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Diversity in International Arbitration: Where Do We Stand? – An Overview of a Berwin Leighton Paisner Survey

Thu, 2017-02-09 04:06

Patricia Živković (Associate Editor)

Babić & Partners Law Firm LLC

Diversity in arbitral tribunals has already received a considerable amount of attention at this blog, especially in regards to gender diversity (post are available here, here, and here). The discussion is, of course, still ongoing and far from reaching the desired goals. On 10 January 2017, Berwin Leighton Paisner released an annual arbitration survey titled Diversity in International Arbitration: Are We Getting There? (“Survey”). The results of the Survey confirm that further discussion on the topic of diversity in arbitration is necessary. This post highlights some of the more interesting (and also thought provoking) results of the Survey, whereas the full version of the Survey can be downloaded here.

The Survey adopted a unique approach in tackling some very important issues by focusing on obtaining statistics in regards to the situation, as well as taking a proactive stance on how to move forward from this point. This was done, in particular, by addressing the issue of attribution of responsibility for promoting and achieving diversity in arbitral tribunals.

The Survey received responses from 122 respondents from all over the globe including: Asia, Australasia, the Middle East and North Africa, North America, Latin America and the Caribbean, Western and Eastern Europe, East and West Africa, the BVI/Cayman and Bermuda (page 5 of the Survey).

The results of the Survey, unfortunately but not surprisingly, revealed that the diversity in arbitral tribunals is far from being achieved and respondents flagged some diversity issues which deserve due consideration. For example:

  1. 84% of respondents thought that there were too many male arbitrators (page 7 of the Survey);
  2. 80% of respondents thought that tribunals contained too many white arbitrators (page 7 of the Survey);
  3. 64% of respondents felt that there were too many arbitrators from Western Europe or North America (page 7 of the Survey);
  4. 28% of respondents believed that they had lost appointments because they were considered too young (page 6 of the Survey).

The catchphrase “pale, male, and stale” has not lost its stand in the field of arbitration thus far. This does not come as surprise as, according to the Survey,

“Established practice in international arbitration is acknowledged to block change and keep new entrants – the same arbitrators are chosen again and again.”

The Most Important Attributes of Arbitrators

The Survey investigated and reported on the attributes that are taken into account by parties when nominating an arbitrator and the importance given by parties to each of these factors.

On a positive note, the expertise of an arbitrator is placed the highest on the list of attributes ranked by importance. The Survey reports that “93% of respondents felt that a potential candidate’s expertise was either ‘very important’ or ‘important’” (page 9 of the Survey). The expertise of potential arbitrators is followed by efficiency, for which 91% of respondents opined as a “very important” or “important” consideration in the nomination process (page 9 of the Survey).

Gender and ethnicity, on the other hand, have received lower percentage on a stand-alone basis. Only 12% considered gender as “very important” or “important” factor, while 24% of the respondents found that ethnicity/national identity was worth consideration when nominating an arbitrator (page 8 of the Survey). However, when respondents were asked to view all the potential candidates as if they were all equal in regards to their level of expertise and experience, the results told a different story. In this context, the results were the following:

  • “On gender, only 6% of respondents said “No”, it was not desirable to have gender balance. Other responses were fairly evenly divided. 50% of respondents thought that it was desirable to have gender balance on arbitral tribunals but 41% thought that “It makes no difference”.” (page 8 of the Survey),
  • “Responses on ethnicity and national background followed a similar pattern with 54% saying “Yes”, 31% saying that “It makes no difference” and 10% saying “No”.” (page 9 of the Survey).

The Attribution of the Responsibility for the Initiation of Change

The Survey asked respondents who is responsible for initiating a change (page 12 of the Survey). It was perceived that all the main actors in arbitration share this responsibility, though in somewhat different portions.

Seventy-eight percent of respondents felt that arbitral institutions should play a role in achieving greater diversity on arbitral tribunals. Sixty-five percent of respondents thought that counsel for parties are also important players. Sixty percent of respondents included arbitrators and 24% of respondents considered that academics and teachers have a role in this as well. Only 12% said that none of the abovenamed had a role in initiating a change and that they were happy with the status quo.

It was also noted that the initiation of change has already been commenced, especially related to gender diversity. This is, however, done scarcely, and not all the diversity attributions have received their share of attention thus far. In particular, it was stated that:

“There is increased transparency about the number of women appointed as arbitrators and there are various initiatives underway to encourage the appointment of more women. There are fewer initiatives in relation to other under-represented groups.” (page 3 of the Survey)

A factor that is gaining more and more attention to this point is the age of arbitrators. A lack of new entrants to the pool of arbitrators is linked to a lack of information about new and less well-known arbitrators from all backgrounds (page 12 of the Survey). Ninety-two percent of respondents stated that they would welcome more information about new and less well-known arbitrators and only 5% of respondents said that they would not (page 12 of the Survey).

Advocating for Diversity

The Survey also reported on the question: “Should diversity matter?” Several responses were collected and put forward to purport the opinion that diversity does matter:

  • the inclusion of individuals of varied racial, ethnic, gender and social backgrounds has a value in itself;
  • a system serving the needs of a particular constituency – in this case, participants in international commerce – should reflect the make-up of that community;
  • a lack of diversity may also affect the quality of arbitral awards;
  • the deliberative process before the arbitral tribunal is likely to be crucial and, therefore, the diversity of views may be fundamental for a fair process and outcome;
  • widening the pool of arbitrators will give greater choice and fewer conflicts, remove the imbalance in information available to different parties and encourage greater efficiency, as well as facilitating new perspectives on the dynamics of a dispute; and
  • a diverse tribunal may be better prepared, more task-orientated, and more attentive to the parties’ arguments than a non-diverse tribunal (page 3 of the Survey).

Author’s Remarks

This post introduces only a small portion of many interesting statistics presented in the Survey. This type of inquiry is welcomed at these times because it serves as a reminder that the road to reach our goals is a long one. It also offers a welcomed point that advocating for diversity should always be put in the context. We welcome your thoughts on these and other statistics as well as your opinion on how to approach these issues in practice.

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Bulgaria Reforms Arbitration Law by Imposing More Control and Restrictions

Tue, 2017-02-07 23:34

Deyan Draguiev

Background

Bulgarian arbitration law has been an area of rare developments. It is incorporated in the International Commercial Arbitration Act (“ICAA”), adopted in 1988 as almost a direct translation of the UNCITRAL Model Law on International Commercial Arbitration in its 1985 version. The only major reform of ICAA was its extension to arbitrations between entirely domestic parties by amendment from 1993. Hence, despite its name, the ICAA regulates both domestic and international arbitrations. Apart from this, the ICAA used to provide for a fairly liberal procedure with very little state interference.

Non-arbitrability of consumer disputes

However, there has been a recent backlash to arbitration mainly because arbitration, due to its flexibility, has become to be seen as a tool for conduct of unfair practices. Some newly established institutions have started handling predominantly consumer disputes where the claimant was a major services provider (heating, electricity, water, etc.). This spawned various debatable practices such as dubious service of documents to respondents and questionable qualification of arbitrators, as such institutions listed largely unknown persons.

The recent amendments adopted by the Bulgarian Parliament purport to avert such suspicious practices by a wide legislative brush: all consumer disputes are excluded from the scope of arbitrability under Article 19 of the Civil Procedure Code. All pending disputes between commercial entities and consumers should be discontinued.

Amended grounds for state court scrutiny of awards

The ICAA used to designate the Sofia City Court as the single state court having jurisdiction to issue writs of execution for the purpose of commencement of enforcement of arbitral awards. The amended law introduces a new jurisdictional criterion: the competent state district court is the court at the domicile or at the seat of the award-debtor. More importantly, now the ICAA empowers the district court to investigate whether the arbitral award is null and void or not. If the award has been rendered under a non-arbitrable dispute, the state court should not issue a writ of execution on its basis. In practice, this has significant consequences. First, the law puts forward a new instrument for state scrutiny over arbitral awards and, indirectly, on the work of arbitrators. Issuance of writs of execution would not only be a formalistic exercise, but it may lead to the result that the long-chased arbitral award is futile just because the relevant state court considers that the arbitral tribunal erred on its own jurisdiction. Although this does not, formally, impair the kompetenz-kompetenz principle, the amended ICAA builds up a second tier test for arbitral awards on the gateway to enforcement, which, if not passed, may make efforts of award-creditors bitter and lost.

Furthermore, the grounds for setting aside under the ICAA were amended, too. As the ICAA used to reflect the 1985 UNCITRAL Model Law, it featured public policy as on of the grounds for setting aside of arbitral awards. It has been an often argued, but seldom granted, basis for setting aside of awards. However, the wide and undefined scope of the concept of public policy has rendered it as a final resort for the aggrieved parties. This has also spawned uncertainty as to what precisely provides for the content of public policy in case of awards rendered by domestic tribunals. The recent amendment of the ICAA removes public policy as ground for setting aside of awards. It is worth noting that, following this legislative change, international (foreign) awards could be resisted enforcement for reasons of violation of public policy only on the basis of the New York Convention, as the ICAA will no longer feature this specific ground. More importantly, if a tribunal is seated in Bulgaria and renders an award which would not be subject to enforcement via the New York Convention due to being a domestic award, the parties would not be able to resort to public policy arguments. Therefore, it seems that the legislative amendment has been quite focused on protecting domestic arbitrations but has lost sight on those with international dimensions.

Governmental control over arbitrators

The ICAA used to feature almost no specific requirements regarding arbitrators. This liberal regime is now changed as the amended law requires: university education, lack of criminal convictions, at least 8 years of professional experience as well as high moral qualities. The law certainly purports to prevent low qualified arbitrators from being appointed, but also clearly restricts freedom of choice, which has always been the backbone of arbitration. Moreover, the Ministry of Justice is now empowered to exercise a form of control over arbitration institutions. The inspectors at the Ministry of Justice are entitled to scrutinize the work of arbitration institutions and provide compulsory instructions to achieve compliance with the law. Arbitrators handling consumer disputes in breach of the prohibition on these cases will be subject to pecuniary sanctions.

Conclusion

The indicated powers of control and scrutiny introduced in Bulgaria are in vague terms and it is not clear whether these will be exercised to full extent. However, the amendment of the ICAA seems to be a clear example of a sway from the liberal regime of almost no state involvement towards a more intrusive one, where both the judiciary and the executive have some, direct or indirect, means to influence arbitration proceedings in Bulgaria.

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Prejudgment Interest: What Is a “Normal Commercial Rate?”

Mon, 2017-02-06 22:01

Tiago Duarte-Silva and Aaron Dolgoff

Charles River Associates

The selection of an interest rate to apply to an arbitral damages award can be an important determinant of the total award. For example, prejudgment interest added 26% to damages across 63 ICSID awards since 2000. Consistent with this notion, many international investment treaties specify claimants be compensated at a reasonable or normal “commercial rate.” However, the lack of specificity in the definition of this rate leaves significant scope for arbitral discretion, and therefore the parties to a dispute may rely on expert opinions to support their particular positions. This imprecise definition requires an interpretation of what constitutes a normal “commercial rate,” either as the rate at which the claimant could have or did invest funds, or the rate at which the claimant could have or did borrow funds.

The importance of clearly defining a “commercial rate” is evident in data on corporate borrowing rates. Such rates show wide variation both over time and across the borrowers’ debt maturity, seniority, and credit risk. Past arbitral decisions have relied on various definitions of “commercial rate,” leaving significant scope for disagreements between the parties as to what constitutes an appropriate rate. We suggest a more empirical approach to help tribunals select a prejudgment interest rate that best comports with their interpretation of “commercial rate.”

In this post, we first describe the concept of “normal commercial rate,” and then examine how corporate debt interest rates vary through time as well as across debt and company characteristics.

Typical clauses for interest compensation in Bilateral Investment Treaties (BITs) define prejudgment interest as a “normal commercial rate.” This is the exact phrase used in BITs with Canada and the UK. Other variations of this phrase are a “commercially reasonable rate” (US or Japan), “appropriate market rate” (France), or “usual bank interest” (Germany). See the most recent model BIT treaties (where available) or recent bilateral treaties, from the UNCTAD BIT database here. Such definition leaves room for opinion on its precise meaning and measurement. For example, the following two cases illustrate two common interpretations:

  • BG Group v. Argentina: “This Tribunal agrees with BG that interest at a reasonable commercial rate is appropriate… The rate of interest is a function of the instrument in which BG could have reasonably invested funds available to it… investment in a highly secure, dollar denominated, liquid and short-term instrument would have enabled BG to rapidly redeploy its funds.” (awarded interest at six month US Treasury rates).
  • Tidewater v. Venezuela: “as the Treaty’s reference to ‘normal commercial rate’ underlines, it represents the cost of borrowing the sum that the claimant ought to have received over the same period of time. Thus, the appropriate reference point is the cost of borrowing available to Claimants.” (awarded interest at 4.5%).

The above examples of arbitral awards show a key issue in determining a “normal commercial rate:” whether that term refers to an investment or a borrowing rate. An investment rate interpretation is consistent with compensation for the opportunity cost of not being able to invest the award amount between the date of harm and the date of the award. Companies are able to invest at rates that run the full gamut of risk, from risk-free debt (e.g., purchase of US Treasury bills) to speculative debt (e.g., purchase of debts in default), to equity investments in specific projects or properties. This interpretation often leads to the selection of a risk-free or nearly risk-free rate (e.g., BG Group v. Argentina’s award of a “highly secure… liquid and short-term instrument”).

The borrowing rate interpretation is consistent with compensation for the claimant’s cost of capital, and, in some circumstances, compensation for being forced to borrow as a result of the alleged harm. A borrowing rate, however, depends on the characteristics of both the borrower and the terms of the loan. Tribunals are often hesitant to use a borrowing rate that is specific to the claimant’s cost of debt, often opting for borrowing rates of low credit risk, non-bank borrowers. For example, the tribunal in Joseph Charles Lemire v. Ukraine (March 28, 2011) eschewed LIBOR as an interbank rate, opting instead for LIBOR+2% as indicative of the higher rate banks would charge to their clients.

Several arbitral awards have referenced a benchmark such as LIBOR+2%, though such awards may be based more on precedent than any empirical assessment of typical commercial borrowing rates. (PSEG Global Inc., et al, v. Republic of Turkey; Sempra Energy International v. Argentine Republic; and Enron Corporation and Ponderosa Assets, LP v. Argentine Republic.) To the extent tribunals intend to award interest at a rate that reflects market conditions during the prejudgment interest time period, reliance on precedent presents a risk that the award would not, in fact, reflect such market conditions. We turn to some empirical data to illustrate this issue.

Figure 1 shows the spread of one-year A-rated corporate bonds over one-year LIBOR. This spread is the difference between the yield on one-year A-rated corporate bonds and the yield on one-year LIBOR. To the extent that an A-rated borrower is typical, A-rated borrowers typically pay rates that are much lower than LIBOR+2% and are frequently lower than LIBOR+0.5% if we put aside conditions observed at the height of the most recent financial crisis. The spread varies over time, even for a constant credit rating. This reflects changing market conditions, i.e., changes in the market’s willingness to accept lower returns for a given credit risk. Note that LIBOR is meant to represent the rate at which a group of banks could borrow funds in the interbank market. It is not necessarily the lowest possible commercial borrowing rate as, for example, a borrower may post collateral that makes the loan less risky than an interbank loan.

Figure 1: A-rated, one-year corporate bond spread to LIBOR

Figure 2 illustrates the A-rated corporate borrowing spread to LIBOR for annual maturities ranging from one to five years. Longer-term borrowing typically entails a higher spread. This maturity premium varies over time: the one-year and five-year spread are sometimes about 25 basis points apart, and sometimes over 100 basis points apart.

Figure 2: A-rated corporate bond spread to LIBOR, across maturities (1 to 5 years)

In other words, corporate debt rates are different for different debt maturities, and that difference in rates varies over time. Again, the spread to LIBOR is typically not 2%. To obtain spreads closer to 2%, one would need to consider a borrower of higher risk than A-rated borrowers. We examine this question next.

Figure 3 shows corporate bond spreads by credit rating (AA, A, and BBB). In addition to the time variation in borrowing costs, there are significant differences in borrowing rates as a function of issuer credit rating. The difference relative to LIBOR becomes quite large for riskier debts. Note also that the incremental borrowing cost of moving from AA-rated to A-rated debt is often smaller than the incremental borrowing cost of moving from A-rated to BBB-rated. These differences would become larger still when moving to credit ratings below investment grade. High yield or junk bonds have ratings below BBB.

Figure 3: One-year corporate bond spread to LIBOR, across ratings (AA to BBB)

The evidence above illustrates that borrowing rates vary over time with market conditions, as well as with debt maturity and credit rating. However, these are only a few of the factors that influence borrowing costs. Other factors include characteristics of the borrower and of the specific debt. Examples of borrower-specific factors affecting credit risks include: size of the company, profitability, consistency or volatility of the business, cash flows, and liquidity of assets. These factors may vary over time, across industries, and across firms within an industry. Debt-specific factors affecting borrowing rates include seniority in bankruptcy, security (collateral or other guarantees), and lender protection rights (e.g., debt covenants).

In conclusion, the selection of an interest rate for arbitral award damages can be an important determinant of the total award. In certain proceedings, tribunals are bound by treaty to award interest at a normal commercial rate. However, neither investment treaties nor award precedents provide clear guidance on how to define and measure a “commercial rate.” In addition to the fundamental question of whether such rates should reflect investment opportunity costs or claimant borrowing rates, there is also the important question as to how to benchmark the appropriate rate (particularly under the borrowing rate definition).

