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Deposition in Japan for U.S.-based International Arbitration

Wed, 2017-06-21 03:48

Shigeki Obi

Young ICCA

I. Introduction

A deposition is a “witness’s sworn out-of-court testimony” (Legal Information Institute “Wex, Deposition”). In U.S.-based litigation, a deposition is available as part of the discovery procedure. In the United States, a deposition is also available in arbitration. Arbitral tribunals seated in the United States may order a deposition of a witness if s/he is under the control of a party (C. SALOMON and S. FRIEDRICH, Obtaining and Submitting Evidence in International Arbitration in the United States, The American Review of International Arbitration (2013), The American Review of International Arbitration, p. 574).

However, like most civil law countries, Japan does not have pre-trial discovery procedures which allow for depositions to be conducted. This presents an obstacle when conducting depositions in Japan for U.S.-based matters, whether in connection with litigation or arbitration proceedings.

II. Deposition in Japan for U.S.-based Litigation

A deposition in Japan is conducted by a U.S. consul when it is taken for use in a U.S.-based litigation. The Consular Convention between Japan and the Unites States of America authorizes a U.S. consular officer to conduct depositions in Japan for U.S.-based litigation (22 March 1963, 15 U.S.T. 768 (hereinafter “Consular Convention”), article 17 (1)(e)(ii)).

Other deposition methods by U.S.-licensed attorneys are considered to be unavailable (Embassy of Japan in the United States “To Attend Deposition Taking By U.S. Consul”, (hereinafter “Embassy of Japan Website”))

A. A Voluntary Deposition by a Consular Officer Is Available

Article 17 (1)(e)(ii) of the Consular Convention provides that “[a consular officer may] take depositions, on behalf of the courts or other judicial tribunals or authorities of the sending state, voluntarily given”.

The Government of Japan strictly interprets that such a deposition is available only if (1) it is conducted on U.S. consular premises; and (2) pursuant to a U.S. court order or commission. Since only a consular officer has the authority to take a deposition and U.S. attorneys are merely allowed to play a supplemental role, all direct or cross- examinations by U.S. attorneys must be presided over by a consular officer (Bureau of Consular Affairs of the U.S. Department of State “Legal Consideration, International Judicial Assistance, Japan, Taking Voluntary Depositions of Willing Witnesses”, last updated 15 November 2013, (hereinafter “DOS Website”).

Non-Japanese participants, including U.S.-licensed attorneys, are required to obtain a Japanese Special Deposition Visa, unless they are (1) an Attorney at Foreign Law in Japan, which is authorized to provide legal services based on the laws of its home jurisdiction (Act on Special Measures concerning the Handling of Legal Services by Foreign Lawyers, Law No. 69 of 2014 (Japan), article 3); (2) a permanent resident of Japan; or (3) a spouse of the one of the above (DOS Website).

B. Other Deposition Methods Are Unavailable in Japan

The Government of Japan takes a position that other deposition methods are unavailable for U.S.-based litigation (Embassy of Japan Website).

First, taking a deposition in Japan for the use of U.S. court proceedings constitutes an indirect exercise of foreign judicial authority in the territory of Japan, even if the deposition is conducted on a voluntary basis. Accordingly, such a deposition is considered as a violation of Japan’s sovereignty unless Japan grants special authorization through the Consular Convention (Y. FUJITA, Transnational Litigation—Conflicts of Laws, in Z. Kitagawa (ed.), Doing Business in Japan, part 5-14, section 14.07 (Matthew Bender, 2015), para. (5)(e)(i)).

Second, Japan is not a member of the Hague Convention on the Taking Evidence of Abroad in Civil or Commercial Matters, which provides procedures for taking evidence abroad upon the request of judicial authorities of state parties. The Hague Convention procedures are of no use to a party to a U.S.-based litigation seeking to take a deposition in Japan.

III. Deposition in Japan for U.S.-based International Arbitration

However, it is unclear whether this outcome applies to a deposition in Japan for a U.S.-based arbitration.

A. It Is Unclear Whether the Consular Convention Covers Depositions for Arbitration

It is uncertain whether the deposition procedure under the Consular Convention is available for the use of U.S.-based arbitration.

Article 17(1)(e)(ii) of the Consular Convention provides that a U.S. consular officer may “take depositions, on behalf of the courts or other judicial tribunals or authorities of the sending state, voluntarily given” (emphasis added).

It can be argued that an international arbitration tribunal does not meet the definition of any “courts or other judicial tribunals or authorities”, because its jurisdiction is based on an arbitration agreement between private parties, and the tribunal does not exercise “judicial” authority, even if it issues a final and binding decision. This potential interpretation, however, to the author’s knowledge, has never been tested or the subject of a Japanese court decision.

B. It Is Unclear Whether Taking a Deposition for U.S.-Based Arbitration Violates Japan’s Sovereignty

The same applies to the issue whether a deposition in aid of U.S.-based arbitration violates Japan’s sovereignty. International arbitration does not arise from an exercise of State power, but from private parties’ arbitration agreement.

In cases where tribunals of U.S.-based international arbitration seek judicial assistance of a U.S. court for taking depositions in Japan, the enforcement proceeding may be seen as an exercise of the U.S. courts’ power in the territory of Japan. However, such practice is uncommon.

IV. Conclusion

As stated above, it is understood that the Consular Convention provides the only deposition method available in Japan in aid of U.S.-based litigation. However, in the arbitration context, no clear answer has been given as to which method is available to conduct a deposition in Japan for the use of U.S.-based arbitration.

I hope this blog to provide a basis of further discussions as to this topic.

*The opinions in this blog post are irrelevant to those of the Permanent Court of Arbitration.

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Eiser Infrastructure v. Spain: Could the tide be turning in favor of photovoltaic foreign investors in Spain?

Tue, 2017-06-20 07:34

Raul Pereira de Souza Fleury

A previous post analyzed the application of the fair and equitable treatment (“FET”) and legitimate expectations in the recent award in Eiser Infrastructure Ltd. v. Spain (ICSID Case No. ARB/13/36), the first ICSID case to reach a final award related to the measures Spain applied to roll-back certain incentives and benefits offered to promote investment in the Concentrated Solar Power (“CSP”) sector. Following up on said post, this one provides some comments on what changed since the award in Charanne B.V. and Construction Investments S.A.R.L v. Kingdom of Spain, which was the first [reported] award relating to Spain’s measures described above. The Eiser award is certainly significant and it has great potential to impact future awards in the at least 29 Energy Charter Treaty (“ECT”) arbitrations left against Spain for the same measures in the CSP sector.

So, what changed since Charanne?

Many are probably wondering what changed since the claims filed by Charanne and Isolux seeking compensation for the measures that modified Spain’s CSP regime. In fact, the tribunal in Eiser did refer to the facts in Charanne to explain their way to the award (¶367 et seq.).

In particular, the Charanne case was based on two pieces of legislation passed by the Spanish government to attract foreign investment in the CSP sector: Royal Decrees (“RD”) 661/2007 and 1578/2008; and two pieces of legislation that affected the feed-in tariff regime and other aspects of the CSP framework: RD 1565/2010 and Royal Decree-Law (“RDL”) 14/2010. These regulations eliminated the feed-in tariffs for solar power plants starting from their 26th year of functioning, limited the working hours of said plants, and imposed fees for the use of transportation and distribution networks (¶367). However, the tribunal indicated that the measures at stake in Charanne “had far less dramatic effects than those at issue here” (¶368).

In Charanne, the majority found that the essential characteristics and guarantees provided by the RDs 661/2007 and 1578/2008 were not eliminated by the 2010 measures (¶518). Charanne’s argument was that the reduction of the benefits to only until the 26th year of operation of the plant would deprive them of all the benefits they had, because the lifetime of CSP plants were between 35 and 50 years (¶523), however, the majority found that Charanne did not submit sufficient evidence to support such allegation (¶522). Moreover, it noted that given the technology available at the time of the construction of the plants, their operation lifetime could not exceed 30 years; and despite this objective benchmark, the majority also noted that even Charanne provided in their lease contracts, terms of 25 years, with some contracts establishing 30 years, and only two contracts providing for more than 30 years (¶527).

Based on this reasoning, the tribunal found that the RDs 661/2007 and 1578/2008, as well as other documents (like promotion documents), could not constitute an essential element of their expectations, as investors, that they would be able to operate the CSP plants for periods of 35 to 50 years (¶529). Therefore, the majority concluded that the 2010 measures—although they implemented adjustments and adaptations—did not eliminate the main characteristics of the regulatory framework, because the investors retained their right to feed-in tariffs and their priority right to sell the totality of their production in the system; and so, as a matter of international law, Charanne’s legitimate expectations were not breached (¶533).

Going back to Eiser, this case was built on regulations affecting RDs 661/2007 and 1578/2008 that differ a great deal from RD 1565/2010 and RDL 14/2010 (the ones at stake in Charanne), to know: RDL 9/2013, RD 413/2014, and Ministerial Order IET/1045/2014. The tribunal in Eiser indicated that Charanne “addressed much less sweeping changes to the photovoltaic regulatory regime, changes that produced far less drastic economic consequences for the Charanne claimants” (¶369). The tribunal found a drastic and abrupt modification of the legal framework upon which Eiser’s investment depended. So, although Article 10(1) of the ECT did not grant Eiser the right to expect an immutable legal regime, they did have the legitimate expectation that the measures would not destroy the value of their investment, and that was the result of the 2013-2014 measures (¶387).

The tribunal found that RDL 9/2013 completely derogated the regime of RD 661/2007, significantly reducing the financial back-up of Eiser. It stated that the new system was based on totally different circumstances, employing a new and never tested normative approach with the purpose of significantly reducing the subsidies granted to the existing solar plants (¶¶390-391).

In particular, the new regime, besides derogating RD 661/2007, it uses a hypothetical standard plant to calculate the profit of pre-existing plants that were built and installed relying on RD 661/2007. Therefore, the tribunal found that the new standard plants do not take into account the real characteristics of the plants installed in the early times of RD 661/2007. The RDL 9/2013 retroactively established standards of design and investment that were supposed to be incorporated by Eiser and other operators, which were early investors under the regime of RD 661/2007 (¶¶413-414).

All this sufficed to establish that Spain breached the FET standard by implementing RDL 9/2013, RD 413/2014, and Ministerial Order IET/1045/2014, which eliminated RDs 661/2007 and 1578/2008, two pieces of legislation completely different and that where the core of Eiser’s (and many other investors) investment in the Spanish CSP sector.

What can we expect from now on?

The Spanish government is right in asserting that Eiser award cannot be deemed binding since that is not the rule in investment arbitration, and “[e]ach arbitration is different, both in the information considered and the arguments advanced.” Moreover, it is true that the tribunal in Eiser recognized that Spain did face a heavy tariff deficit that needed to be addressed. However, and even when the claims Spain is sustaining are related to the same CSP regime, one cannot bypass the fact that the claimants in Charanne framed their claims very narrowly, targeting only RD 1565/2010 and RDL 14/2010, two measures very different from RDL 9/2013, RD 413/2014, and Ministerial Order IET/1045/2014 (at issue in Eiser) in respect to their effects.

It is worth mentioning the other case won by Spain last year, the Isolux case. While here the claimants did challenge 2013 measures, it is reported[1] that the claims related to the implementation of a 7% tax on power generators’ revenues and a reduction in subsidies for renewable energy producers. However, it is hard to know whether the Isolux award will ever play a role in the future cases against Spain, considering that in Eiser, the tribunal rejected Spain’s request to include said award as legal authority, due to its confidential nature (¶¶89-92).

Therefore, we must acknowledge two very important realities separating Charanne (and possibly Isolux) from Eiser: (i) Both cases dealt with different sets of regulatory measures; and more importantly (ii) the regulatory measures analyzed in Eiser had a far wider reach and more negative effect on the investor, since they completely eliminated the legal and regulatory framework relied upon by most investors to make their investments in the Spanish CSP sector. In addition, both tribunals in Charanne and Isolux rendered the award by majority, while the Eiser tribunal was unanimous. This last characteristic, while not a key issue for practical matters, it is worth mentioning.

As indicated at the beginning of this post, more awards are yet to come, and these forthcoming awards will continue to define the landscape of the Spanish investment arbitration saga, similar to the situation with Argentina in the 2000s.

 

[1] The award has not been published.

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Economic Crime and International Investment Law: Current Issues

Mon, 2017-06-19 11:27

Anna Lanshakova

The Twenty-eighth ITF Public Conference on Economic Crime and International Investment Law, hosted by the British Institute of International and Comparative Law (BIICL) on 22 May 2017, attracted 13 distinguished speakers and more than 100 participants for a day discussion on the issues of economic crime in investor-state arbitration. The conference provided a forum for legal scholars, practitioners, and students to reflect on the controversial issues arising out of allegations of economic crime in investor-state arbitration.

The conference commenced with a welcoming address by Professor Yarik Kryvoi, Director of Investment Treaty Forum, followed by keynote address by Lucinda Low, President of the American Society of International Law. In her opening address, Lucinda Low pointed out that the issues of corruption and bribery allegations are increasingly growing both in commercial and investment arbitration. Notable cases dealing with allegations of economic crimes included Fraport Airport v. The Republic of the Philippines, World Duty Free v. The Republic of Kenya, Metal Tech v. The Republic of Uzbekistan, and the most recent case, Vladislav Kim and others v. The Republic of Uzbekistan.

Though issues of economic crimes in investment arbitration are far from novel, there remains a lack of uniformity among arbitral tribunals on how tackle economic crimes. The core issues causing divergence include (i) breach of investors’ obligations as a bar to jurisdiction; (ii) attribution of a state officials’ wrongful acts to the state; (iii) interaction between State criminal proceedings and arbitration; (iv) provisional measures to stop State proceedings; (v) the burden and the standard of proof; (vi) sua sponte investigation and inquiry into corruption. All these controversial concerns were discussed during the conference.

Breach of Substantive National and International Law Obligations as a Bar to Jurisdiction

The first panel discussed the types of investors’ obligations, the breach of which leads to denial of jurisdiction.

Since investment treaties are concluded to encourage and protect foreign investors, they do not represent an adequate source of investors’ obligations vis-à-vis States. Nevertheless, several investment treaty cases have ruled that if a foreign national has acquired foreign investment in violation of the host State’s laws, then such investment should not be protected before investment arbitration tribunal. However, not every single infraction of the host State’s law should lead to denial of protection. To decide whether the tribunal shall upheld the jurisdiction, it should analyse the type of law that was violated, the importance of that law, and the seriousness of the breach. This statement is supported by several cases. In Metalpar v. Argentina, the tribunal upheld the jurisdiction pointing that Argentinian law already prescribed sanction for such violations, and therefore, denial of investment protection would be disproportionate. In Peter Allard v. Barbados, the tribunal upholding the jurisdiction stated that the investor acted in a good faith. Similarly, in Mamadoil v. Albania, the tribunal did not find sufficient seriousness of the breach to deny the jurisdiction.

One of the speakers argued that illegality, even if proven, does not necessarily deprive the tribunal of jurisdiction, unless it is expressly stated in the relevant treaty, or the illegality causes a nullification of property rights under relevant domestic law, such that there is no longer an “investment” for purposes of subject matter jurisdiction.

Discussion also arose over whether the illegality considerations are related to the issues of jurisdiction or admissibility. It was noted that the timing of the investor’s unlawful conduct is critical: it is only unlawful conduct pertaining to the acquisition of the investment that is relevant to the jurisdiction of the tribunal; unlawful conduct ex post the establishment of investment is instead a question for the admissibility. However, no uniformity with respect to the issue exists in the tribunals’ practice. While some tribunals deny jurisdiction after finding establishment illegality (Fraport I, II, Metal-Tech Ltd. v. Republic of Uzbekistan), other tribunals find such claims inadmissible (Plama v. Bulgaria, World Duty Free v. The Republic of Kenya, SGS v. Republic of the Philippines).

Economic Crimes and the Merits of Investor-State Disputes

Panel Two addressed the issues of provisional measures, state attribution, and relationship with national proceedings.

With respect to provisional measures in investor-state arbitration, the proposition was made that though provisional measures can be resorted to in investor-state arbitration according to Article 47 of ICSID Convention, such measures are relatively useless when dealing with criminal proceedings brought by a State against claimants. First, the provisional measures cannot be granted before the tribunal is constituted. Second, it takes a long time to acquire such measures after the tribunal is constituted. Generally, states are not willing to allow the interference of the tribunal in the criminal sphere, as opposed to civil and administrative spheres. When it comes to the exclusivity of arbitration proceedings under Article 26 of the ICSID Convention, the states usually make an argument that this provision only applies to domestic proceedings in civil or administrative matters, but never in criminal.

