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Again the “Incorporation” of the IBA Guidelines into a Code of Ethics: an “Investment in Virtue”?

Fri, 2017-05-19 00:24

Duarte Gorjão Henriques

In many ways, Portugal is a remarkable arbitration-friendly jurisdiction. Not only a new UNICTRAL Model based law has been enacted a few years back now, but also its courts have proved to be very supportive of arbitration. The deference that they have been showing to the validity of the arbitration clause inserted in derivatives master agreements and to the principle of “competenz-competenz” is but a single example of this support. On the other hand, the arbitration community has been developing extraordinary efforts to show that Portugal is placed in the best position to play the role of an international arbitration hub for the Portuguese-speaking countries.

Some thought leaders applauded a few initiatives undertaken by one of the major arbitration players in Portugal. Indeed, while Michael McIlwrath considered the phenomenon of the “incorporation” of the IBA Guidelines on Conflicts of Interests into the Code of Ethics of the Lisbon Commercial Arbitration Centre as a step in the right direction, Catherine A. Rogers underscored the enactment of new criteria for the appointment of arbitrators of the said Arbitration Centre as a “positive move towards increasing party participation and confidence in arbitrator appointments by the CAC”, indicating the “Portugal’s aim to evolve from a respected domestic institution to a global competitor”.

However, two recent cases decided by the Central Administrative Court South (equivalent to the Court of Appeals for administrative matters) raise some concerns as to the real acceptance of the international standards by the Portuguese jurisdiction. In those cases, the Administrative Court had the chance to look at the “IBA Guidelines on Conflicts of Interests in International Arbitration when deciding challenges made against arbitrators in disputes involving Portuguese public entities.1)In Portugal, arbitration is admitted as means to solve disputes involving administrative matters and involving the State and other legal entities governed by public law – Art. 1(5) of the Portuguese Arbitration Law, enacted by Law No. 63/2011 of 14 December 2011. jQuery("#footnote_plugin_tooltip_5707_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5707_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The first case related to a situation where the arbitrator appointed by the claimant (private company), holder of a public concession, was challenged by the respondent (a state instrumentality) in a dispute that arose in relation to the public concession contract.2)Case decided by the Central Administrative Court South on 30 August 2016, accessible at www.dgsi.pt, last accessed on 28 de Abril de 2017. jQuery("#footnote_plugin_tooltip_5707_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5707_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The challenge was drawn on the basis of the fact that the arbitrator had been vice-chairman of the general shareholders meetings’ board of the institution bankrolling the holder of the public concession. The Administrative Court denied the challenge request and considered that the “IBA Guidelines on Conflict of Interests” are relevant but are nothing more than … guidelines. The Court went on as to state that “the guidelines are not applicable by themselves”, and consideration should be given to the dimension of Portugal. Regulation such as the “Guidelines” were drafted for international arbitration “in a human and economic universe unparalleled in the peninsular West”, stressed the Court.

In the second case, the critics went deeper.3)Case decided by the Central Administrative Court South on 16 February 2017, accessible at www.dgsi.pt, last accessed on 28 de Abril de 2017. jQuery("#footnote_plugin_tooltip_5707_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5707_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); A private entity brought a claim in arbitration against the Lisbon Municipality. During the proceedings, it became apparent that the arbitrator appointed by the private entity had been appointed by the same company in three prior cases. That arbitrator had not made any disclosure prior to initiating his mandate. For those reasons (and other ancillary not relevant for this purpose), the Municipality challenged the arbitrator before the Administrative Central Court South.

The Court denied the challenge brought by the Lisbon Municipality, stating that the “IBA Guidelines” are not the Law of Portugal. In reaching this conclusion, the Court found the following:

– the court characterized “quasi-law” or “soft-law” practices as stemming from the Anglo-Saxon traditions that are alien to the European Continental laws, and suggested it is inappropriate to import them into Portuguese cases;
– the court specifically criticized the various IBA guidelines on international arbitration as being neither applicable in domestic arbitration nor a source of Portuguese law;
– the court found that three appointments by the same party was an arbitrary standard used an “American and transnational mathematical fashion” to assess the lack of impartiality or independence of “professional arbitration lawyers” who may make their lives out of arbitration.
– thus, the court asked: why not four or five prior cases? Or in the previous four or five years?

The Court then found that being appointed by the same party on “two or three” prior occasions did not call into question the arbitrator’s independence.

The reasoning presented by these two decisions are in a staggering contrast with four other cases brought before the Supreme Court of Justice, and the Lisbon and Oporto Courts of Appeal, where it was considered that “particular weight should be given to the IBA Guidelines”.4)See decision of the Portuguese Supreme Court of Justice of 12 July 2017, decisions of the Lisbon Court of Appeal of 24 March 2015 and 29 September of 2015, and decision of the Oporto Court of Appeal of 3 June 2014, all accessible here. jQuery("#footnote_plugin_tooltip_5707_4").tooltip({ tip: "#footnote_plugin_tooltip_text_5707_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In those other cases, the courts relied on the IBA Guidelines as a particularly useful instrument in deciding conflicts of interests.

What is the source of this apparent schizophrenia in Portuguese arbitration case law? In part it may be due to a split within the domestic arbitration community in which some traditionalists believe arbitrators capable of self-regulating their independence, while others express concerns about the need to safeguard appearances and assure a degree of oversight by the courts.

It is beyond doubts that Portugal is evolving into a more modern arbitration jurisdiction, equipped with all “state of the art” legal and regulatory instruments, but it is also true that this evolution may not be accomplished without stumbles and occasional “parochialism” along the way.

As I suggested before, the mindset underlying the “traditionalist” demeanor will tend to look at a mere “reference” to the IBA Guidelines5)The provision at stake reads “bearing in mind the IBA Guidelines” (see my post). jQuery("#footnote_plugin_tooltip_5707_5").tooltip({ tip: "#footnote_plugin_tooltip_text_5707_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); as a true “incorporation”, therefore bearing the risk of bringing some binding meaning to those guidelines, which would tend to be “mathematically” applied.

That mindset was obviously echoed in those Administrative Court’s decisions. It is my hope that they are all but two isolated cases.

As Agostinho Pereira de Miranda once titled one article of his own”,6)“Investing in virtue: the duty of disclosure and the procedure to challenge the arbitrator”, originally: “Investir em virtude: dever de revelação e processo de recusa do árbitro”. See ”Revista Internacional de Arbitragem e Conciliação Vol. VI – 2013, Almedina. jQuery("#footnote_plugin_tooltip_5707_6").tooltip({ tip: "#footnote_plugin_tooltip_text_5707_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); I remain confident that these decisions do not signal a “disinvestment in virtue”.

References   [ + ]

1. ↑ In Portugal, arbitration is admitted as means to solve disputes involving administrative matters and involving the State and other legal entities governed by public law – Art. 1(5) of the Portuguese Arbitration Law, enacted by Law No. 63/2011 of 14 December 2011. 2. ↑ Case decided by the Central Administrative Court South on 30 August 2016, accessible at www.dgsi.pt, last accessed on 28 de Abril de 2017. 3. ↑ Case decided by the Central Administrative Court South on 16 February 2017, accessible at www.dgsi.pt, last accessed on 28 de Abril de 2017. 4. ↑ See decision of the Portuguese Supreme Court of Justice of 12 July 2017, decisions of the Lisbon Court of Appeal of 24 March 2015 and 29 September of 2015, and decision of the Oporto Court of Appeal of 3 June 2014, all accessible here. 5. ↑ The provision at stake reads “bearing in mind the IBA Guidelines” (see my post). 6. ↑ “Investing in virtue: the duty of disclosure and the procedure to challenge the arbitrator”, originally: “Investir em virtude: dever de revelação e processo de recusa do árbitro”. See ”Revista Internacional de Arbitragem e Conciliação Vol. VI – 2013, Almedina. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors:

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Switzerland to Become More Attractive for International Arbitration

Thu, 2017-05-18 00:29

Léonard Stoyanov

On 11 January 2017, the Swiss Federal Council proposed a revised version of the Swiss International Private Law Act (“SPILA”) relating to international arbitration (art. 176 et seq.) with a view to increasing the attractiveness of Switzerland as a place of arbitration while preserving the concise, liberal and flexible traits of the SPILA. More precisely, the Federal Council aims at (i) updating the provisions of the SPILA by implementing elements of the Federal Tribunal’s jurisprudence and clarifying ambiguities, (ii) reinforcing parties’ autonomy and (iii) improving the law for a simplified application. This initiative follows on from the modernisation process initiated by other countries.

While the proposed amendments mainly relate to the SPILA, the Federal Tribunal Act (“FTA”) and the Civil Procedure Code (“CPC”) will also be affected if the proposed amendments are adopted by the parliament.

I. Implementing the Federal Tribunal’s jurisprudence and clarifying ambiguities

A. Clarification of the scope of application of chapter 12 SPILA

In its current wording, article 176 I SPILA provides that the provisions of chapter 12 apply to any arbitration if the seat of the arbitral tribunal is in Switzerland and if, at the time when the arbitration agreement was entered into, at least one of the parties had neither his/her/its domicile nor his/her/its habitual residence in Switzerland.

In a decision of 2002 disputed among scholars, the Federal Tribunal held that one ought to take into account the parties’ situation at the time when the arbitral proceedings are initiated rather than at the time when the arbitration agreement was entered into. This created legal uncertainty as one cannot determine from the outset, but only at the time when the parties start arbitration proceedings, which law will apply (chapter 12 SPILA or the internal arbitration rules contained in the CPC). The proposed revised article 176 I SPILA specifies that the parties are those “to the arbitration agreement” so as to make the time of the entry into the arbitration agreement relevant. This would however probably not affect the current federal jurisprudence for parties to arbitral proceedings who/which will not have signed the arbitration agreement.

B. Ancillary procedures

As at today, the CPC is silent with regard to the type of proceedings applicable when the judge is seized in his capacity as “juge d’appui” (e.g. with regard to the appointment, challenge, replacement of arbitrators; see infra, IV with regard to the opportunity of creating a unique Swiss local judge). Hence a new article 251a is proposed which provides that ancillary proceedings relating to international arbitration be conducted in the form of summary proceedings (another provision would be amended to the same extent with regard to internal arbitration).

C. Means of recourse available against an award

While the Federal Tribunal reckons that an award may be rectified, interpreted, completed or revised, the SPILA does not as at today mention the possibility to challenge an award by way of correction, interpretation, addition or revision.

To fill this gap, draft articles 189a and 190a SPILA will, if adopted, exhaustively govern the recourses available against an arbitral award thereby incorporating the federal jurisprudence (these means of recourse are also available in the context of national arbitration in the CPC).

According to draft article 189a SPILA, unless provided otherwise, any party may require from the arbitral tribunal to correct obvious mistakes or interpret or complete certain passages of the award within a thirty day deadline following communication of the award. In the meantime, the arbitral tribunal may on its motion correct, interpret or complete its award. The request does not suspend the deadline to challenge the award before the Federal Tribunal but a new deadline starts for the sole part of the award which was corrected, interpreted or completed.

Draft article 190a SPILA expressly allows for the revision of an award, what both scholars and the Federal Tribunal already opine is possible. Thus, according to this draft provision, a party may request that an award be revised (i) if said party discovers relevant facts or means of proof after the arbitration (provided however that they are not subsequent to the award) and (ii) if criminal proceedings establish that the award was influenced to the detriment of the party challenging the award even in the absence of a conviction (if criminal proceedings are not possible, evidence may be adduced otherwise). The request may be filed within ninety days following the discovery of the revision motive (within a ten year time limitation period). The parties’ autonomy will however prevail insofar as they may agree in their arbitration agreement or at a later stage to exclude the right to a revision.

D. Addressing the impossibility to request the appointment of an arbitrator by the local judge

Pursuant to article 176 III SPILA, if the parties have not specified the seat of the arbitral tribunal, the arbitrators themselves may choose it if both the parties and the arbitration institution designated by them failed to do so. If neither determined the seat, several provisions become inapplicable starting by article 176 I SPILA which governs the applicability of the SPILA itself and extending to all the provisions governing the ancillary jurisdiction of Swiss tribunals and notably article 179 III SPILA which provides that where a tribunal is called upon to appoint an arbitrator, it shall make the appointment.

Accordingly, the draft bill contains an additional sentence to article 179 II SPILA providing for the jurisdiction of the Swiss tribunal first seized.

II. Reinforcing the parties’ autonomy

While the current wording of article 178 I SPILA provides that an arbitration agreement is valid if made in writing, by telegram, telex, telecopier or any other means of communication which permits it to be evidenced by a text, the proposed revision (inspired by the corresponding provision governing internal arbitration) provides that such an agreement is valid if made in writing “or by any other means which permits it to be evidenced by a text”. More importantly, the revised text provides that said condition is deemed to be met even though it is satisfied by only one party to the arbitration agreement, in which case the validity of the agreement as regards its substance will still be examined in light of article 178 II SPILA (which is not due to change).
Thus, to take the example cited by the Federal Council, if party A sends party B a written proposal to enter into a contract which contains an arbitration clause and party B starts performing the contract without signing it, the arbitration clause would be considered as accepted by party B provided that performance of the agreement would be formally reckoned (art. 178 I SPILA) as the acceptance of the offer made by party A as a matter of substantive law (art. 178 II SPILA).

Article 178 SPILA is further due to be completed by a new paragraph extending to unilateral arbitration clauses (and not solely arbitration agreements) contained for example in a will or a trust deed.

The requirements for the parties to renounce the application of chapter 12 SPILA in favour of the internal rules of arbitration (part 3 of the CPC) will continue to be stringent for the sake of legal certainty: a written agreement will be necessary.

III. Increasing of the appeal of the laws governing international arbitration

Rather than amending the SPILA with references to articles of the CPC governing internal arbitration which would apply by analogy, a consolidated version of the SPILA has (rightly) been preferred in view of easing the understanding of the Swiss rules governing international arbitration for foreigners. Accordingly, existing references in the SPILA to provisions in the CPC will be replaced.

Today, briefs filed before the Federal Tribunal must be filed in an official language and may thus not be filed in English. The door is however not completely closed to English as the Federal Tribunal often renounces the requirement of a translation of exhibits in English filed by a party before it unless the other party or parties object thereto.

It is proposed that submissions may be drafted in English in the future. The aim is to avoid translation expenses for the parties. Bearing in mind that the proposed revision does not impact existing restrictions applicable to foreign lawyers to represent parties before the Federal Tribunal, the parties who/which were represented in arbitral proceedings by a lawyer not admitted to represent such party before the Federal Tribunal may be tempted to have such lawyer draft the submission(s) and have it (them) filed by a local lawyer in his/her own name as this would avoid the need to inform the local lawyer of the specifics of the dispute (in some cases perhaps the need for translation) and the related costs. This may however be a miscalculation, aside from political considerations of protectionism, professional ethics or civil liability issues. Indeed, neither the limited grounds for challenging an arbitral award nor the very stringent formal requirements relating to the drafting of the submissions (particularly the recourse), which both explain the very low success rate of challenges of arbitral awards in Switzerland, will be altered in the revised law. The purpose sought with this proposal is solely to avoid translation costs with the Federal Tribunal not to facilitate challenges of awards. No amendment of the FTA with regard to the language of the decision is foreseen such that the decision will still be rendered in an official language (but which one?). Lastly, this proposal may be regarded with some reluctance not only by Swiss lawyers but by the federal judges themselves.

IV. What the Federal Council has decided not to amend

Tomorrow like today, jurisdictional objections will be examined differently depending on whether the seat of the arbitral tribunal is in Switzerland (in which case art. 7 SPILA will apply) or abroad (in which case art. II/3 of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards will apply).

The scope of the examination by the judge seized of an action in a matter in respect of which the parties have entered into an arbitration agreement will continue to be limited to a summary examination when the seat of the arbitral tribunal is in Switzerland whereas the scope of the judge’s examination will be full whenever the seat of the arbitral tribunal is abroad.

To justify the status quo, the Federal Council refers to the Federal Tribunal, which expressed the view that when it is seized of a recourse against an award, it has full power to review whether the arbitral tribunal rightly or wrongfully declared itself competent whenever the seat of the arbitral tribunal is abroad. One may however argue that instead of ruling on this point from the outset with full examination, the narrow scope of examination of the judge entails the risk of being counterproductive in the event the Federal Tribunal later denies the arbitral tribunal’s competence, in which case the parties will have lost time and money (subject to article 186 I bis in fine SPILA).

The idea of a sole “juge d’appui” was also rejected for reasons relating to the federal structure of the State had a cantonal tribunal acted as the national local judge (why such cantonal tribunal rather than another?) and because this task would have interfered with the Federal Tribunal’s duty had it been chosen to act in such capacity for its task must remain that of the uniform application of federal law in the country. Besides, it would have required the judges composing the tribunal in its contemplated capacity as local judge to recuse themselves in the event of a later recourse against the arbitral award. The creation of a separate federal judicial instance was regarded as disproportionate.

V. Conclusion

The proposed amendments do not dramatically reshape the existing chapter 12 of the SPILA but tend to update it and make it easier to use and thus more appealing. The draft bill will be available for consultation until 31 May 2017.

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The Protection of Investments in Disputed Territories: A Panel Hosted by BIICL’s Investment Treaty Forum

Tue, 2017-05-16 23:15

Asaf Niemoj

On March 14th the Investment Treaty Forum at The British Institute of International and Comparative Law hosted a panel of experts to discuss practical and legal aspects of investments protection in the context of territorial disputes.

