5 requires investor to hand over to the agency in charge of investment promotion the selection of his preferred dispute resolution mechanism. Among the substantive rules of investment promotion Article 25 recognizes the State’ powers to implement measures favoring local entrepreneurship. Such measures should not prevent it from respecting its obligations to provide a national treatment as mentioned in the different international investment treaties it entered into.

The wording in the amended version of the 2018 Investment Code is unclear in that the recourse to the Court of Arbitration of Côte-d’Ivoire is optional or mandatory.

Established in 1997 with the support of the State, the Court of Arbitration of Côte-d’Ivoire has no public track-record in resolving investment disputes. Nevertheless, its selection as the competent body to resolve future investment disputes, express the desire of Côte-d’Ivoire, and in some instance African countries, to promote domestic arbitration centres as an alternative to traditional foreign arbitration centres. This is what we term “the Pan African Arbitration Approach”.

This approach refers to the recent trend that African investment-related disputes should be resolved by African arbitral institutions. Indeed with the regionalization of arbitration centres in African States, practitioners and academics have called upon to promote these institutions.

The Pan African Code of Investment encourages parties to solve their disputes through an African public or African private dispute resolution centre (Article 42.1(d)). Article 54(2) of ECOWAS Common Code of Investment (2018) advises States and investors to consider using ‘regional and national alternatives dispute settlement mechanisms’. At the national level, some States like Egypt are following the same path and may look at establishing an ‘Eqyptian Arbitration and Mediation Centre’ (Article 91, Investment Law No. 72 of 2017) in the near future.

The amendments to the Investment Code go hand in hand with the review of Côte-d’Ivoire’s international investment law policy.

 

Côte-d’Ivoire’s initiatives towards a national policy of international investment law

Côte-d’Ivoire does not want to be aside of the global agenda of international investment law and international arbitration reform. From 9-11 April 2019 in Abidjan, a training in the field of investment agreement negotiation and implementation for at least 35 government representatives was led by IISD (International Institute for Sustainable Development). Two eminent African experts, Prof. Makane M’Bengue (Geneva Graduate Institute) and Dr. Suzy Nikiema (International Institute for Sustainable Development) chaired the training.

According to the General Director of Economy at Ministry of Economy and Finance, the training was a preliminary step towards a more global investment policy reform. Indeed, in his own words, some bilateral investment treaties signed and ratified by Côte-d’Ivoire are clearly outdated; one-sided agreements which no longer conform with country development goals. Through this training, Côte-d’Ivoire seems to adopt a proactive action towards investment arbitration and international investment law.

On the international and regional level, the country is very active in the UNCITRAL Working Group III.

In the same vein, at the request of Côte-d’Ivoire UNCTAD conducted a review of its investment policy from February 2019 to November 30, 2019. The report released this year suggests at the medium term more clarification about Côte-d’Ivoire’s consent to arbitration and conciliation. In the long term, the report recommends the abrogation of the investment code which is said to be unnecessary, the adoption of an investment treaty model, the review and cost-benefits analysis of all the BITs concluded, and finally the enhancement of the BITs negotiators skills.

 

The views expressed herein are those of the author alone and should not be regarded as representative of, or binding upon ICSID where the author is currently pursuing an internship, UNCTAD, The Ministry of Economy and Finance of the Republic of Côte-d’Ivoire, or any institution to which the author is affiliated. All the references mentioned in this article are in the public domain.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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The contents of Arbitration – The International Journal of Arbitration, Mediation and Dispute Management, CIArb, Volume 86, Issue 2 (May 2020)

Wed, 2020-05-20 01:00

There are certain moments in the lifetime of an academic journal that prove to be critical for its future. For this Journal, which has been successfully published for more than 100 years now, moving to the publishing house of Wolters Kluwer will undoubtably prove to be a moment of great significance. There are three main reasons that I believe this is the case.

First, in the last two years, the editorial board of the Journal took the conscious decision to focus on articles which take an international and comparative approach and deal with topics which go beyond domestic legislation and practice. We feel strongly about this editorial direction, not least because we believe that the scope of the Journal should reflect the Journal’s global membership of more than 18,000 members who work in the field of international arbitration and, more generally, alternative dispute resolution. Wolters Kluwer is the leading publisher in the field of international dispute resolution, publishing, among other titles, the ICCA Congress Series and the International Arbitration Law Library which is the oldest and most successful academic series on international arbitration. The move to Wolters Kluwer is the natural course of evolution for the Journal and a clear sign of its commitment to academic excellence and international scholarship.

Second, much as I personally love to hold and read manuscripts and print journals, in today’s digital age, expanding the scope of the Journal’s readership requires the use of digital means of distribution. From this issue, the Journal enters a new era of being fully digital and available through Wolters Kluwer Online, in addition to being available to our CIArb members. Importantly, the Journal will now be available through KluwerArbitration.com, which is the world’s foremost resource for research on international arbitration and an indispensable tool for both practitioners and academics. The Journal will also be able to make good use of the Kluwer Arbitration Blog to promote its content and highlight some of its articles.

Third, and possibly more importantly, moving to Wolters Kluwer means that we are creating digital space to host the Journal’s glorious history. While this is still work in progress, Wolters Kluwer is currently creating digital copies of the entire archive of the Journal which stretches back to 1914. Once this enormous task of digitisation is completed, all 375 previous issues of the Journal will be available online creating an unprecedented database not only for arbitration academics and practitioners but also scholars from other fields, such as historians and political scientist, with an interest in the field of international arbitration.

I am as much delighted as excited for the Journal’s new era and look forward to working with Wolters Kluwer in the years to come.

Stavros Brekoulakis, General Editor

 

Gustavo Gaspar Nogueira, The Protection of Public Interest in Contract- Based Arbitration with Public Entities:A Comparative Analysis of the English and Brazilian Legal Systems’.

In light of the phenomenon known as government by contract, States and state entities often outsource the rendering of public services to private agents. This has led to a rise in the number of disputes, particularly arbitrations, between private and public parties. Against the background of a comparison between the English and Brazilian legal systems, this article argues that both procedural and substantive mechanisms are warranted to adequately safeguard the public interest which is implicated in such disputes. This article further explores the procedural and substantive mechanisms which have been implemented under English and Brazilian law, to find that Brazilian law has implemented procedural mechanisms which are more progressive than those provided under English law in terms of protecting the public interest. Nonetheless, this article concludes that both jurisdictions could improve their procedural and substantive frameworks applicable to arbitration proceedings involving public entities in order to achieve a more comprehensive protection of public interest.

 

 Peter O’Malley, The Irish ‘Construction Contracts Act 2013’: Adjudication – What Has Happened and Where Next?

Three years have now passed since ‘The Construction Contracts Act 2013’ (the Act) came into force in the Republic of Ireland (referred to as Ireland in this article) on 25 July 2016. This article seeks to investigate what impact the Act has made in the stated objective of supporting a swift resolution of payment disputes in the Irish construction industry, with particular emphasis on adjudication. Referring to research, evidence, authoritative commentary, and comparison with other jurisdictions, this article discusses what has influenced the adoption of the adjudication provisions in the first two years from enactment. The article then proceeds to consider adjudication activity in the third year to July 2019 in the wider context of dispute resolution activity before discussing what the future direction of adjudication in Ireland under the Act might be.

 

Enuma U. Moneke, The Quest for Transparency in Investor-State Arbitration: Are the Transparency Rules and the Mauritius Convention Effective Instruments of Reform?

In recent years, critics have questioned the legitimacy of international investment law, particularly investor-State arbitration on the grounds, amongst others, that confidentiality and lack of transparency in arbitral proceedings pose a threat to the basic principles of public law and democracy. In response, minimal transparency measures have been introduced by States, regional international economic organizations and the International Centre for the Settlement of Investment Disputes (ICSID) over the last two decades. More recently, the Transparency Rules and the Mauritius Convention were introduced by the United Nations Commission on International Trade Law (UNCITRAL) for a more far-reaching impact. These instruments have been widely applauded as the much awaited solution for entrenching transparency and enhancing the legitimacy of treaty-based investor-State arbitration. But will they really establish transparency in investor-State arbitration considering the opt-out provisions in Article 1(1) of the Transparency Rules and Article 3(1) of the Mauritius Convention? In attempting this question, the article examined the concept of treaty based investor-State arbitration, its public character and the possible effect the opt-out provisions could have on the quest for transparency. It posited that a mechanism that allows parties – States and foreign investors – a choice whether or not to apply these instruments in a given arbitration will impede the attainment of the objective of entrenching transparency in investor-State arbitration.

 

Meg Cochrane, Analysing the Overlap Between Arbitration and Human Rights

In the light of the inception of the human rights litigation revolution in the 1980s and its erosion of the traditionally preeminent perspective that arbitration and human rights constitute distinct, mutually exclusive dimensions of legal discourse, the purpose of this essay is to analyse, firstly, whether there is an overlap between arbitration and human rights and, secondly, the extent to which such exists. This essay contends that rather than employ the term ‘overlap’, arbitration in its modern form is, and has, in fact, shown itself, capable of reinforcing human rights. This contention is examined in relation to the historic scepticism concerning the potential of the arbitration system to undermine human rights protections (Part I), the perceived bias of the arbitration system towards the interests of commercial parties over those of the public (Part II), the general lack of access to effective remedies for victims of business-related human rights violations (Part III), the incorporation of third party beneficiary rights into commercial contracts to ensure compliance with human rights norms (Part IV), and the ease of enforcement regarding arbitral awards as opposed to court judgments (Part V). Nevertheless, despite the substantial progress that has been made thus far, this essay concludes that further progress is still needed.

 

Gordon Blanke, Semi-Secular Arbitration in Islamic Banking and Finance Disputes: A Proposal

This article explores the resolution of Islamic finance disputes through arbitration. It discusses in some detail the reason for which national courts meet natural limitations in the application of the Islamic Shari’a and are as such an imperfect forum for the resolution of Islamic finance disputes. Arbitration more specifically allows a more flexible approach to the governing law, admitting the application of the Islamic Shari’a as a body of legal rules. In order to accommodate Western users of Islamic finance products, the article proposes the introduction of a hybrid form of arbitration, namely semi-secular arbitration that allows the combination of mandatory requirements of the Islamic Shari’a with features of international commercial arbitration whilst ensuring a Shari’a- compliant outcome.

 

 Phil Lord, Case Comment: Garcia V. Church of Scientology Flag Service Organization

This piece analyses the decision rendered by Judge James D. Whittemore of the United States District Court for the Middle District of Florida in the case of Garcia v Church of Scientology Flag Service Organization. It goes beyond the face of the decision, which upholds an arbitration award, to argue that the decision has significant implications for freedom of religion in the United States. More specifically, it argues that the decision narrows the grounds upon which a religious arbitration award can be vacated by a court. The decision allows religious legal systems to, in some circumstances, exist with no oversight from the court system. It exemplifies and supports the thesis that the protections afforded to religious freedom in the United States create room for religious legal systems that are inconsistent with the mainstream legal system to exist. Finally, this piece considers, in light of the obvious issues raised by Judge Whittemore’s decision, whether it might be time to rethink judicial review of religious arbitration awards.

 

Gordon Blanke, English Arbitration and Mediation in the Long Eighteenth Century, by Derek Roebuck, Francis Boorman & Rhiannon Markless (Holo Books 2019), 336 pp., £40, ISBN: 978-0-9572153-3-7

This is the latest in a series of books on the history of dispute resolution in England, authored, edited and directed by someone who – over the years of research and academic writing – has become one of the first and foremost English legal historians on the subject: Prof. Derek Roebuck. 

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Contradicting Party-appointed Experts: German Perspective on the Obligation of Arbitral Tribunals to Appoint a Neutral Expert

Tue, 2020-05-19 03:00

As in most jurisdictions, Germany based arbitral tribunals and German state courts assessing challenges to arbitral awards are often confronted with questions regarding the conflict between the parties’ right to be heard and the denial of the parties’ requests for evidence. In recent years, the German Federal Court of Justice (Bundesgerichtshof – BGH)1)E.g. BGH case nos I ZB 70/17, I ZB 90/18, and I ZB 23/19. jQuery("#footnote_plugin_tooltip_6151_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6151_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and several Higher Regional Courts (Oberlandesgerichte – OLG)3)E.g. OLG Hamburg case no 6 Sch 1/16, no free access, OLG Cologne case no 19 Sch 6/17, and OLG Munich case no 34 Sch 31/15. jQuery("#footnote_plugin_tooltip_6151_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6151_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); rendered numerous decisions relating to this topic.

This post analyses this case law and addresses in particular the aspect of contradictory party-appointed experts: Does German arbitration law provide for an obligation of the tribunal to appoint a neutral expert in case of contradictory party-appointed experts? Does the inquisitorial approach oppose international arbitration practice where such an obligation is generally negated?

Contradictory findings of party-appointed experts pose a day-to-day issue in arbitration proceedings. On the one hand, parties tend to request a tribunal-appointed expert as soon as they realise that they have an unfavourable case in the eyes of the tribunal. On the other hand, the arbitral tribunal – and, naturally, the other party – is regularly convinced that the tribunal is able to render the award based on the established contradictory expert reports. If the tribunal proceeds without appointing an own expert, the opposing party will often rely on their right to be heard and seek to challenge the award before state courts.

Therefore, it is a decisive factor whether or not tribunals are obliged to appoint their own neutral expert. Tribunals, parties or jurisdictions which are shaped by an adversarial approach recognise party-appointed experts by default. Thus, they deny such an obligation and a challenge of the arbitral award on this ground.

 

No Obligation if Arbitral Tribunal Deems itself Capable of making a Determination on its Own

In my opinion,2)For a more detailed assessment see Gramlich, German Arbitration Journal (SchiedsVZ) 2019, 233–242. jQuery("#footnote_plugin_tooltip_6151_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6151_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); under German Law arbitral tribunals are permitted to deny and disregard a request to appoint their own neutral expert if they consider themselves capable of making a determination of the respective factual issue themselves. In an arbitration featuring contradicting party-appointed experts, arbitral tribunals are both allowed to base this determination on either of the conflicting party-appointed experts or take a completely different position. Consequently, in that situation, an obligation of the tribunal to appoint a neutral expert has to be denied. The latter result is different from the predominant opinion in relation to state court proceedings. This follows from structural differences between arbitration law and German civil procedure law leading to the following eight arguments:

First, arbitral tribunals have discretion as to the appointment of neutral experts pursuant to the relevant legal authorities.4)Sec 1049 para 1 s 1 German Code of Civil Procedure (Zivilprozessordnung – ZPO), art 26 para 1 lit a UNCITRAL Model Law, sec 27.2 s 1 DIS Rules 1998, art 28.2 DIS Rules 2018, 25.4 s 1 ICC Rules, art 6 para 1 s 1 IBA Rules and art 6.1 Prague Rules. jQuery("#footnote_plugin_tooltip_6151_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6151_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Second, arbitral tribunals have discretion about the assessment of their own expertise. According to the BGH, it is a state court’s decision whether or not it is capable of rendering a judgment based on its expertise.5)E.g. BGH case no III ZR 65/06. jQuery("#footnote_plugin_tooltip_6151_5").tooltip({ tip: "#footnote_plugin_tooltip_text_6151_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This is even more the case for arbitral tribunals. Furthermore, the tribunal can gain own expertise in the very proceedings – even through the party-appointed experts.

Third, in arbitral proceedings, party-appointed experts, like tribunal-appointed experts, are recognised as evidence. Although the prevailing opinion under sec 1049 para 2 s 2 ZPO and some under art 6.5–6.7 Prague Rules6)Khvalei, Global Arbitration Review 22 November 2018 – The Prague rules – dispelling misconceptions (part „Misconception 2“; Working Group Member of the Prague Rules). Not mentioned by Amarral in his blog post. jQuery("#footnote_plugin_tooltip_6151_6").tooltip({ tip: "#footnote_plugin_tooltip_text_6151_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); attributes less evidential value (convincing power) to them, they are nevertheless recognised as evidence. The latter status is to be differentiated from their qualification in state court proceedings. There, party-appointed experts are merely seen as a “qualified” party submission (qualifiziertes Parteivorbringen) and can thus serve as proof of facts.

Fourth, arbitrators generally have broad discretion on what to recognise as evidence, i.e. the tribunal’s decision on disputed facts does not need to be proven by those means holding evidentiary status. On the contrary, facts can be established as, and are allowed to form the basis of, the award through every source of knowledge. For example, written witness statements and witness statements by phone or affidavits do not constitute means of evidence according to German civil procedural law. In arbitration, they can be used to base the award’s facts. That is also why party-appointed experts – at least initially (regardless of their ultimate evidential value) – hold the same status as tribunal-appointed experts (in addition to the third argument above).

Fifth, arbitration allows for an anticipated assessment of evidence (vorweggenommene Beweiswürdigung) to a certain extent (e.g. OLG Cologne case no 19 Sch 6/17). Arbitral tribunals are permitted to disregard a request for evidence, if they are adequately informed and thus capable to come to a determination contradicting the request (in their own view, see seventh argument below).7)E.g. OLG Cologne case no 19 Sch 7/10. jQuery("#footnote_plugin_tooltip_6151_7").tooltip({ tip: "#footnote_plugin_tooltip_text_6151_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); They can base that opposing determination on all sources of knowledge already produced – not only the evidence already produced – arbitrators are generally free in their assessment of evidence (see fourth argument). In contrast, before German state courts such an assessment which prejudges the results of taking of evidence is illegal.

Sixth, making a determination is possible for the arbitral tribunal even in light of contradicting party-appointed experts. This is possible because contradictory findings can still convey knowledge or expertise on the issue (which can be acquired even in the current arbitration, see second argument). Through the underlying data, initial hypothesis and/or methodology tribunals are often able to achieve an understanding of the issue. In addition, being confronted with two opposing and adversarial positions, tribunals are forced to deal with the same. They will not be able to blindly follow one expert which is – not only from a common law perspective – a major concern regarding tribunal-appointed experts, as discussed also on the blog. Arriving at a decision is also legally possible because party-appointed experts hold evidentiary status (see third argument) and arbitrators are free in what they ultimately recognise as evidence (see fourth argument). In consequence, arbitral tribunals meet their obligation to take evidence and thus respect the parties’ right to be heard.

Seventh, compared with state courts, arbitral tribunals possess extended grounds for rejecting requests for evidence. On the one hand, they can utilise private knowledge whereas state courts, in contrast, can only utilise common knowledge. On the other hand, tribunals are allowed to reject a request for evidence if they subjectively consider themselves to be adequately informed about the subject.8)E.g. BGH case no III ZR 44/89, and OLG Cologne case no 19 Sch 6/17. jQuery("#footnote_plugin_tooltip_6151_8").tooltip({ tip: "#footnote_plugin_tooltip_text_6151_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The latter ground for rejection derives from the circumstance that the principle to exhaust all offers of evidence (Grundsatz der vollständigen Beweiserschöpfung) applies only restrictively in arbitration proceedings.9)E.g. OLG Frankfurt case no 26 Sch 24/12. jQuery("#footnote_plugin_tooltip_6151_9").tooltip({ tip: "#footnote_plugin_tooltip_text_6151_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In this regard, tribunals have to adhere to the requirements of the right to be heard by addressing, at least briefly, the request for evidence or the underlying factual question the request refers to in the award. In this context, meaningless phrases do not suffice.