Regarding the attribution of economic crimes committed by the State’s official to the State, it was stated that we are currently at the situation of attribution asymmetry. International investment tribunals surprisingly resist to apply these principles in scenarios of corruption performed by state officials (i.e., World Duty Free v. The Republic of Kenya and EDF v. Romania). Metal Tech v. The Republic of Uzbekistan it is the only case where the “responsibility” of State is found in the award with respect to the allocation of costs between the parties

In order to rebalance this asymmetry, three fundamental interrelated objectives were suggested: (i) to level playing field between investors and states; (ii) to define and apply the principles and rules pursuant to which foreign investments are promoted and protected or not entitled to protection; (iii) to determine the list of principles and rules according to which State’s conduct is in accordance with international law.

No agreement between the panellists was achieved on whether investor-state tribunals may raise and investigate allegations of corruption sua sponte. On one hand, the arbitrators having a duty to render an enforceable award may overlook the possibility of corruption and face allegations based on public policy violations. On the other hand, conducting an investigation of corruption may invite challenges based upon ultra petita and/or ultra vires.

Evidentiary Challenges of Allegations of Economic Crimes in Investor-State Disputes

Panel Three discussed the evidentiary challenges of allegations of economic crimes in investor-state disputes.

Allegations of economic crimes, such as corruption or bribery are easy to make, but notoriously difficult to prove. In domestic criminal law, the burden of proof is not disputed – the prosecutor has to prove the guilt of the suspect. This issue in investment arbitration is unclear because both the investor and the state representative may be involved in an alleged economic crime such as bribery.

Since ultimately allegations of economic crimes are dealt in accordance with national criminal laws, the burden of proof is also determined with these laws. However, some tribunals addressed the issue of the standard of proof, suggesting that a “reasonable certainty” standard applies to situations of suspected corruption (Metal Tech v. The Republic of Uzbekistan); that “clear and convincing evidence” was needed (EDF v. Romania); or that both standards were equivalent (Getma International and others v. Republic of Guinea).

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Spanish Energy Arbitration Saga: Green Light for Investors Claiming Breach of FET?

Sat, 2017-06-17 07:33

Nahila Cortes

On May 4, 2017 the third final award on the Spanish energy arbitration saga was unveiled. After two wins against Charanne and Isolux Infrastructure (both SCC), this time the foreign investors scored a point, leaving the overall score table at 2-1. In Eiser, the first ICSID case to reach a final award related to the measures Spain applied to roll-back certain incentives and benefits offered to promote investment in the Concentrated Solar Power (CSP) sector, the tribunal awarded €128 million to the investors.

Eiser argued that the measures Spain applied in 2013 and 2014, specifically the Royal Decree-Law (“RDL”) 9/2013, Royal Decree (“RD”) 413/2014, and Ministerial Order IET/1045/2014, expropriated its investments, breached the FET, imposed exorbitant measures against the investment, and did not honor Spain’s commitments. The Tribunal composed of John Crook (Chairman), Stanimir Alexandrov, and Campbell McLachlan, narrowed the analysis of Eiser’s claim to the breach of the FET standard and found that Spain breached Article 10(1) of the Energy Charter Treaty (“ECT”).

Bearing in mind that there are many cases pending against Spain based on the regulatory changes that affected the CSP sector, this piece will focus on the Tribunal’s approach to the threshold of the FET standard under the ECT. Does this award represent a turning point in favor of photovoltaic foreign investors in Spain? Did this Tribunal take a different approach from the one in Charanne to analyze the investor’s legitimate expectations under the FET standard?

In their arguments, the parties discussed two main issues relating to a foreign investor’s legitimate expectations: whether FET protects the investor’s right to an immutable and stable framework; and which type of profits investors can claim for violation to their legitimate expectations. Eiser argued that RD 661/2017, the regulatory framework under which they made their investment, granted Eiser immutable economic rights that were protected by the ECT’s FET standard, guaranteeing stable and transparent conditions for the investment, and that Spain’s measures drastically changed the regulatory framework by eliminating and substituting RD 661/2017 with a completely different and arbitrary regime. On the other hand, the Respondent sustained that Eiser could not expect that RD 661/2007 would remain frozen, and that the investor only had a right to receive reasonable profits.

The Tribunal recognized that the FET standard does not grant foreign investors a “right to regulatory stability per se,” meaning that States always preserve their right to modify their regulatory regimes to adapt to circumstances and changing public needs (¶362). In the absence of specific commitments of the State directly extended to investors, the key issue for the Tribunal was to determine to which extent a foreign investor can trigger the FET protection provided in an investment treaty (in this case, the ECT) and be awarded with compensation as a response to the host State’s action.

The Tribunal concluded that Article 10(1) of the ECT protects investors from a fundamental regulatory change -total and unreasonable- in a manner that does not take into account the circumstances of existing investments made in reliance on the prior regime (¶363). Fundamentally the Tribunal recognized that an investor’s right to a legal stability is an important element of the FET that must be protected; however, this right is not unlimited.

Three factors enabled the Tribunal to reach to this conclusion. As a preliminary matter, citing to ADC v. Hungary, the Tribunal recognized that the regulatory power of the state has a limit that is established by the commitments assumed under investment treaties that cannot be ignored. The Tribunal reasoned that although Spain did experience a legitimate public policy problem with the tariff deficit, and that the decision to take measures in order to remedy said situation was necessary, the Spanish authorities had to take those measures considering the obligations Spain undertook under the ECT, including the obligation to treat foreign investors in a fair and equitable fashion (¶371).

Second, the interpretation of the FET under the ECT shall take into account the ECT objectives of legal stability and transparency (¶379). This Tribunal understood that the State’s obligation to provide FET to investors necessarily implies that the State shall provide fundamental stability in the essential features of the legal framework that investor relied on when making the investment. To arrive to this conclusion, the Tribunal interpreted Article 10(1) under Article 31 of the Vienna Convention on the Law of Treaties, that is, “in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” With this approach, the Tribunal recognized that the objective of the ECT is to provide a legal framework that will foster long term cooperation, and the treaty is just an instrument to increase the stability that is required to fulfill this purpose. Another element that reinforces this approach is that Article 10(1) expressly states that “the Parties shall create stable, equitable and transparent conditions.”

Thirdly, the obligation of the State to provide stability to the essential features of the regimen under which the investments was made has become a rule to most tribunals. Indeed, in this case the Tribunal referred to leading cases that supported this view (¶383), such as Total v. Argentina (ARB/04/01), where it was decided that “an investor has the right to expect that the legal framework will respect basic elements of the investments.” In El Paso v. Argentina (ARB/03/15), the tribunal concluded that the measures adopted by the State considered as a whole, altered the prior legal framework that the investor took in consideration when making the investment and dismantled the existing regulatory framework that was established to attract investors. Moreover, in CMS v. Argentina (ARB/01/08) it was decided that the measures transformed and completely modified the legal and business framework in relation to the framework under which the investment was decided to be performed.

Eiser’s Tribunal established a high threshold to find a breach of the ECT’s FET standard in the absence of State’s specific undertakings. As stated, the regulatory modification must be fundamental, total, and unreasonable, and must not consider the circumstances under which the existing investment was done. In this sense, the Tribunal concluded that Article 10(1) granted investors the right to expect that Spain would not modify the regimen under which the investment was done, in a drastic and unexpected way that would destroy the investment (¶387).

It is interesting to note that the Tribunal’s approach to the applicable standard of the FET does not contradict the Tribunal’s approach adopted in Charanne. Although the final outcomes differ greatly, Charanne’s tribunal applied the same approach to legal stability and dramatic changes to the rules of the game. Said Tribunal considered that an investor has the legitimate expectation that any modification to the legal framework in which the investor based its investment shall not be unreasonably, contrary to the public interest, or disproportional. In effect, the Tribunal considered that a modification is disproportional when it occurs suddenly and unexpectedly removing the essential features of the regulatory framework in place (¶370). Having said this, the differences between both cases were the regulatory measures under consideration, not the standard applied by the Tribunal.

In conclusion, this award might show a trend for future cases challenging RDL 9/2013, RD 413/2014, and Ministerial Order IET/1045/2014 under the ECT’s FET. For this Tribunal, Spain breached the FET standard under the ECT because the measures adopted by the State, fundamentally changed and did not consider the basic features under which Eiser’s investment was made, thus frustrating Eiser’s legitimate expectations. Interestingly, the difference with Charanne was the regulatory measures under analysis, not the approach the Tribunal used to analyze them.

 

The views expressed herein are the views and opinions of the author and do not reflect or represent the views of Allende & Brea or any other organizations to which the author is affiliated.

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What is all the fuss? The Potential Impact of the Hague Convention on the Choice of Court Agreement on International Arbitration

Fri, 2017-06-16 00:50

Mathew Rea and Marcela Calife Marotti

Bryan Cave LLP

We make reference to the Kluwer Arbitration Blog post of 23 September 2016 by Sapna Jhangiani and Rosehana Amin, entitled ‘The Hague Convention on Choice of Court Agreements: A Rival to the New York Convention and a ‘Game-Changer’ for International Disputes?’. That blog concluded that the Hague Convention was potentially a game changer. We respectfully disagree.

Background

The Hague Convention on Choice of Court Agreements, concluded in 2005, which came into force on 1 October 2015 (the “Hague Convention”), aims to improve enforcement of international judgments, as well as ensuring states uphold the choice of court in contractual agreements. It aims to create a system of recognition of court decisions with the same level of predictability and enforcement as the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), which entered into force on 7 June 1959 (the “New York Convention”). Here we explore whether in fact the Hague Convention will be such a game-changer, whether the Hague convention really is a threat to international arbitration and whether it will change the international dispute landscape so drastically.

Ratification and alternative regimes

The Hague Convention has been ratified by the European Union (the “EU”) (except for Denmark), and by Singapore and Mexico (29 countries in total). Another two countries, the United States and Ukraine, have signed the Hague Convention but have not ratified it to date. It must also be noted that with Brexit, the United Kingdom, upon exiting the EU (i.e. after 29 March 2019), will have to sign and ratify the Hague Convention independently if it wishes to be a part of it. The New York Convention by contrast, applies to 154 countries.

Comparative regimes to the Hague Convention include the Brussels Convention (Recast) of 12 December 2012 (the “Brussels Recast”), applicable only to EU member states. Under Chapter III of the Brussels Recast, judgements given in one EU member state shall be recognised in another member state without any special procedure required (Article 36); and such judgment is enforceable without the need to be declared enforceable (Article 39). The EU is also part of the Lugano Convention of 1988, which governs the enforcement of judgments as between Iceland, Switzerland, Norway and all pre-2004 EU states, plus Poland. So the same applies in these countries.

Other regimes include those under the Administration of Justice Act 1920 (for High Court judgements) and the Foreign Judgments (Reciprocal Enforcement) Act 1933 (for lower courts or tribunals), which are effective between the United Kingdom and Commonwealth countries, including Crown states such as the Isle of Man and Jersey to streamline the enforcement of England and Wales judgments.

However, there are countries that have no reciprocal arrangements with other countries such as the United States (or at least until it ratifies the Hague Convention). Therefore, to enforce a decision one has to start new legal proceedings in the court of the country or state in which enforcement is sought, so as to obtain a judgement in that jurisdiction. In the United States one must commence proceedings in the competent state court. The state court, in turn, will determine, based on the local laws, whether to give effect to the foreign judgment.

So the Hague Convention is not such a game changer. There are already conventions in existence, which assist enforcement.

Hague Convention vs. New York Convention

Even if the Hague Convention becomes ratified by more states the ease of enforcement of judgements seems unlikely by itself to impact on the popularity of arbitration.

First the scope of the Hague Convention is more limited than the New York Convention. The Hague Convention excludes consumer contract; employment contracts; carriage of goods; intellectual property matters as well as some fourteen other matters (Article 2). In contrast, the New York Convention does not have a set list similar to Article 2 of the Hague Convention. Instead it defers to national law to make such exclusions (see Article V(2)(a) and (b) of the New York Convention).

The list of matters excluded under Article 2 of the Hague Convention means that even if some parties might otherwise have been inclined to use the Hague Convention they may not be able to. Such parties who will not have the same enforcement protections are, therefore, unlikely to turn away from arbitration and choose court litigation instead.

In terms of recognition and enforceability, under the Hague Convention, Article 8 provides for enforcement and recognition of foreign judgments. Under Article 8, judgments are directly enforceable and the courts of contracting states are not allowed to review the judgment on the merits and “shall be bound by the findings of fact”. Similarly, under the New York Convention, Article III provides that the courts of contracting states must enforce awards rendered in another contracting state in the same way, using national procedural rules, as if it were enforcing a domestic award. However, the New York Convention goes a step further and expressly precludes the imposition of onerous conditions or higher fees than would be imposed on domestic arbitral awards, whilst the Hague Convention does not impose this restriction on national courts.

The Hague Convention and the New York Convention appear to have a very similar list of exceptions as to when the relevant state may refuse to recognise or enforce judgements, including: nullity; impropriety; incapacity; unenforceability and procedural unfairness. However, unlike the New York Convention, the Hague Convention allows a national court to refuse to enforce a judgment or recognise a decision if the judgement or the decision are contrary to a domestic judgement involving the same parties (regardless of the subject matter or cause of action).

Conclusion

The Queen Mary Survey of 2015 outlines the reasons why parties opt for arbitration rather than litigation. These include (in order): (i) enforceability of award and arbitration agreements; (ii) avoiding specific legal systems/national courts; (iii) flexibility; (iv) selection of arbitrators; (v) confidentiality and privacy; (vi) neutrality; (vii) finality; and (viii) speed and costs. If the first reason for users to opt for arbitration (rather than litigation) is enforceability of the award, one might see the Hague Convention as a possible threat to arbitration. However, since the second most popular reason for using arbitration (by a mere 1%) is to avoid specific legal systems/national courts, that may not be the case.

Arbitration and litigation have their own advantages and disadvantages beyond any greater ease of enforcement. But even if ease of enforcement alone were a factor, it seems unlikely the Hague Convention offers much in the way of advantages, which might tip the balance away from arbitration.

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The Trump Executive Order Faces FET-Like Review

Wed, 2017-06-14 23:23

Luke Sobota

Three Crowns LLP

The U.S. Court of Appeals for the Fourth Circuit recently issued an en banc decision, in International Refugee Assistance Project IRAP v Trump, affirming the district court’s injunction against President Trump’s Executive Order temporarily suspending entry into the United States by individuals from six Muslim-majority countries. Although the case concerns the application of specialized U.S. constitutional law, it provides an interesting case study of how domestic courts analyze issues of pretext and proportionality similar to those raised in investment arbitrations under the fair and equitable treatment (FET) standard.

At issue in IRAP and parallel legal proceedings is Section 2(c) of the second Executive Order (the first Executive Order on this topic had been enjoined by the Ninth Circuit Court of Appeals), which imposes a 90-day suspension of entry for nationals of Iran, Libya, Somalia, Sudan, Syria, and Yemen. The Executive Order was issued under the broad grant of authority to the President under the Immigration and Nationality Act (INA), which authorizes the suspension of entry of “all aliens or any class of aliens as immigrants or non-immigrants” whenever the President finds that their entry “would be detrimental to the interests of the United States.” The Executive Order states that these six countries present “heightened threats” because they support terrorism; have been compromised by terrorist organizations; have porous borders that facilitate the illicit flow of weapons and terrorists; or contain active conflict zones. Until existing screening and vetting procedures have been reviewed, the Executive Order continues, the risk of admitting a national from one of these countries intent on committing terrorist acts or otherwise harming the national security of the United States is “unacceptably high.” The Executive Order allows consular officers to issue discretionary waivers on a case-by-case base.

The plaintiffs in IRAP argued, among other things, that the Executive Order violates the Establishment Clause of the First Amendment to the U.S. Constitution, which provides that “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof.” In assessing that claim, the en banc court considered prior Supreme Court precedents in this area. In 1972, the U.S. Supreme Court held in Kleindienst v Mandel that where the Executive exercises power granted to it by Congress over the admission of aliens “on the basis of a facially legitimate and bona fide reason,” the Judiciary will “neither look behind the exercise of that discretion, nor test it by balancing its justification against the [plaintiffs’] First Amendment interests.” (Emphasis added.) Subsequently, in 2001, the Supreme Court held in Zadvydas v Davis that the power of the political branches over immigration is “subject to important constitutional limitations” that must be enforced by the Judiciary. Reconciling these authorities, the majority on the Fourth Circuit determined that it would assess whether the Executive Order was facially legitimate and bona fide under Mandel; only if the Executive Order failed this threshold test would the court engage in the constitutional inquiry noted in Zadvydas.

The court found the Executive Order to be facially legitimate because its stated purpose is to “protect the Nation from terrorist activities by foreign nationals admitted to the United States.”