Territorial disputes sometimes lead to the annexation of the territory of one state by another, of which the annexation of Crimea by the Russian Federation is a good example. International Law provides for the means intended to apply in cases of territorial transfer. However, these concern cases of lawful changes of sovereignty, and not the circumstances described above where no lawful transfer of territory occurred. The result is that investors that were normally protected by treaties signed by the predecessor state may find themselves with no legal recourse. Different legal questions regarding what is, apparently, a legal vacuum emerge; in particular, the possibility that treaties signed by the annexing state would apply in the annexed territory.

Professor Yarik Kryvoi, head of the Investment Treaty Forum, who chaired the panel, introduced the reasons behind the decision to hold such seminar. He spoke about the importance of the issue in light of the many ongoing territorial disputes around the world. Examples of such disputes are the West Sahara-Morocco dispute, The Occupied Palestinians Territories-Israeli dispute, disputes in the South China Sea, Cyprus-Turkey dispute and, more recently, the dispute between the Ukraine and The Russian Federation regarding the Crimea Peninsula.

He further mentioned that large countries are currently involved in territorial disputes – Russia, France, China and India. He pointed out that, surprisingly, the control over territories is the subject of disputes which are currently pending even in Western Europe.

This background makes it clear that protection of investments in disputed territories is a hot and still relevant topic. Professor Kryvoi introduced a panel of experts among them Dr. Daniel Costelloe of WilmerHale and Dr. Tom Grant, of Cambridge University.

The Territorial Application of Treaties and Succession to Investment Treaties in Annexed Territory

Dr. Daniel Costelloe began his presentation by giving a general description of the territorial application of treaties under general international law and, more specifically, the application of the moving treaty-frontiers rule. He discussed these rules with a focus on the question whether an investment treaty applies territorially in annexed territory. Specifically, he analyzed the rule reflected in Article 29 of the Vienna Convention on the Law of Treaties and in Article 15 of the Vienna Convention on Succession of States in Respect of Treaties in the context of annexed territories.

Dr. Costelloe emphasized that the term ”territory” in Art 29 and Art 15, respectively, refers to territories over which the treaty party has sovereignty in accordance with international law. In light of this reading, he concluded that, in the event of an annexation of territory, Art 29 and Art 15 respectively do not apply, because no legal transfer of territory occurred. He noted, at the same time, that in the event of an annexation of territory the application of the moving treaty-frontiers rule becomes difficult.

The second issue Dr. Costelloe addressed concerned the interpretation of references to the term “territory” in treaty provisions, again in the context of annexed territory. The provisions of investment treaties and other types of treaties typically refer to the treaty parties’ territory. Dr. Costelloe cautioned that in interpreting and applying a treaty provision referring to a party’s “territory” a tribunal might be required to take at least some position with respect to the territorial dispute.

Dr. Costelloe pointed out two potential objections to a tribunal’s jurisdiction in these circumstances. First, a respondent, annexing state could – theoretically – object to the tribunal’s jurisdiction on the basis that the treaty does not apply in the annexed territory. This objection is extremely unlikely, however, because it is inconsistent with the annexing state’s claim for the territory. The more likely strategy would simply be non-appearance.

A second potential jurisdictional objection is that a tribunal cannot hear a claim if deciding the claim would require the tribunal to make a legal determination in relation to the underlying territorial dispute. Dr. Costelloe noted that this objection is a plausible one, in light of an investment treaty’s functions – to decide investment disputes rather than territorial disputes – and the jurisdictional limitations it operates under in doing so.

Dr. Costelloe’s conclusions were –

• Where an annexation of territory leads to a de facto, if not a legal, transfer of territory, a strict application of the rule reflected in Articles 29 and 15 mentioned above has the potential to lead to injustice.
• In certain circumstances, there may be room to acknowledge a limited exception to the moving treaty-frontiers rule, even in relation to treaties, such as investment treaties, that, unlike human rights treaties for example, prima facie do not call for extraterritorial application.
• It seems possible to acknowledge such a limited exception without prejudice to the merits of the underlying territorial dispute.

The Ukraine – Russia BIT: The Crimea Case

Dr. Tom Grant spoke about the annexation of the Crimea Peninsula by the Russian Federation and arbitrations which emerged from it.

He mentioned the proceedings instituted by Ukraine against Russia in the International Court of Justice. Ukraine argues, inter alia, that, Russia being a party to the Committee on the Elimination of Racial Discrimination (CERD) and Russia in fact controlling Crimea, the legal obligations under CERD follow Russia to Crimea. Similar argumentation would seem to underpin the claims of investors against Russia under the Russia-Ukraine BIT.

In the arbitrations now pending it seems that Russia will not appear. Nevertheless, each tribunal must ordinarily decide whether it has jurisdiction to hear the case or not and give reasons for its decision. Dr. Grant suggested potential jurisdictional problems, including:

Firstly, the Russia-Ukraine BIT specifically provides that “territory” means territory held in “conformity with… international law”. This proviso might lead to the conclusion that the BIT does not apply in Crimea. To deal with this problem Dr. Grant suspects that, like Ukraine at the International Court, the claimants in the BIT cases will say that the substantive protections of the relevant treaty apply to the occupied territory. The difficulty for the BIT claimants is that the BIT might be interpreted to cover a narrower range of situations than CERD Art. 3 or ECHR Art. 1. Critical will be how much a tribunal is willing to interpret these jurisdictional terms as analogous. BITs might be assimilated into a general category of human rights protections—at a level of principle; but as a matter of practical application each treaty must be interpreted and applied on its own terms.

Secondly, a further potential obstacle which might prevent the application of the BIT is that Ukrainian national law now seems to prohibit investments in the occupied territories. Because the BIT requires investments to be in conformity with national law — including, expressly here, of the sending State — this might prevent a tribunal from applying the BIT. A possible rebuttal is that national law does not alter rights and obligations under international law, certainly not ex post adoption of a national law. Practice, though rich in claims about host State laws, is sparse in regard to laws of the State of origin.

On a final note, Dr. Grant suggested that, if one or more of the investment tribunals indeed finds that jurisdiction is lacking, then a future possibility is that Ukraine invokes Art 10 of the BIT to institute proceedings against Russia in regard to a dispute over the interpretation of the BIT.

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The Ansung Tribunal Gives Its Views On Allocation of Costs Under ICSID Arbitration Rule 41(5)

Tue, 2017-05-16 05:10

Shiyu Wang

On March 9, 2017, a three-person ICSID Tribunal rendered an Award in Ansung Housing Co., Ltd. v. People’s Republic of China.  The case marks the second time where China appears as a Respondent before an ICSID tribunal.  The first case was brought by a Malaysian company in May 2011, but that case was discontinued on May 16, 2013.  The Ansung Tribunal accepted China’s Rule 41(5) objection and dismissed a claim filed by a Seoul-based property developer, Ansung Housing Co. Ltd. (“Ansung Co.”), finding that the Korean company failed to sue within the three-year statute of limitations prescribed under the applicable investment treaty.  The case raises interesting issues concerning costs.

 

Summary

In December 2006, Ansung Co. entered into an investment agreement with the local government of Sheyang County in China’s Jiangsu Province.  The agreement provided Ansung Co. with the exclusive right to build a golf course.  The local government promised to provide the company 200 hectares of land in two phases to build a 27-hole golf course.  In 2009, Sheyang Island Park, a Chinese-local company, started operating an 18-hole golf course in the same area and the local government took no measures to enjoin this alleged illegal operation.  In November 2010, the local government refused to provide Ansung Co. the second phase of 100 hectares of land.  In 2011, without the planned full course, and facing competition from Sheyang Island Park, Ansung Co. was unable to profit and had to pull back its entire investment and sell the golf course, resulting in a total loss of more than CNY100 million (USD14.5 million).

 

According to Article 9(7) of the China-Republic of Korea BIT, “an investor may not make a[n international arbitration] claim . . . if more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, knowledge that the investor had incurred loss or damage.”  Ansung Co. filed its claim on October 7, 2014.  It argued that it first acquired knowledge of its loss or damage on December 17, 2011, after the deal to sell its entire investment in Sheyang-County was closed, so it was still within the three-year period.  China argued, however, that Ansung Co. first acquired knowledge of its loss or damage as early as 2007, when Ansung observed the development of a competing golf course at Sheyang Island Park.  The competing golf course went into operation in 2009, which is well before October 2011.  Pursuant to Rule 41(5), China requested the Tribunal to dismiss Ansung Co.’s claim because the claim was time-barred and, thus, manifestly lacked legal merit.  The Tribunal agreed.

 

Ansung Co. also sought to invoke the MFN clause in Article 3(3) of the China-Republic of Korea BIT to import a provision from a BIT entered into by China with Third States that did not prescribe a temporal limitation for an investor brining a claim against the host.  The Tribunal disagreed, stating that Article 3(3) does not extend to MFN treatment for a State’s consent to arbitrate with investors—specifically not to the temporal limitation period in Article 9(7).

 

Ansung Tribunal Provides Guidance on Allocation of Costs in Rule 41(5) cases

Rule 41(5) allows a Respondent-State to raise an objection that a claim is manifestly without legal merit at the preliminary stage.  If the objection is sustained, the claim will be dismissed. Before Ansung, there were only five ICSID cases on Rule 41(5): Trans-Global Petroleum, Inc. v. Jordan, Brandes Investment Partners, LP v. Venezuela, Global Trading v. Ukraine, RSM Prod. Corp. v. Grenada and MOL Hungarian Oil & Gas Co. Plc v. Croatia.

 

By way of background, Article 61(2) of the ICSID Convention gives the tribunal discretion to allocate costs of the arbitration as it deems appropriate.  Prior to the Ansung Award, two of the Rule 41(5) cases discussed above were dismissed.  Neither case, however, provided a complete picture of the tribunals’ consideration on allocation of costs.  In Global Trading, the tribunal devoted one paragraph at the end of the decision on the matter.  It briefly mentioned two factors relevant to the allocation of costs: the newness of the Rule 41(5) procedure and the reasonableness of both parties’ arguments.  Since the rule was introduced only four years before Global Trading was brought, and since the parties’ arguments were both reasonable, the tribunal adopted the “pay-your-own-way” approach and ordered both parties to cover their own costs.   In RSM, the same year when Global Trading was decided, the tribunal did not consider Rule 41(5)’s novelty at all and applied the “cost follow the event” principle, finding that claimant was liable for 100% of respondent’s legal costs, the fees and expenses of the tribunal, and the administrative fees and expenses of the ICSID.

 

Unlike Global Trading and RSM, the Ansung Tribunal provided a detailed analysis on allocations of costs in Rule 41(5) cases.

 

First, novelty is not within a Tribunal’s consideration for costs anymore.  Global Trading, was decided in 2010 and now in 2017, according to the Ansung Tribunal, the Rule 41(5) procedure can no longer be considered new.  Even if accepting that “MFN applies to temporal limitation” as a novel legal question, such novelty would not be considered by the Tribunal in its allocation of costs.

 

Second, neither Claimant’s unfortunate position nor its efficiency in the Rule 41(5) procedure provide a good reason to allocate costs in its favor.  Ansung Co. submitted that it is a small investor that had already suffered substantial loss because of China’s action. Ansung Co. also asserted that it had pursued its claim in good faith, on sound substantive grounds, and “in the most procedurally efficient and economical manner.”  The Tribunal, however, found that none of these points were relevant to the allocation of costs following a successful Rule 41(5) objection.

 

Third, the Tribunal focused it analysis on the reasonableness of the Respondent’s costs claim.  Ansung Co. cited to a non-Rule 41(5) case—Romak v. Uzbekistan—and submitted that there is a general practice in investment arbitration disfavoring the shifting of arbitration costs against the losing party.  China disputed this and cited RSM where the tribunal applied the “costs follow the event” principle.  The Tribunal made clear that it did not need to venture into a discussion on either the “costs follow the event” or “pay-your-own-way” approaches.   Instead, the only question left was the reasonableness of Respondent’s costs claim.

 

The Tribunal ultimately found Respondent’s costs claim to be disproportionate to its Rule 41(5) objection submission and excessive given the one-day hearing.  As a result, the Tribunal decided to award China its share of the direct costs of the arbitration proceedings plus 75% of its legal fees and expenses.

 

Implications

According to its timeline, Ansung was registered by the ICSID on November 4, 2014, and the Award was rendered on March 9, 2017 – about two years and four months later.  Considering the usual lifespan of ICSID cases, Ansung is likely to encourage future respondent-States to utilize Rule 41(5) objections effectively.  Under English common law, a similar preliminary procedural mechanism is generally known as “motion to dismiss”.  In the United States, under Rule 11 of the Federal Rules of Civil Procedure, if a motion to dismiss is granted due to lack of support for pleadings, a court may impose sanctions against the violating attorneys and litigants.  In March 2017, the U.S. House of Representatives passed H.R. 720 to make Rule 11 sanctions mandatory.

 

While there are only six Rule 41(5) tested cases, based on the analysis in Ansung, after finding meritless claims, it is likely that tribunals would focus mainly on the “reasonableness” of the costs claimed, and no longer consider the “novelty” of the rule in allocating the costs.  But should future parties also worry about the risk of being sanctioned for bringing manifestly unmeritorious claims before tribunals?

 

On one hand, although sanctions are uncommon in arbitration, there are institutional rules such as  Article 18.6 of LCIA Arbitration Rules (2014) which allow the tribunals to order sanctions against counsels who has violated the general guidelines of the rules.  Also, in ICSID arbitration proceedings, the discretion to allocate costs does give tribunals some form of a weapon to use to sanction parties.  For example, in Kim v. Uzbekistan, the tribunal held the respondent responsible for claimants’ entire expert cost (£259,519.76) because respondent’s counsel, in violation of “attorney’s eyes only” procedural order, copied a high-ranking government official on an email that contained confidential information.

 

On the other hand, given the preliminary nature of Rule 41(5), the dismissal of claims and the obligation to pay most, if not all, of the arbitration costs already function as “sanctions” against losing parties.  Rule 41(5) should be utilized to strike a balance between the need to save time and costs and the guarantee of due process in arbitration proceedings.  An actual sanction in addition to a dismissal would probably tip the balance by deterring claimants from bringing their claims.

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Bolivia’s Step Back in State Arbitration

Sun, 2017-05-14 22:40

José Carlos Bernal Rivera

As reported in the excellent piece by Alejandro López Ortiz and Gustavo Fernandes in “A Year of Legal Developments for International Arbitration in Latin America”, Bolivia may have taken a step back in State arbitration with the passing of its new act on arbitration in 2015. The article remarks the limitations to arbitrability introduced by the new act, and the investment arbitration chapter of the act, which intends to provide a domestic arbitration framework for both national and foreign investors in Bolivia. The goals of these and other provisions of the new act are to keep arbitration proceedings (even investment arbitrations involving foreign investors) inside the country and subject to Bolivian law and its authorities.

So, how far does the new Bolivian arbitration act go in its intent to keep State arbitration inside the country? Aside from whether this mechanism will attract foreign investments, it is interesting to analyze the Bolivian proposal. Why is the government so disenchanted with international arbitration? How is the act’s investment arbitration chapter supposed to work? Are these limits to international arbitration a brand new feature of this act, or just a reflex of the policies implemented by the government since 2006? This brief article will try to dig deeper in the current situation of Bolivia, and the great lengths it is willing to go in order to avoid any more international arbitration cases involving the State or State entities in the future.

 

International arbitration boom in the last decade in Bolivia

In the last decade, a large amount of arbitration claims were filed against Bolivia as a result of investment disputes between foreign nationals and the State. The nationalizations carried out by the government of Mr. Evo Morales since he was elected to the Bolivian presidency in 2006, have, predictably, brought a large array of foreign investors to the negotiation table for reaching settlements with the government, and in several cases to arbitration instances. Bolivia promptly proceeded to withdraw from ICSID in 2007, becoming the first country in history to take this step.

Euro Telecom International reached a settlement agreement with Bolivia for approximately US$ 100 million for the nationalization of the telecom company ENTEL. Ashmore Energy International and Shell reached another settlement agreement with Bolivia in 2009 for US$ 241 million for the nationalization of pipeline infrastructure, and Pan American Energy settled with Bolivia for US$ 498 million in 2014 for the nationalization of the oil company “Chaco.”

Other companies were not able to reach settlements and opted for arbitration. Chilean company Quiborax was awarded US$ 48.6 million by an ICSID tribunal. Red Eléctrica of Spain was awarded US$ 65 million for the nationalization of its shares in the Bolivian company “TDE”. The Canadian company South American Silver is seeking US$ 385 million for the nationalization of the “Mallku Khota” mine in Bolivia, and Glencore has recently filed, in August 2016, a new arbitration claim against Bolivia for the nationalization of “Vinto” and “Colquiri” mines, for which the parties were initially negotiating a settlement agreement, which was unsuccessful. There are several other cases, but these are enough to illustrate the point.

It is not possible to say that Bolivia´s disenchantment with investment arbitration in international fora is based solely on the results of these cases. Bolivia’s policy rather fits well with the general discourse of the government regarding the recovery of natural resources from transnational companies. In 2009, the Bolivian Constitution was completely modified in order to implement the new policies of the government.  One of the most remarkable changes was that of article 366, which states that all foreign companies operating within the oil and gas industry in Bolivia are bound to Bolivian sovereignty and authorities, and that “[n]o foreign jurisdiction or international arbitration will be accepted in any case […].”  This is the first and only mention of the word “arbitration” in the Bolivian Constitution.