Eighth, arbitral tribunals autonomously assess the relevance of a particular fact on the decision (e.g. OLG Cologne case no 19 Sch 6/17). A wrong assessment does not, in general, infringe the parties’ right to be heard. It is only impaired if the tribunal’s given assessment is solely intended to conceal that the tribunal did not engage with the parties’ assertion in any way (e.g. OLG Munich case no 34 Sch 31/15). That is the case if the award’s reasoning does not take note of or consider the assertion at all (e.g. OLG Cologne 19 Sch 6/17). The award’s reasoning has to clearly prove the disregard of the assertion, i.e. treat disputed facts as undisputed, base reasoning on a submission not made by parties, not mention fundamental submissions in reasoning of the award (like contributory negligence, violation of contractual obligation to loyalty or cooperation or of statutory duty to mitigate damages). Due to this eighth argument, in 2017 the OLG of Cologne confirmed an arbitral award which rejected a request to appoint a tribunal expert in light of two contradicting party-appointed experts (e.g. OLG Cologne case no 19 Sch 6/17).

 

Conclusion

In contrast to the German state courts, arbitral tribunals are permitted to disregard a request to appoint their own neutral expert if they consider themselves capable of making their own determination because of or despite the contradicting party-appointed experts. Overall, German arbitration law is surprisingly arbitrator-friendly and flexible when it comes to contradictory party-appointed experts – at least compared to German procedural law before state courts. There is no obligation of the tribunal to appoint a neutral expert in case of contradictory party-appointed experts.

This is very important to accommodate the practice – and thus most probably needs – of international arbitrations where party-appointed experts and awards based on contradictory party-appointed experts are common and accepted. I expect German arbitration law to further develop in this direction, mainly through future case law.

References   [ + ]

1. ↑ E.g. BGH case nos I ZB 70/17, I ZB 90/18, and I ZB 23/19. 2. ↑ For a more detailed assessment see Gramlich, German Arbitration Journal (SchiedsVZ) 2019, 233–242. 3. ↑ E.g. OLG Hamburg case no 6 Sch 1/16, no free access, OLG Cologne case no 19 Sch 6/17, and OLG Munich case no 34 Sch 31/15. 4. ↑ Sec 1049 para 1 s 1 German Code of Civil Procedure (Zivilprozessordnung – ZPO), art 26 para 1 lit a UNCITRAL Model Law, sec 27.2 s 1 DIS Rules 1998, art 28.2 DIS Rules 2018, 25.4 s 1 ICC Rules, art 6 para 1 s 1 IBA Rules and art 6.1 Prague Rules. 5. ↑ E.g. BGH case no III ZR 65/06. 6. ↑ Khvalei, Global Arbitration Review 22 November 2018 – The Prague rules – dispelling misconceptions (part „Misconception 2“; Working Group Member of the Prague Rules). Not mentioned by Amarral in his blog post. 7. ↑ E.g. OLG Cologne case no 19 Sch 7/10. 8. ↑ E.g. BGH case no III ZR 44/89, and OLG Cologne case no 19 Sch 6/17. 9. ↑ E.g. OLG Frankfurt case no 26 Sch 24/12. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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A Right of Appeal in International Arbitration: Second Bite of the Cherry: Sweet or Sour? BCLP international arbitration survey 2020

Tue, 2020-05-19 01:00

Last week BCLP released the results of its annual International Arbitration survey on the topic of appeals against a tribunal’s decision on the merits. Respondents to the survey comprised arbitrators, corporate counsel, external lawyers, litigation funders, academics and those working at arbitral institutions.

Procedures for court challenge of an award on the basis of procedural irregularity or jurisdictional error are widely available across jurisdictions. The ability to bring an appeal against a tribunal’s decision on the substantive issues in dispute is not. The rules of major arbitral institutions generally exclude a right of appeal and, in most popular arbitration seats, national arbitration law provides no such recourse to the local courts.

The arguments for and against a right of appeal in international arbitration are well-rehearsed and have been the subject of much debate over the years. The time and costs involved in an appeal; the parties wish to ’opt-out’ of national court jurisdiction and process; the precedent value of appellate court decisions; and the implications of a bad decision in ‘bet the company cases’ are just some of the factors that are thrown into the mix when the topic is discussed.

Despite these competing views, the traditional view in favour of finality has generally held sway with the exception of pockets of sector-based regimes such as GAFTA and FOSFA that have well-established and widely-used arbitration procedures providing or permitting appeals against an award.

However, there are signs that a more nuanced approach to the issue of appeals may be developing. For example, in Singapore the government is consulting on an amendment to the International Arbitration Act to allow for appeals on errors of law on an ‘opt-in’ basis. There also appears to be some appetite for internal appellate procedures such as those offered by CPR, JAMS, AAA and the SCA.

Against this background, our survey had two areas of focus. First, is a right of appeal against an arbitration award desirable? Secondly, is an internal right of appeal offered by an arbitral institution preferable to a right of appeal to a national court, and what features should such an internal appeal mechanism have?

The survey results were interesting. Half of all respondents had direct experience of what they regarded as being an ‘obviously bad’ decision. Despite this, the survey results confirm that many remain committed to finality. 71% of respondents said that a right of appeal would make international arbitration less attractive. 62% said that it would make the arbitration process too long, and 60% that it would make it too expensive.

However, on the other side of the debate, 51% felt that in some cases the consequences of an incorrect decision are so serious as to make the lack of an appeal mechanism unacceptable, and 47% felt that permitting appeals to national courts on the merits of a dispute may aid development of the law.

This range of views is consistent with traditional debate on the topic. What was perhaps more interesting in relation to possible future developments is that 48% of respondents said an internal right of appeal to a second tier tribunal organised by the arbitration institution would be preferable to a right of appeal to a national court. The survey asked questions about what are desirable characteristics of such an ‘internal’ appellate process – gateways to the right of appeal (for example a minimum value of award, or the award being produced by a sole arbitrator); the scope of the permitted appeal (law only or facts and law); deadlines for the appeal decision; and the extent of party input into the constitution of the tribunal. Respondents’ answers to these questions reflected a wide range of views with the exception of that relating to the deadline for an appeal outcome. On that topic, respondents spoke with one voice. 88% said that the appeal decision should be made within six months from commencement of the appellate process.

Momentum for change in the appellate landscape is more likely to be driven through the introduction of internal appellate procedures into arbitration rules, than by reform of national arbitration laws. It will be interesting to see if more of the major arbitral institutions are prepared to introduce new measures in this direction. The availability of time-limited, well administered and carefully drafted appellate procedures may provide some middle ground for those on either side of the appeals debate.

The full report on the BCLP survey can be found at: https://www.bclplaw.com/images/content/1/8/v2/186066/BCLP-Annual-Arbitration-Survey-2020.pdf

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The 2019 Dutch Model BIT: Its Remarkable Traits and the Impact on FDI

Mon, 2020-05-18 03:00

On 22 March 2019, the Dutch Government released the text of the new model Netherlands BIT. Its idealism has been applauded: the new model prioritizes gender and regional diversity as well as the United Nations sustainability goals. Yet, what would the effect be of some of the model’s provisions on Foreign Direct Investment (‘FDI’)? For decades, States, not investors, drafted and concluded treaties to protect and attract foreign investors. Some of the new elements of the Dutch Model BIT raise concerns as to how they would impact FDI. How would investors be likely to respond if the Netherlands were to replace existing BITs with this new text?

 

The Model’s Innovative Elements: Sustainability and Social Responsibility

Heeding criticism of ISDS, the former Minister of Trade and Development decided that the text for Dutch model BITs should be modernized: with a reset that would contribute to sustainable development and a fair distribution of wealth in the world.

On 26 October 2018, the Foreign Minister submitted a letter to the Dutch House of Representatives to confirm the objectives of the proposed model BIT: enhancing sustainability and inclusivity with an eye towards the role investors could play in promoting the UN’s Sustainability Goals.

The drafters of the text also focused on corporate social responsibility and regional and gender diversity:1)Article 6(3) of the Dutch Model BIT. jQuery("#footnote_plugin_tooltip_4293_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4293_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The Contracting Parties reaffirm the importance of each Contracting Party to encourage investors operating within its territory or subject to its jurisdiction to voluntarily incorporate into their internal policies those internationally recognized standards, guidelines and principles of corporate social responsibility that have been endorsed or are supported by that Party, such as the OECD Guidelines for Multinationals Enterprises, the United Nations Guiding Principles on Business and Human Rights, and the Recommendations CM/REC(2016) of the Committee of Ministers to Member States on human rights and business. (Article 7(2) of the Dutch Model BIT) [emphasis added]

The Contracting Parties are committed to promote the development of international investment in such a way as to contribute to the objective of sustainable development. …. Each Contracting Party shall ensure that its investment laws and policies provide for and encourage high levels of environmental and labor protection and shall strive to continue to improve those laws and policies and their underlying levels of protection. (Article 6 (1) and (2) of the Dutch Model BIT)

Going forward, investors can be held accountable and responsible for not complying with the principles of the UN Guiding Principles on Business and Human Rights and the OECD guidelines for multinationals, one of the focal points of the Foreign Minister:

Without prejudice to national administrative or criminal law procedures, a Tribunal, in deciding on the amount of compensation, is expected to take into account non-compliance by the investor with its commitments under the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. (Article 23 of the Dutch Model BIT)

 

The Position on Foreign Investment

The drafters seem animated by a perception that the balance between investors and States has been tilted in favor of investors. The investor-State relationship will no longer be a binary one: other interests must be considered.2)See Article 24 on the consultations of Contracting Parties: “A joint interpretative declaration adopted as result of consultations by the Contracting Parties shall be binding on a Tribunal …”. jQuery("#footnote_plugin_tooltip_4293_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4293_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Dutch Foreign Minister raised the concern about damages awarded in international arbitration being too high. It was felt that those amounts could exceed compensation allowed under Dutch law:

The Tribunal shall not award punitive damages. Monetary damages shall not be greater than the loss suffered by the investor, reduced by any prior damages or compensation already provided in relation to the same factual dispute. (Article 22 (4))

The Minister also wrote to the House of Representatives to indicate the view that, before the current system is replaced by the Multilateral Investment Court, the procedure as envisaged by the model text would improve duration and cost, an important benefit for SMEs.

But it is not clear how the new BIT would reduce duration and cost. It seems that a new appointment mechanism and the departure from party autonomy – discussed below – will likely lead to uncertainty. If parties can no longer appoint arbitrators who are best qualified to adjudicate the dispute at hand, it is more likely that annulment proceedings will follow. Also, given that the Dutch Government apparently welcomes the prospect of a Multilateral Investment Court, it is important to consider the investors’ position and the MIC’s potential impact on investment.

Equally, the Minister does acknowledge that investment could lead to more employment opportunities and increase know-how and innovation.

  

Appointment of Arbitrators

The new model text replaces the current processes that exist in ISDS for appointing arbitrators. The text no longer allows for parties to appoint the arbitrators who are to adjudicate the disputes:

All Members of the Tribunal under this Agreement shall be appointed by an appointing authority. (Article 20 of the Dutch Model BIT)

The treaty thus provides guidelines for the institutional appointment of arbitrators. Those changes were emphasized as an important improvement by the Foreign Minister: the changes to the appointment processes are supposed to boost the impartiality and independence of arbitrators. This change was also arguably made to increase gender and regional diversity. The Minister furthermore emphasized how transparency will be increased and how a role is carved out for third parties.

Proposals to eliminate party autonomy, even if only partially by depriving parties the right to appoint an arbitrator, seem contrary to the interests of States as well as investors. A key element of party autonomy is for both parties to the dispute to have equal participation in the constitution of the tribunal.3)The paper of the Corporate Council International Arbitration Group focuses on the WG-III reforms where party autonomy is under attack as well leading to the same uncertainties and critical questions raised. jQuery("#footnote_plugin_tooltip_4293_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4293_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Not allowing disputants to appoint the arbitrators takes away the pillar of party autonomy – a key characteristic of international arbitration and the New York Convention. When it comes to enforcement of awards, for any arbitration not administered by ICSID, one must resort to the New York Convention. This treaty only applies to decisions that qualify as arbitral awards. Article I of the New York Convention provides a uniform rule for the scope of the treaty. Awards must be based on party autonomy. States and investors will quickly lose confidence in a dispute settlement system that results in the likelihood of unenforceable awards. This uncertainty leads to risk-averse behavior. Without party autonomy, investors will lose trust in investing in many of the places that need them the most and there will be a significant impact on FDI.

Finally, the Model includes a prohibition on double hatting.

Members of the Tribunal shall not act as legal counsel or shall not have acted as legal counsel for the last five years in investment disputes under this or any other international agreement. (Article 20 (5))

The double hatting prohibition reduces the pool of arbitrators significantly. It is hard to see how this prohibition would contribute to gender and geographical diversity if only those who give up their counsel practice can sit as arbitrators. The double-hatting prohibition would no longer allow many experienced arbitrators active in the current ISDS system to act as arbitrator if they were truly excluded from their core practice. The diversity in terms of gender and regional diversity of arbitrators owes its recent advances to the fact that new entrants do not have to abandon their main professional activity.

 

Final Remarks

Although it is time for certain ISDS treaties to be modernized and to revisit some of the elements of international arbitration in order to boost its legitimacy, one must consider the origins of investment treaties: if host countries see benefit in foreign investment, investment treaties should create trust. International arbitration has changed tremendously over the last two decades: it is more diverse than ever with all members of the community pledging to gender diversity, mentoring across borders enabling a new generation of arbitrators to rise. That progress would come to an abrupt halt whether that is by permanent appointments for the MIC or abolishing double-hatting or taking away the ability of parties to appoint arbitrators. However it may be, investment treaties are supposed to attract investors, not deter them.

 

References   [ + ]

1. ↑ Article 6(3) of the Dutch Model BIT. 2. ↑ See Article 24 on the consultations of Contracting Parties: “A joint interpretative declaration adopted as result of consultations by the Contracting Parties shall be binding on a Tribunal …”. 3. ↑ The paper of the Corporate Council International Arbitration Group focuses on the WG-III reforms where party autonomy is under attack as well leading to the same uncertainties and critical questions raised. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Enforcing International Arbitral Awards in Ecuador After Recent Legal Reforms: Is This the End of the Exequatur Process?

Sun, 2020-05-17 04:00

In 2015, Ecuador changed its General Organic Code of Processes (procedural law or COGEP) and imposed an exequatur procedure for foreign awards. The Law of Productive Development, Attraction of Investment, Employment Generation and Tax Stability (Investment Law) enacted in 2018 repealed this requirement. Nevertheless, despite this amendment, there are still practical difficulties that parties face when enforcing an international award in Ecuador. This post explores these difficulties.

 

The Enforcement of International Arbitral Awards under the Investment Law

Foreign investment is integral to Ecuador´s economy. However, during the last administration when President Rafael Correa was in office from 2007-2017, the country exhibited a hostile attitude towards international arbitration which is the preferred mechanism for the resolution of investment disputes. For instance, Ecuador enacted a Constitution which seemed to prohibit the country from submitting disputes to international arbitral tribunals seated outside Latin America (see article 422), passed a procedural law which imposed an exequatur process for enforcing international arbitral awards (see COGEP, article 102) and withdrew from the International Centre for Settlement of Investment Disputes (ICSID) Convention.

Fortunately, as soon as President Lenin Moreno took office in 2017, he supported the enactment of some legal reforms which were needed to present investors with a more attractive scenario. One of these reforms is the Investment Law enacted in 2018.

The Investment Law was certainly a positive shift in Ecuador´s legal framework as one of its main objectives was to remove restrictions on foreign investments. The Investment Law offers different levels of benefits depending on the amount of the investment. It also encourages investors to choose international arbitration as a mechanism for dispute resolution.

One of the most important aspects of the Investment Law was the removal of the provisions related to the homologation or exequatur process of international arbitral awards contained in the COGEP. In short, the homologation process required a party seeking the enforcement of an international award to file a request before the Provincial Court for its recognition. Said party had to comply with five requirements: i) the award had to be considered res judicata under the jurisdiction in which it was issued; ii) the award had to be translated to Spanish, if applicable; iii)  the request presented sufficient documentary evidence showing that the respondent in the arbitration was properly served with the claim and that due process was not violated; iv) the award complied with all the formalities for its validity; and v) the request for homologation had to indicate the place where the person or the company had to be served. During the homologation process, the defendant could file a response and present reasons of why the request should be dismissed. In case the Provincial Court accepted the homologation of the award, then the party could resort to a first level judge for the enforcement.

The Investment Law brought back to life article 42 of the Ecuadorian Arbitration Act which mandates that international arbitral awards shall be enforced in the same manner as domestic arbitral awards. This article is consistent with article III of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which provides for the obligation on the signatory States not to impose more strict conditions for the enforcement of an international award than they would impose for a domestic one. Consequently, the exequatur process is no longer applicable in Ecuador for the enforcement of international awards.

 

The Enforcement of International Arbitral Awards before the Investment Law

As mentioned before, the Investment Law reformed articles 102 to 106 of the COGEP, which required a homologation process for the enforcement of an international award.

The COGEP enacted in 2015 was seen by many as a huge step backward in the development of international arbitration in Ecuador. Some local experts even considered COGEP as a “trojan horse for arbitration in Ecuador” for the following reasons:

  1. According to article 104, a party (applicant) seeking the enforcement of an international award was required to fulfill some complex requirements. For instance, the party had to prove that the respondent in the arbitration was duly served with the claim and that due process was not violated. Moreover, the applicant had to present documents proving the award´s finality and that it had res iudicata effect under the law of the state of origin. As a result, these requirements imposed a disproportionate burden of proof on the applicant.
  2. Contrary to the international trend, the exequatur process was slow, and it lacked clarity, which difficulted an expedite enforcement of international arbitral awards.
  3. In awards against the state, the applicant faced even more challenges given the excessive amount of formalities. Moreover, the applicant was obliged to prove that the award was not in conflict with the Constitution and domestic laws.

Once the party fulfilled all the requirements and the award was dully homologated by the Provincial Court, then the applicant could resort to a first level judge for the enforcement. The exequatur process could take several months and was certainly more burdensome for the applicant compared with the current process because it required a two-step process (homologation and enforcement) instead of only one. Currently, a party seeking the enforcement of an international award is only required to file a petition to a first level judge. Then, the judge issues an order for the immediate enforcement of the international award in the same manner as final judgement or domestic award. The enforcement process is quite simple, and it is usually conducted in a very expeditious way.

In light of the above, one of the most important reforms introduced by the Investment Law is the removal of  the exequatur process for international arbitral awards because it is consistent with the New York Convention in the sense that states should not impose more strict conditions for the enforcement of international awards than they do for domestic ones.

 

Practical Difficulties for the Enforcement of Arbitral Awards due to Judicial Interpretation

Despite the positive legal reforms that the Investment Law brought, the judicial system still makes the enforcement of foreign arbitral awards difficult. Overall, many judges consider that the effect of the reforms contained in the Investment Law is unclear. This misunderstanding by the judges has caused practical problems. For instance, in case number 17113-2018-00003, the Superior Court of Pichincha still made referenceo the exequatur process for an international arbitral award delivered in Chile, although these provisions were no longer applicable due to the reform brought by the Investment Law.