It then turned to the bona fides of the stated rationale. The majority pointed out that Justice Kennedy, joined by Justice Alito, had elaborated on this requirement in his controlling concurrence in Kerry v Din : where a plaintiff makes an “affirmative showing of bad faith” that is “plausibly alleged with sufficient particularity,” the Judiciary may “look behind” the challenged action to assess its “facially legitimate justification.” The court noted that it is “difficult” for a plaintiff to make an affirmative showing of bad faith with plausibility and particularity, and where it does not do so, courts must defer to the facially legitimate reason. But, the court continued, where a plaintiff has “seriously called into question whether the stated reason for the challenged action was provided in good faith,” the Judiciary “must step away from [its] deferential posture and look behind the stated reason for the challenged action.”

The plaintiffs in IRAP argued that the Executive Order invokes national security in bad faith “as a pretext for what really is an anti-Muslim religious purpose.” The court found “ample” evidence to support this assertion, including:

* Then-candidate Trump’s numerous campaign statements expressing animus towards the Islamic faith;
* His proposal to ban Muslims from entering the United States;
* Is subsequent explanation that he would effectuate this proposal by targeting “territories” instead of Muslims directly;
* The first Executive Order, which targeted certain majority-Muslim nations and included a preference for religious minorities;
* Rudolph Giuliani’s statement that the President had asked him to find a way to ban Muslims in a legal way; and
* Statements by President Trump and his advisors that the second Executive Order had the same policy goals as the first.

The court also found “comparably weak evidence” that the Executive Order is meant to serve national security interests, including:

> The exclusion of national security agencies from the decision-making process;
> The post hoc nature of the national security rationale; and
> A report from the Department of Homeland Security that the Executive Order would not diminish the threat of terrorist activity.

Having found that the plaintiffs had made an affirmative showing of bad faith, the Fourth Circuit determined that Mandel’s deferential standard did not obtain and proceeded to address the merits of the Establishment Clause issue. This entailed, as set forth in the Supreme Court’s decision in Lemon v Kurtzman , and other relevant precedents, consideration of whether the Executive Order had a “secular legislative purpose” – a purpose that is “genuine, not a sham,” and that is not “secondary to a religious objective.” The court explained that, in performing this inquiry, courts should attempt to discern the official objective from “readily discoverable fact, without any judicial psychoanalysis of a drafter’s heart of hearts.” This standard calls for an “objective,” “reasonable,” and “common sense” assessment of the text, legislative history, and implementation of the enactment, including attention to the “historical context” and the “specific sequence of events leading to [its] passage.”

Applying this standard, and citing the same evidence that led it to reject application of Mandel’s deferential standard, the Fourth Circuit majority determined that the Executive Order’s “primary purpose is religious.” The court wrote that the Executive Order “cannot be read in isolation from the statements of planning and purpose that accompanied it, particularly in light of the sheer number of statements, their singular source, and the close connection they draw between the proposed Muslim ban and [the Executive Order] itself.” The court further noted that the national security rationale is “belied” by evidence that President Trump issued the first Executive Order without consulting the relevant national security agencies. Although it did not “discount that there may be a national security concern motivating” the Executive Order, the Fourth Circuit held that such purpose was “secondary” to the Executive Order’s religious purpose. The fact that the Executive Order was both “underinclusive” in targeting only a small percentage of the world’s majority-Muslim nations and “overinclusive” in targeting all citizens in the designated countries (including non-Muslims) was, according to the court, “not responsive to the purpose inquiry.” The court thus held that there was a likelihood that the plaintiffs would succeed on their constitutional challenge to the Executive Order.

In a concurring opinion, Judge Keenan, joined by Judge Thacker, further opined that the Executive Order did not comply with the INA because there is no “finding” by the President that the entry of the aliens in question “would be detrimental to the interests of the United States.” (This was the same rationale adopted by the Ninth Circuit in a subsequent decision enjoining the Executive Order.) Judge Keenen wrote that the stated reasoning in the Executive Order is a “non sequitur” because it does not, among other things, “articulate a relationship between the unstable conditions in these countries and any supposed propensity of the nationals of those countries to commit terrorist acts or otherwise endanger the national security of the United States.” In his concurring opinion, Judge Wynn found the apparent rationale for the Executive Order – viz., that “as a matter of statistical fact, Muslims, and therefore nationals of the six predominantly Muslim countries covered by the Executive Order, disproportionately engage in acts of terrorism, giving rise to a factual inference that admitting such individuals would be detrimental to the interests of the United States” – to be “highly debatable.” (Emphasis in original.) Judge Wynn did not find it necessary to resolve that “factual” question, however, because in his view the Constitution forbids “classifying individuals based solely on their race, nationality, or religion … and then relying on those classifications to discriminate against certain races, nationalities, or religions[.]”

Three of the 13 Fourth Circuit judges hearing IRAP dissented. They took the view that, under Din and other Supreme Court precedents, the absence of a bona fide reason must appear on the face of the enactment, and they therefore eschewed any consideration of the broader context in which the Executive Order was issued. Judge Niemeyer wrote that “[i]n looking behind the face of the government’s action for facts to show the alleged bad faith, rather than looking for bad faith on the face of the executive action itself, the majority grants itself the power to conduct an extratextual search for evidence suggesting bad faith, which is exactly what three Supreme Court opinions have prohibited.” Finding that the Executive Order’s “supposed ills are nowhere present on its face,” the dissenting judges concluded that the Executive Order survives the limited review prescribed in Mandel. The dissenters were also critical of the majority’s consideration of statements made during the presidential campaign, a view shared by Judge Thacker, who, in his own concurring opinion, wrote that because the Establishment Clause only concerns governmental action, conduct occurring before the President “takes office” cannot be considered. The majority, however, refused to impose a “bright-line rule against considering campaign statements” and found that they were probative in this case because “they are closely related in time, attributable to the primary decisionmaker, and specific and easily connected to the challenged action.”

As this précis show, the Fourth Circuit’s en banc decision grapples with issues similar to those that investment tribunals often face in applying the FET standard to sovereign actions affecting foreign investors. Although applying U.S. law pertaining to the Establishment Clause, the Fourth Circuit’s assessment of the Executive Order included a detailed assessment of its bona fides, its primary purpose, and its underlying rationale. The dissenting judges believed that the constitutional analysis should begin and end with the text of the Executive Order, but the majority went on to consider the context and history of its issuance. In doing so, the majority applied the following standard of review: an objective, reasonable, and common sense assessment of readily discoverable facts. Notwithstanding the substantial deference afforded the political branches in areas of immigration and national security – which was the specific focus of Judge Shedd’s dissenting opinion – the majority found that the plaintiffs had plausibly demonstrated that the Executive Order’s “stated” national security interest “was provided in bad faith, as a pretext for its religious purpose.” Compare Gold Reserve Inc. v Venezuela, Award, ¶¶ 600, 607 (22 September 2014) (inferring, on the basis of public statements by government officials, that the claimant’s mistreatment “was in breach of the FET standard as it was driven by political reasons”) and Tecnicas Medioambientales Tecmed S.A. v United Mexican States, Award, ¶ 165 (29 May 2003) (viewing agency’s stated reason for refusing to renew a permit in “the wider framework of the general conduct taken by [the agency]”).

Three concurring judges further looked to the rationale of the Executive Order, either rejecting or questioning the notion that nationals from the designated countries are more likely to engage in terrorism because of conditions found there. Their analysis – balancing the harm alleged by the plaintiffs against the stated security benefits of the Executive Order – is not dissimilar to considerations of proportionality that are often considered in FET analysis. See, e.g., Occidental Petroleum Corp. v Republic of Ecuador, Award, ¶¶ 442-452 (5 October 2012) (considering the claimant’s harm “out of proportion to the . . . ‘deterrence message’ which the Respondent might have wished to send”); Saluka Investments BV v Czech Republic, Partial Award, ¶¶ 304-308 (17 March 2006) (stating that “any differential treatment of a foreign investor must not be based on unreasonable distinctions and demands, and must be justified by showing that it bears a reasonable relationship to rational policies”).

The review of sovereign decisions in areas of core competence is a sensitive and complex undertaking, whatever the applicable law. The decision in IRAP was not unanimous, and the final word on the constitutionality of the Executive Order remains with the Supreme Court, which is currently taking briefing on these issues. Come what may, the majority, concurring, and dissenting opinions in the Fourth Circuit’s en banc decision may shed some comparative light for those addressing similar issues under the FET standard in investment arbitration.

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Judicial Activism and Spanish Arbitration

Tue, 2017-06-13 17:52

David J.A. Cairns

There has been much recent judicial activism in Spain in arbitration matters. Although the grounds for annulment of an arbitral award are limited in Spanish Arbitration Law (Article 41) and reflect the UNCITRAL Model Law standards, the volume of recent annulment decisions and the array of issues considered have been noteworthy.

The most active court has been the Superior Court of Madrid (Tribunal Superior de Justicia de Madrid) which decided no less than 124 annulment applications during 2015 and 2016, resulting in 33 annulments or partial annulments (a 26.6% success rate for applicants, with the qualification that this figure includes all cases, and may be much lower for international cases).

The financial crisis has been a fertile source of annulment applications, and particularly of disputes relating to the sale by banks of complex financial products, compounded in some instances by the practice of multiple appointments of the same arbitrators by major banks.

There has also been a strand of decisions relating to the independence and liability or arbitrators and arbitral institutions. These cases have largely arisen in the annulment context, but the most significant is the recent decision of the Spanish Supreme Court on the professional liability of arbitrators.

Some judgments of the Superior Court of Madrid have subordinated the jurisdiction of arbitral tribunals over the merits of the disputes to the imperatives of fundamental law in the form of the Spanish Constitution and, more controversially, European law. There have been complaints that the Superior Court of Madrid has been reviewing the merits of arbitral awards under the guise of annulment, and some vigorous dissenting opinions confirm the impression of doctrinal friction.

The Spanish concept of public policy has long been identified with the fundamental rights recognized by the Spanish Constitution and in the arbitration context particularly with the procedural and material minimum standards of due process and the right of defence. Spanish public policy also includes imperative norms relating to the freedoms guaranteed by European Community law. However, it is also well established that public policy does not authorize the revision of the justice of the award or the correctness of the decision.

The Superior Court of Justice of Madrid in several annulment decisions has built on the significance of European law to Spanish public policy to develop the concept of “economic public policy” identified with the general principle of contractual good faith in situations of inequality, disproportion or asymmetry between the parties by reason of the complexity of the product or disparate knowledge of the contracting parties. To date nine awards dealing with the sale of financial products have been annulled on the grounds of this new and controversial manifestation of economic public policy. However, the concept of economic public policy has not yet been applied to annul an international arbitral award.

The multiple arbitrations involving financial products have also given rise to annulment applications based on conflicts of interest. In another significant judgment, the Superior Court of Madrid annulled an award where the arbitral institution had failed to disclose its relationship with a multiple user of its services. The applicant alleged that the Tribunal Arbitral de Barcelona (TAB) derived a substantial part of its income from arbitrations over financial products, and the respondent (Caixabank, a major Spanish bank based in Barcelona) was a party to many of these cases. Evidence presented to the court demonstrated that Caixabank had participated in 79 TAB arbitrations between 2011 and 2015 and that these cases amounted to 11.62% of TAB’s revenue during this period. The Superior Court of Madrid held that arbitral institutions also have an obligation of independence and impartiality ‘with the consequent reasons for abstention, and the duties of disclosure and of information that apply to the arbitrators, mutatis mutandis, are required from the institutions called to administer arbitrations.’ The Court noted that an institution needed to ‘exercise extreme care in managing the arbitration where a habitual client is involved’ (appeal 79/2015; November 4, 2016).

This is not the only recent case where an award has been annulled on the basis of the conflict of interest of the arbitral institution. Many arbitral institutions in Spain operate under the aegis of local Chambers of Commerce. The Superior Court of Justice of Madrid in a judgment issued in November 2014 annulled an award on the basis that the institution administering the arbitration formed part of the Madrid Chamber of Commerce, which also owned 31% of the respondent in the arbitration. The court found that the indirect interest of the arbitral institution in the outcome of the arbitration violated the principle of the equality of the parties which as a matter of public policy could not be waived. The award was annulled on the ground that there was no valid arbitral agreement as the violation of the principle of equality occurred at the very moment of the agreement. The reasoning of the court in this judgment meant that disclosure of the conflict of interest by the arbitral institution would not have saved the award from annulment (judgment 63/2014, November 13, 2014).

Such a level of annulment activity inevitably raises questions of the professional liability of arbitrators and arbitral institutions. In a recent case, the professional liability of arbitrators arose after a successful annulment application in a case where the majority of the arbitral tribunal had deliberated, voted and issued the award without the participation of the third arbitrator. This breach of collegiality was found to constitute an infringement of the right of defence (and therefore public policy) of the party that had appointed the third arbitrator. In subsequent proceedings brought by one of the parties, the arbitrators constituting the majority were found professionally liable for the amount of their fees paid by that party pursuant to Article 21 of the Arbitration Law (which imposes liability on arbitrators, inter alia, for the damage and losses they cause by reason of recklessness). This liability was recently confirmed by the Spanish Supreme Court in a judgment of February 15, 2017 (Judgment 102/2017).

There are multiple possible interpretations for this judicial activism in arbitration in Spain. Some attribute much to personalities, and a strong division between the current judges in the Superior Court of Madrid. However, the judges are not responsible for the sheer volume of annulment applications that have come before them. There is no doubt that there is a lot of arbitration in Spain. Is there also an arbitral ‘bubble’? Is judicial activism a response to problems generated by the volume of new entrants at all levels of a profitable legal market?

Behind the development and use of the concept of ‘economic public policy’ is an intriguing question of why some arbitral tribunals have adopted an interpretation of the Spanish implementation of the European Directive 2004/39/EC on markets in financial instruments (MiFID) that seems to conflict with the jurisprudence developed in the Spanish courts. Does party autonomy and freedom of contract weigh more heavily with arbitral tribunals, while the courts place more weight on the investor protection objectives of the MiFID Directive? At a time when the legitimacy of international arbitration is already in question in other contexts, some more disquieting questions might be raised. Does international arbitration offer a level playing field for all participants where there are economically powerful repeat players? Are arbitral institutions supervising sufficiently the appointment of arbitrators and the resolution of potential conflicts of interests? Is more transparency and disclosure required from arbitral institutions regarding their own economic interests, their appointment processes, the resolution of challenges to arbitrators, and the identity of arbitrators appointed? Spanish arbitral institutions, of which there are too many, have been slow to adopt the recent initiatives of the LCIA and ICC to address such concerns.
In any event, a high rate of annulment In Spain raises questions that require a response. At its most basic, high annulment rates suggest a desynchronization between the courts and the arbitral community, and arguably qualitative concerns regarding arbitration practice in domestic cases.

The success of arbitration in Spain since the passage of the current UNCITRAL-based Arbitration Law has been truly impressive. There is a vibrant and active arbitration community in Spain. There is no doubt that it will rise to meet this latest challenge, which is indeed a symptom of the success of arbitration.

David JA Cairns is the author of the ICCA Handbook National Report on Spain, recently completely revised and updated and now available.

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A First Look at Eskosol S.p.A. in liquidazione v. Italian Republic: Has Either Party Gained the Upper Hand?

Tue, 2017-06-13 05:28

Gabriele Gagliani

The ICSID Tribunal in the case Eskosol S.p.A. in Liquidazione v. Italian Republic (ICSID Case No.ARB/15/50) has recently issued a Decision on Respondent’s Application under Rule 41(5) of the ICSID Rules of Procedure for Arbitration Proceedings (Arbitration Rules). In 2015, Eskosol filed a Request for Arbitration based on Italy’s claimed violation of the Energy Charter Treaty (ECT). Italy petitioned the Tribunal to dismiss the entirety of Eskosol’s claims based on their manifest lack of legal merit pursuant to Arbitration Rule 41(5).

The Decision of the Tribunal addressed only such preliminary matters as Italy’s objections. However, a closer look at it might already show what lies ahead, in the merits stage, and that Italy might have gained, to some extent, an upper hand in the proceedings.

Background

Eskosol (or the company) was established in Italy in 2009 by a Belgian company, Blusun, and four Italian nationals. Following some changes in the company structure and legal nature, Blusun remained the owner of 80% of Eskosol’s shares. The company had been constituted in Italy to carry out the planning, development and building of solar photovoltaic power plants and to connect them to the national grid. In Italy, at the time of the launch of Eskosol’s project, a system of feed-in tariffs (guaranteed fixed payment) for a duration of 20 years for qualifying photovoltaic power plants projects was in place. Eskosol claims that the Italian Government subsequently adopted two measures (the “Romani Decree” and the “Conto Energia IV”) that have reduced the feed-in tariffs to a point where, Eskosol alleges, the project became economically unviable. Eskosol claimed that it was unable to pay its debt and, as a consequence, it was placed under bankruptcy receivership. Pursuant to Italian law, the Italian bankruptcy receiver is the one who has the power to institute proceedings on behalf of Eskosol.

