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Delhi High Court Rejects Arguments against Enforcement Based on CIETAC Split

Tue, 2018-10-02 20:00

Li Haifeng

Background on CIETAC Split

Up until May 1, 2012 CIETAC had a branch in Shanghai named CIETAC Shanghai Sub-commission (the “Old Sub-commission”). This Old Sub-commission used the same CIETAC arbitration rules but was administered by a secretariat semi-independent of that of the head office of CIETAC in Beijing.

On May 1, 2012 CIETAC launched its 2012 edition of arbitration rules. Some disagreements arose between the Old Sub-commission and the head office of CIETAC, which triggered the Old Sub-commission declaring independence from CIETAC.

On April 11, 2013 the Old Sub-commission renamed itself as Shanghai International Arbitration Center (“SHIAC”) (the “Re-naming”). CIETAC then established a new CIETAC Shanghai Sub-commission (the “New Sub-commission”) shortly after the Re-naming. 1) See e.g. Justin D’ Agostino, Kluwer Arbitration Blog, 2 May 2014, The Aftermath of the CIETAC Split: Two years on, lower courts take clashing views on arbitration agreements and awards– but higher courts strive for consistency. jQuery("#footnote_plugin_tooltip_8170_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8170_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

To clarify uncertainties surrounding the competence of CIETAC and SHIAC over cases with an underlying clause providing for arbitration by CIETAC Shanghai Sub-commission, the Supreme People’s Court of China (the “SPC”) issued a circular in June 2015 (the “SPC Interpretation”). Article 1 states that disputes in connection with contracts signed before the Re-naming carrying an arbitration clause providing arbitration by CIETAC Shanghai Sub-commission shall be administered by SHIAC. It also provides in article 3 that no party shall be upheld in its application for the set-aside or non-enforcement of an award on the ground of no competence if either CIETAC or SHIAC had accepted the case which it should not have as per the SPC Interpretation prior to the issuance date thereof.

Delhi Court’s Decision on Enforcement

As reported in Global Arbitration Review, a Chinese solar power company, LDK Solar Hi-Tech (“LDK”), attempted to enforce a CIETAC award against an Indian counterpart, Hindustan Clean Energy (“Hindustan”), in India. 2) https://globalarbitrationreview.com/article/1171818/chinese-company-enforces-award-in-delhi-despite-arguments-based-on-cietac-split jQuery("#footnote_plugin_tooltip_8170_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8170_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The underlying arbitration clause carried in a guarantee agreement entered into between LDK, as the beneficiary, and Hindustan, as the guarantor, provides that “any and call claims, disputes, controversies or differences arising between the Parties out of or in connection with this Bond shall be submitted for arbitration before China International Economic and Trade Arbitration Commission (CIETAC) in Shanghai by three arbitrators appointed in accordance with the corresponding rules of arbitration…

LDK brought arbitration before New Sub-commission in October 2013 and the award was made in February 2015.

When LDK applied for enforcement of the award in the Delhi High Court, Hindustan tried to resist the enforcement raising the following arguments:

1) That the New Sub-commission had no jurisdiction as the arbitration agreement referred disputes to the Old Sub-commission, now renamed as SHIAC. For this argument Hindustan relied on article 1 of the SPC Interpretation.

2) That CIETAC breached principles of natural justice when it appointed a substitute arbitrator to replace the original chair within 2 days.

All the arguments were rejected by Judge Navin Chawla.

Comments

In my view, Judge Navin Chawla made a judicious judgment.

It is important to note the distinction between providing for arbitration before CIETAC Shanghai Sub-commission on the one hand, and arbitration before “CIETAC in Shanghai” as is in the present case, on the other. The former provision refers to a specific institution by the name of CIETAC Shanghai Sub-commission whereas the latter commonly interpreted as “CIETAC” being the name of the institution whereas “Shanghai” the place of arbitration.

According to the 2005 edition of CIETAC Arbitration Rules, the claimant could choose either CIETAC the head office or CIETAC Shanghai Sub-commission to administer its arbitration if there is no such selection in the arbitration clause. Although in practice cases with a contractual provision for arbitration before CIETAC in Shanghai were usually handled by the Old Sub-commission, CIETAC reserved the right to decide otherwise. So provision for arbitration before CIETAC in Shanghai is not 100% equivalent of arbitration before CIETAC Shanghai Sub-commission.

Art. 1 of the SPC Interpretation obviously refers to an express reference to CIETAC Shanghai Sub-commission by name rather than Shanghai by place because the very object of the circular was to eradicate ambiguity and uncertainty.

Alternatively even if the reference to arbitration before CIETAC in Shanghai could be treated as 100% equivalent of CIETAC Shanghai Sub-commission, article 3 of the SPC Interpretation would have deprived Hindustan of any right to challenge the award on the ground of no competence in China. Since China is the place of arbitration, it’s only normal for the Indian court to give overriding weight to the positions of PRC laws and courts, particularly the SPC.

Chawla J’s rejection of the natural justice point was predicated on the fact that Hindustan had made no effort to achieve agreement with LDK on the choice of presiding arbitrator when it had the opportunity to do so at the start of the case. It’s true that as per the 2005 CIETAC Arbitration Rules, the same procedure should have been followed to appoint a replacement arbitrator as that for the one being replaced. In other words, to replace the presiding arbitrator, the parties should have been given 15 days to agree on a candidate. However, when a party had not exercised that right when it had an opportunity to do so in the first place, it’s hardly arguable that its legitimate interests would be compromised in any consequential way if it was not given a second opportunity. Therefore, Chawla J was only right in commenting that Hindustan was “merely trying to take advantage of an inconsequential issue to challenge the arbitral award”, and that “there is no such thing as mere technical infringement of natural justice.”

Had the presiding arbitrator been appointed without giving the parties an opportunity to agree on a candidate in the first place, would the judge have viewed it as inconsequential and rejected Hindustan’s invocation of natural justice? I think it would probably not be so. Hence the crux of the judgment is that Hindustan had waived or been slack in exercising its right to propose a presiding arbitrator candidate in the first place.

The decision of the Delhi court to enforce the award is a welcome pro-arbitration gesture of Indian courts that they would not refuse enforcement of arbitral awards merely based on some non-material technical irregularities.

 

References   [ + ]

1. ↑ See e.g. Justin D’ Agostino, Kluwer Arbitration Blog, 2 May 2014, The Aftermath of the CIETAC Split: Two years on, lower courts take clashing views on arbitration agreements and awards– but higher courts strive for consistency. 2. ↑ https://globalarbitrationreview.com/article/1171818/chinese-company-enforces-award-in-delhi-despite-arguments-based-on-cietac-split function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Kluwer Mediation Blog – August & September Digest

Tue, 2018-10-02 02:22

Anna Howard

In every negotiation the most important work is done by those in the shadows.” Ian Wishart, as quoted by Bill Marsh in “Personal Connections.”

August and September offered a particularly varied and vibrant selection of posts on the Kluwer Mediation Blog. The topics addressed, to name just a few, include: developments in the creation of the Japan International Mediation Centre – Kyoto; the introduction of mandatory mediation in Romania; developments in Vietnam’s legal and institutional framework for commercial mediation; the potential which lies in establishing strong connections across conflicts; the mediation of art disputes; the timely and provocative idea of an Interdependence Day and an International Declaration of Interdependence; and the impact of artificial intelligence on alternative dispute resolution. A brief summary of each of the posts on the Kluwer Mediation Blog in August and September can be found below. Have a look – there is something for everyone…

In “What might artificial intelligence mean for alternative dispute resolution”, James South and Andy Rogers of CEDR explore a number of questions regarding the impact of artificial intelligence on ADR including: What is AI likely to do in a setting which has been so focussed on combining subtle concepts such as legal rights and a sense of fairness (adjudication) or human interaction and coaching (mediation)? And where do these developments leave us and what will their impact be?

In “Guerilla Gardening – and a plea for a universal declaration of interdependence”, John Sturrock offers the timely and thought-provoking idea of an Interdependence Day and an International Declaration of Interdependence. Drawing on the work of Yuval Noah Harari, Bobby Duffy and Martin Nowak, John identifies a bold antidote to the isolation, silos and alienation too frequently seen in current times.

In “Nourishment for the spirit: the 20th Tulane-Humboldt summer school on Alternative Dispute Resolution”, Greg Bond shares the reflections of some of the students of the 2018 Tulane-Humboldt summer school. This year marked the 20th anniversary of this summer school which has trained over 2000 students from 87 countries on principled negotiation and mediation.

In “Using a speaking stick in mediation”, Alan Limbury explains how he uses an aboriginal speaking stick in his mediations, and to great effect. Alan also shares the five functions of the speaking stick as identified by Alain Roy, a renowned French mediator, which capture why the beautiful speaking stick can be so efficient in mediations.

In “The art of mediation and mediation of art disputes”, Rafal Morek identifies the particular nature of art disputes and explains why mediation is suited for such disputes. Rafal also lists some art disputes for which mediation has been successful and describes numerous initiatives by international organisations to promote the use of mediation for art disputes.

In “Feel the earth move – shifts in the international dispute landscape”, Eunice Chua provides a comprehensive summary of a panel discussion at the recent 2018 UNCITRAL Emergence Conference which shared the title of this post. In particular, Eunice
explores the two key themes which emerged from the panel discussion: first, the idea of a growing dispute resolution ecosystem; and secondly, a changing culture.

In “Mediation in the theatre: no thanks”, Greg Bond describes a workshop he gave on mediation based on the plays and stories of German Romantic writer Heinrich von Kleist which are full of compelling conflict. Greg explains how he presented interests-based negotiation and then asked participants to be mediators for Kleist’s obsessive characters. Greg also considers how the endings of other well-known literary works might have differed had there been some decent mediation.

In “Evaluation or guidance? What do small claimants want from mediators?”, Charlie Irvine considers the perspective of those who use mediation in small claims where most have no legal representation. Charlie shares the claimants’ views about what mediators do to assist and then contrasts this with the mediators’ perspective on what might have been useful for the claimants. Charlie explains how the evaluative/facilitative debate inhibits practitioners from doing what may seem helpful and suggests changes to address this conundrum.

In “Vietnam series: four key features of the commercial mediation framework”, Nadja Alexander offers an overview of the main features of Vietnam’s legal and institutional framework for commercial mediation. By way of very brief overview, the four key features relate to mediator qualifications and requirements for foreign mediators, institutional mediation rules and enforceability of mediated settlement agreements.

In “What have the robots ever done for us?”, Charlie Woods draws on a speech given by Adair Turner earlier this year on “Capitalism in the age of robots: work, income and wealth in the 21st-century” in which Turner argues that the rapid and unstoppable development of automation – which will play out over the next fifty to a hundred years – will have very profound implications for how we live and work. Charlie considers the implications of this development for the skills of mediators and, importantly, the contribution which such skills can make in these changing times.

In “Personal connections”, Bill Marsh describes the connection between two officials, Olly Robbins (representing the UK) and Sabine Wayward (representing the EU), who have been instrumental in keeping the Brexit talks alive during difficult periods. Bill uses this example to explore the importance of personal connections in mediation and the value of direct engagement between the parties. Bill prompts us as mediators to reflect on how we might better enable parties to create connections across the divide.

In “Total recall”, Geoff Sharp shares his theory that memory is predominantly visual and that it is greatly enhanced by visual thinking. Given that our ability as mediators to take in information, store it, and recall it is crucial to our work, Geoff offers some novel techniques on how to enhance this ability.

In “Stone soup – linking mediation theory and practice”, Rick Weiler acknowledges the gap between mediation theory and practice, and describes the Stone Soup Dispute Resolution Knowledge Project at the University of Missouri which is designed to lessen that gap through the collaboration between faculty, students, scholars, practitioners, educational institutions and professional associations. Rick provides a captivating summary of the Stone Soup fable upon which the project is based and shares how this fable’s message has influenced his teaching.

In “Mandatory pre-institution commercial mediation in India: premature step in the right direction?“, Juhi Gupta explains the key features of Section 12A of India’s Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Bill which provides for mandatory pre-institution mediation for commercial disputes. Juhi also considers the further changes which may be needed in order for there to be a greater uptake of commercial mediation in India.

In “Corporate culture and business mediation”, Paul Eric Mason draws on a number of examples from various cultures to explain how business and corporate culture can affect mediation.

In “Why don’t we mediate the “big” disputes?”, Rick Weiler uses Robert A. Baruch Bush’s seminal article “What do we need a mediator for? Mediator’s value-added for negotiation?” in arguing for a greater use of mediation in large disputes involving many parties.

In “Online Dispute Resolution in Brazil: a major opportunity for stakeholders”, Andrea Maia and Daniel Becker identify key developments in Online Dispute Resolution across the globe and then turn their focus to Brazil. They explore the opportunity for further use of ODR in Brazil and consider the resistance in Brazil to an increased used of ODR.

In “Seeing is interpreting – we are all blind in different ways”, Ting-kwok IU explores the ways in which our perspective might give us only a limited view. Ting-kwok uses the Kanizsa Triangle to illustrate that what we see may be an interpretation of what we think we have seen rather than what we have actually seen. Ting-kwok then describes the unique contribution which those who are visually impaired may be able to bring to mediation.

In “Mandatory ‘mediation attempt’“, Constantin-Adi Gavrila explains recent legislative developments in Romania regarding mandatory information sessions on mediation and how such developments have been received.

In “Getting into gear: the Japan International Mediation Centre – Kyoto”, James Claxton and Luke Nottage provide a detailed overview of key developments in the creation of the Japan International Mediation Centre – Kyoto, including the preparation of procedural rules and the compilation of a panel of mediators. James and Luke also share proposals to improve international arbitration services in Japan which, if realised, may present opportunities for symbiosis with the Japan International Mediation Centre – Kyoto.

In “What happens in mediation stays in mediation: new standards of informed consent to mediation in California”, Rafal Morek provides a detailed overview of recent changes to California’s confidentiality mediation regulations which bring about a robust and absolute approach to confidentiality in mediation.

In “Ethics in mediation: Caesar’s wife must be above suspicion”, Martin Svatos shares a recent experience in a mediation to explore the issues of impartiality, neutrality and independence in mediation and urges mediators to take the issue of conflict of interest very seriously.

In “Reconnecting with the power of symbolism”, Rosemary Howell shares a compelling example of her students’ creativity in depicting a symbolic environment of collaboration and co-operation. Rosemary acknowledges how her students’ work has reignited her enthusiasm as a mediator and facilitator to be more creative in developing ways to use the power of symbolism to encourage collaboration and harness creativity.

In “Politics and posturing: anchoring versus creative options”, Greg Bond uses a recent case from German politics to illustrate the claim for mediation as a decision-making tool. Greg uses this example to show that politics needs less posturing and more collaborative decision-making, even across political differences, and that the tools of mediation can help to achieve this.

In “Civility may not be enough – but it’s a good start”, drawing on the work of Mark Kingwell and Amartya Sen, Ian Macduff describes how civility is the oil that makes the dialogues of difference – and hence of justice, resolution, participation – possible. Ian identifies the important nuance that civility and dialogue are not joined in a linear fashion but rather feed on each other, each making the other possible – even if, as Ian says, in a muddling sort of a way.

In “Letting go”, John Sturrock describes recent experiences of “letting go” and considers, more broadly, whether mediators need to let go of ego. In so doing, John notes that the whole point of being a mediator is that we fade away when the job is done and that all that should really matter to us as mediators is the sense of personal gratitude for having an opportunity to contribute to others’ needs, to the best of our ability.

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FIFA Ban on Third-Party Ownership: A Pyrrhic Victory for FIFA in Front of the Swiss Federal Supreme Court?

Sun, 2018-09-30 23:41

Simon Bianchi

Young ICCA

Over the last few years, third-party ownership of soccer players (“TPO”) has become controversial. TPO is a mechanism through which a soccer club assigns a player’s economic rights, including the right to benefit from transfer fees every time the player is transferred to another club, to third-party investors in return for a financial counterpart. Considering that TPO threatens the integrity of sporting competitions, the Fédération Internationale de Football Association (“FIFA”) eventually banned TPO in 2015. On 20 February 2018, the Swiss Federal Supreme Court rendered decision 4A_260/2017 addressing two important legal issues in this context: (i) the legality of the prohibition of TPO and (ii) the independence of the Court of Arbitration for Sport (the “CAS”) towards FIFA. In this decision, the Supreme Court rejected an appeal from the Belgian club RFC Seraing against a CAS award confirming the validity under European and Swiss law of Articles 18bis and 18ter of the FIFA Regulations on the Status and Transfer of Players (“RSTP”), which prohibit TPO agreements.

Background
The dispute originated from two contracts entered into between RFC Seraing and Doyen Sports Investments Limited (“Doyen”) in 2015, according to which Doyen acquired ownership of certain soccer players’ economic rights against payment of a fixed fee to RFC Seraing. On 4 September 2015, the FIFA Disciplinary Committee found that RFC Seraing had violated Articles 18bis and 18ter RSTP and sentenced it to (i) a ban on recruitment for four consecutive registration periods and (ii) a fine in the amount of CHF 150,000 (approx. EUR 132,000).

On 9 March 2016, RFC Seraing brought the case before the CAS arguing that the decision of the FIFA Disciplinary Committee was to be rescinded as Articles 18bis and 18ter RSTP were in breach of (i) the free movement of persons, services and capital enshrined in the Treaty on the Functioning of the European Union (“TFEU”), (ii) European and Swiss competition laws, and (iii) RFC Seraing’s right to respect for private and family life under the European Convention on Human Rights (“ECHR”). Furthermore, RFC Seraing submitted that, in a previous case leading to the decision 4A_116/2016, the Swiss Federal Supreme Court following the CAS had already recognized the legality of TPO agreements.

In its final award dated 9 March 2017, the CAS rejected all legal arguments raised by RFC Seraing. In a nutshell, the CAS found the following:

(i) Even though Articles 18bis and 18ter RSTP restricted the free movement of persons, services and capital, these restrictions pursued legitimate objectives, such as preserving the regularity of sporting competitions and ensuring the independence and autonomy of soccer clubs and players. Furthermore, the possible anti-competitive effects of such restrictions were inherent to the pursuit of these objectives and proportionate to their achievement, especially since other financing schemes remained available to soccer clubs.
(ii) With regard to European competition law, it had already been recognized by the European Commission that FIFA constituted an association of undertakings within the meaning of Article 101 TFEU. However, Articles 18bis and 18ter RSTP did not have as their object the prevention, restriction or distortion of competition, but rather the regulation of the transfer market for soccer players in order to reach the above-mentioned legitimate objectives. In addition, RFC Seraing did not produce any documents evidencing the anti-competitive effects of these Articles. These considerations applied mutatis mutandis for Swiss competition law.
(iii) As to Article 8 ECHR, RFC Seraing did not demonstrate how it would apply and in which way Articles 18bis and 18ter RSTP would violate such provision.
(iv) Regarding the previous decision 4A_116/2016, the dispute did neither concern the conformity of TPO agreements with Articles 18bis and 18ter RSTP, nor deal with the legality of these Articles in light of the above-mentioned statutory provisions. Since the ratio decidendi of this decision did not concern the subject-matter of the present case, it did not bind the CAS in any respect.