Likewise, in case number 17230-2019-03159, the Superior Court of Pichincha claimed that although the Investment Law derogated the exequatur process mandated in articles 102-106 of the COGEP, it did not say anything regarding enforceable instruments contemplated under article 363. In a nutshell, the Superior Court said that under article 363 of the COGEP, only final judgments, domestic arbitration awards, domestic transactional agreements and homologated international arbitral awards are considered enforceable instruments. Hence, it would go against the law to enforce an arbitral award that has not been homologated because it is not considered as an enforceable instrument. It is obvious that when lawmakers passed the Investment Law, they intended to eliminate all restrictions imposed to international awards and enforce them in the same manner as domestic awards.

Although said decisions are only binding and enforceable upon the parties of the corresponding disputes, these judgements show that judicial interpretation might play an important role in neutralizing the positive reforms brought by the Investment Law. According to article 180 of the Organic Code of the Judiciary, the Plenary of the National Court has competence to issue resolutions in case of doubt or lack of clarity when interpreting the law. These decisions are legally binding in all the country and enforceable since the day of their publication in the Official Registry. Thus, it is necessary that the National Court clarifies the scope of the reforms brought by the Investment Law with respect to the enforcement of international arbitral awards in order to avoid confusion at all judicial levels.

 

Conclusion  

The Investment Law brought many positive changes with respect to the practice of international arbitral in Ecuador. Likewise, it is consistent with the provisions contained under article III of the New York Convention. However, due to the judges’ misunderstanding of the legal reforms contained in the Investment Law, enforcing an international arbitral award in Ecuador is still a herculean task. Hopefully, the judicial system will understand soon that there is not any additional requirement that shall be imposed for the enforcement of international awards and that the whole purpose of the Investment Law was to foster the development of arbitration in Ecuador and to attract foreign investment. In the meantime, a resolution by the National court seems the most effective solution to clarify this issue.

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Anti-arbitration Injunctions: Delhi High Court Says Nay

Sun, 2020-05-17 03:00

In a recent decision, Bina Modi and Ors. v. Lalit Modi and Ors., CS(OS) 84 and 85/2020, a single judge of the Delhi High Court has cast doubt on the jurisdiction of Indian courts to grant injunctions restraining arbitral proceedings (popularly called anti-arbitration injunctions). While the grant of anti-arbitration injunctions by Indian courts has been discussed previously on this blog (here and here), the Delhi High Court’s decision merits discussion as it poses a more fundamental question regarding the existence of a court’s jurisdiction to grant anti-arbitration injunctions.

 

Delhi High Court’s Decision in Bina Modi

In Bina Modi, one of the trustees of a family trust had initiated arbitral proceedings against the other trustees for resolution of disputes arising under the trust deed. The other trustees filed two civil suits before the Delhi High Court, seeking inter alia an anti-arbitration injunction against such arbitral proceedings and a declaration that the arbitration agreement in the trust deed was null, void, inoperative and unenforceable. The Delhi High Court, while dealing with the suits, limited its adjudication to whether it has the power to injunct the arbitral proceedings “notwithstanding the [purported] bar” set out in a 2001 decision of a three-judge bench of the Supreme Court of India (“Supreme Court”) in Kvaerner Cementation India Limited v. Bajranglal Agarwal and Anr., (2012) 5 SCC 214.

The Delhi High Court ultimately relied on Kvaerner Cementation and concluded that a civil court did not have jurisdiction to entertain suits to declare invalidity of an arbitration agreement or injunct arbitral proceedings. In doing so, the Delhi High Court noted that Kvaerner Cementation had recently been approved by the Supreme Court in A. Ayyasamy v. A. Paramasivam and Ors., (2016) 10 SCC 386 and National Aluminium Company Limited v. Subhash Infra Engineers Private Limited and Anr., 2019 SCC OnLine SC 1091.

Presently, an appeal against the decision in Bina Modi is pending before a division bench of the Delhi High Court. The division bench has in the interim restrained the respondents from pursuing proceedings before the emergency arbitrator till the disposal of the appeal.

However, in light of Bina Modi’s reliance on Kvaerner Cementation, there is now some doubt as to whether suits seeking anti-arbitration injunctions are maintainable, notwithstanding case law, both of the Supreme Court and other Indian High Courts, affirming civil courts’ jurisdiction to grant such injunctions.

 

Kvaerner Cementation and Subsequent Developments

Kvaerner Cementation was an early decision of the Supreme Court (given in 2001, but reported in 2012) on the Arbitration and Conciliation Act, 1996 (“Act”) which did not consider the interplay between the various provisions of the Act, or the scope of judicial intervention in relation to arbitration. It is a short order which did not consider or cite any precedent, nor did it elaborate on the facts of the dispute.

In Kvaerner Cementation, Kvaerner had sought the grant of an anti-arbitration injunction on the ground that there was no arbitration agreement between the parties, and as such the arbitration already initiated was without jurisdiction. The Supreme Court, on a bare reading of Section 16 of the Act (which enshrines the principle of kompetenz-kompetenz) and the object of the Act, held that a civil court did not have jurisdiction to determine any objection with respect to the existence or validity of the arbitration agreement.

Kvaerner Cementation appears to have read in a negative formulation of kompetenz -kompetenz, denuding civil courts of jurisdiction to rule on, inter alia, the existence and validity of an arbitration agreement. However, the argument that an arbitral tribunal has competence, to the complete exclusion of civil courts, to determine its jurisdiction was soundly rejected by a seven-judge bench of the Supreme Court in SBP & Co. v. Patel Engineering Limited, (2005) 8 SCC 618 and subsequent decisions. Under Indian law, the competence of the arbitral tribunal to rule on its own jurisdiction only means that when issues of jurisdiction are raised before the arbitral tribunal, it can decide them. Accordingly, in light of SBP & Co., it may be argued that Kvaerner Cementation has been implicitly overruled.

Kvaerner Cementation also did not consider earlier decisions of the Supreme Court where it had acknowledged civil courts’ jurisdiction to grant injunctions in restraint of foreign arbitrations and foreign court proceedings where such proceedings were vexatious or oppressive.

A number of judgments of the Supreme Court subsequent to Kvaerner Cementation have also affirmed the jurisdiction of civil courts to grant anti-arbitration injunctions. In Chatterjee Petrochem Company and Anr. v. Haldia Petrochemicals Limited and Ors., (2014) 14 SCC 574, the Supreme Court affirmed civil courts’ jurisdiction to entertain suits seeking grant of anti-arbitration injunctions. While ultimately the Supreme Court declined the grant of an injunction restraining arbitral proceedings, such decision was based on the Supreme Court’s finding that there was a valid arbitration agreement. Similarly, in World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd., (2014) 11 SCC 639 the Supreme Court unequivocally held that a civil court in India had inherent jurisdiction under Section 9 of the Code of Civil Procedure, 1908 to grant injunctions in restraint of arbitration. While these judgments did not consider Kvaerner Cementation, they incontrovertibly acknowledge the inherent jurisdiction of civil courts to grant anti-arbitration injunctions. From these judgments, it is also clear that the issue before courts is now limited to specifying the circumstances in which such injunctions can be granted.

While Kvaerner Cementation has subsequently been cited in two Supreme Court decisions, Ayyaswamy and National Aluminium, the following may be borne in mind.

The Supreme Court in Ayyasamy makes a distinction between cases where the arbitral tribunal is constituted at one party’s instance and the other party files a civil suit stating that the proceedings are not valid, and cases where a suit is filed by one party and the other party files an application under the Act seeking reference of the matter to arbitration. It observes that in the former case, Kvaerner Cementation applies to exclude the jurisdiction of civil courts whereas in the latter, courts have jurisdiction to examine questions of existence and validity of the arbitration agreement and arbitrability of the dispute. However, Ayyasamy did not appreciate that Kvaerner Cementation had been implicitly overruled by SBP & Co. and subsequent decisions which rejected the idea that an arbitral tribunal has the sole competence to decide such questions. Moreover, the distinction made in Ayyasamy appears to be without any real difference as the question of civil courts’ jurisdiction to examine the existence and validity of the arbitration agreement and arbitrability is equally at issue in both cases.

Similarly, in National Aluminium, the Supreme Court relied on Kvaerner Cementation and held that any objection with regard to the existence or validity of an arbitration agreement may be raised before the arbitrator. A civil suit cannot be maintained for determination of such objection. The Supreme Court simply applied Kvaerner Cementation without analysing that Kvaerner Cementation could no longer be considered good law in light of SBP & Co. Interestingly, the Supreme Court also appointed a new arbitrator, without examining the existence of a valid arbitration agreement. This goes against its previous decisions, including in Duro Felguera S.A v. Gangavaram Port Limited, (2017) 9 SCC 729, where the Supreme Court explicitly held that while considering the appointment of an arbitrator, it is well within the power of the Court to look into the existence of a valid arbitration agreement.

Additionally, both Ayyasamy and National Aluminium did not consider the decisions in Chatterjee Petrochem and World Sport Group wherein the Supreme Court had affirmed the jurisdiction of civil courts to grant anti-arbitration injunctions. Therefore, the value of these decisions as binding precedent to negate civil courts’ jurisdiction to grant such injunctions is doubtful at best.

 

Delhi High Court’s Prior Decision in Mcdonald’s

A division bench of the Delhi High Court had previously in Mcdonald’s India Private Limited v. Vikram Bakshi and Ors. 2016 (4) ARBLR 250 (Delhi) dealt with the issue of civil courts’ jurisdiction to grant anti-arbitration injunctions in arbitrations governed by the Act.

The division bench in Mcdonald’s held that civil courts had jurisdiction to grant anti-arbitration injunctions where it was proved that the arbitration agreement was null, void, inoperative or incapable of being performed. However, on facts, the court held that an anti-arbitration injunction could not be granted.

The Delhi High Court in Bina Modi considered Mcdonald’s but held that it was per incuriam as it did not consider Kvaerner Cementation, which was decided by a larger bench of the Supreme Court. However, while Mcdonald’s did not discuss Kvaerner Cementation, the reasoning therein is based on subsequent precedents of the Supreme Court including World Sport Group. It may also be argued that Mcdonald’s did not have to consider Kvaerner Cementation as the hardline interpretation of Kvaerner Cementation i.e. a complete bar on civil court’s jurisdiction is not applicable anymore owing to the decision in SBP & Co. The law laid down in Mcdonald’s holds ground as a challenge to the decision in Mcdonald’s before the Supreme Court was dismissed.

 

Does Section 41(h) of the SRA Bar the Grant of Anti-arbitration Injunctions?

A novel issue considered by the Delhi High Court in Bina Modi was the applicability of Section 41(h) of the Specific Relief Act, 1963 (“SRA”) which bars the grant of injunctions when “equally efficacious relief can certainly be obtained by any other usual mode of proceeding”. The Delhi High Court in Bina Modi decided that the Act provided an equally efficacious relief under Section 16, and therefore, injunctive relief could not be granted by a civil court. While this argument may seem attractive, it must also be taken into account that a procedurally inefficient remedy cannot be equally efficacious. If the issues go to the root of the arbitral proceedings, such as arbitrability and jurisdiction, such issues are bound to come back to the court in some manner or the other, which makes the whole process of referring the matter to an arbitral tribunal an exercise in superfluousness.

It remains to be seen whether the division bench hearing the appeal from Bina Modi would follow the single judge’s approach and deny jurisdiction to grant anti-arbitration injunctions or instead follow the position in Chatterjee Petrochem and World Sports Group.

 

Anjali Anchayil and Tamoghna Goswami are Senior Associates at J. Sagar Associates. This article has been prepared with inputs from Dheeraj Nair, Partner at J. Sagar Associates.

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Global Gas and Refinery Limited and Shell Petroleum Development Company: Is Nigeria Pro or Anti-Arbitration? The Lagos High Court Says That When Challenged, an Arbitrator Should Just Resign

Sat, 2020-05-16 04:00

The ruling given on 25 February 2020 (‘Ruling’) by the High Court of Lagos State in Nigeria (‘Lagos High Court’), setting aside an award in the case of Global Gas and Refinery Limited (‘Global Gas’) and Shell Petroleum Development Company (‘Shell’) on the ground of arbitrator non-disclosure, raises concern to the arbitral community both in Nigeria and abroad. The award was in respect of a dispute arising from an agreement governed by Nigerian law. The proceedings were a domestic arbitration, since both parties were Nigerian entities, and the agreement contained an arbitration clause providing for any dispute to be administered by the International Chamber of Commerce (‘ICC’) under the ICC Arbitration Rules.

In the Ruling, the Lagos High Court held that the presiding arbitrator’s non-disclosure amounted to misconduct, which led to the set aside of the arbitral award, even though a challenge on the same grounds had previously been submitted to the International Court of Arbitration of the ICC (‘ICC Court’), which had dismissed the challenge.

 

Facts of the case

The brief facts of the case are discerned from the Ruling, which is not publicly available, but that the author had access to. This includes the facts retained by the Lagos High Court on the issue of the non-disclosure by the presiding arbitrator.

Global Gas commenced ICC arbitral proceedings alleging that Shell had failed to supply wet gas to it in accordance with the terms of a gas processing agreement dated 15 March 2002.

During the proceedings, Global Gas challenged the appointment of the presiding arbitrator on the grounds that he had failed to disclose information which led to doubts as to his independence and impartiality. This was argued because the presiding arbitrator allegedly1)As conveyed to the author by the presiding arbitrator, the Lagos High Court’s understanding of the facts was “materialy inacurate”, “as were the facts placed before the Judge”, as the presiding arbitrator made clear that he “has never been instructed as an expert or Counsel by SPDC, Royal Dutch Shell or any Shell affiliate in any matter. At the time of the arbitration, (and since), [he] had no professional or other relationship with either of the parties, either subsisting or prior”. The presiding arbitrator also clarified to the author that “this clarification has been sent in a subsequent letter to the ICC Secretariat by the UK lawyers that worked on the case, before the English Courts”. jQuery("#footnote_plugin_tooltip_9143_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9143_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); prepared an expert opinion in a previous litigation matter involving Shell.

The ICC Court reviewed the challenge and dismissed it. The arbitration continued and was concluded with an award by the majority of the tribunal dismissing Global Gas’s claims.

Global Gas then proceeded to the Lagos High Court seeking orders setting aside the final award dated 30 May 2017, refusing recognition and enforcement of the final award plus other consequential orders. The grounds for the application included a claim of misconduct of the majority of the arbitral tribunal in the award.

Global Gas alleged that the presiding arbitrator and the other member of the tribunal that constituted the majority in the arbitral tribunal were both members of the board of governors of an arbitration institution of which Shell’s lead counsel was the chair, and that this body was formed while the arbitration was pending, with no notice or disclosure being made to any of the parties. Global Gas had challenged the appointment of these arbitrators for this reason in the arbitration, but the ICC Court did not uphold the challenge.

Global Gas argued that both the above situations amount to misconduct under Section 30 of the Nigerian Arbitration and Conciliation Act.

 

The Decisions of the Lagos High Court

The Lagos High Court in its Ruling was of the view that the main challenge to the award was the asserted bias of the president of the arbitral tribunal. The Lagos High Court noted that the president of the arbitral tribunal had a relationship with Shell, which he had failed to disclose both to the parties and to the ICC.

The Lagos High Court held that once an arbitrator had been challenged, his or her obligation is to resign and not resist the challenge. The Lagos High Court held that “when an objection is raised on the basis of bias, it casts doubts on the process itself, notwithstanding whether the panel was constituted or not by ICC. This being so, the President of the [arbitral tribunal] must exercise a duty of care towards all the cases that are before them [sic]. Therefore, it does not lie in the Arbitrators to raise a defense or put the process in ridicule. What is expected was to have simply recluse [sic] himself […].”

 

Why the decision of the Lagos High Court is not correct

This position is at odds with international practice standards, which are set out in the IBA Guidelines on Conflicts of Interest in International Arbitration (‘IBA Guidelines’). Even though the arbitration was domestic and the IBA Guidelines were not binding on the proceedings, Shell’s counsel relied upon them during the set aside proceedings as a guidance on international best practices in disclosure requirements.

It appears that the Lagos High Court was not persuaded that the IBA Guidelines or international standards have any relevance to domestic proceedings, as the IBA Guidelines were not considered or otherwise referred to in the Ruling. Rather, the Ruling only referred to Section 8 of the Nigerian Arbitration and Conciliation Act, which states that an arbitrator has an going obligation to disclose any circumstances that may give rise to any justifiable doubts as to his/her impartiality or independence.

In determining whether non-disclosure constitutes a breach of an arbitrator’s conflict of interest obligations, as recently as 2018 in Halliburton Company v Chubb Bermuda Insurance Ltd & Ors [2018] EWCA Civ 817 (19 April 2018) (‘Halliburton case’), the English Court of Appeal provided guidance as to how arbitrators’ conflicts of interest are to be determined. The English Court of Appeal noted that the determination should follow a two-step process. First, one should determine whether disclosure ought to have been made at all; second, one should consider the significance of that non-disclosure. Although English decisions are not binding on Nigerian courts, they are of persuasive authority in instances such as this, where there is no direct Nigerian authority on the point. This is even more important where the bias is alleged in setting aside proceedings.

Unfortunately, the Lagos High Court neither considered whether the alleged relationships required disclosure, nor the effect of the non-disclosure on an impartial observer. Its view was that if challenged, in order to maintain the integrity of the arbitration process, an arbitrator should just resign rather than resist the challenge.

Apart from this not having any basis in legal jurisprudence, the ‘if challenged, just resign’ solution advocated by the Lagos High Court also results in a very practical consideration. If the Ruling is to be followed, the failure of the challenged arbitrator to immediately withdraw will result in any consequent award being set aside. This may result in spurious challenges being submitted for the sole reason of changing an arbitrator with which a party is not happy. This surely cannot be the intention of the challenge procedure.

Furthermore, the Lagos High Court also took the view that the challenged arbitrator had an obligation to disclose these particular facts. However, this position is not supported by reference to the IBA Guidelines. An analysis of Part II of the IBA Guidelines (Practical Application of the General Standards) reveals in its paragraph 4.3.1 that the non-disclosure that the majority of the members of the arbitral tribunal and Shell counsel were members of the board of governors of an arbitration institution should be considered a Green List item. As a result, this does not give rise to a conflict of interest.

The expert opinion given by the presiding arbitrator to the parent company of Shell in another litigation would at worst be an Orange List item as described in paragraph 3.1.1 of Part II of the IBA Guidelines, since depending on when the services were rendered, the relationship would amount to the presiding arbitrator having previously advised or been consulted by an affiliate of Shell in an unrelated matter. From the available data, it appears that the expert opinion was given in a previous litigation, and there was no evidence of an ongoing relationship. Even if this fact should have been disclosed as an Orange List item, nondisclosure in itself cannot be evidence of bias. As stated by the English Court of Appeal in the Halliburton case (paragraph 76), [n]on-disclosure of a fact or circumstance which should have been disclosed, but does not in fact, on examination, give rise to justifiable doubts as to the arbitrator’s impartiality, cannot, however, in and of itself justify an inference of apparent bias. Something more is required …” There is no evidence that the Lagos High Court analysed and/or determined that the non-disclosed relationship could and did give rise to doubts as to the impartiality of the majority of the tribunal.

Even where the arbitrator has failed to disclose a disclosable fact, this should not automatically result in the setting aside the award. The two-step approach advocated in the Halliburton case should result first in a determination that the facts of the undisclosed relationship would lead an objective bystander to harbour justifiable doubts as to the arbitrator’s independence and impartiality before the award is set aside.