However, the decision in hand tells in itself only part of the story. Indeed, in 2014, Blusun and its two owners had already started an arbitral proceedings (ICSID case No.ARB/14/3) against Italy for the alleged prejudice suffered by the investment it had made through Eskosol. In that case, Blusun had challenged a number of measures at issue in the Eskosol case, including the Romani Decree and the Conto Energia IV. The Blusun case Award, Tribunal’s orders, parties’ pleadings and related documents have been covered until now by a confidentiality agreement, with the exception of some excerpts produced by Italy in the Eskosol arbitration. Based precisely on those excerpts, it appears that the Tribunal in the Blusun case denied the foreign investor’s claims on the merits. Indeed, the Blusun Tribunal found that the measures at issue did not violate the ECT and were not the cause of the failure of the Eskosol project in Italy. Blusun and its two shareholders have recently filed an Application for Annulment of the Award.

The Arbitration Rule 41(5) Standard and the Assessment of the Respondent’s Objections

After Eskosol’s Request for Arbitration, pursuant to Arbitration Rule 41(5), Italy filed an application to dismiss the entirety of Eskosol’s claims based on their manifest lack of legal merit. At first glance, the Tribunal tried to strike a balance between the parties’ opposed positions. It stressed that a Rule 41(5) procedure does not have the purpose to address difficult issues of law. Nonetheless, it accepted Italy’s position that briefing legal objections at some length was appropriate for any assessment under the Rule 41(5) standard. As such, the Tribunal applied the standard proposed by Italy and its analysis addressed almost all the difficult and unsettled issues of law raised by the Respondent.

Italy presented four different objections under Rule 41(5). Namely, on whether Eskosol could qualify as a national of another Contracting State under Article 25(2) (b) of the ICSID Convention, whether Eskosol was an instrumentality of Blusun and its two owners, on the identity of parties (i.e. that Blusun and Eskosol were the same parties), and on the identity of object and cause of action between the Blusun and Eskosol cases. Although the Tribunal rejected Italy’s objections, in the Decision, the Tribunal might have somehow tipped the scale in favor of Italy.

Concluding Remarks: A Look to the Merits

The Eskosol Decision provides a number of clues that may bear decisively on the merits stage. While remaining neutral, the Tribunal has indicated a number of arguments that Italy could have raised in the proceedings such as the doctrines of abuse of rights or that no party should be permitted to benefit from its own wrong.

Most importantly, the Tribunal refers repeatedly to the obvious relevance that the Blusun Award has for the Eskosol case. Indeed, the Tribunal points out that Italy is free to argue, later in the case, that the conclusions reached by the Blusun Tribunal are persuasive and should be followed in the Eskosol case. To this end, and should Italy decide to take this course, the Eskosol Tribunal ordered the production of the Blusun Award in full. On this point, two considerations are called for. First, as noted, since the Blusun case concerned various measures, including (but not limited to) those complained of in the Eskosol case, the findings of the Blusun Tribunal are certainly relevant to orient the Eskosol Tribunal. Second, Italy succeeded in raising the important question of legal consistency and certainty in international investment arbitration. And the Tribunal seems to have fully taken up the problem. Clearly, the specter of two arbitral tribunals issuing contradicting decisions as in the Lauder arbitrations saga looms on the horizon. In the next phase of this arbitration, the Eskosol Tribunal will be confronted with issues of systemic importance on the consistency of international investment arbitration.

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Possible Sources Of Disagreement Between Quantum Experts In Discount Rate Estimation: A Review Of ICSID Awards

Mon, 2017-06-12 00:37

Juliette Fortin and Philippe Sales

ArbitralWomen

Quantum experts often rely on the Discounted Cash Flow (DCF) approach to assess losses. The DCF approach is one of the most widely-used and accepted valuation methods, thanks in large part to its flexibility and the fact that it can be tailored to accommodate a wide array of assumptions.

The DCF approach is a method to estimate the current value of a stream of future cash flows. It is predominantly used in cases where the claimant can demonstrate some sort of track record, suggesting that projections of cash flows are not purely speculative. Arbitration tribunals have indeed tended to require a track record of at least two years to provide a basis for the projections required for DCF calculations.

Even when the DCF approach is not the primary valuation method used by a quantum expert, it is often used as a method to provide some confirmation for results obtained with alternative valuation methods.

Making reasonable estimates of future cash flows requires the expert to support his/her projections of the revenues and costs for the period for which projections are made. Counsel also has to choose and support the date for which the assessment of loss is to be made.  And, usually most disputed, the expert must determine the rate at which future cash flows are to be discounted to determine the net present value of the future cash flows.

In practice, the discount rate often turns out to be one of the most disputed and most significant elements of a DCF valuation. It reflects both (i) the time value of money (a dollar today is worth more than a dollar tomorrow, if only due to the passage of time) and (ii) the risk attached to future cash flows. It can have a significant impact on any loss assessment: while 100 EUR to be received in five years has a value of 78 EUR today at a 5% discount rate, it would be valued only at 40 EUR at a 20% discount rate.

The quantum expert needs to support the selection of a number of inputs when estimating a discount rate through the use of the Weighted-Average Cost of Capital (WACC), a blend of the cost of equity and cost of debt. In order to calculate this WACC, the expert first calculates a risk-adjusted cost of equity, based on: risk-free rate, market risk premium, applicable beta, country risk premium, other risk premiums (control, small size, etc.), as well as debt/equity ratio. The expert then needs to choose a relevant cost of debt.

Claimant’s experts and respondent’s experts almost always disagree on the appropriate discount rate. On the basis of available ICSID awards, we provide below a selection of examples of such disagreements with respect to: (1) country risk, which is usually the most disputed parameter, (2) risk-free rate, (3) applicable beta, (4) debt-to-equity ratio, (5) equity market risk premium and (6) company size premium. Note that the impact on the assessment of loss of each parameter described below may vary, we have aimed at focusing on the type of disagreements rather than the magnitude of them in those examples.

First, debates arise over the choice of the country risk premium, which aims at reflecting the additional risk (political instability, volatile exchange rate, etc.) associated with investing in a developing country rather than in the United States or another developed country. In El Paso Energy International Company v. Argentine Republic (ARB/03/15) for example, the parties’ respective experts proposed widely divergent discount rates, reflecting their respective views on country risk. The claimant’s expert computed a discount rate in the range of 12-13%, while the respondent’s expert argued that a 35% discount rate was warranted because of the severity of the Argentine economic crisis.

Neither approach convinced the tribunal. It considered that, while the discount rate calculated by the claimant’s expert was consistent with a risk assessment made under normal economic circumstances, it did not reflect the increased risks caused by Argentina’s sovereign default, which were bound to affect private investors as well. The tribunal further rejected the discount rate calculated by the respondent’s expert on the basis that the use of this rate did not lead to the assessment of fair market value since it attributed all the change in value to the sole economic crisis. The tribunal eventually settled on a 15.4% discount rate, by adjusting the claimant’s expert’s discount rate estimate upwards.

A frequent question is whether expropriation risk should be taken out of the usual country risk premium when an investment is covered by a BIT. Although not addressed here, this question could be the subject of another blog article.

Second, debates also exist over the choice of the risk-free rate, which corresponds to the rate of return of an investment that bears no default risk, such as government bonds from developed countries. In EDF International S.A., SAUR International S.A. and León Participaciones Argentinas S.A. v. Argentine Republic (ARB/03/23) for example, quantum experts disagreed on the relevant measure of the risk-free rate. The claimant’s expert argued that a 10-year US Treasury Bond rate (5.09% at the time) was warranted because it most closely matched the duration of the cash flows under consideration. The respondent’s expert, however, considered the rate of 30-year Treasury Bonds to be more appropriate.

The tribunal sided with the claimant’s expert on this issue, although on more technical grounds than the ones put forth by the claimant’s expert. The tribunal indeed argued that the risk-free rate should be the return on a zero beta portfolio, and that the beta value from the 10-year rate was closer to zero than that of the thirty-year bonds.

Third, the company beta, which measures how much the company’s share price moves against the market as a whole, is frequently discussed among quantum experts. In OI European Group B.V. v. Bolivarian Republic of Venezuela (ARB/11/25) for example, quantum experts disagreed on the proper way to estimate the company beta.

Both quantum experts retained the same sample of seven comparable companies when estimating the company beta, but disagreed on whether the average should be weighted or simple. The claimant’s expert argued that it was necessary to assign greater weight to the companies that appeared to be more comparable to the company being valued. This reasoning convinced the tribunal, which stated that a weighted-average was reasonable to account for these differences in similarity.

Further, although this is not the case in this arbitration, debates about beta also occur over the selection of the relevant industry. Betas are usually taken from published calculations for industries, but the projects being analysed often do not match perfectly the industry calculations.

Fourth, the debt-to-equity ratio, which determines the capital structure, is needed to calculate the WACC. We present below two examples where this ratio was disputed among the quantum experts. In Alpha Projektholding GmbH v. Ukraine (ARB/07/16), the claimant’s expert argued that the relevant ratio was the average 40% debt and 60% equity ratio of a set of comparable companies in the hotels & motels category for emerging markets, as it represented a better measure of the target capital structure of the company being valued. The claimant’s expert estimated a discount rate of 12.1%.

The respondent’s expert, however, considered that the relevant capital structure was the one which had been envisioned for the project under consideration, i.e. 100% equity and 0% debt. The respondent’s expert estimated a discount rate of 14.4%.

The tribunal agreed with the need to rely on the target capital structure and decided to adopt the 12.1% discount rate.

In OI European Group B.V. v. Bolivarian Republic of Venezuela (ARB/11/25), the claimant’s expert chose to use a larger sample of 16 comparable companies, when assessing the debt-to-equity ratio, than the one he used to estimate the company beta. The respondent’s expert argued that the same sample should be used, as a matter of consistency.

The tribunal recognised that both approaches were acceptable, and stated that using the same sample for estimating the company beta and debt-to-equity ratio would be methodologically more consistent. Yet, it sided with the claimant’s expert because the latter’s estimate of the debt-to-equity ratio appeared to be in line with reputable benchmarks, while the estimate of the respondent’s expert was brushed aside for being unreasonable.

Fifth, the equity market risk premium, which reflects the additional risk and expected return of investing in the market, in comparison to risk-free investment. In Tidewater Investment SRL and Tidewater Caribe, C.A. v. The Bolivarian Republic of Venezuela (ARB/10/5) for example, quantum experts disagreed on the correct size of the equity market risk premium. The claimants’ expert argued that a 5% premium was appropriate, based on an approximate average of the range of estimates recommended in empirical studies. The respondent’s expert, on the other hand, argued that a 6.5% premium represented the most accurate long-term equity risk premium and was supported by published data sources.

The tribunal reviewed the information exhibited in the quantum experts’ reports. It accepted the respondent’s expert’s view based on three primary sources of long-term equity risk premium, which gave a long-term market risk premium of between 6.0% and 6.7% at the date of assessment of loss.

Finally, there are cases where quantum experts add a size premium to calculate the relevant discount rate. In Tenaris S.A. and Talta – Trading e Marketing Sociedade Unipessoal Lda. v. Bolivarian Republic of Venezuela (ARB/12/23), quantum experts disagreed on the need to add such a premium.

The claimant’s expert did not use a size premium on the basis that the company being valued was very large compared to other domestic companies in the same industry. The respondent’s expert, on the contrary, argued that a size premium of 2.73% was warranted since the company being valued was much smaller than the comparable companies which constituted the sample used to estimate the beta.

The tribunal agreed with the respondent’s expert, explaining that adding a size premium was reasonable when the size of the company being valued was smaller than the average of comparable companies used to estimate the beta.

In conclusion, estimating the discount rate is a difficult and highly sensitive task. It is the source of frequent disagreement between quantum experts in international arbitration cases. The role of quantum experts is to prepare reasonable and well-supported analyses in order to help the tribunal’s decision-making process.

The views expressed in this article are those of the authors alone and should not be regarded as representative of, or binding upon ArbitralWomen and/or the authors’ firm.

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The Dubai-DIFC Judicial Committee and DIFC Conduit Jurisdiction: A Sequel in Four Parts – The Dubai Court of First Instance on the Attack (Part 3)

Sat, 2017-06-10 17:07

Gordon Blanke

In a recent ruling (see Commercial Case No. 1619/2016, ruling of the Dubai Court of First Instance of 15 February 2017), the Dubai Court of First Instance annulled the DIFC Courts’ rulings in the Banyan Tree line of cases (see Case No. ARB/003/2013, rulings of the DIFC Court of First Instance of 2nd April 2015 and 8 April 2015 (recognising and enforcing a DIAC award and confirming the DIFC Courts’ competence to serve as a conduit jurisdiction); and Appeal No. CA/005/2014, ruling of the DIFC Court of Appeal of 26 February 2015 (in relation to costs); for relevant background, see my previous blog, that recognised and ordered the enforcement of a Dubai International Arbitration Centre (DIAC) arbitration award for onward execution against Meydan Group LLC, the award debtor, in onshore Dubai. It was these cases that originally established the status of the DIFC Courts as a conduit jurisdiction for onshore domestic (non-DIFC) awards for onward execution outside the DIFC. The nullification of these awards at first instance essentially calls into question the DIFC’s acquired conduit jurisdiction status, at least within the context of domestic non-DIFC awards.

The basis of the Dubai Court of First Instance’s decision is a finding that the DIFC Courts did not have proper jurisdiction over the recognition and enforcement of the subject DIAC award:

“It is clear from the documents on record that the case brought in the DIFC Courts to recognize, confirm and enforce the arbitral award does not meet any of the DIFC Courts’ jurisdiction criteria set out in the law. There is nothing in the record to prove that any of the parties are licensed Centre establishments or are duly established or carrying on activity in the Centre or that the agreement in question was executed or performed in the Centre or that the case involves an incident that has occurred in the Centre. The parties have not agreed to give jurisdiction to the Centre nor has the Defendant claimed that any of the jurisdiction criteria are met. It certainly does not appear from reading the two decisions issued by the DIFC Courts in Claim No: ARB/003/2013, dated 2nd April 2015 and 8 April 2015, which are to be invalidated, that any of the DIFC Courts’ jurisdiction criteria set out in the law are met. The decision dated 2nd April 2015 held that the DIFC Courts have jurisdiction under Article 5(A)(d) of Law No. (12) of 2004 on the Judicial Authority at DIFC when there is no evidence in that decision or in the record to support the DIFC Courts’ jurisdiction. Nevertheless, the DIFC Courts confirmed their own jurisdiction to hear the claim then ruled, in their decision of 8 April 2015, that the arbitral award would be recognized and enforced.

[…]

Having established from the record that the DIFC Courts have no jurisdiction to confirm or set aside the arbitral award in question, it follows that the said two decisions are devoid of one of the basic elements of validity (being issued by a court that has no jurisdiction to issue such orders and decisions). The decisions are fatally flawed and void ab initio. The decision in Appeal No. 005/2014, dated 26 February 2015 (concerning the costs of the application contesting jurisdiction), which was issued consequent to the invalid decision of 2nd April 2015 issued in respect of that challenge, is also invalid.” (my translation)

The Dubai Court of First Instance’s conclusion denying the DIFC Court’s proper jurisdiction evidently ignores the true ambit of the jurisdictional gateway under Art. 5(A) of the Judicial Authority Law as amended (see DIFC Law No. 12 of 2004 as amended by DIFC Law No. 16 of 2011), upon which H.E. Justice Al Muhairi himself – correctly – relied in Banyan Tree when confirming the power of the DIFC Courts to serve as a conduit jurisdiction for domestic non-DIFC awards. Art. 5(A)(1) clearly confers upon the DIFC Courts “exclusive jurisdiction over […] (d) any application over which the [DIFC] Courts have jurisdiction in accordance with the Centre [i.e. the DIFC]’s Laws and Regulations”, including – no doubt – the DIFC Arbitration Law. Art. 42(1), the DIFC Arbitration Law, in turn, empowers the DIFC Courts to hear actions for enforcement of both domestic and foreign awards (“[a]n arbitral award, irrespective of the State or jurisdiction in which it was made, shall be recognised as binding within the DIFC and, upon application in writing to the DIFC Court”), including – no doubt – any non-DIFC awards (irrespective of whether these are of onshore UAE or properly foreign origin).

The Dubai Court of First Instance further claims to have general jurisdiction – inter alia by virtue of Art. 4 of Decree No. (19) of 2016 (establishing the Dubai-DIFC Judicial Tribunal or simply the “JT”) – over the validity of the DIFC Courts’ decisions and more specifically over the question as to whether the DIFC Courts’ decisions have been issued within the limits and scope of their proper jurisdiction. For the avoidance of doubt, this proposition entirely disregards the role given to Art. 7 of the Judicial Authority Law as amended, which establishes a regime of mutual recognition between the onshore Dubai and offshore DIFC Courts and hence creates an area of free movement of all judgments, orders and ratified arbitral awards between onshore Dubai and offshore DIFC and vice versa. The fact of the matter is that for the purposes of the operation of Art. 7, the Dubai and the DIFC Courts both qualify as UAE Courts of equal status (there being no vertical hierarchy between them). This is a fundamental pre-condition for the regime of mutual recognition that exists between the two courts and which is based on a presumption of mutual trust, each court deferring to the other on the proper determination of its competence within its own jurisdiction. Neither of the two courts has the power to review the orders, judgments or ratified awards that the respectively other Court has found and declared fit for execution under Art. 7 (by affixing an execution formula). In addition and in any event, to the extent that there were to have been a conflict of jurisdiction or a risk of contradictory outcomes between the Dubai and DIFC Courts in Banyan Tree, reference should have been made to the JT, which has been created precisely for that purpose (see Decree No. (19) of 2016, Art. 2(2)). By way of reminder, the JT has been established as a catalyst for the resolution of any jurisdictional conflicts that may arise between the onshore Dubai and the offshore DIFC courts (see my previous blog).