The benchmarks for corporate borrowing rates differ significantly over time, as well as with different borrower and debt-specific characteristics. To assist tribunals in selection of appropriate interest rates in arbitral disputes, claimants and respondents can provide more detailed empirical data. Such data might show corporate borrowing rates for the relevant period of time as well as display information or expert opinions substantiating why any particular rate should be preferred as typical or reasonable given the case’s specific circumstances.

The views expressed herein are the views and opinions of the authors and do not reflect or represent the views of Charles River Associates or any of the organizations with which the authors are affiliated.

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Arbitration No Matter What?

Mon, 2017-02-06 03:13

Goran Jutriša

Ministry of Foreign and European Affairs of the Republic of Croatia

The first weeks of 2017 have again seen an exchange between Croatia and Slovenia about the continued work of the Arbitral Tribunal expected to decide this year on the course of the boundary between the two states. The Tribunal – formed under the 2009 Arbitration Agreement – will do so despite Croatia’s decision to terminate the treaty and withdraw from the process because of Slovenia’s serious violation of the Agreement in mid-2015. Kluwer Arbitration Blog has previously published a story about this scandal.

During the annual conference of Slovenia’s ambassadors, for example, the country’s officials called for a strategy to implement the prospective decision despite Croatia’s repeated statements that it will not consider itself bound by it, no matter the contents. Only a few days later, the Slovenian Foreign Minister said that Croatia-bound tourists would encounter difficulties when travelling through Slovenia if Croatia did not respect the Tribunal’s award. Croatian officials perceived this as a threat to the tourism industry which makes up 20% of the country’s GDP, prompting swift reactions from the Foreign Minister, as well as MEPs who stated that such moves would be contrary to “the four freedoms” of the EU.

The continued work of the Arbitral Tribunal is evidently a source of great tension between the two countries, which is why – at this point – it is worth looking more closely at the Tribunal’s Partial Award which allowed for the arbitration to continue. It did so despite “[a] severe breach[…] of duty of confidentiality and impartiality” thus only deepening the differences between Croatia and Slovenia instead of providing them with an opportunity to move forward with their bilateral dispute. What the Tribunal did in its Partial Award is establish that Slovenia did in fact violate the Arbitration Agreement, but that nevertheless, “[it] remains in force” (at para. 225) and that the Tribunal, as recomposed in late 2015, following a series of resignations, including that by Judge Abraham, President of the International Court of Justice, has the capacity and, moreover, the duty to continue the proceedings. Leaving several other considerations aside for reasons of brevity, what merits special attention in this decision is the distorted presentation of the most crucial facts of the case that then led the Tribunal to erroneous legal conclusions, all well to the prejudice of Croatia.

The most striking error is the Tribunal’s claim – repeated three times – that after Dr. Sekolec resigned and the Tribunal was recomposed “[n]o doubt has been expressed on the impartiality or independence of the three remaining arbitrators or of the two new ones” (at paras. 186, 195 and 224), whereas Croatia could not have been more vocal about it. In its letters to the Tribunal of 24 July and 31 July 2015, it said, e.g., that it “ha[d] difficulty understanding how it would be possible […] for the other members of the Tribunal […] to distinguish between the arguments and ‘facts’ presented by Slovenia through Arbitrator Sekolec, and those developed solely by Arbitrator Sekolec on his own”. Croatia also said that “no reasonable person would conclude that the actions that have occurred may not have influenced other actors in the arbitration process”. This was repeated in Croatia’s note verbale of 16 March 2016, which was also at the disposal of the Tribunal, as were all other documents that Croatia made available on its Foreign Ministry’s website. The Tribunal chose not only to ignore Croatia’s arguments, but explicitly stated the opposite, i.e. that no objections were made about anyone else on the Tribunal but Dr. Sekolec. By doing so, the Tribunal sought to exonerate itself from the duty to examine the shattering impact that Slovenia’s actions had on the Tribunal as a collective body and on its members as individuals. This duty would have been inherent to its existence even if Croatia had not complained, which it obviously did. Instead, the Tribunal simply opted for the easy, but ultimately wrong way out and examined the issue of independence and impartiality very narrowly and solely from the perspective of two documents that Dr. Sekolec circulated to his co-arbitrators and oral interventions he made in the plenary meetings (at para. 123). The Tribunal ignored recorded conversations which reveal that Slovenian officials prepared these documents and that Dr. Sekolec only edited them to look like his own (at pp. 7-8 of Excerpts from Recordings). The Tribunal did not refer at all to the fact that Dr. Sekolec provided Slovenia with the draft of the “[final] award” (at p. 11 of Excerpts from Recordings) for comments and edits, which he then intended to give to the Tribunal’s Registrar for further distribution.

The Tribunal also asserted that no new arguments or facts were presented to the Tribunal (at para. 195) whereas Dr. Sekolec was caught on tape as discussing the list of disputed areas in order of importance (at pp. 3-4 of Excerpts from Recordings) and textual descriptions of the boundary (at p. 9 of Excerpts from Recordings) as evidence which Slovenia – by explicit admission of Dr. Sekolec and the Slovenian official – had not presented to the Tribunal hitherto, and that he commits to discuss privately with President Guillaume and Judge Simma as his co-arbitrators.

It is logically and legally untenable not to appreciate the full extent of what Slovenia did through Dr. Sekolec, extending well beyond the contents and destiny of the two documents that the Tribunal mentions. It is equally unsustainable not to acknowledge the devastating impact of these actions on the arbitrators’ states of mind at a time when their views were being formed. Notwithstanding their professional integrity and admirable record, in this specific case they were caught in a spider web of Slovenia’s unscrupulous misconduct and manipulation making them manifestly incapacitated to continue to arbitrate independently and impartially.

In addition to affirming its capacity to arbitrate, the Tribunal also finds that it has the duty to do so because of an alleged unbreakable link between the conduct of arbitration and Croatia’s EU accession. However, in fact – no such link exists. The Arbitration Agreement does not provide for Croatia’s immediate and unconditional accession to the EU. It merely takes note of Slovenia’s lifting of reservations to Croatia’s accession negotiations, which in reality happened two months before the Agreement was even signed as the two states openly and actively sought to de-link the border issue from EU accession. That is witnessed by – for example – the explanation of the three principles that the two states’ leaders agreed to on 31 July 2009 (see the Slovenian Government’s website), as well as the Swedish Prime Minister’s letter confirming the EU’s understanding that accession talks would continue and that it is up to Croatia and Slovenia to decide how to resolve the border issue (see the Croatian Government’s website). In that sense, the Tribunal’s statement that “[f]ollowing [the Agreement’s] entry into force […] Slovenia lifted its reservations to Croatia’s accession to the [EU]” (at para. 15) and conclusions derived from that statement are as wrong as they are disappointing. They show the Tribunal’s inability to comprehend the facts of the situation or even merely copy and paste the facts that the two states themselves do not dispute.

The Tribunal’s conclusion that it has the capacity (because its independence and impartiality were not challenged) and duty (because of the alleged unbreakable link between the arbitration and EU accession) to continue its work led it to two erroneous legal conclusions:

First, the Tribunal accepted to be a judge in its own right and proprio motu assess the merits of Croatia’s claim that the independence and impartiality of that very same Tribunal were destroyed beyond repair. An appropriate appreciation of the extent of damage inflicted on this arbitration would have led the Tribunal to exclude itself from assessing the validity of Croatia’s treaty termination. As Croatia requested and as it should happen in all similar cases when procedural provisions of the treaty in question suffered violation, it should have directed the two parties to follow the procedure envisaged in the Vienna Convention, including the conciliation mechanism at the UN (see, for example, Villiger’s Commentary on the 1969 Vienna Convention on the Law of Treaties, at p. 746).

Second, the Tribunal establishes that Slovenia’s violation of the Agreement did not amount to “material breach”, which the Vienna Convention describes as a “violation of a provision essential to the accomplishment of the object and purpose of the treaty”. Thus, Croatia was not entitled to treaty termination. The Tribunal failed to acknowledge as essential – and as violated – the manner in which arbitration is conducted, i.e. by an independent and impartial body. It also remained silent on the fact – nevertheless recognized by one of its members, Judge Simma – that what is essential to a treaty, and what brings about material breach, is primarily what the parties themselves consider a key to effective treaty implementation (see, for example, Simma and Tams’s Article 60: Termination or suspension of the operation of a treaty as a consequence of its breach in the commentary of the Vienna Convention, edited by Corten and Klein). It follows that, had the Tribunal appropriately assessed the extent of harm that Slovenia’s actions inflicted on its independence and impartiality as key components of any arbitration, and had it taken the views of the parties into account, it would have found that Slovenia’s behavior destroyed an essential element of the treaty relation, which in the ICJ’s jurisprudence (paras. 216 et infra) amounts to material breach, giving rise to the right to terminate.

The fact that the Tribunal’s legal conclusions are based on evidently false premises is alarming. It shows a panel either disinterested in facts or unwilling to establish them and apply law. Whatever the true background, the end result is a troubling reality of a tribunal determined to continue to arbitrate even if it means conflating facts, ignoring procedural standards and propelling the parties to an interminable dispute. By deciding to continue its work, the Tribunal missed an opportunity to leave this arbitration process aside and bring Croatia and Slovenia closer to resolving their bilateral dispute through other means. Even more importantly, as an international judicial body, it failed to lead by example by reaffirming the fundamental legal and ethical standards in international arbitration, crucial to all states contemplating third-party dispute settlement mechanisms.

The views expressed herein are those of the authors and do not necessarily represent the views of the Ministry of Foreign and European Affairs of the Republic of Croatia.

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A Case for Paperless Arbitration

Sat, 2017-02-04 21:15

Leon Kopecký

Schoenherr For Schoenherr

Having disposed of yet another forest worth of pristine hearing bundles, I wonder: when will arbitration finally go paperless?

Gillian Lemaire asked the same question in a 2014 piece called “Where Do We Stand?” She looked at the legal and factual obstacles that paperless arbitrations face. Finding that, in reality, there were few, she proposed that much rests on individual case assessment, and joint efforts of tribunals and counsel.

One cannot but agree. At the same time, one cannot but wonder why, three years later, so little progress has been made. True, in a few exceptional cases, tribunals concede to paperless filings, and even hearings. But that is not the rule.

I think that it should be. Absent some elusive principle that justice can only be done on paper, there is nothing short of an award that must be printed, bound, packed, and shipped halfway around the world, usually only to suffer the fate of marketing collaterals. And, with portable screens now resolving better than the eye itself, hearings, too, can be paperless, obviating tedious flipping through pages and quests for missing printouts.

So why are they not? Commentators put it to apathy and aversion to new technologies. I would not agree. I witnessed the most seasoned of arbitrators wielding smartphones and tablets, often following the record not in the provided bundles, but on their devices. Yet, those same arbitrators (with commendable exceptions) also asked to be mailed hard copies of each and every brief, exhibit, and testimony; and instructed that hard copies of the entire record be made available in the hearing room.

Of course, arbitrators should have the right to ask for that. We all like to scribble, and paper does at times beat silicon. But this should be the exception, not the rule. Arbitral institutions should not just allow, but insist on paperless submissions, and discourage hearings with the carbon footprint of a small cruise ship. Counsel should take heed of the term core bundle: the largest of cases aside, those should never measure in truckloads.

But what is the last hurdle, at which general paperless arbitration still fails? I submit – and hope for an inspired discussion in the comments – that this hurdle is standardisation. In arbitration, we have technical standards for communication (email); submission (Word); documentation (pdf); remote collaboration (telco); document production (Redfern); and even exhibits are stamped identically in most cases. But no standard exists for interactive briefs, with formats and usability varying greatly; and much less so for hearing management software, despite the fairly limited number of actually needed features (display, highlight, possibly search).

The international arbitration community – institutions, arbitrators, counsel – should agree on such standards, and abide by them. Responsibility falls on all; but it should probably be the institutions who take the lead. After all, their reach is wider, their resources less strained, and their stance impartial. Together with the tribunals, they can ensure the equal treatment of parties, with no prejudice to those technologically disadvantaged.

Once we all turn and highlight electronic pages in the same way, we can bid adieu to the current lowest denominator of our profession—paper. Those few who cannot do without it may choose to opt in, but with local printing facilities replacing international shipping.

Those fearing costs: bear in mind that portable devices and software can be reused, but printing costs are always sunk. Staff costs stay the same. And those who consider making interactive briefs and electronic hearing bundles to be a formidable exercise: keep calm—it will almost certainly not be yourself doing it.

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SIAC’s 2017 Investment Arbitration Rules: An Overview and Key Changes

Fri, 2017-02-03 22:25

Jonathan Mackojc

Corrs Chambers Westgarth

On 30 December 2016, The Singapore International Arbitration Centre (SIAC) finally released the first edition of its Investment Arbitration Rules (IA Rules). The IA Rules were first published as draft rules on 1 February 2016, and were discussed in a previous article. The IA Rules, which came into effect on 1 January 2017, now reflect more realistic timelines – undoubtedly in response to comments made during the public consultation process.

The IA Rules come at an important time, where a significant number of arbitral institutions continue to search for new ways of maximising business opportunities. Over the last few years, these institutions have sought to differentiate themselves in order to compete for high profile disputes. Leading regional institutions such as the Hong Kong International Arbitration Centre (HKIAC) and SIAC have seen a significant boost in the number of disputes that they handle annually. According to the 2015 Queen Mary International Arbitration Survey, both the HKIAC and SIAC are ranked within the top five most preferred arbitral institutions. This, in part, can be attributed to their proactive approach. Both institutions promote engagement via international roadshows, and other initiatives such as the tribunal secretary accreditation programme.

Over the last few years, Singapore and Hong Kong have been regarded less as competitors due to their unique geographical position; Singapore targets Southeast Asia, while Hong Kong caters for businesses situated in Northern Asia. However, international arbitration disrupts this model, as it is a form of dispute resolution that transcends international borders. Parties are increasingly willing to travel the extra mile, if they can benefit from flexible rules and the promise of the prompt resolution of their disputes.

Institutions such as SIAC have realised that, along with other forms of marketing strategies, one of the most effective means of enticing new parties to opt for arbitration is by revising former arbitration rules and introducing new ones. The IA Rules include several unique provisions which the 2016 SIAC International Arbitration Rules (SIAC Rules) do not feature. The SIAC Rules, which came into effect on 1 August 2016, are also a welcome update to the international arbitration landscape in Asia-Pacific.

Preliminary Considerations

The 2017 SIAC IA Rules are a specialised set of rules which aim to address issues relevant to investment arbitration. As they are essentially a hybrid of specialised investment arbitration rules and commercial arbitration rules, they are not a bespoke set of rules per se. Nonetheless, they are a welcome addition and parties need to familiarise themselves with their application.

Some key points to note are:

• The parties must agree to adopt the IA Rules in their agreements;
• The rules are applicable to disputes involving States, State-controlled entities, statutes, or other relevant instruments;
• The rules apply to any type of arbitration, and no objective criteria shall be considered (i.e issues regarding the existence of an ‘investment’ or ‘investor’). However, any requirements or restrictions in the underlying instrument shall prevail;
• If parties have previously agreed to adopt the 2016 SIAC Rules, they may subsequently consent to use the 2017 IA Rules instead.

Undoubtedly, the key selling point is that parties do not need to define an ‘investment’ as per Article 25(1) of the ICSID Convention. This not only broadens the scope of disputes that may be heard, but also promotes efficiency. Parties which seek to resolve disputes promptly, and are comfortable with strict deadlines, will also be attracted to these rules.

Features of the 2017 SIAC Investment Arbitration Rules

SIAC has introduced a number of innovative provisions in its IA Rules, which provide parties with greater latitude in conducting the arbitration process. They include:

1. Default list procedure – Rule 8: the SIAC Court is now able to adopt a default list procedure where parties fail to appoint their respective arbitrators. In the Draft IA Rules, the time limit for the appointment of either a sole arbitrator or multiple arbitrators was 28 days. The current IA rules now reflect a more lenient timeline, where Rules 6.2 and 7.2 provide for 42 days for a sole arbitrator and 35 days for multiple arbitrators. With respect to the appointment of the presiding arbitrator, Rule 7.3 has not been changed so the period is agreed by the parties or set by the Registrar.

2. Third Party Submissions – Rule 29: broadly, two situations exist. Firstly, Rule 29.1 allows a Non-disputing Contracting Party to make written submissions to the tribunal, provided that it gives notice to the Registrar and the parties. The tribunal may also, on its own initiative, invite a Non-disputing Contracting Party to provide written submissions. However, this is only on a question of treaty interpretation directly relevant to the dispute. Secondly, Rule 29.2 allows this to be extended to submissions regarding a matter within the scope of the dispute, provided that the Tribunal considers the non-exhaustive list in Rule 29.3 alongside the views of the parties.

3. Publication – Rule 38: unlike Rule 32.12 of the SIAC Rules which addresses the publishing of an award in a relatively limited manner, this provision provides complete transparency. It states that once parties have agreed to use the IA Rules, the parties shall be deemed to have allowed SIAC to publish information on proceedings. This information is limited to several key details such as the nationality of the parties and the tribunal, as well as the date of commencement, and whether proceedings are ongoing or terminated. Redacted excerpts may be published with respect to the reasoning of the tribunal, as well as decisions by the Court on challenges to arbitrators. Other, more identifying, information may only be published with the express consent of the parties to the arbitration.