Therefore, the CAS concluded that Articles 18bis and 18ter RSTP were valid under European and Swiss law and that the TPO agreements entered into between RFC Seraing and Doyen constituted a breach of these Articles. However, in light of the proportionality principle, the CAS reduced the ban on recruitment to three consecutive registration periods since the infringements occurred during the transitional period of the RSTP in its new version.

The Swiss Federal Supreme Court Decision
On 15 May 2017, RFC Seraing lodged an appeal to the Supreme Court against the CAS award and raised three legal arguments. First, the award was rendered by an arbitral tribunal which had been improperly constituted under Article 190(2)(a) of the Private International Law Act (“PILA”), in particular the CAS did not qualify as a proper arbitral tribunal because it lacked structural and economic independence from FIFA. Second, the arbitral award rendered by the CAS was incompatible with substantive public policy (Article 190(2)(e) PILA). Third, its right to be heard had been violated by the CAS (Article 190(2)(d) PILA).

The Supreme Court rejected RFC Seraing’s appeal and upheld the CAS award. In its judgment, the Supreme Court recalled the Lazutina decision, which recognized the CAS independence towards the International Olympic Committee, and affirmed that there is no prima facie justification to depart from this jurisprudence. Furthermore, since the Lazutina decision, the CAS had implemented numerous measures to reinforce its structural independence vis-à-vis sports federations. Concerning the economic dependence, FIFA financial participation to the CAS general expenses represented less than 10 % of the CAS total budget. That said, the Supreme Court also referred to the decision rendered in the Pechstein case by the German Federal Court of Justice which, after an extensive review of the CAS functioning, considered that it constituted a proper, independent and impartial arbitral tribunal. In conclusion, the Supreme Court did not find any valid legal ground to overturn its previous jurisprudence and confirmed that the independence of the CAS from FIFA was sufficient to consider the former as an independent and impartial arbitral tribunal.

Concerning the alleged breach of substantive public policy, the Supreme Court reiterated that competition law provisions, whether Swiss or European, do not form part of substantive public policy within the meaning of Article 190(2)(e) PILA as already decided in the Tensacciai case. Therefore, despite the fact that a Swiss arbitral tribunal shall consider Swiss and European competition laws when rendering an award, the Supreme Court would not review how the arbitral tribunal applied these competition law provisions in appeal proceedings.

Furthermore, the Supreme Court rejected RFC Seraing’s submission that TPO agreements were already declared lawful in the decision 4A_116/2016. Indeed, this decision concerned TPO agreements entered into prior to the ban adopted by FIFA, so that the CAS and the Supreme Court only reviewed whether such agreements were contrary to mandatory provisions of European and Swiss law. More specifically, the CAS and the Supreme Court noted in their respective decision that issues related to the financing of professional soccer clubs, such as the legality of TPO, had to be regulated by the relevant sports authorities. Therefore, these previous decisions did neither prevent FIFA from banning TPO, nor address the validity of such prohibition under European and Swiss law.

Finally, RFC Seraing’s contention that the prohibition of TPO violates Article 27(2) of the Swiss Civil Code, as it constitutes an excessive contractual restriction to its economic freedom, was dismissed since RFC Seraing remained free to resort to alternative financing mechanisms.

As to the alleged violation of RFC Seraing’s right to be heard, the Supreme Court found that RFC Seraing shall be precluded from raising such argument since it did not react immediately during the arbitral proceedings.

The Legality of TPO Remains Uncertain

While this decision of the Supreme Court adds to the already existing decisions about the independence of the CAS so that this issue can almost be considered as finally settled, the legality of the prohibition of TPO under European law remains far from being definitively confirmed. Indeed, the Brussels Court of Appeal, seized by RFC Seraing in parallel to the proceedings in front of the Swiss Supreme Court, rendered a partial decision on 29 August 2018 affirming that the obligation for soccer clubs to submit to the jurisdiction of the CAS was null and void as the corresponding arbitration clause was overly broad and not limited to a defined legal relationship (Article II of the New York Convention). Now that the objection to jurisdiction raised by FIFA has been rejected, the Belgian court is expected to address whether the prohibition of TPO is lawful under European law. To add complexity to this issue, the FIFA Disciplinary Committee issued a press release on 26 June 2018 indicating that players were not to be considered as “third party” under Article 18ter RSTP, which could trigger the return of TPO in another form. The TPO saga is just beginning and the Swiss Supreme Court decision might turn out to be a Pyrrhic victory for FIFA.

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State Courts and BIT Arbitrations: Cautious Optimism in the Vodafone v. India Saga?

Sun, 2018-09-30 21:51

Aman Deep Borthakur

Young ICCA

A key issue that has assumed importance in BIT arbitrations today is the role of state courts vis-à-vis investment tribunals. Two aspects of this issue become particularly relevant when courts are faced with claims of vexatious BIT arbitrations: (i) the law applicable in the court’s supervisory capacity, and (ii) the extent to which courts can intervene in such arbitrations. On 7 May 2018, the Delhi High Court addressed these issues from the Indian perspective in Vodafone’s long-running retrospective taxation dispute with the Indian authorities. Its judgement is significant for the 20 plus investment disputes India is currently embroiled in.

Factual Background

On 17 April 2014, the Dutch company, Vodafone International Holdings B.V., initiated an arbitration under the Netherlands-India Bilateral Investment Promotion and Protection Agreement (BIPA), now terminated, disputing its tax liability under Indian statute. Several years later, on 24 January, 2017, Vodafone UK initiated an arbitration under the UK-India BIPA. The Indian government approached the Delhi High Court seeking an anti-arbitration injunction since both arbitrations were related to the same question. The Court dismissed the Indian government’s plea (CS(OS) 383/2017 & I.A.No.9460/2017).

The Ruling of the Delhi High Court

The Court adopted a pro-arbitration outlook while declining to issue the anti-arbitration injunction. It held that the UK-India tribunal was the appropriate authority to decide on the question of abuse of process caused by a multiplicity of proceedings under different BITs. Three related questions were adjudicated upon by the Court: (1) the jurisdiction of state courts to deal with BIT arbitrations, (2) the law applicable to such arbitrations, and (3) multiplicity of BIT proceedings.

Firstly, as regards the jurisdiction of national courts in investment arbitrations, the Court recognised that a signatory to the ICSID Convention would agree to completely negate the jurisdiction of national courts as made clear by Article 26 of the Convention. Countries such as India which are not signatories to the Convention are therefore not bound by this requirement. Hence, a national court in an ICSID non-signatory state such as India has the power to intervene in a BIT arbitration to decide jurisdictional questions if the subject matter of the dispute was in that country. In other words, there is no threshold bar to the jurisdiction of state courts in BIT arbitrations. However, due to the kompetenz-kompetenz principle, courts should exercise this power only in exceptional circumstances such as when no alternative efficacious remedy is possible.

Secondly, on the nature of an investor state arbitration, the Court drew a distinction between an international commercial arbitration and an investor state arbitration. It overruled India’s first investment arbitration court case (Board of Trustees of the Port of Calcutta v. Louis Dreyfus, decided by the Calcutta High Court), holding that commercial arbitrations are born out of the consent of private parties, while the latter is based on state guarantees arising out of treaties. Consequently, a BIT arbitration would not be subject to domestic arbitration statutes but to international law.

The third issue which the Court ruled on was the initiation of separate arbitration proceedings under a different treaty by an entity in the same vertical structure, in this case the U.K. based parent company. It observed that since such multiple proceedings would not per se be vexatious or oppressive, this was not an extraordinary circumstance warranting the court’s intervention. Therefore, this question was ultimately left to the India-UK tribunal.

Analysis

The judgement in Vodafone is certainly a step forward in making India a more preferred seat for investment arbitrations. The court rightly recognised the competence of the UK-BIPA tribunal in being better placed to rule on its own jurisdiction.

However, a number of crucial issues merit clarification and improvement. For instance, the judgement does not define the extent to which international law would be applicable to a BIT arbitration, given specific choice of law clauses now common in a number of BITs. It also implicitly indicates a differential standard of scrutiny for intervention by a state court (whether the proceeding is abusive per se) as opposed to a tribunal. This requires clarity on what constitutes this prima facie standard of abuse of process on which the state court itself could intervene.

Furthermore, the Delhi High Court relied on international investment law cases instead of relying on the domestic Arbitration and Conciliation Act of India. This approach takes the distinction between investment and commercial arbitration too far by completely precluding the application of the Act. This is so because solely for the purpose of supervisory jurisdiction of a state court, an investment arbitration should not be treated differently from a foreign seated commercial arbitration. There is a need to draw a distinction between the substance of a country’s treaty obligations and the procedural aspects of a BIT arbitration. A state court should not intervene in questions such as whether an entity qualifies as an ‘investor’ under a treaty. These are matters that should be left entirely to the domain of a tribunal. However, the characteristic of a BIT proceeding as an arbitration should allow a state court to consider questions such as the granting of provisional measures, assisting in the taking of evidence or injunct vexatious BIT proceedings, as in this case. Adopting an entirely deferential stance towards international investment tribunals (especially problematic when the country in question is not a signatory to the ICSID Convention) would render courts unable to aid parties during BIT proceedings.

Therefore, while the substance of a BIT dispute may be governed by both public and private international law, procedurally it must be looked at from the lens of domestic law of the state court as if it were a commercial arbitration. As a consequence, Part II and Sections 9, 27 and 37 of Part I of the Arbitration Act (provisions applicable to foreign seated commercial arbitrations) would apply even to an investment arbitration with a foreign seat or no designated seat as in this case. Similar powers can be invoked under the statutes of other jurisdictions, most notably Sections 12A and 44 of the Singapore and UK arbitration legislations respectively. Furthermore, if the Act were to not be applicable, several practical issues would arise when invoking the supervisory jurisdiction of a state court. For instance, there would be no statutory scheme for the granting of interim measures by a court or execution of an investment award.

Courts have routinely applied domestic statutes while deciding on the recognition and/or enforcement of investment treaty awards. In both Sanum Investments v. Laos (PCA Case No. 2013-13) and Ecuador v. Occidental Exploration Company (LCIA Case No. UN3467), courts in Singapore and the U.K. respectively determined whether to set aside BIT awards based on provisions in their domestic arbitration statutes.

Lastly, while the court recognises the power of Indian courts to restrain/annul vexatious BIT arbitrations, it refuses to exercise its inherent power in this case on the ground that since Vodafone had offered to consolidate proceedings, there is no question of a double remedy (a view also taken by the CME v. Czech Republic Tribunal). However, there are other reasons apart from multiple awards as to why such arbitrations initiated by companies in the same vertical structure on the same facts are vexatious. The host state is put under a more onerous obligation of defending all of these arbitrations simultaneously while the investor need succeed in just one. However, as the Delhi High Court concurs, the abovementioned tactic is not per se unlawful and has been used in a number of arbitrations such as OI European Group BV v. Bolivarian Republic of Venezuela (ICSID Case No ARB/11/25). It is yet to be seen if Indian courts remain similarly cautious when called upon to exercise their powers to restrain such claims.

Takeaways

This decision has important consequences for the 51 countries India has BITs with at present. It firmly establishes that there is no threshold bar to the jurisdiction of Indian courts to issue anti-arbitration injunctions in investment arbitrations. The wide jurisdiction granted by Section 9 of India’s Civil Procedure Code and recognised by the court can potentially lead to greater court scrutiny of investment awards.

The Delhi High Court’s position on international law being applicable highlights another aspect of non-ICSID investment arbitrations. Article 42 of the Washington Convention provides for parties to agree on the applicable law failing which the law of the host state (including Conflict of Laws Principles) and international law become applicable. Since India is not an ICSID signatory, the BIT provisions must be relied upon. Most Indian BITs, including the UK-India BIPA, contain a clause to the effect that the dispute is to be decided in accordance with the provisions of the BIT. The judgement gives an indication that the interpretation of BIT provisions or any investor-state contracts which contain similar arbitration clauses will now take place in accordance with international principles and will not be subject to the same kind of grounds for annulment as in domestic law.

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China’s International Commercial Court: A Strong Competitor to Arbitration?

Sat, 2018-09-29 20:00

Li Huanzhi

In June 2018, China launched its first and second International Commercial Courts (the “CICC”). The advent of them represents a prolonged attempt of China to upgrade its judicial system by transplanting the advanced international practices to, according to the Supreme Court of China (the “SPC”), “provide services and protection for the “Belt-and-Road” construction (the “BAR”)”.

International commercial courts are certainly no novelty to the international dispute resolution (“DR”) community. Numerous ones have emerged during the past decade with the goal of enhancing the attractiveness of their host countries in the purview of the intense competition on international DR market as one of their main pursuits. However, such aim was rarely mentioned when establishing the CICC. The idea of building a mechanism and corresponding institution for solving disputes in servicing the BAR was first put forward in January 2018 by a CPC Central Committee Opinion. This Opinion set the tone for the CICC by emphasizing its ability to serve, instead of its attractiveness for international parties. The corresponding purpose is stipulated in the Recital of the Provisions of the Supreme People’s Court on Several Issues Regarding the Establishment of the International Commercial Court (the “Provisions”), which can be summarized as, firstly, to better manage international commercial cases, secondly, to create a better judicial environment for transnational players, and lastly, to facilitate the BAR construction. Although an avenue through which parties can voluntarily submit their disputes to the CICC is created, and some of the reforms made by the Provisions are indeed unprecedented, the CICC’s attraction for international cases may remain limited. I explain in this post why the CICC might only be a good “starting point” for China in the cause of being recognized as an attractive place for BAR disputes and could not, for the time being, replace international arbitration as the mainstream avenue.

1. Difficulties posed by the CICC’s jurisdictional approach

According to article 2(1) of the Provisions, parties can submit the first instance international commercial cases with actual connection with China and with an amount in dispute of at least 300 million RMB to the CICC by a jurisdiction agreement. Obviously, such approach leaves limited room for consensual jurisdiction and in practice, poses several difficulties for lawyers intending to select the CICC as the DR forum.

The first difficulty would be how to draft an effective DR clause to select the CICC. There is not always a positive correlation between the total value of a contract and the amount in dispute arising out of such contact. In other words, one cannot predict the “size” of the dispute when drafting a DR clause. Selecting the CICC in a jurisdiction agreement would produce too much uncertainty regardless of the “size” of the contract.

A “safe” way to select the CICC would be to adopt a “non-exclusive” choice of court clause stipulating that disputes over 300 million RMB will be submitted to the CICC and other disputes would be submitted to an arbitral tribunal or other Chinese courts. Nevertheless, the amount in dispute is not always fixed during a proceeding, as Mr. Wei Sun pointed out in his earlier post on this Blog. Cases where the amount in dispute exceed 300 million RMB after the acceptance of other courts either by the change of the claims by the claimant or filing counter-claims by the defendant, might have trouble reaching the CICC. Moreover, one cannot assume that cases with smaller amount in dispute are necessarily easier. Last, it is the truism that the Higher Court or the SPC could transfer tricky cases with the amount in dispute less than 300 million RMB to the CICC if they agree or decide to. Nevertheless, party autonomy would be completely deprived. Setting this quantifiable threshold might lessen the CICC’s workload at the first appearance, but the practical difficulties posed by this may result in parties not selecting the CICC at all.

It is also noted that only cases with actual connection with China can be submitted to the CICC. Here the stubborn Chinese judicial tradition, i.e., Article 34 of the Civil Procedure Law, comes into play. Article 34 enumerates several locations which parties can choose via a written jurisdictional agreement to enable the court of such locations exercising jurisdiction over their disputes. It specifically emphasizes that for a consensual venue to be valid, such venue must have actual connection with the dispute. Thus, the CICC would be difficult to satisfy the demands of parties seeking a neutral forum for BAR disputes.

Taking the other four types of jurisdiction of the CICC into consideration (i. cases transferred from the first instance Higher Court; ii. cases with significant nationwide impact; iii. cases involving application for preservation measure in arbitration and setting aside or enforcement of international commercial arbitration awards; and iv. cases designated by the SPC when it deems appropriate), essentially, they operate only as an internal allocation of jurisdiction inside of the Chinese court system. In other words, with the restriction on the consensual jurisdiction, the CICC might only facilitate the resolution of cases which are already under the Chinese jurisdiction. Moreover, in terms of the CICC’s judicial assistance for the enforcement of preservation measures and awards of international arbitration, parties would, in a way, be encouraged to use arbitration proceedings for BAR disputes.

There are significant differences between the CICC and other international commercial courts. The Singapore International Commercial Court (the “SICC”) requires only a written jurisdiction agreement for an action to be heard by it even where the dispute has no actual connection with Singapore. Similar approach is adopted by the Dubai International Financial Centre Courts (the “DIFCC”). As for the CICC, one may argue that the arrangement with regard to consensual jurisdiction would only enable international parties willing to bring cases to Chinese courts to have their disputes resolved by a more professional bench, instead of vying for jurisdiction with international institutions.

2. Difficulties posed by the Chinese upper laws

Building an international commercial court is never an isolated event. In the absence of a full-scale revision of the current laws, setting some special procedures for the CICC would not be able to eliminate parties’ concerns towards the Chinese judicial system.

A fully-internationalized commercial court requires the participation of reputable foreign judges and highly-professional international lawyers. However, according to Article 9 of the Chinese Judges Law, foreign experts are prohibited from sitting as judges on the CICC, because a judge must possess Chinese nationality. And only Chinese-admitted lawyers can act as legal representatives according to the Chinese Civil Procedure Law, even when the applicable law is foreign law. With its limited room for institutional innovation, the CICC created an internal International Commercial Expert Committee. Parties can use this Committee as the mediator after a case is accepted by the CICC. This approach does, somehow, inexplicably remove the meditation function from the collegial panel, while improving the enforceability of the mediation agreement by allowing the CICC to issue a conciliation statement or a judgment based on the mediation agreement upon parties’ request. The practical value of this Committee remains to be seen. However, it is obvious that this limited approach can by no means possess the same attractiveness compares to other courts with benches comprising leading international experts and flexible rules of representation for foreign lawyers, such as the SICC and the DIFCC, not to mention, to the international arbitration.

Moreover, the Chinese Civil Procedure Law does not provide any compulsive requirement for evidence disclosure before the start of hearings. The possibility of facing surprising evidence might be one of the biggest obstacles preventing a lawyer with common law background from trusting the Chinese judicial proceedings. The Provisions could have learnt from the SICC practices and opened a small window by allowing parties to exclude the application of the Chinese evidential rules and thereby grant more autonomy for parties to manage the proceeding. Regrettably, this issue remains unsolved.