Many parties are negatively impacted when an award is set aside: the parties to the dispute who have expended time and money on putting their case before the arbitrators, and the arbitrators who have also expended their resources in providing a settlement to the dispute. In institutional arbitrations, the arbitral institution which initially reviewed the challenge and rejected it may suffer reputational damage. The confidence of users in the system of arbitration may also be negatively affected by an award that is eventually set aside.

It might have been advisable for the Lagos High Court to give weight to the fact that the institution agreed upon by the parties to administer the arbitration had reviewed the challenge and dismissed it. For as long as this decision stands unchallenged, Lagos cannot claim to be pro-arbitration.

References   [ + ]

1. ↑ As conveyed to the author by the presiding arbitrator, the Lagos High Court’s understanding of the facts was “materialy inacurate”, “as were the facts placed before the Judge”, as the presiding arbitrator made clear that he “has never been instructed as an expert or Counsel by SPDC, Royal Dutch Shell or any Shell affiliate in any matter. At the time of the arbitration, (and since), [he] had no professional or other relationship with either of the parties, either subsisting or prior”. The presiding arbitrator also clarified to the author that “this clarification has been sent in a subsequent letter to the ICC Secretariat by the UK lawyers that worked on the case, before the English Courts”. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Legal and Practical Aspects of Virtual Hearings During (and After?) the Pandemic: Takeaway From the SCC Online Seminar Series

Sat, 2020-05-16 03:00

Two recent online seminars, organised in the context of the Online Seminar Series of the Stockholm Chamber of Commerce (SCC), focused on the fast-track digitalisation into which the world of international arbitration is forced as a result of the pandemic. The first, held on 29 April, addressed the current topic of Online Hearings When the Parties Cannot Agree. The second, held on 5 May, focused on virtual hearings from a Swedish perspective. From the experience shared and predictions made by the panellists on both events, participants departed considering whether confinement-induced adjustments might not, in fact, be sustainably transforming the international arbitration landscape.

 

“Online Hearings When the Parties Cannot Agree”

The first seminar was moderated by Prof. Patricia Shaughnessy (Stockholm University), with panellists Prof. Maxi Scherer (WilmerHale), Michael Mcilwrath (Baker Hughes), Wendy Miles (Debevoise & Plimpton) and Paul Cohen (4-5 Gray’s Inn Square). The Secretary-General of the SCC, Annette Magnusson, indicated in her opening remarks that increased use of virtual tools in times of confinement creates an opportunity to reinvent – not merely reconstitute in a virtual context – what was being done before.

Legal aspects to holding a virtual hearing against the objections of a party: The legal power of tribunals to order a virtual hearing over the objections of a party was naturally at the heart of discussions. Panellists all agreed that tribunals usually have this power. Prof. Scherer stated that there are no national laws or institutional rules which either prohibit or impose the use of virtual hearings. In silence, tribunals will be guided by certain general principles.

Firstly, certain laws grant parties a right to a hearing. This is the case, for example, of the Swedish Arbitration Act (SAA). This should not, however, mean a right to a physical hearing. Prof. Scherer insisted that arguments are exchanged orally and simultaneously over video link all the same. And indeed, any notion that the SAA imposes physical hearings was dispelled during the second webinar (discussed below).

Secondly, tribunals are usually afforded broad powers to determine the procedure as they consider appropriate. This will include when and where a hearing is to be held and, to Prof. Scherer, whether this hearing can be done remotely. This is a balancing exercise between the duty to conduct the arbitration expeditiously and the parties’ right to equal treatment and right to be heard (although the latter two in her view are respected in the case of a virtual hearing, where all participants are equally heard online).

Prof. Scherer suggested factors to consider when deciding whether to hold a virtual hearing, including the reason for the absence and measures taken to ensure presence, the content of the hearing, the possibility for all participant to participate and the delay caused should hearing not be held virtually. One could perhaps add to this list the environmental impact of holding the hearing physically.

M. Scherer also dismissed the common view that the efficiency of cross-examinations would somehow be hampered in virtual environments: an HD screen creates an even more immediate impression of someone as opposed to being 5 metres away in a conference hall.

In concluding remarks, M. Scherer indicated that she was aware of no case where the fact of imposing a virtual hearing in and of itself raised issues at set aside or enforcement stages. As practitioners and court get acquainted with virtual tools, any such fear will dissipate. Comfort comes with the habit.

How to engage users and embrace virtual hearings: But how, then, develop this habit? Wendy Miles shared her experience in dealing with parties and co-arbitrators who are reluctant to move forward with virtual hearings.

In her view, the answer lies in communication. Users are sceptical for psychological reasons: virtual hearings are different, they defy our habits. But this fear can be overcome through efficient communication focused on the specific procedural concerns which are being raised in relation to virtual hearings. These procedural objections to virtual hearings were analysed by the Federal Court of Australia in Capic v Ford Motor Company of Australia Limited (Adjournment) [2020] FCA 486. Ms Miles listed and discredited them in turn.

For example, a procedural objection based on technological limitations. To Ms Miles, this is nothing but fear or lack of experience in the technology. This is a mature technology, and institutions and hearing centres are providing guidance. Another concern raised is the difficulty to interact with experts and witnesses. But this concern can be addressed with better equipment. Ms Miles agreed with Prof. Scherer that proximity with a witness or expert is, in fact, increased by virtual tools. Yet another example is difficulties in managing documents. On that front, institutions are providing satisfactory document management platforms, and Ms Miles shared her positive experience of using the SCC Platform.

In concluding remarks, W. Miles insisted that, if arbitration professionals communicate efficiently, then all participants in the arbitration process will understand that these are only apparent difficulties which can be overcome.

Optimising the proceedings: Michael Mcilwrath looked into new ways to optimise the international arbitration process, with or without digital tools.

He noted that present-day international arbitrations are geared up towards their hearings, which tend to be longer in certain (oftentimes common law) jurisdictions for comparable disputes. But the cause, in Mr Mcilwrath’s view, maybe no other than the participants’ orientation towards the case.

In other words, main hearings can oftentimes be shortened. Mr Mcilwrath commented on specific ways to do this and increase efficiency, all while observing the parties’ right to be heard, with reference to the recent ICC Guidance Note. For example, disposing of certain issues on a documents only basis, and seeking to resolve other issues by agreement between the parties, without the need for a hearing. Other tools, he said, may require a degree of oral communication, such as disposing expeditiously of manifestly unmeritorious claims or defences or addressing at the outset potentially dispositive issues. One could add to his list that tribunals can also actively encourage parties to keep private dialogue channels open in parallel to the proceedings, with a view to finding amicable solutions.

These tools are neither new nor radical. In fact, they are fairly simple in their principle but nonetheless generate forward motion in arbitrations. Mr Mcilwrath hinted that they were underused and that parties now need tribunals to be a little bit firmer and willing to implement these over the objections of one of the parties. Perhaps tribunals will see the current pandemic as an “excuse” to implement the additional firmness Mr Mcilwrath advocates.

Available tools for holding virtual hearings: At last, Mr Cohen provided an overview of the technical toolbox available to users looking to shift away from physical hearings. Video-conferencing is a mature technology: a deluge of old and new programs is now being used in arbitration.

But he noted that one size does not fit all. Different programs will provide different features and experiences. For the purposes of an international arbitration hearing, Mr Cohen insisted on the importance of isolated chatrooms, the ability to share information (and keep the information confidential) and to monitor the number and identity of attendees in the virtual hearing room. One could add, to this list, the importance of being able to display in parallel both the shared screen and video feed of the speaker, and the participants’ ability to independently choose who to look at.

A “secretary for tech” can assist the tribunal in navigating and implementing these various solutions. This assistant can also alleviate concerns regarding privacy and cyber-security (including hacking and intrusions). In Mr Cohen’s view, these concerns are overblown: these are usually secure tools. Some of the readily available programs are transit-encrypted, others end-to-end encrypted, and breaches are most frequently “low tech” (such as responding to a phishing email or having an unreasonably simple password).

Mr Cohen referred in conclusion to the growing number of draft procedural orders and video call protocols freely available, such as the Seoul Protocol or the Africa Arbitration Academy Protocol. No single software or protocol is suited for all hearings. But there is something for everyone.

 

“Online hearings from a Swedish perspective”

The second seminar, co-organised by the SCC and the Swedish Arbitration Association, was also moderated by Prof. Patricia Shaughnessy, with opening comments from SCC Secretary-General Annette Magnusson and panellists Kristoffer Löf (Mannheimer Swartling), Fanny Gleiss Wilborg (Lundberg & Gleiss) and Polina Permyakova (WilmerHale).

Kristoffer Löf examined the legal aspects to online arbitration hearings under Swedish law. Whereas parties in Sweden have a right to a hearing if they request one, Mr Löf dispelled the notion that Swedish law requires any such hearing to take place physically. He referred, in particular, to the travaux préparatoires of the SAA and other laws governing the Swedish judicial process, all of which approve of oral submissions by video link and acknowledge that these virtual tools preserve the parties’ procedural rights. In his view, the video link meets the hearing requirements set out in the SAA – and all panellists agreed.

Mr Löf also noted that Swedish courts are themselves well advanced in their own reliance on video hearings: they are likely to look to their own practices if, and when, the matter arises in setting aside proceedings.

From a Swedish arbitrator’s perspective, Fanny Gleiss Wilborg shared her recent positive experience of online arbitration hearings. Comfort with the medium develops with habit. But the dynamics between participants are unquestionably different, and technical challenges remain to be overcome. Ms Gleiss Wilborg joined other speakers in hoping that present challenges will stimulate reflection and sustainably optimise the arbitration process.

At last, from both her counsel and arbitrator perspective, Polina Permyakova agreed that virtual hearings raise new challenges: a witness might get too comfortable before a camera, parties have new opportunities to disrupt opposite pleadings for example by feigning connection difficulties. Properly anticipating the specific needs of the hearing and scheduling practice rounds are key to success.

 

Conclusion

It became clear, in the course of both online seminars, that an analogy between the physical and virtual hearing is limited. These simply are not the same thing, and seeking to transpose the physical hearing as we know it in a virtual environment is a hopeless exercise. Instead, arbitration professionals should reconsider their habits: the current pandemic has the potential to increase exposure to new and existing optimisation tools, and serve as a catalyst for renewal – and improvement – of the international arbitration process.

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Norway just like Turkey? ICSID Arbitration/s against Norway over Svalbard’s Natural Resources: A Wider Picture

Fri, 2020-05-15 03:00

Recently, the first-ever treaty-based arbitration against Norway was registered with ICSID. The Request for Arbitration was submitted by a Latvian investor, Mr. Peteris Pildegovics, and his company, SIA North Star. This post provides a background to the dispute, outlines possible claims, elaborates on its ramifications, and predicts further arbitrations.

The dispute at hand is similar to the one dealt with in a previous post, where licences granted by a EU Member-State (Cyprus) were disregarded by a neighbouring country of the EU (Turkey) because of a disagreement as to which State may have access to the contended natural resources. That disagreement has resulted in an ongoing and even wider diplomatic stalemate. The ultimate goal of this post is to show, once again, why the EU should reconsider its anti-ISDS policy, since Investor-State arbitration is an effective tool to resolve conflicts and protect the legitimate interests of the nationals of EU Member-States abroad.

 

Point of Contention

The EU and Norway are disputing fisheries rights for catching snow-crabs, a very lucrative delicacy found in the continental shelf surrounding the archipelago of Svalbard.

The crux of the dispute lies in the conflicting interpretations of the Svalbard Treaty signed in Paris in 1920. That Treaty bestowed sovereignty upon Norway over the back-then terra nullius of Svalbard, but at the same time granted the 45 signatories to the Treaty – which includes 23 countries that today are part of the EU – equal rights and non-discriminatory access for commercial purposes to the resources on the archipelago and in the surrounding waters.

Norway and the EU disagree on the geographical scope of the Treaty and the extent to which all signatory States enjoy such right to equal access to natural resources. Norway maintains that the equal enjoyment of commercial rights expressed in the Treaty is only applicable on land and up to the 12 nautical miles limit of the territorial waters surrounding Svalbard, but not to the 200-nautical mile Fishery Protection Zone (FPZ) instituted by Norway around the islands, nor to Svalbard’s continental shelf stretching throughout and beyond the 200 nm. The EU adopts an evolutive interpretation of the Treaty. It contends that the Treaty applies on land and up to the 200 nautical miles around Svalbard, in keeping with the concept of exclusive economic zone (EEZ) that did not exist at the time when that Treaty was drafted. The EU’s understanding of the Treaty’s territorial application is that the areas in which equal access rights apply basically overlaps with the FPZ. This is consistent with Article 121(2) of the 1982 United Nations Convention on the Law of the Sea (UNCLOS), according to which islands generate the same maritime zones as other landmasses, including a territorial sea, contiguous zone, EEZ, and continental shelf.

Consequently, the EU has issued licences for fishing activities covering the 200 nautical miles around the Svalbard archipelago, while Norway deems that in any case (either within the 12 nm or within the 200 nm) such activities constitute illegal fishing if not accompanied by a Norwegian permit.

 

Norwegian Legislation and its Enforcement

The relevant Norwegian legal framework – the Act on the Right to Participate in Fishing and Catching of 26 March 1999 (Participation Act) and the Regulation on Prohibition of Snow-Crab Catching of 19 December 2014 (hereafter the “Regulation”) – establishes a general prohibition to fish snow-crabs unless the vessel holds a Norwegian licence. However, such licence can only be issued to Norwegian citizens or to foreigners as long as they reside in Norway and partner up with other Norwegian citizens who hold the majority of the ownership interests (Section 5 of the Participation Act), and to vessels where half of the crew on board and the ship-master reside in the Norwegian coastal municipalities.

So far, the Norwegian Supreme Court has applied this legislation in two different cases, in both occasions ruling against vessels flying an EU Member State’s flag. Both cases resulted in the application of the criminal provision in the Marine Resources Act section 61, according to which such illegal fishing is punishable with a confiscation and a fine or imprisonment up to one year.

The Senator case is particularly significant since it prompted the Norwegian courts to interpret the Svalbard Treaty. This case involved a Latvian-flagged vessel owned by the company SIA North Star. In 2017, the vessel was intercepted by the Norwegian Coastguard while catching snow crabs in the Svalbard FPZ with a Latvian permit to catch snow-crabs, but without a Norwegian licence.

The company was issued a fine, which it challenged before the Øst-Finnmark District Court. The Court confirmed that the snow-crab is a sedentary species under the UNCLOS, and that Norway has an exclusive right to exploit it, in conformity with Article 77 UNCLOS. The court noted that the Snow-Crab Regulations would contravene the principle of equal rights under the Svalbard Treaty “if the Treaty [could] be invoked in the case”. However, it found that the Svalbard Treaty does not apply beyond Svalbard’s territorial waters (viz. 12 nm from the baseline), hence, it does not apply where the catching took place, within the 200-nm of the Svalbard FPZ.

The company appealed to the Court of Appeal, which reiterated that the snow-crab is a sedentary species, but deemed it unnecessary to consider whether the principle of equal rights in the Svalbard Treaty had been violated. It concluded that snow-crab catching without a Norwegian permit on the Norwegian continental shelf is punishable under criminal law, even in the absence of a valid legal basis for rejecting a permit application. The company appealed against the Court of Appeal’s judgment to the Supreme Court.

On 14 February 2019, the Supreme Court dismissed the appeal concluding that: 1) the snow crab is a sedentary species pursuant to Article 77(4) UNCLOS because of its natural pattern of movement in constant physical contact with the seabed, so the Regulation did apply; 2) the Svalbard Treaty’s principle of equal rights has not in any case been violated, since everyone – also Norwegians – can be punished for catching snow-crab in the area without a permit from Norwegian fishery authorities.

 

Possible ICSID claims

It is possible that the above circumstances could provide the basis for an investor-State arbitration claim under the Latvia-Norway BIT. The Latvian investor may rightly claim that it has an investment – either in the form of a vessel falling under the term “movable property” under Article 1(1)(I) of Norway-Latvia BIT, or in the form of an EU license (which may fit under Article 1(1)(V)’s reference to “business concessions…to exploit natural resources”). The fact that the vessel is registered and licensed in its home-State (Latvia) and so is not “an asset invested in Norway with a permanent presence” would like not constitute a jurisdictional hurdle, according to the ICSID precedents set in SGS vs Philippines, SGS vs Pakistan, and Air Canada vs. Venezuela.

The BIT imposes on Norway certain international obligations, specifically applicable also to the continental shelf over which Norway exercises – in accordance with Article 1(4) – sovereign rights for the purpose of exploration and exploitation of natural resources. Under its BIT obligations, Norway must accord protected investors fair and equitable treatment (FET), compensation in case of direct or indirect expropriation, and most-favoured-nation’s treatment (MFN). For this latter obligation Norway’s other treaties may become relevant to any dispute under the Latvia-Norway BIT. For example, the Norway-Russia BIT has a national treatment (NT) clause, which precludes the Contracting Parties from making negative differentiations between foreign and national investors. The claimant may be able to combine the MFN clause contained in the Norway-Latvia BIT to import this obligation to accord NT contained in the Norway-Russia BIT.

Arguably, Norway has breached its international obligations vis-à-vis the Latvian investor. By disregarding its license and demanding a Norwegian permit – despite the equal right to access to natural resources of Svalbard by the State Parties to the 1920 Treaty – Norwegian authorities have discriminated against the Latvian investor on the basis of its nationality, thus violating the NT obligation. All the nationality-based requirements contained in the Norwegian Participation Act and Regulation may constitute a breach of the NT. The Latvian investor could also argue that Norway has breached the FET obligation by failing to protect its legitimate expectations based on the Svalbard Treaty, which forms part of Norwegian legal framework and is a relevant legal basis against which Norway’s international responsibility will be assessed. The Latvian company may have invested heavily on the basis of that Treaty. Moreover, the investor could argue that Norway violated the MFN standard by exempting Russian vessels from the prohibition from catching snow- crabs without a Norwegian permit, while requiring EU companies to apply for a Norwegian permit. By seizing the Latvian vessel and fining its profits, the investor might also argue that Norway’s Supreme Court unlawfully expropriated SIA North Star’s investment (reportedly, the Latvian investor is losing about 20 million euros a year).

So, the investor may rightly claim that Norway did not comply with its international obligations stemming from the Latvia-Norway BIT and the 1920 Svalbard Treaty. This latter Treaty could be invoked either through Article 31(3)(c) of the VCLT (“any relevant rules of international law applicable in the relations between the parties”) or, alternatively, by relying on the MFN clause contained in the Latvia-Norway BIT in combination with Article 12 of the Norway-Peru BIT (“application of the more favourable international or national rules binding upon the Parties”). Under the Svalbard Treaty, ships and nationals of all the High Contracting Parties shall enjoy equally the rights of fishing in the waters around Svalbard. This entails that if Norwegian ships are allowed to fish snow crabs in those waters, then Latvia-registered ships shall have the same right.