The following provisions are also worth noting:

1. Third-party funding – Rule 24(l), Rule 33.1: the IA Rules tackle the issue of third-party funding directly. The tribunal has the power to order parties to disclose third-party funding arrangements, the identity of the funder, and any other details which the tribunal deems necessary. The tribunal may also take into account any third-party funding arrangements when apportioning the costs of the arbitration. Although other institutional rules have not addressed this, the HKIAC will likely be one of the first to revise its rules in order to reflect recent legislative developments in Hong Kong.

2. Opt-in Mechanism for an Emergency Arbitrator – Rule 27.4: parties may apply for emergency interim relief only if they expressly agree on the Emergency Arbitrator provisions.

3. Early Dismissal of Claims and Defences – Rule 26: as in Rule 29 of the SIAC Rules, the IA Rules allows parties to apply to the tribunal for the early dismissal of a claim or defence, provided that it is manifestly without legal merit or outside the jurisdiction of the tribunal. The IA Rules include an additional basis: that the claim or defence is manifestly inadmissible.

4. Challenges – Rules 12.1, 13.1: as in the SIAC Rules, the Draft IA Rules provided that the party who intends to challenge the arbitrator has a 14 day deadline. The current IA Rules now allow for a 28 day deadline. ICSID Rule 9(1) does not list a deadline, instead encouraging the party to act ‘promptly’. Similarly, the provision in the current IA Rules dealing with the decision on challenge now provides for 21 days as opposed to the 14 days in the Draft IA Rules. The SIAC Rules have a 7-day deadline. Rule 13.3 of the IA Rules also provides the arbitrator with the discretion to continue with proceedings during the challenge, whereas ICSID Rule 9(6) suspends proceedings.

5. Other Pertinent Deadlines – Rules 30.1, 30.3: the Draft IA Rules provided that the tribunal must declare the proceedings closed no later than 30 days after the last hearing or the filing of the last submissions. The current IA Rules amended this and are now aligned with ICSID’s approach, where no deadline exists. The deadline for the draft award has also been modified and is now 90 days from the date on which the tribunal declares the proceedings closed. This is in contrast to the 45-day deadline in the Draft IA Rules. Similarly, ICSID Rule 47 does not provide a deadline for the submission of the draft award.

It will be interesting to observe whether the revised rules will have a significant impact on the quantity and quality of disputes SIAC will administer over the next few years. With SIAC being the first arbitral institution to provide parties with two sets of rules, the question remains: will other institutions follow suit?

The 2017 SIAC IA Rules can be viewed here.

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Is an Arbitration Agreement in a Draft Contract Binding? Perspectives from the courts in Singapore and Switzerland

Thu, 2017-02-02 22:47

Khushboo Shahdadpuri

Columbia Law School

Introduction

In BCY v BCZ [2016] SGHC 249, the High Court of Singapore found that parties could not be bound by an arbitration agreement that was part of an unexecuted underlying contract. This post examines the analysis taken by the Singapore High Court vis-à-vis the Swiss Supreme Court, in a similar fact pattern.

 

The background to BCY v BCZ

BCY v BCZ concerned a proposed sale of shares in a company by the plaintiff to the defendant, subject to the execution of a mutually acceptable Sale and Purchase Agreement (SPA). After seven drafts of the SPA were exchanged, the plaintiff decided not to proceed with its execution. The defendant commenced arbitration proceedings pursuant to the International Chamber of Commerce (ICC) Rules of Arbitration, as provided for in the arbitration agreement of the SPA. The plaintiff objected to the arbitrator’s jurisdiction on the basis that there was no valid arbitration agreement (at [24]). The defendant’s position was that the arbitration agreement was concluded before the SPA (at [26]–[29]).

 

The choice-of-law analysis to determine the validity of the arbitration agreement in BCY v BCZ

In determining the validity of the arbitration agreement, the arbitrator relied on the seminal English Court of Appeal decision in Sulamèrica Cia Nacional de Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638 (Sulamèrica) and found New York law (the governing law of the SPA) to govern the arbitration agreement (at [32]). Applying New York law, the arbitrator found the parties had “mutual assent” to be bound by the arbitration agreement, evident from the exchange of subsequent drafts of the SPA containing the same arbitration agreement and from the plaintiff’s readiness to sign the sixth draft of the SPA (at [33]).

 

In its review of the arbitrator’s decision, the High Court approved the Sulamèrica approach and similarly found New York law to govern the arbitration agreement. In adopting Sulamèrica, the High Court rejected the contrary approach taken by the Assistant Registrar in the earlier case of FirstLink Investments Corp Ltd v GT Payment Pte Ltd [2014] SGHCR 12 (FirstLink). In that case, the Assistant Registrar found that, in the absence of contrary indication, in situations of “direct competition” between the law of the main contract and the law of the arbitral seat, it would be presumed that the latter would govern the arbitration agreement (at [16]). In this regard, Chong J was of the view in BCY v BCZ that there was no such competition in FirstLink because the only explicit reference to the laws of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) did not refer either to the seat of the arbitration (which, according to the SCC Rules, was to be determined by the Board of the SCC) or to the governing law of the main contract (at [54]). Nonetheless, in addressing the competing approaches in Sulamèrica and FirstLink, the High Court’s general findings are worth highlighting.

 

  • ‘Free-standing’ arbitration agreements are stand-alone arbitration agreements not intended to be a term of any underlying contract. If these agreements do not contain an express choice-of-law, the significance of the arbitral seat indicated in the contract would be considered “overwhelming” and the law of the arbitral seat would most likely govern the arbitration agreement (at [44(a)]).

 

  • Where an arbitration agreement forms part of an underlying contract, the express choice-of-law governing the underlying contract would be a strong indication that the parties intended the same law to govern the arbitration agreement (at [44(b)]). This presumption can be displaced either explicitly or implicitly. In the latter, the presumption will only be displaced if upholding it would negate the arbitration agreement in its entirety. In this regard, choosing an arbitral seat that is different from the law of the underlying contract or a minor inconsistency between the governing law and the main contract would not suffice to displace this presumption (at [72]–[75]).

 

  • The substantive law of the seat of the arbitration is not necessarily more neutral than the governing law of the main contract (at [63]).

 

  • Reference to the law of the seat of the arbitration in articles 34(2)(a)(i) and 36(1)(a)(i) of the UNCITRAL Model Law only arises for consideration in the absence of an express or implied choice-of-law. This brings the discussion back to whether the implied choice-of-law ought to be the law of the main contract vis-à-vis the law of the arbitral seat. This reference does not support a presumption in favour of the law of the arbitral seat (at [64]).

 

Notably, both parties in BCY v BCZ acknowledged that there was no material difference between New York and Singapore law on the validity of the arbitration agreement. The analysis of the position under one governing law would therefore be applicable to the other. Interestingly, while both the arbitrator and the High Court of Singapore found the governing law of the arbitration agreement to be New York law, their analysis led to contrary findings. The High Court found there was no objective evidence of the parties’ mutual intention to be bound by the arbitration agreement in the absence of the unexecuted underlying SPA; Chong J’s view was based on the premise that a party is well within its rights to make any amendments to the contract, including the arbitration agreement, before it is signed.

 

Can an arbitration agreement in a draft contract ever be binding?

While, within the factual matrix of this case, the Singapore High Court did not find that the circumstances in which the SPA was negotiated resulted in the formation of a legally binding arbitration agreement, there may well be circumstances in future cases that would reflect parties’ intention to be bound by the arbitration agreement independently and/or prior to the underlying contract. In a decision concerning the validity of an arbitration agreement in a draft contract, the Swiss Supreme Court found that the parties had agreed on the arbitration agreement during negotiation of the main contract, despite their not having signed the underlying contract. The parties, in this case, had initially exchanged comments about amending the specified arbitral seat contained in the arbitration agreement of the draft framework contract. However, the original proposed arbitration agreement remained in the draft and was never negotiated nor modified in further changes between parties. The Supreme Court opined that although the exchange of draft contracts containing arbitration agreements would not per se bind parties to it, there may well be “additional qualified circumstances” that could confer jurisdiction on the arbitral tribunal. Such circumstances include instances of prior contracts containing the same arbitration agreement, the parties’ objective intention to arbitrate their dispute and the exchange of draft contracts establishing their common intention to enter into an arbitration agreement, irrespective of the outcome of the main contract.

 

The relevant question for future tribunals and courts in similar cases will be to determine whether the circumstances leading to the execution of draft contracts manifests the parties’ intention to be bound by the arbitration agreement contained in it, independent and/or prior to the underlying contract. In this regard, if the arbitration agreement is found to be governed by either Singapore or New York law, BCY v BCZ would serve to offer guidance on the relevant circumstances where such intention is manifested. To establish this intent, parties would have to show more than mere agreement to the wording of the arbitration agreement, a proposal to include the arbitration agreement or an expression of readiness to sign the draft contract. Further, caution must be taken to ensure there is no ‘subject to contract’ qualification in the negotiations leading to and beyond the draft contract.

 

Doctrine of separability analysis in determining the validity of arbitration agreements in draft underlying contracts

 

In delivering its judgment, the High Court in BCY v BCZ was also of the view that there was no need to invoke the doctrine of separability in submitting that an arbitration agreement was concluded before the execution of the underlying contract (at [60], [61] and [79]). This would be the correct approach in cases where parties do not submit that the governing law of the main contract is applicable to the arbitration agreement. As noted by the High Court, however, the difficulty arises in making both of the above arguments simultaneously (at [70]). In such scenarios, the doctrine of separability offers a tangible way to connect the arbitration agreement to the main contract, despite its seeming autonomy in having been concluded before the underlying contract.

 

Conclusion
As a final point, it bears nothing that the Singapore courts undertake a de novo review of the issue of whether an arbitral tribunal has jurisdiction (Sanum Investments Ltd v Government of the Lao People’s Democratic Republic [2016] SGCA 57 at [41]-[43]). In comparison, the Swiss Supreme Court can only conduct a restrictive examination of an arbitrator’s decision and was, consequently, precluded from reviewing the parties’ intent to be bound by the arbitration agreement, in the above mentioned case, once the arbitrator had ruled (positively) on the same.

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Third-Party Funding: Milan Event Offered A View Ahead

Wed, 2017-02-01 22:18

Pietro Fogari and Michele Curatola

Lombardi Segni e Associati

On Friday 13 January 2017, the Italian law firm Lombardi Segni e Associati hosted an ICC YAF event on Third-Party Funding (“TPF”) at its Milan office. The debate was introduced by Philippe Pinsolle (Partner, Quinn Emmanuel), key-note speaker of the event. Yasmin Mohammad (Senior Counsel, Vannin Capital), Shannon Lazzarini (Head of Group Litigation, Unicredit) and Pietro Galizzi (Retail Market Gas & Power Legal Assistance Senior Vice President, Eni) addressed the quantitative and qualitative assessment of a possible case to be funded. Steven Friel (CEO, Woodsford Litigation Funding), Georg Scherpf (Senior Associate, Luther) and Benjamin Gottlieb (Associate, Schellenberg Wittmer) addressed the most negotiated issues and clauses of a funding agreement.

The speakers and the lively crowd discussed, among the others, a number of though-provoking comments.

TPF is a direct consequence of the 2008 financial crisis. The 2008 crisis has been regarded as responsible for several financial inconveniences and social repercussions. Regardless of the reasons behind the crisis, the financial crunch has left less money for all market players, including corporations. A few further consequences can be listed in turn here: (i) difficulties to have debts paid; (ii) low returns on traditional investments on financial markets; (iii) failure of projects and transactions; (iv) increase of disputes – both litigation and arbitration proceedings – with substantial amounts of money at stake. This is rather forthright: disputes between impecunious parties have made TPF essential for them and, at the same time, the activity of hedging the risk, as it is often opted by solvent entities, has transformed TPF into a proper fruitful business for funding entities.

What is happening now is that the application of TPF is driving its own regulation and not vice-versa. TPF is an industry which is subject to changes every day. It is well-known that a number of jurisdictions have traditionally either banned or not regulated TPF. This was the case of Singapore and Hong Kong, respectively. Although one of the conventional reasons behind TPF is to guarantee access to justice also to parties that have no financial resources to litigate/arbitrate their disputes, a long-established ground not to consider TPF has been its potential characterization as an offense to the English doctrines of maintenance and champerty. Champerty and maintenance have been considered illegal for two main public policy reasons. First off, it is considered desirable to restrain excess litigation for the effectiveness and efficiency of any judicial system. Second, and most important, champerty and maintenance are supposed to bring money to an individual who was unconnected to the essence of the dispute and not personally harmed by the other party. Nonetheless, these common-law theories appear to be out-of-date today. England, US and Australia already provide for and encourage TPF, whilst other countries are in the process of following their steps. Singapore and Hong-Kong are meaningful examples of this cultural shift. On 10 January 2017, the Singapore Parliament amended the Civil Law Act and allowed, in principle, the use of TPF in international arbitration. Hong Kong seems to be following the same path: a few months ago, crucial legislative amendments to the Hong Kong Arbitration Ordinance were proposed, in order to formally abolish the doctrine of champerty and maintenance, and allow TPF in international arbitration. For all other jurisdictions where TPF is a reality, but legislators have not provided any guidance yet, the business is driving its own regulation.

There are three issues on which the discussions will be focused in the immediate future: consolidation, eligibility and control. The funding entities usually operate as hedge funds, dealing with financial businesses with a focus on claims. They mainly operate on a portfolio basis, which is the only way to obtain returns, and aim to transform claims into a class of assets. Having said that, consolidation means that today major funds are in the process of acquiring other funds and grow in size. From the clients’ perspective, this will imply a reduced number of players in the legal services funding industry; thus, clients will have less power to leverage while negotiating a funding agreement. As to the claims’ eligibility to be funded, this is and will remain necessarily limited. In addition to the reasonable high expectations to be eventually successful, eligible claims need to have some value (i.e., monetary value); the final decision needs to be capable of being enforced with a certain degree of fluency; and the party seeking funding from external resources needs to be assisted by experienced and skilled counsel. The concurrent existence of all these requirements limits substantially the range of action of TPF. Lastly, as to control, the issue whether and to what extent the third-party funder is entitled to be involved in the dispute and in the strategic determinations throughout the proceedings – up to the point to get even control over it – is still debated.

In addition to the above, the ICC YAF event in Milan was gripping also because of TPF’s practical features offered by the panellists, especially by the representatives of funds and counsel with experience in TPF. Through a deep and pragmatic inspection of the process leading to a funding agreement (all the main steps were taken into consideration: from the signature of a non-disclosure agreement to the due diligence analysis, and the exclusivity agreement), the speakers laid out a funding agreement template, and explored its most common negotiated clauses. Particular focus was put on success-fee clauses and their possible distinct structures.

What about Italy?

Despite the seat of the conference, interestingly, no questions have been raised on the implementation of TPF in Italy. Here the situation is peculiar. However, there is interesting room for future improvements. In our opinion, Italy presents the suitable features to fit into this business. As a matter of fact, Italy, unfortunately, suffered from the 2008 crisis fiercely and the number of disputes involving Italian undertakings boosted over the past 8-10 years. As a consequence of the crisis and the on-going economic situation, returns on traditional investments have been drastically low. Hence, in theory a great number of parties may be interested in obtaining funds in order to handle their disputes.

However, TPF is largely foreign to Italy today. There are at least two reasons for this. First, users do not seem to feel the need to resort to litigation funding. Costs of domestic litigation before national courts are still low and affordable compared to other jurisdictions where litigating parties can foresee significant expenditures, also in light of specific stages of the proceedings, such as the discovery. By way of example, in Italy the highest filing fee (which represents the court’s costs) for a first-instance civil proceeding is €3,372. Average counsel’s fees for a full-fledged civil proceeding worth around €1M can be around €30,000 (according to the parameters used by judges to award attorneys’ costs and fees). Second, litigation funders might find problematic to assess certain essential elements of their investment plan, such as the length of proceedings before Italian courts (from the inception to the enforcement stage, if any) that cannot always be foreseen with certainty.

Nonetheless, it is our view that, with the increasing popularity of domestic and international arbitration, the TPF business might find its way into the Italian legal system, as also solvent parties may start to seek funding to allocate the risks in major disputes. Whereas it often seems impossible to predict future trends in the Italian legal market, the vivid interest shown in the Milan event speaks volumes about the market’s appetite for this business.


The views expressed in this article are those of the authors alone and should not be regarded as representative of, or binding upon, the ICC YAF and/or Lombardi Segni e Associati.