In light of the preceding discussions, foreign lawyers’ reluctance in selecting Chinese courts as DR forum and their “medieval” impression of the Chinese judicial system can hardly be converted by the establishment of the CICC. Despite that, the CICC did achieve what it set out to achieve by helping transfer international commercial cases to the hands of a more professional and internationalized bench and creating a much more flexible and efficient procedure for those cases. The CICC may not be able to compete with international arbitration at this moment, but who is to say it will not be a good starting point?

 

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Turkey’s Court of Cassation Refuses to Enforce an Arbitration Clause in English Based on a Turkish Language Requirement

Sat, 2018-09-29 01:08

Courtney Kirkman Gucuk and Can Talaz

In a recent decision, Turkey’s Court of Cassation refused to enforce an arbitration clause in an English language contract between a Turkish party and a foreign party based on Turkey’s national language requirement for commercial enterprises, the Code on the Mandatory Usage of the Turkish Language in Commercial Enterprises No. 805 (“Law No. 805”).

The Contract

The contract at issue is a Licensing and Distribution Contract (“Contract”) between a Swiss company that produces and sells health products (“Swiss Co.”), as licensor, and a Turkish company that handles the import, export, marketing, and sales of health products (“Turkish Co.”), as licensee. The parties signed the Contract in English, without a Turkish counterpart. The Contract is governed by Swiss law and includes an arbitration clause.

The Turkish Court Proceedings

Swiss Co. filed for a declaratory judgment against Turkish Co. in the Turkish court of first instance, the 12thCivil Commercial Court of Ankara (“Commercial Court”). Swiss Co. asked the Commercial Court to declare that Swiss Co. had rightfully terminated the Contract based on Turkish Co.’s non-performance of its contractual obligations. Turkish Co. objected to the request of the Commercial Court to hear the merits of the case because of the existence of an arbitration clause. This argument was accepted by the Commercial Court.

Swiss Co. appealed the Commercial Court’s decision. The Court of Cassation overruled the Commercial Court’s decision on the grounds that the Commercial Court had failed to take into account in its decision Law No. 805 and the obligation of Turkish parties to draft contracts in the Turkish language, and it remanded the case to the Commercial Court.

On remand, the Commercial Court accepted the Court of Cassation’s reasoning and denied Turkish Co.’s objection to its jurisdiction to hear the substantive case based on the arbitration clause. The Commercial Court noted that while the contract is valid, the arbitration clause could not be invoked by Turkish Co. Accordingly, the Commercial Court made a substantive ruling on the merits and decided that Swiss Co. had rightfully terminated the Contract.

Turkish Co. appealed the Commercial Court’s decision, and argued that Law No. 805 did not apply to commercial contracts, but only to commercial books and records. The Court of Cassation rejected Turkish Co.’s argument and upheld the Commercial Court’s decision. It found that based on Article 4 of Law No. 805, Turkish Co. could not invoke the arbitration clause because it was in English. The Court of Cassation upheld the Commercial Court’s decision that Swiss Co. rightfully terminated the Contract.

Turkish Co. has appealed the Court of Cassation’s decision and asked for a correction of the judgment (karar düzeltme) and the case is currently pending before the 11thCivil Law Chamber of the Court of Cassation.

Law No. 805

Law No. 805 is relatively short, comprised of only nine articles. It was adopted in 1926, shortly after Turkey became a Republic in 1923, when Turkey was actively promoting the use of the Turkish language as state policy.

The most important provisions of Law No. 805 are as follows:

Article 1: “All types of Turkish companies and enterprises shall use the Turkish language in all kinds of transactions, contracts, communication and bookkeeping in Turkey.”

Article 2: “For foreign companies and enterprises, this obligation applies to all kinds of transactions and communications with Turkish companies and persons, and whenever foreign companies are obliged to disclose documents and company books to government bodies or officials.” Unlike Article 1, Article 2 does not include the word “contracts”.

Article 3: “Even though the companies referred in Article 2 can use a secondary foreign language in their transactions, the Turkish copy shall prevail, and the binding signatures shall be put on the Turkish copy of such documents. In case the signatures are on the foreign language copy of the contract despite this prohibition, the Turkish text shall be acknowledged.”

Article 4: “Documents and papers that are drafted after this Law becomes effective and are in violation of the above articles will not be taken into consideration for the benefit of the companies and enterprises.”

Article 7: “Any person that acts in contradiction with the provisions of this Law shall be imposed with a judicial fine that is not less than one hundred days.”

Jurisprudence  

Although Turkish parties and foreign parties routinely enter into contracts only in English, to our knowledge this decision is one of less than a dozen cases in which the Turkish courts have applied Law No. 805. The Court of Cassation selectively applied Law No. 805 to deny enforcement of the arbitration clause by Turkish Co., but enforced the rest of the Contract (also in English) on behalf of Swiss Co. Unfortunately, the Court of Cassation did not give a detailed analysis in its decision.

A look back at the few decisions in which Law No. 805 has been applied by the Turkish courts does not provide much guidance.

  • 1977: The court enforced a clause which was written in the English language and contained in a Turkish contract, finding that the clause was customarily in English.
  • 1979: The court refused to enforce a due date clause which was in English and contained in a bank security letter in Turkish given to a government office.
  • 1986: The court dismissed the argument that a foreign company doing business in Turkey should execute a contract in Turkish.
  • 2006: In a dispute between a Turkish bank customer and a Turkish branch of a foreign bank, the court of appeals found that the lower court should have considered Law No. 805.
  • 2009: In the same dispute, on remand the lower court decided that the Turkish branch of a foreign bank could not rely on a contract that was not in Turkish.
  • 2012: The Court of Cassation directed the lower court to consider, because both parties to the contract were Turkish, whether Law No. 805 applied to the dispute, and if so, to decide whether the arbitration-related clauses of the contract would benefit the defendant.
  • 2014: In a dispute between a foreign pharmaceutical company and a Turkish distributor, the court dismissed the case because it found the arbitration clause was invalid in the contract as it was drafted in English.
  • 2015: In a dispute between two Turkish companies related to a sales agreement in English, the Court of Cassation remanded the case because the lower court did not consider Law No. 805. On a second appeal, the Court of Cassation remanded again, finding that the dispute should not be resolved based on the contract but on general Turkish laws.

Analysis

While the Court of Cassation’s recent decision sheds some light on the interpretation of Law No. 805, it also leaves some questions. Significantly, the Court of Cassation’s application of Law No. 805 to the Contract resulted in the enforcement of the Contract except for the arbitration clause. Because the Court of Cassation (and the Commercial Court in the earlier decisions) did not explain its reasoning in detail, we cannot be sure of the entire legal basis for the denial of Turkish Co.’s invocation of the Contract’s arbitration clause.

The Court of Cassation may have differentiated between the parties, as Law No. 805 imposes slightly different obligations on Turkish and foreign parties. In fact, it reasoned, applying Article 4, that the arbitration clause could not be taken into account for the benefit of Turkish Co. That is, Turkish Co. failed to comply with Law No. 805 in making the arbitration agreement and cannot invoke arbitration as a defense in seeking termination of the Turkish court litigation against it. The Court of Cassation also may have reasoned that the arbitration clause was rendered inapplicable for both parties because an arbitration clause that could be invoked by only one party (here, Swiss Co., as a result of Article 4 operating to preclude Turkish Co. from invoking the arbitration clause) would be invalid under Turkish law. The Court of Cassation has a very high standard for assessing the validity of arbitration agreements, which must establish explicitly, exclusively, with certainty, and without any doubt the parties’ agreement to arbitration. Here the Court of Cassation may have decided that an arbitration clause in violation of Law No. 805 is not exclusive, if not valid.

Going Forward

We await the final decision of the Court of Cassation, which could clarify the scope of application of Law No. 805. Until then, foreign and Turkish parties doing business together in Turkey should be cautious and may wish to execute their arbitration agreements as separate contracts in English and Turkish versions. For existing contracts including arbitration clauses between foreign parties and Turkish parties that have been executed in only English, if the parties agree, a Turkish version of at least the arbitration clause can always be executed to avoid possible future complications.

The case reference is: X v. Y, Court of Cassation, 11th Civil Law Chamber, File No. 2016/5836, K. 2017/4720, dated 26/09/2017.

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CIETAC’s Fresh Footprint in North America: Drawing on Experiences of its Hong Kong Counterpart

Thu, 2018-09-27 20:00

Brad Wang and Gloria Ho

The Inauguration
On 2 July 2018, CIETAC established its second arbitration centre outside mainland China – the North America Arbitration Center in Vancouver, Canada. Co-organised by CIETAC and the Vancouver Economic Commission, the inauguration ceremony was graced by the presence of the Honourable Bruce Ralston, Minister of Jobs, Trade and Technology of the Government of British Columbia; the Honourable George Chow, Minister of State for Trade of the Government of British Columbia; Mr. Kong Weiwei, Deputy Consul General of the Consulate-General of the PRC in Vancouver; and close to 200 dignitaries from government departments, trade and commerce federations and the legal profession.

Expectations from the Vice-Chairman
Speaking at the ceremony, Vice-Chairman and Secretary-General of CIETAC Mr. Wang Chengjie pointed out that launching the North America Arbitration Center would enable CIETAC to learn from practices of international arbitration so as to enhance the internationalisation of its arbitration services. At the same time, the North America Arbitration Center would serve as a platform for the legal profession in North America to get informed of Chinese arbitrations.

Further, Mr. Wang foresaw that in establishing an overseas branch in North America, CIETAC would bring fair, efficient and convenient arbitration services to Chinese and foreign parties in North America. He indicated that CIETAC would continue its efforts in promoting the use of international arbitration and in making positive contributions to the development of global trade.

The Hong Kong Experience
Handling foreign-related commercial disputes has been CIETAC’s founding mission since it was established in 1956. However, it was only six year ago and after it has already administered approximately 30,000 cases in total, upon the invitation of the Department of Justice of Hong Kong SAR, when CIETAC decided to step outside mainland China and authorise its Hong Kong Arbitration Center to administer cases when a neutral, common law, (and of course a popular) seat of Hong Kong is preferred by parties. CIETAC was both confident and comfortable with choosing Hong Kong as it saw Hong Kong as a frequently chosen seat of arbitration, and Hong Kong party-related cases ranked as 2nd in its case profile at that time.

CIETAC Hong Kong Arbitration Center was not built in a day. We summarised three key breakthroughs which will be of great assistance to the North America Arbitration Center, as explained below:

  • Chapter VI of CIETAC Arbitration Rules 2015 and Its “Bridging” Function

Headquartered and having most cases administered in Beijing, CIETAC adopts arbitration rules which from version to version consistently feature what CIETAC considers to be the best practices of international arbitration to the extent they are practical to be carried out under the procedural laws in mainland China. The establishment of CIETAC Hong Kong Arbitration Center accordingly called for special rules that are more compatible with procedural laws and arbitration practices in Hong Kong.

Chapter VI was introduced in the CIETAC Arbitration Rules 2015 (the “Rules”), which is exclusively applicable to arbitration cases accepted and administered by the CIETAC Hong Kong Arbitration Center. The Chapter provides that cases under CIETAC Hong Kong Arbitration Center (unless parties agree otherwise) shall adopt an open panel of arbitrators and comply with the doctrine of “Kompetenz-kompetenz”; and acknowledges the power of the arbitral tribunal to make interim measures. A transparently-structured fee schedule was also introduced for the cases CIETAC Hong Kong Arbitration Center administers.

  • The Enforcement of Award of CIETAC Hong Kong Arbitration Center

CIETAC Hong Kong Arbitration Center started to administer its cases under the Rules on 1 January 2015. The next milestone event, subsequently, was the enforcement of an Arbitral Award issued by CIETAC Hong Kong Arbitration Center in mainland China, which gave lawyers and parties a glimpse of a typical case under its auspices, from the beginning to the end.

In late 2016, the Nanjing Intermediate People’s Court of Jiangsu Province of China (“the Intermediate People’s Court”) handed down its ruling ((2016) Su Ren Gang 1) to enforce an Arbitral Award issued by CIETAC Hong Kong Arbitration Center. Relying on the Supreme People’s Court’s Arrangement Concerning Mutual Enforcement of Arbitral Awards between Mainland China and Hong Kong 1999, the Intermediate People’s Court found that the CIETAC award was in accordance with procedural laws of Hong Kong, and the enforcement would not contradict the public interest of mainland China.

  • Offshore Court’s Mareva Injunction in Aid of an Ongoing Case Administered by CIETAC Hong Kong Arbitration Center

While most practitioners were discussing Hong Kong court’s supportive stance in its case Chen Hongqing v Mi Jingtian & Others (HCMP 972/2017) when it comes to granting interim relief for international arbitrations (in this case, a CIETAC mainland Chinese arbitration), an unreported case ((2017) Yue 0113 Cai Bao 237) by a local court in Guangzhou, China (“the Court”) in support of an ongoing arbitration at CIETAC Hong Kong Arbitration Center was lesser-known.

In June 2017, the Court accepted a party’s asset preservation application forwarded by CIETAC Hong Kong Arbitration Center to prevent the respondents from disposing of their assets. Primarily relying on Article 28 of Chinese Arbitration Law and upon a financial undertaking provided by a third party, the Court held that the tests for approving of such application were satisfied.

This case illustrates the “brunch” feature of CIETAC Hong Kong Arbitration Center as it carries both the characteristics of a Hong Kong seat and a sub-commission of CIETAC, a Chinese arbitration commission, and may be argued to have provided a new option of seeking interim reliefs in similar arbitrations.

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Advance Waivers of Conflicts of Interest – Changing the Dimensions of Arbitrator Challenges

Wed, 2018-09-26 23:11

Alefiyah M Shipchandler

Arbitrator neutrality remains an imperative prerequisite in international commercial arbitration. After all, the primary advantage of arbitration is that parties have the ability to choose their own decision-makers.  The issue of advance waivers typically arises at the time of appointment, when the arbitrator reserves the right to continue as an arbitrator despite the occurrence of certain potential conflicts, that would normally give rise to justifiable doubts about the arbitrator’s impartiality and independence. Thus, what the parties end up ‘waiving’ is their future right to challenge the arbitrator on the basis of the previously disclosed potential conflict.

However, can such advance waivers of conflicts of interest supersede the mandatory right of challenging an arbitrator? There exists limited guidance in terms of the validity and enforceability of such waivers and its ultimate impact on the right to have an impartial and independent tribunal. Given that there do not exist any formal Rules or Guidelines on the same, this article aims at pointing out certain practices that have begun to gradually emerge amongst arbitral institutions, in their treatment of advance waivers.

Advance Waivers of Potential Conflict of Interests

In recent times, two kinds of advance waivers are generally used by arbitrators in their declarations of independence and impartiality,

  1. Arbitrators may seek an advance waiver by which parties to the dispute ‘waive’ their right to challenge the said arbitrator at a future time, on the basis of certain potential conflicts. For example,

 “… I would however make a reservation that the other partners of my law firm may be free to continue with current or take up new instructions, involving the parties to this dispute or their affiliates.”

  1. Arbitrators may also seek a ‘waiver’ by the parties, by which the arbitrator is no longer bound by his duty to make continuous disclosure of conflicts. For example,

“The parties are requested to accept that current or future member firms of [the prospective arbitrator’s group of firms] are free … to accept instructions from or against any of the parties to this arbitration … without any duty on my part to make any disclosure in connection with any such instructions.”

Interestingly, the IBA Guidelines on Conflicts of Interest, 2014 (“IBA Guidelines“) only recognizes the use of advance waivers. It does not take any conclusive position on their validity, and leaves this question to be determined by “the specific text” of the waiver, the applicable rules and law. Similarly, even the Report of the International Commercial Disputes Committee of the New York City Bar Association simply states that, “the Committee neither endorses nor rejects the use of advance waivers, but rather seeks to encourage further dialogue and consideration of an existing trend”.

Due to a lack of uniformity on the issue, different arbitral institutions seem to follow different procedures when it comes to advance waivers. A question that needs to be answered is whether parties can in exercise of their autonomy, do away with the arbitrators’ continuous duty of disclosure, which under most procedural rules is mandatory. The UNCITRAL Model Law, for example, omits any grounds for parties to contract out of Article 12’s impartiality standards.

In fact, the IBA Guidelines specifically mandate in General Standard 3(b) that, “advance declaration or waiver in relation to possible conflicts of interest arising from facts and circumstances that may arise in the future does not discharge the arbitrator’s ongoing duty of disclosure”. Given the soft law status of the IBA Guidelines it only remains to be seen whether notwithstanding such advance waiver, an arbitrator shall nevertheless be required to disclose conflicts of interest that may arise in the future.

A practice in point, followed by the ICC is rooted in the supervisory role the Secretariat plays in arbitrations administered by it. According to the current practice, the Court is not bound by the arbitrator’s statement relating to future conflicts of interest. This essentially means that the parties are not precluded from challenging an arbitrator. The Court consequently allows challenges against arbitrators notwithstanding advance waivers. Further, the arbitrator’s duty of continuous disclosure is also not discharged.

There is also a growing tendency of arbitral institutions to refuse the appointment of an arbitrator who requires an advance waiver. For example, when an arbitrator is to be proposed by an ICC National Committee pursuant to Article 13(3) of the ICC Rules, the Court ordinarily does not appoint arbitrators who request advance waivers. A similar practice is also followed by the SCC, where the arbitrator requesting a waiver is required to revise his/her declaration before sending it to the parties.

Proposed Practice

In consonance with the IBA Guidelines and the practice of the ICC Secretariat, the validity of an advance waiver may be evaluated on the basis of the following:

  1. Limited scope of the waiver.

An overly broad waiver covering a variety of potential conflicts, is incompatible with the fundamental principle, that parties to an arbitration have a legitimate interest in being fully informed of all circumstances that ensure that an arbitrator is and remains independent and impartial. Therefore, arbitral institutions such as LCIA do not accept waivers that are overly broad.

  1. Informed consent of the parties and constructive knowledge.

For a waiver to be valid, it must be necessary that the parties are aware of the exact nature of the potential conflict and the implications that that waiver could have on proceedings. The validity of waivers must thus be evaluated on the touchstone of ‘you cannot waive what you do not know’.

  1. Continuing obligation of the arbitrator to disclose conflicts.

Waivers by which an arbitrator attempts to do away with his continuing duty of disclosure should not be accepted at all.

  1. Possibility of challenging the arbitrator despite the advance waiver.

In unison with the mandatory right to challenge an arbitrator, parties should be permitted to challenge an arbitrator despite an advance waiver, in exceptional circumstances. Such leave may be given by the supervisory institution or the arbitral tribunal as the case may be.

  1. Effect on the enforcement of the award vis-à-vis the advance waiver.

Since an arbitral award can be set aside by national courts on the grounds of partiality of an arbitrator, the validity of advance waivers may also be determined on the basis of its general treatment in the jurisdictions from which the parties to the dispute belong. For example, according to the dictum of Justice White in Commonwealth Coatings Corp. v. Continental Cas. Co, arbitrators are not automatically disqualified by a business relationship with the parties before them if both parties are informed of the relationship in advance. Thus, the United States appears amenable to enforce advance waivers.