The above criticism aside, the Dubai Court of First Instance’s ruling also arguably runs counter to the position taken by the UAE Federal Supreme Court when seized by Meydan of the purported jurisdictional conflict between the onshore Dubai and the offshore DIFC courts in the same matter (see Petition No. 2 of 2015, ruling of the UAE Federal Supreme Court of 23rd December 2015 (Jurisdictional Challenge)) prior to the establishment of the JT. By virtue of its powers under Arts 33(9) and (10) and 60 of UAE Federal Law No. (10) of 1973 concerning the Federal Supreme Court, vesting the Federal Supreme Court with exclusive jurisdiction to determine, inter alia, positive and negative conflicts of jurisdiction between local judicial bodies within the same Emirate, the Federal Supreme Court denied that there was a positive conflict of jurisdiction between the offshore DIFC and the onshore Dubai courts in the matter before it. The Federal Supreme Court’s conclusion was based on the fact that the proceedings before the DIFC Courts had already completed and the DIFC Courts had issued an order for recognition and enforcement before the commencement of the challenge proceedings in the onshore Dubai courts (see Commercial Action No. 2127-2014, application for setting aside the subject DIAC award). In a sense, the Federal Supreme Court’s approach confirms the first-seized rule, which I have proposed in previous blogs as a conceptual basis for a principled solution to the present jurisdictional stand-off between the onshore Dubai and offshore DIFC Courts.

That said, the Dubai Court of First Instance (short of its recent ruling being understood as a declaration of war on the jurisdiction of the DIFC Courts) is clearly on the attack. It is to be hoped that on appeal, the Court of Appeal and the Dubai Court of Cassation will fend off the Dubai Court of First Instance, overturn its recent ruling and put the relationship between the onshore Dubai and the offshore DIFC Courts back into balance.

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Taking a Close Look at Today’s Arbitral Process and Who Pays for It: A Report from Helsinki International Arbitration Day 2017 (II)

Sat, 2017-06-10 00:37

Heidi Heidi Merikalla-Teir and Mika Savola

The Finland Arbitration Institute (FAI)

Helsinki International Arbitration Day (HIAD) is an annual arbitration conference organized by the Arbitration Institute of the Finland Chamber of Commerce (FAI). It was held for the sixth time in Helsinki on 18 May 2017.

Is There a Simple Solution to Arbitration Costs Allocation?

The afternoon of the conference was dedicated to the topic of cost allocation in international arbitration. Mr James H. Carter, Senior Counsel at WilmerHale in New York and former Chair of the Board of Directors of the American Arbitration Association, gave a highly interesting and somewhat controversial introduction to this subject with his presentation entitled “Is There a Simple Solution to Arbitration Costs Allocation?”. Mr Carter started by acknowledging that there is a lack of transparency in how the arbitral tribunals allocate the costs of arbitration between the parties, and a lack of consensus on the principles that should govern the apportionment of costs. He went on to identify two prevailing schools of thought as to arbitration costs allocation. According to the “American rule”, the parties split procedural costs (i.e., the arbitrators’ fees and expenses and any applicable administrative charges) and bear their own attorneys’ fees. Under the “costs follow the event” rule (also known as the “loser pays” principle), in turn, costs are apportioned based on the parties’ success on the merits of the case. Mr Carter disputed the oft-stated argument that the “costs follow the event” rule is well-suited and regularly applied in international commercial arbitration: in his experience, at least in the United States, arbitrators in international commercial disputes tend to start from the presumption of “no shifting” of either procedural costs or attorneys’ fees regardless of the outcome of the arbitration. However, when a non-prevailing party has complicated the case by improper procedural manoeuvres, arbitrators may and sometimes do shift some or all of the procedural costs against it. In Carter’s view, this should normally suffice to encourage appropriate and efficient party conduct. But shifting attorneys’ fees – which may run into the millions of dollars on each side – merely on the grounds that one party has prevailed on the merits of the dispute is probably too harsh a sanction to be adopted as a standard practice, not least because it may unduly affect the parties’ right to have their cases heard. Arbitral tribunals should therefore consider it only in the rare cases of manifestly unreasonable party conduct.

The following panel discussion built on the ideas put forth by Mr Carter under the heading “Costs of Arbitration is Always a Hot Topic – How Are the Costs of Arbitration Allocated Between the Parties in the International Commercial Arbitration Practice and Is the Current Practice on the Right Track?”. The session was moderated by Ms Gabrielle Nater-Bass, partner at Homburger, member of the FAI Board and President of the SCAI (Switzerland). The speakers included Ms Anja Håvedal Ipp, Legal Counsel of the SCC (Sweden); Mr Massimo Benedettelli, Professor of International Law at the University ”Aldo Moro”, Bari and partner at ArbLit (Italy); Mr Philippe Cavalieros, partner at Winston & Strawn and a member of the ICC Commission on Arbitration & ADR’s Task Force on Decisions as to Costs (France); and Mr Piotr Nowaczyk, Independent Arbitrator & Mediator and former member of the ICC Court (Poland).

The panelists took issue with Mr Carter’s notion of the limited applicability of the “costs follow the event” principle in international arbitration practice. In fact, many arbitration rules contain an express yet rebuttable presumption that the successful party will be entitled to recover its reasonable costs (e.g., the UNCITRAL, CIETAC, FAI, DIS, Swiss and LCIA Rules). Further, absent mandatory provisions of lex arbitri to the contrary, many arbitral tribunals seem to follow the “costs follow the event” principle as a starting point even in proceedings conducted under such arbitration rules which merely confirm the tribunal’s authority to apportion the costs of the arbitration between the parties without prescribing any guidelines as to the manner in which the costs should be allocated (e.g., the ICC, ICDR, SCC and SIAC Rules). However, not infrequently, when apportioning the costs of arbitration in a given case, arbitrators tend to exercise the wide discretion that most national laws and arbitration rules grant them in this regard by factoring in also considerations other than the parties’ success on the substantive issues in dispute, such as the effect of the parties’ procedural behaviour on the overall efficiency of the arbitral proceedings.

Ms Håvedal Ipp demonstrated the allocation of costs in SCC arbitration by presenting results of a recent study examining 80 arbitral awards rendered in SCC proceedings. According to the study, in 45% of the cases, the losing party was ordered to pay all of the costs of arbitration in full, reflecting a strict application of the “costs follow the event” principle. In 20% of the cases, the costs were split equally between the parties. Finally, in 35% of the cases, the arbitral tribunal applied a more sophisticated cost allocation analysis and apportioned the costs between the parties accordingly. To sum up, Ms Håvedal Ipp concluded that SCC arbitral tribunals seem to invoke the “costs follow the event” rule quite often in disputes which involve a clear losing party, whereas other methods of cost allocation become applicable when the outcome of the substantive dispute is less clear-cut.

The panel then proceeded to consider whether there should be more guidance available in the determination of the allocation of costs so as to increase the predictability and acceptability of final costs in international arbitral proceedings. In this context, a question was also raised as to whether the arbitral tribunal should proactively initiate a dialogue with the parties, at the earliest feasible time, with the aim of obtaining agreement on various issues related to cost recovery. Consistent with the recommendations set forth in the recent ICC Report on Decisions on Costs in International Arbitration, some of the panelists (as well as conference participants) suggested that it might be beneficial for an arbitral tribunal to discuss with the parties already in connection with the first preparatory conference a list of issues pertaining to the apportionment of costs, including (but not necessarily limited to) the following: the recoverability of different cost items, in particular the parties’ internal legal and other management costs; the method of cost allocation to be applied by the arbitral tribunal, including the assessment of the parties’ relative success on the merits and the effect of their procedural conduct on the determination and apportionment of costs; what records the parties are expected to submit to the arbitral tribunal at the end of the proceedings in order to substantiate their cost claims; and the format and timing of the parties’ cost submissions. – While addressing such issues at the outset of the proceedings is arguably not a common practice yet, it does have the benefit of removing uncertainty and improving predictability in relation to the arbitral tribunal’s approach to any cost issues, which in turn serves to contribute to the continuing legitimacy of arbitration as the primary method of resolving international commercial disputes.

Final remarks

The official conference programme ended with the closing remarks of Ms Petra Kiurunen, Vice-Chair of the FAI Board. After that, the participants enjoyed a dinner with an inspiring speech about the “bright future of international arbitration” by Mr Eric A. Schwartz, one of the world’s pre-eminent experts in the law and practice of international arbitration (former Secretary General, member and Vice-President of the ICC Court; former senior partner at King & Spalding; and currently an Arbitrator member/door tenant at Fountain Court Chambers). During the dinner, the Chair of the FAI Board, Mr Mika Savola, was awarded The Chamber of Commerce Cross for his meritorious work for the FAI and contribution to the Finnish business and industry. The Finland Chamber of Commerce also awarded Ms Carita Wallgren-Lindholm the Finland 100 – Special Medal of Merit for her contribution to the Finnish business and industry through her work as an ambassador of Finnish arbitration abroad (read more from Press Release).

The next Helsinki International Arbitration Day will be held on 24 May 2018 (more information will be available here). If you wish to look back at HIAD 2017, you can watch videos from the event here and photos here.

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P v Q: A Principled Approach to Disclosure from Arbitrators?

Fri, 2017-06-09 03:28

Michael McErlaine

Herbert Smith Freehills

The English High Court has reinforced its pro-arbitration stance in two recent judgments in the case of P v Q [2017] EWHC 148 (Comm.) and [2017] EWHC 194 (Comm.). Much attention has been devoted to the failed application under section 24 of the English Arbitration Act 1996 (the “Act”) to remove the arbitral tribunal on the basis of alleged “over-delegation” of their duties to their secretary (see, for example, here). However, this article focuses on the application brought for disclosure of documents passing between the arbitral tribunal and the LCIA secretary. The Court had a relatively carte blanche given the competing approaches put forward by the parties and that, as the judge noted, “the researches of counsel have not identified any case in which an arbitrator has been ordered to give disclosure in connection with a removal application…”.

Background to the case

The case involved a challenge to the tribunal which arose after the Chairman of an arbitral tribunal inadvertently sending an email to P’s legal team intended for the Tribunal Secretary asking for the Tribunal Secretary’s reaction to the email. Full details of the background to the case can be found here.

The disclosure application

P’s challenge, brought under section 24 of the Act, was made with an ancillary application for disclosure of a range of communications between the Tribunal and the Secretary relating to the Secretary’s role and tasks delegated to him.

First, P submitted that the relevant principles governing the disclosure application were those found in the English Civil Procedure Rules (the “CPR”), CPR 31.12 i.e. an application for specific disclosure. In other words, as long as the documents sought were relevant (applying the test in CPR 31.6), the Court has discretion to order their disclosure. P’s lawyers accepted that the substance of the Tribunal’s deliberations would need to be redacted.

Secondly, the co-arbitrators’ counsel put forward a different test. The starting point was that a party cannot seek disclosure from a decision maker in the context of a challenge to such a person’s impartiality citing the case of Locabail (UK) Limited v Bayfield Properties Ltd [2000] QB 451. In addition, Article 30.2 of the 1998 version of the LCIA Rules, which governed the arbitration, also provided protection for the confidential nature of an arbitral tribunal’s deliberations. As such, the parties had contracted out of any jurisdiction the Court may have to order disclosure of the documents in issue.

Thirdly, Q submitted that disclosure should only be granted in rare and compelling cases and then only where: (i) there was a strong prima facie case on the merits of the connected section 24 application and (ii) disclosure was strictly necessary for the fair disposal of that application

The principles to be applied

Faced with these three competing views, the judge posed three questions:

1. Should the Court apply any merits threshold and, if so, what should the threshold be?
2. Should the Court apply a heightened test of relevant and, if so, what should the test be?
3. How should the Court approach the exercise of its discretion to order disclosure?

As to the first question, the Court noted that in an arbitration context it is not always realistic to expect a respondent to engage a summary procedure for strike-out or dismissal of an application – unlike in High Court litigation. However, the judge. saw no reason to depart from the default position that the Court does not address the merits of a substantive dispute when determining an interim application. The judge explicitly stated that, while he was not opening the door to the filing of evidence on the merits of the substantial disputes in applications such as the present one, the relevance and nature of the material sought could be taken into account by the Court when it exercises its discretion to order disclosure.

On the relevance question, the Court agreed with Q that the documents sought should be strictly necessary for the fair resolution of the section 24 application. The Court was satisfied that an application to remove an arbitrator under section 24 of the Act was an interlocutory application. The judge noted that interlocutory proceedings needed to be conducted in accordance with the overriding objective. If the Court started to award disclosure in support of interim applications then the risk of satellite litigation and increased delay and expense would only rise.

The judge held that the Court was required to resolve disputes arising in an arbitration context without unnecessary delay or expense and with minimal Court-intervention. This further justified a heightened standard of relevance.

Furthermore, the Court equated an application for disclosure from an arbitrator with an application against a non-party in Court proceedings, which also imported a test of necessity. Although a slightly odd comparison, the Court did acknowledge that an arbitrator is in a different position from a non-party on the receiving end of an application for disclosure of certain documents (in English procedure, referred to as a Norwich Pharmacal application and often made to enable a party to plead a claim). In particular, the arbitrators need to respond to the application in a way that maintains fairness and impartiality between the parties given the possibility they will maintain an on-going role in the substantive dispute.

Finally, the Court turned to the issue of how to exercise its discretion to order disclosure of the documents. In addition to the default considerations necessitated by the overriding objective – such as time, expense and proportionality – the judge identified a number of other relevant considerations arising from the disclosure application. These were:

1. The proceedings were brought under Part 8 of the CPR. Part 8 is an alternative procedure for bringing claims where there is usually no substantial dispute in fact. This was an indicator – though not determinative – that disclosure will normally be inappropriate. Furthermore, the notion of minimal intervention from the Court meant that disclosure in the context of arbitration claims should only be awarded in exceptional cases.
2. If an arbitral institution has been vested by the parties with the power to order the disclosure being sought and declines to do so then the Court should be reluctant to order disclosure.
3. An application in support of a strong claim – in this case the section 24 application – may potentially justify disclosure in support even though this could result in the parties incurring additional costs.
4. It can only be in the rarest of cases that arbitrators should be required to give disclosure. The Locabail case granting immunity to a judge from such disclosure applies equally to members of an arbitral tribunal to allow them the freedom to carry out their functions.

Commentary

The Court dismissed the disclosure application. The Court did not accept the argument put forward by the co-arbitrators that the LCIA Rules had excluded in its entirety the Court’s jurisdiction to award disclosure. Nonetheless, P had failed to meet the requisite elements of the test – the documents were not strictly necessary to determine the section 24 application, there were no compelling reasons to depart from the Locabail principle, and under the parties’ agreement in the form of the LCIA Rules that the arbitrator’s deliberations should be confidential from the parties. The Court recognised that ordering the disclosure could have wider repercussions for international arbitration. In particular, it could discourage potential arbitrators from serving on tribunals as well as potentially affecting their ability to carry out their adjudicative role properly. The fact that the application was defended by the co-arbitrators’ counsel may be seen as indicative of the general feeling of the arbitration market.

The Court was not persuaded by P’s arguments that there was a distinction between the substance of deliberations and more procedural communications relating to the role of the Tribunal Secretary or tasks to be delegated to the Tribunal Secretary. However, the judgment does not indicate significant analysis of the question of whether the documents sought actually fell within the meaning of “deliberations” in Article 30.2. It could be suggested that, if the LCIA Rules intended to cover procedural communications, such as those at issue in P v Q, the drafters could have used a phrase like “all communications” or “all documents”. The Court did not consider this when relying on the wide scope of the Locabail principle such that all communications for the purposes of the process of deliberation and all documents brought into existence for such purpose are immune from disclosure to the parties.

The Court’s approach has policy advantages in light of the potential problems that could arise if courts or tribunals had to consider process versus substance arguments each time an application for disclosure was made. However, the approach is not wholly satisfactory given that the protection in Article 30.2 derives from the parties’ agreement rather than public policy considerations.