 

Further Possible Arbitrations

Other than Latvia, among the EU States that have been authorized by the EU Commission to issue snow-crabs catching licenses and that are a Party to the Svalbard Treaty, Norway has BITs also with Estonia, Lithuania and Poland. Consequently, snow-crab fishing companies from these countries also may initiate arbitration claims against Norway for having indirectly expropriated their investments (importantly, the underlying BITs cover indirect expropriation). Indeed, the measures enacted by the Norwegian Parliament and implemented by the Norwegian Coastguard and Supreme Court had similar effects of expropriation on all EU licence-holders. Because of the Norwegian restrictions on snow-crab fishing, Latvian, Estonian, Lithuanian, and Polish vessels cannot exercise rights under their snow-crab licences, which are essentially only of practical and legal use around Svalbard’s waters. Hence, the property rights vested in the EU licenses have been indirectly expropriated by Norway’s legislation and enforcement acts.

 

Conclusion

The dispute for snow crabs in Svalbard may set the stage for another dispute concerning the abundant hydrocarbon reserves located in the same waters.

The Norwegian courts interpreting Article 77(4) UNCLOS have found that the snow-crab is a sedentary species. This would apply also to the other natural resources of the seabed and subsoil of the continental shelf, including mineral resources.

In June 2018, the Norwegian Ministry of Petroleum and Energy has granted new oil licenses that extend in the contentious area of Svalbard. Should non-Norwegians be allowed to catch snow- crabs with EU licences on the basis of the Svalbard Treaty, it could also be argued that they should enjoy equal mining rights as those enjoyed by Norwegians in respect of these undeveloped oil and gas reserves on the shelf around Svalbard through EU licences.

In the meantime, Tribunal/s established under the BITs between Norway and Latvia, Estonia, Lithuania, and/or Poland may determine the breadth of the territorial scope of the Svalbard Treaty by applying it either up to the 12 nm from the baseline or up to the 200 nm of the economic zone, thus putting an end to this contentious issue.

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No Deliberations, No Enforcement in Austria: Different Reasoning by the Supreme Court, Same Result?

Thu, 2020-05-14 03:00

In a recent decision of November 2019 the Austrian Supreme Court (“OGH” in German) considered whether an arbitral award rendered by the Chamber of Industry and Commerce of Belarus shall be declared enforceable and emphasized the importance of deliberations in the context of the ordre public standard to reach an enforceable award.

In a nutshell, the Supreme Court held that excluding a co-arbitrator in fact from the deliberations and general decision-making process, thereby also preventing her/him from influencing the decision-making of the other arbitrators, infringes the procedural ordre public, i.e. the body of principles that underpin the operation of the legal system in Austria.

 

Facts of the Case: Arbitrator Excluded from Deliberations

The following facts are known from the Supreme Court’s decision: The claimant sought to obtain a declaration of enforceability for Austria regarding an arbitral award rendered on April 15, 2015 by the Chamber of Industry and Commerce of Belarus. The arbitral tribunal consisted of three arbitrators: two party-appointed arbitrators and one presiding arbitrator, Mr. A.1)The author is not aware of the parties‘ names. The abbreviations used only serve the purpose to enhance the article’s readability. jQuery("#footnote_plugin_tooltip_9087_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9087_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

After the evidentiary proceedings were concluded, an initial meeting between the three arbitrators was scheduled. However, the meeting ended without a decision on the merits of the case. The arbitrator nominated by the respondent, Mr. R., was thus given the prospect of additional meetings in order to come to a decision. Yet, Mr. A. took it upon himself to subsequently draft an award without contacting, informing or discussing the draft with Mr. R.

Mr. A. then requested Mr. R. to sign the draft award he had prepared and which in the meantime had already been signed by Mr. A. and the arbitrator nominated by the claimant. While studying the signed draft award Mr. R. noticed that the award also covered requests submitted by the parties after the evidentiary proceedings were concluded (including but not limited to a request to reopen the procedure). And while Mr. R. was favorable to these requests, Mr. A. quashed them in his draft award.

Mr. R. thus raised his concern that the three arbitrators neither had a concluding discussion regarding the main issues of the case nor had there been a discussion involving Mr. R. regarding the requests submitted by the parties after the evidentiary proceedings’ conclusion. In his response, Mr. A. merely referred Mr. R. to the possibility of a dissenting opinion.

Considering these facts, the lower instances rejected both the claimant’s application for declaration of enforceability and the applications to grant enforcement.

 

Decision of the Austrian Supreme Court

Generally, the Austrian Supreme Court deals with remedies against the judgement of the Courts of Appeal in civil matters and is the first and final instance in annulment claims regarding arbitral awards and proceedings in connection with the constitution of arbitral tribunals, amongst others.

Access to the Supreme Court is limited in two ways: by considering the value of the dispute and by restricting access to the Court to matters which raise a substantial question of legal relevance. A legal issue is considered to raise a substantial question of legal relevance if the lower court’s decision departs from the relevant rulings of the Supreme Court, if there is no case law on the issue in question, or if this issue has not been dealt with consistently in the Court’s past rulings.

In the case at hand, the Supreme Court noted the lack of a substantial question of legal relevance and largely followed the lower instances’ reasoning.

The Court confirmed the decision of the lower court in that it is preferable for all arbitrators to be physically present during the deliberations regarding the merits of the case, especially if the award is subject to a majority vote. Yet, the deliberations between the arbitrators may also be conducted via phone, videoconferencing or in writing.

Bilateral deliberations between two arbitrators are even acceptable according to the Supreme Court, as long as these deliberations do not lead to the factual exclusion of a third arbitrator from the decision-making process.

An arbitrator, who is overruled by his colleagues, must have had the chance to present his opinion to his colleagues and thus to influence the decision-making of the other arbitrators. However, if the arbitrator, who was overruled by his colleagues, is presented with his colleagues’ finalized opinion, the decision-making process leading to the arbitral award is severely tainted.

The Supreme Court upheld the decision of the lower court in considering that Mr. R. was indeed confronted with a finalized opinion by his colleagues, which essentially constituted Mr. R’s factual exclusion from the decision-making process and effectively barred him from the possibility to influence the decision-making of his colleagues.

This, as per the Supreme Court, infringes the procedural ordre public. It is interesting to note, however, that the Supreme Court did not refer to the public policy exception found in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). Instead, it simply upheld the lower-instances’ decisions and stated that enforcing the arbitral award infringes the Austrian ordre public.

The Supreme Court also noted that, contrary to the claimant’s view, the lower instances are not “sweeping aside” the judicial decisions taken in a Belarusian annulment proceedings, because the relevant evaluation criterion in the case at hand is the Austrian legal order, which has not yet been evaluated. The legal view taken by the lower instances moreover does not mean that unanimity is ultimately required if the arbitrators have dissenting opinions, because the matter to consider is a fair and correct decision-making process.

 

Analysis of the Supreme Court decision – Emphasizing the Importance of Deliberations

In practice, objections to the enforcement of arbitral awards based on an infringement of the ordre public are fairly common, but very rarely successful. This is partly due to the narrow definition of the ordre public standard according to the Supreme Court’s case law.

Austria has ratified the New York Convention conceived to facilitate the recognition and enforcement of foreign arbitral awards in the member states of the convention. The relevant Austrian procedural provisions on the enforcement of arbitral awards are found in the Austrian Code of Civil Procedure (Zivilprozessordnung) and the Austrian Enforcement Act (Exekutionsordnung).

And while the New York Convention basically banished the so-called “double-exequatur” proceedings requiring applicants to get an arbitral award rendered enforceable in both the country where the award was issued and the country where enforcement was sought, trying to get foreign arbitral awards recognized and enforced in Austria occasionally still is an uphill battle.

This is due to the Austrian courts’ interpretation of the form requirements provided for in Article IV New York Convention.

The decision at hand is an exceptional case, because it does not concern the form requirements stipulated in the New York Convention, which are typically the basis for rejecting an application for declaration of enforceability; rather, the Supreme Court refers to an infringement of the procedural ordre public when rejecting the claimant’s applications.

Indeed, the fact that an arbitrator was objectively excluded from the deliberations and then confronted with a finalized opinion by his colleagues constitutes a major flaw preventing a fair and correct decision-making process according to Austrian law. The decision of the Supreme Court reflects what seems to be an international consensus regarding the importance of deliberations in arbitration.

The Supreme Court stated that it is not per se improper for two arbitrators to deliberate amongst themselves, provided that the deliberations do not reach an intensity which would effectively exclude the third arbitrator. This approach is also adopted by German law.2)See Schlosser in Stein/Jonas, dZPO23 § 1052 Rz 2. jQuery("#footnote_plugin_tooltip_9087_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9087_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Similarly, the lack of proper deliberations on contentious issues has been relied upon as a ground for annulment in Sweden as early as 1924 (see Årsbackaträvaruaktiebolag v. E. Hedberg, NJA 1924 p. 569).

In a more recent case, an arbitral award rendered by a tribunal in Spain was set aside because one of the arbitrators was excluded from deliberations. Namely, in the now infamous Puma Case, the chairman and one co-arbitrator held the final part of the deliberations without informing the third one, changed the previously agreed content of the award, signed the award and even notified the parties on the same day.

The Supreme Court’s decision also (implicitly) confirmed the importance of the principle of collegiality for the deliberative process; a similar stance was taken in the annulment of the award rendered in the Guangying Costumes v. Eurasia case, in which an arbitrator was de facto excluded from the deliberation process.

Apart from infringing the ordre public in most jurisdictions, the fact that an arbitrator is effectively excluded from the opportunity to deliberate and to convey his or her opinion on the final draft of an award, the arbitral award itself is also at risk of annulment.

This decision should serve as a sharp reminder to arbitrators and counsels alike, not to overlook the ordre public of the state in which the arbitral award will be enforced, when conducting the proceedings and issuing an award.

References   [ + ]

1. ↑ The author is not aware of the parties‘ names. The abbreviations used only serve the purpose to enhance the article’s readability. 2. ↑ See Schlosser in Stein/Jonas, dZPO23 § 1052 Rz 2. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Arbitration in the WTO: Changing Regimes Under the New Multi-party Interim Appeal Arbitration Arrangement

Thu, 2020-05-14 01:00

Since 2017, the appointment of members of the Appellate Body (‘AB’) of the Dispute settlement system of the World Trade Organisation (‘WTO’) has been blocked by the United States (‘US’). This has disrupted the functioning of the WTO dispute settlement system. The US claims that it has blocked the appointment for serious reasons: the AB is guilty of judicial overreach, interpreting WTO agreements in a manner which they were never intended to apply; the AB creates new rights and provides decisions on issues not raised by the parties; and, due to the nature of the consensus requirement, there is no check on the adoption of AB’s decisions.

To resolve this situation, the European Union (‘EU’) and 15 other Members of the WTO have reached an arrangement to arbitrate as between themselves trade disputes under Article 25 Understanding on Rules and Procedures Governing the Settlement of Disputes (‘DSU’ are the governing rules and procedure for dispute settlement). This particular arrangement, called a ‘Multi-party interim appeal arbitration arrangement’ (‘MPIA’), functions as a stop-gap measure to replace the AB for the time being as it remains inoperative.

The first official step towards MPIA dates back to May 2019, when the EU circulated a draft text for an interim appeal arbitration process. In July 2019, the EU and Canada agreed on such an arrangement in the event the AB is unable to hear cases. At the time of writing, 20 WTO Members have taken up the opportunity to join MPIA. However, the participation in MPIA remains open for other WTO Members to join (para 12).  As per the procedure mentioned in MPIA, the participating members of MPIA shall notify the Dispute Settlement Body of the WTO of their intention to join MPIA. (para 12).

 

The dispute settlement mechanism in the WTO

Under the DSU, a WTO Member can seek consultation with another WTO Member in relation to WTO trade disputes. When consultation fails, the complainant can request the Dispute Settlement Body (DSB) to establish an ad hoc Panel (i.e., First Instance body) consisting of three members to hear the dispute. The DSB is responsible for overseeing the entire dispute settlement process. If parties decide to appeal the Panel report to the AB, the report is not adopted by the DSB (Article 16.4 DSU and Article 17 DSU). Normally, the dispute at appellate stage is heard by three members. However, in December 2019, the terms of two of the three remaining members of the AB had expired and in the absence of appointment of members, there is no existing AB to hear the appeals. Due to this, a party to the dispute can now appeal and prevent the adoption of, and compliance with, the report. For example, the US appealed in a dispute between the US and  India (DS436), and because at the time there was no AB to hear the appeal, this procedural move prevented the adoption of the Panel report by the DSB.

 

What kind of a mechanism is expected under Article 25 DSU?

The arbitration mechanism under Article 25.1 DSU is an ‘expeditious’ alternative mechanism that “can facilitate the solution of certain disputes that concern issues that are clearly defined by both parties.” This particular provision can be interpreted in two ways. A narrow interpretation of ‘certain disputes’ in Article 25.1 DSU would restrict arbitration of all the disputes that could actually be raised before the Panel or the AB. On the other hand, a broader interpretation of Article 25.1 DSU would allow all trade disputes to be arbitrated that are ‘clearly’ defined by the parties. The latter interpretation is the one that has gained support in by the DSB. In US-Section 301 Trade Act (2000), for example, the panel ruled that

all Members [are required] to ‘have recourse to’ the multilateral process set out in the DSU when they seek the redress of a WTO inconsistency. In these circumstances, Members have to have recourse to the DSU dispute settlement system to the exclusion of any other system, in particular a system of unilateral enforcement of WTO rights and obligations.

The reason can also be that Article 23.1 DSU allows WTO Members to have recourse to all of the WTO dispute settlement mechanism, including arbitration under Article 25 DSU. Therefore, an arbitration mechanism, as seen under MPIA, is permitted under the DSU.

Article 25.4 DSU states that Articles 21 and 22 DSU are applied “mutatis mutandis” to arbitration awards, while the same is mentioned in MPIA (Annex 1, para 17). Article 21 DSU provides for a surveillance mechanism ensuring a prompt compliance with the recommendations and rulings in Panel or AB reports. When the recommendations and rulings are not implemented within a reasonable period of time, under Article 22 DSU, the complainant can seek compensation from the respondent or suspension of concessions to the respondent. Similarly, the arbitration awards under Article 25 DSU are subject to all the procedures and rules of the DSU such as surveillance and monitoring of implementation and compensation and suspension of concession. This means that when the parties choose arbitration as a recourse, they would not lose any of the benefits that are afforded through the DSB; the MPIA notes that appeal arbitration procedure will be based on the substantive and procedural aspects of Appellate Review pursuant to Article 17 DSU (para 3).

To date, there has been only one dispute, United States- Section 110(5) of US Copyright Act, in which the parties resorted to arbitration under Article 25 DSU. The procedure was not used as an alternative to the panel and AB procedure, but at the stage of implementation, when the panel report had already been adopted.

 

How the MPIA is different from appellate proceedings within the DSB

The MPIA differs in scope to appellate proceedings within the DSB. MPIA applies to all future disputes between participating members including the compliance stage of such disputes as well as disputes pending on the date of the communication, except if the interim panel report (see Article 15 DSU) has already been issued on that date (para 9). An appeal shall be limited to issues of law and legal interpretations covered in the panel report (Annex 1, para 9). The parties to the dispute when mutually agree are free to deviate from the procedure prescribed in the appeal arbitration agreement annexed as Annex 1 in MPIA.

The MPIA also differs in objective. Participating members of MPIA will resort to arbitration as an appeal procedure, as long as the AB is not able to hear the appeals of panel reports (para 1). This means that it is a temporary arrangement and will cease to apply once the AB is operational again. While MPIA exists, the participating members of MPIA cannot file appeals for any trade disputes as between themselves under Articles 16.4 and 17 DSU (para 2).

The structure of these mechanisms also differs. For MPIA, appeals will be heard by three arbitrators selected from a pool of ten standing arbitrators composed by the participating members (para 4). Arbitrators may come from non-participating members but can be removed at the request of the party at dispute (footnote 2). The selection of arbitrators will be according to the same principles and methods applied to form the AB under Article 17.1 DSU, Rules 6(2) of Working Procedures for Appellate Review and procedure mentioned in the Annex 2 of MPIA (para 6). Further, participating members are responsible to provide the arbitrators with appropriate administrative and legal support which will be separate from the WTO Secretariat staff and its division (para 7).

Finally, the procedures also differs. In order to initiate an arbitration under MPIA, a ‘Notice of Appeal’ is filed with the WTO Secretariat no later than 20 days by the parties to the dispute after suspension of the panel proceedings (Annex 1, para 5). This Notice is also issued to other parties and to third parties. MPIA requires the arbitrators to issue an award within an ambitious time limit of 90 days from the date of filing of the Notice of Appeal (Annex 1, para 12). On a proposal from arbitrators, parties to the dispute may agree to extend the 90-day time limit (Annex 1, para 14). However, the arbitrators are allowed to adapt the timetable for appeals provided in the Working Procedures for Appellate Review after consulting the parties to the dispute (Annex 1, para 11).

 

Future outcome

MPIA shows commitments of the WTO Members to uphold the rule-based system under WTO agreements, but not all the Members are ready to bind themselves to the arbitration agreement and give up their right to appeal at the AB. For example, India has refused to join MPIA as joining MPIA means giving up its right to appeal in the AB. Interestingly, MPIA will now create a separate category of appellate reports since the arbitration awards are not required to be adopted by the DSB. This is an unresolved issue since the WTO has not expressed its support or otherwise to MPIA till date.

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Termination of Intra-EU BITs: Commission and Most Member States Testing the Principle of Good Faith under International Law

Wed, 2020-05-13 06:30

The long-awaited Agreement to terminate intra-EU BITs (bilateral investment treaties) was signed on 5 May 2020 (the “Termination Agreement”). According to the European Commission, the Termination Agreement “implements the March 2018 European Court of Justice judgment (Achmea case), where the Court found that investor-State arbitration clauses in [intra-EU BITs] are incompatible with EU Treaties.”

The road the EU has taken to arrive at this point was described in a previous KAB post, so the aim of this post is to focus on two controversial provisions and provide some preliminary thoughts on their impact. I will also briefly consider the position and future of the Member States that chose not to sign the Termination Agreement.

 

Termination of Sunset Clauses and Pending Arbitrations

The two provisions of the Termination Agreement that have given and will continue to give rise to attention include (i) Articles 2 and 3, which terminate the sunset clauses in BITs and (ii) Articles 5 and 7, which purport to terminate all arbitrations under them commenced after the Achmea judgment. The interference with vested rights of third parties in the case of the former, and the arguably retroactive nature of the provision in the latter, renders the validity and application of these provisions suspect, as a matter of international law.

The Contras case (Case concerning Military and Paramilitary Activities in and against Nicaragua (Nicaragua v. United States)) provides an interesting analogy: Three days before Nicaragua seised the International Court of Justice of its case, the United States purported to qualify its declaration accepting the compulsory jurisdiction of the Court under Article 36(2) of the Statute by a notification that excluded disputes with Central American states from its scope.  The original declaration included a 6-month termination period. The ICJ held that the notification was ineffective, pointing out that the termination notice in the original declaration was “inescapable” (Jurisdiction and Admissibility, Judgment, ICJ Reports 1984, p. 392, para. 61). The Court emphasised the principle of good faith in arriving at its conclusion (para. 60).

It may also be worth noting that under the Vienna Convention on the Law of Treaties, treaties do not generally produce retroactive effects (Art. 28) and termination of a treaty “does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination” (Art. 70(1)(b)).