Against this background, the policies of the 2015 arbitration act are definitely not new. The ICSID withdrawal, the 2009 Constitution and, the repeal of key pieces of legislation (such as the repeal of the investment law which was in place since the nineties) were revealing factors regarding the shift in the investment policies of the government, and they all took place several years before the enactment of the new arbitration law of 2015. It is likely that the high amounts paid by the Bolivian government for the nationalizations were a contributing factor for the step back of Bolivia in State arbitration, although some people claim that the amounts paid actually reflect good results, if they compare to the amounts sought by the investors in the first place.

 

The “investment arbitration” chapter of the Bolivian act

This second part of the article analyzes the content of the new act in regards to investment arbitration in Bolivia and subject to Bolivian law. How would an investment arbitration case involving a foreign company be conducted in Bolivia?

One of the most important realizations about this chapter of the Bolivian act is that it might not be applicable to many of the foreign companies doing business in the country. Here is why. There are several restrictions to the participation of foreigners in some industries of the Bolivian economy (all in accordance to the general discourse of the current government, as explained in the first part of this article). The “strategic” sectors of the economy, which include some of the largest industries in Bolivia, such as oil, gas, mining and electricity, are reserved only for State-owned entities. Any participation of foreign companies in these industries can only be made in close connection with State-owned companies. This means that State-owned companies would either need to hire foreign companies to provide services (in which case the foreign companies would probably not be doing investments per se), or they would need to associate with the foreign companies in a sort of joint venture enterprise or “PPP.” The second scenario is less common in practice than the first.

It seems like the investment chapter of the Bolivian law has in mind the rather uncommon scenario of mixed enterprises in which both State and the foreign company associate. This chapter of the law envisages two scenarios: one dedicated to Bolivian investment and, one dedicated to mixed investment and foreign investment. The terms “Bolivian investment”, “mixed investment” and “foreign investment” are not defined in the arbitration act, but their exact definition can be gathered from the Investment Promotion Act of April, 2014.

If a foreign company and a Bolivian State-owned company associate to work in a strategic sector of the Bolivian economy, this would probably be considered a mixed investment (it cannot be a “foreign investment”, because of the restrictions applicable to strategic sectors of the economy). In such a case, internal disputes between the two partners might be considered investment disputes, which the parties could potentially submit to the investment arbitration procedure established under the new act. What would such an investment arbitration case look like?

The investment arbitration chapter of the new Bolivian act establishes several mandatory provisions that will be applied to investment cases, thus limiting the right of the parties to freely determine the characteristics of the procedure in their arbitration agreement. The law mandates that, before submitting to arbitration, the parties must first engage into a conciliation process. The lex arbitri will be Bolivia’s, and the arbitration would be deemed local, not international (though the audiences can take place abroad). The arbitral tribunal must necessarily be composed of three arbitrators, and the arbitration cannot be ex aequo et bono, it must be decided under Bolivian law.

By far, the most relevant restriction in the investment arbitration chapter is that of the lex arbitri. The act mandates that the procedural laws applicable to investment arbitration cases be Bolivian law, which means that any annulment claim sought against an arbitral award issued in an investment case against Bolivia, would be reviewed by Bolivian courts. This is, as you can imagine, far from ideal for a foreign company. If the seat of the arbitration is that of the country against which the company has filed the claim, then many of the most attractive features of the institution of arbitration as an ADR mechanism are diminished.

 

Conclusion

There seems to be several reasons that have pushed Bolivia to withdraw from ICSID and try to establish a local alternative structure for investment arbitration cases. It is also clear, however, that the “local option” in the new arbitration law does not really offer a completely neutral forum for investors, and this might be a potent deterrent for investment. Bolivia must consider the possibility that, by trying to keep investment arbitration cases inside the country, it might be keeping foreign investment outside of it altogether.

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Enterprises in China’s Free Trade Zones Enter 2017 with New Options for Arbitration

Sat, 2017-05-13 20:03

Arthur Dong and Darren Mayberry

On December 30, 2016, the Supreme People’s Court (“SPC”) issued a set of new Opinions. It covers an array of matters relating to legal measures to expedite the development of Free Trade Zones. (Opinions on Providing Judicial Protection for the Construction of Pilot Free Trade Zones, December 30, 2016). Among other matters, the SPC sought to open the Free Trade Zones to further options regarding alternative dispute resolution. Remarks made in Article 9 have effectively designated as Foreign Per Se any Wholly Foreign-Owned Enterprises which are registered in one of 11 current Free-Trade Zones. In three brief paragraphs, the SPC seems to have shifted the landscape for China-based arbitrations. The immediate practical significance of the Opinions may remain humble and limited. In time, the SPC’s Opinions may permit increased deference and jurisdictional purview to foreign tribunals. It also may serve as the beginning of ad hoc arbitration in China.

This note will review the necessity for arbitral institutions under Chinese arbitration agreements. It will also examine the foreign-element requirement necessary to escape the Chinese arbitral institution requirement, while reminding that all China-registered enterprises are Chinese. After summarizing the landscape ahead of the Opinions, the note will then look at the substance of the Opinions. This note then analyzes the expansion of foreign arbitral jurisdiction. It will subsequently consider practical implications. Before the note concludes, it will survey how the Opinions will affect arbitration practitioners and organizations related to the Free Trade Zones.

The Necessity for the Selection of an Arbitration Institution under Chinese Law

Chinese law mandates institutional arbitration of domestic disputes. Article 16 of China’s Arbitration Act requires each arbitration agreement to designate an arbitration commission. Under Article 18 of the Act, lack of clarity on this point may defeat even the validity of the arbitration agreement.

Foreign Arbitration Institutions and the Foreign Elements Requirement

Chinese courts uniformly recognize and enforce foreign awards, including the awards of foreign arbitration institutions and ad hoc tribunals, provided that genuine foreign elements arise throughout the transaction. The foreign elements test will often be satisfied when one of the parties is a foreign-registered company. When both parties are domestic entities, and no other element can connect the dispute to another jurisdiction, selecting offshore arbitration can lead to unnecessary risk and uncertainty.

WFOEs and FIEs as Domestic Entities

Wholly Foreign-Owned Enterprises (“WFOE”) are foreign-owned Chinese entities. Similarly, Foreign Investment Enterprises (FIEs) are Chinese companies, even though they may be entirely foreign-owned (i.e., WFOEs) or only partially foreign owned (joint-ventures).

Enter the Opinions

FIEs may benefit from favorable treatment with regard to arbitration, but they must be registered in one of China’s 11 Free-Trade Zones (FTZs). WFOEs within FTZs will receive particularly favorable arbitration treatment. FTZ-based enterprises may engage in ad hoc arbitration, subject to rather stringent requirements.

First, the SPC has determined that two FTZ-registered WFOEs satisfy the foreign-element test such that they may submit to arbitration agreements seated in foreign jurisdictions. For now, at least, both parties must be WFOEs to qualify. As for FIEs more generally, the SPC has permitted courts to validate such agreements (or not). Accordingly, people’s courts are also to dismiss challenges to recognize or enforce resulting awards when the moving party has either (1) initiated arbitration or (2) failed to object during the arbitration procedure. Objections must challenge the violation of public policy relating to the foreign-element test.

Second, the SPC states that FTZ-registered enterprises may not need to engage supervision of an arbitration commission for China-based arbitration procedures. This applies even FTZ enterprises without foreign investors. Importantly, the enforceability of any ad hoc arbitration will hinge on the satisfaction of three specific requirements. The arbitration clause must designate a specific particular place on the Mainland, a specific (set of) arbitrator(s), and a specific arbitration rule.

Domestic FTZ parties commencing arbitration under an ad hoc arbitration agreement, or even under an agreement designating a foreign institution, could face a challenge to the validity of that agreement. Such a challenge would most likely bring the matter before a People’s Court. Before People’s Courts can declare such clauses invalid, they must report these cases to the higher courts. Likewise, higher courts that agree with the lower court concerning the invalidity of the clause must also report to the SPC for final review.

Two WFOEs qualify as Foreign

The SPC’s Opinions newly opens a classification for WFOEs, one once reserved exclusively to strictly non-domestic companies. WFOEs registered in FTZs are now foreign enterprises. As for FTZ-based non-WFOE FIEs, the Opinions offers a path to enforcement of foreign awards, while also leaving a last opportunity for an opposing party to mount a jurisdictional challenge. This Foreign designation only encompasses those Wholly Foreign-Owned Enterprises registered in one of 11 Free-Trade Zones. Two WFOEs, each registered in a Chinese FTZ, may securely arbitrate their disputes abroad. Unlike a completely foreign-registered company, a single WFOE contracting with a domestic company outside an FTZ may be able or unable to satisfy the foreign elements test, depending on the specific circumstances, the overall nature of the transaction, and other factors.

The Opinions may be the beginning step, therefore, and not the final word, towards the modernization of China’s arbitration regime. And it follows a track not entirely unfamiliar; that of the pursuit of progress through a gradual opening to the outside.

The WFOE FTZ-registration synthesizes existing notable Chinese cases. Two recent cases confronted matters concerning the recognition and enforcement of foreign arbitrations. In the 2015 Golden Landmark v. Siemens ITL case,1)Siemens International Trading (Shanghai) Co., Ltd vs. Shanghai Golden Landmark Co., Ltd (2013) Hu Yi Zhong Min Ren (Wai Zhong) Zi No. 2 (2015) (Shanghai No. 1 Intermediate People’s Court). jQuery("#footnote_plugin_tooltip_3788_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3788_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Shanghai’s First Intermediate Court found a foreign-relation arose simply because both companies were registered in the Shanghai Free Trade Zone. Additionally, it was critical to the decision to enforce the SIAC award that the sources of capital, allocation of income, and governance of the companies were all closely related to foreign investors. Notably, the objecting party had already performed some of the award and had acquiesced to the SIAC tribunal’s authority in other ways. As for the 2013 Chaolaixinsheng case,2)Beijing Chaolaixinsheng Sports and Leisure Co., Ltd. v Beijing Suowangzhixin Investment Consulting Co., Ltd., (2013) Er Zhong Min Te Zi No. 10670 (2014) (Beijing No. 2 Intermediate People’s Court). jQuery("#footnote_plugin_tooltip_3788_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3788_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the SPC came to a different conclusion and refused to recognize or enforce a KCAB award. The Beijing-based companies had little reason to resolve their dispute abroad. The only foreign relation was tenuous; the owner of one of the companies was a Korean citizen. The recent Opinions clarifies that the divergent results were indeed a meaningful product of the differing factual circumstances.

Practical Implications

This note will make an early attempt to assess some immediate and several eventual practical implications of the SPC’s Opinions. Initially it considers the perspective of foreign jurisdictions, tribunals, and practitioners. Then it looks at the effect on Chinese enterprises in the FTZs, and thereafter WFOEs in the FTZs.

For Foreign Jurisdictions, Tribunals, Practitioners

The SPC appears to have left room for foreign tribunals to assume kompetenz-kompetenz over proceedings involving two Chinese parties. In other words, if an FTZ-based (non-WFOE) FIE bears an agreement which has seated the arbitration outside of China, a party challenging jurisdiction may raise the question to the tribunal of whether the foreign elements in the transaction are sufficient to grant it jurisdiction. After all, the Opinions now instructs Chinese courts to recognize and enforce the final awards of foreign tribunals with regards to FTZ-centered FIEs. At the same time, it leaves open whether the commercial arrangements of such FIEs would contain foreign factors sufficient to allow for the validity of foreign arbitration.

This may lead to an interesting phenomenon. Non-Chinese jurisdictions, perhaps particularly Hong Kong and Singapore, may eventually develop ‘foreign’ case law resolving what particular circumstances may satisfy the various factors in the foreign elements test. After all, respondents would be well within their rights to raise objections to jurisdiction against non-WFOE FIEs under China’s public policy prohibition against foreign institutions adjudicating domestic disputes.

Therefore, the SPC’s clarification of Chinese law on the jurisdiction of foreign tribunal and foreign-related elements may do more than simply provide a foundation for foreign tribunals to handle disputes from China-based parties. It could open a small aspect of Chinese law to the world. Small perhaps, but potentially very influential.

Foreign tribunals and district courts abroad should strive to apply the foreign-related tests faithfully, factually, and with special care. Otherwise, the SPC may exercise its power to issue corrective guidance to restrain too liberal findings of foreign-related elements.

On the other hand, no foreign case law may ultimately result regarding foreign-elements under Chinese law and public policy. Foreign arbitration institutions and foreign tribunals may reject all challenges to jurisdiction relating to non-WFOE FIE-involved arbitrations. For a number of reasons, Hong Kong and Singapore courts may define the approach that foreign courts follow when facing such controversies.

For Chinese Enterprises in the FTZs

Many questions and uncertainties remain regarding the opening of ad hoc arbitration. Therefore, the initial practical ramifications of the Opinions on ad hoc arbitration may prove limited. Commercial enterprises are unlikely to crowd towards ad hoc arrangements. Each such ad hoc arbitration agreement would entail a certain challenge to validity soon after commencement of arbitration. Nonetheless, the SPC has signaled that enterprises registered within Free Trade Zones may be able to operate arbitrations entirely differently than enterprises in regular areas. Careful drafters may avoid the controversy and eschew ad hoc arbitration altogether. Likewise, the Opinions demands too many special requirements to save the handful of ‘mistakenly’ drafted arbitration clauses that are already out there.

Chinese enterprises will find the Opinions has cracked the door for ad hoc arbitration, but only just so. FTZ-based enterprises might reasonably fear what lies just on the other side. Not many Chinese enterprises will be too eager to experiment. And yet, the SPC may have nudged ad hoc arbitration forward just enough to gather some momentum.

For Wholly Foreign-Owned Enterprises in the FTZs

The SPC and its Opinions have just handed WFOEs registered in FTZs an unambiguous windfall. They can arbitrate abroad without fear of challenge to the validity of their agreements. Few WFOEs would have dared to arbitrate abroad before due to fears of enforcement complications. Now they can confidently opt to do so.

Concluding Remarks

Published on December 30, 2016, Article 9 of the SPC’s Opinions relating to Free Trade Zones will influence Chinese arbitration well into the coming decade. The Opinions certainly provides for favorable arbitration treatment for enterprises within the Free Trade Zones. That treatment will favor WFOEs in particular, and FIEs generally. Foreign enterprises and foreign arbitral institutions will find much to welcome within the brief three paragraphs of the Opinions. Both international and Chinese arbitration professionals must look now to the National People’s Congress for further and more expansive reform. Presumably, everyone in the international arbitration community looks forward to the SPC resolving the open questions and subsequent controversies in a reasonable and pro-enforcement manner.

References   [ + ]

1. ↑ Siemens International Trading (Shanghai) Co., Ltd vs. Shanghai Golden Landmark Co., Ltd (2013) Hu Yi Zhong Min Ren (Wai Zhong) Zi No. 2 (2015) (Shanghai No. 1 Intermediate People’s Court). 2. ↑ Beijing Chaolaixinsheng Sports and Leisure Co., Ltd. v Beijing Suowangzhixin Investment Consulting Co., Ltd., (2013) Er Zhong Min Te Zi No. 10670 (2014) (Beijing No. 2 Intermediate People’s Court). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors:

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Australia’s International Arbitration Act Amendments: Rejuvenation by a Thousand Cuts?

Sat, 2017-05-13 04:33

Luke Nottage

On 22 March 2017, with minimal fanfare, the Civil Law and Justice Amendment Legislation Bill 2017 (“2017 Bill”) was introduced into the upper house of the federal Parliament. Buried within this omnibus Bill were four proposed reforms to the International Arbitration Act (IAA), renamed as such in 1989 when Australia was one of the first jurisdictions to adopt the UNCITRAL Model Law (after having incorporated the New York Convention in 1974). This follows other amendments to the IAA enacted in 2015 through two other omnibus Bills.

The series of recent amendments raises the question of whether law reform in this field is better achieved through such a piecemeal process, or instead in a more comprehensive fashion involving greater public consultation.

The 2015 Amendments

The Civil Law and Justice Legislation Amendment Act 2015 had basically filled a “legislative black hole” for certain pre-existing international arbitration agreements. This complexity arose from the interaction of the 2010 IAA amendments with new uniform Commercial Arbitration Acts (CAAs) made applicable only to domestic arbitrations.

The Civil Law and Justice (Omnibus Amendments) Act 2015 addressed another problem with the 2010 IAA amendments highlighted soon after the new CAAs were enacted over 2010-17. The former had added provisions providing for confidentiality in international arbitrations, but on an opt-in basis, unlike almost all other provisions added to the Model Law framework. By contrast, the CAAs had provided a similar confidential regime for domestic arbitrations, but on an opt-out basis.

Commentators soon queried this inconsistency, against the backdrop of significant survey and more anecdotal evidence that confidentiality was perceived as one (mid-level) attraction of international arbitration over litigation of commercial disputes. It also seemed ironic that the new CAAs in effect had reversed the decision of the High Court of Australia in Esso v Plowman [1995] HCA 19 (arising from a domestic arbitration) that there was no presumption of confidentiality, yet the IAA in 2010 did not equally create a presumption of confidentiality for international arbitrations seated in Australia. The Civil Law and Justice (Omnibus Amendments) Act 2015 belatedly aligned the IAA with the CAA position, by making confidentiality similarly available on an opt-out basis. This set of legislative reforms in 2015 also made two other less practically significant amendments, which simply aligned the IAA more closely with the New York Convention regime for enforcing foreign arbitral awards.