Moreover, the Court proceeded on the basis that the Locabail principle applies as much to arbitral tribunals as it does to judges. Judges perform an important public function and their jurisdiction derives in a very different way to that of an arbitral tribunal. Arbitrators “contract in” to the role and, whilst their function is quasi-judicial, the genesis of their jurisdiction is the parties’ agreement. It cannot be said that there is a complete overlap in the functions of a judge and an arbitrator. Judges are largely compelled to follow rigid civil procedure rules whereas arbitrators are expected to manage the arbitral process. In this sense, arbitrators have both an adjudicatory function as well as a procedural or administrative function. This, and the private nature of the arbitrator’s role, may justify differences in treatment between judges and arbitrators. For example, whilst section 29 of the Act gives an arbitrator immunity for anything done in the discharge of his function as arbitrator unless he or she is acting in bad faith, in many civil law jurisdictions, legislation relating to judicial liability does not apply to arbitrators who enjoy only qualified immunity (and in some jurisdictions, no immunity), and can be held liable for breaches of contract in relation to the discharge of their duties. It therefore did not necessarily need to follow that Locabail would apply to arbitral tribunals or apply so widely. Disclosure of the arbitrator’s documents would likely have probative value in the context of any claim against the arbitrator.

The principles adopted by the Court are largely to be welcomed as respecting the principle of party autonomy. However, the Court’s reasoning begs the question as to whether parties engaging in ad hoc arbitrations are at a disadvantage when it comes to such applications on the basis that there may be no party agreement on the confidentiality of deliberations. Although it is just one factor to be taken account by the Court when exercising is discretion – and would unlikely on its own change the outcome – more guidance would be welcome.

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Special Issue of the Journal of International Arbitration: Dispute Resolution in Asia

Wed, 2017-06-07 17:30

Maxi Scherer

VIEWS FROM ASIA

Chief Justice Sundaresh Menon, Adjudicator, Advocate, or Something in Between? Coming to Terms with the Role of the Party-appointed Arbitrator
Abstract: This article analyses the role of party-appointed arbitrators in international arbitration, providing a comprehensive discussion of the challenges posed to this institution by the growth of arbitration accompanying the expansion of global trade, and the author’s views on the justifications for the retention of the institution and the proper role that the party-appointed arbitrator should occupy. The article then turns to providing practical rules of engagement and best practices that may be adopted to minimize the risks that are often associated with the system of party appointments.

Neil Kaplan CBE QC SBS, Winter of Discontent
Abstract: This article discusses some of the major criticisms of arbitration today and considers whether these criticisms are justified and whether there are ways in which they can be dealt with effectively by more efficient procedures.

ARTICLES SECTION

Chiann Bao, Third Party Funding in Singapore and Hong Kong: The Next Chapter
Abstract: 2017 marks an important juncture for the arbitral community in Hong Kong and Singapore as both jurisdictions are legislating to make third party funding available for international arbitration. The road to reform was by no means smooth, as the author describes through a review of the policy and prior case law in this area. The author goes on to describe the new legislation and anticipated legal framework for third party funding for arbitration in both jurisdictions. This article will compare the regulatory framework and substantive protections provided in Singapore and Hong Kong with their common law ancestor in England and Wales, across a number of areas where the availability of third party funding has generated concerns and controversy. Given the pace at which litigation funding is expanding, the author anticipates further development of the concept in Asia.

Dr. Nicolas Wiegand, Can Asia Cut the Costs?
Abstract: In recent years, Asian arbitration hubs such as Hong Kong and Singapore are more and more frequently preferred over established venues in Europe or the United States. Apart from the geographical advantage and many other attributes, they are uniquely positioned to provide more cost-effective options for arbitration, which may prove to be one of the major attractions to parties using arbitration. The overall costs for arbitration proceedings still impose a deterring factor that drives away potential users of arbitration, including in booming Asia. To target this issue, this article identifies the main cost drivers and analyzes diverging approaches against the backdrop of the legal environment in Asia to make a proposal as to whether and how Asia can cut the costs.

Mel Andrew Schwing, The KLRCA I-Arbitration Rules. A Shari’a-Compliant Solution to the Problems with Islamic Finance Dispute Resolution in Singapore and Malaysia?
Abstract: In 2012, the Kuala Lumpur Regional Centre for Arbitration launched its i-Arbitration Rules in an attempt to attract more disputes from the multitrillion-dollar Islamic finance industry. The i-Arbitration Rules attempt to provide a Shari’a-compliant protocol for international commercial arbitration of those disputes. This article analyses whether they meet that objective by first exploring why there is a need for an alternative method of dispute resolution in Asia for Islamic finance disputes, then looking at the issues that arise when Shari’a matters are subject to international commercial arbitration, and finally considering whether the i-Arbitration Rules resolve those issues.

João Ribeiro and Stephanie Teh, The Time for a New Arbitration Law in China. Comparing the Arbitration Law in China with the UNCITRAL Model Law
Abstract: As China consolidates its position as one of the most important trade players in the international market, arbitration has become an attractive alternative to litigation in commercial disputes between Chinese companies and their foreign trade partners. The UNCITRAL Model Law on International Commercial Arbitration 1985, with amendments as adopted in 2006, represents the accepted international legislative standard for a modern arbitration law. In order to make China an attractive seat for international commercial arbitration and enhance the efficiency of the arbitration system for the benefit of commercial parties, whether Chinese or foreign, it is important for China to consider adopting the UNCITRAL Model Law. This article provides an overview of the UNCITRAL Model Law and its positive impact on the development of arbitration in several jurisdictions worldwide. Next, the benefits of legal reform are highlighted through a contrast between China’s current Arbitration Law and the UNCITRAL Model Law. Finally, this article lays out a procedural roadmap through which China’s legal framework may be amended to incorporate the UNCITRAL Model Law.

Dr. Fan Yang, “How Long Have You Got?” Towards a More Streamlined System for Enforcing Foreign Arbitral Awards in China
Abstract: Arbitration of China-related commercial disputes has become important because of the growth in trade and investment between China and the rest of the world. Lessons derived from a particular case of recognition and enforcement of a foreign arbitral award in China are of interest to those who are interested in the Chinese reception of arbitral awards. This article will examine the process of enforcing commercial awards in China under the New York Convention (1958). The study will use the concrete experience of the two Australian awards in the Castel v. TCL case to illustrate some deficiencies in the so-called Report System under the current Mainland Chinese law and judicial practice. It will be argued that this Report System needs to be reformed and streamlined. In particular, first, the lower courts should be required to engage the system promptly and without undue delay; secondly, a clear time limit and the consequence of exceeding that time limit should be explicitly provided for each of the stages in the system; and thirdly, the operation of the system should be transparent so that parties can track the progress of their cases once the Report System is engaged. Suggestions will also be made concerning steps which foreign award-holders should take to improve their chances of gaining swift enforcement in Mainland China.

Harshad Pathak and Pratyush Panjwani, Parallel Proceedings in Indian Arbitration Law: Invoking Lis Pendens
Abstract: Prior to the 2015 amendments, the power to appoint arbitrators under section 11 of the Arbitration and Conciliation Act of 1996 in India was vested with the Chief Justice of India, or a High Court. In 2005, the Supreme Court of India re-characterized it as a judicial function, thereby, departing from the position under the UNCITRAL Model Law. While the recent amendments have drastically altered the machinery for appointment of arbitrators, their retrospective application is dubious. As such, the re-characterization of the appointment proceedings as a judicial function still continues to raise concerns, one of which pertains to the jurisdictional overlap between the proceedings for appointment of arbitrators, and those before a judicial authority while deciding an application for seeking a reference to arbitration. Both judicial proceedings are presently permitted by section 8(3) of the 1996 Act to run parallel, even if they involve deciding an identical question concerning the validity of an arbitration agreement. In this article, the authors critique the Indian courts’ failure to identify and address this jurisdictional overlap, and the risks it poses. As a possible solution, the authors rely on the principle of lis pendens, or its common law equivalent of res sub judice, to suggest that where an application seeking reference to arbitration, and involving a question as to existence of a valid arbitration agreement, is pending before a judicial authority, a parallel petition for appointment of arbitrators, raising identical concerns, must not be decided.

NOTES AND COUNTRY REVIEWS
Mariel Dimsey, Hong Kong’s Year in Review: a Résumé of 2016 Arbitration Developments
John Bang and David MacArthur, Korean Arbitration Act Amended to Adopt Key Features of 2006 Model Law Amendments

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Taking a Close Look at Today’s Arbitral Process and Who Pays for It: A Report from Helsinki International Arbitration Day 2017 (I)

Wed, 2017-06-07 02:05

Heidi Heidi Merikalla-Teir and Mika Savola

The Finland Arbitration Institute (FAI)

Helsinki International Arbitration Day (HIAD) is an annual arbitration conference organized by the Arbitration Institute of the Finland Chamber of Commerce (FAI). It was held for the sixth time in Helsinki on 18 May 2017. This year, the event was organized with the support of the ICC International Court of Arbitration and the ICC Finland, and it attracted some 250 legal practitioners from approximately 20 countries to hear presentations and exchange views under the general heading “Taking a Close Look at Today’s Arbitral Process and Who Pays for It”. The topic of the conference was chosen mainly for two reasons: first, to shed light on the different practices applied by different arbitral institutions in the administration of their cases; and second, to discuss the various methods used, and potential best practices to be found, in the allocation of the costs of arbitration by international arbitral tribunals.

Recent Developments at the FAI and the ICC

The conference was opened by the welcoming remarks of the FAI Secretary General, Ms Heidi Merikalla-Teir, and the Executive Director of the ICC Finland, Mr Timo Vuori. They noted the growing international case load of the FAI, which shows that also non-Finnish users of arbitration have come to trust FAI proceedings as a reliable and efficient means to resolve cross-border commercial disputes. It is also evidence of the increasing popularity of Finland as a trustworthy venue for international arbitration, a trend that will probably continue as Finland stands to benefit from its status as a modern society with an advanced legal system and highly educated lawyers, coupled with a top ranking in the global anti-corruption indexes.

The floor was then given to Mr Alexis Mourre, President of the ICC International Court of Arbitration (ICC). In his keynote, Mr Mourre provided an overview of the challenges that international commercial arbitration faces today, and elaborated on the new policies that the ICC has implemented in response to these issues over the past couple of years. They include, among other things, the launch of expedited rules for small-value claims; the increase of transparency through reasoning of the ICC Court’s decisions and publication of arbitrators’ names; the emphasis put on the ethics in arbitration through guidance note on disclosure and rules on the conduct in arbitration; the increase in efficiency by shortening time-limits for the establishment of Terms of Reference and by introducing specific sanctions for delays; and finally, certain additional services, such as the ICC Secretariat’s role in the administration of so-called “sealed offers”.

In his comments on the keynote, the Chair of the FAI Board, Mr Mika Savola, discussed what some of the new ICC policies might mean from the viewpoint of the FAI. As an introductory remark, Mr Savola reminded that when drafting the current FAI Arbitration Rules which came into force in 2013, the ICC Arbitration Rules of 2012 served as a source of inspiration in many respects, especially in relation to the provisions governing multi-contract and multi-party arbitration. Further, Mr Savola praised two of the ICC’s recent policy changes as particularly innovative. First, the fact that the ICC Court is now willing to provide reasons for its decisions on challenge and replacement of arbitrators, prima facie jurisdiction and consolidation of arbitrations upon any party’s request is a groundbreaking move that resonates well with the users of international arbitration and should therefore be carefully considered also by other arbitral institutions. Second, Mr Savola gave credit to the ICC Secretariat for starting to administer “sealed offers” (as explained in para. 193 to 195 of the “Note to parties and arbitral tribunals on the conduct of the arbitration under the ICC Rules of Arbitration” dated 1 March 2017). In his view, this new practice will not only promote amicable settlements of disputes but also serve to reduce the overall costs of arbitration and give the parties and arbitral tribunals a valuable tool to increase the quality of cost decisions in ICC arbitrations. Consequently, other arbitration institutions too would be well-advised to consider adopting similar practices in proceedings governed by their respective rules.

Role of Arbitral Institutions in the Arbitral Process

Mr Savola’s remarks were followed by an interview and discussion on the topic of “How Does the ICC Arbitral Process Work in Practice” by and between Ms Inka Hanefeld, partner at Hanefeld Rechtsanwälte and Vice-President of the ICC Court, and Ms Maria Hauser-Morel, Counsel at the ICC Secretariat. The lively dialogue demonstrated the particularities of case administration during the lifespan of an ICC arbitration, as well as the level of monitoring and scrutiny exercised by the Secretariat and the Court at various stages of the ICC proceedings.

In the next session, the focus shifted to the comparison of case management at five well-known arbitration institutes. The topic was addressed by a prominent and geographically dispersed panel moderated by Ms Carita Wallgren-Lindholm, founding partner at Lindholm Wallgren Attorneys and member for Finland at the ICC Court, under the heading “How Active Is and Should the Role of an Arbitral Institution and its Secretariat be in the Arbitral Process Vis-à-Vis the Arbitral Tribunal and the Parties?”. The speakers included Ms Heidi Merikalla-Teir, Secretary General of the FAI (Finland); Mr Alexander Fessas, Managing Counsel and Secretary General elect of the ICC (France); Ms Annette Magnusson, Secretary General of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) (Sweden); Mr Philipp Habegger, partner at HABEGGER Arbitration and former President of the Arbitration Court of the Swiss Chambers’ Arbitration Institution (SCAI) (Switzerland); and Ms Ulrike Gantenberg, partner at Heuking Kühn Lüer Wojtek and member of the Board of Directors of German Institution of Arbitration (DIS) (Germany).

First, the panel discussed the varying intensity at which different arbitral institutions monitor the arbitral process under their rules, e.g., in areas such as the fixing of advances on costs, deciding on challenges to arbitrators, and scrutiny of arbitral awards. It was noted that the ICC appears to be most closely involved in all the practical aspects of arbitral proceedings (with the exception of issues related to value-added tax, see below), and it is the only institute that exercises full-fledged scrutiny of awards rendered under its auspices. By comparison, the panelists positioned the FAI and the SCC “in the middle of the scale” in terms of the intensity of monitoring, since both of them only request the arbitral tribunal to submit certain types of documents to the institute and do not require the tribunal to share with the Secretariat everything about the proceedings; however, in contrast to the SCC, the FAI Board also reviews each FAI award once it has been issued with a view to collecting information on the arbitrator performance that is crucial for potential future appointments. The DIS and the SCAI, in turn, were placed at the lower end of the scale with respect to their level of engagement in the arbitral process. The DIS, in particular, vests the arbitral tribunal with exceptionally broad powers e.g. in deciding on challenges raised against the arbitrator(s) and in fixing the arbitral tribunal’s own fees, although these features may be subject to change as a result of the DIS Rules revision process that is currently underway.

As to the “geographical coverage” of different arbitral institutions, the panelists noted that while a mere 20% of the cases administered by the SCAI included a Swiss party, there was at least one German party involved in more than 75% of the cases administered by the DIS. Also the FAI and the SCC were viewed mostly as regional players, though with an increasing number of international cases administered under their rules. The ICC was unanimously considered as the only truly global actor among the various arbitration institutes.

The panel also addressed the extent to which different institutes provide services in questions related to value-added tax (VAT) in connection with the fixing of the advances on costs and determining the final costs of the arbitration. It was noted that while the ICC does not strictly speaking administer VAT issues, it does provide a VAT fund account service, thereby offering parties the assurance of having a neutral depository keep the monies until they become payable to the arbitrator(s), and arbitrators the convenience of having an institution administer this financial aspect of the proceedings on their behalf. In contrast, both the FAI and the SCC go further in the administration of VAT issues. This is done already at the outset of the arbitration so that, when calculating advances on costs, the FAI and the SCC take into consideration any potential VAT that may ultimately have to be added to any arbitrator’s fee, and the likely amount of VAT will then be included in the advances on costs to be fixed by the institute. (to be continued)

The next Helsinki International Arbitration Day will be held on 24 May 2018 (more information will be available here). If you wish to look back at HIAD 2017, you can watch videos from the event here and photos here.

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The Parties’ Discretion to Terminate the Proceedings for the Annulment of an Arbitral Award: Recent Developments in Court Rulings

Tue, 2017-06-06 03:13

Emma Morales

Linklaters

On 4 April 2017, the Madrid High Court of Justice (“TSJM”), the court in Spain that handles appeals for the annulment of awards, issued two decisions – Case numbers 43/2016 and 63/2016 – in which it confirms the doctrine already advanced by means of a previous judgment rendered by the same court (see Judgment of the TSJM dated 28 February 2017 [JUR 2017/ 89938]). In brief, according to these three decisions, once the parties file an appeal for the annulment of an arbitral award for any of the reasons described in article 41.2 of the Spanish Arbitration Act (the “Arbitration Act”, Law 60/2003 dated 23 December 2003), they cannot waive or withdraw the appeal filed.