While it is no secret that the EU Commission has disagreed for a long time with the jurisdiction of investment tribunals under intra-EU BITs, it cannot prevent such tribunals from ruling on the validity and effect of these clauses in existing and possible future cases. All it can do is try to influence the outcome (as it has done in numerous cases in the past), most likely by seeking to appear as an amicus curiae. Ultimately the Commission can bring infringement proceedings before the CJEU against the respondent state, if such arbitrations result in an award that is not to its liking, as it did in the Micula case (Cases T624/15, T694/15 and T704/151)Technically the cases were brought by the Micula brothers and their companies, challenging the Commission’s decision to declare Romania’s partial payment of the sum awarded in ICSID Case ARB/05/20 incompatible state aid. The General Court upheld the application in a decision discussed in a KAB post by Guillaume Croisant. jQuery("#footnote_plugin_tooltip_5109_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5109_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });).

This would not contribute to the coherence of systems of international law (of which EU law is one, even if the Commission and EU lawyers do not always see it that way) or create legal certainty. While the Member States must have taken this risk into account when deciding to sign the Termination Agreement, the same cannot be said for EU investors that may have relied on the additional protection provided by an existing BIT (including its sunset clause) when making their investments. Most such investors will not have the appetite or stamina to pursue proceedings under the current uncertain legal regime, leading to the signatories to the Termination Agreement and the Commission having achieved their aims, regardless of the strict legal effect of Articles 2 and 3 of the Termination Agreement.

By contrast, those that are already involved in arbitrations that have ostensibly been unilaterally terminated (or the jurisdiction of the tribunals hearing them withdrawn) under Articles 5 and 7 may have invested enough in their disputes to wish to see them through, even in light of the serious uncertainties that surround the enforceability of any award that they may obtain.2)A further option is open for parties to any arbitration proceedings that were commenced but not concluded before the Achmea judgment, namely to enter into “structured dialogue” with a facilitator in order to try to achieve a settlement, under Article 9 of the Termination Agreement. jQuery("#footnote_plugin_tooltip_5109_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5109_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Signatories – and Not Signatories – to the Termination Agreement

It is noteworthy that it has taken the Member States and the Commission over six months from the agreement on the terms of the Termination Agreement to its signature.3)The terms of the draft leaked at that time are virtually identical to those in the signed version. jQuery("#footnote_plugin_tooltip_5109_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5109_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Presumably the time was needed to try to coax all EU Member States to join the agreement, in which case the attempt appears to have failed. Four Member States have decided not to sign the Termination Agreement: Austria, Finland, Ireland and Sweden. Ireland has no BITs in force (with EU Member States or otherwise), but the other three appear not to have agreed to all the terms of the Termination Agreement and be rather opting for bilateral termination of their individual treaties – an alternative also provided in the political Declarations of January 2019 (see para. 8 of the Declaration signed by Austria and para 8. of the Declaration signed by Finland and Sweden).

It will be interesting to see how those bilateral (termination) treaties differ from the plurilateral Termination Agreement. Sweden, for example, may wish to treat pending arbitrations differently, given its ownership of Vattenfall, even though that case (Vattenfall AB v. Germany, ICSID Case No. ARB/12/12) would not have been specifically affected, being brought under the Energy Charter Treaty (the “ECT”), rather than a BIT. (The Termination Agreement does not apply to the ECT.) While the main difference between the political Declarations is on its face over the ECT, one can also detect broader concerns over “due process” and interference in ongoing proceedings in the Declaration signed by Finland and Sweden (see p. 3). Overall, the Termination Agreement clearly goes further than the Achmea judgment, which may not have been to all Member States’ liking.

Future terminations may in theory at least also be unilateral, leaving the sunset clauses intact, which could result in further infringement proceedings before the CJEU.

While the Commission on the whole got its way, it is clear that there is far less agreement among the Member States on the usefulness and legality of intra-EU BITs than the Commission press communications would suggest.

The UK has also not signed the Termination Agreement, even though its preliminary intention to do so was indicated at the time of the draft agreement, when it was still a Member State. Accordingly, the UK’s existing BITs with EU Member States will remain in force, at least until the future relationship between the UK and the EU is clarified during the ongoing negotiations.

References   [ + ]

1. ↑ Technically the cases were brought by the Micula brothers and their companies, challenging the Commission’s decision to declare Romania’s partial payment of the sum awarded in ICSID Case ARB/05/20 incompatible state aid. The General Court upheld the application in a decision discussed in a KAB post by Guillaume Croisant. 2. ↑ A further option is open for parties to any arbitration proceedings that were commenced but not concluded before the Achmea judgment, namely to enter into “structured dialogue” with a facilitator in order to try to achieve a settlement, under Article 9 of the Termination Agreement. 3. ↑ The terms of the draft leaked at that time are virtually identical to those in the signed version. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Choice of Seat or Venue: Supreme Court of India Dithers

Wed, 2020-05-13 03:00

This blog has previously discussed the issue of jurisdiction of Indian courts over foreign-seated arbitrations and the issue of Indian parties choosing a foreign seat of arbitration. However, a more fundamental issue concerns the interpretation of arbitration agreements to determine the choice of seat. Since September 2018, the Supreme Court of India (“Supreme Court”) has considered this issue on three occasions. Yet, the jurisprudence resulting from these three judgments does not provide consistent and clear guidance on this issue. Consequently, parties pursuing arbitrations having a connection to India are likely to continue facing expensive and time-consuming litigation related to this issue.

We consider each of the three judgments of the Supreme Court and identify specific areas of concern. It may be noted that all three judgments were delivered by three-judge benches composed of different judges.

 

Hardy Exploration

In September 2018, the Supreme Court delivered Union of India v. Hardy Exploration and Production (India) Inc., (2019) 13 SCC 472, the first of these three judgments. In this case, the parties had entered into a production sharing contract containing an arbitration agreement. The arbitration agreement provided that the “venue of conciliation or arbitration proceedings… unless the parties otherwise agree, shall be Kuala Lumpur…” and that “[a]rbitration proceedings shall be conducted in accordance with the UNCITRAL Model Law on International Commercial Arbitration of 1985…”. After disputes arose, the parties commenced arbitration proceedings which were held in Kuala Lumpur and resulted in an award signed in Kuala Lumpur. Union of India sought to challenge the award under the Indian Arbitration and Conciliation Act, 1996 before the Delhi High Court. It contended that the arbitration agreement did not specify the seat of arbitration and referred to the venue of arbitration only. Therefore, Kuala Lumpur was merely the venue and New Delhi was the seat of arbitration. Hardy Exploration argued otherwise.

The Supreme Court held that the parties had not chosen the seat of arbitration and the arbitral tribunal had also not determined the seat of arbitration. It further held that the choice of Kuala Lumpur as the venue of arbitration did not imply that Kuala Lumpur had become the seat of arbitration. According to the Supreme Court, the venue could not by itself assume the status of the seat; instead a venue could become the seat only if “something else is added to it as a concomitant”. The Supreme Court therefore held that Indian courts had jurisdiction to hear a challenge to the award.

The decision in Hardy Exploration is of limited assistance because it does not clearly delineate the concepts of “place”, “seat” and “venue” and because it does not identify the additional factors needed to justify treating the chosen venue as the seat of arbitration. Through this decision, the Supreme Court ultimately did not provide any clarity on this issue except the simple conclusion that a chosen venue could not be treated as the seat of arbitration in the absence of additional factors indicating that such chosen venue was intended to be the seat of arbitration.

 

Soma JV

Thereafter, in December 2019, the Supreme Court revisited this issue in BGS SGS Soma JV v. NHPC Ltd., 2019 SCC OnLine SC 1585, which concerned an arbitration agreement stipulating that “Arbitration Proceedings shall be held at New Delhi/Faridabad, India…”. The Supreme Court prescribed the following bright-line test for determining whether a chosen venue could be treated as the seat of arbitration:

  1. If a named place is identified in the arbitration agreement as the “venue” of “arbitration proceedings”, the use of the expression “arbitration proceedings” signifies that the entire arbitration proceedings (including the making of the award) is to be conducted at such place, as opposed to certain hearings. In such a case, the choice of venue is actually a choice of the seat of arbitration.
  2. In contrast, if the arbitration agreement contains language such as “tribunals are to meet or have witnesses, experts or the parties” at a particular venue, this suggests that only hearings are to be conducted at such venue. In this case, with other factors remaining consistent, the chosen venue cannot be treated as the seat of arbitration.
  3. If the arbitration agreement provides that arbitration proceedings “shall be held” at a particular venue, then that indicates arbitration proceedings would be anchored at such venue, and therefore, the choice of venue is also a choice of the seat of arbitration.
  4. The above tests remain subject to there being no other “significant contrary indicia” which suggest that the named place would be merely the venue for certain proceedings and not the seat of arbitration.
  5. In the context of international arbitration, the choice of a supranational body of rules to govern the arbitration (for example, the ICC Rules) would further indicate that the chosen venue is actually the seat of arbitration. In the context of domestic arbitration, the choice of the Indian Arbitration and Conciliation Act, 1996 would provide such indication.

The bright-line test prescribed in Soma JV was diametrically opposite to the principle laid down in Hardy Exploration. While Hardy Exploration stipulated that a chosen venue could not by itself assume the status of the seat of arbitration in the absence of additional indicia, Soma JV prescribed that a chosen venue for arbitration proceedings would become the seat of arbitration in the absence of any “significant contrary indicia”.

Although the bright-line test prescribed in Soma JV provided much needed clarity, it was not without its own share of problems. The Supreme Court did not identify which factors constitute “significant contrary indicia” and thereby displace the conclusion that a chosen venue is actually the seat of arbitration. It also did not consider whether the existence of a jurisdiction clause in favour of the courts of a place other than the chosen venue or the choice of curial law of a place other than the chosen venue constituted “significant contrary indicia”.

In addition, the Supreme Court wholeheartedly adopted the “Shashoua principle”, a principle that had first been articulated in the specific context of London arbitration. This principle was articulated by the England and Wales High Court in Roger Shashoua and Ors. v. Mukesh Sharma, [2009] EWHC 957 (Comm) wherein the High Court held that the chosen venue (London) was the seat of arbitration because the parties had: (a) chosen London as the venue of arbitration; (b) not designated any other place as the seat of arbitration; (c) chosen a supranational body of rules to govern the arbitration, and (d) there were no contrary indicia. The High Court’s decision was premised on London arbitration being “a well known phenomenon which is often chosen by foreign nationals with a different law”. This underlying rationale evidently did not apply in the Indian context.

It may be noted that the Supreme Court in Soma JV also held that its earlier decision in Hardy Exploration was per incuriam since it failed to follow the “Shashoua principle” approved by the five-judge bench decision in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services, (2012) 9 SCC 552. As a result, it appeared that Hardy Exploration was no longer good law and Soma JV would hold the field instead.

 

Mankastu Impex

Finally, in March 2020, the Supreme Court yet again considered the issue of choice of seat in arbitration agreements in Mankastu Impex Pvt. Ltd. v. Airvisual Ltd., 2020 SCC OnLine SC 301.

In this case, Mankastu (an Indian company) and Airvisual (a Hong Kong company) had entered into an MoU containing an arbitration agreement. The arbitration agreement provided that “[a]ny dispute, controversy… shall be referred to and finally resolved by arbitration administered in Hong Kong” and “[t]he place of arbitration shall be Hong Kong…”. The governing law clause in the MoU provided that “[t]his MoU is governed by the laws of India… and courts at New Delhi shall have the jurisdiction.” Once disputes arose between the parties, Mankastu approached the Supreme Court under the Indian Arbitration and Conciliation Act, 1996 for appointment of a sole arbitrator.

Mankastu argued that since Indian law was the governing law and courts at New Delhi had jurisdiction, the seat of arbitration was New Delhi, and accordingly, the Supreme Court could appoint a sole arbitrator. It further argued that Hong Kong was only the venue of arbitration and not the seat and relied on Hardy Exploration for this purpose.

On the other hand, Airvisual contended that since the arbitration agreement provided that the place of arbitration shall be Hong Kong and such arbitration shall be administered in Hong Kong, the seat of arbitration was Hong Kong. Accordingly, Indian courts had no jurisdiction to appoint a sole arbitrator. It relied on Soma JV for this purpose.

In response, Mankastu incorrectly argued that since Hardy Exploration and Soma JV were both judgments from a three-judge bench, Soma JV could not have decided that Hardy Exploration was per incuriam and therefore Hardy Exploration continued to be good law.

The Supreme Court, instead of decisively settling the controversy by affirming Soma JV, decided to sidestep it altogether. It noted that the use of the expression “place of arbitration” could not decide the intention of the parties to designate that place as the seat of arbitration and such intention had to be determined from other clauses in the agreement between the parties and their conduct. The Supreme Court held that the choice of Hong Kong as the “place of arbitration” itself did not lead to the conclusion that the parties had chosen Hong Kong as the seat of arbitration. However, because the parties had also agreed that such arbitration was to be administered in Hong Kong, the Supreme Court ultimately held that the parties had chosen Hong Kong as the seat of arbitration.

 

Conclusion

Although the result in Mankastu Impex is correct insofar as Hong Kong was determined to be the seat of arbitration, the Supreme Court’s disinclination towards affirming Soma JV has cast doubt on the precedential value of Soma JV. Moreover, although the Supreme Court did not explicitly follow Hardy Exploration, it appears to have adopted a similar approach in reaching its conclusion, particularly by emphasising the need for additional evidence of the intention of parties’ rather than the mere use of the expression “place of arbitration”.

As a result, it is unclear whether Hardy Exploration remains good law or the bright-line test in Soma JV holds the field. The bright-line test laid down in Soma JV is certainly clearer, more objective and aligned with the principle of party autonomy. Therefore, it merits consideration and affirmation by the Supreme Court at the next suitable opportunity. In the meantime, parties would be well advised to use express language referring to the “seat” of arbitration specifically to avoid unnecessary litigation on this issue.

 

Anjali Anchayil and Ashutosh Kumar are advocates practising in New Delhi, India. The views expressed in this article are personal.

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Belt and Road and the International Financial Architecture

Tue, 2020-05-12 03:00

China’s Belt and Road Initiative (“BRI”) is well known as the largest infrastructure construction program in world history.1)This post is expressed as Michael J. Bond’s personal opinion and does not represent the views of any organization or party. jQuery("#footnote_plugin_tooltip_1571_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); President Xi Jinping announced its two components in 2013; one is a land-based Silk Road Economic Belt and one a sea-based 21st Century Maritime Silk Road. His grand plan includes overland and maritime work to build bridges, highways, communications facilities, ports, railroads, pipelines, power systems, hydroelectric dams, and airports crossing 70 or more country borders connecting China to the rest of Asia, Europe, the Middle East, Africa, and South America. Further details on BRI’s scale and scope can be reviewed on the PRC government’s Belt and Road Portal.

Most of the reporting on BRI addresses allegations of corruption, less developed countries taking on excessive debt, or the economic viability of the BRI projects.2)See, e.g., John Hurley, Scott Morris, Gailyn Portelance, “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective”, Center for Global Development, CGD Policy Paper 121, March 2018; and reports in the Financial Times on April 14, 2019, July 18, 2019, and December 10, 2019. jQuery("#footnote_plugin_tooltip_1571_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This much is known. Few, however, have noticed that BRI also is fostering very fundamental changes to the world’s financial architecture.

 

Changes to financial architecture

First, some history. The US dollar has been the world’s reserve currency since the Bretton Woods accords following the end of the Second World War. Even after the US left the gold standard in 1971, the world’s central banks were content to hold dollars, development banks funded projects in dollars, and world-wide commodities, including oil, were priced in dollars. As the issuer of dollars and dollar denominated Treasury bank notes, which were as good as gold, the US government held sway over the function of the international financial system.

Being in a position to lead the banks who had no choice other than to use dollars with a connection to the US, the US government’s power to impose its will was essentially unchallenged. As paper money fell out of use in favor of credit cards and other electronic payment systems, all transactions of any moment passed one way or another through processing systems in New York. That meant any transaction that touched US soil, even if only in a digital way, subjected the transferring parties to US jurisdiction. This fact informed the power to impose punitive economic sanctions on nations such as Libya, Iraq, Iran, Cuba, North Korea, Russia and their citizens.

A hundred years ago, when it was said the sun never set on the Union Jack, the Bank of England was similarly situated with the pound sterling to ensure an orderly and predictably capital friendly international payments regime. Seeking to hang on to what power remains, Brexit can be viewed as an effort to preserve sterling’s international status. In the meantime, the US Federal Reserve, the International Monetary Fund and its World Bank, which was born as the International Bank for Reconstruction and Development, took the lead. With monetary union in Europe, its European Central Bank and the Euro are vying for a place at the table. The Chinese have learned how to play by the old rules.

China tried once before over 500 years ago. Walter B. Wriston, former Chair of Citibank and a prolific writer about the impact of the information revolution on international finance wrote, “China was the first nation to issue paper currency, having done so in the eleventh century, but soon had to abandon the practice as its currency was nowhere acceptable.”3)Walter B. Wriston, “The Twilight of Sovereignty”, Fletcher Forum of World Affairs, 1993. jQuery("#footnote_plugin_tooltip_1571_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); 25 years ago, looking to the future at what was coming, he presciently observed, “[t]he velocity of change in economics, technology, science, and military capabilities is shifting the tectonic plates of national sovereignty and power.” Mr. Wriston was right.

Professor John A. Mathews of Macquarie University reports that the BRI is about to challenge the world’s reserve currency, payments systems and basis of commodity pricing.4)John A. Mathews, “China’s Long Term Trade and Currency Goals: The Belt & Road Initiative”, The Asia-Pacific Journal, January 1, 2019 (“Mathews”). jQuery("#footnote_plugin_tooltip_1571_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Traditionally, China’s currency, the yuan which is also known as renminbi (“RMB”), was not freely convertible, but that is changing as China internationalizes RMB. The BRI contracts favor Chinese developers, contractors and suppliers and usually require payments in RMB. To finance the BRI projects, China established its own international development banks, including a new Asian Infrastructure Investment Bank (“AIIB”). In 2013, the UK issued the first sovereign renminbi bond by a western government. The Financial Times reports, “the UK has been keen to establish the City of London as a platform for overseas business in the Chinese currency as it starts to play a bigger role in the global economy.”5)“US attacks UK’s constant accommodation with China”, Financial Times, March 12, 2015. jQuery("#footnote_plugin_tooltip_1571_5").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

For domestic payments, while American Express was granted approval to operate in China, Visa and Mastercard are still frozen out.6)“China’s central bank delays market entry for Visa and Mastercard”, Financial Times, January 13, 2019. jQuery("#footnote_plugin_tooltip_1571_6").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Essentially scale jumping over the West’s credit card payment systems, China soon will roll out a digitization of the RMB. The very concept of money is changing rapidly. As Mr. Wriston predicted in 1993, the Information Standard has replaced the Gold Standard.

China imports more oil than any other country and pays Russia, Iran and Venezuela for oil in RMB; Prof. Mathews speculates that Saudi Arabia soon may follow suit.7)Mathews. jQuery("#footnote_plugin_tooltip_1571_7").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The RMB is now convertible to gold in Shanghai and Hong Kong. In March 2018, China established a RMB based oil futures contract on the Shanghai International Energy Exchange that, in its first four months traded an equivalent of US $538 billion and may eventually challenge Europe’s Brent and the West Texas Intermediate oil pricing benchmarks now traded in London and New York.