The 2017 Bill

Practitioners and commentators on international arbitration in Australia were mostly caught by surprise by the 2015 amendments. Nor was there much forewarning of the third and latest tranche of legislative amendments. The federal Attorney-General’s Explanatory Memorandum for the 2017 Bill explains (at para 10) that these: (i) specify the ‘competent court’ for Model Law purposes, (ii) “clarify procedural requirements” for foreign award enforcement, (iii) modernise arbitrators’ powers to award costs, and (iv) deal with confidentiality related to arbitrations subject to the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration.

The first amendment corrects another drafting error dating back to when Part III of the IAA gave force of law to the Model Law from 1989. Namely, Section 18 still does not specify that the Federal Court (in addition to the State and Territory Courts) is a “competent court” for the Model Law award enforcement regime under Articles 35 and 36 (or to assist tribunals in taking evidence under Article 27). Nor is the Federal Court specified for the recognition and enforcement of interim measures under Article 17H, added in the 2010 amendments.

The Explanatory Memorandum (at para 307) notes that this omission “has led to costly and confusing litigation as to which courts have jurisdiction”. This presumably refers to the protracted TCL v Castel saga, where the Federal Court had to invoke instead the Judiciary Act to deal with a challenge to enforcement of an Australia-seated international arbitration award (see more here). Such awards remain relatively rare, but now that Australia is belatedly attracting some international arbitrations, it is high time to fix this drafting problem.

The second proposed amendment also responds to calls to align the IAA regime with the New York Convention, by amending s8(1) to clarify that a foreign award is binding between the “parties to the award” rather than between the “parties to the arbitration agreement” pursuant to which it is made. The Explanatory Memorandum notes (paras 293-5) that:

“In Altain Khuder  [(2011) 282 ALR 717] the Victorian Court of Appeal held that [s8(1)] may require the award creditor seeking to enforce an award against a non-signatory to the arbitration agreement to do more than simply produce the award and the putative arbitration agreement in an application to enforce a foreign award, for the onus to shift onto the award debtor to demonstrate why the award should not be enforced. … In Dampskibsselskabet [(2012) 292 ALR 161] Foster J declined to follow the Victorian Court of Appeal in Altain Khuder, holding that the simple evidential onus cast upon the award creditor by sections 8 and 9 of the Act is to produce the award and the putative arbitration agreement without more, even if the award debtor is not named in the arbitration agreement relied on. This decision is in line with international practice and represents the approach which should be adopted in all Australian jurisdictions.”

This is again a welcome reform, as commentators have criticised the approach adopted by the Victorian Court of Appeal.

Regarding the third proposed amendment, the Memorandum notes (at para 318) that IAA s27 currently

“refers to an arbitral tribunal’s power to make an award as to costs and to tax or settle the amount of costs to be paid and to award costs as between party and party or solicitor and client. The references to taxing costs on a party and party or solicitor and client basis are outmoded and inflexible in contrast to current practice in international arbitration.”

Lastly, the Memorandum explains (from para 311) that s22 will be amended to exclude the opt-out confidentiality provisions where parties to an Australia-seated arbitration have agreed to apply the UNCITRAL Transparency Rules. The Memorandum explains at paras 312-3 that:

“Australia is not presently a party to the Transparency Convention. However, should the parties to an investment arbitration, which is to be conducted subject to the Transparency Convention, agree that the seat of the arbitration should be in Australia, this amendment would prevent any conflict between the IAA and the Transparency Convention. This broadens the scope of arbitration work which can be conducted in Australia under the IAA.”

The Attorney-General does not indicate that his Department from at least 2 March 2017 was undertaking informal consultations as to whether Australia should ratify the Convention (which will enter in force six months after Switzerland’s ratification on 18 April 2017). Ratification is important to give the revised s22 more “bite”, since Australia has many earlier BITs allowing arbitration under UNCITRAL Rules but lacking transparency provisions, including the failed challenge by Philip Morris Asia.

Nonetheless, even Australia’s recent treaties allowing investor-state arbitration have not adopted the Transparency Rules – preferring instead to build in specific transparency provisions. Some commentators on the Bill have referred to the Korea-Australia FTA, signed on 8 April 2014. However, Side Letters exchanged on that date confirm that both countries will consult as to the future application of the Transparency Rules, but until any separate agreement they will not apply. There are similar Side Letters for the China-Australia FTA, signed on 17 June 2015.

Concluding Remarks

Overall, the latest set of IAA amendments usefully completes rectification of various legislative drafting errors and uncertainties associated with Australia’s incorporation of international arbitration instruments. The 2010 amendments had already added s8(3A) to clarify that the listed grounds for refusing enforcement of foreign awards were exhaustive, as envisaged by the New York Convention.

Yet at least some of these problems seem to have arisen because of insufficient public consultation. Only the 2010 amendments involved the Attorney-General releasing an Issues Paper and eventually uploading an initial round of public submissions. Even then, the government made further changes to its own Bill, without it being referred to a select committee. That step could have allowed another round of submissions, as well as oral hearings, to permit deeper analysis (including how best to deal with confidentiality, including associated court proceedings). Nor have the three subsequent sets of amendments been referred to a select committee, or even subject to a prior departmental issues paper or exposure draft. The respective Attorneys-General also have not taken the opportunity to task the Australian Law Reform Commission (ALRC) to examine such issues, in contrast for example to New Zealand in 2013.

Australia is now left with calls to deal with several more difficult IAA reform questions, reiterated by Albert Monichino SC in 2015. The government should therefore heed a recent call from the NSW Law Society to engage the ALRC for a more comprehensive review of “laws that hamper Australian courts and arbitrators being able to efficiently and effectively deal with cross-border disputes”.

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P&I Insurer’s Consent to U.S. Jurisdiction in Service of Suit Clause Does Not Override Contractual Right to Arbitrate

Fri, 2017-05-12 00:41

Jason P. Minkin and Nicole Gallagher

The question of whether the jurisdictional grant in a “service of suit” clause overrides an otherwise valid and enforceable arbitration clause in the same agreement has been addressed by several courts in the United States. See McDermott Int’l, Inc. v. Lloyds Underwriters of London, 944 F.2d 1199 (5th Cir. 1991); Neca Ins., Ltd. v. Nat’l Union Fire Ins. of Pittsburgh, PA, 595 F. Supp. 955 (S.D.N.Y. 1984); West Shore Pipe Line Co. v. Associated Elec. and Gas Ins. Services, Ltd., 791 F. Supp. 200 (N.D. Ill. 1992); New Hampshire Ins. Co. v. Canali Reinsurance Co. Ltd., 2004 WL 769775 (S.D.N.Y. April 12, 2004); Lloyds Underwriters v. Netterstrom, 17 So. 3d 732 (Fla. Dist. Ct. App. 2009).

These courts have recognized the distinct purposes of the two clauses, which allow them to co-exist in harmony in the same agreement. The arbitration clause provides a choice of forum for resolving disputes under the contract, whereas the service of suit clause requires a party to consent to the jurisdiction to enforce the arbitration award. See West Shore Pipe Line Co., 791 F. Supp. at 203-04 (arbitration awards are not self-enforceable and therefore, service of suit clauses can dictate the location of any action that might be necessary following arbitration in order to enforce the award).

On April 13, 2017, the United States District Court for the Southern of Texas reinforced this general proposition, that a service of suit clause is not intended to override the English arbitration clause in the same protection and indemnity (“P&I”) insurance policy, holding that the two clauses, by their plain language, are to be read in harmony with each other, with the arbitration clause requiring the parties to arbitrate the substance of their dispute in England under English law, and the service of suit clause requiring the insurer to submit to the jurisdiction of an appropriate United States court for enforcement proceedings. Gemini Ins. Co. v. Certain Underwriters at Lloyd’s London, Civ. No. 4:17-cv-01044 (S.D. Tex., April 13, 2017).

Gemini involved an insurance coverage dispute arising from a maritime personal injury accident. Paul Blasingame, a Jones Act seaman, was crushed between a wellhead and his assigned vessel, the M/V Rhea, while climbing onboard during operations for his employer, Galveston Bay Energy, LLC (“Galveston”). The seaman sued his employer and the owner of the vessel under the Jones Act in Texas state court. Among other insurance coverage, Galveston maintained primary P&I insurance through a Lloyd’s syndicate, issued through the Osprey Underwriting Agency, Ltd. (“Osprey”), and commercial umbrella liability insurance through Gemini Insurance Company (“Gemini”). Gemini and other insurers whose policies were also implicated agreed to fund their share of settlement of the maritime personal injury accident, whereas Osprey, on behalf of Lloyd’s, did not agree to settle. Gemini disputed the position taken by Osprey, ultimately agreeing to pay more than its share of the settlement and obtaining from Galveston an assignment of rights to pursue Osprey and Lloyd’s under the Osprey P&I policy.

The Osprey P&I policy contained a “Law and Practice Clause” which provided, in relevant part that, “[n]otwithstanding anything else to the contrary, this insurance is subject to English law and practice and any dispute under or in connection with this insurance is to be referred to Arbitration in London, ….” Pursuant to the Law and Practice Clause, Osprey, on behalf of Lloyd’s, commenced arbitration proceedings in England seeking a determination that it did not owe any money toward the underlying maritime personal injury settlement.

Gemini, in turn, sued Lloyd’s in Texas state court, alleging that it was subrogated to Galveston’s rights under the Osprey P&I policy and asserting various contract and quasi-contract theories of recovery. Gemini also sought injunctive relief preventing Lloyd’s from going forward with the English arbitration. The Texas state court granted Gemini a temporary restraining order. Lloyd’s then removed the action to the federal district court in Texas pursuant to 9 U.S.C. § 205 (which provides for removal where, as was the case here, the subject matter of an action or proceeding pending in a State court relates to an arbitration agreement or award falling under the Convention on the Recognition and Enforcement of Arbitral Awards) (the “New York Convention”). After the case was removed to federal district court, a hearing took place to decide whether a preliminary injunction should be entered against Lloyd’s preventing them from pursuing the arbitration in England. The court denied the preliminary injunction request, favoring arbitration in England instead, as discussed below.

First, the Gemini court determined the “Law and Practice Clause” in the Osprey P&I policy was governed by the New York Convention and because it required arbitration under English law, it contained an implicit delegation clause for the arbitrator, not the court, to decide what claims are arbitrable. See Gemini, Op. at 9-10 (“By agreeing to arbitrate under English law, the parties clearly and unmistakably consented to delegate to the arbitrator the power to make threshold determinations about what claims are arbitrable.”)

Next, the court addressed, and ultimately rejected, Gemini’s argument that the jurisdictional grant in the Osprey P&I policy’s “Service of Suit” clause requiring the insurers to submit to the jurisdiction of a United States court in the event they fail to pay any amount due under the Osprey P&I policy, overrode the Law and Practice Clause requiring arbitration in England. The Osprey P&I policy’s Service of Suit clause provided, in relevant part, that “It is agreed that in the event of the failure of the Underwriters severally subscribing to this insurance (the Underwriters) to pay any amount claimed to be due hereunder, the Underwriters, at the request of the Assured, will submit to the jurisdiction of a court of competent jurisdiction within the United States of America … Subject, in all respects, to the Osprey Law and Practice Clause as contained in the clauses dated 1.04.96.” This clause, Gemini argued, was more specific than the Law and Practice Clause, and therefore governed under the ordinary rule that specific provisions trump general provisions. According to Gemini, the Service of Suit clause applied to a narrower universe of claims – actions for “failure … to pay any amount claimed to be due” – which was more specific than the broader dispute resolution provision in the Law and Practice Clause.

In rejecting Gemini’s arguments, the Gemini court noted that the Osprey P&I policy contemplated arbitration of disputes, that the summary section of the P&I policy specified that choice of law and jurisdiction are governed by the “Law and Practice Clause,” and that the “Law and Practice Clause” itself stated that arbitration in England is required “[n]otwithstanding anything else to the contrary ….” The “Law and Practice Clause,” the court stated, “then adds suspenders to that belt, emphasizing that ‘[i]n the event of a conflict between this clause and any other provision of this insurance, this clause shall prevail and the right of either party to commence proceedings before any other Court or Tribunal in any other jurisdiction shall be limited to the process of enforcement of any award hereunder.’” The Service of Suit clause, the court explained, was “explicitly subordinated” to the Law and Practice Clause because it also stated that it was “[s]ubject, in all respects, to the Osprey Law and Practice Clause….” Gemini, Op. at 11-12.

The Gemini court also found persuasive the “harmonizing” approach of the Fifth Circuit Court of Appeals in McDermott Int’l, Inc. v. Lloyds Underwriters of London, 944 F.2d 1199, 1200 (5th Cir. 1991) (harmonizing the two clauses by limiting the service of suit clause to actions to enforce arbitration awards issued under the arbitration clause is a reasonable and permissible interpretation of the contract) and the Florida appellate court in Lloyds Underwriters v. Netterstrom, 17 So. 3d 732, 736 (Fla. Dist. Ct. App. 2009) (same, and even if the two clauses conflicted, the arbitration clause controls). According to the Gemini court, “[t]he best way to harmonize these two provisions is not, as Gemini suggests, to treat the ‘Service of Suit’ provision as a carve-out from the ‘Law and Practice’ provision’s broad sweep.” The court explained that “[w]hile Gemini is correct that, all else equal, specific provisions control over general provisions,” that principle of construction, according to the court, cannot override clear contract language of the two clauses at issue. Gemini, Op. at 12. To find otherwise would “rewrite the parties’ contract,” which the Gemini court would not do.

Gemini reinforces the proposition that courts will apply arbitration clauses and service of suit clauses in harmony with each other. Insurers and practitioners should be aware of the Gemini decision and that such contract provisions, as demonstrated in Gemini, are not intended to conflict with each other. Rather, as the Gemini court noted, the two provisions work together to prevent costly fights over the appropriate forum for litigating issues arising out of the parties’ international insurance contract.

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Can Foreign Investors Sue the UK for Brexit?

Wed, 2017-05-10 22:27

Roger Alford (Editor)

Here in London, it seems there is no end to the number of Brexit conferences one may attend. But as far as I know, there has yet to be one addressing the question of whether Brexit may give rise to viable investment arbitration claims against the United Kingdom. So on May 30, 2017 the University of Notre Dame and Volterra Fietta will host a debate on this question.

The panel will include:

Roger Alford, Notre Dame Law School
Markus Burgstaller, Hogan Lovells
Luis González García, Matrix Chambers
Dan Sarooshi, Oxford University and Essex Court Chambers
Jeremy Sharpe, Shearman & Sterling
Suzanne Spears, Notre Dame Law School and Volterra Fietta

The location is the University of Notre Dame, 1-4 Suffolk Street, London, SW1Y 4HG. The event begins at 6:00 pm with a reception afterward.

If you are interested in registering, please RSVP to [email protected]

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Choice Between Interim Relief from Indian Courts and Emergency Arbitrator

Tue, 2017-05-09 21:29

Rishab Gupta and Aonkan Ghosh

YSIAC

The ability of a party to obtain urgent interim relief is central to the efficacy of any method of dispute resolution. In case of disputes that are subject to an arbitration agreement, until recently parties had only two options: either approach national courts for interim relief in support of the arbitration, or wait for the formation of the arbitral tribunal and then make an application for interim relief. The former would essentially require parties to initiate local proceedings before national courts (the avoidance of which may in fact have been the principal reason for choosing arbitration in the first place). The latter would expose a party to the risk of dissipation of assets while the arbitral tribunal is being constituted.

Emergency arbitration is often cited as one of the solutions to the parties’ conundrum. But is emergency arbitration genuinely a substitute to urgent interim relief from courts? In this article, we compare the pros and cons of obtaining urgent interim relief from national courts and emergency arbitrator. In doing so, we focus on India’s experience and provide statistics from the practice of Indian courts.

Relevant Parameters

By way of background, under Section 9 of India’s Arbitration and Conciliation Act, 1996 (the Act), Indian courts can grant interim relief in support of arbitration. Parties can approach courts for interim relief at any point before the constitution of the arbitral tribunal. However, after the tribunal has been constituted, parties are generally expected to seek interim relief from the tribunal directly. Further, interim relief from Indian courts is available even in cases where the seat of arbitration is outside India, unless the parties have agreed otherwise.

As for emergency arbitration, while the Act makes no reference to it, rules of Indian arbitration institutions – such as the Mumbai Center for International Arbitration and the Indian Council of Arbitration – allow parties to seek orders from emergency arbitrators. Moreover, Indian parties are often involved in emergency arbitration proceedings conducted by foreign institutions, particularly SIAC.

The table below contains a comparison of interim relief available under Section 9 of the Act with emergency arbitration.

How long it takes to obtain interim relief?

For the purposes of this study, we randomly selected 300 Section 9 applications filed before the Delhi High Court in the year 2016. Next, we excluded those applications that were either withdrawn or granted with the consent of the parties. For the applications that remained in our dataset, we analysed the time it takes to obtain the first ad-interim order. Ad-interim orders are orders of Indian courts that are operative either till the final disposal of an interim application or till the next hearing. For example, in urgent matters, a court might grant an ad-interim injunction restraining the respondent from calling upon a performance bank guarantee, pending the final adjudication of the Section 9 application. Accordingly, in evaluating the efficacy of Section 9 proceedings, the relevant time period is between filing of Section 9 application and grant of the first ad-interim order, as opposed to the date on which the Section 9 application is finally disposed of.

The study revealed that the median time it took the Delhi High Court to grant ad-interim relief from the date of filing is 3 days.