Path Ahead

Another question that must also be answered is as to what impact the advance waiver might have on a challenge to the arbitrator. Could an arbitrator rely on the advance waiver as a defence in such case? And to that extent, can the advance waiver be used to draw conclusions on some form of acquiescence or can it be used to increase the objective standard necessary to uphold a challenge against an arbitrator?

Advance waivers thus affect various elements which are at play in commercial arbitration, including party autonomy, standards of impartiality and independence, duty of disclosure and even enforceability.  In light of the uncertainty surrounding them, it is necessary to formulate a set of rules, even if in the form of soft law, to regulate the use and ensure uniformity in the enforcement of advance waivers and address the effect they have on arbitral proceedings.

 

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The Contents of b-Arbitra, Issue 2018-1

Tue, 2018-09-25 16:33

Annet van Hooft and Jean-François Tossens

We are pleased to present you with this new issue of b-Arbitra, which is once more filled with thought provoking articles and new developments. This issue is published as part of our cooperation with Wolters Kluwer. As announced, our journal is now also accessible in digital form on Jura in Belgium and in the Kluwer Law Arbitration database.

In this issue you will find Marie Stoyanov, Werner Eyskens, Valentin Bourgeois and Michaël Fernandez-Bertier’s in-depth review of the impact that the presence, or absence, of criminal proceedings or complaints may have on the treatment of corruption allegations in investor-state arbitrations. They also look at how the arbitral proceedings and criminal proceedings may interfere with one another.

We then have Michael Neumeier and Miroslav Georgiev’s article exploring whether mass claims in arbitration in Europe, and in particular in Germany, could one day become a reality. They look into existing impediments and options to give form to such proceedings, against the background of U.S. and Australian law.

With respect to recent case law, we are very pleased to offer you two annotations by Alexander Hansebout regarding two Yukos decisions. The first annotation (concerning Civ. Bruxelles, 9 December 2016, published in b-Arbitra 2017/2) focusses on the existing confusion regarding the exequatur procedure that applies in Belgium to awards rendered in the Netherlands and provides an overview of the various existing exequatur regimes in Belgium. The second annotation concerns the seizure of assets (Civ. Bruxelles, 8 June 2017, published in b-Arbitra 2017/2), the intervention of the Belgian state and the relevance of current status of the title that the seizures were based on.

We then include the CJEU’s decision in the Achmea matter and AG Wathelet’s opinion. A comment on this opinion and the Court’s decision will be published in a future issue of our journal.

We also publish, without annotation, two decisions of the Court of First Instance of Brussels regarding third party opposition to arbitral awards. They are related to the decision of the Constitutional Court of 16 February 2017 No. 21/2017 (published with annotation by Olivier Caprasse and Maxime Malherbe in b-Arbitra 2017/2). The first judgment Civ. Bruxelles (Fr.), of 29 January 2016 concerns the proceeding up to the posing of the preliminary question to the Constitutional Court. The second judgment Civ. Bruxelles (Fr.), of 12 April 2018 concerns the Court’s decision to annul two ICC awards on the basis of third party opposition, after having obtained a confirmative answer from the Belgian Constitutional Court that the Belgian Code of Civil Procedure’s limitation of the availability of third party opposition to judgments from state courts only, violated the Constitution.

We have several book reviews, notably of Philippe De Bournonville’s (posthumous) title “L’arbitrage, tiré a part du Répertoire notarial” by Caroline Verbruggen, and of Sigvard Jarvin and Corinne Nguyen’s “Compendium of International Commercial Arbitration Forms,” by Herman Verbist. We conclude with a book review by Jean François Tossens of Jacques Herbot’s “ Contracts in the People’s Republic of China.”

We hope you enjoy this issue and always welcome further views, exchanges and suggestions from our readers.

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The Material Scope of the 1958 New York Convention: Russian Courts Make It Broader

Tue, 2018-09-25 02:00

Mikhail Samoylov

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) has its own scope – it states that it “shall apply to the recognition and enforcement of arbitral awards”. Only decisions made by arbitrators are to be considered “awards” within the meaning of the New York Convention1)UNCITRAL Secretariat Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (2016) para 22. jQuery("#footnote_plugin_tooltip_8658_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8658_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, rather than decisions handed down by judges. As one prominent academic notes: “[t]here is no universal international treaty governing the recognition and enforcement of foreign court judgments.”2)Gary B. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing (Fifth Edition) (Kluwer Law International 2016) p. 129 jQuery("#footnote_plugin_tooltip_8658_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8658_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Despite that, Russian courts are invoking the New York Convention in the exequatur proceedings of foreign court judgements.

This blog post will first briefly reveal the results from the research conducted by the author on the issue (I). The next part of this contribution then discusses some possible reasons why Russian courts apply the New York Convention erroneously (II), and some consequences of such practices (III). The author summarizes conclusions in a final part (IV).

I. A Case Study of Erroneous Practice

Research carried out by the author shows that in at least 81 cases, which were considered in recent years, Russian courts invoked the New York Convention in the exequatur proceedings of foreign court judgements.

The table below reveals (i) the countries where foreign court judgements were rendered (the nationality of a foreign court judgement); and (ii) the number of exequatur proceedings in Russian courts in which the New York Convention was applied to such judgements:

N The nationality of a foreign court judgement The number of exequatur proceedings in Russia 1. Belarus 6 2. Cyprus 3 3. China (Hong Kong) 1 4. Finland 2 5. France 2 6. Georgia 1 7. Italy 2 8. Japan 2 9. Kazakhstan 29 10. Kyrgyzstan 2 11. Lithuania 4 12. Moldova 4 13. Mongolia 1 14. Netherlands 1 15. Poland 1 16. Ukraine 17 17. United Kingdom of Great Britain and Northern 2

Moreover, Russian courts apply the New York Convention even in cases where a foreign judgement was rendered in a State (a territory) that is not a party to the New York Convention. For instance, in case No А41-55167/16, the New York Convention was invoked for the recognition and enforcement of the Nampkhosky court on sea matters of the Democratic People’s Republic of Korea in Russia.

II. Prerequisites for Erroneous Practice

There might be several possible explanations for such erroneous practice. First, there is a dual meaning of the word “arbitrage” in the Russian language. The word “arbitrazh” in Russian comes from “arbitrage” in French. While in French, “arbitrage” is an alternative method of dispute settlement (“[r]èglement d’un différend ou sentence arbitrale rendu par une ou plusieurs personnes, auxquelles les parties ont décidé, d’un commun accord, de s’en remettre.” 3)Le Nouveau Petit Robert. Dictionnaire alphabétique et analogique de la langue française ; texte remanié et amplifié sous la direction de Josette Rey-Debove et Alain Rey (Dictionnaires Le Robert, Paris 2009), p. 129 jQuery("#footnote_plugin_tooltip_8658_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8658_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });), in the terms of Russian law and the language, the word has a dual meaning, and it means :

(i) dispute resolution by a state court – an arbitrazh court;

(ii) dispute resolution by arbitral tribunals.

This dual meaning confuses Russian courts and foreign courts. For example, a Sweden court in the exequatur proceedings, confused by a translation of “an arbitrazh court” from Russian to Swedish, applied Sections 54-55 of the Swedish Arbitration Act (which correspond to Article V of the New York Convention) and declared the ruling of a Russian arbitrazh court enforceable.4) Eric Johnson, ‘The “Award” Not Recognized – and Rightfully So’ (10 April 2017). jQuery("#footnote_plugin_tooltip_8658_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8658_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, the Swedish Supreme Court corrected the lower court, clarified that in the case at hand, the enforcement was sought for a court ruling, rather than for an arbitral award (Swedish Supreme Court decision on 30 March 2017, Case No. Ö 5209-13).

Further misunderstanding can be possibly caused by the wording of Russian procedural law. Article 241 (1) of the Arbitrazh Procedure Code of the Russian Federation reads as follow:

foreign courts judgements <…>, and awards of arbitral tribunals and international commercial arbitration courts are recognized and enforced in the Russian Federation by arbitrazh courts, if the recognition and enforcement of such decisions are stipulated in an international treaty of the Russian Federation and in federal law.” (emphasis added).

In 1996, the Supreme Arbitrazh Court of the Russian Federation clarified that the New York Convention deals only with arbitral awards, whereas the recognition and enforcement of foreign court judgements are governed either by an international treaty to which Russia is a party to, or by Russian law. The notion of “a foreign court judgement” is not equal to the notion of “an arbitral award”.

Article 241 (1) of the Arbitrazh Procedure Code of the Russian Federation, which became law in 2002, rests upon the mentioned rationale. One would say that the same approach should have been true regarding its application by Russian courts. Notwithstanding the clarification of the highest court, Russian courts often consider the notions “a foreign court judgement” and “an arbitral award” as the synonyms of a common notion – a court judgement. For example, in case No А40-187536/2015 the Arbitrazh court of the city of Moscow threated a LCIA award as a foreign court judgement. Opposite, in case No A53-11372/2017, the Arbitrazh court of the Rostov region treated a foreign court judgement as an arbitral award, and stated:

Grounds for refusing the recognition and enforcement of a decision of the Economical court of the Kharkov region [Ukraine] <…> providing for Article V of the [New York] Convention are not established <…> the petition [for the enforcement] shall be satisfied.”

Finally, recognizing that Russia may not have an international treaty on the recognition and enforcement of court judgements with a country where a court judgment was rendered, Russian courts often use the New York Convention instead of such an international treaty, or use the New York Convention simultaneously with an international treaty (see, e.g., the decision of the Arbitrazh court of the Pskov region dated 16 February 2017 in case No A52-2950/2016).

III. The Consequences of Erroneous Application

The erroneous application of the New York Convention in the exequatur proceedings of foreign court judgements may, and, in fact, leads to the adverse effects to judgment creditors. At the outset, in 23 of 81 examined cases, Russian courts refused the recognition and enforcement of foreign court judgements and based its conclusions on the provisions of the New York Convention. Articles V(1)(b) and V(2)(b) of the New York Convention were the article most frequently applied by Russian courts in those cases.

(a) Proper Notice

Article V(1)(b) of the New York Convention requires that the party against whom the award is invoked was properly notified of the appointment of the arbitrator and of the arbitral proceedings. Although Russian procedural law contains similar provisions regarding foreign court judgements, Russian courts apply Article V(1)(b) of the New York Convention instead of a relevant provision of a procedural law. For example, in case No А47-2947/2010, the Arbitrazh court of the Orenburg region refused the enforcement and recognition of a Kazakhstan court judgement having established that the judgement debtor was not properly notified of a court proceeding in Kazakhstan.

(b) Public Policy

The public policy defence is one of the most often invoked by the parties against whom arbitral awards, or foreign courts decisions, are invoked.

Russian procedural law entitles Russian courts to refuse the enforcement of a foreign court judgement if the enforcement of such judgement would violate of the Russian public policy (Article 244 (1)(7) the Arbitrazh Procedure Code the Russian Federation). Hence, recourse to the New York Convention is not needed. Nevertheless, Russian courts invoke Article V(2)(b) of the New York Convention, instead of a relevant provision of the Arbitrazh Procedure Code of the Russian Federation. One among numerous examples of such application is the following statement given by the Arbitrazh court of the city of Moscow in the case No А40-29792/15:

“[t]he court considers that consideration on the territory of the Republic of Moldova of a dispute that falls under the exclusive competence of a Russian arbitrazh court, violates sovereignty of the Russian Federation, Article V(2)(b) of the New York Convention, <…>, therefore the recognition and enforcement of such decision should be rejected due to violation of the public order of the Russian Federation.

IV. Conclusion

The application of the New York Convention to foreign court judgments is undoubtedly an erroneous practice of Russian courts, and such practice should be discontinued by the Russian Supreme Court. Until that moment, the following guidance may be useful for a party seeking enforcement of a foreign court judgment in Russia:

  1. All procedural requests submitting to Russian courts shall be drafted clearly, stressing that enforcement of the foreign court judgment is the aim of exequatur, rather than enforcement of an arbitral award;
  2. The party shall keep in mind that Russian courts can invoke Article V (1) of the New York Convention by its own discretion. For example, in case No А51-14965/2016, the Arbitrazh court of the Primorsky Krai faced with the recognition and enforcement of a court judgement rendered by a Hong Kong court. Despite the fact that a judgement debtor had no objections to the enforcement of the judgement, the court, guided by Article V(1)(b) of the New York Convention, examined whether the judgement debtor was properly notified of a court proceeding at the Hong Kong court;
  3. Legal arguments showing to a court that the New York Convention is not applicable in the exequatur proceedings shall be put into the case at an early stage of the proceedings. A reference to the Russian Supreme Arbitrazh Court letter of 1996 is a useful argument.

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.

References   [ + ]

1. ↑ UNCITRAL Secretariat Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (2016) para 22. 2. ↑ Gary B. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing (Fifth Edition) (Kluwer Law International 2016) p. 129 3. ↑ Le Nouveau Petit Robert. Dictionnaire alphabétique et analogique de la langue française ; texte remanié et amplifié sous la direction de Josette Rey-Debove et Alain Rey (Dictionnaires Le Robert, Paris 2009), p. 129 4. ↑ Eric Johnson, ‘The “Award” Not Recognized – and Rightfully So’ (10 April 2017). 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: International Arbitration and the Rule of Law
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Snapshot on Litigation Finance in Latin America

Sun, 2018-09-23 16:23

Zachary Krug and Helena Eatock

Litigation finance continues expand rapidly on a global basis, including in Latin America. The region’s code-based civil systems generally permit litigation funding and the continued growth in arbitration make it an attractive market for funding. Brazil, as the region’s largest economy, and with a well-developed and sophisticated legal system, is leading the way.  Moreover, local practitioners emphasize that third party funding is not only growing, but that it may be developing in a uniquely Latin American way.

Growing Demand for Funding

Practitioners familiar with the legal market report a growing interest in funding.  Erika Levin, a partner at a law firm with deep ties to the region notes that “parties in Latin America have been warming up to the idea of litigation finance over the last few years.” Likewise, Marcela Kohlbach de Faria and Marianna Marra, lawyers at Brazil’s leading litigation funder, report that interest has “been growing rapidly,” which has been driven by the “well-known advantages of litigation funding, such as access to justice and better control of companies’ allocation of costs.”

They report that the bulk of inquiries come from civil engineering and construction matters.  That is largely “due to the high costs regarding expert determinations and the (usually long) hearings of expert witnesses.”  However, inquiries come from all sectors—from mergers and acquisitions to intellectual property matters—reflecting an increasing demand throughout the legal sector.

An Uptick in Funded Matters

Now, it appears that that interest is beginning to translate into an uptick in actually funded matters—at least for certain types of disputes.

Interestingly, there is an important distinction between arbitration and litigation. Thus far, the demand for funding of arbitration has far outpaced the demand for funding in litigation. Kohlbach de Faria and Marra believe that is not surprising given the relatively low costs of litigation compared to arbitration: “Since tribunal costs are not high, so, compared to arbitration, in most cases the amount of money that must be spent to litigate in the Brazilian judiciary does not justify a funding contract.”

Thus, unlike common law jurisdictions, where the high costs of litigation are one of the main drivers of funding, in Brazil at least for now, funding is primarily being requested for arbitration matters.

While specific details remain elusive and the overall number remains small relative to other jurisdictions with a longer experience using funding, anecdotally, there appears to be a steady uptick in the number of arbitrations involving third party funding.  For example, in November 2017, Brazilian law firm Atelier Jurídico conducted a survey of Brazilian arbitration institutions on their practices with regard to third party funding.  Interestingly, the survey reports at least four cases involving third party funding, whereas there were none in the prior year.

Notably, because disclosure of funding is not generally required, this may well underreport the number of arbitrations that are third party funded.  To be sure, the numbers remain relatively small, but the trend seems evident.

Disclosure of Funding

Disclosure of funding is, of course, a topic of continued debate globally.  As funding remains new, there are few, if any, rules around funding, let alone disclosure. However, in Brazil, the CAM-CCBC (Brazil Canada Chamber of Commerce), a leading arbitral centre, issued guidelines in July 2016 recommending the disclosure of funding so that any potential conflicts can be considered.

Interestingly, since CAM-CCBC publication of its funding guidelines, other Latin American arbitral institutions have followed with similar rules or recommendations. Perhaps this suggests that concerns over potential conflicts (the main issue generally driving disclosure) are overblown, or simply a cautious approach as the centres evaluate whether the actual number of funded cases warrants promulgations of new rules.

In any event, Kohlbach de Faria and Marra note that the bulk of funding inquiries they receive for arbitration dispute involve arbitration clauses referring to Cam-CCBC (40%), followed by the ICC (16.8%).  Thus, as funding grows, the CAM-CCBC’s disclosure recommendation will have an impact even if it is not followed by other centres.

Lex Mercatoria of Latin American Funding

From the Calvo doctrine to today, Latin America often goes its own way and litigation funding may be no different.

Kohlbach de Faria and Marra emphasize that this lack of specific rules and regulations should not be seen as a sign of funding’s uncertain footing in the region. Indeed, quite the contrary:  “In Latin America, for instance, there are only a few guidelines over TPF and the institute lacks governmental regulation, but those who think such fact implements an obstacle for litigation funding may be mistaken.”  Rather, they note that “the Latin American regional market, in the absence of regulation, tends to stipulate its own application methods and limitations – a kind of lex mercatoria – whereas legislation in a market that is still blossoming could undermine its development.”

Time for a Brazilian ALF?

Nevertheless, some practitioners predict that with the growth of funding, some type of regulatory body will eventually be desirable.  For example, Carlo Verona, a partner at Demarest focused on international arbitration and cross-border litigation, argues that “self-regulation is key” because a robust “litigation funding market cannot operate without trust, transparency and suitability.”  Verona notes that the UK’s Association of Litigation Funders provides a potential model: “ALF’s Code of Conduct, set of procedural rules and stellar list of funder members is perfect adequate to the expanding Brazilian market, currently boosted by the wide spread use of arbitration for complex disputes and recent amendments regarding enforcement of judgments and awards in the Code of Civil Procedure.”

Looking to the Future

Looking ahead, litigation funding will no doubt continue to grow, particularly in arbitration, as practitioners and claimants become more familiar with its substantial advantages in offsetting risk and leveling the playing field in contentious disputes.  Of course, regional economic and political uncertainty may also play a role in the growth of funding.

For example, Brazil’s economic slump and the lingering impacts of the Lava Jato revelations likely portend a number of disputes that will eventually find their way into arbitration. Indeed, Kohlbach de Faria and Marra note that Lava Jato has had “enormous impacts” and “its unfolding affected the vast bulk of Brazilian construction and engineering companies.” Thus, funding may be particularly attractive now, “especially in the current scenario of economic crisis and difficulties in various branches of Latin America economy, such as the construction field.”

Hermes Marangos, a partner at a disputes-centred law firm in London with a cross-border practice that frequently involves Latin American matters, reflects that “the effect of new regulations to speed up justice, provide opportunities for claims by shareholders, investors in infrastructure, suppliers and consultants and many others who suffered losses in Brazil.” But Marangos notes that because many of the current disputes “involve sensitive claims for the local market and raise potential conflicts,” which provides an “opportunity for local teams which are not conflicted as well as international experts and funders come together to pursue these claims.”