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Summary Procedure in the SCC Arbitration Rules of 2017: Shifting the Paradigm of Preliminary Objections in International Arbitration

Wed, 2017-02-01 03:24

Yunus Emre Akbaba

Turkish Arbitration Review

The new arbitration rules of the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC Rules” or “Rules”) entered into force on 1 January 2017. These Rules introduced a new procedure in Article 39 that is, in fact, uncommon to most of the renowned arbitration rules, including the ICC Rules of Arbitration (2012), the LCIA Arbitration Rules (2014), the ICSID Arbitration Rules (2006), and the UNCITRAL Arbitration Rules (2010). The said article in the pertinent part reads as follows:

Article 39 Summary procedure
(1) A party may request that the Arbitral Tribunal decide one or more issues of fact or law by way of summary procedure, without necessarily undertaking every procedural step that might otherwise be adopted for the arbitration.
(2) A request for summary procedure may concern issues of jurisdiction, admissibility or the merits. It may include, for example, an assertion that:

(i) an allegation of fact or law material to the outcome of the case is manifestly unsustainable;
(ii) even if the facts alleged by the other party are assumed to be true, no award could be rendered in favour of that party under the applicable law; or
(iii) …

Article 39 empowers SCC tribunals, at the request of either party, to rule on certain issues of fact or law in a summary procedure. As its name suggests, a review under the summary procedure will not involve a thorough assessment of the facts surrounding the case. It will rather provide parties with an opportunity to isolate certain matters of fact or law, and bring them separately to the attention of arbitral tribunals at any time throughout the proceedings, and even obtain an early judgment confined to these particular matters.

Furthermore, such a request for summary procedure under Article 39 does not necessarily have to take the form of accustomed preliminary objections such as jurisdictional and/or admissibility objections, but parties may even seek for a decision on a matter pertaining to the merits of the case.

The possibility of obtaining a decision on a particular issue relating to the merits could perhaps be deemed as the most distinctive feature of the summary procedure. This is especially so because of the fact that parties to arbitration are already able to seek a decision on the matters of jurisdiction and admissibility by way of preliminary objections without a need for a summary procedure; however, a conclusive resolution on a merits-related issue, broadly speaking, has not so far been possible before a final award is rendered.

While it is true that it is too early to foresee how parties will make use of Article 39, and arbitral tribunals react to requests thereunder, the benefits of such provision for arbitral proceedings in general, seem to be evident.

First, and for obvious reasons, the summary procedure will ensure procedural economy by allowing a party against whom an unsustainable, meritless, or even abusive claim is brought an opportunity to terminate the proceedings at an early stage. This possibility is clear from Article 39 (2) as it expressly illustrates two instances where such a request for summary procedure might be made (see above, Article 39 (2) (i) and (ii)).

These two grounds for a request for summary procedure are, in essence, not novel to international tribunals. The wording adopted in Article 39 (2) (i) and (ii) is similar to the manner in which the International Court of Justice described the general form of admissibility objections on several occasions, most famously in the Oil Platforms Case. (See, Oil Platforms [Iran v USA]). The same description has also been followed by some of investment tribunals. From this perspective, Article 39 of the SCC Rules might partly be viewed as a codification of the practice of international tribunals. This being said, such a codification was indeed crucial and needed. Namely, there is no description with respect to the extent and form of admissibility objections either in the Statute and the Rules of the Court (1978) or in arbitration rules. That leads to inconsistent applications, especially among investment tribunals, as it will be discussed below.

In line with the first benefit, which serves the procedural economy, the SCC summary procedure may also put an end to the ongoing debate around the distinction between jurisdiction and admissibility. To be more precise, it might be argued that the summary procedure contained in the SCC Rules may render the implications of this distinction irrelevant. Arbitral practice has, so far, shown that, in bifurcated proceedings, arbitral tribunals are often inclined to reject to rule on admissibility objections and certain types of jurisdictional objections (most commonly objections to jurisdiction ratione materiae) raised by parties due to two main reasons. First, there is only limited evidence before the tribunal at this stage to rule on such complex objections. Second, a ruling on preliminary objections of this kind highly carries the risk of interfering with the merits, or prejudging them. Accordingly, numerous merits-related issues remain non-adjudicated at the jurisdictional stage, and they are forwarded to the merits phase without any conclusive determination by tribunals on points of fact or law. Consequently, the party previously raising such objections has to bring the same matters before the tribunal again at the merits stage, and other party naturally responds to these objections. This not only entails a waste of the time spent by the parties when raising and responding to the voluminous objections of this kind, but also the time spent by tribunals when reviewing these preliminary objections. Moreover, it also obliges arbitral tribunals to give a ruling at the merits stage on the issues which do not, in fact, fundamentally belong to the merits.

In an ideal bifurcated proceeding, tribunals are expected to discuss only the core substantive claims underlying the dispute at the merits stage, e.g., whether there is a violation of the relevant contract/treaty or not. Inadmissible claims, or any other claim which is not legally feasible to a determination on its merits, should be eliminated at the jurisdictional stage. It, therefore, seems that Article 39 of the SCC Rules will be an effective tool which will ensure more efficient and expeditious functioning of the merits stage by enabling parties to request arbitral tribunals to conclusively resolve the matters which are important to maintain the integrity of the merits at an early stage.

Another benefit of Article 39 is the strengthening of the mandate of arbitral tribunals to conduct the proceedings. As stated above, the lack of an explicit legal ground prevented some tribunals to rule on admissibility objections. These tribunals were of the opinion that they cannot rule on the admissibility of claims, as applicable rules do not accord them any power to do so. Also, regarding treaty arbitration, Methanex case is a clear example where the tribunal had categorically rejected to rule on admissibility objections by arguing that the applicable rules do not confer on the tribunal any power to rule on the admissibility of the claims. Some other tribunals did not expressly reject giving a ruling, but they simply disregarded such objections, and decided to join them to merits – again, primarily due to the risk of trespassing to the merits with lack of full evidence. One may argue that arbitral tribunals may freely decide on merits-related issues for this is already inherent to the tribunals’ general power to conduct the proceedings. Nevertheless, Article 39 of the SCC Rules provides an effective legal ground for tribunals to rule on such preliminary objections without any fear of intervention in the merits or acting ultra petita in the form of a summary procedure, subject to the parties’ request. Arbitral tribunals will have diminished discretion to disregard such preliminary objections given that, under the clear language of Article 39 (1), the lack of full evidence or trespassing into the merits will no longer be an easy excuse to make. After all, Article 39 will also pave the way for an established case law.

In bifurcated proceedings, a ruling on the admissibility of claims in conjunction with rulings on the objections to subject-matter jurisdiction might be a very effective procedural tool for tribunals to make a prima facie review of the case, sort out the core claims to be heard at the merits stage, and hereby exclude inadmissible and sometimes abusive claims at the very early stage of the proceedings. Put differently, they may enable arbitral tribunals to narrow down the scope of the claims to be ruled on at the merits stage, and this may facilitate resolving disputes in a prompt and efficient manner. However, due to the practical concerns hitherto discussed, preliminary objections did not always serve well to prepare a case for a trial on merits. It is likely (and expected) that future arbitral proceedings to be conducted under the auspices of the SCC Institute will make a paradigm shift.

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Bye-Bye BITs? Poland Reviews Its Investment Policy

Tue, 2017-01-31 04:04

Marcin Orecki

AGP Metro Polska Astaldi S.p.A. Gülermak Agir Sanayi Inşaat ve Taahhüt A.Ş. s.c.

Much ink has recently been spilt on the Investor State Dispute Settlement (“ISDS”) system, especially in the light of the Comprehensive Economic and Trade Agreement (“CETA”), and the Transatlantic Trade and Investment Partnership (“TTIP”) (summary of criticism recently collected by G. Kaufmann-Kohler, M. Potesta, at 10, available here). The existence of a potential overlap and conflict between Bilateral Investment Treaties (“BITs”) concluded between EU Members (intra-EU BITs) and the EU single market is also widely commented (see, for example, this post, and a pending case before the Court of Justice of the European Union C-284/16, Achmea). The Republic of Poland (“Poland”), as an EU Member State, is naturally a part of the debate over the TTIP, CETA, and intra-EU BITs. In June 2015, the EU Commission commenced the EU PILOT procedure against Poland – a scheme designed to resolve compliance problems without having to resort to infringement proceedings – regarding intra-EU BITs.

Poland is a contracting party to approximately 60 BITs (23 of them are intra-EU BITs) and the Energy Charter Treaty. Interestingly, Poland is not a contracting party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. Unfortunately, investment arbitration cases involving Poland are not publicly available. Recently, public was informed that eleven investment proceedings were pending, with the estimated claim value reaching approximately 2 billion EUR.

During past years, after a few attempts were made via administrative courts to advocate for the publication of investment arbitral awards, superficial, very general, and scarce information about a few cases were made known to the public. The Regional Administrative Court in Warsaw (see judgement of 25.10.2012, case no. II SAB/ Wa 252/12; judgement of 7.05.2013, case no. II SA/Wa 2249/12; judgement of 17.06.2014, case no. II SA/Wa 1390/13) and the Supreme Administrative Court of Poland (see judgment dated 28.04.2016, case no. I OSK 2456/14) stated that an arbitral award rendered against Poland is public information which should be disclosed to the public under the Access to Information Act. The Supreme Administrative Court decided also that a settlement reached before an investment arbitral tribunal is public information (see judgement of 28.04.2016, case no. I OSK 2706/14). The issue whether mere information about the statement of claim against a state in investment arbitration or pending arbitration case is qualified as public information has not yet been resolved in the case law.

In February 2016, one of the high officials of the Ministry of Treasury of Poland stated in the Polish Parliament that investment arbitration constitutes a serious threat to Poland, which justifies an immediate termination of BITs (available in Polish here). This statement, however, was followed by the official statement of the Ministry which focused on the termination of intra-EU BITs (available here).

Almost a year later, on 5 January 2017, the Prime Minister of Poland rendered the regulation no. 1 by which she appointed an interministerial group for the legal and international aspects of the investment policy of Poland (“Regulation” – published on 11 January 2016 in the Official Journal of the Republic of Poland, item 21, available in Polish here) (“Working Group”) . The Working Group consists of permanent members and non-permanent members. Permanent members are the representatives of the ministries of the Polish Government and representatives of the State Treasury Solicitors’ Office (as of 1 January 2017, General Counsel to the Republic of Poland). The Working Group is an advisory body to the Prime Minister of Poland (§ 3 of the Regulation). Non-permanent members (external experts) may take part in discussions of the Working Group with an advisory role (§ 3 sec. 3 of the Regulation).

The Working Group will prepare recommendations for the Prime Minister of Poland regarding issues related to the investment policy of Poland and ISDS mechanism included in International Investment Agreements (“IIAs”). The tasks of the Working Group can be categorized in the following way:

First, the revision and analysis of binding IIAs to which Poland is a Contracting Party in light of EU Law, economic interests of Poland, and economic interests of Polish investors. Additionally, the analysis of rules and consequences of the termination of the intra-EU BITs will be conducted. Even though the Regulation explicitly refers only to the potential termination of intra-EU BITs, wording of § 2 sec. 1 of the Regulation in connection with Justification to the Regulation (“Justification”, available in Polish here) suggests that the Polish Government did not limit the revision to the intra-EU BITs, and that evaluation of the potential termination of other BITs will be provided as well.

According to the Justification, many investors these days abuse rights and protection granted to them in BITs by using BITs as an additional and free insurance for their investments (at 1-2 of the Justification). Further, the Justification raises question of whether any particular reason exists for the preference of investors protected by BITs, if Poland is, an EU Member State, established democracy which respects market rules and has a confident, independent, and impartial judiciary system (at 2 of the Justification). Moreover, it is stressed that BITs do not contain provisions upholding protection of labor, environment, and natural resources.

Finally, the Justification states the following:

“Polish investors do not benefit from the protection granted by BITs, but Poland is sued by foreign investors. According to the information from the State Treasury Solicitors’ Office, despite the fact that 98% cases against Poland are won (cases settled are considered to be won as well), Poland bears the costs of arbitral proceedings”.

All these arguments may justify revision, renegotiation, and termination of BITs (at 6 of the Justification).

Regarding intra-EU BITs, the Justification refers to the Polish declaration provided within the PILOT procedure. Namely, Poland is willing to terminate intra-EU BITs by joint declarations of all EU Members, or by a mutual agreement between BITs contracting parties, or by a unilateral termination (at. 5 of the Justification).

At this point, the Poland-Italy BIT, dated 10 May 1989, expired on 9 January 2013 due to Italy’s termination (investments are protected until 8 January 2018). In 2016, Poland received official notifications from Romania and Czech Republic as to the termination of their respective BITs concluded with Poland, with an immediate effect and without the application of sunset clauses. The Justification confirms that Denmark is also going to file a similar notification to Poland (at. 5-6 of the Justification).

It must be underlined again that there is no clear division between the intra-EU BITs and BITs with non-EU Members within the analysis to be conducted by the Working Group. Advantages and drawbacks of investment protection and ISDS system concern all BITs. However, it seems that there are more arguments for termination of intra-EU BITs.

Second, the Working Group will prepare a list of potential states with which Poland should conclude IIAs, and a new model BIT which can be concluded with these states. Moreover, a revision and analysis of draft IIAs negotiated by the EU will be conducted.

Even though the Justification contains a critical review of IIAs, it provides information that the Working Group should also try to establish a list of potential developing states with which Poland can potentially conclude BITs. In this part, the Justification underlines advantages of BITs for Polish investors (at 3 of the Justification). Consequently, the Justification shows that the statement of the Polish Government towards IIAs is ambivalent. On the one hand, Poland wants to revise, renegotiate, and terminate BITs as Polish investors do not benefit from BITs protection. On the other hand, Poland commences negotiations regarding new BITs.

According to the Justification, Poland is going to commence negotiations with Ethiopia, Angola, Nigeria, and Senegal. One of the tasks of the Working Group is to draft a new model BIT, using experience from the EU-US and EU-Canada negotiations on the TTIP and CETA (at 3 of the Justification).

Third, the Working Group will provide an analysis of disputes commenced by investors against Poland. The Justification does not provide any detail explanation as to this point. The Working Group will probably discuss internally all pending arbitrations against Poland, and share experiences regarding ISDS in a current form (at 6 of the Justification).

In conclusion, Poland is clearly sceptical regarding investment protection granted by BITs containing an ISDS system in a current form. That will most likely lead to the termination of some of the BITs (especially intra-EU BITs). On the other hand, Poland leaves some space for further discussion regarding the revision of current BITs (the scope of the protection granted to investors, new ISDS system), at least with non-EU Members. The establishment of the Working Group is welcome. It may help in the formulation of a new Polish investment policy, including the revision of the ISDS system.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of the AGP Metro Polska Astaldi S.p.A. Gülermak Agir Sanayi Inşaat ve Taahhüt A.Ş. s.c., its affiliates, or its employees.

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The Validity of an Arbitration Clause Incorporated by Reference: A Step Forward by Russian Courts

Mon, 2017-01-30 03:00

Mikhail Samoylov

Egorov Puginsky Afanasiev & Partners

The question of the validity of an arbitration clause incorporated by reference is debatable in international arbitration. The approach of national courts to the issue varies from jurisdiction to jurisdiction (e.g., see here).

The Russian Law on International Arbitration (1993) is based on the UNCITRAL Model Law. In particular, the Law provides in Article 7 that the reference in a contract to any document containing an arbitration clause constitutes an arbitration agreement in writing, provided that the reference is such as to make that clause part of the contract. In regards to whether there is a valid reference to an arbitration clause, Russian courts, from time to time, face certain legal issues either at a stage when a party to a dispute brings a case in a state court (in violation of the arbitration agreement), or at a stage of the recognition and enforcement of a foreign arbitral award. The attitude to the problem differs among courts.

There was some positive development in the field, and a recent decision in the case A60-12039/2016 promoted a rather pro-arbitration approach to this issue. Prior cases served the opposite approach, under which courts more often than not refused the recognition and enforcement of a foreign arbitral award because they concluded that the arbitration agreement formal requirements were not fulfilled when the arbitration agreement was claimed to be concluded by reference.

For example, in the case A53-15628/2016, a party (a seller) sought the recognition and enforcement of the arbitral award rendered in New York. The dispute arose from a contract for the supply of oil products. The contract had a reference to the seller’s General Terms and Conditions (“Terms”) which contained an arbitration clause. These Terms were made a part of the contract.

Although arbitrators found that they had jurisdiction over the dispute, and that there was an arbitration agreement incorporated by reference, a Russian state court, the Arbitrazh Court of the Rostov region, had an opposite view. The court concluded that the arbitration agreement had not been concluded in writing in the examined case, and hence was invalid.

Despite the fact that the Russian Law on International Arbitration has a provision under which the reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement in writing, the court did not recognise that the reference to another document falls under criteria “in writing”. The weak argumentation of the ruling deprives us of the possibility to understand logic of the court. Still, the case A53-15628/2016 is an example of a rather formalistic, and somewhat arbitration unfriendly, approach.

In this context, the case A60-12039/2016 goes far further.

A., a company incorporated in Ukraine, entered into an agreement with B., a company incorporated in Russia. The agreement was related to a transfer of an internet number resource (an IPv4 address).When a dispute arose, A. demanded the return of the IPv4 address, and as a claimant brought the case before the Arbitrazh court of the Sverdlovsk region (a Russian state court).

B. invoked Article 148(1)(5) of the Russian Arbitrazh Procedural Code and objected to the court proceedings. That article, in the vein of Article II (2) of the New York Convention, provides that the court is to leave the claim without consideration. It means that the court terminates the proceedings without prejudice if there is an arbitration agreement between the parties, unless the court finds that the agreement is invalid, inoperative, or incapable of being performed. B. invoked the existence of an arbitration clause between the parties. A., in contra, argued there was no arbitration agreement between the parties, and that the court had jurisdiction to hear the case.

By its ruling on 30 June 2016, the Arbitrazh Court of the Sverdlovsk region has endorsed the defendant’s objection, terminated the proceedings, and referred the parties to arbitration. The ruling has been upheld both by an appeal court – the 17th Arbitrazh Appeal Court (decision of 1 September 2016), and by a court of cassation – the Arbitrazh court of the Ural region (decision of 16 November 2016).