Prof. Mathews reports China recently established offshore RMB clearing hubs.8)Ibid. jQuery("#footnote_plugin_tooltip_1571_8").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); These are not located in Brussels where the SWIFT international payments system is headquartered. Further Prof. Mathews observes that BRI’s RNB based trade and investment “promises to promote Chinese soft power while serving as a means for countries to evade US sanctions.”9)Ibid. jQuery("#footnote_plugin_tooltip_1571_9").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The power to impose sanctions is a demonstration of sovereignty. As China imposes its will to reorganize the assumptions forming the basis of the international financial system, the US’s sovereign power may diminish, just as Mr. Wriston predicted.

 

Dispute resolution in the new financial architecture: quo vadis?

The impact, if any, of these changes to the underpinning of the world’s financial architecture on international commercial arbitration is difficult to predict.

My view is that these potential changes to the international financial architecture should have no immediate impact on international commercial arbitration. Indeed, in November 2019 China announced, in a joint declaration with arbitration institutions from the Belt & Road Countries, its intent to promote arbitration for dispute resolution as a fair way of solving trade disputes10)“Arbitration Institutions to form mechanism under Belt and Road Initiative” November 8, 2019. jQuery("#footnote_plugin_tooltip_1571_10").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Lu Pengqi, Deputy Director of the China Council for Promotion of International Trade, acknowledged that arbitration differs from country to country along the Belt & Road, which are mostly emerging economies and developing countries with various concepts, laws and regulations. “We hope international arbitration institutions can promote the building of a community of arbitration laws under the Belt & Road Initiative by upholding the concepts of opening, sharing and serving, and facilitate the worldwide application of resolutions on a variety of disputes.”11)Ibid. jQuery("#footnote_plugin_tooltip_1571_11").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); And according to Luo Dongchuan, Vice President of the Supreme People’s Court, China will advance its arbitration system reform and make efforts in building an arbitration friendly judicial environment.12)Ibid. jQuery("#footnote_plugin_tooltip_1571_12").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); All practitioners will welcome those optimistic forecasts.

All construction projects include risks of potential loss and claims, and the larger the project, the larger those risks. As the BRI projects mature, we can expect a growing volume of claims will be presented to the arbitral institutions chosen by the parties. Because China and most of its BRI partner countries are signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the New York Convention, arbitration awards should be enforceable worldwide whether rendered in US dollars, British pounds, Euro or RMB.

Further to a large extent, the likely impact will turn on the reaction of the US administration and its financial allies among the capitalist economies, all of whom benefit from a certain and reasonably stable reserve currency.

In the near term, I would expect parties will adjust their claims as needed to accommodate the requirement for compensation for just claims under principles including pacta sunt servanda.  By way of example, investors and lenders have learned to accommodate sharia law’s prohibition on recovery of interest. Parties will adjust to a system based upon a new or alternative reserve currency. In the longer term, instability should make a neutral de-localized forum for dispute resolution even more desirable. To apply Karl Polyani’s double movement, I predict the world’s investors and traders will find a way to accommodate the more diffuse sovereignty presented by another reserve currency.

 

Conclusion

While the world’s financial infrastructure morphs, the current US administration’s talking points with China appear to focus on the balance of trade and intellectual property amongst others. In this era of change, as Ted Turner once put it, we can “lead, follow or get out of the way”. But we should do so with our eyes open. These issues and more will still be with us once the world shakes off the current coronavirus pandemic.

References   [ + ]

1. ↑ This post is expressed as Michael J. Bond’s personal opinion and does not represent the views of any organization or party. 2. ↑ See, e.g., John Hurley, Scott Morris, Gailyn Portelance, “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective”, Center for Global Development, CGD Policy Paper 121, March 2018; and reports in the Financial Times on April 14, 2019, July 18, 2019, and December 10, 2019. 3. ↑ Walter B. Wriston, “The Twilight of Sovereignty”, Fletcher Forum of World Affairs, 1993. 4. ↑ John A. Mathews, “China’s Long Term Trade and Currency Goals: The Belt & Road Initiative”, The Asia-Pacific Journal, January 1, 2019 (“Mathews”). 5. ↑ “US attacks UK’s constant accommodation with China”, Financial Times, March 12, 2015. 6. ↑ “China’s central bank delays market entry for Visa and Mastercard”, Financial Times, January 13, 2019. 7. ↑ Mathews. 8, 9. ↑ Ibid. 10. ↑ “Arbitration Institutions to form mechanism under Belt and Road Initiative” November 8, 2019. 11, 12. ↑ Ibid. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Corporate Restructuring in Investor-State Disputes: Can We Predict Tribunals’ Decisions?

Mon, 2020-05-11 03:00

Traditionally, nationality for corporate entities has been regulated by national law, often by reference to whether a corporation has a seat in a country or was incorporated under its laws. However, international investment law has departed from the generally accepted rules of international law on the nationality of corporate persons.

Already in the 1960s, the drafters of the ICSID Convention noted that the system of international investment law could add further criteria which would help qualify investors as ‘foreign’. More specifically, they agreed to include the criterion of control in the ICSID Convention. Qualifying investors as foreign on the basis of control rather than place of incorporation or business has also appeared in various international investment agreements.1)See, e.g., Documents Concerning the Origin and the Formulation of the Convention. Volume II, Part 1. pages 78-80. jQuery("#footnote_plugin_tooltip_7332_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7332_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The British Institute of International Law (BIICL) and Baker McKenzie recently concluded a study examining how international tribunals approach the use of corporate restructuring by corporations to benefit from international investment agreements. It sheds light on how tribunals approached this question in the past and, to some extent, will help shape legitimate expectations of parties involved in investor-state disputes in the future.

 

Separating Domestic and Foreign Companies

Foreign investors may prefer to incorporate locally for many reasons but most frequently they do so because of tax considerations. Host states themselves frequently require foreign-owned companies to be locally incorporated to qualify for government procurement, to benefit from subsidies, to enter certain sectors of the economy or for other reasons. If such companies are not treated as ‘foreign’, a large proportion of foreign investment would not be protected by international law.

However, separating truly foreign from domestic companies often presents challenges to investor-state tribunals since most investment treaties aim to protect foreign, rather than domestic investors. This led many tribunals to pierce the corporate veil in order to reveal the shareholders or natural persons affected by adverse actions of the host state.

The existence of corporate groups with complex ownership structures, nominees and various forms of disguised ownership further complicates the determination of whether an investor is foreign and is, thus, eligible for protection under international investment agreements. Investor-state tribunals have developed different approaches on whether the effective control of a claimant over a relevant entity must be merely legal or also factual.2)See also footnote 25 of the report listing a number of cases where tribunals took very different approach on this matter. jQuery("#footnote_plugin_tooltip_7332_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7332_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); That has resulted in what some states view as frivolous claims which harm the reputation of host states, and generate a regulatory chill, as was recently discussed by the UNCITRAL Working Group III.

 

Corporate Restructuring as an ISDS Problem

The currently ongoing investor-State dispute settlement reform discussions touched upon corporate restructuring. Although the UNCITRAL Working Group III has not yet addressed the issue of corporate restructuring in great detail, concerns were expressed with respect to the lack of mechanisms to address frivolous or unmeritorious claims (para. 122), including limitations on the standing of investors (para. 118) and divergent interpretations relating to jurisdiction and admissibility (para. 15).

All these problems may involve determining the nationality of the investor, whether it can be treated as foreign and thus eligible for treaty protections. Usually answering these questions requires interpretation of broad treaty standards in the absence of detailed guidance in the treaty itself. Both the parties and tribunals may also struggle to get a good sense of whether there was a consensus on issues of corporate restructuring and investment protection in dozens of earlier arbitral awards dealing with similar issues.

In the context of investor-state disputes, the term ‘corporate restructuring’ usually refers to decisions to incorporate companies in certain jurisdictions to benefit from more favourable conditions, most commonly related to tax matters but also to investment treaty protections. The Corporate Restructuring and Investment Treaty Protections study demonstrates when such restructuring is seen as permissible under international investment agreements and when the respondent states successfully object to the jurisdiction of the arbitral tribunals.

 

State Objections Based on Corporate Structuring

The BIICL/Baker McKenzie study shows that the top five most successful objections of respondent states were based on the interpretation of the relevant treaty clause, the timing of restructuring, the existence of genuine economic activities of the claimant entity as well as examination of the underlying reason for corporate restructuring (including the abuse of process).

In practice, tribunals distinguish between original investment structuring and subsequent restructuring. Where the claim is brought by the original investor, tribunals tend to abide by the strict wording of the treaty. But where the claimant is not the original investor, the tribunals are more likely to apply additional criteria, e.g. considering whether the corporate restructuring was an abuse of process or applying the Salini test for identifying an investment.

For example, the Phoenix Action Ltd v. Czech Republic case involved the insertion of an Israeli entity into a domestic Czech investment structure after a dispute with the government had arisen. The respondent state’s objection prevailed on the sole basis that the investment was not bona fide, as the local entities were acquired at a later stage with the sole purpose of benefiting from the Israel-Czech Republic investment treaty.

While the study found no meaningful effect of differences between various applicable arbitration rules (e.g. ICSID, UNCITRAL or ICSID Additional Facility), the exact language of the relevant treaty matters. For example, in nearly 80% of cases, investors succeeded with overcoming the jurisdictional objections of respondent states because tribunals held that there was no scope to imply any additional requirements into the definitions of ‘investor’ and ‘investment’.

 

Timing of Restructuring and Genuine Economic Activities Matter

Investor-state tribunals pay particular attention to whether the restructuring was effectuated before or after the dispute arose and whether such dispute was foreseeable to the investor at the time of the restructuring. Such analysis was also key as part of the ‘abuse of process’ objection. Where the investment structure was in place from the outset, only in one fifth of all cases respondent states succeeded with their objections.

Moreover, if the tribunals find that the company engaged in a genuine economic activity in the respondent state, in nearly all cases, the investors were able to overcome jurisdictional objections. In the absence of such activity in the respondent state, tribunals almost always agreed with the respondent state’s objections (90%).

In the absence of detailed guidance in relevant international treaties, tribunals have significant freedom in deciding on the permissibility of corporate restructuring. However, certain trends have already crystallised and are likely to prevail in practice. These trends can also subsequently find reflections in reformed international investment agreements or practice of investor-state tribunals. Also, these findings will help investors to structure their business activities in order to benefit from international investment agreements.

Read the full study:

Ed Poulton, Yarik Kryvoi, Ekaterina Finkel and Janek Bednarz, Corporate Restructuring and Investment Treaty Protections, BIICL/Baker McKenzie, London, 2020

References   [ + ]

1. ↑ See, e.g., Documents Concerning the Origin and the Formulation of the Convention. Volume II, Part 1. pages 78-80. 2. ↑ See also footnote 25 of the report listing a number of cases where tribunals took very different approach on this matter. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Event Report: CISG and Arbitration, Old Friends Still Getting to Know Each Other

Sun, 2020-05-10 04:00

The year 2020 marks the 40th anniversary of the United Nations Convention on Contracts for the International Sale of Goods (CISG), one of the most important substantive instruments in international commercial law. To celebrate this occasion, the ICDR Young and International (Y&I) group and NYU’s Center for Transnational Litigation, Arbitration, and Commercial Law organized a conference on 3 February 2020 entitled “CISG in International Arbitration”.

The conference opened with comments from Dr. Friedrich Rosenfeld (Partner, Hanefeld Rechtsanwälte), who presented broadly on the issue of the law applicable to the merits in international arbitration.1)This presentation was based on a forthcoming article, see F. Rosenfeld / F. Ferrari, ‘The Law Applicable to the Merits in International Commercial Arbitration’, forthcoming in: A. Bjorklund / F. Ferrari / S. Kröll, Cambridge Compendium of International Commercial and Investment Arbitration (Cambridge University Press, 2020). jQuery("#footnote_plugin_tooltip_5034_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5034_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Dr. Rosenfeld explained that, while courts would normally use the forum’s conflict of law rules, arbitrators are not bound by the same conflict rules as courts at the seat. Instead, arbitrators should use autonomous conflict of law rules, such as art. 28 of the UNCITRAL Model Law or art. 31 of the ICDR Rules. Such rules are supportive of party autonomy, as they allow parties not only to choose any applicable law, but their reference to “rules of laws” also allows a choice of soft law like the UNIDROIT Principles or lex mercatoria; beyond this, parties may even instruct arbitrators to decide on the basis of equitable principles. Absent parties’ agreement, arbitrators are granted discretion to decide the applicable law. As far as the exercise of this discretion is concerned, some conflicts rules expressly require arbitrators to identify an additional conflicts rule outside the arbitration framework (voie indirecte), whilst others allow arbitrators to directly select the applicable law without such a detour (voie directe).

Dr. Rosenfeld asserted that, in practice, most arbitrators would seek guidance from existing conflict rules—even under the voie directe. An example of such a conflicts rule is the closest connection rule found in the Rome Convention, which presumes that the law with the closest connection is that of the country where the characteristic obligation is performed. Finally, Dr. Rosenfeld explained that the choice of law framework is subject to limitations by overriding mandatory rules, which arbitrators should follow even against the parties’ agreement.

Subsequently, Marco Torsello (Partner, ArbLit) discussed the applicability of the CISG in arbitration. He explained that, in litigation, only courts of contracting states would consider the applicability of the CISG. The court would in that case consider the internationality (different places of business) and the territoriality requirements (those places of business must be in contracting states as per art. 1(1)(a), or the conflict rules must lead to the law of a contracting state as per art. 1(1)(b)). The court would also review the CISG applicability ratione materiae and that the case is not covered by any exclusion. However, an arbitral tribunal is not a state forum, so Mr. Torsello argued that arbitrators are not bound by art. 1(1)(a) of the CISG, which cannot even be regarded as a conflict rule because it is merely an applicability requirement. In practice, arbitrators have normally applied the CISG when the requirements of art. 1(1)(a) are met, but Mr. Torsello indicated that this is rather an expression of arbitration’s discretion in applying autonomous conflict rules. Equally, as per art. 1(1)(b), when these autonomous rules lead to the application of the law of a contracting state, the arbitrators should apply the CISG. This outcome would not be affected by an art. 95 reservation, because while such reservation would make art. 1(1)(b) inapplicable in court, arbitrators are not state forums and would not be bound by reservations. The same would be true regarding art. 96 reservations (which exclude the CISG’s freedom of form), but this issue might need to be considered by the arbitrators as a matter of public policy.

After a short break, Prof. Kevin Davis (NYU School of Law) discussed the battle of the forms under the CISG. He described the typical scenario as one in which one party submits an offer with his standard form, and the other party accepts it but also sends his own standard form. In these situations, the CISG generally follows what is called the mirror image rule: the second form would be a counteroffer, which would be accepted if, for example, performance of the contract is initiated, and the first form would be deemed rejected. Art. 19(2) of the CISG also allows a combination of the forms if the reply does not materially alter the terms of the offer, absent an objection from the other party. Nonetheless, art. 19(3) provides a broad list of illustrations of what constitutes a material alteration, and although some scholars argue that art. 19(3) establishes only a rebuttable presumption, this position is difficult to reconcile with the text of the CISG. As a result, the mirror image rule would normally apply, subject to modulations by usages and practices between the parties. Once the applicable standard form is identified, Prof. Davis explained that it would need to be interpreted according to art. 8 of the CISG. For example, if the form includes additional terms by reference, determining if the incorporation is effective would require considering all of the relevant circumstances. In particular, it will be necessary to consider if the parties truly understood what these additional terms mean, which is a factual issue that cannot be decided only on motions.

Afterwards, Gretta Walters (Counsel, Chaffetz Lindsey) addressed specific performance under the CISG. She highlighted that art. 46, which covers specific performance, is the first substantive remedy the CISG presents for buyers, consistent with the goal of preserving the contractual relationship. Although art. 46 does not limit the kinds of specific performance that a buyer may seek, art. 28 provides that a court is not required to order specific performance if it considers that it would not do so under its own domestic law. Ms. Walters described how the drafters of the CISG had in mind that civil law countries tend to prefer specific performance, while common law ones often rather award damages, and art. 28 reflects this difference. Although it could be argued that art. 28 could lead to a lack of uniformity in how courts apply the CISG, she argued that, in practice, most parties have claimed damages and such lack of uniformity has not resulted. As to whether art. 28 would apply in arbitration, Ms. Walters concluded that, as remarked by Mr. Torsello, arbitrators are not a state forum and are therefore not bound by art. 28, an idea reinforced by this article’s reference exclusively to courts and not arbitrators. Nevertheless, she noted that the CISG contains some limitations to specific performance. For instance, specific performance cannot be requested together with inconsistent remedies (such as contract avoidance or price reduction), and substitute goods can only be demanded if the lack of conformity constitutes a fundamental breach.

Finally, Prof. Clayton Gillette (NYU School of Law) analyzed economic hardship under the CISG. He indicated that it is unclear whether hardship was intended to be covered by the CISG. Prof. Gillette analyzed four possible approaches. First, it could be argued that art. 79 of the CISG, which deals with exemptions from performance, encompasses hardship as a potential impediment. This position seems to be prevalent at least in civil law countries. Another interpretation would argue that the existence of hardship is generally governed by the CISG, but the strict language of art. 79 excludes the possibility of considering it an impediment. An alternative approach argues that hardship is governed by the CISG, but not by any specific article, which means that it must be decided in conformity with CISG’s general principles, as per art. 7. Finally, it is also possible that hardship is not governed by the CISG, in which case the issue would be decided by the law applicable pursuant to private international law rules. Prof. Gillette stated that, assuming the CISG governs hardship, art. 79 also requires it to be unforeseeable or unavoidable. He criticized some courts’ narrow interpretation of this requirement that focuses on the price increase for the specific contract, ignoring the underlying reason for the price change and the general volatility of the market. Along the same lines, he argued that some companies might knowingly enter into some contracts with high price volatility as part of a portfolio of contracts, so the company’s financial health would not be affected even if those contracts are subject to large price increases.

A related issue not directly addressed by the speakers is whether the CISG can apply to arbitration agreements. This has generated some controversy, mostly focused on whether the CISG’s freedom of form in art. 11 would prevail over the form requirement in art. II of the New York Convention, especially if, as explained by Mr. Torsello, art. 96 reservations would not bind arbitral tribunals. A common argument against it is that art. 90 establishes that the CISG does not prevail over any previous international treaty, which would include the New York Convention. However, art. VII(1) of the New York Convention could point in the opposite direction, as it states that the New York Convention shall not deprive any party of any right to recognition and enforcement under more favorable laws or treaties, which could arguably encompass the CISG’s freedom of form. For the purpose of contract formation, art. 19(3) of the CISG indicates that dispute settlement clauses are material terms, which seems to support the idea that at the very least the CISG’s rules on formation explained by Prof. Davis could apply to arbitration agreements. As we progress through the year, it is to be expected that, despite postponements due to COVID-19, there will be many other events around the globe about the CISG, so hopefully the celebration of the CISG’s 40th anniversary will serve to provide more clarity on these questions and to promote a better understanding of the CISG.

References   [ + ]

1. ↑ This presentation was based on a forthcoming article, see F. Rosenfeld / F. Ferrari, ‘The Law Applicable to the Merits in International Commercial Arbitration’, forthcoming in: A. Bjorklund / F. Ferrari / S. Kröll, Cambridge Compendium of International Commercial and Investment Arbitration (Cambridge University Press, 2020). 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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IP Arbitration in Brazil: What is the Current Scenario?