Finally, “while the majority of financing has occurred with respect to arbitrations in Brazil and Mexico,” Erika Levin predicts “a continued rise in its use throughout the region with respect to arbitrations as well as litigations.”

However funding grows in Latin America, it will be particularly interesting to see how it develops differently from the common law jurisdictions where it is more deeply established.

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Confidentiality in International Commercial Arbitration: Truth or Fiction?

Sat, 2018-09-22 16:05

Marlon Meza-Salas

Confidentiality is usually mentioned among the advantages of international commercial arbitration (ICA). The thought that confidentiality is an innate attribute, seems to be an attractiveness considered to choose ICA to settle disputes. For a long time, it did not seem to be questioned that the private nature of the arbitration process also forced the parties to maintain confidentiality. However, since certain judgments were issued in some countries from the mid-1980s that held: (i) that confidentiality was not an essential attribute of arbitration (Esso and others v. Plowman (1995) 128 A.L.R. 391 —High Court of Australia), (ii) that there was no general principle of confidentiality (U.S. v. Panhandle et al. (1988) 118 F.R.D. 346 (D. Del) —in United States), or (iii) an implied duty of confidentiality in ICA (Bulbank v. A.I. Trade Finance (2000) The Supreme Court of Sweden, case T1881-99), it was evidenced that the belief about confidentiality in ICA was not universal.

When reviewing the comparative law, it is noted that there is no uniform approach on the subject but instead significant differences, since many national legislations do not regulate confidentiality at all, other countries mention it in a very general way, and exceptionally some statutes contain broader regulations. Diversity is so great that even where it is recognized, there are huge differences about its content and scope.

So, it is not surprising that many commentators reject the existence of an implied confidentiality duty in ICA. The truth is that confidentiality in ICA can be misleading, to the point that it has been said it is a “myth” (See J.C. Fernández Rozas, Trayectoria y contornos del mito de la confidencialidad en el arbitraje comercial, 2(2) Arbitraje – Revista de Arbitraje Comercial y de Inversiones 335, 335-378 (2009).

Confidentiality in National Legislations

Confidentiality in ICA is not protected in most countries, which may be due to the fact that the UNCITRAL Model Law on ICA followed in whole or in part by many countries, contains no provision in this regard. In contrast, the laws of New Zealand, Peru, Scotland and Australia have meticulous regulations on confidentiality.

The situation varies among the countries usually chosen as ICA seats. For instance, although there is no statutory regulation on confidentiality for ICA in Great Britain, there is an important development in case law to protect confidentiality. In the United States, the Federal Arbitration Act and the Uniform Arbitration Act adopted as a model by most States, do not impose confidentiality requirements. In France, a legal amendment of 2011 established the duty of confidentiality for domestic arbitration, but not for ICA unless the parties have agreed to it.

Confidentiality in Arbitration Rules

Many arbitration institutions regulate confidentiality, but mainly as a duty of the arbitrators and the staff of each center. Some rules are more detailed or there are Codes of Ethics for arbitrators, but they do not always establish a duty of confidentiality for the parties. This is the case with the ICC Rules, whose article 6 of Appendix I, and article 1 of Appendix II, only impose duties on arbitrators and the staff of the International Court of Arbitration, but not on the parties, although article 22.3 authorizes the Arbitral Tribunal to make orders concerning confidentiality upon the request of any party. Similarly, article 37.1 of the ICDR rules of the AAA only imposes duties of confidentiality on arbitrators and Administrator and article 37.2 establishes that the tribunal may make orders concerning confidentiality; in addition, there is a Code of Ethics with provisions on confidentiality for arbitrators that applies to both domestic AAA arbitrations and international ICDR arbitrations.

In contrast, article 30 of the LCIA Rules regulates the duty of confidentiality in a well-defined manner. The UNCITRAL Arbitration Rules do not mention the subject, although article 34.5 seems to recognize an implicit confidentiality of the award by requiring the consent of both parties so that it may be made public.

Personal and Material Scope of Confidentiality

The discussion is not limited to whether or not there is a duty of confidentiality, because even where the duty is recognized, its content and scope vary. Thus, among the people who could possibly be subject to a confidentiality duty, we find the arbitrators, the staff of the arbitration institutions, secretaries, witnesses, experts, court reporters, translators, interpreters or other people involved in the arbitration, the parties and their representatives and advisors.

The material scope could cover from the fact of the very existence of the arbitration, to the pleadings and memorials of the parties, the documents produced or other evidence such as witness statements or experts reports, the award and other arbitration decisions, as well as information contained in such filings.

The information contained in the arbitration filings can be critical, since it can be, for example, sensitive commercial information such as profit margins, production costs, pricing policies, know-how or trade secrets, the disclosure of which could harm one or both parties involved in an ICA. It could also expose the financial situation of a company or the existence of a defective product, situations that could compromise the image of a company in front of the public and favor competitors.

Absolute Confidentiality Does Not Exist: The Exceptions

A request for annulment, or the request for recognition and enforcement of an award issued in an ICA, are legal actions processed in courts, and in such cases the confidentiality —if any— has to yield, and the award and all information contained therein become public. Something similar happens if judicial assistance is required to request or enforce interim injunctions in an ICA. These situations are called natural exceptions to confidentiality.

Also, one or both parties may be legally bound to disclose information related to the arbitration, for example, at the request of some regulatory authority (in banking, securities, or insurance matters), or by a tax, criminal or judicial authority. In these cases, we are before exceptions to confidentiality due the public interest that are imposed over the private interest of the parties, although they could be interested in keeping the arbitration away from the public sphere.

There are other circumstances that do not fit with the inevitable situations described above, but some legislations, arbitration rules, or case law in some countries, have also admitted as exceptions to the duty of confidentiality. This is the case, for example, when disclosing the existence of arbitration is reasonably necessary to protect the legitimate interests of one of the parties vis-à-vis third parties, or to protect or enforce a right against a third party acting as a plaintiff or defendant, which has been qualified as a matter of procedural public order. It has also been considered that there is no violation of the duty of confidentiality if certain information related to the arbitration is communicated but there is a legitimate reason to do so. Likewise, the right of certain interested third parties to know the existence and outcome of the arbitration has been recognized, such as a parent company, shareholders of a company, corporate auditors, an insurance company, and even an interested party in acquiring a company that requires a due diligence.

Among interested third parties against whom a party may have a legitimate need to disclose the existence of an arbitration, an ICC publication mentions the case of a sub-contractor, who would be entitled to know the terms and circumstances of an arbitral dispute between the main contractor and the owner of the works (See Craig, Park & Paulsson, International Chamber of Commerce Arbitration 312 (Oxford/ICC, 3rd.ed., 2000). A fortiori —we add—, the owner of the works would have the right to know about an arbitral dispute between his contractor and a sub-contractor. In these cases, the exception seems to be justified in the fact that they are linked contracts that, although they are independent contracts themselves, are closely connected by sharing some degree of identity in the object or cause (See J.O.Rodner, Los Contratos Enlazados – El Subcontrato 35 (Academia de Ciencias Políticas y Sociales, 2nd.ed., 2013).

Hence, unless explicitly forbidden by the applicable legislation or arbitration rules, or by agreement among the parties, the parties may disclose details of their own arbitration, including to interested third parties, if there are legitimate reasons to justify that they are acting in good faith.

Conclusions and Recommendations

In matters of confidentiality, the only thing that tends to be recognized almost unanimously in national legislations or in the arbitration rules regarding ICA, is the duty of confidentiality of the arbitrators in the performance of their tasks, but not of the parties or other people involved in the arbitration proceedings. That is why arbitrators in ICA usually promote the inclusion of an express agreement about confidentiality among the parties when establishing the bases of the arbitration procedure, commonly called Terms of Reference.

The diversity is so great that even in cases where the applicable rules recognize the duty of confidentiality, bounded people and the protected contents also vary, which indicates that there is no presumption of confidentiality in ICA or at least there is no general principle on the matter.

That is why those interested in protecting their ICA disputes from public dissemination or in avoiding potentially unfavorable or harmful publicity, should verify the applicable law regarding confidentiality, since depending on the circumstances of each case and the agreement entered into by the parties, it could be the law applicable to the arbitration agreement, the law of the contract, or the law of the seat of arbitration. In any case it is still advisable to include express provisions in the arbitration agreement that deal with confidentiality.

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Arbitration Reform in Ukraine in Action: First Results

Sat, 2018-09-22 02:00

Kateryna Shokalo

On 15 December 2017, the renewed Supreme Court was launched in Ukraine, which triggered the entry into force of the new amendments of, inter alia, Civil and Commercial Procedure Codes. Within this broader judicial reform, a number of long-awaited changes in legal framework for international commercial arbitration have been brought forward, including the following:

  • reducing the number of court instances in arbitration-related matters from four to two, by courts of appeal acting now as the first instance courts;
  • stipulating the principle of interpretation in favorem validitatis;
  • empowering the courts to support arbitration through granting the interim measures, preservation and taking of evidence; and
  • introducing simplified procedure of voluntary compliance with arbitral awards.

To analyse the efficiency of application of the new rules, this post is overview of the court practice from the past nine months and it will highlight the most noteworthy cases.

The Enforcement of Arbitration Agreements

Ukrainian courts have been renowned for their strict formalism. For instance, from time to time, the courts refused to enforce arbitration agreements due to the non-essential discrepancies in the name of arbitral institution. This issue had become the central one in Vilnohirske sklo LLC v Expobank CZ a.s. case, which was recently considered by the Supreme Court.

The claimant, Ukrainian entity, filed a claim to a Ukrainian commercial court over the invalidity of the mortgage agreement executed in English and Ukrainian. According to the English version of this mortgage agreement, the disputes shall be decided by the “Arbitration Tribunal of the Chamber of Commerce of the Czech Republic and the Agrarian Chamber of the Czech Republic”. Meanwhile, the official name of the institution reads as “the Arbitration Court attached to the Czech Chamber of Commerce and the Agricultural Chamber of the Czech Republic”. Vilnohirske sklo claimed that the discrepancies between the official name of arbitral institution and the one stated in the arbitration agreement are so significant that make the arbitration agreement not capable of being performed.

The first instance court disagreed, referring the parties to arbitration. The court of appeal, however, upheld the claimant’s position and sent the case back to the first instance court for consideration on merits. Expobank CZ a.s. challenged this ruling to the Supreme Court, which ultimately enforced the arbitration agreement.

The Supreme Court found that notwithstanding the existing discrepancies the parties intention to resolve the disputes under the rules of particular arbitral institution is evident. Article 22 (3) of the amended Commercial Procedure Code stipulates that any defects in the arbitration agreement and/or doubts as to its validity, operability and capability of being performed should be interpreted by the court in favour of its validity, operability and capability of being performed.  Meanwhile, the court primarily derived in favorem presumption from Ukraine’s obligation to recognise arbitration agreements under Article 2 of the New York Convention and stated that it is also provided in the Article 22 (3) of the Commercial Procedure Code.

Interim Measures

Before 15 December 2017 it was practically impossible to obtain interim measures and any other support of arbitral proceedings from Ukrainian courts. The arbitration reform filled the legislative gap for arbitration proceedings seated both in Ukraine and abroad.

On 9 February 2018, SoftCommodities Trading Company SA filed an application to Odesa region Court of Appeal, acting as the first instance court, for interim measures in support of arbitration initiated under the GAFTA Arbitration Rules against Elan Soft LLP. The dispute arose out of the supply contract for supply of 20 000 tons of Ukrainian wheat by several lots. SoftCommodities claimed that the parties agreed for the supply of the lot in the amount of 2500 tons, of which Elan Soft delivered 1000 tons. The other 1500 tons should have been stored in the warehouse of Ukrainian company – Davos Firm LLC. SoftCommodities, however, figured out that only 1290 tons are available in the warehouse and, therefore, initiated the arbitration claiming damages. Arguing that Elan Soft has been trying to move all wheat remaining in the warehouse out to avoid the enforcement of future arbitral award, the SoftCommodities asked the Ukrainian court for (i) freezing 1290 tons of Ukrainian wheat stored by Davos Firm LLC, and (ii) prohibiting Davos Firm LLC and Maritime Trade Port Ust-Dunaisk, the port at the location of the warehouse, to move 1290 tons of Ukrainian wheat out of the warehouse.

Under the general rule, the court seized with the application for an interim measure should consider the case ex parte within two days, while it may order the claimant to appear before the court in certain cases or consider the application inter partes in exceptional circumstances. The court decided to hear this case with the participation of all parties, including Davos Firm LLC and Maritime Trade Port Ust-Dunaisk. The court reasoned that the additional evidence as to the amount of wheat stored in the warehouse in February 2018 and its price should be lodged and analysed as well as certain issues regarding counter-security should be decided.

On 22 February 2018, the court upheld the application in full. Regrettably, the court did not provide sound reasoning to offer a clear guidance for future applications. Furthermore, the court secured the possible damages of Elan Soft by the guarantee of another Ukrainian company in the amount equivalent to the price of 1290 tons of Ukrainian wheat. The court decided that the counter-security is obligatory in this case since SoftCommodities is neither registered, nor has its assets in Ukraine sufficient for compensation of possible damages.

Elan Soft applied to Odesa region Court of Appeal for cancellation of the interim measures, however, unsuccessfully. In the meantime, Elan Soft challenged the ruling on granting the interim measures to the Supreme Сourt. It remains to be seen whether the Supreme Court will uphold this ruling and/or clarify the test for granting the interim measures in support of arbitration.

Voluntary Compliance with an Arbitral Award

Due to foreign currency regulations, debtors encountered practical difficulties in voluntary compliance with arbitral awards. The debtor should furnish the servicing bank with the execution writ, which may be obtained as a result of recognition and enforcement proceedings. The arbitral reform resolved this problem introducing expedited procedure of recognition and voluntary compliance with the arbitral awards. The court shall consider the respective application without the participation of the parties and analyse merely the arbitrability of disputes and public policy issues.

On 4 May 2018, PJSC Centrenergo applied to Kyiv city Court of Appeal, acting as the first instance court, for recognition and voluntary compliance with the LCIA award. In this case, the tribunal dismissed the claims of Centrenergo and in a separate award ordered to repay to Mercuria Energytrading S.A. the arbitration and legal costs. On 21 May 2018, Kyiv city Court of Appeal recognised the LCIA award on costs allowing voluntary compliance therewith.

Conclusions

To streamline Ukrainian court practice in arbitration-related matters with the best international standards all participants should contribute to this process. On the one hand, the above illustrated court practice provides some reasons to hope about the tendency for efficient application of thoroughly drafted new provisions. Meanwhile, we should not undermine the significance of the fresh approach to the interpretation of old (in effect) rules. On the other hand, to build a robust and arbitration-friendly court system, the author calls Ukrainian arbitration practitioners to engage into meaningful arguments, e.g. not the ones that a negligible discrepancy in the name of institution makes the arbitration agreement incapable of being performed.

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Can Directors Rely on their Companies’ Arbitration Agreements?

Thu, 2018-09-20 23:00

Ramandeep Kaur

YSIAC

Joint venture agreements increasingly provide for arbitration, allowing the JV partners to resolve matters privately.  Where a director of a JV company (or JV partners) is sued in his capacity as a director in relation to matters arising out of the joint venture agreement, can he also rely on the arbitration agreement in the joint venture agreement?  Or, must he be left to contend with the public scrutiny of litigation?

Unsurprisingly for a legal problem, the answer is “it depends”.  It depends, according to the Singapore High Court in A co and others v D and another [2018] SGHCR 9, on objective intentions of signatories to the arbitration agreement.  As a general proposition, this is uncontroversial.  Its application however is instructive, indeed cautionary, for directors wishing to avoid litigation, who might otherwise be lulled into an assurance of confidentiality based on arbitration agreements signed by their companies.

The Court clarified that just because a director may be acting in his capacity as a director cannot justify his reliance on his company’s arbitration agreement, even if it is broadly drafted (as most arbitration agreements now are).  Something more is required.  Seemingly, a lot more is required – nothing short of an express statement covering claims against a director might suffice.

Facts

Company A was incorporated pursuant to a joint venture between companies F and G.  The relationship between parties to the joint venture was governed by an investment agreement concluded between, among others, companies A, F and G (“IA”).

The incorporated JV, Company A, was the holding company of Companies B and C, and B in turn was the parent company of Company H.  D was the executive chairman and CEO of Company G, and his son, E, was the managing director of Company C.  D and E were also directors of Company A.

Various persons and entities connected with the IA were embroiled in a string of acrimonious proceedings, which included 4 litigations and 1 arbitration.  The latest salvo in this series was a Court action by Company F against D and E.  In this suit, Company F, acting on behalf of Companies A, H and C (“Companies”), alleged that D and E were in breach of their fiduciary duties to the Companies.

D and E applied to stay the suit in favour of arbitration under section 6 of Singapore’s International Arbitration Act (“IAA”), on the basis that the arbitration agreement in the IA applied to them, even though they had not signed it.  They emphasised the breadth of the arbitration agreement, which applied to “any dispute, controversy or conflict arising out of or in connection with” the IA.  This, they argued, on a “holistic” reading of the IA, included claims brought by “Group Companies” (as defined in the IA, to include the Companies) against “Affiliates” (which included D and E).

Alternatively, relying on the “agency principle” from American jurisprudence, they contended that they could compel the Companies to arbitrate simply because the Companies’ claims concerned D and E’s conduct as directors of companies which were governed by the IA.

The Decision

The High Court declined the stay application.  There appears to have been no serious argument on whether the subject matter of the suit was indeed connected with the IA.  The issue was instead framed as whether D and E were parties to the arbitration agreement, which they had not signed.

Objectively, the arbitration agreement did not apply to D and E

Importantly, the Court held that the mere wording of the arbitration agreement, wide though it was, was insufficient to imply that it covered the Companies’ claims against D and E.  It was significant to the Court that the arbitration agreement had on a separate occasion been expressly incorporated into a deed (which was unrelated to this dispute).  This, the Court held, demonstrated that if parties intended to arbitrate disputes between the Companies and D and E, they could similarly have made an express provision to that end.

The Court concluded that nothing in the IA demonstrated the necessary objective intention to arbitrate the Companies’ claims against D and E, and in the absence of any other supporting circumstances or parties’ conduct, such intention simply was not there.  A clause in the IA, which provided that claims by Company A against D and E (as “Affiliates”) shall be prosecuted on behalf of Company A by directors of company F was found to be irrelevant, as it dealt only with who has the authority to prosecute, not with the mode of the dispute resolution.