Considerations

The arguments of the Arbitrazh court of the Ural region will be considered onwards.

Preliminary, the Court underlines that both A. and B. are members of the Réseaux IP Européens Network Coordination Centre (hereinafter: “RIPE NCC”), which is the regional Internet registry for Europe, the Middle East, and parts of Central Asia.

Each legal entity who plans to obtain services from the RIPE NCC and, therefore, become a member of the RIPE NCC has to enter into the RIPE NCC Standard Service Agreement (hereinafter: “Standard Service Agreement”). Both A. and B. have entered into the Standard Service Agreement.

The Standard Service Agreement in its Article 6 provides that the members of the RIPE NCC have to comply with the RIPE policies and RIPE NCC procedural documents. The RIPE NCC Conflict Arbitration Procedure and the Transfer of Internet Number Resources (hereinafter: “Policy”) are amongst them.

Furthermore, the court examined the question of whether there was an arbitration agreement between the parties. The court noted that the RIPE Standard Service Agreement in Article 11 provides for any disputes which may arise from the Standard Service Agreement to be settled in accordance with the RIPE NCC Conflict Arbitration Procedure. Article 11 is nothing more than an arbitration clause. The Court acknowledged that:

  1. A. and B. are parties to the RIPE NCC Standard Service Agreement,
  2. they have known about the arbitration clause as well as a whole policy related to arbitration, and
  3. they have undertaken obligations to comply with, inter alia, the RIPE NCC Conflict Arbitration Procedure.

Having reached this inference, the court concludes that the dispute which arose between the parties falls within the aforesaid arbitration clause, which is a valid arbitration clause, and consequently the court terminated the proceedings.

Conclusions

“Where the document referred to contains an arbitration clause, a question arises as to whether the reference to that document is sufficient for the parties to be bound by the arbitration agreement.” (Fouchard, Gaillard, Goldman on International Commercial Arbitration (Kluwer Law International 1999) 272).

The two cases mentioned above serve as a good basis to show how broad the specter of the application of this rule is. Of course, the circumstances of each case need to be taken into account, but the cases are similar enough to show how unpredictable the answers to a situation involving the conclusion of an arbitration agreement by reference can be.

In regards to the case A53-15628/2016, one may conclude that the existence of the reference to a document containing an arbitration clause (the seller’s General Terms and Conditions) is not enough to make a conclusion that an arbitration agreement is concluded in writing. Perhaps, a judge had in mind that the document containing an arbitration clause should be agreed on by both parties, while the document was set out by one of the parties, leaving no opportunity for the other party to negotiate more favourable terms (“take it or leave it” position).

In contrast, in the case A60-12039/2016, courts consistently decided the issue of the existence of an arbitration agreement under extremely broad terms, which, in fact, happens rarely.

The Policy, along with the agreement, constitutes a contract between the parties. There is no doubt that the contract has been concluded in consideration of services are provided by the association. Having become a member of the association, by entering into the Standard Service Agreement, both parties have agreed to comply with the policies and procedures of the association. One of the procedures is an agreement to arbitrate. It is an explicit provision. The parties knew this and this provision has been accepted. The requirement that an arbitration agreement shall be in writing was met and, therefore, the arbitration agreement was valid under the Russian Law on International Arbitration.

The latter case is a good example of the arbitration-friendly attitude, and worthy of mentioning in order to bring a fresh look onto the validity of arbitration clauses incorporated by reference in Russia.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Egorov Puginsky Afanasiev & Partners, its affiliates, or its employees.

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China’s Path to Ad Hoc Arbitration emerges from the Free Trade Zones

Fri, 2017-01-27 19:12

Sophia Feng

Singapore International Arbitration Centre

On December 30, 2016, the Supreme People’s Court (“SPC”) issued Opinions on Providing Judicial Protection for the Construction of Pilot Free Trade Zones (“FTZ”) (“Opinions”). The Opinions are tailored to safeguard judicial reform even as it attempts to tackle the urgent issues within the FTZ.

Article 9 of the Opinions further addresses ad hoc arbitration. Practitioners are galvanized and have received the Opinions with a warm reception. Ad hoc arbitration agreements may now be concluded between enterprises in FTZs.

This article will first explain SPC’s previous rejection of the recognition of ad hoc arbitration agreements in China. Then it will illustrate the merits of Art. 9 (1) and Art. 9 (3.1) of the Opinions. It will finally offer the writer’s suggestions for the incorporation of ad hoc arbitration into Chinese law.

Ad hoc arbitration agreements concluded within mainland China have long been denied recognition, even though such agreements may be the dominant form of international commercial dispute resolution. Recognition of arbitration agreements is governed by Article 16 of the PRC Arbitration Law (1994). Art. 16 provides that “an arbitration agreement shall include the chosen arbitration commission.” This means a valid arbitration agreement must select and clearly identify a specific arbitration institution that will supervise the contemplated arbitration. However, the absence of any guiding arbitration institution is the key distinction of ad hoc arbitration. Parties shall determine and agree on their own arbitration procedures.

Hence, when confronting an ad hoc agreement, Chinese courts would regard it as invalid since parties must choose a specific arbitration commission. In Zueblin International v. Wuxi Woco Corporation (2004), the Wuxi Intermediate Court decided the Arbitration Clause Zueblin invoked was invalid. The specific language there stated, “Arbitration 15.3 ICC Rules Shanghai shall apply.” The only way the Court could have validated the clause was by re-interpreting the clause to accord the appointment of chosen arbitration commission. In RuiFu Shipping Co. v. ZhenHong Energy, both parties agreed to the following: “English law to apply arbitration in Xiamen, Fujian province.” However, the specific name for the arbitration commission in Xiamen was missing. The Higher Court of Guangdong province redefined the clause, pursuant to Article 6 under the Interpretation on Issues regarding PRC Arbitration Law (2008). It ruled that the agreement was valid because it found that the Xiamen Arbitration Commission was the sole arbitration institution in this location. In this case, recognition of the agreement was still predicated upon the concept of a host institution guiding the arbitration.

Interestingly, such strict criteria do not mean Chinese courts will categorically refuse to recognize an ad hoc arbitration agreement. Parties can arbitrate outside China where ad hoc arbitration is accepted. Alternately, parties may choose a different law to govern their arbitration agreement’s validity when arbitrating in China. China is a party to the New York Convention. Therefore, the SPC will respect party autonomy and apply a choice-of-law rule that enables Chinese courts to recognize and enforce many arbitration awards. The choice-of-law rule was adopted by Chinese legislators in the Law on Application of Law in Foreign-related Civil Relations. In cases before Chinese courts where the validity of an ad hoc arbitration agreement is being challenged, the ad hoc agreement will not be invalid solely because it does not call for institutional arbitration. Rather, such an agreement will be enforced as long as the parties have specifically chosen, and are permitted to choose, a law which allows for ad hoc arbitration.

To strengthen the scope and validity of ad hoc arbitration, Art. 9 (3.1) of the Opinions provides a relief for enterprises registered in the FTZ. It eliminates the requirement of choosing an arbitration commission in the agreement for such enterprises. In its place, it demands three other requirements: a specific location for hearing, designated arbitrators, and mandatory arbitration rules. Ad hoc arbitration that qualifies under those grounds may be acknowledged by the Chinese courts.

The Opinions crystallizes the interpretation of “foreign element” in an arbitration agreement. Art. 9 (1) allows “parties [that] are wholly-owned foreign enterprises that legally incorporated or registered in the FTZs agree to file an arbitration to a foreign arbitration institution.” The Opinions further instruct how “people’s courts shall not determine the arbitration agreement invalid solely base on the fact that no foreign elements were involved in the disputed issues.” It may be reasonably assumed that parties qualifying under these grounds are entitled to arbitrate their case in an arbitration institution, either at home or abroad.

Prior to the Opinions, one decision made by the Shanghai No. 1 Intermediate Court signaled the recognition of arbitration agreements and foreign arbitral awards for parties registered in the FTZ. In Siemens Co. v. Shanghai Golden Property (2015), the court decided that the arbitration agreement stating, “parties’ disputes shall be brought to SIAC and SIAC rules shall be applied” was valid. It ultimately recognized the SIAC arbitral award.

This decision set the bar for determining “the involvement of foreign elements,” i.e., parties shall be (1) wholly-owned foreign enterprises; but also (2) legally incorporated or registered within the FTZ. In this case, both parties met both criteria, and their arbitration agreement was validated. This decision, reinforced and bolstered by Art. 9 (1) of the Opinions, opens the door for wholly-owned foreign enterprises that legally incorporated or registered within the FTZs to commence their arbitrations in a foreign arbitration institution, such as SIAC. And “lack of foreign element” would not be the sole reason for Chinese courts to outlaw an arbitration agreement.

Despite the open acclaim for the Opinions, the SPC has remained ever cautious as it implements milestone decisions and reforms. First, in Art. 9 (3.1) of the Opinions, the SPC employed the wording “may be deemed as valid” instead of “shall be deemed as valid.” An ad hoc arbitration is closely associated with the involvement of people’s courts at different levels, thus territorial jurisdiction and award enforcement are essentials to consider when determine an arbitration agreement. Second, as stipulated in Art. 9 (3.2), parties are to go through a lengthy process to gain an approval from the SPC if the arbitration agreement is challenged. The SPC still has firm control and power over the latest and most controversial cases. The application of Art. 9 of the Opinions is still limited. It applies only to the arbitration agreement concluded between enterprises registered in the FTZs. The modification of relevant laws will only take place if such practice proves effective at dispute resolution, at least according to Zhang Yongjian, the presiding judge of the 4th Civil Division of the Supreme People’s Court of China. (From the SPC’s Press Conference on Jan 9th, 2017).

Recognizing ad hoc arbitration agreements and awards is necessary. The international arbitration system based on New York Convention has integrated the international practice of dispute resolution. Further persisting in requiring an appointing institutional arbitration would only hamper the continuing development of arbitration in China. However, the complete incorporation of ad hoc arbitration into Chinese law requires still more than merely the elimination of the appointing arbitration institutions requirement. Statutory PRC Arbitration Law remains founded upon the basic requirement that all arbitrations seated in China shall be institutional.

Although concerns remain, the Opinions harmonized the conclusions from previous rulings and clearly signal the future trend for Chinese arbitration legislation and practice. The Opinions provide the legal basis and guideline for judges, practitioners, and parties to apply ad hoc arbitration. The predominant effect of the Opinions will be to strengthen the environment for foreign arbitration institutions. This will allow institutions to better serve China’s arbitration practice.

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Towards the Uncertainties of a Hard Brexit: An Opportunity for International Arbitration

Thu, 2017-01-26 23:12

Guillaume Croisant

Linklaters

Last week, Theresa May delivered her long-awaited speech setting out Britain’s broad objectives in forthcoming Brexit negotiations with the EU. She confirmed the rumours of a “hard Brexit” by indicating Her Majesty’s Government’s intention to see the UK out from the Single Market and the Custom Union and to seek “a new and equal partnership […], not partial membership of the European Union, associate membership of the European Union, or anything that leaves us half-in, half-out. We do not seek to adopt a model already enjoyed by other countries. We do not seek to hold on to bits of membership as we leave”. She further warned the EU negotiators that “no deal for Britain is better than a bad deal for Britain” and highlighted her willingness to build a “Global Britain”, “free to strike trade agreements with countries from outside the European Union”.

Whether this blueprint towards a hard Brexit will lead to a “stronger, fairer, more Global Britain” has yet to be seen, but may well offer new opportunities to commercial and investment arbitration.

Brexit, with or without a deal, should not be effective before mid-2019 at the earliest. Although Theresa May had announced the triggering of Article 50 TFEU before the end of March 2017, this date could be postponed because of Tuesday’s ruling of the UK Supreme Court ([2017] UKSC 5) prescribing an Act of Parliament for the triggering of Article 50. It will then be highly likely that the negotiations between the EU and the UK will last at least the two-year period provided for by this provision.

The consequences of Brexit for international litigations and the drafting of international contracts may therefore be seen as relatively remote. That, however, would mean forgetting that many of the dispute resolution clauses of the contracts concluded today will be relied upon in several years, i.e. after the UK’s withdrawal from the EU. In this context, drafters of international contracts with UK/EU aspects seeking legal certainty would be well advised to opt for international arbitration rather than litigation. Indeed, as summarised below, a hard Brexit will have an uncertain, and potentially significant, impact on private international law whereas its legal consequences on international commercial arbitration should be foreseeable and limited.

Private international law has been gradually harmonised at the EU level. In civil and commercial matters, the law applicable to contractual and non-contractual obligations is mainly governed by, respectively, the EU Rome I and Rome II regulations whereas conflicts of jurisdictions and judicial cooperation are governed by the EU Brussels I recast regulation and the Lugano Convention (which has extended the Brussels I regulation’s regime to Iceland, Norway and Switzerland). In addition, many other ancillary instruments, aiming at building other aspects of the European judicial area, have also been adopted at the EU level (e.g. common rules on taking of evidence, harmonised procedures such as the European enforcement order for uncontested claims, etc.).

In order to “provide certainty wherever we can”, Theresa May indicated that “as we repeal the European Communities Act, we will convert the ‘acquis’ – the body of existing EU law – into British law”. This should be done without hurdles with regard to choice of law. The UK could indeed replicate the rules of the Rome I and Rome II regulations into its domestic legislation. Since these instruments have a universal nature, EU courts will continue to apply them even if the choice of law rules lead to the application of English law.

However, the same does not apply to conflicts of jurisdictions and the European judicial area which are based on reciprocity. The mere fact of the UK implementing the rules of the Brussels I recast regulation and the other ancillary instruments into its domestic law would not entail the application of these rules by the courts of EU Member States facing an English judgment, a jurisdiction clause designating English courts or parallel proceedings conducted in England. In the absence of a specific convention, the UK will be considered as a third State for the application of these instruments.

Besides an ad hoc mechanism extending the Brussels I recast regulation regime to the UK, it has been argued that several other private international law instruments could potentially be relied on in order to avoid these consequences: the 2007 Lugano Convention on jurisdiction and the enforcement of judgments in civil and commercial matters; the 2005 The Hague Convention on choice of court agreements; the 1968 Brussels Convention (predecessor to the Brussels I regulation) or the eight bilateral enforcement treaties concluded before the European harmonisation by the UK with, respectively, Austria, Belgium, France, Germany, Italy, the Netherlands and Norway.

However, the most straightforward of these alternatives seem difficult to reconcile with a hard Brexit while the remaining ones are far from providing a comprehensive set of rules:

• the extension of the Brussels I recast regulation to the UK is jeopardised by Theresa May’s declarations that the UK refuses to “comply with the EU’s rules and regulations without having a vote on what those rules and regulations are” and “will take back control of our laws and bring an end to the jurisdiction of the European Court of Justice in Britain”;
• the adoption of the 2007 Lugano Convention would either require the UK to become a member of the European Free Trade Association – which does not appear compatible with Theresa May’s statement that the UK “does not seek to adopt a model already enjoyed by other countries” – or to get the unanimous consent of the parties to this Convention. It would also imply the acceptance of the jurisdiction of the ECJ (see the Protocol No. 2 to the Lugano Convention). Finally, the Lugano Convention does not implement the changes brought by the recast of the Brussels regulation;
• the material scope of the 2005 The Hague Convention is limited to exclusive jurisdiction clauses concluded between professionals. Its temporal scope may also be problematic since the Convention applies merely to jurisdiction clauses concluded after the entry into force of the Convention for the State of the chosen court;
• a “revival” of the 1968 Brussels Convention appears legally doubtful since this instrument was adopted under Article 220 of the Treaty of Rome in order to develop a common judicial area between the European Community’s Member States. It would also imply the jurisdiction of the ECJ – rejected by Theresa May’s blueprint – and the application of outdated rules;
• a “revival” of the bilateral treaties appears more likely from a legal standpoint but these treaties are limited to the eight EU/EFTA above-mentioned States, have a limited material scope and provide for rather outdated rules;
• finally, transitional questions – such as the rules applicable to the recognition and enforcement, after the UK’s withdrawal, of judgments rendered before this withdrawal – are also likely to lead to further uncertainty.

In a European/Lugano context, the rules that will be applicable to the recognition and enforcement of English judgments, the jurisdiction clauses designating English courts and parallel proceedings with English courts are therefore likely to raise complex legal questions and be subject to uncertainties following an effective Brexit.

In contrast, the legal consequences of Brexit on international commercial arbitration should be limited and foreseeable since this field has been harmonised at an international rather than at an EU level and is expressly excluded from the Brussels I recast and Rome I regulations.

The 1958 New York Convention will continue to ensure the recognition and enforcement of arbitration clauses and awards in the more than 150 signatory countries (including the UK and the remaining EU Member States). As developed in a previous post of this blog, the enforceability of English seated arbitration clauses will be enhanced following Brexit, since English courts will unequivocally regain the ability to immobilise proceedings in Member State courts brought in breach of an arbitration agreement. It is indeed still unclear whether the findings of the ECJ West Tankers case (C-185/07), i.e. the prohibition of anti-suit injunctions within the EU, continues to apply following the “clarification” of the scope of the arbitration exception by the Brussels I recast regulation. In the Gazprom case, rendered after the recast, the ECJ has upheld the possibility for arbitral tribunals to order anti-suit injunctions but did not follow its Advocate General who pleaded for a general admissibility of anti-suit injunctions, whether ordered by arbitral tribunals or domestic courts. Brexit should put an end to these discussions since the UK Supreme Court ([2013] UKSC 35) has confirmed the English court’s power to issue anti-suit injunctions save for the “European inroad”.