Art. 41:
1. The award may be annulled only if the party requesting the annulment claims and proves:
B) That he has not been duly notified of the appointment of an arbitrator or of arbitration proceedings or has not been able, for any other reason, to assert his rights.
E) That the arbitrators have resolved on matters not subject to arbitration.
F) That the award is contrary to public order.
2. The motives contained in paragraphs b), e) and f) of the previous section may be appraised by the court hearing the action for annulment ex officio or at the request of the public prosecutor in relation to the interests legally defended.

In both annulment proceedings (Case numbers 43/2016 and 63/2016), the parties requested termination because an out-of-court settlement had been reached during the pendency. In the first case, the request was based on article 19.2 of the Spanish Civil Procedural Law, Law 1/2000 dated 7 January 2000 (“LEC”) (transaction), while in the second it was based on Article 22.1 LEC (extra-procedural satisfaction).

The arguments given by the Court to reject the parties’ request to termite the proceeding for the annulment of an arbitral award could be summarized as follows: it concluded that the transaction, waiver or withdrawal (as putting into practice the principle that the parties set the scope of the case and the judge is limited by the relief sought) in proceedings for the annulment of an arbitral award that deals with a matter not subject to parties decision making (“indisponible”), cannot be accepted by the Court when the appeal is based on any of the reasons that the court could assess ex officio (i.e. those established in Article 41.2 Arbitration Act, and sections b), e) and f) of Article 41.1 referred to above).

Therefore, for the TSJM, only appeals for the annulment of an arbitral award based on the other grounds of Article 41.1 could be subject to the parties’ discretion (i.e. transaction, waiver, withdrawal, etc).

Art. 41:
1. The award may be annulled only if the party requesting the annulment claims and proves:
A) That the arbitration agreement does not exist or is not valid.
C) That the arbitrators have resolved on matters not subject to their decision.
D) That the designation of the arbitrators or the arbitration procedure has not respected the agreement between the parties, unless such agreement is contrary to an imperative regulation of this Law, or, in the absence of such agreement, that have not been adjusted to this law.

To support its decisions, the TSJM considered that, once an appeal for the annulment of an arbitral award has been filed based on the grounds referred to (Article 41.2 Arbitration Act, sections b), e) and f) of Article 41.1) the parties cannot decide on it, thus depriving the court of undeniable jurisdiction. The reason is that there are general interests that deserve protection, such as the preservation of public order and, in particular, the need for the arbitration procedure to be carried out in accordance with the most basic requirements of hearing and contradiction. General interests that, according to the TSJM, the court has a legally imposed duty to safeguard ex officio.1)To support its grounds, TSJM refers to previous judgements dated 17 September 2015 [PROV 2015, 242025]. 23 October 2015 [JUR 2015, 301853] and 2 November 2016 [AC 2016, 1939]. jQuery("#footnote_plugin_tooltip_6839_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6839_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The TSJM itself recognizes that this assessment clearly emphasizes judicial control over arbitration, although in this case the justification would lie in the fact that the ex officio examination proceeds on those grounds that go beyond the simple will of the parties and their decision-making powers. Thus, the TSJM recalls that the annulment of an arbitral award can only be agreed by the competent Court, and not by means of a transaction by the parties.

The rulings were subject to a dissenting vote by one of the judges, who considers that the principle that the parties limit the scope of the case and that the judge is limited by the relief sought, cannot be restricted except by legislation.

According to this dissenting opinion, the protection of general interests is guaranteed in any case through the mechanisms for rejection of the transaction established in section 2 of article 19 LEC, since the Court must analyse whether the transaction reached by the parties is illegal. This judge understands that to deny the parties the possibility to waive, withdraw or compromise in proceedings for the annulment of an award infringes the legal provisions of article 19 LEC, and could cause damage to any of the parties if a judgment was finally rendered contrary to what was agreed in good faith in the transaction. Finally, the dissenting opinion concludes by listing other negative consequences which, in this judge’s view, this ruling entails for: the parties, which do not obtain satisfaction for their interests; the Administration of Justice, which is forced to artificially enlarge the procedure without any effect; and for arbitration, by introducing a further obstacle in exercising action for the annulment of the award.

There are many other negative effects that could be raised. Nevertheless, we could not agree more with this dissenting opinion.

References   [ + ]

1. ↑ To support its grounds, TSJM refers to previous judgements dated 17 September 2015 [PROV 2015, 242025]. 23 October 2015 [JUR 2015, 301853] and 2 November 2016 [AC 2016, 1939]. 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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Use of Economics in International Arbitrations

Mon, 2017-06-05 05:30

Carlos Pabon-Agudelo

When one talks with practitioners about the use of economics in the context of International Arbitrations, the conversation basically focuses on damages determination and what methodologies to use to determine amount of harm. Very often the discussion becomes dry and both sides end up being frustrated.  No doubt discussions around discount rates or valuation methodologies, for instance, could become a dry topic between two different professionals if the discussion is not kept within the context of the issue at hand – the claim.  However, experts and counsels have forgotten that there is always an economic rationale behind any claim and methodological calculation. This rationale can be used to make a claim or counterclaim more robust. The use of economics in international arbitrations is not limited to damages. Economics is key to formulate a strong case before a tribunal either in commercial or investment state settings.

 

To grasp this idea in the context of international arbitrations either at the commercial or the investment-state level, one needs to go back to the basic instrument behind any commercial relationship – the contract.

 

Business and investment contracts are legal documents and at their core they represent a codification of a commercial relationship between parties.  Since a contract is a legal memorialization of a financial/economic arrangement, economic principles underpin those relationships.   So contracts are economic documents and are a key factor that allow market economies to work and do so efficiently. This means that contracts:

i) allow parties to rely on each other to abide by the terms and conditions as agreed in the contract;

ii) are paramount instruments that facilitate large and long-lived infrastructure projects because once an investment is committed, the investor is at risk for a substantial, long term and immobile investment and the other party for the reliability of the investors;

iii) are an economically efficient way to allocate a given set of risks, rewards and obligations when negotiated freely since the terms and conditions have been captured in a voluntary and mutually beneficial agreement. If that balance is upset, either because one of the parties sees an opportunity to maximize its gain or there is an event that disrupts the anticipated gain for one or both parties, then economic efficiency is lost.

 

Since economic principles underlie the contracting structure in either the basic agreement or any further amendments, the use of economics to interpret contracts is indispensable. Such economic interpretation must reflect the commercial and economic objectives and expectations of the parties when the contract was signed. In the context of international disputes, this means to analyze whether a claim, for instance, of contract breach or infeasibility is inconsistent with the initial commercial and economic principles explicitly or effectively agreed to by the parties.  In addition, it means checking whether the balance of risks and rewards inherent in the contract has been maintained or has been altered, and the economic repercussions of any possible modification by the arbitrators.

 

So, economics is a fundamental input for counsel because it helps not only to determine damages, but also to understand and assess the principles surrounding a commercial relationship. By using economics as a tool, practitioners can formulate a well-structured case from the beginning; not limiting themselves to the breach of legal clauses but more importantly assessing the state of a commercial relationship and how it has been affected by an event or how it might be altered by an award.

 

The following war stories illustrate how the use of economics in the context of international arbitrations complements and supports the legal analysis and informs tribunals. I was a consulting expert in those cases.

 

The first story refers to a request for contract modification. Claimant’s integrated gas/electricity project consisted of the monetization of fuel reserves by generating and transmitting the commodity to a market. Claimant argued that due to changes in market conditions of its commodity, contract royalties should be reduced. It also claimed that it was not treated fairly and that one of its integrated activates had been harmed due to paying high royalties.

 

The economic and commercial analysis undertaken brought to light several key facts:

i) the failure to link a contract modification request with the plain language terms in the contract;

ii) the development of unsupported market arguments to justify the renegotiation of the contract that were not in line with the reference markets agreed initially by the parties;

iii) the likely unbalancing of the risks and rewards established in the contract since the counterparty was not receiving any benefits from the proposed contract changes;

iv) the development of unfairness arguments that were not a precondition for contract reform; and

v) the flawed argument of contract infeasibility. Essentially, economic analysis showed that the claim had no valid basis and that any contract modification should only be based on the terms of the contract as agreed by both parties since there was no economic support for contract infeasibility.

 

The second story refers to a power distribution concessionaire in the South Asian market. Claimant argued that a “comfort letter” committed the international investor to fund power costs owed to an energy supplier. The economic analysis undertaken in this case showed several facts:

i) the misunderstanding and misapplication by government authorities of the fundamentals of a power sector reform, e.g. economic efficiency, competition, attraction of private investment and the opportunity to earn an adequate return, etc.;

ii) the failure of the government and regulatory agency to comply with its obligations, e.g. collection enforcement, payment of due bills, power theft reduction, etc.; and

iii) the misrepresentation that funding operating losses through equity contributions was a common business practice when the holding company had been structured to shield itself from those practices.  Effectively, by using economic principles of utility regulation and market restructuring, it was noted to the tribunal that the claim was baseless and that failure to comply with economic fundamentals and basic utility regulation principles had financially encumbered the investor.

 

Finally, the third story is a commercial arbitration case that involved the purchase of a power and desalinization plant. The claim referred to a breach of warranties when the plant became nonoperational after the asset was acquired. Economic analysis was used in the case to:

i) assess historical and projected future financial information;

ii) determine damages based on lost profits and direct cost approaches;

iii) assess damages based on reading of the case facts; and

iv) assess the indirect effects of lost revenue and long plant shutdowns such as the ability to make further investment, and the negative impact on commercial relationships with 3rd parties and off-takers. Again, by using economic principles the tribunal was informed about the economic and commercial implications that a breach of warranties had brought upon the investors and the need for compensation for the harm caused.

 

As the war stories above illustrate, economic analysis is a very important and valuable tool in the context of international disputes. It helps in understanding the underlying principles of a commercial relationship and assesses whether the allocation of responsibilities and rewards that originally was agreed by the parties has been affected.  It also helps to determine alternatives to rebalance a contract if such a balance has been altered.

 

The use of economic principles in the context of commercial or investment-state arbitrations is not different as one can infer from the examples above. The principles are the same. The difference basically just relies on the applicable legal framework and the specific heads of claim.  The expert and counsel need to work together to develop robust arguments within the applicable law to make stronger cases.

 

Finally, as the case stories show, economic analysis is a tool that not only informs tribunals, but also allows them to become aware of the tradeoffs between the economic benefits of providing relief via contact modification with the economic harm from disturbing the allocation of rights and obligations agreed by the parties in a contract.

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Women in Arbitration Are on the Rise

Sat, 2017-06-03 23:10

Victoria Pernt

Schoenherr

The numbers are in, and they are encouraging.

In the past decade, female arbitrator appointments have more than tripled.

Last year alone, arbitral institutions appointed a third more female arbitrators than the year before. Driving this trend is the Equal Representation in Arbitration Pledge (the “Pledge”), a global initiative addressing the gender imbalance in arbitration. Launched in May 2016, the Pledge quickly garnered support. Over 1,800 signatories committed to promoting the fair representation of women in international arbitration.

The Pledge has led to a considerable rise in female arbitrator appointments in a single year. According to research published by Lucy Greenwood to mark the one-year anniversary of the Pledge (featured by GAR), institutional appointments of female arbitrators increased by over a third, from about 12 % in 2015 to about 17 % in 2016.

The success of the Pledge has so far rested on the shoulders of the arbitral institutions.

Four institutions revealed how they put their commitments to the Pledge into practice. At the “Not in the Rules” seminar this May in Vienna, Stefano Azzali (Milan Chamber of Arbitration), Annette Magnusson (Arbitration Institute of the Stockholm Chamber of Commerce), Manfred Heider (Vienna International Arbitral Centre) and Francesca Mazza (Deutsche Institution für Schiedsgerichtsbarkeit, the “DIS”) gave participants a glimpse behind the curtains of institutional arbitrator appointments. The DIS, for example, has introduced an extra step in the appointment process in order to increase its female arbitrator appointments to 30 %: whenever a shortlist of four to five candidates does not include at least one woman, a separate shortlist is compiled only including female candidates. This extra step ensures that the DIS proactively searches for equally suitable female arbitrators.

But let’s not pat ourselves on the back just yet. It is still a long way to parity.

While arbitral institutions may proactively appoint female arbitrators, they are often not involved in the appointments. The ICC, for example, makes direct appointments in only 25 % of its cases. Notably, the ICC Rules provide for the appointment of presiding arbitrators by the institution. Under the DIS Rules, on the other hand, chairmen are appointed by the party-appointed arbitrators. This leaves little room for the DIS to appoint arbitrators itself, and it does so in only 10 % of the cases.

Most arbitrator appointments are therefore made by the parties – and those lag far behind the institutions in appointing women.

The reason may be that female arbitrators often lack visibility: Mirèze Philippe and Noor Dahim observed that “[t]alented female practitioners in dispute resolution are numerous”, yet women do not promote themselves in the same way men do. Ms Philippe notes that it is “everyone’s responsibility to promote each other”, and recommends search services for female arbitrators such as those offered by ArbitralWomen and the Pledge.

Law firms should provide more opportunities for women internally. This solution to the lack of visibility is put forward by White & Case partner Andrew de Lotbinière McDougall and attorney Fiona Candy, who believe in the snowball effect of good female counsel being appointed as arbitrators.

The Pledge also plays an important role in increasing the visibility of talented female lawyers: it reminds them to promote themselves, and it calls upon organisations, law firms, and arbitral institutions to actually offer them opportunities to do so. After all, even the most suitable female arbitrator candidate is unlikely to be appointed if unknown to the appointing party.

To truly achieve fair representation of women in arbitration, increasing their visibility is key. Only then may the Pledge achieve its “ultimate goal of full parity”.

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Antitrust Arbitration in Europe (Part II): The Scope and Effect of Arbitration Clauses (Microsoft Case)

Sat, 2017-06-03 08:20

Patricia Živković (Associate Editor)

My previous blog post on this topic dealt with two issues stemming from the juxtaposition between the current arbitration legal framework and necessary due process requirements which are specifically developed for antitrust damages proceedings: (1) the necessary regulation of complex arbitration specifically designed for antitrust damages matters, and (2) the need to address information asymmetry in antitrust arbitration proceedings (through the introduction of discovery). This post is, on the other hand, focused on the scope and effect of arbitration clauses in antitrust damages matters. The recent English High Court decision of 28 February 2017, (Microsoft Mobile OY (Ltd) v Sony Europe Limited et al., [2017] EWHC 374 (Ch)) (“Microsoft case”), depicts a development of a new transnational phenomenon – antitrust arbitration. In the Microsoft case, the High Court made the decision to stay the present court proceedings on antitrust damages claims commenced by Microsoft Mobile Oy (Ltd) (“Microsoft”), to give effect to an arbitration clause agreed upon between the parties.

Microsoft, a company established under the laws of Finland, is a manufacturer and distributor of mobile telephone handsets, which contain lithium ion batteries (“Li-ion Batteries”). Microsoft brought the proceedings in its own right and as assignee of the rights of Nokia and its relevant subsidiaries, and claimed damages for losses caused by allegedly anti-competitive conduct in relation to the sale to Nokia and/or to Microsoft Mobile of Li-ion Batteries (“Cartel”). The Cartel, according to Microsoft, was allegedly formed by four companies established in three different jurisdictions: Sony Europe Limited (England and Wales), Sony Corporation (Japan), and LG Chem Limited and Samsung SDI Co Limited (South Korea) (“Defendants”). Microsoft held Defendants or any of them jointly and severally liable for the loss and damage which manifested itself in higher prices paid by Nokia and/or Microsoft Mobile for Li-ion Batteries and additional costs, incurred by financing the overcharge suffered by them.

Microsoft contended the jurisdiction of the English High Court based on Article 4 of the Brussels I Regulation (Recast), as Sony Europe, the first defendant, had domicile in England and Wales. The other Defendants are companies domiciled in Japan and the Republic of Korea; hence, Microsoft needed permission to serve the claim out of the jurisdiction pursuant to Part 6.36 of the Civil Procedure Rules. This post is further focused on a jurisdictional objection made by Sony Europe, which sought a stay of the proceedings against it pursuant to section 9 of the Arbitration Act 1996 on the grounds that the dispute between Microsoft and Sony Europe is subject to a valid arbitration clause.

Sony Europe contended that an arbitration clause concluded between it and Nokia was unaffected by the assignment to Microsoft Mobile and continued to bind Microsoft Mobile. Interestingly, this was a common ground between the parties. However, they departed on whether the claims brought in these proceedings against Sony Europe fall within the scope of that arbitration clause.