Directors cannot rely on “agency principle” to compel arbitration

D and E also argued that they could compel the Companies to arbitrate simply because their allegations concerned D and E’s conduct as directors of companies which were governed by the IA.  This was based on the “agency principle” espoused in a 2011 American decision, Kiskadee Communications v Philip Father 2011 US Dist Lexis 34974 (N. Cal. 2011), which allows an agent to benefit from an arbitration agreement if claims against him (i) concern acts done in his capacity as an agent, and (ii) arise out of or relate to the contract containing the arbitration agreement.

The Court declined to import this “novel” point to Singapore law for a number of reasons, of which the most compelling appears to be the criticism of the “agency principle” (even within American jurisprudence) for its potential to offend parties’ objective intentions, i.e. by allowing an “agent” to invoke an arbitration agreement when objectively, parties may not have intended such an outcome.

Company F’s submissions about the differences between the tests for stay under American and Singapore legislation also found favour with the Court in reaching this conclusion.  The Court accepted that section 3 of the Federal Arbitration Act did not require the party seeking the stay to be a party to the arbitration agreement; all that was required was “an issue referable to arbitration under an agreement in writing for such arbitration”.  On the other hand, section 6 of Singapore’s IAA only allows a party to the arbitration agreement to make an application for stay.

This difference however, appears more apparent than real.  Singapore’s IAA does not define “party”, and where an “agent” seeks to rely on an arbitration agreement, his party status is the very question that needs to be decided.  Further, section 9 of Singapore’s Contract (Rights of Third Parties) Act allows third-party beneficiaries of arbitration agreements to invoke them in prescribed circumstances, thus expressly allowing non-parties to rely on them.  On the other hand, it is highly doubtful whether the American Federal Arbitration Act allows anyone other than a party to (or a third-party beneficiary of) an arbitration agreement to stay court proceedings in favour of arbitration.  It requires an issue referable to arbitration “under an agreement”, and an agreement can only be invoked by those who agree to it or are otherwise intended to be its beneficiaries.

Third party rights under Contract (Rights of Third Parties) Act (“CRTPA”)

Although D and E did not seek to rely on the CRTPA, the Court affirmed the theoretical possibility of a non-signatory invoking an arbitration agreement in his capacity as an intended third-party beneficiary of the arbitration agreement, provided:

  1. the arbitration agreement purports to confer a benefit on him, such that the benefit is intended (not merely incidental); and
  2. parties intended to entitle him to enforce the arbitration agreement.

Comment

The key take-away for directors (or other corporate officers and agents) wishing to rely on arbitration agreements signed by their companies is to say so in writing.  Otherwise, they face the uphill task of convincing the court that the signatory companies also objectively intended to make the directors parties to the companies’ arbitration agreement.

This is not easy, and as A v D demonstrates, arguments based on the interpretation of the underlying contract and the scope of disputes it envisages will likely not pass muster.  The CRTPA will also be of little, if any, assistance to a director in this predicament, as it too requires demonstration of parties’ intention to benefit a third party, and to allow him to enforce the arbitration agreement.  The safest course is to spell out the parties and the disputes that the arbitration agreement is to cover.

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Supreme Court of India ‘Rules Out’ the Rulebook in Favor of Substantive Rights

Thu, 2018-09-20 22:00

Siddharth Ratho and Tanisha Khanna

YSIAC

A mandatory legal provision is one that a party has no choice but to obey, whereas a directory provision is one which the party is encouraged to obey. In other words, a mandatory provision must be observed, disobedience of which would lead to a nullification of the legal act, whereas a directory provision is optional.

In the case of State of Bihar & Ors. v Bihar Rajya Bhumi Vijas Bank Samiti1) Civil Appeal No. 7314 of 2018 jQuery("#footnote_plugin_tooltip_6176_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6176_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, the Supreme Court of India (“SC”) has had occasion to decide whether Section 34(5)2) Section 34 (5) of the Arbitration Act (inserted vide Section 18 of the Arbitration and Conciliation (Amendment) Act, 2015) states as follows: An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement. jQuery("#footnote_plugin_tooltip_6176_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6176_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); of the Indian Arbitration and Conciliation Act, 1996 (“Act”), is a mandatory or directory provision of law. In doing so, it had to play referee to two competing considerations – discouraging unscrupulous defendants by upholding strict rules of procedure, versus preventing procedural provisions of law from defeating substantive rights. The SC eventually ruled in favor of the latter.

Consequently, prior notice to an adversary is not mandatory for filing an application to set aside an arbitration award. In reaching its conclusion, the SC elucidated important principles governing the distinction between mandatory and directory provisions of procedural law.

Precedential Back Drop

In this case, the SC was tasked with finally resolving two contrary streams of precedent. One line of rulings, helmed by New India Assurance Co. Ltd. v Hilli Multipurpose Cold Storage Pvt. Ltd. (2015) 16 SCC 20, held that procedural provisions of law (in this case the time limit prescribed for filing a written statement under the Consumer Protection Act, 1986 (“CPA”)) were mandatory in nature. The SC in New India Assurance was guided by observations in Dr. J.J. Merchant & Ors. v Shrinath Chaturvedi (2002) 6 SCC 635 to the effect that the prescribed time limit for filing of a written statement under the Code of Civil Procedure, 1908 (“CPC”) was ‘required to be adhered to.’

Eventually, the SC upheld its previous rulings in Topline Shoes v Corporation Bank, (2002) 6 SCC 33 Salem Advocate Bar Association v Union of India (2005) 6 SCC 344, State v N.S. Gnaneswaran (2013) 3 SCC 594 and Kailash v Nankhu & Ors (2005) 4 SCC 480, where similar procedural provisions prescribing time-lines were considered directory in nature.

Facts and Arguments

The newly introduced Section 34(5) of the Act provides that applications to set aside arbitral awards “shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.” Section 34(6) further provides that such an application is to be disposed of expeditiously and in any event within one year from the date on which such notice is served upon the other party.

The appellants in this case (“Appellants”) had filed an application for setting aside an arbitral award under Section 34 of the Act (“Application”) before the High Court of Patna (“Patna HC”) without issuing prior notice to the respondents (“Respondents”). The Respondents challenged the maintainability of the Application on the ground that no prior notice had been issued to them. The Appellants countered this by stating that the requirement to provide notice under Section 34 (5) of the Act was only directory in nature.

The two arguments came to a head before a single judge of the Patna HC, who relied upon the SC ruling in Kailash to hold that the requirement to issue notice under Section 34(5) of the Act was only directory in nature. However, a division bench of the Patna HC struck down the single judge’s order, opining that the obligatory language in which the provision was couched, and the object of the section, indicated that the provision was mandatory in nature.

Accordingly, the Appellants appealed the decision of the Patna HC division bench before the SC.

Game, Set, Match: SC upholds appeal, ruling that prior notice is not mandatory

On appeal, the SC initially observed that the language of Section 34(5), namely the words ‘shall’, ‘only after’ and ‘prior notice’ supported the Respondents’ argument that the provision was mandatory in nature. The SC also took note of the 246th Indian Law Commission Report (“Law Commission Report”) which documented that the object of Section 34(5) and 34(6) was that an application under Section 34 be disposed of expeditiously within a period of one year from the date of service of the notice.

However, the SC ultimately served three decisive strikes against the Respondents’ arguments.

  • Strike 1: No consequence under the Act for non-service of notice

Relying upon a plethora of judgments, the SC held that the Section 34(5) of the Act was directory in nature because no consequences was provided for its contravention.  The SC also drew a parallel with Section 29A of the Act which prescribes the time limit within which an arbitration award is required to be made and also provides that if the same is not met, the mandate of the arbitrator stands terminated. This stands in stark contrast to Sections 34(5) and 34(6) which did not prescribe a consequence if an application under Section 34 was not decided within the prescribed time limit.

  • Strike 2: Object of Section 34 was to advance justice, not defeat it

The SC held that procedural provisions of law, such as Sections 34(5) and 34(6), ought not be construed in a manner that justice itself was trampled upon. The Law Commission Report indicated that the object behind them was to dispose of applications under Section 34 expeditiously. However, as had been observed in Kailash, the intent behind such provisions was to ‘expedite the hearing and not scuttle the same.’ The SC emphasized the time-honored principle that ‘all rules of procedure were the handmaids of justice’. It noted that ‘if, in advancing the cause of justice, it is made clear that such provisions should be construed as directory, then so be it.

Apart from alluding to the ratio in Kailash to this effect, the SC also noted similar observations in Topline Shoes wherein it was held that a similar provision under the CPA did not create any substantive rights in favor of the complainant that bars a respondent from advancing his defense.

Relying upon the principles propounded in these previous judgments, the SC held that to construe the requirement of ‘prior notice’ in Section 34 as mandatory in nature would defeat the advancement of justice.

  • Strike 3: New India Assurance judgment liable to be set aside

The SC was conscious of the contrary finding of the SC in New India Assurance wherein it was held that the time period for filing a written statement under the CPA was mandatory. In doing so, the SC in New India Assurance relied upon observations in JJ Merchant wherein it was observed that a speedy trial in summary proceedings did not necessarily indicate that justice had not been administered.

In New India Assurance, the SC had reasoned that the remarks in JJ Merchant would prevail, as JJ Merchant was decided prior to Kailash.

The SC in the present case, however, noted that the judgement in New India Assurance had completely overlooked a crucial paragraph in Kailash which underscored both that (i) the observations in JJ Merchant were obiter; and (ii) Topline Shoes had not been cited before the court in JJ Merchant, and that therefore the critical ratio on the consequence of no penalty being provided had not been considered in JJ Merchant.

Additionally, the reasoning in Kailash had been successively upheld by a three–judge bench in Salem Bar Association. In light of this, the SC reasoned that the reliance on the observations in JJ Merchant in New India Assurance was misplaced, and that it was principles propounded in Kailash that held the field.

What this means for procedural provisions of Indian law

This judgment clarifies that before construing a particular provision to be mandatory or merely directory in nature, one has to assess whether there are any penal consequences provided for the same, and whether or not adhering to such a procedural requirement would in any manner take away a vested right of a party and in effect scuttle the administration of justice. This would certainly affect the applicability of the various new provisions introduced across various statutes in India, such as provisions imposing strict time lines for the resolution of disputes, whether through arbitration, litigation, or corporate insolvency.

Some of these statutory time-lines are arguably unreasonable given the judicial backlog, pendency of cases and lack of judges in India. What this judgment re-affirms is that while adhering to procedure is important, administration of justice remains paramount.

References   [ + ]

1. ↑ Civil Appeal No. 7314 of 2018 2. ↑ Section 34 (5) of the Arbitration Act (inserted vide Section 18 of the Arbitration and Conciliation (Amendment) Act, 2015) states as follows: An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement. 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: International Arbitration and the Rule of Law
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Australia’s (In)Capacity in International Commercial Arbitration

Thu, 2018-09-20 00:49

Luke Nottage and Nobumichi Teramura

With some fanfare, on the sidelines of the ICCA Congress hosted in Sydney over 15-18 April, the Australian Trade and Investment Commission (Austrade) unveiled a glossy brochure entitled “Australia’s Capability in International Commercial Arbitration”. This blog posting explains its key contents, identifying both convincing and unconvincing aspects. Our later blog posting will compare Japan as another Asia-Pacific jurisdiction that is also still struggling to attract many international commercial arbitration (ICA) cases.

Australia’s ICA Capacity

The Austrade brochure’s Introduction first summarises the general advantages of ICA: flexibility of process, final and binding outcomes, global enforceability under the New York Convention, neutrality of forum, a process “private and confidential by agreement”, and “time and cost efficiency”. The ensuing Industry Overview then argues for Australia as a compelling “neutral forum for ICA between trading partners in the Asia-Pacific region” as “the ICA landscape has evolved considerably” over the last 5-10 years, through:

  • legislative reforms (including the 2006 revisions to the UNCITRAL Model Law, enacted in 2010 for international arbitration);
  • a supportive and independent judiciary (reiterating elsewhere that the World Bank in 2018 ranked “Australia’s judicial processes as the world’s best”: p3);
  • expert arbitrators and more ICA specialisation among law firms (including a growing number of global firm offices) and barristers;
  • new arbitration centres and support facilities; and
  • “increased education and skills training offerings, from university level through to arbitrator training” (p5).

Regarding further reasons as to “why arbitrate in Australia?”, a summary diagram adds “proximity to Asia and time zone advantages” as well as “stable political environment and resilient economy”.

The last point may surprise readers even vaguely familiar with Australia’s convoluted and unstable federal politics over the last decade (and indeed last month, resulting in another change of Prime Minister). Such political uncertainty might even be linked to Australia’s piecemeal approach to amending ICA legislation evident since 2015. Readers may also wonder about the added complexity of State and Territory politics, which makes it harder and slower to implement uniform legislation nation-wide (such as Commercial Arbitration Acts now also based largely on the revised Model Law for domestic arbitrations, enacted over 2010-2017).

Yet it is true Australia’s institutions for passing, implementing and interpreting legislation are basically sound. The Austrade brochure, under the next heading of “An esteemed judicial system and modern legislative framework” (p7), adds that “Australia ranks 13th out of 180 countries on Transparency International’s corruption perception index” and more generally that “Australia is ranked 15th out of 190 economies for ease of doing business” (p10 instead states that it is ranked “14th”).

The brochure also remarks that “7 Australian universities are among the world’s Top 50 for law” (p7) – at least on the QS rankings. Later, under the heading “World-class expertise, lawyers and infrastructure” (p8), it includes (Professor) Jeffrey Waincymer as one of Australia’s “leading international arbitrators” (along with six lawyers and one former judge). Under “Building capacity through quality education and training”, the brochure notes that “many leading Australian universities offer ICA courses as part of their undergraduate or post-graduate legal degrees” (p11).  Many readers may also be aware of the strong involvement and achievements of Australian law students in the Vis Moot and other more recent competitions developing and displaying ICA-related knowledge and skills.

Australia’s ICA Incapacity

Ironically, however, mooting experience may encourage some students later as lawyers to attempt overly ambitious or innovative arguments in ICA-related court proceedings in Australia. This could explain why case disposition times have not changed before and after the 2010 amendments even in the Federal Court, arguably generating the most consistently pro-arbitration judgments over the last decade (spurring on most State and Territory courts). However, a more direct cause is probably the lack of an indemnity cost principle (as in Hong Kong) for failed challenges regarding ICA agreements and awards, despite several calls for reform. Generally, delays and costs remain major disincentives to choosing and especially later pursuing ICA. This may be particularly true for a country like Australia following the adversarial common law tradition, and with a growing population of lawyers.

A related challenge, not well addressed in the Austrade brochure, is Australia’s geographical inconvenience. Why should Asian parties come to Australia’s main cities for ICA when very popular regional venues like Singapore and Hong Kong are so much closer, as well as having all the advantages listed by Austrade? Matters could be resolved instead say in Darwin, but that northerly Australian city lacks ICA-experienced local counsel, facilities and (if matters end up in court) judges. An alternative would be to promote ICA for where the geography of Australia’s larger cities becomes an advantage, for example transactions between South America and Asia (including China’s new Belt and Road Initiative). Further niche marketing should focus on areas like the resources sector, where Australia has special expertise and the amounts in dispute are often large so travel time and expense is not such an issue. (It is therefore unfortunate that the brochure does not mention the Perth Centre for Energy and Resources Arbitration.) Another way to combat ‘the tyranny of distance’ would be to focus more on e-arbitrations and/or expedited proceedings (without hearings), especially for smaller-value disputes.

A further challenge for seating ICA in Australia is the Australian Consumer Law. It sets mandatory rules not only for transactions involving individual “consumers” in the narrower sense used abroad, but also (indeed increasingly) for business-to-business transactions. Yet there is little legislative and even case law guidance as to their scope regarding forum selection, governing law and award enforcement. Statutory reform has fallen between the cracks (namely the Treasury with consumer law regulators, and the federal Attorney General’s Department) and remains unlikely.

A final disincentive for legal advisors considering Australia as a seat for ICA may be the country’s ambivalence about Investor-State Dispute Settlement (ISDS) since 2011. It may be seen as reflecting or potentially reviving ambivalence about arbitration generally, even though the Chief Justice of the Federal Court emphasised for the ICCA Congress audience that ICA and ISDS arbitration have some significant differences.

Conclusion

Where does this leave Australia overall? The proof should be in the pudding. As another positive change over the last 5-10 years, Austrade asserts an “increased case load and use of Australian seats for ICA” (p5). No sources are given and no statistics are published by ACICA (Australia’s main ICA institution). However, a Board member’s publication in 2015 suggested that on average ACICA had attracted 8 cases per annum since the 2010 amendments. This is indeed an increase over 1-4 over 2008-9, but it is still a very small caseload. The same is true for Australia-seated ICC arbitrations: only one filed on average over 2005-9, but almost four annually since 2010. The four ICC arbitrations filed in 2017 compare with 38 in Singapore, 18 in Hong Kong, six in Korea and four in Japan.

It is also interesting to compare this Austrade brochure with another (and related website, archived here) published in 2003 with support from six major Australian law firms, promoting the “Sydney Arbitral Advantage” and replete with gorgeous photos. As well as listing similar advantages such as a supportive legislative framework for ICA, it contrasted Sydney’s mild sunny weather compared to other traditional and regional arbitral venues, and competitive hotel room rates. It also mentioned (tongue-in-cheek!) the exciting restaurant options available after “a hard day of arbitration”, and even the comparatively low price of a dozen oysters (pp12-13 of the PDF here).

The more conventional recent Austrade brochure remains another useful effort to put Australia on the map for ICA, perhaps especially for businesspeople or in-house counsel. But like most marketing initiatives, the brochure (over-)emphasises the positives. Acknowledging negatives such as geographical inconvenience could help suggest (partial) counter-measures or niche markets. A more distinctive and realistic assessment may also be more effective in persuading legal specialists, or those already familiar with Australia, to give it a go.

 

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Why arbitrate at the Astana International Financial Centre?

Wed, 2018-09-19 00:23

Philip Kim

Herbert Smith Freehills

A focus on the AIFC Arbitration and Mediation Rules 2018 and improvement to enforcement of arbitral awards in Kazakhstan

Introduction to the AIFC

The Astana International Financial Centre (AIFC) is a financial hub in Kazakhstan that came into operation this year. The purpose of the AIFC is to establish itself as a key centre for financial services in Central Asia, with a view to diversifying the Kazakh economy and provide a platform to achieve Kazakhstan’s aim of becoming one of the top 30 developed countries by 2050.1) “100 Concrete Steps”, News Release, Embassy of Kazakhstan in the UK. See also here. jQuery("#footnote_plugin_tooltip_4450_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4450_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  The AIFC also seeks to capitalise on the Belt and Road initiative and support the finance needs of the Kazakh economy, which is undergoing significant change, as a result of the continued privatisation of State assets in Kazakhstan.

In a previous blog post, I reported on the establishment of the AIFC, its legal framework and its dispute resolution bodies. In short, the AIFC is like a “country within a country”, which has an independent judiciary separate from the Kazakh courts, the AIFC Court, which consists of distinguished common law judges and applies English law to disputes that come before it. In addition to the AIFC Court, the AIFC has an international arbitration centre, the procedural rules of which will be considered in this blog post.