Finally, the new opportunities offered by Brexit in the field of investment arbitration have already been highlighted in this blog. Theresa May’s blueprint confirmed the UK Government’s eagerness to conclude new free-trade agreements, with the EU, the US and commonwealth nations in particular. Given the UK’s tradition in this regard, and the importance of London in the investment arbitration market, these free-trade agreements are likely to provide for arbitration with regard to investor-state disputes though this perspective is less likely for the potential UK-EU free-trade agreement. In the wake of the CETA’s adoption, Wallonia’s rebuff and several demonstrations across Europe (notably in Germany) have indeed shown a growing mistrust of investment arbitration in the EU.

The views expressed herein reflect only the views of the author.
For a more detailed analysis of the consequences of Brexit on private international law and international arbitration, see our recent article (in French): Fog in Channel – Continent Cut Off, Journal des Tribunaux, 2017/2, pp. 24 et seq. and the special issue of the Journal of International Arbitration.

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An Unlikely Tandem of Criminal Investigations and Arbitral Proceedings: A Case Study of the INA – MOL Oil & Gas Proceedings

Thu, 2017-01-26 05:42

Ema Vidak Gojkovic

OMNIA STRATEGY LLP, London

 

Arbitral tribunals are increasingly faced with allegations of corruption. In these situations, arbitral proceedings and criminal investigations frequently go in tandem. Their findings overlap and may influence one another.

Regardless of the many instances where corruption is alleged, there have been only a few investment cases in which a finding of corruption was actually made.

Arbitral tribunals made findings of corruption in World Duty Free v. Kenya (2006) and Metal-Tech v. Uzbekistan (2013). In World Duty Free, the tribunal found that the payment of $2 million to set up duty-free airport stores constituted a bribe, invalidated the investment contract, and it denied the claimant any relief. In Metal-Tech, the tribunal found that the corrupt payment of $4 million in “consultancy” fees to the Prime Minister’s brother placed the investment outside the BIT’s protection.

In Siemens v. Argentina and Niko Resources v. Bangladesh, corruption was established on the basis of a positive finding by another authority. In Niko, Bangladesh presented a plea agreement between Niko and Canadian prosecutors, where Niko confessed to paying a bribe to the Bangladeshi Minister for Energy in 2005. Niko had not participated in any acts of corruption after 2005. Consequently, even though there was a finding of corruption, “there [wa]s no link of causation between [Niko’s] established acts of corruption and the conclusion of the agreements”, since the Bangladeshi minister who had taken bribes from Niko resigned quickly thereafter, before the signing of the relevant agreement.

The relationship between arbitral and criminal proceedings raises several interesting questions. Some of the recent Croatian arbitration cases, including the two arbitral proceedings involving INA Industrije Nafta d.d. (INA) and MOL Hungarian Oil and Gas PLC. (MOL), provide a good opportunity to analyze the impact of criminal investigations on arbitral proceedings.

INA – MOL Oil & Gas Arbitration Proceedings

INA is Croatia’s most significant enterprise in the oil & gas field. In 2002, the Croatian Parliament passed the INA Privatization Act to transform INA from a state-owned to a privatized company. In an open public tender, MOL won the tender with a bid of $505 million against OMV’s offer of $420 million.

Between 2003 and 2011, MOL progressively built up its shareholding in INA, becoming the largest shareholder of the company with a 49.1% stake. The Government of Croatia is the second largest investor with 44.84%.

In 2009, MOL gained management control of INA through the First Amendment to the Shareholders Agreement (FASHA). In the same year, the parties negotiated one more crucial contract: the Gas Master Agreement (GMA; with FASHDA: 2009 Agreements), under which INA’s gas storage and trading businesses were to be spun off into separate subsidiaries and transferred to the Government.

The circumstances in which the 2009 Agreements came about lie at the heart of the dispute. Croatia maintains that the 2009 Agreements were procured by MOL’s Chairman Zsolt Hernádi’s bribing of Croatia’s then Prime Minister Ivo Sanader.

Two Parallel Arbitrations: UNCITRAL & ICSID

In November 2013, MOL initiated an ICSID arbitration against Croatia over violations of obligations concerning MOL’s investments in Croatia (ICSID Case No. ARB/13/32). Claims are asserted under the Energy Charter Treaty for the unfair and inequitable treatment and expropriation of MOL’s investments in Croatia.

In January 2014, Croatia responded to MOL by filing an UNCITRAL arbitration (PCA Case No. 2014-15) pursuant to the INA Shareholders Agreement and GMA, with the place of arbitration in Geneva, Switzerland. The Government requested that the 2009 Agreements be declared null and void, that MOL pay damages caused by its conduct, and account to Croatia for INA’s conduct since January 2009.

In both arbitrations Croatia’s main argument is that MOL procured the 2009 Agreements by corruption. To meet its burden of proof, Croatia relied on the Croatian Supreme Court’s verdict against Sanader (November 2012), convicting Sanader for taking a €5m bribe from MOL in exchange for facilitating the 2009 Agreements.

However, in July 2015, Croatia’s Constitutional Court annulled the corruption conviction on grounds of procedural errors and ordered a retrial, which started in September 2015.

While the ICSID arbitration is still pending, the outcome of the UNCITRAL arbitration became known to the Croatian public through an urgent press conference called by Croatian Prime Minister Andrej Plenković on Christmas Eve.

Plenković confirmed that the UNCITRAL tribunal has overruled Croatia’s request to nullify the 2009 Agreements, finding that the evidence was not sufficient to prove corruption. The full award has not yet been made public.

MOL published excerpts from the award, where “rejecting all submissions and contentions to the contrary, the Arbitral Tribunal FINDS, DECLARES, RULES, ORDERS and AWARDS that Croatia’s claims based on bribery, corporate governance and MOL’s alleged breaches of the 2003 Shareholders Agreement are all dismissed.”

With regard to bribery the tribunal found that:

Having considered most carefully all of Croatia’s evidence and submissions on the bribery issue, which has been presented in a most painstaking and comprehensive way, the Tribunal has come to the confident conclusion that Croatia has failed to establish that MOL did in fact bribe Dr Sanader. Accordingly, Croatia’s case that the FASHA and GMA be rendered null and void due to the alleged bribery fails.

This is particularly important in light of the fact that during the UNCITRAL proceedings, at the invitation of the president of the arbitration, Sanader gave full testimony (with cross-examination). Sanader himself disclosed this fact in a 2014 interview with the Croatian media.

Criminal Investigations and Arbitral Proceedings: Three Questions

In the case of competing forums, the applicable law can have a significant impact on whether a positive finding of corruption is issued. Courts and tribunals may come to different conclusions concerning the same facts and legal issues. Consequently, there is a high risk of issuing conflicting decisions.

Moreover, arbitrators do not have the same resources or investigatory powers as criminal prosecution authorities. While a corruption finding may be the crucial issue of the case, arbitrators may not have the necessary tools to establish it.

In analyzing this tension, I briefly consider two questions, with special application to INA MOL arbitrations.

1. What is the Effect of a Criminal Court’s Corruption Verdict on a Pending Arbitration?

Generally, a criminal verdict does not have a binding effect on the arbitral tribunal.
In Inceysa Vallisoletana v. El Salvador, the tribunal held that state parties’ findings as to the legality of investment are not determinative. This is for the tribunal to determine, and domestic court findings are not res judicata for the purposes of determining jurisdiction.

Following this approach, in the UNCITRAL arbitration, MOL asserted that Croatia offered no support that the Sanader judgment “should be given automatic legal effect in an international arbitration.” (Decision, ft. 5) MOL’s position is that the Sanader judgment is of no relevance to the validity of the disputed agreements.

In the Sanader decision, the Croatian Constitutional Court expressly addressed this question and opined that domestic court decisions do not have res judicata effect in international arbitration proceedings:

Decisions by national courts, including those by the Constitutional Court, cannot in general have an impact on arbitration proceedings initiated or conducted by the Republic of Croatia in the field of international commercial law. It is a general principle that arbitral tribunals are not bound by final judgments of national courts, or decisions issued by national constitutional courts, because such judgments and decisions are regarded as facts by arbitral tribunals. Such tribunals examine matters in the case before them on their own.

However, even if the criminal verdict has no binding effect, it will be taken into account in the arbitrators’ assessment of evidence.

2. What is the Effect of a Criminal Court’s Corruption Verdict on the Enforcement of an Award?

An award upholding a contract deemed by a criminal court to be tainted by corruption may be challenged at the enforcement stage on public policy grounds (Article V(2)(b) New York Convention). The likelihood of an award being set aside or denied enforcement on this ground will depend on the extent of the court’s review powers and its understanding of what constitutes public policy.

In the Constitutional Court’s decision quashing the Sanader verdict, the Court opined that contracts procured through corruption are per se contrary to state interests and public policy:

The very fact that a person under the office of prime minister offers or accepts a bribe to influence the conclusion of a legal transaction within the competence of the Government – within the limits of his authority – makes the legal transaction concerned corruptive a priori in the substantive sense, … Each such transaction is per definitionem contrary to the interests of the Republic of Croatia.

Conclusion

The co-existence of parallel proceedings, such as in the INA MOL disputes, presents a number of risks for the parties. Different tribunals may reach different conclusions, and such conclusions may contradict domestic criminal law findings.

The uneven state of arbitration jurisprudence reflects the lack of consensus on how to deal with corruption in international disputes. Regardless of the proclaimed “zero tolerance policy” towards corruption, unforeseeable outcomes did little to deter litigants from bringing disputes involving corruption to the international arena.

This leaves us with several queries: Is the situation desirable where local verdicts finding corruption can be rejected by tribunals? In what way can the two be reconciled? Should there be a presumption that criminal judgments are prima facie valid? What if domestic proceedings are flawed?

It remains to be seen how the INA MOL claims, and in particular the issue of parallel criminal proceedings, will be approached by the ICSID tribunal. Croatian Prime Minister Plenković announced that the ICSID award is expected in the summer of 2017.

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Myanmar’s New Investment Law and its Confidence in International Arbitration

Wed, 2017-01-25 05:30

Maximilian Clasmeier

White & Case LLP

Introduction

“The world is curious about Myanmar”, said U Htay Aung, Union Minister of Hotels and Tourism of Myanmar at the World Economic Forum on East Asia in 2013. And indeed, he is right. This article serves as evidence. Myanmar has managed to take a number of important steps in gradually opening up its economy, attracting investment and creating growth for the benefit of its people. The new Myanmar Investment Law (“MIL“) with its confidence in international arbitration is yet another step in that direction. Since 1944, the year of Myanmar’s first Arbitration Act, arbitration’s popularity has grown particularly in the country’s neighboring ASEAN countries. For Myanmar, it was thus a logical imperative to accede to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) on 16 April 2013 after approval by the Assembly of the Union. Honoring its international obligations under the New York Convention, Myanmar has adopted the Union Law No. 5/2016 (the “New Arbitration Law“) on 5 January 2016, repealing the former Arbitration Act of 1944. It is based upon the 2006 UNCITRAL Model Law and many of its provisions thus constitute familiar territory for international arbitration’s users.

 

New Myanmar Investment Law

The MIL will come into force with full effect in April 2017. The government has worked closely with the World Bank Group’s International Finance Corporation to level the playing field for local and foreign investors. As Myanmar is currently the single ASEAN country with two distinct investment laws for domestic and foreign investors, this effort constitutes a major change. It abandons a divisive regime that even in Southeast Asia is only of historic rather than contemporary importance. While the final version of the MIL has not yet been published, the draft provides an insight into the government’s policy aimed at increasing investor confidence. Specifically, Sec. 3(b) MIL describes the protection of investors and their investments as one of the new law’s objectives.

 

Chapter 11 then deals with the substantive treatment of investors. Sec. 48(a) MIL sets out that with respect to the expansion, management, operation, and the sale or other disposition of direct investments, which are subject to the provisions of the MIL, foreign investors and direct investments made by them, shall be accorded treatment no less favorable than that accorded to Myanmar’s domestic investors. Furthermore, the MIL provides for a most-favored-nation clause as well as fair and equitable treatment.

 

Chapter 16 of the MIL also sets out responsibilities of investors. These range from respect for customs, traditions and culture, an obligation to report the finding of antique objects or treasures, proper accounting to compliance with local labor laws. In this regard, the MIL constitutes a modern approach in balancing the interests of investors with those of the state in order to achieve growth for the mutual benefit.

 

Investor-state arbitration

The synchronization of foreign and domestic investors’ rights encompasses the possibility to refer disputes between state entities and investors to dispute settlement. Sec. 83 MIL envisages the erection of a mechanism “to allow for claims and settlement of losses, which will allow the conduct of inquiries in order to resolve issues before they become legal disputes and to prevent the occurrence of disputes.” Responsible for the mechanism will be the newly created Myanmar Investment Commission.

 

Sec. 85 MIL furthermore allows for respective dispute resolution agreements between a state entity and an investor. If parties then enter into, e.g., an arbitration agreement, that agreement shall prevail: “(b) If the method of dispute resolution in the relevant agreement is stated, an investor shall follow in accordance with this method of dispute resolution.” The provision thereby ensures that respective individual arbitration agreements will be enforced in order to give investors access to arbitration as opposed to local courts.

 

On the other hand, the MIL does not contain a standing offer to arbitrate. Apart from investment contracts, investors may thus only avail themselves of those standing offers that currently exist in Myanmar’s investment treaty regime, namely its BITs with China, India, Japan, Laos and Thailand. Myanmar’s BITs with Israel, Korea and Vietnam likewise provide such standing offers, but are not yet in force. Sec. 85(b) MIL thus requires that an arbitration agreement is already in existence, which will then be enforced. Investors who may not take advantage of standing offers contained in the abovementioned treaties are thus well-advised to incorporate arbitration clauses into their investment contracts.

 

In the absence of an arbitration clause, an investor may encounter a rather nebulous scenario in attempting to resolve disputes: Sec. 85(a) MIL provides that “[i]f the method of dispute resolution in the relevant agreement is not stated, investment disputes shall be settled in the court or arbitral tribunal in accordance with the laws of the Union.” In other words, investment disputes may be heard in a local court or before an arbitral tribunal. The provision, however, remains silent on the exact prerequisites and circumstances of either scenario. By way of interpretation, it appears though, as if Sec. 85(a) MIL simply clarifies the enforceability of post-dispute-arbitration-agreements: The term “relevant agreement” cannot refer to the arbitration agreement itself. If it did refer to the arbitration agreement, Sec. 85(a) MIL would read: “[i]f the method of dispute resolution in the relevant arbitration agreement is not stated […]”. That cannot be right. If an arbitration agreement or any dispute resolution agreement is already at hand, there already is clarity as regards the method of dispute resolution. Rather, the term “relevant agreement” refers to a respective investment contract. If that investment contract then does not state a method of dispute resolution, “investment disputes shall be settled in the court or arbitral tribunal in accordance with the laws of the Union.” Sec. 85(a) MIL then merely allows the parties to the dispute to opt for arbitration after the dispute has arisen. This interpretation is in line with Sec. 9(b) of the New Arbitration Law, according to which the arbitration agreement “may be in the form of an arbitration clause in a contract or in the form of a separate agreement.” If the parties do not opt for arbitration, the dispute may be referred to the local courts.

 

What creates uncertainty is the broad wording “in accordance with the laws of the Union.” A plainly textual approach to Sec. 85(a) MIL is not sufficient. The provision could firstly constitute a sole clarification that any arbitration seated in Myanmar is to be conducted in accordance with domestic law. However, from a systematic perspective, it would then remain unclear why Sec. 85(b) MIL, declaring arbitration agreements enforceable, does not set up the same requirement. Regardless of the timing of the arbitration agreement, Myanmar will have an interest in an arbitration seated on its territory to be conducted in compliance with its laws.

 

Secondly, Sec. 85(a) MIL could provide for a mandatory Myanmar seat, in case of a post-dispute-arbitration-agreement. However, such interpretation would run contrary to Sec. 10(a) of the New Arbitration Law which renders arbitration agreements enforceable, “unless [a court] finds that the agreement is null and void, inoperative or incapable of being performed” and Sec. 23(a) of the New Arbitration Law that determines parties’ freedom in choosing the seat of the arbitration.

 

Thirdly, the provision could determine Myanmar law as the substantive law. Especially when read together with the New Arbitration Law, this interpretation appears more plausible, if the arbitration is purely domestic. Sec. 32(a)(1) of the New Arbitration Law provides that the substantive law shall be Myanmar law, if a domestic arbitration is at hand. An arbitration is domestic, if it is not international pursuant to Sec. 3(i) of the New Arbitration Law. However, whenever a foreign investor acts as claimant, the arbitration will be international. In that case, “[I]n accordance with the laws of the Union” will refer to the whole of Sec. 32(a) of the New Arbitration Law, including (2), which allows parties the choice of the substantive law. For foreign investors, this wording is then likely to be of little practical relevance.