In the context of emergency arbitration, it is not possible to carry out a similar empirical study because arbitration institutions do not disclose data about individual cases. Also, time periods set out in the rules of the various institutions vary. For example, SIAC Rules provide that the emergency arbitrator must issue an award/order within 14 days of his appointment, while the ICC Rules provide 15 days. Experience shows that SIAC and ICC emergency arbitrators often issue their orders more quickly than that; nevertheless, it is likely to remain the case that parties can receive even quicker relief by filing a Section 9 application in Indian courts.

Success rate

Out of the 300 Section 9 applications filed before the Delhi High Court, 72 applications were either granted, withdrawn by consent or remain pending with no interim relief ordered to date. Of the remaining 228 applications, interim relief of some sort was granted in 167 cases. This represents a success rate of 73 per cent for the applicant. The most common forms of interim relief granted by the Delhi High Court were freezing injunction prohibiting dealing with or disposing of certain assets, orders for deposits of sums in court, creation of bank guarantee in favour of the applicant, and disclosure of assets.

In case of emergency arbitration, again very limited data is publicly available to evaluate the success rate in a methodical manner. In case of SIAC for example, between July 2010 and 31 March 2017, 57 emergency arbitration applications were filed, of which 29 applications were granted while 2 remain pending, 6 were withdrawn and 4 were granted by consent. That represents a success rate of 64.4 per cent. Other institutions have not however published similar statistics.

Orders against third parties

Emergency arbitrators cannot grant relief against third parties. That is an important limitation, which derives from the fact that the jurisdiction of emergency arbitrators and the (eventual) arbitral tribunal is limited to those parties who have consented to submit their dispute to arbitration. For example, article 29(5) of the ICC Rules expressly provides that the ICC’s Emergency Arbitrator Provisions apply only to signatories to the arbitration agreement or their successors.

On the other hand, Indian courts, like courts of other jurisdictions, can grant interim relief against third parties in certain circumstances (for example, where such orders are necessary to protect the subject matter of the arbitration). The classic situation is when a freezing order is granted against a bank that holds funds on behalf of one of the respondents. An emergency arbitrator would not be able to make the bank a party to the freezing order.

Ex-parte orders

The ability of a party to obtain ex parte interim orders can be crucial in circumstances where an element of surprise is necessary (for example, where prior notice to the respondent would lead him to remove his assets from the jurisdiction of the court). Like in other jurisdictions, Indian courts can grant ex parte orders in exceptional circumstances. Emergency arbitrators, on the other hand, cannot grant relief on an ex parte basis. That is because one of the central tenets of arbitration is that all parties be given equal opportunity to present their case.

Enforceability

Even if a party is successful in obtaining relief from an emergency arbitrator, it must still deal with the question of enforcement. With the exception of Singapore and Hong Kong, in no other country orders of emergency arbitrators have received statutory recognition. In India, the Law Commission considered this issue at the time of suggesting amendments to the Act; however, ultimately no such amendment was made. Therefore, orders of emergency arbitrators are not enforceable in India. The fact that certain rules permit emergency relief to be granted as “awards”, and not just “orders”, will make no difference to their enforcement in India (compare Schedule 1(6) of the SIAC Rules with Article 29(2) of the new ICC Rules).

Despite concerns regarding their enforceability in India, emergency relief can be crucial in Indian related arbitrations. To start with, orders of emergency arbitrators may be extremely helpful if the respondent has assets in jurisdictions where such orders are enforceable (e.g. Singapore and Hong Kong). Further, experience shows that parties often voluntarily comply with emergency orders. That may be because losing parties fear that arbitral tribunals would not look too kindly on their failure to comply with the orders of emergency arbitrators. Moreover, to further incentivize compliance, arbitration rules allow arbitral tribunals to reflect non-compliance with the orders of emergency arbitrators in their final award (see, e.g., Article 29(4) of the ICC Rules). Finally, and rather counter-intuitively, orders of emergency arbitrators may assist a party in obtaining relief from an Indian court under Section 9 of the Act (see, e.g., HSBC v. Avitel 2014 SCC OnLine Bom 102, where the Bombay High Court granted interim relief in the same terms as that of a SIAC appointed emergency arbitrator; but see Raffles Design (2016) 234 DLT 349, where the Delhi High Court in the context of a Section 9 application effectively ignored the orders of a SIAC appointed emergency arbitrator).

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PCA Award Trapped in the Confines of the Singapore State Immunity Act

Mon, 2017-05-08 20:17

Olga Boltenko, Lakshanthi Fernando and Nanxi Ding

In early March 2017, the Singapore High Court released a judgment in which it considered an important question of enforcement of investor-state awards.

In Josias Van Zyl v Kingdom of Lesotho [2017] SGHCR 2, AR Pereira was asked to decide whether an order to enforce a final award in a treaty dispute administered by the Permanent Court of Arbitration is to be served through diplomatic channels, or whether it could be served by way of simple service on the defendant’s solicitors in Singapore.

While admittedly technical, the issue of service of process is fundamentally important for the enforcement of treaty awards. Having an enforcement order or a writ that cannot be served is equivalent to having a cheque that cannot be cashed. Singapore praises itself on being one of the most forward-thinking jurisdictions in Asia for treaty disputes. That praise, inevitably, should come with a convenient and speedy service mechanism. The convenience of service on a foreign State is inherently dependent upon the procedural privileges and immunities that a State enjoys in the enforcement jurisdiction. Having to resort to diplomatic channels is a universally accepted but arguably cumbersome and potentially lengthy procedure. In contrast, serving enforcement orders on solicitors next door is a convenient, predictable, and speedy process.

In essence, in Josias Van Zyl v Kingdom of Lesotho, AR Pereira decided Singapore’s fate when it comes to enforcement of treaty awards. He sent a strong message to the legal community that Singapore, at least in the interim, is not prepared to deviate from the traditional service mechanism through diplomatic channels, even where the enforcement circumstances might justify a more flexible and speedy procedure.

A blog post on Singapore would be incomplete without a reference to Hong Kong. In Hong Kong, service on a foreign State is governed by Order 11 Rule 7 of the Rules of the High Court. The Rules’ provisions are far from controversial and as such have not generated much debate or case law, apart from an important caveat of the Congo judgment. As a general rule, in Hong Kong, a person to whom leave has been granted to serve on a State must lodge a request in the High Court Registry for service to be arranged by the Chief Secretary for Administration, who will then effectuate the service. The Chief Secretary would forward the service request to the Ministry of Foreign Affairs, where the request would be served through consular or diplomatic channels. Helpfully, in addition to a rather non-controversial set of service rules, there is no requirement in Hong Kong for the plaintiff seeking to serve a State to demonstrate in the service application that the State does not enjoy immunity from suit or immunity from execution (NML Capital Ltd v Republic of Argentina).

This is where the similarities between the two jurisdictions end. Hong Kong’s Rules of the High Court allow flexibility of service on a foreign State where the State has agreed to a procedure different from that specified in the rules. In addition to that, the Hong Kong judiciary is known to exercise an important degree of flexibility by allowing service on Hong Kong solicitors rather than through diplomatic channels where the circumstances so warrant. In FG Hemisphere Associates LLC v Democratic Republic of Congo [2009] 1 H.K.L.R.D., Reyes J noted that the enforcing party sent the originating summons to various government officers of the defendant State, which in turn had caused the State to acknowledge service. Against this background, Reyes J granted the plaintiff an ex parte order for substituted service by posting the originating summons to Congo’s solicitors in Hong Kong.

The Singapore judiciary takes a completely opposite approach to service on a foreign State. Having been seized of the matter, AR Pereira, in a succinct judgment of 9 pages, determined that the Enforcement Order falls within the confines of s14 of the Act and dismissed the plaintiff’s application to serve the Enforcement Order on Lesotho’s solicitors in Singapore, thus precluding the plaintiffs from pursuing the easiest way of service.

Procedural Background

The underlying arbitration was conducted under the auspices of the PCA and the UNCITRAL Rules (PCA Case No. 2013-29: Swissbourgh Diamond Mines (Pty) Limited, Josias Van Zyl, The Josias Van Zyl Family Trust and others v. The Kingdom of Lesotho). The claim was brought by a group of South African investors, including the plaintiffs, against Lesotho, under the Treaty of the Southern African Development Community, for expropriation of their mining leases by the government. On 18 April 2016, a PCA tribunal seated in Singapore released its final award on costs. It is this final PCA award that the plaintiffs are seeking to enforce against Lesotho in Singapore.

The plaintiffs first tried to serve the Enforcement Order on Rajah & Tann, Lesotho’s solicitors in Singapore. Rajah & Tann declined to accept service on the basis that they had no instructions from Lesotho to do so. The plaintiffs then sought to serve the Enforcement Order on Webber Newdigate who represented Lesotho in the PCA arbitration, but to no avail. Persisting, the plaintiffs attempted service on Lesotho’s Attorney-General. That attempt was brushed off by Webber Newdigate on the basis that service was not compliant with s 14(1) of the Singapore State Immunity Act. That is why the plaintiffs motioned for substituted service of the Enforcement Order on Rajah & Tann in Singapore.

Reasoning and Judgment

AR Pereira, having looked into the plaintiff’s numerous attempts to navigate their Enforcement Order through the – almost Machiavellian – ping pong game by Lesotho’s counsel, took the view that the Enforcement Order must be served through diplomatic channels, for the following reasons.

Firstly, the Enforcement Order, when served, has the effect of instituting proceedings against a State within the meaning of s 14 of the State Immunity Act and of O69A r6(2) of the Singapore Rules of Court. AR Pereira found no reason to exclude enforcement proceedings from the procedural requirements of service on foreign States.

Secondly, AR Pereira rejected the plaintiffs’ arguments that the High Court should apply the Singapore Rules of Court, in particular Order 69A Rule 6, to allow the plaintiffs to serve the Enforcement Order on Lesotho’s Singapore solicitors. He noted that Order 69A Rule 6 of the Rules of Court is silent on the mode of effecting service on foreign States, but that must be because when the Rules were drafted, investor-state enforcement proceedings were not in contemplation, thus the omission should not remove the mandatory requirements of s 14 of the State Immunity Act. The plaintiff’s counsel argued that in any event, Lesotho is well aware of the enforcement proceedings given that it is involved in the set aside proceedings in Singapore and has retained counsel to pursue its set aside application. That argument did not convince AR Pereira who found that “if the State Immunity Act requires service in accordance with a specified procedure”, then it should not matter how the related set aside proceedings have developed.

Finally, AR Pereira found that the setting aside proceedings and the enforcement proceedings are fundamentally different. It is impossible to equate the initiation of the setting aside proceedings to the “appearance” in the enforcement proceedings. For that reason, Lesotho’s initiation of the setting aside proceedings in Singapore cannot be construed as a waiver of its procedural privileges under the State Immunity Act.

Conclusion

In effect, the Singapore courts have affirmed that they will not treat a State’s participation in related proceedings as a waiver of the State’s procedural privileges under the State Immunity Act. Arguably, this determination makes service of enforcement orders in treaty matters more cumbersome, but it gives respondent States certainty that they will keep their procedural privileges irrespective of whether they have initiated setting aside proceedings before the Singapore courts or not. Many other jurisdictions would loathe waiving the States’ procedural privileges, so AR Pereira’s determinations are not at all surprising. However, one cannot help but wonder whether Singapore would have risen to an entirely different level of accommodating treaty disputes from inception to enforcement, had AR Pereira allowed (as Reyes J did in Hong Kong) the Enforcement Order to be served on Lesotho’s local solicitors in Singapore.

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The Protection of the Public Interest in Public Private Arbitrations

Sun, 2017-05-07 23:37

Stavros Brekoulakis

ITA

In international arbitration, as in other fields of law, the divide between private and public—commercial arbitration and public international (including investment) arbitration—traditionally has been the generally, if uncritically, accepted belief. When public bodies are involved in commercial contracts, the traditional point of distinction has been whether the state operated jure imperii or jure gestionis. Apart from the fluid and often difficult to ascertain meaning of the these grandiose Latin terms, the distinction has been unsatisfactory, mainly because it fails to capture an increasingly growing middle ground upon which the arbitration literature has only recently started to focus, including in an article I recently co-authored with Margaret Devaney for the Modern Law Review1)See for example, S. Schill, project on ‘Transnational Private-Public Arbitration as Global
Regulatory Governance: Charting and Codifying the Lex Mercatoria Publica’. jQuery("#footnote_plugin_tooltip_9486_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9486_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. It is the ground occupied by contracts between public bodies and private parties, and disputes arising out of such contracts that may have public interest implications. Examples of such contracts (and related disputes) include public procurement contracts, big infrastructure and concession contracts, contracts for the provision of an essential public service (provision of energy and water) or contracts for the implementation of important governmental policies in sectors that are sensitive for the public, such as health, education, social welfare and immigration.

The last forty years has witnessed a remarkable growth in the rise of public-private contracts and related disputes. The growth owes to two concurrent developments. One the one hand, with the collapse of the non-arbitrability doctrine, the scope of arbitration has greatly expanded to include not only claims pertaining to the formation, interpretation and performance of commercial contracts, but crucially statutory claims that may have crucial social implications. Today, international arbitral tribunals routinely review disputes associated with public policy, including (in investment law) disputes arising out of the exercise of regulatory sovereignty of host states.

On the other hand, a combination of economic and ideological factors has led to increased interaction between public and private sectors and increased reliance on private actors to perform public functions in virtually every industrialized state.

The connection between these two developments—the expansion of arbitration’s domain and the rise of the ‘contracting state’—is the fact that many public-private contracts favour arbitration and other private forms of dispute resolution over resolution of disputes in the national courts. For example, the Model Terms and Conditions of Contracts for Goods issued by the UK Office of Government Commerce provide for a multi-tiered dispute resolution process ending in arbitration in the event that informal negotiation and mediation are unsuccessful. Similar dispute resolution provisions are common in the standard forms of international construction contracts typically utilized for procurement of public works.

This type of public-private arbitration can have important implications for the public interest. The e-Borders case provides an example from the UK. The case concerned a dispute between the UK Secretary of State for the Home Department and the US defence company, Raytheon Systems Limited, in respect of a 2007 contract for the design, development and delivery of a multimillion pound technology system (e-Borders) which would reform UK border controls by establishing an electronic system to vet travellers entering and leaving the UK. When the Home Office terminated the contract in 2010 for significant delays in progress of the works, Raytheon commenced arbitration proceedings claiming substantial damages for unlawful termination. The arbitration proceedings were conducted confidentially, under the rules of the London Court of International Arbitration. The arbitrators were English and American, with a Canadian chairman. The arbitrators decided, apparently within an exclusively private law setting, that the Home Office had unlawfully terminated the contract. It awarded damages of approximately £190 million to Raytheon, plus £38 million in interest and claimant’s costs. While the award was challenged by the Home Office and subsequently set aside by the High Court for serious irregularity, the Home Office announced in March 2015 that it had reached a negotiated resolution, agreeing to pay £150 million to Raytheon in full and final settlement of the dispute. The e-Borders award raised serious concerns in the British government and attracted intensive media and public interest, with the focus on the impact of the award on public finances and on UK border security. Some observed that the e-Borders dispute cost the British taxpayer millions of pounds, with no disclosure of information about what went wrong with the Raytheon contract.

As the e-Borders case demonstrates, the potential problem with public-private arbitration is that, while their outcomes may have far-reaching implications for the public interest, the resolution of these disputes may be conducted within an exclusively private law framework. This raises important questions, notably whether the public interest is accounted for, and indeed protected, in public-private arbitrations.

The answer to this question depends on the national applicable law. French law, for example, recognizes the distinctive nature of public-private arbitrations, and a number of French courts decisions have held that awards arising out of public-private arbitrations must be reviewed by administrative courts to ensure that the award is not contrary to French mandatory rules of public law.2)See, for example, the decision of Tribunal des conflits in INSERN v Fondation Letten F. Saugstad (2010) and the more recent decision of the Conseil d’Etat in its 9 November 2016 decision. jQuery("#footnote_plugin_tooltip_9486_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9486_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Similarly, Brazil’s recently-enacted arbitration law provides that public-private arbitration is subject to the ‘principle of publicity’ and all other laws governing transparency in public affairs.3)Law No 13,129 of 26 May 2015. jQuery("#footnote_plugin_tooltip_9486_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9486_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

By contrast, and partially because of the lack of a developed administrative law sphere or a separate body of administrate courts, English arbitration law has been exclusively developed around a private law paradigm, which treats all arbitrations (including those with public interest implications) as commercial. In addition, the English concept of public policy generally has been narrowly construed, and does not necessary capture public law norms.

Resolution of public-private disputes within this private law framework gives rise to a number of potential threats to the public interest. One threat is the likely non-application of public law norms, such as the administrative law doctrines of ultra vires and the rule against fettering, which allow public bodies to disrupt public-private contracts to pursue a competing public interest goal. A second potential threat is the non-application of public law principles of openness and accountability. As public bodies are given their powers on the understanding that they are to be exercised in the public interest, the public has an interest in ensuring such powers are not abused. However, this objective cannot be achieved in public-private arbitrations, which are typically private and confidential. As in the e-Borders case, if the public is denied access to important information in relation to these arbitrations, the public is deprived of the opportunity to consider ‘what went wrong’ and to attribute accountability either to the public body (in which case political accountability should ensue) or to the private party (in which case civil liability should follow).