Sun, 2020-05-10 03:00

International background on IP arbitration

The past decade has witnessed a substantial growth in the use of arbitration to solve Intellectual Property (“IP”) disputes. To the day, the WIPO Arbitration and Mediation Center (“WIPO Center”) has administered over 650 arbitration, mediation and expert determination cases, a number which grows faster every year, as portrayed by the ascending curve below:

 

[Source: WIPO – World Intellectual Property Organization]

 

In the US, the American Arbitration Association has handled 110 IP arbitration cases only in 2016. Across the Pacific, by 2014 the Japan Intellectual Property Arbitration Center had managed some 130 mediation and arbitration proceedings.

Looking to the future, numbers brought by the 2016 International Dispute Resolution Survey conducted by the Queen Mary University of London, which focused specifically on Technology, Media and Telecommunications (“TMT”) disputes, show that 82% of practitioners and in-house counsels from all over the globe indicate that there will be an increase in the use of arbitration to solve TMT conflicts in the years to come. Likewise, 92% of the respondents trust that “international arbitration is well suited for TMT disputes”.

 

Challenges to the development of IP arbitration in Brazil

In Brazil, however, the use of arbitration in IP conflicts is still sprouting. For instance, numbers released in 2014 by the CAM-CCBC – Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada, a leading arbitral institution in Brazil and Latin America, showed that IP-related proceedings represented only 3% of the center’s total caseload.

It is still unclear why the Brazilian IP community remains reluctant to arbitration. From our experience, we can safely state that it is not yet common for national players to insert arbitration clauses in IP contracts. The main reason for this appears to be that since both IP and arbitration are two specific legal fields, locally covered by two selected groups of practitioners, the Brazilian IP community has not yet realized the full advantages of using arbitration to solve their IP conflicts.

As an example, it is not rare for experienced Brazilian IP practitioners to believe that arbitration excludes from the parties the possibility to pursue pre-arbitral interim measures before state courts, even though such guarantee is expressly provided for in article 22-A of the Brazilian Arbitration Act. At the end of the day, it seems that most local IP practitioners are not yet acquainted enough with the particularities and advantages of arbitration, therefore preferring to keep their disputes before familiar local courts (a tendency that had already been noticed by Prof. David Caron when commenting on IP arbitration in the US in the early 2000s).

Another factor that may contribute to such outcome is that, in Brazil, some scholars have raised concerns as to the arbitrability of IP disputes. The issue would emerge in situations where the respondent to the arbitration challenges the validity of the claimant’s registered IP right, therefore creating a scenario in which the arbitrators may have to invalidate an act undertaken by a state authority (the Brazilian Patent and Trademark Office – “BPTO”).

According to Selma Lemes and José Rogério Cruz e Tucci, any decisions concerning the validity of IP rights would exceed an arbitral tribunal’s powers. Other authors pose a different view, such as the one stressed by Trevor Cook and Alejandro I. Garcia: “an arbitral award is […] effective only inter partes, and has no effect in rem, so a determination that a registered IPR is invalid will only have effect as between the parties to the arbitration – the registered IPR in issue […] will remain in full force and effect on the register as against the rest of the world”.1)COOK, Trevor; GARCIA, Alejandro I.. International Intellectual Property Arbitration, Kluwer Law International, 2010, p. 7. jQuery("#footnote_plugin_tooltip_2177_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2177_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This position is also shared by Daniel Levy, Rafael Atab de Araujo2)ARAUJO, Rafael Atab. A Arbitragem Comercial Internacional e a Propriedade Intelectual: arbitrabilidade e questões práticas, no Brasil e no Direito Comparado. 2011. Dissertação (Mestrado em Direito Internacional e da Integração), Faculdade de Direito, Universidade do Estado do Rio de Janeiro, 2011, p. 100. jQuery("#footnote_plugin_tooltip_2177_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2177_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Luiz Guilherme Loureiro.3)LOUREIRO, Luiz Guilherme de A. Vieria. Arbitragem e Propriedade Industrial. Revista de Direito Privado. v. 5, a. 2, jan./mar. 2001, p. 154-155. jQuery("#footnote_plugin_tooltip_2177_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2177_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); According to them, an arbitral tribunal would have powers to incidentally decide upon validity issues, rendering a decision with no erga omnes effects.

In this perspective, the Brazilian Industrial Property Law (“Brazilian IP Law”) states in its articles 57 and 175 that patent and trademark invalidity actions must be filed before the federal courts, since the BPTO, a federal authority, must intervene on the case. Infringement actions, on the other hand, shall be filed before the state courts (with no participation of the BPTO), and, in such proceedings, it is common for the defendant to argue that the plaintiff’s IP rights in issue is invalid. When this happens, the state judge shall incidentally decide upon the validity claim, since article 56, 1st paragraph of the Brazilian IP Law provides that “patent invalidity shall be raised as a defense at any time”. Even though the aforementioned disposition only refers to patents, Brazilian courts have long established that it applies to trademarks as well (see, e.g., TJSP, Apelação n. 9219541-09.2005.8.26.0000, Des. Rel. Oscarlino Moeller, j. 01/01/2009).

In view of this, it is reasonable to conclude that since the Brazilian IP Law does not pose any barriers to the rendering of incidental decisions by state judges as to the validity of IP rights, the same rule shall apply to arbitrators, which are considered to be “judges in fact and in law”, in accordance to article 18 of the Brazilian Arbitration Act. In other words, an arbitral tribunal applying Brazilian law could use the guarantee contained in article 56, 1st paragraph of the Brazilian IP Law to render a decision with inter partes effects as to the validity of an IP right in the course of the arbitration. Hence, it is our understanding that IP disputes are fully arbitrable under Brazilian law. There remains, however, one potential risk to the broad use of arbitration in disputes which address validity issues: the current understanding of the Brazilian Superior Court of Justice (“STJ”) regarding article 56, 1st paragraph of the Brazilian IP Law.

Ever since 2012, the STJ has repeatedly ruled that article 56, 1st paragraph shall be disregarded, being state judges prevented from issuing incidental declarations as to the validity of IP rights in the course of infringement lawsuits (see, e.g., here). In such occasions, the invalidity claim shall be addressed in a parallel lawsuit before the federal courts, remaining the infringement action suspended pending a final decision on the validity issue (see, e.g., here). As a result, there could be a risk that arbitrators, like state judges, feel compelled to suspend the arbitration in case a validity issue is raised in the course of the proceeding, in order to prevent future challenges to the arbitral award. As to this moment, there is no case law addressing this precise matter.

In order to cast legal certainty over the arbitrability of IP controversies in Brazil, Nathalia Mazzonetto proposes an alteration in the text of the Brazilian IP Law, so as to encompass an express provision authorizing the use of arbitration in IP disputes, including those in which the validity of the respective IP right has been questioned.4)MAZZONETTO, Nathalia. Arbitragem e Propriedade Intelectual: aspectos estratégicos e polêmicos. São Paulo: Saraiva, 2017. p. 257. jQuery("#footnote_plugin_tooltip_2177_4").tooltip({ tip: "#footnote_plugin_tooltip_text_2177_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The author goes even further, suggesting that invalidity decisions rendered in the course of arbitral proceedings should produce erga omnes effects, an approach which has already been adopted in Belgium5)Belgian Patent Law, article 51(1). jQuery("#footnote_plugin_tooltip_2177_5").tooltip({ tip: "#footnote_plugin_tooltip_text_2177_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Switzerland.6)Decision of December 15th, 1975 of the Federal Office of Intellectual Property. jQuery("#footnote_plugin_tooltip_2177_6").tooltip({ tip: "#footnote_plugin_tooltip_text_2177_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Conclusion

Arbitration is yet to be embraced by the Brazilian IP community. In our experience, this derives from the fact that local IP practitioners do not seem to be sufficiently acquainted with the full advantages that the use of arbitration could bring to their clients’ dispute resolution policies.In an attempt to fill this gap, some important initiatives have already been put into action by the Brazilian IP community, namely the creation of (i) the Brazilian Arbitration Committee’s Study Group on IP Arbitration and Mediation; and (ii) the CSD-ABPI – Centro de Solução de Disputas em Propriedade Intelectual, a dispute resolution center specialized in IP conflicts, administered by the Brazilian Intellectual Property Association.

Additionally, the concerns raised by some scholars as to the arbitrability of IP disputes (especially in light of the Superior Court of Justice’s current understanding) may contribute to the reluctance of referring those disputes to arbitration. It must be clear, however, that the arbitrability issue related to IP conflicts can only be raised when the validity of the underlying IP right is challenged. Even though such challenges are common in infringement actions before state courts, the same hardly ever occurs in arbitral proceedings, where disputes emerge out of contractual grounds, such as disagreements over (i) the payment of royalties, (ii) the definition of the licensed product, (iii) the obligations and limitations of the licensee as to the use of the licensed right, among others.

In one way or the other, it is time for the Brazilian legal community to open their eyes to alternatives that go beyond litigation when it comes to addressing IP conflicts. Arbitration has proven to be an extremely cost-efficient dispute resolution method, due to its agility, neutrality, specialty and confidentiality. As demonstrated by the abovementioned statistics, the use of arbitration to solve IP conflicts is a global trend, which Brazil would do well to follow.

References   [ + ]

1. ↑ COOK, Trevor; GARCIA, Alejandro I.. International Intellectual Property Arbitration, Kluwer Law International, 2010, p. 7. 2. ↑ ARAUJO, Rafael Atab. A Arbitragem Comercial Internacional e a Propriedade Intelectual: arbitrabilidade e questões práticas, no Brasil e no Direito Comparado. 2011. Dissertação (Mestrado em Direito Internacional e da Integração), Faculdade de Direito, Universidade do Estado do Rio de Janeiro, 2011, p. 100. 3. ↑ LOUREIRO, Luiz Guilherme de A. Vieria. Arbitragem e Propriedade Industrial. Revista de Direito Privado. v. 5, a. 2, jan./mar. 2001, p. 154-155. 4. ↑ MAZZONETTO, Nathalia. Arbitragem e Propriedade Intelectual: aspectos estratégicos e polêmicos. São Paulo: Saraiva, 2017. p. 257. 5. ↑ Belgian Patent Law, article 51(1). 6. ↑ Decision of December 15th, 1975 of the Federal Office of Intellectual Property. 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: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Exclusive Application of UNIDROIT Principles to Cure the Parties’ Disagreement on the Lex Contractus: a View from France

Sat, 2020-05-09 03:00

The Paris Court of Appeal recently upheld an ICC award where the arbitral tribunal exclusively applied the UNIDROIT Principles of International Commercial Contracts (‘the Principles’) as lex contractus failing any agreement on the applicable law between the parties.

This recent development deserves further analysis as it confirms French courts’ favourable attitude towards the application of the Principles in international arbitration and illustrates good arbitral practice where the contract is silent as to the applicable law.

 

Evolution of the UNIDROIT Principles’ Scope of Application

In the 1994 initial version, the Principles limited their application to circumstances where (i) the parties had directly chosen them as lex contractus (Preamble, para. 2), (ii) the parties had indirectly chosen them in broadly referring to the lex mercatoria or general principles of law (para. 3), (iii) the applicable law did not provide for a relevant answer (para. 4), or (iv) it was necessary to interpret an international uniform instrument (para. 5).

A decade later, the Principles’ ambitious drafters rewrote paragraph 4 of the Preamble and extended their application where the parties had not chosen any law to govern their contract, be it by silence or disagreement (Preamble of the 2004 Principles, para. 4). The Preamble remained unchanged in the 2010 and 2016 Principles.

 

Arbitral and French Judicial Practice on UNIDROIT Principles

Most of ICC cases referring to the Principles have used them as a means of interpreting and supplementing national law (e.g. ICC cases 15956, 16314, 19272) or international uniform instruments, such as the CISG (e.g. ICC cases 14633, 16369) and the 1964 Hague Convention (ICC case 8547).

Where the contracting parties have not agreed on the applicable law and the arbitration is Paris-seated, ICC arbitral tribunals enjoy great freedom to determine the lex contractus, in accordance with Art. 1511 of the French Code of Civil Procedure (‘CCP’) and ICC Rule 21(1).

No established practice emerged as to how to justify the application of the Principles where the parties remained silent or disagreed. Arbitrators have used different criteria including e.g. the lack of satisfactory connecting factors (ICC cases 13012, 15089), the international nature of the contract (ICC case 9875), or the contract’s reference to the INCOTERMS (ICC case 8502). In some instances, Tribunals have inferred a negative choice excluding national rules from the parties’ rejection of each other’s national law and their choice to resort to arbitration in order to apply the Principles. This is particularly the case with State contracts (e.g. for supply of goods or construction in ICC cases 7110, 7375, 10385), although not exclusively (ICC case 15089). The Principles have also been applied when the contract had been concluded under “economic duress” (ICC case 13009), and even ex officio without any justification (ICC case 12698).

Under French judicial practice, the Principles’ applicability is narrowed as French courts rely on their own conflict-of-law rules. In cases unrelated to arbitration, courts have very rarely relied on the Principles as a means of interpretation of international instruments, be it suggested by a party (Reims Court of Appeal, 6 September 2012, no. 11/02698; Court of Cassation, 17 February 2015, no. 12-29.550) or not (Grenoble Court of Appeal, 24 January 1996, Harpert Robinson; 23 October 1996, GAEC v Teso Ten Elsen). In setting-aside proceedings, the Paris Court of Appeal held that an arbitral tribunal applying the Principles to supplement the national law chosen by the parties does not violate its mandate within the meaning of Art. 1520(3) of the CCP (5 March 1998, Forasol v. CISTM).

 

A Recent View: ICC Case 20731(2017)

In a recent award in ICC Case 20731(2017), the Principles were applied under the Preamble’s most challenging hypothesis of application (para. 4) to cure the contract’s silence and the parties’ failure to agree on the applicable law during the proceedings.

In this case, a dispute arose between an Indian company -supplier- and a Romanian company -buyer- (together, ‘the Parties’) in relation to an agreement for the supply of stainless-steel tubes. Only providing for “Arbitrage: cour d’arbitrage de Paris”, the very succinct arbitration agreement did not provide for any choice of law.

From the outset of the proceedings, the tribunal invited the Parties, in a first procedural order, to “examine” the law applicable to the dispute, including transnational rules of law. Each party claimed that its own domestic law was applicable to the contract but both agreed on the use of the so-called direct method. Relying on this agreement and its freedom to determine the applicable law, the tribunal decided in a third procedural order that the Principles would apply to the dispute.

Interestingly, the tribunal did not ground its choice on the Parties’ negative choice excluding national rules but rather explicitly relied on (i) its empowerment to determine the “most appropriate” applicable law, (ii) the “largely international” nature of the contract as well as (iii) the parties’ agreement for the determination of the applicable law in accordance with the voie directe method. This reasoning offers a convincing rationale as it safeguards the parties’ autonomy and favors a neutral solution that consolidates the award’s legitimacy.

 

A Valid Award Under Art. 1520(3) of the CCP

Under the scrutiny of the Paris Court of Appeal, the award was fully upheld on 25 February 2020 (n°17/18001).

The Court dismissed the supplier’s claim that the arbitral tribunal, by applying the Principles, had “ruled without complying with the mandate conferred upon it” as per Art. 1520(3) of the CCP. It tersely considered that the Parties “failed to agree on the application of Indian law to the dispute and the arbitrators did not rule in equity but in law, applying the 2010 UNIDROIT Principles”.

Under French law, absent any choice of law, the determination of the applicable law is entirely left to the arbitral tribunal, which must decide the dispute “in accordance with the rules of law it considers appropriate” (Art. 1511 of the CCP). Arbitrators are free to use the method of their choice and their determination and implementation of the lex contractus are not reviewed by the annulment judge in order to avoid re-examination of the merits of the dispute (Court of Cassation, 22 October 1991, no. 89-21.528; Paris Court of Appeal, 24 November 2005, BVBA v. Cat et Co).

Accordingly, the application of the Principles in accordance with paragraph 4 of the Preamble is not a ground to set-aside an award. A party dissatisfied with the lex contractus applied by the arbitral tribunal may only be successful before French courts if it demonstrates that the arbitrators did not apply the rules of law chosen by the parties. This certainly explains the supplier’s claim that the tribunal should have applied Indian law, allegedly “the law chosen by the parties”, in order to comply with its mandate. In such circumstances, it sufficed for the Court to note the Parties’ uncontroversial disagreement on the applicable law in order to dismiss the supplier’s request.

The Court thus limited its analysis to the determination of a disagreement between the Parties on the lex contractus. To this purpose, the Court relied its analysis on the procedural steps taken by the tribunal. Since it had already decided in a procedural order that the Principles were applicable to the dispute failing any agreement on the applicable law, the Court simply observed that the award was “in compliance with this decision”. By requesting from the Parties specific submissions on the applicable law as soon as the proceedings started, the arbitral tribunal crystallised their disagreement on this issue and thus secured the validity of its award.

 

Conclusion: The UNIDROIT Principles, a Valid Set of “rules of law

Although predictable, the upholding of the award on this ground is of interest in two respects:

(i) First, the Paris Court confirms that an arbitral tribunal may validly make exclusive application of the Principles in the event the contract is silent and the parties subsequently fail to reach an agreement on the applicable law.

Such a ruling complies with the wording of both ICC Rule 21(1) and Art. 1511 of the CCP, which broadly refer to “the rules of law” available to arbitrators, rather than merely “law”, as in e.g. Art. 46 of the UK Arbitration Act, Art. 1051(2) of the German ZPO or Art. 28 the UNCITRAL Model Law. This textual difference has been interpreted as possibly denying arbitrators in these jurisdictions the right to apply non-national rules of law, as the word “law” would exclusively refer to national legislative provisions. The Court’s ruling is also fully consistent with its previous case-law, according to which an arbitral tribunal does not exceed its mandate by applying the lex mercatoria absent any choice-of-law agreement (Paris Court of Appeal, 13 July 1989, no. 88-18887, Valenciana v. Primary Coal).

This decision makes clear that the Principles, just like the lex mercatoria, qualify as “rules of law” within the meaning of Art. 1511 of the CCP, available to arbitrators under French law absent any choice-of-law agreement between the parties.

(ii) Second, in line with this finding, the Court also confirms that an arbitral tribunal applying the Principles does not rule in equity. Under French law, an award may be set aside when the arbitral tribunal ruled as amiable compositeur without any empowerment to do so, in breach of Art. 1512 of the CCP. The Court thus makes a clear distinction between the application of the Principles, which are a particular set of legal rules (“a system of principles and rules of contract law which are common to existing national legal systems or best adapted to the special requirements of international commercial transactions” as per Art. 4(a) of the Preamble’s official commentary) and the concept of amiable composition, in full consistency with the Court of Cassation’s previous ruling that an arbitral tribunal applying the lex mercatoria does not rule in equity (Court of Cassation, 22 October 1991, no. 89-21.528).

This shining example of application of the Principles under paragraph 4 of the Preamble contributes to their diffusion and constitutes a perfectly good arbitral practice where the contractual framework to an international commercial dispute is silent as to the applicable law, the only limit to the Principles’ exclusive application being their non-exhaustive character.

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