AIFC Rules

Leading arbitral institutions, particularly in recent years, have strived to enhance the user experience, by making real efforts to distinguish themselves from each other, through constant innovations in their procedural rules, which have resulted in tangible improvements, such as the strengthening of ethics in the practice of international arbitration, increased awareness of the need for and encouragement of better cost and time efficiency,2) Many leading arbitral institutions publish comparative studies in relation to costs incurred in institutionally administered arbitrations. jQuery("#footnote_plugin_tooltip_4450_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4450_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and the establishment of emergency arbitrator procedures.

The International Arbitration Centre of the AIFC is no exception to this trend. Despite being a young arbitral institution, which began operations this year, it has announced state-of-the-art rules for its administered arbitrations (Rules), which came into force on 1 January 2018.

 Key features of the Rules

The Rules are broadly similar in content and structure to those of the leading arbitral institutions such as the rules of the LCIA and the HKIAC, in that they contain the standard elements that would be expected in procedural rules, such as procedures to be followed for the commencement of arbitration and the appointment of arbitrators, as well as procedures for seeking interim or emergency relief and procedures by which proceedings can be consolidated and additional parties joined to arbitral proceedings. However, there are some notable provisions in the Rules, as follows.

  • Overriding Objective – Article 2 states that the purpose of the overriding objective of the Rules is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense. It is interesting to see the use of terminology perhaps more familiar to those users of the Civil Procedure Rules in the English Courts. It is also worth noting that the language of Article 2 draws from section 33 of the English Arbitration Act 1996, which differs slightly in that it expressly imposes a general duty to the tribunal. It will be interesting to see whether Article 2 will have any utility, and if it is relied on, how it will be interpreted, as such a statement is capable of varied interpretation by tribunals. Although Article 2 of the Rules appears, on its wording, to be less stringent than the “duty” imposed under section 33 of the English Arbitration Act, it is unlikely to make any difference in practice because the overriding objective in Article 2 is clearly well intended and reflects a standard that should be maintained in arbitral practice.
  • Joinder and Consolidation – Article 6 contains provisions on joinder and consolidation, which makes the Rules suitable for disputes involving multiple contracts. Articles 6.8 and 6.9 are specifically aimed at arbitrations involving multiple contracts. However, Articles 6.8 and 6.9 do not make clear whether arbitrations involving multiple contracts should be commenced in: (i) a single Request for Arbitration or (ii) in separate Requests of Arbitration and later consolidated.3) In comparison, see Rule 6 of the SIAC Rules 2016, which is more detailed. jQuery("#footnote_plugin_tooltip_4450_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4450_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • Independence of Arbitrators – Article 9 requires arbitrators to be independent and impartial. There is also a requirement for prompt disclosure, throughout the life of an arbitration, of any circumstances giving rise to justifiable doubts as to an arbitrator’s independence or impartiality. The Rules do not prescribe or give guidance on these circumstances. The author has experience of cases where the parties challenged the appointment of an arbitrator on the basis of potential conflicts of their affiliated firms, rather than conflicts individual to the arbitrator. Whilst the IBA Guidelines on Conflicts of Interest in International Arbitration have become accepted good practice in the field of international arbitration, it would be interesting to see if the Centre provides more guidance how this Article may be applied, like the ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration,(paragraphs 15 to 26) and the KCAB which provides guidance on this topic in its ethics for arbitrators.
  • Amended and Supplemented Statement of Case – Article 13.8 permits a party to submit an amended or supplemented Statement of Case, so long as the party’s amended case falls within the relevant arbitration agreement and before the closure of proceedings. The Rules give the tribunal the power to refuse to accept an amendment or supplement to a Statement of Case if it would be contrary to the overriding objective. Although the overriding objective is broad in scope, it arguably restricts the tribunal’s case management powers, so far as Statements of Case are concerned. This provision contrasts with equivalent provisions in other institution’s rules; for example, under Article 22 of LCIA International Arbitration Rules (2014), any amendment or supplement to a Statement of Case is subject to an application being made to the tribunal, which is given broad discretion on whether to grant that request, taking into account any duty similar to the overriding objective under the law of the seat.
  • Representatives – Article 17 permits any authorized person, not just legal practitioners, to represent a party. In this regard, there is no harmonization in the rules of the leading arbitral institutions. For example, Rule 23 of the SIAC International Arbitration Rules (2016) is similar and permits non-lawyers to represent parties but the LCIA International Arbitration Rules (2014), by default, in Article 18, requires legal representatives. Practically speaking, it is likely that most parties in international arbitration under the Rules will choose to be represented by lawyers.
  • Tribunal appointed Experts – Article 21 permits the Tribunal to appoint experts to provide an opinion to the tribunal on any expert issue. Similar provisions are found in the rules of leading arbitral institutions, notable Article 26 of the SIAC International Arbitration Rules (2016) and Article 21 of the LCIA International Arbitration Rules (2014). However, Article 21 does not make clear how the fees and expenses of such expert would be paid. In practice, this is likely to be decided by the direction of the tribunal, exercising its broad case management powers, and agreement is likely to be reached during party consultation, but the lack of an express provision addressing that issue may prolong the party consultation and require the tribunal to give more detailed reasons for deciding how costs should be paid in the interim.
  • Sanctions for Default and Waiver – Article 22 grants the tribunal the power to draw appropriate inferences in circumstances where a party fails to comply with the Rules or any procedural order. The Rules could have gone further by giving the tribunal more wide ranging powers to encourage parties’ compliance with the Rules and procedural directions.4) See LCIA International Arbitration Rules (2014), Article 18.6. jQuery("#footnote_plugin_tooltip_4450_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4450_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • Early Determination – Article 25 provides that a party may apply to the tribunal for the early determination of an issue of fact or law by an abbreviated procedure. This is available where: (i) the claim or defence has no real prospect of success; or (ii) the claim or defence is manifestly outside the jurisdiction of the tribunal. This addresses a common concern of lack of speed in international arbitration. This is similar to Rule 29 of the SIAC International Arbitration Rules (2016). However, there are two notable differences. Firstly, Article 25 of the Rules does not require the tribunal to issue a reasoned order or award within 60 days of the application, which is the position under the SIAC Rules (Article 29.4). Instead, Article 25 confers more flexibility and permits the tribunal to fix the expedited procedure in the form it deems appropriate, with no express time limit for a decision under this procedure. Secondly, the wording of Article 25 arguably suggests that it is a summary judgment procedure, as a claim or defence can be dismissed if there is “no real prospect of success“. On the other hand, Rule 29 of SIAC Arbitration Rules (2016) imposes a higher standard by allowing early dismissal, where a claim or defence is “manifestly without legal merit” or “manifestly outside the jurisdiction of the tribunal“. It will be interesting to see how Article 25 is used and interpreted.
  • Release and Replace of Arbitrators – Article 11 provides that an arbitrator is released from the terms of his or her appointment and ceases to be a member of the tribunal when he or she delivers a notice of resignation to the Registrar. The arbitrator does not have to wait for confirmation by the Centre and the wording suggests that the resignation will be effective immediately,5) In contrast, see Article 10.1 of the LCIA International Arbitration Rules (2014). jQuery("#footnote_plugin_tooltip_4450_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4450_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and there are no provisions on whether and how much the released arbitrator would be paid.6) In contrast, see Article 10.6 of the LCIA International Arbitration Rules (2014). jQuery("#footnote_plugin_tooltip_4450_6").tooltip({ tip: "#footnote_plugin_tooltip_text_4450_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It is worth noting that Article 11.1(4) provides an additional ground for releasing an arbitrator – if the arbitrator is unable or fails to perform his or her functions as an arbitrator. It is not made express who will make this determination – the Centre and/or the other members of the tribunal (if there is more than one arbitrator). A similar provision exists under the SIAC International Rules (2016), Rule 17.3, which makes clear that the procedure for challenge and replacement of an arbitrator applies. In practice, although it remains to be seen whether it will actually be the case, it is likely that the challenge procedure under Article 10 would be followed where the ground for releasing an arbitrator is on the basis of failure to perform his or her functions.

Why would the Parties choose to arbitrate under these AIFC Rules?

There is one noteworthy feature of the Rules, which make them a particularly attractive choice for commercial parties that desire a swift resolution of disputes and parties with interests in Kazakhstan.

Enforceability of orders and arbitral awards made easier in Kazakhstan

Under Article 24.4, a party may, with the permission of the tribunal, request from the AIFC Court of First Instance (an independent court within the AIFC, which consists of distinguished common law judges) an order enforcing the Tribunal’s order for interim relief or an Award. This is particularly useful where the enforcement action needs to be carried out in Kazakhstan. AIFC Court decisions are to be enforced in Kazakhstan like decisions of the national courts of Kazakhstan.  Whilst Kazakhstan is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) and the European Convention on International Commercial Arbitration (1961), neither Conventions have been ratified,7) Kazakhstan has acceded to the New York Convention jQuery("#footnote_plugin_tooltip_4450_7").tooltip({ tip: "#footnote_plugin_tooltip_text_4450_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); which has resulted in some views that foreign arbitral awards are only enforceable in Kazakhstan on a reciprocal basis. This risk is not present where enforcement is made through the AIFC Court. It is also worth noting that the AIFC shall recognise an award issued in an arbitration under the Rules, even in circumstances where the seat is not the AIFC; in other words, a London seated arbitration under the Rules would still be enforceable through the AFIC Court.8) Regulation 45(1) of the AIFC Arbitration Regulations 2017 which states that: “An arbitral award, irrespective of the State or jurisdiction in which it was made, shall be recognised as binding within the AIFC…“ jQuery("#footnote_plugin_tooltip_4450_8").tooltip({ tip: "#footnote_plugin_tooltip_text_4450_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Concluding remarks

As explained above, there are parts of the Rules which could benefit from further innovation and clarity. However, there is no doubt that these Rules, in their current form, reflect many of the more recent developments in other institutional arbitration rules. It is particularly worth noting that these Rules make it easier for awards to be enforced in Kazakhstan, the largest economy in Central Asia, with vast natural resources and growing international trade. For this reason alone, the Rules have already positioned itself to resolve disputes relating to this significant and dynamic economy. Together with the AIFC Court, it will be interesting to see how the Centre develops over time and the role it plays in resolving disputes in the CIS.

 

References   [ + ]

1. ↑ “100 Concrete Steps”, News Release, Embassy of Kazakhstan in the UK. See also here. 2. ↑ Many leading arbitral institutions publish comparative studies in relation to costs incurred in institutionally administered arbitrations. 3. ↑ In comparison, see Rule 6 of the SIAC Rules 2016, which is more detailed. 4. ↑ See LCIA International Arbitration Rules (2014), Article 18.6. 5. ↑ In contrast, see Article 10.1 of the LCIA International Arbitration Rules (2014). 6. ↑ In contrast, see Article 10.6 of the LCIA International Arbitration Rules (2014). 7. ↑ Kazakhstan has acceded to the New York Convention 8. ↑ Regulation 45(1) of the AIFC Arbitration Regulations 2017 which states that: “An arbitral award, irrespective of the State or jurisdiction in which it was made, shall be recognised as binding within the AIFC…“ 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: International Arbitration and the Rule of Law
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Towards an Exceptio Fundati? Assessing a (Potentially) Emerging Exception for Third Party Funding in Investment Treaty Decisions on Security for Costs in the Wake of Armas v. Venezuela

Mon, 2018-09-17 16:30

Alexander G. Leventhal

“The problem with money,” wrote the American poet and philosopher Ralph Waldo Emerson, “is that it costs too much.” This may soon ring all too true for some investment treaty arbitration claimants and the third parties that seek to fund their claims.

Recent developments suggest that there may be support – albeit embryonic – for an exception to traditional standards for ordering security for costs where a claimant-investor in an investment treaty arbitration receives third party funding. This touches upon an issue for which investment treaty arbitration has struggled to find a condign response. A respondent-State may face a claim from an impecunious, yet well-funded, claimant against whom it will be unable to enforce an award on costs. Although that claimant will have ample funds for the arbitration, the source of those funds, the third party funder, lies beyond the jurisdiction of the arbitral tribunal. Existing standards for provisional measures or security for costs may not address the unique nature of third party funding in investment treaty arbitration. At the same time, however, care must be taken not to stifle potentially meritorious claims for which no alternative forum exists.

In a recent decision in the case of Manuel García Armas and others v. Venezuela (PCA Case No. 2016-08, Procedural Order No. 9, 20 June 2018 (the “Decision”)), a tribunal ordered claimants to provide security for costs in an investment treaty arbitration for only the second known time. While this alone would merit some interest, two aspects of this decision are worthy of particular reflection.

First, after the claimants disclosed the existence of a third party agreement, the tribunal ordered the claimants to produce that agreement, invoking a duty to protect the integrity of the proceedings (see Decision, ¶2).

Second, having established that the agreement did not provide that the funder would cover an award for costs, the tribunal ordered the claimants to prove that they could cover such an award (Decision, ¶242). In so doing, it effectively reversed the burden of proof, which would usually lie with the moving party, and placed the onus on the non-moving parties to demonstrate their solvency. While the tribunal shied from declaring that the existence of third party funding automatically reversed the burden of proof, it found – quite creatively – on the basis of the “procedural principal that obliges the parties to cooperate in good faith with the Tribunal” and the shifting of the burden of proof, that “the burden should lie on the party that is in the best conditions to produce the evidence” (Decision, ¶246).1)Translation from the original Spanish is the author’s. jQuery("#footnote_plugin_tooltip_9606_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9606_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Be that as it may, the decision suggests no basis for the shifting of the burden of proof other than the third party funding agreement and, in particular, the fact that the agreement did not cover a costs award.

The Armas tribunal ultimately concluded that the claimants had not met the burden, brushing aside a number of concerns raised by the claimants, including:

  • the State’s role in contributing to the claimants’ insolvency, an argument whose assessment, according to the tribunal, would prejudge the merits, (Decision, ¶214);
  • the concern that providing information on the claimants’ assets could lead to reprisals from the respondent-State (Decision, ¶219); and
  • the concern that the decision would stifle an otherwise meritorious claim, a worry that, the tribunal found, lacked merit because the claimants themselves had alleged that they were solvent and thus could meet an award on costs (although the tribunal itself found such solvency had not been demonstrated) (Decision, ¶232) and because, the tribunal concluded, the “denial of justice” would in fact be greater for the respondent-State if it could not collect an award for costs (Decision, ¶235).

The grounds for this decision are unique, but its result is not entirely so. In RSM Prod. Corp. v. Santa Lucia (ICSID Case No. ARB/12/10, Decision on Saint Lucia’s Request for Security for Costs, 13 August 2014 (“RSM Decision”)), an investment treaty tribunal ordered security for costs – and even later discontinued proceedings when the claimant failed to comply with that order. The tribunal, however, did not base its decision solely on the fact that the claimant was funded by a third party. Instead, it found that the claimant’s conduct in those and other proceedings – its refusal to pay its share of the provision on costs and its failure to satisfy a prior award on costs – created a “material risk” that an award on costs would not be met (Id., ¶81), a risk that was “supported” by the fact that the claimant was funded by a third party (RSM Decision, ¶83).

A dissenting opinion by one arbitrator, Gavin Griffith QC, went even further. Alluding to the fact that a respondent-State may face an impecunious, yet well-funded, claimant, Mr Griffith suggested that the existence of a funding agreement alone should constitute exceptional circumstances justifying an order for security for costs (RSM Decision., Dissenting Opinion, ¶11).

Mr Griffith puts his finger on a delicate issue. In commercial arbitration, a moving party has the ability to know the financial state of its counterparty when entering into the arbitration agreement. A party, therefore, should not be able to stifle a meritorious claim if it cannot prove some change in the counterparty’s circumstances. Some commercial tribunals have found that the third party agreement itself constitutes a change in circumstances that merits a security for costs order (Procedural Order – Security for Costs August 3, 2012, 2 Cahiers de l’arbitrage 399 (2013)) This inquiry, however, is more challenging in investment treaty arbitration where the respondent-State does not choose its arbitral counterparty in the same way. The respondent-State’s offer to arbitrate is an open one and the State is forced to take its claimant as it lies, usually without the ability to bring a counterclaim. When the arbitration agreement is concluded, the funding agreement will generally already exist .

Likewise, where a tribunal applies a standard for provisional measures, rather than one specific to security for costs, a State’s request may not always meet the requirements of such test. Where the award is years in the future, the potential for irreparable harm may not satisfy the condition of urgency necessary for a provisional measures order (see e.g. Burimi S.r.l. and Eagle Games Sh.a. v. Albania, ICSID Case No. ARB/11/18, Procedural Order No. 2, 3 May 2012, ¶40).

But does this justify a shift in the onus probandi that could stifle a potentially meritorious claims? As the tribunal in the Pey Casado v. Chile case noted, the respondent-State could easily have included in its offer to arbitrate – i.e. in the relevant provisions of the applicable treaty – an appropriate way to deal with the issue (ICSID Case No. ARB/98/2, Décision sur les Mesures Conservatoires sollicitées par les Parties, 25 September 2001, ¶85). The same can be said of the rules governing procedure. In another dissenting opinion in the RSM case, Judge Edward Nottingham warned of the “mischief which can follow if individual tribunals adjudicating particular cases latch on to broad language in the governing documents as a warrant to address matters which, if they were matters of general concern, could and should be addressed by the ICSID Administrative Council after input and consultation with all interested parties” (RSM Decision, Dissenting Opinion, ¶17).

In this sense, the Armas Decision is timely because it was rendered only months before the Proposals for Amendment of the ICSID Rules.

These Proposals would expressly grant ICSID tribunals the power to order security for costs – separately from provisional measures. That an ICSID tribunal already has the power to do so is not in dispute. However, an independent provision could ultimately result in an autonomous standard that would allow tribunals to take into account a party’s ability to comply with an adverse decision on costs – potentially, in the same way that the Armas tribunal did.

In addition, the Proposals require parties to disclose the source of any third party funding, which could invite the tribunal to order production of the underlying agreement itself – as in the Armas case.

These Proposals, if adopted, could lead to special treatment for funded claimant-investors in security for costs decisions. Some tribunals may even be tempted to follow the lead of the Armas tribunal and shift the burden of proof onto the funded party, requiring it to demonstrate its solvency where a third party funding agreement exists and/or does not cover an award on costs.

The Armas Decision – along with the ICSID Proposals – invites us to ponder whether the future holds an emerging exceptio fundati – an exception to the traditional security for costs standard. One that would even shift the burden of proof in the presence of a third party funding agreement onto the funded party and require it to show that it can meet an award for costs. Such an exception is no trifle. It could effectively allow an investment treaty tribunal to put a halt to a claim where neither the party to the dispute nor the funder are prepared to satisfy an order for security for costs. This would be revolutionary. It would require funders to rethink their cost assumptions in investment treaty cases and could make it harder for some claimants to obtain funding.

While we may not yet be there, the Armas Decision brings us closer to Emerson’s reality.