International arbitration, as a private means of dispute resolution, has been under public scrutiny and (often unfair) criticism, especially in relation to investor-state dispute settlement. However, as the number of public-private contracts increases, public attention is likely to be drawn to public-private arbitrations as well. Unless arbitration responds by dealing with important public interest concerns, state regulation (possibly unwelcome) may soon ensue.

References   [ + ]

1. ↑ See for example, S. Schill, project on ‘Transnational Private-Public Arbitration as Global
Regulatory Governance: Charting and Codifying the Lex Mercatoria Publica’. 2. ↑ See, for example, the decision of Tribunal des conflits in INSERN v Fondation Letten F. Saugstad (2010) and the more recent decision of the Conseil d’Etat in its 9 November 2016 decision. 3. ↑ Law No 13,129 of 26 May 2015. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors:

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The Vis Moot Is Much More Than Who Wins

Sat, 2017-05-06 20:17

University of Ottawa

From left to right: Aaron King, James Plotkin, Natalie Kolos, Chloe Waind, Dora Konomi, Emily Bradley, Emily McMurtry, Prof. Anthony Daimsis, Eric Bergsten (moot founder), the final bench: Professor Yeşim M. Atamer (Turkey; Professor at Istanbul Bilgi University and also a member of the CISG Advisory Council), Carlos S Forbes, (Brazil; President of CAM-CCBC), and the Rt Hon. Lord Phillips of Worth Matravers (UK; former Senior Law Lord and former President of the UK Supreme Court).

It is hard to put into words the sheer magnitude of the Vis Moot, let alone how it feels to win such a prestigious and challenging competition. While we cannot begin to describe the emotions experienced during the six months leading up to the University of Ottawa’s victory, nor the feelings we continue to experience since then, this post is our best attempt to explain the individual moments, both big and small, that made the Vis Moot one of the most memorable experiences of our lives.

While the competition itself began in the beautiful Vienna Opera House, where we were serenaded with the latest version of Harry Flechtner’s CISG song, our preparation began long before then. The team spent many nights debating on the best arguments for the Claimant and the Respondent, all while endeavouring to remember our high-school math when trying to figure out how many Equatorianian Denars there are in one US Dollar based on the variable exchange rate.

We had the pleasure of attending several pre-moots before travelling to Vienna, including the 4th Annual Penn State Law Pre-Moot, the 5th Annual NYU Practice Moot, and the 1st CAM-CCBC Hanseatic Pre-Moot. These pre-moots gave us the opportunity to test our arguments in front of expert arbitrators from around the world who challenged us and pushed our oral advocacy skills to the next level. Before the competition began, we also participated in a few informal practice rounds with the University of Freiburg, the University of Belgrade, and the University of Auckland. There we met students who were not only articulate and compelling speakers, but also kind and sincere individuals who truly embodied the Vis Moot’s professional and inclusive character. They gave us yet another glimpse into the exceptional talent we would encounter over the next few days.

In the general rounds we faced opponents from the HBKU School of Law, Peking University, Catholic University of Andres Bello, and the University of Zenica. While we felt confident in our performance, we could not help but ruminate on the mistakes we made and the things we wished we had done differently. Given the scoring system’s subjectivity and the strength of our competition, we were relieved to learn that our hard work got us into the playoffs.

We went up against some excellent teams during the playoffs. In the round of 32 we faced the University of Mainz in one of our closest matches. Both the team and their coach, Prof. Dr. Peter Huber, were humble and gracious when we were declared the winners of the round. Throughout the remainder of the competition, they would continue to support us and congratulate us on our success.

By the end of the first day of the playoffs, we were tired – we had argued four challenging rounds in one day, with some of us arguing every round. After a good night’s sleep we were recharged and ready for the semi-finals. There, we faced the University of Montevideo, a consistently strong competitor. The University of Ottawa had faced Montevideo in the 2011 Vis Moot finals so we knew we had our work cut out for us. The team held each other and our breath as we awaited the results. At that moment we felt the weight of the blood, sweat, and tears we had poured into this moot for the last six months. When the arbitrators declared that the University of Ottawa would be advancing to the Grand Final, we cheered and cried.

Walking into the Reed Messe Vienna for the final round brought back the same feelings of awe we experienced during the opening ceremony. Sitting in an immense room filled with thousands of our peers and international commercial arbitration experts from around the world, we could truly feel the significance of the Vis Moot. Eric Bergsten, the father of the Vis Moot and the man who crafted the arbitration problem for the first 20 years of the moot’s existence had succeeded in creating something truly special – a devilishly complex and challenging moot that would bring together over 340 schools from across 65 countries. Because of his vision and passion, we will forever be connected to many of the world’s brightest arbitration minds and the 2,000 students who shared in this experience with us. And the Vis management, made up of Stefan Kröll, the new mad genius behind the problem, Christopher Kee and Patrizia Netal have found a way to capture the magic that our own Vis alumni refer to while recounting their experiences.

The final round against O.P. Jindal Global University flew by, and once again we were left unsure as to which team would prevail. While we nervously awaited the final results, we were overjoyed to learn our teammate Natalie Kolos was awarded the Martin Domke Award for top individual oralist and Chloe Waindand and Emily Bradley received honourable mentions in the same category. It was not long before Mr. Carlos Forbes, the President of the CAM-CCBC and an arbitrator on the final tribunal, climbed the stage to announce the winners. His speech was short and sweet. With a huge smile, he announced the University of Ottawa had won. For the next several hours, students and coaches from around the world would congratulate us and shake our hands. The level of support and congeniality we experienced was exceptional.

Our victory represented a record breaking third win for the University of Ottawa – the most wins by any university in the Moot’s history. This level of success exemplifies how seriously the University of Ottawa and its faculty take mooting and oral advocacy in general. Our university consistently performs well in both domestic and international moots, thanks in part to its excellent coaches. Our coaches, Prof. Daimsis and James Plotkin, a member of the Vis 2015 winning team, pushed us harder than any of us had ever been pushed before. Prof. Daimsis also brought in a great number of guest arbitrators to ensure we considered the problem from every possible angle. Lord Hacking, a leading figure in arbitration for over 35 years, came all the way from London, England, to help in our training. Prof. Daimsis and Mr. Plotkin’s dedication to the Vis and our success inspired us and brought out the best in every team member.

Winning the Vis Moot was a rewarding end to the six months of hard work and dedication we have put into this arbitration problem. But what truly made us winners was not achieving our goal of winning the final, but what we became in getting there. The Vis Moot has had a profound impact on each and every one of us in different ways and has taken us all from ordinary law students to fierce advocates ready to embark on what will surely be exciting and successful careers in law.

Throughout the year, our coaches reminded us that the Vis is so much more than just a moot. Participating in the Vis, according to Prof. Daimsis, is a transnational accreditation. This explains how students from our faculty have ended up in the world’s leading law firms, specifically in their arbitration departments. And the common thread linking all our alumni is the Vis moot.

From all of us on the Ottawa team, thank you to everyone who helped make this dream possible and thank you to all those in the Vis community who contributed to this once in a lifetime experience.

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The Western Front: New Arbitration Rules for the Supreme Court of Western Australia

Fri, 2017-05-05 23:24

Elizabeth Macknay, Stewart McWilliam, Christopher Hicks and Timothy Goyder

Herbert Smith Freehills

Introduction

Western Australia has many of the hallmarks of an arbitral hub: from a stable liberal democracy, a reliable and predictable judiciary, and very low rates of corruption, to offices of numerous national and international law firms, world-standard business hotels (albeit only a recent arrival), and an efficient international airport (again, only of late, but better late than never). The capital, Perth, is a short flight from south Asia, and situated in the most populous time zone on the planet. Sitting at the base of an enormous corridor of economic activity, Perth ought, in theory, be a favoured venue for international arbitration.

It is no secret, though, that Western Australia, like all Australian jurisdictions, has lagged the rest of the developed world in its uptake and acceptance of international arbitration as a form of dispute resolution. It remains the case that most commercial disputes concerning Western Australian projects are resolved by litigation, not arbitration.

However, recent economic drivers, and an increasingly ‘arbitration friendly’ Supreme Court, may herald an increase in international arbitrations that are either seated in Western Australia or involve Western Australian companies.

Economic drivers affecting international arbitration

During the global resources boom in the mid-2000’s, minerals-rich Western Australia was a hotbed of exploration and project development. Over this period, the State saw a substantial increase in inbound investment, as money rushed into Western Australia to fund the construction of some of the most significant resources and energy projects in the world. While empirical evidence is difficult to come by, it is logical to suspect that many of the contracts struck during this period contain agreements to arbitrate.

The mining construction boom has passed, and many projects have now entered, or are entering, the production phase. But with projects facing cost pressures associated with global economic stagnation over the past decade, the spectre of disputation looms large. And with so many sophisticated international companies active in the jurisdiction, there is likely to be a growing volume of arbitrations with some connection to Western Australia. This, among other things, prompted the foundation of the Perth Centre for Energy and Resources Arbitration to deal with new opportunities for Perth-seated arbitration.

Fortunately, the Supreme Court of Western Australia recognises, and is supportive of, this development. It has recently implemented new court rules to streamline and clarify the process for parties seeking the support of the Supreme Court in aid of arbitration. Additionally, recent decisions of the Supreme Court have signalled that Western Australia is a safe seat for commercial arbitration.

New Arbitration Rules

The Supreme Court (Arbitration) Rules 2016 (WA) (Rules) substantively came into force on 3 January 2017. The Rules apply to both international arbitration governed by the International Arbitration Act 1974 (Cth) (IAA) and domestic arbitration governed by the Commercial Arbitration Act 2012 (WA). The Rules set out the processes by which parties can apply to the Court to, among other things:

(a) stay court proceedings commenced notwithstanding the existence of a valid arbitration agreement (Rule 6);
(b) grant provisional relief in aid of an arbitration (Rule 12);
(c) facilitate arbitration processes (for example, by issuing subpoenas to third parties in respect of documentary evidence) (Rules 9-11); and
(d) enforce or set aside an arbitral award or another procedural order (Rules 7 and 13-14).

All proceedings subject to the rules are referred to the Commercial and Managed Cases List, and, specifically, a separate Commercial Arbitration List, currently managed by the Chief Justice of the Supreme Court.1)This designated list existed prior to the enactment of the Rules, pursuant to Practice Direction 4.1.2.3 of the Consolidated Practice Directions of the Supreme Court of Western Australia. jQuery("#footnote_plugin_tooltip_8431_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8431_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Rules also provide designated court forms for use in proceedings related to Commercial Arbitration.

The Rules are similar to the rules adopted in other Australian jurisdictions, and are a continuation of the measures adopted by both Commonwealth and State governments following a review of Australia’s arbitration framework. This review, which commenced in 2008, was designed to improve the effectiveness and efficiency of the arbitral process in Australia. In large part, this was achieved by the adoption of uniform legislation, based on the Model Law, in each state and territory to govern commercial arbitration, and amendments to the IAA. At the time of writing, the Commonwealth government has just proposed further reforms to the IAA that would make the enforcement of foreign awards easier in Australia.

Practical Judicial Support

In addition to the practical architecture of the new Rules, the Western Australian Supreme Court has recently made clear in a number of decisions that Western Australia is an ‘arbitration-friendly’ jurisdiction. The Court has issued a number of recent decisions staying court proceedings and upholding the validity of arbitration agreements.2)See Samsung C&T Corporation v Duro Felbuera Australia Pty Ltd [2016] WASC 193; Roy Hill Holdings Pty Ltd v Samsung C&T Corporation [2015] WASC 458. jQuery("#footnote_plugin_tooltip_8431_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8431_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Further, the Chief Justice has, in recent years, endorsed the principle, set out in the English authority of A v B [2007] EWHC 54, that a party successful in applying for a stay of proceedings due to the existence of a valid arbitration agreement should ordinarily be awarded indemnity costs.3)Pipeline Services WA Pty Ltd v Atco Gas Australia Pty Ltd [2014] WASC 10 [18]; KNM Process Systems SDN BHD v Mission New Energy Ltd formerly known as Mission Biofuels Ltd [2014] WASC 437(S). jQuery("#footnote_plugin_tooltip_8431_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8431_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); While this principle has not been universally accepted by judges of the Court,4)Australian Maritime Systems Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2016] WASC 52 (S); Roy Hill Holdings Pty Ltd v Samsung C&T Corporation [2015] WASC 458 (S). jQuery("#footnote_plugin_tooltip_8431_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8431_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); it is another sign of an increasingly pro-arbitration judiciary in Western Australia.

This being said, the Court continues to preserve its own jurisdiction to award interim relief, notwithstanding the existence of an arbitration agreement (or to refuse relief in support of an existing or pending arbitration) unless there is clear and unequivocal contractual language which would require that deference to the arbitral process. In the recent case of CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASC 112, which considered an application to restrain the defendant from calling on certain bank guarantees, the Court both:

(a) refused the application for a stay of interim injunction proceedings pending arbitration made by the defendant (because of an express carve out in the relevant arbitration agreement for urgent injunctive relief); and
(b) in any event, did not grant the injunctive relief5)The decision is currently on appeal to the Court of Appeal, and a temporary injunction has been granted pending the outcome of the appeal, see: CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASCA 85. jQuery("#footnote_plugin_tooltip_8431_5").tooltip({ tip: "#footnote_plugin_tooltip_text_8431_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); (to prevent a call on the bank guarantees) sought by the plaintiff as it did not accept, among other things, the plaintiff’s argument that the defendant should be restrained from calling on the bank guarantees (which they were contractually permitted to do) until the arbitration process had run its course.

Conclusion

Both the introduction of the Rules and the Court’s recently expressed disposition to supporting and endorsing the arbitral process make clear that Western Australia is an arbitration-friendly jurisdiction. In the coming years, as more arbitrations are likely to take place in Western Australia, practitioners should be confident that the Court system will be supportive of the arbitration process.

References   [ + ]

1. ↑ This designated list existed prior to the enactment of the Rules, pursuant to Practice Direction 4.1.2.3 of the Consolidated Practice Directions of the Supreme Court of Western Australia. 2. ↑ See Samsung C&T Corporation v Duro Felbuera Australia Pty Ltd [2016] WASC 193; Roy Hill Holdings Pty Ltd v Samsung C&T Corporation [2015] WASC 458. 3. ↑ Pipeline Services WA Pty Ltd v Atco Gas Australia Pty Ltd [2014] WASC 10 [18]; KNM Process Systems SDN BHD v Mission New Energy Ltd formerly known as Mission Biofuels Ltd [2014] WASC 437(S). 4. ↑ Australian Maritime Systems Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2016] WASC 52 (S); Roy Hill Holdings Pty Ltd v Samsung C&T Corporation [2015] WASC 458 (S). 5. ↑ The decision is currently on appeal to the Court of Appeal, and a temporary injunction has been granted pending the outcome of the appeal, see: CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [2017] WASCA 85. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors:

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Improper Deliberations in International Arbitration as a Ground for Annulment

Fri, 2017-05-05 00:30

Claire Morel de Westgaver and Brian Kotick

Bryan Cave LLP

The obligation for an arbitral tribunal to deliberate before rendering an award is at the heart of the arbitral process. In fact, parties typically agree to submit their disputes to a panel of three arbitrators for the purpose of ensuring objectivity, well thought decisions and equal treatment. Deliberation is so fundamental to the arbitral procedure that its absence, or abuse, could form the basis of annulment proceedings. This is what happened in the Puma case, in which the Spanish Supreme Court recently held that a party to an annulled award was entitled to recover arbitrator fees paid to two arbitrators on the basis that by excluding the third arbitrator from the deliberations they had been reckless and engaged their liability under section 21 of the Spanish Arbitration Law (Judgment of the Spanish Supreme Court, 102/2017).

Most leading arbitration rules are virtually silent on the requisite formalities, if any, of deliberations. Arbitration rules routinely address their confidential nature and sometimes specify that they may take place at a place different from the seat of the arbitration, but they do not generally include provisions relating to the timing (Article 15.10 of the LCIA Rules being an exception) or the conduct of the deliberations. Certain arbitration regimes address the possibility of a decision rendered by a truncated tribunal, including in the event that an arbitrator refuses to participate in deliberations and/or sign an award. Yet, aside from arbitrators’ overarching obligation to be impartial and fair, arbitration rules and statutes tend to remain silent on any duties of arbitrators to conduct the deliberations in a specified manner.

As a result, the standard a court should apply when faced with an arbitral tribunal that does not properly deliberate is far from clear. It has been argued that deliberation is an implied right of the parties derived from their right to be heard and their right to equal treatment. Others have suggested that it is an arbitrator’s duty based on international public policy, since its absence would result in a decision not taken by the arbitral tribunal but by one or two individuals abusing their power.

In the Puma case, the arbitral award was set aside on the basis that Mr. Santiago Gastón de Iriarte, the arbitrator appointed by Puma AG RDS (“Puma”), had not participated in the final deliberation. After several meetings between all three arbitrators, the deliberations regarding damages to be paid by Puma broke down. Two days after the last of these meetings, and with knowledge that Mr. Gastón was travelling, the remaining two arbitrators met, without summoning Mr. Gastón, and rendered an award on terms on which Mr. Gastón did not agree. The parties were notified of the award that same day.

In its decision of 15 February 2017, the Spanish Supreme Court affirmed the ruling of the Provincial Court of Appeal of Madrid, finding that the deliberations had been conducted contrary to the principle of arbitral collegiality. The Supreme Court held that a violation of the principle of collegiality was a violation of the right to a fair trial (Article 24 of the Spanish Constitution) and constituted a ground for annulment for public policy (section 41.1(f) of the Spanish Arbitration Law). The Court came to this conclusion after confirming that the non-participation of the third arbitrator was not the result of purposeful delay, obstruction or intervention in the decisive final discussion in which the final award was to be rendered (which under most arbitration regimes would have allowed a truncated tribunal to issue an award).