 

Conclusion

The objectives of the MIL are clearly geared towards attracting foreign investment and enhancing economic growth, e.g., aiming for “citizens to be able to work alongside with the international community” and to “cause to emerge businesses and investments that meet international standards.” (Sec. 3(h), (i) MIL). The MIL is another noteworthy step for Myanmar towards becoming an arbitration-friendly jurisdiction in line with its investment objectives. The terms of the new MIL at times remain vague and ambiguous, but it is now primarily the courts that will determine the practical impact of the legislative changes. Over time, Myanmar may then provide assurance to investors that economic reality reflects the country’s modern policies. The world, and especially the international arbitration community, will be watching future steps and do so with a bit more curiosity each time.

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A Call to Arms: Education to Prevent the Harsh Reality of Guerrilla Tactics in the Face of the UAE’s Recent Law on Possible Criminal Sanctions for Arbitrators

Mon, 2017-01-23 17:19

Giorgio Sassine

When implemented and understood properly by all players involved, international commercial arbitration should run like a well-oiled machine. Jurisdictions such as France, the United Kingdom, Sweden and Switzerland understand this – from the legislature, to the courts, to the practitioners and parties involved.  Many other jurisdictions, such as the United States, Singapore and Hong Kong also understand the importance that international commercial arbitration has on the global stage and have implemented legislation and education towards that understanding, albeit with minor hiccups along the way.  All is well, for the most part.

When international commercial arbitration runs smoothly, the sticky-bandit respondent should not be able to place sticks in the spokes of the wheels of this machine – as my professor used to say. Such is often referred to as guerilla tactics.  Although the respondent may try – and indeed it does, and does, and does again – the principles of international commercial arbitration and due process should manifest themselves and snap the respondent’s hope of overturning the machine from its rightful path to justice.

This ideal world of international commercial arbitration exists in a vacuum; and, honestly, this is what makes international commercial arbitration so interesting and exciting to many of us. We readily enjoy the open discussions, the debates and theory of international commercial arbitration.  We oddly enough enjoy the unsettling ground that this body of law rests upon.  It is why we read the blogs with open interest, attend the conferences with attentive ears, and steadied the course and fought the battles to call this our career.

Of course, we all want to create a world that better understands the principles that international commercial arbitration rests upon – however, the journey on the path to that utopia is what brings us joy. It is our hope, as practitioners, that we can create a world that finally understands our quirks – our passion, understanding and dedication to international commercial arbitration.  It is why we write, it is why we lobby and it is why we press forward and take the time to make others understand how important international arbitration is to our social order as it exists today.

As champions of international arbitration and pioneers on this journey, I ask you to take heed to the challenge now faced in the UAE and how it very surely strikes mightily upon the fabric of international arbitration. This is a call to arms.  Federal Decree Law No. 7 of 2016, an amendment to the Federal Penal Code No. 3 of 1987, provides that Article 257 of the Penal Code now reads:

Anyone who issues a decision, expresses an opinion, submits a report, presents a case or proves an incident in favor of or against a person, in contravention of the requirements of the duty of neutrality and integrity, while acting in his capacity as an arbitrator, expert, translator or fact finder appointed by an administrative or judicial authority or selected by the parties, shall be punished by temporary imprisonment [i.e., 3 – 15 years].

The aforesaid categories of persons shall be barred assuming once again the responsibilities with which they were tasked in the first instance, and shall be subject to the provisions of Article 255 of this law.” See Michael Black QC, Arbitrators to Face Jail in UAE (29 Nov. 16) (noting that translation supplied by Hasan Arab, Co-Head of Litigation, Al Tamimi & Co.).

This law is true cause for concern. As Michael Black, QC put it “There is concern that this criminal jurisdiction will be abused, with disgruntled parties making unsubstantiated criminal complaints against arbitrators, prompting unwarranted criminal investigations.” Id.   And as Essam Al Tamimi put it “Arbitrators including myself and the legal community in general are concerned at the prospect of vexatious criminal complaints or threats of such complaints against tribunal members sitting in the UAE.”  Essam Al Tamimi, Don’t scare business away, Al Tamimi warns UAE (06 Dec. 16).

It is deeply troubling and entirely unsatisfying to realize that an arbitrator may face criminal sanctions for attempting to uphold its duty and acting as an arbiter of justice. Even allegations which have little to no factual support, may very well wind up in the hands of a court who does not fully appreciate the subtleties of international arbitration  – I admit my skepticism, but note that one UAE court recently decided that England was not a signatory to the New York Convention.

Mr. Al Tamimi goes on to warn that “a prosecutable offence for arbitrators will create vast scope for losing parties or parties wishing to derail an arbitration to bring or threaten criminal action.” Id. No doubt, losing parties will make these attempts.  And herein lies one of my greatest concerns – the combination fatality: UAE law stipulates that arbitrations seated within the UAE require all members of the arbitral tribunal to be physically present in the UAE to sign the award.  If an arbitrator does not sign the award within the UAE, the award is at risk of being annulled.

Now, here is the harsh reality: a respondent could file or threaten to file a criminal complaint in the UAE and prevent the arbitrator(s) from obviously wanting to enter the UAE’s jurisdiction, thereby preventing the award from being signed by all arbitrators within the UAE. Instead of sticks, the respondent has literally placed an entire log fortress in front of the machine.  The sad, sad truth is that this is a tactic at the respondent’s disposal.

In the face of the respondent’s devilish attempt at derailing the arbitration, do the arbitrators risk not having all members present in the UAE under the limited exceptions to this law? Will the courts understand the games that the respondent has played?  Does the arbitrator take the risk and enter the UAE in order to provide justice to the claimant; or does the arbitrator stay clear of the UAE to avoid being possibly sent to jail? How does the local bar in which the arbitrator is a member of consider such allegations and/or the arbitrator’s refusal to enter the UAE and face such allegations?  Tough questions, among many more, that certainly deserve attention by all of us.

So what is the call to arms, what should we do? Should we simply abandon the UAE as a hub for international commercial arbitration?  Should we give up and seek to counsel parties to avoid arbitration at all costs in the UAE?  Should we pack up, caravan out and search for higher ground?

No. We should educate.  It is our duty as members of this profession to educate and bring light to such dark corners.  I am pleased to hear Mr. Al Tamimi note that “a number of arbitrators and legal practitioners from the UAE, backed by renowned international arbitrators and institutions, have made a plea to the UAE Cabinet of Ministers to review article 257 with a view to swiftly amending or repealing it.” Id.  I suggest that we follow their lead and write, write and write some more.  I suggest that we continue to present ourselves as voices of reason, not from the mountain top, but from the land of those who may not understand our perspective.  Let us not forget, international arbitration is a very complex subject with subtleties that many of us do not fully understand.  It is these same subtleties that nevertheless attract us to this body of law.  We must therefore educate if we are to repeal this law.  But we educate to furthermore prevent similar laws from taking root.  Justice is simply not served otherwise.  This is after all the journey that we enjoy.

Mr. Sassine is a former Associate at Obeid Law Firm in Beirut, Lebanon, graduate of Stockholm University’s LL.M. in international commercial arbitration and a member of the New York State Bar.

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Recent Developments in the Arbitration Rules of Lima Chamber of Commerce

Sun, 2017-01-22 22:16

Mijail Cienfuegos Falcón

Universidad Nacional Mayor de San Marcos, Faculty of Law

In January 2017 the new Lima Chamber of Commerce Arbitration Rules (the “new LCC Rules”) will come into force. These rules seek to provide a better regulatory framework and improve the efficiency of arbitration by taking into consideration the world´s leading international arbitration institutions’ rules. Numerous key changes have been made to ensure the quality of arbitration as the preferred method of private parties to settle their disputes. This article will review several new or changed provisions in the new LCC Rules that are of great importance to arbitration practitioners, students and users alike.

Joinder and Consolidation

In the arbitration context, the term joinder relates to a third party which is carried into an arbitration to participate in its proceeding upon the request of one of parties to that arbitration. Consolidation, on the other hand, allows two or more separate arbitrations, pending or to be initiated, to be unified into a single arbitration proceeding.

The new LCC Rules provide that before the tribunal is constituted, a party to an arbitration may request by an application to the Arbitration Center of LCC (the “Center”) the joinder of additional parties to that arbitration (the “Request for Joinder”). The Higher Council of Arbitration of Center (the “Council”) may approve or not that application (Rule 8.1).

After the tribunal is constituted, the joinder is allowed only if all involved parties, included the additional parties, agree and the tribunal accepts the application (the “Joint Request for Joinder”). The tribunal makes a decision based on the necessity or convenience that the disputes with the additional party be resolved within the same arbitration, the status of the arbitration proceeding and other circumstances that it deems relevant (Rule 8.4).

In the consolidation, the Council may allow to merge two or more separate arbitration into one single proceeding when all parties agree or one of them requests it (the “Request for Consolidation”) in the following cases (Rule 9.1), where:

a) all of the claims in separate arbitrations are brought under the same arbitration agreement; or

b) the claims are brought under more than one arbitration agreement, if the following requirements are met:
i. the different agreements are mutually compatible, or;

ii. these related to the same legal relationship; and

iii. the parties in the separate arbitrations are the same.

The Council may take into consideration any circumstance that it deems important, including whether one or more arbitrators have been confirmed or appointed in more than one of the arbitrations and, if so, whether the same or different persons have been confirmed or appointed (Rule 9.2).

After the tribunal is constituted, the consolidation of one single arbitration proceeding of two or more separate arbitrations only proceeds if the parties to these arbitrations submit a request by mutual agreement in the arbitration which commenced first and those separate arbitrations are to be subject to the same tribunal (Rule 9.5).

Appointment of Arbitrators in Multi-party Disputes

The new LCC Rules cover the appointment of arbitrators in proceedings in which there are more than two parties, that is, in multi-party proceedings.

In cases involving multi-party disputes, the tribunal shall be constituted in accordance with the parties’ agreement (Rule 13.1). If the parties have not agreed on the method to constitute the tribunal, the Center shall set a certain period of time for the claimant or for the group of claimants and, respectively for the respondent or for the group of respondents to appoint an arbitrator (Rule 13.2). Where an additional party has been joined and the dispute is to be referred to three arbitrators, the additional party may, jointly with the claimant or with the respondent, appoint an arbitrator (Rule 13.3). Where a party or group of parties fails to nominate an arbitrator, the Center shall appoint all of the arbitrators, including the presiding arbitrator (Rule 13.4).

Emergency Arbitrator and Expedited Arbitrations

The new LCC Rules introduce to the legal framework two new and innovative arbitration figures: emergency arbitrator and expedited arbitrations.1) In Latin America, the LCC is one of the first Arbitration Centers to incorporate both figures. In 2009, the Mexico Arbitration Center Rules only introduced the emergency arbitrator in article 30 bis. jQuery("#footnote_plugin_tooltip_8161_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8161_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Both figures were incorporated with the aim of granting a more time effective proceeding for resolving disputes in specific situations.

Emergency Arbitrator provisions seek to provide an urgent interim decision for a party which cannot await the constitution of a tribunal. On the other hand, Expedited Arbitrations provisions apply for arbitration claims in which the dispute concerns a limited amount of money.

Before the tribunal is constituted, any of the parties that apply for emergency preventive measures can request a procedure be initiated before an emergency arbitrator (Rule 35.1). This procedure is established in the Appendix I of the new LCC Rules and is called the Emergency Arbitrator Rules (the “EmAr Rules”). The competence of the Arbitrator ends when the tribunal is constituted (Rule 35.3).

In the following situations, the EmAr Rules do not apply (Rule 35.5):

a) if the arbitration agreement is subscribed before the entry into force of the EmAr Rules;

b) if the parties to arbitration agreement have excluded previously and expressly the application of EmAr Rules; or

c) if the State is a party to the arbitration and there is no express submission in the arbitration agreement to Emergency Arbitrator proceedings, to EmAr Rules or to the Center.

The Council appoints the Emergency Arbitrator two days after the receipt of the application (Article 3.1 of EmAr Rules). The decisions of the Emergency Arbitrator are binding for the parties (Rule 35.2).

Once the proceeding ends, the Emergency Arbitration´s urgent interim order can lose its binding character in the following cases (Article 8.7 of EmAr Rules):

a) Non presentation of the request for arbitration within the next ten days after receipt of the request for urgent measures, unless the Emergency Arbitrator determines that a longer period is required.

b) The acceptance by the Council of the Emergency Arbitrator´s challenge.

c) Withdrawal of the request for arbitration or termination of the arbitration before the final award is rendered.

Expedited Arbitrations are appropriate for disputes concerning limited amounts of money, taking into account the claim amount and the possible counterclaim, does not exceed the limit stablished for these purposes in the Table or Tariffs to the Center or when the parties agree regardless the amount in dispute with the later confirmation of the Center. The scope of application and the proceedings’ regulation are established in Appendix II, called Expedited Arbitrations Rules (the “ExAr Rules”).

The Expedited Arbitrations are faster proceedings than the usual arbitration proceedings by providing for the settlement of the disputes in less than 4 months.

The arbitral tribunal has been granted the power to decide the disputes based on written pleadings and the evidence which accompanies them; unless the parties agree to hold a hearing on the merits. The tribunal holds a single hearing (Article 2(e) of ExAr Rules). The tribunal must issue the award within a period of 3 months from the date on which it was constituted (Article 2 (f) of ExAr Rules).

Conclusion

The changes highlighted above are not the only changes introduced by the new LCC Rules, but show the desire to offer a better institutional framework which ensures the quality of arbitration proceedings. Inspired by the rules of leading international arbitration institutions, the recent arbitration developments adopted by the new LCC Rules facilitate the effective and efficient settlement of disputes and seek to position the Center as an arbitration institution with international standards.

The growing number of disputes where with complex maze of contracts, which often involved more than two parties, would find their best way of settlement in a single arbitration. Addressing this issue, the new LCC Rules adopted provisions which govern several aspects of multiparty arbitration proceeding: the joinder, the consolidation and the procedure for the appointment of arbitrators – but not the intervention. Unlike article 4(2) of the 2012 Swiss Rules, the new LCC Rules do not permit a third party that wishes to participate voluntarily to join a pending arbitration proceeding (intervention). On the other hand, emergency arbitrator and expedited arbitration provisions adopted by the new LCC Rules are important provisions which allow obtaining quick and effective protection for the parties in the specific circumstances mentioned above.

In a nutshell, the new rules make the LCC a pioneer in Latin America by introducing relevant provisions that major international arbitration institutions have adopted.

References   [ + ]

1. ↑ In Latin America, the LCC is one of the first Arbitration Centers to incorporate both figures. In 2009, the Mexico Arbitration Center Rules only introduced the emergency arbitrator in article 30 bis. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors:

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Takeaways from Ayyasamy: The Practical Impossibility of Determining “Serious Allegations of Fraud” and the Apprehension Towards Arbitration

Thu, 2017-01-19 17:01

Agnish Aditya

National Law University Odisha

A few months back, the Supreme Court of India attempted to set the issue of arbitrability of fraud at rest in the case of A. Ayyasamy v. A. Paramasivam [(2016) 10 SCC 386]. The court, while deciding an application under Section 8 held that although “mere allegations of fraud simplicitor” are arbitrable, “serious allegations of fraud” are not. In a previous blog post, the authors have already expressed their reluctance in celebrating the judgment and pointed out the protectionist and interventionist attitude of the judgment. The authors commented that a positive aspect to this judgment is that “it will bring consistency in practice”. I shall attempt to show that perhaps they are too optimistic by showing that a consistent application of the Ayyasamy dicta is perhaps impossible.

Problems with the Arbitrability Test in Ayyasamy

It is well settled in Indian law that the Court can examine the issue of arbitrability of a dispute under a Section 8 application. The Arbitration and Conciliation Act, 1996 [the Act] does not offer any guidance for determining arbitrability of a subject matter. Thus, in absence of any guidance, the Supreme Court devised a test for determining arbitrability (defined by the court as “capable of being adjudicated by a private forum”) in Booz-Allen & Hamilton Inc v. SBI Home Finance [(2011) 5 SCC 532]. According to the Court disputes relating to a right in personam are arbitrable and disputes relating to rights in rem are not. The Court, however, added a caveat to this rule writing “this is not however a rigid or inflexible rule”.

In Ayyasamy, the Court did not follow the Booz-Allen test for determining the arbitrability of fraud claims. It did not distinguish between “mere allegations of fraud simplicitor” and “serious allegations of fraud”, while holding the latter non-arbitrable, on the basis of the type of right it affects. Instead, the Court held that “serious allegations of fraud” are not capable of being dealt by the arbitrator since it involves complicated issues of fact which require reviewing of voluminous evidence. The Court also opined that ordinary civil courts are better equipped to handle such cases as “[G]enerations of judges have dealt with such allegations in the context of civil and commercial disputes.”

The Court, in Ayyasami, did not rely on the established precedent for determining arbitrability. While the Booz-Allen test has been criticized for being too generic and not practicable, it does find its basis in jurisprudence. The reasoning in Ayyasamy, however, is solely based on an apprehension towards arbitration.

Interpreting “Serious Allegations of Fraud”

The phrase “serious allegations of fraud” can be traced back to one of the earliest cases on arbitrability of fraud claims in India, Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak [AIR 1962 SC 406]. In Abdul Kadir, the Court held that when there are “serious allegations of fraud” levelled at a party, if the party so desires, the Court shall refuse to refer the matter to arbitration. In N. Radhakrishnan v. Maestro Engineers [(2010) 1 SCC 72], the Court found that since there were “serious allegations of fraud” the matter could not be referred to an arbitrator. High Courts have also used this term while determining arbitrability of a dispute. But none of these cases have attempted to chalk out a uniform method of determining what makes an allegation a “serious” one. The Ayyasamy judgment has necessitated such a test.