The views expressed in this blog post are those of the author alone and do not reflect the opinions of Quinn Emanuel.

References   [ + ]

1. ↑ Translation from the original Spanish is the author’s. 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: International Arbitration and the Rule of Law
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A Candid(e) View on English Case Law in Times of Brexit

Sun, 2018-09-16 16:53

Daniel Levy

In one of Voltaire’s most famous tales, two characters continuously dispute their visions of the world, and whilst Pangloss is always looking for a cause for all small events fitting into a broader system, Candide, optimistic, prefers to look at how he himself can change the world not by pursuing its meaning, but with his everyday actions. That is why, at the very end, after Pangloss spends quite some time explaining his theories about the world, Candide just replies with his famous quote: “Excellently observed,”… “but let us cultivate our garden.”

Voltaire offers a good metaphor as to how those involved with international arbitration view their world and the cases before them. Sometimes, judges and arbitrators can be more Pangloss, trying to make their decisions fit a theoretical perspective on international arbitration and sometimes more Candide, concerned with the immediate and pragmatic challenge of a dispute and not the concatenation of all events in “the best of all worlds”.

Of course, as Candide as they can be, it is unreasonable to expect judges and arbitrators to operate in a vacuum. They are well aware of the extraordinary historical moments affecting our society and Brexit – and the attractiveness of London as a seat for international arbitration – is certainly not an exception. Curiously, a line of recent decisions handed down by the High Court and Court of Appeal in these last couple of months reveals a very interesting balance between Pangloss and Candide in favour of international arbitration.

Starting chronologically, Halliburton ([2018] EWCA Civ 817), in April 2018, shows the application of pro-international standards of disclosure to be provided by arbitrators aimed at protecting an award under an objective approach to the duty to disclose. Indeed, a certain pragmatism, particularly attractive in international arbitration, is put forward as the Court of Appeal contends that non-disclosure of a potential issue conflict in a case of overlapping appointments is not, per se, a ground for justifiable doubt as to an arbitrator’s impartiality. Instead, not only must specific circumstances be present to challenge the impartiality and independence of the arbitrator, but the duty to disclose must be determined by the arbitrator on the basis of present facts and knowledge, and not with the benefit of hindsight.

This pragmatic and contextual view of English courts, looking at each concrete situation without the concern of deductively applying general standards, is allied to the commercial and business-oriented focus of English judges in international arbitration cases, as we can see in Dreymoor ([2018] EWHC 909 (Comm)).

In Dreymoor the High Court demonstrated this perspective in relation to the extension of an arbitration clause in a group of contracts. In his decision, which considered a group of contracts which contained both ICC and LCIA clauses, expressing that the arbitration shall be seated in London, Butcher J. looked at the centre of gravity of the group of contracts and discussed how reasonable business-orientated people negotiating these commercial agreements would have decided to protect the arbitration in a sensible way: the commercial approach is balanced with flexibility and efficiency.

This is illustrated further in the Perkins decision ([2018] EWHC 1500) (Comm), handed down in June 2018 where Bryan J. construed the meaning of an obscure arbitration clause – providing for arbitration only if there was “no reciprocal enforcement procedures” between the UK and the country of the Distributor Agreement (Lebanon) – in accordance with the principles identified by Lord Hoffmann in the Fiona Trust case, ascertaining the “rational commercial purpose” or “reasonable commercial expectation” of “rational businessmen” (quoted by Bryan J at §82). It means that the interpretation of the clause must result in giving the “certainty, speed and simplicity” (at §105), three international arbitration cornerstones. In Perkins, the outcome was that the English Commercial Court granted an anti-suit injunction in respect of the Lebanese proceedings commenced by the Distributor in support of English arbitration.

Less than one month after Dreymoor, Raga ([2018] EWHC 1008 (Comm)), in May 2018, revealed another very strong pro-arbitration stance in a challenge under s.68 of the Arbitration Act 1996 (“the 1996 Act”) (serious irregularity). As the ground for serious irregularity in this LCIA case was an alleged breach of the Tribunal’s general duty under s.33 of the 1996 Act by the arbitrators’ failure to stay the arbitration until the outcome of parallel Ukrainian court procedures, this decision also represents an interesting indication as to how the English courts could react to foreign jurisdictions during Brexit. The Court made eight observations in respect of challenges to awards based on an alleged breach of a tribunal’s general duty under s. 33 of the 1996 Act, including the fact that the tribunal’s conduct must be assessed as at the time of the award and not with reference to what transpired subsequently. The case also serves as a useful reinforcement of the high threshold imposed by the English court under s.68 of the 1996 Act, protecting awards from frivolous challenges.

One day after Raga, the English court faced another very important issue of international arbitrations. In Atlas Power ([2018] EWHC 1052 (Comm)), the High Court considered an anti-suit injunction to restrain one party from challenging a partial final London-seated award before the courts of Pakistan on the grounds that the Pakistani courts had jurisdiction over the arbitration.

Although the English court was faced with a very obscure dispute resolution clause, Atlas Power shows how English courts are still firmly wedded to the fact that a choice of London as the seat of the arbitration necessarily meant that the parties intended that proceedings on the award should be only those permitted by English law, following the reasoning in C v D ([2008] 1 Lloyd’s Rep. 239). Even if the laws of Pakistan expressly governed the contracts in dispute, the High Court was keen to  distinguish the curial law from the governing law, as the former is the only one applicable to the supporting procedures of an international arbitration.

It could be argued that Atlas Power is the only decision in the series of decisions discussed recently before the English courts that reinforces the supervisory power of English courts for international arbitrations seated in London, as opposed to any other choice of law; however, if it is considered from an optimistic (rectius, Candide) perspective, it is also the decision that not only follows a quite coherent jurisprudence, but also allows international arbitrators in London to apply any foreign law to the dispute without the risk of having any of the parties trying to create a fictitious link between that same law and its respective jurisdiction.

A further injunction request was also at the centre in the case of Sana Hassib Sabbagh ([2018] EWHC 1330 (Comm)), but this time requiring the respondent not to commence an arbitration in Lebanon. If Atlas Power shows how English courts react to foreign challenges of a London-based arbitration, in this case we can see how the English courts react to an English challenge of a foreign arbitration. Although the High Court was satisfied with the claimant’s argument as to it not being bound by the articles of association containing the arbitration clause and being discussed in the Lebanese procedure, interestingly this case also shows how cautious and mindful the High Court is in granting the requested anti-arbitration injunction.

Robin Knowles J. reinforced that anti-arbitration injunctions should only be granted under exceptional circumstances and where the seat of the arbitration offers appropriate supervisory jurisdiction. The English court must be comfortable in its role of protecting parties from foreign arbitration procedures that they are not bound by and, more importantly, comfortable in doing this under foreign law: “What matters is not which court decided them but that they are correct conclusions of Lebanese law” (at 31). This is reassuring for party autonomy in the choice of applicable law.

The ease of the English courts in dealing with complex international disputes is reinforced in Nori Holdings ([2018] EWHC 1343 (Comm)) when the High Court ruled on a further case concerning anti-suit injunctions and restraining court proceedings in both Russia and Cyprus. If Raga and Atlas Power show us the reasoning of the courts concerning foreign jurisdictions, Nori Holding goes a step further as it considers a foreign EU jurisdiction and the Recast Regulation. In anticipation of Brexit, this is thought provoking.

It is interesting to note that the High Court remains very cautious to avoid disrespecting other jurisdictions and sticking to the West Tankers jurisprudence (ECJ Case C-185/07 [2009] AC 1138). What is more revealing still is that the High Court could have used the Gazprom (ECJ Case C-536/13) and Advocate General Wathelet’s opinion – and in light of  Brexit  – as a safety valve to start questioning the Recast Regulation. Nevertheless, Males J., even acknowledging that possibility, preferred to give full meaning to West Tankers (which remains “good law”) and to the Brussels Regulation. The anti-suit injunction restraining the Cypriot court proceedings was then dismissed with the anti-suit restraining the Russian proceeding being granted.

Mutual respect and comity are at the centre of this judgment and, more importantly, do not seem to depend on the sole wording of the Recast Regulation or of the ECJ case law. In a scenario where the EU agreements and the ECJ jurisdiction are questioned, it is very positive that their philosophy can be applied as rule of law.

This seems to be the exact sense of Vijay ([2018] EWHC 1539 (Comm)), decided on 20 June 2018. After an ICC sole arbitrator rendered an award in Paris ordering damages against the respondent for its failures in executing a construction contract, both the claimant and respondent started a series of actions either to enforce the award in Seychelles, where the respondents’ assets were, or to challenge it, respectively. It is important to note that different provisional and interim attachment measures were requested in Seychelles by the claimant, with the undertaking given being ultimately lifted in favour of the respondent.

In parallel, the claimant also requested the enforcement of the award in the UK, and a worldwide freezing order against the defendant. Although the enforcement procedure is still to be decided by the English courts later in 2018, the Mareva injunction was dismissed by Butcher J. The grounds for the decision seem to illustrate the concern of the High Court not only to identify which is the closest jurisdiction to support an international arbitration, but, more importantly, not to contradict its decision. Butcher J. saw a very limited link between the arbitration and the UK, as both parties were Seychelloises, their contract related to the construction of a hotel in Seychelles and was governed by Seychellois law. Paris was the seat of the arbitration and the assets of the respondent in the UK are minor compared to the assets in Seychelles.

Along with the protection of the most appropriate enforcement jurisdiction, the High Court, inter alia, also considered that any worldwide freezing order would be contrary to the decisions already rendered by the Seychellois courts, inconsistent and “disarharmonious” (at 43(4)). The pursuit of “harmony” and the respect of the primary jurisdiction concerned with the enforcement of the international award show how the English courts are attentive to offer an equally harmonious arbitration seat for its cases.

In conclusion, could we say that these eight decisions supporting the international arbitration regime in a little more than two months are a coincidence? Or are they just the result of a very long tradition of international arbitration case law evolving into a very supportive jurisdiction? In one way or another, this very business-oriented, pragmatic, international and harmonious perspective in all eight cases in only two months are too much opposite to the recent political movements to be just thrown together as insignificant as a whole. Like Voltaire’s Candide, I would prefer to see London as a beautiful garden for international arbitration and decisions that have been cultivating it for the best of all possible worlds.

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Third Party Funding in Sweden – Uncovering Uncharted Territory

Sun, 2018-09-16 02:19

Johan Sidklev, Carl Persson and Bruno Gustafsson

Introduction

Despite a rapid emergence at a global stage, third-party funding (TPF) appears yet as unfamiliar to businesses in the Nordic region. According to a survey included in the 2018 edition of the Roschier Disputes Index, merely 5 per cent of the Nordic companies have used TPF for financing litigation or enforcement proceedings. Arguably, these results mirror that the occurrences of TPF in Sweden have so far been limited to international arbitrations seated in Sweden, i.e. there is no internal market for TPF. Nonetheless, respondents of the survey who had used TPF described positive experiences, which indicates that an increasing number of businesses in the Nordic region will eventually embrace that resorting to TPF for financing arbitration costs is not only possible but may also be viable and beneficial. Concurrently, the already considerable amount of funded arbitrations seated in Sweden will likely increase and attract greater interest going forward.

Alongside the utilities of TPF are several important legal issues. In April this year, the ICCA-Queen Mary Task Force published its Report for public discussion on some of the most pressing of such inquiries, several of which remain yet to be examined from a Swedish viewpoint. As of today, there are no laws or mandatory rules in Sweden regulating TPF and, given the absence of a domestic market, it is unlikely that legislature will be introduced in the near future. Nonetheless, the particular features of Swedish law may have inferences on TPF in international arbitrations seated in Sweden as well as on the prospective emergence of a domestic funding market. This will be dealt with further below.

Restrictions on Risk Arrangements

In Sweden, the structuring of the funding agreement (i.e. the contractual arrangement stipulating the terms behind the funding) is not subject to any common practice. However, the Swedish Bar Association’s Code of Professional Conduct (CPC) governs the financial interests of Swedish lawyers. Save upon a set of exceptional grounds, the CPC prohibits lawyers from executing “risk agreements”, under which the reimbursement constitutes a percentage of the amount recovered by the client. As TPF will likely remain unregulated, the Bar Association’s stringent rules on risk agreements likely do not reflect an impending Swedish approach imposing comparable restrictions towards funding agreements. However, funders, who engage Swedish counsel, must do so accepting that Swedish lawyers utilize traditional fee models. This, in turn, might carry implications to the construction and terms behind the funding arrangement, as some funders are inclined to demand the funded party’s legal counsel to part risk through the use of outcome-based fee arrangements.1)See Jonas von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure, International Arbitration Law Library, Volume 35 (Kluwer Law International; 2016) p. 33-34. jQuery("#footnote_plugin_tooltip_4350_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4350_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Disclosure

The well-articulated issues of disclosure in relation to TPF are strongly linked to the fundamental requirement for an impartial and independent tribunal. The prevailing controversy relates to how the arbitral tribunal can ensure its independence if not informed of the existence of TPF. Currently, neither Swedish arbitration legislation nor any arbitration rules impose any apparent obligation for parties to disclose funding sua sponte.

The Queen Mary Task Force Report expresses a stricter view on disclosure obligations than tribunals have tended to do in practice. Among other things, the report suggests that parties “should, on their own initiative, disclose the existence of a third-party funding arrangement and the identity of the funder to the arbitrators”.2)See Report for public discussion of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, Apr. 2018. The ICCA Reports No. 4. At p. 81. jQuery("#footnote_plugin_tooltip_4350_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4350_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The IBA Guidelines on Conflicts of Interest expresses an analogous approach. The explanatory section re General Standard 6 (b) states that “[t]hird-party funders and insurers in relation to the dispute may have a direct economic interest in the award, and as such may be considered to be the equivalent of a party”, in effect suggesting that the same disclosure requirements that apply to the parties may be imposed towards funders.

It remains to be seen how courts and tribunals in Sweden will handle the correlation between disclosure and TPF. Previously, transnational soft law sources, such as the IBA Guidelines, have influenced the Swedish Supreme Court’s interpretation of the provisions relating to conflicts of interest in the Swedish Arbitration Act on several occasions (See, e.g., NJA 2007 p. 841 & NJA 2010 p. 317). If applied in a TPF context, this tendency may predict a shifting towards a stricter view on disclosure duties, at least with respect to the existence of funding and the identity of the funder.

Costs

In the Swedish context, case-law has developed regarding investors attempting to attribute the risk for adverse costs liability to shell companies acquired for the sole purpose of pursuing legal claims. In several cases, the Swedish Supreme court has deemed the shareholders of such “claims vehicles” personally liable for adverse costs (See, e.g., NJA 2014 p. 877 and on NJA 2006 p. 420). This veil-piercing doctrine entails that personal liability may step in where the third-party investor has acted as the effective beneficiary in the dispute and where the claim has been transferred to a company in poor financial condition. Furthermore, the cases suggest that personal liability requires that the purpose behind using the claims vehicle is to indemnify the investors in case of an adverse judgment so as to limit the adverse financial consequences of a negative outcome in the dispute. Through this development, the Swedish Supreme Court has sought to prevent arrangements whereby a creditor transfers a claim to a financially weak party in order to discharge the liability for legal fees and litigation costs in the event of an unsuccessful outcome while simultaneously retaining the financial interest linked to a successful outcome.3) Johan Sidklev & Carl Persson “Chapter 5 – Sweden” in Third Party Litigation Law Review, 1st ed. (2017) p. 146. jQuery("#footnote_plugin_tooltip_4350_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4350_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In relation to TPF, a discussed issue relates to the notion that funders, in general, do not cover adverse costs. It is debatable whether the view of the Swedish Supreme Court on costs allocation may be applied also to third-party funding in the context of arbitration. If so, does this mean that a third party funder may be ordered to pay adverse costs, for instance through tribunal-ordered costs orders directed towards the funder? We believe that the answer is no, as third-party funding generally does not involve any transfer of claims, i.e. funders do not become formal parties to the arbitrations in which they are invested.

Another measure that could mitigate the risks associated with financially weak parties who opted for the external funding of arbitration claims is security for costs. However, the use of security for costs in arbitrations involving TPF has triggered a heated debate after the tribunal in RSM v. Saint Lucia, in a fairly controversial manner, ordered security for costs against the funded claimant. Subsequent to RSM v. Saint Lucia, assessments of tribunals provide a multi-faceted view on how to evaluate the relation between impecuniousness and the existence of funding on the one hand, and the general standards for granting security for costs on the other.4)See e.g. EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, ICSID Case No. ARB/14/14. South American Silver Limited v. Bolivia, UNCITRAL, PCA Case No. 2013-15, Procedural Order No. 10 (Jan. 11, 2016), and Caso CPA No. 2016-08 Manuel Garcia Armas v. Venezuela (Procedural Order dated June 20, 2018). jQuery("#footnote_plugin_tooltip_4350_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4350_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); As per the latest revision in 2017, the SCC Arbitration Rules contain a provision (article 38) specifically on security for costs. By providing detailed and explicit requisites, including an elucidation that security for costs should be granted only under “exceptional circumstances”, article 38 provides some clarity with respect to the general conditions for granting security for costs. However, as a corollary to the lack of consistency demonstrated in international practice, it is fair to say that a prediction of how tribunals seated in Sweden will apply these conditions with respect to the involvement of a third party funder, is clouded by uncertainty.

The ICCA Queen Mary Task Force report has attempted to mitigate these uncertainties by providing recommendations as to the appropriate standards for assessing security for costs in relation to TPF. From this time and on, it will be interesting to observe what impact these directions will have on how tribunals choose to apply article 38 of the SCC Rules in funded arbitrations brought by impecunious parties.

Looking Forward

The Swedish legal community has previously viewed third-party funding with a fair amount of disinclination. However, during the course of the past year, we have witnessed the development of a more optimistic attitude among practitioners and business representatives alike. It appears indisputable that this emerging trend ventures a perspicuous future for TPF in the Nordic region, and Sweden in particular. Nonetheless, the above-discussed issues constitute merely a selection out of multiple procedural queries relating to TPF and its impact on arbitration. In order to secure a well-operating market, these issues ought to be analyzed more scrupulously and simultaneously interconnected with the characteristics of Swedish arbitration law.

References   [ + ]

1. ↑ See Jonas von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure, International Arbitration Law Library, Volume 35 (Kluwer Law International; 2016) p. 33-34. 2. ↑ See Report for public discussion of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, Apr. 2018. The ICCA Reports No. 4. At p. 81. 3. ↑ Johan Sidklev & Carl Persson “Chapter 5 – Sweden” in Third Party Litigation Law Review, 1st ed. (2017) p. 146. 4. ↑ See e.g. EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, ICSID Case No. ARB/14/14. South American Silver Limited v. Bolivia, UNCITRAL, PCA Case No. 2013-15, Procedural Order No. 10 (Jan. 11, 2016), and Caso CPA No. 2016-08 Manuel Garcia Armas v. Venezuela (Procedural Order dated June 20, 2018). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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