The Court stated that deliberation and voting “operates as a means of internal control of its members […]. In other words, it is not the case of that, once the possibility of the majority has been envisaged, or by the agreement of those who support a particular proposal or decision, the participation of the remaining members can be rejected ‘ad limite’, since they have the right and obligation to know […] the internal reasons that justified the decision and final vote”.

The issue of improper deliberations, as discussed in the Puma case, is not a novel one. In Sweden, for example, the absence of a proper deliberation on contentious issues has been relied upon as a ground for annulment as early as 1924 (see Årsbackaträvaruaktiebolag v. E. Hedberg, NJA 1924 p. 569). More recently, the award in Czech Republic v. CME was challenged, though unsuccessfully, on the basis of the alleged exclusion of an arbitrator from the deliberations (Svea Court of Appeals, Case no T 8735-01).

In France, the Court de Cassation considered the principle of collegiality in a similar context in the case of Papillon Group Corporation vs. Arab Republic of Syria and Others decided in 2011. In this case, the Court de Cassation held that given that the Paris Court of Appeal had found that a collegial meeting had taken place and that the third arbitrator had had an opportunity to voice his opposition through a dissenting opinion, the presumption that the arbitral award was rendered after deliberation had not been refuted by the challenging party. As such, the Court de Cassation held that the Paris Court of Appeal was right in concluding from these elements that there had not been any violation of the principle of collegiality described by it as “suppose[ing] that every arbitrator has the right to debate any decision with his colleagues” (Decision n° 706, F-D, R 09-17.346, 29 June 2011).

Without more guidance on the manner in which they should be conducted, deliberations are left exposed to abandonment or abuse. This consequence is exacerbated by the confidential nature of deliberation which makes the occurrence of an impropriety more difficult to establish. In this context, the rising demand for more transparency in international arbitration might lead arbitral institutions to become more inclined to promote a more formal and transparent deliberation process. However, one may legitimately wonder whether doing so would thwart inevitable – often frivolous – challenges and thereby better protect the integrity of the arbitral process. Or, on the contrary, whether a more regulated approach to deliberations would open the door to yet more undue scrutiny over arbitrators and their awards, which in turn could negatively impact the decision-making process and arbitrators’ independence.

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Machine Arbitrator: Are We Ready?

Wed, 2017-05-03 17:30

José María de la Jara, Alejandra Infantes and Daniela Palma

A group of lawyers has been coveted in recent years by the most prestigious law firms. They are supposed to predict results more accurately than Gary Born, create more persuasive stories than Stanimir Alexandrov and even issue better awards than Gabrielle Kauffman-Kohler. Their names are Watson, Ross, Lex Machina and Compas – they are Machine Learning Systems (“MLS) with natural language capability and the capacity to review thousands of decisions in merely seconds.

Computer systems are constantly evolving and their use by lawyers has grown steadily. For example, DRExM has been recently used in Egypt to resolve construction disputes, as it has the ability to recommend the most suitable dispute resolution technique, depending on the nature of the dispute, the evidence and the relation between the parties.

In this scenario, it is important to ask whether technology might replace arbitrators in the near future. In order to perform such evaluation, we will resort to the legal framework of several countries from Latin America, as well as the provisions of the UNCITRAL Model Law. Then, we will explore whether MLS would perform better than humans do. Finally, we will turn to the crystal ball to predict which discussion might lay in the arbitration market of the future.

Are parties able to appoint Machine Learning Systems as arbitrators?

Naturally, none of the revised arbitration laws expressly forbids the appointment of a computer as an arbitrator. Instead, every provision regarding the validity of the arbitration agreement only defines it as the submission of a dispute to the arbitrators. In turn, the definitions of “arbitral tribunal” only state that parties may appoint a sole or a plurality of arbitrators. Thus, based on this circular argument, both an arbitration agreement referring the dispute to a Machine Learning System arbitrator and the composition of a tribunal by such machine would be valid.

However, the Arbitration Acts from Peru (art. 20), Brazil (art. 10), Ecuador (art. 19) and Colombia (art. 7 – domestic arbitration) include specific references to arbitrators as “people” or require them to act by themselves. For example, the Peruvian Arbitration Act states that “any individual with full capacity to exercise his civil rights may act as an arbitrators”.

In contrast, legislation from Chile, Colombia (international arbitration) and Mexico, as well as the Model Law, do not contain a specific reference to arbitrators as “people” nor require them to be in capacity to exercise their civil rights. Arguably, this legal loophole would enable users to designate a computer as an arbitrator in these countries.

Despite of that, legal status of MLS might change in the future. For example, members of the European Parliament have proposed to provide legal status to robots, categorizing them as “electronic people” and holding them responsible for their acts or omissions. This kind of regulation would open new doors, arguably allowing parties to appoint computers, even in countries that require “people” arbitrators.

Furthermore, even if parties were not allowed to appoint computers as arbitrators, that does not mean they cannot agree to use them. Even if arbitration laws do not apply, courts should still enforce such agreements as a matter of contract law.

Besides these normative considerations, we believe the appointment of machine arbitrator could be held back based on a supposed breach of international public order. According to Gibson, this concept evolves continually to meet the needs of the political, social, cultural and economic contexts. However, change takes time.

Hence, one might argue that an award rendered by machine arbitrators should be set aside for defying the international public order, as it lacks key human characteristics such as emotion, empathy and the ability to explain its decision.

Would machine arbitrators perform better?

Even though technology has evolved dramatically in the last years, a MLS is still not able to accurately read, predict nor feel emotions. In our view, the lack of emotional processing would be a great handicap for a machine arbitrator. To illustrate this point, let us review what happened to Elliot, one of Antonio Damasio’s patients.

Elliot had a tumor the size of a small orange. Even though the operation was successfully performed, Elliot’s family and friends noticed something strange in his behavior after the procedure.

Before deciding where to eat, Elliot scrupulously scanned the menu of each restaurant, where he would sit, the lighting scheme and attended each establishment to verify how full it was. Elliot was no longer Elliot. Although his IQ had remained intact, he had the emotional life of a mannequin. Without emotion he was unable to make decisions.

In sum, emotions are critical for humans. This would be a great handicap for machine arbitrators. As explained by Allen, computers can’t spontaneously feel emotions, because they can’t recognize nor understand cues as facial expression, gestures, and voice intonation. In turn, machines can’t convey information about their own emotional state by using appropriately responsive cues.

In this sense, Nappert and Flader state that “failure to give proper recognition to the parties’ emotional reactions arguably hampers the arbitrators’ understanding of the case as it discounts the part played by the parties’ emotions in the circumstances leading up to the dispute”.

Emotions act as a source of information, cause of motivation and influence information processing by coloring our perception, memory encoding and judgments. Without them, our decisions are not human.

Also, specific emotions as anger play an important role in legal decision making. As explained by Terry Maroney, anger generates a predisposition towards fighting against injustice. Thus, angry arbitrators are prone to feel an intense desire to repair an unfair situation, even if that means taking more risks to fix the current scenario.

Moreover, Machine Learning Systems also lack empathy. That is, the ability to understand the intentions of others, predict their behavior, and experience the emotion they are feeling.

This emotional intelligence trait requires the development of metacognition; meaning, thinking about thinking, thinking about feeling and thinking about other thoughts and feelings. However, this feature hasn´t been achieved by computers yet.

Empathy is crucial in arbitration. As Frankman explains, arbitrators need to put themselves on the parties’ shoes to understand their hopes, struggles, expectations and assumptions. It is only after this cognitive exercise that arbitrators are ready to fully understand the dispute and reach an award.

Furthermore, Machine Learning Systems are not yet able to explain their own decisions. This could be a problem, even where unreasoned awards are allowed if agreed (e.g. Perú). For example, computers would not be able to issue final judgements regarding a preliminary decision subject to an appeal for reconsideration. Arguably, this could feed resistance against machine arbitrators, based on due process.

Notably, the European Union’s General Data Protection Regulation – which takes effect on May 2018 – forbids automated decisions regarding profiling if the algorithms cannot be later explained to its users (“right to an explanation”). According to Burrel, this will create several problems, as corporations might try to conceal information from public scrutiny, access to codes will probably be not simple enough for ordinary citizens and, specially, there will be a mismatch between the mathematics involved in machine learning and the demands of human-scale reasoning and style of interpretation.

In sum, machines are limited. In our view, an emotionless arbitrator without empathy and the ability to explain itself would not be able to fully understand the drama of the parties, their intent and the provided meaning besides the written text of the contract and documents.

Having said that, we do believe MLS could assist arbitrators. For example, HYPO is a computer that could guide arbitrators in the search for precedent, explaining similarities and differences between cases and even suggesting possible arguments that could be used for the resolution of the dispute. In such cases, the system would not make the decision, but only act as a guide for arbitrators. In this scenario, it would still be up to the human arbitrators to attribute intent and meaning to the evidence.

Final remarks

The arbitration legal framework was not designed to expressly forbid nor allow the appointment of computers as arbitrators. As technology evolves, the time to amend our laws might come sooner than expected.

Therefore, we encourage arbitration practitioners to discuss what would change if machine arbitrators are appointed. How would the standard of conflicts of interests apply? Would it be possible to appoint a computer in a panel with two human arbitrators? How would they deliberate?

Technology will no doubt eventually catch up and provide solutions. Prehistoric lawyers who try to cling to tradition and suppress innovation will remain at the middle of the evolutionary chain. Hence, it is up to the arbitration community to express its needs for empathetic arbitrators that are able to explain and feel their decisions. After all, as Sydney Harris said, “the real danger is not that computers will begin to think like men, but that men will begin to think like computers”.

* The authors would like to acknowledge and thank Christopher Drahozal, Sophie Nappert and Miguel Morachimo for their assistance and contribution to this work.

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Kluwer Mediation Blog – April Digest

Wed, 2017-05-03 03:41

Anna Howard

From conciliation applications in Germany, the use of mediation for companies under judicial reorganization in Brazil, the recent INADR International Law Student Mediation Tournament at the University of Strathclyde in Scotland, to transformative teaching in Shanghai, the broad coverage of topics continues on the Kluwer Mediation Blog. Why not have a look at the summary of the April posts below…

In Did They Teach You This in Law School?, following his recent attendance at the American Bar Association Dispute Resolution Conference, John Sturrock identifies a top ten list of themes which are fairly critical for modern lawyers.

In What Would You Do With … A River At The Table?, drawing on the recent granting of full legal personality to the Whanganui River in New Zealand, Ian Macduff considers the granting of legal rights and moral status to the environment. Ian then explores how to ensure that, in mediation, all those whose interests and rights are at stake are present or represented.

In Transformative Teaching and Training – and Mediation, Greg Bond shares his recent experience of working in Shanghai with undergraduate students from a Chinese university and a German university. Greg explores the variety of ways in which this experience was transformative for both the students and the teacher.

In Your Good Faith Counts – Conciliation Applications in Germany, Krzysztof Nowak and Innhwa Kwon provide a detailed examination of recent German cases on the suspension of the limitation period following an application for conciliation.

In Settling Well, drawing on Michael Leathes’ recent book, Negotiation: Things Corporate Counsel Ought to Know But Were Not Taught, Michael McIIwrath argues that dispute lawyers (both internal and external lawyers) need to invest time into understanding more about negotiation.

In Cooperation with a Competitor, Charlie Irvine explores the challenge faced by young mediators in the recent INADR International Law Student Mediation Tournament at the University of Strathclyde: not only do students act as mediator, advocate and client, but they must co-mediate with a student from another team. In simple terms, the students are being asked to cooperate with a competitor. Charlie identifies the fascinating implications of such cooperation with competitors.

In Movie Mediation Musings – Arrival, Joel Lee identifies useful lessons that mediators can draw from the movie Arrival.

In Is Mediation a Business?, in the first of a series of blogs on the business of mediation, Stephen Walker discusses whether mediation is a business.

In Corporate Recovery, Mediation and Master Chef, Andrea Maia considers the use of mediation in Brazil for companies under judicial reorganization.

In ICC Mediation Competition 2017: In Conversation With The Finalists, Bill Marsh and Anna Howard reflect on, and share, their interview with the finalists of the ICC Mediation Competition 2017.

In Mediation For All Or Mediation At All: How To Make A Living Out Of Mediation?, Virginia Vilches considers how to make a living out of mediation and considers a recent project to implement mediation in El Campo De Gibraltar in Spain.

In Should Mediation Be Free?, Sabine Walsh considers whether mediation should be free, and the meaning of “free”, questions which arise from the current debate in Ireland on its new draft mediation law.

In A New Seat At The Mediation Table? The Impact Of Third Party Funding On The Mediation Process (Part 2), Geoff Sharp and Bill Marsh share their thoughts on the impact third party funding has on the mediation process.

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Trade Wars and Commodity Arbitration

Tue, 2017-05-02 02:00

Ivan Kasynyuk and Dmitry Koval

Throughout the modern history of mankind, trade wars accompanied almost every military or political conflict between hostile states, ready to take the most radical actions for the sake of the victory. This is not surprising as trade directly affects the economy and, accordingly, the ability of the country to fight and resist successfully.

Unfortunately, in order to understand what “trade war” means, we do not have to look into the past, but we just need search in the latest news. As before, such actions nowadays constitute an integral part of any international conflict: trade blockades, sanctions, import duties, quotas and licenses, preferences and many other “weapons” are actively used by world players for their own purposes. Of course, the least “guilty” participants of the market – producers and trading companies of both countries – suffer the most from such conflicts. These players are blatantly forced to incur huge losses as a result of all sorts of restrictions and prohibitions, which often are fatal for their business.

The sphere of commodity trading is particularly at risk, as it is always likely that circumstances preventing contract execution will appear during a significant period of time between the moment of the conclusion of the contract and its execution. The probability of the ban can sometimes be foreseen, as in the cases with the adoption of mirroring sanctions. However, such events have the tendency to occur suddenly, especially given an ongoing armed conflict and the political situation. What can be done in this case?

Import duty

To illustrate, it might happen that goods are sold in April and are to be delivered in September, but official authorities of a buyer’s country introduce additional duties for the import of goods. Who should bear such losses? Is it possible to refuse to supply or to take the goods?

Let us take as example the recent case of the introduction of import duties on the import of Russian products to Turkey and, in particular, the duty on corn and wheat which was established at 130%, and considering that the sale of corn of Russian origin took place in February with subsequent delivery in May.

First of all, it is worth paying attention to the contract concluded between the parties. As a general rule, the parties explicitly determine the buyer to be the party responsible for the import of the goods and for all the formalities associated with the import, including the payment of taxes and duties in the country of import. If the contract is silent, majority of grain and oil commodities contracts incorporate standard contract forms developed by Grain and Feed Trade Association (“GAFTA”) and Federation of Oils, Seeds and Fats Associations (“FOSFA”), which expressly state that all import duties, taxes, levies, etc., present or future, in country of destination, shall be for buyers’ account. If the contract does not incorporate any standard contract form, the parties should refer to any specific rules regulating their obligations under the contract. Most of such transactions are carried out by sea on the basis of CIF or FOB in accordance with the international rules of Incoterms, according to which taxes, duties and other official fees, as well as customs formalities payable upon importation of goods, are paid by the buyer.

Moreover, such contracts tend to incorporate English Law by implication from a standard form or an express agreement. Under the general rule, English law consider such duties as business risks, which do not release the responsible party from performing contractual duties.

That is, under the conditions described above, payment of the import duty on Russian wheat introduced by Turkey will lie with the buyer and will not release it from the obligation to take and pay for the delivered goods.

Import ban

And, what is the case if the authorities of the buyer’s country prohibit the import of goods completely? Is the buyer’s refusal to take the goods due to force majeure circumstances reasonable in this case? The answer is not so clear and it depends on many factors.

Let us take as example a case under the Rules of Arbitration of FOSFA concerning a ban on import of agricultural products in the country of destination. A large agro-holding company (“Seller”) concluded a contract with agro-industrial company (“Buyer”) for the delivery of goods for import and further processing on the territory of the Buyer. According to the contract, the Seller should have delivered the goods on the DAF terms (Incoterms 2000). The place of delivery was the border between the states of the parties and the governing law of contract was English law.

The contract had a force majeure clause that ambiguously interpreted the consequences of imposing import restrictions and the Buyer’s responsibility for not obtaining an import license and other official permits necessary for the import of goods into the territory of his country. Soon after the contract was concluded, the Buyer reported on the governmental restrictions on imports of goods from the Sellers’ country and referred to the force majeure circumstances, making the execution of the contract impossible. Despite the official prohibition, the Seller refused to accept the Buyer’s notification of force majeure and proceeded to fulfill its obligations. During the next several months, the Seller repeatedly notified the Buyer about its readiness to deliver the goods and asked the latter to provide documentary instructions, without which further execution of the contract by rail was impossible. The Buyer confirmed that it could not take the goods, justifying its position by the onset of force majeure circumstances. In the meantime, the price of goods had significantly decreased, making the contract extremely unfavorable for the Buyer. By the end of the delivery period stipulated in the contract, the Buyer had terminated the contract, under the force majeure clause. In response, the Seller considered the Buyer to be in default. As the price for the goods decreased, the Seller demanded compensation for the difference between the contract price and the market price, to which the Buyer objected, arguing the force majeure circumstances and referring to the frustration doctrine under the English law which provides for an exemption from liability. Eventually, the case was submitted to the FOSFA arbitration at the request of the Buyer.