This matter was already discussed to a certain extent in international practice. For example, Dutch and Finnish courts found, that broadly worded arbitration agreements do not encompass antitrust disputes.1)Case No. C/13/500953/HAZA 11-2560, CDC Project 13 SA v Akzo Nobel NV et al., District Court of Amsterdam (June 4, 2014) (upheld by the Amsterdam Court of Appeals); East West Trading BV v. United Technologies Corp. and Others, District Court of Central Netherlands (November 27, 2013); CDC Hydrogen Peroxide SA v Kemira Oyj, District Court in Helsinki, Finland (July 4, 2013). jQuery("#footnote_plugin_tooltip_6951_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6951_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In 2015, the CJEU decided on a similar matter upon the reference for a preliminary ruling from the Landgericht Dortmund (Germany) in the case Cartel Damages Claims Hydrogen Peroxide SA v Akzo Nobel NV et al., which involved the defendants from the same cartel. According to the CJEU,

“A jurisdiction clause can concern only disputes which have arisen or which may arise in connection with a particular legal relationship, which limits the scope of an agreement conferring jurisdiction solely to disputes which arise from the legal relationship in connection with which the agreement was entered into. […] In the light of that purpose, the referring court must, in particular, regard a clause which abstractly refers to all disputes arising from contractual relationships as not extending to a dispute relating to the tortious liability that one party allegedly incurred as a result of the other’s participation in an unlawful cartel.” (Paras 68 and 69 of the CJEU Judgement)

The CJEU limited its opinion solely to jurisdiction clauses, i.e. choice of law clauses, leaving “the effectiveness of broadly worded agreements to arbitrate in relation to follow-on damages claims […] subject to uncertainty in Europe“.

The English High Court’s decision in the Microsoft case proves this standpoint by stating the following:

“In conclusion, whilst I accept that it is possible for the provisions of EU law to permit a court to sideline or declare ineffective an arbitration clause, there is nothing in the decision of the Court in CDC to mandate such a course. […] I appreciate that the Court did not consider arbitration clauses specifically. However, that fact cannot disguise the basic truth that the Court’s approach to the risk of “fragmentation of claims” was fundamentally different to that of the Advocate General, and involved a wholesale rejection of his approach. I can see nothing in the decision of the Court to require me to displace the effect of the arbitration clause as something inimical to EU law. Accordingly, I reject Microsoft Mobile’s contention that the arbitration clause should be set aside or disregarded on the grounds of EU law.” (Para. 81 of the English High Court’s decision)

As mentioned in my previous post, collective redress plays an important role in private antitrust damages actions, as antitrust damages proceedings involve multiple claimants on one side and (possibly) multiple respondents (competition law infringers) on the other side. It is visible from the above citation that the High Court was aware that referring Microsoft to arbitration would lead to the fragmentation of claims as the claims against Sony Europe would need to be submitted in arbitration, without the joinder of other parties, and Microsoft would lose its anchor defendant in England and Wales. However, the question before the Court was, therefore, whether the lack of collective redress within arbitration render the arbitration clause ineffective or inoperable. According to the English High Court, the answer was clearly “no”.

As to the relation between contractual and tort claims, which were explicitly distinguished by the CJEU in regards to jurisdiction clauses, the English High Court held that:

“[…] the mere fact that a claim in contract has not been pleaded is, to my mind, irrelevant. Were the manner in which a case was actually pleaded to matter, instead of how a case could have been pleaded, it would be easy for a claimant to circumvent the scope of an arbitration or jurisdiction clause by selectively pleading or not pleading certain causes of action. It would be an extraordinary outcome were a claimant successfully to be able to contend that, because a contractual claim had not been pleaded, a “parallel” claim in tort arising out of exactly the same facts and with a scope defined by that contract fell outside the scope of such a provision. The proposition only has to be stated to be rejected.” (Para. 72(ii) of the English High Court’s decision)

Besides posing this argument, which aimed at the prevention of abuse through the construction of claims, the High Court also found the connection between contractual and tort claims in this case to be considerable because since, for example and among other reasons, the extent to which the negotiated price was above the “good faith” price will inevitably involve an examination of the dealings between the defendant and the various other cartelists. Consequently, the English Court found the antitrust damages claims against Sony Europe to fall under the arbitration clause and stayed the court proceedings against Sony Europe.

The High Court’s decision is a detailed and interesting read which brings a new stance within the EU on the matters discussed within. As such, it cannot be covered in its entirety in this post. However, from what was mentioned here, a several conclusions for the arbitration community can be made. Firstly, the position of EU national courts as to the enforcement of arbitration clauses in cases of antitrust damages claims is not yet uniform. Clear opposite stances on these issues in different jurisdictions can influence the choice of an anchor defendant, depending on a desired jurisdictional result. More importantly, the arbitration community should figure out as soon as possible how to deal with those claims that will be referred to arbitration, just as they were in the Microsoft case. Whereas an arbitration clause may perfectly well stand at the beginning of arbitration, this does not answer the question whether due process rights of a claimant seeking antitrust damages will be adequately protected within arbitration proceedings. In other words, the enforcement of arbitration agreements does not guarantee an enforceable arbitral award, and this may eventually result with a non-suitability of arbitration for such claims.

References   [ + ]

1. ↑ Case No. C/13/500953/HAZA 11-2560, CDC Project 13 SA v Akzo Nobel NV et al., District Court of Amsterdam (June 4, 2014) (upheld by the Amsterdam Court of Appeals); East West Trading BV v. United Technologies Corp. and Others, District Court of Central Netherlands (November 27, 2013); CDC Hydrogen Peroxide SA v Kemira Oyj, District Court in Helsinki, Finland (July 4, 2013). 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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Hong Kong Court of Appeal Affirms that the Choice of Remedies Doctrine Does Not Offend Principle of Good Faith under the New York Convention

Thu, 2017-06-01 19:19

Nicholas Poon

YSIAC

Introduction

The dispute over the enforcement of an arbitration award (“Award”) between the Astro and Lippo groups of companies has been fought out in numerous jurisdictions, notably Singapore and Hong Kong. When Astro sought to enforce the Award it had obtained against Lippo in Singapore, Lippo resisted on the ground that the tribunal (“Tribunal”) lacked jurisdiction as it had improperly joined some of the parties to the arbitration (“Arbitration”). Astro contended that Lippo may not raise this objection at the enforcement stage as Lippo had elected not to avail itself of its right under Article 16(3) of the Model Law to challenge the Tribunal’s preliminary ruling that it had jurisdiction.

Decisions in Singapore and Hong Kong

The Singapore Court of Appeal (“SGCA”) disagreed with Astro, holding that Lippo was not so precluded because the Model Law gave parties the choice to elect between active and passive remedies against an award. Accordingly, Lippo may still enforce its passive remedy to resist enforcement, despite not having availed itself of the active remedies in Article 16(3) or Article 34. On the merits of the jurisdictional objection, the SGCA agreed with Lippo that the Tribunal had improperly joined several of the parties to the Arbitration. But that was not the end.

Astro had taken out parallel proceedings in Hong Kong to enforce the Award which Lippo did not resist initially. It was only after enforcement orders were granted and judgment entered against Lippo that Lippo sought an extension of time to set aside the same.

The Hong Kong High Court (“HKHC”), which heard the matter after the SGCA had rendered its judgment, (a) declined to extend time for setting aside the enforcement orders and judgment, and further (b) held that Lippo was precluded from resisting enforcement as its conduct constitutes a breach of the good faith principle under the New York Convention (“Convention”).

The Hong Kong Court of Appeal (“HKCA”) agreed with the HKHC on the first issue, but not the second, which is the focus of this commentary.

HKCA’s decision

The HKCA affirmed the position under Hong Kong law that even if one of the grounds for resisting enforcement under the Convention is established, the court has a discretion to enforce the award “in circumstances where there has been [a] breach of the ‘good faith’ principle by the award debtor”. However, in its view, Lippo had not breached the good faith principle because:

(a) the Tribunal’s wrongful joinder of some of the parties was a “fundamental defect”. In this regard, it is “particularly relevant” to take into account the law of the seat of arbitration and ruling of the supervisory court (i.e. the SGCA’s decision);

(b) Lippo had not concealed its objection to the Tribunal’s jurisdiction, nor did Lippo fail to raise the same to the Tribunal and carried on with the Arbitration on the footing that it would raise the objection only at the enforcement stage;

(c) as Lippo had expressly reserved its position as regards jurisdiction throughout, Astro did not proceed with the Arbitration in reliance on Lippo’s conduct;

(d) there is no general obligation on the part of an award debtor to “exhaust his remedies in the supervisory court before he could rely on a [Convention] ground to resist enforcement”; and

(e) the requirement of “good faith” under the Convention and the “choice of remedies” doctrine under the Model Law are not mutually exclusive but complementary.

Commentary

The HKCA’s decision represents another significant endorsement of the choice of remedies doctrine.

Practically, with the HKCA’s decision, the positions in Singapore and Hong Kong in relation to the raising of jurisdictional objections before the courts are now aligned. It should be noted, however, that the global treatment of choice of remedies is far from homogenous. There are other jurisdictions which have adopted a contrary approach. One such example is England, where section 73(2) of the Arbitration Act 1996 provides that a party which could have but did not challenge the tribunal’s ruling on jurisdiction by any available process of review or appeal or by challenging the award on jurisdiction, may not later object to that tribunal’s substantive jurisdiction on a ground which was the subject of that ruling.

On that note, it is understandable that some are disappointed that the HKCA did not disapprove of the choice of remedies doctrine as anti-arbitration. Such disappointment should not be overstated.

First, even if an award debtor succeeds in resisting enforcement in one jurisdiction (as opposed to setting aside the award in the supervisory court), the award remains valid. It may still be enforced elsewhere, subject of course to the application of any estoppel.

Second, while there is a default expectation that awards should be enforceable, it bears emphasising that the grounds for refusing enforcement under the Convention exist to protect an award debtor from an unjustified award. Thus, the discretion to enforce an award notwithstanding that a ground for refusing enforcement is established should be exercised judiciously and hence sparingly. The idea that liberal enforcement of awards is somehow pro-arbitration is deeply flawed. Where an award is successfully challenged, it could be as much pro-arbitration as when a challenge is dismissed. The integrity of arbitration as a system cannot be tied to the outcome in particular cases. It is promoted only when the outcome is driven by the principled application of the rules which comprise and regulate the system.

Third, the risk that much time and resources spent in obtaining an award may be wasted should an award debtor succeed in resisting enforcement on the grounds of a jurisdictional objection which could have been decided earlier by the courts can be ameliorated in at least one of two ways.

The first way is for the putative award creditor to obtain curial blessing of the tribunal’s jurisdictional ruling under Article 16(3). Contrary to initial presumptions, Article 16(3) is party-blind. This is evidenced by the Model Law’s careful and deliberate choice of words of “any party may request” in Article 16(3), which may be contrasted with the use of the words “the challenging party” under Article 13(3) which deals with curial review of a challenge against an arbitrator.1)See also Simon Greenberg, “Direct Review of Arbitral Jurisdiction under the UNCITRAL Model Law on International Commercial Arbitration” in The UNCITRAL Model Law after Twenty-Five Years: Global Perspectives on International Commercial Arbitration (Frédéric Bachand and Fabien Gélinas eds) (Juris, 2013) at pp. 64–65. jQuery("#footnote_plugin_tooltip_7141_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7141_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The use of the words “decide the matter” further adverts to the Model Law’s intention not to restrict Article 16(3) to a specific type of application. By choosing not to avail itself of Article 16(3) to determine the tribunal’s jurisdictional ruling, the putative award creditor absorbs the risk that an enforcement court may subsequently disagree with the tribunal’s ruling. The proposition that it is the award debtor who is responsible for any wastage of time and resources should the final award be refused enforcement is therefore not entirely fair.

The second way is to request the tribunal to codify its jurisdictional ruling in an award, and thereafter enforce the same. There is a legitimate body of jurisprudence that a tribunal’s jurisdiction ruling can constitute an award and ought to be enforceable as such under the applicable national arbitration laws and the Convention.2)See, for e.g., Yves Derain and Eric A. Schwartz, A Guide fo the ICC Rules of Arbitration (Kluwer, 2nd Ed, 2005) at p. 108; Jean-François Poudret, Sébastien Besson, Comparative Law of International Arbitration (Thomson Sweet & Maxwell, 2nd Ed, 2007) at p. 402. See also Emirates Trading Agency LLC v Sociedade de Fomento Industrial Private Limited [2015] EWHC 1452 at [25]; Christian Mutual Insurance Co., v. Ace Bermuda Insurance Limited [2002] Bda L. R. 1. jQuery("#footnote_plugin_tooltip_7141_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7141_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Under this approach, the claimant can take the tribunal’s jurisdictional award and enforce it in the seat of arbitration, or any other jurisdiction in which it is likely to seek enforcement of a final award. Indeed, this possibility was directly referenced in the Commission Report on the Model Law.3)Report of the United Nations Commission on International Trade Law on the work of its eighteenth session (3-21 June 1985) A/40/17, at para. 159. jQuery("#footnote_plugin_tooltip_7141_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7141_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); If the respondent elects not to resist enforcement or is unsuccessful, and the jurisdictional award is enforced as a judgment, any subsequent attempt to challenge the final award on the same jurisdictional objections determined in the jurisdictional award is most likely to fail on res judicata grounds. This approach however remains to be tested fully in Singapore.4)Cf. International Research Corp PLC v Lufthansa Systems Asia Pacfici Pte Ltd [2014] 1 SLR 130 at [65] and its treatment of PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597. jQuery("#footnote_plugin_tooltip_7141_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7141_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In conclusion, the HKCA’s decision represents another victory for the choice of remedies doctrine. But the contours of the doctrine are only starting to take shape. It will likely take many more court and arbitration decisions to work out its optimum operative parameters.

References   [ + ]

1. ↑ See also Simon Greenberg, “Direct Review of Arbitral Jurisdiction under the UNCITRAL Model Law on International Commercial Arbitration” in The UNCITRAL Model Law after Twenty-Five Years: Global Perspectives on International Commercial Arbitration (Frédéric Bachand and Fabien Gélinas eds) (Juris, 2013) at pp. 64–65. 2. ↑ See, for e.g., Yves Derain and Eric A. Schwartz, A Guide fo the ICC Rules of Arbitration (Kluwer, 2nd Ed, 2005) at p. 108; Jean-François Poudret, Sébastien Besson, Comparative Law of International Arbitration (Thomson Sweet & Maxwell, 2nd Ed, 2007) at p. 402. See also Emirates Trading Agency LLC v Sociedade de Fomento Industrial Private Limited [2015] EWHC 1452 at [25]; Christian Mutual Insurance Co., v. Ace Bermuda Insurance Limited [2002] Bda L. R. 1. 3. ↑ Report of the United Nations Commission on International Trade Law on the work of its eighteenth session (3-21 June 1985) A/40/17, at para. 159. 4. ↑ Cf. International Research Corp PLC v Lufthansa Systems Asia Pacfici Pte Ltd [2014] 1 SLR 130 at [65] and its treatment of PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597. 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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May Digest – Kluwer Mediation Blog

Thu, 2017-06-01 03:30

Anna Howard

From making the case for understanding the mediator as co-creator, with the parties, of outcomes to exploring the argument that mediators need to be qualified lawyers, there has been much lively discussion on the blog this month. You will also find a post on the key findings of recent empirical research in New Zealand on users of commercial mediation. Scroll down for a brief summary of all the posts on the Mediation Blog in May.

In Brexit, Trump and the Nash Trap. A loss of trust, Greg Rooney applies the Nash Trap to the recent events of Brexit and the election of Donald Trump. Greg then considers the relevance of the Nash Trap to mediation.

In From Regulation to Resolution: Mediating Disputes in Regulated Sectors, Suzanne Rab explores the reasons why disputes in regulated sectors are suited to mediation. Suzanne then identifies which types of dispute in regulated sectors would be amenable to mediation and explains the relevance of sector insights for the effective conduct of mediations in these sectors.

In That Daunting First Mediation, Alex Azarov reflects on his first mediation and identifies lessons he learnt from that experience. Alex’s thoughtful guidance will be helpful to both those new to mediation and those with more experience.

In The Mediator’s Prayer 2, Joel Lee offers a sequel to A Mediator’s Prayer as he succinctly captures how a mediator will assist disputants during the mediation process.

In Confusions Between Good Mediation Skills and Legal Knowledge, Constantin Adi-Gavrila draws on a recent conversation with a lawyer to examine the view that mediators should be lawyers.

In Who Are We Helping? The Mediator As Co-Creator, Charlie Irvine considers worries about mediation’s approach to manifest injustice before making the case for understanding the mediator as co-creator, with the parties, of outcomes. Charlie argues that co-creation enhances the prospects for justice.

In Mediation Cultures Are Relative: The Example Of Mediator-Lawyers, Caucus and Joint Session, Greg Bond responds to Constantin Adi-Gavrila’s earlier post in which Constantin writes about a conversation with a friend who was convinced that all mediators need to be lawyers. Greg examines the argument that to mediate you need to be a qualified lawyer, have legal knowledge of the disputed matter, and be able to evaluate it from a legal perspective.

In Users Of Commercial Mediation In New Zealand: The First Empirical Study, Grant Morris outlines the key findings of his recent empirical research on the users of commercial mediation in New Zealand. Grant presented the findings of this research at the Auckland Global Pound Conference on 31 May 2017.

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