At first one might interpret “serious allegations of fraud”, as used in Ayyasamy, as allegations of fraud which involve copious amounts of sum or are serious enough to deserve a criminal trial. As a matter of policy, this could be a cogent interpretation since frauds of such magnitude affect a right in rem and should be tried in a public court for transparency and accountability. It could also be argued as being opposed to public policy, which is a ground for setting aside an award. However, a careful reading of the judgment would show that this interpretation is only partly correct.

The court found “serious allegations of fraud” non-arbitrable because it involves complicated issues of fact and requires adducing of elaborate evidence. Thus, when the court refers to “serious allegations of fraud” it is independent of the gravity of the alleged fraud but is dependent on the amount of evidence required to prove the allegation.

So if a case involves allegations of fraud consisting of a hefty sum of money, but does not require elaborate evidence to prove and does not involve complicated issues of fact; it can be referred to the arbitral tribunal. On the contrary an allegation of fraud with little money involved may be non-arbitrable due to complex issues of fact or elaborate evidence required to prove the allegations.

Problems with This Interpretation

The proposed interpretation of “serious allegations of fraud” gives rise to two problems. The first, and the graver one, being that the determination of the nature (whether “serious” or “mere”) of the allegations shall depend on the nature of the judge. A pro-arbitration judge might refer a case to arbitration by finding a matter capable of being adjudicated by an arbitrator. A sceptic judge, however, might find the same matter non-arbitrable. This shall lead to judicial interference which the Act seeks to minimise.

The Court can come to a better conclusion by examining the qualifications of the appointed (or prospective) arbitrator. This shall help the Court determine whether the arbitrator will be capable of adjudicating upon a fraud claim or not. But there are problems with this approach as well. The Act does not contemplate a Court sitting in judgment over an arbitrator’s qualification. This might not only be undesirable by the parties and the arbitrator but also practically impossible.

But if this approach is taken, it shall give rise to the second problem of further undesirable judicial intervention and delay. In Ayyasamy, the Court held that in order to determine whether an allegation is a “serious” one or not the Court shall conduct “a strict and meticulous inquiry into the allegations of fraud”. This statement does not tell us about the standard of proof that the Court requires, but one may assume that a prima facie case will not suffice. An examination of the qualifications of an arbitrator shall not add to this “strict and meticulous inquiry” requirement and lead to delays and increased judicial intervention which is contrary to the objectives of the Act.

Concluding Remarks

In Ayyasamy, the Court found that the allegations merely related to matters of accounts which could be looked into “even by the arbitrator.” This statement clearly has the undertone of a lack of confidence in the process of arbitration. Even though, post the White Industries award, the Supreme Court has been forced to adopt the pro-arbitration rhetoric; Ayyasamy exhibits that subliminally the Court is still apprehensive of arbitration.

Ayyasamy, like most post-BALCO cases [see this post], indulges in pro-arbitration rhetoric while relying on international authorities and established principles of Kompetenz-Kompetenz, minimal interference, etc. But unfortunately it culled out the “serious allegations” and “mere allegations” dichotomy based on its apprehensions of fraud and not on precedents or policy. As I argued above, the interpretation of these terms which logically flow from the judgment are not practically possible without breaching the policies which are instrumental for fostering arbitration.

One may argue that legislative intervention is the only cure to this conundrum, but the fact is that the legislature already missed an opportunity by rejecting the Law Commission’s recommendation in this regard. The Law Commission recommended, and rightly so, to amend Section 16 of the Act and make fraud expressly arbitrable. The legislature failed to do so for unexplained reasons. Thus, banking for a legislative intervention any time is perhaps not practicable.

But before we jump to criticize the Supreme Court’s thinly veiled scepticism towards the capability of arbitration and arbitrators, we must introspect. The lack of confidence on arbitrators is not completely unfounded. India is still far behind in adopting the best practices in arbitration. Although arbitration is often resorted to, finding experienced arbitrators is often difficult. The lack of well-established institutional arbitration in India also adds to the problem. India still has a long way to go in developing confidence in arbitration as a reliable method of dispute resolution.

The issue of arbitrability of fraud claims might be resolved sooner or later by the judiciary or the legislature. But the problem of crisis of confidence can only be tackled by the community of lawyers and arbitrators by addressing the naysayer’s concern in a legitimate manner. Recently the Government has constituted a High Level Committee to review the current arbitration regime in India and suggest measures for institutionalization [see this post] which definitely seems to be the best foot forward for bringing a change in the current domestic arbitration regime.

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Secondments in International Arbitration

Thu, 2017-01-19 07:56

Raul Pereira de Souza Fleury

LL.M., American University Washington College of Law

Despite the heavy workload, practicing international arbitration can be fun; you are always challenged by disputes arising from a diversity of issues that test your ability to design the best strategy to achieve the best possible outcome for your client, combined with the complexity that a single case can reach and the many instances in which a sovereign State is involved, as in investment and State-to-State arbitration. At the same time, practicing international arbitration can be a major source of headache: the client itself.

In many occasions, counsel does not get the client’s full cooperation for a variety of reasons. In international arbitration it often is the same. But this does not mean that the client is unwilling to cooperate; it just means that counsel and client are not the same, do not think alike because they are not in the same business, and very possibly they do not share similar cultures and backgrounds. This is routine in international arbitration, where different cultures, backgrounds, and legal systems often collide.

To close –or at least bridge– this counsel-client cooperation gap, the practice of secondment can be of great help in the field of international arbitration.

Definition and Possible Benefits in International Arbitration

A secondment is the practice in which a law firm lends an associate to a client for anywhere from a few months to a year or more. As a consequence, the law firm attorney works full time for the client’s legal department for a limited duration. The benefits of this practice can be viewed from three perspectives: (i) the client, which will benefit from having a highly specialized attorney in its legal department; (ii) the seconded lawyer, who will learn a great deal from the client’s business and culture, as well as create strong relations with the clients’ legal team; and (iii) the law firm, which will have a unique opportunity to strengthen its relationship with its client and gain a more comprehensive understanding of the issues the client faces on a daily basis.

While any practice area can benefit from this practice, secondments can most make a difference in an area where the client lacks specialists. Given that international arbitration is a highly specialized area of law and that corporations rarely have a legal department specialized in international arbitration or even an in-house international arbitration lawyer, corporations often have to heavily rely on outside counsel when faced with an arbitration.

In light of the above, a secondment can greatly facilitate the relationship between the client and the arbitration team of a law firm. Through a secondment, an associate in the international arbitration practice of a law firm, preferably a senior one, can add value to the client’s legal department by working closely with in-house counsel during the initial steps of an arbitration in which the client is involved by training in-house counsel of the nuts and bolts of international arbitration or by teaching how the law firm manages an arbitration to ensure that the client and law firm are on the same page.

Each arbitration is different and unique and therefore requires different approaches. While specialists in law firms may know how to deal with these various situations, clients might not be so comfortable. The seconded lawyer can provide great utility in these circumstances serving as an important link between the law firm and the client’s legal department to achieve optimal cooperation in building a strong case. Many aspects related to the arbitration are linked to strong cooperation between law firm and client, such as case strategy, document production, and factual and expert witnesses. To avoid unpleasant surprises during the development of the arbitration, minds must be tuned to the same frequency.

Concerning case strategy, having a clear path to follow is fundamental for the arbitration practice of a law firm. This can take several weeks of meetings between the lawyers that will handle the case, in which the in-house counsel likely will not attend. During this phase, it would be highly beneficial to bridge any gaps between the law firm and the client’s legal department, and a seconded attorney can help achieve this goal.

Document production is another sensitive and critical part of any arbitration that, as Peter Ashford has written, “serves as part of a process towards a final determination on the merits.” As William W. Park suggests, document production works as a “pre-hearing information exchange” between the parties, and it can take time and money. Efficient cooperation between counsel and client accordingly is crucial in this phase of the arbitration. Cases are won on the basis of efficient document production. In this context, a seconded attorney with a better understanding of the client’s business may play an important role by providing efficient counseling on preparing the list of documents to be requested from the opposing party, as well as responding to the opposing party’s requests.

Expert witnesses can also play a critical role in an arbitration, particularly in cases involving highly technical issues. And very often – if not always – a party’s counsel will work closely with the expert, reviewing the expert report and discussing important substantive points. The seconded attorney, who has a better understanding of how the client’s business works and runs, will certainly have a better background to discuss these issues with the expert and reach a higher quality final product.

Final Words

This article has reviewed a non-exhaustive list of how a seconded attorney might improve the cooperation between a law firm and a client’s legal department in the field of international arbitration. As arbitration becomes more and more the ordinary means for dispute resolution in international commerce, efficient cooperation between in-house and outside counsel in an arbitral proceeding will become more necessary.

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Arbitration in the UAE: End of Year Round-up – From Apparent Authority and shipping arbitration under the EMAC Rules to Kompetenz-Kompetenz under the DIFC Arbitration Law (Part 2)

Tue, 2017-01-17 17:34

Gordon Blanke

DWF (Middle East) LLP

In a sequence of recent rulings starting in 2015, the Dubai Courts have confirmed that the doctrine of apparent authority does, after all, find application to the formation of arbitration agreements. The former prevailing position was that apparent authority did not have a place in arbitration, which requires a special – rather than just a general – power of attorney for an attorney’s agreement to arbitrate to bind the original rights holder (see Art. 58 read together with Art. 203(4), UAE Civil Procedures Code, and the extensive commentary provided in G. Blanke, Commentary on the UAE Arbitration Chapter, Sweet & Maxwell, 2016, forthcoming, at II-017 and II-032-II-037). In its more recent case law precedent, the Dubai Court of Cassation takes the firm view that a natural person signing an arbitration agreement on behalf of a legal person binds that person to arbitration unless proven otherwise. In this sense also, an agent has been taken to bind a principal to arbitration to some extent in the past (see again G. Blanke, Commentary on the UAE Arbitration Chapter, at I-108 and II-018). This development is encouraging and demonstrates yet again the often-understated arbitration-friendly nature of the UAE and in particular the Dubai Courts. Given their importance to the successful enforceability of arbitration agreements against original rights holders, all three Dubai Court of Cassation judgments under scrutiny here deserve closer scrutiny. One of the traditional arguments raised by award debtors in defense to an action for enforcement by an award creditor of a domestic arbitral award within the UAE is the incapacity of the original signatory of the underlying arbitration agreement and the resultant nullity of the arbitral award as against the legal person on whose behalf the arbitration agreement is purported to have been signed (see Art. 216(1)(b), UAE Civil Procedures Code; and again G. Blanke, Commentary on the UAE Arbitration Chapter, at II-140). Even though that argument had some credit under the former case law precedent, it will hardly succeed following the findings of the Dubai Court of Cassation in the more recent rulings discussed here. At least two of these rulings deal with a request to enforce an arbitration award rendered under the auspices of the Dubai International Arbitration Centre, in shorthand the “DIAC”, against limited liability companies (LLCs), whose general managers are presumed to have the power to bind the company to arbitration under the prevailing provisions of UAE law and established case law precedent (see Art. 237, UAE Commercial Companies Law; and G. Blanke, Commentary on the UAE Arbitration Chapter, at I-073 and II-021).

In the first ruling (see Appeal No. 547/2014 – Palm Jebel Ali LLC v. Alan Stenet, ruling of the Dubai Court of Cassation of 21st October 2015), Palm Jebel Ali LLC (“PJA”), the award debtor, sought the nullification of the award on the basis that the underlying arbitration agreement was not signed by an authorized representative of PJA’s and therefore not enforceable against it. According to PJA, given its status as a limited liability company (LLC), it was only its manager that had authority to sign, no other person having been authorized by the manager to do so. The Dubai Court of Cassation rejected PJA’s motion for nullification: According to the Court, bland allegations that the signature of a contract did not accord with that of a company’s manager (despite submission in evidence of specimen signatures) could not succeed without a formal filing for forgery; there was a presumption that the signature placed on behalf of the company was that of an authorized person or representative. In addition, in the Court’s view, the apposition of the company stamp was, in itself, sufficient to confer authenticity and hence a binding effect on the underlying arbitration agreement. In the second ruling (see Appeal No. 293/2015 – Middle East for Development LLC v. Safir Real Estate Investments LLC, ruling of the Dubai Court of Cassation of 27 January 2016), Middle East for Development LLC (“MED”), the award debtor, was equally rebuffed by the Dubai Court of Cassation in its endeavours to nullify on the basis of lack of capacity a DIAC award rendered in favour of Safir Real Estate Investments LLC (“Safir”) in relation to the late delivery of an off-plan real estate unit. MED regarded as defective and flawed in its reasoning the Dubai Court of Appeal’s ruling according to which MED had failed to prove that the person who signed the underlying arbitration agreement was not MED’s general manager or a duly authorized signatory. The Court of Appeal also relied on MED’s failure to raise the defense of incapacity before the DIAC Tribunal itself. Before the Dubai Court of Cassation MED sought to argue that MED’s signatory (not being a general manager) had only been granted a general – as opposed to a special – power of attorney and could therefore not bind the company to arbitration.

In response, the Dubai Court of Cassation found that the burden of proof for a successful action for nullification rested upon the award debtor. In particular, the Court held that a person that signed for and on behalf of a corporate entity (indicated by the signature block reading “Signature of the authorized Seller”) a sale and purchase agreement that contained an arbitration clause had to be understood to be a fully authorized signatory, including with respect to the arbitration clause. The Court also reminded that the authorization issue had not been raised before the tribunal. In the third ruling (see Case No. 310/2015 – Al-Firjan LLC v. JNR Development Limited, ruling of the Dubai Court of Cassation of 27 April 2016), the Dubai Court of Cassation concluded that [i]t is […] well established before this Court that if the name of a certain company has been included in the beginning and introduction of a contracted while another person signed at the bottom of that contract, this establishes a legal presumption that whoever signs the contract has done so in the name of and for the company irrespective of whether the company’s name is associated with that of the individual signatory.” This, so the Court, also held for the arbitration clause contained in the underlying main contract.

Taken in the round, the above-mentioned rulings confirm the application of the concept of apparent authority to the formation of arbitration agreements. There also now appears to be a legal presumption in favour of capacity to sign where an award debtor has entirely failed to raise the capacity defense before the arbitral tribunal. The most recent rulings of the Dubai Court of Cassation give rise to the proposition that failure to do so amounts to a waiver to raise the capacity defense at the enforcement stage. For the avoidance of doubt, the burden to prove lack of capacity rests on the award debtor. In a similar vein, in one recent case before the DIFC Courts (see Claim No. XXXX – Ginette Pjsc v. (1) Geary Middle East FZE (2) Geary Limited, order of the DIFC Court of First Instance of 7 April 2016), the DIFC Courts refused to set aside a DIFC-LCIA award on the basis that in reliance on the doctrine of apparent authority, the underlying arbitration agreement was validly executed (whether under DIFC or UAE law).

Turning to the DIFC, not only has the DIFC-LCIA adopted a revised set of rules, but also has the Emirates Maritime Arbitration Centre (EMAC), established in April 2016 (for some history on the EMAC’s establishment, see G. Blanke, “Dubai announces plans to establish Emirates Maritime Arbitration Centre: Do they hold water?”, Kluwer Law Arbitration Blog, 2nd October 2014  and G. Blanke, “The EMAC finally established: Welcome on board!”, Kluwer Arbitration Blog, 4 June 2016,  now adopted its own rules, the 2016 EMAC Rules of Arbitration. The EMAC has been empowered to oversee disputes both under the EMAC Arbitration Rules or any other rules chosen by the parties, seeks co-operation with other regional and/or international arbitration centres and aims to establish a roster of maritime arbitrators for appointment in EMAC arbitration. The EMAC Arbitration Rules came into effect on 23 June 2016. These constitute a modern set of arbitration rules that combine the best of other internationally leading arbitration rules and contain provisions, such as the appointment of an emergency arbitrator, an extensive arsenal of interim measures and a fast-track procedure that may be of particular assistance in the resolution of maritime disputes. Most importantly for present purposes, arbitrations under the EMAC Rules are default-seated in the DIFC. This will naturally import the efficiencies of the DIFC Courts in their role as curial courts into an EMAC arbitration process.

It further bears mentioning that the DIFC Dispute Resolution Academy has recently entered into a memorandum of understanding with the Jebel Ali Free Zone Authority (JAFZA) (see Memorandum of Understanding between the DRA and JAFZA, dated 16 October 2016), which inter alia envisages the promotion by JAFZA and its member companies of the DIFC-LCIA as an arbitration centre for the resolution of disputes involving JAFZA or one of its member companies (see Memorandum, Cl. 4.1.2.5).

Finally, in one case earlier this year (see CFI 036/2014 – Vannin Captal PCC PLC v. (1) Al Khorafi and Others, Amended Order of Justice Sir Richard Field of 18 April 2016), the DIFC Court of First Instance confirmed that the DIFC Court’s curial powers to intervene in ongoing arbitration proceedings under the DIFC Arbitration Law were subject to the principle of kompetenz-kompetenz and did not empower the Court to make findings on the tribunal’s proper jurisdiction in advance of the tribunal itself determining that issue. A discretionary power to stay the proceedings will be exercised in favour of the tribunal’s power to determine its own jurisdiction in a first instance.

 

 

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