The Seller’s position consisted of two key arguments. Firstly, according to DAF terms, the obligation to obtain a license to import goods in the territory of the Buyer’s country rested on the Buyer, while the Seller’s duty was limited to the delivery of the goods to the borders between the states and did not imply importation into the territory of the Buyer’s country. Secondly, any restrictions on the import of goods into the territory of the Buyer’s country are not force majeure circumstances either within the framework of the contract concluded, including under the DAF terms, or in accordance with English law. In particular, restrictions on import of goods do not fall under the frustration doctrine referred to by the Buyer, as this circumstance did not prevent the Buyer from lawfully performing its contractual obligations, namely, accepting the goods at the contracted place of delivery.

The Tribunal observed that the ban on import had no effect on the fulfillment of the contractual obligations by either the Seller or the Buyer: the Seller could deliver the goods and the Buyer could accept them at the border between the states. At the same time, the import of goods to the Buyer’s country was not the responsibility of the Seller, who was responsible only for export while the Buyer had the obligation to import the goods. Consequently, the ban on imports was not a force majeure circumstance either under the contract, or under English law. Finally, the Tribunal decided that the Buyer could not refer to the ban on the import of goods and refuse to fulfill its contractual obligations. Having terminated the contract, the Buyer itself infringed the contract and therefore must compensate the Seller for the losses incurred as a result of the Buyer’s non-fulfillment of the contract.

The position of the arbitral tribunal under the FOSFA rules shows that impossibility to import will not discharge the contract under the doctrine of frustration. The intention for the goods to be processed in Buyer’s state was indeed the reason why the Buyer concluded the contract; however, the impossibility for such purpose to be achieved was not a sufficient ground to discharge the Buyer from its contractual obligations. The decision generally follows the line adopted by English courts in cases with similar circumstances. (See Congimex Companhia Geral de Commercio Importadora & Exportadora S.A.R.L. v. Tradax Export S.A [1983] 1Lloyd’s Rep. 250 and Bangladesh Export Import Co Ltd v. Sucden Kerry S.A. [1995] 2 Lloyd’s Rep. 1) The parties clearly outlined the scope of their duties in the contract and did it in such a way that the import ban would not make the performance illegal. First, the parties agreed on the DAF Incoterms which specifically provides that the Seller’s obligation is to place the goods at the border between the parties’ states, cleared for export but not cleared for import. Second, the parties agreed to English law as the governing law, which provided adequate level of protection against import prohibitions, preventing the parties to use such circumstances in bad faith and escape from their respective contractual obligations.

Conclusion

Unfortunately, trade conflicts are part of the current trade and economic policy of many countries and they are an inherent risk factor, which must be taken into account when doing business with these countries. Mostly driven by political reasons, the states are always ready to introduce trade restrictions in order to harm the opponent as much as possible. Like any war, a trade conflict entails losses on both sides. In most cases, this practice becomes detrimental to both states, not only to the one introducing the ban, as the case presented above shows.

 

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Moldovan Supreme Court Recommends the ICCA Guide as an Interpretative Tool for the New York Convention

Mon, 2017-05-01 03:35

Corina Vodă

One of the goals of “ICCA’s Guide to the Interpretation of the 1958 New York Convention: A Handbook for Judges” – as stated by Neil Kaplan in the Guide’s introduction – is to assist judges around the world in “using the Convention in a way consistent with its letter and spirit”. It seems that the Moldovan Supreme Court of Justice is set to do just that: through an explanatory judgment dated 25 April 2016, it recommended lower courts to take into account the ICCA Guide when deciding on requests to recognise and enforce foreign arbitral awards. This development is remarkable at least for two reasons. First, it is apparently the first time a national court made reference to the ICCA’s New York Convention Guide and, second, it comes from a jurisdiction which, while considerably invested in crafting a modern and robust arbitration system, has so far been relatively unknown in the world of international commercial arbitration.

Going beyond merely directing lower courts to ICCA’s New York Convention Guide, the Moldovan Supreme Court of Justice has summarised the guiding principles courts should abide by when seized with a request to recognise and enforce a foreign arbitral award. These include, among others:

(i) the principle of presumption of validity of both the arbitration agreement and the related arbitral award,
(ii) a pro-enforcement approach when interpreting the New York Convention,
(iii) the prohibition of review on the merits, coupled with
(iv) the principle of restrictive interpretation of the grounds for refusal of recognition and enforcement.

While certain amendments to the Moldovan laws on arbitration and the Civil Procedure Code in 2015 were designed to align the language of the national legislation and the language of the New York Convention in order to exclude conflicts between these two legal sources, the Supreme Court of Justice – in its explanatory judgment – has recognised that contradictions and overlaps might still arise. Consequently, it offered a wide range of solutions:

(i) in case of overlaps between Moldovan law and the New York Convention, the latter will be applied with priority, except when Moldovan law is more favourable (a possibility also in line with Article VII(1) of the New York Convention);
(ii) in case the New York Convention does not regulate specific legal issues, Moldovan law will apply as supplementing the former; and
(iii) in case the New York Convention explicitly refers to national legislation, the latter will be applied.

Furthermore, the explanatory judgment pays special attention to (non-Moldovan) court practice referred to in the ICCA’s New York Convention Guide, directing Moldovan courts to consider it when interpreting Article V of the New York Convention. In addition, Moldovan courts are to take into account the UNCITRAL Secretariat Guide on the 1958 New York Convention as well as the International Law Association Recommendations on the Application of Public Policy as a Ground of Refusing Recognition or Enforcement of International Arbitral Awards.

It is to be noted that explanatory judgments of the Supreme Court of Justice are aimed at unifying Moldovan court practice and do not have any binding force per se. However, in practice they are factually binding, and they are regularly referred to by lower courts and especially by the Supreme Court of Justice itself.

The effort of the Supreme Court of Justice to harmonise local practice by drawing upon international standards needs to be viewed as part of a wider policy of the Republic of Moldova to promote alternative dispute resolution mechanisms. While the 2017 Doing Business Report of the World Bank shows a significant advance of the country in the position of “Enforcing Contracts”, court proceedings remain subject to criticism for their length and at times unpredictable outcome. It is in this context that Moldovan arbitration is starting to flourish. The beginning of this year alone has marked the launch of a new arbitral institution – Chisinau International Commercial Arbitration Court (CACIC) – operating under the aegis of the American Chamber of Commerce. It is also this year that Moldova is intended to make its debut in the ICCA Yearbook of Commercial Arbitration. These are exciting evolutions that showcase (yet again) that arbitration practice worldwide speaks the same language: that of the New York Convention.

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Charting a New Path to Commercial Arbitration: Sierra Leone to Accede to the New York Convention

Fri, 2017-04-28 03:37

Michael Imran Kanu

Sierra Leone’s inaugural Commercial Law Summit was held this March (2017) on the theme of facilitating responsible private sector development through improvements in commercial law justice (Hebert Smith Freehill and UK-Sierra Leone Pro-Bono Network, ‘Conference Pack’, 2017). The summit provided a distinctive opportunity for the main stakeholders in commercial law and justice to map out the reform priorities with respect to the promotion of responsible private sector development. Commercial arbitration was identified as one of the key areas to urgently address, given the apparent gap in terms of its insignificant and minimal use as a dispute resolution mechanism, thereby contributing to the slow private sector development. Arbitration is seen as an important tool to protect foreign investors and to promote foreign direct investments. One of the apparent lacuna in this regard is the country’s failure to ratify the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘New York Convention’ or ‘Convention’).

The Changing Political View and Judicial Approach to Commercial Arbitration

The impetus to chart a new path to commercial arbitration, especially international commercial arbitration, may have been largely externally influenced. For starters, the summit which pointed the spotlight on the issue was organized by foreign institutions (Hebert Smith Freehill LLP and UK-Sierra Leone Pro-Bono Network). Further, a seeming race to the top (to entice investors) appears to have been developing in the Mano River Union sub-region, as Sierra Leone’s neighbouring countries, Guinea and Liberia, have ratified the Convention (Convention Contracting States). The summit’s arbitration workshop participants proposed, as a matter of high priority, the establishment of a new legislative framework for domestic and international commercial arbitration and accession to the New York Convention. In their reaction speeches, the Chief Justice and Attorney-General & Minister of Justice respectively echoed the judicial and governmental commitments to purposively address and/or implement the proposals.

In the Justice Sector Reform Strategy and Investment Plan III for Sierra Leone, acceding to the New York Convention is a key national priority.1)Sierra Leone Justice Sector Reform Strategy and Investment Plan III (JSRSIP III), 14-15. jQuery("#footnote_plugin_tooltip_4128_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4128_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Judiciary’s Strategic Plan 2016-2021 talks of strengthening ADR as pro conflict resolution and court decongestion strategies.2) Sierra Leone Judiciary Strategic Plan 2016-2021, 18-19. jQuery("#footnote_plugin_tooltip_4128_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4128_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); These emerging policy indications defer from the prevalent judicial approach to commercial arbitration, anchored in the obsolete and/or inadequate Arbitration Act 1960 (‘Act’).3)See Arbitration Act 1960, Cap 25 of the Laws of Sierra Leone 1960. This Act was inherited from the 1950 English Arbitration Act (which has been revised in England in 1975 and 1996). The Act in Sierra Leone does not have the basic provisions to comply with the obligations in the Convention. It has no provisions for stay nor enforcement of foreign arbitral awards. jQuery("#footnote_plugin_tooltip_4128_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4128_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Judicial intervention regarding commercial arbitration has mostly related to the determination of the validity of arbitration agreements. There is no recent example or case law dealing with attempts to enforce an arbitral award, whether domestic or foreign.

Based on the existing case law, there is a strong judicial resistance to accept parties’ intention to arbitrate their commercial disputes. However, this robust resistance is being positively influenced by governmental policy and creeping judicial activism. The courts of superior judicature in Sierra Leone4)The Constitution of Sierra Leone 1991, s 120(4), which provides that the superior courts of judicature ‘shall consist of the Supreme Court of Sierra Leone, the Court of Appeal and the High Court of Justice which shall be the superior courts of record of Sierra Leone’. jQuery("#footnote_plugin_tooltip_4128_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4128_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); have unwaveringly endorsed the common law rule which prohibits parties from ousting the jurisdiction of the courts by contract (Kill v. Hollister (1746) 1 Wils. 129). This means the courts are not bound to accept parties’ agreement to arbitrate, because such agreements are deemed to be ouster of jurisdiction by contract, and hence not a bar to court actions. At the same time, where a valid arbitration agreement exists, section 5 of the Act gives the High Court discretion to stay judicial proceedings pending arbitration. However, when exercising their discretion under section 5, the courts have consistently upheld the abovementioned prohibition on contractual ouster of jurisdiction rule. In the leading Court of Appeal case of Kabia v. Kamara (1967/68 ALR SL CA, 455) Sir Bankole-Jones in giving the court’s opinion, which is still the statement of the law, stated:

I interpret [the arbitration] clause as being merely an agreement between the parties to refer certain matters to arbitration. I think it has for a long time been the law that a mere agreement between the two parties to arbitration cannot be pleaded in bar of an action brought in respect thereof Scot v. Avery. [The arbitration clause] in my opinion is nothing more than a contract to refer. It may be the ordinary arbitration clause but it is certainly not a submission for the arbitrator is neither chosen nor appointed. The learned Trial Judge was therefore right in holding that [the] clause was not a bar to the action.5)Kabia v. Kamara (1967/68 ALR SL CA, 455, 459. See Scott v Avery 10 ER 1121 (1856); 25 LJ Ex 308; 5 HLC 811. jQuery("#footnote_plugin_tooltip_4128_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4128_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Therefore, the restrictive interpretation and application of section 5 of the Act has provided little scope for arbitration to flourish. Firstly, the section has a strict waiver rule according to which any procedural step taken after filing an appearance to a judicial action is deemed to be a waiver of the intention to arbitrate.6)The law has been further obfuscated by the Court of Appeal’s decision in Ogoo and Another v Huawei Technologies Limited and Another (CIV. APP 31/2010 [2012] SLCA 01), where it held that the failure to submit to arbitration in accordance with the terms of an agreement is not an irregularity but a question of jurisdiction. jQuery("#footnote_plugin_tooltip_4128_6").tooltip({ tip: "#footnote_plugin_tooltip_text_4128_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Secondly, the discretion to grant an application for stay of proceedings has been disproportionately limited by the courts. In this line, judges routinely and wrongly refer to the restrictive forum non conveniens standards in the English cases of The Eleftheria ((1969) 2 All ER 641) and Spiliada Maritime Corp v. Consulex Ltd. ((1986) 3 All ER 843) adopted in Sierra Leone in A. P. Moller v. Hadson Taylor & Co (C.A. 6th March 1990) as the criteria to determine applications for stay of proceedings pending arbitration (Technoscavi v. Civil Engineering Company and Another (CC 424/2007 (2007) SLHC 40)).

In Attorney General and Ministry of Justice v. Cape Management and Entertainment (CC 352/07 (2007) SLHC 31), the High Court rejected an application for a stay of proceedings pending arbitration on the grounds, inter alia, that the bare reference clause was insufficient since a terminated contract having an arbitration clause could not be held to be valid. In the aforementioned Kabia v. Kamara case, Sir Bankole-Jones held that a party is estopped from relying on an arbitration clause after wholly repudiating the container contract. This approach clearly rejected the separability doctrine. The same principle was applied by the High Court in Riga Shipyards v. Owners and/or Persons Interested in the Vessel M/V Redcat (CC 105/2012). This conservative judicial approach limited the use of arbitration to resolve commercial disputes.

An opposite stance, however, could be gleaned from recent court decisions. In 2013, in Courtville Investment v. Sierra Leone Transport Authority (FTCC: 059/13 (2013) SLHC 59), Chief Justice Charm, then judge, stayed the court proceedings and referred the dispute to be resolved by arbitration as initially agreed by the parties. In Madam Abi Haruna v. Delian Shengai Ocean Fishery Co. Ltd. (FTCC 122/15 (2015) SLHC 122), Sengu Koroma J. in determining whether a corporation agreement which provided for dispute resolution by the China International Economic and Trade Arbitration Commission (CIETAC) was valid, opined (obiter) that the doctrine of separability in the English Arbitration Act 1996, confirmed in the English Court of Appeal case of Habour Assurance Co. (UK) Ltd. v. Kansa General International Assurance Co. Ltd. ([1993] 3 ALL ER 897), was a mere restatement of a common law rule, and hence applicable in Sierra Leone. This view contradicts the binding reasoning in Kabia v. Kamara. Thus, although the view of Sengu Koroma J. is per incuriam, it, however, illustrates a creeping trend in courts’ practice to honour the agreement of parties to arbitrate their disputes.

A New Legislative Framework for Arbitration

Given the inadequacy of the Act and the demonstrable restrictive/conservative view of the courts on arbitration in Sierra Leone, a new legal framework is needed to implement the new governmental policy, and to comply with the obligations under the New York Convention when ratified. If the primary obligations under the Convention are to uphold a valid and binding arbitration agreement and for the recognition and enforcement of foreign arbitral awards, then the new law in Sierra Leone has to provide for the same. The Law Reform Commission has produced an advanced copy of the Arbitration Bill, which if passed will repeal the present statute. Although the intent here is not to analyze the bill, it must be said that its basic framework provides the basis to bolster commercial arbitration and accession to the Convention. The bill, if and when enacted, will mainstream commercial arbitration in Sierra Leone for good.

Conclusion

Arbitration has risen to become the dispute resolution mechanism of choice for international commerce. In international investment circles, the quest for neutrality and security of investments put States under some unseen pressure to reform their regulatory framework to allow for resolution of commercial disputes based on parties’ autonomy. The seeming pressure from investors is nudging the Government of Serra Leone towards urgent reforms on the one hand; and on the other hand, the emerging judicial activism is slowly eroding the restrictive principles and providing the impetus for judicial deference towards arbitration in Sierra Leone. The enactment of the Arbitration Bill will certainly chart a new path in commercial arbitration (domestic and international) in Sierra Leone, with hopes for a consequent accession to the New York Convention.

References   [ + ]

1. ↑ Sierra Leone Justice Sector Reform Strategy and Investment Plan III (JSRSIP III), 14-15. 2. ↑ Sierra Leone Judiciary Strategic Plan 2016-2021, 18-19. 3. ↑ See Arbitration Act 1960, Cap 25 of the Laws of Sierra Leone 1960. This Act was inherited from the 1950 English Arbitration Act (which has been revised in England in 1975 and 1996). The Act in Sierra Leone does not have the basic provisions to comply with the obligations in the Convention. It has no provisions for stay nor enforcement of foreign arbitral awards. 4. ↑ The Constitution of Sierra Leone 1991, s 120(4), which provides that the superior courts of judicature ‘shall consist of the Supreme Court of Sierra Leone, the Court of Appeal and the High Court of Justice which shall be the superior courts of record of Sierra Leone’. 5. ↑ Kabia v. Kamara (1967/68 ALR SL CA, 455, 459. See Scott v Avery 10 ER 1121 (1856); 25 LJ Ex 308; 5 HLC 811. 6. ↑ The law has been further obfuscated by the Court of Appeal’s decision in Ogoo and Another v Huawei Technologies Limited and Another (CIV. APP 31/2010 [2012] SLCA 01), where it held that the failure to submit to arbitration in accordance with the terms of an agreement is not an irregularity but a question of jurisdiction. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors:

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